Designing the Value Chain Across Borders: The Dispersion Decision

National Diamonds and International

Competition

GLOBAL STRATEGY

Dr. Ruth V. AguileraCollege of Business

University of Illinois at Champaign-Urbana March 2009

Session I: Topics to Cover

• What is Global Strategy?– Global vs. Multi-domestic Firms

• Multinational Firms – Types of Multinational Firms– Global Integration

• Globalization or Regionalization?

• Porter’s International Competitive Advantage

• Vernon Product Life Cycle

What is Global Strategy?Ghoshal

• Definition– Strategic Objectives– Sources of Competitive Advantage

• Integration-Responsiveness Framework

Multinational Firms Guillen

• Definition

• Dispersion (assets or employees)

• Coordination: – Kobrin’s index of global integration

Regional & Global Strategies

in MNCsRugman & Verbeke (2004)

Thinking about how to measure how global a company is…How would you measure it?

Regional & Global Strategies

• From WWII economic power has become more disperse– While in 1967, U.S. held 50.4% of the world

stock of FDI, by 1990 it only participated with 25.4%.

– Formation of a TRIAD: North America, EU & Asia.

• The Fortune 500 (2001)– International sales

Types of MNCs• Home region oriented: At least 50% of

their sales in their home region of the triad.• Bi-regional: At least 20% of their sales in

each of two regions. • Host region oriented: More than 50% of

their sales in a triad market other than their home region.

• Global: at least 20% of their sales in all three triad regions, but less than 50% in any one region.

• Particularly Rugman & Verbeke (2004) noted:– The majority of the world’s largest 500

companies are MNCs– Out of the 365 Co. within those 500, only 9 are

considered “GLOBAL” from a sale profile viewpoint.

– 320 of those companies have 80% of their sales in their home region of the TRIAD

Percentages of Types of MNCs & Percentage intra-regional sales

• Home region oriented (320 firms): 80.3%

• Bi-regional (25 firms): 42%

• Host region oriented (11 firms): 30.9%

• Global (9 firms): 38.3%

Global MNCs (Rugman & Verbeke)• IBM• Sony• Royal Philips Electronics • Nokia• Intel• Canon• Coca-cola• Flextronics electronics• LVMH

What is the conclusion of this study?

To be continued by Flores (MBA2003) and Aguilera!

Check the course website for details

Porter’s Five Forces to Industry Analysis

SUBSTITUTEPRODUCTS

ENTRYBARRIERS

CUSTOMERSCOMPETITORSSUPPLIERS

What Makes Entry Barriers a Strong Force?

ENTRYBARRIERS

Few Technology

Advantages

Few Technology

Advantages

Few Experience

Curve Effects

Few Experience

Curve Effects

Low Brand LoyaltyLow Brand Loyalty

Low Customer LoyaltyLow Customer Loyalty

Low Capital RequirementsLow Capital Requirements

Few Tariffs or Other

Trade Barriers

Few Tariffs or Other

Trade Barriers

Few Economies of

Scale Effects

Few Economies of

Scale Effects

What Makes Substitute Products a Strong Force?

SUBSTITUTEPRODUCTS

Low Switching CostsLow Switching Costs

High Quality Substitute ProductsHigh Quality Substitute Products

Low Priced SubstitutesLow Priced Substitutes

What Makes Suppliers a Strong Force?

SUPPLIERS

Suppliers have

Good Reputations

Suppliers have

Good Reputations

High Switching CostsHigh Switching Costs

Ability to Integrate

Forward

Ability to Integrate

Forward

Few Substitute ProductsFew Substitute Products

Few SuppliersFew Suppliers

What Makes Customers a Strong Force?

CUSTOMERS

Customers Purchase

in Large Quantities

Customers Purchase

in Large Quantities

Low Switching CostsLow Switching Costs

Customers Purchase

From Several Suppliers

Customers Purchase

From Several Suppliers

Customer Profits are LowCustomer Profits are Low

Customers are LargeCustomers are Large

What Makes Competitors a Strong Force?

COMPETITORS

Low Switching CostsLow Switching Costs

Diversity RivalryDiversity Rivalry

High “First Mover” AdvantagesHigh “First Mover” Advantages

Entry of New FirmsEntry of New Firms

High Exit BarriersHigh Exit Barriers

Many CompetitorsMany Competitors

Competitors of Equal SizeCompetitors of Equal Size

What about at the COUNTRY level?

Why These Country Differences in World-Class Manufacturing?

USA Japan Germany France Taiwan South Korea

Aerospace Autos Luxury autos High-speed trains Electronic components

Steel

Pharmaceuticals Consumer electronics

Machine-tools, instruments

Satellite launchers Machine-tools

Ships

Medical equipment

Heavy machinery

Specialty chemicals

Nuclear engineering

Clothing & footwear

Subcompact automobiles

…or in World-Class Services?

