Global Strategy Formulation

Global Strategy Formulation

• “Going global”– Gradual process – Core competencies, mission, structure, culture, and

processes of international corporations evolve in the creation of global corporations.

– Truly global Strategies are extremely rare. – To create a vision a company must accurately define

what globalization means for its particular business.– Each company and industry will have very different

requirements for global success.

Globalization And Industrial Clustering

• Clustering- some countries or regions of the world are more efficient than others in producing particular goods which causes a clustering of competing firms. – Reasons for clustering are: natural resources,

concentration of buyers, transportation cost, labor cost, local government laws, etc.

Porter’s National Diamond

Porter’s National Diamond helps explain why particular regions attract certain global industries.

Factor Conditions• What is the degree in which the country or

regions endowments match the characteristics and requirements of the industry.

• Two forms of endowments– Natural conditions (ex: climate, minerals)– Created conditions (ex: skill levels, capital,

infrastructure)• If a industry is highly profitable and barriers to

entry are low, the forces of imitation and diffusion cause such and industry to spread across international borders.

Industry Globalization Drivers

IndustryGlobalization

Potential

Economic Drivers (cost)•Nature of industry•Economies of scale/location•Differences in country costs

Competitive Drivers•Interdependence between countries/regions•Globalization of competitors

Market Drivers•Evolution of customer needs•Global customers•Global channels•Transferability of marketing

Government Drivers•Trade barriers•Regulatory climate•Technology/standards

Industry Globalization Drivers are underlying conditions that create the potential for an industry to become more global.

Market Drivers• Market drivers are measures that define how customer behavior patterns evolve and

converge.

• Market drivers are important because they indicate whether…– worldwide channels of distribution can develop– market platforms are transferable– “lead” countries can be identified in which most innovation takes place

• Many forces push companies to think more globally in order to…– meet foreign competition head on– better serve an increasingly global customer base – exploit diverse capabilities and cost advantages– take advantage of an easing global environment

• Example: HDTV

Cost Drivers• Cost drivers are factors that define the opportunity for global scale or scope economics,

sourcing efficiencies reflecting differences in costs between countries and regions, and technology advances. They shape the economics of an industry.

• In many different industries, the minimum sales volume required for cost efficiency might not be available in a single country or region anymore.

• Example: Pharmaceutical industry– The development of many new drugs can no longer be justified on the basis of the economic returns from a single

country.– Exploiting differences in costs for product development, manufacturing, and sourcing in different parts of the world

have become critical to success. (R&D)

• Determining which parts of the value chain are your cost drivers also assists in assessing the need for mergers and acquisitions and guides the development of key alliances.

Competitive Drivers• Competitive drivers are defined by the actions of competing firms--the extent to which

competitors from different continents enter the market, globalize their strategies and corporate capabilities, and create interdependence between geographical markets.

• The globalization potential of an industry is also influenced by competitive drivers such as…(1) the degree to which total industry sales are made up by export/import volume(2) the diversity of competitors in terms of their national origin(3) the extent to which major players have globalized their operations and created an interdependence between their competitive strategies in different parts of the world

• Some useful questions to ask when analyzing global competitive drivers are…– How many competitive arenas does our company compete in?– Do we mainly face the same competitors in different parts of the world?– Do competitors employ similar strategies in the different arenas?– How necessary is it to coordinate competitive responses on a global scale?

Government Drivers• Government drivers include such factors as favorable trade policies, a benign regulatory

climate, and common product and technology standards. The presence or absence of these factors have a direct influence on a company’s global strategic options.

• As the politics and economics of global competition have become more closely intertwined, companies are paying greater attention to the nonmarket dimensions of their global strategies in an attempt to shape the global competitive environment to their advantage.

• EXAMPLE: Telecommunications industry-Falling trade barriers and other deregulatory moves have encouraged companies to pursue more global approaches to their business. ( Outsourcing)

Global Strategy Formulation

• Four types:– Multinational– International– Global– Transnational

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

– Ex: Nestle- Allows the company to adapt to differences in local taste preferences and distribution structures

– Most strategic and operating decisions are made at the local level

Global Strategy Formulation• International

– Industries in which global strategic advantage depends on• 1. Effectively developing new products in home market• 2. Diffuse innovations to foreign markets through affiliate

organizations• Example: High Technology Companies

• Global or Transnational– When some degree of standardization is possible– Example: Coca-Cola, McDonalds– Some parts of the value chain are standard and others are

tailored to local needs– Implementation can be hard due to difficult coordination

Global Strategy Dimensions

• 1. Market Participation• 2. Standardization/Positioning• 3. Activity Concentration• 4. Coordination of decision making• 5. Non-market factors

Market Participation

• It is too expensive to enter every market available

• Companies must weigh the relative advantages of a direct or indirect presence

• Midsize companies- key is to create a worldwide resource network through alliances

• Good strategies- highly selective in participation, realistic target market and profit objectives, and balance stretch with current capabilities

Market Participation, Continued

• “Must” Markets– Markets in which a company must compete to

realize its global ambitions

• “Nice-to-be-in” Markets– Desirable, not critical

• Other factors:• Developing global presence takes time & resources• Pace of international expansion depends on customer

demand

Standardization/Positioning• Motivations for standardization

– Reducing cost & enhancing quality

• Adopting a more global market positioning is another form of standardization– Ex: Disney, IBM– Global Branding

Global Mix Global Offer

Global Message Global Change

Global Branding Matrix

Global Mix Global Offer

Global Message Global Change

Standardized

OFFER

Tailored

Standardized Tailored

MESSAGE

Activity Concentration

• Companies must ask themselves 3 questions:– What parts of the value-creation process to keep in-house

and which to outsource?– Can we streamline our value-creation process by

eliminating duplicate operations in other parts of the world?

