Denise Katrina S.
Perez
MBA 113 — Strategy and International Business
Reaction Paper 7
International Strategic Issues
Many definitions have been applied to business strategy which, while differing in detail,
broadly agree that it involves devising the guiding rules or principles which influence the
direction and scope of the organizations activities over the long term. Kenneth Andrews
of the Harvard Business School defined corporate strategy as: ‘the pattern of decisions in
a company that determines and reveals its objectives, purposes or goals, produces the
principal policies and plans for achieving those goals, and defines the range of business
the company is to pursue.’
Choice of Strategy
There have been several theoretical models of strategic choice, each of which seeks to
identify the main strategic options open to the business in pursuit of its objectives. The
following three approaches to strategic choice are often referred to.
1. Product–market strategies which determine where the organization competes and the
direction of growth. Igor Ansoff (1968) presented the various strategic options in the
form of a product-market matrix which presents the following strategies:
■ Market penetration strategy refers to gaining a larger share of the market by
exploiting the firm’s existing products. Unless the particular market is growing, this
will involve taking business away from competitors, perhaps using one or more of the
4Ps in a national or international context.
■ Market development strategy involves taking present products into new markets, and
thus focusing activities on market opportunities and competitor situations.
■ Product development strategy is where new products are introduced into existing
markets, with the focus moving towards developing, launching and supporting
additions to the product range.
■ Diversification strategy involves the company branching out into both new products
and new markets. This strategy can be further subdivided into horizontal, vertical,
concentric and conglomerate diversification.
2. Competitive strategies which influence the action/reaction patterns an organization
will pursue for competitive advantage. Porter (1980) and later writers emphasized the
contribution of strategic decisions to achieving some competitive advantage over the
competition. Such competitive advantages were often expressed in terms of ‘added value’
the more successful firms in an industry were able to generate vis-à-vis the most
marginal firm in that industry. Writing in 1980 in his pioneering book, Competitive
Strategy, Porter identifies three generic strategies open to firms, which may help position
the firm to achieve such competitive advantages.
■ Overall cost leadership strategy requires the business to achieve lower costs than
other competitors in the industry while maintaining product quality. This strategy
requires aggressive investment in efficient plant and machinery, tight cost controls and
cost minimization in functional areas. An organization must understand the critical
activities in the business’ value chain that are the sources for cost advantage and
endeavour to excel in one or more of them.
■ Differentiation strategy is based on creating ‘something unique, unmatched by its
competitors’ which is ‘valued by its buyers beyond offering simply a lower price.’
This entails achieving industry-wide recognition of different and superior products
compared to competitors, which might result from using superior technology or
providing superior customer service.
■ Focus strategy involves selecting ‘a particular buyer group, segment of the product
line, or geographic market’ as the basis for competition rather than the whole industry.
This strategy is ‘built around serving a particular target very well’ in order to achieve
better results. Within the targeted segment, the business may attempt to compete on a
low cost or differentiation basis.
3. Institutional strategies which involve a variety of formal and informal relationships
with other firms usually directed towards the method of growth (e.g. acquisition v.
organic). The focus here is on possible relationships with other firms and organizations.
An initial decision for a firm seeking growth is whether to do so using its own endeavors
(e.g. organic growth) or to short-cut the growth process by some kind of institutional
tie-up with other firms. These can, of course, take many forms, including the franchise,
joint venture, alliances, mergers, acquisitions and such.
Corporate Strategy in a Global Economy
Prahalad (1999) paints a vivid picture of a ‘discontinuous competitive landscape’ as
characterizing much of the 1990s and early years of the millennium. Industries are no
longer the stable entities they once were. In a progressively less stable environment
dominated by discontinuities, there will arguably be a shift in perspective away from the
previous strategic focus of Porter and his contemporaries in which companies are seen as
seeking to identify and exploit competitive advantages within stable industrial structures.
Strategy in the New Competitive Environment
1. Recognizing changes in strategic space. Deregulation and privatization of previously
government-controlled industries, access to new market opportunities in large
developing countries (e.g. China, India, Brazil) and in the transitional economies of
Central and Eastern Europe, together with the rapidly changing technological
environment, are creating entirely new strategic opportunities. Clearly the strategic
‘space’ available to companies is ever expanding, creating entirely new possibilities in
the modern global economy.
2. Recognizing globalization impacts. Globalization of business activity is itself opening
up new strategic opportunities and threats. Arguably the distinction between local and
global business will itself become increasingly irrelevant. The local businesses must
devise their own strategic response to the impact of globalized players. Additionally,
globalization opens up new strategic initiatives in terms of geographical locations, modes
of transnational collaboration, financial accountability, and logistical provision.
