International Strategic Management refers to the strategies that enable a firm to work in an international environment. Since business houses operate in an era of globalisation, certain comprehensive strategies need to be implemented to operate in an international environment.
International strategic management is a continuous planning process to develop strategies so that firms can operate abroad and withstand international competition.
Firms want to operate in an international environment to expand their market size and get a favourable return on investments.
Types of International Strategies
The firm has to choose between four international strategies:
- Multidomestic strategy
- Global strategy
- Transnational strategy
- International strategy
“To understand how international strategies align with different decision-making levels in an organisation, readers can also explore our detailed guide on levels of strategy – corporate, business, and functional, which explains how strategic choices are framed at each level.
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Multidomestic Strategy
The products of multi-domestic companies are tailor-made to satisfy the requirements of the local markets. The subsidiaries of these companies operate as per the local markets, independent from the headquarter. The structure is decentralized without much pressure to go globally integrated.
Nestlé is an example of a multi-domestic strategy. The products of Nestlé adapt to local tastes and preferences.
Key Features:
- Achieves maximum local responsiveness
- Focuses more on responsiveness than cost reduction
Global Strategy
Global companies are highly centralized. The products are not customised but standardised. The subsidiaries of global companies work as per their headquarter, and implement decisions of their parent concern. Another term for this type of model is the hub-and-spoke model.
Pfizer, a pharma company, is one of this type.
Key Features:
- The strategy helps to reap the benefits of economies of scale
- Cost-reductions lead to increased profitability
- Activities are based in favourable locations
Transnational Strategy
It’s a combination of global and multi-domestic firms. These firms consider the whole value chain to maximize local responsiveness as well as derive benefits from global integration.
Transnational companies are flexible in downstream activities. The economies of scale are achieved upstream. The transnational companies have an integrated network of subsidiaries throughout the world. These subsidiaries exchange knowledge and expertise and achieve strategic goals.
Unilever is a transnational company.
Key Features:
- Low cost and product differentiation strategy
- Maintains a high level of responsiveness
- Cross-cultural learning
- Economies of scale
International Strategy
The strategy of an international company is also known as exporting strategy. The products are produced domestically and sent (exported) to other countries. The firms do not need much local adaption and global integration, and their major value chain activities are maintained at the headquarter.
Large wine producers from countries such as France and Italy are great examples of international companies.
Characteristics:
- Low pressure for local responsiveness and cost reductions
Pressures for Local Responsiveness
Firms face pressures for local responsiveness due to the following factors:
- The difference in tastes and preferences of consumers
- The difference in traditional and cultural outlook
- The difference in infrastructure and channels of distribution
- Policies and demands of the host nation
Pressures for Cost Reductions
Apart from pressures for local responsiveness, firms also face pressures for cost reductions.
Pressures for cost reductions are more in the following areas:
- Industries producing commodity-type products
- Difficult differentiation on non-price factors
- Competitors based in a low-cost location
- Low switching costs
- Excess capacity produced
- Liberal trade policies globally
As the competition intensifies, companies plan to shift towards the areas that depict high pressures on cost reductions.
Key Decisions for Operating Outside the Home Country
A firm takes three main decisions to operate outside the home-country:
- Which foreign market to enter
- The right time to enter
- The scale of entry and strategic commitments
Modes of Overseas Entry
Exporting
Most manufacturing firms start an overseas business by exporting goods.
Licensing
The foreign licensee buys rights to produce the products of the firm for a negotiated fee. The licensee puts up most of the overseas capital.
Franchising
It is a type of specialised licensing. The franchiser sells an intangible property, and the franchisee agrees to follow the rules of business.
Joint Ventures
Two business firms collaborate typically in 50:50 modes to carry out business. This is the most preferred way to enter new markets.
Wholly-Owned Subsidiaries
Acquiring 100% stock by the parent company.
Foreign Direct Investment
Investing directly in a foreign market.
Piggybacking
Two companies, non-competitive in nature, come together to sell each other’s products in their respective home countries.
Reasons Why Firms Go for International Markets
In today’s competitive world, many firms go for global markets.
- Firms want to grow and expand. Since domestic markets get saturated, firms have to step out in international markets to gain more profits
- Due to slow growth in domestic markets, firms go global to increase sales
- With wide market opportunities, the production scale will also increase. This will lead to economies of scale
- In many parts of the world, the cost of labour and other raw materials is low outside the home country. This proves economical for the firm
- Many governments provide incentives to foreign companies to encourage foreign investment
- The cost of production is low in many countries. Companies prefer to establish their scale of operations in such countries
- Many times, the home government imposes regulations on trade practices. This may increase the cost of operating at home. To avoid this, firms look for international markets where restrictions are low
- Most firms would like to spread the risks in countries that are different from the native country concerning market size, rate of growth, types of customers, etc
Frequently Asked Questions (FAQs)
1. What is International Strategic Management?
International Strategic Management refers to the continuous planning process through which firms develop strategies to operate in foreign markets and face international competition effectively in a globalised business environment.
2. Why do firms adopt international strategies?
Firms adopt international strategies to expand market size, increase profits, achieve economies of scale, reduce production costs, access new resources, and spread business risks across different countries.
3. What are the main types of international strategies?
The four main types of international strategies are multidomestic strategy, global strategy, transnational strategy, and international strategy.
4. What is a multidomestic strategy?
A multidomestic strategy focuses on tailoring products and services according to local market needs. Subsidiaries operate independently to achieve maximum local responsiveness.
5. What is a global strategy in international business?
A global strategy involves centralized operations and standardized products across countries. It aims at cost reduction and economies of scale through global integration.
6. What is a transnational strategy?
A transnational strategy combines global efficiency and local responsiveness. Firms achieve economies of scale while maintaining flexibility to adapt to local market conditions.
7. What is an international (exporting) strategy?
An international strategy involves producing goods in the home country and exporting them to foreign markets with minimal local adaptation and limited global integration.
8. What are pressures for local responsiveness?
Pressures for local responsiveness arise due to differences in consumer preferences, culture, infrastructure, distribution channels, and host-country government policies.
9. What are pressures for cost reductions?
Pressures for cost reductions exist in industries producing commodity-type products, where price competition is high, differentiation is difficult, and competitors operate in low-cost locations.
10. What are the major modes of overseas market entry?
Major modes of overseas entry include exporting, licensing, franchising, joint ventures, wholly-owned subsidiaries, foreign direct investment, and piggybacking.
11. What decisions must a firm take before entering international markets?
Before entering international markets, a firm must decide which foreign market to enter, the timing of entry, and the scale of entry along with strategic commitments.
12. How do international strategies help firms manage global competition?
International strategies help firms balance cost efficiency and local responsiveness, access global markets, optimize resource utilization, and sustain competitive advantage.
13. Which international strategy offers maximum local responsiveness?
The multidomestic strategy offers maximum local responsiveness as products and operations are customized according to local market needs.
14. Which international strategy focuses on cost leadership?
The global strategy focuses mainly on cost leadership by standardizing products and centralizing operations to achieve economies of scale.
