12.

Internationalization
12.1
12.2
12.3
12.4

Internationalization and Globalization, Differences

Why Going International
How Going International
Case Study

During the last half of the twentieth century, many barriers to international trade
fell and a wave of firms began pursuing global strategies to gain a competitive
advantage. However, some industries benefit more from globalization than do
others, and some nations have a comparative advantage over other nations in
certain industries. To create a successful global strategy, managers first must
understand the nature of global industries and the dynamics of global competition.

In the international competitive environment, the ability to develop a transnational

organizational capability is the key factor that can help the firm adapt to the
changes in the dynamic environment. As the fast rate of globalization renders the
traditional ways of doing business irrelevant, it is vital for managers to have a global
mindset to be effective. Globalization of business has led to the emergence of
global strategic management. A combination of strategic management and
international business will result in strategies for global cooperation. However, there
are obstacles to progress along the way.
The problems caused by these obstacles can be solved by cooperative ventures
based on mutual advantages of the parties involved. Proper effective
communication will be a key element for global strategies because what is proper
and effective in one culture may be ineffective and improper in another. Marketing
products globally is complex and difficult because of several factors including:
International Strategic Alliances, coordination and control of international
marketing, communication, regional trade blocks, and choice of global strategy. The
firm with the choice of an effective global strategy that takes into consideration its
strengths and weaknesses in the face of the opportunities and threats in the
environment, will survive.

12.1 Internationalization and Globalization,

Differences
An international strategy means that internationally scattered subsidiaries act
independently and operate as if they were local companies, with minimum

coordination from the parent company. Global strategy leads to a wide variety of
business strategies, and a high level of adaptation to the local business
environment. The challenge here is to develop one single strategy that can be
applied throughout the world while at the same time maintaining the flexibility to
adapt that strategy to the local business environment when necessary (Yip G.
2002). A global strategy involves a carefully crafted single strategy for the entire
network of subsidiaries and partners, encompassing many countries simultaneously
and leveraging synergies across many countries.
What differences are there between the global strategy and international strategy?
There are three key differences.
The first relates to the degree of involvement and coordination from the centre.
Coordination of strategic activities is the extent to which a firms strategic activities
in different country locations are planned and executed interdependently on a
global scale to exploit the synergies that exist across different countries. An
international strategy does not require strong coordination from the centre. A global
strategy, on the other hand, requires significant coordination between the activities
of the centre and those of subsidiaries.
The second difference relates to the degree of product standardization and
responsiveness to local business environment. Product standardization is the degree
to which a product, service, or process is standardized across countries. An
international strategy assumes that the subsidiary should respond to local business
needs unless there is a good reason for not doing so. In contrast, the global strategy
assumes that the centre should standardize its operations and products in all the
different countries, unless there is a compelling reason for not doing so (Zou S.,
Cavusgil S.T. 2002).
The third difference has to do with strategy integration and competitive moves.
Integration and competitive move refer to the extent to which a firms
competitive moves in major markets are interdependent. For example, a
multinational firm subsidizes operations or subsidiaries in countries where the
market is growing with resources gained from other subsidiaries where the market is
declining, or responds to competitive moves by rivals in one market by counterattacking in others.
The international strategy gives subsidiaries the independence to plan and execute
competitive moves independentlythat is, competitive moves are based solely on
the analysis of local rivals . In contrast, the global strategy plans and executes
competitive battles on a global scale. Firms adopting a global strategy, however,
compete as a collection of a globally integrated single firms. An international
strategy treats competition in each country on a stand-alone basis, while a global
strategy takes an integrated approach across different countries (Yip G. 2002).

