INDIAN INSTITUTE OF FOREIGN TRADE

INTERNATIONAL BUSINESS STRATEGY

DR.K.RANGARAJAN
PROFESSOR
 Why IBS ????
• Why do firms go abroad?
• What differentiates a "global" from a "multi-domestic" industry?
• What distinguishes “Global Market” and “Global Industry”?
• What are the dilemma in ‘configuring’ and ‘coordinating’ business
activities across the nations?
• What are the strategic considerations when a company goes
beyond the home country?
• Why and when do/should companies engage in cross-border
strategic alliances?
• What are the associated risks and how to guard against them?
• What potential roles can foreign subsidiaries play in an MNC's
global strategy? Etc …

The focus will be on Progressive Internationalization of Firms

 Domestic (vs.) Global Strategy:

• Greater scale and scope of activities

• More alternatives for configuration Of VA Activities
• More scope for competitive advantage
• More subjected to cultural and lingual activities
• Wider economic and factor conditions
Historical Traces of International Business

2000 BC - Mediterranean Trade (Mesopotamia, Greece,

Phoenicia)
500 BC - Control by Greeks (Mass Production)
200 BC - Control by Romans (Venice and Genoa Ports)
16th Century - Mercantilist Theory emerged -> Spain &
Portugal ->Seafaring Capacity
19th Centry - Industrial Revolution: First trace of MNC –
Colt, Singer and JP Coats
20th Century - IB Established as an imperative, MNCs
progressed rapidly
Historically Corporate Globalization
took place in 3 stages

Global Integration
(Global)

Internationalisation
(Multinational)

Export
(Trade)
Before WW I:
• International capital movements •Phase III (1971-90):
associated with population European & Japanese firms have become
movements out of Europe important source of FDI
•Majority of Portfolio Investments US become a major recipient of FDI
•UK was the largest creditor nation NICs started showing their impact
•Phase IV (1991 onwards):
Inter-war Period: FDI has become the core
•Decline of European Might Patterns of investment, tech. Diffusion and
•US became major creditor nation trade among nations are shaped by agents of FDI
due to Direct Investment – the MNCs
•Intl. Portfolio Investment declined Asia (esp. India & China) has become the
due to 1930 Financial crisis focus point
Post-war Period: . Phase V ( Since 2010) :
•Phase I (1945-60):  Emergence of RTAs & ASEAN
MNCs from UK & US dominated  Weakening of EU
Concentration on extraction of  CIS countries in energy
petro. and other RMs  Protectionism & WTO?
•Phase II (1961-70):
Continental Europe & Japan’s
Entry
 Growth Imperative-Paper
industry

Efficiency Imperative-
Mercedes Benz

Imperatives of Knowledge Imperative

Globalization -GE India

Globalization of
Customers-GE Plastics
following AT & T

Globalization of
Competitors-Fuji &
Kodak
Recent Changes in General Globalization Drivers

Some of the widespread changes include the following:

Market Drivers
• Per capita income converging among industrialized nations
• Convergence of lifestyles and tastes (e.g., McDonald’s in India and
Stolichnaya vodka in America)
• Increasing travel creating global consumers
• Organizations beginning to behave as global customer
• Growth of global and regional channels (e.g.,Walmart (US) in 10
Countries, Carrefour (France) in 31, Metro (Ger.) in21,& 7-eleven (Jap.) in 21 )
• Establishment of world brands (e.g., Coca-Cola, Levi’s, Microsoft)
• Push to develop global advertising (e.g. McCann's for Nestle & Gillette;
Saatchi & Saatchi’s commercials for British Airways.
• Spread of Global & regional media (CNN,MTV,Star TV in Asia)
 Recent Changes in General Globalization Drivers…

Cost Drivers

• Continuing push for economies of scale (but offset by flexible

manufacturing)
• Accelerating technological innovation
• Advances in transportation (e.g., use of Federal Express to
deliver urgent supplies from one continent to another)
• Emergence of newly industrializing countries with productive
capabilities and low labor costs (e.g.., China, India, Indonesia
etc.)
• Increasing cost of product development relative to market life
 Recent Changes in General Globalization Drivers…

