To survive in today’s global marketplace, firms must be able to exploit opportunities presented to them anywhere in the world and respond to changes in domestic and foreign markets as they arise. This requires a concise definition of the firm’s corporate mission, a vision for achieving that mission, and an unambiguous understanding of how the company intends to compete with other firms. To obtain this understanding, firms must do the following: compare their strengths and weaknesses to those of their worldwide competitors; assess likely political, economic, and social changes among their current and prospective customers; and analyze the impact of new technologies on their ways of doing business.
This chapter’s learning objectives include the following:Characterizing the challenges of international strategic management.Assessing the basic strategic alternatives available to firms.Distinguishing and analyzing the components of international strategy.Describing the international strategic management process. Identifying and characterizing the levels of international strategies.
An international business competes for customers in global markets. In order to be successful, the firm’s resources must be deployed to achieve the desired levels of profitability, growth, and market share. Strategic management is used to address these challenges.
International strategic management is a comprehensive, ongoing management planning process aimed at formulating and implementing strategies that enable a firm to compete effectively in the global marketplace. Strategic management is usually the responsibility of top-level executives at corporate headquarters and senior managers in domestic and foreign subsidiaries.
There are many similarities between developing a strategy for competing in a single country and developing a strategy for competing in multiple countries. In both cases, the firm’s strategic planners must answer the same fundamental questions:What products and/or services does the firm intend to sell?Where and how will it make those products or services?Where and how will it sell them?Where and how will it acquire the necessary resources?How does it expect to outperform its competitors?
However, developing an international strategy is far more complex than developing a domestic one. Managers developing an international strategy must understand and deal with multiple governments, currencies, accounting systems, political systems, and legal systems, as well as a variety of languages and cultures. They must also implement strategic plans among business units located in different parts of the world, as well as monitor and control strategic outcomes.
Managers usually consider such complexities acceptable trade-offs for the additional opportunities that come with global expansion. Indeed, international businesses can exploit three sources of competitive advantage.Global Efficiencies. International firms can capture location efficiencies by operating facilities anywhere in the world that yields the lowest production or distribution costs or that best improves the quality of service they offer their customers. Similarly, by building factories to serve more than one country, international firms may also capture economies of scale. By broadening their product lines in each of the countries they enter, international firms may enjoy economies of scope, lowering their production and marketing costs and enhancing bottom-line profits. Multinational Flexibility. The political, economic, legal, and cultural environments of countries vary widely; moreover, these environments can change constantly. Unlike domestic firms, which operate in and respond to changes in a single environment, international businesses may respond to a change in one country by implementing a change in another country. Worldwide Learning. Business environments throughout the world are diverse. An international firm may respond to these environments by adjusting its operations from one country to the next. This response will contribute to organizational learning and allow the firm to transfer knowledge to its operations in other countries.
This section focused on The Challenges of International Strategic Management. The discussion began by defining international strategic management. It then introduced some fundamental questions faced by strategic planners, explored the complexities of international strategy, and examined some sources of competitive advantage for businesses that operate internationally. The next section will focus on Strategic Alternatives.
In their attempt to obtain global efficiencies, multinational flexibility, and worldwide learning, multinational corporations typically adopt one the following strategic alternatives: home replication, multidomestic, global, and transnational.
In the home replication strategy, a firm utilizes the core competency or firm-specific advantage it developed at home as its main competitive weapon in the foreign markets that it enters. That is, it takes what it does exceptionally well in its home market and attempts to duplicate it in foreign markets.
A multidomestic corporation is a collection of relatively independent operating subsidiaries, each of which focuses on a specific domestic market. Each of these subsidiaries has the flexibility to customize its products, marketing campaigns, and operations techniques to meet the needs of its local customers. In addition, local managers have considerable power and authority. This strategy is effective when there are clear differences among national markets; when economies of scale for production, distribution, and marketing are low; and when the cost of coordination between the parent corporation and its various foreign subsidiaries is high.
In a global strategy, the corporation views the world as a single marketplace. The primary goal of this strategy is the creation of standardized goods and services that will address the needs of customers worldwide. Thus, the global corporation views the world market as a single entity as it develops, produces, and sells its products. It tries to capture economies of scale in production and marketing by concentrating its production activities in a handful of highly efficient factories and then creating global advertising and marketing campaigns to sell those goods. Since the global corporation must coordinate its worldwide production and marketing strategies, it usually concentrates power and decision-making responsibility at a central headquarters location.
In the transnational strategy, a corporation attempts to combine the benefits of global scale efficiencies with the benefits and advantages of local responsiveness. The corporation does not automatically centralize or decentralize authority. Rather, it carefully assigns responsibility for various organizational tasks to that unit of the organization best able to achieve the dual goals of efficiency and flexibility.
