Summary MNB3702_ Global Business Management_ Exam Notes & Learning outcomes.

MNB3702_ Global Business Management_ Exam Notes & Learning outcomes. Explain the concept of “global competitive advantage”. Global competitive advantage can be defined as the superiority gained by an organisation when it can provide the same value as its competitors but at a lower price or can charge a higher price by providing greater value through differentiation, in the international marketplace. The aim is to leverage one or more sustainable competitive advantages which will make the business successful. In essence, MNCs become successful because they possess a distinct advantage relative to their competitors. Traditionally, the two most prominent sources of competitive advantage can be found in the business’s cost structure and its ability to differentiate itself from competitors. For our purposes, this translates into:  How best to minimise cost pressures  How best to optimise local responsiveness. Businesses that create competitive advantages by leveraging one or both of these options usually experience above-average profitability within their industry. 2. Explain the determinants of global competitive advantage. The factors are location economies; economies of scale, scope and experience; leveraging core competencies; leveraging subsidiary skills; and government incentives. 2.1. Location economies  When MNCs seek to locate their value creation activities in particular locations in the world trade and transport barriers permitting their motivation to do so flows from the operation of location economies.  This means they choose to locate their operations in locations where the political economies, including relative factor costs, are most conducive to the performance of their operations.  Location economies that arise from performing value creation activities in the optimum location for that activity. Locating a value creation activity in an optimum location has two effects: 1. It lowers the cost of value creation, enabling the MNC to achieve a lemmas! position and, therefore, a lower cost structure. 2. It enables the MNC to differentiate its product offerings relative to its competitors  The prevalence of location economies means access to comparatively lower-priced resources and easier access to markets, given the potential impact of transportation costs and trade barriers. Indeed, such key markets could be conducive to product differentiation, enabling the MNC to grow its customer base.  Value creation nuances arising from unique locational advantages are always subject to two constraints which have the potential to limit these advantages, namely transportation costs and the operation of trade barriers. It is therefore imperative that MNCs bear these limitations in mind when seeking to draw on location economies.  The effect of locating value creation activities where they are most effectively and efficiently performed is that the MNC will have to be prepared to manage a potentially complex network of value creation activities located across the globe.  The result to taking advantage of location economies is that MNCs, by increasing their production and sales volumes, will also reap the cost benefits of increased experience, scale and scope as a means of increasing efficiencies. Downloaded by: sohnehilscher | Distribution of this document is illegal S - The study-notes marketplace 2.2. Economies of scale, scope and experience  When trade barriers come down and the size of the market increases, MNCs can increase their production, which results in lower costs per unit. This phenomenon is known as economies of scale.  Some increases in production and sales are usually due to global expansion. This implies that MNCs can produce more cheaply overseas due to higher production and sales volumes making them more efficient and more able to survive in a highly competitive global market.  Consequently, as markets increase, it becomes feasible for MNCs to invest in larger markets.  MNC’s in industries e.g. pharmaceutical& and the automotive may aim at recouping their high expenditures in research and development (R&D) and production facilities through the benefits of economies of scale.  For some MNCs, the benefits of economies of scope can only be gained through sharing resources across a number of business units affiliated to the MNC.  Economies of scope often results in what is known as the benefits of experience effect. As production and sales volumes increase, the MNC also benefits from a reduction in production costs over time due to its growing experience and capabilities. This phenomenon is often illustrated by the experience curve, which refers to systematic reductions in production costs that occur over the life of a product.  Some have even observed that a reduction in a product’s production costs frequently coincides with the doubling of cumulative output for the product 2.3. Leveraging core competencies  The success of many MNCs also depends on the core competencies that underlie the development, production and marketing of their product or service offerings.  ‘Core competence’ refers to skills within the MNC that competitors cannot easily match or imitate. In practice, these skills may exist in any of the MNC’s value creation activities, namely production, marketing, R&D, logistics, general management, human resources management (HRM), and so forth. Such skills are often expressed in product offerings that competitors find difficult to match or imitate.  Core competencies are the bedrock of an MNC’s competitive advantage. However, the real challenge lies in the MNC’s ability to leverage its core competencies by replicating them in other geographical markets so as to increase its financial returns.  It should be noted that core competencies and the corresponding skills involved can be further enhanced through the operations of subsidiaries located in host countries. 2.4. Leveraging subsidiary skills  In more mature MNCs with numerous foreign operations abroad, a network of subsidiary operations possessing the requisite skills already exists in the host countries, serving as a repository for such foreign operations.  