Strategic Management Course Overview

Course Overview: Objectives
To acquire familiarity with the principal
concepts, frameworks and techniques of
strategic management.
To gain expertise in applying these concepts,
frameworks and techniques in order to
- understand the reasons for good or
bad performance by an enterprise,
- generate strategy options for an
enterprise,
- assess available options under 2

Course Overview: Objectives
(cont’d)
To integrate the knowledge gained in previous
courses.
To develop your capacity as a general manager
in terms of
- an appreciation of the work of the
general manager,
- the ability to view business
problems from a general management
perspective, 3

THE CONCEPT OF
STRATEGY
THE CONCEPT OF
STRATEGY
The Concept of Strategy and the Pursuit of
Sustainable Above-Normal Profits

Domain of StrategyDomain 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

DefinitionDefinition
 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
Division A
R & D
Personnel
Finance
Production
Marketing/Sales
Division B
R & D
Personnel
Finance
Production
Marketing/Sales
FUNCTIONAL
STRATEGIES
BUSINESS
STRATEGY
CORPORATE
STRATEGY
CORPORATE
HEAD OFFICE

Levels of StrategyLevels 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 StrategyCommon Elements in Successful Strategy
Successful
Strategy
Profound
understanding of
the competitive
environment
Objective
appraisal of
resources
Long-term, simple
and agreed upon
objectives
$
EFFECTIVE IMPLEMENTATION

Strategy as a Quest for ProfitStrategy 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 MaximizationFrom 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 = Σt Ct
(1 + r)t
Where: V market value of the firm.
Ct free cash flow in time t
r weighted average cost of capital

The World’s Most Valuable Companies:
Performance Under Different Profitability Measures
The World’s Most Valuable Companies:
Performance Under Different Profitability Measures
COMPANY MARKET
CAP.
($BN.)
NET
INCOM
E ($BN)
RETURN
ON
SALES
(%)
RETURN
ON
EQUITY
(%)
RETURN
ON
ASSETS
(%)
RETURN
TO
SHARE-
HOLDERS
(%)
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 ChoiceShareholder 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

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
A Comprehensive Value Metrics FrameworkA Comprehensive Value Metrics Framework

Above Normal
Profits
(in Excess of the Competitive Level)
Avoid
Competitors
Be Better Than
Competition
Attractive
Industry
Attractive
Niche Cost
Advantage
Differentiation
Advantage
Attractive
Strategic
Group
Entry
Barriers
Mobility
Barriers
Isolating
Mechanisms
Sources of Superior PerformanceSources of Superior Performance

Sources of Competitive AdvantageSources of Competitive Advantage
COST
ADVANTAGE
COST
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
COMPETITIVE
ADVANTAGE
COMPETITIVE
ADVANTAGE
Similar product
at lower cost
Price premium
from
unique product

The Experience CurveThe Experience Curve
The “Law of Experience”
The unit cost value added to a standard product
declines by a constant % (typically 20-30%) each
time cumulative output doubles.
Cost per
unit of
output (in
real $)
Cumulative Output
1992
1994
1996
1998
2000
2002 2004

Examples of Experience CurvesExamples of Experience Curves
100K 200K 500K 1,000K 5 10 50
Accumulated unit production Accumulated units
(millions) (millions)
1960Yen
15K20K30K
PriceIndex
50100200300
70% slope
75%
Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71

Drivers of Cost AdvantageDrivers of Cost Advantage
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
RESIDUAL EFFICIENCY
ECONOMIES OF LEARNING
ECONOMIES OF SCALE
• Organizational slack; Motivation &
culture; Managerial efficiency
• Ratio of fixed to variable costs
• Speed of capacity adjustment
• Location advantages
• Ownership of low-cost inputs
• Non-union labor
• Bargaining power
• Standardizing designs & components
• Design for manufacture
• Process innovation
• Reengineering business processes
• Increased dexterity
• Improved organizational routines
• Indivisiblities
• Specialization and division of labor

