MANAGEMENT POLICY AND STRATEGY SESSION - III (B)

Prof. Sushil\IITD\Session-III(B) 1

MANAGEMENT POLICY AND STRATEGYSESSION - III (B)

Globalization and Global Strategy

Prof. SushilDepartment of Management StudiesIndian Institute of Technology, Delhi

INDIAEmail: [email protected]


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


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 B&W 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.



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.



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.



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 world’s 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.


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.


GLOBAL STRATEGY

Contd…..

Global Businesses– In which the minimum volume required for cost

efficiency is not available in the company’s home market.

Global Companies– Which have distribution systems in key foreign

markets that enable cross-subsidization, international retaliation, and world scale volume.


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


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


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


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


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 – Organisation’s ability to implant a global strategy– Benefits/costs of global strategy


Multidomestic and Global Industries

A global industry is one in which competition crosses national borders

A global industry is one in which competition crosses national borders

A multidomestic industry is one in which competition is essentially segmented from

country to country

A multidomestic industry is one in which competition is essentially segmented from

country to country


Framework of Global Strategy Forces

Position and resources of business and parent company

Industry globalization drivers

•Market factors

•Cost factors

•Environmental factors

•Competitive factors

Appropriate setting for global strategy levers

•Majors market participation

•Product standardization

•Activity concentration

•Uniform marketing

•Integrated competitive moves

Organization’s ability to implement a global strategy

Benefits/costs of global

strategy


GLOBALIZATION DIMENSIONS

DimensionsMarket Participation

Product Offering

Location of Value-added activities

Marketing ApproachCompetitive Moves

Multidomestic Strategy

No Particular Pattern

Fully customized in each countryAll activities in each country

LocalStand-alone by country

Global StrategySignificant share in major marketsFully standardized worldwide Concentrated-one activity in each (different country)Uniform worldwideIntegrated across countries


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.


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.


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.


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

MARKETING APPROACH


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 competitor’s home market as a parry to an

attack on one’s home market.

Bridgestone Corporation - Japanese Tire Action of Major competitors

– Continental AG’s acquisition of GenCorp's General Tire and Rubber Company.

– General Tire’s JV with two Japanese tire makers,– Sumitomo’s acquisition of an intent in Dunlop Tire.

Competitive move– Establish the presence in major US market – Formed a JV to own and manage Firestone Corporation’s world wide tire

business - gained access to Firestone’s European plants.

COMPETITIVE MOVES


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.



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



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.



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



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 America’s 100 branches.

J.P. Morgan - US, Swiss Bank Corporation and SP Warburg Group - Britain - increased their participation in major European markets.



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).



Contd…..

Competitive Drivers Inter dependence of Countries - When activities are shared

among countries a competitor’s 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.



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 P&G saw the threat on its home turf and out bid

Unilever. With Richardson - Vicks European system P&G strengthened the

European position.

Changes Over TimeEuropean 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


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).


BENEFITS OF A GLOBAL STRATEGYContd…...

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)



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)



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 Japan’s backyard to prevent Japanese expansion – Hong kong, Singapore, Philippine


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.


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”)


What is Globalization?

The strategy of approaching

worldwide markets with

standardized products.


Projected Economic Growth


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)

Evolution of a

global firm

entails progressi

vely involved strategy

levels

Development of a Global Corporation


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


Beginning to Globalize: Key Steps

Make connections with academia and research organizations

Scan global situation

Undertake cooperative research projects

Increase firm’s global visibility


Strategic management planning must be global

because . . .

Strategic Management Planning in Global Industries

Increase in global

competition

Increased globalization of

firms

Increased scope of global management

task

Information explosion

Rapid development of

technology

Breeds managerial confidence


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


Market Requirements and Product Characteristics

Success in foreign markets requires assessment of two key dimensions of

customer demand

Acceptance of standardized

products

Rate of product innovation

desired

Prof. Sushil\IITD\Session-III(B) 44Location of activities

Geographicallydispersed

Geographicallyconcentrated

High

Low

Coord

inati

on

of

acti

vit

ies

is a reward and apositive reinforcement

is punishment

is punishment

is a reward and anegative reinforcement

High foreign investment with

extensive coordination among

subsidiaries

Global strategy

Country-centered strategy by

multinationals with a number of

domestic firms operating in only

one country

Export-based strategy with decentralized

marketing

International Strategy Options


International Strategy Options

Foreignbranch

Foreignsubsidiary

Jointventure

Foreignbranch

Licensing,contract

manufacturing,

franchising

Jointventure

Jointventure

Licensing,contract

manufacturing,

franchising

Export

High

High

Low

Pro

du

ct

div

ers

ity

Market complexity

MANAGEMENT POLICY AND STRATEGY SESSION - III (B)

Documents

global competition

global competitorsbuilding

global strategyprof

global vulnerability

world wide brand positions

cost gap

automation of manufacturing

european distribution