Skills can be created, nurtured and transferred anywhere within an MNC’s global network of operations, giving rise to a ubiquitous set of skills which are often located across the world  Whenever people have the opportunity and incentive to create an internationally located source of skills, such skill sets are often characterised by a high degree of versatility, having the potential to be transferred elsewhere. The application of such skill sets may lower the cost of production in locations anywhere in the world, while enhancing the perceived value and support for higher product pricing, which is not only the monopoly of the host government.  Leveraging the skill sets created within subsidiaries in host countries and applying them to an MNC’s internationally located operations invariably offers advantages to the parent company. This is, for instance, borne out by parent MNCs such as MTN and Nestle, both of which have strong operations in Nigeria. These two MN Cs have -through their subsidiaries- produced a strong set of internationally transferrable skills which can be leveraged to make the most of the localised set of skills at their disposal, together with knowledge and relationships which can also be leveraged for the benefit of the parent company. Downloaded by: sohnehilscher | Distribution of this document is illegal S - The study-notes marketplace 2.5. Government incentives  Are designed to influence an MNC’s competitive advantage in an attempt to encourage firms to establish their foreign operations in a particular destination.  such incentives to attract foreign investment, as it will create jobs and enhance competitiveness, both of which have an impact on the country’s trade balance.  Because countries compete to attract investors, many incentives are designed to lower an MNC’S operating costs.  It could include lower taxes, training of employees, loan guarantees, low interest loans, exemption of import duties and subsidies for energy and transport costs.  These are all measures which, if successfully administered and applied, stand to enable MNCs to succeed in foreign destinations. They should be designed to enhance and sustain an MNC's international competitive advantages.  Government incentives will often determine whether MN Cs will prosper or fail over time. Incentives can help MNCs choose better strategies so as to enhance their competitiveness by leveraging their competitive advantage(s) in various locations around the world. Competitiveness strategies can also be a measure of the aggressiveness with which MNCs pursue their competitive advantage(s) .  Competitive strategies should be developed to enable the MNC to confront competition, not to avoid competition. Therefore, in the effort to develop viable globally competitive strategies, every effort should be made to do so without promoting protectionism, which only serves to protect MN Cs and their corresponding industries rather than advancing such industries. 3. Clarify the goals of an MNC, in the context of establishing competitive advantage(s) 3.1 Long-term, sustainable efficiencies must drive the MNC’s current business activities. This means leveraging the relative cost advantages that offshore locations present. These include lower wages, lower cost of capital and cheap raw materials. Although these benefits can be leveraged by competitors as well, the measure of economies of scale and scope achieved in the process can differentiate an MNC from competitors as they share in investments and costs across markets and business units. 3.2 The management of risks involves assessing how current local risks may be reduced, rather than moving the business to other locations. This involves trade-offs among prevailing risks, for instance considering current political risks relative to what obtains in other countries. Attempts to avoid current local risks could render MNCs more vulnerable to competitive risks if another MNC succeeds in earning good profits in the same location despite the risks involved. Local risks are inherent in an MNC’s competitive advantage. Managing such risks calls for balancing scale with strategy and operational flexibility. Indeed, this balancing act could even have an impact on the diversification of the MNC's portfolio of risks and alternative options. 3.3 Internal learning capabilities must be nurtured and developed relative to the need to manage future change. Building a sustainable competitive advantage involves learning from cultural differences in organisational and managerial processes and systems. This would enable the MNC to benefit from cross-cultural differences and the experience they offer in terms of cost-reduction and innovation initiatives and the prospect of shared learning across organisational components in different markets, businesses and products. Downloaded by: sohnehilscher | Distribution of this document is illegal S - The study-notes marketplace 4. Enunciate (State) the sources of competitive advantage(s) o Competitive advantage (CA) grows out of the ways an MNC organises and performs discrete activities which include sales and service initiatives, product design and manufacturing processes and the raising of capital to fund activities aimed at securing a sustainable CA in international markets. o These activities are usually structured in the context of a value chain, which illustrates how an MNC creates value for its customers and indicates whether customers are Willing to pay for its products or services as portrayed in the value chain. o The profitability gained from this series of activities depends on the extent to which the value created exceeds the cost of performing all the requisite undertakings. o To gain a competitive advantage, an MNC must create greater comparable buyer value, enabling it to secure a premium price for its products or services. This could then result in differentiation, giving rise to a unique competitive advantage. o Consequently, it may be argued that, traditionally, businesses seek to maximise their value creation activities so as to enhance their wealth as they pursue the entrenchment of their competitive advantage(s). They do so with the aid of the value chain, which depicts the creation and progress of value creation activities. They can track the creation of value for customers according to the linkages connecting the different activities in their value chain. o Similarly, an MNC creates value for its customers through performing the activities depicted in its value chain. Therefore, in order to create unique value for its customers, an MNC, in its quest for global competitive advantage, is dependent on a number of catalysts. These are typified by the following aspects, manifested at various levels Within the context of a country’s political economy: 1. A country’s national environment can yield certain aspects that assist in establishing a competitive advantage, namely: -national factor endowments, including raw materials, human resources transportation and communications infrastructure, general management skills, legal systems and the national culture -clusters of related and supporting industries (this implies the extent to which specific clusters support a particular industry). 