Chapter 7: International Strategies: Creating Value in Global Markets
4 attributes of nations that individually, and as a system constitute the diamond of national advantage:
- Factor Endowments: The nation’s position in factors of production, such as skilled labour or infrastructure, necessary to compete in a given industry. Factors of production must be
developed that are industry specific and firm specific. Firm-specific knowledge and skills created within countries that are rare, valuable, difficult to imitate, and rapidly and efficiently
deployed are the factors of production that are ultimately lead to a nation’s competitive advantage.
- Demand conditions: The nature of home-market demand for the industry’s product or service. Consumers who demand highly specific, sophisticated products and services force
firms to create innovative, advanced products and services to meet the demand. Countries with demanding consumers drive firms in that country to meet high standards, upgrade
existing products and services, and create innovative products and services. This helps a nation’s industries better anticipate future global demand conditions and proactively respond
to product and service requirements before competing nations are even aware of the need for such products and services.
- Related and supporting industries: The presence or absence in the nation of supplier industries and other related industries that are internationally competitive. A competitive
supplier base helps a firm obtain inputs using cost-effective, timely methods, thus reducing manufacturing cost. Close working relationships with suppliers provide potential to develop
competitive advantages through joint research and development and the ongoing exchange of knowledge. Related industries offer similar opportunities for joint efforts among firms
and create probability that new entrants will appear in the market, increasing competition and forcing existing firms to become more competitive through efforts such as cost control,
product innovation, and novel approaches to distribution.
- Firm strategy, structure, and rivalry: The conditions in the nation governing how companies are created, organized, and managed as well as the nature of domestic rivalry. This
competitive rivalry increases efficiency with which firms develop, market, and distribute products and services within the home country. Domestic rivalry thus provides strong impetus
for firms to innovate and find new sources of competitive advantage. Rivalry forces firms to look outside their national boundaries for new markets, setting up conditions necessary for
global competitiveness. Firm’s that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete
in world market. Porter’s diamond does not imply that one managerial style is best across industries, but different strategies and different organizational structures have been
instrumental in creating world-class competitors.
Motivation for International Expansion
- Increase the size of potential markets for a firm’s products and services
- An increase in revenue and asset base potentially enables a firm to attain economies of scale, which helps spread fixed cost over larger volume of production.
- Reducing costs of research and development as well as operating costs
- Taking advantage of arbitrage opportunities, which involves buying something from a place where it is cheap and selling it in another place where it commands a higher price.
- International expansion also extend the life cycle of a product that is in its maturity stage in a firm’s home country, but has greater demand elsewhere.
- Enables a firm to optimize the physical location for every activity in its value chain. All firms have to make critical decision as to where each activity will take place.
Potential Risks of International Expansion
- Political and Economic Risk: Forces such as social unrest, military turmoil, demonstrations, and even violent conflict and terrorism can pose serious threats. Political risk can
arise from boycotts directed toward the home government of a corporation and its policies. Laws, as well as enforcement of laws, associated with the protection of intellectual
property rights can be another significant potential risk in entering new countries.
- Currency Risks: Currency fluctuation can pose substantial risks. A company with operations in several countries must constantly monitor exchange rate between its currency
and that of the host country. Even small change in exchange can result in significant difference in cost production or net profit when doing business over seas. When government
intervention is well intended, the macroeconomic effects of such action can be very negative for multinational corporations.
- Management Risks: Management risks reflect the challenges that managers face when they respond to the inevitable differences that they encounter in foreign markets
including culture, custom, language, income levels, customer preferences, distribution systems, and so on.
Achieving Competitive Advantage in Global Markets
Two opposing forces when expanding globally pull firms: cost reduction and adaptation to local markets. Firms must choose among four basic types of international strategies:
international, global, multi-domestic, and transnational.
Two Opposing Forces: Reducing Costs and Adapting to Local Markets
- Pressures to lower costs derive from standardization or even commoditization of many productions; meaningful differences among producers’ diverse offerings may be difficult to
discern, and price then becomes the main competitive weapon. Pressure further intensifies when competition arises from producers located in low-cost countries. Standardization
promotes substantial economies of scale; supplying global markets with standard products allows for global manufacturing decisions and the adoption of global marketing efforts.
