CHAPTER

10

Global Strategy:
Competing Around the
World

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Part 2 Strategy Formulation

22

22

LO 10-1

Define globalization, multinational enterprise (MNE),

foreign direct investment (FDI), and global
strategy.

LO 10-2

Explain why companies compete abroad and evaluate

advantages and disadvantages.

LO 10-3

Explain which countries MNEs target for FDI, and how they
enter foreign markets.

LO 10-4

Describe the characteristics of and critically evaluate the

four different strategies MNEs can pursue
when competing
globally.

LO 10-5

Explain why certain industries are more competitive in

specific nations than in others.

LO 10-6

Evaluate the relationship between location in a regional

cluster and firm-level competitive advantage.
103

Chapter Case 10

Hollywood Goes Global

Hollywood movie: The quintessential American product

However, non-US sales increased: 50% in 2000,
and 70% in 2010
Altered global strategic focus

Movies that fit the global market by adapting foreign scripts, hiring
international actors/actressesetc.

Treat emerging markets as focal targets

Not just filmmaking industries, but also the electronics industry
(example: Korea, China), and auto industry (example: India)
Key questions: How can a company compete effectively in a

global market place?

104

What Is Globalization?

Globalization is a process of closer integration and

exchange between different countries and peoples
worldwide.

Made possible by:

Falling trade and investment barriers
Advanced telecommunications
Reduced transportation costs
Importance of MNEs and FDIs

105

What Is Globalization?
Multinational Enterprise (MNE)
Deploys resources and capabilities in the procurement,

production, and distribution in

least two countries

at

Less than 1% of firms, BUT employ 19% of U.S. workforce

74% of private sector R&D spending

Foreign Direct Investment (FDI)

Investments in value chain activities abroad

Global Strategy
To sustain a competitive advantage
Competing against foreign and domestic companies

around the world

106

Why Global?
Gain access to a larger market
Capitalize on market potential, such as China, India, and

emerging economies

Gain access to low-cost input factors

Labor, natural resources, technology, logistics

Managing corporate risk

Leverage core competencies
Develop new competencies
Location economies
Unique locational advantages

107

STRATEGY
STRATEGY HIGHLIGHT
HIGHLIGHT 10.1
10.1

Globalization 1.0: 19001941

Stages of
Globalization

Only sales and distribution took place overseas

Globalization 2.0: 19452000

Duplicating business functions overseas

Globalization 3.0: 21st century

MNEs become global collaboration networks

(see Exhibit 10.2)

18

EXHIBIT 10.2

Globalization 3.0 - Collaboration

Networks

109

EXHIBIT 10.3

International Sales as % of Total

Data from 2010

1010

STRATEGY
STRATEGY HIGHLIGHT
HIGHLIGHT 10.2
10.2

Does GMs Future

Reside in China?

Market opportunity in China

1.4 billion population, only 1 in 100 people owns a vehicle

GM entered China in 1997

Joint venture with Shanghai Automotive Industrial Corp
China is 25% of GMs revenues and GROWING fast
GM China factories are more productive than U.S. plants

GMs future relies on China and other emerging economies

$ 250 million on a state-of-the-art R&D centerin Shanghai
Future of GM likely decided in their international HQin Shanghai
1011
111

Disadvantages of Expanding Internationally

Liability of foreignness
Additional cost of doing business in an

unfamiliar cultural and economic environment

Cost of coordinating across geographic distance
Economic development may increase the cost of

doing business
Rising

wages with improved living standards

Difficulty

in protecting intellectual property

1012

LO 10-1 Define globalization, multinational enterprise (MNE), foreign

direct investment (FDI), and global strategy.
LO 10-2 Explain why companies compete abroad and evaluate
advantages and disadvantages.
LO 10-3 Explain which countries MNEs target for FDI, and how
they enter foreign markets.
LO 10-4 Describe characteristics of and critically evaluate four
different strategies MNEs pursue when competing
globally.
LO 10-5 Explain why certain industries are more competitive in specific
nations than in others.
LO 10-6 Evaluate the relationship between location in a regional cluster
and firm-level competitive advantage.
1013

Global Expansion: Where

How does an MNE decide where to go?
National institutions:

Well-established legal and ethical pillars as well as

well- functioning economic institutions such as
capital markets, banks, and infrastructures

National culture: "Programming of the mind"

Geert Hofstedes Cultural Dimensions

1.
2.
3.
4.
5.

