CHARLES W. L. HILL / GARETH R. JONES
Strategic Management
Chapter
8
An Integrated Approach 10th ed.
Strategy in the
Global
Environment
Student Version
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Prepared by C. Douglas Cloud , Professor Emeritus of Accounting, Pepperdine University
Learning Objective: After reading this
chapter, you should be able to understand
the process of globalization and how that
impacts a company’s strategy.
THE GLOBAL AND NATIONAL ENVIRONMENT
The Globalization of Production and Markets
 In the past half century, the tariff rate on
manufactured goods between countries has
dropped from 40% to under 4%.
 Industry boundaries no longer stop at national
borders.
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THE GLOBAL AND NATIONAL ENVIRONMENT
The Globalization of Production and Markets
 The shift from national to global markets has
intensified competitive rivalry in many industries.
 National markets that once were consolidated
oligopolies have been transformed into segments
of fragmented global industries where a large
number of companies battle for market share.
 Although globalization has increased both the
threat of entry and intensity of rivalry, it also has
created enormous opportunities for companies
based in those markets.
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THE GLOBAL AND NATIONAL ENVIRONMENT
National Competitive Advantage
 In a study of national competitive advantage,
Michael Porter identified four attributes of a
country-specific environment that have an
important impact on companies located within
that nation:
1) Factors endowment: A nation’s position in factors
of production such as skilled labor or the infrastructure necessary to compete in a given industry.
2) Local demand conditions: The nature of home
demand for the industry’s product or service.
(continued)
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THE GLOBAL AND NATIONAL ENVIRONMENT
National Competitive Advantage
3) Related and supporting industries: The presence
or absence in a nation of supplier industries and
related industries that are internationally
competitive.
4) Firm strategy, structure, and supporting
industries: The conditions in the nation governing
how companies are created, organized, and
managed, and the nature of domestic rivalry.
 Porter argues that companies from a given nation
are most likely to succeed in industries or strategic
groups in which the four attributes are favorable.
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Learning Objective: After reading this chapter,
you should be able to discuss the motives for
expanding internationally.
INCREASING PROFITABILITY AND PROFIT
GROWTH THROUGH GLOBAL EXPANSION
 The success of many multinational companies
is based:
 not just on the goods or services that they
sell in foreign nations,
 but also upon the distinctive competencies
that underlie production and marketing of
those goods or services.
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8-6
INCREASING PROFITABILITY AND PROFIT
GROWTH THROUGH GLOBAL EXPANSION
 The success of many multinational companies is
based upon the unique skills that underlie the
production and marketing of those goods or
services.
 Because distinctive competencies are the most
valuable aspects of a company's business
model, the successful global expansion of
manufacturing companies like Toyota and P&G
was based on the ability to transfer aspects of
the business model and apply it to foreign
markets.
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8-7
INCREASING PROFITABILITY AND PROFIT
GROWTH THROUGH GLOBAL EXPANSION
Realizing Location Economies
 Location economies are the economic benefits
that arise from performing a value creation
activity in the optimal location for that activity.
 Location economies can have one of two effects:
1) It can lower the costs of value creation, helping the
company achieve a low-cost position.
2) It can enable a company to differentiate its product
offerings.
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8-8
INCREASING PROFITABILITY AND PROFIT
GROWTH THROUGH GLOBAL EXPANSION
Leveraging the Skills of Global Subsidiaries
 Leveraging the skills created within subsidiaries
and applying them to other operations with the
firm’s global network may create value.
 Managers must have the humility to recognize that
valuable skills can arise anywhere within the firm’s
global network, not just the corporate center.
 They must establish an incentive system that
encourages local employees to acquire new
competencies.
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8-9
Learning Objective: After reading this chapter,
you should be able to review the different
strategies that companies use to compete in
the global market place.
COST PRESSURES AND PRESSURES FOR
LOCAL RESPONSIVENESS
 Companies that compete in the global
marketplace typically face two types of
competitive pressures:
1) Pressures for cost reductions.
2) Pressures to be locally responsive.
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COST PRESSURES AND PRESSURES FOR
LOCAL RESPONSIVENESS
Pressures for Cost Reductions
 To respond to pressures to lower costs, a firm must
try to lower the costs of value creation.
 One approach to lowering cost is to outsource
certain functions to low-cost foreign suppliers.
 Pressures for cost reductions are particularly
intense in industries producing commodity-type
products where differentiation on nonprice factors is
difficult and price is the main competitive weapon.
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8-11
COST PRESSURES AND PRESSURES FOR
LOCAL RESPONSIVENESS
Pressures for Local Responsiveness
 Strong pressures for local responsiveness emerge
when customer tastes and preferences differ
significantly between countries.
 When the auto industry tried to make “world cars,”
they discovered that consumers in different auto
markets had different tastes and preferences.
 A study showed that in the consumer electronics
industry, buyers reacted negatively to an overdose of
standardized global products.
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8-12
COST PRESSURES AND PRESSURES FOR
LOCAL RESPONSIVENESS
Differences in Infrastructure
and Traditional Practices
 Pressures for local representativeness may create
a need to customize products accordingly.
 In North America, electrical systems are based on
110 volts, whereas some European countries base
their electrical systems on 240 volts.
 Steering wheels in Britain are on the right side of the
dashboard, while they are on the left side in France.
 Wireless handsets use GSM in Europe and a CDMA
network in the United States and parts of Asia.
