Global Strategy: Competing Around the World Joe Mahoney

What Is Globalization? Globalization is a process of closer integration and exchange between different countries and peoples worldwide. Made possible by:   Falling trade and investment barriers   Advanced telecommunications   Reduced transportation costs   Importance of MNEs and FDIs 10–2

What Is Globalization? Multinational Enterprise (MNE)   Deploys resources and capabilities in the procurement, production, and distribution in at least two countries   Less than 1% of firms, BUT employ 19% of U.S. workforce – –74% of private sector R&D spending Foreign Direct Investment (FDI)   Investments in value chain activities abroad Global Strategy   To sustain a competitive advantage   Competing against foreign and domestic companies around the world 10–3

Why Global? Gain access to a larger market   Capitalize on market potential, such as China, India, and emerging economies Gain access to low-cost input factors   Labor, natural resources, technology, logistics Managing corporate risk Leverage core competencies Develop new competencies   Location economies   Unique locational advantages 10–4

Globalization - Collaboration Networks 10–5

International Sales as % of Total Data from –6

1–7 Does GM’s Future Reside in China? Market opportunity in China  1.4 billion population, only 1 in 100 people owns a vehicle GM entered China in 1997  Joint venture with Shanghai Automotive Industrial Corp  China is 25% of GM’s revenues and GROWING fast  GM China factories are more productive than U.S. plants GM’s future relies on China and other emerging economies  $ 250 million on a state-of-the-art R&D center…in Shanghai  Future of GM likely decided in their international HQ…in Shanghai 10–7

Disadvantages of Expanding Internationally Liability of foreignness   Additional cost of doing business in an unfamiliar cultural and economic environment   Cost of coordinating across geographic distance   Economic development may increase the cost of doing business   Rising wages with improved living standards   Difficulty in protecting intellectual property 10–8

Global Expansion: Where How does an MNE decide where to go?   National institutions:   Well-established legal and ethical pillars as well as well- functioning economic institutions such as capital markets, banks, and infrastructures   National culture: "Programming of the mind"   Geert Hofstede’s Cultural Dimensions 1. 1.Power distance 2. 2.Individualism 3. 3.Masculinity/femininity 4. 4.Uncertainty-avoidance 5. 5.Long-term orientation 10–9

Corporate Tax Rates Institutional Difference Matters 10–10

Global Expansion: How Exporting: producing goods in one country to sell in another country Acquisition, strategic alliance are also popular vehicles for entry into foreign markets MNEs sometime prefers greenfield operations or wholly-owned subsidiaries   Greenfield is building new factories/offices from scratch   Physically and organizationally building from the "ground up." 10–11

Modes of Foreign Market Entry Market Entry along the Investment and Control Continuum 10–12

Strategy around the World: Local Responsiveness vs. Cost Reduction Local responsiveness :   Tailor product and service offerings to fit local consumer preferences and host-country requirements   Higher cost   Example: McDonald’s uses mutton in India Cost reduction:   MNEs enter global marketplace with the intention to reduce operation cost   Example: Toyota Prius 10–14

The Integration-Responsiveness Framework

Four Global Strategies International strategy   Leveraging home-based core competencies   Selling the same products or services in both domestic and foreign markets   Example: Selling Starbucks coffee internationally Localization (product differentiation) strategy   Maximize local responsiveness via a multi-domestic strategy   Consumers will perceive them to be domestic companies   Example: Nestlé’s customized product offerings in international markets 10–16

Four Global Strategies Global standardization (cost leadership) strategy   Economies of scale and location economies   Pursuing a global division of labor based on best-of-class capabilities reside at the lowest cost   Example: Lenovo’s R&D in Beijing, Shanghai, and Raleigh; production center in Mexico, India, and China Transnational strategy   Combination of localization strategy (high responsiveness) with global standardization strategy (lowest cost position attainable)   Example: German multimedia conglomerate Bertelsmann : Caterpillar’s earth-moving equipment

National Competitive Advantage Death-of-distance hypothesis   Geographic location alone should not lead to firm-level competitive advantage because firms are now more able to source inputs globally (ex: capital, commodities, etc.) Labor markets also have become more global.   Computer manufacturers – China & Taiwan   Consumer electronics – Japan & South Korea   Mining companies – Australia Why are certain industries in some countries more competitive than in others?   Answer: National Competitive Advantage 10–18

Porter’s Diamond Model of National Competitive Advantage 10–19

National Competitive Advantage Framework Factor conditions   A nation’s endowments in terms of national, human, and other resources as well as supportive infrastructure and institutions. Demand conditions   Specific characteristics of demand in a firm’s domestic market Competitive intensity   Highly competitive environments tend to stimulate firms to outperform others ( e.g., German car industry) Related and supporting industry   Leadership in related and supporting industries can also foster world-class competitors in downstream industry   Complementarity 10–20

Regional Clusters Regional cluster   A group of interconnected companies and institutions in a specific industry, located near each other geographically and linked by common characteristics   Knowledge spillover   Positive externalities that are regionally constrained   Exchange of ideas among firms in a cluster 10–21

Mapping a Regional Cluster: Research Triangle 10–22

Omaha Telemarketing Hotel Reservations Credit Card Processing Wisconsin / Iowa / Illinois Agricultural Equipment Detroit Auto Equipment and Parts Rochester Imaging Equipment Western Massachusetts Polymers Boston Mutual Funds Medical Devices Mgmt. Consulting Biotechnology Software and Networking Venture Capital Hartford Insurance Providence Jewelry Marine Equipment New York City Financial Services Advertising Publishing Multimedia Pennsylvania / New Jersey Pharmaceuticals North Carolina Household Furniture Synthetic Fibers Hosiery Dalton, Georgia Carpets South Florida Health Technology Computers Nashville / Louisville Hospital Management Baton Rouge / New Orleans Specialty Foods Southeast Texas / Louisiana Chemicals Dallas Real Estate Development Wichita Light Aircraft Farm Equipment Los Angeles Area Defense Aerospace Entertainment Silicon Valley Microelectronics Biotechnology Venture Capital Cleveland / Louisville Paints & Coatings Pittsburgh Advanced Materials Energy West Michigan Office and Institutional Furniture Michigan Clocks San Diego Golf Equipment Biotech/Pharma Minneapolis Cardio-vascular Equipment and Services Warsaw, Indiana Orthopedic Devices Colorado Computer Integrated Systems / Programming Engineering Services Mining / Oil and Gas Exploration Las Vegas Amusement / Casinos Small Airlines Oregon Electrical Measuring Equipment Woodworking Equipment Logging / Lumber Supplies Seattle Aircraft Equipment and Design Software Coffee Retailers Boise Information Tech Farm Machinery Geographical Distribution of Clusters Source: Adapted from Professor Michael E. Porter, Harvard Business School 10–23