Strategic Management Lecture Slides

Strategic Management BUSM 3200

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BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-1

Learning outcomes

Assess the internationalisation potential of different
markets.
Identify sources of competitive advantage in
international strategy, through both global sourcing
and exploitation of local factors.
Distinguish between four main types of international
strategy.
Rank markets for entry or expansion, taking into
account attractiveness, cultural and other forms of
distance and competitor retaliation threats.
Assess the relative merits of different market entry
modes, including joint ventures, licensing and foreign
direct investment.
BUSM 3200- Strategic Management (Jan 2013) GDS
9(A)-2

International strategy framework

Figure 8.1 International strategy framework

9(A)-3

International v global strategy

International strategy refers to a range of
options for operating outside an organisation’s
country of origin.

Global strategy involves high coordination of
extensive activities dispersed geographically in
many countries around the world.

N.B. Global strategy is just one kind of international strategy.

9(A)-4

The Strategic Motives Why Companies
Decide To Enter Foreign Markets

WHY COMPANIES DECIDE TO
ENTER FOREIGN MARKETS

To gain access to To spread business
new customers risk across a wider
To exploit core market base
competencies

To achieve lower To access resources
costs and economies and capabilities in
of scale foreign markets

9(A)-5
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–5

WHY COMPETING ACROSS NATIONAL
BORDERS MAKES STRATEGY
MAKING MORE COMPLEX

Industry competitiveness factors that
1. vary from country to country

Location-based advantages for certain
2. countries

Differences in government policies
3. and economic conditions

4. Currency exchange rate risks

Differences in cultural, demographic,
5. and market conditions
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Internationalisation drivers
Professor George Yip’s
Model

Figure 8.2 Drivers of internationalisation
Source: Adapted from G. Yip, Total Global Strategy II, Financial Times Prentice Hall, 2003, Chapter 2

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Geographical Sources of Advantages
Geographical location of activities is a crucial
source of competitive advantage
Organization can improve the configuration of its
value chain and network by taking advantage of
country-specific differences
Two principal opportunities available:

1. Locational Advantages
2. International Value Network

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Location advantages:
Porter’s diamond (1)

Porter’s Diamond – explains why some
locations tend to produce firms with
sustained competitive advantages in some
industries more than others.
The four drivers in Porter’s Diamond stem
from:
local factor conditions
local demand conditions
local related and supporting industries
local firm strategy structure and rivalry.
9(A)-9

The Diamond Framework

♦ Answers important questions about
competing on an international basis by:
● Predicting where new foreign entrants are
likely to come from and their strengths.
● Highlighting foreign market opportunities
where rivals are weakest.
● Identifying the location-based advantages
of conducting certain value chain activities
of the firm in a particular country.

9(A)-10

Location advantages:
Porter’s diamond (2)

Figure 8.3 Porter’s Diamond – the determinants of national advantages
Source: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc., from The Competitive Advantage of Nations by Michael E. Porter. Copyright © 1990, 1998 by
Michael E. Porter. All rights reserved

9(A)-11

1. Factor Conditions
• Factors of production include not only labor, capital,
and natural resources (e.g., land and minerals) but
also factors that can be created.
• The latter are more relevant to developed nations
that are seeking competitive advantage over firms in
other countries.
• These include a skilled human resource pool as well
as the supporting infrastructure of a country, e.g.,
communication and transportation systems as well
as a stable banking system.

2. Demand Conditions
• Demand conditions refer to the demands that
consumers place on an industry for goods and
services.
• Consumers who demand highly specific,
sophisticated products and services force
firms to be more innovative to meet such
demand.
• Such consumer pressure presents challenges
to a country’s industries to also make it more
competitive in international markets.

3. Related and Supporting Industries
• Related and supporting industries enable
firms to more effectively manage inputs.
• For example, countries with a strong supplier
base benefit by adding efficiency in
downstream activities.
• That is because a competitive supplier base
helps a firm obtain inputs using cost-effective,
timely methods it contributes to reducing
manufacturing costs.

4. Firm Strategy, Structure and Rivalry
• Firms develop strategies and structures to
compete with other firms in the same country
that are trying to capture the same customer
market.
• Rivalry is particularly intense in nations with
strong consumer demand conditions, strong
supplier bases, and high new entrant potential
from related industries.
• Such rivalry provides a strong impetus for firms to
innovate and find new sources of competitive
advantage.

International Value Network: Global sourcing

Global sourcing refers to purchasing services and
components from the most appropriate suppliers
around the world regardless of their location.
The advantages include:
 Cost advantages include labour costs,
transportation and communications costs, taxation
and investment incentives.
 Unique local capabilities.
 National market characteristics and reputation.