Economies of Scale: The Long-Run
Cost Curve for a Plant
Economies of Scale: The Long-Run
Cost Curve for a Plant
Units of output
per period
Minimum
Efficient Plant
Size: the point
where most scale
economies are
exhausted
Cost per
unit of
output
Sources of scale economies:
- technical input/output relationships
- indivisibilities
- specialization

10 20 50 100 200 500 1,000
Annual sales volume (millions of cases)
AdvertisingExpenditure($percase)
0.020.050.100.150.20
Coke
Pepsi
Seven Up
Dr. PepperSprite
Diet Pepsi
Tab
Fresca
Diet Rite
Diet 7-Up
Schweppes
SF Dr. Pepper
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.
Scale Economies in Advertising: U.S. Soft DrinksScale Economies in Advertising: U.S. Soft Drinks

Applying the Value Chain to Cost Analysis:
The Case of Automobile Manufacture
Applying the Value Chain to Cost Analysis:
The Case of Automobile Manufacture
STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES
STAGE 2. ALLOCATE TOTAL COSTS
PURCH-
ASING
PARTS
INVEN-
TORIES
R&D
DESIGN
ENGNRNG
COMPONENT
MFR
ASSEMBLY
TESTING,
QUALITY
CONTROL
GOODS
INVEN-
TORIES
SALES
&
MKITG
DISTRI-
BUTION
DEALER &
CUSTOMER
SUPPORT

PURCH-
ASING
PARTS
INVEN-
TORIES
R&D
DESIGN
ENGNRNG
COMPONENT
MFR
ASSEMBLY
TESTING,
QUALITY
CONTROL
GOODS
INVEN-
TORIES
SALES
&
MKITG
DISTRI-
BUTION
DEALER &
CUSTOMER
SUPPORT
--Plant scale for each -- Level of quality targets -- No. of dealers
component -- Frequency of defects -- Sales / dealer
-- Process technology -- Level of dealer
-- Plant location support
-- Run length -- Frequency of defects
-- Capacity utilization under warranty
Prices paid --Size of commitment -- Plant scale --Cyclicality &
depend on: --Productivity of -- Flexibility of production predictability of sales
-- Order size R&D/design -- No. of models per plant --Customers’
--Purchases per --No. & frequency of new -- Degree of automation willingness to wait
supplier models -- Sales / model
-- Bargaining power -- Wage levels
-- Supplier location -- Capacity utilization
STAGE 3.
IDENTIFY
COST
DRIVERS
Applying the Value Chain to Cost Analysis: The
Case of Automobile Manufacture (continued)

PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR
INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR
Consolidation of orders to increase
discounts, increases inventories
Designing different models around
common components and platforms
reduces manufacturing costs
Higher quality parts and materials
reduces costs of defects
at later stages
Higher quality in manufacturing
reduces warranty costs
STAGE 5. RECCOMENDATIONS FOR COST REDUCTION
STAGE 4. IDENTIFY LINKAGES

The Nature of DifferentiationThe Nature of Differentiation
TOTAL CUSTOMER RESPONSIVENESS
Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
INTANGIBLE
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customer’s image, status,
identity, and desire for exclusivity
TANGIBLE DIFFERENTATION
Observable product characteristics:
• size, color, materials, etc.
• performance
• packaging
• complementary services
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

Identifying Differentiation Potential:
The Demand Side
Identifying Differentiation Potential:
The Demand Side
THE PRODUCT
THE
CUSTOMER
What needs
does it satisfy?
By what
criteria do they
choose?
What
motivates
them?
What are key
attributes?
Relate patterns of
customer
preferences to
product attributes
What price
premiums do
product attributes
command?
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
Using the Value Chain to Identify
Differentiation Potential on the Supply Side
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
MIS that supports
fast response
capabilities
Training to support
customer service
excellence
Unique product features.
Fast new product
development
Quality of
components &
materials
Defect free
products.
Wide variety
Fast delivery.
Efficient order
processing
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
Identifying Differentiation Opportunities through
Linking the Value Chains of the Firm and its
Customers: Can Manufacture
1. Distinctive can design can assist canners’ marketing activities.
2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.
3. Frequent, reliable delivery can permit canner to adopt JIT can supply.
4. Efficient order processing system can reduce customers’ ordering costs.
5. Competent technical support can increase canner’s efficiency of plant utilization.
Suppliesofsteel
&aluminum
Service&
technicalsupport
Sales
Distribution
Inventoryholding
Manufacturing
Design
Engineering
Inventoryholding
Purchasing
Distribution
Marketing
Canning
Processing
Inventoryholding
Purchasing
CANNERCAN MAKER
1
2 4
5
3

