Global Mickey ‘Mickey Mouse is every bt as popular around the globe 2s Coca-Col' soft drinks and MeDonald’ | burgers. Indeed, the mouse's famed silhouette is no doubt just as recognizable in Brazil, India, aly and South Africa as is the shape of a Coke bottle or the golden arches of McDonald's The Walt Disney Company, however, has done a surprisingly poor job of capitalizing on the global potential | ‘or is various products. In 1999, for instance, 80 percent of Disney’s $234 billion in revenues camé a from the United States, a coun- “Disney CONTINUES to Struggle j, Surtees trasts markedly with Coca-Colt other areas of its international Operations and MéDonald, each of which 29 «derives about two-thirds of is | revenue from other countries. Perhaps Disney's most public effort at internationalization has bee theme park operations. Is | fst theme park, Disneyland, opened in Anaheim, California, in 1955 and war cane ‘generating huge Profs. The firms next major theme park development, Wal Disney Word, opened near Orlando. Floridan 1971 also was a major succes. Because the two patks generate enornees profits, Disney ‘has continued to invest in them by building new atractons and on-site hotels and by opening new Parks adjacent to the existing ones For example, the fourth Walt Disney World theme park the‘ter studying this chapter, you © should be able to: CF “ay |. Characterize the challenges of © «international strategic management. Fe ssess the basic strategic © + alternatives available to firms. i ‘ istngush and analyze the i component of international + sate. ° Describe the international strategic. management process. Identify and characterize the levels (of international strategies. | ines California Adventure, opened in 200% Gren the enormous popularity of Disney characters abroad, the frm saw Sprites to expand theme park operations to foreign markets, es first into a foreign market, Tokyo Disneyland, opened in 1984. The hive long been Disney fans, and many Japanese ourists visit and Disney World each year. Market research also showed the enthusiastically supporced the idea ofa Disney park in Japan. To Ets, though, the firm did nos inves diectlyn the park—a decision managers would eventually come {0 regret. Instead, a Japanese invest- troup called ce Oriental Land Company financed and eniely owns Disneyland, Disney oversaw the park’s construction and manages itbut "snl royaley income from t.Tohy Dsneylandhas been an enormods from the day it opened its gates: It eres only eight years, a milestone that Disney/an Presucces of Tolyo Disneyland inspired the frm to seek ovher foreign? cpporturiced, fer evaluating potential sites throughout @/09e fhe ide Paris) and ong in eld the advantage of a more the French site, although sub- ted its 100 millionth visitor 1d took twice as long to reach. Sai eo to Barcelona). The Spanish site h "ble climate, similar to Florida's. Howeverject to harsher winter weather condions as closer to Europe's major population centers. Some 360 trlion people tive within a twoshour plane ride of Paris, After careful consideration of the two loca. tions, Disney chose the French ste and made is plans for Euro Disney public in 1988, This ime, ehough, Disney decided to parscipate mare fully in both the park's ownership and its profits. Howevet, the French government decreed that Disney's ownership in the new venture could bbe no more than 49 percent, with the remaining 51 percent made available for trade on European Stock exchanges. The French government’ offer of numerous economic incentives also payed a role, in Disney's decision. The government sold the land for the park at bargain-basement prices and agreed to extend the Parisian rail system to the park's front door, But as Euro Disney took shape, storm clouds loomed. The cultural elite in Paris lambasted the project as an affront'to French cultural’ ‘traditions, Farmers protested the manner in which the French government condemned ther land so that ic could be sold to Disney. The firm found itself defending its conservative employee dresscodes, + regimented training practices, and plans'to ban alcohol from park facilities, Amid the controversy Euro Disney opened its doors to the public on April 12, 1992, Unfortunately, Disney's timing’could not have been worse—a recession swept through Europe just as the park was opening, To aggravate matters, the British, Italian, and Spanish central banks devalued their respective currencies, raising the cost for thelr citizens to vacation in France. Disney was forced to drop its plan to reduce its debt by selling land near the park to local developers. The carrying cost of ts debt rose further as French interest rates climbed. Disney also severely misjudged the spending habits of park visitors, who spent 12 percent lesson food and souvenirs than expected. Disney plan- ners aso presumed hotel guests would sta;’an average of three days, 25 they did in Orlando, but Euro Disney visitors typically stayed two days or less. Further, the firm had planned to sell the hotels shorty after the park's opening and use the proceeds to finance expansion in other areas. Unfortunately the low occupancy rates made the properties less attractive, and Disney found no buyers. At this point Euro Disney seemed to be burning money, and it actually came clase to being shut down. Eventually a complex and costly financial restructuring plan implemented in 1994 barely saved the park, andit | has only been within the las few years that Disneyiand Paris, as the park was renamed, has begun earning profit. . Fortunately, Disney seems to be getting ts act together regarding international theme park oper tions. For example, in 2001 it opened Tokyo DisneySea adjacent co Tokyo Disneyland, Bath atten- dance and spending have gradually improved at Disneyland Paris, and the new Disney Studios theme park will open there in 2002. Disney's biggest news, though, was its decision to build a new parkin + Hong Kong, The company gets a 43 percent equity stake inthe $3.6 billion project in exchange for an investment of only $314 milion. The local government, in curn, will invest over $29 billion in lowe interest loans, land, and infrastructure improvements for the remaining $7 percent share. But Disney continues to struggle in other areas ofits international operations. For example, thee ate only 11 million subscribers to the Disney Channel cable television network outside the United States; this contrasts with 54 milion foreign subscribers to AOL Time Warner's Cartoon Network Disney has experienced a $159 million decline in worldwide licensing revenues in recent yeas. Indeed, things have gorten so bad thar the company is overhauling its business and has created a separ + unit called Walt Disney International. Its goal? Obviously, to increase international revenues Company executives have calculated that if they can increase per capita consumer spending of Disney-related products in just five countries—the United Kingdom, Italy, Germany, France, and } Japan—to 80 percent ofthe level in the Us lion in annual revenues? d States, the firm would generate an additional $2 bk. The Challenges of International Strategic Management > 263 “Xo survive in today’s global marketplace, a firm must be able to quickly ‘exploit opportunities presented to it anywhere in the world and respond to changes in. domestic and foreign markets as they arise. This requires a cogent definition of the firm's corporate mission, a vjsion for achieving that mis- + sion, and an unambiguous understanding of how it intends to corppete with other firms. To obtain this understanding, a firm must carefully compare its strengths and weaknesses to those of its worldwide comipetitors; assess likely political, eco- nomic, and social changes among its current and prospective customers; and ana- lyze the impact of new technologies on its ways of doing business, “Disney's decisions to build Tokyo Disneyland, Disneyland Paris, Tokyo \DisneySea. Disney Studios Paris, and Hong Kong Disneyland are consistent with its strategy to be a global entertainment firm. So, too, are its efforts to increase worldwide licensing of its characters and expand its audience for the Disney Channel to other countries. The firm stumbled badly, however, in its initial efforts with Disneyland Paris. and, knows.{ts tompetitors will continue to fight for market share. European vacationetd: can enjoy other amusement parks, such as Denmark's Legoland'or France's Cipal-Parc Asterix. Mickey Mouse lunch boxes compete for the attention of the world’s schoolchildren with lunch boxes featuring England's Paddington Bear, France's Babar the Elephant, and Belgium's Smurfs. And AOL Time Warner's Cartéon. Network has been outperforming the mouse for years. Thus’ Disney's top managers know that they are in a continuous battle for the entertainment dollars (and yen and pounds and euros) of the world’s con- sumers and that It 1s up to the managers to deploy the firm's resources to achieve desired levels of profitability, growth, and market share. * THE GHALT PA og Disney's managers, like those of other international busines30, " ‘management to address these challenges. More specifically, inter: gic management is a comprehensive and ongoing management p. aimed at formulating and implementing strategies that enablé a firm to compete cffectively internationally. The process of developing a particular international strategy is often referred to as strategic planning. Strategic planning is usually the responsibility of top-level executives at corporate headquarters and senior managers in domestic and foreign operating subsidiaries. Most larger firms also tave permanent planning staff to provide technical assistance for top managers as they develop strategiés. Disney's five-person planning staff, for example, gath- tred demographic and economic data that the firm’s decision makers ised to select the original French site for Euro Disney. national strategies, which are comprehensive frameworks for achieving a firm's fundamental goals. Conceptually, there are many similarities between developing a strategy for competing in a single country and developing one for competing in mul- tiple countries. In both cases the firm's strategic planners 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 services? Where and how will it sell them? * . * Where and how will it acquire the necessary resources -* How:does