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11 International Strategies WHAT ARE INTERNATIONAL STRATEGIES? Define International Strategy International strategy simply refers to the concept of operating in multiple countries simultaneously. A good example of a company implementing international strategies would be Procter and Gamble. The company operates in over 80 countries (meaning it has either production facilities or sales offices) and sells its products in over 180 countries. You can illustrate P&G’s international strategy quite dramatically by going to the website http://pg.com/company/who_we_are/globalops.shtml and moving the cursor to various company locations around the world. Interestingly, each of P&G’s foreign units has its own website. International strategy is a topic that is very well covered by the business press (particularly the Financial Times) and so you can make use of ample examples to help students understand this topic. Slides 11-2 and 11-3 These slides identify the international activities of Procter and Gamble and show how widespread the company is in terms of its global reach. Slide 11-4 This slide is a snapshot of the homepage for Yahoo Malaysia. Yahoo’s international strategy calls for specific homepages for each country. Get students to compare the contents of Yahoo’s homepage in the U.S. with that of the homepage for Yahoo Malaysia to identify the similarities and differences. INTERNATIONAL STRATEGY AND OTHER CORPORATE STRATEGIES Slide 11-5 Use this slide to help students understand that international strategies are in reality a special case of the corporate strategies discussed in Part 3 of the book. Describe The Relationship Between International Strategy and Other Corporate Strategies, Including Vertical Integration and Diversification It is important to reiterate that international strategy is just corporate strategy in a different geographical context. This provides the link between this chapter and the topics discussed in Part 3 of the book – corporate strategies such as vertical integration, diversification, strategic alliances, and mergers and acquisitions. Therefore, why firms might want to pursue corporate strategies in an international context are essentially the same reasons why firms pursue corporate strategies – reasons delineated in Chapters 6-10. International strategies are nothing new. Historical examples of international strategy can be found in the Silk Route between China and India, the formation of the East India Company by Great Britain, and similar such events. In fact, the search for trading opportunities (East India Company) and trade routes (the Silk Route) was a primary motivation for the exploration of much of the world. International strategies can be pursued by any kind of firm – large, medium, or small. In addition, these strategies can be pursued at any time in a company’s life. The ‘Strategy in the Emerging Enterprise” box describes how Logitech, the Switzerland-based maker of computer peripheral devices, thought international at a very early stage of its life. Slide 11-6 Use this slide to explain how international a number of companies are. Students are usually quite amazed at how some seemingly U.S. companies get a substantial part of their revenues from abroad. Teaching Points • International strategies are extremely popular as evidenced by their coverage in the business press. Stress to students that international activity is a much-used vehicle particularly for a strategy of diversification. • Reiterate that international strategies are not a recent development. They have been around for a long time. • Discuss how major companies have diversified their revenue base by getting sales from several foreign markets. THE VALUE OF INTERNATIONAL STRATEGIES So, what do international strategies have to do with the VRIO Framework? You must reiterate that to be a source of sustained competitive advantages for firms, international strategies must exploit a firm’s valuable, rare, and costly-to-imitate resources and capabilities. Not just that, but the firm must be organized in such a way that it can realize the advantages of these resources and capabilities. This detour to the fundamental VRIO Framework not only underscores this chapter’s link with the earlier part of the book, it also provides a good segue for the next topic. Describe Five Ways That International Strategies Can Create Economic Value To be economically viable, international strategies must meet the same two value criteria that we first saw in Chapter 7: They must exploit real economies of scope, and It must be costly for outside investors to realize these economies of scope on their own. Slide 11-7 This slide shows the five potential sources of economies of scope that justify going outside a firm’s domestic market. Important Point: You should get students to compare the potential sources of economies of scope to justify international expansion as listed in Table 11.1, with the general list of economies of scope given in Table 7.1. What can be learned from comparing the two lists? To Gain Access to New Customers for Current Products or Services This is a good one to start looking at economies of scope in an international context because it is intuitive – international strategy creates value if such a foray helps the firm gain access to new customers for its current product or