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2. Strategy Preparation:
Read ch.6
Homework:
the e-commerce market in China
Prepare a brief on the current (2011) status of the e-commerce market in China. Use material from the text book (chapter 6), and any other sources you like.Prepare a brief on the current (2011) status of the e-commerce market in China. Use material from the text book (chapter 6), and any other sources you like.
3.
What is strategy?
What is strategic planning?
International strategic management process
Globalization & Regionalization
Entry strategy options
4. What is STRATEGY? = basic means by which company competes:
choice of business(es) in which to operate, &
ways in which it differentiates itself from competitors
GLOBAL STRATEGY
= STRATEGY world-class complexity
5. What is STRATEGIC PLANNING? = process by which management evaluates future prospects of firm & decides on appropriate strategies to achieve long-term objectives
Companies with global orientation position themselves to take advantage of worldwide trends & opportunities.
Strategic planning is essential to address increasing global competition & to coordinate far-away operations.
6. Why go international? Defensive (reactive)
Global competition
vs
Trade barriers
Regulations & restrictions
Customer demand
Aggressive (proactive)
Economies of scale
Growth opportunities
Resource access & cost savings
Incentives DEFENSIVE REASONS:
Global competition
- can’t let competitor get entrenched in foreign market(s), so it’s difficult for other companies to get in later; “first bite of the apple”
global competitors prompt each other’s global movements
e.g. Global health care titans: Pfizer, world’s biggest drug maker, bought Wyeth in 2009; then Roche (Switzerland) bought Genentech; then Merck bought rival Schering-Plough, whose business is 70% outside US, strong position in emerging markets
e.g. Unilever (importing since 1888) built up dominant position in India before P&G got there (about 20 years ago)
Trade barriers
tariffs, quotas, buy-local policies, etc.
make exports too expensive & too impractical
fewer in recent years, but still some complexities
e.g. EU block exemption for franchise industry (McDonald’s can’t contract with a single supplier to supply all franchises: like Coke in USA)
Regulations & restrictions
by home gov’t
companies want to avoid licensing & regulatory bother in largest markets
US has new Food Safety Alerts & Tips Widget app.
Customer demand
foreign customer requests that domestic supplier follow it to foreign countries (e.g. McDonald’s meat supplier sets up JVs; machinery companies)
OFFENSIVE REASONS:
Economies of scale
achieve world-scale volume to optimize modern capital-intensive manufacturing equipment & amortize huge R & D costs when facing short life cycles, e.g. pharmaceutical industry
keep up with new technologies, e.g. diaper industry
Growth opportunities
companies in home/mature markets in developed countries still hungry for growth
look for new opportunities in emerging markets
use surplus profits to develop new markets overseas & deploy underutilized resources (mgt, tech, machinery)
Resource access & cost savings
proximity to raw materials – more control over inputs & lower transportation costs
lower labor costs
positive impact on home manufacturing (labor) e.g. Xerox move to Mexico – union accommodations to keep jobs in US
attractive costs of power, transportation, financing
Incentives
- gov’ts offer tax incentives to attract business - tax holidays, exemptions, subsidies, loans, property use, customs privileges
e.g. Russia has special economic zones
e.g. North Carolina landed Electrolux with tax incentives in 2009 (beat Alabama); South Carolina got BMW with tax incentives (1992)
DEFENSIVE REASONS:
Global competition
- can’t let competitor get entrenched in foreign market(s), so it’s difficult for other companies to get in later; “first bite of the apple”
global competitors prompt each other’s global movements
e.g. Global health care titans: Pfizer, world’s biggest drug maker, bought Wyeth in 2009; then Roche (Switzerland) bought Genentech; then Merck bought rival Schering-Plough, whose business is 70% outside US, strong position in emerging markets
e.g. Unilever (importing since 1888) built up dominant position in India before P&G got there (about 20 years ago)
Trade barriers
tariffs, quotas, buy-local policies, etc.
make exports too expensive & too impractical
fewer in recent years, but still some complexities
e.g. EU block exemption for franchise industry (McDonald’s can’t contract with a single supplier to supply all franchises: like Coke in USA)
Regulations & restrictions
by home gov’t
companies want to avoid licensing & regulatory bother in largest markets
US has new Food Safety Alerts & Tips Widget app.
