Global Business Strategy: Design & Implementation

GEB 6365 - INTERNATIONAL BUSINESSEXECUTIVE MBANovember 03, 2006

What is strategy?

• A Creative thought, an idea, a concept, or a plan that uses the natural laws to its advantage to turn a potential loss into victory. It is a plan or a series of maneuvers for obtaining a specific goal or result.

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Sun Tzu: The Art of War --- 500 B.C.

• Consists of 13 short chapters with titles such as “estimates,” “terrain,” “offensive strategy,” “employment of secret agents.”

• Written in form of short stories or verses averaging 30-40 per chapter

• Example: Victory is the main object in war… We have not yet seen a clever operation that was

prolonged…for there has never been a protracted war from which a country has benefited.

• Art of Offensive Strategy– When ten to the enemy’s one, surround

him…– When five times his strength, attack him…– If double his strength, then divide him…– If equally matched, you may engage him…– If weaker numerically, be capable of

withdrawing…– And if in all respects unequal, be capable of

eluding him…

– To foresee a victory which the ordinary man can foresee is not the acme of skill…

– The skillful commander takes up a position in which he cannot be defeated and misses no opportunity to master his enemy…

– Thus a victorious army wins its victories before seeking battle: an army destined to defeat, fights in the hope of winning

Who are Strategists?

• People who understand the natural laws and the outcomes they govern, and can creatively use the same in their favor.

What has History Taught Us?

• Strategy is about seeking an “unfair” advantage in situations where it is the outcome and not the game that counts.

• Formulating strategy requires that you know the laws that govern the outcomes of the particular competition.

What has History Taught Us?

• Specific knowledge of the competitors and the situation are needed to produce real, implementable strategies.

• Creating strategies that win is a skill that can be learned.

Importance of Competition

• Strategy cannot be formulated in vacuum.

• Competition determines the appropriateness of a firm’s strategic actions, and hence, is at the core of the success or failure of firms.

Competition, Competitive Strategy, and Competitive Advantage

• A firm’s strategy cannot be formulated in vacuum

• Competition is at the core of the success or failure of firms

• Competition determines the appropriateness of a firm’s activities that contributes to its performance

• Competitive strategy is the search for a favorable competitive position in an industry.

Competitive Advantage

The set of unique features of

a company and its products that

are perceived by the target

market as significant and superior

to the competition.

SustainableCompetitive Advantage

An advantage

that cannot be copied

by the competition.

Industry Structure Analysis

• The essence of formulating a CS is relating the firm to its environment

• The key aspect of a firm’s environment is the industry in which it competes

Industry Structure Analysis The five competitive forces

Industrycompetitors

Rivalry amongexisting firms

Potentialentrants

Potentialentrants

SubstitutesSubstitutes

SuppliersSuppliers BuyersBuyers

Bargaining powerof suppliers

Bargaining powerof Buyers

Threat ofnew entrants

Threat ofsubstitute productsor services

Barriers to Entry

• Economies of scale• Product differentiation• Capital requirements• Switching costs• Access to distribution channels• Other advantages

– Patents– Government subsidies

Continuum of competition

• Number ofsellers

• Productdifferences

• Importance ofmarket mix

• Large numberof sellers

• Similar products

• Distribution isimportant

• Large numberof sellers

• Unique butsubstitutable

• Pricing isimportant

• A few largecompetitors

• Similarproducts

• Promotion iskey to achieveperceivedproductdifferences

• Singleproducer

• Unique andunsubstitutable

• Unimportant

BASIS OFCOMPARISON

PURECOMPETITION

MONOPOLISTICCOMPETITION OLIGOPOLY MONOPOLY

Number of sellersMany One

Number of Sellers and Differentiation

Low

High

Low High

Nu

mb

er o

f se

llers

Differentiation

Pure monopoly Oligopoly

Purecompetition

Monopolisticcompetition

Types of CompetitionTypes of Competition

DirectDirect

• Nike Vs Reebok Vs Adidas

© PhotoDisc

Types of Competition

Direct

IndirectIndirectMcDonalds vs. Pizza Hut vs. Arby’s vs. Chinese takeout

© PhotoDisc

Types of Competition

Direct

Indirect

General (Budget)General (Budget)

© PhotoDisc

Competing for the same dollars

Levels of Competition

Share of the Mind

Share of the Wallet

Generic Competition

Product Category

ProductForm

Direct toIndirect

Defining the Competitive Set

• Levels of Marketing Competition

– Product Form based competition – Diet Colas– Product Category based competition – Soft Drinks– Generic or “need-based” perspective - Beverages– Rivalry or “Budget-based” competition – Food,

Entertainment, etc.

