Strategy and Strategic Analysis

GEST-S-468

Pr Manuel Hensmans

Advanced exam

Only for ULB Erasmus students leaving early! • Friday 14 December

• 2-4.30 pm

• UD2.218A

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Schedule classes

• Today – International Strategy II

• Friday 23 November, from 4-6pm – McKinsey guest lecture

• Monday 26 November – Innovation I

• Monday 3 December – Innovation II

• Friday 7 December, 4-6.30 pm – Mergers & Acquisitions

– Strategy development processes

• Monday 10 December, 2-4pm – No class, but come to my office if you have questions

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Slide 8.4

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Slide 8.4

Strategic Choices

8: International Strategy

Last class: International strategy

• Start with analysis of home advantage • Does it contribute to international distinctiveness of my capability?

– comparative advantages?

– Porter’s diamond analysis • Role of government!

5

This class: International strategy

• Analyse international industry structure – Integration-responsiveness grid

– Different corresponding internationalization strategies

– Grocery retail: difficult internationalization experiences • Lessons?

– Change structure to your advantage or adapt strategy? • Case Ikea, Google

• Analysis of host location opportunities – CAGE distance framework

– Strategic advantages host location?

– Market attractiveness versus incumbent aggressiveness

6

This class: International strategy

• Emerging challengers – Case Lenovo

– Reverse innovation

– Strengths/weaknesses Chinese multinationals

7

11-8

Integration – Responsiveness Grid Industry Exercise

Hollywood / Bollywood

Internationalizing strategic capabilities 4 alternative strategies

Global Strategy Firm views the world as

single marketplace. Goal is to

create standardized products

Home Replication Strategy Firm uses

home cluster superiority

to simply export

Multidomestic Strategy Firm adapts to local environment

through relatively

independent subsidiaries

Transnational Strategy Firm combines global scale

efficiencies with

with host location learning

Low High

Pressures for Local Responsiveness

Pre

ssu

res fo

r G

lob

al In

teg

ratio

n

High

Low

Internationalizing strategic capabilities 4 alternative strategies

Home Replication Strategy Firm uses

home cluster superiority

to simply export

Low High

Pressures for Local Responsiveness

Pre

ssu

res fo

r G

lob

al In

teg

ratio

n

High

Low

Internationalizing strategic capabilities 4 alternative strategies

Global Strategy Firm views the world as

single marketplace. Goal is to

create standardized products

Low High

Pressures for Local Responsiveness

Pre

ssu

res fo

r G

lob

al In

teg

ratio

n

High

Low

Internationalizing strategic capabilities 4 alternative strategies

Multidomestic Strategy Firm adapts to local environment

through relatively

independent subsidiaries

Low High

Pressures for Local Responsiveness

Pre

ssu

res fo

r G

lob

al In

teg

ratio

n

High

Low

Internationalizing strategic capabilities 4 alternative strategies

Transnational Strategy Firm combines global scale

efficiencies with

with host location learning/

resource advantages

Low High

Pressures for Local Responsiveness

Pre

ssu

res fo

r G

lob

al In

teg

ratio

n

High

Low - Swiss engineering centre: product development

- Design partners in Ireland: design ideas

- Operating HQ in California: design approval

- Taiwan engineering centre: runs pilots

- China plant: high-volume manufacturing

Large-scale internationalization hardest…

• In what type of quadrant? – Bottom right: multi-domestic

• High pressures for local responsiveness

• Low potential for global standardization

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Grocery

retail

Puzzling internationalization picture

• Sales of the world’s 10 biggest retailers tripled from 2000 to 2011 – global sales more than quintupled—admittedly from a very low base.

• world’s 5 biggest grocery retail markets? – the United States, Germany, Japan, the UK, and France

• Yet no retailer is present in all five markets Neither continental Europe nor Japan / failed in Germany (and South Korea)

Failed to break in Japan, US, Germany (and exited UK,…)

No continental European business; failed in France & Japan (and Taiwan)

Failure UK (and Denmark)

15

16

Food Retail

Supplier internationalization!

17

Failure international food retail is a low-margin business, yet…

18

Failure international food retail is a low-margin business, yet…

19

TENDENCY TO INTERNATIONALIZE TO GROW QUICKLY RATHER THAN STRATEGY OF

BUILDING SUSTAINABLE DIFFERENCE

Why did suppliers do better?

