BUSINESS STRATEGY

FMA3093

INTERNATIONAL BUSINESS MANAGEMENT SEMINAR

International Strategic Management

International strategic management is a comprehensive and ongoing management planning process aimed at formulating and implementing strategies that enable a firm to compete effectively internationally.

Strategic Planning

The process of developing a particular international strategy is often referred to as strategic planning. top-level executives at corporate headquarterssenior managers in domestic and foreign operating subsidiaries

What Is Strategy?

Strategy is a plan of action that channels an organization’s resources so that it can effectively differentiate itself from competitors and accomplish unique and viable goals.

Managers develop strategies based on the organization’s strengths and weaknesses relative to the competition and assessing opportunities.

Managers decide which customers to target, what product lines to offer, and with which firms to compete.

Strategy in an International Context

Strategy in an international context is a plan for the organization to position itself vis-a-vis its competitors, and resolve how it wants to configure its value chain activities on a global scale.

Its purpose is to help managers create an international vision, allocate resources, participate in major international markets, be competitive, and perhaps reconfigure its value chain activities given the new international opportunities.

Strategy Should Pinpoint to Actions

Formulate a strong international visionAllocate scarce resources on a

worldwide basisParticipate in major marketsImplement global partnershipsEngage in global competitive movesConfigure value-adding activities on a

global scale

Strategic Planning

Developing international strategy is more complex than developing a domestic one

Managers need to consider various factors, such as: Culture Political economy Governmental interference Labor relations Coordination of implementation

Strategic Planning

International businesses have the ability to exploit three sources of competitive advantages not available to domestic firms:Global efficienciesMultinational flexibilityWorldwide learning

Sources of Competitive Advantage

Global efficiencies

Worldwidelearning

Multinational flexibility

The Purpose of international Strategy

Bartlett and Ghoshal argue that managers should look to “…develop, at one and the same time, global scale in efficiency, multinational flexibility, and the ability to develop innovations and leverage knowledge on a worldwide basis”.

These three strategic objectives – efficiency, flexibility, and learning – must be sought simultaneously by the firm that aspires to become a globally competitive enterprise.

Three Strategic Objectives

Efficiency –lower the cost of operations and activities Location efficiencies, economies of scale,

economies of scale

Flexibility –tap local resources and opportunities to help keep the firm and its products unique

Learning -- add to its proprietary technology, brand name and management capabilities by internalizing knowledge gained from international ventures.

Trade-Offs among the Three Objectives

International business success is largely determined by the degree to which the firm achieves these three goals of efficiency, flexibility, and learning.

But it is often difficult to excel in all three areas simultaneously. Rather, one firm may excel at efficiency, while another may excel at flexibility, and a third at learning.

Sustainability over time is also a challenge.

Understand how global markets, products, competition, and risk influence the choice of a multinational strategy and the choice of a market-entry strategy.

Multinational Strategies: Dealing with the Global-Local Dilemma

The IR Framework

The discussion about the pressures on the firm of achieving global integration and local responsiveness has become known as the integration-responsiveness (IR) framework.

Integration-Responsiveness Framework

The Integration-Responsiveness Framework summarizes two basic strategic needs: to integrate value chain activities globally, and to create products and processes that are responsive to local market needs.

Global-local dilemma – a fundamental strategic dilemma faced by all multinational

companies when competing internationally

Pressures to respond to the unique needs of the markets in each country in which a company does business – Local responsiveness option

Efficiency pressures that encourage companies to de-emphasize local differences and conduct business similarly throughout the world – Global integration option

Multinational Strategies: Dealing with the Global-Local Dilemma

Global integration means coordinating the firm’s value chain activities across many markets to achieve worldwide efficiency and synergy to take advantage of similarities across countries.

Integration-Responsiveness Framework

Objectives of Global Integration

Global integration seeks economic efficiency on a worldwide scale, promoting learning and cross-fertilization within the global network, and reducing redundancy.

Headquarters personnel justify global integration by citing converging demand patterns, spread of global brands, diffusion of uniform technology, availability of pan-regional media, and the need to monitor competitors on a global basis.

Companies in such industries as aircraft manufacturing, credit cards, and pharmaceuticals are more likely to emphasize global integration.

