Strategy in the Global Environment
Strategy in the Global Environment
TYPES OF GLOBAL BUSINESS ACTIVITIES
OVERVIEW OF INTERNATIONAL STRATEGY DEVELOPMENT
STAGES OF INTERNATIONAL STRATEGY DEVELOPMENT
INTERNATIONAL MARKET EVALUATION
ANALYSIS OF INTERNATIONAL STRATEGIES
Though global economic activity has existed for centuries, globalization in its current form began in earnest in the 1970s. Essentially, globalization refers to growth of trade and investment, accompanied by the growth in international businesses, and the integration of economies around the world. According to Punnett the globalization concept is based on a number of relatively simple premises:
- Technological developments have increased the ease and speed of international communication and travel.
- Increased communication and travel have made the world smaller.
- A smaller world means that people are more aware of events outside of their home country and are more likely to travel to other countries.
- Increased awareness and travel result in a better understanding of foreign opportunities.
- A better understanding of opportunities leads to increases in international trade and investment, and the number of businesses operating across national borders.
- These increases mean that the economies and financial markets around the world are more closely integrated.
Managers must be conscious that markets, supplies, investors, locations, partners, and competitors can be anywhere in the world. Successful businesses will take advantage of opportunities wherever they are and will be prepared for downfalls. Successful managers, in this environment, need to understand the similarities and differences across national boundaries, in order to utilize the opportunities and deal with the potential downfalls.
The globalization of business is easy to recognize in the spread of many brands and services throughout the world. For example, Japanese electronics and automobiles are common in Asia, Europe, and North America, while U.S. automobiles, entertainment, and financial services are also common in Asia, Europe, and North America.
Moreover, companies have become transnational or multinational—that is, they are based in one country but have operations in others. For example, many Japan-based automakers now operate factories in the United States and elsewhere, while U.S.-based Coca-Cola operates plants in other countries.
In developing appropriate global strategies, managers need to take the benefits and drawbacks of globalization into account. A global strategy must take into account the events around the globe, as well as those at home.
International strategy is the continuous and comprehensive management technique designed to help companies operate and compete effectively across national boundaries. While companies' top managers typically develop global strategies, they rely on all levels of management in order to implement these strategies successfully. The methods companies use to accomplish the goals of these strategies take a host of forms. For example, some companies form partnerships with companies in other countries, others acquire companies in other countries, others still develop products, services, and marketing campaigns designed to appeal to customers in other countries. Some rudimentary aspects of international strategies mirror domestic strategies in that companies must determine what products or services to sell, where and how to sell them, where and how they will produce or provide them, and how they will compete with other companies in the industry in accordance with company goals.
The development of international strategies entails attention to other details that seldom, if ever, come into play in the domestic market. These other areas of concern stem from cultural, geographic, and political differences. Consequently, while a company only has to develop a strategy taking into account known governmental regulations, one language (generally), and one currency in a domestic market, it must consider and plan for different levels and kinds of governmental regulation, multiple currencies, and several languages in the global market.
Though multinational corporations have been a mainstay of the business scene for some time, the most recent wave of globalization by U.S. companies began in the 1980s, as companies began to realize that concentrating on the domestic market alone would lead to stagnant sales and profits and that emerging markets offered many opportunities for growth. Part of the motivation for this globalization stemmed from the lost market share in the 1970s to multinational companies from other countries, especially those from Japan. Initially, these U.S. companies tried to emulate their Japanese counterparts by implementing Japanese-style management structures and quality circles. After adapting these practices to meet the needs of U.S. companies and recapturing market share, these companies began to move into new markets to spur growth, enable the acquisition of resources (often at a cost advantage), and gain competitive advantage by achieving greater economies of scale.
The globalization of U.S. companies has not been without concerns and detractors. Exporting U.S. jobs, exploiting child labor, and contributing to poverty have all been charges laid at the doors of U.S. companies. These charges have been accompanied by demonstrations and consumer boycotts.
Nor have U.S. companies been the only ones affected. Companies in the rest of the developed world have globalized along with U.S. companies, and they have also faced the sometimes negative consequences.
Interestingly, in the late twentieth and early twenty-first century, there has also been a growth in international companies from developing and transitional countries, and this trend can be expected to continue and increase. Exports and investment from the People's Republic of China are a notable example, but companies from Southeast Asia, India, South Africa, and Latin America, to name some countries and regions, are making themselves known around the world.
Businesses may choose to globalize or operate in different countries in four distinct ways: through trade, investment, strategic alliances, and licensing or franchising. Companies may decide to trade tangible goods such as automobiles and electronics (merchandise exports and imports). Alternatively, companies may decide to trade intangible products such as financial or legal services (service exports and imports).
