Strategy in the Global Environment

- Carl von Clausewitz

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. 2.

Industries are becoming global in scope Industry

boundaries no longer stop at national borders.

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.

Porters diamond:
1. Companies from a given nation are most likely to succeed in industries in which the four attributes are favorable. 2. The attributes form a mutually reinforcing system in which the affect of one attribute is dependent on the state of the others. Helps managers to: Identify global competitors Locate global resources Assess how tough it is to enter certain national markets

Figure 8.1

Source: Adapted from M.E. Porter, The Competitive Advantage of Nations, Harvard Business Review, March-April, 1990, p. 77.
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The attributes of Porters diamond: 1. Factor Endowments or Conditions

2. Local

The cost and quality of factors of production Basic factors: land, labor, capital, and raw material Advanced factors: technological, managerial, infrastructure

Demand Conditions

3. Competitiveness

Home demand plays an important role in the impetus for upgrading competitive advantage. Companies are most sensitive to the needs of their closest customers.

4. Intensity

The spill-over benefits from investments by supporting industries Different nations characterized by different management ideologies Strong association between vigorous domestic rivalry and the creation and persistence of competitive Copyright advantage Houghton Mifflin in an industry
Company. All rights reserved.

Industries

of Related and Supporting

of Rivalry

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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 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.

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

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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
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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.
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- Alan Gomez

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Figure 8.3

Companies typically choose among the four main global strategic postures when competing internationally. The appropriateness of each strategy varies with the extent of pressures for cost reduction versus local 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 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
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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 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. Copyright Houghton Mifflin
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Figure 8.4
Over time, competitors inevitably emerge. Companies that do not take steps to reduce their cost structure may be outflanked by efficient global competitors.

As competition intensifies, companies need to orientate toward either a Standard Globalization or a Transnational strategy.

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1.

2.

Which overseas markets to enter

Assessment of long-run profit potential

Balancing the benefits, costs, and risks associate with doing business in a country

A function of the size of the market, purchasing power of consumers, the likely future purchasing power of consumers

3.

Timing of entry

A function of economic development and political stability

Scale of Entry and Strategic Commitments

Entering on a large scale is a major strategic commitment Benefits and drawbacks of small-scale entry Copyright Houghton Mifflin
Company. All rights reserved.

First-mover advantages: preempt and build share First-mover disadvantages: pioneering costs

With long term impacts that may be difficult to reverse

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1. 2. 3.

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:

Exporting Licensing

Most manufacturing companies begin their global expansion as exporters and later switch to one of the other modes. A foreign licensee buys the rights to produce a companys product for a negotiated fee; licensee puts up most of the overseas capital.

Franchising

4. 5.

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.

Joint Ventures

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

Wholly-Owned Subsidiaries

Parent company owns 100% of subsidiarys stock setup or acquire

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Table 8.1

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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 Management know-how

Wholly-owned subsidiary is preferred over licensing and joint ventures to minimize risk of losing control. Franchising, joint ventures, or subsidiaries are preferred as risk is low of losing management know-how.

The greater the cost pressure, the more likely a company will want to pursue some combination of exporting and wholly-owned subsidiary:

Pressures for Cost Reduction and Entry Mode

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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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

Give competitors a low-cost route to gain new technology and market access

Disadvantages

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

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

2. Alliance structure 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.
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Opportunism includes the expropriation of technology or markets

Figure 8.5

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- Jack Daniels

There is no finish line.

- Phil Knight, CEO, Nike
RoyaltyFree/PhotoDisc Collection/ Getty Images
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