CHAPTER 7: GLOBALIZATION AND INTERNATIONAL STRATEGY

OPPORTUNITIES IN THE GLOBAL MARKET

The international market yields potential for corporate extension and market penetration as the global
population continuous to increase, needing new products and services. The global strategy is the selling
of more goods and services outside of its domestic market. It is the process of diversifying operation of
to the wider base of operation by expanding its market niche to other countries for quality products,
which the domestic market has saturated. There are products that could be produced at low cost due to
the presence of local material inputs that is not available in other countries.

Some demand for products may then develop in other countries and export opportunities become open
for corporate strategic action. Increased demand in foreign countries justify direct investments in
products operation abroad as demand need to be meet before competitors take the lead step forward
the target market. As firm standardized its products, process of producing the same may be less costly in
other countries as labor costs may be lower than in the domestic market. Another reason is that
manufacturing cost terms of power rates and other operating inputs may be lower in another country.

Corporate expansion in China differs by the type of firm. The large population of China is an opportunity
to expand the market of products that answer the new lifestyle of its population due to their changes in
consumer behavior. San Miguel Corporating expand its beer facilities in China due to increasing demand
of its beer producers as the brand has been known in the world market for its taste and aroma. By
operating the foreign market, they reduce the cost in terms of labor and other inputs.

The Global strategic operation is further driven by more universal products and the pressure of increase
international integration of trade and commerce. As countries worldwide industrialized the demand for
products and commodities appears to be similar. This borderless demand for products in brought about
by The development of international cultural integration and lifestyle in developed countries.

Similarity in needs and wants to drive more corporate expansion in the international trade and expand
their market base for more competitive advantage. This competitive advantage is driven further by the
presence of known brand products worldwide that visualize and model lifestyles in different cultures.
This universal in nature, and men and women would like to appear in the same social strata. This drives
farther the imitation of known brands such as nikes , adidas and many other in the market.

The firms of expanding in international market are not devoid for challenges. Firms have to consider the
followings factors when they engage in international operations:
1. Firm in global food and consumer products has to adapt to the local taste preference of the country in
which they operate.

2. Employment contract and training of manpower in competitive quality.

3. Cultural diferences and language used in operatrion that effects production efficiency.

4. Join ownership of international operations like Philippines requiring sixty percent local partners and
forty percent foreign capital investments .

5. Requirements in the use of more local content in product manufacturing.

6. Research and development in the use of local materials.

THE BENEFITS OF GLOBAL STRATEGIES

1. Increase Market size

There could be dramatic increase in the market as firm move into the global market. As part of the firms’
expansion effort they have to be successful in the emerging market by providing incentives to retailers to
stock its products and use the local banking facilities and agents in collecting payments. Coca-Cola and
Pepsi have saturated market in the American region and large population of Chinese who are now having
a new change in consumer behavior and value prefrences.

The increasev in market size also effects the firm’s size also affects the firm’s willingness to invest in
research and development to build strong competitive advantage in that particular market. The presence
of large market offers higher potential for return in investments especially where there is the presence of
technical and scientific knowledge base in the host country. Technical and educational level of the
country induces foreign investments as training and research development will be less costly for the
investing firm.

2. Return on Investments

The primary reason in investing in foreign market to generate above average return on investments.
Firms that have specialized in a certain type of product and have expanded both horizontally and
vertically in the local market, have to find a new source of investments where they could use their
available resources for new business opportunities worldwide.

Jollibee Corporation with vast capital and manpower resources has to expand internationally to capture
part of the market share of KFC and develop a new market niche that will give them substantial return in
foreign currency as they operate on global market where the exchange rate is in dollar. Jollibee does not
need investments in research and development as theyt have formulated their menu based on the
prevailing taste buds of most customers to its Chicken Joy, Burgers, French fries, and other products
especially for Filipinos around the globe.
 3. The economies of scale

Firms enjoy the economies of scale by producing and distributing products internationally. The firm can
standardize their products that can be suitable to all types of customers worldwide especially in the
electronic industry and other consumer products. Procter and gamble is in Thailand producing shampoo
and hair conditioner bringing into the Philippines for its consumer market and on the other hand
exporting its detergent to Thailand for similar market.

