Global Strategy and Profit Growth

Global Strategy

• International expansion is a way of maximizing returns by leveraging skills and product offerings in markets where local competitors lack these advantages.
• Globalization impacts industries, shifting boundaries beyond national borders and intensifying competition across industries.
• Cross-border trade and investment barriers are declining, opening up previously protected markets to international companies.

Profit Growth Through Global Expansion

• Expanding markets leverages home-developed products and services through international sales.
• Utilizing distinctive competencies in production and marketing is crucial.
• Globally scaled operations provide economies of scale, leading to reduced unit costs
• Location economies are achieved by performing value-creation activities in the optimal locations (e.g., leveraging skills of global subsidiaries).
• Transportation costs, trade barriers, political and economic risks need thoughtful consideration.

Pressures for Cost Reduction and Local Responsiveness

• Cost Reductions: Intense in commodity-type product industries where pricing is the primary competitive factor and non-price factors are less important.
• Cost reductions are driven by low-cost locations, powerful consumers, and low switching costs. Excess industry capacity also fuels cost pressures.
• Local Responsiveness: Greatest pressures arise from variations in consumer tastes and preferences, diverse infrastructure and traditional practices, differing distribution channels, and host government demands.

Choosing a Global Strategy

• Standard Globalization Strategy: A low-cost strategy that leverages economies of scale and location economies, where local responsiveness isn't crucial .
• Localization Strategy: A strategy to customize goods/services to match country-specific tastes and preferences, appropriate when significant differences exist across markets and cost pressure is manageable.
• Transnational Strategy: A complex strategy that seeks to achieve low costs and differentiation, simultaneously. This strategy mandates the flow of skills between subsidiaries.
• International Strategy: A strategy to sell products tailored to universal needs where there is minimal need to differentiate and limited competition.
• Tight control over marketing and product strategy by the head office is common.

Basic Entry Decisions

• Market Entry: Assessing long-term profit potential (market size, consumer purchasing power) while weighing costs and risks associated with market entry.
• Timing: Considering first-mover advantages (preempting competition, building market share), versus first-mover disadvantages (pioneering costs).
• Scale of Entry: The benefits and drawbacks of large-scale (major strategic commitment) versus small-scale market entry need to be carefully evaluated.

Choice of Entry Mode

• Exporting: Beginning global expansion as an exporter, with potential later shifts to other modes, such as licensing, franchising, joint ventures, or wholly-owned subsidiaries.
• Licensing: A foreign licensee purchases rights to produce a company's product, providing a lower capital investment to start in a new market.
• Franchising: A more specific form of licensing where the franchiser demands strict adherence to business practices.
• Joint Ventures: A 50/50 joint venture is one favored mode for entering new markets.
• Wholly Owned Subsidiaries: The parent company owns 100% of the subsidiary's stock.

Advantages and Disadvantages of Entry Modes

• Exporting: Advantages include economies of scale, disadvantages include high transport costs, trade barriers, and potential issues with local marketing agents.
• Licensing: Advantages include low development costs and risks, but with disadvantages of restricted control over technology, quality, and strategic coordination.
• Franchising: Similar advantages to licensing (low costs and risk) with disadvantages of lack of control over technology, quality, and strategic coordination.
• Joint Ventures : Advantages are shared development, risk, and knowledge, but disadvantages include reduced control over technology, quality, and coordination.
• Wholly Owned Subsidiaries: High costs and risks, are disadvantages, but this structure provides complete control over technology and coordination.

Choosing Among Entry Modes

• Distinctive Competencies: Technological know-how benefits from wholly-owned subsidiary, while management know-how may favor franchising, joint ventures, or subsidiaries.
• Cost Reduction: Exporting and wholly-owned subsidiaries are often best solutions when dealing with high cost pressures.

Global Strategic Alliances

• Cooperative Agreements: Collaborative agreements among companies from different countries, potentially ranging from contractual arrangements to joint ventures.
• Advantages: Ease of entry, sharing costs, access to skills and assets, and establishing industry standards.
• Disadvantages: Possibility of technology or market access leakage, while opportunism by alliance partners needs to be monitored, and managed accordingly.

Making Strategic Alliances Work

• Partner Selection: Selecting partners who align with strategic goals and avoid exploitation in alliances. Thorough partner screening is crucial.
• Alliance Structure: Adequate risk control, guarding against opportunism by alliance partners is needed.
• Alliance Management: Effective alliance management requires sensitivity to cultural differences and interpersonal relationship skill building to achieve mutually beneficial goals.

Structuring Alliances

• Opportunism Prevention: Reducing the potential harm from opportunistic behavior (expropriation of technology or market access) through well-defined contractual safeguards, skillful technology protection, and alliance partner selection for credibility.