Customer demand
foreign customer requests that domestic supplier follow it to foreign countries (e.g. McDonald’s meat supplier sets up JVs; machinery companies)
OFFENSIVE REASONS:
Economies of scale
achieve world-scale volume to optimize modern capital-intensive manufacturing equipment & amortize huge R & D costs when facing short life cycles, e.g. pharmaceutical industry
keep up with new technologies, e.g. diaper industry
Growth opportunities
companies in home/mature markets in developed countries still hungry for growth
look for new opportunities in emerging markets
use surplus profits to develop new markets overseas & deploy underutilized resources (mgt, tech, machinery)
Resource access & cost savings
proximity to raw materials – more control over inputs & lower transportation costs
lower labor costs
positive impact on home manufacturing (labor) e.g. Xerox move to Mexico – union accommodations to keep jobs in US
attractive costs of power, transportation, financing
Incentives
- gov’ts offer tax incentives to attract business - tax holidays, exemptions, subsidies, loans, property use, customs privileges
e.g. Russia has special economic zones
e.g. North Carolina landed Electrolux with tax incentives in 2009 (beat Alabama); South Carolina got BMW with tax incentives (1992)
7. Strategic Management Process The global formulation process parallels the domestic process, but it is more complex because of the greater difficulty in gaining accurate and timely information, the diversity of geographic locations, and the differences in political, legal, cultural, market, and financial processes. The strategic planning process identifies potential opportunities for (1) appropriate market expansion, (2) increased profitability, and (3) new ventures for exploiting strategic advantages.
In reality, the stages are rarely so linear. The process is continuous, iterative and intertwined.
The global formulation process parallels the domestic process, but it is more complex because of the greater difficulty in gaining accurate and timely information, the diversity of geographic locations, and the differences in political, legal, cultural, market, and financial processes. The strategic planning process identifies potential opportunities for (1) appropriate market expansion, (2) increased profitability, and (3) new ventures for exploiting strategic advantages.
In reality, the stages are rarely so linear. The process is continuous, iterative and intertwined.
8. Marketing - worldwide, regional, national market share & growth; annual % sales growth
Production - volumes; economies of scale; quality & cost control; production efficiencies
Profitability - profit growth rates; ROI; ROE; ROA
Finance - minimize global tax; capital structure optimization; foreign exchange management; finance subsidiaries effectively
R & D - global patents for new products; proprietary technologies; worldwide R&D labs
DEFINE mission / objectives The mission for an organization defines the company’s function in society (raison d'ętre). It determines the company’s direction and provides a basis for strategic decision making. Objectives flow from the mission.
A firm’s global objectives usually fall into the areas of marketing, production, profitability, finance, and R&D. Because of the greater risk involved, market volume and profitability goals are usually set higher for international operations than for domestic operations.
The mission for an organization defines the company’s function in society (raison d'ętre). It determines the company’s direction and provides a basis for strategic decision making. Objectives flow from the mission.
A firm’s global objectives usually fall into the areas of marketing, production, profitability, finance, and R&D. Because of the greater risk involved, market volume and profitability goals are usually set higher for international operations than for domestic operations.
9. Political stability
Currency stability - inflation; fluctuations impact profitability
Nationalism - host government’s goals for independence & economic improvement
International competition - who’s there? supply & demand? space for us? ASSESS environment Environmental assessment includes environmental scanning and continuous monitoring to keep abreast of variables around the world that may pose opportunities or threats. Environmental scanning should take place at 3 levels: global, regional, and national.
Nationalism - through import controls, equity requirements, local content requirements, profit repatriation, patent & trademark protection, infrastructure status (e.g. China – lax patent protection)
International competitor analysis - most important of environmental assessments. Will infrastructure support new companies in that industry? Is there room for additional competition? What is relative supply and demand for proposed product or service? What are your competitors’ positions, their goals and strategies, and their strengths and weaknesses, relative to those of our company?