9(A)-16

The concept of ‘value chain networks’
Global strategy requires the firm to decide where
exactly it wants to ‘optimally locate’ its core
activities
If you go back to the model of the value chain, you
can then extend it beyond the domestic market
and consider how it is to be configured and then
integrated across a set of countries in order to
create a globally integrated network
The network itself provides the global firm with
competitive advantages

9(A)-17

The concept - dispersion and configuration of the value chain
in a global network

Concentrate
R&D in the US Concentrate
MFG in China

Coordinate Marketing
© GDS and Sales from AUST

9(A)-18

Reasons for Locating Value Chain Activities
for Competitive Advantage
♦ Lower wage rates ♦ Proximity to suppliers
♦ Higher worker and technologically
productivity related industries
♦ Lower energy costs ♦ Proximity to customers
♦ Fewer environmental ♦ Lower distribution costs
regulations ♦ Availableunique
♦ Lower tax rates natural resources
♦ Lower inflation rates

9(A)-19

INTERNATIONAL STRATEGIES

The global–local dilemma relates to the
extent to which products and services
may be standardised across national
boundaries or need to be adapted to
meet the requirements of specific
national markets.

9(A)-20

International strategies

Figure 8.4 Four international strategies
Source: Adapted ‘Changing patterns of international competition’, pp. 9–39, Figure 5 (Porter, M. 1987). Copyright © 1987, by The Regents of the University of California. Reprinted from
the California Management Review, vol. 28, no. 2. By permission of The Regents. cmr berkeley.edu. All right reserved. This article is for personal viewing by individuals accessing this
website. It is not to be copied, reproduced or otherwise disseminated without written permission from the California Management Review. By viewing this document, you here by agree
to these terms. For permission or reprints, contact: cmr@haas. berkeley.edu electronic formats.

9(A)-21

International Strategies
Simple Export:
 Concentration of activities (particularly manufacturing) in
one country, most likely the country of origin
 Marketing such as pricing and distribution is decided at
the local level
 Take advantage of locational advantages
Multi-domestic
 Dispersion of activities (manufacturing, marketing,
product development) in overseas countries
 Each market is treated independently
 Local adaptations to meet local market needs

9(A)-22

International Strategies
Complex Export
 Location of activities in one country
 Involves coordinated marketing

Global Strategy
 Mature form of international strategy
 Uses international value chain networks
 Geographical location is determined according to the
locational advantage for each activity so that product
development, manufacturing and marketing functions
might be located in different countries.

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Approaches to International Strategy
♦ Multidomestic Strategy
● Varies product offerings and competitive approaches
from country to country.
♦ Global Strategy
● Employs the same basic competitive approach in all
countries where the firm operates.
♦ Transnational Strategy
● Is a think-global, act-local approach that incorporates
elements of both multidomestic and global strategies.

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Three Approaches for Competing Internationally

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Two Opposing Pressures: Reducing
Costs and Adapting to Local Markets
Ted Levitt

Strategies that favor global products and brands
 Should standardize all of a firm’s products for all of their
worldwide markets
 Should reduce a firm’s overall costs by spreading
investments over a larger market
 Are based on three assumptions
 Customer needs and interests worldwide are becoming
more homogeneous
 People (worldwide) prefer lower prices at high quality
 Economies of scale in production and marketing can be
achieved through supplying global markets

Two Opposing Pressures: Reducing
Costs and Adapting to Local Markets
But those three assumptions may not always be
true
 Product markets vary widely between nations (customer
needs and interests?)
 In many product and service markets, there appears to be
a growing interest in multiple product features, quality
and service (preference for low price?)
 Technology permits flexible production, cost of
production may not be critical to product cost, and firm’s
strategy should not be product-driven

Advantages and Disadvantages of Multidomestic,
Global, and Transnational Approaches

Multidomestic Approach
Advantages Disadvantages
• Can meet the specific needs of • Hinders resource and capability
each market more precisely sharing or cross-market transfers
• Can respond more swiftly to • Higher production and distribution
localized changes in demand costs
• Can target reactions to the • Not conducive to a worldwide
moves of local rivals competitive advantage
• Can respond more quickly to
local opportunities and threats

9(A)-28

Global, and Transnational Approaches (cont’d)

Global Approach
• Lower costs due to scale and • Unable to address local needs
scope economies precisely
• Greater efficiencies due to the • Less responsive to changes in
ability to transfer best practices local market conditions
across markets • Higher transportation costs and
• More innovation from knowledge tariffs
sharing and capability transfer • Higher coordination and integration
• The benefit of a global brand costs
and reputation

9(A)-29

Global, and Transnational Approaches (cont’d)