– Can we relocate value added activities to more cost-effective locations?

Coordination of Decision Making

• Involves aligning company resources (management, capital, and personnel) to work towards a common goal in order to collectively answer important questions:– What markets do we participate in?– How should resources be allocated?– How do we compete?

“Many companies have found that integrating and coordinating activity on a global scale is at least as important as control” (SAVFTT pg. 188)

Nonmarket Demensions

• Increasingly, global corporate success is influenced by nonmarket factors that are governed by social, political, and legal arrangements. Different countries have vastly different political, economic, and legal systems. An effective global strategy addresses both elements; it has market dimensions that seek to create value through economic performance and nonmarket strategy dimensions aimed at unlocking competitive opportunity.

Entry Strategies

• Exporting – low risk, but has high costs when compared to the small amount of control over marketing and distribution. Does not allow firsthand experience in staking out a competitive position abroad.

• Licensing – low cost and carries limited risk, but issuing firm has low control and limited returns.

• Joint Ventures – allow risk sharing and give the firm some degree of flexibility. Profits must also be shared.

• Acquisitions/Startups – the ultimate commitment. Firm has all the risk, but if successful enjoys all the return.

International Entry Strategies

Ownership

Entry Cost

Start-up

Joint Ventures

Licensing

Exports

SAVFTT Page 190

Region/Country Analysis• Political and Social Systems

• Openness

• Product Markets

• Labor Markets

• Capital Markets

Wal-Mart: Global Opportunity

• Driven by need to grow.

• Relation between employees and stock.

• Two key resources that aided global expansion.

Wal-Mart: Target Markets

• Stages of expansion.

• Stage 1: 1991-1995

• Stage 2: 1996 to present

Mode of Entry

• Wal-Mart– Chose an acquisition to enter Canada.

• Very similar markets.

– Used a 50-50 Joint venture to enter Mexico• Needed to expertise of Mexico’s largest retailer, Cifra,

due to the income and cultural differences.

– Chose two different strategies in South America. Went with a 60-40 joint venture in Brazil and a wholly owned subsidiary in Argentina.

Global Transfer of Skills

• Wal-Mart was able to get Canada’s Woolco out of the red by using a US model. Within three years, they were the leading discount retailer in Canada.

• The transition included Wal-Mart sending a team to help employees understand “the Wal-Mart way”, renovating every store, and familiarizing customers with low prices, good customer service, and a broad mix.

Local Adaptation

• Wal-Mart had many difficulties in China and had to experiment many different approaches that would best align with the Chinese culture.– There were low levels of disposable income and

unpredictable government policies and regulations they had to deal with.

– Adaptations was vital. Wal-Mart created smaller stores, hybrid stores, carried more products and different foods.

Local Competition• Acquiring a dominant player.

– Wetkauf hypermarket chain in Germany. Competing against them would not have been a good strategy.

• Acquiring a weak player.– Woolco in Canada. Is a good strategy if the company

can turn the weak player into a strong player.

• Launching a frontal attack on the incumbent.– Carrefour in Brazil. Created a price war, especially

with food, so Wal-Mart had to focus on customer service and merchandise mix. Only a good strategy if you have a huge competitive advantage.

Gains and Setbacks• Wal-Mart’s international stores account for

around 40% of their stores, but less than 25% of their profits. It’s a huge “playground” so to speak. Their global strategies have not always been successful though…– Wal-Mart in Germany. Had to sell it’s stores and

lost over $1 billion because they were not able to achieve the economies of scale they needed.

Global Strategy and Risk

• Political Risk – relates to politically induced actions and policies initiated by a foreign government– Can be broken into two sub-categories: Global risk and

country-specific risk

• Legal Risk – is assessed by analyzing the foundations of a country’s legal system and determining whether or not the laws are properly enforced– Numerous countries have laws protecting multinational’s

rights, but are rarely enforced

Global Strategy and Risk

• Financial/Economic Risk – comparable to operating and financial risk at home– Currency competitiveness and fluctuation

• Societal/Cultural Risk – involves understanding elements such as the standard of living, patriotism, religious factors, or the presence of charismatic leaders.

Global Strategy and Risk

• Exploiting Similarities and Differences– “How much to adapt the business model—how much to

standardize from country to country versus how much to localize to respond to local differences”—defines global strategy in terms of exploiting similarities.

– A single focus on possible tradeoffs between global scale economies and local considerations obscures strategic opportunities bases on the exploitation of differences.

– arbitrage