Chapter
Eight
Strategy
in the Global
Environment
The Global and National
Environments
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. Industries are becoming global in scope
Industry boundaries no longer stop at national borders.
2. 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.
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Increasing Profitability and Profit
Growth Through Global Expansion
 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 firm’s global network
Must also consider transportation costs, trade
barriers, as well as the political and economic risks.
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Pressures for Cost Reductions
and Local Responsiveness
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
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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Pressures for Local
Responsiveness
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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Choosing a Global Strategy
 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 company’s 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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Choosing a Global Strategy
 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.
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Basic Entry Decisions
1. Which overseas markets to enter
•
Assessment of long-run profit potential
»
•
A function of the size of the market, purchasing power of
consumers, the likely future purchasing power of consumers
Balancing the benefits, costs, and risks associate
with doing business in a country
»
A function of economic development and political stability
2. Timing of entry
•
•
First-mover advantages: preempt and build share
First-mover disadvantages: pioneering costs
3. Scale of Entry and Strategic Commitments
•
Entering on a large scale is a major strategic
commitment
»
•
With long term impacts that may be difficult to reverse
Benefits and drawbacks of small-scale entry
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The Choice of Entry Mode
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 company’s strategy:
1. Exporting
Most manufacturing companies begin their global expansion as
exporters and later switch to one of the other modes.
2. Licensing
A foreign licensee buys the rights to produce a company’s product for
a negotiated fee; licensee puts up most of the overseas capital.
3. Franchising
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.
4. Joint Ventures
Typically a 50/50 venture – a favored mode for entering a new market
5. Wholly-Owned Subsidiaries
Parent company owns 100% of subsidiary’s stock – setup or acquire
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Advantages and Disadvantages
of Different Entry Modes
Table 8.1
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Choosing Among Entry Modes
 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 company’s distinctive competency:
• Technological know-how
» Wholly-owned subsidiary is preferred over licensing and joint
ventures to minimize risk of losing control.
• Management know-how
» Franchising, joint ventures, or subsidiaries are preferred as risk
is low of losing management know-how.
 Pressures for Cost Reduction and Entry Mode
The greater the cost pressure, the more likely a company will want to
pursue some combination of exporting and wholly-owned subsidiary:
• 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
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
•
•
•
•
Facilitate entry into a foreign market
Share fixed costs and associated risks
Bring together complementary skills and assets
Set technological standards for its industry
 Disadvantages
• Give competitors a low-cost route to gain new
technology and market access
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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Making Strategic Alliances Work
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 firm’s vision for the purpose of the alliance
Is unlikely to try to exploit the alliance to its own ends
Conduct research on potential partners
2. Alliance structure
•
•
Risk of giving too much away is at an acceptable level
Guard against opportunism by partner in alliance agreement
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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Structuring Alliances
to Reduce Opportunism
Opportunism includes
the expropriation of
technology or markets
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Figure 8.5
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