service offerings. If customers in foreign markets are both willing and able to buy the firm’s products or services, then the firm can increase its revenues in pursuing this option. The key question, then, is will the firm’s offerings sell in foreign markets? This leads to the issue of convergence vs. divergence of tastes worldwide. This is likely to be an interesting discussion (particularly if the class is made up of people from different countries or those that have traveled abroad) because students are likely to have distinct opinions on what works and what doesn’t in foreign markets. You can structure this discussion by asking the class to think about the following two issues: Different physical standards internationally (size, for example) Differences in tastes Are these differences insurmountable? It may appear so, particularly if we look at the numerous marketing blunders (“No va” anyone! Or “Nothing sucks like an Electrolux!”) described in the text. But strictly speaking, these differences can be addressed by being sensitive to local market needs. A good example of this is McDonald’s sensitivity to Indian belief in the sacredness of the cow by eschewing beef-based burgers in its stores in that country. Once we address the issue of willingness, we can turn to ability to buy or affordability. A firm looking into international markets should realize that there are at least three reasons local customers may be willing but unable to buy the firm’s products: Inadequate distribution channels Trade barriers Insufficient wealth to make purchases Distribution is not organized in many foreign markets the same way it is in Western Europe or the U.S. For example, a McKinsey report points out that organized retail (retail stores that are part of chains) accounts for only 3-5% in India and 5-30% in China (two potentially very large and attractive markets), in comparison to 98% in the U.S. This makes these markets difficult to crack for foreign firms, as it may be costly for these firms to access the fragmented distribution networks. Besides, firms already operating in these markets may control the distribution networks, effectively locking out potential foreign entrants. In addition, inadequate transportation, warehousing, and retail facilities may hinder entry into some foreign markets. Table 11.2 presents a daunting list of tariffs, quotas, and nontariff trade barriers. The example of Kodak’s inability to crack the Japanese market primarily because of trade barriers is illustrated in the text. It was particularly galling for Kodak to face trade barriers in Japan when its Japanese rival, Fuji, found it easy to access the U.S. market. Probably the nadir of Kodak’s corporate life was when Fuji became the official sponsor of the 1984 Los Angeles Olympics! Quotas existed in the apparel segment until recently and even now there are severe restrictions on foreign firm ownership in several countries. Finally, foreign consumers may not have the financial wherewithal to buy certain goods or services provided by foreign firms. Per capita GDP varies widely among countries. In countries with very low per capita GDP (such as Zimbabwe, Nepal, and Rwanda), it is unlikely that there will be significant demand for many products or services that are seen in more affluent western countries. Slide 11-8 This slide presents a selected list of per capita GDP of a number of countries based on the list developed by the International Monetary Fund. Note the disparity between the rich countries and the poor countries. Would a product successful in (say) Switzerland find a market in (say) Burundi? Related to the wealth issue is the issue of the value of the local currency in international markets. Hard currencies are those that are traded, and hence, have value in international markets (the Euro, the British Pound, the U.S. dollar). When firms operate in countries without hard currency, what value is there for the firm to take the profits out of that market? Immediately after the collapse of the former Soviet Union, the Russian ruble had very little value outside the country. A foreign firm could sell vast amounts of its products in Russia but could do nothing with the ruble outside of Russia. Countertrade is a solution to this problem. Pepsi used the Russian ruble that it generated in that country to buy locally produced vodka. Since Russian vodka had value in international markets, Pepsi was able to sell Russian vodka in foreign markets and thus convert the ruble into hard currency! New customers in foreign markets can also help firms manage the product life cycle. As shown in Slide 11-8, products go through different stages in their life cycle – the introduction stage, the growth stage, the maturity stage, and the decline stage. You should stress the fact that a product could be going through different stages of its life cycle in different countries. For example, a product could be in the maturity stage in country A but in the growth stage in country B. Why is this important? The Crown Cork & Seal example in the book makes this point tellingly. When the U.S. market moved from three-piece to two-piece metal containers, the company shifted its vaunted three-piece manufacturing technology to those foreign markets where three-piece metal containers were just entering the market. The company not only extended the life of its assets, it also