International Strategy

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International Strategy

Ramsin Yakob, PhD ramsin.yakob@liu.se IEI/Linköpings Universitet

• The field of international strategy concerns the study of

international activities of firms and their interactions with foreign governments, competitors, and employees. It seeks to address not only the question of why or firms go overseas, but also more importantly what they do and how they do it. (Kogut, 2002)

• Content; What functions are performed by cross-border enterprises; how they deal with differences that arise at national borders.

• Hence International strategy is not the same as International Management or International Organization.

• But in essence: International strategy is about reaching arbitrage benefits; labour, capital, tax, administrative, cultural, geographic etc…

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INTERNATIONALIZATION

Economic Extension, Cross-border, Qualitative/ Quantitative, FDI • Ownership • Control LIABILITY OF FOREIGNESS •Unfamiliarity •Spatial Distance •Firms Specific costs •Host/Home country

environment

Challenges associated with engaging in FDI means that a number of questions has to be asked by the TNC!

Internationalization ”questions” Why? Where? When? What How?

The Strategic Challenge

1. Cultural Distance

• e.g. Differences in national cultural attributes

2. Administrative (or institutional) distance

• e.g. Differences in societal institutions

3. Geographic or spatial distance

• e.g. physical distance between countries

4. Economic distance

• e.g. differences in consumer wealth, income level and distribution, infrastructure, cost and quality of resources

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1. What is our distinct resource base that provides internationally transferable Firm Specific Assets (FSA)?

2. Which value-added activities in which foreign location(s) will permit us to exploit and augment our distinct resource base?

3. What are expected costs and difficulties we will face when transferring this distinct resource base?

4. What specific resource recombination (associated with each

alternative foreign entry and operating mode) is required to make the proposed international value-added activities successful?

5. Do we have the required resource recombination capability in-house?

6. What are the costs and benefits of using complementary resources of external actors to fill this gap?

Strategic Questions in IB

• Invest in countries that offer higher rates of return (FDI Flow)

• However this does not explain why FDI flows both ways in a country…

• Possession of advantages that outweigh drawbacks of market distance and uncertainty

• Advantages can only be exploited through ownership and control of foreign investments

• But why would a firm choose to exploit it advantage through ownership rather than other means?

• The ability to arbitrage internationally within the MNC network. Exploit national diversity.

• Production flexibility (or other parts of the value-chain)

• Apply their current intangible skills, expand current scope, and increase investment in intangibles (learning, knowledge etc…)

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The Eclectic Paradigm –

a framework for explaining the existence of MNC’s

• O-L-I Paradigm

Ownership – Resources and

capabilities give advantage

Localization – for comparative

advantage

Internalization – carrying out

certain activities internally

Global Strategy: an Organizing framework

(Ghosal, 1990)

• The goals of a MNE classified into three broad

The Goals – Strategic Objectives

• Exploiting differences in input and output markets in

different countries

(buying in one country, manufacturing and selling in another)

• Exploiting economies of scale (

production in one counter, multiple country selling)

• Exploiting economies of scope

(finding synergies between products, markets, activities)

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Global Strategy: an Organizing framework

(Ghosal, 1990) Global Strategy: an organizing framework

Sources of competitive advantage

Strategic objectives National differences Scale economies Scope economies Achieving efficiency

in current operations

Benefit from differences in factor costs. Location advantages (where to locate firm activities). Product adaptation (national differentiation)

Expanding and exploiting scale economies in each activity. The effect of scale on cost reduction

Sharing of investments and cut costs across products, markets and businesses. Shared external relations (serving a global customer)

Managing risks Managing risks arising from changes in different countries

Balancing scale with strategic and operational flexibility

Portfolio diversification of risks

Innovation learning and adaptation

Learning from differences in organizational, managerial and processes and systems.

