Unit - 4

International Strategic
Management
 International Strategic
Management

- A comprehensive and ongoing

management planning process aimed
at formulating and implementing
strategies that enables a firm to
compete effectively internationally.
 Pressure for
Cost reduction
and
Local responsiveness
 Pressure for Cost reduction
When are pressure for cost reduction highest?

1. In industries producing commodity type products.

2. When major competitors are based in low cost locations.
3. Where consumers are powerful.
4. Liberalization of the world trade and investment.
How can industries try to lower costs?

- Mass producing standardized products in an optimal location.

- Outsourcing to low cost suppliers

 Pressure for Local responsiveness

1) Difference in consumer taste and preferences.

Example :
- Thereis a strong demand among North American
consumers for pickup trucks, particularly in the South
and West where many families have a pickup truck as a
second or third car. In contrast, in European countries,
pickup trucks are seen purely as utility vehicles and are
purchased primarily by firms rather than individuals.
 Pressure for Local responsiveness
2) Difference in infrastructure and Traditional
practices.
Example:
- North America consumer electrical appliances run
on 110 volts while in some European and Asian
countries 220-240 volts.
- left hand right hand drive in case of cars.
 Pressure for Local responsiveness
3) Differences in distribution channels.
Example:
-Five retail chains control 65% of the market in
Germany, but no chain controls more than 2% of the
market in neighboring Italy. Thus, retail chains have
considerable buying power in Germany, but
relatively little in Italy.
 Pressure for Local responsiveness
4) Host- Government demands.
Example:
- Pharmaceutical firms are subject to local clinical testing,
registration of products, pricing restrictions, all of which
require that manufacturing and marketing of drug should
meet local requirements.

- Threats of protectionism, economic nationalism, local

content rules all dictate that international business
manufacture locally
 Types of Strategic
Management
High

Trans-
Cost reduction Pressures

Global
national
Strategy
Strategy

Multi-
International
Domestic
Strategy
Strategy

Low

Low High
Pressures for local responsiveness
International strategy
It try to create value by transferring valuable skills and
products to foreign markets where local indigenous
competitors lack those skills and products.
In reality, the most international firms have created
value by transferring different products & offerings
developed at home to new overseas market.
They tend to centralize product development at home
and establish only local manufacturing and marketing
units at the overseas market.
Examples are McDonalds, IBM, Wal-Mart, Microsoft etc.
 Multi-domestic strategy
This strategy is to customize the firms product
& offering, management strategy and business
strategy to the conditions of the foreign
countries where it is operating.
This strategy is based on an English adage
when you are at Rome, live in the roman style;
when you are elsewhere, live as they live
elsewhere.
Most desirable when there are high pressures for
local responsiveness and low pressures for cost
reductions.
 Global Strategy
A global strategy is focus on pursuing low-cost
tactics.
This strategy is not to customize the firms
product offering and marketing strategy to local
conditions of the foreign countries because
customization rises cost.
Under this strategy firm concentrates its
production, marketing and R&D activities only in
a few favorable locations.
Transnational Strategy
This strategy involves simultaneous focus on
reducing costs, transferring skills & products, and
boosting local responsiveness in foreign market.
It is balanced combination of all other strategy.
Recommended when a firm faces high pressures for
both cost reductions and local responsiveness and
when there are significant opportunities for
leveraging valuable skills within the firms global
network of operation.
Example, Samsung
 Opportunity Assessment
The key to successful domestic and international
entrepreneurship is to develop an idea that has
a market with a need for the product or service
idea conceived.
Opportunity assessment is often best
accomplished by developing an opportunity
assessment plan.
An opportunity assessment plan is not a
business plan.
 An opportunity assessment plan has four
sections:
The first section develops the idea,
analyzes competitive products and
companies, and identifies the unique
selling propositions.
The second section focuses on the market
its size, trends, characteristics, and
growth rate.
The third section focuses on the
entrepreneurs and management teams
skills and experience.
The final section develops a time line
indicating the steps to successfully launch
the venture.
 Strategy in International
Business
INTRODUCTION
The focus is in the firm itself and, in particular, on the action
managers can take to compete more effectively as an international
business.
Need of Strategy in
International Business :
Formulate a strong international
vision
Allocate scare resources on a
worldwide basis
Participate in major markets
Implement global partnerships
Engage in global competitive moves
Configure value-adding activities on
a global scale
 Role of Strategy in
International Business
1) Creating Value
2) Adopting effective Strategic positioning
3) Considerations
4) Leveraging products and competence
5) Benefiting from Location Economies
6) Leveraging subsidiary skills
 1) Creating Value
Value
The measure of a firms capability
of selling what makes for
more than the costs
incurred to make it

