Ch 10- Global Strategy: Competing Around the World

Why go global (disadvantages)

1. Liability of foreignness: additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances 2. Loss of reputation: reputation for innovation, customer service, or brand reputation. Low wages, long hours, and poor working and living conditions can damage a company's brand. Directly concerns the MNEs' corporate social responsibility (CSR) 3. Loss of intellectual property

3 stages of globalization

1900-1941: all the important business functions were located in the home country, exporting goods to other markets. 1945-2000: new focus on growing business. MNEs began to create smaller, self-contained copies of themselves, with all business functions intact, in a few key countries (Western European countries, Japan, and Australia). Required FDI. Allowed for greater local responsiveness. Headquarters set overarching strategic goals and allocated resources through the capital budgeting process, local mini-MNE replicas had considerable leeway in day-to-day operations 21ST CENTURY: companies now freely locate business functions anywhere in the world based on an optimal mix of costs, capabilities, and PESTEL factors. Greater communication. Global enterprise with centers of expertise

Consequences of Globalization

2. Rising wages and other costs are likely to negate any benefits of access to low-cost input factors. 1. 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 distance 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. Cultural- language, social norms, beliefs, values, ethnicity, religion. Hofstede and culture: Power distance, individualism, masculinity-femininity, and uncertainty avoidance, long-term orientation and indulgence Administrative and political- absence or presence of shared monetary or political associations, political hostilities, and weak or strong legal and financial institutions. Colony-colonizer relationship. Tariffs, trade quotas, FDI restrictions. Strong legal and ethical pillars as well as well-functioning economic institutions Geographic- how far two countries are from each other but also includes additional attributes, such as the country's physical size, topography, time zones, waterways Economic- wealth and per capita income of consumers is the most important determinant of economic distance

Going global: where?

CAGE distance framework

Competitive intensity in focal industry

Companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition

Going global: how?

Exporting Strategic alliances (including licensing, franchising, and joint ventures) Subsidiary (Acquisitions and Greenfield operations)

Global Strategy

Getting a larger customer base (larger market) Understanding the supply chain (Gain access to low-cost input factors) Develop new competencies

multidomestic strategy

Strategy pursued by MNEs that attempts to maximize local responsiveness, with the intent that local consumers will perceive them to be domestic companies. High pressure for local responsiveness and low pressure for cost reductions Used when entering host countries with large and/or idiosyncratic domestic markets. Common in the consumer products and food industries Strengths & weaknesses: reduced exchange-rate exposure, costly and inefficient because it requires the duplication of key business functions across multiple countries, risk of IP appropriation increases because exposing codified knowledge and tacit knowledge

international strategy

Strategy that involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets. Tends to rely on exporting or the licensing of products and franchising of services to reap economies of scale by accessing a larger market. Strength and weakness- limited local responsiveness. Expropriation of intellectual property (IP). Highly affected by exchange-rate fluctuations International strategy is reassuring to everyone because customers know what to expect in different countries and companies can rely on their costs

Related and supporting industries/complementors

The 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 two are combined— further strengthens national competitive advantage The effects of sophisticated customers and highly competitive industries ripple through the industry value chain to create top-notch suppliers and complementors

globalization

The process of closer integration and exchange between different countries and peoples worldwide, made possible by falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs. Combined, these factors reduce the costs of doing business around the world. allows companies to source supplies at lower costs, to learn new competencies, and to further differentiate products

US MNE's

U.S. MNEs have a disproportionately positive impact on the U.S. economy- make up 1% of total number of US companies but account for a large amount of employment, wages and GDP

multinational enterprise

a company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries engine behind globalization By making investments in value chain activities abroad, MNEs engage in foreign direct investment (FDI)

Factor conditions

a country's endowments in terms of natural, human, and other resources. Other important factors include capital markets, a supportive institutional framework, research universities, and public infrastructure

Foreign Direct Investment (FDI)

a firm's investments in value chain activities abroad

liability of foreignness

additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances

globalization hypothesis

assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous The strategic foundations of the globalization hypothesis are based primarily on cost reduction. Lower cost is a key competitive weapon, and MNEs attempt to reap significant cost reductions by leveraging economies of scale and by managing global supply chains to access the lowest-cost input factors Although there seems to be some convergence of consumer preferences across the globe, national differences remain, due to distinct institutions and cultures.

death-of-distance hypothesis

assumption that geographic location alone should not lead to firm-level competitive advantage because firms are now, more than ever, able to source inputs globally

Why go global (advantages)

benefits exceed the costs (EVC): 1. Gain access to a larger market- Unless companies in smaller economies expand internationally, their domestic markets are often too small for them to reach significant economies of scale to compete effectively against other MNEs. economies of scale and economies of scope for CA 2. Gain access to low-cost input factors- lower labor costs in manufacturing and services 3. Develop new competencies- attractive for firms that base their com- petitive advantage on a differentiation strategy. These companies are making foreign direct investments to be part of communities of learning, which are often contained in specific geographic regions. Location economies

location economies

benefits from locating value chain activities in the world's optimal geographies for a specific activity, wherever that may be

Greenfield operations

building new, fully owned plants and facilities from scratch

cultural distance

cultural disparity between an internationally expanding firm's home country and its targeted host country

Porters diamond framework

explains national competitive advantage. Consists of four interrelated factors: Factor conditions, Demand conditions, Competitive intensity in focal industry, Related and supporting industries/complementors

global strategy

part of a firm's corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world

Demand conditions

specific characteristics of demand in a firm's domestic market

global standardization strategy

strategy attempting to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost High pressure for cost reductions and low pres- sure for local responsiveness. Often organized as networks. Business-level strategy tends to be cost leadership (must maintain a minimum efficient scale) Advantages & weaknesses: obtaining the lowest cost point possible by minimizing local adaptations

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 four strategic positions are: International Multidomestic Global-standardization Transnational

transnational strategy

strategy that attempts to combine the benefits of a localization strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable) High pressure for local responsiveness and high pressure for cost reductions Blue ocean strategy global matrix structure- difficult to implement because of the organizational complexities involved. High local responsiveness typically requires that key business functions are frequently duplicated in each host country, leading to higher costs. Further compounding the organizational complexities is the challenge of finding managers who can dexterously work across cultures in the ways required by a transnational strategy

national culture

the collective mental and emotional "programming of the mind" that differentiates human groups

local responsiveness

the need to tailor product and service offerings to fit local consumer preferences and host-country requirements

National Competitive Advantage

world leadership in specific industries. Companies from home countries that are world leaders in specific industries tend to be the strongest competitors globally home market made up of sophisticated customers who hold companies to a high standard of value creation and cost containment contributes to national competitive advantage

global expansion framework

y axis- cost pressure (high to low) x axis- pressures for LR (low to high) Up and down is DNA, side to side is transactional (and companies may move along it but not up and down)