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CHAPTER 11

International Strategic Management

After studying this chapter, students should be able to:

> Characterize the challenges of international strategic management.


> Assess the basic strategic alternatives available to firms.
> Distinguish and analyze the components of international strategy.
> Describe the international strategic management process.
> Identify and characterize the levels of international strategies.

LECTURE OUTLINE

OPENING CASE: Global Mickey

The opening case explores the Walt Disney Company’s international strategy. In
particular, the case examines the difficulties Disney has faced in establishing a theme
park in France.

Key Points

• The Walt Disney Company is a $23 billion MNC that currently earns over $150
million a year in royalties and licensing fees.

• Disney expanded its popular theme park concept in 1984 from its original two
sites in the United States to Japan. To limit its risk, Disney signed an agreement
with the Oriental Land Company, which financed and owns Tokyo Disneyland and
pays Disney royalties. Tokyo Disneyland proved to be an enormous success, and
prompted Disney to seek other foreign opportunities.

• Disney chose Paris, France as the site for its next theme park in 1988. Paris
was selected because some 350 million people live within a two-hour plane ride of
the city, and because the French government offered numerous incentives,
including bargain-priced land and an extension of the Parisian rail system to the
park. Disney was permitted to retain up to 49 percent of the stock in the new theme
park.

• Euro Disneyland however, proved not to have the fairy tale success of its
Japanese counterpart. Critics feared that it would threaten the French culture, and
likened it to “a cultural Chernobyl,” farmers condemned the decision of the
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government to sell their land to Disney, and the company found itself under fire for
its dress code, training practices, and plans to ban alcohol from the park.

• So far, although some 11 million people visit the park each year, the project has
been struggling financially. Construction costs were higher than expected, visitors
have spent less than anticipated on food and lodging, and the company has had to
increase its staff and number of computer reservation terminals.

• The park reached a major financial crisis after just 18 months of operation.
Disney and its banks agreed to new financial arrangements in 1994, which included
an agreement by Disney to relinquish royalty payments and management fees paid
by Euro Disney. In addition, the project received an injection of much needed
capital from a Saudi Arabian investor.

• Disney executives remain optimistic about the park’s future, noting an


anticipated rise in discretionary spending in France. In fact, by 1997, the park had
become the number one tourist destination in Europe.

• Disney’s international efforts continue. In 2001, Disney opened Tokyo


DisneySea next door to Tokyo Disney, and Disney recently announced plans for a
new park in Hong Kong.

• Disney is still struggling in other areas of its international operations, especially


in international subscriptions to the Disney cable channel and in worldwide licensing
revenues.

CHAPTER SUMMARY

Chapter Eleven explores the issue of international strategic management. The chapter
begins with a discussion of the basic components of international strategy, and then
moves on to consider the strategy formulation and implementation process. Finally,
strategy development is examined at the corporate level, the business level, and the
functional level.

I. THE CHALLENGES OF 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. The process of developing
a particular international strategy is referred to as strategic planning. Top-level
executives and senior managers are normally responsible for strategic planning.

Teaching Note:
Instructors may want to point out that students who are
taking or who have taken a course in business policy and
strategy will find that a fair amount of overlap will probably exist between the
discussion of this material and the concepts that were presented in the business
policy and strategy course. In other words, it should be stressed that many of the
same techniques are used in strategic planning, regardless of whether one is
considering a domestic market or a foreign market.
International Strategic Management 162

• Strategic planners responsible for both domestic and international strategies


must answer the same fundamental questions: what products and/or services does
the firm intend to sell? Where and how will it make those products or deliver the
services? Where and how will it sell them? Where and how will it acquire the
necessary resources? How does it expect to outperform its competitors? Discuss
Table 11.1 here.
• International strategic planners must also contend with cultural, political, and
geographical differences among countries.
• International companies are in a position to exploit three sources of competitive
advantage – global efficiencies, multinational flexibility, and worldwide learning –
that are unavailable to domestic firms. The text provides examples of each type of
competitive advantage.

Pret a Manger (“Ready to Eat”)


In 1986, two British men launched a faux French eatery called Pret a Manger. The
“fast casual” eatery emphasizes high quality prepared foods and customer service.
The company has grown from one store to 130 and has refused to consider
franchising in order to maintain consistency across the chain. The chain is
expanding into the United States, and McDonald’s has purchased a 33% stake in
the company. On its Web site, the company affirms: “McDonald’s does not have
any direct influence over what we sell or how we sell it.”

