BUS 189 – Jan 12, 2011

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CH 06 – STRATEGY IN THE GLOBAL ENVIRONMENT

GLOBALIZATION
• Globalization “The process enabling financial and investment markets to operate
internationally, largely as a result of deregulation and improved communications.”
• Two facets of Globalization
• Globalization of Markets
• separate nat'l mkts into one world market
• they're all going to be competitors in the same mkt
• Globalization of Production

GLOBALIZATION OR NOT?
Coca-Cola: globalization
#1 global brand of 2010
vision: not to be more than 1 hr away from every human being on earth
Dell: should focus on it if they do not already
outsource customer service
take adv of that factor of prod'n/labor
Local liquor store in SJ ← Mr T's Liquor Locker
not necessary

although globalization is a big part of growing business, local store maybe not relevant

THE GLOBAL ENVIRONMENT

2 macro factors: decline of barriers and deregulation which causes free flow of goods and
services and capital
in previous yrs, more difficult to cx w/global partners
• Drivers of Globalization:
• Decline in barriers
• Technological changes
• Industries must consider a Global economy and competitors
• Expand SWOT analysis
• An Increase in direct foreign investment
• Higher rivalry for market share
• Increase of Opportunities
: politics, resources, competitors in their mkt
: real-life e.g.
: Wal-Mart in the 90s

WAL-MART CASE
• Issue: Growth was beginning to plateau
• 1990s: Growth in U.S. is limited
• 2000: Predicted increase market saturation
• Initial Strategy
• Expanded into international markets
• Problem:
• Attempted Solution: Joint Venture
• 1991: Joint Venture with Cifra in Mexico
 • Did not take conditions into consideration/distribution issues
• Result:
• Sales low due to product selection
• New Solution/Result:
• Carry Mexican products
• Build factories near Wal-Mart
• Grew to lead in the Mexican Market
critics predicted correctly (initially in Mexico) of being too “American” and not adapting
• Developed Solution: Expand Global Influence through
• Acquire existing retailers and transfer information systems, logistics, and
management expertise
• Establish new stores
• Benefits: Economies of Scale
• Lower Prices
• Gain of market share
• New ideas from foreign countries
: experienced some very great benefits from global expansion
“Only the paranoid survive.”
• Future:
• Continued Global Expansion
• Wal-Mart only does 25% of business internationally
• Global market is still fragmented thus allowing global expansion
• Plan Evaluation and corrections:
• Failed in different economies
• Modify strategy and Implement
: e.g. in South Korea, not able to decode customer needs/wants
: Germany already had low-cost superstores
: Japan takes it offensive to buy at a lower price (as low as you can)

INCREASING PROFITABILITY THROUGH GLOBALIZATION

– There are several ways in which expanding globally provides opportunities for
companies to increase profitability

EXPANDING THE MARKET: LEVERAGING PRODUCTS AND COMPETENCES

– One of the first steps to 'going global' is selling internationally those goods or services
that are produced at home using the company's existing competences; their unique set of
skills
– The goods sector uses their competences in manufacturing processes
– The service sector uses the 'blueprint' of their business model used at home and
applies it abroad
: bring biz model, not MFG processes overseas

Procter & Gamble had a large portfolio of consumer products but their competences in mass-
marketing surpassed the skills of competitors and allowed the company to grow rapidly.

Toyota entered the global market using their distinct competences in automobile manufacturing
and earned large returns from these skills.

: Microsoft as well
: service-oriented co. that has expanded nationally—McDonald's

REALIZING ECONOMIES OF SCALE

– A company can realize cost savings from economies of scale by:
– Spreading fixed costs across its entire global sales volume which allows the average
unit cost to be lower.
– Using production facilities more effectively and intensively.
– Earning more bargaining power with suppliers to drive down the costs of key inputs.
: higher profit margins

E.g. Microsoft spent $5 billion to develop Windows Vista but once spread over the global
demand, the cost has a smaller effect.
Intel is able to use its factories more efficiently to serve a global demand vs using them for only a
U.S. demand.
Wal-Mart has been able to drive down prices through suppliers (large volumes)

REALIZING LOCATION ECONOMIES

: not every location is suited to provide same goods and services
Location economies- are the economic benefits arising from performing a value creation activity
in the optimal location.
Finding this can either:
• Lower costs of value creation, helping to achieve a low-cost position
• Enable a company to differentiate its product
e.g. IBM's ThinkPad X31 laptop was desinged in the US and diff components made in: Thailand,
South Korea, Malaysia and US. Assembled in Mexico.