The production facilities are utilized in wider perspective and the technical and research process in
concentrated in one location thereby reducing cost and developing the economies of sale. In the process
the firm standardized its products across country borders, used in the same or similar production
facilities and coordinated critical resource functions as marketing and distribution systems to achieve the
greater economies of scale.

4. Exchanges in Technical and Learning Process

No Country is a monopoly of knowledge base. Each country developed core competencies that can be
used in the international market through resource and knowledge sharing between units across country
borders. The sharing generates synergy that contributes to the production of higher quality goods and
services at lower cost.

Working Across international markets provides the firm with new learning opportunitie. The filipino
Engineers working with Japanese counter parts in the production of electronic products and car
accessories developed new technical capabilities as well as learning new work behavior that could
transform new work values. On the other hand, other nationalities can learn filipino values and the
English language, which is used in the industrial setting.

5. Localized Operational Advantages

Some firms operate in another country because of the lower labor cost. Example of this is China that
offers almost offers almost half of the cost of labor in Philippines. Some industries in the in the
Philippines like Colgate, Palmolive, went to china to take advantage due to labor unrest experience in the
last decade. In addition, Colagte – Palmolive is aiming at market penetration on the large population of
China as an added advantage for wider market base.

Another factor for the relocation of international operation is the cost of production in terms of electric
cost, energy and other resources, which could be available in that country. Another reason is the ability
critical supplies in the production of goods. Political stability and incentives of government in terms of
taxes and duties are encouragements for the global positioning of industries. Transparency in
governance and the presence of more honest administration are another factors that attracts
investments in the global market.

STRATEGIC APPROACHES TO INTERNATIONAL BUSINESS

The success of firms going into the international or global market is dependent on the strategic
approaches being implemented. At the business level, firms must follow some generic approaches
strategies such;

1. Cost leadership
2. Differentiation
3. Integrated cost leadership and differentiation

The implementation of the above strategic action in the international business community will create a
competitive advantage, as its strategy must realize core competencies based on difficult duplicate
resource capabilities. Along this line, firms expect to create value through the implementation of
business-level strategy and corporate-level strategy in the global market.

BUSSINESS LEVEL STRATEGY IN THE GLOBAL MARKET

The international business strategy has some unique features that differentiate it from the local strategic
actions implemented in the local business scenario. In the global scenario, the home country of
operation is often the most important source of competitive advantage. The resources and capabilities
established in the home country frequently allow the firm to pursue strategies into the market located in
another country.

The firm’s resources and capabilities are duplicated and transferred into the country of operation that
capitalize on the following factors:

1. Factors of production

This dimension refers to the inputs necessary to compete in any industry. These factors of production are
important considerations in cost of competitive advantage as it has something to do with following:
 a. The cost of labor

It is one important component in the production of goods and services as no international business
would locate their operatios where the labor cost is more that its domestic operation. The operation of
most Japanese and American companies in the Philippines is due to our lower labor cost and competent
man power resources. They could produce cheaper products thereby gaining competitive advantage.

b. Cost of land for construction facilities

Corporate expansion of plants and facilities needs land. The cost of land in the suburban Metro Manila
such as Laguna and Batangas is a factor to consider in locating their operations in the Philippines. Toyota,
Mitsubishi, Ford Kia Motors, and other multinational firms are operating in this region as most farm lots
have been converted to industrial subdivisions to accommodate the growing industrialization. These big
firms need hectares of land to accommodate their plant facilities, which they were able to purchase at
lower cost.

