Chapter 7: Strategy and the Enterprise in International Contexts

University of London

Business and Management

in a Global Context

Chapter 7:
Strategy and the
Enterprise in International
Contexts
- Reading Material

Lecturer: M.Nageb

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Chapter 7: Strategy and the Enterprise in International Contexts

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Chapter 7: Strategy and the Enterprise in International Contexts

Chapter 7: Strategy and the Enterprise in International

Contexts – Overview

Learning By the end of this chapter, and having completed the

Outcomes Essential reading and activities, you should be able to:

• define the concepts of strategy, value creation and the
value chain of a company

• apply these concepts to real-life cases in international

business

• identify economies from location, experience effects and

scale, and apply these ideas to strategy development in
international business

• describe the major components of an environmental

analysis and apply the PESTEL, CAGE and SWOT
frameworks to actual cases

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Chapter 7: Strategy and the Enterprise in International Contexts

1 INTRODUCTION

Introduction This chapter provides an introduction to international
business management strategy. In order to go international
all firms must first develop a strategy and identify how to
create more value by operating in foreign, as well as
domestic, markets. An important part of strategy is to
design the firm’s value chain of primary and support
activities to ensure that it has the processes and activities
necessary to crate and optimise value. The managers of a
firm must be also understand the economies of international
enterprise, and n particularly how they achieve economies
of location, scale, and from ( experience ) effects.

With this in place, the firm needs to carry out an

environmental analysis to identify the key factors that
support or construct strategic action in different markets.
This a way of linking our learning from Part one of this to
book to generating strategic options. We provide three
framework – PESTEL, CAGE, and SWOT – to facilitate
such an analysis.

Finally the firm needs to choose a strategy. We introduce

four types of strategy commonly pursued in international
business, how such strategies, evolve, and detail
Ghaemawat’s aggregation,, arbitrage, and
adaptation (AAA) strategy triangle as a basis for
designating strategy for international concerns.

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Study Guide

• Define the concept of strategy

• Apply these concepts to real-life cases in international business

2 WHAT IS STRATEGY?

What is
strategy?

A firm’s strategy has been defined as a long-term

plan, a set of actions and/or as an integrated set of
commitments. For example:

• “ a set of concrete plans to help the organisation

accomplish its goal”

• “the creation of a unique and valuable position, involving a

different set of activities … making trade-offs in competing
… creating fit among a company’s activities ( Porter, 1996)

• “ the determination of the basic long-term goals and

objectives of an enterprise, and the adoption of course of
action and the allocation of resources necessary for
carrying out these goals” (Chandler, 1962)

• “An integrated and coordinated set of commitments and

action designed to exploit core competencies and gain a
competitive advantage” ( Hitt, Ireland and Hoskinsson, 2003)

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Chapter 7: Strategy and the Enterprise in International Contexts

Here we will work with the Hitt et al (2003) definition,

recognising that strategy looks at long term ( 3years or
more) direction, while planning actions for short (1year)
and medium term (3 years or more) goals.

Strategy asks, and seeks to answer, three fundamental

questions:

• where are we now?

• where do we want to be/must we be?
• how do we get there?

These questions form the essence of strategy as shown in

the above diagram

• Emergent strategy – this may emerge in the course of

events, as managers respond to circumstances, take
opportunities or have to react to unexpected events
(emergent).
e.g. Honda in US. Initially it entered the market to
compete with local bikes such as Harley Davidson. But soon
what emerged was that, Honda being a smaller bike than
Harley Davidson, the bikes were used as fun and sport,
especially along the beaches due to its ease of
manoeuvrability and hence it was apt to be distributed
through sports stores.

Article

A 1 Hyflux growth (It started as water filtration system, selling in

Singapore and to nearby Johore Bahru as the market was close by. But it
was not easy and it moved to newer markets in China but the going was
though. It won a tender in Singapore to build a desalination plant and
then moved on to Middle East and North American (relevant also for
Chapter 10 – strategy is called market development)

A 2 SIA Battling head winds ( SIA has ventured from its flag ship,
SIA into travel & tours (SilkAir), Budget Airline (SCOOT and Tiger Air),
Joint Venture in India (Vistara), SIA Engineering, SIA Cabin Food and even
property markets and transportation.

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A 3 Keppel Heartaches and Accolades Along the Way (The Keppel

Group of Companies includes Keppel Offshore & Marine, Keppel Land,
Keppel Infrastructure, Keppel Telecommunications & Transportation
(Keppel T&T) and Keppel Capital Holdings among others) – it has a
diversified strategy.

3 WHAT IS PROFITABILITY AND PROFIT GROWTH

Profitability • Firms needs to pursue strategies that increases

& Profit profitability and profit growth
growth
Profitability • this is the rate of return the firm
makes on its invested capital.
• a firm can increase profitability by
adopting strategies that
a. reduce cost and /or
b. add value to the firm’s
products/service
thus allowing the firm to raise prices

Profit • this is the percentage increase in net

growth profits over time.
• a firm can increase the rate of profit
growth by selling more
products/services in existing markets, or
pursuing strategies to enter new
markets

Firms see international business as a way of increasing

profitability and their profit growth rates.

In practice a firm is always trying to find the optimal,

that is the most profitable, balance between

a keeping its own costs low and

b differentiating its products/services in ways that
allow it to increase prices to levels at which enough
customers will still buy those offerings.

But take note that the balance is not easy. Cutting

cost will increase profitability but quality may be
sacrificed and customers may move to rivals.

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So firms can create superior value if they

organise their operations efficiently. To do this we
now turn to Porter’s value chain activities.

Study Guide

• Define the concepts of value creation and the value chain of a company

• Apply these concepts to real-life cases in international business

4 VALUE CHAIN - PORTER

1a Value Value Chain ( Porter )

Chain
CONVERTING RESOURCES: THE VALUE CHAIN

The value chain describes those activities of the organisation

that add value to purchased inputs. Primary activities are
involved in the production of goods and services. Support
activities provide necessary assistance. Linkages are the
relationships between activities. Managing the value chain,
which includes relationships with outside suppliers, can be a
source of strategic advantage.

Upstream activities - these are primary activities which are

closely to the supplier

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Downstream activities - these are primary activities which

are closely to the customer.

The purpose of value chain analysis is to understand how the

company creates value. It is clear that firms usually only have
a handful of activities that outperform their rivals. These
areas then is the source of the firm's core competency which
the rivals are unable to imitate. These value activities are the
basis of the company's unique offering.

To show the relevance of value chain analysis in the age of the

internet – the explanation below potrays the value
chain of an internet start-up company looking to compete
against Amazon.

VALUE CHAIN FOR INTERNET START-UP

Primary Inbound • inbound shipment of top
Activities logistics titles
• warehousing

Operations • server
• operations
• billing
• collections

Outbound • picking and shipment of

logistics top titles from warehouse
• shipment of other titles
from third party
distributors

Marketing • Pricing
and Sales • promotion
• advertising
• product information and
reviews
• affiliation with other
websites

Service • returned items

• customer feedback

Support Firm • financing

Activities infrastructure • legal support
• accounting

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Human • recruitment
Resources • training
• incentive systems
• employee feedback

Technology • inventory systems

Development • site software
• pick and pack procedures
• site look

Procurement • CDs/DVDs / shipment

• computers telephone
lines
• shipping services
• media

Implications:
• The essential idea of the value chain is to add as much as
possible as cheaply as possible, and most importantly to
capture the value
• One effective way of giving value to customers is outsourcing.
This is purchase of a value - creating activity from an external
supplier.
• Value chain needs to be re-configured in order to redesign
strategies to minimise the strong competitive forces
• In short value chain is the source of core competencies
• In International business firms transfer their value chain
activities to countries which are able to perform better
thereby adding more value to their customers

Value
Chain
Network THE VALUE NETWORK/SYSTEM

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Note: A firm's value chain is connected to other value chains in

what is called a value network (Porter used the term value
system).

It may be possible to capture the benefit of some of the value

generated both upstream and downstream in the value network.
An obvious way to do this is by vertical integration through
the acquisition of suppliers and customers.

Firms may using their bargaining powers in relation of buyers

and sellers to reduce the strong competitive forces in the
industry

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Addenda

Value Chain Analysis

Primary and Secondary Value Activities

The firm needs to analyse whether and where it is adding value (as
perceived by customers) to produce.

It is vital that the linkages between the different elements of a value

chain are considered. Firstly this is to ensure consistency - for example, a
differentiator will want to ensure that any cost advantages within the
value chain do not compromise overall quality. Secondly it may be that
through linking separate activities more effectively than competitors a
firm can gain a competitive advantage.

To gain a competitive advantage over its rivals a company must either

• perform value creation functions at a lower cost than its rivals or

• perform them in a way that leads to differentiation and a
premium price.

