Strategic Management

PMIR 2010-12, Course no: STMP10-3, Session 10

Corporate Strategy – Internationalization
• Tradeoffs in international Strategy • Types of International Strategy • Modes of internationalization

Tradeoff in International Strategy International strategy is a strategy of firms involving transfer of products or resources across domestic boundary • National boundary creates discontinuity of institutional environment for business – differences in availability and rights on the use of public assets – property rights on personal and business assets – cultures. government support. differ between foreign and domestic companies • The above factors are in addition to factors related to geographic location . values. language (with time) – barrier to mobility of resources. regulations. especially human resources • Rules. norms. etc.

Tradeoff in International Strategy ADVANTAGES • Increases product market size – Economies of scale and scope.when that is not possible in domestic market due to market size or regulatory hurdles . especially important for short life cycle of innovation • Entering less competitive market when return in domestic market is poor • Expanding business to reinvest surplus fund . especially important in small domestic market – Magnifies economic rent by leveraging innovation to skim market.

) • Learning – about foreign market – nuances of internationalizing • Access to resources – Availability e. natural resources – low cost e. technology.Tradeoff in International Strategy ADVANTAGES (contd. labor .g.g.

economic regulations. etc. terrorism. foreign exchange rates.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. • Institutional and cultural barriers of transfer of core competencies . law and order. war.

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 Div 1 Div 2 Div 3 Div 4 Div 5 Div 6 Div n .

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 Div 1 Div 2 Div 3 Div 4 Div 5 Div 6 Div n .

especially at the regional level Div n . span of control decreases –Div 1 complexity 2 Div increases3 Div cost of coordination Div 6 Div 4 Div 5 – Ease of control increases. but within a region they are centralized and standardized for leveraging regional competencies • Centralization and standardization in homogenous regions – Achieve economies of scope and scale to a significant extent Corporate – Learning from one country may apply to another in the same region Headquarter • Decentralization and customization at the global level – Catering to regional needs which is homogenous Region 1 Region k – High scope of expansion – suitableRegion 2 for achieving high growth strategies • Hierarchy increases.Types of International Strategy MULTI REGIONAL Strategic and operational decisions are decentralized and customized for regional requirements.

Types of International Strategy MULTI REGIONAL D1 R1 D2 R2 D3 HQ Rk Dn • 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. especially at the regional level . span of control decreases – complexity increases cost of coordination – Ease of control increases.

Types of International Strategy TRANSNATIONAL Trying to marry global efficiency with local responsiveness Adapting the global competency at different local levels • extremely difficult to manage Global coordination but local flexibility – inherently conflicting • requires deep knowledge Corporate Headquarter High risk but extremely high returns Div 1 Div 2 Div n .

Modes of International Strategy Ownership/Governance Partner Licensing Joint Strategic Alliance Acquisition Export Own Domestic New subsidiary Foreign Location of operation .

Modes of International Strategy EXPORTING • Common beginning for many firms Partner Joint Own Dom For • Require marketing and distributing contracts with foreign partners – little control over these activities – little information about customers • Difficult to differentiate • Logistics cost high. services though internet now possible • Tariff barrier may be a hurdle • Useful for geographically close countries .

low return • Least costly form of international expansion • Effective way to leveraging entrepreneur rents of innovation .Modes of International Strategy LICENSING Partner Joint Own Dom For Foreign licensee purchases right to manufacturing and sell a firm’s product in the host country or a set of countries by paying a royalty • Low resource commitment. low risk.

• Strategic decision of licensing may reduce volume of sales .) • Little control on manufacturing and marketing Partner Joint Own Dom For • Knowledge transfer may create competition after IPR expiry • IPR infringement • Long term contract reduces option of changing modes.Modes of International Strategy LICENSING (contd.

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 to mutual learning and performance • Cultural barrier to learning and developing trust • Difficulty in maintaining trust .Modes of International Strategy Partner STRATEGIC ALLIANCES Joint Own Dom For • Sharing of committed resources (complementary).

incentives. etc. high risk and returns (?) • Expensive and may require debt financing • Negotiations are complex for cross border acquisitions • Difficulty in integrating due to differences in culture. • Knowledge erosion – exodus of managers after acquisitions . cultural barriers to de-facto control • High commitment of resources. systems.Modes of International Strategy Partner ACQUISITION • Quick access to new market – rapid growth Joint Own Dom For • Complete de-jure control.

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 Partner Joint Own Dom For .Modes of International Strategy GREENFIELD VENTURE (New wholly owner subsidiary) • Complex process • Highest level of commitment.

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