Chapter 10 Global Strategy Competing Around the World

Chapter 10 Global Strategy: Competing Around the World Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

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Chapter Outline 10. 1 What Is Globalization? • Stages of Globalization 10. 2 Going Global: Why? • Advantages of Expanding Internationally • Disadvantages of Expanding Internationally 10. 3 Going Global: Where and How? • Where in the World to Compete? The CAGE Distance Framework • How Do MNEs Enter Foreign Markets? 10 -3

Chapter Outline (cont’d) 10. 4 Cost Reductions vs. Local Responsiveness: The Integration-Responsiveness Framework • • International Strategy Multidomestic Strategy Global-Standardization Strategy Transnational Strategy 10. 5 National Competitive Advantage: World Leadership in Specific Industries • Porter’s Diamond Framework 10. 6 Implications for the Strategist 10 -4

Chapter. Case 10 ©STR/AFP/Getty Images/Newscom Hollywood Goes Global § Hollywood movie: The quintessential American product • However, non-U. S. sales increased: 50% in 2000, AND 70% in 2012 § Altered global strategic focus • Movies that fit the global market by adapting foreign scripts, hiring international actors/actresses • Two versions of Iron Man 3 in 2013 (one just for China) § Treat emerging markets as focal targets § Not just filmmaking industries, but also electronics industry (ex: Korea, China), and auto industry (ex: India) 10 -5

Exhibit 10. 1 Lifetime Revenues of Hollywood Blockbuster Movies >$500 million (in $ million) 10 -6

10. 1 What Is Globalization? § § Globalization is a process of closer integration and exchange between different countries and peoples worldwide. Made possible by: • Falling trade and investment barriers • Advanced telecommunications • Reduced transportation costs • Importance of MNEs and FDIs 10 -7

Stages of Globalization § Globalization 1. 0: 1900 − 1941 • Only sales and distribution took place overseas • Knowledge flowed one way; home to international § Globalization 2. 0: 1945− 2000 • Duplicating business functions overseas • Knowledge flow back to headquarters remained limited § Globalization 3. 0: 21 st Century • MNE reorganizes to a more seamless global enterprise • MNEs become global collaboration networks ü See Exhibit 10. 2 10 -8

Exhibit 10. 2 Globalization 3. 0: 21 st Century Based on an optimal mix of costs, skills, and PESTEL factors, MNEs are organized as global collaboration networks that perform business functions throughout the world. 10 -9

WHAT DEFINES A U. S. COMPANY? Address • IBM, GE, and others are U. S. companies… ü Despite the fact that a majority of their employees work outside the U. S. Investment • Carmakers from Japan (Toyota, Honda, and Nissan) and South Korea (Hyundai and Kia) and engineering companies (Siemens from Germany, and ABB) ü All have made significant investments in the U. S. ü Also created a large number of good jobs 10 -10

GLOBALIZATION HAS TWO CONSEQUENCES FOR MNES 1) Rising wages and other costs… May negate any benefits of access to low-cost input factors. 2) As the standard of living rises in emerging economies… MNEs are hoping that increased purchasing power will enable workers to purchase the products they used to make for export only. 10 -11

10. 2 Going Global: Why? § Gain access to a larger market • MNE has opportunities for economies of scale and scope • Firms in smaller home markets (Acer, Nestlé, Samsung) § Gain access to low-cost input factors • Labor, natural resources, technology, logistics. • Professionals less expensive in China & India § Develop new competencies • Location economies − Cisco, Astra. Zeneca, & Unilever • Polycentric innovation strategies 10 -12

Strategy Highlight 10. 1 Does GM’s Future Lie in China? § Market opportunity in China • 1. 4 billion people; only 1 in 100 people owns a vehicle. § GM entered China in 1997. • Joint venture with Shanghai Automotive Industrial Corp ü Sold 1. 4 million vehicles in 2012. • China makes up 25% of GM’s revenues and GROWING fast. • GM China factories are more productive than U. S. plants. § 70% of GM revenues – OUTSIDE the United States 10 -13

Disadvantages of Expanding Internationally § Liability of foreignness • Additional cost of doing business in an unfamiliar cultural and economic environment § Loss of reputation • Globalizing a supply chain can have unintended effects ü Low wages, long hours, poor working and living conditions • This challenge directly concerns the MNEs’ corporate social responsibility (CSR) § Loss of intellectual property • Large-scale infringements in software, movie, & music 10 -14

