Chapter eight -Strategy in the Global Environment

1. Understand the process of globalization and how it impacts a company’s strategy.

❖ The global and national environments

✓ Fifty years ago, national markets were isolated due to significant trade and
investment barriers.
✓ Managers focused on analyzing only their company's domestic markets.
✓ Few global competitors entered national markets, and foreign market entry
was expensive.
✓ Today, barriers to international trade and investment have decreased, leading
to the creation of huge global markets.
✓ Companies from different nations are now entering each other's home
markets, intensifying competition.
✓ Rivalry cannot be understood solely within national boundaries; managers
must consider the impact of globalization on their company's competitive
environment.
✓ Strategies must be adapted to exploit opportunities and counter competitive
threats in this new global landscape.
✓ The section will explore changes brought about by falling trade barriers and
present a model for analyzing the competitive situation in different nations.
• The Globalization of Production and Markets
✓ Globalization of Production and Markets refers to the integration and
interconnectedness of production processes and markets on a global scale.
✓ Companies now source materials, components, and labor from various
countries to optimize cost and efficiency.
✓ Global supply chains have become common, where different stages of
production occur in multiple countries.
✓ Advancements in transportation and communication technologies have
facilitated this global integration.
✓ Companies can now reach a broader customer base across borders through
e-commerce and online platforms.
✓ Globalization has led to increased competition as companies from different
countries enter each other's markets.
✓ Multinational corporations have expanded their operations globally to tap
into new markets and resources.
✓ Globalization has led to the rise of emerging markets, such as China and India,
as significant players in the global economy.
✓ However, globalization has also sparked concerns about job displacement and
income inequality in some countries.
✓ Governments and policymakers must adapt to the challenges and
opportunities posed by the globalization of production and markets.

✓ The trend toward the globalization of production and markets has several
important implications for competition within an industry:
o First, industry boundaries do not stop at national borders. Because,
- Many industries are now global in scope.
-Competitors and potential future competitors exist in various national
markets.
-Analysing only the home market may lead to unpreparedness for efficient
foreign competitors.
-Companies' home markets are under attack from foreign competitors due
to globalization.
o Second, the shift from national to global markets has intensified
competitive rivalry in many industries.
o Globalization increases the threat of entry and rivalry in protected
national markets.

• National Competitive Advantage

✓ National Competitive Advantage refers to the unique strengths and
capabilities that give a country a competitive edge in specific industries or
sectors.
✓ It is based on factors such as natural resources, skilled labor, technology,
infrastructure, and supportive government policies.
✓ These advantages enable a country's companies to outperform competitors
in the global marketplace.
 ✓ Michael Porter identified four attributes of a national or country-specific
environment that have an important impact on the global competitiveness of
companies located within that nation:
i. Factor endowments: A nation’s position in factors of production such as
skilled labor or the infrastructure necessary to compete in a given industry.
ii. Local demand conditions: The nature of home demand for the industry’s
product or service
iii. Related and supporting industries: The presence or absence in a nation of
supplier industries and related industries that are internationally competitive
.
iv. Firm strategy, structure, and rivalry: The conditions in the nation governing
how companies are created, organized, and managed, and the nature of
domestic rivalry.
 i. Factor Endowments: Cost and quality of factors of production determine
competitive advantage in certain industries for specific countries.
✓ Factors of production include basic factors like land, labor, capital, and raw
materials.
✓ Advanced factors encompass technological knowhow, managerial
sophistication, and physical infrastructure (roads, railways, ports).
✓ The United States' competitive advantage in biotechnology may result from
the presence of advanced factors like technological knowhow.
✓ Basic factors, like a pool of relatively low-cost venture capital, contribute to
funding risky start-ups in biotechnology.
✓ Factor endowments shape a country's ability to excel in specific industries
and drive economic specialization.

ii. Local Demand Conditions: Home demand drives companies to improve

competitive advantage.
✓ Companies are sensitive to the needs of their closest customers.
✓ Home demand shapes product attributes and pressures for innovation and
quality.
✓ A nation gains competitive advantage when domestic customers are
sophisticated and demanding.
✓ Sophisticated buyers in Japan stimulated the camera industry to improve
quality and introduce innovations.
✓ In Scandinavia, demanding customers pushed Nokia and Ericsson to invest in
cellular phone technology early.
✓ Nokia, Ericsson, and Motorola became significant players in the global cellular
telephone equipment industry due to their early investments.

