International Strategies Jay B. Barney, “ Gaining and Sustaining Competitive Advantage ”

1. International StrategiesJay B. Barney, “Gaining and Sustaining Competitive Advantage” Corporate Strategy Dr. Amin Wibowo, MBA. • MM UGM Yogyakarta, 6 Nov 2010 • Kelompok 3 AP-14: • Bayu Setiaji • Nureni Susilowati • Sri Muniati

2. Focus • How firms can leverage their resources and capabilities across multiple geographic market. • The conditions under which international strategies can create economic value, as well as the conditions under which firms can be sources of sustained competitive advantage

3. I. The Value of International Strategies • International strategies are diversification strategies. • Economics of scope • Enable a firm to exploit environmental opportunities or neutralize environmental threats.

4. Potential Sources of Economies of Scope for Firms Pursuing International Strategies : • Gaining access to new customers for current products or services. • Gaining acces to low cost factors of production • Developing new core competencies • Leveraging current core competencies in new ways • Managing corporate risk

5. 1. Gaining access to new customers for current products or services • Internationalization and Firm Revenues Are Non-domestic Customers Willing to Buy ? • Different preferencies between a firm’s domestic and foreign market. (physical standard, taste, etc) • Require firms seeking to internationalized operation to change their current products or services. • To be an economy of scope : those products or services must address the needs, wants, and preferences of customers in foreign markets, at least as well as alternatives.

6. Cont’d Are Non-domestic Customers Able to Buy ? • Customers might be willing to buy but may be unable to buy. Three reasons : inadequate distribution channels, trade barriers, and insufficient wealth to make purchase • Build distribution channels or networks, through build own distribution networks from scratch, work with local partner to utilize the networks that are already in place, cooperating/ alliances with firms that already have networks. • Trade barriers have the effect of increasing cost of selling, difficult to realize the economic of scope. Restricted by various tariff and non-tariff trade barrier . Trade barrier to raise government revenue, to protect local employment, to encourage local production to replace import, to protect new industries from competition, to encourage foreign direct investment, and to promote export activity.

7. Tariffs, Quotas, and Nontariff Trade Barriers p.481

8. Cont’d • If customers lack the wealth or sufficient hard currency to make purchase, then the potential value of economy of scope can go unrealized. • Level of consumer wealth based on per capita income of people in the market or gross national product. • Hard currencies are currencies that are traded, and thus have value on international money market. • Without hard currency has essentially no value outside the country. One solution to the lack of hard currency in foreign market is called Countertrade, receive payment not in the form of currency, but in the form of other products or services that firm can selling on the world market.

9. Cont’d • Internationalization and Product Life Cycles Gaining access to new customers enable a firm to manage its products or services through their life cycle.

10. The Product Life Cycle Industry sales introduction growth maturity decline

11. Cont’d • Internationalization and Cost Reduction • Gaining access to new customers can increase a firm’s volume of sales, then that can reduce the firm’s costs and enable the firm to gain cost advantages. • Focus on aspects of a firm’s operation where economies of scale can be realized, include exploiting in R & D and in marketing. • Exploiting economies of scale - whatever their source – is becoming a more important source of economic value in most international industries.

12. 2. Gaining Acces to Low-Cost Factors of Production • Raw Materials To gain low cost raw material is the most traditional and important reason why some firms engage in international enterprise. • Labor To gain low labor costs by moving their manufacturing operations. Low cost labor is not sufficient, but labor cost advantages is more important and workers are able to produce high quality products efficiently. • Technology The motivation for partnering is to obtain new technologies and new business opprtunities

13. 3. Developing New Core Competencies • Learning from International Operations How to learn modify and change the core competencies, develop new core competencies.

14. Cont’d • Leveraging New Core Competencies in Additional Markets After learn, modify, and develop new core competencies, it must then leverage competencies across its operations – both domestic and international – in order to realize their full value.

15. 4. Leveraging Current Core Competencies in New Ways Not only extend operations across country boundaries, the firms also leverage their competencies across products and services in ways that might not be economically viable in their domestic markets.

16. 5. Managing Corporate Risk • Outside equity holders can manage risk more efficiently on their own by investing in a diversified portfolio of stocks. The sole purpose of which is risk diversification. • Barriers to international capital flows exist for at least some countries which have the effect of increasing the cost to individual investors of investing in a international capital market. • Such barriers include different tax structures across countries, different accounting standards, different securities regulations, and different political and economic systems. • A firm is pursuing an international strategy in order to exploit another valuable economy of scope, the pursuit of that strategy will also have the effect of reducing the firm’s level of risk.

17. The Local Responsiveness / International Integration Trade-off Local responsiveness : • addressing the local needs of nondomestic customers • increasing demand for current products or services. • enable to expose traditional core competencies to new competitive situation • increasing the chances. • detailed local knowledge leverage their new traditional competencies in new ways in their nondomestic markets.

