Global Strategic Management

• Global Strategy: Competing Around the

World
Part 2 Strategy Formulation
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.
 Hollywood Goes Global

• Hollywood movie: The quintessential American product

 However, non-US sales increased: 50% in 2000,
and 70% in 2010

 Altered global strategic focus

 Movies that fit the global market by adapting foreign scripts, hiring
international actors/actresses…etc.

• Treat emerging markets as focal targets

 Not just filmmaking industries, but also the electronics industry
(example: Korea, China), and auto industry (example: India)

 Key questions: How can a company compete effectively in a

global market place?
 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

 What Is Globalization?
• Multinational Enterprise (MNE)
 Deploys resources and capabilities in the procurement,
production, and distribution in at
least two countries
 Less than 1% of firms, BUT employ 19% of U.S. workforce
– 74% of private sector R&D spending

• Foreign Direct Investment (FDI)

 Investments in value chain activities abroad

• Global Strategy
 To sustain a competitive advantage
 Competing against foreign and domestic companies
around the world
 Why Global?
• Gain access to a larger market
 Capitalize on market potential, such as China, India, and
emerging economies

• Gain access to low-cost input factors

 Labor, natural resources, technology, logistics

• Managing corporate risk

• Leverage core competencies

• Develop new competencies

 Location economies
 Unique locational advantages
 STRATEGY HIGHLIGHT Stages of Globalization

• Globalization 1.0: 1900–1941

 Only sales and distribution took place overseas

• Globalization 2.0: 1945–2000

 Duplicating business functions overseas

• Globalization 3.0: 21st century

 MNEs become global collaboration networks
(see Exhibit 10.2)
1–8
Globalization 3.0 - Collaboration Networks
International Sales as % of Total

Data from 2010

 STRATEGY HIGHLIGHT Does GM’s Future Reside
in China?
• Market opportunity in China
 1.4 billion population, only 1 in 100 people owns a vehicle

• GM entered China in 1997

 Joint venture with Shanghai Automotive Industrial Corp

 China is 25% of GM’s revenues and GROWING fast

 GM China factories are more productive than U.S. plants

• GM’s future relies on China and other emerging economies

 $ 250 million on a state-of-the-art R&D center…in Shanghai

 Future of GM likely decided in their international HQ…in Shanghai

1–11
Disadvantages of Expanding Internationally

• Liability of foreignness

 Additional cost of doing business in an

unfamiliar cultural and economic environment

 Cost of coordinating across geographic distance

 Economic development may increase the cost of

doing business
 Rising wages with improved living standards

 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 characteristics of and critically evaluate four
different strategies MNEs 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?
 National institutions:
 Well-established legal and ethical pillars as well as
well- functioning economic institutions such as
capital markets, banks, and infrastructures

 National culture: "Programming of the mind"

 Geert Hofstede’s Cultural Dimensions

1. Power distance
2. Individualism
3. Masculinity/femininity
4. Uncertainty-avoidance
5. Long-term orientation
 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

 Greenfield is building new factories/offices from scratch

 Physically and organizationally building from the "ground up."
 Modes of Foreign Market Entry

Market Entry along the

Investment and Control Continuum
 Entry Modes of International Expansion

High Wholly Owned

Subsidiary
Extent of Investment Risk

Joint Venture

Strategic Alliance

Franchising

Licensing

Exporting
Low
Low High
Degree of Ownership and Control
Adapted from Exhibit 7.7 Entry Modes for International Expansion
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-31
Strategy around the World:
Cost Reduction vs. Local Responsiveness

• Local responsiveness:
 Tailor product and service offerings to fit local
consumer preferences and host-country requirements
 Higher cost
 Example: McDonald’s uses mutton in India

•Cost reduction:
 MNEs enter global marketplace with
the intention to reduce operation cost
 Example: Toyota Prius
The Integration-Responsiveness Framework
 Four Global Strategies

• International strategy
 Leveraging home-based core competencies
 Selling the same products or services in both domestic
and foreign markets
 Example: Selling Starbucks coffee internationally

• Localization (product differentiation) strategy

 Maximize local responsiveness via a
multi-domestic strategy
 Consumers will perceive them to be domestic
companies
 Example: Nestlé’s customized product offerings in
international markets
 Four Global Strategies