iii. Competitiveness of Related and Supporting Industries: A key attribute of

national advantage in an industry.
✓ Presence of internationally competitive suppliers or related industries
enhances a country's competitive position internationally.
✓ Investments in advanced factors of production by related industries spill over
into other industries, benefiting them.
✓ Examples: Swedish fabricated steel products benefit from strengths in the
specialty steel industry.
✓ Switzerland's success in pharmaceuticals relates to its previous achievements
in the technologically related dye industry.
✓ Successful industries within a country tend to be grouped into clusters of
related industries.
✓ This clustering phenomenon is one of the most pervasive findings of Porter's
study.
✓ An example of a cluster is the German textile and apparel sector, including
high-quality cotton, wool, synthetic fibers, sewing machine needles, and
textile machinery.
iv. Intensity of Rivalry: The fourth attribute of national competitive advantage
in Porter's model.
✓ Different nations have distinct management ideologies that impact their
ability to build competitive advantage.
✓ German and Japanese firms emphasize improving manufacturing processes
and product design, with engineers in top management.
✓ Many U.S. firms have people with finance backgrounds in top management,
leading to less attention to manufacturing processes and product design.
✓ Porter argues that the dominance of finance in the U.S. leads to an
overemphasis on maximizing short-term financial returns.
✓ Consequently, the U.S. experiences a relative loss of competitiveness in
engineering-based industries where manufacturing and design are critical,
such as the automobile industry.
• Using the Framework:
✓ The framework just described can help managers to identify from where their
most significant global competitors are likely to originate.
✓ The framework can also be used to help managers decide where they might
want to locate certain productive activities.
✓ Finally, the framework can help a company assess how tough it might be to
enter certain national markets.
_______________-End______________
8-2 Discuss the motives for expanding internationally.
❖ Increasing profitability and profit growth through global expansion
✓ Global expansion can enable companies to increase and rapidly grow
profitability.
✓ At the most basic level, global expansion increases the size of the market in
which a company is competing, thereby boosting profit growth.
✓ Global expansion offers opportunities for reducing the cost structure of the
enterprise or adding value through differentiation, thereby potentially
boosting profitability.

• Expanding the Market: Leveraging Products

✓ A multinational company that does business in two or more national
markets.
✓ Multinational companies can increase growth by selling goods or services
developed at home internationally.
✓ Examples: Procter & Gamble (P&G) sells its best-selling products
worldwide;
-Microsoft focuses on selling its software globally;
-automobile companies like Ford, Volkswagen,
-and Toyota expand by offering products in international markets.
✓ Higher returns are likely when indigenous competitors lack comparable
products.
✓ Toyota's success is based on its distinctive competency in manufacturing
automobiles, which it leverages for international growth.
✓ P&G's global success is based not only on its products but also on its skills
in mass marketing consumer goods, leading to higher returns through
global expansion.
✓ Successful global expansion relies on transferring and applying aspects of a
company's business model to foreign markets.
✓ Service sector companies, like financial institutions, retailers, and
restaurant chains, also expand globally by replicating their business model
with some adjustments for local differences.
 ✓ Examples: Starbucks and Wal-Mart expanded globally using their
established business models from the United States as blueprints for
international operations.

• Realizing Cost Economies from Global Volume

✓ International expansion allows companies to realize cost savings from
economies of scale, boosting profitability.
✓ Spreading fixed costs over global sales volume lowers average unit costs.
✓ Example: Microsoft spreads the development cost of Windows 8 over global
demand, resulting in significant scale economies.
✓ Serving a global market allows companies to utilize production facilities more
intensively, leading to higher productivity and lower costs.
✓ Example: Intel can keep its factories open for more shifts and days by serving
a global market, increasing capital productivity and return on invested capital.
✓ Global sales increase the company's bargaining power with suppliers,
enabling them to negotiate lower input costs and boost profitability.
✓ Example: Wal-Mart leverages its enormous sales volume to bargain down the
prices it pays to suppliers for merchandise.
✓ Selling to a global market can also lead to cost savings from learning effects.
✓ Learning effects result in increased employee productivity with cumulative
increases in output over time.
✓ By selling to a global market and increasing sales volume, a company can
accelerate learning, enhance employee productivity, and gain a cost
advantage over competitors with limited international markets.
• Realizing Location Economies
✓ Location economies : The economic benefits that arise from performing a
value creation activity in an optimal location.
✓ Thus, if the best designers for a product live in France, a firm should base its
design operations in France.
✓ Locating a value creation activity in the optimal location for that activity can
have one of two effects:
(1)it can lower the costs of value creation, helping the company achieve a
low-cost position;
(2) it can enable a company to differentiate its product offering,
-which gives it the option of charging a premium price or keeping prices low and
using differentiation as a means of increasing sales volume.
✓ Thus, efforts to realize location economies are consistent with the business-
level strategies of low cost and differentiation.