12.2 Why Going International

Companies go international for a variety of reasons but the typical goal is company
growth or expansion. When a company hires international employees or searches
for new markets abroad, an international strategy can help diversify and expand a
business.
Economic globalization is the process during which businesses rapidly expand their
markets to include global clients. Such expansion is possible in part because
technological breakthroughs throughout the 20th century rendered global
communication easier. Air travel and email networks mean it is possible to manage
a business from a remote location. Now businesses often have the option of going
global, they assess a range of considerations before beginning such expansion.
Overseas operations are often attractive to executives seeking to reduce their
budgets in order to increase profit. For example, it is possible to cut business
overhead costs in countries with relatively deflated currencies and lower costs of
living. U.S.-based businesses can further reduce overhead by operating in countries
that have free trade arrangements with the United States. It is often cheaper to
employ a workforce in these countries since the cost of living is lower. When
companies experience financial crises, executives sometimes attempt to save what
remains of the company by reformulating the budget and moving overseas (Elmuti
D., Kathawala Y. 2001).
Expanded markets entice many executives into going global. William Edwards of All
Business explains that going global can reduce a company's reliance on local and
national markets. That is, downturns in consumer demand at home are offset by
upturns in consumer demand in international markets. Larger markets also mean
the potential for greater profit, so companies go global to seek new business
opportunities and even to expand the range of goods and services that they offer.
Sometimes businesses expand to under-exploited regions to gain market dominance
before an industry competitor expands into the region.
Change is an ever present facet of business development. Businesses transfer
ownership, for example, and end up reformulating their entire business structures.
Companies hire outside consultants to advise restructuring during financial crises.
Sometimes the fact that businesses go global is the product of the inevitable ebb
and flow of commerce. An overseas buyer may transfer operations to the home
country. The majority of an industry's business may shift overseas, making global
expansion all the more desirable. Competition may develop in regions such that it is
unwise for your company not to follow.

12.3 How
Going
Strategies

International:

Entry

Foreign market entry strategies differ in degree of risk they present, the control and
commitment of resources they require and the return on investment they promise.
There are two major types of entry modes:
1) non-equity mode, which includes export and contractual agreements,
2) equity mode, which includes joint venture and wholly owned subsidiaries.
The market-entry technique that offers the lowest level of risk and the least market
control is export and import. The highest risk, but also the highest market control
and expected return on investment are connected with direct investments that can
be made as an acquisition (sometimes called Brownfield) and Greenfield
investments (Terpstra V., Sarathy R. 2001).
Exporting and importing
The first and the most common strategy to be an international company is: import
and export of goods, materials and services. Exporting is the process of selling
goods or services produced in one country to other countries. There are two types
of exporting: direct and indirect. Indirect export means that products are carried
abroad by other agents and the firm doesnt have special activity connected with
international market, because the sale abroad is treated like the domestic one. For
these reasons it is difficult to say that it is an internationalization strategy. In the
case of direct exporting, the firm becomes directly involved in marketing its
products in foreign markets.
Licensing
Licensing is another way to enter a foreign market with a limited degree of risk. The
international licensing firm gives the licensee patent rights, trademark rights,
copyrights or know-how on products and processes. In return, the licensee will:
produce the licensors products, market these products in his assigned territory and
pay the licensor fees and royalties usually related to the sales volume of the
products. This type of agreement is generally welcomed by foreign public
authorities because it brings technology into the country.
Franchising

Franchising is similar to licensing except that the franchising organisation tends to

be more directly involved in the development and control of the marketing
programme.
The franchising system can be defined as a system in which semi-independent
business owners (franchisees) pay fees and royalties to a parent company
(franchiser) in return for the right to become identified with its trademark, to sell its
products or services, and often to use its business format and system.
Compared to licensing, franchising agreements tends to be longer and the
franchisor offers a broader package of rights and resources which usually includes:
equipments, managerial systems, operation manual, initial trainings, site approval
and all the support necessary for the franchisee to run its business in the same way
it is done by the franchisor. In addition to that, while a licensing agreement involves
things such as intellectual property, trade secrets and others in franchising it is
limited to trademarks and operating know-how of the business.
Advantages of the international franchising mode are as follows:
low political risk
low cost
allows simultaneous expansion into different regions of the world
well selected partners bring financial investment as well as managerial capabilities to the operation.
There are also disadvantages of the international franchising mode:
franchisees may turn into future competitors
demand of franchisees may be scarce when starting to franchise a company, which can lead to making
agreements with the wrong candidates
a wrong franchisee may ruin the companys name and reputation in the market
comparing to other modes such as exporting and even licensing, international franchising requires a
greater financial investment to attract prospects and support and manage franchisees.

