International Strategy Ramsin Yakob, PhD ramsin.yakob@liu.se IEI/Linköpings Universitet What is it? The field of international strategy concerns the study of international activities of firms and their interactions with foreign governments, competitors, and employees. It seeks to address not only the question of why or firms go overseas, but also more importantly what they do and how they do it. (Kogut, 2002) Content; What functions are performed by cross-border enterprises; how they deal with differences that arise at national borders. Hence International strategy is not the same as International Management or International Organization. But in essence: International strategy is about reaching arbitrage benefits; labour, capital, tax, administrative, cultural, geographic etc 2 Linköpings universitet 1
The Strategic Challenge Challenges associated with engaging in FDI means that a number of questions has to be asked by the TNC! INTERNATIONALIZATION Economic Extension, Cross-border, Qualitative/ Quantitative, Internationalization questions Why? Where? When? What How? LIABILITY OF FOREIGNESS Unfamiliarity Spatial Distance Firms Specific costs Host/Home country environment FDI Ownership Control Strategy and Distance 1. Cultural Distance e.g. Differences in national cultural attributes 2. Administrative (or institutional) distance e.g. Differences in societal institutions 3. Geographic or spatial distance e.g. physical distance between countries 4. Economic distance e.g. differences in consumer wealth, income level and distribution, infrastructure, cost and quality of resources 5 Linköpings universitet 2
Strategic Questions in IB 1. What is our distinct resource base that provides internationally transferable Firm Specific Assets (FSA)? 2. Which value-added activities in which foreign location(s) will permit us to exploit and augment our distinct resource base? 3. What are expected costs and difficulties we will face when transferring this distinct resource base? 4. What specific resource recombination (associated with each alternative foreign entry and operating mode) is required to make the proposed international value-added activities successful? 5. Do we have the required resource recombination capability in-house? 6. What are the costs and benefits of using complementary resources of external actors to fill this gap? 6 Why do MNCs Exist? (the eternal question ) Invest in countries that offer higher rates of return (FDI Flow) However this does not explain why FDI flows both ways in a country Possession of advantages that outweigh drawbacks of market distance and uncertainty Advantages can only be exploited through ownership and control of foreign investments But why would a firm choose to exploit it advantage through ownership rather than other means? The ability to arbitrage internationally within the MNC network. Exploit national diversity. Production flexibility (or other parts of the value-chain) Apply their current intangible skills, expand current scope, and increase investment in intangibles (learning, knowledge etc ) 7 Linköpings universitet 3
The Eclectic Paradigm a framework for explaining the existence of MNC s O-L-I Paradigm Ownership Resources and capabilities give advantage Localization for comparative advantage Internalization carrying out certain activities internally Global Strategy: an Organizing framework (Ghosal, 1990) The goals of a MNE classified into three broad categories 1. Achieve efficiency in its current activities 2. Manage the risks involved in carrying out operations 3. Develop internal learning capabilities to innovate and adapt Linköpings universitet 4
The Goals Strategic Objectives 1. Achieving efficiency: The firm as an input-output system Differentiation (to increase value of products sold) Low cost factors (input) Higher scale economies Efficient production processes 2. Managing Risk: Macroeconomic risks (wars, natural disasters, etc) Policy risks (political risk) Competitive Risk (response from competitors) Resource Risk (scarce resources) Risks need to be considered jointly! 3. Innovation, learning, and adaptation: Innovation to continue to grow and flourish (strategic dynamism) Learning from diversity (explicit objective, create learning mechanisms and systems) Adapt to new input The Means Sources of Competitive Advantage Exploiting differences in input and output markets in different countries (buying in one country, manufacturing and selling in another) Exploiting economies of scale (production in one counter, multiple country selling) Exploiting economies of scope (finding synergies between products, markets, activities) Linköpings universitet 5
