INTERNATIONAL MONETARY SYSTEM
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 6
5.1. Gold Standard:
The gold standard was used as an exchange system in European countries in 1870,
while in the United States, the gold standard began to be accepted around 1879. The gold
standard system basically determines the exchange rate of a country's currency based on the
value of gold (Ball et al., 2005).
The UK in 1821-1914 had set its currency, the pound sterling, against gold at
£4.2474/oz of gold. This meant that the British government was willing to buy gold or sell
gold for one oz at £4.2474.
The government or country that has set its currency against gold must maintain a
sufficient supply of gold so that the buying and selling of gold can be guaranteed. If the
government of another country also sets its exchange rate based on gold, then the exchange
rate between two currencies from two different countries can be determined.
5.2. Bretton Wood:
During World War II, many countries of the world were involved with disputes to
consider the gold standard or other monetary systems. However, many officials realized that
some system should be prepared to operate when peace returned. Actually, the considerations
did not wait until the end of the war. Earlier, in 1944, representatives of the major allied
powers, The United States and the United Kingdom, which were considered to have a
dominant role, met at Bretton Wood, New Hampshire to plan for the future. At this
consensus, it was discussed about (1) stable exchange rates are desirable but experience may
require adjustments, (2) floating or fluctuating exchange rates proved unsatisfactory, (3)
government control over trade, exchange, production and so on. Later, the Bretton Woods
Conference established the International Monetary Fund (IMF) (Ball et al., 2005).
5.3. Balance of Payments:
The IMF's job is to provide assistance to member countries that are facing difficulties in
keeping their balance of payments in deficit. A key indicator of what is happening with a
country's economy and what its government is experiencing is seen in the balance of
payments. When the balance of payments is in deficit, it is often due to inflation, and
companies doing business there must adapt their pricing, inventory, accounting and other
practices to inflationary conditions (Ball et al., 2005).
Industry Analysis:
According to Porter and Maulana (1997), basically the intensity of competition in an
industry is rooted in the economic structure of the industry itself. Competition in an industry
depends on five basic forces (five competitive forces) that affect its economic structure,
namely;
1. Threat of new entrants
2. Threat of subtitute products
3. Bargaining power of suppliers
4. Bargaining power of the customer
5. Competition from similar companies from the industry (rivals amoung existing firms)
The five forces together will influence and determine the potential profit of an industry.
Each industry has different potential profits because the interaction and intensity of the
operation of the five forces above will be different for each industry.
In Porter's Five Forces analysis, the first thing to do is to determine who are the players
or who play a role in the industry, then the variables and indicators of the five factors will be
explained.
Threat of new entrants:
New entrants will increase the level of competition in an industry (Porter and Maulana,
1997). The entry of new entrants into an industry depends on the following things:
a. Customer loyalty, if the customer has been very loyal to the old product, it will create
a barrier to entry for new entrants.
b. Product differentiation, product differentiation means that a particular company has
brand identification and customer loyalty, due to advertising, customer service, past
product differences, or simply because it was the first company to enter the industry.
Differentiation creates a barrier to entry into an industry by making it costly for new
entrants to acquire existing customers.
c. Investment costs, large investment requirements create a barrier to entry for an
industry.
d. Switching costs, the amount of costs a new entrant must incur to switch from one
supplier to another will create a barrier to entry.
e. Access to distribution channels, getting the right customer distribution channels and
supplier channels is a challenge for any new entrant.
f. Government policies, regulations, licensing requirements.
Bargaining power of buyers:
The bargaining power of buyers in the industry plays a role in pushing prices down, as
well as providing offers in improving quality or more services, and making competitors
compete with each other (Porter and Maulana, 1997). Buyers have strong bargaining power if
they fulfill the following conditions:
a. Groups of buyers are centralized or buy in bulk.
b. Purchased products are part of a cost or purchase of a considerable amount.
c. Products purchased are standard or undifferentiated products
d. Buyers face small switching costs.
e. Buyers have complete information about a product.
Threat of substitute products or services:
The existence of substitute products or services will limit the amount of potential profit
that will be obtained from an industry (Porter and Maulana., 1997).
Bargaining power of suppliers:
Suppliers can use bargaining power against buyers in the industry by increasing prices
or reducing the quality of products or services purchased. The conditions that make the
supplier's position strong tend to resemble the conditions that make the buyer strong (Porter
and Maulana., 1997).
Competition among existing companies:
According to Porter and Maulana (1997), competitors in this case are players who
produce and sell similar products, which will be sold to other players compete for market
share. The intensity of competition will be high if:
a. Balanced number of competitors.
b. Diverse competitors.
c. Sluggish industry growth will turn competition into a battle for market share for
companies looking to expand.
d. Lack of product differentiation
e. High fixed costs create severe pressure on all companies.
