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Lecture 2
Strategic
Complexities In
Global Environment
HND Global Business Environment
Lecture Overview
◈ International Economic Integration◈ Reasons For Going International ◈ Strategic Complexities ◈ Establishing Mission & Objectives◈ Assess External Environment◈ Analyze Internal Factors ◈ Evaluate Strategic Approach ◈ International Supply Chain Management
Lecture Overview
◈ International Economic Integration◈ Reasons For Going International ◈ Strategic Complexities ◈ Establishing Mission & Objectives◈ Assess External Environment◈ Analyze Internal Factors ◈ Evaluate Strategic Approach ◈ International Supply Chain Management
International Economic
Integration
An Evolving Competitive Landscape
1
International Economic Integration
◈ Following Great Depression, World War II, global economy was in tatters
◈ For economic growth and stability, nations realized they need to assist and get assistance from nearby countries; as opposed to protectionist measures
◈ For this they needed to promote trade
International Economic Integration
◈ Trade was restricted by tariffs-taxes applied to imported or exported goods
◈ Following World War II, tariffs averaged 45 percent worldwide severely limiting international trade
International Economic Integration
◈ 8 rounds of negotiations between nations reduced average worldwide tariffs on manufactured goods from 45 percent to less than 7 percent
◈ Negotiations were known as the General Agreement on Tariffs and Trade (GATT)
◈ During this time, world trade grew dramatically
International Economic Integration
◈ GATT’s Fundamental Principle
⬥Each member nation must open its markets equally to every other member nation
⬥“Trade without discrimination” ⬥Once a country and its trading partners had agreed to reduce a
tariff, that cut was automatically extended to every other member country
International Economic Integration
◈ GATT’s effectiveness declined over time, reforms were necessary
◈ GATT’s focus was on merchandize trade, neither trade in services or IP-both increasingly important
◈ Governments devised craftier methods of trade protection-non tariff barriers
International Economic Integration
◈ To restore an effective means for trade liberalization, officials created the World Trade Organization (WTO) in 1995
◈WTO is a full fledged organization which adopted principles of GATT; in addition expanded scope and continued negotiations and resolved trade disputes
International Economic Integration
◈WTO has 159 members, accounts for 97% of the worlds trade
◈ Since GATT, worlds trade has grown significantly
◈ Critics argue WTO favors developed nations as it is difficult for poorer nations to compete in non regulated world
International Economic Integration
International Economic Integration
◈Many countries began to shift to bilateral rather than multilateral free trade agreements.
◈ In 2012, U.S. signed free trade agreements with Colombia and South Korea
◈ Sri Lanka has a free trade agreement with Pakistan from 2005, India from 2003
International Economic Integration
◈ Regional trade agreements (RTAs) -agreements among groups of nations
◈ To reduce tariffs and develop similar technical and economic standards
◈ Such agreements have usually led to more trade among the member nations
International Economic Integration
◈ Geographic proximity is an important reason for economic integration
◈ Short distances for goods/services
◈ Consumer tastes are similar, distribution channels can be easily established
International Economic Integration-Benefits
◈ Politically, regional economic integration promotes peace by fostering closer economic ties
◈ Trade disputes handled constructively, discrimination impossible for participating countries
◈ Free trade and investment raise incomes and stimulate economic growth
International Economic Integration-Types Of RTA
◈ Free Trade Area (FTA)- group of countries that remove trade barriers among themselves
◈ Each still maintains different external policies regarding non-members
◈ NAFTA, SAFTA
International Economic Integration-Types Of RTA
Lecture Overview
◈ International Economic Integration◈ Reasons For Going International ◈ Strategic Complexities ◈ Establishing Mission & Objectives◈ Assess External Environment◈ Analyze Internal Factors ◈ Evaluate Strategic Approach ◈ International Supply Chain Management
Reasons For Going
International
The Basis For Strategy
2
Reasons For Going International-Reactive Reasons
Globalization of Competitors
◈ Competitors going abroad, entrenched in foreign market; difficult for others to enter at later time
◈ Competitors operating globally may have greater market power, lower costs; may give them advantage domestically
Reasons For Going International-Reactive Reasons
Globalization of Competitors
◈ Foreign competitors entering a market reduces market share for a company
◈ No other choice other than expanding to foreign market
Reasons For Going International-Reactive Reasons
Trade Barriers
◈ Some countries still utilize restrictive trade barriers; tariff, quota, buy local policies which makes foreign products too expensive, impractical
◈ Companies switch from export to overseas manufacturing
Reasons For Going International-Reactive Reasons
Trade Barriers
◈ Toyota-manufacturing plants in the United States to circumvent import quotas.