- One cannot forget that countless local firms thrive by offering products that cater to the specific needs of local consumers. Many global firms customize their products and
services to target local market segments.
- Transportation costs and other diseconomies of scale put a damper on the ability of firms to build very large facilities in the most cost-efficient locations to supply distant markets.
Flexible factory automation technologies enable economies of scale to be attain at lower levels of output and do not require production of single standardize product.
- Based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets. Country units are allowed to make some minor adaptations to products
and ideas coming from the head office, but they enjoy little independence and autonomy. The primary goal of strategy is worldwide exploitation of the parent firm’s knowledge and
capabilities. All sources of core competencies are centralized. With increasing pressures to reduce costs due to global competition, especially from low-cost countries,
opportunities to successfully employ this strategy are becoming more limited. It is most suitable in situations where a firm has distinctive competencies those local companies in
foreign markets lack.
- Different activities in value chain typically have different optimal location, where it fails to take advantage of the benefits of optimally distributed value chain.
- This strategy is susceptible to higher levels of political risk and currency risk, where it is often too closely identified with a single country. It may suddenly make a product
unattractive abroad when increases in value of currency occur. Lack of local responsiveness may result in alienation of customer, where firm’s inability to be receptive to new
ideas and innovation from foreign subsidiaries may lead to missed opportunities.
- Primary goal is on controlling costs, where corporate office strives to achieve a strong level of coordination and integration across various businesses.
- Strive to offer standardized products and services as well as local manufacturing, R&D, and marketing activities in only few locations.
- Emphasizes economies of scale due to standardization of products and services and centralization of operations in few locations.
- Although cost may be lower, firm may have to forgo opportunities for revenue growth, since it does not invest extensive resources in adapting product offerings from one market
- It is appropriate when there are strong pressures for reducing costs and comparatively weak pressures for adaptation to local markets. Identifying potential economies of scales
become an important consideration not only from larger production plants or runs, but also from more efficient logistics and distribution networks. Worldwide volume is also
especially important supporting high levels of investments in R&D. It also enables a firm to create a standard of level of quality throughout the world.
- However, decisions about locating facilities must weigh the potential benefits from concentrating operations in a single location against higher transportation and tariff costs that
result from such concentration. Geographic concentration of any activity may also tend to isolate that activity from targeted markets, which could be risky and may affect the
facility’s ability to quickly respond to changes in market conditions and needs. Concentrating an activity in a single location also makes the rest of the firm dependent on that
location. This implies that unless the location has world-class competencies, the firm’s competitive position can be eroded if problems arise.
- Firm emphasizes on differentiating its product and service offerings to adapt to local markets follow this strategy. Decisions evolving from this strategy tend to be decentralized to
permit the firm to tailor its products and respond rapidly to changes in demand.
- Enables a firm to expand its market and charge different prices in different markets.
- Differences in language, culture, income level, customer preferences, and distribution systems are only a few of the many factors that must be considered.
- The way products are packaged must sometimes be adapted to local market conditions. Some consumers in developing countries are likely to have packaging preferences very
different from those in the West. Cultural differences may also require a firm to adapt its personnel practices when it expands internationally.
- Risk associated is that local adaptation of products and services will increase a company’s cost structure. Key challenge of managers is to determine the trade-off between local
adaptation and its cost structure.
- Local adaptation, even when well intentioned, may backfire at times.
- Consistent with other aspects of global marketing, optimal degree of local adaptation evolves over time. Variety of factors, such as influence of global media, greater international
travel, and declining income disparities across countries, may lead to increasing global standardization. The need for greater customization and local adaptation may increase
over time. Firms must recalibrate the need for local adaptation on an ongoing basis; excessive adaptation extracts a price as surely as under adaptation. Transnational Strategy
- Multinational firm following this strategy strives to optimize the tradeoffs associated with efficiency, local adaptation, and learning. It seeks efficiency not for tis own sake, but as a
means to achieve global competitiveness. It recognizes importance of local responsiveness but as a tool for flexibility in international operations. Innovation is regarded as an
outcome of a larger process of organizational learning that includes the contribution of everyone in the firm.
