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Gbm unit-08 (international strategic management)

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Gbm unit-08 (international strategic management)

  1. 1. 07/06/10 1 By : Prof. Amit Kumar
  2. 2. 07/06/10 2 “A student pursuing management education from IILM- Graduate School of Management, for example may find himself or herself placed in a firm located in a totally different country. Knowledge about international business keeps the youngster mentally prepared to accept assignment in an alien environment. Forewarning is definitely forearming, for the fresh management graduate”. IILM-GSM Importance of this course Global Business Management
  3. 3. 07/06/10 3 Course: Global Business Management 1. Globalization 2. Global Trade & Theory 3. Global Technological Environment 4. Global Economic Environment 5. Global Political-Legal Environment 6. Foreign Direct Investments 7. Regional Economic Integration 8. Strategy and Structure of International Business IILM-GSM Global Business Management
  4. 4. IILM-GSM Global Business Management International Strategic Management 407/06/10
  5. 5. Contents • Nature of International Strategic Management • Opening Case: Ford Motor in Thailand, Nestle Global • Strategies in Increased Profitability for Multinational  Acquiring and or Developing Brands  Reaping Experience Curve Benefits  Realizing Location Economies  Skills and Core Competencies • Strategic choices for Global Expansion  Multi domestic strategy  International strategy  Global strategy  Transnational strategy IILM-GSM Global Business Management International Strategic Management 507/03/15
  6. 6. Strategic Management Defined: Set of managerial decisions and actions that determines the long-run performance of a firm. IILM-GSM Global Business Management International Strategic Management 6
  7. 7. 7 Basic Model of Strategic Management Four Basic Elements IILM-GSM Global Business Management International Strategic Management 7
  8. 8. 8 Evaluation and Control and Control Strategic Management Model Strategy Formulation Strategy Implementation Mission Objectives Strategies Policies Feedback/Learning Environmental Scanning Societal Environment General Forces Task Environment Industry Analysis Structure Chain of Command Resources Assets, Skills Competencies, Knowledge Culture Beliefs, Expectations, Values Reason for existence What results to accomplish by when Plan to achieve the mission & objectives Broad guidelines for decision making Programs Activities needed to accomplish a plan Budgets Cost of the programs Procedures Sequence of steps needed to do the job Process to monitor performance and take corrective action Performance External Internal Evaluation and Control IILM-GSM Global Business Management International Strategic Management 8
  9. 9. Nature of International Strategic Management • In concept, SM process in an MNC is similar to that in any other form of organization. • The main complicating factors being the numerous country and regional environments it has to analyze and understand before considering various strategic options. • Strategy implementation can be more difficult because different cultures have different norms, values and work ethics. IILM-GSM Global Business Management International Strategic Management 9
  10. 10. Nature of International Strategic Management Tata Steel (Group of Tata) succeed in acquiring another that is four times as large. The Tata Group (from Tea to Truck Conglomerate, most widely admired business group in India) spent 3 billion dollars on 19 acquisitions in five continents, from the Eight O’ Clock Coffee Co. in US to Daewoo in South Korea. IILM-GSM Global Business Management International Strategic Management 10
  11. 11. Nature of International Strategic Management • Ford Motor, which has re-entered the market in Thailand and despite a shrinking demand for automobiles, there is beginning to build a strong sales force to garner market share. The firm’s strategic plan is based on offering the right combination of price and financing to a carefully identified market segment. • In particular, Ford is working to bring down the monthly payments so that customers can afford a new vehicle. This is the same approach that Ford used in Mexico, where the currency crisis of 1994 resulted in serious problems for many multinationals. 07/06/10 11 IILM-GSM Global Business Management International Strategic Management
  12. 12. Nature of International Strategic Management Toyota is another MNC which has benefited vastly from strategic management. The company is going beyond the automotive market. In the process, Toyota is assessing environmental opportunities and threats and examining its internal strengths and weaknesses so that the firm’s strategic thrust can exploit its strengths and sidestep any shortcomings. 07/06/10 12 IILM-GSM Global Business Management International Strategic Management
