MANAGEMENT POLICY AND STRATEGY SESSION III B

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MANAGEMENT POLICY AND STRATEGYSESSION - III (B)

• Globalization and Global Strategy
• Prof. Sushil
• Department of Management Studies
• Indian Institute of Technology, Delhi
• INDIA
• Email sushil_at_dms.iitd.ernet.in

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IDENTIFYING THE TARGET

• Japanese present in or dominate most product
  categories in consumer electronics
• In less than 20 years Canon, Hitachi, Seiko and
  Honda have established world wide reputation
  equal to those of Ford, Kodak and Nestle
• Strategic intent prevalent among global
  competitors
• Building a global presence
• Defending a Domestic Position
• Overcoming national fragmentation
• World Television Industry
• Japanese- global presence
• US (RCA, GE and Zenith) - Defending domestic
  dominance
• Europe (Philips, CSF Thomson) - overcoming
  national fragmentation

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IDENTIFYIG THE TARGET Contd.

• Loose Bricks - In US
• Japanese Strategy
• - late 1960s - established brand dominance in
  small screen and portable televisions ignored by
  US producers
• 1967 - Largest producer of BW TVs
• 1970 - Closed the gap in colour sets
• Labour and scale advantages
• Labour cost change - as economies develop and
  exchange rate fluctuates.
• Low cost manufacturing location shifting - Japan
  to Korea - to Singapore - Taiwan
• Created strong distribution positions and brand
  franchises
• Evolved into low-cost sourcing to world scale
  volume and world wide brand positions across the
  spectrum of consumer electronics products.

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IDENTIFYIG THE TARGET Contd.

• US Producers
• Believed that Japanese did well due to low cost
  high quality systems.
• Vulnerable as did not understand the changing
  nature of Japanese competitive advantage.
• Did not have presence outside US, so they had to
  fight every market share battle in US.
• Reduced prices at home affected 100 of their
  sales volume but for Matsushita it was only a
  fraction.

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IDENTIFYIG THE TARGET Contd.

• Loose Bricks in Europe
• Philips well known everywhere in the world
  international distribution system, but has own
  problems
• 1970 Restriction in Europe on TV sets
  manufacturing - Japanese supplied picture tubes.
• Sony, Matsushita and Mitsubishi set up local
  manufacturing operations in UK.
• Toshiba and Hitachi found UK partners.
• They had to pay price penalties in moving
  assembly from Far East to Europe for establishing
  European distribution and brand positions.
• Found a loose brick in small screen portables,
  and picture tubes in Europe
• European market was more fragmented.

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IDENTIFYIG THE TARGET Contd.

• Nearly 3 million of total European market in 1976
  Philips was the only one could fund the
  automation of manufacturing and rationalization
  of product lines. However, its tube manufacturing
  spread over seven European countries.
• By 1982 Philips was worlds largest colour TV
  maker and closed the cost gap with Japanese.
• Philips operated through national markets,
  country managers are poorly placed to assess
  global vulnerability. Philips risk responding on
  a local basis to global competition.

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GLOBAL STRATEGY

• Cross - subsidization and retaliation in
• Chemical
• Audio
• Aircraft engine
• Computer
• What determined whether competition was global or
  national
• International cash flows rather than
  international product flows
• Scale economies
• Homogeneous markets
• Global Competition
• Occurs when companies cross-subsidize national
  market share battles in pursuit of global brand
  and distribution positions.

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GLOBAL STRATEGY Contd..

• Global Businesses
• In which the minimum volume required for cost
  efficiency is not available in the companys home
  market.
• Global Companies
• Which have distribution systems in key foreign
  markets that enable cross-subsidization,
  international retaliation, and world scale volume.

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NEW CONCEPTS

• World-wide cost competitiveness - minimum world
  market share to underwrite the appropriate
  manufacturing scale and product-development
  effort.
• Retaliation - minimum market share in a
  particular country to be able to influence the
  behaviour of key global competitors.
• (e.g. 2 to 3 share is too week).
• Home country vulnerability - competitive risks of
  national market share leadership if not
  accomplished by international distribution.
  Rather high market share may have opposite effect
  - support high price levels - foreign competitor
  come under the price umbrella.
• As part of the global strategy distinguish
  between objectives of
• low-cost sourcing
• minimum scale
• a national profile base
• retaliation against a global competitor
• benchmarking products and technology in a
  state-of-the art market

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NEW CONCEPTS Contd..

• Product Families
• Global competition requires a broader corporate
  concept of product line- scrutinize all products
  moving through distribution channels in which its
  products are sold.
• Scope of Operations
• Cost advantage are less durable than brand and
  distribution advantages.
• Investment in world-scale manufacturing not
  linked to global distribution presents untenable
  risks.
• Support investment in core technologies
• Honda - Engine Technology
• Automobiles, Motorcycles, Power tillers,
  Snow-mobiles, Lawnmowers, Power generators

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NEW CONCEPTS Contd..

