Session 4

Global Enterprise and Competition66.511.202Fall 2007

Ashwin Mehta, Visiting Faculty

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International Strategy,Structure &Integration

Corporate/GlobalStrategy

CorporateStructure &Integration

Business Strategy

BusinessStructure &Integration

Strategy --- Global to Regional/Local

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Corporate Strategy FrameworkCorporate strategy

vision, goals, objectives

building and exploiting corporate advantage(resources)

Value creationone time Vs ongoing(businesses)

Structure, Systems and ProcessesFor coordination and control

Industries

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Hierarchy of Strategy

Corporate

Business

Functional

•Growth•Stability•Retrenchment•Portfolio•Parenting

Competitive (Cost, Differentiation)CooperativeBusiness ecosystem

Functional plans &IntegrationLeadership, Followership

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QUESTIONS OF CORPORATE-LEVEL AND BUSINESS-LEVEL STRATEGY

• Corporate-level strategy should ask

• Business-level strategy should ask

– In which markets do we compete today?

– In which markets do we want to compete tomorrow?

– How does our ownership of a business ensure its competitiveness today and in the future?

– How do we compete in this market today?

– How will we compete in this market in the future?

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CorporateStrategy

Directional

Portfolio

Parenting --- businesses, build, synergies between businesses

GrowthConcentration

Diversification

Vertical

Horizontal

Concentric

Conglomerate

Invest

M&A

Alliances

Leveraged GrowthStability

Retrenchment

---- multiple businesses, products --- analysis to lead to Directional strategyBCG matrix, GE Business Screenmarket share, industry attractivenessQualitative and quantitative

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Growth Strategy Options

1. Organic Growth – Investments in assets required to growInvest in factories. Machinery, skills, etc.Time to reap benefits? Risks? Changing environment

2. Acquisition – buy necessary assets --- tangibles and intangibles

Upfront payments, Integration issues, unpredictable returns

3. Alliances – partner with companies to complementTypically Buyer-Seller relationshipsTightly coupled relationship, too much legal, limited flexibility

4. Leveraged Growth – network of asset owners, orchestrated by A Mobilizer

Loosely coupled relationshipGoverned by market based economic incentives, not legal agreements

Leveraged Growth: Expanding sales without Sacrificing Profits, John Hagel, HBR 2002

Session 4http://www.lifung.com/

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Founded in Guangzhou, the PRC in 1906, the Li & Fung Group is a multinational group of companies driving strong growth in three distinct core businesses - export sourcing through Li & Fung Limited, distribution through IDS and retailing through CRA and other non-listed entities. The Li & Fung Group has a total staff of over 24,000 across 40 countries worldwide, with a revenues of over US$8.5 billion in 2005.

The Group's export trading arm is Li & Fung Limited – one of the largest export sourcing firm that manages the supply chain of high-volume, time-sensitive consumer goods through its office network in close to 40 countries.

Li & Fung

http://www.lifung.com/

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As a Supply Chain Manager across many producers and countries, Li & Fung provides the convenience of a one-stop shop for customers through a Total Value-Added Package: from product design and development, through raw material and factory sourcing, production planning and management, quality assurance and export documentation to shipping consolidation.

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An impressive financial performance

(in HK$)

2,005 2,004 2,003 2,002 2,001 2,000 1,999 1,998 1,997 1,996Sales 55,617,374 47,170,601 42,630,510 37,281,360 33,028,575 24,993,018 16,297,501 14,312,618 13,345,722 12,513,857Y-O-Y% 17.91% 10.65% 14.35% 12.88% 32.15% 53.35% 13.87% 7.24% 6.65%Op Profits 1,884,600 1,556,036 1,251,986 1,137,025 668,985 793,268 595,305 471,921 361,490 302,075% of sales 3.39% 3.30% 2.94% 3.05% 2.03% 3.17% 3.65% 3.30% 2.71% 2.41%

Equity 4,624,801 4,709,435 4,190,473 3,786,469 3,430,781 3,361,916 1,143,221 1,337,485 1,163,644 1,054,894Debt 753,192 509,487 64,094 69,199 65,955 137,642 414,868 397,058 400,000 283,431Debt/Equity 0.16 0.11 0.02 0.02 0.02 0.04 0.36 0.30 0.34 0.27

http://www.lifung.com/investor/index.html

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How?

Since its founding, in 1906, Li Fung family owned Trading company

Acting as a broker between manufacturers and buyers in ApparelsMargin pressures as with direct links between buyers and manufacturers

Mid-1970’s remade the companyFrom brokerage (connecting 2 points) toan orchestrator – connecting and coordinating many different links

of suppliers and buyersowns no factoriesowns no transportation equipment to ship material in various production

stages privileged access to 7,500 supply and manufacturing companies

around the WorldCore competencies: deep knowledge of apparel marketLeverage other companies’ assets to grow!

