Chapter 10: Global Strategy:

Competing Around the World

 Chapter 10: Case Highlight:
IKEA: The World’s Most Profitable Retailer

• Sells home furnishings in 420 stores, in

50 countries, and employs 210,000 people

• Revenues of 38 billion euros (about $43 billion)

The Rise of IKEA:

• Started in 1943 by 17-year-old Ingvar Komprad

• Do-It-Yourself (DIY) approach

• Took 20 years to expand beyond Sweden

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 Chapter 10: Case Highlight:
IKEA: The World’s Most Profitable Retailer

IKEA’s strategy has evolved

•Follows a global standardization strategy
•Achieves economies of scale through managing the global supply
chain

They have adapted to consumer demands

•Smaller stores, customized furniture, online presence,
and installation assistance
•Acquisition of TaskRabbit, a furniture
assembly and delivery company

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 4

Globalization

• Globalization is a process of closer integration and

exchange between different countries and peoples
worldwide

• Globalization is made possible by:

– Falling trade and investment barriers
– Advances in telecommunications
– Reductions in transportation costs

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Globalization Has Led to
Increases in Living Standards

• Germany and Japan

– Export-led growth, despite devastation after WWII
• Brazil, Russia, India, and China (BRIC)
– 40% of world’s population, now produce half the world’s
economic growth
– China: the second largest economy worldwide
• Hong Kong, Singapore, South Korea, and Taiwan
– Are now advanced economies, which
were previously underdeveloped

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 6

Global Strategy

• Part of a firm’s corporate strategy

• Goal:
– To gain and sustain a competitive advantage
– To compete against other foreign and domestic
companies around the world

• Foreign Direct Investment (FDI):

– A firm’s investments in value chain
activities abroad

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 7

Multinational Enterprises

• A company that deploys resources and capabilities in

– The procurement, production, and distribution of goods and
services in at least two countries
• MNE’s make up less than 1% of the number of total U.S. companies, but they:
-- Account for 11% of private-sector employment growth since 1990
-- Employ 19% of the work force
-- Pay 25% of the wages
-- Provide 31% of U.S. gross domestic product (GDP)
-- Make up 74% of private-sector R&D spending
• Examples:
– Boeing, Caterpillar, Coca-Cola, GE, IBM,
Exxon Mobil, John Deere, P&G, Wal-mart
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 8

Globalization in the 21st Century

MNEs are global-collaboration networks that

perform business functions throughout the world

Exhibit 10.4
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 Strategy Highlight 10.1
Does GM’s Future Reside in China?

• Market opportunity in China

 1.4 billion population, only 1 in 100 people owns a vehicle

 Strategic market for Mary Barra, CEO of GM

• GM entered China in 1997

 Joint venture with Shanghai Automotive Industrial Corp

 China is 40% of GM’s revenues and growing fast

 GM China factories are more productive than U.S. plants

• GM’s future relies on China and other emerging economies

 $250 million on a state-of-the-art R&D center…in Shanghai

 Future of GM likely decided in their international HQ…in Shanghai

Advantages and Disadvantages
of International Expansion
Exhibit 10.5

© McGraw Hill
 11
Strategy Highlight 10.2
Wal-mart Retreats from Germany

• They lost billions and exited Germany

in 2006, selling to Metro
• What went wrong?
– Culturally, Germans didn’t want to cheer and smile.
• Behaved gruffly like at every other retail store
– They couldn’t get costs down = prices weren’t low
• Many other stores were cheaper and more convenient
– They had a liability of foreignness

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 12

Loss of Reputation

• Reputation is one of the most valuable resources that a firm

may possess
– Innovation reputation
– Customer service reputation
– Brand reputation (Apple’s brand is valued at $250 billion)
• Loss of reputation can be due to low wages, long hours, and
poor working and living conditions overseas (e.g., a spate of
suicides at Foxconn, Apple’s main supplier in China)
• Local government may be corrupt
• Minimum safety standards may not
be enforceable
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 13

Loss of Intellectual Property

• Particularly in the software, movie, and music industries

• Copyright infringements can occur in foreign markets

• Intellectual property can be siphoned off

or reverse-engineered

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Modes of Foreign-Market Entry along
the Investment and Control Continuum

Exhibit 10.7

© McGraw Hill
 Entry Modes of International Expansion
Wholly Owned
High
Subsidiary
Extent of Investment Risk

Joint Venture

Strategic Alliance

Franchising

Licensing

Exporting
Low
Low High
Degree of Ownership and Control
Adapted from Exhibit 7.7 Entry Modes for International Expansion
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-31
 16

The Integration Responsiveness Framework

• Deals with the pressures an MNE faces for cost

reductions and local responsiveness
– Local responsiveness: the need to tailor product and
service offerings to fit local consumer preferences
• Four different strategies to gain and sustain
competitive advantage when competing globally:
– International strategy
– Multi-domestic strategy
– Global-standardization strategy
– Transnational strategy

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 17

The Integration-Responsiveness Framework:

Global Strategy Positions and Representative MNEs

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 18

International Strategy

• Leverages home-based core competencies

• Sells the same products or services in both domestic
and foreign markets (e.g., Starbucks)
• Advantageous when the MNE faces:
– Low pressures for local responsiveness
– Low pressures for cost reductions
• Often used successfully by MNEs with:
– Large domestic markets
– Strong reputations and brand names
• Limited local responsiveness
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 19