Environmental assessment includes environmental scanning and continuous monitoring to keep abreast of variables around the world that may pose opportunities or threats. Environmental scanning should take place at 3 levels: global, regional, and national.
Nationalism - through import controls, equity requirements, local content requirements, profit repatriation, patent & trademark protection, infrastructure status (e.g. China – lax patent protection)
International competitor analysis - most important of environmental assessments. Will infrastructure support new companies in that industry? Is there room for additional competition? What is relative supply and demand for proposed product or service? What are your competitors’ positions, their goals and strategies, and their strengths and weaknesses, relative to those of our company?
10. Attractiveness of overseas market - rule of law; human rights; cultural norms & ethics
Barriers to entry - make market more attractive & valuable
Anti-dumping barriers - importing companies must complete extensive paperwork to get into US and avoid anti-dumping charges
Internal strength assessment - identify distinctive competencies; comparative advantages
Internal & competitive environs Barriers to entry – e.g. US protects American pharmaceutical industry with stringent drug approval requirements. New entrants with cheaper drugs are restricted. Americans pay double what Canadians & Europeans pay for same drugs produced in US. US drug companies earn above-average profits in US market, because restrictions reduce competition.
Internal analysis involves weighing the company’s options relative to its strengths and weaknesses.
Distribution strength e.g. Wal-Mart
Promotion strength e.g. Disney
Barriers to entry – e.g. US protects American pharmaceutical industry with stringent drug approval requirements. New entrants with cheaper drugs are restricted. Americans pay double what Canadians & Europeans pay for same drugs produced in US. US drug companies earn above-average profits in US market, because restrictions reduce competition.
Internal analysis involves weighing the company’s options relative to its strengths and weaknesses.
Distribution strength e.g. Wal-Mart
Promotion strength e.g. Disney
11. Globalization strategy = treating world as undifferentiated marketplace
Establish worldwide economies of scale, offshore manufacturing, international cash flows
Going global is easy with e-commerce
Strategic alliances - horizontal or vertical
Regionalization / localization - multi-domestic strategy
Integrated global strategy - worldwide sourcing, integrated production & marketing
“Born global”- start w. global reach, Internet, international employees Global strategy options E-commerce can facilitate rapid entrance into new geographic markets.
Challenges: varying business models; jurisdiction and responsibility for cross-border electronic transactions; local cultural expectations; differences in privacy laws; government regulations; taxes; payment infrastructure; ability of local physical infrastructure to support e-business.
Advantages: expands sales channels; lower operational costs; better customer service; fast entrance into new geographic markets; improved customer loyalty; better relationships with distributors/channels.
Regionalization / localization
Local markets are linked together within a region, allowing local responsiveness.
When competitiveness is determined on a country-by-country basis rather than on a global basis, regional strategies are more appropriate than globalization. In the regionalization or multi-domestic strategy top managers within each region decide on their own investment locations, product mixes, and competitive positioning. Subsidiaries are run as quasi-independent organizations. Pressures for regionalization include (1) unique consumer preferences resulting from cultural or national differences, (2) domestic subsidies, and (3) technologies that facilitate low cost product variation.
E-commerce can facilitate rapid entrance into new geographic markets.
Challenges: varying business models; jurisdiction and responsibility for cross-border electronic transactions; local cultural expectations; differences in privacy laws; government regulations; taxes; payment infrastructure; ability of local physical infrastructure to support e-business.
Advantages: expands sales channels; lower operational costs; better customer service; fast entrance into new geographic markets; improved customer loyalty; better relationships with distributors/channels.
Regionalization / localization
Local markets are linked together within a region, allowing local responsiveness.
When competitiveness is determined on a country-by-country basis rather than on a global basis, regional strategies are more appropriate than globalization. In the regionalization or multi-domestic strategy top managers within each region decide on their own investment locations, product mixes, and competitive positioning. Subsidiaries are run as quasi-independent organizations. Pressures for regionalization include (1) unique consumer preferences resulting from cultural or national differences, (2) domestic subsidies, and (3) technologies that facilitate low cost product variation.
