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Global Strategy. Challenges of Going Overseas. Foreign firms face all the disadvantages of being foreign; they must confront all the advantages that native players enjoy from being in their home territory. They face numerous risks. Economic risks--changes in exchange rates.
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Challenges of Going Overseas Foreign firms face all the disadvantages of being foreign; they must confront all the advantages that native players enjoy from being in their home territory.
They face numerous risks • Economic risks--changes in exchange rates. • Political risks--changes in policy actions of governments, wars, civil disorders, etc. • Business risks--competitors’ actions and responses, changes in consumers’ choices, etc. • Resource risks--changes in requirement of firm resources.
Basis for Going Overseas A firm goes abroad to make more profits by exploiting its key resources: technology brand name management capability
Foreign Entry When a firm enters a foreign market, it is more optimal to transfer its existing home-country advantages/resources to the target country rather than develop required advantages in the target country from scratch.
Benefits of Going Abroad A multinational firm is exposed to diverse environments. The diversity provides them with learning opportunity • Example: P&G developed special surfactants in Japan because consumers there wash their clothes in cold water. • It developed a special capability in water softening because water in Europe contains more minerals. • It developed technology to suspend dirt in wash water in the U.S. because consumers demand removal of dirt from clothes.
Efficiency Perspective Value of outputs Efficiency = -------------------- Value of inputs - enhance value of outputs - minimize costs of inputs - reduce cost of processing/managing
Potential for Cost reduction comes from: Factor costs Scale economies Scope Economies
Factor Costs • Different countries have different factor endowments. • This leads to differences in factor costs. • Different tasks require different factors. • Thus, each activity can be located in the country where the relevant factors are available at lowest cost.
Scale Economy • Firms must increase output to achieve scale benefits. • In the late 70s, the minimum efficient scale required for production of small cars was 400,000 units. No U.S. company produced more than 200,000 units, while Toyota produced 500,000 Corollas. • Learning leads to progressive cost reduction. • Firms must achieve higher market share worldwide and be the first to reach there.
Caveats of Scale • Scale efficiencies are obtained through increased specialization and through creation of dedicated assets and systems. • This can cause inflexibility and limit the firm’s ability to cope with change. • Need to balance scale and flexibility through flexible manufacturing and administrative systems.
Scope Economy • Firms have to incur expenditures on similar activities in different countries. • Some of these activities can be combined to reduce costs. • For example: Cost of the joint production of two or more products can be less than the cost of producing them separately.
Flexibility to produce multiple products Toyota, Ford Use common distribution channels for multiple products Matsushita Share R&D across multiple products NEC Global brand names Coca Cola Servicing multi-national customers world-wide Citigroup Pooling knowledge from different markets P&G Examples of Scope Economies Product Diversification Market Diversification Shared Physical Asset Shared External Relations Shared Learning
Caveats of Scope Economies • Certain parts of a company’s businesses may be inherently very different from others, and may not offer scope economies. • For example: In the soft drink industry, skills required for bottling and distribution are very different from the task of creating brand name image. • There cannot be cost savings from jointly operating the two businesses.
Perspectives on global strategy? Levitt (1983): Effective global strategy is not a bag of many tricks but the successful practice of just one: product standardization. The core of a global strategy lies in developing a standardized product to be produced and sold the same way throughout the world. Basically, exploit economies of scale.
Arguments against Standardization • Consumer tastes and preferences, distribution systems, government regulations vary among countries. • A firm can tailor its offerings to fit the unique requirements in each national market.
Hamel and Prahalad (1985): Effective global strategy requires a broad product portfolio so that investments on technologies and distribution channels can be shared. Cross-subsidization across products and markets and a strong world-wide distribution system are most important. -centralize decision making
Kogut (1985): Effective global strategy requires that a firm be like a nimble-footed athlete who wins through flexibility and arbitrage. Source from multiple suppliers, shift production to benefit from changing factor costs and exchange rates, and arbitrage to exploit imperfections in financial and information markets. -centralize decision making
Global Strategy boils down to: Standardization (as opposed to national differentiation or responsiveness) Centralization or Integration (as opposed to decentralization or local autonomy).
It may just depend upon the top-management team’s attitude There are three kinds of attitudes: Geocentric (think global) Polycentric (think local) Ethnocentric (think home)
Integration--Global Firms have a choice in how they structure the flow of tasks within the worldwide value-adding system. The more integrated the flow of tasks appears to be, the more global the firm’s strategy is assumed to be. Note that certain tasks can be better integrated than others (like R&D, Finance versus Marketing).
Arguments against Integration Firm can benefit by creating integrated and autonomous national subsidiaries which can exploit strong links with local stakeholders to defend against more efficient global firms.
Integration & Differentiation Choice is based on estimates of cost advantages of global integration of certain tasks vis-à-vis the differentiation benefits of responding to national differences in tastes, industry structures, distribution systems, and government regulations.
Product Characteristics • Among the different industries, one industry (such as consumer electronics) may be characterized by low differentiation benefits and high standardization advantages, • while another (such as packaged foods) may be quite the opposite.
Firm Choice • Within an industry, the strategy of one firm (such as Toyota) may be based on exploiting the advantages of global integration through centralized production and decision making and standardized products, • while that of another (such as Fiat) may aim at exploiting the benefits of decentralized production and differentiated products.
Functional Level • Within a firm, research may offer greater efficiency benefits through integration and standardization, • while sales and service may provide greater efficiency benefits through decentralization and differentiation.
Integration-Responsiveness Integrat ion Industry Company Function Task Hi Consumer Electronics Telecoms Toyota Research Product Policy Pricing Manufacturing Autos Marketing Ford Advertising Packaged Food Procurement Financing Cement Lo Service Fiat Promotion Lo Hi Lo Hi Lo Hi Lo Hi National Differentiation or Responsiveness
Problems of Integration By emphasizing the importance of rationalizing the flow of components and final products within a global system, the importance of internal flows of people, technology, information, and values has been de-emphasized.
The main problem. • Global strategy shifts organizational power from subsidiaries to the headquarters. • Subsidiaries are simply deliverers of products and programs designed by the center. • The center becomes insensitive to knowledge accumulated by subsidiary managers. • Subsidiary managers become demotivated. • They resist learning from different countries.
Localization could be just as bad! • In companies with autonomous subsidiaries, which enjoy very high levels of resources and autonomy, learning may not occur because: • Inability of local staff to transfer and synthesize knowledge developed in other subsidiaries. • Local loyalties, turf protection, and the not-invented-here syndrome may restrict internal flow of information.
Cost savings may be impeded! • Search for scale economies may lead to greater amount of intra-company, inter-country, flow of goods, capital, people, and information. • These flows tend to be expensive and difficult to coordinate; enhances risk of management failure. • Attracts attention of different governments and may result in interventionist policies.
Global Strategy Global strategy is one in which a firm competes in different national markets by leveraging its competitive or resource position in other national markets to gain highest efficiency company-wide.
Hout et al (1982): Effective global strategy requires the approach not of a hedgehog, who knows only one trick, but that of a fox, who knows many. Exploit economies of scale through global volume, take preemptive positions through quick and large investments, and manage inter-dependently to achieve synergies across different activities.
