In the modern world of business, companies have to engage in stiff competition in order to survive in the market. This pertains not only to companies working inside one country but to international businesses as well. On the whole, it is paramount for such organizations to appropriately formulate their strategy if they are to become successful internationally (Buckley and Ghauri 9). However, it is often unclear whether a business should attempt to create “uniform” products or to adapt them to local specifics. Therefore, in this paper, approaches to formulating international business strategies are discussed.
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Formulating Global Strategies
Nowadays, many businesses choose to expand internationally, quite often, in order to be able to make use of economies of scale. However, it may be quite difficult for companies to adapt to different markets. Therefore, when formulating strategies for international/global expansion, organizations rather often decide to adapt a globalized approach, that is, to produce standardized goods that are supposed to be attractive to customers who are representatives of a wide array of cultures. An example of such a company is Coca-Cola, whose CEO at the time, Roberto Goizueta, stated in 1996 that “the labels ‘international’ and ‘domestic’ no longer apply” (qtd. in Ghemawat, “The Forgotten Strategy” 76). Nevertheless, differences between countries may be quite substantial, which means that such standardization might not be a viable alternative due to the fact that local clients often may decide to choose a local product that is adapted to their tastes and desires rather than a “standardized” global product (Ghemawat, “The Forgotten Strategy” 78).
On the whole, Ghemawat stresses that the differences between local markets can be classified into four main categories: cultural distance (languages, religion, ethnic differences, etc.), administrative distance (legal, institutional, and political differences), geographic distance (physical remoteness, a dearth of common borders, sea or river access, etc.), and economic distance (differences in incomes of potential clients, cost of labor and capital availability of knowledge, infrastructure, raw materials, and so on), which can be abbreviated as CAGE (“Distance Still Matters” 139; “The Forgotten Strategy” 78-82). Because of such differences, it may be quite difficult for companies to produce standardized products that would be competitive in all the markets.
Therefore, Ghemawat proposes to actually take advantage of these cultural differences, formulating strategies that would allow for adapting products of a company for local consumers while at the same time taking steps aimed at making use of various economic or legal differences (for instance, producing goods in countries with lower labor costs and with more friendly taxation policies; “The Forgotten Strategy” 78-82). For instance, “Embraer,” a Brazilian company that produces aircraft, uses differences in the price and availability of labor so as to significantly reduce their spending on maintaining their labor force (qtd. in Ghemawat, “The Forgotten Strategy” 81-82). Utilizing these differences is labeled “arbitrage” by Ghemawat; according to the researcher, there are four main types of arbitrage: cultural, administrative, geographic, and economic, according to his CAGE model (“The Forgotten Strategy” 78-82). Such strategies may be rather effective, for, rather than ignore cultural differences, they permit taking advantage of these differences and turning them into profits.
Nevertheless, it should be observed that it may be quite difficult to reconcile the strategy of arbitrage and the utilization of the economies of scale. It is usually rather problematic to simultaneously exploit differences and similarities. Even though combining them to a limited extend can sometimes be done, as the examples of companies such as “GE Medical Systems” demonstrate, it is impossible to reconcile them perfectly due to a variety of conflicts – such as the impossibility of simultaneously standardizing and specializing products, for example (Ghemawat, “The Forgotten Strategy” 83).
Therefore, it should be stressed that in the modern market, companies need to take into account that even though the world is becoming more integrated, regional differences sometimes tend to become more pronounced (Ghemawat, “Finding Your Strategy in the New Landscape” 56). Thus, strategies should be formulated while taking into account four main components: markets and products (the need to penetrate additional levels of customer incomes, more channels, and expand geographic coverage); operation and innovation (improving supply chains and introduce technological enhancements in production); organization and people (closing cultural differences such as language barriers, managing talent); and identity and reputation (establishing a strong identity of a company; Ghemawat, “Finding Your Strategy in the New Landscape” 57-60). It is paramount to do so while formulating global strategies in order to enable organizations to be competitive in the international market.
On the whole, it should be stressed that there are two main approaches to formulating international business strategy: standardization and globalization, on the one hand, or making use of arbitrage so as to adapt products for local consumers and to utilize the various local advantages and disadvantages (such as cost of capital and labor, taxation policies, costs of transportation, and so on), on the other. While the two approaches can be partially combined, it is impossible to reconcile them to a full extent. Also, when formulating strategies, companies need to take into account a number of components (such as certain issues of operation, creating a strong reputation, etc.) in order for these strategies to be successful.
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Buckley, Peter J., and Pervez Ghauri. International Business Strategy: Theory and Practice. Routledge, 2015.
Ghemawat, Pankaj. “Distance Still Matters: The Hard Reality of Global Expansion.” Harvard Business Review, 2001, Web.
“Finding Your Strategy in the New Landscape.” Harvard Business Review, 2010, Web.
“The Forgotten Strategy.” Harvard Business Review, 2003, Web.