International Business (MOD001055)
Chapter 7: International Strategic Issues
Zubair Hassan (2013) International Strategic Issues. International Business
7.1.
Introduction
This chapter covers one major components of learning objectives/outcomes that are
likely to examine via coursework or examination. This chapter will enable students to
build their knowledge on strategic issues faced by international business, such as the
strategic analysis, evaluating strategic options, and operations management etc.
This chapter will cover the following topics:
Business strategy – ideas and concepts
Choice of strategy
Corporate strategy in a global economy
International business and the value chain
International business strategies
International business strategies and political perspectives
Institutional strategies and international business
Techniques for strategic analysis
International operations management and logistical strategies
7.2.
Business Strategy –ideas and concept
Some of the techniques used in strategic analysis include SWOT, PESTLE and
industry analysis.
7.2.1. SWOT and PESTLE analysis
It is believed that organisation must achieve ‘fit’ between internal and
external environment by formulating an appropriate strategy. This means
organisational much achieves “fit” between its capabilities, competences and
resources (strengths/weakness) and external situation (opportunities/threats)
(Wall et al, 2010).
Identifying strengths/weakness and opportunities/threats is known as SWOT
analysis. In order to use SWOT analysis, firms must analyse the internal and
external environment. External environment can be analysed using PESTLE
framework (covered in chapter 4-6)
External analysis involves identifying the influences that might come from
political, economical, social, technological, legal and ecological environment
of business. This analysis will enable the organisation to identify
opportunities and threats from external environment.
Similarly, Porter (1980s) proposed an alternative framework that can be used
for further analysis of the external environment to identify opportunities and
threats from industry itself.
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7.2.2. Porter’s five forces/Industry Analysis
Porter’s five forces framework includes bargaining power of
customer/purchasers, suppliers, threats of substitutes, threats of new entrants,
and threats from existing competitors (rivalry).
Nortan and Hughes (2009, p. 73-76) provides a useful discussion of Porter’s
five forces.
New Entrants
1. Through the impact of actual entry. A new entrant will reduce profits in
the industry by:
(a)Reducing prices either as an entry strategy or as a consequence of
increased industry capacity. There is also the danger that a price war
may break out as rivals try to recover share or push out the new rival.
(b) Increasing costs of participation of incumbents through forcing
product quality improvements, greater promotion or enhanced
distribution.
(c) Reducing economies of scale available to incumbents by forcing them
to produce at lower volumes due to loss of market share.
2. By forcing firms to follow pre-emptive strategies to stop them from
entering. In view of the above danger, firms may take action to forestall
entry of new rivals by:
(a)Charging an entry-deterring price which is so low as to make the
market unattractive to new, and possibly higher cost, rivals.
(b) Maintenance of high capital barriers through deliberate investment in
product or production technologies or in continuous promotion of
research and development. New rivals would be unlikely to gain
sufficient scale to recover these investments.
Porter suggests that the strength of the threat of market entry depends on the
availability of barriers to entry against the entrant. These are:
1. Economies of scale. Incumbent firms will enjoy lower unit costs due to
spreading their fixed costs across a larger output and through the ability to
drive better bargains with their suppliers. This gives them the ability to
charge prices below the unit costs of new entrants and hence render them
unprofitable.
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2. Product differentiation. If established firms have strong brands, unique
product features or established good relations with customers, it will be
hard for an entrant to rival these by a price reduction, and expensive and
time consuming to emulate them.
3. Capital requirements. If large financial resources will be needed by a rival
to enter, the effect will be to exclude many potential entrants. Porter
argues this will be particularly effective if the investment is needed in
dedicated capital assets with no alternative use or in promotion. Few
would-be entrants will want to take the risk.
4.
Switching costs. These are one-off costs for a customer to switch to the
new rival. If they are high enough, they will eliminate any price advantage
the new rival may have. Examples include connection charges,
termination costs, special service equipment and operator training costs.
5. Access to distribution channels. If the established firms are vertically
integrated, this leaves the entrant needing either to bear the costs of setting
up its own distribution or depending on its rivals for its sales. Both will
reduce potential profits.
6. Cost advantages independent of scale. These make the established fi rm to
have lower costs. Examples are unique low-cost technologies, cheap
resources, or experience effects (a fall in cost gained from having longer
experience in the industry, usually influenced by cumulative production
volume).
7. Government policy. Some national governments jealously guard their
domestic industries by forbidding imports or using legal and bureaucratic
techniques to stall import competition. Also, some governments prefer to
allow existing firms to grow large to give them the economies of scale that
they will need to compete in a global market.
Pressure from substitute products
Substitute products are ones that satisfy the same need despite being
technically dissimilar. Examples include aeroplanes and trains, e-mail and
postal services, and soft drinks and ice cream.
Substitutes affect industry profitability in several ways:
1. They put an upper limit on the prices the industry can charge without
experiencing large-scale loss of sales to the substitute.
2. They can force expensive product or service improvements on the
industry.
3. Ultimately, they can render the industry technologically obsolete.
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The power of substitutes depends on:
1. Relative price/performance. A coach journey is cheaper than a rail journey
which is in turn cheaper than a flight. However, a coach is slower than a
train. The trade-off is far less clear between e-mail and postal services for
simple messages, since e-mail is both quicker and cheaper!
2. The extent of switching costs
Bargaining Power of buyer
Buyers use their power to trade around the industry participants to gain lower
prices and/ or improvements to product or service quality. This will impact on
profitability. Their power will be greater if:
1. Buyer power is concentrated in a few hands. This denies the industry any
alternative markets to sell to if the prices offered by buyers are low.
2. Products are undifferentiated. This enables the buyer to focus on price as
the important buying criterion.
3. The buyer earns low profits. In this situation, they will try to extract low
prices for their inputs. This effect is enhanced if the industry’s supplies
constitute a large proportion of the buyer’s costs.
4.
