Week 11: Global Strategy
How is globalisation made possible?
- Falling trade and investment barriers - Advanced telecommunications - Reduced transportation costs - Importance of MNEs and FDIs
Low investment and control: Advantages of Licensing and Franchising Strategies
- Low resource requirements - Income from royalties and franchising fees - Rapid expansion into many markets
Integration-Responsiveness Framework: Local responsiveness
- Tailor product and service offerings to fit local consumer preferences and host-country requirements. - Generally entails higher costs and sometimes even outweighs cost advantages from Economies of scale and low cost input factors - Higher cost → eg: McDonald's uses mutton in India, but general business model of offering fast food remains the same the world over. - Walmart sells live animals for food preparation in China, IKEA sells kimchi fridge and metal chopsticks in South Korea.
CAGE Framework: Economic distance
- Wealthy countries engage in relatively more cross-border trade than poorer ones - Rich countries tend to trade more frequently with other rich countries - Poor countries also tend to trade more frequently with rich countries. - Companies from rich countries benefit in cross-border trade with other rich countries when their competitive advantage is based on economies of experience, scale, scope and standardisation - this is because replication of existing business models are easier in country where incomes are relatively similar and resources, complements and infrastructure are of roughly equal quality. - Rich countries trade with poor ones to benefit from economic arbitrage (access to low cost input factors)
CAGE Framework: Geographic distance most affects industries or products...
- With low value-to-weight ratio (cement) - That are fragile and perishable (glass, meat) - In which communications are vital (financial services)
What is globalisation?
Globalisation is a process of closer integration and exchange between different countries and people worldwide.
Integration-Responsiveness Framework: Benefits of Multidomestic Strategy
Highest possible local responsiveness: - Can meet the specific needs of each market more precisely - Can respond more swiftly to localized changes in demand - Can target reactions to the moves of local rivals - Can respond more quickly to local opportunities and threats Increased differentiation Reduced exchange-rate exposure as majority of value creation takes place in the host country business units, which tend to span all functions.
How do MNEs enter foreign markets?
Low investments and low level of control: - Exporting - Licensing - Franchising High investments and high level of control: - Joint venture - Acquisition - Greenfield operations
Integration-Responsiveness Framework: Risks of Global-standardisation Strategy
No local responsiveness: - Unable to address local needs precisely - Less responsiveness to changes in local market conditions Some exchange rate exposure "Race to the bottom" as wages increase Some risk of IP expropriation Higher transportation costs and tariffs Higher coordination and integration costs
Porter's Diamond Framework: Demand Conditions
Specific characteristics of demand in a firm's demand market. Home market is made up of sophisticated customers who hold companies to high standard of value creation and cost containment which contributes to national competitive advantage. Demanding customers may also clue firms into the test development in specific fields and may push firms to move basic findings into commercial applications for the marketplace.
Reasons for MNEs to expand internationally
- Gain access to larger market - Gain access to low-cost input factors - Develop new competencies
Integration-Responsiveness Framework: Global-standardisation Strategy (Infosys, Lenovo, Siemens Energy)
- High pressure for cost reductions, low pressure for local responsiveness - Strategy attempting to reap Economies of scale and location economies by pursuing a global division of labor based on the best of class capabilities reside at the lowest cost (eg: Lenovo's R&D in Beijing, Shanghai, and Raleigh; production center in Mexico, India, and China - Does not require them to change product features, quality → standardize internal processes - Used by MNEs (often organised as networks) that are offering standardised products and services (i.e. computer hardware or business process outsourcing) - Main business-level strategy is cost leadership
Integration-Responsiveness Framework: Risks of International Strategy
- No or limited local responsiveness - Highly affected by exchange-rate fluctuations - IP embedded in product or service could be expropriated (i.e. pirates can reverse-engineer the products to discover the IP embedded: in Thailand, flourishing market for knockoff luxury sports cars)
CAGE Framework: Administrative and Political distance most affects industries or products...
- That a foreign government views as staples (electricity), as building national reputations (aerospace) or as vital to national security (telecommunications)
Porter's Diamond Framework: Factor Conditions
A nation's endowments in terms of national, human, and other resources such as capital markets, supportive institutional framework, research universities, public infrastructures (airports, roads, schools, health care system)
Polycentric innovation strategy
A strategy in which MNEs now draw on multiple, equally important innovation hubs throughout the world characteristic of Globalization 3.0 I.e. GE global research which orchestrates a network of excellence with facilities in New York, Bangalore, Shanghai, and Munich
Globalisation Hypothesis
Assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous. I.e. McDonald's, Coca Cola, Ikea.