- Firm’s assets and capabilities are dispersed according to the most beneficial location for specific activity. Managers avoid the tendency to either concentrate activities in a central
location or disperse them across many locations to enhance adaptation.
- Central philosophy of transnational organization is enhanced adaptation to all competitive situation as well as flexibility to capitalizing on communication and knowledge flows
throughout the organization. Principal characteristics are the integration of unique contributions of all units into worldwide operations. Thus joint innovation by headquarters and
by one of the overseas units can potentially lead to the development of relatively standardized and flexible products and services that are suitable for multiple markets.
- However, the choice of seemingly optimal location cannot guarantee that the quality and cost of factor inputs will be optimal. Managers must ensure that the relative advantage of
a location is actually realized.
- Although knowledge transfer can be a key source of competitive advantage, it does not take place “automatically” For knowledge to be effectively transferred from one subsidiary
to another, it is important for the source of knowledge, the target units, and the corporate headquarters to recognize the potential value of such unique knowhow. Firms must
create mechanism to systematically and routinely uncover the opportunities for knowledge transfer.
Entry Modes of International Expansion
- Exporting: Producing goods in one country to sell in another. Enables a firm to invest the least amount of resources in terms of its products, its organization, and its overall
corporate strategy. Downturn, it provides less local employment than other modes of entry. The advantage is that all firms start from scratch in sales and distribution when
entering new markets. Because many foreign markets are nationally regulated and dominated by networks of local intermediaries, firms need to partner with local distributors to
benefit from their valuable expertise and knowledge of their own markets. Multinationals recognized that they cannot master local business practices, meet regulatory
requirements, hire and management local personnel, or gain access to potential customers without some form of local partnership and minimize their own risk. They do this by
hiring local distributors and investing very little in the undertaking. Firm gives control of strategy marketing decisions to local partners.
- Licensing: Enables company to receive royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable item of intellectual property. The
advantage is that the firm granting license incurs little risk, since it does not have to invest any significant resources into the country itself. The licensee gains access to the
trademark, patent, and so on and is able to potentially create competitive advantages. The disadvantage is that the licensor gives up control of its product and forgoes potential
revenues and profits. Furthermore, the licensee may eventually become so familiar with the patent and trade secrets that it may become a competitor; in effect, the licensee may
make some modification to the product and manufacture and sell it independently of the licensor without having to pay royalty fee. In addition, if licensee selected by multinational
firms turn out to be a poor choice, brand name and reputation of the product may be tarnished.
- Franchising: Franchise contracts generally include broader range of factors in operation and involves longer period. The advantage is that it limits the risk exposure that a firm
has in overseas markets while expanding revenue base of the parent company. However, firms receive only a portion of revenues, in the form of franchise fees, instead of the
entire revenue, as would be the case if firm set up operation itself through direct investment.
- Strategic Alliance and Joint Venture: Strategic Alliances can take many forms, including joint research and development, joint exploration initiatives, joint production, or co-
distribution of two partners’ products. Unlike licensing, multinational retains substantially more control over strategic and operational decisions. Joint ventures are a unique form of
strategic alliance in that they entail the creation of third legal entity, owned by the partners, with a clear mandate and separate organizational structure. Strategic alliances have
been effect in helping firms increase revenue and reduce costs and also enhance learning and diffuse technology. They enable firms to share risks as well as potential returns.
Also, by gaining exposure to new sources of knowledge and technologies, such partnerships can help firms develop core competencies that can lead to competitive advantages
in the marketplace. Entering into partnerships with host country firm can provide very useful information on local market tastes, competitive conditions, legal matters, and cultural
nuances. Managers must be aware of the risks associated and how to minimize them. There must be well-articulated goals to guide the strategic alliance, and the partners must
agree on a set of related, clearly defined criteria to measure progress. A well-defined strategy must be strongly supported by the organizations that are party to the partnership.