See below - e.gs how the reconfiguring of value change can give the firm
some kind of competitive advantage over others.

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Article

A 4 SIA exploring ways to grow new revenue (increasingly airlines

have begun offering services that aim to make travel more convenient –
from priority security screening to early boarding, as well as single-visit
access to airport lounges and VIP treatment at the airport – all these
tend to add value to customers and enable the airline to differentiate
itself from others)

A 5 Value Chain at Jurong Island (Singapore has built up a long

chain in chemicals, with refineries producing feedstock for crackers, and
eventually, speciality chemicals).

Video

V 1 Porter’s Value Chain

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Chapter 7: Strategy and the Enterprise in International Contexts

Study Guide

• Identify economies from location, experience effects and scale, and apply
these ideas to strategy development in international business

5 GOING INTERNATIONAL – GAINING ECONOMIES FROM

LOCATION, EXPERIENCE EFFECTS AND SCALE

1. • The success of companies that expand internationally

Competitive depends, firstly, on the goods or services they sell – that
Positioning is the competitiveness of their value proposition or
offering to international customers.

2. Core • International success depends on core competencies –

competencies skills within the company that competitors cannot easily
match or imitate and that contributes to profitability.
Hence core competencies enable the company to reduce
the costs of value creation and / or to create perceived
value so that premium pricing is possible

Video

V 2 Business strategy – Core Competencies

3. Resource • The resource-based model suggests that above-

Based model average returns from any firm are largely
of superior determined by characteristics inside the firm.
returns. • The resource-based view focuses on developing or
obtaining valuable resources and capabilities that are
difficult or impossible for rivals to imitate.

4. Three Gaining economies from location, experience

ways of effects and scale can lower costs and make
achieving the firm globally competitive.
cost
advantage Location Here value creations activities are
economies dispersed where they can be performed
most efficiently and effectively.
Location economies arise from performing
a value creation activity in the optimal
location for that activity, where
ever in the world that might be.

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A location might be more attractive

cost-wise because of favourable
political, legal, and economic
factors for example.

Also due to differences in factor

costs certain countries have
comparative advantage when producing
certain products, for example,
historically, pharmaceuticals in
Switzerland, semiconductors in
South Korea, computer software in
the USA.

By achieving location economies, firms

can lower the costs of value creation
and achieve a low cost position, and can
also differentiate their product offering.
Firms that take advantage of location
economies in different parts of the
world create a global web of value
creating activities.

Different stages of the value

chain are dispersed to locations
where perceived value is maximised or
where the costs of value creation are
minimised. As an example, Lenovo
products are designed in USA, case
keyboard and had drives are made in
Thailand, wireless card in Malaysia etc
Note: location economies can vary over
time.

Arising from the above the firm is able

to lower the costs of value creation and
achieve a low – cost position and can
therefore differentiate their product
offering.

Experience
curve
effects

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This refers to systematic reductions

in production costs over product
lifetime. Studies have tended to show,
for example in the airframe industry,
that whenever output doubles, the cost
per unit declines to 80% of the previous
cost.
This comes mainly from learning
effects, as people learn to work more
productively and management
achieves efficiencies in how work is
organised. When learning falls off
after a few years, then economies of
scale – whereby increasing the scale of
production spreads costs more thinly
over each unit produced- will also
contribute to this cumulative effect.

Economies This refers to the reduction in unit cost

of scale achieved by producing a large volume of
a product. Sources of economies of
scale include: spreading fixed
development and production costs over a
larger volume of output; utilising
production facilities more intensively;
increasing bargaining powers with
suppliers.

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Going international can help economies

of scale in several ways. For example
the cost to a pharmaceutical
company like Pfizer of developing an e
major drug and bring it to marker can
exceed US900 million and take 12 years.
Companies like Pfizer therefore look to
sell their products worldwide to reduce
average unit costs by spreading fixed
costs over an increasing sales volume.
The highly competitive global
automobile industry faces intensive
cost pressures in every product type
from luxury cars to the cheapest. An
efficient factory needs to scale at, say,
200,000 unit per year. The only way to
sell cars in that number is to serve
international as well as domestic
markets, so using its factory assets
more intensively.
Growth in output and size, fuelled by
international sales, may also have
another scale benefit. As demand for
resource inputs increases so does
bargaining power with suppliers, thus
retailers like Wal- Mart generate
huge sales volumes can negotiate down
prices it pays to suppliers of goods sold
in Wal-mart stores.

Note: once a firm has achieved any or all of the above

cost benefits it will a profitable low – cost position
which can create a significant barriers to new
entry for new firms.
The utilisation of any these three sources of economies
can have significant strategic impacts for a firm. In
certain industries, once a firm establishes a profitable
low cost position that can from a real barrier to new
competitors.
For example in the 1970s Matsushita lagged behind
Philips and Sony in the race to get a commercial
videocassette recorder on the market. Matsushita’s
strategy was to build sales volume world wide and fast
by producing from one Japanese factory, which reaped

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huge learning effects and economies of scale. The

objective was to get its VHS standard for
videocassette recorders accepted worldwide ( Sony and
Philips had their own standards). Lower costs of
production enabled Matsushita to drop its prices by
50% within five years of launching its first VHS
videocassette recorder. By 1983 it controlled 45% of
the global market and had a major scale and cost
advantage over its rivals

6 ANALYSING THE INTERNATIONAL ENVIRONMENT

Study Guide

• Describe the major components of an environmental analysis and apply

the PESTEL, CAGE and SWOT frameworks to actual cases

Introduction The aforesaid has given you some knowledge of the internal
factors such as the economics and activities that will
affect strategy. Essential these are the internal strengths
and weaknesses of a firm that underpins strategy.
Now we turn our attention to the external factors that
could affect a firm in its formulation of strategy. There
are three useful framework that could be use to analyse
the external environmental, national and international
factors. These are

• The PESTEL framework

• The CAGE Distance framework
• Ghemawat’s AAA model for strategy development

1. The • What Environmental factors are affecting the

PESTEL Organisation?
framework • Which of these are the most important at the present
time? In the next few years?

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PESTEL provides a comprehensive list of influences on the

possible success or failure or particular strategies.

Political • Government policies, taxation

changes, foreign trade regulations,
political risks in foreign markets,
changes in the trade blocs

Economic • Business cycles, interest rates,

personal disposable income, exchange
rates, unemployment rates, GDP trends

• Socio- • Population changes, income

cultural distribution, lifestyle changes,
consumerism, changes in culture and
fashion

• Technological • New discoveries and technology

developments, increased spending on
R&D

• • Environmental protection regulations,

Environmental energy consumption, global warming,
(Green) waste disposal, re-cycling

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Chapter 7: Strategy and the Enterprise in International Contexts

Legal • Competition laws, health and safety

laws, employment laws, licensing laws,

An example on PESTEL from study guide:

Here is a PESTEL analysis for the global airline industry:

P – government support for national carriers; increased

security control; restrictions on migration

E – fluctuating/declining national economic growth rates

2011–15; rising fuel prices but unstable

S – rise in travel by elderly; increased student

travel/exchange students

T – fuel efficient airframes/engines, bigger planes; business

teleconferencing increase

E – noise pollution controls increase; also controls/taxes on

energy consumption; more land for airports

L – restrictions on airline mergers; preferential airport

rights for some carriers.

Here are some rules for using PESTEL:

• apply selectively – identify specific factors that impact on

the industry, market and organisation

• Identify factors that are important currently but also

consider which will become more important in the next few
years

• use data to support your points and analyse trends using

up-to-date information

• Identify opportunities and threats.

Video

V 3 PESTEL Analysis

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2 The What does SWOT represents?

SW OT
Framework • S – Strengths of the firm

• W – Weaknesse of the firm

• O – Opportunities of the firm

• T – Threats to the firm

Here SW refers to the internal firm’s capabilities, while OT

refers to the PESTEL environments, plus competitive ( see
Porter’s five force model later) competitive rivalry at
industry level. There is a neat way of performiong a SWOT
analysis and deriving some provisional views of strategy. It
is called ‘MiniMax’ analysis . You have to ask four
questions:

1. How can the firm maximise its strengths to take

advantage of its opportunities?
2 How can a firm leverage its strengths to minimise threats?
3 How can a firm maximise opportunities to minimise its
weaknesses?
4 What action do the firm need to take to minimise its
weaknesses and threats?

