INDIAN INSTITUTE OF FOREIGN TRADE

INTERNATIONAL BUSINESS STRATEGY

COURSE COORDINATOR:

DR.K.RANGARAJAN

PROFESSOR

Why IBS ????• Why do firms go abroad? • What differentiates a "global" from a "multi-domestic" industry? • What distinguishes “Global Market” and “Global Industry”?• What are the dilemma in ‘configuring’ and ‘coordinating’ business

activities across the nations? • What are the strategic considerations when a company goes

beyond the home country? • Why and when do/should companies engage in cross-border

strategic alliances? • What are the associated risks and how to guard against them? • What potential roles can foreign subsidiaries play in an MNC's

global strategy? Etc …

The focus will be on Progressive Internationalization of Firms

Modules At GlanceSession Contents

Session I Globalisation of Markets & Competition History & Dimensions of IBPhenomenon of GlobalisationDrivers of globalization Diagnosing Industry Globalisation Potential

Session II Elements of Global StrategyGlobalisation ImperativesYip’s Globalisation Triangle and frameworkPorter’s & Prahalad’s framework Four Elements of Global Strategy

Session III Country Entry & AttractivenessEntry Strategies – Objectives, timing & modeCountry Attractiveness – Market & IndustryopportunitiesFacets of country risk analysis

Modules At Glance

Session Contents

Session IV & V Challenges of Synergy: Global Strategy & FunctionalStrategies

Issues in Marketing FunctionIssues in Finance functionOrganizing options & DesignsGlobal HR Wheel & issues

Session VI Role of Strategic Alliances in Global ExpansionLogicForms and Levels of AlliancesEvaluation & Problems

Session VII Future ChallengesGlobalisation in the Digital AgeFuture ScenariosFuture of Global Corporations

Evaluation Pattern:

The performance of the students will be evaluated on the following pattern:Criterion Weightage

• Term Project 30 %• Quizzes (2) 10 %• Case Analysis 20 %• ET (Case Based & Open Book) 40 %

Outline• History & Dimensions of IB• Globalization Phenomenon & Drivers• Why Global Strategy?• Domestic (vs) Global Strategy

Learning ObjectivesWhen you complete this module, you should

be able to : • Identify or Define:

– International business & its evolution– Multinational, Global corporation– Impact of Globalization process on Strategy

formulation

• Describe or Explain:– Globalisation and localisation factors– Differences between global and domestic

strategies

Historical Traces of International BusinessHistorical Traces of International Business

2000 BC - Mediterranean Trade (Mesopotamia, Greece, Phoenicia)

500 BC - Control by Greeks (Mass Production)

200 BC - Control by Romans (Venice and Genoa Ports)

16th Century - Mercantilist Theory emerged -> Spain & Portugal ->Seafaring Capacity

19th Centry - Industrial Revolution: First trace of MNC –Colt, Singer and JP Coats

20th Century - IB Established as an imperative, MNCs progressed rapidly

Before WW I:• International capital movements associated with population movements out of Europe•Majority of Portfolio Investments•UK was the largest creditor nation

Inter-war Period:•Decline of European Might•US became major creditor nation due to Direct Investment•Intl. Portfolio Investment declined due to 1930 Financial crisis

Post-war Period:•Phase I (1945-60):MNCs from UK & US dominatedConcentration on extraction of petro. and other RMs•Phase II (1961-70):Continental Europe & Japan’s Entry•Phase III (1971-90):European & Japanese firms have become important source of FDIUS become a major recipient of FDINICs started showing their impact•Phase IV (1991 onwards):FDI has become the corePatterns of investment, tech. Diffusion and trade among nations are shaped by agents of FDI – the MNCsAsia (esp. India & China) has become the focus point

Globalisation of the World EconomyGlobalisation of the World Economy

Sources UNCTAD, World Investment Report, 2005 and BIS, 2007

1982 1990 2006 Multiplier 2005/1982

World GDP ( Billion US$) 11760 21670 48000 4.08

Trade (Billions US$) 1900 3500 11900 6.2

Foreign Direct Investment Stocks (BillionUS$) 640 1780 12000 18.7

Sales of Foreign Affiliates of Multinational Firms (Billion US$) 2740 6125 25177 9.2

