Toys ‘R’ Us: the internationalisation of fun

Group K3 share their insight into the competitive advantages that have allowed Toys ‘R’ Us to dominate the US toy market and the national differences which obstructed their expansion overseas.

Research has shown that Toys ‘R’ Us (TRU) has strong FSAs. A number of examples can prove this. Firstly, the company has pursued a push system that allows store managers to adapt stock to local needs as well as monitoring positive and negative sale trends. This leads to a logistical system that is quickly responsive. It was developed in the United States and later introduced in Japan.

Secondly, TRU has a strong relationship with local manufactures and large toys companies in the USA. This contributes to reduce its cost and maintain low price because TRU directly deals with manufactures. TRU is also capable of handling regulatory issues and adapt strategy into foreign markets.

In addition, the company uses superior technology for effectively monitoring its inventories. Finally, TRU has strong connections to the government in both Japan and Germany. The company can thus be located in the below right tier box (quarter 4) of the FSA-CSA Matrix.

Even though TRU was able to overcome some issues faced in some countries, the host countries specific advantages (both Japan and Germany) could be considered weak even that it does not affect the firm’s internationalization and profitability. For example, TRU loses part of its profit because of currency exchange rates (Yen is strong currency when compared to USD). Moreover, the government policy and store size regulations in Japan affect the company operation.

Eventually, the company has succeed in adapting different situations in each country that it enters e.g. Japan but it has failed in Sweden because TRU lacked of understanding both the labour and capital markets.

In terms of positioning in its international activities, by forming a joint venture with McDonalds’s in Japan, TRU has found local partner to overcome barriers, regulations and real estate decisions. The company also has changed the retail format, distribution systems and location strategies to understand local customers. On the other hand, TRU did not form joint ventures in Europe and suffered from lack of adaptation to the European market, including issues to meet local conditions and working relationships.

ISM crash course: organisational strategy

Businesses come in all shapes and sizes, but in every case their structure consists of a distribution of  the authority to allocate tasks and coordinate operations. Accordingly,  organisational structure determines the way firms operate and perform by establishing procedure and decision-making processes. Ideally, then, a company’s structure should complement its purpose.

Multinational enterprises (MNEs) vary greatly in form and function. Whereas, small to medium businesses (SMEs) might be expected to choose between a product or functional organisation, multinationals have to account for the difficulties of operating in international markets which might by geographically, culturally or politically distant.  This has led to the adoption of diverse organisational forms which can be bedazzling in their hierarchies and  confusing in their connections. Rugman and Collingson (2012) identify five key variables MNEs weigh when choosing their structure, but emphasise that the relationship between structure and strategy is not totally explained:

• Relative importance of international operations
• Company history and international experience
• Their line of business and product strategy
• Management strategy
• The flexibility of the firm in adapting to organisational changes

So, without any further ado, here is the HBR guide to organisational structure. (Click to enlarge)

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2.

3.

 Example

United Colors of Benetton 

The United Colors of Benetton is known for its high-street fashion, controversial ad campaigns and European origin. Its unusual organisational structure, the ‘flagship network’ is less renowned. The fashion-house operates as the middle process of a value chain that takes in materials from outside suppliers and sells through independent retailers who buy into the Benetton franchise. UCoB designs and dyes the clothing using wool treatments it meticulously developed over half a century.

 Its limited FDI has made some commentators question its multinational status, but there is no denying that United Colors of Benetton has made the most of their firm specific and country specific advantages.  The firm’s Italian headquarters draws on the cultural capital of a city that has set the tone of the world’s wardrobes since the 1960s and positions Benetton within the European economic bloc. Importantly, using independent retailers as channels to international markets has allowed UCoB’s leadership to concentrate on building the brand equity which lends the company its competitive edge.

Thank you team L3!

Team L3 have very generously shared their tutorial answers analysing the strategy and structure of luxury brand conglomerate LVMH and recent developments in the beer industry – and the structural factors behind them. HBR hopes that they will assist your preparations for Saturday’s ISM exam!

