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Chapter 10
Global Strategy: Competing
Around the World

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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Learning Objectives
1. Define globalization, multinational enterprise (MNE),
foreign direct investment (FDI), and global strategy.
2. Explain why companies compete abroad, and evaluate
the advantages and disadvantages of going global.
3. Apply the CAGE distance framework to guide MNE
decisions on which countries to enter.
4. Compare and contrast the different options MNEs have to
enter foreign markets.
5. Apply the integration-responsiveness framework to
evaluate the four different strategies MNEs can pursue
when competing globally.
6. Apply Porter’s diamond framework to explain why certain
industries are more competitive in specific nations than in
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 What is Globalization?

A process:
• Closer integration and exchange.
• Between countries and peoples worldwide.

Made possible by:

• Falling trade and investment barriers.
• Advances in telecommunications.
• Reductions in transportation costs.

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 Global Strategy

Part of a firm’s corporate strategy to:

• Gain and sustain a competitive advantage.
• Compete against foreign and domestic companies.
Foreign direct investment:
• Investments in value chain activities abroad.
Multinational enterprise:
• Deploys resources and capabilities in two countries or
more.

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 Stages of Globalization
Globalization 1.0: 1900 to 1941:
• Sales, operations, and some procurement.
• Strategy flowed from headquarters to international sites.
Globalization 2.0: 1945 to 2000:
• To reconstruct damage from the war.
• Focus on European countries, Japan, and Australia.
• Greater local responsiveness.
• Headquarters set goals and international sites influenced
tactics.
Globalization 3.0: 21st Century:
• Business function locations are based on costs, capabilities, and
PESTEL factors.
• Companies can operate 24/7, 365 days a year.
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 The Current State of Globalization

The world only semi-globalized:

• The level of globalization is at 10-25% total.
Evidence:
• 2% of all voice-calling minutes are cross-border.
• 3% of world’s population are immigrants.
• 9% of investments are foreign direct investments.
• 15% of patents list at least one foreign inventor.
• 18% of Internet traffic crosses national borders.
Retrenchment may occur in the future:
• There has been a rise of nationalism.

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 Advantages and Disadvantages of International Expansion

Exhibit 10.5

Access the text alternate for slide image.

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 Advantages of Going Global

Gain access to a larger market.

Gain access to low-cost input factors.

Develop new competencies.

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 Advantage #1: Gain Access to a Larger
Market

Helps multinational enterprises with economies of

scale and scope.
• Participating in a much larger market.

Opportunities to outcompete local rivals.

Helps firms in smaller economies:

• Achieve growth.
• Gain and sustain competitive advantage.

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 Advantage #2: Access to Low-Cost Input
Factors
Helps multinational enterprises that pursue a low-
cost leadership strategy.
Examples of low-cost raw materials: lumber, iron
ore, oil, and coal.

Has been a key driver of globalization:

• Lower labor costs is the main focus now.
• India provides well-educated English-speaking young
people.
• China provides low labor costs and an efficient
infrastructure.
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 Advantage #3: Develop New
Competencies
Helps multinational enterprises that pursue a
differentiation strategy.

Access to:
• Communities of learning.
• Specific geographic regions.
• Location economies.
• Locating value chain activities in optimal geographies.

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 Disadvantages of Going Global

1. Liability of foreignness.

2. Loss of reputation.

3. Loss of intellectual property.

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 Disadvantage #1: Liability of Foreignness

Unfamiliar cultural environment.

Unfamiliar economic environment.

Coordinating across geographic distances.

Can result in additional costs.

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 Disadvantage #2: Loss of Reputation

Reputation is one of the most valuable resources.

• Reputation dimensions can include innovation, customer
service, brand reputation.

Loss of reputation can diminish competitiveness.

• Low wages, long hours, and poor conditions.
• Local government may be corrupt.
• Safety standards may not be enforceable.
This challenge concerns corporate social
responsibility
(Chapter 1).
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 Disadvantage #3: Loss of Intellectual Property

It can be difficult to protect IP in foreign markets.

• Particularly software, movies, and music.
• Copyright infringements can occur.

Some countries are known for partnering initially,

but then reverse-engineering capabilities.
• Intellectual property exposure.

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 The CAGE Distance Framework

Distance is the main cost and risk of expansion.

CAGE is an acronym for different types of distance:

• Cultural.
• Administrative and political.
• Geographic.
• Economic.
Guides multinational enterprise decisions on which
countries to enter.

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 Cultural Distance

Disparity between a firm’s home and host country,

specifically social norms and morals, beliefs, and
values.

Made up of:
• Power distance.
• Individualism.
• Masculinity–femininity.
• Uncertainty avoidance.
• Long-term orientation.
• Indulgence.
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 Administrative and Political Distance

Captured in factors such as:

• Shared monetary or political associations.
• Political hostilities.
• Weak or strong legal and financial institutions.

Political and administrative barriers include:

• Tariffs, quotas and restrictions.

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 Geographic Distance

More than just physical distance.

Measured by:
• Physical size (Canada versus Singapore).
• Within-country distances to its borders.
• Topography.
• Time zones.
• Whether the countries are contiguous.
• Access to waterways and the ocean.
• Infrastructure.
• Roads, power, and telecommunications.

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 Economic Distance

Wealth and per capita income of consumers.

• Wealthy countries engage in more cross-border trade.

Wealthy countries trade with wealthy countries.

• Economies of experience, scale, scope, and
standardization
• Similar infrastructure and resources.

Wealthy countries trade with poor countries.

• Access to low-cost input factors (economic arbitrage).

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 Modes of Foreign-Market Entry along the Investment and
Control Continuum

Exhibit 10.7

Access the text alternate for slide image.

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 Cost Reductions vs. Local Responsiveness

Two opposing forces in Globalization

global competition: hypothesis:
• Cost reductions: key • Consumer needs and
competitive weapon. preferences are
• Local responsiveness: converging.
tailoring to specific • Food, music, movies,
preferences. clothing.
• Examples: McDonalds,
Coca-Cola, rock music,
Greek salad, Hollywood
movies, Levi jeans.

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 The Integration-Responsiveness Framework: Global Strategy
Positions and Representative MNEs

Exhibit 10.8
Source:. Adapted from C.K.
Prahalad and Y.L. Doz
(1987), The Multinational
Mission (New York: Free
Press); and K. Roth and
A.J. Morrison (1991), “An
empirical analysis of the
integration-responsiveness
framework in global
industries,” Journal of
International Business
Studies 21: 541–564.

Access the text alternate for slide image.

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 International Strategy

When a company sells Often used successfully

the same products or by multinational
services in both enterprises with:
domestic and foreign • Large domestic markets.
markets. • Strong reputations and
Low cost reductions / brand names.
low local
responsiveness:
• Leverages home-based
core competencies.
• Sells the same products
domestically and abroad.
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 Multidomestic Strategy

Low-cost reductions / high-local responsiveness:

• Local consumers ideally perceive products as local.

Can be costly and inefficient:

• Duplication of business functions across countries.

Common in:
• Consumer products industry.
• Food industry.

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 Global-Standardization Strategy

High-cost reductions / low-local responsiveness:

• Economies of scale and location economies.
• Achieved through global division of labor.
• Based on wherever capabilities have lowest cost.

Price, the main competitive weapon:

• Minimal local adaptation.

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 Transnational Strategy

High-cost reductions / high-local responsiveness:

• “Think globally, act locally.”
• Best practices, ideas, and innovations used everywhere.
Used by multinational enterprises that pursue a blue
ocean strategy.

Difficult to implement:
• Duplication of efforts.
• Organizational complexity.

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 Dynamic Strategic Positioning: Google’s YouTube

Exhibit 10.10 Access the text alternate for slide image.

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 National Competitive Advantage
• South Korea and Japan:
Death of distance consumer electronics.
hypothesis: • Australia: mining.

High-performing firms for • India: business process

outsourcing.
certain industries are
concentrated in specific • Germany: engineering and
cars.
countries.
• Italy: fashion.
• United States:
biotechnology, software, • France: wine.
internet.
• China and Taiwan:
computer manufacturing.

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 Porter’s Diamond of National Competitive Advantage

Exhibit 10.11
Source:. Adapted from M.E. Porter (1990, March–April), “The competitive
advantage of nations,” Harvard Business Review: 78.

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 Factor Conditions

A country’s Other important factors:

• Capital markets,
endowments:
institutional frameworks,
• Natural, human, and other research universities,
resources. public infrastructure.
• Resource-rich: focus on • Airports, roads, schools,
commerce. health care system, etc.
• Resource-lacking: focus
on human capital.

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 Demand Conditions

Characteristics of demand in a firm’s domestic

market.

Customers hold companies to standards of value

creation:
• Developments in research.
• Cost containment.
• New commercial applications for the market.

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 Competitive Intensity in a Focal Industry

Competitive environments lead to better

performance.

Example: German car industry:

• Fierce domestic competition,
• Demanding customers,
• Results in top-notch engineering.

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 Related and Supporting
Industries/Complementors
Leadership in related and supporting industries
fosters complementors in downstream industries:
• Firms that provide an additional good or service.
• Combined with the primary product.
• Leads customers to value the firm’s offering more.
• Further strengthens national competitive advantage.

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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.