Global Strategy: an Organizing framework (Ghosal, 1990) Global Strategy: an organizing framework Sources of competitive advantage Strategic objectives National differences Scale economies Scope economies Achievingefficiency in current operations Benefit from differences in factor costs. Location advantages (where to locate firm activities). Product adaptation (national differentiation) Expanding and exploiting scale economies in each activity. The effect of scale on cost reduction Sharing of investments and cut costs across products, markets and businesses. Shared external relations (serving a global customer) Managing risks Managing risks arising from changes in different countries Balancing scale with strategic and operational flexibility Portfolio diversification of risks Innovation learning and adaptation Learning from differences in organizational, managerial and processes and systems. Benefiting from experience cost reduction, innovation, Shared learning across organizational components, knowledge Single Company: Firm Value Chain (business unit level) The set of linked, value creating activities a firm performs to design, produce, market, deliver, and support a product the format and interactions amongst the various functions of a firm Primary Activities Upstream Value Activities In-bound Downstream Value Activities Out-bound 14 Linköpings universitet 6
Downstream and Upstream Activities Upstream activities can be separated from the customer - Creates competitive advantage that stems from the entire system of countries Downstream activities close to the customer - Creates competitive advantages that are largely country specific (reputation, brand, service network) Value Chain Components Primary Activities Inbound Logistics receiving, warehousing, inventory, production control, supplier control Operations transformation processes Outbound Logistics wholesalers, retailers, final customer Marketing & Sales marketing mix and advertising Service customer support, after sale service, complaints handling, training, upgrades Linköpings universitet 7
Value Chain Components Support Activities Procurement obtaining inputs such as raw materials, services, machinery, components, etc Technology Development technology development involved in design the product and creating/improving the way activities are performed, R&D, process automation HRM the recruiting, training and development of personnel, incentives, retention. Firm infrastructure general management, accounting, legal aspects, finance, strategic planning Different levels of strategy Reach, Competitive contact, Managing Activities and Business Interrelationships, Management Practices Influencing, Anticipating changes, Positioning Business processes, Value chain, Functional strategies, Coordination of resources 18 Linköpings universitet 8
TYPE OF FDI/MOTIVE Variables influencing the location of value added activities (1970s ) Variables influencing the location of value added activities (2000s - ) ResourceSeeking Availability, price and quality of natural resources. Infrastructure to enable resources to be exploited, and products arising from them to be exported. Government restrictions on FDI and/or capital. Investment incentives (tax holidays). As in the 1970s. Local partners for upgrading quality of resources and processing and transportation of output. Availability of local partners to jointly promote knowledge and/or capital intensive resource exploitation. Example: A German company opening a plant I Slovakia to produce and re-export to Germany. Market Seeking Mainly domestic and occasionally adjacent regional markets, Real wage costs, material costs, transport costs, non-tariff trade barriers Large and growing markets. Availability and price of skilled professional labour. Presence and competitiveness of related firms (e.g. suppliers). Quality of national and local infrastructure. Macroeconomic and macro-organizational policies of host governments. Close presence to users in knowledge-intensive sectors. Example: Automotive MNCs have invested heavily in China EfficiencySeeking Mainly production cost related (labour, materials, machinery). To engage in trade in intermediate and final products. Export processing zones. Investment incentives (tax breaks, grants, subsidized land). As in the 1970s but more emphasis on wage and material costs. Increased role of governments in removing economic obstacles and facilitating upgrading of HR (training and education). Availability of specialized spatial clusters (industrial parks). Example: Global sourcing Strategic Asset Seeking Availability of knowledge-related assets and markets necessary to protect or enhance ownership specific advantages. Institutional variables influencing ease or difficulty of which such assets can be acquired by foreign firms. As in the 1970s, but growing importance due to geographical dispersion of knowledge-based assets. Opportunities offered for exchange of localized tacit knowledge, ideas and interactive learning. Access to different cultures, institutions and systems; and different consumer demands and preferences. Example: Acquiring key local firms, R&D, Human Capital, Market knowledge etc.. Two key dimensions: Distinguishing firm IB Strategies 1. Configuration of activities: Of its activities worldwide or where in the world each activity in the value chain is performed, including in how many places. Configuration options range from concentrated (performing an activity in one location and serving the world from it to dispersed (performing every activity in each country) 2. Coordination of activities How similar activities in different countries are coordinated with each other. Coordination activities range from none to very high. Where should the company locate its activities and how strong should the control be? 20 Linköpings universitet 9
