Chapter 6

STRATEGIES FOR INTERNATIONAL COMPETITION

LEARNING OBJECTIVES

Discuss the roots of international strategy including ethnocentric, polycentric and

geocentric organizations.
Explain the facilitators of international expansion for firms.
Employ various analytical and portfolio thinking to understand to which countries
firms decide to expand.
Distinguish among the global, multidomestic and transnational mindsets of firms
and industries.
Describe the fit of various value-chain activities into a firms total international
strategy.
Explain the various levels of strategic integration including Stand-Alone, Simple
Integration, Complex Integration.
Integrate the specific firm-level initiatives of Core Competency Leveraging,
Counterattack and Glocalization to a firms international strategy.

TOPICS
The roots of international strategy
Strategically expanding overseas
Facilitators of international expansion
Where to expand internationally
Strategic planning for foreign market entry
Managing a portfolio of country subsidiaries
Host country attractiveness versus competitive strength matrix
The international risk versus return portfolio
Modern international strategic orientations
Global versus multidomestic strategic orientations
The transnational orientation imperative
The value chain configuration and strategic orientation of firms
Worldwide dispersal and re-integration of value chain activities
The functional scope of value chain dispersal and integration strategies
Stand-Alone strategies
Simple Integration
Complex Integration
Merging strategic orientations and functional integration strategies
Firm-level strategies for international competitiveness
Core competency leveraging
Counterattack
Glocalization
LECTURE OUTLINE

Opening Case
1. How does international diversification of operations fit into Maytags strategy?
For a U.S. company such as Maytag, imports have become a major concern. In the
past, the size of appliances made imports less of a threat because of high
transportation costs. Over the years, this has been offset by significantly lower labor
and production costs in Asia. Chinas Haier and South Koreas LG now compete with
Maytag and others for the U.S. market. In addition, Maytags U.S.-based
competitors, GE and Whirlpool, import their appliances from Mexico. To lower its
costs and be price competitive, Maytag has embarked on a strategy of international
diversification of operations. It uses what is called a triad strategy or a three-tiered
approach to manufacturing. Maytag dishwashers have Chinese motors, Mexican
wiring, and are put together in the U.S.
2. In your opinion, what factors should Maytag consider when deciding where to
produce its appliances? Where to sell them?
Cost is an important factor that Maytag should consider when deciding where to
produce its appliances. As indicated in the above question, the global appliance
industry is becoming very price competitive. In the U.S. market, Maytag competes
with imports such as Chinas Haier and South Koreas LG, it also competes with
Mexican imports from its U.S. rivals, GE and Whirlpool. The appliance should be
produced as close to its end market, so that it can react quickly to fast changing
demand. Protection of intellectual property is a critical factor, too. The case
describes how Maytag decided to source the turbidity sensor from a German supplier,
rather than from China because of fear of intellectual property theft.
As far as selling the appliances go, Maytags principal market is the U.S. Due to
globalization, it is likely that customers in other markets are aware of Western brands
and have the purchasing power. Maytag should study these markets and move in
when they are attractive.
3. What are the overall pressures for firms competing in the global appliance
industry?
For much of its life, the global appliance industry was highly local. This meant that
products produced locally were sold locally. The high costs of transportation of bulky
appliances was the chief reason for this. But things have changed now. Labor and
production costs in Asia are so low that they offset the transportation costs. This
means that Chinese (like Haier) and South Korean companies (like LG) can ship their
appliances and sell them in the U.S. market at highly attractive prices. This puts
tremendous pressure on U.S. manufacturers such as Maytag, Whirlpool, and GE.
They have to lower their costs, otherwise they will not be competitive. As they
consider moving their production to lower wage countries, they also have to think
about the protection of their intellectual property. Making critical and proprietary

