MANAGEMENT POLICY AND STRATEGY SESSION - III (B)

1. MANAGEMENT POLICY AND STRATEGYSESSION - III (B) Globalization and Global Strategy Prof. Sushil Department of Management Studies Indian Institute of Technology, Delhi INDIA Email: sushil@dms.iitd.ernet.in Prof. Sushil\IITD\Session-III(B)

2. IDENTIFYING THE TARGET • Japanese present in or dominate most product categories in consumer electronics • In less than 20 years Canon, Hitachi, Seiko and Honda have established world wide reputation equal to those of Ford, Kodak and Nestle • Strategic intent prevalent among global competitors • Building a global presence • Defending a Domestic Position • Overcoming national fragmentation World Television Industry • Japanese- global presence • US (RCA, GE and Zenith) - Defending domestic dominance • Europe (Philips, CSF Thomson) - overcoming national fragmentation Prof. Sushil\IITD\Session-III(B)

3. IDENTIFYIG THE TARGET Contd…. Loose Bricks - In US • Japanese Strategy - late 1960s - established brand dominance in small screen and portable televisions ignored by US producers • 1967 - Largest producer of B&W TVs • 1970 - Closed the gap in colour sets • Labour and scale advantages • Labour cost change - as economies develop and exchange rate fluctuates. • Low cost manufacturing location shifting - Japan to Korea - to Singapore - Taiwan • Created strong distribution positions and brand franchises • Evolved into low-cost sourcing to world scale volume and world wide brand positions across the spectrum of consumer electronics products. Prof. Sushil\IITD\Session-III(B)

4. IDENTIFYIG THE TARGET Contd…. US Producers • Believed that Japanese did well due to low cost high quality systems. • Vulnerable as did not understand the changing nature of Japanese competitive advantage. • Did not have presence outside US, so they had to fight every market share battle in US. • Reduced prices at home affected 100% of their sales volume but for Matsushita it was only a fraction. Prof. Sushil\IITD\Session-III(B)

5. IDENTIFYIG THE TARGET Contd…. Loose Bricks in Europe • Philips well known everywhere in the world international distribution system, but has own problems • 1970 Restriction in Europe on TV sets manufacturing - Japanese supplied picture tubes. • Sony, Matsushita and Mitsubishi set up local manufacturing operations in UK. • Toshiba and Hitachi found UK partners. • They had to pay price penalties in moving assembly from Far East to Europe for establishing European distribution and brand positions. • Found a loose brick in small screen portables, and picture tubes in Europe • European market was more fragmented. Prof. Sushil\IITD\Session-III(B)

6. IDENTIFYIG THE TARGET Contd…. • Nearly 3 million of total European market in 1976 Philips was the only one could fund the automation of manufacturing and rationalization of product lines. However, its tube manufacturing spread over seven European countries. • By 1982 Philips was world’s largest colour TV maker and closed the cost gap with Japanese. • Philips operated through national markets, country managers are poorly placed to assess global vulnerability. Philips risk responding on a local basis to global competition. Prof. Sushil\IITD\Session-III(B)

7. GLOBAL STRATEGY • Cross - subsidization and retaliation in • Chemical • Audio • Aircraft engine • Computer • What determined whether competition was global or national: • International cash flows rather than international product flows • Scale economies • Homogeneous markets • Global Competition • Occurs when companies cross-subsidize national market share battles in pursuit of global brand and distribution positions. Prof. Sushil\IITD\Session-III(B)

8. GLOBAL STRATEGY Contd….. • Global Businesses • In which the minimum volume required for cost efficiency is not available in the company’s home market. • Global Companies • Which have distribution systems in key foreign markets that enable cross-subsidization, international retaliation, and world scale volume. Prof. Sushil\IITD\Session-III(B)

