Unit – 13

strategies for global

environment
• Major Drivers of Globalization
• The global business environment is becoming more complex and dynamic,
with expanding and deepening of ties between societies and between
organizations within those societies. Moreover, many large organizations
now see themselves as truly global in scope, not rooted in any particular
country. Environment creates complexity and uncertainty for all firms but
global firms face highest degree of complexity and uncertainty in
management since subsidiaries or subunits of global firms are located in
different countries and deal in diverse products, services and markets; a
very complex set of dynamic environment exists that need to be
understood, monitored and analysed in real time to take effective
decisions in a decentralized set up across the world.
• To survive and grow in such multi-layered, multinational and multi-
cultural environment, an MNC’s managers must be capable of assessing
the opportunities and threats in respect of their industry and their
organizations and develop strategies and structures to continuously
respond to the emerging situations.
• WHY DO FIRMS ENTER INTERNATIONAL BUSINESS
• International business refers to business activities that involve the
transfer of resources, goods, services, knowledge, skills, or information
across national boundaries. The resources that make up this flow are
raw materials, capital, and people. Goods may be semi-finished, finished
assemblies and products. Services include banking, accounting, legal,
insurance, management consulting, trade services, education,
healthcare and tourism among others. Knowledge and skills include
technology and innovation, organisational and managerial skills and
intellectual property rights such as copyrights, trademarks and brand
names. Information flows include databases and networks. The parties
include individuals, companies both private and public, company
clusters, government bodies and international institutions and
universities. International business is conducted by individuals, nations
but predominantly by MNCs. International business by MNCs is different
because large part is internally traded amongst subsidiaries at transfer
prices. Their objectives are to maximise and optimise operations as a
group of subsidiaries, irrespective of national boundaries.
• Generally the motivations for conducting international business include
market motives, economic motives and strategic motives. These
motives will vary from one business activity to another, producing multiple
motivations for the international firm with a broad scope of activities in
different parts of the globe. Some of these reasons are as under:
• Commercial risk can be spread across several countries.
• Involvement in international business can facilitate the experience curve
effect, i.e. cost reductions and efficiency increase as business acquires
experience of certain type of activity, function or project. Management is
exposed to fresh ideas and different approaches to solving problems.
• Economies of scope result from firm doing wide range of activities and
hence able to provide some common services and inputs useful for each
activity.
• The cost of new product development could require so much expenditure
that the firm is compelled to adopt an international perspective, to recover
developmental cost.
• There might be intense competition in the home market but little in
some foreign countries. For example, three auto giants of USA, have
diversified in Europe and South East Asia.
• Firms go international to increase their return through higher revenue and
lower costs to benefit from differences in costs of labour, natural
resources and capital, as well as their regulatory requirements such as
taxation. Firms like Motorola, Intel, and IBM went to China for above
reasons.
• When companies have some distinctive capabilities or resources which
they want to exploit for example McKenzie, or Boston Consultants have
competencies in organisation design, development, problem solving and
strategic management.
• Sometimes firms go international to take advantage of being “first
mover.”
• When firms will benefit through vertical integration or diversification or
acquisitions in other countries.
• When companies follow their major customers and competitors abroad.
For example, Japanese tyre maker Bridgestone found itself in the U.S.
market when its customers-Japanese car makers- Toyota, Honda, and
Nissan established their manufacturing operations in U.S. Bridgestone
took over Firestone to become a leading global tyre maker.
•
• Although international business is often an extension of domestic business, it is
significantly different from the latter, mainly due to the differences in
environmental dynamics and operational nature. Environmentally, the diversity