Creates Value Using

Cost leadership Strategy
Differentiation Strategy
 2) Strategic positioning
Strategic positioning is concerned with the way in
which a business as a whole distinguishes itself in a
valuable way from its competitors and delivers value
to specific customer segments

Specific product feature Strategy

Strategic positioning
Competitor Strategy
 Strategic positioning
Positioning by emotions
A stand-up comedian overcomes his fear of
stammering in a Nescafe Commercial.
 3) Considerations
If product or services is needed or
desired
Language and cultural differences
Managing time zone difference
Religious or lifestyle considerations,
etc
 4) Leveraging products
and competencies
A company can increase its growth rate
by taking goods or services developed at
home and selling them internationally

Success of multinational companies also

rest upon the core competencies
Examples of core
competencies
 5) Location Economies

Economic
benefit derived
from locating
production
activities in
optimal locations
 6) Leveraging subsidiary
skills
Value created by identifying skills and applying it to
firms global network of operations

Example:
Unilever is divided into geographical basis with
subsidiaries in each country for a particular
business.

Other example: McDonalds, Agricultural

subsidies, etc.
Estimating
Market
Potential
 Market Potential
The maximum sales reasonably
attainable under agiven set of
conditions within a specified period
of time
 FORMULA
MP=N x P x Q
Where,
MP=market potential
N=number of possible buyers
P=average selling price
Q=average number purchased by
each buyer
 Why Estimate?
To make entry / exit decisions
To make resource level decisions
To make location and other resource
allocation
decisions
To set objectives and evaluate performance
As an input to forecast.
 MARKET POTENTIAL
APPROACH

Top Down Approach

Bottom Up Approach
 Information Sources
Deriving Market Potential Estimates
Calculation
via.
Primary Data Statistical Potential
method estimates
Secondary
Data
Judgment
Past Sales
 Information sources

Primary Sources
Survey Analysis
 Secondary Sources
Government sources
Trade associations
Bank research studies
Financial and industrial analysis
Private company data sources
Internet
Press
 New Product Potential
New Product is subjected to :
Products relative advantage or ability to
compete.
Compatibility
Manufacturing
Distribution
Sales Staff
Risks
Adoption pattern
CHOOSING A
STRATEGY
 International strategy
Skills and product are transferred to foreign market .

They tend to establish manufacturing and marketing

functions in each major country in which they do business

Normally head office retains tight control over marketing

and product strategy

It also facilitates transfer of skills and expertise.

It creates moderate operational cost and a high profits.

For example: Microsoft where it offers the same software

program around the world.
 Advantages and Disadvantages
International
Advantagesstrategy
Disadvantages

Transfer of Lack of local

distinctive responsiveness
competencies to Inability to realize
foreign markets location economies
 Multi-Domestic strategy
Companies that adopt this strategy tend to
establish a complete set of value creation
activities, including production, marketing and
R&D in each national market they do business
Increase profit by customizing .
Low cost reduction.
High local responsiveness.
For example: Haagen-Dazs ( locally responsive).
 Advantages and Disadvantages
Multi domestic / Localization
Advantages strategy
Disadvantages

Ability to customize Inability to realize

product offerings location economies
and marketing in High cost of
accordance with implementation.
local
responsiveness
 Global strategy

Focus on increasing profitability and

profit growth by reaping the cost
reductions that come from experience
curve effects, location economies &
economies of scale.
There is customization of products.
For example: Lenovo.
 Advantages and Disadvantages.
Global Standardization
strategy
Advantages Disadvantages

Ability to exploit Lack of local

experience-curve responsiveness
effects
Ability to exploit
location economies
 Transnational strategy

This strategy involves simultaneous

focus on reducing costs, transferring
skills & products, and boosting local
responsiveness in foreign market.
High cost reduction.
High local responsiveness.
For example: Coke.
Think globally act locally.
 Advantages and Disadvantages
Transnational
strategyDisadvantages
Advantages