c. Natural resources of the country of operation

The Philippines is rich in natural resources, which could be transformed into finished products for export
to other countries. Japan and Korea imported our iron ores, copper, and gold; Our copper and iron ores
are exported to their country for processing and re-exported back as semi-finished products for further
processing and re-exported back as semi finished products for further processing into electronic
components and car accessories. While we experience calamities such as floods and typhoon, the
weather condition still is favorable for the development of more industries that attracts international
location.

d. Infrastructure development

The opening of more infrastructure like expressways and the development of more road systems are
factors that would encourage multinational corporations to locate their facilities in the country. While
traffic congestion is a discouraging factor, it is only felt in the metropolitan cities of Manila and its
suburbs. Communication systems have to be improved, as this factor will affect the speed of
transmission of information to the home office of the foreign corporation.

2. It is the characteristics of the nature and size of the buyers’ needs in the home market for th
industry’s goods and services. The sheer size of a market segment can produce the demand
necessary to create scale efficient facilities this scale efficiency can create leadership dominance
of the industry in another global market. Specialized demand may also create opportunities
beyond home country boundaries.
 3. Related and Supporting Industries

The manufacturing of goods is not monopoly of one company. They are dependent on the support of
available suppliers of material inputs in the production of goods or their basic products. Toyota and
other car manufactures in the Philippines dependent on the suppliers of other parts and accessories,
which are available within the country within country or nearby countries like Malaysia, Singapore and
Thailand. The regional cooperation in the supply of basic inputs and production has been design to
support industries within the region to produce the economies of scale.

4. Firm strategy, Structure and Rivalry

The foster of growth of certain industries varies among firms in the global market. This dimesion
refers to the technical competencies of the firm along the areas of their expertise. Germany has strong
emphasis on methodical production system and process improvements while Japan has its unusual
cooperative and competitive system that facilitated the cross-functional management of complex
assembly operations. Italy is noted for fashion designers in car, apparels and furniture while the united
states in the development of computer software applications and other electronic system that has
favored the development of these industries.

5. The Government Policy of the country of Operation

The government policy in which the multi-national company operated also affects the success anf
failure of international expansion and operation. The country’s geographic and cultural proximity to
several promising market, the existence of rivals in the home market and the accompanying pressure to
upgrade production facilities can help achieve international market competition, Tariff the taxes in other
countries also affect the profitability and operational dimensions of the international firms.

While the above-cited dimensions and factors create successful operations in another country, firms
must create its own success strategies that will generate ‘additional return investment. The corporate
leadership in operational and strategic planning strategies for international operations must focus on
competitive advantage based on their competencies and implement the strategies that take advantage
of the distinct country factors.

Operating managers in the country of operation must know the cultural and political system of the
country as compelling reasons for the success and failure of international operations. They must be
aware of the values, culture, the consumer behavior and economic system operating in the home
environment that will contribute to the great success of their strategic implementation.

THE LEVEL OF CORPORATE STRATEGY IN INTERNATIONAL OPERATIONS

The strategy is based on the type of market conditions in the country of operation. Some
multinational corporations give individual country units of the authority to develop their own business
level strategy to tailor fit their operations according to the needs and problems prevailing the country.
On the other hand, when the strategies could be patterned in the mother company in terms of product
standardization and sharing of resources, the operational styles become similarly the same with the
same with the mother company.
 Product and geographic diversification are the usual focus and scope of international corporate level
strategy as they operate multiple industries and in multiple countries. The corporate headquarters,
usually the united states or Japan or any European multinational corporations guide the strategic actions
in the country of operations. Consultants and executives of the mother company are stationed in the
host country to oversee operations.

The levels of corporate level strategies are:

1.Multi-Domestic Strategy

It is the process of decentralizing operating decisions to tailor fit the product according to the needs
and wants of the consumer in the particular country. The focus us competition within the country and
assumes that market needs, and desire need segmentation according to the buying behavior of the
market.

This strategy operated effectively as the firms customizes its product to meet the specific needs and
preferences of the local consumers. It further focuses on industry condition, the political and legal
requirements, the social norms and values prevailing in the host country. The firm must therefore
maximize the competitive response to the idiosyncratic requirements of the market.