that exists between countries with regard to their currency, inflation and interest
rates, accounting practices, cultures, social systems, business practices, laws,
government regulations, and political stability are among the many reasons for
the complexity of international business.
• Therefore, international business is riskier than domestic business. For instance,
variation in inflation, currency, taxation, and interest rates among different
nations has a significant impact on the profitability of an international firm. For a
firm that is borrowing and investing in a foreign country, the higher interest rates,
taxes and inflation rates mean higher cost of production and lower profitability.
• On the other hand, for a firm that is depositing money in a foreign bank, higher
interest rates mean a higher return. Similarly currency exchange rate fluctuations
can significantly alter profitability calculations unless forward contract and
hedging is resorted to. Similarly, cultural differences will influence marketing of
products and business transactions because people interpret communication
according to their culture and react accordingly. Further, market demand and
supply conditions and consumer behaviour are different than from home country.
• There are some other issues in international business, which are not present in
domestic business. These are:
• Information on foreign countries needed by a particular firm may be difficult or
impossible to obtain.
• Deals might have to be transacted in foreign language and under foreign laws,
customs and regulations.
• International managers require a broader range of management skills than do
managers of domestic firms.
• Large amount of important work might have to be left to intermediaries, consultants
and advisors.
• Higher interaction with government bodies of different countries is required with
greater need for public relation work in the host countries.
• In spite of these problems and difficulties firms go international for marketing,
economic and strategic reasons.
• In 1990, Michael Porter and his team studied about 100 companies of 10
nations. Porter examined and answered the question, why some industries
within a country grow and excel, for example, automobile industry in Japan.
According to him, success of a certain industry in a country is based on the
combined impact of four factors:
• Factor endowments,
• Demand conditions,
• Related and supporting industries,
• Firm strategy, structure and rivalry.
• Porter views these four factors as constituting the diamond. He proposed
that a firm is most likely to succeed in those industry segments where the
diamond is most favourable. He also suggested two more variables,
chance and government, which can influence the national diamond:
Factor endowments
• He further divided this factor into two: basic factors and advanced factors.
Basic factors include natural resources, climate, demographics, etc. and
advanced factors include communication, infrastructure, government, etc.
He feels that advanced factors are more essential for competitive
advantage. For this, he gave example of Japan where there is shortage of
arable land and mineral deposits, yet through investment they have made
developments.
Demand Conditions
• Demand conditions within a country play an important role in improving
competitive advantage. If the demand within a country is high, then it exerts
pressure on a company to innovate and improve the quality of the product.
Here we take an example of wireless phones. The demand conditions of
Scandinavia, forced NOKIA of Finland and Ericsson of Sweden to develop
cellular phone technology.
Related and Supporting Industries
• Availability of related and supporting industries too add to competitive
advantage. For example, Switzerland’s success in pharmaceuticals is
closely related to its previous international success in the technologically
related dye industry.
Firm Strategy, Structure and Rivalry
• Strategy and structure also add to competitive advantage of a nation. A
good example is from Japan and Germany’s firms which have well planned
strategy and structure. A strong and domestic competition adds to the
competitive advantage e.g. Nokia in Finland rose to global pre-eminence in
the cellular telephone market.
Porter’s emphasis on innovation as the source of competitiveness reflects an
increased focus on the industry and product as well as on the country’s culture
and its factor endowments. In particular, the role of governments in
encouraging private and public enterprises, protecting infant industries and
development of infrastructure and investment climate is duly emphasized. In
fact, this theory reflects current global trade pattern which is based on industry
specific strengths of nations.
•
NATIONAL COMPETITIVE ADVANTAGE: PORTER’S DIAMOND
I
Figure 4.4: Porter’s Diamond