Ability to exploit Difficulties in

experience-curve effects implementation because
Ability to exploit of organizational
location economies problems.
Ability to customize High cost of controlling
products and marketing and monitoring.
 Entering and
operating in
International Markets
Why International Market???
Large Market Size
Economies of Scale
Smoothing Business Cycles
Increased growth rate
Excess Capacity
How to Enter International
Markets
Direct Exporting
Direct exporting is selling directly into
the market you have chosen using in the
first instance you own resources. Many
companies, once they have established a
sales program turn to agents and/or
distributors to represent them further in
that market. Agents and distributors work
closely with you in representing your
interests. They become the face of your
company and thus it is important that your
choice of agents and distributors is
handled in much the same way you would
hire a key staff person.
Liscensing
Licensing is a relatively sophisticated
arrangement where a firm transfers the
rights to the use of a product or service to
another firm. It is a particularly useful
strategy if the purchaser of the license has
a relatively large market share in the
market you want to enter. Licenses can be
for marketing or production. licensing).
 Franchise
Franchising is a typical North American
process for rapid market expansion but it is
gaining traction in other parts of the world.
Franchising works well for firms that have a
repeatable business model (eg. food outlets)
that can be easily transferred into other
markets. Two caveats are required when
considering using the franchise model. The first
is that your business model should either be
very unique or have strong brand recognition
that can be utilized internationally and secondly
you may be creating your future competition in
your franchisee.
Partnership
Partnering is almost a necessity when
entering foreign markets and in some
parts of the world (e.g. Asia) it may be
required. Partnering can take a variety of
forms from a simple co-marketing
arrangement to a sophisticated strategic
alliance for manufacturing. Partnering is a
particularly useful strategy in those
markets where the culture, both business
and social, is substantively different than
your own as local partners bring local
market knowledge, contacts and if
chosen wisely customers.
Joint Venture
Joint ventures are a particular form of
partnership that involves the creation of a
third independently managed company. It
is the 1+1=3 process. Two companies
agree to work together in a particular
market, either geographic or product, and
create a third company to undertake this.
Risks and profits are normally shared
equally. The best example of a joint
venture is Sony/Ericsson Cell Phone.
 Buying A Business
In some markets buying an existing local
company may be the most appropriate entry
strategy. This may be because the company has
substantial market share, are a direct competitor
to you or due to government regulations this is
the only option for your firm to enter the market.
It is certainly the most costly and determining
the true value of a firm in a foreign market will
require substantial due diligence. On the plus
side this entry strategy will immediately provide
you the status of being a local company and you
will receive the benefits of local market
knowledge, an established customer base and
be treated by the local government as a local
firm.
 Piggybacking
Piggybacking is a particularly unique way of
entering the international arena. If you have a
particularly interesting and unique product or
service that you sell to large domestic firms that are
currently involved in foreign markets you may want
to approach them to see if your product or service
can be included in their inventory for international
markets. This reduces your risk and costs because
you are essentially selling domestically and the
larger firm is marketing your product or service for
you internationally.
Turnkey Projects
Turnkey projects are particular to
companies that provide services such as
environmental consulting, architecture,
construction and engineering. A turnkey
project is where the facility is built from the
ground up and turned over to the client
ready to go turn the key and the plant is
operational. This is a very good way to enter
foreign markets as the client is normally a
government and often the project is being
financed by an international financial agency
such as the World Bank so the risk of not
being paid is eliminated.
Greenfield Investments
Greenfield investments require the
greatest involvement in international
business. A greenfield investment is
where you buy the land, build the facility
and operate the business on an ongoing
basis in a foreign market. It is certainly
the most costly and holds the highest risk
but some markets may require you to
undertake the cost and risk due to
government regulations, transportation
costs, and the ability to access
technology or skilled labour.
EXPORTING AND IMPORTING
 Exporting
One of the foreign market Entry strategy

Most easiest and Traditional form of operating in foreign market

Manufacturing Firms begin global expansion as exporters and later

switch on to another mode for serving a foreign market

Defined as Marketing of goods produced in one country to another

 For example; India export comprises mainly of
engineering textile products ,petroleum products
, Precious stones, jewellery , sugar and leather
products.
 Direct exporting

When a manufacturer or exporter sells directly to

a buyer located in a foreign market
 Indirect Exporting

Use of independent middleman to market the firms

product overseas
 Advantages
Increasing Profit and sales potential as foreign orders are larger than those placed by
local buyers

Substantial Scale of economies with products that are more global in scope and have
wide range of acceptance around the world

Lower per unit cost as production will expand which lead to greater use of existing
capacities