it expect to oistperform its competitors?! ational straiegy. however, is far more complex than devel- ring Abroad” Indicates. Managers developing a Developing an intern: sping a domestic one; as “Vente ”284 > Chapter 10 International Strategle Management VENTURING. ’ road | IT MAY NOT BE AS Easy | AS IT SEEMS! ‘Online businesses are all the rage these days. It seems that compa nies everywhere are rushing to start an e-business or move their existing business onto the Intermet. One of the most promising ‘market opportunites for online businesses is incernational expan sion. Is potentials due co the presumed ease of foreign-market entry—low fixed costs, no transportation expenses, and so forth. Online businesses are nevertheless advised to keep several things inmind as they venture abroad. st, domestic Web site hits might be a good indicator of mar- ‘et povential Thus if fir is gectng 500 oF more hits a day from Cone particular country that country might have excellent poten {ial for alecal electronic operation. Conversely, only a handful of hits might indicate chat the market potential is so small as to be "ot worth the time. Second, cultural norms should also be con- sidered. For example, it might be perfectly appropriate in some ‘ouneries to have a Web sie image featuring a woman with bare arms or @ man smoking a cigar, but in other countries these. images might be taboo. , LaAguage isues ae also important Hiring a domestic transla tor to create foreign-language versions of a Web site might be economical, bur the translator mighe not know regional dialects or other language nuances. Thus experts advise using a local serv. ice toat least review language content. Further although practices such as sling customer lists or asking for personal information in ‘exchange for various incentives might be acceprable in some ‘counties, they may be legally prohibited or strongly discouraged in other countries. 0 ross-browser compatibility may also be an issue Different character sets, for example, can pose real problems when users expore a Web site. Credit card usage aso varies widely in dif. lent countries. Just because a firm is sucessful selling to cus- tomers using Master Card or Visa in one country does not nec. essarily mean it can use the same technique in another country, Finally online businesses should not overiook the complications associated with shipping across national boundaries. Selling a Produce via a Web site co a customer in Asia might be relatively easy, but the seller must still get the goods there, and getting them there may entail myriad shipping expenses and customs regulations. . Soutce: Omid Rahat, “I Aint No Gringo!” NewMedia, Jay 1585, p.27-36, strategy for a domestic firm must deal with one national government, one currer one accounting system, one Political system, one legal system, and, usually, a sin. gle language and a comparatively homogeneous culture. Conversely, managers Tesponsible for developing a strategy for an international firm must understand and deal with multiple governments, multiple currencies, multiple accounting sys- tems, multiple political systems, multiple legal systems, and a variety of languages and cultures. These and other differences in domestic and international operations and how they affect a firm's strategy are summarized in Table 10.1. Moreover. managers in an international business must also coordinate the implementation of their firm's strategy among business units located in different Parts of the world with different time zones, different cultural contexts, and differ. ent economic conditions, as well as monitor and control thelr performance. Managers usually consider these complexities acceptable trade-offs for the addi. tonal epportunities that come with global expansion, Indeed, international busi. nesses have the ability to exploit three sources of competitive advantage unavail- able to domestic firms: *+ Global effciences: International firms ean improve thelr efficiency through se eral means unaccessible to a domestic firm, They can capture location affaers cies by locating their facilities anywhere in the world that yields them the lowest : Production or distrbution costs or that best improves the quality of service they offer their customers. Productio.. of athletic shoes, for example, is very laber sntensive, and Nike, like many ofits competitors, centers its manufacturing inBe : ‘The Challenges of International Strategic Management > 263 al Operations That Affect Strategie Management for US. Firms FACTOR - US. OPERATIONS * INTERNATIONAL OPERATIONS Language {English used almost universally ‘Use of local language required in many stations Cukure Relatively homogeneous Quite diverse, both between couintres and within counties Politics Stable and relavely unimportant (Often volatile and of decisive importance Economy Relatively uniform, ‘Wide variaions among countries and among regions within countries Covenneal _ Mininalandmenorby predeaie (Often extensive and subject to rapid change incerference : | Labor Skilled labor available Stile labor often scare requiring training or redesign of production methods : Financing Well developed financial markers ‘Often poorly developed financial markets capital flows subject ro . {government control Markecresearch Data easy to collect Somerimes data difficult and expensive co collect Advertsing Mary media available; few restrictions Media limited: many restrictions low literacy rates rule ou print media in some countries - Money US. dollar used universally ‘Must change from one currency to another, problems created by changing exchange ates and governmental restrictions Transportation Among the best in the world (Often inadequate ‘communication Control ‘Always. problem, but centralized control A worse problem; must walk tightrope between overcentralzing will work and losing control through too much decentalting Comnracts ‘Once signed, are binding on both parties Can be voided and renegotiated if one party becomes dissatisfied e even if one party makes a bad deal Laborrelations Collective bargaining, layoff of workers Layoff of workers often no possible, may have mandatory wor ey patticipatidn in management; workers may seek change through political process rather than collective bargaining Tour Adapced fom R.G Murdick RC. Moos RH Eckhouse and. WZismere Business Pl: A Famevot jor Andi (Couribs, Obie Grid Tee) p 27% a found in Peace and Robinon Saepc Management erate, plementation and Corto sth ed © 1996 (Bur Ridge. Richard O. Irwin. inc). Reprinted with permission. countries where labor costs are especially low.* Similarly, by building factories to sthe more than one country, international firms may also lower their produc- fon costs by capturing economies of scale. For example, rather than splitting production of its new sports utility vehicle among several factories, Mercedes- cocceided to produce this vehicle only at its Alabama assembly plant to ben- ee com ceonomies of scale in production.* Finally, by broadening their product Tem Coren of the countries they enter. international firms ‘may enjoy sees es of scope, lowering their production and marketing costs and enhanc: fig tneir bottom lines. When Nissan first started selling cars in the United Oe et gntroduced a single model and sold the car through dealerships owned By exer companies. In relative terms the costs of distributing a single vehicle Oy aoe Chis pnanner were quite high. Over time, however, as the firm's reputa model in his Trablishied, it gradually stroduced other models and today has its tion Decale Crerican sales and distribution network selling a wide range of care aoe ae ane a result, Nissan's distribution costs per vehicle model are much 6 Tower than when it first entered the U.S. market286 > Chapter 10 International Strategic Management . © Multtmarket flexibility: As we discussed in, Chapters 3 and 4, there are wide variations {n the political, economic, legal, and cultural environments of countries. Moreover, these environments are constantly changing: New laws are passed, new governments are elected, economic policies are changed, new competitors may enter (or leave) the national market, and so on, International businesses thus face the challenge of responding to these multiple diverse and changing environ- ments. Often firms find it beneficial to empower local managers to respond quickly to such changes. However. unlike’ domestic firms, which operate in and respond to changes in the context of a single domestic environment, international businesses may also respond o a change in one country by implementing a change in another country. Chicken processor Tyson Foods, for example, has benefited over the past decade from the increased demand by health-conscious US, consumers for chicken breasts. In producing > Capturing global efficiencies i ‘more chickeri breasts, Tyson also produced more chicken legs and thighs, which an important component in the are considered less desirable by U.S. consumers. Tyson capitalized on its surplus formulation of an international fetiny tussian market, whe ‘ meat is preferred over ight, and the famiacon tance by targeting the Russian market, where dark meat ls P gh Matanes Rese nen Chinese market, where chicken feet are considered a tasty delicacy. Tyson exports eficences by producing over $250 million worth of chicken thighs and legs to Russia and China.’ Ina vari- microwaves in Shanghai to tke ety of ways similar to this, international busiriesses can exploit and respond to ‘sdvancage of China low labor changes in their operating environments better than domestic firms can. costs. One-third ofthe worlds Worldwide learning: The diverse operating environments of multinational corpo- Chee eat tations (MNCs) may also contribute to organizational learning.® Differences in : these operating environments may cause the firm to operate differently in one country than another. An astute firm may learn from these differences and » transfer this learning to its operations in other countries.