SUMMARY STRATEGY & INTERNATIONAL BUSINESS - VERBEKE
A short summary on main theories and of special use for conceptualizing learnings
Chapter II – the critical role of firm-specific advantages
Prahalad and Hamel (1990): introduced the Core Competence view
• Constitute the most important source of an MNE’s success
• Senior managers should view their firm as a portfolio of ‘core competencies’,
which are its higher order FSA’s (routines and recombination capabilities).
Characteristics COC’s are:
o Difficult to imitate
o Give access to a variety of markets
o Add significant value to end products
o Their loss strongly harms firm performance
• Core competencies are the routines and recombination capabilities, which
produce components called core products, which are put together to crate end
products.
* Bartmess & Cerny (1993) explained in great detail the implications of a core-
competencies approach when the MNE expands internationally.
• It assumes that manufacturing knowledge is a stand-alone FSA
• It assumes that this FSA can be effortlessly recombined with foreign location
advantages
** Egelhoff (1993) studied the contrasts of the mainstream Japanese and US
approaches to strategy.
• US MNEs follow the SBU approach, whereas Japanese ones follow the CC
approach.
• US MNEs focus on short-term profitability through product differentiation and
frequent repositioning whereas Japanese MNEs focus on long-term
performance through continuous improvement of process technology for
standardized products – resulting in high product quality at low costs
~
Pattern I: core competencies (NLB FSA’s) typically developed in the home country
(guided by corporate-level senior management) and then diffused to the rest of the
firm, where no further need of recombination is present for going abroad.
~
Limitations of Prahalad and Hamel’s analysis (5):
1. LA of home country is irrelevant for development for development of CC;
Porter’s theory does acknowledge this.
1
,2. Overlook the harm of reallocation of competence carriers to a firm’s CC;
Bartmess & Cerny argued for this
3. Foreign subsidiaries may also develop CC
4. A centralized approach to the development of CCs may result in bounded
rationality and reliability problems
5. Streamlining operations to develop and exploit CCs is often harmful in the
case of downstream activitiesbecause it hinders local responsiveness
2
,Chapter III – the nature of home country location advantages
Porter (1990): Diamond Model
• Porter’s idea is that, ultimately, an MNE’s long-term competiveness results
from vigorous domestic pressure in its home base, forcing it to innovate and
improve productivity.
• Porter supports the idea that the most important aspect of international
business strategy is 4 key home LAs often simply referred to as Porter’s
Diamond.
• CONTRASTS Prahalad and Hamel’s core competence approach: as the
role of home-country advantage is ignored. Such advantage drive FSA
creation and hence, long term international competitiveness by pushing
MNE’s to innovate.
• Home location advantage in an industry depends on a set of 4 interrelated
conditions (national competitive advantage):
o Factor conditions
§ Strong if CREATED (=Japanese firms developed expertise to
overcome lack of natural resources) factor conditions are
favorable: skilled labor, scientific knowledge and
infrastructure. FAVORABLE natural factor conditions may be
disadvantageous: firms may become complacent –
UNFAVORABLE natural factor conditions may be desirable
because they force firms to be creative
o Demand conditions
§ Domestic market size and domestic buyer sophistication.
§ Demanding customers force companies to be innovative (e.g.
Chinese consumer-facing industries)
o Firm strategy, structure, and rivalry
§ Home LA is strong if domestic player’s strategic orientation
fits with industry requirements (Japanese vs. US carmakers =
continuous learning & upgrading vs. focus on short-term)
§ Also strong if home industry is characterized by intense rivalry
à ”survival of the fittest”
o Related and supported industries
§ Firms in an industry benefit from the presence of related and
supported industries that are highly competitive as suppliers
and producers of similar products push the firm to efficiency
and innovation. Especially if these are co-located together with
other Diamond actors (Silicon Valley, High tech campus TUe).
• Porter: a channel for exploiting or incrementally extending FSAs developed at
home. The MNE is either a Centralized Exporter or an International
Projector. Given his focus on a single home base per business unit, Porter
3
, implicitly rejects the relevance of a Multi-centred MNE or an International
Coordinator.
* Kuemmerle: Porter focuses primarily on the rise of industries at the national
level, and less on firm-specific challenges. As a result, Porter’s work provides
relatively little practical guidance to the managers or owners of newly
established small firms, in terms of what location advantages can – or should –
mean to them. He found that early internationalization often occurs in
neighboring countries low-cost risk experiments. Mix of LB-knowledge and
international transferable knowledge only needed incremental change.
** Teece: FDI Silicon valley: cluster
• Contrasts Porter by arguing that inward FDI is beneficial, whereas
Porter thinks that it would represent the failure of creating home
advantages; a diamond with weakness.
~
Pattern II: location-bound FSAs are developed in the home country base and then
upgraded to become internationally transferable
~
Limitations Porter:
1. Assumption of isolated national diamonds. Porter ignores the fact that
companies can be successful if the home location advantages (diamond) are
not present, but are present in the host country (Canada –US, NAFTA) or
Singapore outward FDI allowing to access inputs such as natural resources
from other countries.
2. Ignores the need to create LB-FSA’s in the host country. Barlet and Ghosal
do highlight this.
