Chapter 8: Strategy in the Global Environment

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• Chapter 8 Strategy in the Global Environment
• BA 469 Spring Term, 2005
• Professor Dowling

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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

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Increasing Profitability Through Global Expansion
(contd)

• 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

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Increasing Profitability Through Global Expansion
(contd)

• Leveraging the skills of global subsidiaries
• Competencies can be created anywhere within a
  multinationals 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

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Pressures for Cost Reductions and Local
Responsiveness
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Pressures for Cost Reductions

• When companies produce commodity products
• Where differentiation on nonprice 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

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Pressures for Local Responsiveness

• Differences in customer tastes and preferences
• Differences in infrastructure and traditional
  practices
• Differences in distribution channels
• Host government demands

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Four Basic Strategies
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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

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Choosing a Global Strategy (contd)

• Multidomestic 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

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Choosing a Global Strategy (contd)

• Global strategy
• Focusing on increasing profitability by reaping
  cost reductions that come from experience curve
  effects and location economies pursuing a
  low-cost strategy on a global scale
• Makes sense when there are strong pressures for
  cost reductions and demand for local
  responsiveness is minimal

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Choosing a Global Strategy (contd)

• Transnational strategy
• Simultaneously seeking to lower costs, be locally
  responsive, and transfer competencies in a way
  consistent with global learning

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Cost Pressures and Pressures for Local
Responsiveness Facing Caterpillar
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Advantages and Disadvantages of Different
Strategies for Competing Globally
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Basic Entry Decisions

• 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

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Basic Entry Decisions (contd)

• Timing of entry
• First-mover advantages
• First-mover disadvantages
• 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

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The Choice of Entry Mode

• Exporting
• Licensing
• Franchising
• Joint ventures
• Wholly-owned subsidiaries
• Choosing Among Entry Modes

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The Advantages and Disadvantages of Different
Entry Modes
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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

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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

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Making Strategic Alliances Work Partner Selection

• A good partner
• Helps the company achieve strategic goals
• Shares the firms vision for the purpose of the
  alliance
• Is unlikely to try to exploit the alliance to its
  own ends
• Conduct research on potential partners

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Structuring Alliances to Reduce Opportunism
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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