COURSE: GLOBAL BUSINESS MANAGEMENT MGT610

DR. DIMITRIS STAVROULAKISPROFESSOR OF HUMAN RESOURCE MANAGEMENTDEPT OF ACCOUNTINGTEI OF PIRAEUS

Unit 3: MNC Strategy

Training Material: - Textbook: pp 175-180. -Video: “Facebook’s Competitive Advantage” (3.24 min).

Business Strategy

Proverbs

“If you don’t know where you are heading, you are likely to end-up anywhere” (English proverb)

Unless you change your direction, you are likely to end-up where you are heading” (Chinese proverb)

Greek origin, strategos: stratos = army, agos = leader

Strategy as “the basic characteristics of the match an organization achieves with its environment” (Hofer & Schendel, 1978, Strategy Formulation: Analytical Concepts; the field’s first textbook).

Strategy as “the basic characteristics of the match an organization achieves with its environment.” (Hofer & Schendel, 1978, Strategy formulation: Analytical concepts; the field’s first textbook)

Strategy as “plan, pattern, position, perspective, and ploy” (Henry Mintzberg, 1987, Five P’s for Strategy).

Strategy as “plan, pattern, position, perspective, and ploy.” (Henry Mintzberg, 1987, Five P’s for Strategy)

Strategy as a “pattern of objectives, purposes, or goals, and major policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be” (Kenneth Andrews, 1971, The Concept of Corporate Strategy).

Strategy as a “pattern of objectives, purposes, or goals, and major policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.” (Kenneth Andrews, 1971, The concept of corporate strategy)

Strategy is “the great work of the organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.” Sun Tzu (400-300 b.c.)

Strategy is “the great work of the organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.” (Sun Tzu, approx. 500 BC)

“Everyone has a strategy until you get punched in the mouth” (Mike Tyson).

“Everyone has a plan ‘till they get punched in the mouth.” (Mike Tyson)

What is Strategy?

Strategy preconditions

Strategy has been defined as “the match an organization achieves between its internal resources and skills […] and the opportunities and risks created by its external

environment.”

Source: Hofer, C. W. & Schendel, D. (1978). “Strategy formulation: Analytic concepts”, St. Paul, MN: West: 12.

“Know yourself, know your opponents; encounter a hundred battles, win a hundred victories !”

Sun Tzu, “The Art of War”, approx. 500 BC

Winning Strategy Templateo Is strategy compatible with the company mission statement?o Does the strategy fit the company’s external environment ?o Is strategy feasible and within the potential of company

resources ? Is it compatible to personnel values?o Does strategy lead to sustainable

competitive advantage?o Will the company strategy beat the market ?o Does strategy boost company performance?o Does strategy put the company ahead of trends?o Does the company strategy embrace uncertainty?o Has risk & competition been assessed ?o Is strategy compatible with the life-cycle of company products ?

Competitive Advantage (CA)

Competitive Advantage (CA) (cont) CA has to be recognizable and to be translated to customer

value (e.g. lower pricing due to exceptional contract with key suppliers). Advantages that do not add to customer value are not going to last (e.g. unexploited qualified personnel, as in the Greek public sector). National CA (abundance of Greek scientists/professionals).

Sustaining CA requires erecting barriers against the competition. “A good strategist seeks not only to ‘win the hill’, but hold on to it.” (S. Jain).

In order to be sustainable, CA has to be embedded in the firm over time in the form of culture, expertise, resources etc. CA has to be durable against competitors’ attacks, as well as against environmental changes.

It may be achieved either through cost leadership (Greece), or through differentiation, or focus on a particular segment of the market.

Sources of Competitive Advantage

COST ADVANTAGE

DIFFERENTIATIONADVANTAGE

COMPETITIVEADVANTAGE

Similar product

at lower cost

Price premium

from unique product

Features of Cost Leadership and Differentiation Strategies

Generic strategy Key strategy elements Resource & organizational requirements

COST Scale-efficient plants. Access to capital. ProcessLEADERSHIP Design for manufacture. engineering skills. Frequent

Control of overheads & reports. Tight cost control. R&D. Avoidance of Specialization of jobs and marginal customer functions. Incentives for accounts. quantitative targets.

DIFFERENTIATION Emphasis on branding Marketing. Product and brand advertising, engineering. Creativity. design, service, and Product R&D, Innovation, KM. quality. Human resources and incentives. Strong cross-functional coordination.

Porter’s generic strategies Cost leadership: Lower cost producer.

Use of technology, reduction of distribution cost, government assistance, reduction of labor costs, economies of scale, global approach to the market (EasyJet, Samsung, Wal-Mart).

Differentiation: Takes advantage of unique features (brand name, technical excellence, quality, packaging).

