8 Note Has not been proofread Strategy in

8 Note: Has not been proofread. Strategy in the Global Environment

Next Week – Chapter 9 – Discussion Questions • Under what conditions might horizontal integration be inconsistent with the goal of maximizing profitability? • What value creation activities should a company out-source to independent suppliers? What are the risks involved in outsourcing these activities? • What steps would you recommend that a firm take in order to build long-term cooperative relationships with its suppliers that are mutually beneficial? (p. 323) Copyright © Houghton Mifflin Company. All rights reserved. 2

Next Week – Chapter 10 – Discussion Questions • Question 2– Under what circumstances might it be best to enter a new business area by acquisition, and under what circumstances might internal new venturing be the preferred entry mode? • Question 4 – Look at Honeywell’s portfolio of businesses (described in Honeywell’s 10 K statement, which can be accessed on the web at www. honeywell. com). How many different industries is Honeywell involved in? Would you describe Honeywell as a related or unrelated diversification company? How do you think that Honeywell’s diversification strategy increases profitability? (p. 361) Copyright © Houghton Mifflin Company. All rights reserved. 3

Opening Case - MTV • Found that when expanding globally, it had to change its business model to conform to what was “popular” to different national markets. • Chapter 8 focus on global strategies firms can pursue to gain a competitive advantage. • Location economies – benefits that arise from performing a value creation activity in the optimal location for that activity – anywhere in the world. Copyright © Houghton Mifflin Company. All rights reserved. 4

Location Economies – Reinventing Levi Closing Case (Chapter 4 – pp. 147 -148) • • • In 2002, Levi's U. S. -based parent company closed six U. S. manufacturing plants, eliminating 3, 600 jobs. San Francisco-based Levi Strauss, which just turned 150 years old, became one of America's iconic brands in the 1950 s and '60 s, as its jeans became a wardrobe staple of baby boomers – but, they became arrogant (p. 147). Its competitors appeared to get the upper hand by moving their manufacturing to Asia or Central America – while Levi continued to manufacture its jeans primarily in the US. – Case Discussion Question 1: From a value creation perspective, what exactly is Levi trying to achieve by moving manufacturing out of the US? (p. 148) – Do you think that the “global strategic actions” Levi is taking by moving its manufacturing out of the US will help it to reverse its “six-year decline and build a sustainable competitive advantage? ” – What is Dell, Inc. trying to achieve by moving customer support (helpdesks) activities out of the US? (PCN) – What about the US economy and manufacturing jobs moving to other countries? (Presidential Election gets closer should hear more about this one. PCN) Copyright © Houghton Mifflin Company. All rights reserved. 5

Location Economies and Value Creation Activities in the “Optimal” Location for that Activity (p. 261) • Can have two effects: 1) It can lower the costs of value creation helping the company achieve a low-cost position. 2) It can help a firm differentiate its product offering, which gives it the option of charging a premium price or keeping price low and using differentiation as a means of increasing sales volume. 3) Bottom line – efforts to realize location economies are consistent with the business-level strategies of low cost and differentiation. Copyright © Houghton Mifflin Company. All rights reserved. 6

Peter Drucker’s “Post Capitalist Society” • Drucker, the leading guru of management, argues that we are in the middle of a great social transformation, akin to the Renaissance, which is symbolized by the computer. The primary resource is no longer capital, land, or labor but knowledge – hence "post-capitalist". • Knowledge has become the means of production and creates value by "productivity" and "innovation" through its application to work. • He indicates that the US will be doing less making and moving things. • Bottom line: A strategy that enables a firm to create value. Copyright © Houghton Mifflin Company. All rights reserved. 7

The Experience Curve – Chapter 4 • Serving a global market from one or a few plants – Is consistent with moving down the experience curve and establishing a low-cost position. – Key questions is often where should the “few” plants be located. (PCN) Copyright © Houghton Mifflin Company. All rights reserved. 8

Sources of Competitive Advantage • Global strategy and • Distinctive competencies are expansion is a way firm’s a firm’s specific resources can further exploit the value and capabilities that allow a creation potential of their firm to achieve these to gain a distinctive competencies. competitive advantage. (Chap. 3) – – – Copyright © Houghton Mifflin Company. All rights reserved. Superior Efficiency Quality Innovation Customer Responsiveness Top management’s value & aspirations (PCN) 9

Increasing Profitability Through Global Expansion • Location economies – Economic benefits from performing a value creation activity in the optimal location – Effects • Can lower costs • Can enable differentiation – Caveats • Transportation costs and trade barriers • Political and economic risks Copyright © Houghton Mifflin Company. All rights reserved. 10

Choosing a Global Strategy • International strategy – Creating value by transferring competencies and products to foreign markets where indigenous competitors lack those competencies and products – Makes sense if a company has a valuable competence that indigenous competitors in foreign markets lack and if it faces weak pressure for local responsiveness and cost reductions Copyright © Houghton Mifflin Company. All rights reserved. 11

Increasing Profitability Through Global Expansion (cont’d) • The experience curve – Serving a global market from one or a few plants is consistent with moving down the experience curve and establishing a low-cost position • Transferring distinctive competencies – Companies with distinctive competencies can realize large returns by expanding to global markets where competitors lack similar competencies and products Copyright © Houghton Mifflin Company. All rights reserved. 12

Increasing Profitability Through Global Expansion (cont’d) • Leveraging the skills of global subsidiaries – Competencies can be created anywhere within a multinational’s global network of operations – Managers must establish an incentive system to encourage local employees to acquire new competencies – Managers must have processes in place to identify valuable new competencies and help transfer them within the company Copyright © Houghton Mifflin Company. All rights reserved. 13