II. STRATEGIC ALTERNATIVES

• MNCs typically follow one of four strategic alternatives. The first, the home
replication strategy, utilizes the firm’s domestically developed core competency or
firm-specific advantage as its main weapon in the foreign markets it enters. The
second alternative, the multidomestic strategy, requires the firm to view itself as a
collection of relatively independent operating subsidiaries, each of which focuses on
a specific domestic market. The global strategy, in which the firm views the world
as a single marketplace and has a primary goal of creating standardized goods and
services that will meet the needs of customers worldwide, is the third alternative for
international firms. Finally, some firms may choose to follow the transnational
strategy in which an attempt is made to combine the benefits of global scale
efficiencies with the benefits of local responsiveness.

Master of the Furniture Universe


This section describes the Swedish furniture company, IKEA, its philosophy,
strategy, and global expansion. It currently has 70,000 workers and in 2001, 255
million shoppers visited its 150 stores worldwide. The firm has a strong culture
committed to affordable stylish furniture for “people with thin wallets.” IKEA has
struggled along the way (for example, trying to sell beds in the United States that
didn’t match standard sheet sizes). IKEA is now venturing into suburban
development, designing and building entire communities of apartments that are
furnished with IKEA products.

• The home replication strategy may be appropriate for firms when both the
pressures for global integration and the need for local responsiveness are low,
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while the multidomestic approach is often employed when pressures for local
responsiveness are high but pressures for global integration are low. The text
notes that Toys “R” Us uses the home replication strategy, while Kraft and Cadbury
Schweppes follow the multidomestic approach.
• Sony and Matsushita both follow the global strategy to respond to high
pressures for global integration (with the need for local responsiveness low), while
Ford Motor employs the transnational strategy as it attempts to meet needs for both
global integration and local responsiveness. Figure 11.1 summarizes the
strategic alternatives.

Teaching an Old Dog New Tricks


General Motors provides an example of the benefits of worldwide learning. Through
its joint venture with Toyota, it mastered kaizen and JIT inventory management. It
later applied the lessons learned to other plants, significantly increasing efficiency
worldwide.

III. COMPONENTS OF AN INTERNATIONAL STRATEGY

The four basic components of an international strategy are distinctive competence,


scope of operations, resource deployment, and synergy.

Distinctive Competence

• Distinctive competence answers the question “what do we do exceptionally


well, especially as compared to our competitors?” A firm then tries to build a
sustainable competitive advantage (an advantage over its competitors that can
be maintained over time) based on its distinctive competence. A firm may have the
same distinctive competence in every market (i.e., Coca-Cola), or a unique
distinctive competence in each market.
• Dunning’s eclectic theory (see Chapter 3) suggests that it may be necessary for
a firm to have an ownership advantage (distinctive competence) for it to
successfully compete in foreign markets. The international strategies a firm adopts
frequently reflect the interplay between its distinctive competence and foreign
business opportunities. The text provides examples of how various firms use their
distinctive competencies to exploit international markets.

Scope of Operations

• The scope of operations answers the question “where are we going to conduct
business?” The response to the question may be in terms of geographic regions, or
in terms of market or product niches within one or more regions. The text illustrates
both types of responses using the Grupo Luksics, a conglomerate operation, and
Disney’s theme parks as examples.
International Strategic Management 164

Resource Deployment

• Resource deployment answers the question “given that we are going to


compete in these markets, how will we allocate our resources to them?” Resources
can be allocated along product lines, geographical lines, or both. The text provides
examples of each type of resource deployment.

Synergy

• Synergy answers the question “how can different elements of our business
benefit each other?” The text illustrates this concept by examining how Disney
gains in its operations.

IV. DEVELOPING INTERNATIONAL STRATEGIES

• International strategic management is usually carried out in two broad stages:


strategy formulation and strategy implementation. During the strategy formulation
stage, the firm establishes its goals and the strategic plan that will lead to the
achievement of those goals. During the strategy implementation stage, the firm
develops the processes it will use to achieve the formulated international strategies
by means of specific tactics. Discuss steps in the strategic planning process
described in Figure 11.2 here.

Mission Statement

• A mission statement attempts to clarify an organization’s values, purposes,


and directions. It may be used as a starting point in the strategic planning process
or it may be developed after the process is finished. Mission statements may
specify target customers and markets, principal products or services, geographical
domain, core technologies, concerns for survival, plans for growth and profitability,
basic philosophy, and desired public image.
• A firm may have multiple mission statements--one for the overall firm and one
for each foreign subsidiary.

Teaching Note:
Instructors may want to ask students to compare and
contrast the mission statements of several domestic and
international companies. Mission statements can usually be obtained from a
company’s annual report or their website.