USA UK Germany France Spain Italy Switzerland

Entertainment Money & finance

Insurance Tourism Tourism Design ‘Suitcase’ banking

Software & information

Waste mgmt Custom software

Design Retail banking

Hospitality

Money & finance

Airlines Large-scale software

Privatized Utilities

Porter’sDiamond of National Advantage

FactorConditions

RelatedIndustries

DemandConditions

FirmStrategy,Structure,Rivalry

Land & Capital Skilled labor Infrastructure Open markets Free trade flows

Market size Scale effects Sophisticated buyers Government support & demand

Supplier industries feed innovation into industry & place pressures on industry to innovate.

Strong firms Intense rivalry Rapid innovation

innovation

Government

Leaders

chance

CHANGE

Determinants of National Competitive Advantage

• Factor Conditions: the nation’s position in factors of production such as skilled labor or infrastructure, necessary to compete in a given industry.

• Demand Conditions: the nature of home-market demand for the industry’s product or service.

• Related and Supporting Industries: the presence or absence in the nation of supplier industries and other related industries that are internationally competitive.

• Firm Strategy, Structure and Rivalry: the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.

Points to Remember

• Factor conditions change and are malleable.

• Rivalry generally good, although perhaps not among your suppliers.

• Pay attention to global demand.

• Complacency breeds failure.

• Next discontinuity?

Internet Impact

• Product design, features, and use:– Data-carrying watches (w/ Sega).– Watches with email, internet connection, cash

chip, telephone? (w/ HP).

• Marketing: Need to redesign colors.

• Services: Internet time (1,000 beats/day). 51 million visits to its website.

Applying the FrameworkBangalore software

development

Japanese consumer electronics

Silicon Valley Swiss Watch Industry

Factor conditions

Abundant English-speaking engineers

Abundant engineers

Magnet for engineers

Image; expensive craftsmen

Rivalry Global Local Global Cartels global

Demand conditions

Global Local Global Local global

Related industries

Weak infra-

structure

Suppliers, banks

VCs, equipment, designers

Banks, machine tools

• Efficiency:

– Combination & recombination of K, L, and technology to lower costs.

– Experience/learning curve effect from operating in one location.

– Problem: Adverse changes in relative prices.

• Specialization:

– Become a “category-killer.”

– Benefit from networks of long-term relations with specialized suppliers.

• Flexibility:

– Long-term connections with related & support industries.

– Problem: Difficulty in shifting production in the short run?

• Innovation:

– Advantage of co-locating R&D and manufacturing.

– Problem: Sophistication/universality of home-country demand?

Sources of Firm Advantages that stem from National Advantages

International Product Cycles(Vernon)

A. Traditional Product Cycle Hypothesis (PCH):

1. Products go through a “life cycle”:

• Introduction• Growth• Maturation• Decline

2. Entrepreneurs and managers:• Introduce new products when they see a market

opportunity• They tend to be “myopic” and/or “rationally bounded”

• Market opportunities are first seen in the home market of the firm.

• Examples:– Consumer electronics

– Automobiles

– Wristwatches

– Medicinal herbs

– Life insurance

– Fast food

3. Introduction and Growth stages:• Product is unstandardized: different designs, inputs & processes.

• Hard to determine optimum location, production scale or sale price.

• High product differentiation across firms.

• Individual firms do not differentiate.

• Low price-elasticity of demand

4. Maturation & Decline• Standarization within differentiated kinds.

• Normalization of designs, inputs & processes.

• Less uncertainty as to optimum location, production sale or sale price.

• Individual firms differentiate through brands, advertising, and variations.

• Increased price-elasticity of demand.

5. Implications of the theory

• Product or service innovations reflect features of the home country

• Home country features are taken into account when locating activities abroad

• International expansion ought to be careful, cautious, incremental, one-step-at-a-time process

• Countries most similar to the home country are approached first

6. Sequence of expansion:– Exporting arms-length from home– Licensing a foreign producer– Establishing a sales subsidiary– Establishing a first plant– Establishing subsequent plants

• Examples:International migration of productionSwedish multinationalsJapanese consumer electronics

B. The New Product Cycle Theory:

1. Big changes since the mid-1970s• Globalization & Trade Blocs.

• Firms and managers are now less “myopic” (learning, experience, training, telecommunications, the “global” village).

• Many firms are now global in reach

• Cross-national lags in new product introduction have been shortened.

2. Vernon’s qualifications in 1979• “Global scanner” companies =>PCH is useless to them.

• “Multidomestic” companies => PCH still applies.

• Small exporting companies => PCH still applies

3. Other LimitationsFor some products, shifts in location do not usually

take place The innovating country maintains its export ability through the product’s life cycle– Products w/ extremely short life cycles

– Luxury products for which cost is of little concern to the consumer

– Products for which the company can use a differentiation strategy

– Products that require specialized technical labor to evolve into the next generation

Comparative vs. Competitive Advantage

• Comparative Advantage – location-specific• Competitive Advantage – firm-specific• Value-addedQuestions:Where should the value-added chain be

broken across borders?In what functional activities should a firm

concentrate resources?

