(Originally published on OUBS Blog)
Even if you do not carry out international activities within your organisation, you will be affected by international trade and strategies of MNCs (Multinational corporations). Delivering robust strategies across borders is very dynamic and complex.
Internation competition: the management of internation trade
Activities of multinationals are based on foreign direct investment (FDI), which also led to much of internation trade now being internal to these MNC, who oversee immense resources rivaling all but the richest countries. Over time, the overseas parts of the companies became more independant with managers tasks being planning, control and administration. Now the entire value chain could be redesigned. High skills in co-ordination and integration across borders are needed. This skill has lead to the emergence of partnerships and alliances.
The law of comparative costs and comparative advantage underlies all international trade and countries have different capabilities in land, labour and capital.
Porter (1990) identified some factors of production influencing international movements:
- internationally mobile factors of production (mobility of labout increasing)
- fast-changing technology
- mobility barriers, entry or exit barriers
To gain competitive advantage, the following factors play a role:
- human resources
- physical resources
- knowledge resources
- capital resources
It is important to understand where a competitive advantage comes from though. In the case study about Komatsu and Caterpillar, Komatsu’s formulation and implementaion of a long-term strategy to become established in world markets, enabled existing sources of comparative advantage (cost) to support internation competitive advantage.
There are four main types of international trade:
- Foreign direct investment
- joint ventures or strategic alliances
Rugman et al. (1985) developed a rational decision tree to decide which one is right for you.
Are there barriers to free trade?
-> No -> Export
Is there a risk of dissipation of knowledge
-> Yes -> FDI
-> No -> License
But is there a resource limitation?
-> Yes -> Strategic alliance
Remember that the approach needs to fit your company, industry and time… and of course your company
You can either be:
- Multinational: decentralised and self-sufficient in each nation, working with local opportunities, retaining knowledge within units
- Global: centralised but scaled globally, implementing the strategies of the parent company, with knowledge at the center retained
- International: core competencies central, using parent company capabilities, knowledge from center outwards
- Transnational: dispersed, interdependent, specialised, different contributions integrated, knowledge jointly developed and shared
Governments play a large role though, in both directions, as they also have to cope with MNCs moving elsewhere. The regulatory authority is there ‘to provide the conditions for the market to work and if necessary correct potential excesses.’
The benefit of being an MNC is that you have more flexibility and options. You can try to exploit those barriers that are good for you and avoid the others. Large organisations have some advantages here, identified by Kogut (1985) as:
- production shifting
- tax minimisation
- financial markets
- information arbitrage
- global co-ordination
- reducting political risk
Comparative Advantage and International Competitive Advantage
Kogut suggested that “Gobal strategies rest on the interplay of the competitive advantage of firms and the comparative advantage of countries.“
National markets are now becoming only parts of a global market and levers for internationalisation can be said to be world trade and FDI. Porter’s national ‘diamond’ is interesting here to understand the different in national positions. Here Demand Conditions; Factor Conditions; Firm Strategy, Structure and Rivalry; Related and Supporting Industries interact.
Next, looking at the value chain. Configuration refers to where the value chain activities are performed and a choice of configuration can be a source of advantage. Co-ordination is about how it is managed. These two interact, as the co-ordination needs to be between different parts dependent on how the value chain is configured. There are three different options for the value chain, one being scale efficiencies by putting on part of the value chain in one location and putting them emphasis here. The other option would be seek efficiency in each link of the chain and the last option would be to look across the entire chain and optimize the linkages across it.
Ghoshal’s organisation framework is helpful in finding out what the point is of a global strategy. In the frame work there are
- Achieving efficiency in current operations
- Managing risks
- Innovation, learning and adaptation
and Sources of competitive advantage
- National differences
- Scale economics
- Scope economics
The point of a global strategy would then be on of the strategic objectives, achievable through the said competitive advantages
Economy of scope can be best defined through the example of Gillette buying Duracell.
using a resource [a global distribution network for razors] acquired for one purpose for additional purposes [selling batteries] at little or no extra cost.
International Industries and International Firms
There are different strategies here:
- Multidomestic or Multilocal = each country or region on a stand-alone basis
- Global = integrated approach
There can also be a mix in global strategy for some products and regional one for others, depending on what is warranted for the product. As markets are converging and differences (social, economic and cultural) shrinking, there are more options to at least go global on part of your strategy, building arround a standardised core while offereing local variations.
Some argue though that the problem starts to appear that there are real differences between countries and even intra-country fragmentation happening. Maybe the standardisation has gone too far.
Ikea has benefited from building universal appeal for their products, allowing standardised marketing and distribution. You can benefit in global operations from: design, purchasing, manufacturing operations, packaging, distribution, marketing, advertising, customer service and software development. Mixing advantages from global operations and local ones is known as glocalisation. A good example here is that the chinese would like their shampoos in sachets rather than bottles and buy them in barber shops. This is something that needs to be known but the same shampoo as such, the same production process, etc. can still potentially be used.
There are different kinds of international firms. The most advanced system of those is what Bartlett and Ghoshal (1993) named ‘beyond the M-form’, with M for multidivisional. Rather it’s an emerging N-form with N standing for network. Here the importance is on co-ordination and providing a shared corporate purpose.
In service industries you are selling an intangible experience. Globalisation is about delivering a similar service for a mobile customer base. The service needs to be consistent and often the customer internationalises first. Branding is an important part of providing, or at least suggesting a quality and consistency across borders. Staff training is very important here and the more can be decoupled from the customer into the back-office value chain, the grater the reconfiguration advantages for scale and scope.
International Strategy Development
The decision tree should tell you that in absense of barriers of free trade, you should simply export. If there are no risk of dissipating knowledge, then FDI is needed. The mid way would be a strategic alliance.
You need to take into account the partners’ cultures, attitude and expectations as well as the potential loss of control and limit of alternative opportunities.
Reason for strategic alliances might be:
- faster penetration and exploitation of key markets
- new strategic directions otherwise not possible
- potential payoffs higher than costs
- immediate access
- need for complex resource bundles
- safety by spreading financial risks, novelty risks, political risks, volatility, standards
- a way of building defences
Harrigan argued that alliances fail because operating managers do not make them work, not because contracts are poorly written.
Faulkner (1994) found four factors for successful management of alliances:
- positive partner attitudes
- clear organisational arrangements
- a learning philosophy
- congruent long-term goals
There are several types of analysis:
- joint ventures
To make them work you can use a gateway system, a gatekeeper to avoid misunderstandings. The mission of gateway executives is boundary-spanning. You should also only gradually increase areas of involvement for incompatibilities to be reduced. Many successful alliances also have divorce procedures.