Lecture notes International Strategic Management

This summary is written in 2013-2014.

Lecture 1: Introductions on international strategic management

Additional definitions on some key principals:

Strategy; a set of commitments and actions, which is fully integrated and coordinated. It’s goal is to utilize core competencies and develop competitive advantages.

Strategic management: management process to asses a company and its competitors. Furthermore, it meets all these competitors by setting appropriate goals and strategies. Finally, it evaluates these goals and strategies to see whether or not they have been successful or need to be replaced by new strategy or goals.

International Strategic Management: a management planning process, which determines the strategies and goals, but in an international setting: how to expand abroad or compete internationally.

Globalization, and therefore strategic theory evolves from different types of factors:

1. Political
2. Technological
3. Social
4. Competitive

International perspective gives several benefits on:

1. Costs
2. Timing
3. Learning
4. Arbitrage

Which are influenced by different types of factors:

1. Cultural
2. Commercial
3. Technical
4. Legal

Lecture 2: Internationalization theory and practice

In this lecture, several theories for trade and other international activities are discussed.

Absolute cost advantage, by Adam Smith in 1776, is the idea of operating internationally based on an advantage, where the same amount of resources lead to greater production of a good or service than another one.

Comparative advantage, an idea by Ricardo in 1817, refers to specialization in one product, and trading that against another product which is specialized in. Heckscher and Ohlin (1952) suggest that the basis for trade lies in relative scarce (rare, not very available) or abundant (voluminous, over available) resources. A country will export goods for which it has abundant resources, and import goods for which it has scarce resources. This means, that a country will produce goods for which the relative cost of production is the lowest.

  Entry mode theories originate in differences in motivation to internationalize: one can move abroad to escape stagnation in their own country, some may need to do so to keep up with competition, some need to follow their customers which move abroad or others do so out of cost-cutting motivations. Several theories are developed around these issues.

The Uppsala Model suggest that companies to through several phases towards internationalization. Firstly, they start by gaining experience in their home markets. Secondly, they internationalize to a nearby market (both in terms in physical distance, so the measurable, concrete distance, and physic distance, so the relative distance, as cultural distance) and then slowly move further to more far away markets. Thirdly, exportation instead of other forms of entry is chosen and developed. Fourthly, after years of experience and appearance in the foreign market, fully owned subsidiaries and other forms of integration are formed.

Key elements are that distance has several, different elements, the commitments to internationalization are developed slowly, and also cannot be rushed, and these are reversible.

The Born Global Concept holds the idea that a firm can (in contrary to the Uppsala Model) enter several foreign markets at the same time. Due to increased information available, for any person or organization, one can start from scratch anywhere without first needing to gather information in a domestic market. The official definition of a Born Global firms says that it should have an percentage of export of 25% within the first three years. So, is a firm “Born global” or just rapidly growing, and the persons behind the organization may have experience already.

The Diamond Model or Cluster Model suggests that a company should internationalize according to a network, where the forces of Porter’s model (found in the book) are already present.

Attractiveness of a market is determined in order to find out where to internationalize to. This can be done based on the risks of a country and the opportunities both the market and the industry offers.

Country risks can be of different kinds:

1. Political
2. Economic
3. Competitive
4. Operational

Market opportunities lie in:

1. Market size
2. Market growth
3. Quality of demand (differentiating from price-sensitive, mass production to less price-sensitive, differentiated production)

Industry opportunities lie in:

1. The competitive climate of the industry (consider Porter’s five forces)
2.  Resource endowments
3. Government incentives

Another topic in entry mode theory is corporate social responsibility (CSR). Also see chapter 15 from the book on this topic. CSR policy incorporates a spirit (rather than just law) of  ethical standards and international norm.

From the economic point of view, a manager acts ethical when acting legal and maximizing shareholder value. “The business of business is business” according to Milton Friedman: no further social actions have to be taken, that is the role of the government.

From a responsibility point of view, as firms are global instead of national, firms can and should take global responsibility, as governments are not able to do so. Also, firms are more likely to stay than governments. Furthermore, they are more coordinated that governments and as firms take a lot from society, and therefore should give back too. Also, firms have more power than the individuals and should act upon this.

Lecture 3: Agency theory and firm boundaries

In this lecture, market presence and activities will be discussed.

First topic is the theory of transaction cost economics.

Transactions can take place in both the market (external) or within the organization (internally). Transaction cost economics (TCE) analyzes the transactions, where the costs made in performing the transaction are the transaction costs. These can be search and information costs, bargaining costs and policing and enforcement costs. Firms exist as the costs of market transactions must be higher than the internal costs of transaction. At first the market costs are lower and transactions take place on the market. However, at a certain price and quantity level, it will be cheaper to take transaction internal, and ‘buy’ them. In conclusion, we may say:

• Activities are internalized when the costs of outsourcing are higher than the (transaction) costs of internalization
• Activities are outsourced when the costs of internalization are higher than the (transaction) cost of out-sourcing

The TCE are influenced by bounded rationality and bounded reliability (found in the book in chapter 1). Together with some environmental factors (complexity and the small number of players) this generates the General Transaction Costs. These are present for all transaction. Additionally, costs can increase by three characteristics of assets: specificity, uncertainty/complexity and frequency. The higher the degree of these characteristics, the higher the market transactions costs (so, higher than the internal costs), and these tend to be externalized.

The second topic is the Agency Theory.

The Agency Theory, also known the principal-agent problem, addresses the issue of agency costs, which is the costs of difference in objectives. These objectives are the objectives of an agent (in a firm the officers or managers) and the principals (the shareholders or owners). These differences lead to losses, when the principal pays the agent to perform in a certain way that is beneficial for the principal, but costly for the agent. The other way around, they also occur when the principal can only observe the actions of the agent in a rather difficult or costly manner. Agency costs also increase when there is information asymmetry, uncertainty or risks.

Two solutions to this problem exist, to either fully specify all contracts or monitor all agents, but this might be very costly and the costs of this may be higher than the agency costs themselves.

The third topic in this lecture is on entry modes, namely Foreign Distributors, Strategic Alliances and Mergers and Acquisitions. This is perfectly described in the book in chapter 11, 12 and 13, and only the additions are given below.

When looking at Foreign Distribution as an entry mode, a vicious circle can be found as commitments is mainly short-term by the home country, which reduces the efforts made by the foreign distributor, which again reduces the probability of success, which then decreases commitment in the first place. Therefore, FD is unlikely to  succeed.

When firms gain from a Strategic Alliance, it often is as both firms in the alliance commit to sharing just enough information, to jointly create new FSAs, also known as Alliance-specific advantages (ASAs). These are only transferable to other locations within the alliance, and the individual firm within the alliance cannot claim the ASA. Additionally, with the creation of ASAs, stability and incentive to commitment is increased.

Two problems with Mergers and Acquisitions are found: the underestimation of the costs of integration, and the overestimation of the benefits.

Lecture 4: Firms Structure and Control

The first topic in this lecture is Integration responsiveness.

Remember the global firms in lecture 1. The global firm wins in terms of cost, timing, learning and arbitrage benefits. The local firm wins in terms of flexibility, proximity and quick response time à customer-orientated benefits. So, the firm is shaped by both the forces of globalization and localization. The theory of integration-responsiveness is one of understanding industries, where both the pressures for global integration and local responsiveness are evaluated and lead to three types of competitive situations: full globalization, full localization and a mix of both. When combining this with cost pressure, a matrix of strategies arises:

• International Strategy with low pressure of costs and low pressure for local responsiveness.
• Global Strategy with high pressure of costs and low pressure for local responsiveness
• Multidomestic Strategy with low pressure of costs and high pressure for local responsiveness
• Transnational Strategy with high pressure of costs and high pressure for local responsiveness

An implication of this theory, is that there is always an optimal strategy, given the forces from that industry. So, in an industry with equal forces, all firms should have the same structure and strategy.

The next topic is then on accompanying Organizational Structure of the firm.

Transaction Cost Economics (TCE) are a great determinant of the type of organizational structure. Several internal organizational forms exist: partnerships, peer groups, simple hierarchies, U-form firms and M-form firms. When internationalizing, difference can be made between Home and Host country, headquarters and subsidiary respectively. Each type of internal organization can be transformed into an multinational form. M-form and U-form firms can easily be modified by moving parts of the internal operations abroad.

Additionally, organizations can adapt a structure based on the number of business units and the international responsiveness forces:

• The Global Function Model is centralized in decision-making. Subsidiaries are local legal entities of the firm. E.g. Apple.
• The Geographic Model, is decentralized in decision-making. Subsidiaries act as independent units. E.g. ISS
• The Single Matrix Model is in between the previous two, with shared executive power. Subsidiaries should think global, act local. E.g. Citigroup
• The Multi-Business Global Product Division Model, where the firms is divided into business divisions, with a CEO on top, where divisions act independently. E.g. 3M
• The Multi-Business Geographic Model, where each country is responsible for its own divisions and operations. The countries act autonomously. E.g. SAB Miller
• The Multi-Business Matrix Model is between the previous two with dual responsibility, which is shared between divisions and geographical units. E.g. BASF The Chemical Company.

Another topic in this lecture is Top Management Teams.

There are a number of types of managers: global business managers, who are strategists; country managers, who should deal with local opportunities and threats; functional managers, who are specialists and deal with transferring best practices; and corporate managers, who are overall leaders of the organizations. Management specialization can be a cost benefit as it increases efficiencies, but additional management levels may also be very costly: costs of implementation and agency costs. In order to decrease the second, corporate governance is an solution. Corporate governance is the system in which businesses are controlled in rights and responsibilities, by providing rules and procedures. Furthermore, objectives are set and performance is monitored.

In corporate governance, some concrete managerial actions can be found to decrease the principal-agent problem: cash bonuses, share plans, stock options or temporary contracts. Furthermore, agents can be monitored internally by shareholders, non-executive directors or via a two-tier board system, externally by an auditing firm, stock analysts or debt providers, and competition based monitoring in the product, managerial labor or stock market, and in the market for corporate control.

Lecture 5: Firm Competitiveness

The first topic in this lecture is the theory of competitive advantage (also found in lecture 2). Two theories are found about the creation of competitive advantages: market-based “outside-in” models (Porter’s five forces, found in the book) and resource-based “inside-out” models. The second one is more unique, where resources are VRIN; valuable, rare, in-imitable and non-substitutable. In this order, the more characteristics a resource has, the more it leads to a sustained competitive advantage. Also, all firms in a market have the same stock of resources and everyone has the same access and knowledge to it.

Once a competitive advantage is created, how can it be sustained? Two types of isolating mechanisms, which are economic factors that limit the possibility of duplication: impediments to imitation, and the early mover advantage. Impediments are categorized in legal restrictions, superior access to inputs and customers, market size and economies of scale, and intangible barriers to imitation. Early mover advantages are found in the learning curves, reputation and buyer uncertainty, buyer switching costs and network effects.

The second topic is innovation management

In the resource-based view resources are publicly available. A sustainable, competitive advantage must have resources that are scarce and imperfectly mobile, and an innovation allows a firm to create scarcity: an unique innovation provides an resource only to the creators of the innovation, which means scarcity for competitors. Innovation has several dimensions by which it can be characterized: product vs. process, radical vs. incremental, competence enhancing vs. competence destroying and architectural vs. component.

The third topic is Strategic Human Resource Management.

The resource-based view explains why human resources can lead to a sustainable competitive advantage: they are fully VRIN. TCE also explains the value of human resources, as an internal or external decision making influence, but that only applies to unskilled workers, because addition on them is a matter of transaction cost analysis.

Human Resource Management (HRM) a mean to form policies and practices, that together improve the relationship between firm and employees. Human capital can be a source of competitive advantage and human resource practices directly influence the organization’s human capital. HRM knows several challenges: assignment issues, expatriate issues localization issues and global skills issues. The expatriate issue points at the difficulties that come with expansion abroad and the employees involved oversees. Together, companies and expatriates must determine on strategic vision, select and prepare for this, and agree on compensation, tenure, support and career follow-up. Expatriates will find challenges in the new job, family and local insertion and will react to that by flight (the isolated expat), fight (the militant expat), fit (the cosmopolitan expat) or follow (the assimilated expat). The global skill issue address the need for skills (combination of organizational role of the manager and some individual characteristics) fitted with the requirements of the manager. Bartlett and Ghoshal (1992) divided managers into business, country and functional managers, so an role in the organization. Individual skills can be found in the fields of professional, cultural, negotiating, relational, leaderships, intellectual, courage & determination, and flexibility.

The fourth topic is Cross-Cultural Management.

Cross-cultural management is applied when differences in meanings, concepts, behaviors and attitudes exist, when language differs, etc. Culture is very hard to define, and in management, different levels of culture can be found: corporate, industry, professional and national or ethnic culture. Many research on national culture has been conducted, grouped into four categories: ethnological research (Hall, 1960, on non-verbal means), managerial values and assumptions (Hofstede, 1980, measurements of distance), country clusters (Huntington, 1997, 8 civilizations) and economic clusters (Weber, 19^th century, clusters based on cultural and economic differences).

Lecture 6: Non-Market Strategies

First topic is the theory of Non-Market Strategy

The market is frame of relationship, in which the firm positions itself. A market strategy is the set of actions taken with the goal of improving performance to create value. Porter’s five forces model forms a great example for this. Also, in the resource-based view, market strategy means investing in VRIN resources.

However, this is not a sufficient view: the non-market must be taken into account, which is external to the firm and its environment. The non-market environment structures the firms from the outside by social, political and legal influences, e.g. governments, NGOs, citizens, regulators, media etc. The environment is characterized by the four I’s which can be applied to both market and non-market:

• issues, which is Porter’s five forces in the market, and regulations in the non-market
• institutions, which is market transactions costs and decision-making in the market, and regulators in the non-market
• interests, which is profit maximization in the market, and fairness and harmony in the non-market
• information, which is market research, reputation and advertising in the market, and prejudices, rumor and media in the non-market

Firms must be able to control its opportunities in order to be able to apply non-market strategy. If it cannot control its opportunities, if for example it is totally controlled by market aspects, a non-market strategy will have no impact. The non-market may include voluntary actions, but also involuntary, which the firm cannot influence. Therefore, both market and non-market strategies should be included in an integrated strategy.

Secondly, the impact of non-market strategy on business is discussed.

The non-market can change to hinder the firm, and other firms can use the non-market to hinder the firm. As the non-market is often not transparent, changes and its sources can be unclear. Responding to changes is often useless, so a more active approach is suitable: corporate political activism (CPA), is often seen as negative but are activities that give advantages in the non-market. This activism can merely be seen as lobbying. CPA is done by providing financial incentives (political contribution, soft money), building constituency (stakeholder coalitions, trade associations) or providing information (lobbying, communication with policymakers).

Lecture 7: A view to the future

Some topics regarding the future are discussed in this lecture. To start, business is booming.

Regarding globalization, and its driving forces of political, technological, social and competitive factors, these are increasingly important nowadays. The rise of the WTO, increase in FDI, reduction in traveling costs, cultural convergence indicate a larger force towards globalization. However, calls against globalization are also increasing; globalization has increased the difference between rich and poor, and increasing poverty (more people are relatively poor, though world as a whole is more wealthy: the rich are richer). Some organization benefited heavily: many huge multinationals, e.g. Coca Cola or Apple, earn more money than countries as a whole.

Challenges here to maintain the situation as it is today: threats of free-trade, re-regulation, cultural divergence etc.? Also, countries may interact in the market to support its own organizations, resulting in a mixed market and non-market. Furthermore, now developing countries will become developed at some time: attractiveness and low-cost benefits will disappear. The aging of populations in China, Europe and US are just around the corner.

It has been argued, that there is a progression in the choice of business and strategy models, which depend on the environment. We may question whether this is still true in 20 years.