Case Study
GLOBAL AVIATION INDUSTRY:
The aviation industry is a major economic force, both in terms of its own operations
and its impact on related industries such as aircraft manufacturing and tourism. Today, the
global aviation industry comprises over 2,000 airlines operating over
23,000 aircraft, providing services to more than 3,700 airports. Historically annual growth in
air travel has been about twice the annual growth in GDP.
In the United States aviation industry, approximately 100 certified passenger airlines
operate more than 11 million flight departures per year, and carry more than one-third of the
world's total air traffic. United States airlines carried 745,000,000 passengers in 2006. United
States aviation reported total revenues of more than $160 billion, with ± 545,000 employees
and more than 8,000 aircraft operating 31,000 flights per day. Commercial aviation accounts
for 8% of the United States GDP.
The impact for aircraft manufacturers, making the volatility of airline profits and their
dependence on good economic conditions a serious concern for both industries. These
concerns have grown dramatically since airlines were deregulated.
Since the deregulation of US aviation in 1978, pressure on governments to reduce their
involvement in the competitive economics of airlines has spread to most parts of the world.
Average fares have declined since deregulation with new entrants and successful low-cost
flights having a major impact on both airline pricing practices and the public's expectations of
cheap air travel.
A more negative potential impact is that pressure to cut costs, combined with increased
profit volatility, mergers and bankruptcies of some airlines leads to job losses periodic,
reducing airline union wages and the benefits of deregulation are not enjoyed equally by all
travelers.
Despite a substantial decrease in the real average fare paid for United States domestic
market air travel, the difference between the lowest and highest offered by airlines increased,
burdensome business travelers were forced to pay higher fares.
Airline management strategies and practices that were fundamentally changed by
deregulation, liberalization, competition, cost management and productivity improvements
have been a major focus of US aviation for the past 20 years. In the past, internal growth
and/or mergers were the primary means by which airlines hoped to take advantage of
economies of scale through partnerships and "global alliances" designed to offer a
standardized set of products and to project a unified marketing image to consumers.
On a global scale, the aviation industry is experiencing a financial crisis, especially in
the United States. The problems started from the economic crisis in early 2001 to the
catastrophic terror attacks of September 11, 2001. In the United States, the industry posted a
cumulative net loss of over
$40 from 2001 to 2005. The industry crisis resulted in layoffs and cuts of almost 20% of total
system capacity, in anticipation of the inevitable decline in passenger traffic due to concerns
about the safety of air travel. However, aviation was in serious trouble well before 9/11. At
the same time, airline labor costs and fuel prices were rising every year. And by 2006 net
profits could return totaling more than $3 billion.
The critical challenges of maintaining airline profitability, ensuring safety and security
and developing adequate air transportation infrastructure. The rapid growth of the global
aviation industry and the continued threat of terrorist attacks raise important safety and
security issues for every airline, and every airline passenger. The need for expanded
infrastructure, both airports and air traffic, is critical for the developing world such as India,
China, Africa and the Middle East, where much greater rates of demand growth are expected
for both passenger and cargo air transportation.
Case Question:
1. Based on the above case, analyze the global airline industry using Porter's Five Forces?
International Strategic Management
7.1. International Strategic Management Challenges:
International strategic management is a comprehensive and ongoing management that
aims to formulate and implement strategies that enable companies to compete effectively
internationally. The process of developing a specific international strategy is often called
strategic planning. Strategic planning is usually the responsibility of top-level executives at
corporate headquarters and senior management at the company's domestic and overseas
operating branches. Most larger companies also have permanent planning staff to provide
technical assistance to top-level managers as they strategize (Griffin & Pustay, 2006).
International strategic management is a planning process International strategic
management results in the development of multiple international strategies, which are a
comprehensive framework for achieving the fundamental goals of the firm. Conceptually,
there are many similarities between developing a strategy to compete in one country and
developing a strategy to compete in many countries (Griffin & Pustay, 2006). In both cases,
corporate strategists must answer the same fundamental questions:
1. What products and/or services will the company sell?
2. Where and how will the company make the product or service?
3. Where and how will the company sell these products and services?
4. Where and how will the company obtain the necessary resources?
5. How will the company be able to beat its competitors?
However, international strategy development is much more complicated than domestic
strategy. Managers developing strategy for domestic companies must deal with one domestic
government, one currency, one accounting system, one legal and political system, and
usually, one relatively homogeneous language and culture. However, managers of
international companies must understand and deal with multiple governments, currencies,
accounting systems, political systems, legal systems, and multiple languages and cultures. In
addition, managers of international companies must also harmonize the implementation of
corporate strategy among business units spread across the globe with different time zones,
different cultural contexts, and different economic conditions and must also monitor and
control their performance. However, managers usually consider this complexity as a trade-off
for the additional opportunities presented by global expansion. There are three resources of
competitive advantage that international firms must possess: global efficiency, multinational
flexibility, worldwide learning (Griffin & Pustay, 2006).
