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Strategy and nonmarket environment – Summary
Look at the response lecture notes and case 1.
Read the summarizes of every chapter in the nonmarket book.
Content
PART I: MARKET
1) Simple structure................................................................................................................................................................................ 11
2) Functional structure......................................................................................................................................................................... 11
3) International division structure....................................................................................................................................................... 12
4) Global organization structure product-focused (standardized products).................................................................................12
5) Global area structure area or market-focused.............................................................................................................................. 13
6) Matrix structure................................................................................................................................................................................. 14
7) Transnational network structure..................................................................................................................................................... 14
PART 1: MARKET
1. Introduction and internationalization
1.1 OLI Paradigm (Dunning, 1980)
Explains the rationale for and the direction of Foreign Direct Investment (FDI) how and why the firms internationalize.
- The more the ownership-specific advantages possessed by an enterprise, the greater the inducement to internalize
them; and the wider the attractions of a foreign rather than a home country production base, the greater the likelihood
that an enterprise, given the incentive to do so, will engage in international production.
- Exploit foreign markets firm becomes an international enterprice (= firm which services foreign markets). To be able
to produce in foreign ánd in domiciled markets, the firm must have additional ownership advantaged which outweight
the inevadeble business costs of dealing with unfamiliar stakeholders and operating in unfamiliar territory. This
increases through experience on the foreign market.
1) Ownership advantages (firm-specific advantages; FSAs) = unique assets, capabilities or core competencies of the firm
that determine the firm’s competitive advantages. Value proposition based on assets which the firm has and others has
not.
- Examples: trademark, entrepreneurial skills, production methods (resources that are transferable across borders and
enable competitive advantage building).
- Classification of ownership advantages:
o Asset-type FSAs
Tangible = technology embodied in new products, machinery & equipment, patents, financial, capital,
etc.;
Intangible = knowledge of information to utilize the tangible assets.
o Transaction-type FSAs = ability to generate rent by the use of superior intra-firm hierarchies, both intra-firm
and between firm and markets.
Organizational-based = ability to organize intra-firm activities and manage large organizations.
Economies of scale
Institutional-based = knowledge of institutions and relational capabilities;
1
, External market-based = knowledge concerning where to buy and sell efficiently.
o Recombinant-type FSAs = ability to recombine the firm’s own assets with other internal and external assets.
2) Location advantages = arise from using resources that are tied to a particular foreign location and used jointly with
one’s own unique assets (raw materials, low wages, tariffs/taxes). Location advantages in combination with your
unique assets gives you location ownership advantages. De buitenlandse markt geeft jou een voordeel die je op de
thuismarkt niet hebt.
- Examples: climate conditions, tax regulations.
- Classification of location advantages:
o Exogenous L advantages = derive from natural assets. Examples: land availability, climate, extractive
resources, promiximity to other markets, membership in a regional integration scheme.
o Fundamental L advantages:
Basic infrastructure, examples: primary schools, health care, transport, telecoms.
Legal infrastructure, examples: legal system, tariff system, property rights.
Regulation and policy, examples: incentives, subsidies, industrial policy, competition policy,
capacity to enforce regulation.
Financial infrastructure, examples: banking, insurance, stock exchange.
o Knowledge-related L advantages = knowledge infrastructure, examples: universities, public research
institutes.
o Structural L Advantages = market and demand structure, examples: income level and distribution, market
size, consumer sophistication, availability of skilled employees, distribution channels, competition.
o ? L advantages = spillover of knowledge, co-location advantages: firms benefitting from clustering effect
(staying in the same reason).
3) Internalizing advantages = arise through one’s own production rather than through partnership arrangement such as
licensing.
- Internalizing = the desire of the company to retain control over its knowhow (its unique advantages).
- Firms prefer FDI over licensing or exporting to retain control over knowhow, functional processes and strategy.
