Gbm unit-08 (international strategic management)

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By :

Prof. Amit Kumar

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“A student pursuing management education from IILM- Graduate School of Management, for example may find himself or herself placed in a firm located in a totally different country. Knowledge about international business keeps the youngster mentally prepared to accept assignment in an alien environment. Forewarning is definitely forearming, for the fresh management graduate”.

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Importance of this course

Global Business Management

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Course: Global Business Management

1. Globalization

2. Global Trade & Theory

3. Global Technological Environment

4. Global Economic Environment

5. Global Political-Legal Environment

6. Foreign Direct Investments

7. Regional Economic Integration

8. Strategy and Structure of International Business

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Global Business Management

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Global Business Management International Strategic Management

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Contents• Nature of International Strategic Management• Opening Case: Ford Motor in Thailand, Nestle Global• Strategies in Increased Profitability for Multinational

Acquiring and or Developing Brands Reaping Experience Curve Benefits Realizing Location Economies Skills and Core Competencies

• Strategic choices for Global Expansion Multi domestic strategy International strategy Global strategy Transnational strategy

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Strategic Management

Defined:

Set of managerial decisions and actions that determines the long-run performance of a firm.

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Basic Model of Strategic Management

Four Basic Elements

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Evaluation and Control

and Control

Strategic Management Model

Strategy Formulation

Strategy Implementation

Mission

Objectives

Strategies

Policies

Feedback/Learning

Environmental

Scanning

Societal Environment

General Forces

Task Environment

Industry Analysis

Structure Chain of Command

Resources Assets, Skills

Competencies, Knowledge

Culture Beliefs, Expectations,

Values

Reason for existence

What results to accomplish by when Plan to

achieve the mission & objectives Broad

guidelines for decision making

Programs

Activities needed to accomplish a plan

Budgets

Cost of the programs Procedures

Sequence of steps needed to do the job

Process to monitor performanceand take corrective action

Performance

External

Internal

Evaluationand Control

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Nature of International Strategic Management

• In concept, SM process in an MNC is similar to that in any other form of organization.

• The main complicating factors being the numerous country and regional environments it has to analyze and understand before considering various strategic options.

• Strategy implementation can be more difficult because different cultures have different norms, values and work ethics.

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Tata Steel (Group of Tata) succeed in acquiring another that is four times as large. The Tata

Group (from Tea to Truck Conglomerate, most widely admired business group in India) spent 3

billion dollars on 19 acquisitions in five continents, from the Eight O’ Clock Coffee Co. in

US to Daewoo in South Korea.

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• Ford Motor, which has re-entered the market in Thailand and despite a shrinking demand for automobiles, there is beginning to build a strong sales force to garner market share.

The firm’s strategic plan is based on offering the right combination of price and financing to a carefully

identified market segment.• In particular, Ford is working to bring down the monthly

payments so that customers can afford a new vehicle. This is the same approach that Ford used in Mexico, where the currency crisis of 1994 resulted in serious problems for many multinationals.

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Toyota is another MNC which has benefited vastly from strategic management. The

company is going beyond the automotive market.

In the process, Toyota is assessing environmental opportunities and threats and examining its internal strengths and weaknesses so that the firm’s strategic

thrust can exploit its strengths and sidestep any shortcomings.

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Strategies to Increase Profitability in IB

An MNC is able to increase its profitability in ways often notavailable to a domestic firm. For example a global firm ableto:

1. Acquiring and or Developing Brands2. Reaping Experience Curve Benefits3. Realizing Location Economies4. Skills and Core Competencies

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“ Nestle is the best example to be mentioned. Nestle is the world’s largest food company, employed over 384,000 people in 2009, 97% of whom worked outside Switzerland. In 2009, Nestle operated 880 factories in 156 countries. One half of its sales were in Europe, and 25% came from North America”.

1. Acquiring and or Developing Brands


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Nestle has been highly successful in its global operations. It has adopted several strategies to achieve the success.

1. Strategy of acquiring and/or developing widely known brands.

2. Another important strategy is to continuously improve traditional products. For instance, Nestle produces over 200 types of instant coffee, all tailored to meet the requirements of specific countries.