Buyers are aware of alternative producer prices. This enables them to
trade around the market. Improvements in information technology have
significantly increased this, by enabling a reduction in ‘search costs’.
5. Low switching costs. In this case, the switching costs might include the
need to change the final product specification to accept a different input or
the adoption of a new ordering and payments system.
Bargaining Power of Suppliers
The main power of suppliers is to raise their prices to the industry and hence
take over some of its profits for themselves. Power will be increased by:
1. Supply industry dominated by a few firms. Provided that the buying
industry does not have similar monopolistic firms, the supplier will be able
to raise prices. For example, the ‘Wintel’ domination in personal
computers developed because IBM did not insist on exclusive access to
Microsoft’s operating systems or Intel’s processors.
2. The suppliers have proprietary product differences. These unique features
of images make it impossible for the industry to buy elsewhere. For
example, branded food suppliers rely on this to offset the buyer power of
the large grocery chains.
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Rivalry among existing competitors
Some industries feature cut-throat competition, while others are more relaxed.
The latter have the higher profitability. Porter suggests that the factors
determining competition are:
1. Numerous rivals, such that any individual firm may suddenly reduce price
and trigger a price war. If there are fewer firms of similar size, they will
tend to, formally or informally, recognise that it is not in their interest to
cut prices.
2. Low industry growth rate. Where growth is slow, the participants will be
forced to compete against one another to increase their sales volumes.
3. High fixed or storage costs. The former, sometimes called operating
gearing, put pressure on firms to increase volumes to take up capacity.
Because variable costs are low, this is usually accomplished by cutting
prices. This is common in transportation and telecommunications.
Similarly, high storage costs are often the cause of a sudden dumping of
stocks on to the market.
4. Low differentiation or switching costs mean that price competition will
gain customers and so be commonplace.
5. High strategic stakes. This is where a lot depends on being successful in
the market. Often this is because the firms are using the market as a
springboard into other lines of business. For example, banks may fight for
a share of the current (chequing) account or mortgage markets in order to
provide a customer base for their insurance and investment products.
6. High exit barriers. These are economic or strategic factors making exit
from unprofitable industries expensive. They can include the costs of
redundancies and cancelled leases and contracts, the existence of
dedicated assets with no other value or the stigma of failure.
7.2.3. Portfolio analysis
The portfolio matrix analyses the range of products possessed by an
organisation (its portfolio) against two criteria: relative market share and
market growth. It is sometimes called the growth–share matrix
Boston Consultancy Group’s portfolio matrix provides a useful framework
for examining an organisation’s own competitive position. The
organisation’s portfolio of products is subjected to a detail analysis according
to market share, growth rate and cash follow.
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The diagram below shows the BCG matrix that is being used by many
organisations to make decision which product to invest or not
Figure 7.1: BCG matrix
Source: Perry (2009, p.172).
Lynch (2008, p.132) defined the following elements as follows
Stars: The upper-left quadrant contains the stars: products with high relative
market shares operating in high-growth markets. The growth rate will mean
that they will need heavy investment and will therefore be cash users.
However, because they have high market shares, it is assumed that they will
have economies of scale and be able to generate large amounts of cash.
Overall, it is therefore asserted that they will be cash neutral an assumption
not necessarily supported in practice and not yet fully tested.
Cash cows: The lower-left quadrant shows the cash cows: product areas that
have high relative market shares but exist in low-growth markets. The
business is mature and it is assumed that lower levels of investment will be
required. On this basis, it is therefore likely that they will be able to generate
both cash and profits. Such profits could then be transferred to support the
stars. However, there is a real strategic danger here that cash cows become
under-supported and begin to lose their market share
Problem children: The upper-right quadrant contains the problem children:
products with low relative market shares in high-growth markets. Such
products have not yet obtained dominant positions in rapidly growing
markets or, possibly, their market shares have become less dominant as
competition has become more aggressive. The market growth means that it is
likely that considerable investment will still be required and the low market
share will mean that such products will have difficulty generating substantial
cash. Hence, on this basis, these products are likely to be cash users.
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Dogs: The lower-right quadrant contains the dogs: products that have low
relative market shares in low-growth businesses. It is assumed that the
products will need low investment but that they are unlikely to be major
profit earners. Hence, these two elements should balance each other and they
should be cash neutral overall. In practice, they may actually absorb cash
because of the investment required to hold their position. They are often
regarded as unattractive for the long term and recommended for disposal.
7.3.
Choice of Strategy
There have been several theoretical models of strategic choice, each of which seeks to
identify the main strategic options to the business in pursuit of its objectives.
There are mainly three approaches to strategic choices (options):
Product –market strategies-which determine where the organisation competes and
the direction of growth
Competitive strategies-which influence the
organisation will pursue for competitive advantage
actions/reactions
patterns
an
Institutional strategies- which involve a variety of formal and informal relationships
with other firms usually directed towards the method of growth (acquisition vs
organic)
7.3.1. Product-Market strategies
Figure 7.2: Ansoff Matrix
Source: Botten (2009, p.283)
As shown in the figure 7.2, product-market approach provides four strategic
choices that firms can adopt. These strategies are discussed below as
illustrated by Botten (2009, p.282-284)
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Market penetration strategy: Firm increases its sales in its present line of
business. This can be accomplished by:
●
Price reductions;
●
Increases in promotional and distribution support;
●
Acquisition of a rival in the same market;
●
Modest product refinements.
Product development strategy: This involves extending the product range
available to the firm’s existing markets. These products may be obtained by:
●
Investment in the research and development of additional products;
●
Acquisition of rights to produce someone else’s product;
●
Buying-in the product and ‘ badging ’ it;
● Joint development with owners of another product who need access to
the firm’s distribution channels or brands.
Market development strategy: Here the firm develops through finding
another group of buyers for its products. Examples include:
● Different customer segments, for example, introducing younger
people to goods previously purchased mainly by adults;
● Industrial buyers for a good that was previously sold only to households;
● New areas or regions of the country;
● Foreign markets.
