MKT 448LECTURE 5

Global Strategy

Foreign Entry

When a firm enters a foreign market, it is more optimal to transfer its existing

home-country advantages/resources to the target country rather than develop

required advantages in the target country from scratch.

Reason

Foreign firms face all the disadvantages of being foreign; they must confront all

the advantages that native players enjoy from being in their home

territory.

They face numerous risks

• Economic risks--changes in exchange rates.

• Political risks--changes in policy actions of governments, wars, civil disorders, etc.

• Business risks--competitors’ actions and responses, changes in consumers’ choices, etc.

• Resource risks--changes in requirement of firm resources.

Basis for Going Overseas

A firm goes abroad to make more profits by exploiting its key resources:

technology

brand name

management capability

Benefits of Going Abroad

A multinational firm is exposed to diverse environments. The diversity

provides them with learning opportunity

• Example: P&G developed special surfactants in Japan because consumers there wash their clothes in cold water.

• It developed a special capability in water softening because water in Europe contains more minerals.

• It developed technology to suspend dirt in wash water in the U.S. because consumers demand removal of dirt from clothes.

Global Strategy

Global strategy is one in which a firm competes in different national markets

by leveraging its competitive or resource position in other national markets to gain highest efficiency

company-wide.

Efficiency Perspective

Value of outputsEfficiency = --------------------

Value of inputs

- enhance value of outputs- minimize costs of inputs- reduce cost of processing

Potential for Cost reduction comes from:

Factor costs(Potential of reducing costs of inputs by acquiring

them in different markets)

Scale economies(Potential of reducing costs with large-scale

production necessary to serve multiple markets)

Scope Economies(Potential of sharing of costs across markets)

Input

• Different countries have different factor endowments.

• This leads to differences in factor costs.

• Different tasks require different factors.

• Thus, each activity can be located in the country where the relevant factors are available at lowest cost.

Scale economy• Firms must increase output to achieve scale

benefits.– In the late 70s, the minimum efficient scale

required for production of small cars was 400,000 units. No U.S. company produced more than 200,000 units, while Toyota produced 500,000 Corollas.

• Learning leads to progressive cost reduction.

• Firms must achieve higher market share worldwide and be the first to reach there.

Caveats of Scale

• Scale efficiencies are obtained through increased specialization and through creation of dedicated assets and systems.

• This can cause inflexibility and limit the firm’s ability to cope with change.

• Need to balance scale and flexibility through flexible manufacturing and administrative systems.

Scope Economy

• Firms have to incur expenditures on similar activities in different countries.

• Some of these activities can be combined to reduce costs.

• For example: Cost of the joint production of two or more products can be less than the cost of producing them separately.

Examples of Scope Economies

• Flexibility to produce multiple products

– Toyota, Ford

• Use common distribution channels for multiple products

– Matsushita

• Share R&D across multiple products

– NEC

• Global brand names

– Coca Cola

• Servicing multi-national customers world-wide

– Citigroup

• Pooling knowledge from different markets

– P&G

Shared Physical Asset

Product Diversification Market Diversification

Shared External Relations

Shared Learning

Caveats of Scope Economies• Certain parts of a company’s businesses may

be inherently very different from others, and may not offer scope economies.

• For example: In the soft drink industry, skills required for bottling and distribution are very different from the task of creating brand name image.

• There cannot be cost savings from jointly operating the two businesses.

Perspectives on global strategy?Levitt (1983):

Effective global strategy is not a bag of many tricks but the successful practice of just one:

product standardization.

The core of a global strategy lies in developing a standardized product to be produced and sold the same way throughout the world.

Basically, exploit economies of scale.

Hout et al (1982):Effective global strategy requires the approach

not of a hedgehog, who knows only one trick, but that of a fox, who knows many.

Exploit economies of scale through global volume, take preemptive positions through quick and large investments, and manage

inter-dependently to achieve synergies across different activities.

Hamel and Prahalad (1985):

Effective global strategy requires a broad product portfolio so that investments on

technologies and distribution channels can be shared.

Cross-subsidization across products and markets and a strong world-wide

distribution system are most important.

Kogut (1985):

Effective global strategy requires that a firm be like a nimble-footed athlete who wins

through flexibility and arbitrage.

Source from multiple suppliers, shift production to benefit from changing factor costs and exchange rates, and arbitrage to

exploit imperfections in financial and information markets.

Global Strategy boils down to:Centralization

(as opposed to decentralization or local autonomy).

Integration

(as opposed to national differentiation)

Global

(as opposed to multinational, multidomestic, or local responsiveness).

Arguments against Global Strategy• Consumer tastes and preferences, distribution

systems, government regulations vary among countries.

• A firm can tailor its offerings to fit the unique requirements in each national market.

• Firm can benefit by creating integrated and autonomous national subsidiaries which can exploit strong links with local stakeholders to defend against more efficient global firms.

Much depends upon the top-management team’s attitude

There are three kinds of attitudes:

Geocentric (think global)

Polycentric (think local)

Ethnocentric (think home)

Modified Global StrategyFirms have a choice in how they structure the

flow of tasks within the worldwide value-adding system.

The more integrated the flow of tasks appears to be, the more global the firm’s strategy is

assumed to be.

Note that certain tasks can be better integrated than others (like R&D, Finance versus

Marketing).

Integration vs Differentiation

Choice is based on estimates of cost advantages of global integration of certain

tasks vis-à-vis the differentiation benefits of responding to national differences in tastes,

industry structures, distribution systems, and government regulations.

Product Characteristics

• Among the different industries, one industry (such as consumer electronics) may be characterized by low differentiation benefits and high integration advantages,

• while another (such as packaged foods) may be quite the opposite.

Firm Choice

• Within an industry, the strategy of one firm (such as Toyota) may be based on exploiting the advantages of global integration through centralized production and decision making,

• while that of another (such as Fiat) may aim at exploiting the benefits of national differences.

Functional Level

• Within a firm, research may offer greater efficiency benefits of integration,

• while sales and service may provide greater differentiation advantages.

Integration-Responsiveness

Industry

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Lo

National Differentiation or Responsiveness

Integrat

ion

Hi

Cosnumer Electronics

Telecoms

Autos

CementPackaged Food

Toyota

Fiat

Ford

Research

Manufacturing

Marketing

Procurement

Service

Product Policy

Pricing

Advertising

Financing

Promotion

Company Function Task

Lo Hi Hi HiLo Lo

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Problems of Centralization

By emphasizing the importance of rationalizing the flow of components

and final products within a global system, the importance of internal

flows of people, technology, information, and values has been de-

emphasized.

The main problem.• Global strategy shifts organizational power from

subsidiaries to the headquarters.

• Subsidiaries are simply deliverers of products and programs designed by the center.

• The center becomes insensitive to knowledge accumulated by subsidiary managers.

• Subsidiary managers become demotivated.

• They resist learning from different countries.

Localization could be just as bad!

• In companies with autonomous subsidiaries, which enjoy very high levels of resources and autonomy, learning may not occur because:– Inability of local staff to transfer and synthesize

knowledge developed in other subsidiaries.– Local loyalties, turf protection, and the not-

invented-here syndrome may restrict internal flow of information.

Cost savings may be impeded!• Search for scale economies may lead to

greater amount of intra-company, inter-country, flow of goods, capital, people, and information.

• These flows tend to be expensive and difficult to coordinate; enhances risk of management failure.

• Attracts attention of different governments and may result in interventionist policies.