BUS 498 Ch 10

A cost leader:

More likely to achieve success with a global-standardization strategy

Multinational Enterprises

A company that deploys resources and capabilities in -The procurement, production, and distribution of goods and services -At least two countries Examples: -Boeing, Caterpillar, Coca-Cola, GE, John Deere, Exxon Mobil, IBM, P&G, and Walmart

The Business Level Strategy Influences the Global Strategy

A cost leader: A differentiator: A blue ocean strategy:

Factor Conditions

A country's endowments: -Natural, human, and other resources -Resource rich countries: focus on commerce -Resource lacking countries: focus on human capital Other important factors: -Capital markets -A supportive institutional framework -Research universities -Public infrastructure (airports, roads, schools, health care system, etc.)

Globalization

A process of closer integration and exchange Between different countries and peoples worldwide Made possible by: -Falling trade and investment barriers -Advances in telecommunications -Reductions in transportation costs

A blue ocean strategy:

Also called a transnational strategy Combines high pressures for cost reductions with high pressures for local responsiveness Is difficult to implement

Global-Standardization Strategy

Attempts to reap significant: -Economies of scale & location economies -Through global division of labor where capabilities are at the lowest cost Arises out of the combination of: -High pressure for cost reductions -Low pressure for local responsiveness Price becomes the main competitive weapon

Gain Access to a Larger Market

Becoming an MNE provides opportunities for -Economies of scale -Economies of scope Opportunities to participate in a larger market Opportunities to outcompete local rivals Helps firms in smaller economies -Achieve growth -To gain and sustain competitive advantage

Administrative & Political Distance

Captured in factors such as: -Shared monetary or political associations -Political hostilities -Weak or strong legal and financial institutions Political and administrative barriers include: -Tariffs -Trade quotas -FDI restrictions

The Integration Responsiveness Framework

Deals with the pressures an MNE faces for cost reductions and local responsiveness -Local responsiveness: the need to tailor product and service offerings to fit local consumer preferences

Cultural Distance

Disparity between a firm's home country and its targeted host country -Social norms and morals, beliefs, and values -Differentiation among human groups Made up of: -Power distance -Individualism -Masculinity-femininity -Uncertainty avoidance -Long-term orientation -Indulgence

LO 10-2 Explain why companies compete abroad, and evaluate the advantages and disadvantages of going global.

Firms expand beyond their domestic borders if they can increase their economic value creation (V - C) and enhance competitive advantage. Advantages to competing internationally include gaining access to a larger market, gaining access to low-cost input factors, and developing new competencies. Disadvantages to competing internationally include the liability of foreignness, the possible loss of reputation, and the possible loss of intellectual capital.

Advantages of Going Global

Gain access to a larger market. Gain access to low-cost input factors. Develop new competencies.

Stages of Globalization

Globalization 1.0: 1900-1941 Globalization 2.0: 1945-2000 Globalization 3.0: 21st Century

LO 10-1 Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy.

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. A multinational enterprise (MNE) deploys resources and capabilities to procure, produce, and distribute goods and services in at least two countries. Many MNEs are more than 50 percent globalized; they receive the majority of their revenues from countries other than their home country. Product, service, and capital markets are more globalized than labor markets. The level of everyday activities is roughly 10 to 25 percent integrated, and thus semi-globalized. Foreign direct investment (FDI) denotes a firm's investments in value chain activities abroad.

The CAGE Distance Framework

Guides MNE decisions on which countries to enter CAGE is an acronym for different types of distance -Cultural -Administrative and political -Geographic -Economic

Develop New Competencies

Helps MNEs that pursue a differentiation strategy Foreign direct investments provide access to: -Communities of learning: often contained in specific geographic regions -Location economies: benefits from locating value chain activities in optimal geographies

Gain Access to Low-Cost Input Factors

Helps MNEs that pursue a low-cost leadership strategy Examples of low-cost raw materials: -Lumber, iron ore, oil, and coal Was a key driver of Globalization 1.0 and 2.0 -During Globalization 3.0, firms benefit from lower labor costs in manufacturing and services

Competitive Intensity in a Focal Industry

Highly competitive environments lead to better firm performance. Example: Fierce environment for German car companies helped prepare them for global competition -Fierce domestic competition -No-speed-limit autobahn -Require top-notch engineering of chassis and engines -High gas prices ($9) put pressure on low fuel consumption -Demanding customers

Four different strategies to gain and sustain competitive advantage when competing globally:

International strategy Multidomestic strategy Global-standardization strategy Transnational strategy

Related and Supporting Industries/Complementors

Leadership in related and supporting industries Fosters complementors in downstream industries -Firms that provide an additional good or service --Combined with the primary product --Leads customers to value the focal firm's offering more -Further strengthens national competitive advantage

International Strategy

Leverages home-based core competencies Sells the same products or services in both domestic and foreign markets Advantageous when the MNE faces: -Low pressures for local responsiveness -Low pressures for cost reductions Often used successfully by MNEs with: -Large domestic markets -Strong reputations and brand names Limited local responsiveness

Disadvantages of Going Global

Liability of foreignness Loss of reputation Loss of intellectual property

Globalization in the 21st Century

MNEs are global-collaboration networks that perform business functions throughout the world

A differentiator:

More likely to achieve success with an international or multidomestic strategy

LO 10-3 Apply the CAGE distance framework to guide MNE decisions on which countries to enter.

