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ADMS 4900 Class 7. Strategic Management Part I. Exam Details. Sat Dec 5th from 9:30 - 12:30 Room is now CLH D   3 Hours bring your casebook . Case – Palliser Furniture. Case – Palliser Furniture. Global Strategies and International Advantage. Outline.

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ADMS 4900 Class 7

Strategic Management Part I


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Exam Details

Sat Dec 5th from 9:30 - 12:30

Room is now CLH D  

3 Hours bring your casebook





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Outline

Terminology of International Business

The Context of International Strategy

National Competitive Advantage

The Internationalization Process

From International to Global Strategies

The Drivers of Globalization


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Outline (continued)

Global vs. Local

Strategic Choices

The Best of Both Worlds

Strategy and Organization

Managing International Organisation


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The Terminology of International Business

Multinational Enterprises: Companies with subsidiaries located in more than one country, normally restricted to the largest international firms.


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The Terminology of International Business

Exxon Toyota

Wal-Mart Mitsui

GM Citygroup

Ford

Daimler

Shell

BP

GE

Mitsubishi


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The Terminology of International Business

Foreign Direct Investment: capital invested in other nations by firms through their control of foreign subsidiaries and affiliates.



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The Terminology of International Business

International Business: Transactions across national borders.

International Trade: exporting and importing




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National Competitive Advantage

Innovation was not dues to just firm strength, but the success of nations.

Factors include

Local supply (factor) conditions and demand.

Related industries



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Factor conditions

Demand conditions

Related and supporting industries

Firm strategy, structure, and rivalry

Factors Affecting a Nation’s Competitiveness


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Factor conditions

Factors Affecting a Nation’s Competitiveness

  • Nation’s position in factors of production

    • Skilled labour

    • infrastructure

  • To achieve competitive advantage, factors of production must be created

    • Industry specific

    • Firm specific

    • Pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed


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Demandconditions

Factors Affecting a Nation’s Competitiveness

  • Nature of home-market demand

    • Industry’s product

    • Industry’s service

  • Demands that consumers place on an industry for goods and services

    • Demanding consumers push firms to move ahead of companies from other nations

    • Demanding consumers drive firms in a country to

      • Meet high standards

      • Upgrade existing products and services

      • Create innovative products and services


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Factors Affecting a Nation’s Competitiveness

Presence or absence in the nation of internationally competitive

Supplier industries

Other related industries

Related and supporting industries

  • Enable firms to manage inputs more effectively

    • Strong supplier base adds efficiency to downstream activities

    • Competitive supplier base lets a firm obtain inputs using cost-effective, timely methods

  • Allow joint efforts among firms

  • Create the probability that new entrants will enter the market


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Firmstrategy, structure, and rivalry

Factors Affecting a Nation’s Competitiveness

  • Conditions in the nation governing how companies are

    • Created ; Organized; Managed

  • Nature of domestic rivalry

  • Rivalry is intense in nations with conditions of

    • Strong consumer demand ;Strong supplier bases

    • High new entrant potential from related industries

  • Competitive rivalry increases the efficiency with which firms develop, market, and distribute products and services within the home country

  • Competitive rivalry increases the efficiency with which firms

    • Develop within the home country

    • Market within the home country

    • Distribute products and services within the home country


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Firm Strategy, Structure and Rivalry

Competitive rivalry increases the efficiency with which firms

Develop within the home country

Market within the home country

Distribute products and services within the home country

Domestic rivalry provides a strong impetus for firms to

Innovate

Find new sources of competitive advantage

Domestic rivalry forces firms to look beyond national borders for new markets

Firm strategy, structure, and rivalry


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Porter’s Diamond of National Advantage: As Applied to India

Adapted from Exhibit 7.1 India’s Virtual Diamond in Software


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Internationalization Process India

Companies that peruse an internationalization strategy create value by transferring skills and products to foreign markets.

R&D is done at home, but manufacture often takes place in place.

  • Marketing and strategy is a head office function.


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Why go International? India

  • Diversity against home market risks

  • Tap into growing markets

  • Follow competition

  • Reduce costs (manufacturing)

  • Overcome trade barriers

  • Protect intellectual property rights.


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A Company’s Motivation for International Expansion India

Increase the size of potential markets

Attain economies of scale

Extend the life cycle of a product

Optimize the physical location for every activity in its value chain

Performance enhancement

Cost reduction

Risk reduction


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Potential Risks of International Expansion India

Political and economic risk

Social unrest

Military turmoil

Demonstrations

Violent conflict and terrorism

Laws and their enforcement

Currency risks: Currency exchange fluctuations

Management risks : Culture ; Customs; Language

Income levels

Customer preferences

Distribution system


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Opposing Pressures and Four Strategies India

Exhibit 7.5 Opposing Pressures and Four Strategies



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International Strategy India