Multi-domestic (product differentiation) Strategy

• Used to try and maximize local responsiveness

 Example: Nestlé’s customized product offerings in international
markets

• MNEs hope that local consumers will perceive their

products or services as local ones
• This strategy arises out of the combination of :
– High pressure for local responsiveness
– Low pressure for cost reductions
• Can be costly and inefficient
– Duplication of business functions
across countries
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 20

Global-Standardization (cost-leadership) Strategy

• Attempts to reap significant:

– Economies of scale and location economies
– Through global division of labor where capabilities are
at the lowest cost
 Example: Lenovo’s R&D in Beijing, Shanghai, and Raleigh;
production center in Mexico, India, and China
• Arises out of the combination of:
– High pressure for cost reductions
– Low pressure for local responsiveness
• Price becomes the main competitive weapon

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 21

Transnational Strategy

• Strategy that attempts to combine:

– Benefits of a localization strategy
• High local responsiveness
– With a global-standardization strategy
• Lowest-cost position attainable
 Examples: German multimedia conglomerate Bertelsmann

: Caterpillar’s earth-moving equipment

• Arises out of the combination of:
– High pressure for local responsiveness
– High pressure for cost reductions
• Used by MNEs pursuing a blue ocean strategy
• Difficult to implement
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 22

Porter’s Diamond of National Competitive Advantage

Why some nations outperform others in certain industries

Exhibit 10.11
Source:. Adapted from M.E. Porter (1990, March–April), “The competitive
advantage of nations,” Harvard Business Review: 78.

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 23

Factor Conditions

• A country’s endowments:
– Natural, human, and other resources
– Resource rich countries: focus on commerce
– Resource lacking countries: focus on human capital

• Other important factors:

– Capital markets
– A supportive institutional framework
– Research universities
– Public infrastructure (airports, roads,
schools, health care system, etc.)
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 24

Demand Conditions

• The characteristics of demand

– For example, due to dense urban living conditions, hot and
humid summers, and high energy costs, Japanese customers
demand small, quiet, and energy-efficient air conditioners

• From a firm’s domestic market

• Customers hold firms to high standards of value creation
– Developments in research
– Cost containment
– Other marketplace applications

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 25

Competitive Intensity in a Focal Industry

• Highly competitive environments lead to better firm

performance
• Example: Fierce environment for German car companies
helped prepare them for global competition
– Fierce domestic competition
(e.g., Daimler, BMW, and Volkswagen)
– No-speed-limit autobahn
– Requires top-notch engineering of chassis and engines
– High gas prices put pressure on low fuel consumption
– Demanding customers

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 26

Related and Supporting Industries/Complementors

• Leadership in related and supporting industries

• Fosters complementors in downstream industries

– Firms that provide an additional good or service

• Combined with the primary product
• Leads customers to value the focal firm’s offering more

– Further strengthens national competitive advantage

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 Regional Clusters

• Regional cluster
 A group of interconnected companies and institutions
in a specific industry, located near each other
geographically and linked by common characteristics

 Knowledge spillover

 Positive externalities that are

regionally constrained

 Exchange of ideas among firms

in a cluster
Mapping a Regional Cluster: Research Triangle
 Geographical Distribution of Clusters
Boise Wisconsin / Iowa / Illinois Boston
Information Tech Agricultural Equipment Minneapolis West Michigan Western Massachusetts Mutual Funds
Farm Machinery Cardio-vascular Office and Institutional Medical Devices
Polymers
Omaha Equipment Furniture Mgmt. Consulting
Seattle Telemarketing and Services Rochester Biotechnology
Aircraft Equipment and Design Hotel Reservations Michigan Imaging Equipment Software and
Software Credit Card Processing Warsaw, Indiana Clocks Networking
Coffee Retailers Orthopedic Devices Detroit Venture Capital
Auto Equipment Hartford
Oregon and Parts Insurance
Electrical Measuring Providence
Equipment Jewelry
Woodworking Equipment Marine Equipment
Logging / Lumber Supplies
New York City
Financial Services
Silicon Valley Advertising
Microelectronics Publishing
Biotechnology Multimedia
Venture Capital Pennsylvania / New Jersey
Pharmaceuticals
Las Vegas Pittsburgh
Amusement / Advanced Materials
Casinos Energy
Small Airlines
North Carolina
Los Angeles Area Household Furniture
Defense Aerospace Synthetic Fibers
Entertainment Hosiery
Wichita
Light Aircraft Cleveland / Louisville
San Diego Paints & Coatings
Farm Equipment Baton Rouge /
Golf Equipment
Biotech/Pharma New Orleans Dalton, Georgia
Dallas Specialty Foods Carpets
Real Estate
Development Southeast Texas /
Nashville / Louisville
Colorado Louisiana
Hospital Management South Florida
Computer Integrated Systems / Programming Chemicals
Health Technology
Engineering Services Computers
Mining / Oil and Gas Exploration

Source: Adapted from Professor Michael E. Porter, Harvard Business School

 Geographic Location Matters Globally:
National Competitive Advantage

© McGraw Hill