Government Drivers
• Reduction of tariff barriers (e.g., NAFTA,FTAs)
• Reduction of non-tariff barriers (e.g., Japan’s gradual
opening of its markets)
• Creation of trading blocs (e.g., EU, ASEAN etc)
• Decline in role of governments as producers and
customers (e.g., denationalization of many industries in
Europe, China, India etc.)
• Privatization in previously state-dominated economies,
particularly in Latin America
• Shift to open market economies from closed communist
systems in Eastern Europe & Soviet
• Increasing participation of China and India in the global
economy
Recent Changes in General Globalization Drivers…

Competitive Drivers
• Continuing increase in level of world trade
• More countries becoming key competitive battlegrounds (e.g.,
rise of Japan to become a “lead” country)
• Increased ownership of corporations by foreign acquirers
• Rise of new competitors intent upon becoming global
competitors(e.g.,Japanese(70s),Koreans(80s),Taiwanese
(90s),Chinese(00s), Indian & Russian (10s).
• Rise of ‘born global’ companies.
• Growth of global networks making countries interdependent in
particular industries ( eg.,electronics)
Recent Changes in General Globalization Drivers…

Other Drivers
• Revolution in information and communications
(e.g.,personalcomputers,mobiletelephony,internet etc.)
• Globalization of financial markets (e.g., listing of
corporations on multiple exchanges, and issuing debt
in multiple currencies)
• Improvements in business travel (e.g., improved air
travel and rise of international hotel chains)
 Industries: Global or Local ?

Factors Pushing for Globalization Factors Against Globalization

• Low entry barriers • Cultural Differences

• High Scale Technology • Customer proximity
• Convergence of consumption • Transport costs
• Transport • Legal requirements

Characteristics of Global Industries Characteristics of Local Industries

• Similar Needs & Customers Behavior • Different Needs & Customers Behavior
• Standardized Products • Customized Products/services
• Beyond country economies of scale • Low economies of scale
• Complex distribution
• Speed of Innovation
• Transferability of experience
• Transferability of experience • “Local” customers
• “Global” customers • High transport costs
• “Global” pricing
• “Global” competitors
 DIFFERENT INDUSTRIES HAVE DIFFERENT
COMPETITIVE REQUIREMENTS

HIGH

Civil Aircraft Telecommunication

Equipments
Microprocessors
Institutional Banking Corporate Banking

Bulk Chemicals Automobile

Paint
GLOBAL
FORCES

Package Tours

Retail Banking
Catering
LOW Food
Retail
LOW HIGH

LOCAL FORCES
 WITHIN BUSINESSES DIFFERENT SEGMENTS HAVE
DIFFERENT COMPETITIVE REQUIREMENTS
PAINTS
HIGH

AUTOMOTIVE MARINE

AIRCRAFT
CAR

GLOBAL
FORCES INDUSTRIAL

LOW DO IT YOURSELF
LOW HIGH

LOCAL FORCES
 WITHIN BUSINESSES DIFFERENT FUNCTIONS HAVE
DIFFERENT BENEFITS OF BEING "GLOBAL" or "LOCAL"

HIGH
Research Development
Finances After Sales
Services
Components Sourcing
Components Manufacturing

GLOBAL Logistics
FORCES Marketing

Advertising

Accounting
Customers Services
LOW Sales

LOW HIGH
LOCAL FORCES
Definition of Internationalization

An Open Definition
Diversification issues of International
involvements, Such as HOW,
WHERE, WHO, WHY also present
difficulties to develop and integrated
definition Of internationalization to be
A Broader Definition applicable in all possibilities
-“a process of increasing
Involvement in international
operations”
-“De-internationalization”
In Previous Time
“the outward movements in an
individual firm’s or larger
grouping’s international
operations”

Source: Welch & Luostarinen, 1988, p37

 Uppsala Model
Who and Where
-Developed by Johanson & Wiedersheim-Paul in 1975 at Uppsala University
-Complemented by Johanson & Vahlne in 1977

What
Empirical Bases:
Four Swedish Company: Volvo, Sandvik, Atlas Copco, and Facit

Theoretical Contribution:
-Establishment Chain (International Penetration)
-Psychic Distance (International Expansion)
-Dynamic Model (Knowledge Development and Increasing Foreign Market
Comittment)

PD – Sum of factors preventing flow of info from & to the Mkt.