1. Globally Efficient:
International companies can improve efficiency through various means that domestic
companies do not have. By locating facilities around the world where production and
distribution costs are lowest, the best location or location efficiency is obtained that can
improve the quality of the company's services offered to customers (Griffin & Pustay,
2006).
2. Multinational Flexibility
Responding to a variety of constantly changing environments is a challenge that
international businesses face. However, unlike domestic companies, which operate and
respond to change within the context of a single domestic environment, international
companies can respond to changes in one country by implementing changes in another
(Griffin & Pustay, 2006).
3. Worldwide Learning
The diverse operating environments of multinational companies also contribute to
organizational learning. The differences among the operating environments cause the
company's operations to differ from one country to another. If the company can learn
from these differences and transfer these learnings to its operations in the countries,
then the company becomes superior to competitors (Griffin & Pustay, 2006).
The exploitation of these three factors simultaneously is difficult. Global efficiency can
be achieved more easily if one company is given global responsibility for the task at hand.
Multinational flexibility increases when companies delegate responsibilities to local
managers in subsidiaries. Giving power to local managers allows each subsidiary to
customize its products, human resource policies, marketing techniques, and other business
practices to meet the wants and needs of potential customers in each market served by the
company. However, this increased flexibility reduces the firm's ability to achieve global
efficiency in areas such as production, marketing, and R&D (Griffin & Pustay, 2006).
If the company pursues global efficiency and/or multinational flexibility too much, it
will struggle to achieve global knowledge. Concentrating power in one unit within the
company to achieve global efficiency will cause the company to ignore the lessons and
information gained by other units within the company. Moreover, other units will have the
incentive or ability to acquire such information if these units know that the "experts" at
headquarters will ignore them. Decentralizing power to local managers will also create
similar problems. A decentralized structure will make it difficult for the company to transfer
knowledge from one subsidiary to another other companies. Local subsidiaries may reject
any outside information because they consider it irrelevant to the local situation. Companies
that want to increase global knowledge should use an organizational structure that is able to
increase knowledge transfer between subsidiaries and headquarters. Companies should also
create incentive structures that motivate managers at headquarters and at subsidiaries to
acquire, disseminate, and act on opportunities in global knowledge (Griffin & Pustay, 2006).
Multinational companies typically use one of four strategic alternatives in their efforts
to balance the three objectives of global efficiency, multinational flexibility, and global
knowledge (Griffin & Pustay, 2006). The alternative strategies include:
1. Home replication strategy
The company uses its core competencies or company-specific advantages developed in
its home country as a competitive weapon in the foreign markets it enters.
2. Multidomestic strategy
A multidomestic company views itself as a set of independently operating subsidiaries,
with each subsidiary focusing on one specialized domestic market. Moreover, each
subsidiary is free to customize its products, marketing campaigns, and operating
techniques to meet the needs of its local customers. This multidomestic approach is
especially effective when there are clear differences among national markets, when
economies of scale in production, distribution, and marketing are low, and when
coordination costs between the parent company and its worldwide subsidiaries are very
high. Since each subsidiary in a multidomestic company must be responsive to local
markets, it is common for the parent company to delegate some power and authority to
managers in subsidiaries in different destination countries.
3. Global strategy
Global corporations view the world as a single market and their main goal is to create
goods and services that have high standards capable of meeting the needs of customers
around the world.
4. Transnational strategy
Transnational corporations seek to combine the advantages of efficiencies of global
scale, which global corporations seek to achieve, with the benefits and advantages of
responsiveness to local circumstances, which is the goal of multidomestic corporations.
To do this, transnational corporations do not directly centralize or decentralize power.
Instead, they will carefully delegate responsibility for various organizational tasks to
the organizational unit deemed most capable of achieving both efficiency and
flexibility.
A home country imitation strategy is often used by companies when the pressure for
global integration and the need to respond to local circumstances are low. A multidomestic
approach is often used when the need to respond to local circumstances is high, but the
pressure for global integration is low. A global strategy is best suited when the pressure for
global integration is high but the need to respond to local circumstances is low. Transnational
strategies are best suited when the pressure for global integration and the need to respond to
local conditions are high (Griffin & Pustay, 2006).
7.2. Components of International Strategy
1. Distinctive competence:
Unique competencies can be advanced technology, efficient distribution networks, great
organizational practices or well-known brands. The possession of a unique competence by a
firm is seen by many experts as a necessary condition for a firm to compete successfully in
foreign markets. Without a unique competence, foreign firms will find it difficult to compete
with local firms that are perceived to understand the local market better. Unique
competencies represent an important resource for company. Companies often exploit this
advantage by expanding operations into as many markets as the resources can reach (Griffin
& Pustay, 2006).
2. Scope of operation:
Scope can be defined as a geographic area, such as a country, a region within a country,
and/or a group of countries. Scope can also focus on niche markets or products within one or
more regions, such as niche markets for high-quality products, low-cost niche markets, or
other specialized niche markets. Companies have limited resources and each market has its
own appeal for different products, so managers must decide which markets are most
attractive to their company. Then, the scope of operations depends on the company's unique
competencies (Griffin & Pustay, 2006).