12. E-global or E-local? E-global when:
trade is global in scope
business does not involve delivering orders
when business model can be easily hijacked by local competitors
E-local when:
production & consumption are regional
customer behavior & market structures differ across regions, but are similar within a region
supply-chain management is very important to success.
Although the Internet is a global medium, companies still face decisions regarding how much products and services can be globalized versus how much they must be localized to regional and national markets.
E-global strategies are likely to work well for global B2B markets in steel, plastics, and electronic components.
E-local strategies are better for consumer retailing and financial services.
Although the Internet is a global medium, companies still face decisions regarding how much products and services can be globalized versus how much they must be localized to regional and national markets.
E-global strategies are likely to work well for global B2B markets in steel, plastics, and electronic components.
E-local strategies are better for consumer retailing and financial services.
13. Chinese Lenovo became global with purchase of IBM’s PC business in 2005 “We are proud of our Chinese roots but we no longer want to be positioned as a Chinese company. We want to be a truly global company.” Lenovo Chairman, Mr. Yang
Yang Yuanqing is the chief executive officer of Lenovo, returning to this role in 2009 having held the job from 2001-2005.
No global headquarters. Marketing team in Bangalore, India. Development team in several centers around the world. Meetings often virtual. Board meetings rotate venues.
Mr. Yang moved his family to Raleigh, NC, to immerse himself in culture and language of global business. Yang Yuanqing is the chief executive officer of Lenovo, returning to this role in 2009 having held the job from 2001-2005.
No global headquarters. Marketing team in Bangalore, India. Development team in several centers around the world. Meetings often virtual. Board meetings rotate venues.
Mr. Yang moved his family to Raleigh, NC, to immerse himself in culture and language of global business.
14. “GLOCAL” strategy = GLObal + loCAL
adopted regionalization early
operations in 60 countries
306,000 employees
556 domain companies – follow policies to develop local R&D to tailor products to markets, plants set own rules, good corporate citizen in every country
15. Global strategy (one-size-fits-all) didn’t work so well
now adapt to local markets
use CAGE model to look at Google:
Cultural distance: Google’s biggest problem in Russia from difficult language.
Administrative distance: Chinese censorship issues reflect differences between home & host policies.
Geographic distance: Google’s products can be digitized, but hard to do from afar.
Economic distance: Underdevelopment of payment structure in Russia disadvantage versus local rivals. Pankaj Ghemawat – CAGE model: Redefining Global Strategy, Harvard Business School, 2007
Cultural, Administrative, Geographic & Economic distances between countries - recognizes differences and similarities between countries.Pankaj Ghemawat – CAGE model: Redefining Global Strategy, Harvard Business School, 2007
Cultural, Administrative, Geographic & Economic distances between countries - recognizes differences and similarities between countries.
16. globally integrated worldwide - vertically & horizontally
worldwide sourcing, fully integrated production & marketing systems
factories in Ireland, Brazil, China, Malaysia, Tennessee & Texas
assembly & delivery system from 47 locations around the world
very low inventory
extreme flexibility because every order is custom-built
“The notebook was co-designed in Austin, Texas, and in Taiwan … The total supply chain for my computer, including suppliers of suppliers, involved about four hundred companies in North America, Europe and primarily Asia, but with thirty key players. (It was delivered by UPS 17 days after ordering.)” Thomas Friedman, The World is Flat, 2005
17. Global strategy decisions: Entry Strategies E-Business
Exporting
Licensing
Franchising
Contract manufacturing
Offshoring
Outsourcing services
Turnkey operations
Management contracts
International JVs (Joint Ventures)
Wholly owned subsidiaries E-Business - low risk; rapid entry/exit; beware of differences in culture, language, intellectual property laws, consumer protection, taxes.
