Strategic Management

DCP 2012-14, Session 15

International Strategy and Globalization

Introduction Tradeoffs in International Strategy Types of International Strategy
Multidomestic Global Multiregional Transnational Dyadic Transnational Value Chain Reconfiguration

Modes of Entry and Operation

Export License Strategic Alliance Wholly Owned Subsidiary Acquisition, Greenfield Venture

Introduction
International strategy is a strategy of firms involving transfer of products or resources across domestic boundary National boundary creates discontinuity of environment
differences in availability and rights on the use of public assets property rights on personal and business assets cultures, values, norms, language (with time) barrier to mobility of resources, especially human resources

Rules, regulations, government support, etc. differ between foreign and domestic companies Markets factor and product markets are different

Tradeoff in International Strategy

ADVANTAGES Increases product market size
Economies of scale when domestic market is small or saturated Economies of scope when some capability/knowledge can be leveraged across different markets

Entering less competitive market when return in domestic market is poor

Expanding business to reinvest surplus fund - when that is not
possible in domestic market due to market size or regulatory hurdles

Tradeoff in International Strategy

ADVANTAGES (contd.)

Maintaining account of internationalizing customers e.g. auto

component suppliers to Suzuki; services like law, auditing, advertising

Learning (early phase)

about foreign market nuances of internationalizing

Access to resources e.g. natural resources, labour, technology, etc of

Right quality/skill e.g. coal in Australia, diamond cutter in India, leather technology in Italy low cost e.g. call center operators in emerging economies

Tradeoff in International Strategy

DISADVANTAGES Complexity is high
difficult to manage
cost of coordination may increase

Liability of foreignness
cost of learning
cost of bureaucratic and statutory requirements for foreign firms lack of reputation

Country risk instability of national government, economic regulations,

foreign exchange rates, law and order, terrorism, war, etc.

Institutional and cultural barriers of transfer of core competencies

Types of International Strategy

MULTIDOMESTIC Strategic and operational decisions are decentralized and customized for local requirements
Decentralization Autonomy of divisional managers good local manager required Limited application of learning from one operation to another Difficulty of monitoring and control Difficulty in achieving economies of scope and scale lower profitability
Corporate Headquarter

Customization Easy to expand by catering to local needs suitable for achieving high growth

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Types of International Strategy

GLOBAL Strategic and operational decisions are centralized and standardized for leveraging competencies
Centralization Complex coordination of interdependent SBUs across different countries High scope of application of learning from one operation to another Easy to monitoring and control Easy to achieve economies of scope and scale operation higher profitability
Corporate Headquarter

Standardization Difficult to cater to local needs low growth opportunities

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Types of International Strategy

MULTI REGIONAL Strategic and operational decisions are decentralized and customized for regional requirements, but within a region they are centralized and standardized for leveraging regional competencies

Corporate Headquarter

Region 1

Region 2

Region k

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Types of International Strategy

MULTI REGIONAL
S1

HQ

R1
S2

R2
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Sn

Centralization and standardization in homogenous regions

Achieve economies of scope and scale to a significant extent Learning from one country may apply to another in the same region

Decentralization and customization at the global level

Catering to regional needs which is homogenous High scope of expansion suitable for achieving high growth strategies

Hierarchy increases, span of control decreases

complexity increases cost of coordination Ease of control increases, especially at the regional level

Types of International Strategy

TRANSNATIONAL - DYADIC Trying to marry global efficiency with local responsiveness
Adapting the global competency at different local levels difficult to manage

Global coordination but local flexibility inherently conflicting

requires deep knowledge

High risk but high returns

Corporate Headquarter

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Types of International Strategy

TRANSNATIONAL VALUE CHAIN RECONFIGURATION Different global activities at different locations + local responsiveness
Multi-location global coordination but local flexibility inherently conflicting and complex Adapting the global competency at different local levels extremely difficult to manage
requires deep knowledge

Corporate Headquarter Glob. Op. 1 Glob. Op. 2

Very high risk but very high returns

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Modes of Entry and Operation

EXPORTING Common beginning for many firms low risk

Require marketing and distributing contracts with foreign partners

little control over these activities

little information about customers

Economies of scale, but difficult to differentiate Logistics cost high

useful for geographically close countries services though internet now possible

Tariff barrier

Modes of Entry and Operation

LICENSING Foreign licensee purchases right to manufacturing and sell a firms product in the host country or a set of countries by paying a royalty technology, brand, etc. Low resource commitment and risk, low return Least costly form of international expansion

Effective way to leveraging entrepreneurial rents of innovation

Modes of Entry and Operation

LICENSING (contd.) Little control on manufacturing and marketing, low returns Forgone option of
export due to exclusive rights of licensee changing licensee immediately if performance is poor

Knowledge transfer creates competition after IPR expiry

IPR infringement, reverse engineering, technological leapfrogging

Modes of Entry and Operation

STRATEGIC ALLIANCES (incl. franchising & JV) Sharing of committed resources (complementary), risk and returns Effective way of accessing host country knowledge by contributing core competencies to partner

Scope of learning and developing core competency required to do business in host countries
Relationship between the partners is important for mutual learning and performance Cultural barrier to learning and developing trust

Modes of Entry and Operation

WHOLLY OWNED SUBSIDIARY ACQUISITION Quick access to new market rapid growth Negotiations are complex for cross border acquisitions Complete de-jure control, cultural barriers to de-facto control

High commitment of resources, high risk and returns ?

Expensive and may require debt financing Difficulty in integrating due to differences in culture, incentives, systems, etc. Knowledge erosion exodus of managers after acquisitions

Modes of Entry and Operation

GREENFIELD VENTURE (New wholly owner subsidiary) Complex process Highest level of commitment, risk and returns Complete control Retains knowledge/core competencies within firm better where IPR regime is weak Useful when core competencies can be leveraged without host country related core competences
cultural distance is less
country risk is low previous experience of host country