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Global Business Strategy Analysis

Executive Summary

Wide range of economic liberalization and advanced information and communication technology has opened up the international markets and this has increased the levels of competition among firms. Globalization has kindled the desire in the large and medium sized firms to increase their values by expanding their presence in different geographical locations. Apart from the generic strategies of product differentiation and cost leadership, firms desirous of expanding their business to foreign markets are formulating and adopting several strategic measures to achieve the organizational goals of cost minimization and profit maximization. The strategies include localization, global standardization, transnational and international strategies. Firms depending on the degrees of pressures of local responsiveness and cost reduction resort to the adoption of any of these strategies. Experience curves and location economies help the firms to reduce production costs and enhance profitability. Core competencies and leveraging of products also enable the firms to improve the profitability. There are several modes of entries, which the firm adopts for entering the foreign markets. Strategic alliance is one of such methods where the competitors unite in a foreign market to garner the strength of skills and technological advantages that the individual partners to the alliance could not achieve due to excessive costs or for any other reasons. This paper analyzes the salient aspects of global business strategies. As a case study, this paper also presents the suggested strategic moves for Sara Lee to enter the Venezuela and South Korean markets. The relative advantages and disadvantages of the strategies of Sara Lee are also discussed.

Introduction

Global business strategy is the strategies adopted by business houses operating in a global business environment. These businesses serve the consumers situated in different countries of the world. Globalization has contributed to the development of global business strategies through which larger domestic companies would like to increase its sales growth and economic value. Global business strategies offer the firms operating in the global environment the distinct advantage of economies of scale and thereby there is a significant reduction in production costs is achieved (EconomyWatch). This increases the competitive strength of the companies operating globally. In this context, this paper analyses the concept of strategy in depth and all other facets of global business strategy. The paper also details the global business strategies that Sara Lee would like to adopt for their expansion into Venezuela and South Korea.

Principles of Strategy in International Business

“When strategic planning arrived on the scene in the mid-1960s, corporate leaders embraced it as “the one best way” to devise and implement strategies that would enhance the competitiveness of each business unit” (Mintzberg, 2004). Firms adopt strategies to move to different markets all over the world for three main reasons. They are: (i) growth opportunities in the home country are found to be diminishing; (ii) the firms may think that they can create better value by transferring the business model to markets in different geographical locations, and/or (iii) the firms would like to take the advantage of first-mover in to the foreign soil. For achieving these ends, firms formulate a number of strategies. In generic terms, strategy can be defined to include the actions that the managers may take to achieve the organizational objectives. For most of the firms, the foremost goal is to maximize the value of the firm to the owners of the business. In order to increase the value of the firm, the profitability of the firm must be enhanced. Profitability in general is the rate of return the firm makes on its invested capital. This is calculated by dividing the net profits earned by the firm by the total amount of invested capital. The profit growth can be ascertained by the percentage increase of the firm over the corresponding historic period. The following diagram illustrates the strategy of the firm for increasing its value.

The strategy of the firm for increasing its value

Value Creation and Porter’s Generic Strategies

Creating more value to the firm is one of the ways of increasing the profitability of the firm. The value created for the firm is measured by the difference between the cost of production at the firms hand and the value that the consumers attribute to the product or service. According to Michael Porter, the management expert the value and the competitive strength of a firm is determined by the basic strategies of cost advantage and product differentiation. On application of these basic strategies, Porter has developed three generic strategies of Cost leadership, differentiation and focus (QuickMBA). The following table is illustrative of Porter’s generic strategies.

Porter’s generic strategies

Global Expansion and Profit Growth

Generally, the firms expanding globally are able to enhance their profitability as compared to the domestic firms. The global firms get the distinct advantages of (i) expanding the market for their domestic products to different geographical locations, (ii) realizing the location economies by undertaking value creation activities in different parts of the world, (iii) realizing greater cost economies and (iv) ensuring a greater return on investments by utilizing any valuable skills developed in the foreign countries (InternationalBusiness, 2008).

