Global Strategy II: Doing Business in the Global

Economy!
Professor Marcelo Bucheli

Welcome to Global Strategy II: Doing Business in the Global Economy!............................2

Meet Professor Bucheli .......................................................................................................3
Module 1 ..............................................................................................................................4
Lesson 1-1: Pressures and Corporate Global Strategy ............................................................. 4
Lesson 1-2: The Global Value Chain .......................................................................................... 7
Lesson 1-3: Sources of Responsiveness and Cost Reduction Pressures ................................. 14
Lesson 1-4: The Four Basic Global Strategies ......................................................................... 19
Lesson 1-5: Managing Pressures and International Differences ................................................ 25
Lesson 1-6: Netflix's Internationalization Strategy ...................................................................... 30

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 Global Strategy II: Doing Business in the Global
Economy!
Professor Marcelo Bucheli

Welcome to Global Strategy II: Doing Business in the Global

Economy!

Hello students. My name is Marcello Uccelli from the University of Illinois Urbana
Champagne in the United States. I wanted to welcome you to the Global Strategy 2
course: Operating in the Global Economy. Here we will see how managers decide their
investment decisions in this crazy world, and the type of elements that determine these
strategies. And how even wider elements like the political and economic environment
effect these strategies. So the point here is to really look at managers operating in this
global economy and their process of decision making in it. So let's go, come with me.
And let's explore how to profit in the world global economy.

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 Global Strategy II: Doing Business in the Global
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Professor Marcelo Bucheli

Meet Professor Bucheli

My name is Marcelo Bucheli. I was born in Venezuela, then I grew up in Chile. I went to
the United States and did my PhD at Stanford University. A PhD in history in which I
studied international business. I mean, historical studies on international business. Later
on, I worked at Harvard Business School where I taught at the MBA program. I taught a
business history program at Harvard. And right now, I'm a faculty member at the
University of Illinois at Urbana-Champaign. What we're going to do in this course, or
what I hope we achieve here, is an understanding about how firms make their decisions
when operating globally. And how to interpret the environment in which these decisions
are made. Something that has made me feel a little bit uncomfortable in the last years is
that many textbooks or studies on international business ignore or neglect political
aspect or historical aspects. However, the world keeps moving, history continues, and
we're affected by it. So this is something that I would like all of us to achieve. First, an
awareness of the differences between countries. The differences on how you have to
behave in these countries, and how history and politics determine, strongly, whether we
like it or not, the decisions that we make as managers. For a long time in my years in
South America I did a lot of mountaineering in the Andes mountains. Which something
that is not very easy to do in the flat state of Illinois where I live now. I love cinema,
particularly independent cinema. And I enjoy classical music as well as 1980s new
wave that is not that new anymore.

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 Global Strategy II: Doing Business in the Global
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Professor Marcelo Bucheli

Module 1
Lesson 1-1: Pressures and Corporate Global Strategy

In our previous sessions, we explored how the global economy operates, what the
origins of this global economy are, and the evolution of some of the most important
emerging markets in the global economy. What we're going to do now is try to
understand how firms operate in this global economy. And to find ways to determine
what type of strategy a firm should follow when engaging in operations internationally.
When operating globally, firms face two types of pressures. The first one is what we call
cost reduction pressures and the second one is what is known as responsiveness
pressures. Let's talk a bit about the cost reduction pressures.

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Professor Marcelo Bucheli

These are the pressures faced by firms that are selling goods that do not need much
adaptation in different markets. We can talk about stuff like oil or coal or wheat. I mean,
you sell it in the same way no matter where you go.

Responsiveness pressures are the ones faced by corporations, that are selling or
offering services or goods that require an adaptation to different markets and these are

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 Global Strategy II: Doing Business in the Global
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Professor Marcelo Bucheli

the patient, as we will explore later, might be the result of differences in terms of culture,
religion, climate, geography, political systems, etc. So these type of elements might
generate new pressures for firms that are operating at the global level and have to
adapt to the different places where they operate. Determining pressures, the type of
pressures that a firm faces, unfortunately sometimes it's not as straightforward as I just
mentioned. Take firms like Unilever and Procter & Gamble.

