8 Strategy in Global Environment

7/28/2019 8 Strategy in Global Environment

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Strategy in the Global Environment


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- Carl von Clausewitz


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The trend toward globalization has many implications:

1. Industries are becoming global in scope Industryboundaries no longer stop at national borders.

2. Shift from national to global marketsThishas intensified competition in industry after

industry.3. Steady decline in barriers to cross-border trade

and investment This hasopened up many once protected markets to companiesbased outside of them.

International expansion represents a way of earninggreater returns by transferring the skills and productofferings derived from distinctive competencies tomarkets where indigenous competitors lack these skills.


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Copyright Houghton MifflinCompany. All rights reserved.

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Figure 8.1

Source: Adapted from M.E. Porter, The Competitive Advantage

of Nations, Harvard Business Review, March-April, 1990, p. 77.

Porters diamond:1. Companies from a given

nation are most likely tosucceed in industries inwhich the four attributesare favorable.

2. The attributes form amutually reinforcingsystem in which theaffect of one attribute isdependent on the stateof the others.

Helps managers to: Identify globalcompetitors

Locate global resources Assess how tough it is to

enter certain nationalmarkets


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The attributes of Porters diamond:

1. 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

2. 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 closestcustomers.

3. Competitiveness of Related and SupportingIndustries The spill-over benefits from investments by supporting industries

4. 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 industryCopyright Houghton MifflinCompany. All rights reserved.

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Expanding the market by leveraging products Taking goods or services developed at home and selling them

internationally

Utilizing the distinctive competencies that underliethe 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 firms global network

Must also consider transportation costs, trade

barriers, as well as the political and economic risks.


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Figure 8.2

The best strategy for acompany to pursue may

depend on the kinds ofpressures it must copewith:

Cost Reductions or

Local Responsiveness


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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 environmentCopyright Houghton MifflinCompany. All rights reserved.

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Pressures for cost reductions are greatest inindustries producing commodity-type productswhere price is the main competitive weapon:


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Differences in customertastes and preferences

Differences in

infrastructure andtraditional practices

Differences indistribution channels

Host governmentdemands


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The greatest pressures for local responsivenessarise from:

Dealing with these contradictory pressures is adifficult strategic challenge, primarily becausebeing locally responsive tends to raise costs.


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Figure 8.3

Companies typicallychoose among thefour main globalstrategic postures

when competinginternationally.

The appropriatenessof each strategyvaries with the extentof pressures for costreduction versuslocal responsiveness.


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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 scaleMakes the most sense when there are strong pressures for

cost reduction and the demand for local responsiveness isminimal

Localization Strategy

Customizing the companys goods or services so thatthy provide a good match to tastes and preferences indifferent national marketsMost appropriate when there are substantial differences

across nations with regard to consumer tastes andpreferences and where cost pressures are not too intense


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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 atransnational strategy is a complex and challenging task.

International Strategy Multinational companies that sell products that serve

universal needs (minimal need to differentiate) and donot face significant competitors (low cost pressure).

In most international companies the head office retains tight

control over marketing and product strategy.Copyright Houghton MifflinCompany. All rights reserved.8 |13


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Figure 8.4

Over time, competitors inevitablyemerge. Companies that do nottake steps to reduce their coststructure may be outflanked byefficient global competitors.

As competition intensifies,companies need to orientatetoward either a StandardGlobalization or a Transnational

strategy.


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1. Which overseas markets to enter Assessment of long-run profit potential

A function of the size of the market, purchasing power ofconsumers, 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

2. Timing of entry First-mover advantages: preempt and build share First-mover disadvantages: pioneering costs

3. 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 entryCopyright Houghton MifflinCompany. All rights reserved. 8 |15


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1. ExportingMost manufacturing companies begin their global expansion as

exporters and later switch to one of the other modes.

2. LicensingA foreign licensee buys the rights to produce a companys productfor a negotiated fee; licensee puts up most of the overseas capital.

3. FranchisingFranchising is a specialized form of licensing. The franchiser not

only sells intangible property, but also insists that franchisee agreesto follow strict rules as to how it does business.

4. Joint VenturesTypically a 50/50 venture a favored mode for entering a new

market

5. Wholly-Owned SubsidiariesParent company owns 100% of subsidiarys stock setup or acquire


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When and how to enter a new national market raise thequestion of how to determine the best mode or vehicle forentry. The optimal one depends on the companys strategy:


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Table 8.1


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Distinctive Competencies and Entry ModeTo earn greater returns from differentiated products or where competitorslack comparable products, the optimal mode of entry depends on thenature of the companys 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 lowof losing management know-how.

Pressures for Cost Reduction and Entry ModeThe 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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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


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Global Strategic Alliancesare cooperative agreements betweencompanies from different countries that are actual or potentialcompetitors. They range from short-term contractual cooperativearrangements to formal joint ventures with equity participation.

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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The failure rate for international strategic alliances is quitehigh. Success seems to be a function of three main factors:

Successful partners view the alliance as an opportunity tolearn rather than purely as a cost- or risk-sharing device.

1. Partner selectionA good partner: Helps the company achieve strategic goals Shares the firms vision for the purpose of the alliance

Is unlikely to try to exploit the alliance to its own ends Conduct research on potential partners

2. Alliance structure Risk of giving too much away is at an acceptable level Guard against opportunism by partner in alliance agreement

3. Manner in which alliance is managed Sensitivity to cultural differences Build relationship capital through interpersonal relationships


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Figure 8.5Opportunism includesthe expropriation of

technology or markets

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