2019 Jan 9 Lecture 8 International Strategy

Slide 8.
Strategic Choices
8: International Strategy
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 8.2
Learning outcomes
• Assess the internationalisation potential of

different markets.
• Identify sources of competitive advantage in
international strategy, through both exploitation of
local factors and global sourcing.
• Understand the difference between global
integration and local responsiveness and four
main types of international strategy.
• Rank markets for entry or expansion, taking into
account attractiveness, cultural and other forms of
distance and competitor retaliation threats.
• Assess the relative merits of different market entry
modes, including joint ventures, licensing and
foreign direct investment.
Slide 8.3
International strategy: main themes
Slide 8.4
International and global strategy
• International strategy refers to a range of

options for operating outside an
organisation’s country of origin.
Slide 8.5
Drivers of internationalisation (1)
Source: Adapted from G. Yip, Total Global Strategy II, Financial Times Prentice Hall, 2003, Chapter 2.
Slide 8.6

Market drivers
– Similar customer needs (e.g. credit cards – Visa, Master Card; but
not food industries)
– Global customers (e.g. car components standardised)

– Transferable marketing (e.g. Coca-Cola marketed same way globally)
Cost drivers
− Scale economies (e.g. heavy R&D in aircraft
manufacturing require high volumes of purchases &
production to lower costs. This requires international mkts)
− Country-specific differences (e.g. clothing:
manufacturing in Bangladesh i.e. lower labour cost/design
in Paris i.e. concentrated fashion expertise)
− Favourable logistics (e.g. low cost of transporting
microchips than bulky products like furniture)
Slide 8.7

Government drivers
− Trade policies (e.g. reduction of trade and investment barriers in the
EU; WTO policies result in more flow of goods/services)
− Technical standardisation (e.g. in electronics allow firms to enter different
markets with the same product )
− Host government policies (e.g. where there are free markets entail
easy entry and exit; there could be local content/ownership restrictions,
e.g. 2015 ZM poultry, transport, quarry now restricted to Zambians)
Competitive drivers
− Interdependence (e.g. global co-ordination between subsidiaries with
same offering in different countries e.g Uniliver SA supplies Unilever Zambia,
Malawi and southern Africa for economies of scale)
− Global competitors (e.g. rivals may use profits to cross subsidise
aggressive moves; so other competitors may want to adopt the same
strategy to protect subsidiaries under attack, Trade Kings Vs Unilver ZM; any
withdrawal from such mkts may result in lower economies of scale)
Slide 8.8
Locational advantage: Porter’s Diamond
• Porter’s Diamond – explains why some locations
tend to produce firms with competitive advantages in
some industries more than others.
The four drivers in Porter’s Diamond arise from:
• local factor conditions- factors of production (land, labour,
capital e.g Linquisitic abilities of the swiss attracts international
banks, cheap energy in north america advantages aluminimuim
industry, etc)
• local demand conditions- sophisticated and demanding home
customers help you become effective in competing elsewhere too
• local related and supporting industries – e.g. silicon valley
forms clusters of hardware, software, research and Venture capital firms
together create a virtuous circle of high techology enterprises
• local firm strategy, industry structure and rivalry can be
bases for competitive advantage e.g. Japanese car
companies allowed by govt to compete against each helps them
manage to competite on the international mkt
Slide 8.9
Porter’s Diamond – the determinants of

national advantages
Source: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc., from The Competitive Advantage of Nations by Michael E. Porter.
Copyright © 1990, 1998 by Michael E. Porter. All rights reserved.
Slide 8.10
Country level use of Porter’s Diamond Model

(PDM)
• PDM 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.
• Governments can also foster local industries by raising
safety or environmental standards (i.e. creating
sophisticated demand conditions) or encouraging
cooperation between suppliers and buyers on a domestic
level (i.e. building clusters of related and supporting
industries in particular regions).
Firm level use of Porter’s Diamond
Slide 8.11
Model (PDM)
• For individual organisations, the value of PDM is to identify
the extent to which they can build on home-based
advantages to create competitive advantage in relation to
others internationally. To compete with local actors,
organisations must carefully exploit the distinct
environmental conditions and structural attributes.
• E.g Dutch brewing companies – such as Heineken – had an advantage in early
internationalisation due to the combination of sophisticated consumers and limited
room to grow at home. They have been pushed to go international by taking these
capabilities to other markets.
• Volvo Trucks, the Swedish truck and construction equipment manufacturer, has
achieved global success by building on a local network of sophisticated
engineering partners and suppliers and a local demand orientated towards
reliability and safety.
• Before embarking on an internationalisation strategy, managers should seek out
sources of general locational advantage to underpin their company’s individual
sources of advantage.
Slide 8.12
Apart from domestic bases of geographic advantage,