• Resource Allocation
• SBU Concept
• (GE, 3M, HP)
• Separate manufacturing and marketing subsystems
• Manufacturing local - for global, or
• Manufacturing global, marketing local
• Global competition strategy - HQ
• (Strategic mission, timing of launch, level of
  market share, level of investment, expected cash
  flow)
• Local marketing strategy - National Subsidiary
  (marketing mix).
• Slice the company in many ways
• one way for distribution investments
• another for technology
• another for manufacturing

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GLOBAL INTEGRATION

• Global integration contrasts with the
  multinational approach whereby companies set-up
  country subsidiaries that design, produce and
  market products or services tailored to local
  needs.
• Changes supporting global integration
• growing similarity of what citizens of different
  countries want
• reduction in tariff and non-tariff barriers
• too expensive technology investments to amortize
  in one market only
• global competitors - rules of the game
• Steps for developing global strategy
• Developing the core strategy - the basis of
  sustainable competitive advantage. Unusually
  developed for the home country first.
• Internationalizing the core strategy- through
  international expansion of activities and through
  adaptation.
• Globalizing- the international strategy by
  integrating the strategy across countries

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WHAT IS GLOBAL STRATEGY

• A multi-domestic strategy seeks to maximize world
  wide performance by maximizing local competitive
  advantage, revenues or profits.
• A global strategy seeks to maximize world wide
  performance through sharing and integration.
• Global Strategy Forces
• Global strategy Levers
• Position of Businesses and parent company
• Industry globalisation drivers
• Organisations ability to implant a global
  strategy
• Benefits/costs of global strategy

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Multidomestic and Global Industries
A multidomestic industry is one in which
competition is essentially segmented from country
to country
A global industry is one in which competition
crosses national borders
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Framework of Global Strategy Forces
Position and resources of business and parent
company

• Appropriate setting for global strategy levers
• Majors market participation
• Product standardization
• Activity concentration
• Uniform marketing
• Integrated competitive moves

Benefits/ costs of global strategy

• Industry globalization drivers
• Market factors
• Cost factors
• Environmental factors
• Competitive factors

Organizations ability to implement a global
strategy
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GLOBALIZATION DIMENSIONS

• Dimensions
• Market Participation
• Product Offering
• Location of Value-
• added activities
• Marketing Approach
• Competitive Moves

Multidomestic Strategy No Particular
Pattern Fully customized in each country All
activities in each country Local Stand-alone
by country
Global Strategy Significant share in major
markets Fully standardized worldwide
Concentrated-one activity in each (different
country) Uniform worldwide Integrated across
countries
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MARKET PARTICIPATION

• A pattern of major share in major markets - USA-
  Europe - Japan triad.
• Electrolux Group - Swedish
• Building significant share in major world
  markets.
• Aims to be the first global appliance maker.
• 1986-acquired Zanussi Industries to become top
  producer of appliances in Western Europe.
• Later the year acquired White Consolidated
  Industries the third largest American appliance
  manufacturer.

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PRODUCT OFFERING

• Product standardization to a greater or lesser
  extent. Differing world wide needs can be met by
  adapting the standardized core product.
• Boeing 737
• 1970 - sales began to level off.
• Entered developing countries but product did not
  fit to new environments
• Shortness of run ways, greater softness, lower
  technical expertise of pilots - planes tend to
  bounce during landing, the brakes failed.
• Modified the design - adding thrust to engines,
  redesigning wings, landing gear, tires with lower
  pressure.
• These adaptations to core product enabled 737 to
  be best selling plane in history.

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LOCATION OF VALUE ADDED ACTIVITIES

• Costs are reduced by breaking up the value chain-
  so each activity may be conducted in a different
  country.
• One value chain strategy is partial concentration
  and partial duplication
• Electronics Companies
• Locate part or all of manufacturing in Southeast
  Asia - low cost, skilled labour - key component -
  chip is very cheap
• US - Japan semi-conductor Agreement - Japanese
  agreed not to sell chips in US - Chips being
  sold below cost in South East Asia.