• Leveraging the Skills of Global Subsidiaries

✓ Multinational companies can develop valuable competencies and skills in
their home nation and then expand internationally by selling products and
services based on those competencies.
✓ However, mature multinational enterprises with established subsidiary
operations in foreign markets can also develop valuable skills in those
subsidiaries.
✓ Valuable skills can be created anywhere within a multinational's global
network of operations, where people have the opportunity and incentive to
try new ways of doing things.
✓ The creation of skills that lower production costs or enhance perceived value
is not limited to the corporate center.
✓ Leveraging skills developed within subsidiaries and applying them to other
operations within the global network can create value.
✓ Example: McDonald's foreign franchisees in France have become a source of
valuable new ideas.
✓ Facing slow growth in France, local franchisees have experimented with the
menu, layout, and theme of restaurants.
✓ Changes include upgrading restaurant interiors with hardwood floors,
exposed brick walls, and armchairs, departing from the traditional
McDonald's design.
✓ The menu has been changed to include premium sandwiches priced higher
than average hamburgers.
✓ These changes have led to an increase in same-store sales from 1% annually
to 3.4% in France.
✓ Impressed with the impact, McDonald's executives are considering adopting
similar changes in other markets with sluggish same-store sales growth,
including the United States.
✓ For the managers of a multinational enterprise, this phenomenon creates
important new challenges.
o First, managers must have the humility to recognize that valuable skills
can arise anywhere within the firm’s global network, not just at the
corporate centre.
o Second, they must establish an incentive system that encourages local
employees to acquire new competencies.
o Third, managers must have a process for identifying when valuable new
skills have been created in a subsidiary.
o finally, they need to act as facilitators, helping to transfer valuable skills
within the firm.

❖ Cost pressures and pressures for local responsiveness

✓ Companies that compete in the global marketplace typically face two types of
competitive pressures:
o pressures for cost reductions and
o pressures to be locally responsive.
A) Differences in Customer Tastes and Preferences
B) Differences in Infrastructure and Traditional Practices
C) Differences in Distribution Channels
D) Host Government Demands

✓ Competitive pressures place conflicting demands on a company.

✓ To respond to pressures for cost reductions, a company must minimize its unit
costs.
✓ Achieving this goal may require locating productive activities at the most
favorable low-cost location worldwide.
✓ Offering a standardized product to the global marketplace helps realize cost
savings from economies of scale and learning effects.
✓ On the other hand, pressures to be locally responsive require a company to
differentiate its product offering and marketing strategy across countries.
✓ This differentiation accommodates diverse demands arising from national
differences in consumer tastes, preferences, business practices, distribution
channels, competitive conditions, and government policies.
✓ Differentiation across countries can involve significant duplication and lack of
product standardization, which may raise costs.

i. Pressures for Cost Reductions

✓ In competitive global markets, international businesses face pressures for
cost reductions.
✓ To respond to these pressures, a firm must lower the costs of value creation.
✓ Manufacturers may mass-produce standardized products at optimal
locations to achieve economies of scale and location economies.
✓ Outsourcing certain functions to low-cost foreign suppliers is another
strategy to reduce costs.
✓ Retailers like Wal-Mart may push suppliers to lower their prices, leading to a
shift in production to low-cost countries like China.
✓ Service businesses may move back-office functions to developing nations
with lower wage rates.
✓ Cost reduction pressures are intense in industries producing commodity-
type products where price is the main competitive weapon.
 ✓ These pressures are also present in industries with universal needs, where
consumers' tastes and preferences are similar across different nations.
✓ Liberalization of world trade and investment has increased cost pressures in
recent decades by facilitating greater international competition.