Companies may enter the global market through various kinds of international investments. Companies may choose to make foreign direct investments, which allow them to control companies and assets in other countries. In addition, companies may elect to make portfolio investments, by acquiring the stock of companies in other countries in order to gain control of these companies.
Another way companies tap into the global market is by forming strategic alliances with companies in other countries. While strategic alliances come in many forms, some enable each company to access the home market of the other and thereby market their products as being affiliated with the well-known host company. This method of international business also enables a company to bypass some of the difficulties associated with internationalization such as different political, regulatory, and social conditions. The home company can help the multinational company address and overcome these difficulties because it is accustomed to them.
Finally, companies may participate in the international market by either licensing or franchising. Licensing involves granting another company the right to use its brand names, trademarks, copyrights, or patents in exchange for royalty payments. Franchising, on the other hand, is when one company agrees to allow a company in another country to use its name and methods of operations in exchange for royalty payments.
Generally, a company develops its international strategy by considering its overall strategy, which includes its operations at home and abroad. We can consider four aspects of strategy: (1) scope of operations, (2) resource allocation,(3) competitive advantage, and (4) synergy. The first component encompasses the geographic locations—countries and regions—of possible operations as well as possible markets or niches in various regions. Since companies have limited resources and since different regions offer different advantages, managers must select the markets that offer the company the optimal opportunities.
The second component of the global strategy focuses on use of company resources so that a company can compete successfully in the chosen markets. This component of strategy planning also determines the relative importance of various company functions and bases the allocation of resources on the relative importance of each function. For instance, a company may decide to allocate its resources based on product lines or geographical locations.
Next, management must decide where the company can achieve competitive advantage over other companies in the industry. Management can identify their competitive advantage by determining what the company does better (or can do better) than its competitors. Companies may realize this advantage through a host of techniques such as using superior technology, implementing more efficient organizational practices and distribution systems, and cultivating well-known brands. This component of the strategy involves not only identifying existing or potential areas of competitive advantage but also developing a plan for sustaining areas of competitive advantage. Finally, global strategy should involve establishing a plan for the company that enables its various functions and operations to benefit one another. For example, a company can use one line of products to encourage sales of another line of products, thereby enabling different parts of a business to benefit from each other.
Some have argued that internal operations can also be global in scope. For example, a 2002 article in the Academy of Management Executive emphasizes the importance of sourcing at a global level. The authors note that coordinating and integrating a company's sourcing and purchasing on a global scale can result in competitive advantages by making an organization more efficient. Likewise, Thomas Friedman has written about the importance of global supply chains. Friedman uses Wal-Mart as an example of a company with a sophisticated global supply chain. The company has achieved a remarkable degree of efficiency in its supply chain by having an IT system that allows for speedy communication with its suppliers. General Motors is another company that has used IT systems to improve its global supply chain.
In general, recent innovations in technology have aided in all aspects of conducting business operations in a global environment. For example, Colgate Palmolive has used Web-based training materials across its organization instead of in-person training.
Many companies are now outsourcing many of their operations internationally. For example, if you call to get information on your credit card, you may well be talking to someone in India or Mexico. Equally, manufacturers often outsource production to low labor-cost countries. Concerns over ethical issues, such as slave and child labor, have led to companies outsourcing under controlled conditions—offshore production may be subject to surprise visits and searches and outsourced factories are required to conform to specific criteria. Unfortunately, outsourcing and subcontracting can make oversight a very difficult task.
However, there are other steps a company can take towards becoming more globally competitive. For example, one BusinessWeek article pointed out that while many U.S. companies are pursuing a global strategy, this is not reflected in the composition of directors. The article argues that companies need to add foreign nationals to their board of directors to help promote global strategies. While this may present some practical problems (such as travel to board meetings and culture clashes), the “internationalizing” of a board of directors can help cement a company's commitment to a global strategy.
Strategy development itself generally takes places in two stages: strategy formulation and strategy implementation. When planning a strategy, companies identify their international objectives and put together a strategy that will enable them to realize their goals. During the planning stage managers propose, revise, and finally ratify plans for entering new markets and competing in them.
After a strategy has been agreed on, managers must take steps to have it implemented. Consequently, this stage involves determining when to begin global operations as well as actually starting operations and putting into action the other components of the global strategy.
More specifically, the first stage—strategy formulation—entails analysis of the company and its environment, establishing strategic goals, and developing plans to achieve goals as well as a control framework. By assessing itself and the global business environment, a company can determine what markets, products, services, etc. offer opportunities for growth. This process involves the collection of data on a company and its environment, including information on global markets, regulation, productivity, costs, and competitors. Therefore, the collection of data should supply managers with economic, financial, political, legal, and social information on various countries and their markets for different products or services. Based on this information, managers can determine what markets and products offer economically feasible opportunities for global expansion.
