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Theory of Strategic Managementwith Cases, 8eHills, Jones
Chapter EightGlobal Strategy
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The Global and NationalEnvironments
The trend toward globalization has manyimplications:
1. Industries are becoming global in scopeIndustry boundaries no longer stop at nationalborders.
2. Shift from national to global marketsThishas intensified competition in industry afterindustry.
3. Steady decline in barriers to cross-border trade and investmentThis has opened up many once protectedmarkets to companies based outside of them.
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Increasing Profitability ThroughGlobal Expansion
Expanding the market by leveraging products Taking goods or services developed at home and selling them
internationally
Cost economies from global volume Economies of scale, lower unit costs
Location economies Economic benefits from performing a value creation activity in the
optimal location
Leveraging the skills of global subsidiaries
Applying these skills to other operations within firms global network
Must also consider transportation costs, tradebarriers, as well as the political and economic risks.
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Pressures for Cost Reductionsand Local Responsiveness
Figure 8.2
The best strategy for acompany to pursue may
depend on the kinds ofpressures it must copewith:
Cost Reductions or
Local Responsiveness
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Pressures for Cost Reductions
Where differentiation on
non-price factors is difficult Where competitors are
based in low-cost location
Where consumers are
powerful and face low switching costs Where there is persistent excess capacity
The liberalization of the world trade andinvestment environment
Pressures for cos t reduct ion s are greatest inindust r ies produ c ing commodi ty -type products
where pr ice is the main competi t ive weapon:
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Pressures for LocalResponsiveness
Differences in customertastes and preferences
Differences in
infrastructure andtraditional practices
Differences indistribution channels
Host governmentdemands
The greatest p ressures for local respons ivenessarise from :
Dealing with these contradictory pressures is adifficult strategic challenge, primarily becausebeing locally responsive tends to raise costs.
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Choosing a Global Strategy
Standard Globalization Strategy Reaping the cost reductions that come from economies
of scale and location economies
Business model based on pursuing a low-cost strategy
on a global scaleMakes the mo st sense when there are stron g pressu res forcost reduct ion and the demand for local respon siveness ismin imal
Localization Strategy Customizing the companys goods or services so that
thy provide a good match to tastes and preferences indifferent national marketsMost approp r iate when there are substant ia l di f ferencesacross nat ions w i th regard to con sumer tastes andpreferences and w here cos t pressu res are not too intense
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Choosing a Global Strategy
Transnational Strategy Difficult to pursue due to its conflicting demands
Business model that simultaneously:
Achieves low costs Differentiates across markets
Fosters a flow of skills between subsidiariesBui ld ing an organizat ion capable of suppo r t ing atransnat ional strategy is a com plex and c hal lenging task.
International Strategy Multinational companies that sell products that serve
universal needs (minimal need to differentiate)and do notface significant competitors (low cost pressure).In m ost in ternat ional companies the head o ff ice retains t ightcontro l ov er market ing and prod uct strategy.
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Basic Entry Decisions
1. Which overseas markets to enter (WHERE) Assessment of long-run profit potential Balancing the benefits, costs, and risks associate
with doing business in a country
2. Timing of entry (WHEN) First-mover advantages: preempt and build share First-mover disadvantages: pioneering costs
3. Scale of Entry (HOW) Entering on a large scale is a major strategic
commitment Benefits and drawbacks of small-scale entry
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The Choice of Entry Mode
1. ExportingMost manufacturing companies begin their global expansion asexporters and later switch to one of the other modes.
2. LicensingA foreign licensee buys the rights to produce a companys productfor a negotiated fee; licensee puts up most of the overseas capital.
3. FranchisingFranchising is a specialized form of licensing. The franchiser notonly sells intangible property, but also insists that franchisee agreesto follow strict rules as to how it does business.
4. Joint VenturesTypically a 50/50 venturea favored mode for entering a new market
5. Wholly-Owned SubsidiariesParent company owns 100% of subsidiarys stock setup or acquire
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Advantages and Disadvantagesof Different Entry Modes
Table 8.1
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Choosing Among Entry Modes
Distinctive Competencies and Entry ModeOptimal mode of entry depends on the nature of the companysdis t inc t ive competency:
Technological know-how Wholly-owned subsidiary is preferred over licensing and joint
ventures to minimize risk of losing control.
Management know-how
Franchising, joint ventures, or subsidiaries are preferred as riskis low of losing management know-how.
Pressures for Cost Reduction and Entry ModeThe greater the cos t pressure, the mo re l ikely a company w il l want to
pursue some combinat ion of expor t ing and who l ly -owned subs id iary : Export finished goods from wholly-owned subsidiary
Marketing subsidiaries for overseeing distribution Tight control over local operations allows company to use profits
generated in one market to improve position in other markets.
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Global Strategic Alliances
Advantages Facilitate entry into a foreign market Share fixed costs and associated risks Bring together complementary skills and assets
Set technological standards for its industry
Disadvantages Give competitors a low-cost route to gain new
technology and market access
Global Strategic Alliancesare cooperative agreements betweencompanies from different countries that are actual or potentialcompetitors. They range from short-term contractual cooperativearrangements to formal joint ventures with equity participation.
Some alliances benefit the company.Beware, alliances can end up giving away technology
and market access with very little gained in return.
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Making Strategic Alliances Work
The fai lure rate for internat ional s trategic al liances is qu itehigh. Success seems to b e a funct ion of three main factors:
Successful partners view the alliance as an opportunity tolearn rather than purely as a cost- or risk-sharing device.
1. Partner selectionA good partner: Helps the company achieve strategic goals Shares the firms vision for the purpose of the alliance
Is unlikely to try to exploit the alliance to its own ends Conduct research on potential partners
2. Alliance structure Risk of giving too much away is at an acceptable level Guard against opportunism by partner in alliance agreement
3. Manner in which alliance is managed Sensitivity to cultural differences Build relationship capital through interpersonal relationships
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Structuring Alliancesto Reduce Opportunism
Figure 8.5Opportunism includesthe expropriation of
technology or markets