1 8 Strategy in the Global Environment

2 Related Concepts/Theories Theory of comparative advantage – a country is ahead, and all other country’s benefit, if  A country produces a product where it has comparative advantage, i.e. cost of production.  Uses the revenues to purchase other products Tariff and non-tariff barriers  Tariffs are levied on incoming products  Non-tariff barriers can come in many forms, with the intent of protecting local production

3 The world is flat... (Friedman) Three converging developments  A global, Web-enabled playing field that allows multiple forms of collaboration  Gradual adaptation of organizations through horizontal collaboration in the value creation process  Opening of economies like China, India, Russia, and in Eastern Europe, Latin America, and Central Asia to the world economy – 3 billion people

4 Going International, Global Initial strategies to do business outside one’s borders Strategies for firms with on-going overseas business

5 Basic Entry Decisions Which overseas markets to enter  Psychological closeness  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 associated with doing business in a country A function of economic development and political stability

6 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

7 Process of Expansion Expansion outside the comfort of one’s country is a gradual process  Exports  Licensing or franchising  Joint-venture  Wholly-owned Subsidiary

8 The Advantages and Disadvantages of Different Entry Modes

9 Choosing Among Entry Modes Distinctive competencies and entry mode  Technological competency Wholly-owned subsidiary is preferred over licensing and joint ventures  Management competency Franchising, joint ventures, subsidiaries Pressures for cost reduction in entry mode  Great pressure for cost reductions Exporting and wholly-owned subsidiaries

10 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 to the industry Disadvantages  Give competitors a low-cost route to gain new technology and market access

11 Making Strategic Alliances Work: 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

12 Structuring Alliances to Reduce Opportunism

13 Making Strategic Alliances Work: Managing the Alliance Sensitivity to cultural differences and their effects on management style Building interpersonal relationships among managers from different companies Ability to learn from alliance partners and put the knowledge to good use

14 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

15 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

16 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

17 Global strategy – factors to consider Pressures for cost reductions Pressures for local responsiveness

18 Pressures for Cost Reductions When companies produce commodity products Where differentiation on nonprice factors is difficult and price is the main competitive weapon Where competitors are based in low-cost locations Where there is persistent excess capacity Where consumers are powerful and face low switching costs The liberalization of the world trade and investment environment

19 Pressures for Local Responsiveness Differences in customer tastes and preferences Differences in infrastructure and traditional practices Differences in distribution channels Host government demands

20 Four Basic Strategies

21 Choosing a Global Strategy International strategy  Creating value by transferring competencies and products to foreign markets where indigenous competitors lack those competencies and products  Makes sense if a company has a valuable competence that indigenous competitors in foreign markets lack and if it faces weak pressure for local responsiveness and cost reductions

22 Choosing a Global Strategy (cont’d) Multidomestic strategy  Developing a business model that allows a company to achieve maximum local responsiveness  Makes sense when there are high pressures for local responsiveness and low pressures for cost reductions  Companies may become too decentralized and lose the ability to transfer skills and products

23 Choosing a Global Strategy (cont’d) Global strategy  Focusing on increasing profitability by reaping cost reductions that come from experience curve effects and location economies; pursuing a low-cost strategy on a global scale  Makes sense when there are strong pressures for cost reductions and demand for local responsiveness is minimal

24 Choosing a Global Strategy (cont’d) Transnational strategy  Simultaneously seeking to lower costs, be locally responsive, and transfer competencies in a way consistent with global learning

25 Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar

26 Advantages and Disadvantages of Different Strategies for Competing Globally

27 Exercise What global strategy did MTV (Opening case Ch 8) pursue? Why did it not work and to what strategy did they change? Do the same for IKEA (Strategy in Action 8.3)? What do each of these situations impose on specific functional strategies?

28 Exercise What global strategy did Airborne pursue? What entry strategies did they implement? What was(were) the major reason(s) for these choices?