Environmental Scanning and the SWOT Analysis

• The second step in the strategy development process is an assessment of the


firm’s strengths, weaknesses, opportunities, and threats (SWOT analysis).
Environmental scanning (the systematic collection of data about all elements of the
firm’s internal and external environments) is used to identify a firm’s SWOT.
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• Firms using environmental scanning to collect information about opportunities


and threats facing the firm obtain data about economic, financial, political, legal,
and competitive changes in various markets the firm serves or might want to serve.
Some of this information is also used for political risk analysis and country market
analysis. The text provides examples of how Boeing and Disney have used
environmental scanning to identify external threats and opportunities.
• A firm also assesses its strengths and weaknesses during this stage of the
strategy planning process. One technique for assessing a firm’s strengths and
weaknesses is the value chain. The value chain breaks down the firm into its
important activities such as production, marketing, human resource management,
and so forth to enable its managers to identify competitive strengths and
weaknesses. Discuss Figure 11.3 here.
• Information derived from the SWOT analysis can be used to develop strategies
that exploit environmental opportunities and organizational strengths, neutralize
environmental threats, and protect or overcome organizational weaknesses.

Strategic Goals

• Strategic goals are the major objectives the firm wants to accomplish through
pursuing a particular course of action. They should be measurable, feasible, and
time limited. The text provides examples of how Disney set goals for its European
operations.

Tactics

• Tactics (specific tactical goals and plans) involve middle managers and focus
on the details of how to implement strategic plans. The text illustrates this concept
with an example of how Grand Metropolitan handled tactical issues during its recent
merger with Guinness.

Control Framework

• A control framework is the managerial and organizational process used to


keep the firm on target toward its strategic goals. The control framework can
prompt revisions in any of the preceding steps in the strategy formulation process.
The text provides an example of Euro Disney’s control framework.

V. LEVELS OF INTERNATIONAL STRATEGY

Most companies develop strategies for three distinct levels within the organization:
corporate, business, and functional. These strategy levels are illustrated in Figure 11.4.

Corporate Strategy

Corporate strategy helps a firm define the domain of business in which it intends to
operate. A firm might adopt any of three forms of corporate strategy: single-business,
related diversification, or unrelated diversification.
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1. The Single-Business Strategy

• The single-business strategy calls for a firm to rely on a single


business, product, or service for all its revenue. The main advantage of this
strategy is that it allows a firm to concentrate on one product or service.
However, firms following this strategy may be more vulnerable to changes in the
external environment than firms following a different strategy. The text provides
an example of how firms including Singapore Airlines, McDonald’s, and Dell
pursue single-business strategies.

2. Related Diversification

• The most common corporate strategy, related diversification, calls for


the firm to operate in several different, but related businesses, industries, or
markets at the same time. A firm employing this type of strategy can leverage a
distinctive competence in one market in order to strengthen its competitiveness
in others.
• The text provides an example of how Disney follows a strategy of related
diversification and also of Accor’s related diversification strategy.
• The advantages of a related diversification strategy are numerous. First,
a firm is less vulnerable to competitive or economic threats since it does not
depend on a single product or service. Second, a firm may be able to achieve
economies of scale across its related units. Third, a firm may be able to use
technology or expertise developed in one market to facilitate entry into a second
market.
• A main disadvantage of related diversification is the cost of coordinating
the operations of the related divisions. A firm may also find that all of its
business units are affected simultaneously by changes in economic conditions.

3. Unrelated Diversification

• A firm following a strategy of unrelated diversification operates in


several unrelated industries and markets. During the 1960s, when unrelated
diversification was the most popular investment strategy, firms became
conglomerates (comprised of unrelated businesses).
• There are several advantages to an unrelated diversification strategy.
First, the corporate parent is often able to raise capital more easily than any of
its independent units can separately. Second, overall risk may be reduced
because a firm is less vulnerable to business cycle fluctuations. Third,
competitive threats may pose a lesser risk since any given threat is only likely to
affect a portion of the firm’s total operations. Finally, a firm can more easily
divest unprofitable operations and acquire new operations.
• The main disadvantage of an unrelated diversification strategy is that
there is not synergy across business units. Moreover, managing a
conglomerate is complex because it requires that executives be familiar with a
much wider array of businesses and markets than if operations are related.
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Business Strategy

• Business strategy focuses on each line of business within an organization and


answers the question “how should we compete in each market we have chosen to
enter?” Firms that follow a diversification strategy (either related or unrelated)
usually group lines of business into strategic business units (SBUs).
• A firm may develop a unique strategy for each of its SBUs, or it may follow the
same strategy for all of them. The three basic forms of business strategy are
differentiation, overall cost leadership, and focus.

1. Differentiation

• The most common strategy is differentiation, whereby a firm attempts to


establish and maintain the image that the SBU’s products or services are
fundamentally unique from other products or services in the same market
segment. The text provides several examples of firms that have adopted this
type of strategy.

2. Overall Cost Leadership

• A firm following a strategy of overall cost leadership focuses on


achieving highly efficient operating procedures so that its costs are lower than
its competitor’s. A firm then attempts to sell products in high volumes at low
prices. The text provides examples of firms that follow an overall cost
leadership strategy.

