Competitive strategies: Global vs. local

© Professor Daniel F. Spulber

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Global competitive strategiesThe G5

Platform strategy Network Strategy Intermediary strategy Entrepreneur strategy Investment strategy

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• Home, supplier, partner, and customer countries of competitors – differences as sources of competitive advantage

• Differences in global value connection• Differences in products, brand, technology• Differences in impacts of political, legal and

regulatory climate – trade agreements, home country policies

Design global competitive strategies for competitive advantage

Global competitive strategies

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Global competitive strategiesCompetitive advantage must be relative to

both global and local competitors:

Unilever in US: Breyers, Ben and Jerry’s, Good Humor, Klondike, Popsicle

Nestlé in US: Dreyers

The great ice cream battle

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• Gujarat Cooperative Milk Marketing Federation (GCMMF): India's largest food products marketing organization.

• Two million farmers in the cooperative• Slogan: “A taste of India”• PRICE: 10 rupees (20 cents): 100 milliliter Amul ice cream

versus80 milliliter Hindustan Lever Kwality Wall vanilla ice cream

• ADVERTISING COSTS: Amul: 1% of sales versusHindustan Lever: 10-15% of sales on advertising

UNILEVER in India – Kwality WallHindustan Lever faces successful local competitor

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Umbrella brands:Nestlé products in the super-market.Some products carry both global brand and local brand.

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Global platform strategy

The global challenge

Global market size: standardization

Local differentiation: customization

Strategy: Determine best combination of global and local activities for competitive advantage

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Forces calling for global products (standardization):• Convergence in customer preferences and income

across target countries with economic development and trade

• Competition from successful global products• International brand awareness• Cost benefits from standardization• Falling costs of trade with greater globalization

Global platform strategy

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Forces calling for local products (customization):• Differences in customer preferences and income

across target countries• Build local brand recognition• Competition from successful domestic products• Regulatory requirements (quality, safety, technical

specifications, domestic content) -- EU product standards

• High costs of trade create separate markets

Global platform strategy

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Global platform strategy

Reduces development and production costs Used in automobiles, mobile phones, computers,

aircraftExample: Cost per product (development and mfg):

$80Cost of basic platform development: $100Cost of each variation (development and production):

$50Use platform when serving four or more customer

country markets: Compare costs of serving four markets:

Distinct products: 4 x $80 = $320Platform and 4 variations $100 + 4 x $50 = $300 ***

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Business sells 10 units each in Country A and in Country F

• Unit costs – economies of scale Two local products at 10 units each $ 30/unit

Global product at 20 units $ 20/unit• Price company can charge per unit:

Global product: $80/unit in each country Two local products: $95/unit in each country Global versus regional product:Tailoring brings $ 5 more earnings per unit Profit greater by $ 100

Improve tradeoff with platforms and flexible factories to realize economies of scope (mass customization)

Global platform strategyProduct variety versus economies of scale

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Global platform strategy

International business managers make decisions about what should be global versus local:

• Products• Technology and inputs • Manufacturing • Brands• Marketing• DistributionExample: Wal-Mart must compete with both international

players such as Carrefour and local retailers

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Global platform strategy Local brand positioning of a

global brand and global product • Corona sells the same beer, produced

in 8 plants in Mexico, all over the world• Advertising adapts to target countries:

begins as a working class beer in Mexico, becomes a high quality import in most other countries.

• Marketing adapts to local markets• Corona coordinates internationally

through its subsidiaries

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Global platform strategy

• Most products are local and not branded. For example: in food sector Nestle estimates that only 1 % of all goods in food markets are branded

• Increasing number of international brands, Corona, Nestlé, Sony

• Increasing brand variations: BMW 3-series (1990s): More than 1 million varieties can be ordered

• Local distribution and marketingExample: McDonald’s, Coca-Cola: Global brand, some local product tailoring, reliance on local distribution

• Local technology, production, customer serviceAcer computer company

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Global network strategy

• Create network of customers, suppliers, partners

• Use network to achieve global size and reach

• Use network to provide local customization

• Network relationships generate competitive advantage

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The international business contributes value by creating an international network: Recall Li & Fung

Networks can consist of informal business relationships or more formal contractual relationships

Networks facilitate coordination of sourcing and serving

Network replaces n ∙ m links withm + n links (hub and spoke network)