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MARKETING APPROACH

• Uniform marketing approach around the world-
  although not all elements of marketing mix be
  uniform.
• Unilever
• Great success with a fabric softener that used a
• global common positioning
• advertising theme
• symbol (a teddy bear)
• But brand name varied by country

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COMPETITIVE MOVES

• A competitor is attacked in one country in order
  to drain its resources for another country.
• Competitive attack in one country is countered in
  another country
• Counter attack in a competitors home market as a
  parry to an attack on ones home market.
• Bridgestone Corporation - Japanese Tire
• Action of Major competitors
• Continental AGs acquisition of GenCorp's General
  Tire and Rubber Company.
• General Tires JV with two Japanese tire makers,
• Sumitomos acquisition of an intent in Dunlop
  Tire.
• Competitive move
• Establish the presence in major US market
• Formed a JV to own and manage Firestone
  Corporations world wide tire business - gained
  access to Firestones European plants.

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INDUSTRY GLOBALISATION DRIVERS

• Market Drivers
• Homogeneous Customer Needs - Understanding which
  aspects can be standardized and which could be
  customized in the key.
• Global customers - buy on a centralized or
  coordinated basis for decentralized use (e.g.
  National defence agencies).
• Having a single global account manager make it
  easier for global customer for single global
  price - the lowest price.
• Global channels - Global channels are rare - but
  region wide channels are increasing.
• (e.g. European grocery distribution and
  retailing)
• Transferable Marketing - Brand names and
  advertising may be requiring little local
  adaptation.

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INDUSTRY GLOBALISATION DRIVERS Contd..

• Cost Drivers
• Economics of Scale and Scope - corresponding
  risks are rigidity and vulnerability to
  disruption.
• Electronics Industry
• Cost of circuits have decreased - advantage goes
  to companies that can produce lowest cost
  components. Size has become a major asset.
• Thomson (France) - 1987 increased in operating
  scale and global coverage by acquiring RCA
  television business from GE.
• Learning and Experience - The steeper the
  learning and experience curves greater the
  potential benefit.
• Sourcing Efficiencies - Centralized purchasing

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INDUSTRY GLOBALISATION DRIVERS Contd..

• Himont - Global Polypropylene Market
• Global coordination among manufacturing
  facilities in purchase of key raw material -
  monomer
• Favourable Logistics - A favourable ratio of
  sales value to transportation cost enhances the
  ability to concentrate production. Other
  logistical factors are
• non perishability
• absence of time urgency
• little need for location close to customer
  facilities.
• Differences in Country Costs and Skills
• Concentration in low-cost or high-skill countries
  - increase productivity and reduce cost.
• The danger is of training future offshore
  competitors.

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INDUSTRY GLOBALISATION DRIVERS Contd..

• Volkswagen
• Hourly Labour cost Germany DM 40
• Spain DM 20
• Moved production of Polos from Wolfbury to Spain.
• Product Development Costs - Developing few global
  or regional products
• Ford Motor Company
• Centres of Excellence program - to reduce
  duplication
• Ford of Europe - Common platform for all compacts
  
• Ford of NA - replacement of midsized Taurus and
  Sable

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INDUSTRY GLOBALISATION DRIVERS Contd..

• Governmental Drivers
• Favourable Trade Policies - Import tariffs and
  quotas, non tariff barriers, export subsidies,
  local content requirements, currency and capital
  flow restrictions, requirements on technology
  transfer.
• European Community - Banking and Financial
  Services
• Decision to permit free flow of capital along
  member countries
• Deutsche Bank had only 15 offices outside Germany
  - established major presence in French market.
• 1987 - moved to Italian market by acquiring Bank
  of Americas 100 branches.
• J.P. Morgan - US, Swiss Bank Corporation and SP
  Warburg Group - Britain - increased their
  participation in major European markets.

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INDUSTRY GLOBALISATION DRIVERS Contd..

• Compatible Technical Standards - often standards
  are set with protectionism in mind
• (e.g. Motorola - electronics products excluded
  from Japanese market - operated at a higher
  frequency than was permitted in Japan).
• Common Marketing Regulations - Certain type of
  media may be prohibited or restricted
• (e.g. - US is for more liberal than Europe about
  advertising claims on TV.
• British TV do not allow scenes of children
  pestering their parents to buy a product).

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INDUSTRY GLOBALISATION DRIVERS Contd..

• Competitive Drivers
• Inter dependence of Countries - When activities
  are shared among countries a competitors market
  share in one country affects its scale and
  overall cost position in the shared activities.
• (e.g. companies promote product as the leading
  brand in US.)
• Automobile Industry
• Ford and Volkswagen- concentrate production and
  more competitive
• Toyota - pressured to enter more markets to reach
  the volume. 1984-87 doubled the number of cars
  for German market.

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INDUSTRY GLOBALISATION DRIVERS Contd..

