Developing an International Entry Strategy

Learning Topic

Global Strategy as Business Model Change

As the company expands into foreign markets, it must examine how global expansion would impact every component of its business model.

A business model constitutes the way a company creates value for customers, shareholders, suppliers, employees, and the community better than its competitors. A company’s value proposition composes the core of its business model. Companies in the same business can create value in different ways. Companies can choose how to perform their activities and how to put them in a coherent whole that differentiates them from their competitors. Here are a few examples of how business models help companies create superior value and differentiate themselves:

· The business model developed by Dell to sell direct by eliminating intermediaries provided a significant competitive advantage. IBM and HP could not emulate this model, as their marketing relied on their extensive distribution systems.

· Southwest Airlines’s business model integrates complementary practices that reinforce each other to deliver better economic value than their competitors. Some of these practices include no seat assignments, a standard fleet of aircraft, a high level of employee stock ownership, quick gate turnaround, etc.

· One of two companies renting movies may decide to offer movies online instead of renting or selling a physical copy, with same licensing fees. However, the cost of holding inventory would be reduced considerably and provide greater customer convenience. By reducing storage and distribution costs, the company would also increase its revenues and profits.

Developing business models is not a simple task because markets do not remain static. Business models change with the redefinition of value caused by new entrants, changes in customer needs, the advent of new technology, and competition from global players.

Business models undergo change as companies globalize. Companies often enter global markets in gradual steps, starting with exports and global sourcing, before growing into a multinational organization. At each stage, there are different opportunities and therefore a need for different business models. A global strategy for the company includes changing a company’s business model to create a global competitive advantage.

The leverage points for companies to globalize and develop a new business model include the following:

· efficiency—comparative advantage of location; economics of scale

· responsiveness—market access and customer needs that require localization of some production or service

· knowledge leverage—use of people and ideas globally

Different organizations are particularly well-adapted to one or another of these performance dimensions. Addressing all three is difficult.

The development of the value-chain infrastructure dimension of the business model should answer some of the following questions:

· What key internal resources and capabilities should the company create to support the chosen value proposition and target markets?

· What partner network should it put together to support the business model?

· How should these activities be organized into an overall, coherent value-creation and value-delivery model?

· What should be the suitable global organizational structure and decision-making process?

Creating a global mindset is a key determinant of the success of global strategy.

The list below explains three generic approaches to global value creation that are integral to the development of a business model as part of the global strategy:

· adaptation—Increase revenues and market share by tailoring one or more components of a company’s business model to suit local requirements or preferences.

· aggregation—Achieve economies of scale or scope by creating regional or global efficiencies.

· arbitrage—Exploit economic or other differences between national or regional markets by locating separate parts of the supply chain in different places.

References

de Kluyver, C. (2010). Fundamentals of Global Strategy. New York, NY: Business Expert Press.  Retrieved from https://saylordotorg.github.io/text_fundamentals-of-global-strategy/s06-02-global-strategy-as-business-mo.html

Resources

· Case Study: Microsoft in China

Learning Resource

Case Study: Microsoft in China

When a company decides to expand into foreign markets, it must take its business model apart and consider the impact of global expansion on every single component of the model. For example, with respect to its value proposition, a company must decide whether or not to modify its company's core strategy as it moves into new markets. This decision is intimately linked to the choice of which markets or regions to enter and why. Once decisions have been made about the what (the value proposition) and where (market coverage) of global expansion, choices need to be made about the how. Namely, these are choices about whether or not to adapt products and services to local needs and preferences or standardize them for global competitive advantage; whether or not to adopt a uniform market positioning worldwide; which value-adding activities to keep in-house; which activities to outsource; and which activities to relocate to other parts of the world. Finally, decisions need to be made about how to organize and manage these efforts on a global basis. Together, these decisions define a company's global strategic focus on a continuum from a truly global orientation to a more local one. Therefore, crafting a global strategy is about deciding how a company should change or adapt its core (domestic) business model to achieve a competitive advantage as the firm globalizes its operations.

The conceptual global strategy formulation framework can by defined by linking Pankaj Ghemawat's generic strategy framework for creating a global competitive advantage with the above business model concept and the full array of globalization decisions a company faces when it evaluates its global options. Generic value creation options need to be evaluated for each business model component to address a range of globalization decisions.

Consider the challenges Microsoft faced in going to China. Today, Bill Gates is a local hero. On a recent visit he met with four members of the politburo in a single day; most executives would count themselves lucky to talk with just one of China's top leaders. Last spring, President Hu Jintao toured the Microsoft campus in Redmond, Washington, and was treated to a dinner at Gates's home.

It has not always been this way. Microsoft stumbled for years after entering China in 1992 and lost money there for over a decade. It finally became apparent that almost none of the success factors that drove the company's performance in the United States and Europe applied to China. To succeed there, Microsoft had to become the "un-Microsoft," pricing at rock bottom instead of charging hundreds of dollars for its Windows operating system and Microsoft Office applications. It furthermore abandoned the public-policy strategy it used elsewhere of protecting its intellectual property at all costs and closely partnered with the government instead of fighting it, as in the United States—a decision that has opened the company to criticism from human rights groups.

