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Cost reductions

- 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.

PORTER'S DIAMOND FRAMEWORK

- a framework to explain national competitive advantage, why some nations outperform others in specific industries.

DEVELOP NEW COMPETENCIES

-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 -AstraZeneca, aCambridge, Massachusetts, to be part of the Boston biotech cluster, in hopes of developing new R&D competencies in biotechnology.

Economic development across the globe has two consequences for MNE

1. rising wages and other costs are likely to negate any benefits 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

foreign direct investment (FDI)

A firm's investments in value chain activities abroad.

globalization hypothesis

Assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous. -For many business executives, the move toward globalization is based on this

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.

s location economies

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

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 cultural 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.

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. (Leneovo) - arises out of the combination of high pressure for cost reductions and low pressure for local responsiveness. -Their business-level strategy tends to be cost leadership -products are standardized, ex. to benefit from low-cost labor and to be close to its main markets to reduce shipping costs, Lenovo's manufacturing facilities are in Mexico, India, and China. -obtaining the lowest cost point possible by minimizing local adaptations—is also one of its key weaknesses. (MTV global did not attract global audiences)

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.

national culture

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

WHERE IN THE WORLD TO COMPETE? THE CAGE DISTANCE FRAMEWORK

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. So wouldn't companies choose new markets solely based on measures such as per capita consumption of the product and per capita income?

LOSS OF INTELLECTUAL PROPERTY

Were joint venture partners with domestic Chinese companies. These firms now allege that the Chinese partners built on the Japanese and European partners' advanced technology Page 353to create their own, next-generation high-speed trains.

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. is

ADVANTAGES OF GOING GLOBAL

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

Four strategies to gain and sustain competitive advantage when competing globally.

▪ International (Harley Davidson , rolex, starbucks) ▪ Multidomestic (Nestle) ▪ Global-standardization (Lenovo) ▪ Transnational (P&G)

DISADVANTAGES OF GOING GLOBAL

▪ Liability of foreignness- additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances ▪ Loss of reputation. ▪ Loss of intellectual property.

CAGE distance framework

▪Cultural- Different languages, ethnicities, religions, social ▪ Administrative and political- Absence of trading bloc Absence of shared currency, monetary or political association ▪ Geographic - ack of common border, waterway access, adequate transportation, or communication links ▪ Economic- Different consumer incomes Different costs and quality

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. - Main stage persued in Globalization 2.0 (Ex. Nestlé, the largest food company in the world, is known for customizing its product offerings to suit local preferences, tastes, and requirements. -A multidomestic strategy, in contrast with an international strategy, faces reduced exchange-rate exposure because the majority of the value creation takes place in the host-country business units, which tend to span all functions. -a multidomestic strategy is costly and inefficient because it requires the duplication of key business functions across multiple countries - risk of IP appropriation increases -manufactured locally. Tacit knowledge that is at risk

MNEs face two opposing forces when competing around the globe:

1. Cost reductions 2. local responsiveness. -Taken together, however, cost reductions and local responsiveness present strategic trade-offs because higher local responsiveness frequently goes along with higher costs -Just like low cost and differentiation at the business strategy level, cost reductions and local responsiveness are trade-offs when competing globally.

3 STAGES OF GLOBALIZATION

1. GLOBALIZATION 1.0: 1900-1941 - all the important business functions were located in the home country. 2.GLOBALIZATION 2. - a new focus on growing business—not only to meet the needs that went unfulfilled during the war years but also to reconstruct the damage from the war. From 1945 to the end of the 20th century, in the Globalization 2.0 stage, 1946-2000 MNEs began to create smaller, self-contained copies of themselves, with all business functions intact, in a few key countries; 3. Globalization 3.0 stage.Began in 2001 One watershed event was China's entry into the World Trade Organization in the same year. The World Trade Organization (WTO) is a global organization overseeing and administering the rules of trade between nations.15 The goal of the WTO is to help companies conduct their business across borders based on multinational treaties that are negotiated and signed by its 164 member nations.

four main dimensions of culture emerged:

1. Power distance, 2. individualism, 3. masculinity-femininity, 4uncertainty avoidance added long-term orientation and indulgence.55

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. ex. Canada and Mexico partner with the United States in the North American Free Trade Agreement (NAFTA), increasing trade in goods and services between the three countries. As a result, United States is the largest trading partner for both Canada and Mexico. -countries also erect other political and administrative barriers, such as tariffs, trade quotas, FDI restrictions, and so forth, to protect domestic competitors

As a consequence, globalization is currently undergoing some retrenchment with a stronger focus on nationalism. Rather than multinational trade deals negotiated by international bodies such as the WTO, bilateral treaties between countries are in vogue. The future viability of entire economic trading blocs such as the European Union or NAFTA are being questioned. Any resulting changes would likely affect cross-border trade in a negative fashion, impacting MNEs the most.

