International business Strategy Development

1. STRATEGY DEVELOPMENT
NIJIL CV

2. INTERNATIONAL STRATEGIC
MANAGEMENT
• Strategic management is concerned with the process of
formulating , implementing and evaluating strategies to achieve a
firm’s objectives.
• While this is conceptually the same at domestic and international
levels, the main complicating factors in international business are
the numerous country and regional environments a firm (normally
an MNC) has to analyse before considering the various strategic
options. Strategy implementation is also complicated by
geographic distances, cultural and national differences and
variations in business practices.

3. STRATEGIC MANAGEMENT
CONTD
• Strategic management is critical in international business. A firm needs to keep
track of its increasingly diversified operations, in a continuously changing
international environment.
• Expanding globally allows firms to increase their profitability in ways not
available to purely domestic operations. This is why investment has outgrown
trade, in global terms.
• A firm is able to increase its profitability, through global operations by: (1)
earning a greater return from its distinctive skills and core competencies, (2)
realising location economies by dispersing operations on those locations
where they can be performed most efficiently, (3) realising greater experience
curve economies (systematic reductions in production costs observed during
the life of a product, on account of economies of scale caused by output
increases, and learning effects) and (4) acquiring and/or developing widely
known brands, and skills developed in foreign operations, and transferring
them within the firm’s global network of operations.
• A firm’s ability to increase its profitability by exploiting these four strategies
depends on how well it formulates its production, marketing and finance
strategies and implements them in differing national environments.

4. VALUE CREATION
• Two basic conditions determine a firm’s profits: the amount of value
customers place on the firm’s goods or services, and the firm’s costs of
production. The price that the firm can charge is generally less than the value,
on account of competition.
• The value creation by a firm is the difference between the value and a formula
based on cost of production. A company creates value (V) by converting inputs
at a certain cost (C) into a product on which consumers place a certain value.
• A company can create more value (V-C) either by lowering production costs
(low cost strategy ) or by making the products more attractive through
superior design, functionality, features, quality etc. so that customers place a
greater value on the product (differentiation strategy). According to Michael
Porter, low cost and differentiation are two basic strategies for creating value
and attaining a competitive advantage in an industry.
• Porter emphasizes that it is important for management to decide where the
company wants to be positioned with regard to value and cost, to configure
operations accordingly, and to manage them efficiently. It is also important
that a firm chooses a strategic position that is viable.

5. VALUE CHAIN
• The operations of a firm can be thought of as a value chain
composed of a series of distinct value creation activities including
production, marketing and sales, materials management, R&D,
human resources, information systems and the firm infrastructure.
• Value creation activities or operations can be categorized as
primary and support activities. If a firm is to implement its
strategy efficiently, it must manage these activities effectively and
in a manner consistent with its strategy.

6. VALUE CHAIN ANALYSIS
• Value chain analysis is complementary to internal environmental analysis of a
firm.
• Primary activities are concerned with the design, creation, and delivery of the
product; its marketing; and its support and after-sales service. Primary
activities can be broken into four functions: research and development,
production, marketing and sales, and service.
• R&D is concerned with the design of products and production processes. R&D
is also performed by service companies in financial and non-financial sectors.
Production is concerned with creation of goods or services.
• The marketing and sales functions of a firm can help to create value in several
ways. For example, through brand positioning and advertising, the marketing
function can increase the value that consumers perceive in a firm’s product.
Marketing and sales can also create value by discovering consumer needs and
communicating them back to the R&D function of the company, which can
then design products better matching the needs. The role of service activity is
to provide after-sales service and support. This function can create a perception
of superior value in the minds of the consumers by solving customer problems
and supporting customers after they have purchased a product.

