Lecture 1 - Introduction to ISM
Strategy: an integrated and coordinated set of commitments and actions, designed to exploit
core competencies, to gain a competitive advantage.
- Competitive advantage: higher price for consumers or lower costs for producers.
Strategic management: ongoing process that evaluates the company, its competitors, and sets
goals and strategies to meet all existing and potential competitors; and then reassesses these
to determine whether it has succeeded or needs replacement by a new strategy.
International strategic management: management planning process aimed at developing
strategies to allow an organization to expand abroad and compete internationally.
Four ‘competitive configurations’
1. Domestic Configuration
- What is it? → operate in one country, source in one country and supply in one
country.
- How does it generate value? → Labour + Capital = Product (beer); Consumers
prefer beer to the money (consumer surplus); Consumers pay more than the cost
of production (producer surplus).
- What’s the role of the international business manager? → None.
- What are the problems with the model? → Small market, limited growth potential,
high market dependence.
2. Export Configuration
- What is it? → Differentials in price (i.e.: they are willing to pay more) and/or
demand (i.e.: they are able to drink more) create opportunities abroad.
- How does it generate value? → If the differential in price and demand are high
enough and the costs of supply (transportation costs) are low enough, profit can
be created.
- What’s the role of the international business manager? → Defining market
attractiveness. Selecting export markets. What makes an attractive export
market.
- What are the problems with the model? → Transportation costs create an
inefficiency.
3. Multinational Configuration
- What is it? → Replicating the firm's operations abroad (avoid transportation
costs).
- How does it generate value? → Transportation costs are minimized, foreign
consumers pay foreign prices for domestic goods even if domestic operations are
more efficient.
- What’s the role of the international business manager? → In addition to choosing
markets, the manager must consider organising subsidiaries and managing
international staff.
- What are the problems with the model? → Duplication of functions; inefficient use
of resources.
, 4. Global Configuration
- What is it? → Firms split their supply chains across countries, to maximize profits
at each stage, to exploit regional differentials in cost, supply and demand.
- How does it generate value? → Functions which are unprofitable in one country
are moved to locations in which they are profitable so that the value is maximized
across the entire supply chain.
- What’s the role of the international business manager? → In addition to the tasks
in the previous models, the manager must assign functions to countries, circulate
managers and staff between functions and ensure communication between
functions.
- What are the problems with the model? → No problems, this is the most efficient
model. Global businesses have been made possible by ‘globalization’.
Globalization is the process of international integration arising from the interchange of world
views, products, ideas and other aspects of culture.
Internationalizing provides the firm with significant advantages.
- Costs benefits: lower production costs, lower transportation cost.
- Revenue benefits: bigger markets with more consumers.
- Learning benefits: learn from international failures, learn from the host country.
- Arbitrage benefits: find expensive resources cheaper.
Four critical elements
1. Liability of foreignness: set of costs based on a particular company’s unfamiliarity with
and lack of roots in a local environment.
- you will not have the same success.
- you will incur more costs in the foreign market.
2. Localization advantages: advantages that come when the firm chooses to focus on
serving one (local) market, rather than all (global) markets.
, - In a market with localization advantages internationalization implies: Loss of
Flexibility; Loss of Proximity; Loss of Quick Response Abilities.
- In every industry there is one force pushing us to globalize and another pushing
us to localize.
3. Creation of disadvantages: threat of discrimination
4. Location-bound advantages: if a firm has location-bound advantages, it cannot
internationalise (i.e. immoble resources, local market reputation and knowledge).
- If the firm does not have non-location bound advantages, and it cannot create
them, then it should reconsider internationalisation (i.e. Walmart in Germany).
Key questions to ask before internationalising: What are the firm's advantages? Are the firm's
advantages location bound?
Article 1.1 - Hu, Y.S., 1995. The international transferability of the firm's advantages.
The firm's advantages and disadvantages are defined as its strengths and weaknesses either
relative to the competition in a specific competitive arena or relative to an alternative to the firm
(from the viewpoint of the other party) in a particular context.
- Advantage is always relative: stems from assets and capabilities that are superior to
those possessed by the relevant competition or alternative, or that are combined and
deployed in such a way as to confer a superior competitive position.
- The relevant competition against which advantages are defined includes both actual and
potential competition.
- The sum of the firm's advantages and disadvantages may be termed its
competitiveness.
Success at home does not always mean success abroad.
- The advantages that a firm possesses relative to firms in its own country need not be
identical to (and may be quite different from) the advantages that it will have relative to
firms in another country.
- superiority relative to the firm's domestic rivals need not mean superiority relative to
foreign firms.
