Strategy: A View From the Top Chapter 8: Global Strategy Formulation

1. Strategy: A View From the TopChapter 8: Global Strategy Formulation TEAM 1 JT Lehotsky Tara Ferguson Taylor Skidmore Sunny To

2. Today’s Discussion • Globalization and Clustering • Macroeconomic perspective • Global Strategy Formulation • Microeconomic level • Global Strategy and Risk

3. Globalization • Some countries or regions of the world are more efficient than others in producing particular goods. • Examples • Australian mining • US agriculture

4. Clustering • In the absence of natural comparative advantages industrial clustering occurs. • If transportation costs are not too high and there is economy of scale a large area can be served from a single location.

5. Porter’s National Diamond

6. Factor Conditions • The degree to which a country’s endowments match those needed by the industry. • When a particular industry is highly profitable and barriers to entry are low the industry will spread to international borders. • Japanese compete in industries that orginated in the United States.

7. Demand Conditions • Demand in the home country. • When a large home market develops before it takes hold elsewhere in the world firms have ample incentives to look for business abroad when saturation at home begins to set in. • Japanese motorcycle industry.

8. Related and Supporting Industries • The presence of related and supporting industries. • Hollywood has a host of suppliers and service providers.

9. Competitiveness • Five forces of Chapter 4 • The more vigorous the domestic competition, the more successful firms are likely to be in competing on a global scale.

10. Government and Chance • Governments can change or make policies to nurture global industries but these policies aren’t always effective. • Chance deals with random events or sheer luck. • US is the leader in photography industry is because Kodak and Polaroid creators were born in America.

11. Industry Globalization Drivers Market Drivers Evolution of customer needs Global Channels Transferability Economic Drivers Nature of industry Economies of scale/location Differences in country costs Industry Globalization Potential Competitive Drivers Interdependence between countries/regions Globalization of competitors Government Drivers Trade barriers Regulatory climate Technology/standards

12. Market Drivers • Have to meet changing customer expectations. • Hamburgers in India

13. Cost Drivers • In a growing number of industries, the minimum sales volume required for cost efficiency is simply no longer available in a single country or region. • Economies of scale and scope; experience effects; and exploiting differences in factor costs for product development, manufacturing, and sourcing in different parts of the world have become critical to global success. • This creates the need for critical mass in different parts of the value chain.

14. Competitive Drivers • The globalization potential of an industry is influenced by competitive drivers such as: • The degree to which total industry sales are made up by export or import volume. • The diversity of competitors in terms of their national origin. • The extent to which major players have globalized their operations and created an interdependence between their competitive strategies in different parts of the world.

15. Government Drivers • Certain industries are more regulated then others, having a direct influence on a company’s global strategic options. • Steel Industry: Trade policies, technical standards, policies and regulations, and government subsidies. • Google in China

16. Global Strategy Formulation • Multinational- applicable when customer needs and industry conditions vary considerably from country to country and a high degree of localization is required • International- the importance of managing the international product life cycle through the transfer of technologies to foreign markets. • Global or Transnational- when some degree of standardization in products and services is possible.

17. Global Strategy Dimensions • Global strategy formulation requires analysis of at least five additional dimensions: • Market Participation • Standardization/Positioning • Activity Concentration • Coordination of Decision Making • Non-market Factors

18. 1. Market Participation • Few companies can afford to enter all markets open to them. They must weigh the relative advantages of a direct or indirect presence in different regions of the world. • A global view requires a multidimensional perspective. Many industries need to distinguish between “must” markets and “nice to be in” markets. Example: Motorola • Developing a global presence also takes time and requires substantial resources.

19. 2. Standardization/Positioning • As globalization advances, many companies are seeking opportunities to standardize core products and services. • Reducing cost and enhancing quality are primary motivations for standardization. • Adopting a more global market positioning is a another form of standardization • By applying a global, cost-benefit approach to formulating marketing strategy, companies seek to balance flexibility with uniformity.

