1 INTERNATIONAL STRATEGY: CREATING VALUE IN GLOBAL MARKETS STRATEGIC MANAGEMENT BUAD 4980.

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INTERNATIONAL STRATEGY: CREATING VALUE IN GLOBAL

MARKETS

INTERNATIONAL STRATEGY: CREATING VALUE IN GLOBAL

MARKETS

STRATEGIC MANAGEMENT BUAD 4980

STRATEGIC MANAGEMENT BUAD 4980

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INTERNATIONAL STRATEGYINTERNATIONAL STRATEGY

Globalization

The increase in international exchange, including trade in goods and services as well as exchange of money, information, ideas, and information.

The growing similarity of laws, rules, norms, values, and ideas across countries.

Overview of the Global EconomyOverview of the Global Economy

STRATEGIC MANAGEMENT – BUAD 4980STRATEGIC MANAGEMENT – BUAD 4980

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Overview of the Global EconomyOverview of the Global Economy

Extremes in the effects of global capitalism:

The economies of East Asia have attained rapid growth and improved standards of living

Income in Latin America grew by only 6 percent in the past two decades

Average incomes in sub-Saharan Africa and the old Eastern European bloc have actually declined


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Porter’s Diamond of National AdvantagePorter’s Diamond of National Advantage


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Global Factors Affecting a Nation’s

Competitiveness


Competitiveness Factor Endowments

The nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry.

Demand Conditions

The nature of home-market demand for the industry’s product or service.


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Competitiveness


Competitiveness Related and Supporting Industries

The presence or absence in the nation of supplier industries and other related industries that are internationally competitive.

Firm Strategy, Structure, and Rivalry

The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.


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Factor EndowmentsFactor Endowments

To achieve competitive advantage, factors of production must be created

Industry and Firm specific:

The pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed

Firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate and rapidly and efficiently deployed are the factors that create national competitive advantage


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Demand ConditionsDemand Conditions

The demands that consumers place on an industry for goods and services

Demanding consumers drive firms in a country to:

Meet high standards

Upgrade existing products and services

Create innovative products and services


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Related and Supporting IndustriesRelated and Supporting Industries

Enable firms to manage inputs more effectively

Allow joint efforts among firms

Share technical capabilities and infrastructure


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Rivalry is intense in nations with conditions of:

Strong consumer demand

Strong supplier bases

High new entrant potential from related industries

Competitive rivalry stimulates innovation and new means of achieving competitive advantage

Firm Strategy, Structure and RivalryFirm Strategy, Structure and Rivalry


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Firm Strategy, Structure and RivalryFirm Strategy, Structure and Rivalry

Competitive rivalry increases the efficiency with which firms

Develop within the home country

Market within the home country

Distribute products and services within the home country

Firms faced with intense domestic competitive rivalry will often develop business strategies and structures allowing them to compete outside their domestic markets


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Porter’s Diamond of National Advantage – Applied to India

Porter’s Diamond of National Advantage – Applied to India


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Motivation for Companies to Expand

Internationally


Internationally Increase the size of potential markets

Attain economies of scale

Take advantage of “arbitrage” opportunities

Extend the life cycle of a product

Optimize the physical location for every activity in its value chain


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Internationally


Internationally Optimizing the location for every activity in a firm’s value chain can result in

Performance Enhancement

Cost Reduction

Risk Reduction


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Potential Risks of International ExpansionPotential Risks of International Expansion

Political and Economic Risk

Social unrest

Military turmoil

Demonstrations

Violent conflicts and terrorism

Laws and their enforcement

Unstable governments


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International Risk RankingsInternational Risk Rankings

Source: Transparency International, 2010


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Corruption Perceptions Index (CPI)Corruption Perceptions Index (CPI) The Transparency International 2010 CPI ranks

the most corrupt countries in the world

The scores range from ten (least corrupt) to zero

(highly corrupt)

The five most corrupt countries are Somalia (CPI Score: 1.1)

Myanmar (CPI Score: 1.4)

Afghanistan (CPI Score: 1.4)

Iraq (CPI Score: 1.5)

Uzbekistan (CPI Score: 1.6)


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International Risk RankingsInternational Risk Rankings


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Currency Risk

Currency exchange fluctuations

Appreciation (strengthening) of the US Dollar

Government management of monetary policy and intervention in financial markets


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Management Risks

Different culture

Different customs

Different language

Different income levels / standard of living

Country-specific customer preferences

Less developed distribution system / infrastructure


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Global Dispersion of Value ChainsGlobal Dispersion of Value Chains

Outsourcing

Utilizing firms in other countries to perform value-creating activities that were previously performed in-house within the firm’s home country


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Offshoring

Shifting an activity that was previously performed in a domestic location to a foreign location.