® For example, MeDonald’s U.S. managers once believed that i's restaurants should be free. ‘standing entities located in suburbs and small towns. A Japanese franchisee con- Xinced McDonalé's to allow it to open a restaurant in an inner-city office building. ‘That restaurant's success caused McDonald's executives to rethink their store location eriteria. Nontraditional lecations—office buildings, Wal-Mart super. Stores, even airplanes—are now an-Important source of new growth for the firm. See “Bringing the World into Focus" for another example of this phenomenon. Unfortunately, itis difficult to explott these three factors simuitaneously. Global efficiencies can be more easily obtained when a single unit of a firm is given world Wide responsibility for the task at hand. BMW's engineering staff at headquarters. in Munich. for example, is responsible for the research and design of the company's new automobiles. By focusing its research and development (R&D) efforts at one location, BMW engineers designing new transmissions are better able to coordinate thelr activities with their counterparts designing new engines. However, centrallz- ing control of its R&D operations also hinders BMW's ability to customize its prod- uct to meet the differing needs of customers in different countries. Consider the simple question of whether to include cup holders in its cars. In designing cars to ~ be driven safely at the prevailing high speeds of Germany's autobahn, ‘the com- Pany’s engineers decided that cup holders-were both irrelevant and: dangerous. Driving speeds in the United States, however, are much lower, and-cup holders areThe Ehtlenges of International Stategie Management > 287. OP AGI | “TEACHING AN OLD DOG NEW TRICKS” General Motors provides a dramatic example of the benefits of -worldwvide learning. During the 1980s the company was suffering from high production costs, deterioration jn the quality ofits vehicles, and a loss of market share to its domestic and foreign fivals. In 1984 General Motors entered into a joint vencure with “Toyota to establish a new company called NUMMIL CM’ gal in creating NUMMI was to learn more about how Toyota’ lean manufacturing, kaizen (continuous improvement), and justine time inventory controls systems worked”? GM then used this knowledge in developing its newest US. automotive division, Saturn. Later, the lessons learned from NUMMMI were adopted by an important comfort feature in autos sold to USS. consumers. Lengthy battles were fought between BMW's German engineers and its U.S. marketing managers over this seemingly trivial {ssue. Only in the mid-1990s did cup holders finally become a standard feature in the firm's automobiles sold in North America. As this example illustrates. if too much power is centralized in one unit of a firm, the unit may ignore the needs of consumers in other markets. Conversely, multimarket flexi- bility is enhanced when a firm delegates responsibility to the managers of local sub- ‘sidiaries. Vesting power in local managers allows each subsidiary to tailor its products, personnel policies, marketing techniques, and other business practices to meet the specific needs and wants of potential customers in each market the firm serves. However, this increased flexfoility will reduce the firm's ability to obtain global efficiencies in such areas as production, marketing, and R&D. Furthermore, the unbridled pursuit of global efficiencies and/or multimarket flexibility may’ stifle the firm's attempts to single unit of the firm to capture glol lessons and information acquired by units may have little incentive or that the “experts” at headquarter: hands of local subsidiary managers may creat promote worldwide learning. Centralizing power in a bal efficiencies may cause the unit to ignore other units of the firm. Moreover, the other ability to acquire such information if they know 's will ignore them. Decentralizing power in the similar problems. A decentralized GMs Germany sibsiiary, Adam Opel AG, when ic built its new factory in the East German town of Eisenach in she early 1950s. ‘Today the Eisenach operation is not only Europe's most efficient ‘auto assembly plant, i is also GM's: ts productivity is double ‘GM's average. GM is now incorporating the lessons learned from its Eisenachy/Saturn/NUMMI experiences into three new factories in Argentina, China, and Poland as well sits existing factories in , Europe and the Americas. " se Source “GM Is Balding Planes in Developing Nations co Weo New ‘Markets? Wal tree Journal, August 41987, pA. a > Ge wsesis management Council to encourage the sharing (of few techniques and ideas ks ‘medialimaging managers may learn new ways of sling goods in China, fr example, bybsening 10 the experiences of manages from other CE divisions apersting there‘Chapter 10. Intemational Strategie Management EGIC AL structure may make It difficult to transfer learning from one subsidiary to another. Local subsidiaries may be disposed to automatically reject outside information as not being germane to the local situation. Firms wishing to promote worldwide Jearning must utilize an organizational structure that promotes knowledge transfer among its subsidiaries and corporate headquarters. The firms must also create incentive structures that motivate managers at headquarters and in subsidiaries to acquire, disseminate, and act upon worldwide learning opportunities. For example, consider the success of Nokia, headquartered in Helsinki, Finland, which ts among the world’s leaders in the cellular telephone and telecommunica- tlons industries. Nokia, like other telecommunications equipment manufacturers, was struggling to keep pace with rapid shifts in its worldwide markets. Managers in different regions had little idea what thelr counterparts in other markets were doing, and Nokia factories were grappling with excess inventories of some products and inventory shortages of others. In some instances Nokia factories in one country would shut down for a lack of a critical part that a Nokia factory in another coun- try had in surplus. In response the firm's CEO, Jorma Ollila, established what he called “commando teams" to attack these problems. The teams were charged with improving efficiency throughout the firm. Using a new worldwide information sys- tem, Nokia managers now monitor global. regional, and local sales and inventory on a real-time basis. This allows them to make internal transfers of parts and fin- ished goods efficiently, More important, this approach has allowed Nokia to spot market trends and new product developments that arise in one region of the world and transfer this knowledge to improve its competitiveness in other areas and product lines.!? : General Electric adopted a different approach to facilitate learning transfer among its units. It established 12 management councils. composed of senfor exec- utives from different subsidiaries. At the quarterly meetings of these councils each member must present a new idea that other subsidiaries can use in their bus!- nesses as well. In this way hard-earned knowledge of new techniques or market ‘opportunities can be quickly spread throughout GE's operations.!2 TERNATIVES MNCs typically adopt one of four strategic alternatives in their attempt to balance the three goals of global efficiencies, multimarket flexibility. and worldwide learning. The first of these strategic alternatives 1s the home replication strategy. In this approach a firm utilizes the cpre competency or firm-specific advantage it devel- oped at home as its main competitive weapon in the foreign markets that it enters. That is, the firm takes what it does exceptionally well in its home market and attempts to duplicate that in foreftn markets. Mercedes-Benz’s home replication strategy, for example, relies on its well-known brand name and its reputation for building well-engineered, Iuxurious cars capable of traveling safely at very high speeds. It is this market segment that Mercedes-Benz has chosen to exploit inter- nationally, despite the fact that only a very few countries have both the high income levels and the high speed limits appropriate for its products. Yet consumers in Asia, the rest of Europe, and the Americas, attracted by the car’s mystique, eagerly buy it, knowing that they too could drive their new car 150 miles per hour, if only the local police would let them. The multidomestic strategy 1s a second alternative available to international firms.'® A multidomestic corporation views itself as a collection of relatively inde- pendent operating subsidiaries, cach of which focuses on a specific domestic mar- ket. In addition, each of these subsidiaries is free to customize its products, its marketing campaigns, and its operating techniques to best meet the needs of its local customers. The multidomestic approach is particularly effective when thera, are clear differences among national markets; wht en economies of scale for produc-tion, distribution, and marketing are low; and when the cost of coordination between the parent corporation and its various foreign subsidiaries is high. Because each subsidiary in a mulldomestic corporation must be responsive to the local market, the parent company usually delegates considerable power and authority to managers of its subsidiartes in various host countries. MNCs operating before World War Il often adopted this approach because of the difficulties in con- trolling distant foreign subsidiaries, given the communfcation and transportation technologies of that time, The global strategy 1s the third alternative philosophy available for interna- tonal firms. A global corporation views the world as a single marketplace and has as its primary goal the creation of standardized goods and services that will - Address the needs of customers worldwide. The global strategy 1s almost the exact opposite of the multidomestic strategy. Whereas the multidomestie firm believes that its customers in every country are fundamentally different and must be approached from that perspective, a global corporation assumes that customers are fundamentally the same regardless of their nationalities. Thus the global corporation views the world market as a single entity as the corporation develops, produces, and sells its products. It tries to capture economies of scale in production and marketing by concentrating its production activities in a hand- ful of highly efficient factories and then creating global advertising and marketing campaigns to sell the goods produced in those factories, Because the global cor- poration must coordinate its worldwide production and marketing strategies, it usually concentrates power and decision-making responsibility at a central head- quarters. The home replication strategy and the