Designing the Value Chain Across
Borders: The Dispersion Decision
National Diamonds and International
Competition
GLOBAL STRATEGY
Dr. Ruth V. Aguilera
College of Business
University of Illinois at Champaign-Urbana
March 2009
Session I: Topics to Cover
• What is Global Strategy?
– Global vs. Multi-domestic Firms
• Multinational Firms
– Types of Multinational Firms
– Global Integration
• Globalization or Regionalization?
• Porter’s International Competitive Advantage
• Vernon Product Life Cycle
What is Global Strategy?
Ghoshal
• Definition
– Strategic Objectives
– Sources of Competitive Advantage
• Integration-Responsiveness Framework
Multinational Firms
Guillen
• Definition
• Dispersion (assets or employees)
• Coordination:
– Kobrin’s index of global integration
Regional & Global
Strategies in MNCs
Rugman & Verbeke (2004)
Thinking about how to measure how global a
company is…
How would you measure it?
Regional & Global Strategies
• From WWII economic power has become
more disperse
– While in 1967, U.S. held 50.4% of the world
stock of FDI, by 1990 it only participated with
25.4%.
– Formation of a TRIAD: North America, EU &
Asia.
• The Fortune 500 (2001)
– International sales
Types of MNCs
• Home region oriented: At least 50% of
their sales in their home region of the triad.
• Bi-regional: At least 20% of their sales in
each of two regions.
• Host region oriented: More than 50% of
their sales in a triad market other than their
home region.
• Global: at least 20% of their sales in all
three triad regions, but less than 50% in any
one region.
• Particularly Rugman & Verbeke (2004)
noted:
– The majority of the world’s largest 500
companies are MNCs
– Out of the 365 Co. within those 500, only 9 are
considered “GLOBAL” from a sale profile
viewpoint.
– 320 of those companies have 80% of their sales
in their home region of the TRIAD
Percentages of Types of MNCs &
Percentage intra-regional sales
•
•
•
•
Home region oriented (320 firms): 80.3%
Bi-regional (25 firms): 42%
Host region oriented (11 firms): 30.9%
Global (9 firms): 38.3%
Global MNCs (Rugman & Verbeke)
•
•
•
•
•
•
•
•
•
IBM
Sony
Royal Philips Electronics
Nokia
Intel
Canon
Coca-cola
Flextronics electronics
LVMH
What is the conclusion of this
study?
To be continued by Flores
(MBA2003) and Aguilera!
Check the course website for details
Porter’s Five Forces to Industry Analysis
SUBSTITUTE
PRODUCTS
SUPPLIERS
COMPETITORS
ENTRY
BARRIERS
CUSTOMERS
What Makes Entry Barriers a
Strong Force?
Few Economies of
Scale Effects
Few Technology
Advantages
Few Tariffs or Other
Trade Barriers
ENTRY
BARRIERS
Few Experience
Curve Effects
Low Capital Requirements
Low Brand Loyalty
Low Customer Loyalty
What Makes Substitute Products a
Strong Force?
Low Priced Substitutes
SUBSTITUTE
PRODUCTS
High Quality Substitute Products
Low Switching Costs
What Makes Suppliers a Strong Force?
Suppliers have
Good Reputations
Few Suppliers
SUPPLIERS
Few Substitute Products
Ability to Integrate
Forward
High Switching Costs
What Makes Customers a
Strong Force?
Customers Purchase
in Large Quantities
Customers are Large
CUSTOMERS
Low Switching Costs
Customer Profits are Low
Customers Purchase
From Several Suppliers
What Makes Competitors a
Strong Force?
Competitors of Equal Size
Many Competitors
Low Switching Costs
High Exit Barriers
COMPETITORS
Diversity Rivalry
Entry of New Firms
High “First Mover” Advantages
What about at the COUNTRY
level?
Why These Country Differences in World-Class Manufacturing?
USA
France
Taiwan
Luxury autos
High-speed trains
Electronic
components
Steel
Pharmaceuticals Consumer
electronics
Machine-tools,
instruments
Satellite
launchers
Machinetools
Ships
Medical
equipment
Specialty
chemicals
Nuclear
engineering
Clothing &
footwear
Subcompact
automobiles
Spain
Italy
Switzerland
Design
Aerospace
Japan
Autos
Heavy
machinery
Germany
South
Korea
…or in World-Class Services?
USA
UK
Germany
France
Entertainment
Money &
finance
Insurance
Tourism
Tourism
Software &
information
Waste mgmt
Custom
software
Design
Retail
banking
Money &
finance
Airlines
Large-scale Privatized
software
Utilities
‘Suitcase’
banking
Hospitality
Porter’s
Diamond of National Advantage
innovation
Firm
Strategy,
Structure,
Rivalry
Factor
Conditions
Land & Capital
Skilled labor
Infrastructure
Open markets
Free trade flows
Government
Strong firms
Intense rivalry
Rapid innovation
Leaders
CHANGE
Demand
Conditions
Related
Industries
Market size
Scale effects
Sophisticated
buyers
Government
support & demand
chance
Supplier industries feed
innovation into industry & place
pressures on industry to
innovate.
