Chapter Eight Strategy in the Global Environment.

Chapter Eight

Strategy in the Global Environment

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The Global and National Environments

International expansion represents a way of earning greater returns by transferring the skills and product offerings derived from distinctive competencies to markets where indigenous competitors lack these skills.

The trend toward globalization has many implications: 1. Industries are becoming global in scope

Industry boundaries no longer stop at national borders.

2. Shift from national to global markets This has intensified competition in industry after industry.

3. Steady decline in barriers to cross-border trade and investment This has opened up many once protected markets to companies based outside of them.


Increasing Profitability and Profit Growth Through Global Expansion Expanding the market by leveraging products

• Taking goods or services developed at home and selling them internationally

• Utilizing the distinctive competencies that underlie the production and marketing

Cost economies from global volume• Economies of scale from additional sales volume• Lower unit costs and spreading of fixed costs

Location economies• Economic benefits from performing a value

creation activity in the optimal location• Leveraging the skills of global subsidiaries• Applying these skills to other operations within firm’s global network

Must also consider transportation costs, trade barriers, as well as the political and economic risks.


Pressures for Cost Reductions and Local Responsiveness

Figure 8.2

The best strategy for a company to pursue may depend on the kinds of pressures it must cope with:

• Cost Reductions or

• Local Responsiveness


Pressures for Cost Reductions

Where differentiation on non-price factors is difficult

Where competitors are based in low-cost location

Where consumers are powerful and face low switching costs

Where there is persistent excess capacity The liberalization of the world trade and

investment environment

Pressures for cost reductions are greatest in industries producing commodity-type products where price is the main competitive weapon:


Pressures for Local Responsiveness

Differences in customer tastes and preferences

Differences in infrastructure and traditional practices

Differences in distribution channels

Host government demands

The greatest pressures for local responsiveness arise from:

Dealing with these contradictory pressures is a difficult strategic challenge, primarily because being locally responsive tends to raise costs.


Choosing a Global Strategy

Standard Globalization Strategy• Reaping the cost reductions that come from economies

of scale and location economies• Business model based on pursuing a low-cost strategy

on a global scale Makes the most sense when there are strong pressures for

cost reduction and the demand for local responsiveness is minimal

Localization Strategy• Customizing the company’s goods or services so that

thy provide a good match to tastes and preferences in different national markets

Most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences and where cost pressures are not too intense


Choosing a Global Strategy

Transnational Strategy• Difficult to pursue due to its conflicting demands• Business model that simultaneously:

» Achieves low costs » Differentiates across markets » Fosters a flow of skills between subsidiaries

Building an organization capable of supporting a transnational strategy is a complex and challenging task.

International Strategy• Multinational companies that sell products that serve

universal needs (minimal need to differentiate) and do not face significant competitors (low cost pressure).

In most international companies the head office retains tight control over marketing and product strategy.


Basic Entry Decisions

1. Which overseas markets to enter• Assessment of long-run profit potential

» A function of the size of the market, purchasing power of consumers, the likely future purchasing power of consumers

• Balancing the benefits, costs, and risks associate with doing business in a country

» A function of economic development and political stability

2. Timing of entry• First-mover advantages: preempt and build share• First-mover disadvantages: pioneering costs

3. Scale of Entry and Strategic Commitments• Entering on a large scale is a major strategic

commitment » With long term impacts that may be difficult to reverse

• Benefits and drawbacks of small-scale entry


The Choice of Entry Mode

1. Exporting Most manufacturing companies begin their global expansion as

exporters and later switch to one of the other modes.

2. Licensing A foreign licensee buys the rights to produce a company’s product

for a negotiated fee; licensee puts up most of the overseas capital.

3. Franchising Franchising is a specialized form of licensing. The franchiser not

only sells intangible property, but also insists that franchisee agrees to follow strict rules as to how it does business.

4. Joint Ventures Typically a 50/50 venture – a favored mode for entering a new market

5. Wholly-Owned Subsidiaries Parent company owns 100% of subsidiary’s stock – setup or acquire

When and how to enter a new national market raise the question of how to determine the best mode or vehicle for entry. The optimal one depends on the company’s strategy:


Advantages and Disadvantages of Different Entry Modes

Table 8.1


Choosing Among Entry Modes

Distinctive Competencies and Entry Mode To earn greater returns from differentiated products or where

competitors lack comparable products, the optimal mode of entry depends on the nature of the company’s distinctive competency:• Technological know-how

» Wholly-owned subsidiary is preferred over licensing and joint ventures to minimize risk of losing control.

• Management know-how » Franchising, joint ventures, or subsidiaries are preferred as risk

is low of losing management know-how. Pressures for Cost Reduction and Entry Mode The greater the cost pressure, the more likely a company will want to

pursue some combination of exporting and wholly-owned subsidiary:• Export finished goods from wholly-owned subsidiary• Marketing subsidiaries for overseeing distribution

» Tight control over local operations allows company to use profits generated in one market to improve position in other markets.


Global Strategic Alliances

Advantages• Facilitate entry into a foreign market• Share fixed costs and associated risks• Bring together complementary skills and assets• Set technological standards for its industry

Disadvantages• Give competitors a low-cost route to gain new

technology and market access

Global Strategic Alliances are cooperative agreements between companies from different countries that are actual or potential competitors. They range from short-term contractual cooperative arrangements to formal joint ventures with equity participation.

Some alliances benefit the company. Beware, alliances can end up giving away technology

and market access with very little gained in return.


Making Strategic Alliances Work The failure rate for international strategic alliances is quite high. Success seems to be a function of three main factors:

Successful partners view the alliance as an opportunity to learn rather than purely as a cost- or risk-sharing device.

1. Partner selection – A good partner:• Helps the company achieve strategic goals• Shares the firm’s vision for the purpose of the alliance• Is unlikely to try to exploit the alliance to its own ends Conduct research on potential partners

2. Alliance structure• Risk of giving too much away is at an acceptable level• Guard against opportunism by partner in alliance agreement

3. Manner in which alliance is managed• Sensitivity to cultural differences• Build relationship capital through interpersonal relationships


Structuring Alliances to Reduce Opportunism

Figure 8.5Opportunism includes the expropriation of

technology or markets

Chapter Eight Strategy in the Global Environment.

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