Global Business Environment and International

Strategy MOD007191

Lecture 6
Internationalization Strategy

Dr Andre Samuel
[email protected]
Why Go Global ?

• Saturation of local market

• Inability to adapt to the local market / product suitability
• Too much competition
• Low margin
• Availability of better resources at global locations
• To develop a new market
• To launch a completely new product
• To avoid stagnation
The Big Questions

• Which country should I go to ?

• Is it just one country or multiple countries ?

• Should the countries have some commonalities ?

• What is the strategy for Entering Foreign

Markets?
Why Amazon's Marketplace Failed In China

https://youtu.be/g3ddcu-LLWI?si=mXf0vovK1YiIBl9-
From Local to Global Strategy
Local Vs Global
Market Pros Cons
Local • Known Market • Saturation of potential
• Established • Stagnation in growth
brand/footprint/process

Global • Opportunity to develop new • Unknown Market

market • To be established afresh(Cost
• Business growth intensive)
• New product development
opportunities
Multinational Corporations
• An important aspect of • Seeking to maximize profits
globalization has been the on a global rather than
market dominance of the national level only
multinational corporation
(MNC).

• Initially, characterized by the

• A company is called a production and distribution
multinational if it functions of a standardized product
in its country of origin and or service on a world-wide
has a branch in at least one basis
foreign country
So what is a MNC?
• “A firm that engages in • A multinational firm is one
Foreign Direct Investment that operates and is
(FDI) by directly controlling managed from bases in a
and managing value adding number of countries.
activities in other countries”
(Peng 2022, p.4)
• Ownership of assets in a
foreign country is
considered a defining
feature
So How do they do this?
• Offshore Production

• Subsidiaries

• Mergers and Acquisition

https://www.youtube.com/watch?v=FCojpFwWuG0
T&C Garments Factory Egypt (Levi's)

https://www.youtube.com/watch?v=C1j9ipTFjmw
Why go Global?
• Changes in the global economy

• There is a shift away from multinationals using wholly owned

subsidiaries to a greater involvement of, joint ventures and
outsourcing using contract manufacturers

• And Vertical Specialization

Vertical Specialization leads to The Global
Factory
• A global factory relates to the disaggregation of the production
process across a number of different firms in different
countries.

• i.e. firms are locating different parts of an increasingly fragmented

production process in different countries

• Based on a number of factors including not only access to raw

materials and nearness to markets but also the attractiveness of
taxation regimes, other regulatory controls, and, of course, the
level of wages
• To further understand this shift to Global Value chains, we
must delve into the Value Chain Model

• Remember, a MNC engages in Foreign Direct Investment

(FDI) by directly controlling and managing value adding
activities in other countries” (Peng 2022, p.4)
Modules/Units of Business Operation
• Resourcing
• Production
• Haulage and
Storage(Distribution)
• Marketing Resourcing Production Distribution Marketing Sales/Service

• Sales
• Service
Porter, M.E., 1985 Competitive Advantage, The
Free Press
• “Competitive advantage cannot be understood by looking at
a firm as a whole
• It stems from the many discrete activities a firm performs in
designing, producing, marketing, delivering, and supporting
its product.
• Each of these activities can contribute to a firm’s relative cost
position and create a basis for differentiation”
Value Chain Model

Competitive advantage is derived from the way in which firms organize and perform
these activities within the value chain.
Primary Activities
• Inbound logistics
• Receiving raw materials and/or partly finished goods; storing them;
and transferring them to the manufacturing section
• Operations
• Producing finished goods from raw materials and/or partly finished
goods
• Outbound logistics
• Storing finished goods and then distributing them to customers
• Marketing and sales
• Promoting the firm’s products; soliciting orders from prospective
customers
• After-sales service
• Maintaining the value of the product to the customer after it has been
delivered
Support Activities

• Firm infrastructure
• General management; accounting and finance; legal
department; health and safety; etc.
• Human Resource Management
• Recruiting; training and developing; appraising; career
planning; etc.
• Technology development
• Research and development, relating to both products and
processes
• Procurement
• Acquiring the goods and services that the firm needs in order
to operate effectively; applicable to both primary and support
activities
Global Value Chain (GVC)
• Represents the build up of value along a supply chain made
up of a number of international partners

M.W. Hansen et al. / Journal of World Business 44 (2009) 121–130

Apple iPhone’s GVC
What are Global Value Chains and why they matter?

https://www.youtube.com/watch?v=_sY8nbtDTTY
What’s the idea?
• We can see from the value chain of the iPhone that the key
value added activities are kept in house by Apple and
include R&D, design, branding and marketing

• The least value added component is manufacture, the

assembly of the parts, which is outsourced either to Taiwan
or China, although most iPhones are now assembled in China

• The assembly process represents only about 1 per cent of

the cost of the iPhone.
• The MNC retains significant control of the entire process.

