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Developing a global strategy

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About six months ago, I mentioned the importance of globalization to the world's economy. But, how does a company form a business strategy in the current environment? Have a look at the attached. Toward the end of the presentation are specific strategies to take. I hope it generates some business ideas to explore.

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Developing a global strategy

  1. 1. Sources: DHL Global Connectedness Index, 2011 Concept based on WORLD 3.0 Global prosperity and how to achieve it, Harvard Business Review Press, Copyright, 2011 1 NAFTA LAFTA EU ASEAN
  2. 2. World is flat. The world is one huge market. Anything or anyone can go anywhere, anytime. Do you think this is true? Are there barriers to connectedness? 2
  3. 3. Global Connectedness – Goods & Service Trade In comparison to total economic activity (GDP), what percent is global? When asked about global interaction, the traditional data to compare a country’s external merchandise/service trade with it’s total GDP. So, lets start there. Global Trade 3 Total GDP
  4. 4. Global Connectedness – Merchandise & Service Trade With both merchandise and service international trade at only 30% of the world GDP, there is still a great deal of growth potential. This 22% could actually be closer to 15% if you consider re-exporting of semi-finished products exported to another country for final processing and supplied to the end user. We could be connected a great deal more. 1930 9% of GDP 2015 22% of GDP Growth in trade connectedness Source: DHL Global Connectedness Index, 2016 4
  5. 5. Japan’s Global Connectedness – Merchandise & Service Trade Japan’s external trade ratio is well below the average. It is mainly due to it large domestic market. It has much room for expansion. Outward 15% of GDP Inward 16% of GDP Source: DHL Global Connectedness Index, 2016 From worldwide suppliers To worldwide markets 5
  6. 6. USA’s Global Connectedness – Merchandise & Service Trade The United States’ external trade ratio is below the average. It is mainly due to it large domestic market too. It can expand much more. Outward 8% of GDP Inward 13% of GDP Source: DHL Global Connectedness Index, 2016 USA From worldwide suppliers To worldwide markets 6
  7. 7. China’s Global Connectedness – Merchandise & Service Trade The China’s external trade ratio is closer to the average. This might be one of the main reasons China has such high growth. It is helped by valuable imports and it is financed by exports. In the future, serving the domestic market will become more important as wealth is created. Outward 21% of GDP Inward 15% of GDP Source: DHL Global Connectedness Index, 2016 China From worldwide suppliers To worldwide markets 7
  8. 8. Global Connectedness – Foreign Direct Investment (FDI) Source: DHL Global Connectedness Index, 2011 FDI peeked in 2000 20% of capital formation Foreign direct investment (FDI) to capital formation (Total investment in fixed assets) FDI settled in 2010 10% of capital formation FDI fell in 2007 15% of capital formation There is great global economic benefits of FDI (financial transfer, technical transfer, business knowhow transfer, etc.) 8
  9. 9. Global Connectedness – Financial Movement Source: “Home Bias in International Equity Portfolios: A Review (August 2007) Foreign equity investment (share purchase only) Foreign equity investment 2005 ~ 2007 20% of all investments There is much room for foreigners investing in foreign companies. It trust and better communication continues to grow so should investment. 9
  10. 10. Global Connectedness – Communication & Information 20% of all internet connections are international. 5% of all phone calls are international. Source: DHL Global Connectedness Index, 2011 We could communicate and share information much more than we are now. This would build trust, investment and greater prosperity. 10
  11. 11. 53/140 Bits per second per internet user International calls International email 63/140 Outward per minutes/capita 112/140 Inward per minutes/capita Source: DHL Global Connectedness Index, 2012 (World ranking among 140 countries (99% of world GDP and 95% of population) Japan’s Global Ranking – Telephone/Internet Communication Of 140 countries Outward calls Inward calls 11 Outward email data Inward email data