See the diagram below

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Example – SIA Minimax Analysis for creating strategies

iii SWOT Analysis – this is the product of external and internal environmental analysis –
matching and convergent

Strengths Weakness
· Customer service
· Strong brand name · High Cost
· Good management · Too large to control
· Modern fleet of planes · No domestic market
· Govt. Support · bad relations with
· Cash Rich unions

SO STRATEGIES OW STRATEGIES
Opportunities
· Invest in business for · increased output /
· expanding in newly open cabin food Productivity - greater
markets - China, · Venture into newly mileage- Economies of
Eastern Europe open market - China, scale - to reduce costs.
· Related Businesses Russia · employ right number of
· Unrelated Business · Venture into property staff - otherwise -
market retrench

ST STRATEGIES TW STRATEGIES

Threats · JV - established - · Star alliance - SIA,

· Budget airlines Budget Airline - Tiger Lufthansa, Ibia, Nippon
· High oil prices Air Air, South Africa
· Other airlines · Improve security Airlines - e.g bulk
· Further Differentiate buying of oil; bulk
· Terrorism
buying of planes;
· Asian Diseases itself - Better service
sharing of passengers
· Use greater passenger
and routes to reduce
load - A380
costs.

Note: That SWOT is a product of internal and external environmental analysis

The above is matching or convergent strategies for SIA.

Video

V 4 SWOT Analysis

V 4a Starbucks SWOT Analysis

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7 THE GAGE DISTANCE FRAMEWORK – see chapter 1 – Journal

Article in HBR by Ghemawat – Distance still matters

3 The The CAGE Distance Framework

CAGE We mentioned Ghemawat’s work on Distance Still
distance Matters in chapter 1. He developed a CAGE framework to
framework provide a richer understanding of what he means by distance
– it is not just geographical distance he is referring to. You
will recall that Ghemawat argues, and produces evidence for
the fact that, for global strategy, distance still matters.
Despite Thomas Friedman’s ‘The World Is Flat,’ (see chapter
1) there are important differences between countries. The
world is not globalised but semi-globalised. In practice firms
recognise this by trading less in parts of the world that are
more distant from them in cultural,

administrative/political/institutional, geographic, or economic

terms. Firms need to pay attention to the distinctively large
differences that arise at national borders, and devise
international business strategies that take these differences
into account. Ghemawat argues that pure global
standardization and localization strategies will not work.
International business strategy always needs to take into
account the CAGE factors which stands for Cultural,
Administrative, Geographical, and Economic differences. Note
there are significant typical bilateral differences between
the USA and several Asian mainland countries. Clearly,
distance and differences between the USA and these Asian
mainland countries are not just geographic. There are also
cultural differences for example language, race/ethnicity,
social norms and values; administrative, political and
institutional differences; and economic differences, e.g.
personal incomes, infrastructure, human talent. Each country
will also have what Ghemawat calls ‘unilateral’ CAGE
attributes – distinct attributes that a PESTEL analysis
would highlight, and which will influence the design of
international business strategy. For example Singapore has
English as its language, is multi-ethnic, has strong legal
institutions, is a small island (that has been made bigger!)
but strategically located, and has historically had strong
government intervention in the economy, and a protected
bank system.

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The CAGE Distance Framework: Country – Level Analysis

Cultural Administrative Geographic Economic
distance distance distance distance
Bilateral ( • Different • Lack of colonial ties • Physical • Differences
or languages • lack of shared distance in consumer
Multilateral • Different regional trading block • Lack of land incomes
Attributes ) ethnicities / • Lack of common border • Differences
lack of currency • Differences in availability
connective • Different legal in climates ( of
ethnic or systems and disease * human
social • Political hostility environments ) resources
networks • Differences * financial
• Different in time zones resources
religions * natural
• Differences resources
in national * intermediate
work inputs
• Different *
values, norms infrastructure
and * Supplier /
dispositions distribution
structure
* complements
*
organizational
capability

Unilateral • • nonmarket/closed • • economic

Attributes Traditionalism economy ( home bias landlockedness size
• Insularity vs foreign bias ) • geographic • low per
• Spiritualism • lack of membership size capita income
• in international orgs. • Geographic • low level of
Inscrutability • weak legal remoteness monetization
institutions/corruption • limited
• lack of govt. checks resources,
and balances inputs,
• societal conflict infrastructure,
• political / complements
expropriation risk capability.
Ghemawat also points out that a CAGE distance analysis at
country level may not suffice. In Ghemawat (2010) he
argues also for a CAGE industry-level analysis and discusses
the case of Mexican-based multinational CEMEX and its
internationalization strategy. One of the notable parts of
CEMEX’s rise to globalism over 25 years has been the care
with which it entered markets that shared affinities with
Mexico on several of the CAGE dimensions. Its international
excursions began in 1992 with the acquisition of two Spanish
companies (Mexico is Spanish speaking). Then it acquired
small cement companies in Latin America and the Caribbean,
then in Colombia and Venezuela. Note that its acquisition
policy over the years recognises that CAGE factors are so
important that local companies are needed in order to gain
local market share. By the mid-2000s CEMEX had become
Mexico’s top multinational with operations in 30 countries
across five continents, and was the first firm from a
developing country to enter the list of the world’s top 100
transnational firms.

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Video

V 5 Pankaj Ghemawat – CAGE framework for international

business

8 DEVELOPING INTERNATIONAL BUSINESS STRATEGY:

GHEMAWAT’S AAA MODEL

Ghemawat’s How to deal with the international environments-regions,

AAA model countries, and industries-and the characteristics and
differences uncovered by analyses like PESTEL and CAGE?
Ghemawat provides an answer in his AAA framework. When
looking to globalize, the firm will experience a tension
between the need to be responsive to local conditions and
markets (Adaptation), and the need to achieve economies
of scale and other advantages through global integration
(Aggregation). At the same time it will want to take
advantage of any absolute economies it can get from
operating in a different country (Arbitrage). Let’s look
at these concepts in more detail (see Figure above). In a
foreign marketplace:

Integration Adaptation, Aggregation, and Arbitrage Strategies

AAA Strategy Adaptation Aggregation Arbitrage
Competitive To achieve local To achieve scale To achieve
Advantage: Why relevance though and scope absolute (
globalise at all? national focus ( economies nonscalar )
while exploiting through economies
some scale ) international through
standardisation international
specialisation
Configuration: To limit the effects of cultural – To exploit (
Where to locate administrative – geographic – selected )
overseas? economic differences by differences by
concentrating on foreign countries operating in
that are similar to home more diverse
countries
Coordination: By country: By business: By function:
How should emphasis on emphasis on emphasis on
international adjustments to horizontal vertical
operations be achieve a local relationships to relationships,
organised? face within achieve including across
borders economies of organisational
scale across boundaries
borders
Checks: What to Excessive variety Excessive Narrowing
watch out for or complexity standardisation spreads
strategically?
Corporate Potentially Appearance of The exploitation
Diplomacy: discreet and and backlash or displacement

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Which public robust given against of suppliers,

issues need to be emphasis on homegenisation channels, or
addressed? cultivation of a or hegemonism ( intermediaries:
local face especially on potentially most
part of US prone to political
companies ) disruption

Adaptation provides the most obvious strategy for dealing

with differences. The strategy is to adjust to those
differences. Faced with different customer preferences,
offer different or modified products or services and tailor
policies, positioning, advertising, and pricing. But such
variation can be expensive, and sub-strategies will be
needed to reduce the costs of such variation.

Aggregation.
The strategy here is to overcome differences. Use
grouping devices and intragroup coordination
mechanisms to create greater economies of scale/scope
than country-by-country adaptation can provide.
Standardization of products/services is just one
Aggregation strategy amongst many other possibilities.
Particularly important are regional strategies that
aggregate based on geography. This involves establishing
for example regional hubs, shared service centres, and
marketing and sales platforms regionally. Recall that more
than one half of international trade and foreign direct
investment (FDI) takes place within regions. One reason is
that countries in a region often have commonalities in the

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cultural, administrative and economic, as well as

geographic, dimensions of the CAGE distance framework.
But firms also aggregate along other dimensions. For
example, Tata Consultancy Services (TCS), based in India,
and one of the largest Indian IT services companies,
aggregates partly by language. Uruguayan operations
service Spanish-speaking markets; Hungarian operations
service German-speaking countries; while TCS has also set
up in Morocco to service French-speaking markets. Recall
CEMEX, and how initially it focused on emerging markets –
representing an aggregation strategy along an economic
dimension. Later it shifted to an aggregation strategy
based on geography.

Arbitrage.
As a strategy, this exploits differences between national
or regional markets by locating different parts of the
supply chain in different places. As such, arbitrage
represents a production strategy, where the firm focuses
on absolute economies rather than scale economies gained
through standardization. Find the location where there are
lower labour costs, lower resource (minerals, raw materials)
or assembly costs or cheaper capital, and perhaps tax
advantages. In practice, firms in every industrial and
service sector have multiple arbitrage opportunities
across the world, and we shall deal with this issue of
sourcing and supply chain management in much more
detail in chapter 9.