Pressures for Global Integration

Economies of Scale. Concentrating manufacturing in a few select locations to achieve economies of mass production.

Capitalize on converging consumer trends and universal needs. Companies such as Nike, Dell, ING, and Coca-Cola offer products that appeal to customers everywhere.

Uniform service to global customers. Services are easiest to standardize when firms can centralize their creation and delivery.

Global sourcing of raw materials, components, energy, and labor. Sourcing of inputs from large-scale, centralized suppliers provides benefits from economies of scale and consistent performance.

Global competitors. Global coordination is necessary to monitor and respond to competitive threats in foreign and domestic markets.

Availability of media that reaches customers in multiple markets. Firms now take advantage of the Internet and cross-national television to advertise their offerings in numerous countries simultaneously.

Pressures for Local Responsiveness

Unique resources and capabilities available to the firm. Each country has national endowments that the foreign firm should access.

Diversity of local customer needs. Businesses, such as clothing and food, require significant adaptation to local customer needs.

Differences in distribution channels. Small retailers in Japan understand local customs and needs, so locally responsive MNEs use them.

Pressures for Local Responsiveness

Local competition. When competing against numerous local rivals, centrally-controlled MNEs will have difficulty gaining market share with global products that are not adapted to local needs.

Cultural differences. For those products where cultural differences are important, such as clothing and furniture, local managers require considerable freedom from HQ to adapt the product and marketing.

Host government requirements and regulations. When governments impose trade barriers or complex business regulations, it can halt or reverse the competitive threat of foreign firms.

The Four Strategies Emerging from the IR Framework

1. Home replication/International strategy

2. Multi-domestic strategy

3. Global strategy

4. Transnational strategy

Strategic Alternatives

Global StrategyFirm views the world assingle marketplace. Goal is to create standardizedproducts.

Home ReplicationFirm uses core competency or firm-specific advantage

Multidomestic StrategyFirm operates as a collection of relativelyindependent subsidiaries

Transnational StrategyFirm combines benefits of global scaleefficiencies with benefitsof local responsiveness

Low HighPressures for Local Responsiveness/Flexibility

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Home Replication Strategy(Export Strategy or International Strategy)

The firm views international business as separate from, and secondary to, its domestic business. Such a firm may view international business as an opportunity to generate incremental sales for domestic product lines.

Products are designed with domestic customers in mind, and international business is sought as a way of extending the product lifecycle and replicating its home market success.

The firm expects little knowledge flows from foreign operations.

Multi-Domestic Strategy(Multi-Local Strategy)

Headquarters delegates considerable autonomy to each country manager allowing him/her to operate independently and pursue local responsiveness.

With this strategy, managers recognize and emphasize differences among national markets. As a result, the internationalizing company allows subsidiaries to vary product and management practices by country.

Country managers tend to be highly independent entrepreneurs, often nationals of the host country. They function independently and have little incentive to share knowledge and experiences with managers elsewhere.

Products and services are carefully adapted to suit the unique needs of each country.

Advantages of Multi-Domestic Strategies

If the foreign subsidiary includes a factory, locally produced goods and products can be better adapted to local markets.

The approach places minimal pressure on headquarters staff because management of country operations is delegated to individual managers in each country.

Firms with limited international experience often find multi-domestic strategy an easy option as they can delegate many tasks to their country managers (or foreign distributors, franchisees, or licensees, where they are used).

Disadvantages of Multi-Domestic Strategy

The firm’s foreign managers tend to develop strategic vision, culture, and processes that differ substantially from those of headquarters.

Managers have little incentive to share knowledge and experience with those in other countries, leading to duplication of activities and reduced economies of scale.

Limited information sharing also reduces the possibility of developing knowledge-based competitive advantage.

Competition may escalate among the subsidiaries for the firm’s resources because subsidiary managers do not share a common corporate vision.

It leads to inefficient manufacturing, redundant operations, a proliferation of products designed to meet local needs, and generally higher costs of international operations than other strategies

Global Strategy

With global strategy, the headquarters seeks substantial control over its country operations in an effort to minimize redundancy, and achieve maximum efficiency, learning, and integration worldwide.