Diversification strategy: Here the firm is becoming involved in an entirely
new industry, or a different stage in the value chain of its present industry.
Ansoff distinguishes several forms of diversification:
1. Related diversification. Here there is some relationship, and therefore
potential synergy, between the fi rm’s existing business and the new
product/market space:
(a) Concentric diversification means that there is a technological
similarity between the industries which means that the firm is
able to leverage its technical know-how to gain some
advantage. For example, a company that manufactures
industrial adhesives might decide to diversify into adhesives to
be sold via retailers. The technology would be the same but the
marketing effort would need to change.
(b) Vertical integration means that the firm is moving along the
value system of its existing industry towards its customers
(forward vertical integration) or towards its suppliers
(backward vertical integration). The benefits of this are
assumed to be:
●
taking over the profit margin presently enjoyed by
suppliers or distributors;
●
Securing a demand for the product or a supply of
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●
●
key inputs;
Better synchronisation of the value system;
Reduction in buyer or supplier power.
However, it also means increasing the firm’s investment in the
industry and hence its fixed cost base. It should also be noted that
Vertical integration may well take the company into industries where
the operating characteristics are significantly different. For instance,
the oil industry can be considered, simplistically, to have three stages
in the industry value chain. Those stages can be described as
exploration and production, refining and, finally, marketing of
petroleum and other products. The business model and the critical
success factors for each of these industries are quite different and will
require different types of management to be successful. They are
sufficiently different to be described as unrelated diversification.
Shell is a typical vertically integrated company
2. Unrelated diversification. This is otherwise termed conglomerate
growth because the resulting corporation is a conglomerate,
that is, a collection of businesses without any relationship to
one another. The strategic justifications advanced for this
strategy are to:
●
take advantage of poorly managed companies which can
then be turned around and either run at a gain to the
shareholders or sold on at a profit;
●
spread the risks of the firm across a wide range of
industries;
●
escape a mature or declining industry by using the
positive cash flows from it to develop into new and
more profitable areas of business.
A typical conglomerate company would be Yamaha who
manufacture amongst other products pianos, musical organs
and motorcycles.
7.3.2. Competitive strategies
Porter (1980) introduced three generic strategies that whereby that relies on
three host potential factors
 Architecture: ( a more effective set of contractual relationships with
suppliers/customers)
 Incumbency advantages (reputation, branding, scale of economies,
etc.)
 Innovation (product or process, protected by patents, licences etc.)
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 Operational efficiencies (quality circles, JIT techniques, re-engineering
etc).
The three generic strategies are given the figure 7.3 below
These three strategies were:
Overall cost strategies
Differentiation strategies
Focus strategies
Cost Strategy
Achieving the industry’s ‘ lowest delivered cost to customer ’ provides a
number of competitive advantages to the firm:
 reduces the impact of competitive rivalry by allowing the firm to make
superior profit margins at the prevailing level of industry prices – the
firm can also become the price leader because no other firm is able to
undercut it;
 reduces the impact of buyer and supplier power by giving the firm a
unique cushion of profits against cost increases and price cuts –
indeed, buyer and supplier power will be the forces which drive
rivals from the industry;
 low costs provide a barrier to entry against potential new entrants and
hence safeguard long-term profits.
Porter recognises that cost reduction strategies are widespread due to
management’s adherence to the experience curve concept. He criticises this
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by pointing out that it only considers production costs, and recommends
analysis of the entire value chain to achieve substantial cost savings.
Differentiation strategy
This is a premium perceived value in the eyes of the buyer. This will normally
result in a number of competitive advantages:

premium prices can be charged for the product to give better
margins in the short run, while in the long run exempting the fi rm
from the price wars of the mature stage;

differentiation is a barrier to entry;

buyer power from retailers and manufacturers may be reduced if
the differentiation of the product makes it an essential element in
attracting their customers;

the cushion of better profits reduces the impact of buyer and
supplier power.
Focus Strategy
This strategy involves selecting a particular buyer group, segment of the
product line, or geographic market’ as the basis for competition rather than the
whole industry. This strategy is ‘built around serving a particular target very
well’ in order to achieve better results. Within the targeted segement the
business may attempt to compete on a low cost or differentiation basis (Wall,
et al, 2010, p.245).
Figure 7.4: Example of Competitive Strategies
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7.3.3. Institutional Strategies
The focus here is on possible relationships with other firms and
organisations. An initial decision for firm seeking growth is whether to do
so using its own endeavours (e.g. organic growth) or to short-cut the growth
process by some kind of institutional tie-up with other firms.
This can take many forms, including the franchising, joint venture, alliances,
and mergers & acquisitions. There are also many other conventional
techniques of business analysis such as product life cycle, strategic clock,
value chain analysis, barriers to entry, and constable market theory and so
on.
7.4.
Corporate Strategy in a global economy
Prahalad (2002, p.2) paints a vivid picture of ‘discontinuous competitive landscape’
as characterising much of the 1990s and early years of the millennium. Industries are
no longer stable entities they once are for the following reasons:
1. Privatisation and deregulations become global trends within industrial sectors
(e.g. telecommunication, power , water, healthcare, financial services) and even
within nations themselves (e.g. transition economies such as China).
2. Rapid technology changes and convergence of technologies are constantly
redefining industrial ‘boundaries’ so that the ‘old’ industrial structure become
barely recognisable.
3. Internet related technologies are beginning to have major impacts on business to
business and business to consumer relationship
4. Pressure groups based around environmental and ecological sensitivities are
progressively well organised and influential
5. New forms of institutional arrangements and liaisons are exerting greater
influences on organisational structures than hitherto (strategic alliances,
franchising).
7.4.1. Strategy in the new competitive environment
According to Prahalad (2002, p. 2-3) suggested four key ‘transformations’
which must now be registered:
1. Recognising changes in strategic space. Consider for example, the
highly regulated power industry. All utilities once looked alike and their
scope of operations were constrained by public utility commissions and
government regulators. Due to deregulation, utilities can now determine
their own strategic space. Today utilities have a choice regarding the
level of vertical integration.
