5
STRATEGIC CHAPTER MANAGEMENT IN THE MULTINATIONAL
COMPANY: CONTENT AND FORMULATION
Learning Objectives
Define the generic strategies of differentiation and low cost
Understand how low-cost and differentiation strategists make money
Recall multinational examples of the use of the generic strategies
Understand competitive advantage and the value chain and how it applies to multinational
operations
Understand how multinational firms use offensive and defensive strategies
Understand the basics of multinational diversification
Understand how to apply the traditional strategy formulation techniques, industry, and
competitive analysis to the multinational company
Realize that the national context affects both the convergence and divergence in the
strategies used by multinational companies
Basic Strategic Content Applied to the Multinational Company
Strategy the central, comprehensive, integrated, and externally oriented set of choices of
how a company will achieve its objectives
A strategy needs to address important areas:
Which business a company wants to be in
What the company will use to create presence in a market
How the company will win customers
For MNCs, a major question is which country to enter at what time or what products
to produce
Multi companies use many of the same strategies practiced by domestic companies
Competitive Advantage and Multinational Applications of Generic
Strategies
Generic strategies ways that both domestic and multinational companies keep and
achieve competitive advantage
Competitive advantage when a company can outmatch its rivals in attracting and
maintaining its targeted customers
Two primary generic strategies
Differentiation strategy strategy based on finding ways to provide superior value to
customers
o Exceptional product quality, unique product features, or high quality service
Low cost strategy producing products or services equal to those of competitors at a
lower cost
o Lower cost by increasing efficiency quality level acceptable to customers is not
sacrificed
How Do Low-Cost and Differentiation Firms Make Money ?
Differentiation: people will often pay a higher price for the extra value of a superior
product or service
2
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3 y Section 1/Chapter Outlines
Low cost: products or services similar to competitors in price and value yield additional
profits from cost savings
Exhibit 5.1 Costs, Prices, and Profits for Differentiation and Low-Cost Strategies
(Shows how the relationships among costs, prices, and profits work for the differentiator and the
low-cost strategists, compared to the average competitor)
Focus strategy applying a differentiation or low-cost strategy to a narrow market
Competitive scope how broadly a firm targets its products or service
o Companies with narrow competitive scope may focus on limited products, certain
types of buyers, or specific geographical areas
o Companies with broad competitive scope may have many products targeted at a
wide range of buyers
Exhibit 5.2 Porters Generic Strategies
(Shows the four subdivisions of Porters generic strategies, including the basic differentiations
and cost-leadership strategies with their broad-market or narrow-market options)
Competitive Advantage and the Value Chain
A firm can gain competitive advantage by finding sources of lower cost or differentiation
in any of its activities
Value chain all the activities that a firm uses to design, produce, market, deliver, and
support its product
Exhibit 5.3 Value Chain
(Shows a picture of a value chain)
Value chain Primary and Support activities
Primary activities involve the physical actions of creating (or serving), selling, and
providing after-sale service of products
o Upstream refers to early activities in the value chain, such as R&D and dealing
with suppliers
o Downstream refers to later value chain activities, such as sales and dealing with
distribution channels
Support activities include systems for human resources management, organizational
design and control, and a firm's basic technology
Value chain enables companies to determine its internal cost structure to for benchmarking
efficiency against industry or other competitors
Outsourcing the deliberate decision to have outsiders or strategic allies perform certain
activities in the value chain
About half of U.S. manufacturing jobs will be outsourced to more than 28 emerging
countries over the next 10 years
In general, outsourcing makes sense if an outsider can perform a value-chain task
better or more cheaply
Tasks that are crucial to the companys ability to achieve competitive advantage should
not be outsourced
Distinctive Competencies
Distinctive competencies strengths that allow companies to outperform rivals
Distinctive competencies come from two major sources
Resources inputs into the production or service processes (tangible or intangible)
Capabilities the ability to assemble and coordinate resources effectively (ways that
lead to lower costs or differentiated output)
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Chapter 5/ Strategic Management in the MNC: Content and Formulation y 4
Sustaining Competitive Advantage
Sustainable - characteristic of strategies that are not easily defeated by competitors
Capabilities that lead to competitive advantage must have four characteristics
Valuable capabilities create demand for a companys services or products or give
companies cost advantages
Rare capabilities are those that a company possess but no or few competitors possess