Strategy Highlight 10. 2 Walmart Retreats from Germany § Walmart entered Germany. • Acquisition of 21 stores and 74 hypermarkets § Walmart duplicating its U. S. policies and applying them in Germany • Employees refused to accept those policies. § Walmart faced significant cultural differences. § The result is a defeated Walmart that sold its stores to Metro… Walmart’s key rival in Germany! 10 -15

10. 3 Going Global: Where and How? Absolute Metrics Relative Distance CAGE Distance Framework 10 -16

Where in the World to Compete? The CAGE Distance Framework § A decision framework based on the relative distance. between home and a foreign target country § Along four dimensions: 1. 2. 3. 4. Cultural distance Administrative and political distance Geographic distance Economic distance 10 -17

Exhibit 10. 3 The CAGE Distance Framework 10 -18

HOFSTEDE AND CULTURAL DIMENSIONS § Hofstede’s national-culture research work provides a useful tool to proxy cultural distance § Based on data analysis from more than 100, 000 individuals from different countries, four dimensions of culture emerged: • • • Power distance Individualism Masculinity–femininity Uncertainty avoidance Long-term orientation (fifth cultural dimension added later) 10 -19

CAGE IN CONCLUSION § Helps determine the attractiveness of foreign target § A deeper analysis requires looking inside the firm’s strengths and weaknesses • Increase or reduce distance from specific foreign markets § Although technology may create a seemingly smaller world… • The costs of distance are often high and should be considered. 10 -20

How Do MNEs Enter Foreign Markets? Remaining decision: How to enter a foreign market Low investments and low level of control: • Exporting • Licensing • Franchising High investments and high level of control: • Joint venture • Acquisition • Greenfield operations 10 -21

Exhibit 10. 4 Modes of Foreign Market Entry along the Investment and Control Continuum 10 -22

10. 4 Cost Reductions vs. Local Responsiveness: The Integration-Responsiveness Framework § Two opposing forces when competing globally § Cost reductions versus local responsiveness § Cost reduction: § MNEs enter global market place with the intention to reduce operation cost − Globalization Hypothesis § Ex: Toyota Prius § Local responsiveness: § Tailor product and service offerings to fit local consumer preferences and host-country requirements § Higher cost § Ex: Mc. Donald’s uses mutton in India 10 -23

Exhibit 10. 5 The Integration-Responsiveness Framework: Global Strategy Positions and Representative MNEs 10 -24

INTEGRATION-RESPONSIVENESS FRAMEWORK § International strategy: • Leveraging home-based core competencies • Selling the same products or services in both domestic and foreign markets ü Ex: Harley-Davidson in China § Multidomestic strategy: • Maximize local responsiveness • Consumers will perceive them to be domestic companies. ü Ex: Nestlé's customized product offerings 10 -25

INTEGRATION-RESPONSIVENESS FRAMEWORK (Continued) § Global-Standardization strategy: • Economies of scale and location economies • Pursuing a global division of labor based on best of class capabilities reside at the lowest cost ü Ex: Lenovo’s R&D in Beijing, Shanghai, and Raleigh; production center in Mexico, India, and China § Transnational Strategy: • Combination of localization strategy (high responsiveness) with global standardization strategy (lowest cost position attainable) • “Think globally but act locally” ü Ex: German multimedia conglomerate Bertelsmann 10 -26

Exhibit 10. 6 Dynamic Strategic Positioning: The MTV Music Channel 10 -27

Exhibit 10. 7 International Strategy: Characteristics, Benefits, and Risks 10 -28

Exhibit 10. 7 Multidomestic Strategy: Characteristics, Benefits, Risks 10 -29

Exhibit 10. 7 Global-Standardization and Transnational Strategies: Characteristics, Benefits, Risks 10 -30

10. 5 National Competitive Advantage: World Leadership in Specific Industries § Death-of-distance hypothesis: • 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. ü Computer manufacturers – China & Taiwan ü Consumer electronics – Japan & South Korea ü Mining companies − Australia § Why are certain industries in some countries more competitive than in others? • Answer: National competitive advantage 10 -31

