CHAPTER

Global Strategy
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Foreign Entry
When a firm enters a foreign market, it is more optimal to transfer its existing home-country advantages/resources to the target country rather than develop required advantages in the target country from scratch.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Reason
Foreign firms face all the disadvantages of being foreign; they must confront all the advantages that native players enjoy from being in their home territory.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

They face numerous risks

Economic risks--changes in exchange rates. Political risks--changes in policy actions of governments, wars, civil disorders, etc. Business risks--competitors actions and responses, changes in consumers choices, etc. Resource risks--changes in requirement of firm resources.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Global Factors Influencing Business Strategy

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Factors

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Factors
Key factors influencing global business strategy can be summarised under the PEST heading: Political Economic Social Technological
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Political
Political Change regime change through coup, violence, etc. Change in government through democratic election can influence future business strategy. e.g. the opportunities that are now available in Russia and Eastern Europe following the collapse of communism Political Uncertainty in countries like Zimbabwe, Sudan, Venezuela. Political uncertainty can lead to a fall in investment by businesses and influence decisions on expansion and business ventures War/Terrorism create uncertainty Political Doctrine can affect the ease with which business is conducted
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Economic
All these factors need to be considered in any global business venture:
Tax Systems Investment Considerations and Allowances Sophistication of Financial Markets ease with which capital can be moved and raised Commodity Prices oil, energy, metals Monetary and Fiscal Policies interest rates, tax regimes, government aid Internal Regulation and Bureaucracy can be stifling! Exchange Rates

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Social
Religious Considerations appropriateness of some business ventures Impact on local communities of business development availability of jobs, training, environmental impact for these communities Impact on the environment can impact on the businesses image Ethical considerations Cultural issues
2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

The impact on the local environment not only affects human communities but can also inflict widespread ecological damage. This imposes social costs on the environment but also can cost the business large sums in legal costs and compensation.
Copyright: Photolibrary Group

McGraw-Hill/Irwin

Technological
Availability and developments in technology can have a powerful influence on global business strategy: e.g. Access to bandwidth PC ownership Technology and sales processing payments and sales Compatibility of technologies in Business Management accounting systems, language differences, etc. 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin

Basis for Going Overseas

A firm goes abroad to make more profits by exploiting its key resources: technology brand name management capability

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Benefits of Going Abroad

A multinational firm is exposed to diverse environments. The diversity provides them with learning opportunity Example: P&G developed special surfactants in Japan because consumers there wash their clothes in cold water. It developed a special capability in water softening because water in Europe contains more minerals. It developed technology to suspend dirt in wash water in the U.S. because consumers demand removal of dirt from clothes.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Global Strategy
Global strategy is one in which a firm competes in different national markets by leveraging its competitive or resource position in other national markets to gain highest efficiency company-wide.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Efficiency Perspective
Efficiency =

Value of outputs -------------------Value of inputs

- enhance value of outputs - minimize costs of inputs - reduce cost of processing

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Potential for Cost reduction comes from:

Factor costs
(Potential of reducing costs of inputs by acquiring them in different markets)

Scale economies
(Potential of reducing costs with large-scale production necessary to serve multiple markets)

Scope Economies
(Potential of sharing of costs across markets)
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Input
Different countries have different factor endowments. This leads to differences in factor costs. Different tasks require different factors. Thus, each activity can be located in the country where the relevant factors are available at lowest cost.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Scale economy
Firms must increase output to achieve scale benefits.
In the late 70s, the minimum efficient scale required for production of small cars was 400,000 units. No U.S. company produced more than 200,000 units, while Toyota produced 500,000 Corollas.