LEVERAGING THE SKILLS OF GLOBAL SUBSIDIARIES

– For the experienced MNC, valuable skills can be created anywhere within the co.'s global
operations; it does not have to occur in the home country
– McDonald's, for example, facing slow growth in their restaurants located in France,
listened to and followed the ideas of their French employees
: menu and décor should be offered (chicken on focaccia bread > popular than
hamburger) no plastic seats (all armchairs), hardwood floors → 2.5% inc in sales
: Rome has the largest McDonald's in the world

COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS

– Two competitive pressures that companies face in global market

PRESSURES FOR REDUCTIONS

– Are especially intense in industries producing commodity-type products that are
universal needs such as bulk chemicals, petroleum, steel, sugar, handheld calculator,
semiconductor chips, personal computers, and liquid crystal display screens
– And are also intense in industries where major competitors are based in low-cost
locations, and where consumers are powerful and face low switching costs
– Require companies to minimize their unit cost by:
– Manufacturing products in low-cost location in the world
– Outsourcing certain functions to low-cost foreign suppliers
– Mass-producing standardized product in order to realize scale economies
– For example, many computer companies outsource their telephone-based customer
service centers to India (e.g. Citibank)
PRESSURES FOR LOCAL RESPONSIVENESS
– Requires companies to accommodate
– The differences in consumer tastes and preferences
– Infrastructure and traditional practices
– Distribution channels
– And host gov't demands such as
– Economic and political demands that req local responsiveness
– Local clinical testing, registration procedures...
– Local content rules force company such as
– Toyota to manufacture most of its cars for Americans in the U.S.

FOUR BASIC STRATEGIES

Global standardization strategy
Transational strategy
International strategy
Localization strategy
pressures for cost reductions/local responsiveness

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
: downside- duplication of fn's and shorter prod'n runs that will essentially raise costs
: avoid customization at all costs
: aggressively pricing out competitors
: makes the most sense when there are strong pressures for cost reduction and low
pressure for local responsiveness—products w/universal need
– Intel, Texas Instruments and Motorola
– e.g. TI—don't customize to local demand; TI-89 exactly the same in India as U.S.

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
: consumers see diff values
: standardized product for global consumption
: if you can customize to the local demand of diff products (go to Calcutta that is
tailored for them ← they will see perceived/added value, can charge for it)
: increase demand at same time; word-of-mouth
: e.g. Yahoo!; MTV (TRL, Egypt) ← tailoring product to local demand; instead of
watching VH1, people will watch MTV
: efficiency and
: car co.'s

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
: ABB – hugh engineering conglomerate as well as Ford
MNC utilizing this strategy aim for low cost pressures and low pressure
: serve universal need; face no competitors; limited pressure to reduce cost structure
: De Biers; Xerox (sustained comp adv)
: such heavy patent protection that for multitude of yrs, nobody could even think
to get into photocopy business
: charge higher price (b/c can)

INTERNATIONAL STRATEGY
– Centralize 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
: Procter & Gamble
: Nike- Kobe Bryant
: even Kobe Bryant has to go to Nike headquarters
: Achilles heel- eventually over time, competitors going to emerge
: if managers don't take proactive steps to prevent this, will lose comp adv (if not
high efficiency)
: Xerox; Canon- Xerox's own internal fault; eventually going to have competition,
and be prepared for it
: not valuable for long-term; should shift to global standardization or transnational in interest of
competition
: same can be said of localization strategy: if don't see potential competition

CHOICES OF ENTRY MODE

– Exporting:
– Many companies begin global expansion through exporting production
– Allows companies to bypass the cost of establishing manufacturing facilities
– It may be consistent with scale economies and location economies
: great e.g. SONY
: Japanese auto co.'s
– Licensing:
– A license in a foreign country can purchase the rights to produce a product in their
country
– the cost of development and risk involved is low
: e.g. RCA
– Franchising
– A specialized form of licensing where the franchisor sells intangible property (usually
a brand or trademark)
– The franchisee agrees to follow the strict rules and business plans of the company
: McDonald's
: basically sell their brand to someone to sell
: quality is the same in every store
 : operating manual for McDonald's is 750-pp long (lot of standardization)
– 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
: Fuji Xerox = Xerox could go into Japan
: NUMMI
: most ventures go 50-50, but some go 51-49 so dominant can have more ctrl
– Wholly Owned Subsidiaries
– A parent company owns 100% of a smaller self-contained business unit
– Very costly approach, since parent company is responsible for all financing
: great for taxes
: American Airlines is owned by AmeriCorp
: Procter & Gamble owns Mr. Clean

