the political economy of internal trade

Lecture Slides compiled by Franklin Styne 1Interface Global Education

CHAPTER 11

THE STRATEGY OF

AN INTERNATIONAL

BUSINESS

Why Companies need to expand internationally?

Strategy of a firm

Global Entry Strategies

EPRG Framework

International Expansion strategies

HR policies of International companies

Case Study – Starbucks failed entry strategy

Lecture Slides compiled by Franklin Styne

There are 2 reasons

Proactive Reactive

1. to respond from abroad

2. to beat competitors of new markets;

3. to diversify their customer base

4. to create incremental revenues and

profits through international market.

1. the domestic market has low or no-growth potential

2. current customers have gone overseas;

3. domestic workforce needs to be preserved

4. lower manufacturing and labour costs can be an advantage.


To compete more effectively in a

Global economy managers must consider

3

The benefits of expanding into foreign markets

Which strategies to pursue in foreign markets

The value of collaboration with global competitors

The advantages of strategic alliances

Lecture Slides compiled by Franklin Styne 4Interface Global Education

A firms' strategy can be defined as

the actions that managers take to attain the goals of the firm.

For most firms, the preeminent goal is to maximize the value of the firm is done in legal, ethical, and socially responsible manner.

WHAT IS STRATEGY?


Strategy and the Firm

Profitability refers to the rate of return the firm makes on its invested capital

Profit growth is the percentage increase in net profits over time

Typically, strategies focus on:

Reduce costs

Add value and

Raise prices

Sell more in

Existing markets

Enter new

Markets

Profitability

Profit-growth

Value of an

Enterprise

Profitability

Profit growth

Value of an enterprise


Firms that expand internationally can increase their profitability and profit growth by

1. Entering markets where competitors lack similar competencies

2. Realizing location economies

3. Exploiting experience curve effects

4. Transferring valuable skills within the organization

The concept behind the Experience Curve is that the more experience a business has in producing a particular product, the lower its costs.

What are the strategies that companies can use ?


EPRG Model

• Introduced in 1969 by Perlmutter

• The strategy of an organization is characterized by 3 factors, Ethnocentricism, Polycentricism and Regiocentricism

• Later Wind, Douglas and Perlmutter (1973) extended this model by another factor Geocentrism hence EPRG model

• Before entry to a foreign market the MNC need to determine which approach is suitable

7Interface Global Education

Ethnocentric

Geocentric Polycentric

Regiocentric


EPRG Framework


Ethnocentric OrientationThe practices and policies of headquarters and of the operating company in the home country become the default standard to which all subsidiaries need to comply. Such companies do not adapt their products to the needs and wants of other countries where they have operations. There are no changes in product specification, price and promotion measures between native market and overseas markets.

Regiocentric OrientationIn this approach a company finds economic, cultural or political similarities among regions in order to satisfy the similar needs of potential consumers. For example, countries like Pakistan, India and Bangladesh are very similar. They possess a strong regional identity.

Geocentric OrientationGeocentric approach encourages global marketing. This does not equate superiority with nationality. Irrespective of the nationality, the company tries to seek the best men and the problems are solved globally within the legal and political limits. Thus, ensuring efficient use of human resources by building strong culture and informal management channels.

Polycentric OrientationIn this approach, a company gives equal importance to every country’s domestic market. Every participating country is treated solely and individual strategies are carried out. This approach is especially suitable for countries with certain financial, political and cultural constraints.

Ethnocentric

Geocentric Polycentric

Regiocentric


A company can adopt different entry

strategies when they enter a foreign

market

Watch the video and write down the

Global market entry strategies

Interface Global Education 9

https://www.youtube.com/watch?v=SMMk4XqsEGI


Global Market entry strategies

Firms can enter foreign markets through1. Exporting

2. Turnkey projects

3. licensing or franchising to host country firms

4. a joint venture with a host country firm

5. a wholly owned subsidiary in the host country to serve that market

• The advantages and disadvantages of each entry mode are determined by• transport costs and trade barriers

• political and economic risks

• firm strategy


Choosing an International Strategy

There are four basic

strategies to compete in

the international

environment

1. global standardization

2. localization

3. transnational

4. international


Watch this video on the 4 strategies to

compete in the international market

https://www.youtube.com/watch?v=83rBbT5Qq_E&t

=3s



Global Standardization

Strategy

A global standardization strategy

focuses on increasing profitability

and profit growth by reaping the cost

reductions that come from

economies of scale, learning effects,

and location economies

the goal is to pursue a low-

cost strategy on a global scale

makes sense when there are

strong pressures for cost

reductions and demands for

local responsiveness are

minimal

Localization

Strategy

A localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets

makes sense when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense


Transnational

Strategy

A transnational strategy 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

foster a multidirectional flow of skills between different subsidiaries

makes sense when there are both high cost pressures and high pressures for local responsiveness

International

Strategy

An international strategyinvolves taking products first produced for the domestic market and then selling them internationally with only minimal local customization makes sense when there are

low cost pressures and low pressures for local responsiveness


Types of HR Policies

There are three types of human resources policies

key management positions are filled by home-country nationals

host country nationals manage local subsidiaries and home country nationals occupy positions at HQ

the best people are sought for key jobs throughout the organization, regardless of their nationality

1. Ethno-centric approach

2. Poly-centric approach

3. Geo-centric approach

The most attractive policy is the geocentric approach, however it is not always easy to implement


Case study

Watch this video on Starbucks failed

expansion strategy and answer the

questions that follow


https://www.youtube.com/watch?v=_FGUkxn5kZQ


Listen to the video and answer the

following questions

What are the reasons that Starbucks failed in

Australia?

What was wrong with their strategy

What in you opinion they should have done to

succeed in the Australian market?



Chapter review

Why Companies need to expand internationally?

Strategy of a firm

Global Entry Strategies

EPRG Framework

International Expansion strategies

HR policies of International companies

Case Study – Starbucks failed entry strategy



END OF MODULE


the political economy of internal trade

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