SG7001 / Managing Strategy, Operations and Partnerships

Topic Overview: Evaluating Strategy in the Global Environment

4.1 Introduction

Either concerning a multinational enterprise or a small-to-medium enterprise, any move into the international market
is going to be fraught with risk and uncertainty so it is important that the organisation has a comprehensive entry
strategy in place before it takes any concrete steps. Any strategy for international business expansion is bound to be
based on three fundamental considerations – location, timing and mode of entry – and as such, it must answer the
questions of where, when and how.

Timing is also important. Being a first or early mover in the market can reap substantial rewards, but it can have
disadvantages, too. Early foreign entrants can gain long-term customer loyalty simply from being in the market
before the rest of the competition. This kind of market power is illustrated by the example of Bank of America and
Citibank in South America. Pre-emptive advantages can be won by companies who take advantage of opportunities
that are only available to first movers. The cases of Toys ’R’ Us in Japan and Volkswagen in China exemplify this
kind of advantage (Rugman and Collinson, 2012).

However, first and early movers also face many risks and uncertainties that may be considerably reduced by the time
late investors arrive. For example, rules about foreign investment may still be unclear, leaving room for corruption;
local infrastructure may not be adequate; suppliers may need a lot of encouragement and training to reach acceptable
standards; and the right kind of financial and professional services may not yet be available. By the time the late
movers arrive, many of these problems will have been sorted out. There are many examples of spectacular success
and disastrous failure where the timing of market entry may have been a significant factor (Rugman and Collinson,
2012).

Choosing the most effective way to enter the international market is a complex matter and a crucial strategic
decision. A mistake at this stage will have long-term repercussions. If the company plans to make a direct
investment overseas, there are several possible ways to do this – by opening its own local offices, getting into a joint
venture, taking an equity stake in a local firm or buying it out completely. There are likely to be local laws that will

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shape and influence this kind of decision, apart from the pure business considerations. If the company is not ready to
make a direct investment, there are transfer-related modes of entry available, such as franchising operations or

licensing local production. In any of these cases, the company is probably already familiar with the market through
exporting to it or subcontracting some processes to a local organisation (Rugman and Collinson, 2012).
Countertrade is another important entry mode, involving trading arrangements between parties from different
countries in which goods and/or services are exchanged without the need for cash. These arrangements include
barter, counter-purchases, offset agreements, and buyback contracts.

4.2 Learning Objectives

LO.1 Analyse International Business Strategy

LO.2 Critically examine the ‘Strategy Diamond’ and the Five Elements of Strategy
LO.3 Define staging

4.3 Organizing ethics: a stakeholder debate

Managers can carry out stakeholder analysis and planning, but sometimes their own view of who stakeholders are
and their stake in organisational outcomes may differ from the view held by stakeholders themselves. Please read
carefully the following study from Hummels (1998) and answer the following questions:
1. What does the article suggest might help overcome this discrepancy?
2. What are your opinions of the issues raised by the author?

4.4 International business strategy

Both Multinational Enterprises (MNEs) and Small and medium-sized enterprises (SMEs) operating on a global scale
require special kinds of organisational structure to deal with different businesses and parts of businesses that are
located in widely separated locations. It is critical to keep the firm’s international business strategy firmly focused as
it must ensure that appropriate structures are in place to manage and coordinate any organisation operating in a
global environment. This demands not only specialised knowledge of the business processes involved but also a

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comprehensive understanding of the geographical nodes of the organisation and why they were selected as the best
possible locations for particular business activities (Capon et. al, 1987).

An organisation’s international business strategy must aim to find the most effective balance between global
integration and local responsiveness (Chakravarthy and Perlmutter, 1985). Economies of scale must be traded
carefully against the competitive advantages to be gained from meeting the particular needs of different markets. For
the MNE, certain countries and regions may contain parts of the supply chain, have bases for some elements of
production or logistics and be markets for the organisation’s products and services all at the same time. Harmonising
all these activities effectively within and across national boundaries presents major challenges. Excellence in the
management of operations is only one aspect of this. International strategy must take full account of the constraints
as well as the opportunities that are present in all the different areas where businesses are located. This means being
fully aware of the cultural, political and legal environment in each location and how these constraints and
opportunities will impact any business decisions taken centrally (Festing et. al, 2007).