Advantages of multi-domestic strategy:

a. Satisfaction of Local consumer needs and wants.

b. Expansion of market share.
c. Presence of quality products.
d. Lower price due to competition.
e. Presence of branded products in international market.

Disadvantages of multi-domestic strategy:

a. Corporate uncertainly of the future due to competition.

b. The economies of scale are limited to local market.
c. Decentralization of operation entail additional cost due to higher salaries and allowances of
assigned executives.
d. Difficulty in adapting to local conditions.

2.The Global Strategy Through Standardization

This strategy focuses on the development of more standardized products across country markets as
operation is more controlled by the central office in the home country.

By standardization and the utilization of innovative stratergies at the main office , the firm develops
more competitive advantage as they economized on research and development cost and maximized
production capacity.

Adbvantages of the Global Strategy

a. Utilizes the economies of scales

b. Reduced cost in product development research
c. More control of the home office
 d. Standardized products

Disadvantages of the Global Strategy

a. It requires sharing of resources

b. Foregoing growth opportunities in local market
c. Needs effective coordination and control
d. Product adaptation to local market

3Transnational Strategic Implementation

It is an international strategy through which the firm seeks to achieve global efficiency and local
responsiveness. It requires close global coordination and local flexibility as it needs to build and
implement shared vision and individual commitment through a network of common objectives

The effective implementation of the corporate vision and objectives at the national headquarters in
the local level could achieve better results in product communication system through
teleconferencing and information exchange efficiency and standardization could be possible

Advantages of the Transnational Strategy

a. Produces higher performance level

b. Product standardization in the international market
c. Efficiency produces economie of scale
d. Improves competitiveness in international market

Diadvantages of transnational strategy

a. Difficulty in coordination and control

b. Strict compliance to standards and specifications
c. Marketing and pricing strategy differ across countries
d. Geovernment requirements of increase local content

THE MODE OF ENTRY IN INTERNATIONAL OPERATIONS

1. Exporting
It is the process of establishing marketing and distributing of the products to a foreign country
through distributors or chain of retailers on contractual arrangements. Exporting is most
advantageous when the mother corporation is nearest the foreign market due to the
transportation cot or where faciltitIes are available in bringing the product to other countries are
put in place.

Volume and heavy products need ships as means of transportation, while high value and low
volume products could be transported faster with the use of air transport.

Advantages of exporting
a. Low capital requirement in establishing office
b. Ease in operation as distributors handle marketing
c. Less risk as it passes on to distributors
 d. Immediate in increasing sales at low investments

Disadvantages of Exporting

a. Higher cost of products

b. Low control in operation and distribution
c. Difficulty in marketing competitive products
d. Presence of more competing products

Licensing Arrangement with foreign Partners

It is the process of allowing a foreign firm to purchase the right to manufacture the firms’ product within
the host country. It is a form organizational network being practiced by smaller firms. Unde this
arrangement, the firm that allows the use of its right to use the brand name of the product, its features
and specifications is paid a royalty for every product produced and distributed.

The licensee takes the risks and makes monetary investment in faciltites for the manufacturing,
marketing and distribution of the products. Licensing arrangement is also a way to expand returns base
on previous innovations. The licenser has little control in the operation of the licensee except in
coordinating on the requirments of product quality. The quality must be within the brand specifications
to protect it simage in the market

International Strategic Alliance

Streategic alliance has become the popular arrangement in international expansion as it allows the
partner firms to share and risk their common reaources. This arrangement could be favorable to both
partners as it can facilitate the development of core competencies that contribute to the firm’s future
strategic competitiveness. The partnership could be brought by common understanding of both
corporate values in management ansd trust in its capability to sustain profitable operation.