Determinants of National
Competitive Advantage
• Factor Conditions: the nation’s position in factors of
production such as skilled labor or infrastructure, necessary to
compete in a given industry.
• Demand Conditions: the nature of home-market demand for
the industry’s product or service.
• Related and Supporting Industries: the presence or absence
in the nation of supplier industries and other related industries
that are internationally competitive.
• Firm Strategy, Structure and Rivalry: the conditions in the
nation governing how companies are created, organized, and
managed, as well as the nature of domestic rivalry.
Points to Remember
• Factor conditions change and are malleable.
• Rivalry generally good, although perhaps
not among your suppliers.
• Pay attention to global demand.
• Complacency breeds failure.
• Next discontinuity?
Internet Impact
• Product design, features, and use:
– Data-carrying watches (w/ Sega).
– Watches with email, internet connection, cash
chip, telephone? (w/ HP).
• Marketing: Need to redesign colors.
• Services: Internet time (1,000 beats/day). 51
million visits to its website.
Applying the Framework
Bangalore
software
development
Japanese
consumer
electronics
Silicon Valley
Swiss Watch
Industry
Factor
conditions
Abundant
Englishspeaking
engineers
Abundant
engineers
Magnet for
engineers
Image;
expensive
craftsmen
Rivalry
Global
Local
Global
Cartels 
global
Demand
conditions
Global
Local
Global
Local 
global
Related
industries
Weak infrastructure
Suppliers,
banks
VCs,
equipment,
designers
Banks,
machine tools
Sources of Firm Advantages that stem from
National Advantages
• Efficiency:
– Combination & recombination of K, L, and technology to lower costs.
– Experience/learning curve effect from operating in one location.
– Problem: Adverse changes in relative prices.
• Specialization:
– Become a “category-killer.”
– Benefit from networks of long-term relations with specialized suppliers.
• Flexibility:
– Long-term connections with related & support industries.
– Problem: Difficulty in shifting production in the short run?
• Innovation:
– Advantage of co-locating R&D and manufacturing.
– Problem: Sophistication/universality of home-country demand?
International Product Cycles
(Vernon)
A. Traditional Product Cycle Hypothesis (PCH):
1. Products go through a “life cycle”:
•
•
•
•
Introduction
Growth
Maturation
Decline
2. Entrepreneurs and managers:
• Introduce new products when they see a market
opportunity
• They tend to be “myopic” and/or “rationally bounded”
• Market opportunities are first seen in the home market of the
firm.
• Examples:
–
–
–
–
–
–
Consumer electronics
Automobiles
Wristwatches
Medicinal herbs
Life insurance
Fast food
3. Introduction and Growth stages:
•
•
•
•
•
Product is unstandardized: different designs, inputs & processes.
Hard to determine optimum location, production scale or sale price.
High product differentiation across firms.
Individual firms do not differentiate.
Low price-elasticity of demand
4. Maturation & Decline
•
•
•
•
Standarization within differentiated kinds.
Normalization of designs, inputs & processes.
Less uncertainty as to optimum location, production sale or sale price.
Individual firms differentiate through brands, advertising, and
variations.
• Increased price-elasticity of demand.
5. Implications of the theory
• Product or service innovations reflect
features of the home country
• Home country features are taken into
account when locating activities abroad
• International expansion ought to be careful,
cautious, incremental, one-step-at-a-time
process
• Countries most similar to the home country
are approached first
6. Sequence of expansion:
–
–
–
–
–
Exporting arms-length from home
Licensing a foreign producer
Establishing a sales subsidiary
Establishing a first plant
Establishing subsequent plants
• Examples:
International migration of production
Swedish multinationals
Japanese consumer electronics
B. The New Product Cycle Theory:
1. Big changes since the mid-1970s
•
•
•
•
Globalization & Trade Blocs.
Firms and managers are now less “myopic” (learning,
experience, training, telecommunications, the “global”
village).
Many firms are now global in reach
Cross-national lags in new product introduction have been
shortened.
2. Vernon’s qualifications in 1979
•
•
•
“Global scanner” companies =>PCH is useless to them.
“Multidomestic” companies => PCH still applies.
Small exporting companies => PCH still applies
3. Other Limitations
For some products, shifts in location do not usually
take place The innovating country maintains its
export ability through the product’s life cycle
– Products w/ extremely short life cycles
– Luxury products for which cost is of little concern to
the consumer
– Products for which the company can use a
differentiation strategy
– Products that require specialized technical labor to
evolve into the next generation
Comparative vs. Competitive
Advantage
• Comparative Advantage – location-specific
• Competitive Advantage – firm-specific
• Value-added
Questions:
Where should the value-added chain be
broken across borders?
In what functional activities should a firm
concentrate resources?
Comparative vs. Competitive
1. Each stage’s contribution to the : VALUE
ADDED CHAIN.