INDUSTRY ANALYSIS
AND POSITIONING
INDUSTRY ANALYSIS
AND POSITIONING
Determining Industry Attractiveness and
Identifying Strategic Opportunities

Profitability of US Industries (selected industries only)Profitability of US Industries (selected industries only)
Household & Personal Products 22.7 Gas & Electric Utilities 10.4
Pharmaceuticals 22.3 Food and Drug Stores 10.0
Tobacco 21.6 Motor Vehicles & Parts 9.8
Food Consumer Products 19.6 Hotels, Casinos, Resorts 9.7
Securities 18.9 Railroads 9.0
Diversified financials 18.3 Insurance: Life and Health 8.6
Beverages 18.8 Packaging & Containers 8.6
Mining & crude oil 17.8 Insurance: Property & Casualty 8.3
Petroleum Refining 17.3 Building Materials, Glass 8.3
Medical Products & Equipment 17.2 Metals 8.0
Commercial Banks 15.5 Food Production 7.2
Scientific & Photographic Equipt. 15.0 Forest and Paper Products 6.6
Apparel 14.4 Semiconductors &
Computer Software 13.9 Electronic Components 5.9
Publishing, Printing 13.5 Telecommunications 4.6
Health Care 13.1 Communications Equipment 1.2
Electronics, Electrical Equipment 13.0 Entertainment 0.2
Specialty Retailers 13.0 Airlines (22.0)
Computers, Office Equipment 11.7
Median return on equity (%), 1999-2005

18.4
15.2
15
14.7
12.8
11.9
11.3
11
10.3
10.3
9.9
9.9
9.6
9.5
9
9
8.4
7.7
6.9
6.5
6.2
0 5 10 15 20
Pharmaceuticals
Household and personal products
Computer software and services
Media
Commercial services
Semiconductors
Healthcare equipmernt and services
Food, beverages, tobacco
Hotels, restaurants, leisure
Technology hardware and equipment
Automobiles and components
Capital goods
Food retailing
Consumer durables and apparel
Retailing
OVERALL AVERAGE
Materials
Energy
Transporation
Telecom services
Utilities
Average ROIC 1963-2003 (%)
The Profitability of Global Industries: Return on Invested Capital, 1963-2003

THE INDUSTRY
ENVIRONMENT
• Suppliers
• Competitors
• Customers
Social structure
The national/
international
economy
Technology
Government
& Politics
The natural
environment
Demographic
structure
Social structure
From Environmental Analysis
to Industry Analysis
From Environmental Analysis
to Industry Analysis
•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
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 StructuresThe Spectrum of Industry Structures
Concentration
Entry and Exit
Barriers
Product
Differentiation
Information
Perfect
Competition
Oligopoly Duopoly Monopoly
Many firms A few firms Two firms One firm
No/Low barriers Significant barriers High barriers
Homogeneous
Product
Potential for product differentiation
Perfect
Information flow
Imperfect availability of information

Porter’s Five Forces of Competition FrameworkPorter’s Five Forces of Competition Framework
SUPPLIERS
POTENTIAL
ENTRANTS
SUBSTITUTES
BUYERS
INDUSTRY
COMPETITORS
Rivalry among
existing firms
Bargaining power of suppliers
Bargaining power of buyers
Threat of
new
entrants
Threat of
substitutes