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Remaking of the Company

Organization – change from traditional geographical to customer centric structures

dedicated divisions serve largest apparel designers (Laura Ashley, Abercrombie & Finch, Levi Strauss, etc.

other divisions focus on smaller customers

Each division run by “lead entrepreneur”, with deep understanding of customers’ needs

kept relatively small $30 to 50 million in revenue

Supply side – up-to-date information on thousands of suppliers capability and performance

Allocate work across the network; give in-depth feedback to further improve performance

Knowledge of supply chain makes the Company tailor it to meet the

customer need.can begin production within hours after receiving the order from a customer

over the Internet!

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Global Value Added

Idea Design Raw Material

Sourcing

Consolidation Logistics

Quality Control

Outsource mfg. to

network of suppliers

Finding Production

Partner

Customer network of retail chains

Customer(Traditional

Trading House)

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What are the sources of Li & Fung’s value added?• Providing integrated supply-chain management

through an extensive network• Reducing customer inventory• Price and quality control• Delivery and logistics management• IT network: production and dist. mgmt.• Front end: design, engineering, production

planning• Back end: quality control, logistics• Sourcing, raw materials, components• Extensive manufacturing network (3000

factories, over 1 million workers)

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• Creates Li & Fung Distribution• More customers in Europe• Greater scale and adds production capacity• Adds new sources of supply• Changes IBS from introducing agent between clients and

manufacturers to a higher margin sourcing company• Import business fills gaps• Additional entry into retail• Fills in the mosaic by extending sourcing and distribution

networks

What does merger with Inchcape do

for Li & Fung’s strategy?

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Li & Fung’s strategy maximizes global value added:

• Supplier network of quality manufacturers with extensive set of relationships

• Li & Fung coordinates supply chain for a specialized set of a products (textiles, toys)

• Customer network of large retail chains (Abercrombie & Fitch, Gymboree)

• Li & Fung consolidates demands and consolidates supplies, establishes prices, coordinates exchange, balances supply and demand, allocates products.

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Li & Fung’s supplier networks optimize:

• Gains from trade – taking advantage of economies of scale of suppliers

• Gains from trade – taking advantage of comparative advantages of countries in the supply chain – constant location adjustment

• Costs of trade – taking advantage of best combination to reduce costs of transactions, transportation, tariffs, and time

• Combining elements of supply chain to maximize gains from trade net of costs of trade

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Other Examples of Orchastrators

Nike (own process network)

Cisco (Semi Closed Network)

Wal-Mart (Own process network)

Technology Systems Integrators (such as EDS, IBM) created a Global network to deliver solutions

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Business Strategy Considerations:

Arenas – Where will we be active?

Vehicles – How do we get there?

Differentiators – How will we win?

Staging – What speed and sequence?

Economic Logic – How will returns be obtained?

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Evaluating Corporate Strategy --- Five Tests:

VisionInternal ConsistencyExternal FitCorporate AdvantageFeasibility

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Strategy Formulation process

Hierarchy of Strategy---multidimensional view

Corporate Global

Business Regional

Functional Local (Country-level)

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STRATEGIES FOR DIFFERENT PHASES OF THE INDUSTRY LIFE CYCLE

•Decline

•Mature

•Embryonic

•Growth

•Phases of industry life cycle

Arenas Vehicles Differentiators Staging Economic LogicLocal Internal

development

Alliances to secure missing inputs or distribution access

Target basic needs, minimal differentiation

Tactics to gain early footholds

Prices tend to be high.

Costs are also high Focus is on securing additional capital to fund growth phase.

Penetration into adjacent markets

Alliances for cooperation

Acquisitions in targeted markets

Increased efforts toward differentiation

Low cost leaders emerge through gaining experience advantages and scale

Integrated positions require choice of focusing first on cost or differentiation

Margins can improve rapidly because of experience and scale

Price premiums accrue to successful differentiators

Globalization

Diversification

Mergers and acquisitions result in consolidation

More stable positions emerge across competitors

Choosing international markets and new industry diversification; need rational sequencing

Consolidation results in fewer competitors (favoring higher margins) but declining growth demands cost containment and rationalization of operations.

Some arenas may be abandoned if decline is severe

Focus on segments which provide most profitability

Acquisitions for diversifying moves

Divestitures to exit for some competitors

Rationalizing cost

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Strategy Formulation process

Hierarchy of Strategy

CorporateBusinessFunctional

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Functional Strategies

Marketing Technology/Development

Operations Production

Logistics Purchasing

Servicing Human Resource

Finance Information Technology

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Functional Strategies --- Considerations

Core Competency

Integration

Timing (first mover Vs Follower)

In-house Vs Outsourcing

Strategy Options and Scenarios Evaluation

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Global Regional Local

Regional teams are the key to Company’s Globalization initiatives

Jeffrey Immelt, CEO, GE, HBR 12/2005

Global leverage is about playing 3-D chess- at the global, regional and local levels

John Manzer, CEO International, Wal-Mart, HBR 12/2005

Regional strategies for Global leadership*

*: Pankaj Ghemawat, HBR 12/2005

Session 4Source: Global Marketing Management, Kotabe and HelsenSession 1

Session 4

LENOVO

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How did Lenovo’s home country affect its initial development and management strategy?

