Chapter 9 6/2/10. Global Strategy. Framework for Global Competition. Labor Pooling. Why Do Regions Matter? Technological Spillovers

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1 Chapter 9 Global Strategy Framework for Global Competition The economic logic of global competition depends on the costs and benefits of geographical location Regional advantages National advantages Global strategy is beyond leveraging benefits of the firm s country of origin Includes leveraging firm s capabilities and resources across national markets Successfully competing as a global firm means achieving higher economic performance than indigenous rivals Why Do Regions Matter? Labor force pooling among firms Use of specialized local suppliers Technological spillovers in the region Labor Pooling Firms benefit from labor pooling when labor requirements are uncertain Local labor fills unexpected demand Specialized Local Suppliers Firms benefit when: The firms industry and the supplier industry grow in the region at about the same pace Supplier inputs are specialized to local customers Technological Spillovers Spillovers are enabled by Opportunities for mutual observation among firms in the region Networks among workers and managers across firms Managerial transfers within the region Start-ups by former employees of incumbents Mobility among existing firms Regional associations Informal communication lending to knowledge of similar technological issues

2 Why Do Countries Matter? Laws and regulations National cultures Natural resources and geography The factors in Porter s diamond model: Demand characteristics Factor markets Related industries Competition Laws and Regulations National laws and regulations, such as: Fiscal policy such as taxes Industry regulation Trade policy Monetary policy Laws and regulations influence: Investment Shape and scale of demand Trade Competitive markets require the strong rule of law National Culture Determined by geography, climate, languages, religions, martial history and orientation, arts, political systems, family and social traditions, and economic mores Affects consumer taste and buying patterns Influences competitive strength of local firms Geography and Natural Resources Countries differ substantially in natural resources and geographic location These differences are not sufficient for variation in national wealth Effective management practices are necessary for the development of the nation s economic health Porter s Diamond Model Global Strategy Framework Source: Michael Porter, The Competitive Advantage of Nations (New York Free: Press, 1990), p. 72. Figure 8.1 Source: Adapted from Bruce Kogut, Designing Global Strategies: Comparative and Competitive Value Chains, Sloan Management Review, Table

3 Country and Firm-specific Advantage Country (comparative) advantage Derived from nation-specific resources or capabilities that provide local firms with competitive advantages in global markets, such as: Natural resources such as diamonds in Russia and South Africa Superior quality and supply chain management practices developed in Japan Firm-specific (competitive) advantage Derived from resources and capabilities within the firm itself Factors Affecting Firm-specific Advantage Economies of scale in one or more activities, such as operations Economies of scope from products sold across multiple markets Diffusion of superior practices from home office to units in regional markets Accelerated learning curve gained from the collective experiences of the regional units Nationally Segmented Industries Industries in which: No country has an advantage over any other country There are no opportunities for firms to develop superior global cost or value drivers Examples portrait photography, clothing alterations, beauty salons and barbershops Industries Vertically Integrated Across Borders Industries in which: Some countries have an advantage over others in an activity in the value chain There are no opportunities for firms to develop superior global cost or value drivers Examples: blockbuster movies (U.S.), diamond cutting (Antwerp, New York), and high fashion (Northern Italy, Paris, New York) Industries Horizontally Integrated Across Borders Industries in which: No country has an advantage over any other There are opportunities for firms to develop superior global cost or value drivers Examples: fast food, automobiles, vacation resorts Industries Vertically and Horizontally Integrated Across Borders Industries in which: Some countries have an advantage over others There are opportunities for firms to develop superior global cost or value drivers Examples: semiconductors, software, financial services An industry becomes global when non-domestic firms have consistently superior market positions compared to domestic rivals

4 Global Configuration Global configuration is defined as the geographical locations of a firm s activities The determinants of a firm s configuration are: Comparative advantage associated with country of origin Strategic position in the world market Firm size Opportunities at time of entry Changes in these factors can alter the configuration over time Changes in a Firms Configuration Shifts in the location of a firm s activities globally can be due to: Changes in country specific advantages, such as rise of software in India and manufacturing in China Changes in strategy as firms shift their value and cost drivers Changes in firm size Global technological and administrative innovations, such as the Internet Exchange rates Modes of Foreign Market Entry Pattern of investment reflects need for increased control over operations in the host country First, export Then, licensing Then, joint venture Then, wholly owned production activities The process of internalization Follows economic logic similar to vertical integration Need for control Relative competence to perform the activity Potential Risks of International Investments Potential governmental appropriation of firm s assets Removal of price guarantees Removal of guarantees related to shifts in currency and exchange rates Favoritism towards competition Political Risk Associated with Large Scale Investments Factors that reduce political risk: Entering firm is large and well connected Regulating institution in host country is involved in several sectors Powerful entrepreneurs in the country benefit from trade liberalization The firm s investment is not associated with a notable redistribution of wealth Organizing for Global Competition Establishing an international division Advantage: managers focused on international growth Disadvantage: responsibility for international growth separated from core line organization Subordinating regional operations to functions Advantage: each function capable of coordinating its investments globally Disadvantage: difficulty in coordinating global activities across the value chain

