Global Strategy
Agenda
 Globalization
 International Expansion
 National Competitiveness
IKEA: The World’s Most Profitable Retailer

IKEA:
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Sells home furnishings in 420 stores, in 50 countries, employs 210,000 people.
Revenues of 38 billion euros.
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The rise of IKEA:
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Started in 1943 by a 17-year-old: DIY approach.
Took 20 years to expand beyond Sweden.
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IKEA’s strategy has evolved.
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From an international strategy to a global standardization strategy.
Achieves economies of scale through managing the global supply chain.
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They have adapted to consumer demands.
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Smaller stores, customized furniture, online presence, installation assistance.
Acquisition of TaskRabbit, a furniture assembly and delivery company.
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What are IKEA’s global challenges?
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What is Globalization?
A process:
• Closer integration and exchange.
• Between countries and peoples
worldwide.
Made possible by:
• Falling trade and investment
barriers.
• Advances in telecommunications.
• Reductions in transportation costs.
Global Strategy
Part of a firm’s corporate strategy
to:
• Gain and sustain a competitive
advantage.
• Compete against foreign and
domestic companies.
Foreign direct investment:
• Investments in value chain activities
abroad.
Multinational enterprise:
• Deploys resources and capabilities
in two countries or more.
Stages of Globalization
Globalization 1.0: 1900 to 1941:
• Sales, operations, and some procurement.
• Strategy flowed from headquarters to international
sites.
Globalization 2.0: 1945 to 2000:
• To reconstruct damage from the war.
• Focus on European countries, Japan, and Australia.
• Greater local responsiveness.
• Headquarters set goals and international sites
influenced tactics.
Globalization 3.0: 21st Century:
• Business function locations based on costs,
capabilities, and PESTEL factors.
• Companies can operate 24/7, 365 days a year.
The Current State of Globalization
The world only semi-globalized:
• The level of globalization is at 10-25% total.
Evidence:
• 2% of all voice-calling minutes are crossborder.
• 3% of world’s population are immigrants.
• 9% of investments are foreign direct
investments.
• 15% of patents list at least one foreign inventor.
• 18% of Internet traffic crosses national borders.
Retrenchment may occur in the future:
• There has been a rise of nationalism.
Advantages and Disadvantages of International
Expansion
Exhibit 10.5
Access the text alternate for slide image.
Advantages of Going Global
Gain access to a larger market.
Gain access to low-cost input factors.
Develop new competencies.
Advantage #1: Gain Access to a Larger Market
Helps multinational enterprises with economies of
scale and scope.
• Participating in a much larger market.
Opportunities to outcompete local rivals.
Helps firms in smaller economies:
• Achieve growth.
• Gain and sustain competitive advantage.
Advantage #2: Access to Low-Cost Input Factors
Helps multinational enterprises that pursue a lowcost leadership strategy.
Examples of low-cost raw materials: lumber, iron
ore, oil, and coal.
Has been a key driver of globalization:
• Lower labor costs is the main focus now.
• India provides well-educated English-speaking young people.
• China provides low labor costs and an efficient infrastructure.
Advantage #3: Develop New Competencies
Helps multinational enterprises that pursue a
differentiation strategy.
Access to:
• Communities of learning.
• Specific geographic regions.
• Location economies.
• Locating value chain activities in optimal geographies.
Disadvantages of Going Global
1. Liability of foreignness.
2. Loss of reputation.
3. Loss of intellectual property.
Disadvantage #1: Liability of Foreignness
Unfamiliar cultural environment.
Unfamiliar economic environment.
Coordinating across geographic distances.
Can result in additional costs.
Disadvantage #2: Loss of Reputation
Reputation is one of the most valuable resources.
• Reputation dimensions can include innovation, customer
service, brand reputation.
Loss of reputation can diminish competitiveness.
• Low wages, long hours, and poor conditions.
• Local government may be corrupt.
• Safety standards may not be enforceable.
This challenge concerns corporate social
responsibility (Chapter 1).
1
Disadvantage #3: Loss of Intellectual Property
It can be difficult to protect IP in foreign markets.
• Particularly software, movies, and music.
• Copyright infringements can occur.
Some countries are known for partnering initially,
but then reverse-engineering capabilities.
• Intellectual property exposure.
Going Global: Where?
The CAGE Distance Framework
 Guides MNE decisions on which countries to
enter
 CAGE is an acronym for different types of
distance
Cultural
 Administrative and political
 Geographic
 Economic