For a long time, these firms offered a similar range of products, but followed different
interpretations of what pressures they were facing. For instance, Procter & Gamble, for
awhile, believed that they were selling products in which they were facing cost reduction
pressures. They believed that they were offering very generic goods, like detergent, or
soap, or the like, and therefore these goods did not need adaptation to the firm markets.
Unilever, the Dutch British company on the contrary, had a very different perception of
what they were doing. For decades, until the 1980s, they were considered that their
goods that they were selling, again, soap, detergent, chocolate and the like, needed to
be adapted to different markets because of different perceptions people had of these
different markets. So this led to very different strategies for each firm. Unilever, focusing
on individual markets, Procter & Gamble, focusing on the global market as a single unit.
So this is what we're going to explore here in this session.

As you guys might remember from previous sessions, before we talked about the type
of advantages, a firm was going to exploit when going abroad, we talked about
ownership advantages, location advantages, and internalization advantages. These
advantages, as we mentioned in a previous class, helped us to determine whether it
makes sense for our firm to become multinational or not. But now, if you decide that it
makes sense for a firm to become a multinational corporation, we're going to explore
the strategies followed by firms. Taking into account the pressures that I just mentioned,
the cost reduction pressures and responsiveness pressures.

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Professor Marcelo Bucheli

Lesson 1-2: The Global Value Chain

In order to understand how a firm strategizes in the world economy, we need to go

back, or take into account the concept of value chain, because now we're going to be
talking about global value chains. Let's remember what the value chain is about, we
have what is known as global value chains. A global value chain is one in which the
different segments of the production process are located in different parts of the world.
So, let's say a company conducts its research and development in one country, then
produces the product in a second country. And that second country buys the
components from a third country, then the assembly process can be done in a fourth
country, and the customers can be in a fifth or sixth country.

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 Global Strategy II: Doing Business in the Global
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Professor Marcelo Bucheli

So the global economy created after the 1990s and 2000s, and particularly the lowering
of tariffs occurring all over the world during that period, permitted the creation of these
global value chains, which has been exploited by major firms in the world. And explains
why so many Western firms outsource their production to other places of the world,
particularly in Asia. But we also need to take into account that Asian corporations are
also investing in having some parts of their value chains located in Western countries.

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 Global Strategy II: Doing Business in the Global
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Professor Marcelo Bucheli

Why do corporations distribute their different segments of the value chain all over the
world? Well, let's go back to the concepts that we studied in the previous section,
comparative advantages. Some countries might provide an advantage at producing
something at cheaper prices, and some other places might provide an advantage at
conducting research. Again, let's look back at the value chain, but now let's take into
account a particular firm, let's look at Apple, look at the research and development.
Most of it takes place in the United Sates with some parts sometimes in a place like
India, but then production.

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Professor Marcelo Bucheli

Most of it takes place in China using components from many different countries,
including places like Indonesia or South Korea.

Marketing and sales, we have different things here, global campaigns for the iPhone.
Sometimes you find the same poster advertising iPhone, let's say, the iconic black
image wearing white headphones, in the subway of Paris and on a billboard in India or

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Professor Marcelo Bucheli

on a bus stop in New York. So here we find a global marketing and sales process, but
then you go to customer service, and here Apple has its specialized stores with some
people that in some countries are called the geniuses working at the Apple Store.

This is Apple, again, providing customer service at the final point of sales. This is
partially because Apple tries to differentiate itself from other computer corporations, and
that is strongly related to the customer service at the point of sales. But if somebody
wants to talk over the phone and get customer service, then, again, this customer
service representative might be located in a place like India. We know that the value
chain of a particular product can be distributed all over the world, now the question is
where to locate these segments of the value chain. And how do you know you need to
really distribute the value chain all over the world to begin with? We know that some
firms do it, some firms don't, some firms just specialize in one segment of the value
chain. Take Walmart, just sales, they do not produce anything, they do not have much
of a customer service, but they became the largest corporation in the United States just
by focusing on one segment of the value chain.

