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Strategy in the Global Environment

Chapter 6

Essentials of Strategic Management, 3/eCharles W.L. Hill | Gareth R. Jones

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The Global Environment

Managers need to consider:– How globalization is impacting the

environment in which their company competes

– What strategies they should adopt to exploit opportunities

– How to counter competitive threats

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The Global Environment

Industry boundaries do not stop at national borders

The shift to global markets has intensified competitive rivalry in industries

Global markets created enormous opportunities

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Increasing Profitability Through Globalization The success of many multinational

companies is based not just on the goods and services they sell, but upon the distinctive competencies that underlie their production and marketing

Globalization increases profits by:– Expanding the market– Realizing economies of scale– Realizing location economies– Leveraging the skills of global subsidiaries

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Competitive Pressures

Two main pressures: Pressure for cost reduction Pressure to be locally responsive

These pressures place conflicting demands on a company

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Cost Reductions

Cost reductions are common in:– Industries where price is the main competitive

weapon– Industries with universal need products– Universal Need: When consumer preference

is similar or identical in different nations Companies may achieve cost reduction by

basing production in a low-cost location or by offering a standardized product.

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Local Responsiveness Pressures

These arise from differences in:– Consumer taste and preferences– Infrastructure or traditional practices– Distribution channels– Host government demands

The more that customer preferences vary, the more local responsiveness is required

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Choosing a Strategy

Basic four strategies: Global Standardization Strategy Localization Strategy Transnational Strategy International Strategy

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Global Standardization Strategy

Focuses on increasing profitability by pursuing a low-cost strategy on a global scale

Works best if there is:– Strong pressure for cost reduction– Low pressure for local responsiveness

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Localization Strategy

Customizes goods or services to provide a good match to tastes and preferences in different national markets

Works best if there is:– Low cost pressure– Varied taste and preferences by nation

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Transnational Strategy

Attempts to achieve low-cost, differentiated products across markets and to foster a flow of skills between different subsidiaries

Works best if there is simultaneous :– High cost pressures– High local responsiveness pressures

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International Strategy

Centralizes product development, but manufactures and markets globally

Works best if there is:– Low cost pressure– Low pressure for local responsiveness– A universal need product– No significant competitors

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Choices of Entry Mode

Exporting– Many companies begin global expansion

through exporting production– Exporting allows companies to bypass the

cost of establishing manufacturing facilities– Exporting may be consistent with scale

economies and location economies

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Choices of Entry Mode (cont’d)

Licensing– A licensee in a foreign country can purchase

the rights to produce a product in their country– The cost of development is low, as well as the

risk involved

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Choices of Entry Mode (cont’d)

Franchising A specialized form of licensing where the

franchiser sells intangible property (usually a brand or trademark).

The franchisee agrees to follow the strict rules and business plans of the company

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Choices of Entry Mode (cont’d)

Joint Venture– Separate corporations come together to form

a new corporate entity– Two or more companies have an ownership

stake, but combine resources for mutual benefit

– Sharing knowledge can be dangerous for the companies involved

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Choices of Entry Mode (cont’d)

Wholly Owned Subsidiaries– A parent company owns 100% of a smaller

self-contained business unit– This can be a very costly approach, since the

parent company is responsible for all of the financing