Lecture 8 - International Strategy PDF

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Lecture 8 notes for the strategic management module that shows notes for international strategy. All notes have been writen by me after listening back to the lecture slides. I have added diagrams that were a part of the lecturers presentation too for additional context....

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lecture 8 – International Strategy

How is International Strategy different from Domestic Strategy? •

The same generic theories apply (need for strategic fit, need for competitive advantage, etc.

What is international strategy? International business strategy refers to plans that guide commercial transactions taking place between entities in different countries. Typically, international business strategy refers to the plans and actions of private companies rather than governments; as such, the goal is increased profit

5 Main Themes (Johnson 2014)

Drivers of globalisation – include market demand, the potential for cost advantages, government pressures and inducements and the need to respond to competitor moves. Given the risk and costs of international strategy, managers need to know what the drivers are strong to justify adopting an international strategy in the first place. Advantages – geographic and firm specific – advantages might come from firm-specific and geographical advantages. Firm-specific advantages are the unique strategic capabilities proprietary to an organisation. Geographical advantages might come both from geographic location of the origin business and from the international configuration of their value network.

Managers need to appraise these potential sources of competitive advantage carefully: if there are no competitive advantages, international strategy is liable to fail International strategy – If drivers and advantages are sufficiently strong to merit an international strategy, then a range of strategic approaches are opened up, from the simplest export strategies to the most complex global strategies Market Selection – Having adopted the broad approach to international strategy, the question next is which country markets to prioritise and which to steer clear of. The issues here range from the economic to the cultural and political. Entry mode selection – Once target countries are selected, managers have to determine how they should enter each particular market. Again, export is a simple place to start. but there are licensing, franchising, joint venture, and wholly owned subsidiary alternatives to consider as well.

Drivers of globalisation

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Globalisation has happened for a reason – there are benefits to firms that operate on a global basis

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Yip (2003) suggests that there are four broad categories of globalisation drivers ....

Yip’s globalisation framework sees international strategy potential as determined by market drivers, cost drivers, government drivers and competitive drivers. Market drivers - a critical facilitator of internationalisation is standardisation of market characteristics. There are three components underlying this driver. First, the presence of similar customer needs and tastes; for example, the fact that in most societies consumers have similar

needs for easy credit has promoted the worldwide spread of a handful of credit card companies such as visa. Second is the presence of global customers; for example, car component companies have become more international as their customers, such as Toyota or ford, have internationalised, and required standardised components for all their factories around the world. Finally, transferable marketing promotes market globalisation; brands such as Coca-Cola are still successfully marketed in very similar ways across the world. Cost drivers - costs can be reduced by operating internationally. Again, there are three main elements to cost drivers. First, increasing volume beyond what a national market might support can give scale economies, both on the production side and in purchasing of supplies. Companies from smaller countries such as the Netherlands, Switzerland and Taiwan tend to become proportionately much more international than companies from the USA, which have a vast market at home. Scale economies are important in industries with high product development costs, as in the aircraft industry, where initial costs need to be spread over the large volumes on international markets. Government drivers – First, reduction of barriers to trade and investment has accelerated internationalisation. The World Trade Organisation has been instrumental in reducing trade barriers globally. Similarly, the emergence of regional economic integration partnerships like the EU has promoted this development. No government allows complete economic openness and it typically varies widely from industry to industry, with agriculture and high-tech industries related to defence likely to be particularly sensitive. The collapse of the Soviet Union was a liberation and adoption of free markets. Compatible technical standards make it easier for companies to access different markets as they can enter many markets with the same product or service without adapting to local idiosyncratic standards. Competitive drivers – relate to globalisation as an integrated worldwide strategy rather than simpler international strategies. It has 2 elements. First, interdependence between country operations increases the pressure for global coordination. For example, a business with a plant in Mexico serving both the US and the Japanese markets has to coordinate carefully between 3 locations: surging sales in one country, or a collapse in another, will have significant knock-on effects on the other countries. The second element relates directly to competitor strategy. The presence of globalised competitors increases the pressure to adopt a global strategy in response because competitors may use one’s countries profits to cross-subsidise under attack from targeted, subsidised competition.

The key insight into Yip’s drivers framework is  

international potential of industries is variable many different factors that can support it as indicated above, but others can inhibit it

For example, customer needs and tastes for many food products inhibit internationalisation of them and local governments often impose tariff barriers, ownership restrictions and local content requirements on foreign entrants. Leveraging advantages The second element of Johnson’s model of internationals strategy considers the advantages that firms may be able to leverage during international expansion. A competitor entering a market from overseas typically starts with considerable disadvantages relative to existing home competitors, which will usually have superior market knowledge, established relationships and local customers and strong supply chains

Porter’s diamond – theory of national competitive advantage •

Porter’s theory is that the way a firm interacts in its domestic environment dictates how well it will develop a competitive advantage when entering foreign markets ....

Porters diamond suggests that locational advantages may stem from local factor conditions; local demand conditions; local related and supporting industries;and from local firm strategy structure and rivalry. These 4 interacting determinants of locational advantage work as follows; 1. Factor conditions – ‘factors of production’ that go into making a product or service (ie raw materials, land and labour) Factor condition advantages at a national level can translate into general competitive advantages for national firms in international markets. Eg the linguistic ability of the swiss as traditionally provided a significant advantage to their banking industry. Cheap energy has traditionally provided an advantage for the North American aluminium industry. 2. Home demand conditions - the nature of the domestic customers can become a source of competitive advantage. Dealing with sophisticated and demanding customers at home helps train a company to be effective overseas. For example, America’s long distances have led to competitive strength in very large truck engines. The same with Italy and France with fashion 3. Related and supporting industries – local ‘clusters’ of related and mutually supporting industries can be an important source of competitive advantage. These are often regionally based, making personal interaction easier. 4. Firm strategy – The characteristic strategies, this can also be bases of advantage. German companies strategy of investing in technical excellence gives them a characteristic advantage in engineering industries and creates large pools of expertise. A competitive local industry structure is also helpful: if too dominant in their home territory, local organisations can become complacent and lose advantage overseas. Some domestic rivalry can be an advantage. For example, the long-run success of the Japanese car companies is partly based on government policy sustaining several

national players (unlike the UK where they are all merged into one) and the Swiss pharmaceuticals industry became strong in part because each company had to compete with several strong local rivals.