Adv/Disadv
When RCA licensed to Japan, lost a lot of share b/c Japanese co.'s assimilated own technology
w/RCA's so now local Japanese co.'s own majority of mkt share over RCA

Franchising: lack of ctrl over qlty

: Hilton as e.g.
: word of mouth
Joint Ventures: lack of ctrl over technology
: Toyota took a huge risk when it went in w/GM and formed Nummi
: b/c technology for making cars was very efficient; very fortunate that GM didn't take
advantage of that knowledge ← although success for Toyota, can be dangerous for
others, such as RCA
Wholly Owned Subsidiaries
: those who want to protect their tech and knowledge of co.
: mostly pharmaceutical co.'s, semiconductor, electronics
: gain advantage over rivals

IKEA
-Global Cult with 230 stores
-33 countries that host 410 million shoppers a year
-Sales $18 billion (reduce price 2-3% per year)
-Target Market
*Middle class
*low-priced, but fashionable household items/furniture
*8000-10 000 items per warehouse using extreme promotions to attract customers
: warehouse; way configured interior- make sure all customers there had to go to each dep't
before they check out;
: makes it difficult to pass through the entire store w/o stopping at each dep't
: go in to purchase coffee pot and leave with entire kitchen set
-Supply Markets
*Lower cost suppliers
*Big markets to avoid the costs associated with shipping
*5 suppliers Europe, 3 United States, and 2 China
*Klippan love seat
: Europe/U.S./China = largest mkt's
 : Klippan love seat most popular; over yr's reduced price by 40%
: standard formula thruout warehouses all over the world
: food court, daycare ctr ← parents can shop
: ran into slight prob when came to U.S.
: in Europe ← things are smaller, beds measured in cm, not King, Queen, and Twin
: in China, a lot of ppl live in apt's in city, so they have balconies
: balcony section in warehouse (in China), when ppl in China shop there, go there to see
diff furniture they can put on balcony
: offer delivery service b/c ppl in China don't have cars (many of them)
: IKEA tailors to each of the countries they're in and keep low prices down

Global Environment
Increasing Profitability (through Global Expansion)

Strategy
Choices of Entry
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1.) Pressure for cost reductions are greatest in industries producing commodity type
products, where meaningful differentiation on nonprice factors is difficult and price is the main
competitive weapon
2.) By expanding its sales volume through international expansion, a company can reduce
costs by economies of scale.
3.) Universal needs exists when the tastes and preferences of consumers in different nations
are similar if not identical
4.) What strategy should be implemented localization
5.) What are the economic benefits that arise from a value creation activity location
economies
6.) Entering into international operations, which strategy offers the lowest level of control?
Franchising
7.) When a company's strategy is based upon , they are executing the international strategy.
8.) Taking advantage of cheaper costs in foreign markets- outsourcing
9.) Exporting
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: most jobs that get outsourced are union jobs
: Ross Perot said NAFTA (before it was signed) was representative of a large sucking sound of
jobs to Mexico
: for every job outsourced, 2 jobs pop up at home
: globalization is almost certainly here to stay, so it's more and more unusual for an organization
not to have a global footprint
: Int'l biz incubator w/5 or 6 employees meet definition of MNC
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1.) Which of the following is not true about how the global environment has changed over
the last fifty years?
a) Barriers to international trade have lowered
b) Markets have become increasingly isolated from one another
c) Companies from different nations are entering one another's markets much more
frequently and rapidly
d) None of the above
e) All of the above
China joined WTO about 5 yrs ago
EU – unique b/c something beyond NAFTA and free trade zone; do not need passports or visas
to move between member states
What they're trying to create in Europe is what we have in the U.S.
: political and economic entity like the U.S.
counter U.S. and NAFTA

2.) Location economies refer to a company's ability to

a) expand its sales volume by expanding into new markets
b)realize low cost savings by increasing its global scale of
c)

