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International Management

International Management. Phatak, Bhagat, and Kashlak. Chapter 6. Strategies for International Competition. Learning Objectives. Discuss the roots of international strategy including ethnocentric, polycentric and geocentric organizations.

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International Management

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  1. International Management Phatak, Bhagat, and Kashlak

  2. Chapter 6 Strategies for International Competition

  3. Learning Objectives • Discuss the roots of international strategy including ethnocentric, polycentric and geocentric organizations. • Explain the facilitators of international expansion of firms. • Employ various analytical and portfolio thinking to understand to which countries firms decide to expand. • Distinguish among the global, multidomestic and transnational mindsets of firms and industries. • Describe the fit of various value-chain activities into a firm’s total international strategy. • Explain the various levels of strategic integration including Stand-Alone, Simple Integration, Complex Integration. • Integrate the specific firm-level initiatives of Core Competency Leveraging, Counterattack and Glocalization to a firm’s international strategy.

  4. Chapter Topics • The Roots of International Strategy • Strategically Expanding Overseas • Strategic Planning for Foreign Market Entry • Managing a Portfolio of Country Subsidiaries • Modern International Strategic Orientations • Worldwide Dispersal and Re-Integration of Value Chain Activities • Firm-Level Strategies for International Competitiveness

  5. Fig 6-1:International Orientations The Ethnocentric Firm The Polycentric Firm The Geocentric Firm

  6. Types of Firm Orientation Ethnocentric • It looks at everything that originates from an organization’s home country as the best in the world. Extreme orientation. Polycentric • There are vast differences among the various countries because of differences in culture, language, race, and in their economic, political, and legal systems. Because of these great differences, it would be impossible for the home country nationals to really understand the foreign environments. Hence, management in the parent company should give foreign subsidiaries as much freedom as is possible to manage their own affairs. Extreme opposite of ethnocentrism. Geocentric • There is no predisposition regarding degree of control or centralization. Rather, there is emphasis on interdependence among headquarters and all foreign subsidiaries. World-oriented attitude.

  7. Fig 6-2: Macro-Environmental Facilitators of Internationalization Political Forces Technological Forces Internationalization Market Forces Competitive Forces

  8. Political Risk Cultural Distance Geographic Distance Economic Environment Foreign Exchange Volatility Market size Market Growth Regulatory Environment Factors in Country Attractiveness Ratings

  9. Ex 6-1: An Analytical Hierarchy Approach to International Expansion (2003)

  10. Steps in Foreign Market Entry • Identify the company’s objective in its foreign market entry • Preliminary country screening • What are the opportunities and constraints in the target market? • What capabilities, resources, and skills are needed to succeed in the foreign market? • Does the company have the core capabilities and resources to score high on the key success factors? What are our strengths and weaknesses on the key success factors? • Should the company enter the target market, and how? • Compare and rank the targeted countries

  11. Fig 6-3: Managing a Portfolio of International Subsidiaries High Collaborative Strategies Growth Strategies Host Country Attractiveness Cross-Subsidization Strategies Defensive Strategies Low High Low Firm-Level Competitive Strength in Each Host Country

  12. Measuring the Firm’s Competitive Strength in Host Country Factors include: • Relative Market Share • Relative Market Support • Technology Fit with the Host Country • Relative Contribution Margin • Brand Recognition

  13. Fig 6-4:International Risk-Return Portfolio High (Under- Developed Countries) Harvest & Divest or Licensing Increase Resources To Match Risk or IJVs Medium (Emerging Economies Host Country Risk Selectively Grow Low (Developed Countries) Cross- Subsidize Industry Leadership Grow Negative to Low Medium High Expected Profits in Each Host Country

  14. Strategic Orientations of International Firms • MNCs can be categorized as using one of the four basic international strategies: 1.Global Orientation 2.International Orientation 3.Transnational Orientation 4.Multi-domestic Orientation • The appropriateness of each strategy depends on pressure for cost reduction and local responsiveness in each country. • Global strategy and Multi-domestic strategy are the simplest cases, while both International strategy and Transnational strategy are most complex.

