Chapter 10 - International strategy

Question 1

Internationalisation drivers

Answer 1

Drivers of an organisation’s internationalisation include market demand, the potential for cost advantages, government pressures and inducements, and the need to respond to competitor moves. Given the risks and costs of international strategy, managers need to know how strong the drivers are to justify adopting an international strategy in the first place.

Question 2

Geographical and firm-specific advantages

Answer 2

In international competition, advantages might come from firm-specific and geographical advantages. Geographical advantages might come both from the geographic location of the original business and from the international configuration of their value system.

Question 3

International strategy

Answer 3

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 transnational strategies.

Question 4

Market selection

Answer 4

Having adopted the broad approach to international strategy, the next question is which country markets to prioritise and which to steer clear of. Here managers need to consider differences and distances in economic, regulatory, political and cultural institutions.

Question 5

Entry strategy mode

Answer 5

Finally, once target countries are selected, managers must 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 (acquisition or ‘greenfield’ investments) alternatives to consider as well.

Question 6

Yip’s globalisation framework

Answer 6

sees international strategy potential as determined by market drivers, cost drivers, government drivers and competitive drivers.

Question 7

Market drivers

Answer 7

A critical facilitator of internationalisation is standardisation of market characteristics. Three components underlying this driver:
1. The presence of similar customer needs and tastes
2. The presence of global customers
3. Transferable marketing promotes market globalisation

Question 8

Cost drivers

Answer 8

Costs can be reduced by operating internationally. Three main elements:
* Increasing volume beyond what a national market might support can give sacle economies, both on the production side and in purchasing of supplies.

Companies from smaller countries, like Sweden, tend to become much more international than companies from the USA (big home market).
* Where its possible to take advantage of variations in country-specific differences. e.g. production in Bangladesh, design in France
* Favourable logistics, or the costs of moving products across borders relative to their final value

Question 9

Government drivers

Answer 9

Three government factors that facilitate internationalisation:
* Reduction of barriers to trade and investment has accelerated internationalisation. Governments have reduced goods and capital restrictions.
* The liberalisation and adoption of free markets encourages international trade and investments.
* Technology standardisation as government factor

Question 10

Competitive drivers

Answer 10

relate specifically to globalisation as an integrated worldwide strategy rather than simpler international strategies. Two elements:
* Interdependence between country operations increases the pressure for global coordination.
* The presence of globalised competitors pressures to adopt a global strategy in response because competitors may use one country’s profits to cross-subsidise their operations in another.

Question 11

Porter’s Diamond

Answer 11

explains why some locations tend to produce firms with competitive advantages in some industries more than others.

Locational advantages may stem from local factor conditions; local demand conditions; local related and supporting industries; and from local firm strategy structure and rivalry.

Four interacting determinants of locational advantage work:
* Factor conditions - ‘factors of production’ in making a product or service (raw materials, land and labour). Factor condition advantages at a national level can translate into general competitive advantages for national firms in international markets.
* Home demand conditions.. Domestic customers as a source of competitive advantage. Sophisticated and demanding customers at home helps train a company to be effective overseas.
* Related and supporting industries. Local ‘clusters’ of related supporting industries is a important source of competitive advantage. Regionally based, making personal interaction easier.
* Firm strategy, industry structure and rivalry - the characteristic strategies, industry structures and rivalries in different countries can also be bases of advantage.

The value of Porter’s diamond is to identify the extent to which they can build on home-based advantages to create competitive advantage in relation to others internationally.

Question 12

International value system

Answer 12

For international companies, advantage also needs to be drawn from the international configuration of their value system.

Different skills, resources and costs of countries globaly can be exploited to locate each element of the value chain in that country where it can be conducted most effectively and efficiently.

Question 13

Locational advantages

Answer 13

1. Cost advantages include labour costs, transportation and communications costs and taxation and investment incentives.Labour costs are important.
2. Unique local capabilities allows organisation to enhance its competitive advantage. Gradually, value-creating and innovative activity become geographically dispersed across multiple centres of excellence within multinational organisations.

Question 14

Global integration

Answer 14

Pressures for global integration - encourage organisations to coordinate their activities across diverse countries to gain efficient operations.