used its resources to get a competitive advantage. Slide 11-9 This slide shows the different stages in the life cycle of a product. Finally, foreign markets help increase the total volume of sales for the firm, thus giving it economies of scale to help it compete better in both its domestic as well as foreign markets. To Gain Access to Low-Cost Factors of Production So far we have looked at the demand side of going international – how to sell more of the product or the service. Now turn the class’s attention to the fact that supply side motivations are also valid reasons for going abroad. The three basic inputs that every firm needs—raw materials, labor, and technology—all may prompt firms to go international. Accessing low-cost raw materials has historically been the motivation for international operations. Thus, coffee companies set up operations in coffee producing countries. Tropicana has operations in Brazil to access that country’s orange supply. Labor costs vary across the world. The “Made in China” label has become quite ubiquitous in the American economy because of the low cost of labor in that country. Many companies have moved their call centers to countries such as India to take advantage of the availability of low cost English-speaking people in that country. There is a dark side to this, however, as described in the “Ethics and Strategy” box. For many people, low cost labor would conjure up images of sweatshops and inhumane working conditions. Maquiladoras, or manufacturing plants owned by foreign companies but operated in Mexico close to the U.S. border, have become commonplace. Labor costs in Mexico are roughly one-fifth of those in the U.S., making maquiladoras highly attractive. Access to foreign technology may also motivate firms to go abroad. This typically happens in the case of companies from less technologically advanced countries setting up operations in countries with more advanced technologies. To Develop New Core Competencies A company may want to develop new competencies to help it compete in the global marketplace. This motivation may prompt it to go international to either adapt its existing competencies to market conditions or to help develop new ones. For this to happen, though, the organization has to have a learning orientation. Wal-Mart, for example, made a number of mistakes in its international operations (it stocked its Mexican stores with snowmobiles, for example!), but learnt from every one of them to have a sizeable international business. Learning is critical to success in the international setting. On one level, firms have to learn about the new market before entering. For example, as suggested above, firms need to learn which resources and capabilities may or may not meet the VRIO criteria. On another level, firms must continue to learn after entering the new market. This is especially true when firms have entered the new market with a partner. If the firm is attempting to acquire new resources and capabilities, learning will obviously be critical to success. Important Point: A learning mentality not only helps the firm absorb knowledge in a new market, it also helps the firm avoid costly overconfidence. Some firms commit costly cultural faux pas simply because they are too arrogant to invest in learning about the local culture. Slides 11-10 and 11-11 Emphasize that a learning mentality takes discipline and a dose of humility, especially when a firm has been highly successful in its domestic market. Example: General Motors entered into an alliance with Toyota known as NUMI. This alliance was a way for Toyota to learn about building cars in the U.S. It was also a way for GM to learn about building small cars from Toyota. Slide 11-11 identifies the factors that determine the ability to learn from international operations. To Leverage Current Core Competencies in New Ways International operations can also help firms use existing competencies in new product/market arenas. Doing this allows the firm to exploit new opportunities that play to their existing strengths. The example given in the book of Honda’s entry into the lawn mower business is a good one. Honda has core competencies in developing high performance power trains. They used to create successful businesses in motorcycles and automobiles. The U.S. market, however, gave them a new opportunity in lawn mowers that they did not have in Japan. To Manage Corporate Risk The topic of diversification to manage corporate risk was first visited in Chapter 7. The conclusion in that chapter was that since outside shareholders can diversify their own investment portfolio in a more efficient way, corporate diversification for the sole purpose of risk reduction was a questionable motivation. The same holds true in the case of diversification in an international context, but for two exceptions. Pose the following question to the class: If investor A wants to diversify his risks, can he invest in multiple domestic stocks? The answer to this is a “yes.” It is quite easy for investor A to buy a number of domestic stocks to own a reduced risk diversified portfolio. What if he wants to own stocks of foreign companies to reduce his exposure to one country’s stocks? This is not as easy as diversifying into domestic stocks. In certain cases, there are barriers to international capital flows. In such cases, it is more efficient for