Internationalization Strategies - Essay Example

Internationalization Strategies Internationalization Strategies International business refers to international dealings of a business or country pertaining exchange of goods, services and information. Companies may exchange physical corporate assets or acquire an entire company. An organization can also have facilities and economic interests in several countries. According to Hitt, Ireland, Hoskisson (2011), the main reason firms go international is to extend the lifecycle of their products. Firms require expanding to secure required resources. Supply of raw materials has caused many Chinese companies to expand internationally. Industries such as electronics and clothing move their operations to foreign companies due to lower production coasts. Industrialization in different countries has caused similar demand for products. This has caused pressure in several companies to integrate their operations globally. People in developed countries have similarities in lifestyles and companies are forced to expand globally to meet increased demands. Business level- integrated cost leadership and differentiation Every business requires a competitive strategy in its domestic market. In international business the home country is the main source of competitive advantage. The ability of a firm to expand into international countries depends on the resources and abilities established in the home country. However, as the business expands into the global market, the home country becomes less significant in providing competitive advantage Hitt, Ireland, Hoskisson (2011). As stated by Michael (1998), this advantage occurs in two types: cost leadership and differentiation. The value of goods refers what buyers can pay, and a firm can have an advantage by offering lower prices than competitors or providing benefits that offset the high prices. Competitive forces originate from emergence of new competitors, substitutes, increased bargaining power, and rivalry among competitors. These forces determine the ability of a business organization to have higher rates of returns than investment costs. Advanced factors such as digital communication and advanced workforce education also determine the competitiveness of a firm. Integrated cost leadership and differentiation are integrated actions aimed delivering goods or services at prices lower than competitors with features acceptable to customers. A business requires efficient scale facilities and control production costs and overhead tightly. Monitoring costs of competitor products helps an organization adjust its prices to lower levels. Advantages The firm concentrates on a segment of customers and tailors its strategies and resources to its service. Hoskisson (2008) argues that strategic competitiveness is achieved when the firm satisfies a group of customers. The firm is committed at providing customers with superior value to gain advantage over competitors. This helps a company increase its profit. For example, Ford Motors estimates that increase in customer loyalty creates approximately $100 million additional profits annually. Firms concentrate more on their core business activities. Firms channel most of their resources on core activities and carry out innovations aimed at satisfying their customers. SAS institute is a software company that allocated more than 30 percent of their revenues to R&D. the firm concentrates on its core competences to serve customers such as the U.S bureau. Companies maintain low costs while serving a wide segment of customers. In the case of airlines, flight attendants may be required to purchase their own uniforms and customers are charged to check luggage. Flight attendants spend time selling products like water, digital cameras and MP3 players to passengers. Global companies can participate in e-commerce. This improves customer relations management. Careful integration of technology in a firm increases successful competition of a business. CEMEX SA, a Mexican global cement company, uses the internet as a link between its customers, plants and headquarters. The company is able to automate orders and optimize deliveries. Continued cost reduction reduces entry levels for new competitors. New entrants may be forced to provide below average product prices. Disadvantages Rivalry exists between competitors. Customers tend to be loyal to certain producers, and as their loyalty increases, their sensitivity to prices reduces. This causes rivalry between competing firms. In the U.S, competition between Coke and Pepsi for domination in soft drink market has led to cola wars. Customers are willing to accept price increases when the product still meets their needs. This increases their bargaining power. Firms have to cope with the varying demands of customers and uniqueness of their products. Experience can narrow value perception of customers. For example, IBM was the leading computer company and had differentiated features. Familiarity by customers and the entry of other brands in the market caused a shift in customer loyalty. Competitors offered similar features at a reduced price. Differentiation encourages counterfeiting of products. Counterfeiters produce goods that attempt to convey differentiated features and offer them at reduced prices. Success of a company increases demand for their products including counterfeits. When a company focuses on one line of production, customer needs may become similar to those of industry wide customers. This reduces the demand for their products and minimizes the profit margin due to shift in customer satisfaction. Corporate-level Strategies Multi-domestic Strategy According to Hitt, Ireland, Hoskisson (2011), multi-domestic strategy involves