Copyright © Houghton Mifflin Company. All rights reserved. STRATEGIC MANAGEMENT Lecture 8 Dr. John Kraft Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Opening Case Evolution of Strategy at Coca Cola Copyright © Houghton Mifflin Company. All rights reserved.

National and Competitive Advantage Source: Adapted from M.E. Porter, “The Competitive Advantage of Nations,” Harvard Business Review, March-April, 1990, p. 77. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Finland’s Nokia Copyright © Houghton Mifflin Company. All rights reserved.

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: Industries are becoming global in scope Industry boundaries no longer stop at national borders. Shift from national to global markets This has intensified competition in industry after industry. Steady decline in barriers to cross-border trade and investment This has opened up many once protected markets to companies based outside of them. Copyright © Houghton Mifflin Company. All rights reserved.

Increasing Profitability Through Global Expansion Location economies Economic benefits from performing a value creation activity in the optimal location Effects Can lower costs Can enable differentiation Caveats Transportation costs and trade barriers Political and economic risks Source: Publisher’s PowerPoint, Ch8-Slide 2 Copyright © Houghton Mifflin Company. All rights reserved.

Increasing Profitability Through Global Expansion (cont’d) The experience curve Serving a global market from one or a few plants is consistent with moving down the experience curve and establishing a low-cost position Transferring distinctive competencies Companies with distinctive competencies can realize large returns by expanding to global markets where competitors lack similar competencies and products Source: Publisher’s PowerPoint, Ch8-Slide 3 Copyright © Houghton Mifflin Company. All rights reserved.

Increasing Profitability Through Global Expansion (cont’d) Leveraging the skills of global subsidiaries Competencies can be created anywhere within a multinational’s global network of operations Managers must establish an incentive system to encourage local employees to acquire new competencies Managers must have processes in place to identify valuable new competencies and help transfer them within the company Source: Publisher’s PowerPoint, Ch8-Slide 4 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Running Case Wal-mart in Global Expansion Copyright © Houghton Mifflin Company. All rights reserved.

Pressures for Cost Reductions and Local Responsiveness Source: Publisher’s PowerPoint, Ch8-Slide 5 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Four Basic Strategies Source: Publisher’s PowerPoint, Ch8-Slide 8 Copyright © Houghton Mifflin Company. All rights reserved.

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 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Localization of IKEA Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Closing Case MTV Networks Copyright © Houghton Mifflin Company. All rights reserved.

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. Copyright © Houghton Mifflin Company. All rights reserved.

Advantages/Disadvantages of Strategies for Competing Globally Source: Publisher’s PowerPoint, Ch8-Slide 14 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Film India Click for Video- India Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action McDonald’s Is Here, There, and Everywhere Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Real World “The Jollibee Phenomenon- A Philippine Multinational” Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action “Hewlett Packard in Singapore” Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Evolution of Strategy at P&G Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Basic Entry Decisions 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 Timing of entry First-mover advantages: preempt and build share First-mover disadvantages: pioneering costs 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 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Basic Entry Decisions 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 Source: Publisher’s PowerPoint, Ch8-Slide 15 Copyright © Houghton Mifflin Company. All rights reserved.

Basic Entry Decisions (cont’d) Timing of entry First-mover advantages First-mover disadvantages Scale of entry and strategic commitments Entering on a large scale is a strategic commitment, both positive and negative Benefits and drawbacks of small-scale entry Source: Publisher’s PowerPoint, Ch8-Slide 16 Copyright © Houghton Mifflin Company. All rights reserved.

The Choice of Entry Mode 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: Exporting Most manufacturing companies begin their global expansion as exporters and later switch to one of the other modes. 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. 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. Joint Ventures Typically a 50/50 venture – a favored mode for entering a new market Wholly-Owned Subsidiaries Parent company owns 100% of subsidiary’s stock – setup or acquire Copyright © Houghton Mifflin Company. All rights reserved.

Advantages and Disadvantages of Different Entry Modes Table 8.1 Copyright © Houghton Mifflin Company. All rights reserved.

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. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Real World “Diebold” Copyright © Houghton Mifflin Company. All rights reserved.

Making Strategic Alliances Work The failure rate for international strategic alliances is quite high. Success seems to be a function of three main factors: 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 Alliance structure Risk of giving too much away is at an acceptable level Guard against opportunism by partner in alliance agreement Manner in which alliance is managed Sensitivity to cultural differences Build relationship capital through interpersonal relationships Successful partners view the alliance as an opportunity to learn rather than purely as a cost- or risk-sharing device. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Cisco and Fujitsu Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Real World “Fuji-Xerox” Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Real World “It’s a Grand-Latte World” Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. End of Lecture 8 Copyright © Houghton Mifflin Company. All rights reserved.