the firm to diversify internationally to reduce risks. The second exception has to do with privately owned firms. Shareholders in such firms may continue to own the firm’s stock for a variety of reasons and hence may not have the liquidity to diversify their investment. In such cases, it may be justifiable for the firm to do so. At this point in the discussion, it is best to review the fact that there are six potential sources of economies of scope for firms pursuing international strategies and that some of the economies come from the demand side, while others come from the supply side. These scope economies can be thought of as “good” reasons for a firm to go international. Teaching Points • Underscore the importance of value creation as the key motivation behind international expansion. • Emphasize the need to look at motivations both from a revenue viewpoint (demand side) as well as from a cost viewpoint (supply side). In addition, learning and risk reduction are also good motivations. • Anchor this discussion in the discussion from Chapter 7 concerning value creation. THE LOCAL RESPONSIVENESS/INTERNATIONAL INTEGRATION TRADE-OFF Discuss The Trade-Offs Between Local Responsiveness and International Integration, and Transnational Strategies As A Way To Manage This Trade-Off When a firm contemplates entering an international market, one of the main questions to be answered is: How much must the products and/or services of the focal firm be modified for the foreign market? The answer to this question depends primarily on two issues. First, the degree of necessary modification depends on whether the product or service in question lends itself to standardization across national boundaries. Second, the degree of modification depends on how similar the tastes and preferences of the foreign customers are to the tastes and preferences of customers in the firm’s domestic market. If a global standard exists for a product or service, then local tastes and preferences are not a major concern. This is often the case with electronics and high technology products. Firms using this strategy of international integration rely on centralized decision-making and strive for efficiencies from being able to produce at global volumes. The business functions remain centralized at headquarters. In many ways, the logic of the global strategy is similar to the cost leadership strategy. Historically, Japanese companies like Sony and Hitachi have been successful with global strategies. On the other hand, if a product does not have a global standard and there are significant differences in local tastes and preferences from country to country, then local responsiveness becomes key. This strategy consists of replicating business functions in multiple countries as needed. For example, a firm using this strategy might establish marketing and finance organizations in each country where it operates. The implementation of this strategy is similar to the implementation of a product differentiation strategy in that managers and employees are given great latitude in responding to local tastes and preferences. Historically, European companies like Phillips, Siemens, and Unilever have been successful using the local responsiveness approach. A hybrid of these two approaches, known as the transnational strategy, has been suggested as a way to exploit the benefits of both international integration and local responsiveness. The basic idea behind this strategy is that the local knowledge gleaned from operations set up in specific countries can be transferred around the world through an integrated network of coordinated reporting relationships. Slide 11-12 Explain to students that managers have a strategic choice to make about how they compete in international markets. The big trade-off is between local responsiveness to differences in tastes and preferences and international integration (providing a standardized product to multiple foreign markets). An appropriate strategic response is dependent on the product and the foreign market. Ask students for an example of a product that is sold in standard form the world over. In almost every class, Coca-Cola is one of the first responses. Some will say it’s the same everywhere, others will say it tastes different in different parts of the world. A manager of a Coca-Cola bottling plant explained that the concentrate shipped to bottlers by the Coca-Cola Company is exactly the same the world over. Local bottlers adjust the sweetness and carbonation to suit local tastes. Thus, Coca-Cola seems to be following more of a global strategy at the same time as its bottlers (some are company owned, some are independent) are following more of a multi-domestic strategy. FINANCIAL AND POLITICAL RISKS IN PURSUING INTERNATIONAL STRATEGIES Financial Risks: Currency Fluctuation and Inflation As firms do business in foreign markets, they may face currency fluctuations, different rates of inflation, different accounting practices, and a host of similar financial risks. Important Point: You have to emphasize that, while many financial risks exist in international markets, most risks are predictable and therefore manageable. Firms hedge against currency fluctuations, for example. Very often the real risk lies in sudden and unpredictable changes in the economic environment in the host country. Slide 11-13 Use this slide to introduce