Second, there must be a clear understanding of capabilities and resources that will be central to the partnership. Without such understanding, there will be fewer opportunities for
learning and developing the competencies that could lead to competitive advantages. Third, trust is a vital element through establishing relationships. Fourth, cultural issues,
which could potentially lead to conflict and dysfunctional behaviours, need to be addressed. An organization’s culture is the set of values, beliefs, and attitudes that influence the
behaviour and goals of its employees. Thus recognizing cultural differences as well as striving to develop a common culture is vital. Finally, the success of a firm’s alliance should
not be left to chance. To improve their odds of success, many companies have carefully documented alliance-management knowledge by creating guidelines and manuals to help
them manage specific aspects of the entire alliance life cycle.
- Wholly Owned Subsidiary: A business in which a multinational company owns 100 percent of the stocks. It can either acquire an existing company in the home country or it can
develop a totally new operation. It is the most expensive and risky of various entry modes, as it also yields the highest returns. It provides multinational company with the greatest
degree of control over all activities including manufacturing, marketing, distribution, and technology development.
Global Dispersion of Value Chain: Outsourcing and Offshoring
Outsourcing: When a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house. It may be a new activity that firm is perfectly
capable of undertaking, but chooses to have someone else perform for cost or quality reasons. Can be domestic or foreign firms.
Offshoring: When a firm decides to shift an activity that is performing in a domestic location to a foreign location. Offshoring and outsourcing often go together; that is, a firm may
outsource an activity to a foreign supplier, thereby causing the work to be offshored as well.
Chapter 8: Industry Change and Competitive Dynamics
Four Evolutionary Trajectories of Industry Change
- Radical change occurs when core activities and core assets both face threat of obsolescence. (Overnight delivery, cheap and instantaneous document delivery via fax and
Internet has made core assets/core activities of firms like FedEx less relevant.
- Intermediate change occurs when core assets are not threatened, but core activities are. (Automobile dealerships)
- Creative change is when core assets are threatened, but core activities are not. (Oil, gas exploration, pharmaceutical, film production)
- Progressive changes occur in industries where neither core assets nor core activities face imminent threat of obsolescence.
Strategy in Introduction Stage: Products are unfamiliar to consumers. Market segments are not well defined, and product features are not clearly specified. Early development of an
industry typically involves low sales growth, rapid technology change, operating losses, and the need for strong sources of cash to finance operations. Since there are few players and
not much growth, competition tends to be limited. Success requires an emphasis on R&D and marketing activities to enhance awareness of the product/services. Challenge involves
developing product and finding a way to get users to try it and generating enough exposure so that the product emerges as the standard by which all other competitors’ products are
Strategy in Growth Stage: Characterized by strong increases in sales. Potential for strong sales attracts other competitors who also want to benefit. The primary key to success in this
stage is to build consumer preferences for specific brands. This requires strong brand recognition, differentiated products, and the financial resources to support a variety of value chain
activities, such as marketing and sales, customer service, and R&D. Efforts in this stage are directed toward stimulating selective products, whereas efforts in the growth stage are
directed toward stimulating selective demand. Revenues increases at an accelerating rate because new consumers are trying the product and a growing proportion of satisfied
consumers are making repeat purchases. As product moves through its lifecycle, the proportion of repeat buyers to new purchases increases. Yet, new products and services often fail if
there are relatively few repeat purchases.
Strategy in Maturity Stage: Aggregate industry demand begins to slow. Since markets are becoming saturated, there are few opportunities to attract new adopters. It is no longer
possible to grow around competition so direct competition becomes predominant. With fewer prospects, marginal competitors begin to exit the market. Rivalry among existing
competitors intensifies because there is often fierce price competition as expenses associated with attracting new buyers rise. Advantages based on efficient manufacturing operations
and process engineering becomes more important for keeping costs low as customers become more price-sensitive and becomes more difficult for firms to differentiate their offering
once users have greater understanding of products and services.
Strategy in Decline Stage: industry sales and profits begin to fall. Changes in the business environment are at the root of an industry or product group entering this stage. Changes in
consumer tastes or a technological innovation can push a product into decline. Products in the decline stage, often consume a large share of management time and financial resources
relative to their potential worth. As sales and profits decline, competitors may start drastically cutting their prices to raise cash and remain solvent in the short term. Situation is further
aggravated by wholesale liquidation of assets, including inventory, of some of the competitors that have failed, which intensifies the price competition. At this stage, firm have 4 strategic
options that are critical to their success. If many competitors decide to leave the market, sales and profit opportunities increase. Prospects are limited if all competitors remain. If
competitors merge, their market power increase can erode opportunities for the remaining players. Managers must carefully monitor actions and intention of competitors before deciding
course of action. Four basic strategies: maintaining, harvesting, exiting, or consolidation.