7. VALUE CHAIN ANALYSIS CONTD
• Support activities in the value chain provide inputs that allow the primary activities to occur.
These include materials management, human resource function, information systems, and
company infrastructure.
• The materials management (or logistics) function controls the transmission of physical
materials through the value chain, from procurement through production and into distribution.
The efficiency with which this is carried out can significantly reduce cost, thereby creating more
value.
• Similarly the human resource function can help create more value: if a company has the right
mix of skilled people to perform the value creation activities effectively, and if the people are
adequately trained, motivated and compensated to perform their value creation activities.
• Information systems refer to the electronic systems for managing inventory, tracking sales,
pricing products, dealing with customer service inquiries etc. Information systems, coupled with
communications features of the internet, can alter efficiency and effectiveness with which a firm
manages its value creation activities.
• Company infrastructure includes the organisational structure, control systems and culture of
the firm. Leadership of the top management can effectively shape the infrastructure of the firm ,
and through that the performance of all its value creation activities.

8. STRATEGIC MANAGEMENT
PROCESS• Scanning of global environment: three areas of macro-environment are
relevant- firstly, forecast of macroeconomic and industry trends such as
markets for specific products, per capita income, availability of labour and
raw materials.
• Secondly, exchange rates, exchange controls, balance of payments, and
rates of inflation. Thirdly, potential market share in particular area, as
compared to that of competitors.
• Also relevant are factors related to political risk.

9. STRATEGIC MANAGEMENT
PROCESS CONTD
• Formulation of strategies: strategic options for a firm are
international, multi-domestic, global and transnational.
• Areas for strategy formulation are profitability, marketing, production,
finance, and personnel/ human resources.
• Strategy implementation is the process of attaining goals by using
the organisational structure to execute the strategy formulated. This
involves three main issues, location, ownership and functional
strategies (marketing, manufacturing, finance, technology and human
resources).
• Evaluation and control: strategic evaluation includes assessing the
actual results and comparing them with the expected ones, and using
corrective actions to ensure that performance conforms to plans.
Evaluation can use key financial criteria such as return on investment,
return on equity, profit margin, market share, debt to equity, earning
per share, sales growth and assets growth.

10. STRATEGIC MANAGEMENT
PROCESS CONTD
Firms that pursue an international strategy try to create value by transferring
valuable skills and differentiated products to foreign markets. They tend to
centralize product development functions at home. They achieve experience curve
and location economies, but lack local responsiveness.
• Firms that pursue a multi-domestic strategy orient themselves towards achieving
maximum local responsiveness. They extensively customize their products and
marketing strategy to match different national conditions. Disadvantage is inability
to exploit experience curve and differentiation.
• Global strategy involves focusing on increasing profitability by achieving cost
reductions coming from experience curve and location economies. This strategy is
effective where there are strong pressures for cost reductions and where demands
for local responsiveness are minimal. (standardized global products)
• Trans-national strategy involves exploiting experience-based cost economies and
location economies, transferring core competencies (skills within the firm that
competitors cannot easily match or imitate) within the firm and at the same time,
paying attention to pressures for local responsiveness. This strategy is ideal, but
difficult to create an organizational infrastructure to support it.

11. COUNTRY EVALUATION AND
SELECTION
• Examining international geographic strategies is important because
companies rarely have enough resources to take advantage of all
opportunities. Committing human, technical and financial resources to
one location may mean foregoing projects in other areas. Geographic
alternatives are an integral part of a company’s decisions on allocating
resources.
• Companies must determine where to market and where to produce.
Companies must also ascertain where to locate such specialised units
as R&D departments and regional headquarters.
• Market location and production location decisions are interconnected
because to sustain a long term competitive advantage, early
production innovations must be linked with later cost advantage.
Transport costs or government regulations may mean that local
production is necessary for serving the chosen market.
• In scanning for alternative production locations, often there is risk of
overlooking opportunities or risk of examining too many opportunities.
Environmental analysis is key to short-listing.