Eg – Language, education, business practices, culture, ind. Dev.

Source: Johanson & Wiedersheim-Paul (1975), Johanson & Vahlne (1977)

 Dynamic Model
Dynamic Model
- A model of knowledge development and an increasing foreign market commitment
- State Aspects: Market Knowledge & Incremental Commitment
- Change Aspects: Commitment Decision & Current Activities
- Interaction between state aspects & change aspects
“Market knowledge and market commitment are assumed to affect decision
regarding commitment of resources to foreign markets and the way current
activities are performed. Market knowledge and market commitment are in turn
affected by current activities and commitment decisions”

Illustration:

Source: Johanson & Vahlne (1977)

 Dynamic Model-State Aspects & Change Aspects

Market Knowledge Commitment Decisions

-General Knowledge -Perceived opportunities and problems on a
-Marketing methods, specific market
- Common characteristics of customers -The economic effect
-Market Specific Knowledge -Uncertainty effect
- Business culture,
- Climate, characteristics of customer firms
and their personnel

Market Commitment Current Business Activities

-Amount of resources -A lag in current business and their
- size of investment (marketing, consequences
organization, personnel) -The prime source of experiences
-Degree of commitment
- Alternative use for the committed
resources and transferring them into the
alternative one

Source: Johanson & Vahlne (1977)

 Dimensions of Distance: The CAGE Framework

Prof. Ghemawat (2001) countered Friedman’s allegations about world being

a “global village”. Instead, he argued that MNCs will continue to face
enormous difficulties due to persisting distance between people (cultural,
administrative, geographic, economic):

 Cultural Distance concerns different ethnicities, religions,

languages, and social values. Industries most affected include
food and those having linguistic content (media, TV). Size is also
a cultural factor (Americans prefer big cars, Japanese small
ones). In the Americas a strong demand exists for small trucks,
while in Europe this does not happen.
 Dimensions of Distance: The CAGE Framework

 Administrative Distance refers to commercial zones, links

between former colonies, diplomatic relations, government
systems etc (e.g. Mexico and Spain, Portugal and Brazil).

 Geographic Distance influences producers of fragile &

perishable goods (glass, fruit), of low value-to-weight (cement), or
of high transportation costs (tourism).

 Economic Distance has to do with differences in development

and people welfare. Most affected industries are luxury products,
cars & high-tech.

DISRUPTION OF EUROZONE. Country Differences?

 The Eclectic Paradigm
 Was developed by Prof. Dr. John Dunning, Rutgers U
(1993, 2002, 2008).
 Attempts to interpret all stages of international
expansion, from exporting till FDI.
 The contemporary company is viewed as fully
informed about predominant conditions in
international markets.
 Activities of MNCs are likely to be oriented to countries
offering optimal combinations of preconditions
described below. Different combinations of the three
variables determine the modes, industries and
geographical distribution of MNCs’ international
operations.
 The Eclectic Paradigm (cont)

 Distinguishes 3 categories of advantages that enhance

globalization of business:

• Ownership Advantages
• Location Advantages
• Internalization Advantages

 From the initials, the Eclectic Paradigm is widely

known as “OLI Framework”.
 The OLI Framework

Location Advantage:
Location Specific factors. These are external
to the firm including transportation cost,
government regulation, infrastructure factors

OLI
Internalization:
Ownership Advantage: Cost advantage from vertical and
Firm specific factors including horizontal integration, due to
technology, , patent, process, transaction cost caused by market
name recognition, and other failure
core competencies
 Network Model
Network Model
-The market is regarded as a network relationship between firms
-Direct relations and indirect relationships with supplier, distributors, customers and
Competitors

Illustration

Source: Johanson & Mattsson (1988), Brandenburger & Nalebuff (2000)

 Internationalization according to Network Approach

International Extension
International Penetration
“Through establishment of position in
“By developing the positions and
Relation to counterparts in national Net
Increasing resource commitments in
that are new to the firm”
Those nets abroad in which the firm
Already has positions”

International Integration
“By increasing co-ordinations between
Positions in different national nets”

Source: Johanson & Mattsson (1988)