Global sourcing is another basis for advantage
Global sourcing refers to purchasing services and
components from the most appropriate suppliers
around the world, regardless of their location.
The advantages include:
• Cost advantages: e.g. labour costs, transportation
and communications costs, taxation and
investment incentives (it could still be cheaper to
import despite all these costs)
• E.g. American and European firms, for example, have moved much of their
software programming tasks to India where a computer programmer costs an
American firm about one quarter of what it would pay for a worker with comparable
skills in the USA
Slide 8.13
•Unique local capabilities: e.g. centres of

excellence in R&D clusters globally.
• E.g European pharmaceuticals company GSK has R&D laboratories in Boston
and the Research Triangle in North Carolina USA in order to establish research
collaborations with the prominent universities and hospitals in those areas.
Internationalisation, therefore, is increasingly not only about exploiting an
organisation’s existing capabilities in new national markets, but about developing
strategic capabilities by drawing on capabilities found elsewhere in the world.
•National market characteristics and national
reputation for a particular product can enable
organisations to develop differentiated product
offerings aimed at different market segments
•E.g. American guitar-maker Gibson, for example, complements its US-made products with
often similar, lower-cost alternatives produced in South Korea under the Epiphone brand.
However, because of the American music tradition, Gibson’s high-end guitars benefi t from the
reputation of still being ‘made in the USA’.
Slide 8.14
International strategies- having considered the drivers (reasons)

and location advantages for going international, what are the
alternative internalisation strategies? The global–local dilemma
The global–local dilemma relates to

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.
• two opposing pressures – global integration vs local responsiveness –
put contradictory demands on an organisation’s international strategy.
• High pressure for global integration implies an increased need to
concentrate and coordinate operations globally for efficiency & quality.
• In contrast, high pressure for local responsiveness implies a greater
need to disperse operations and adapt to local demand. th
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10 edition ©Pearson Education Limited 2014
Slide 8.15
Global vs local dilemma

• Organisations need to assess to what degree there
are potential advantages of cost and quality of global
integration and balance those pressures against the
need to adapt products and/or services to local
conditions.
• For some products and services –such as televisions and other electronics
goods e.g phones – markets appear similar across the world, offering huge
potential scale economies if design, production and delivery can be
centralised.
• For other products and services – such as television programming and
even food– tastes still seem highly national-specific, drawing companies to
decentralise operations and control as near as possible to the local market.
Slide 8.16
International strategies- having considered the

drivers (reasons) and location advantages for going international, what are the
alternative internalisation strategies?
Slide 8.17
Four international strategies (1)

Export strategy
• Leverages home country capabilities, innovations and
products in foreign markets
• Used when pressure for both global integration and local
responsiveness is low
• Suitable for companies with strong brands (e.g. Google
centralises its R&D and the core architecture underlying its internet
services at its headquarters in California in the USA and exploits it
internationally with minor adaptations except for local languages and
alphabets.
• The key risk is a home country-centred view

in contrast to skilled local rivals. E.g. google
faces rivalry from Baidu in China and Naver in Korea that
understand local consumer behaviour better
Slide 8.18

Multi-domestic strategy
• Maximises local responsiveness – different product offerings
for different countries.
• A low level of international co-ordination.
• Organisation is like a collection of relatively independent
units.
• Commonly found in marketing-orientated companies (e.g.
food companies, Frito-Lay, a US branded-snacks company, tailors its global
products to local tastes and even creates entirely new snack products for local
markets.
• Risks include manufacturing inefficiencies and brand

dilution (a proliferation of costly product and service variations and risks
towards brand and reputation if national practices become too diverse.).
Slide 8.19

Global strategy
• Maximises global integration with little or no local
adaptation of products/services.
• Standardised products are deemed to suit all markets
and efficient production is emphasised through
economies of scale.
• Geographically dispersed activities are centrally
controlled from headquarters.
• Common for commodity products (e.g. cement) but
also might include IKEA.
• Global strategy involves high coordination of extensive activities dispersed
geographically in many countries around the world. N.B. Global strategy is
just one kind of international strategy.
Slide 8.20
• It is a common strategy for commodities or commodity-like products.