The key to successful global competitiveness is to look at

the tradeoffs between the three As when entering a
specific country and industry, and form an integrated AAA
strategy. The diagram above summarizes Ghemawat’s views
on what each strategy offers and how they often pull in
different directions. You can see first of all that there are
real tensions between the three strategies in terms of
first the objectives of going international, where best to
locate overseas, how international operations should
beorganized, what to watch out for strategically, and
which public issues need to be addressed. International
business management is about clarifying and dealing with
these tensions inherent in the strategic choices
made.Ghemawat helpfully discusses the example of De
Beers the Africa-based diamond mining and retail
multinational. He argues that, even before its more recent

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Chapter 7: Strategy and the Enterprise in International Contexts

strategy shift, De Beers used all three AAA strategies to

engage with cross-country differences. Thus De Beers
adapted to adjust to country differences by focusing on
owning mines in ‘weak governance countries’, presented
different marketing campaigns for different countries while
obscuring the country of origin, strove for market and
product development in different markets and tended to
have a global mindset in its management cadre. De Beers
also aggregated to overcome country differences.
Infrastructure and other activities were subject to large-
scaleeconomies. Global demand was managed by stockpiling
to keep the price up and by global advertising. And it built
up bargaining power over its distribution channels through
leveraging size and control.

At the same time De Beers undertook arbitrage to

exploit differences. For example, it sourced where material
costs were low, for example Africa, Russia, and Australia.
On labour costs it used India for absorbing the smallest
stones. It gained attractive terms from certain countries
needing contracts. It arbitraged to reduce its tax burden.
And it retained superior information on optimal locations
for its range of activities.

Addenda – table of the above on De Beers

Adaptation • Owning mines in weak governance

countries
• obscure the country of origin not to
incite xenophobia

Aggregate • to overcome country differenes

• stockpile to keep prices high
• global advertising
• build bargaining powers with
suppliers

Arbitrage • transfer cutting of gems to India

where labour is skilled and cheap

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Chapter 7: Strategy and the Enterprise in International Contexts

9 CHOOSING A STRATEGY FOR INTERNATIONAL BUSINESS

There are four basic strategies to compete in international markets as

shown in the hereunder diagram. The appropriateness of each strategy
depends on the pressure for cost reduction and local responsiveness in the
industry.

Pressure for cost reductions are greatest when:

• in industries producing commodity type products that fill universal needs

(needs that exist when the tastes and preferences of consumers in
different nations are similar if not identical) where price is the main
competitive weapon.

• when major competitors are based in low cost locations

• Where there is persistent excess capacity

• Where consumers are powerful and face low switching costs

Pressure for local responsiveness arise from:

• Differences in consumer tastes and preferences. Strong pressure

emerges when consumer tastes and preferences differ significantly
between countries

• Differences in traditional practices and infrastructure. Strong pressure

emerges when there are significant differences in infrastructure and/or
traditional practices between countries

• Differences in distribution channels, - there is a need to be responsive to

differences in distribution channels between countries.

• Host government demands – economic and political demands imposed by

host country governments may require local responsiveness

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Chapter 7: Strategy and the Enterprise in International Contexts

Global Standardisation Strategy Transnational Strategy

(Ghemawat Aggregation) (Ghemawat Aggregation & Adaptation)
Reduction /Integration

Global Product Division Org Structure Global Matrix Org Structure

Global IS Approach Transnational IS Approach
Pressure for Cost

Geocentric Staffing - Cosmopolitan Geocentric/Regiocentric Staffing - Cosmopolitan

Eg:Hotels & Airlines Eg: Banks & Automobile

International/Home Replication Localisation/ Multidomestic Strategy

Strategy (Ghemawat Adaptation)

International Division Org Structure Geographical Area Org Structure

Home Replication IS Approach Multinational IS Approach
Ethnocentric Staffing - Parent Country National Polycentric Staffing - Host Country National

Eg: UOL- VLE E.g: Retailing

Pressure for Local Responsiveness

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Chapter 7: Strategy and the Enterprise in International Contexts

10 FOUR BASIC INTERNATIONAL BUSINESS STRATEGIES

Types of Description of the strategies

strategies

1. • stresses the advantages of replication

International internationally of home country-based competencies
(Home e.g. brand, distribution network, product, and services
replication)
• Taking product first produced for the domestic
market and selling them internationally with only
minimal local customisation makes sense when
there are low cost/global integration pressures and
low pressure for local responsiveness

2 Localisation • this considers each country or region as a stand-

(Multidomestic alone local market worthy in itself of significant
strategy ) adaptation and attention.

• this responds to Ghemawat’s Adaptation

requirements in strategy.

• the strategy involves increasing profitability by

customising goods or services so that they match
tastes and preferences in different national markets.
• this makes sense when there are substantial
differences across nations with regard to consumer
tastes and preferences and when cost pressure are not
too intense.

3Global • seeks to develop and distribute standardised

Standardisation products/services worldwide to reap the benefits of
strategy economies of scale and shared product development.

• This is Ghemawat’s Aggregation goal, namely to

increase profitability and profit growth using
economies of scale, learning effects, and location
economies.

• This makes sense when there are strong pressures

for cost reductions and demands for local
responsiveness are minimal

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Chapter 7: Strategy and the Enterprise in International Contexts

4 • which aims to capture the ‘best of both worlds’ by

Transnational endeavouring to be both cost efficient (Aggregation
strategy focus) and locally responsive (Adaptation focus).

• This tries to simultaneously achieve low costs

through location economies, economies of scale, and
learning effects, differentiate the product offering
across geographic markets to account for local
differences, and foster a multidirectional flow of skills
between different subsidiaries in the firm’s global
network of operations

• This makes sense when cost pressures are intense

and pressure for local responsiveness are strong.

5.Concluding • An International / home replication strategy

comment may not be viable in the long term. To survive,
firms may need to shift to a global standardisation
strategy or a transnational strategy in advance of
competitors

• A localisation strategy may give a firm a competitive

edge, but if the firm is simultaneously facing
aggressive competitors, the company will also have to
reduce its cost structures. This will require a shift
toward a more Transnational Strategy.

11 CHOICES FOR MULTINATIONAL ENTERPRISES

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Chapter 7: Strategy and the Enterprise in International Contexts

Video

V 6 Bartlett & Ghoshal – International Strategies

V 7 Managing in a Global Economy

12 MANAGING KNOWLEDGE IN GLOBAL FIRMS ( FOUR TYPES OF

MNEs)

13 ETHNOCENTRIC, POLYCENTRIC AND GEOCENTRIC

ORIENTATION (EPG)

How a firm orientates itself to its international markets?

3 Stages of Perlmutter recognised three stages in the

multinational development of multinationals.
development
• Ethnocentric – the company carries out its
overseas operations for the benefit of the home
or source country, and the ways of working in the

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Chapter 7: Strategy and the Enterprise in International Contexts

home culture are imposed on the foreign

subsidiaries
• Polycentric – operations in the host country are
left to local management, who are more affected
by the host government and culture, but also
absorbing the corporation’s culture
• Geocentric – positions in the global organisation
can be reached by anyone regardless of
nationality, according to merit. A corporation’s
culture emerges and managers do not carry any
constraints, including national cultural
constraints, from one country to another.

14 NAGEB’S COMPARISON OF FIVE FORCE FRAMEWORK VS

GENERIC STRATEGIES VS GHEMAWAT AAA

Five Force Generic Ghemawat AAA

strategies
Description • Profit potential • How the firm Disagrees with
of the of industry – competes in the Friedman that the
Model threats of five market – focus, world is flat and
forces should be cost leadership, that distance still
weak for profit differentiation matters. This
potential • Otherwise firm identified by
will be stuck-in- Ghemawat GAGE
the-middle framework. The
AAA strategies are
used to manage the
CAGE framework
Merits • Informs firms • One way to • Multidomestic
on how to manage the five strategy –
manage each forces is to rely on Adaptation
threat of the Porter’s generic • Global standard
five forces – e.g strategy – strategy –
to increase the overcome the Aggregation
barriers to entry threat of rivalry • Transnational –
– scale • Basis of other Aggregation +
economies, forms of planning adaptation
management e.g Differentiating • Firms facing high
expertise e.g strategy – firm cost pressure -
Keppel – huge oil should allocate Arbitrage
rigs resources to

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Chapter 7: Strategy and the Enterprise in International Contexts

improve on its
quality
Demerits • Market • Only two Difficult to strike a
dynamism may variables – that is balance between all
change market segment three strategies.
• Industry may and type of
have advantage sought
complements and – not sophisticated
have to consider and rich enough
the five forces of • Difficult if firm
both has many
complements businesses e.g
conglomerate like
GE

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Chapter 7: Strategy and the Enterprise in International Contexts

SAMPLE EXAMINATION QUESTIONS

1a Describe the components of a SWOT / PESTEL analysis

b. Describe, using an example, how a MiniMax framework can

be used.

iii SWOT Analysis – this is the product of external and internal environmental analysis –
matching and convergent

Strengths Weakness
· Customer service
· Strong brand name · High Cost
· Good management · Too large to control
· Modern fleet of planes · No domestic market
· Govt. Support · bad relations with
· Cash Rich unions

SO STRATEGIES OW STRATEGIES
Opportunities
· Invest in business for · increased output /
· expanding in newly open cabin food Productivity - greater
markets - China, · Venture into newly mileage- Economies of
Eastern Europe open market - China, scale - to reduce costs.
· Related Businesses Russia · employ right number of
· Unrelated Business · Venture into property staff - otherwise -
market retrench

ST STRATEGIES TW STRATEGIES

Threats · JV - established - · Star alliance - SIA,

· Budget airlines Budget Airline - Tiger Lufthansa, Ibia, Nippon
· High oil prices Air Air, South Africa
· Other airlines · Improve security Airlines - e.g bulk
· Further Differentiate buying of oil; bulk
· Terrorism
buying of planes;
· Asian Diseases itself - Better service
sharing of passengers
· Use greater passenger
and routes to reduce
load - A380
costs.