Benefiting from experience – cost reduction, innovation,

Shared learning across organizational components, knowledge

Single Company: Firm Value Chain (business unit level)

The set of linked, value creating activities a firm performs to design, produce, market, deliver, and support a product – the format and interactions amongst the various functions of a firm

Upstream Value Activities In-bound

Downstream Value Activities Out-bound Primary Activities

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• Upstream activities can be separated from the customer

- Creates competitive advantage that stems from the entire system of countries

• Downstream activities close to the customer

- Creates competitive advantages that are largely country specific (reputation, brand, service network)

Downstream and Upstream Activities

• Inbound Logistics – receiving, warehousing, inventory,

production control, supplier control

• Operations – transformation processes

• Outbound Logistics – wholesalers, retailers, final customer

• Marketing & Sales – marketing mix and advertising

• Service – customer support, after sale service, complaints

handling, training, upgrades

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• Procurement – obtaining inputs such as raw materials, services,

machinery, components, etc

• Technology Development – technology development involved in design

the product and creating/improving the way activities are performed, R&D, process automation

• HRM – the recruiting, training and development of personnel, incentives,

retention.

• Firm infrastructure – general management, accounting, legal aspects,

finance, strategic planning

Value Chain Components – Support Activities

Different levels of strategy

Reach, Competitive contact, Managing Activities and Business Interrelationships, Management Practices

Influencing, Anticipating changes, Positioning

Business processes, Value chain, Functional strategies,

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TYPE OF FDI/MOTIVE

Variables influencing the location of value added activities (1970s’)

Variables influencing the location of value added activities (2000s’ - …)

Resource Seeking Availability, price and quality of natural resources. Infrastructure to enable resources to be exploited, and products arising from them to be exported. Government restrictions on FDI and/or capital. Investment incentives (tax holidays).

As in the 1970s. Local partners for upgrading quality of resources and processing and transportation of output. Availability of local partners to jointly promote knowledge and/or capital –intensive resource exploitation. Example: A German company opening a

plant I Slovakia to produce and re-export to Germany.

Market Seeking Mainly domestic and occasionally adjacent regional markets, Real wage costs, material costs, transport costs, non-tariff trade barriers

Large and growing markets. Availability and price of skilled professional labour. Presence and competitiveness of related firms (e.g. suppliers). Quality of national and local infrastructure. Macroeconomic and macro-organizational policies of host governments. Close presence to users in knowledge-intensive sectors. Example: Automotive MNCs have invested heavily in

China

Efficiency Seeking Mainly production cost related (labour, materials, machinery). To engage in trade in intermediate and final products. Export processing zones. Investment incentives (tax breaks, grants, subsidized land).

As in the 1970s’ but more emphasis on wage and material costs. Increased role of governments in removing economic obstacles and facilitating upgrading of HR (training and education). Availability of specialized spatial clusters (industrial parks). Example: Global

sourcing

Strategic Asset Seeking

Availability of knowledge-related assets and markets necessary to protect or enhance ownership specific advantages. Institutional variables influencing ease or difficulty of which such assets can be acquired by foreign firms.

As in the 1970s, but growing importance due to geographical dispersion of knowledge-based assets. Opportunities offered for exchange of localized tacit knowledge, ideas and interactive learning. Access to different cultures, institutions and systems; and different consumer demands and preferences. Example: Acquiring

key local firms, R&D, Human Capital, Market knowledge etc..

Distinguishing firm IB Strategies

Two key dimensions:

1. Configuration of activities:

• Of its activities worldwide or where in the world each activity in the value chain is performed, including in how many places.

• Configuration options range from concentrated (performing an activity in one location and serving the world from it to dispersed (performing every activity in each country)

2. Coordination of activities

• How similar activities in different countries are coordinated with each other.

