Chapter 6: Strategy in the Global Environment

Increasing Profitability Through Globalization • The success of many multinational companies is based not just on the goods and services they sell, but upon the distinctive competencies

Chapter 6

Strategy in the Global

Environment

The Global Environment

• Managers need to consider:

– How globalization is impacting the

environment in which their company

The Global Environment

• Industry boundaries do not stop at national borders

• The shift to global markets has intensified competitive rivalry in industries

• Global markets created enormous

opportunities

Increasing Profitability Through

Globalization

• The success of many multinational companies is based not just on the goods and services they sell, but upon the distinctive competencies that underlie their production and marketing

• Globalization increases profits by:

– Expanding the market

– Realizing economies of scale

– Realizing location economies

– Leveraging the skills of global subsidiaries

Competitive Pressures

• Two main pressures:

– Pressure for cost reduction

– Pressure to be locally responsive

• These pressures place conflicting

demands on a company

Cost Reductions

• Cost reductions are common in:

– Industries where price is the main competitive

weapon

– Industries with universal need products

– Universal Need: When consumer preference is similar

or identical in different nations

• Companies may achieve cost reduction by

basing production in a low-cost location or by

offering a standardized product

Figure 6.1: Pressures for Cost

Reduction and Local Responsiveness

Local Responsiveness

Pressures

• These arise from differences in:

– Consumer taste and preferences

– Infrastructure or traditional practices

– Distribution channels

– Host government demands

• The more that customer preferences vary, the more local responsiveness is required

Choosing a Strategy

Basic four strategies:

1 Global Standardization Strategy

2 Localization Strategy

3 Transnational Strategy

4 International Strategy

Figure 6.2: Four Basic

Strategies

Global Standardization Strategy

• Focuses on increasing profitability by

pursuing a low-cost strategy on a global scale

• Works best if there is:

– Strong pressure for cost reduction

– Low pressure for local responsiveness

Localization Strategy

• Customizes goods or services to provide a good match to tastes and preferences in different national markets

• Works best if there is:

– Low cost pressure

– Varied taste and preferences by nation

Transnational Strategy

• Attempts to achieve low-cost,

differentiated products across markets and

to foster a flow of skills between different subsidiaries

• Works best if there is simultaneous :

– High cost pressures

– High local responsiveness pressures

International Strategy

• Centralizes product development, but manufactures and markets globally

• Works best if there is:

– Low cost pressure

– Low pressure for local responsiveness– A universal need product

– No significant competitors

Choices of Entry Mode

“You do not choose to become global The market

chooses for you,it forces your hand.”

Choices of Entry Mode

economies and location economies

Choices of Entry Mode (cont’d)

• Licensing

– A licensee in a foreign country can purchase the rights to produce a product in their country– The cost of development is low, as well as the risk involved

Choices of Entry Mode (cont’d)

• Franchising

– A specialized form of licensing where the

franchiser sells intangible property (usually a brand or trademark)

– The franchisee agrees to follow the strict rules and business plans of the company

Choices of Entry Mode (cont’d)

• Joint Venture

– Separate corporations come together to form

a new corporate entity

– Two or more companies have an ownership stake, but combine resources for mutual

benefit

– Sharing knowledge can be dangerous for the companies involved

Choices of Entry Mode (cont’d)

• Wholly Owned Subsidiaries

– A parent company owns 100% of a smaller self-contained business unit

– This can be a very costly approach, since the parent company is responsible for all of the financing

Choices of Entry Mode

Entry Mode Advantages Disadvantages

Exporting

• Ability to realize localization and scale based economies

• High transport costs

location and scale based economies

• Inability to engage in global strategic

coordination

• Lack of control over technology

Choices of Entry Mode (cont’d)

Entry Mode Advantages Disadvantages

Franchising

• Low development costs and risks • Inability to engage

in global strategic coordination

• Lack of control over quality

Joint

Ventures

• Access to local partners’ knowledge

• Shared development costs and risks

• Political dependency

• Inability to engage in global strategic

coordination

• Inability to realize location/scale

economies

• Lack of control over technology

Choices of Entry Mode (cont’d)

Wholly Owned

Subsidiaries

• Protection of technology

• Engage in global strategic coordination

• Realize location and scale economies

• Higher costs and risks

Entry Mode Advantages Disadvantages

Figure 6.3: Changes Over Time

“Remember the finish line is at

the end of the race Don’t use up all of your energy before

reaching it.”

- Jack Daniels

“There is no finish line.”

- Phil Knight, CEO, Nike

© RoyaltyFree/PhotoDisc Collection/ Getty Images