Global

Strategy

Dr. Mohammad Hamsal

The Global and National

Environments
The trend toward globalization has many
implications:

1. Industries are becoming global in scope

Industry boundaries no longer stop at national
borders.

2. Shift from national to global markets

This has intensified competition in industry after
industry.

3. Steady decline in barriers to crossborder trade and investment

This has opened up many once protected

markets to companies based outside of them.
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National Competitive Advantage

Porters diamond:
1. Companies from a
given nation are
most likely to
succeed in
industries in which
the four attributes
are favorable.
2. The attributes form
a mutually
reinforcing system
in which the affect
of one attribute is
dependent on the
state of the others.
Source: Adapted from M.E. Porter, The Competitive Advantage
of Nations, Harvard Business Review, March-April, 1990, p. 77.

National Competitive Advantage

The attributes of Porters diamond:
1. Factor Endowments or Conditions
The cost and quality of factors of production
Basic factors: land, labor, capital, and raw material
Advanced factors: technological, managerial, infrastructure

2. Local Demand Conditions

Home demand plays an important role in the impetus for upgrading
competitive advantage.
Companies are most sensitive to the needs of their closest
customers.

3. Competitiveness of Related and Supporting Industries

The spill-over benefits from investments by supporting industries

4. Intensity of Rivalry
Different nations characterized by different management ideologies
Strong association between vigorous domestic rivalry and the
creation and persistence of competitive advantage in an industry
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Increasing Profitability Through

Global Expansion
Expanding the market by leveraging products
Taking goods or services developed at home and selling them
internationally

Cost economies from global volume

Economies of scale, lower unit costs

Location economies
Economic benefits from performing a value creation activity in the
optimal location
Leveraging the skills of global subsidiaries
Applying these skills to other operations within firms global network

Must also consider transportation costs, trade

barriers, as well as the political and economic risks.
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Pressures for Cost Reductions

and Local Responsiveness
The best strategy for a
company to pursue may
depend on the kinds of
pressures it must cope
with:
Cost Reductions or
Local Responsiveness

Pressures for Cost Reductions

Pressures for cost reductions are greatest in
industries producing commodity-type products
where price is the main competitive weapon:
Where differentiation on
non-price factors is difficult
Where competitors are
based in low-cost location
Where consumers are
powerful and face low switching costs
Where there is persistent excess capacity
The liberalization of the world trade and
investment environment
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Pressures for Local

Responsiveness
The greatest pressures for local responsiveness
arise from:
Differences in customer
tastes and preferences
Differences in
infrastructure and
traditional practices
Differences in
distribution channels
Host government
demands
Dealing with these contradictory pressures is a
difficult strategic challenge, primarily because
being locally responsive tends to raise costs.
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Four Basic Strategies

Companies typically
choose among the
four main global
strategic postures
when competing
internationally.
The appropriateness
of each strategy
varies with the extent
of pressures for cost
reduction versus
local responsiveness.

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Choosing a Global Strategy

Standard Globalization Strategy

Reaping the cost reductions that come from economies

of scale and location economies

Business model based on pursuing a low-cost strategy
on a global scale
Makes the most sense when there are strong pressures for
cost reduction and the demand for local responsiveness is
minimal

Localization Strategy

Customizing the companys goods or services so that

they provide a good match to tastes and preferences in
different national markets
Most appropriate when there are substantial differences
across nations with regard to consumer tastes and
preferences and where cost pressures are not too intense
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Choosing a Global Strategy

Transnational Strategy

Difficult to pursue due to its conflicting demands

Business model that simultaneously:
Achieves low costs Differentiates across markets
Fosters a flow of skills between subsidiaries
Building an organization capable of supporting a
transnational strategy is a complex and challenging task.

International Strategy

Multinational companies that sell products that serve

universal needs (minimal need to differentiate) and do not
face significant competitors (low cost pressure).
In most international companies the head office retains tight
control over marketing and product strategy.
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Changes in Strategy over Time

Over time, competitors inevitably
emerge. Companies that do not
take steps to reduce their cost
structure may be outflanked by
efficient global competitors.

As competition intensifies,
companies need to orientate
toward either a Standard
Globalization or a Transnational
strategy.

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Basic Entry Decisions

1. Which overseas markets to enter (WHERE)

Assessment of long-run profit potential

Balancing the benefits, costs, and risks associate
with doing business in a country

2. Timing of entry (WHEN)

First-mover advantages: preempt and build share

First-mover disadvantages: pioneering costs

3. Scale of Entry (HOW)

Entering on a large scale is a major strategic

commitment
Benefits and drawbacks of small-scale entry

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The Choice of Entry Mode

1. Exporting
Most manufacturing companies begin their global expansion as
exporters and later switch to one of the other modes.

2. Licensing
A foreign licensee buys the rights to produce a companys product
for a negotiated fee; licensee puts up most of the overseas capital.

3. Franchising
Franchising is a specialized form of licensing. The franchiser not
only sells intangible property, but also insists that franchisee agrees
to follow strict rules as to how it does business.

4. Joint Ventures
Typically a 50/50 venture a favored mode for entering a new market

5. Wholly-Owned Subsidiaries
Parent company owns 100% of subsidiarys stock setup or acquire

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Advantages and Disadvantages

of Different Entry Modes

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Choosing Among Entry Modes

Distinctive Competencies and Entry Mode
Optimal mode of entry depends on the nature of the companys
distinctive competency:

Technological know-how
Wholly-owned subsidiary is preferred over licensing and joint
ventures to minimize risk of losing control.

Management know-how
Franchising, joint ventures, or subsidiaries are preferred as risk
is low of losing management know-how.

Pressures for Cost Reduction and Entry Mode

The greater the cost pressure, the more likely a company will want to
pursue some combination of exporting and wholly-owned subsidiary:

Export finished goods from wholly-owned subsidiary

Marketing subsidiaries for overseeing distribution
Tight control over local operations allows company to use profits
generated in one market to improve position in other markets.
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