Joint Ventures
Foreign joint ventures have much in common with licensing. The major difference is
that in joint ventures, the international firm has an equity position and a
management voice in the foreign firm. A partnership between host- and homecountry firms is formed, usually resulting in the creation of a third firm (Byrne S.,
Popoff L. 2008).
This type of agreement gives the international firm better control over operations
and also access to local market knowledge. The international firm has access to the
network of relationships of the franchisee and is less exposed to the risk
expropriation thanks to the partnership with the local firm (Geringer J.M., Hebert L.
1989).

This type of agreement is very popular in international management. Its popularity

stems from the fact that it permits the avoidance of control problems of the other
types of foreign market entry strategies. In addition, the presence of the local firm
facilitates the integration of the international firm in a foreign environment (Killing
J.P. 1982).
Strategic alliances
A strategic alliance is a term used to describe a variety of cooperative agreements
between different firms, such as shared research, formal joint ventures, or minority
equity participation (Campbell E., Reuer J.J. 2001). The modern form of strategic
alliances is becoming increasingly popular and has three distinguishing
characteristics:
they are usually between firms in high - industrialized nations
the focus is often on creating new products and technologies rather than distributing existing ones
they are often only created for short term durations.

Technology exchange - this is a major objective for many strategic alliances. The
reason for this is that technological innovations are based on interdisciplinary
advances and it is difficult for a single firm to possess the necessary resources or
capabilities to conduct its own effective R&D efforts. This is also supported by
shorter product life cycles and the need for many companies to stay competitive
through innovation (Jagersma P.K. 2005).

The greatest disadvantage of strategic alliances is the risk of competitive

collaboration some strategic alliances involve firms that are in fierce competition
outside the specific scope of the alliance. This creates the risk that one or both
partners will try to use the alliance to create an advantage over the other (Grant
R.M., Baden Fuller Ch. 2004).

Direct investments
In this arrangement, the international firm makes a direct investment in a
production unit in a foreign market. It is the greatest commitment since there is a
100% ownership. There are two primary ways for direct investments: firms can
make a direct acquisition in the host market or they can develop its own facilities
from the ground up and this form is called Greenfield investment. Acquisition has
become a popular mode of entering foreign markets mainly due to its quick access.
Acquisition is lower risk than Greenfield investment because the outcomes of an
acquisition can be estimated more easily and precisely. Greenfield investment is the

establishment of a new wholly owned subsidiary. It is often complex and potentially

costly, but it is able to full control to the firm and has the most potential to provide
above average return. Greenfield investment is high risk due to the costs of
establishing a new business in a new country. This entry strategy takes much time
due to the need of establishing new operations, distribution networks, and the
necessity to learn and implement appropriate marketing strategies to compete with
rivals in a new market.
Foreign market entry strategies are numerous and imply a varying degree of risk
and of commitment from an international firm. In general, the implementation of an
international development strategy is a process achieved in several steps. Indirect
exporting is often used as the starting point; if the results are satisfactory, more
committing agreements are made by associating local firms.

12.4 Case Study

The furniture industry is an example of an industry that did not lend itself to
globalization before the 1960s. The reasons for that are its features. Furniture has a
huge volume compared to its value, relatively high transport costs and is easily
damaged in shipping. Government trade barriers also were unfavorable. But IKEA
company established in the 1940s in a small village in Sweden, has become one of
the worlds leading retailers of home furnishings. In 2002 it was ranked 44th out of
the top 100 brands by Interbrand, topping other known brands such as Pepsi. In
2002, it had more than 160 stores in 30 countries. How did IKEA achieve it? The
IKEA business idea is: We shall offer a wide range of well-designed, functional home
furnishing products at prices so low that as many people as possible will be able to
afford them. By the early 1960s the Swedish market was saturated and IKEA
decided to expand its business formula outside Sweden. They noted: Sweden is a
very small country. Its pretty logical: in a country like this, if you have a very strong
and successful business, youre bound to go international at some point. The reason
is simpleyou cannot grow any more (Retrieved from http://www.ikea.com). IKEAs
internationalization strategy in Scandinavian countries and the rest of Europe has
not paid significant attention to local tastes and preferences in the different
European countries. Only necessary changes were allowed, to keep costs under
control and IKEAs low responsiveness to local needs strategy seems to work well in
Europe (Kling K., Gofeman I. 2003).
The first challenge came in 1985 when IKEA entered the US market and faced
several problems there. The root of most of these problems was the companys lack
of attention to local needs and wants. US customers preferred large furniture kits
and household items. As a result of initial poor performance in the US market, IKEAs
management realized that a standardized product strategy should be flexible