In a 2008 article in The Journal of Global Business and Technology, Peter Mayer and Robert G. Vambery argued that traditional models for strategic analysis were not sufficient for operating in a global environment. Specifically, they proposed adding elements of change into the Product Life Cycle and SWOT (strengths, weakness, opportunities, threats) analyses. In the case of SWOT analysis, they point out that incorporating various types of change as elements for consideration can result in more than one strategy going forward.
Regardless of whether this is done or not, once this analysis is complete, managers must establish strategic goals, which are the significant goals a company seeks to achieve through a particular pursuit such as entering a new regional market. These goals must be practicable, measurable, and limited to a specific time frame. After the strategic goals have been established, companies should develop plans that allow them to accomplish their goals, and these plans should concentrate on how to implement strategic plans. Finally, strategy formulation involves a control framework, which is a process management uses to help ensure that a company remains on the right course when implementing its strategic plans. The control framework essentially responds to various developments while the strategic plans are being implemented. For example, if sales are lower than the projected sales that are part of the strategic goals, then a company might increase its marketing efforts and temporarily lower its prices to stimulate additional sales.
While many aspects of international strategy and its formulation are similar to their domestic counterparts, some key aspects are not, and hence call for different methods and different kinds of information. Gaining knowledge of international markets is one of these key differences—and a crucial part of developing an international strategy. In order for a company to enter a new market, capture market share, and thereby increase sales and profits, it must know what that market is like. At a basic level, a company must examine different markets, evaluate the advantages and disadvantages of entering each, and select only the markets that show the greatest potential for entry and growth.
When examining different international markets, a company should consider the market potential, competition, regulation, and cultural factors of each. Company managers can assess market potential by collecting data on the gross domestic product (GDP), per capita GDP, population, transportation, and other figures of various countries. This kind of information will enable managers to determine the spending power of the consumers in each country and determine if that spending power allows them to purchase a company's products or services. Managers also should consider the currency stability of the different markets, which can be done by using documents from the home countries to determine currency value and fluctuation over a period of years.
To select the best markets for entry, managers also should consider the degree of competition within different markets and should anticipate future competition in them as well. Determining the degree of competition involves the identification of all the companies competing in the prospective markets as well as their sizes, market shares, and prices. Managers then should evaluate a prospective market by considering the number of competitors and their characteristics as well as the market conditions—that is, whether the market is saturated with competition and cannot support any new entrants.
Next, managers should evaluate the regulatory environment of the prospective markets, since knowing tax, trade, and other related policies is essential for a successful international business. This step entails determining the respective tariffs and trade barriers of prospective markets. Different types of trade barriers may influence the kind of business activity a company chooses for a particular market. For example, if a prospective market has trade barriers that restrict the entry of foreign-made goods, a company might decide to access the market through foreign direct investment and manufacture its products in that country itself. Ownership restrictions also may limit a company's interest in a particular market; some countries permit foreign companies to set up local operations only if they establish a partnership with a local company. In addition, managers should find out if prospective countries charge foreign companies higher taxes or if they offer tax breaks and incentive to encourage economic development. A final consideration companies must make concerning government is stability. Since some countries have rough
government transitions resulting from coups and uprisings, companies must countenance the possibility of political turmoil that could substantially disrupt business.
The last step in international market evaluation is the assessment of cultural factors. To avoid difficulties associated with cultural differences, some managers look for new markets that have cultural similarities to their home market, especially for initial international market penetration endeavors. Unlike market potential, competition, and regulation, cultural differences are more difficult to evaluate. Nevertheless, managers must try to determine the consumer needs and preferences in the prospective markets. Managers must also account for cultural differences in labor relations such as worker motivation, compensation, hours, etc. if planning foreign direct investment in an overseas company. Moreover, a thorough understanding of a prospective country's culture will greatly facilitate any kind of global business enterprise. This cultural knowledge should include a basic understanding of a prospective country's beliefs and attitudes, language and communication styles, dress, food preferences and customs, time and time consciousness, relationships, values, and work ethic. This kind of cultural information is essential for developing an effective and realistic global strategy.
Since conducting primary research is labor intensive and time consuming, managers may obtain preliminary information on prospective markets from books such as Dun & Bradstreet's Guide to Doing Business Around the World and Business Protocol: How to Survive and Succeed in Business, or The Economist's “Doing Business in …” series, which list potential trade opportunities, policies, etiquette, taxes, and so on for various countries.