 Internationalization according to Network Approach

Source: Developed by us based on Hollenson.S. (2001)

 Network Model in Application
Network Model
Internationalization Process is influenced by the internationalization characteristics
of both the firm and of the market

Source: Johanson & Mattsson (1988)

 Network Model in Application
The Early Starter The Lonely International
-All the actors have few relations with firms -The firm has already established
abroad relationships with or in overseas markets
-The firm possesses few knowledge about -Accumulated knowledge
overseas market -Possess a wider capability of resource
-Small firms follow Establishment Chain adjustment
-Large firms can use acquisition and green -Its network can be used as bridges for
field investment others to internationalize

The Late Starter The International Among Others

-All other actors have already been -The international independence makes it
international possible to use its position in one net as a
-The firm can utilize others network to bridge to other net.
internationalize -International extension and penetration can
-The greater need for co-ordinate accelerate be speeded up.
the penetration process

Source: Johanson & Mattsson (1988)

The Globalization Debate
 International – business is operating in more than one country
 Multinational – business is operating in several countries with some decentralization of
management decision making to overseas subsidiaries and little
coordination of activities across national boundaries
 Global & Transnational – business operating in several countries and configure,
coordinate and control all such activities
(Transnationality is by the equity stake of a business operating away from the home country –
UNCTAD)
 Globalization of Market – converging commonality (homogeneity in terms of tastes &
preferences)
 Globalization of Industry – the extent to which the value addition activities in the
industry are configured and coordinated globally
 Global Strategy
o A global core competence giving access to global markets
o Extensive participation in major world markets
o Global configuration of value adding activities which exploits both national
similarities and integration of activities
o Local responsiveness, where required
o Differentiated structure and organization
 High High FDI
Global strategy
High foreign investment (with extensive co-
In dispersed activities Ordination and
With a high degree of Concentration)
Co-ordination among
Coordination of Subsidiaries.
activities
Country Focused Stgy. Export Strategy
Company Strategy based upon
with several national Exporting of product/
Subsidiaries each Service with decent-
operating in only one ralized marketing
Country In each host country
Low
Geographically Geographically
Dispersed concentrated

Configuration of activities

Porter’s Model
 High Global businesses:
Global markets,
global integrated
strategy requiring
Pressures global management
for Product Emphasis
Global Multifocal Business
Integrati Area emphasis
on
Local responsive
business strategy based
on local markets, national
Low subsidiaries
Low Pressure for local responsiveness High
The Integration-Responsiveness Matrix
 Yip’s Framework for Global Strategy

Position and Resources

of Business and Parent
Company
Global Strategy Levers
Benefits/
• Global Market Participation Costs of
• Global Products Global
• Global Location of Activities Strategy
• Global Marketing
Industry Globalization • Global Competitive Moves
Drivers
• Market
• Cost
• Government
• Competitive Organization’s Ability to
Implement a Global
Strategy
 Strategic Considerations in Internationalisation

• Choice of Products
• Choice of Markets
• Choice of Entry
• Implementing Entry Choice
• Action in the Local Market (Home & Host
Country Customers)
• Speed of Global Expansion
A Framework for choice of products:
Attractiveness of product Lines as
Launch Vehicles for Initial Globalization

2 1
Most attractive
Moderately
(Marriott full-
attractive
Service Lodging)

4 3
Least attractive Moderately
(Marriott Senior attractive
Living Services)

Low High

Expected Payoffs from Globalization

Drivers of a Market’s Strategic Importance

Low

Low High
Learning Potential
A Framework for Choice of Markets

Phased-in Rapid
entry (create Entry
Beachhead first)

Ignore for Opportunistic

now Entry

Low High
Firm’s ability to
Exploit the Market
Alternative Modes of Entry

Honda’s initial Bridgestone’s

Entry into the Acquisition of
U. S. market U. S.-based
Firestone

Ford-Mazda
Genenetch-Hoffman
LaRoche

Champion Inter
national’s paper KFC’s
exports through franchises
independent brokers in India

100% Export 100% Local

Exports versus Local Production
Greenfield vs. Cross-border Acquisition

High
Green field Greenfield operations
Impact on Local Competition
operations (Nucor’s
or cross-border entry into Brazil)
acquisitions