Employement of Foreign Affiliates of Multinational Firms (1000) 21500 25100 73630 3.4

Cross-Borders Mergers and Acquisitions (BillionUS$) 25 150 880 35

International Royalties Payments (Billion US$) 9 30 132 14.6

Foreign Exchange Transactions (Billion US$) 11000*

300000 1168000 105

* estimate

The Universe of Transnational Corporations (TNCs)The Universe of Transnational Corporations (TNCs)

Examples : # of affiliates Ford Unilever Siemens

1970 65 94 841985 140 146 165

2000 270 244 416

Source: UNCTAD, 2005

Total numbers of Multinational Corporations

37000 77000

Total number of Foreign affiliates 170000 770000

Total assets of Foreign Affiliates 5390 B$ 45600 B$

Total Sales of Foreign Affiliates 5727 B$ 22200 b$

Total Employement of Foreign Affiliates (Thousand)

24471 62000

1990 2007

Recent Changes in General Globalization Drivers

Some of the widespread changes include the following:

Market Drivers• Per capita income converging among industrialized nations

• Convergence of lifestyles and tastes (e.g., McDonald’s in India andStolichnaya vodka in America)

• Increasing travel creating global consumers

• Organizations beginning to behave as global customer

• Growth of global and regional channels (e.g.,Walmart (US) in 10Countries, Carrefour (France) in 31, Metro (Ger.) in21,& 7-eleven (Jap.) in 21 )

• Establishment of world brands (e.g., Coca-Cola, Levi’s, Microsoft)

• Push to develop global advertising (e.g. McCann's for Nestle & Gillette;Saatchi & Saatchi’s commercials for British Airways.

• Spread of Global & regional media (CNN,MTV,Star TV in Asia)

Cost Drivers

• Continuing push for economies of scale (but offset by flexible manufacturing)

• Accelerating technological innovation• Advances in transportation (e.g., use of Federal Express to

deliver urgent supplies from one continent to another)• Emergence of newly industrializing countries with productive

capabilities and low labor costs (e.g.., China, India, Indonesia etc.)

• Increasing cost of product development relative to market life

Recent Changes in General Globalization Drivers…

Government Drivers• Reduction of tariff barriers (e.g., NAFTA,FTAs)• Reduction of non-tariff barriers (e.g., Japan’s gradual

opening of its markets)• Creation of trading blocs (e.g., EU etc)• Decline in role of governments as producers and

customers (e.g., denationalization of many industries inEurope, China, India etc.)

• Privatization in previously state-dominated economies,particularly in Latin America

• Shift to open market economies from closed communistsystems in Eastern Europe & Soviet

• Increasing participation of China and India in the globaleconomy

Recent Changes in General Globalization Drivers…

Competitive Drivers• Continuing increase in level of world trade• More countries becoming key competitive battlegrounds (e.g.,

rise of Japan to become a “lead” country)• Increased ownership of corporations by foreign acquirers• Rise of new competitors intent upon becoming global

competitors(e.g.,Japanese(70s),Koreans(80s),Taiwanese(90s),Chinese(00s), Indian & Russian (10s).

• Rise of ‘born global’ companies.• Growth of global networks making countries interdependent in

particular industries ( eg.,electronics)

Recent Changes in General Globalization Drivers…

Other Drivers• Revolution in information and communications

(e.g.,personalcomputers,mobiletelephony, internetetc.)

• Globalization of financial markets (e.g., listing ofcorporations on multiple exchanges, and issuing debtin multiple currencies)

• Improvements in business travel (e.g., improved airtravel and rise of international hotel chains)

Recent Changes in General Globalization Drivers…

Historically Corporate Historically Corporate Globalization Globalization took place in 3 stagestook place in 3 stages

Export(Trade)

Internationalisation(Multinational)

Global Integration(Global)

ELEVATORS in EUROPEELEVATORS in EUROPE

R

P M

R

P M

R

P M

R

P M

R

P M

R

P M

R

P M

R

P M

R

P MR

P

M

R

M MP

PM M M

MM M

P

GIS 4

ELEVATORS in EUROPEELEVATORS in EUROPE

Why Companies Globalize?

