Global Corporate Strategy.Lecture 1.An Introduction to Global Strategy..doc

ULMS519. Global Corporate Strategy. Lecture 1. An Introduction to Global Strategy.IntroductionThe aims of this lecture are:· To explore different conceptions of strategy· To outline why global strategy is particularly complex· To introduce key issues in global strategy· To introduce key frameworks in global strategy, particularly the industry-based perspectiveKey Issues in Global StrategyThere has been considerable debate over what strategy is, both in theory and in the way in which firms devise and enact strategy. Peng identifies three broad schools of thought in strategy:1. Strategy as plan2. Strategy as actionMintzberg has argued that the strategy which emerges from lower level decisions has much more bearing on how companies compete than formal planning systems. 3. Strategy as integration/theoryThis School occupies an intermediate position between the strategy as plan and the strategy as action schools. This approach conceives of strategy as being a theory which frames how firms decide on possible courses of action.A General Framework for Thinking about StrategyA very fundamental perspective on strategy is, firstly, to assume that the objective is to maximize the value of the enterprise and secondly, to identify that the ability to earn profit is basic to this goal. Profit is the difference between total revenue and total cost. This implies that firms have two ways in which they can grow profits and therefore create value:1. Increase profitability. 2. Grow profits. Porter (1985) analysed the sources of competitive advantage for a particular firm in terms of the value chain of the firm. This analysis distinguishes between primary activities, composed of Research and Development (R&D), Production, Marketing and Sales and Customer Service. These primary activities are backed up by support activities made up of information systems, logistics and human resources.What Is Different about International Strategy?An important question is what is different about global strategy? Tallman & Yip (2009, p308) capture the essence:“Our answer is that international strategy, while still business strategy, brings forward and explicit consideration for the effects of locational differences and institutional contexts that requires adaptations in the application of classic strategic analysis techniques and adoption of additional analytical frameworks.” It is important to acknowledge a point made forcefully by Rugman and Verbeke that very few firms have a truly global strategy in the sense that they have operations which are reasonably evenly spread across the world.Over the past decade, there has been an important shift in global strategy across MNEs. Previously there was an emphasis on expansion across international boundaries to access markets.Dunnings Eclectic ParadigmFor many years Dunnings paradigm has been a key framework for analysing international business, and above all multinational enterprises. It rests on three elements:1. Ownership advantages. These are the sources of competitive advantage that firms have. 2. Locational advantages. The issue here is where will be the most favourable location for production.3. Internalisation advantages. This turns on the issue of whether the firm will do things in house or via market exchange. The following table gives a simple schema for when three broad types of international strategy might be preferred. Foreign Direct InvestmentExportingLicensingOwnership advantagesYesYesYesLocational advantagesYesNoYesInternalisation advantagesYesYesNoAs Lasserre notes, firms may take up a variety of positions relating to these three modes of exploiting competitive advantages.Key Questions in Global StrategyPeng sets out four key issues in strategy, the principal one being what underlies superior performance? These will be considered alongside others which are particularly important in global strategy.1. Why do firms differ/How do firms behave?These questions bear on what influences the strategies which firms enact. Peng talks in terms of a strategy tripod, each leg of which relates to three important perspectives in International Business regarding what influences a firms chosen strategy.· Industry characteristics. Going back to a classic work by Porter (1980) on competitive strategy, emphasis has been placed on the so-called “five forces” which will determine the nature and intensity of competition in particular industries.· Influential papers by Wernerfelt (1984) and Barney (1991) identified that strategy would be influenced by the particular resources and capabilities possessed by firms. · A third perspective, which has been successful, but perhaps less so than the other two in International Business is the institutional perspective. The essence here is that how firms choose to compete will be influenced by what they perceive to be the “rules of the game”.2. What determines the scope of the firm?In the context of global strategy, there are three important dimensions of scope: geographic scope; product scope; and how much of the value chain from raw material to final consumer the firm undertakes in each of its markets. All firms need to decide what activities they will undertake in-house and which goods and services they will buy from third parties.This question is of great interest in current thinking on global strategy because of two important trends in corporate strategy. The first is the increasing “fine-slicing” of activities by firms, whereby the value chain is broken up into smaller and more narrowly-focussed operations. The second is that firms are making increasing use of “hybrid” relationships, such as alliances and joint ventures, which fall part-way between doing things entirely in house and at the other extreme relying on impersonal market exchange. The issue of the scope of the firm also relates to the Resource-Based View, as firms are becoming more narrowly focussed on things they are particularly good at.As Tallman and Yip argue, larger operations which internationalisation allows open the way for economies of scale and scope, learning curve effects, market power vis-à-vis rivals, customers and suppliers and other benefits of size.3. Balancing the need for integration across the firms international operations with the need to be responsive to local needs and requirements in the countries in which it operates.As Lasserre argues, there are a range of factors favouring increasing globalisation and a set of factors which limit it. How these factors play out will differ industry to industry.Factors for:1. Political factors.2. Technological factors. 3. Social factors. 4. Competitive factors.Factors against:1. Cultural factors. 2. Commercial factors: distribution, customisation and responsiveness. 3. Technical factors: standards, spatial presence and languages. 