CHAPTER 8

International Strategy

KNOWLEDGE OBJECTIVES
Studying this chapter should provide you with the strategic management knowledge needed to:

1. Explain traditional and emerging motives for firms to pursue international diversification.
2. Explore the four factors that lead to a basis for international business-level strategies. 3. Define the three international corporate-level strategies: multidomestic, global, and transnational. 4. Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization.

GLOBALIZATION & DEVELOPING NATIONS

Economic globalization the formation of a single worldwide economy could further disadvantage the developing nations.
Do exogenous growth models explain the poor growth rates of LDCs? Does international communitys (World Bank, IMF) development paradigm focus too much on GDP growth, not enough on well-being & sustainable development? How best to assess genuine progress? How do domestic and international politics impeded economic reforms?

What socio-cultural & legal institutions hinder / help sustainable development?

Can anti-globalization protests (WTO, McDonalds) compel creation of a New World Order? Or, will MNC-dominated hegemony prevail?

The Globalization Trifecta

Globalization refers to processes that increase connectivity among societies & their people, institutions, organizations. Globalization intertwines cultural, political, and economic interdependencies that challenge traditional arrangements.
The growing extensity, intensity, and velocity of global interactions can be associated with their deepening impact such that the effects of distant events can be highly significant elsewhere and specific local developments can come to have considerable global consequences. (Held et al. 1999)

Communication & transportation technologies compress and decouple time, geographic spaces, social distances (global village) National & regional boundaries grow increasingly permeable Cultural / identity groups become detached from their traditional territorial bases (the diffusion of supraterritoriality)

The World is Flat

A brief History of the 21st Century
by Thomas L. Friedman

Globalization
Version 1.0. 1492 (Columbus) - 1800.
Key factors-- muscle, horsepower, windpower, steampower Agent of change -- Countries and governments

Version 2.0. 1800 to 2000

slowed by Great Depression and World Wars I and II key factors: falling transportation costs, and later, by falling telecommunications costs telegraph, telephones, the PC, satellites, fiber-optic cable, and early version of the Internet.
Source: The World is Flat, A brief History of the 21st Century
by Thomas L. Friedman

Globalization
Version 3.0. 2000 to present
Key factors-- power for individuals to collaborate and compete globally. Software, applications, global fiber-optic network Agent of change -- Individuals, much more diverse --- non-Western, non-white

Source: The World is Flat, A brief History of the 21st Century

by Thomas L. Friedman

Friedmans ten flattening forces

1. Fall of the Berlin Wall
The events of November 9, 1989, tilted the worldwide balance of power toward democracies and free markets.

2. Netscape IPO
The August 9, 1995, offering sparked massive investment in fiberoptic cables.

3. Work flow software

The rise of apps from PayPal to VPNs enabled faster, closer coordination among far-flung employees.

4. Open-sourcing
Self-organizing communities, la Linux, launched a collaborative revolution.

5. Outsourcing
Migrating business functions to India saved money and a third world economy.
by Thomas L. Friedman & Wired Magazine, May 2005

Source: The World is Flat, A brief History of the 21st Century

Friedmans ten flattening forces

6. Offshoring
Contract manufacturing elevated China to economic prominence.

7. Supply-chaining
Robust networks of suppliers, retailers, and customers increased business efficiency. See Wal-Mart.

8. Insourcing
Logistics giants took control of customer supply chains, helping mom-and-pop shops go global. See UPS and FedEx.

9. In-forming
Power searching allowed everyone to use the Internet as a "personal supply chain of knowledge." See Google.

10. Wireless
Like "steroids," wireless technologies pumped up collaboration, making it mobile and personal.
Source: The World is Flat, A brief History of the 21st Century
by Thomas L. Friedman & Wired Magazine, May 2005

CHARACTERISTICS

PHASE-I

PHASE-II

PHASE-III

PHASE-IV

DOMESTIC
Primary Orientation Competitive Strategy Importance of world business Product/Service Domestic Marginal

INTERNATIONAL
Market Multi-Domestic Important

MULTINATIONAL
Price Multi-National Extremely Important

GLOBAL
Strategy Global Dominant

Product/Service

New, Unique
Product engineering emphasized

More Standardized
Process engineering emphasized Shared Decreasing Decreasing Few Large, multi-domestic Domestic and Primary markets

Completely Standardized (commodity)

Engineering not emphasized Widely shared Very low Very low Many Large, multinational

Mass-customized
Product and process engineering Instantly and Extensively shared Very high High, yet Immediately decreasing Significant (few or many) Largest, global Global, least cost

Technology R & D/ Sales Profit margin Competitors Market Production location

Proprietary High High None Small, Domestic Domestic

Multinational, least cost

Exports
Structure Cultural sensitivity With whom Level

None
Functional divisions Marginally important No one No one

Growing, high potential

Functional with International division Very important Clients Workers and clients

Large, saturated
Multinational line of business Somewhat important Employees Managers

