MGPO 383
International Business Policy
Session 2
Amir Taherizadeh
Strategy & Organization Area
Desautels Faculty of Management
McGill University
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Readings
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Alcacer, J. (2014). Why do Firms Go Abroad? Strategies to
Create Value Globally. HBS
Collis et al. (2006). Introduction to International Strategy.
HBS.
Levitt, T. (1983). The Globalization of Markets. HBS.
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Core Concepts
Convergence Phenomenon
Basis of Competition
The Hedgehog Knows
Scarcity as a Common Trait
The Liability of Being a Foreigner
The Paradox of Being Consistent
The Better-Off Test
Ownership Test
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Globalization of Markets
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Ethnic Markets
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This Photo by Unknown Author is licensed under CC BY-SA-NC
They don’t deny or contradict global homogenization
but confirm it.
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The Phenomenon of Convergence
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The world’s needs and desires have been irrevocably homogenized
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The emergence of global markets for standardized consumer products on a previously
unimagined scale of magnitude.
• Economies of scale in production, marketing, distribution and management
Global commonality
Ancient differences in national tastes or modes of doing business disappear
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The Basis of Competition
• They compete on the basis of appropriate value—the best combinations of
price, quality, reliability, and delivery for products that are globally
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Vindication of the Model T
If a company forces costs and prices down and
pushes quality and reliability up—while maintaining
reasonable concern for suitability—customers will
prefer its world-standardized products.
The theory holds at this stage in the evolution of globalization—no
matter what conventional market research and even common
sense may suggest about different national and regional tastes,
preferences, needs, and institutions.
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Practical Lesson Learned
We cannot ignore shared similarities.
A market segment in one country is seldom unique; it has close
cousins everywhere precisely because technology has
homogenized the globe
Look for identical and similar customer segment across the
world to gain economies of scale.
In this sense you are standardizing.
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If You Are Interested …
Taken figuratively, the words can be made to yield a sense in which they mark one of
the deepest differences which divide writers and thinkers, and, it may be, human
beings in general. For there exists a great chasm between those, on one side, who
relate everything to a single central vision, one system, less or more coherent or
articulate, in terms of which they understand, think and feel – a single, universal,
organising principle in terms of which alone all that they are and say has significance
– and, on the other side, those who pursue many ends, often unrelated and even
contradictory, connected, if at all, only in some de facto way, for some psychological or
physiological cause, related to no moral or aesthetic principle. These last lead lives,
perform acts and entertain ideas that are centrifugal rather than centripetal; their
thought is scattered or diffused, moving on many levels, seizing upon the essence of a
vast variety of experiences and objects for what they are in themselves, without,
consciously or unconsciously, seeking to fit them into, or exclude them from, any one
unchanging, all-embracing, sometimes self-contradictory and incomplete, at times
fanatical, unitary inner vision (p. 436-437).
https://www.ocf.berkeley.edu/~jfkihlstrom/apa01foxes.htm
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Global vs. Multinational Corporation
• The global corporation knows everything about one great thing.
• It knows about the absolute need to be competitive on a worldwide basis as
well as nationally and seeks constantly to drive down prices by standardizing
what it sells and how it operates.
• It treats the world as composed of few standardized markets rather than
many customized markets.
• It actively seeks and vigorously works toward global convergence.
• Its mission is modernity.
• its mode is price competition, even when it sells top-of-the-line, high-end
products.
• It knows about the one great thing all nations and people have in common:
scarcity.
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Important Shared Qualities of Money and Its Application
Experience teaches that money has three special qualities:
scarcity,
difficulty of acquisition, and
transience.
People understandably treat it with respect.
Everyone in the increasingly homogenized world market wants products
and features that everybody else wants.
Different cultural preferences, national tastes and standards, and
business institutions are vestiges of the past.
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Everybody Wants More!
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Do You Agree or Disagree?
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International Strategy
Differences Are Highlighted
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Differences
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Countries are fundamentally different.
– culture,
– religion,
– politics,
– geography,
– or other deep-seated institutional
legacies
• the same industries have
dramatically different profitability in
different countries.
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Differences Create Obstacles
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Countries are fundamentally different.
– culture,
– religion,
– politics,
– geography,
– or other deep-seated institutional
legacies
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the same industries have dramatically
different profitability in different countries.
