1. International Business: Actions Internationalisation Theories and Practices (I) Business College School of Management

2. Key Questions What approaches to global strategy do firms take? How do organisations internationalise? How does international business manage its internal operations globally? How does international business manage its external operations (e.g. relationship with the host country/communities)?

3. Key Learning Objective This session will help you to understand the concepts of: 1) Michael E. Porter’s Diamond Model 2) Global Strategy – Ghosal & Nohria Matrix 3) Born Global Concept

4. Michael E. Porter’s Diamond Model Porter argues that nations can create factors that promote competitive advantage of nations as well as stronger level of FDI. RMIT University School of Management 4

5. Examples of National competitive Advantages Abundant, low-cost labor in China Mass of IT workers in India Huge reserves of bauxite in Australia Abundant agricultural land in the USA Oil in Saudi Arabia RMIT University School of Management 5

6. Michael E. Porter’s Diamond Model RMIT University School of Management 6

7. Michael Porter’s Diamond Model: Sources of National Competitive Advantage 1.Firm strategy, structure, and rivalry – the presence of strong competitors at home serves as a national competitive advantage 2.Factor conditions – labour, natural resources, capital, technology, entrepreneurship, and know how 3.Demand conditions at home – the strengths and sophistication of customer demand 4.Related and supporting industries – availability of clusters of suppliers and complementary firms with distinctive competences RMIT University School of Management 7

8. Industrial Clusters A concentration of suppliers and supporting firms from the same industry located within the same geographic area Examples include: the Silicon Valley, fashion cluster in northern Italy, pharma cluster in Switzerland, footwear industry in Pusan, South Korea, and the IT industry in Bangalore, India Can serve as a nation’s export platform RMIT University School of Management 8

9. National Policy Proactive economic development plan enacted by the government to nurture or support promising industries sectors. Typical initiatives: -Tax incentives -Investment incentives -Monetary and fiscal policies -Rigorous educational systems -Investment in national infrastructure -Strong legal and regulatory systems (Examples: Japan, Dubai, and Ireland) RMIT University School of Management 9

10. Activity 1: Diamond Model Please discuss the concept of Porter’s diamond model and apply it to one industry in one country. RMIT University School of Management 10

11. Bartlett and Ghoshal’s Model of Internationalization Strategy RMIT University School of Management 11

12. Source: Adapted from Bartlett and Ghoshal (1991)., Managing Acrocc Border, Harvard Business Press.

13. International strategy Create value by transferring valuable core competencies to foreign markets that local competitors lack. Centralise product development functions at home Establish manufacturing and marketing functions in local country but head office exercises tight control over it Limit customization of product offering and market strategy –Strategy effective if firm faces weak pressures for local responsive and cost reductions

14. Multidomestic strategy Main aim is maximum local responsiveness. Customize product offering, market strategy including production, and R&D according to national conditions Generally unable to realize value from experience curve effects and location economies. Possess high cost structure.

15. Global strategy Focus is on achieving a low cost strategy by reaping cost reductions that come from experience curve effects and location economies. Production, marketing, and R&D concentrated in few favorable functions. Market standardized product to keep cost low. Effective where strong pressures for cost reductions and low demand for local responsiveness.

16. Transnational strategy To meet competition firms aim to reduce costs, transfer core competencies while paying attention to pressures for local responsiveness Global learning –Valuable skills can develop in any of the firm’s world wide operations –Transfer of knowledge from foreign subsidiary to home country, to other foreign subsidiaries Transnational strategy difficult task due to contradictory demands placed on the organization –Example : Caterpillar

17. Activity 2: IB Strategies in Action In your team, please select one MNC and discuss their strategy and identify which of the 4 strategies that best suits your company. Why? What are the advantages and disadvantages of the strategy?

18. Born Global The ‘Born Global’ concept was coined in a survey for The Australian Manufacturing Council by the McKinsey Consultants In Australia, a new breed of exporting companies, which contributed substantially to the nation's export capital, was then emerging. The creation of these exporters though not unique to the Australian economy, reflects 2 fundamental phenomena of the 1990s: –1.Small is beautiful –2.Gradual internationalization is dead

19. Born Global Amongst the Born Global firms, in Australia, there are several high-tech firms, but the typical firm uses well-known technology. These firms have experienced higher growth rates than other industries in Australia and a large growth in their export compared to their home-market sales. A major factor in the explanation of the Born Global phenomenon (McKinsey & Co., 1993) is the management’s commitment to internationalization. Another major factor is the firm’s ability to standardize production, marketing, etc. in a global niche instead of developing customized products.

20. Factors Supporting ‘Born Global’ Dramatic increases in speed, quality and efficiency of international communication and transportation have reduced the transaction costs of multinational interchange. Increasing homogenization of many markets in distant countries has made the conduct of international business easier to understand by everyone. International financing opportunities are increasingly available. Human capital is internationally mobile.

21. Activity: Born Global [Synthesise] In your team, please select 1 company that is considered ‘Born Global’ and identify factors promoting the company to become a ‘born global’ company.

22. References Ghoshal, S., & Nohria, N. (1993), “Horses for courses: Organizational forms for multicultural corporations”, Sloan Management Review, Winter 1993, pp. 27, 31. Johanson, J., Vahlne, J.-E. (1977), "The internationalization process of the firm – a model of knowledge development and increasing foreign market commitments", Journal of International Business Studies, Vol. 8 No.1, pp.23- 32. Madsen, T.K., Servais, P. (1997), "The internationalization of born globals: an evolutionary process?", International Business Review, Vol. 6 No.6, pp.551- 81. Oviatt, B.M., McDougall, P.P. (1994), "Toward a theory of international new ventures", Journal of International Business Studies, Vol. 25 No.1, pp.45-64. Oviatt, B.M., McDougall, P.P. (1995), "Global start-ups: entrepreneurs on a worldwide stage", Academy of Management Executive, Vol. 9 No.2, pp.30-44.

23. Future Reading -Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry: A Transaction Cost Analysis. Journal of International Business Studies, 17: 1-26. - Kogut, B. and H. Singh. 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19: 411-432. - Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The strategy of Japanese investors in the United States. Management Science, 39(9): 1054-1070. - Hennart, J. F., and Reddy, S. 1997. The Choice Between Mergers/Acquisitions and Joint Ventures: The Case of Japanese Investors in the United States. Strategic Management Journal 18: 1-12. - Barkema, H. G. and Vermeulen, F. 1998. International Expansion Through Start-up or Acquisition: A Learning Perspective. Academy of Management Journal 41: 7-26. -- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield Start-up? Institutional, Cultural and Transaction Cost Influences. Strategic Management Journal 21: 89-97.