  12. 12. Visiting foreign countries & foreign populations 1.9% Of Japanese population is from another country. Source: UN report Trends in International Migrant Stock: The 2015 Revision. 14.3% Of USA population is from another country. Connecting face-to-face What percent of the world population are from foreign countries? 3% of the world population live outside of their home country. What percent of the world population have studied in a foreign country? 2% of university student have studied outside their country. What professionals are foreigners in the US? 33% of USA engineers are from foreign countries. 27% of USA mathematician, statisticians and computer science specialists are from foreign countries. 24% of USA scientists and researches are from foreign countries. 12
  13. 13. United Arab Emirates 7,826,981 83.7 Singapore 2,323,252 42.9 Switzerland 2,438,702 28.9 Israel 2,046,873 26.5 New Zealand 1,132,736 25.1 Germany 12,005,690 14.9 United States 46,627,102 14.3 Sweden 1,639,771 14.3 United Kingdom 8,543,120 11.3 France 7,784,418 11.1 Greece 1,242,514 11.1 Italy 5,788,875 8.0 Russia 11,643,276 7.7 Turkey 4,580,678 5.81 Japan 2,437,169 1.9 India 5,338,486 0.4 Egypt 297,448 0.4 China 848,511 0.1 Indonesia 295,433 0.1 Vietnam 68,290 0.1 Visiting foreign countries & foreign populations Connecting face-to-face (foreign population & percentage of total population) THE BENEFIT: Advanced cultural diversity, learning, teaching, blending, interaction and understanding 13
  14. 14. 20% 40% 60% 80% 100%0 Source: Concept based on Redefining Global Strategy, Crossing Borders in a World Where Differences Still Matters, Harvard Business School Press, Copyright, 2007 Global Connectedness – Overall Summary Level of international connection International to domestic telephone calls Foreign university students to total Management research with global content to total Charity to foreign country to domestic Foreign direct investment to capital formation Foreign tourists to total Foreign related patents to domestic Foreign held stock to domestic Foreign trade to GDP Immigrants to total population 14
  15. 15. 40% 80% 120% 160% 200%0 Source: Pankaj Ghemawat and Rajiv Malick, “The Industry-Level Structure of International Trade Networks: A Gravity-Based Approach”, working paper, Harvard Business School, February 2003 Global Connectedness – Overall Summary Factors that improve connected (over average) Common language Colony or colonizer Common currency Common land border Common regional trading block +188% +114% +125% +42% +47% 15
  16. 16. Looking at foreign markets & production bases Differences from us & other regions Source: World 3.0 GLOBAL PROSPERITY AND HOW TO ACHIEVE IT Are all other regions very different from us? Are there great differences between us and the other location? Is there great distance between us and the other location? In World 3.0 both distance and differences still matter greatly. Those differences must be explored in each case to determine the ideal level of connectedness. Some issues should be kept at the local level, other issues at the global level. Yes No 16
  17. 17. CAGE - Differences Source: World 3.0 GLOBAL PROSPERITY AND HOW TO ACHIEVE IT G-Geographic – Are there great geographic differences? E-Economic – Are there great economic differences? A-Administrative – Are there great administrative differences? C-Culture – Are there great cultural differences? Yes No 17
  18. 18. C- Cultural Differences – Industry Sensitivity Indicators Source: World 3.0 GLOBAL PROSPERITY AND HOW TO ACHIEVE IT Country of Origin – Is country of origin a major concern? Language – Is high language communication skill required? Tastes – Are there great preference/standards differences? Traditions – Are there strong historic traditions in the industry? Yes No 18
  19. 19. A- Administrative Differences – Industry Sensitivity Indicators Source: World 3.0 GLOBAL PROSPERITY AND HOW TO ACHIEVE IT Government Involvement – Is the government involved in funding, procurement, standard-setting, etc? Yes No National Priority – Is this industry of strategic national priority? Rigidity/flexibility – Are the products highly specialized, capital intensive (can affect potential and risks)? Restraints – Are there strong operating procedure restrictions (imports, exports, FDI)? 19
  20. 20. G- Geographic Distance – Industry Sensitivity Indicators Source: World 3.0 GLOBAL PROSPERITY AND HOW TO ACHIEVE IT Hazards/fragile – Is quality transportation and freight hazards a concern? Weight/Value – Are the products high weight & low value? Perishable – Does the product lose its value quickly (time-sensitive)? Yes No 20
  21. 21. E – Economic Distance – Industry Sensitivity Indicators Source: World 3.0 GLOBAL PROSPERITY AND HOW TO ACHIEVE IT Yes No Cost Content – Is the product costing heavily dependent on local factors (labor, material process, equipment, etc.)? Scale – Is it difficult to standardize the product to suit a wide range of international markets? Pricing – Are the products price sensitive? Price negotiations on price is very common when deciding to buy? Distribution – Is the supply chain poorly developed and very different from your home market? 21
