The Global Environment Chapter 5

Globalization Globalization is the strategy of approaching worldwide markets with standard products The strategic operations and threats posed by globalization affect almost every U. S. industry Understanding the nuances of competing in global markets is becoming a required competence of strategic managers

Why Firms Globalize To reap benefits from industries and technologies developed abroad Direct penetration of foreign markets can drain vital cash flows from a foreign competitor’s domestic operations – Reduces the competitor’s ability to invade U. S. markets Question: should firms be proactive or reactive? (Exhibit 5.3)

Complexity of the Global Environment Differences in political, legal, social, and cultural environments Demands of foreign governments Widely differing economic and social conditions Business practices and negotiating styles are different Communication with, and control of, overseas affiliates is difficult Extreme competition Restrictions imposed by the European Union, Association of Southeast Asian Nations (ASEAN), and Latin American Free Trade Area, among others

Pressures for Cost Reductions The product is a commodity Differentiation on non-price factors is difficult. Price is the main competitive weapon Competitors are based in low-cost locations There is persistent excess capacity Customers are powerful, and switching costs are low. Global competition, global trade, and global investment opportunities.

Pressures for National Responsiveness Differences in distribution channels Host government demands Different product standards Different customer needs and tastes Businesses or consumers prefer locally made products Managing details in a global organization is difficult and complex. Subsidiaries know local market needs and management practices better than headquarters.

Global Strategy Produce standard products efficiently in large facilities, and use a standard marketing strategy Little or no national responsiveness This strategy seeks to benefit from economies of scale in production, distribution, marketing, and purchasing – Requires close coordination with headquarters Production facilities are located where total costs of production, transportation, and tariffs are low (location economies)

Global Strategy (2) Used when – The need for cost reduction is high AND – The need for national responsiveness is low This strategy is used to compete on low prices. Some firms that use global strategies: Canon, Fuji, Texas Instruments Firms that make commodity products (industrial chemicals, paper, etc.) often use global strategies

International Strategy This strategy used by firms with products or core competencies that international competitors cannot match. – The objective is to increase earnings by utilizing core competencies in foreign markets – These firms usually compete on differentiation Used when – The need for cost reduction is low AND – The need for national responsiveness is low

International Strategy (2) Home office controls product development and marketing strategy. Limited customization of products and marketing strategy if necessary – Limited national responsiveness Production and a marketing department in each major country  more expensive than global strategy – This strategy does not take advantage of economies of scale and location economies Some firms that use this strategy: IBM, Wal-Mart

Multidomestic Strategy A strategy that attempts to maximize national responsiveness Firm usually has product development, production, and marketing in each country – This strategy does not take advantage of economies of scale and location economies Often used by companies that serve niche markets – National responsiveness is more important than cost pressures. Often, distinctive competencies are not transferred from one market to another.

Multidomestic Strategy (2) Used when – The need for cost reduction is low AND – The need for national responsiveness is high Problems – Lack of coordination among subsidiaries in different countries – Decisions made by a subsidiary may not be in the best interest of the company as a whole – High costs

Transnational Strategy A strategy that seeks to – Achieve low costs by using economies of scale and location economies – Transfer core competencies within the firm – Achieve a high degree of national responsiveness Used when – The need for cost reduction is high AND – The need for national responsiveness is high Some firms that use this strategy: Toyota, Honda, Caterpillar, AT & T

Transnational Strategy (2) Requirements for success: – Transfer of knowledge throughout the company (global learning) – Coordination of production, purchasing, and marketing throughout the company – A corporate culture that encourages mutual trust, coordination, and knowledge sharing Hardest strategy to implement

Comparison of the 4 Strategies Global strategy International strategy Multi-domestic strategy National responsiveness LowHigh Global integration Low High Transnational strategy