Chapter 4

Chapter 4
Strategic Management in the
Multinational Company: Content
and Formulation

Copyright© 2007 Thomson Learning All rights reserved

Learning Objectives

•• Define differentiation and low cost
Define differentiation and low cost
•• Understand how low-cost and differentiation strategists
Understand how low-cost and differentiation strategists
make money
make money
•• Recall multinational examples of use of generic
Recall multinational examples of use of generic
strategies
strategies
•• Understand competitive advantage and value chain
Understand competitive advantage and value chain
•• Understand offensive and defensive strategies
Understand offensive and defensive strategies

Copyright© 2007 South-Western/Thomson Learning All rights reserved

Learning Objectives

•• Understand basics of multinational diversification
Understand basics of multinational diversification
•• Understand how traditional strategy formulation
Understand how traditional strategy formulation
techniques apply to the multinational company
techniques apply to the multinational company
•• Realize both the convergence and divergence in
Realize both the convergence and divergence in
strategies
strategies


Basic Strategy for the
Multinational Company

•• Strategy: the central, comprehensive, integrated and
Strategy: the central, comprehensive, integrated and
externally oriented set of choices of how a company
externally oriented set of choices of how a company
will achieve its objectives
will achieve its objectives



•• Important strategic areas
Important strategic areas
-- Arenas: a company needs to be able to decide which
Arenas: a company needs to be able to decide which
businesses ititwants to be in
businesses wants to be in
-- Vehicles: a properly stated strategy also needs to include
Vehicles: a properly stated strategy also needs to include
the vehicles a company will use to create a presence in
the vehicles a company will use to create a presence in
specific markets or products
specific markets or products
-- Differentiators/Economic Logic: a company also needs to
Differentiators/Economic Logic: a company also needs to
decide what ways ititwill use to win over customers
decide what ways will use to win over customers
-- Sequencing: a company also needs to decide in what
Sequencing: a company also needs to decide in what
sequence and at what pace major decisions will be made
sequence and at what pace major decisions will be made


•• Multinational companies use many of the same
Multinational companies use many of the same
strategies as domestic companies
strategies as domestic companies


Competitive Advantage and
Multinational Applications of
Generic Strategies
•• Generic strategies: basic ways to achieve and sustain
Generic strategies: basic ways to achieve and sustain
competitive advantage
•• Competitive advantage: when a company can
Competitive advantage: when a company can
outmatch its rivals in attracting and maintaining its
outmatch its rivals in attracting and maintaining its
targeted customers
targeted customers


Multinational Applications of
Generic Strategies (cont.)
•• Differentiation strategy: providing superior value to
Differentiation strategy: providing superior value to
customers
customers
•• Ex.: BMW competing in the world market by
Ex.: BMW competing in the world market by
providing high-quality and performance sports cars
providing high-quality and performance sports cars
•• Low-cost strategy: producing at a lower cost than
Low-cost strategy: producing at a lower cost than
competitors
competitors
•• Ex.: Korean semiconductor firms
Ex.: Korean semiconductor firms


How Do Low-Cost and
Differentiation Firms Make
Money?
•• Differentiation
Differentiation
•• Customers often pay a higher price for extra value
Customers often pay a higher price for extra value
•• Low-cost
Low-cost
•• Additional profits come from cost savings
Additional profits come from cost savings


Exhibit 5.1: Costs, Prices, and
Profits for Differentiation and
Low-Cost Strategies


Focus Strategy

•• Strategies can be further subdivided on the basis of
Strategies can be further subdivided on the basis of
competitive scope
competitive scope
•• Competitive scope: how broadly a firm targets its
Competitive scope: how broadly a firm targets its
products or services
products or services
•• -- Narrow competitive scope for certain buyers or
Narrow competitive scope for certain buyers or
geographic areas
geographic areas
•• -- Broad competitive scope when a large range of
Broad competitive scope when a large range of
buyers are targeted
buyers are targeted

Exhibit 5.2: Porter’s Generic
Strategies


the Value Chain

•• A firm can gain competitive advantage by finding
A firm can gain competitive advantage by finding
differentiation or low costs in its activities
differentiation or low costs in its activities
•• Value chain is a convenient way of looking at the firm’s
Value chain is a convenient way of looking at the firm’s
activities
activities
•• Value chain: all the activities that a firm used to design,
Value chain: all the activities that a firm used to design,
produce, market, deliver, and support its product
produce, market, deliver, and support its product


Exhibit 5.3: The Value Chain


Components of the Value
Chain

•• Primary activities: physical actions of creating, selling,
Primary activities: physical actions of creating, selling,
and after-sale service of products
and after-sale service of products
•• Upstream: early activities in the value chain
Upstream: early activities in the value chain
•• -- R&D
R&D
•• -- Dealing with suppliers
Dealing with suppliers


Components of the Value
Chain (cont.)