12. COUNTRY EVALUATION AND
SELECTION CONTD
• The factors that have the most influence on the placement of sales and
production are market size, ease and compatibility of operations, costs
and resource availability.
• Some of these variables are more important for the production
location decisions, others for the sales allocation decision; others for
both.
• Sales potential, is probably the most important variable in ascertaining
which location will be considered and whether an investment will be
made, assuming that sales are at a price above cost and so will be
profitable.
• Exports to a country are an indication of sales potential. Other
indicators are GDP, per capita income, growth rates, size of the middle
class, and level of industrialisation.

13. COUNTRY SELECTION CONTD
• As regards ease and compatibility of operations, a company should
examine geographic, language and market similarities, red tape (which
affects operations including initial permission, bringing expatriate
personnel, licenses to produce and sell certain goods and satisfying
government agencies on matters like taxes, labour conditions, and
environmental compliance), feasibility studies on convergence with
company capabilities and policies, lead country strategy, and costs
and resource availability (particularly for resource-seeking
investments)
• Employee compensation is the most important cost of manufacturing
abroad for most companies (about 60%, not including taxes). New
technologies might make it more cost effective to produce say in the
US rather than in, say, Thailand, where it might require a larger labour
input. For this, and other reasons, a least-cost location may not be the
best alternative.

14. ROI AND COUNTRY SELECTION
• Given the same expected return, most decision makers prefer a more
certain to a less certain outcome.
• An estimated rate of return on investment (ROI) is calculated by
averaging the various returns deemed possible for investments. As
uncertainty increases, investors may require a higher estimated ROI.
• Often it is possible to reduce risk or uncertainty, such as by insuring
against the possibility of non-convertibility of funds. But these are
costly to the company. So some weight should be given to risk and
uncertainty in country selection, in order to assess whether the degree
of risk is acceptable without incurring additional costs. If not,
management needs to calculate an ROI that includes expenditures,
such as for insurance, to increase the outcome certainty of the
operation.
• All this explains why companies generally invest first in those foreign
countries they perceive to be similar to the home country.

15. COST BENEFIT ANALYSIS
• Cost benefit analysis (CBA or BCA) is used by both governments
and private firms to compare the cost of investing in a project with
the benefits accruing, both expressed in monetary terms in real
time. This can then be set off against best possible alternatives for
investment.
• The basic point is that all elements of the cost and all elements of
the benefit have to be measured, and expressed in real time
monetary terms.
• For a company ROI is probably a better way of analysing
investment feasibility than CBA/BCA

16. COMPETITIVE RISK
• A company’s innovative advantage may be short-lived. Even when
the company has a substantial competitive lead time, the time may
vary among markets. One strategy for exploiting temporary
monopoly advantages is known as the imitation lag
• To pursue this strategy a company moves first in those countries
most capable of developing local production themselves, and later
to other countries. If technology and other factors are available in
the country , local producers may start manufacturing well before
foreign competitors.
• Companies may also develop strategies to find countries in which
there is least likely to be competition. Some companies aim at
smaller countries, because its competitors may be concentrating
their efforts on larger markets.

17. MONETARY RISK
• If a company’s expansion occurs through direct investment abroad,
access to the invested capital and the exchange rate on its earnings
are key considerations.
• Liquidity preference is the theory that investors usually want
some of their holdings to be in highly liquid assets, on which they
are willing to take a lower return, This is required to make near-
term payments, such as dividends, and for unexpected
contingencies such as stockpiling requirements in case supplies are
affected, as well as for shifting funds for more profitable
opportunities elsewhere.
• In the final analysis, most investors are concerned about the ability
to convert earnings from operations abroad, and the cost of doing
so.

18. POLITICAL RISK ASSESSMENT
• A major concern of international companies is that the political
climate will change in such a way that their operating position
might deteriorate.
• Risks include takeover of property with or without compensation,
operational restrictions on the company, and damage to property
or personnel.
• Methods of assessment include analysis of past patterns, opinion
analysis and political instability measurements.
• Foreign investors may get targeted, with or without connivance of
local leadership, if there is growing economic distress, leading to
frustration, in a country.