- Maintaining refers to keeping product going without significantly reducing marketing support, technological development, or other investments, in the hope that competitors will
eventually exit the market.
- Harvesting involves taking as much profit as possible from business and making absolutely minimal investments. It requires sales volume to be maximized and costs be reduced
quickly. Managers must review all firm’s value-creating activities for cost cutting including operations and sales and marketing, as well as support activities, such as procurement,
information systems, and technology development.
- Exiting the market involves dropping product from firm’s portfolio. - Consolidation involves one firm acquiring a number of its competitors in a declining industry. The surviving firm enhances its market power and acquires valuable assets and
retains the best facilities and effectively rationalizes its operations. It takes production capacity out of the system in an orderly fashion and prevents price war that could severely
hurt its profits.
- Assets and cost surgery: Very often, firms tend to have accumulated assets that do not produce any returns include real estate, buildings, or fine art pieces etc. Outright sales or
sale-and-leaseback free up considerable cash and improve returns. Investment in new plants and equipment can be deferred. Firms try to aggressively cut administrative
expenses and inventories and speed up the collection of receivables. Outsourcing production of various inputs can reduce cost, for which market prices may be cheaper
elsewhere compared with in-house production costs.
- Selective product and market pruning: Discontinue unsuccessful product line, cut off unprofitable and usually difficult clients, and focus all of the resources on a few core
- Piecemeal productivity improvements: Improving business process by re-engineering them, benchmarking specific activities against industry leaders, encouraging employee input
to identify excess costs, reducing R&D and marketing expenses, increasing capacity utilization, and improving employee productivity lead to significant overall gain.
New Competitive ActionThreat Analysis (market commonality/resource similarity)Motivation and capabilities to respondTypes of competitive actions (tactical actions
or strategic actions)Likelihood of competitive reaction (market dependence/competitor’s resources/actor’s reputation/choose not to react) Repeat
Chapter 11: Strategic Leadership: Creating a Learning, Ethical, and Socially Responsible Organization
Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. Successful leaders must recognize three
interdependent activities that must be continually reassessed for organizations to succeed: Setting directions, designing organization, and nurturing culture dedicated to excellence and
Setting Directions: Leaders need a holistic understanding of an organization’s stakeholders. Requires ability to scan the environment to develop knowledge of all company’s
stakeholders and other salient environmental trends and events. Managers must integrate this knowledge into a vision of what the organization could become. It necessitates the
capacity to solve increasingly complex problems, become proactive in approach, and develop viable strategic options. Strategic vision provides a clear future direction, provides a
framework for organization’s mission and goals, and enhances communication, participation, and commitment.
Designing Organization: At times, leaders have difficulty implementing their vision and strategies due to lack of understanding responsibility and accountability among managers;
reward systems do not motivate individuals toward the desired organizational goals; inadequate or inappropriate budgeting and control systems; and insufficient mechanism to integrate
activities across the organization. Successful leaders are actively involved in building structure, teams, systems, and organizational processes that facilitate the implementation of their
vision and strategies. Without appropriately structuring organizational activities, a firm would generally be unable to attain an overall low-cost advantage by closely monitoring its costs
through details and formalized cost and financial control procedures.
Nurturing Culture Dedicated to excellence and ethical behaviour: Organizational culture can be an effective means of organizational control. Leaders play a key role in changing,
developing, and sustaining an organizational culture. Leaders can also have an effect on a firm’s culture and ethics. Managers and top executives must accept personal responsibility for
developing and strengthening ethical behaviour throughout the organization. They must consistently demonstrate that such behaviour is central to the vision and mission of the
organization. Elements including role model, corporate credos and codes of conduct, reward and evaluation systems, and policies and procedures, must be present and reinforced for a
firm to become highly ethical.
