International Business Strategy: Challenges and Advantages

• International Business Strategy (IBS) involves additional costs and challenges
• Operating in a foreign market imposes these costs and challenges on firms compared to domestic firms

Why IBS is challenging:

• Liability of foreignness: additional costs & challenges for firms in foreign markets versus domestic
• Paradox of fit: fit that is strong with one competitive environment becomes a disadvantage in foreign markets

Location advantages and firm-specific advantages:

• Location advantages concern a home country's unique economy, politics, or culture
• Skilled labor, infrastructure, and natural resources can create location advantages
• Location-bound firm-specific advantages include competitive advantages strongly linked to the home country, making them hard to transfer
• Examples of location-bound firm-specific advantages include local suppliers, regulatory expertise, and brand loyalty
• Non-location-bound firm-specific advantages cover unique firm strengths that can be transferred across borders
• Proprietary technology and a strong brand recognition are examples of non-location-bound firm-specific advantages

3 Key Questions of IBS:

• Why?
• Adding value, volume (more customers)
• Decreasing costs by covering fixed costs with more units
• Differentiation
• Improving industry structure is achieved by reducing pressure from stakeholders
• Neutralizing risks through risk diversification
• Generating knowledge via increased replication
• Where?
• Understand local advantages via Porter's Diamond
• Porter’s Diamond (Diamond of National Advantage) framework includes:
• Factor conditions: Nation's position in factors of production (e.g., skilled labor, capital)
• Demand conditions: Nature of home-market demand
• Related and supporting industries: Presence/absence of internationally competitive suppliers in related industries
• Firm strategy, structure, and rivalry: How companies are created, organized, and managed

CAGE Distance:

• CAGE is a framework used to measure the distance between countries. It consists of:
• Cultural Distance: language, values, norms, traditions, demographics
• Administrative Distance: colonial ties, currency, institutions, political system
• Geographic Distance: Spatial proximity, borders, time zones, transportation
• Economic Distance: per capita income, labor costs, workforce, market size and growth

Articles: "The Competitive Advantage of Nations" - M. Porter

• Refers to the diamond framework above

Articles: "Why do firms go abroad? Strategies to create value globally" – Juan Alcácer

• Going global does not guarantee success
• Three global strategies for value creation:
• Deployment: replicating a successful home-market business model globally
• Development: expanding to gain new knowledge or capabilities
• Deeping: reducing costs by leveraging global economies of scale or offshoring
• Companies need to balance standardization with local responsiveness

Articles: "Distance still matters: the hard reality of global expansion" - Pankaj Ghemawat

• CAGE model

Key industry (De)Globalization Drivers:

• Cost drivers:

• Large country cost differentials

• Economies of scale & scope

• Favorable cross-border logistics

• Global supply chain networks

• High product development costs relative to market life

• Government drivers:

• Free trade, open economies

• Privatization & deregulation

• Trading blocks

• Compatible technical standards

• Common marketing regulation

• Market drivers:

• Convergence of needs/tastes

• Globalization of customers, distributors, and brands

• Global/transferable marketing

• Competitive drivers:

• Competitors operating globally

• Increased entry of new global competitors

• Increase in ownership by foreign acquirers

• Rise in global M&A and strategic alliances

• Multi-market competition

Entry Mode Strategies:

• Entry Options in a global & digital context gain added complexity and fragility and include:
• Export
• Alliances
• Licensing
• Franchising
• M&A
• Greenfield

5 Levers for ADDING Value

• Local adaptation
• Greater local appeal and fit through modifying existing business models
• Builds on adding volume, differentiating, neutralizing risks, and generating knowledge
• Global economies of scale
• Concentrating scale-sensitive activities
• Builds on adding volume, decreasing costs, and improving industry structure
• Global economies of scope
• Serving global customers with similar demands across markets
• Builds on adding volume, differentiating and improving industry structure
• Optimal locations for activities & resources
• Exploiting CAGE differences for arbitrage (costs, structure, skills, regulations, taxes, demand)
• Builds on decreasing costs, neutralizing risks, and generating knowledge.
• Global Knowledge transfer
• Develop superior resources/capabilities and leverage internationally
• Builds on all aspects of ADDING value

3 Key Choices:

• **
• Actors
• IQ vs EQ
• The triangle for success: the interface
• HQ staff as heavy traveler
• Expatriates as the bridge
• Local management as local Touch
• Local partner: Angels or Devils
• Could be key to success or failure
• Can accelerate your entry strategy You have to:
• Pay attention
• Respect
• Cultivate to harvest
• Put rules on paper like a prenuptial agreement
• Ethics
• Every new country brings new challenges
• Create internal rules
• Lead by example
• Include all stakeholders

Articles: "Converting Global Presence into Global Competitive Advantage"

• Global presence doesn't automatically create competitive advantage
• Expansion alone is not enough; firms must leverage their global footprint

Challenges in Global Strategy Execution:

• Localization vs standardization trade-offs: over-customization increases costs
• Risk of market misjudgment: poor adaptation can lead to failure
• Coordination complexity: balance between autonomy and centralization.