THREAT OF ENTRY
•Capital requirements
•Economies of scale
•Absolute cost advantage
•Product differentiation
•Access to distribution
channels
•Legal/ regulatory barriers
•Retaliation
SUBSTITUTE
COMPETITION
• Buyers’ propensity
to substitute
• Relative prices &
performance of
substitutes
BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
INDUSTRY RIVALRY
•Concentration
•Diversity of
competitors
•Product differentiation
•Excess capacity &
exit barriers
•Cost conditions
SUPPLIER POWER
• Supplier concentration
• Relative bargaining
power
The Structural Determinants of CompetitionThe Structural Determinants of Competition

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
•high concentration
•product differentiation
•patent protection
•steady demand growth
•no cyclical fluctuations
of demand
THREAT OF
SUBSTITUTES
LOW
No substitutes.
(Changing as managed care
encourages generics.)
BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)
DRUG
INDUSTRY
(ROE=22%)

Applying Five-Forces AnalysisApplying 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
Neutralizing The Five
Competitive Forces
Force
Entry
Rivalry
Substitute
s
Buyers
Suppliers
Method for Neutralizing Force
Erecting barriers (isolating
mechanisms) create & exploit economies of scale,
aggressive deterrence, design in switching costs, etc.
Compete on nonprice dimensions: cost
leadership, differentiation, cooperation, etc.
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
Time
Salesvolume
Fermentation Shakeout Maturity Decline

How Typical is the Life Cycle Pattern?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
1900 50 90 07 1930 50 70 90 07
MOTORCYCLES TV’s
 Life cycle model can help us to anticipate industry
evolution—but dangerous to assume any common, pre-
determined pattern of industry development
Color
B&W Portable
HDTV ?

Evolution of Industry Structure over the Life CycleEvolution of Industry Structure over the Life Cycle
INTRODUCTION GROWTH MATURITY DECLINE
DEMAND Affluent buyers Increasing Mass market Knowledgeable,
penetration replacement customers, resi-
demand dual segments
TECHNOLOGY Rapid product Product and Incremental Well-diffused
innovation process innovation innovation technology
PRODUCTS Wide variety, Standardization Commoditiz- Continued
rapid design change ation commoditization
MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity
URING intensive mass-production
TRADE -----Production shifts from advanced to developing countries-----
COMPETITION Technology- Entry & exit Shakeout & Price wars,
consolidation exit
KSFs Product innovation Process techno- Cost efficiency Overhead red-
logy. Design for uction, ration-
alization, low
cost sourcing

The Driving Forces of Industry EvolutionThe Driving Forces of Industry Evolution
Customers become
more knowledgeable
& experienced
Diffusion of
technology
Demand growth
slows as market
saturation approaches
Customers become
more price conscious
Products become
more standardized
Distribution channels
consolidate
Production shifts
to low-wage
countries
Price competition
intensifies
Bargaining power
of distributors
increases
BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION
Excess capacity
increases
Production
becomes less
R&D
& skill-intensive
Quest for new
sources of
differentiation

0
50
100
150
200
250
1895 1905 1915 1925 1935 1945 1955
No. of firms
Changes in the Population of Firms over the
Industry Life Cycle: US Auto Industry 1885-1961
Changes in the Population of Firms over the
Industry Life Cycle: US Auto Industry 1885-1961
rce: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

Preparing for the Future : The Role of Scenario
Analysis in Adapting to Industry Change
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

1880s 1920s 1960s 2000
Mail order,
catalogue
retailing
e.g. Sears
Roebuck
Chain
Stores
e.g. A&P
Discount
Stores
e.g. K-Mart
Wal-Mart
“Category
Killers”
e.g. Toys-R-Us,
Home Depot
Internet
Retailers
e.g. Amazon;
Expedia
Warehouse
Clubs
e.g. Price Club
Sam’s Club
Innovation & Renewal over the
Industry Life Cycle: Retailing
Innovation & Renewal over the
Industry Life Cycle: Retailing
?

