Strategy in International Context

By

Prof Soumitra Mookherjee

1
 Value Creation
Profits can be increased by:
•adding value to a product so that customers are willing
to pay more for it – a differentiation strategy
•lowering costs – a low cost strategy

•Michael Porter argues that superior profitability goes

to firms that create superior value by lowering the cost
structure of the business and/or differentiating the
product so that a premium price can be charged
 The Value Chain System

Upstream Value Chain Internal Value Chain Downstream Value Chain

Activities
Internally
Activities, Costs &
Performed User Value
Costs & Margins of
Activities, Chains
Margins of Allies &
Costs &
Suppliers Strategic
Margins
Partners

• Comparing Costs All Along the Value Chain

• Suppliers Value Chain Influence Operational Costs
• Forward Channels Costs & Margins “Determine Prices”
• Activities reflect end user satisfaction. 3
 The Value Chain
• Michael Porter, professor at Harvard Business School, uses
the value chain as a systematic means of displaying and
categorizing business activities.

• The term value chain means that at each stage of the

order-to-delivery system, value is added to the product or
service.

• HOW !!!!!

4
 Porter’s Value Chain
Support Activities Firm Infrastructure

Human Resource Management

M
Technology Development

ar
gin
PROCUREMENT
Information Technology
OUTBOUND LOGISTICS
INBOUND LOGISTICS

Marketing & Sales

Operations

Service

gi n
ar
Primary Activities M 5
Choosing A Strategy
Four Basic Strategies
 Global Standardization Strategy
•The global standardization strategy focuses on
increasing profitability and profit growth by reaping the
cost reductions that come from economies of scale,
learning effects, and location economies
•The strategic goal is to pursue a low-cost strategy on a
global scale

The global standardization strategy makes sense when:

•there are strong pressures for cost reductions
•demands for local responsiveness are minimal
 Localization Strategy
•The localization strategy focuses on increasing
profitability by customizing the firm’s goods or services
so that they provide a good match to tastes and
preferences in different national markets

The localization strategy makes sense when:

•there are substantial differences across nations with
regard to consumer tastes and preferences
•where cost pressures are not too intense
 Transnational Strategy
The transnational strategy tries to simultaneously:
•achieve low costs through location economies,
economies of scale, and learning effects
•differentiate the product offering across geographic
markets to account for local differences
•foster a multidirectional flow of skills between
different subsidiaries in the firm’s global network of
operations
The transnational strategy makes sense when:
•cost pressures are intense
•pressures for local responsiveness are intense
 International Strategy
•The international strategy involves taking
products first produced for the domestic market
and then selling them internationally with only
minimal local customization

The international strategy makes sense when

•there are low cost pressures
•low pressures for local responsiveness
The Evolution of Strategy
Changes in Strategy over Time
 Modes of International Business Expansion
These are specific forms of entering a foreign country so as to have international
presence and achieve firm’s strategic goals.
Mode of international business expansion is an institutional mechanism by which a firm
expands its operations overseas.
Factors influencing choice of entry modes
• Willingness to commit resources in the target country
• Extent of risk the firm is willing to take for international expansion
• Market attractiveness and return expected from overseas operations
• Government regulations and level of control to be exerted in firm’s foreign
operations
• Possible flexibility of expansion modes
• Timing of market entry and competitive conditions

12
 Exports

Manufacturing the goods in the home country or a third country

and shipping them for sales to a country other than the country
of production.

Export is the most common initial mode of entry into foreign

markets as it involves much lower risks and is a low cost and
simple mode of entry.

13
 Piggybacking (Complementary Exports)

Use of well-established distribution network of another company in

foreign country, and not committing own resources

Rider – Carrier Relationship

Leveraging on experience of carriers marketing channels

e.g. FIAT – TATA
Wrigley’s chewing Gum – EID Parry
BULL – HCL as no competitive threats

14
 International Strategic Alliance

In contractual expansion modes, the partner firms complement each other with one or
more of their strategic strengths, such as superior technology, strong brand equity,
manufacturing facilities, well-established distribution network, etc.

Cooperation with one or more than one firm overseas to carry out a business activity
wherein each one contributes its different capabilities and strengths to the alliance.

e.g. RANBAXY – ELI LILLY – Manufacturing Contracts

NIKE – Outsource production in China, Vietnam, Bangladesh
China – producing 25 -30 % of ACs, refrigerators, Washing
machines
Taiwan – Leader in semi conductor Manufacturing

15
 International Strategic Alliances
Agreeing to cooperate with one or more firms overseas to carry
out a business activity, where each party would contribute its
strengths, resources, and capabilities to the alliance

1. Develop a common long term and common strategy

2. Share the resources and relationship is reciprocal and
relationships are organized along horizontal lines
3. The efforts can be spread globally

e.g. Philips – Multiple strategic alliance across all business

segments for blunting the forces of Japanese, America,
Taiwanese, Korean players in electronics sector. Not depending
only in Europe where their assets and workforce are located.

