The "Basic Concepts" of International Business Strategy: A Review and Reconsideration

Author(s): Daniel Sullivan and Alan Bauerschmidt

Source: MIR: Management International Review, Vol. 31, Frontiers of International
Business Research (1991), pp. 111-124
Published by: Springer
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mlr Special Issue 1991, pp. 111-124
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Daniel Sullivan/Alan Bauerschmidt

The "Basic Concepts"

of International Business Strategy:
A Review and Reconsideration

Abstract

■ Innovative explanations of international business strategy (IBS) have not

been penalty-free: increased information often seems to increase ambiguity
over the issue of strategically managing worldwide activities.
■ We analyze the views of managers of 63 Fortune 500 firms who worked in
international, multinational, and global industries. Factor analysis suggests
framing discussion within the context of the notions of multinational integra-
tion, internationalization through innovation, and national responsiveness.
■ The results suggest that IBS reduces to the "basic concepts" of efficiency,
effectiveness, and learning and, most significantly, how executives simulta-
neously manage these dimensions.

Key words

■ Strategic simultaneity among dimensions of IBS indicates that a firm's perfor-

mance as a "transnational company" depends on how well it simultaneously
optimize efficiency, effectiveness, and learning.

Authors

Daniel Sullivan, Assistant Professor of International Business, Freeman School of Business, Tulane
University, New Orleans, LO, U.S.A.
Alan Bauerschmidt, Professor of Management, College of Business Administration, University of
South Carolina, Columbia, SC, U.S.A.

Manuscript received October 1990, revised March 1991.

mlr vol. 31 • Special Issue • 1991 111

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Daniel Sullivan/ Alan Bauerschmidt

International business strategy (IBS) no longer is a speculative notion only

connected with certain types of firms operating under certain types of industry
conditions in the face of certain types of governmental regulations. Many agree
that IBS is a firm's reconciliation of the dual imperative (Doz, 1986), its config-
uration and coordination of value activities (Porter, 1986), and its administra-
tion of internalized market transactions (Buckley/Casson, 1985; Bartlett/
Ghoshal, 1989). Notwithstanding general consensus, a casual scan of the strat-
egy literature indicates that ambiguity persists. New studies of IBS inevitably
advise managers to consider yet another variable, or in some cases, adopt a
fashionable decision logic. Further complicating matters is the prevalence of
conclusions induced from unique case studied. Then again, looking to survey
research for an objective reference point often proves futile in that most empir-
ical studies of strategy are descriptive and classificatory (Chrisman et al., 1988).
So, although international strategy has been researched from a variety of angles
with a variety of methods, its usefulness to managers is questionable. Indeed, the
deteriorating situation prompted Hamel and Prahalad (1989, p. 63) to caution
managers that "regaining competitiveness will mean rethinking many of the
basic concepts of strategy."

Table 1. Convergence and Contradictions in Interpretations of International Strategy

Research Strategic Imperatives Strategic Constraints Strategic Logic

Hout, Porter Interdependent subsidiaries Preemptive efficiencies Synergistic decision-

Rudden, and compels leveraging compet- of global competitors making at so-called
Vogt (1982) itive edges across nations. limit market access. "leverage points" enact
Innovative decision logics National conditions barriers to entry and
change the scale and scope also impede interna- mobility,
of competition. tionalization.
Levitt (1983) Product standardization to Economic and cultural "Shell the same
exploit scale economies; nationalism threatens to the same way, every
Commitment to producing impede standardization; where."
low cost, high quality Second-mover disad-
products. vantages
Hamel and World brand domination Subsidiaries intent
Prahalad enables leveraging technol- retaining autonomy
(1983; 1984) ogy and distribution chan- resource allocation
nels; Contracting product Political pressure for ch
life cycles accelerates prod- national decision cen- i
uct throughput. Manage ters. and defend market
cash flows to cross-subsi- share,
dized subsidiaries.

Kogut Multimarket sourcing and Political risks and in- Surrender strategic fit
(1985 A; production shifting to arbi- formation uncertainty for strategic flexibility
1985B) trage market imperfections can create inefficiencies to gain comparative-ad-
and economic dis-equili- in external and internal vantage based competi-
bria. transactions. tive advantage.

