1. Global Business Management (MGT380) Lecture #20: Global Strategy

2. Learning Objectives  Understand how firms make strategic choice  Understand the importance of strategic alliances  Management of global alliances

3. Recap of the last lecture  Firms can increase growth by selling goods or services developed at home internationally; The success of firms that expand internationally depends on the goods or services they sell, and on their core competencies (skills within the firm that competitors cannot easily match or imitate); Core competencies enable the firm to reduce the costs of value creation and/or to create perceived value in such a way that premium pricing is possible  When firms base each value creation activity at that location where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity, they realize location economies (the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be) i) By achieving location economies, firms can: lower the costs of value creation and achieve a low cost position; and differentiate their product offering  Firms that take advantage of location economies in different parts of the world, create a global web of value creation activities; value chain are dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized A caveat: transportation costs, trade barriers, and political risks complicate this picture

4.  Experience effect: The experience curve refers to the systematic reductions in production costs that have been observed to occur over the life of a product; Learning effects are cost savings that come from learning by doing. So, when labor productivity increases, individuals learn the most efficient ways to perform particular tasks, and management learns how to manage the new operation more efficiently  Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product; Sources of economies of scale include:  spreading fixed costs over a large volume  utilizing production facilities more intensively  increasing bargaining power with suppliers Firms that compete in the global marketplace typically face two types of competitive pressures: pressures for cost reductions; and pressures to be locally responsive Pressures for cost reductions force the firm to lower unit costs, but pressure for local responsiveness require the firm to adapt its product to meet local demands in each market—a strategy that raises costs

5. Pressures for local responsiveness arise from:  differences in consumer tastes and preferences - strong pressures for local responsiveness emerge when consumer tastes and preferences differ significantly between countries. Pick-up trucks  differences in traditional practices and infrastructure - pressures for local responsiveness emerge when there are differences in infrastructure and/or traditional practices between countries; EU 240-volt system, UK 110-volt;  differences in distribution channels - a firm's marketing strategies needs to be responsive to differences in distribution channels between countries. Detergents retails control 65% in Germany while in Italy it is 2%. Doctors  host government demands - economic and political demands imposed by host country governments may necessitate a degree of local responsiveness. Drug stores should be dispersed to meet local demands. Threat of protectionism. To sell railcars in Germany you must manufacture it in Germany. There are four basic strategies to compete in the international environment:  global standardization; 2) localization 3) transnational 4) International

6. Strategic Choice There are four basic strategies to compete in the international environment:  global standardization  localization  transnational  International  The appropriateness of each strategy depends on the pressures for cost reduction and local responsiveness in the industry

7. Strategic Choice:International Strategy  The international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization The international strategy makes sense when  there are low cost pressures  low pressures for local responsiveness

8. Strategic Choice: Localization Strategy  The localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets The localization strategy makes sense when:  there are substantial differences across nations with regard to consumer tastes and preferences  where cost pressures are not too intense

9. Strategic Choice-Global Strategy  The global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies  The strategic goal is to pursue a low-cost strategy on a global scale The global standardization strategy makes sense when:  there are strong pressures for cost reductions  demands for local responsiveness are minimal

10. Strategic Choice: Transnational Strategy The transnational strategy tries to simultaneously:  achieve low costs through location economies, economies of scale, and learning effects  differentiate the product offering across geographic markets to account for local differences  foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations The transnational strategy makes sense when:  cost pressures are intense  pressures for local responsiveness are intense

11. The Evolution of Strategy  An international strategy may not be viable in the long term  To survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors  Similarly, localization may give a firm a competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures, and the only way to do that may be to shift toward a transnational strategy

12. 14-12 What Are Strategic Alliances?  Strategic alliances refer to cooperative agreements between potential or actual competitors  range from formal joint ventures to short-term contractual agreements  the number of strategic alliances has exploded in recent decades