16
 International Strategic Alliances

Advantages of strategic alliances:

1. Sharing of investment cost and equity and capital contribution

2. Access to tangible and intangible resources
3. Promoting cooperation for mutual benefit
4. Managing local cultures better and more effectively
5. Risk reduction while operating overseas
6. Local partners know consumer behavior and align business strategies
accordingly

17
 International Strategic Alliances

Limitations of strategic alliances:

1. Objective incompatibility leads to conflicts and disputes

2. Cultural disparities leading to misunderstandings
3. Sharing resources may nurture others at your expense
4. Who owns – ownership structure – how much ???
5. Profit sharing ratio --- ???

18
 International Franchising
A special form of licensing in which intangible assets are transferred to a foreign firm
along with methods of doing business in a prescribed manner and other assistance.

This arrangement is over an extended period of time in return for a franchising fee.

e.g.

McDonalds, KFC, Burger King

PIZZA HUT,
STARBUCKS,
WH SMITH, WOOLWORTHS
Marks & Spencer – International Franchisee

19
 International Joint Venture

Equity participation of two or more firms resulting in formation of a new entity.

e.g. Bajaj Alliance, Hero – HONDA (No Longer)

Prudential ICICI, TATA– AIG, Telecom Firms, Mahindra Renault
Bharti – Walmart, StarBacks – Tata,

Advantages – Sharing of risks, resources, competencies, managing local

cultures, language barriers better, etc

Disadvantages: Cultural Conflicts, Sharing of profits, disputes,

20
 Wholly Owned Subsidiary

Setting up a fully owned new entity in a foreign country. – 100% FDI in terms of ownership
and control.

e.g. LG, Samsung

Honda, Toyota, FORD
SONY, AKAI,
KELLOGS, HEINZ

This is a preferred option when exports become a tedious/ cumbersome process requiring
enormous documentation work and market opportunities are encouraging to warrant
independent investment and operations.

Also, FDI allows to customize and adapt products as per local needs

21
 Mergers and Acquisitions

Transfer and merging of existing assets of a domestic firm to a foreign firm lead to
mergers and acquisitions.

Cross-border mergers: a new legal entity emerges by way of merging assets and
operations of firms from more than one country.
Cross-border acquisition: involves transferring management control/ dilution of assets
and operations of a domestic company to a foreign firm. As a result the local firm
becomes an affiliate of the foreign company.

22
 Mergers and Acquisitions
Examples of Global Mergers and Acquisitions:

1. TATA – CORUS

2. ARCELOR MITTAL – acquisition based growth initiative

3. Standard Chartered Bank takeover of ANZ Grindlays worldwide

4. Kraft Vs Cadbury

5. P & G Vs Gillette – global amalgamation

6. Vodafone and Hutch Merger – Largest deal in India

7. Airtel Vs Zain – Africa not fetching the best results

8. Global Airlines industry – series of M & As like KLM and North West

23
 Mergers and Acquisitions
Long Term Value Creation:

1. Pooling and sharing of resources – e.g. joint manufacturing, distribution and central
IT networks
2. Promoting healthy and fair competition as capacity creation not due to
commencement of new project – but throuh merger or a takeover
3. Economies of scale and scope
4. Enlarged market exposure in terms of product portfolios and markets
5. Higher valuation of merged firm
6. Transfer of competencies and technologies
7. Best Practices and efficient business processes
8. Scope for innovation and Higher differentiation

24
 Organization structure
 Need to create division of labor
 Need to integrate these groups to ensure organizational
effectiveness
 Dimensions of Macro and Micro Structure
 Firm Growth as Evolutionary Process
Single Business

Geographic Product
Diversification Diversification
(Foreign Sales as %Total Sales) (Product Diversity)

Product and Geographic

Diversification
Horizontal Differentiation

• degree to which tasks C EO

are divided into distinct
P ro d 1 P ro d 2 P ro d 3 P ro d 4
homogeneous groups
– function-wise
– geographic-wise
– product-wise
CEO

M kt M fg Finance R &D Logistics

 Vertical Differentiation

• Number of levels CEO

within the organization
EV P EV P EV P

Sr. VP Sr. VP

VP VP VP

Asst. VP Asst. VP Asst. VP

Branch M gr. Branch M gr.

Asst. Branch M gr
 Spacial Dispersion

• Degree to which activities are located in

different areas

HQ

US P a cific E u r.

S upport M fg. M fg

F inance R&D Legal P rod 1 P rod 2

Pressures for Global Efficiency Structure Follows Strategy

High
Horizontal Differentiation?
and Centralization

Vertical Differentiation?

Low Spacial Dispersion?

Low High
Pressures for Local Responsiveness and Decentralization
 Export

Germany

U.S.

Mexico

Malaysia
 Functional Structure
w/ International Sales Division

HQ
Fin./A cct.

M anufacturing M arketing Logistics R&D

International
S ales
Multidomestic

Germany

U.S.