3. The final strategy is that the company has given local managers substantial autonomy.

4. However, basic strategy, brand policy, and financial decisions are controlled at company headquarters in Vevey, Switzerland.


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2. Reaping Experience Curve Benefits


• The experience curve refers to the systematic reductions in production costs over the life of a product. The experience curve has greater strategic relevance.

• The firm that moves down the experience curve most rapidly has a cost advantage over its competitors.

• Serving the global market from a single location helpsto establish low cost strategy.

• Aim to rapidly build up sales, aggressive marketing strategiesand first-mover advantages.

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‘One firm that has exploited the strategy of experience curve to its advantage is Matsushita, a Japanese company. Along with Sony & Philips, Matsushita was in a race to develop a commercially viable videocassette recorder in the 1970s. Although Matsushita initially lagged behind Philips and Sony, it got its VHS format accepted as the world standard and reaped enormous experience- curved based cost economies’.

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‘Matsushita’s strategy was to build global volume as rapidly as possible. To ensure that it could accommodate worldwide demand, the firm increased its production capacity 33-fold from 205,000 units in 1977, to 6.8 million units by 1984. By serving world market from a single location in Japan, Matsushita realized considerable experience curve advantages’.

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3. Realizing Location Economies


• Because of differences in factor costs, certain countries have a comparative advantage in the production of certain products. For example,

• Japan excels in the production of automobiles and consumer electronics.

• The US excels in the production of pharmaceuticals, biotechnology and financial services.

• Switzerland excels in the production of precision instruments and pharmaceuticals.

• India excels in the production of computer software. 07/06/10 19

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What does all these mean?

• A firm does benefit by basing each of its value creation activities at that location where PEST factors are most conductive to the performance of that activity.

Firms that pursue such a strategy are said to be realizing location economies.

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General Motors (GM) did precisely the same thing. Design of its Pontiac Le Mans car was done in Germany, key components were manufactured in Japan, Taiwan and Singapore; assembly was

performed in South Korea; and advertising strategy was formulated in Great Britain. Each of

these countries was best suited to perform a particular value creation activity.

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4. Skills and Core Competencies


The term core competence refers to skills within the firmthat competitors can not easily imitate. The skills may exist in production, finance, R&D or marketing.

• Toyota has, in the production of cars.• McDonalds’s has, in managing fast food operations.• P&G has, in developing and marketing consumer

products.• Wal-Mart, in information system and logistics.

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An MNC is able to increase its profitability in ways often notavailable to a domestic firm. For example a global firm ableto:

1. Acquiring and or Developing Brands2. Reaping Experience Curve Benefits3. Realizing Location Economies4. Skills and Core Competencies

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Strategic choices for Global Expansion

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Pressures for Cost Reductions

• Intense in industries of standardized, commodity type 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 investment

environment• 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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Management Focus – Tailoring world cars to the U.S. market

• Japanese automobile manufacturers customize car design to tastes of American consumers– Toyota released the Tundra with V8 engines which looks

like a heavy-duty pickup truck with a powerful engine– Nissan let U.S. engineers and planners be completely

responsible for development of most vehicles sold in North America

– Honda customizes the Pilot, it’s next generation SUV according to tastes for American families who wanted bigger vehicles with three row seating

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Four basic strategies to enter and compete in the

international environment:

1. Multi domestic strategy2. International strategy3. Global strategy4. Transnational strategy

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Multi-domesticStrategy

GlobalStrategy

InternationalStrategy

TransnationalStrategy

Pressure for Global IntegrationPr

essu

re o

f Loc

al

Res

pons

iven

ess

High

LowLow High


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• Main aim is maximum local responsiveness.• A firm pursuing a multi-domestic strategy customizes its

products to suit the needs of customers in each country in which is operates. The company transfers to its subsidiaries the core competencies it has developed at home and establishes a wholly owned subsidiary.

• Strategic control is decentralized to each foreign subsidiary which operates automatically and develops its own set of value creation activities.

• Multi-domestic strategy seek to take advantage of local differentiation.

Multi-domestic Strategy


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Strategies for Global Expansion

• But the problem with this strategy is that each subsidiary becomes and stand-alone company. Because the resources and skills are transferred from the parent company, the benefit of global learning is lost.