Defining the Competitive Set

• Identifying Competitors– SIC categories– Substitutability– Managerial Judgment– Customer Purchase based measures

• Brand Switching Data• Cross-Elasticity of Demand

– Customer Judgment based measures

Basic Competitive Strategies

• Cost Leadership

• Differentiation

• Focus (Niche)

How will you compete?On Cost (lowest cost

supplier) On Value (Differentiation)

Cost Position

Low High

Cost Leadership• Objectives -

– Lowest cost and price across the industry

– Profitability through volume and market share

• Advantage - Cost leaders are survivors. Profitable under a wide range of conditions– industry price wars

– economic downturns

• Disadvantages -– Costly - takes a long time to achieve

– Tends to be unstable (not sustainable) - can be emulated (lower cost producers)

Sources of Cost Leadership

• Minimized Service– Southwest Airlines– Wal-Mart

• Scale Economies– McDonald's– Henry Ford

• Technology– Dell (business model)

Cost leadership is not the same as “cheap!”

Value/Differentiation

• Objectives -– Unique ability to satisfy a consumer want across an industry– High perceived value relative to cost– Profitability through price premium, volume, and share

• Advantage - Highly profitable• Disadvantages -

– Hard to sustain– Vulnerable to competitive emulation.– Market drives out non-essential differentiation over life cycle

Sources of Differentiation

• Service, Support– IBM– Caterpillar

• Unique Technology– Apple (pre-Windows)– Palm

• Ubiquity– Hertz– AT&T

Technological leadership aloneis not the basis of a sustainable strategy!

Four Generic Competitive Strategies … Cost, Differentiation, Focus

Cost Position

MarketShare

Broad

Narrow

Low High

Low CostPosition Differentiation

CostFocus

DifferentiationFocus

Focus strategies- flanking attacks- guerrilla tactics

Broadly targeted

strategies

(frontal assault)

Focus Strategies

• Objectives - Find a limited segment where you can compete on either cost leadership or differentiation and ignore the rest.

• Advantages - – Less costly - don't need a competitive advantage across the

industry

– Unattractive target

– Less competition

• Disadvantages - – Could become "too successful" and attract broadly targeted

firms

– Highly dependent on health of industry, economy

Examples of Cost Focusers

Strategy Example Targeted At

Oil Retailing Mapco Exxon, Shell, etc.

Long Distance Calling

"Dial-Arounds" AT&T, MCI, Sprint

Home, Small Office Computing

“White Box” (unbranded) PC builders

Branded PC mfrs (Compaq, Dell, etc.)

Regional Air Travel

Airtran Major Carriers

Examples of Differentiation Focusers

Strategy Example Targeted At

High-End Touring Cars

BMW Cadillac, Lincoln

Scientific/ Technical Computing

Sun IBM

Financial Services

“Boutique” (personalized) advisors

Merrill-Lynch

Analysis software

@RISK Excel

Worst possible position . . .

Cost Position

MarketShare

Broad

Narrow

Low High

Low CostPosition Differentiation

CostFocus

DifferentiationFocus

Cost, Differentiation, Focus

Broadly targetedstrategies(frontal assault)

Stuckin the Middle Focus strategies

- flanking attacks- guerrilla tactics

Stuck In The Middle . .

• NEITHER COST NOR DIFFERENTIATION LEADERSHIP

• ALL THINGS TO ALL PEOPLE

• LOW PROFIT MARGINS

• DECLINING SHARE

Can two or more players occupythe same space at the same

time?

Cost Position

Scope(MarketShare)

Broad

Narrow

Low High

Can two or more players occupythe same space at the same

time?

Cost Position

Scope(MarketShare)

Broad

Narrow

Low High

Strategy is….

• making tradeoffs in competing ... choosing what not to do”

Southwest Airlines Continental Lite

Industry Analysis• Can help reveal

– industry structure& competitive strategies– firm’s strategic challenges– market opportunities

• But, firm’s ability to create world-wide advantage will be greatly influenced and constrained by– existing asset configurations– its historical definition of management responsibilities– ingrained organizational norms

Administrative Heritage• A firm’s organizational history,• the values, norms and practices of its management, &• its management culture

• It can be, at the same time– the firm’s greatest assets -- the underlying source of its

key competencies– and also a significant liability, since it resists change and

thereby prevents realignment or broadening of strategic capabilities

Factors Governing Global Competition

• Country-Specific Advantages

• Government Policies

• Industry Structure• Organizational Structure & Strategic

Attributes of the Firms

Management Orientation

• Ethnocentric

• Polycentric

• Geocentric

• Regiocentric

What are You….International, Multinational, Global or

Transnational?

• International– Strategy is to transfer skills and products

(derived from core competencies) to markets where indigenous competitors lack those skills and products.

• Multinational– Strategy is to target independent markets

and to maximize local responsiveness

• Global– Strategy is to target the global market

place, thereby achieving cost reductions that come from experience curve and economies of scale.

