Chapter 6STRATEGIES FOR INTERNATIONAL COMPETITION

LEARNING OBJECTIVES

Discuss the roots of international strategy including ethnocentric, polycentric and geocentric organizations.

Explain the facilitators of international expansion for firms. Employ various analytical and portfolio thinking to understand to which countries

firms decide to expand. Distinguish among the global, multidomestic and transnational mindsets of firms

and industries. Describe the fit of various value-chain activities into a firm’s total international

strategy. Explain the various levels of strategic integration including Stand-Alone, Simple

Integration, Complex Integration. Integrate the specific firm-level initiatives of Core Competency Leveraging,

Counterattack and Glocalization to a firm’s international strategy.

TOPICS

The roots of international strategyStrategically expanding overseas

Facilitators of international expansionWhere to expand internationally

Strategic planning for foreign market entryManaging a portfolio of country subsidiaries

Host country attractiveness versus competitive strength matrixThe international risk versus return portfolio

Modern international strategic orientationsGlobal versus multidomestic strategic orientationsThe transnational orientation imperativeThe value chain configuration and strategic orientation of firms

Worldwide dispersal and re-integration of value chain activitiesThe functional scope of value chain dispersal and integration strategiesStand-Alone strategiesSimple IntegrationComplex IntegrationMerging strategic orientations and functional integration strategies

Firm-level strategies for international competitivenessCore competency leveragingCounterattackGlocalization

LECTURE OUTLINE

Opening Case

1. How does international diversification of operations fit into Maytag’s strategy?

For a U.S. company such as Maytag, imports have become a major concern. In the past, the size of appliances made imports less of a threat because of high transportation costs. Over the years, this has been offset by significantly lower labor and production costs in Asia. China’s Haier and South Korea’s LG now compete with Maytag and others for the U.S. market. In addition, Maytag’s U.S.-based competitors, GE and Whirlpool, import their appliances from Mexico. To lower its costs and be price competitive, Maytag has embarked on a strategy of international diversification of operations. It uses what is called a “triad” strategy or a three-tiered approach to manufacturing. Maytag dishwashers have Chinese motors, Mexican wiring, and are put together in the U.S.

2. In your opinion, what factors should Maytag consider when deciding where to produce its appliances? Where to sell them?

Cost is an important factor that Maytag should consider when deciding where to produce its appliances. As indicated in the above question, the global appliance industry is becoming very price competitive. In the U.S. market, Maytag competes with imports such as China’s Haier and South Korea’s LG, it also competes with Mexican imports from its U.S. rivals, GE and Whirlpool. The appliance should be produced as close to its end market, so that it can react quickly to fast changing demand. Protection of intellectual property is a critical factor, too. The case describes how Maytag decided to source the turbidity sensor from a German supplier, rather than from China because of fear of intellectual property theft.

As far as selling the appliances go, Maytag’s principal market is the U.S. Due to globalization, it is likely that customers in other markets are aware of Western brands and have the purchasing power. Maytag should study these markets and move in when they are attractive.

3. What are the overall pressures for firms competing in the global appliance industry?

For much of its life, the global appliance industry was highly local. This meant that products produced locally were sold locally. The high costs of transportation of bulky appliances was the chief reason for this. But things have changed now. Labor and production costs in Asia are so low that they offset the transportation costs. This means that Chinese (like Haier) and South Korean companies (like LG) can ship their appliances and sell them in the U.S. market at highly attractive prices. This puts tremendous pressure on U.S. manufacturers such as Maytag, Whirlpool, and GE. They have to lower their costs, otherwise they will not be competitive. As they consider moving their production to lower wage countries, they also have to think about the protection of their intellectual property. Making critical and proprietary

parts in foreign countries may save money, but there is also the likelihood that their components are “copied” by local competitors. They need to balance the cost imperative with the imperative to protect their intellectual property.

The Roots of International Strategy

Howard Perlmutter identified three states of mind or attitudes that can be inferred from examining the managerial practices of international firms. They are: ethnocentric, polycentric, and geocentric (Figure 6-1).

An ethnocentric attitude represents an extreme orientation. It looks upon everything that originates from an organization’s home country, as the best in the world. Thus, the international firm’s headquarters controls all that goes on in the world for that firm. A polycentric attitude represents that opposite extreme. It assumes that there are vast differences among the various countries because of differences in culture, language, race, and in their economic, political, and legal systems. In this approach, management in the parent company gave foreign subsidiaries as much freedom as is possible to manage their own affairs. A geocentric attitude is one that is world-oriented. There is no predisposition regarding degree of control or centralization. Rather there is an emphasis on interdependence among headquarters and all foreign subsidiaries.

Strategically Expanding Overseas

Internationalization has been facilitated through various factors as seen in Figure 6-2. These factors are:

Government and political forces Technological forces Market forces Competitive forces

Practical Insight 6-1 depicts global Internet initiatives of firms and industries in New Zealand and India.

