Lecture 2 Strategic Complexities In Global Environmentbms.lk/download/HND/semester 4/GBE/week-2/Lecture 2 Strategic... · Economic & Demographic Variables ⬦Demographics: Population,

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

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


◈ 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


◈ 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


◈ 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


◈ 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


◈ 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


◈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



◈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


◈ 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


◈ 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


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


Globalization of Competitors

◈ Foreign competitors entering a market reduces market share for a company

◈ No other choice other than expanding to foreign market


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


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


Regulations & Restrictions

◈ Regulations and restrictions by firm’s home government becomes expensive

◈ Companies will seek out less restrictive foreign operating environments


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


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)


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


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


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


Incentives

◈ Governments seeking new infusions of capital, technology, and knowhow provide incentives

◈ Tax exemptions, tax holidays, subsidies, loans, andthe use of property


Incentives

◈ This decreases risk and increase profits

◈ Thus are attractive to foreign companies

◈ EPZ’s, Government promoting investment in specific industry

Lecture Overview


Strategic Complexities

Challenges Faced By Organizations In Global Business Environment

3


◈ Foreign firms need to overcome a liability of foreignness

◈ Inherent disadvantage that foreign firms experience in host countries because of their non-native status


◈ 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


◈ 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


◈ 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


1. Establish Mission & Objective

2. Assess External

Environment

3. Analyze Internal Factors

4. Evaluate Strategic Approach

Lecture Overview


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


◈ Match strategic goals to location specific advantages


◈ 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


◈ 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


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


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


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


Environmental Scanning

◈ Process of gathering information, forecasting relevant trends, competitive actions, and circumstances

◈ That will affect operations in geographic areas of potential interest


◈ 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


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


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


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


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


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)


Internal analysis

◈ Apple & Huawei- Technological capability

◈Walmart & Carrefour- Effective distribution channels

◈ Nike & Disney-Superior promotion capabilities



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


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?


Lecture Overview


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


◈ Fundamental decision in international strategic management

◈Whether to pursue global or regional (or local) strategies

◈ Globalization vs. national responsiveness conflict


◈ 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


◈ 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


◈ 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



◈ 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


◈ 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


Toyota T100 Toyota Tundra




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


International Strategy


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


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


Global Strategy


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


Multidomestic Strategy


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


Transnational Strategy

Lecture Overview


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


◈ 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


◈ 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


◈ 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


◈ 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



Global Supply Chain

Management

1. Global Sourcing

2. Offshore Manufacturing

3. Outsourcing4. Contract

Manufacturing


◈ 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


◈ 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


◈ Offshore manufacturing-company decides to manufacture outside its home market, invests in facility


◈ 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


◈ Offshore Manufacturing

◈ Disadvantages High investment required Country may lose cost advantage in future Loss of focus Political and other macro environmental risks


◈ Outsourcing- company externalizes a process or function to another business;

◈ IT, customer service, accounting, research

◈ Can be domestic or offshore


◈ 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


◈ 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



◈ Disadvantages Loss of technology, loss of knowledge, competitive advantage Companies may also be producing for competitors



◈ 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



◈ 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


The Make Or Buy Decision

◈Which should be performed internally and which could be subcontracted to independentcompanies?


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


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


How Companies Manage International SC

◈ Use Information Technology-ERP, MRP, E-Commerce; access provided to suppliers


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


Global Distribution Challenges

◈ Margins demanded in international market may be higher; power of distributors

◈ Multiple channels increase price of products

◈ Conflict of interest

Thanks!

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Lecture 2 Strategic Complexities In Global Environmentbms.lk/download/HND/semester 4/GBE/week-2/Lecture 2 Strategic... · Economic & Demographic Variables ⬦Demographics: Population,