Core Competencies and Leveraging the Products

The profitability and growth of the company is largely facilitated by the activity of the firm in taking the products and services developed in the home country and selling them in the global markets. The returns to the company would be generally larger in cases where the local competitors in the countries to which the global firms take their products do not possess any comparable products. Another factor that contributes to the success of the transnational or global companies is the core competencies they possess. These core competencies enable the global firms to excel in the development, production, and marketing of their goods and services in comparison with the indigenous competitors. Core competencies are represented by the skills that a firm possesses which cannot be matched by the competitors and they enable a firm to reduce the costs of value creation.

Location Economies and Experience Effects

The location economies are the economies arising to a firm by undertaking a value creation activity in those locations, which are optimal for carrying out that activity. The location economies allow the firm to lower the costs of value creation and thereby the firm is able to achieve a low-cost position. Location economies also enable a firm to better product differentiation than those offered by the competitors. In order to garner the advantages of location economies firms normally disperse the value chain activities to those different locations around the world where the value for the firm is maximized or where the firm can achieve lower costs in creating values (International Business, 2008).

The experience curve allows the firm to apply systematic reduction techniques in the production costs, which have been found to occur over the lifecycle of a product. The strategic significance of the experience curve can be observed in the ability of the firm to reduce its costs of creating value and increasing its profitability while the firm moves down the experience curve.

Choosing an International Strategy

Firms that extend their businesses to global markets normally are expected to face the pressures for cost reduction and pressures to be locally responsive as the two kinds of competitive forces acting on them. Therefore, the firms have to choose an international business strategy that best meets the requirements of these two competitive forces (International Business, 2008). The following matrix exhibits the position of the firm in choosing an international strategy.

International business strategy

One weakness that normally is associated with any international strategy is that the there will be number of competitors entering the market over the time. An international strategy therefore may not help the firms in the long run. This necessitates the firm to shift towards a global standardization strategy. Alternatively, the firm can adopt a transnational strategy that places the firm ahead of the competitors. Similarly, when the competition grows stronger, the international strategies and localization strategies may not work to the advantage of the firm, which also puts the pressure on the firm to select a global standardization strategy or a transnational strategy. This strategy applies to branded processed food and personal care products in addition to other products that are meant to meet the local cultural standards.

Global Standardization Strategy

This strategy focuses on getting the advantages of low costs by using the cost reduction opportunities emanating from experience curve and location economies. Production, marketing and R&D are concentrated in a few favorable locations to achieve the cost advantages. The products are market standardized so that the costs can be kept as low as possible. This strategy becomes more effective when there are strong pressures are acting on the firm for cost reductions and low demand for local responsiveness. For instance firms in the semi conductor industry mostly this strategy for their growth and profitability.

Localization Strategy

Localization strategy focuses on meeting maximum local responsiveness. Under this strategy, the product offerings are customized and market strategies for the production and R&D functions are formulated according to the national conditions. There will be no standardization of products attempted and the competition will be met through localization of products. It will be difficult for the firms adopting localization to realize value from the experience curve effects and location economies. Due to decentralization factor, this strategy possesses a higher cost structure. Localization strategy is effective when the firm faces a strong pressure for local responsiveness and a weak pressure for cost reductions.

Transnational Strategy

In order to meet the enhanced competition, firms resort to reduction in costs and transfer core competencies to the local countries. At the same time, firms pay attention to pressures for local responsiveness too. Transnational strategy involves global learning where the firm would be able to develop valuable skills in any of the locations where the firm is having its operations. Similarly, the firm would be able to transfer knowledge from the foreign subsidiary to home country as well as to subsidiaries operating in other countries. It is difficult to adopt transnational strategy since the firm is faced with contradictory demands placed on it.

International Strategy

The essence of international strategy is to create value for the firm by dispersing the core competencies of the firm to international markets that the domestic competitors lack. The product development functions may be centralized at the home country. The manufacturing and marketing activities may be shifted to the local country with the exercise of close control by the head office. The international strategy becomes effective in situations where the pressure on the firm for local responsiveness and cost reductions is weak.