Further, most strategic alliance are formed with the host country that knows and understands the
competitive condition, political and legal requirements and the cultural idiosyncrasies of the country
which could help the expanding firm manufacture and market the competitive product. The partners in
alliance bring their resources in both knowledge and technology and develop competitive products for
marketing in the host country or its neighboring country regions

Advantages of Interantional Strategic Allicance

a. Development of competitive strategies

b. Share cost in facilties and resources
c. Share risk in production and marketing
d. Technology transfer to host country
e. Learning new corporate strategies and capabilities

Disadvantages of International Strategic Alliance

a. Problems of cultural integration

b. Difference in work values and perceptioons
 c. C. Incompatibility in management styles may cause conflict in decision making
d. Difficulty in management due to language barriers especially in non-English communicating
countries
e. Trust of partners is critical

Acquisitions of Existing Local Firm

The free trade mania in the last decade continues to expand in the global market. In the same manner,
big multi- national corporations, which have the resources and capital, would like to expand their
operations by buying out non-performing firms in some countries where thay would like to penetrate the
growing market needs. The multi-national corporations believe that it is the easiest way to penetrate
the international market for their products or services.

Entering a country’s firm through acquisition is not devoid of problems. It can be exceedingly complex in
some countries due to the differences in culture and legal requirements and getting information as basis
for decision making. Getting the right firm to acquire and take over its operation may pose legal
government requlations in terms of capital sharing arrangements. The Philippines require the 60%
capital for local and 40% foreign partner investment

Advantages in Acquisitions

a. Easy access to foreign market

b. Control of operations is the hands of investors
c. More products could be marketed in the foreign markets
d. Technology transfer to local firm

Disadvantages in Acquisition

a. It requires big investments debt financing

b. Comppicated and complex in operation due to cultural differences
c. Difficult to negotiate agreements
d. Difficulty in merging operational system due to differences in manasgement style

The Greenfield Venture Operation

It is the establishment of a wholly onwed new subsidiary in a foreign country. While in the process is
complex and potemntially costley, it affords the maximum operating control and has the potential of
getting the above average return on investments. This potential is especially true of fimrs with strong
intangible capabilities that have strong leverage in entering a country with opportunuities for
investments in green-filed ventures

The cost of establishing a new business operastion in a new country is high, The foreing firm has to hire
local nationals or consultants to study the operational requirements. The foreign firm has to hire local
nationals or consultants to study the operational requirements. The foreign needs to establish
manufacturing facilties, bring new technology , establish distribution channels and networks and learn
appropriate marketing strastegies in order to compete in the new market.

Advantages of Greenfield Venture Operations

a. Technology transfer to the new country

 b. Generation of employment opportunities
c. Operational control and manasgement
d. New product development for new market

Disadvantages of Greenfield Venture Operation

a. Costly on initial investments

b. Government requirements and regulations
c. Risky in competitive advantage over local firms with similar product.

THE RISK IN INTERNATIONAL ENVIRONMENT

Firms’ expanding in the international environment carry multiple risks as it is difficult to implement and
manage. Highly diversified firms are accustomed to market conditions yielding competitive situations
that differ from what was [redicted. The international environment is full of opportunities for growth
and expansion, yet the turbukent scenario still lingers as riskes in investment.

Several risks are involved with multinational operations. Foremost among them, these risks are the ff

The Political Environment

It is related to instability in government where the firm intends ot operate, insurgency, civil wars and
changes oin national leadership are risks that difficult to predict and therefore pose as congruent risk in
business operastion. Changes in political leadership and type of governance may create new regulaton
of business operation for multinational firms such as tariff and taxes, legal requirement and the possible
nationalization of private assets. Government instability and conflicts should be studied very carefully
before investing in foreign country.

The Economic Rsik

The economic situation in the country may look very positive during the initial operation of the
multinational firm, yet the turbulent environment in terms of difference and fluctuiation on the value of
different currencies which could be partly due to the political risk. The firm’s competoitive advantage
could be affected when the value of the currencies in the country of operation fluctualtes eroding the
possible gain I n operation. Recession in the country of operaton affects multinational operations.