Note: That SWOT is a product of internal and external environmental analysis

The above is matching or convergent strategies for SIA.

c. Describe the components of Ghemawat’s CAGE framework

d. Describe the Ghemawat’s aggregation, adaptation and

arbitrage framework and illustrate how it can be used with an
example of your choice.

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Chapter 7: Strategy and the Enterprise in International Contexts

Student’s essay

1a. Describe the components of a PESTEL analysis.

The PESTEL Analysis is a tool that is used to identify and analyze the key
drivers of change in the strategic or business environment. It stands for
Political, Economic, Social, Technological, Environmental and Legal factors.
The tool allows the assessing of the current environment and potential
changes. The idea is, if the project is better placed than its competitors,
it would be able to respond to changes more effectively.

Political: Every project has both internal politics and external politics. The
internal politics like team jealousies, cohesive projects, and personal
interests occur in all projects and must be considered and managed by
stakeholders. The external politics refer to those which the stakeholders
do not control. These events include all political events like employment
laws, tax policies, trade restrictions, trade reforms, environmental
regulations, political stability, tariffs, etc.

Economic: This factor takes into consideration all events that affect the
internal and external economic environment. The internal or micro-
economic events relate to the project viability and internal soundness of
the project. Financial models and accounting techniques need to be used
during the evaluation phase to ensure the viability. The external or macro-
economic events include interstate taxes, embargoes, interest rates,
economic growth, recession, inflation rate, exchange rate, minimum wage,
wage rates, unemployment, cost of living, working hours, credit availability,
financing availability, etc.

Sociological: The sociological factor takes into consideration all events that
affect the market and community socially. Thus, the advantages and
disadvantages to the people of the area in which the project is taking
place also need to be considered. These events include cultural
expectations, norms, population dynamics, healthy consciousness, career
altitudes, global warming, etc.

Technological: This factor takes into consideration all events that affect
technology. Since technology often becomes outdated within a few months
after it is launched, it is important to consider this. This factor could also
take into consideration all barriers to entry in certain markets and
changes to financial decisions.

Environmental: This factor takes into consideration ecological and

environmental aspects that could be either economic or social in nature.

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Chapter 7: Strategy and the Enterprise in International Contexts

These include temperature, monsoons, natural calamities, access by rail,

air, and road, ground conditions, ground contamination, nearby water
sources, and so forth.

Legal: This factor takes into consideration all legal aspects like
employment, quotas, taxation, resources, imports and exports, etc.

Student need to provide a summary of the above – refer to lecture notes

1b. Describe, using an example, how a MiniMax framework can

be used.

A ‘MiniMax’ analysis is an easy way of performing a SWOT analysis and

deriving some provisional views of strategy by asking the following 4
questions.
• How can a company maximize its strengths to take advantage of its
opportunities?
• How can a company leverage its strengths to minimize threats?
• How can accompany maximize opportunities to minimize its
weaknesses?
• What actions does a company need to take to minimize its
weaknesses and threats

For example please see notes on SIA’S MiniMax framework or please

develop your own from your own examples

1c. Describe the components of Ghemawat’s CAGE framework.

The cultural, administrative, geographic, and economic (CAGE) distance

framework helps managers identify and assess the impact of distance
on various industries. The more two countries differ across these
dimensions, the riskier the target foreign market. By analyzing the
possible impact of distance—in all its dimensions—you sweeten the odds
of investing in profitable foreign markets.

Cultural Distance. Culture is sometimes referred to as the software

of the mind, in that it has a sometimes invisible but indelible in-fluence
on people`s values and behaviors. Cultural distance, then, has to do with
the possible differences existing in relation to the way individuals from
different countries observe certain values and behaviors.
A number of researchers have identified significant cultural differences
among countries. Distinct cultural differences are observed around the
following dimensions: power distance (the extent to which individuals
accept the existence of inequalities between subordinates and superiors

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Chapter 7: Strategy and the Enterprise in International Contexts

within a hierarchical structure); uncertainty avoidance (individuals`

willingness to coexist with uncertainty about the future); individualism
(how the individuals in a society value individualistic behaviors as
opposed to collective ones.

Administrative Distance. Administrative distance reflects the

historical and present political and legal associations between trading
partners; for example, colonial ties between trading partners, or
participation in common trading blocs. Trade practices between
countries can be significantly affected by laws and regulations enacted
at the national or international level. Because they affect fundamental
business practices, they often affect the competitive position of firms
as well.

Geographic Distance. How far apart are trading partners in physical

terms: the size of the country, differences in climates, and nature of
transportation and information networks? You can think of geographic
distance as absolute, in terms of the miles or kilometers that seperate
a firm from another market or supplier. Technology and the Internet,
however, has shrunk distance in terms of transportation time, and now
with digital products and services, almost entirely eliminated geographic
distance as a constraint of trade between some markets.

Economic Distance. Economic distance captures fundamental

differences relating to income, the distribution of wealth, and the
relative purchasing power of segments of a geographic market. This has
been one of the biggest barriers, for instance, in the way of U.S. firms`
success selling products in emerging markets. In global terms, this is
the four billion people who live on less than $2 per day. The phrase
“bottom of the pyramid” is used in particular by people developing new
models of doing business that deliberately target that market,
typically using new technology. An example of a product that is
designed with the needs of the very poor in mind is that of a shampoo
that works best with cold water. Such a product is marketed by
Hindustan Lever (part of the Unilever family of firms).

1d. Describe the Ghemawat’s aggregation, adaptation and

arbitrage framework and illustrate how it can be used with
an example of your choice.

Adaptation provides the most obvious strategy for dealing with

differences. The strategy is to adjust to those differences. When faced
with different customer preferences, offer different or modified
products or services and tailor policies, positioning, advertising, and
pricing. But such variation can be expensive, and sub-strategies will be

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Chapter 7: Strategy and the Enterprise in International Contexts

needed to reduce the costs of such variation. Samsung smart phones,

tablets, computers have languages to adapt to each country’s language
and preferences. Also, their marketing mix strategy is adapted to each
country’s requirements. In US, local characters are used in promotion
and pricing to reflect competition.

Aggregation is used to overcome differences. Use grouping devices

and intragroup coordination mechanisms to create greater economies of
scale/scope than country-by-country adaptation can provide.
Standardization of products/services is just one Aggregation strategy
amongst many other possibilities. Particularly important are regional
strategies that aggregate based on geography. This involves
establishing for example regional hubs, shared service centres, and
marketing and sales platforms regionally. More than one half of
international trade and foreign direct investment (FDI) takes place
within regions. One reason is that countries in a region often have
commonalities in the cultural, administrative and economic, as well as
geographic, dimensions of the CAGE distance framework. But firms also
aggregate along other dimensions. Samsung have supply chains that are
region-based with separate hubs in Asia, Europe and North America.

The Arbitrage strategy exploits differences between national or

regional markets by locating different parts of the supply chain in
different places. As such, arbitrage represents a production strategy,
where the firm focuses on absolute economies rather than scale
economies gained through standardization. Find the location where
there are lower labor costs, lower resource (minerals, raw materials) or
assembly costs or cheaper capital, and perhaps tax advantages. For
example, Samsung transfers its production to cheaper cost countries
such as China, Indonesia, Vietnam and India.