Difficult-to-imitate capabilities are not easily copied by competitors
Non-substitutable capabilities have no strategic equivalent for competitors
Exhibit 5.4 How Distinctive Competencies Lead to Successful Strategies
(Summarizes the relationships among resources, capabilities, distinctive competencies, and
eventual profitability)
Offensive and Defensive Competitive Strategies in International Markets
Competitive strategies moves multinational firms use to defeat competitors
In offensive strategies, companies directly target rivals from whom they wish to
capture market share
In defensive strategies, companies seek to beat back or discourage their rivals
offensive strategies
Offensive competitive strategies direct attacks, end-run offenses, pre-emptive strategies,
and acquisitions
Direct attacks: price cutting, adding new features, comparison advertisements that
show lesser quality in competitors products, or going after severely neglected or
poorly served market segments
End-run offensives : avoid direct competition and seek unoccupied markets
Preemptive competitive strategies : being the first to gain some advantageous position
Acquisitions: firm buys its competitors
Defensive competitive strategies attempts to reduce the risks of being attacked, to
convince an attacking firm to seek other targets, or to blunt the impact of any attack
Counterparry fending of a competitor's attack in one country by attacking them in
another country, usually the competitor's home country
Multinational Diversification Strategy
Business-level strategies those for a single business operation
Corporate-level strategies how companies choose their mixtures of different businesses
(or diversification)
Two types of diversification
Related diversification a mix of businesses with similar products and markets
o Three reasons to chose related diversification: sharing activities, transferring core
competencies, and developing market power
Unrelated diversification a mix of businesses in any industry
o Main concern is only whether an acquisition is a good financial investment
Like domestic companies, multinationals also pursue diversification strategies
A quick way to gain a presence
Allows coordination and use of resources from different businesses located anywhere
Can more easily to establish global brand names for different but related products
Allows crosssubsidization, both across countries and across companies
Diversification is good up to a certain point its benefits need to be weighed against the
added costs
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5 y Section 1/Chapter Outlines
Exhibit 5.5 Examples of Diversified Multinationals
(Shows a selection of Global Fortune 500 diversified multinational companies with major lines
of businesses)
Strategy Content: Brief Conclusions
First section of chapter provided an overview of basic strategies generic, competitive,
and diversified
Next section review traditional strategy formulation
Strategy Formulation: Traditional Approaches
Strategy formulation process by which managers select the strategies to be used by their
company
Popular analyses for successful strategy formulation help managers understand the
following:
The competitive dynamics of the industry
Their company's competitive position in the industry
The opportunities and threats faced by their company
Their organizations strengths and weaknesses
Industry and Competitive Analyses
Industries are the main competitive arenas of a company's business activities
Managers must understand the forces affecting the industry, its economic
characteristics, and the driving forces of change and competition within it
Porters five forces model a popular technique that can help a multinational firm
understand the major forces at work in the industry and the degree of attractiveness
First force the degree of competition in the industry
Second force the threat of new entrants based on the barriers to entry
Third force the bargaining power of buyers the degree to which buyers can
influence competitors within the industry
Fourth force the bargaining power of suppliers the degree to which suppliers exert
influence on the industry
Fifth force the threat of substitutes the extent to which competitors are confronted
with alternatives for their products
Economic characteristics that influence strategy selection: market size, ease of entry and
exit, and whether there are economies of scale in production
Driving forces of change should be monitored includes the speed of new product
innovations, technological changes, and changing society attitudes and lifestyles
Extent of competition also affects the industry
Key success factors (KSFs) important characteristics of a company or its product that
lead to success in an industry
Examples: innovative technology or products, broad product line, effective distribution
channels, price advantages, effective promotion, superior physical facilities or skilled
labor, experience of firm in business, cost position for raw materials, cost position for
production, R&D quality, financial assets, product quality, and quality of human
resources
Competitor analysis profile of a competitors strategies and objectives
Four steps to the analysis
1. Identify the strategic intents of competitors
2. Identify current and anticipated generic strategies used by competitors
3. Identify current and anticipated offensive and defensive competitive strategies
used by rivals