Conclusion:
- O:
o No O remain domestic, I or L doesn’t matter.
o Only O:
If advantages aren’t easily transferable exporting. If exporting is not feasible licensing or
franchising;
Exporting may not be feasibly, due to: high internationally transportation costs, lack of
domestic capacity, inhibit the import of foreign products, buyers prefer products originating
from a particular country, production is cheaper than at home, products need to be altered to
gain sufficient consumer demand abroad.
If advantages are easily transferable licensing or franchising.
Starbucks: assets = their identity (brand, global name), good image of a responsible
organization, great location with high traffic customers, economies of scale
(‘schaalvoordelen’), customer relations.
IKEA (international replicator): O = capabilities arising from organisational structures and
culture. Support for ongoing learning process aimed at frequent modification of the format
for replication. Variation in marketing, pricing, etc. across stores. Standardisation across
stores in higher-level features such as company values and vision. Management
knowhow to run large stores and knowlow of global supply chain mangement. These
specific ownership advantages are easily transfarable to foreign locations franchising.
o Besides: export difficulties, because of export quota or high transaction costs.
o No internalizing advantage, because of not having the prerequisite knowledge
(vereiste kennis) or barriers to entry new foreign markets.
- O & L licensing.
2
, - O & I exporting: keep the production in house,
wouldn’t trust another organization to produce your
production (no risk). Way to reduce transaction costs
cost effective.
- O & L & I:
o FDI (opening a fabric of facility abroad): retain
control and protect knowhow.
o No internalizing advantages, because of
barriers or not having prerequisite knowledge
license.
A cost benefit analysis of different entry modes needs to be
conducted to determine which would be economically most
beneficial to the firm.
- FDI = wholly owned subsidiary:
o Greenfield investment – establishment
o Brownfield investment – acquisition
1.1 Process Theory of Internationalization (PTI-model) / Uppsala internationalization model (Johanson & Vahlne, 1977)
Essence = Internationalization is a dynamic process of learning (step-by-step reduction of market uncertainty). You built up your
market knowledge which let you be able to see market opportunities and see an opening to enter a market.
- When you are unfamiliar with a market, the costs of the business on this new market are higher because you are
uncertain. You have to build up market knowledge and to reduce the unfamiliarity with that market.
- When you are expanding abroad keep the distance small. When you are confident enough, you can move further away
of your home-market.
- Examples:
3
, o IKEA: took 20 years to enter its neighbouring country, Norway. Then it focused on building Western
European operations over the next decades. Only more recently has it accelerated its internationalisation.
o Starbucks: Why did Starbucks fail in Australia (despite many similarities between the US and Australian
markets)? They underappreciated the differences between US and Australian consumers. On the face of
it, US and Australia have similar characteristics (language and culture), but firms can underestimate
differences.
PTI-Model: ‘State’ and ‘change’ aspects of
internationalization. State aspects are current business
activities and commitment decision. Market knowledge
and market commitment are assumed to affect decisions
regarding commitment of resources to foreign markets
and the way current activities are performed. Marked
knowledge and market commitment are affected by
current activities and commitment decisions.
Therefore, the process is a causal cycles.
Market knowledge commitment decisions.
Current activities (how much resources you put in)
market commitment (how much resources you actually
want to put in).
Distinct (different) stages in internationalization:
1.2 Theory of International New Ventures (INVs) or Born Globals – (Oviatt & McDougall, 1994)
INVs = businesses that from inception seek to derive competitive advantages from the use of resources, especially unique
knowledge, and sale of outputs in multiple countries (IT-firms, biotech firms, etc. = business which are from the start
international, their origins are international.
- If a company moves abroad (to another region: America, Europe, Asia) immediately (within 2 years) and if they adopt
the business line global born company (INV).
- If a company moves abroad later former region company (traditional internationalization process; PTI). A region
company is more cost effective in comparation with a global born company.
Oviatt & McDougall (1994): explain the INVs-phenomenon by integrating the international business, entrepreneurship and
strategic management theory. The framework describes four sufficient and necessary elements for the existence of INVs:
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