global strategy share an important simi- larity Under either approach a firm conducts business the same way anywhere in the world. There is also an important difference between the {wo approaches. A firm utilizing the home replication strategy takes its domestic way of doing busi- ness and uses that approach in foreign markets as well."In essence a firm using this strategy believes that if its business practices work in its domestic market, then they should also work in foreign markets. Conversely, the starting point for a firm adopting a global strategy has no such home country bias. In fact, the concept of a home market is irrelevant because the global ‘firm thinks of its market asa @obal one, not one divided into domestic and foreign segments. The global firm tries to figure out the best way to serve all ofits customers in the global market and then does so. . ‘A fourth approach available to international firms is the transnational strategy. ‘The transnational corporation attempts to combine the benefits of global scale effl- ciencies, such as those pursued by a global corporation, with the benefits and advantages of local responsiveness, which is the goal of a multidomestic corpora- tion. To do so, the transnational corporation does not automatically centralize or decentralize authority. Rather. it carefully assigns responsibility for various organt« zational tasks to the unit of the organization best able to achieve the dual goals of efficiency and flexibility. ‘A transnational corporation may choose to centralize certain management fune- tions and detision making, stich as.R&D and financial operations, at corporate headquarters. Other management functions, such as human resource manage. ment and marketing, may be decentralized, allowing managers of local subsidiaries to customize their business activities to better, respond to the local culture and business environment. Microsoft, for example, locates most ofits product develop: ment efforts in the United States, while responsibility for marketing is delegated to its foreign subsidiaries. Oftentimes transnational corporations locate responsibility for one product line in one country and responsibility for a second product line in another country. To achieve an interdependent network of operations, (ransna- tional corporations focus considerable attention on sntegration and coordination among their various subsidiaries. Hl Strategie Alternat 2s589 Chapter 10 ttrgfonl state Management . Figure 10.1 assesses these four strategic approaches against two criteria: the ‘ » 78. need for flexibility and responsiveness to local conditions and the need to achfeve © global efficiencies. Firms must pay particular attention to local conditions when consumer tastes or preferences vary widely across countries; when large differ- fences exist tn local laws, economic conditions, and infrastructure; or when host country governments play a major role in the particular industry. Pressures for global effictencies arise when a firm is selling a standardized commodity with Uttle ability to differentiate {ts products through features or quality, such as agricultural goods, bulk chemicals, ores and low-end semiconductor chips. If trade barriers and transportation costs are low, such firms must strive to produce thelr goods at- the lowest possible cost. Conversely, if the product features desired by consumers f vary by country or if firms are able to differentiate their products through brand names, after-sales support services, and quality differences, the pressures for Global effictenctes are lessened. ‘The home replication strategy Is often adopted by firms when both the pressures, for global efficiencies and the need for local responsiveness are low, as the lower. left-hand cell in Figure 10.1 shows. Toys 'R’ Us, for example, has adopted this approach to internationalizing its operations. it uses the marketing, procurement, and distribution techniques developed in its U.S, retail outlets in its foreign stores as well. The company's managers believe that the firm's path to success interna- Uionally is the same as it was domestically: Build large, warehousclike stores, buy 5 in volume, cut prices, and take market share from smaller, high-cost tay retailers, Accordingly. the managers see little reason to adjust the firm's basic domestic strategy as they enter new international markets. ‘The multidomestic approach is often used when the need to respond to local conditions Is high, but the pressures for global efficiencies are low. Many compa- nies selling brand name food products have adopted this approach. Although not unmindful of the benefits of reducing manufacturing costs, such marketing-driven companies as Kraft, Unilever, and Cadbury Schweppes-are more concerned with meeting the specific needs of local customers, thereby ensuring that these cus- tomers will continue to pay a premlum price for the brand name goods the eompa- * nies sell. Moreover, the companies often rely on local production facilities to ensure that local consumers will readily find fresh, high-quality products on their super market shelves. . ‘The global strategy s most appropriate when the pressures for global efficiericies are high but the need for local responsiveness anid flexibility is low. In such cases 8 és Strategic Alternatives 3 bees ee martetpace andi ing Pressu 5 ign primary goal i to create.” for Balancing Pre sures B Wien Jivaeldie gods a for Global Integration & Services that wil address and Local Responsiveness ‘2 fb. the needs of custonieg sce Source Adapted from Sumantra Ea i Ghoshal and Nitin Nobria,"Honses SB | ENE PRE mae — for Courses: Organizational Forms & Hone Repuicanion Steareay. "f° Mutnooitesnie Stanteots ae for Mukinatonal Corporations? 6 ‘The frm uses the core compe: The frm views tell ag ac UES RoekWine’ US tency or frmspecitic advantage - ";'> collection of relatively deen S « ‘Sloan Management - B Low it developed at home as its. dent operating subsidiari 3 1993 pp 27 and 3. 8 tain competitive weaton bs the® ) goatee a foreign markets it enters. > , . tow High ‘ Pressures ror Local Responsiveness ano FLexisiuiry| | firms can focus on creating standardized goods, marketing campalgns, distribution systems, and so forth, This strategy has been adopted by many Japanese con- sumer electronics firms such as Sony and Matsushita, which design their products ‘ith the world in mind. Aside from minor adaptations for differences in local elec- trfeal systems, these firms’ stereos, portable disc players-VCRs, and DVD players are sold (0 consumers throughout the Quad countries with little need for cus- tomization. Thus these firms are free to seek global efficiencies by capturing economies of scale in manufacturing and concentrating their production in coun- tries offering low-cost manufacturing facilities, ‘The transnational strategy 1s most appropriate when pressures for global effl- clencies and local responsiveness are both high. The Ford Motor Company has been attempting to employ this strategy. For example, Ford now has a single man- ager responsible for global engine and transmission development. Other managers have similar responsibilities for product design and development, production. and marketing. However, each manager 1s also responsible for ensuring that Ford jucts are tailored to meet local consumer tastes and preferences. For instance, Ford products sold in the United Kingdom must have their steering wheel mounted on the right side of the passenger compartment. Body styles may also need to be slightly altered in different markets to be more appealing to local cus- tomer tastes. ‘ot addressed to this point has been the issue of worldwide learning. Worldwide learning requires the transfer of information and experiences from the parent to each subsidiary, from each subsidiary to the parent, and among subsidiaries. Neither the.home replication, multidomestic, nor global strategy is explicitly designed, however, to accomplish such learning transfer. The home replication stategy is predicated on the parent company transferring the firm's core compe- tencles t its foreign’ subsidiaries. The multidomestic strategy decentralizes power to the local subsidiaries'so they can respond easily to local conditions. The global strategy centralizes decision making so the firm can achieve global integration of its activities. ‘The transnational strategy would appear to be better able to promote global learning with its mix of centralization and decentralization of functions—a primary reason for adopting the transnational strategy in the first place. Transnational cor- porations utilize stich techniques as matrix organizational designs, project teams, informal management networks, and corporate cultures to help promote transfer of Imowledge among their subsidiaries. Such approaches to promote worldwide learn ing are also available to firms adopting the home replication, multidomestic, and obal approaches. However, such firms need to exert a systematic effort to suc- cessfully make use of these techniques. COMPONENTS OF AN INTERNATIONAL STRATEGY ¢ the overall international strategic philosophy of their firm, man- agers who Engage in international strategic planning then need to address the four busle components of strategy development. These components are distinctive com- Petence, seope of operations, resource deployment, and synergy.!* After determining Distinctive Competence the first component of international strategy, answers the question “What do we do exceptionally well, especially as compared to our com- Feplors™” A firm's aistinetive competence may be cutting-edge technology, efficient Cidnbation networks, superior organizational practices, or well-respected brand Dames a aus discussion of Dunning’s eclectic theory in Chapter 8 suggested, a firm’s possession of a distinctive competence (what Dunning called an ownership advantage) is thought by many experts to be a necessary condition for a firm to Distinctive competence, . Components of an International Strategy > 291ter 10 International Strategic Manageiment te successfully outside its home market. Without a distinctive competence a foretgn fem wl have difleulty competing with local firms that are presumed to know the local market better. The Disney name, image. and portfolio of characters, for example, are a-distinctive competence that allows the firm to succeed in foreign markets, Similarly, the ready availability of software programs compatible with, © Windows gives Microsoft an advantage in competing with local firms outside the _ United State: ‘Whatever its form, this distinctive competence represents an important resource to the firm, A firm often wishes to exploit this advantage by expanding {ts opera.» tlons into as many markets as its resources allow.