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Professor Marcelo Bucheli

But let's take another type of big firm, BP, used to be called British Petroleum, now it's
just BP, because they didnt want to deal with the name British for political reasons. And
here we have a firm that might own oil fields in places like the Middle East, pipelines,
tankers, platforms in the ocean, and sometimes, and certainly, sorry, refineries, and all
the way down to the final segment of the value chain, which is the gas station, where
somebody might buy the product that they offer. So, some firms do it like this, some
others don't, some focus on just one segment of the value chain, like Starbucks, they
just sell coffee, but they don't own plantations, while others really integrate their different
segments in different countries. This is what we're going to explore now, how to
determine where to distribute the value chain in conjunction with the concepts that we
mentioned before that were cost reduction pressures and responsiveness pressures.
The final segment of the value chain for Apple, customer service, usually is again in the
hands of Apple.

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Professor Marcelo Bucheli

Here we have, in many big cities of the world, usually located in prime real estate areas
and extremely visible, the Apple stores where customers can go there and consult with
the so called geniuses, these people that work for Apple at helping the customers. And
in this way, we see the firm again, taking control of this last segment of the value chain,
something that is important for this firm, and we see not other computer firms do it,
because for Apple, distinguishing itself from the rest is part of what allows them to
charge higher prices. But the customer service of Apple can also be, you don't need to
go to the store, as we all know, some people can call over the phone. In the English
speaking world, usually these phone calls will be answered by an expert located in
India. So here we have the customer service in the Apple store in the main areas of the
main cities of the world, but also, when we're talking over the phone with a
representative, highly likely this person will be located in India, so this is what a global
value chain would look like. We already mentioned also an example with the oil
industry, and we can mention many other examples of firms located in different
segments of the value chain in different countries.

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 Global Strategy II: Doing Business in the Global
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Professor Marcelo Bucheli

Lesson 1-3: Sources of Responsiveness and Cost Reduction

Pressures

Let's explore what the sources of these pressures, responsiveness pressures and cost
reduction pressures are. Responsiveness pressures, we have several sources of these
pressures. The first one and maybe most obvious one is just different tastes in between
countries. What is considered nice or attractive or cool in one place is not in another
place. Some countries, for example, give a lot more importance of things like the quality
of bread in Europe, something that in the United States, for instance, is not something
important for people. And therefore the kind of things that are offered are going be
different. Or let's mention things like cars. Europeans, for different reasons, do not like
big cars. In the United States, by contrast, most people like to own big cars. So tastes,
which sometimes come from very long time ago, will force many corporations to adapt
and respond and be responsive to the differences between countries.

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Professor Marcelo Bucheli

Another source of responsiveness pressures is infrastructure, or rather differences

infrastructure. Let's go to very simple things like plugs. They are not the same. And we
know that we cannot plug on the wall the same thing that we plug in the United Kingdom
as in France or the United States. And we have different voltage systems that
corporations need to adapt to. Infrastructure also means things like roads and the
quality of them.

Certain types of cars simply cannot simply be driven in bad roads in poor countries.
And you just would not sell them in these places. Or the infrastructure sometimes is
adapted and it was created a long time ago thinking in certain characteristics that not all
countries share. For instance, driving on the right hand, on the right side of the car in
the United Kingdom or Japan or many other countries, which is not the case for the
Unites States or many places in Western Europe or Latin America. So somebody selling
cars needs to take that into account. And because roads are made and rules are made
thinking about people driving either in one side or the other of the car and the road. So
these elements certainly force corporations to be more responsive.

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Professor Marcelo Bucheli

Another very important source of responsiveness pressures comes from culture and
religion. And we know that people in some places have deep held beliefs around
religion. And cultures, as we know, are not the same, and culture many times is
determined by religion. And this determined what is considered right or wrong, moral or
immoral. So let's take some very basic things, like food. In a place like India,
vegetarianism is widely accepted as a way of life. This is something that a multinational
like McDonald's had to adapt to. I mean, they realized they just cannot sell burgers
made out of beef from cows and they also have to adapt to the Middle East and to, God,
okay. Let's start, sorry.

