Hill 8e Basic Ch08

8/12/2019 Hill 8e Basic Ch08

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Copyright Houghton Mifflin Company. All rights reserved. 8 | 1

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



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.



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



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



Advantages and Disadvantagesof Different Entry Modes

Table 8.1



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.



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.



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



Structuring Alliancesto Reduce Opportunism

Figure 8.5Opportunism includesthe expropriation of

technology or markets

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Hill 8e Basic Ch08