Learning leads to progressive cost reduction. Firms must achieve higher market share worldwide and be the first to reach there.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Caveats of Scale
Scale efficiencies are obtained through increased specialization and through creation of dedicated assets and systems. This can cause inflexibility and limit the firms ability to cope with change. Need to balance scale and flexibility through flexible manufacturing and administrative systems.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Scope Economy
Firms have to incur expenditures on similar activities in different countries. Some of these activities can be combined to reduce costs. For example: Cost of the joint production of two or more products can be less than the cost of producing them separately.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Examples of Scope Economies

Product Diversification
Shared Physical Asset

Market Diversification

Flexibility to produce multiple products Toyota, Ford

Use common distribution channels for multiple products Matsushita Share R&D across multiple products

Global brand names

Coca Cola

Shared External Relations

Servicing multinational customers world-wide Citigroup

Pooling knowledge from different markets P&G

Shared Learning

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Caveats of Scope Economies

Certain parts of a companys businesses may be inherently very different from others, and may not offer scope economies. For example: In the soft drink industry, skills required for bottling and distribution are very different from the task of creating brand name image. There cannot be cost savings from jointly operating the two businesses.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Perspectives on global strategy?

Levitt (1983): Effective global strategy is not a bag of many tricks but the successful practice of just one: product standardization. The core of a global strategy lies in developing a standardized product to be produced and sold the same way throughout the world. Basically, exploit economies of scale.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Hout et al (1982):
Effective global strategy requires the approach not of a hedgehog, who knows only one trick, but that of a fox, who knows many. Exploit economies of scale through global volume, take preemptive positions through quick and large investments, and manage inter-dependently to achieve synergies across different activities.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Hamel and Prahalad (1985):

Effective global strategy requires a broad product portfolio so that investments on technologies and distribution channels can be shared. Cross-subsidization across products and markets and a strong world-wide distribution system are most important.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Kogut (1985):
Effective global strategy requires that a firm be like a nimble-footed athlete who wins through flexibility and arbitrage. Source from multiple suppliers, shift production to benefit from changing factor costs and exchange rates, and arbitrage to exploit imperfections in financial and information markets.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Global Strategy boils down to:

Centralization (as opposed to decentralization or local autonomy). Integration (as opposed to national differentiation) Global (as opposed to multinational, multidomestic, or local responsiveness).
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Arguments against Global Strategy

Consumer tastes and preferences, distribution systems, government regulations vary among countries. A firm can tailor its offerings to fit the unique requirements in each national market. Firm can benefit by creating integrated and autonomous national subsidiaries which can exploit strong links with local stakeholders to defend against more efficient global firms.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Much depends upon the topmanagement teams attitude

There are three kinds of attitudes: Geocentric (think global) Polycentric (think local) Ethnocentric (think home)
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Product Characteristics
Among the different industries, one industry (such as consumer electronics) may be characterized by low differentiation benefits and high integration advantages, while another (such as packaged foods) may be quite the opposite.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Firm Choice
Within an industry, the strategy of one firm (such as Toyota) may be based on exploiting the advantages of global integration through centralized production and decision making, while that of another (such as Fiat) may aim at exploiting the benefits of national differences.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Functional Level
Within a firm, research may offer greater efficiency benefits of integration, while sales and service may provide greater differentiation advantages.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Integration-Responsiveness
I n Industry Company Function Task t Hi e Cosnumer Telecoms Toyota Research Product Pricing Electronics Policy Manufacturing g Autos r Marketing Ford Advertising a Packaged Procurement Financing Cement Food t Service Fiat Promotion Lo i Lo Hi Lo Hi Lo Hi Lo Hi o National Differentiation or Responsiveness n
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Problems of Centralization
By emphasizing the importance of rationalizing the flow of components and final products within a global system, the importance of internal flows of people, technology, information, and values has been deemphasized.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

The main problem.

