Lecture Notes : IBM UNIT – III

Staff Name : D Anuradha INTERNATIONAL STRATEGIC MANAGEMENT

STRATEGY OF THE FIRM

A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm. For

most of the firms, the preeminent goal is to maixmise the value of the firm for its owners, its

shareholders. To maximize the value of a firm, managers must pursue strategies that increase the

profitability of the enterprise and its rate of profit growth over time.

Profitability can be defined as the rate of return that the firm makes on its invested capital (ROIC),

which is calculated by dividing the net profits of the firm by total invested capital.

Profit Growth is measured by the percentage increase in net profits over time.

Higher profitability and higher rate of profit growth will increase the value of an enterprise and thus

the returns garnered by its owners, the shareholders. Managers can increase the firm’s profit by

expanding internationally.

STRATEGIC ALLIANCE

Definition – “Strategic Alliances are cooperative agreements between the firms that go beyond normal

company to company dealings.

Types

1. Non-equity Alliances

2. Equity Alliances

3. Joint Ventures

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Enterprise Valuation

Profit Growth

Enter New Markets

Add Value & Raise Prices

Profitability

Sell more in existing markets

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Reduce Costs

1. Non-Equity Alliance - In non-equity alliance cooperating firms agree to work together to carry on

activities but they do not take equity position in each other or form an independent organisation to

manage their cooperative efforts. E.g – Supply Agreement , Distribution Agreement

2 .Equity Alliance – In an equity alliance cooperating firms supplement contracts with equity holding

in alliance patterns.

3. Joint Venture – In Joint Venture cooperating firms create a legally independent firm in which they

invest and share profits,

Benefits of Strategic Alliance

1. It can help in cost reduction

2. It helps to access complementary skills

3. To access capital and grants

4. In increasing bargaining power

5. It helps in improving performance and efficiency.

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Strategic Alliances

Non-Equity AllianceCo-operation between firm is managed directly through contracts, without cross-equity holdings or an independent firm being created

Joint VentureCooperating firms form an independent firm in which they invest. Profits from this independent firm compensate partners forthis investment

Equity AllianceCooperative contracts are supplemented by equity investments by one partner in the other partner. Sometimes these investments are reciprocated.

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Pitfalls of Strategic Alliance

a. Adverse Selection – The major problem with alliance is the adverse selection of partners. Potential

cooperative partners may misinterpret the skills, abilities of the resources and may promise to bring to

the alliance certain resources that is not under control.

b. Moral Hazard – Partners in an alliance may possess resources and capabilities of high quality and

of considerable value but fail to make them available to alliance partners. In this way, the less

qualified engineers effectively transfer wealth from other alliance partners to their own firm.

c. Hold Up – A hold up may take place even without an adverse selection not moral hazard occurring.

Once a strategic alliance has been formed, partners may make investments that have value only in the

context of that alliance and in no other activities.

d. Access to Information – Access to information is another drawback of strategic alliance. For

collaboration to work effectively, one alliance partner may have to provide the other with information

it would prefer to keep secret. It is difficult to identify information need ahead of time. Therefore, a

firm may enter into an agreement not anticipating the need to share certain information.

e. Distribution of Earnings – As the partner share risks and costs, they also share profits. There are

other financial considerations that can cause conflict.

f. Potential Loss of Autonomy – Loss of autonomy is another potential drawback of a strategic

alliance. It was for this reason that the late Dhirubhai Ambani never countenanced the idea of an

alliance. He bought technology for his PFY plant at Patalaganga from DuPont but refused their equity

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Strategic Alliance

Moral HazardAdverse Selection

Hold Up

Loss of Autonomy

Access to Information

Changing Circumstances

Distribution of Earnings

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participation. Ambani did not take partners because he could never play second fiddle. Just as firms,

share profits and risk, they also share control, thereby limiting what each can . Most attempts to

introduce new products or services change the way the alliance does business.

g. Changing Circumstances – Changing circumstances may also affect the viability of a strategic

alliance. The economic conditions that motivated the cooperative arrangement may no longer exist, or

technological advances may render the alliance obsolete.

Scope of Strategic Alliances

An alliance may be Comprehensive that is the one which the partner participate in all facets of

conducting business. An alliance may have a more narrowly defined focus concentrating on any

element of the business such a R& D. These latter alliances are called Functional Alliances.