  22. 22. What global connectedness offers (ADDING) Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 A – ADDING BUSINESS, production volume/economies of scale D – DECREASING COSTS through regional costing differences D – DIFFERENTIATING, offering different products and solutions to increase willingness to pay more I – IMPROVING COMPETITIVE ADVANTAGE and bargaining power N – NORMALIZE RISKS as success in one market balances failures in others G – GENERATING CAPACITY by spreading and diffusing knowledge 22
  23. 23. ADDING Value Scorecard – A – Adding volume, or growth Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 Confirm the goals of entering a foreign market or producing overseas Forecast the profit potential of added growth and volume Forecast potential on a global level, regional level, national level, distributor level and end-user level Determine the company capacity for expansion Determine the effect of volume on competitiveness Determine added supply requirements 23
  24. 24. ADDING Value Scorecard – D – Decrease Costs Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 24 Confirm where the cost reduction will come from (separate all costs) Explore any added cost that might occur Explore any potential indirect costs Project long-term cost increases Determine fixed cost, variable costs and break-even point Determine main factors that determine costs increases/decreases (like currency movements) Estimate any potential shortages that could influence costs
  25. 25. ADDING Value Scorecard – D – Differentiating & increasing willingness to pay Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 Look at R & D-to-sales and advertising-to-sales ratios in industry and your strengths among competitors Focus on customer willingness to pay and product benefit to them Project impact of differentiation by global changes Anticipate competitor reaction to your global strategy Segment market appropriately 25
  26. 26. ADDING Value Scorecard – I – Improving bargaining power Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 Determine international differences in industry profitability Determine any market entry/exit bearers Determine customer switching bearers Determine potential for substitution Determine change on influence with suppliers Determine change on influence on customers Determine moves of competitors to response to your cross-border operation Explore and react to regulatory and nonmarket restraints and local business ethics 26
  27. 27. ADDING Value Scorecard – N – Neutralizing risks Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 Identify the key risks in your industry (capital intensity, labor concerns, supply shortages, legal restrictions, demand volatility) Assess how much cross-boarder operations reduce or increase risks Compare benefits to risks by cross-boarder operation 27
  28. 28. Risk rating for material development projects in rural areas Source: Nippon Export and Investment Insurance A Japan, Singapore, Germany, USA, Britain B South Korea, Spain, Slovakia C China, Malaysia, Poland, Chile D Russia, India, Thailand, Mexico, Algeria, Morocco E Philippines, Turkey, Hungary, Colombia F Vietnam, Greece, Egypt, Angola G Cambodia, Honduras, Cameroon, Bolivia H North Korea, Myanmar, Iraq, Lebanon, Libya Review national risk rating by governments, insurance companies and financial institutions. They specialize in risk management. Below is just on source rating anywhere in these countries. The higher the risk, the greater the profit potential must be. Highest Lowest RISK 28
  29. 29. ADDING Value Scorecard – G – Generating knowledge, resources and capacity Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 Access local specifications and learn user requirements Access local distribution requirements Explore similar capacities that could be of value Hold discussions with suppliers, consultants, target users, distributors, political leaders and local firms Hire people who are open, willing to learn and adapt Create cross-boarder teams in diverse locations Expand on cross-boarder interaction and assignments Explore valuable diversity 29
  30. 30. Strategies for Global Value Creation Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 TRANSFER EXPERTISE Offer new value ADAPTATION Make appropriate market & production adjustments WEALTH CREATION Confirm profit potential 30
  31. 31. Strategies for Global Value Creation - Adaption Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 ADAPTATION Make appropriate market & production adjustments 31