In the extreme case, global strategy asks why not make ‘the same thing, the same way, everywhere?’ It favors greater central coordination and control than multi-domestic strategy, with various product or business managers having worldwide responsibility.

Activities such as R&D and manufacturing are centralized at headquarters, and management tends to view the world as one large marketplace.

Advantages of Global Strategy

Global strategy provides management with a greater capability to respond to worldwide opportunities

Increases opportunities for cross-national learning and cross-fertilization of the firm’s knowledge base among all the subsidiaries

Creates economies of scale, which results in lower operational costs.

Can also improve the quality of products and processes -- primarily by simplifying manufacturing and other processes. High-quality products promote global brand recognition and give rise to customer preference and efficient international marketing programs.

Limitations of Global Strategy

It is challenging for management, particularly in highly centralized organizations, to closely coordinate the activities of a large number of widely-dispersed international operations.

The firm must maintain ongoing communication between headquarters and the subsidiaries, as well as among the subsidiaries.

When carried to an extreme, global strategy results in a loss of responsiveness and flexibility in local markets.

Local managers who are stripped of autonomy over their country operations may become demoralized, and lose their entrepreneurial spirit.

Transnational Strategy: A Tug of War

A coordinated approach to internationalization in which the firm strives to be more responsive to local needs while retaining sufficient central control of operations to ensure efficiency and learning.

Transnational strategy combines the major advantages of multi-domestic and global strategies, while minimizing their disadvantages.

Transnational strategy implies a flexible approach: standardize where feasible; adapt where appropriate.

What Transnational Strategy Implies

Exploiting scale economies by sourcing from a reduced set of global suppliers; concentrating the production of offerings in relatively few locations where competitive advantage can be maximized.

Organizing production, marketing, and other value-chain activities on a global scale.

Optimizing local responsiveness and flexibility. Facilitating global learning and knowledge transfer. Coordinating competitive moves --how the firm

deals with its competitors, on a global, integrated basis.

How IKEA Strives for Transnational Strategy

Some 90% of the product line is identical across more than two dozen countries. IKEA does modify some of its furniture offerings to suit tastes in individual countries.

IKEA’s overall marketing plan is centrally developed at company headquarters in response to convergence of product expectations; but the plan is implemented with local adjustments.

IKEA decentralizes some of its decision-making, such as language to use in advertising, to local stores.

Difficulty of Implementing Transnational Strategy

Most firms find it difficult to implement transnational strategy.

In the long run, almost all firms find that they need to include some elements of localized decision-making because each country has idiosyncratic characteristics. Few people in Japan want to buy a computer that includes an English-language keyboard.

While Dell can apply a mostly global strategy to Japan, it must incorporate some multi-domestic elements as well. Even Coca-Cola, varies its ingredients slightly in different markets. While consumers in the U.S. prefer a sweeter Coca-Cola, the Chinese want less sugar.

Components of International Strategy

Distinctivecompetence

Scope of operations

Resourcedeployment

Synergy

Distinctive Competence

Answers the questionWhat do we do exceptionally well,

especially as compared to our competitors?Represents important resource to the

firm

Scope of Operations

Answers the questionWhere are we going to conduct business?

Aspects of scope Geographical region Market or product niches within regions Specialized market niches

Resource Deployment

Answers the questionGiven that we are going to compete in these

markets, how will we allocate our resources to them?

Resource specifics Product linesGeographical lines

Synergy

Answers the questionHow can different elements of our business

benefit each other? Goal is to create a situation where the whole is

greater than the sum of the parts

Developing International Strategies

Strategyformulation

Strategy implementation

Steps in International Strategy Formulation

Develop a mission statement

Perform a SWOT analysis

Set strategic goals

Develop tactical goals and plans

Develop a control framework

Levels of International Strategy

Corporate Strategy

Single-Business StrategyRelated DiversificationUnrelated Diversification

Advantages of Related Diversification

Less dependence on single productGreater economies of scaleEntry into additional markets more

efficient and effective

Business Strategy

Differentiation

Focus

Overall cost leadership

Functional Strategies

Financial

Marketing

OperationsR&D

Human resources