- Domestic strengths do not necessarily mean competitive advantages and success in a
foreign country.
, - The company that operates most successfully abroad may not be the strongest firm in
the industry at home.
- For the same firm with international operations, the advantage that matters most in the
home nation may not be the same as the advantage that has most value in a foreign
country.
A firm can only gain advantage if it is able to transfer some advantages (or their ingredients)
from outside the target country that are not available to indigenous players.
- Non-transferability can occur for two reasons: due to geographical specificity (workforce,
monopoly position, supply chain, reputation, customers and suppliers relationships) or to
the tacit nature of knowledge.
- Absence of value may be due to the lack of "fit" with the environment or to competitors'
moves to neutralize the advantage.
- Only non-location bound advantages can be transferred.
Managerial implications:
- identifying the advantages to be transferred.
- assets that are not necessarily superior in the home context and general industry and/or
national attributes may become important advantages in a foreign country.
- if an important advantage is found to be non-transferable, one should consider defining
the advantage at a different level (knowing how to create a reputation instead of
transferring the existing one).
- if the advantage is non-transferable, the firm should contemplate whether a different
mode of operations would allow transfer (i.e. licensing, subsidiary, joint venture).
- exporting the product in which the advantage is embodied is a substitute for exporting
the capacity to make the product.
- transferability may depend on the choice of target countries.
- transferability may necessitate sustained investment in complementary assets through
such things as training, local personnel, and local facilities.
- transfer is neither automatic nor easy but may require creative adaptations and effort.
Article 1.2 -
Foreign firms from institutionally distant countries imitate the practices of domestic firms
(isomorphism). However, the benefits of an isomorphic strategy diminish with experience.
- Foreign firms are at a disadvantage vis-à-vis indigenous competitors.
- Liability of foreignness: foreign firms typically underperform relative to domestic
competitors.
Isomorphism: firms are more likely to adopt isomorphic strategies in situations characterized by
uncertainty and information asymmetry.
- Foreign entrants from distant markets imitate local firms to reduce information
asymmetry, fit the local institutional environment better, acquire legitimacy, and
ultimately, offset the liability of foreignness.
- Isomorphism partially mediates the relationship between distance and performance.
- The greatest benefits to isomorphism are likely to accrue to inexperienced firms from
institutionally distant markets.
Strategy: an integrated and coordinated set of commitments and actions, designed to exploit
core competencies, to gain a competitive advantage.
- Competitive advantage: higher price for consumers or lower costs for producers.
Strategic management: ongoing process that evaluates the company, its competitors, and sets
goals and strategies to meet all existing and potential competitors; and then reassesses these
to determine whether it has succeeded or needs replacement by a new strategy.
International strategic management: management planning process aimed at developing
strategies to allow an organization to expand abroad and compete internationally.
Four ‘competitive configurations’
1. Domestic Configuration
- What is it? → operate in one country, source in one country and supply in one
country.
- How does it generate value? → Labour + Capital = Product (beer); Consumers
prefer beer to the money (consumer surplus); Consumers pay more than the cost
of production (producer surplus).
- What’s the role of the international business manager? → None.
- What are the problems with the model? → Small market, limited growth potential,
high market dependence.
2. Export Configuration
- What is it? → Differentials in price (i.e.: they are willing to pay more) and/or
demand (i.e.: they are able to drink more) create opportunities abroad.
- How does it generate value? → If the differential in price and demand are high
enough and the costs of supply (transportation costs) are low enough, profit can
be created.
- What’s the role of the international business manager? → Defining market
attractiveness. Selecting export markets. What makes an attractive export
market.
- What are the problems with the model? → Transportation costs create an
inefficiency.
3. Multinational Configuration
- What is it? → Replicating the firm's operations abroad (avoid transportation
costs).
- How does it generate value? → Transportation costs are minimized, foreign
consumers pay foreign prices for domestic goods even if domestic operations are
more efficient.
- What’s the role of the international business manager? → In addition to choosing
markets, the manager must consider organising subsidiaries and managing
international staff.
- What are the problems with the model? → Duplication of functions; inefficient use
of resources.
, 4. Global Configuration
- What is it? → Firms split their supply chains across countries, to maximize profits
at each stage, to exploit regional differentials in cost, supply and demand.
- How does it generate value? → Functions which are unprofitable in one country
are moved to locations in which they are profitable so that the value is maximized
across the entire supply chain.
- What’s the role of the international business manager? → In addition to the tasks
in the previous models, the manager must assign functions to countries, circulate
managers and staff between functions and ensure communication between
functions.