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
Time
Salesvolume
Emergence Convergence Coexistence Dominance
Established
Industry
Emerging Industry

The Industry Life Cycle as an S
curve
Performance
Time
Ferment
Takeoff
Maturity
Discontinuity

The S-curve Maps Major
Transitions
Performance
Time
Ferment
Takeoff
Maturity
Discontinuity

RESOURCES,
CAPABILITIES, AND
CORE COMPETENCES
RESOURCES,
CAPABILITIES, AND
CORE COMPETENCES

THE FIRM
Goals and
Values
Resources and
Capabilities
Structure and
Systems
THE
INDUSTRY
ENVIRONMENT
•Competitors
•Customers
•Suppliers
STRATEGY
STRATEGY
The
Firm-Strategy
Interface
The
Environment-Strategy
Interface
Shifting the Focus of Strategy Analysis:
From the External to the Internal Environment
Shifting the Focus of Strategy Analysis:
From the External to the Internal Environment

Rationale for the Resource-based
Approach to Strategy
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.

Precision
Mechanics
Fine
Optics
Micro-
Electronics
35mm SLR camera
Compact fashion camera
EOS autofocus camera
Digital camera
Video still camera
Plain-paper copier
Color copier
Color laser copier
Laser copierBasic fax
Laser fax
Mask aligners
Excimer laser aligners
Stepper aligners
Inkjet printer
Laser printer
Color video printer
Calculator
Notebook computer
Canon: Products and Core Technical CapabilitiesCanon: Products and Core Technical Capabilities

Eastman Kodak’s Dilemma
1980’s
1990’s
Resources & Capabilities Businesses
Chemical Imaging
•Organic Chemistry
•Polymer technology
•Optomechtronics
•Thin-film coatings
Brands
Global Distribution
Film
Cameras
DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics
Need to build digital
imaging capability
Digital Imaging
Products (e.g. Photo CD
System; Advantix
cameras & film
Fine Chemicals
Pharmaceuticals
Diagnostics

STRATEGY
INDUSTRY KEY
SUCCESS FACTORSCOMPETITIVE
ADVANTAGE
ORGANIZATIONAL
CAPABILITIES
RESOURCES
TANGIBLE INTANGIBLE HUMAN
•Financial
•Physical
•Technology
•Reputation
•Culture
•Skills/know-how
•Capacity for
communication
& collaboration
•Motivation
The Links between Resources, Capabilities
and Competitive Advantage
The Links between Resources, Capabilities
and Competitive Advantage

Appraising ResourcesAppraising Resources
RESOURCE CHARACTERISTICS INDICATORS
Financial Borrowing capacity Debt/ Equity ratio
Internal funds generation Credit rating
Tangible Net cash flow
Resources Physical Plant and equipment: Market value of
size, location, technology fixed assets.
flexibility. Scale of plants
Land and buildings. Alternative uses for
Raw materials. fixed assets
Technology Patents, copyrights, know how No. of patents owned
R&D facilities. Royalty income
Intangible Technical and scientific R&D expenditure
Resources employees R&D staff
Reputation Brands. Customer loyalty. Company Brand equity
reputation (with suppliers, customers, Customer retention
government) Supplier loyalty
Human Training, experience, adaptability, Employee qualifications,
Resources commitment and loyalty of employees pay rates, turnover.

The World’s Most Valuable Brands, 2006The World’s Most Valuable Brands, 2006
Rank Company Brand Rank Company Brand
value value
($bn.) ($bn.)
1 Coca-Cola 67.5 11 Mercedes Benz 20.0
2 Microsoft 59.9 12 Citi 20.0
3 IBM 53.4 13 Hewlett-Packard
18.9
4 GE 47.0 14 American Express
18.6
5 Intel 35.6 15 Gillette 17.5
6 Nokia 26.5 16 BMW 17.1
7 Disney 26.4 17 Cisco 16.6
8 McDonald’s 26.0 18 Louis Vuitton 16.1
9 Toyota 24.8 19 Honda 15.8
10 Marlboro 21.2 20 Samsung 15.0
http://www.interbrand.com/best_brands_2007.asp Source: Interbrand

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)
Defining Organizational CapabilitiesDefining Organizational Capabilities