Exporting - low-risk, good for testing markets overseas. Some small firms seldom go beyond exporting, and large firms use this avenue for many of their products. Experienced firms may establish an export department or hire an export management company. When setting up an export system, particular care must be given to choosing a distributor, as some countries have regulations that make it difficult to remove an inefficient distributor. Check tariffs, quotas, freight costs, distance from supplier countries. e.g. French perfume - only made in France
Licensing grants the rights to a firm in the host country to either produce or sell a product, or both. The agreement involves the transfer of rights to patents, trademarks, or technology for a specified period of time in return for a fee paid by the licensee. e.g. Anheuser-Busch has licensees in England, Japan, Australia, and Israel. Licensing is relatively low risk because it requires little investment. It makes sense in countries where entry by other means is prohibited and for products in the mature phase of the life-cycle—when competition is intense, margins decline, and production is relatively standardized. It is useful for firms with rapidly changing technologies, diverse product lines, and small firms with few financial and managerial resources for direct investment abroad.
Franchising - franchisor licenses a company’s trademark, products and services, and operating principles to franchisee for an initial fee and ongoing royalties. Franchising is relatively low risk and is ideal for small businesses. e.g. McDonald, Nike
Contract manufacturing involves contracting for the production of finished goods or component parts. These goods are then imported to the home or other countries for assembly or sale, or they are sold in the host country. e.g. Nike
Offshoring - company moves one, some, or all of its factories to another country. Offshoring provides access to foreign markets and lower production costs, while avoiding trade barriers. According to the US Commerce Department, about 90% of production from US-owned offshore factories is sold to foreign consumers. e.g. Toyota
Outsourcing - Service sector outsourcing is outsourcing “white-collar” jobs. e.g. General Electric – India, China; Oracle – India – software design, customer support, accounting. Historically, India has been a primary location for IT outsourcing. However, as wages in India are beginning to rise, many companies are beginning to outsource to the Philippines, South Africa, Hungary, and the Czech Republic.
Turnkey operations entail designing and constructing a facility abroad (e.g. chemical plant), training local personnel, and turning the keys over to local management for a fee. e.g. a Fiat company constructed in the former Soviet Union.
Management contract - contract gives a foreign company the rights to manage the daily operations of a business but not to make decisions regarding ownership, financing, or strategic and policy changes. Usually, management contracts are used in combination with other agreements, such as joint ventures.
International joint ventures - agreements between two or more companies to produce a product or service together. While they offer considerable opportunities, joint ventures are more risky than most strategies discussed thus far. JVs - facilitate rapid entry into new markets; help overcome trade barriers; help achieve economies of scale; can help secure access to additional raw materials; help acquire managerial and technological skills; can spread risk associated with operating in a foreign environment. e.g. Mittal Steel (India) + Arcelor (France); Nokia (Finland) + Siemens (Germany). JVs attractive to governments looking for infusions of capital & management expertise.
Wholly owned subsidiaries entail starting a product or service from scratch or acquiring an existing firm in the host country. Acquisitions allow for rapid entry in markets with established products and distribution networks. Wholly owned subsidiaries represent the highest risk entry strategy, but the company has full control over the operation. e.g. P&G purchased Gillette, creating world’s largest (for now) consumer goods company; (Belgian) Godiva owned by Yildiz, of Turkey, previously owned (1966-2007) by Campbell Soup, USA. Sometimes only way to get around country’s import quotas (US import quotas/Toyota, Nissan, Honda) or local content laws. Consider local attitudes to foreign ownership, currency stability, repatriation, threat of expropriation, nationalism.
E-Business - low risk; rapid entry/exit; beware of differences in culture, language, intellectual property laws, consumer protection, taxes.
Exporting - low-risk, good for testing markets overseas. Some small firms seldom go beyond exporting, and large firms use this avenue for many of their products. Experienced firms may establish an export department or hire an export management company. When setting up an export system, particular care must be given to choosing a distributor, as some countries have regulations that make it difficult to remove an inefficient distributor. Check tariffs, quotas, freight costs, distance from supplier countries. e.g. French perfume - only made in France
Licensing grants the rights to a firm in the host country to either produce or sell a product, or both. The agreement involves the transfer of rights to patents, trademarks, or technology for a specified period of time in return for a fee paid by the licensee. e.g. Anheuser-Busch has licensees in England, Japan, Australia, and Israel. Licensing is relatively low risk because it requires little investment. It makes sense in countries where entry by other means is prohibited and for products in the mature phase of the life-cycle—when competition is intense, margins decline, and production is relatively standardized. It is useful for firms with rapidly changing technologies, diverse product lines, and small firms with few financial and managerial resources for direct investment abroad.