Power distance
Individualism
Masculinity/femininity
Uncertainty-avoidance
Long-term orientation
1014

EXHIBIT 10.4

Corporate Tax Rates

Institutional Difference Matters

1015

Global Expansion: How

Exporting: producing goods in one country to sell
in another country
Acquisition, strategic alliance are also popular
vehicles for entry into foreign markets
MNEs sometime prefers greenfield operations
or wholly-owned subsidiaries
Greenfield is building new factories/offices from scratch

Physically and organizationally building from the "ground up."

1016

EXHIBIT 10.5

Modes of Foreign Market Entry

Market Entry along the

Investment and Control Continuum
1017

Entry Modes of International Expansion

Wholly Owned
Subsidiary

Extent of Investment Risk

High

Joint Venture
Strategic Alliance
Franchising
Licensing
Exporting

Low

Low

Degree of Ownership and Control

High

Adapted from Exhibit 7.7 Entry Modes for International Expansion

Copyright 2005 by TheMcGraw-Hill Companies, Inc. All rights reserved.

7-31

Strategy around the World:

Cost Reduction vs. Local
Responsiveness
Local responsiveness:
Tailor product and service offerings to fit local

consumer preferences and host-country requirements

Higher cost
Example:

McDonalds uses mutton in India

Cost reduction:
MNEs enter global marketplace with

the intention to reduce operation cost

Example:

Toyota Prius
1019

EXHIBIT 10.6

The Integration-Responsiveness
Framework

Four Global Strategies

International strategy
Leveraging home-based core competencies
Selling the same products or services in both domestic

and foreign markets

Example:

Selling Starbucks coffee internationally

Localization (product differentiation) strategy

Maximize local responsiveness via a

multi-domestic strategy
Consumers will perceive them to be domestic
companies
Example:

Nestls customized product offerings in

international markets
1021

Four Global Strategies

Global standardization (cost leadership) strategy
Economies of scale and location economies
Pursuing a global division of labor based on best-of-class

capabilities reside at the lowest cost

Example:

Lenovos R&D in Beijing, Shanghai, and Raleigh;

production center in Mexico, India, and China

Transnational strategy
Combination of localization strategy (high responsiveness)

with global standardization strategy (lowest cost position

attainable)
Example:

German multimedia conglomerate Bertelsmann

: Caterpillars earth-moving equipment

EXHIBIT 10.7

Characteristics, Benefits, and Risks

of Four Types of Global
Strategy
Characteristics
Benefits
Risk

Often the first step in

internationalizing.
Used by MNEs with relatively large
domestic markets (e.g., MNEs from
U.S., Germany, Japan).

International
Strategy

Well-suited for high-end products

Localization

markets (e.g., Germany, Japan,

Leveraging core
competence.
Economies of scale.
Low-cost implementation
through:
Exporting or licensing

IP embedded in product

(such as machine tools) and luxury

goods that can be shipped across

(for products)
or service could be
Franchising (for services) expropriated.
Licensing (for
the globe.
trademarks)

Products and services tend to have

strong brands.

Main competitive strategy tends to

be differentiation since exporting,

licensing, and franchising add

additional costs.

Used by MNEs to compete in

Highest-possible local
Duplication of key
host countries with large and/or
responsiveness.
business functions
lucrative but idiosyncratic domestic Reduced exchange-rate
in multiple countries
exposure.

(Multidomestic) Saudi Arabia).

Strategy
Often used in consumer products

No or limited local
responsiveness.
Highly affected
by exchange rate
fluctuations.

and food industries.

Main competitive strategy is
differentiation.
MNE wants to be perceived as local
company.

leads to high cost of

implementation.
Little or no economies of
scale.
Little or no learning across
different regions.
Higher risk of IP
Expropriation.

1023

Characteristics, Benefits, and

Risks of Four Types of Global
Strategy
Characteristics
Benefits
Risk

EXHIBIT 10.7

Global-

Location economies:

No local responsiveness.

Standardization

Used by MNEs that are offering

standardized products and
services

global division of labor

Little or no product

Strategy

(e.g., computer hardware or

based on wherever best-of- differentiation.

business process outsourcing).

Main competitive strategy is
price.

class capabilities

Some exchange-rate

reside at lowest cost.

exposure.

Economies of scale.

Race to the bottom as

wages increase.

Some risk of IP

Transnational
(Glocalization)
Strategy

expropriation.

Used by MNEs that pursue an

integration strategy at the
business
level by simultaneously focusing
on
product differentiation and low
cost.
Mantra: Think globally, act
locally.

Attempts to combine

Global matrix structure

benefits of localization and is costly and difficult to

standardization strategies implement, leading to high
simultaneously by creating failure rate.
a global matrix structure.

