AB3602

Strategic Management

Week 7 - International Strategy

Caleb Tse
Strategy, IB and Entrepreneurship Division
Nanyang Business School
Nanyang Technological University

AY2023-24 S2
 Agenda

Explain International Strategy

▪ Categorise different types of international strategy (geographic
diversification)
▪ Explain the motives for geographic diversification
▪ Identify the sources of national advantage
▪ Identify different entry modes
Strategic Management Framework
UBER
When in Rome…?
Corruption Perception Index

https://www.transparency.org/en/cpi/2023
Economic Freedom Index

http://www.heritage.org/index/
 International Strategy and
Other Concepts
Globalization

‘The process of closer integration and exchange between different

countries and people worldwide’

Multinational Enterprise/Corporation (MNE/MNC)

‘A company that deploys resources and capabilities in the procurement,

production, and distribution of goods and services in at least two
countries’

International Strategy

‘Part of a firm’s corporate strategy to gain and sustain competitive

advantage when competing against other foreign and domestic
companies around the world’
 International Strategy &
Corporate Strategy
Corporate Strategy

A corporate-level strategy specifies actions a firm takes to gain a

competitive advantage by selecting and managing a group of different
businesses competing in different product markets

What range of products

and services to offer

Where to compete
 Importance of MNEs

• According to McKinsey in 2010, MNEs account for less than

1% of the number of total US companies, but they:
• Account for 11% of private-sector employment growth since 1990
• Employ 19% of the work force
• Pay 25% of the wages
• Provide for 31% of the US GDP
• Make up 74% of private-sector private R&D spending
 Importance of MNEs

• MNEs engage in FDI when they invest in value chain activities

abroad
Important and Timely Topic

In 2021, at
least 30% of
trade in Asia
went through
Singapore
Geopolitics & Trade Patterns

https://www.mckinsey.com/mgi/our-research/geopolitics-
and-the-geometry-of-global-trade
Reasons and Outcomes
 Stages of Going Abroad

• Go abroad? Why?
• Incentives & benefits: Advantages
• Disadvantages & Challenges
• Environmental trend & risks

• Where to go?
• Which Region? Which country?

• How?
• Business-level strategy
• Corporate-level strategy: Integration-Responsiveness framework
• Entry mode
 Going Abroad? Advantages

• Gain access to a larger market

• Emerging markets & product life cycle
• MNE has opportunities with larger consumer base
• Firms in smaller home markets (Nestlé, Samsung)
• Lower costs: Economies of scale & location advantage
• Economies of scale: Global scale
• Labor, natural resources, technology, logistics
• Securing critical supply from local sources (Apple outsources iPhone production
to Asian countries)
• Develop new competencies
• Exposure to new knowledge − Cisco in Bangalore & Unilever in China
• Polycentric innovation strategies − GE develops devices in emerging markets
• Faster and higher potential to recoup investments in R&D
Gain Access to Larger Markets:
Wine Industry Before Trade War

The US is the 4th largest

producer of wine in the
World.

1. Italy
2. France
3. Spain
4. US

Wine consumption shifting

to developing/emerging
economies (e.g. India,
China)

https://www.youtube.com/watch?v=xyOT0mSVS0Q
Developing New Competences

GE’s Reverse Innovation →

https://youtu.be/SQIHEovCNJY?t=37s
 Going Abroad? Disadvantages

• Liability of foreignness
• Additional cost (relative to indigenous companies) of doing business
in an unfamiliar cultural, administrative, and economic environment
• Loss of reputation
• Globalizing a supply chain can have unintended effects
• Low wages, long hours, poor working and living conditions
• This challenge directly concerns the MNEs’ corporate social
responsibility (CSR), which is part of the broader ESG concerns
• Loss of intellectual property
• Large-scale infringements in tech, software, movie, music, etc.
• Uncontainable Costs: Other risks (discussed later)
• Complexity due to size, coordination and so on
• Political & economic risks
Liability of Foreignness
Liability of Foreignness: Example
 Loss of Reputation:
MNEs’ & Stakeholders
Loss of Intellectual Property

titanium dioxide
Risks in an International Environment

Political Risks Economic Risks

❖ Instability in national
governments
❖ War, both civil and
international
❖ Potential nationalization of a
firm’s resources
❖ Geopolitical tensions between
countries
❖ Differences and fluctuations in
the value of different
currencies
❖ Differences in prevailing wage
rates
❖ Difficulties in enforcing
property rights
❖ Unemployment
Geopolitical Tensions
 Stages of Going Abroad

• Go abroad? Why?
• Incentives & benefits: Advantages
• Disadvantages & Challenges
• Environmental trend & risks

• Where to go?
• Which Region? Which country?

• How?
• Business-level strategy
• Corporate-level strategy: Integration-Responsiveness framework
• Entry mode
 Going Global: Where?

GDP per capita, per capita

Absolute Metrics consumption of a product.

