Sessions One and Two-Introduction and Theories course notes

DSM 602:GLOBAL STRATEGIC

MANAGEMENT

April 19, 2023 DSM 602 MBA-SoB-UoN 1

SESSION ONEINTRODUCTION AND FRAMEWORK OF

GLOBAL STRATEGIC MANAGEMENT


INTRODUCTION: Overview of GSM

Unlike the basic strategic management course, global strategic management is less process oriented.

While SM is concerned with managing a firm’s relationship with the environment in general, GSM is specifically concerned with managing a firm’s relationship with the global business environment.

The business environment, whether national or global in nature must be managed for survival and success.


GSM is necessary for survival; more importantly it is necessary for success in the global business environment.

Thus the global business challenge is a pervasive one, whether the business environment is local or foreign.

In the domestic market, for example, it is present in several forms e.g.: Imported products, Contract manufacturing for foreign firms, Licensees

for foreign firms, Franchisees of foreign firms, Subsidiaries of foreign firms etc, all of which represent direct and indirect competition at home with foreign firms.


In a global industry, a firm’s strategic moves in one country can be significantly affected by its competitive position in another country.

As a result, strategic management planning must be global for reasons such as: Increased scope of global management task; Increased globalization of firms; Information explosion Increase in global competition; Rapid development of technology; Need to breed managerial confidence; etc.

Therefore, in a global industry, a firm must maximize its capabilities through a worldwide strategy.


Defining GSMDefined along the most likely phases firms go through

as they adopt a global strategy: Single country strategy export strategy international strategy

global strategy Single country strategy: confined within home country. Export strategy: domestic strategy with an export strategy

attached to it. International strategy: establishment of subsidiaries outside

home market (multinational firm) Global strategy: integrating and creating a single strategy on a

global scale.


A global strategy involves the carefully crafted single strategy for the entire network of subsidiaries and partners, encompassing many countries simultaneously and leveraging synergies across many countries.

This is in contrast to international strategy, which involves a wide variety of business strategies across countries, and a high level of adaptation to the local business environment.


A global strategy has three major dimensions:1. Standardization dimension (How much does a firm

standardize its offerings across countries?)Global strategy is the process of exploiting the synergies

that exist across different countries, as well as the comparative advantages offered by different countries.

2. Configuration and coordination dimension (How much are a firm’s activities concentrated in a few locations and coordinated across countries?)

Multinational firms must configure their operations to exploit the benefits offered by different country locations, and coordinate their activities across countries to capture synergies derived from economies of scale and scope.


3. Integration dimension (How much does a firm integrate its competitive moves across countries?)Global strategy is concerned with the integration of

competitive moves across country markets.A firm makes competitive moves not because they are

the best for the particular country r region involved but because the are best for a firm as a whole.

Each of the above dimensions offers a partial explanation of global strategy.


A global strategy is the process towards one, two, or all the three dimensions as opposed to the extreme points of the dimension i.e. a global strategy does not require an absolute form of each of the dimensions but rather an appropriate level of each.

What is Global Strategic Management?


“GSM is the entire process of crafting a coherent, coordinated, integrated, and unified strategy that sets the degree to which a firm globalizes its strategic behaviors in different countries through standardization of offerings, configuration and coordination of activities in different countries, and integration of competitive moves across countries” (Frynas & Mellahi 2011).


Framework of GSM The global business environment is increasingly getting more

competitive and changing for business firms.

An effective global strategy will help a firm not only to survive but also to excel in its global business environment.

For a firm to develop an effective global strategy, i.e a competitive global strategy, the following are important: An understanding of the global business phenomenon, such as the forces

and process of internationalization and globalization of business.


An understanding of the assumptions upon which global business is founded, such as, theories of international trade and investment.

An understanding of the global business environment and its strategic implications.

Strategic selection of markets to enhance competitiveness.

Strategic entry and operation in foreign markets to enhance competitiveness e.g. through affiliation or strategic partnership.

Competitive strategies for global business operations, such as positioning strategies.

Strategic management of global business operations, such as production strategies, marketing strategies, human resource strategies and financing strategies.


Strategic management of risk in global operations.

Strategic organization and control of global business interests and operations.

Therefore, besides the competitive strategies, international business strategies are part and parcel of global business strategies and constitute the framework of GSM as a field of study.


Questions for Further Study

1. Compare and contrast international business and international trade.

2. Explain the differences between international business and domestic business.

3. Why is international or global business more delicate and challenging than domestic business?


SESSION TWO

THEORETICAL FOUNDATIONS OF

GLOBAL BUSINESS MANAGEMENT


Introduction • Global or international business has never been taken for

granted.

• Major questions asked about it include:– Why do nations and firms trade and invest beyond

their national borders?

– What type of commodities should a nation export and import?