2. An attractive industry environment can yield opportunities for both generating profits and establishing a competitive advantage. The catalysts for a supportive industry include factors of production, related and supporting industries and favourable demand conditions, all of which are conducive to building up a competitive industry. Indeed, substantial local demand is a strong stimulus for the formation of local firms and industries. 3. Access to unique and profitable generating resources and capabilities is critical for establishing a competitive advantage, both locally and internationally. 5. Distinguish between global, national and industry competitive advantages  Competitive advantage originates from disparities in the quality of resources in different countries.  This gives rise to country determinants of competitive advantage, which influence the way that MNCs create and sustain competitive advantage in global industries.  The latter process provides the backdrop to the role of the home nation in providing the necessary home-based advantages.  This reaffirms Porter’s theory of national competitive advantage.  The nature of competition and the sources of competitive advantage differ widely among industries and even industry segments.  Consequently, it is necessary to isolate the influence of the home nation on the MNC’s ability to compete in specific industries and industry segments, with the aid of a particular global strategy. Downloaded by: sohnehilscher | Distribution of this document is illegal S - The study-notes marketplace 5.1 Competitive Advantage - Porters diamond theory. Porter theorised that four attributes of a nation shape the environment in. which local firms compete and from which MNCs compete internationally. These four attributes promote or impede the creation of competitive advantages: 5.1. Factor endowments refer to a nation’s position in terms of factors of production, such as skilled labour or infrastructure. These are pivotal to the Heckscher-Ohlin international trade theory. Porter distinguished between basic factors (for example natural resources, climate, location, demography) and advanced factors (communication infrastructure and skilled labour, and R&D facilities). He argued that advanced factors of production are most conducive to achieving competitive advantage. Strategic competitive advantages are the by-products of certain strategic investments initiated by major industry players, highly efficient companies and entrepreneurial-oriented governments. Such investments are targeted at upgrading the manufacturing and operational efficiency of corporations, and they ultimately help a country to improve its advances in the utilisation of scarce natural resources. 5.2. Demand conditions are significant in the context of upgrading competitive advantage. MNCs are most sensitive to their closest customers. Consequently, the characteristics of home demand are particularly important in shaping the attributes of domestically manufactured products. Home demand also creates pressure for innovation in that local consumers pressurise local firms to meet high standards of product quality and innovation. This affects the quality of a nation’s company and industry environment, from which MNCs gain competitive advantage. 5.3. Suppliers or related and supporting industries that are internationally competitive are crucial to establishing competitive advantage. Investments by related and supporting industries in specific factors of production can spill over into a specific industry, enhancing its international competitive position. This is exemplified by Invicta Holdings Ltd in South Africa and their investments in the capital equipment industry. A consequence of this phenomenon is that successful industries within a country tend to be grouped into clusters of related industries. Examples of this in South Africa include the mining industry, located mainly in Gauteng, and the automotive industries cluster, located in Gauteng and the Eastern Cape. Such clusters are important because of the valuable knowledge that can flow between firms in particular industry clusters. 5.4. Firm strategy, structure and rivalry are manifested within a nation. Porter distinguishes this phenomenon as follows: First, different nations are characterised by different managerial ideologies which can influence the building of competitive advantage in specific industries. For example, the predominance of engineers in the top echelons of German manufacturing companies is noteworthy. Secondly, there is a strong association between vigorous domestic rivalry and the persistence of competitive advantages in particular industries. This leads to MNCs looking for ways of improving efficiency, which will make them better competitors. Domestic rivalry creates pressure to innovate in order to improve quality and reduce costs, and to invest in upgrading the country’s advanced factors of production. All of this helps to create world-class competitors. 5.2 Industry Competitive Strategies The transition from an MNC’s home country competitive advantages to global competitive strategies often reflects the structure of the country’s industries. This is because a country’s industry structure often reflects that country’s national endowments. It must be borne in mind that requirements for success in particular industry the different stages of industry development to isolate the competitive advantages that can shape strategic choices, These revolutionary phases in the transformation of industries are: The Evolutionary Development of Industries 5.2.1 Emerging industries  These are regarded as newly formed or re-formed industries that are the product of technological innovation, newly emerging customer needs or other social or economic changes. Downloaded by: sohnehilscher | Distribution of this document is illegal S - The study-notes marketplace  Examples of emerging industries are those that have come about as a result of internet-based social networking, satellite radio, telemedicine, surgical robots and online service industries e.g. Uber and Airbnb  Emerging industries are characterised by uncertainties.  