The story begins 15 years ago, when Microsoft sent a couple of sales managers into China from Taiwan. Their mission was to sell software at the same prices the company charged elsewhere. It did not work. The problem was not brand acceptance—everyone was using Windows. But no one was paying. Counterfeit copies could be bought on the street for a few dollars. Market share simply did not translate into revenue.

Microsoft fought bitterly to protect its intellectual property. It sued other companies for illegally using its software but lost regularly in court. Country managers came and went—five in one five-year period. Two of them later wrote books criticizing the company. One, Juliet Wu, whose Up Against the Wind became a local best seller, wrote that Microsoft heartlessly sought sales by any means, that its antipiracy policy was needlessly heavy-handed, and that her own efforts to help bosses in Redmond understand China had been rebuffed.

To add insult to injury, Beijing's city government started installing free open-source Linux operating systems on workers' PCs. (The Chinese Academy of Sciences promoted a version called Red Flag Linux.) Meanwhile, security officials were troubled that government and military operations depended on Microsoft software made in the United States.

In 1999, Gates sent a senior executive, who headed the company's public-policy efforts, to figure out why Microsoft was so hated. After extensive investigation, the executive concluded that Microsoft's business model in China was wrong: the company had assigned executives that were too junior, selling was overemphasized, and the company's business practices did not recognize the importance of collaborating with the government.

In response, Gates sent 25 of Microsoft's 100 vice presidents on a weeklong China immersion tour. The company hired former Secretary of State Henry Kissinger for advice and to open doors and it set a path to help China develop its own software industry, an urgent government priority. The company even commissioned a McKinsey study for Chinese officials in 2001 that, among other things, recommended improving the protection of intellectual property.

The company also initiated talks with Chinese security officials to convince them that Microsoft's software was not a secret tool of the US government. As a result, in 2003, the company offered China and 59 other countries the right to look at the fundamental source code for its Windows operating system and to substitute certain portions with their own software—something Microsoft had never allowed in the past. Now when China uses Windows in sensitive applications, such as in the president's office and in its missile systems, it can install its own cryptography.

The opening of a research center in Beijing in 1998 proved to be a turning point. Created because Gates was impressed with the quality of the country's computer scientists, the laboratory helped Microsoft revamp its image. It began accumulating an impressive record of academic publications, helped lure back smart émigré scientists, and contributed key components to globally released products like the Vista operating system. The lab soon became, according to local polls, the most desirable place in the country for computer scientists to work.

Microsoft executives had also concluded that China's weak intellectual property enforcement laws meant its usual pricing strategies were doomed to fail. While acknowledging the problem that people in China pirated so much software, Gates decided that if they were going to pirate anybody's software, he would certainly prefer it be Microsoft's.

In hindsight, it is clear that tolerating piracy turned out to be Microsoft's best long-term strategy, and that it is the reason Windows is used on an estimated 90% of China's almost 200 million PCs. Competing for users with Linux is easier when there is piracy than when there is not, as consumers can get the real Microsoft software, and at the same price as Linux. In China's back alleys, in fact, Linux often costs more than Windows because it requires more disks. Microsoft's own prices have also dropped—it now sells a package of Windows and Office to students for $3.

In 2003, Microsoft took a quantum leap forward in China by hiring Tim Chen, who had been running Motorola's China subsidiary. Chen arrived with a practiced understanding of how a Western company could succeed in China. He kept up the blitz of initiatives. Microsoft made Shanghai a global center to respond to customer e-mails. It began extensive training programs for teachers and software entrepreneurs. And it began to work with the ministry of education to finance 100 model computer classrooms in rural areas.

These actions served to change the perception that Microsoft had mainly come to promote antipiracy and to sue people and demonstrated that it had a long-term vision. In the following years, Microsoft invested substantially in China and even invited officials to help decide on local software and outsourcing companies to invest in. By doing so, it successfully leveraged the synergy that existed between the need of the Chinese economy to have local software capability and the company's need for an ecosystem of companies using its technology and platform. At the same time, the Chinese government started thinking more like Microsoft. It required central, provincial, and local governments to begin using legal software. The city of Beijing now pays for software its employees had previously pirated.

In another boost for Microsoft, the government required local PC manufacturers to load legal software on their computers. Lenovo, the market leader, had been shipping as few as 10% percent of its PCs that way, and even US PC makers in China were selling many machines "naked." Another mandate requires gradual legalization of the millions of computers in state-owned enterprises. As a consequence, the number of new machines shipped with legal software nationwide has risen from about 20 percent to more than 50 percent in recent years.

Glossary

Core strategy

A strategy that a firm develops over time that reflects the firm's key choices about what value it provides to whom in its markets and how, and at what price and cost

Global strategy

Describes a firm's intention to change or adapt its core (domestic) business model to achieve a competitive advantage as the firm engages in globalized operations

References

Kirkpatrick, D. (2007). How Microsoft conquered China. Fortune Magazine. Retrieved from http://archive.fortune.com/magazines/fortune/fortune_archive/2007/07/23/100134488/index.htm

Licenses and Attributions

4.2 Global Strategy as Business Model Change from Fundamentals of Global Strategy v. 1.0 was adapted by Saylor Academy and is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensor. UMUC has modified this work and it is available under the original license.

© 2019 University of Maryland University College

All links to external sites were verified at the time of publication. UMUC is not responsible for the validity or integrity of information located at external sites.