4.5 Integrating global operations

Coordinating and controlling the global operations of an MNE concerns the integration of all the parts of the
organisation to achieve strategic orientation. Implementation of the international business strategy will be achieved
by clear communication of corporate values and strategic objectives, appropriate performance targets and effective
procedures for monitoring progress and measuring results. For that reason, various mechanisms (output, bureaucratic
and cultural) are used: data processing systems for integrating and analysing information, management tools for
establishing strategy and planning implementation, human resource management tools for setting objectives and
guiding behaviour and so on (Rugman and Collinson, 2012).
The idea of corporate socialisation is proposed as an effective tool for integration, involving the rotation of key staff
to foreign postings and management development programmes to ensure that subsidiaries understand their role in
the global strategy. Effective implementation depends upon having the right organisational structure to manage an
ongoing reform programme of considerable complexity across cultural as well as national boundaries (Rugman and
Collinson, 2012).

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4.6 Developing global alliances

Strategic alliances are part of the fabric of globalisation. Finding the right partner to assist the process of market
entry is a critical strategic decision, and there are many examples of cases where things have gone disastrously
wrong because inappropriate local partners were chosen on the basis of poor local knowledge. Alliances may or may

not involve equity. The partner organisations can form an equity joint venture that structures an appropriate level of
ownership for each. However, cooperative joint ventures can be formed without involving equity arrangements.
These are contractual partnerships, which can be designed to enable joint exploration, joint research and
development (R&D), coproduction, co-marketing and so on, as required (Sugiura, 1990).
There are many examples of alliances that begin with dazzling hopes, only to end in failure. Bringing two separate
business entities – with different backgrounds, organisational structures and management cultures – into a smooth
and constructive working relationship is an extremely difficult task. Empirical research suggests that over half of
such strategic alliances fail.

4.7 Managing Innovation

Any firm that wants to survive and prosper must be focused on innovation. Whether it’s an MNE or a SME,
innovation is critical for any organisation in these dynamic times. Organisations that ignore innovation condemn
themselves to a very uncertain future. If you look at any MNE that is growing you will see that they are capitalising
on their unique assets to ensure the organisation is focused on innovation. Without question MNEs have an
advantage over SMEs with this regard because the multinational organisation has the capacity to service particular
groups or customers globally and the various country locations offer different resources and inputs and enable them
to be used in an innovative process. Research and development is one area where an innovative MNE has an
advantage (Hitt et al, 1997).

Firms outsourcing R&D projects are often looking to enhance their competitive position in target markets by
locating innovation close to the customer base to ensure responsiveness to local tastes and requirements. There are
also benefits to be gained from specialised expertise that may be available more readily and cheaply overseas.
Developing countries can derive major benefits from becoming targets for outsourcing by gaining new skills from
the transfer of technology. There are challenges to be faced as well, and companies outsourcing innovation are

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bound to be concerned with security and copyright regarding intellectual property that may be fundamental to their
future success. However, the track record of success in this area seems to be much more encouraging than the
experience of global strategic alliances (Rugman and Collinson, 2012).

One of the major dangers faced by companies is outsourcing R&D to partner organisations that are direct
competitors in strategic resource markets. These dangers can be mitigated by limiting the scope of alliance activities.

There are plenty of other examples on the Internet that you should be looking at to see how leading organisations
handle innovation in this dynamic global environment (e.g. Facebook, Sony, IBM, Siemens and Spreadshirt).

4.8 The Strategy Diamond and the Five Elements of Strategy

Good strategy formulation means refining the elements of the strategy (Hambrick and Fredrickson, 2001).
Remember, first of all, not to confuse part of a strategy − for example, being a low-cost provider or first mover in an
industry − for the strategy itself. Being a low-cost provider or first mover may be part of a strategy, but it’s not a
complete strategy.

As we noted earlier, a strategy is the means by which a firm will achieve its goals and objectives. This is, of course,
the intended strategy, although through this process managers have a good chance of shaping the realized strategy as
well. In a for-profit firm, a business strategy will generally address how it will compete against its rivals and make a
profit. For instance, if a firm has an objective to be one of the top two firms in a particular industry, this is a complex
objective. As result, a strategy designed to pursue this objective will consist of an integrated set of choices. These
choices can be categorized as five related elements of strategy based on decisions that managers make regarding
arenas, vehicles, differentiators, staging, and economic logic. We refer to this constellation of elements, which are
central to the strategic management process, as the strategy diamond. Unfortunately, many naïve managers only
focus on one or two such elements, often leaving large gaps in the overall strategy. Or, they may have all five pieces,
but not understand how they need to fit together. Only when you have answers to your questions about each of these
five elements you can determine whether your strategy is an integrated whole; you’ll also have a better idea of the
areas in which your strategy needs to be revised or overhauled. As Figure 1 shows, a good strategy diamond
provides answers to all five questions (Hambrick and Fredrickson, 2001):

1. Arenas. Where will we be active?

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2. Vehicles. How will we get there?

