Formulating Global Business Strategies

FORMULATING GLOBAL STRATEGIES

Presented by:

Mailyn Castro8 May 2010

Philippine Christian University

Strategies in Globalization

Globalization involves decision making on the following lines:

Deciding whether to go global Deciding which markets to enter Deciding how to enter the market Learning how to handle differences. Adjusting the management process Selecting a managerial approach Deciding organization structure.

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Global and National Environments Barriers to international trade and investment have tumbled and huge global

markets for goods and services have been created. Companies from different nations are entering the global arena on unprecedented scales, increasing the intensity of competition.

Globalization of production has been increasing as companies take advantage of lower barriers to disperse important part of their production processes around the globe. Globalization of markets has evolved over time to usher in a time where national markets are merging into one huge global marketplace. As mentioned earlier, this has brought in intense competition and has also forced companies to maximize their efficiency, quality customer responsiveness and innovative ability like never before.

Ways of Expanding Globally

Expanding the market: Leveraging Products

A company can increase its growth rate by taking goods and services global. The success depends on the ability of the company to transfer their distinctive competencies into the foreign market. For e.g. P&G was able to succeed globally because it was able to replicate its mass marketing skills to out-market the indigenous players. (Transfer of Business Model).

Realizing Cost Economies from Global Volume

From Economies of scale, learning effects and bargaining power with suppliers.

Realizing Location Economies

Location Economies arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be.

For e.g. ClearVision realized that eye glasses could be manufactured at low cost in Hong Kong, so it moved its production facility there and later removed to China as Hong Kong grew costlier. It also set up investments in France and Italy in order to gain advantage from the presence of design expertise there for its status eye division.

Leveraging skills of global subsidiaries

For e.g. McDonald’s has come to realize that foreign subsidiaries can be source of innovative ideas. Skills can be created anywhere people have the opportunity and incentive to try new things.

Pressures faced by Global companies

1. Pressures for cost reduction

2. Pressures for local responsiveness

a) Differences in customer tastes and preferences.

b) Differences in Infrastructure

c) Differences in Distribution Channel

d) Host Government Demands

Choosing a Global Strategy

Strategies in Globalisation

Deciding whether to go global: Globalization is here to stay. Considering the vastness of the

domestic market firms need to take a decision on whether or not to go global. Technological innovations, crumbling trade barriers, global flow of capital, revolution in information technology, intensity of market competition, changing lifestyles and demand for new products are making internationalization inevitable.

However, not all businesses need to go global. Local businesses do well to concentrate on local markets. Before going international, the Company must weigh several risks and decide about its ability to operate globally.

Deciding which markets to enter:This involves deciding on: Volume of foreign sales Number of countries to market in Type of countries to enter.


Strategies in GlobalisationDeciding how to enter the marketEntry Strategies: The Company must decide on the best mode of entry. The

usual entry strategies are:

Exporting: It is the simplest and the traditional mode of entering foreign markets. Exporting is the appropriate strategy when one or more conditions prevail.

Volume of foreign business is not large enough to justify production in the foreign market.

Cost of production in the foreign market is high. Foreign market is characterized by production bottlenecks like

infrastructural problems. There are political or other risks in the foreign country. Company has no permanent interest in the foreign market. Foreign investment is not favored by the foreign country concerned. Licensing or contract manufacturing is not a better alternative. Exporting is more attractive than other modes particularly when

underutilized capacity exists and where expansion of the existing facility might be easier and less costly.


Strategies in GlobalisationLicensing: Licensing occurs when one company (the licensor) grants a license

to a company in another country (the licensee). The license agreement might provide for the flow of unpatented technical information to the licensee, it may authorise him to use the licensor’s trade name, it may also specify that the licensor will provide technical assistance and product upgrades and improvements. In return the licensee will be required to pay an upfront payment and royalty to the licensor.

Licensing is most common in technology intensive and R & D intensive sectors such as pharmaceuticals, chemicals and industrial sectors. It enables the licensor to exploit their R & D acheivements through the generation of royalty income. The licensor benefits from the lcensee’s local knowledge. However, it does not provide a basis for further expansion into the market. Rather, it could give rise to potential competitors.

Franchising is a form of licensing in which the franchiser provides the franchisee with a standard package of products as well as marketing and management systems that have proved successful in the home country.

Franchising allows the franchisor (parent company) more control over how you operate your business and there is usually a franchise fee (monthly percentage of your gross sales). In exchange most franchisors provide training and support to make sure that your business succeeds.Franchising is a great opportunity for those without business experience as they will hold your hand and train you. Franchising is common in service industries like hotel and fast food etc.


Strategies in Globalisation Contract manufacturing: It is an alternative to licensing. A

company doing international marketing, contracts with a foreign producer to manufacture products for sale in the foreign market. The company however, retains responsibility for promoting and distributing its products.