9. NEW CONCEPTS • World-wide cost competitiveness - minimum world market share to underwrite the appropriate manufacturing scale and product-development effort. • Retaliation- minimum market share in a particular country to be able to influence the behaviour of key global competitors. • (e.g. 2 to 3% share is too week). • Home country vulnerability- competitive risks of national market share leadership if not accomplished by international distribution. Rather high market share may have opposite effect - support high price levels - foreign competitor come under the price umbrella. • As part of the global strategy distinguish between objectives of • low-cost sourcing • minimum scale • a national profile base • retaliation against a global competitor • benchmarking products and technology in a state-of-the art market Prof. Sushil\IITD\Session-III(B)

10. NEW CONCEPTS Contd….. Product Families • Global competition requires a broader corporate concept of product line- scrutinize all products moving through distribution channels in which its products are sold. Scope of Operations • Cost advantage are less durable than brand and distribution advantages. • Investment in world-scale manufacturing not linked to global distribution presents untenable risks. • Support investment in core technologies Honda - Engine Technology • Automobiles, Motorcycles, Power tillers, Snow-mobiles, Lawnmowers, Power generators Prof. Sushil\IITD\Session-III(B)

11. NEW CONCEPTS Contd….. Resource Allocation • SBU Concept (GE, 3M, HP) • Separate manufacturing and marketing subsystems • Manufacturing local - for global, or • Manufacturing global, marketing local • Global competition strategy - HQ (Strategic mission, timing of launch, level of market share, level of investment, expected cash flow) • Local marketing strategy - National Subsidiary (marketing mix). • Slice the company in many ways • one way for distribution investments • another for technology • another for manufacturing Prof. Sushil\IITD\Session-III(B)

12. GLOBAL INTEGRATION • Global integration contrasts with the multinational approach whereby companies set-up country subsidiaries that design, produce and market products or services tailored to local needs. • Changes supporting global integration: • growing similarity of what citizens of different countries want • reduction in tariff and non-tariff barriers • too expensive technology investments to amortize in one market only • global competitors - rules of the game • Steps for developing global strategy • Developing the core strategy- the basis of sustainable competitive advantage. Unusually developed for the home country first. • Internationalizing the core strategy- through international expansion of activities and through adaptation. • Globalizing- the international strategy by integrating the strategy across countries Prof. Sushil\IITD\Session-III(B)

13. WHAT IS GLOBAL STRATEGY • A multi-domestic strategyseeks to maximize world wide performance by maximizing local competitive advantage, revenues or profits. • A global strategyseeks to maximize world wide performance through sharing and integration. • Global Strategy Forces • Global strategy Levers • Position of Businesses and parent company • Industry globalisation drivers • Organisation’s ability to implant a global strategy • Benefits/costs of global strategy Prof. Sushil\IITD\Session-III(B)

14. Multidomestic and Global Industries A multidomestic industry is one in which competition is essentially segmented from country to country A globalindustry is one in which competition crosses national borders Prof. Sushil\IITD\Session-III(B)

15. Framework of Global Strategy Forces Position and resources of business and parent company • Appropriate setting for global strategy levers • Majors market participation • Product standardization • Activity concentration • Uniform marketing • Integrated competitive moves Benefits/ costs of global strategy • Industry globalization drivers • Market factors • Cost factors • Environmental factors • Competitive factors Organization’s ability to implement a global strategy Prof. Sushil\IITD\Session-III(B)

16. Dimensions Market Participation Product Offering Location of Value- added activities Marketing Approach Competitive Moves GLOBALIZATION DIMENSIONS Multidomestic Strategy No Particular Pattern Fully customized in each country All activities in each country Local Stand-alone by country Global Strategy Significant share in major markets Fully standardized worldwide Concentrated-one activity in each (different country) Uniform worldwide Integrated across countries Prof. Sushil\IITD\Session-III(B)

17. MARKET PARTICIPATION • A pattern of major share in major markets - USA- Europe - Japan “triad”. Electrolux Group - Swedish • Building significant share in major world markets. • Aims to be the first global appliance maker. • 1986-acquired Zanussi Industries to become top producer of appliances in Western Europe. • Later the year acquired White Consolidated Industries the third largest American appliance manufacturer. Prof. Sushil\IITD\Session-III(B)