enough to respond to local markets. In the early 1990s IKEA redesigned its strategy
and adapted its products to the US market. Thanks to it IKEAs sales in the US
increased significant and by 2002 the US market accounted for 19% of IKEAs
revenue. As the case study illustrates, in several industries firms with effective
strategy do not have to change their core strategy significantly when they move
beyond their home market. IKEA does not significantly change its corporate strategy
and operations to adapt to local markets unless there is a compelling reason for
doing so. IKEAs strategy in the US during the 1980s demonstrates that even the
most successful formula in the home market can fail if multinational companies do
not respond effectively to local business realities (Carnegy H. 1995).

Quiz
1. To create a successful global strategy, managers must first understand
the
a. Nature of global industries
b. Dynamics of global competition
c. Both a & b
d. None of the above
2. What is the key factor that can help the firm adapt to the changes in
the dynamic environment?
a. Developing a transactional organizational capability
b. Developing global industries
c. All of the above
d. None of the above
3. What is vital for managers to have to be effective?
a. Global mindset
b. Global perspective
c. Dynamic environment
d. All of the above

4. The process during which businesses rapidly expand their markets to

include global clients is called
a. Business process
b. Economic globalization
c. Globalization
d. None of the above
5. How many types of entry mode are there?
a. 3

b. 4
c. 2
d. 5
6. Which includes export and contractual agreement?
a. Equity mode
b. Non-equity mode
c. Both a & b
d. None of the above
7. Which includes joint ventures?
a. Non-equity mode
b. Equity mode
c. Both a & b
d. None of the above
8. Which includes wholly owned subsidiaries?
a. Equity mode
b. Non-equity mode
c. All of the above
d. None of the above
9. The most common strategy to be an international company isa. Export and import
b. Franchising
c. Licensing
d. None of the above
10.
The process of selling good and services produced in one country
to other country is calleda. Import
b. Business
c. Export
d. None of the above
11.
There are how many types of exporting?
a. 2
b. 3
c. 4
d. 5
12.
The firms becomes directly involved in marketing its products in
foreign markets in which exporting?
a. Direct
b. Indirect
c. Both a & b
d. None of the above
13.
Licensing can bring ___________ to the country
a. Development
b. Technology
c. Prosperity

d. None of the above

14.
Which of the following is similar to licensing?
a. Import
b. Export
c. Franchising
d. None of the above
15.
Low political risk is an advantage ofa. Franchising
b. Licensing
c. Import
d. Export
16.
A variety of cooperative agreements between different firms is
known asa. Franchising
b. Licensing
c. Joint venture
d. Strategic alliance
17.
Which is a major objective of strategic alliance?
a. Technology exchange
b. Marketing the products
c. Both a & b
d. None of the above

18.
The modern form of strategic alliance has how many distinctive
characteristics?
a. 2
b. 3
c. 4
d. 5
19.
The risk of competitive collaboration is the _________ strategic
alliance.
a. Disadvantage
b. Advantage
c. Characteristic
d. None of the above
20.
There are how many primary ways of direct investment?
a. 4
b. 3
c. 2
d. 5
Answers: 1.c, 2.a, 3.a, 4.b, 5.c, 6.b, 7.b, 8.a, 9.a, 10.c, 11.a, 12.a, 13.b, 14.c,
15.a, 16.d, 17.a, 18.b, 19.a, 20.c