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The forces of change - deregulation, the emergence of large developing
countries such as India, China and Brazil as major business
Opportunities - provide a new playing field. Simultaneously, forces of
digitalisation, the emergence of the internet and the convergence of
technologies, provide untold new opportunities for strategists. The
canvas available to the strategist is large and new. One can paint the
picture one wants.
2. Recognising globalisation impact. Increasingly, the distinction between
local and global business will be narrowed. All businesses will have to
be locally responsive and all businesses will be subject to the influences
and standards of global players. Consider for example, McDonald's and
Coca-Cola - held up as examples of a truly global players unconstrained
by local customers and national differences. In India, McDonald's had to
change its recipe to serve lamb (instead of beef) and vegetarian patties (a
radical departure from its normal western fare). Coke had to recognise
the power of "Thums Up", a local cola (which Coke purchased) and
promote that product. The need for local responsiveness, especially
when global companies want to penetrate markets with different levels
of consumer purchasing power are very clear. On the other hand,
Nirula's, a local fast food chain in India, was, in its own restaurants,
forced to respond to the cleanliness and ambience of McDonald's. This
is a case of global standards being imposed on a local player.
Global and local distinctions will remain in products and services.
Globalisation may have as much to do with standards - quality, service
levels, safety, environmental concerns, protection of intellectual
property, and talent management. Needless to say, globalisation will
force strategists to come to terms with multiple geographical locations,
new standards, capacity for adaptation to local needs, multiple cultures
and collaboration across national and regional boundaries in everything
from manufacturing, product development, global account management,
and logistics
3. Recognizing the importance of timely responses. Given the nature of
competitive changes, speed of reaction will be a critical element of
strategy. At a minimum, it will challenge the yearly planning cycle. For
example, consider the traditional strategic planning process in a large
company. The process of strategy discussion and commitments typically
starts in October. It identifies the strategic issues for the next calendar
year and three to four years hence. Speed is also an element in how fast
a company learns new technologies and integrates them with the old. As
all traditional companies are confronted with disruptive changes, the
capacity to learn and act fast is increasingly a major source of
competitive advantage.
4. Recognising the importance of innovation. Innovation was always a
source of competitive advantage. However, the concept of innovation
was tied to product and process innovations. In many large companies,
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the innovation process is still called the "product creation process".
Reducing cycle time, increasing modularity, tracking sales from new
products introduced during the last two years as a percentage of total
sales, and global product launches were the hallmarks of an innovative
company. Increasingly the focus of innovation has to shift towards
innovation in business models.
7.5.
International Business and the value chain
International production is dominated by MNE that are increasingly transnational in
operations , including horizontally and vertically integrated activities more widely
dispersed on geographical basis.
This dispersion of activities across the world can be explained in detail using Value
Chain activities developed by Porter. These activities are divided into two categories
of primary activities and secondary activities (Wall et al, 2010, p. 254).
Primary activities: are those required to create the product (goods or services,
including inbound raw materials, components and other inputs), sell the product and
distribute it to the market place
Secondary/support activities: includes a variety of functions such as human
resources management, technological development, management information
systems, finance for procurement, etc. These secondary activities are required to
support the primary activities.
Source: Cullen. and Parboteeah (2010, p. 38).
Figure 7.5: Value Chain
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These activities are combined to experience the synergy effect. Synergy refers to the
so called ‘2+2=5 or greater than this, whereby the whole become greater than the sum
of the individual parts.
A number of sources can be identified as contributing to these global synergies.
1. Localisation on global scale where only international business can dispersed
individual value creating activities around the world to locations where they can
be undertaken most efficiently and effectively.
2. Economies of scale where it only by becoming an international business that the
firm can operate at such size that all available economies of scale technical
(technical, non technical) are achieved for a particular activity within the value
chain. This is especially important when the ‘minimum efficient size’ for an
activity within the firms value chain exceeds the maximum level of output
achievable within domestic economy.
3. Economies of scope and experience where only international business can
configure most appropriate mix of activities (economies of scope) within value
chain consistent with efficient and effective production. Or where only by
becoming an international business can the firm secure the economies of
experience to minimise the cost.
4. Non-organic growth on international scale where the international business
recognises that organic growth is ‘insufficient’ to meet its key objectives and
where some form institutional arrangement with one or more overseas firms is
seen as the way ahead.
5. Increase in geographical reach of core competencies where the international
business seeks to earn a ‘still higher return from distinctive core competencies by
applying those competencies to new geographic markets.
7.6.
International Business Strategy
Choosing a multinational strategy, be it transnational, multidomestic, international,
regional, or some combination of these options, depends to a large degree on the
balance of pressures for local adaptation and potential advantages of cost and quality
from global integration. Figure 7.6 shows where the basic multinational strategies
fall in meeting these often conflicting demands.
One of the best ways to determine whether local adaptation pressures or global
integration pressures are more important is to understand the degreeof globalization
of the industry in which your company competes.
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Global
Figure 7.6: International strategies
7.6.1. International strategy
International strategies selling global products and using similar marketing
techniques worldwide. The international strategy is a partial global
integration strategy. That is, companies pursuing international strategies,
such as Toys “R” Us, Boeing, Apple, and IBM, take a middle ground
regarding the global–local dilemma. Like the transnational strategist, the
international strategist prefers, to the degree possible, to use global products
and similar marketing techniques everywhere. To the degree that local
customs, culture, and laws allow, they limit adaptations to minor
adjustments in product offerings and marketing strategies. However,
international-strategist MNCs differ from transnational companies in that
they keep as many value-chain activities as possible located at home. In
particular, the international strategist concentrates its R&D and
manufacturing units at home to gain economies of scale and quality than are
more difficult to achieve with the dispersed activities of the transnational.