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Partner 1

Partner 1

R&D PRODMKTGFIN R&DFINMKTGPROD

Production Strategic Alliance

Marketing Strategic Alliance

Marketing Strategic Alliance

Marketing Strategic Alliance

Marketing Strategic Alliance

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a .Production Alliance- It is a functional alliance in which two or more firms join, each manufacturing

products or providing services in a shared or common facility.

b. Marketing Alliance – It is a functional alliance in which two or more firms share marketing

services or expertise

c. Financial Alliance – It is a collaborative arrangement of firms that wish to reduce the financial

risks associated with a project.

d. R&D Alliance – The partners agree to undertake joint research to develop new products or services.

STANDARDISATION VS DIFFERENTIATION (ADAPTATION)

Standardisation & Differentiation –. Some products can be sold anywhere in the world with little or

no modification. Other products need to be modified or adapted and sold according to needs of

markets.

Factors Encouraging Standardisation

1. High Cost f Adaptation – Adaptation to suit local needs may add to cost which is sure to weaken

the competitive advantage of a firm.

2. Industrial Products – Industrial products tend to be more standardized that consumer goods. Even

when industrial goods are modified, the changes are likely to be minor – an adaptation of the electric

voltage or the use of metric measures.

3. Convergence and Similar Taste – Another reason for standardisation is the convergence and similar

taste in diverse markets. As countries attain economic development, their consumption patterns are

likely to converge.

4. Predominant Use In Urban Environment – It has been observed that products targeted at urban

markets in developing countries tend to be similar to those marketed in developed countries. Products

targeted at semi-urban markets require more changes and those targeted for national markets in

developing countries need more adaptation to accommodate the requirements of the poorer population.

5. Economies in Marketing – High production volumes, is made possible through standardisation,

result in economies of scale in manufacturing.

FACTORS ENCOURAGING ADAPTATION (DIFFERENTIATION)

A number of factors force an MNC to resort to product adaptation. Modifying products need to meet

local needs tends to raise sales revenue. The specific reasons for product adaptation is :

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1. Differences in Technical Standards – Each country has its own technical specifications and a given

product should meet these standards if it were to be marketed there.

2. Consumer and Personal Use Products – A firm marketing consumer or personal use products has

no choice but to adapt its offering to suit local needs e.g. McDonald’s portions of the menu are the

same throughout the world, but some items are designed specifically to suit local tastes.

3. Variation in Consumer Needs and Differing use Conditions – Although a given product fulfills a

similar need in different countries, the conditions under which the product is used may vary.

4. Variations in Ability to Buy – Income levels differ from country to country. This affects not only

the demand for consumer durables but also for inexpensive consumer goods. Product features may

have to be adapted to make the products affordable to lower income people.

5. Fragmented Independent National Subsidiaries - Some firms have foreign operations that predate

World War II. Because of the economic rational prevailing at that time, these subsidiaries were largely

self-contained units. Many of them developed products for their markets without regard to

international product uniformity within the company.

6. Cultural Differences – Culture necessitates adaptation of products. Culture influences purchasing

decisions made on the basis of style or aesthetics. Cosmetics and other beauty aids are good examples.

Cosmetics that sell well in the US may not be acceptable to Indian Women. So also shampoos and

deodorants, which may have strong appeal in Europe, but fail to attract customers in the US.

7. Influence of Government – The government of a land may prohibit the import of a product or its

local manufacturing. Conversely, the product may be required to be locally manufactured and not

imported.

8. Trade-off between Standardisation and Adaptation – Standardisation is as unavoidable as

adaptation. Cost savings from standardisation outweigh the disadvantages of not adopting to meet

customers precise requirements. At the same time, the benefits from customer satisfaction, because of

adaptation ,are well understood by firms.

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STRATEGIC OPTIONS

Low Pressures for Local Responsiveness High

i) Global Standardisation Strategy – A firm that pursue a global Standardisation strategy focus on

increasing profitability and profit growth by reaping the cost reductions that come from economies of

scale, learning effects and location economies; their strategy is to pursue a lost-cost strategy on a

global scale.

This strategy makes sense hen there are strong pressures for cost reduction and demand for local

responsiveness are minimal. E.g. Intel, Texas, Motorola all pursue a global standardisation

ii) Localisation Strategy – It focuses on increasing profitability by customizing the firm’s goods or

services so that they provide a good provide good match to tastes and preferences in different national

markets. Localisation is most appropriate when there are substantial differences across nations with

regard to consumer tastes and preferences and where cost pressures are not too intense.

iii) Transnational Strategy – A firms that pursue a transnational strategy are trying to simultaneously

achieve lost costs through location, economies of scale and learning effects; differentiate their product

offering across geographic markets to account for local differences; and foster a multidirectional flow

of skills between different subsidiaries in the firm’s global network of operations.

iv) International Strategy – Many of the enterprise pursue international strategy which means, they

the products first produced for their domestic market and selling them internationally with only

minimal local customization.

