MGT 563
OPERATIONS STRATEGIES
Dr. Aneel SALMAN
Department of Management Sciences
COMSATS Institute of Information Technology,
Islamabad
Recap Lecture 31
• Balanced Score Card
Outcomes
• Understand and be able to perform the key steps in the
development of a operations strategies for new or
existing companies.
• Understand how companies set strategic direction and
how they use data and analysis to create key strategic
and operational performance measures to monitor the
effectiveness of the strategy implemented.
• Understand the issues and challenges companies face
when developing operation strategies to improve
performance, such as resistance to change, limited
resources, etc., and the importance of employee
involvement in the process, and the need to manage
the strategic planning process.
THE CONCEPT OF STRATEGY
The Concept of Strategy and the
Pursuit of Sustainable Above-Normal
Profits
Domain of Strategy
• strategic competitiveness and above normal returns
• concerns managerial decisions and actions which
materially affect the success and survival of business
enterprises
• involves the judgment necessary to strategically
position a business and its resources so as to maximize
long-term profits in the face of irreducible uncertainty
and aggressive competition
• strategy is the linkage between a business and its
current and future environment
Definition
• The determination of the long run goals and
objectives of an enterprise, the adoption of
courses of action and the allocation of
resources necessary for carrying out these
goals
•
•
Alfred Chandler, Strategy and Structure
Levels of Strategy
CORPORATE
STRATEGY
BUSINESS
STRATEGY
FUNCTIONAL
STRATEGIES
CORPORATE
HEAD OFFICE
Division A
Division B
R&D
R&D
Personnel
Personnel
Finance
Finance
Production
Production
Marketing/Sales
Marketing/Sales
Levels of Strategy
• Corporate strategy... defines the scope of the business
in terms of the industries and markets in which it
competes.
– includes decisions about diversification, vertical
integration, acquisitions, new ventures, divestments,
allocation of scarce resources between business units
• Business strategy... is concerned with how the firm
competes within a particular industry or market... to
win a business unit must adopt a strategy that
establishes a competitive advantage over its rivals.
• Functional strategy... the detailed deployment of
resources at the operational level
Common Elements in Successful Strategy
Successful
Strategy
EFFECTIVE IMPLEMENTATION
Long-term, simple
and agreed upon
objectives
Profound
understanding of
the competitive
environment
Objective
appraisal of
resources
$
Strategy as a Quest for Profit
•
The stakeholder approach : The firm is a coalition of interest groups—it seeks
to balance their different objectives
 The shareholder approach : The firm exists to maximize the wealth of
its owners (= max. present value of profits over the life of the firm)
For the purposes of strategy analysis we assume that the primary goal of the firm
is profit maximization.
Rationale:
1) Boards of directors legally obliged to pursue shareholder interest
2) To replace assets firm must earn return on capital > cost of capital
(difficult when competition strong).
3) Firms that do not max. stock-market value will be acquired
Hence: Strategy analysis is concerned with identifying and accessing the sources
of profit available to the firm
From Profit Maximization to Value Maximization
• Profit maximization an ambiguous goal
–
–
–
–
Total profit vs. Rate of profit
Over what time period?
What measure of profit?
Accounting profit versus economic profit (e.g. Economic Value Added:
Post-tax operating profit less cost of capital
Maximizing the value of the firm:
Max. net present value of free cash flows: max. V = St
Where:
V
Ct
r
market value of the firm.
free cash flow in time t
weighted average cost
of capital
Ct
(1 + r)t
The World’s Most Valuable Companies:
Performance Under Different Profitability Measures
COMPANY
MARKET
CAP.
($BN.)
NET
INCOME
($BN)
RETURN
ON
SALES
(%)
RETURN
ON
EQUITY
(%)
RETURN
ON
ASSETS
(%)
RETURN
TO
SHAREHOLDERS
(%)
Exxon Mobil
372
36.1
19.9
34.9
17.8
11.7
General Electric
363
16.4
10.7
22.2
14.7
(1.5)
Microsoft
281
12.3
40.3
30.0
18.8
(0.9)
Citigroup
239
24.6
22.0
21.9
1.5
4.6
BP
233
22.3
9.9
27.9
10.7
10.2
Bank of America
212
16.5
27.0
14.1
1.2
2.4
Royal Dutch Shell
211
25.3
14.7
26.7
11.6
11.8
Wal-Mart
197
11.2
5.5
21.4
8.1
(10.3)
Toyota Motor
197
12.1
10.7
13.0
4.8
(22.1)
Gazprom
196
7.3
28.1
9.8
7.1
n.a.
HSBC
190
15.9
23.0
16.3
1.0
(11.8)
Procter & Gamble
190
8.7
17.3
13.7
6.4
7.2
Shareholder Value Maximization and Strategy Choice
The Value Maximizing Approach to Strategy Formulation:
•
Identify strategy alternatives
•
Estimate cash flows associated with cash strategy
•
Estimate cost of capital for each strategy
•
Select the strategy which generates the highest NPV
Problems:
•
•
Estimating cash flows beyond 2-3 years is difficult
Value of firm depends on option value as well as DCF value
Implications for strategy analysis:
•
Some simple financial guidelines for value maximization
a) On existing assets—maximize after-tax rate of return
b) On new investment—seek rate of return > cost of capital
•
Utilize qualitative strategy analysis to evaluate future profit potential
A Comprehensive Value Metrics Framework
Shareholder
Value
Measures:
• Market value of the
firm
•Market value added
(MVA)
•Return to
shareholders
Intrinsic
Value
Measures:
• Discounted cash
flows
•Real option values
Financial
Indicators
Measures:
• Return on Capital
• Growth (of
revenues & operating
profits
•Economic profit (EVA)
Value
Drivers
Sources:
• Market share
• Scale economies
• Innovation
• Brands
Sources of Superior Performance
Above Normal Profits
(in Excess of the Competitive Level)
Avoid
Competitors
Attractive
Industry
Attractive
Strategic
Group
Attractive
Niche
Entry
Barriers
Mobility
Barriers
Isolating
Mechanisms
Be Better Than
Competition
Cost
Advantage
Differentiation
Advantage
Sources of Competitive Advantage
COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
The Experience Curve
The “Law of Experience”
1992
1994
Cost per
unit of
output (in
real $)
The unit cost value added to a standard product
declines by a constant % (typically 20-30%) each time
cumulative output doubles.
