1. 8 Chapter © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CHARLES W. L. HILL / GARETH R. JONES Strategic Management An Integrated Approach 10th ed. Strategy in the Global Environment Student Version Prepared by C. Douglas Cloud, Professor Emeritus of Accounting, Pepperdine University

2. Learning Objective:After reading this chapter, you should be able to understand the process of globalization and how that impacts a company’s strategy. Learning Objective: After reading this chapter, you should be able to understand the process of globalization and how that impacts a company’s strategy. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE GLOBAL AND NATIONAL ENVIRONMENT  In the past half century, the tariff rate on manufactured goods between countries has dropped from 40% to under 4%.  Industry boundaries no longer stop at national borders. The Globalization of Production and Markets

3. 8-3 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE GLOBAL AND NATIONAL ENVIRONMENT  The shift from national to global markets has intensified competitive rivalry in many industries.  National markets that once were consolidated oligopolies have been transformed into segments of fragmented global industries where a large number of companies battle for market share.  Although globalization has increased both the threat of entry and intensity of rivalry, it also has created enormous opportunities for companies based in those markets. The Globalization of Production and Markets

4. 8-4 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE GLOBAL AND NATIONAL ENVIRONMENT  In a study of national competitive advantage, Michael Porter identified four attributes of a country-specific environment that have an important impact on companies located within that nation: 1)Factors endowment: A nation’s position in factors of production such as skilled labor or the infra- structure necessary to compete in a given industry. 2)Local demand conditions: The nature of home demand for the industry’s product or service. National Competitive Advantage (continued)

5. 8-5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE GLOBAL AND NATIONAL ENVIRONMENT 3)Related and supporting industries: The presence or absence in a nation of supplier industries and related industries that are internationally competitive. 4)Firm strategy, structure, and supporting industries: The conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry. National Competitive Advantage  Porter argues that companies from a given nation are most likely to succeed in industries or strategic groups in which the four attributes are favorable.

6. 8-6 Learning Objective:After reading this chapter, you should be able to discuss the motives for expanding internationally. Learning Objective: After reading this chapter, you should be able to discuss the motives for expanding internationally. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The success of many multinational companies is based: not just on the goods or services that they sell in foreign nations, but also upon the distinctive competencies that underlie production and marketing of those goods or services. INCREASING PROFITABILITY AND PROFIT GROWTH THROUGH GLOBAL EXPANSION

7. 8-7 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The success of many multinational companies is based upon the unique skills that underlie the production and marketing of those goods or services.  Because distinctive competencies are the most valuable aspects of a company's business model, the successful global expansion of manufacturing companies like Toyota and P&G was based on the ability to transfer aspects of the business model and apply it to foreign markets. INCREASING PROFITABILITY AND PROFIT GROWTH THROUGH GLOBAL EXPANSION

8. 8-8 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Location economies are the economic benefits that arise from performing a value creation activity in the optimal location for that activity.  Location economies can have one of two effects: 1)It can lower the costs of value creation, helping the company achieve a low-cost position. 2)It can enable a company to differentiate its product offerings. INCREASING PROFITABILITY AND PROFIT GROWTH THROUGH GLOBAL EXPANSION Realizing Location Economies

9. 8-9 INCREASING PROFITABILITY AND PROFIT GROWTH THROUGH GLOBAL EXPANSION Leveraging the Skills of Global Subsidiaries  Leveraging the skills created within subsidiaries and applying them to other operations with the firm’s global network may create value.  Managers must have the humility to recognize that valuable skills can arise anywhere within the firm’s global network, not just the corporate center.  They must establish an incentive system that encourages local employees to acquire new competencies. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. Learning Objective:After reading this chapter, you should be able to review the different strategies that companies use to compete in the global market place. Learning Objective: After reading this chapter, you should be able to review the different strategies that companies use to compete in the global market place. COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS  Companies that compete in the global marketplace typically face two types of competitive pressures: 1)Pressures for cost reductions. 2)Pressures to be locally responsive. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. 8-11 COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Pressures for Cost Reductions © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  To respond to pressures to lower costs, a firm must try to lower the costs of value creation.  One approach to lowering cost is to outsource certain functions to low-cost foreign suppliers.  Pressures for cost reductions are particularly intense in industries producing commodity-type products where differentiation on nonprice factors is difficult and price is the main competitive weapon.