tools to manage financial risks. Point out that many firms actively manage exchange rate risk by hedging in international currencies. In fact, exchange rate risk and the ability to manage it are often the difference between profits and losses in international markets. Refer to Slide 11-2 to note that Procter and Gamble’s 2013 profits were adversely affected due to foreign exchange rate changes in Venezuela. Political Risks Discuss The Political Risks Associated With International Strategies and How They Can Be Measured Just as the political environment forms an important part of the analysis in the firm’s domestic market, it affects a firm’s international strategies. The effect can be felt at the macro level, such as when a country becomes hostile to all foreign investment. Rapid political changes are a fact of life in many countries and foreign companies have to constantly be aware of seismic shifts in governmental thinking. Political changes do not have to be to the disadvantage of foreign firms. When faced with a severe foreign exchange shortage in 1991, the Indian government, at the behest of the World Bank, opened up the country for foreign investment. The effect can also be felt at the micro or firm level as the following example illustrates. ► Example: EDS Faces Political Risk in Iran When the Shah of Iran was deposed in the late 1970s and fundamentalists took control of the country, EDS, the U.S. software firm founded by Ross Perot, was forced out and its assets were expropriated. The company had been entrusted with the task of creating a social security system for Iran. When EDS demanded payment for work done, the Iranian government responded by kidnapping a group of EDS executives. The Iranians demanded a ransom that was exactly equal to what EDS was demanding as payment for services rendered! Ross Perot mounted a heroic rescue attempt to get his executives out of the country. This incident formed the basis of a made-for-television movie called “On Wings of Eagles.” Students should be made aware of the fact that multinational companies are not completely at a disadvantage with regard to political risks. Political risk can be quantified by identifying various country attributes (listed in Table 11.4) and rating countries on these attributes to get a composite score. This is how countries stood in a recent ranking: Least Risky Luxembourg Switzerland Norway Denmark United States Sweden Most Risky North Korea Afghanistan Iraq Cuba The Marshall Islands Zaire Slide 11-14 This slide indicates that while political risk is difficult to manage, there are ways for a firm to mitigate the impact of this risk. When Case International, a U.S. manufacturer of agriculture and construction equipment, wanted to enter the Brazilian market, the Brazilian government required local ownership and content. After negotiating with the government, agreements were reached as to who could own the Brazilian operations of Case International and what percentage of the manufactured product had to originate in Brazil. While financial risks can generally be managed so that firms can fare relatively well during international financial crises, international companies have relatively few tools to manage political risks once the risk becomes a reality. The obvious strategy to avoid such situations is to enter only politically stable markets. Doing so, however, means forgoing rich opportunities in other, less stable countries. One approach to managing political risk is to negotiate entry conditions with the host government to mitigate or neutralize the political risks in that country. The other approach is to stay politically neutral at all times in the foreign country. In the 1960s, ITT was accused of interfering with Chile’s domestic affairs and suffered business consequences as a result. By staying neutral and avoiding political entanglements, a company can minimize the chances of political interference. Another way to manage political risk in international markets is to make investments that are likely to become more valuable if the political risk is realized. For example, suppose a large food products company decides to invest in coffee bean production in Brazil. Further suppose that a land reform movement in Brazil presents a substantial political risk. If the land reform movement succeeds, large corporate producers will be driven off the land and the land will be turned over to indigenous peoples. If that happens, coffee bean prices are likely to spike because Brazilian production will fall due to the scale and learning curve economies that will be lost as the indigenous peoples take over the land. The large food products company could ‘hedge’ against this political risk by investing in coffee bean production in several other South and Central American countries. If the risk in Brazil is realized and coffee bean prices go up substantially, the gains of the company in these other countries will help to offset the loss in Brazil. Teaching Points • Stress that financial and political risks are important variables in the international context. • Point out that many political risks can be anticipated and managed to an extent. INTERNATIONAL STRATEGIES and sustained competitive advantage The Rarity of International Strategies Discuss The Rarity and Imitability Of International Strategies International strategies have become less rare