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Chapter 7: Strategy and the Enterprise in International Contexts

2014 Zone A Question 2

‘Environmental analysis is critical for international business.’ In

light of this statement discuss:
a. The main components of a PESTEL analysis. (6 marks)

b. What a SWOT analysis is and how a Mimimax approach to

developing strategy can be performed, using company examples
of your choice. (9 marks)

c. The components and importance of Ghemawat’s CAGE and

AAA frameworks,using examples to illustrate your points.
(10 marks)

Reading for this question

Relevant material and references are in pp.89–96 of the subject guide
and: Willcocks, L. Global business management foundations. (Stratford:
Steve Brookes Publishing, 2013) [ISBN 9780956414533] Chapter 4.

Approaching the question

For (a) these are Political, Economic, Social, Technological, Environmental
and Legal, and require a description, albeit brief, of what each consists of.

For (b) discussion of Strengths, Weaknesses, Opportunities and Threats,

illustrated with a company example is a good answer. A very good answer
would supply a worked example of how strengths and opportunities are
used to gain competitive advantage. Strengths are used to meet threats,
opportunities are used to minimise weaknesses, and strategies are
generated to minimise weaknesses and threats.

For (c) CAGE is Cultural, Administrative, Geographical and Economic

distance, and should be described in detail with illustrative examples.
AAA is Aggregation, Arbitrage and Adaptation strategies which should
be described with illustrative examples drawn from the subject guide or
reading.

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Chapter 7: Strategy and the Enterprise in International Contexts

Mock 2015 - Question 8

Using relevant concepts and illustrative examples:

a) Identify the role of location economies, experience curve
effects and economies of scale in enabling companies to attain
global cost advantages. (6 marks)

b) With regard to international business strategy, explain the

forces that create pressures for cost reductions for firms and
the forces that create pressures for local responsiveness.
(8 marks)

c) Describe the four basic international business strategies

that a firm can adopt to compete in international markets.
(11 marks)

Introduction
The three concepts have a common trend. They are inter-related. When
firms utilize them the end result will be reduction in cost. When firm uses
all or one of the above activities then firms will be able to perform better
than rivals. It will improve their competitive advantages. The above also
creates barriers to entry for potential entrants. ( Porter’s five force
model ).

a. location economies.
Different locations have different advantages/resource to offer. Firm will
be able to reduce total costs, exploit markets, different locations have
different institutions.
Markets – there are often advantages in being close to existing or
potential markets – this is one reason why so many companies have
sought to set up in the rapidly developing, hugely populated country of
China. Institutional factors could also be an attractive in encouraging a
firm to locate its production in certain countries.

• Resource endowments
The locality may have specific resource advantages, for example, in land,
labour, weather and infrastructure that the MNE can tap into. For
example, a recent development has seen Chinese MNEs seek natural
resources around the world in oil, gas, minerals and also agriculture and
land.

• Agglomeration
Refers to the location advantages arising from the clustering of economic
activity in certain locations. Think of Silicon Valley in the USA and the
cluster of suppliers, manufacturers, research companies and market

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Chapter 7: Strategy and the Enterprise in International Contexts

leaders or of the City in London as a global financial centre.

Experience Curve effects

• Doing things over and over again and getting better. Firms can identify
ways by which performance can be improved. Experience improves
efficiency and thus reduction in costs. Being more experienced will
contribute to higher productivity and thus lowering cost Quality defects
become fewer and fewer and hence lowering costs.
Managers have to focus on a wide variety of activities – but experience
curve enables a manager to do more things with lesser time.
Also in terms of suppliers or the government department the organization
will be able to provide feedback to solve problems

Economies of scale
As the volume of output increase the average costs of the firm will fall.
The fixed cost is spread over a larger unit of output thus reducing cost
per unit. Bulk buying and larger market size ( going global ), increasing
returns. Using equipment more intensively. Also larger order increases
the bargaining power of organisation and therefore forces the supplier to
reduce prices that lower the cost of ordering.

Can use Dell as an example to show how to integrate the above three
concepts.

b. Pressures for cost reductions are greatest:

• in industries producing commodity type products that fill universal
needs (needs that exist when the tastes and preferences of consumers
in different nations are similar if not identical) where price is the main
competitive weapon - batteries
• when major competitors are based in low-cost locations – textiles
• where there is persistent excess capacity ( e.g. TVs i.e consumable
durables )
• where consumers are powerful and face low switching costs. ( Washing
powders/soaps/detergent/shampoos ) – firms therefore need to have a
tight control over costs.

Pressures for local responsiveness arise from the following:

• Differences in consumer tastes and preferences – strong pressure
emerges when consumer tastes and preferences differ significantly
between countries – some countries have large cars ( lower prices of fuel
and lower tax - US ) while others have fuel efficient cars ( higher tax -
Singapore )
• Differences in traditional practices and infrastructure – strong pressure
emerges when there are significant differences in infrastructure and/or

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Chapter 7: Strategy and the Enterprise in International Contexts

traditional practices between countries. E.g In India power supply

interruption and hence machines must be compatible to emergency power
generators.
• Differences in distribution channels – there is a need to be responsive
to differences in distribution channels between countries. E.g. US have
mega markets
• Host government demands – economic and political demands imposed
by host country governments may require local responsiveness ( carbon
emission for cars in the EU. No packaging for cigarettes ( Australia ) and
cannot be displayed openly - UK)
• If competitors are operating in low cost countries then the pressure for
other firms to do the same.
• Absence of low switching costs give consumers the upper hand to switch
to other suppliers and hence the firm is under pressure to reduce costs.

c The four basic strategies are as follows.

Managers faced two different pressures – pressure for cost reduction and
pressure for local responsiveness.

• International (home replication) strategy, which stresses

the advantages of replication internationally of home country-based
competencies (e.g. brand, distribution network) and products and
services. Taking products first produced for the domestic market and
selling them internationally with only minimal local customisation
makes sense when there are low cost/global integration pressures and
low pressures for local responsiveness.

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Chapter 7: Strategy and the Enterprise in International Contexts

• Localisation (multi-domestic) strategy, which considers each

country or region as a stand-alone local market worthy in itself of
significant adaptation and attention. This responds to Ghemawat’s
Adaptation requirements in strategy. The strategy involves increasing
profitability by customising goods or services so that they match
tastes and preferences in different national markets. This makes sense
when there are substantial differences across nations with regard to
consumer tastes and preferences and when cost pressures are not too
intense.

• Global standardisation strategy, which seeks to develop and

distribute standardised products/services worldwide to reap the
benefits of economies of scale and shared product development. This
is Ghemawat’s Aggregation goal, namely to increase profitability and
profit growth by reaping the cost reductions from economies of scale,
learning effects and location economies. This makes sense when
there are strong pressures for cost reductions and demands for local
responsiveness are minimal.

• Transnational strategy, which aims to capture the ‘best of both

worlds’ by endeavouring to be both cost efficient (Aggregation focus)
and locally responsive (Adaptation focus). This tries to simultaneously
achieve low costs through location economies, economies of scale and
learning effects; differentiate the product offering across geographic
markets to account for local differences; and foster a multidirectional
flow of skills between different subsidiaries in the company’s global
network of operations. This makes sense when cost pressures are
intense and pressures for local responsiveness are intense. E.g. P&G makes
adjustment to its washing powder due to the different hardness of the
water.

Firms may have to go through an evolutionary process to choose any one of

the strategy.

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Chapter 7: Strategy and the Enterprise in International Contexts

Mock 2016 Question 6

One of the major tasks that managers involved with

international business strategy need to concern themselves
with is the analysis of the global environment. Therefore:

a Explain what you understand by the PESTEL, framework

and suggest how managers of international firms can use
it. (5 marks)

b What is Ghemawat’s CAG Distance Framework and how can

it enhance the understanding of international managers?
(12 marks)

c Comment on the four basic strategies that firms can

utilise to compete in international markets (8 marks)

a PESTEL – Framework for the firm is to understand the

international environment in which the firm operates. Explain briefly
what is PESTEL all about. If PESTEL does not change then there is
predictability, which will help international managers.

Political – e.g. China and Vietnam entry into WTO has helped
international managers

How managers can make use of PESTEL?

• Are all of these factors equally important to the manager? No.

The manager has to determine which factor is more important
depending on the nature of the business. E.g. software firm relies
more on Legal factors to protect its intellectual property.

• How PESTEL helps not in present decisions but also in the future.
E.g. Toyota builds a factory in Mexico needs to understand how
PESTEL framework will change in the near future in Mexico

• For e.g. in China now the growth rate is around 7% and India has
7.5%. An international manger should be sceptical about the figure
of 7%. Need to look at other data like trade, freight which may
not support the forecast.

• PESTEL helps to identify OT ( external environmental analysis )

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Chapter 7: Strategy and the Enterprise in International Contexts

b CAGE framework

Culture
Administrative
Geographic
Economic

Thomas Friedman – the world is flat. Ghemewat ‘s argument is

that distant still matters. We do not live in world where the world
constitute a single market. Need to understand the CAGE
framework so that the firm can standardise or customise. For e.g.
CEMEX – world’s largest manufacture of cement ( Mexico ).

