Modern Competitive Strategy 3 rd Edition Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reservedMcGraw-Hill/Irwin

Chapter 9 Global Strategy 9-2

Framework for Global Competition The economic logic of global competition depends on the costs and benefits of geographical location Regional advantages National advantages Global strategy is beyond leveraging benefits of the firm’s country of origin Includes leveraging firm’s capabilities and resources across national markets Successfully competing as a global firm means achieving higher economic performance than indigenous rivals 9-3

Why Do Regions Matter? Labor force pooling among firms Use of specialized local suppliers Technological spillovers in the region 9-4

Labor Pooling Firms benefit from labor pooling when labor requirements are uncertain Local labor fills unexpected demand 9-5

Specialized Local Suppliers Firms benefit when: The firms’ industry and the supplier industry grow in the region at about the same pace Supplier inputs are specialized to local customers 9-6

Technological Spillovers Spillovers are enabled by Opportunities for mutual observation among firms in the region Networks among workers and managers across firms Managerial transfers within the region Start-ups by former employees of incumbents Mobility among existing firms Regional associations Informal communication lending to knowledge of similar technological issues 9-7

Why Do Countries Matter? Laws and regulations National cultures Natural resources and geography The factors in Porter’s diamond model: Demand characteristics Factor markets Related industries Competition 9-8

Laws and Regulations National laws and regulations, such as: Fiscal policy such as taxes Industry regulation Trade policy Monetary policy Laws and regulations influence: Investment Shape and scale of demand Trade Competitive markets require the strong rule of law 9-9

National Culture Determined by geography, climate, languages, religions, martial history and orientation, arts, political systems, family and social traditions, and economic mores Affects consumer taste and buying patterns Influences competitive strength of local firms 9-10

Geography and Natural Resources Countries differ substantially in natural resources and geographic location These differences are not sufficient for variation in national wealth Effective management practices are necessary for the development of the nation’s economic health 9-11

Figure 8.1 Source: Michael Porter, The Competitive Advantage of Nations (New York Free: Press, 1990), p. 72. Porter’s Diamond Model 9-12

Table 8.3 Source: Adapted from Bruce Kogut, “Designing Global Strategies: Comparative and Competitive Value Chains,” Sloan Management Review, Global Strategy Framework 9-13

Country and Firm-specific Advantage Country (comparative) advantage Derived from nation-specific resources or capabilities that provide local firms with competitive advantages in global markets, such as: Natural resources such as diamonds in Russia and South Africa Superior quality and supply chain management practices developed in Japan Firm-specific (competitive) advantage Derived from resources and capabilities within the firm itself 9-14

Factors Affecting Firm-specific Advantage Economies of scale in one or more activities, such as operations Economies of scope from products sold across multiple markets Diffusion of superior practices from home office to units in regional markets Accelerated learning curve gained from the collective experiences of the regional units 9-15

Nationally Segmented Industries Industries in which: No country has an advantage over any other country There are no opportunities for firms to develop superior global cost or value drivers Examples portrait photography, clothing alterations, beauty salons and barbershops 9-16

Industries Vertically Integrated Across Borders Industries in which: Some countries have an advantage over others in an activity in the value chain There are no opportunities for firms to develop superior global cost or value drivers Examples: blockbuster movies (U.S.), diamond cutting (Antwerp, New York), and high fashion (Northern Italy, Paris, New York) 9-17

Industries Horizontally Integrated Across Borders Industries in which: No country has an advantage over any other There are opportunities for firms to develop superior global cost or value drivers Examples: fast food, automobiles, vacation resorts 9-18

Industries Vertically and Horizontally Integrated Across Borders Industries in which: Some countries have an advantage over others There are opportunities for firms to develop superior global cost or value drivers Examples: semiconductors, software, financial services An industry becomes global when non-domestic firms have consistently superior market positions compared to domestic rivals 9-19

Global Configuration Global configuration is defined as the geographical locations of a firm’s activities The determinants of a firm’s configuration are: Comparative advantage associated with country of origin Strategic position in the world market Firm size Opportunities at time of entry Changes in these factors can alter the configuration over time 9-20

Changes in a Firms’ Configuration Shifts in the location of a firm’s activities globally can be due to: Changes in country specific advantages, such as rise of software in India and manufacturing in China Changes in strategy as firms shift their value and cost drivers Changes in firm size Global technological and administrative innovations, such as the Internet Exchange rates 9-21

Modes of Foreign Market Entry Pattern of investment reflects need for increased control over operations in the host country First, export Then, licensing Then, joint venture Then, wholly owned production activities The process of internalization Follows economic logic similar to vertical integration Need for control Relative competence to perform the activity 9-22

Potential Risks of International Investments Potential governmental appropriation of firm’s assets Removal of price guarantees Removal of guarantees related to shifts in currency and exchange rates Favoritism towards competition 9-23

Political Risk Associated with Large Scale Investments Factors that reduce political risk: Entering firm is large and well connected Regulating institution in host country is involved in several sectors Powerful entrepreneurs in the country benefit from trade liberalization The firm’s investment is not associated with a notable redistribution of wealth 9-24

Organizing for Global Competition Establishing an international division Advantage: managers focused on international growth Disadvantage: responsibility for international growth separated from core line organization Subordinating regional operations to functions Advantage: each function capable of coordinating its investments globally Disadvantage: difficulty in coordinating global activities across the value chain 9-25

Organizing for Global Competition (cont’d) Subordinate functions to regional operations Advantage: aligns regional business with local competitive requirements Disadvantage: reduces ability to benefit world-wide scale or scope in functions 9-26

Organizing for Global Competition (cont’d) Hybrid forms of international competitors Functional structure with country divisions (e.g., China, Japan) Geographical structure with central functions (e.g., technology development) Transnational network formation among worldwide units 9-27

Table 8.4 Source: Adapted from Christopher Bartlett and Sumantra Ghoshal, Managing across Borders: The Transnational Solution (Cambridge: Harvard Business School Press, 1989). p. 65 Types of Organization Structure of Global Firms 9-28