Imports and exports

Global alliances Critically important Employees and Clients Executives

Strategic assumption

One Way/ One best Way

Many good ways

One least cost way

Many good ways Simultaneo usly

Cultural Globalization

Globalization institutionalizes the diffusion of a secularized world culture, Western in origin, that trumps all alternatives.
Globalization processes spread a legitimated world cultural order of universally accepted, rational, & democratic ideas reshaping national states, organizations, and individual identities.
(John Meyer et al. 1997)

World-cultural values & norms creates isomorphism among:

National constitutions everywhere adopt common institutions: citizenship rights, public education, health, pensions

International organizations, especially the UN system

Associations of scientific & professional experts Voluntary associations & social movement organizations

Political Globalization

The 1648 Treaty of Westphalia, ending the Thirty Years War, destroyed the Holy Roman Empire and loyalties based on religion. It created todays system of sovereign nation-states.
No governmental authority exists over nations
National borders are absolute barriers against interference & intervention by outsiders National security requires international balanceof-power (ultimately, by credible threats of war)

Is globalization slowly eroding nation-state sovereignty? Are new supranational orgs (EU, UN, NATO, World Court) constructing a multilateral, intergovernmental system? Will international orgs acquire enough legitimate authority to gain control over the means of violence among nations?

Economic Globalization

After World War II, trade negotiation rounds under GATT drove economic globalization, resulting in treaties to remove tariff barriers to "free trade as now interpreted by World Trade Org.
Two definitions of economic globalization: World Bank: Freedom and ability of individuals and firms to initiate voluntary economic transactions with residents of other countries. IMF: The growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, freer international capital flows, and more rapid and widespread diffusion of technology.

Four key dimensions of economic globalization involve the flows across national boundaries of: goods & services; financial capital (FDI); labor (human migration); technology & knowledge. What explains the differential economic growth of nations? Does GDP indicate well-being?

MNC Water Barons at the Village Pump

MNCs commodify, commercialize, & exploit all sources of profit. For example, since 1990, six water utility firms won contracts to privatize public waterworks affecting 300M people in 56 countries.
These MNCs Bechtel (U.S.), Suez, Vivendi Environnement, Saur (France) United Utilities (UK), Thames Water (Germany) claim to be more efficient in providing cheaper, clean water than often-corrupt public utility companies. Working with the World Bank, water barons lobby governments, trade & standards INGOs to change municipal and trade laws. By 2020 these firms may monopolize 67% of current public water. Critics say they are predatory capitalists that ultimately plan to control the worlds water resources and drive up prices even as the gap between rich and poor widens. The fear is that accountability will vanish, and the world will lose control of its source of life.
(Center for Public Integrity: www.icij.org)

WTO Ensuring Free Trade? The WTO, created in 1995, is a primary target of activists in the anti-corporate globalization movement.
The WTO is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. <www.wto.org>

Core WTO principles are Trade without Discrimination & Promoting Fair Competition among nations.

The WTO multilateral trading system is negotiated and signed by governments. These contracts guarantee member nations trade rights & bind governments to keep trade policies within agreed limits. Their purpose is to ensure that trade flows as predictably and freely as possible, by helping producers, exporters, and importers of goods and services conduct their business smoothly.

WTO A New Evil Empire?

Anti-globalists criticize the WTO for its allegedly undemocratic decision-making and lack of openness in reaching agreements. They claim the 25 richest developed nations manipulate trade deals to the disadvantage of 120 poor developing countries. LDCs often lack staff and expertise to win favorable tariff reductions. Textile quotas block clothing imports from low-wage countries. US, EU, and Japanese subsidy rates are $20,000 per farmer.
What should be a level playing field in free-trade talks? Should all nations have equal access and status in trade disputes? How can poor nations afford negotiators & experts? Should negotiations produce actually equal outcomes and implementation? Would genuine trade fairness require a massive transfer of wealth from the richest to poorest nations?

Millennium Development Goals

UN Millennium Development Goals were adopted in 2002 by a consensus of experts from the UN Development Programme, OECD, IMF, and World Bank.
The goals for 2015: 1. Cut extreme poverty & hunger in half 2. Achieve universal primary education 3. Promote gender equality & empower women 4. Reduce under-five mortality by 2/3rds 5. Reduce maternal mortality by 3/4ths 6. Reverse spread of HIV/AIDS, malaria, TB 7. Ensure environmental sustainability 8. Global development partnership - aid, debt Are these goals Utopian? Cost estimates for meeting most MDGs by 2015 would require additional $50B/year in official development assistance doubling current aid levels. No G-7 nation has reached agreed target of 0.7% of developed countries GNP (only Scandinavia & Netherlands have).

[D]onor resources can play an important role in strengthening the ability to use resources effectively. This is a focus of UNDP work in many countries in partnership with governments, donors, and civil society.

So what about China and India?

So what about China and India?