International managers can then use CAGE framework to look at

unilateral attributes of countries and bi lateral attributes. Both
these attributes can be applied to a company. Once the CAGE
framework is established then the international manager can plan
ahead e.g. can grouped together the CAGE framework of different
countries

c Study guide page 95 Choosing a strategy for international business.

In a world of gloablisation or semi globalisation – the international
managers has two things to do:

i pressure for cost reduction – low or high

ii pressure for low responsiveness – low or high

Firms has to decide between these two variables – need to give

some examples.

See notes or study guide

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Chapter 7: Strategy and the Enterprise in International Contexts

May 2016 Zone B Q.2

‘ An important part of a firm’s international business strategy

is to design its value chain and to understand the economics of
international enterprise.’ Elaborate on this as follows:

a. What are the two basic strategies that a firm can adopt
to increase profitability? Give examples to illustrate
your arguments. (4 marks)

b. How can we undertake a value chain analysis for a firm?

What does it enable us to understand? (12 marks)

c. Explain the importance of location economies, experience

curve effects and economies of scale in enabling firms to
achieve global cost advantages. Illustrate your answer
with examples. (9 marks)

Reading for this question

The relevant material appears the subject guide, Chapter 7, and Willcocks
(2013) Chapter 4.

Approaching the question

Parts a) and b) tended not to be well answered, except by a minority of

candidates, while part c) was on the whole much better answered.

a. The two basic strategies are (i) reduce costs, and (ii) add value to the
company’s products/services which allows it to increase prices.

b. We expect a detailed exposition of the value chain analysis covering

primary and support activities, and an explanation of the relevance of
value chain analysis for a firm.

c. See p.90 in the subject guide and pp.70–71 in Willcocks (2013) for
the type of description and illustration required for each of the three
terms.

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Student’s Essay

May 2016 Examinations

‘An important part of a firm’s international business strategy

is to design its value chain and to understand the economics of
international enterprise.’ Elaborate on this as follows:

a. What are two basic strategies that a firm can adopt to

increase profitability? Give examples to illustrate your
arguments.

Cost Organizing the value chain activities in an efficient

reduction manner.
Transfer production to countries with economy
(China,Vietnam)
Reduce bargaining power of suppliers by having a greater
number of suppliers. Negotiate for better prices with the
right suppliers.
Add value to Differentiate product from the rest.
the firm’s Firm should undertake R&D. This will help the firm to add
product more features and benefits. Eg cars now have airbags,
anti-brake system, wider monitor screens, GPS, internet,
sunroof.
Firm can differentiate itself by creating brand awareness.
Eg Samsung

b. How can we undertake a value chain analysis for a firm?

What does it enable us to understand?

The process or activity by which a company adds value to a product by

using primary activities (inbound logistics, operations, outbound logistics,
marketing and sales and after sales service enhanced by support activities
(infrastructure HRM, technology and operations.
Primary activities
Inbound logistics Apple’s current CEO Tim Cook is known for his
strategy of getting suppliers to compete with each
other and this ensures that they supply the goods to
Apple on time for production. Failing which Apple will
drop the suppliers from its supplier list.
Operations Apple operations are divided into several countries such
as America, Europe, china etc. Apple’s operations are
conducted by 116,000 full time equivalent employees.
Specifically only some models of Mac computers are
manufactured in USA and the majority of Apple

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Chapter 7: Strategy and the Enterprise in International Contexts

products are outsourced to manufacturing units based

in Asia. Apple has established a global web of value
creating activities around the world.
Outbound Apple outbound logistics involves warehousing and
logistics distribution of ready iphones, ipads and mac computers
and other products produced by the company.

Marketing and E-commerce sales is rightly acknowledged by the

sales company as a massive source of value in terms of
inbound logistics.

Apple delivers their products to the customer through

their own styled store and other specific stores as to
add value. This gives the company a better image
which is reflected in the prices customers are willing
to pay for prices.
After sales Apple has a global 24 hour hotline. Apple ensures
service quality service by developing competencies among it’s
service staff so that they can advise customers on how
best to solve their problems. In countries Apple has a
dedicated service centre where customers can visit to
clarify their problems.

Support activities
Procurement Apple works with hundreds of suppliers around the
world and maintains a highly sophisticated supply chain
management.
Technology Apple is known for technological innovations and for the
right quality and unique designs of its products. In
order to maintain its competitive advantage, the brand
has to invest a lot in R&D. For example, in 2016 Apple
spent more than 10b in R&D.
Firm Apple has many businesses and therefore mulit-
infrastructure divisional structure is appropriate where authority is
devolved to divisional managers to hold them
accountable for performance E.g divisions are iMac,
iPod, iTunes ,Ipad etc.
Although it has clear hierarchy apple also promotes
integration by having team or project or matrix
structure (see chapter 11)
HRM Apple emphasizes hard work for all workers. Instead of
promising career progression, Apple concept is for
employees to own the career. Career path is not fully
supported by Apple. Employees must seek information
about other jobs in different units themselves. Instead

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Chapter 7: Strategy and the Enterprise in International Contexts

of providing training and development programmes,

Apple makes their employees do it themselves. Apple
seeks global talent.

c) Explain the importance of location economies, experience

curve effects and economies of scale in enabling firms to
achieve global costs advantages. Illustrate your answer with
examples.
Location economies Location economies is the study of strategies used by
firms in a monopolistically competitive environment in
determining where to locate for countries for cost
reduction, seek value or differentiation. Cost
reduction - Bangladesh for textiles, Healthcare in
India
Scandanavian countries for medical equipment. Semi
conductors from South Korea. Software from the US.
(In other words, countries that have the presence of
cluster as cited by Porter in Diamond Factors.
Experience Curve Experience is the practical knowledge, skill or
practice derived from direct observation of or
participation in events or in a particular activity.
Learning of shortcuts, standardization or improvement
of production methods or when employees acquire a
new skill. E.g. Toyota’s lean manufacturing system
earned a greater return by leveraging any valuable
skills developed in foreign operations and transferring
them to other entities within the firm’s global
network of operations.
Economies of scale Economies of scale is economic term that describes a
competitive advantage that large entities have over
small entities. It means that the larger the business,
non profit or government, lower it’s cost. There are 2
main types of economies of scale – internal and
external. Internal economies are internal to company
itself and controllable by management – production,
marketing, finance. External economies are supported
by external factors such as geographical location of
firms , industry or government. Eg. – heavy industries
in Singapore are located in Tuas. Lower taxes to
attract large companies, example firms being located
in export processing zones.

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Chapter 7: Strategy and the Enterprise in International Contexts

Mock 2017 Q2

2. In light of the fact that any firm that aspires to go

international needs profound awareness of the strategic
opportunities provided by the global business environment,
address the following:

a Explain how a firm might utilise “ minimax” analysis for

creating international business strategies 8 marks

b. Describe Pankaj Ghemawat’s AAA model for developing a

firm’s international business strategy 9 marks

c Discuss the Four basic strategies that firms can utilise in

order to compete in international markets. 8 marks.

A Minimax analysis begins with the analysis of PESTEL framework – firm

makes sense of what the environment is all about. This enables the firm to
identify the Opportunities and Threats. SWOT analysis help to identify
Strengths and Weakness, which is internal, and Opportunities and Threats
are external to the firm. The firm should use its Strengths to cease on its
opportunities and also the strengths can be used to minimise the Threats.
In addition the Opportunities of the firm can be used to minimise the
Threats. Also the Threats and Weakness need to be minimised.

b Aggregation – global integration

Adaptation - local responsiveness
Arbitrage – global production

In a world of globalisation where the world is flat, national identities have

disappeared ( Thomas Friedman ). But distance matters which is identified
by the CAGE framework hence AAA comes to manage differences brought
about by distances
Aggregation – there are differences between countries but we can
overcome by aggregation we can enjoy economies of scale and become a
cost leadership
Adaptation – firms needs to adjust to local market factors
Arbitrage – transfer production to countries where it is cheaper to
produce

c FOUR basic strategies - see notes

International strategy – home replication

Global standardisation strategy – Aggregation
Localisation ( multidomestic strategy ) – Adaptation

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Chapter 7: Strategy and the Enterprise in International Contexts

Transnational strategy – aggregation and adaptation

May 2017 Zone A Q7

Using relevant concepts and illustrative examples:

a. Distinguish and elaborate upon the primary activities and the

support activities that contribute to a firm’s value chain
8 marks

b. Explain how location economies, experience curves and

economies of scale enable international firms to attain global
cost advantages. 9 marks

c. With regard to international business strategy, explain the

forces that create pressures for cost reductions and the forces
that create pressures for local responsiveness. 8 marks

Reading for this question

The relevant material appears in Willcocks (2013) Chapter 4 and the

subject guide, Chapter 7.