•• Downstream: later value chain activities
Downstream: later value chain activities
•• Sales and dealing with distribution channels
Sales and dealing with distribution channels
•• Support activities: systems for human resources
Support activities: systems for human resources
management, organizational design and control, and
management, organizational design and control, and
technology
technology


Outsourcing

•• Outsourcing: a deliberate decision to have outsiders or
Outsourcing: a deliberate decision to have outsiders or
strategic allies perform certain activities in the value
strategic allies perform certain activities in the value
chain
chain
•• About half of U.S. manufacturing jobs will be
About half of U.S. manufacturing jobs will be
outsourced to more than 28 emerging countries over
outsourced to more than 28 emerging countries over
the next 10 years
the next 10 years
•• About 10% of U.S. service jobs may be outsourced
About 10% of U.S. service jobs may be outsourced


Outsourcing

•• When should a multinational company outsource?
When should a multinational company outsource?
•• Outsourcing makes sense if an outsider can perform
Outsourcing makes sense if an outsider can perform
a value-chain task better or more cheaply
a value-chain task better or more cheaply
•• However, tasks that are outsourced should the ones
However, tasks that are outsourced should the ones
that are not crucial to the company’s ability to
that are not crucial to the company’s ability to
achieve competitive advantage
achieve competitive advantage


Exhibit: 5.4: The Major
Advantages and
Disadvantages of Outsourcing


Distinctive Competencies

•• Strengths that allow companies to outperform rivals
Strengths that allow companies to outperform rivals
-- Ex.: Quality, innovation, customer service
Ex.: Quality, innovation, customer service
•• Resources: inputs into the production or service
Resources: inputs into the production or service
processes
processes
-- Ex.: Buildings, land, equipment, employees
Ex.: Buildings, land, equipment, employees


Distinctive Competencies

•• Capabilities: ability to assemble and coordinate
Capabilities: ability to assemble and coordinate
resources effectively
resources effectively
•• Resources provide the organization with potential
Resources provide the organization with potential
capabilities.
capabilities.
•• For long-term success, capabilities must lead to
For long-term success, capabilities must lead to
sustainable competitive advantage.
sustainable competitive advantage.


Sustaining Competitive
Advantage

•• Sustainable: strategies not easily defeated by
Sustainable: strategies not easily defeated by
competitors
competitors
•• Four characteristics of capabilities that lead to
Four characteristics of capabilities that lead to
-- Valuable
Valuable
-- Rare
Rare
-- Difficult to imitate
Difficult to imitate
-- Non-substitutable
Non-substitutable

Exhibit 5.5: Relationships Among
Resources, Capabilities, Distinctive
Competencies, and Eventual
Profitability


Competitive Strategies in
International Markets

•• Competitive strategies: strategic moves multinationals
Competitive strategies: strategic moves multinationals
use to defeat competitors
use to defeat competitors
-- Offensive competitive strategies: direct attacks to
Offensive competitive strategies: direct attacks to
capture market share
capture market share
-- Defensive competitive strategies: attempts to
Defensive competitive strategies: attempts to
discourage offensive strategies
discourage offensive strategies
-- Counter-parry: fending off a competitor’s attack in
Counter-parry: fending off a competitor’s attack in
one country by attacking in another country
one country by attacking in another country

Offensive Strategies

•• Direct attacks: price cutting, adding new features, or
Direct attacks: price cutting, adding new features, or
going after poorly served markets
going after poorly served markets
•• End-run offensives: seeking unoccupied markets
End-run offensives: seeking unoccupied markets
•• Preemptive competitive strategies: being first to obtain
Preemptive competitive strategies: being first to obtain
particular advantageous position
particular advantageous position
•• Acquisitions: buying out a competitor
Acquisitions: buying out a competitor


Defensive Strategies

•• Attempts to reduce risks of being attacked
Attempts to reduce risks of being attacked
•• Convince an attacking firm to seek other targets
Convince an attacking firm to seek other targets
•• Blunt the impacts of any attack
Blunt the impacts of any attack
•• Exclusive contracts with best suppliers
Exclusive contracts with best suppliers
•• New models to match competitor’s lower prices
New models to match competitor’s lower prices
•• Public announcements about the willingness to fight
Public announcements about the willingness to fight


Counter-parry

•• Popular strategy for multinationals
Popular strategy for multinationals
•• Respond to attack by attacking competitor in another
Respond to attack by attacking competitor in another
country
country
•• Ex.: Kodak—When Fuji attacked Kodak in the U.S.,
Ex.: Kodak—When Fuji attacked Kodak in the U.S.,
Kodak retaliated by attacking Fuji in Japan.
Kodak retaliated by attacking Fuji in Japan.
•• Goodyear also attacked Michelin in Europe as
Goodyear also attacked Michelin in Europe as
response to attack in U.S.
response to attack in U.S.