BuyersSellers

12 links

7 links

Global network strategy

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Global network strategyPhysical networks:• Communications: Wired and mobile telephone systems• Internet • Transportation: Railroads, Airlines, Shipping,

Intermodal systems• Energy: Oil and natural gas pipelines, Electric power

transmission and distribution • Logistics: Postal systems, Wholesale and retail

distributionBusiness networks:

Manufacturing, services, distribution, technology, social networks (trust and information sharing)

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Global network strategy: The global factory

• Hong Kong manufacturers own or contract with more than 40,000 factories in South China employing four million workers

• To take advantage of specialized sources in different countries - best quality

• To take advantage of cost variations across countries - least cost sources

• To take advantage of location - minimize transport-costs, transaction costs, and tariffs

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• Examples: Dairy Farm, Shell, Zara• Growth: access to additional

customers• Develop global brands• Coordination economies from

centralized regional warehouses and production facilities

• Provide access to sourcing network – Enhances value of supplier contacts by expansion of distribution

• Lower transaction costs for suppliers who deal with fewer distributors

• Lower risk from pooling demand fluctuations

Global network strategy: The global store

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Global network strategy

• Network effects: Number of members can affect the value of most of existing links

• Architecture: Structure of the network affects costs and performance (hub-and-spoke versus point-to-point)

• Companies should capture the value created by their network organizing activities

• Networks are mechanisms for delivering all kinds of services, such as entertainment and information, rather than physical products.

“Access is becoming a potent conceptual tool for rethinking our world view as well as our economic view, making it the single most powerful metaphor of the coming age.” Jeremy Rivkin The Age of Access

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Global network strategyPartner networks

• Achieve global scale• Members focus on their region• Reduce competition by avoiding duplication of

facilities and operations• Avoid government restrictions on ownership

and market dominance• Technology standard setting• Complements in production• Complements in demand (game players and games)

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Global network strategyPartner networks: Global reach

British Airways / American Airlines• Provide 60% of all transatlantic services• "Alliance that Revolves Around You" • ONEWORLD members: Iberia, Cathay Pacific,

Quantas, Finnair, Aer Lingus, Lan Airlines (Chile) • The airlines cooperate on scheduling and ticketing,

frequent flyer programs, airport clubs, baggage handling, customer service

• Competitive response to the STAR ALLIANCE from United, Lufthansa, SAS, Air Canada and Thai Airways (210,000 Employees, flights to 578 cities in 106 countries)

• 600 destinations in 135 countries around the world, operating over 8000 flights daily, 230 million passengers/year

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Global network strategyPartner networks: Technology standards

Mobile phone operating system: Owners

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Global network strategyPartner networks: Technology standards

Mobile phone operating system: Licensees

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Global network strategyPartner networks: Technology standards

• Software licensing company• Open- standard operating system • First open Symbian OS phone (in 2001): Nokia 9210 Communicator• About 85% market share• Standard-setting network

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Global network strategyFranchise networks

Advantages• Rapid international growth• Local ownership• Local management• Lower capital outlays

Disadvantages• Search cost of finding franchise

owners overseas• Costs of monitoring performance

across borders• Transaction costs of forming franchise

contracts in other country remains

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MatchmakerBrings buyers and sellers together across international borders

Market makerCreates and operates markets that cross international borders

AgentProvide representation in other countries

Global intermediary strategy

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Global intermediary strategyMatchmaker

• Bridge international differences in goods and services, business practices, law and regulations, currencies, languages, time zones

• Provide value-added activities• Representative agents in sales, distribution, purchasing,

financing, contracting, and supply chain managers• Match offers to buyer and seller needs: product features,

location, time.• Avoids costs of search for buyers and sellers• Reduces buyer and seller risks from dealing with few

trading partners,

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Global intermediary strategyMatchmaker

• Language: Seller speaks Chinese, buyer speaks Spanish, intermediary speaks both

• Currency: Seller wants pesos, buyer has dollars, intermediary changes dollars to pesos

• Distance: Seller is in Thailand, buyer is in Brazil, intermediary arranges transportation

• Trust: Buyer and seller both trust the intermediary without having dealt directly with each other

• Time: Seller is in Japan, buyer is in Mexico, intermediary operates in both time zones

• Knowledge: Seller in Germany knows production technology, buyer in US knows preferences of US customers, intermediary combines knowledge of supply and demand across borders

• Culture: Seller and buyer are in different countries, intermediary adapts products, services, contract terms and negotiation to diverse social customs

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Mitsui

“Our first core competence is facilitating international trade with innovative services tailored to client needs”

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Mitsui

“Our second core competence is working with our global clientele to create new trade flows and new business”

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Mitsui

“Distributor of goods and services;

Transfer agent for technology;

Financier, Investor; Project organizer; Market developer; Resource developer; Well-informed

consultant and business partner.”