There is a need to balance the pressures of global integration with the pressures of local responsiveness

Question 15

Local responsiveness

Answer 15

Pressures for local responsiveness - implies a greater need to disperse operations and adapt to local demand.

There is a need to balance the pressures of local responsiveness with the pressures of global integration

Question 16

Global-local dilemma

Answer 16

the extent to which products and services may be standardised across national boundaries or need to be adapted to meet the requirements of specific national markets.

There are four kinds of international based on the strategic chooices of this balance

Question 17

Export strategy

Answer 17

exploits home country capabilities, innovations and products in different foreign countries. It is good when both pressures for global integration and local responsiveness are low.

Companies that have distinctive capabilities together with strong reputation and brand names succeeds.

• Ex. Rolex centralises its design and manufacturing in Switzerland and distributes its products in exclusive stores around the globe.

Downside is the limits of a home country centralised view of the business with risks of skilled local competitors getting ahead.

Question 18

Multi-domestic strategy

Answer 18

maximises local responsiveness. Each country is treated differently with considerable autonomy for each country manager to best meet the needs of local markets and customer preference.

Strong benefit when there are limited efficiency gains from integration. Food and consumer product industries where local idiosyncratic preferences are significant.

Disadvantages in manufacturing inefficiencies, risks towards brand and reputation if national practices become too diverse.

Question 19

Global strategy

Answer 19

maximises global integration. “The world is seen as one marketplace with standardised products” that fully exploits integration and efficiency in operations.

Focus on capturing scale economies, exploiting location economies worldwide with geographically dispersed value chain activities being coordinated and controlled centrally from headquarters.

Beneficial when there are substantial cost or quality efficiency benefits from standardisation and when customer needs are relatively homogeneous across countries. For commodities or commodity-like products.

Drawback is reduced flexibility due to standardisation that limits possibilities to adapt activities and products to local conditions.

Question 20

Transnational strategy:

Answer 20

most complex strategy that tries to maximise both responsiveness and integration. Unite key advantages of multi-domestic and global strategies while minimising their disadvantages.

Products and operational activities are adapted to local conditions in each country (Multi-domestic). BUT, exploits learning and innovation between dispersed units in different countries (Global strategy).

The value chain inlcudes a complex combination of centralised manufacturing to increase efficiency combined with distributed assembly and local adaptations.

Firms find it difficult to implement given its complexity and the fundamental trade-off between integration and responsiveness.

Question 21

Arbitrage

Answer 21

implies that multinationals take advantage of price differences between two or more markets by purchasing goods cheaply in one market and selling them at a higher price in another.

Question 22

Country and market characteristics

Answer 22

Most common evaluation for a countrys potential for entry, is an analysis of economic conditions (GDP, etc.) and competitiveness and political stability measurment.
But also important with institutional infrastructure
* Regulatory systems, contract-enforcing mechanisms, specialised intermediaries and other ‘soft’ infrastructure

PESTEL can be used as it not only considers economic factors but broader institutional as well.

Question 23

CAGE framework

Answer 23

measures the match between countries and companies according to the distance of Cultural, Administrative, Geographical and Economic distance,
* Cultural distance - differences in language, ethnicity, religion and social norms. Not just similarity in consumer tastes, but important compatibilities in terms of managerial behaviours.
* Administrative and political distance. - distance is in terms of incompatible administrative, political or legal traditions.
* Geographical distance. - Geographical characteristics of the country such as size, sea access and the quality of communications infrastructure. Transport infrastructure can overwin physical distance (km between).
* Economic distance.- differences in cost and quality of various inputs and infrastructure.
There are huge disparities in wealth internationally and MNC from rich countries risk losing out on large markets if they only concentrate on the wealthy elites overseas.

Question 24

Competetive charachteristics

Answer 24

Porter’s Five Forces Framework can help, important to observe that an attractive industry in the home market can be unattractive in another country.

Country market assesed by three criteria:
* Market attractiveness to the new entrant, based on PESTEL, CAGE and five forces analyses.
* Defender’s reactiveness, influenced by the market’s attractiveness to the defender but also by the defender working with a globally strategy (extremt globaliserad). A defender will react if the markets are important to it and it has the managerial capabilities to coordinate its response.
* Defender’s clout, the defender is able to encourage defenders in order to fight back. Clout in share in the particular market, also by connections to other powerful local players, retailers or government.