Mexican Cemex, one of the largest cement companies in the world, follows
a global strategy with centralised and shared services in information
technology, R&D, human resources and financial services across countries
and regions.14
• Non-commodity companies can also follow a global strategy, like Sweden’s

furniture retailer IKEA. Based on a strong home base they standardise
products and marketing with limited local adaptation to gain maximum
global integration efficiency.
• The drawback of the global strategy is reduced flexibility due to

standardisation that limits possibilities to adapting activities
and products to local conditions. This has, for example, led
IKEA to make minor modifications of some furniture offerings
to suit local tastes.
Slide 8.21

Transnational strategy
• Complex strategy that maximises local
responsiveness and global co-ordination
• Aims to maximise learning and knowledge
exchange between dispersed units
• Efficient operations but products/services
adapted to local conditions
• Hard to achieve but General Electric is a
possible example.
Slide 8.22
• Rare: General Electric has been celebrated as having a transnational

strategy that emphasises seeking and exchanging ideas irrespective
where they come from. The company swaps ideas regarding efficiency,
customer responsiveness and innovation across different parts of the
value chain and diverse countries worldwide.
• Summary: It is rare that companies adopt a pure form of international strategy;
instead they often blend approaches and are located somewhere between the
four strategies. As exemplified above, IKEA has a global strategy, but also makes
some minor local adaptations, which may take it towards more of a transnational
strategy.
• Often regions (e.g. Europe or North America) play a larger role in international
strategy than individual countries or global expansion. Thus many multinationals
compromise between local and global logics by opting for regional strategies . The
aim of this strategy is to attain some of the economic efficiency and location
advantages of more global strategies while simultaneously reaching local
adaptation advantages. Regions are treated as relatively homogenous markets
with value chain activities concentrated within them. Sales data suggest that many
multinational companies follow this type of strategy focused on one or two regions
including the triad of the European Union, the North American Free Trade
Agreement and/or Japan/Asia. For example, over 85 per cent of all cars sold
within each region of Europe, North America and Japan are built in that same
region. th
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10 edition ©Pearson Education Limited 2014
Slide 8.23
Market selection and entry- having decided on which

strategy- next question is which country/ies
Market characteristics
Four elements of the PESTEL framework are
particularly important in comparing countries for
entry:
• Political – political environments vary widely
between countries and can alter rapidly. The focus
is political stability and predictability. Zambia?
• Economic – key comparators are levels of gross
domestic product and disposable income which
indicate the potential size of the market.
• Social – factors like population characteristics and
lifestyle as well as cultural differences.
• Legal – countries vary widely in their legal regime. .
Slide 8.24
The CAGE framework

A common procedure is to rank country markets against each other on criteria such as PESTEL
and then to choose the countries for entry that offer the highest relative scores. However,
the CAGE framework suggests that what matters is not
just the attractiveness of different countries relative to each other, but also the compatibility of
the countries with the internationalising firm itself. Thus the CAGE framework underlines the importance
of match between country and firm.
Cultural Administrative and

differences in language, ethnicity, political distance
religion and social norms. incompatible administrative, political or legal
Cultural distance is not just a matter of similarity
in consumer traditions. Colonial ties can diminish difference,
but so that the shared heritage of France and
Also managerial behaviour its former West African colonies creates
e.g. Canada closer to US in culture than Mexico ( Spain?)
certain understandings that go beyond
linguistic advantages.
Geographic Distance Economic/wealth Distance

Multinationals from rich countries are typically
kilometres separating one country from weak at serving very poor consumers.
another, but involves other geographical But Poor consumers can be
characteristics of the country such as size, sea access big market for essential goods.
and the quality of communications infrastructure. E.g Zambia needs food
Slide 8.25
Competitive characteristics
Assessing the relative attractiveness of markets by PESTEL and CAGE
analyses is only the first step. The second element relates to competition.
Here, of course, Michael Porter’s five forces framework can help.
Country markets can be assessed according to

three criteria:
• Market attractiveness to the new entrant
(PESTEL, CAGE and five forces analyses, for example. In Figure below,
countries A and B are the most attractive to the entrant.
• The likelihood and extent of defender’s

reaction
• Defenders’ clout – the relative power of
defenders to fight back.
Slide 8.26
International competitor retaliation