◈ ZTE—Chinese telecom equipment maker moved to Brazil; to avoid that country’s high importtariffs, though cheaper to manufacture in China
Reasons For Going International-Reactive Reasons
Regulations & Restrictions
◈ Regulations and restrictions by firm’s home government becomes expensive
◈ Companies will seek out less restrictive foreign operating environments
Reasons For Going International-Reactive Reasons
Customer Demands
◈ Operations in foreign countries frequently start as a response to customer demands
◈ As a solution to logistical, supply chain problems; McDonalds meat supplier ventures abroad along with the company
Reasons For Going International-Proactive Reasons
Economies of Scale
◈ Achieve large scale volume to make the fullest use of modern capital-intensive manufacturing equipment; reduce cost through volume
◈ Amortize staggering research and development costs
Reasons For Going International-Proactive Reasons
Economies of Scale
◈ High costs of research and development, costs of keeping up with new technologies
◈ Can often be recouped only though global sales
◈ Pharmaceutical industry (Eg Merck and Pfizer)
Reasons For Going International-Proactive Reasons
Growth Opportunities
◈ As domestic growth declines markets saturate, opportunities abroad look more attractive
◈ Internet now greatly facilitates the ability to quickly link to contacts in other countries, promote products and services
Reasons For Going International-Proactive Reasons
Resource Access & Cost Savings
◈ Resource access, cost savings entices companies to operate from overseas bases.
◈ Availability of raw materials and other resources; greater control over inputs and lower transportation cost
Reasons For Going International-Proactive Reasons
Resource Access & Cost Savings
◈ Lower labor costs (for production, service, and technical personnel)—major consideration
◈ Leads to lower unit costs; provide a vital ingredient to competitiveness for companies
Reasons For Going International-Proactive Reasons
Incentives
◈ Governments seeking new infusions of capital, technology, and knowhow provide incentives
◈ Tax exemptions, tax holidays, subsidies, loans, andthe use of property
Reasons For Going International-Proactive Reasons
Incentives
◈ This decreases risk and increase profits
◈ Thus are attractive to foreign companies
◈ EPZ’s, Government promoting investment in specific industry
Lecture Overview
◈ International Economic Integration◈ Reasons For Going International ◈ Strategic Complexities ◈ Establishing Mission & Objectives◈ Assess External Environment◈ Analyze Internal Factors ◈ Evaluate Strategic Approach ◈ International Supply Chain Management
Strategic Complexities
Challenges Faced By Organizations In Global Business Environment
3
Strategic Complexities
◈ Foreign firms need to overcome a liability of foreignness
◈ Inherent disadvantage that foreign firms experience in host countries because of their non-native status
Strategic Complexities
◈ Differences in formal and informal institutions governing the rules of the game in different countries
◈ Local firms are already well versed in these rules
◈ Foreign firms need to invest resources to learn suchrules; some are in favor of local firms
Strategic Complexities
◈ In this age of globalization customers supposedly no longer discriminate against foreign firms
◈ Reality is foreign firms are often still discriminated against, sometimes formally, other times informally
◈ Essential for organizations to plan strategically before eyeing international opportunities
Strategic Complexities
◈ Global strategic formulation process, parallels process followed in domestic companies
◈ Process far more complex-diversity of geographic locations; differences in political, legal, cultural, market, and financial processes
◈ These factors introduce a greater level of risk in strategic decisions
Strategic Complexities
1. Establish Mission & Objective
2. Assess External
Environment
3. Analyze Internal Factors
4. Evaluate Strategic Approach
Lecture Overview
◈ International Economic Integration◈ Reasons For Going International ◈ Strategic Complexities ◈ Establishing Mission & Objectives◈ Assess External Environment◈ Analyze Internal Factors ◈ Evaluate Strategic Approach ◈ International Supply Chain Management
Establishing Mission &
Objective
Identifying Foreign Market
4
Establishing Mission & Objective
◈ Decide objective of company in international operation or expansion; identify strategic goals
◈ Firm’s global objectives usually fall into the areas of
⬥Marketing, profitability, finance, production, and research and development
Establishing Mission & Objective
◈ Match strategic goals to location specific advantages
Establishing Mission & Objective
◈ Certain countries have other location specific advantages
◈ Geographic Advantage
⬥Target Sri Lanka as a base to target South Indian market, or Hong Kong to target Chinese market