parts in foreign countries may save money, but there is also the likelihood that their
components are copied by local competitors. They need to balance the cost
imperative with the imperative to protect their intellectual property.
The Roots of International Strategy
Howard Perlmutter identified three states of mind or attitudes that can be inferred
from examining the managerial practices of international firms. They are:
ethnocentric, polycentric, and geocentric (Figure 6-1).
An ethnocentric attitude represents an extreme orientation. It looks upon everything
that originates from an organizations home country, as the best in the world. Thus,
the international firms headquarters controls all that goes on in the world for that
firm. A polycentric attitude represents that opposite extreme. It assumes that there
are vast differences among the various countries because of differences in culture,
language, race, and in their economic, political, and legal systems. In this approach,
management in the parent company gave foreign subsidiaries as much freedom as is
possible to manage their own affairs. A geocentric attitude is one that is worldoriented. There is no predisposition regarding degree of control or centralization.
Rather there is an emphasis on interdependence among headquarters and all foreign
subsidiaries.
Strategically Expanding Overseas
Internationalization has been facilitated through various factors as seen in Figure 6-2.
These factors are:

Government and political forces

Technological forces
Market forces
Competitive forces

Practical Insight 6-1 depicts global Internet initiatives of firms and industries in New
Zealand and India.
The decision as to where to expand internationally would depend upon the companys
assessment of a number of factors including:

Political risk
Cultural distance
Geographic distance
Economic environment
Foreign exchange volatility
Market size
Market growth

 Regulatory environment
Firms can use a number of techniques to assess the attractiveness of each market. In
the Analytical Hierarchy Process, the firm develops a list of important variables to
consider. Then the firm uses these variables to rate each country under consideration
in which to expand. Complementing this rating is the firms determination of relative
weights given to each variable. Exhibit 6-1 illustrates this technique.
Strategic Planning for Foreign Market Entry
The strategic planning process for foreign market entry consists of the following
discrete steps:
1.
2.
3.
4.

Identify the companys objective in its foreign market entry

Preliminary country screening
What are the opportunities and constraints in the target market?
What capabilities, resources, and skills are needed to succeed in the foreign
market?
5. Does the company have the core capabilities and resources to score high on the
key success factors? What are our strengths and weaknesses on the key success
factors?
6. Should the company enter the target market, and how?
7. Compare and rank the targeted countries
Managing a Portfolio of Country Subsidiaries
Two approaches help companies manage a portfolio of country subsidiaries. In the
Country Attractiveness/Competitive Strength matrix (Figure 6-3), the relative
attractiveness of the subsidiaries countries may be determined through a set of
political, economic, cultural, and market factors. The firms competitive strength in a
given host country may be measured through many different factors (relative market
share, relative market support, etc.). This combination of country attractiveness and
competitive strength presents four possibilities: growth strategy, collaborative
strategies, defensive strategies, and cross-subsidization strategies.
The International Risk-Return portfolio (Figure 6-4) uses expected profits in a
specific host country on one axis and the risk or uncertainty on the other. It offers six
different strategies to manage the portfolio of subsidiaries.
Modern International Strategic Orientations
Many scholars and observers have chosen to classify companies with international
operations into four categories: international, multinational, global, and transnational.
Figure 6-5 portrays these orientations and the associated pressures leading to each.
An international orientation is one in which the focus of the top management is upon
domestic operations, and the international operations are treated as accessories whose