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 "Basic Concepts" of International Business Strategy

Table 1. (continued)

Research Strategic Imperatives Strategic Constraints Strategic Logic

Quelch and Emphasize efficient global Tendency of managers Tailoring global opera-
Hoff (1986) use of good marketing to see global marketing tions to maximize efli-
ideas rather than standard- either as standardiza- ciency in concept devel-
izing to gain scale. Install tion or adaptation. Ex- opment and effective-
an organization that en- panding HQ bureau- ness in local delivery,
courages transfer of infor- cracy slows response
mation. time and raises costs.

Porter Configure value activities Market and political Achieve integration by

(1986) to exploit factor cost dif- imperfections threatens efficiently configuring
ferentials; Extend competi- to separate value activi- and effectively coordi-
tive advantage by coordi- ties. nating the global value
nating interrelationships. chain.

Ghoshal Global competitiveness Misplaced belief in the "Strategic tasks of

(1987) rests on achieving scale ef- notion of industry de- managing globally is to
fects, managing attendant terminism; Inability to use sources of competi-
risks, and developing inter- separate operational tive advantage to opti-
nal systems of innovation and strategic risks; Un- mize efficiency, risk,
and adaptation. able to leverage learn- and learning simultane-
ing. ously."

Bartlett and Developing a transnational L

Ghoshal capability to manage tive heritage that is and global coordination
(1989) across borders, a task that contradictory to are precursors of suc-
requires integrative pro- transnationalism. Ten- cess in the international
cesses that move the firm dency to imitate organi- marketplace.
from a philosophy of fit to zational capacities of
one of flexibility. competitors.

Hamel and Create sense of urgency Challenge to managers' Strategic intent captures
Prahalad among managers. Exten- traditional views of the essence of winning,
(1989) sive competitors intelli- planning. Analyzes are is stable over time, and
gence. Resourceful work- biased toward domestic sets targets that deserve
ers. Clear checks and bal- markets. commitment,
ances.

Stalk and Focused operations that A portfolio of unrelated Sustaini

Hout (1989) emphasize flexible manu- products and an organi- position
facturing and rapid re- zation that stress cost viding the mo
sponse systems built on a and control over fast for the lowes
foundation of R and D. responses. the least amount of
time.

Ohmae Principle of "equidistance" Misplaced home coun- The lure of a global

(1989) in managers' vision -seeing try reflex to implement product is a false allure,
and thinking globally. United Nations Model. Deliberate insideriza-
Managing variable ap- Bureaucratic inertia tion of functional
proaches to global prod- ruins collaborations. strengths is the route to
ucts requires so-called in- global success,
siderization of functional
skills.

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Daniel Sullivan/Alan Bauerschmidt

The question is, then, what basic concepts should executives rethink? Many
prescriptions promise to resolve this query (see Table 1). For example, Levitt
(1988) argues that the touchstone of IBS is manufacturing low-cost, high-qual-
ity goods that transcend economic and cultural nationalism due to technological
diffusion and consumer rationality. Hamel and Prahalad (1983, 1985) advise the
ambitious firm to maximize product throughput in global distribution channels
as well as reinforce world brand domination by arbitrating cash flows, both
techniques that enact daunting barriers to entry and mobility. Prahalad and
Doz (1987) note that reconciling the economic and political imperatives, man-
aged within the appropriate organization context, enables a MNC to profitably
trade-off efficiency or effectiveness. Ohmae (1989) advances a different notion,
prescribing full-scale "insiderization" of the MNC's functional strengths, even
if they require challenging headquarters' reflexive response to promote outsider-
ization. Porter (1986) emphasizes the joint importance of configuring and coor-
dinating value activities in order to maximize allocative, productive, and mar-
keting efficiencies. Bartlett and Ghoshal (1989) follow a similar line, but unlike
the economic efficiency perspective of Porter, they adopt an organizational
perspective: the international manager must simultaneously achieve global scale
and local scope effects.
Needless to say, these and the other recommendations presented in Table 1
offer an international manager a rich menu of strategic variables. Upon consid-
eration, though, these choices become confusing due to the diversity of explana-
tions. Therefore, working within the framework of Table 1, this study evaluate
managers' beliefs about the "basic concepts" of IBS.

Research Measures

Recurring themes in the international strategy literature emphasize fo

cepts: multinational integration, national responsiveness, internationaliz
imperatives, or intangible assets. Table 2 profiles these concepts as well
lines operational measures developed by Arpan et al. (1986) and Sullivan
Recent testing of this set of measures among internationally active sm
nesses by Sullivan and Bauerschmidt (1989) yielded an alpha of 0.79
exceeding the 0.70 threshold that Nunnally (1978) advises for sound me
ment.