ii. Pressures for Local Responsiveness

✓ In competitive global markets, international businesses also face pressures for
local responsiveness.
✓ These pressures arise from differences in consumer tastes and preferences,
infrastructure, traditional practices, distribution channels, and host
government demands.
✓ To respond to these pressures, a company must differentiate its products and
marketing strategy from country to country all of which tend to raise a
company’s cost structure.
A) Differences in Customer Tastes and Preferences
• Strong pressures for local responsiveness arise when customer tastes and
preferences vary significantly between countries due to historic or cultural
reasons.
• In such cases, a multinational company needs to customize its products
and marketing messages to appeal to the specific preferences of local
customers.
• This customization requires the company to delegate production and
marketing responsibilities to its overseas subsidiaries.
• Local subsidiaries are better equipped to understand and cater to the
unique needs and preferences of their local markets.
• By allowing subsidiaries to handle production and marketing, the company
can adapt its products and services to the specific demands of each
market, enhancing its competitiveness.
• This localization strategy can lead to increased customer satisfaction and
brand loyalty, as customers feel that the company understands and caters
to their specific needs.
 • However, implementing a localization strategy may also lead to higher
costs, as each subsidiary may require unique marketing campaigns and
product adaptations.
• Balancing the need for local responsiveness with cost efficiency is crucial
for multinational companies to remain competitive and profitable in
diverse markets.

B) Differences in Infrastructure and Traditional Practices

• Pressures for local responsiveness also arise from differences in infrastructure
and traditional practices among countries.
• Infrastructure differences, such as varying electrical systems, transportation
networks, or communication standards, may require companies to customize
their products accordingly.
• For instance, consumer electrical appliances must be adapted to the different
voltage standards used in various countries, such as 110 volts in North
America and 240 volts in some European countries.
• Traditional social practices can also influence product customization. For
example, driving practices on the left-hand side of the road in the UK and the
right-hand side in most of Europe create a demand for cars with right-hand
and left-hand driving configurations, respectively.
• Companies may need to delegate manufacturing and production functions to
foreign subsidiaries to accommodate these differences effectively.
• Some infrastructure differences may be rooted in history, while others can
result from recent technological developments or industry-specific standards.
• In the wireless telecommunications industry, different technical standards like
GSM and CDMA prevail in different regions, requiring companies to tailor
their products to meet the specific requirements of each standard.
• Adapting products to suit local infrastructure and practices enhances the
relevance and usability of the products in specific markets, thereby increasing
customer satisfaction and sales.
• However, this customization may also increase production costs and
complexity, as different product variations may be needed for each market.
• Balancing the need for local responsiveness with cost efficiency is essential
for multinational companies seeking to succeed in diverse markets with
varying infrastructure and practices.
C) Differences in Distribution Channels
• pressures for local responsiveness arise from differences in customer tastes,
infrastructure, traditional practices, and distribution channels among
countries.
• Companies must customize their products and marketing strategies
accordingly, often delegating functions to foreign subsidiaries.
• For instance, pharmaceutical companies may use different marketing
approaches in the UK and Japan compared to the US due to varying
preferences.
• Similarly, distribution systems differ between countries like Brazil, Poland, and
Russia, requiring tailored strategies.
• While localization enhances customer relationships, managing diverse
approaches requires effective coordination within the multinational
organization.

D)Host Government Demands

• Host government demands impose local responsiveness on multinational
companies.
• Pharmaceutical companies, for example, face requirements for local
clinical testing, registration procedures, and pricing restrictions in different
countries.
• Governments control significant portions of budgets in various sectors,
leading to demands for products and services tailored to local needs.
• Threats of protectionism, economic nationalism, and local content rules
can compel companies to manufacture locally to comply with host country
regulations.
• Adapting to host government demands is crucial for successful operations
and maintaining positive relations with local authorities.
• __________end__________-
8-3 Review the different strategies that companies use to compete in the
global marketplace.