Firm strategy, structure

and rivalry

Factor Demand

endowments conditions

Related and supported

industries
Strategies in Geographic Expansion

Figure 9.2: Risk, returns and control in various modes of entry

Risk and
Returns FDI Related Umbrella company
Wholly owned subsidiary
Equity joint venture

Cooperative joint venture.

Transfer Branch
related Franchising
Licensing

Trade-related
Contracting
Exporting
Resource commitment

Low Control High

• EXPORTING
• Exporting means the sale abroad of an item produced, stored or processed in the supplying firm’s
home country. Exporting is often the first stage of overseas trading (transfer of goods across
national boundaries by direct or indirect methods) practiced by small and medium sized
enterprises. Entering into overseas market normally requires a steep learning curve and persistent
commitment over several years to achieve any significant success. Large multinationals also
export goods and services from different subsidiaries to various markets and also from one
subsidiary to another.
• There are significant possible benefits, which a company may gain from exporting. These are
outlined below:
• Exporting is relatively cheap and convenient to administer and carries no risk of failure of direct
foreign investments.
• Export sales offset lack of growth in the domestic market.
• Export markets will help exploit the full potential of business (products, services, technology).
• Export sales help improve gross margins and profitability and improve company’s quality profile.
• Export sales reduce dependence on domestic markets for growth and reduce unit costs.
• The revenues from foreign sales accrue entirely to the exporting company (rather than it having to
repatriate profits from foreign subsidiaries).
• The firm builds a network of contacts with foreign agents, distributors, retail outlets, etc. which
help it to understand foreign environment and degree of risk.
• Direct exporting provides a total control over the selling process, avoiding the need to share know-
how with foreign partners and requires less initial capital investment.
• Export activity keeps the firm up-to-date on international changes in technology, product’s
modifications and servicing levels.
• Export sales will help utilise excess production capacity and synchronise fluctuations in revenue
pattern, production schedules.
• However, there are reasons for not exporting, which are as under:
• Cost of financing long periods between obtaining export orders,
delivering the goods to distant destinations and getting paid.
• Problems of acquiring and retaining staff competent to undertake the
huge amount of paperwork associated with international marketing
and also those who possess the linguistic and specialist foreign
trade skills necessary for selling abroad.
• Managerial resources necessary to visit foreign markets regularly,
monitor and control agents and distributors, meet important
customers, attend foreign exhibitions, etc.
• Costs and inconvenience of finding capable foreign agents and
distributors, and investigating the market characteristics and trading
rules of various countries.
• Forecasting sales in foreign countries can be far more difficult than
in the firm’s home nation. Changes in the political, legal, social and
economic superstructures of other nations are hard to predict, as are
the behaviours of actual and potential competing compa
• FRANCHISING
• Franchising is a form of licensing, whereby the franchisee adopts the
parent company’s entire business format, i.e. its name, trademarks,
business methods, layout of premises and technology, etc. The franchiser
provides in return for royalty and lump sum fee, a variety of supplementary
management services: training, technical advice, stock control systems,
even perhaps financial loans.
• Hence, it retains complete control over how the product is marketed,
but the franchisee carries the risks of failure and the franchiser’s capital
commitment is typically low. It combines the technical experience of
franchiser with the intimate local knowledge of the franchisee. Franchisees
are self-employed and not the employees of the parent company.
Franchisees are sheltered under a protective umbrella of specialist skills,
resources and experiences already possessed by the parent company.
They obtain a well-known brand name and set of activities with a proven
reputation.
• Franchisees are required to protect the franchiser’s good name
through maintenance of minimum quality standards, adoption of uniform
appearance, adherence to business practices, etc. The franchisee is also
expected to purchase raw materials and equipments from franchiser at
prices fixed in advance (for example, meat for hamburgers, spare parts,
ingredients for alcoholic or soft drinks).
• JOINT VENTURES
• Joint ventures are collaborative arrangements between
unrelated parties, which exchange or combine various
resources while retaining their separate and legal status.
There are two types of JV: equity and contractual. The
former involves each partner taking an equity stake in
the venture, by setting up a joint subsidiary with its own
share capital and legal status as a corporate entity. In a
contractual joint venture, there is an agreement for
knowledge sharing, mutual licensing and other
arrangements for resource sharing and obligations to
each other. The most typical JV is a 50/50 venture, in
which each side contributes a team of managers under a
leader appointed with mutual consent along with a
coordination committee and information format which is
agreed upon to review the JV regularly.
• WHOLLY OWNED SUBSIDIARIES
• Despite the cost and risk involved, companies may invest in establishing overseas
subsidiaries if resources, expertise and experienced people in international business
are available and the company has long-term goals and strategy of operating in
foreign markets.
• The Dunning’s eclectic theory of international production explains the motives
for global business. According to this theory, companies make FDI (foreign direct
investment) to gain:
• Ownership-specific advantages, which include property, tangible assets,
production innovation, marketing systems, economies of scale, scope, and
experience effect, ability to gain access to inputs, leverages of resources of parent
company and favoured market access.
• Internationalisation advantages result from avoidance of ‘transaction advantages,
costs of dealing with external parties, ability to cross subsidise operations, ability to
control supplies and market outlets.
• Location-specific advantages come from input prices, controlling quality at the
source or during process, increasing productivity, spatial distribution, obtaining
investment incentives, overcoming trade barriers and reducing transport and
communication costs.
 Fig. 6.1
Globalisation and Localisation

