Strategy in the Global Environment Aims • Understand the process of globalization and how it impacts a company’s strategy • Discuss the motives for expanding internationally • Review the different strategies that companies use to compete in the global market place • Explain the pros and cons of different modes for entering foreign markets Ford’s Global Strategy Ford’s Global Strategy The Global and National Environments • …did they need to pay much attention to entering foreign markets, because that was often prohibitively expensive. Rivalry can no longer be understood merely in terms of what happens within the boundaries of a nation… • The Globalization of Production and Markets: • …dramatic lowering of barriers to international trade and investment. Reduction of tariff and promotion of hassle free entry. ‘….merging into one huge global marketplace.’ Microsoft, Coca-Cola, Starbucks. The Global and National Environments • Implication of globalization of production and markets • First, ….their home market can be caught unprepared by the entry of efficient foreign competitors. Lay relaxed Eventual shocks Blockbuster Netflix, You Tube Apple Samsung Japan’s FI J.P. Morgan American Motors Toyota and Honda Barnes & Noble Amazon American electronics retailer, Radio Shack Best Buy and Amazon The Global and National Environments • Second, national markets that once were consolidated oligopolies, dominated by three or four companies and subjected to relatively little foreign competition. Global oligopolies Companies Videogame industry Microsoft and Sony Airlines Boeing and Airbus Smartphone market Apple and Samsung Soft drink companies PepsiCo and Coca-Cola Automobile Toyota and Volkswagen Finally, ….it has also created enormous opportunities for companies based in those market. The Global and National Environments National Competitive Advantage The Global and National Environments Michael Porter’s ‘Diamond’ Companies that feed the benefits Factor Endowment Saudi Aramco, Intel in US, Nestle’s abundant supply of fresh water in Swiss. local demand conditions BMW of Germany, Swedish furniture IKEA, Japan's strong culture of innovation and quality, UNIQLO. Intensity of Rivalry 1. Different management ideology • Predominance of engineers in top management at German and Japanese firms • Predominance of people with finance backgrounds leading many U.S. firms 2. Competition improves efficiency and innovation Competitiveness of Related and Supporting Industries Apple’s advantage from Silicon Valley technology industry, Intel’s competitiveness from American semiconductor industry. Toyota’s competitiveness of the Japanese auto parts industry. Increasing Profitability and Profit Growth Through Global Expansion • Expanding the Market: Leveraging Products • Realizing Cost Economies from Global Volume • Realizing Location Economies • Leveraging the Skills of Global Subsidiaries Increasing Profitability and Profit Growth Through Global Expansion • Expanding the Market: Leveraging Products • A company can increase its growth rate by taking goods or services developed at home and selling them internationally. • But how?.... • Skills • Business model • The know-how • Take examples of McDonald's, Alibaba, P&G, Starbucks, Toyota, Samsung. Increasing Profitability and Profit Growth Through Global Expansion • Realizing Cost Economies from Global Volume • Scale economies come from several sources • spreading the fixed costs • can potentially utilize its production facilities more intensively 24/7 • Increase bargaining power; Again WM. • cost savings from learning effects (e.g. Tesla, Intel, Boeing) Increasing Profitability and Profit Growth Through Global Expansion • Realizing Location Economies: The economic benefits that arise from performing a value creation activity in an optimal location. …Apple’s designs and development in California but assembly in China. • Location Economies may have effects…What you think? Cost Leadership or Differentiation? • In this world you can not sit in one place. • Major Challenges • Transpiration cost (New Zealand; an uneconomical location) • Trade barriers (US production shift from Asia to Mexico) Increasing Profitability and Profit Growth Through Global Expansion • Leveraging the Skills of Global Subsidiaries • McDonald’s subsequent modification of menu and interior decoration helped improve the sales in France. • Challenges • recognize that valuable skills can arise anywhere • incentive system for new competencies, which are not easy to come by • must have a process for identifying when valuable new skills have been created in a subsidiary • act as facilitators Cost Pressures and Pressures for Local Responsiveness Pressures for Cost Reductions: Firm must try to lower the costs of value creation. Computer companies have outsourced their telephone-based customer service functions to India. Commodity type product. Consumers are powerful and face low switching costs. Pressures for Local Responsiveness: • Differences in Customer Tastes and Preferences • Differences in Infrastructure and Traditional Practices • Differences in Distribution Channels • Host Government Demands Choosing a Global Strategy Choosing a Global