Roth5_Ch10_W20_Global.pptxChapter 10
Global Strategy: Competing Around the World
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The AFI Strategy Framework
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Learning Objectives
Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy.
Explain why companies compete abroad and evaluate the advantages and disadvantages of going global.
Apply the CAGE distance framework to guide MNE decisions on which countries to enter.
Compare and contrast the different options MNEs have to enter foreign markets.
Apply the integration-responsiveness framework to evaluate the four different strategies MNEs can pursue when competing globally.
Apply Porter’s diamond framework to explain why certain industries are more competitive in specific nations than in others.
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Hollywood and Globalization
Hollywood movie: The quintessential American product
However, non-U.S. sales increased: 50% in 2000, 70% in 2012, but slowing in 2016, (accounted for $39B in sales)
Altered global strategic focus
Movies that fit the global market by adapting foreign scripts, hiring international actors/actresses
Two versions of Iron Man 3 in 2013 (one just for China)
Treat emerging markets as focal targets
Not just filmmaking industries, but also electronics industry (ex: Korea, China), and auto industry (ex: India)
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All Time World Box Office
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2018 Operation Red Sea $1.5M in US, $579M in China
Avenger End Game, Domestic: $858,373,000 30.7%+ Foreign: $1,937,901,401 69.3%= Worldwide: $2,796,274,401
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What is Globalization?
A process…
…that provides closer integration and exchange…
…between countries and peoples worldwide.
Made possible by:
Falling trade and investment barriers.
Advances in telecommunications.
Reductions in transportation costs.
Importance of MNEs and FDIs
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Combined, these factors reduce the costs of doing business around the world, opening the doors to a much larger market than any one home country. Globalization also allows companies to source supplies at lower costs, to learn new competencies, and to further differentiate products. Consequently, the world’s market economies are becoming more integrated and interdependent.
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Global Strategy
Part of a firm’s corporate strategy to:
Gain and sustain a competitive advantage.
Compete against foreign and domestic companies.
Foreign direct investment:
Investments in value chain activities abroad.
Multinational enterprise:
Deploys resources and capabilities in two countries or more.
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Instructors can ask students where their sneakers (especially Nike) are being made. The answer will highly likely be a place outside the U.S., and most probably in Asia. Then ask students why the sneakers are made in Asia.
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Global Strategy
Multi-National Enterprises, (MNE’s) - make up less than 1% of the number of total U.S. companies, but they:
Account for 11 percent of private-sector employment growth since 1990.
Employ 19 percent of the work force.
Pay 25 percent of the wages.
Provide for 31 percent of the U.S. gross domestic product (GDP).
Make up 74 percent of private-sector
R&D spending.
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Stages of Globalization
Globalization 1.0: 1900 to 1941:
Sales, operations, and some procurement.
Strategy flowed from headquarters to international sites.
Globalization 2.0: 1945 to 2000:
To reconstruct damage from the war.
Focus on European countries, Japan, and Australia.
Greater local responsiveness.
Headquarters set goals and international sites influenced tactics.
Globalization 3.0: 21st Century:
Business function locations are based on costs, capabilities, and PESTEL factors.
Companies can operate 24/7, 365 days a year.
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The Current State of Globalization
The world only semi-globalized:
The level of globalization is at 10-25% total.
Evidence:
2% of all voice-calling minutes are cross-border.
3% of world’s population are immigrants.
9% of investments are foreign direct investments.
15% of patents list at least one foreign inventor.
18% of Internet traffic crosses national borders.
Retrenchment may occur in the future:
There has been a rise of nationalism.
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Continued economic development across the globe has two consequences for MNEs. First, rising wages and other costs are likely to negate any benefits of access to low-cost input factors. Second, 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.
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Globalization has two consequences for MNE’s
Rising wages and other costs…may negate any benefits of access to low-cost input factors, (but someone is always willing to go lower).
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.
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China’s labor costs are steadily rising in tandem with improved standard of living. Wages have increased 50% since 2005. Rising wages and fewer workers, (due to one-child-per–family) along with China’s currency appreciation will lessen the economic advantage.
China is now using Africans for manufacturing.