  13. 13. Strategies to Increase Profitability in IB An MNC is able to increase its profitability in ways often not available to a domestic firm. For example a global firm able to: 1. Acquiring and or Developing Brands 2. Reaping Experience Curve Benefits 3. Realizing Location Economies 4. Skills and Core Competencies 07/06/10 13 IILM-GSM Global Business Management International Strategic Management
  14. 14. “ Nestle is the best example to be mentioned. Nestle is the world’s largest food company, employed over 384,000 people in 2009, 97% of whom worked outside Switzerland. In 2009, Nestle operated 880 factories in 156 countries. One half of its sales were in Europe, and 25% came from North America”. 1. Acquiring and or Developing Brands Strategies to Increase Profitability in IB 07/06/10 14 IILM-GSM Global Business Management International Strategic Management
  15. 15. Nestle has been highly successful in its global operations. It has adopted several strategies to achieve the success. 1. Strategy of acquiring and/or developing widely known brands. 2. Another important strategy is to continuously improve traditional products. For instance, Nestle produces over 200 types of instant coffee, all tailored to meet the requirements of specific countries. 3. The final strategy is that the company has given local managers substantial autonomy. 4. However, basic strategy, brand policy, and financial decisions are controlled at company headquarters in Vevey, Switzerland. Strategies to Increase Profitability in IB 07/06/10 15 IILM-GSM Global Business Management International Strategic Management
  16. 16. 2. Reaping Experience Curve Benefits Strategies to Increase Profitability in IB • The experience curve refers to the systematic reductions in production costs over the life of a product. The experience curve has greater strategic relevance. • The firm that moves down the experience curve most rapidly has a cost advantage over its competitors. • Serving the global market from a single location helps to establish low cost strategy. • Aim to rapidly build up sales, aggressive marketing strategies and first-mover advantages. 07/06/10 16 IILM-GSM Global Business Management International Strategic Management
  17. 17. 2. Reaping Experience Curve Benefits Strategies to Increase Profitability in IB ‘One firm that has exploited the strategy of experience curve to its advantage is Matsushita, a Japanese company. Along with Sony & Philips, Matsushita was in a race to develop a commercially viable videocassette recorder in the 1970s. Although Matsushita initially lagged behind Philips and Sony, it got its VHS format accepted as the world standard and reaped enormous experience- curved based cost economies’. 07/06/10 17 IILM-GSM Global Business Management International Strategic Management
  18. 18. 2. Reaping Experience Curve Benefits Strategies to Increase Profitability in IB ‘Matsushita’s strategy was to build global volume as rapidly as possible. To ensure that it could accommodate worldwide demand, the firm increased its production capacity 33-fold from 205,000 units in 1977, to 6.8 million units by 1984. By serving world market from a single location in Japan, Matsushita realized considerable experience curve advantages’. 07/06/10 18 IILM-GSM Global Business Management International Strategic Management
  19. 19. 3. Realizing Location Economies Strategies to Increase Profitability in IB • Because of differences in factor costs, certain countries have a comparative advantage in the production of certain products. For example, • Japan excels in the production of automobiles and consumer electronics. • The US excels in the production of pharmaceuticals, biotechnology and financial services. • Switzerland excels in the production of precision instruments and pharmaceuticals. • India excels in the production of computer software. 07/06/10 19 IILM-GSM Global Business Management International Strategic Management
  20. 20. 3. Realizing Location Economies Strategies to Increase Profitability in IB What does all these mean? • A firm does benefit by basing each of its value creation activities at that location where PEST factors are most conductive to the performance of that activity. Firms that pursue such a strategy are said to be realizing location economies. 07/06/10 20 IILM-GSM Global Business Management International Strategic Management
  21. 21. 3. Realizing Location Economies Strategies to Increase Profitability in IB General Motors (GM) did precisely the same thing. Design of its Pontiac Le Mans car was done in Germany, key components were manufactured in Japan, Taiwan and Singapore; assembly was performed in South Korea; and advertising strategy was formulated in Great Britain. Each of these countries was best suited to perform a particular value creation activity. 07/06/10 21 IILM-GSM Global Business Management International Strategic Management