19. RESEARCH AND ANALYSIS
• Business research is undertaken to reduce uncertainties in the
decision process, to expand or narrow the alternatives under
consideration, and to asses the merits of existing programmes.
• Data collection and comparability problems.
• External sources of information: individualised reports, specialised
reports, service companies, government agencies, international
organisations and agencies, trade associations, internal generation.
• An evaluation matrix is often used for ranking markets with
reference to their attractiveness for the company. The matrix will
include the relevant general country and industry-specific factors,
all expressed in such specific terms that they lend themselves for
clear measurement and evaluation.

20. DIVERSIFICATIONVS
CONCENTRATION STRATEGIES
• While a company may eventually gain a sizeable presence and
commitment to more countries, there are different paths to that
position.
• In a diversification strategy, the company will move rapidly into
most foreign markets, gradually increasing its commitment within
each of them, e.g. By liberal licensing policy for a given product’
• At the other extreme, with a concentration strategy, it will move
to only one or few countries until it develops a very strong
involvement and competitive position there.
• There are, of course, hybrids of the two strategies.

21. DIVERSIFICATIONVS
CONCENTRATION CONTD
• Major variables for deciding on strategy:
• Sales response function (amount of sales created at different levels of
marketing expenditure)
• Growth rate in each market : when the growth rate in each market is
high, a company usually should concentrate on a few markets, as it will
cost a great deal to maintain market share and costs per unit are
typically lower for the market share leader.
• Sales stability in each market: International diversification has shown
to have an even stronger relationship to profit stability than product
diversification does.
• Competitive lead time: the first company to enter a market often
gains advantages in terms of brand recognition and access to best
suppliers, distributors and local partners. This is called first-in
advantage. If it thinks it has a long lead time, concentration strategy is
warranted.

22. CONCENTRATIONVS
DIVERSIFICATION CONTD
• Spill over effects are situations in which marketing programme in
one country results in awareness in another. In such situations a
diversification strategy has advantages as additional customers
may be reached with little additional incremental cost.
• Need for Product, communication and distribution adaptation
and the costs involved may necessitate a concentration strategy.
• Programme control requirements: The more a company needs to
control operations in a foreign country, the more is tendency for
concentration.
• Extent of constraints: constraints on what a company can do may
be internal or external (resources, specialised technical personnel,
HR issues). Generally these tend to favour a concentration strategy.

23. EVALUATION OF INVESTMENT
PROPOSALS
• A company must do detailed analysis of specific projects and
proposals in order to make allocation decisions. A variety of
financial criteria are used for this.
• Rate of return figures on foreign operations may be difficult to
measure. Profit figures from individual operations may obscure real
impact of these operations on overall company activities.
• Normally investment proposals are evaluated separately and a go-
no-go decision is taken, based on a requirement that the project
meets some minimum threshold criteria.
• Companies are answerable to stockholders and employees. So,
resources cannot be left idle or be employed for low rate of return.

24. REINVESTMENT AND
DIVESTMENT
• Most of the net value of foreign investment comes from
reinvesting earnings abroad, rather than transferring new capital
abroad. Reinvestment feasibility decisions are taken differently
from original investment decisions.
• Divestment may be needed due to poor performance, operation
no longer fitting the overall company strategy or identification of
better alternative opportunities.
• Divestment may occur by selling or closing facilities, the former
being preferred option. Divestment is a difficult decision because of
government regulations and adverse international publicity.

25. BUSINESS ENTRY STRATEGIES
• Exporting
• Licensing and franchising
• Contract manufacturing
• Management contract
• Assembly operations
• Fully owned manufacturing facilities
• Investment-FDI
• Greenfield investment
• Joint venture
• Mergers and acquisitions
• Strategic alliance
• Global strategic alliance

26. EXPORTING
Exporting is a strategy in which a company, without any marketing
or production organization overseas, exports a product from its
home base. Often the exported product is fundamentally the same
as the one marketed in the home market. This strategy is easy to
implement, and carries minimal risks.
This is the most common overseas entry strategy particularly for
small firms. Many companies employ this entry strategy when they
first become involved with international business.

27. EXPORTING CONTD.
• Export is not always an optimal strategy. A desire to keep
international activities simple, together with a lack of product
modification, makes a company’s marketing strategy inflexible and
unresponsive.
• In countries like India, where exporting and production for export,
are given incentives by the government, exporting is attractive.
Much depends on the strength of the currency: if it is too strong,
exports are not attractive.

28. LICENSING
• Under licensing, a firm in one country, (the licensor) permits a firm
in another country (the licensee) to use its intellectual property
(such as patents, trade marks, copyrights, technology, technical
knowhow, marketing skill or some other specific skill) for monetary
benefit in the form of royalty or fees paid by the licensee.
• In many countries such fees are regulated by the government.
• There are also cross-licensing contracts, with mutual exchange of
knowledge or patents.

29. LICENSING CONTD
• As an entry strategy, licensing requires neither capital investment
nor knowledge and marketing strength in foreign markets.
Licensing reduces risk of exposure to government intervention in
that the licensee is typically a local company that can provide
leverage against government intervention.
• Licensing may also serve as a stage in the internationalisation of a
firm by providing a means by which foreign markets can be tested
without major investment of capital or management time.
• One of the risks of licensing is that the licensee would become a
competitor after the expiry of the licensing period, and may even
develop capabilities to introduce better products.

30. FRANCHISING
• Franchising is “ a form of licensing in which a parent company (the
franchiser) grants another independent entity (the franchisee) the
right to do business in a prescribed manner”. This right can take the
form of selling the franchiser’s products “ using its name,
production and marketing techniques or general business
approach.”
• One of the common forms of franchising involves the franchiser
supplying an important ingredient (part, material etc). Franchising
usually involves a combination of many elements, such as
manufacturer-retailer systems (automobile dealership),
manufacturer-wholesaler systems(soft drinks) and service firm-
retailer-systems ( hotels and fast food outlets).

31. CONTRACT MANUFACTURING
Under contract manufacturing, a company doing international marketing,
contracts with firms in foreign countries to manufacture or assemble its
products while retaining the responsibility of marketing the products.
The main advantage is that the company does not have to commit
resources to set up production facilities, and does not have to take foreign
investment risks.
The disadvantages are lack of control over the production process, loss of
profits from manufacturing and possibility of potential competitors
emerging.

32. MANAGEMENT CONTRACTING
• In a management contract, the supplier brings together a package
of skills that will provide an integrated service to the client without
incurring the risk and benefit of ownership.
• The firm providing the knowhow may not have any equity stake in
the enterprise being managed.
• Management contracting is a low-risk method of getting into a
foreign market. It is particularly effective in the service sector.

33. TURNKEY CONTRACTS
• A turnkey operation is an agreement by the seller to supply a buyer
with a facility fully equipped and ready to be operated by the
buyer’s personnel, who will be trained by the seller.
• Turnkey contracts are common in international business,
particularly in the supply, erection and commissioning of plants
such as oil refineries, steel mills, cement and fertiliser plants etc.

34. ASSEMBLY OPERATIONS
• A manufacturer who wants many of the advantages associated
with overseas manufacturing facilities and yet does not want to go
that far, may find it desirable to establish overseas assembly
facilities in selected markets.
• Assembly operation is a cross between exporting and overseas
manufacturing.
• Advantages are taking advantage of location economies, lower
import duties on components, satisfying “ local content”, and
relatively low investment.

35. FULLY OWNED
MANUFACTURING
• It is not possible to maintain substantial market standing in an
important area unless a company has a physical presence as a
producer.
• A company with long term and substantial interest in a foreign
market would normally establish a fully owned manufacturing
facility there.
• It provides a firm with complete control over production and
quality, but it requires sufficient financial and managerial resources.