The people making the iphone want to own the iphone. They probably care less about…
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And they probably don’t care about…
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And they probably care less about…whoopee cushions, Halloween stuff, metal chickens and all the other crap we buy…
Home Goods motto should be “Nothing you need to own”
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MAGA realities
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That boat has sailed…we are never going back to being a manufacturing country.
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Advantages and Disadvantages of International Expansion
Exhibit 10.5
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Advantages of Going Global
Gain access to a larger market.
Gain access to low-cost input factors.
Develop new competencies.
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Advantage #1: Gain Access to a Larger Market
Helps multinational enterprises with economies of scale and scope.
Participating in a much larger market.
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 multinational enterprises that pursue a low-cost leadership strategy.
Examples of low-cost raw materials: lumber, iron ore, oil, and coal.
Has been a key driver of globalization:
Lower labor costs is the main focus now.
India provides well-educated English-speaking young people.
China provides low labor costs and an efficient infrastructure.
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Example: 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 are some of the more well-known Indian IT service companies. Taken together, these companies employ more than 250,000 people and provide services to many of the Global Fortune 500. Many MNEs have close business ties with Indian IT firms. Some, such as IBM, are engaged in foreign direct investment through equity alliances or building their own IT and customer service centers in India. More than a quarter of Accenture’s work force, a consultancy specializing in technology and outsourcing, is now in Bangalore, India.
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Advantage #3: Develop New Competencies
Helps multinational enterprises 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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AstraZeneca, a Swiss-based pharmaceutical company, relocated its research facility to Cambridge, Massachusetts, to be part of the Boston biotech cluster, in hopes of developing new R&D competencies in biotechnology. Cisco invested more than $1.6 billion to create an Asian headquarters in Bangalore and support other locations in India, in order to be in the middle of India’s top IT location. Unilever’s new-concept center is located in downtown Shanghai, China, attracting hundreds of eager volunteers to test the firm’s latest product innovations on-site, while Unilever researchers monitor consumer reactions.
Many MNEs now are replacing the one-way innovation flow from Western economies to developing markets with a polycentric innovation strategy—a strategy in which MNEs now draw on multiple, equally important innovation hubs throughout the world characteristic of Globalization 3.0; see Exhibit 10.3.
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Disadvantages of Going Global
Liability of foreignness.
Loss of reputation.
Loss of intellectual property.
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Disadvantage #1: Liability of Foreignness
Unfamiliar cultural environment.
Unfamiliar economic environment.
Coordinating across geographic distances.
All can result in additional costs.
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What works in US does not mean it will work in other countries…and viceversa…Fresh and Easy
Walmart’s problems in several international markets are in large part because of the liability of foreignness. In particular, Walmart failed in Germany and experienced a similar fate in South Korea, where it also exited in 2006. In addition, Walmart has tried for many years to successfully enter the fast-growing markets in Russia and India, but with little or no success. Walmart’s success recipe that worked so well domestically didn’t work in Germany, South Korea, Russia, or India.
Walmart underestimated its liability of foreignness when entering and competing in Germany, and how it is now facing the German grocery industry disruptors, Aldi and Lidl, on its home turf.
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Disadvantage #2: Loss of Reputation
Reputation is one of the most valuable resources.
Reputation dimensions can include innovation, customer service, 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.
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Apple’s brand, for example, stands for innovation and superior customer experience. Apple’s brand reputation is also one of its most important resources. Apple’s brand is valued at $230 billion, making it the most valuable in the world.
However, low wages, long hours, and poor working and living conditions contributed to a spate of suicides at Foxconn, Apple’s main supplier in China. The Taiwanese company, which employs more than a million people, manufactures computers, tablets, smartphones, and other consumer electronics for Apple and other leading consumer electronics companies. The backlash against alleged sweatshop conditions in Foxconn prompted Apple to work with its main supplier to improve working conditions and wages. Tim Cook, Apple’s CEO, visited Foxconn in China to personally inspect its manufacturing facility and workers’ living conditions. Although conditions at Foxconn have been improving, Apple started to diversify its supplier base by adding Pegatron, another Taiwanese original equipment manufacturer (OEM).
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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.
Intellectual property exposure.
How many of you use a pirated textbook?
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Theft and reverse engineered to then compete. China is biggest abuser. That is why they release movies simultaneously now. Trumps’s trade war is part of this discussion.