• Global standardization (cost leadership) strategy

 Economies of scale and location economies
 Pursuing a global division of labor based on best-of-class
capabilities reside at the lowest cost
 Example: 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)
 Example: German multimedia conglomerate Bertelsmann
: Caterpillar’s earth-moving equipment
 Characteristics, Benefits, and Risks
of Four Types of Global Strategy
  Characteristics Benefits Risk
  • Often the first step in • Leveraging core • No or limited local
  internationalizing. competence. responsiveness.
  • Used by MNEs with relatively large • Economies of scale. • Highly affected
  domestic markets (e.g., MNEs from • Low-cost implementation by exchange rate
  U.S., Germany, Japan). through: fluctuations.
International • Well-suited for high-end products • Exporting or licensing • IP embedded in product
Strategy (such as machine tools) and luxury (for products) or service could be
  goods that can be shipped across • Franchising (for services) expropriated.
  the globe. • Licensing (for trademarks)  
  • Products and services tend to have  
  strong brands.  
  • Main competitive strategy tends to  
  be differentiation since exporting,  
  licensing, and franchising add  
  additional costs.    
  • Used by MNEs to compete in • Highest-possible local • Duplication of key
  host countries with large and/or responsiveness. business functions
  lucrative but idiosyncratic domestic • Reduced exchange-rate in multiple countries
Localization markets (e.g., Germany, Japan, exposure. leads to high cost of
(Multidomestic) Saudi Arabia). implementation.
Strategy • Often used in consumer products • Little or no economies of
  and food industries. scale.
  • Main competitive strategy is • Little or no learning across
  differentiation. different regions.
  • MNE wants to be perceived as local • Higher risk of IP
  company. Expropriation.
       
 Characteristics, Benefits, and Risks
of Four Types of Global Strategy
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.
       
 Wal-mart Retreats
STRATEGY HIGHLIGHT
from Germany

• Wal-mart entered Germany

 Acquisition of 21 stores and 74 hypermarkets

• Wal-mart duplicated its U.S. policies and applied them in Germany

 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.

1–25
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
 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
 Consumer electronics – Japan & South Korea
 Mining companies – Australia

• Why are certain industries in some countries more

competitive than in others?
 Answer: National Competitive Advantage
Porter’s Diamond Model of National
Competitive Advantage
National Competitive Advantage Framework
• Factor conditions
 A nation’s endowments in terms of national, human, and other resources as
well as supportive infrastructure and institutions.

• Demand conditions
 Specific characteristics of demand in a firm’s domestic market

• Competitive intensity
 Highly competitive environments tend to stimulate
firms to outperform others (e.g., German car industry)

• Related and supporting industry

 Leadership in related and supporting industries can also foster world-class
competitors in downstream industry
 Complementarity
 Regional Clusters

• Regional cluster
 A group of interconnected companies and
institutions in a specific industry, located
near each other geographically and linked
by common characteristics

 Knowledge spillover

 Positive externalities that are

regionally constrained

 Exchange of ideas among firms

in a cluster
Mapping a Regional Cluster: Research Triangle
 Geographical Distribution of Clusters
Boise Wisconsin / Iowa / Illinois Boston
Information Tech Agricultural Equipment Minneapolis West Michigan Western Massachusetts Mutual Funds
Farm Machinery Cardio-vascular Office and Institutional Medical Devices
Polymers
Omaha Equipment Furniture Mgmt. Consulting
Seattle Telemarketing and Services Rochester Biotechnology
Aircraft Equipment and Design Hotel Reservations Michigan Imaging Equipment Software and
Software Credit Card Processing Warsaw, Indiana Clocks Networking
Coffee Retailers Orthopedic Devices Detroit Venture Capital
Auto Equipment Hartford
Oregon and Parts Insurance
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
Los Angeles Area Household Furniture
Defense Aerospace Synthetic Fibers
Entertainment Hosiery
Wichita
Light Aircraft Cleveland / Louisville
San Diego Paints & Coatings
Farm Equipment Baton Rouge /
Golf Equipment
Biotech/Pharma New Orleans Dalton, Georgia
Dallas Specialty Foods Carpets
Real Estate
Development Southeast Texas /
Nashville / Louisville
Colorado Louisiana
Hospital Management South Florida
Computer Integrated Systems / Programming Chemicals
Health Technology
Engineering Services Computers
Mining / Oil and Gas Exploration

Source: Adapted from Professor Michael E. Porter, Harvard Business School