Globalization and National Competitive Advantage in Strategic Management

1. GARETH R. JONES /CHARLES W. L. HILL Theory of Strategic Management 10th ed. Strategy in the Global Environment Chapter 8 Prepared by C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University

2. Learning objectives • Understand the process of globalization and how it impacts a company’s strategy • Discuss the motives for expanding internationally • Review the different strategies that companies use to compete in the global market place • Explain the pros and cons of different modes for entering foreign markets

3. Globalization of Production and Markets • Globalization of production and markets • Increased as companies took advantage of lower barriers to international trade and investment • National markets started merging into one global marketplace • Implications • Companies are finding home markets inundated by foreign competitors • Critical to maximize efficiency, quality, customer responsiveness, and innovative ability (functional strategies)

4. National Competitive Advantage

5. BASIC QUESTIONS ADDRESSED • Why are corporations domiciled in certain countries more successful than others • What are industry clusters and why are they relevant • When is the right time for a firm to go international • Do governments have a role in the development of industrial clusters and successful corporations

6. National Competitive Advantage in a global market Factor endowments • Nation’s position in factors of production necessary to compete in an industry Local demand conditions • Nature of home demand for the industry’s product or service Related and supporting industries • Presence or absence in the nation of supplier and related industries that are internationally competitive Firm strategy, structure, and rivalry • Conditions in the nation governing: • How companies are created, organized, and managed • Nature of domestic rivalry

7. FACTOR CONDITIONS: • BASIC FACTORS – Land, Labor, capital, raw materials, natural resources, climate, location and demographics • ADVANCE FACTORS – Technological knowhow, communication Infrastructure, Research facilities and so on. • Basic factors can provide only an initial advantage • They must be supported by advanced factors to maintain success. E.g. • Switzerland was the First country to experience labour shortages. They abandoned labour-intensive watches and concentrated on innovative/high-end watches. • Japan has high priced land and so its factory space is at a premium. This lead to just-in-time inventory techniques.

8. DEMAND CONDITIONS: • Home country Demand plays an important role in producing competitiveness. • Enables better understand the needs and desires of the customers • It shapes the attributes of domestically made products and creates pressure for innovation and quality. E.g. 1: Japanese cameras E.g. 2 : The French wine industry

9. RELATED AND SUPPORTING INDUSTRIES • Benefits of investment in advanced factors by Suppliers and related industries can spill over • Creates clusters of supporting industries, thereby achieving a strong competitive position internationally. • E.g.1 • Silicon Valley, where all kinds of tech-giants and tech-start-ups are clustered in order to share ideas and stimulate innovation. • E.g. 2 • Switzerland success in pharmaceutical industry is closely related to its international success in technical dye industry.

10. FIRM STRATEGY, STRUCTURE & RIVALRY: • domestic rivalry is instrumental to international competitiveness, since it forces companies to develop unique and sustainable strengths and capabilities. • The more intense domestic rivalry is, the more companies are being pushed to innovate and improve in order to maintain their competitive advantage. • E.g. Japanese automobile industry with intense rivalry between players such as Nissan, Honda, Toyota, Suzuki, Mitsubishi and Subaru

11. Government • The role of the government in Porter’s Diamond Model is described as both ‘a catalyst and challenger‘ • governments should encourage and push companies to raise their aspirations and move to even higher levels of competitiveness

12. Chance • Even though Porter originally didn’t write anything about chance or luckin his papers, the role of chance is often included in the Diamond Model as the likelihood that external events such as war and natural disasters can negatively affect or benefit a country or industry. • The discontinuities created by chance may lead to advantages for some and disadvantages for other companies.

13. Michael Porter’s Diamond Model or The Theory of National Competitive Advantage of Industries)

14. Porter’s Diamond Model factors

15. INCREASING PROFITABILITY AND PROFIT GROWTH THROUGH GLOBAL EXPANSION • Expanding the Market: Leveraging Products • Realizing Cost Economies from Global Volume • Location Economies • Leveraging the Skills of Global Subsidiaries

16. Expanding the Market: Leveraging Products • A company can sell goods, developed at home, internationally to increase its growth rate • Multinational company: Does business in two or more national markets • Success depends on the distinctive competencies that underlie its production and marketing process • E.g. Toyota and P&G • Ability to transfer aspects of the business model and apply it to foreign markets.