Porter’s diamond model underlines the environmental conditions and structural attributes of nations and their regions that contribute to their competitive advantage. It has been used by Governments aiming to increase the competitive advantage of their local industries. The argument that rivalry can be positive has led to a major policy shift in many countries towards encouraging local competition rather than protecting home-based industries.

International Strategy

Bartlett & Ghoshal (1989) argued that there were two key pressures for firms competing on an international basis: •

Pressures for cost reduction

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Pressures to be locally responsive

Pressures for Cost Reductions •

In industries producing commodity-type products

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Where competitors are based in low-cost locations

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Where consumers are powerful & switching costs low

Pressures for Local Responsiveness •

Local tastes may demand different products for that market

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Local legislation may mean products need to be customised

4 different international strategies can then be developed… 1. Global strategy – maximises global integration. In this strategy the world is seen as one marketplace with standardised products and services that fully exploits integration and efficiency in operations. The focus is on capturing scale economies and exploiting location economies worldwide with geographically dispersed value chain activities being coordinated and controlled centrally from headquarters. This strategy is the exact opposite to the multi-domestic strategy. A global strategy is most beneficial when there are substantial cost or quality efficiency benefits from standardisation and when customer needs are relatively homogenous across countries. 2. Transnational strategy – Tries to maximise both responsiveness and integration. Its aim is to unite the key advantages of the multi-domestic and global strategies while minimising their disadvantages. In addition, it maximises learning and knowledge exchange between dispersed units. In this strategy products and services and operational activities are, subject to minimum efficiency standards, adapted to local conditions in each country. This strategy also leverages learning and innovation across units in different countries. Coordination is neither centralised at home nor dispersed in

foreign countries, but encourages knowledge flows from wherever ideas and innovations come from. 3. International strategy – leverages home country capabilities, innovations and products in different foreign countries. It is advantageous when both pressures for global integration and local responsiveness are low. Companies that have distinctive capabilitites together with strong reputation and brand names often follow this strategy with success. Google for example, centralises its R&D and the core architecture underlying its internet services at its headquarters in California in the USA and exploits itinternationally with minor adaptations except for local languages and alphabets. The downside is the limits of a home country centralised view of the business with risks of skilled local competitors getting ahead. 4. Localisation strategy – maximises local responsiveness. It is based on different product or service offerings and operations in each country depending on local market conditions and customer preferences. Each country is treated differently with a considerable autonomy for each country manager to best meet the needs of the local markets and customers in that particular country.

Market selection Having decided which of the four internationalisation strategies to adopt, the next stage in the model is to consider “market selection” There are three determinants of market attractiveness that need to be considered in internationalisation strategy: •

Hill (2014) suggests that there are three factors that contribute to a country’s overall attractiveness for global expansion ....

Using this example for Turkey

Market Selection – CAGE Model (Ghemawat) 

Measures the match between countries and companies according to four dimensions of distance 1. Cultural 2. Administrative 3. Geographic 4. Economic

CULTURAL – differences in language, ethnicity, religion and social norms. Not just a matter of similarity in consumer tastes, but extends to important capabilities in terms of managerial behaviours. US firms closer to Canada than to Mexico. ADMINISTRATIVE - distance in terms of incompatible administrative, political or legal traditions. Colonial ties can diminish difference, so that the shared heritage of France and its former West African colonies creates certain understandings that go beyond linguistic advantages GEOGRAPHIC – not just a factor of physical kilometres ,but involves other geographical characteristics of the country such as size, sea access and the quality of communications infrastructure. Transport infrastructure can shrink or exaggerate physical distance. ECONOMIC – refers to wealth distances. Multinationals from rich-country multinationals are losing out on large markets if they only concentrate on the wealthy elite overseas. If rich-country multinationals can develop new capabilities to serve these numerically large markets, they can bridge the economic distance, and significantly extend their presence in booming economies such as China and India and bring to these poor consumers the benefits that are claimed for Western goods.

Entry mode selection Once a national market has been selected for entry, an organisation needs to choose how to enter that market. •

Johnson (2014) highlights two critical dimensions to be considered when making market entry mode decisions ….

1. Tradability - Relates to the product’s characteristics (size, fragility, perishability) & also the ease of doing business / IP risks in the target country 2. Competitive advantage - A measure of whether a firm has all the capabilities to go on its own, or whether it needs support from a partner.

Root (1994) suggests that companies have three potential approaches open to them when making market entry mode selection decisions .... •

Naïve rule. The company uses the same entry mode for all foreign markets

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Pragmatic rule. The company uses a workable entry mode for each market; typically, it is found that companies which adopt this approach tend to favour low-risk entry modes.

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Strategy rule. The company compares the benefits of the alternative entry modes available each time it enters a new market, before making a decision

The staged international expansion model proposes a sequential process whereby companies gradually increase their commitment to newly entered markets, as they build market knowledge & capabilities. This is challenged by two phenomena …. •

‘Born-global firms’

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Emerging-country multinationals

International strategy – GONE WRONG •

Australian firm Wesfarmers bought Homebase in 2016 for £340 million

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The company sold it in May 2018 for £1

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Poor management & a lack of understanding of the differences between their domestic market & the UK were said to be to blame...