⬥Miami the gateway of America; North American firms can target to expand South
⬥Dubai being in central location between Asia and Europe, Asia & Africa
Establishing Mission & Objective
◈ Advantages Arising From Economic Integration
⬥Firms outside EU, looking to target EU market can setup operations in a low cost EU country
⬥Firms interested in exporting to Indian or Pakistani markets can setup operation in Sri Lanka to avail preferential trading terms under the Free Trade Agreement
⬥When Sri Lanka lost GSP+ scheme, many apparel companies looked to expand to Bangladesh to avail the latter's facilities
Establishing Mission & Objective
Culture & Location
◈ Cultural distance-difference between two cultures along some identifiable dimensions
◈MNE’s by default first enter culturally similar countries; Belgian firms targeting France to take advantage of language, history, common culture
Establishing Mission & Objective
Culture & Location
◈ In cases of efficiency seeking and resource seeking strategic goals-cultural and institutional factors are less important
◈ Indian firms acquiring mines in Africa, Sri Lankan apparel factories entering Vietnam, Cambodia
Lecture Overview
◈ International Economic Integration◈ Reasons For Going International ◈ Strategic Complexities ◈ Establishing Mission & Objectives◈ Assess External Environment◈ Analyze Internal Factors ◈ Evaluate Strategic Approach ◈ International Supply Chain Management
Assess External
Environment
Variables In The Macro Environment
5
Assess External Environment
◈ Variables in the macro environment or external environment around the world
◈ Have the potential to shape a businesses future by posing new opportunities or threats
◈ Firms must adapt to their environment to survive
Assess External Environment
Environmental Scanning
◈ Process of gathering information, forecasting relevant trends, competitive actions, and circumstances
◈ That will affect operations in geographic areas of potential interest
Assess External Environment
◈ Activity conducted on three levels—global, regional,and national
◈ Focus on the future interests of firm and cover major variables such as
⬥Political and economic risk; technological, legal, and physical constraints
Assess External Environment
When Firm Internationalizing For Market Expansion
◈ Economic & Demographic Variables
⬦ Demographics: Population, Growth Rate, Age Distribution⬦ Income, Purchasing Power, Consumer Behavior, Purchasing Habits, Income
Elasticity ⬦ Prices Of Products, Availability of Substitutes⬦ Cultural Factors
Assess External Environment
When Firm Internationalizing For Resource Acquisition
◈ Resource Consideration
⬦ Labor, Quality Of Talent/Skill, Tertiary Education ⬦ Availability Of Raw Material, Suppliers, Import Facilities⬦ Electricity & Utilities ⬦ Land, Real Estate ⬦ Transportation, Infrastructure & Logistics ⬦ Access To Finance
Assess External Environment
When Firm Internationalizing For Resource Acquisition
◈ Cost Consideration
⬦ Cost of Labor⬦ Cost of Real Estate, Land, Facilities⬦ Cost of Raw Material & Transportation ⬦ Cost of Utilities & Other Miscellaneous⬦ Specific Benefits Offered By Government⬦ Tax system
Assess External Environment
When Firm Internationalizing
◈ Political Environment
⬦ Government control and restrictions on foreign investment⬦ Volatility of political climate⬦ Wage and price regulations, restrictions on repatriation of profit⬦ Foreign exchange risk ⬦ Labor regulations⬦ Export or Import quotas, local job creation quotas
Lecture Overview
◈ International Economic Integration◈ Reasons For Going International ◈ Strategic Complexities ◈ Establishing Mission & Objectives◈ Assess External Environment◈ Analyze Internal Factors ◈ Evaluate Strategic Approach ◈ International Supply Chain Management
Analyze Internal
Factors
Assessing Firms Strengths & Weaknesses
6
Analyze Internal Factors
Internal analysis
◈ Determine which areas of the firm’s operationsrepresent strengths or weaknesses compared to competitors
◈ Firm’s financial and managerial expertise, functional capabilities- key success factors (KSFs)
Analyze Internal Factors
Internal analysis
◈ Apple & Huawei- Technological capability
◈Walmart & Carrefour- Effective distribution channels
◈ Nike & Disney-Superior promotion capabilities
Analyze Internal Factors
Analyze Internal Factors
Internal analysis
◈ Companies develop their strategies around key strengths, or distinctive competencies
◈ Core competencies are usually difficult for competitors to imitate; Apple core competency in design and marketing
Analyze Internal Factors
Internal analysis
◈ Specifically assess their current competitors—global and local—for the proposed market
◈ What are our competitors’ positions, their goals and strategies, their resources, and their strengths and weaknesses, relative to those of our firm?
