The Strategy of International Business

There are some basic principles of strategy and a various way in which firms can
profit from global expansion.
Let´s start talking about the very definition of strategy. It 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 shareholder value. Maximizing shareholder value
requires firms to focus on increasing their profitability and the growth rate of profits
over time.
International expansion may enable a firm to earn greater returns by transferring
the product offerings derived from its core competencies to markets where local
competitors lack those product offerings and competencies.
It may pay a firm to base each value creation activity it performs at that location
where factor conditions are most conducive to the performance of that activity. We
refer to this strategy as focusing on the attainment of location economies.
By rapidly building sales volume over a standardized product, international
expansion can assist a firm in moving down the experience curve by realizing
learning effects and economies scale.
A multinational firm can create additional value by identifying valuable skills created
within its reign subsidiaries and leveraging those skills within its global network of
operations.
The best strategy for a firm to pursue often depends on a consideration of the
pressures for cost reductions and for local responsiveness.
Firms pursuing an international strategy transfer the products derived from core
competencies to reign markets, while undertaking some limited local
customization.
Firms pursuing a localization strategy customize their product offering, marketing
strategy, and business strategy to national conditions.
Firms pursuing a global standardization strategy focus on reaping the cost
reductions that come from experience curve effects and location economies.
Many industries are now so competitive that firms must adopt a transnational
strategy. This involves a simultaneous focus on reducing costs, transferring skills
and products, and boosting local responsiveness. Implementing such a strategy
may not be easy.
One example of this international Strategy is the Mexican company CEMEX:
Even more remarkable than its emergence as a global leader in the cement
industry from its humble origins in northern Mexico in 1906 is how CEMEX
achieved this transformation. Viewed through the lens of risk, CEMEX’s trajectory
appears as a confluence of formal processes, metrics, and tools orchestrated to
deliver a breakthrough in operational excellence and a masterful exercise in
managing strategically in the face of uncertainty.
From a risk management perspective, two themes run through the CEMEX story.
First, having “grown up” in one of the world’s tougher market and institutional
environments in the world, CEMEX developed the ability to thrive in markets where
more powerful competitors dared not go. Embracing rather than avoiding specific
kinds of risks has become a trademark of CEMEX, a valued core competence. For
example, the company has developed a set of capabilities and processes that has
transformed the risks of demand volatility it faces in emerging markets into a
source of competitive advantage. The second pervasive theme is managing risk
not as something independent of, but as, the day-to-day business of the company.
Risk management is so embedded in the company’s cultural and organizational
fabric that it is barely noticeable as a distinct management function at either the
strategic or tactical level.
Strategically, CEMEX integrates market and demand risks in its overall planning for
capacity and sourcing. Operationally, it mitigates these risks by actively trading
cement across markets. CEMEX matches or beats global industry standards in
managing the physical hazards inherent in cement and concrete production and
distribution, despite its considerable exposure in emerging markets in which safety
practices are perceived to be less rigorous. Its emphasis on achieving operational
efficiency by systematically applying management practices and metrics and on
promoting company-wide visibility through intelligence and information systems is
central to the CEMEX Way.
The greatest strategic risk CEMEX has faced and successfully managed to date is
the threat to its economic viability and independence posed by the opening of the
Mexican economy and the globalization of the cement industry. It responded to this
threat by aggressively pursuing greater global scale while simultaneously
narrowing its product focus to cement and concrete. Because growth was achieved
through acquisition at a pace well beyond what internal cash flows could support,
the need for substantial external financing exposed CEMEX to new risks that
demanded the development of new capabilities.
The ability to conduct business in tough institutional environments and the capacity
to integrate risk considerations into its strategic and operational decision making
processes have paid handsome dividends to CEMEX, helping it to navigate the
consolidation of its national market in the 1960s and 1970s, survive Latin America’s
“lost decade” of the 1980s, ride the first wave of sectoral internationalization in the
late 1990s, and become one of largest building materials companies in the world at
the beginning of the 21st century. Now CEMEX must marshal its capabilities to
meet a new set of challenges that face the cement industry, and CEMEX as an
increasingly visible player within the industry, as it enters the next millennium.
Among these are the increasing concern on the part of citizens and governments
with the potential impact of cement production and use on the environment and
human health, the emergence of more stringent global standards for transparency
and business practices, and the emergence of new technologies that could
potentially alter the economics of the cement business.

