Strategy in International Business – 4 basic Strategies for International Business

Definition of Strategy in international business:

Strategy in international business refers to plan that guide expanding globally allows firms to increase their profitability. Firms that operate internationally are able to:

  1. Expand the market for their domestic product offerings by selling those products in international markets.
  2. Realize location economies by dispersing individual value creation activities to those locations around the globe. Where they can be performed most efficiently and effectively.
  3. Earn a greater return by leveraging any valuable skills developed in foreign operations. And transferring them to other entities within the firm’s global network of operations.

Companies follow 4 basic strategies to enter International Business:

  1. International Strategy
  2. Localization Strategy
  3. Global Strategy
  4. Transnational Strategy

Appropriateness of each strategy varies pressures for cost reduction and local responsiveness.

Global Strategy:

Global strategy is a business model based on pursuing a low cost strategy on a global scale. Companies that pursue a global standardization strategy focus on increasing profitability by reaping the cost reductions that come from economies of scale and location economies; that is, they pursue a low cost strategy on a global scale. The production, marketing, and R&D activities of companies pursuing a global strategy are concentrated in a few favorable locations.

International Strategy:

International strategy is uses existing core competencies to exploit opportunities in foreign markets. Sometimes it is possible to identify multinational companies. That find themselves in the fortunate position of being confronted with low cost pressures and low pressures for local responsiveness. Typically these enterprises sell a product that serves universal need. But because they don’t face significant competitors, they are not confronted with pressures to reduce their cost structure. Xerox found itself in this position in the 1960s, after its invention and commercialization of the photocopier. Strong patents protected the technology comprising the photocopier. So for several years Xerox did not face competitors- it had a monopoly. Because the product highly valued in most developed nations, Xerox was able to sell the same basic product all over the world. And charge a relatively high price for it. 

Transnational Strategy:

Transnational Strategy is a business model that simultaneously achieves low cost, differentiates the product offering across geographic markets. And fosters a flow of skills between different subsidiaries in the company’s global network of operations. We have argued that a global standardization strategy makes most sense. When cost pressures are intense and demands for local responsiveness limited. Conversely, a localization strategy makes most sense when demands for local responsiveness are high but cost pressures are moderate or low.

In essence, companies that pursue a transnational strategy are trying to develop a strategy. That simultaneously achieves low cost, differentiate the product offering across geographic markets, and foster a flow of resources such as process knowledge between different subsidiaries in the company’s global network of operations. As attractive as this may sound, the strategy is not easy to pursue. Because it places conflicting demands on the company. Differentiating the product to respond to local demands in different geographic markets raises costs, which runs counter to the goal of reducing costs.

Localization Strategy:

A localization strategy focuses on increasing profitability by customizing the company’s goods or services. So that they provide a favorable match to tastes and preferences in different national or regional markets.  Localization is most appropriate when there are substantial differences across nations or regions with regard to consumer tastes and preferences, and where cost pressures are not too intense. By customizing the product offering to local demands, the company increases the value of that product in the local market. On the downside, because it involves some duplication of functions and smaller production runs, customization limits the ability of the company to capture the cost reductions associated with mass producing a standardized product for global consumption.