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Strategy in the Global Environment

Related Concepts/Theories
Theory of comparative advantage a country is ahead, and all other countrys benefit, if
A country produces a product where it has comparative advantage, i.e. cost of production. Uses the revenues to purchase other products

Tariff and non-tariff barriers

Tariffs are levied on incoming products Non-tariff barriers can come in many forms, with the intent of protecting local production
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The world is flat . . . (Friedman)

Three converging developments
A global, Web-enabled playing field that allows multiple forms of collaboration Gradual adaptation of organizations through horizontal collaboration in the value creation process Opening of economies like China, India, Russia, and in Eastern Europe, Latin America, and Central Asia to the world economy 3 billion people
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Going International, Global

Initial strategies to do business outside ones borders Strategies for firms with on-going overseas business

Basic Entry Decisions

Which overseas markets to enter
Psychological closeness 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 associated with doing business in a country
A function of economic development and political stability
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Basic Entry Decisions (contd)

Timing of entry
First-mover advantages First-mover disadvantages

Scale of entry and strategic commitments

Entering on a large scale is a strategic commitment, both positive and negative Benefits and drawbacks of small-scale entry

Process of Expansion
Expansion outside the comfort of ones country is a gradual process
Exports Licensing or franchising Joint-venture Wholly-owned Subsidiary

The Advantages and Disadvantages of Different Entry Modes

Choosing Among Entry Modes

Distinctive competencies and entry mode
Technological competency
Wholly-owned subsidiary is preferred over licensing and joint ventures

Management competency
Franchising, joint ventures, subsidiaries

Pressures for cost reduction in entry mode

Great pressure for cost reductions
Exporting and wholly-owned subsidiaries
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Global Strategic Alliances

Advantages
Facilitate entry into a foreign market Share fixed costs and associated risks Bring together complementary skills and assets Set technological standards to the industry

Disadvantages
Give competitors a low-cost route to gain new technology and market access
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Making Strategic Alliances Work: Partner Selection

A 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

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Structuring Alliances to Reduce Opportunism

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Making Strategic Alliances Work: Managing the Alliance

Sensitivity to cultural differences and their effects on management style Building interpersonal relationships among managers from different companies Ability to learn from alliance partners and put the knowledge to good use

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Increasing Profitability Through Global Expansion

Location economies
Economic benefits from performing a value creation activity in the optimal location Effects
Can lower costs Can enable differentiation

Caveats
Transportation costs and trade barriers Political and economic risks
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Increasing Profitability Through Global Expansion (contd)

The experience curve
Serving a global market from one or a few plants is consistent with moving down the experience curve and establishing a low-cost position

Transferring distinctive competencies

Companies with distinctive competencies can realize large returns by expanding to global markets where competitors lack similar competencies and products
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Increasing Profitability Through Global Expansion (contd)

Leveraging the skills of global subsidiaries
Competencies can be created anywhere within a multinationals global network of operations Managers must establish an incentive system to encourage local employees to acquire new competencies Managers must have processes in place to identify valuable new competencies and help transfer them within the company
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Global strategy factors to consider

Pressures for cost reductions Pressures for local responsiveness

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Pressures for Cost Reductions

When companies produce commodity products Where differentiation on nonprice factors is difficult and price is the main competitive weapon Where competitors are based in low-cost locations Where there is persistent excess capacity Where consumers are powerful and face low switching costs The liberalization of the world trade and investment environment

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Pressures for Local Responsiveness

Differences in customer tastes and preferences Differences in infrastructure and traditional practices Differences in distribution channels Host government demands

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Four Basic Strategies

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Choosing a Global Strategy

International strategy
Creating value by transferring competencies and products to foreign markets where indigenous competitors lack those competencies and products Makes sense if a company has a valuable competence that indigenous competitors in foreign markets lack and if it faces weak pressure for local responsiveness and cost reductions
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Choosing a Global Strategy (contd)

Multidomestic strategy
Developing a business model that allows a company to achieve maximum local responsiveness Makes sense when there are high pressures for local responsiveness and low pressures for cost reductions Companies may become too decentralized and lose the ability to transfer skills and products
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Choosing a Global Strategy (contd)

Global strategy
Focusing on increasing profitability by reaping cost reductions that come from experience curve effects and location economies; pursuing a lowcost strategy on a global scale Makes sense when there are strong pressures for cost reductions and demand for local responsiveness is minimal

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Choosing a Global Strategy (contd)

Transnational strategy
Simultaneously seeking to lower costs, be locally responsive, and transfer competencies in a way consistent with global learning

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Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar

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Advantages and Disadvantages of Different Strategies for Competing Globally

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Exercise
What global strategy did MTV (Opening case Ch 8) pursue? Why did it not work and to what strategy did they change? Do the same for IKEA (Strategy in Action 8.3)? What do each of these situations impose on specific functional strategies?

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Exercise
What global strategy did Airborne pursue? What entry strategies did they implement? What was(were) the major reason(s) for these choices?

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