Essentials of Strategic Management,

3/e
Charles W.L. Hill | Gareth R. Jones

Chapter 6
Strategy in the
Global
Environment

© 2012 South-Western, a part of Cengage Learning

The Global Environment
 Managers need to consider:
– How globalization is impacting the
environment in which their company
competes
– What strategies they should adopt to exploit
opportunities
– How to counter competitive threats

© 2012 South-Western, a part of Cengage Learning

The Global Environment
 Industry boundaries do not stop at national
borders
 The shift to global markets has intensified
competitive rivalry in industries
 Global markets created enormous
opportunities

© 2012 South-Western, a part of Cengage Learning

Increasing
Profitability Through Globalization
 The success of many multinational companies
is based not just on the goods and services
they sell, but upon the distinctive competencies
that underlie their production and marketing
 Globalization increases profits by:
– Expanding the market
– Realizing economies of scale
– Realizing location economies
– Leveraging the skills of global subsidiaries

© 2012 South-Western, a part of Cengage Learning

Competitive Pressures
 Two main pressures:
 Pressure for cost reduction
 Pressure to be locally responsive
 These pressures place conflicting demands
on a company

© 2012 South-Western, a part of Cengage Learning

Cost Reductions
 Cost reductions are common in:
– Industries where price is the main competitive
weapon
– Industries with universal need products
– Universal Need: When consumer preference
is similar or identical in different nations
 Companies may achieve cost reduction by
basing production in a low-cost location or by
offering a standardized product.

© 2012 South-Western, a part of Cengage Learning

Local Responsiveness Pressures
 These arise from differences in:
– Consumer taste and preferences
– Infrastructure or traditional practices
– Distribution channels
– Host government demands
 The more that customer preferences vary, the
more local responsiveness is required

© 2012 South-Western, a part of Cengage Learning

Choosing a Strategy
Basic four strategies:
 Global Standardization Strategy
 Localization Strategy
 Transnational Strategy
 International Strategy

© 2012 South-Western, a part of Cengage Learning

Global Standardization Strategy
 Focuses on increasing profitability by
pursuing a low-cost strategy on a global scale
 Works best if there is:
– Strong pressure for cost reduction
– Low pressure for local responsiveness

© 2012 South-Western, a part of Cengage Learning

Localization Strategy
 Customizes goods or services to provide a
good match to tastes and preferences in
different national markets
 Works best if there is:
– Low cost pressure
– Varied taste and preferences by nation

© 2012 South-Western, a part of Cengage Learning

Transnational Strategy
 Attempts to achieve low-cost, differentiated
products across markets and to foster a flow
of skills between different subsidiaries
 Works best if there is simultaneous :
– High cost pressures
– High local responsiveness pressures

© 2012 South-Western, a part of Cengage Learning

International Strategy
 Centralizes product development, but
manufactures and markets globally
 Works best if there is:
– Low cost pressure
– Low pressure for local responsiveness
– A universal need product
– No significant competitors

© 2012 South-Western, a part of Cengage Learning

Choices of Entry Mode
 Exporting
– Many companies begin global expansion
through exporting production
– Exporting allows companies to bypass the
cost of establishing manufacturing facilities
– Exporting may be consistent with scale
economies and location economies

© 2012 South-Western, a part of Cengage Learning

Choices of Entry Mode (cont’d)
 Licensing
– A licensee in a foreign country can purchase
the rights to produce a product in their country
– The cost of development is low, as well as the
risk involved

© 2012 South-Western, a part of Cengage Learning

Choices of Entry Mode (cont’d)
 Franchising
 A specialized form of licensing where the
franchiser sells intangible property (usually a
brand or trademark).
 The franchisee agrees to follow the strict rules
and business plans of the company

© 2012 South-Western, a part of Cengage Learning

Choices of Entry Mode (cont’d)
 Joint Venture
– Separate corporations come together to form
a new corporate entity
– Two or more companies have an ownership
stake, but combine resources for mutual
benefit
– Sharing knowledge can be dangerous for the
companies involved

© 2012 South-Western, a part of Cengage Learning

Choices of Entry Mode (cont’d)
 Wholly Owned Subsidiaries
– A parent company owns 100% of a smaller
self-contained business unit
– This can be a very costly approach, since the
parent company is responsible for all of the
financing

© 2012 South-Western, a part of Cengage Learning