CHAPTER 10 Global Strategy Competing Around the World

Part 2 Strategy Formulation 2– 2

LO 10 -1 Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy. LO 10 -2 Explain why companies compete abroad and evaluate advantages and disadvantages. LO 10 -3 Explain which countries MNEs target for FDI, and how they enter foreign markets. LO 10 -4 Describe the characteristics of and critically evaluate the four different strategies MNEs can pursue when competing globally. LO 10 -5 Explain why certain industries are more competitive in specific nations than in others. LO 10 -6 Evaluate the relationship between location in a regional cluster and firm-level competitive advantage.

Chapter Case 10 Hollywood Goes Global • Hollywood movie: The quintessential American product Ø However, non-US sales increased: 50% in 2000, and 70% in 2010 Ø Altered global strategic focus v Movies that fit the global market by adapting foreign scripts, hiring international actors/actresses…etc. • Treat emerging markets as focal targets Ø Not just filmmaking industries, but also the electronics industry (example: Korea, China), and auto industry (example: India) Ø Key questions: How can a company compete effectively in a global market place?

EXHIBIT 10. 1 Lifetime Revenues - Blockbuster Movies

What Is Globalization? • Globalization is a process of closer integration and exchange between different countries and peoples worldwide. • Made possible by: Ø Falling trade and investment barriers Ø Advanced telecommunications Ø Reduced transportation costs Ø Importance of MNEs and FDIs

What Is Globalization? • Multinational Enterprise (MNE) Ø Deploys resources and capabilities in the procurement, production, and distribution in at least two countries v Less than 1% of firms, BUT employ 19% of U. S. workforce – 74% of private sector R&D spending • Foreign Direct Investment (FDI) Ø Investments in value chain activities abroad • Global Strategy Ø To sustain a competitive advantage Ø Competing against foreign and domestic companies around the world

Why Global? • Gain access to a larger market Ø Capitalize on market potential, such as China, India, and emerging economies • Gain access to low-cost input factors Ø Labor, natural resources, technology, logistics • Managing corporate risk • Leverage core competencies • Develop new competencies Ø Location economies Ø Unique locational advantages

STRATEGY HIGHLIGHT 10. 1 Stages of Globalization • Globalization 1. 0: 1900– 1941 Ø Only sales and distribution took place overseas • Globalization 2. 0: 1945– 2000 Ø Duplicating business functions overseas • Globalization 3. 0: 21 st century Ø MNEs become global collaboration networks (see Exhibit 10. 2) 1– 9

EXHIBIT 10. 2 Globalization 3. 0 - Collaboration Networks

EXHIBIT 10. 3 International Sales as % of Total Data from 2010

STRATEGY HIGHLIGHT 10. 2 Does GM’s Future Reside in China? • Market opportunity in China Ø 1. 4 billion population, only 1 in 100 people owns a vehicle • GM entered China in 1997 Ø Joint venture with Shanghai Automotive Industrial Corp Ø China is 25% of GM’s revenues and GROWING fast Ø GM China factories are more productive than U. S. plants • GM’s future relies on China and other emerging economies Ø $ 250 million on a state-of-the-art R&D center…in Shanghai Ø Future of GM likely decided in their international HQ…in Shanghai 1– 12

Disadvantages of Expanding Internationally • Liability of foreignness Ø Additional cost of doing business in an unfamiliar cultural and economic environment Ø Cost of coordinating across geographic distance Ø Economic development may increase the cost of doing business v Rising wages with improved living standards v Difficulty in protecting intellectual property

LO 10 -1 Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy. LO 10 -2 Explain why companies compete abroad and evaluate advantages and disadvantages. LO 10 -3 Explain which countries MNEs target for FDI, and how they enter foreign markets. LO 10 -4 Describe the characteristics of and critically evaluate the four different strategies MNEs can pursue when competing globally. LO 10 -5 Explain why certain industries are more competitive in specific nations than in others. LO 10 -6 Evaluate the relationship between location in a regional cluster and firm-level competitive advantage.