Location economies
Benefits from locating value chain activities in the world's optimal geographies for a specific activity, wherever that may be
Global Matrix Structure
Combines Economies of Scale along specific product divisions with economies of learning attainable in specific geographic regions Best practices, ideas, and innovations will be diffused throughout the world, regardless of their origination
CAGE Framework: Cultural - What increases the distance?
Distance between 2 countries increase with: - Different languages, ethnicities, religions, social norms and dispositions - Lack of connective ethic or social networks - Lack of trust and mutual respect
Why are certain industries in some countries more competitive than in others?
Due to national competitive advantage.
Stages of Globalisation: Globalisation 2.0 1945-2000
Duplication of business functions overseas allowed for greater local responsiveness to country-specific circumstances. Duplicated business functions: smaller, self-contained copies of themselves with all business functions intact, mainly in Australia, Western Europe, and Japan. Required significant amount of Foreign Direct Investments (FDIs). Knowledge flow back to HQ remained limited.
Porter's Diamond Framework
Explains national competitive advantage - Factor conditions - Demand conditions - Competitive intensity in focal industry - Related and supporting industries/complementors
Porter's Diamond Framework: Competitive Intensity in Focal Industry
Highly competitive environments tend to stimulate firms to outperform others. Competitors that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition.
Stages of Globalisation: Globalisation 3.0 21st century
MNE organises to a more seamless global enterprise with centres of expertise: freely locate business functions anywhere in the world. MNEs become global collaboration networks.
Are natural resources needed to generate world-leading companies?
No, as resource-rich countries like Iran, Iraq, Russia, etc. are not home to any of the world's leading companies. Natural resources-scarce countries such as Singapore often develop world-class human capital to compensate
Stages of Globalisation: Globalisation 1.0 1900-1941
Only sales and distribution and procurement of raw materials took place overseas. Knowledge flowed one way; home to international.
Integration-responsiveness framework
Strategy framework that juxtaposes the pressures an MNE faces for cost reductions and local responsiveness to derive four different strategies to gain and sustain competitive advantage when competing globally
National Competitive Advantage
World leadership in specific industries Companies that are world leaders in specific industries tend to be the strongest competitors globally Direct effect on firm-level competitive advantage
CAGE Framework: Administrative and Political - What increases the distance?
- Absence of trading blocs - Absence of shared currency, monetary, or political association - Absence of colonial ties - Political hostilities - Weak legal and financial institutions - Tariffs, trade quotas and FDI restrictions to protect domestic competitors
Integration-Responsiveness Framework: Benefits of Transnational Strategy
- Attempts to combine benefits of localisation and standardisation strategies by creating a global matrix structure - Economies of scale, location, experience, and learning (global learning) - Enables the transfer and sharing of resources and capabilities across borders - Provides the benefits of flexible coordination - Autonomous P&L centers but attempts to share best practices across units; global learning and HR strategies are coordinated @ network level
High investment and control: Advantages of Alliance and Joint Venture Strategies
- Avoid entry barriers - Allow for resource and risk sharing - Partner's knowledge of local market conditions - Joint learning and sharing - Preservation of partner independence
High investment and control: Advantages of Greenfield Strategies
- Building new, fully owned facilities from scratch - High level of control over venture - "Learning by doing" in the local market - Direct transfer of the firm's technology, skills, business practices, and culture
High investment and control: Disadvantages of Greenfield Strategies
- Capital cost of initial development - Risks of loss due to political instability or lack of legal protection of ownership - Slowest form of entry due to extended time required to construct facility
Disadvantages of MNEs expanding internationally: Loss of reputation
- Considerable risk and cost of doing business abroad - Globalising a supply chain can have unintended effects: low wages, long hours, poor working and living conditions: Foxconn, Apple's supplier -> Apple stands for innovation and superior customer experience but any potential negative exposure from its global activities can diminish reputation This challenge directly concerns the MNEs corporate social responsibility: ensuring ethical sourcing of materials and suppliers is important (moral responsibility) but there is also market incentive to protect their reputation given the public backlash in horrific externalities.
CAGE Framework: Cultural distance most affects industries or products...