Do I need to do this whole thing again? >> I don't think so. If you just start with, what
was the line right before you mentioned McDonald's? >> I think it's- >> India is
vegetarian. >> Okay. >> So why don't you start with India? Yeah, if you could just start
with, for example, and then go into India. Stand by. Okay, whenever you're ready. >>
For example, let's take India. India, a county with a very large percentage of its
population practicing vegetarianism as a way of life. This is something that a company
like McDonald's had to realize very quickly. And then they had to in order to sell in the
Indian market, they had to start selling vegetarian food. Something that, let's say, in a
place like the United States and Canada, nobody really relates McDonald's with
vegetarian food.

And we can find other things that religion or culture determine the consumption patterns
of people, or the way you can sell them certain things. In certain places of Europe, for
instance, you can advertise with certain images in which human bodies are shown more

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liberally than, let's say, in the United States. Where morals lead people to cover the
bodies of people in advertisement, and in the United States you can show more, let's
say, than in Saudi Arabia. So these, just the way you sell something, can be determined
by culture and religion. And this is something that, depending on the product
somebody's selling, will create responsiveness pressures. As I mentioned before, food
might be linked to things like religion, or even other industries like entertainment.

MTV, for example, learned the hard way that not everybody on planet Earth just wanted
to watch American pop music or American productions in the same way they were
shown in the United States. When MTV started spreading around the world they
thought, everybody loves Hollywood and everybody loves American pop culture
because it sells a lot. After a while they realized people actually enjoy watching videos
of people speaking in their same language, singing in their same language, or singing or
performing the kind of music they like. So this led this firm to eventually develop a more
responsive strategy because the pressure was there. And related to the previous point,
there's another element that, again, depending on what you sell or how you want to sell
it, responsiveness pressures might be present, and this is language.

Of course, we know not all the people in the world speak the same language. And as
the case with MTV before, there was the wrong assumption by some corporations that
everybody would understand English, master English, and like English. So this is
something that is reflected in many other areas, for example, keyboard manufacturing
for computers. We know that the keyboards in the French speaking world are not the
same one as in the Spanish speaking world or the English speaking world or the Arabic

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world. So this is something that forces corporation to be more responsive to these very
important cultural aspect. And a final but important source of responsiveness pressures
are government regulations. You simply cannot sell the same things, or the same
products, or the same services in different places due to regulations. Let's take an
example and compare the United States and Europe. The United States, at the time of
this course, did not have many regulations controlling the use of genetic products in
their cattle. This is something that basically creates a kind of beef that is different from
the one Europeans consume.

In Europe there are many regulations forbidding the use of many chemicals, or other
types of products in cattle. So you can simply not sell the same beef that you produce in
the United States into the European markets. Their relations just do not allow that beef
to go in there because their authorities belief that this is harmful for your health. And we
find many other types of regulations, let's say in other industries like the financial
industry. Governments have different laws in different places of the world and we have
other types of regulations even in more less harmful products, let's say certain tools,
that require some more safety elements in some countries than others. Or in some
country's you can sell certain drugs in a pharmacy down the street while in others you
need a medical, a doctor's note saying that you can buy it. So all these will affect the
way a corporation develops its strategy, and certainly would show us that the same
strategy cannot be used in the same way in different countries if we take into account
these type of pressures.

So I just mentioned a few of the many possible responsiveness pressures a corporation

might face. And again let's remember, sometimes it's hard to determine where the
pressures are coming. And so remember, the second pressure is the cost reduction
pressures. Usually for goods that are very generic that do not need adaptation and that
are sold in the same way in different markets. We mentioned before things like primary
material or raw materials like oil, or coal, or wheat.

But there are even some manufactured goods that do not need much of an adaptation,
even relatively complex ones such as microchips. No matter what religion you are or
which language you speak, the microchip that you use inside of your computer is going
to be pretty much the same and and the point is to sell it at lower prices with greater
capabilities. Or we can go to some even more trivial goods, shoelaces. You don't really
need an adaptation of shoelaces around the world, and somebody can just produce
them wherever they're cheaper at producing and sell them all over the place. I
mentioned shoelaces but not clothes in general, because, again, these would face a
more responsiveness pressure. That depends on, again, religion, or simply climate or
weather. So basically we have these two sources of pressures that need to be taken
into consideration when trying to understand the kind of strategies that a firm follows
when operating in the global economy.