Multinational Diversification
Strategy

•• Business-level strategies: strategies for a single
Business-level strategies: strategies for a single
business operation
business operation
•• Corporate-level strategies: how companies choose
Corporate-level strategies: how companies choose
their mixture of different businesses
their mixture of different businesses


Diversification

•• Related diversification: companies acquire businesses
Related diversification: companies acquire businesses
that are similar in some way to their original or core
that are similar in some way to their original or core
business
business
•• -- Ex.: Nike adding clothing line to its shoe
Ex.: Nike adding clothing line to its shoe
operations
operations
•• Unrelated diversification: firms acquire businesses in
Unrelated diversification: firms acquire businesses in
any industry
any industry
•• -- Main concern is whether it’s a good financial
Main concern is whether it’s a good financial
investment
investment

Strategy Formulation:
Traditional Approaches

•• Strategy formulation: process by which managers
Strategy formulation: process by which managers
select the strategies to be used by their company
select the strategies to be used by their company
•• Popular analysis techniques
Popular analysis techniques
•• Competitive dynamics of the industry
Competitive dynamics of the industry
•• Company’s competitive position in the industry
Company’s competitive position in the industry
•• Opportunities and threats faced by their company
Opportunities and threats faced by their company
•• Company’s strengths and weaknesses
Company’s strengths and weaknesses


Industry and Competitive
Analysis

•• Porter’s five forces model: a popular technique that
Porter’s five forces model: a popular technique that
can help a multinational firm understand the major
can help a multinational firm understand the major
forces at work in the industry and the degree of
forces at work in the industry and the degree of
attractiveness of the industry
attractiveness of the industry


Analysis

•• Porter’s Five Forces Model
Porter’s Five Forces Model
1. The degree of competition among existing
1. The degree of competition among existing
competitors in the industry
competitors in the industry
2. The threat of new entrants
2. The threat of new entrants
3. The bargaining power of buyers
3. The bargaining power of buyers
4. The bargaining power of suppliers
4. The bargaining power of suppliers
5. The threat of substitutes
5. The threat of substitutes


Analysis

•• Managers must understand their industry well to
Managers must understand their industry well to
formulate good strategies.
formulate good strategies.
•• Must understand economic characteristics of industries
Must understand economic characteristics of industries
and driving forces
and driving forces
•• Economic characteristics include
Economic characteristics include
-- Market size
Market size
-- Ease of entry
Ease of entry
-- Opportunities for economies of scale
Opportunities for economies of scale

Driving Forces

•• The important changes that have potential to affect an
The important changes that have potential to affect an
industry
industry
-- Speed of new product innovations
Speed of new product innovations
-- Technological changes
Technological changes
-- Changing societal attitudes and lifestyles
Changing societal attitudes and lifestyles


Key Success Factors (KSFs)

•• Important characteristics of a company or its product
Important characteristics of a company or its product
that lead to success in an industry
that lead to success in an industry
-- Innovative technology or products
Innovative technology or products
-- Broad product line
Broad product line
-- Effective distribution channels
Effective distribution channels
-- Price advantages
Price advantages
-- Effective promotion
Effective promotion
-- Superior physical facilities or skilled labor
Superior physical facilities or skilled labor

Key Success Factors

-- Experience of firm in business
Experience of firm in business
-- Cost position for raw materials
Cost position for raw materials
-- Cost position for production
Cost position for production
-- R&D quality
R&D quality
-- Financial assets
Financial assets
-- Product quality
Product quality
-- Quality of human resources
Quality of human resources


Competitor Analysis

•• Profiles of competitor’s strategies and objectives
Profiles of competitor’s strategies and objectives
•• Four steps
Four steps
1. Identify strategic intent of competitors
1. Identify strategic intent of competitors
2. Identify current and anticipated generic strategies
2. Identify current and anticipated generic strategies
3. Identify current and anticipated offensive and
3. Identify current and anticipated offensive and
defensive competitive strategies
defensive competitive strategies
4. Assess current positions of competitors
4. Assess current positions of competitors


Competitor Analysis (cont.)

