Frameworks and Strategies for Operating a Global Business

In this topic, you will be introduced to some of the main frameworks and strategies that help you understand international business activity. These concepts allow you to understand the reasons businesses expand internationally and the decision-making process they use. These frameworks and strategies can be used to study decision making retrospectively where we can learn from the way in which businesses tried to enter new markets and whether this was successful. We can also use these tools to determine the strategic direction of future business expansion.

Welcome to Topic 2: Frameworks and Strategies for Operating a Global Business. In this topic, you will learn about:

• The motives behind international expansion
• The strategies businesses use to expand into new global markets
• The typical process through which firms develop their international business activities.

These relate to the Subject Learning Outcomes:

1. Explain the impact of globalisation on the business environment.
2. Describe the fundamental frameworks and strategies for competing successfully in a global economy.

Welcome to your pre-seminar learning tasks for this week. Please ensure you complete these prior to attending your scheduled seminar with your lecturer.

Click on each of the following headings to read more about what is required for each of your pre-seminar learning tasks.

Why do businesses expand internationally?

There are several reasons that drive an organisation to expand its business internationally. Note, that there may be multiple reasons for expanding into a specific market. Similarly, an organisation may choose to expand into multiple markets at the same time and the reasons for doing so may differ for each of the distinct markets.

Eclectic paradigm, or the OLI framework, assists companies to make decisions as to whether they should make direct investments in overseas markets. In general, each advantage is unique to the country the business invests into. There are four (4) main internationalisation motives that companies are driven by when they look at investing into another country, these are:

1. Resource seeking is when the organisation can buy resources of comparable or higher quality, at a lower cost than in the home country. This can include labour, technical, or managerial know-how or physical resources (Collinson et al. 2020). The firm is seeking a ‘buy better’ motive (Cuervo-Cazurra et al. 2015).
2. Market seeking is when goods or services are supplied from existing markets to new emerging markets (Collinson et al. 2020). The firm is seeking a ‘sell more’ motive (Cuervo-Cazurra et al. 2015).
3. Efficiency seeking is where businesses rationalise or re-organise the structure of established markets in such a way that they can gain an advantage from the way current activities are dispersed across the world (Collinson et al. 2020). This might help achieve economies of scale; where organisations increase the profit margins by reducing the cost associated with producing the goods or services. The firm is seeking a ‘buy better’ and ‘sell more’ motive (Cuervo-Cazurra et al. 2015).
4. Strategic asset seeking is where organisations look at their long-term goals, in other words, their strategic objectives. This might mean they look strategically at a strong position to secure their future competitiveness in the market (Collinson et al. 2020). Advantages gained through any investment in overseas markets are seen to strengthen the business’ position or weaken the position of its competitors in the long run. The firm is seeking an ‘upgrade’ motive (Cuervo-Cazurra et al. 2015).

The OLI framework can be used to assist an organisation in making decisions regarding whether or not to expand its operations globally. The following image provides an overview of the four(4) reasons a company would consider prior to venturing into a global expansion.

Adapted from 'Internationalization motives: sell more, buy better, upgrade and escape, by Cuervo-Cazurra, A, Narula, R & Un, C 2015, Multinational Business Review, 23(1):25-35.

Watch this video, OLI on the map. Exploring Dunning’s eclectic paradigm, which provides a brief overview of the OLI model, mapping out an example on the world map to show what this might look like.

OLI stands for Ownership, Location and Internationalisation. This is reflected in the decisions made based on each of these topics in the following framework flow chart.

Once the decision has been made to expand, the business will either establish locations in host countries if there is a location advantage, or export if there is no location advantage.

The decision to expand based on a license/franchise agreement or through foreign direct investment (FDI), depends on the level of risk and knowledge the organisation has in relation to the new markets.

International business strategies

Once a business has decided that there are motives to internationalise, there are four (4) main strategies that businesses use to expand internationally: an international, multi domestic, global, or transnational strategy (Bartlett & Ghoshall 1989). Depending on the businesses' needs, resources and aims, one of these will fit best. The strategies are based on two (2) different pressures firstly local responsiveness and secondly global integration.

When there is high pressure for local responsiveness, we see organisations customise their products or services while low pressure for local responsiveness means an organisation can have a uniform product or service and does not need to tailor it to a local market.

When it comes to global integration, high-pressure leads to centralisation and low-pressure leads to decentralisation. Businesses with high rates of global responsiveness reduce costs by creating economies of scale.

The following diagram maps the Bartlett & Ghoshall expansion strategies.

International strategy

An international strategy is the most common. This strategy covers the export of products and services to international markets or alternatively importing goods and services from abroad to use domestically.

The challenges for this strategy include:

• Legal requirements for local sales
• Managing global supply chains
• Import and export requirements
• Establishing sales and administration offices internationally
• Compliance with manufacturing and trade regulations.

The main benefit is:

• Least amount of overhead required.

