How do you build a global strategy?

To develop international, multinational and global business strategies, we’re going to use the model below which identifies the main issues. We will then examine each part in more depth.

Essentially, the model begins by analysing the markets in which the company is already engaged – perhaps only in one country, perhaps in several but without a fully-developed international strategy. In addition, the company should also begin looking at the prospects around the world for its products or services – not in detail by individual country, but in general terms.

As a starting point, it’s worth using some basic international data to analyse different countries. The type of data is shown in the two graphs on the right – economic data that explores the total wealth of some selected countries and the wealth per person for the same countries.

There’s not much doubt that the USA is the world’s wealthiest country. However, the countries of the European Union – for example Germany, the UK and France – are not far behind individually. Importantly from an international trade perspective, the EU countries can be grouped together. This means that the European Union as a combined market would come much closer to the USA in terms of total wealth.

 

Although China has been catching up over the last few years in terms of total wealth, there are many more people in China than the USA – hence the wealth per head in China is substantially below that of that of the USA.

These basic types of comparison are explored in more depth in the country selection film further down the page.

 

The next step is then to identify the company’s resources for international expansion, especially those that have competitive advantage. For example, the company may have special patents or brands that can be used in international expansion. Again, we’ll explore this in a more structured way shortly.

It’s only after this that a company should set its international and global objectives. Some companies may find this surprising – why shouldn’t a company begin by setting out what it wants to achieve internationally?

The reason for leaving objective-setting until now is that objectives need to be set in the realistic context of what opportunities exist in the market place and what resources the company possesses for its international expansion. To take a simple example, there would be little point in a car company setting a target for major expansion in the US car market in 2009 when that market is under such pressure. Equally, small computer services company may simply not have the resources for a global product launch, however attractive its service. It would be better to define its objectives more realistically.

Having defined its objectives, a company can then begin to explore which markets around the world represent the best opportunities: usually called market entry and mode. At the same time, it will want to think about how it enters such markets – perhaps a product launch, perhaps a joint venture and so on. These two aspects are represented by the two circular arrows in the model above. We’ll look in more depth at these issues later.

Finally, whatever choice is made about market entry and mode, the company will wish to think about pricing, products, distribution and a whole range of other factors related to its international objectives. This is called developing the product or service offering and forms the last part of the model. On this website, developing the product offering is treated as a separate section for reasons of space.

Importantly, there is an important aspect missing from the model – innovation and learning. The reason for leaving this out is to avoid over-complicating the basic development process. But we won’t ignore these issues. We will cover them at the end.

Analysing the international markets and country choice

Here is a short film that summarises some of the basic factors in country choice. In practice, there are more factors involved than can be captured in a short film. The purpose of the film is to explain how an initial country choice can be made depending on some simple criteria.

As explained above, the film focuses on only two choice factors – country population and wealth – in developing international and global strategy. In practice, there are five main areas in analysing international opportunities:

• Customer demand in the main broad geographical areas: market size, growth and history – including special customers such as large multinationals already involved as customers in a particular region. These factors include, but go beyond, the population and wealth issues identified in the film.
• Competitors: local and international companies already in country markets, their market shares and basic facilities -what major competitive advantages do they have?
• International and regional infrastructures: what are the major costs involved in communicating, transporting and distributing in various parts of the world?
• Country politics and economic trends: some basic considerations only at this stage, such as political risk and economic growth – too much to analyse in depth at this stage.
• International trade barriers, tariffs and quotas: are there any major issues here that will support or block the market opportunity?

[Note: trade barriers, tariffs and quotas are defined in the first section above. ‘What is Global Strategy?’]

Conclusion: So what is the market opportunity? And where is it geographically?

There are two main aspects to identifying the company’s resources for international and global expansion:

• The reasons why the company wants to go international or global
• Sustainable competitive advantages of the company in its home market prior to going global. These will form the bedrock of how the company will go international or global.

The following film explains the relationship between these two important factors. It’s the first of three films in this section – split for technical reasons. The other two are introduced below.