Global strategy shifts organizational power from subsidiaries to the headquarters. Subsidiaries are simply deliverers of products and programs designed by the center. The center becomes insensitive to knowledge accumulated by subsidiary managers. Subsidiary managers become demotivated. They resist learning from different countries.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Slide 10-3

Global Expansion Benefits

Earn greater return from distinctive skills, core competences
inimitable or difficult to imitate skills in value chain

Realize location economies (choice of FDI location)

create multinational network of activities (global web)

Realize greater experience curve economies, which reduce the cost of value creation
learning effects, economies of scale
Unit costs B A Experience curve

Accumulated output

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Slide 10-4

Pressures for

Global Integration & Local Responsiveness

High Global Integration Cost Reduction Pressures Low Low Ball bearings, wheat

Cosmetics, food, household goods Local Responsiveness Pressures High Country Differences in - consumer tastes/preferences - infrastructure/practices - distribution channels - host government needs

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Slide 10-5

Strategic Choice
High Global Strategy Transnational Strategy Cost Reduction (Global Integration) Pressures International Strategy Low Low Local Responsiveness Pressures Multidomestic Strategy

High

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Slide 10-6

Multidomestic MNC
From: Bartlett and Ghoshal, Managing across borders, 1989

HK UK USA Japan Mexico India Chile

Decentralized Federation - Many key assets, responsibilities and decisions localized Personal Control - Informal HQ-Sub relationship, simple financial controls Multidomestic Mentality - Management sees overseas operations as portfolio of independent businesses Rights Reserved. McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All

Slide 10-7

International MNC
HK UK USA Japan Mexico Coordinated Federation - Many key assets, responsibilities and decisions localized Administrative Control - Centralized HQ control, formal planning and control, tight HQ-Sub linkage International Mentality - Management sees overseas operations as appendages to a domestic operation
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. From: Bartlett and Ghoshal, Managing across borders, 1989

Chile

India

Slide 10-8

Global MNC
HK UK USA Japan Mexico Centralized Hub - Most strategic assets, resources, responsibilities and decisions centralized Operational Control - Tight HQ control of decisions, resources, information Global Mentality - Management sees overseas operations as delivery pipelines to a unified global market
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. From: Bartlett and Ghoshal, Managing across borders, 1989

Chile

India

Slide 10-9

Transnational MNC
UK

From: Bartlett and Ghoshal, Managing across borders, 1989

HK Chile

India

Japan Mexico

USA

Networked Organization - Distributed, specialized resources and capabilities Interdependent Units - large flows of components, products, resources, people, and information Transnational Mentality - Complex process of coordination and cooperation in an environment of shared decision making
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Global Marketing Strategy

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Market Entry Decisions

1. How many resources and what investment are necessary to enter the market? 2. To what extent can the manufacturer control corporate activities in the foreign market? 3. How much knowledge can the manufacturer gain about the foreign market by this market entry alternative? (Keegan, 2001).

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Exporting
The marketing and direct sales of a domestically made product in a foreign country Does not require foreign investment in production facilities

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Advantages of Exporting
Manufacturing is home-based Opportunity to learn overseas markets before investing in bricks and mortar Speed of entry because of its use of existing facilities Cost effective

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Disadvantages of Exporting
At the"mercy" of overseas agents and so the exporter has a lack of control Limited information on the local market Viewed as an outsider to the local country Logistics Problems with servicing exports Legal issues

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Types of Exporting
Indirect
local intermediary knows the foreign market conditions

Direct
gives the company a greater degree of control over its distribution channels

Piggybacking
already modes of transport and distribution facilities set up and the newly exporting company chooses to use them
McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Franchising
Franchising - derived from the French Word meaning to be free from servitude. Franchise agreement more comprehensive than regular licensing agreement. Contractual agreement between a franchisor and a franchisee. Basic product sold is well-recognized brand name.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Franchising
Franchiser provides support services to franchisee. - Training manuals for employees - help with product lines - production scheduling - accounting manuals - assistance with franchising
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

International Expansion of franchising

Objective is to search for environment that promotes cooperation and reduces conflict. Internet has had profound impact on the industry and helped fuel its recent growth. United States is home to greatest number of franchisers. franchising development begins as response to perceived local opportunity

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Two Major Types of Franchising