Cross-border Greenfield
Acquisitions operations
(Int’l Paper’s or cross-border
entry into Europe) acquisitions

Low High
Uniqueness of Corporate Culture
 Global Strategy Framework

GLOBAL AMBITION
Relative importance of
region and countries in
terms of sales, assets

GLOBAL GLOBAL GLOBAL BUSINESS

SYSTEM
POSITIONING STRATEGY
Choice of: - Investments in
- Countries resources, assets
- Value proposition and competencies to
create a global value
GLOBAL ORGANISATION chain
- Development of
- Global structure
global capabilities
- Global processes
through alliances
- Global co-ordination
and acquisitions
- Global human resource
management
 SONY’S GLOBAL DEVELOPMENT
Phase I Phase II Phase III Phase IV
1960-1970 1970-1980 1980 1989
EXPORT LOCALISATION GLOBAL GLOBAL
LOCALISATION DIVERFICATION

AMBITION INNOVATION PRODUCTS MARKETS GLOBAL LEADER

Aggressive Match markets/ ENTERTAINMENT
Overseas production
markets Video Audio
penetration
POSITIONING USA – JAPAN – EUROPE - ROW Hard

Soft
INVESTMENTS USA as key Assembly plants R&D outside
market audio + Local content Japan Shortening Acquisitions
TV PLC
ORGANISATION Central hub Marketing Regional HQs
confederation Functions
Transnational
move
AMBITION

Global Distribution of Markets (2005)

Europe North America Asia Pacific Rest of the World

(%) (%) (%) (%)

Advertising 19 57 23 1
Clothing & Footwear 32 27 25 15
Computer Hardware 27 27 39 7
Construction materials 18 9 63 10
Consumer Electronics 30 23 38 9
Cosmetics 37 22 27 14
Data Processing Services 29 52 14 9
Electrical Appliances 28 27 34 10
Electrical Equipments 23 20 42 15
Environment Services 31 39 23 7
Health Care Equipment 34 46 18 2
Home Furnitures 44 22 18 15
Insurance 34 38 25 3
Mobile Phones 30 25 42 3
Paint & Coatings 26 27 35 12
Pharmaceuticals 28 48 18 6
RetailIing 32 30 23 15
Specialty Chemicals 45 39 11 4
AMBITION

Measuring Globalisation

100%

90%

NORTEL
80%

70%
NOKIA
60%
Ratio of Foreign Assetss /
MOTOROLA
Total Assets 50%
ALCATEL

40%

30% ERICSSON

20%

10%

0%
0% 20% 40% 60% 80% 100%

Ratio of Foreign Sales /Total Sales

Circle proportional to Total sales

AMBITION

Measuring Globalisation

Unctad: WIR, 2006

 Mapping of Global ambition

1
Global
Player
Global
Sourcer Regional
Dominant
Global Player

Global
Regional
Exporter Exporter
Player

0 1
Global Revenue Index (GRI)
AMBITION

Measuring Globalisation

100%

Bridgeston
Goodyear
80

Michelin
Global 60
Capability
Index Pirelli Tyres
(GCI) 40

20

0
0 20 40 60 80 100%

Global Revenue Index (GCI)

Mapping of the consumer electronics industry

% 100
THOMSON

80
SONY

60
MATSUSHITA PHILIPS
40

20

0
%
0 20 40 60 80 100
Global Revenue Index (GRI)
 The evolution of Whirlpool globalisation

% 100
Global Capability Index (GCI)
1999

80 1990

60

40
1980
20

0
%
0 20 40 60 80 100
Global Revenue Index (GRI)
 Global Positioning
It consists of two types of choices: Choice of Countries
& Defn. of value prop.
Choice of Countries:
Key Countries – Size, growth, quality of HR etc are critical for
companies LT competitiveness. Japan, Korea in Auto sector.
Emerging Countries – Countries exhibiting high growth rate.
China, India, Poland, Brazil.
Platform Countries – serve as hub for setting up regional centers
that are platforms for further development.
Marketing Countries
Sourcing Countries
 GLOBAL
POSITIONING

Geographical Positioning
Countries Portfolio

KEY COUNTRIES: Have to be there

EMERGING COUNTRIES (WINDOW OF OPPORTUNITIES) :