Global Expansion: Where • How does an MNE decide where to go? Ø National institutions: v Well-established legal and ethical pillars as well- functioning economic institutions such as capital markets, banks, and infrastructures Ø National culture: "Programming of the mind" v Geert Hofstede’s Cultural Dimensions 1. 2. 3. 4. 5. Power distance Individualism Masculinity/femininity Uncertainty-avoidance Long-term orientation

EXHIBIT 10. 4 Corporate Tax Rates Institutional Difference Matters

Global Expansion: How • Exporting: producing goods in one country to sell in another country • Acquisition, strategic alliance are also popular vehicles for entry into foreign markets • MNEs sometime prefers greenfield operations or wholly-owned subsidiaries Ø Greenfield is building new factories/offices from scratch v Physically and organizationally building from the "ground up. "

EXHIBIT 10. 5 Modes of Foreign Market Entry along the Investment and Control Continuum

Strategy around the World: Cost Reduction vs. Local Responsiveness • Local responsiveness: Ø Tailor product and service offerings to fit local consumer preferences and host-country requirements Ø Higher cost v Example: Mc. Donald’s uses mutton in India • Cost reduction: Ø MNEs enter global marketplace with the intention to reduce operation cost v Example: Toyota Prius

EXHIBIT 10. 6 The Integration-Responsiveness Framework

Four Global Strategies • International strategy Ø Leveraging home-based core competencies Ø Selling the same products or services in both domestic and foreign markets v Example: Selling Starbucks coffee internationally • Localization (product differentiation) strategy Ø Maximize local responsiveness via a multi-domestic strategy Ø Consumers will perceive them to be domestic companies v Example: Nestlé’s customized product offerings

Four Global Strategies • Global standardization (cost leadership) strategy Ø Economies of scale and location economies Ø Pursuing a global division of labor based on best-of-class capabilities reside at the lowest cost v Example: Lenovo’s R&D in Beijing, Shanghai, and Raleigh; production center in Mexico, India, and China • Transnational strategy Ø Combination of localization strategy (high responsiveness) with global standardization strategy (lowest cost position attainable) v Example: German multimedia conglomerate Bertelsmann

Characteristics, Benefits, and Risks of Four Types of Global Strategy EXHIBIT 10. 7 Characteristics Benefits • Often the first step in internationalizing. • Used by MNEs with relatively large domestic markets (e. g. , MNEs from U. S. , Germany, Japan). International Strategy • Well-suited for high-end products • Exporting or licensing • IP embedded in product (such as machine tools) and luxury goods that can be shipped across the globe. • Products and services tend to have strong brands. • Main competitive strategy tends to be differentiation since exporting, licensing, and franchising additional costs. • Used by MNEs to compete in host countries with large and/or lucrative but idiosyncratic domestic (for products) • Franchising (for services) • Licensing (for trademarks) • Highest-possible local responsiveness. • Reduced exchange-rate or service could be expropriated. • Duplication of key business functions in multiple countries markets (e. g. , Germany, Japan, exposure. leads to high cost of Localization (Multidomestic) Strategy • Leveraging core competence. • Economies of scale. • Low-cost implementation through: Risk • No or limited local responsiveness. • Highly affected by exchange rate fluctuations. Saudi Arabia). implementation. • Often used in consumer products and food industries. • Main competitive strategy is differentiation. • MNE wants to be perceived as local company. • Little or no economies of scale. • Little or no learning across different regions. • Higher risk of IP Expropriation.

