BUILDING YOUR COMPANY’S CAPABILITIES THROUGH GLOBAL EXPANSION - RAT and CAT.

TLDR:

RAT: Determines if a business should enter a market:

  Relevance: Are current strengths suited to the target market?

   Appropriability: Are strengths unique enough for business potential?

   Transferability: Can capabilities transfer without losing value?

 CAT: Evaluates internal capability enhancement via internationalisation:

   Complementary: Are new and existing assets synergistic?

   Appropriability: Can the business fully leverage new assets?

   Transferability: Can assets be retrieved without losing a competitive edge?

1. Timing in Internationalisation: Early expansion can offer advantages but is risky; delayed entry allows resource buildup but may hinder agility. 
2. Role of Government: Policies can either facilitate or restrict international expansion. China is given as an example.
3. Human Capital: Managerial experience and talent play a critical role in adapting and exploiting new opportunities.
4. Implications: Long-term success requires cultivating dynamic capabilities, leveraging time, fostering R&D, and understanding government policies.

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Given the radical changes in the global economy, strategic efforts are essential for business expansion with a winning competitive advantage. Lessard, Lucea and Vives (2013) propose a systematic approach to leveraging and enhancing internal capabilities through internationalisation using two frameworks - RAT and CAT. 

RAT answers: 

1. Relevance - Are the strengths relevant to the target market? 

2. Appropriable - Distinct and inimitable enough to be considered a potential business? 

3. Transferable - Capturing potential while transferring the capabilities without hampering value creation? 

CAT addresses the enhancement of internal capabilities through internalisation: 

1. Complementary - How complementary are the new assets and existing capabilities that drive its competitive advantage? 

2. Appropriable - Are businesses deriving maximum benefits and appropriating the value of the new capabilities? 

3. Transferable - Can the new assets be retrieved from the source location without compromising competitiveness? 

RAT - should businesses move in to add capabilities? CAT - does moving in improve businesses’ capabilities? 

Summarily, the paper posits that expansion is an attempt to sustain the life wire of the business through `movement’. The new market appeals by demand to the company's current capabilities; in turn, this new market must enhance the capabilities of the business. 

Lessard, Lucea and Vives (2013) convincingly emphasise the exploitation and enhancement of internal capabilities, shifting from the traditional FDI exploitative perspective to a more balanced approach that considers both exploitation and capability-building through internationalisation. A firm may internationalise to exploit proprietary advantages such as superior technology and product know-how that it already possesses in the home market to secure and enhance a competitive position in a new market. For example, Uber’s expansion into different markets reflects how relevancy to the market drives the adaptation of the business model to meet the needs of the local conditions. To accommodate cost concerns for consumers in India, launched Uber Auto and Moto. Uber ran a pilot version in the Middle East allowing women to select the gender of drivers and was acquired by DiDi Chuxing (a major player in the Chinese ride-hailing market) in 2016.

Similarly, some scholars have recently argued that a firm’s internationalisation is not only explained by the motivation to exploit its current assets in new markets but also by the need to seek or acquire strategic assets that it lacks internally from other markets (Shan & Song, 1997). By late 1990s, Tata Tea had become a dominant player in India’s tea market; however, realised the obstacles when it sought to establish a global presence. Tata went on to acquire a complementary well-established brand in the global tea market, allowing it to transfer new capabilities without compromising its core competencies. “Developing brands overseas was not only time-consuming and costly, but also required knowledge of local conditions”, said Mr. K Krishna Kumar, (at the time) Vice-Chairman of Tata Tea (Kale, 2009). Mr. Krishna Kumar explained, “We needed a vehicle, a brand to break into the overseas market. Tetley presented the right opportunity. It was the second largest brand in the world.” 

