Chapter

Eight
Strategy
in the Global
Environment

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:

1. Industries are becoming global in scope

Industry boundaries no longer stop at national borders.

2. Shift from national to global markets

This has intensified competition in industry after industry.

3. Steady decline in barriers to cross-border

trade and investment

This has opened up many once protected markets to

companies based outside of them.

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 firms global network

Must also consider transportation costs, trade

barriers, as well as the political and economic risks.

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

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

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.

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 companys 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

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.

Basic Entry Decisions

1. 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

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 entry

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 companys strategy:

1. Exporting
Most manufacturing companies begin their global expansion as
exporters and later switch to one of the other modes.

2. Licensing

A foreign licensee buys the rights to produce a companys product for

a negotiated fee; licensee puts up most of the overseas capital.

3. 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.

4. Joint Ventures

Typically a 50/50 venture a favored mode for entering a new market

5. Wholly-Owned Subsidiaries

Parent company owns 100% of subsidiarys stock setup or acquire

Advantages and Disadvantages

of Different Entry Modes
Table 8.1

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 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
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.

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.

Making Strategic Alliances Work

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

1. 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

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

Successful partners view the alliance as an opportunity to

learn rather than purely as a cost- or risk-sharing device.

Structuring Alliances
to Reduce Opportunism
Opportunism includes
the expropriation of
technology or markets

Figure 8.5