Module 1: Understanding Global Strategic Principles
Welcome to Module 1 of our Competitive Advantage in the Global Economy course! In this module we will introduce the concept of global strategy by thinking about what it means to live in a globalized business world.
Firms today operate in a very different environment than they did just 20 years ago. Today, you will find even the smallest firms engaged in international business. Consider this observation from the book, The Future is Now: U.S. Small Businesses Overcome Export Barriers by Peggy Olivier Muller (2008):
The U.S. Census Bureau recently reported that identified U.S. exporters - companies that can be linked to export transactions - accounted for $910 billion in exports, up almost 15% from 2005. Small- to medium-sized businesses were responsible for 96% of manufacturer exports (Trembley, 2008). Driving this increase in demand for U.S. exports is strong economic growth abroad, particularly in emerging markets. The global poverty rate has been cut by more than half since 1981, with much of the credit due to market reforms in developing countries. Hundreds of millions of people have joined the rising middle class in China, India, and in reform-minded countries elsewhere in Asia, Latin America, Africa, and the Middle East. Griswold, 2008). (para. 1)
The days of large corporations controlling most international business have passed. They maintain control over well-known brands, such as McDonalds and Coca-Cola, but most goods and services that are sold overseas from the United States come from smaller firms. Part of the reason for this phenomenon is that there is substantial assistance available to start a small export business. The U.S. Small Business Association, for instance, offers training, guides, and even financial assistance to help entrepreneurs get started in international business.
II. Taking U.S. Business Overseas
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Considering the markets available overseas for U.S. and other businesses, the world is literally their oyster. The United States is saturated in many areas with highly competitive products and services that have established reputations and extensive contacts in the country. So, for a small business that wants to get started in an industry that already exists, such as selling bicycles or food products, it is exceedingly difficult. And many small businesses, despite being creative and hard-working, usually lack the financial capital to take market share away from existing businesses.
However, overseas there are a number of consumers who have less access to these competitive products and services and have growing disposable income. This is good news for small businesses, as it means that new doors will open for small firms willing to sell their goods and services abroad. One of your readings this week is a short article from Olivier P. Muller of Credit Suisse
Here is an excerpt from that article:
Against this backdrop, the source of growth for many Western consumer companies is likely to shift from consumer finance-driven developed markets to emerging markets. There are a number of reasons to believe this: One main reason is above-average population growth. Emerging markets are projected to be the largest contributors to population growth, with demand for basic products growing as these countries become increasingly developed.
A second reason to believe this is the bottom-of-the-pyramid effect: Consumers at the bottom of the wealth pyramid first gain access to basic products as consumers move out of poverty and products become affordable, and this structural effect creates a healthy growth driver for consumer products capable of meeting different income levels.
A third reason is the wealth effect and structurally rising disposable income: These twin engines lead consumers to gradually move from basic needs to more sophisticated demand patterns, as they climb the social ladder. Moreover, rising disposable income, an emerging middle class, and a declining share of food expenses are drivers for rapidly growing demand for consumer goods, increasingly in the premium segment.
III. Rising Incomes and Rising Demand
One of the drivers of this race to expand overseas is growing global wealth. Fifty years ago, only a handful of countries had easy access to disposable income that they were willing to spend on goods and services. That was also a time in which national pride led many individuals to seek out domestically-made products rather than foreign imports. Times have changed.
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Today, incomes in many countries have risen, on average, including in new markets such as China, India, and Brazil. This has created an increasing demand for luxury and non-essential goods and services. Additionally, national pride has been replaced by demand for quality and variety, which can generally only be achieved by looking to foreign imports. As a result, demand for foreign imports has not only grown in usual markets like Europe and Canada, it has also grown exceedingly fast in emerging markets.
Firms today are keen to associate their products with the right markets, but this is not easy to discern. As you will see when you work on your portfolio project, finding the right market for your good or service is often more difficult than figuring out which good or service you will sell. There are plenty of markets that you can find willing consumers, but many of those markets are difficult to access or risky for you as a foreign business interest.
We will discuss in a later module how to address issues such as legal institutions and rule of law in foreign markets, and how these affect investment risk. In this introductory lesson, however, our main goal is to understand what globalization is and how it has changed the nature of business abroad.
Hopefully, what you take away from this discussion is an understanding of why globalization is changing the way that firms, especially small firms, do business. We will develop our understanding of why this matters and how it changes the game for business strategy as we move on into subsequent units.
Module 2: Competition – Challenges and Opportunities, Part I
Healthy Competition
Imagine yourself as a young entrepreneur. You have a wonderful idea for a global business (at least you think so) and you are eager to get it off the ground. To lay the foundations, you begin creating a business plan, which includes a global marketing strategy as well as a financing strategy. However, when doing a little on research on market opportunities for your business, you quickly realize that the competition is more expansive than you previously thought. New companies are cropping up all over the United States engaged in similar work as you are proposing thanks in part to advice and financing from the government (see Module 1). But even more than that, you begin to understand that many of your competitors aren’t U.S. companies at all—they are foreign companies.
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Competition is not a bad thing. In fact, healthy competition generally encourages improved product or service design or development, lower production costs, and more innovative marketing and sales techniques. These can benefit you if you are aggressive and astute enough to stay ahead of your competitors. Of course, if you get comfortable, you may find yourself looking for new work. To survive in the new global marketplace today, it is critical for a company to take measures to stay ahead of the competition. This often means expanding into or strengthening existing foreign markets. A company willing to take on some risk by going abroad may be able to attract enough consumers to offset any losses in their home market.