- Content-intensive service - With high linguistic content (TV) - Related to national and/or religious identity (food) - Carrying country-specific quality associations (wine)
High investment and control: Disadvantages of Acquisition Strategies
- Costs of acquisition - Complexity of acquisition process - Integration of the firms structures, cultures, operations, and personnel
High investment and control: Disadvantages of Alliance and Joint Venture Strategies
- Cultural and language barriers - Costs of establishing the working arrangement - Issues of joint control - Protection of proprietary technology or competitive advantage
CAGE Framework: Cultural Distance
- Cultural disparity between an internationally expanding firm's home country and targeted host country. - Directly affects customer's preferences - A greater cultural distance can increase the cost and uncertainty of conducting business abroad - Cultural and linguistic differences are highly correlated
CAGE Framework: Economic - What increases the distance?
- Different consumer incomes - Different costs and quality of natural, financial and human resources - Different information or knowledge
CAGE Framework: Economic distance most affects industries or products...
- For which demand varies by income (cars) - In which labor and other cost differences matter (textiles)
Integration-Responsiveness Framework: Risks of Transnational Strategy
- Global matrix structure is costly and difficult to implement, leading to high failure rate - Some exchange-rate exposure - Higher risks of IP expropriation - Conflicting goals may be difficult to reconcile and require trade-offs - Implementation more costly and time-consuming - More complex to implement: high local responsiveness typically requires key business units are frequently duplicated in each host country, leading to higher costs -> challenge of finding managers who can dextrously work across cultures in the ways required by a transnational strategy
CAGE framework in conclusion
- Helps determine the attractiveness of foreign target. - A deeper analysis requires looking inside the firm's strength 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.
High investment and control: Advantages of Acquisition Strategies
- High level of control - Quick large-scale market entry - Avoids entry barriers - Access to acquired firm's skills
Integration-Responsiveness Framework: Transnational Strategy (ABB, Bertelsmann, P&G)
- High pressure for cost reductions and local responsiveness - Combination of localization strategy (high responsiveness) with global standardization strategy (lowest cost position attainable) - Think globally but act locally: German multimedia conglomerate Bertelsmann - Used by MNEs that pursue an integration strategy (blue ocean) by simultaneously focusing on product differentiation and low cost (reconciling)
Reasons for MNEs to expand internationally: Gain access to low-cost input factors
- Labor, natural resources, tech, logistics: natural resources was a key driver for globalisation 1.0 and 2.0 - Professionals less expensive in China and India: significant cost differential exists for high-skilled labour and not just low-skilled labour
CAGE Framework: Geographic - What increases the distance?
- Lack of common border, waterway access, adequate transportation or communication links - Physical remoteness - Different climates and timezones
Disadvantages of MNEs expanding internationally: Loss of intellectual property
- Large scale copyright infringements in software, movie, and music due to IP exposure - When required to partner with foreign host firm, companies may find their IP being siphoned off and reverse-engineered.
Integration-Responsiveness Framework: Benefits of International Strategy
- Leveraging core competencies - Economies of scale - Low cost implementation through: exporting/licensing (products), franchising (services), licensing (trademarks)
Disadvantages of MNEs expanding internationally
- Liability of foreignness - Loss of reputation - Loss of intellectual property
Integration-Responsiveness Framework: Benefits of Global-standardisation Strategy
- Location economies: global division of labour based on wherever best-of-class capabilities reside @ lowest cost. To be price competitive, MNEs must maintain a minimum efficient scale. - Lower costs due to scale, scope, and standardisation economies - Greater efficiencies due to the ability to transfer best practices across markets - More innovation from knowledge sharing and capability transfer - The benefit of a global brand and reputation - Price becomes the main competitive weapon
Integration-Responsiveness Framework: International Strategy (Rolex, Starbucks, Harley-Davidson)
- Low pressure for cost reductions and local responsiveness - Leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets (i.e. Harley-Davidson in China) - Often the first step in internationalising - Used by MNEs with relatively large domestic markets or strong exporters (eg: MNEs from US, Germany, Japan, SK) - Well suited for high-end products with value-to-weight ratio such as machine tools and luxury goods that can be shipped across the globe - Products and services tend to have strong brands - Main business level strategy tends to be differentiation because exporting, licensing, franchising add additional costs (to reap economies of scale by accessing a larger market) - Capitalises on the fact that foreign customers want to buy the original product (I.e. Apple iPhone: luxury product and status symbol the world over) - Increasing globalisation hence fewer and fewer markets correspond to international strategy (low pressures in cost reduction and local responsiveness)
Integration-Responsiveness Framework: Multidomestic Strategy (Bridgestone, Nestle, Philips)
- Low pressure for cost reductions, high pressure for local responsiveness. - Maximise local responsiveness with the intent that local consumers will perceive the company to be domestic (eg: Nestle's customised product offerings) - Outward facing: changes (i.e. promotion, language used, menu design, etc.) - Inward facing: does not change (service/training processes, recipes for standardized items, etc.) - Used by MNEs to compete in host countries with large and lucrative but idiosyncratic domestic markets (eg: Germany, Japan, Saudi Arabia) - Often used in consumer products and food industries - Main business-level strategy is differentiation I.e. Nestle: known for customising product offerings to suit local tastes, preferences and requirements - strong brand names, core competencies in R&D and quality in their consumer products and food industries.