-To a large degree the interna. tlonalization strategy adopted by a company reflects the interplay between tts dis- tinctive competence and the business opportunities available in different countries.!8 For example, Stuttgart-based Robert Bosch GmbH, the world’s largest auto- motive electronic equipment supplier, was the first company to develop and sell electronic fuel injection and antilock brake systems. This head start resulted in @ distinctive competence that other firms have found difficult to match. Bosch still enjoys a 50 percent share of these lucrative markets, selling to automobile manufacturers in all six inhabited continents.!® Similarly, Frankfurt’s Glasbau Hahn constructs glass showcases with self-contained climate controls and fiber optic lighting: Because the showcases are perceived to be thé world's best, museums pay Glasbau Hahn as much as $100,000 for a case in which to dis- Play priceless art, sculpture, or artifacts. Exploiting its distinctive competence in this specialized market, Glasbau Hahn has built ‘$12 million international business. : Scope of Operations ‘The second component, the seope of operations, answers the question “Where are we golng to conduct business?” Scope may be defined in terms of geographical regions, such as countries. regions within a country, and/or clusters of countries. Alternatively, scope may focus on market or product niches within one or more + regions, such as the premium-quality market niche, the low-cost market niche, or ", other specialized market niches. Because all firms have finite resources’ and because markets differ in their relative attractiveness for various products, man- agers must decide which markets are most attractive to their firm. Scope {s, of course, tied to the firm's distinctive competence: If the firm possesses a distinctive competence only in certain regions’ or in specific product lines, then the firm's scope of operations will focus on those areas where it enjoys the distinctive compe- tence, For example, the geographical scope of Disney's theme park operations consists of the United States, Japan, and France, with Hong Kong to come, while the geo- graphical scope of Disney's movie distribution and merchandise sales operations is. more than 100 countries: Other companies have chosen to participate in many lines of business but narrow their geographic focus, such as Grupo Luksics, a family: owned conglomerate with interests in beer, copper, banking, hotels, railroads, telecommunications, and ranching in Chile and neighboring countries. Conversely, Ballantyne, a small ($12 million in annual revenues) Nebraska-based company, Is sharply focused, just like its primary product: feature-film projectors, in which the company enjoys a 65 percent share of the U.S. market and a 30 percent market share elsewhere.® Similarly, in the semiconductor industry, many firms have cho- sen to limit thelr operations to specific product niches. Asian semiconductor man- ‘ufacturers like Samsung, NEC, and Toshiba dominate the global memory chip mar- ket. California-based Intel focuses on producing the microprocessors that power most IBM-compatible personal computers. Texas Instruments specializes in digital signal processors, which convert analog signals into digital signals. Such chipspave many tses, from computer modems to stereo systems to cellular phones. Semens concentrates on chips that have automotive applleations, and Philipg spe: dalizes in the development of multimedia semtconductors, which bridge consumer dectronics and computers.'® Thus strategic planning results in some international businesses choosing to compete in only a few markets, some to compete in many, and others (such as Disney) to vary their operations across the different types of pusiness operations In which they are involved. : resource Deployment Resource deployment answers the question “Given that we az to compete fn these markets, how will we allocate our resources to'them?” For example, crea though Disney will soon have theme park operations in four countries, the firm does not have an equal resource commitment to each market. Disney invested nothing in Tokyo Disneyland, limited its original investment in Disneyland Paris to 49 percent of its equity, and will cap its investment in Hong Kong ag well. However, « ieontnues.te tnvest heavily in its U.S, theme park operations and in filmed enter- tainment. Resource deployment might be specified along product lines, geographical lines, or both. This part of strategie planning determines relative itortles for firm’ lmited resources. Disney could have easily solved Disneyland Paris's financial dif- ficulties without outside assistance. However, additional investment would have taken the firm's commitment far beyond the level it thought viable for its resource deployment goals and perhaps jeopardized its ability to build the Animal Kingdom in Orlando or to purchase Capital Cities /ABC. Some large MNCs choose to deploy their resources worldwide. For example, Osaka-based Sharp Corporation manuféttures its electronic goods in 33 plants in 26 countries. Other firms have opted to focus their production in one country. Boeing, the leading U.S. exporter, concentrates final assembly of commercial air- craft in the Seattle, Washington, region. DaimlerChrysler concentrates production of Mercedes-Benz automobiles in Germany: even though its newest plant is in Alabama, 9 out of 10 Mercedes are still German built.?! Although these firms buy materials and sell products globally, they have limited most of their production resource deployment to their home countries. Synergy ‘ - The fourth component of international strategy, synergy. answers the question “How can different elements of our business benefit each other?" The goal of, syn- + ergy is to create a situation where the whole is greater than the sum of the parts. Disney has excelled at generating synergy in the United States. People know the Disney characters from television, so they plan vacations to Disney theme parks. At «the parks they are bombarded with information about the newest Disney movies, * and they buy merchandise featuring Disney characters, which encourage them to watch Disney characters on TY, starting the cycle all over again. However, as noted earlier, the firm has struggled in its efforts to be as effective in global markets. Developing international strategies fs not a one; dimensional process, Firms gener- fegic management in two broad stages: strategy for- ally carry out international strat ulation and strategy implementation. Simply put, strategy formulation Is decid- Ing what to do, and strategy implementation is actually doing it. 11. In strategy formulation the firm establishes its goals and the strategic plan that Ul Teal ce the achievernent of those goals. In international strategy formulation *, DEVELOPING WHTERNATIONAL STRATEGIES €EE 2949 Chapter 10 Ie onat strategie Management te Sted Whenever an Incernet firm sets up shop in afferent country, one ‘ofthe frst questions its managers have to ask is how to diferent- 2 self from other sts. In an interesting twist one major player inthe globat arena has gone in the opposite direction imitation ~ rather chan diferentiation The frm is Yahoo! Japan and, so far at “Teast is scracegy is paying off n a big way. As ofthe end of 2000, ‘Yahoo! Japaris stock has risen 6000 percent since its initial sting in November 197, . Icall started when Maszhiro Inoue decided to seeka licensing agreement with Yahoo! to create and maintain a japanese Web sive patterned after the popular Yahoo! sie in the United Sates. In his own words, I decided to copy everything from the US" AS a result, Yehoo! Japan looks and works exactly like its US, cournter- This strategy flies in the face of conventional Japanese wis “pgp. which suggest that paience and meticulous attention to jastes are necessary ingredients for success. Yahoo! Japan, MEMa'o, has been a smashirn success. An estimated 85 per- ‘cent CMroynese Internet users vie Yahoo! Japan at least once a month 2M frm has an overvhelming market share in a high-growzh a kind of lntenet nirvana often sought Indeed. a new leton seems to be emerging aad and brands olidified in the United States can work very Mix hove who wecute chemin oes countries art ks category headings even follow Engl alphabetical orden, even though they use japanese characters. Sources "Yahoo! pan kearns fiom "6 Sch Fchevthencs Evans Wal Set Journal Decernber 17, 2000,p. 4; SO%ents rors,“ Wal : "yahoo en mization and eed Lead to Dominance! Wal Se wang speeded POC 58-195 op 81,84 aanagers develop, refine, ad agree on which maskets to enter fore best to compete in each. Much of what we discuss in the rest of this CRT how in the next two chapters primarily concerns international strategy form "4 (tring he Word” presents an example of how one enreprene ori his ref strategy : 2. In strategy implementation the firm develops the tactics for achteving the fo mulated international strategies. Disney's decision to build Disneyland Paris was part of strategy formulation, but deciding which attractions to include, | when to open; and what to charge for admission was part of strategy imple mentation, Strategy implementation is usually achieved via the organization’ design, the work of its employees, and its control systems and processes. | Chapters 13 through 15 deal primarily with implementation issues. although every strategte planning process is in many ways unique, there is net | ertheless a set of general steps that managers usually follow as they set about developing their strategies. These steps, shown in Figure 10.2, are discussed next. Mission Statement | Most organizations begin the international strategie planning process by ereating® mission statement, which clarifies the organization's purpose, values, and direc: Uons. The mission statement is often used as a way of communicating with internal and external constituents and stakeholders about the firm's strategic direction. It may specify