◈ What are the likely competitor reactions to our strategic moves?
Analyze Internal Factors
Lecture Overview
◈ International Economic Integration◈ Reasons For Going International ◈ Strategic Complexities ◈ Establishing Mission & Objectives◈ Assess External Environment◈ Analyze Internal Factors ◈ Evaluate Strategic Approach ◈ International Supply Chain Management
Evaluate Strategic
Approach
Weighing Strategic Alternatives In Light Of Macro & Micro Environmental Analysis
7
Evaluate Strategic Approach
◈ After external environment evaluation, internal factors assessment, competitive analysis done, and GO decision established
1. Determine what overall strategic approach to the global marketplace firm wishes to take
2. Determine specific entry strategy
Evaluate Strategic Approach
◈ Fundamental decision in international strategic management
◈Whether to pursue global or regional (or local) strategies
◈ Globalization vs. national responsiveness conflict
Evaluate Strategic Approach
◈ Global integration-production and distribution of products and services of a homogeneous type and quality on a worldwide basis
◈ Compete by establishing worldwide economies of scale, offshore manufacturing
Evaluate Strategic Approach
◈ Global integration-is possible due to declining tariff’s and formation of trading blocks
◈ Globalization, internet, social media is contributing to commonality of consumer tastes
◈ Sony, Apple
Evaluate Strategic Approach
◈ Global strategy treats all countries similarly, regardless of differences in cultures and systems
◈ Problems result, such as a lack of local flexibility and responsiveness and a neglect of the need for differentiated products
◈ Opportunity for competitors to capitalize
Evaluate Strategic Approach
Evaluate Strategic Approach
◈ National responsiveness need to understand the different consumer tastes in segmented regional and national markets
◈Managers within each region decide on owninvestment locations, product mixes, competitive positioning; run subsidiaries as independent organizations
Evaluate Strategic Approach
◈ There is need for economies of scale to compete on cost—there are opposing pressures to regionalize
◈ Newly developed economies (NDEs) and developing, or emerging, economies
◈ Localization pressures include unique consumer preferences-cultural or national differences
Evaluate Strategic Approach
Toyota T100 Toyota Tundra
Evaluate Strategic Approach
Evaluate Strategic Approach
Evaluate Strategic Approach
International Strategy
◈ Replicating home-country-based competencies, production expertise, design skills, or brandpower, in foreign markets
◈ Activities set, directed by home office, no need to adapt activities in international markets
Evaluate Strategic Approach
International Strategy
Evaluate Strategic Approach
Global Strategy
◈ Standardized products that vary little from country to country
◈Managers face high pressures for global integration yet low pressures for local responsiveness-volume, cost minimization, efficiency
Evaluate Strategic Approach
Global Strategy
◈ Companies create products for a world market, manufacturing them on a global scale in a few highly efficient plants, and
◈Marketing them through a few focused distribution channels
Evaluate Strategic Approach
Global Strategy
Evaluate Strategic Approach
Multidomestic Strategy
◈ Company’s subsidiaries in their respective local markets design, make, and market products that respond to local preferences
◈ Ignore economies of scale because integration is not very important
Evaluate Strategic Approach
Multidomestic Strategy
Evaluate Strategic Approach
Transnational Strategy
◈ A firm using a transnational strategy seeks a middle ground between a multidomestic strategy and a global strategy.
