Strategic Management

PMIR 2010-12, Course no: STMP10-3, Session 10

Corporate Strategy –
Internationalization
• Tradeoffs in international Strategy

• Types of International Strategy

• Modes of internationalization
 Tradeoff in International Strategy
International strategy is a strategy of firms involving transfer
of products or resources across domestic boundary

• National boundary creates discontinuity of institutional

environment for business
– differences in availability and rights on the use of public assets
– property rights on personal and business assets
– cultures, values, norms, language (with time)
– barrier to mobility of resources, especially human resources

• Rules, regulations, government support, etc. differ between

foreign and domestic companies

• The above factors are in addition to factors related to

geographic location
 Tradeoff in International Strategy
ADVANTAGES

• Increases product market size

– Economies of scale and scope, especially important in small domestic
market
– Magnifies economic rent by leveraging innovation to skim market,
especially important for short life cycle of innovation

• Entering less competitive market when return in domestic

market is poor

• Expanding business to reinvest surplus fund - when that is not

possible in domestic market due to market size or regulatory hurdles
 Tradeoff in International Strategy
ADVANTAGES (contd.)

• Learning
– about foreign market
– nuances of internationalizing

• Access to resources
– Availability e.g. technology, natural resources
– low cost e.g. labor
 Tradeoff in International Strategy
DISADVANTAGES

• Complexity is high
– difficult to manage
– cost of coordination may increase

• Liability of foreignness
– cost of learning
– cost of bureaucratic and statutory requirements for foreign firms
– lack of reputation

• Country risk – instability of national government, economic regulations,

foreign exchange rates, law and order, terrorism, war, etc.

• Institutional and cultural barriers of transfer of core

competencies
 Types of International Strategy
MULTIDOMESTIC
Strategic and operational decisions are decentralized and
customized for local requirements
Decentralization
• Autonomy of divisional managers – good local manager required
• Limited application of learning from one operation to another
• Difficulty of monitoring and control
• Difficulty in achieving economies of scope and scale – lower profitability

Corporate
Headquarter Customization
Easy to expand by catering to local needs –
suitable for achieving high growth

Div 1 Div 2 Div 3 Div 4 Div 5 Div 6 Div n

 Types of International Strategy
GLOBAL
Strategic and operational decisions are centralized and
standardized for leveraging competencies
Centralization
• Complex coordination of interdependent SBUs across different countries
• High scope of application of learning from one operation to another
• Easy to monitoring and control
• Easy to achieve economies of scope and scale operation – higher profitability

Corporate
Standardization
Headquarter
Difficult to cater to local needs –
low growth opportunities

Div 1 Div 2 Div 3 Div 4 Div 5 Div 6 Div n

 Types of International Strategy
MULTI REGIONAL
Strategic and operational decisions are decentralized and
customized for regional requirements, but within a region they
are centralized and standardized for leveraging regional
competencies
• Centralization and standardization in homogenous regions
– Achieve economies of scope and scale to a significant extent
Corporate
– Learning from one country may apply to another in the same region
Headquarter
• Decentralization and customization at the global level
– Catering to regional needs which is homogenous
Regionof1 expansion – suitableRegion
– High scope 2
for achieving Region
high growth k
strategies

• Hierarchy increases, span of control decreases

–Div
complexity
1 Div 2increases
Div 3cost of
Divcoordination
4 Div 5 Div 6 Div n
– Ease of control increases, especially at the regional level
 Types of International Strategy HQ

MULTI REGIONAL R1 R2 Rk

D1 D2 D3 Dn

• Centralization and standardization in homogenous regions

– Achieve economies of scope and scale to a significant extent
– Learning from one country may apply to another in the same region

• Decentralization and customization at the global level

– Catering to regional needs which is homogenous
– High scope of expansion – suitable for achieving high growth strategies

• Hierarchy increases, span of control decreases

– complexity increases cost of coordination
– Ease of control increases, especially at the regional level
 Types of International Strategy
TRANSNATIONAL
Trying to marry global efficiency with local responsiveness

Adapting the global competency at

different local levels
• extremely difficult to manage
Global coordination • requires deep knowledge
but local flexibility –
inherently conflicting High risk but
extremely high
Corporate returns
Headquarter

Div 1 Div 2 Div n

 Modes of International Strategy

Partner Licensing
Ownership/Governance

Joint Strategic Alliance

Acquisition
Export New subsidiary
Own
Domestic Foreign

Location of operation
 Modes of International Strategy
EXPORTING Partner
Joint

• Common beginning for many firms Own

Dom For

• Require marketing and distributing contracts with foreign

partners
– little control over these activities
– little information about customers

• Difficult to differentiate

• Logistics cost high, services though internet now possible

• Tariff barrier may be a hurdle

• Useful for geographically close countries

 Modes of International Strategy
Partner

LICENSING Joint
Own
Dom For

Foreign licensee purchases right to manufacturing and sell a

firm’s product in the host country or a set of countries by
paying a royalty

• Low resource commitment, low risk, low return

• Least costly form of international expansion

• Effective way to leveraging entrepreneur rents of innovation

 Modes of International Strategy
Partner
LICENSING (contd.)
Joint
Own
• Little control on manufacturing and marketing Dom For

• Knowledge transfer may create competition after IPR expiry

• IPR infringement

• Long term contract reduces option of changing modes.

• Strategic decision of licensing may reduce volume of sales

 Modes of International Strategy
Partner
STRATEGIC ALLIANCES Joint
Own
Dom For

• Sharing of committed resources (complementary), risk and

returns
• Effective way of accessing host country knowledge by
contributing core competencies to partner
• Scope of learning and developing core competency required to
do business in host countries
• Relationship between the partners is important to mutual
learning and performance
• Cultural barrier to learning and developing trust
• Difficulty in maintaining trust
 Modes of International Strategy
Partner
ACQUISITION Joint
Own
• Quick access to new market – rapid growth Dom For

• Complete de-jure control, cultural barriers to de-facto control

• High commitment of resources, high risk and returns (?)

• Expensive and may require debt financing

• Negotiations are complex for cross border acquisitions

• Difficulty in integrating due to differences in culture,

incentives, systems, etc.
• Knowledge erosion – exodus of managers after acquisitions
 Modes of International Strategy
GREENFIELD VENTURE (New wholly owner subsidiary)
Partner
• Complex process
Joint
Own
• Highest level of commitment, risk and returns
Dom For

• Complete control

• Retains knowledge/core competencies within firm – better

where IPR regime is weak

• Useful when core competencies can be leveraged without host

country related core competences
– cultural distance is less
– country risk is low
– previous experience of host country