• The MNC controls less tangible, high value activities such as

design, marketing, branding and management skills and
consequently makes it difficult for local firms to compete
since these activities are more difficult to copy
Nutella Global Value Chain

https://www.thegrocer.co.uk/how-nutella-is-made-study-reveals-global-supply-chain/352954.article
What is a strategy ?
• A path from A to B ?
• A method to reach a goal ?
• A set of actions ?
• A series of planning and execution ?
• Are there multiple options from A to B ?
Strategy Building

Internal Analysis
Resources, Capabilities,
Competences-
Strengths and Weaknesses
Goal Strategy
External Analysis
Industry and Environment –
Opportunities and Threats
 Managing your business strategy
Costs
Benefits Corruption
Size of the Economy Legal Costs
Likely Economic Growth Lack of Infrastructure
Overall
Attractiveness

Risks
Political Risks: Social Unrest / Anti-Business Trends
Economic Risks: Mismanagement of Economy
Legal Risks: Failure to Safeguard Basic Rights
27
How to Enter-
Entry Modes
Risk Management : Progress slowly
Strategic Options - Operations
Low Risk Medium Risk
Indirect merchandise Direct merchandise exports
(retailers)

30
 Different strategic paths to mitigate risk
Low/Med Risk
• Licensing and franchising- agreement to allow a partner to
manufacture or sell abroad.
• Joint ventures- collaborative arrangements or alliances in which an
equity investment is made with a partner.
• Strategic alliances- companies work together, but the agreement
is critical to at least one partner.

High Risk
Entry Mode
Examples
Strategic choices (options)
• Strategic directions (development, penetration,
diversification)?

• Internationalisation/globalisation?
 Generic strategies

• Porter introduced the term ‘Generic Strategy’ to mean

basic types of competitive strategy that hold across
many kinds of business situations.
• Competitive strategy is concerned with how a strategic
business unit achieves competitive advantage in its
domain of activity.
• Competitive advantage is about how an SBU creates
value for its users both greater than the costs of
supplying them and superior to that of rival SBUs.
 Three generic strategies

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior
Performance
by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved
Cost-leadership

Cost-leadership strategy • Example:

involves becoming the
lowest-cost organisation in a
domain of activity. • Ryanair focuses on minimizing
operational costs by using
Four key cost drivers that can secondary airports, which have
help deliver cost leadership: lower landing fees.
• Lower input costs.
• Economies of scale. • They operate a single type of
aircraft (Boeing 737), which
• Experience. reduces maintenance and
• Product process and design. training costs.
Differentiation strategies
Differentiation involves • Example:
uniqueness along some • Emirates
dimension that is sufficiently
valued by customers to allow a • Premium Customer Experience:
price premium. Emirates is known for its luxurious
in-flight experience, including
spacious seating, gourmet meals,
Two key issues: and high-quality entertainment
systems.
• The strategic customer on • Innovative Amenities: Features
whose needs the differentiation like private suites in First Class,
is based. on-board lounges, and showers
• Key competitors – who are the on their A380 aircraft set them
rivals and who may become a apart from competitors.
rival.
Differentiation in the US airline industry

Mapping differentiation in the US airline industry

Source: Simplified from Figure 1, in D. Gursoy, M. Chen and H. Kim (2005), ‘The US airlines relative positioning’, Tourism Management, 26, 5, 57–67: p. 62
Focus strategies
• Example:
A focus strategy targets a
• Virgin Atlantic
narrow segment of domain of
an activity and tailors its
• Target Market: Virgin Atlantic focuses on
products or services to the long-haul flights, particularly between
needs of that specific the UK and destinations like the US,
targeting business and premium leisure
segment to the exclusion of travelers.
others. • Unique Customer Experience: The
airline differentiates itself with stylish
Two types of focus strategy: branding, innovative amenities like in-
flight bars, mood lighting, and high-
• cost-focus strategy quality in-flight entertainment. These
features appeal to a specific segment
• differentiation focus strategy that values a premium travel
experience.
Summary- Three Generic Competitive Strategies

Strategy as Plan Product Market Key Functional Areas

Differentiation Segmentation

Cost leadership Low (mainly by price) Low (mass market) Manufacturing, services,
and logistics

Differentiation High (mainly by High (many market Research and development

uniqueness) segments) (R&D), marketing, and sales

Focus Extremely high Low (one or a few R&D, marketing, and sales
segments)
Strategic Options – Product/Service
• Global Standardisation
• Localisation
• International
• Transnational
Types of International Strategies
Organisational Focus