Sustainable competitive advantages of the company: these are the advantages over competitors that cannot be easily imitated by others. They form the bedrock in strategy theory for the development of effective strategy. Unfortunately, they are easy to discuss in principle and more difficult to identify in practice. [For those with an academic background, they relate to the Resource-Based View, RBV, of the organisation – more in the Strategic Management section.]

Essentially, the argument is that the competitive advantages possessed by the company in its home market should form the basis of its international expansion strategy. For companies already in international markets, they will wish to focus on those advantages that allow them to outperform their rivals.

The next film explores in more depth the reasons why a company might wish to develop its international business. These will have a major impact on its international and global strategies.

The third film examines in more depth the way that a company might develop its international
business.

Here’s a checklist of some possible areas of competitive advantage for a company:

• Differentiation: unique features or attributes that set a company apart, such as a brand or special level of service
• Low costs: but these need to be translated into a customer benefit like lower prices than competitors
• Dominance of a part of a market, such as a market segment or niche
• High performance or technology – perhaps a patented process
• Quality – superior to rivals for example in performance or durability
• Service levels that are superior to rivals – perhaps in national coverage
• Network of relationships – people and business contacts that set the company apart
• Specialist technical skills and other areas of specialist expertise – sometimes called ‘core competencies’
• Branding – from one country that might be extended elsewhere to other countries

Readers will note that I have not included some other areas of competitive advantage here like reputation, innovative capability and knowledge. The reason is that I suspect that these are more relevant to basic strategy development, rather than international strategy. These are outlined in the section on Strategic Management. But if they are relevant, include them!

Other important resources related to going global: much of strategic management literature is obsessed with competitive advantage. In practice, any organisation attempting to expand beyond its home country will need a wide range of other resources that are not better than rivals but just as important.

For example, a decent distribution network for a product may be no better than rivals but will be essential in selling the product.

Perhaps the most important resource is the human resource – don’t underestimate the knowledge, skills, time and personal sacrifices that are needed for good results.

Conclusion: So what resources do we need and where will they come from?

Setting the company’s international objectives

With regard to international expansion, the company’s objectives involve three important questions:

1. Why go international? The answer will determine the strategic approach
2. What profits do we expect over what timescale and with what risk?
3. Waht commitment is needed and will be given by the top management team?

Why go international? There are at least four reasons:

• Desire to acquire overseas resources such as minerals or oil that are not available in the home country
• Need to generate growth beyond the home market
• Seeking greater cost reduction and efficiency from areas such as economies of scale and scope
• Searching for strategic assets, such as attractive takeover targets, to deliver market share and branding

In addition to the above (which come from the late Professor John Dunning), there are at least two more reasons that come from more recent experience:

• Fierce competition in the home market, making overseas expansion more attractive
• World wide web availability, making it easier and cheaper to sell across the world.

What profitability, over what timescale and with what risk?

In early 2010, Ryanair – the European budget airline – announced that it had made a loss of 10.9 million Euros ( US$ 15.3 million) during the period October to December 2009.

However, it was also the fastest growing airline in Europe. Moreover, it was still anticipating making a net profit of 275 million Euros for the full year based mainly on its highly profitable Summer business activity.

From an international strategy perspective, the company was quite prepared to accept a short-term loss as it continued to build market share – a classic example of careful consideration of profit objectives in relation to time-scale.

• Each organisation will have its own measures, e.g. profitability, market share, earnings per share, the time period over each will be delivered
• Important to clarify these at an early stage to select opportunities
• Note that international development is probably more risky than developing at home because there are greater unknowns – lack of knowledge of overseas market, political risks, etc. This means that it may be better to set higher, more demanding objectives than for the home market
• It’s quite complex to balance the various considerations – see Lynch ‘Polygon of Purpose’ page 225 of 5th edition ‘Strategic Management.‘

What commitment from top management?