If you want to help your classmates, why not have some of your team answers featured?

Email henleybusinessreview@gmail.com

(Attach files or place the answers in the body of the email.)

Thanks and good luck!

The HBR Team

LVMH: the strategy of style

What are the advantage and disadvantage of LVMH’s current organisational structure?

LVMH, world leader in the luxury goods industry, has adopted a global product structure wherein the business’s diverse product categories are managed separately.

This is a suitable structure for a highly economically integrated multi-national. LVMH likes to boast that its global brands unite consumers into a worldwide elite through their highly-recognised motifs and standardised (though quickly replaced) designs. This brings advantageous economies of scale. As a retail brand, LVMH could expect to save 30% of its commercial costs – advertising, rent, shop assistants – each time it doubles in size . Indeed, LVMH uses marketing to change consumer tastes to suit the firm’s existing offerings, not vice versa. Efforts to encourage Asian middle classes to embrace LVMH’s European sophistication have taken off in recent years. In 2011, they accounted for 27% of total sales. At the same time, the structure helps LVMH build and maintain the link between product development personnel and customers, placing brand experts at the helm. Because of this, the firm has been proactive in keeping up with global trends. For instance, Loewe is expanding as part of a strategy to satiate a growing appetite for leather goods with lesser-known names.

The global product structure is not without disadvantages. When product categories are independently managed – charged with pricing, location and inventory decisions – there is an inevitable duplication of facilities and personnel which adds to LVMH’s operating costs.Furthermore, it takes longer to foster professional managers to meet the criterion for global product structure, which is to understand local and foreign markets well.

What alternative structures might be suitable for LVMH? Why?

Matrix structure might be suitable for LVMH. Currently, there are many multinational enterprises using matrix structure since matrix structure consists of two lines of responsibilities, which are functional and product structure or regional and product structure. Matrix structure can make up for deficiencies brought by a single division of the enterprise. According to the annual report of LVMH in 2010, the three major markets based on the profit contribution are the United States(23%), Europe(34%) and Asia(34%). The features of each individual regional market are different from the others. Hence, matrix structure allows LVMH to balance product and global location strategy in order to develop the business in-depth according to characteristic of each region. As a luxury industry leader, LVMH might need to enhance the differentiation and services in order to make further development. LVMH utilizes both product division and geographical division, which helps to integrate the needs of local customers and product innovation and service, to achieve part of national responsiveness.

Why might it be difficult for LVMH to develop a ‘transnational’ network structure?

Transnational network structure combines both functional and area structure and it also depends on a network arrangement to connect global subsidiaries. The aim of this structure is to help companies to take benefits from different resources in local environment to feed the organization. For instance, , the company would move its manufacturing to Asia to take the advantage of cheap labour if LVMH adopted this structure. However, the purpose of LVMH is to provide high- quality luxury products. Besides, the brand image is the most important part to gain high profits. Once the company wants to take other advantages of global economies of scale, for example, the cheap labours in Asia, it might damage the brand image. Therefore, transnational network structure is difficult to help LVMH to achieve global economies of scale and hold a reputation of high quality and status at same time.

There is no global beer, only local

Using the Integration/Responsiveness framework, explain the logic of cross border mergers and acquisitions (M&A) among the largest beer brands.

Over the past decade, the beer industry has consolidated through mergers and acquisitions (see table below) which have given the 4 top breweries 45% of global volume and 55% of global revenue (Savage, 2012).

Far from seeing a corresponding shift in the industry to quadrant 1 of the integration/responsiveness matrix, local brands are more important than the globally-recognised Budweiser, Becks or Stella Artois (found in quadrant 2 due to regional marketing).

The beer industry is driven by structural conditions – economies of scale, product characteristics, barriers to entry, market size – which favour regionally responsive breweries.