- What are the problems with the model? → No problems, this is the most efficient
model. Global businesses have been made possible by ‘globalization’.
Globalization is the process of international integration arising from the interchange of world
views, products, ideas and other aspects of culture.
Internationalizing provides the firm with significant advantages.
- Costs benefits: lower production costs, lower transportation cost.
- Revenue benefits: bigger markets with more consumers.
- Learning benefits: learn from international failures, learn from the host country.
- Arbitrage benefits: find expensive resources cheaper.
Four critical elements
1. Liability of foreignness: set of costs based on a particular company’s unfamiliarity with
and lack of roots in a local environment.
- you will not have the same success.
- you will incur more costs in the foreign market.
2. Localization advantages: advantages that come when the firm chooses to focus on
serving one (local) market, rather than all (global) markets.
, - In a market with localization advantages internationalization implies: Loss of
Flexibility; Loss of Proximity; Loss of Quick Response Abilities.
- In every industry there is one force pushing us to globalize and another pushing
us to localize.
3. Creation of disadvantages: threat of discrimination
4. Location-bound advantages: if a firm has location-bound advantages, it cannot
internationalise (i.e. immoble resources, local market reputation and knowledge).
- If the firm does not have non-location bound advantages, and it cannot create
them, then it should reconsider internationalisation (i.e. Walmart in Germany).
Key questions to ask before internationalising: What are the firm's advantages? Are the firm's
advantages location bound?
Article 1.1 - Hu, Y.S., 1995. The international transferability of the firm's advantages.
The firm's advantages and disadvantages are defined as its strengths and weaknesses either
relative to the competition in a specific competitive arena or relative to an alternative to the firm
(from the viewpoint of the other party) in a particular context.
- Advantage is always relative: stems from assets and capabilities that are superior to
those possessed by the relevant competition or alternative, or that are combined and
deployed in such a way as to confer a superior competitive position.
- The relevant competition against which advantages are defined includes both actual and
potential competition.
- The sum of the firm's advantages and disadvantages may be termed its
competitiveness.
Success at home does not always mean success abroad.
- The advantages that a firm possesses relative to firms in its own country need not be
identical to (and may be quite different from) the advantages that it will have relative to
firms in another country.
- superiority relative to the firm's domestic rivals need not mean superiority relative to
foreign firms.
- Domestic strengths do not necessarily mean competitive advantages and success in a
foreign country.
, - The company that operates most successfully abroad may not be the strongest firm in
the industry at home.
- For the same firm with international operations, the advantage that matters most in the
home nation may not be the same as the advantage that has most value in a foreign
country.
A firm can only gain advantage if it is able to transfer some advantages (or their ingredients)
from outside the target country that are not available to indigenous players.
- Non-transferability can occur for two reasons: due to geographical specificity (workforce,
monopoly position, supply chain, reputation, customers and suppliers relationships) or to
the tacit nature of knowledge.
- Absence of value may be due to the lack of "fit" with the environment or to competitors'
moves to neutralize the advantage.
- Only non-location bound advantages can be transferred.
Managerial implications:
- identifying the advantages to be transferred.
- assets that are not necessarily superior in the home context and general industry and/or
national attributes may become important advantages in a foreign country.
- if an important advantage is found to be non-transferable, one should consider defining
the advantage at a different level (knowing how to create a reputation instead of
transferring the existing one).
- if the advantage is non-transferable, the firm should contemplate whether a different
mode of operations would allow transfer (i.e. licensing, subsidiary, joint venture).
- exporting the product in which the advantage is embodied is a substitute for exporting
the capacity to make the product.
- transferability may depend on the choice of target countries.
- transferability may necessitate sustained investment in complementary assets through
such things as training, local personnel, and local facilities.
- transfer is neither automatic nor easy but may require creative adaptations and effort.
Article 1.2 -
Foreign firms from institutionally distant countries imitate the practices of domestic firms
(isomorphism). However, the benefits of an isomorphic strategy diminish with experience.
- Foreign firms are at a disadvantage vis-à-vis indigenous competitors.
- Liability of foreignness: foreign firms typically underperform relative to domestic
competitors.
Isomorphism: firms are more likely to adopt isomorphic strategies in situations characterized by
uncertainty and information asymmetry.
- Foreign entrants from distant markets imitate local firms to reduce information
asymmetry, fit the local institutional environment better, acquire legitimacy, and
ultimately, offset the liability of foreignness.
- Isomorphism partially mediates the relationship between distance and performance.
- The greatest benefits to isomorphism are likely to accrue to inexperienced firms from
institutionally distant markets.