3. Focus

• A focus strategy calls for a firm to target specific types of products for
certain customer groups or regions. Firms match the specific product features
to the needs of specific consumer groups. The text provides several examples
of companies pursuing this type of strategy.

Functional Strategies

• Functional strategy answers the question, “how will we manage the functions of
finance, marketing, operations, human resources, and research and development in
ways consistent with our international corporate and business strategies?”
• International financial strategy is covered in depth in Chapter 18. The topic of
Chapter 16 is international marketing strategy. International operations strategy is
the focus of Chapter 17, and international human resource strategy is emphasized
in Chapter 20.
International Strategic Management 168

CHAPTER REVIEW

1. What is 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 in the global marketplace.

2. What are the three sources of competitive advantage available to international businesses
that are not available to purely domestic businesses?

The three sources of competitive advantage available to international businesses are


global efficiencies, multinational flexibility, and worldwide learning.

3. Why is it difficult for firms to exploit these three competitive advantages simultaneously?

It is difficult to exploit the three competitive advantages simultaneously because each


advantage requires a different strategic perspective. For example, to exploit global
efficiencies, a firm often centralizes control; however, this limits its ability to exploit
multinational flexibility. Pursuing either global efficiencies or multinational flexibility may
inhibit a company’s ability to promote worldwide learning, since in the case of global
efficiencies, the centralization of power may limit the ability to glean information from other
parts of the firm, while the decentralization of power that is associated with multinational
flexibility may also impair worldwide learning as units operate in isolation from each other.

4. What are the four basic philosophies that guide strategic management in most MNCs?

The four basic philosophies that guide strategic management include the home replication
strategy, the multidomestic strategy, the global strategy, and the transnational strategy.

5. How do international strategy formulation and international strategy implementation differ?

International strategy formulation involves the creation of a firm’s international strategies.


During this stage of the strategy process, the firm establishes its goals and the strategic
plan that will help it achieve the goals. International strategy implementation is the process
by which a strategy is achieved.

6. What are the steps in international strategy formulation? Are these likely to vary among
firms?

The key steps in international strategy formulation are developing a mission statement;
analyzing the firm and its environment to determine strengths, weaknesses, opportunities,
and threats; setting strategic goals; developing tactical goals and plans; and developing a
strategic control framework. These steps are used by most firms.
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7. Identify the four components of an international strategy.

The four components of an international strategy are scope of operations, resource


deployment, distinctive competence, and synergy. Defining the scope of operations
involves determining where business will be conducted. Resource deployment identifies
how resources will be allocated to each market the firm will compete in. Distinctive
competence identifies what the firm does exceptionally well, especially when compared to
the competition. Finally, synergy involves determining how different elements of a
business benefit each other.
International Strategic Management 170

4.
8. Describe the role and importance of distinctive competence in international strategy
formulation.

Distinctive competence is the first component of international strategy, and answers the
question “what do we do exceptionally well, compared to our competitors?” It is thought to
be a necessary condition for competing in international markets.

9. What are the three levels of international strategy? Why is it important to distinguish
among the levels?

The three levels of international strategy are corporate, business, and functional. It is
important to distinguish among the three levels because it helps to ease the complexity of
international strategic management.

10. Identify and distinguish among the three common approaches to corporate strategy.

The three common approaches to corporate strategy are single business, related
diversification, and unrelated diversification. A single business strategy requires firms to
rely on a single business for its livelihood. In contrast, a firm that has diversified into
related areas operates in several different but related businesses simultaneously. Finally,
a firm that has diversified into unrelated areas operates in several unrelated businesses at
the same time.

11. Identify and distinguish among the three common approaches to business strategy.

The three basic forms of business strategy are differentiation, overall cost leadership, and
focus. A firm following a differentiation strategy tries to establish and maintain the image
that its products/services are unique from competing products/services. An overall cost
leadership strategy involves focusing on achieving highly efficient operating procedures so
that a firm’s costs are lower than its rivals, and selling products/services at lower prices.
Finally, a focus strategy requires a firm to target specific types of products/services for
certain customer groups.
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12. What are the basic types of functional strategies most firms use? Is it likely that some firms
have different functional strategies?

The most common types of functional strategies include financial strategy, marketing
strategy, operations strategy, human resource strategy, and R&D strategy. While most
firms employ these basic functional strategies, some firms may emphasize certain areas
more than others.

QUESTIONS FOR DISCUSSION

1. What are the basic differences between a domestic strategy and an international strategy?

Strategic planners answer many of the same questions, regardless of whether they are
developing strategies for international markets or for domestic markets. However,
international strategy development is more complex because planners must contend with
cultural, political, language, economic, governmental, and geographic differences.
Students may wish to refer to Table 10.1 for a summary of common differences between
domestic and international operations that affect strategic management.