4. Legal factors.These ideas have been tied together powerfully in what has become known as global integration/local responsiveness grid:HighGlobalisation/integration forcesLowMicrochipsCarsBulk chemicals Telecoms equipmentPharmaceuticals Telecoms servicesHairdressing Packaged food Retail banking Food retailingLow Localisation/responsiveness forcesHighThe same diagram has also been used to map preferred strategy onto industry types in each quadrant:HighGlobalisation/integration forcesLowGlobal standardisation strategyTransnational strategy International strategyLocalisation strategyLow Localisation/responsiveness forcesHighGlobal standardisation strategy is applicable in industries with strong pressures for efficiency, speed and learning but few pressures for local adaptation. International strategy is most applicable where there are neither strong cost pressures, nor strong pressures for localisation.Localisation strategy is most applicable where there is high pressure for localisation but weak pressures for international integration to promote efficiency and/or learning. Transnational strategy is required where there are strong pressures both for international integration and for local responsiveness. Pharmaceuticals is a paradigm example.In principle, one could decompose the broad industries identified into more specific activities within the value chain.4. Balancing the need to exploit existing firms-specific resources and competencies with the need to upgrade and enhance these resources and competencies.The idea that MNEs seek to exploit sources of competitive advantage goes back to Hymer who articulated that given the disadvantages firms would face in competing in unfamiliar local markets, they would need to have offsetting sources of strength. At the same time, it cannot stand still and needs to seeking to upgrade its competencies and resources. It has come to be appreciated that being multinational itself stimulates this process of upgrading, because the firm is able to learn from what it sees in overseas locations and through its process of adapting to different local contexts.5. What internal structure should a firm adopt?Internal structure refers to the relationships between different parts of the organisation (and also what different parts to break the organisation down into). There are three important dimensions of structure:1. the basis on which tasks are broken up;2. the depth of the hierarchy used;3. the extent to which decision-making power is delegated (the degree of centralisation or decentralisation).There are several key issues which are important in the design of internal structure: how to promote efficient and effective information flows; how to structure management control to monitor the activities of the firm and promote alignment of actions with objectives; how to create incentives for effort in pursuit of strategic objectives; and how to promote corporate culture which underpins cooperation and harmony with corporate strategy.Unitary or Functional Form.In this form of organisation each function has a hierarchy which peaks at the top of the organisation in e.g. marketing director, finance director. At the top of the hierarchy for the firm as a whole is the chief executive.U-form advantages: simple, efficient, specialisation of functions, career progressionAn important concept related to the inefficiency of the U-form for large organisations is that of control loss which relates to the fact that information is likely to get distorted as it passes both up and down the vertical chain of command.The U-form is best suited to small to medium sized firms, but is also well suited to very large organisations where there is a strong imperative to closely coordinate flows along the value chain.Multidivisional Form.The multi-divisional structure has been described by Williamson as the most significant organisational innovation of the twentieth century.The distinguishing marks of the M-form are the splitting of the company into semi-autonomous profit-responsible divisions which are coordinated at the strategic level by a head office. This contrasts with the holding company or H-form which contains a number of distinct subsidiaries under common ownership but where the subsidiaries are not subject to concerted strategic direction. Williamson identifies the following principles of optimal divisionalisation:1. identify separate economic activities within the firm;2. accord each division quasi-autonomous status;3. monitor the efficiency performance of each division;4. award incentives;5. allocate cash flows to high yield uses;6. perform strategic planning (diversification, acquisition and related activities) in other respects.A key question which multinational firms must grapple with is what will be the key principle along which divisions will be organised: product lines (emphasising integration); or geographical lines (emphasising local responsiveness)?The M-form structure is the one that combines the divisionalisation concept with an internal control system and a strategic decision-making capability.Williamson argues that because of its advantages the M-form firm should come closer to profit maximising behaviour than other organisation forms and thus should exhibit superior performance. This is known as the M-form hypothesis. The Matrix StructureMatrix is an arrangement for combining functional specialism with structures built around products, projects or programmes.Product LineABCRegionEuropeNorth AmericaAsiaThe matrix structure provides a framework within which complex interdependencies can be handled.It suffers from complexity and slowness of decision making.6. How should firms compete in emerging economies and with MNEs from emerging economies? And, how should and do MNEs from emerging economies compete with overseas rivals?From the mid-1980s when Ohmae (1985) introduced the terminology of the Triad, North America, Europe and Japan, the focus of analysis in global strategy has been on MNEs from these regions. It is still true that most MNE activity is still centred on these regions, however there has been a decisive shift in the emergence of other economies outside the Triad region both as sites for MNE operations (both aimed at production and marketing and distribution) and as the sources of MNEs from outside the Triad.7. Balancing flexibility and riskIn order to compete effectively, resources need to be committed. An important idea in modern strategic thinking is that in an uncertain world there is value in maintaining a degree of flexibility. This strategic flexibility is manifest in a number of ways:· Production shifting. · Financial arbitrage. · Information arbitrage. · Leverage opportunities. This relates to the potential ability of the MNE to build international coalitions, to price selectively in different markets or to use the threat of relocation to extract concessions from host countries. 8. As Peng concludes, the holy grail of strategy is identifying what are the principal influences on the relative success and failure of firms. It is, understandably, difficult to pinpoint the answer to this question. All three elements of the strategy tripod contribute some part of the explanation. Industry CompetitionMichael Porters seminal contributio