  22. 22. 4. Skills and Core Competencies Strategies to Increase Profitability in IB The term core competence refers to skills within the firm that competitors can not easily imitate. The skills may exist in production, finance, R&D or marketing. • Toyota has, in the production of cars. • McDonalds’s has, in managing fast food operations. • P&G has, in developing and marketing consumer products. • Wal-Mart, in information system and logistics. 07/06/10 22 IILM-GSM Global Business Management International Strategic Management
  23. 23. Strategies to Increase Profitability in IB An MNC is able to increase its profitability in ways often not available to a domestic firm. For example a global firm able to: 1. Acquiring and or Developing Brands 2. Reaping Experience Curve Benefits 3. Realizing Location Economies 4. Skills and Core Competencies 07/06/10 23 IILM-GSM Global Business Management International Strategic Management
  24. 24. Strategic choices for Global Expansion 07/06/10 24 IILM-GSM Global Business Management International Strategic Management
  25. 25. Pressures for Cost Reductions • Intense in industries of standardized, commodity type product that serve universal needs • Major competitors are based in low-cost locations • Consumers are powerful and face low switching costs • Liberalization of world trade and investment environment • Examples – Bulk chemicals, petroleum, steel, personal computers 07/06/10 25 IILM-GSM Global Business Management International Strategic Management
  26. 26. Pressures for Local Responsiveness • Differences in consumer tastes & preferences – North American families like pickup trucks while in Europe it is viewed as a utility vehicle for firms • Differences in infrastructure & traditional practices – Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts • Differences in distribution channels – Germany has few retailers dominating the food market, while in Italy it is fragmented • Host-Government demands – Health care system differences between countries require pharmaceutical firms to change operating procedures 07/06/10 26 IILM-GSM Global Business Management International Strategic Management
  27. 27. Management Focus – Tailoring world cars to the U.S. market • Japanese automobile manufacturers customize car design to tastes of American consumers – Toyota released the Tundra with V8 engines which looks like a heavy-duty pickup truck with a powerful engine – Nissan let U.S. engineers and planners be completely responsible for development of most vehicles sold in North America – Honda customizes the Pilot, it’s next generation SUV according to tastes for American families who wanted bigger vehicles with three row seating 07/06/10 27 IILM-GSM Global Business Management International Strategic Management
  28. 28. Strategic choices for Global Expansion Four basic strategies to enter and compete in the international environment: 1. Multi domestic strategy 2. International strategy 3. Global strategy 4. Transnational strategy 07/06/10 28 IILM-GSM Global Business Management International Strategic Management
  29. 29. Multi-domestic Strategy Global Strategy International Strategy Transnational Strategy Pressure for Global Integration Pressureo High Low Low High Strategic choices for Global Expansion 07/06/10 29 IILM-GSM Global Business Management International Strategic Management
  30. 30. • Main aim is maximum local responsiveness. • A firm pursuing a multi-domestic strategy customizes its products to suit the needs of customers in each country in which is operates. The company transfers to its subsidiaries the core competencies it has developed at home and establishes a wholly owned subsidiary. • Strategic control is decentralized to each foreign subsidiary which operates automatically and develops its own set of value creation activities. • Multi-domestic strategy seek to take advantage of local differentiation. Multi-domestic Strategy Strategic choices for Global Expansion 07/06/10 30 IILM-GSM Global Business Management International Strategic Management
  31. 31. Strategies for Global Expansion • But the problem with this strategy is that each subsidiary becomes and stand-alone company. Because the resources and skills are transferred from the parent company, the benefit of global learning is lost. • The potential benefits from multi-domestic strategy need to be stated. The strategy can result in the establishment of a series of successful foreign subsidiaries. • Firms pursuing multi-domestic strategy tend to adopt worldwide area structure. • H.J. Heinz, Ford and GM, Philips pursued multi-domestic strategies when they first entered European Markets. Multi-domestic Strategy 07/06/10 31 IILM-GSM Global Business Management International Strategic Management
  32. 32. Strategies for Global Expansion Multi-domestic Strategy • Product customized for each market • Decentralized control - local decision making • Effective when large differences exist between countries • Advantages: – product differentiation – local responsiveness – minimized political risk – minimized exchange rate risk 07/06/10 32 IILM-GSM Global Business Management International Strategic Management
  33. 33. Strategies for Global Expansion Multi-domestic Strategy • Philips is a good example, followed a multi-domestic strategy. • This strategy resulted in: – Innovation from local R&D – Entrepreneurial spirit – Products tailored to individual countries – High quality due to backward integration Multi-domestic strategy presented Philips with many challenges: – High costs due to tailored products and duplication across countries – The innovation from the local R&D groups resulted in products that were R&D driven instead of market driven. – Decentralized control meant that national buy-in was required before introducing a product07/06/10 33 IILM-GSM Global Business Management International Strategic Management
  34. 34. Strategies for Global Expansion • International strategy replicates certain features of the multi- domestic approach. • As with multi-domestic strategy, the firm transfers its core competences to the foreign subsidiary so that it can reap the differentiation advantage. • But certain core competencies in R&D, marketing and product development are centralized at home. • All other operating decisions are decentralized (like multi-domestic strategy). The need for coordination is moderate. • Limit customization of product offering and market strategy. • Coco-Cola, Pepsi-Cola, pursue and international strategy. • These firms follow worldwide product division structure. • There is limited local responsiveness. International Strategy 07/06/10 34 IILM-GSM Global Business Management International Strategic Management
  35. 35. Strategies for Global Expansion • With a global strategy, a standardized product is manufactured at a few low-cost location and then offered to the global market. • As with international strategy, only limited customizing to suit the tastes of individual markets is allowed. • Product standardization allows a firm to achieve huge global economies of scale which translates to lower costs and lower prices. • When low price is accompanied by quality, the firm has a very strong competitive advantage. • AT&T is a typical company which pursues global strategy. • Firms pursuing global strategy operates with a worldwide product division structure. Global Strategy 07/06/10 35 IILM-GSM Global Business Management International Strategic Management
  36. 36. Strategies for Global Expansion Global Strategy • Product is the same in all countries. • Centralized control - little decision-making authority on the local level • Effective when differences between countries are small • Advantages: – Cost – Coordinated activities – Faster product development Semiconductor industries often adopt Global Strategy. IILM-GSM Global Business Management International Strategic Management 3607/06/10
  37. 37. Strategies for Global Expansion Global Strategy • Matsushita is a good example that followed a global strategy. • This strategy resulted in: – Strong global distribution network – Company-wide mission statement that was followed closely – Financial control – More applied R&D – Ability to get to market quickly and force standards since individual country buy-in was not necessary. The global strategy presented Matsushita with the following challenges: – Problem of strong yen – Too much dependency on one product - the VCR – Loss of non-Asian employees because of glass ceilings Matsushita Electric Industrial, now Panasonic Corporation, a multinational electronics corporation based in Kadoma, Japan IILM-GSM Global Business Management International Strategic Management 3707/06/10
  38. 38. Strategies for Global Expansion • Firms pursuing transnational strategy yield to both the pressures – global integration and local responsiveness. • The need for global integration creates pressures for centralizing some operating decisions (particularly production and R&D). • At the same time, the need to be locally responsive creates pressures for decentralizing other operating decisions to subsidiaries (particularly marketing). • Consequently, these companies tend to mix relatively high degrees of centralization for some operating decisions with relatively high degree of decentralization for others. • These firms tend to operate with matrix type structures in which both product division and areas have significant influence. Transnational Strategy IILM-GSM Global Business Management International Strategic Management 3807/06/10
  39. 39. Strategies for Global Expansion • P&G is one example of an MNC which is pursuing the transnational strategy. • Starting with multi-domestic strategy in 1980s, by 1990s the largest soaps and detergents manufacturer switched to transnational strategy. • P&G now co-ordinates its skills and resources to reduce cost across countries and increase its differentiation advantage inside each country as well. The new strategy gives P&G a competitive advantage over its arch rival, Unilever. Transnational Strategy IILM-GSM Global Business Management International Strategic Management 3907/06/10

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