Some exchange-rate

Economies of scale,

location, and learning.

exposure.
Higher risk of IP
expropriation.

STRATEGY
STRATEGY HIGHLIGHT
HIGHLIGHT 10.3
10.3

Wal-mart Retreats
from Germany

Wal-mart entered Germany

Acquisition of 21 stores and 74 hypermarkets

Wal-mart duplicated its U.S. policies and applied them in Germany

Employees refused to accept those policies
Wal-mart faced significant cultural differences
Wal-mart could not develop efficient economies of scale and distribution
centers to drive cost down
The result is a defeated Wal-mart that sold its stores to Metro,
Wal-marts key rival in Germany
ALDI, another of Wal-marts competitors in Germany, is now expanding
aggressively in the U.S.

125

LO 10-1 Define globalization, multinational enterprise (MNE),

foreign
direct investment (FDI), and global
strategy.
LO 10-2 Explain why companies compete abroad and evaluate
advantages and disadvantages.
LO 10-3 Explain which countries MNEs target for FDI, and how they
enter foreign markets.
LO 10-4 Describe the characteristics of and critically evaluate the
four different strategies MNEs can pursue when
competing globally.
LO 10-5 Explain why certain industries are more competitive in
specific nations than in others.
LO 10-6 Evaluate the relationship between location in a
regional
cluster and firm-level competitive
advantage.
1026

National Competitive Advantage

Death-of-distance hypothesis
Geographic location alone should not lead to firm-level

competitive advantage because firms are now more able

to source inputs globally (ex: capital, commodities, etc.)
Labor markets also have become more global.
Computer manufacturers China & Taiwan
Consumer electronics Japan & South Korea
Mining companies Australia

Why are certain industries in some countries more

competitive than in others?
Answer: National Competitive Advantage
1027

EXHIBIT 10.8

Porters Diamond Model of National

Competitive Advantage

Porter American
Future Video

1028

National Competitive Advantage Framework

Factor conditions
A nations endowments in terms of national, human, and other resources as

well as supportive infrastructure and institutions.

Demand conditions
Specific characteristics of demand in a firms domestic market

Competitive intensity
Highly competitive environments tend to stimulate
firms to outperform others (e.g., German car industry)

Related and supporting industry

Leadership in related and supporting industries can also foster world-class

competitors in downstream industry

Complementarity

1029

Regional Clusters
Regional cluster
A group of interconnected companies and
institutions in a specific industry, located
near each other geographically and linked
by common characteristics
Knowledge spillover
Positive

externalities that are

regionally constrained

Exchange

of ideas among firms

in a cluster
1030

EXHIBIT 10.9

Mapping a Regional Cluster: Research

Triangle

1031

Geographical Distribution of Clusters

Boise
Boston
Wisconsin / Iowa / Illinois
Minneapolis
Information Tech Agricultural Equipment
West Michigan
Western Massachusetts Mutual Funds
Cardio-vascular Office and Institutional
Farm Machinery
Medical Devices
Polymers
Omaha
Equipment
Mgmt. Consulting
Furniture
Seattle
Rochester
Telemarketing
and Services
Biotechnology
Aircraft Equipment and Design
Imaging
Hotel Reservations
Software and
Michigan
Equipment
Software
Credit Card Processing
Networking
Warsaw, Indiana Clocks
Coffee Retailers
Venture Capital
Detroit
Orthopedic Devices
Auto Equipment
Hartford
and Parts
Insurance
Oregon
Electrical Measuring
Providence
Equipment
Jewelry
Woodworking Equipment
Marine Equipment
Logging / Lumber Supplies
New York City
Financial Services
Silicon Valley
Advertising
Microelectronics
Publishing
Biotechnology
Multimedia
Venture Capital
Pennsylvania / New Jersey
Pharmaceuticals
Las Vegas
Pittsburgh
Amusement /
Advanced Materials
Casinos
Energy
Small Airlines
North Carolina
Household Furniture
Los Angeles Area
Synthetic Fibers
Defense Aerospace
Hosiery
Entertainment
Wichita
Cleveland / Louisville
Light Aircraft
San Diego
Paints & Coatings
Farm Equipment
Baton Rouge /
Golf Equipment
New Orleans
Biotech/Pharma
Dalton, Georgia
Dallas
Specialty Foods
Carpets
Real Estate
Southeast Texas /
Development
Nashville / Louisville
Louisiana
Colorado
Hospital Management
South Florida
Chemicals
Computer Integrated Systems / Programming
Health Technology
Engineering Services
Computers
Mining / Oil and Gas Exploration
1032
Source: Adapted from Professor Michael E. Porter, Harvard Business School