From
From Business
Business Strategy
Strategy to
to Corporate
Corporate
Strategy:
Strategy: The
The Scope
Scope of
of the
the Firm
Firm
• Business Strategy is concerned with how a firm
computes within a particular market
• Corporate Strategy is concerned with where a
firm competes
the scope of its activities
• The dimensions of scope are
– geographical scope
– vertical scope
– product scope
Transactions Costs and the
Scope of the Firm
Which is more efficient : several specialist firms linked by markets, or
the combination of these specialist firms under common
ownership.
VERTICAL
PRODUCT
GEOGRAPHICAL
AREAS
SINGLE
V1
P1 P2 P3
A1 A2 A3
FIRM
V2
V3
SEVERAL
V1
SPECIALIZED V2
FIRMS
V3
P1
P2
P3
A1 A2
A3
Common Issue--- What are TRANSACTION COSTS of markets
compared with administrative costs of the firm?
Introduction (cont.)
• Types of Diversification
– Vertical integration
• Strategy of acquiring control over additional links in
value chain of producing and delivering products/services.
• Backward integration
– Moving closer to sources of raw materials by acquiring resource
suppliers or manufacturing the components needed for
production of final product.
• Forward Integration
– Just the opposite: moving closer to end-user (acquire retail
outlets for distribution, etc.).
Engineering
and Design
Exhibit:
Vertical
Integration
Purchasing
Backward Integration
Assembly and
Production
After-Sale
Service
Forward Integration
Determinants of Changes
in Corporate Scope
1800 - 1975: Expansion in size & scope of biggest industrial corporations.
Administrative costs of firms fell due to
• Advances in transportation, information and communication
technologies
• Advances in management - accounting systems, decision sciences,
financial techniques, organizational innovations, scientific management
1975 - 1995: Contraction in size & scope of biggest industrial
corporations. Increased market turbulence, more competition,
accelerated technological change
Need for speed, flexibility, responsiveness
Large, complex corporations become relatively less efficient
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 from:
-- small numbers of firms
-- transaction-specific investments
-- opportunism and strategic misrepresentation
-- taxes and regulations on market transactions
Introduction (cont.)
• Advantages of vertical integration
– Greater control over costs and supply of
components.
– Avoids the transaction costs associated with
dealing with vendors or retailers.
– Ability to protect proprietary technology.
– Ability to maintain or cultivate a company’s
reputation for outstanding quality or service.
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 creates
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
Introduction (cont.)
• Disadvantages of vertical integration
– Higher fixed overhead costs.
– Integrated firms must deal with transfer price dilemma
which can create serious morale and other internal
problems.
– Demand uncertainty creates problems.
• Low demand can lead to underutilization of plant capacity.
• High demand can result in dependence on outside suppliers.
– Technological change can leave these firms stuck with
old technology.
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 two stages have similar
optimal scale of operation?
Are the two stages strategically
similar?
How uncertain is market demand?
Does VI increase risk?
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 unpredictability
----the more costly is VI
If heavy investment
required and risks
between stages are interrelated----VI increases risk.
Designing Vertical Relationships: LongTerm 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.
Different Types of Vertical
Relationship
Degree of Commitment
Low
Formalization
Low
Informal
supplier/
customer
relationships
Vertical
integration
Supplier/
customer
partnerships
Spot sales/
purchases
Joint
ventures
Agency
agreements
Franchises
Long-term
contracts
High
High
The Internationalization of Industries
LO W
International Trade
HIGH
The Process of Internationalization
International
Industries
Global
Industries
--aerospace
--military hardware
--diamond mining
--agriculture
--automobiles
--oil
--semiconductors
--consumer electronics
Domestic
Industries
Multinational/
Multidomestic
Industries
--railroads
--laundries/dry cleaning
--hairdressing
--milk
LOW
--retail banking
--hotels
--consulting
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
Analyzing Competitive Advantage within an
International Context: The Basic Framework
FIRM RESOURCES & CAPABILITIES
-- Financial resources
THE INDUSTRY ENVIRONMENT
Key Success Factors
-- Physical resources
-- Technology
-- Reputation
-- Functional capabilities
-- General management capabilities
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 is relatively efficient in the production of those
products which make intensive use of resources which 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
emerges as competitive advantage.
Porter’s Competitive Advantage of
Nations
Extends and modifies traditional theory of comparative
advantage to take account of the following factors:
• Competitive advantage is about companies --- the
importance of the national environment is providing a home
base for the company.