3. Recognizing the importance of timely responses. Even annual planning cycles are
arguably becoming progressively obsolete as the speed of corporate response becomes a
more critical success factor, both to seize opportunities and to repel threats.
4. Recognizing the enhanced importance of innovation. Although innovation has long
been recognized as a critical success factor, its role is still further enhanced in an
environment dominated by ‘discontinuities.’ Successful companies must still innovate in
terms of new products and processes but now such innovation must also be directed
towards providing the company with faster and more reliable information on customers
as part of mass customization, quick response and personalized product business
philosophies.
These factors are arguably changing the context for business strategy from positioning
the company within a clear-cut industrial structure, to stretching and shaping that
structure by its own strategic initiatives. It may no longer be sensible or efficient to
devise strategic blueprints over a protracted planning time-frame and then seek to apply
the blueprints mechanically given that events and circumstances are changing so rapidly.
The direction of broad strategic thrust can be determined as a route map, but tactical and
operational adjustments must be continually appraised and modified along the way. Nor
can the traditional strategy hierarchies continue unchallenged – i.e. top management
creating strategy and middle management implementing it. Those who are closest to the
product and market are becoming increasingly important as well-informed sources for
identifying opportunities to exploit or threats to repel. Arguably the roles of middle and
lower management in the strategic process are being considerably enhanced by the
‘discontinuities.’ Top managers are finding themselves progressively removed from
competitive reality in an era of discontinuous change. Their role is rather to set a broad
course, to ensure that effective and responsive middle and lower management are in
place to exercise delegated strategic responsibilities, and to provide an appropriate
infrastructure for strategic delivery.
International Business Strategies
The enormous variety of operations embraced by the term ‘multi-national’ has led some
writers to distinguish between four key strategies when competing in the international
business environment: a global strategy, a transnational strategy, a multi-domestic
strategy and an international strategy. The appropriateness of the particular strategy
selected will depend to a considerable extent on the pressures faced by the international
business in terms of both cost and local responsiveness.
■ Global Strategy
This is particularly appropriate when the firm faces high pressures in terms of cost
competitiveness but low pressures in terms of being responsive to local market
conditions. Firms adopting a global strategy focus on being cost competitive by securing
the various economies of scale and experience. Production, marketing and R & D
activities tend to be concentrated in a few (and in extreme cases a single) favorable
geographical locations rather than being widely dispersed. The emphasis of the global
firm is on a homogenous, standardized product to maximize these various technical and
non-technical economies. Of course such a low-cost strategy is only possible where few
pressures exist to localize either production or marketing. If localization pressures were
high, then shorter production runs of a locally-differentiated product would invariably
raise both technical (production) and non-technical (function/support services) costs.
The global strategy is best suited to industrial products for which there are high pressures
for cost reductions but relatively low pressures for the product to be differentiated to
meet local market requirements. A global strategy does not suit many consumer goods
markets where product differentiation is a key to local/cultural acceptability.
■ Transnational Strategy
This is particularly appropriate when the firm faces pressures in terms of both cost
competitiveness and responsiveness to local conditions. Of course such local
responsiveness may involve more than the ‘local’ market acceptability of a differentiated
product. It might, for example, also reflect entry barriers which effectively protect the
local market from the import of a standardized product, however locally acceptable to
consumers.
Firms adopting the transnational strategy cannot depend on cost reductions via scale
economies from producing a standardized product in a few selected geographical
locations. Rather, they must seek cost reductions by exploiting location economies
appropriate to a particular element of the value chain. These cost reduction outcomes via
a transnational strategy must, of course, remain consistent with the high pressure towards
local responsiveness.
Implementing a transnational strategy is likely to require a high degree of complex
organizational coordination across geographically-dispersed primary and secondary
activities within the global value chain. There is also likely to be an element of conflict
between cost reductions via various mechanisms and cost increases resulting from an
increased local responsiveness which inhibits scale economies of both a technical and
non-technical nature.
■ Multi-domestic Strategy
This is particularly appropriate when the firm faces low pressures in terms of cost
competitiveness but high pressures in terms of local responsiveness. This strategy tends
to involve establishing relatively independent subsidiaries, each providing a full range of
value chain activities (primary and secondary) within each national market. The
subsidiary is broadly free to customize its products, focus its marketing and select and
recruit its personnel, all in keeping with the local culture and the expressed preferences
of its customers in each local market.
