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

8

Strategy in the Global

Environment

Note: Has not been proofread.

Copyright © Houghton Mifflin Company. All rights reserved. 8 - 2

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)


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 10K 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)


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.


Location Economies – Reinventing LeviClosing 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 1950s and '60s, 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 (help-desks) 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)


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.


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.


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)


Sources of Competitive Advantage

• Global strategy and expansion is a way firm’s can further exploit the value creation potential of their distinctive competencies.

• Distinctive competencies are a firm’s specific resources and capabilities that allow a firm to achieve these to gain a competitive advantage. (Chap. 3)– Superior Efficiency

– Quality

– Innovation

– Customer Responsiveness

– Top management’s value & aspirations (PCN)


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


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


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


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


Pressures for Cost Reductions and Local Responsiveness

• Firms that compete in the global market-place usually face two types of competitive pressures.

1) Pressures for cost reduction

2) Pressures to be locally responsive

Firm C – Pressures to be both cost reduction and locally responsive.


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


Pressures for Local Responsiveness

• Differences in customer tastes and preferences

• Differences in infrastructure and traditional practices

• Differences in distribution channels

• Host government demands


Four Strategies to Enter & Compete in the Global Market

1) International Strategy• 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, McDonald’s, Wal-Mart, & Microsoft

2) Multi-domestic Strategy• Cost considerations tend to take a back seat – in

the competitive 2000’s it’s “mostly a thing of the past.”

3) Global Strategy – e.g., Dell, Inc.• Not applicable when there are high demands for

local responsiveness.4) Transnational Strategy – rarely profitable today

• Firms seek to simultaneously achieve low-cost, be locally responsive, transfer competencies, and differentiation advantages.


Four Basic Strategies


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



• 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



• Transnational strategy– Simultaneously seeking to lower costs, be

locally responsive, and transfer competencies in a way consistent with global learning


Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar


Advantages and Disadvantages of Different Strategies for Competing Globally


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


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


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)


The Choice of Entry Mode

• Exporting

• Licensing

• Franchising

• Joint ventures

• Wholly-owned subsidiaries

• Choosing Among Entry Modes


The Advantages and Disadvantages of Different Entry Modes


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


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


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


Structuring Alliances to Reduce Opportunism


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


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


Discussion Questions

• What kind of companies stand to gain the most from entering into strategic alliances with potential competitors? Why? (p. 294)


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