2. Should the same managers be involved in both formulating and implementing strategy, or
should each part of the process be handled by different managers? Why?

In most cases, strategy formulation and strategy implementation will be handled by


different managers. The process of developing an international strategy, or strategic
planning, is typically the responsibility of top-level executives at corporate headquarters
and senior managers in subsidiaries. In contrast, tactics, the development of specific
tactical goals and plans, typically involves middle managers.

3. Successful implementation of the global and transnational approaches requires high levels
of coordination and rapid information flows between corporate headquarters and
subsidiaries. Accordingly, would you expect to find many companies adopting either of
these approaches in the nineteenth century? Prior to World War II? Prior to the advent of
personal computers?

Home replication and multidomestic strategies allow subsidiaries to operate with more
autonomy than the global and transnational strategies do. The day-to-day control and
coordination of subsidiary activities was impossible with good communication technology.
Thus, global and transnational strategies were impossible up until World War II. Even after
WWII, when international phone calls and telegrams came into more widespread use, it
was still nearly impossible for such strategies to be implemented. With direct dial
international calls, fax technology, and satellite communications, firms began pursuing
such strategies in the 1960s and 1970s. The personal computer, email, teleconferencing
(1980s and beyond) made such strategies viable options for almost any company.
International Strategic Management 172

4. Study mission statements from several international businesses. How do they differ, and
how are they similar?

Depending on which companies are studied, students may find many differences in
mission statements, or just a few. Some factors that should be analyzed include target
customers and markets, principal products or services, geographical domain, core
technologies, concerns for survival, plans for growth and profitability, basic philosophy, and
desired public image.

5. How could a poor SWOT analysis affect strategic planning?

The purpose of a SWOT analysis is to identify a firm’s strengths, weaknesses,


opportunities, and threats. The SWOT then becomes a basis from which a company’s
strategy is built. Therefore, a SWOT analysis that failed to correctly identify a company’s
strengths, weaknesses, opportunities, and threats would potentially have a negative impact
on the company’s competitiveness.
173 Chapter 11

6.
7. Why do relatively few international firms pursue a single-product strategy?

Companies that pursue a single-business strategy are more vulnerable to competition and
to changes in the external environment than firms following a diversification strategy. A
strategy of related diversification, however, allows a firm to leverage a distinctive
competency in one market and increase its competitiveness in others. In addition, a firm
pursuing a strategy of related diversification may be able to achieve scale economies. A
firm following a strategy of unrelated diversification may have an advantage in raising
capital, and may be less vulnerable to fluctuations in business cycles and competitive
threats.

8. How are the components of international strategy (scope of operations, resource


deployment, distinctive competence, and synergy) likely to vary across different types of
corporate strategy (single-business, related diversification, and unrelated diversification)?

A company that follows a single-business strategy will probably have a narrower scope of
operations than firms following either of the other two strategies. In addition, because a
single-business firm is focused on just one area, it can use all of its resources to strengthen
that particular business and improve its distinctive competence. Companies following a
single-business strategy will probably have fewer opportunities for synergy than a firm
following a strategy of related diversification. Firms following strategies of either related
diversification or unrelated diversification will probably have to make tradeoffs between
units when deploying resources and developing sustainable competitive advantages.

9. The new Disney theme park in Hong Kong is slated to open in 2006. Develop a list of at
least five ways other units of the Disney Corporation can help promote and publicize this
park as the grand opening nears.

Students will probably have a range of ideas as to how Disney should promote its new
venture. Many students will probably focus on efforts at existing Asian operations as a
starting point, and then explore options for promoting the Hong Kong park within the
company’s U.S. parks, stores, and TV station.

10. Is a firm with a corporate strategy of related diversification more or less likely than a firm
with a corporate strategy of unrelated diversification to use the same business strategy for
all SBUs? Why or why not?

Both firms that are pursuing strategies of related diversification and firms that are pursuing
strategies of unrelated diversification tend to group businesses into SBUs. In the former
situation, the products and services of each SBU are alike in some ways, while in the latter
case, the products and services of each SBU are not alike. The type of strategy,
differentiation, overall low-cost producer, or focus chosen for each SBU will reflect the
environment within which the SBU operates. In some cases, the same basic strategy is
chosen for all SBUs; in other cases, strategies will differ.
International Strategic Management 174

11. Identify products you use regularly that are made by international firms that use the three
different business strategies.

Responses to this question will vary according to the products and companies chosen by
students. However, some common products and associated strategies include Bic pens
(overall low-cost leadership), Levi's jeans (differentiation), and Honda Accord station
wagons (focus).

12. Related and unrelated diversification represents extremes on a continuum. Discuss why a
firm might want to take a mid-range approach to diversification, as opposed to being purely
one or the other.