Transnational Approach
• Offers the benefits of both local • More complex and harder to
responsiveness and global implement
integration • Conflicting goals may be difficult to
• Enables the transfer and sharing reconcile and require trade-offs
of resources and capabilities • Implementation more costly and
across borders time-consuming
• Provides the benefits of flexible
coordination

9(A)-30

MARKET SELECTION AND ENTRY

Not all countries are equally attractive
Need to do country PESTEL analysis
Then decide on the appropriate
Market Entry Mode

9(A)-31

Market characteristics

Four elements of the PESTEL framework are
particularly important in comparing countries for
entry:
 Political. Political environments vary widely
between countries and can alter rapidly.
 Economic. Key comparators are levels of Gross
Domestic Product and disposable income which
indicate the potential size of the market.
 Social. Factors like population characteristics and
lifestyle as well as cultural differences.
 Legal. Countries vary widely in their legal regime.

9(A)-32

Political and Economic Risks

♦ Political Risks
● Stem from instability or weaknesses in
national governments and hostility to foreign
business.
♦ Economic Risks
● Stem from the stability of a country’s
monetary system, economic and regulatory
policies, lack of property rights protections,
and risks due to exchange rate fluctuation.

9(A)-33

The Impact of Government Policies and
Economic Conditions in Host Countries
♦ Positives ♦ Negatives
● Tax incentives ● Environmental regulations
● Low tax rates ● Subsidies and loans to
● Low-cost loans domestic competitors
● Site location and ● Import restrictions
development ● Tariffs and quotas
● Worker training ● Local-content requirements
● Regulatory approvals
● Profit repatriation limits
● Minority ownership limits

9(A)-34

The Risks of Adverse Exchange Rate Shifts

♦ Effects of Exchange Rate Shifts:
● Exporters experience a rising demand for
their goods whenever their currency grows
weaker relative to the importing country’s
currency.
● Exporters experience a falling demand for
their goods whenever their currency grows
stronger relative to the importing country’s
currency.

9(A)-35

The CAGE framework
Proposed by Professor Ghemawat

Cultural Administrative and
distance political distance

Geographic Economic/ wealth
distance distance

9(A)-36

International cross-cultural comparison

Figure 8.5 International cross-cultural comparison
Source: M. Javidan, P. Dorman, M. de Luque and R. House, ‘In the eye of the beholder: cross-cultural lessons in leadership from Project GLOBE’, Academy of Management
Perspectives, February 2006, pp. 67–90 (Figure 4: USA vs China, p. 82). (GLOBE stands for ‘Global Leadership and Organizational Behavior Effectiveness’.)

9(A)-37

Assessing country markets

Country markets can be assessed
according to three criteria:
 Market attractiveness to the new entrant

 The likelihood and extent of defenders’
reaction
 Defenders’ clout – the relative power of
defenders to fight back.

9(A)-38

International competitor retaliation

Figure 8.6 International competitor retaliation
Source: Reprinted by permission of Harvard Business Review. Exhibit adapted from ‘Global gamesmanship’ by I. MacMillan, S. van Putter and R. McGrath, May 2003.
Copyright © 2003 by the Harvard Business School Publishing Corporation. All rights reserved

9(A)-39

The staged international
expansion model
The staged international expansion model
proposes a sequential process whereby companies
gradually increase their commitment to newly
entered markets, as they build market knowledge
and capabilities.
This is challenged by two phenomena:
 ‘Born-global’ firms - new small firms that internationalise
rapidly (usually in new technologies)
 Emerging-country multinationals - building unique
capabilities in the home market but exploiting them in
international markets very quickly.

9(A)-40

Modes of entry

Exporting

Joint ventures and alliances

Licensing

Foreign direct investment

9(A)-41
BUSM 3200- Strategic 41

Entry Modes of International Expansion

Modes of international market entry

Figure 8.7 Modes of international market entry

9(A)-43

Exporting

No need for Lose any location
operational facilities advantages in the
in host country host country
Economies of scale in Dependence on
the home country export
Internet can intermediaries
facilitate exporting Exposure to trade
marketing barriers
opportunities Transportation costs

9(A)-44

Joint ventures and alliances

Shared investment Difficult to find good
risk partner
Complementary Relationship
resources management
Maybe required for Loss of competitive
market entry advantage
Difficult to integrate
and coordinate

9(A)-45

Licensing

Contractual source of Difficult to identify
income good partner
Limited economic Loss of competitive
and financial advantage
exposure Limited benefits
from host nation

9(A)-46

Foreign direct investment

Full control Substantial
Integration and investment and
coordination possible commitment
Rapid market entry Acquisitions may
through acquisitions create integration/
Greenfield coordination issues
investments are Greenfield
possible and may be investments are
subsidised time consuming and
unpredictable

9(A)-47

How do firms build competitive
advantages in global business arena?