4. Assess the current positions of competitors
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Chapter 5/ Strategic Management in the MNC: Content and Formulation y 6
Exhibit 5.6 Hypothetical Country-by-Country Competitive Analysis of Rivals
(Shows hypothetical competitive profiles of four companies in different countries)
Company-Situation Analysis
The most common tool for a company situation analysis is called the SWOT
SWOT analysis of an organizations internal strengths and weaknesses and the
opportunities or threats from the environment
Strength: a distinctive capability, resource, skill, or other advantage of an organization
relative to its competitors
Weakness: any competitive disadvantage of a company relative to its competitors
Opportunitie s: favorable conditions in a firm's environment
Threats: unfavorable conditions in the environment
The SWOT analysis for the multinational company is more complex than for the domestic
company
More complex general and operating environments because they operate in two or
more countries
Each country provides its own national context, representing different opportunities
and threat
Import and export barriers
Volatile exchange rates
Local inflation affects international markets
Governmental policies affecting repatriation of earnings
A country-by-country SWOT is probably the most prudent approach
Corporate Strategy Selection
The major strategic question is which businesses in the portfolio are targets for growth and
investment and which are targets for divestment or harvesting
Matrix analysis is one way of assessing a corporate business portfolio
The BCG growth-share matrix one popular choice that is used to decide how much
of its resources a corporation should devote to any unit
o Divides businesses into four categories based on the industry growth rate and the
relative market share of the business in question
1. Stars the most attractive businesses located in fast growing industries
where a company has a relatively large market share
2. Dogs businesses with relatively low market shares in low-growth industries
3. Cows businesses in slow-growth industries where the company has a strong
market share
4. Problem children business in high-growth industries where the company has
a poor market share
Exhibit 5.7 BCG Growth-Share Matrix for a Diversified Multinational Company
(Shows that for each type of business, the growth-share matrix has a suggested strategy)
GE portfolio matrix another popular choice
Contains nine cells based on high, medium, and low levels of industry attractiveness
and on strong, average and weak levels of a businesss competitive position in the
industry
Used to determine the competitive position of a business in its industry
For the diversified multinational the company, portfolio assessment becomes more
complex
Portfolio analyses must be conducted for each business in each country or region of
operation
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7 y Section 1/Chapter Outlines
The National Context and Organizational Strategy: Overview and
Observations
The national context affects organizational design and strategy formulation and content
through the following processes
The social institutions and national and business cultures encourage or discourage
certain forms of businesses and strategies in each nation
Each nation must rely on its available factor conditions for developing industries and
the firms within industries
Social institutions and culture determine which resources are used, how they are used,
and which resources are developed
Multinational managers can generalize and apply these ideas in order to understand the
actions of rivals or alliance partners in any country where their firms do business
Summary and Conclusions
Few students will work in industries untouched by global competition
Even the managers of domestic firms need a good understanding of multinational business
strategy
Competitive strategies must be considered on a country-by-country basis
Despite global trends of convergence in strategies, the institutional and cultural conditions
favor different strategies by competitors from different nations
Strategy is a combination of planned intent and adaptive reactions to changing
circumstances (new opportunities and threats)
Beyond the traditional strategic questions facing all managers, the multinational manager
must confront other issues related to strategy, discussed in Chapter 6
Global Watch Exercises
1. INDIVIDUAL ASSIGNMENT with GROUP PRESENTATION
Using the Global Watch site, have each student research the strategy of one company. They
can select a company with either a low-cost strategy, or one with a differentiation strategy.
Based on their research, have them answer the following questions.
What is the name of the company and what are they in business for?
Does this company adopt a Low-Cost Strategy, or a Differentiation Strategy?
If a Low Cost Strategy, explain how the company achieves a competitive advantage.
What pieces of the value chain do they focus on to gain an advantage over their
competitors?
If a Differentiation Strategy, how do they differentiate themselves? How do they add
value to their product or service, in comparison to their competitors, to give them an
advantage that consumers are willing to pay for?
Upon return to the next class, either have them pair up in groups of between 2 and 4 students,
or call on a few of them to present to the class as a whole for the benefit of everyones learning.