Product and Trade Name Franchise - suppliers make contracts with dealers to buy or sell products or product lines Business Format Package Franchising - occurs when franchisor licences a business format, operating system and trademark/brand name, to the franchisee.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Joint ventures
A joint venture is a partnership of two or more participating companies that have joined forces to create a separate legal entity (Cateora & Graham, 2002). There are a number of issues associated with JVs including : - They are established, separate, legal entities. - A joint venture acknowledges the intent of the partners to share in the management of the joint ventures. - These partnerships are made between legally incorporated entities like companies; not with individuals and each party must have invested to some extent in the venture

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Reasons for entering into a joint venture

Both companies can share the risk with a new venture. The joint venture company may bring new skills, core competencies, production methods and key contacts to the international firm. Joint ventures allow firms to combine different value chain strengths with regard to marketing capability or production processes (Keegan, 1999). Joint ventures also provide access to more financial resources allowing companies to gain greater economies of scale and reduce unit cost of production in effect increasing profitability and become more competitive

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Disadvantages of Joint Ventures

Both companies must recognise the need to establish guidelines and procedures for dealing with problems which may arise in a joint venture. Such problems include issues in relation to the protection of the venture from parent companys interference. The issue of the ownership structure is a very sensitive one as companies become anxious that they may lose control to the parent company.

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Disadvantages of Joint Ventures (Cont.)

Companies must also share the rewards in a joint venture placing greater emphasis on financial investment and dividends. Other disputes occur over what product lines to introduce, sourcing of raw materials and key components and on what technology to use (Miller et al. 1996).
Consider cultural differences and political systems in the local environment.
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Types of Joint Venture

Complementary Technology Ventures
Market Technology Venture
Two companies combine technologies to diversify existing product/market portfolio

Combination of market knowledge of one company with the production knowledge of the other company

Sales Joint Venture

Producer and local company agree to an agreement, which is a mixture of an independent representation and own branch

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Types of Joint Venture

Concentration Joint Venture
Competing companies join to form larger and more economical units

Research and development Joint venture

Companies try to create synergies by making use of research facilities and combining knowledge

Supply Joint Venture

Competitors with similar needs cooperate to protect supplies and prevent new competitors from entering into the market

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Strategic Alliances
Explained:
Complementary resources Competitors /different countries Nations together Overcome weaknesses & strengths Combine value chain activities -> purpose Comp adv.
2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin

Strategic Alliances
Nature: Parties remain independent to alliance Share benefits and control Tech swaps, R&D exchanges, marketing relationships Importance: Globalisation & knowledge in business Knowledge compared to traditional economic forces Knowledge driven society => most basic econ resource Speed of knowledge transfer and communication

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Strategic Alliances
Rationale
Insufficient resources Pace of innovation & market diffusion High costs of R&D Concentration of firms in mature industries Government cooperation Self protection Access to difficult markets / speedy access /reduce risk Enable local adaptation Improve operations, facilities, processes Access to new tech/capabilities/knowledge
2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin

Slide 10-11

Making alliances work Which partner?

A suitable partner
Helps achieve strategic goals; brings needed, valuable capabilities Shares the firms vision for the alliances purpose Is not likely to exploit the alliance to its own ends

To select a partner
Do thorough background check from public sources Collect information from third parties who have personal experience with the likely partner(s) Spend a lot of face-to-face time with likely partner(s)
McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Slide 10-12

Making alliances work What Structure?

Protect technology/know-how that is not intended to be transferred Draw a solid contract with safeguards against opportunism Achieve equitable gain through agreed swaps of technology the other wants Seek creditable, clearly articulated commitment to partner behavior a-priori
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Slide 10-13

Making alliances work How to manage?

Show sensitivity to cultural differences that explain different managerial styles Build trust
Set up framework for formal and informal face-to-face meetings to create the opportunity for a common value system to emerge Build an informal network of personal relationships

Learn from partners

Apply the knowledge within your own organization Brief your employees on partner strengths

McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved.