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(12) How China Is Changing Your Internet | The New York Times – YouTube
Please use your own words. No references allow. You must thoroughly answer all the questions (min. 300 words). You need to draw from theories and concepts rather than using common sense. Chapter materials are on the PowerPoint.
1. What is design thinking, and how is it different from grand design? When is grand design more effective in innovation than design thinking?
2. What is WeChat’s approach to innovation?
3. What are some key components of grand design?
4. What should innovators take away from WeChat’s experience?
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International Strategy: Creating Value in Global Markets
chapter 7
Learning Objectives
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After reading this chapter, you should have a good understanding of:
LO7.1 The importance of international expansion as a viable diversification strategy
LO7.2 The sources of national advantage; that is, why an industry in a given country is more (or less) successful than the same industry in another country.
LO7.3 The motivations (or benefits) and the risks associated with international expansion, including the emerging trend for greater off shoring and outsourcing activity.
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Learning Objectives
LO7.4 The two opposing forces – cost reduction and adaptation to local markets – that firms face when entering international markets.
LO7.5 The advantages and disadvantages associated with each of the four basic strategies: international, global, multidomestic, and transnational.
LO7.6 The difference between regional companies and true global companies.
LO7.7 The four basic types of entry strategies and the relative benefits and risks associated with each of them.
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International Strategy
Consider…
The global marketplace provides many opportunities for firms to increase their revenue base and their profitability.
However, managers face many opportunities and risks when they diversify abroad.
What should a firm do in order to attain a competitive advantage in this global marketplace?
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The trade among nations has increased dramatically in recent years and it is estimated that by 2015, the trade across nations will exceed the trade within nations. This makes international expansion a viable diversification strategy. In a variety of industries such as semiconductors, automobiles, commercial aircraft, telecommunications, computers, and consumer electronics, it is almost impossible to survive unless firms scan the world for competitors, customers, human resources, suppliers, and technology. Firms need to know how to be successful and create value when diversifying into global markets. Some of the questions that need to be answered include: what explains the level of success of a given industry in a given country? What are some of the major motivations and risks associated with international expansion? How can firms handle the opposing forces of cost reduction and local adaptation – should firms pursue international, global, multidomestic, or transnational strategies? What entry strategies should a firm choose in order to enter a foreign market?
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International Strategy
Globalization has to do with the rise of market capitalization around the world:
International exchanges have increased
Trade in goods & services
Exchange of money, information, & ideas
Laws, rules, norms, values, and ideas are growing more similar across countries
Challenges include balancing between emerging markets & developed markets
How to meet the needs of customers at very different income levels
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Globalization = has two meanings. One is the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information. Two is the growing similarity of laws, rules, norms, values, and ideas across countries. Globalization has undeniably created tremendous business opportunities for multinational corporations. One of the challenges with globalization is determining how to meet the needs of customers at very different income levels. In many developing economies, distributions of income remain much wider than they do in the developed world, leaving many impoverished even as the economies grow. The concept “bottom of the pyramid” refers to the practice of a multinational firm targeting its goods and services to the nearly 5 billion poor people in the world who inhabit developing countries. See Strategy Spotlight 7.1.
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International Strategy
Exhibit 7.1 Growth in GDP per Person from 2001 to 2011 by Region
Source: A game of catch-up. The Economist, September 24: 3-6.
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The rapid rise in global capitalism has had dramatic effects on the growth in different economic zones. The growth experienced by developed economies in the first decade of the 2000s was anemic, while the growth in developing economies was robust. This trend is continuing, with emerging markets growing 4% faster than developed markets in 2011 and 2012. This has resulted in a dramatic shift in the structure of the global economy. As of 2013, over half the world’s output will come from emerging markets. This fact affects a firm’s international strategy.