Approaching the question

a. This required a definition of value chain and primary and support

activities. We expected a detailed exposition of value chain analysis
covering primary and support activities. We allocated marks for an
explanation of the relevance of value chain analysis for a firm and any
illustrative examples.

b. See page 90 in the subject guide and pages 70 and 71 in Willcocks

(2013) for the type of description and illustration required for each
of the three terms: location economies, experience curve effects and
economies of scale.

c. Forces that create cost pressure include producing commodity

products, competitors in low-cost locations, persistent excess
capacity, consumer power and low switching costs. Forces that create
localisation pressure include differences in consumer tastes and
preferences, differences in traditional practices and infrastructure,
differences in distribution channels and economic and political
demands imposed by host country governments.

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Chapter 7: Strategy and the Enterprise in International Contexts

Good Student’s Essay

Chapter 7

Q4. Describe the Ghemawat’s aggregations, adaptation and

arbitrage framework and illustrate how it can be used with an
example of your choice.

Aggregation is about creating greater economies of scale or scope as a

way of dealing with differences such as differences in preferences from
customers, offers, products, services, pricing, positioning etc. by using
grouping devices and intragroup coordination mechanism. For example, the
aggregation is Indian sub-continent; India, Sri-Lanka, Bangladesh, and
Pakistan. Another example is the middle-east countries. They have slight
resemblance in culture especially in music some of the actors and
actresses are Muslim (Ali Zaffar, Shah Rukh Khan, KatrinaKai). In addition,
Bollywood is also well received in South-East Asia such as Malaysia and
Indonesia.

Adaptation is about creating global value by changing one or more

elements of a company’s offer to meet local requirements or preferences.
This is probably the most widely used global strategy. For example, some
scenes in the movie can be shot in different countries to show some
popular sights and scenery; EkTha Tiger was shot in Turkey, Evening in
Paris shot in Paris, Singapore shot in Singapore. In different countries
there are different subtitles, for example, in china there is mandarin, in
US there is English, and in Middle East there is Arabic etc.

Arbitrage is a way of exploiting differences rather than adapting to them

or bridging them, and defines the original global strategy. For example,
Bollywood movies will be film in countries where studio cost will be
cheaper, for example, China (Hengdian World Studios where there are
replicas of Eiffel Tower, coliseum of Rome, London Bridge and Statue of
Liberty in New York. Furthermore, the supporting actresses and actors
which are required in large numbers are cheaper in china as well as the
costumes and other accessories are required in the film making.

Q8. Using relevant concepts and illustrates examples:

a) Identify the role of location economies, experience curve

effects and economies of scale in enabling companies to
attain global cost advantages.

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Chapter 7: Strategy and the Enterprise in International Contexts

Role of location economies, experience curve effects and economies of

scale are inter-related and when firms fully utilize all 3 of them, they
will be able to make reductions in cost. It also creates barriers to entry
for potential entrants based on porter’s five force model.
Location Economies: there are different offers and advantages for
different locations and by that, firms will be able to reduce total costs
and exploits markets. For example, Location economies: Lenovo is design in
US, keyboards and hard drives are made in Thailand, wireless cards are
made in Malaysia, assemble in Mexico and ship back to US. Toyota in
Indonesia has cheap land, low wages, skilled labour, low cost of production
because of low prices of raw materials and components. Firms can also
access to neighbouring companies which have growing per capita income.
Such as, Thailand, Philippines, Malaysia, India, Australia.

Experience curve effects: By repeating doing a thing and getting better in

it. Experience improves efficiency and thus reduction in costs. Being more
experienced can contribute to higher productivity, lesser defects and
hence lowering the cost. For example, Boeing has been manufacturing
planes since 1916. They have developed managerial expertise and
production efficiency which is not easily copied by others. Over the years,
Boeing has managed to reduce the cost of productions of planes and at the
same time improving the designing of the planes. A good example is the
latest 787, dream liner which has fuel efficiency.
Economies of scale: refer to the reductions in unit cost achieved by
producing a large volume of a product. The cost of producing medicine is
extremely high due to R&D and once it is developed it becomes a fixed
cost. This cost can be spread over extremely large output contributing to
very low cost per unit pushing up profits similarly to computer games.

b) With regard to international business strategy, explain

the forces that create pressures for cost reductions for
films and the forces that create pressures for local
responsiveness.

Pressure for local responsiveness is the willingness of firms to make

adjustments to their products, services and their ways of conducting
business at the local level, such as, local cultural and needs. For example,
food products like Maggie of Nestle, spicy curry, tom yum, chicken soup,
prawn flavour, laksa. Clothes, such as, H&M produces warm clothes in
Europe at the same time it produces light cotton clothes in Singapore and
other southeast asia countries to cater weather conditions. Also, bank
needs to respond to the formal and informal institutions.

Pressure for cost reductions forces the firm to lower unit costs. For
example, Consumer electronics, such as, Samsung, apple, LG, Toshiba, all

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Chapter 7: Strategy and the Enterprise in International Contexts

these face cost pressures. Airplane manufacturer, especially Boeing

transfer parts of components and also watches.

c) Describe the four basic international business strategies

that a firm can adopt to compete in international
markets.

International (home replication) strategy: selling home grown products

to overseas market with minimum local customization, short-term
measure, it has low pressure for cost reduction and local responsiveness
it can simply replicate itself in overseas market. Example, strategy is
use by newly establish firm. The firms international orientation is
ethnocentric that is whatever happens at home, happens overseas.
Example, when Toyota initially set up its operation it used the
ethnocentric orientation to penetrate overseas market.
Localisation (multi-domestic) strategy: It has high pressure for local
responsiveness and low pressure for cost reduction; mostly it is use by
retailers. To achieve maximum local responsiveness by customising both
their product offering and market strategy to match different nation
condition. Each country or region as a stand-alone local market worthy
in itself of significant adaptation and attention. The firm international
orientation towards its overseas market is polycentric orientation.
Example, initially Unilever had 17 countries subsidiaries in Europe in
1980s. John Deere tractor company of India succeed established a team
of Indian and US engineers to develop tractors for the US market.
Global standardisation strategy: it has high cost reduction
pressure and local responsiveness. Develop and distribute standardize
product or services worldwide to reap the benefits of economic of
scales and share product development. The firm has a geocentric
orientation and treats the world as one big global market. Example,
Inter-continental (5 stars hotel) has utilised geocentric orientation
which can be seen with it growing global performance. SIA offers the
same service all over the world and maintain its slogan, “a great way
to fly”.
Transnational strategy: they aim to be both costs efficient and locally
responsive. They achieve low cost through location economies, economies
of scale and learning effect. For such firm, the world is their market
and therefore the orientation is geocentric. Example, Red Bull, its
packaging is different in North America and China. It is because the
colours on the packaging are perceive in different ways by the
consumers in that country. North America can packaging has red, silver
and blue while China has red and gold. There’s little homogenisation
because the firms alter the products to fit local culture, for example,
HSBC, the world’s local bank.

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Chapter 7: Strategy and the Enterprise in International Contexts

Mock 2018

Using relevant concepts and illustrative examples:

(a) Explain the significance of location economies, experience
curve effects and economies of scale in enabling companies to
achieve global cost advantages. (9 marks)

(b) In the context of international business strategy, what are

the forces that create pressures for cost reductions for firms
and what are the forces that create pressures for local
responsiveness. (8 marks)

(c) Discuss how a firm might utilise MiniMax analysis for

creating international business strategies. (8 marks)

Mr Nilesh’s Answer

(a) 9 marks
This part of the question requires candidates to display solid knowledge of
the three concepts mentioned in the question. A strong answer requires
solid conceptual understanding and some suitable illustrations. Candidates
will find the relevant material on page 90 of the Subject Guide.

(b) 8 marks
This part of the question can be answered very easily with reference to
the relevant material presented on pages 95/96 of the Subject Guide.
Candidates should aim to give four reasons why firms face pressures for
cost reductions and to give four reasons why firms face pressures for local
responsiveness.

(c) 8 marks
The best explanation for the MiniMax analysis is on pages 72-74 in the
Willcocks book. Candidates should not bring their knowledge of the CAGE
Distance Framework into this answer. The answer has to aim to be
conceptual in its exposition and a single company example or a number of
references to different though relevant, should not constitute the entire
or a substantial part of the answer.

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Chapter 7: Strategy and the Enterprise in International Contexts

May 2018 Zone A 2c

c. Describe Ghemawat’s AAA strategic framework, its strengths and

limitations and how it can be used for defining a strategy for the global
market place. (7 marks)

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