Strategy in The Global Environment: Gareth R. Jones /charles W. L. Hill

GARETH R. JONES /CHARLES W. L.
HILL
Theory of Strategic Management 10th ed.
Chapter Strategy in the

8 Global
Environment
Prepared by C. Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University
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
2
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)
3
National Competitive Advantage
4
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
5
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 6
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
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
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.
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
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
11
Chance
• Even though Porter originally didn’t write anything about chance or

luck in 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.
12
Michael Porter’s Diamond Model or
The Theory of National Competitive
Advantage of Industries)
13
Porter’s Diamond Model factors
14
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
15
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.
16
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
17
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
18
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
19
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
20
21
COST PRESSURES AND PRESSURES FOR
LOCAL RESPONSIVENESS
 Companies that compete in global

marketplace typically face two types of
competitive pressures:
1) Pressures for cost reductions.
2) Pressures to be locally responsive.
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.
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.
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.
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.
Four Basic Strategies
27
Four Basic Strategies
28
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.
29
Multidomestic/Localization
Strategy
 Low Integration and High Responsiveness
 Focuses on increasing profitability by

customizing a company’s goods
 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
30
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
31
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
 Product serves universal needs
 Companies are not confronted with cost
pressures
 E.g., Xerox in the early days
32
Changes over Time
33
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
34
Different Entry Modes: Pros & Cons
35
Different Entry Modes: Pros & Cons
36
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
37
 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
38
 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
39

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GARETH R. JONES /CHARLES W. L.

Theory of Strategic Management 10th ed.

Chapter Strategy in the

Prepared by C. Douglas Cloud

Understand the process of globalization and how it impacts

Globalization of production and markets

• Why are corporations domiciled in certain countries more

• 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

Firm strategy, structure, and rivalry

• Conditions in the nation governing:

Home country Demand plays an important role in producing

Enables better understand the needs and desires of the customers

It shapes the attributes of domestically made products and creates

E.g. 1: Japanese cameras

Benefits of investment in advanced factors by Suppliers and related

• domestic rivalry is instrumental to international competitiveness, since it forces

• The role of the government in Porter’s Diamond Model is

• Even though Porter originally didn’t write anything about chance or

• Expanding the Market: Leveraging Products

 Companies that compete in global

Pressures for Cost Reductions

 To respond to pressures to lower costs, a firm must

Pressures for Local Responsiveness

 Pressures for local representativeness may create

Differences in Distribution Channels

 Because of differences in distribution channels

 Focuses on increasing profitability by

Wholly owned subsidiary

 Cooperative agreements between companies

 Bring together skills and assets that cannot

 Disadvantage - Give competitors a low-cost route

 Success of an alliance depends on:

 Structure - Ensure alliance agreement guards

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