Reasons for MNEs to expand internationally: Gain access to larger market
- MNE has opportunities for economies of scale and scope: reinforce basis of their competitive advantage and allows MNEs to out-compete local rivals. - Firms in smaller home markets (Acer, Nestle, Samsung): Becoming an MNE may be necessary to achieve growth or to gain and sustain competitive advantage as domestic markets may be too small for companies to reach significant economies of scale to compete effectively against other MNEs.
Low investment and control: Disadvantages of Licensing and Franchising Strategies
- Maintaining control of proprietary know-how - Loss of operational and quality control - Adapting to local market tastes and expectations
Low investment and control: Disadvantages of Export Strategies
- Maintaining relative cost advantage of home-based production - Transportation and shipping costs - Exchange rates risks - Tariffs/Import duties - Loss of channel control
Reasons for MNEs to expand internationally: Develop new competencies
- Particularly attractive for firms that base their competitive advantage on a differentiation strategy - Location economies - Cisco, AstraZeneca, and Unilever (Unilever's concept center in downtown Shanghai - attract eager volunteers to test firm's latest product innovations on-site) - Polycentric innovation strategies
Low investment and control: Advantages of Export Strategies
- Producing goods in 1 country to sell in another and to test whether a foreign market is ready for a firm's products - Low capital requirements - Economies of scale in utilizing existing production capacity - No distribution risk - No direct investment risk
What are the 2 consequences of globalisation 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
CAGE Framework
A decision framework based on the relative distance between home and a foreign target country along four dimensions: cultural distance, administrative and political distance, geographic distance, and economic distance. This is because most of the costs and risks involved in expanding beyond the domestic market are created by distance Tells a firm where to compete.
Disadvantages of MNEs expanding internationally: Liability of foreignness
Additional cost of doing business in an unfamiliar cultural and economic environment, and coordinating across geographic distances.
Integration-Responsiveness Framework: Risks of Multidomestic Strategy
Duplications of key business functions in multiple countries lead to high cost of implementation (costly and inefficient) Each country unit tends to be highly autonomous: - Little or no economies of scale - Little or no learning across different regions Higher risk of IP expropriation: exposing tacit knowledge because products are manufactured locally (i.e. process of how to create consumer products of higher perceived quality) Hinders resource and capability sharing or cross-market transfers Not conducive to a worldwide competitive advantage
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, with 2 new ones: - Power distance - Individualism - Masculinity-feminity - Uncertainty avoidance - Long-term orientation - Indulgence Combining the distinct dimensions of culture into an aggregate measure for each country to compare the national-culture measures for any 2 country pairings to inform their entry decisions.
Porter's Diamond Framework: Related and Supporting Industry
Leadership in related and supporting industries can also foster world-class competitors in downstream industry. Availability of top-notch complementors - firms that provide a good or service that leads customers to value the focal firm's offering more when the 2 are combined - further strengthens national competitive advantage Eg: Switzerland leveraged its early lead in industrial chemicals into pharmaceuticals: a sophisticated health care service sprang up alongside as an important complementor, to provide further stimulus for growth and continuous improvement and innovation.
Integration-Responsiveness Framework: Cost Reduction
MNEs enter global market place with the intention to reduce operation cost: Globalization Hypothesis → example: Toyota Prius I.e. Most vehicles today are built on global platforms and modified (sometimes only cosmetically) to meet local tastes and standards MNEs attempt to reap significant cost reductions by leveraging economies of scale and by managing global supply chains to access lowest-cost input factors. Low cost is a key competitive weapon.
Are MNEs solely to blame due to unintended effects in host country?
No, they are not solely to blame as local governments are corrupt and unwilling or unable to enforce a minimum of safety standards. However, MNEs also receive the blame with negative consequences on reputation. For example, accused of exploiting workers and being indifferent to their working conditions.