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Factors Affecting a Nation’s Competitiveness
Michael Porter’s diamond of national advantage explains why some nations and their industries outperform others:
Factor endowments
Demand conditions
Related and supporting industries
Firm strategy, structure, & rivalry
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Some nations and their industries are more competitive than others. Understanding these differences helps a firm create a competitive advantage when it expands internationally. Diamond of national advantage = a framework for explaining why countries foster successful multinational corporations, consisting of four factors – factor endowments; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry. These four attributes jointly determine the playing field that each nation establishes and operates for its industries. Factor endowments = a nation’s position in factors of production. Demand conditions = the nature of home-market demand for the industry’s product or service. Related and supporting industries = the presence, absence, and quality in the nation of supplier industries and other related industries that supply services, support, or technology to firms in the industry value chain. Firm strategy, structure, and rivalry = the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
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Factors Affecting a Nation’s Competitiveness
Factor endowments involve factors of production:
Land
Capital
Labor
Factors of production must be industry & firm specific
Must be rare, valuable, difficult to imitate, and rapidly & efficiently deployed
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Factors of production are the building blocks that create usable consumer goods and services. Companies and advanced nations seeking competitive advantage over firms and other nations create many of these factors of production. For example, a country or industry dependent on scientific innovation must have a skilled human resource pool to draw upon. This resource pool is not inherited; it is created through investment in industry–specific knowledge and talent. The actual pool of resources is less important than the speed and efficiency with which these resources are deployed. Thus, firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to a nation’s competitive advantage. The island nation of Japan is given as an example.
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Factors Affecting a Nation’s Competitiveness
Demand conditions refer to the demands that consumers place on an industry
Demanding consumers drive firms in that country to:
Meet high standards
Upgrade existing products and services
Create innovative products and services
Better anticipate future global demand
Proactively respond to product & service requirements
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Consumers who demand highly specific, sophisticated products and services force firms to create innovative, advanced products and services to meet the demand. This consumer pressure presents challenges to a country’s industries. Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. The conditions of consumer demand influence how firms view a market. This, in turn, helps the nation’s industries to better anticipate future global demand conditions and proactively respond to product and service requirements. Denmark is given as an example.
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Factors Affecting a Nation’s Competitiveness
Related and supporting industries enable firms to manage inputs more effectively:
A competitive supplier base
Reduces manufacturing costs
Close working relationships with suppliers
Allows for joint research & development
Development of related industries
Forces existing firms to practice cost control, product innovation, better distribution methods
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A home country’s industries can become a source of competitive advantage when related and supporting industries are developed. Countries with a strong supplier base benefit by adding efficiency to downstream activities. A competitive supplier base helps a firm obtain inputs using cost effective, timely methods, thus reducing manufacturing costs. Also, close working relationships with suppliers provide the potential to develop competitive advantages through joint research and development and the ongoing exchange of knowledge. Related industries create the probability that new companies will enter the market, increasing competition and forcing existing firms to become more competitive through efforts such as cost control, product innovation, and novel approaches to distribution. Combined, these give the home country’s industries a source of competitive advantage. The Italian footwear industry is given as an example.
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Factors Affecting a Nation’s Competitiveness
Firm strategy, structure, & rivalry due to
Strong consumer demand
Strong supplier base
High new entrant potential from related industries
Domestic rivalry leads to a search for new markets
Rivalry is a strong indicator of global competitive success
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Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new entrant potential from related industries. This competitive rivalry in turn increases the efficiency with which firms develop, market, and distribute products and services within the home country. Domestic rivalry thus provides a strong impetus for firms to innovate and find new sources of competitive advantage. This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness. Domestic rivalry is perhaps the strongest indicator of global competitive success. Firms that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete in world markets.
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Question?
All of the factors below have made India’s software services industry extremely competitive on a global scale except
a large pool of skilled workers.
a large network of public and private educational institutions.
tax and antitrust legislation that protect the dominant players in the industry.
A large, growing market, and sophisticated customers.
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Answer: C. See the discussion of Porter’s diamond of national advantage. Factor conditions, demand characteristics, and the existence of related and supporting industries are all factors that affect a nation’s competitiveness. Policies that protect the nation’s domestic competitors do not lead to a nation’s competitive advantage on the worldwide stage.