1996
1998
2000
Cumulative Output
2002
2004
Examples of Experience Curves
75%
100K
200K
500K
1,000K
Accumulated unit production
(millions)
UK refrigerators, 1957-71
Price Index
50 100 200 300
1960 Yen
15K 20K 30K
Japanese clocks & watches, 1962-72
70% slope
5
10
Accumulated units
(millions)
50
Drivers of Cost Advantage
ECONOMIES OF SCALE
• Indivisibli\ties
• Specialization and division of labor
ECONOMIES OF LEARNING
• Increased dexterity
• Improved organizational routines
PRODUCTION TECHNIQUES
• Process innovation
• Reengineering business processes
PRODUCT DESIGN
INPUT COSTS
• Standardizing designs & components
• Design for manufacture
• Location advantages
• Ownership of low-cost inputs
• Non-union labor
• Bargaining power
CAPACITY UTILIZATION
• Ratio of fixed to variable costs
• Speed of capacity adjustment
RESIDUAL EFFICIENCY
• Organizational slack; Motivation &
culture; Managerial efficiency
Economies of Scale: The Long-Run
Cost Curve for a Plant
Sources of scale economies:
- technical input/output relationships
- indivisibilities
- specialization
Cost per
unit of
output
Minimum
Efficient Plant Size:
the point
where most scale
economies are
exhausted
Units of output
per period
Scale Economies in Advertising: U.S. Soft Drinks
Advertising Expenditure ($ per case)
0.20
0.10 0.15
0.05
0.02
Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main brands incur
lower advertising costs per unit of sales than their smaller rivals.
Schweppes
SF Dr. Pepper
Diet 7-Up
Tab
Diet Pepsi
Diet Rite
Fresca
Seven Up
Sprite
Dr. Pepper
Pepsi
10
20
50
100
Annual sales volume (millions of cases)
200
500
1,000
Coke
Applying the Value Chain to Cost Analysis:
The Case of Automobile Manufacture
STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES
PURCHASING
PARTS
INVENTORIES
R&D
DESIGN
ENGNRNG
COMPONENT
MFR
ASSEMBLY
TESTING,
QUALITY
CONTROL
STAGE 2. ALLOCATE TOTAL COSTS
GOODS
INVENTORIES
SALES
&
MKITG
DISTRIBUTION
DEALER &
CUSTOMER
SUPPORT
Applying the Value Chain to Cost Analysis: The Case of
Automobile Manufacture (continued)
--Plant scale for each
component
-- Process technology
-- Plant location
-- Run length
-- Capacity utilization
STAGE 3.
IDENTIFY
COST
DRIVERS
PURCHASING
PARTS
INVENTORIES
R&D
DESIGN
ENGNRNG
COMPONENT
MFR
-- Level of quality targets -- No. of dealers
-- Frequency of defects
-- Sales / dealer
-- Level of dealer
support
-- Frequency of defects
under warranty
ASSEMBLY
TESTING,
QUALITY
CONTROL
Prices paid
--Size of commitment
-- Plant scale
depend on:
--Productivity of
-- Flexibility of production
-- Order size
R&D/design
-- No. of models per plant
--Purchases per
--No. & frequency of new
-- Degree of automation
supplier models
-- Sales / model
-- Bargaining power
-- Wage levels
-- Supplier location
-- Capacity utilization
GOODS
INVENTORIES
SALES
&
MKITG
DISTRIBUTION
--Cyclicality &
predictability of sales
--Customers’
willingness to wait
DEALER &
CUSTOMER
SUPPORT
Applying the Value Chain to Cost Analysis: The Case of
Automobile Manufacture (continued)
STAGE 4. IDENTIFY LINKAGES
Consolidation of orders to increase
discounts, increases inventories
PRCHSNG
PARTS
INVNTRS
R&D
DESIGN
Designing different models around
common components and platforms
reduces manufacturing costs
COMPONENT
MFR
ASSEMBLY
Higher quality parts and materials
reduces costs of defects
at later stages
STAGE 5. RECCOMENDATIONS FOR COST REDUCTION
TESTING GOODS
QUALITY
INV
SALES DSTRBTN DLR
MKTG
CTMR
Higher quality in manufacturing
reduces warranty costs
The Nature of Differentiation
DEFINITION: “Providing something unique that is valuable to the
buyer beyond simply offering a low price.” (M. Porter)
THE KEY IS TO CREATE VALUE FOR THE CUSTOMER
TANGIBLE DIFFERENTATION
Observable product characteristics:
• size, color, materials, etc.
• performance
• packaging
• complementary services
INTANGIBLE DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customer’s image, status, identity, and
desire for exclusivity
TOTAL CUSTOMER RESPONSIVENESS
Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
Identifying Differentiation Potential:
The Demand Side
THE PRODUCT
THE
CUSTOMER
What needs does
it satisfy?
By what criteria
do they
choose?
What are key
attributes?
Relate patterns of
customer
preferences to
product attributes
What price premiums
do product attributes
command?
What
motivates
them?
What are demographic,
sociological,
psychological correlates
of customer behavior?
FORMULATE
DIFFERENTIATION
STRATEGY
• Select product
positioning in relation
to product attributes
• Select target
customer group
• Ensure customer /
product compatibility
• Evaluate costs and
benefits of
differentiation
Using the Value Chain to Identify
Differentiation Potential on the Supply Side
MIS that supports fast
response capabilities
Training to support
customer service
excellence
Unique product features.
Fast new product
development
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND
OPERATIONS
LOGISTICS
Quality of
components &
materials
OUTBOUND
MARKETING
LOGISTICS
Defect free
products. Wide
variety
Fast delivery.
Efficient order
processing
SERVICE
& SALES
Building brand
reputation
Customer technical
support. Consumer
credit. Availability of
spares
Identifying Differentiation Opportunities through
Linking the Value Chains of the Firm and its
Customers: Can Manufacture
1
5
2
3
5. Competent technical support can increase canner’s efficiency of plant utilization.
Distribution
4. Efficient order processing system can reduce customers’ ordering costs.
Marketing
3. Frequent, reliable delivery can permit canner to adopt JIT can supply.
Canning
2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.