Characteristics, Benefits, and Risks of Four Types of Global Strategy EXHIBIT 10. 7 Characteristics Benefits Risk Global- • Used by MNEs that are offering • Location economies: • No local responsiveness. Standardization standardized products and services global division of labor • Little or no product Strategy (e. g. , computer hardware or based on wherever best-of- differentiation. business process outsourcing). class capabilities • Some exchange-rate • Main competitive strategy is price. reside at lowest cost. exposure. • Economies of scale. • “Race to the bottom” as wages increase. • Some risk of IP expropriation. Transnational • Used by MNEs that pursue an • Attempts to combine • Global matrix structure (Glocalization) integration strategy at the business benefits of localization and is costly and difficult to Strategy level by simultaneously focusing on standardization strategies implement, leading to high product differentiation and low cost. simultaneously by creating failure rate. • Mantra: Think globally, act locally. a global matrix structure. • Some exchange-rate • Economies of scale, exposure. location, and learning. • Higher risk of IP expropriation.

STRATEGY HIGHLIGHT 10. 3 Wal-mart Retreats from Germany • Wal-mart entered Germany Ø Acquisition of 21 stores and 74 hypermarkets • Wal-mart duplicated its U. S. policies and applied them in Germany Ø Employees refused to accept those policies • Wal-mart faced significant cultural differences • Wal-mart could not develop efficient economies of scale and distribution centers to drive cost down • The result is a defeated Wal-mart that sold its stores to Metro, Wal-mart’s key rival in Germany • ALDI, another of Wal-mart’s competitors in Germany, is now expanding aggressively in the U. S. 1– 26

LO 10 -1 Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy. LO 10 -2 Explain why companies compete abroad and evaluate advantages and disadvantages. LO 10 -3 Explain which countries MNEs target for FDI, and how they enter foreign markets. LO 10 -4 Describe the characteristics of and critically evaluate the four different strategies MNEs can pursue when competing globally. LO 10 -5 Explain why certain industries are more competitive in specific nations than in others. LO 10 -6 Evaluate the relationship between location in a regional cluster and firm-level competitive advantage.

National Competitive Advantage • Death-of-distance hypothesis Ø Geographic location alone should not lead to firm-level competitive advantage because firms are now more able to source inputs globally (ex: capital, commodities, etc. ) Labor markets also have become more global. Computer manufacturers – China & Taiwan v Consumer electronics – Japan & South Korea v Mining companies – Australia v • Why are certain industries in some countries more competitive than in others? Ø Answer: National Competitive Advantage

EXHIBIT 10. 8 Porter’s Diamond Model of National Competitive Advantage Porter American Future Video

National Competitive Advantage Framework • Factor conditions Ø A nation’s endowments in terms of national, human, and other resources as well as supportive infrastructure and institutions. • Demand conditions Ø Specific characteristics of demand in a firm’s domestic market • Competitive intensity Ø Highly competitive environments tend to stimulate firms to outperform others (e. g. , German car industry) • Related and supporting industry Ø Leadership in related and supporting industries can also foster world -class competitors in downstream industry Ø Complementarity

Regional Clusters • Regional cluster Ø A group of interconnected companies and institutions in a specific industry, located near each other geographically and linked by common characteristics Ø Knowledge spillover v Positive externalities that are regionally constrained v Exchange of ideas among firms in a cluster

EXHIBIT 10. 9 Mapping a Regional Cluster: Research Triangle

Geographical Distribution of Clusters Boise Boston Wisconsin / Iowa / Illinois Minneapolis Information Tech Agricultural Equipment Mutual Funds West Michigan Western Massachusetts Cardio-vascular Office and Institutional Farm Machinery Medical Devices Polymers Omaha Equipment Mgmt. Consulting Furniture Seattle Rochester Telemarketing and Services Biotechnology Aircraft Equipment and Design Imaging Equipment Hotel Reservations Software and Michigan Software Credit Card Processing Networking Clocks Warsaw, Indiana Coffee Retailers Venture Capital Detroit Orthopedic Devices Auto Equipment Hartford and Parts Insurance Oregon Electrical Measuring Providence Equipment Jewelry Woodworking Equipment Marine Equipment Logging / Lumber Supplies New York City Financial Services Silicon Valley Advertising Microelectronics Publishing Biotechnology Multimedia Venture Capital Pennsylvania / New Jersey Pharmaceuticals Las Vegas Pittsburgh Amusement / Advanced Materials Casinos Energy Small Airlines North Carolina Household Furniture Los Angeles Area Synthetic Fibers Defense Aerospace Hosiery Entertainment Wichita Cleveland / Louisville Light Aircraft San Diego Paints & Coatings Farm Equipment Baton Rouge / Golf Equipment New Orleans Biotech/Pharma Dalton, Georgia Dallas Specialty Foods Carpets Real Estate Southeast Texas / Development Nashville / Louisville Louisiana Colorado Hospital Management South Florida Chemicals Computer Integrated Systems / Programming Health Technology Engineering Services Computers Mining / Oil and Gas Exploration Source: Adapted from Professor Michael E. Porter, Harvard Business School