  15. Fig 6-5: StrategicOrientations of International Firms High Transnational Orientation (Pharmaceuticals, Telecommunications, Financial Services) Global Orientation (Chemicals, Heavy Metals, Extractive Industries) Global Integration and Coordination Pressures International Orientation (Cement, Fabric Mills) Multidomestic Orientation (Consumer Non-Durables) Low Low High Local Responsiveness Pressures (National Differentiation)

  16. Global Integration & National Differentiation • Global Integration: the production and distribution of products and services of a homogeneous type and quality on a worldwide base. • National Differentiation: the need to understand the different consumer tastes in segmented regional markets and respond to different national standards and regulations imposed by autonomous governments and agencies.

  17. Global Integration & National Differentiation (Cont.) • - The vertical axis measure the need for global integration. - Global integration generates economies of scale (takes advantages of large size) and also capitalizes on further lowering unit costs (through experience curve benefits) as a firm moves into worldwide markets selling its products and service. -This requires centralizing specific activities and increases coordination and control of geographically dispersed activities. • - The horizontal axis measure the need for multinationals to respond to national responsiveness of differentiation. MNCs must address local tastes and government regulations. - This requires geographic desperation of activities or a decentralization of coordination and controll for individual MNCs.

  18. 1. International Strategy(Export Strategy) • The firms views international business as a secondary to its domestic business. • Such a firm may view international business as an opportunity to generate incremental sales for domestic products lines. • Products are designed with domestic customers in mind, and international business is sought as a way of extending the product lifecycle and replicate its home market success.

  19. 1. International Strategy (Cont.) • The need for both differentiation and integration are low. • Firms in this strategy have valuable core competencies that host-country competitors do not possess and face minimal pressure for local responsiveness and cost reduction • Lower need for centralized quality control and centralized strategic decision making. • Examples: McDonald’s & Microsoft

  20. 2.Multi-Domestic Strategy • Headquarters delegates considerable autonomy to each country manager allowing him to operate independently and pursue local responsiveness. • Managers recognize and emphasize differences among national markets. As a result, the internationalizing company allows subsidiaries to vary product and management practices by country. • The need for differentiation is high but the concern for integration is low.

  21. 2.Multi-Domestic Strategy (Cont.) • Used when: there are high pressure for local responsiveness and low pressure for cost reduction. • Firms with limited international experience often find multi domestic strategy as easy option as they can delegate many tasks to their country managers ( or foreign distributors, franchisees, licensees, where they are used) • This will results in an increase in cost structure, but will be responsive to local needs and therefore be successful. • In this case, niche companies adopt products to satisfy the high demands of differentiation and ignore economies of scale because integration is not very important.

  22. 3.Global Strategy • With global strategy, the headquarters seeks substantial control over its country operations in an effort to minimize redundancy, and achieve maximum efficiency, learning and integration worldwide. • Management tends to view worldwide as one large markets. • The need for integration is high and for awareness of differentiation low. • Used when: there are high cost pressure and low demand for localized product offering. • Firms that experience high cost pressure should use global strategy in an attempt to benefits from scale economies in production, distribution, and marketing. • Therefore, it is a low-cost strategy • Firms in in this strategy offers a standardized product worldwide. • Mergers and acquisitions often occur.

  23. 3.Global Strategy (Cont.) • It is a challenging for management as it requires a close coordination of activities of a large number of widely-dispersed international operations. • The firm must maintain ongoing communication between headquarters and the subsidiaries, as well as among the subsidiaries. • When carried to an extreme, global strategy results in a loss of responsiveness and flexibility in local markets.

  24. 4. Transnational Strategy • A coordinated approach to internationalization in which the firm strives to be more responsive to local needs while retaining sufficient central control of operations to ensure efficiency and learning. • Organizing production, marketing, and other value-chain activities on a global scale. • Optimizing local responsiveness and flexibility. • In this strategy, firms tends to concentrate the production of offerings in relatively few locations where competitive advantage can be maximized. • The needs for both national responsiveness and integration are high.

  25. 4. Transnational Strategy (Cont.) • Used when: there are high cost pressure and high demands for local responsiveness. • The most challenging strategy and the one where successful MNCs seeks to operate. • Very difficult to pursue effectively. • Because, pressure for cost reduction and local responsiveness put contradictory demands on a company as localized products offering increase cost. • Transnational strategy implies a flexible approach: standardize where feasible; adopt where appropriate.