High Consumer
electronics, Telecommun
cameras etc ication
Pressure for localisation
Synthetic fibre Steel, food,
Low cement, movies, clothing

Low pressure for globalisation High

Pressure for Globalisation and Localisation

 Fig. 6.1
Globalisation and Localisation

Global matrix
High Multi domestic
structure;
strategy; global
transnational
product structure strategy
Pressure for localisation
International Global strategy-
strategy and global geographic
Low structure structure

Low Pressure for globalisation High

Pressure for Globalisation and Localisation

 Hetharchy,
Keiratsu
etc.
Networked-
global
enterprises
Transnational

Global

MNC or multi-
domestic
International
domestic
 Globalizati
Globalisation of on
supply chain markets

Globalisation
of mind set

Globalizati Globalization of
on of designs,
resources knowledge,

Capital, HR information
• GLOBAL EXPNSION THROUGH STRATEGIC
ALLIANCES
• One of the most popular ways companies get involved in
international operations is through international strategic
alliances. The average large U.S. Corporation, which
had no alliance in early 1990s, now has more than 30
alliances globally. Companies in rapidly changing
industries, such as media, entertainment,
pharmaceuticals, biotechnology and software might have
hundreds of these relationships.
• Typically alliances include, licensing, joint ventures,
and consortia. For example, pharmaceutical companies
such as Merck, Eli Lilly and Pfizer cross license their
newest drugs to one another to support industry-wide
innovation and marketing to offset the high fixed costs
incurred on research and distribution.
• Companies often seek joint ventures to take advantage
of partner’s knowledge of local markets, to achieve
production cost savings through economies of scale, to
share complementary technological strengths, or to
distribute new products and services through another
country’s distribution channels.
• A type of consortium, ‘the global virtual organization’, is
increasingly being used and offers a promising approach
for meeting worldwide competition. The virtual
organization refers to a continually evolving set of
company relationships that exist temporarily to exploit
unique opportunities or attain specific strategic
advantages. A company may be involved in multiple
alliances at any one time.
• Oracle, a software company, is involved in as many as
15,000 short-term organizational partnerships at any
time. Some executives believe shifting to a virtual
approach is the best way for companies to be
competitive in the global market place
• Subsidiaries Roles
• Subsidiary roles play a key part in balancing global
integration and local responsiveness.
• In an autonomous role, the subsidiary performs most
activities of the value chain independently of
headquarters, selling most of its output in the local
market.
• In a receptive role, most subsidiary functions are highly
integrated with headquarters or with other business
units, for example, exporting most of the subsidiary
production to the parent company or to other
subsidiaries, while importing multiple products or
components from them.
• In an active role, many activities, like R&D, are located
locally but carried out in close coordination with other
subsidiaries. The autonomous role is typical of MNC,
employing a multi-domestic strategies.
• Receptive role is typical of MNCs, following global strategies and
active role is often assigned to subsidiaries by MNCs, following
transnational strategies with strong mandate from headquarters
along with considerable autonomy for local adaptation.
• Among different subsidiaries of the same MNC, however, the level
of autonomy may vary due to the different roles and mandates
among them.
• It is possible, for instance, that most subsidiaries in a firm (using a
global strategy) be receptive while a subsidiary serving as the centre
of excellence in design is active or autonomous
• Another way of looking at subsidiary role is, from the
perspective of flow of knowledge across the MNC
units. The expertise transferred, can be purchasing skills
or marketing knowledge (product or packaging design or
distribution expertise etc. Subsidiaries can be classified
by the extent to which each
• (a) receives knowledge inflow from the rest of the
corporation and (b) provides knowledge outflow to the
rest of the corporation.
• Four subsidiaries roles get generated: global innovator
(high outflow and low inflow), integrated player (high
outflow and high inflow), implementer (high inflow and
low outflow) and local innovator (local outflow and local
inflow).
• In the global innovator role, the subsidiary is the fountain
- head of knowledge for other units. The integrated
player role implies creating knowledge that can be
utilised by other subsidiaries. In this role the subsidiary
exchanges knowledge with headquarters and with other
subsidiaries on an on-going basis. In the implementer
player role, the subsidiary engages in very little
knowledge creation and relies very heavily on knowledge
inflow from headquarter or peer subsidiaries. Finally the
local innovator role implies that the subsidiary has
complete local responsibility for the creation of relevant
expertise. However, this knowledge may not be useful or
relevant to other subsidiaries
Subsidiary classifications on Knowledge creation basis.

