International Business

Lecture 6
 The Uppsala
Internationalization Model
The Uppsala Model has been one of the most
discussed dynamic theories in Nordic School and
International Business Studies and has affected many
researches in the way to explain the process of
internationalization of companies
 Cont.

 They believed most existing theories at that time toned down

the problems of cultural differences and ignored the internal
foundations needed so that companies could handle
international activities.

 As a result Swedish researchers developed their own model as a

more independent model to explain the sequential steps in the
direction of increased foreign dedication

 The model was based on empirical observation from four

Swedish manufacturers and influenced by the works of Penrose
(1959), Cyert & March (1963), Aharoni (1966) Vernon (1966)
and others.
 Cont.

The Uppsala Internationalization Model distinguishes four

different steps of entering an international market, which
cannot be viewed independently of a company’s situation,
market and the market knowledge.

Step 1: No regular export activities (sporadic export).

Step 2: Export via independent representative (export mode).

Step 3: Establishment of a foreign sales subsidiary.

Step 4: Foreign production/manufacturing.

 Cont.

From the observation, they find out that companies

normally start their expansion in a psychic nearby
market. There, they have enhanced knowledge of the
market and more control of resources, thereafter
gradually when the companies have become more
experienced and acquired better resources, they expand
to the more distance market.

Secondly, most often companies entered a new market

through export before establishment of foreign sales
subsidiary or foreign production.
 Cont.

In their study, they refer to the interdependence of

market knowledge and market commitment and they
develop a matrix model to illustrate the positive
correlation between market knowledge and the
commitment decisions, as well to emphasize the
sequential development of market activities and its
positive correlation to market commitment. The core
explanation of the model is that increased market
knowledge will lead to increased market commitment,
and vice versa.
 Resource VS Market VS Knowledge Seeking

Scholars identified a series of motivations behind

firms’ internationalization decisions.

Resource- companies invest abroad in search of key

supplies like raw materials or low-cost production factors
like labor or capital. For example, Royal Dutch Shell and its
industry peers went abroad to find new oil reserves whilst
Nike or Acer set up production facilities in new locations
where labor could be sourced more economically.

Market- firms cross borders both to enhance sales and to

exploit economies of scale and scope.
 Cont.

Knowledge- Recent developments in technology have

eliminated some of the challenges posed by distance and
enabled companies to access resources and customers
remotely without requiring a local presence.

For instance, Shiseido only succeeded on the French

market after moving their complete product development
there and hiring a so-called ‘nose,’ an excellent French
perfume developer who understands the tastes of local
customers.
 Cont.

Additionally, studies show that companies from

emerging economies, which invest abroad, are mainly
motivated by the opportunity to acquire new
technologies and skills.
Global Corporate Structure and Control

The Integration-Responsiveness (IR) Framework

Apart from the important fact that companies often do not have a choice
but to adapt to local requirements if they want to do business in a
particular market, contingency theory suggests that there is no best way to
organize and manage a corporation, or to make decisions that will result in
optimal outcomes for all businesses.
Building on this thinking, several academics have developed models and
frameworks to support managers in establishing the right environment-
strategy- structure fit. Among the best known is the Integration-
Responsiveness (IR) framework developed by Prahalad and Doz and
extended by Bartlett and Ghoshal. The IR framework shows that the
tension between global integration and local responsiveness leads to
three basic international business strategies out of which a company can
select the one which best fits its context
The framework is based on managerial perceptions of a company’s
external forces. It suggests that managers who perceive that their
industry or business is pressured to globalize will maximize the central
coordination and integration of activities across national boundaries.

In contrast, if the pressures they perceive are mostly local, the

strategies will largely be tailored for each local market. Finally, when
environmental perceptions indicate a need to respond simultaneously
to both global integration and local responsiveness pressures,
management will adopt a ‘multifocal’ business strategy, emphasizing
the coordination of operations while maintaining a high level of
responsiveness to each local context.
 Integration –Responsive Framework
The IR framework can be used not only at the company level, but also
at an aggregate level of industries, or even at a functional or task
level within a single business. For instance, the Contracting and
Procurement (C&P) function at Shell is shaped by both globalization
and localization pressures.
By aggregating the global
demand for certain equipment
or services, the company
increases its buying power. On
the other hand, countries like
Nigeria or Qatar impose
rigorous requirements for oil
and gas companies to use local
labor and locally produced
resources. Therefore, at task
level, the sourcing is multifocal.
 Integration –Responsive Framework

As companies require different organizational horses to

manage superior performance in different
environmental courses, Bartlett and Ghoshal took the
Integration-Responsiveness framework a step further
and suggested organizational structures for the various
strategies that emerge from the intersection of the
forces for globalization and localization.