As a consequence, globalization is currently undergoing some retrenchment with a stronger focus on nationalism. Rather than multinational trade deals negotiated by international bodies such as the WTO, bilateral treaties between countries are in vogue. The future viability of entire economic trading blocs such as the European Union or NAFTA are being questioned. Any resulting changes would likely affect cross-border trade in a negative fashion, impacting MNEs the most.

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). -rises out of the combination of high pressure for local responsiveness and high pressure for cost reductions - generally used by MNEs that pursue a blue ocean strategy at the business level -aims to benefit from global learning -structure combines economies of scale along specific product divisions with economies of learning attainable in specific geographic regions. The idea is that best practices, ideas, and innovations will be diffused throughout the world, regardless of their origination. - pursue a blue ocean strategy at the business level by simultaneously focusing on product differentiation and low cost. Mantra: Think globally, act locally. Attempts to combine benefits of localization and standardization strategies simultaneously by creating a global matrix structure. Economies of scale, location, experience, and learning.

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. A possible loss in reputation can be a considerable risk and cost for doing business abroad.

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. A possible loss in reputation can be a considerable risk and cost for doing business abroad.

PORTER'S DIAMOND FRAMEWORK 4 factors

_)▪ Factor conditions - country's endowments in terms of natural, human, and other resources. ( capital markets, a supportive institutional framework, research universities) - Based on human capital and know-how ▪ Demand conditions. 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 also clue firms into the latest developments in specific fields/ push firms to move research. ▪ 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. (Ex. Fierce domestic competition in Germany, for example, combined with demanding customers and the no-speed-limit autobahn make a tough environment for any car company) ▪ 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. (. Switzerland, for example, leveraged its early lead in industrial chemicals into pharmaceuticals.80 A sophisticated health care service industry sprang up alongside as an important complementor, to provide further stimulus for growth and continuous improvement and innovation.)

Economic Distance

*Most important factor -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. -replication of an existing business model is much easier in a country where the incomes are relatively similar and resources, -Companies from wealthy countries also trade with companies from poor countries to benefit from economic arbitrage (exploits the tiny differences in price between identical assets in two or more market)

INTERNATIONAL STRATEGY

- Strategy that involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets. Ex. (Harley Davidson , Rolex, Starbucks) - enables MNEs to leverage their home-based core competencies in foreign market -frequently the first step companies take when beginning to conduct business abroad -advantageous when the MNE faces low pressures for both local responsiveness and cost reductions. - limited local responsiveness - expropriation of intellectual property

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 -The country's infrastructure, including road, power, and telecommunications networks, also plays a role in determining geographic distance. (Ex. Fruits and vegitables)

How do MNEs enter foreign markets?

- low investments and low level of control (exporting, licensing, franchising) - high investments and high level of control (joint venture, acquisition, greenfield operations)

local responsiveness.

- the need to tailor product and service offerings to fit local consumer preferences and host-country requirements; it generally entails higher costs - there seems to be some convergence of consumer preferences across the globe, national differences remain, due to distinct institutions and cultures. -local responsiveness generally entails higher cost, and sometimes even outweighs cost advantages from economies of scale and lower-cost input factors.

GAIN ACCESS TO A LARGER MARKET

-A MNE provides significant opportunities for companies, given economies of scale and scope that can be reaped by participating Page 347Page 348in a much larger market. -can reinforce the basis of their competitive advantage. - Ex. w Narayana Health, a specialty hospital chain in India, founded and led by Dr. Devi Shetty, obtained a low-cost competitive advantage in complex procedures such as open-heart surgery. Narayana Health is now leveraging its low-cost, high-quality position by opening specialty hospitals in the Cayman Islands (to serve U.S. patients) and Kuala Lumpur, Malaysia. -somme countries with relatively weak domestic demand companies based in smaller economies, becoming an MNE may be necessary to achieve growth or to gain and sustain competitive advantage. Examples include Acer (Taiwan), Casella Wines (Australia), IKEA (featured in the ChapterCase), Nestlé (Switzerland), LEGO (Denmark

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. —aThe engine behind globalization -Boeing, Caterpillar, Coca-Cola, GE, John Deere

LOSS OF REPUTATION

-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. The textile industry is notorious for sweatshop conditions, and many Western companies such as the Gap (United States), H&M (Sweden), and Carrefour (France) have taken a big hit to their reputations in factory accidents in Bangladesh and elsewhere in Southeast Asia -MNEs have a market incentive to protect their reputations given the public backlash in the wake of factory accidents, child labor, worker suicides, and other horrific externalities.

polycentric innovation strategy

-many MNEs now are replacing the one-way innovation flow from Western economies to developing markets -strategy in which MNEs now draw on multiple, equally important innovation hubs throughout the world characteristic of Globalization 3.0; se

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. -Consider that several countries and locations can score similarly on such absolute metrics of attractiveness. -how does an MNE decide?

Why are certain industries more competitive in some countries than in others?

goes to the heart of the issue of national competitive advantage national competitive advantage World leadership in specific industries.