Chapter 10 - Global Strategy: Competing Around the world

How is globalization made possible?

-Falling trade and investment barriers -Advanced telecommunications -Reduced transportation costs -Importance of MNEs and FDIs

Why do firms expand internationally? The main reasons firms expand abroad are to:

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

Why do firms expand internationally? Gain access to a larger market:

-Helps MNEs with economies of scale and scope - competitive advantage -Helps firms in smaller economies (like IKEA) --achieve growth --Gain and sustain competitive advantage -Create opportunities to launch niche products --would we have r/mathpics if we didn't aggregate? Companies that base their competitive advantage on economies of scale/scope have an incentive to gain access to larger markets because this can reinforce the basis of their competitive advantage

Disadvantage of going global: Liability for foreignness

-Unfamiliar cultural environment -unfamiliar economic environment -Coordinating across geographic distances **can result in additional costs Walmart had liability of foreignness in Germany

Disadvantages of going global

-liability of foreignness -loss of reputation -loss of intellectual property

Cultural distance is made up of

-power distance -individualism -masculinity - femininity -uncertainty avoidance -long-term orientation -indulgence

Stages of globalization

1.0 1900-1941 2.0 1945 - 2000 3.0 21st century

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 -economic distance. Countries that are 5,000 miles apart trade only 20% of the amount traded among countries that are 1,000 miles apart. A common language increases trade between two countries by 200% over country pairs without one

Disadvantage of going global: Loss of reputation

A firm's reputation can have several dimensions, including a reputation for innovation, customer service, or brand reputation Loss of reputation can diminish competitiveness -low wages, long hours, and poor conditions -local government may be corrupt -safety standards may not be enforceable

MTV Example

At first, MTV followed a global standardization strategy. To be more responsive to local audiences, MTV then implemented a multidomestic strategy to meet the need for local responsiveness. This led to a loss of all possible scale effects, especially rolling out expensive content over a large installed base of views. In a move a few years later, MTV shifted its strategic position away from multidomestic strategy and is now pursuing a transnational strategy.

Foreign Direct Investment

By making investments in value chain activities abroad, MNEs engage in FDI

Going global: Where and how?

Cage distance framework

Administrative & 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

Competitive Intensity in a Focal Industry

Competitive environments lead to better performance. Example: German car industry -Fierce domestic competition -Demanding customers -Results in top-notch engineering Companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition 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

Cultural distance

Disparity between a firm's home country and its targeted host country -Social norms and morals, beliefs, and values -Differentiation among human groups

How do MNEs enter foreign markets?

Exporting - producing goods in one country to sell in another (one of the oldest forms of internationalization) The model moving from left to right, has been suggested as a stage model of sequential commitment to a foreign market over time --often used to test whether a foreign market is ready for a firm's products. When studying vertical integration and diversification, there are different forms along the make-or-buy continuum

Why do firms expand internationally? Develop new competencies

Help MNEs that pursue a differentiation strategy Access to: -communities of learning -location economies

Why do firms expand internationally? Gain access to low-cost input factors

Helps MNEs that pursue a low-cost leadership strategy Examples of low-cost raw materials: Lumber, iron ore, oil, and coal ** Key driver behind Globalization 1.0 and 2.0

What does globalization costs between agents do?

In different countries it goes down

Example of Globalization 3.0 - Firms expanding globally from lower labor costs in manufacturing and services

India - India carved out a competitive advantage in business process outsourcing (BPO), not only because of low-cost labor but because of an abundance of well-educated, English-speaking young people --Infosys, TCS and Wipro = well know IT service companies in India (global fortune 500)

Disadvantage of going global: loss of intellectual property

It can be difficult to protect IP in foreign markets. -particularly software, movies, and music -copyright infringements can occur Some countries are known for partnering initially, but then reverse-engineering capabilities (Siphoned off) **Software, music and movie industries have long lamented large-scale copyright infringements in many foreign markets It's important that companies expanding internationally carefully weigh the benefits and costs of doing so. -if the cost of going global as captured by the following disadvantages exceeds the expected benefits in terms of values added (c>v), if the economic value creation is negative, then firms are better off not expanding internationally

Globalization 1.0 (1900-1941)

Lack of capacity to coordinate complex operations around the world only sales and distributions overseas Access to low-cost raw materials

Related and supporting industries/complementors

Leadership in related and supporting industries fosters complementors in downstream industries. Firms that provide an additional good or service --Combined with the primary product --Leads customers to value the firm's offering more Further strengthens national competitive advantage

globalization 2.0 1945 - 2000

MNE's creates smaller, self-contained copies of themselves in few key countries greater local responsiveness to country-specific circumstances Globalization as a peace tool Access to low-cost raw materials

Globalization 3.0: 21st Century

MNEs create global collaboration networks Locate business functions Centers of expertise as hubs **Fims have expanded globally to benefit from lower labor costs in manufacturing and services

Why do firms agglomerate?