Processing
1. Distinctive can design can assist canners’ marketing activities.
Inventory holding
Service & technical
support
Sales
Distribution
Inventory holding
Manufacturing
Design Engineering
Inventory holding
Purchasing
Supplies of steel
& aluminum
CAN MAKER
Purchasing
4
CANNER
INDUSTRY ANALYSIS AND
POSITIONING
Determining Industry Attractiveness
and Identifying Strategic
Opportunities
Profitability of US Industries (selected industries only)
Median return on equity (%), 1999-2005
Household & Personal Products 22.7
Pharmaceuticals
Tobacco
Food Consumer Products
Securities
18.9
Diversified financials
18.3
Beverages
18.8
Mining & crude oil
Petroleum Refining
17.3
Medical Products & Equipment 17.2
Commercial Banks
15.5
Scientific & Photographic Equipt.
Apparel
Computer Software
13.9
Publishing, Printing
13.5
Health Care
Electronics, Electrical Equipment
Specialty Retailers
Computers, Office Equipment 11.7
Gas & Electric Utilities
10.4
22.3
Food and Drug Stores
10.0
21.6
Motor Vehicles & Parts
9.8
19.6
Hotels, Casinos, Resorts
9.7
Railroads
9.0
Insurance: Life and Health
8.6
Packaging & Containers
8.6
17.8
Insurance: Property & Casualty 8.3
Building Materials, Glass
8.3
Metals
8.0
Food Production
7.2
15.0
Forest and Paper Products
6.6
14.4
Semiconductors &
Electronic Components
5.9
Telecommunications
4.6
13.1
Communications Equipment
1.2
13.0
Entertainment
0.2
13.0
Airlines
(22.0)
The Profitability of Global Industries: Return on Invested Capital, 1963-2003
Utilities
6.2
6.5
Telecom services
Transporation
6.9
Energy
7.7
Materials
8.4
OVERALL AVERAGE
9
Retailing
9
Consumer durables and apparel
9.5
Food retailing
9.6
Capital goods
9.9
Automobiles and components
9.9
Technology hardware and equipment
10.3
Hotels, restaurants, leisure
10.3
Food, beverages, tobacco
11
Healthcare equipmernt and services
11.3
11.9
Semiconductors
Commercial services
12.8
Media
14.7
Computer software and services
15
Household and personal products
15.2
Pharmaceuticals
18.4
0
5
10
15
Average ROIC 1963-2003 (%)
20
From Environmental Analysis
to Industry Analysis
The national/
international
economy
Technology
Government
& Politics
The natural
environment
THE INDUSTRY
ENVIRONMENT
• Suppliers
• Competitors
• Customers
Demographic
structure
Social structure
structure
Social
•The Industry Environment lies at the core of the Macro Environment.
•The Macro Environment impacts the firm through its effect on the Industry
Environment.
Drawing Industry Boundaries :
Identifying the Relevant Market
• What industry is BMW in:
– World Auto industry
– European Auto industry
– World luxury car industry?
• Key criterion: SUBSTITUTABILITY
– On the demand side : are buyers willing to substitute between
types of cars and across countries
– On the supply side : are manufacturers able to switch
production between types of cars and across countries
• We may need to analyze industry at different levels of
aggregation for different types of decision
The Spectrum of Industry Structures
Perfect
Competition
Oligopoly
Concentration
Many firms
A few firms
Entry and Exit
Barriers
No/Low barriers
Significant barriers
Product
Differentiation
Homogeneous
Product
Potential for product differentiation
Information
Perfect
Information flow
Duopoly
Two firms
Imperfect availability of information
Monopoly
One firm
High barriers
Porter’s Five Forces of Competition Framework
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL
ENTRANTS
Threat of
Threat of
new entrants
SUBSTITUTES
Rivalry among
existing firms
Bargaining power of buyers
BUYERS
substitutes
The Structural Determinants of Competition
SUPPLIER POWER
• Supplier concentration
• Relative bargaining
power
THREAT OF ENTRY
•Capital requirements
•Economies of scale
•Absolute cost advantage
•Product differentiation
•Access to distribution
channels
•Legal/ regulatory barriers
•Retaliation
INDUSTRY RIVALRY
•Concentration
•Diversity of
competitors
•Product differentiation
•Excess capacity &
exit barriers
•Cost conditions
BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
SUBSTITUTE
COMPETITION
• Buyers’ propensity
to substitute
• Relative prices &
performance of
substitutes
SUPPLIER POWER
LOW
THREAT OF ENTRY
LOW
•economies of scale
•capital requirements
for R&D and clinical
trials
•product differentiation
•control of distribution
channels
•patent protection
INDUSTRY
COMPETITIVENESS
LOW
DRUG
INDUSTRY
(ROE=22%)
THREAT OF SUBSTITUTES
LOW
•high concentration
•product differentiation
•patent protection
•steady demand growth
•no cyclical fluctuations
of demand
BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)
No substitutes.
(Changing as managed care
encourages generics.)
Applying Five-Forces Analysis
Forecasting Industry Profitability
• Past profitability a poor indicator of future
profitability.
• If we can forecast changes in industry
structure we can predict likely impact on
competition and profitability.
Strategies to Improve Industry Profitability
• What structural variables are depressing profitability
• Which of these variables can be changed by individual or collective
strategies?
Neutralizing The Five
Competitive Forces
Force
Entry
Method for Neutralizing Force
Erecting barriers (isolating
mechanisms) create & exploit economies of
scale, aggressive deterrence, design in switching
costs, etc.
Rivalry
Compete on nonprice dimensions:
cost leadership, differentiation, cooperation, etc.
Substitutes
Buyers
Suppliers
Improve attractiveness compared to
substitutes: better service, more features, etc..
Reduce buyer uniqueness: forward
integrate, differentiate product, new customers, etc..
Reduce supplier uniqueness: backward
integrate, obtain minority position, second source, etc..
The Traditional Model of Industry Life Cycle
Shakeout
Sales volume
Fermentation
Time
Maturity
Decline
How Typical is the Life Cycle Pattern?
• Technology-intensive industries (e.g. pharmaceuticals,
semiconductors, computers) may retain features of
emerging industries.
• Other industries (especially those providing basic
necessities, e.g. food processing, construction, apparel)
reach maturity, but not decline.
• Industries may experience life cycle regeneration.
Sales
Sales
B&W
Color
Portable
HDTV ?