Distinguishing firm IB Strategies: The GI-LR Grid Industry Pressure for Global Integration HIGH Global Strategy The world as a single market Tight control HQ focus International Strategy Existing core competencies Transnational Strategy Flexibility Coordination Global Integration Multi-Domestic Strategy Autonomy Customization LOW LOW Industry Pressure for Local Responsiveness HIGH 21 Distinguishing firm IB Strategies: The GI-LR Grid Standardization and central control are imperative across international operations Standardization and central control are useful but not necessary across international operations HIGH Industry Pressure for Global Integration LOW Global Strategy Semi conductors Bulk chemicals Institutional banking Automobiles International Strategy Raw materials Transnational Strategy Consumer electronics Coporate banking Multi-Domestic Strategy Health care Processed food Retail banking 22 LOW Industry Pressure for Local Responsiveness Adaptation and decentralization are unnecessary to sell generic products to similar markets HIGH Adaptation and decentralization needed to sell customized products to differing markets Linköpings universitet 10
Distinguishing firm IB Strategies: Push vs. Pull As innovation diffuses in the home market, competition eventually pushes firms to export and then later to invest in foreign markets. Home market drives the international expansion of firms. 23 Distinguishing firm IB Strategies: Push vs. Pull PULL PULL MNCs are positively attracted to locations that are important sites of innovative activities in their own industries. Countries with technological advantages tend to attract FDI as well as generate outward FDI flows 25 Linköpings universitet 11
IB Strategies: Regionalization Most firms are regional rather than global (Rugman & Verbeke, 2004) Five critical issues to the MNE s functioning 1. Products are not equally accessible across the globe; concentration in one geographic market 2. The limits to non-location bound nature of MNEs knowledge base 3. Inability to access and deploy required location-bound firm specific advantages 4. The need for different competitive strategies in different markets 5. The need for a regional component in the MNEs governance structure to deal with regional characteristics 27 IB Strategies: Regionalization Global Sales of 20% or more in each of the three triads, but less than 50% in any region of the triad Bi-regional Sales of at least 20% in each of the two regions, but less than 50% in any one region Host Region Oriented more than 50% of sales in a triad market other than their home region Home region oriented At least 50% of sales in their home region of the triad 28 Linköpings universitet 12
Analysing the Environment Political Monopolies legislation, Trade Barriers, Taxation policies, Duties, Employment law, government stability Economic Business Cycles, GDP Trends, Interest rates, Banking system, World trends, country trends, industry trends, Inflation, Unemployment rates, Purchasing power Social Lifestyle changes, Demographics, Income distribution, Social mobility, Level of education, Consumerism Technological Government spending on R&D, Technological focus, Tech transfer, Internet Legal Legal system, consumer-, competition-, Employment-, health and safety laws Environmental Weather, Green movement, Polution P E S T E L Five Forces Diagram (industry analysis) Supplier Power Barriers to Entry Competitive Rivalry Threat of Substitutes Buyer Power Linköpings universitet 13
Diamond of National Advantage Number of competitors. Barriers to entry. Strategic importance and retaliation? Refers to inputs used as factors of production. Key factors have been created not inherited Availability, accessibility= Sustained Competitive Advantage Factor Conditions Firm Strategy, Structure and Rivalry Demand Conditions Related and Supporting Industries Suppliers and related industries. Often at a regional level. Clusters and Agglomerations Sophistication of domestic market Impacts on the pace and direction of innovation and product development. The mix of customer needs and wants. The scope and growth of the market. Transmission of domestic preferences SWOT Analysis Strength Your specialist marketing experience A new, innovative product or service Location of your business Quality processes and procedures Any aspect of your business adding value to your product Weakness Lack of marketing expertise Undifferentiated products and services (i.e. in relation to your competitors) Location of your business Poor quality goods and service Your lack of experience Poor reputation Opportunity A developing market such as the Internet or a geographic market Mergers, joint ventures, and strategic alliances Moving into new market segments that offer improved profits A market vacated by an ineffective competitor Threat A new competitor in your home market Price wars with competitors A competitors new, innovative product or service Competitors superior access to channels of distribution Taxation + Trade barriers Linköpings universitet 14
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