The decision as to where to expand internationally would depend upon the company’s assessment of a number of factors including:

Political risk Cultural distance Geographic distance Economic environment Foreign exchange volatility Market size Market growth Regulatory environment

Firms can use a number of techniques to assess the attractiveness of each market. In the Analytical Hierarchy Process, the firm develops a list of important variables to consider. Then the firm uses these variables to rate each country under consideration in which to expand. Complementing this rating is the firm’s determination of relative weights given to each variable. Exhibit 6-1 illustrates this technique.

Strategic Planning for Foreign Market Entry

The strategic planning process for foreign market entry consists of the following discrete steps:

1. Identify the company’s objective in its foreign market entry2. Preliminary country screening3. What are the opportunities and constraints in the target market?4. What capabilities, resources, and skills are needed to succeed in the foreign

market?5. Does the company have the core capabilities and resources to score high on the

key success factors? What are our strengths and weaknesses on the key success factors?

6. Should the company enter the target market, and how?7. Compare and rank the targeted countries

Managing a Portfolio of Country Subsidiaries

Two approaches help companies manage a portfolio of country subsidiaries. In the Country Attractiveness/Competitive Strength matrix (Figure 6-3), the relative attractiveness of the subsidiaries’ countries may be determined through a set of political, economic, cultural, and market factors. The firm’s competitive strength in a given host country may be measured through many different factors (relative market share, relative market support, etc.). This combination of country attractiveness and competitive strength presents four possibilities: growth strategy, collaborative strategies, defensive strategies, and cross-subsidization strategies.

The International Risk-Return portfolio (Figure 6-4) uses expected profits in a specific host country on one axis and the risk or uncertainty on the other. It offers six different strategies to manage the portfolio of subsidiaries.

Modern International Strategic Orientations

Many scholars and observers have chosen to classify companies with international operations into four categories: international, multinational, global, and transnational. Figure 6-5 portrays these orientations and the associated pressures leading to each.

An international orientation is one in which the focus of the top management is upon domestic operations, and the international operations are treated as accessories whose main purpose is to support the domestic operations by providing critical raw materials

or components or incremental sales of the domestic product lines. A global orientation relies on coordination of worldwide activities to maximize the collective organization. In this orientation, a firm’s position in one competitive market is significantly affected by its competitive position in other markets. Such firms derive the cost benefits of scale or scope economies. Not all industries and firms which compete internationally exhibit the market interdependencies fitting the global orientation profile. Certain factors will contribute to an industry’s need to be more responsive to local environments. The resulting multidomestic strategy is an approach that attacks each market individually rather than attempting to gain cost advantages from a global integration effort. Transnational companies are described as those that attempt to balance the need to be responsive to host country markets through adaptation of the product, marketing strategies, and management practices to suit local conditions, and at the same time try to obtain global efficiencies by linking and coordinating the dispersed operations.

The value chain is an important concept that helps to understand the difference between global and multidomestic industries. It groups a firm’s activities into several categories, distinguishing between those directly involved in producing, marketing, delivering, and supporting a product or service; those that create, source, and improve inputs and technology; and those performing overarching functions such as raising capital, or overall decision making. The value chain is shown in Figure 6-6.

Worldwide Dispersal and Re-integration of Value Chain Activities

International firms have rapidly moved to put in place integrated systems of international production and distribution capable of most effectively achieving the three objectives of efficiency in current operations, risk management, and global learning and innovation.

In the initial stages of internationalization, products are exported by the company to foreign markets from the home country. As the company expands its markets abroad to include several countries, it may choose to perform one or more activities in the value chain in foreign locations with the principal purpose of taking advantage of national differences, scale economies, and scope economies. Having dispersed the value chain activities in different parts of the world, international companies implement plans to re-integrate those activities in response to a global strategy designed to enable the company to achieve its objectives most efficiently and effectively, under an umbrella of an acceptable level of risk. The level of integration falls in one of three categories:

Stand-Alone Simple Integration Complex Integration

The practice of outsourcing by some international companies represents simple integration in its most popular form. Practical Insight 6-2 illustrates the dominant

role India plays in performing so-called “backroom” operations. Figure 6-7 illustrates a summary of the international orientations and integration strategies.

Firm-level Strategies for International Competitiveness

Core competency leveraging is a strategy being used by companies that are gaining prominence in a variety of businesses. Core competence may be defined as the distinctive ability to excel in a key area, upon which a company can build a variety of businesses and develop new generations of products, some of which customers may need but have not yet imagined. Core products are the intermediate linkages between core competencies and end products. Apart from technological core competence, companies can develop core competencies in a variety of functional areas: logistics and distribution, marketing, purchasing, etc.

With the increasing globalization of industries, international companies have come to realize that a competitive attack against a home market can be launched by foreign companies who, at the time of the attack, may have a relatively small presence in it. Today, global competition is characterized by a series of competitive attacks and counterattacks by global companies in each other’s home and third-country markets. Cash flows are needed to develop the various capabilities required to make an effective attack or counterattack. The types of capabilities needed are:

channels of distribution through which to direct an attack investment in key core competencies a wide range of products that can benefit from the same distribution channels.

Global companies must be careful that, in their zealous pursuit of an effective global strategy, they do not neglect managerial initiative at lower levels in the organizational hierarchy, especially at the regional and subsidiary levels. The term glocalization represents a firm-level strategic response that parallels the industry-level, total firm transnational organization. Glocalization is simply thinking globally but acting locally.