For example, Boeing keeps most of its R&D and production in the United
States while selling its planes worldwide with a similar marketing approach
focusing on price and technology. However, for its most recent plane, the
Dreamliner, Boeing become a little more transnational, outsourcing
production and design of some components to Japan and other countries but
leaving final assembly in the US. Unfortunately for Boeing, coordination
problems resulted in costly delays to the final delivery of the plane.
When necessary for economic or political reasons, companies with
international strategies frequently do set up sales and production units in
major countries of operation. However, home-country headquarters retains
control of local strategies, marketing, R&D, finances, and production. Local
facilities become only “mini-replicas” of production and sales facilities at
home
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7.6.2. Multidomestic strategy
Multidomestic strategies emphasizing local responsiveness issues at the
country level. One important problem for a locally responsive strategist is
the question of how fine-grained one should focus. The extreme approach is
called the multidomestic strategy, which means each country where you do
business is treated differently.
The key distinguishing feature of multi-domestic firm is that they
extensively customize both their product offering and their marketing
strategy to match different national conditions. Consistent with this, they
also tend to establish a complete set of value creation activities, including
production, marketing, and R& D in each major national market in which
they do business.
7.6.3.
Global strategy
Firms that pursue a global strategy focus on increasing profitability by
reaping the cost reduction that come from experience curve effects and
location economies. That is they are pursuing a low cost strategy. The
production, marketing, and research and development activities of the firm
pursuing a global strategy are concentrated in a few favourable locations.
Global firms tend not to customised their product offerings and marketing
strategy to local conditions because customisation raises cost (it involves
shorter production runs and duplications of functions). Instead, global firm
prefer to market standardised product offerings worldwide so that they can
reap the benefit from economies of scale that underlie the experience curve.
They may also use their cost advantage to support aggressive pricing in
world market.
This strategy makes more sense where there are strong pressures for cost
reduction and where demands for local responsiveness are minimal.
According to Hills (2003), Texas Instruments, Motorola and Intel are
pursuing a global strategy. However this strategy is not appropriate when
there is a strong demand for local responsiveness.
7.6.4. Transnational strategy
This strategy pursues two goals get top priority: seeking location advantages
and gaining economic efficiencies from operating worldwide.
The more inclusive version of global integration is known as the
transnational strategy. Its top priorities are seeking location advantages
and gaining economic efficiencies from operating worldwide. Location
advantages mean that the transnational company disperses or locates its
value-chain activities (e.g. manufacturing, R&D, and sales) anywhere in the
world where the company can “do it best or cheapest” as the situation
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requires. For example, Intel has manufacturing and testing facilities located
in five countries outside of the US, its headquarters. These production
facilities offer cheaper but also high-quality labor. Michael Porter argues
that, for global competition, firms must look at countries not only as
potential markets but also as “global platforms.” A global platform is a
country location where a firm can outperform competitors in some, but not
necessarily all, of its value-chain activities.
The transnational views any country as a global platform where it can
perform any value-chain activity. Thus, the absolute advantage of a nation is
no longer just for locals.
Examples of such transnational strategic activities include:

Locate upstream supply units near cheap sources of high-quality raw
material—approximately 18 multinational oil companies are in Nigeria

Locate research and development centers near centers of research and
innovation—in 2005 Motorola opened its new R&D center in
Bangalore, a growing center of IT development in India.

Locate manufacturing subunits near sources of high-quality or lowcost labor—Intel has five sites where labor is relatively cheap and well
educated.

Share discoveries and innovations made in any unit regardless of
location with operations in other parts of the world—Ford’s Taiwanbased design center, named Ford Lio, is working on the nextgeneration Tierra medium sized sedan, which shares a chassis platform
with the Mazda 323, for the Asia-Pacific market.

Locate supporting value-chain activities such as accounting in lowcost countries—GE Capital uses Indian employees to do support
activities such as checking eligibility of payments on health plans.

Operate close to key customers—BWM produces a sport utility
vehicle in the US, which is the major market for this type of vehicle.

Offshore aftermarket support such as call centers to low-cost
countries— if you call American Express, Sprint, Citibank, or IBM it
is likely your call will be answered in India
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Table 7.1: The Content of Multinational Strategies: From Local
Adaptation to Global Integration
Source: Cullen and Parboteeah (2010, p. 46)
7.6.5. Advantages and disadvantages of international business strategies
strategy
Advantages
Standardised products
become highly cost
competitive
Disadvantages
Less responsive to local
conditions
Economies of scale
Loss of market share if
consumer behaviour
becomes more responsive to
localised characteristic
Economies of experience
Few opportunities for global
learning
Global
Emphasis home country
core competences
Economies of locations via
a geographically dispersed
value chain
Complex coordination to
implement strategy
Economies of experience
Possible conflicts between
cost competitiveness and
local responsiveness.
Global learning stemming
from the sharing of core
Difficult to implement due
organisational problems
Transnational
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competences
Product differentiation with
production and marketing
responsive to local
conditions
Highly customised
production and marketing,
emphasising local
responsiveness
Most appropriate where the
minimum efficient size
(MES) is relatively low for
key elements of the value
chain and strong
Multidomestic local/cultural preferences
exist
Loss of location economies
(which require a
geographically dispersed
value chain)
Loss of experience
economies
Little global learning where
core competencies are not
transferred between foreign
companies
Lack of corporate group
cohesions
International
Core competencies
transferred to foreign
markets
Less responsive to local
condition
Economies of scale for
centralised markets in ‘core
architecture ‘ (e.g. product
development)
Less location economies
available via retention of
core competencies
Less global learning as few
core competencies
transferred
Less experience economies
available
Source: Wall et al (2010, p. 258)
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7.7.
International business strategies and political perspectives
MNE also makes strategic decision based on political decision of economic
integrations.
7.7.1. Economic Integration-national responsiveness framework
1. National responsiveness refers to the pressure on MNE to respond to
different national or regional (e.g. EU) standards imposed by
governments and agencies and to different consumers tastes in
segmented national (or regional) markets.