1. Strategic intent
1. Strategic intent
-- Broad objectives of competitors
Broad objectives of competitors
1. Current and anticipated generic strategies
1. Current and anticipated generic strategies
-- Helps determine key KSF
Helps determine key KSF
1. Current and anticipated offensive and defensive
1. Current and anticipated offensive and defensive
competitive strategies
competitive strategies
2. Current positions
2. Current positions


Exhibit 5.7: Hypothetical Competitive
Profiles of Four Companies in Different
Countries


Company-Situation Analysis:
SWOT

•• Strengths: distinctive capability, resource or skill
Strengths: distinctive capability, resource or skill
•• Weaknesses: competitive disadvantage compared to
Weaknesses: competitive disadvantage compared to
competitors
competitors
•• Opportunities: favorable conditions in the environment
Opportunities: favorable conditions in the environment
•• Threats: unfavorable conditions in the environment
Threats: unfavorable conditions in the environment


SWOT Analysis

•• More complex than for domestic firms
More complex than for domestic firms
•• Multinationals face more complex general and
Multinationals face more complex general and
operating environments
operating environments
•• Environments vary by country
Environments vary by country


Corporate Strategy Selection

•• Diversified corporation has a portfolio of businesses
Diversified corporation has a portfolio of businesses
•• Major issue is which businesses to invest in and which
Major issue is which businesses to invest in and which
businesses to divest
businesses to divest
•• The basic tool: matrix analyses
The basic tool: matrix analyses
•• The most popular is the growth-share matrix of the
The most popular is the growth-share matrix of the
Boston Consulting Group (BCG).
Boston Consulting Group (BCG).


BCG Share Matrix

•• Division into four categories based on market share
Division into four categories based on market share
and relative market share
and relative market share
•• Stars: the most successful firm
Stars: the most successful firm
•• Dogs: businesses with low market shares in low-
Dogs: businesses with low market shares in low-
growth industries
growth industries
•• Cash cows: businesses in slow-growth industries
Cash cows: businesses in slow-growth industries
where company has strong market-share position
where company has strong market-share position
•• Problem children: businesses in high-growth
Problem children: businesses in high-growth
industries where company has a poor market share
industries where company has a poor market share

Exhibit 5.8: The BCG Growth
Share Matrix


Matrices

•• All matrices help answer basic strategy formulation
All matrices help answer basic strategy formulation
question such as
question such as
•• Are businesses in attractive industries?
Are businesses in attractive industries?
•• Are most businesses growing?
Are most businesses growing?
•• Are there sufficient cash cows to finance other
Are there sufficient cash cows to finance other
businesses?
businesses?
•• Is business portfolio well positioned for the future?
Is business portfolio well positioned for the future?
•• Is the some strategic synergies among businesses?
Is the some strategic synergies among businesses?

Organizations Alike:
Globalization and
Convergence
•• Convergence: increasing similarity of management
Convergence: increasing similarity of management
practices
practices
•• Convergence is most apparent with transnational firms
Convergence is most apparent with transnational firms
•• Multinational firms competing in the same industry tend
Multinational firms competing in the same industry tend
to have similar structures and strategies regardless of
to have similar structures and strategies regardless of
the location of the company’s headquarters
the location of the company’s headquarters


Globalization and
convergence
•• How Globalization pushes organizations to be more
How Globalization pushes organizations to be more
similar
similar
-- Global customers and products
Global customers and products
-- Growing levels of industrialization and economic
Growing levels of industrialization and economic
development
development
-- Global competition and global trade
Global competition and global trade
-- Gross-border mergers, acquisitions, and alliances
Gross-border mergers, acquisitions, and alliances
-- Cross-national mobility of managers
Cross-national mobility of managers
-- Internationalization of business education
Internationalization of business education

Globalization and
convergence
•• National differences still affect the way many firms compete via
National differences still affect the way many firms compete via
their choices of strategies
their choices of strategies
•• Three important reasons to understand the national differences
Three important reasons to understand the national differences
•• Managers in successful multinational firms must understand
Managers in successful multinational firms must understand
and anticipate the strategies of rivals from other countries
and anticipate the strategies of rivals from other countries
•• Managers in successful multinational firms must understand
Managers in successful multinational firms must understand
the strategies of potential business partners
the strategies of potential business partners
•• Strategies developed in one national context might be
Strategies developed in one national context might be
copied and modified to fit another national context
copied and modified to fit another national context


The National Context and
Organizational Strategy:
Overview and Observations
•• The national context affects organizational design and
The national context affects organizational design and
strategy formulation and content through the following
strategy formulation and content through the following
processes
processes
-- The social institutions and national and business
The social institutions and national and business
cultures encourage or discourage certain forms of
cultures encourage or discourage certain forms of
businesses and strategies in each nation
businesses and strategies in each nation
-- Social institutions and national culture serve as
Social institutions and national culture serve as
barriers to the easy transfer of competitive
barriers to the easy transfer of competitive
advantages among countries
advantages among countries

The National Context and
Organizational Strategy:
Overview and Observations
-- Each nation must rely on its available factor
Each nation must rely on its available factor
conditions for developing industries and the firms
conditions for developing industries and the firms
within industries
within industries
-- Social institutions and culture determine which
Social institutions and culture determine which
resources are used, how they are used, and which
resources are used, how they are used, and which
resources are developed
resources are developed


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