and more common these days. There are several keys drivers of this: Firms are aware of the fact that international expansion can help realize substantial economies of scope. Changes in the organization of the international economy—the formation of regional trading blocs such as ASEAN and NAFTA, for example—have eased entry barriers to foreign markets. Technological improvements—particularly in transportation and communication— have helped firms compete on a global scale. Standards that have emerged internationally—particularly in technology, accounting, and communications—have helped firms create successful strategies to compete globally. Once you have established the ubiquity of international expansion, the question can posed as to what makes international strategies rare? There are two ways to increase the rareness of a firm’s international strategy. One is that, as there are numerous opportunities in many foreign markets, firms may not compete head-to-head in a particular market, making their international strategy rare. Secondly, not all firms bring the same resources to a particular international market. The unique resources that a firm may bring to a particular international market make its strategy rare. Once you explain the rarity aspect of international strategies, the attention can be turned toward its imitability – both direct and via substitutes. One firm’s success in a specific foreign country is likely to attract imitators. However, direct duplication may be costly if the resources that are required are path dependent, uncertain, or socially complex. For example, Unilever has been in India for nearly 100 years and has built an extensive distribution and manufacturing infrastructure. It has learned about the Indian market and the singular tastes of its consumers. Procter and Gamble, a late entrant to India, has had to play catch up with Unilever. Substitutes, however, do exist in case direct imitation is prohibitively costly. Foreign market entry through strategic alliances or via mergers and acquisitions are common strategies. Slide 11-15 This slide gives examples of a number of international strategic alliances. You can use this slide to reinforce the fact that substitution can often make a company’s international strategy imitable. THE ORGANIZATION OF INTERNATIONAL STRATEGIES Describe Four Different Ways To Organize To Implement International Strategies The discussion above sets the stage for the “O” part of the VRIO Framework. To realize the full potential of its international strategy, a firm must be appropriately organized. Table 11.5 presents a succinct overview of the possibilities that lie within the two extremes of market governance (for example, exporting) and hierarchical governance (e.g., wholly owned subsidiaries) in international markets. A firm may choose to import/export and thus, do business across countries. In such cases, an option for the firm would be to use, for example, a marketing agency in a foreign country to sell its goods in that country. Thus, a U.S. manufacturer may enter into a contract with a Japanese selling agency to sell its products in Japan. This is a low cost entry mode for the U.S. firm because it uses the already established infrastructure—warehouse, sales force, channel contacts—of the Japanese company. Firms are likely to use the importing/exporting mode when they are unsure about the market potential or when they discover that they do not have the capabilities and resources to compete in these markets. Intermediate forms—between the two extremes of market governance and hierarchical governance—exist for doing business across countries. Principal among them are licensing and strategic alliances. In a licensing agreement, the licensor grants the rights to the product (design, brand name, etc.) to a licensee in return for licensing fees. The licensee makes the investment necessary to make the product in the specific country. Strategic alliances (and joint ventures) involve partnerships with one or more firms to enter foreign markets. Foreign direct investment is when a firm chooses to be vertically integrated in operating in multiple markets. It either acquires a firm in the foreign country (such as when Coca-Cola acquired a local beverage company in India) or forms its own local subsidiary (PepsiCo in India). Needless to say, the political and economic risks must be considered before a substantial foreign direct investment is made. Slide 11-16 Use this slide to show students that various organizing options exist for firms pursuing international strategies. Relate them to the concepts first encountered in Chapter 6 (Vertical Integration). When a firm implements a diversification strategy internationally, it faces the same issues as it does in a domestic implementation. It has to measure performance and develop compensation policies for example. Structurally though, it has specific issues to address. As indicated in Table 11.6 in the text, firms pursuing an international strategy have four basic organizational structural alternatives: decentralized federation coordinated federation centralized hub transnational structure Slide 11-17 Use this slide to remind students of the commonly used terms—international integration and local responsiveness—introduced earlier. Explain how the terms used here—centralized hub, decentralized federation, and the coordinated