Mitsui

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Mitsui is in top 15 of Fortune Global 500

http://www.mitsui.co.jp/tkabz/english/corp/index.htm

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Global intermediary strategyBeating bypass competition

TradeCountry H

Transaction cost T

ServeCountry A

SourceCountry B

Bypass competitionTransaction cost T*

Transaction strategy offers innovative transactions Your costs of trade T must be less than competitor costs of trade T*

Example:Li & Fung

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Global intermediary strategyMarket maker

• Cemex

• Mittal

• Cargill

• BP Amoco

• eBay

The global market maker aggregates demand across countries and aggregates supply across countries

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Ingram Micro: the leading international wholesaler of technology products and services

• Wholesales 280,000 computer hardware and software products – think of number of prices!

• Sources in US and many other countries from 1,700 manufacturers

• Serves 175,000 resellers in more than 100 countries• Serves through operations and affiliates in 35 countries• Establishes prices, coordinates sales and purchases, clears the

market, allocates products

Global intermediary strategyMarket maker

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Global intermediary strategyMarket maker

• Creates and operates international markets• Chooses prices, conveys information• Adjusts sourcing and serving to clear markets – avoids

efficiency losses from market imbalances• Provides immediacy: ready to buy and sell• Allocates goods and services across countries• Gathers and aggregates information about customers and

suppliers on an international level, inventories, orders, and production

• Applies IT to international coordination• Earns returns from international risk pooling

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Global intermediary strategyAgents

• Export Marketing Company (EMC) represents sellers, can be broker or dealer, bears risks, arranges resale, transportation, credit

• Export Trading Company (ETC) represents buyers, handles imports, usually takes title to goods

• Act as international agent: provide expertise in negotiation, market knowledge

• Provide trust to buyers and sellers• Allows principal to delegate authority for distant

transactions• Provides market expertise, often to smaller firms

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Global intermediary strategyMore agents

• Piggyback arrangements: e.g. Sony distributes in Japan for Whirlpool; GE Trading Co. distributes for other US manufacturers in Africa and Latin America

• General Trading Companies: In Japan, there are Sogo Shosha (large scale) and Senmon Shosha (smaller scale) trading companies. Similar companies exist in Europe, South Korea, Taiwan, Singapore and Hong Kong

• Government Procurement Agencies, e.g. China Central Trade Offices

• Distributor/Importer (jobbers, dealers, wholesalers)• Direct sales (representatives that work on

commission)• Overseas retailers, wholesalers

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Global entrepreneur strategy

• Bring buyers and sellers together in new combinations• Provide new products to new customer countries• Arrange new production and procurement in supplier

countries• Introduce innovative transaction methods across borders

– Citigroup financial services, Google, eBay• Apply innovative technologies and business methods• Create new business firms in other countries• New inter-country connections!

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Global entrepreneur strategyMicro creditIn 1974, Yunus, a Bangladeshi economist

from Chittagong University, led his students on a field trip to a poor village. They interviewed a woman who made bamboo stools, and learnt that she had to borrow the equivalent of 15p to buy raw bamboo for each stool made. After repaying the middleman, sometimes at rates as high as 10% a week, she was left with a penny profit margin.

1983: Yunus founds Grameen BankIn Bangladesh today, Grameen Bank has

1,084 branches, with 12,500 staff serving 2.1 million borrowers in 37,000 villages.

www.grameen.com

Muhammad Yunus of Bangladesh and the Grameen Bank jointly awarded the 2006 Nobel Peace Prize.

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Summary and take-away points

• Coordination of competitive actions across borders key to gaining global competitive advantage

• Achieve standardization and customization

• Advantage over global and local competitors

• Many more strategies possible…

Investment strategy next time