• Forces Driving Global integration– Manufacturing Efficiency– Scale Economies– Cross Subsidization– Synergistic benefits

• Forces Driving National Responsiveness– Consumer Tastes and Preferences– Local Competitors– Host Government Policies– Market Infrastructure

Industry Globalization Drivers

• Market Drivers– Common Customer Needs– Global Customers & Channels– Transferable Marketing Mix– Lead Countries

• Cost Drivers– Global Economies of Scale & Scope– Steep Learning & Experience Curve Effects– Favorable Logistics– Shortening PLC, Rising R&D & Development Costs– Fast Changing Technology

Industry Globalization Drivers

• Government Drivers– Favorable Trade Policies– Compatible Technical Standards– Common Marketing Regulations– Government as a Customer & Competitor

• Competitive Drivers– Presence of Global Competitors– Presence of Strong Local Competitors– Competitive Interdependence across markets

International Marketing Decisions

• Global Product Strategies

• Standardization versus Customization

• Multinational Diffusion

• Global Communications

• Differences in Distribution Systems

International Product Strategy

• Factors Encouraging Standardization– Economies of scale– Increasing size of homogenous segment– Consistent image– Time to Market– Modular Vs. Core Product Approach

• Factors Encouraging Adaptation/Customization– Mandatory adaptation– Discretionary adaptation– Environmental Differences– Meeting Consumer Needs

Multinational Diffusion

• How do consumers in different countries react to a new product/service?

• What role does culture play in influencing consumers’ reactions to new product introductions?

• Is it possible to forecast sales and the time it would take for a product to achieve a certain level of market penetration?

Multinational Diffusion

• The diffusion of a new product/service is a culture-specific phenomenon. Differences in the adoption process can be explained by country-specific factors.– (Gatignon, Eliashberg, and Robertson (1989))

• Differences in the rate of diffusion between high Vs. low context cultures

(Takada and Jain, 1991)

Multinational Diffusion

• Existence of a lead-lag effect in cross-national diffusion patterns, i.e., the later a product gets introduced in a country, the faster will be the adoption.– (Takada and Jain, 1991)

• Rogers (1983) attributes of an innovation that can potentially accelerate adoption– relative advantage of the new product– compatibility with the needs of adopters– Complexity; Observability & Trialability

Learning Effect - The Concept

• When a new product/technology is introduced first in one country and with a time lag in subsequent countries, there exists an opportunity for consumers in the lag countries to learn from the experience of the lead country adopters. This Phenomenon is what is referred to as the “learning effect.”– (Ganesh &Kumar 1996).

• Such a learning has the potential to reduce the risk associated with adopting the new product, thus contributing to an accelerated diffusion of the product in the lag countries.

Learning EffectBetween Lead &

Lag Markets

Geographical Proximity

CulturalSimilarity

EconomicSimilarity

Time Lag

Type ofInnovation

Technical Standard

Faster Adoption in Lag Markets

Manufacturers’Actions in Lag

Markets

• The smaller the geographical distance is between the lead and lag markets, the stronger will be the learning effect.

• The more similar the lead and lag markets are culturally, the stronger will be the learning effect.

• The more similar the lead and lag markets are economically, the stronger will be the learning effect.

• The time lag between the introduction of an innovation in the lead and lag markets is positively related to the learning effect.

• In the case of continuous innovations, the learning effect will be stronger when compared with discontinuous innovations.

• The existence of an industry standard for the technology enhances the learning effect; conversely, a lack of a technical standard weakens the learning effect.

Factors Influencing Intl. Advertising Strategy

• Product-Market Conditions

• Culture

• Govt. Laws & Regulations

Communication Objectives

• Educate the Consumer?

• Create Awareness?

• Induce Trial?

• Induce Loyalty Behavior?

Product-Market Conditions

• Economic Similarity

• Stage in PLC

• Competitive Intensity

• Infrastructural Facilities

Infrastructural Facilities

• Media Availability & Usage– Outdoor ads. (Bolivia 48%)– Cinema ads. (common in Nigeria)– Radio (popular in Nepal & Mexico)– Print (Norway 97%; Oman 100%)– TV (Peru 88%; Costa Rica 78 %)

Laws Affecting Promotions

– Most controversial element of international marketing, advertising and sales promotion

– Laws pertain to:• message• media• truthfulness• use of models• ban on certain sensitive products

Govt. Laws & Regulations

• Government Regulations governing Media & Message– Sweden - ban on TV ads– Germany - only 15-20 mins per day– France, Belgium etc. - ban on comparative

advertisements– Saudi Arabia - ban use of women– U.S. - ban use of fortune tellers– Canada, Japan, France - ban use of cartoon

characters in ads to children

• Government Regulations on Certain Promotions

• Government Regulations on Certain Products– Tobacco– Alcoholic beverages– Slimming products (Australia & France)

– Toothpaste– Aspirin– Investments & savings– Contraceptives– Detergents

Gray Market

• Unauthorized middlemen who circumvent authorized marketing channels by buying in low-price markets and reselling in high-price markets

– Cameras

– Watches

– Toothpaste

Japan’s Distribution System

• Multi-layered complex channels of distribution

• special relationships between channel members - “Keiretsu”

• Inefficient Distribution

• Exclusionary business practices

• Structural Impediments Initiative (SII)

Keiretsu

alignments or combination of companies, more or less closely related & coordinated, that do business with one another on a regular and often quite intimate basis

• Capital Keiretsu• Enterprise Keiretsu• Distribution Keiretsu