Pressure for both local adaptation and low costs are rather low

Different activities in the value chain have different optimal locations

Susceptible to higher levels of currency and political risks


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Global Strategy India

Competitive strategy is centralized and controlled largely by corporate office

Emphasizes economies of scale

Advantages

Larger production plants

Efficient logistics and distribution networks

Supports high levels of investment in R&D

Standard level of quality throughout the world


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Global Strategy India

  • Disadvantages

  • Concentration on scale-sensitive resources and activities in one or few locations leads to higher transportation and tariff costs

  • Activity is isolated from targeted markets

  • The rest of the firm becomes dependent on that geographically isolated location


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Multidomestic Strategy India

Emphasis is differentiating products and services to adapt to local markets

Authority is more decentralized

Risks include

Increased cost structure

Potential problems with local adaptations

Finding optimal degree of local adaptation is difficult


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Transnational IndiaStrategy

Optimization of tradeoffs associated with efficiency, local adaptation, and learning

Firm’s assets and capabilities are dispersed according to the most beneficial location for a specific activity

Avoids the tendency to either

Concentrate activities in a central location

Disperse them across many locations to enhance adaptation

Unique risks and challenges

Choice of an “optimal” location cannot guarantee that the quality and cost of factor inputs will be optimal

Knowledge transfer can be a key source of competitive advantage, but it does not take place automatically


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Transnational Strategies India

“Exploit experience-based cost economies and location economies, transfer distinctive competences within the company, and at the same time pay attention to pressures for local responsiveness”

(Bartlett and Ghoshal, 1989)


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Strengths and Limitations of Various Strategies India

Strategy Strengths Limitations

  • Leverage and diffuse parent’s knowledge and core competencies.

  • Lower costs because of less need to tailor products and services.

  • Greater level of worldwide coordination

International

  • Limited ability to adapt to local markets.

  • Inability to take advantage of new ideas and innovations occurring in local markets.

Global

  • Strong integration across various businesses.

  • Standardization leads to higher economies of scale which lowers costs.

  • Helps to create uniform standards of quality throughout the world.

  • Limited ability to adapt to local markets.

  • Concentration of activities may increase dependence on a single facility.

  • Single locations may lead to higher tariffs and transportation costs.

Exhibit 7.6 Strengths and Limitations of Various Strategies


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Strengths and Limitations of IndiaVarious Strategies

Strategy Strengths Limitations

Multi-domestic

  • Ability to adapt products and services to local market conditions.

  • Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue.

  • Less ability to realize cost savings through scale economies.

  • Greater difficulty in transferring knowledge across countries.

  • May lead to “over-adaptation” as conditions change.

Transnational

  • Ability to attain economies of scale.

  • Ability to adapt to local markets.

  • Ability to locate activities in optimal locations.

  • Ability to increase knowledge flows and learning.

  • Unique challenges in determining optimal locations of activities to ensure cost and quality.

  • Unique managerial challenges in fostering knowledge transfer.

Exhibit 7.6 Strengths and Limitations of Various Strategies


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The Internationalization Process India

This chart shows the progression in internationalization from licensing (minimum), to foreign direct investment (maximum).


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Entry Modes of International Expansion India

High

Low

Wholly Owned

Subsidiary

Joint Venture

Strategic Alliance

Extent of Investment Risk

Franchising

Licensing

Exporting

LowHigh

Degree of Ownership and Control

Adapted from Exhibit 7.7 Entry Modes for International Expansion


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Exporting India

Relatively inexpensive way to enter foreign market

Minimal risk

Successful distributors

Carry product lines that complement the multinational’s products

Behave as if they are business partners with the multinationals.

Invest in training, information systems, and advertising and promotion


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Licensing and Franchising India

Franchisor receives a royalty or fee

Franchisee gets to use trademark, patent, trade secret or other valuable intellectual property

Disadvantages

Loss of control over its product

Licensee may become a competitor

Threat to brand name and reputation of products

Advantages

Limited risk exposure

Expanded revenue base


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Strategic Alliances and Joint Ventures India

Partnerships that enable firms to share risks and potential revenues and profits

Partners

gain exposure to new knowledge and technologies

Develop core competencies that can lead to competitive advantages

Gain information on local markets conditions


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Strategic Alliances and Joint Ventures India

  • Partnerships that enable firms to share risks and potential revenues and profits

  • Risks

    • Needs to be clearly defined strategy supported by both partners

    • Needs to be clear understanding of capabilities and resources that will be central to the partnership

    • Must be trust between partners


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Wholly Owned Subsidiaries India

Business owned by only one multinational company

Acquire an existing company in the home country

Develop a totally new operation (greenfield venture)

Most expensive and risky of all global entry strategies

Greatest control over all activities


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A little on Globalization & Trade… India

INTERNATIONAL TRADE

Attempts to improve balance of payments between countries.

Use of differential tariffs.

Trade policy has become the source of many international disputes.


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General Agreement on Tariffs and Trade - GATT (1947) India

Goal was to minimize new existing trade barriers

Reduce import tariffs and quotas

To abolish preferential trade agreements between member countries

Tariff concessions were negotiated on the principle of reciprocity. (you scratch my back I’ll scratch yours).


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Uruguay Round of GATT India

The goal was the eventual reduction of tariffs by 33%

Tried to reduce or eliminate many non-tariff impediments.