2. Economic integration refers to the pressure on MNE to develop
economies of scale to develop location economies (via global
specialisation for appropriate activities within the value chain), to
develop experience economies and to seek to benefit from other
efficiency advantages from increased coordination and control of
geographically dispersed activities.
Strategies appropriate to the MNE will then depend on the quadrant they inhibit or
seek to inhibit.
High
Economic
Integration
Pressure
Quadrant 1
Quadrant 2
Quadrant 4
Quadrant 3
Low
Low
National
Responsiveness
Pressure
High
7.7.2. Strategies appropriate to the MNE
1. Quadrant 1: high economic integration, low national responsiveness.
Here the MNE operates in a market characterised by high economic
integration pressures and its strategy must therefore incorporate a drive
for cost and price competitiveness. Typically MNE in this quadrant will
be centralised in structure, often using mergers and acquisitions to
achieve economies of scale, scope and experience. However, this MNE
in this quadrant need not by unduly concerned with responding to host
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country national (political, regulatory, and cultural) concerns as these are
deemed to have low impact on its operations.
2. Quadrant 2: High economic integration, High national responsiveness.
Here MNE operates in a market characterised by strong international
cost and price competitiveness pressure but it must see such challenges
while paying due regard to the high political sensitivities of host
nationals/regional governments and agencies. MNE in this quadrant will
face a variety of policy options which seeks compromise between these
two , somewhat opposing tendencies. The coordination of variety of
flexible responses maybe challenging for the MNE
3. Quadrant 3: Low economic integration, low national responsiveness.
Here economic integration is less important to the MNE than national
responsiveness. Production practices in product specification and
support activities (e.g. marketing) must be carefully adapted to the
consumer characteristics, standards and regulation of the
national/regional grouping. Economic integration is much less important
(less cost and price competitive pressures) than a decentralised strategy
responsive to national (regional) characteristics.
4. Quadrant 4: Low economic integration, low national responsiveness.
Few scale economies or location economies via a more geographically
dispersed value chain are likely in this quadrant so price competition
will tend to be less fierce. Nor are there are many benefits from seeking
close alignment with national (regional) regulations, standards and
consumer characteristics. A broadly standardised product can be sold by
MNE in this quadrant and there may be benefits from a centralised
transfer of core competencies to overseas national (regional)
subsidiaries.
7.8.
Institutional Strategies international business
There are two broad institutional strategies used by MNE such as
1. Mergers and Acquisition
2. Knowledge management
7.8.1. Mergers and Acquisitions
Merger takes place with mutual agreement of the management of both
companies, usually through exchange of shares of the merging firms with
shares of merging firms with shares of the legal entity.
Acquisition (or takeover) occurs when management of the firm A makes a
direct offer to the shareholders of firm B and acquires controlling interest.
Acquisition normally requires additional funds to takeover the firm.
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Figure 7. 7. Driving forces for Mergers and Acquisition
Mergers and Acquisition (M&A) are encouraged for many reasons.
1. Cost based synergies. Horizontal acquisitions have traditionally been
considered an effective means of achieving economies of scale in
production, in R&D and in administrative, logistical and sales functions.
Cost based synergies can be achieved through cost efficiencies. This
means that growth in firms can provide economies of scale , i.e. a fall in
long run average costs. These can be of a technical or non technical
variety.

Technical economies of scale. These are related to an increase
in size of the plant or production unit and are most common in
horizontal M & As. Reasons include:
 Specialisation of labour or capital, which becomes more
possible as output increases. Specialisation raises
productivity per unit of labour/capital input, so that
average variable costs fall as falls as output increases.
 The engineer rules whereby material costs increase as the
square but volume (capacity) increases as the cube, so
that materials costs per unit of capacity fall as output
increases.
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 Dovetailing of process, which may only be feasible at
high levels of output. Dovetail will allow to avoid
incurring the unnecessary cost of spare (unused) capacity.

Non-technical (enterprises) economies. These are related to an
increase in size as a whole and are valid for both horizontal and
vertical Merger and Acquisition (M&A).
 Financial economies. Large organisations can raise
financial capital more cheaply, lower interest rates, access
to share and rights issues via Stock Exchange listings
etc).
 Administrative, marketing and other functional
economies- existing departments can often increase
throughput without a pro-rata increase in their
establishment
 Distributive economies. More efficient distributional and
supply chain operations become feasible with great size
(lorries, ships, and other containers can be dispatched
with loads nearer to capacity etc).
 Purchasing economies. bulk buying discounts are
available for larger enterprises. Also, vertical integration
(e.g. backwards) means that components can be
purchased at cost from the now internal supplier rather
than at cost plus profit.
Economies of scope is about more appropriate mix of products or
activities in the company’s portfolio can help reduce average costs.
Cost based synergy or cost efficiency can be also achieved through
economies of scope via M& A.
 Risk reduction. This applies particularly to conglomerate
M&As, which involves diversifying the firm’s existing
portfolio of products or activities. Such diversification
helps cushion the firm against any damaging movements
which are restricted particular products groups or particular
countries.
 Market Power. The enlarged firms can use its high market
share or capitalised value to exert greater influence on
price or on any competitor actions/reactions in ‘game’
playing situations. Enhanced market power can be
deployed to raise corporate profit or to achieve other
corporate objectives.
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However Robert Gertner (2000) suggested three possible reasons for
the failure of mergers and acquisition.
 Unpredictability: For acquisitions where the stock market
reacts negatively to the merger announcements, the subsequent
break-ups (divestments) of the new entity was more likely to
occur. This suggested that stock market does in fact have
some ability to identify those mergers and acquisitions that are
more likely to fail in the future.
 Agency problem: Where the principle-agent problem occurs,
there may well be a separation of interests between those of the
shareholders (principals) and managers (agents). It may then
follow that a merger/acquisition viewed as favourable by one
may actually be unfavourable to the other. Some research
indicated that only 17% M&A produce any value for
shareholders while 53% of M&A destroyed shareholders value.