Comparative vs. Competitive

1. Each stage’s contribution to the : VALUE ADDED CHAIN.

• Highly competitive industries => low cost oriented strategies (total cost) – American steel industry

• Low competitive industries =>Revenue oriented strategies (product differentiation; market value), -- ex. home computers

2. Value-Added Analysis • “Strategy is not jus the selection of profitable product

markets; it is also the attempt to create a competitive advantage by investing in the link that generates the product attribute most strongly desired by consumers and which corresponds to the firm’s distinctive competence relative to its competitors.”

• “An application of the value-added chain in this context rests on the identification of the characteristics of consumer demand and the strategic positioning of firms in terms of their control over the critical links that supply these characteristics”

Example: Panasonic/Radio Shack

Components

Assembly

Marketing, Sales & Distribution

Retailing

PANASONIC RADIO SHACK

The Value-Added Chain of Comparative Advantage

3. International environment. Differences in:• Institutional & cultural barriers

• Endowments, costs, productivities

4. Distortions:• Transportation costs

• Tariffs & other trade regulations

• Competitive advantage if firms (scale, scope, and learning)

5. International strategy is a/ either comparative or competitive strategy, or both.

SWISS WATCH INDUSTRY

Where is Switzerland?

Comparative Advantage of Nations

Firm strategy,structure, and

rivalry

Related andsupportingindustries

Factorconditions

Demandconditions

Gov’t: Education;financial regulation.

Gov’t: product standards andregulations; trade protection.

Gov’t: Industrial policies, infrastructure for business.

Gov’t: Competition Policy.

Technological Change & the Wristwatch

Components mid-19th C. 1950s 1960s 1970s 1980s

Power Spring Battery Battery Battery Battery

Case Metal Metal Metal Metal Plastic

Materials Gold, metals, jewels

Metals, alloys

Metals, alloys

Plastic, metals, alloys

Plastic, metals, alloys

Movement Escapement Escapement Tuning fork Quartz Quartz

Transmission Gears Gears Gears Gears Circuit

Face Analog Analog Analog Digital or Analog

Digital or Analog

Dominant firms:

The Swatch story

Collections

Original Skin

Irony

Beat

Chrono Scuba

Main Exporting Countries in 2007

* Includes re-exports. Note that Seiko and Citizen manufacture a large proportion of their inexpensive watches in Hong Kong and China.

Source: http://www.fhs.ch

Value Units Value per($bn) (mn) unit

Switzerland 13.4 25.9 517.4Hong Kong* 6.4 472.9 13.5China 2.4 638.3 3.8Germany 1.2 14.1 85.1France 1.3 5.8 224.1

Swiss Exports by Type of Watch in 2007Type of watch:

Value

($bn)

Units

(mn)

Value

per unit ($)

Mechanical 67% 16% 1965

Electronic 33% 84% 187

Total 12.3 25.9 476

Source: http://www.fhs.ch

Swatch: Operating Margins

– Upper segment: 24%.– Middle segment: 13%.– Lower segment: 5%.– Movements: 4%.

http://www.fhs.ch/en/swissm.php

Competence-Destroying Innovations

Ice Refrigeration

Telegraph Telephone

Gas lamps Incandescent lamps

Vacuum tube Transistor

Vinyl record Compact disc

Propeller Jet engine

Typewriter Word processor

Minitel Internet

Chemical photography Digital photography

Traditional toys Videogames

Mechanical watch Digital watch

Digital watch ???

Wristomo

• DoCoMo—Seiko.• Launched in 2003.• Weight (grams) Approx. 113

(including battery). Continuous talk time (minutes) Approx. 120. Continuous stand-by time (hours) Approx. 200. Data transmission speed 64 kbps/ 32 kbps.

• http://www.3gnewsroom.com/3g_news/mar_03/news_3234.shtml

Other DoCoMo Gear

Citizen’s VIRT• Bluetooth-enabled watch.• The watch communicates

with the owner’s cell phone.• When a call comes in, the

number and name of the caller is shown on the watch.

• Calls can be put on hold or forwarded from the watch.

• It alerts the owner if he o she leaves the cell phone behind.

• Announced in June 2006.

Seiko reacts with its own bluetooth watch.

Citizen’s VIRT• Bluetooth-enabled watch.• The watch communicates

with the owner’s cell phone.• When a call comes in, the

number and name of the caller is shown on the watch.

• Calls can be put on hold or forwarded from the watch.

• It alerts the owner if he o she leaves the cell phone behind.

• Announced in June 2006.

Seiko reacts with its own bluetooth watch.

SMS Technology Australia

Detective Dick Tracy

(1946)

Points to Remember

• Location advantages are contingent on the technology employed.

• Location advantages can turn into disadvantages very quickly.

• Importance of paying attention to global demand shifts.

• Complacency breeds failure.• Next technological discontinuity?

– It will affect low-cost producers (i.e. China) to a greater extent than higher-end & differentiated producers (Switzerland, France).