Build Competitive Advantage
in International Markets

Use international
Share resources, Gain cross-border
location to lower
competencies, coordination
cost or differentiate
and capabilities benefits
product

9(A)-48

When to Concentrate Activities in a Few Locations

♦ The costs of manufacturing or other activities are
significantly lower in some geographic locations than
in others.
♦ There are significant scale economies in production
or distribution.
♦ There are sizable learning and experience benefits
associated with performing an activity in a single
location.
♦ Certain locations have superior resources, allow
better coordination of related activities, or offer other
valuable advantages.

9(A)-49

When to Disperse Activities across Many Locations

♦ Buyer-related activities can be conducted at a distance.
♦ There are high transportation costs.
♦ There are diseconomies of large size.
♦ Trade barriers make a central location too expensive.
♦ Dispersing activities reduces exchange rate risks.
♦ Dispersion helps prevent supply interruptions.
♦ Dispersion helps avoid adverse political developments.
♦ Dispersion allows for location-based technology and
production cost competitive advantages.

9(A)-50

Internationalization and performance

Inverted U-curve – complexity may erode
the advantages of internationalization

Service sector disadvantages –
internationalization may only work
well for manufacturing firms

Internationalisation and product diversity

9(A)-51

Subsidiary roles in an international portfolio

Figure 8.8 Subsidiary roles in multinational firms
Source: Reprinted by premission of Harvard Business School Press. From Managing across Borders: The Transnational Solution by C.A. Bartlett and S. Ghoshal. Boston, MA 1989, pp.
105–11. Copyright © 1989 by the Harvard Business School Publishing Corporation. All rights reserved

9(A)-52

Subsidiary roles
Strategic leaders
 Hold valuable resources; located in countries that have
competitive success
Contributors
 Located in countries of lesser strategic significance but
hold valuable internal capabilities
Implementers
 Not contributing substantially to competitive advantage
but help to generate financial resources (‘cash cow’)
Black holes
 Located in countries that are crucial for competitive
success but lack resources (‘question marks’)
9(A)-53

Summary (1)
Internationalisation potential in any particular market
is determined by Yip’s four drivers: market, cost,
government and competitors’ strategies.
Sources of advantage in international strategy can be
drawn from both global sourcing through the
international value network and national sources of
advantage, as captured in Porter’s Diamond.
There are four main types of international strategy,
varying according to extent of coordination and
geographical configuration: simple export, complex
export, multidomestic and global.

9(A)-54

Summary (2)

Market selection for international entry or expansion
should be based on attractiveness, multidimensional
measures of distance and expectations of competitor
retaliation.
Modes of entry into new markets include export, licensing
and franchising, joint ventures and overseas subsidiaries.
Internationalisation has an uncertain relationship to
financial performance, with an inverted U-curve warning
against over-internationalisation.
Subsidiaries in an international firm can be managed by
portfolio methods just like businesses in a diversified
firm.

9(A)-55

PRACTICE ESSAY QUESTIONS
IMPORTANT NOTE: →
 These questions are provided for your reference only – they are only
INDICATIVE of the standard of questions you might expect in the final exam.
 DO NOT use these questions to “spot”
 The RMIT examiner will post advice on the exam on the Learning Hub closer
to the exam; you are required to pay attention to that advise
 The questions here show the range of topics that could be tested from this
lecture; they are NOT exhaustive
 To score a high grade it is important to LINK the theory to applications and
examples. Where from?
 You have been assigned specific cases to read from the text. Each case

study will show you the kinds of strategic decisions the case company
needs to make. You can draw from these examples.
 You have selected a case company for your project; you may use

examples from there.
 You are supposed to read widely from the business press about local,

regional and international companies strategies. You can use examples
from there as well.

9(A)-56

Sample essay question
 What are some of the benefits and risks
associated with a firm implementing an
international strategy

If there are drawbacks in a specific
international market, explain how these
might be identified using Porter's
diamond model of national advantage.
Give examples to support your answer.

9(A)-57

• Discuss the advantages and
disadvantages associated with related
and unrelated diversification strategy for
international expansion. Illustrate your
answer with examples from one case
studied in this course.
 Question is tricky: need to LINK two chapter material,
one on diversification (Chapter 7) and one on
international strategy (Chapter 8)
 Only list the advs and disdvs of diversification from the
point of going international

9(A)-58


What are four risks associated with
international strategy?
Give examples from the XYZ case
studied in this course to illustrate how
these risks might be managed to
improve firm performance.

9(A)-59


Discuss the benefits and risks
associated with expansion into
international markets.
Use specific examples in your answer
to illustrate how potential risks might
be managed effectively for a firm to
gain sustainable competitive
advantage.

9(A)-60

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