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Professor Marcelo Bucheli

Lesson 1-4: The Four Basic Global Strategies

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,"

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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

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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

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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,

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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

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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.

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Lesson 1-5: Managing Pressures and International Differences

How do we figure out the sources of the pressures that a firm faces and the way we are
going to respond to them? As I mentioned before, some larger things need to be
analyzed in a way that are hard just to summarize in, let's say a score or an index like
political systems or differences in culture or differences in tastes. They require exploring
the markets and getting deep knowledge about that. But, there are still some tools that
have been created and I'm going to mention one that can be useful for a firm to start
approaching an understanding of where the pressures are coming from.

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Professor Marcelo Bucheli

So let's explore the framework created by Pankaj Ghemawat, known as the 3-As, that
stand for aggregation, adaptation, and arbitrage. Aggregation is the one related to
economies of scale. Adaptation is the one related to customization or localization of
activities. And arbitrage is the one related to exploiting the possibility of producing at low
costs in some particular place. Firms that have a high ratio of advertisement over sales
revenue might be receiving the signal that they need to adapt, or localize. A lot of
advertisement in different places certainly might mean adaptation. Another ratio that is
useful is research and development over sales revenue. This would mean that a firm
might be exploiting the economies of scale, and therefore this would relate to
aggregation. And the third one, the third ratio to take into the consideration, is labor
costs over sales revenue, which would relate to whether we need to arbitrage or not.
This is for a firm that depends too much on labor. Now, there's a possibility of combining
the three of them in different ways. Never the three of them, but just two at a time. >>
Cut right there. I just want to double check.

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 Global Strategy II: Doing Business in the Global
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Professor Marcelo Bucheli

I'd hate for something to be happening and we not know what Aggregation plus
adaptation. These would be very similar to the Caterpillar example that we explored
before. A firm that is trying to exploit low labor cost advantages of some places, or low
production costs while at the same time adapting to the different markets. Aggregation
plus arbitrage. This is the kind of strategy that a firm like the TATA group from India has
developed, which they developed by creating global centers and regional centers. And
what they called near shore centers of production and development.

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Professor Marcelo Bucheli

And in this way they could exploit economies of sale, while at the same time developing
the advantages of low cost production. And arbitrage plus adaptation. A good example
is Cognizant from India, in the technology sector. It produces in India, but it has a
presence in the United States. It has offices in the United States where they can learn
firsthand what the customer base needs. And in this way, they can adapt to this while at
the same time keeping the local cost production centers in India. So Let's now conclude
this module. >> Just say in conclusion. >> Okay. >> Yeah, keep it simple.

>> In conclusion, managers need to take a look at the different pressures, particularly
responsiveness pressures and cost reduction pressures, and determine where they're
coming from. Depending on where they come from, that will determine also the
distribution of different segments of the value chain all over the world. Or even if it's a
firm just focusing on one segment of the value chain, these also are determining, the
cost reduction pressures or the responsiveness pressures will also lead the firm to
adapt to the different places or to produce at cheaper prices. Let's say McDonald's
again, just expanding abroad in one segment of the value chain, around sales, but they
adapted to difference places according to the responsiveness pressures. So, these
pressures are there.

And they determine the composition and the global distribution of the value chain. And
depending on how this value chain is distributed around the world, well, we will have
managerial challenges at putting all these things together and coordinating the different
units with each other. We had seen for a while that corporations were facing more and

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Professor Marcelo Bucheli

more low cost reduction pressures and responsiveness pressures at the same time. But
with the rights of economic nationalism this whole way of arranging the strategy might
change. And that is why paying attention to the wider environment, both political,
cultural, and economic is important.

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Professor Marcelo Bucheli
Lesson 1-6: Netflix's Internationalization Strategy

Thus far, we have discussed the four strategies that firms can choose among when they
face pressures for local responsiveness and cost reduction. Now, we often focus on the
strategies in the context of firms that engage in manufacturing and that are known to set
up subsidiaries across the globe. But how do these strategic choices apply to firms that
primarily operate through the use of the Internet? In this video, we'll look at the case of
Netflix and how it implements the localization strategy when it operates abroad. Let's start
with a bit of background on the firm. We know that Netflix began in the late 1990s with the
DVD-By-Mail subscription model.