3. Resource deployment:
Resource utilization can be determined by product line, geographic line, or both (Griffin &
Pustay, 2006).
4. Synergy:
The goal of synergy is to create a situation where the whole is better than the sum of its parts
(Griffin & Pustay, 2006).
7.3. Developing an International Strategy:
Companies usually carry out international strategic management in two stages: strategy
formulation and strategy implementation. In strategy formulation, the company sets its goals
and plans the strategies it will use to achieve those goals. In strategy implementation, the
company develops tactics to achieve the formulated strategy (Griffin & Pustay, 2006).
7.4. Levels of International Strategy:
According to Griffin and Pustay (2006), the levels of international strategy are divided
into three, namely corporate, business, and functional. The three levels of multinational
company strategy can be seen in Figure 7.2.
1. Corporate Strategy:
Corporate strategy seeks to clarify the business area the company intends to enter. There are
three corporate strategies, namely
a. The single-business strategy calls for the company to rely on only one business, product
or service to generate all its revenue.
b. A related diversification strategy calls for a company to operate in several different
businesses, industries and markets that are still fundamentally interconnected.
c. Unrelated diversification strategy, the company operates in several unrelated industries
and markets.
2. Business Strategy:
Business strategy focuses on a specific business, subsidiary, or specialized operating unit
within the company. Business strategy seeks to answer the question "How should we
compete in each market we enter?" According to Porter (1997), there are three forms of
strategy, namely differentiation, cost leadership, and focus.
a. Differentiation, where the company creates a new product/service that is perceived by
the entire industry as unique. Forms of differentiation include design or brand image,
technology, customer service, distribution.
b. Full cost advantage/leadership, the company focuses on achieving highly efficient
operating procedures so that its costs are lower than those of its competitors. This
enables the company to sell goods or services at a lower price.
c. In focus, companies target specific types of products to specific customer groups or
regions. Whereas differentiation and overall cost leadership strategies are aimed at
achieving industry-wide goals, focus strategies are built to best serve specific targets.
This strategy is based on the premise that the company will is able to serve its narrow
strategic targets more effectively and efficiently than competitors who compete more
broadly.
3. Functional Strategy
According to Griffin & Pustay (2006), functional strategy seeks to answer the question "How
do we manage the finance, marketing, operations, human resources, and research and
development (R&D) functions in a manner consistent with corporate strategy and
international business strategy?"
Practice Questions:
Critical Thinking Ability Test Questions and Answer Key:
Discuss the answers to the questions below and answer briefly!
1. Name and explain three resources of competitive advantage in international companies?
2. List and explain 4 alternative strategies to balance the three objectives of competitive
advantage through international business?
3. Name the levels of international strategy?
Answer Key:
1. Three resources of competitive advantage not available to domestic firms are global
efficiency, multinational flexibility, worldwide learning:
a. Global Efficiencies, international companies can increase efficiency through various
means that domestic companies do not have. Companies can gain location efficiency by
locating their facilities anywhere in the world where production and distribution costs are
lowest or where they can best improve the quality of services offered to customers.
b. Multinational Flexibility, International businesses face the challenge of responding to a
variety of constantly changing environments. However, unlike domestic companies,
which operate and respond to changes in the context of a single domestic environment,
international companies can respond to changes in one country by implementing changes
in another.
c. Worldwide Learning, the diverse operating environments of multinational companies
also contribute to organizational learning. The differences among these operating
environments cause a company's operations to differ from country to country. A smart
company will learn from these differences and transfer this learning to its operations in
other countries.
2. Alternative strategies include:
a. Home replication strategy, the company uses the core competencies or special
advantages of the company developed in its home country as a competitive weapon in the
foreign market it enters.
b. Multidomestic strategy, a multidomestic company views itself as a set of independently
operating subsidiaries, with each subsidiary focusing on one specialized domestic
market. In addition, each subsidiary is free to customize products, marketing campaigns,
and operating techniques to meet the needs of its local customers. This multidomestic
approach is especially effective when there are clear differences among national markets,
when economies of scale in production, distribution, and marketing are low, and when
coordination costs between the parent company and its worldwide subsidiaries are high.
Since each subsidiary in a multidomestic company must be responsive to local markets,
it is common for the parent company to delegate some power and authority to managers
in subsidiaries in different destination countries.
c. Global strategy, global companies view the world as a single market and their main goal
is to create goods and services that have high standards that are able to meet the needs of
customers around the world.
d. Transnational strategy, transnational corporations seek to combine the advantages of
efficiencies of global scale, which global corporations seek to achieve, with the benefits
and advantages of responsiveness to local circumstances, which is the goal of
multidomestic corporations. To do this, transnational corporations do not directly
centralize or decentralize power. Instead, they will carefully delegate responsibility for
various organizational tasks to the organizational unit deemed most capable of achieving
both efficiency and flexibility.