Customer ValueCV

PROFIT

Internal CostsC

Supplies (S)

Costs

Volume (V)

Get Access to resources and procurement(S)

Increase Size benefit from Economies of Scale (C)

Increase Size (V): Capture market opportunities

Get access to low cost labor and infrastructure (C)

Get access to knowledge (CV and C)

Serve global customers (CV)

Reduce risks through geographical diversification

Price

GLOBAL INDUSTRIESGLOBAL INDUSTRIES

Global industries are industriesin which firms can sustain competitive advantages only if :

• They are present in the key countries of the world

and• They integrate and coordinate their activities across the world on a centralized manner.

LOCAL INDUSTRIESLOCAL INDUSTRIES

Local industries are industries in which firms can sustain competitive within the boundaries of countries.

Firm competing in multilocal industries Are either:• Domestic firms within each country

•Subsidiaries of multinational companies operating independently of each others in the respective countries

Industries: Global or Local ?

Factors Pushing for Globalization

• Similar Needs & Customers Behavior• Standardized Products• Beyond country economies of scale • Speed of Innovation• Transferability of experience• “Global” customers• “Global” pricing• “Global” competitors

• Low entry barriers• High Scale Technology• Convergence of consumption• Transport

• Cultural Differences• Customer proximity• Transport costs• Legal requirements

• Different Needs & Customers Behavior• Customized Products/services• Low economies of scale • Complex distribution• Transferability of experience• “Local” customers• High transport costs

Factors Against Globalization

Characteristics of Global Industries Characteristics of Local Industries

HIGH

GLOBALFORCES

LOW

LOW HIGH

LOCAL FORCES

DIFFERENT INDUSTRIES HAVE DIFFERENT COMPETITIVE REQUIREMENTS

Civil Aircraft

Microprocessors

Bulk Chemicals

Catering

Automobile

TelecommunicationEquipments

Package Tours

Retail Banking

FoodRetail

Paint

Corporate BankingInstitutional Banking

WITHIN BUSINESSES DIFFERENT SEGMENTS HAVEDIFFERENT COMPETITIVE REQUIREMENTS

HIGH

GLOBALFORCES

LOW

LOW HIGH

LOCAL FORCES

AUTOMOTIVE

AIRCRAFT

MARINE

CAR

INDUSTRIAL

DO IT YOURSELF

PAINTS

HIGH

GLOBALFORCES

LOW

LOW HIGHLOCAL FORCES

WITHIN BUSINESSES DIFFERENT FUNCTIONS HAVEDIFFERENT BENEFITS OF BEING "GLOBAL" or "LOCAL"

Research

Finances

Development

After SalesServices

Logistics

Components Sourcing

Components Manufacturing

Marketing

Accounting

Customers ServicesSales

Advertising

The Globalization Debate

International – business is operating in more than one country

Multinational – business is operating in several countries with some decentralization of management decision making to overseas subsidiaries and little coordination of activities across national boundaries

Global & Transnational – business operating in several countries and configure, coordinate and control all such activities

(Transnationality is by the equity stake of a business operating away from the home country –UNCTAD)

Globalization of Market – converging commonality (homogeneity in terms of tastes & preferences)

Globalization of Industry – the extent to which the value addition activities in the industry are configured and coordinated globally

Global Strategy

o A global core competence giving access to global markets

o Extensive participation in major world markets

o Global configuration of value adding activities which exploits both national similarities and integration of activities

o Local responsiveness, where required

o Differentiated structure and organization

Domestic (vs.) Global Strategy:

• Greater scale and scope of activities

• More alternatives for configuration Of VA Activities

• More scope for competitive advantage

• More subjected to cultural and lingual activities

• Wider economic and factor conditions

Imperatives of Globalization

Growth Imperative-Paperindustry

Globalization of Competitors-Fuji & Kodak

Knowledge Imperative-GE India

Efficiency Imperative-Mercedes Benz

Globalization of Customers-GE Plastics following AT & T

High FDIHigh foreign investmentIn dispersed activitiesWith a high degree ofCo-ordination amongSubsidiaries.