 Managerial errors. Lack of knowledge, errors of judgement
and managerial hubris (overconfidence)
can manifest
themselves in all three phases of M& A activities such as
planning, implementation, and operational phases.
7.8.2. Knowledge management
Knowledge is about information that comes laden with experience,
judgement, intuitions and values (Empson, 1999, cited at Wall et al, 2010).
Four types of knowledge
1. Explicit knowledge: codified knowledge
reports, online etc
available in books,
2. Tacit Knowledge: knowledge embodied in human experience and
practice
3. Collective knowledge: the outcomes of corporate structure and
process for converting tacit knowledge into explicit knowledge
available for corporate use in process or products innovation.
Nonaka and Takeuchi (1995) identified the process of knowledge
conversions and how different forms of knowledge in the organisations
were form.
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Figure 7.8: Knowledge creating process
Socialization
The process that transfers tacit knowledge in one person to tacit knowledge
in another person is socialization. It is experiential, active and a “living
thing,” involving capturing knowledge by walking around and through
direct interaction with customers and suppliers outside the organization and
people inside the organization. This depends on having shared experience,
and results in acquired skills and common mental models. Socialization is
primarily a process between individuals.
Externalization
The process for making tacit knowledge explicit is externalization. One
case is the articulation of one’s own tacit knowledge, ideas or images in
words, metaphors, analogies. A second case is eliciting and translating the
tacit knowledge of others - customer, experts for example - into a readily
understandable form, e.g., explicit knowledge. Dialogue is an important
means for both. During such face-to-face communication people share
beliefs and learn how to better articulate their thinking, though instantaneous
feedback and the simultaneous exchange of ideas. Externalization is a
process among individuals within a group.
Combination.
Once knowledge is explicit, it can be transferred as explicit knowledge
through a process is called combination. This is the area where information
technology is most helpful, because explicit knowledge can be conveyed in
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documents, email, data bases, as well as through meetings and briefings.
The key steps collecting relevant internal and external knowledge,
dissemination, and editing/processing to make it more usable. Combination
allows knowledge transfer among groups across organizations.
Internalization
Internalization is the process of understanding and absorbing explicit
knowledge in to tacit knowledge held by the individual. Knowledge in the
tacit form is actionable by the owner. Internalization is largely experiential,
in order to actualize concepts and methods, either through the actual doing
or through simulations. The internalisation process transfers organization
and group explicit knowledge to the individual.
Nonaka and Takuchi suggest five key mechanisms by which knowledge
creation can e encouraged
1. Intentions. Senior management must be committed to accumulating,
exploiting and renewing the knowledge base within their organisation and
to creating management systems compatible with this intention.
2. Autonomy. Individual are the major source of new knowledge and they
must be given organisational support to explore and develop new ideas.
3. Creative chaos. An internal ‘culture’ must be established which is willing
to use new knowledge to challenge existing orthodoxies.
4. Redundancy. Knowledge should not be allowed to become ‘redundant’ via
it being rationed to selected individuals only within the organisation.
5. Requisite variety. The internal diversity within the organisation must at
least match that of the external environment within which it operates.
7.9.
Techniques for Strategic analysis
Some of the widely used techniques include
Game based techniques
Strategic Scenario analysis
7.9.1. Game-based Techniques
This approach has been widely used in highly concentrated industries and
markets dominated by a few large firms. The idea is to estimate for each
proposed strategy the firm might adopt, the likely counter –strategies of teh
rival (or rivals).
The decision rules are built on the assumption of two of which are widely
adopted:
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1. Maxi-min decision rule-assumes that rivals reacts in the worst way
possible for each strategy of the firm. Then the firm can selects the best
(maxi) of the worst (mini) possible outcome.
2. Mini-max decision rule- assumes that the rival (firm B) reacts in the best
(for firm A) way possible for each A strategy. Firm A then selects the
worst (mini) of these best (maxi) possible outcomes.
A number of other ideas are widely presented in game theory approaches.
 Dominant strategy: In this approach the firm seeks to do the best it can
(in terms of the objectives set) irrespective of the possible
actions/reactions of any rivals.
 Nash equilibrium. This occurs when each firm is doing the best that it
can in terms of its own objectives, given the strategies chosen by the
other firms in the market.
 Prisoner dilemma. This is an outcome where the equilibrium for the
game involves both firms doing worse than they would have done
had they colluded, and sometimes called a ‘cartel game’ because the
obvious implication is that the firm would be better off by colluding.
There are different types of games to which these ideas might be
applied include one-shot game, repeated game, sequential game, and
finally first mover advantage.
7.9.2. Strategic Scenario Analysis
A scenario cab be defined as an internally consistent view of the future,
which often reflects a situation in which large number of variables are seen
as moving in particular direction.
Scenario analysis is an approach that is widely used to evaluate possible
future outcomes of different courses of actions (e.g. high, medium, low
profitability scenarios).
Arguably scenario analysis takes a broader perspective in terms of strategic
direction than does game theory, the latter confirming itself to competitors
actions/reactions. Scenario analysis is more useful in macroeconomics or
industry wide factors, whereas game theory is more useful in dealing with
the strategic uncertainties related to rivals.
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7.10. International operations management and logistical strategies
Both international operations management and international logistics involve the
coordination of set of interrelated activities directed towards the efficient production
and supply of goods and services.
7.10.1. International operation management
International management of operations and production may be very similar
to the management of operations and production in a home country.
Common to both are considerations regarding the efficient use of all the
factors of production, productivity improvements, R & D, and the extent of
horizontal or vertical integration, or both. The international environment,
however, includes other considerations.