114 nth- vol. 31 • Special Issue • 1991

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Daniel Sullivan/ Alan Bauerschmidt

Sample

A cross-sectional design required polling managers from five industries: textile

mill products (SIC 22), paper and allied products (SIC 26), chemical and allied
products (SIC 28), electrical and electronic products (SIC 36), and transporta-
tion equipment (SIC 37). Bartlett and Ghoshal (1987) contend that strategic
tasks, demands, and constraints vary significantly across an "international"
(SIC 22 and 26), "multinational" (SIC 28), and "global" (SIC 36 and 37) indus-
try. Although they admit their typology is "clearly oversimplified," Bartlett and
Ghoshal maintain that it controls for industry specific effects.
We only included large companies since their strategic outlook, resources,
and constraints differ from those of smaller companies (Miller 1988). We classi-
fied the firm as large if it was ranked in the 1988 Fortune 500 list of American
manufacturing firms. We further segmented the sample by only including inter-
nationally active companies since they see international business more as a
strategic opportunity rather than an operational risk (Schlegelmilch 1986). We
did not set a formal internationalization standard, such as 10% of annual sales,
due to its questionable discrimination (Sullivan/Bauerschmidt 1990). Instead,
we asked each manager to decide this issue.

Data Collection

The sample criteria reduced the Fortune 500 to a population of 180 firms
cover letter, post-paid return envelope, and single-page questionnaire were se
to a manager in each firm. The choice of respondent followed Mansfie
Romeo, and Wagner's (1979) precedent by polling the Director of Internation
Operations. In firms where no such office existed we polled senior executive
such as the Director of Strategic Planning (Hambrick 1983). Each measure use
a five point Likert scale. Two mailouts spaced three weeks apart yielded
usable questionnaires for a response rate of 35%.

Data Analysis

We assessed the representativeness of the respondents by comparing them w

the remaining Fortune 500 firms. We calculated mean responses and Pearson-

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 "Basic Concepts" of International Business Strategy

Table 3. Significance of the Difference in the Characteristics of the Nonresponding and Responding
Fortune 500 Firms

Characteristic Mean of the Mean of the F-Statistic Significance

Responding Firms Nonresponding Firms of Difference
(Number) (Number)

Revenue $6,495,000,000 (63) $3,364,000,000 (437) 7.75 0.0056

Profit $ 376,999,000(63) $ 160,210,000(437) 8.49 0.0037
Assets $5,643,000,000 (63) $3,126,000,000 (432) 5.63 0.0180
Equity $2,374,000,000(63) $1,245,000,000(430) 5.84 0.0160
Listing 192.6(63) 258.8(437) 11.82 0.0006
Employees 58,802(63) 23,004(432) 15.25 0.0001
Age 79.2 years (59) 70.0 years (391) 3.65 0.0566
Foreign source 28.8 percent (41) 28.7 percent (209) 0.00 0.9611
of revenues

Product Moment correlations. Preventing inferential interpretations prompt

principal components factor analysis with orthogonal rotations. The latent ro
criterion ruled factor selection.

Sample Characteristics

The typical respondent was the Director of International Operations who

worked for a company that had $ 6.5 billion in sales and employed nearly 60,000
people. Table 3 shows that on seven dimensions the firms that responded are
significantly larger than the other 437 Fortune firms. Under some design condi-
tions such dissimilarity would limit the findings. However, the two sets corre-
spond on the proportion of revenues earned through international activity: both
responding and non-responding firms earned an average of 29 percent of rev-
enues overseas in 1988. * The respondents represented companies in global (33
of 63), multinational (16 of 63), and international (14 of 63) industries.

Findings

Table 4 shows the means, standard deviations, and intercorrelations for the
eight measures. The importance and influence of matching company activity to
country conditions scores the highest mean ranking, has little variance, and
records two of the strongest intercorrelations. The respondents also emphasize

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Daniel Sullivan/ Alan Bauerschmidt

Table 4. Means, Standard Deviations, and Intercorrelations Among the Measures of IBS (n = 63)

Measure Mean SD123 45678

1 Extending the life cylce 3.98 0.85 1.00

of domestic products
2 Diminishing growth 3.38 1.05-0.02 1.00
opportunities in the
home market
3 Manufacturing products 3.58 0.99 0.16 0.15 1.00
that are acceptable
worldwide
4 Obtaining economies 3.11 1.07 0.08 0.06-0.09 1.00
of scale in production
5 Extending knowledge 3.90 0.91 0.22a-0.09 0.32b 0.04 1.00
and technology
to foreign markets
6 Adapting products to local 3.49 1.09 0.14 0.29b 0.39b -0.17 0.27b 1.00
customers* preferences
7 Leadership in research 2.82 1.08-0.03 0.35b0.08 0.16 0.16 0.20 1.00
and development
8 Matching company activity 4.03 0.93 0.04 0.43b 0.08 0.23 a 0.09 0.31 b 0. 37 b 1.00
to country conditions

■ p<0.05.
b p>0.01.

