Location Strategy: Use Location to Build Competitive Advantage

cross-market subsidization

Is the diversion of resources and profits from one market to support competitive offensives in another different market.

Slide 26

Link location choices to global product strategy (positioning) in building competitive advantage

Go beyond the traditional focus (product markets). Look at resources/capabilities behind firm's product markets. Some may blame their poor performance due to bad external environment, but we can always find a few firms has good profitability even under the same situation.

What is Resource-based View Theory?

profit sanctuary

country markets (or geographic regions) in which a firm derives substantial profits because of its protected market position or its competitive advantage.

mutual forbearance

create a deterrence effect that restrains them from taking aggressive action against one another due to the fear of a retaliatory response that might escalate the battle into a cross-border competitive war. Therefore, we can predict that there will be less rivalry between firm A and B.

refer to the demands that consumers place on an industry Demanding consumers drive firms in that country to: o Meet high standards o Upgrade existing products and services o Create innovative products and services o Better anticipate future global demand o Proactively respond to product & service requirements

describe demand conditions

involve factors of production: o Land o Capital o Labor This provides a nation's position in factors of production necessary to compete in a given industry o Can be either basic (natural resources, climate, location) or advanced (skilled labor, infrastructure, technological know-how)

describe factor endowments

The key is to understand the the unique traits of the location related to the industry where firms are competing.

describe industry-specific location characteristics

due to o Strong consumer demand o Strong supplier base o High new entrant potential from related industries Benefits and Risks of Local firm's rivalry o Rivalry is a strong indicator creating positive pressures for firms to innovate and improve quality, reduce costs o Rivalry could mean high entry and survival barriers for firms that are deciding to enter into the location

describe local firms' strategy, structure, and rivalry

enable firms to manage inputs more effectively: o A competitive supplier base - Reduces manufacturing costs o How easy/difficulty is it to develop working relationships with suppliers - Allows for joint research & development o Development of related industries (complementors) - Forces existing firms to practice cost control, product innovation, better distribution methods

describe related and supporting industries

reflect the collective learning in organizations. Can lead to the creation of value and synergy between the home and host countries, if... Skills/expertise that you can transfer across business units in a corporation They are difficult for competitors to imitate or replace

explain core competencies in firm fit: unique capabilities

managers can use CAGE framework to analyze which country is a good location choice for firms •CAGE: Distances in (1) Culture, (2) Administrative System (political/economic system), (3) Geography and (4) Economic Development

explain country-specific location characteristics what is CAGE?

Firms tend to expand first into countries that are similar to their home country (Spanish MNCs in Latin America) Affinity between the home and host countries decreases the liability of foreignness

explain firm fit

Incentives may include advantageous regulations, tax breaks, lower utility rates, subsides for training and other investments, improvements to local infrastructure and accelerated deprecation. o E.g., Intel and Vietnamese government But firms should be mindful of the potential for hidden costs (e.g. investment is sunk, deals are condition-based) Government may take steps to block foreign firm entry o When a foreign entrant is perceived as a threat to local organizations • E.g., Canada refused to limit the airline volume of Emirates after local airlines made complaints about it. • E.g, Huawei was blocked in the U.S.

explain gov. incentives (pros and cons)

o Using powerful brand names to extend a differentiation-based competitive advantage beyond the home market. o Coordinating activities for sharing and transferring resources and production capabilities across different countries' domains to develop market dominating depth in key competencies.

explain how to Build a Dynamic-Capabilities based multinational corporation

Understanding where firms come from and their strength Highlighting foreign market opportunities (where local rivals are weak) or threats (where local rivals are strong) why a nation achieve international success in a particular industry: Factor endowments Demand conditions Related and supporting industries Firm strategy, structure, & rivalry

how can Michael Porter's diamond of national advantage model can help firms make location choice decisions in two ways? what does this model inform?

- The costs of manufacturing or other activities are significantly lower in some geographic locations than in others. - There are significant scale economies in production or distribution. - There are sizable learning and experience benefits associated with performing an activity in a single location. - Certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages.

how can you use location choices to lower cost

When: o Buyer-related activities need to be close to customers. o There are high transportation costs. o There are diseconomies of large size. o Trade barriers make a central location too expensive. Benefits: o Dispersing activities reduces exchange rate risks. o Dispersion helps prevent supply interruptions. o Dispersion helps avoid adverse political developments.

how can you use location choices to lower cost (when and benefits)

Corporation is like a tree, grows from its roots. - Core products are nourished by competences and engender business groups, whose fruits are end products. Core competences tend to be less tangible.

how is a corporation like a tree?

multimarket contact

include when competitor meet each other in multiple "product" markets (so not necessarily limited to geographic) Mutual forbearance is tacit collusion as a consequence of firms competing in many markets and the resulting increase in their interdependence. Tacit collusion is legal.

organizational assets that are difficult to identify and account for, and are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources. Example = Harley-Davidson's strong brand image. A firm's specific practices and procedures, and the firm's culture, may also be resources that provide competitive advantage.

what are some intangible resources of firm fit?

organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources, and technological resources. These include assets that the firm uses to create value for its customers: physical resources such as the plant's proximity to customers and suppliers; financial resources such as accounts receivables; organizational resources such as employee development, evaluation and reward systems; technological resources such as trade secrets and patents.

what are some tangible resources of firm fit?

Locating in a cluster have costs and benefits: Benefits (easier access to key inputs and spilled-over knowledge from competitors) Costs (Your trained workers might move to your competitors; your supplier might leak your knowledge/innovation to rivals) If you're a leader in the industry, the benefits of geographic cluster to you would be limited

what are the pros and cons when locating in a cluster?

o City/province within the country that firms will choose to locate (for a plant, distribution center, or sale office). • The examples of the characteristics are access to airports/ports, industry park, and skillful labors o Site characteristics will be especially salient in countries like China or India, where vast intracountry variations exist. o For manufacturing, certain country/industry characteristics are necessary but not enough o For sales, local site conditions are less important

why are site-specific location characteristics also important? what does their importance depend on?

Firms with a home and host country in common may experience vastly different degrees of strategic fit (fit between their organization and host country) This is because of the following: o Unique capabilities (and core competence) o Prior entry experience (locations the firm selected previously) o Business model that the firm employ in its home country can influence location decision

why are there different degrees of strategic fit?