36. INVESTMENT: FDI
• Investment in manufacturing facilities in a foreign country is an
expensive and risky form of international business entry. Yet there
are many factors which promote it:
• Transportation costs
• Market restrictions
• Competition
• Product life cycle theory
• Resource, market and production factor- based location
advantages.

37. GREENFIELD INVESTMENT
• A greenfield investment is the investment in a manufacturing,
office, or other physical company-related structure or group of
structures in an area where no previous facilities exist. The name
comes from the idea of building a facility literally on a “green” field.
• Greenfield investing is usually offered as an alternative to other
forms of investment, such as mergers and acquisitions, joint
ventures etc. Greenfield investing is often mentioned in the context
of FDI.
• This form of investment where a new venture is started in a
country, is advantageous to it in that new assets are created, with
new long-term job opportunities. In view of this many countries
give tax breaks and other incentives for such investments.

38. JOINTVENTURES
• Joint venture is any form of association (except for pure trading operations) which
implies collaboration for more than a transitory period. Overseas joint ventures
could be:
• Sharing of ownership and management in an enterprise.
• Licensing/ franchising agreements
• Contract manufacturing
• Management contracts.
• What is often meant by joint venture is a joint ownership venture. This can take the
form of a foreign investor buying interest in a local firm, local firm acquiring interest
in existing foreign firm or foreign and local entrepreneurs jointly forming new
enterprise.
• Where fully owned foreign enterprises are not permitted, joint venture with local
firms provide a viable alternative.
• Many Indian firms have used this route to enter foreign markets. Following
liberalisation in 1991, a substantial number of foreign firms entered the Indian
market through joint ventures. Many have since set up fully-owned subsidiaries.

39. STRATEGIC ALLIANCE
• Strategic alliance seeks to enhance the long term competitive
advantage of a firm by forming alliance with its competitors,
existing or potential.
• The goals are to leverage critical capabilities, increase the flow of
innovation and increase flexibility in responding to market and
technological changes.
• There are at least three types of SA in terms of objectives: shared
distribution, licensed manufacturing and R&D alliances.
• Strategic alliance is used as a market entry strategy. A firm may
enter a foreign market by forming an alliance with a firm in the
foreign market for marketing and distributing the former’s
products.This can also be a two-way process.

40. GLOBAL STRATEGIC ALLIANCE
• There are several forms of strategic alliance, equity strategic
alliance (two or more firms own percentages of a new company),
non-equity strategic alliance (two or more firms form a contractual
relationship to share some of their unique resources and
capabilities for competitive advantage, and global strategic
alliance which is a working relationship between companies (often
more than two) across national boundaries and increasingly across
industries. Sometimes it is formed between a company and a
foreign government or among companies and governments. A
good example is alliances formed between airlines.

41. MERGERS AND ACQUISITIONS
• M&A has been a very important market entry and expansion
strategy. A number of Indian companies in recent times have used
this strategy to enter foreign markets in areas like steel,
communications, pharmaceuticals etc.
• This strategy provides instant market access, particularly through
acquisition of a distribution network. It can also provide access to
new technology or patent rights.
• Cost is an important factor, and there are problems if valuation is
not properly done. This affects the shareholder value of the
company.
• Acquisitions often face problems from governments, labour unions,
cultural dissimilarities.

42. MERGERS AND ACQUISITION
CONTD
• When one company takes over another and clearly establishes
itself as the new owner, the purchase is called an acquisition. From
a legal point of view, the target company ceases to exist. An
acquisition may be friendly or hostile. When a smaller company
takes over a larger, well-established company, it is known as a
reverse take-over.
• In the pure sense of the term, a merger happens when two firms
agree to forward as a single new company rather than remain
separately owned and operated. In 1999, Glaxo-Wellcome and
SmithKline Beecham merged to form a new company, Glaxo
SmithKline.
• In practice mergers of equals rarely happen, and acquisitions are
often euphemistically described as mergers to make them more
palatable. e.g. Takeover of Chrysler by Diamler Benz in 1999,
essentially an acquisition, but described as a merger.