International Management

Table of Contents

1  Introduction  1

2  Background Information  2

3  Global Strategies of Internationalization  7

3.1  Introduction  7

3.2  Identify International Opportunities  8

3.3  Types of International Strategies  11

3.3.1  International Strategy  12

3.3.2  Multidomestic Strategy  13

3.3.3  Global Strategy  13

3.3.4  Transnational Strategy  14

3.3.5  Summary  15

4  Entry Modes  16

5  Management Problems Risks  31

6  Conclusion  33

Introduction

1

Modern companies are trying to gain an advantage over their competitors. Most of them are finding that a good way to gain such an advantage is through the complex process of going global. By doing so, enterprises can extend their product lines to other countries and cultures. They can also save money on labour costs by taking advantage of the lower standard of living in some countries. Global expansion enables a company to add value by transferring core skills overseas, using global volume to cover product development costs, realizing economies of scale from global volume, and configuring value-creation functions in locations where value added is maximized. Companies pursuing global strategies can gain cost economies by integrating manufacturing, marketing, and competitive strategies across national boundaries, but they must give up a certain degree of responsiveness to national conditions. This study looks at the strategies companies adopt when they expand outside their domestic marketplace and start to compete on a global basis.

The first chapter starts with a discussion how global expansion creates important values for companies.

The second chapter examines different strategies which companies can pursue in the global arena. These four different strategies are reviewed in detail - the international strategy, the multidomestic strategy, the global strategy, and last but not least the transnational strategy. Furthermore the pros and cons of each of these strategies are debated. In addition the link between the appropriateness of different strategies and the pressures of cost reductions and local responsiveness is made.

In the next section the various basic options a company has for entering a foreign market - exporting, licensing, strategic alliances, joint ventures, franchising, turnkey projects, foreign direct investment, acquisitions and the establishment of a wholly owned subsidiary as well as e-Commerce - are reviewed in detail. Finally, the last section gives a brief summary with important concluding remarks.

Background Information

2

1. Globalisation

There are a lot of definitions of globalisation. The IMF (International Monetary Fund) established under the Bretton Woods Strategy defined globalisation as follows: “the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, freer international capital flows, and more rapid and widespread diffusion of technology”. 1 Another important institution, the World Bank, also established under the Bretton Woods System, defines globalisation as follows: "Freedom and ability of individuals and firms to initiate voluntary economic transactions with residents of other countries”. 2 Another definition of globalisation is: “Globalisation is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology.” 3 This process has not only effects on the environment and on culture but also on political systems, on economic development and prosperity, and on human physical well-being in societies around the world.

2. The History of Globalization 4

Globalisation is not a new phenomenon. For thousands of years, people - and, later, also corporations - have been buying from and selling to each other in lands at great distances. 5 Globalisation is known since the 19th century. In the year 1961 „globalisation“ was mentioned for the first time in a dictionary. Since the 1980s it is a core term in political and economical discussions. 6

6 M. Kastl, B. Rödl, Going Global, p. 12 ff.

Background Information

3

3. Indicators of Globalization 7

Indicators are signs for a growing globalisation. A growing indicator represents an increasing globalisation. The most important indicators of globalisation will be given in the following:

a) World trade 8 From 1950-1998 the trade in goods increased over 17 times whereas production of goods rose just 6 times. 9 From 1970 to 1998 FDI increased from $21 to $27 Million.

b) People movement and transport Since 1950 person flight kilometres went up 100 times, tourism enlarged and also legal migration.

c) Increasing communication processes 10 Since 1960 telephone connections went up more than 10 times. The introduction of mobile phones, fax, VoIP, video-conferencing, Internet the so called new communication and information technologies are providing a global networking cooperation through an almost cost free permanent communication connection with high quality, too.

d) Internationalisation of culture 11 Enlargement of west cultural moral concepts and life styles: scientists understand under this point especially that the western lifestyle and everything is quite dominant and extending. Development towards a global availability of elements of all cultures: but they also see the important aspect that from each culture certain elements are more important than others and that people are willing to accept those.

7 L. Helfrich, Einführung in die Globalisierungsdebatte, p. 8 ff

8 http://www.polity.co.uk/global/research.htm#environment 2000 9 http://www.globalization101.org/globalization/ 2002

10 http://www.globalization101.org/globalization/ 2002 11 http://www.polity.co.uk/global/research.htm#environment 2000

Background Information

4

4. Why Globalization? 12 13 14

There are quite a lot of reasons why companies decide to go global or international. One is to protect themselves from the risks and uncertainties of the domestic business cycle; by setting up operations in another country, they can often secure a hedge against economic volatility in the home country.

A second reason is to tap the growing world market for goods and services. For

example many foreign companies have targeted the US because of its large population and very high per capita purchasing power. Americans have both a desire for new goods and services and the money to buy them. The same is true for many other industrialized nations. For example, US companies have targeted Europe and Asia and are looking for new market opportunities around the world for the future.

A third reason for going global is to respond to foreign competition. Using the

competitor strategy, the company will set up operations in the home countries of the competitors. This strategy is designed to take away business from competitors and retaliate for the competitor‘s attacking the company in its home market.

Another reason is to reduce costs (labour, taxes, etc.). By setting up operations close to the customer, companies can eliminate transportation costs, avoid the expenses associated with having intermediaries handle the product, develop more accurate and rapid response to customer needs, and take advantage of local resources. These can help reduce the costs.