such factors as the firm's target customers and markets, principal Products or services, geographical domain, core technglogies, concerns for su vival, plans for growth and profitability, basic Philgsophy, and desired public | / 2. rego ‘ Devetor a Mission 2»? ge Starenent 9 » « Define'the firm's valves,” Purpose, and direct '. Penronu 4 SWOT As ‘Assess the firm's ext intemal environments tid <*_ strengths, Weaknesses," opportunites, and treats: opportunities. Neutralize external ‘threats and overcome the fits weaknesses, ‘ ? Qevetor Tacticar Goats ano Plans: Devise the means to achieve strategic goals and to guide A the firm's daily activities. eee secs ‘e Devevoe Contra. E Framework Formulate managerial and cxganizational systems and. sion statement of The Walt Disney Company is “to mntinuing to be the world’s premier entertalnment fc. and financial standpoint.” Hershey Foods’ mis- 1 of being the "No. 1 confectionery company in ology specifies tts mission to be a “major, prof- roducer and distributor of specialty alloys, mate- rultiple mission statements—one for the Overall firm ‘one for each of its various foreign ‘subsidiaries. Of course, a firm: acne and one for eSatermenta must ensure that they ae compas image? For example, the mis: crate shareholder value by co ‘company from a creative, strategi sion statement includes the £93 North America.” Carpenter Techni able, and growing international P: EWironmental Scanning and the SWOT Analysis The second step in devel trategy 1s conducting a SWOT analysis. SWOT Is an Second step n developing a SSS ortanities, and Threats." A firm typtcally ferony “ ‘Weaknesses. s, im for “srengths, Wear erforming an environmental sean, 9 systematic unas Steps in International Strategy Formulation296.9 Chapter 10. Intemational taene Manarrent he firmn'a external and tnternal environments, production costs, and colton of i about all elementn oft Incliding markets, regulatory Ineues, Cor i " Aneta hey mnpetiiors’ action, When era of a planning staff pean the © external environment, U identify both opportunities (the On SWOT) and threats (the Tin pwon) aS te ene 'They obtain data about econonte, aanctal, podtenl, leysl, wel a competitive changen tn the varioun markets the firm nerves or night want to es ‘diseueed in Chapter, 0% well tBuch data aré also ured for politient riske nnalyrin, a the country market analyuin diactiwsed in Chapter 11.) For exun ’ ple, Boring cone tinuowely mon nd economic forces that affect wie tre \ tora changen In polltien! During the early 1990s political fh China led to more competition in the 1 nltfin domeatic alr travel market, The Chinere government wl Hit the giant mtnten earrler CAC {nto competing regional carriers and owed Heng tongs Cathey _ Proile artne to offer air travel ‘within China, Boeing's environmental scanning uageated that a booming demand for ar travel would make the Chinese market « partfedlarly appealing opportunity. Accordingly, the ffm chose to locate a new Pilea office in Beljing, The move paid off, and Chine hina become one of Boeings | moat important markets. | External environmental acanning alKo ylelda data ab to ee frm, auch nw shrinking markets, inereantng compel tion. the potential for new government regulation, political inntability in key markets, and the develope . ment of new technologies that could make the firm's manufacturing, facilities or product lines obsolete, ‘Threats 10 Dioney Include tnereaned competition tn the U.S, market from Universal Studion, Six Hngn, and other theme parkes potential competition in Europe from theme parks there: French resentinent of U.S. $ntru+ ‘son In France; and fucinating exchange alten, Threats to BMW Include ehang. Ing U.S. automobile fuel efflelency Miandarda, Increaned competition rom avkel, and Migh Ger Jabor coals, jternattonal Japanese producers fn the vary: w Inelude not only competition tn the tn Worldwide and TNh Threats (o Federal Expres! express packnge delivery inarket from fim uch ay DULe Faenthan the raplly growing wae of e-iall and fax machines to wend mensages Internationally. In conducting a SWOT analysts, a fru ‘ednternal envviroriancnt ti 1 Jes 2 onal strengtlis are skills, renource. erie connpetitors, Potential sensi, wile, form the baa vtive competence, might nchide a hbundanee of matnugertal te ie technology. well-knoven brand naricte tuurplus eainlh, # good pub sein key counteles, Disney's otrengtlts include nd strong rnarleet share Me orporate debi and ihe iniernotiodal apes! otis characters, BMW's strengths Hesede its sled workforce, Innovallve ens} veer ‘and reputation for products) high-quality automobile i i | rm also needs to acknowledge 119 organizational weaknenses, Then Weal nesses reflect defle rnin In aks, resources, or other factors that | “they may Include poor disteibullon networks | nek of nkilied International Mal") fF competitors, out environmental threats agers rut abo anal rengtlrs nd wwerakresves (he and W | andl other advantages he strategse 1 of a firm's distinc cent, cutting: Me Image. encles or short petitivent hinder the firm's comp outside the home mark abvor rel jee product development efforts Hat ag behind, those 0! ‘gwen regarding Disneyland Parly include high capt, iy. BMW's weakness jantzational weakne publiclly, an y Ingh domestic id underutilized hotel capactt ifficull for S19 Jabor costs, which mal ‘5 ork ike Mt dl Disne tal costs, negative de Its extreme! ai weaknesnes tn the vale, inclu compete on the basts of price, ‘One technique for assessing a firm's strengths an fard Business School Profensor Michael Porter, the valut mat actlvites—proguction: Mae ident ped by Harv: ict" ita enable ss strategs9ts (0 | ne firm into its Amport Eacli primary and support # chain fs a bre ikdown of th tng, human resource mana igement, andl 60 fort tu its competitive advantages and disadvantages ee | a chain, DeveloDeveloping International Strategies» 297 meters erte Primary Betvties meen “Manufacturing —___Marketing & Soles Senice Company Infrastructure Information Systems Human Resources Support activities ~~ Research & Development cae Sourcing & Logistics | gy depicted in Figure 10.3 can be the source of an organizational strength (distine- ‘ive competence) or weakness. For example, the quality of Caterpillar’s products and Development in the figure) and the strength of its worldwide dealer- | ship network (Marketing, Sales, and Service) are among its organizational strengths, but poor labor relations (Human Resources) represent one of its organt- ational weaknesses. Managers use information derived from the SWOT analysis to develop specific cflecive strategies. Effective strategies are those that exploit environmental oppor- tunities and organizational strengths, neutralize environmental threats, and pro- {ect or overcome organizational weaknesses. For example, BMW's décision to butd automobiles in South Carolina took advantage of its strong brand image in the . United States. This decision also neutralized the firm’s internal weakness of high German labor costs and its vulnerability to loss of U.S. customers if Germany's currency were to rise in value relative to the U.S. dollar. Strategic Goals With the mission statement and SWOT analysis as context, international strategic planning is largely framed by the setting of strategic goals. Strategie goals are the nnajor objectives the firm wants to accomplish through pursuing a particular course of action. By definition they should be measurable, feasible, and time lim- fled (answering the questions “How much, how, and by when?’). For example, Disney set strategie goals for Disneyland Paris for projected attendance, revenues, and so on, but as the Scottish poet Robert Burns noted, “the best laid plans of mice and men’ often go awry. Part of the park's resultant financia! problems arose from the firm's goals not being met. Disney's strategic managers had to revise the firm's strategic plan and goals, taking into account the new information painfully learned from the first years of the park's unprofitable operation, Tactics sath a Figze 102 afer a SWOT analysts has ben performed and tate fic goals set, the next step in strategic planning 1s to develop specific tactical foals arid plans. or tactics. Tactics usually involve middle managers and focus on the details of implementing the firm’s strategie goals. For example, Grand Metropolitan, a huge British food company, and Guinness, a major British spirits maker merged to ereate Diageo PLC. one of the world’s largest consumer prod ucts companies with revenues of 817 billion. The merger agreement reflected strategic decisions by the two companies. After plans for the merger were The Value Chain, Source. Adapted with the permis- son of The Free Pres, a Division of ‘Simon & Schuster from Competitive ‘Advantage Creating and Sustaining ‘Superior Pxformance, by Michael E. Porter, Copyright © 1985 by ‘Michael € Porter.Management £ > Chapter 10. International Strteei : * . “ announced, middle managers in both companies were faced with the challenge of integrating various components of the two original companies into a single new one, Tactical issues such as the integration of the firms’ accounting and informa. tlon systems, human resource procedures involving hiring, compensation, ang career paths, and distribution and logistics questions ranging from shipping ang - transportation to warehousing all had to be addressed and synthesized into one . new way of doing business.24 Control Framework The final aspect of strategy formulation 1s the development of a control frame. work, the set of managerial and organizational processes that keep the firm moy. ing toward its strategic goals. For example, Disneyland Parts had a first-year attendance goal of 12 million visitors. When it became apparent that this goal would not be met, the firm increased its advertising to help boost attendance and temporarily closed one of its hotels to cut costs, Had attendance been runni ahead of the goal, the firm might have decreased advertising and extended the theme park's operating hours. Each set of responses stems from the control framework established to keep the firm on course. As shown by Figure 10.2's feed. back loops, the control framework can prompt revisions in any of the preceding steps in the strategy formulation process. We discuss control frameworks more | fully in Chapter 15. ; LEVELS OF ENTE TATIONAL ST RAT