17. Realizing Cost Economies from Global Volume • A company can realize cost savings from economies of scale by: • Spreading the fixed costs and setting up production facilities over its global sales volume, a company can lower its average unit cost • Serving a global market, a company utilizes its production facilities more intensively • Bargaining down the cost of key inputs with suppliers • Increasing its sales volume more rapidly

18. Location Economies • Countries differ from each other in cost and quality of factors of production • Economic benefits that arise from performing a value creation activity in an optimal location • Help a company: • Achieve a low-cost position • To differentiate its product offering • To gain competitive advantage over rivals who base all their value creation activities at a single location

19. Location Economies • Transportation costs and trade barriers complicate the process of realizing location economies E.g. • Many U.S. companies have shifted their production from Asia to Mexico • Low labor cost • Proximity to the U.S. market • NAFTA

20. Leveraging the Skills of Global Subsidiaries • Managers must: • Realize that valuable skills can arise anywhere within a firm’s global network • Establish an incentive system that encourages local employees to acquire new competencies • Have a process for identifying valuable new skills created in a subsidiary • Help transfer valuable skills within the firm • E.g. McDonald’s • Finding that foreign franchisees are a source of valuable new ideas

22. COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS • Companies that compete in global marketplace typically face two types of competitive pressures: • Pressures for cost reductions. • Pressures to be locally responsive.

23. COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Pressures for Cost Reductions • To respond to pressures to lower costs, a firm must try to lower the costs of value creation. • One approach to lowering cost is to outsource certain functions to low-cost foreign suppliers. • Pressures for cost reductions are particularly intense in industries producing commodity-type products where differentiation on nonprice factors is difficult and price is the main competitive weapon.

24. COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Pressures for Local Responsiveness • Strong pressures for local responsiveness emerge when customer tastes and preferences differ significantly between countries. • When the auto industry tried to make “world cars,” they discovered that consumers in different auto markets had different tastes and preferences. • A study showed that in the consumer electronics industry, buyers reacted negatively to an overdose of standardized global products.

25. COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Differences in Infrastructure and Traditional Practices • Pressures for local representativeness may create a need to customize products accordingly. • In North America, electrical systems are based on 110 volts, whereas some European countries base their electrical systems on 240 volts. • Steering wheels in Britain are on the right side of the dashboard, while they are on the left side in France. • Wireless handsets use GSM in Europe and a CDMA network in the United States and parts of Asia.

26. COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Differences in Distribution Channels • Because of differences in distribution channels among countries, firms may have to delegate marketing functions to national subsidiaries. • British and Japanese doctors do not respond favorably to U.S.-style high pressure sales force. Thus, the pharmaceuticals use a soft sell approach in these two countries. • In Brazil, supermarkets account for 36% of food retailing, 18% in Poland, and less than 1% in Russia.

27. Four Basic Strategies

28. Four Basic Strategies

29. Global Standardization Strategy • Business model based on pursuing a low-cost strategy on a global scale • Companies market a standardized product worldwide to reap maximum benefit from economies of scale • Most appropriate when: • Pressures for cost reductions are strong • Demand for local responsiveness is minimal • E.g., Intel.

30. Multidomestic/Localization Strategy • Low Integration and High Responsiveness • Focuses on increasing profitability by customizing a company’s goods • Most appropriate when: • Consumer tastes and preferences differ across nations • Cost pressures are not very strong • Benefit - Product value raises in the local market • Limitation - Cost reduction by mass-producing a standardized product is not possible • E.g., MTV

31. Transnational Strategy • High Integration and High Responsiveness • Maximize local responsiveness and global integration. • Create economies of scale more upstream in the value chain • Be more flexible and locally adaptive in downstream activities such as marketing and sales. • In terms of organizational design • Integrated and interdependent network of subsidiaries all over the world. • These subsidiaries have strategic roles and act as centers of excellence. • Due to efficient knowledge and expertise exchange between subsidiaries, the company in general is able to meet both strategic objectives. • E.g., Caterpillar

32. International Strategy • Occurs when: • Companies establish manufacturing and marketing functions in each major country they do business in • Local customization of product offering and marketing strategy is limited in scope • Most appropriate when: • Product serves universal needs • Companies are not confronted with cost pressures • E.g., Xerox in the early days

33. Changes over Time

34. The Choice of Entry Mode Exporting • Manufacturing the product in a centralized location and then exporting it to other national markets Licensing • Licensees purchase the rights to produce a company’s product in their country for a negotiated fee Franchising • Specialized form of licensing in which the franchiser expects the franchisee to abide by rules governing how it does business Joint venture • Most typical form of is a 50/50 venture Wholly owned subsidiary • Parent company owns hundred percent of the subsidiary’s stock

35. Different Entry Modes: Pros & Cons

36. Different Entry Modes: Pros & Cons

37. Global Strategic Alliances • Cooperative agreements between companies from different countries that are actual or potential competitors • Advantages • Facilitate entry into a foreign market • Allow firms to share the costs of developing new products or processes

38. Global Strategic Alliances • Bring together skills and assets that cannot be developed alone • Help establish technological standards for the industry that will benefit the firm • Disadvantage - Give competitors a low-cost route to new technology and markets • Success of an alliance depends on: • Partner selection

39. Global Strategic Alliances • Structure - Ensure alliance agreement guards against the risk of opportunism by a partner • Opportunism: Seeking one’s own self-interest, through guile • Managing the alliance - Building relational capital • Relational capital - Interpersonal relationships between the firms’ managers