1.Global standardization strategy

-A business model based on pursuing a low-cost strategy on a global scale.
✓ Global standardization strategy focuses on cost reduction through economies
of scale and location advantages.
✓ Companies following this strategy concentrate their production, marketing,
and research and development (R&D) activities in a few strategically
advantageous locations.
-By doing so, they can leverage the benefits of operating in regions with
access to raw materials, skilled labor, supportive infrastructure, and
favorable tax policies.
✓ One of the primary advantages of the global standardization strategy is the
focus on limited customization.
 -Customizing products and marketing strategies for different markets can lead
to higher costs due to shorter production runs and duplicated functions.
-Instead, companies prefer to offer a standardized product worldwide to achieve
maximum benefits from economies of scale.
✓ Market a standardized product worldwide allows companies to optimize
production efficiencies and reduce costs per unit.
-This becomes particularly effective when the demand for the product is
high and consistent across various markets.
✓ Another key aspect of this strategy is global marketing.
-By maintaining a consistent marketing approach across different
countries, companies can create a unified brand image and capitalize on
global recognition.
✓ Not all industries are well-suited for a global standardization strategy.
- It is particularly effective in industries where products serve universal
needs and strong pressures for cost reductions exist.
- Examples include the semiconductor industry, where global standards
have emerged, leading companies like Intel, Texas Instruments, and Motorola to
pursue a global strategy.
✓ However, in consumer goods markets, demand for local responsiveness can
be higher.
-Despite this, some consumer goods companies are also adopting a global
standardization strategy to drive down their production and distribution
costs.
-P&G is an example of a company that has embraced this approach to
achieve cost efficiencies.
2.Localization Strategy
-A strategy focused on increasing profitability by customizing the company’s
goods or services so that the goods provide a favourable match to tastes and
preferences in different national markets.
✓ Localization strategy is most appropriate when significant differences exist in
consumer tastes and preferences across nations, and when cost pressures are
not too intense.
✓ Customizing the product offering to local demands increases the product's
value in the local market.
✓ However, customization may limit the company's ability to achieve cost
reductions associated with mass-producing a standardized product for global
consumption.
✓ Localization strategy can be justified if added value from customization
supports higher pricing or leads to substantially greater local demand,
allowing cost reductions through scale economies in the local market.
✓ MTV is an example of a company that pursued a localization strategy to
match the demands of viewers in different nations, avoiding loss of market
share and declining profitability.
✓ Companies following a localization strategy must still closely monitor costs
and seek efficiency to capture some scale economies from their global reach.
✓ Some companies, like automobile manufacturers, customize their product
offerings to local market demands
-while achieving scale economies through common vehicle platforms and
components across different models and efficiently scaled factories.

3.transnational strategy
-A business model that simultaneously achieves low costs, differentiates the
product offering across geographic markets, and fosters a flow of skills
between different subsidiaries in the company’s global network of operations.
-What happens, however, when the company simultaneously faces both
strong cost pressures and strong pressures for local responsiveness? How can
managers balance out such competing and inconsistent demands?
✓ According to some re searchers, pursuing what has been called a
transnational strategy is the answer.
✓ Transnational strategy aims to respond to both cost reductions and local
responsiveness in a global environment.
✓ Companies seek to achieve location economies, economies of scale, and
transfer skills within the global network of operations.
✓ Flow of skills and product offerings should not be one-way but should occur
between home country and foreign subsidiaries and between foreign
subsidiaries.
✓ Implementing a transnational strategy is challenging due to conflicting
demands of cost reduction and product differentiation.
✓ Few companies have perfected this strategy, but some examples like
Caterpillar demonstrate successful implementation.
✓ Caterpillar redesigned products with identical components and invested in
large-scale component-manufacturing facilities for scale economies while
having assembly plants in major global markets for local product features.
✓ Building an organization capable of supporting a transnational strategy is
complex and challenging due to organizational structure and control system
issues.

4. International Strategy
✓ International strategy is suitable for multinational companies facing low
cost pressures and low pressures for local responsiveness.
✓ Companies selling products that serve universal needs without significant
competition may adopt this approach.
✓ Xerox found itself in this position in the 1960s after its invention and
commercialization of the photocopier.
✓ Xerox did not face competitors—it had a monopoly.
- Because the product was highly valued in most developed nations,
- Xerox was able to sell the same basic product all over the world and
charge a relatively high price for it.
✓ At the same time, because it did not face direct competitors, the company
did not have to deal with strong pressures to minimize its costs.
✓ Companies following this strategy tend to centralize product development
(e.g., R&D) at home and establish manufacturing and marketing functions
in major countries or regions.
✓ Limited local customization of product offering and marketing occurs in
international companies; head office retains control over marketing and
product strategy.
✓ Examples of companies pursuing this strategy include P&G and Microsoft,
with significant product development in their home locations and some
localization for foreign markets.

