International Management
Reading One - Building your Company's capabilities through Global Expansion
? The leading question: How can you increase the odds of success in new international markets?
● Evaluate whether your company’s capabilities are relevant and transferable to the new country – and whether you can
appropriate value from there.
● Ask whether new capabilities gained through cross-border expansion will be complementary, transferable and
value-providing to the rest of the organization.
The global competitive landscape is becoming increasingly dynamic and complex, creating both new threats and opportunities.
Global companies need to sharpen their global strategies by focusing on how to exploit, enhance and renew or even transcend
their home-based sources of advantage.
The researchers have developed a framework to help strategist answer the following questions:
1. Will a company’s current capabilities provide a competitive advantage in a target market?
2. Will that new location give the company an opportunity to enhance its capabilities?
Capabilities and Competitive Advantage
The task of the global strategist is to build a platform of capabilities culled from the resources, experiences, and innovations of
units operating in multiple locations; to transplant those capabilities wherever appropriate; and then to systematically upgrade and
renew them – ahead of competition. E.g., Apple, and IKEA. Global winners typically create and sustain their international
competitiveness through a systematic process of exploiting, renewing, and enhancing their core capabilities.
Exploit Existing Capabilities
The simplest way to gain advantage in foreign markets is by exploiting capabilities first developed at home like IKEA and
McDonald’s. However, the exploitation of capabilities can also take place through the acquisition of companies abroad, like NH
Hotels, AXA, and CEMEX.
The question is: How well can the company’s capabilities travel and where can they be best replicated? To answer this question,
we use “RAT Test” >> Relevant, Appropriable and Transferable. The RAT Test helps identify whether a particular market is
suitable for the successful deployment of one of a company’s home-market businesses.
The RAT Test comprises three questions:
1. Are the capabilities developed in the home market relevant to customers in the target market? Would they create value
for the customer?
2. If deployed in the foreign market, would these capabilities be appropriable? Do they allow for the capture of value?
3. Are the capabilities transferable? Can the
company deploy its capabilities effectively in
the target foreign location without sacrificing
too much value creation and capture potential?
Some international expansions are frustrated because
the capabilities that make a company a leader in some
countries are not relevant in others IKEA, for example,
made a misstep when it moved into Japan, not
recognizing that the Japanese had a deep aversion to
assembling their own furniture.
The RAT test focuses on how to avoid missteps and
successfully exploit a company’s existing capabilities
in a new context.
,Create New Capabilities
Companies also expand internationally to gain access to strategic assets or to develop new capabilities. The key concerns of
strategists are to determine whether the new capabilities complement the company’s existing set of capabilities, whether these new
capabilities can actually generate additional value for the company, and whether it is possible to transfer them from the specific
context in which they were developed to the rest of the organization.
In order to evaluate the potential for enhancing the current sources of advantage through the assets and new capabilities developed
in foreign markets, global strategists can use the “CAT Test” explores whether new capabilities will be Complementary,
Appropriable and Transferable and helps the strategist understand the potential of the new assets and capabilities to enhance
existing advantages.
The CAT Test comprises three questions:
1. Are the new assets and capabilities that the company will develop/acquire in the new market complementary to the
existing capabilities that constitute the base of the company’s competitive advantage?
2. Are they appropriable? Can the company appropriate enough of the value of these new capabilities, or will other
companies extract the value of the capabilities/resources that they supply?
3. Are they transferable? Can the company effectively bring them back from the source location and integrate them into its
capability set without sacrificing their value?
A Virtuous Cycle
RAT and CAT represent a cycle of capability exploitation and enhancement.
>> The process of internationalization starts when they begin exploring which of their capabilities have the potential to be
relevant, appropriable, and transferable into other markets. As a company starts to operate in new foreign markets, some of their
existing products, services or business model need to be adapted to the local context in order to maximize the company’s
competitiveness in the new market.
>> Internationalizing requires the development of new host-country-specific capabilities.
>> The result is a continuous cycle of exploration, exploitation, adaptation, and enhancement.
A company can enhance its capabilities by exploiting those that are relevant, appropriable, and transferable (RAT) in another
target country. Then, after the company augments its capabilities by competing in the new market, it can enhance its overall
capabilities by identifying those newly acquired capabilities that are commentary, appropriate, and transferable (CAT) to all the
organization.
Reading Two - International Diversification and Firm Performance. The S-curve Hypothesis.
Introduction
Firms are diversifying the geographic scope of their business activities in the pursuit of competitive advantage.
,This study addresses the following questions:
● What is the relationship between multinationality and firm performance?
● Is it linear?
● Is it curvilinear, or is the relationship more complex than a U-curve or inverted U-curve?