Such a strategy is more likely to occur when economies of scale in production and
marketing are low, and when there are high coordination costs between parent and
subsidiary. A disadvantage of such local ‘independence’ may also be an inability to
realize potential experience economies. A further disadvantage may manifest itself in the
autonomous actions of subsidiaries, sometimes paying little regard to broader-based
corporate objectives.
■ International Strategy
This is particularly appropriate when the firm faces low pressures as regards both cost
competitiveness and local responsiveness. The international strategy places the main
focus on establishing the ‘core architecture’ (e.g. product development and R & D)
underpinning the value chain at the home base and seeking to translate this more or less
intact to the national market overseas. Some localized production and marketing
activities may be permitted, but these will be limited in scope.
Over time some additional local customization of product and marketing has tended to
accompany the international strategy. Not least because of some well publicized failures
from an overly strict adherence to the ‘core architecture’ at head offices. Such celebrated
failures, together with a growing awareness of the benefits of at least a limited amount of
local responsiveness, have somewhat diluted the international strategy, though it still
remains one in which a centralized core architecture persists. It is most appropriate to
situations where the parent firm possesses core competencies, which are unmatched by
indigenous competitors in foreign markets, and where the key characteristics of the
product are broadly welcomed by consumers in those markets.
Institutional Strategies in International Business
■ Mergers and acquisitions (M & A)
A merger takes place with the mutual agreement of the management of both companies,
usually through an exchange of shares of the merging firms with shares of the new legal
entity. Additional funds are not usually required for the act of merging, and the new
venture often reflects the name of both the companies concerned.
An acquisition (or takeover) occurs when the management of Firm A makes a direct
offer to the shareholders of Firm B and acquires a controlling interest. Usually, the price
offered to Firm B shareholders is substantially higher than the current share price on the
stock market. In other words, a takeover involves a direct transaction between the
management of the acquiring firm and the stockholders of the acquired firm. Takeovers
usually require additional funds to be raised by the acquiring firm (Firm A) for the
acquisition of the other firm (Firm B), and the identity of the acquired company is often
subsumed within that of the purchaser.
A key strategic goal used to support M & A activity is that the combined entity creates
positive net value (i.e. creates potential synergies). Of course, the realization of any
potential synergies will crucially depend on whether the post-integration phase really
does permit the transfer of core competencies, from acquirer to target or vice versa.
■ Knowledge management
Knowledge is certainly not data, which are objective facts available to users without
judgement. Nor is knowledge the same as information, which is merely data which have
been categorized, analyzed and summarized in order to give the data a context, i.e. a
relevance and purpose. Information therefore is data endowed with relevance and
purpose. Information develops into knowledge when it is used to make comparison,
assess consequences, establish connections, and engage in a dialogue. Knowledge can,
therefore, be seen as information that comes laden with experience, judgement, intuition
and values.
The Knowledge-Creating Spiral
1. Explicit knowledge: Codified knowledge available in books, reports, online, etc.;
2. Tacit knowledge: Knowledge embodied in human experience and practice;
3. Individual knowledge: The source of much tacit and explicit knowledge;
4. Collective knowledge: The outcome of corporate structures and processes for
converting tacit and individual knowledge into explicit knowledge available for
corporate use in process or product innovation.
Nonaka and Takeuchi (1995) identify four interrelated processes by which knowledge
flows around the organization and is converted into different forms:
1. Socialization: The process of communicating the tacit knowledge that resides within
the individual human resource base of companies throughout the organization;
2. Externalization: The process of converting tacit knowledge into an explicit codified
form accessible to others in the organization both individually and collectively;
3. Combination: The process of analyzing, classifying and integrating the explicit
knowledge within the organization into forms which can more readily be used in
pursuing that organization’s objectives;
4. Internalization: The process by which individuals absorb explicit knowledge so that it
becomes a foundation from which new forms of tacit and explicit knowledge may
subsequently emerge.
Nonaka and Takeuchi suggest five key mechanisms by which knowledge creation can be
encouraged:
1. Intention. Senior management must be committed to accumulating, exploiting and
renewing the knowledge base within their organizations and to creating management
systems compatible with this intention.
2. Autonomy. Individuals are the major source of new knowledge and they must be
given organizational support to explore and develop new ideas.
3. Creative chaos. An internal ‘culture’ must be established which is willing to use new
knowledge to challenge existing orthodoxies.
4. Redundancy. Knowledge should not be allowed to become ‘redundant’ via it being
rationed to selected individuals only within the organization. Instead, knowledge
exchange must be encouraged and supported throughout the organization.
5. Requisite variety. The internal diversity within the organization must at least match
that of the external environment within which it operates.
