Business case analysis
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CHAPTER 10
Global Strategy: Competing Around
the World
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The AFI Strategy Framework
Exhibit 1.3 Jump to Appendix 1 long image description
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Learning Objectives
LO 10‐1 Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy.
LO 10‐2 Explain why companies compete abroad, and evaluate the advantages and disadvantages of going global.
LO 10‐3 Apply the CAGE distance framework to guide MNE decisions on which countries to enter.
LO 10‐4 Compare and contrast the different options MNEs have to enter foreign markets.
LO 10‐5 Apply the integration‐responsiveness framework to evaluate the four different strategies MNEs can pursue when competing globally.
LO 10‐6 Apply Porter’s diamond framework to explain why certain industries are more competitive in specific nations than in others.
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§10.2 Going Global: Why?
Advantages:
1. Gain access to a larger market.
2. Gain access to low‐cost input factors.
3. Develop new competencies.
Disadvantages:
1. Liability of foreignness
2. Loss of reputation
3. Loss of intellectual property
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Advantage #1: Gain Access to a Larger Market
Helps MNEs with economies of scale and scope
Opportunities to outcompete local rivals
Helps firms in smaller economies
• Achieve growth
• Gain and sustain competitive advantage
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Advantage #2: 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
Was a key driver of Globalization 1.0 and 2.0
• Lower labor costs is the main focus now
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Advantage #3: Develop New Competencies
Helps MNEs that pursue a differentiation strategy
Access to:
• Communities of learning
• Specific geographic regions
• Location economies
• Locating value chain activities in optimal geographies
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Disadvantage #1: Liability of Foreignness
Unfamiliar cultural environment
Unfamiliar economic environment
Coordinating across geographic distances
Can result in additional costs
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Disadvantage #2: Loss of Reputation
Reputation: one of the most valuable resources
• Innovation, customer service, brand
Loss of reputation can diminish competitiveness
• Low wages, long hours, and poor conditions
• Local government may be corrupt
• Safety standards may not be enforceable
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Disadvantage #3: 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.
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§10.3 Going Global: Where and How?
Where? The CAGE Distance Framework
• Distance is the main cost and risk of expansion.
• CAGE is an acronym for different types of distance.
• Cultural
• Administrative and political
• Geographic
• Economic
• Guides MNE decisions on which countries to enter.
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Cultural Distance
Disparity between a firm’s home and host country
• Social norms and morals, beliefs, and values
Made up of:
• Power distance
• Individualism
• Masculinity–femininity
• Uncertainty avoidance
• Long‐term orientation
• Indulgence
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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, quotas and restrictions
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Geographic Distance
More than just physical distance
Measured by these attributes:
• Physical size (Canada versus Singapore)
• 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
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Economic Distance
Wealth and per capita income of consumers
• Wealthy countries engage in more cross‐border trade.
Wealthy countries trade with wealthy countries.
• Economies of experience, scale, scope, and standardization
• Similar infrastructure & resources
Wealthy countries trade with poor countries.
• Access to low‐cost input factors
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How Do MNEs Enter Foreign Markets?
Exhibit 10.6
Jump to Appendix 2 long image description
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§10.4 Cost Reductions vs. Local Responsiveness
Two opposing forces in global competition:
1. Cost reductions
• Key competitive weapon
2. Local responsiveness
• Tailoring to specific preferences
Globalization hypothesis
• Consumer needs and preferences converging
• Food, music, movies, clothing
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The Integration‐Responsiveness Framework
Exhibit 10.7 Jump to Appendix 3 long image description
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International Strategy
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
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Multidomestic Strategy
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
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Global‐Standardization Strategy
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
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Transnational Strategy
High cost reductions / high local responsiveness
• “Think globally, act locally”
• Best practices, ideas, and innovations used everywhere
Used by MNEs that pursue a blue ocean strategy
Difficult to implement:
• Duplication of efforts
• Organizational complexity
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Dynamic Strategic Positioning: The MTV Music Channel
Exhibit 10.8
Jump to Appendix 4 long image description