20

• Created longer-term growth expectations – Accepted that returns accrue only over time

– Took their time to break in foreign markets

• Differentiated their brands better from local incumbents – not just provide shelf space + change home offering a little bit

• but new VRIN in host location!

– Focus on one consumer segment

• Rather than cater to all as in home supermarket

• Hybrid takes time

• Focus on food & non-food with more standardization & global buying opportunities

E-commerce transnational strategy

10-11/10/2012

21

Non-food

e-commerce

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revenue in world’s largest retail markets

0%

20%

40%

60%

80%

100%

120%

140%

32

34

36

38

40

42

44

46

48

2010 US Japan United Kingdom

Germany Canada France China Italy Spain Rest of the World

2011

Sa

les g

row

th

Sa

les r

eve

nu

e, U

S$ b

illio

n

Amazon.com Inc: Retail Sales Growth 2010-2011

Absolute Growth Percentage Growth

Industry globalization capacity

Comparative

advantage:

- Mfct China

- Design US

- Dependence Belgian

exports on German

export demand

- Pressures to coordinate

with EU crisis economics

Can both facilitate & inhibit!

Least open industries?

agriculture, defense, high-tech,

US airlines

- Credit card companies &

international credit custom

- Car component mfcturers

follow Toyota…

- Coca-Cola brand!

Globalize industry?

• Incumbent furniture producers: multi-domestic strategy

• IKEA?

– Global strategy

• Same catalogue/offer everywhere

24 |

FURNITURE

globalized the industry structure?

• By overcoming cost barriers to standardization – Previous barriers included:

• a) high cost to transport a bulky product

• b) costs of damage during transport

– By

• using flatpack kits (which allowed for volume production)

• including the customer in the value chain (e.g., to transport the product, and replace assembly labor in the plant)

IKEA created international cost advantages over local competitors

25 |

globalized the industry structure

• By standardizing customer preferences – Previous barriers included:

• a) furniture is a durable good

• b) furniture is a fashion-rewind business, passed on from family elders

– By

• Focusing on young, professionally mobile people

• Buying furniture is like buying clothes (fashion-forward)

IKEA created international lifestyle advantages over local competitors

26 |

Government drivers!

• Can force international companies to adapt their strategy

- Google did not allow Chinese employees access to source code

- refused Chinese censorship from 2009 onwards

Market share impact?

from 36 % (2009) to 16.7 % (2011)

73.8 % (2011)

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Adapt to government drivers?

From home replication to transnational strategy!

- opened first R&D centre outside US in Bangalore (2004)

- Indian centre came up with Google Finance, Google Map Maker...

- caves in somewhat to country’s restrictive policies!

Market share impact?

80 %

28

Delhi High Court & Indian Government:

"develop a mechanism to keep a check and remove

offensive and objectionable material" or

"like China, we will block all such websites"

Top 3 country governments surveillance requests? (January to June 2012)

29

7,969

2,319

1,566

Internet differences

• Digital advertising expenditures? – $7.4 billion

– $291 million

• Wireless internet users? 500 million

100 million

30

Google in 2012

From home replication to transnational strategy?

• Introduce to Chinese users of Android mobiles – Google Play contains thousands of Android mobile apps

– Knows Chinese governments will want censorship of some apps

• Attract Chinese consumers with local-based searches – do not require official censorship, such as searches for Chinese store

discounts and other online retailer

31

How to select host country?

• CAGE distance framework

• Strategic advantages of host location

• Market attractiveness versus incumbent aggressiveness

32

7-33

CAGE Difference Framework Estimated Effects: A Gravity Model of Bilateral Trade

-

34 |

The impact of CAGE!

Strategic advantages host location?