20. The Global Branding Matrix Message Standardized Tailored Standardized Offer Tailored

21. The Global Branding Matrix • Global Mix Strategies- both the offer and the message are the same. • A product’s usage patterns and brand potential are homogeneous on a global scale. • Scale and scope cost advantages substantially outweigh the benefits of partial or full adaptation. • Competitive circumstances are such that a long-term, sustainable advantage can be secured using a standardized approach.

22. Global Offer Strategies- apply when the same offer can beneficially be positioned differently in different parts of the world • Holiday Inn • Global Message Strategies- use the same message worldwide but allow for local adaptation of the offer. • McDonalds • Global Change Strategies- both the offer and the message are adapted to local market circumstances.

23. 3. Activity Concentration • To enhance global competitiveness, continuously reexamine: • Which parts of value-creation process they should perform themselves & which to outsource • Whether they can eliminate duplicate operations in different parts of the world & reduce manufacturing sites • Whether they can relocate value-added activities to more cost-effective locations

24. 3. Activity Concentration • Selecting the right level of participation and location: • Factor conditions • Presence of supporting industrial activity • Nature and location of the demand for the product • Industry rivalry • Tax consequences • Currency and political risks • Ability to manage different locations • Other elements of overall strategy • Eli Lilly – R&D and clinical trails in India & China • Rising development costs - $1.1 billion per drug • Phase III test costs - $50 million a year • But not all outsourcing • Patients might not be able to afford them • Patent protection

25. Risks of Activity Concentration • Organization problems • Staffing problems • Increase performance risk at a time when the dependence of one unit on others is increased • Does not necessarily preclude being responsive to local demands • Rather, decide which value-creation process should be standardized or concentrated

26. 4. Coordination of Decision Making • The degree to which decision making is coordinated on a global scale defines the extent to which globalization has been implemented successfully • Decisions to be made: • Which markets to participate in • How to allocate resources • How to compete

27. 5. Nonmarket Dimensions • Global corporate success is influenced by nonmarket factors that are governed by social, political, and legal arrangements • Different countries have different… • Political systems • Economic systems • Legal systems • Cultures • Educational levels • Skill levels Have profound implications for the rules that shape global competition and, consequently, crafting a global strategy

28. India Independence logo • Mission Statement • To organize the world’s information and make it universally accessible and useful. • 95+% worldwide revenue comes from online ads when a “Google search” is performed • India – more people are offline; mobile devices outnumber internet connections • http://www.news-relay.com/latest-news/googlecom-has-tweaked-its-global-strategy-for-india/

29. International Entry Strategies Ownership Acquisition / Start-Up Alliances / Joint Ventures Entry Mode Licensing Exports Low High Entry Cost

30. Region/Country Analysis • 5 dimension framework to map a particular country/region’s institutional contexts • Political and social systems • Openness • Product markets • Labor markets • Capital markets

31. How Wal-Mart Went Global • Evolution from domestic company into a major global player • Global Opportunity • Target Markets • Mode of Entry • Global Transfer of Skills • Local Adaptation • Local Competition • Gains and Setbacks

32. Global Opportunity • Decision to “go global” was driven by need to grow • Confining itself meant missing out on 96% of world’s potential customers • Key success factor – dedicated and committed workforce • Leveraged 2 key resources • Developed tremendous buying power with giant domestic suppliers • Took advantage of domestically developed knowledge and competencies

33. Target Markets • Could not simultaneously enter all options outside US • First 5 years • Concentrated heavily on Americas • European market was less attractive as first point of entry • Already mature • Competitors would retaliate • Reduce competitive advantage • Asia markets also unattractive • Geographically and culturally distant

34. Mode of Entry • Canada – Acquisition • Mature market • Adding new retail capacity was unattractive • Mexico – Greenfield Start-Up • Significant income and cultural differences • Brazil– Joint Venture • With Lojas Americana • Argentina – Wholly owned subsidiary • Success in Brazil • And only 2 major markets

