7.1. Introduction - FTMS · Zubair Hassan (2013) International Strategic Issues. ... threats of new...

International Business (MOD001055) Chapter 7: International Strategic Issues Zubair Hassan (2013) International Strategic Issues. International Business

Notes compiled by Zubair [email protected] or [email protected] 1

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.



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.



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.



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.



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.



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.



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 actions/reactions patterns an

organisation will pursue for competitive advantage

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)



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



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.)



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



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



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.



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,



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



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.



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

Global



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



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 low-

cost 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 Taiwan-

based design center, named Ford Lio, is working on the next-

generation 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 low-

cost 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



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 Disadvantages

Global

Standardised products

become highly cost

competitive

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

Emphasis home country

core competences

Transnational

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



competences

Product differentiation with

production and marketing

responsive to local

conditions

Multidomestic

Highly customised

production and marketing,

emphasising local

responsiveness

Loss of location economies

(which require a

geographically dispersed

value chain)

Most appropriate where the

minimum efficient size

(MES) is relatively low for

key elements of the value

chain and strong

local/cultural preferences

exist

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)



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.

Quadrant 1

Quadrant 2

Quadrant 4

Quadrant 3

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

Economic

Integration

Pressure

High

Low

High Low National

Responsiveness

Pressure



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.



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.



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.



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 available in books,

reports, online etc

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.



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



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:



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.



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



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. Design.

2. Manufacture

3. Distribution

4. Capacity

5. Stock

6. Purchasing

7. Scheduling

8. 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.



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



implies that companies should hold stock in generic form for as long as

possible before deciding how to extend the product range by re-

configuring 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.



Reference list

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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