◈ Tries to balance desire for efficiency with need to adjust to local preferences in various countries
Evaluate Strategic Approach
Transnational Strategy
Lecture Overview
◈ International Economic Integration◈ Reasons For Going International ◈ Strategic Complexities ◈ Establishing Mission & Objectives◈ Assess External Environment◈ Analyze Internal Factors ◈ Evaluate Strategic Approach ◈ International Supply Chain Management
International Supply
Chain Management
Complexities Of International Supply Chain
8
International Supply Chain Management
◈ Supply Chain-All tasks and services that connect everything that happens to a product from raw material to consumer
◈ All linkages-origination of raw materials, to various processing points of raw materials, to production facilities to the distribution channels
International Supply Chain Management
◈ Supply chains involve transporting goods and materials, inventory management and flows, order processing, materials handling, and warehousing
◈Many parts, subcomponents, raw materials used in products, are sourced from other countries;
◈Most supply chains are global supply chains
International Supply Chain Management
◈ Vertical Integration-strategy when a company controls more than one stage of the supply chain
◈ Typical phases of supply chain: research & development, manufacturing, distribution, and retail
International Supply Chain Management
◈ Vertical Integration
◈ Advantages Does not need to rely on suppliers; less chance of disruption Limits bargaining power of suppliers Can ensure quality of products; as company in control over
major processes Can pass on cost savings to customers
International Supply Chain Management
◈ Vertical Integration
◈ Disadvantages Must invest significant expense in setting up facilities Loss of focus; why Apple has refocused its activities in the
value chain Lack of competition may lead to poor quality products
International Supply Chain Management
International Supply Chain Management
Global Supply Chain
Management
1. Global Sourcing
2. Offshore Manufacturing
3. Outsourcing4. Contract
Manufacturing
International Supply Chain Management
◈ Global Sourcing- process of obtaining a supply of inputs (raw materials and parts) for production from around the world
◈ Logistics, improved communications enables companies to source raw material at cheapest price from distant countries
International Supply Chain Management
◈ Global Sourcing
◈ A third of ingredients need to come from abroad◈ Ingredients sourced from India, Netherlands, China, Vietnam, Brazil etc◈ Must manage supply chain carefully to ensure timeliness, safety, quality◈ Purchasers monitor weather patterns, commodity trends, energy prices
◈ Must coordinate closely with suppliers
International Supply Chain Management
◈ Offshore manufacturing-company decides to manufacture outside its home market, invests in facility
International Supply Chain Management
◈ Offshore Manufacturing
◈ Advantages Flexibility Low labor costs, availability of cheap materials, components Government incentives, facilities, favorable tax structures Proximity to markets Economies of scale can be achieved if facility is used to
manufacture for multiple markets
International Supply Chain Management
◈ Offshore Manufacturing
◈ Disadvantages High investment required Country may lose cost advantage in future Loss of focus Political and other macro environmental risks
International Supply Chain Management
◈ Outsourcing- company externalizes a process or function to another business;
◈ IT, customer service, accounting, research
◈ Can be domestic or offshore
International Supply Chain Management
◈ Contract Manufacturing- when one company arranges for another company to manufacture its products
◈ Company provides manufacturer with all the specifications, materials required for production process
International Supply Chain Management
◈ Global Sourcing, Outsourcing, Manufacturing
◈ Advantages Reduce costs through cheaper labor, laxer work rules, and
lower land and facilities costs Improve quality of products Improve delivery of supply process; gain access to products
only available abroad No need for company to invest; flexible can change
International Supply Chain Management
◈ Global Sourcing, Outsourcing, Manufacturing
◈ Disadvantages Loss of technology, loss of knowledge, competitive advantage Companies may also be producing for competitors
International Supply Chain Management
◈ Global Sourcing, Outsourcing, Manufacturing
◈ Disadvantages Greater uncertainty in global sourcing of raw
materials/components; higher lead times even for products Supply delays, interruptions, stoppages can create havoc in a
company’s production Uncertainties outside control of companies; eg Government
intervention, natural disasters
International Supply Chain Management
◈ Global Sourcing, Outsourcing, Manufacturing
◈ Disadvantages Ethical concerns of production in developing, poorer
countries Health, safety, security issues- Eg. Rana Plaza, Bangladesh Poor treatment of workers- Eg. Foxconn Child Labor
International Supply Chain Management
The Make Or Buy Decision
◈Which should be performed internally and which could be subcontracted to independentcompanies?
International Supply Chain Management
The Make Or Buy Decision
◈MNEs must focus on parts of production critical to the product; they are particularly good at making
◈ Outsource parts where suppliers have distinct comparative advantage, such as greater scale, lower cost structure
International Supply Chain Management
How Companies Manage International SC
◈ Develop supply chain as core competency
◈ Emphasize on supplier relationship; establish close relationship that of a partner, internalize
◈ Diversify supplier network to mitigate risk
International Supply Chain Management
How Companies Manage International SC
◈ Use Information Technology-ERP, MRP, E-Commerce; access provided to suppliers
International Supply Chain Management
Distribution
◈ Process of making product or service available for the consumer or business user that needs it
◈ Distribution channel can be as short- direct transaction from business to consumer; interconnected intermediaries along the way such as wholesalers, distributers, agents and retailers
International Supply Chain Management-Distribution
India
International Supply Chain Management-Distribution
India
International Supply Chain Management
Global Distribution Challenges
◈ Margins demanded in international market may be higher; power of distributors
◈ Multiple channels increase price of products
◈ Conflict of interest