The weight of the product means it is more efficient to produce beer close to the market place. Moreover, despite differences in flavour and cost between mass-produced beers being small, customers perceive brands as being distinct in important ways (see McConnell, 1968). Notably, populations are loyal to their national brands.

Transportation and consumer preference provide entry barriers to foreign breweries. Merging with breweries or acquiring brands in quadrant 4 allows industry leaders to overcome these restrictions and expand. While scale advantages are emptied at much smaller capacities than those commanded by the top breweries, local responsiveness continues to provide business opportunities (Madsen et al. 2011).

With greater consolidation among the largest beer brands, do you see the relative importance of integration vs. responsiveness changing in the global beer industry?

Global consolidation led by AB InBev, SABMillar, Heineken and Carlsberg has increased the potential for economic integration in the beer industry. Successful global brands include Guinness, Corona and Budweiser, which increased Anheuser-Bush’s market share by over 40% between 1950 and 1990 (Greer 1993).

However, historical taste preferences, legacy systems, laws and infrastructure mean that regional products continue to dominate. Yet, brand consolidation can be seen in the localities (Savage, 2012). For example, the top 5 brands in China now represent 37% of the market, up from 12% a decade ago.

Consolidation trends in beer and historical trends across other FMCG industries suggest that, in the future, local markets will be more receptive to global brands offering unique customer value propositions. Yet, as product and marketing becomes integrated, differences in laws and transport will require breweries to be nationally responsive for some time to come – positioning the largest among them in quadrant 2.

Imperilled Business Machines: the rise and fall and rise of IBM

IBM’s history reads like a thriller.

From its 1911 foundation, its character quickly emerges: professional, innovative and enigmatic – operating under the motto: ‘THINK’. From the 1950s to the 1980s IBM’s heroic rise was marked by large and farsighted investments. Under Thomas J Watson Jr. IBM produced the System/360 computer, computer languages, the hard and floppy disks, the supermarket checkout, an early ATM. The IBM PC stands out even among these impressive contributions. The computer was the most successful technology introduction of its time. Within a single month, unit sales had exceeded 5 year forecasts. In 1990, the company was the 2nd most profitable enterprise in the world and was believed to be set to benefit from the continued growth of the IT industry.

However, just as IBM was being lauded by many commentators as the ‘greatest company in the world’, the company succumbed to deep-seated structural problems and started bleeding profit at a startling rate. In 1991, the company’s earnings dropped to -$2.8bn, and would drop by 60% during each of the next 2 years.

(Click to enlarge) 

Beginning from basics

After initial attempts of cost cutting, which saw 40,000 leave the company, Loius Gerstner was appointed as the first outsider CEO in IBM’s history. While business analysts questioned whether Gerstner could save the technology multinational without an industry background, insiders knew that the real purpose of the appointment was to break the group up for sale.

Gerstner took control in April 1993 and began a revaluation of IBM’s competitive advantages from the perspective of their clients. In the first 2 months, Gerstner travelled thousands of miles visiting customers and analysts to one conclusion:

“They said repeatedly, ‘We don’t need one more disk drive company, we don’t need one more database company or one more PC company. The one thing you guys do that no one else can do is help us integrate and create solutions.’”

At the end of 1993, the CEO understood that selling of IBM’s businesses would be the worst possible course of action. Customers valued the scope of IBM’s products and expertise. He would respond by pushing for ‘One IBM’:

“[We had to change] the view that IBM was a group of fiefdoms. We needed to have a sense that we were going to operate as a team, as a global entity ….”

(Click to enlarge)

One IBM

Gerstner led IBM to transform its organisation, processes, culture and strategy to better serve customers. His and York’s cost control and efficiency drive made the group profitable: posting a profit of $382m in 1993, rising to $5bn by the end of 1994. IBM’s shift also complemented that of the global economy as a whole, as services became increasingly important in the 1990s. By 2000, IBM Global Services had grown into the world’s largest IT consulting and web services organisation, contributing 38% of IBM’s $88.4bn revenue.