1900 50 90 07
MOTORCYCLES
1930
50 70
TV’s
90
07
• Life cycle model can help us to anticipate industry
evolution—but dangerous to assume any common, predetermined pattern of industry development
Evolution of Industry Structure over the Life Cycle
INTRODUCTION
Affluent buyers
GROWTH
Increasing
penetration
TECHNOLOGY
Rapid product
innovation
Product and
Incremental
process innovation innovation
PRODUCTS
Wide variety,
Standardization
rapid design change
Commoditization
Continued
commoditization
MANUFACTURING
Short-runs, skill
intensive
Deskilling
Overcapacity
DEMAND
TRADE
Capacity shortage,
mass-production
MATURITY
Mass market
replacement
demand
DECLINE
Knowledgeable,
customers, residual segments
Well-diffused
technology
-----Production shifts from advanced to developing countries-----
COMPETITION
Technology-
Entry & exit
KSFs
Product innovation
Process technology. Design for
Shakeout &
consolidation
Cost efficiency
Price wars,
exit
Overhead reduction, rationalization, low
cost sourcing
The Driving Forces of Industry Evolution
BASIC CONDITIONS
Customers become
more knowledgeable
& experienced
INDUSTRY STRUCTURE
Customers become
more price conscious
Products become
more standardized
Diffusion of
technology
COMPETITION
Production
becomes less R&D
& skill-intensive
Production shifts
to low-wage
countries
Quest for new
sources of
differentiation
Price competition
intensifies
Excess capacity
increases
Demand growth
slows as market
saturation approaches
Distribution channels
consolidate
Bargaining power
of distributors
increases
Changes in the Population of Firms over the
Industry Life Cycle: US Auto Industry 1885-1961
250
200
150
No. of firms
100
50
0
1895
1905
1915
1925
1935
1945
1955
Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.
Preparing for the Future : The Role of Scenario
Analysis in Adapting to Industry Change
• Stages in undertaking multiple Scenario Analysis:
• Identify major forces driving industry change
• Predict possible impacts of each force on the industry
environment
• Identify interactions between different external forces
• Among range of outcomes, identify 2-4 most likely/ most
interesting scenarios: configurations of changes and
outcomes
• Consider implications of each scenario for the company
• Identify key signposts pointing toward the emergence of
each scenario
• Prepare contingency plan
Innovation & Renewal over the
Industry Life Cycle: Retailing
Warehouse
Clubs
e.g. Price Club
Sam’s Club
Mail order,
catalogue
retailing
e.g. Sears
Roebuck
1880s
Chain
Stores
e.g. A&P
1920s
Discount
Stores
e.g. K-Mart
Wal-Mart
“Category
Killers”
e.g. Toys-R-Us,
Home Depot
1960s
Internet
Retailers
e.g. Amazon;
Expedia
2000
?
Gary Hamel: Shaking the Foundations
OLD BRICK
NEW BRICK
Top management is responsible
for setting strategy
Everyone is responsible
for setting strategy
Getting better, getting faster
is the way to win
Rule-busting innovation
is the way to win
IT creates competitive advantage
Unconventional business concepts
create competitive advantage
Being revolutionary is high risk
More of the same is high risk
We can merge our way to
competitiveness
There’s no correlation between
size and competitiveness
Innovation equals new products
and new technology
Innovation equals entirely new
business concepts
Strategy is the easy part,
Implementation the hard part
Strategy is the easy only if you’re
content to be an imitator
Change starts at the top
Change starts with activists
Our real problem is execution
Our real problem is innovation
Big companies can’t innovate
Big companies can become gray-haired
revolutionaries
An Alternate Model of Industry Life Cycle
Convergence
Sales volume
Emergence
Coexistence
Dominance
Established
Industry
Emerging Industry
Time
The Industry Life Cycle as an S curve
Performance
Maturity
Discontinuity
Takeoff
Ferment
Time
The S-curve Maps Major Transitions
Maturity
Performance
Discontinuity
Takeoff
Ferment
Time
RESOURCES, CAPABILITIES, AND
CORE COMPETENCES
Shifting the Focus of Strategy Analysis:
From the External to the Internal Environment
THE FIRM
THE
INDUSTRY
ENVIRONMENT
Goals and
Values
Resources and
Capabilities
STRATEGY
STRATEGY
Structure and
Systems
The
Firm-Strategy
Interface
•Competitors
•Customers
•Suppliers
The
Environment-Strategy
Interface
Rationale for the Resource-based
Approach to Strategy
• When the external environment is subject to
rapid change, internal resources and capabilities
offer a more secure basis for strategy than
market focus.
• Resources and capabilities are the primary
sources of profitability.
Canon: Products and Core Technical Capabilities
Precision
Mechanics
Fine
Optics
35mm SLR camera
Compact fashion camera
EOS autofocus camera
Digital camera
Video still camera
Basic fax
Laser fax
Plain-paper copier
Color copier
Color laser copier
Laser copier
Mask aligners
Inkjet printer
Excimer laser aligners
Laser printer
Color video printer
Stepper aligners
Calculator
Notebook computer
MicroElectronics
Eastman Kodak’s Dilemma
Resources & Capabilities
1980’s
Chemical Imaging
•Organic Chemistry
•Polymer technology
•Optomechtronics
•Thin-film coatings
Brands
Global Distribution
1990’s
Businesses
Film
Cameras
Fine Chemicals
Pharmaceuticals
Diagnostics
DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics
Need to build digital imaging
capability
Digital Imaging Products
(e.g. Photo CD System;
Advantix cameras & film
The Links between Resources, Capabilities
and Competitive Advantage
COMPETITIVE
ADVANTAGE
INDUSTRY KEY
SUCCESS FACTORS
STRATEGY
ORGANIZATIONAL
CAPABILITIES
RESOURCES
TANGIBLE
•Financial
•Physical
INTANGIBLE
•Technology
•Reputation
•Culture
HUMAN
•Skills/know-how
•Capacity for
communication &
collaboration
•Motivation
Appraising Resources
RESOURCE
Tangible
Resources
CHARACTERISTICS
Financial
Borrowing capacity
Internal funds generation
Physical
Plant and equipment:
size, location, technology
flexibility.
Land and buildings.
Raw materials.
Debt/ Equity ratio
Credit rating
Net cash flow
Market value of
fixed assets.
Scale of plants
Alternative uses for
fixed assets
Technology
Patents, copyrights, know how
R&D facilities.