2. GROUP ASSIGNMENT
Divide the class into groups of four. Have each group select a company one that they work
for, used to work for, or a well-known company. Alternatively, you can have them try and find
a company on the Global Watch site. In their groups, have them conduct a SWOT analysis on
the selected company. The group should answer the four components of the SWOT analysis:
Strengths
Weaknesses
Opportunities
Threats
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Chapter 5/ Strategic Management in the MNC: Content and Formulation y 8
The simple activity within the groups is a good learning experience in at of itself; however, you
can ask (a) group(s) to present their analysis to the class if appropriate and time allows.
Chapter 5
Harley-Davidson, Inc.: Troubled Times Increase H-Ds
Reliance on International Sales
Synopsis
This case describes Harley Davidson and its experiences going international. The case
describes the heavyweight motorcycle industry in the light of the luxury goods market. The
case discusses the main markets of luxury goods and how Harley Davidson has fared in these
various markets. The case also describes Harley Davidsons many competitors such as Ducati,
BMW, Honda, Suzuki, Kawasaki and Yamaha. The case also discusses Harley Davidson as
selling a product to a traditional customer base built on nostalgia/comfort and design to evoke
an earlier image while the other main competitors focus on other competitive bases such as
technological development, performance, style and performance.
Learning Objectives
This case is well suited for a good discussion of strategic management issues facing a luxury
company like Harley-Davidson. Specifically, the following issues can be highlighted:
Is a differentiation strategy appropriate for Harley Davidson? Will this strategy work in all
countries?
Is the strategic bases for Harley Davidson (nostalgia, comfort) adequate to ensure
sustainable competitive advantage? Should they be concerned about other companies
efforts to manufacture heavyweight motorcycles based on performance, design, and
technology?
The case also provides enough information for a good discussion of Porters five forces
model. Specifically, the case also provides some understanding of the application of five
forces model across countries and cultures.
The case also illustrates a comprehensive comparison of the competition as relevant to
global and local markets.
Case Discussion Questions
1.
Which of Porters generic strategies is Harley Davidson using? Will this strategy work for
all of the countries described in the case? Why or why not?
2.
What does a Porters five forces analysis reveal about the strategies Harley Davidson has
employed in recent years?
3.
How does Harley Davidson compare to its competitors?
Analysis
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1.
Which of Porters generic strategies is Harley Davidson using? Will this strategy work
for all of the countries described in the case? Why or why not?
For this section, it is necessary to first discuss the various generic strategies available. The two
generic strategies are low cost and differentiation. More specifically, companies can try to
reduce costs as much as possible (low cost strategy) and target either the broad market (cost
leadership - general) or specific narrower segment in the market (cost leadership focused).
Alternatively, companies can produce and sell products at a premium price by incorporating
additional desirable traits (differentiation strategy), and target either the broad (general) market
or narrow (niche) market.
By examining Harley Davidsons strategic approaches, it is clear that they are manufacturing a
product that incorporates unique characteristics (nostalgia, comfort, American image, etc.) and
selling their motorcycles at a premium price. It is therefore easy to conclude that they are
pursuing a differentiation strategy.
The next key issue is whether they are targeting the broad market or a narrow segment of the
market. It should be clear from the case that they are targeting certain types of buyers and
offering a somewhat limited range of products. Thus, H-D is pursuing a focused or niche
market strategy. Harley Davidson is therefore a focused differentiator.
It seems likely that this strategy will work in all countries because it is customized enough to
accommodate local preferences. Harley Davidson is very keen on preserving their image and
reputation for highly exclusive motorcycles. By targeting a narrower segment and maintaining
exclusivity, they are more likely to maintain their image and reputation.
2.
What does a Porters five forces analysis reveal about the strategies Harley Davidson
has employed in recent years?
At this point, it is useful to discuss Porters five forces model and what each force represents.
You can break the class in groups and ask each group to focus on each of the geographic areas
mentioned in the text (i.e., U.S., Europe, Japan, China, India and Russia). The ensuing
discussion will hopefully reveal that the forces are different from one region to the other.
U.S.
Degree of competition among existing rivals moderate. There is some significant
competition although Harley Davidson clearly enjoys the dominant position with a
55% market share in 2008.
Threat of new entrants weak. The heavyweight motorcycle industry already has a
number of significant competitors. Harley Davidsons brand name represents a strong
barrier to entry that will be difficult to match.