Possibilities for creating new product lines for different market segments (Toyota Lexus Camry). Identification of strategic customers and competitors. Achievement of hard loyalty.Control of costs ! (Savoy Hotel, London: 3 employees per guest, guests may call a waiter, maid, or valet any moment by pressing a button – less than 1% annual profit in 2009). Friday’s (personal waiter, called by first name).

Focus: on specific market segments (IKEA, Porsche, Godiva). Possibly differentiate later on through vertical integration (Gucci, Germanos, Babyland etc).

Combination of cost & differentiation strategies: e.g. in the clothing industry (Benetton, Diesel, Zara etc). Porter : Danger of being caught in the middle (average prices & nothing exceptional).

Cost Leadership Strategy An integrated set of actions taken to produce goods or

services with features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers. Preconditions: Relatively standardized products Features acceptable to many customers Lowest competitive price

Cost saving actions required by this strategy: Tightly controlling production costs and overheads Minimizing costs of sales, R&D and service Building efficient scale & manufacturing facilities Monitoring costs of services provided by subcontractors Simplifying production processes

Cost Leadership Strategy Competitive Risks:

Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations

Focus on cost reductions may occur at expense of customers’ perceptions of quality and differentiation

Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

Differentiation Strategy An integrated set of actions taken to produce goods or services

(at an acceptable cost) that customers perceive as being different in ways that are important to them. Features: Non-standardized products Customers value differentiated features more than they

value low cost

Cornerstones: Quality R&D and innovation Fit to customers’ needs and demands Cost proximity. Differentiation does not mean indifference to

costs, instead costs ought to remain near competitionDifferentiation may concern both tangible and imaginary,

intangible features of a product (image, status & value for money).

Competitive Risks of Differentiation

The price differential between the differentiator’s product and the cost leader’s product becomes too large

Differentiation ceases to provide enough value for which customers are willing to pay

Experienced customers scrutinize the value of differentiated features

Counterfeit goods replicate differentiated features of the firm’s products

Focus Strategies An integrated set of actions taken to produce goods

or services that serve the needs of a particular competitive segment. Preconditions: Particular buyer groups (e.g. youths or senior citizens) Different segments of a product line (e.g. conventional

customers versus do-it-yourselfers - IKEA) Different geographic markets

Types of focused strategies: Focused cost leadership strategy Focused differentiation strategy

Competitive Risks of Focus Strategies

A focusing firm may be “outfocused” by its competitors A large competitor may set its sights on a firm’s niche

market Customer preferences in a niche market may shift to

the broader market Can involve compromises:

Becoming neither the lowest cost nor the most differentiated firm

Becoming “stuck in the middle”: Lacking the strong commitment and expertise of

firms following either a cost leadership or a differentiated strategy

Economies of scale: Obtained through mass production and negotiations of costs with suppliers.

Economies of scope: Obtained through synergistic utilization of resources (tangible or intangible), e.g. knowledge, patents, innovations with regard to new markets, products, or services.

COMPETITIVE ADVANTAGE

THE INDUSTRY ENVIRONMENTKey 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 the International Context

Resources Are the source of a firm’s capabilities Cover a spectrum of individual, social and

organizational phenomena Alone, do not yield a competitive advantage Comprise a firm’s assets, including people and the

value of its brand name Represent inputs into a firm’s production process,

such as: Capital equipment Skills of line employees Brand names Financial resources Talented managers

Resources Are the source of a firm’s capabilities Cover a spectrum of individual, social and

organizational phenomena Alone, do not yield a competitive advantage Comprise a firm’s assets, including people and the

value of its brand name Represent inputs into a firm’s production process,

such as: Capital equipment Skills of line employees Brand names Financial resources Talented managers

Easy to Imitate:Cash Commodities

Can be Imitated (but may not be):Capacity Economies of Scale

Cannot be imitated:PatentsUnique locationUnique assets(e.g. Mineral rights)

Source: Collins & Montgomery, Corporate Strategy: Resources and the Scope of the Firm (1996).

Steps of Resource Imitability

.5-24

VRIO Framework – Four questions to evaluate firm’s key resources (Barney)

–Value: Does it provide customer value and competitive advantage?

–Rareness: Do other competitor possess it?

–Imitability: Is it costly for competitors to imitate?

–Organization: Is the firm properly organized to exploit the resource?

It is not enough for an organization to possess valuable resources, it must have also the capacity to appropriately exploit them !

Strategic Audit: SWOT Analysis Purpose: SWOT aims at the identification of a

company-specific strategic model that will match company resources to the demands of the environment.

Strengths & Weaknesses: Internal, within the companyOpportunities & Threats: External, outside the company

Strengths: E.g. international experience, skilled personnel, distribution network, long-term contracts.

Weaknesses: E.g. outdated technology, inefficient customer service, bureaucracy, inexperienced execs.

Opportunities: E.g. appearance of new markets, economic growth, perspectives for business alliances.

Threats: E.g. emergence of new competitors, rising oil prices, unstable political environment, inflation.

Business Strategy