Technical and scientific
employees
No. of patents owned
Royalty income
R&D expenditure
R&D staff
Reputation
Brands. Customer loyalty. Company
reputation (with suppliers, customers,
government)
Brand equity
Customer retention
Supplier loyalty
Training, experience, adaptability,
commitment and loyalty of employees
Employee qualifications,
pay rates, turnover.
Intangible
Resources
Human
Resources
INDICATORS
The World’s Most Valuable Brands, 2006
Rank Company
Brand
value
($bn.)
1
2
3
4
5
6
7
8
9
10
67.5
59.9
53.4
47.0
35.6
26.5
26.4
26.0
24.8
21.2
Coca-Cola
Microsoft
IBM
GE
Intel
Nokia
Disney
McDonald’s
Toyota
Marlboro
Rank
11
12
13
14
15
16
17
18
19
20
Company
Brand
value
($bn.)
Mercedes Benz
20.0
Citi
20.0
Hewlett-Packard 18.9
American Express 18.6
Gillette
17.5
BMW
17.1
Cisco
16.6
Louis Vuitton
16.1
Honda
15.8
Samsung
15.0
http://www.interbrand.com/best_brands_2007.asp
Source: Interbrand
Defining Organizational Capabilities
Organizational Capabilities = firm’s capacity for
undertaking a particular activity. (Grant)
Distinctive Competence = things that an organization
does particularly well relative to competitors. (Selznick)
Core Competence = capabilities that are fundamental to a
firm’s strategy and performance. (Hamel and Prahalad)
Identifying Organizational Capabilities:
A Functional Classification
FUNCTION
Corporate
Management
CAPABILITY
EXEMPLARS
Financial management
Strategic control
Coordinating business units
Managing acquisitions
ExxonMobil, GE
IBM, Samsung
BP, P&G
Citigroup, Cisco
MIS
Speed and responsiveness through
rapid information transfer
Wal-Mart, Dell
Capital One
R&D
Research capability
Development of innovative new products
Merck, IBM
Apple, 3M
Manufacturing
Efficient volume manufacturing
Continuous Improvement
Flexibility
Briggs & Stratton
Nucor, Harley-D
Zara, Four Seasons
Design
Design Capability
Apple, Nokia
Marketing
Brand Management
Quality reputation
Responsiveness to market trends
Sales, Distribution
& Service
Sales Responsiveness
PepsiCo, Pfizer
Efficiency and speed of distribution LL Bean, Dell
Customer Service
Singapore Airlines
Caterpillar
P&G, LVMH
Johnson & Johnson
MTV, L’Oreal
The Value Chain:
The McKinsey Business System
TECHNOLOGY
PRODUCT DESIGN
MANUFACTURING
MARKETING
DISTRIBUTION
SERVICE
The Porter Value Chain
FIRM INFRASTRUCTURE
SUPPORT
ACTIVITIES
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
MARKETING
LOGISTICS
& SALES
SERVICE
PRIMARY
ACTIVITIES
The Rent-Earning Potential
of Resources and Capabilities
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED
THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY
Scarcity
Relevance
Durability
SUSTAINABILITY OF THE
COMPETITIVE ADVANTAGE
Transferability
Replicability
Property rights
APPROPRIABILITY
Relative
bargaining power
Embeddedness
Assessing a Companies Resources
and Capabilities: The Case of VW
Importanc
e
VW’s
Relative
Strength
R1. Finance
6
R2. Technology
R3. Plant and equipment
RESOURCES
R4. Location
R5. Distribution
CAPABILITIES
Importance
VW’s Relative
Strength
4
C1. Product
development
9
4
7
5
C2. Purchasing
7
5
8
8
C3. Engineering
7
9
C4. Manufacturing
8
7
C5. Financial
management
6
3
C6. R&D
6
4
C7. Marketing & sales
9
4
C8. Government
relations
4
8
7
8
4
5
Appraising VW’s Resources and Capabilities
(Hypothetical only)
10
Key Strengths
Superfluous Strengths
C3
R3
C8
Relative Strength
C4
C2
R2
5
R1
C6
1
Strategic Importance
C5
C1
C7
Key Weaknesses
Zone of Irrelevance
1
R4
R5
5
10
Approaches to Capability Development
1)
Acquire and develop the underlying resources. Especially human resources
--Externally (hiring)
--Internally through developing individual skills
2)
Acquire/access capabilities externally through acquisition or
alliance
3)
Greenfield development of capabilities in separate organizational unit (IBM &
the PC, Xerox & PARC, GM & Saturn)
4)
Build team-based capabilities through training and team development (i.e.
develop organizational routines)
5)
Align structure & systems with required capabilities
6)
Change management to transform values and behaviors (GE, BP)
7)
Product sequencing (Intel , Sony, Hyundai)
8)
Knowledge Management (systematic approaches to acquiring, storing,
replicating, and accessing knowledge)
COMPETITIVE ADVANTAGE AND THE
SCOPE OF THE FIRM
From Business Strategy to Corporate Strategy:
The Scope of the Firm
• Business Strategy is concerned with how a firm
computes within a particular market
• Corporate Strategy is concerned with where a
firm competes, i.e. the scope of its activities
• The dimensions of scope are
– product scope
– vertical scope
– geographical scope
Transactions Costs and the
Scope of the Firm
Vertical Product Geographical
Scope
Scope
[A] Single
Integrated
Firm
[B] Several
Specialized
Firms linked
by Markets
V1
V2
V3
V1
V2
P1
P1
P2
P2
P3
P3
Scope
C1
C1
C2
C2
V3
In situation [A] the business units are integrated within a single firm.
In situation [B] the business units are independent firms linked by markets.
Are the administrative costs of the integrated firm less than the transaction
costs of markets?
C3
C3
Determinants of Changes in Corporate Scope
1800 – 1980 Expanding scale and scope of industrial corporations due to
declining administrative costs of firms:
• Advances in transportation, information and communication
technologies
• Advances in management—accounting systems, decision sciences,
financial techniques, organizational innovations, scientific management
1980 – 1995 Shrinking size and scope of biggest industrial corporations.
Increasingly
turbulent
external
environment
Increased no. of managerial
decisions. Need for fast
responses to external
change
Admin. costs of
firms rise relative
to transaction
costs of markets
1995 – 2007 Rapid increase in global concentration (steel, aluminium,
oil, beer, banking, cement).
Key drivers: quest for market power and scale economies.