Before making production decisions, an MNC must consider such additional
factors as different wage rates, industrial relations, sources of financing,
foreign exchange risk, international tax laws, control, the appropriate mix of
capital and labor, access to suppliers, and the production-experience curve
in each country. While many MNCs attempt to standardize their production
systems on a worldwide basis by transferring production processes and
procedures unchanged from the parent corporation, these environmental
influences often make such standardization unsuccessful or at best difficult.
7.10.2. Operation management: a manufacturing perspective
Operation management is concerned with managing the transformation
process whereby input resources are converted into outputs. Five general
approaches can be used for managing transformation process and continuous
process.
1. Project process. These are traditionally sued to produce highly
customised, one off items such as the construction of new building,
production of cinema film or the installation of computer system (Low
volume, high variety products).
2. Jobbing process. These involve the manufacture of a unique item from
beginning to end as a result of an individual order. Products are
subjected to jobbing processes are usually of a small stature than those
subjected to project processes and may include handmade shoes,
restored furniture and individualised computer system.
3. Batch process. These involve the manufacture of a number of similar
items whereby a batch of products is processed through a given stage
before the entire batch is moved on to the next stage in well defined
sequences. Example clothing, (High volume)
4. Mass production. These involves the use of a mass production line
whereby the product moves continuously from one operation to another
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without stopping. Mass process typically produce goods in large
volumes but less varied in terms of design characteristics. Example
include motor vehicles, food preparations etc.
5. Continuous process. These can be considered as variation of mass
processes in that goods are produced in even larger volumes and are
often highly standardised in their design, such as beer, paper and
electricity production.
7.10.3. Operation management: a non manufacturing perspective
Also operation management is concern about service provisions. In service
provision entities such as hospitals, educations, airlines, hotels provides
services. Nigel Slack identified five performance objectives for operation
management for service provision organisation such as cost, quality, speed,
dependability and flexibility.
7.10.4. Current operations management issues
Some of the issues relating operations management include
1.
2.
3.
4.
5.
6.
7.
8.
Design.
Manufacture
Distribution
Capacity
Stock
Purchasing
Scheduling
Employees
7.10.5. Flexible specialisation
Flexible specialisation is a term that is often applied to new methods of
manufacturing that attempt to produce ‘an expandable range of highly
specialised products’. Flexible specialisation emerged as a result of the
globalised and information intensive environment within which firms
operate and increase in demand for products that are custom-made and more
varied in nature.
Implication of flexible specialisation
1. To render less useful the idea of the learning or experience curve in
contributing to productive efficiency, whether for the provision of
service or goods.
2. Shifts the focus away from various internal economies of scale as a
major competitive advantage.
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7.10.6. Integration versus modularity
A modular product has been defined as a ‘complex product whose
individual elements has been designed independently and yet functions
together as seamless whole’.
Enterprises Resource Planning:
This terms refers to wide variety of company-wide information system that
are increasingly replacing the more fragmented, stand-alone IT system in
many companies.
Modular strategies
Globalisation has been a driving force for modular strategies. Modular
strategies can embrace production, design, and or use
1. Modularity in production. (MIP).
2. Modularity in design
3. Modularity in use
7.10.7. International logistics
Logistics is a term that has long been associated with military activities, and
particular with coordinating the movements of troops and other supplies to
specific locations in the most efficient ways technically feasible.
Logistical principles
1. Square root law- the amount of safety stock required will decline by
fractions who denominator is the square root of the reduction in number
of stock holding points in logistical system.
2.
Logistical cost control. It will often be the case that logistical changes
will reduce certain specified costs but only at the expenses of raising
other costs. Such changes will only be applied where the net outcome is
positive, i.e. the logistical cost trade off is ‘favourable’.
3. Time compressions. This refers to the various attempts to accelerate the
flow of materials and information in logistical systems. It is sometimes
extended to cover a variety of techniques and approaches, such as just-in
time, quick responses, lead-time management, lean logistics, process
mapping techniques and so on.
4. Postponements principles. The company will benefit by postponing
decisions as to precise configuration of customised products until as late
a stage as possible within the precise configuration of customised
product until as late a stage as possible within the supply chain. This
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implies that companies should hold stock in generic form for as long as
possible before deciding how to extend the product range by reconfiguring the stock into the separate ‘stock-keeping units’(SKU)
which correspond to customised products.
Application of this ‘postponement principle’ reduces the volume of
inventory in the global supply chain and the costs associated with under
–supplying (stock-out costs) or over supplying (stock handling costs) a
particular market with customised products.
7.10.8. International distribution system
There are many types of distribution system, These include
1. Direct
2. Transit
3. Classical
4. Multicounty
Choice of distribution channels include:
1. Foreign customer base
2. Export volumes
3. Value density of products
Transport issues are also important issues in international logistics.
Centralisation and decentralisation of distribution system can significantly
influence the cost of transpiration.
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Ajami, R.A., Cool, K., Goddard, G.J., Khambata, D and Sharpe, M.E. (2006). International
Business: Theory and Practice, (2nd Edition). pp. 3-19. M.E. Sharpe, Inc.
Brett, J, Behfar, K, Kern, M C (2006). Managing multi-cultural teams. Harvard business
review, 84(11), pp.
Cullen, J.B., and Parboteeah, K.P. (2010). International Business: Strategy and Multinational
Company, pp. 3-33. Routledge, 270 Madison Ave, New York, NY 10016
Fedor, Kenneth J., Werther Jr., William B (1996). The Fourth Dimension: Creating
Culturally Responsive International Alliances. Organizational Dynamics, 25( 2),
pp.39-53
Katsioloudes, M.I. and Hadjidakis, S. (2007). International Business: A global perspective.
Butterworth-Heinemann /Elsevier
Wall, S., Minocha, S., and Rees, B. (2010). International Business, (3rd Edition), pp.1-36.
Prentice Hall, Financial Times. (RECOMMENDED READING)
Yeung, Irene Y. M.; Tung, Rosalie L. (1996). Achieving business success in
Confucian societies: The importance of Guanxi (Connections). Organizational
Dynamics, 25(2), pp. 54-65
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