A further reason is to overcome tariff barriers by serving a foreign market from

the inside. The EU provides an excellent example. Companies outside the EU, which export goods to France, are subject to tariffs. However, those companies

12 A. F. Alkhafaji: Competitive Global Management, 1995, p. 34 f.

M. K. Welge: Globales Management, p. 2 f.

13 U. Teusch: Was ist Globalisierung, p. 37 ff

14 Yip: Die Globale Wettbewerbsstrategie, p. 143

Background Information

5

producing goods in France not only do not have to pay the French tariffs, they can also transport goods made in France to any other country in the EU without paying tariffs.

The same is true for outside companies operating in North America, thanks to the US-Canada agreement and eventually NAFTA. These economic alliances encourage companies to set up operations in a host country rather than export into that market.

A final reason for going global is the desire to take advantage of technological

expertise by getting directly involved in overseas markets, companies pay closer attention to emerging technological developments there and are better prepared to acquire these new technologies or develop substitutes. The result of being closer to the action is that the companies increase their global competitiveness.

5. Pros & Cons 15

Advantages of globalisation are 16 :

 Increased free trade between nations  Greater flexibility to operate across borders (because trade barriers have been partly eliminated)  Increased flow of communications which allows vital information to be shared between individuals and corporations around the world  Greater ease and speed of transportation for goods and people  Reduction of cultural barriers increases the global village effect  Reduction of likelihood of war between developed nations (because now these countries have to work together to cooperate and they are in some extent dependent on each other)  Increases in environmental protection in developed nations

Background Information

6

Disadvantages of globalisation are 17 :

 Unrestricted free trade benefits those with more financial leverage (i.e. the rich) at the expense of the poor  Greater immigration, including illegal immigration  Likelihood of economic disruptions in one nation effecting all nations  Greater risk of diseases being transported unintentionally between nations  Spread of a materialistic lifestyle and attitude that sees consumption as the path to prosperity  Increase in the chances of civil war within developing countries and open war between developing countries as they vie for resources

Global Strategies of Internationalization

7

3.1 Introduction

In this chapter the contribution of global strategies to the process of building and maintaining a competitive advantage are considered.

The picture above gives an overview of the main phases, which should be taken into account when a company plans to go global. 18

First of all it is important to identify the international opportunities. Why do firms internationalize their operations? What are the expectations from going global e.g. increased market size, economies of scale, etc.? Which opportunities are offered?

The next step is to explore and to check the company’s resources and capabilities –that means its strengths and weaknesses. Based on this information the enterprise has to contemplate the different international strategies. Which international strategy is the best to achieve the strategic objectives?

After selecting the optimal strategy, the different modes of entry have to be taken into account. Dependent on the core competencies of the enterprise, the

18 Michael E. Porter: Competitive Advantage of Nations, 1990, p. 72; A. F. Alkhafaji: Competitive Global Management,

1995, p. 347

Global Strategies of Internationalization

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most adequate entry mode will be chosen. The company will enter the foreign market through the different modes of entry, for instance exporting, licensing, acquisitions, etc.

However companies have to look very carefully at the problems and risks which can occur before, during and after the entry process. The analysis and evaluation of these issues is essential for the successful entrance of the company in the new foreign market.

Finally the company should have a strategic competitiveness outcome: that means better performance and innovation! Provided that the domestic enterprise considers all the mentioned essential steps, it will succeed with its Global Strategy.

The mentioned phases will be described more in detail in the following paragraphs.

3.2 Identify International Opportunities 19 20 21

Expanding globally allows both large and small companies increase their profitability in a number of ways not available to merely domestic enterprises.

Increasing market size

Distinctive competencies are unique strengths that allow a company to achieve superior efficiency, quality, innovation, or customer responsiveness. These competencies enable a company to lower the costs of value creation and/or to perform value-creation activities in ways that lead to differentiation and premium pricing. Thus a company’s competitive advantage can be created. Companies with valuable distinctive competencies can often realize enormous returns by applying these competencies, and their products to foreign markets, where indigenous competitors lack similar competencies and products. Those companies can increase their market size applying their unique competencies and products.

19 M. H. Tayeb: International Business, 2000, p. 130 ff.

20 V. R. Rao, J .H. Steckel: Analysis for Strategic Marketing, 1998, p. 5 ff.

Global Strategies of Internationalization

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Return on Investment

Companies that compete in the global marketplace face two types of competitive pressures: pressures for cost reductions and pressures to be locally responsive. These competitive pressures place conflicting demands on a company.

Responding to pressures for cost reductions a company tries to minimize its unit costs. Pursuing such a goal may require a company to base its productive activities at the most favorable low-cost location, wherever in the world that might be. It may also require a company to offer a standardized product to the global marketplace in order to ride down the experience curve as quickly as possible.

Reacting to pressures to be locally responsive requires a company to differentiate its products and its marketing strategy from country to country. It must try to accommodate the diverse demands. The reasons for the diverse demands are national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions, and government policies. Differentiation across countries can involve a lack of product standardization and thus it may raise costs. Because of pressures for local responsiveness, it may not be possible to serve the global marketplace from a single low-cost location, and to produce a globally standardized product, and thus it may not be possible for a company to realize the full benefits from experience-curve and location economies.

The return on investment (ROI) is a calculation used to determine whether a proposed investment is wise, and how well it will repay the investor. Companies dealing successfully with the two mentioned types of competitive pressures can increase their ROI considerably.

21 A. F. Alkhafaji: Competitive Global Management, 1995, p. 31 ff.