Franchising - franchisor licenses a company’s trademark, products and services, and operating principles to franchisee for an initial fee and ongoing royalties. Franchising is relatively low risk and is ideal for small businesses. e.g. McDonald, Nike
Contract manufacturing involves contracting for the production of finished goods or component parts. These goods are then imported to the home or other countries for assembly or sale, or they are sold in the host country. e.g. Nike
Offshoring - company moves one, some, or all of its factories to another country. Offshoring provides access to foreign markets and lower production costs, while avoiding trade barriers. According to the US Commerce Department, about 90% of production from US-owned offshore factories is sold to foreign consumers. e.g. Toyota
Outsourcing - Service sector outsourcing is outsourcing “white-collar” jobs. e.g. General Electric – India, China; Oracle – India – software design, customer support, accounting. Historically, India has been a primary location for IT outsourcing. However, as wages in India are beginning to rise, many companies are beginning to outsource to the Philippines, South Africa, Hungary, and the Czech Republic.
Turnkey operations entail designing and constructing a facility abroad (e.g. chemical plant), training local personnel, and turning the keys over to local management for a fee. e.g. a Fiat company constructed in the former Soviet Union.
Management contract - contract gives a foreign company the rights to manage the daily operations of a business but not to make decisions regarding ownership, financing, or strategic and policy changes. Usually, management contracts are used in combination with other agreements, such as joint ventures.
International joint ventures - agreements between two or more companies to produce a product or service together. While they offer considerable opportunities, joint ventures are more risky than most strategies discussed thus far. JVs - facilitate rapid entry into new markets; help overcome trade barriers; help achieve economies of scale; can help secure access to additional raw materials; help acquire managerial and technological skills; can spread risk associated with operating in a foreign environment. e.g. Mittal Steel (India) + Arcelor (France); Nokia (Finland) + Siemens (Germany). JVs attractive to governments looking for infusions of capital & management expertise.
Wholly owned subsidiaries entail starting a product or service from scratch or acquiring an existing firm in the host country. Acquisitions allow for rapid entry in markets with established products and distribution networks. Wholly owned subsidiaries represent the highest risk entry strategy, but the company has full control over the operation. e.g. P&G purchased Gillette, creating world’s largest (for now) consumer goods company; (Belgian) Godiva owned by Yildiz, of Turkey, previously owned (1966-2007) by Campbell Soup, USA. Sometimes only way to get around country’s import quotas (US import quotas/Toyota, Nissan, Honda) or local content laws. Consider local attitudes to foreign ownership, currency stability, repatriation, threat of expropriation, nationalism.
18. Long-term vs short-term perspective China & Japan have longer-term time horizons than USA.
Risk orientation - equity vs non-equity High uncertainty avoidance cultures (e.g. Latin American, African countries) prefer non-equity modes of entry.
Power-distance - equity vs non-equity High power distance cultures (e.g. Arab countries & Japan) tend to use more equity modes of entry abroad.
Impact of CULTURE on choice of strategy High power distance cultures observe more interpersonal inequality & hierarchy (i.e. subordinates accept unequal power & hierarchy in company).High power distance cultures observe more interpersonal inequality & hierarchy (i.e. subordinates accept unequal power & hierarchy in company).
19. In-class case studyIn-class case study
20. Next class: Midterm exam Preparation: - review PPTs - review your class notes - review text - review current affairs topics Exam will include:
Multiple choice questions
Fill-in-the-blank
Short answers
Long answers - choices
Exams are based on:
material presented / discussed in class including cases
terms and information from the text book
readings / homework material
topics brought by your classmates (current affairs) - these will be basic, no-depth questions
Exam will include:
Multiple choice questions
Fill-in-the-blank
Short answers
Long answers - choices
Exams are based on:
material presented / discussed in class including cases
terms and information from the text book
readings / homework material
topics brought by your classmates (current affairs) - these will be basic, no-depth questions