18. Cont’d • The full exploitation of economies of scale often can occur only if there is tight integration across all the markets in which a firm operates. • The full value of these economies of scope is realized only when they are transferred from a particular domestic market into operation of a firm in all its other markets. • When international product standard exist, then standarization is not problematic. • When local responsiveness requires only a few modification of a standardized product, international integration can be very effective.

19. The Transnational Strategy • Traditional trade-off can be resolved by a transnational strategy that exploits all the advantage of both strategies. • Achieve international economies of scale by becoming the firm’s primary supplier of this product , service or activity.

20. Financial and Political Risk in Pursuing International Strategies Financial circumstances and political events can significantly reduce the value of international strategies. • Financial Risks : Currency Fluctuation and Inflation • Such fluctuation can turn investment into good news (profit) or bad news (lose). • Different rates of inflation across countries can require very different managerial approaches, business strategies, and accounting practices. • Hedging strategies use of a variety of financial instruments and experience but can do nothing to reduce business risks. • Financial strategies cannot manage political risks.

21. Cont’d • Political Risks Changes in political rule of the game can change the value of firms’s resources and capabilities. • Types of Political Risks Macro level : political situation in a country change the value Micro level : politics in a country affect the fortunes in particular industries. • Quantifying Political Risks • Managing Political Risk Limited investment may not enable a firm to take full advantage of whatever economies of scope . Approaches : bargaining power to negotiate or to turn political risk from a threat into a opportunity.

22. The Value of International Strategies : The Empirical Evidence • The superior performance of firms pursuing international strategies than firms operating only in domestic market. • To realize real economies of scope to be a source of SCA (sustained competitive advantage), these must also rare, costly to imitate, and the firm must be organized to fully realize it.

23. II. INTERNATIONAL STRATEGIES AND SUSTAINED COMPETITIVE ADVANTAGE • The Rarity of International Strategies • The substantial economies of scope • The organization of the international economy (WTO Agreement in conjunction with EC, ASEAN, NAFTA, and other free-trade zones) has susbtantially reduced both tariff and nontariff barriers to trade, facilitate trade among countries in an agreement, spur firms to take advantage of opportunities to expand. • Improvement in the technological infrastructure of business (transportation, communication, etc) can reduce the cost and increase profitability • The emergence of various communication, technical and accounting standard (standars in personal computer and business language – english). • The rarity requirement is that the resources and capabilities to gain a temporary competitive advantage .

24. Cont’d • Imitability of International Strategies Direct Duplication of International Strategies (1) Will firms try to duplicate valuable and rare international strategies ? (2) Will firms be able to duplicate these valuable and rare strategies ? • Direct duplication may be too costly • International strategies can be a source of sustained competitive advantage • Some of the resources and capabilities are likely to be costly to imitate (such as management teams with a great deal of foreign experience) • The cost of creating experience base in a team can be thought of as the cost of direct duplication

25. Cont’d Substitutes for International Strategies • Substitutes can limit the ability of that strategy to generate sustained competitive advantages. • The potential value of some of the economies of scope (slide 4) is substantially greater in an international context, compared to the values of those economies in a purely domestic context.

26. III. THE ORGANIZATION OF INTERNATIONAL STRATEGIES • Becoming Internationalized : Organizational Options As firm become more integrated into international operations, their level of direct investment in nondomestic market increases. This investment is called foreign direct investment. Organizing Options for Firms Pursuing International Strategies sds

27. Cont’d Market Governance, Exporting, and International Strategies • Firms work with some partner or partners to receive, market, and distribute their product in a nondomestic setting. • Relatively low cost and the limited risk exposure. • The opportunity cost associated with restricting a firm’s international operations to export. Intermediate Market Governance, Strategic Alliances, and International Strategies • The alliances range from simple licensing arrangements by which a domestic firm grants a firm in a non-domestic market the right to use its products and brand names to sell products in that non-domestic market, to full-blown joint ventures, by which a domestic firm and a non-domestic firm create an independent organizational entity to manage international efforts. • Opportunistic behavior can threaten the stability of alliances.

28. Cont’d Hierarchical Governance, Integration, and International Strategies • Integrate by acquiring a firm in a nondomestic market or by forming a new wholly owned subsidiary to manage their operations in a nondomestic market. • Expensive and risky - subject to both political and economic risks • Advantages : • enable a firm to realize any of the economies of scope; • enables managers to use a wider range of organizational controls to limit the threat of opportunism than are normally available in market forms or intermediate market forms of international governance; • Enables firms to capture all the economic profits from their international operations.

29. Cont’d • Managing the Internationally Diversified Firm Organizational Structure (four basic alternatives) Structural Options for Firms Pursuing International Strategies

30. Local Responsiveness, International Integration, and Organizational Structure Importance of local responsiveness High Decentralized federation Transnational structure Coordinated federation Centralized hub Low Low Importance of Global Integration

31. Cont’d Management Control Systems and Compensation Policies Choose control systems and compensation policies that create incentives for division general managers/ country president to cooperate appropriately to realize the economies of scope that originally motivated the implementation of an international strategy.

32. Kjcz. THANK YOU