Specifically, they defined global, multinational,

international and transnational organizations
Extended Integration –Responsive Framework
 Global Company

Operation & Trading: Any company which is having operations

and trading in many countries around the world in called a
Global Company. Generally, the number of countries in these
case is quite high, around 15-20+ countries.
Investment: Global companies mostly have foreign direct
investment in some or all of the foreign countries where they
operate in.
Strategy: In most of the global companies , the organization
structure and key decision making functions have a
‘centralized’ approach- the major changes are taken from the
headquarter of the company. Major decisions can be-
amalgamation, new product launching etc.
 Global Company (Cont.)

Products/R&D:
Products development processes are generally
initiated and also completed by the Parent company
and then distributed to the subsidiary companies ar
other countries for further trading. Subsidiary
companies may take in product evolvement process
but the final development takes place at the
headquarter of the parent company’s country.

Example: ____________________________
 Global Company (Cont.)

Challenge:
As these companies have investments in many
countries, they face regulatory and legal issues in those
countries often, Also their companies follow uniform
product type across all countries so they miss the local
touch in it and this sometimes lowers the demand in
some countries.
 International Company

Operation & Trading: International companies are the

companies that sell the products in foreign countries by
exporting. These companies do not have their own
establishments in foreign countries.
Investment: International companies do not have any
foreign direct investment (FI) in the foreign countries
where they export to or import from their
products/services.
Strategy: As these companies do not have any foreign
set up or branches, the key decision making functions is
always taken from domestic country of the company.
 International Company (Cont.)

Products/R&D: Product development processes are

accomplished in the domestic country.

Example: ___________________________

Challenges: Legal, regulatory and customs issues are

the key bottlenecks for these companies. Also, in cases
where the taste of products in some of the countries
does not match, these company may run the risk of
failures.
 Multinational Company

Operation & Trading: Any company, which is having

operations and trading in two or more countries across
the globe is called as a Multinational Company.
Generally, the number of countries in this cases, would
be in the medium range- from two to ten.
Investment: May or may not have foreign direct
investment (FDI) in very few foreign countries where
the operate in.
Strategy: Multinational companies, mostly, have a
‘centralized’ organization structure and key decisions
making functions.
 Multinational Company (Cont.)

Products/R&D: Just like the global companies, in case of

multinational companies the products development
processes are generally taken up by the parent company
and then distributed to various subsidiary companies at
foreign countries for further trading.

Example: ____________________________

Challenges: In addition to the international legal issues,

these companies also face various IPR (intellectual
property rights) issues like product idea copying.
 Transnational Company

Operations & Trading: These type of companies can be

considered as a mixture of the global, multinational and
international companies. The structure is little complex
type and also versatile. These companies are pretty
flexible in term of operating across the globe by
adopting the local cultures and consumer behaviors and
the ultimate marketing strategy based on it.

Investment: Transnational companies mostly have

foreign direct investment (FD) in many of the foreign
countries where the operate in.
 Transnational Company (Cont.)

Strategy: Transnational companies prefer to have

‘decentralized’ organization structure and key decisions
making functions where in each of their international
establishments are responsible to take their own key
decision as suitable for the local region they are in.
Products/R&D: Here, subsidiary companies at different
countries are also given the rights to develop products on
their own based on the local needs and demands, though
the final approval for launching may come from parent
company. Their product often varies from country to
country in line with consumer preference and taste.
 Transnational Company (Cont.)

Example: ____________________________

Challenges: Due to varied organization structure and

culture, transnational companies mainly face internal
manpower issues and organizational problems.
 The Adaptation–Aggregation–Arbitrage Model
(Pankaj Ghemawat)

- Also Known as ‘AAA Triangle’.

 AAA Triangle Model

Adaptation seeks to boost revenues and market share by

maximizing a firm’s local relevance.