Organizational Architecture

Organizational architecture encompasses the elements of formal organization structure, control systems and incentives, organizational processes and culture and members of the organization. For the success of any organization in terms of its profitability, it is important that there must be internal consistency in the different elements of organizational architecture. Another important requirement is that the organizational architecture must match with the strategy proposed to be implemented by the organization. It is necessary that the organizational architecture and strategy must be consistent with each other. They must be consistent with the competitive environment prevailing in the market/industry. A formal organizational architecture will take the following form:

Organizational Architecture

Organizational Structure

Organizational structure being one of the elements of organizational architecture incorporates (i) the division of the organization into various sub-units in a formal way, (ii) the location of decision-making responsibilities within the structure and the (iii) the establishment of integrating mechanisms to coordinate the functions of the sub-units created. Organizational structure can be attempted in three different dimensions; (i) vertical differentiation – where the decision-making responsibilities are located within a structure, (ii) horizontal differentiation – involving the formal subdivision of the organization into different sub-units and (iii) establishment of integrating mechanisms – created with a view to coordinate the activities of the sub-units.

Controls

Control systems are established within the organizational structure to measure the performance of the sub-units and assess the capabilities of the managers, while the incentives are meant to reward the managerial behavior contributed to the success of the organization. Control systems may take the form of personal control, bureaucratic control, output control or cultural control.

Strategic Alliances

Any firm desirous of entering into foreign markets would always be confronted with the decision of the particular market it would like to enter as well as the scale and mode of entry. The firm has to assess the long-term potential for the existence and growth of the company in the foreign country and make the correct choice of entry. The firms can use different modes of entry like (i) exporting, (ii) turnkey projects, (iii) licensing, (iv) franchising, (v) joint ventures, or (vi) wholly owned subsidiaries. Each entry mode has its own advantages and disadvantages.

Forming strategic alliances is yet another mode of entering into the foreign market and strategic alliances represent the cooperative agreements entered into by potential or actual competitors. Strategic alliances have the advantages of facilitating the firm entering into a particular foreign market on a fixed cost-sharing basis. The alliance can bring into existence certain specific skills and assets, which the alliance partners do not possess or they cannot develop individually. Strategic alliance enables the firms to establish standards for the technology used by the industry throughout the world. However, strategic alliances suffer from the basic disadvantage of enabling the competitors to make use of a low cost route to acquire latest technology and entering the foreign market.

Strategic alliances are looked with favor because the individual firms may not be able to meet the high cost of technology development alone. Further, the firm may not have the required skill or resources to venture alone. Strategic alliance is found to be good way to learn new skills and technology and it is one of the best ways to enter the foreign markets.

Benefits of Global Expansion

Global expansion of any business is likely to result in several tangible and intangible advantages to the firm spreading its business to different geographic locations. Firms expanding to foreign markets are able to increase the profitability in a number of ways, which are normally not available to the domestic firms. The expansion to international markets offers distinct leveraging of products and the core competencies of the firms can be utilized to maximize their profitability. Location economies in the form of lower costs of production and availability of cheaper labor are some of the major benefits arising from international expansion of the businesses. Cost economies from experience effects that the firms cannot derive unless they expand to foreign markets is another major benefit resulting from the global expansion of their businesses. The company can enjoy the benefits of the skills and expertise available from the subsidiary companies located in the host countries, which also helps in improving the profitability of the firms.

Sara Lee and Global Expansion

Studying a country’s infrastructure is important for a foreign organization so that it can understand if the country has growth conditions, or conditions that will cost the company money and will not be beneficial for investment (Sullivan, 1999).

Expansion into Venezuela and South Korea

Sara Lee has to make two fundamental strategic decisions before it can decide to expand the business in Venezuela and South Korea so that the company can ensure it gains the competitive advantage over the domestic competitors. First, the company must decide where it can locate the assets and the employees. This decision can be approached from an economic perspective as shown in the following matrix. This decision will enable the company to be more or less expanding the operations throughout the world.

