Global Strategy (Chapter 10)
globalization hypothesis
Assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous This is meant to explain why business are finding success outside their native nation
location economies
Benefits from locating value chain activities in the world's optimal geographies for a specific activity, wherever that may be.
global-standardization strategy: strengths and weaknesses
S: Economies of scale and standardization, location economies W: No local responsiveness, Little or no product differentiation, "Race to the bottom" as wages increase
Demand Conditions
The specific characteristics of demand in a firm's domestic market A 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 Demanding customers may clue firms into the latest developments in specific fields and may push firms
Disadvantage of going global 2: loss of reputation
While cost savings can generally be achieved, globalizing a supply chain can also have unintended side effects. These can lead to a loss of reputation and diminish the MNE's competitiveness MNEs' search for low-cost labor has had tragic effects where local governments are corrupt and unwilling or unable to enforce a minimum of safety standards This is a CSR dilemma (Ensuring ethical sourcing of raw materials and supplies is becoming ever more important, and scandals can sink the perceived value of a company)
MNEs face two opposing forces when competing around the globe
cost reductions versus local responsivenes They present strategic trade-offs because higher local responsiveness frequently goes along with higher costs. Conversely, a focus on cost reductions does not allow for much local responsivenes Cost reduction typically what cost-leader is after L.R. is typically what differentiator is after (increases differentiation among products and offerings)
4 Strategies within the integration-responsiveness framework/ Global Expansion Framework
1) International Strategy 2) Multidomestic Strategy 3) Global-Standardization Strategy 4) Transnational Strategy
3 Disadvantages of Going Global
1) Liability of Foreignness 2) Loss of Reputation 3) Loss of Intellectual Property
multinational enterprise (MNE)
A company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries.
CAGE Framework
A decision framework based on the relative distance between home and a foreign target country along four dimensions: 1) cultural distance 2) administrative and political distance 3) geographic distance 4) economic distance Provides guidance on HOW a firm decides where to compete
foreign direct investment (FDI)
A firm's investments in value chain activities abroad
Strength and Disadvantage of International Strategy
A strength of the international strategy—its limited local responsiveness—is also a weakness in many industries. For example, when an MNE sells its products in foreign markets with little or no change, it leaves itself open to the expropriation of intellectual property highly affected by exchange-rate fluctuations
Disadvantage of going global 1: Liability of Foreignness
Additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distance
Administrative and political distance
Administrative and political distances are captured in factors such as the absence or presence of shared monetary or political associations, political hostilities, and weak or strong legal and financial institutions Many foreign (target) countries erect political and administrative barriers, such as tariffs, trade quotas, FDI restrictions, and so forth, to protect domestic competitors. Industries important to national security are typically protected
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 global strat 1: Gain access to larger market
Companies that base their competitive advantage on economies of scale and economies of scope have an incentive to gain access to larger markets because this can reinforce the basis of their competitive advantage
Competitive Intensity in a focal industry
Companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition
Cultural Distance
Cultural disparity between an internationally expanding firm's home country and its targeted host country Greater cultural distance increases the liability of foreignness
Porter's Diamond Framework
Explains national competitive advantage -Factor conditions -Demand conditions -Competitive Intensity in a focal industry -Related and supporting industries/complementors
The impact of economic development on MNEs
First, rising wages and other costs are likely to negate any benefits of access to low-cost input factors. Second, 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
Why develop a global strategy?
Gain access to larger market Gain access to low-cost input factors Develop new competencies A firm pursues international expansion if, after careful assessment, it determines that doing so can increase its economic value creation and enhance competitive advantage
Geographic Distance
Geographic distance does not simply capture how far two countries are from each other but also includes additional attributes, such as the country's physical size (Canada versus Singapore), the within-country distances to its borders, the country's topography, its time zones, and whether the countries are contiguous to one another or have access to waterways and the ocean
Related and supporting industries/complementors
Leadership in related and supporting industries can also foster world-class competitors in downstream industries. The availability of top-notch complementors 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
Why global strat 2: Gain access to low-cost input factors
MNEs that base their competitive advantage on a low-cost leadership strategy are particularly attracted to go overseas to gain access to low-cost input factors
What is distance in the CAGE framework?
Most of the costs and risks involved in expanding beyond the domestic market are created by distance. Distance not only denotes geographic distance (in miles or kilometers), but also includes, as the CAGE acronym points out, cultural distance, administrative and political distance, and economic distance Things like sharing a common currency or culture can decrease "distance," making a potential foreign target nation more appealing
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.
