U. Washington, Geog. 349: Strategic Management University of Washington
Geography 349, Geography of International Business
Professor Harrington
Strategic Management
 

There is a common thread that I want to reinforce here:  strategic action to maximize returns on corporate assets.  In addition, this is a good juncture to compare explicitly frameworks of industrial location and international trade.

Contents:
STRATEGIC  MANAGEMENT
A widely used framework for business planning is to identify the firm's unique (or relatively unique) advantages:  in more formal terms, to identify the assets on which the firm can earn economic rents.


CORPORATE  STRATEGY
In the complex, multi-divisional corporation, this analysis and the consequent actions can be pursued at different levels.  At the corporate level, the key question is "What lines of business would allow our assets to earn the maximum economic rents?"

A hotelier might ask whether its success at buying valuable real estate during market depressions makes it as much a real-estate investment company as a hotelier.  A positive answer might lead it into other forms of real estate investment and management, and perhaps out of direct management of the hotels.  Another hotelier might recognize that its worldwide name recognition and reservations system are its key assets, to be best exploited by owning few properties and managing many, and perhaps branching out into other forms of tourist or business travel arrangements.
Note that the environment influences these decisions:  the time may be right, or not so right, to profit substantially from real-estate divestment or investment.

A clothing company may recognize its strongest asset as its production capacity and skill, its trademark, its design, or its distribution network (company-owned warehouses, retail outlets, marketing lists, and information systems).  Greater profit per unit of investment may be had through directly "renting" its production capability to other firms, licensing its trademark to selected products made by others, designing for others, or including others' products in in its distribution system.
Granted, it could maximize its size by doing it all.  But the usual goal is increasing ROI.

Either of these cases suggests types of the corporate actions:

  • vertical integration or disintegration (taking on more or less of the production and marketing chain) and
  • horizontal integration or disintegration (taking on more or less of the total market).
Each can be achieved by
  • acquisition or sale of existing operations, or by
  • starting up new operations or shutting down old operations.
Acquisition or shut down generally make more sense when entering or exiting an sector or country that faces over-capacity.

Often, vertical or horizontal integration or disintegration has international manifestations for the firm.  For most large firms, the fundamental question should be what strategic action needs to be taken to increase returns on corporate assets.  The particular action and the particular international manifestation should follow.
 


BUSINESS  STRATEGY  (a.k.a. COMPETITIVE  STRATEGY  OF  THE  FIRM)
Business strategy takes the line of business as a given, and then asks how the firm should compete within the line of business, given its specific assets (Therefore, each strategic business unit within a corporation would develop its own competitive strategy, though potential synergies among the strategies need to be realized through actions at the corporate level).

Typical competitive strategies include

  • low-cost production and pricing
  • high-quality (often relatively customized) production
  • market segmentation (producing different products for different sub-markets, and pricing accordingly)
  • geographic market specialization or segmentation.
Each of these strategies can have geographic manifestations.
  • Low-cost production can lead to "offshore" production in mon-market-oriented settings that are low-cost export platforms because of labor wages, environmental regulation, tax rates, etc.
  • Customized production once meant production near the customer:  new technologies for "flexible production" are reducing this requirement.  The text mentions that BMW decided on a U.S. rather than Mexican location for its first North American production operation, in part because of the importance of national origin to the perception of its targeted market segment.
  • Finally, a national market may be chosen explicitly because of the size (growth) of the most relevant market segment in a given market, or because of the competitive structure of the producers for that market.  (An example of the latter:  the movement of a large, low-cost, vertically integrated retailer into a market dominated by small, fragmented, high-cost retailers).
How does a company select a country for its low-cost, customized, or market-entry strategy?
The text presents several rationales:
  • logistical ease (with respect to home or other operations)
  • linguistic and cultural similarity
  • market size and growth
An additional strategic consideration has been termed ologopolistic reaction:  the tendency for large, ologopolistic firms to match each other's major strategic moves (such as FDI into a particular country).  This tendency is motivated by the concern that a close competitor might gain an important advantage from its new production or market stronghold.  It is not always a wise policy.  The relative advantage of the competitor needs to be assessed before its movement is followed.
 


OPERATIONAL  STRATEGY (a.k.a. FUNCTIONAL STRATEGY)

Each operational element of an organization (product development;  procurement;  production and production location;  marketing, including pricing, promotion, and distribution) should reflect and support the organization's explicit choice of business (or comptitive) strategy. 
  • How might the product development, procurement, production, location, and marketing decisions of a clothing company vary according to the company's business strategy? 
  • What about the decisions of a public institution of higher education, based on its competitive strategy -- the role it wishes to play in higher education, compared to other institutions?
Study my notes on international marketing as an example of how operational (or functional) decisions should be aligned with one another and with the overall competitive strategy of the corganization.


METHODS  OF  COUNTRY  ASSESSMENT
The text mentions several methods of gathering and assessing information regarding international opportunities.  Three things are key:

Assessment of risk:

  • market risk (is the market large and sustained?  what's the likelihood of additional competition, e.g., because of ologopolistic reaction?)
  • monetary risk
  • political risk (described at some detail in the text)
Assessment of return:
  • expected return equals the sum of:  each potential level of ROI, multiplied by the probability of that level of ROI (such that the sum of the probabilities equals 1.0) -- see Table 13.1 of D&R text.
Relationship between risk and return:
  • Greater risk needs to be matched by greater and faster expected return.


TRADE  THEORY  AND  LOCATION  THEORY
The first half of our course focused on models of international trade.  These were, loosely, general-equilibrium models, concerned for the interaction of entire economies.  At the core of our analyses and frameworks was the understanding that each country has resources that need to be used as productively as possible:  our analytic question was how these resources should be used, for what products and potential exports, and with what effects on wages (both nominal wages and wages after changes in cost of living after cheaper imports).

Our current frameworks for international investment by particular companies are very different.  We're not concerned with the general-equilibrium impacts of FDI on national wages, employment levels, and global output.  Rather, we're concerned about maximizing the return to one company for its deployment of its limited resources -- which don't have to be deployed in any one country.  Location theory typically doesn't concern itself with the effects of production location on economic aggregates;  it takes wage levels, resource locations, and markets as given and seeks to optimize microeconomic returns from a location decision.

Companies are in competition with each other;  countries aren't.  Countries are in competition for inward FDI from particular companies;  the aggregate of FDI and other investment flows into and within a country should follow the comparative advantage of the country as suggested by trade theories.


copyright James W. Harrington
revised 27 December 2013