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international strategy

Page history last edited by Brian D Butler 13 years ago

 

 

 

 

 

 

 

International strategy

 

From International Business :  The strategy component of competing internationally is very interesting.  Some of the key issues are:

  1. How does a local company compete against large multinational
  2. How can foreigners compete in emerging markets against entrenched local companies (with subsidies, government protection, etc).
  3. How do you choose the right markets to compete in?
  4. Market entry strategy :  for example, how do you choose the right strategy for Entering the US market from overseas

 

 

 

Table of Contents:


 

 

     see also:  International Business , strategy international marketing , hedging risk

 

 

Choosing the right GLOBAL location

 

Where internationally should you locate your business facilities?  Macroeconomic interrelations shift periodically, and a competitive advantage in one location may become a disadvantage over time. This could happen if there are changes in exchange rates, if there are local inflationary pressures, if there are raw material shortages, or if there are changes in government policies. When a country develops, it will lose comparative advantage in wages, and needs to move up the value chain (as was described in “Beyond Cheap Labor”). There is a direct relationship between GDP per person and wages per hour, so even China will someday loose its comparative advantage as the worlds cheap labor market as its GDP per person rises over time. A country need to manage the transition from competing on low cost labor to more value added products and services. It was interesting that the book “Driving Growth” placed such high value on a country’s ability to develop a competitive local service market as a means for improving the standard of living. This focus on developing the market for local services is essential for unlocking productivity growth that will drive competitive advantage in many other areas.

 

 

Important concept for multinationals:  the "global Value-Chain"

 

Divide up the Value Chain and then locating each component of that value chain in the country / region that offers the lowest mix of cost-factors that are most important to that function. I am fascinated by the concept that one location has a comparative advantage over others, and that this explains why certain activities occur in certain locations, and not in others. For example, if you divide the value chain into areas such as operations, R&D, sales, marketing, customer service, and purchasing, you find transnational companies locating each of these activities in an area that gives them the largest competitive advantage, and lowest costs for each individual function. Manufacturing, for example, might be placed in the location with the lowest factor input costs related to labor, but R&D might be located in a place which has advanced education, a history of innovation, or a developed and highly competitive consumer market. It is best to allow each asset to be specialized and to use the location that has the best mix of factor costs that are important to that function. For example, the USA might be selected for design, China for manufacturing, UK for research, and India for call center outsourcing or software design, creating many “centers of excellence” across the globe, which are all globally linked together through the Value Chain. Porter’s “Diamond” analysis tool is very helpful for conducting this comparative analysis.

 

 

 

 

 

 

 

 

 

Global Innovation

 

Rather than relying solely on a center-for-global Innovation model, many companies are seeking to develop locally-leveraged, but then globally-linked innovation models.

 

The global market for knowledge is changing, and it is common to find centers for innovation in many non-traditional market locations around the world. The old thinking was that the USA was the best location for developing innovation, which directly led to the strategy of “international” that many US based companies followed.

 

 

The idea was that the USA had the most sophisticated consumer market, the most developed technology, and the highest level of competition; which were all of the ingredients for development of innovations that could be exported in the product life cycle to the rest of the world. This assumption has been recently challenged as other markets have developed in their ability to produce global innovations. As an example, we discussed the emergence of “Skype”, a revolutionary VoIP telephone service that was developed in Estonia (not in Silicon Valley).

 

Based on this new understanding of how innovations can come from anywhere, companies are attempting to capture worldwide knowledge like never before. The challenge for transnational companies is to figure out how to capture and leverage this worldwide knowledge base. If they can do this effectively, this is one of the main sources of competitive advantage that a transnational company will have over its international, global, or multinational competitors.

 

 

 

Culture

 

Not all competitive advantages of a location will necessarily be based on the traditional factors of land, labor and raw materials, but instead they may be based on culture and on the specific talents of the individuals in an area. There are certain cultural aspects of some places that partially explain why they have become global centers for particular activities. Innovation and global learning may come from anywhere in the world, but it is interesting to me that the US, and California in particular have been so successful at developing worldwide innovations.

 

One of the reasons that I believe these US based companies have been so successful at sustaining innovation has been a direct result of the culture of innovation and risk taking that defines California.

 

In the US, there is a culture of risk-taking where there is not a cultural bias against individuals that fail. As we discussed in class, many cultures in Latin America place great shame on individuals that fail in business. This has a cultural effect of creating disincentive to take huge risks that are necessary to achieve true innovations. This topic and its potential remedies was a heated discussion during our facilitator sessions.

 

Management Challenges

 

Because of the complexities of the new transnational companies, there are new management challenges that must be met as the global leaders try to get the benefits of global economies of scale, mixed with national flexibility and responsiveness, and the benefits of worldwide learning. Because these goals are sometimes contradictory, the management of these organizations is sometimes very complex and difficult to manage. We saw this difficulty exemplified with the BRL Hardy case study in which there were conflicting desires to develop global brand awareness, and the desire to achieve local responsiveness to local market conditions at the same time. As we discussed in class, many companies will find this complexity too difficult to achieve, but may have to give up local flexibility, global efficiency, or worldwide learning if they are not able to do so. In addition to shifting external business factors, there will be new management requirements for companies attempting to internationalize. Companies that are lacking in organizational strength may want to consider selling or licensing technology or brand name, exporting, or franchising as less- risky ways of going abroad.