Country Focused Stgy.Companywith several nationalSubsidiaries each operating in only one Country

Global strategy(with extensive co-Ordination andConcentration)

Export StrategyStrategy based uponExporting of product/Service with decent-ralized marketingIn each host country

GeographicallyDispersed

Geographically concentrated

Configuration of activities

High

Porter’s Model

Low

Coordination of

activities

High

Low

Global businesses: Global markets, global integrated strategy requiring

global management

Local responsivebusiness strategy based

on local markets, national subsidiaries

Product EmphasisMultifocal Business

Area emphasis

Pressures for Global Integration

Low High Pressure for local responsivenessThe Integration-Responsiveness Matrix

Position and Resources of Business and Parent

Company

Industry Globalization Drivers

• Market• Cost• Government• Competitive

Benefits/Costs of Global

Strategy

Global Strategy Levers• Global Market Participation• Global Products• Global Location of Activities• Global Marketing• Global Competitive Moves

Organization’s Ability to Implement a Global

Strategy

Yip’s Framework for Global Strategy

Strategic Considerations in Internationalisation

• Choice of Products• Choice of Markets• Choice of Entry• Implementing Entry Choice• Action in the Local Market (Home & Host

Country Customers)• Speed of Global Expansion

A Framework for choice of products:Attractiveness of product Lines as Launch Vehicles for Initial Globalization

2

Moderately attractive

1Most attractive(Marriott full-

Service Lodging)

3Moderatelyattractive

4Least attractive(Marriott Senior Living Services)

Low High

Expected Payoffs from Globalization

Drivers of a Market’s Strategic ImportanceDrivers of a Market’s Strategic Importance

Low High

Low

Learning Potential

A Framework for Choice of Markets

Phased-in entry (create

Beachhead first)

Ignore for now

OpportunisticEntry

Rapid Entry

Low HighFirm’s ability to

Exploit the Market

Alternative Modes of Entry

Honda’s initialEntry into the U. S. market

Champion International’s paper exports through

independent brokers

KFC’s franchises in India

Ford-Mazda Genenetch-Hoffman

LaRoche

Bridgestone’sAcquisition of

U. S.-basedFirestone

100% Export 100% LocalExports versus Local Production

Greenfield vs. Cross-border Acquisition

Green fieldoperations

or cross-borderacquisitions

Cross-borderAcquisitions(Int’l Paper’s

entry into Europe)

Greenfieldoperations

or cross-borderacquisitions

Greenfield operations (Nucor’s

entry into Brazil)

Low High

Hig

h

Uniqueness of Corporate Culture

Impa

ct o

n L

ocal

Com

petit

ion

SONY’S GLOBAL DEVELOPMENT

Regional HQs Functions Transnational move

Marketing confederation

Central hubORGANISATION

R&D outside Japan Shortening PLC

Assembly plants Local content

USA as key market audio + TV

INVESTMENTS

USA – JAPAN – EUROPE - ROWPOSITIONING

GLOBAL LEADER ENTERTAINMENT

MARKETSPRODUCTSMatch markets/ production

INNOVATIONAggressiveOverseas markets penetration

AMBITION

GLOBAL DIVERFICATION

GLOBAL LOCALISATION

LOCALISATIONEXPORT

Phase IV1989

Phase III1980

Phase II1970-1980

Phase I1960-1970

Video Audio

Hard

Soft

Acquisitions

GLOBAL STRATEGY

GLOBAL AMBITION

GLOBALPOSITIONING

GLOBAL ORGANISATION

GLOBAL BUSINESS SYSTEM

Relative importance of region and countries in terms of sales, assets

Choice of:- Countries- Value proposition

- Global structure- Global processes- Global co-ordination- Global human resource

management

- Investments in resources, assets and competencies to create a global value chain

- Development of global capabilities through alliances and acquisitions

Global Strategy Framework

Europe North America Asia Pacific Rest of the World(%) (%) (%) (%)

Advertising 19 57 23 1Clothing & Footwear 32 27 25 15Computer Hardware 27 27 39 7Construction materials 18 9 63 10Consumer Electronics 30 23 38 9Cosmetics 37 22 27 14Data Processing Services 29 52 14 9Electrical Appliances 28 27 34 10Electrical Equipments 23 20 42 15Environment Services 31 39 23 7Health Care Equipment 34 46 18 2Home Furnitures 44 22 18 15Insurance 34 38 25 3Mobile Phones 30 25 42 3Paint & Coatings 26 27 35 12Pharmaceuticals 28 48 18 6RetailIing 32 30 23 15Specialty Chemicals 45 39 11 4

Global Distribution of Markets (2005)