Take-Away Concepts LO 10 -1 Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy. ü Globalization involves closer integration and exchange between different countries and peoples worldwide, made by factors such as falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs. ü A multinational enterprise (MNE) deploys resources and capabilities to procure, produce, and distribute goods and services in at least two countries. ü Foreign direct investment (FDI) denotes a firm’s investments in value chain activities abroad. LO 10 -2 Explain why companies compete abroad and evaluate advantages and disadvantages. ü Firms compete internationally to gain access to a larger market, gain access to low-cost input factors, and develop new competencies. ü To compete successfully abroad, firms must overcome the liability of foreignness.

Take-Away Concepts LO 10 -2 Explain why companies compete abroad and evaluate advantages and disadvantages. (cont’) ü As local wages and costs of living increase, a low-cost location advantage evaporates. On the upside, this can turn producers into consumers. ü Constant pressures to reduce cost lead to a “race-to-the-bottom” where MNEs chase the lowest cost locations. LO 10 -3 Explain which countries MNEs target for FDI, and how they enter foreign markets. ü When an MNE has to decide between countries in which to invest, two additional country-level factors come into play: national institutions and national culture. ü Managers have the following strategy vehicles for entering foreign markets (on a continuum from low to high investment needs and control): exporting, strategic alliances (licensing for products, franchising for services), joint venture, and subsidiary (acquisition or greenfield).

Take-Away Concepts LO 10 -4 Describe the characteristics of and critically evaluate the four different strategies that MNEs can pursue when competing globally. ü To navigate between the competing pressures of cost reductions and local responsiveness, MNEs have four strategies: international, localization, global-standardization, and transnational. ü An international strategy leverages home-based core competencies into foreign markets, primarily through exports. It is useful when the MNEs face low pressures for both local responsiveness and cost reductions. ü A localization strategy attempts to maximize local responsiveness in the face of low pressure for cost reductions. It is costly and inefficient because it requires the duplication of key business functions in multiple countries. ü A global standardization strategy seeks to reap economies of scale and location by pursuing a global division of labor based on wherever best-of -class capabilities reside at the lowest cost. It involves little or no local responsiveness.

Take-Away Concepts LO 10 -4 Describe the characteristics of and critically evaluate the four different strategies that MNEs can pursue when competing globally. (Cont’) ü A transnational strategy attempts to combine the high local responsiveness of a localization strategy with the lowest cost position attainable from a global-standardization strategy. It also aims to benefit from global learning. Although appealing, it is difficult to implement due to the organizational complexities involved. ü Exhibit 10. 7 summarizes the characteristics, benefits, and risks of the four global competition strategies. LO 10 -5 Explain why certain industries are more competitive in specific nations than in others. ü National competitive advantage, or world leadership in specific industries, is created rather than inherited. ü Four interrelated factors explain national competitive advantage: (1) factor conditions, (2) demand conditions, (3) competitive intensity in a focal industry, and (4) related and supporting industries/complementors.

Take-Away Concepts LO 10 -6 Evaluate the relationship between location in a regional cluster and firm-level competitive advantage. ü Even in a globalized world, the basis for competitive advantage is often local. ü Strong empirical evidence suggests that being located in a regional cluster can have a positive effect on firm-level competitive advantage, both domestically and globally.