Firms may take a mid-range approach to diversification in an effort to capitalize on the


benefits of both strategies, while minimizing the disadvantages. For example, firms often
pursue related diversification strategies in an effort to gain economies of scale, or profit
from a firm-specific advantage. However, a firm may find its operations in jeopardy if
economic conditions change. In contrast, a strategy of unrelated diversification would
protect a firm to some extent from this sort of situation. Hence, a mid-range strategy may
be a good option for some MNCs.

13. What are some of the issues a firm might need to address if it decides to change its
corporate or business strategy? For example, how would an MNC go about changing from
a strategy of related diversification to a strategy of unrelated diversification?

There are a number of issues to consider when changing strategy. For example, a firm
that changes its strategy from related diversification to unrelated diversification would have
to consider whether it had the resources (capital and human) to operate its new ventures.
It would also need to consider coordination and organizational structure issues.

BUILDING GLOBAL SKILLS

Essence of the exercise


This exercise is designed to provide students with a greater understanding of the steps
involved in assessing the market potential of a foreign country. The exercise requires students
to explore the potential for four unrelated products in several different marketplaces.

Answers to the follow-up questions:

1. Characterize the current business strategies the company appears to be following with
each of its four existing businesses.

There may be some debate as to which of the three business strategies (differentiation,
cost leadership, or focus) the company is using in each of its divisions. Because
information about each business is limited, students may have to make assumptions as
they characterize each business.
175 Chapter 11

2. Evaluate the extent to which there are any bases of relatedness among any of the four
existing businesses.

Most students will probably suggest that the four areas are basically unrelated. However,
some students may focus on issues such as target customers, and argue that there is
indeed some degree of relatedness among the four lines of business.

3. Using the criterion your group prefers, select any single business and assume that you will
recommend that it be kept and the other three sold.

This is an area where students will find that a good SWOT analysis comes in handy (see
additional application below).

4. Identify existing competitors for the business you chose to keep, including both domestic
and international firms.

Again, students who have taken the time to create a good SWOT analysis should be aware
of who the firm’s competitors are and their likely reaction to changes in the business
environment.

5. Identify three other countries where there might be potential for business expansion.
Explain why.

Responses to this question will vary, depending on which line of business a group has
chosen to keep. Students should again refer to their SWOT when answering this question,
and should consider not only market size and growth, but also issues such as the
competition and trade barriers.

6. Think of at least two other businesses that are related to the business you will keep and
which might be targets for acquisition.

As in the previous question, responses to this will vary depending on which area students
have decided to keep. Students may find it beneficial to discuss their responses with other
groups that have chosen to keep the same line of business.

Other Applications
This exercise requires students to identify various pieces of information and make
recommendations based upon that information. Much of the information required to make
these decisions would be found in a company’s SWOT analysis. Students can be asked to
develop an extensive SWOT analysis as a starting point for this exercise. Many students
find that it is helpful to work in a group format when developing this information.
International Strategic Management 176

CLOSING CASE

The New Conquistador

The closing case explores the activities of Telefonica de Espana, discussing the
deregulation of the Spanish telecommunications market and concentrating on
Telefonica's aggressive expansion into South American markets.

Key Points

• Telefonica de Espana was a state-owned phone company in Spain for most of


its existence.

• With the EU's abolishment of state-sponsored telephone monopolies in 1998,


Telefonica privatized, modernized, and re-analyzed its strategy.

• Telefonica's management decided to target Latin America for expansion, feeling


its linguistic and historical ties gave it a competitive advantage.

• Having been a state-owned monopoly itself, Telefonica invested in several


phone companies being privatized in Latin America and successfully turned them
around. However, the case also details some of the troubles Telefonica has had in
competing successfully in South America.

Case Questions

1. Go back in time to 1986. Do a SWOT analysis for Telefonica de Espana. Does


your analysis lead to the same conclusions as Telefonica's managers?

Not entirely. In 1986 Latin America was a long way from its move toward
privatization in the 1990's. Thus, the opportunity to move aggressively into Latin
America could not be foreseen. The threat of increased competition from other
European competitors, however, could be expected as Spain joined the EU, and
barriers to trade and investment across Europe began to fall. One of Telefonica's
strengths would have been its government ownership in 1986 (no longer a strength
today), and its greatest internal weakness would have been inefficiency -- a
weakness addressed in the late 1990's.

2. How would you characterize the corporate strategy adopted by Telefonica?

Related diversification through acquisition. They expanded in industries traditionally


related to the telephone industry (cellular service, Internet).
177 Chapter 11

3. Minority investors in Telefonica's South American subsidiaries were unhappy


with the parent corporation. Suppose you are a senior manager at the parent
corporation. How would you handle the problem with the minority investors? What
would you recommend to the CEO should be done about the minority investors?