Research has continuously, conceptually, argued for the benefits inherent in internationalisation; allowing firms to leverage excess firm-specific resources into new markets creating economies of scope (Wiersema and Bowen, 2011), accentuation of existing core competencies, and access to substantial growth opportunities in the product markets of foreign countries (Hitt et al., 2006). These benefits are often realised through the transferability of firm-specific resources to new markets. Others further argued that internationalisation allows firms to gain competitive advantage through economies of scale – spreading the fixed costs across larger markets. There are clear benefits and examples of businesses that further demonstrate these benefits such as Coca-Cola and Apple’s global expansion led by the transferability and appropriability to the newer markets. 

Likewise, a research by Bolaji and Chris (2014), studies how internationalisation has impacted the Nigerian banking industry. The selected banks were those that owned wholly subsidiaries in other countries and also listed on the London Stock Exchange: First Bank of Nigeria Plc, Zenith Bank of Nigeria Plc, Guarantee Trust Bank of Nigeria Plc, United Bank of Africa Plc and Access Bank of Nigeria Plc. The results indicated a strong positive relationship between the variables - internationalisation and the banks' enhanced (and exploited) capabilities. The more internationalised and larger the firm, the more improved its capabilities. 

Similarly, (Kale, 2009) studying the Indian market, states that internationalisation adds to and creates a competitive advantage. Indian companies are engaging in overseas acquisition to primarily gain access to customers in new geographical markets, gain new or advanced technologies or products, and acquire management talent with the mindset and skills to operate businesses in more advanced or competitive conditions (Kale 2009). 

Globalisation fosters economic liberalisation and open markets, which subsequently intensifies competition and broadens the variance of product and service quality. This competitive environment has a profound impact on consumer preferences, as customers are increasingly exposed to a wider array of options and innovations. In response to these evolving market dynamics, firms frequently pursue overseas acquisitions as a strategic means of accessing advanced technologies and capabilities, thereby enhancing the quality and competitiveness of their offerings in global markets. These acquisitions are pivotal in enabling firms to navigate heightened competition, both in their domestic markets and internationally. Furthermore, integrating the operations of the acquired company with domestic operations enables firms to achieve greater scale and scope, thereby enhancing their cost competitiveness in global markets. A notable example is Hindalco's acquisition of Novelis in North America, which significantly strengthened Hindalco's global standing. According to Kumar Birla, chairman of Hindalco, “This deal secures Hindalco’s position as a leading aluminum company in the world. Novelis brings critical technological expertise. With Novelis, we also gain immediate scale and a global footprint.” (Kale, 2009). 

Despite these perspectives on internalisation using the RAT and CAT, the framework fails to demonstrate other critical determining factors that impact internationalisation. There are attendant costs to expansion. As firms expand their operations beyond national borders, there are correlative operational challenges like increasing costs of co-ordination and control, liability of foreignness and other risks connected to foreign activities. Lu and Beamish (2004) and Oesterle, Richta, and Stratmann (2008) argued that internationalisation is usually associated with the disadvantage of risk of discrimination by host country customers or government which may erode the relative gain from internationalisation. The RAT and CAT framework fails to reflect consideration of factors such as the firm’s age, regulations, chance, managerial experience, and timing of internationalisation. 

Timing of Internalisation 

Harry et al.,2006 emphasise time as a determinant factor in the success of internatlisation. While early internationalisation can provide advantages, it also presents challenges that firms must navigate. This duality suggests that the timing of internationalisation is critical for businesses. Early internalisation can lead to failure owing to the cost and resource needed, while late internalisation may seem beneficial because it can allow firms to gather resources and experiences; it may also lead to inertia for the organisation which is a hindrance to growth and adaptability. Bolaji and Chris (2014) show at first, a parallel mean and finally an increase in both the mean internationalisation and performance.

According to the Uppsala model, firms tend to face the difficulties of cultural challenges (psychic distance) at the start of the internationalisation process. This means firms will undergo a learning process which leads to increased operation costs of internationalisation. But with time (understanding of the new markets through appropriate strategy), cost efficiency increases and profit maximises. While Harry et al strongly support early internalisation, the focal point is that the consideration of timing is critical to the success of the expansion. 