Proximity reduces transport costs Marshall (1920) emphasized three different types of transport costs: 1. costs of moving goods 2. costs of people 3. costs of ideas Sharing resources: -infrastructure, legal and political framework Labor poor and specialized supplier Common knowledge base (benefit from knowledge spillovers)

Communities of learning

Sillicon valley vs. route 128

Global Standardization Strategy

Strategy attempting to reap significant economies of scale and location economies by pursuing a global division of labor based on whatever 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. MNEs using this strategy are often organized as networks (Globalization 3.0) Their business-level strategy tends to be cost leadership. Because there is little or no differentiation or local responsiveness because products are standardized, price become the main competitive weapon High cost reductions / low local responsiveness -Economies of scale & location economies -Achieved through global division of labor ---Based on wherever capabilities have lowest cost Price, the main competitive weapon -Minimal local adaptation

Integration Responsiveness Grid

Strategy 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

Multi-domestic 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. MNEs frequently use a mutlidomestic strategy when entering hosts countries with large and/or idiosyncratic domesti markets, such as Japan or Saudi Arabia One of main strategies MNEs pursued in the globalizaiton 2.0 stage. The risk of IP appropriation increases when companies follow a multidomestic strategy. Besides exposing codified knowledge embedded in products, as in the case with an international strategy, a multidomestic strategy also requires exposing tacit knowledge because products are manufacture locally. Low cost reductions / high local responsiveness --Local consumers ideally perceive products as local Can be costly and inefficient --Duplication of business functions across countries Common in: --Consumer products industry --Food industry

transnational Strategy

Strategy that attempts to combine the benefits of localization strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable) A transnational strategy is generally used by MNEs that pursue a blue ocean strategy at the business level by attempting to reconcile product and/or service differentiations at low cost The idea is that best practices, ideas, and innovations will be diffused throughout the world, regardless of their origination. The managers' mantra is to think globally, but act locally. High cost reductions / high local responsiveness -"Think globally, act locally" -Best practices, ideas, and innovations used everywhere Difficult to implement: -Duplication of efforts -Organizational complexity

International Strategy

Strategy that involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets -rely on exporting or licensing of products and franchising of services to reap economies of scale by accessing a larger market -a strength of international strategy - its limited local responsiveness - is also a weakness in many industries Low cost reductions / low local responsiveness --Leverages home-based core competencies --Sells the same products domestically and abroad Often used successfully by MNEs with: --Large domestic markets --Strong reputations and brand names

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.

Cost reductions vs. local responsiveness

Two opposing forces in global competition --cost reductions ---key competitive weapon Local responsiveness --tailoring to specific preferences

What question does globalization 3.0 stage raise?

What Defines a U.S. Company? - headquarter location -employee location -revenue location -plant location

What is the engine behind globalization is 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 MNEs engage in foreign direct investment (FDI)

National Competitive Advantage

a consideration of world leadership in specific industries. o That issue, in turn, has a direct effect on firm-level competitive advantage. Companies from home countries that are world leaders in specific industries tend to be the strongest competitors globally High-performing firms for certain industries are concentrated in specific countries. --United States: biotechnology, software, internet --China and Taiwan: computer manufacturing --South Korea and Japan: consumer electronics --Australia: mining --India: business process outsourcing --Germany: engineering and cars

Factor Conditions of Porter's Diamond

describe a country's endowments in terms of natural, human, capital and other resources A country's endowments: -Natural, human, and other resources -Resource-rich: focus on commerce -Resource-lacking: focus on human capital Other important factors: -Capital markets, institutional frameworks, research universities, public infrastructure --Airports, roads, schools, health care system, etc.

Geographic distance

more than just a physical distance -within-country distances to its borders -topography -time zones -whether the countries are contiguous -access to waterways and the ocean -infrastructure --roads, power, and telecommunications

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

Demand conditions of porter's diamond

the specific characteristic of demand in a firm's domestic market Customers hold companies to standards of value creation. --Developments in research --Cost containment --New commercial applications for the market

Economic distances

wealth and per capita income of consumers -wealthy countries engage in more cross-boarder trade wealthy countries trade with wealthy countries -economies of experience, scale, scope and standardization --similar infrastructure and resources wealthy countries trade with poor countries --access to low-cost input factors