18. PRODUCT OFFERING • Product standardization to a greater or lesser extent. Differing world wide needs can be met by adapting the standardized core product. Boeing 737 • 1970 - sales began to level off. • Entered developing countries but product did not fit to new environments • Shortness of run ways, greater softness, lower technical expertise of pilots - planes tend to bounce during landing, the brakes failed. • Modified the design - adding thrust to engines, redesigning wings, landing gear, tires with lower pressure. • These adaptations to core product enabled 737 to be best selling plane in history. Prof. Sushil\IITD\Session-III(B)

19. LOCATION OF VALUE ADDED ACTIVITIES • Costs are reduced by breaking up the value chain- so each activity may be conducted in a different country. • One value chain strategy is partial concentration and partial duplication Electronics Companies • Locate part or all of manufacturing in Southeast Asia - low cost, skilled labour - key component - chip is very cheap • US - Japan semi-conductor Agreement - Japanese agreed not to sell chips in US -> Chips being sold below cost in South East Asia. Prof. Sushil\IITD\Session-III(B)

20. MARKETING APPROACH • Uniform marketing approach around the world- although not all elements of marketing mix be uniform. Unilever • Great success with a fabric softener that used a • global common positioning • advertising theme • symbol (a teddy bear) • But brand name varied by country Prof. Sushil\IITD\Session-III(B)

21. COMPETITIVE MOVES • A competitor is attacked in one country in order to drain its resources for another country. • Competitive attack in one country is countered in another country • Counter attack in a competitor’s home market as a parry to an attack on one’s home market. Bridgestone Corporation - Japanese Tire • Action of Major competitors • Continental AG’s acquisition of GenCorp's General Tire and Rubber Company. • General Tire’s JV with two Japanese tire makers, • Sumitomo’s acquisition of an intent in Dunlop Tire. • Competitive move • Establish the presence in major US market • Formed a JV to own and manage Firestone Corporation’s world wide tire business - gained access to Firestone’s European plants. Prof. Sushil\IITD\Session-III(B)

22. INDUSTRY GLOBALISATION DRIVERS Market Drivers • Homogeneous Customer Needs - Understanding which aspects can be standardized and which could be customized in the key. • Global customers - buy on a centralized or coordinated basis for decentralized use (e.g. National defence agencies). Having a single global account manager make it easier for global customer for single global price - the lowest price. • Global channels - Global channels are rare - but region wide channels are increasing. (e.g. European grocery distribution and retailing) • Transferable Marketing - Brand names and advertising may be requiring little local adaptation. Prof. Sushil\IITD\Session-III(B)

23. INDUSTRY GLOBALISATION DRIVERS Contd….. Cost Drivers • Economics of Scale and Scope - corresponding risks are rigidity and vulnerability to disruption. Electronics Industry • Cost of circuits have decreased - advantage goes to companies that can produce lowest cost components. Size has become a major asset. • Thomson (France) - 1987 increased in operating scale and global coverage by acquiring RCA television business from GE. • Learning and Experience - The steeper the learning and experience curves greater the potential benefit. • Sourcing Efficiencies - Centralized purchasing Prof. Sushil\IITD\Session-III(B)

24. INDUSTRY GLOBALISATION DRIVERS Contd….. Himont - Global Polypropylene Market • Global coordination among manufacturing facilities in purchase of key raw material - monomer • Favourable Logistics - A favourable ratio of sales value to transportation cost enhances the ability to concentrate production. Other logistical factors are • non perishability • absence of time urgency • little need for location close to customer facilities. • Differences in Country Costs and Skills • Concentration in low-cost or high-skill countries - increase productivity and reduce cost. • The danger is of training future offshore competitors. Prof. Sushil\IITD\Session-III(B)

25. INDUSTRY GLOBALISATION DRIVERS Contd….. Volkswagen • Hourly Labour cost Germany DM 40 Spain DM 20 • Moved production of Polos from Wolfbury to Spain. • Product Development Costs - Developing few global or regional products Ford Motor Company • Centres of Excellence program - to reduce duplication • Ford of Europe - Common platform for all compacts • Ford of NA - replacement of midsized Taurus and Sable Prof. Sushil\IITD\Session-III(B)