Type of Foreign Expansion Necessary conditions
for the existence of Sara Lee
Sufficient conditions
for the existence of Sara Lee
Vertical
  • Cost & productivity of production factors (theory of comparative advantage)
  • Asset specificity
  • Uncertainty
Horizontal
  • Transportation costs
  • Trade protectionism
  • Exchange rate shifts
  • Need to customize
  • Intangible assets: patents, brands, knowhow, and other firm-specific skills

Adapted from: Richard E. Caves, Multinational Enterprise and Economic Analysis New York: Cambridge University Press, 1996.

Sara Lee with its focus on leading/repeated branded consumer goods and intense global practices may well adopt the horizontal expansion strategy into both Venezuela and South Korea. However, there should be intense control exercised on the costs so that the company can remain competitive. Greater product focus and increased operational efficiency would ensure that the company makes the operations in these countries profitable.

Advantages of Horizontal Expansion

The company can make best use of its firm-specific skills in respect of the branded products. There need to be only minimal adaptation for localization. Global practices will entail immediate brand recognition.

Disadvantages

The company has to ensure that it controls costs effectively as otherwise, it will lose the competitive edge. There must be increased operational efficiency to ensure cost reduction.

Secondly, the company has to decide on the global business strategy depending on the forces of demand for cost reduction or local responsiveness. The four possible strategies that the company can adopt depending on the degree of its expansion are shown in the following table.

 The four possible strategies that the company can adopt

The company has to analyze carefully the tension between the pressures of cost reduction and local responsiveness before it can arrive at a strategy balancing these two conflicting pressures. “On the one hand, every multinational firm needs to deliver what the customer wants, even if it requires costly local adaptation and responsiveness. On the other, multinational firms seek to improve the efficiency of their operations by integrating across borders so as not to be outperformed by local players in each national market”. (Prahalad & Doz, 1987)

In the case of Sara Lee the best strategy would be to adopt the international strategy where adapting to the local peculiarities represents the key advantage in both the countries. This is because the national markets are large enough to derive the benefits of scale economies.

Advantages

The company can transfer the core competencies to these markets as a key competitive advantage over domestic competition. The product development function can be centralized in the home country. The manufacturing and marketing functions can be established Venezuela and South Korea while the managerial control can be retained in the head office.

Disadvantages

Over the time, there will be increase in the pressure on the company to reduce costs. This strategy may not be viable in the long-term with the increase in the intensity of competition.

Conclusion

Managing business enterprises across geographical boundaries is not an easy affair. The international dimension to the markets and competition complicates the issues of strategy formulation and implementation, which are already difficult more complicated. It is for the managers and business leaders in the multinational firms to take into account the various intricacies of global business strategies so that they can emerge successful and achieve the organizational objectives in terms of profitability and growth. The twin forces of cost reduction and local responsiveness operate on the decision of the firm to adopt an appropriate global business strategy. There are other elements like the core competencies of the firm, firm-specific skills and knowhow, product leveraging and technological excellence, which determine the adoption of a particular business strategy to move to international markets. It should be noted that over the time, increase in pressures for cost reduction may force the firm to change its strategy and in such situations, the managers must orient their companies towards the adoption of either a global standardization strategy or transnational strategy.

References

EconomyWatch. (n.d.). Global Business Strategy. Web.

InternationalBusiness. (2008). The Strategy of International Business (Chapter 12). Web.

Mintzberg, H. (2004). The Rise and fall of Strategic Planning In J Kurtzman, G Rifking and V Grifith (Eds) MBA in a Box: Practical Ideas from the Best Brains in Business. New York: Crown Press.

QuickMBA. (n.d.). Porter’s Generic Strategies. Web.

Prahalad C K and Yves L. Doz, The Multinational Mission: Balancing Local Demands and Global Vision. New York: Free Press, 1987

Reuters. (2008). Sara Lee Corporation Presents Strategies to Drive Profitable Growth. Web.

Sullivan, J. (1999). What is infrastructure? Exploring international business environment. Boston MA: Pearson Custom Publishing.

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