3. The levels of international strategy are divided into three, namely corporate, business, and
functional.
Case Study:
ANGKASA PURA I BUSINESS DIVERSIFICATION
In January-July 2019, all airports managed by PT Angkasa Pura I experienced a
decrease in passenger movements by an average of 19 percent. As stated by the President
Director of PT Angkasa Pura I Faik Fahmi where the highest decline in passenger traffic at
Adi Soemarmo Solo Airport was up to 40 percent and Yogyakarta Airport fell 12 percent.
The decline in passenger traffic occurred due to the impact of the increase in air freight
rates and the opening of the Jakarta-Surabaya land route via the toll road. Faik Fahmi said
that people began to save on travel costs and chose transportation that was more cost-
effective. Faik said, the decline also occurred in cargo movements at 14 Angkasa Pura I
managed airports. Until the first semester of 2019, cargo movements fell 5 percent (yoy) from
251,753,942 kg to 239,803,364 kg.
Based on this data, PT Angkasa Pura I will increase non-aeronautical revenue because
it rose 9 percent compared to last year. Non-aeronautical business development such as the
development of shopping tours at the airport with the concept of eat, shop, and fly. The
addition of hotels at the airport is also a strategy. Airports that started with the concept are in
Banjarmasin, Yogyakarta and Balikpapan where the business will be carried out by a
subsidiary with its own brand. It is hoped that the non-aeronautical side of revenue can
compensate for the reduction in aero revenue which fell in the first semester of 2019 so that
profits since January-July 2019 of around Rp 800 billion can increase to around Rp 2 trillion
at the end of the year.
PT Angkasa Pura I Service and Marketing Director Devi Suradji said Angkasa Pura I is
improving airport services to boost revenue. Non-aeronautical programs will encourage
consumers to spend more money at the airport. "At least they can be at the airport for up to 3
hours," she said.
PT Angkasa Pura I is applying for Airport Council International (ACI) accreditation for
the four airports it manages, Airports Yogyakarta International, Adi Sutjipto Airport, Frans
Kaisiepo Biak Airport, and Syamsuddin Noor Banjarmasin Airport. Another 10 airports have
received ACI international level 1 accreditation. The company also cooperates with Incheon
Airport to manage Jeddah and Kuwait airports.
Case Question:
1. Explain the meaning of international strategic management?
2. Describe the various components of international strategy and explain the components of
international strategy in Angkasa Pura I?
3. What corporate strategy is implemented by Angkasa Pura I?
4. Name the Strategic Unit Business (SBU) owned by Angkasa Pura I?
Strategies for Analyzing and Entering Foreign Markets
8.1. Overseas Market Analysis:
According to Griffin & Pustay (2006), there are three steps that companies can take if
they want to enter foreign markets, namely:
a. Conduct assessments of alternative overseas markets:
In assessing alternative foreign markets, companies should consider a variety of
factors, including the size of the market, both present and potential future, the level of
competition to be faced, the legal and political environment, and sociocultural factors
that may affect the company's operations and performance. Table 8.1 summarizes some
of the most important factors.
b. Evaluate the costs, benefits, and risks of entering each market:
In this case, two types of costs are relevant: direct costs and opportunity costs.
Direct costs are those incurred at the time of the firm's entry into a new foreign market
and include the costs of setting up the firm's operations or purchasing certain facilities,
moving managers to run them, and shipping tools and merchandise. The company must
include opportunity costs. Since the firm has limited resources, entry into a particular
market may preclude or delay entry into another market. The profit that the firm would
have earned in this second market is an opportunity cost. The firm cancels or delays its
opportunity to earn profits from the second market because it chooses to enter the first
market. Therefore, planners must assess all available alternatives very carefully (Griffin
& Pustay, 2006).
Entry into a particular market is considered to offer potential benefits to the
company. These potential benefits include sales and profits, lower acquisition and
manufacturing costs, competitive advantages, access to new technologies, and
opportunities to achieve synergies with other operations (Griffin & Pustay, 2006).
Companies entering into new markets face the risk of exchange rate fluctuations,
increased operating complexity, and direct financial losses caused by an inaccurate
assessment of market potential (Griffin & Pustay, 2006).
c. Selecting the most potential market to enter:
Based on the steps previously described, the company can choose the most
potential market to enter (Griffin & Pustay, 2006).
8.2. Choosing How to Log In:
Dunning's Electic Theory provides insight that the factors that influence a company's
choice of entry into foreign markets are ownership advantage, location advantage, and
internalization advantage. Proprietary advantages are tangible and intangible resources
owned by a company that give it a competitive advantage over its competitors. Location
advantage is a factor that influences a company's desire to produce in the destination country
rather than producing in the home country. Internalization advantage is an advantage that
makes a company expected to produce its own products or services, rather than contracting
with other companies to produce them produce it (Griffin & Pustay, 2006). The following
ways of entering foreign markets are presented in Figure 8.1.