AMBITIONAMBITION

Market Driven/ Resources Driven

Market Driven Resources Driven

Capture Growth Opportunitiesof the region to expand global sales

Capture resources(Natural, Human,Knowledge) for globalcompetitiveness

AMBITIONAMBITION

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 20% 40% 60% 80% 100%

NORTEL

NOKIA

MOTOROLAALCATEL

ERICSSON

Ratio of Foreign Sales /Total Sales

Ratio of Foreign Assetss /Total Assets

Circle proportional to Total sales

AMBITIONAMBITION

Measuring Globalisation

Measuring Globalisation

AMBITIONAMBITION

Unctad: WIR, 2006

Mapping of Global ambition

Global Player

RegionalDominant Global Player

Global Revenue Index (GRI)

RegionalPlayer

0

Global Sourcer

1

Global Exporter Exporter

1

0

20

40

60

80

100%

0 20 40 60 80 100%

BridgestonGoodyear

Michelin

Pirelli Tyres

GlobalCapability

Index (GCI)

Global Revenue Index (GCI)

Measuring Globalisation

AMBITIONAMBITION

Mapping of the consumer electronics industry

%

Global Revenue Index (GRI)

100

0

20

80

60

40

200 10040 60 80%

MATSUSHITA

THOMSON

PHILIPS

SONY

The evolution of Whirlpool globalisationG

loba

l Cap

abili

ty In

dex

(GC

I)

Global Revenue Index (GRI)

%

100

100

0

20

80

60

40

20 40 60 800%

1990

1980

1999

Global PositioningIt consists of two types of choices: Choice of Countries

& Defn. of value prop.

Choice of Countries:

Key Countries – Size, growth, quality of HR etc are critical for companies LT competitiveness. Japan, Korea in Auto sector.

Emerging Countries – Countries exhibiting high growth rate. China, India, Poland, Brazil.

Platform Countries – serve as hub for setting up regional centers that are platforms for further development.

Marketing Countries

Sourcing Countries

KEY COUNTRIES: Have to be there

EMERGING COUNTRIES (WINDOW OF OPPORTUNITIES) : Its time to go there

PLATFORM COUNTRIES: ENTRY and SUPPORT

MARKETING COUNTRIES : No need to invest/ Only sales

SOURCING COUNTRIES: Manufacturing base /source of Raw materials/ Purchasing Office

Geographical PositioningGeographical PositioningCountries PortfolioCountries Portfolio

GLOBAL POSITIONING

Ciba Fine Chemicals

GLOBAL POSITIONING

Ciba Fine ChemicalsGLOBAL

POSITIONING

Customer’s needs

Similar(Global Segments)

Different(Local Segments)

Minimun Size Of

Production

High(Global Scale)

Low(Local Scale)

GLOBALSTANDARDISATION

AircraftMicroprocessors

BasicChemicalsPulp and paper

Electronic Componernts

MODULARSTANDARDISATIONAnd MULTIBRANDS

ElevatorIT ServicesBeer

LOCALADAPTATION

FoodsConsulting Services

PROCESSSTANDARDISATION

Cement

Example: Intel, DellExample: Otis, SAB

Example: CemexExample: Carrefour

Standardised or LocalisedStandardised or Localised ??

GLOBAL POSITIONING

GLOBAL POSITIONING

THE THREE DIMENSIONS OF GLOBAL COMPETITIVE POSITIONING

Global Standardisation

Local Adaptations

Competeon Costs/priceAdvantages

Competeon Differentiated/valueAdvantages

Multiple Segments

Single Segment

GLOBAL POSITIONING

THE THREE DIMENSIONS OF GLOBAL COMPETITIVE POSITIONING

Global Standardisation

Local Adaptations

Competeon Costs/priceAdvantages

Competeon Differentiated/valueAdvantages

Multiple Segments

Single Segment

Wal Mart

Carrefour

Dairy Farm(in Asia)

Global Positioning

Global niche players

Standard Adaptive

Differentiated Cost Leader Differentiated Cost leaderStandardised niche differentiator

Low-cost standardised niche

Differentiated niche adapter

Low-cost niche adapter

Example:Swatch, Intel

Example:Acer

Example:McDonald

Example:Carrefour

Global Positioning

Broad Global players

Standard Adaptive

Differentiated Cost Leader Differentiated Cost leader

Broad niche differentiator

Broad standardised cost leader

Broad adaptive differentiator

Broad adaptive cost leader

Example:SONY

Example:Matsushita

Example:Unilever P&G Philips

Example:Electrolux

Global Business System

It consists of decomposing the value chain elements that are spread and integrated across the world.