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Global Standardisation

Strategy

International Strategy

Transnational Strategy

Localization Strategy

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GLOBAL PORTFOLIO MANAGEMENT

If the investor has only a sort of property interest in investing the capital in buying equities, bonds or

other securities abroad, it is referred to as Portfolio Investment or Management. In case Portfolio

investment, the investor uses his capital in order to get a return on it, but has no much control over the

use of the capital. There are mainly two routes of Portfolio Investment in India viz.

Foreign Institutional Investors ( FIIs) – Through Mutual Funds

Global Depositary Receipts (GDRs)

American Depositary Receipts (ADRs)

Foreign Currency Convertible Bonds (FCCBs)

GDR / ADR and FCCB are instruments issued by Indian companies in the foreign markets for

mobilizing foreign capital by facilitating portfolio investment by foreigners in Indian securities.

GLOBAL ENTRY STRATEGIES / FORMS OF INTERNATIONAL BUSINESS

The decision of how to enter a foreign market can have a significant impact on the results. Expansion

into foreign markets can be achieved via the following.

i) Exporting – Direct , Indirect

ii) Licensing

iii) Franchising

iv) Turnkey Projects

v) Wholly Owned Subsidiaries

vi) Joint Venture

vii) Strategic Alliance

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Foreign Investment

Direct Investment

Wholly Owned Subsidiary

AcquisitionJoint Venture

Investment I GDRs, ADRs, FCCBs, etc.

Investment by FIIs

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I) EXPORTING - Exporting is the process of selling of goods and services produced in one country

to other countries

Types : a. Direct Exporting , b. Indirect Exporting

a. Direct exports - Direct exports represent the most basic mode of exporting, capitalizing on

economies of scale in production concentrated in the home country and affording better control over

distribution.

b. Indirect exports - Indirect exports is the process of exporting through domestically based export

intermediaries. The exporter has no control over its products in the foreign market.

Types of Indirect Exports:-

i) Export trading companies (ETCs),

ii) Export management companies (EMCs),

iii) Export merchants - wholesale companies that buy unpackaged products from

suppliers/manufacturers for resale overseas under their own brand names

II ) LICENSING - An international licensing agreement allows foreign firms, either exclusively or

non-exclusively to manufacture a proprietor’s product for a fixed term in a specific market.

III) FRANCHISING - The Franchising system can be defined as: “A system in which semi-

independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in

return for the right to become identified with its trademark, to sell its products or services, and often to

use its business format and system

IV)TURNKEY PROJECTS - A turnkey project refers to a project in which clients pay contractors to

design and construct new facilities and train personnel.

V) WHOLLY OWNED SUBSIDIARIES (WOS) - A wholly owned subsidiary includes two types

of strategies: Greenfield investment and Acquisitions. Greenfield investment and acquisition

include both advantages and disadvantages. To decide which entry modes to use is depending on

situations.

Greenfield investment is high risk due to the costs of establishing a new business in a new country.

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Acquisition has become a popular mode of entering foreign markets mainly due to its quick access

VI) JOINT VENTURE - There are five common objectives in a joint venture: market entry,

risk/reward sharing, technology sharing and joint product development, and conforming to

government regulations.

VII) STRATEGIC ALLIANCE - A Strategic Alliance is a term used to describe a variety of

cooperative agreements between different firms, such as shared research, formal joint ventures, or

minority equity participation

Comparison of Foreign Market Entry Modes

Mode Advantages Disadvantages

ExportingMinimizes risk and investment. Speed of entry Maximizes scale; uses existing facilities.

Trade barriers & tariffs add to costs. Transport costs Limits access to local information Company viewed as an outsider

Licensing

Minimizes risk and investment. Speed of entry Able to circumvent trade barriers High ROI

Lack of control over use of assets. Licensee may become competitor. Knowledge spillovers License period is limited

Joint Ventures

Overcomes ownership restrictions and cultural distance Combines resources of 2 companies. Potential for learning Viewed as insider Less investment required

Difficult to manage Dilution of control Greater risk than exporting a & licensing Knowledge spillovers Partner may become a competitor.

Direct Investment

Greater knowledge of local market Can better apply specialized skills Minimizes knowledge spillover Can be viewed as an insider

Higher risk than other modes Requires more resources and commitment May be difficult to manage the local resources.

ORGANIZATIONAL ISSUES OF INTERNATIONAL BUSINESS

1. Political and legal differences – The political and legal environment of foreign markets is different

from that of the domestic market. The complexity generally increases as the number of countries in

which a company does business increases. Political and legal environment is not exactly the same in

all the states of India.