main purpose is to support the domestic operations by providing critical raw materials
or components or incremental sales of the domestic product lines. A global
orientation relies on coordination of worldwide activities to maximize the collective
organization. In this orientation, a firms position in one competitive market is
significantly affected by its competitive position in other markets. Such firms derive
the cost benefits of scale or scope economies. Not all industries and firms which
compete internationally exhibit the market interdependencies fitting the global
orientation profile. Certain factors will contribute to an industrys need to be more
responsive to local environments. The resulting multidomestic strategy is an
approach that attacks each market individually rather than attempting to gain cost
advantages from a global integration effort. Transnational companies are described as
those that attempt to balance the need to be responsive to host country markets
through adaptation of the product, marketing strategies, and management practices to
suit local conditions, and at the same time try to obtain global efficiencies by linking
and coordinating the dispersed operations.
The value chain is an important concept that helps to understand the difference
between global and multidomestic industries. It groups a firms activities into several
categories, distinguishing between those directly involved in producing, marketing,
delivering, and supporting a product or service; those that create, source, and improve
inputs and technology; and those performing overarching functions such as raising
capital, or overall decision making. The value chain is shown in Figure 6-6.
Worldwide Dispersal and Re-integration of Value Chain Activities
International firms have rapidly moved to put in place integrated systems of
international production and distribution capable of most effectively achieving the
three objectives of efficiency in current operations, risk management, and global
learning and innovation.
In the initial stages of internationalization, products are exported by the company to
foreign markets from the home country. As the company expands its markets abroad
to include several countries, it may choose to perform one or more activities in the
value chain in foreign locations with the principal purpose of taking advantage of
national differences, scale economies, and scope economies. Having dispersed the
value chain activities in different parts of the world, international companies
implement plans to re-integrate those activities in response to a global strategy
designed to enable the company to achieve its objectives most efficiently and
effectively, under an umbrella of an acceptable level of risk. The level of integration
falls in one of three categories:

Stand-Alone
Simple Integration
Complex Integration

The practice of outsourcing by some international companies represents simple

integration in its most popular form. Practical Insight 6-2 illustrates the dominant
role India plays in performing so-called backroom operations. Figure 6-7 illustrates
a summary of the international orientations and integration strategies.
Firm-level Strategies for International Competitiveness
Core competency leveraging is a strategy being used by companies that are gaining
prominence in a variety of businesses. Core competence may be defined as the
distinctive ability to excel in a key area, upon which a company can build a variety of
businesses and develop new generations of products, some of which customers may
need but have not yet imagined. Core products are the intermediate linkages between
core competencies and end products. Apart from technological core competence,
companies can develop core competencies in a variety of functional areas: logistics
and distribution, marketing, purchasing, etc.
With the increasing globalization of industries, international companies have come to
realize that a competitive attack against a home market can be launched by foreign
companies who, at the time of the attack, may have a relatively small presence in it.
Today, global competition is characterized by a series of competitive attacks and
counterattacks by global companies in each others home and third-country markets.
Cash flows are needed to develop the various capabilities required to make an
effective attack or counterattack. The types of capabilities needed are:

channels of distribution through which to direct an attack

investment in key core competencies
a wide range of products that can benefit from the same distribution channels.

Global companies must be careful that, in their zealous pursuit of an effective global
strategy, they do not neglect managerial initiative at lower levels in the organizational
hierarchy, especially at the regional and subsidiary levels. The term glocalization
represents a firm-level strategic response that parallels the industry-level, total firm
transnational organization. Glocalization is simply thinking globally but acting
locally.
A successful strategy incorporates the glocalization of the following interrelated
elements: management, foreign affiliates, exports, products, and production.
McDonalds glocalization move in Japan is described in Practical Insight 6-3.
DISCUSSION QUESTIONS
1. Pick any industry and develop a list of factors that you believe are critical to
consider when deciding overseas.
The answers to this question will vary depending upon the industry selected. The text
gives the example of McDonalds and the factors relevant to this company. If we take

the example of the mid-price hotel industry (companies such as Holiday Inn), the
relevant factors would be:
economic environment
market size
market growth
regulatory environment
The above are examples of factors to consider when making the decision to select a
specific foreign country. The next step would be to consider the key success factors
in which the company must excel in order to succeed in the foreign market.
Examples of factors for the mid-priced hotel industry would be:

consistent service quality

standardization of operating procedures

2. Why will the transnational approach require more of a firms resources to

implement?
Transnational companies are described as those that attempt to balance the need to be
responsive to host country markets through adaptation of the product, marketing
strategies, and management practices to suit local conditions, and at the same time try
to obtain global efficiencies by linking and coordinating the dispersed operations.
The resources and activities are distributed to specialized foreign operations, and they
are integrated into an interdependent network of worldwide operations. Because of
the need to distribute a number of resources and activities and also have integrating
mechanisms to coordinate them, the transnational approach requires more of a firms
resources to implement.
3. Why is the value chain important to understand in relationship to a firms
international strategic approach?
The value chain groups a firms activities into several categories, distinguishing
between those directly involved in producing, marketing, delivering, and supporting a
product or service; those that create, source, and improve inputs and technology; and
those performing overarching functions such as raising capital, or overall decision
making. The value chain activities are either primary activities (those directly
involved in producing or marketing goods or services of a firm) or support activities
(those that facilitate and enhance the effectiveness and efficiency of the various links
in the primary activities chain). Primary activities are further classified as either
upstream (inbound logistics, operations) or downstream (outbound logistics,
marketing and sales, after-sales service). The distinction between upstream and
downstream activities has strategic implications to how companies compete in an
industry. Competitive advantage in upstream and support activities often grows more
out of the entire system of countries in which a firm competes than from its position
in any one country. In contrast, downstream activities create competitive advantages
that are largely country-specific. The value chain is thus the starting point in a firms

international strategic approach because it helps in making the decision to locate

activities in specific places.
4. Link the levels of integration strategies to (a) ethnocentrism, polycentrism and
geocentrism, and (b) the global, multidomestic, and transnational approaches.
Figure 6-7 in the text presents the linkages. Companies pursuing a Stand Alone
integration strategy have a multidomestic orientation and are polycentric firms. Firms
pursuing a Simple Integration strategy have an early global orientation (i.e. they are
just moving to this orientation) and are typically ethnocentric. Finally, a Complex
Integration strategy goes with a firm pursuing a global approach and inclined to move
toward the transnational approach. Such a firm is also geocentric in its orientation.
5. Give examples of various ways a firm can glocalize.
Companies can glocalize management by giving considerable freedom to subsidiary
managers in certain areas, while maintaining headquarters control in others.
Transferring production technology to the host country and increasing the ratio of
locally produced items is another example of glocalization. McDonalds product
portfolio is another example of glocalization. Certain products are kept constant
throughout the world, while others (e.g. Chicken Maharaja Mac, McVeggie) are
localized.
MINI-CASE
1. Should CIENA look to move software development operations into India?
Due to changes in the competitive nature of the telecommunications equipment
industry, CIENA has shifted its emphasis to software from hardware. Evidence of
this is in its allocation of 269 engineers and managers for hardware and 480 for
software. This makes a good case for moving software development to India. As the
pros listed in the case indicates, India has skilled labor in the software area and the
government, keen on attracting foreign companies, is offering a number of incentives.
CIENA can get tremendous cost savings by moving its software development to
India.
2. Should CIENA pursue the Chinese market, look to establish production facilities
there for export purposes, or do both?
The chapter talks about the strategy of counterattack. With the increasing
globalization of industries, international companies have come to realize that a
competitive attack against a home market can be launched by foreign companies who,
at the time of the attack, may have a relatively small presence. Today, global
competition is characterized by a series of competitive attacks and counterattacks by
global companies in each others home and third-country markets. That is exactly

what Huawei Technologies is doing to CIENA. CIENA should counterattack by

getting into China, not just to use it as an export base but to sell there in competition
with Huawei. A key issue, though, is the cash flows needed by CIENA to develop the
various capabilities required to make an effective counterattack. If CIENA has the
resources, acquiring production facilities in China may help in two ways: lower its
production cost because of lower labor costs, and attack Huawei in its home market.
3. How can CIENA protect its intellectual property in each country?
This is an important issue for CIENA to consider. India has weak anti-piracy laws
while 90% of the software in China is pirated. However, it is likely that the
intellectual property protection environment in India is changing as seen by the influx
of U.S. companies such as Oracle and Microsoft. CIENA should obtain patent
protection in India. The same should be done in China. In addition, CIENA should
aggressively pursue legal remedies in both countries for any violation of its
intellectual property rights.