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International Strategy
KNOWLEDGE OBJECTIVES
Studying this chapter should provide you with the strategic management knowledge needed to:
1. Explain traditional and emerging motives for firms to pursue international diversification.
2. Explore the four factors that lead to a basis for international business-level strategies. 3. Define the three international corporate-level strategies: multidomestic, global, and transnational. 4. Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization.
Economic globalization the formation of a single worldwide economy could further disadvantage the developing nations.
Do exogenous growth models explain the poor growth rates of LDCs? Does international communitys (World Bank, IMF) development paradigm focus too much on GDP growth, not enough on well-being & sustainable development? How best to assess genuine progress? How do domestic and international politics impeded economic reforms?
Globalization refers to processes that increase connectivity among societies & their people, institutions, organizations. Globalization intertwines cultural, political, and economic interdependencies that challenge traditional arrangements.
The growing extensity, intensity, and velocity of global interactions can be associated with their deepening impact such that the effects of distant events can be highly significant elsewhere and specific local developments can come to have considerable global consequences. (Held et al. 1999)
Communication & transportation technologies compress and decouple time, geographic spaces, social distances (global village) National & regional boundaries grow increasingly permeable Cultural / identity groups become detached from their traditional territorial bases (the diffusion of supraterritoriality)
Globalization
Version 1.0. 1492 (Columbus) - 1800.
Key factors-- muscle, horsepower, windpower, steampower Agent of change -- Countries and governments
Globalization
Version 3.0. 2000 to present
Key factors-- power for individuals to collaborate and compete globally. Software, applications, global fiber-optic network Agent of change -- Individuals, much more diverse --- non-Western, non-white
2. Netscape IPO
The August 9, 1995, offering sparked massive investment in fiberoptic cables.
4. Open-sourcing
Self-organizing communities, la Linux, launched a collaborative revolution.
5. Outsourcing
Migrating business functions to India saved money and a third world economy.
by Thomas L. Friedman & Wired Magazine, May 2005
7. Supply-chaining
Robust networks of suppliers, retailers, and customers increased business efficiency. See Wal-Mart.
8. Insourcing
Logistics giants took control of customer supply chains, helping mom-and-pop shops go global. See UPS and FedEx.
9. In-forming
Power searching allowed everyone to use the Internet as a "personal supply chain of knowledge." See Google.
10. Wireless
Like "steroids," wireless technologies pumped up collaboration, making it mobile and personal.
Source: The World is Flat, A brief History of the 21st Century
by Thomas L. Friedman & Wired Magazine, May 2005
CHARACTERISTICS
PHASE-I
PHASE-II
PHASE-III
PHASE-IV
DOMESTIC
Primary Orientation Competitive Strategy Importance of world business Product/Service Domestic Marginal
INTERNATIONAL
Market Multi-Domestic Important
MULTINATIONAL
Price Multi-National Extremely Important
GLOBAL
Strategy Global Dominant
Product/Service
New, Unique
Product engineering emphasized
More Standardized
Process engineering emphasized Shared Decreasing Decreasing Few Large, multi-domestic Domestic and Primary markets
Mass-customized
Product and process engineering Instantly and Extensively shared Very high High, yet Immediately decreasing Significant (few or many) Largest, global Global, least cost
Exports
Structure Cultural sensitivity With whom Level
None
Functional divisions Marginally important No one No one
Large, saturated
Multinational line of business Somewhat important Employees Managers
Strategic assumption
Cultural Globalization
Globalization institutionalizes the diffusion of a secularized world culture, Western in origin, that trumps all alternatives.
Globalization processes spread a legitimated world cultural order of universally accepted, rational, & democratic ideas reshaping national states, organizations, and individual identities.
(John Meyer et al. 1997)
Political Globalization
The 1648 Treaty of Westphalia, ending the Thirty Years War, destroyed the Holy Roman Empire and loyalties based on religion. It created todays system of sovereign nation-states.
No governmental authority exists over nations
National borders are absolute barriers against interference & intervention by outsiders National security requires international balanceof-power (ultimately, by credible threats of war)
Is globalization slowly eroding nation-state sovereignty? Are new supranational orgs (EU, UN, NATO, World Court) constructing a multilateral, intergovernmental system? Will international orgs acquire enough legitimate authority to gain control over the means of violence among nations?
Economic Globalization
After World War II, trade negotiation rounds under GATT drove economic globalization, resulting in treaties to remove tariff barriers to "free trade as now interpreted by World Trade Org.
