Competitive strategies: Global vs. local

1. Competitive strategies: Global vs. local © Professor Daniel F. Spulber

2. Global competitive strategiesThe G5 • Platform strategy • Network Strategy • Intermediary strategy • Entrepreneur strategy • Investment strategy

3. Global competitive strategies • Home, supplier, partner, and customer countries of competitors – differences as sources of competitive advantage • Differences in global value connection • Differences in products, brand, technology • Differences in impacts of political, legal and regulatory climate – trade agreements, home country policies Design global competitive strategies for competitive advantage

4. Global competitive strategies Competitive advantage must be relative to both global and local competitors: Unilever in US: Breyers, Ben and Jerry’s, Good Humor, Klondike, Popsicle Nestlé in US: Dreyers The great ice cream battle

5. Gujarat Cooperative Milk Marketing Federation (GCMMF): India's largest food products marketing organization. • Two million farmers in the cooperative • Slogan: “A taste of India” • PRICE: 10 rupees (20 cents): 100 milliliter Amul ice cream versus 80 milliliter Hindustan Lever Kwality Wall vanilla ice cream • ADVERTISING COSTS: Amul: 1% of sales versus Hindustan Lever: 10-15% of sales on advertising UNILEVER in India – Kwality Wall Hindustan Lever faces successful local competitor

6. Umbrella brands:Nestlé products in the super-market.Some products carry both global brand and local brand.

7. Global platform strategy The global challenge • Global market size: standardization • Local differentiation: customization Strategy: Determine best combination of global and local activities for competitive advantage

8. Global platform strategy Forces calling for global products (standardization): • Convergence in customer preferences and income across target countries with economic development and trade • Competition from successful global products • International brand awareness • Cost benefits from standardization • Falling costs of trade with greater globalization

9. Global platform strategy Forces calling for local products (customization): • Differences in customer preferences and income across target countries • Build local brand recognition • Competition from successful domestic products • Regulatory requirements (quality, safety, technical specifications, domestic content) -- EU product standards • High costs of trade create separate markets

10. Global platform strategy Reduces development and production costs Used in automobiles, mobile phones, computers, aircraft Example: Cost per product (development and mfg): $80 Cost of basic platform development: $100 Cost of each variation (development and production): $50 Use platform when serving four or more customer country markets: Compare costs of serving four markets: Distinct products: 4 x $80 = $320 Platform and 4 variations $100 + 4 x $50 = $300 ***

11. Global platform strategyProduct variety versus economies of scale Business sells 10 units each in Country A and in Country F • Unit costs – economies of scale Two local products at 10 units each $ 30/unit Global product at 20 units $ 20/unit • Price company can charge per unit: Global product:$80/unit in each country Two local products: $95/unit in each country Global versus regional product: Tailoring brings $ 5 more earnings per unit Profit greater by $ 100 Improve tradeoff with platforms and flexible factories to realize economies of scope (mass customization)

12. Global platform strategy International business managers make decisions about what should be global versus local: • Products • Technology and inputs • Manufacturing • Brands • Marketing • Distribution Example: Wal-Mart must compete with both international players such as Carrefour and local retailers

13. Corona sells the same beer, produced in 8 plants in Mexico, all over the world Advertising adapts to target countries: begins as a working class beer in Mexico, becomes a high quality import in most other countries. Marketing adapts to local markets Corona coordinates internationally through its subsidiaries Global platform strategy Local brand positioning of a global brand and global product

14. Global platform strategy • Most products are local and not branded. For example: in food sector Nestle estimates that only 1 % of all goods in food markets are branded • Increasing number of international brands, Corona, Nestlé, Sony • Increasing brand variations: BMW 3-series (1990s): More than 1 million varieties can be ordered • Local distribution and marketing Example: McDonald’s, Coca-Cola: Global brand, some local product tailoring, reliance on local distribution • Local technology, production, customer service Acer computer company

15. Global network strategy • Create network of customers, suppliers, partners • Use network to achieve global size and reach • Use network to provide local customization • Network relationships generate competitive advantage

16. Global network strategy Sellers Buyers The international business contributes value by creating an international network: Recall Li & Fung Networks can consist of informal business relationships or more formal contractual relationships Networks facilitate coordination of sourcing and serving Network replaces n ∙ m links with m + n links (hub and spoke network) 12 links 7 links

