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Chapter 6

Strategy in the
Global
Environment

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

Class Room Discussion


THE GLOBAL ENVIRONMENT

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

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

Expanding the market


A company can increase its growth rate by taking

goods or services developed at home and selling


them internationally.
Many companies are doing this like

P&G
Microsoft
Volkswagen
Toyota

Most of the companies success is based on their

Distinctive competencies (unique Skills)

Realizing economies of scale


Companies can increase its sales volume through costs

saving by economies of scale.


It comes from
Spreading fixed cost associated with developing a
product and setting up production facilities over its global
sales volume, a company can lower its average unit cost.
A company can potentially utilize its production facilities
more intensively which lead higher productivity, lower
costs and greater profitability.
The bargaining power with suppliers increases which
allow it to bargain down the cost of key inputs and boost
profitability that way.

Realizing Location Economies


These the economic benefits that arise from

performing a value creation activity in the optimal


location for that activity.
It has two effects
It can lower the cost of value creation, helping the
company to achieve a low cost position.
It can enable a company to differentiate its product
offering., which gives it the option of charging a
premium price or keeping price low and using
differentiation as a means of increasing sales
volume.

Increasing Profitability Through


Realizing Location Economies
Global Expansion
Location economies
Economic benefits from performing a value
creation activity in the optimal location
Effects

Can lower costs


Can enable differentiation

caveat

Transportation costs and trade barriers


Political and economic risks

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Participative Discussion on Case

WAL-MARTS GLOBAL EXPANSION

Leveraging the skills of global


subsidiaries
Such skills created within subsidiaries and

applying them to other operations within the firms


global network may create value.
MacDonald's Example

Leveraging the skills of global subsidiaries


Competencies

can be created anywhere


within a multinationals global network of
operations
Managers must establish an incentive
system to encourage local employees to
acquire new competencies
Managers must have processes in place
to identify valuable new competencies
and help transfer them within the
company

COST PRESSURE & PRESSURES FOR


LOCAL RESPONSIVENESS

As a manager in your company how could u reduces the cost of


your product and how would u c the customer resp. also expalin its
factors

Competitive Pressures
Two main pressures:
Pressure for cost reduction
Pressure to be locally responsive
These pressures place conflicting demands

on a company

Pressures for Cost Reductions and


Local Responsiveness

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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.

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

Pressures for Cost Reductions


When companies produce commodity products
Where differentiation on non-price factors is

difficult and price is the main competitive weapon


Where competitors are based in low-cost locations
Where there is persistent excess capacity
Where consumers are powerful and face low
switching costs
The liberalization of the world trade and
investment environment

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Pressures for Local Responsiveness


Differences in customer tastes and

preferences
Differences in infrastructure and traditional
practices
Differences in distribution channels
Host government demands
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Reading required
from text book

CHOOSING A GLOBAL STRATEGY

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

Four Basic Strategies

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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

Choosing a Global Strategy


Global strategy
Focusing on increasing profitability by reaping cost
reductions that come from experience curve
effects and location economies; pursuing a lowcost strategy on a global scale
Makes sense when there are strong pressures for
cost reductions and demand for local
responsiveness is minimal

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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

Localization Strategy
Localization strategy
Developing a business model that allows a
company to achieve maximum local
responsiveness
Makes sense when there are high pressures
for local responsiveness and low pressures for
cost reductions
Companies may become too decentralized
and lose the ability to transfer skills and
products

The evolution of strategy at P & G

STRATEGY IN ACTION
(CLASS DISCUSSION)

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

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

International strategy
Creating value by transferring competencies and
products to foreign markets where indigenous
competitors lack those competencies and products
Makes sense if a company has a valuable
competence that indigenous competitors in foreign
markets lack and if it faces weak pressure for local
responsiveness and cost reductions

CHOICES OF ENTRY MODE

The Choice of Entry Mode


Exporting
Licensing
Franchising
Joint ventures
Wholly-owned subsidiaries
Choosing Among Entry Modes

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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

Choices of Entry Mode (contd)


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

Choices of Entry Mode (contd)


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

Choices of Entry Mode (contd)


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

Choices of Entry Mode (contd)


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

The Advantages and Disadvantages of Different


Entry Modes

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