This question allows for a lot of latitude on the part of students, as well as creative
thinking. There is no "right" answer and students should be encouraged to consider
a wide range of alternatives. The problem with minority stockholders is not yet
severe. The management fees it charges its South American subsidiaries erode
their profitability while improving the profitability of the main office. In today's global
equity market, investors can choose to invest other stocks related to Telefonica.
Telefonica may wish to re-examine the pricing of its spin-offs and internal sales.
The stagnation of share values in South America may hurt the company in the long
run.

4. Many South American countries are in the process of deregulating their


telephone industries. How should Telefonica respond to the increased likelihood of
new entrants into its formerly protected markets?

One key factor in creating barriers to new market entrants is to develop customer
loyalty. As a first mover into the market, Telefonica has the opportunity to "win
over" customers before many other competitors enter. Thus, it becomes important
for Telefonica to offer high quality service at a good price. Continued development
of new technology will also help reduce its vulnerability to new entrants.

BRAZIL: HOW DO YOU USE JEITINHO?

Chapter 11:
International Strategic Management

Suggestions on incorporating the Multimedia exploration into the lesson plan

The key objectives of Chapter 11 are:

• Understanding the challenges of international strategic management


• Assessing the strategic alternatives available to firms
• Identifying international strategies and the strategic management process

The following are some suggestions on how best to utilize the CultureQuest materials to
achieve these objectives.

1. The chapter includes three active media hangers, called CultureQuest


Insight Into, on the three key topic areas: culture, business, geography & history. In this
chapter all three focus on Brazil. For each Active Media lesson, assign your students to
review the online materials that include additional video and discussion of the
respective topic. They will need to review this online material in order to answer the test
questions as well as participate in suggested activities and discussion noted later in this
section.
International Strategic Management 178

2. Review the case in the text at the end of the chapter and use it as an
example to initiate additional discussion and activities

Additional Exercises
1. Student Activity and Discussion:
After the students have read the chapter end case and reviewed the online
materials, discuss the following questions and statements.

• Use Table 11.1 on page 310 and identify each of the factors an American firm may
encounter in Brazil versus the U.S.
• Discuss the cultural nuances of doing business in Brazil and how that has impacted the
country.
• What regional considerations and cultural nuances should companies review before
deciding where to establish business operations in Brazil?

2. Team Activity and Discussion:


Group students into teams of 2-3. Have students select a global company that has operations
in Brazil.

• What factors do you think the company considered when they selected to have
operations in Brazil?
• Assess whether these considerations will continue to be advantageous for the
company in the coming decades.

Additional test questions on this information can be found in the Test Item File.

Chapter 11:
Test Questions

1. Which of the following best describes Jeitinho in Brazil?

a. Brazilian cultural practice for tough negotiations


b. Brazilian cultural practice of finding a way to get something done.
c. Brazilian dining etiquette.
d. None of the above.

B. The hallmark of Brazilian business culture is a creative approach known simply as jeitinho.
Jeitinho means “to find a way.” For Brazilians, there’s always another way to get something
done. An individual who needs a document, for example, might take the bureaucratic steps
necessary to obtain it. Unfortunately, because of rules and regulations, obtaining it might
179 Chapter 11

become impossible. However, by using personal connections, bending the rules, making a
“contribution,” or simply approaching the problem from a different angle, he or she might be
able to find a way. In other words, the individual would use jeitinho.

(For more details, please refer to the online CultureQuest lessons for Chapter 11.)

2. True or False.

Companies assessing new markets for their products and services should also take into
account the cultural attitude towards ambiguity.

True. A key cultural measuring stick is tolerance for ambiguity. How does your culture deal with
uncertainty? Does it favor risk taking? Does it value loyalty to superiors? Does it favor or
discourage change?
In all cultures, understanding where the individual stands can be quite an effort. That’s where
rules and rituals come in. In most Asian cultures, for example, greetings can be highly
ritualized and learning these rituals is important to gaining acceptance. It may not suffice to say
"hello" without stating your name, title, and occupation.
Similarly, people in Asia may take a long time before disclosing personal details and accepting
strangers into their groups. The degree of sincerity and openness they show reflects how
much the outsider has been accepted. If you’re accustomed to quicker acceptance of others,
you might find this a bit of an adjustment.
People who have a low tolerance for uncertainty generally prefer to steer clear of conflict and
competition. They tend to appreciate clear instructions. At the office, sharply defined rules and
rituals are used to usher tasks to completion. Japan is often considered an example of such a
society.
Conversely, Northern Europeans and Americans accept a relatively high threshold of
uncertainty. Judging by the degree of dissent and risk they indulge in, they generally log lower
stress levels in their relationships. Yet their relationships tend to be more superficial and less
committed. Friendships form quickly, but relationships, even between them and their 300 “best
friends,” are not necessarily binding or enduring. Members of these cultures require less formal
rules to interact.