Two definitions of economic globalization: World Bank: Freedom and ability of individuals and firms to initiate voluntary economic transactions with residents of other countries. IMF: The growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, freer international capital flows, and more rapid and widespread diffusion of technology.
Four key dimensions of economic globalization involve the flows across national boundaries of: goods & services; financial capital (FDI); labor (human migration); technology & knowledge. What explains the differential economic growth of nations? Does GDP indicate well-being?
MNCs commodify, commercialize, & exploit all sources of profit. For example, since 1990, six water utility firms won contracts to privatize public waterworks affecting 300M people in 56 countries.
These MNCs Bechtel (U.S.), Suez, Vivendi Environnement, Saur (France) United Utilities (UK), Thames Water (Germany) claim to be more efficient in providing cheaper, clean water than often-corrupt public utility companies. Working with the World Bank, water barons lobby governments, trade & standards INGOs to change municipal and trade laws. By 2020 these firms may monopolize 67% of current public water. Critics say they are predatory capitalists that ultimately plan to control the worlds water resources and drive up prices even as the gap between rich and poor widens. The fear is that accountability will vanish, and the world will lose control of its source of life.
(Center for Public Integrity: www.icij.org)
WTO Ensuring Free Trade? The WTO, created in 1995, is a primary target of activists in the anti-corporate globalization movement.
The WTO is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. <www.wto.org>
Core WTO principles are Trade without Discrimination & Promoting Fair Competition among nations.
The WTO multilateral trading system is negotiated and signed by governments. These contracts guarantee member nations trade rights & bind governments to keep trade policies within agreed limits. Their purpose is to ensure that trade flows as predictably and freely as possible, by helping producers, exporters, and importers of goods and services conduct their business smoothly.
Anti-globalists criticize the WTO for its allegedly undemocratic decision-making and lack of openness in reaching agreements. They claim the 25 richest developed nations manipulate trade deals to the disadvantage of 120 poor developing countries. LDCs often lack staff and expertise to win favorable tariff reductions. Textile quotas block clothing imports from low-wage countries. US, EU, and Japanese subsidy rates are $20,000 per farmer.
What should be a level playing field in free-trade talks? Should all nations have equal access and status in trade disputes? How can poor nations afford negotiators & experts? Should negotiations produce actually equal outcomes and implementation? Would genuine trade fairness require a massive transfer of wealth from the richest to poorest nations?
[D]onor resources can play an important role in strengthening the ability to use resources effectively. This is a focus of UNDP work in many countries in partnership with governments, donors, and civil society.
INDIA
Population to grow to 1.6b by 2050. More efficient with capital than China. English speaking, friendly toward the U.S. and its citizens, more democratic and open society. Very undeveloped infrastructure power and transportation Red-tape, bureaucracy and corruption Bottlenecks in high quality training High growth needed to avoid increased unemployment
FIGURE
8.1
Basic factors
Natural and labor resources
Advanced factors
Digital communication systems and an educated workforce
Other strategies dictate business-level strategies from the home office and coordinate resource sharing across units.
Multidomestic Strategy
Multidomestic strategy
Strategy and operating decisions are decentralized to strategic business units (SBU) in each country. Products and services are tailored to local markets. Business units in one country are independent of each other. Assumes markets differ by country or regions. Focus on competition in each market.
Prominent strategy among European firms due to broad variety of cultures and markets in Europe.
Global Strategy
Global strategy
Products are standardized across national markets. Business-level strategic decisions are centralized in the home office. Strategic business units (SBU) are assumed to be interdependent. Emphasizes economies of scale. Often lacks responsiveness to local markets. Requires resource sharing and coordination across borders (hard to manage).
Transnational Strategy
Transnational strategy
Seeks to achieve both global efficiency and local responsiveness. Difficult to achieve because of simultaneous requirements:
Strong central control and coordination to achieve efficiency Decentralization to achieve local market responsiveness
Environmental Trends
Liability of Foreignness
Legitimate concerns about the relative attractiveness of global strategies
Global strategies not as prevalent as once thought
Regionalization
Focusing on particular region(s) rather than on global markets Better understanding of the cultures, legal and social norms
TABLE
8.1
Type of Entry
Exporting
Licensing
Strategic alliances
Acquisition
Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations
Complex, often costly, time consuming, high risk, maximum control, potential above-average returns
Optimal Solution
Export
Optimal Solution
Licensing
Optimal Solution
Strategic Alliance
Optimal Solution
Strategic Alliance
Optimal Solution
Strategic Alliance
Optimal Solution
Wholly-owned Subsidiary