Advantages: The Company does not have to commit resource for setting up

production facilities. It frees the company from the risks of investing in foreign countries. In case there is idle production capacity readily available, it enables

the marketer to get started immediately. In many cases the cost of the product obtained by contract

manufacturing is lower than if it were manufactured by the international firm.

It is a less risky way to start with. If the business is not successful, it is easier to wind up.

Disadvantages: Less control over the manufacturing process Has the risk of developing potential competitors It is not suitable in case of high tech products and cases which

involve trade secrets etc.


Strategies in GlobalisationManagement Contracting: In a management contract, the supplier brings

together a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership; i.e. the firm providing the management know-how may not have any equity stake in the enterprise being managed. It could entail supply of expertise in functions such as finance, personnel, production and general management. It is a low risk method of getting into a foreign market and it starts yielding income from the very beginning.

Benefits: They can provide organizational skills not available locally. Expertise is immediately available rather than built up. Management assistance in the form of support services that would be

difficult and costly to duplicate.

Disadvantages: Arrangement is not sensible if the company can put its scarce

management talent to better use or if there are greater profits to be made by undertaking the whole venture.

Management contract might prevent a company from setting up its own operations

Eg: Tata Tea has contracts to manage plantations in Sri Lanka


Strategies in GlobalisationTurnkey Contracts: A turnkey operation is an agreement by

the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who would be trained by the seller. It is similar to the management contract wherein the company contracts with a foreign entity to design and build an entire operation. The term is common in the construction industry, for instance, in which it refers to the bundling of materials and labor by sub-contractors.

Turnkey contracts are used in the construction of large infrastructure projects such as power plants, dams, airports, road, railways etc. BOT is an example of a turnkey project.


Strategies in GlobalisationJoint Ventures mean joining up with foreign companies to produce or market

the products or services. There are different types of joint ventures such as:

Licensing / franchising arrangements Contract manufacturing Management contracts Sharing of ownership and management in an enterprise.

Joint venture generally means Joint Ownership venture. A joint ownership venture may be brought about by:

A foreign investor buying an interest in a local company A local firm acquiring an interest in an existing foreign firm By both foreign and local entrepreneurs jointly forming a new enterprise. In addition to the foreign and local partner, ownership could also be

invited from the public. Benefit of the same is that it permits a firm with limited resources to enter more foreign markets than might be possible under a policy of forming wholly owned subsidiaries.

Local partner would be in a better position to deal with the Government and the public. Presence of a local partner would lower the hostility in the minds of the locals


Strategies in GlobalisationMergers and Acquisitions: Merger : A merger is a result of two firms, often of similar size,

agreeing to move ahead and exist as a single new company. Mergers are mostly financed by a stock swap. In a stock swap, owners of stock in both companies receive an equivalent measure of stock in the newly formed association

Acquisition : A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own.

Advantages : Provides instant access to markets and distribution network. It helps in reducing competition.


Strategies in GlobalisationStrategic Alliance: A Strategic Alliance is a formal relationship formed between two

or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations. It seeks to enhance the long term competitive advantage of the firm by forming alliance with its competitors, existing or potential in critical areas.

Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property.

The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization , shared expenses and shared risk


http://en.wikipedia.org/wiki/Cooperation

http://en.wikipedia.org/wiki/Collaboration

http://en.wikipedia.org/wiki/Synergy

http://en.wikipedia.org/wiki/Technology_transfer

http://en.wikipedia.org/wiki/Economic_specialization

Strategies in GlobalisationCountertrade: Countertrade is a form of international trade in which certain import and

export transactions are directly linked with each other and in which import of goods and services are paid for by export of goods, instead of money payments.

Main variants of countertrade are: Barter: Exchange of goods or services directly for other goods or

services without the use of money as means of purchase or payment.

Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country.

Counter purchase : Sale of goods and services to a country by a company that promises to make a future purchase of a specific product from the country.

Buyback occurs when a firm builds a plant in a country - or supplies technology, equipment, training, or other services to the country - and agrees to take a certain percentage of the plant's output as partial payment for the contract


Strategies in GlobalisationLearning how to handle differences: Another stage in evolving a global strategy is learning to handle differences

that exist across countries. Few differences of utmost importance is awareness of political risk, cultural differences etc. Use of local nationals in key management positions can ease the political, social and cultural friction.

Adjusting the management process: Management process involves planning, organising, staffing and controlling. Managerial process at the macro and micro level need to be oriented in different countries. The thrust in adjusting the management process is to motivate people to think and act globally.

Selecting a managerial approach: What must be the appropriate managerial practice suitable for an MNC? An amalgamation of the Japanese and American approaches is needed wherein Japanese approach was of long term employment, collective responsibility and collective decision making while the American approach is of short term employment, individual responsibility and individual decision making and rapid career paths.

Deciding of an Organisation Structure: Efficient operation of an MNC requires an effective organisational structure. A successful organisation should maintain smooth operating internal communication and control, as well as sensitive and flexible interaction with the dynamics of the international business environment.Tuesday 11 April 2023 20

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Formulating Global Business Strategies

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