1 in 5 CEO’s say there company has experience IP theft from China in 2019.
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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 multinational enterprise decisions on which countries to enter.
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Although absolute metrics such as country wealth or market size matter to some extent—as we know, for example, that a 1 percent increase in country wealth leads to a 0.8 percent increase in international trade—the relative factors captured by the CAGE distance model matter more. For instance, countries that are 5,000 miles apart trade only 20 percent of the amount traded among countries that are 1,000 miles apart. Cultural distance matters even more. A common language increases trade between two countries by 200 percent over country pairs without one.
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Cultural Distance
Disparity between a firm’s home and host country, specifically 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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Cultural differences find their expression in language, ethnicity, religion, and social norms. They directly affect customer preferences (see Exhibit 10.5). Because of religious beliefs, for example, Hindus do not eat beef, while Muslims do not eat pork. In terms of content-intensive service, cultural and language differences are also the reason global internet companies such as Amazon or Google offer country-specific variations of their sites.
Bribery is acceptable in other countries…are you willing to play?
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Administrative and 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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Many foreign (target) countries also erect other political and administrative barriers, such as tariffs, trade quotas, FDI restrictions, and so forth, to protect domestic competitors. In many instances, China, for example, requests the sharing of technology in a joint venture when entering the country.
The 19 European countries in the eurozone not only share the same currency but also integrate politically to some extent. It should come as no surprise then that most cross-border trade between European countries takes place within the EU. Germany, one of the world’s largest exporters, conducts roughly 75 percent of its cross-border business within the EU.
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Geographic Distance
More than just physical distance.
Measured by:
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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Geographic distance is particularly relevant when trading products with low value-to-weight ratios, such as steel, cement, or other bulk products, and fragile and perishable products, such as glass or fresh meats and fruits.
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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 and resources.
Wealthy countries trade with poor countries.
Access to low-cost input factors (economic arbitrage).
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Although Walmart in Canada is a virtual carbon copy of the Walmart in the United States, Walmart in China is quite different.
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Modes of Foreign-Market Entry along the Investment and Control Continuum
Exhibit 10.7
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Exporting—producing goods in one country to sell in another—is one of the oldest forms of internationalization (part of Globalization 1.0).
It is often used to test whether a foreign market is ready for a firm’s products. When studying vertical integration and diversification (in Chapter 8), there are different forms along the make-or-buy continuum. Chapter 9 outlined how strategic alliances (including licensing, franchising, and joint ventures) and acquisitions are popular vehicles for entry into foreign markets. These organizational arrangements were discussed in detail in previous chapters.
Vz-Vodaphone
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Cost Reductions vs. Local Responsiveness
Two opposing forces in global competition:
Cost reductions: key competitive weapon.
Local responsiveness: tailoring to specific preferences.
Globalization hypothesis:
Consumer needs and preferences are converging.
Food, music, movies, clothing.
Examples: McDonalds, Coca-Cola, rock music, Greek salad, Hollywood movies, Levi jeans.
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The Integration-Responsiveness Framework: Global Strategy Positions and Representative MNEs
Access the text alternate for slide image.
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International Strategy
Sells the same products or services in both domestic and foreign markets.
Low-cost reductions / low-local responsiveness:
Leverages home-based core competencies.
Sells the same products domestically and abroad.
Often used successfully by MNE’s with:
Large domestic markets.
Strong reputations and brand names.
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A strength of the international strategy—its limited local responsiveness—is also a weakness in many industries. For example, when an MNE sells its products in foreign markets with little or no change, it leaves itself open to the expropriation of intellectual property (IP). Looking at the MNE’s products and services, pirates can reverse-engineer the products to discover the intellectual property embedded in them.
Harley, Rolex. Selling the same products or services in both domestic and foreign markets
Starbucks would probably be international, but could also fit into multidomestic. Low pressure for cost reduction and local support
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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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Nestle, Bridgestone, Philips, (Swiss, Japanese, Dutch). Consumers will perceive them to be domestic companies. Differentiation but local…
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Global-Standardization Strategy
High-cost reductions / low-local responsiveness:
Economies of scale and 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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Lenovo, the Chinese computer manufacturer, is the maker of the ThinkPad line of laptops, which it acquired from IBM in 2005. To keep track of the latest developments in computing, Lenovo’s research centers are located in Beijing and Shanghai in China, in Raleigh, North Carolina (in the Research Triangle Park), and in Japan. 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. The company describes the benefits of its global-standardization strategy insightfully: “Lenovo organizes its worldwide operations with the view that a truly global company must be able to quickly capitalize on new ideas and opportunities from anywhere. By forgoing a traditional headquarters model and focusing on centers of excellence around the world, Lenovo makes the maximum use of its resources to create the best products in the most efficient and effective way possible.”