Diversification of business risk as company will not be tied to changes of domestic

market of only one specified country

Gain new experience and location economies as going international can yield valuable
information on new technologies ,marketing techniques and foreign competitors.
Location economies by moving production elsewhere where cost is lower. For
example ; Many US electronics firms moved their manufacturing to Far east due to
availability of low cost labour
 Cont.
Expand life cycle of product as product reaches maturity stage can be
introduced in different market where never marketed before. For
example ,In 1990 Nestle faced significant challenged in its market
growth so it decided to lessen its focus on developed market like north
America and its home based market in Switzerland to emerging market
like India and China

North America India

Switzerland China
 Disadvantages
Extra cost to develop new market , new promotional materials , and
transportation cost

Product modification for safety and security codes and import restrictions
and satisfy importing countries labeling or pakaging requirements

Export licenses and documentation requirement for some companies to

export products

Market information related to less developed countries business

practices ,market characteristics , cultural barriers may be unavailable

Trade barriers can make exporting uneconomical.

 Importing
Purchasing of products from other countries
For example; India major import comprises of crude oil ,
machinery, military products, fertilizers ,gems , antiques and
artworks.
 Advantages
Introducing new products to the market, For example If a product
produced by china seems useful in Australia they can import it and
introduce it to potential customers

Reducing cost in manufacturing by importing products, parts of product

than investing in expensive machinery

Becoming a leader in the industry by being the first to import fresh

products before competitors do

Providing high quality products

 Disadvantages
Dominance of foreign goods in domestic market as a result of which local
manufacturers may lose their business and may cause total collapse of local
industry .For Example; Carpet industry in Nepal declined to due to Chinese
carpet industry competition as its carpet cost was cheaper.

Conflict of domestic values due to acceptance of social values. The domestic

industries may severely damaged due to import from countries where wages are
low and domestic industries are unable to compete since they cannot lower
down the prices of goods also have obligation of worker union.

Loss of job due to low cost labor in foreign countries influences importing
goods.

Trade deficit will cause currency devaluation and inflation. For example;
Nepal is facing trade deficit as its import is higher than export which causes
currency devaluation and inflation.
Collaborating/ Joint
venture
&
Strategic alliance
What is a joint venture?
 A joint venture is a business agreement in which
the parties come together to take on one project by
equally investing in terms of money, time and
effort. MONEY

INPUT TIME

EFFORT

They exercise control over the enterprise and

consequently share revenue, expenses and assets.
REVENUE
OUTPUTS
EXPENSES
 Advantages
Provides companies the opportunity to gain
new capacity and expertise

Allow companies to get new technological

knowledge

Access to greater resources- specialized

staff and technology

Sharing of risks
JVs offer a creative way for companies to
exit from non- core businesses
 Disadvantages
There is an imbalance in level of expertise,
investment or assets bought into the
venture by the different partners

Different culture and management styles

result in poor integration and co operation

The partners dont provide enough

leadership and support in the early stages

Success in a JV depends on through research

and analysis of the objectives
STEPS TO A SUCCESSFUL JOINT
VENTURE
The Process
IDENTIFY
VALUATE
CONSTRUCT
DEFINE
CREATE
ENSURE
FINALIZE
COSTOMER TECHNOLOGIC
ELECTONIC AL
EXPERTISE LEADER
AUTOMOBILE TECHNOLOG
MANUFACTUR Y AND
ER EXPERIENCE
 What is strategic alliance?
A strategic alliance is an agreement between
two or more parties to pursue a set of agreed
upon objectives needed while remaining
independent organizations.
The alliance is a collaboration where each
partners hopes that the benefit form the
alliance will be greater than those from
individual efforts.
It does not create a legal entity, i.e. a new
company.
 Advantages
Flexibility: Provides flexibility of operation and does
not bind to a legal contract

Opportunities for growth: Using the partners

distribution networks by taking advantages of a good
brand image can help a company to grow faster

Costs: Partnership can help to lower the cost

especially in non profit areas like research and
development

Shared knowledge: Sharing skills, brand, market

knowledge, technical know how and assets results
in pool of resources which is more valuable than the
separated single resources
 Disadvantages
Coordination: Difficulties due to informal
cooperation settings.

Uneven alliances: When the distribution power are

distributed very uneven, the weaker partner might
be forced to act according to the will of the more
powerful partner.

