EMBA 716

2008
Chapters 11&12
Global Strategy,
Entering Foreign
Markets
 Outline

• Strategy and enterprise value

• Cost reduction and local responsiveness
• Experience effects
• Four basic strategies when competing
internationally
• Entering foreign markets
• Rise of emerging markets in mergers and
acquisitions
 Strategy

Strategy
• “the action managers take to attain the goals of a firm”
• For most firms, the preeminent goal is to maximize the
value of the firm for its owners and its shareholders
• To maximize value, firms must pursue strategies that
increase profitability and profit growth
There are two basic strategies to achieve the goals:
• differentiation strategy (differentiate products, increase
price: add value, features, quality, delivery, service)
• low cost strategy

Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Determinants of Enterprise Value

Reduce Costs

Profitability

Add Value &

Raise Prices
Enterprise
Valuation
Sell More in
Existing Markets

Profit Growth

Enter New
Markets
Figure 11.1
Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Global Expansion & Profitability

Firms that operate internationally are able to:

• Expand the market for their domestic product offerings
by selling those products in international markets
• Earn a greater return by leveraging any valuable skills
developed in foreign operations and transferring them
to other entities within the firm’s global network of
operations – knowledge management
• Realize location economies by dispersing individual
value creation activities to locations around the globe
where they can be performed most efficiently and
effectively - create a global web of value-creation
activities
• Realize greater cost economies from experience effects
by serving an expanded global market from a central
location, thereby reducing the costs of value creation
Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Experience Effects

Experience Effects
• As individuals and/or organizations get more
experienced at a task, they usually become more
efficient at it.
• The experience curve refers to the systematic
reductions in production costs that have been
observed to occur over the life of a product
• Example: assembly of aircraft frames; the cost to
produce a frame declines as more units are produced
Two things explain this:
• Learning effects
• Economies of scale

Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Experience Effects

• Learning Effects • Economies of Scale

• Cost savings that come • Reductions in unit cost
from “learning by achieved through volume
doing” production
• More significant in • Sources
complex and repetitive o Spread fixed costs
tasks over a large volume
• Management efficiency o Employing technology
• Decline then cease o Serving global markets
after 2 to 3 years to increase scale
• Decline after this point o Global sales increase
comes from economies size of firm, allowing
of scale greater bargaining
power with suppliers
Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Competitive Pressures

• Firms that compete in the global marketplace typically

face two types of competitive pressures that affect their
ability to realize location economies and experience
effects:
– pressures for cost reductions
– pressures to be locally responsive
• These pressures place conflicting demands on the firm.

Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Cost Reduction & Local Responsiveness

Differences in
- consumer tastes/preferences
- infrastructure/traditional practices
- distribution channels
- host government demands
Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Four Basic Strategies When
Competing Internationally
Pressures for Cost Reductions
High Global
Transnational
Standardization
Strategy
Strategy

International
Low

Localization
Strategy Strategy

Low High
Pressures for Local Responsiveness
Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 International Strategy

• An international strategy involves taking products first

produced for the domestic market and then selling
them internationally with only minimal local
customization
• Tendency to centralize product development functions
such as R&D at home
• When there are low cost pressures and low pressures
for local responsiveness, an international strategy is
appropriate
• Microsoft, Harley-Davidson

Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Global Standardization Strategy

• A global standardization strategy focuses on increasing

profitability and profit growth by reaping the cost
reductions that come from economies of scale, learning
effects, and location economies
• The strategic goal is to pursue a low-cost strategy on a
global scale
• Firms prefer to market a standardized product
worldwide, so that they can reap the maximum benefits
from economies of scale and learning effects
• This strategy makes sense when there are strong
pressures for cost reductions and demands for local
responsiveness are minimal
• Texas Instrument, Intel, Motorola

Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Localization Strategy

• A localization strategy focuses on increasing

profitability by customizing the firm’s goods or
services so that they provide a good match to tastes
and preferences in different national markets
• Localization is most appropriate when there are
substantial differences across nations with regard to
consumer tastes and preferences, and where cost
pressures are not too intense
• Duplication of functions and small production runs
• MTV

Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Transnational Strategy

• A transnational strategy tries to simultaneously:

– achieve low costs through location economies,
economies of scale, and learning effects
– differentiate the product offering across geographic
markets to account for local differences
– foster a multidirectional flow of skills between
different subsidiaries in the firm’s global network of
operations
• A transnational strategy makes sense when cost
pressures are intense, and simultaneously, so are
pressures for local responsiveness.
• Caterpillar
Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Evolution of Strategy

Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Global Leadership Strategy

• “We [Toyota] intend to continue moving

forward with globalization … by further
enhancing the localization and independence of
our operations in each region.”
Fujio Cho, Toyota Vice Chairman

(“Regional Strategies for Global Leadership,” Harvard Business Review, Dec 2005)
 Entering Foreign Markets

A firm expanding internationally must decide:

• Which markets to enter?
• When to enter these markets?
– First-mover or follower?
• What scale and what nature should this entry have?

Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Entering Foreign Markets

• There are more than 200 nation-states in the world

• Each country’s attractiveness as a market to a
particular firm depends on:
– The firm’s objectives
– A balance of benefits, costs, and risks
• Global Competitiveness Index (World Economic Forum)
• Ease of Doing Business Index (World Bank)
– A high ranking on the ease of doing business index
means the regulatory environment is conducive to
the operation of business.
– This index averages the country's percentile
rankings on 10 topics, made up of a variety of
indicators, giving equal weight to each topic.

Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ease of Doing Business Index

(http://www.doingbusiness.org/economyrankings/)
 Why Emerging Markets?

• Since early 1990s, emerging economies have been

fastest growing markets in the world
• Lower manufacturing/service center costs due to
inexpensive labor
• Companies such as China’s Haier Group have
penetrated US market
• Beware of institutional voids:
– Wide variation in quality of infrastructure
– Political and social system (government interference,
religion, private property rights, corruption, media ,
IPR)
– Openness (restrictions on foreign investments, free-
trade agreements, tariffs, freedom of travel, human
rights)
• BRIC
Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Real GDP Growth

(http://siteresources.worldbank.org/INTGEP2008/Resources/complete-report.pdf)
 Various Entry Modes

Global Business Today, 5/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Rise of Emerging Markets in M&A

• The number of majority acquisitions increased globally

by 6%, acquisitions of established companies by
emerging firms grew at an annual rate of 26%
• US companies participate in 1 out of 5 M&As (2002-07)
• Emerging competitors present a potential threat to
companies in developed countries
• Companies from India, Malaysia, and China together
account for 56% of the deals from 2002-07 (Figure 2)
• As emerging firms acquire state-of-the-art products and
technology, they are diminishing established
companies’ advantages in innovation and threatening
their global market superiority

(http://www.atkearney.com/shared_res/pdf/Emerging_Markets_MandA.pdf)
 M&A Activity
Figure 1. An increase in deals between developed and developing countries

(http://www.atkearney.com/shared_res/pdf/Emerging_Markets_MandA.pdf)
 M&A Activity
Figure 2. China, India and Malaysia are at the forefront of M&A Activity

(http://www.atkearney.com/shared_res/pdf/Emerging_Markets_MandA.pdf)
 M&A Activity

Figure 3. Oil exporting countries represent the majority of sovereign wealth funds

(http://www.atkearney.com/shared_res/pdf/Emerging_Markets_MandA.pdf)
 M&A Activity
Figure 4. Firms from both developed & developing countries target the same industries

(http://www.atkearney.com/shared_res/pdf/Emerging_Markets_MandA.pdf)
 M&A Activity
Figure 5. Emerging firms are superseding companies in established countries

(http://www.atkearney.com/shared_res/pdf/Emerging_Markets_MandA.pdf)
 On International Mergers

• “A multi-national merger is like a juggling act. Drop

one ball and the rest can come tumbling down.”
• “It’s different people from different countries trying
to speak one corporate language.”
• “Many mergers fail. However, a hallmark of many
successful mergers is the assimilation of different
people and cultures into one company, speaking with
one voice, sharing one goal. Success comes to those
companies who get this right.”
MERCER, Wall Street Journal, Sept 12, 2007
Thank You

Questions?