Global Dispersion of Value ChainsGlobal Dispersion of Value Chains


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Achieving Competitive Advantage in Global

Markets


Markets Distinct global strategies emerge from the opposing pressures of Reducing Costs and Adapting to Local Markets

Lowering unit costs maintains competitiveness in pricing in global markets

May require locating facilities where a cost advantage can be achieved

Adapting to local markets requires modifying product attributes to satisfy varying consumer preferences in different countries

May add costs to differentiate products


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Markets


Markets


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Markets


Markets International Strategy

Based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets

The primary goal of the strategy is worldwide exploitation of the parent firm’s knowledge and capabilities that foreign competitors lack

Low degree of global adaptation

Core competencies associated with centralized headquarters location

Low pressures for local adaptation and lowering costs


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Markets


Markets International Strategy – Strengths / Limitations


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Markets


Markets Global Strategy

Competitive strategy is centralized and controlled largely by corporate administration

Emphasizes achievement of economies of scale to lower global costs

Pressure for adaptation is low and pressure for lowering costs is high


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Markets


Markets Global Strategy – Strengths / Limitations


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Markets


Markets Multidomestic Strategy

Emphasis is differentiating products and services to adapt to local markets

Decision-making is more decentralized

Pressure for local adaptation is high and pressure for lowering costs is low


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Markets


Markets Multidomestic Strategy – Strengths / Limitations


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Markets


Markets Transnational Strategy

Optimization of tradeoffs associated with efficiency, local adaptation, and learning

Firm’s assets and capabilities are dispersed according to the most beneficial location for a specific activity

Pressures for both local adaptation and lowering costs is high


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Markets


Markets Transnational Strategy – Strengths / Limitations


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Global vs. Regional ExpansionGlobal vs. Regional Expansion

Advantages of regional vs. global expansion

Geographic proximity

Cultural, language, customer preference similarities

Linked infrastructure and distribution

Favorable trading relationships

Most companies are involved in regional or bi-regional expansion, not global expansion


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Entry Modes of International ExpansionEntry Modes of International Expansion


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Exporting

Producing goods in one country to sell to residents of another country


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Exporting Benefits

Simplest way to enter a market with least investment risk

Foreign distribution partners facilitate entry

Exporting Risks / Limitations

Little control over local distribution practices

Potential competition with other distributor products


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Licensing / Franchising

Contractual agreement in which a company receives a royalty or fee in exchange for the right to use its intellectual property

Restrictions on use of intellectual property are part of any licensing or franchising agreement


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Licensing or Franchising Benefits

Low investment risk

Avoid trade barriers and currency risk exposure

Licensing or Franchising Risks / Limitations

Loss of control

Lower profits due to royalty / fees paid to licensee

Intellectual property rights potentially at risk


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Strategic Alliances and Joint Ventures

Partnership arrangements with foreign firms or other multinationals

Strategic alliances usually are limited to resource sharing arrangements, marketing and distribution

Joint Ventures involve the creation of a third-party enterprise with joint ownership and/or shared assets


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Strategic Alliances and Joint Ventures -Benefits

Shared risks with less investment than wholly-owned subsidiaries

Gain market or technical knowledge and operating expertise from partners

Shared revenues and profits


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Strategic Alliances and Joint Ventures - Risks / Limitations

Success usually requires the following:

Defined strategy that is mutually acceptable

Defined responsibilities and contributions

Mutual trust

Unifying “common culture”

Detailed procedures and documentation defining all aspects of the partnership arrangement


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Wholly Owned Subsidiaries

A business in which a multinational company owns 100 percent of the stock.


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Wholly Owned Subsidiaries - Benefits

Provides greatest degree of control of all company activities

Highest investment cost and risk – but can lead to highest returns

No revenue or profit sharing


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Wholly Owned Subsidiaries – Risks / Limitations

Highest investment risk – assumed entirely by parent company

Must go through learning curve relating to cultural, political and legal environment in the host country


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Case Analysis: Marketing to the “Bottom of the Pyramid”

Case Analysis: Marketing to the “Bottom of the Pyramid”

For years, companies focused on the upper portion of the income pyramid to market products

Recently, more companies have found success marketing to the poorer populations of developing countries

Micro Loans have become an industry in itself, catering to low income families wishing to start businesses

Some companies, like Unilever, have modified packaging and item quantity marketed to low income customers to meet the restrictions of their standards of living


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Case Analysis: India and the Diamond of National Advantage


Over one-fifth of Fortune 1000 companies outsource their software requirements to Indian firms

Indian software exports have increased from $5.9 billion in 2000 to a projected $80 billion in 2010

The Indian software industry has grown at a 25% annual rate over the past decade

More than 800 firms in India are involved in software services as their primary activity


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Software and IT firms in India are projected to employ 2.3 million people by 2010

The IT sector is expected to contribute 7% of India’s GDP in 2010

India has focused on educating students in IT to provide the labor resources necessary to staff this industry

Global demand conditions for software continue to increase as more developed countries rely more heavily on complex software systems to increase efficiency

India now has both the supplier base and competitive advantage against rivals in the software development industry


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Case Analysis: How Wal-Mart Profits from Arbitrage

Case Analysis: How Wal-Mart Profits from Arbitrage

Wal-Mart’s above-average profitability has been attributed to factors such as superior logistics, strict overhead control, and effective use of information systems

Wal-Mart is aggressively pursuing international expansion across the globe

Another key factor in Wal-Mart’s success has been its ability to purchase large volumes of goods at very cheap prices, sourcing more and more from foreign countries such as China

It is estimated that China alone may be supplying between $50 - $70 billion annually, generating savings of $16 - $23 billion annually


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Case Analysis: How Deere & Co. Learned From its Indian Operations

Case Analysis: How Deere & Co. Learned From its Indian Operations

In an attempt to enter the Indian agricultural market for farm equipment, Deere engineered small no-frills tractors for he Indian market

Deere didn’t consider these basic tractors would appeal to US customers when it first introduced them to India

Ironically, Indian manufacturer Mahindra was beginning to market small, basic tractors to US consumers needing basic features for their personal properties

Deere has introduced slightly modified versions of its Indian tractor design for use in the US, with great success


1 INTERNATIONAL STRATEGY: CREATING VALUE IN GLOBAL MARKETS STRATEGIC MANAGEMENT BUAD 4980.

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