 Greater distance = more difficult to expand
internationally
Cultural Distance
 Cultural Distance:
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Disparity between a firm’s home and host country,
specifically social norms and morals, beliefs, and
values.
Cultural differences find their expression in
language, ethnicity, religion, and social norms
Facets of Cultural Distance
 Hofstede’s cultural dimensions
1. Power distance - degree to which the less powerful
members of a society accept and expect that power is
distributed unequally
2. Individualism - preference for a loosely-knit social
framework in which individuals are expected to take
care of only themselves and their immediate families
3. Masculinity–femininity - preference in society for
achievement, heroism, assertiveness and material
rewards for success versus cooperation, caring, modest
societies
Facets of Cultural Distance
 Hofstede’s cultural dimensions
4. Uncertainty avoidance - degree to which the
members of a society feel uncomfortable with
uncertainty and ambiguity
5. Long-term orientation – degree to which members
of society focus on future challenges versus current
challenges
6. Indulgence – degree to which society allows
relatively free gratification of basic and natural human
drives related to enjoying life and having fun
Hofstede’s Cultural Distance Calculator
https://www.hofstede-insights.com/product/compare-countries/
Administrative & Political Distance

Captured in factors such as:
Shared monetary or political associations
 Political hostilities
 Weak or strong legal and financial institutions
 Differences in corruption levels

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Political and administrative barriers include:
Tariffs
 Trade quotas
 FDI restrictions
 Visa restrictions

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Example: Countries in EU have low distance here
Geographic Distance
Does not imply only
physical distance
 Includes the following
attributes:

Physical size (Canada
versus Singapore)
 Within-country distances to
its borders
 The country’s topography
 Time zones
 Access to waterways and
the ocean

Economic Distance
 Wealth and per capita income of consumers
 Wealthy countries tend to engage in more
cross-border trade.
 Wealthy countries trade with wealthy
countries.

To benefit from economies of experience, scale,
scope, and standardization
o Due to similar infrastructure & resources
 Example: US and Canada similar; US and
Central African Republic not similar
CAGE Summary
Distance
C
A
G
E
Cultural
Administrative and
Political
Geographic
Economic
• Different languages,
•
ethnicities, religions,
•
social norms, and
between two countries dispositions
• Lack of connective
•
increases with …
ethnic or social networks •
• Lack of trust and mutual •
respect
• With high linguistic
•
content (TV)
• Related to national
most affects industries and/or religious identity
(foods)
or products …
• Carrying countryspecific quality
associations (wines)
Absence of trading bloc •
Absence of shared
currency, monetary or
political association
Absence of colonial ties •
Political hostilities
•
Weak legal and financial
institutions
Lack of common border, •
waterway access,
adequate transportation, •
or communication links
Physical remoteness
Different climates and
time zones
•
Different consumer
incomes
Different costs and
quality of natural,
financial, and human
resources
Different information or
knowledge
That a foreign
• With low value-to•
government views as
weight ratio (cement)
staples (electricity), as • That are fragile or
•
building national
perishable (glass, meats)
reputations (aerospace), • In which
or as vital to national
communications are vital
security
(financial services)
(telecommunications)
For which demand varies
by income (cars)
In which labor and other
cost differences matter
(textiles)
How To Enter Foreign Markets
Choice of Entry Modes
Wholly owned
Extent of risk
Export

Involves using domestic plants as a
production base for exporting to
foreign markets

Excellent initial strategy to pursue
international sales
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Advantage:
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Minimizes both risk and capital
requirements
Disadvantage:
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Costs are high
•
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Transportation costs
Tariffs
Long-term contracts: Franchising & Licensing
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Often used when a firm has
valuable resources (e.g., business
model, brand, patented product)
But does not wish to commit their
own resources to enter foreign
markets
Advantage:
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Avoids risk of committing
resources to unfamiliar markets
Disadvantage

Risk of providing know-how to
foreign firms and losing control
over its use
*Random fact: KFC is popular during Christmas in Japan
Watch
Joint Ventures, Equity Alliances
JVs and Equity-based alliances with foreign companies
are a way to:
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Enter a foreign market, or
Strengthen a firm’s competitiveness in world markets