• Changes in Strategy over Time

✓ The Achilles heel of the international strategy is the emergence of

competitors over time.
✓ Without proactive cost reduction, companies may be outflanked by
efficient global competitors.
✓ Xerox's case illustrates how Japanese competitors like Canon surpassed it
by producing efficient photocopying equipment at lower prices.
 ✓ The failure to reduce cost structure in advance led to Xerox losing global
market share to competitors.
✓ An international strategy may not be viable in the long term; companies
may need to shift toward a global standardization or transnational strategy
to survive.
✓ Localization strategy may provide a competitive edge, but aggressive
competitors may necessitate adopting a transnational strategy for cost
reduction.
✓ As competition intensifies, international and localization strategies become
less viable, and companies must orientate towards global standardization
or transnational strategies.
_____________END______________
8-4 Explain the pros and cons of different modes for entering foreign
markets.
• The choice of entry mode
1. Exporting
2. Licensing
3. Franchising
4. Joint ventures
5. Wholly owned subsidiaries
1. Exporting:
✓ Involves selling products or services from the home country to the foreign
market.
✓ Companies can use direct exporting (selling directly to foreign customers) or
indirect exporting (using intermediaries like distributors or agents).
✓ Lower financial risk and investment compared to other entry modes.
✓ Suitable for companies with limited international experience or resources.
2.Licensing:
✓ Companies grant the rights to use their intellectual property (technology,
patents, trademarks) to a foreign partner in exchange for royalties or fees.
✓ Low financial risk and investment, as the licensee assumes production and
marketing responsibilities.
✓ Allows companies to access foreign markets quickly without substantial
capital outlay.
✓ Less control over the foreign operations and potential risk of losing
intellectual property control.
3.Franchising:
✓ Similar to licensing but involves granting the right to use a complete
business model, including branding, products, and operations.
✓ The franchisor provides support and guidance to the franchisee.
✓ Franchisees bear most of the investment and operational costs.
✓ Allows for rapid market expansion with lower capital requirements.
✓ Limited control over franchisee operations and potential challenges in
maintaining consistent quality and brand image.
4.Joint ventures:
✓ Involves a partnership between a local and foreign company to establish a
new entity in the foreign market.
✓ Shared ownership and control, with each partner contributing resources
and expertise.
✓ Allows access to local market knowledge, distribution channels, and
political connections.
✓ Shared risks and rewards, but potential for conflicts and cultural
differences.
5.Wholly owned subsidiaries:
✓ Companies establish a new entity or acquire an existing company in the
foreign market, retaining full ownership and control.
✓ Provides maximum control over operations and strategic decisions.
✓ Allows for better integration and coordination with the parent company.
✓ Requires significant financial investment and higher risks.
✓ Provides long-term benefits and opportunities for global expansion.

• Choosing an Entry Strategy

I. Distinctive Competencies and Entry Mode:
✓ International strategy is pursued by companies expanding internationally
to capitalize on greater returns from differentiated product offerings,
entering markets where local competitors lack comparable products.
✓ The optimal entry mode depends on the nature of the company's
distinctive competency, particularly distinguishing between technological
knowhow and management knowhow.

✓ For Technological Knowhow:

-If a company's competitive advantage comes from proprietary technological
knowhow, licensing and joint-venture arrangements should be avoided to
minimize the risk of losing control of the technology.
-Setting up a wholly owned subsidiary is a safer option for high-tech companies
aiming to profit from distinctive technological knowhow.
-In some cases, licensing or joint-venture arrangements can be structured to
reduce the risk of technology expropriation or to gain global acceptance before
imitation occurs.
✓ For Management Knowhow:
-Companies with a competitive advantage based on management knowhow
(e.g., service companies like McDonald's or Hilton) have less risk of losing
control of their skills to franchisees or joint-venture partners due to strong
protection of brand names through trademarks.
-Many service companies prefer a combination of franchising and subsidiaries to
control franchisees within a specific country or region.
-Joint ventures with local partners are often preferred to establish controlling
subsidiaries in a country or region, as they can be more politically acceptable
and provide local knowledge to the subsidiary.