Porter’s Diamond Framework § Factor conditions: § A nation’s endowments in terms of national, human, and other resources. § Demand conditions: § Specific characteristics of demand in a firm’s domestic market. § Competitive intensity: § Highly competitive environments tend to stimulate firms to outperform others. § Related and supporting industry: § Leadership in related and supporting industries can also foster worldclass competitors in downstream industry. 10 -32

Exhibit 10. 8 Porter’s Diamond of National Competitive Advantage 10 -33

10. 6 Implications for the Strategist § The CAGE framework helps with global strategy decisions. § Business-level strategy provides clues to possible global strategies. § Despite globalization and the Internet geographic location has maintained its importance. § The enduring competitive advantages in a global economy lie increasingly in local things: • Knowledge, relationships, and motivation that distant rivals cannot match 10 -34

Chapter. Case 10 ©STR/AFP/Getty Images/Newscom Consider This… • The Hollywood film industry enters global market to explore new revenue stream! • Will we see a decrease in the production of regional and U. S. -centered movies? Or will small independent movie producers pick up a higher share of the domestic U. S. market? • What are some alternatives to combat piracy? • How would you prioritize which nations to expand distribution into if you were working for a major Hollywood movie studio? 10 -35

Take-Away Concepts LO 10 -1 Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy. Globalization • Globalization involves closer integration and exchange between different countries and peoples worldwide, made possible by factors such as falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs. MNEs • A MNE deploys resources and capabilities to procure, produce, and distribute goods and services in at least two countries. • Many MNEs are more than 50% globalized; they receive most of their revenues from countries other than their home country. Semi-globalized • Products, service, and capital markets are more globalized than labor markets. The level of everyday activities is roughly 10 to 25% integrated, and thus semi-globalized. FDI • FDI denotes international investments in value chain activities. 10 -36

Take-Away Concepts Global Strategy LO 10 -2 Explain why companies compete abroad, and evaluate the advantages and disadvantages of a global strategy. • Companies expand beyond their home market if the benefits outweigh the risks. Advantages • Advantages to competing internationally include gaining access to a larger market, gaining access to low-cost input factors, and developing new competencies. Disadvantages • Disadvantages to competing internationally include the liability of foreignness, the possible loss of reputation, and the possible loss of intellectual capital. 10 -37

Take-Away Concepts LO 10 -3 Apply the CAGE distance framework to explain which countries MNEs enter. Distance • Most of the costs and risks involved in expanding beyond the domestic market are created by distance. Relative Distance • The CAGE distance framework determines the relative distance between the home and foreign target country along four dimensions: cultural distance, administrative and political distance, geographic distance, and economic distance. 10 -38

Take-Away Concepts LO 10 -4 Compare and contrast the different options MNEs have to enter foreign markets. Foreign Entry Modes • The strategist has the following foreign entry modes available: exporting, strategic alliances (licensing for products, franchising for services), joint venture, and subsidiary (acquisition or greenfield). Control & Risk Trade-offs • Higher levels of control, and thus a greater protection of IP and a lower likelihood of any loss in reputation, go along with more investment-intensive foreign entry modes such as acquisitions or greenfield plants. 10 -39

Take-Away Concepts LO 10 -5 Apply the integrationresponsiveness framework to evaluate the four different strategies MNEs can pursue when competing globally. § To navigate between the competing pressures of cost reductions and local responsiveness, MNEs have four strategy options: international, multidomestic, global-standardization, and transnational. § An international strategy leverages home-based core competencies into foreign markets, primarily through exports. It is useful when the MNE faces low pressures for both local responsiveness and cost reductions. § A multidomestic 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. 10 -40

Take-Away Concepts LO 10 -5 (cont’d) Apply the integrationresponsiveness framework to evaluate the four different strategies MNEs can pursue when competing globally. § A global-standardization strategy seeks to reap economies of scale and location by pursuing a global division of labor based on wherever bestof-class capabilities reside at the lowest cost. It involves little or no local responsiveness. § 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. 10 -41

Take-Away Concepts LO 10 -6 Apply Porter’s diamond framework to explain why certain industries are more competitive in specific nations than in others. § National competitive advantage, or world leadership in specific industries, is created rather than inherited. § 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. § Even in a more globalized world, the basis for competitive advantage is often local. 10 -42

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