– What are the gains from trade?

– Why do some LDCs prefer to export manufactured goods rather than raw materials and agricultural products?

• These questions appear simple, but providing answers to them has proven to be quite complex.


• Attempts to answer them have led to several theories.

• It is evident from the theories that while the questions have remained basically the same over time, answers have continued to change and sometimes even in circles.

• None of the theories provide a complete explanation of the phenomenon of global business.

• The theories complement each other in explaining the rationale of global business.

• A summary of the key points of the major theories that constitute the theoretical foundations of global business, as we know it today, is provided.


1. The Philosophy of Mercantilism• The central idea in mercantilism is that the wealth of a nation

depends on exports rather than imports.

• Advocates of this philosophy were the nation states which were mainly European nations.

• They advocated a national policy of protectionism, arguing that exports were a blessing because they led to an inflow of precious metals (mainly silver and gold) and that imports were a burden because they led to an outflow of “bullion”.

• The mercantilists strongly believed that if a country lacks gold and silver mines, it should encourage exports and discourage imports.


• Although the mercantilists were confusing treasure for wealth, they strongly believed also that wealth was a necessary condition for national power.

• To a great extent, this belief was true and is still true even today. How?


2. The Theory of Absolute Advantage• This theory was clearly articulated in Adam Smith’s book- The

Wealth of Nations, published in 1776.

• Whereas mercantilism encouraged exports and discouraged imports wholesale, Adam Smith made it clear that nations benefited more if they exported only what they could produce best and imported what they were not good at producing.

• The assertion is that a country might be more efficient in the production of some commodities and less efficient in others relative to another nation.

• When a country is more efficient than another in the production of a commodity, it has absolute advantage in the production of that commodity.


• Adam Smith argued that specialization based on absolute advantage enables countries to produce more in total and exchange surplus products for goods that are cheaper in price than they would if they were produced at home.

• Thus, unlike mercantilism, Adam Smith argued that all countries would benefit from free trade and championed a policy of laissez-faire rather than protectionism.


3.The Theory of Comparative Advantage• Explained in David Ricardo’s book- On the Principles of Political

Economy and Taxation (1891)

• It was a direct reaction to Adam Smith’s theory of absolute advantage which left certain fundamental questions unanswered e.g. whether a country could still trade if it did not possess absolute advantage in any product or if it possessed absolute advantages in both products.

• It argues that a country has a comparative advantage in the commodity in which its degree of superiority is higher, and a comparative disadvantage in the commodity in which its degree of superiority is lower, relative to another country.


• Similarly, a country has a comparative advantage in the commodity in which its degree of inferiority is lower, and a comparative disadvantage in the commodity in which its degree of inferiority is higher, relative to another country.

• Accordingly, therefore, advantages are not absolute but are comparative.

• Comparing two countries on two products, each country will have a CA in one commodity and a CD in the other unless one country is equally efficient or inefficient in both commodities.

• Thus, even if a country possessed absolute advantage in the production of two commodities, it must still be relatively more efficient in one commodity than the other.


• If each country specializes and trades in the commodity of its comparative advantage, both countries benefit.


4. Factor Proportions Theory• Also known as Factor Intensive Theory or the H-O (Heckscher-

Ohlin) Theory.

• Based on the premise that it takes some technology to produce a product.

• The technology depends on the proportions of labour and capital that are combined to produce the product.

• Thus, some products are labour intensive while others are capital intensive.

• Accordingly, CA is derived not from the productivity of a country, but from the relative abundance of its factors of production.


• Therefore, a country should specialize in the production and export of those products that use intensively its relatively abundant factor.


5. The Leontief Paradox• Emerged out one of the most famous tests of economic theory

between 1951 and 1953 by Prof. Wassily Leontief.

• He tested whether the factor proportions theory could be used to explain the types of goods imported and exported by USA.

• His hypothesis was: USA exports should be relatively capital intensive than imports if the postulates of factor proportions theory are true.

• He found that products exported by USA firms were relatively more labour intensive than the products it imported; suggesting that US was a labour-abundant country, yet it was known to be capital abundant: hence a Paradox!


• To explain the paradox, Leontief argued that the US is 2-3 times more efficient than other countries.

• If the labour supply in the US were adjusted to account for this efficiency, the US could actually be considered as a labour abundant nation.

• The existing empirical research on the H-O theory indicates that Leontief’s paradox has not taken place.


6. Overlapping Product Ranges Theory• The difficulties in empirically validating the factor proportions

theory led scholars in 1960s and 1970s to search for new explanations of the determinants of trade between countries.

• It was argued that the overlapping ranges of product sophistication represent the products that entrepreneurs would know well from their home markets and could therefore potentially export and compete in foreign markets.

