gbm unit-08 (international strategic management)
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By :
Prof. Amit Kumar
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“A student pursuing management education from IILM- Graduate School of Management, for example may find himself or herself placed in a firm located in a totally different country. Knowledge about international business keeps the youngster mentally prepared to accept assignment in an alien environment. Forewarning is definitely forearming, for the fresh management graduate”.
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Importance of this course
Global Business Management
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Course: Global Business Management
1. Globalization
2. Global Trade & Theory
3. Global Technological Environment
4. Global Economic Environment
5. Global Political-Legal Environment
6. Foreign Direct Investments
7. Regional Economic Integration
8. Strategy and Structure of International Business
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Contents• Nature of International Strategic Management• Opening Case: Ford Motor in Thailand, Nestle Global• Strategies in Increased Profitability for Multinational
Acquiring and or Developing Brands Reaping Experience Curve Benefits Realizing Location Economies Skills and Core Competencies
• Strategic choices for Global Expansion Multi domestic strategy International strategy Global strategy Transnational strategy
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Strategic Management
Defined:
Set of managerial decisions and actions that determines the long-run performance of a firm.
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Basic Model of Strategic Management
Four Basic Elements
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Evaluation and Control
and Control
Strategic Management Model
Strategy Formulation
Strategy Implementation
Mission
Objectives
Strategies
Policies
Feedback/Learning
Environmental
Scanning
Societal Environment
General Forces
Task Environment
Industry Analysis
Structure Chain of Command
Resources Assets, Skills
Competencies, Knowledge
Culture Beliefs, Expectations,
Values
Reason for existence
What results to accomplish by when Plan to
achieve the mission & objectives Broad
guidelines for decision making
Programs
Activities needed to accomplish a plan
Budgets
Cost of the programs Procedures
Sequence of steps needed to do the job
Process to monitor performanceand take corrective action
Performance
External
Internal
Evaluationand Control
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Nature of International Strategic Management
• In concept, SM process in an MNC is similar to that in any other form of organization.
• The main complicating factors being the numerous country and regional environments it has to analyze and understand before considering various strategic options.
• Strategy implementation can be more difficult because different cultures have different norms, values and work ethics.
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Nature of International Strategic Management
Tata Steel (Group of Tata) succeed in acquiring another that is four times as large. The Tata
Group (from Tea to Truck Conglomerate, most widely admired business group in India) spent 3
billion dollars on 19 acquisitions in five continents, from the Eight O’ Clock Coffee Co. in
US to Daewoo in South Korea.
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Nature of International Strategic Management
• Ford Motor, which has re-entered the market in Thailand and despite a shrinking demand for automobiles, there is beginning to build a strong sales force to garner market share.
The firm’s strategic plan is based on offering the right combination of price and financing to a carefully
identified market segment.• In particular, Ford is working to bring down the monthly
payments so that customers can afford a new vehicle. This is the same approach that Ford used in Mexico, where the currency crisis of 1994 resulted in serious problems for many multinationals.
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Nature of International Strategic Management
Toyota is another MNC which has benefited vastly from strategic management. The
company is going beyond the automotive market.
In the process, Toyota is assessing environmental opportunities and threats and examining its internal strengths and weaknesses so that the firm’s strategic
thrust can exploit its strengths and sidestep any shortcomings.
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Strategies to Increase Profitability in IB
An MNC is able to increase its profitability in ways often notavailable to a domestic firm. For example a global firm ableto:
1. Acquiring and or Developing Brands2. Reaping Experience Curve Benefits3. Realizing Location Economies4. Skills and Core Competencies
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“ Nestle is the best example to be mentioned. Nestle is the world’s largest food company, employed over 384,000 people in 2009, 97% of whom worked outside Switzerland. In 2009, Nestle operated 880 factories in 156 countries. One half of its sales were in Europe, and 25% came from North America”.
1. Acquiring and or Developing Brands
Strategies to Increase Profitability in IB
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Nestle has been highly successful in its global operations. It has adopted several strategies to achieve the success.
1. Strategy of acquiring and/or developing widely known brands.
2. Another important strategy is to continuously improve traditional products. For instance, Nestle produces over 200 types of instant coffee, all tailored to meet the requirements of specific countries.
3. The final strategy is that the company has given local managers substantial autonomy.
4. However, basic strategy, brand policy, and financial decisions are controlled at company headquarters in Vevey, Switzerland.
Strategies to Increase Profitability in IB
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2. Reaping Experience Curve Benefits
Strategies to Increase Profitability in IB
• The experience curve refers to the systematic reductions in production costs over the life of a product. The experience curve has greater strategic relevance.