Also, large corporations better at reconciling size with agility
The Basic Issues in Diversification Decisions
Superior profit derives from two sources:
INDUSTRY
ATTRACTIVENESS
RATE OF PROFIT
> COST OF CAPITAL
COMPETITIVE
ADVANTAGE
Diversification decisions involve these same two issues:
• How attractive is the sector to be entered?
•Can the firm achieve a competitive advantage?
Diversification among the US Fortune 500, 1949-74
70.2
29.8
63.5
53.7
36.5
53.9
46.3
39.9
46.1
37.0
60.1
63.0
1949 Percentage
1954 of1959
1969(single-business,
1974
Specialized1964
Companies
vertically-integrated and dominant-business)
Percentage of Diversified Companies (related-business
and unrelated business)
Note:
During the 1980s and 1990s the trend reversed as large
companies refocused upon their core businesses
Diversification among Large UK Corporations,
1950-93
70
60
Single business
50
Dominant
business
Related business
40
30
20
Unrelated
business
10
0
1950 1960 1970 1983 1993
Motives for Diversification
GROWTH
--The desire to escape stagnant or declining industries
is a powerful motive for diversification (e.g. tobacco,
oil, newspapers).
--But, growth satisfies managers not shareholders.
--Growth strategies (esp. by acquisition), tend to
destroy shareholder value
RISK
SPREADING
--Diversification reduces variance of profit flows
--But, doesn’t create value for shareholders—they can
hold diversified portfolios of securities.
--Capital Asset Pricing Model shows that diversification
lowers unsystematic risk not systematic risk.
PROFIT
--For diversification to create shareholder value, then
bringing together of different businesses under
common ownership & must somehow increase
their profitability.
Diversification and Shareholder Value: Porter’s Three
Essential Tests
If diversification is to create shareholder value, it must meet
three tests:
1. The Attractiveness Test: diversification must be directed
towards attractive industries (or have the potential to
become attractive).
2. The Cost of Entry Test: the cost of entry must not capitalize
all future profits.
3. The Better-Off Test: either the new unit must gain
competitive advantage from its link with the company, or
vice-versa. (i.e. some form of “synergy” must be present)
Additional source of value from diversification: Option value
Competitive Advantage from Diversification
ECONOMIES
OF
SCOPE
ECONOMIES
FROM
INTERNALIZING
TRANSACTIONS
• Sharing tangible resources (research labs, distribution systems)
across multiple businesses
• Sharing intangible resources (brands, technology) across multiple
businesses
• Transferring functional capabilities (marketing, product
development) across businesses
• Applying general management capabilities to multiple businesses
• Economies of scope not a sufficient basis for diversification ---must be supported by transaction costs
• Diversification firm can avoid transaction costs by operating
internal capital and labor markets
• Key advantage of diversified firm over external markets--- superior
access to information
Relatedness in Diversification
Economies of scope in diversification derive from two
types of relatedness:
• Operational Relatedness-- synergies from sharing
resources across businesses (common distribution
facilities, brands, joint R&D)
• Strategic Relatedness-- synergies at the corporate level
deriving from the ability to apply common management
capabilities to different businesses.
Problem of operational relatedness:- the benefits in terms
of economies of scope may be dwarfed by the
administrative costs involved in their exploitation.
Transactions Costs and The Existence of the Firm
• Transaction cost theory explains not just the boundaries
of firms, also the existence of firms.
• In 18th century English woollen industry, no firms –
independent spinners and weavers linked by merchants.
• Residential remodeling industry -- mainly independent selfemployed builders, plumbers, electricians, painters.
• Key issue -- transaction costs of the market vs.
administrative costs of firms.
• Where transaction costs high—firm is more efficient means
of organization
Note: transaction costs comprise costs of search and contract
negotiation and enforcement
The Costs and Benefits of Vertical Integration:
BENEFITS
• Technical economies from integrating processes e.g. iron
and steel production
—but doesn’t necessarily require common ownership
• Superior coordination
• Avoids transactions costs of market contracts in situations
where there are:
-- small numbers of firms
-- transaction-specific investments
-- opportunism and strategic misrepresentation
-- taxes and regulations on market transactions
The Costs and Benefits of Vertical Integration:
COSTS
• Differences in optimal scale of operation between different
stages prevents balanced VI
• Strategic differences between different vertical stages create
management difficulties
• Inhibits development of and exploitation of core
competencies
• Limits flexibility -- in responding to demand cycles
-- in responding to changes in technology,
customer preferences, etc.
(But, VI may be conducive to system-wide flexibility)
• Compounding of risk
When is Vertical Integration More Attractive
than Outsourcing?
How many firms are available
to undertake the activities?
Is transaction-specific investment
needed?
Does limited information permit
cheating?
Are taxes or regulation imposed
on transactions?
Do the different stages have similar
optimal scales of operation?
Are the two stages strategically
similar?
How great the need for entrepreneurship
& continual upgrading of capabilities
How uncertain is market demand?
Are risks compounded by
linkages between vertical stages
The fewer the companies
the more attractive is VI
If yes, VI more attractive
VI can limit opportunism
VI can avoid them
Greater the similarity, the
more attractive is VI
Greater the strategic
similarity ---the more
attractive is VI
Greater the need, the greater
the disadvantages of VI
Greater the unpredictability
----the more costly is VI
VI increases risk.
The value chain for steel cans
Iron ore
mining
Steel
production
Steel strip
production
Can
making
VERTICAL
INTEGRATION,
AND MARKET
CONTRACTS
VERTICAL
INTEGRATION
MARKET
CONTRACTS
Canning of
food, drink,
oil, etc.
MARKET
CONTRACTS
What factors explain why some stages are vertically integrated,
while others are linked by market transactions?
Designing Vertical Relationships: Long-Term Contracts
and Quasi-Vertical Integration
• Intermediate between spot transactions and vertical
integration are several types of vertical relationships
---such relationships may combine benefits of both market
transactions and internalization
• Key issues in designing vertical relationships
-- How is risk allocated between the parties?
-- Are the incentives appropriate?
Recent Trends in Vertical Relationships
• From competitive contracting to supplier partnerships, e.g.
in autos
• From vertical integration to outsourcing (not just
components, also IT, distribution, and administrative
services).
• Diffusion of franchising
• Technology partnerships (e.g. IBM- Apple; Canon- HP)
• Inter-firm networks
General conclusion: boundaries between firms and markets
becoming increasingly blurred.