35

• Natural resources • Dvp or buy new oil fields

• New markets • Search for customers

• Strategic resources • Gain access to advanced resources

– upstream (R&D), downstream (marketing), reputational…

• Efficiency • Outsourcing, economies of scale &scope opportunities

Market vs aggressiveness? What country would you choose?

acquires

• Shocked US government, IBM employees, shareholders, media… – IBM was thé original PC icon

• Why did IBM sell to Lenovo? – Commoditized PC market

– Premium-pc corporate segment Think Product Group needs investment

– Boost goodwill Chinese government for further IBM contract

– Longstanding relation with Lenovo and its predecessor NDP

– Lenovo’s culture moulded on IBM’s example

37

CAGE

• Cultural distance – Different managerial behaviours

• Americans talk more, are wedded to strict schedule of meetings, while being late for meetings, not having the same standards of politeness

• Administrative distance – Lenovo is the creation of a Chinese state-owned research institute

– IBM is a private sector commercial enterprise in thé capitalist country

• Geographical distance – the US market is a very long way from Lenovo’s traditional base, and the timezone

difference will be very tiring for the managers in the two countries

• Economic distance – IBM’s traditional corporate market for its ThinkPad computers is a very different

one to Lenovo’s traditional “good enough” market

38 |

Case

• Home advantages? – Low-cost Chinese manufacturing base

– non-Western character recognition software

• important in emerging economies

– Revenues from Chinese market dominance

• cross-subsidise aggressive strategies in other parts of the world

• Acquisitions!

– ‘national champion’ status

• government ownership via the Chinese Academy of Sciences

39

Case

• Home disadvantages? – Low quality, low price brand perception

– We cannot compete in most developed, premium segments!

– Western Multinationals will scoop our home market!

40

Case

• advantage? – Natural resources?

– New market?

– Strategic resource seeking?

– Efficiency?

• Strategic resource seeking / market

• Acquire top developed brand

– Upgrade marketing image in US

– Become 3rd largest PC manufacturer in one stroke

41 |

Market Attractiveness vs Incumbent Aggressiveness

• Attractive market, but incumbents! – Strong in small and medium-size business market

– Yet, Dell was having a hard time in China

• Less cash to retaliate

• Took very aggressive stance – signed up Office Depot as distributor

– Focused on corporate & small and medium-size business market

– hired a senior Dell manager (Amelio)

• Hired senior Dell China managers in 2005 and 2006

42

Market Attractiveness vs Incumbent Aggressiveness

• Strategy of protection rather than attack – use IBM brand/market experience to protect home market from foreign

premium invasion

• Attack? – Emerging markets!

– Lenovo’s sales in emerging economies are really taking off

• unit shipments increasing by at least 40 % in all markets

• Russia and Ukraine: +141 %

• India : +64.9 %

43

Result of Lenovo’s strategy

• Lenovo’s ‘Protect and Attack’ transnational strategy pays off – after years of trailing in third or fourth place for global PC market share

– In 2011 overtook rival Dell for second place

10-11/10/2012

44

Emerging economy challengers

• The #1 Smartphone vendor is

• The #1 Ready-mix Cement producer is

• The #1 Gas-producer is

• The #1 Regional Jet manufacturer is

• The #1 Wine & Spirits producer is

• Finnish

• North-American

• Korean

• German

• Indian

• Mexican

• American

• Norwegian

• Russian

• Canadian

• Brazilian

• Pan-European

• Indian

• English

• French

1

2

3

4

5

Emerging economy challengers

• What have they learned from Japanese and Korean challengers?

Reverse innovation principle

– Become part of Western innovation clusters / latest tech standards

– Acquire Western premium reputation/learning

– Use Western platform to conquer emerging markets

46

Overhauled new product development gap with US -By starting R&D lab in Silicon Valley -By acquiring US firms -Moving from licensee to leading company

Reverse Innovation

47

48

Tata Nano Car « The people’s car »

2,200$

The average Indian isn’t so keen to

advertise the fact that they can only

afford “the world’s cheapest car”

(2011)

Price close to second-hand branded car!

Reverse Innovation II

• What do these brands have in common?

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Two-pronged strategy

• Upgrade brand to European luxury standards – Chinese-European design

– with “Made in Italy” or “Made in France” tag

– Build flashy stores in London to woo Chinese visitors

• Use governmental aid – to launch their own fashion & luxury brands

– fits in picture of Chinese government’s urge for more Chinese authenticity and less corruption by Western norms

50

McKinsey Shangai Study + other studies

• Chinese companies are weaker in three main areas: – lack deep knowledge of Western and other local markets

• Lack analytical tools for uncovering and understanding customer needs

• Trial and error

– corporate cultures are risk-averse and authoritarian

• Not prone to development of new ideas

– Little experience with managing international subsidiaries

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