Differences between home

country and (potential) Relative Distance
host country.

Decision framework based

CAGE Framework on relative distances.
 The CAGE Distance Framework
(Ghemawat, 2001)

A decision framework based on the relative distance between

home and a foreign target country along four dimensions:
• Cultural distance
• Culture: “collective programming of the mind”
• Cultural Distance: cultural disparity between home and target
countries
• Administrative and political distance
• Factors such as shared monetary or political associations, political
hostilities between countries, development of legal and financial
institutions
• Geographic distance
• Share borders?
• Economic distance
• Different wealth and per capita income of consumers
 Cultural Distance

• Geert Hofstede, a Dutch researcher of culture, has defined culture as…

"the collective
programming of the mind
which distinguishes the
members of one group or
category of people from
another."

Lexical Distance
Cultural Distance
The CAGE Distance Framework

• Countries with closer

relative CAGE distances
= high trade volume

• Framework can be used

for deciding where to
geographically expand
while minimizing liability
of foreignness
 Stages of Going Abroad

• Go abroad? Why?
• Incentives & benefits: Advantages
• Disadvantages & Challenges
• Environmental trend & risks

• Where to go?
• Which Region? Which country?

• How?
• Business-level strategy
• Corporate-level strategy: Integration-Responsiveness framework
• Entry modes
Business-level International Strategies
Importance of national competitive advantage (Porter’s Diamond Model):
❖ Conditions in a firm’s domestic market affect the degree to which firms can build capabilities
that can be leveraged when expanding to foreign markets

❖ Economy
❖ Skilled Labour
❖ Tech Innovation
❖ Infrastructure
❖ Capital availability
 National Competitive Advantage

Example: Fierce
environment for
German car
companies helped
prepare them for
global competition

❖ Economy
❖ Skilled Labour
❖ Tech Innovation
❖ Infrastructure
❖ Capital availability
Corporate-level International Strategies

❖ Global – MNC views the world

as a single market. Operations
are controlled centrally from
the corporate office.
❖ Multidomestic – Several
subsidiaries operating as stand-
alone business units in multiple
countries.
❖ Transnational – Specialised
facilities permit local
responsiveness. Complex
coordination mechanisms
provide global integration.
International Corporate-Level Strategy:
Integration-Responsiveness Framework

Rothaermel, 2017
Three Types of International Strategies
 International Strategy

• An international strategy is essentially a strategy in which

a company sells the same products or services in both
domestic and foreign markets
• An international strategy:
• Is the oldest type of international strategy
• Leveraging home-based core competencies
• Selling the same products or services in both domestic and
foreign markets
• Examples: Many companies doing any business abroad (e.g.,
Rolex, Ferrari, and so on)
 Multidomestic Strategy

• A multi domestic strategy is an international strategy in which strategic and

operating decisions are decentralized to the strategic business units in individual
countries or regions for allowing each unit the opportunity to tailor products to
the local market
• A multi domestic strategy:
• Maximize local responsiveness: Decentralization and different business level
strategy
• Consumers will perceive them to be domestic companies
• Results in less knowledge sharing for the corporation as a whole
• Does not allow economies of scale to develop and thus can be more costly
• Example: Nestlé’s customized product offerings
 Global Strategy

• A global strategy is an international strategy in which a firm’s home office/HQ

determines the strategies that business units are to use in each country or
region
• A firm using a global strategy:
• Seeks to develop economies of scale: Standardization of product
• Assumes customers throughout the world have similar needs
• A global strategy:
• Maximize global integration: Cost reduction
• Offers greater opportunities to take innovations developed at the
corporate level, or in one market, and apply them to other markets
• Example: Lenovo’s R&D in China and USA; production in Mexico, India,
and China
 Transnational Strategy

• A transnational strategy is an international strategy through

which the firm seeks to achieve both global efficiency and
local responsiveness
• A transnational strategy:
• Integrates characteristics of both multi domestic (high
responsiveness) and global strategies (lowest cost position
attainable)
• Requires “flexible coordination”—“Think globally but act locally”
• Is difficult to use because of its conflicting goals
• Can produce higher performance than multi domestic or global
strategies if implemented effectively
• Example: Unilever - CEO: ‘The very nature of our products requires
proximity to local markets and the need to benefit from everybody’s
creativity and experience makes a sophisticated means of
transferring information across our organization highly desirable’
 IKEA’s International Strategy?

https://finance.yahoo.com/video/ikeas-secret-global-success-205550715.html

• What is IKEA’s global strategy position according to Integration-

Responsiveness Framework?
• IKEA is currently expanding rapidly in ASEAN countries. What
recommendations will you give IKEA?
 The Business Level Strategy &
Corporate-Level International Strategy

