Globalization and Strategies for International Expansion

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Globalization and Strategies for International
Expansion

• UNCW-CSB MGT455 Fall 2009
• Based on D,LE Ch.7 and other sources
• Prof. Carlos L. Rodriguez

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Topics of Lecture

• Globalization
• Reasons for International Expansion
• Risks in Foreign Markets
• Types and Determinants of Strategies for Foreign
  Operations
• Basic Entry Decisions and Modes of Entry
• The Competitiveness of Nations

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Forces Favoring Globalization The Case for
Going Global

• Saturated domestic markets
• Profitability of foreign markets
• Reduction of trade barriers
• Emergent Economies markets
• End of communism/shift to market
• English as a global language?
• International capital markets
• Uniformity in technical standards
• Learning with/from foreign partners

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Strategy for Foreign Operations

• Increased Complexity and Uncertainty
• Local Governments
• Many more competitors
• Channels of distribution
• Foreign Exchange
• Consumers tastes and preferences
• A Delicate Balance
• Cost Pressures versus Pressures for Local
  Responsiveness

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Why expand globally

• Transfer / leverage on core competencies
• Location and Coordination economies
• Experience / Learning
• Scale economies
• Spread risk / Extend the life of the product

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Core Competencies

• Difficult-to-imitate skills that create value
• They can exist in different areas
• production (Toyota)
• management (McDonalds)
• marketing (Procter Gamble)
• distribution (Gillette)
• First wave of expansion of US businesses
• developing and marketing name brand consumer
  products

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Location Economies

• Costs of doing business vary a lot globally
• Comparative Advantage
• Whenever possible, locate your companys
  value-creating activities where they can be
  performed most efficiently
• a global web of value-creation activities
• But dont forget logistics and transportation,
  foreign exchange, trade barriers, and political
  risks

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Experience/Learning Determinants and Scale
Economies

• Production costs fall during the product life
  cycle
• Learning by doing (productivity and efficiency)
• Increased exposure to cultural and other
  differences
• Economies of scale (new drugs are a very good
  example)
• plant-based (building volume)

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Spreading Risks

• Exchange and Political Risk
• Multiple sourcing alternatives
• Differences in rates of growth among countries
  and regions
• Fooling the product life cycle

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Potential Risks of International Expansion

• Political and economic risk
• Social unrest
• Military turmoil
• Demonstrations
• Violent conflict and terrorism
• Laws and their enforcement
• Currency risks
• Currency exchange fluctuations
• Appreciation of the U.S. dollar

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Potential Risks of International Expansion

• Management risks
• Culture
• Customs
• Language
• Income levels
• Customer preferences
• Distribution system

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New Trends Outsourcing and Offshoring

• Outsourcing occurs when a firm decides to utilize
  other firms to perform value-creating activities
  that were previously performed in-house.
• Offshoring takes place when a firm decides to
  shift an activity that they were previously
  performing in a domestic location to a foreign
  location.

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Pressures for Efficiency x Pressuresfor Local
Responsiveness

• A very difficult but necessary balance
• standardization versus customization
• Cost Reductions (Efficiency)
• very important for commodities
• Local Responsiveness
• tastes and preferences
• infrastructure
• distribution channels
• host government demands

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Determinants of Strategies for Foreign Operations
Trans National
Global
Low
High Cost Pressures
Inter national
Multi domestic
Low
High
Local Responsiveness
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International

• Transfer domestic products, know-how to foreign
  markets
• weak local competition
• strong brands know-how
• Head office in control (also centralized RD)
• Some decentralization (Mktg, Distr.)
• Not suitable when cost and responsiveness
  pressures are high
• More difficult to attempt in todays markets

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Multidomestic (Multicountry)

• Maximize local responsiveness
• products, sometimes brands
• strategies
• manufacture locally
• Adequate for situations when pressures for local
  responsiveness are high and for costs reductions
  low
• Weakness the development of decentralized
  federations

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Global

• Maximize cost reductions
• experience and scale
• location
• Standardize
• Concentrate R/D / Mktg / Production in a few
  centers around the world
• Inappropriate when demands for local
  responsiveness are high

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Transnational

• Exploit cost reductions
• scale experience
• Transfer competencies in global learning format
• from headquarters
• from other sites to headquarters
• from sites to sites
• Coordinating problems are usually high

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Expanding to Foreign Markets

• After examining Why?
• Basic entry decisions
• Where?
• When?
• Which size?
• Modes of Entry (How?)
• From exporting to wholly-owned subsidiaries
• Control / Exposure / Risks

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Basic Entry Decisions Where ?

• Decision based on analysis of benefits, costs,
  and risks
• Size and growth potential of the market / wealth
  of consumers
• Political stability / economic system
• Short-term vs. long-term analysis
• Markets where firm has more competitive
  advantages and can thus create value
• Emerging Markets higher risk, but also higher
  potential for profits
• Beware of institutional voids

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Basic Entry Decisions When?

• Before or after major competitors ?
• First-mover Advantages
• preempt rivals / capture market share
• establish brand
• gain scale and experience economies
• create switching costs
• First-mover Disadvantages (Pioneering Costs)
• others will learn from your mistakes
• costs of educating consumers

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Basic Entry Decisions Which Size?

• Strategic Commitment
• Small scale
• more flexibility to reverse decision (learning
  objectives)
• but also weaker in relation to competitors
• Large scale
• more difficult to reverse
• but gives clients more confidence
• reactions from competitors are more vigorous

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Modes of Entry

• Firms Decisions are affected by
• Environmental Conditions (political, economic,
  etc)
• The firms strategy in relation to
• Size of Investment vs. Size of Firm
• Control / Risks
• Four main forms
• Exporting
• Licensing / Franchising
• Joint Ventures
• Wholly Owned Subsidiaries

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Trade-off Exposure vs. Control
Exposure
Wholly owned
subsid. JV
License/Franchising Export
Control
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Exporting

• Pros
• Mfg. scale experience cost reductions (firm can
  have one major plant)
• Lower FDI needs

• Cons
• Miss comparative advantages of other countries?
• Transport. costs
• Barriers to entry
• Local partners distributors less committed?

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Licensing

• Pros
• Licensee capitalizes
• Avoid exposure in risky nations
• Avoid barriers to FDI and importing
• May use cross-licensing and JVs to reduce risks
  of loss of control

• Cons
• Risk of loss of control over know-how
• Cannot cross-subsidize
• Forego scale cost reductions

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Franchising

• Pros
• Franchisee capitalizes
• Quick expansion
• Local partners political clout

• Cons
• Quality control and global consistency may suffer
• May require local subsidiary to supervise
  franchisees

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Joint Venture

• Pros
• Use local partners clout and local knowledge
• Lower capital needs
• Reduce risks

• Cons
• JV partner may become competitor
• Lack of shared goals
• Resolving disagreements

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Wholly Owned Subsidiary

• Pros
• Total control over transfer of core competencies
• Strategic coordination
• Adequate for global and transnational strategies

• Cons
• Costs
• Risks

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Strategy and Globalization

• Globalization of production and markets
• Enlarged industry boundaries
• Increased competition in domestic markets
• Faster innovation and obsolescence
• But why are industries from some countries more
  globally competitive?

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Determinants of National Competitive Advantage
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National State and Competitive Advantage
(Porters Diamond)

• Four attributes that impact a firms global
  competitiveness
• Factor Endowments
• Demand Conditions
• Related and Supporting Industries
• Intensity of Competitive Rivalry
• Examples
• Importance of location
• and of government initiatives (intervention?)