Given the complexities of international strategic management, many international businesses—especially MNCs—find it useful to develop strategies for three distinct levels within the organization. These levels of international strategy, illustrated in Figure 10.4, are corporate, business, and functional.28 } Corporate Strategy Corporate strategy attempts to define the domain of businesses the firm intends to | operate. Consider three Japanese electronics firms: Sony competes in the global market for consumer electronics and entertainment but has not broadened its Corporate Stratecy Thee Levels of tatgy Sioe nines Qe for MNCs . - ‘ Related civersificaion Ueeneddwstenen SSE ff Business Stearecy rericaaae Differentiation.” Cost leadership Funcrionat Stratecies Finance Marketing Operations Human resource ‘management i): : Levls of Internationa Strategy scope Into home and kitchen appliances. Archrival Matsushita competes in all these industries. while Pioneer Electronic Corporation focuses offly on electronic fqudlo and video products. Each firm has answered quite differently the question of (hat constitutes its business domain. Their divergent answers reflect their differ- ing corporate strengths and weaknesses, as well as thelr differing assessments of the opportunities and threats produced by the global economic and political envi- ronments, A firm might adopt any one of three forms of corporate strategy: a single- business strategy, a related diversification strategy, or an unrelated diversification strategy: ‘The Single-Business Strategy. _ The single-business strategy calls for a firm to rely ona single business, product, or service for all its revenue. The most signif- jeant advantage of this strategy ts that the firm can concentrate all Its resources and expertise on that one product or service. However, this strategy also increases the firm's vulnerability to {ts competition and to changes in the external environ- ment, For example. for a firm producing only VCRs, a new ins.ovation such as the DVD player makes the firm's single product obsolete, and the firm may be unable to develop new products quickly enough to survive. Nonetheless, many MNCs, such as Air Canada, McDonald's, and Dell. have found the single-business strategy & rewarding one. Related Diversification. The most common corporate strategy, related diver- sifieation, calls for the firm to operate in several different but fundamentally felated businesses, industries, or markets at the same time. This strategy allows the firm to leverage a distinctive competence in one market to strengthen {ts com petitiveness in other markets. The goal of related diversification and the basic rela- Honship linking various operations are often defined in the firm's mission. state~ ment. : Disney uses the related diversification strategy. Each of its operations Is linked to the others via Disney characters, the Disney logo, a theme of wholesomeness, gnd a reputation for providing high-quality family entertalnment. Disney movies ahd TV chows, many of which are broadcast over Disney-owned networks, help sell Disney theme parks, which in turn help sell Disney merchandise. Accor SA. the worlds second largest hotel operator, also uses a related diversification strategy. Originally the operator of a chain restaurant, this Paris-based frm began acquiring fuxary hotel chains such as Sofitel and budget chains such as Motel 6. To keep its dining rooms and hotel beds full, Accor then branched out into the package tour buslnece and the rental car business. To promote tourism, the firm even opened its wn theme park north of Paris, based on the French cartoon character Asterix the Gaul2° ‘Related diversification has several advantages. First, the firm depends less on a single product or service, 0 it fs less vulnerable to competitive or economie Snes at bor example, if Disney faces increased competition in the theme park Pasties, tte movie, television, and licensing divisions can offset potential declines in treme park revenues. Moreover, these related businesses may make it more di Hoult fer ee outsider to compete with Disney in the first place. For example, non- Disney animated movies have trouble competing against new animated releases from the Disney Studios. Makers of non-Disney ‘movies must buy advertising at Co ene) wile Disney can inexpensively promote its new releases to fam fed waiting inline at its theme parks and to viewers of shows on ABC of the Dishoy Channel, Sintiar problems confront rival theme park operators. who have 10 ot Heene Simller Prant exposure that Disney's theme parks receive on network eh Hansa tre Disney Channel and on T-shirts and caps worn by Kids of all ges worldwide. Beads. sated diversification may produce economies of scale for a fm Toe | example: The Limited, Ine. takes advantage of ts vast sie 19 Bi. TE clothirs lines at iorabie prices from Far Eastern manufacturers and then divides the purchases 1s300 > Chapter 10 International Strategle Management among its Limited, Express, Lerner, and other divisions. Similarly, Disney has cre. ated a division it calls Strategic Sourcing, This unit's purpose 1s to consolidate ag much of the firm's global purchasing as possible. For example, the company buys aj its packaging materials from one supplier. Consumers who buy merchandise from Disheyland Paris, the Disney Store in Los Angeles, the Lion King show in London, a Disney Web site, or the direct-mail Disney catalog will all receive their purchases in : the same’ style box bought from the same manufacturer. The company estimates that within live yeafs if will be saving over $300 million annually from this approach2® - - > Third, related diversification may-allow a firm to use technology or expertis? developed in one market to enter a second market more cheaply and easily. For example, Pirelli SpA used its expertise in producing rubber products and insulated cables, refined over 100 years ago, to become the world's fifth largest producer of ‘automobile tires. Pirellt has also transferred its knowledge of rubber cables to become a major producer of fiber optic cables. More recently, Casto Computer + Company transferred the knowledge it gained in making hand-held electric caleu- ators during the 1970s to the production of inexpensive electronic digital watches, “musical synthesizers, and pocket televisions, Such potential synergies are a major advantage of the related diversification strategy. One potential disadvantage of related diversification ts the cost of coordinating the operations of the related divisions. A second fs the possibility that all the firms business units may be affected simultaneously by changes in economic conditions. . For example, Accor can create synergies by steering travel customers to its hotels, and restaurants. Yet all of Accor’s divisions are vulnerable to a downturh in tourism. Ifanother oil crisis erupts or an increase in terrorist actions keeps travel- ers at home, all Accor businesses will suffer: Unrelated Diversification. A third corporate strategy international businesses, may use is unrelated diversification, whereby a firm operates in several unre- lated industries and markets. For example, Pearson PLC, a British firm, owns pub- a) Ushing companies, a fledgling restaurant chain, and a television production busi- ness.® Similarly, General Electric owns such diverse business units as a television network (NBC), a lighting manufacturer, a medical technology firm, an aircraft engine producer, a semiconductor manufacturer, and an investment bank. These operations are unrelated to each other, and there is little reason to anticipate syn ergy among such diverse operations and businesses. During the 1960s unrelated diversification was the most popular investment strategy. Many large firms, such as ITT, Gulf and Western, LTV, and Textron, became conglomerates, the term used for firms comprising unrelated businesses The unrelated diversification strategy yields several benefits. First, the corporate parent may be able to raise capital more easily than any of its independent units can separately. The parent can then allocate this capital to the most profitable opportunities available among its subsidiaries. Second, overall riskiness may be reduced because a conglomerate is less subject to business cycle fluctuations. For example, temporary difficulties facing one of its units might’be offset by success 1" another. Third, a conglomerate is less vulnerable to competitive threats because any given threat is likely to affect only a portion of its total operations. Fourth, conglomerate can more easily shed unprofitable operations because they are inde- pendent. It also can buy new operations without worrying about how to integrate them into existing businesses. Nonetheless, the creation of conglomerates through the unrelated diversification strategy 1s gut,of favor today primarily because of the lack of potential syner&Y across unrelated businesses. Because the businesses are unrelated, no one opera tion can regularly sustain or enhance the others. For example, GE managers ¢ not use any of the competitive advantages they may have developed in the lighting business to help offset low ratings at the firm's television network, Further, itis dif aaa.eves of interationa Sutgy > 301 fcult for staff at corporate headquarters to effectively manage diverse businesses because the staff must understand @ much wider array of businesses and markets than if operations are related. This complicates the performance monitoring of indi- vidual operations. As a result, although some conglomerates such as GE and Textron have thrived, many others have changed thelr strategy or disappeared aE ere for example, considering a reorientation of Its bust ness away from unrelated diversification and more toward related diversification. Currently the firm has operations in passenger cars and trucks, commercial vehi- des, financial services and information technology, aerospace, rail. dlesel engines, and auto electronics. However, DaimlerChrysler is consolidating some of its nonau- tomotive activities, selling others, and patting more ont wae cme oF te mona. automobile operations.2° Putting more and more empl Buiiness Strategy * Whereas corporate strategy deals with the overall organization, business strategy focuses on specific businesses, subsidiaries, or operating units within the firm. Business strategy seeks to answer the question “How should we compete in each market we have chosen to enter?" Firms that pursue corporate strategies of related diversification or inrelated dwersification tend to bundle sets of businesses together into strategic business units (SBUs). In firms that follow the related diversification strategy, the products and services of each SBU are somewhat similar to each other. For example, Disney defines its SBUs as theme parks and resorts, creative content filmed entertain- ment, character licensing, Disney Stores). and broadcasting (ABC, the Disney Channel, ESPN). In firms that follow unrelated diversification strategies, products and services of each SBU are dissimilar. Textron, for example, has created four ‘SBUs: aircraft, automotive products, financial services, and industrial products. By focusing on the competitive environment of each business or SBU, business strategy helps the firm improve its distinctive competence for that business or untt. Once a firm selects a business strategy for an SBU, it typically uses that strategy in all geographical markets the SBU serves. The firm may develop a unique business strategy for each of its SBUs, or it may pursue the same business strategy for all of them. The three basic forms of business strategy are differentiation, overall cost, leadership, and focus.