decentralizing strategic and operating decisions to business units in each country. This helps each unit tailor products for the local market. This strategy assumes markets are differentiated by the national boundaries of the country. The managers customize products according to consumer needs, industry conditions, social norms, and political and legal structures. These strategies improve the competitiveness of the unit in the local market. However, these strategies reduce knowledge sharing of the company as a whole. These strategies do not allow the development of economies of scale which increases costs. For example, Unilever is a European consumer products firm operating in several countries around the world. The strategic and operating decisions are decentralized to different regional business units. This gives regional managers autonomy to adapt product offerings to fit market needs. According to Lymbersky (2008), this strategy is used when a company requires adapting to conditions in specific countries and pressure for global efficiencies is not intense. Advantages As stated by Tamer, Gary & John (2007), managers recognize and emphasize variations among national markets. The mother company allows the subsidiary company to vary their products and management practices as per the country or region. Country managers are independent entrepreneurs, and in most cases are nationals of the host country. Their functions are independent and have little incentive for knowledge sharing with managers in other countries. Products and services are engineered to suit the unique needs of customers in each country. In cases where foreign subsidiaries include factories, locally produced products are better adapted to local markets. This approach puts minimal pressure on headquarter staff. This is because management of business operations is delegated to individual managers in each country. Some firms have limited international experience. They find multi-domestic strategy an easy option as tasks are delegated to country managers. Disadvantages Learning across country boundaries is limited. Henry (2008) explains that information in one country is not transferred automatically to all business units. Market information is needed for sensitivity of domestic conditions. Wal-mart bought Wertkauf and Interspar grocery chain in Germany in 1998. It generated sales of about $2.5 billion annually but never posted a profit. The company had failed to understand the culture of Germans. Their ethics manual prevented romantic relationships between employees and supervisors. This was viewed by Germans as a violation of their human rights. Limited sharing of information reduces the chances of developing and managing knowledge based competitive advantage. Competition may increase among subsidiary companies for organizational resources because country managers have different corporate visions. Decentralizations leads to inefficient manufacturing, redundant operations, high costs of international operation and proliferation of goods designed for local markets. Foreign managers of subsidiary firms develop strategic visions, cultures and processes that differ from those of headquarters. Global strategy As stated by Hitt, Ireland, Hoskisson (2011), this strategy assumes standardization of products across country markets. This strategy is centralized and controlled by the home office. Strategic business units in different countries are interdependent, and the home office has integration across these businesses. The home office dictates the competitive advantage and products are standardized across all countries. This strategy has more economies of scale and innovations in one country can be applied to markets in another country. This strategy has lower risks and may cause the firm to forego growth in the local markets. Mercedes Benz has successfully utilized this strategy to sell its products globally. The quality and durability of their products is recognized worldwide, which has propelled the success of this strategy. Advantages Global strategy is more effective when differences between countries are small, and there is global competition. It gives a company higher economies of scale. Henry (2008) explains that as a firm increases the volume of its outputs, it is able to reduce its unit costs. Firms involved in production of large outputs accumulate their learning experiences. This allows them to move down the experience curve, which generates cost reductions. Firms configure the value chain in order to achieve economies of scale in all activities. Chan & Lee (2005) explain that the firm gains extra-national scale economies in manufacturing. The needs of a single market are surpassed, and these products are exported to markets in other countries and regions. Technology transfer is coordinated between markets. Different countries undergo different technology advancement rates. Technology in one country can be spread to other subsidiaries due to centralized management. The reputation of the organization can be leveraged by providing reliable levels of goods and services. Standardization is carried out at a central point, and all subsidiaries operate at the same level and product quality cannot be compromised. The organizations also reduce their inventory. Goods are manufactured in a central place which reduces production in every country or region. The organization can offset disadvantages in the home country by exploring international markets. Disadvantages It is challenging for the management, especially in highly centralized organizations to, to coordinate activities of a large number of widely dispersed international operations. Large organizations have multiple operations in other countries and centralized