2. Pressures for Cost Reduction and Entry Mode

✓ Greater pressures for cost reductions lead companies to consider a
combination of exporting and wholly owned subsidiaries as their entry mode
strategy.
✓ Manufacturing in locations with optimal factor conditions and then exporting
to other markets can result in significant location economies and scale
economies.
✓ Exporting the finished product to wholly owned marketing subsidiaries in
different countries allows the company to oversee distribution and maintain
tight control over the global value chain.
✓ Wholly owned marketing subsidiaries are preferred over joint ventures or
foreign marketing agents to ensure coordination and control in a globally
dispersed value chain.
✓ Tight control over local operations enables the company to use profits from
one market to strengthen its competitive position in another market.
✓ Companies pursuing global or transnational strategies favor establishing
wholly owned subsidiaries for greater control and coordination across
different markets.
______________End_____________
❖ Global strategic alliances
✓ Global strategic alliances are cooperative agreements between companies
from different countries that are actual or potential competitors.
✓ Strategic alliances range from formal joint ventures,
-in which two or more companies have an equity stake,
- to short-term contractual agreements,
- in which two companies may agree to cooperate on a particular problem

• Advantages of Strategic Alliances

✓ First, strategic alliances may facilitate entry into a foreign market.
✓ Second, strategic alliances allow firms to share the fixed costs (and associated
risks) of developing new products or processes.
✓ Third, an alliance is a way to bring together complementary skills and assets
that neither company could easily develop on its own.
✓ Fourth, it can make sense to form an alliance that will help firms establish
technological standards for the industry that will benefit the firm.
Some more advantages are:
✓ Access to new markets
✓ Shared resources and expertise
✓ Risk sharing
✓ Access to new technologies
✓ Cost reduction
✓ Faster market entry
✓ Learning and knowledge transfer
✓ Enhanced competitive advantage.
✓ Government and regulatory support
✓ Flexibility and adaptability
✓ Branding and reputation enhancement
✓ Global reach and presence
 • Disadvantages of Strategic Alliances
✓ Loss of control over key decisions and operations
✓ Potential conflicts and disagreements between partners
✓ Differences in organizational culture and management styles
✓ Risk of information leakage or intellectual property theft
✓ Unequal commitment and contribution from partners
✓ Limited scope for independent decision-making and flexibility
✓ Reliance on partner's capabilities and resources
✓ Difficulty in integrating different systems and processes
✓ Challenges in managing the alliance effectively
✓ Uncertainty regarding partner's long-term commitment
✓ Possibility of partners becoming competitors in the future
✓ Difficulty in managing conflicting interests and priorities.
____________End___________

❖ Making Strategic Alliances Work

✓ Failure rate for international strategic alliances is high.
✓ Study of 49 alliances found two-thirds facing serious managerial and
financial troubles within 2 years.
✓ 33% of alliances rated as failures by involved parties.
✓ Success depends on three main factors:
1. Partner selection
2. Alliance structure
3. Alliance management.
1.Partner selection
✓ One of the keys to making a strategic alliance work is to select the right kind
of partner.
✓ A good partner has three principal characteristics:
I. First,A good partner helps achieve strategic goals, such as:
-Achieving market access
-Sharing costs and risks of new-product development
-Gaining access to critical core competencies.
 II. Second, a good partner shares the firm’s vision for the purpose of the
alliance.
III.Third, A good partner avoids exploiting the alliance for its own gains.
-They do not attempt to expropriate the company's technological knowhow
without providing equitable benefits in return.
✓ Comprehensive research on potential alliance candidates is essential.
✓ Collect pertinent, publicly available information about potential partners.
✓ Gather data from informed third parties, including companies with prior
alliances, investment bankers, and former employees.
✓ Get to know potential partners well before committing to an alliance.
✓ Conduct face-to-face meetings between senior and middle-level managers to
ensure the right chemistry.

3. Alliance Structure
✓ Having selected a partner, the alliance should be structured so that the
company’s risk of giving too much away to the partner is reduced to an
acceptable level.
✓ First, alliances can be designed to make it difficult (if not impossible) to
transfer 26technology not meant to be transferred.
✓ Second, contractual safeguards can be written into an alliance agreement to
guard against the risk of opportunism by a partner.
✓ Third, both parties in an alliance can agree in advance to exchange skills and
technologies that the other covets, thereby ensuring a chance for equitable
gain.
✓ Fourth, the risk of opportunism by an alliance partner can be reduced if the
firm extracts a significant credible commitment from its partner in advance.

4. Managing the Alliance

✓ Sensitivity to cultural differences is crucial for managing alliances successfully.
✓ Building trust between partners and learning from each other are key to
maximizing alliance benefits.
✓ Successful alliance management involves building interpersonal relationships
and relational capital between firms' managers.
✓ Ford and Mazda's alliance demonstrates the value of personal relationships
and trust-building through regular meetings and getting to know each other
better.
✓ Personal relationships create an informal management network that can be
used to solve problems in joint committee meetings and other formal
contexts.
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