• Globalized competitors - The need to preempt a
  global competitor can spur increased market
  participation.
• Unilever - European Consumer Product
• Launched a hostile take over bid for Richardson -
  Vicks Inc.
• Global archrival PG saw the threat on its home
  turf and out bid Unilever.
• With Richardson - Vicks European system PG
  strengthened the European position.
• Changes Over Time
• European Major Appliance Industry
• Globalisation forces seem to have reversed
• 1960s and 70s - regional standardization strategy
  was successful
• 1980s - the most successful strategies seem to be
  national

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BENEFITS OF A GLOBAL STRATEGY

• Cost Reductions
• Economies of scale by pooling production or other
  activities for two or more countries
• (Sony - concentrated its CD production in Terre
  Haute, Indiana, and Saizburg, Austria)
• Exploiting lower factor costs by moving
  manufacturing or other activities to low-cost
  countries.
• (Mexican side of the US - Mexico border is
  crowded with manufacturing plants of US companies
  using Mexican labour)
• Exploiting flexibility
• (Moving production from location to location on
  short notice to take advantage of lowest cost at
  a given time).

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BENEFITS OF A GLOBAL STRATEGY Contd...

• Dow Chemical
• LP model for best production using by location
• exchange rates
• tax rates
• transportation cost
• labour cost
• Enhancing bargaining power - can switch
  production to different location increases
  bargaining power with suppliers, workers, and
  host governments.
• (European labour Union- single European market
  allow switching production)

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BENEFITS OF A GLOBAL STRATEGY Contd...

• Improved Quality of Products and Programs
• Toyota
• Markets a far smaller number of models than GM.
• Concentrated on improving its few models, while
  GM fragmented developmental funds.
• Toyota Camry in US rated as the best in class of
  medium - sized cars.
• Enhanced Customer Preference
• Through reinforcement
• (e.g. soft drinks, food companies, financial
  services - credit cards)
• For industrial products - a multinational
  customer with a standard product around the world
  gains from world wide familiarity
• (e.g. Computer manufacturers)

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BENEFITS OF A GLOBAL STRATEGY Contd...

• Increased Competitive Leverage
• More points from which to attack or counter
  attack
• Becton Dickinson - US Medical Products
• To prevent Japanese becoming a competitive
  nuisance in disposable syringes - enter three
  markets in Japans backyard to prevent Japanese
  expansion
• Hong kong, Singapore, Philippine

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DRAWBACKS OF GLOBAL STRATEGY

• Significant management costs - increased
  coordination, reporting requirements, added
  staff.
• Earlier or greater commitment to a market than
  warranted.
• (American co. - Motorola - penetrate Japan more
  to enhance global competitiveness position than
  making money in Japan).
• Product standardization may result in a product
  that does not satisfy any customer.
• Procter Gamble
• Stumbled - introduced Cheer laundry detergent in
  Japan without changing US product or marketing
  message (the detergent was effective in all
  temp.)
• Two instances of insufficient adaptation
• detergent did not suds up as Japanese use a great
  deal of fabric softener.
• Japanese usually work cloths in cold tap/bath
  water.
• Cheer become successful in Japan - after
  reformulating the product and marketing messages.

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DRAWBACKS OF GLOBAL STRATEGY Contd..

• Canon
• Sacrificed the ability to copy certain Japanese
  paper sizes when it first designed a photocopier
  for the global market
• Activity concentration distances customers and
  can result in lower responsiveness and
  flexibility. Also increases currency risk.
• Uniform marketing can reduce adaptation to local
  customer behaviour.
• (British Airways - Telecommercial - Manhattan
  Landing)

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What is Globalization?
The strategy of approaching worldwide markets
with standardized products.
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Projected Economic Growth
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Development of a Global Corporation
1. Export-import activity
2. Foreign licensing and technology transfer
3. Direct investment in overseas operations
(manufacturing plants and global management
skills)
4. Substantial increase in foreign investment
(foreign assets comprise significant portion of
total assets)
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Strategic Orientation of Global Firms

• Ethnocentric
• Values and priorities of parent organization
  should guide strategic decision making of all
  operations
• Polycentric
• Culture of company in which strategy is
  implemented dominates decision making
• Regiocentric
• Parent firm attempts to blend its own
  predispositions with those of region under
  consideration
• Geocentric
• Parent firm adopts global systems approach to
  decision making, emphasizing global integration

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Beginning to Globalize Key Steps
Scan global situation
Make connections with academia and research
organizations
Increase firms global visibility
Undertake cooperative research projects
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Strategic Management Planning in Global Industries
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The Global Challenge

• Few pure cases of either global or
  multidomestic industries exist
• The challenge -- global firms must
• Decide which activities will be performed in how
  many and which locations
• Determine degree to which activities are
  coordinated across locations

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Market Requirements and Product Characteristics
Success in foreign markets requires assessment
of two key dimensions of customer demand
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International Strategy Options
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International Strategy Options
High
Product diversity
High
Low
Market complexity