Chapter 10: Global Strategy: Competing Around The World

Advantages of Adopting Global Strategy

-Gain access to a larger market. -Gain access to low-cost input factors. -Develop new competencies. —> Some MNEs pursue a global strategy in order to develop new competencies. These companies are making foreign direct investments to be part of communities of learning, which are often contained in specific geographic regions.

Joint Venture

Another special form of strategic alliance, two or more partners create and jointly own a new organization. Since the partners contribute equity to this venture, they make a long-term commitment, which in turn facilitates transaction-specific investments.

Strategic Alliance

Are voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services. —Strategic alliances can facilitate investments in transaction-specific assets without encountering the internal transaction costs involved in owning firms in various stages of the industry value chain. —Is also an umbrella term that denotes different hybrid organizational forms—among them, long-term contracts, equity alliances, and joint ventures. Examples include: -Long Term Contracting -Equity Alliance -Joint Venture -Greenfield

International

Is essentially a strategy in which a company sells the same products or services in both domestic and foreign markets. It enables MNEs to leverage their home-based core competencies in foreign markets. An international strategy is one of the oldest types of global strategies and is frequently the first step companies take when beginning to conduct business abroad.

Transnational

MNEs pursuing this strategy attempt to combine the benefits of a localization strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable). This strategy arises out of the combination of high pressure for local responsiveness and high pressure for cost reductions. —Is generally used by MNEs that pursue a blue ocean strategy at the business level by attempting to reconcile product and/or service differentiation at low cost. —Besides harnessing economies of scale and location, a this strategy also aims to benefit from global learning. MNEs typically implement a transnational strategy through a global matrix structure.

Cultural Distance

MNEs then can compare the national-culture measures for any two country pairings to inform their entry decisions. The difference between scores indicates the cultural disparity between the internationally expanding firm's home country and its targeted host country. —In short, greater cultural disparity increases the liability of foreignness.

Globalization Hypothesis

One of the core drivers for globalization is to expand the total market of firms in order to achieve economies of scale and drive down costs. For many business executives, the move toward globalization is based on the hypothesis which states that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogeneous.. —The strategic foundations of the 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 lowest-cost input factors.

Greenfield

Preferred by MNEs, it consists of building new, fully owned plants and facilities from scratch.

Exporting

Producing goods in one country to sell in another—is one of the oldest forms of internationalization (part of Globalization 1.0). It is often used to test whether a foreign market is ready for a firm's products.

Subsidiary

The corporation has full ownership of this entity and can direct it via control and command.

Economic Distance

The wealth and per capita income of consumers is the most important determinant. —Wealthy countries engage in relatively more cross-border trade than poorer ones. —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. —Companies from wealthy countries benefit in cross-border trade with other wealthy countries when their competitive advantage is based on economies of experience, scale, scope, and standardization.

Integration Responsiveness Framework (different strategies)

This framework juxtaposes the opposing pressures for cost reductions and local responsiveness to derive four different strategic positions to gain and sustain competitive advantage when competing globally. —The four strategic positions: -International -Multi-domestic -Global-standardization -Transnational

CAGE Distance Framework

Where in the world 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. The primary driver behind firms expanding beyond their domestic market is to strengthen their competitive position by gaining access to larger markets and low-cost input factors and to develop new competencies. — CAGE distance framework, CAGE is an acronym for different kinds of distance: -Cultural -Administrative and political -Geographic -Economic

Equity Alliance

Yet another form of strategic alliance is an equity alliance—a partnership in which at least one partner takes partial ownership in the other partner. —A partner purchases an ownership share by buying stock or assets (in private companies), and thus making an equity investment. The taking of equity tends to signal greater commitment to the partnership. —Credible commitment: —> A long-term strategic decision that is both difficult and costly to reverse.

Global-standardization

—MNEs pursuing this strategy attempt to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever the best-of-class capabilities reside at the lowest cost. The global-standardization strategy arises out of the combination of high pressure for cost reductions and low pressure for local responsiveness. —MNEs using this strategy are often organized as networks (Globalization 3.0). This lets them strive for the lowest-cost position possible. Their business-level strategy tends to be cost leadership. Because there is little or no differentiation or local responsiveness because products are standardized, price becomes the main competitive weapon. To be price competitive, the MNE must maintain a minimum efficient scale.

Administrative and 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

MNE

Globalization has led to significant increases in living standards in many economies around the world. The engine behind globalization is the multinational enterprise — a company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries. —need an effective global strategy that enables them to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world. By making investments in value chain activities abroad, they engage in foreign direct investment (FDI).

Geographic Distance

The costs of cross-border trade rises with increased distance. It is important to note, however, that it does not simply capture how far two counties are from each other, but also includes additional attributes., such as the country's physical size, 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. —The country's infrastructure, including road, power,and telecommunications networks, also plays a role in determining geographic distance.

Disadvantages of Adopting Global Strategy

-Liability of foreignness. —> This liability consists of additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances. -Loss of reputation. —> One of the most valuable resources that a firm may possess is its reputation. A firm's reputation can have several dimensions, including a reputation for innovation, customer service, or brand reputation. -Loss of intellectual property —> The issue of protecting intellectual property in foreign markets also looms large. The software, movie and music industries have long lamented large-scale copyright infringements in many foreign markets.

Death of Distance Hypothesis

Globalization, the prevalence of the internet with other advances in communications technology, and transportation logistics can lead us to believe that firm location is becoming increasingly less important. —Because firms can now, more than ever, source inputs globally, many believe that location must be diminishing in importance as an explanation of firm-level competitive advantage.

Factors Making Global Market More Accessible

Globalization: -Is a 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, opening the doors to a much larger market than any one home country. —Globalization also allows companies to source supplies at lower costs, to learn new competencies, and to further differentiate products. Consequently, the world's market economies are becoming more integrated and interdependent.

Multi-domestic

MNEs pursuing this strategy attempt to maximize local responsiveness, hoping 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 and low pressure for cost reductions.

Long Term Contracting

Work much like short-term contracts but with a duration generally greater than one year, help overcome this drawback. Long-term contracts help facilitate transaction-specific investments. —Licensing: Is a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property such as a patent. —Franchising: Is an example of long-term contracting. In these arrangements, a franchisor, such as McDonald's, Burger King, 7-Eleven, H&R Block, or Subway, grants a franchisee (usually an entrepreneur owning no more than a few outlets) the right to use the franchisor's trademark and business processes to offer goods and services that carry the franchisor's brand name.