Transnational strategy: Strengths and Weaknesses
S: Attempts to combine benefits of localization and standardization strategies simultaneously by creating a global matrix structure. Economies of scale, location, experience, and learning. W: Global matrix structure is costly and difficult to implement, leading to high failure rate (requires duplication of key business functions in each host country because of high L.R. Challenging to find managers who can dexterously work across cultures)
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 arises out of the combination of high pressure for cost reductions and low pressure for local responsiveness cost-leaders tend to adopt this strat Because there is little or no differentiation or local responsiveness because products are standardized, price becomes the main competitive weapon. To be cost competitive, the MNE must maintain a minimum efficient scale Who: MNEs that manufacture commodity products such as computer hardware or offer services such as business process outsourcing
integration-responsiveness framework/ Global Expansion Framework
Strategy framework that juxtaposes the pressures an MNE faces for cost reductions and local responsiveness to derive four different strategies (aka how a company is planning on going global) to gain and sustain competitive advantage when competing globally
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 arises out of the combination of high pressure for local responsiveness and low pressure for cost reductions common in the consumer products and food industries
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) arises out of the combination of high pressure for local responsiveness and high pressure for cost reductions pursued by companies with blue ocean strat Besides harnessing economies of scale and location, a transnational strategy also aims to benefit from global learning implemented through a global matrix struc. This organizational structure combines economies of scale along specific product divisions with economies of learning attainable in specific geographic regions (benefits of cost-leader plus differ)
International Strategy
Strategy that involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets advantageous when the MNE faces low pressures for both local responsiveness and cost reductions often used successfully by MNEs with relatively large domestic markets and with strong reputations and brand names (foreign customers want to buy the original product, so they tend to use differentiation as their business strategy) rely on exporting or the licensing of products and franchising of services to reap economies of scale by accessing a larger market
To measure "distance" between nations, relative distance has to measured instead. Absolute metrics can't be relied on. To measure this "relative distance," strategists use
The CAGE Framework
National Culture
The collective mental and emotional "programming of the mind" that differentiates human groups Defined by Hofstede
local responsiveness
The need to tailor product and service offerings to fit local consumer preferences and host-country requirements Local responsiveness generally entails higher cost, and sometimes even out-weighs cost advantages from economies of scale and lower-cost input factors
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 cost
Where to compete??
The question of where to compete geographically is, following vertical integration and diversification, the third dimension of determining a firm's corporate strategy
Economic Distance
The wealth and per capita income of consumers is the most important determinant of economic distance Rich countries tend to trade with other rich countries; in addition, poor countries also trade more frequently with rich countries than with other poor countries Replication of an existing business model is much easier in a country where the incomes are relatively similar and resources, complements, and infra-structure are of roughly equal quality
Why global strat 3: Develop new competencies
This motivation is particularly attractive for firms that base their competitive 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
Disadvantage of going global 3: loss of intellectual property
When required to partner with a foreign host firm, companies may find their intellectual property being siphoned off and reverse-engineered Shows the downsides of intellectual property exposure
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
If the cost of going global exceeds the expected benefits in terms of value added (C > V), then a firm should...
not expand internationally
Hofstede's Cultural Dimensions
power distance, individualism, masculinity-femininity, uncertainty avoidance, long-term orientation, indulgence
State of globalization in the world
the level of globalization is no more than 10 to 25 percent this means the world is only semi-globalized rn
When deciding how to enter a foreign market, companies have to weigh the following
Foreign-entry modes with a high level of control such as foreign acquisitions or greenfield plants reduce the firm's exposure to two particular downsides of global business: loss of reputation and loss of intellectual property Should we export? (good test of whether a foreign market is ready for a firm's products) Will we be required to participate in a joint-venture with a local firm?
multidomestic strategy: strengths and weaknesses
S: An MNE following a multidomestic strategy, in con-trast with an international strategy, faces reduced exchange-rate exposure because the majority of the value creation takes place in the host-country business units W: costly and inefficient because it requires the duplication of key business functions across multiple countries W: Unable to reap economies of scale or learning across regions. W: The risk of IP appropriation increases when companies follow a multidomestic strategy (requires exposing tacit knowledge because products are manufactured locally.)
What is culture?
Culture is made up of a collection of social norms and mores, beliefs, and values. Culture captures the often unwritten and implicitly understood rules of the game Cultural differences find their expression in language, ethnicity, religion, and social norms
Factor Conditions
Describe a country's endowments in terms of natural, human, and other resources NOTE: natural resources are often not needed to generate world-leading companies because competitive advantage is often based on other factor endowments such as human capital and know-how