3. True or False.

Two key aspects of Brazilian life and culture are soccer and Carnaval

True. Brazilians are deeply passionate about Carnaval and soccer and it impacts the culture.
International Strategic Management 180

4. Identify two regional considerations or cultural factors a company should review before
deciding where to establish business operations in Brazil?

As with many aspects of Brazilian life, corporate culture varies somewhat by region and
industry sector. The ages, educational backgrounds, and international experience of the
employees and employers also are significant factors. Further, foreign multinationals often
introduce elements of their own corporate cultures into their Brazilian operations.
Regional Differences
When it comes to doing business in Brazil, the most important city is São Paulo. It is
cosmopolitan in every respect, and the business culture reflects this. Many people speak
several languages and have lived abroad, or work for the numerous foreign corporations
whose Brazilian headquarters are in the city. International business practices are prevalent,
and the focus is on the final product. Yet cultivating relationships, as elsewhere in the country,
remains important. As you move farther away from the large cities of São Paulo and Rio, the
pace slows, decision making takes longer, and a far more relaxed attitude prevails.
Fellow Brazilians often chide Paulistanos, as natives of São Paulo are called, for being so
serious and business-minded. It’s not uncommon to find a Paulistano working long hours and
investing in extra training to enhance his or her career opportunities. People in the southern
regions of the country, with their largely European heritage, are also viewed as more
industrious and organized. This southern area includes the states of Paraná, Santa Catarina,
and Rio Grande do Sul.
Rio de Janeiro
Cariocas, or people from Rio de Janeiro, do not share the Paulistanos’ reputation for diligence.
Rather, they’re seen as pleasure seekers, and jokes abound about Cariocas skipping work on
good beach days.
International Influence
There is a clear hierarchy among Brazilian companies with respect to their international
exposure. Those that have multinational operations have adopted international business
practices; smaller companies with mainly Brazilian operations are still very traditional. Often
multinationals based outside Brazil contract with local companies with far less international
experience, leading to clashes of corporate cultures.
Likewise, older managers are more likely to follow more traditional Brazilian business norms
than younger managers. Many young Brazilians have studied or worked abroad. In addition,
younger employees tend to have been exposed to more international practices through the
Internet and the media and by working for foreign companies. They’re eager to be on the
cutting edge and very eager to adopt the business practices and products of their counterparts
in North America and Europe.
As the Brazilian economy has become more international in scope, the need for people
experienced in dealing with foreign companies — and countries — has increased dramatically.
This trend is reflected in the much greater attention to detail, to punctuality, and to output.
Hierarchy of Credentials
At all levels it’s common to find employees attending night school. Many Brazilians join
companies at a young age and complete their degrees while working full time. Many also
choose to augment their résumés (currículo) with additional courses, often weekend seminars
known as postgraduate degrees.
181 Chapter 11

In status-conscious Brazil, a prestigious degree is the absolute prerequisite for career success.
Only rarely will a Brazilian join a company in an entry-level position and rise through the ranks.
Brazilian companies mirror the hierarchical nature of the culture at large.
Adaptability
Being forced to deal with uncontrollable circumstances, from poor phone service to economic
uncertainty, has been a day-to-day challenge for Brazilians. It has tended to make them an
adaptable people. Rather than becoming frustrated by all they cannot control, they’ve learned
to live with these limitations. In recent years, though, improvements in the infrastructure,
particularly telecommunications, have enabled Brazilian companies to operate more efficiently
and more in line with international norms and practices.
But attitudes can be ingrained, and, because of the constant need to adapt, Brazilian workers
may strike you as more content than many people to accept “good enough.” Form — the way
things are done — often takes precedence over content and quality. As a result, you may be
surprised by less-than-perfect, sometimes even mediocre, standards. They accept what they
consider small problems (probleminhos). For example, although a business letter he wrote
contained several typos, a Brazilian was about to mail it. When his American boss questioned
him about the errors, the Brazilian’s response was “So what if I made a few mistakes?”
However exasperated you may be by their relaxed standards, you’re likely to be impressed by
the Brazilians’ ability to cope with rapidly changing conditions. Also remember, the situation is
improving. Many Brazilians, especially those in the younger generation, are both ambitious and
entrepreneurial.

Resources for additional information

http://www.bnamericas.com/ – business news for Latin America, including Brazil

http://www.latintrade.com/newsite/index.cfm – Latin trade news site

http://www.brazilcouncil.org/ – Brazil trade council

http://www.brazileconomy.com/ – World News – Brazil

http://www.latinnews.com/ – Latin America news and up-to-date headlines

www.economist.com – search for trade to see most recent articles

http://www.countrybriefings.com/?showPage&PAGE=atmaGlobal.tml&RID=4196 – current
economic information on major economies around the world
www.culture-quest.com – business and cultural information on countries and regions around
the world