Global Expansion Strategies for Profit Growth

1. 8 Chapter 8: Strategy in the Global Environment BA 469 Spring Term, 2007 Prof. Dowling

2. Increasing Profitability Through Global Expansion • Location economies • Economic benefits from performing a value creation activity in the optimal location • Effects • Can lower costs • Can enable differentiation • Caveats • Transportation costs and trade barriers • Political and economic risks

3. Increasing Profitability Through Global Expansion (cont’d) • The experience curve • Serving a global market from one or a few plants is consistent with moving down the experience curve and establishing a low-cost position • Transferring distinctive competencies • Companies with distinctive competencies can realize large returns by expanding to global markets where competitors lack similar competencies and products

4. Increasing Profitability Through Global Expansion (cont’d) • Leveraging the skills of global subsidiaries • Competencies can be created anywhere within a multinational’s global network of operations • Managers must establish an incentive system to encourage local employees to acquire new competencies • Managers must have processes in place to identify valuable new competencies and help transfer them within the company

5. Pressures for Cost Reductions and Local Responsiveness

6. Pressures for Cost Reductions • When companies produce commodity products • Where differentiation on nonprice factors is difficult and price is the main competitive weapon • Where competitors are based in low-cost locations • Where there is persistent excess capacity • Where consumers are powerful and face low switching costs • The liberalization of the world trade and investment environment

7. Pressures for Local Responsiveness • Differences in customer tastes and preferences • Differences in infrastructure and traditional practices • Differences in distribution channels • Host government demands

8. Four Basic Strategies

9. Choosing a Global Strategy • International strategy • Creating value by transferring competencies and products to foreign markets where indigenous competitors lack those competencies and products • Makes sense if a company has a valuable competence that indigenous competitors in foreign markets lack and if it faces weak pressure for local responsiveness and cost reductions

10. Choosing a Global Strategy (cont’d) • Multidomestic strategy • Developing a business model that allows a company to achieve maximum local responsiveness • Makes sense when there are high pressures for local responsiveness and low pressures for cost reductions • Companies may become too decentralized and lose the ability to transfer skills and products

11. Choosing a Global Strategy (cont’d) • Global strategy • Focusing on increasing profitability by reaping cost reductions that come from experience curve effects and location economies; pursuing a low-cost strategy on a global scale • Makes sense when there are strong pressures for cost reductions and demand for local responsiveness is minimal

12. Choosing a Global Strategy (cont’d) • Transnational strategy • Simultaneously seeking to lower costs, be locally responsive, and transfer competencies in a way consistent with global learning

13. Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar

14. Advantages and Disadvantages of Different Strategies for Competing Globally

15. Basic Entry Decisions • Which overseas markets to enter • Assessment of long-run profit potential • A function of the size of the market, purchasing power of consumers, the likely future purchasing power of consumers • Balancing the benefits, costs, and risks associate with doing business in a country • A function of economic development and political stability

16. Basic Entry Decisions (cont’d) • Timing of entry • First-mover advantages • First-mover disadvantages • Scale of entry and strategic commitments • Entering on a large scale is a strategic commitment, both positive and negative • Benefits and drawbacks of small-scale entry

17. The Choice of Entry Mode • Exporting • Licensing • Franchising • Joint ventures • Wholly-owned subsidiaries • Choosing Among Entry Modes

18. The Advantages and Disadvantages of Different Entry Modes

19. Choosing Among Entry Modes • Distinctive competencies and entry mode • Technological competency • Wholly-owned subsidiary is preferred over licensing and joint ventures • Management competency • Franchising, joint ventures, subsidiaries • Pressures for cost reduction in entry mode • Great pressure for cost reductions • Exporting and wholly-owned subsidiaries

20. Global Strategic Alliances • Advantages • Facilitate entry into a foreign market • Share fixed costs and associated risks • Bring together complementary skills and assets • Set technological standards to the industry • Disadvantages • Give competitors a low-cost route to gain new technology and market access

21. Making Strategic Alliances Work: Partner Selection • A good partner: • Helps the company achieve strategic goals • Shares the firm’s vision for the purpose of the alliance • Is unlikely to try to exploit the alliance to its own ends • Conduct research on potential partners

22. Structuring Alliances to Reduce Opportunism

23. Making Strategic Alliances Work: Managing the Alliance • Sensitivity to cultural differences and their effects on management style • Building interpersonal relationships among managers from different companies • Ability to learn from alliance partners and put the knowledge to good use