Bargaining power of buyers weak to moderate. Heavyweight motorcycle buyers
clearly prefer Harley Davidson in the U.S. because of its iconic status. H-D enjoys a
strong loyalty from its customer base, and H-D manages its supply carefully so that
their bikes are not too easy to come by
Bargaining power of suppliers weak to moderate. Because Harley Davidson fully
involves their suppliers in the design and manufacture of their products, suppliers can
obviously have more power on Harley Davidson. However, it is important to note that
Harley Davidson strives for mutually beneficial, long-term relationships with
suppliers, and requires that its suppliers be committed to annual cost reductions.
Threat of substitutes weak. Most buyers in the U.S. buy Harleys because of the
perceived image of freedom and adventure that is afforded by a Harley, its iconic
status that is essentially unmatchable by other substitutes.
Europe
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Chapter 5/ Strategic Management in the MNC: Content and Formulation y 10
Japan
Degree of competition among existing rivals strong. -Harley Davidson faces a
number of strong European companies (Ducati, BMW) that offer products with
characteristics that Harley Davidson doesnt offer
Bargaining power of buyers strong. European buyers are not necessarily looking for
nostalgia in their motorcycles. They are more willing to go for style and performance
of European manufacturers and are less likely to buy into Harleys iconic status in the
U.S.
Other forces - similar to the U.S.
Degree of competition among existing rivals strong. Harley has to contend with
strong companies in the Asia-Pacific region
Bargaining power of buyers - strong - Japanese buyers have more choice
Other forces - similar to the U.S.
China and India
Degree of competition among existing rivals moderate. These markets are new and
attracting competitors. Import tariffs and emission standards provide significant
barriers to H-D entering these markets, so other competitors are taking advantage.
Bargaining power of buyers high. Price is the competitive issues in these markets.
Since motorcycles are often the preferred mode of transportation in these markets, a
competitive price and quality product are the preference, as opposed to high-end iconic
products like Harley Davidson.
Other forces - similar to the U.S.
Australia and New Zealand
Degree of competition among existing rivals weak to moderate. These markets
enjoy a similar following to that seen in the United States. H-D is seen as a symbol of
freedom of the open road in these places, where their roads and landscapes are similar
to that of the U.S.
Bargaining power of buyers moderate. The growth segment in the Australian
motorcycle market is off-road or dirt bikes with 40% of the market
Other forces similar to the U.S.
3.
How does Harley Davidson compare to its competitors?
On the whole, Harley-Davidson produces a good quality bike; however, the technology of their
bikes lags behind their competitors. This is, of course, largely intentional because they rely on
other factors to sell their product.
All of Harleys major competitors have their headquarters outside of the U.S., and most operate
units of large diversified companies. H-D does have some newer domestic brands such as Big
Dog and Polaris, who focus on the ultrahigh-end motorcycle market.
An overview of the competition is as follows:
Ducati Motor Holdings
European market
Sells style and performance based on technologically-advanced designs
Dominates the Superbike Championships
Customer tends to be younger and somewhat less affluent than H-Ds
BMW
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11 y Section 1/Chapter Outlines
Strategy based on premium pricing, and setting the standard in technology,
environment, and safety
Production concentrated on 3 different series
Focus on sophistication and class
High resale value, but high purchase price limits market share
Honda
World leader in motorcycle manufacturing
Combination of excellent engineering and quality with highly automated
manufacturing to achieve economies of scale for low-cost advantage
Highly diversified company with many product lines
Kawasaki
World leader in the transportation equipment and industrial good industries with
diverse product lines for each category
High performance and low maintenance products
Offering of multiple models of motorcycles to suit different purposes
Large international presence
Suzuki
Third larges manufacturer of motorcycles
Significant international presence over 190 countries
Joint manufacturing efforts and direct sales subsidiaries
Efficiency is the backbone of their low-cost position
Yamaha
Tailors its products to local market conditions
Diverse produce line boats, generators, golf carts, ATVs, snowmobiles, etc.
Full line of motorcycles ranging from scooters to heavyweights
Competitive advantage focuses on speedy and high performance racing bikes
Lessons
Provides a key example of how competitors fare in the heavyweight motorcycle industry
Good understanding of how to apply Porters five forces model in different
regions/countries
Understanding how to evaluate competitors
Appropriate understanding of the luxury markets and growing demand from emerging
markets
2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.