Overview
This lecture covers globalization strategy, focusing on how firms increase profitability and profit growth through value creation, competitive advantage, and adapting to regional and global market demands.
Firm Goals & Globalization Strategy
- Firms aim to grow profits and demonstrate sustained profit growth.
- After exhausting local markets, firms look to globalization for new growth opportunities.
- Profitability increases by reducing costs or adding value to justify higher prices.
- Profit growth comes from selling more in current markets or entering new ones.
Value Creation & Competitive Advantage
- Michael Porter’s value strategies: differentiation (premium pricing for unique products) and low-cost leadership (volume at low cost).
- Value is created by maximizing the difference between price and production cost.
- Firms assess their operations, R&D, and products to determine value drivers.
- The value chain includes primary activities (production, marketing, R&D) and support activities (HR, logistics, IT).
Global Expansion Considerations
- Firms decide whether to standardize products globally or tailor them to local markets.
- Core competencies and cost reduction are leveraged in new markets for a competitive edge.
- Location economies: producing in regions with advantages (cost or differentiation).
- Parts of the value chain may stay centralized or be relocated based on value maximization.
- Transportation, political, and economic risks must be considered in global production.
Experience Curve & Economies of Scale
- Production costs fall as cumulative output increases due to learning and efficiency.
- Firms that achieve high volume early gain a cost advantage (“first-mover advantage”).
- Skills and efficiencies discovered in one location can be transferred firm-wide.
Pressures: Cost Reduction vs. Local Responsiveness
- Firms face pressures to reduce costs and/or customize for local demands.
- High cost pressure/low responsiveness: standardized, low-cost products.
- High responsiveness/low cost pressure: products tailored to local tastes.
- High demands for both (transnational strategy) are complex and resource-intensive.
- Local responsiveness is driven by consumer tastes, infrastructure, distribution, government, and regionalism.
Globalization Strategies
- International: minimal customization, low cost pressure.
- Global Standardization: high cost pressure, low customization.
- Localization: low cost pressure, high local adaptation.
- Transnational: high pressures for both cost reduction and local adaptation.
- Firms may shift strategies over time in response to competition and market changes.
Risks & Environmental Challenges
- Trade barriers, tariffs, and macroeconomic changes affect global strategies.
- Global supply chains are more vulnerable to disruptions (wars, climate events, pandemics).
Key Terms & Definitions
- Profitability — ability to increase profits by reducing costs or raising value/prices.
- Profit Growth — increasing total profit by expanding markets or sales.
- Differentiation — offering unique products to justify premium pricing.
- Low-Cost Leadership — being the lowest-cost provider for competitive pricing.
- Value Chain — sequence of primary and support activities that create value.
- Location Economies — advantages gained from operating in specific geographic areas.
- Experience Curve — cost decrease as production experience and scale increase.
- Transnational Strategy — balancing cost efficiency and local responsiveness.
Action Items / Next Steps
- Review Porter's value creation model and value chain concept.
- Consider examples of the four global strategies.
- Prepare for potential exam questions on globalization risks and strategy trade-offs.