3. Differentiators. How will we win in the marketplace?
4. Staging and pacing. What will be our speed and sequence of moves?
5. Economic logic. How will we obtain our returns?

Figure 1: The Business Strategy Diamond (adapted from Hambrick and Fredrickson, 2001)

Let’s take a closer look at each of these elements.

By arenas, we mean areas in which a firm will be active. Decisions about a firm’s arenas may encompass its
products, services, distribution channels, market segments, geographic areas, technologies, and even stages of the

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value-creation process. Unlike vision statements, which tend to be fairly general, the identification of arenas must be
very specific: It will clearly tell managers what the firm should and should not do. In addition, because firms can
contract with outside parties for everything from employees to manufacturing services, the choice of arenas can be
fairly narrowly defined for some firms.

For example, Under Armour made the choice to compete in performance apparel for men, women, and children.
Historically, their target market has been in the U.S., but they recently expanded into Europe. More recently, they
also targeted users in new market segments and moved into athletic footwear. They sell their products primarily
through sporting goods stores. In addition to these arena choices, Under Armour has entirely outsourced the
production of its products to outside textile firms, mostly in Asia.

Vehicles are the means for participating in targeted arenas. For instance, a firm that wants to go international can
achieve that objective in different ways. Under Armour sent their own personnel to Europe to open those operations.
Wal-Mart, in recent moves to enter certain international markets (such as Argentina and China), has both acquired
local retail chains and opened new stores on its own in order to gain more immediate presence. Likewise, a firm that
requires a new technology could develop it through investments in R&D. Or, it could opt to form an alliance with a
competitor or supplier who already possesses the technology, thereby accelerating the integration of the missing
piece into its set of resources and capabilities. Finally, it could simply buy another firm that owns the technology. In
this case, then, the possible vehicles for entering a new arena include acquisitions, alliances, and organic investment
and growth.

A firm that understands why its customers regularly choose its products or services over those of competitors has
identified its differentiators. The output of differentiators can be seen in the features and attributes of a company’s
products or services that help it win sales. Firms can be successful in the marketplace along a number of common
dimensions, including image, customization, technical superiority, price, and quality and reliability. Under Armour
gains sales in the marketplace through both image and technical superiority. Toyota and Honda have done very well
by providing effective combinations of differentiators. They sell both inexpensive cars and cars with high-end, high-
quality features, and many consumers find the value that they provide hard to match. As you will learn later in this
course, while effective strategies often combine differentiators, it is important to make very specific choices about
what your product or service is and what it is not. It is impossible to be all things to all consumers. It’s difficult to
imagine, for instance, a single product that boasts both state-of-the-art technology and the lowest price on the
market. Part of the problem is perceptual − consumers often associate low quality with low price. Part of it is

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practical − leading-edge technologies cost money to develop and command higher prices because of their
uniqueness or quality.

There are two critical factors in selecting differentiators:

• These decisions must be made early: Key differentiators rarely materialize without significant up-front
decisions, and without valuable differentiators, firms tend to lose marketplace battles.

• Identifying and executing successful differentiators means making tough choices – tradeoffs: Managers who
can’t make tough decisions about tradeoffs often end up trying to satisfy too broad a spectrum of
customer needs; as a result, they make too many strategic compromises and execute poorly on most
dimensions.

Audi (Audi, 2020) provides an example of a company that has aligned these two factors successfully. In the early
1990s, Audi management realized that its cars were perceived as low-quality, high-priced German automobiles −
obviously a poor position from which to compete. The firm decided that it had to move one way or another − up
market or down market. It had to do one of two things: (1) lower its costs so that its pricing was consistent with
customers’ perceptions of product quality or (2) improve quality sufficiently to justify premium pricing. Given
limited resources, the firm could not go in both directions − that is, produce cars in both the low-price and high-
quality strata. Audi made a decision to invest heavily in quality and image; it invested significantly in quality
programs and in refining its marketing efforts. Ten years later, the quality of Audi cars has increased significantly,
and customer perception has moved them much closer to the level of BMW and Mercedes. Audi has reaped the
benefits of premium pricing and improved profitability, but the decisions behind the strategic up-market move
entailed significant trade-offs.