• Plenty of research to show that this is essential for successful international expansion
• Means that the Chief Executive must be convinced and actively support international initiatives
• Note the importance of the pressures on individual leaders in managing an international or global operation – the need to visit worldwide locations puts pressure on personal life, for example
• Also important to consider the personal human resource characteristics of the individual leader or senior manager – more likely to be successful if she or he is open, flexible and able to work with groups from many different cultures.

Conclusion: Essential to identify why the organisation wishes to go international or global, over what timescale and with what resources.

Choosing markets and how to enter them: ‘market entry and mode’

The strategy for international expansion depends on two main topics:

1. Method of entry
2. Country (or region of world) selected

Importantly, the process of resolving these issues is circular, i.e. the choice of one will influence the choice of the other. For example, it might be that the best method of entering a country might be to acquire a company. But the acquisition may be expensive and risky and therefore it might be better to select another country. These two topics are explained separately below but the results may need to be reconsidered as a whole afterwards.

Method of entry

According to the classic work of Johanson and Vahlne 1977 and 1990, the method of entry can be considered a long a continuum of opportunities and risks:

• Export: make in home country
• Set up an overseas office: this will provide a permanent presence in a country selling a product or service
• Begin the first overseas manufacture: this is a big step because it required the recruitment of local people and the commitment of major finance to a country or region
• Develop multinational operations: invest in several countries or a region of the world, e.g. Europe or China.
• Develop a global operation: not just manufacturing in various countries but true, integrated co-operation, as explored in the definitions earlier.

In principle at least, each of the above categories involves greater risk and therefore should also deliver higher rewards (more profits).

‘Develop multinational operations‘ is not necessarily a simple task. It may involve an acquisition, a joint venture with a local company or some other form of co-operation. This may arise because of barriers to entry, lack of local knowledge, existing dominance of a local company and many other factors. These issues are explained and explored in more depth in the Expansion Method Matrix in the section on this website entitled: ‘How does Strategic Management link with Global Strategy?

Choosing the country or geographic region

Some basic considerations involved in the choice of countries include the following:

• Population size, density and distribution
• Political issues: ‘dictatorship versus democracy’ and ‘left wing versus right wing’ are simplistic but a start. The degree of change and the stability of politics are probably just as important as the political stance of the country.
• Trading issues: country membership of trade groups, the barriers to entry into the nation and the ability to export not just good from the nation but profits back to the home country
• Financial and tax issues: Taxes imposed, the banking and financial structures, insurance, legal ownership of assets like factories, ownership of intellectual property like patents and brands
• Nature of economic activity: largely rural? degree of urbanisation?
• Methods of distribution, e.g. small shops or supermarkets, roads and transport infrastructure and investment
• Telecommunications and the availability of the internet
• Culture and language
• Education and training: levels, apprenticeships, higher levels of education
• Religeous and ethical issues: these are important and must be respected
• Marketing and communications: how to promote the product? what media available? at what cost?

In choosing a country, it is often appropriate to begin by collecting basic country comparative data on such topics as:

• Growth in national wealth, measured both as total wealth (GPD) and also as wealth per head of the population
• Balance of payments data
• Price inflation and impact on currency
• Unemployment rate
• Export and import trade statistics
• Growth of money supply
• Areas and levels of economic activity
• Basic political and economic stability

This data can often be assembled quite quickly from the web: United Nations, World Bank, UNCTAD, national government data, European Union, commercial websites, etc. Links to these institutions and data are shown in the section on Globalization: What are the main global institutions?

Essentially, the above general data can be used to build a shorter list of countries to be examined in more depth. In practice, gathering such data on a large number of countries is quick using the web but rapidly becomes too much to consider in any depth.

For example, we once assembled data on all the countries in South America. We found that the data was too much to examine in sufficient depth to make investment decisions. We then reduced the list to just three countries – Brazil, Argentina and Chile – in order to examine them further. We used some simple criteria to establish this list – population size, economic stability and wealth per head of the population. This was no disrespect to the other countries but they were not appropriate for our range of products at that time.

The last part of this process – developing the product or service offering – is a somewhat large topic. It is therefore explored as a separate section on this website.