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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 multinational enterprises that pursue a blue ocean strategy.
Difficult to implement:
Duplication of efforts.
Organizational complexity.
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Strong local competition for conglomerates…
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Dynamic Strategic Positioning: Google’s YouTube
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Intl -Red was available in US and select English speaking countries, (Aus, NZ), but kept the content US-based.
Multidomestic-Premium launch allowed search engines to customize to country and culture preferences.
Trans – Will allow search engine to find content for you WHEREVER your are…
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National Competitive Advantage
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
Italy: fashion
France: wine
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The Death of Distance Hypothesis is the assumption that geographic location shouldn’t lead to firm-level competitive advantage because firms are able to source inputs globally, and this assumption is inaccurate.
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Porter’s Diamond of National Competitive Advantage
Exhibit 10.11
Source:. Adapted from M.E. Porter (1990, March–April), “The competitive advantage of nations,” Harvard Business Review: 78.
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Factor Conditions
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.
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Resource-rich countries: Afghanistan, Iran, Iraq, Russia, Saudi Arabia, and Venezuela…but not home to any world’s leading companies.
Countries that lack natural resources: Denmark, Finland, Israel, Japan, Singapore, South Korea, Switzerland, Taiwan, and the Netherlands…but have large corps in country
Natural resources are not needed because competitive advantage is often based on human capital and know how.
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Demand Conditions
Characteristics 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.
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For example, due to dense urban living conditions, hot and humid summers, and high energy costs, it is not surprising that Japanese customers demand small, quiet, and energy-efficient air conditioners. In contrast to the Japanese, Finns have a sparse population living in a more remote countryside. A lack of landlines for telephone service has resulted in the Finnish demand for high-quality wireless services, combined with reliable handsets (and long-life batteries) that can be operated in remote, often hostile, environments. Cell phones have long been a necessity for survival in rural areas of Finland. This situation enabled Nokia to become an early leader in cell phones.
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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.
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German car companies such as Volkswagen (which also owns Audi and Porsche), BMW, and Daimler.
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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.
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Toyota’s global success in the 1990s and early 2000s was based to a large extent on a network of world-class suppliers in Japan. This tightly knit network allowed for fast two-way knowledge sharing—this in turn improved Toyota’s quality and lowered its cost, which it leveraged into a successful blue ocean strategy at the business level.
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The World’s Most Profitable Retailer
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Toyota’s global success in the 1990s and early 2000s was based to a large extent on a network of world-class suppliers in Japan. This tightly knit network allowed for fast two-way knowledge sharing—this in turn improved Toyota’s quality and lowered its cost, which it leveraged into a successful blue ocean strategy at the business level.
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IKEA
Sweden based
28 Countries
$35B
CSR firm
Core competency: Designing and offering modern and functional home furnishings in a unique retail experience resulting in a low cost structure.
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Asia accounts for 9% of sales, but 35% of its inputs
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What type of business is IKEA?
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What type of business is IKEA?
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Started as Global but moved to Transnational…
Adapted to countries need for smaller locations
Click and collect stores, more online
Redesigns for more urban…customization.
Adding delivery and installation services as some people are less inclined to self build with minimal instructions
Localization aka Multidomestic…
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Are you what you eat?
In your groups, interview each other about your experiences with ethnic food. Answer the following:
What is your favorite ethnic food?
How often do you eat it?
Is it part of your family heritage or did someone else introduce it to you?
Was it through social media or a personal recommendation? (who?)
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Are you what you eat? - Debrief
What specific connections between food and culture have you found in your daily lives?
How do you see food and culture as it impacts your workplace/school life?
Have you learned anything about cultures through food related traditions or beliefs?
Do you feel diversity in the workplace/school have impacted the types of food you seek to enjoy?
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