Table 5. Rotated Factor Structure of the Responses to the Eight Questions

Factor one Factor two Factor three Communality

World-wide product acceptance 0.79313 -0.03268 0.09127 0.638460

Obtaining economies of scale 0.75640 0.20314 -0.23683 0.669498
Extending product life-cycles 0.70425 -0.03732 0.10258 0.507883
Extending expertise to foreign markets 0.11892 0.68784 0.37124 0.625091
Leadership in research and development 0.42457 0.63968 0.24813 0.651021
Diminishing opportunity in home market 0.34082 -0.74692 0.29775 0.762699
Adapting to country conditions 0.05733 0.21064 0.75982 0.624976
Adapting products to foreign markets -0.03040 -0.02391 0.71344 0.510494
Explained variance 2.011947 1.528878 1.449297

extending a product's life as well as gaining additional rent

technology from international sales. The respondents link t
ishing growth opportunities in the home markets with the
responsiveness and innovation. Manufacturing global pro
the same issues.
Factor analysis revealed three clusters (see Table 5). Factor one combines
world-wide product acceptance, obtaining economies of scale, and extending
product life cycles. Manufacturing standardized products at the lower per unit

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 "Basic Concepts" of International Business Strategy

cost is a characteristics of the multinational integration strategy (Doz, 1986). Its

linkage with the organizing principle of the product life cycle (Vernon, 1966)
confirms that a MNC implementing multinational integration does so to reduce
manufacturing costs as well as extend scale effects through overseas sales
(Caves, 1982 b). The consistency of this cluster with Doz's (1986) description of
multinational integration prompts assigning this label to factor one.
The second factor links two measures of intangible assets (extending exper-
tise to foreign markets and exploiting leadership in research and development)
with a measure of internationalization (diminishing opportunities in the home
market). The latter variable's negative loading, Vernon (1966) suggests, reflects
a firm's intent to maximize rents on its innovation through international diffu-
sion. The connection of the measures of intangible assets with expanding market
scope emphasizes the link between the firm's technological leadership and its
international mobility. This factor supports our earlier finding that internation-
ally active small businesses initially rely on innovations to establish overseas
competitiveness (Sullivan/Bauerschmidt, 1989). As such, we reuse the factor
label of "internationalization through innovation."
Factor three links two measures of national responsiveness - adapting to
country conditions and tailoring products to foreign markets. The common
denominator of matching products and processes to foreign markets conforms
to discussions of the strategy of national responsiveness (Doz, 1986). As such,
this designation labels factor three.

Discussion

Traditional interpretations of IBS endorse a univariate decision logic in

belief of the supremacy of strategic fit - optimally configuring resources t
coalign the firm with its environment (Fayerweather, 1982; Stopford and Wel
1972). Contemporary works have taken a contrary view, emphasizing the pr
macy of strategic simultaneity (Doz, 1986; Ghoshal, 1987; Porter, 1990; Stalk
Hout, 1990). This literature, largely inferred from clinical case research, asser
that recent trends reduce the usefulness of a single strategic logic. The acce
ating pace of competitive change (Stalk/Hout, 1990), changing strategic impe
atives (Hamel/Prahalad, 1989), linkages between upstream and downstrea
value activities (Porter, 1990), and necessity of administrative innovat
(Bartlett/Ghoshal, 1989) challenge the philosophy of fit. Moreover, no longe
are MNCs able to isolate these tasks; their linkages demand simultaneous
managing their interaction.