coordination is difficult. The firm must maintain continuous communication between the headquarters and subsidiaries. Major organizations are made in the headquarters and have to be communicated to subsidiary units in different countries. Subsidiaries share information between themselves and report market variations and operational needs to the headquarters. There is loss of responsiveness and flexibility in the local market when global strategies are extreme. Organizations concentrate more on international subsidiaries and pay less attention to local markets and customers. Local managers in subsidiaries are stripped of autonomy in the country operations. This may demoralize them as they do not make important decisions concerning business operations and processes. As Segal-Horn argues, there are several advantages of carrying out certain activities such as marketing and R&D from a centralized place. This prevents loss of proprietary knowledge to competitors. Transnational Strategy Ireland, Hoskisson& Hitt (2008) explain that in this strategy, the firm produces unique standardized products in different markets. The firm combines benefits of global scale efficiency with advantages of local responsive in a country. This requires centralization and decentralization simultaneously. IKEA is a global furniture producer that employs this strategy. It relies on standardization of products with global production and distribution. However, it has a system of democratic design where new designs for local markets are designed and introduced. This helps IKEA produce products aimed at satisfying local consumers. This strategy is the most important to facilitate learning, but expensive and difficult to implement. Balancing centralization and decentralization produces a culture of transfer of knowledge among subsidiaries and transnational diffusion of practices. Advantages As stated by Miyamoto (2008) exchange of core competence is possible. The organization can locate or disperse its value-chain activities in the world where costs are cheap. This helps increase value for products and services. The company can take advantages of economies of scale, scope and cost factors to increase global competitiveness. Taking exchange of exchange rates, regulations, technology and tastes of local markets can increase the turnover of the investment. The company centralizes some resources and capabilities and distributes others. Production may be located in a low-wage country. Distributing resources reduces over dependency on a single facility to protect against disruptions such as exchange rate changes. Distributed resources and capabilities are more sensitive to differences in the local market needs. Local subsidiaries can respond to changes in the local market without affecting demands in other countries. Transnational companies identify and respond to potential opportunities and risks in the local market efficiently. Disadvantages Such companies suffer from organizational anarchy and suffer from centrifugal forces. This requires the organization to provide a sense of unity to ensure that managers share core business objectives. Organizational units are dispersed which causes complexity in the strategic task. This causes confusion among managers as they are required to share in the universal vision of the organization. Managers tend to become parochial, and the corporate vision needs to be communicated to all managers. It is difficult to internalize the organizational focus since different subsidiaries have a narrower view and experience base. This causes managers to develop individual understanding and acceptance. Implementing this strategy is difficult and expensive. The organization requires producing goods for international market as well as for local markets where subsidiary units are located. Specialization of products in environments with limited scope and shortened life cycles of products poses risks in organizational profitability. Conclusion International strategies are action plans that channel organizational resources so that a business can differentiate itself from competitors. These strategies are based on strengths and weaknesses relative to competition and opportunities available. An organization must maintain its competitive advantage for survival in the international market. The organization can have a centralized management and decisions are communicated from the headquarters to subsidiaries. Specific business units in different countries can be independent from the mother organization and make their own decisions based on the business environment in the country. An international company may have centralized management and production but also produce goods that meet local market demands. These strategies have different requirements for strategic management, and a particular organization requires proper planning before venturing into international markets. References CHAN, C.-K., & LEE, H. W. J. (2005). Successful strategies in supply chain management. Hershey, Idea Group Pub. HENRY, A. (2008). Understanding strategic management. Oxford, Oxford University Press. HITT, M. A., IRELAND, R. D., & HOSKISSON, R. E. (2011). Strategic management: competitiveness & globalization. Concepts. Mason, OH, South-Western Cengage Learning. HOSKISSON, R. E., & HOSKISSON, R. E. (2008). Competing for advantage. Mason, OH, Thomson/South-Western. IRELAND, R. D., HOSKISSON, R. E., & HITT, M. A. (2008). Understanding business strategy: concepts and cases. Mason, OH., South-Western Cengage Learning. LYMBERSKY, C. (2008). Market entry strategies text, cases and readings in market entry management. Hamburg, Management Laboratory Press. MIYAMOTO, K. (2008). 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