Identifying Organizational Capabilities:
A Functional Classification
Identifying Organizational Capabilities:
A Functional Classification
FUNCTION CAPABILITY EXEMPLARS
Corporate Financial management ExxonMobil, GE
Management Strategic control IBM, Samsung
Coordinating business units BP, P&G
Managing acquisitions Citigroup, Cisco
MIS Speed and responsiveness through Wal-Mart, Dell
rapid information transfer Capital One
R&D Research capability Merck, IBM
Development of innovative new products Apple, 3M
Manufacturing Efficient volume manufacturing Briggs & Stratton
Continuous Improvement Nucor, Harley-D
Flexibility Zara, Four Seasons
Design Design Capability Apple, Nokia
Marketing Brand Management P&G, LVMH
Quality reputation Johnson & Johnson
Responsiveness to market trends MTV, L’Oreal
Sales, Distribution Sales Responsiveness PepsiCo, Pfizer
& Service Efficiency and speed of distribution LL Bean, Dell
Customer Service Singapore Airlines
Caterpillar

The Value Chain:
The McKinsey Business System
The Value Chain:
The McKinsey Business System
TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

The Porter Value ChainThe Porter Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
PRIMARY
ACTIVITIES
SUPPORT
ACTIVITIES

Scarcity
Relevance
Durability
Transferability
Replicability
Property rights
Relative
bargaining power
Embeddedness
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED
SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE
APPROPRIABILITY
THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY
The Rent-Earning Potential
of Resources and Capabilities
The Rent-Earning Potential
of Resources and Capabilities

Importance
VW’s
Relative
Strength
C1. Product
development
9 4
C2. Purchasing 7 5
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
Importan
ce
VW’s
Relative
Strength
R1. Finance 6 4
R2. Technology 7 5
R3. Plant and
equipment
8 8
R4. Location 7 4
R5. Distribution 8 5
RESOURCES CAPABILITIES
Assessing a Companies Resources
and Capabilities: The Case of VW
Assessing a Companies Resources
and Capabilities: The Case of VW

RelativeStrength
Strategic Importance
Superfluous Strengths Key Strengths
Zone of Irrelevance Key Weaknesses
1
1
5 10
5
10
R1
R2
R3
R4
R5
C1
C2
C3
C4
C5
C6 C7
C8
Appraising VW’s Resources and CapabilitiesAppraising VW’s Resources and Capabilities
(Hypothetical only)

Approaches to Capability DevelopmentApproaches 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)
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
COMPETITIVE
ADVANTAGE AND THE
SCOPE OF THE FIRM

From Business Strategy to Corporate Strategy:
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

P1 P2 P3 C1 C2 C3
Vertical Product Geographical
Scope Scope Scope
V1
V2
V3
P3P2P1 C3C2C1
V1
V2
V3
[A] Single
Integrated
Firm
[B] Several
Specialized
Firms linked
by Markets
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?
Transactions Costs and the
Scope of the Firm
Transactions Costs and the
Scope of the Firm

Determinants of Changes in Corporate ScopeDeterminants 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 Increased no. of managerial Admin. costs of
turbulent decisions. Need for fast firms rise relative
external responses to external to transaction
environment change 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

RATE OF PROFIT
> COST OF CAPITAL
INDUSTRY
ATTRACTIVENESS
COMPETITIVE
ADVANTAGE
The Basic Issues in Diversification DecisionsThe Basic Issues in Diversification Decisions
Superior profit derives from two sources:
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, 1949-74Diversification among the US Fortune 500, 1949-74
Percentage of Specialized Companies (single-business,
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
1949 1954 1959 1964 1969 1974
70.2 63.5 53.7 53.9 39.9 37.0
29.8 36.5 46.3 46.1 60.1 63.0

0
10
20
30
40
50
60
70
1950 1960 1970 1983 1993
Single business
Dominant
business
Related business
Unrelated
business
Diversification among Large UK
Corporations, 1950-93
Diversification among Large UK
Corporations, 1950-93