8.3. Other Considerations for Foreign Market Entry:
In considering exporting as a means of market entry, companies must consider other
factors, in addition to the form of export used, which include (1) government policies, (2)
marketing issues, (3) logistics considerations, and (4) distribution issues (Griffin & Pustay,
2006).
Government Policy:
Export promotion policies, export financing programs, and other forms of home
country subsidies will encourage firms to choose exports as a mode of entry. Conversely,
destination countries may impose tariffs and non-tariff barriers or import goods, thereby
discouraging firms from relying on exports as a mode of entry (Griffin & Pustay, 2006).
Marketing Issues”
Marketing issues, such as image, distribution and customer response, can also influence
the decision to export (Griffin & Pustay, 2006).
Logistical Considerations”
Companies must consider the physical distribution costs of warehousing, packing,
transporting, and distributing goods, as well as the cost of holding inventory (Griffin &
Pustay, 2006).
Distribution Issues”
Companies experienced in exporting may choose to build their own distribution
networks in key markets (Griffin & Pustay, 2006).
INTERNATIONAL STRATEGIC ALLIANCES
9.1. Definition of Strategic Alliance
A strategic alliance is a business agreement in which two or more companies decide to
cooperate for mutual benefit. A joint venture is a specialized form of strategic alliance that is
a combination of two or more companies to create a new business entity that is legally
separate and distinct from its parent company (Griffin & Pustay, 2006).
9.2. Benefits of International Strategic Alliances
The benefits or advantages of companies making alliances include (Griffin & Pustay,
2006):
a. Ease of market entry
Intense competition and unfavorable government regulations are often faced by companies
that want to enter new markets. In addition, the high cost of entering a new market is an
obstacle for companies. Therefore, working with local companies is an option and can
help companies to enter new markets. For example, Unilever Indonesia, which is a
subsidiary of the London-based multinational Unilever, acquired PT Ultrajaya Milk
Industry Indonesia, which is a local Indonesian beverage company, so that Unilever
Indonesia can dominate the beverage market in Indonesia.
b. Risk sharing
Strategic alliances can be used to reduce and control single-firm risks. For example,
Boeing formed an alliance with several Japanese companies to reduce financial risk in the
development and production of the Boeing 777. Boeing worked with three Japanese
partners, namely Fuji, Mitsubishi and Kawasaki, where these three partners agreed to
make 20% of the 777 aircraft. Boeing, as the controlling partner in this alliance, also
hopes that its partners will form sell new airplanes to Japanese customers such as Japan
Airlines and All Nipon Airways.
c. Sharing knowledge and expertise
By making strategic alliances, companies share the knowledge and expertise of each
partner. For example, Toyota and General Motors in America created a joint venture
called NUMMI (New United Motor Manufacturing, Inc). General Motors closed its car
manufacturing plant in Fremont, California, because it was inefficient and operating costs
were too high. Toyota then agreed to reopen the plant and manage it through the NUMMI
joint venture. The reason each company formed this joint venture was mainly to share
knowledge. Toyota wanted to learn about how to deal with labor and parts suppliers in the
US market, while General Motors wanted to observe Japanese management practices
firsthand.
d. Achieving synergy and competitive advantage
By companies collaborating with each other, it will be easier to compete in new markets
than by working alone. This creates synergy and competitive advantage for the company,
from a combination of strategic alliance benefits (ease of market entry, risk sharing and
knowledge sharing).
9.3. Scope of the International Alliance:
According to Griffin & Pustay (2006), the scope of cooperation in alliances between
companies varies. Cooperation consists of a comprehensive alliance, in which each partner
participates in every business operation, from product design to production and marketing. A
picture of the scope of a strategic alliance is presented in Figure 9.1.
a. A Comprehensive Alliance, formed when the participants agree to carry out jointly the
various stages of the process that create a product or service that can be brought to market.
b. Functional alliances are narrower in scope and include only one business function.
Generally, functional-based alliances do not take the form of joint ventures. Types of
functional alliances include production alliances, marketing alliances, financial alliances,
and R&D alliances.
9.4. Strategic Alliance Implementation:
Partner selection:
The success of any cooperation depends on choosing the right partner. Based on the
results of research, strategic alliances will run successfully if the skills and resources of the
partners complement each other. Considerations that can be made in choosing a partner
include: compatibility, the nature of the prospective partner's product or service, the relative
security of the alliance, the learning potential of the alliance (Griffin & Pustay, 2006).
Form of ownership:
Generally, joint ventures always take the form of a limited liability company (PT),
venture (CV) (Griffin & Pustay, 2006).