** Differentiation. Differentiation strategy Is a commonly used business strat- egy. Itattempts to establish and maintain the image (either real or perceived) that the SBU's products or services are fundamentally unique from other products or services in the same market segment. Many international businesses today are attempting to use quality as a differentiating factor. If successful at establishing a high-quality image, they can charge higher prices for their products or services. For tzample, Rolex sells its timepieces worldwide for premlum prices. The firm limits its sales agreements to only a few dealers in any given area, stresses quality and Status n ite advertising, and seldom discounts its products. Other international “firms that use the differentiation strategy effectively include Coca-Cola (soft drinks), Nikon (cameras), Calvin Klein (fashion appare), and Waterford Wedgewood (ine china and glassware). Other firms adopt value as their differentiating factor. They compete by charging i ices. Marks and Spencer has used the Teasonabl for quality goods and services. Marks pe sr i ey een ca nie eget European continent. Lands’ End, a Wisconsin mail-order clothing seller, has ako used tis diferentiation strategy to row Into a bllon-dllar company. I has tstablished cpcrations in the United Kingdom, Germany. and Japan. By translat- tng its catalogs into the local language. providing local mailing addresses and tele- Phone natin og accepting local currencies, its international operations haveler 10. International Strategic Management come to account for almost 10 percent of its sales. Irontcally, this effort puts Marks ~ and Spencer and Lands’ End in direct competition with.each other, with each stressing the value factor. They may have to switch to differentiation based on dis- tribution mode—catalog versus retail outlet sales. Overall Cost Leadership. The overall cost leadership strategy calls for a firm to focus on achieving highly efficient operating procedures so that its costs are lower than.its competitors’ ¢osts. This allows the firm to sell its goods or serv- ices for lower prices. A successful overall cost leadership strategy may result in lower levels of unit profitability (due to lower prices) but higher total profitability (due to increased sales volume). For example, France's Bic Pen Company makes approximately 3 million pens a day. By concentrating on making those pens as cheaply as possible, the firm ts able to sell them for a very low price. Taken together, volume production and a worldwide distribution network have allowed Bic to flourish. Other firms that use this strategy are Timex (watches), Fut (fil), Hyunda (automobiles), the LG Group (consumer electrontes), and NEC (semlcon- ductors). Focus. A focus strategy calls for a firm to target specific types of products for certain customer groups or regions. Doing this allows the firm to match the fea- tures of specific produets fo the needs of specific consumer groups. These groups might be characterized by geographical region, ethnicity, purchasing power, tastes in fashion, or any other factor that influences ‘Heir purchasing patterns. For example. Cadbury Schweppes PLC markets Hires Root Beer only in the United States because root beer does not appeal to people elsewhere. In other countries Cadbury sells other flavors of soft drinks, including Solo (mixed fruit flavored) and Trina (grapefruit flavored), that do not appeal to U.S. consumers. Honda sells Accord station wagons primarily in the United States because U.S. consumers like station wagons more than do consumers in other countries. It concentrates on sciling its low-priced Civic in less-developed countries, where consumers have less discretionary income, and emphasizes its faster Prelude in Europe, where speed limits tend to be higher. Sony's business strategy for its consumer electronics SBU focuses on continually upgrading and refining the products through extensive R&D while maintaining its reputation for producing high-quality electronics. 5 Functional Strategies Functional strategies attempt to answer the question “How will we manage the functions of finance, marketing, operations, human resources, and R&D in ways consistent with our international corporate and business strategies?” We briefly introduce each common furictional strategy here but leave more detailed discus- sion to later chapters. International financial strategy deals with such issues as the firm's desired cap- {tal structure, investment policies, foreign-exchange holdings, risk reduction tech- niques, debt policies, and working-capital management. Typically. an international oe a financial strategy for the overall firm as well as for each SBU. We cover'International financial strategy more fully in Chapter 18. International marketing strategy concerns the distribution and selling of the firm's products or services. It addresses questions of product mix, advertising, pro- motion, pricing, and distribution, International marketing strategy is the subject of Chapter 16. International operations strategy deals with the creation of the firm's products or services. It guides decisions on such issues as sourcing, plant location, plant lay- out and design, technology, and inventory management. We return to international operations management in Chapter 17. ' iwe Chapter 20. Finally. a firm’s international rection of the firm's f technologies. ‘The next step in formulati markets to enter and which to avoid. now to enter the chosen markets, These t Mand 12. a . CHAPTER REVIEW | ~ ‘Summary International strategic management is a comprehensive and ongoing management planning process aimed at formulating and implement ing strategies that enable a firm to compere efecively in diferent rrkers Although there are many similares in developing domes and incemationa sraegies, international firms have three addtional sources of comperitive advancages unavailable to domestic firms These ae global eficiencis, mulimarkee flexblsy'and worldwide eating Fems participating in internacional business usualy adopt one of fer swategic alternatives the home replication strategy che mukido- reste strategy, che global srateg, or the transnational sate. Each cf these seratepies has advantages and disadvantages in terms ofits Bly o help firms be responsive to local circumstances and to chive the benefis of global efficiencies. 5 ‘Awell-conceived sraregy has four exsential components: 1. Distinctive competence —what the frm does exceptionally wel the aray of markets in which the firm 2. Scope of operation: 1 plans to operate 3, Resource deployment—how the firm wil distribute es resources across diferent areas 4. Synergy—the ‘epree to which diferent operations within the firm can benefc each other ‘mulation isthe process of creating 2 1 process of carrying out these led international stracegy imple- formulation a firm follows thee International strategy for fem’ incernational scracegis. Th States viaaspeciic tactics i call mentation, In incernationalsrate@y ener sep: 1. Develop mission statement ose, and directions. 2. Thoroughly analyze the fi 2: the opporcuitis and threats tha ex «that specifies the fir’ values, pur- mis strengths and weaknesses, 25 well icin its environment. CChopter Review > 303, I R&D strategy 1s concerned with the magnitude and investment in creating new products and developing new ‘ing international strategy 1s to determine which for- ‘The firm's managers must then decide two issues are the subjects of Chapters Sec strategic goals, outline racial goals and plans, and develop a ‘control framework : ‘Mose firs develop strategy at three level: 1. Corporace strategy answers the question “What businesses will “we operate?” Basic corporate strategies are single business, related diversification, and unrelated diversification 2, Business strategy answers the question “How should we com- pete in each market we have chosen to enter!” Fundamental business strategies are cifferentiacion, overall cost leadership, and focus 3. Functional scrategy deals with how the fir intends to manage the functions of finance, marketing, operations, human resources, and REO. Review Questions 1. Whatisinternationdl strategic management? 2. What ae the thee sources of competitive advantage avaiable to incernational businesses that are noc avaiable co domestic firs? 3. Why is it dificult for firms to exploit these three competitive advantages simultaneous? ‘What are the four basic philosophies thac guide strategic man- agement in most MNCS? '5. How do international strategy formulation and international strategy implementation difer? 6, What are the steps in international strategy formulation? Are these likely to vary among firms? 7. Identity the four components ofan intemationalsrategy.* 8. Describe the role and importance of distinctive competence in international strategy formulation, 9. Wha are the three levels of international strategy? Why is it importanc to distinguish among the levels? 10. Identify three common approaches to corporate strategy and distinguish among them. 4