Cracking the case: how to survive the assessment centre

As assessment centre season rolls on, HBR offers you some insight into the daunting hurdles between you and employment – and seeks to help you clear them.

Whether over the phone, in groups or in interview, a large proportion of graduates will go through case study exercises before securing their first job. These can be daunting for those without a background in business and who might feel unprepared compared to those who use SWOT diagrams and matrices daily.

Never fear! Businesses call upon case studies for the very reason that there is no unique qualifying background for many occupations. Instead, case studies seek to test general analytical and problem-solving skills. Case studies usually simulate a discussion about a business decision regarding either a problem with the company, product or competitors or an opportunity which requires exploration. The point is not to arrive at the ‘right’ solution, rather to proceed logically, raise questions, identify key issues, use frameworks and demonstrate creativity, confidence and poise. Phew! Got all that?

McKinsey & Co, world leaders in problem solving, suggest the following approach:

1. Understand the question: ask for clarification where unclear
2. Think broadly: don’t get bogged down in any single issue before useful areas have been explored
3. Break down problem into logical structure
4. Don’t be afraid to request additional information: as you better understand the problem the need for more information may become clear
5. Test emerging thoughts: question whether you are answering the question asked
6. Conclude: synthesise thoughts concisely and develop a recommendation, discuss trade-offs and relate back to question

That’s all very well in principle, but how do you get from an open question to an insightful response?

Learning a few basic frameworks 

There are not many better starts than Porter’s Five Forces, one of the most widely-used frameworks in business. Like any framework, it is not complete, but it is useful starting point for any discussion. Porter posits that, at the most fundamental level, there are five primary forces which determine relative competitive advantage in industries:

• Threat of new entrants – entrants have to overcome barriers including economies of scale, product differentiation, access to distribution channels/raw materials/favourable locations and information costs.
• Bargaining power of buyers/customers – buyer groups have influence if they are concentrated, purchase at large volumes, face small switching costs and are deciding between undifferentiated products.
• Bargaining power of suppliers – the industry is vulnerable if it is an unimportant customer of the supplier, if the supplier group is a crucial input to the buyer’s business or suppliers pose a credible threat of forward integration.
• Threat of substitute products – comparable products which compete on price, place, promotion or benefits are disruptive to the existing order.
• Rivalry with competitors – competition increases if industry demonstrates slow growth, high fixed costs, well-balanced rivals or a lack of differentiation.

These factors are important because they impact businesses’ ability to make money. Competition pressurises firms into minimising price and adding benefits to attract customers. Therefore, markets with intense competition allow only minimal profit margins. Conversely, mild competition gives companies the freedom to operate at wider profit margins.

Hopefully, this has started you on the right track. Other frameworks to look out for include (click to enlarge):

Keep calm, progress logically and remember that recruiters don’t want experts, they want thinkers. Good luck!

Our fairytale ending

Wal-Mart’s World: Porter’s determinants in international business

Porter’s six determinants of national competitiveness can be used to analyse the availability of resources and skills and the pressures  on companies to compete based on country specific advantages (CSAs). Rugman’s double diamond places business in the context of the region. However, for MNEs involved in all the triad regions Porter’s determinants are just as important.

Example

Wal-Mart

Wal-Mart developed its firm specific advantages (FSAs) to complement the CSAs of the United States. The firm’s scale strategy is enabled by the country’s inexpensive land and wealthy suburbs. Further, the US’s entrepreneurial culture has encouraged decentralised control and a consumer emphasis on “Everyday Low Prices” smothers concern over Wal-Mart’s dependence on imports from low-cost countries, such as China. Government policy supports the MNE by legislating for a low minimum wage.

Wal-Mart began its international expansion in 1991, entering Mexico with a joint venture. Wal-Mart’s international division has frequently struggled to approach the profitability of its domestic operations. The MNE has found it difficult to adapt to local markets, maintain customer service and keep its prices low. In other words its strategy was disrupted by location-bound differences.