High
Knowledge
Global Innovator Integrated Player
Outflow
Local Innovator Implementer
Low
Low High
Knowledge Inflow

1.17 Subsidiary Competence and Importance

• Subsidiary Competence and Importance
• The strategic importance of local environment and competence of
the foreign subsidiary are two key considerations determining
subsidiary roles.
• The strategic leader role is played by a highly competent subsidiary
located in a strategically important market. This subsidiary serves as
partner to headquarter in developing the strategy and implementing
it.
• Contributor subsidiaries operate in small or strategically less
important market but have distinctive capabilities.
• Implementer subsidiaries operate in less important strategically
markets but are competent to maintain local operations. Their
market potential is limited as reflected in corporate resource
commitment. The efficiency of an implementer is as important as the
creativity of its strategic leaders because it provides the strategic
leverage that affords the MNCs to gain competitive advantage.
Implementer subsidiaries create opportunities to capture economies
of scale and scope that are crucial to global strategies.
• Finally black hole subsidiaries operate in important markets where
they barely make a dent, but their local presence is essential for
maintaining global presence.
 Competence of subsidiaries
And Importance of Markets-Classification
High
Competence Contributor Subsidiary Strategic Leaders
Of subsidiary

Implementer Subsidiary Black hole- Sub.

Low
Low High
Importance of market
ROLE OF CORPORATE HEADQUARTER
• The role of corporate in the development and management of
subsidiaries is crucial for the growth of enterprise as a whole.
Corporate parent has to take the view on how it will relate to and
seek to enhance the strategies of subsidiaries and add value in their
functioning. This is quite significant because different subsidiaries
play different roles.
• There are different approaches, that are adopted by various parents
in managing their subsidiaries. There are parents who seek to
operate in a portfolio management style. They have with slim
corporate head office staff seeking to balance investments in
business by reviewing acquisition targets, buying wisely and
divesting poor performers.
• A second role is as a restructurer of businesses, for example, the
role taken by Mittal Steel or Hanson Group. They focused on
acquisition of businesses not doing well but having inherent value
and turning them around by restructuring the organisations and
revamping their operations. The corporate skills will be in the area of
identifying such targets and restructuring and transforming them.
They will frequently move senior executives from head office to
subsidiaries for this purpose
• A parent may also seek to add benefits to businesses by
helping with the interrelationships between the business
themselves. This is sometimes called managing synergy.
The corporation may seek to transfer skills and
competencies from one business unit to another. These
could be competencies learned in the management of
one value chain, which are relevant to the value chain of
another business. It could be the marketing skills that
can be transferred to other less sophisticated
businesses, for example, by moving experienced
marketing executives.
• Another approach is the sharing of activities. Marriot
sought to share activities across hotels, restaurants and
airport facilities. Such shared activities included the
ability to provide and learn from standardised hotel
procedures and to benefit from shared procurement and
distribution. They were supported by an organisational
structure that encourages integration and cooperation.
 COMPETING INTERNATIONALLY

• PRICE/ PERFORMANCE EQUATION

• BRAND MANAGEMENT AND PACKAGING
• MARKET BUILDING
• PROFUCT DESIGN
• CAPITAL RESOURCES
• BUILDING LEVERAGES THROUGH ALLIANCES
• S