( size of bubble indicates defender’s clout)
Source: Reprinted by permission of Harvard Business Review. Exhibit adapted from ‘Global gamesmanship’ by I. MacMillan, S. van Putter and R. McGrath, May 2003.
Copyright © 2003 by the Harvard Business School Publishing Corporation. All rights reserved.
Slide 8.27
The staged international

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

• ‘Born-global firms’ – new, small firms that
internationalise rapidly (usually in new
technology industries - companies like Twitter and
Instagram internationalised quickly from being small start-ups.)
• Emerging-country multinationals – building
unique capabilities in the home market but
exploiting them in international markets very
quickly. E.g Zambeef, Dangote, etc
Slide 8.28
Modes of entry –
in increasing order of difficulty
Export
License or franchise
Joint ventures
Wholly owned subsidiary
Slide 8.29
Entry mode determination/basis

• The breadth of competitive advantage in the target market.
This determines whether entry into the market can be done
relying upon the company’s own capabilities, or whether it must
draw on the capabilities of local partners, for instance to access
distribution channels or to manufacture locally.
• Tradability , in other words the ability to rely on trading relationships,
rather than the firm’s own presence. Tradability is determined by two
factors: ease of transport from home country to target country, and
the quality of legal protection in the target country. Legal protection
refers for example to the ability to enforce contracts, to safeguard
performance standards or to protect intellectual property such as
patented technologies. Tradability is low where it is unsafe to trade
through market-based contracts with local partners
Slide 8.30
Modes of international market entry
Slide 8.31
Entry modes -description

• Export is the baseline option, and is suitable where the product or services are
easily transported from country to country and where the home-based
competitive advantages are sufficiently broad to minimise reliance on local
companies.
• License or franchise the product or service where competitive advantages are
too narrow to go it alone, but the legal environment is such that licensees and
franchisees can be relied on not to abuse their contracts, under-perform on
standards or steal the intellectual property.
• Joint ventures work where competitive advantages are narrow, but local
licensees or franchisees cannot be trusted with intellectual property or long-term
performance.
• A joint venture involving shared ownership gives the foreign company more
direct control and ensures that the local partner has an interest in maximising
the value of the common enterprise rather than solely its own standalone
interests.
• Wholly owned subsidiary is an attractive route where competitive advantages
are sufficiently broad not to depend on local partners, but where nevertheless
transport difficulties rule out simple export. Such wholly owned subsidiaries can
be via new greenfield investments (as for example many Japanese car
companies have entered EU mkts or via acquisition, where the integration of a
local firm completes the breadth of competitive advantage required.
Slide 8.32
Export
Advantages Disadvantages
• No need for • Lose any location
operational facilities advantages in the
in host country host country
• Economies of scale • Dependence on
in the home country export intermediaries
• Internet can facilitate • Exposure to trade
export marketing barriers
opportunities • Transportation costs
Franchising:
A system in which semi-independent business
owners (franchisees) pay fees and royalties to a
parent company (franchiser) in return for the
right to become identified with its trademark,
to sell its products or services, and often to use
its business format and system.
7 - 33
Slide 8.34
License and franchise
• Contractual source • Difficult to identify
of income good partner
• Limited economic • Loss of competitive
and financial advantage
exposure • Limited benefits from
host nation
Slide 8.35
Joint ventures
• Shared investment • Difficult to find good
risk partners
• Complementary • Relationship
resources management issues
• Maybe a • Loss of competitive
requirement for advantage
market entry • Difficult to integrate
and coordinate
Slide 8.36
Wholly owned subsidiary
• Full control • Substantial
• Integration and co- investment and
ordination possible commitment
• Rapid market entry • Acquisitions may
through acquisitions create integration/
• Greenfield coordination issues
investments are • Greenfield
possible and may be investments are time
subsidised consuming and
unpredictable
Slide 8.37
Internationalisation and
performance
Inverted U-curve – complexity may eventually erode

the economies of scales/advantages of internationalisation
Service-sector disadvantages –
internationalisation may only work
well for manufacturing firms.
E.g banks are heavily regulated, services are culturally sensitive,
may require extensive host country presence like MTN has had to spread (costs!)
Internationalisation and product diversity –