This graphic assesses thefour alternative strategies against two criteria: the need for local responsiveness and the need for global integration. The home replication strategy is often adopted when pressures for global integration and local responsiveness are low. Companies that use this strategy see little need to alter basic domestic strategy as they enter international markets.The multidomestic strategy is used when the need to respond to local conditions is high, but pressures for global integration are low. For example, companies selling brand-name food products adopt this approach when they rely on local producers to keep fresh, high-quality products on their shelves.The global strategy is most appropriate when the pressures for global integration are high, but the need for local responsiveness is low. In such cases, the firm can seek economies of scale through the use of standardized goods, marketing campaigns, distribution systems, and so forth. The transnational strategy is most appropriate when pressures for global integration and local responsiveness are both high. Transnational corporations utilize matrix organizational designs, project teams, informal management networks, and corporate cultures to help promote the transfer of knowledge among their subsidiaries.
This section focused on the following Strategic Alternatives—home replication, multidomestic, global, and transnational. The next section will focus on the Components of an International Strategy.
After determining the overall international strategic philosophy of their firm, managers must address the four basic components of strategy development. Those components are distinctive competence, scope of operations, resource deployment, and synergy.
The first component of international strategy is distinctive competence. It answers the question: “What do we do exceptionally well, especially as compared to our competitors?” A firm’s distinctive competence may be cutting-edge technology, efficient distribution networks, superior organizational practices, or well-respected brand names. Whatever its form may take, this distinctive competence represents an important resource to the firm. Therefore, the internationalization strategy adopted by a company reflects the interplay between its distinctive competence and the business opportunities available in different countries.
The second component, scope of operations, answers the question: “Where are we going to conduct business?” As a rule, a firm’s scope of operations will focus on those areas where it enjoys a distinctive competence. Scope may be defined in terms of geographical regions, such as countries, regions within a country, and/or clusters of countries. Or it may focus on market niches within one or more regions, such as the premium-quality market niche, the low-cost market niche, or other specialized market niches.
Resource deployment answers the question: “Given that we are going to compete in these markets, how should we allocate our resources to them?”Resource deployment might be specified along product lines, geographical lines, or both. This part of strategic planning determines relative priorities for a firm’s limited resources. Some large MNEs deploy their resources worldwide by manufacturing goods in factories in many countries. Other firms focus their production resource deployment on their home countries.
Synergy is the fourth component of international strategy. It answers the question: “How can different elements of our business benefit each other?” The goal of synergy is to create a situation in which the whole is greater than the sum of the parts.
This section focused on the following Components of an International Strategy: distinctive competence, scope of operations, resource deployment, and synergy. The next section will cover Developing International Strategies.
Developing an international strategy is not a one-dimensional process. Firms generally carry out international strategic management in two broad stages: In strategy formulation, the firm establishes its goals and the strategic plan that will lead to the achievement of those goals. Much of what we discuss in the rest of this chapter and in the next two chapters concerns the formulation of international strategy.In strategy implementation, the firm develops the tactics for achieving the formulated international strategies. Chapters 14 and 15 deal primarily with implementation issues.
While every strategic planning process is unique in many ways, most managers follow some basic steps—developing a mission statement, performing a SWOT analysis, setting strategic goals, developing tactical goals and plans, and developing a control framework.
The international strategic planning process begins with the creation of a mission statement, which clarifies the organization’s purpose, values, and directions. It may specify such factors as the firm’s target customers and markets, principal products or services, geographical domain, core technologies, concerns for survival, plans for growth and profitability, basic philosophy, and desired public image. A multinational enterprise may have multiple mission statements—one for the overall firm and one for each of its foreign subsidiaries. Of course, a firm that has multiple mission statements must ensure that they are compatible.
The second step in developing a strategy is conducting a SWOT analysis. SWOT is an acronym for “Strengths, Weaknesses, Opportunities, and Threats.” A firm typically initiates this analysis by performing an environmental scan, a systematic collection of data about all elements of the firm’s external and internal environments.When members of a planning staff scan the external environment, they obtain data about economic, financial, political, legal, social, technical, and competitive changes in the various markets the firm serves or might want to serve. Then, they analyze the data, looking for opportunities and threats that confront the firm. A firm’s strategic managers must also assess the firm’s internal environment, that is, its strengths and weaknesses. Organizational strengths are skills, resources, and other advantages the firm possesses relative to its competitors. Organizational weaknesses reflect deficiencies in skills, resources, or other factors.
One technique for assessing a firm's strengths and weaknesses is the value chain. The value chain is a breakdown of the firm into its important activities—production, marketing, human resource management, and so forth. This graphic shows that each primary and support activity can be the source of an organizational strength (distinctive competence) or weakness. For example, the quality of a company’s products (Research and Development) and the strength of its worldwide dealership network (Marketing, Sales, and Service) would be among its organizational strengths, but a history of contentious labor relations (Human Resources) would represent one of its organizational weaknesses.