Its time to go there

PLATFORM COUNTRIES: ENTRY and SUPPORT

MARKETING COUNTRIES : No need to invest/ Only sales

SOURCING COUNTRIES:
Manufacturing base /source of Raw materials/ Purchasing Office
 GLOBAL
POSITIONING
Ciba Fine Chemicals
 GLOBAL
POSITIONING Ciba Fine Chemicals
 GLOBAL
POSITIONING

THE THREE DIMENSIONS OF GLOBAL

COMPETITIVE POSITIONING

Global Standardisation

Multiple Segments

Single Segment
Local Adaptations

Compete Compete
on Costs/price on Differentiated/value
Advantages Advantages
 Global Positioning

Global niche players

Standard Adaptive
Differentiated Cost Leader Differentiated Cost leader
Standardised Low-cost Differentiated Low-cost
niche standardised niche adapter niche
differentiator niche adapter

Example: Example: Example: Example:

Swatch, Intel Acer McDonald Carrefour
 Global Positioning

Broad Global players

Standard Adaptive

Differentiated Cost Leader Differentiated Cost leader

Broad niche Broad Broad adaptive Broad
differentiator standardised differentiator adaptive
cost leader cost leader

Example: Example: Example: Example:

SONY Matsushita Unilever P&G Electrolux
Philips
 Global Business System

It consists of decomposing the value chain

elements that are spread and integrated
across the world.

To what extent do business units share

resources, assets and competencies on order
to optimise synergies? What are the
corporate priorities in resource allocation
among businesses?
Value Chain STAGE MODEL OF INTERNATIONAL DEVELOPMENT

R&D Development
Adaptation

Buying Buying Buying Buying Sourcing Local

Office Office Office Office Local +
Procurement
Components Plant Regional
+
Manufacturing
Global
Assembly Assembly
Plants

Marketing
Marketing subsidiaries
Marketing
subsidiaries Subsidiaries
Subsidiaries Subsidiaries Subsidiaries

Agent Wholly
Local Owned
Local distributor
Sales Joint
distributor Ventures

Time
EXPORT LOCALISATION MULTINATIONAL GLOBAL

Number
of Countries

ISD 2
 Global Configuration of the Value Chain

R&D Procurement Manufacturing Marketing General

Management

GLOBAL
CENTRES

REGIONAL
CENTRES

LOCAL
UNITS
 Components of a Global Value Chain
Research Sourcing Customers
Development Production Marketing Services Finances H.R.M

•Global - Global - Policies - Corporate - International

- Central R & D - Global factories
- Procedures Finance H.R.M
- Technology - Global materials marketing
strategy - Information - Global
Strategy flow
- Global system Treasury
- Core Technology - Process Engineering
communication - Control
- Core Products - Central sourcing
- Technology - Global products
conferences Management
- Technological - Regional
intelligence Accounts
- Regional
Bidding
- Regional - Regional
•Regional - Regional Products - Regional factories
customers careers
development - Regional sourcing - Distribution
- Promotion support - Regional - Training
- Regional
- Sales - Logistics Debt financing
intelligence
- Maintenance- Regional
- Regional seminars
Control

- After sales - Local careers

•Local - Local Laboratories- Local production
services - Local
- Local sourcing
- Local
borrowing

GIS 35
 Global Organization

It is the design of an orgainsational

architecture which is able to support and
implement the global ambition, global
positioning and global business system .
 Global Strategic Development and Organisation

EXPORT LOCALISATION MULTINATIONAL GLOBAL

HQ HQ HQ
HQ

Domestic International
Operations Divisions Regions Functions
Single Marketing
Operations and Sales
Business

Domestic Export Country

Country Subsidiaries Country Subsidiaries
Subsidiaries
and Agencies and Agencies
and Agencies

HQ
HQ

Division III
Division III
HQ
Division II HQ
Division II
Division I International
Division I Divisions
Regions
Multiple Regions Regions
Business Marketing
Operations Domestic
and Sales
Operations
Division II
Country Division III
Country
Domestic Export Subsidiaries
Division II Subsidiaries Division I
and Agencies
and Agencies
Division I