3.) Companies are most likely to benefit from a localization strategy when there is
a) low pressure for cost reductions and low pressure for local responsiveness
b) low pressure for cost reductions and high pressure for local responsiveness
c) high pressure for cost reductions and high pressure for local responsiveness
d) high pressure for cost reductions and low pressure for local responsiveness
e) all of the above
e.g. of co. that follows localization strategy? MTV; Yahoo! (optimized home page to diff pg's)

4.) Co.'s most likely to benefit from global standardization strategy when there is
a) low pressure for cost reductions and low pressure for local responsiveness
b) low pressure for cost reductions and high pressure for local responsiveness
c) high pressure for cost reductions and high pressure for local responsiveness
d) high pressure for cost reductions and low pressure for local responsiveness
e) all of the above
same product everywhere (Texas Instruments, Intel) Windows? ← only thing they chg'd
differently (Outlook, Explorer, etc) is just language ← not a lot of pressure for cost reduction

5.) Co.'s most likely to pursue a transnational strategy when there is

a) low pressure for cost reductions and low pressure for local responsiveness
b) low pressure for cost reductions and high pressure for local responsiveness
c) high pressure for cost reductions and high pressure for local responsiveness
d) high pressure for cost reductions and low pressure for local responsiveness
e) all of the above
difficult to pursue: simultaneously responsive and reduce cost
NUMMI ← see every vehicle come out of the paint shop (diff color); 2 door or 4 door
cost of change over (e.g. red paint to yellow paint) high, but Toyota developed technique: world
class MFG ← paint system that every car coming thru could be painted a diff color

6.) Co's are most likely to pursue an int'l strategy when there is
a) low pressure for cost reductions and low pressure for local responsiveness
b) low pressure for cost reductions and high pressure for local responsiveness
c) high pressure for cost reductions and high pressure for local responsiveness
d) high pressure for cost reductions and low pressure for local responsiveness
e) all of the above
e.g. Procter & Gamble, (maybe) Nike, Intel (?),

7.) In the semiconductor industry, products are highly standardized around the world and
there is fierce competition. Semiconductor companies are thus likely to benefit from
GLOBAL STANDARDIZATION

8.) When Xerox first expanded internationally, its product was highly valued in most
developed nations and was protected by strong patents. Sell product at high price.
 INTERNATIONAL STRATEGY

9.) As the worldwide market for a product becomes more competitive, which two strategies
become less viable?
INTERNATIONAL AND LOCALIZATION (d)
as mkt's become more mature, products become more standardized, more price pressure, so
transnational strategy tends to survive and standardization strategy tends to survive

10.) If a company wishes to expand abroad with a product that has very high transportation
costs, which of the following entry modes is least likely to be considered?
EXPORTING
: make it here and ship it over ← transport costs are high, export not effective/not gonna work
: the other ones (licensing, franchising, JV, wholly owned subsidiary) do not use transportation
b/c typically producing in country selling to

11.) If a co. wishes to have very strong control over its technology, MFG ops, and service,
which of following entry modes is most likely to choose to expand abroad?
WHOLLY OWNED SUBSIDIARY
: maintain complete ctrl

12.) McDonald's sometimes expands into foreign countries by selling the rights to operate a
McDonald's to local entrepreneur
FRANCHISING

13.) Xerox teamed up with Fuji to sell photocopiers

JV
Fuji had 51% (NUMMI = 50/50)

14.) Once a company has multiple domestic locations, becomes MNC. False
15.) ?
16.) Location economies are benefits that arise from mfg and selling a certain product in
particular geographic location. False
: localization strategy pick low-cost locations
: many co.'s want to sell to EU sell in Europe; locate ops ctr in Ireland (lowest MFG costs, tax
structure, etc.)
: if MFR/sell in S. America → Brazil
: Asia → China, now Vietnam and maybe to Laos/Cambodia; China vs India ← China has better
infrastructure; India- roads are terrible, electricity is spotty

17.) Co.'s global standardization strategy focuses on reaping benefits of scale and location
economies. true
: want to drive cost down; high pressure for cost reduction

18.) Localization strategy makes most sense when demands for responsiveness low and cost
reduction high false

19.) MNC that are fortunate enough to have low cost pressures and low pressure for local
responsiveness are typically enterprises selling a product that serves a universal need true
: Procter & Gamble
20.) Major disadvantage to franchising can be lack of qlty ctrl true