1. Cost reductions
• Forces the firm to lower unit costs

2. Being locally responsive

• Requires the firm to adapt its product to meet local
demands in each market but, this strategy can raise costs

3. Being differentiable
• By offering something unique – requires the the firm to be
innovative and resourceful
Pressures for Cost Reductions

Pressures for cost reductions are greatest

1. In industries producing commodity type products that fill universal
needs (needs that exist when the tastes and preferences of
consumers in different nations are similar if not identical) where price
is the main competitive weapon
2. When major competitors operate on low-cost-high volume model
3. Where there is persistent excess capacity
4. Where consumers are powerful and face low switching costs
Pressures for Local Responsiveness

1. Differences in consumer tastes and preferences ( Source location

and destination location)
• When consumer tastes and preferences differ significantly between
countries
2. Differences in traditional practices and infrastructure
• When there are significant differences in infrastructure and/or
traditional practices between countries
3. Differences in PESTEL factors
• Any difference in any or more of the elements may initiate the need
for local responsiveness – Classic example : ( Car steering on the
right-hand side in UK – Legal/Regulatory element)
Strategic Options 1- Global standardization

• Increase profitability and profit growth by cost reductions

• Depends on economy of scale
• Aims to pursue a low-cost strategy on a global scale

• This strategy works when there are strong pressures for cost
reductions and demands for local responsiveness are minimal
Examples of Global Standardization
• Microsoft, for example, offers the same software programs
around the world but adjusts the programs to match local
languages.
• Procter & Gamble attempts to gain efficiency by creating
global brands whenever possible. Global strategies also can
be very effective for firms whose product or service is largely
hidden from the customer’s view, such as silicon chip maker
Intel.
• Lenovo also uses this strategy. For such firms, variance in
local preferences is not very important, but pricing is.
Strategic Options 2- Localization
• Increase profitability by • Netflix customizes the
customizing products/services programming that is shown on its
in response to the channels within dozens of
expectation/demand of different countries, including New
local markets Zealand, Portugal, Pakistan, and
India.
• This strategy works when there
are substantial differences • Case:
across nations/markets as • Netflix bets big on Asia as it sees
regards to consumer preferences ‘significant potential’ in these
/ choices / expectations and yet markets

• Cost focus is not a primary

requirement.
Example of Localization
• Heinz adapts its products to
match local preferences.
• India market- will not eat
garlic and onion
• Heinz offers a version of its
signature ketchup that does
not include these two
ingredients.
Strategic Options 3- International
• Take products first produced for the domestic market and sell them
internationally with only minimal local customization
• This strategy works when there are not much requirement for cost
focus and local responsiveness.
• Generally true for globally recognized brands
• However some localisation may still be required based on the
legal/infrastructural requirement of the country (remember PESTEL) –
Example : Changing the charging plug according to the country for an
electronic item
Examples of International
• Belgium chocolate exporters do not lower their price when
exporting to the American market to compete with Hershey’s,
nor do they adapt their product to American tastes.
• Starbucks and Rolex watches are other examples of firms
pursuing the international strategy.
Strategic Options 4- Transnational

• A blend of low costs through location economies, economies of

scale, and learning effects
• Differentiation of products across geographic markets

• Response to local variations

• Adopts to multidirectional flow of skills between different locations in the firm’s

global network

• This strategy works when both cost pressures and pressures for local
responsiveness are intense
Transnational Examples
• Large fast-food chains such as McDonald’s and Kentucky
Fried Chicken (KFC) rely on the same brand names and the
same core menu items around the world.
• These firms make some concessions to local tastes too.
• In France, for example, wine can be purchased at
McDonald’s. This approach makes sense for McDonald’s
because wine is a central element of French diets.
• In Saudi Arabia, McDonalds serves a McArabia Chicken
sandwich, and its breakfast menu features no pork products
like ham, bacon, or sausage.
Strategic Decision – While entering a market
• Brownfield Investment- Acquisition of existing
firm.
• Greenfield Investment- Setting up entirely new
facilities.
• Foreign direct investment (FDI)- shift of money
capital but using local resources in host country &
investor takes a controlling interest in foreign
company.
FDI – A large scale operation for MNCs
Foreign direct investment (FDI):
• Greater market access.
• Search for lower production costs- offshoring for lower
labour costs e.g. software industry in India.
• Quest for natural resources & other assets e.g. Shell,
Exxon.
• Competition from developing country MNCs – Tata taking
over European Steel firm- Corus.