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Professor Marcelo Bucheli

While this model continues to this day, Netflix decided to transition to and primarily focus
on offering streaming services beginning in 2007. The early success of this new model let
the firm to set its sights on going beyond the United States. In 2010, it started its
international expansion by entering Canada. Now, this makes sense when we consider
traditional theories of international expansion. Firms typically go to countries that are
geographically close to their home countries and where there are some cultural
similarities. Once the firm established itself in Canada, it decided to expand to
approximately 50 countries across Europe and Latin America over the next five years.
These were markets where the firm believed that consumers were relatively affluent and
had easy access to broadband Internet. After this move, the firm entered into what some
analysts consider as the third phase of its international expansion.

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Seemingly overnight in early 2016, the firm begun streaming in an additional 140
countries. So within less than a decade, Netflix had expanded to approximately 190
countries, and the firm has achieved high success with nearly two-thirds of its over 200
million subscribers coming from outside of the United States and Canada. What's driven
this success? Largely it's due to the firm's implementation of a localization strategy.

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Professor Marcelo Bucheli
This strategy entails one, producing and tailoring content that fits the needs and wants of
local consumers; two, expanding its physical presence in particular countries; and three,
creating new business models in particular markets. Let's take these items one at a time.
First, with regard to producing and tailoring content, Netflix recognizes that not all
countries will be open to American shows given differences in consumer preferences.

Thus, in 2016, Ted Sarandos, Chief Content Officer for the firm, went on record saying,
"Every new dollar we spend is for global content and for global rights." We've seen Netflix
live up to this statement. Across the globe, the firm has spent hundreds of millions of
dollars to obtain licenses to stream local shows on its platform. Additionally, the firm has
established partnerships to produce original content in various countries.

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For example, in 2020, the firm established four partnerships with Japanese and South
Korean Anime houses as a way to jointly produce content. This is beneficial as it serves to
increase the firm's consumer basis in these markets and offer new content for fans of the
genre across the globe. In addition to producing local content, Netflix has spent heavily to
ensure that consumers can watch programs in more than 30 languages. Furthermore,
both English and non-English language shows have options for subtitles in local
languages. Second, the firm has expanded its physical presence across the globe. Now,
when we think of Netflix, we often think of simply having the ability to turn on our TVs or
computers and stream the service and that everything behind the scenes occurs at the
firm's headquarters in California, but that's not the case.

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The firm has a physical presence in about 20 countries beyond the United States, such as
Turkey, Brazil, France, and Japan. The physical presence allows the firm to hire local
experts who can help create content, build relationships with local production houses for
potential partnerships, and conduct market research. Thus, Netflix can adapt more quickly
to changes in consumers' needs and wants with a physical presence in the country.
Beyond having offices for local staff, the firm's physical presence includes establishing
production facilities so that it can have more control in the production of local content,
tying to our first point.

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For example, in 2018, Netflix opened its first European production hub in Madrid. The firm
followed up this decision by establishing a production hub in Toronto in 2019, and we are
likely to see the establishment of a production hub in Sweden and a film studio in Turkey
in the near future. Third, Netflix has experimented with a new business model for
particular markets.

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Specifically, the firm has introduced a mobile-only subscription plan in countries such as
India, Malaysia, Thailand, Nigeria, and the Philippines. In Nigeria, for example, the plan
costs approximately three dollars per month. This plan is a way to attract more
subscribers, particularly those who are price-sensitive, as the plan is typically less than
half the cost of the traditional plan in these markets. Furthermore, consumers in these
markets tend to watch more content on their phones, both at home and on the go. As we
see in the case of Netflix, the localization strategy is propelling the firm's success across
the globe by one, producing and tailoring content that fits the needs and wants of local
consumers; two, expanding its physical presence in particular countries; and three,
creating new business models in particular markets, the firm may be poised to maintain its
dominance in the video streaming market.

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