• The firm that moves down the experience curve most rapidly has a cost advantage over its competitors.
• Serving the global market from a single location helpsto establish low cost strategy.
• Aim to rapidly build up sales, aggressive marketing strategiesand first-mover advantages.
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2. Reaping Experience Curve Benefits
Strategies to Increase Profitability in IB
‘One firm that has exploited the strategy of experience curve to its advantage is Matsushita, a Japanese company. Along with Sony & Philips, Matsushita was in a race to develop a commercially viable videocassette recorder in the 1970s. Although Matsushita initially lagged behind Philips and Sony, it got its VHS format accepted as the world standard and reaped enormous experience- curved based cost economies’.
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2. Reaping Experience Curve Benefits
Strategies to Increase Profitability in IB
‘Matsushita’s strategy was to build global volume as rapidly as possible. To ensure that it could accommodate worldwide demand, the firm increased its production capacity 33-fold from 205,000 units in 1977, to 6.8 million units by 1984. By serving world market from a single location in Japan, Matsushita realized considerable experience curve advantages’.
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3. Realizing Location Economies
Strategies to Increase Profitability in IB
• Because of differences in factor costs, certain countries have a comparative advantage in the production of certain products. For example,
• Japan excels in the production of automobiles and consumer electronics.
• The US excels in the production of pharmaceuticals, biotechnology and financial services.
• Switzerland excels in the production of precision instruments and pharmaceuticals.
• India excels in the production of computer software. 07/06/10 19
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3. Realizing Location Economies
Strategies to Increase Profitability in IB
What does all these mean?
• A firm does benefit by basing each of its value creation activities at that location where PEST factors are most conductive to the performance of that activity.
Firms that pursue such a strategy are said to be realizing location economies.
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3. Realizing Location Economies
Strategies to Increase Profitability in IB
General Motors (GM) did precisely the same thing. Design of its Pontiac Le Mans car was done in Germany, key components were manufactured in Japan, Taiwan and Singapore; assembly was
performed in South Korea; and advertising strategy was formulated in Great Britain. Each of
these countries was best suited to perform a particular value creation activity.
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4. Skills and Core Competencies
Strategies to Increase Profitability in IB
The term core competence refers to skills within the firmthat competitors can not easily imitate. The skills may exist in production, finance, R&D or marketing.
• Toyota has, in the production of cars.• McDonalds’s has, in managing fast food operations.• P&G has, in developing and marketing consumer
products.• Wal-Mart, in information system and logistics.
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Strategies to Increase Profitability in IB
An MNC is able to increase its profitability in ways often notavailable to a domestic firm. For example a global firm ableto:
1. Acquiring and or Developing Brands2. Reaping Experience Curve Benefits3. Realizing Location Economies4. Skills and Core Competencies
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Strategic choices for Global Expansion
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Pressures for Cost Reductions
• Intense in industries of standardized, commodity type product that serve universal needs
• Major competitors are based in low-cost locations• Consumers are powerful and face low switching
costs• Liberalization of world trade and investment
environment• Examples
– Bulk chemicals, petroleum, steel, personal computers
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Pressures for Local Responsiveness
• Differences in consumer tastes & preferences– North American families like pickup trucks while in Europe
it is viewed as a utility vehicle for firms• Differences in infrastructure & traditional practices
– Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts
• Differences in distribution channels– Germany has few retailers dominating the food market,
while in Italy it is fragmented• Host-Government demands
– Health care system differences between countries require pharmaceutical firms to change operating procedures
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Management Focus – Tailoring world cars to the U.S. market
• Japanese automobile manufacturers customize car design to tastes of American consumers– Toyota released the Tundra with V8 engines which looks
like a heavy-duty pickup truck with a powerful engine– Nissan let U.S. engineers and planners be completely
responsible for development of most vehicles sold in North America
– Honda customizes the Pilot, it’s next generation SUV according to tastes for American families who wanted bigger vehicles with three row seating
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Strategic choices for Global Expansion
Four basic strategies to enter and compete in the
international environment:
1. Multi domestic strategy2. International strategy3. Global strategy4. Transnational strategy
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Multi-domesticStrategy
GlobalStrategy
InternationalStrategy
TransnationalStrategy
Pressure for Global IntegrationPr
essu
re o
f Loc
al
Res
pons
iven
ess
High
LowLow High
Strategic choices for Global Expansion
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• Main aim is maximum local responsiveness.• A firm pursuing a multi-domestic strategy customizes its
products to suit the needs of customers in each country in which is operates. The company transfers to its subsidiaries the core competencies it has developed at home and establishes a wholly owned subsidiary.