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2. Cultural differences – Cultural differences are one of the most difficult problems in international

marketing. Many domestic markets ,however are also not free from cultural diversities.

3. Economic differences – The economic environment may vary from country to country.

4. Differences in the currency unit – The currency unit varies from nation to nation. This may

sometimes cause problems of currency convertibility, besides the problems of exchange rate

fluctuations.

5. Differences in the language – An international marketer often encounters problems arising out of

differences in the language. Even when the same language is used in different countries, the same

words or terms may have different meaning or connotations.

6. Differences in the marketing structure – The availability and nature of the marketing facilities

available in different counties may vary widely.

7. Trade and investment restrictions – Trade and investment restrictions are very important

problems in international business.

8. High costs of distance – When the markets are far removed by distance, the transport cost becomes

high and the time required for effecting the delivery tends to become longer. Distance tends to increase

certain other costs also.

9. Differences in business practices – Trade and other business practices and customs may differ

between markets.

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PROBLEMS IN INTERNATIONAL BUSINESS

ORGANISATION STRUCTURE

Organisation structure can be seen in 3 dimensions

i) Vertical Differentiation ( Decision-making responsibilities within a structure)

ii) Horizontal Differentiation (Formal division of the organisation into subunits)

i) Vertical Differentiation – A vertical differentiation determines where in its hierarchy the decision-

making power is concentrated. It deals of Centralized and Decentralized Decision-making.

Merits of Centralisation

1. It facilitates co-ordination - It ensures smooth flow of products from one production process to

another.

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MNC

Frustration & Antipathy

Imperialism

Inequities

Interference with Economic Objectives

Environmental Degradation

Social Disruption

TechnologyLoss of Sovereignty

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2. It ensures that the decisions are consistent with Organisational Objectives – When decisions are

decentralized to lower-level managers, those managers may make decisions at variance with top

management goals

3. Power and Authority is Concentrated in one individual – Centralisation can give top level

managers the means to bring about needed organizational changes.

4. It ignores the duplication of activities- Duplication occurs in decentralized organisation when

similar activities are carried on by various subunits within the organisation

Merits of Decentralisation

1. When top management is overburdened and the decision-making authority is centralized and this

can result in poor decisions.

2. The motivational research favours decentralisation. Behavioural scientists proved that employees

feel a greater degree of freedom when they have more work to do

3. It facilitates more flexibility – More rapid decisions can be taken as the decisions do not have to

be referred up to the hierarchy unless they are exceptional in nature.

4. It ensures better decisions – In a decentralized structure, decisions are made closer to the spot by

individuals.

5. It increases Control – Decentralisation can be used to establish relatively self controlled

performance.

2. Horizontal Differentiation - It is concerned with how the firm decides to divide itself into

subunits. The decisions is normally made on the basis of function, type of business, or geographical

area.

CONTROLLING OF INTERNATIONAL BUSINESS – APPROACHES TO CONTROL

Objectives of Control in Organisation

A good or effective control system in a multinational enterprise should have the following objectives:

It should supply adequate data for top management to monitor, evaluate and adjust the global

strategy of the enterprise as the situation demands.

It should provide the means for coordinating the units of the enterprise so that they work toward

common objectives, if any.

It should provide the basis for evaluating the performance of the units and their managers at each

level of the organisation.

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Approaches to Control

Market Approach: Under this approach external market forces is allowed to control the behaviour of

management within the units of the multinationals.

Rules Approach: Instead of the market feedback, a rules-oriented organisation places greater reliance

on strongly imposed rules and procedures. It usually has highly developed planning and budgeting

system with extensive formal reporting.

Corporate Culture Approach: In a corporate culture controlled organisation the members of the

organisation internalise the goals by developing a strong set of beliefs and values which influence their

operations.

PERFORMANCE OF GLOBAL BUSINESS

Performance is measured at four tiers:

1. Individual Performance.

2. Function or Group Performance

3. Corporate or Organisational Performance

4. Sub Sectoral Performace

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PERFORMANCE EVALUATION SYSTEM.

Stages of Performance Evaluation SystemStage

I Identify Parameters

II Identify Tools / Indicators

III Measure Performance

IV Evaluate Performance

Parameters and Indicators of Performance

i) Performance parameters -are performance values denoting different outputs, such as, sales and

employment. Indicators are the relationships of outputs inter se or with other inputs, such as,

profitability, productivity, debt-servicing ratios.

ii) Performance Indicators - provide the tools for measurement of performance.

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