Human Capital 

The price system alone cannot “manage” economic activity. Lessard, Lucea and Vives (2013) discuss how markets and organizations complement each other for readiness and enhancement of capabilities, without reflecting the consideration of managerial experience and human capital. Managers have critical roles to play in how capabilities are transformed and allocated. Harry et al.,2006 attributes the `possibilities’ of success to the quality of managerial experience in moderating the outcomes of internationalisation.

Firms led by managers with prior international experience are better positioned to fail forward and harness the capabilities available from such entries. More research shows managerial experiences and quality of talent as inclusive of a business’ capabilities (Kale, 2009). By partnering with a well-run company in a developed economy, businesses acquire management talent that is experienced in competing in advanced and competitive markets. Those executives are also well versed with, and well connected with, customers and institutions in those markets to help overcome the liability of ‘foreignness’.

As Kale, 2009 notes, the infusion of foreign practices and culture into the Indian acquirer can have a huge upside for the acquirer. Success requires that managers behave in an intensely entrepreneurial manner and build into their organisation the capacity to sense, transform and reconfigure opportunities as competitive forces dictate. Zhang et al.,2021 provide evidence that government policies do matter for encouraging firms to invest abroad.

Hence, managers must understand how certain contingencies in how government policies affect their expansion decisions and take advantage of such institutional benefits. When managers consider their internationalisation strategies, they must identify how they can effectively integrate the benefits of government policies and the business’ advantages. Such capabilities, when and if built, constitute the dynamic capabilities framework. 

Government and Regulations 

In recent decades, governments in emerging economies have actively implemented a range of policies that are crucial for enhancing openness and establishing transparent regulatory environments, which are collectively advantageous for internationalisation (Globerman & Shapiro, 2002). The existence of regulatory barriers by themselves becomes a determiner of how a business may choose to internationalise. These varying modes of entry affect culture and structure and directly, results. As domestic firms relocate portions of their production to other countries, technology, knowledge, and capital have assumed greater importance than land—the traditional source of state power—thereby redefining the role of government (Rosecrance, 1996; Sideri, 1997).

The Chinese government has developed and introduced various policies to simplify administrative procedures, ease capital controls, lower financial costs, and provide industrial or regional guidance to reduce political and investment risks, in tandem with the gradual easing of regulative restrictions. For example, the Ministry of Commerce (MOC) and the National Development and Reform Commission (NDRC) have decentralised authority over provincial governments. The MOC and NDRC approve overseas investment projects, help investors assess the feasibility of their projects, and reduce the bureaucracy and time associated with getting approval (Zhang et al.,2021).

These changes reduce administrative costs, lower the threshold of Outward Foreign Direct Investment (OFDI), and make the application process easier. This makes firms more efficient and improves their operation capabilities, achieving growth and economies of scale. Hence, such policies in the Chinese market can considerably stimulate and increase the ability of Emerging-country Multinational Enterprises (EMEs) to invest abroad.

While the introduction of government policies is overall effective in stimulating international expansion, firms are affected differently by the advantages of these policies (Zhang et al.,2021). 

Key Takeaways for Managers 

The global strategist is responsible for building a platform of capabilities based on the resources, experiences, and innovations of different units, and then transferring those capabilities. Generally, leading through change is often the translation of firm strategies into sustainable and positive economic performance. Understanding the positive impact of internationalisation on firm performance means managers can begin to explore international markets to enhance the performance of the firm.

As a result of this positive relationship, however, managers must be wary of over-simplification of the processes involved. They must design strategies that ensure optimising internationalisation in terms of when, where and how to expand. Designing this is never as simply described exhaustively by a framework.

Finally,

Beyond ensuring relevancy/complementariness, appropriacy and transferability of capabilities combined with the benefits of the dynamic capabilities framework (the ability to integrate, leverage and reconfigure internal and external capabilities to adapt to an ever-rapidly changing business environment). This includes the ongoing development of human capital and talent, leveraging time as a strategic asset, fostering excellence in research and development, and cultivating a nuanced understanding of government relations and policies.

Ultimately, the survival of the business takes precedence over expansion. By prioritising both vertical and horizontal growth, businesses are positioned for long-term success.