26. INDUSTRY GLOBALISATION DRIVERS Contd….. Governmental Drivers • Favourable Trade Policies - Import tariffs and quotas, non tariff barriers, export subsidies, local content requirements, currency and capital flow restrictions, requirements on technology transfer. European Community - Banking and Financial Services • Decision to permit free flow of capital along member countries • Deutsche Bank had only 15 offices outside Germany - established major presence in French market. 1987 - moved to Italian market by acquiring Bank of America’s 100 branches. • J.P. Morgan - US, Swiss Bank Corporation and SP Warburg Group - Britain - increased their participation in major European markets. Prof. Sushil\IITD\Session-III(B)

27. INDUSTRY GLOBALISATION DRIVERS Contd….. • Compatible Technical Standards - often standards are set with protectionism in mind (e.g. Motorola - electronics products excluded from Japanese market - operated at a higher frequency than was permitted in Japan). • Common Marketing Regulations- Certain type of media may be prohibited or restricted (e.g. - US is for more liberal than Europe about advertising claims on TV. • British TV do not allow scenes of children pestering their parents to buy a product). Prof. Sushil\IITD\Session-III(B)

28. INDUSTRY GLOBALISATION DRIVERS Contd….. Competitive Drivers • Inter dependence of Countries- When activities are shared among countries a competitor’s market share in one country affects its scale and overall cost position in the shared activities. • (e.g. companies promote product as “the leading brand in US”.) Automobile Industry • Ford and Volkswagen- concentrate production and more competitive • Toyota - pressured to enter more markets to reach the volume. 1984-87 doubled the number of cars for German market. Prof. Sushil\IITD\Session-III(B)

29. INDUSTRY GLOBALISATION DRIVERS Contd….. • Globalized competitors- The need to preempt a global competitor can spur increased market participation. Unilever - European Consumer Product • Launched a hostile take over bid for Richardson - Vicks Inc. • Global archrival P&G saw the threat on its home turf and out bid Unilever. • With Richardson - Vicks European system P&G strengthened the European position. Changes Over Time European Major Appliance Industry • Globalisation forces seem to have reversed • 1960s and 70s - regional standardization strategy was successful • 1980s - the most successful strategies seem to be national Prof. Sushil\IITD\Session-III(B)

30. BENEFITS OF A GLOBAL STRATEGY Cost Reductions • Economies of scale by pooling production or other activities for two or more countries (Sony - concentrated its CD production in Terre Haute, Indiana, and Saizburg, Austria) • Exploiting lower factor costs by moving manufacturing or other activities to low-cost countries. (Mexican side of the US - Mexico border is crowded with manufacturing plants of US companies using Mexican labour) • Exploiting flexibility (Moving production from location to location on short notice to take advantage of lowest cost at a given time). Prof. Sushil\IITD\Session-III(B)

31. BENEFITS OF A GLOBAL STRATEGY Contd…... Dow Chemical • LP model for best production using by location • exchange rates • tax rates • transportation cost • labour cost • Enhancing bargaining power - can switch production to different location increases bargaining power with suppliers, workers, and host governments. (European labour Union- single European market allow switching production) Prof. Sushil\IITD\Session-III(B)

32. BENEFITS OF A GLOBAL STRATEGY Contd…... • Improved Quality of Products and Programs Toyota • Markets a far smaller number of models than GM. • Concentrated on improving its few models, while GM fragmented developmental funds. • Toyota Camry in US rated as the best in class of medium - sized cars. • Enhanced Customer Preference • Through reinforcement (e.g. soft drinks, food companies, financial services - credit cards) • For industrial products - a multinational customer with a standard product around the world gains from world wide familiarity (e.g. Computer manufacturers) Prof. Sushil\IITD\Session-III(B)