Motives for DiversificationMotives 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 --Diversification reduces variance of profit flows
SPREADING --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
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 DiversificationCompetitive Advantage from Diversification
• 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
ECONOMIES
OF
SCOPE
ECONOMIES
FROM
INTERNALIZING
TRANSACTIONS

Relatedness in DiversificationRelatedness 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
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 self-
employed 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
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

Integration: COSTS
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?
When is Vertical Integration More Attractive
than Outsourcing?
How many firms are available The fewer the companies
to undertake the activities? the more attractive is VI
Is transaction-specific investment If yes, VI more attractive
needed?
Does limited information permit VI can limit opportunism
cheating?
Are taxes or regulation imposed VI can avoid them
on transactions?
Do the different stages have similar Greater the similarity, the
optimal scales of operation? more attractive is VI
Are the two stages strategically Greater the strategic
similar? similarity ---the more
attractive is VI
How great the need for entrepreneurship Greater the need, the greater
& continual upgrading of capabilities the disadvantages of VI
How uncertain is market demand? Greater the unpredictability
----the more costly is VI
Are risks compounded by VI increases risk.
linkages between vertical stages

Iron ore
mining
Steel
production
Steel strip
production
Can
making
The value chain for steel cans
MARKET
CONTRACTS
VERTICAL
INTEGRATION
MARKET
CONTRACTS
Canning of
food, drink,
oil, etc.
VERTICAL
INTEGRATION,
AND 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
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 RelationshipsRecent 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.

Patterns of InternationalizationPatterns of Internationalization
Trading Global
Industries Industries
--aerospace --automobiles
--military hardware --oil
--diamond mining --semiconductors
--agriculture --consumer electronics
Domestic Multidomestic
Industries Industries
--railroads
--laundries/dry cleaning --retail banking
--hairdressing --hotels
--milk --consulting
InternationalTrade
Foreign Direct Investment
LOW
LOW
HIGH
HIGH

Implications of Internationalization
for Industry Analysis
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
THE INDUSTRY
ENVIRONMENT
Key Success Factors
FIRM RESOURCES
& CAPABILITIES
-- Financial resources
-- Physical resources
-- Technology
-- Reputation
-- Functional capabilities
-- General management
capabilities
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
Competitive Advantage within an International
Context: The Basic Framework
Competitive Advantage within an International
Context: The Basic Framework

National Influences on Competitiveness: The
Theory of Comparative Advantage
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
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
portation equipment
Other manufacturers -.68 -.07 .01 .29 .40
Note: Revealed comparative advantage for each product group
is measured as: (Exports less Imports)/ Domestic production

Porter’s Competitive Advantage
of Nations
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.

FACTOR CONDITIONS
DEMAND
CONDITIONS
RELATING AND
SUPPORTING
INDUSTRIES
STRATEGY, STRUCTURE,
AND RIVALRY
Porter’s National Diamond FrameworkPorter’s National Diamond Framework
. 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
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 ProductionInternational 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 firm-
specific 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 CostsThe 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. Mexico
Parts & components 7,750 8,000
Labor 700 40
Shipping cost 300 1,000
Inventory 20 40
TOTAL 8,770 9,180

Location and the Value ChainLocation and the Value Chain
Comparative advantage in textiles and apparel by stage of processing
Hong Kong 1 -0.96
2 -0.81
3 -0.41
4 +0.75
Italy 1 -0.54
2 +0.18
3 +0.14
4 +0.72
Japan 1 -0.36
2 +0.48
3 +0.48
4 -0.48
U.S.A. 1 +0.96
2 +0.64
3 +0.22
4 -0.73
Country Stage Index of Country Stage Index of
of Revealed of Revealed
Processing Comparative Processing Comparative
Advantage Advantage
Note:
1 = production of fiber (natural & synthetic) 2 = production of spun yarn
3 = production of textiles 4 = production of clothing

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 coordination
benefits from co-locating activities?
Determining the Optimal Location
of Value Chain Activities
Determining the Optimal Location
of Value Chain Activities

Resource commitment
TRANSACTIONS DIRECT INVESTMENT
Spot
sales
Exporting
Foreign
agent /
distributor
Licensing
Franchising
Joint venture
Marketing &
Distribution
only
Long-
term
contract
Licensing
patents &
other IP
Fully
integrated
Wholly
owned
subsidiary
Marketing&
Distribution
only
Fully
integrated
Low High
Alternative Modes of Overseas Market EntryAlternative Modes of Overseas Market Entry

Alliances and Joint Ventures:
Management Issues
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?