Fundamentals of Global Strategy: Understanding Globalization

• Firms gradually globalize, starting from exporting to full multinational operations

5 Stages of Industry and Business Globalization:

• Market entry: firms enter by exporting/sourcing
• Product specialization: shifting production to low-cost locations
• Value chain disaggregation: breaking down and relocating activities
• Value chain reengineering: modifying processes for efficiency
• Creation of new markets: expanding into emerging markets and adjusting strategies

Industry globalization factors (Drivers):

• Market drivers: customer demand convergence
• Cost drivers: economies of scale, labor cost advantages
• Competitive drivers: global rivalry pushing firms to expand
• Government drivers: trade policies, regulations and industry support

Subsidiary Role Typologies – Bartlett & Ghoshal Model:

• Not all subsidiaries play the same role in a multinational corporation
• Barlett & Ghoshal's proposed typology depends on:
• Strategic importance of the local market
• Subsidiary competence

Four Subsidiary Roles:

• Strategic leader (High importance, High competence)

• Subsidiaries co-develop global strategies with HQ

• Contributor (Low importance, High competence)

• Subsidiaries not in key market but develop unique innovations or expertise

• Implementer (Low importance, Low Competence)

• Most common role; subsidiaries execute corporate strategy with minimal autonomy

• Black hole (High importance, Low competence)

• A weak subsidiary in a crucial market; MNCs must either invest in its growth or exit

Global Integration vs. Local Responsiveness - Bartlett & Ghoshal’s Typology:

• MNCs balance global efficiency with local responsiveness

Four Types of Multinational Strategies:

• Multidomestic strategy (Low integration, High responsiveness)
• Each subsidiary operates independently and adapts products/services to local markets
• Global strategy (High integration, Low responsiveness)
• Standardized products, centralized control and cost-focused efficiency
• Transnational strategy (High integration, High responsiveness)
• Tries to achieve both global scale and local adaption
• International strategy (Low integration, Low responsiveness)
• Exports products from home country with minimal changes; HQ controls most operations

Organizational Structure: Evolutionary Paths:

International Division Structure:

• Most used in early stages of internationalization
• Dominant home market with its own structure
• The international division draws on products and/or services from the home market

Area (geographic) Division Structure:

• Leverages benefits of local adaption/ responsiveness
• Gives priority to local market
• Prone to activity and cost duplication
• Limits economies of global scale and scope

Global Product Division Structure:

• Product/service divisions managed globally
• To maximize global economies of scale and scope
• Requires sophisticated global coordination
• Reduced sensitivity to local differences, limited local responsiveness

Global Matrix Structure:

• Aim to combine benefits of local responsiveness and global integration
• Managers report both to product and country/area manager
• Difficult in keeping the balance between the different reporting lines
• Decision-making becomes slow and fraught with conflict due to gaps or overlaps in responsibilities

Front-end / Back-end Structure:

• Structure is increasingly in useBack end of value chain is globally integrated
• Front end focus on local responsiveness
• Requires excellent linking mechanisms across the front and back end of organizations

Articles: "Emerging Markets: Look Before You Leap"

Emerging markets are not uniform

• Institutional voids define emerging markets
• These are gaps in key market supporting institutions that businesses must address 4 types of institutional voids:
• Credibility enhancers, offer independent validations (auditors, rating agencies)
• Informational analyzers
• Media, analysts, and databases that help companies make informed decisions
• Aggregators & distributors, retail networks, banks, and logistics companies that facilitate market access
• Transaction facilitators, payment systems, financial institutions, and legal frameworks that enable secure transactions

Why Institutions Matter and Institutional voids matter:

• Adapt business model to fill these voids
• Emerging markets require a customized strategy
• External factors affect how markets work
• Government policies, historical factors, and cultural aspects

Articles: "What Every CEO Needs to Know About Nonmarket Strategy":

• Nonmarket strategy = market strategy, helping to address regulatory risks, social campaigns, and political interference

• A well-crafted non-market strategy creates competitive advantages

• Companies must shape their external environment, not just react to events

• Business operates in two environments:

• Market environment

• Competitors, customers, suppliers, and traditional business operations

• Nonmarket environment

• Government regulations, activism, public perception, and social issues

The (IA)³ Framework:

• Issue
• Identify key political/social problems affecting business
• Actors
• Determine stakeholders involved
• Interests (understand what each actor wants)
• Arena (Identify where these battles are fought)
• Information (Leverage data to shape perceptions and influence decisions)
• Assets (Use reputation, relationships, and coalitions to win non-market battles)

Blue Ocean Strategy Create, don't compete

• Do not aim to beat competition, make it unnecessary
• Create a bigger pie rather than fight for a slice of an existing pie
• Value innovate, create a unique value proposition
• Link innovation to value
• Innovation is not enough to make the competition unnecessary
• Create win-wins: Create businesses that make you win, the buyer win, and the community win
• Reduce costs & enhance differentiation:
• Minimize costs and maximize differentiation when creating new business

Fight in Red Oceans vs Create a Blue Ocean:

• Strive to beat the competition vs Make competition irrelevant
• Capture share of existing markets vs Make competition irrelevant
• Accept the rules of the game vs Set new rules of the game
• Find solutions to existing problems vs Define and solve new problems
• Serve customers of an industry vs Bring noncustomers into an industry
• Win at somebody else's expense Make competition irrelevant

Three Characteristics of a Successful Blue Ocean Strategy:

• Focus
• A clear, unique strategy.
• Divergence
• Differentiation from competitors
• Compelling Tagline
• Easy to communicate the value proposition

International Business Strategy (IBS) presents unique challenges and costs for firms. These challenges include the liability of foreignness and the paradox of fit. Location and firm-specific advantages also play a key role in international business strategy.