Question 25

Entry mode strategies

Answer 25

differ in the degree of resource commitment to a particular market and the extent to which an organisation is operationally involved in a particular location.
In order of increasing resource commitment, four key entry modes:
1. Exporting contractual arrangements through..
2. Licensing or franchising to local partners
3. Joint ventures with lical companies, in other words the establishment of jointly owned businesses
4. Wholly owned subsidiaries, through either the acquisition of established companies or ‘greenfield’ investments; the development of facilities from scratch.

Question 26

Staged international expansion model

Answer 26

proposes a sequential process whereby companies gradually increase their commitment to newly entered markets, as they build knowledge and capabilities.
* Emphasises the role of experience and learning in determining entry mode strategy.
* Internationalisation brings organisations into unfamiliar territory, requiring managers to learn new ways of doing business.

• Firms enter initially by exporting or licensing, thereby acquiring some local knowledge while minimising local investments.
• As they gain knowledge and confidence, firms increase their exposure, perhaps first by a joint venture and finally by creating a wholly owned subsidiary

Question 27

Pros and cons of Exporting

Answer 27

• Advantages of requiring relatively fewer resources and risks while offering speedy entry and possibilities to fully exploit production economies in prevailing facilities
• Disadvantage in transportation costs and the possibility that products can be manufactured cheaper locally. Limited control of marketing and sales and possible international trade barriers.

Question 28

Pros and cons of Licensing or franschising

Answer 28

involves a contractual agreement whereby a local firm receives the right to exploit a product technology or a service concept commercially for a fee during a specific time period.
* * Resource commitments can be kept low as local partners bear the primary financial and political risks while entry can be relatively quick.
* The main disadvantage with this entry mode is potential lack of control over technologies and product and service quality plus a possible risk of technological leakage and poor quality.

Question 29

Pros and cons of Joint ventures

Answer 29

are jointly owned companies where the international investor shares assets, equity and risk with a local partner.
* Resource and financial commitments are limited compared to full ownership, and financial and political risks are also reduced.
Ability to build on the local partner’s knowledge of customer needs and local institutions.
* Risk of losing control over technologies to the partner.
Disagreements and conflicts between the partners when the joint venture evolves and changes over time.

Question 30

Pros and cons of wholly owned subsidiaries

Answer 30

full control through setting up entirely new greenfield operations or by acquiring a local firm.
* Strong control over technologies, operations, sales and financial results.
Allows for exploiting production and coordination economies among diverse units globally.
* Needs substantial resource commitments and costs besides risks for larger firms.

Question 31

Born-global firms

Answer 31

are new small firms that internationalise rapidly at early stages in their development.
* New technologies now help small firms swiftly link up to international sources of expertise, supply and customers worldwide.

Question 32

Emerging-country multinationals

Answer 32

move quickly through entry modes. Develop unique capabilities in their home market that then need to be rolled out quickly worldwide before competitors catch up.

Question 33

Subsidiaries

Answer 33

Complex strategies for big MNCs (Unilever) can result in highly differentiated networks of subsidiaries with a range of distinct strategic roles.

• Subsidiaries play different roles according to the level of local resources and capabilities available to them and the strategic importance of their local environment.
• Corporate headquarters can assign these roles, but subsidiaries sometimes also take on roles more independently

Four different subsidiary roles:
* Strategic leaders leaders hold valuable resources and capabilities, located in countries that are crucial for competitive success because of, for example, the size of the local market or the accessibility of key technologies. Playing important strategic roles with entrepreneurial potential for the whole multinational organisation. Either assigned strategic roles or take autonomous strategic initiatives
* Contributors located in countries of lesser strategic significance, but with valuable internal capabilities to nevertheless play key roles in a multinational organisation’s competitive success.
* Implementers, not contributing substantially to the enhancement of a firm’s competitive advantage, are important cause they generate financial resources
* Black holes located in countries that are crucial for competitive success but with low-level resources or capabilities.