After examining the prospective markets in this manner, managers are ready to evaluate the advantages and disadvantages of each potential market. One way of doing so is the determination of costs, advantages, and disadvantages of each prospective market. The costs of each market include direct costs and opportunity costs. Direct costs are those a company pays when establishing a business in a new market, such as costs associated with purchasing property and equipment and producing and shipping goods. Opportunity costs, on the other hand, refer to the costs associated with the loss of other opportunities, since entering one market rules out or postpones entering another because of a company's limited resources. Hence, the profits that could have been earned in the alternative market constitute the opportunity costs.
Each prospective market usually has a variety of advantages, such as the possibility for growth, which will lead to greater revenues and profits. Other advantages include relatively low material and labor costs, new technology gaining strategic advantage over competitors, and matching competitors' actions. However, each prospective market also usually has a number of disadvantages, including opportunity costs, greater business complexity, and potential losses stemming from unforeseen aspects of prospective markets and from currency fluctuations. Other disadvantages might result from potential losses associated with unstable political conditions.
After a significant amount of globalization had taken place, business analysts began to examine the success of various strategies for doing business in other countries. This examination led to the distinction between various orientations of international strategies. The main distinction was between multi-domestic (also called multi-local) international strategies and global strategies. Multi-domestic international strategies refer to those that address competition in each country or region on an individual basis, whereas global strategy refers to addressing competition in an integrated and holistic manner across country and regional boundaries. Hence, multi-domestic international strategies attempt to appeal to the needs of customers in different countries or regions, while global strategies attempt to standardize products and marketing to work across boundaries. Instead of relying on one of these strategies, multinational companies might adopt a different strategy for different products or services. For example, a company might use a global strategy for its electronics and a multi-domestic strategy for its appliances.
Critics of the standardization approach argue that it makes two questionable assumptions: that consumers' needs are becoming more homogenous throughout the world and that consumers prefer high quality and low prices over advanced features and functions. Nevertheless, standardized global strategies have some significant benefits. Companies can reduce their marketing expenditures, for example, if they use the same ads in all their markets. Besides marketing savings, global strategies can lead to other kinds of benefits and advantages in areas such as design, packaging, manufacturing, distribution, customer service, and software development. Some have noted that standardization has the traditional benefits associated with many large organizations, such as efficiencies of speed and scale.
On the other hand, some people argue that companies must customize their products or services to meet the needs of various international markets, and hence must use a multi-domestic strategy at least in part. For example, KFC planned a standardized approach to its foray into the Japanese market, but the company soon realized it had to change its strategy to meet the needs of Japanese consumers and customize its operations in Japan. Consequently,
KFC introduced smaller pieces of foods to cater to a Japanese preference, and located restaurants in crowded areas along with other restaurants, moving away from independent sites. As a result of these changes, the fast-food restaurant experienced stronger demand in Japan. In another example, News Corporation originally relied on a global strategy with its STAR-TV satellite television network, attempting to provide the same television shows across Asia in English. The company quickly switched to a multi-domestic strategy, providing programming in local languages after receiving low ratings and advertising dollars with its first approach.
However, as Inkpen and Ramaswamy argue, real world strategies are more likely to be a mix of standardization and localization. In fact, they go so far as to assert that real world circumstances simply may not allow for a purely standardized global strategy. They also point out that even within an industry different firms may develop different combinations and degrees of standardized and localized approaches. As an example, they report that some automobile manufacturers try to tailor their cars for each market (which might have different regulatory environments, national tastes, and economies), while others seek to offer as standardized a product as possible across national borders. It is also important to note that markets may favor one approach over the other.
Finally, some management scholars have advocated a hybrid strategy of the two, arguing that companies must have a high degree of competency in both standardization and localization. Management scholars Bartlett and Ghoshal identified one such organizational model they termed a “transnational organization.” These organizations are highly decentralized, allowing for effective localization strategies, but they also involve a high degree of knowledge sharing throughout, allowing a company to also draw on many of the advantages of standardization.
However, a variety of corporate collapses, and the revelation of unethical and illegal practices in many international companies, has led to a focus on Corporate Governance and Ethics in the early twenty-first century. Issues of what constitutes socially responsible behavior are likely to be a major part of global strategy for the coming years. In a 2008 opinion piece, a Hewlett Packard employee also noted that business ethics were and should be a significant concern for companies with global reach. He cites the need to grow responsibly, particularly in countries that are still developing, as well as maintaining an ethical internal culture and having high standards for vendors.
SEE ALSO International Business; International Management; Macroenvironmental Forces; Management Information Systems; Multinational Corporations; Strategic Planning Failure; Strategic Planning Tools; Strategy Formulation; Strategy Implementation; Strategy Levels; Sweatshops; Transnational Organization
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