emba 716 2008 chapters 11&12 - leong keong management...

EMBA 7162008

Chapters 11&12Global 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

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

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 growthThere are two basic strategies to achieve the goals:• differentiation strategy (differentiate products, increase

price: add value, features, quality, delivery, service)• low cost strategy


Determinants of Enterprise Value

Profitability

Profit Growth

Reduce Costs

Add Value &Raise Prices

Sell More inExisting Markets

Enter NewMarkets

EnterpriseValuation

Figure 11.1


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


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


Experience Effects

• Learning Effects• Cost savings that come

from “learning by doing”

• More significant in complex and repetitive tasks

• Management efficiency• Decline then cease

after 2 to 3 years• Decline after this point

comes from economies of scale

• Economies of Scale• Reductions in unit cost

achieved through volume production

• Sourceso Spread fixed costs

over a large volumeo Employing technologyo Serving global markets

to increase scaleo Global sales increase

size of firm, allowing greater bargaining power with suppliers


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.


Cost Reduction & Local Responsiveness

Differences in - consumer tastes/preferences- infrastructure/traditional practices- distribution channels- host government demands


Four Basic Strategies When Competing Internationally

LocalizationStrategy

GlobalStandardization

StrategyTransnational

Strategy

InternationalStrategy

Low High

Hig

hLo

w

Pressures for Local Responsiveness

Pres

sure

s fo

r Cos

t Red

uctio

ns


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 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


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


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


Evolution of Strategy

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)


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?

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.

Entering Foreign Markets

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

Real GDP Growth

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


Various Entry Modes

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

M&A Activity


Figure 2. China, India and Malaysia are at the forefront of M&A Activity

M&A Activity


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

M&A Activity


Figure 4. Firms from both developed & developing countries target the same industries

M&A Activity


Figure 5. Emerging firms are superseding companies in established countries

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?

emba 716 2008 chapters 11&12 - leong keong management...

Documents