9.5. Managing Strategic Alliances
According to Griffin & Pustay (2006), there are three ways to manage strategic
alliances:
a. Joint management agreement:
In shared management agreements, each partner participates fully and actively in managing
the alliance. The partners run the alliance and the managers regularly pass on instructions and
details to the alliance managers. Alliance managers have limited power and must defer most
decisions to the parent company managers. This type of agreement requires a high level of
coordination between partners. An example is the joint venture between Coca-cola and Group
Danone to distribute Coke's Minute Maid orange juice in Europe and Latin America. The
joint venture incorporates Danone's distribution network and production facilities, while
Coca-Cola controls marketing and finance.
b. Task sharing agreement:
In this alliance management, one of the partners has the main responsibility for strategic
alliance operations. For example, the alliance between Boeing and a steel plate company
from Japan, which has the primary responsibility for designing and manufacturing the 777
commercial airplane is Boeing.
c. Delegation agreement:
Under this agreement, both partners delegate management to the executives of the joint
venture, so that the management of the joint venture can have the power and autonomy to
make key decisions and is not accountable to the managers of the participating company.
9.6. Causes of Alliance Failure:
Factors that cause strategic alliance failure are incompatibility between partners, access
to information, conflicts about the distribution of opinions, loss of autonomy, and changing
circumstances (Griffin & Pustay, 2006). Incompatibility between partners is the main cause
of alliance cooperation failure. This incompatibility can lead to conflict. Mismatches can
stem from differences in corporate culture, country culture, or goals and objectives.
For the collaboration to be effective, both partners must provide information to each
other, including confidential information such as the company's technology, finances, and
research results. Furthermore, as partners share risks and costs, they also share profits. The
distribution of profits and income must be negotiated at the beginning of the agreement and
clearly stated in the agreement to avoid conflicts in income distribution.
Another factor that causes alliance failure is the potential loss of autonomy because
companies share risks and profits, so companies also share control, causing one partner to
take over the entire operation of the company or the joint venture can become a stand-alone
company independent of its parent companies. In addition, another factor is that changes in
circumstances or changes in the external environment can affect the continuity of strategic
alliances.
Practice Questions
Critical Thinking Ability Test Questions and Answer Key:
Discuss the answers to the questions below and answer briefly!
1. Explain what a strategic alliance is?
2. Explain the benefits of strategic alliances?
3. Name and explain three strategic alliance managements?
Answer Key for Chapter 9 Practice Questions:
1. A strategic alliance is a business agreement in which two or more companies decide to
cooperate for mutual benefit. A joint venture is a specialized form of strategic alliance in
which two or more companies combine to create a new business entity that is legally separate
and distinct from its parent company.
2. The benefits of strategic alliances include:
a. Ease of market entry, intense competition and unfavorable government regulations are
often faced by companies that want to enter new markets. In addition, the high cost of
entering a new market is a barrier for companies. Therefore, working with local
companies is an option and can help companies to enter new markets.
b. Risk sharing, strategic alliances can be used to reduce and control single company risks.
c. Sharing knowledge and expertise, by making a strategic alliance, companies share
knowledge and expertise that each partner has.
d. Achieving synergies and competitive advantage, by companies collaborating with each
other, it will be easier to compete in new markets than by working alone. This creates
synergies and competitive advantages for the company, from the combined benefits of
strategic alliances.
3. Three ways to manage strategic alliances:
a. Joint management agreement, each partner fully and actively participates in managing the
alliance.
b. A task-sharing agreement, where one partner has primary responsibility for the operation of
the strategic alliance.
c. Agreement delegation, both partners delegate management to joint venture executives.
Case Study:
GET TO KNOW SKYTEAM, GARUDA INDONESIA'S INTERNATIONAL
AVIATION ALLIANCE:
Just as superhero alliances work together to defeat their opponents, the aviation world
has several alliances that compete with each other. One such alliance is called SkyTeam,
which consists of 20 international airline members that fly nearly 16,000-plus flights a day
carrying up to 612 million each year with connectivity to the world's largest airlines.
1,052 routes in 177 countries.
The alliance, which is supported by 481,691 employees and a fleet of around 3,054
aircraft with an additional nearly 1580 fleets incorporated in subsidiaries/affiliates of member
airlines, makes SkyTeam one of the leading and leading aviation alliances in the world
besides Star Alliance and Oneworld. So, how can airlines that are actually competing with
each other establish a mutually constructive cooperation?
Reported by KabarPenumpang.com from various sources, the SkyTeam alliance was
originally formed from the signing of a long-term cooperation contract between Air France
and Delta Air Lines on June 22, 1999. The signing of the contract will open up the possibility
of establishing an alliance in the future.
The meeting was held again on June 22, 2000 in New York, where the CEOs of
Aeroméxico, Air France, Delta Air Lines, and Korean Air gathered to follow up on the
discourse that had not previously found a bright spot. On that very day, the four airline
leaders agreed to establish an alliance called SkyTeam. On the first day of its formation, the
alliance connected 6,402 daily flights to 451 destinations in 98 countries around the world. A
day later, promotions began to intensify around the world with the tagline "Caring More
About You".
