Strategy Formulation in a
Global Environment
Lecture on May 9, 2005
International Strategic
Management
Prof. Dr. Michael Dowling
Global Integration
Goal of global efficiency
Transnational
Corporations
Goal of multinational flexibility
Local Responsiveness

Global Efficiency
) Ratio of value of outputs to inputs
– increase value of outputs or
– lower value of inputs or
– both
Multinational Flexibility
) Ability to scan broad environment and detect changes that present new risks and opportunities
) Side bets to cover contingencies

Worldwide learning
) Internalization of international diversity creates potential for enhanced learning
) Organization must exploit potential!
– Develop mechanisms and organizations worldwide to sense customer needs and market opportunities
) Multinational
) International
) Global
) Transnational
Types

Multinational Strategy
) Focus on national differences
) Focus on revenues rather than cost
) Differentiation of products in response to customer preferences, industry characteristics, and government regulation
) Local resources to meet local needs
) Local autonomy
) Inability to exploit knowledge from other national units
– E.g. Unilever, Philips, Nestle
International Strategy
) Development of home innovations to develop competitive positions abroad
) Often involves attempt to transfer products, processes, or strategies from developed home market to less developed ones
) Weakness in both efficiency and flexibility
) E.g. in US - Kraft, Pfizer, P&G, GE

Global Strategy
) Emphasis on efficiency through global economies of scale
) Compromises on both flexibility and learning
) High transport costs and exchange rate risks
) Reduced learning through centralized
R&D
– E.g. Japan - Toyota, Canon, Komatsu,
Matushita
Transnational Strategy
) Both efficiency and flexibility important
) Costs and revenues must be managed simultaneously
) Innovation can be found in many parts of organization
) Capabilities and resources must be in part centralized and in part decentralized
) Complex!

Examples of a Transnational - Asea
Brown Boveri
) 1987 merger of Asea AB of Sweden and BBC Brown Boveri Ltd of
Switzerland
) world leader in power generation and transmission equipment
) also supplier of process automation, robotics, locomotives, pollution control equipment
) local organization - 1300 separate companies
– customer strategies
– regional results
– day to day management
– relationships with local government

) Business Areas - 65 global
– world-wide strategy and results
– R&D and product development
– purchasing coordination
– transfer of know-how
– acquisitions and divestments
Hout, Porter & Rudden
) Change industry by
– Exploiting economies of scale through global volume
– preempting competitor positions through large investments in innovation
– managing interdependently to achieve synergies
) No reliance on “world product”

Hamel & Prahalad
) Best defense is a good offense!
– Use cash flow at home to attack home markets of foreign competitors
‹ good example - Goodyear´s counterattack on
Michelin in Europe
‹ bad example - RCA with TVs in the US
Develop core business strategy
Internationalize the strategy
Core Business Strategy
Globalize the strategy
Country
A
Country
B
Country
C
Country
D
Country
E

Framework of Global Strategy Forces
Position and resources of business and parent company
Industry globalization drivers
• Market factors
• Cost factors
• Environmental factors
• Competitive factors
Appropriate setting for global strategy levers
• Major market participation
• Product standardization
• Activity concentration
• Uniform marketing
• Integrated competitive moves
Benefits/ costs of global strategy
Organization´s ability to implement a global strategy
Market Participation
) Multidomestic
– stand alone potential for profits
– patterns of investments accrue from local advantage
) Global
– potential for global benefits
– e.g. home market of competitor
– pattern developed for global advantage

Product Offering
) Multidomestic
– tailored to local needs
) Global
– standardized core product with minimum on local adaptation
Location of Value Added Activities
) Multidomestic
– value chain reproduced in each country
) Global
– value chain activities located in country with low cost for that activity

Marketing Approach
) Multidomestic
– tailored to each country
) Global
– uniform approach
Competitive Moves
) Multidomestic
– made specific to a country
) Global
– integrated across countries

Main Benefits of a Global Strategy
) Cost reduction
– economies of scale
– lower factor costs
– flexibility to seek lowest cost
– enhance bargaining power to reduce input costs
) Improved quality
– fewer products mean usually better quality control
– e.g. Toyota vs.. GM
) Enhanced Customer Preference
– better to establish brand name - e.g. Coca
Cola
) Increased competitive leverage
– more points for counterattack of competitors

Downside of Global Strategy
) Significant management costs for coordination, staff, etc.
) Product standardization may not satisfy all customers!
) Increase currency risks by activity concentration
) Integrated competition may lead to losses in particular countries
Ideal Strategy!
) Find a balance between level of strategy globalization and globalization potential of the industry
) Balance also depends on limitations of organization such as structure, culture, people, etc.

Globalization Potential of Industry versus
Globalization Strategy
High
National strategic disadvantage
Business D
Business C
Balanced global and national strategic advantage
Business B
Low
Business A
Low
Global strategic disadvantage
Globalization potential of industry High
Strategy Implementation in a
Global Environment

Early Research
) John Stopford, late 1960s
– 187 largest US-based MNCs
– number of products sold internationally (diversity)
– importance of international sales
) World wide companies adopt different organizational structures at different phases of development.
) End result often a “matrix” structure
Stopford and Well`s International Structural Stages Model
Worldwide
Product
Division Global Matrix
(or „Grid“)
Alternate Paths of Development
International
Division
Area
Division
Foreign Sales as a Percentage of Total Sales

Bartlett and Goshal:
Adapting to Administrative Heritage
) Every company is influenced by its development path
– history
– management culture
Organizational Configuration Models
(a) Decentralized Federation common to European multinational strategy
Mainly
Financial
Flows
(capital out; dividends back)
Loose, Simple Controls;
(strategic decisions decentralized)