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Daniel Sullivan/ Alan Bauerschmidt

Therefore, our most notable finding is the respondents' support of strategic

simultaneity through their depiction of IBS as a system of simultaneous equa-
tions organized around the variables of multinational integration, international-
ization through innovation, and national responsiveness. To this end, the data
support the popular inference that univariate logics no longer explain IBS for
large firms. Instead, managers of large MNCs indicate that devising a strategy
that sustains global competitiveness compels a firm to perform as a "trans-
national company," a performance that depends on how well "managers of
multinational corporations . . . optimize efficiency, responsiveness, and learning
simultaneously in their worldwide operations" (Bartlett/Ghoshal, 1987, p. 7;
authors' emphasis).
We should note that the respondents' expression of strategic simultaneity is
neither new nor radical. Vernon (1971) foreshadowed this notion with his ac-
knowledgement of the demise of the product life cycle; he theorized that MNCs,
once they have sold and manufactured abroad, no longer follow its univariate
logic of internationalization. As did the respondents suggest, Vernon explained
that the complexity of configuration, coordination, and competition in the
global market compels managers to jointly achieve the synergies of manage-
ment, marketing, and manufacturing, under the umbrella of innovative tech-
nology.
Similarly, strategic simultaneity, as least in a domestic context, is not an
extreme notion. Firms have wide-ranging strategic discretion; studies of strate-
gic management report that Porter's (1980) generic strategies are not mutually
exclusive choices. True, Porter depicts them as distinct options with unique
strategic menus. However, Dess and Davis (1984), Hambrick (1983), and Miller
and Friesen (1986) found that a firm can pursue several strategies simulta-
neously that span the low cost leader-differentiation spectrum. Our data suggest
similar conditions are at play in the international context.

IBS and Firm Size

The results of a related work prompt a brief discussion of firm size and m
ager's view of IBS. Earlier, we had asked managers of internationally ac
small businesses to judge the importance of the eight measures used in this s
(Sullivan/Bauerschmidt, 1989). Although we had hypothesized a similar fact
structure, the responses of 96 small firms loaded on a single factor. The da
suggested that small business managers saw leadership in research and devel
ment as the sine qua non of their IBS.2

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 "Basic Concepts'* of International Business Strategy

Joint consideration of the small and large firm findings suggests an intrigu-
ing characteristic of IBS. The data on large and small firms indicate that small
business managers' strategic logic is to internationalize on the basis of innova-
tion. Relying on technical or process innovations lessens the pressure on the
typically short-staffed small business to master methods of international mar-
keting and management. Vernon (1966), however, notes that eventually a firm
must develop these skills to sustain its competitiveness in foreign markets. The
Fortune respondents intimate that competing in advanced markets requires the
skill to simultaneously manage the demands of internationalization by innova-
tion, multinational integration, and national responsiveness.
Neither study precisely explains the relationship among these concepts.
Together, though, they hint that internationalization by innovation may be the
fundamental characteristic of IBS. The small business managers saw leadership
in R and D singularly expressing the logic of international strategy. The Fortune
respondents also convey the importance of innovation, an outcome that sup-
ports Franko's (1989, p. 470) report that "corporate R&D intensity emerges as
a principal, perhaps the principal, means of gaining market share in a global
competition." Furthermore, overarching both studies is Porter's (1990) declara-
tion that a firm's international competitiveness rests on its ability to "innovate
and upgrade."

Conclusion

The starting point of this study was Hamel and Prahalad's (1989) call to rethink
"basic concepts" of strategy. However, the subjectivity of popular interpreta-
tions of IBS challenge even identifying, let alone re-thinking, basic concepts.
Our findings, we believe, confirm and consolidate suggestions that among large
MNCs, these basic concepts are innovation, efficiency, and effectiveness. More-
over, assessing each dimension in isolation, under the presumption of a univari-
ate logic, is myopic. The confirmation of strategic simultaneity argues for fram-
ing discussion of the IBS of large MNCs within the context of internationaliza-
tion through innovative, multinational integraton, and national responsiveness.
Before closing, there are some limitations to the findings. Reliance on man-
ager's attitudes is inevitably limiting to the reliability of the findings. We believ
the precautions taken with respect to choice of respondents along with the
clarity of the measures mitigated this threat. Similarly, a cross-sectional sample
can obscure or amplify differences in managers' views. Bartlett and Ghoshal's
typology purports to minimize this risk; our related analyses support this con-
tention.

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Daniel Sullivan/Alan Bauerschmidt

Notes

1 We were unable to pinpoint the proportion of revenues earned from foreign sources for all the
Fortune Firms. Some respondents as well their firms declined to disclose it.
2 There was no significant difference between the Fortune and Florida firms in terms of proportion
of total revenues earned internationally.

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