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Example: Factors Affecting a Nation’s Competitiveness
Exhibit 7.2 India’s Diamond in Software
Source: From Kampur D.,and Ramamurti R., “India’s Emerging Competition Advantage in Services,” Academy of Management Executive: The Thinking Managers Source. Copyright © 2001 by Academy of Management. Reproduced with permission of Academy of Management via Copyright Clearance Center..
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Firms that succeed in global markets have first succeeded in intensely competitive home markets. Competitive advantage for global firms typically grows out of relentless, continuing improvement, and innovation. The Indian software industry offers a clear example of how the attributes in Porter’s “diamond” interact to lead to the conditions for a strong industry to grow. See Strategy Spotlight 7.2 for information on how mutually reinforcing elements work in this market.
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International Expansion:
Motivations
A company decides to become a multinational firm in order to:
Increase market size
Attain economies of scale
Take advantage of arbitrage opportunities
In every stage of the value chain
Enhance a product’s growth potential
Reinvigorating the product life cycle
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Multinational firms = firms that manage operations in more than one country. Companies pursue international expansion in order to increase the size of potential markets for firms’ products and services. Expanding a firm’s global presence also automatically increases its scale of operations, providing it with a larger revenue and asset base, which potentially enables the firm to attain economies of scale. This can also spread fixed costs such as R&D over a larger volume of production. Arbitrage opportunities = an opportunity to profit by buying and selling the same good in different markets. In its simplest form, arbitrage involves buying something from where it is cheap and selling it somewhere where it commands a higher price. Arbitrage can be applied to virtually any factor of production and every stage of the value chain. Walmart is an example. Enhancing the growth rate of a product that is in its maturity stage in a firm’s home country, but that has greater demand potential elsewhere is another benefit of international expansion.
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International Expansion:
Motivations
A company decides to become a multinational firm in order to:
Optimize the location of value chain activity
To enhance performance
To reduce cost
To reduce risk
Explore reverse innovation
Design & manufacture products locally
Export no-frills products to developed markets
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A firm has to decide where to locate the various activities that it must engage in to produce products and services. Primary activities, such as inbound logistics, operations, and marketing, as well as support activities, such as procurement, R&D, and human resource management must be located in areas where the firm can see performance enhancement, cost reduction, and risk reduction. Location decisions can affect the quality with which any activity is performed in terms of the availability of needed talent, speed of learning, and the quality of external and internal coordination. Location decisions can affect the cost structure in terms of local manpower and other resources, transportation and logistics, and government incentives and the local tax structure. Nike’s manufacture of shoes in Asia is an example. Erratic swings in the exchange ratios between global currencies requires firms to manage these currency risks by spreading the high cost elements of their manufacturing operations across a few select and carefully chosen locations around the world. Reverse innovation = new products developed by developed country multinational firms for emerging markets that have adequate functionality at a low cost. Many leading companies are discovering that developing products specifically for emerging markets can pay off in a big way. When products can deliver adequate functionality at a fraction of the cost, these products can subsequently find success in value segments in wealthy countries as well. See Strategy Spotlight 7.3.
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International Expansion:
Risks
Multinational firms also encounter risks:
Political risk due to social unrest, military turmoil, demonstrations, terrorism, absence of the rule of law can lead to
Destruction of property
Disruption of operations
Non-payment for goods and services
Arbitrary government decisions
Economic risk due to piracy and counterfeiting
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Political risk = potential threat to a firm’s operations in the country due to ineffectiveness of the domestic political system. Countries that are viewed as high risk are less attractive for most types of businesses. Another source of political risk in many countries is the absence of the rule of law. Rule of law = a characteristic of legal systems where behavior is governed by rules that are uniformly enforced. The absence of rules or the lack of uniform enforcement of existing rules leads to what might often seem to be arbitrary and inconsistent decisions by government officials. This can make it difficult for foreign firms to conduct business. The laws, and the enforcement of laws, associated with protection of intellectual property rights can be a major potential economic risk in entering new countries. Economic risk = potential threat to a firm’s operations in the country due to economic policies and conditions, including property rights laws and enforcement of those laws. Firms rich in intellectual property have encountered financial losses as piracy or imitations of their products have grown due to a lack of law enforcement of intellectual property rights. Counterfeiting = selling of trademarked goods without the consent of the trademark holder. Counterfeiting, a direct form of theft of intellectual property rights, is a significant and growing problem.
