Strategic Management - Chapter 10: Global Strategy

Advantages of International Expansion

- Access new markets - Access lower-cost inputs - Develop new competencies

Relative Distance

A company must consider such things like the CAGE model to determine where to ultimately land

Foreign Direct Investment

A firm's investment in value chain activities abroad - A way MNEs engage abroad

Cost Reductions and Local Responsiveness

MNEs face two opposing forces when competing around the globe:

National Culture

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

Porter's Diamond of National Competitive Advantage

Used to explain national competitive advantage - why some nations outperform others in specific industries

Geographic Distance

o The cost to cross-border trade rise with geographic distance o Also other attributes like 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 o Countries infrastructure

Economic Distance

o The wealth and per capita income of consumers is the most important determinant of economic distance o Wealthy countries engage relatively more cross-boarder trade than poorer ones § Richer countries tend to trade with richer ones, etc. o Replication of an existing business model is much easier in a country where the incomes are relatively similar and resources, complements, and infrastructure are of roughly equal quality Economic Arbitrage

1. Rising wages and other costs are likely to negate any benefit 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

· Global Economic Development: Impact on MNES o Two consequences for MNEs...

Disadvantages of International Expansion

- Liability of foreignness - Loss of reputation - 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 Distance 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

Polycentric Innovation Strategy

A strategy in which MNEs draw on multiple, equally important hubs throughout the world characteristic of Globalization 3.0

Natural Resources

A type of factor condition, 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

Liability of Foreignness

Additional costs of doing business in an unfamiliar culture and economic environment, and of coordinating across geographic distances

Less

Although many large firms are more than 50% globalized, the world itself is far _________ global

Global Hypothesis

Assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous o Shown by how the same products can be sold in many different markets (like McDonalds in Japan, etc.)

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 o However, it turns out that high-performing firms in certain industries are concentrated in specific countries § Like the US for tech companies, Italy for fashion, China for manufacturing, etc.

Hofstede's Research on Culture

Based on a lot of data, four main dimensions of culture emerged: · 1. Power Distance · 2. Individualism · 3. Masculinity-Femininity · 4. Uncertain Avoidance · 5. Long-term orientation · 6. Indulgence

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 in a new country

Economic Arbitrage

Companies from wealthy countries trading with companies from poor countries to benefit

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

Absolute Metrics

Cost structures, educated workforce, etc.

Cultural Distance

Cultural disparity between an internationally expanding firm's home country and its targeted host country - English speaking countries are culturally closer to the US (like Australia, UK, New Zealand, etc.)

Factor Conditions

Describe a country's endowments in terms of natural, human, and other resources · Universities, infrastructure, capital markets, etc.

1. Factor Conditions 2. Demand Conditions 3. Competitive Intensity in a Focal Industry 4. Related and Supporting Industries/Complementors

Four Interrelated Factors

1. International 2. Multidomestic 3. Global-standardization 4. Transactional

Four different global strategies....

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 - firms that provide a good or service that leads customers to value the focal firm's offerings more when the two are combined - further strengthens national competitive advantage · Ex. Switzerland leveraged its early lead in industrial chemicals into pharmaceuticals

Corporate Social Responsibility

MNEs need to rise to the challenge, also to not lose their reputation

Distance

Not only denotes geographic distance, but also includes cultural distance, administrative and political distance, and economic distance

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 - MNE needs a global strategy

Exporting

Producing goods in one country to sell in another - is one of the oldest forms of internationalization

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 o High pressure for cost reductions and low pressure for local responsiveness o Products are standardized, so prices become the main competitive weapon o MNEs that manufacture commodity products such as computer hardware or offer services such as business process outsourcing generally pursue a global-standardization strategy § Tech companies offshoring manufacturing to cheaper countries

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

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 o Arises out of the combination of high pressure for local responsiveness and low pressure for cost reductions o When entering a large and or idiosyncratic domestic markets, such as Japan or Saudi Arabia o One of the main strategies in the Globalization 2.0 stage o Is costly and inefficient because it requires the duplication of key business functions across multiple countries o Risk of IP appropriation increases

Transactional 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) o Arises out of the combination of high pressure for local responsiveness and high pressure for cost reductions o Generally used by MNEs that pursue a blue ocean strategy at the business level o Aims to benefit from global learning o Think globally, but act locally o Difficult to implement because the organizational complexities involved

International Strategy

Strategy that involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets o One of the oldest types of global strategies and is frequently the first step companies take o Advantageous when the MNE faces low pressures for both local responsiveness and cost reductions o Can leave itself open to the expropriation of intellectual property

Local Responsiveness

The need to tailor product and service offerings to fit local consumer preferences and host-country requirements o Like selling chopsticks in China, Using fish and chicken instead of beef in India, etc. o Entails higher costs, and sometimes even outweighs 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, advancements in telecommunications, and reductions in transportation costs - Reduce the costs of doing business around the world, opening doors to a much larger market than any one home country - Significant opportunities for individuals, companies and countries - Has resulted in many economies around the world growing significantly, and living standards rising

Demand Conditions

The specific characteristics of demand in a firm's domestic market · Ex. 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

Semi-globalized

The world is ____________ · Social welfare and living standards can be had through further globalization if future integration is managed effectively through coordination efforts by governments o Ex. European Union is an example of coordinated economic and political integration by 28 countries

11% of private-sector employment growth since 1990, employ 19% of the work force, pay 25% of the wages, provide for 31 percent of the US GDP, and make up 74 percent of private-sector R&D spending

US MNEs have a disproportionately positive impact on the US economy o They account for 1% of the number of total US companies but they...

National Competitive Advantage

World leadership in specific industries - Companies from home countries that are world leaders in a specific industries tend to be the strongest competitors globally

Globalization 1.0 (1900-1941)

o Basically, all the important business functions were located in the home country o Blossoming of the idea of MNEs o Strategy formation and implementation, as well as knowledge flows, followed a one-way path - from domestic headquarters to international outposts

Administrative and Political Distance

o 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 o Tariffs, trade quotas, FDI restrictions, etc. to protect domestic competitors o Legal and ethical pillars as well as well-functioning economic institutions such as capital markets and an independent central bank reduce distance

Globlization 3.0 (2001-pressent)

o China entered the WTO in 2001, big moment o Communication limitations of the past were all but reduced, and MNEs have been able to expand greatly to wherever they want o The MNE's strategic objective changes - Moved from a multinational company with self-contained operations in a few select countries to a more seamless global enterprise with centers of expertise · Each of these centers of expertise is a hub within a global network for delivering products and services o Some new ventures organize as global collaboration networks from the start

Globalization 2.0 (1945-2000)

o MNEs began to create smaller, self-confined copies of themselves, with all business functions intact, in a few key countries; notably, Western European countries, Japan and Australia - Required a significant amount of Foreign Direct Investment o Local mini-MNE had leeway in day-to-day operations in the new country o Knowledge flow back to the US headquarters remained limited in most cases

Globalization 3.1: Retrenchment

o Several black swan events have buffeted the world economy in recent years - Financial crisis of 2008 - European sovereign debt crisis - Etc. o All of these macro events contributed to a rise of nationalism in the US and Western Europe - Countries are looking inward, "America First," European right-wing nationalist parties exiting the EU, etc.