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8-13
COST PRESSURES AND PRESSURES FOR
LOCAL RESPONSIVENESS
Differences in Distribution Channels
 Because of differences in distribution channels
among countries, firms may have to delegate
marketing functions to national subsidiaries.
 British and Japanese doctors do not respond
favorably to U.S.-style high pressure sales force.
Thus, the pharmaceuticals use a soft sell approach in
these two countries.
 In Brazil, supermarkets account for 36% of food
retailing, 18% in Poland, and less than 1% in Russia.
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8-14
CHOOSING A GLOBAL STRATEGY
Global Standardization Strategy
 Companies that pursue a global standardization
strategy focus on pursuing a single low-cost
strategy on a global scale.
 The production, marketing, and R&D activities of
companies pursuing a global strategy are
concentrated in a few favorable locations.
 Despite being depicted as the “poster child” for
standardized global products, even McDonald’s
has found it has to customize its menu to account
for differences in tastes and preferences.
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8-15
CHOOSING A GLOBAL STRATEGY
Localization Strategy
 A localization strategy focuses on increasing
profitability by customizing the company’s goods or
services so that the goods provide a favorable
match to preferences in different national markets.
 The downside of this strategy is that it involves
some duplication of functions and smaller
production runs.
 This strategy makes sense if the added value
associated with local customization brings higher
prices.
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8-16
CHOOSING A GLOBAL STRATEGY
Transnational Strategy
 Companies that pursue a transnational strategy
are trying to develop a business model that
simultaneously:
 achieves low costs,
 differentiates the product offering across geographic
markets,
 and fosters a flow of skills between different
subsidiaries in the company’s global network of
operations.
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8-17
Learning Objective: After reading this chapter,
you should be able to explain the pros and cons
of different modes of entering foreign markets.
CHOOSING AN ENTRY MODE
 There are five primary choices of entry mode:
exporting, licensing, franchising, setting up a joint
venture
with a host country, and open a subsidiary.
X
Exporting
 Most manufacturing companies begin their global
expansion as exporters and only later switch to
one of the other modes for serving foreign
markets.
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8-18
CHOOSING AN ENTRY MODE
Exporting
 Exporting has two distinct advantages:
1) It avoids the cost of establishing manufacturing
operations in the host country, which are often
substantial.
2) It may be consistent with scale economies and local
economies.
 By manufacturing the product in a centralized
location and then exporting it to other national
markets, the company may be able to realize
substantial economies of scale from global sales.
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8-19
CHOOSING AN ENTRY MODE
Exporting
 There are also a number of drawbacks to
exporting:
1) Exporting from the company’s home base may not
be appropriate if there are lower-cost locations for
manufacturing the product abroad.
2) High transportation costs can make exporting
uneconomical.
3) Tariff barriers or the threat of tariff barriers can make
exporting uneconomical.
4) There is no guarantee that a local agent will act in
the exporter’s best interest.
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8-20
CHOOSING AN ENTRY MODE
Licensing
 International licensing is an arrangement
whereby a foreign licensee purchases the rights
to produce a company’s product in the licensee’s
country for a negotiated fee.
 The advantages of licensing include:
 The company does not have to bear the development
costs and risks associated with opening up a foreign
market.
 Licensing can be very attractive to companies that lack
capital to develop operations overseas.
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8-21
CHOOSING AN ENTRY MODE
Licensing
 Licensing has three serious drawbacks:
1) It does not give a company the tight control over
manufacturing, marketing, and strategic functions in
foreign countries that it needs to have in order to
realize scale and location economies.
2) Licensing severely restricts a company’s ability to
coordinate strategy in use profits from one country to
support competitive attacks in another .
3) By licensing its technology, a company can quickly
lose control over its technology.
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8-22
CHOOSING AN ENTRY MODE
Franchising
 Franchising is basically a specialized form of
licensing in which the franchiser not only sells
intangible property to the franchisee but also
insists that the franchisee agree to abide by strict
rules on how to do business.
 The advantages of franchising are similar to those of
licensing.
 However, franchising may inhibit the firm’s ability to
take profits out of one country to support competitive
attacks in another.
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8-23
CHOOSING AN ENTRY MODE
Joint Ventures
 Joint ventures have a number of advantages.
1) A company may feel that it can benefit from a local
partner’s knowledge of a host country’s competitive
conditions, culture, language, political system, and
business system.
2) When the development costs and risk of opening up
a foreign market are high, a company might gain by
sharing these costs and risks with a local partner.
 The disadvantages include giving up control of
technology and losing tight control over subsidiaries.
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8-24
CHOOSING AN ENTRY MODE
Wholly Owned Subsidiaries
 A wholly-owned subsidiary is one in which the
parent company owns 100% of the subsidiary’s
stock. There are three advantages to this entry
mode:
1) It reduces the company’s risk of losing control.
2) It gives a company the kind of tight control over
operations in different countries that it needs if it is
going to engage in global strategic coordination.
3) It may be the best choice if a company wants to
realize location and scale economies.
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CHOOSING AN ENTRY MODE
Wholly Owned Subsidiaries
 On the other hand, there are some disadvantages
to using the wholly owned subsidiary entry mode:
1) It is the most costly method of serving a foreign
market.
2) The parent must bear all the costs and risks of setting
up overseas.
3) There are problems in trying to “marry” divergent
corporate cultures, and these problems may more
than offset the benefits.
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