The Organization of International Business

There is a specific organizational architecture that can be used by multinational
enterprises to manage and direct their global operations. Although different
strategies require different architectures; strategy is implemented through archi-
tecture. To succeed, a firm must match its architecture to its strategy in
discriminating ways. Firms whose architecture does not fit their strategic
requirements will experience performance problems. It is also necessary for the
different components of architecture to be consistent with each other.
Organizational architecture refers to the totality of a firm's organization, including
formal organizational structure, control systems and incentives, processes,
organizational culture, and people.
Superior enterprise profitability requires three conditions to be fulfilled: the different
elements of a firm's organizational architecture must be internally consistent, the
organizational architecture must fit the strategy of the firm, and the strategy and
architecture of the firm must be consistent with competitive conditions prevailing in
the firm's markets.
Organizational structure means three things: the formal division of the organization
into subunits (horizontal differentiation), the location of decision-making
responsibilities within that structure (vertical differentiation), and the establishment
of integrating mechanisms.
Control systems are the metrics used to measure the performance of subunits and
make judgments about how well managers are running those subunits.
Incentives refer to the devices used to reward appropriate employee behavior.
Many employees receive incentives in the form of annual bonus pay. Incentives are
usually closely tied to the performance metrics used for output controls.
Processes refer to the manner in which decisions are made and work is performed
within the organization. Processes can be found at many different levels within an
organization. The core competencies or valuable skills of a firm are often
embedded in its processes. Efficient and effective processes can help to lower the
costs of value creation and to add additional value to a product.
Organizational culture refers to a system of values and norms that is shared
among employees. Values and norms express themselves as the behavior
patterns or style of an organization at new employees are automatically
encouraged to follow by their follow employees.
Firms pursuing different strategies must adopt a different architecture to implement
those strategies successfully. Firms pursuing localization, global, international, and
transnational strategies all must adopt an organizational architecture that matches
their strategy.
While all organizations suffer from inertia, the complexity and global spread of
many multinationals might make it particularly difficult for them to change their
strategy and architecture to match new organizational realities. At the same time,
the trend toward globalization in many industries has made it more critical than
ever that many multinationals do just that.

Entry Strategy and Strategic Alliances

Basic entry decisions include identifying which markets to enter, when to enter
those markets, and on what scale.
The most attractive reign markets tend to be found in politically stable developed
and developing nations that have free market systems and where there is not a
dramatic upsurge in either in inflation rates or private-sector debt.
There are several advantages associated with entering a national market early,
before other international businesses have established them selves. These
advantages must be balanced against the pioneering costs that early entrants
often have to bear, including the greater risk of business failure.
Large-scale entry into a national market constitutes a major strategic commitment
that is likely to change the nature of competition in that market and limit the
entrant's future strategic flexibility. Although making major strategic commitments
can yield many benefits, there are also risks associated with such a strategy.
There are six modes of entering a reign market: exporting, creating future key
projects, licensing, franchising, establishing joint ventures, and setting up a wholly
owned subsidiary.
Exporting has the advantages of facilitating the realization of experience curve
economies and of avoiding the costs of setting up manufacturing operations in
another country. Disadvantages include high transport costs, trade barriers, and
problems with local marketing agents.
Turnkey projects allow fims to export their process know-how to countries where
FDI
might be prohibited, thereby enabling the firm to earn a greater return from this
asset. The disadvantage is that the firm may inadvertently create efficient global
competitors in the process.
The main advantage of licensing is that the licensee bears the costs and risks of
opening a reign market. Disadvantages include the risk of losing technological
know-how to the licensee and a lack of tight control over licensees.
The main advantage of franchising is that the franchisee bears the costs and risks
of opening a reign market. Disadvantages center on problems of quality control of
distant franchisees.
Joint ventures have the advantages of sharing the costs and risks of opening a
reign market and of gaining local knowledge and political in fluence. Disadvantages
include the risk of losing control over technology and a lack of tight control.
The advantages of wholly owned subsidiaries include tight control over
technological know how. The main disadvantage is that the firm must bear all the
costs and risks of opening a reign market.
The optimal choice of entry mode depends on the firm's strategy. When
technological know how constitutes a firm's core competence, wholly owned
subsidiaries are preferred, since they best control technology. When management
know-how constitutes a firm's core competence, foreign franchises controlled by
joint ventures seem to be optimal. When the firm is pursuing a global
standardization or transnational strategy, the need for tight control over operations
to realize location and experience
curve economies suggest wholly owned subsidiaries are the best entry mode.
When establishing a wholly owned subsidiary in a country, a firm must decide
whether to do so by a greenfield venture strategy or by acquiring an established
enterprise in the target market.
Acquisitions are quick to execute, may enable a firm to preempt its global
competitors, and involve buying a known revenue and profit stream. Acquisitions
may fail when the acquiring firm overpays for the target, when the cultures of the
acquiring and acquired firms clash, when there is a high level of management
attrition after the acquisition, and when there is a failure to integrate the operations
of the acquiring and acquired firm.
The advantage of a greenfield venture in a reign country is that it gives the firm a
much greater ability to build the subsidiary company that it wants. For example, it is
much easier to build an organization culture from scratch than it is to change the
culture of an acquired unit.
Strategic alliances are cooperative agreements between actual or potential
competitors. The advantage of alliances is that they facilitate entry into foreign
markets, enable partners to share the fixed costs and risks associated with new
products and processes, facilitate the transfer of complementary skills between
companies, and help firms establish technical standards.
The disadvantage of a strategic alliance is that the firm risks giving away
technological know- how and market access to its alliance partner.
The disadvantages associated with alliances can be reduced if the firm selects
partners carefully, paying close attention to the firm's reputation and the structure
of the alliance so as to avoid unintended transfers of know-how.
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