13. 14-13 Why Choose Strategic Alliances?  Strategic alliances are attractive because they  facilitate entry into a foreign market; e.g., Motorola initially finds it difficult to enter in Japan- so joined Toshiba  allow firms to share the fixed costs and risks of developing new products or processes (Both above firms contributed $1 billion)  bring together complementary skills and assets that neither partner could easily develop on its own; French Thomson (core is access to EU market) and Japanese JVC(technology)  help a firm establish technological standards for the industry that will benefit the firm

14.  But, the firm needs to be careful not to give away more than it receives  Japanese semi-conductor industry; Stealing competitive advantage

15. 14-15 What Makes Strategic Alliances Successful?  The success of an alliance is a function of 1. Partner selection  A good partner  helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values  shares the firm’s vision for the purpose of the alliance  will not exploit the alliance for its own ends

16.  Firm should do:  Collect as much as much pertinent and publically available information  Collect data from informed third parties which includes previous partners if they had already alliances, bankers who had dealing with them, & former employees  Get to know the potential partner as well as possible before committing to an alliance. This should include face-to-face meetings between senior managers to ensure that chemistry is right

17. 14-17 What Makes Strategic Alliances Successful? 2. Alliance structure  The alliance should  make it difficult to transfer technology not meant to be transferred  have contractual safeguards to guard against the risk of opportunism by a partner  allow for skills and technology swaps with equitable gains  minimize the risk of opportunism by an alliance partner 3. The manner in which the alliance is managed  Requires  interpersonal relationships between managers  learning from alliance partners  Building trust

18. 14-18 Review Question _______ refers to the time and effort spent learning the rules of a new market. a) First mover advantages b) Strategic commitments c) Pioneering costs d) Market entry costs

19. 14-19 Review Question How do most firms begin their international expansion? a) with a joint venture b) with a wholly owned subsidiary c) with licensing or franchising d) with exporting

20. 14-20 Review Question What is the main disadvantage of wholly owned subsidiaries? a) they make it difficult to realize location and experience curve economies b) the firm bears the full cost and risk of setting up overseas operations c) they may inhibit the firm's ability to take profits out of one country to support competitive attacks in another d) high transport costs and tariffs can make it uneconomical

21. 14-21 Review Question If a firm wants the option of global strategic coordination, the firm should choose a) franchising b) joint ventures c) licensing d) a wholly owned subsidiary

22. 14-22 Review Question All of the following are advantages of acquisitions except a) they are quicker to execute b) it is easy to realize synergies by integrating the operations of the acquired entities c) they enable firms to preempt their competitors d) they may be less risky

23. 14-23 Review Question Which of the following is not important to a successful strategic alliance? a) establishing a 50:50 relationship with partner b) creating strong interpersonal relationships c) a shared vision d) learning from the partner

25. Summary of the lecture There are four basic strategies to compete in the international environment:  global standardization  localization  transnational  International  Strategic alliances refer to cooperative agreements between potential or actual competitors  range from formal joint ventures to short-term contractual agreements  the number of strategic alliances has exploded in recent decades

26.  Strategic alliances are attractive because they  facilitate entry into a foreign market; e.g., Motorola initially finds it difficult to enter in Japan- so joined Toshiba  allow firms to share the fixed costs and risks of developing new products or processes (Both above firms contributed $1 billion)  bring together complementary skills and assets that neither partner could easily develop on its own; French Thomson (core is access to EU market) and Japanese JVC(technology)  help a firm establish technological standards for the industry that will benefit the firm Partner selection A good partner  helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values  shares the firm’s vision for the purpose of the alliance  will not exploit the alliance for its own ends

27. 2. Alliance structure  The alliance should  make it difficult to transfer technology not meant to be transferred  have contractual safeguards to guard against the risk of opportunism by a partner  allow for skills and technology swaps with equitable gains  minimize the risk of opportunism by an alliance partner 3. The manner in which the alliance is managed  Requires  interpersonal relationships between managers  learning from alliance partners  Building trust