2 nations with 1/3 of global population Exponential economic growth during the last 20 years -9.5% in China, 6% in India China has largest # of cell phone users, 350 million, projected to be 600 million in 2009. By 2007, China will have more broadband internet access than the U.S. China -- mass manufacturing powerhouse India strength in design, services, and precision industry

Offshoring and Outsourcing

McKinsey Global Institute estimates that 9.6 million U.S. services jobs could be sent offshore today (theoretically), 4m jobs more likely. Some industries changed beyond recognition. Outsourcing: 49% of packaged software worldwide 44% of infotech services 25% of worldwide banking jobs 19% of insurance jobs 13% of pharmaceutical jobs 52% of engineering jobs 31% of accounting jobs

Strengths and Challenges

CHINA
1-child policy limits population growth to 1b, then a graying population to reach 300m by 2025. Strong infrastructure with centralized coordination and planning. Growing political backlash against authoritarian control. High growth needed to avoid increased unemployment

INDIA

Population to grow to 1.6b by 2050. More efficient with capital than China. English speaking, friendly toward the U.S. and its citizens, more democratic and open society. Very undeveloped infrastructure power and transportation Red-tape, bureaucracy and corruption Bottlenecks in high quality training High growth needed to avoid increased unemployment

FIGURE

8.1

Opportunities and Outcomes of International Strategy

Identifying International Opportunities

International Strategy
A strategy through which the firm sells its goods or services outside its domestic market.

Reasons to having an international strategy

International markets yield potential new opportunities.
New market expansion extends product life cycle. Needed resources can be secured. Greater potential product demand.

Determinants of National Advantage

Factors of production
The inputs necessary to compete in any industry
Labor Land Natural resources Capital Infrastructure

Basic factors
Natural and labor resources

Advanced factors
Digital communication systems and an educated workforce

Determinants of National Advantage (contd)

Demand Conditions
Characterized by the nature and size of buyers needs in the home market for the industrys goods or services.
Size of the market segment can lead to scale-efficient facilities. Efficiency can lead to domination of the industry in other countries. Specialized demand may create opportunities beyond national boundaries.

Determinants of National Advantage (contd)

Related and Supporting Industries
Supporting services, facilities, suppliers and so on.
Support in design Support in distribution Related industries as suppliers and buyers

Firm Strategy, Structure and Rivalry

The pattern of strategy, structure, and rivalry among firms.
Common technical training Methodological product and process improvement Cooperative and competitive systems

Selecting an International Corporate-Level Strategy

The type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies.
Some strategies provide individual country units with the flexibility to choose their own strategies.

Other strategies dictate business-level strategies from the home office and coordinate resource sharing across units.

Multidomestic Strategy
Multidomestic strategy

Strategy and operating decisions are decentralized to strategic business units (SBU) in each country. Products and services are tailored to local markets. Business units in one country are independent of each other. Assumes markets differ by country or regions. Focus on competition in each market.

Prominent strategy among European firms due to broad variety of cultures and markets in Europe.

Global Strategy
Global strategy

Products are standardized across national markets. Business-level strategic decisions are centralized in the home office. Strategic business units (SBU) are assumed to be interdependent. Emphasizes economies of scale. Often lacks responsiveness to local markets. Requires resource sharing and coordination across borders (hard to manage).

Transnational Strategy
Transnational strategy

Seeks to achieve both global efficiency and local responsiveness. Difficult to achieve because of simultaneous requirements:
Strong central control and coordination to achieve efficiency Decentralization to achieve local market responsiveness

Firm must pursue organizational learning to achieve competitive advantage.

Environmental Trends
Liability of Foreignness
Legitimate concerns about the relative attractiveness of global strategies
Global strategies not as prevalent as once thought

Difficulty in implementing global strategies

Regionalization
Focusing on particular region(s) rather than on global markets Better understanding of the cultures, legal and social norms

TABLE

8.1

Global Market Entry: Choice of Entry

Characteristics
High cost, low control

Type of Entry
Exporting

Licensing
Strategic alliances

Low cost, low risk, little control, low returns

Shared costs, shared resources, shared risks, problems of integration (e.g., two corporate cultures)

Acquisition

Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations
Complex, often costly, time consuming, high risk, maximum control, potential above-average returns

New wholly owned subsidiary

Dynamics of Mode of Entry

Whats the best solution?
Situation
The firm has no foreign manufacturing expertise and requires investment only in distribution.

Optimal Solution
Export

Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation
The firm needs to facilitate the product improvements necessary to enter foreign markets.

Optimal Solution
Licensing

Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation
The firm needs to connect with an experienced partner already in the targeted market.

Optimal Solution
Strategic Alliance

Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation
The firm needs to reduce its risk through the sharing of costs.

Optimal Solution
Strategic Alliance

Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation
The firm is facing uncertain situations such as an emerging economy in its targeted market.

Optimal Solution
Strategic Alliance

Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation
The firms intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.

Optimal Solution
Wholly-owned Subsidiary