Chapter 6
Strategy in the Global
Environment
The Global Environment
• Managers need to consider:
– How globalization is impacting the environment in
which their company competes
– What strategies they should adopt to exploit
opportunities
– How to counter competitive threats
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The Global Environment
• Industry boundaries do not stop at national
borders
• The shift to global markets has intensified
competitive rivalry in industries
• Global markets created enormous opportunities
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Increasing
Profitability Through Globalization
• The success of many multinational companies is
based not just on the goods and services they
sell, but upon the distinctive competencies that
underlie their production and marketing
• Globalization increases profits by:
–
–
–
–
Expanding the market
Realizing economies of scale
Realizing location economies
Leveraging the skills of global subsidiaries
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Video Clip: Globalization at Subway
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Competitive Pressures
• Two main pressures:
– Pressure for cost reduction
– Pressure to be locally responsive
• These pressures place conflicting demands on a
company
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Cost Reductions
• Cost reductions are common in:
– Industries where price is the main competitive
weapon
– Industries with universal need products
– Universal Need: When consumer preference is
similar or identical in different nations
• Companies may achieve cost reduction by
basing production in a low-cost location or by
offering a standardized product.
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Figure 6.1: Pressures for Cost
Reduction and Local Responsiveness
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Local Responsiveness Pressures
• These arise from differences in:
–
–
–
–
Consumer taste and preferences
Infrastructure or traditional practices
Distribution channels
Host government demands
• The more that customer preferences vary, the
more local responsiveness is required
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Choosing a Strategy
Basic four strategies:
•
•
•
•
Global Standardization Strategy
Localization Strategy
Transnational Strategy
International Strategy
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Figure 6.2: Four Basic Strategies
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Global Standardization Strategy
• Focuses on increasing profitability by pursuing a
low-cost strategy on a global scale
• Works best if there is:
– Strong pressure for cost reduction
– Low pressure for local responsiveness
– Texas instruments, Motorola, Intel
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Localization Strategy
• Customizes goods or services to provide a good
match to tastes and preferences in different
national markets
• Works best if there is:
• MTV
– Low cost pressure
– Varied taste and preferences by nation
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Transnational Strategy
• Attempts to achieve low-cost, differentiated
products across markets and to foster a flow of
skills between different subsidiaries
• Works best if there is simultaneous :
• Ford
– High cost pressures
– High local responsiveness pressures
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International Strategy
• Centralizes product development, but
manufactures and markets globally
• Works best if there is:
• Xerox, Microsoft
–
–
–
–
Low cost pressure
Low pressure for local responsiveness
A universal need product
No significant competitors
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Choices of Entry Mode
“You do not choose to become global. The
market chooses for you,it forces your hand.”
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Choices of Entry Mode
• Exporting
– Many companies begin global expansion through
exporting production
– Exporting allows companies to bypass the cost of
establishing manufacturing facilities
– Exporting may be consistent with scale economies
and location economies
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Choices of Entry Mode (cont’d)
• Licensing
– A licensee in a foreign country can purchase the
rights to produce a product in their country
– The cost of development is low, as well as the risk
involved
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Choices of Entry Mode (cont’d)
• Franchising
– A specialized form of licensing where the franchiser
sells intangible property (usually a brand or
trademark).
– The franchisee agrees to follow the strict rules and
business plans of the company
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Choices of Entry Mode (cont’d)
• Joint Venture
– Separate corporations come together to form a new
corporate entity
– Two or more companies have an ownership stake,
but combine resources for mutual benefit
– Sharing knowledge can be dangerous for the
companies involved
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Choices of Entry Mode (cont’d)
• Wholly Owned Subsidiaries
– A parent company owns 100% of a smaller selfcontained business unit
– This can be a very costly approach, since the parent
company is responsible for all of the financing
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Choices of Entry Mode
Entry Mode
Exporting
Licensing
Advantages
Disadvantages
• Ability to realize
localization and
scale based
economies
• High transport costs
• Trade barriers
• Problems with local
marketing agents
• Low development
costs and risks
• Inability to realize
location and scale
based economies
• Inability to engage in
global strategic
coordination
• Lack of control over
technology
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Choices of Entry Mode (cont’d)
Entry Mode
Franchising
Joint Ventures
Advantages
Disadvantages
• Low development
costs and risks
• Inability to engage
in global strategic
coordination
• Lack of control over
quality
• Access to local
partners’ knowledge
• Shared
development costs
and risks
• Political
dependency
• Inability to engage in
global strategic
coordination
• Inability to realize
location/scale
economies
• Lack of control over
technology
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Choices of Entry Mode (cont’d)
Entry Mode
Wholly Owned
Subsidiaries
Advantages
• Protection of
technology
• Engage in global
strategic coordination
• Realize location and
scale economies
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Disadvantages
• Higher costs and
risks
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Figure 6.3: Changes Over Time
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“Remember the finish line is at the
end of the race. Don’t use up all of
your energy before reaching it.”
- Jack Daniels
“There is no finish line.”
- Phil Knight,
CEO, Nike
© RoyaltyFree/PhotoDisc Collection/ Getty Images
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