33. BENEFITS OF A GLOBAL STRATEGY Contd…... Increased Competitive Leverage • More points from which to attack or counter attack Becton Dickinson - US Medical Products • To prevent Japanese becoming a competitive nuisance in disposable syringes - enter three markets in Japan’s backyard to prevent Japanese expansion • Hong kong, Singapore, Philippine Prof. Sushil\IITD\Session-III(B)

34. DRAWBACKS OF GLOBAL STRATEGY • Significant management costs - increased coordination, reporting requirements, added staff. • Earlier or greater commitment to a market than warranted. (American co. - Motorola - penetrate Japan more to enhance global competitiveness position than making money in Japan). • Product standardization may result in a product that does not satisfy any customer. Procter & Gamble • Stumbled - introduced Cheer laundry detergent in Japan without changing US product or marketing message (the detergent was effective in all temp.) • Two instances of insufficient adaptation • detergent did not suds up as Japanese use a great deal of fabric softener. • Japanese usually work cloths in cold tap/bath water. • Cheer become successful in Japan - after reformulating the product and marketing messages. Prof. Sushil\IITD\Session-III(B)

35. DRAWBACKS OF GLOBAL STRATEGY Contd….. Canon • Sacrificed the ability to copy certain Japanese paper sizes when it first designed a photocopier for the global market • Activity concentration distances customers and can result in lower responsiveness and flexibility. Also increases currency risk. • Uniform marketing can reduce adaptation to local customer behaviour. (British Airways - Telecommercial - “Manhattan Landing”) Prof. Sushil\IITD\Session-III(B)

36. What is Globalization? The strategy of approaching worldwide markets with standardized products. Prof. Sushil\IITD\Session-III(B)

37. Projected Economic Growth Prof. Sushil\IITD\Session-III(B)

38. Evolution of a global firm entails progressively involved strategy levels Development of a Global Corporation 1.Export-import activity 2. Foreign licensing and technology transfer 3. Direct investment in overseas operations (manufacturing plants and global management skills) 4. Substantial increase in foreign investment (foreign assets comprise significant portion of total assets) Prof. Sushil\IITD\Session-III(B)

39. Strategic Orientation of Global Firms • Ethnocentric • Values and priorities of parent organization should guide strategic decision making of all operations • Polycentric • Culture of company in which strategy is implemented dominates decision making • Regiocentric • Parent firm attempts to blend its own predispositions with those of region under consideration • Geocentric • Parent firm adopts global systems approach to decision making, emphasizing global integration Prof. Sushil\IITD\Session-III(B)

40. Beginning to Globalize: Key Steps Scan global situation Make connections with academia and research organizations Increase firm’s global visibility Undertake cooperative research projects Prof. Sushil\IITD\Session-III(B)

41. Increased scope of global management task Breeds managerial confidence Increased globalization of firms Strategic management planning must be global because . . . Rapid development of technology Information explosion Increase in global competition Strategic Management Planning in Global Industries Prof. Sushil\IITD\Session-III(B)

42. The Global Challenge • Few “pure” cases of either global or multidomestic industries exist • The challenge -- global firms must • Decide which activities will be performed in how many and which locations • Determine degree to which activities are coordinated across locations Prof. Sushil\IITD\Session-III(B)

43. Acceptance of standardized products Rate of product innovation desired Market Requirements and Product Characteristics Success in foreign markets requires assessment of two key dimensions of customer demand Prof. Sushil\IITD\Session-III(B)

44. Global strategy High foreign investment with extensive coordination among subsidiaries is a reward and a positive reinforcement is punishment High Coordination of activities Export-based strategy with decentralized marketing Country-centered strategy by multinationals with a number of domestic firms operating in only one country is punishment is a reward and a negative reinforcement Low Geographically dispersed Geographically concentrated Location of activities International Strategy Options Prof. Sushil\IITD\Session-III(B)

45. Joint venture Foreign branch Foreign subsidiary Licensing, contract manufacturing, franchising Joint venture Foreign branch Export Licensing, contract manufacturing, franchising Joint venture International Strategy Options High Product diversity High Low Market complexity Prof. Sushil\IITD\Session-III(B)