17. Global network strategy Physical networks: • Communications: Wired and mobile telephone systems • Internet • Transportation: Railroads, Airlines, Shipping, Intermodal systems • Energy: Oil and natural gas pipelines, Electric power transmission and distribution • Logistics: Postal systems, Wholesale and retail distribution Business networks: Manufacturing, services, distribution, technology, social networks (trust and information sharing)

18. Global network strategy: The global factory • Hong Kong manufacturers own or contract with more than 40,000 factories in South China employing four million workers • To take advantage of specialized sources in different countries - best quality • To take advantage of cost variations across countries - least cost sources • To take advantage of location - minimize transport-costs, transaction costs, and tariffs

19. Global network strategy: The global store • Examples: Dairy Farm, Shell, Zara • Growth: access to additional customers • Develop global brands • Coordination economies from centralized regional warehouses and production facilities • Provide access to sourcing network – Enhances value of supplier contacts by expansion of distribution • Lower transaction costs for suppliers who deal with fewer distributors • Lower risk from pooling demand fluctuations

20. Global network strategy • Network effects: Number of members can affect the value of most of existing links • Architecture: Structure of the network affects costs and performance (hub-and-spoke versus point-to-point) • Companies should capture the value created by their network organizing activities • Networks are mechanisms for delivering all kinds of services, such as entertainment and information, rather than physical products. “Access is becoming a potent conceptual tool for rethinking our world view as well as our economic view, making it the single most powerful metaphor of the coming age.” Jeremy RivkinThe Age of Access

21. Global network strategyPartner networks • Achieve global scale • Members focus on their region • Reduce competition by avoiding duplication of facilities and operations • Avoid government restrictions on ownership and market dominance • Technology standard setting • Complements in production • Complements in demand (game players and games)

22. Global network strategyPartner networks: Global reachBritish Airways / American Airlines • Provide 60% of all transatlantic services • "Alliance that Revolves Around You" • ONEWORLD members: Iberia, Cathay Pacific, Quantas, Finnair, Aer Lingus, Lan Airlines (Chile) • The airlines cooperate on scheduling and ticketing, frequent flyer programs, airport clubs, baggage handling, customer service • Competitive response to the STAR ALLIANCE from United, Lufthansa, SAS, Air Canada and Thai Airways (210,000 Employees, flights to 578 cities in 106 countries) • 600 destinations in 135 countries around the world, operating over 8000 flights daily, 230 million passengers/year

23. Global network strategyPartner networks: Technology standards Mobile phone operating system: Owners

24. Global network strategyPartner networks: Technology standards Mobile phone operating system: Licensees

25. Global network strategyPartner networks: Technology standards • Software licensing company • Open- standard operating system • First open Symbian OS phone (in 2001): Nokia 9210 Communicator • About 85% market share • Standard-setting network

26. Global network strategyFranchise networks Advantages • Rapid international growth • Local ownership • Local management • Lower capital outlays Disadvantages • Search cost of finding franchise owners overseas • Costs of monitoring performance across borders • Transaction costs of forming franchise contracts in other country remains

27. Global intermediary strategy • Matchmaker • Brings buyers and sellers together across international borders • Market maker • Creates and operates markets that cross international borders • Agent • Provide representation in other countries

28. Global intermediary strategyMatchmaker • Bridge international differences in goods and services, business practices, law and regulations, currencies, languages, time zones • Provide value-added activities • Representative agents in sales, distribution, purchasing, financing, contracting, and supply chain managers • Match offers to buyer and seller needs: product features, location, time. • Avoids costs of search for buyers and sellers • Reduces buyer and seller risks from dealing with few trading partners,

29. Language: Seller speaks Chinese, buyer speaks Spanish, intermediary speaks both Currency: Seller wants pesos, buyer has dollars, intermediary changes dollars to pesos Distance: Seller is in Thailand, buyer is in Brazil, intermediary arranges transportation Trust: Buyer and seller both trust the intermediary without having dealt directly with each other Time: Seller is in Japan, buyer is in Mexico, intermediary operates in both time zones Knowledge: Seller in Germany knows production technology, buyer in US knows preferences of US customers, intermediary combines knowledge of supply and demand across borders Culture: Seller and buyer are in different countries, intermediary adapts products, services, contract terms and negotiation to diverse social customs Global intermediary strategyMatchmaker

30. Mitsui “Our first core competence is facilitating international trade with innovative services tailored to client needs”

31. Mitsui “Our second core competence is working with our global clientele to create new trade flows and new business”

32. Mitsui Mitsui “Distributor of goods and services; Transfer agent for technology; Financier, Investor; Project organizer; Market developer; Resource developer; Well-informed consultant and business partner.”