federation—relate to international integration and local responsiveness strategies. Describe the conditions under which each of these approaches would be most appropriate as indicated below. It is best to go through these structural forms one by one and help students understand how they are different. It is a good suggestion to use Figure 11.2 in the text as these terms are discussed. The figure helps relate these structural options to the two key imperatives in international markets: pressure to be locally responsive and the pressure for global integration. In a decentralized federation (a multi-domestic approach), country units are highly autonomous and are managed as full profit-and-loss divisions. The divisional manager is in charge of all operations in that country. There are very few shared activities among the divisions. The corporate headquarters plays a limited role in the day-to-day functioning of the country divisions. Employees of country divisions tend to identify strongly with their country units and may not even be aware that they are a part of a large, internationally diversified firm. If we look at Figure 11.2, it is clear that such an approach is used when the pressure for local responsiveness is high and the importance of global integration is low. When Richardson Vicks was an independent company (now it is owned by Procter and Gamble), it operated its country units as decentralized federations. The Indian unit of Richardson Vicks developed several herb-based medications for the cough and cold market to be sold in India only. The unit had complete freedom to do so as long as it met corporate profit objectives. A coordinated federation is similar to a decentralized federation in that the country units are operated as full profit-and-loss centers. The difference is in the amount of autonomy granted to division general managers. While they typically have autonomy in operational decisions, broad strategic decisions are made at the corporate headquarters. A coordinated federation also attempts to share some activities among the country units. Colgate-Palmolive is an example of a coordinated federation. Product knowledge is shared among country units as well as the R&D activity. A look at Figure 11.2 indicates that this structural form is a good fit when the need for local responsiveness is moderate and there is some benefit to be gained from global integration. The decentralized and coordinated federation approaches work well when the product(s) being sold require(s) substantial modification to be responsive to local tastes and preferences. Food, fashion, and personal care products often require modification to be accepted in different markets. A centralized hub is a suitable choice when the need for international integration is fairly high but there is very little pressure to be responsive to specific local needs. Country units have limited autonomy both for operational and strategic decisions. The role of the divisions is simply to implement the strategies, tactics, and policies developed by the corporate office. Such a firm attempts to exploit a global product – a standard product sold in most or all markets with little, if any, modification from market to market. This approach is geared to maximize scale economies. Bausch and Lomb, the eye care company, uses such an approach. The standardized products are sold under common brand names (e.g., “ReNu”) in all the markets. Discussion & Activity: Coca-Cola in World Markets Ask if any students have tried Coke in other countries around the world. If you get a positive response, ask them if the Coke tasted different in the foreign country. You will usually get a few responses indicating that there are differences in the taste and/or fizziness. Some students may have visited displays in Atlanta, Las Vegas, or other places where you can taste Coke from around the world. There are differences. You might have a little fun with students by asking how they could tell a difference when most people can’t tell a difference between Coke and Pepsi in blind taste tests. Now ask students what international strategy they think Coke is following? You will usually get some who say it’s an international integration because the logo and bottle are so similar around the world. You will get others who will argue for a local responsiveness strategy because of the differences in taste. Now inform students that Coca-Cola is really in two businesses: the business of selling concentrate to local independently owned bottlers who bottle and distribute the product and the business of owning some bottling and distribution operations. Also inform students that on a field trip to an independently owned bottler, a manager told a group of students that the concentrate shipped by Coca-Cola all over the world was exactly the same (this really happened with one of the authors’ student groups). The manager explained that any taste differences that exist are because local bottlers can adjust the levels of sweetener and carbon dioxide. If this is true, then Coca-Cola seems to be following an international integration strategy with its concentrate business and more local responsiveness strategy in its bottling and distribution operations. Point out that firms can use elements of each strategy. Wal-Mart is another good example of a company that seems to be rigidly global in some areas