• This is due to two main principles:– The total range of product sophistication demanded by a country’s

residents is largely determined by its level of income: As income per capita rises, the complexity and quality level of the products demanded by the country’s residents also rise.


– An entrepreneur could not be expected to effectively service a foreign market that is significantly different from the domestic market because competitiveness comes from experience.

• The question is why consumers would import a product seemingly identical to the one they were producing and exporting from their own country.

• This may be addressed more in terms of market segments i.e. although the products may be quite similar, they belong to different market segments.


7. Product Life Cycle Theory• According to the Vermon (1966) theory, manufactured goods

pass through three major stages:1. The new product2. The maturing product3. The standardized product

• At the life of a product passes through these stages, its main production and market location changes.

• Production locations change as the basic technology for the product becomes more widely known and the need for skilled labour in its production declines.


• Previous exporters eventually find it pragmatic to reduce production and rely more on imports coming from countries enjoying cost advantages in the product.

• Net exporters change to be net importers.• The changes may be illustrated as shown.



Stage Developed Country (Innovator)

Other Countries

New Product Stage

Innovator

Exports

Developed Countries

Least Dev’d Countries

Exports Imports

Net importers

Imports


Maturity Stage

Innovator Exports

Imports Net importer

Developed CountriesExports Imports

Net Exporters

Exports Imports

Net Importers

Standardized Stage

Innovator Imports

Developed Countries


Exports

Imports

Exports Imports Net Exporters

• Vernon argued that it could very well be the same firms that are moving production from the innovator country to other advanced countries, and eventually to less developed countries.

• Developed countries have a lot of trade among themselves.• Least developed countries have a lot of trade among themselves

Large export volume.Little export volume.


8. Economies of Scale and Imperfect Competition Theory

• Developed by Krugman P. and others in the 1980s to explain how trade is altered when markets are not perfectly competitive and production of specific products possess economies of scale.

• Focuses on two types of economies of scale, namely: internal and external economies of scale, and how each affects the pattern of international trade.

• Internal economies of scale occurs when the cost per unit of output depends on the size of an individual firm: the firm can produce more to lower cost per unit and price in order to sell more.


• Firms in related industries which can not enjoy internal economies of scale are forced into extinction, thereby releasing resources such as share capital which the expanding firm can use for its expansion.

• External economies of scale occurs when the cost per unit of output depends on the size of the industry rather than the size of an individual firm.

• Such an industry may produce at low costs than the same industry that is smaller in size in other countries.

• Thus, due to external economies, a country can potentially dominate world markets in a particular product.


9. The Competitive Advantage of Nations Theory• Articulated by Porter M. E. (1990) in his book The Competitive

Advantage of Nations.

• He contended that companies develop international competitiveness if their nations are characterized by the following factors:

– Factor conditions-how appropriate these are for competition in a specific industry.

– Demand conditions e.g. demanding local customers.

– Related and supporting industries e.g. aggressive home-based suppliers.

– Firm strategy, structure and rivalry e.g. the challenges of strong domestic rivals.


• Porter argues that these four factors constitute the components of “the diamond of national advantage” as he calls it.

• Porter’s theory is in many ways a synthesis of the theories that came before it.


10. The Theory of Foreign Direct Investment• This theory has sought to answer the following two fundamental

questions:1. What motivates a firm to go beyond exporting or licensing?2. What benefits does the multi-national firm expect to achieve by

establishing physical presence in other countries?

• According to FDI theories, a firm may want to invest in another country for various reasons such as:– To seek or access e.g. low cost labour, markets, raw materials, and

political stability or security.– To exploit factor and market imperfections usually created by

governments.– To internalize the firm’s technical know-how for sustainable

competitive advantage.


Importance of the Theories• They help explain some of the questions regarding international trade and

investment.

• They provide insight regarding the rationale for the pursuit of different policies by nations over time.

• They provide a framework that can assist business or government in formulating trade and investment policies e.g. the life cycle theory suggests that newly developed products that are high in technological base may be marketed better in high-income advanced countries than in LDCs.

• The insights they provide may be useful in formulating strategies that can enhance competitiveness e.g. the overlapping product ranges theory suggests that in manufactured products, LDC firms are more competitive in other LDCs than in developed countries. Therefore, LDCs should be the main focus of strategy for such firms.


Questions for Further Study1. Does the theory make any assumptions?

2. What does the theory suggest about sources of comparative or competitive advantage?

3. What are the implications of the theory regarding the rationale and patterns of world trade?

4. What are the conclusions of the theory?

5. What are the strengths and limitations of the theory in your view?

6. How is the present day world trade and investment patterns explained by the theory?


Sessions One and Two-Introduction and Theories course notes

Documents

uona global strategy

global business environment

single strategy

global industry

domestic strategy

global scale

worldwide strategy

global business challenge