35. Global Transfer of Skills • Wal-Mart acquired Woolco (Canada) • Sending a transition team  Wal-Mart way of doing business + core competencies • Upgrade to Wal-Mart standards + renovate • Leverage high brand recognition by introducing “everyday low prices” strategy • Provide a broad merchandise mix, excellent customer service, and a high in-stock position • Implement employee rewards •  Profitable and leading discount retailer in 3 years

36. Local Adaption • Wal-Mart and Chinese market • China: • regulations and government policies: unpredictable • Infrastructure: not well-developed • Low levels of disposable income • Language difference • Hybrid store: supercenter and a warehouse club (memberships) • Smaller satellites stores fit better with local needs • Product sourcing and product selection  balance the desire of local for high-status U.S.-made consumer goods and domestic goods

37. Local Competition • Acquiring a dominant player. • Acquiring a weak player. • Launching a frontal attack on the incumbent.

38. Acquiring a dominant player • Germany: Wertkauf hypermarket chain (21 stores, one of the most profitable) • Reason: • Mature European market  building new ones not good • Strict zoning laws precluded greenfield operations

39. Acquiring a weak player • Remember the Woolco case?

40. Launching a frontal attack on the incumbent • Attacking dominant and entrenched local competitors head-on • Only feasible when the global company can bring a significant competitive advantage to the host country • Brazil 1996: aggressive pricing • Backfired when local competitors retaliated and initiated a price war • Leading sale category was food  local sourcing  local competitors’ advantage • Focus on customer service and merchandise mix

41. Gains and Setbacks • Not all of Wal-Mart’s global moves succeeded • 1999, Asda in Britain (acquiring a dominant player). Now behind Tesco and gradually fell behind in profit and market share. • 2005, costly exit from the German market, loss of $1 billion: unable to attain the economies of scale to beat rivals’ prices • International activities: 40% of the stores  <1/4 of total sales • However: only overseas markets offer the world’s biggest retailer the kind of room it needs to grow.

42. GLOBAL STRATEGY AND RISK

43. Political Risk • Politically induced actions and policies initiated by a foreign government • Assess stability of a country’s current government and its relationships with others • 2 subcategories: global and country-specific risk • Global risk: all of a company’s multinational operations • Country-specific: a specific country • Macro and micro risk: • Macro: how foreign investment in general in a particular country is affected by reviewing the government’s past use of soft and hard policy instruments • Micro: particular company or group of companies

44. Legal Risk • Multinational companies encounter in the legal arena in a particular country • Analyzing the foundations of a country’s legal system  law properly enforced? • High risk (loss of IP, technology, trademarks…): countries with written laws protecting a multinational's rights but rarely enforce

45. Financial/Economic Risk • Analogous to operating and financial risk at home • Volatility of a country’s macroeconomic performance and the country’s ability to meet its financial obligations directly affect performance • A nation’s currency competitiveness and fluctuation are important indicators of a country’s stability + willingness for changes and innovations • Other factors

46. Societal/Cultural Risk • Associated with operating in a different sociocultural environment • Ethnics, Religions, Nationalist movements, Ideologies, Change Adaptability… should be analyzed • Standard of living, patriotism, religious factors, the presence of charismatic leaders…

47. Exploiting Similarities and Differences • Wal-Mart: global strategy involves more than taking a superior business model and rolling it out globally to capture economies of scale.

48. Similarities

49. Differences = obstacles to overcome? • Global strategies based on the principle of arbitrage = differences in costs, market structure, or other key variables  competitive advantages • Best global strategies exploit opportunities to standardize while differentiate • CEMEX: Mexican global cement producer • Arbitrage cost differences • Standardized operational strategy (uniform production to distribution chains with information technology, innovation) • Choose how to raise capital independently from the way it chooses to compete in product markets • Differences: make arbitrage valuable: comparative advantages • Similarities: create opportunities for scales