A successful strategy incorporates the glocalization of the following interrelated elements: management, foreign affiliates, exports, products, and production. McDonalds’ glocalization move in Japan is described in Practical Insight 6-3.

DISCUSSION QUESTIONS

1. Pick any industry and develop a list of factors that you believe are critical to consider when deciding overseas.

The answers to this question will vary depending upon the industry selected. The text gives the example of McDonalds and the factors relevant to this company. If we take the example of the mid-price hotel industry (companies such as Holiday Inn), the relevant factors would be:

economic environment market size market growth regulatory environment

The above are examples of factors to consider when making the decision to select a specific foreign country. The next step would be to consider the key success factors in which the company must excel in order to succeed in the foreign market. Examples of factors for the mid-priced hotel industry would be:

consistent service quality standardization of operating procedures

2. Why will the transnational approach require more of a firm’s resources to implement?

Transnational companies are described as those that attempt to balance the need to be responsive to host country markets through adaptation of the product, marketing strategies, and management practices to suit local conditions, and at the same time try to obtain global efficiencies by linking and coordinating the dispersed operations. The resources and activities are distributed to specialized foreign operations, and they are integrated into an interdependent network of worldwide operations. Because of the need to distribute a number of resources and activities and also have integrating mechanisms to coordinate them, the transnational approach requires more of a firm’s resources to implement.

3. Why is the value chain important to understand in relationship to a firm’s international strategic approach?

The value chain groups a firm’s activities into several categories, distinguishing between those directly involved in producing, marketing, delivering, and supporting a product or service; those that create, source, and improve inputs and technology; and those performing overarching functions such as raising capital, or overall decision making. The value chain activities are either primary activities (those directly involved in producing or marketing goods or services of a firm) or support activities (those that facilitate and enhance the effectiveness and efficiency of the various links in the primary activities chain). Primary activities are further classified as either upstream (inbound logistics, operations) or downstream (outbound logistics, marketing and sales, after-sales service). The distinction between upstream and downstream activities has strategic implications to how companies compete in an industry. Competitive advantage in upstream and support activities often grows more out of the entire system of countries in which a firm competes than from its position in any one country. In contrast, downstream activities create competitive advantages that are largely country-specific. The value chain is thus the starting point in a firm’s international strategic approach because it helps in making the decision to locate activities in specific places.

4. Link the levels of integration strategies to (a) ethnocentrism, polycentrism and geocentrism, and (b) the global, multidomestic, and transnational approaches.

Figure 6-7 in the text presents the linkages. Companies pursuing a Stand Alone integration strategy have a multidomestic orientation and are polycentric firms. Firms pursuing a Simple Integration strategy have an early global orientation (i.e. they are just moving to this orientation) and are typically ethnocentric. Finally, a Complex Integration strategy goes with a firm pursuing a global approach and inclined to move toward the transnational approach. Such a firm is also geocentric in its orientation.

5. Give examples of various ways a firm can glocalize.

Companies can glocalize management by giving considerable freedom to subsidiary managers in certain areas, while maintaining headquarters control in others. Transferring production technology to the host country and increasing the ratio of locally produced items is another example of glocalization. McDonalds’ product portfolio is another example of glocalization. Certain products are kept constant throughout the world, while others (e.g. Chicken Maharaja Mac, McVeggie) are localized.

MINI-CASE

1. Should CIENA look to move software development operations into India?

Due to changes in the competitive nature of the telecommunications equipment industry, CIENA has shifted its emphasis to software from hardware. Evidence of this is in its allocation of 269 engineers and managers for hardware and 480 for software. This makes a good case for moving software development to India. As the pros listed in the case indicates, India has skilled labor in the software area and the government, keen on attracting foreign companies, is offering a number of incentives. CIENA can get tremendous cost savings by moving its software development to India.

2. Should CIENA pursue the Chinese market, look to establish production facilities there for export purposes, or do both?

The chapter talks about the strategy of counterattack. With the increasing globalization of industries, international companies have come to realize that a competitive attack against a home market can be launched by foreign companies who, at the time of the attack, may have a relatively small presence. Today, global competition is characterized by a series of competitive attacks and counterattacks by global companies in each other’s home and third-country markets. That is exactly what Huawei Technologies is doing to CIENA. CIENA should counterattack by getting into China, not just to use it as an export base but to sell there in competition

with Huawei. A key issue, though, is the cash flows needed by CIENA to develop the various capabilities required to make an effective counterattack. If CIENA has the resources, acquiring production facilities in China may help in two ways: lower its production cost because of lower labor costs, and attack Huawei in its home market.

3. How can CIENA protect its intellectual property in each country?

This is an important issue for CIENA to consider. India has weak anti-piracy laws while 90% of the software in China is pirated. However, it is likely that the intellectual property protection environment in India is changing as seen by the influx of U.S. companies such as Oracle and Microsoft. CIENA should obtain patent protection in India. The same should be done in China. In addition, CIENA should aggressively pursue legal remedies in both countries for any violation of its intellectual property rights.