33. Mitsui is in top 15 of Fortune Global 500 http://www.mitsui.co.jp/tkabz/english/corp/index.htm

34. Global intermediary strategyBeating bypass competition TradeCountry H Transaction cost T Transaction strategy offers innovative transactions Your costs of trade T must be less than competitor costs of trade T* Example: Li & Fung ServeCountry A SourceCountry B Bypass competition Transaction cost T*

35. Global intermediary strategy Market maker • Cemex • Mittal • Cargill • BP Amoco • eBay The global market maker aggregates demand across countries and aggregates supply across countries

36. Global intermediary strategy Market maker Ingram Micro: the leading international wholesaler of technology products and services • Wholesales 280,000 computer hardware and software products – think of number of prices! • Sources in US and many other countries from 1,700 manufacturers • Serves 175,000 resellers in more than 100 countries • Serves through operations and affiliates in 35 countries • Establishes prices, coordinates sales and purchases, clears the market, allocates products

37. Global intermediary strategyMarket maker • Creates and operates international markets • Chooses prices, conveys information • Adjusts sourcing and serving to clear markets – avoids efficiency losses from market imbalances • Provides immediacy: ready to buy and sell • Allocates goods and services across countries • Gathers and aggregates information about customers and suppliers on an international level, inventories, orders, and production • Applies IT to international coordination • Earns returns from international risk pooling

38. Global intermediary strategyAgents • Export Marketing Company (EMC) represents sellers, can be broker or dealer, bears risks, arranges resale, transportation, credit • Export Trading Company (ETC) represents buyers, handles imports, usually takes title to goods • Act as international agent: provide expertise in negotiation, market knowledge • Provide trust to buyers and sellers • Allows principal to delegate authority for distant transactions • Provides market expertise, often to smaller firms

39. Global intermediary strategyMore agents • Piggyback arrangements: e.g. Sony distributes in Japan for Whirlpool; GE Trading Co. distributes for other US manufacturers in Africa and Latin America • General Trading Companies: In Japan, there are Sogo Shosha (large scale) and Senmon Shosha (smaller scale) trading companies. Similar companies exist in Europe, South Korea, Taiwan, Singapore and Hong Kong • Government Procurement Agencies, e.g. China Central Trade Offices • Distributor/Importer (jobbers, dealers, wholesalers) • Direct sales (representatives that work on commission) • Overseas retailers, wholesalers

40. Global entrepreneur strategy • Bring buyers and sellers together in new combinations • Provide new products to new customer countries • Arrange new production and procurement in supplier countries • Introduce innovative transaction methods across borders – Citigroup financial services, Google, eBay • Apply innovative technologies and business methods • Create new business firms in other countries • New inter-country connections!

41. Global entrepreneur strategy Micro credit In 1974, Yunus, a Bangladeshi economist from Chittagong University, led his students on a field trip to a poor village. They interviewed a woman who made bamboo stools, and learnt that she had to borrow the equivalent of 15p to buy raw bamboo for each stool made. After repaying the middleman, sometimes at rates as high as 10% a week, she was left with a penny profit margin. 1983: Yunus founds Grameen Bank In Bangladesh today, Grameen Bank has 1,084 branches, with 12,500 staff serving 2.1 million borrowers in 37,000 villages. www.grameen.com Muhammad Yunus of Bangladesh and the Grameen Bank jointly awarded the 2006 Nobel Peace Prize.

42. Investment strategy next time Summary and take-away points • Coordination of competitive actions across borders key to gaining global competitive advantage • Achieve standardization and customization • Advantage over global and local competitors • Many more strategies possible…