Based on the pressures that a company faces,

we're going to explore four basic strategies a firm

can develop when engaging in global operations,

and that will explain to us how they

will distribute the different elements of the value chain around the world.

As we've seen here,

the vertical axis shows pressures for

cost reduction and the horizontal axis pressures for responsiveness,

going from low to high.

Now, let's explore, let's divide this table into four quadrants,

and explore the different options that firms have.

Let's say for instance, that you are in the lower left quadrant.

This means this is a firm or an industry that is facing

low pressures for responsiveness and low cost reduction pressures.

This is the best place to be.

If you are a firm that is not facing any much pressure to accommodate to

different places and in which you are not facing

many pressures to also reduce your costs.

Who are the lucky ones that are in this situation?

It's usually firms producing universal needs in which they have monopolistic power.

Not many firms have these characteristics and,

there are just a few of them that we can provide examples for.

For example, Xerox.

When it developed the photocopy machine in the 1970s,

this was a big success.

Not many firms had developed something as needed as the photocopy machine.

So, the photocopy machine was so successful that in the beginning,

a whole generation of people used to call

the photocopies a Xerox and even used it as a verb.

"I'm going to Xerox something," instead of,

"I'm going to make a photocopy."

So, why did people were talking about,

"I'm going to Xerox something," instead of,

"I'm going to make a photocopy?"

Because there were no other firms producing photocopy machines, only Xerox.

So, Xerox had this enormous monopolistic power in which they were

producing this very expensive machine all the corporations wanted to buy,

and they could not buy from anyone.

So, how could they deal with this situation?

Well, they could just produce in

one or two places of the world even at high prices, at high production prices.

It didn't really matter and export the good to many other countries around.

So, this means that they could focus,

they could put the research and development and

even the production facilities in a single place,

mostly the United States,

and exported these very bulky and heavy machines.

They were bulky, they were heavy.

It was expensive to move them around but nobody could produce them.

So, as long as Xerox owned the patent and nobody else could produce these machines,

it was in this situation and this is what we can call an international strategy.

An international strategy would be the one

in which you face those two little pressures and then you can

put most of the segments of the value chain in one or maybe two places,

and just export all over the place.

A more contemporary case would be the pharmaceutical industry.

These corporations invest a lot of money

in research and development usually located in one or two countries of the world.

Let's say a country like Germany is

a big creator of patents and inventions in the pharmaceutical industry.

If you produce, let's say,

a vaccine that everybody who needs and everybody

wants and nobody knows how to use it or how to create it,

well then this corporation can also develop an international strategy.

Because not only they can afford to produce in a single place of the world,

but this also provides them with an advantage,

because you don't want

the production of this good in which you hold a lot of secrets and patents,

to be taking place in a country where your secrets could be stolen.

So, many of these corporations,

they prefer to just remain in Germany where they can be more secure

that their secrets are going to be safe

and no matter how expensive it is to remain in Germany,

as long as they hold the patent,

they can benefit from international operations and international business by exporting

these vaccines or whatever product they are producing to other countries.

Again, not many firms are in this situation.

You are depending on a patent that eventually will

expire or maybe somebody copying what you did.

But again, this is the best situation to be in but not many firms are in this situation.

But those that are,

can afford to just concentrate many aspects of

their value chain especially in research and development and production,

may be in a single area,

to protect secrets and exploit their advantages by exporting into many other places.

Let's go back to our table,

and let's imagine now you're in the top left quadrant,

which means you're facing high pressures for

cost reduction and low responsiveness pressures.

This is a case of things like microchips or as mentioned before, raw materials.

There is no need to adapt to different markets.

So, the way to enter and exploit advantages in the market is by competing through prices.

So, a corporation that is in this situation will very likely,

the one that is in this top left quadrant,

develop what is known as a global standardization strategy.

This means you might concentrate

production in a single place in order to exploit economies of scale.

But, you might concentrate this production in a place in which production is cheap.

Again, if you're in the raw materials industry,

you cannot just move production.