Factor conditions:

• Distribution in Mexico was disrupted by poor infrastructure, resulting in stocking problems and raised costs and prices.
• Undeveloped markets: stocking ice skates, riding lawn mowers, leaf blowers and fishing tackle in Mexico was not suitable.
• Japanese cultural resistance to the discount model.
• Local culture has to be understood for Wal-Mart to make good its promise of excellent customer service.

Supporting industries:

• European retailers are dependent on local suppliers. This environment favours firms which have been long-established. The importance of relationships with supporting industries means Wal-Mart has competed by merging with established European firms, such as Asda in the UK.
• Wal-Mart originally lacked leverage with local suppliers in Mexico, many of which would not deliver directly to stores and distribution centre. This was improved by a partnership with a leading local trucking company.

Physical and human resources:

• Europe is marked by relatively expensive land and high wages. Most European cities lack the expansive suburbs and open spaces required for Wal-Mart’s warehouse-style outlets.

Rivalry:

• Wal-Mart must compete with established retail firms as they expand internationally.
• India: the leaders of the retail market are 12-40 million tiny retail shops which are predominantly run by small family businesses. Since the announcement of the Wal-Mart/Bharti joint venture, ‘India FDI Watch’ has emerged to represent the in­terests of the small stores. They have held large rallies and demonstrations against Bharti, Wal-Mart, and other big-box retailers.

Government:

• Previous barriers to international business in China.
• The MNE got bad press in Germany for not abiding by some important laws and regulations.
• In India, restrictions on foreign ownership have forced the company to team up with Bharti.
• Russia: Anti-corruption group Transparency International ranked Russia 147th out of 180 countries on its most recent corruption perception index. In June, Swedish furniture retailer IKEA said it would halt further investment in Russia, citing the “unpredictability of administrative processes.”

ISM crash course: single and double diamond models

Diamond models – CSAs made pretty.

The word of business is indebted to Michael Porter, Harvard Professor. He thought up many of the economic models we use today, particularly when judging, explaining and predicting competitive advantage. A competitive advantage consists of a resource, strategy, innovation or operational efficiency which strengthens a business in comparison to rival enterprises in its industry.

Determinants of competitive advantage

Porter saw location as a crucial source of competitive advantage due to six broad factors:

• Factor conditions: physical resources, human resources, knowledge resources, capital resources
• Demand conditions: customer base raises capital, sophisticated consumers force innovation
• Related and supporting industries: partners in cost efficiency and upgrading market offer
• Firm factors: strategy, structure, rivalry
• Government: influence to above determinants of competitiveness
• Chance: factors beyond the firm’s control which can disrupt competitive positions

Single diamond model

The single diamond model demonstrates the interaction of these forces in the marketplace. It was published in Porter’s The Competitive Advantage of Nations in which the scholar examines eight developed nations and two newly industrialised countries.

The model has been successfully applied to clusters – groupings of small industries where the performance of one is related to the performance of the others. However, by itself, the single diamond model cannot fully explain the international success of multinationals relative to industry rivals.

Double diamond model

The double diamond model, developed by Alan Rugman, seeks to fill this need. Since Rugman firmly believes that international trade is driven by the intraregional trade and investment of MNEs’ (trade within their region), he argued that firms within countries could also access regional advantages. In this way the domestic diamond (CSAs included in the single diamond model) were added to by region specific advantages (RSAs).

Example

Tata Motors Limited

Tata Motors LTD (TML), an Indian multinational, has successfully exported its low price and fuel efficient vehicles across Asia. This has been supported by strategic joint ventures, acquisitions and mergers – beginning with Daewoo in Korea in 2004. Tata Motors relies on a proficient in-house development and design team to make its products suitable for export, adapting them to the regulatory and emission restrictions of overseas markets. TML has leveraged its FSAs by exporting to Africa and ASEAN countries with CSAs closely resembling those of the firm’s home nation. The country specific and regionally-based advantages which make up TML’s double diamond are listed below: