Internationalization Strategies Questions - Essay Example

Using Porters 4 determinants of national advantage as your starting point outline the main reasons why a business might look at pursuing an internationalization strategy as part of its growth and expansion plans. What comparative advantages and disadvantages might internationalization bring to a company pursuing such a strategy? Porter’s diamond theory of national advantage identified four determinants of national competitive advantage as: factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry. These four determinants affect the sources of competitive advantage for firms within a given country and thus make them either more competitive globally or susceptible to competition from foreign based companies. The reasons why a business may seek to pursue an internationalization strategy as part of its growth and expansion plans are strongly contextual. In particular, they will reflect the economic and political features of the country or region of the investing firm, and of the country or region in which the company seeks to invest. Other factors at that will determine this decision include: the industry and the nature of the value added activity in which the firm is engaged and the characteristics of the individual investing firm, including its objectives and strategies in pursuing these objectives. Dunning (2000) identified four major types of internationalization activities: (1) market seeking or demand oriented activities that are geared towards satisfying a particular foreign market, or set of foreign markets; (2) resource seeking or supply oriented activity that targets gaining access to natural resources; (3) efficiency seeking activity which is designed to promote a more efficient division of labour; and (4) strategic asset seeking, which aims to protect or augment the existing specific advantages of the internationalising firm and/or to reduce the advantages of its competitors. These activities also mirror the advantages that organisations gain by pursuing internationalisation strategy such as greater market share, brand awareness and revenue, accessing more resources or technology for competitive advantage, efficiency and economies of scale which lowers cost of production, spreading of business risk and creation of entry barriers to one’s industry. Factor conditions refer to the inputs that are necessary for a firm to compete such as capital, infrastructure, land and labour. According to Porter (1990) the stock of factors in a country at any given time is less important than the extent to which they are upgraded and deployed. In reference to Dunning's resource seeking internationalisation objective, a company may therefore be attracted to a particular country where its key resources are generally rapidly upgraded for example the strong government support experienced in China’s manufacturing industry. Home demand conditions refer to the level of demand of a particular product locally in comparison to its level of demand abroad. It is largely influenced by size, number of independent buyers, sophistication of local buyers, rate of demand growth, early demand and early saturation. A more demanding local market leads to national advantage and a strong, trend-setting local market helps local firms anticipate global trends. Early saturation of the local market also motivates firms to continue innovation and to reduce cost and/or pricing of products for example Japan’s TV industry saturated early and forced home players to seek new markets in Europe and North America. Finally, the home firms will be forced to enter foreign markets, Dunning’s market seeking international activity, in the search for more business and sustainable growth. Porter’s third determinant, related and supporting industries reflects the importance of the link between businesses within a value chain. Related industries refers to those industries that share certain elements of their business for example the US has a vibrant information systems industry that supports its national defence systems industry, artificial intelligence systems industry and also commercial IT industry. When local supporting industries are competitive, firms enjoy more cost effective and innovative inputs (Porter, 1990). In such cases, a business may seek to move into a foreign country to benefit from the strength of the related and supporting industries for example BAE systems a British company invested in the US. Lastly, Porter argued that the strategy and structure of domestic firms also determines the national competitiveness of the country. For example the open communication and inclusive management style of American companies differs from the autocratic, top-down management style of Japanese companies or the methodical inclinations of German companies. These management styles may be more suited for different industries such that an organization may be attracted to one country over another based on their similarity in terms of organisational structures and cultures. Internationalisation also has its disadvantages. For starters it creates an extra challenge when it comes to coordination between the home base and the foreign subsidiaries. The extent of this challenge is determined by the type of foreign market entry adopted by the company. Secondly, internationalisation exposes the country to the microeconomic factors of the foreign country or region. For example the current economic downturn in the European Union will reflect on the performance of all companies with subsidiaries in that region. Thirdly, some foreign governments have policies that either prevent repatriation of profits or highly tax repatriated profit inflows to the home country. This forces the organisation to spend all its profits outside its home country. Also, exchange rate fluctuations affect the profits made by organisations in foreign countries. 2) Identify the analysis tool that you would use to judge the appropriateness of each of the internationalization strategies. Against what criteria would the decision regarding the form of internationalization to pursue best be judged? The analysis tool that shall be used here to judge the appropriateness of the internationalization strategy to pursue is Bartlett and Ghoshal (2002) global integration versus local responsiveness 2x2 matrix shown below. This matrix identifies four possible strategies that a business could adopt as an internationalization strategy, namely: international or export strategy, multinational or multi-domestic strategy, global strategy and transnational strategy. Integration vs. Responsiveness Global Strategy Transnational Strategy International Strategy Multinational Strategy Prahalad and Doz (1999) stated that the pressures for global integration arose out of need for either operation integration or strategic coordination. Examples of pressures for operating integration are homogeneity of needs or tastes, pressure for cost reduction, scale economies and technology intensity. On the other hand, examples of strategic coordination include investment intensity, and the importance of multinational competitors and/or customers to the company. Examples of pressures for local responsiveness include the demands of the host government, differences in consumer needs or tastes and need for substitutes (Prahalad & Doz, 1999). However, localization involves much more than just tailoring products to the market. According to Lessard (2003) localization involves five levels ranging from the superficial to the intimate. These levels, in increasing intimacy, are: (1) sufficiently localizing not to offend; (2) sufficiently localizing in order to effectively sell home products and services; (3) sufficiently localizing to adapt home-based products and services to the local environment; (4) sufficiently localizing in order to develop internationally competitive products based on the local environment; and ultimately (5) sufficiently localizing to the extent that you can influence the rules of the game within that local environment. The low pressure for global integration strategies are the international and multinational strategies. An international strategy is pegged on the home country’s expertise and thus it is highly centralized to reflect this. Here innovation, production and the core of the value chain is based on the home country. Knowledge gained from the home country is transferred downwards to the foreign subsidiaries. This strategy presumes superiority of the home country with respect to the foreign countries. A multinational strategy involves investing directly in new facilities in each of the foreign countries or regions so as to locally produce and market products. This strategy is ideal where there are high trade barriers, poor international transport and communication networks and highly fragmented consumer tastes. The multinational strategy allows a company to rapidly respond to different local needs and opportunities and avoid high trade tariffs. The high pressure for global integration strategies are the global strategy and the transnational strategy. Global strategy resembles the international strategy in terms of high centralization and foreign subsidiaries being highly dependent on the home company for technology, knowledge and other resources. The difference comes in the former’s pursuit of operating economies of scale. Also, the global strategy works best where there is homogeneity in terms of consumer needs or tastes for the given products. The transnational offers the company the best of both worlds: local responsiveness and global integration. Under a transnational strategy activities are located in those countries where they can be performed most efficiently and effectively. Also the company encourages its local managers to share their best practices so that they can be applied globally. Lessard (2003) argued that the transnational strategy allows organizations to realize the tripartite needs of: achieving efficiency through global economies of scale and comparative advantage of location; responding to local customer demands; and leveraging knowledge globally across all subsidiaries. Bartlett and Ghoshal (2002) argued that eventually all companies that seek to remain competitive in the international market arena would have to adopt the transnational strategy. According to them intense globalisation has intensified competition in almost all industries such that businesses will need to pursue both local differentiation and cost reduction if they are to sustain their competitive advantages. On the other hand, Rugman and Verbeke (2005) disagree with this notion arguing that based on their global sales, most international companies rely on their home regions more than on global performance per se. This supports the view that regional strategy is increasing in significance as global strategy declines in influence. For this reason it could be better for companies seeking to make inroad internationally to focus on developing regional level strategies rather than global strategies. References Bartlett, C.A. & Ghoshal, S. (2002). Managing Across Borders: The Transnational Solution. 2nd Ed. Boston, MA: Harvard Business School Press. Dunning, J.H. (2000). The eclectic paradigm as an envelope for economic and business theories of MNE activity. International Business Review. 9. p.pp. 163–190. Lessard, D.R. (2003). Frameworks for Global Strategic Analysis. Journal of Strategic Management Education. 1 (1). p.pp. 1–12. Porter, M.E. (1990). The competitive advantage of nations. New York: Free Press. Prahalad, C.K. & Doz, Y.L. (1999). The Multinational Mission: Balancing Local Demands and Global Vision. New York: Simon and Schuster. Rugman, A.M. & Verbeke, A. (2005). Towards a Theory of Regional Multinationals: A Transaction Cost Economics Approach. MIR: Management International Review. 45 (1). p.pp. 5–17.  Read More