5 Organizing for Global Competition (cont d) Subordinate functions to regional operations Advantage: aligns regional business with local competitive requirements Disadvantage: reduces ability to benefit world-wide scale or scope in functions Organizing for Global Competition (cont d) Hybrid forms of international competitors Functional structure with country divisions (e.g., China, Japan) Geographical structure with central functions (e.g., technology development) Transnational network formation among worldwide units Types of Organization Structure of Global Firms Chapter 10 New Business Development Source: Adapted from Christopher Bartlett and Sumantra Ghoshal, Managing across Borders: The Transnational Solution (Cambridge: Harvard Business School Press, 1989). p. Table Diversification The Process of New Business Development Occurs when a firm develops a new, autonomous unit, as opposed to an extension of a current product line Each unit within the firm Competes in a unique product market Can control the resources and capabilities required to compete effectively Can develop an effective strategic plan for the unit Including a unique mission for the business within the firm New Business Ideas o From inside and outside the organization o Proposed by all levels of management Strategy Execution Top Management Assessment o Control and coordination systems Within the business units Within the corporate infrastructure o Compensation and incentive systems Within the business units Within the corporate infrastructure o Learning and culture Within the business units Within the corporate infrastructure o Consistency of activities within existing business units The Concept of Corporate Strategy o Portfolio of businesses o Interbusiness transfers o Centralized activities o Top-down initiatives o Corporate infrastructure Source: Adapted from Robert, A Model of the Interaction of Strategic Behavior, Corporate Context and the Concept of Strategy. Academy of Management Review, 8, (1983), pp Figure

6 Motivations for Diversification Two questions: What is the new business going to do for the firm? What is the parent company going to do for the new business? Motivations for Diversification (cont d) Common motivations to diversify: To reduce earnings volatility To acquire a new source of revenues and earnings To reposition current businesses To employ current resources and capabilities in new markets 1 2 Reduce risk Contributions of Venture to Parent Company Lower earnings volatility Reduce cost of equity Should not be a primary motivation for diversification as capital markets are more efficient at diversifying risk Add to corporate growth in revenues and earnings Dependent on success of new business Superior market positioning Effective defense of market position Contributions of Venture to Parent Company (cont d) Help to reposition other businesses in the parent firm Dependent on viability of new business Three risks: Benefits from new business might be lower than expected Isolating mechanisms of venture s contribution might be weak Decline of market position over time 3 4 Contributions of the Parent Company to the New Venture Financial capital Resources Capabilities Management skills Entrepreneurial General management Financial Capital Firms on average cannot be more efficient than external capital markets in allocating financial resources to businesses. This disadvantage is reduced when: The value chains of the businesses are highly related The firm invests in businesses that are capital constrained (e.g., small) and have high growth potential 5 6 6

7 Resources Firms share resources among business units in order to improve their market positions: Improve value (e.g., brand) Lower costs (economies of scale and scope) The contribution of the shared resource to a business unit should be benchmarked against market alternatives Capabilities Capabilities transferred to a business unit should contribute to its market position (through higher value or lower cost) A paradox: codified capabilities are easier to transfer but also more observable and imitable This problem is acute for firms diversifying for the first time 7 8 Entrepreneurial Management Firms can transfer managerial expertise in innovation and growth to a new business The transferred expertise frequently involves building scaledriven value and cost drivers Transfers of expertise can also involve knowledge about how to manage the unit s boundaries as it grows Core Competence In contrast to common usage, the original meaning of core competence is the combination of: A technology platform from which many applications could be developed (e.g., adhesives at 3M) An entrepreneurial capability to commercialize applications Both of these are necessary and neither is sufficient General Management Existing management expertise helps a new business unit achieve a sustainable competitive advantage during shakeout and maturity When a multi-business firm frequently specializes in businesses that focus on either a value or cost advantage: Managers across business units benefit from shared knowledge and practices Corporate executives have a more homogeneous portfolio of business units in the major drivers of their market positions (value or cost) New Market Characteristics Characteristics of industries that are attractive to firms seeking to diversify: Large ultimate size of new market A high growth rate in demand A future industry structure in which the startup will have a favorable position Every diversification event is an entry event

8 Major challenges: Differentiation Managing New Ventures Separating the new venture from existing businesses so that it can tailor its investments more closely to its market s requirements Integration Tying the new venture to existing businesses so that it can benefit from their resources and capabilities New Venture Governance Multiple perspectives on business unit valuation across the firm Separate resource allocation mechanisms for existing and startup business units Different management incentive schemes for existing and startup businesses Alternative mechanisms for interunit coordination and control Diversification Through Acquisition About 40% of all acquisitions occur in a merger wave Four major waves with peaks in 1900, 1927, 1970 and 2000 Three minor waves with peaks in 1919, 1948 and 1986 Why do they occur? Shifts in the rules of competition in some industries Stock market booms which make acquirers feel rich Top management optimism Empirics on Acquisition Performance Target firm shareholders typically benefit from being acquired Acquiring firm shareholders are likely to benefit when: Deals are made with cash Targets are private Acquiring firms are less likely to benefit when: The acquiring firm is large Acquisition Stage: Determinants of Cash Flows: The Stages of Profiting from a New Business Acquisition Stage I Stage II Stage III Transaction Private Information Forecasting Ability Negotiating Skills Due Diligence Integration/Turnaround Competence - Planning - Protocols - Execution Turnaround or Integration Complementarity of Acquirer and Target Businesses: - Resources - Capabilities Corporate Contributions: - Infrastructure - Governance Ongoing Operations Dynamic Capability - Innovations to Improve Market Position Isolating Mechanisms - Prevention of Imitation - Customer Retention Macroeconomic and Industry Forces Carve-Outs Spinning off part of the equity in a startup to outside investors: Improves estimates of venture s value Allows the entrepreneur and management team to own shares in venture Allows parent firm to benefit from owning shares Relevant to Acquisitions Only Relevant to Any New Business

9 Diversification in Different Nations Industry-to-industry diversification patterns differ significantly across countries Technological relatedness from existing to new businesses is the same across countries But opportunities for diversification from one industry to another vary according to national institutions such as: Regulation Industry associations Labor laws Corporate networks of directors and owners