(b) Coordinated Federation common to US international strategy
Mainly
Knowledge
Flows
(technology products, processes, systems)
Formal System Controls;
(planning, budgeting, replicating parent company administrative system)
(c) Centralized Hub
- common to Japanese global strategy
Mainly Flows of Goods
Tight, Simple Controls;
(key strategic decisions made centrally)

Solution: Building Organizational
Capabilities
) Formal structure not enough!
) MNC must develop multiple organizational capabilities:
– administrative systems
– communication systems
– interpersonal relationships
Integrated Network Model the Transnational Solution
Distributed, Specialized
Resources and Capabilities
Complex Process of Coordination and Cooperation in an Environment of Shared Decision Making
Large Flows of
Componets, Products,
Resorces, People, and Information among
Interdependent Units

The “Biological Model” of the
Transnational
) Anatomy
– line structures for formal relationships, but task forces and committees for additional decision making forums
) Physiology
– Information flows, including informal relationships
– Importance of meetings, trips, committee assignments
) Psychology
– corporate values and beliefs
– vision and mission
– behavior and public actions of senior management
– personnel policies, practices, systems

Problems with Matrix structures
) Positive Theory
– managers report both to area and functional supervisors
– multiple channels of communication
) Negative practice
– raised level of disagreement and conflict
– dual reporting led to confusion and conflict
– cultural differences heightened problems
International Cooperative Strategy

Typical Day for McKinsey Consultant –
David Ernst
) Gas pumped into his car is a product of an alliance between Royal/Dutch Shell and
Texaco
) Credit card to pay is co-branded with Shell and Mastercard
) Starbucks Coffee sold in airport through a JV with Marriott Corp.
) Airline he uses part of a group of several international carriers.
– „For most companies the basis of competition has shifted to groups of companies competing against groups of companies.“

Other Examples
) Oracle software has 15-16.000 alliances!
) IBM has announced $30 billion in alliances since May 1999 including Dell and Cisco Systems
) Average large company has 30 alliances
Types
) Networks
) Licenses
) Contracts, e.g. for R&D
) Joint Ventures
) Consortia
) Minority Investments
Loose
Tight

Reasons
) risk sharing
) scale economies
) access to markets
) access to technology
) converging markets
Why alliances can make more sense than acquisitions
(Business Week 10/99)
) Flexibility and informality promote efficiencies
) Access to new markets and technologies
)
)
Ability to create and disband projects easily
Multiple parties share risks and expenses
)
)
)
Partners can retail their independent brand identification
Working with partners possessing multiple skills can create major synergies
Rivals can often work harmoniously together
)
)
Alliances can take multifarious forms, from simple
R&D deals to huge projects
Ventures can accommodate dozens of participants
) Antitrust laws can shelter cooperative R&D activities

Goals
) Product goals
– Cost reductions
– Product range additions
) Knowledge goals
– transfer of capabilities
Risks - Giving away your future?
) skills
) jobs
) technology

Cost
) Complexity
) Uncertainty
) Difficulty in merging cultures
) Failure rate
– Andersen Consulting:
‹ “61% of corporate partnerships are either outright failures or seen as ´limping´along.”
Management of Alliances
(Bartlett and Goshal)
) Choice of Partner
) Managing Boundaries
) Structure of Alliance
) Managing Knowledge Flows

Guideline for strong and lasting Alliances
) Compatibility and Responsibility
) Equal contributions
) Strong management
) Separate Culture
Management of Alliances
(Gomes-Casseres - HBS)

Global Logic of Alliances
Kenichi Ohmae
) Globalization makes them essential
– restatement of Triad power
) Dispersion of Technology
– no one company can be expert at everything
) Need to spread fixed costs
) Danger of building internally through equity
) Focus on ROS not ROA
Collborate with Competitors and Win
Hamel, Doz, Prahlad
) Based on research on 15 alliances
– four European-US
– two intra-European
– two European-Japan
– seven US-Japan
) In part in response to HBR article by
Robert Reich, “Joint Ventures with
Japan Give Away our Future”

Findings
) Alliances with Asian companies not always one sided
) Collaboration is a form of competition
) Harmony not the most important measure of success
) Cooperation has limits
) Japanese firms
– make major effort to learn from partners
) Western firms
– enter alliances to avoid investments, reduce risks
– many “alliances” just outsourcing
– e.g. Honda-Rover: Rover used Honda technology to avoid investments in design for new cars.

Conditions under which partners both can profit
) Strategic goals converge even as competitive goals diverge: e.g. Siecor
) Size and market power of partners is modest compared to industry leaders
) Each partner believes it can learn from other but still protect proprietary skills
Secure Defenses Important
) Defenses depends on type of skills
– danger of tranfer is greater when
‹ easily transported (in drawings, etc)
‹ workers can leave with knowledge
‹ independent of cultural context
– Asian companies contribute complex process skills (hard to tranfer), Western companies often contribute technology
(easier to transfer).

) Written agreements important
– limited in scope
‹ e.g. single technology rather than a whole group of technologies
‹ time limit
– specific performance requirements
– careful control of gatekeepers of information (informal relationships)
) too much collegiality is dangerous!
‹ Western managers and engineers too open.
‹ Japanese managers more closed.
– “We don´t feel any need to reveal what we know. It is not an issue of pride for us. We are glad to sit and listen. If we´re patient we usually learn what we want to know.”
) physical separation sometimes important
Enhance learning capabilities
) Western companies must become more receptive to learning from partners
– Japanese executive
‹ “Our Western partners approach us with the attitude of teachers. We are quite happy with this, because we have the attitudes of students”
) Top management must be committed to learning
) Lower level employees must be trained to be observant and learn.