Elements of Effective Leadership
- Integrative thinking: Integrative thinking guides people to reconcile opposing thoughts and identify creative solutions that provide them with more options and new alternatives.
Some elements include: Salience: take stock of what features of decision you consider relevant and important. Don’t restrict your thinking to few major features and consider
those that may be less important. Try to think of everything that may matter. Causality: Make a mental map of causal relations between features and how various features relate
to one another. Architecture: Use mental map to arrange a sequence of decisions that will lead to specific outcome and realize that no particular decision path is right or wrong.
Consider multiple options simultaneously may lead to better decision. Resolution: Make your selection. Your final resolution is linked to how you evaluate if you are dissatisfied
with your choices; go back through the process; and revisit your assumptions. This approach enables decision makers to consider situations not as forced trade-offs, but as a
method of synthesizing opposing ideas into creative solutions.
- Overcoming barriers to change: Organizations at all levels are prone to inertia and are slow to learn, adapt, and change because: Many people have vested interests in the
status quo; There are systemic barriers; Behaviour barriers; Political barriers; and personal time constrains. Leaders must draw on a range of personal skills as well as
organizational mechanisms to move their organizations forward in the face of such barriers. One of the most important tools to overcome barriers to change is a leader’s personal
and organizational power. Leaders must be on guard not to abuse power and should measure exercise of power.
- Effective use of power: Used in order to overcome barriers to change. Power refers to leader’s ability to get things done in a way he or she wants them to be done. It is the
ability to influence other people’s behaviour, to persuade them to do things that they otherwise would not do, and overcome resistance and opposition to changing direction.
Effective exercise of power is essential for successful leadership. Leader derives his/her power from several sources or bases. Can be classified by organizational and personal.
Organizational base of power refers to the power that a person wields become of holding a formal management position, which include legitimate power, reward power, coercive
power, and informational power. Leader might also be able to influence subordinates because of his/her personality characteristics and behaviour including referent power and
expert power. Successful leaders use different bases of power, and often a combination of them, as appropriate to meet demands of a situation, such as the nature of task, the
personality characteristics of subordinates, the urgency of the issue, and other factors. Leader must recognize that persuasion and developing consensus are often essential, but
so is pressing for action.
- Emotional intelligence: The capacity for recognizing one’s own emotions and those of others. Give components of EI: Self-awareness (the ability to recognize and understand
one’s mood, emotions, and drives, as well as their effect on others. Signs include self-confidence, realistic self-assessment, and self-deprecating sense of humour), Self-
regulation (the ability to control or redirect disruptive impulses and moods and also to suspend judgment by thinking before acting. Signs include trustworthiness and integrity,
comfort with ambiguity, and openness to change), Motivation (Passion to work for reasons that go beyond money or status and a propensity to pursue goals with energy and
persistence. Signs include strong drive to achieve, optimism, and organizational commitment), Empathy (Ability to understand emotional makeup of people and have a skill in
treating people according to their emotional reaction. Signs include expertise in building and retaining talent, cross-cultural sensitivity, and service to clients and customers), and
Social skills (Proficiency in managing relationships and building networks and the ability to find common ground and build rapport. Signs include effectiveness in leading change,
persuasiveness, and expertise in building and leading teams).
Developing a learning organization:
- Inspiring and motivating people with a mission or purpose
- Empowering employees at all levels
- Accumulating and sharing internal knowledge
- Gathering and integrating external information
- Challenging the status quo and enabling creativity
Integrity-Based Approaches versus Compliance-Based Approaches to Organizational Ethics
- Integrity-based ethics combine concern for law with an emphasis on managerial responsibility for ethical behaviour. It is broader, deeper, and more demanding than a legal
- Compliance-based approaches are externally motivated based on the fear of punishment for doing something unlawful. It is driven by personal and organizational commitment to
To become highly ethical and socially responsible, a firm must have: Role models, corporate credos and code of conduct, reward and evaluation systems, and policies and procedures.
- Role models: leaders are role models in their organization and must “walk the talk”; they must be consistent in their words and deeds. When leaders don’t believe in ethical
standards that they are trying to inspire, they will not be effective as good role models. Such acti