LO W
International Trade
HIGH
Patterns of Internationalization
Trading
Industries
Global
Industries
--aerospace
--military hardware
--diamond mining
--agriculture
--automobiles
--oil
--semiconductors
--consumer electronics
Domestic
Industries
Multidomestic
Industries
--railroads
--laundries/dry cleaning
--hairdressing
--milk
--retail banking
--hotels
--consulting
LOW
Foreign Direct Investment
HIGH
Implications of Internationalization
for Industry Analysis
•
•
•
INDUSTRY STRUCTURE
Lower entry barriers around national markets
Increased industry rivalry
--- lower seller concentration
--- greater diversity of competitors
Increased buyer power: wider choice for dealers & consumers
COMPETITION
• Increased intensity of competition
PROFITABILITY
• Other things remaining equal, internationalization tends to reduce an industry’s
margins & rate of return on capital
Competitive Advantage within an International
Context: The Basic Framework
FIRM RESOURCES
& CAPABILITIES
THE INDUSTRY ENVIRONMENT
-- Financial resources
-- Physical resources
-- Technology
-- Reputation
-- Functional capabilities
-- General management
capabilities
Key Success Factors
COMPETITIVE
ADVANTAGE
THE NATIONAL ENVIRONMENT
-- National resources and capabilities (raw materials;
national culture; human resources; transportation,
communication, legal infrastructure
-- Domestic market conditions
-- Government policies
-- Exchange rates
-- Related and supporting industries
National Influences on Competitiveness: The
Theory of Comparative Advantage
A country has a relative efficiency advantage in those products
that make intensive use of resources that are relatively
abundant within the country. E.g.
• Philippines relatively more efficient in the production of
footwear, apparel, and assembled electronic products than in
the production of chemicals and automobiles.
• U.S. is relatively more efficient in the production of
semiconductors and pharmaceuticals than shoes or shirts.
When exchange rates are well-behaved, comparative
advantage becomes competitive advantage.
Revealed Comparative Advantage for
Certain Broad Product Categories
USA Canada
W. Germany Italy Japan
Food, drink & tobacco
.31
.28
-.36
-.29
-.85
Raw materials
.43
.51
-.55
-.30
-.88
Oil & refined products
-.64
.34
-.72
-.74
-.99
Chemicals
.42
-.16
.20
-.06
-.58
Machinery and trans-
.12
-.19
.34
.22
.80
-.68
-.07
.01
.29
.40
portation equipment
Other manufacturers
Note:
Revealed comparative advantage for each product group
is measured as: (Exports less Imports)/ Domestic production
Porter’s Competitive Advantage
of Nations
Extends and adapts traditional theory of comparative
advantage to take account of three factors:
 International competitive advantage is about companies
not countries—the role of the national environment is
providing a home base for the company.
 Sustained competitive advantage depends upon dynamic
factors-- innovation and the upgrading of resources and
capabilities
 The critical role of the national environment is its impact
upon the dynamics of innovation and upgrading.
Porter’s National Diamond Framework
FACTOR CONDITIONS
RELATING AND
SUPPORTING
INDUSTRIES
DEMAND
CONDITIONS
STRATEGY, STRUCTURE,
AND RIVALRY
1.
2.
3.
4.
FACTOR CONDITIONS—“Home grown” resources/capabilities more important
than natural endowments.
RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters”
DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation
STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.
Consistency Between Strategy
and National Conditions
In globally-competitive industries, firm strategy needs to
take account of national conditions:
– U.S. textile manufacturers must compete on the basis of
advanced process technologies and focus on high quality,
less price-sensitive market segments
– In the semiconductor industry, CA-based firms concentrate
mainly upon design of advanced chips, Malaysian firms
concentrate upon fabrication of high volume, less
technologically advanced items (e.g. DRAM chips)
– Dispersion of value chain to exploit different national
environments (e.g. Nike conducts R&D in US, components in
Korea and Thailand, assembly in Indonesia, China, and India,
marketing in Europe and North America)
International Location of Production
– National resource conditions: What are the major
resources which the product requires? Where are these
available at low cost?
– Firm-specific advantages: to what extent is the
company’s competitive advantage based upon firmspecific resources and capabilities, and are these
transferable?
– Tradability issues: Can the product be transported at
economic cost? If not, or if trade restrictions exist, then
production must be close to the market.
The Role of Labor Costs
Hourly Compensation for Production Workers, 1999 ($)
Germany
26.93
Japan
20.89
U.S.
19.20
France
19.98
U.K.
16.56
Spain
12.11
Korea
6.75
Mexico
2.12
BUT, wages are only one element of costs:
Cost of Producing a Compact Automobile
U.S.
Parts & components
7,750
Labor
700
Shipping cost
300
Inventory
20
TOTAL
8,770
Mexico
8,000
40
1,000
40
9,180
Location and the Value Chain
Comparative advantage in textiles and apparel by stage of processing
Country
Stage
Index of
of Revealed
Processing Comparative
Advantage
Country
Stage
Index of
of
Revealed
Processing Comparative
Advantage
Hong Kong
1
2
3
4
-0.96
-0.81
-0.41
+0.75
Japan
1
2
3
4
-0.36
+0.48
+0.48
-0.48
Italy
1
2
3
4
-0.54
+0.18
+0.14
+0.72
U.S.A.
1
2
3
4
+0.96
+0.64
+0.22
-0.73
Note:
1 = production of fiber (natural & synthetic) 2 = production of spun yarn
3 = production of textiles
4 = production of clothing
Determining the Optimal Location
of Value Chain Activities
The optimal location
of activity X considered
independently
WHERE TO LOCATE
ACTIVITY X?
Where is the optimal location
of X in terms of the cost and
availability of inputs?
What government incentives/ penalties
affect the location decision?
What internal
resources and capabilities does the firm
possess in particular locations?
What is the firm’s business strategy
(e.g. cost vs. differentiation advantage)?
The importance of links
between activity X and
other activities of the firm
How great are the coordination
benefits from co-locating activities?
Alternative Modes of Overseas Market Entry
DIRECT INVESTMENT
TRANSACTIONS
Exporting
Spot
sales
Foreign
agent /
distributor
Long-term
contract
Low
Licensing
Licensing
patents &
other IP
Joint venture
Marketing &
Distribution
only
Franchising
Resource commitment
Wholly owned
subsidiary
Fully
integrated
Marketing&
Distribution
only
Fully
integrated
High
Alliances and Joint Ventures: Management
Issues
•
•
•
Benefits:
--Combining resources and capabilities of different companies
--Learning from one another
--Reducing time-to-market for innovations
--Risk sharing
Problems:
--Management differences between the two partners. Conflict
most likely where the partners are also competitors.