 

Once a firm internationalizes, they typically run into the dilemma of trying to achieve global scale and local responsiveness at the same time. A global manager also has to be on the lookout for macroeconomic changes, and to be aware that countries (and individual states) have their own objectives, and that there is a risk that those objectives might change over time. You need to monitor changes in elections and policies to see if country strategy and yours become misaligned. This could result in serious risk (or opportunities) for your company.

 

 

How to Compete against global leaders

 

Staying below the radar, and focusing on a niche market that more powerful global companies may be ignoring are good strategies to consider when competing against a stronger global leader. The book “Transnational management” focused on companies such as Dell, Cemex and Electrolux that successfully followed this strategy to international success. The key to this strategy is to focus just on one niche market, but to develop multiple layers of competitive advantages in that product or service.

 

A company may start out as an OEM supplier to more powerful international companies, or they may focus on serving industries that established leaders consider insignificant. The goal is to develop strength and infrastructure. Then, when the company is ready, they should move quickly to expand with its own brand and challenge quickly. This was seen in the BSkyB case when Sky chose to enter the satellite TV market which BBC considered to be a peripheral market that it was not interested in. By staying under the radar, they were able to build on their strengths and eventually challenge BBC for mainstream viewers (and ad dollars)

 

The advantage of global companies

 

Staying below the radar, and focusing on a niche market that more powerful global companies may be ignoring are good strategies to consider when competing against a stronger global leader. The book “Transnational management” focused on companies such as Dell, Cemex and Electrolux that successfully followed this strategy to international success.

 

The key to this strategy is to focus just on one niche market, but to develop multiple layers of competitive advantages in that product or service. A company may start out as an OEM supplier to more powerful international companies, or they may focus on serving industries that established leaders consider insignificant. The goal is to develop strength and infrastructure. Then, when the company is ready, they should move quickly to expand with its own brand and challenge quickly. This was seen in the BSkyB case when Sky chose to enter the satellite TV market which BBC considered to be a peripheral market that it was not interested in. By staying under the radar, they were able to build on their strengths and eventually challenge BBC for mainstream viewers (and ad dollars)

 

Transnational Companies

 

Transnational companies are complex organizations that attempt to extract the benefits of “international”, “global”, or “multinational” firms, but at the same time, they try to mitigate the drawbacks from each. A transnational firm is a very sophisticated and complex one that requires a very subtle management as it is attempting to eliminate the inherent drawbacks of each of the traditional structures and strategies.

 

The classic “multinational” model is seen in abundance with European firms which manage a portfolio of relatively independent national subsidiaries. With a long history of protectionism and wars, European companies became very adept at managing a decentralized federation, running subsidiaries with a high level of autonomy.

 

One of the benefits of this arrangement is that multinational companies with their strong country presence have been very good at responding to the uniqueness of the various markets in which they operate. One of the drawbacks, however, is that they have given up global scale efficiency, and may be redundant in many of their tasks. The “global” model which is epitomized by companies such as Toyota, focused on centralizing efforts and gaining efficiency for exports, but suffered from a lack of local responsiveness and flexibility.

 

 

The third traditional model is the “international” strategy which is strongly seen in US based companies that developed innovations at home and saw foreign subsidiaries as marketing and sales appendages. The weakness of the international model is that it lacked the corporate structure for capturing worldwide innovation and learning. The transnational company is one that attempts to capture all of the strengths of these three global strategies, and attempts to avoid any of the weaknesses. In my opinion, this is very complicated and complex, and is only possible in the most sophisticated of organizations.

 

Global Alliances

 

 

Alliance

 

Companies that used to focus primarily on preempting their competitors are now seeking ways to create stronger interdependencies and linkages by forming global alliances with their competitors, suppliers and host governments. As companies have adapted to the transnational mindset of creating interdependent linkages within their own global networks, they have also become more comfortable in accepting risks associate with interdependencies with other outside companies. In stark contrast with popular strategy theory of just 20 years ago, it is now common for international competitors to enter into strategic alliances with even their fiercest of competitors. As we saw with the Star Alliance case, global alliances are a good way for a company to expand internationally without needing to invest in worldwide infrastructure themselves. The alliance may also be a good way to gain access to technology, or to gain access to markets that may be off limits due to government regulations. Other benefits of forming alliances are the opportunity to share R&D costs and share in the risk of global product development. At the same time, there are competitive risks that must be considered. There may be conflicting branding desires of the partners, as well as different motivations such as strategic, political, economic or cultural variations. In class we also discussed the confusion that consumers sometimes feel when trying to identify with the alliance rather than the individual companies. For example, it was difficult for any of our class to remember which airlines were members of the Star Alliance (and not with oneworld, for example), but we could all identify with the individual carriers / brands. For this reason, we recognized that branding of the alliance is much more difficult than creating synergies in procurement or in back office support systems.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Digg!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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