product diversified firms do better but this eventually leads to coordination costs
Slide 8.38
Subsidiary roles in multinational

firms’s portfolio
Source: Reprinted by permission of Harvard Business School Press. From Managing across Borders: The Transnational Solution by C.A. Bartlett and S. Ghoshal. Boston, MA 1989,
pp. 105–11 . Copyright © 1989 by the Harvard Business School Publishing Corporation. All rights reserved.
Slide 8.39
• Strategic leaders are subsidiaries that not only hold valuable

resources and capabilities, but are also 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. Japanese and
European subsidiaries in the USA often play this role.
• Contributors are subsidiaries located in countries of lesser strategic
significance, but with sufficiently valuable internal capabilities to
nevertheless play key roles in a multinational organisation’s competitive
success. The Australian subsidiary of the Swedish telecommunications
firm Ericsson played such a role in developing specialised systems for
the firm’s mobile phone business.
• Implementers , though not contributing substantially to the enhancement
of a firm’s competitive advantage, are important in the sense that they
help generate vital financial resources. In this sense, they are similar to
the ‘cash cows’ of the BCG matrix. The danger is that they turn into the
equivalent of ‘dogs’.
Slide 8.40
• Black holes are subsidiaries located in countries that are crucial for
competitive success but with low-level resources or capabilities. This is a
position many subsidiaries of American and European firms found
themselves in over long periods in Japan. They have some of the
characteristics of ‘question marks’ in the BCG matrix, requiring heavy
investment.
• Possibilities for overcoming this unattractive position include the
development of alliances and the selective and targeted development of key
resources and capabilities.
Slide 8.41
Summary (1)
• Internationalisation potential in any particular market is

determined by Yip’s four drivers of
internationalisation: market, cost, government and
competitors’ strategies.
• Besides firm specific competitive advantages (see
Chapter 3), sources of advantage in international
strategy can be drawn from both national sources of
advantage as captured in Porter’s Diamond, and global
sourcing through the international value system.
• There are four main types of international strategy,
varying according to extent of coordination and
geographical configuration: export strategy, multi-
domestic strategy, global strategy and transnational
strategy.
Slide 8.42
Summary (2)
• Market selection for international entry or expansion

should be based on attractiveness, multi-dimensional
measures of distance and expectations of competitor
retaliation.
• Modes of entry into new markets include export,
licensing and franchising, joint ventures and
overseas wholly owned subsidiaries.
• Internationalisation has an uncertain relationship to
financial performance, with an inverted U-curve warning
against over-internationalisation.
• Subsidiaries in an international firm can be managed by
portfolio methods just like businesses in a diversified
firm.

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Slide 8.

• Assess the internationalisation potential of

International strategy: main themes

International and global strategy

• International strategy refers to a range of

Drivers of internationalisation (1)

Drivers of internationalisation (2)

– Global customers (e.g. car components standardised)

Drivers of internationalisation (3)

Porter’s Diamond – the determinants of

Country level use of Porter’s Diamond Model

Apart from domestic bases of geographic advantage,

•Unique local capabilities: e.g. centres of

International strategies- having considered the drivers (reasons)

The global–local dilemma relates to

Global vs local dilemma

International strategies- having considered the

Four international strategies (1)

• The key risk is a home country-centred view

Four international strategies (2)

• Risks include manufacturing inefficiencies and brand

Four international strategies (3)

• It is a common strategy for commodities or commodity-like products.

• Non-commodity companies can also follow a global strategy, like Sweden’s

• The drawback of the global strategy is reduced flexibility due to

Four international strategies (4)

• Rare: General Electric has been celebrated as having a transnational

Market selection and entry- having decided on which

The CAGE framework

Cultural Administrative and

Geographic Distance Economic/wealth Distance

Country markets can be assessed according to

• The likelihood and extent of defender’s

International competitor retaliation

The staged international

This is challenged by two phenomena:

Wholly owned subsidiary

Entry mode determination/basis

Modes of international market entry

Entry modes -description

License and franchise

Wholly owned subsidiary

Inverted U-curve – complexity may eventually erode

Internationalisation and product diversity –

Subsidiary roles in multinational

• Strategic leaders are subsidiaries that not only hold valuable

• Internationalisation potential in any particular market is

• Market selection for international entry or expansion

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