Differentiators are what drive potential customers to choose one firm’s offerings over those of competitors. The
earlier and more consistent the firm is at defining and driving these differentiators, the greater the likelihood that
customers will recognize them.

Staging refers to the timing and pace of strategic moves. Staging choices typically reflect available resources,
including cash, human capital, and knowledge. At what point, for example, should Under Armour enter specific
international markets? Perhaps if the company pursues global opportunities too early, it may redirect resources that

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are needed to exploit its existing opportunities in the U.S. And, when it is time to expand internationally, it is critical
to decide which countries they will enter first and which will come later. Furthermore, as product lines are
expanded, it is critical to decide which products make the most sense to enter next, and which should be saved for a
later time. For instance, there are many possible expansion moves for Under Armour in sporting goods. They have
sacrificed some of these possible opportunities for the time being (e.g., running shoes) in order to focus on other
activities first (e.g. football cleats). Wal-Mart explicitly decided to delay its international moves so that it could
focus first on dominating the U.S. market, which is, after all, the largest retail market in the world. Despite mixed
results overseas, Wal-Mart is the undisputed leader in global retailing and has recently increased its emphasis on
international markets as the basis for future growth.

Staging decisions should be driven by several factors: resources, urgency, credibility, and the need for early wins.
Because few firms have the resources to do everything they’d like to do immediately, they usually have to match
opportunities with available resources. In addition, not all opportunities to enter new arenas are permanent; some
have only brief windows. In such cases, early wins and the credibility of certain key stakeholders may be necessary
to implement a strategy.

Most of the firms you will study in this course are likely to be for-profit firms. As such, a key objective of these
firms is to earn an economic profit. The previous four elements of strategy just reviewed (arenas, vehicles,
differentiators, and staging) will only make sense for a for-profit firm to the extent that they combine to earn a profit.
Economic logic is the fifth element of strategy and it refers to how the firm will earn a profit − that is, how the firm
will generate positive returns over and above its cost of capital. Economic logic is the “fulcrum” for profit creation.
Earning normal profits, of course, requires a firm to meet all of its fixed, variable, and financing costs, and achieving
desired returns over the firm’s cost of capital is a tall order for any organization. In analysing a firm’s economic
logic, think of both costs and revenues. Sometimes economic logic resides primarily on the cost side of the equation.
Southwest Airlines, for example, can fly passengers for significantly lower costs per passenger mile than any major
competitor. At other times, economic logic may rest on the firm’s ability to increase the customer’s willingness to
pay premium prices for products (in other words, prices that significantly exceed the costs of providing enhanced
products).

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4.9 Summary

Through this topic we have shifted our attention on issues related to the Evaluation of Strategy in the Global
environment. In the next week, we will have the opportunity to analyse concepts associated with Operations
Performance, Strategy, Resources and Capabilities.

References

Audi (2020) [online] Available at: <https://www.audi.com/en/company/history.html> [Accessed 14 September

2020].

Capon, N.l, Christodoulou, C., Farley, J. U., and Hulbert, J. M. (1987) “A Comparison of the Strategy and Structure
of United States and Australian Corporations,” Journal of International Business Studies, vol. 18, no. 1.

Chakravarthy, B.S. and Perlmutter, H. (1985) ‘Strategic Planning for a Global Business’, Columbia Journal of
World Business, Summer, 3–11.

Festing, M., Eidems, J., & Royer, S. (2007). Strategic issues and local constraints in transnational compensation
strategies: An analysis of cultural, institutional and political influences. European Management Journal, 25(2), 118 –
131.

Hambrick, D.C. and Fredrickson, J. W. (2001) ‘Are You Sure You Have a Strategy?’, Academy of Management
Executive, 15(4), pp. 48−59.

Hitt,M. A., Hoskisson, R. E., and Kim, H. (1997) “International Diversification: Effects on Innovation and Firm
Performance in Product-Diversified Firms,” Academy of Management Journal, vol. 40, no. 4 (August).

Hummels, H. (1998) ‘Organizing ethics: a stakeholder debate’, Journal of Business Ethics, 17(13), pp.1403−1419

Rugman, A. and Collinson S. (2012) International Business. eds. 6. Pearson

Sugiura, H., (1990) “How Honda Localizes Its Global Strategy”, Sloan Management Review, Fall, pp. 77–82.

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