Sharing: In strategic alliance the partners must

share skills and know-how. this can be critical if
business secrets are included, agreements can
protect these secrets but the partners might not be
willing to stick to such an agreement.
 Types of strategic
alliance
Horizonta Equity
l alliance alliance

Non
equity
alliance
Global Vertical
alliance alliance
 Explosion of alliance in
recent years
1. February 2001
The coca cola company and Procter & Gamble -$4.2
billion joint venture.
To use coca cola huge distribution system to increase
reach for the P&G product- Pringles and sunny delight.
2. Star alliances: Largest partnership in the airlines
industries
Scandinavian Airlines, Thai Airways international, Air
Canada, Lufthansa and United Airlines came together
to launce star airlines.
It reach extend to 130 countries and more than 815
destinations
Collective revenue for the partnership at more than
$63 billion
3. Hewlett- Packard and NTT DoCoMo created a
partnership

To conduct joint research on technology for fourth

generation mobile phone

To bring together HPs network infrastructure and

computer servers with DoCoMos wireless
broadband technology.
 The Strategic Alliance
Process
This process involves planning, implementation
and evaluation, and has five stage life cycle and
a structured methodology is applied to
preparation and negotiation at each stage.
 The Process

Setting alliance strategy

Selecting a partner

Structuring the alliance

Managing the alliance

Reevaluating the alliance

Strategic alliance VS. Joint
venture
Strategic
Joint Venture
Alliance
Strategic alliance Joint venture chooses
allows you to remain in its own direction, with
control of your own the guidance of its
company board
Strategic alliance
Joint venture becomes
summons the core
a blending of cultures
strength and difference
and create an
of another organization
organizational culture
to deliver value
and path
Strategic alliance is a
contractual or Joint venture is a legal
handshake agreement partnership, LLC or
cooperation
Strategic alliance
requires continued
Joint venture has its
relationship
own leadership team
maintenance
Franchising &
Global
Outsourcing
 Franchising

Special Licensing

Franchisor Franchisee
(Business (Affiliated
owner) Dealer)
Deals
Intangibles: Franchisee
Trademark
s
Franchisor
Royaltie
s
 Types of Franchise
Business Format
Product or Trade Name
Dealership
Unit/Manufacturer
Master Franchise
Regional Franchise
 Increased Quality Control
Outlets
Complex
Brand Procedure
Recognition
Territory
Reduced Cost Control
and risks
Outsourcin
Reduce costs by transferring portions of
g
work to outside suppliers

Service Outsourc
Compan
s er
y
(Supplier)
 Reduce
Cost
WHY?
Focus
on Core
Improve
Quality

Conser
ve
Innovation
Capital
s
 Areas of
Outsourcin
g
 Cost Effective Quality Control
Productivity Linguistic
and Efficiency Barriers
Skilled Hidden Costs
Expertise
 Types of Outsourcing
Business Process Outsourcing
Knowledge Process Outsourcing
Legal Process Outsourcing
Recruitment Process Outsourcing
Engineering Process Outsourcing
Foreign Direct
Investment
Multinational
Companies
Foreign Direct Investment
Concept

Investment in a foreign country where investor

retains the control over investment

It can be in the form of subsidiary, acquiring a

stake in existing firm or starting a joint venture
in foreign country.

At times, involve more than capital investment

Types of FDI

On the basis of direction of investment

1. Inward FDI foreign firms taking over domestic

assets

2. Outward FDI Domestic firms taking control over

foreign assets

On the basis of types of activity

3. Horizontal FDI firm investing in foreign country

in similar production activity as in home country
2. Vertical FDI

Backward aimed at producing inputs for the

firms production process

Forward aimed to sell the output of the firms

domestic production process

3. Conglomerate FDI

> Direct investment overseas aimed at

manufacturing products not manufactured by the
firm in home country
Trends
Expansion of FDI has increased global production,
employment generation and trade

Positive impact on the economic growth of the

host countries

The stock of FDI has increased over time

More stable and positive relationship between
global FDI flows and world GDP
 Multinational Companies
Concept

Large co-operations with operations spread over

several countries managed by home country

The headquarter of MNC coordinates production

and marketing facility

Operated to generate significant share of total

revenue from foreign markets
 Reasons for firms to become MNC:
* get access to more market and customer

* operate closer to target international market

* gaining access to lower cost of production

*create better brand

Types of MNC
Subsidiaries where the enterprise owns more
than 50% of share

Branches MNC opens branches in different

countries that work under the direction and
control of head office

Franchising MNC grants the firm the right to use

its trademark, patent, brand name after paying
royalty

Joint Venture MNC does partnership with local

firms while establishing the company there
Trends
Fast expansion and growth of MNC
Integration and cooperation between emerging
and developed markets contributing in growth of
global economy

Advantages of cost efficiency and innovation will

accelerate the worldwide trend of bringing more
affordable and effective solution to world

MNC has been boosting economic growth