But in other sectors,

let's say like the microchip industry, you can.

So, you would move the production to a place that is

cheap and just can produce in large quantities.

And then, you export from this or let's say two, three,

four places around the world and just export to their surrounding areas.

So, this is basically what is known as a global standardization strategy.

Usually concentration of production and research and

development in just a few very favorable places,

the places that allow you to produce cheaply and in big quantities.

So in short, a global standardization strategy would

mean concentrating production and

research and development maybe in just a few places in the world.

But the ones that allow the firm to produce in

very large quantities and at very low prices.

Now, let's put ourselves in this other point of our table,

the lower right side.

This means this is the case of a firm facing

low pressures for cost reduction and high pressures for responsiveness.

Related to what we mentioned before,

this would be a firm that is producing or offering a good or service that

depends a lot or has to adapt

a lot to differences between countries due to religious differences,

cultural differences, government regulations or infrastructure among others.

So, this is some situation in which when the differences between nations are very big,

you need to customize your production,

which means a firm might actually locate

several segments of the value chain in different countries.

So, kind of like one value chain here,

one value chain there,

or at least many segments of this value chain in different places,

because then you're dealing with things like marketing and sales

that might need customization.

Production might need customization or even customer service might need customization.

So, for this kind of situation,

a firm might show

many or several value chains either at regional levels or even at the domestic level.

The final quadrant in their right upper corner

of our table shows the most complex situation,

the one nobody wants to be in but the one in which most firms are,

which is the one in which a firm is facing

high responsiveness pressures and high cost reduction pressures.

So, when does this happen?

This is something that happens when competition is particularly fierce and firms need

to both deal with their adaptation to

different countries and at the same time try to reduce the costs.

Again, in neither one of

the previous strategies we have assumed that cost pressures are non-existent.

I mean, what we are talking about is that they are

lower than in the other places in the table.

So, let's go back to this most complex quadrant.

A firm that is in this location will

more likely develop what is known as a transnational strategy,

which is the one consisting of producing in cheaper places

and at the same time adapting to the needs of different places.

Maybe one of the best examples of this is

the case of the U.S. based corporation Caterpillar,

which has produced construction equipment and farming equipment for a long time.

Now, Caterpillar in the last decades has faced

very strong competition from varied Asian producers.

Now, this is something that has forced them to develop the following strategy.

They need to adapt to the different markets because

construction regulations and the construction characteristics in

different places are not exactly the same.

But again, they're facing the competition of low cost producers,

and some of the consumers of the Caterpillar equipment are not

exactly very wealthy individuals or very wealthy corporations.

The way they do this is the following one.

They make the components of their products in very different low cost locations,

and then they opened assembly plants in the countries where they were

going to sell these products using

the low cost components that had been produced elsewhere.

And the assembly plants adapted the products to the conditions of the local market.

This is extremely complex.

This is not an easy thing to manage,

but this is the situation in which

many firms have been finding themselves in the last years.

So, we have been seeing firms moving from

the other three quadrants little by little towards a transnational strategy.

The car industry is another example.

Let's make the components as cheap as

possible in the places where they can produce them cheaply.

But then we adapt the cars to the different characteristics of different countries,

either whether they drive on the left side or their right hand or

emission regulations or size preferences,

these kinds of things.

So, this is something that has been the trend in the last few years.

Now, so far, I've been assuming a stable political environment.

What the events taking place in the last years show is the following trend,

a trend towards a defense of nationalism and protectionism.

At the time of this recording,

some multinational corporations were beginning to rethink whether to develop

a transnational strategy and instead actually

start going towards some more localisation strategy,

in order to protect themselves against protectionism and nativism.

And this is a trend that remains to be seen where the final result will be.

But the point here is that this is also a trend that is still

responding to different responsiveness or cost reduction pressures.

As part of their responsiveness pressures,

politics is also present and as has been said in the past sessions,

we can never forget about politics when thinking about global strategy.

The Four Basic Global Strategies

Global Strategy II: Doing Business in The Global Economy

Meet the Instructors