Most of the costs and risks involved in expanding beyond the domestic market are created by distance. The CAGE distance framework determines the relative distance between home and foreign target country along four dimensions: cultural distance, administrative and political distance, geographic distance, and economic distance.

Global Strategy

Part of a firm's corporate strategy Goal: -To gain and sustain a competitive advantage -To compete against other foreign and domestic companies around the world Foreign Direct Investment: -A firm's investments in value chain activities abroad

Loss of Intellectual Property

Particularly in the software, movie, and music industries Copyright infringements can occur in foreign markets. Intellectual property can be siphoned off or reverse-engineered.

The CAGE Framework Helps Make Global Strategy Decisions

Relative distance / closeness to a target market Assesses multiple dimensions -Cultural, administrative/political, geographic, and economic Mode of foreign entry -Consider degree of investment -Consider level of control

Loss of Reputation

Reputation is one of the most valuable resources that a firm may possess. -Innovation reputation -Customer service reputation -Brand reputation Can be due to low wages, long hours, and poor working and living conditions overseas Local government may be corrupt. Minimum safety standards may not be enforceable

Globalization 1.0: 1900-1941

Sales, operations, and some procurement Strategy flowed from HQ to international sites

Transnational Strategy

Strategy that attempts to combine: -Benefits of a localization strategy --High local responsiveness -With a global-standardization strategy --Lowest-cost position attainable Arises out of the combination of: -High pressure for local responsiveness -High pressure for cost reductions Used by MNEs that pursue a blue ocean strategy Difficult to implement

Death of Distance Hypothesis:

The assumption that geographic location shouldn't lead to firm-level competitive advantage because firms are able to source inputs globally. This assumption is inaccurate.

Demand Conditions

The characteristics of demand From a firm's domestic market Customers hold companies to high standards of value creation. -Developments in research -Cost containment -Other marketplace applications

Dimensions to Formulate the Firm's Corporate Strategy

The degree of vertical integration The level of diversification How / if to compete outside of its home market -The benefits usually outweigh the costs. -Even small companies can compete this way. --Via the Internet

State of Globalization

The level of globalization is no more than 10 to 25 percent total. Evidence: -2% of all voice-calling minutes are cross-border. -3% of world's population are first-generation immigrants. -9% of all investments are foreign direct investments. -15% of patents list at least one foreign inventor. -18% of Internet traffic crosses national borders. The world isn't fully globalized. -Only semi-globalized

Is the Internet Causing Firm Location To Be Less Important?

The short answer: no High-performing firms in certain industries are concentrated in specific countries.

LO 10-4 Compare and contrast the different options MNEs have to enter foreign markets.

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). 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.

Physical Geographic Location Maintains Its Importance

This is the case despite the rise of the internet. Examples of regional geographic clusters: -Silicon Valley: computer technology -Chicago: medical device firms -Southern Germany: Daimler, BMW, Audi, Porsche -Northern Italy: fashion companies Local presence provides: -Knowledge -Relationships -Motivation

Multidomestic Strategy

Used to try and maximize local responsiveness MNEs hope that local consumers will perceive their products or services as local ones. This strategy arises out of the combination of: -High pressure for local responsiveness -Low pressure for cost reductions Can be costly and inefficient -Duplication of business functions across countries

Liability of Foreignness

Working in an unfamiliar cultural environment Working in an unfamiliar economic environment Can result in additional costs

Globalization 3.0: 21st Century

Business function locations are based on costs, capabilities, and PESTEL factors Companies can operate 24/7, 365 days a year

Geographic Distance

Does not imply only physical distance Includes the following attributes: -Physical size (Canada versus Singapore) -Within-country distances to its borders -The country's topography -Time zones -Whether the countries are contiguous to one another -Access to waterways and the ocean Infrastructure is also important: -Roads, power, and telecommunications

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.

LO 10-5 Apply the integration-responsiveness 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, multi-domestic, 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 multi-domestic 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. A global-standardization strategy seeks to reap economies of scale and location by pursuing a global division of labor based on wherever best-of-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.

Globalization 2.0: 1945-2000

To reconstruct damage from the war Focus on European countries, Japan, and Australia Greater local-responsiveness HQ set goals, international sites influenced tactics

Economic Distance

Wealth and per capita income of consumers Wealthy countries tend to engage in more cross-border trade. Wealthy countries trade with wealthy countries. -To benefit from economies of experience, scale, scope, and standardization --Due to similar infrastructure & resources Wealthy countries trade with poor countries. -To access low-cost input factors