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Differences Create Opportunities
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New Flavors to Offer the World and Tapp into
Demand Side Scope Economies
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The fact that Argentineans love a caramel
spread called Dulce de Leche that is not
eaten outside Latin America, allowed Haagen
Daaz to develop a new flavor of ice cream
that was successfully introduced around the
world.
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https://www.sweetandsavorybyshinee.com/homemadedulce-de-leche/
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https://commons.wikimedia.org/wiki/File:H%C3%A4agen-Dazs_Map.svg
Global Efficiencies
• Economies of Scale
• Economies of Scope:
efficiencies formed by variety, not
volume
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The “Better off” Test
To justify its presence in more than one country, a firm must create some value from performing an activity in the
new market or country.
Value 1: Demand-Side Scope Economy
• Leveraging something from its home country to the new market,
– Start by exporting the same goods then get more involved through greenfield investment
• Example: More customers to sell to > $$$$
Value 2: Supply-Side Scope Economy
• It’s about supply side of value chain.
• Exploiting or accessing something in the new market that is valuable in its home market.
• Finding low-cost labor to lower expenses > $$$$
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The Ownership Test
To justify why does a firm have to become a multinational? Why not simply license to a firm that is competing in the target
market?
Must identify the market failure that prevents efficient contracting between the parties in different countries
• International contracts are difficult to write:
– The rule of law, a mutual trust in business relationships, and effective contract enforcement mechanisms are
often missing or incomplete, in many countries.
– If a firm is to compete in such countries, it will have to do so itself, or face enormous risks, such as the
expropriation of its assets or the lack of effective recourse against partners that renege on contractual terms.
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Whenever the asset is information whose value is transferred when it is revealed, contracts can be impossible to
write.
– Microsoft is loath to license its code to a Chinese firm to convert to Mandarin and sell in China.
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Why Do Firms Fail to Create Value in New National Markets?
In-Class Discussion
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The Liability of Being a Foreigner
• The vulnerability of organizations that venture outside of familiar territory.
– New Types of Costs Due to
• Discriminatory regulations that favor local competitors
• Caps on foreign ownership
• Fees for new patents and trademarks
• Higher costs to be present in different geographical locations
• More tech pieces to deploy
• More and longer hours of work
• Lack of experience in negotiation with new suppliers > losses
• Lack of qualified suppliers > more investment needed.
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The Paradox of Being Consistent
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This arises from what an expanding firm knows well.
– How to create and capture value in its home market.
– It reflects the fact that the firms with the greatest advantage in their home markets are also
the firms most likely to fail when expanding abroad.
– Monkeying and repeating the same business model and business strategy may NOT work!
• Case of McDonald in Malaysia
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Then How can Firms Create and Capture Value in New
National Markets?
In-Class Discussion
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Deployment Strategies
Replicate a successful business model across counties
• Sources of competitive advantage stays the same
• We just aggregate demand across markets and increase the volume.
• Relationship between cost and customer willingness-to-pay remains
constant.
• This is like a business-unit growth strategy
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Considerations
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Must target homogenous segment of customers.
Must focus on similarities rather than differences
Some modifications still may be needed.
Keep costs similar across markets
Tap into comparative advantages of a host country (low
wages, natural resources)
Avoid inflated transportation costs
Make sure supply chain is not interrupted.
Meet the demands of local legislation
Guarantee standardization of products and services
Example: IKEA
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Development Strategy
Takes advantage of differences between locations
Enjoys location-specific unique endowments
We diversify geographically to obtain new capabilities
It is the process of arbitraging knowledge across
countries.
• Low-cost labor or cheap raw materials vs. knowledge
• If you gain that knowledge, you create a much more
sustainable competitive advantage.
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Deepening Strategies
To deepen a firm’s source of competitive advantage
To widen the competitive advantage
No change in primary business strategy
How?
• Offshoring activities to low-cost locations.
• Launching regional products
Examples:
• KFC with some taste adjustments for Chinese market
• Pizza Hut – Adding shrimps & squid as pizza topping
Key Difference?
• Organizations try to take advantage of a higher willingness-topay in the host market.
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Case Study
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Discussion Question
• What has driven Netflix’ success internationally?
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If Time Permits…
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In-Class Reading – Discussion (myCourses)
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In-Class Reading – Discussion (myCourses)
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End of Class
This Photo by Unknown Author is licensed under CC BY-SA-NC
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Economies of Scope
• Economies of scope are “efficiencies formed by variety, not
volume". In economics, "economies" is synonymous with cost
savings and "scope" is synonymous with broadening
production/services through diversified products.
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