• Highly competitive industries => low cost
oriented strategies (total cost) – American
steel industry
• Low competitive industries =>Revenue
oriented strategies (product differentiation;
market value), -- ex. home computers
2. Value-Added Analysis
• “Strategy is not jus the selection of profitable product
markets; it is also the attempt to create a competitive
advantage by investing in the link that generates the
product attribute most strongly desired by consumers and
which corresponds to the firm’s distinctive competence
relative to its competitors.”
• “An application of the value-added chain in this context
rests on the identification of the characteristics of
consumer demand and the strategic positioning of firms in
terms of their control over the critical links that supply
these characteristics”
Example: Panasonic/Radio Shack
PANASONIC
RADIO SHACK
Components
Assembly
Marketing, Sales &
Distribution
Retailing
The Value-Added Chain of
Comparative Advantage
3. International environment. Differences in:
• Institutional & cultural barriers
• Endowments, costs, productivities
4. Distortions:
• Transportation costs
• Tariffs & other trade regulations
• Competitive advantage if firms (scale, scope, and learning)
5. International strategy is a/ either comparative or
competitive strategy, or both.
SWISS WATCH INDUSTRY
Where is Switzerland?
Comparative Advantage of Nations
Gov’t: Competition Policy.
Firm strategy,
structure, and
rivalry
Gov’t: Education;
financial
regulation.
Factor
conditions
Demand
conditions
Related and
supporting
industries
Gov’t: Industrial policies, infrastructure for business.
Gov’t: product
standards and
regulations;
trade protection.
Technological Change & the Wristwatch
Components
mid-19th C.
1950s
1960s
1970s
1980s
Power
Spring
Battery
Battery
Battery
Battery
Case
Metal
Metal
Metal
Metal
Plastic
Materials
Gold, metals, Metals,
jewels
alloys
Metals,
alloys
Plastic,
Plastic,
metals, alloys metals, alloys
Movement
Escapement
Escapement
Tuning fork
Quartz
Quartz
Transmission Gears
Gears
Gears
Gears
Circuit
Face
Analog
Analog
Digital or
Analog
Digital or
Analog
Dominant
firms:
Analog
The Swatch story
Collections
Irony
Original
Skin
Chrono
Scuba
Beat
Main Exporting Countries in 2007
Switzerland
Hong Kong*
China
Germany
France
Value
($bn)
13.4
6.4
2.4
1.2
1.3
Units
Value per
(mn)
unit
25.9
517.4
472.9
13.5
638.3
3.8
14.1
85.1
5.8
224.1
* Includes re-exports. Note that Seiko and Citizen manufacture a large
proportion of their inexpensive watches in Hong Kong and China.
Source: http://www.fhs.ch
Swiss Exports by Type of Watch in 2007
Type of
watch:
Value Units Value
($bn) (mn) per unit
($)
Mechanical 67% 16%
1965
Electronic
33% 84%
187
Total
12.3 25.9
476
Source: http://www.fhs.ch
Swatch: Operating Margins
–
–
–
–
Upper segment: 24%.
Middle segment: 13%.
Lower segment: 5%.
Movements: 4%.
http://www.fhs.ch/en/swissm.php
Competence-Destroying Innovations
Ice
Telegraph
 Refrigeration
 Telephone
Gas lamps
Vacuum tube
Vinyl record
 Incandescent lamps
 Transistor
 Compact disc
Propeller
Typewriter
Minitel
Chemical photography




Traditional toys
Mechanical watch
Digital watch
 Videogames
 Digital watch
 ???
Jet engine
Word processor
Internet
Digital photography
Wristomo
• DoCoMo—Seiko.
• Launched in 2003.
•
Weight (grams) Approx. 113
(including battery).
Continuous talk time (minutes)
Approx. 120.
Continuous stand-by time (hours)
Approx. 200.
Data transmission speed 64 kbps/
32 kbps.
•
http://www.3gnewsroom.com/3g_n
ews/mar_03/news_3234.shtml
Other DoCoMo Gear
Citizen’s VIRT
• Bluetooth-enabled watch.
• The watch communicates
with the owner’s cell
phone.
• When a call comes in, the
number and name of the
caller is shown on the
watch.
• Calls can be put on hold or
forwarded from the watch.
• It alerts the owner if he o
she leaves the cell phone
behind.
• Announced in June 2006.
Seiko reacts with its own bluetooth watch.
Citizen’s VIRT
• Bluetooth-enabled watch.
• The watch communicates
with the owner’s cell
phone.
• When a call comes in, the
number and name of the
caller is shown on the
watch.
• Calls can be put on hold or
forwarded from the watch.
• It alerts the owner if he o
she leaves the cell phone
behind.
• Announced in June 2006.
Seiko reacts with its own bluetooth watch.
SMS Technology Australia
Detective
Dick Tracy
(1946)
Points to Remember
• Location advantages are contingent on the
technology employed.
• Location advantages can turn into disadvantages
very quickly.
• Importance of paying attention to global demand
shifts.
• Complacency breeds failure.
• Next technological discontinuity?
– It will affect low-cost producers (i.e. China) to a greater
extent than higher-end & differentiated producers
(Switzerland, France).