Multi-domestic strategy

A multi-domestic strategy requires the business to establish subsidiaries (in international markets) and tailor its products and services to local customers. In a multi-domestic strategy goods or services are customised in response to local market desires.

Challenges of this strategy include:

• Investment required to establish an overseas headquarters (or subsidiaries)
• Investing in adaptation or tailoring of products and services to the local market
• Marketing products or services to local customers who may not recognise or understand what the business is offering
• Adapting marketing strategies to a different culture
• The risk of failure if local markets are misunderstood, customers do not accept the products or services, or costs are higher than expected.

The main benefit is:

• The business can penetrate (or enter) new markets which may otherwise not be accessible.

Global strategy

A global strategy is based on the efficiencies gained by economies of scale. In a global strategy minor or no changes are made to practice services this usually applies to an iconic product or service. The product or service sold as part of a global strategy is thus similar or identical in all markets around the world. The business produces as many of the same products or services as possible to reduce the costs associated with each individual product or service as much as it can.

Challenges of this strategy include:

• Trying to homogenise products or services, in other words keeping these as similar as possible, to reduce costs
• Identifying the smallest possible adaptation, which will allow the business to enter a new market whilst keeping its costs as low as possible.

The main benefit is:

• Keeping costs as low as possible and achieving a higher profit margin.

Transnational strategy

The transnational strategy is considered a combination of multi-domestic and global strategies. In a transnational strategy, certain products or services are available globally whilst others are tailored to, and only available in certain markets. The headquarters and core operations are kept in the country of origin whilst also establishing entire operations in other markets. This is the most composite strategy.

Challenges of this strategy include:

• High level of costs associated with legal implications in the different countries
• Requires a more complex way of managing the various parts of the operation for this to work successfully.

The main benefit is:

• Allows for a highly tailored approach to global expansion.

Evolution of a firm’s international business activities

Due to the level of risk perceived by the organisation and the (lack of) knowledge they have about the new markets, international expansion is often an evolution for the business. This allows the organisation to develop competencies specific to the new market requirements.

The following Uppsala model diagram illustrates the typical process through which firms develop their international business activities. The final stage is often one where subsidiaries are established under the full ownership model (which is when we refer to the organisation as having become a multinational enterprise or MNE).

The first three (3) options, which allow a firm to explore the new market with the lowest possible risk and commitment are the exporting and licensing/franchising options. These are all contractual arrangements where the firm does not invest in equity (Collinson et al. 2020). In contrast, the shared, and full ownership models are forms of foreign direct investment of FDI.

Welcome to your seminar for this topic. Your lecturer will start a video stream during your scheduled class time, you can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then click 'Join' to enter the class.

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The learning tasks are listed below, these will be completed during the seminar with your lecturer. Should you be unable to attend, you will be able to watch the recording which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.

Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)

In-seminar learning tasks

The in-seminar learning tasks identified below will be completed during the scheduled seminar. Your lecturer will guide you through these tasks. Click on each of the following headings to read more about the requirements for each of your in-seminar learning tasks.

Welcome to your post-seminar learning task for this week. Please ensure you complete this after attending your scheduled seminar with your lecturer. Your lecturer will advise you if this is to be completed during your consultation session. Click on the following heading to read more about the requirements for your post-seminar learning task.

Each week you will have a consultation session which will be facilitated by your lecturer. You can join in and work with your peers on activities relating to this subject. These session times and activities will be communicated to you by your lecturer each week. Your lecturer will start a video stream during your scheduled class time, you can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then click 'Join' to enter the class.

Click here to access your seminar.

Should you be unable to attend, you will be able to watch the recording which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.

Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)

• de Bruin, L 2017, International Business Strategy, Business-to-you.
• Mister Simplify 2020, Bartlett and Ghoshal's International Strategies Model, streaming video, YouTube.

References

• Bartlett, C & Ghoshal, S 1989, Managing Across Borders: The Transnational Solution, Harvard Business School Press.
• Collinson, S, Narula, R, Rugman, A & Qamar, A 2020, International business, 8th edn., Pearson Publishing.
• Cuervo-Cazurra, A, Narula, R & Un, C 2015, ‘Internationalization motives: sell more, buy better, upgrade and escape’, Multi­national Business Review, 23(1):25–35.
• Cuervo-Cazurra, A & Narula, R 2015 ‘A set of motives to unite them all? Revisiting the principles and typology of internationalization motives,’ Multinational Business Review, 23(1):2–14.
• Gokh, I 2021, OLI on the Map Exploring Dunning's Eclectic Paradigm and FDI Motives, streaming video, YouTube, https://www.youtube.com/watch?v=bwHFSwLFmo4
• Kuzina, V 2018, Once more with feeling: the story of IKEA in Japan, SME Japan, https://www.smejapan.com/business-news/story-ikea-japan/
• Rugman, A 2010, ‘Reconciling internalization theory and the eclectic paradigm’, Multinational Business Review, 18(2):1–12.
• Verbeke, A 2013, International Business Strategy, Cambridge University Press.