Globalisation Strategies

7/29/2019 Globalisation Strategies

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GLOBALISATION STRATEGIES


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VALUE CREATION

Profit determined by : The amount of value customers place on firms goods or

services (V) Firms cost of production (C)

Consumer surplus occurs when price charged by afirm on a good or service is less than value placed onit by a customer

Firm creates profit by increasing value or loweringcost

Two basic strategies to create value and attaincompetitive advantage according to Porter: Low cost Differentiation strategy


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Firm as a value chain

Where does value come from Any firm is composed of a series of distinct value creating

activities Primary activities

Research & development Production Marketing & sales Service

Support Activities

Materials management or logistics Human resource Information systems Company infrastructure


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Firm as a value chain


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Strategy in international business

Strategy is concerned with identifying and

taking actions that willlower costs of valuecreation and/or differentiatethe firmsproduct offering through superior design,

quality service, functionality, etc.

Meet both of Porters Goals


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Advantages of global expansion

Location economies

Cost economies from experience effects

Leveraging core competencies

Leveraging subsidiary skills

BUT

Profitability is constrained by productcustomization and the imperative oflocalization.


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FEARS

Complications arise due to

Transportation costs

Trade barriers

Political and economic risks US firms have shifted production from Asia to

Mexico due to

Low labor costs.

Proximity to U.S. Transportation costs


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Location economies

Realized by performing a value creation activity inan optimal location anywhere around the globe

Often arise due to differences in factor costs

It can lower costs of value to enable low coststrategy and/or

Help in differentiation of products fromcompetitors

Global web: different stages of value chain aredispersed to those locations where perceivedvalue is maximized or costs of value creation areminimized


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Experience effects

The systematic reduction in production costs

that occurs over the life of a product

First observed in aircraft industry where unit costs

reduced by 80% each time output was doubled

Caused due to

Learning effects

Economies of scale


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Learning effects

Cost savings that come from learning by doing

Arises due to increased worker productivity and

management efficiency

Significant in cases of technologically complex task asthere is a lot to be learned

Experienced during start-up phase, cease after two

or three years Decline after this point comes from economies of

scale.


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Economies of scale

Refers to reduction in unit cost by producing a

large volume of a product

Sources:

Reduces fixed costs by spreading it over a large

volume

Ability of large firms to employ increasingly

specialized equipment or personnel


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Leveraging core competencies

Core competence: Skills within the firm thatcompetitors cannot easily match or imitate

Earn greater returns by transferring these skills

and/or unique product offerings to foreign marketswho lack them (McDonalds)

Examples:

Consumer marketing skills of U.S. firms allowed them

to dominate European consumer product market in1960s and 70s


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Leveraging subsidiary skills

Value created by identifyingthem and applying it to afirms global network ofoperations

Some Challenges: Managers must create an

environment where incentivesare given to take necessaryrisks and reward them

Need a process to identifynew skill development

Need to facilitate transfer ofnew skills within the firm

Unique skills and ideasoften developed in foreign

subsidiaries


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Pressures for cost reductions

Intense in industries of standardized, commoditytype product that serve universal needs

Major competitors are based in low-cost locations

Consumers are powerful and face low switching costs

Liberalization of world trade and investmentenvironment

Examples Bulk chemicals, petroleum, steel, personal computers


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Pressures for local responsiveness

Differences in consumer tastes & preferences North American families like pickup trucks while in Europe

it is viewed as a utility vehicle for firms

Differences in infrastructure & traditional practices Consumer electrical system in North America is based on

110 volts; in Europe on 240 volts

Differences in distribution channels Germany has few retailers dominating the food market,

while in Italy it is fragmented

Host-Government demands Health care system differences between countries require

pharmaceutical firms to change operating procedures


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STRATEGIC CHOICES

International strategy

Multi domestic strategy

Global strategy

Transnational strategy


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CLASSIFICATION

1. International companies are importers and exporters, they haveno investment outside of their home country.

2. Multinational companies have investment in other countries, butdo not have coordinated product offerings in each country. Morefocused on adapting their products and service to each individual

local market3. Global companies have invested and are present in many

countries. They market their products through the use of thesame coordinated image/brand in all markets. Generally onecorporate office that is responsible for global strategy. Emphasison volume, cost management and efficiency.

4. Transnational companies are much more complex organizations.They have invested in foreign operations, have a central corporatefacility but give decision-making, R&D and marketing powers toeach individual foreign market


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INTERNATIONAL STRATEGY

Create value by transferring valuable corecompetencies to foreign markets thatindigenous competitors lack

Centralize product development functions athome

Establish manufacturing and marketingfunctions in local country but head office

exercises tight control over it Limit customization of product


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MULTIDOMESTIC STRATEGIES

Main aim is maximum local responsiveness

Customize product offering, market strategy

including production, and R&D according to

national conditions

Generally unable to realize value from

experience curve effects and location

economies

Possess high cost structure


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GLOBAL STRATEGY

Focus is on achieving a low cost strategy by

reaping cost reductions that come from

experience curve effects and location economies

Production, marketing, and R&D concentrated infew favorable functions

Market standardized product to keep costs low

Effective where strong pressures for costreductions and low demand for local

responsiveness


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TRANSNATIONAL STRATEGY

To meet competition firms aim to reduce costs,transfer core competencies while paying attention topressures for local responsiveness

Global learning

Valuable skills can develop in any of the firms worldwide operations

Transfer of knowledge from foreign subsidiary tohome country, to other foreign subsidiaries

Transnational strategy difficult task due tocontradictory demands placed on the organization


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Advantages and disadvantages of the

four strategies

Globalisation Strategies

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