Aggregation attempts to deliver economies of scale by

creating regional or sometimes global operations, which
involve standardizing the offerings and grouping together
the development and production processes.

Arbitrage aims to exploit national or regional differences,

often by locating separate parts of the supply chain in
different places.
 Adaptation
These strategies increase market share and revenue by adapting
some components in a business model of a company such that it
is suitable to suffice local preferences and requirements. This is
the most widely used strategy among the three. Generally, to
penetrate into new customer base in a new market, the
organization tend to adapt the measures and practices which are
favored locally. This leads to easy acceptance by the customers. 

Example- McDonald's has included various items such as Paneer

Salsa Wrap, the Chicken Maharaja Mac, the Veg McCurry Pan to
suit Indian customers instead of hamburgers made of beefs, etc.
which are less preferred by Indian consumers. 
Examples: Disneyland making ‘Mulan’ a highlight in its Shanghai theme
park, Kitkat introducing matcha flavored chocolate bar in Japan, KFC
selling rice congee for breakfast in China.
Adaptation is the most commonly-used strategy. It is
especially crucial for companies whose products have
to cater to local consumers’ taste and preferences (e.g.
FMCG company, B2C service company, etc
 Aggregation

These strategies seek to achieve economies of

scale/scope by generally creating global efficiencies. These
usually involve standardization of the part of the value
proposition which could further lead to the assemblage of
production and development processes. To create
substantial cost advantage by centralizing purchasing of
raw materials, producing end products, etc. in few places
where the relative cost incurred in labor and other
resources is less, some organizations although globalized,
use to follow aggregation strategies instead of adaption.
The only avenue is not geographic aggregation for
generation of economies of scale or scope. 
An example of a company mastering this strategy is the Japanese
automotive giant – Toyota. Toyota’s production is concentrated in
Japan. FY2015, Toyota reported 8.9million units of cars produced
worldwide. Of these, almost 4.1million units are produced in
Japan. The huge scale of production in Japan allows Toyota to
enjoy lower cost, higher efficiency, and quality control. At the
same time, the concentration of facilities
makes implementation easier as Toyota continue pushing out
series of cost-saving initiatives.
 Arbitrage

These strategies neither include bridging the different markets nor

adapting the local demands. Rather these inculcate the strategy of
creation of global value by exploiting the difference between the
markets itself, usually by profiting by the margin of difference in the
separate supply chain’s parts in different places. One could buy
from a cheap market place and sell where the price is higher. The
bargaining power use to be an added advantage in such cases.
Sometimes, a particular place is famous for some products, concepts
and other entities. This fact could be leveraged and that particular
essence of particular place could be used to earn revenue by
setting the market where demand for such products exists. Thus, it
also includes Cultural (country-of-origin effects), Administrative
(taxes, regulations, security), Geographic (distances, climatic
differences) and Economic (differences in prices, resources and
knowledge) effects. 
Arbitrage focuses on ‘exploiting’ differences between locations
for the benefit of the whole organization. Production cost is the
most typical example – e.g. having factories in locations with
lower raw material and labor cost. This strategy typically
benefits labor intensive.

One of the most prominent examples is perhaps Apple

outsourcing manufacturing and assembly process to China
(mainly to Foxconn). In 2013, Forbes estimated that if
Apple brings back manufacturing to the US, it would incur
$4.2billion extra cost.
Example- Walmart use to sell products worldwide
which have been bought from China and earn
from the differences in the prices.
What approach is best for a company?

It is tempting to adopt all three approaches to enjoy the full

benefit. However, it is rarely achieved in reality. The inherent
conflicting nature of the three strategies and the amount of
resources required make it difficult to achieve a balance.

Companies who successfully adopt a combination of all

three often spend years in trial-and-error.
 EXAMPLE

P&G is a great example. P&G started its global

expansion with an adaptive-arbitrage strategy.
They focused extensively on locational R&D and
creating autonomous mini-P&G branches in each
location. Meanwhile, they outsourced a certain part of
the production process to cheaper locations.

Years later when this localization strategy produced too

much redundancy across regions, P&G added an
element of aggregation and created a matrix
organization structure to focus on creating synergy
across regional business units and product lines.
Companies should examine its own business
nature and strength before deciding the primary
strategy. After a directional overall strategy is
chosen, companies can then proceed to explore
tactics to execute the chosen strategy.