Mexico

Malaysia
 Geographic Structure

HQ

N. Am er. Eur. Latin Am er. Pac.Rim

Mkt. Mfg. R&D Prod. A Prod. B Prod. C

 Matrix Structure (B)

HQ

Geographic Areas Product 1 Product 2 Product 3 Product 4

US
Eur
Asia
 FUNCTIONAL STRUCTURE

Headquarters

Research & Accounting &

Production Marketing
Development Finance
 International Division Structure
Headquarters

Domestic Division Domestic Division Domestic Division International Division

General Manager General Manager General Manager General Manager
Product Line A Product Line B Product Line C Area Line

Functional units

Country 1 Country 2
General Manager General Manager
(Product A, B and/or C) (Product A, B and/or C)

Functional units
 Worldwide Area Structure
Headquarters

Regional VP Regional VP Regional VP

North America Europe Far East

Regional VP Regional VP
Latin American Middle East/Africa

President
President President
President President
President
Subsidiary
Subsidiary Subsidiary
Subsidiary Subsidiary
Subsidiary
11 22 33
 A Worldwide Product Division Structure

Headquarters

Worldwide Worldwide Worldwide

Product Group Product Group Product Group
or Division A or Division B or Division C

Area 1 Area 2
(domestic) (international)

Functional units Functional units

 A Global Matrix Structure

Headquarters

Area 1 Area 2 Area 3

Product
Division A
Product
Division B Manager here
belongs to Division
Product B
and Area 2
Division C
 CHANGE MANAGEMENT
Why Change Management is crucial ??

Organizations are required to keep changing if they are to keep

up and cope with global developments in economics, politics,
technologies, legislation, demographics, etc
 CHANGE MANAGEMENT
External Triggers:

1. Economic and business conditions change

2. Technological disruption and new technologies
3. Changes in tastes, behaviors, values or requirements in
society and consumer psychology/ behaviour
4. Competitive landscape
5. Legislation and government policies
6. Mergers and acquisitions elsewhere in the market
7. Shifts in local, national and international politics
 CHANGE MANAGEMENT

Internal Triggers:

1. New product/service innovations

2. Appointment of new senior managers/ new management
team
3. Skill deficiencies, requiring retraining
4. Low performance, low morale
5. High stress, or high staff turnover
6. Office/factory relocation
 THE SCALE OF CHANGE

Realignment: This generally does not involve a substantive rethink

of the organization's assumptions, beliefs and business model. A
realignment has a greater focus on efficiency and profitability.

Transformation: This involves a significant redefinition of mission,

business model, culture and/or its structure and processes.
whereas a change on the larger scale of transformation goes
beyond this to challenge an organisation's assumptions.
 THE SCALE OF CHANGE
Incremental change involves only realignment as opposed to full
transformation, we can see that as adaptation. Adaptation is the
most frequent form of change that we are likely to see as it's on a
small scale.

Reconstruction involves significant change within the organization

within a short time period. The enterprise maintains its business
model, culture, structure etc. For example, businesses who had to
upskill on online sales as a result of the Covid-19 pandemic were
engaging in a turnaround strategy to address a crisis.

Revolutionary change involves a rapid and significant strategic

and cultural change in the organization that impacts culture,
strategy, business models, structure and challenges
 REINFORCING CULTURAL CHANGE
1. Organizational design and structure:
Modify the Organizational design and structure, -
refers to the way the organization is divided into
units, such as product lines and areas of
responsibility.
2. Systems and procedures:
The daily routines and processes of work are highly
visible parts of an organisation. Modify and adapt to
fit in with new desired cultural norms and ways of
doing things
 REINFORCING CULTURAL CHANGE
3. Rites and rituals - significance if they are carried out
regularly. They can be a way to reinforce beliefs, not
only old beliefs, but also new ones. If a firm is looking
for a more customer focused culture, then
introducing an 'employee of the week' section on the
homepage will help to reinforce this cultural change.

4. Design of physical space: The physical design of an

organization can be used to reinforce certain beliefs
For example, whether an organization uses open plan
offices or lots of quiet, private work areas can reflect
ambience on work and interaction with colleagues.
 PRINCIPAL AGENT THEORY

CRITICAL ASSUMPTIONS:

A.There are 2 sets of actors – Principals and Agents

B.Actors try to maximize their own utility – Profits Vs Wages
C.Asymmetric Information
D. Conflict of Interests
E.Monitoring and Incentives: Principal reviews performance and motivates employees to
perform
F. Monitoring a good mechanism as long as agents are not dissatisfied
G.Principals compare the cost and the benefits accruing from each outcome
H.Optimal Solution: Utility is maximized
 PRINCIPAL AGENT THEORY

CASE STUDY: COVID 19 PANDEMIC

Monitor What ?? INPUT or OUTPUT

Work from Home – Software's for facilitating discussions, review meetings

Output : Remote working – measure actual contribution and performance
 PRINCIPAL AGENT THEORY

Surveillance monitoring: An alternative

True – Induce better control and review that managers act in the interests of employers

Problems : High cost of monitoring, enforcement costs – Technology can reduce cost

Human Cost: Employees get rebellious, diminishing productivity.

 PRINCIPAL AGENT THEORY

Solutions to Principal Agent Problems:

a. Stock options – allocate shares to employees at reduced price

b. Monetary incentives
c. Sense of belongingness
d. Redrafting employment contracts
e. Systems of better governance and bringing in transparency and accountability.