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PART FIVE
GLOBAL STRATEGY, STRUCTURE, AND
IMPLEMENTATION
CHAPTER TWELVE
THE STRATEGY OF INTERNATIONAL BUSINESS
OBJECTIVES
12-1 Explain the idea of strategy in the MNE
12-2 Profile how executives make strategy
12-3 Differentiate resources, capabilities, and core competencies
12-4 Assess approaches to create value
12-5 Diagram the features and functions of the value chain
12-6 Compare global integration and local responsiveness
12-7 Differentiate the types of strategies used by MNEs
CHAPTER OVERVIEW
Chapter Twelve presents tools and concepts used in analyzing and formulating an
international business strategy. First, the role of strategy in international business is
examined. Next, value chain analysis is used to identify the internal capabilities of the
firm that can be leveraged to create competitive advantage. The dilemma of choosing
between two imperatives: standardizing products and processes or localization is also
discussed. Finally, a typology of strategic alternatives including international,
localization, global, and transnational strategies is presented.
CHAPTER OUTLINE
OPENING CASE: Zara’s Disruptive Vision: Data-Driven Fast-Fashion
[see Fig 12.1 and Map 12.1.]
Zara, a large clothing retailer headquartered in northwest Spain, has used an innovative
strategy to power its global expansion. The first Zara shop opened its doors in 1975 in La
Coruña. Today, there are more than 2,000 outlets and, on average, a new one opens
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every day. Now, in 2016, from its humble beginnings, there are more than 2,000 Zara
storefronts strategically located in leading cities spanning 88 countries. Zara’s vision of
data-driven fast-fashion anchors its strategy to integrate cutting-edge systems;
state-of-the-art information technology; efficient, scale-driven production; astonishing
logistics; and alluring distribution that designs, makes, moves, and sells sophisticated, yet
affordable, apparel. Zara, in starting and sustaining the data-driven fast-fashion
revolution, translates its vision into a practical strategy through a range of ingenious
choices in acquiring resources, developing capabilities, and creating competencies.
Separately and collectively, these anchor Zara’s competitiveness. Presently, no other
apparel company comes close to designing, making, moving, and selling fashion as
speedily as Zara. Its success leaves rivals with less time to figure out how to better
configure and coordinate their operations. Some stay in the game, such as H&M, while
others fall further behind, notably Gap.
I. STRATEGY IN THE MNE
Superior performance requires managers to plan for the opportunities and
threats in the global business environment. The scale and scope of opportunities and,
inevitably, threats spanning 214 markets can overwhelm analysis. The job of the
strategist is identifying the implications of these situations to which products to
make, where to make them, where to sell them, how to compete, and, all the while,
earn a profit. In principle, strategy is an integrated and coordinated set of
commitments and actions that reflect the company’s present situation, identifies
the direction it should go, and determines how it will get there [see Fig 12.1]
A. Getting Started: Vision and Mission
Strategy starts with a vision and a mission. Vision is the idealization of
what an MNE firm wants to be. It expresses, in broad terms, its ultimate goal.
The MNE’s mission defines its business, its objectives, and its approach to
achieving them. Table 12.1 profiles the vision and mission statements of various
MNEs.
1. Rhetoric to Reality. Translating the lofty rhetoric of an MNE’s vision and
mission into relevant programs and realistic performance standards, one can
imagine, is tough. Increasing the challenge for the typical MNE is the fact
that its vision and mission statements must work in many businesses run by
many different people operating in many different environments.
B. Moving Onward: Strategic Planning
Planning is a comprehensive process that determines how the firm can best
achieve its goals. Managers use various frameworks to organize strategic
planning. Most frameworks follow a similar logic and share common steps,
typically cycling through some variation of the following sequence: (1) identify
potential product markets and assess each for opportunities and threats; (2)
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assess the preferences of targeted customer segments; (3) analyze internal
strengths and weaknesses relative to customers’ expectations and competitors’
competencies; (4) formulate a strategy; (5) set clear and compelling objectives;
(6) formalize programs, policies, and tactics; (7) acquire resources, create
capabilities, and develop competencies; and (8) monitor thresholds and adjust
standards given change in performance, rivals, or markets.
II. MAKING SENSE TO MAKE STRATEGY
The complexity of the global business environment can easily overtax strategic
planning. Preempting analysis paralysis spurs managers to integrate sensemaking
perspectives into strategic planning. Sensemaking involves studying shifting
markets, competitors’ initiatives, and changing consumer behaviors in order to
determine how economics, politics, culture, trade, and industry influence the
company’s plans. Managers apply a range of sensemaking perspectives. One
commonly sees variations of the Industrial Organization and the Great by
Choice outlooks.
1. Industrial Organization (IO). The IO outlook sets the external environment
as the primary determinant of an MNE’s strategic plan. The IO model holds
that markets tend toward perfect competition. Strategic planning processes
anchored in the IO sensemaking perspective assess how an industry’s
structural characteristics shape competitive dynamics that, in turn, determine
the profitability of different choices
2. Great by Choice Outlook. In reality, some industries are, and persistently
remain, far from perfectly competitive. In these settings, proprietary
advantages, high entry barriers, or oligopolistic dynamics, for instance,
produce market imperfections. These sorts of situations spotlight an
alternative sensemaking perspective. That is, manager’s insight in terms of
acquiring resources, organizing capabilities, and developing competencies,
rather than the structure of the industry, fundamentally shapes strategic
success. This view, generally referred to as Great by Choice, highlights the
power of bright managers and their keen sense of devising a strategy that is
difficult, if not impossible, to copy.
III. THE ROLE OF RESOURCES, CAPABILITIES, AND COMPETENCIES
The IO Model and the Great by Choice outlooks both speak to the importance of
resources, capabilities, and competencies in supporting a strategy that creates
competitive
advantages. Resources are inputs into an MNE production process. A capability is
the capacity for resources to perform an activity in an integrated manner [see Table
12.2 and Table 12.3]. Managers bundle resources and capabilities to create a core
competency.
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IV. THE QUEST TO CREATE VALUE
We follow convention and define value in economic terms, specifying it as the
difference between the cost of making a product and the price that customers are
willing to pay for it. In broad terms, an MNE can create value by perfecting
processes and products in order to do things more efficiently than others, thereby
making products for lower costs than can competitors (the strategy of cost
leadership). Alternatively, MNE can create value by doing something no one else can
do, and do it effectively, thereby making products for which consumers pay a
premium price (the strategy of differentiation). In some situations, an MNE
insightfully combines the two approaches (the strategy of integrated cost
leadership/differentiation).
A. The Cost Leadership Strategy. The cost leadership strategy aims to make a
product at a given level of quality for a cost below those of competitors.
1. Risk of the Cost Leadership Strategy. The cost leadership strategy has
several risks, including (1) disruptive technologies change efficiency
standards; (2) customer’s needs change; and (3) cheaper, and better
products from rivals.
B. The Differentiation Strategy. The differentiation strategy champions
developing products that customers value and that rivals find hard, if not
impossible, to match or copy. Products are differentiated on a variety of tangible
and intangible dimensions.
1. Risk of the Differentiation Strategy. The differentiation strategy has
several risks, including (1) customers’ expectations change; (2) customers
no longer see sufficient value to justify the price premium; (3) a rival
introduces a newer, cooler, higher-performing alternative; (4) counterfeits
that offer a cheaper imitation.
C. The Integrated Cost Leadership/Differentiation Strategy. The differentiation
strategy calls for continual innovation, whereas cost leadership champions
sustainable efficiency. The integrated cost leadership/differentiation strategy
aims to do both. The integrated cost leadership/differentiation strategy provides
customers with relatively lower-cost products that also have differentiated
features.
1. Risks of the Integrated Cost Leadership/Differentiation Strategy. The
key threat to the integrated cost leadership/differentiation strategy is
getting “caught in the middle,” falling short of optimizing production or
sufficiently differentiating.
POINT—COUNTERPOINT:
Is Strategic Planning Productive?
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POINT: Indeed, in today complex global business environment, strategic planning is
necessary. Strategic planning pushes managers to break free of day-to-day routines, look
toward the horizon, and ask and answer big questions. Strategic planning improves the
flexibility to change as markets change. Strategic planning, by enforcing rigorous,
disciplined, systematic decision-making, makes expanding into familiar markets or
venturing into different territories manageable.
COUNTERPOINT: In actuality, the shifting dynamics of the global marketplace present
overwhelming challenges that suggest strategic planning is arguably ineffective.
Managers’ best intentions to map the future, many continually run into the problem that
the future famously does not cooperate with pre-set visions, missions, and plans.
Notwithstanding best intentions, strategic planning falls prey to deficiencies
and delusions.
V. ORGANIZING VALUE CREATION: THE VALUE CHAIN
Just as strategic planning helps managers develop their strategy; value chain analysis
helps them assess how activities create value. Value-chain analysis helps managers
understand the potential and performance of resources and capabilities, thereby
clarifying cost structures and value creation. The value chain is the set of linked
activities the company performs to design, make, market, distribute, and support
a product. A value chain disaggregates a firm into (1) primary activities that
design, make, sell, and deliver the product; and (2) support activities that
implement the primary activities.
A. Configuring the Value Chain
How an MNE distributes value activities around the world is the matter of
configuration—essentially, the task of deciding which activity to do where.
Besides the option to sell in the 214 markets that compose the global business
environment, the MNE has the option to install operations in each. In theory,
configuration ranges from concentrated (the MNE performs all value chain
activities in one location) to dispersed (the MNE performs different value-chain
activities in different locations).
1. Location Advantages. Differing environmental conditions, given differing
political, legal, and market features, means costs differ from country to
country. The option to go anywhere to do anything pushes MNEs to exploit
location advantages.
2. Economies of Scale. overcoming the liability of foreignness—namely, the
additional costs that an MNE operating outside its home country incurs
above those experienced by a local firm—requires achieving some
offsetting efficiencies, no matter which strategy an MNE chooses.
Technically, an MNE captures economies of scale in terms of size, output,
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or scale of operation. Increasing output lets it distribute fixed costs across a
higher number of units, thereby systematically decreasing per-unit cost.
3. Experience and Learning Effects. Industry and firm conduct confirms that
low costs create strategic advantage. Hence, MNEs look to capitalize on the
scale and scope of their operations to exploit potential cost minimization via
experience and learning effects.
4. The Risks of Configuration Choices. Configuration decisions face the
risks of unpredictable market change. Disruptions, such as a regime change,
material shortages, labor unrest, or currency instability, can quickly convert
an efficient location into a costly one.
VI. GLOBAL INTEGRATION VERSUS LOCAL RESPONSIVENESS
Competing in the global marketplace puts an MNE on the horns of a dilemma:
should it single-mindedly standardize products and processes and resolutely exploit
location effects to maximize the efficiency gains of global integration? Or, should it
adapt products and processes to the unique situations in each market in order to
maximize the effectiveness benefits of local responsiveness? As we see in Table
12.6, significant motivations endorse each imperative.
A. The Potential for Standardization
The convergence of national markets, standardization of business, and efficiency
imperatives push MNEs to integrate activities.
B. The Characteristics of Consumer Preferences
Differences in local consumers’ preferences endure due to cultural redisposition,
historical legacy, and latent nationalism. Responding to local customers’
preferences requires customizing products and processes. Adaptation reduces the
efficiencies of standardization, thereby aggravating the liability of foreignness,
inflating operational costs, and reducing value creation.
C. The Effect of Institutional Agents
Aspects of standardization endorse global integration whereas the issue of
divergent consumer behaviors endorses local responsiveness. A third factor,
institutional agents and their policy agendas, can, at different times, support
either scenario. Various transnational institutions, such as the IMF, WTO, and
World Bank, build an increasingly seamless global business environment. On
the other hand, institutional agents, particularly host governments, often strongly
encourage, if not compel, local responsiveness.
D. Global Integration and Local Responsiveness: Mapping their
Interaction
Operating internationally calls for configuring and coordinating operations in
ways that reconcile the competing demands of global integration and local
responsiveness. The Integration-Responsiveness (IR) Grid provides a
straightforward framework to organize analysis (see Figure 12.4). Procedurally,
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it positions an industry in the quadrant that represents its sensitivity to the dual
imperatives. As such, it provides executives a framework to interpret the
challenge. The IR Grid helps managers map their strategic options given
prevailing pressures for standardization and adaptation in their particular
industry
VII. INTERNATIONAL CORPORATE-LEVEL STRATEGIES
Corporate-level strategy determines the actions an MNE takes to gain a competitive
advantage by selecting and managing its business across a group of nations. A
corporate-level strategy (1) articulates how managers plan to reconcile global
integration and local responsiveness in ways that support the MNE’s vision and
mission, (2) stipulates how managers will integrate the MNE’s various parts into a
strategic whole, and (3) specifies the decision-making role the headquarters and
subsidiaries take doing so. The international, localization, global standardization, and
transnational strategies anchor contemporary interpretation. Table 12.7 profiles the
principles and practices of each archetype.
A. International Strategy. The international strategy emphasizes the transfer
of core competencies from the domestic operation to foreign subsidiaries. It
allows for limited local customization. Examples of companies using this
strategy include Airbus, Apple, and Google.
1. Advantages. The international strategy works well when an MNE’s
products or processes speak to a universal customer preference.
2. Limitations. Headquarters’ confidence in the superior competitiveness of
its competencies discourages local adaptation. Initially, this outlook does
not carry high risks. But, as an MNE expands its global operations, a
one-way view of the world may miss opportunities or misread threats in
foreign markets. Moreover, the international strategy sustains strong
performance as long as foreign rivals scramble futilely.
B. The Localization Strategy. The localization strategy encourages
decentralized decision-making so that local subsidiaries can adjust value
activities to local circumstances.
1. Advantages. The localization strategy superbly speaks to the unique
features of consumer preferences, market situations, and environmental
context found in a national market. It drives MNEs to customize products
and processes. The localization strategy gives the MNE’s local units a
distinctive advantage against in-country competitors who lack the
benefits provided by the parent company.
2. Limitations. The localization strategy, by encouraging operational
overlap, increases overhead expenses.
C. Global Strategy. A global strategy requires worldwide consistency and
standardization in order to be effective. Firms that choose the global strategy
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face strong pressures for cost reductions but weak pressure for local
responsiveness. Operationally, MNEs that adopt a global strategy usually are or
aim to become the low-cost player in their industry. This generally requires
global-scale production facilities in a few low-cost locations.
1. Advantages. The transnational strategy reconciles global integration and
local responsiveness in ways that leverage the MNE’s core competency
throughout worldwide operations.
2. Limitations. The transnational strategy is difficult to implement in
practice, given the challenges of complicated agendas, high costs, and
cognitive limits.
D. Transnational Strategy. The transnational strategy targets the efficiency of
global integration, the effectiveness of local responsiveness, and the systematic
diffusion of innovations.
1. Advantages. The global strategy exploits economies of scale, learning
effects, and location economies in order to translate the MNE’s resources
and capabilities into core competences that support cost leadership
worldwide.
2. Limitations. The cost sensitivity of the global strategy leaves MNEs little
latitude to customize processes or products to local conditions; each
change reduces efficiency. Hence, an MNE’s success is a function of the
validity of the ‘one type product fits all customers’ needs worldwide’
thesis.
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