The mission statement and SWOT analysis provide a context for the next step—the setting of strategic goals. These goals are the major objectives the firm wants to accomplish through pursuing a particular course of action. By definition, they should be measurable, feasible, and time-limited (answering the questions: “how much, how, and by when?”).
After a SWOT analysis has been performed and strategic goals set, the next step in strategic planning is to develop specific tactical goals and plans, or tactics. During this phase, middle managers devise the means to achieve strategic goals and guide the firm’s daily activities.
The final aspect of strategy formulation is the development of a control framework, the set of managerial and organizational processes that keep the firm moving toward its strategic goals. The control framework can prompt revisions in any of the preceding steps in the strategy formulation process. Control frameworks are discussedmore fully in Chapter 14.
The topic of this section was Developing International Strategies. The discussion began by reviewing the two stages of international strategic management. Then it provided an overview of the typical steps involved in creating an international strategy:developing a mission statement, performing a SWOT analysis, setting strategic goals, developing tactical goals and plans, and developing a control framework. The next section will cover the Levels of International Strategy.
Given the complexities of international strategic management, many international businesses find it useful to develop strategies for three distinct levels within the organization—corporate, business, and functional.
Corporate strategy attempts to define the domain of businesses in which the firm intends to operate. The single-business strategy calls for a firm to rely on a single business, product, or service for all its revenue. The most significant advantage is that the firm can concentrate all its resources and expertise on that one product or service. However, this strategy also increases the firm’s vulnerability to competition and changes in the external environment.Related diversification is the most common corporate strategy. The firm operates in several different but fundamentally related businesses, industries, or markets at the same time. This strategy allows the firm to leverage a distinctive competence in one market in order to strengthen its competitiveness in others. A third corporate strategy is unrelated diversification, whereby a firm operates in several unrelated industries and markets. Because these operations are unrelated, there is little opportunity for synergy among such diverse operations and businesses.
Business strategy focuses on specific businesses, subsidiaries, or operating units within the firm. It seeks to answer the question: “How should we compete in each market we have chosen to enter?”Firms that pursue corporate strategies of related diversification or unrelated diversification tend to bundle sets of businesses together into strategic business units (SBUs). In firms that follow the related diversification strategy, the products and services of each SBU are somewhat similar to each other. In firms that follow unrelated diversification strategies, products and services of each SBU are dissimilar. The three basic forms of business strategy are differentiation, overall cost leadership, and focus. Once a firm selects a business strategy for an SBU, it typically uses that strategy in all geographical markets the SBU serves.
An SBU can use a differentiation strategy to establish and maintain the image that its products or services differ fundamentally from other products or services in the same market segment. Many international businesses use quality as a differentiating factor. If successful, they can charge higher prices for their products or services. Other firms adopt value as their differentiating factor. They compete by charging reasonable prices for goods and services. A firm that uses an overall cost leadership strategy controls its costs by through highly efficient operating procedures. Lower costs allow it to sell its goods or services for lower prices. A successful overall cost leadership strategy results in lower per-unit profitability due to lower prices but higher total profitability due to increased sales volume.A focus strategy calls for a firm to target specific types of products for certain customer groups or regions. This approach allows the firm to match the features of specific products to the needs of specific consumer groups.
Functional strategies address the question: “How will we manage the functions of finance, marketing, operations, human resources, and research and development in ways consistent with our international corporate and business strategies?”International financial strategy deals with such issues as the firm’s desired capital structure, investment policies, foreign-exchange holdings, risk-reduction techniques, debt policies, and working-capital management. Typically, an international business develops a financial strategy for the overall firm, as well as for each SBU. International operationsstrategy deals with the creation of the firm’s products or services. It guides decisions on such issues as sourcing, plant location, plant layout and design, technology, and inventory management. International human resource strategy focuses on the people who work for an organization. It guides decisions regarding how the firm will recruit, train, and evaluate employees; what it will pay them; and how it will deal with labor relations. A firm’s international R&D strategy is concerned with the magnitude and direction of the firm’s investment in creating new products and developing new technologies.The next steps in formulating international strategy will determine which foreign markets to enter and which to avoid. The firm’s managers must then decide how to enter the chosen markets. These topics will be covered in Chapters 12 and 13.
This section covered the Levels of International Strategy. The discussion started with an overview of corporate strategy and then introduced the application of corporate strategy to strategic business units. The discussion then reviewed the strategies of differentiation, cost leadership, and focus. It also explored the following functional strategies: financial, operations, human resources, and research and development. This presentation will close with a review of the chapter’s learning objectives.
This concludes the PowerPoint presentation on Chapter 11, “International Strategic Management.” During this presentation, we have accomplished the following learning objectives: Characterized the challenges of international strategic management.Assessed the basic strategic alternatives available to firms.Distinguished and analyzed the components of international strategy.Described the international strategic management process. Identified and characterized the levels of international strategies. For more information about these topics, refer to Chapter 11 in International Business.