Benefits are seldom shared equally. Distribution of benefits
determined by:
– Strategic intent of the partners- which partner has the clearer
vision of the purpose of the alliance?
– Appropriability of the contribution-- which partner’s resources
and capabilities can more easily be captured by the other?
– Absorptive capacity of the company-- which partner is the
more receptive learner?
General Motors’ Alliances with Competitors
SAAB
AVTOVAZ
FIAT
50%
owned
SUZUKI
GM
FUJI
60%
owned
ISUZU
40% investment
IBC Vehicles
Ltd. (U.K.)
(Makes vans in UK)
TOYOTA
50% owned
50%
owned
SAIC
New United Motor
Manufacturing
Inc. (NUMMI)
(Makes cars in US)
DAEWOO
Multinational Strategies:
Globalization vs. National Differentiation
The case for a global strategy:
• National preferences in decline—world becoming a single,
if segmented, market
• Accessing global scale economies—in purchasing,
manufacturing, product development, marketing.
• Strategic strength from global leverage—ability to crosssubsidize a national subsidiary with cash flows from
other national subsidiaries
• Need to access market trends and technological
developments in each of the world’s major economic
centers- N. America, Europe, East Asia.
Ted
Levitt
“Globaliz-ation of
Markets”
Thesis
Hamel &
Prahalad
Thesis
Kenichi
Ohmae’s
“Triad
Power”
Thesis
Globalization & Global Strategy —What are they?
•
GLOBALIZATION ?
--Something to do with increasing interdependence between countries.
•
GLOBAL STRATEGY
--At simplest level: Treating the world as a single market
E.g. Japanese companies during the 1970s & 1980s,
(YKK, Honda) standard products, developed &
manfactured within Japan; distributed & marketed
worldwide
--At more sophisticated level: Strategy that recognizes
and exploits linkages between countries (e.g. exploits
global scale, national resource differences, strategic
competition)
World as
single mkt.
World as interrelated mkts.
global strategy
World as
separate
national mkts.
multidomestic strategy
Analyzing benefits/costs of a global strategy
Forces for globalization
MARKET DRIVERS
--Common customer needs
--Global customers
--Cross-border network effects
COST DRIVERS
--Global scale economies
--Differences in national resource
availability
--Learning
COMPETITIVE DRIVERS
--Potential for strategic competition
(e.g. cross- subsidization)
Forces for localization / national
differentiation
MARKET DRIVERS
--Different languages
--Different customer preferences
--Cultural differences
COST DRIVERS
--Transportation costs
--Transaction costs
--Economic & political risk
--Speed of response
GOVERNMENT DRIVERS
--Barriers to trade & inward inv.
--Regulations
Jet engines
Autos
Benefits
of
global
integration
Consumer
electronics
Telecom
equipment
Investment
banking
Steel
Cement
Online C2C auctions
Beer
Dry
cleaning
Retail
banking
Auto
repair
Restaurant
chains
Funeral
services
Benefits of national differentiation
Positioning industries in terms of benefits of globalization
and national differentiation
Jet engines
Autos
Benefits
of
global
integration
Consumer
electronics
Telecom
equipment
Investment
banking
Retail
banking
Cement
Auto
repair
Funeral
services
Benefits of national differentiation
The Evolution of Multinational Strategies and
Structures: (1) 1900-1939—Era of the Europeans
The European MNC as Decentralized Federation :
• National subsidiaries self-sufficient and autonomous
• Parent control through appointment of subsidiaries senior
management
• Organization and management systems reflect conditions of
transport and communications at the time e.g. Unilever, Phillips,
Courtaulds, Royal Dutch/Shell.
The Evolution of Multinational Strategies
and Structures: (2) 1945-1970—U.S. Dominance
American MNC’s as Coordinated Federations :
• National subsidiaries fairly autonomous
• Dominant role as U.S. parent-- especially in developing
new technology and products
• Parent-subsidiary relations involved flows of technology
and finance, and appointment of top management. e.g.
Ford, GM, Coca Cola, IBM
The Evolution of Multinational
Strategies and Structures:
(3) 1970s and 1980s—The Japanese Challenge
The Japanese MNC as Centralized Hub
• Pursuit of global strategy from home base
• Strategy, technology development, and manufacture
concentrated at home
• National subsidiaries primarily sales and distribution
companies with limited autonomy. e.g. Toyota, NEC,
Matsushita
Marketing Global Strategies and Situations to Industry
Conditions: Firm Success in Different Industries
Branded, Packaged
Consumer Goods
Philips
General Electric
local responsiveness
- Global industry
- Matsushita the most
successful
- Philips the survivor
- GE sold out
global integration
global integration
Matsushita
Telecommunications
Equipment
NEC
Kao
P&G
Unilever
local responsiveness
global integration
Consumer Electronics
Erickson
ITT
local responsiveness
- Substantial national
differentiation, few global
scale economies
- Kao has limited success
outside Japan
- Unilever and P&G most
successful
- Requires both global
integration and national
differentiation.
- NEC only partially
successful
- ITT sold out
- Ericsson most
successful
Reconciling Global Integration with National
Differentiation: The Transnational Corporation
Tight complex
controls and
coordination and a
shared strategic
decision process.
Heavy flows of
technology, finances,
people, and materials
between
interdependent units.
The Transnational: an integrated network of distributed interdependent
resources and capabilities.
– Each national unit and source of ideas, skills and capabilities that can
be harnessed to benefit whole corporation.
– National units become world sources for particular products,
components, and activities.
– Corporate center involved in orchestrating collaboration through
creating the right organizational context.
Designing the MNC: Key Learning
1.
2.
3.
4.
5.
On what basis to organize—products, geography, functions?
--Where is coordination most important?
--How global is the industry? How global is the firm’s
strategy?
If one dimension is dominant, how to coordination along the
other dimensions?
--Maintain single line accountability
--Other dimensions of coordination can be “dotted line”
relations
What’s the role of HQ?
--Control function
--Coordination function
--Exploiting scale economies in centralized provision of
services
The need for internal differentiation
--By product/business
--By function
--By country
Formal & informal organization