>> Geographic diversification and firm performance
The returns from a geographic diversification strategy were related to costs and benefits that varied depending on the extent of a
firm’s internationalization. Furter, the study explores how the motives for a firm’s international expansion influenced the
performance consequences of a geographic diversification strategy.
Findings:
● The returns from a geographic diversification strategy were related to costs and benefits that varied depending on the
extent of a firm’s internationalization.
● The horizontal S-curve showed the performance decline with increasing internationalization, followed by a positive
relationship between increasing geographic diversification and firm performance, which then declined at very high levels
of multinationality.
● This relationship in turn was moderated by intangible asset advantages that accrued with expansion of the geographic
scope of a firm.
● Firms with strong technology or advertising assert advantaged achieved higher returns to geographic expansion.
Background and Hypothesis
Studies have shown that higher levels of geographic diversification lead to better firm performance. Other studies have indicated
no relationship, or a negative relationship.
● The latter finding of a U-curve has sparked the idea that an S-curve might exist.
● The conflicting results could be an outcome of incomplete theorization about the full range of benefits and costs, and
about the changes in these benefits and costs over the time it takes to fully implement an internationalization strategy.
● Development of a theoretical framework providing a more complete account of the benefits and costs of
internationalization as well as theory on how benefits and costs change across stages of international expansion.
Benefits from Geographic Diversification
● Provides exploration and exploitation benefits
● It enables a from to realize economies of scale and scope
● reduce costs and increase revenues by increasing a firm’s market power over its suppliers, distributors and customers
● It lowers costs by enabling arbitrage of differences in input and output
● A firm can gain above-normal returns, by exploiting its firm-specific assets, especially intangible ones, in international
markets
● Exploration → using an organizational learning perspective; emphasized that a firm’s subsidiaries in host countries can
help to enhance its knowledge base, capabilities, and competitiveness through experiential learning.
Cost related to Geographic Diversification
● The costs in geographic diversification are typified by the problems of the liabilities of newness and foreignnes
● Costs such as purchasing and installing facilities, staffing, and establishing internal management systems and external
business networks.
● These challenges can put a new subsidiary in a disadvantageous position, as compared to an established firm in the target
market and can decrease competitiveness.
● These liabilities, however, can also improve reputations and legitimacy in the host country in which they operate
>> A foreign subsidiary has a liability of foreignness that can lead to its having higher costs because it cannot conduct business
activities as effectively as local firms.
- Mistakes in various business decisions are more likely
- Transaction and coordination costs increase with the degree of geographic diversification
Many of the costs associated with product diversification also apply to geographic diversification:
E.g. coordination difficulties, information asymmetry, and incentive misalignment between headquarters and divisional managers.
As the number of internal transactions increases with the number of foreign subsidiaries established by a firm, governance costs
can rise rapidly to a point at which the governance costs exceed any internationalization benefits.
, Geographic Diversification and Firm Performance
● Both exploitation and exploration benefits should increase with international expansion, up to a point of diminishing
returns
● Total costs of internationalization:
The total costs for the liability of foreignness decrease and become level when an internationalizing firm
becomes familiar with various foreign countries.
- The total costs of the liabilities of newness decrease with learning and with improvements in legitimacy.
- The total coordination costs accelerate with the addition of foreign subsidiaries and new host countries.
● The interplay between these benefits and costs of internationalization should result in a horizontal S-shaped relationship.
Interaction Effects of Intangible Assets and Geographic Diversification
The slopes in the different phases of the S-shaped curve could vary across firms. Pace and country choice could moderate the
extent of the liabilities of newness and foreignness encountered in international expansion. Another potential influence is the
international strategy and structure adopted by a multinational firm, which could moderate the extent of coordination costs that
firm encounters.
● One important dimension that can moderate the exploitation benefit of an internationalization strategy is a firm’s
intangible assets, such as technological know-how, patents, management skills, brand and goodwill are information
incentives.
● For efficient exploitation, the cross-border exchange of these assets must be internalized.
● An intangible asset value is not likely to depreciate significantly when it is applied in different markets.
Conclusion
Hypothesis 1: The relationship between geographic diversification and firm performance is nonlinear, with the slope negative at
low levels of geographic diversification, positive at medium levels, and negative at high levels of geographic diversification →
Strongly supported
Hypothesis 2: A firm’s intangible assets moderate the relationship between geographic diversification and firm performance in
such a way that high levels of intangible assets increase the performance gains attributable to geographic diversification →
partially supported; important to note that the “main effect” between internationalization and performance remained robust in all
the models when the interaction terms were included
In developing a comprehensive stage model of the relationship between multinationality and performance, the study suggests that
researchers need to be cautious in attributing immediate positive/negative performance outcomes to a geographic diversification