One example of a major company that followed this expansion strategy is Avon. Avon is an old American company, founded in 1886. It produced a number of health and beauty products that it sold using door-to-door saleswomen and in-home demonstrations. This model worked very well in the mid-twentieth century when women engaged more frequently in the job market but faced barriers to entry in many “traditional” jobs. However, as early as the 1950s, Avon began to see the need to expand overseas (although it was already in Canada since 1914). They sensed a decline in U.S. market share as more competitors came on to the market with more innovative and attractive options. Many of these competitors, as you might imagine, were foreign.
Avon is now operating based largely on an international business strategy. Most of its sales, and thus its consumers, are located overseas. This allows Avon to weather economic recession in the United States and other major markets by keeping steady income from growing economies less susceptible to global economic downturns. By adapting and innovating in its strategy, Avon successfully maintains a more than 120 year old beauty business.
II. Adapting to the Competition
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Avon’s success is not the rule in all cases. Consider the example of Kodak and Fujifilm. Both of these companies started around the same time—Kodak in the United States and Fujifilm in Japan. Kodak, from Rochester, New York, was seen as the small-town hero—a company that grew from basic filmmaking to advanced photography lenses and devices. They had a monopoly over photography in the United States for much of the twentieth century, and Kodak was indeed a household name.
Fujifilm was its Japanese competitor, which maintained a similar monopoly in Japan. Fuji exported some products to the United States, but for most of the twentieth century, these products were seen as cheap competitors to Kodak and were passed over by U.S. consumers. This all changed with the digital revolution. Film became a thing of the past as consumers gained access to electronic media cards, which allow a consumer to take photos, see them immediately, and delete them if they wish without spending any money on development. Cameras also began to fall by the wayside as digital devices such as smartphones began to replace the traditional camera.
Kodak had a hard time keeping up with these market changes. They tried to get a foothold in digital cameras but lost most of their market share in film and traditional cameras quickly. Fuji was more adaptable and recognized that it needed to diversify its product line and embrace the digital revolution. They suddenly became a strong competitor to Kodak in the United States and Kodak became associated with the old way of taking pictures. Fuji continues to survive through a diverse array of products, while Kodak is struggling to survive. This is another example of how adapting to global market shifts can help a business survive, and failing to do so can mean the end to even the most famous companies.
Module 3: Competition – Challenges and Opportunities, Part II
I. Partnering with the World
As we discussed in Module 1, the world is becoming more globalized. But it is also becoming more interdependent. This means that we have come to rely on other countries to sell and buy the products and services that we want. Consider this statement from the United Nations Food and Agriculture Program (1997):
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A look at the appropriate figures, (for example The World Development Report by the World Bank) will indicate that the world is becoming increasingly interdependent for its economic progress. In 1954, in the USA, for instance, imports were only one percent of GNP, but in 1984 they had risen to 10%. In food crops, while developing countries trade in coffee, cocoa, cotton and sugar actually declined in value during the 1980s, developing countries as a group experienced annual export growth rates of 4 to 11% in categories like processed fruit and vegetables, fresh processed fish products, feed stuffs and oil seeds. High value food product exports in 1990 totalled approximately $144 billion, the same as crude petroleum, representing 5% of world commodity trade. In 1990, more than twenty Less Developed Countries (LDCs) had exports of high value foods exceeding $500 million including countries like Brazil, China, Thailand, India and Senegal.
Terms such as global village and world economy have become very fashionable. Marketing goods and services on a global scale can happen in an "engineered" way, but often it is the result of good and meticulous planning. For example, in order to stave off potential famine, the United Nations’ World Food Programme (WFP) may purchase maize from Zimbabwe and distribute it in Tanzania, Malawi and Kenya. This "engineered" international marketing transaction may benefit Zimbabwe, without Zimbabwe having to prospect markets. Most international transactions are not like this. Most are clearly planned, involving meticulous attention to global social and economic differences and/or similarities in product, price, promotion, distribution and socio/economic/legal requirements.
II. Global Alliances
This interdependence in many ways has led firms, new and established, to look toward foreign companies to form alliances and develop new partnerships to promote their business globally. It has made many firms realize that maintaining an advantage in one market should not come at the expense of participating in other markets. Here is more on this from the United Nations Food and Agriculture Organization (1997):
The long held tenants of marketing are "customer value", "competitive advantage" and "focus". This means that organisations have to study the market, develop products or services that satisfy customer needs and wants, develop the "correct" marketing mix and satisfy its own objectives as well as giving customer satisfaction on a continuing basis. However, it became clear in the 1980s that this definition of marketing was too narrow. Preoccupation with the tactical workings of the marketing mix led to neglect of long term product development, so "Strategic Marketing" was born. The focus was shifted from knowing everything about the customer, to knowing the customer in a context which includes the competition, government policy and regulations, and the broader economic, social and political macro forces that shape the evolution of markets. In global marketing terms this means forging alliances (relationships) or developing networks, working closely with home country government officials and industry competitors to gain access to a target market. Also the marketing objective has changed from one of satisfying organisational objectives to one of "stakeholder" benefits - including employees, society, government and so on. Profit is still essential but not an end in itself.