In October 2000, CSA Czech Airlines signed an agreement with the SkyTeam alliance
as a first step to join the alliance. It wasn't until 2001 that the airline officially became the
fifth member of SkyTeam and also added a total of 14 destinations in 21 countries.
In 2001, SkyTeam opened a new hub supported by Korean Airlines at Incheon
International Airport, Seoul. The opening of the new hub was expected to increase the
network of flight routes in Asia and open up new markets in addition to the Americas and
Europe, considering Korean Air was the only Asian airline in SkyTeam at that time.
On July 27, 2001, SkyTeam accepted Alitalia as its sixth member and the alliance's
connectivity increased to 21 routes in 6 countries as SkyTeam's global network. Two years
after its inception, the US Department of Transportation (DoT) certified SkyTeam following
much public distrust of the alliance, especially on transatlantic routes.
As the years go by, more and more airlines have decided to join SkyTeam, including
KLM, China Eastern Airlines, China Western Airlines, and Garuda Indonesia. The state-
owned airline officially joined SkyTeam on March 5, 2014 and was the last airline to join the
alliance.
Complementary. This is one of the reasons Garuda Indonesia decided to join SkyTeam.
Through Senior Manager Public Relations, Ikhsan Rosan told KabarPenumpang.com on
Tuesday (17/10/2017), that each alliance has its own 'weaknesses', and Garuda will try to
make up for them. "For example, SkyTeam is rather weak for flights in Southeast Asia and
Australia, so Garuda Indonesia is here to fill the void," Ikhsan Rosan said.
Garuda's membership of SkyTeam will certainly make it easier for passengers who
want to travel long distances. For example, if you want to fly to Los Angeles using Garuda.
You only need to pay one ticket, one price to get to Los Angeles, even though you will have
to transit in Dubai and change airlines (other SkyTeam members) to fly to Los Angeles. Los
Angeles and everything is pre-arranged so you don't have to scramble to find which airline
will fly to Los Angeles. You certainly won't be charged extra for the transfer process. One
price, one destination, but more than one airline. Not only that, the number of bonus miles
still applies and is calculated between airlines in SkyTeam. Garuda also hopes that Soekarno
Hatta International Airport can become a new hub for SkyTeam members who want to travel
to the southern part of Indonesia, such as Australia and New Zealand.
Case Question:
1. Based on the case above, explain the method Garuda Indonesia chose to enter the
foreign market?
2. Describe the benefits that Garuda Indonesia gained from its alliance with Skyteam?
Case Study 2
CARDIG-CHANGI TO MANAGE KOMODO AIRPORT, THIS IS THE
GOVERNMENT'S REQUEST:
JAKARTA, KOMPAS.com-The government has announced the Cardig Aero Service
(CAS) consortium as the winner of the auction for the Komodo Airport Development Project
in Labuan Bajo, NTT with a PPP scheme in December 2019. Transportation Minister Budi
Karya Sumadi targets the development of Komodo Airport to increase the number of
passengers to 4 million per year. For this reason, he hopes that the development with CAS
can further improve the quality of service so that it benefits air transportation service users.
The consortium consists of PT Cardig Aero Service (CAS), Changi Airports
International Pte Ltd (CAI), and Changi Airports MENA Pte Ltd, which has been managing
Changi airport in Singapore. "Mr. President instructed me to create a climate of competition
between the private sector and state-owned enterprises. We hope that the Cardig and Changi
Consortium can perform as well or better than SOEs. We want this to be managed
professionally," Budi said in a press release, Monday (1/20/2020). As for Budi, the
inauguration of the Komodo airport development cooperation with CAS will take place on
February 7, 2020 by signing an MoU. For information, Labuan Bajo is one of the New Bali
prepared by the government with Komodo Airport as its gate.
Meanwhile, PPP cooperation with CAS will design, build, and finance the construction
of land, air, and supporting facilities. Some of the things that will be developed include
extending the runway from 2,250 meters to 2,750 meters, expanding the apron 20,200 square
meters, and expanding the domestic terminal 6,500 square meters. In addition, building an
international terminal of 5,538 square meters, building a cargo terminal of 2,860 square
meters, and building several other supporting facilities. The investment value prepared to
manage Komodo Airport IDR 1.2 trillion and the estimated total value of operational costs
for 25 years IDR 5.7 trillion. Furthermore, the Komodo Airport Manager has an obligation to
pay an upfront concession of IDR 5 billion and an annual concession of Komodo Airport
revenue of 2.5 percent and an increase of 5 percent per year as well as a clawback of 50
percent.
Case Question:
1. Explain the meaning of strategic alliance and describe the form of alliance made by Komodo-
Cardig-Changi Airport?
2. Explain the benefits of Komodo Airport's alliance with Cardig-Changi?