To what extent do business units share resources, assets and competencies on order to optimise synergies? What are the corporate priorities in resource allocation among businesses?

R & D

Procurement

Manufacturing

Marketing

Sales

STAGE MODEL OF INTERNATIONAL DEVELOPMENTSTAGE MODEL OF INTERNATIONAL DEVELOPMENT

EXPORT LOCALISATION GLOBAL

AgentLocaldistributor

Localdistributor

Marketingsubsidiaries

Marketingsubsidiaries Subsidiaries

WhollyOwnedJointVentures

Assembly

BuyingOffice

Assembly

Components

SourcingLocalPlant

Local+Regional+GlobalPlants

Subsidiaries SubsidiariesSubsidiaries

Adaptation

Development

ISD 2

MULTINATIONAL

Time

Value Chain

Numberof Countries

BuyingOffice

BuyingOffice

BuyingOffice

Global Configuration of the Value ChainGlobal Configuration of the Value Chain

R & D Procurement Manufacturing Marketing GeneralManagement

GLOBALCENTRES

REGIONALCENTRES

LOCALUNITS

ResearchDevelopment

SourcingProduction Marketing Customers

Services

•Global

•Regional

•Local

- Central R & D- Technology

Strategy- Core Technology- Core Products- Technology

conferences- Technological

intelligence

- Regional Productsdevelopment

- Regionalintelligence

- Regional seminars

- Local Laboratories

- Global factories- Global materials

flow- Process Engineering- Central sourcing

- Regional factories- Regional sourcing

- Local production- Local sourcing

- Global marketing

strategy- Global

communication - Global productsManagement

- Regional Accounts- Regional Bidding

- Distribution- Promotion- Sales

Finances H.R.M

- Policies- Procedures- Informationsystem

- Regionalcustomerssupport

- Logistics- Maintenance

- After salesservices

- CorporateFinance

- Global Treasury

- Control

- Regional Debt financing

- RegionalControl

- Local borrowing

- InternationalH.R.M

- Regionalcareers

- Training

- Local careers- Local

GIS 35

Components of a Global Value ChainComponents of a Global Value Chain

Building GlobalCompetitive Advantages

TRANSFERRABILITY of COMPETITIVE ADVANTAGESWhat is the value of our existing advantages on local

markets? To what extend do we need to adapt our products and

management approaches?What new capabilities need to be acquired and how?

Our CompetitiveAdvantages

To what extendThey are

transferrable

Which newCapabilities to create and how?

Customer’s needs

Similar(Global Segments)

Different(Local Segments)

Source ofCompetitive Advantages

Technical TRANSFER withLiitle adaptation

TRANSFER andADAPT

ADAPT andRECREATE

TRANSFERAnd ADAPT

Ex: Unilever

Example: Mc Donald’s Example: Carrefour

Transferrability of Competitive Transferrability of Competitive Advantages and Business model ?Advantages and Business model ?

Mirror image of Positioning

Social, CulturalPolitical, Contextual

ex: Dell, Intel..)

Global Organization

It is the design of an orgainsational architecture which is able to support and implement the global ambition, global positioning and global business system .

EXPORT LOCALISATION GLOBALMULTINATIONAL

SingleBusiness

Multiple Business

HQ

Country Subsidiaries and Agencies

Regions

HQ

Country Subsidiaries and Agencies

FunctionsOperations

Marketing and Sales

Domestic Export

HQ

HQ

Division II

Division III

Operations

Domestic

Marketing and Sales

Export

Division I DivisionsInternational

Country Subsidiaries and Agencies

Division III

Division II

Division I

OperationsDomestic

HQ

OperationsDomestic

HQ

DivisionsInternational

Country Subsidiaries and Agencies

HQ

Regions

Division I

Division II

Division IIICountry Subsidiaries and Agencies

HQ

Division I

Division II

Regions Regions

Global Strategic Development and OrganisationGlobal Strategic Development and Organisation