• Strategic control is decentralized to each foreign subsidiary which operates automatically and develops its own set of value creation activities.
• Multi-domestic strategy seek to take advantage of local differentiation.
Multi-domestic Strategy
Strategic choices for Global Expansion
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Strategies for Global Expansion
• But the problem with this strategy is that each subsidiary becomes and stand-alone company. Because the resources and skills are transferred from the parent company, the benefit of global learning is lost.
• The potential benefits from multi-domestic strategy need to be stated. The strategy can result in the establishment of a series of successful foreign subsidiaries.
• Firms pursuing multi-domestic strategy tend to adopt worldwide area structure.
• H.J. Heinz, Ford and GM, Philips pursued multi-domestic strategies when they first entered European Markets.
Multi-domestic Strategy
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Strategies for Global ExpansionMulti-domestic Strategy
• Product customized for each market• Decentralized control - local decision making• Effective when large differences exist between
countries• Advantages:
– product differentiation– local responsiveness– minimized political risk– minimized exchange rate risk
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Strategies for Global ExpansionMulti-domestic Strategy• Philips is a good example, followed a multi-domestic strategy. • This strategy resulted in:
– Innovation from local R&D – Entrepreneurial spirit – Products tailored to individual countries – High quality due to backward integration
Multi-domestic strategy presented Philips with many challenges:
– High costs due to tailored products and duplication across countries
– The innovation from the local R&D groups resulted in products that were R&D driven instead of market driven.
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Strategies for Global Expansion
• International strategy replicates certain features of the multi- domestic approach.
• As with multi-domestic strategy, the firm transfers its core competences to the foreign subsidiary so that it can reap the differentiation advantage.
• But certain core competencies in R&D, marketing and product development are centralized at home.
• All other operating decisions are decentralized (like multi-domestic strategy). The need for coordination is moderate.
• Limit customization of product offering and market strategy.• Coco-Cola, Pepsi-Cola, pursue and international strategy. • These firms follow worldwide product division structure. • There is limited local responsiveness.
International Strategy
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Strategies for Global Expansion
• With a global strategy, a standardized product is manufactured at a few low-cost location and then offered to the global market.
• As with international strategy, only limited customizing to suit the tastes of individual markets is allowed.
• Product standardization allows a firm to achieve huge global economies of scale which translates to lower costs and lower prices.
• When low price is accompanied by quality, the firm has a very strong competitive advantage.
• AT&T is a typical company which pursues global strategy.• Firms pursuing global strategy operates with a worldwide
product division structure.
Global Strategy
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Strategies for Global ExpansionGlobal Strategy
• Product is the same in all countries.• Centralized control - little decision-making
authority on the local level • Effective when differences between countries are
small• Advantages:
– Cost– Coordinated activities– Faster product development
Semiconductor industries often adopt Global Strategy.
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Strategies for Global ExpansionGlobal Strategy• Matsushita is a good example that followed a global strategy. • This strategy resulted in:
– Strong global distribution network – Company-wide mission statement that was followed closely – Financial control – More applied R&D – Ability to get to market quickly and force standards since
individual country buy-in was not necessary.
The global strategy presented Matsushita with the following challenges:
– Problem of strong yen – Too much dependency on one product - the VCR – Loss of non-Asian employees because of glass ceilings
Matsushita Electric Industrial, now Panasonic Corporation, a multinational electronics corporation based in Kadoma, Japan
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Strategies for Global Expansion
• Firms pursuing transnational strategy yield to both the pressures – global integration and local responsiveness.
• The need for global integration creates pressures for centralizing some operating decisions (particularly production and R&D).
• At the same time, the need to be locally responsive creates pressures for decentralizing other operating decisions to subsidiaries (particularly marketing).
• Consequently, these companies tend to mix relatively high degrees of centralization for some operating decisions with relatively high degree of decentralization for others.
• These firms tend to operate with matrix type structures in which both product division and areas have significant influence.
Transnational Strategy
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Strategies for Global Expansion
• P&G is one example of an MNC which is pursuing the transnational strategy.
• Starting with multi-domestic strategy in 1980s, by 1990s the largest soaps and detergents manufacturer switched to transnational strategy.
• P&G now co-ordinates its skills and resources to reduce cost across countries and increase its differentiation advantage inside each country as well. The new strategy gives P&G a competitive advantage over its arch rival, Unilever.
Transnational Strategy
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