• Sustained competitive advantage depends upon dynamic
factors-- innovation and the upgrading of firm’s resources
and capabilities
• The critical role of the national environment is its influence
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 and capabilities more important
than natural endowments.
RELATED AND SUPPORTING INDUSTRIES. Competitive advantage occurs in
“industry clusters” (e.g. semiconductors-computers-software in the U.S.).
DEMAND CONDITIONS. Discerning domestic customers drive quality and innovation
(e.g. Japanese camera industry)
STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives innovation and
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
– Malaysian semiconductor manufacturers can be competitive in
high volume, less technologically advanced items (e.g.
memory chips)
– Dispersion of value chain to exploit different national
environments (e.g. Nike: R&D in U.S., components in Korea
and Taiwan, assembly in China, Thailand and India, marketing
in Europe and North America)
International Location of Production
3 considerations:
– 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.
International Location of Industrial
Activities within the Value Chain
The optimal location
of activity X considered
independently
WHERE TO
LOCATE
ACTIVITY X?
The importance of links
between activity X and
other activities of the firm
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)?
How great are the benefits
of linkages through proximity?
Overseas Market Entry: Alternative
Modes
TRANSACTIONS
DIRECT INVESTMENT
Exporting: Exporting: Exporting: Licensing Franchising
Joint
Wholly owned
Spot
Long-term with foreign technology
venture
subsidiary
transcontract
distributor/
and
Marketing & Fully
Marketing
Fully
actions
agent trademarks
distribution integral- & sales
integralonly
ted
only
ted
Key issues:
• Is the firm’s competitive advantages based upon firm-specific or
country-specific resources and capabilities?
• Is the product tradable and what are the barriers to/ costs of
trade?
• Does the firm possess the full range of resources and capabilities
needed to serve the overseas market?
Introduction (cont.)
• Global diversification
– Usually motivated by desire to grow (Boeing,
Kellogg’s, Caterpillar).
– Simplest route is exporting.
– Others include licensing or franchising.
– Most complex route is to establish wholly-owned
subsidiaries.
Introduction (cont.)
– Challenges in global diversification:
• Most difficult challenge is to appreciate the unique
cultures and customs of foreign markets.
– Need for products to be adapted to accommodate these
markets.
Alliances and Joint Ventures:
Management Issues
•
•
•
Benefits: ability to combine different resources and capabilities of
separate partners, ability to learn from one another.
Problems: management differences between the two partners.
Conflict potential greatest where the partners are also
competitors.
Collaborating with competitors: benefits seldom shared equally.
Determinants of distribution of benefits:
– 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?
Multinational Strategies: Globalization
versus National differentiation
The case for a global strategy:
• National preferences in decline-- possible to view the
Ted
Levitt
world becoming a single, if segmented, market.
“Global-ization
• Access to global scale economies--cost savings in purchasing, Thesis”
manufacturing, product development and marketing.
• Strategic strength from global positioning-- but
Hamel &
Prahalad
locating in multiple national markets, by locating in multiple
Thesis
national markets, the global competitor can cross-subsidize
to
attack nationally focused rivals.
Need to access market trends and technological
Kenichi Ohmae’s
“Triad Power”
developments in each of the world’s major economic
Thesis
centers- N. America, Europe, EastAsia.
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Strategy and Organization of the MNC:
The Evolution of Multinational Strategies and
Structures : (1) Pre 2nd WW: 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.
Strategy and Organization of the MNC:
The Evolution of Multinational
Strategies and Structures: (2) Post 2nd
WW: 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
Strategy and Organization of the MNC:
The Evolution of Multinational Strategies and
Structures: (3) 1970’s and 1980’s: 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
Matching Global Strategies and
Structures to Industry Conditions
Degree of globalization depends upon the benefits of global
integration versus the benefits of national differentiation.
Key issue: --How important are global scale economies?
--How different are customer requirements between
countries?
Benefits
of
global
integration
• Jet engines
• Consumer • Telecommunications
electronics
equipment
• Cement
• Packaged
grocery products
Benefits of national differentiation
Marketing Global Strategies and
Situations to Industry Conditions: Firm
Success in Different Industries
Philips
General Electric
local responsiveness
responsiveness
Telecommunications
Equipment
Kao
P&G
Unilever
local responsiveness
global integration
Matsushita
Branded, Packaged
Consumer Goods
global integration
global integration
Consumer Electronics
NEC
Erickson
ITT
local
- Global industry
- Substantial national
- Requires both global
- Matsushita the most
successful
- Philips the survivor
- GE sold out
differentiation, few global
scale economies
- Kao has limited success
outside Japan
- Unilever and P&G most
successful
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.