• The potential benefits from multi-domestic strategy need to be stated. The strategy can result in the establishment of a series of successful foreign subsidiaries.

• Firms pursuing multi-domestic strategy tend to adopt worldwide area structure.

• H.J. Heinz, Ford and GM, Philips pursued multi-domestic strategies when they first entered European Markets.

Multi-domestic Strategy

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Strategies for Global ExpansionMulti-domestic Strategy

• Product customized for each market• Decentralized control - local decision making• Effective when large differences exist between

countries• Advantages:

– product differentiation– local responsiveness– minimized political risk– minimized exchange rate risk

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Strategies for Global ExpansionMulti-domestic Strategy• Philips is a good example, followed a multi-domestic strategy. • This strategy resulted in:

– Innovation from local R&D – Entrepreneurial spirit – Products tailored to individual countries – High quality due to backward integration

Multi-domestic strategy presented Philips with many challenges:

– High costs due to tailored products and duplication across countries

– The innovation from the local R&D groups resulted in products that were R&D driven instead of market driven.

– Decentralized control meant that national buy-in was required before introducing a product07/06/10 33

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http://www.india.philips.com/index.page


• International strategy replicates certain features of the multi- domestic approach.

• As with multi-domestic strategy, the firm transfers its core competences to the foreign subsidiary so that it can reap the differentiation advantage.

• But certain core competencies in R&D, marketing and product development are centralized at home.

• All other operating decisions are decentralized (like multi-domestic strategy). The need for coordination is moderate.

• Limit customization of product offering and market strategy.• Coco-Cola, Pepsi-Cola, pursue and international strategy. • These firms follow worldwide product division structure. • There is limited local responsiveness.

International Strategy

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• With a global strategy, a standardized product is manufactured at a few low-cost location and then offered to the global market.

• As with international strategy, only limited customizing to suit the tastes of individual markets is allowed.

• Product standardization allows a firm to achieve huge global economies of scale which translates to lower costs and lower prices.

• When low price is accompanied by quality, the firm has a very strong competitive advantage.

• AT&T is a typical company which pursues global strategy.• Firms pursuing global strategy operates with a worldwide

product division structure.

Global Strategy

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Strategies for Global ExpansionGlobal Strategy

• Product is the same in all countries.• Centralized control - little decision-making

authority on the local level • Effective when differences between countries are

small• Advantages:

– Cost– Coordinated activities– Faster product development

Semiconductor industries often adopt Global Strategy.

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Strategies for Global ExpansionGlobal Strategy• Matsushita is a good example that followed a global strategy. • This strategy resulted in:

– Strong global distribution network – Company-wide mission statement that was followed closely – Financial control – More applied R&D – Ability to get to market quickly and force standards since

individual country buy-in was not necessary.

The global strategy presented Matsushita with the following challenges:

– Problem of strong yen – Too much dependency on one product - the VCR – Loss of non-Asian employees because of glass ceilings

Matsushita Electric Industrial, now Panasonic Corporation, a multinational electronics corporation based in Kadoma, Japan

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http://www.panasonic.com/


• Firms pursuing transnational strategy yield to both the pressures – global integration and local responsiveness.

• The need for global integration creates pressures for centralizing some operating decisions (particularly production and R&D).

• At the same time, the need to be locally responsive creates pressures for decentralizing other operating decisions to subsidiaries (particularly marketing).

• Consequently, these companies tend to mix relatively high degrees of centralization for some operating decisions with relatively high degree of decentralization for others.

• These firms tend to operate with matrix type structures in which both product division and areas have significant influence.

Transnational Strategy

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• P&G is one example of an MNC which is pursuing the transnational strategy.

• Starting with multi-domestic strategy in 1980s, by 1990s the largest soaps and detergents manufacturer switched to transnational strategy.

• P&G now co-ordinates its skills and resources to reduce cost across countries and increase its differentiation advantage inside each country as well. The new strategy gives P&G a competitive advantage over its arch rival, Unilever.

Transnational Strategy

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Gbm unit-08 (international strategic management)

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