3. Too much emphasis on the country as unit of analysis
4
A short summary on main theories and of special use for conceptualizing learnings
Chapter II – the critical role of firm-specific advantages
Prahalad and Hamel (1990): introduced the Core Competence view
• Constitute the most important source of an MNE’s success
• Senior managers should view their firm as a portfolio of ‘core competencies’,
which are its higher order FSA’s (routines and recombination capabilities).
Characteristics COC’s are:
o Difficult to imitate
o Give access to a variety of markets
o Add significant value to end products
o Their loss strongly harms firm performance
• Core competencies are the routines and recombination capabilities, which
produce components called core products, which are put together to crate end
products.
* Bartmess & Cerny (1993) explained in great detail the implications of a core-
competencies approach when the MNE expands internationally.
• It assumes that manufacturing knowledge is a stand-alone FSA
• It assumes that this FSA can be effortlessly recombined with foreign location
advantages
** Egelhoff (1993) studied the contrasts of the mainstream Japanese and US
approaches to strategy.
• US MNEs follow the SBU approach, whereas Japanese ones follow the CC
approach.
• US MNEs focus on short-term profitability through product differentiation and
frequent repositioning whereas Japanese MNEs focus on long-term
performance through continuous improvement of process technology for
standardized products – resulting in high product quality at low costs
~
Pattern I: core competencies (NLB FSA’s) typically developed in the home country
(guided by corporate-level senior management) and then diffused to the rest of the
firm, where no further need of recombination is present for going abroad.
~
Limitations of Prahalad and Hamel’s analysis (5):
1. LA of home country is irrelevant for development for development of CC;
Porter’s theory does acknowledge this.
1
,2. Overlook the harm of reallocation of competence carriers to a firm’s CC;
Bartmess & Cerny argued for this
3. Foreign subsidiaries may also develop CC
4. A centralized approach to the development of CCs may result in bounded
rationality and reliability problems
5. Streamlining operations to develop and exploit CCs is often harmful in the
case of downstream activitiesbecause it hinders local responsiveness
2
,Chapter III – the nature of home country location advantages
Porter (1990): Diamond Model
• Porter’s idea is that, ultimately, an MNE’s long-term competiveness results
from vigorous domestic pressure in its home base, forcing it to innovate and
improve productivity.
• Porter supports the idea that the most important aspect of international
business strategy is 4 key home LAs often simply referred to as Porter’s
Diamond.
• CONTRASTS Prahalad and Hamel’s core competence approach: as the
role of home-country advantage is ignored. Such advantage drive FSA
creation and hence, long term international competitiveness by pushing
MNE’s to innovate.
• Home location advantage in an industry depends on a set of 4 interrelated
conditions (national competitive advantage):
o Factor conditions
§ Strong if CREATED (=Japanese firms developed expertise to
overcome lack of natural resources) factor conditions are
favorable: skilled labor, scientific knowledge and
infrastructure. FAVORABLE natural factor conditions may be
disadvantageous: firms may become complacent –
UNFAVORABLE natural factor conditions may be desirable
because they force firms to be creative
o Demand conditions
§ Domestic market size and domestic buyer sophistication.
§ Demanding customers force companies to be innovative (e.g.
Chinese consumer-facing industries)
o Firm strategy, structure, and rivalry
§ Home LA is strong if domestic player’s strategic orientation
fits with industry requirements (Japanese vs. US carmakers =
continuous learning & upgrading vs. focus on short-term)
§ Also strong if home industry is characterized by intense rivalry
à ”survival of the fittest”
o Related and supported industries
§ Firms in an industry benefit from the presence of related and
supported industries that are highly competitive as suppliers
and producers of similar products push the firm to efficiency
and innovation. Especially if these are co-located together with
other Diamond actors (Silicon Valley, High tech campus TUe).
• Porter: a channel for exploiting or incrementally extending FSAs developed at
home. The MNE is either a Centralized Exporter or an International
Projector. Given his focus on a single home base per business unit, Porter
3
, implicitly rejects the relevance of a Multi-centred MNE or an International
Coordinator.
* Kuemmerle: Porter focuses primarily on the rise of industries at the national
level, and less on firm-specific challenges. As a result, Porter’s work provides
relatively little practical guidance to the managers or owners of newly
established small firms, in terms of what location advantages can – or should –
mean to them. He found that early internationalization often occurs in
neighboring countries low-cost risk experiments. Mix of LB-knowledge and
international transferable knowledge only needed incremental change.
** Teece: FDI Silicon valley: cluster
• Contrasts Porter by arguing that inward FDI is beneficial, whereas
Porter thinks that it would represent the failure of creating home
advantages; a diamond with weakness.
~
Pattern II: location-bound FSAs are developed in the home country base and then
upgraded to become internationally transferable
~
Limitations Porter:
1. Assumption of isolated national diamonds. Porter ignores the fact that
companies can be successful if the home location advantages (diamond) are
not present, but are present in the host country (Canada –US, NAFTA) or
Singapore outward FDI allowing to access inputs such as natural resources
from other countries.
2. Ignores the need to create LB-FSA’s in the host country. Barlet and Ghosal
do highlight this.
3. Too much emphasis on the country as unit of analysis
4
