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Strategy in the Global

Environment
MTV Networks has been a symbol of globalization. Although its international foray
got off to a weak start, MTV realized its folly in providing the same content to a
global audience and adopted a localization strategy.

Global and National Environments


Barriers to international trade and investment have tumbled and huge global
markets for goods and services have been created. Companies from different
nations are entering the global arena on unprecedented scales, increasing the
intensity of competition.

Globalization of production has been increasing as companies take advantage of


lower barriers to disperse important part of their production processes around the
globe. Globalization of markets has evolved over time to usher in a time where
national markets are merging into one huge global marketplace. As mentioned
earlier, this has brought in intense competition and has also forced companies to
maximize their efficiency, quality, customer responsiveness and innovative ability
like never before.

National Competitive Advantage

Michael Porter identified four attributes of a national or country specific


environment that have an important impact on the global competitiveness of
companies located in that region:

1. Factor Endowments – cost and quality of factors of production.


2. Local Demand Conditions
3. Related and Supporting Industries
4. Firm strategy, structure and rivalry – Porter makes two points here. First,
different nations have different management ideologies. For example,
German and Japanese companies tend to be managed by engineers who can
be attributed to their improving manufacturing processes and design. In
contrast, there is a predominance of Finance backgrounds in the U.S firms,
which leads them towards the maximization of short term financial returns.
He also argues that there is strong correlation between vigorous domestic
competition and creation and persistence of a competitive advantage within
an industry.
Ways of Expanding Globally

Expanding the market: Leveraging Products


A company can increase its growth rate by taking goods and services global. The
success depends on the ability of the company to transfer their distinctive
competencies into the foreign market. For e.g. P&G was able to succeed globally
because it was able to replicate its mass marketing skills to out-market the
indigenous players. (Transfer of Business Model).

Realizing Cost Economies from Global Volume


From Economies of scale, learning effects and bargaining power with suppliers.

Realizing Location Economies


Location Economies arise from performing a value creation activity in the optimal
location for that activity, wherever in the world that might be.

For e.g. ClearVision realized that eye glasses could be manufactured at low cost in
Hong Kong, so it moved its production facility there and later removed to China as
Hong Kong grew costlier. It also set up investments in France and Italy in order to
gain advantage from the presence of design expertise there for its status eye
division.

Leveraging skills of global subsidiaries


For e.g. McDonald’s has come to realize that foreign subsidiaries can be source of
innovative ideas. Skills can be created anywhere people have the opportunity and
incentive to try new things.

Pressures faced by Global companies


1. Pressures for cost reduction
2. Pressures for local responsiveness
a) Differences in customer tastes and preferences.
b) Differences in Infrastructure
c) Differences in Distribution Channel
d) Host Government Demands
Choosing a Global Strategy
Companies typically choose among four different strategic postures when
competing internationally.

a. A global standardization policy – appropriate when pressures for local


responsiveness are low but pressures for cost reduction are high.
b. Localization strategy – appropriate when pressures for local responsivess are
high but pressures for cost reduction are low.
c. Transnational Strategy – Both are high.
d. International Strategy – Both are low.

I am covering only transnational here because it seems the most difficult to self-
guess.

The need to compete with low-cost competitors like Komatsu of Japan forced
Caterpillar to look for greater cost economies. However, variations in construction
practices etc meant they also had to be locally responsive. Caterpillar redesigned
its products to use many similar components and invested in a few large scale
component manufacturing facilities, sited at global locations to realize scale
economies. At the same time, it augmented the centralized manufacturing of
components with assembly plants in major markets to add local product features.

Basic Entry Decision


Which overseas market to enter?

The choice of market to enter must be based on an assessment of their long term
profit potential. The attractiveness of a country as a potential market for
international business depends on costs and benefits, whose analysis must be done.

One other factor of importance is the value that a company’s business model can
create in foreign market. This depends on the suitability of its business model to
that market and the nature of the population.

What is the right timing of Entry?

This depends on whether a company believes it would be able to capture


substantial first mover advantage.

Scale of Entry and Strategic commitments

Look at the table in Page 294 for a brief summary of the entry modes
available to a firm and their advantages and disadvantages.

Global Strategic Alliances


Advantages:
1. Facilitates entry into a foreign market.
2. Allows firms to share the fixed costs of developing new products and
processes.
3. Brings together complementary skills and assets that neither company could
easily develop on its own.
4. Helps establish technological standards for the industry.

Disadvantages:

1. Firms can piggyback on your successes while offering few benefits to you.

Making Alliances Work


1. Choose the right partner.
2. Structure Alliance to reduce opportunism by:
a) Walling off critical tech
b) Establishing contractual safeguards
c) Agreeing to swap valuable skills and technologies
d) Seeking credible commitments.
1. Managing the Alliance
a) By building interpersonal relationships between the firm’s managers.
Japanese held several alliances with the U.S managers and learnt from
them whereas U.S. managers showed remarkable resistance to learning
from their counterparts, a study argues.

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