• A cost leader:
• More likely to achieve success with a global-standardization strategy
• A differentiator:
• More likely to achieve success with an international or multi-domestic strategy
• An integrated cost-leadership and differentiation:
• More likely to achieve success with a transnational strategy
• Combines high pressures for cost reductions with high pressures for local
responsiveness
• Is difficult to implement
 Strategy Characteristics
• Often the first step in internationalizing.
International
• Used by MNEs with relatively large domestic
markets or strong exporters (e.g., MNEs from the
United States, Germany, Japan, South Korea).
• Well-suited for high-end products with high value-
to-weight ratios such as machine tools and luxury
goods that can be shipped across the globe.
• Products and services tend to have strong brands.
• Main business-level strategy tends to be
differentiation because exporting, licensing, and
franchising add additional costs.
• Used by MNEs to compete in host countries with
Multidomestic
large and/or lucrative but idiosyncratic domestic
markets (e.g., Germany, Japan, Saudi Arabia).
• Often used in consumer products and food
industries.
• Main business-level strategy is differentiation.
• MNE wants to be perceived as local company.
• Used by MNEs that are offering standardized
Global-
products and services (e.g., computer hardware or
Standardization business process outsourcing).
• Main business-level strategy is cost leadership.
• Used by MNEs that pursue a blue ocean strategy at • Attempts to combine benefits of
Transnational
the business level by simultaneously focusing on
product differentiation and low cost.
• Mantra: Think globally, act locally.
• Economies of scale, location,
Benefits Risks
• Leveraging core competencies. • No or limited local responsiveness.
• Economies of scale. • Highly affected by exchange-rate
• Low-cost implementation through: fluctuations.
➢ Exporting or licensing (for products) • IP embedded in product or service
➢ Franchising (for services) could be expropriated.
➢ Licensing (for trademarks)
• Highest-possible local responsiveness. • Duplication of key business functions
• Increased differentiation. in multiple countries leads to high
• Reduced exchange-rate exposure. cost of implementation.
• Little or no economies of scale.
• Little or no learning across different
regions.
• Higher risk of IP expropriation.
• Location economies: global division • No local responsiveness.
of labor based on wherever best-of- • Little or no product differentiation.
class capabilities reside at lowest cost. • Some exchange-rate exposure.
• Economies of scale and • “Race to the bottom” as wages
standardization. increase.
• Some risk of IP expropriation.
• Global matrix structure is costly and
localization and standardization difficult to implement, leading to
strategies simultaneously by creating high failure rate.
a global matrix structure. • Some exchange-rate exposure.
• Higher risk of IP expropriation.
experience and learning.
 How Do MNEs Enter Foreign Markets?

Remaining decision: How - Entry Mode

• Low investments and low level of control:
• Exporting
• Licensing
• Franchising
• High investments and high level of control:
• Joint venture
• Acquisition
• New Wholly Owned Subsidiary: Greenfield operations
Entry Modes
High Commitment of Resources Low

New Wholly Owned

Acquisition Strategic Alliance Licensing Exporting
Subsidiary
Description Description Description Description Description
Internal development Buying over another Partnership with Another firm Home-based
/ organic growth firm to gain entry another firm to purchases the right production coupled
combine expertise to manufacture and with a foreign-
Characteristics Characteristics sell controlled forward
• Complex • Quick access to new Characteristics distribution channel
• Often costly markets • Shared costs Characteristics
• Time consuming • High costs • Shared resources • Low cost Characteristics
• High risk • Complex • Shared risks • Low risk • High cost
• Maximum control negotiations • Problems of • Little control • Low control
• Potential above- • Problems of integration (e.g., • Low returns
average returns merging with two corporate
domestic cultures)
operations

An Understanding of the Foreign Market, Together with a Firm’s Resources and Capabilities
Drives Entry Mode Choice
 Entry Modes
Advantages Disadvantages
New Wholly • Maximum control • Complex
Owned Subsidiary • Potential above-average returns • Often costly
• Time consuming
• High risk
Acquisition • Quick access to new markets • High costs
• Complex negotiations
• Problems of merging with domestic
operations
Strategic Alliance • Shared costs • Problems of integration (e.g., two corporate
• Shared resources cultures)
• Shared risks
Licensing • Low cost • Little control
• Low risk • Low returns
Exporting • Scale economies • High transportation cost
• Low control
Opportunities and Outcomes of
International Strategy: A summary
 New Environmental Trends & Risks

• Deglobalization & Decoupling

• COVID-19, Russia’s war with Ukraine and climate change, governments and global
companies are seeking security and resilience over the benefits of global value chains
• Trade wars (US vs China, etc.)
• Increasing Regionalization
• Some firms choose to concentrate their international strategies on regions (e.g., the
European Union, Asia, Latin America) rather than on individual country markets

• Implications: How to conquer Liability of Foreignness?

• Adjusting international strategy in response to changing trends: External analysis
• Leveraging core competencies in international strategy to adapt to changes: Internal
analysis
• Contain the political and economic risks when forming strategy (look at CAGE framework
model)
See you next week!