• Coordination activities range from none to very high. • Where should the company locate its activities and how

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Distinguishing firm IB Strategies:

The GI-LR Grid

Global Strategy The world as a single market Tight control HQ focus International Strategy Existing core competencies Transnational Strategy Flexibility Coordination Global Integration Multi-Domestic Strategy Autonomy Customization HIGH LOW LOW HIGH

Industry Pressure for Local Responsiveness In d u s tr y P re s s u re f o r G lo b a l In te g ra ti o n 22 Global Strategy Semi conductors Bulk chemicals Institutional banking Automobiles International Strategy Raw materials Transnational Strategy Consumer electronics Coporate banking Multi-Domestic Strategy Health care Processed food Retail banking HIGH LOW

LOW Industry Pressure for Local Responsiveness HIGH

In d u s tr y P re s s u re f o r G lo b a l In te g ra ti o n Adaptation and decentralization are unnecessary to sell generic products to similar markets

Adaptation and decentralization needed to sell customized products to differing markets Standardization and

central control are useful but not necessary across international operations

Standardization and central control are imperative across international operations

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Distinguishing firm IB Strategies:

Push vs. Pull

• As innovation diffuses in the

home market, competition eventually pushes firms to export and then later to invest in foreign markets. Home market drives the

international expansion of firms.

Distinguishing firm IB Strategies: Push vs. Pull

P

U

L

PULL

• MNCs are positively attracted to locations that are important sites of innovative activities in their own industries.

Countries with technological advantages tend to attract FDI as well as generate outward

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IB Strategies: Regionalization

• Most firms are regional rather than global

(Rugman & Verbeke, 2004)

• Five critical issues to the MNE’s functioning

1. Products are not equally accessible across the globe; concentration in one geographic market

2. The limits to non-location bound nature of MNEs’ knowledge base 3. Inability to access and deploy required location-bound firm

specific advantages

4. The need for different competitive strategies in different markets 5. The need for a regional component in the MNEs’ governance

structure to deal with regional characteristics

IB Strategies: Regionalization

Global Sales of 20% or more in each of the three triads, but less than 50% in any region of the triad

Bi-regional Sales of at least 20% in each of the two regions, but less than 50% in any one region

Host Region Oriented

more than 50% of sales in a triad market other than their home

region

Home region oriented

At least 50% of sales in their home region of the triad

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Analysing the Environment

• Political –Monopolies legislation, Trade Barriers, Taxation

policies, Duties, Employment law, government stability

• Economic –Business Cycles, GDP Trends, Interest rates, Banking system, World trends, country trends, industry trends, Inflation, Unemployment rates, Purchasing power

• Social –Lifestyle changes, Demographics, Income distribution, Social mobility, Level of education, Consumerism

• Technological –Government spending on R&D, Technological focus, Tech transfer, Internet

• Legal –Legal system, consumer-, competition-, Employment-, health and safety laws

• Environmental –Weather, Green movement, Polution

E

P

S

T

E

L

Five Forces Diagram (industry analysis)

Supplier Power

Competitive Rivalry

Barriers to

Entry _SubstitutesThreat of

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Diamond of

National

Advantage

Factor Conditions Related and Supporting Industries Demand Conditions Firm Strategy, Structure and Rivalry Refers to inputs used

as factors of production. Key factors have been created not inherited Availability,

accessibility= Sustained Competitive Advantage

Sophistication of domestic market Impacts on the pace and direction of innovation and product development. The mix of customer needs and wants. The scope and growth of the market. Transmission of domestic preferences

Number of competitors. Barriers to entry. Strategic importance and retaliation?

Suppliers and related industries. Often at a regional level. Clusters and Agglomerations

SWOT Analysis

Strength Weakness

Opportunity

– Your specialist marketing experience – A new, innovative product or service – Location of your business – Quality processes and procedures – Any aspect of your business adding value

to your product

– Lack of marketing expertise

– Undifferentiated products and services (i.e. in relation to your competitors) – Location of your business – Poor quality goods and service – Your lack of experience – Poor reputation

– A developing market such as the Internet or a geographic market

– Mergers, joint ventures, and strategic alliances

– Moving into new market segments that offer improved profits

– A market vacated by an ineffective competitor

– A new competitor in your home market – Price wars with competitors

– A competitors new, innovative product or service

– Competitors superior access to channels of distribution

– Taxation + Trade barriers

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International Strategy