and more locally responsive in others. The transnational option has been discussed in earlier. It is a good idea to tie in the earlier discussion when talking about the transnational structure. Slide 11-18 Emphasize that the transnational approach is an attempt to provide a high level of local responsiveness while at the same time achieving a high level of international integration. Compare the roles of country managers and corporate headquarters between the coordinated federation and the transnational approach. Point out that these managers need to think about their roles in a fundamentally different way to make the transnational approach work. Looking at Figure 11.2, we can note that the transnational structure is the option to use when there is a high need for local responsiveness and a simultaneous high need for international integration. It is a good idea to compare the coordinated federation and the transnational structure, because both structures have something in common and yet are different. The similarity between the two structures is in the autonomy that the country units have with respect to operational matters. Country divisional managers have considerable latitude in this area. The key difference between the two is in regard to strategic decisions. In a coordinated federation, this is the domain of the corporate office. To exploit economies of scope for example, the corporate office may choose to centralize the R&D function and manage it directly. Not necessarily so in the case of the transnational structure. Here, the quest for the corporate office is to locate “best-in-class” centers from among the country units and locate the activity in the country unit that excels in that activity. For example, a global automaker may choose to locate its design function in, say, Italy, because that unit is the “best-in-class” in design. The corporate office continuously scans for competitive advantage in its country units. Needless to say, this structure requires a tremendous amount of communication among the units as well as rotation of key managers across the globe. Authors Christopher Bartlett and Sumantra Ghoshal who are credited with developing the idea of the transnational structure argued that this structure is more a state of the mind than anything tangible. A transnational organization looks at its international operations with a very different perspective than organizations using any of the other three structures. The role of country units shifts as and when they develop unique skills that are transferable. You can summarize this discussion by going back to Figure 11.2 in the text and laying out these options in terms of the two imperatives. The key is to reiterate that these structures alone are not enough to successfully implement an international diversification strategy. These structures work in tandem with other elements such as control systems and compensation practices. The complexity of these elements rises exponentially when a firm ventures overseas. That is the major management challenge. Teaching Points • Ask students whether implementation issues would be more challenging when a U.S. company goes to the U.K. or when the company goes to China? Stress the importance of cultural and geographic separation on implementation. • Use examples to indicate what is meant by local responsiveness (driving on the left side of the road in the U.K and the need for the driver to be on the right side of the car) and international integration. • Stress to students that the structure to adopt in international markets results from an astute reading of the two opposing forces – localization and integration. • Reiterate that the transnational structure is not easy to implement. It requires a new way of thinking about the interaction between the corporate office and the country units. SUMMARY OF ISSUES IN INTERNATIONAL STRATEGIES Students must understand that international strategies are a special case of diversification strategies. In other words, these diversification strategies happen outside the firm’s domestic borders. This means that like any other diversification, international strategies must make sense from the point-of-view of economies of scope. On a regular basis they read about these transactions and some may have worked in an organization that was involved in M&A activity. One of the most important things for students to understand is that as firms go international they are faced with two opposite imperatives – to be locally responsive or go for economies of scale via international integration. The VRIO Framework allows us to see if a firm’s international strategy is a source of sustained competitive advantage. While international strategies are commonplace in today’s world, a firm can bring unique resources and capabilities to international markets. This not only makes it rare, it also makes direct imitation difficult and costly. There are, however, substitutes in the form of strategic alliances and wholly owned subsidiaries. Firms must organize themselves to take advantage of international opportunities. They have several options to do so but the option must match their strategy of either local responsiveness or international integration. Instructor Manual for Strategic Management and Competitive Advantage Concepts and Cases Jay B. Berney, William S. Hesterly 9781292060088, 9781292258041