  26. The basic steps in formulating strategies • In international management, strategic planning can be broken into the following steps: • Scanning the external environment for opportunities and threats. • Conducting an internal resource analysis of company strength and weakness. • Formulating goals in lights of external scanning and internal analysis. • Strategy Implementation.

  27. 1. Scanning the external environment for opportunities and threats: • The process of providing management with accurate forecasts of trends related to external changes in geographic areas where the firm currently is doing business or is considering setting up operations. • These changes relate to economy, competition, political stability, technology, and demographic consumer data.

  28. 2. Conducting an internal resource analysis of company strength and weakness: • Internal analysis identifies the key factors of success (KFS) that will dictate how well the firm is likely to do. • Key Factors of success (KFS) are factors necessary for a firm to effectively compete in a market niche. • For example, a KFS for an international airline is price, safety, accommodations…

  29. 3. Formulating goals in lights of external scanning and internal analysis: • Areas for formulation of MNCs goals are: • Profitability • Marketing

  30. 4.Strategy Implementation • The process of providing goods and services in accord with predetermined plan action. • This implementation typically involves such considerations as: • Deciding where to locate operation (level of industrialization, amount of government control, restriction in foreign investment, benefits offered by host country, infrastructure, nature of the workforce, cost of doing business) • Carrying out an entry and ownership strategy • Using functional strategies to implement the plan that focus on marketing, production, and finance.

  31. The Value Chain “The value chain groups a firm’s activities into several categories, distinguishing between those directly involved in producing, marketing, delivering and supporting a product or service; those that create, source, and improve inputs and technology; and those performingoverarching functions such as raising capital, or overall decision making” Michael Porter

  32. Fig 6-6: Upstream, Support, and Downstream Activities and Competitive Advantage Firm Infrastructure Human Resource Management Support Activities Technology Development Value What buyers are willing to pay? Procurement M a r g i n Marketing and Sales After-Sales Service Inbound Logistics Outbound Logistics Operations Primary Activities

  33. Principles in Redesigning Value Chains for International Firms (Gupta and Govindarajan) • Redesigning the set of activities as well as the interfaces across activities, such as supplier and customer linkages • Redesigning in order to accrue significant gains in the firm’s cost structure, asset investment and/or speed of responsiveness to external environmental changes • Redesigning to ensure rapid growth in market share and economies of scope expansion into other related products and services

  34. Factors Inducing the Dispersal of Value Chain Activities • Comparative advantage of the country (competitive input costs, low levels of political risk, market size, proximity to major markets or supply sources, availability of knowledge and skills in the population, etc.) • Efficiency gains from economies of scale and scope derived from an increased internal functional specialization and international division of labor • Competitive pressures from domestic and foreign-based companies and the necessity to compete in the competitors’ home and third country markets

  35. Factors Inducing the Dispersal of Value Chain Activities (contd.) • The benefits of flexibility and risk reduction derived from multiple sourcing points and destination points for components, products, and capital • The opportunities to innovate and learn from diverse cultures and economic systems • The fact that human, capital, material, and knowledge-based resources are dispersed throughout the world and not concentrated in any one country or region; and tariff and non-tariff barriers that prevent market penetration via exports

  36. Level of Integration of Value Chain Activities • Stand-alone • Simple integration • Complex integration

  37. International Outsourcing Outsourcing is performing some activities in the value chain in foreign countries and linking them to work done elsewhere, mainly in the home country. International outsourcing is the farming out of some value chain activities to countries other than the home country and the major market countries of the product or service

  38. Fig 6-7: Integration Strategies and Antecedent Factors

  39. Core Competency and Core Products Core Competency: The distinctive ability to excel in a key area, upon which a company can build a variety of businesses and develop new generations of products, some of which customers may need but have not yet imagined Core Products: the intermediate linkages between core competencies and core products

  40. Glocalization • Firm-level strategic response that parallels the industry-level, total firm transnational orientation • Thinking globally but acting locally

  41. Key Terms and Concepts • Ethnocentrism • Polycentrism • Geocentrism • International expansion • Value chain dispersal • Simple integration strategy • Multidomestic orientation • Global orientation

  42. Key Terms and Concepts (contd.) • Transnational orientation • Core competency leveraging • Counterattack • Glocalization

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