12. 8-12 COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Pressures for Local Responsiveness  Strong pressures for local responsiveness emerge when customer tastes and preferences differ significantly between countries. When the auto industry tried to make “world cars,” they discovered that consumers in different auto markets had different tastes and preferences. A study showed that in the consumer electronics industry, buyers reacted negatively to an overdose of standardized global products. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

13. 8-13 COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Differences in Infrastructure and Traditional Practices  Pressures for local representativeness may create a need to customize products accordingly. In North America, electrical systems are based on 110 volts, whereas some European countries base their electrical systems on 240 volts. Steering wheels in Britain are on the right side of the dashboard, while they are on the left side in France. Wireless handsets use GSM in Europe and a CDMA network in the United States and parts of Asia. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. 8-14 COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Differences in Distribution Channels  Because of differences in distribution channels among countries, firms may have to delegate marketing functions to national subsidiaries. British and Japanese doctors do not respond favorably to U.S.-style high pressure sales force. Thus, the pharmaceuticals use a soft sell approach in these two countries. In Brazil, supermarkets account for 36% of food retailing, 18% in Poland, and less than 1% in Russia. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. 8-15 CHOOSING A GLOBAL STRATEGY Global Standardization Strategy  Companies that pursue a global standardization strategy focus on pursuing a single low-cost strategy on a global scale.  The production, marketing, and R&D activities of companies pursuing a global strategy are concentrated in a few favorable locations.  Despite being depicted as the “poster child” for standardized global products, even McDonald’s has found it has to customize its menu to account for differences in tastes and preferences. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. 8-16 CHOOSING A GLOBAL STRATEGY Localization Strategy  A localization strategy focuses on increasing profitability by customizing the company’s goods or services so that the goods provide a favorable match to preferences in different national markets.  The downside of this strategy is that it involves some duplication of functions and smaller production runs.  This strategy makes sense if the added value associated with local customization brings higher prices. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. 8-17 CHOOSING A GLOBAL STRATEGY Transnational Strategy  Companies that pursue a transnational strategy are trying to develop a business model that simultaneously: achieves low costs, differentiates the product offering across geographic markets, and fosters a flow of skills between different subsidiaries in the company’s global network of operations. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. 8-18 Learning Objective:After reading this chapter, you should be able to explain the pros and cons of different modes of entering foreign markets. Learning Objective: After reading this chapter, you should be able to explain the pros and cons of different modes of entering foreign markets. CHOOSING AN ENTRY MODE © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exporting X  Most manufacturing companies begin their global expansion as exporters and only later switch to one of the other modes for serving foreign markets.  There are five primary choices of entry mode: exporting, licensing, franchising, setting up a joint venture with a host country, and open a subsidiary.

19. 8-19 Exporting  Exporting has two distinct advantages : 1)It avoids the cost of establishing manufacturing operations in the host country, which are often substantial. 2)It may be consistent with scale economies and local economies. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  By manufacturing the product in a centralized location and then exporting it to other national markets, the company may be able to realize substantial economies of scale from global sales. CHOOSING AN ENTRY MODE

20. 8-20 Exporting  There are also a number of drawbacks to exporting: 1)Exporting from the company’s home base may not be appropriate if there are lower-cost locations for manufacturing the product abroad. 2)High transportation costs can make exporting uneconomical. 3)Tariff barriers or the threat of tariff barriers can make exporting uneconomical. 4)There is no guarantee that a local agent will act in the exporter’s best interest. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CHOOSING AN ENTRY MODE

21. 8-21 The company does not have to bear the development costs and risks associated with opening up a foreign market. Licensing can be very attractive to companies that lack capital to develop operations overseas. Licensing  International licensing is an arrangement whereby a foreign licensee purchases the rights to produce a company’s product in the licensee’s country for a negotiated fee.  The advantages of licensing include: © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CHOOSING AN ENTRY MODE

22. 8-22 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Licensing has three serious drawbacks: 1)It does not give a company the tight control over manufacturing, marketing, and strategic functions in foreign countries that it needs to have in order to realize scale and location economies. 2)Licensing severely restricts a company’s ability to coordinate strategy in use profits from one country to support competitive attacks in another. 3)By licensing its technology, a company can quickly lose control over its technology. Licensing CHOOSING AN ENTRY MODE

23. 8-23 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee but also insists that the franchisee agree to abide by strict rules on how to do business. The advantages of franchising are similar to those of licensing. However, franchising may inhibit the firm’s ability to take profits out of one country to support competitive attacks in another. Franchising CHOOSING AN ENTRY MODE

24. 8-24 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Joint ventures have a number of advantages. 1)A company may feel that it can benefit from a local partner’s knowledge of a host country’s competitive conditions, culture, language, political system, and business system. 2)When the development costs and risk of opening up a foreign market are high, a company might gain by sharing these costs and risks with a local partner.  The disadvantages include giving up control of technology and losing tight control over subsidiaries. Joint Ventures CHOOSING AN ENTRY MODE

25. 8-25  A wholly-owned subsidiary is one in which the parent company owns 100% of the subsidiary’s stock. There are three advantages to this entry mode: 1)It reduces the company’s risk of losing control. 2)It gives a company the kind of tight control over operations in different countries that it needs if it is going to engage in global strategic coordination. 3)It may be the best choice if a company wants to realize location and scale economies. Wholly Owned Subsidiaries CHOOSING AN ENTRY MODE

26. 8-26  On the other hand, there are some disadvantages to using the wholly owned subsidiary entry mode: 1)It is the most costly method of serving a foreign market. 2)The parent must bear all the costs and risks of setting up overseas. 3)There are problems in trying to “marry” divergent corporate cultures, and these problems may more than offset the benefits. CHOOSING AN ENTRY MODE Wholly Owned Subsidiaries