Strategy • Global Standardization Strategy • Companies try not to customize their product offerings and marketing strategy to local conditions because customization, which involves shorter production runs and the duplication of functions, can raise costs. Procter & Gamble (P&G), Intel, McDonald's. • Localization strategy • Localization is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense. Walmart, Unilever, Google. Choosing a Global Strategy • Transnational Strategy: • Company must try to realize location economies and economies of scale from global volume, transfer distinctive competencies and skills within the company, and simultaneously pay attention to pressures for local responsiveness. Company Strategy Nestlé maintains a portfolio of globally recognized brands while also adapting its products to cater to local tastes Sony developing products with global appeal while also customizing certain features for specific regional markets Ford designing and manufacturing vehicles that have a global appeal and consistent quality standards Nike globally recognized products while also incorporating local influences Tata developing global brands while adapting its products and services to local market needs and cultural sensitivities Choosing a Global Strategy • International Strategy: • Typically, these enterprises are selling a product that serves universal needs, but because they do not face significant competitors, they are not confronted with pressures to reduce their cost structure. Firms that operate in monopoly situation. Company Strategy Ryanair low-cost air travel and limited local responsiveness H&M operates a centralized supply chain to maintain low costs and it prioritizes cost efficiency over extensive localization DHL operating a standardized logistics network and mostly insensitive to local responsiveness Li & Fung cost efficiency by leveraging its global network of suppliers and maintaining a limited level of local responsiveness Changes in Strategy over Time Xerox and Canon The Choice of Entry Mode Choosing an Entry Strategy • Distinctive Competencies and Entry Mode: • Technological know-how or management know-how. Control of proprietary technological know-how, licensing and joint venture are risky. Risk Strategy Control over Technological knowhow licensing and joint venture wholly owned subsidiary, licensing may also help reduce the limitation before the tech become obsolete. Management knowhow Full control over brand reduces risk franchising and subsidiaries Choosing an Entry Strategy • Pressures for Cost Reduction and Entry Mode: • Exporting and wholly owned subsidiaries (may have tight control over cost, marketing). Company to use the profits generated in one market to improve its competitive position in another market. Global Strategic Alliances • Cooperative agreements between companies from different countries that are actual or potential competitors. • Advantages of Strategic Alliances: • First, strategic alliances may facilitate entry into a foreign market. Warner Brothers in China found it tough to release films. McDonald's in China too. • Second, strategic alliances allow firms to share the fixed costs. Boeing’s ally with Japanese companies to build Boeing’s latest commercial jetliner by sharing $8 billion. • Third, an alliance is a way to bring together complementary skills and assets that neither company could easily develop on its own. • Fourth, it can make sense to form an alliance that will help firms establish technological standards for the industry that will benefit the firm. Disadvantages of Strategic Alliances • Alliances have risks. It gives away valuable know-how to its competitors. Japanese success in the machine tool and semiconductor industries was built on U.S. technology acquired through strategic alliances. Making Strategic Alliances Work • Partner Selection: • First, a good partner helps the company achieve strategic goals such as achieving market access, sharing the costs and risks of new-product development. • Second, a good partner shares the firm’s vision for the purpose of the alliance. • Third, a good partner is unlikely to try to exploit the alliance opportunistically for its own ends—that is, to expropriate the company’s technological know-how while giving away little in return. • IBM, Sony, Toshiba, and Fuji firms with good reputation in alliance. • Information about potential alliances should be collected from third parties, employees, previous alliances. Making Strategic Alliances Work • Alliance Structure: General Electric and Snecma in aircraft engine. Do not compete with me by exploiting my tech. TRW with Japanese firms Cross licensing Xerox insisted Fuji invest in a 50/50 joint venture to serve Japan and East Asia Making Strategic Alliances Work • Managing the Alliance: • sensitivity to cultural sensitivity. • building interpersonal relationship. • Ford and Mazda for example. • Japanese companies take alliance as an opportunity to learn Agreement between General Motors and Toyota Motor Corp. to build the Chevrolet Nova. According to one of the Japanese managers, “We learned about U.S. supply and transportation. And we got the confidence to manage U.S. workers.”