Pressures for Cost Reductions and Local Responsiveness • Firms that compete in the global marketplace usually face two types of competitive pressures. Firm C – Pressures to be both cost reduction and locally responsive. 1) Pressures for cost reduction 2) Pressures to be locally responsive Copyright © Houghton Mifflin Company. All rights reserved. 14

Pressures for Cost Reductions • When companies produce commodity products • Where differentiation on non-price factors is difficult and price is the main competitive weapon • Where competitors are based in low-cost locations • Where there is persistent excess capacity • Where consumers are powerful and face low switching costs • The liberalization of the world trade and investment environment Copyright © Houghton Mifflin Company. All rights reserved. 15

Pressures for Local Responsiveness • Differences in customer tastes and preferences • Differences in infrastructure and traditional practices • Differences in distribution channels • Host government demands Copyright © Houghton Mifflin Company. All rights reserved. 16

Four Strategies to Enter & Compete in the Global Market 1) International Strategy • • 2) Multi-domestic Strategy • 3) Cost considerations tend to take a back seat – in the competitive 2000’s it’s “mostly a thing of the past. ” Global Strategy – e. g. , Dell, Inc. • 4) Attempt to create value by, e. g. , attempting to transfer differentiated product offerings developed at home to foreign markets. Firms include IKEA, IBM, P&G, Mc. Donald’s, Wal-Mart, & Microsoft Not applicable when there are high demands for local responsiveness. Transnational Strategy – rarely profitable today • Firms seek to simultaneously achieve low-cost, be locally responsive, transfer competencies, and differentiation advantages. Copyright © Houghton Mifflin Company. All rights reserved. 17

Four Basic Strategies Copyright © Houghton Mifflin Company. All rights reserved. 18

Choosing a Global Strategy (cont’d) • Multi-domestic strategy – Developing a business model that allows a company to achieve maximum local responsiveness – Makes sense when there are high pressures for local responsiveness and low pressures for cost reductions – Companies may become too decentralized and lose the ability to transfer skills and products Copyright © Houghton Mifflin Company. All rights reserved. 19

Choosing a Global Strategy (cont’d) • Global strategy – Focusing on increasing profitability by reaping cost reductions that come from experience curve effects and location economies; pursuing a lowcost strategy on a global scale – Makes sense when there are strong pressures for cost reductions and demand for local responsiveness is minimal Copyright © Houghton Mifflin Company. All rights reserved. 20

Choosing a Global Strategy (cont’d) • Transnational strategy – Simultaneously seeking to lower costs, be locally responsive, and transfer competencies in a way consistent with global learning Copyright © Houghton Mifflin Company. All rights reserved. 21

Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar Copyright © Houghton Mifflin Company.

Advantages and Disadvantages of Different Strategies for Competing Globally Copyright © Houghton Mifflin Company.

Basic Entry Decisions • A firm thinking about foreign expansion must make three basic decisions: • First – 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 Copyright © Houghton Mifflin Company. All rights reserved. 24

Basic Entry Decisions (cont’d) • Second – When to enter those markets/timing of entry – First-mover advantages – First-mover disadvantages • Third – On what scale of entry and strategic commitments – Entering on a large scale is a strategic commitment, both positive and negative – Benefits and drawbacks of small-scale entry Copyright © Houghton Mifflin Company. All rights reserved. 25

Pioneering Costs • First-mover Disadvantages to Entering a Foreign Market Before Other Global Firms • Cost that arise when the business system in a foreign country is so different from that in a firm’s home market that it has to devote considerable effort, time, and expense to learning the rules of the game. (p. 279) Copyright © Houghton Mifflin Company. All rights reserved. 26

The Choice of Entry Mode • • • Exporting Licensing Franchising Joint ventures Wholly-owned

The Advantages and Disadvantages of Different Entry Modes Copyright © Houghton Mifflin Company. All

Choosing Among Entry Modes • Distinctive competencies and entry mode – Technological competency • Wholly-owned subsidiary is preferred over licensing and joint ventures – Management competency • Franchising, joint ventures, subsidiaries • Pressures for cost reduction in entry mode – Great pressure for cost reductions • Exporting and wholly-owned subsidiaries Copyright © Houghton Mifflin Company. All rights reserved. 29

Global Strategic Alliances • Advantages – Facilitate entry into a foreign market – Share fixed costs and associated risks – Bring together complementary skills and assets – Set technological standards to the industry • Disadvantages – Give competitors a low-cost route to gain new technology and market access Copyright © Houghton Mifflin Company. All rights reserved. 30

Making Strategic Alliances Work: 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 Copyright © Houghton Mifflin Company. All rights reserved. 31

Structuring Alliances to Reduce Opportunism Copyright © Houghton Mifflin Company. All rights reserved. 32

Making Strategic Alliances Work: Managing the Alliance • Sensitivity to cultural differences and their effects on management style • Building interpersonal relationships among managers from different companies • Ability to learn from alliance partners and put the knowledge to good use Copyright © Houghton Mifflin Company. All rights reserved. 33

Managing the Alliance – Hamel & Prahalad • Found than the non-American partners emerge from an alliance stronger. – i. e. , Japanese partners had made a greater effort to learn. – While American tended to regard an alliance purely as a cost-sharing or risk-sharing device rather than as an opportunity to learn how a potential competitor does business. (p. 292) • Quick knowledge transfer by non-Americans Copyright © Houghton Mifflin Company. All rights reserved. 34

Discussion Questions • What kind of companies stand to gain the most from entering into strategic alliances with potential competitors? Why? (p. 294) Copyright © Houghton Mifflin Company. All rights reserved. 35