Strengthen protection for intellectual property.

Open trade in investments and services

Establish the World Trade Organization (W.T.O.)


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WORLD TRADE ORGANIZATION - W.T.O. India

Operates a dispute settlement process

Possesses stronger power to enforce agreements

Has the authority to issue trade sanctions against a country that refuses to revoke an offending law or practice.


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The GATT and Trade Debate India

SUPPORTERS

GATT would improve the overall business environment.

Would create jobs

Would stimulate trade and investment.

Would allow countries to lever their natural competitive advantages.

OPPONENTS

GATT would result in massive losses of manufacturing jobs

Would result in lower pay for workers in developed countries.

Opportunities would threaten the sovereignty of countries.

The powerful W.T.O.


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NAFTA Debate India

“The rhetoric is getting more vituperative. Now, they're talking about abrogating (the agreement). That would be a disaster for American jobs“

Frank Vargo, VP for trade policy at the National Association of Manufacturers.


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Trading Communities India

To promote trade among countries that have common economic and political interest or are located in a particular region.

They favor member counties over non-member countries.

The Commonwealth of Nations

The North American Free Trade Agreement

European Union


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International Trade India

In 1990, International trade was approximately $8.76 trillion (US), double that of 1980.

Driven by inflation and higher prices for commodities, the value of international trade in the United States increased nearly tenfold between 1958 and 1985.


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The Growth of International Trade India

Floating currency exchange rates were adopted in 1973.

In the 1970s and 1980s, price competition between trading partners was augmented by the resulting fluctuations in exchange rates.

The depreciation of a country's currency making exports appear cheaper and causing imports to appear more expensive.

This affects a country's balance of trade.


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Back to business… What Strategy? India

Multidomestic Strategy

Competition in one country is independent of competition elsewhere.

Markets in each country have different consumer behaviour.

Portfolio of independent subsidiaries

Leads to product diversity.


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From International to Global Strategy India

Global Strategy

Competition in one country influenced by competition elsewhere.

Markets and consumer behaviour broadly similar in all countries.

International coordination and integration.

Leads to product standardisation


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Toyota India

Our global strategy used to center on ‘world cars’ which we would modify slightly to accommodate demand in different markets. Today our focus is shifting to models that we develop and manufacture for selected regional markets.


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Why Global? Scale is important but.. India

Exposure to global best practices.

Access to technology

Ability to serve customers

Ability to anticipate competitors

Leaning and knowledge transfer


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Why Global? They are only viable if… India

They serve locals better than the domestics

Are hard to copy

Are sustainable.

Change the economics of the industry

Are capable of further development.


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Concluding Remarks India

International strategy is a significant extension of the logic of competitive advantage.

International trade and national competitive advantage are key parts of the business environment

International trade underpinning internationalization.

Globalization promoting international standardization.


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Concluding Remarks India(continued)

International business strategy involves the management of standardization and differentiation.

Attempts to gain the ‘best of both worlds’ have involved have resulted in great success for some companies, disaster for others.



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Outline India

Characteristics of the ‘new’ economy

The new world of network industries

Network externalities

Winner takes all markets

Technology and standards

Consumer networks

Networks, standards and competition

The implications for strategy


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Characteristics of the ‘Old’ Economy India

‘Old’ Economy

Economies of scale and scope

Diminishing returns to scale

Mature economies dominate

Competitive behaviour


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Characteristics of the ‘New’ Economy India

‘New’ Economy

Network externalities – ‘winner takes all’

Increasing returns to scale

Opportunities for developing countries

Co-operative behaviour


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Network Industries India

The value of a good is influenced by the aggregate consumption of all goods in the market and in related markets

Normally positive relationship.

Examples:

Phones

Railways

Electricity

Computer operating systems

(Economides and Flyer 1997)


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Types of Network India

  • Star Network

  • Is a collection of nodes that are clustered around a central resource.

  • Local Telephone exchange

  • Office Network Hub


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Types of Network India

  • Crystal Network

  • Where information can travel into one central hub, then outward into interconnecting centers.


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Network Externalities India

The increasing utility that a user derives from consumption of a product as the number of other users who consume the same product increases.

(Katz and Shapiro 1985)



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Lock-in and Switching Costs India

Consumers invest in complementary and durable assets;

Costs of switching to an alternative prohibitive;


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Lock-in and Switching Costs India

Switching costs higher where network externalities are present as collective switching is needed to compensate for network benefits.

Examples:

Microsoft Windows-Intel-Microsoft Office

VHS versus Betamax


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The Impact of Strong Network Externalities India

Very large asymmetries between firms/platforms

Likelihood of market dominance

Enhancement and protection of proprietary standards


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Implications for Strategy India

Expectations management central to marketing

Open standards is key to volume

First strategic choice is which network to join

Networked complementarities and cooperative strategies

Increased role of brands and marketing to lead customers to preferred network


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Concluding Remarks India

Network externalities becoming more prominent with growth of ICT.

First mover advantage and dominant position becomes critical.

Achieve a dominant position, or be prepared to give ground.


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