Example: Tata Starbucks Private Limited
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Advantage
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Fill gaps in technical expertise or knowledge of local markets
Disadvantage
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Potential for different motives and conflicting objectives
Wholly Owned Subsidiaries
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Greenfield
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Advantages
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A form of foreign direct investment where a
company establishes operations in another
country by constructing new facilities from
scratch
Complete operational and strategic control
Especially useful with proprietary technology
Disadvantages
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Slow, expensive, complicated
May experience political, regulatory pressures
Global Entry Modes of Starbucks
Source: Merrill Lynch and Starbucks website
Types of Global Strategies:
The Integration-Responsiveness
Framework
Cost Reductions vs. Local Responsiveness
Two opposing forces in
global competition:
Globalization
hypothesis:
• Cost reductions: key
competitive weapon.
• Consumer needs and
preferences are
converging.
• Local responsiveness:
tailoring to specific
preferences.
• Food, music, movies,
clothing.
• Examples: McDonalds,
Coca-Cola, rock music,
Greek salad, Hollywood
movies, Levi jeans.
The Integration Responsiveness Framework
Used to classify global strategies into four types
Global integration
global economies of scale
Local
responsiveness
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International Strategy

Sells the same products or services in both domestic
and foreign markets
Benefits
• Leverage home-based
core competencies
• Utilize economies of scale
• Low cost implementation
through:
• Exporting
• Licensing
• Franchising
Ex: Harley-Davidson in China
Risks
• No or limited local
responsiveness
• Affected by exchange rate
• IP embedded in
product/service can be
expropriated
Multidomestic Strategy
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Used to try and maximize local responsiveness
MNEs hope that local consumers will perceive their products or
services as local ones
Duplication of key business functions across countries
Benefits
• Highest possible local
responsiveness
• Reduced exchange rate
exposure
Ex: Nestlé’s adapts different products
for each market according to
consumer preferences.
Risks
• Duplication of units is
expensive
• Little economies of scale
• Little or no learning
across regions
Global-Standardization Strategy
 Attempts to reap significant:
Economies of scale & location economies
 Through global division of labor where capabilities
are at the lowest cost

Benefits
• Reduced labor costs
• Economies of scale
• Standardized operations
Risks
• No local responsiveness
• Some exchange rate
exposure
• Risk of wage changes
Ex: Apple sells standardized products
around the world. An iPhone or iPad
looks the same wherever you buy it.
iPhone production takes place mainly
in China, where labor costs are low.
Transnational Strategy

Strategy that attempts to combine:
o High local responsiveness
o Lowest-cost position attainable
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“Think globally but act locally”
Benefits
• Reduced labor costs
• Economies of scale
• Learning
•
Risks
• Global matrix structure is
costly and difficult to
implement (high failure rate)
• Some exchange rate
exposure
Ex: Unilever focuses on different brands and types of
products in different regions (e.g., marmite in Australia and
mayonnaise in the US) but still maintains a singular
corporate identity. They create economies of scale upstream
in the value chain and are more locally adaptive
downstream (i.e., marketing and sales.)
Determinants of National Advantage:
World Leadership in Specific Industries
Porter’s Diamond Framework

What is it for?
 It helps explain why some nations outperform others in certain
industries
Four factors determine a country’s competitive advantage in a given
industry:
 Factor conditions – Availability and quality of “home grown”
resources
 Related/supporting industries – Industry clusters
 Demand conditions – Domestic demand that drives industry
innovation
 Rivalry – Domestic competition that fosters strong firms + industry
innovation
Porter’s Diamond of National Competitive Advantage
Factor Conditions
 A country’s
endowments:
Natural, human, and
other resources
 Other resources:

o Capital markets
o Research universities
o Public infrastructure
(airports, roads, schools,
health care system, etc.)
Demand Conditions

Nature of home-market demand for
the industry’s product or service

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Sophisticated demand forces firms to
create advanced products and services
Examples:
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Denmark:
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Known for its environmental awareness
 Leads in water pollution control
equipment
Japan:
o
Known for dense, urban living-conditions
and hot, humid summers  production
of small, quiet, and energy-efficient air
conditioners
Competitive Intensity
Highly competitive environments tend to stimulate firms
to outperform others.
 Example: Fierce competition for German car companies
helped prepare them for global competition
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Related and Supporting Industry
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Leadership in related and supporting industries fosters world-class
competitors in downstream industry.
Example:
 Switzerland’s strong chemicals industry allowed it to grow into a
hub for pharmaceuticals