1. Strategy in the Global Environment
Chapter Eight
Strategy in the Global Environment

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“No war should be begun until it is first determined what is to be achieved and how it will be conducted.”
- Carl von Clausewitz
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3. 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.
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4. National Competitive Advantage
Figure 8.1
Porter’s diamond:
Companies from a given nation are most likely to succeed in industries in which the four attributes are favorable.
The attributes form a mutually reinforcing system in which the affect of one attribute is dependent on the state of the others.
Helps managers to:
Identify global competitors
Locate global resources
Assess how tough it is to enter certain national markets
Source: Adapted from M.E. Porter, “The Competitive Advantage of Nations,” Harvard Business Review, March-April, 1990, p. 77.
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5. National Competitive Advantage
The attributes of Porter’s diamond:
Factor Endowments or Conditions
The cost and quality of factors of production
Basic factors: land, labor, capital, and raw material
Advanced factors: technological, managerial, infrastructure
Local Demand Conditions
Home demand plays an important role in the impetus for upgrading competitive advantage.
Companies are most sensitive to the needs of their closest customers.
Competitiveness of Related and Supporting Industries
The spill-over benefits from investments by supporting industries
Intensity of Rivalry
Different nations characterized by different management ideologies
Strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry
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6. 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.
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7. 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
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8. Pressures for Cost Reductions
Pressures for cost reductions are greatest in industries producing commodity-type products where price is the main competitive weapon:
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
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9. Pressures for Local Responsiveness
The greatest pressures for local responsiveness arise from:
Differences in customer tastes and preferences
Differences in infrastructure and traditional practices
Differences in distribution channels
Host government demands
Dealing with these contradictory pressures is a difficult strategic challenge, primarily because being locally responsive tends to raise costs.
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“You do not choose to become global. The market chooses for you, it forces your hand.”
- Alan Gomez
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Four Basic Strategies
Figure 8.3  
Companies typically choose among the four main global strategic postures when competing internationally.
The appropriateness of each strategy varies with the extent of pressures for cost reduction versus local responsiveness.  
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12. 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
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13. 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.
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14. Changes in Strategy over Time
Figure 8.4
Over time, competitors inevitably emerge. Companies that do not take steps to reduce their cost structure may be outflanked by efficient global competitors.
As competition intensifies, companies need to orientate toward either a Standard Globalization or a Transnational strategy.
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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
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16. 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
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17. Advantages and Disadvantages of Different Entry Modes
Table 8.1
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18. 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.
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19. Global Strategic Alliances
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.
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
Some alliances benefit the company.
Beware, alliances can end up giving away technology and market access with very little gained in return.
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20. 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.
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21. Structuring Alliances to Reduce Opportunism
Figure 8.5
Opportunism includes the expropriation of technology or markets
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“Remember the finish line is at the end of the race. Don’t use up all of your energy before reaching it.”
- Jack Daniels
“There is no finish line.”
- Phil Knight,
CEO, Nike
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