Developing Value in Global Markets

Developing Value in Global Markets

Chapter

7

International Strategy

developing Value in Global Markets

After reading this chapter, you should have a good understanding of the following learning objectives:

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 offshoring and outsourcing activity.

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 truly 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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LEARNING FROM MISTAKES

What was supposed to be one of India’s hottest new shopping centers didn’t turn out that way. Dreams Mall, located in a Mumbai suburb, was built by Housing Development & Infrastructure Ltd. (an Indian real estate development company) to cater to the growing middle class of the world’s second-most populous nation. But four years after its grand opening, the “dream” has become, in essence, a retail nightmare. Now, the mall consists of a smattering of struggling stores on the ground floor along with a maze of dark hallways with mostly empty shops. Space that was intended for retailers is used by call centers. And abandoned corridors are rented out for wedding receptions.

Across India, many of the country’s more than 300 malls have suffered weak sales and high vacancy rates. This was not anticipated. Developers over the past decade have built more than 250 shopping centers to tap into India’s rapidly expanding consumer culture. Some analysts had estimated that India’s middle class would grow to more than 400 million people. However, only a sliver of them (less than 10 million by McKinsey & Company’s estimates) have sufficient disposable income to make them steady mall customers.

India did not get its first mall until the late 1990s. Developers started building many others after Spencer Plaza in Chennai and a few others were so successful. Some construction companies began building three or more malls right next to each other in some neighborhoods in New Delhi and Mumbai. As noted by Benu Sehgal, vice president at DLF Ltd., a big developer, “Everyone jumped into the mall business with little understanding of who they were actually targeting.” Govind Shrikhande, chief executive of one of India’s largest retailers, said, “Everyone was opening malls left, right, and center. The consumer was never at the center of the planning process.”

Even with high vacancy rates, some Indian malls are doing very well. For example, Select CITYWALK Mall in South Delhi is considered “India’s No. 1 mall.” Others that are highly successful in India’s highly competitive market include DLF Promenade, Ambience Palladium, Phoenix, Inorbit, and Marketcity. What makes these malls successful? They win in the marketplace because they have a sound knowledge of the market and make informed decisions at the right time. For example, Select CITYWALK focused on what is considered “premium” in its positioning in the market: a level lower than affordable luxury. Today the mall is moving toward the affordable luxury category. Also, Select CITYWALK has a nice collection of retailers, such as Zara, Nike, and H&M, a multiplex theater, and great food. As noted by Yogeshwar Sharma, chief executive of Select CITYWALK, “Mall operation is one of the easiest things, given you know the job. Every game has its own rules. If you follow the rules, you are successful, if you don’t you fail.”

Discussion Questions

1 What lessons can other multinational companies learn from the boom and bust of shopping centers in India?

2 How can foreign retailers be successful in a country in which shopping centers are not attracting enough customers?

Sources: Kulshrestha, A. 2016. India may attract $80 million PE investment in retail real estate, say JLL. artices.economictimes.indiatimes.com . April 14: np.; Rana, P. 2015. Empty dream at India’s malls. the Wall Street Journal. June 17: C1, C8; and, Batra, A. 2015. What makes Select CITYWALK India’s successful mall, reveals Yogeshwar Sharma. retail.economictimes.indiatimes.com . March 20: np.

page 204

In this chapter we discuss how firms create value and achieve competitive advantage in the global marketplace. Multinational firms are constantly faced with many important decisions. These include entry strategies; the dilemma of choosing between local adaptation (in product offerings, locations, advertising, and pricing) and global integration; and others. We will address how firms can avoid pitfalls by developing a better understanding of the business environments of different countries as illustrated by the lukewarm response of Indian consumers to the new malls discussed previously. In addition, we address factors that can influence a nation’s success in a particular industry. In our view, this is an important context in determining how well firms eventually do when they compete beyond their nation’s boundaries.

LO 7-1

The importance of international expansion as a viable diversification strategy.

THE GLOBAL ECONOMY: A BRIEF OVERVIEW

Managers face many opportunities and risks when they diversify abroad.1 The trade among nations has increased dramatically in recent years, and it is estimated that recently the trade across nations exceeded the trade within nations. 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.2

GE’s wind energy business benefits by tapping into talent around the world. The firm has built research centers in China, Germany, India, and the United States “We did it,” says CEO Jeffrey Immelt, “to access the best brains everywhere in the world.” All four centers have played a key role in GE’s development of huge 92-ton turbines:3

· Chinese researchers in Shanghai designed the microprocessors that control the pitch of the blade.

· Mechanical engineers from India (Bangalore) devised mathematical models to maximize the efficiency of materials in the turbine.

· Power-systems experts in the United States (Niskayuna, New York), which has researchers from 55 countries, do the design work.

· Technicians in Munich, Germany, have created a “smart” turbine that can calculate wind speeds and signal sensors in other turbines to produce maximum electricity.

The rise of globalization—meaning the rise of market capitalism around the world—has undeniably created tremendous business opportunities for multinational corporations. For example, while smartphone sales declined in Western Europe in the third quarter of 2014, they grew at a 50 percent rate in Eastern Europe, the Middle East, and Africa.4

globalization

a term that has two meanings: (1) the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information; (2) the growing similarity of laws, rules, norms, values, and ideas across countries.

This rapid rise in global capitalism has had dramatic effects on the growth in different economic zones. For example, Fortune magazine’s annual list of the world’s 500 biggest companies included 156 firms from emerging markets in 2015, compared to only 18 in 1995.5 McKinsey & Company predicts that by 2025 about 45 percent of the Fortune Global 500 will be based in emerging economies, which are now producing world-class companies with huge domestic markets and a commitment to invest in innovation.

Over half the world’s output now comes from emerging markets. This is leading to a convergence of living standards across the globe and is changing the face of business. One example of this is the shift in the global automobile market. China supplanted the United States as the largest market for automobiles in 2009.

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 challenge for multinational firms is to tailor their products and services to meet the needs of the “bottom of the pyramid.” Global corporations are increasingly changing their product offerings to meet the needs of the nearly 5 billion poor people in the world who inhabit developing countries. Collectively, this represents a very large market with $14 trillion in purchasing power.

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