  32. 32. Strategies for Global Value Creation - Adaption Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 Design: reduce process costs Use production standardization, platforms and modules to reduce production costs Focus: reduce need for costly variation Target a specific region, segment, product line or value chain process Innovation: improve effectiveness Explore new applications and combinations for the foreign market Variation Modify the product and marketing promotional program. Externalization: reduce variation burden Outsource certain functions through strategic alliances, franchising, etc. 32
  33. 33. Strategies for Global Value Creation – Transfer Expertise Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 TRANSFER EXPERTISE Offer new value 33
  34. 34. Transferring expertise – Regional strategies Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 1. Regional or home focus: One processing location mainly service home market. Small amount of second market attention 2. Regional portfolio: Move to one off-shore foreign direct investment to supply that market 3. Regional hub: Create an off-shore production operation to serve the surrounding markets in that region 4. Regional platforms: Standardize components in each production operation to supply several regions 5. Regional mandates: Awarding certain regions assignments to specialize in specific global responsibilities and roles. 6. Regional networks: A broad configuration of coordinated processes to supply the whole cross- boarder network of markets 90% of global companies 34
  35. 35. 3. Regional hub R2R1 1. Regional focus R2R1 2. Regional portfolio R2R1 = One product line R = Region = minor effort = minor effort Home production, major and minor markets. Major and minor production, cross sharing products Major and minor production, major and minor markets Increasing complexity & managerial challenge with regional development issues, supervision issues and coordination issues Transferring expertise – Regional strategies review 35
  36. 36. 6. Regional networks R2R1 4. Platforms R2 5. Regional Mandates R2R1R1 Even more of a complex managerial challenge = One product line R = Region = minor effort = minor effort R4R3 Products and components for global markets Massive, coordinated and controls worldwide supply system. HQ request for production specialization for global markets Transferring expertise – Regional strategies review 36
  37. 37. Strategies for Global Value Creation – Wealth creation Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 WEALTH CREATION Confirm profit potential 37
  38. 38. Wealth Creation – Questions to ask Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 1. Volume: Can wealth be created by adding volume across-boarders? 2. Costs: Can costs be reduced by cross-boarder projects? 3. Differentiation: Can differentiation be created by cross- boarder activities which increase willingness to buy? 4. Bargaining Power: Will bargaining power be improved by crossing boarders? 5. Risks: Will risks be reduced by going across boarders? 6. Capacity: Will added skills, valuable experience and knowledge be gained which will increase capacity through foreign market activities? 38
  39. 39. Combinations of global value creation strategies Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 Selling products across boarders Transfer expertise mainly as is Adapt mainly to local market Producing products across boarders Ideal point Ideal point Where should your company be on these lines? Where is the competition on these lines? What will be your competitive advantage? 39
  40. 40. Getting started using a refined global strategy analysis Source: Redefining Global Strategy, Pankaj Ghemawat, Harvard Business School Press, 2007 1. Performance Review: In what regions is the customer underserved for your product? Can they be profitably supplied? 2. Industry’s competitive environment: Who are the top players in the industry? What cross-boarder production is there? Are products standardized? Are prices moving up or down? What is the relationship between costing and volume? What is the main distribution method? How important is advertising/marketing, R&D, labor costs, capital investment in your industry? 3. CAGE: Do the CAGE analysis and determine market differences. 4. Global Value Creation: Using the ADAPTATION, TRANSFER EXPERTISE, WEALTH CREATION material, determine what value could be created. 5. ADDING: Do the ADDING analysis and determine your ideal strategy. 40
  41. 41. 41 A successful global strategy has many benefits: 1. It can help a company expand when its industry is declining. 2. It can help a company reduce its costs much more that it can in its home market only. 3. It can make a company far more competitive than its competitors. 4. It can give a company bargaining power it does not have in its domestic market only. 5. It can reduce a company’s overall risks. 6. It can provide great experiences which will develop its overall abilities.

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