The absence of rules presents both a risk and an opportunity for potential investors.  The strategic positioning of MNCs relative to emerging industries is critical and, if carefully articulated, could serve to reduce uncertainty in emerging industries. Characteristics of emerging industries:  There is technological uncertainty regarding the product standardisation that will eventually unfold. MNCS with proprietary ownership of certain technologies could capitalise on this uncertainty and reap the benefits of the competitive advantage.  The prevalence of inadequate information about competitors could lead to competitor uncertainty, and uncertainty about the strength of demand vis-a-vis buyers in the marketplace. Such uncertainty could present opportunities which could create one or more competitive advantages. For example, competitive advantages could be created in terms of first-time customers who are confused as to the availability of non-standardised products in an uncertain market space.  There is uncertainty as to how predictably the experience curve applies to those wishing to enter emerging industries. This is due to doubt regarding the initial costs which could be incurred by MNCs seeking to penetrate such industries, together with uncertainty as to when corresponding costs will start declining.  The dearth of entry barriers can be a catalyst to the formation of new firms.  Raw materials and components are inaccessible, owing to suppliers not yet being ready to respond to the industry’s needs.  There is a need for high-risk capital, due to industry uncertainty. These characteristics should prompt MNCs to formulate global business strategies which have the potential to:  Improve the industry’s structure, so as to alleviate uncertainty in the marketplace  Improve the quality of products to be sold in such markets  Build congenial relationships with suppliers and their distribution channels  Capitalise on technological uncertainty by entrenching their own technological dominance  Galvanise a core of reliable customers in the face of future competitors encroaching on this market space. 5.2.2 Growing industries  This phase implies a rapid increase in new competitors, often new entrants who are large competitors with substantial resources, and who have anticipated that this market will, eventually, prove itself as an attractive destination for MNCs and other competitors.  A market of this nature has the capacity to support product and brand differentiation, as well as the resilience to support the financial resources needed for heavy market expenditure and growing price competition, with its impact on cash flows.  An example of a growing industry is the building and installation of specialised kitchen cupboards.  Increasing demand in the marketplace is compatible with economies of scale and scope as market entrants increase production and service capacity to meet growing demand.  This is conducive to increased investment in plant and equipment, R&D, as well as more rigorous marketing efforts to target specific customer groups.  Such efforts require strong distribution capabilities, which will place a heavy demand on the capital resources of MNCs. Global business strategies in growing industries characteristics include: Downloaded by: sohnehilscher | Distribution of this document is illegal S - The study-notes marketplace  the ability to establish strong brand recognition  the ability to expand production capacity to meet growing demand, including capacity in the area of service capability and the training logistics associated with such capacity  product innovation so as to adapt products and skills to scaled-up operations ill emerging market niches  the competency and capacity to effect product differentiation from other competitors entering the market space  the accompanying resources and skills to create unique product features and advantages, including strong capabilities in sales and marketing  the ability to ensure repeat buying on the part of existing customers. 2.5.3 Mature industries A maturing industry is one that is experiencing significantly slower growth. An industry is said to be mature when nearly all the potential buyers of the products in that industry are already users of the product e.g. the alcoholic beer industry. Market demand consists mainly of repetitive or replacement sales to existing users. Growth hinges on the industry’s ability to attract a few buyers and to convince buyers to increase their usage of the product. Mature consumer goods typically have a growth rate of below 5 per cent, equal to the growth rate of the economy or the growth rate of the customer base. Some of the catalysts in the transition to maturity relate to new technological advances or product innovations. Industry maturity has two implications for competitive advantage and the building of global business strategies: 1. It reduces the number of opportunities to establish a competitive advantage. 2. Opportunities for competitive advantage move from differentiation-based to cost-based factors. MNCs therefore need to focus on low advantage in mature industries. To exploit low costs, to three cost drivers which can play a role in this regard, namely economies of scale, low-cost inputs and low overheads. Maturing industries exhibit the following characteristics:  Buyer demand and market share decline due to price cutting and increased advertising  The number of sophisticated buyers increases due to consumers experience with the product. As they become familiar with competing brands, they are able to evaluate different brands.  The abovementioned constraints put pressure on industry profitability.  Increased competition encourages mergers and acquisitions from competitors, which drives the weakest competitors out of the industry. In response to these constraints, markets should be designed to:  prune product lines and drop unprofitable lines  place an appropriate emphasis on process innovation that allows for low-cost product design and manufacturing methods  allow the MNC to pursue cost reductions wherever possible  facilitate careful buyer selection, thereby focusing on less aggressive buyers  pursue possible horizontal integration to acquire rival firms whose weaknesses can be exploited  consider international expansion to markets where there is still growth.