SUZUKI
ISUZU
TOYOTA
IBC Vehicles
Ltd. (U.K.)
GM
New United Motor
Manufacturing
Inc. (NUMMI)
10% owned. Co-production
49%owned. Co-production
40% investment
60%
owned
50% owned
50%
owned
(Makes vans in UK)
(Makes cars in US)
SAAB
50%
owned
FIAT
20% owned (2000-5).
Collaboration on technology
and components
FUJI
20% owned; joint production
DAEWOO
50.9%
owned;technical&
production
collaboration
AVTOVAZ
Russian JV to produce cars
SAIC
JV to produce cars in China
General Motors’ Alliances with CompetitorsGeneral Motors’ Alliances with Competitors

Multinational Strategies:
Globalization vs. National Differentiation
Multinational Strategies:
Globalization vs. National Differentiation
 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 cross-
subsidize 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.
Hamel &
Prahalad
Thesis
Kenichi
Ohmae’s
“Triad
Power”
Thesis
Ted
Levitt
“Globaliz-
-ation of
Markets”
Thesis
The case for a global strategy:

Globalization & Global Strategy —What are they?Globalization & Global Strategy —What are they?
• GLOBALIZATION ?
--Something to do with increasing interdependence
between countries.
• 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)
• 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
separate
national mkts.
global strategy
World as inter-
related mkts.
multidomestic strategy

Analyzing benefits/costs of a global strategyAnalyzing benefits/costs of a global strategy
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
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
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 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)

Benefits of national differentiation
Benefits
of
global
integration
Cement
Telecom
equipment
Jet engines
Consumer
electronics
Autos
Funeral
services
Retail
banking
Investment
banking
Auto
repair
Restaurant
chains
Steel
Online C2C auctions
Beer
Dry
cleaning

Benefits of national differentiation
Benefits
of
global
integration
Cement
Telecom
equipment
Jet engines
Consumer
electronics
Autos
Funeral
services
Retail
banking
Investment
banking
Auto
repair
Positioning industries in terms of benefits of
globalization and national differentiation
Positioning industries in terms of benefits of
globalization and national differentiation

The Evolution of Multinational Strategies and
Structures: (1) 1900-1939—Era of the Europeans
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
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 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
Marketing Global Strategies and Situations to Industry
Conditions: Firm Success in Different Industries
Consumer Electronics Branded, Packaged Telecommunications
Consumer Goods Equipment
- Global industry - Substantial national - Requires both global
- Matsushita the most differentiation, few global integration and national
successful scale economies differentiation.
- Philips the survivor - Kao has limited success - NEC only partially
- GE sold out outside Japan successful
- Unilever and P&G most - ITT sold out
successful - Ericsson most
successful
local responsiveness local responsiveness local responsiveness
global
integration
globalintegration
global
integration
Matsushit
a
Philips
General Electric
Ka
o
P&G
Unilever
NEC
Erickson
ITT

Reconciling Global Integration with National
Differentiation: The Transnational Corporation
Reconciling Global Integration with National
Differentiation: The Transnational Corporation
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.
Tight complex
controls and
coordination and a
shared strategic
decision process.
Heavy flows of
technology,
finances, people,
and materials
between
interdependent
units.

1. 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?
1. 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
1. What’s the role of HQ?
--Control function
--Coordination function
--Exploiting scale economies in centralized provision of
services
1. The need for internal differentiation
--By product/business
--By function
--By country
1. Formal & informal organization
Designing the MNC: Key LearningDesigning the MNC: Key Learning

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