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International Expansion:
Risks
Multinational firms also encounter risks:
Currency risk due to fluctuations in the local currency’s exchange rate
Affects cost of production or net profit
Management risk due to culture, customs, language, income level, customer preferences, distribution systems
Could lead to the need for local adaptation of apparently standard products
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Currency risk = potential threat to a firm’s operations in the country due to fluctuations in the local currency’s exchange rate. Even a small change in the exchange rate can result in a significant difference in the cost of production or net profit when doing business overseas. An example includes the U.S. dollar appreciating against other currencies, making U.S. goods more expensive to consumers in foreign countries. Management risk = potential threat to a firm’s operations in a country due to the problems that managers have making decisions in the context of foreign markets. Managers must respond to the inevitable differences that they encounter when doing business in multiple countries. Cultural differences can pose unique challenges. Even in the case of apparently standard products, some degree of local adaptation may become necessary.
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International Expansion:
Risks
Exhibit 7.3 A Sample of Country Risk Ratings, January 2013
Source: euromoneycountryrisk.com
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When the company expands its international operations, it does so to increase its profits or revenues. As with any other investment, however, there are also potential risks. To help companies assess the risk of entering foreign markets, rating systems have been developed to evaluate political, economic, as well as financial and credit risks. Euromoney magazine publishes a semi annual “country risk rating” that evaluates political, economic, and other risks that entrants potentially face. Exhibit 7.3 presents a sample of country risk ratings, published by the World Bank, from the 178 countries that Euromoney evaluates. Note that the lower the score, the higher the country’s expected level of risk.
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Example:
Risks from Corruption
The Transparency International Corruption Perceptions Index (CPI) reveals the most corrupt countries in the world
The scores range from 100 (very clean) to 0 (highly corrupt).
The most corrupt countries are:
Somalia, North Korea, & Afghanistan (CPI scores: 8)
Sudan (CPI score: 13)
Myanmar (CPI score: 15)
Uzbekistan & Turkmenistan (CPI scores: 17)
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See http://www.transparency.org/cpi2012/results. Looking at the Corruption Perceptions Index 2012, it’s clear that corruption is a major threat facing humanity. Corruption destroys lives and communities, and undermines countries and institutions. It generates popular anger that threatens to further destabilise societies and exacerbate violent conflicts. The Corruption Perceptions Index scores countries on a scale from 0 (highly corrupt) to 100 (very clean). While no country has a perfect score, two-thirds of countries score below 50, indicating a serious corruption problem. Corruption translates into human suffering, with poor families being extorted for bribes to see doctors or to get access to clean drinking water. It leads to failure in the delivery of basic services like education or healthcare. It derails the building of essential infrastructure, as corrupt leaders skim funds. Corruption amounts to a dirty tax, and the poor and most vulnerable are its primary victims.
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International Expansion:
Managing Risks
Managing political risk through
Market diversification
Developing stakeholder coalitions
Wooing key influencers
Putting key stakeholders on their boards
Managing economic risk through global dispersion of value chains
Outsourcing
Offshoring
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Strategy Spotlight 7.4 discusses how firms can manage the risks from political instability and adverse actions by governments. Competing in a range of geographic markets lessons the risk of actions by a single government or turmoil in a single nation. Firms can also develop coalitions with other multinationals investing within the country. Smart firms identify key influencers such as legislative leaders, regulators, and local officials who can become political supporters. These key stakeholders can be invited to join the firm’s board. This gives the locals a stake in the company’s success. To manage economic risk, firms can disburse their value chains across several countries and continents. Outsourcing = using other firms to perform value-creating activities that were previously performed in-house. The firm may be perfectly capab