• Domestic strategy-customer focus

• Economies of scale and experience from large domestic market

• Pricing strategy – above domestic competitors and below international entrants

• Strong domestic brand

• Retail outlets and 19 branch offices

• Distribution (2000 distributors and resellers)

Yang Yuanqing Vice Chairman,

President and CEO

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From humble beginnings…

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PC-Sales in China: Market Shares 1994

Source: Luo, Yadong, Multinationals in China, Copenhagen 2000

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Chinese PC-Market (US$ million)

1996 1997 1998 (e)

Import Market 87 157 221

Local Prod. 4,218 5,761 8,114

Exports 439 502 707

Total Market 3,866 5,416 7,628

Imports (US) 32 63 88

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PC-Sales in China (Millions of Units)

1996 1997 1998 (e)

Foreignbrands

0.14 0.21 0.26

US brands 0.65 0.77 0.95

Chinesebrands

1.32 2.05 2.79

Total 2.11 3.03 4.00

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The Chinese Hardware Market• 30% Average Annual

Growth Rate• More than 50% of all

buyers buy units between $1,200 and $1,800

• What customers value:– Personal Relationships– After Sales-Service

• Tariffs (MFN): 15%

To be lowered.• Value-Added Tax: 17%

Market Segmentation by industry:– Finance

33%– Telecom

17%– Government 10%– Transportation10%– Power/Petrol 4%– Education 6%– Distribution 4%– Manufacturing 8%– Other 8%

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Did Lenovo derive any advantages/disadvantages from its home country?

• Production cost advantage from labor market relative to international competitors not manufacturing in China

• Government connections compared to global entrants

• Local distribution system hard to copy, Continued transaction costs for international companies

• Would DELL’s direct sales approach fit Chinese consumer market?

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What threats does Lenovo face, and what competitive advantages were sustainable?

• Lowering of trade barriers

• DELL and other international businesses started producing in China

• DELL offered direct sales and marketing

• Entrants have global brands

• Entrants have access to latest technology

• Other Chinese companies offered low-cost clones

• Falling component prices affect Legend’s pricing strategy

• Growing importance of notebooks

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How did Legend update its strategy?

• Local tailoring of products and brands to compete with international companies

• Partnerships with global companies

• Launches Lenovo brand

• Product diversification into cell phones and other consumer products

• Adjustment of pricing policies• Expansion of domestic

distribution

• Expansion in business services

• First database server in China

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Lenovo Notebook

• Configuration Soleil 8100DT/8200DT

• CPU Intel Pentium II 266/300MHz(1.7v)

• Monitor 14.2" TFT, XGA 1024*768*16M

• Main Memory 80MB/144MB, expandable to 144MB

• 2*144Pin DIMM Cache L2 Cache 512 KB

• 24x CD-ROM, USB, PCMCIA, 7 pounds

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Lenovo organization 1999

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Lenovo Company Structure 2003

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What were strategic reasons behind decision to expand internationally?

• Greater competitive challenges to domestic market from global companies

• Seeking greater economies of scale• Chinese manufacturing gives cost advantage that

can be used to expand to global markets• Benefits of expanding sales for supporting R&D• Benefits of developing global brand

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Launching a new global brand.

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Why did Lenovo choose to expand by IBM acquisition?

• Lenovo becomes the third largest computer maker in the world

• Temporary access to IBM brand• Access to Thinkpad brand• IBM laptop and PC technology• Access to suppliers• Increased market power from merger• Access to management

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The IBM acquisition

“Separately, Lenovo and the PC Division possessed outstanding development, manufacturing, marketing and customer-care capabilities, with different areas of expertise and emphasis in the enterprise and consumer markets.

Together, as the new Lenovo, those strengths are combined into a growth-oriented, global enterprise, strategically focused on the PC space and more committed to innovation in IT clients than any other company. We have a passion for innovation that is unique in our industry.”

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The IBM acquisition

Change of headquarters to Purchase, N.Y.Now Raleigh, N.C.William J. AMELIO

President and

Chief Executive Officer

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What challenges lie ahead for Lenovo?

Lenovo brand products make worldwide debut (3000 family)

Head-to-head competition with HP and Dell

Challenges from low-cost competitors, Acer and others

More?

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Assignment 2 Due November 29, 2007 GO TO THIS LINK http://topics.nytimes.com/top/news/business/companies/claiborne_liz_ inc/index.html?adxnnl=1&inline=nyt-org&adxnnlx=1186160600-Jqre2Ppd+F3BgUzNGlfiWw

REVIEW THE ARTICLE, DO A WEB RESEARCH ON COMPANIES DISCUSSED IN THE ARTICLE, AND ADDRESS THESE QUESTIONS: (YOU SHOULD WRITE AN INTRODUCTION/CONTEXT BEFORE ADDRESSING THESE QUESTIONS)

1. What was Liz Claiborne value chain prior to Mr. McComb’s arrival? Discuss its implications.

2. How is Mr. McComb changing the company directions, why and what are the implications (include competition implications)?

3. Review Liz Claiborne last 3-year financials (create a common size income statement), analyze trends and comment.

4. What are their major business segments? Discuss US Vs International business (including revenues).

YOUR REPORT MUST BE BETWEEN 1000 AND 1500 WORDS AND MUST INCLUDE SOURCES REFERENCED.