International Strategy

International Strategy

Chapter EightChapter Eight

BA 495.009BA 495.009

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Today’s Agenda

• Rationale for international expansionRationale for international expansion• International business-level & corporate-International business-level & corporate-

level strategieslevel strategies• Methods of EntryMethods of Entry• Results of International DiversificationResults of International Diversification• Risks & Managerial ProblemsRisks & Managerial Problems• Wrap-upWrap-up

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Opportunities & Outcomes of International Strategy

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Rationale for & Benefits of

International Expansion

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Classic Rationale for International Diversification: Extend a Product’s Life Cycle

Production is standardized and Production is standardized and relocated to low cost countries.relocated to low cost countries.

Product DemandProduct DemandDevelops and FirmDevelops and FirmExports ProductsExports Products

Firm IntroducesFirm IntroducesInnovation inInnovation in

Domestic MarketDomestic Market

ForeignForeignCompetitionCompetition

Begins ProductionBegins Production

Firm BeginsFirm BeginsProduction AbroadProduction Abroad

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International Strategy Benefits• Benefit 1: Increased Market SizeBenefit 1: Increased Market Size

International market can be opportunity for growth International market can be opportunity for growth when domestic market is saturated.when domestic market is saturated.

Market power creates significant advantages – global Market power creates significant advantages – global market allows even more power over competitors.market allows even more power over competitors.

• Benefit 2: Return on InvestmentBenefit 2: Return on Investment Large investment projects may require global markets Large investment projects may require global markets

to justify the capital outlays.to justify the capital outlays.

Weak patent protection in some countries implies that Weak patent protection in some countries implies that firms should expand overseas rapidly in order to firms should expand overseas rapidly in order to preempt imitators.preempt imitators.

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International Strategy Benefits

• Benefit 3: Economies of Scale (or Learning)Benefit 3: Economies of Scale (or Learning)

Expanding size or scope of markets helps to achieve Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as economies of scale in manufacturing as well as marketing, R&D or distribution.marketing, R&D or distribution.

Can spread costs over a larger sales base.Can spread costs over a larger sales base.

Can increase profit per unit.Can increase profit per unit.

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International Strategy Benefits

• Benefit 4: Location AdvantagesBenefit 4: Location Advantages

Low cost markets aid in developing competitive Low cost markets aid in developing competitive advantage by providing access to:advantage by providing access to:

• Raw materialsRaw materials

• TransportationTransportation

• Lower costs for laborLower costs for labor

• Key customersKey customers

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International Strategies

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Business-level & Corporate-level Strategies• Business-level strategy by unitBusiness-level strategy by unit

DifferentiationDifferentiation Cost-leaderCost-leader Focused Focused

• Corporate-level strategies unique to international Corporate-level strategies unique to international presencepresence MultidomesticMultidomestic GlobalGlobal TransnationalTransnational

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Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage of Nations, by Michael E. Porter, p. 72. Copyright ©1990, 1998 by Michael E. Porter.

Determinants of National Advantage

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Determinants of National Advantage• Factors of productionFactors of production

The inputs necessary to compete in any industryThe inputs necessary to compete in any industry• LaborLabor • • LandLand • • Natural resourcesNatural resources

• CapitalCapital • • InfrastructureInfrastructure

• Demand ConditionsDemand Conditions Characterized by the nature and size of buyers’ needs Characterized by the nature and size of buyers’ needs

in the home market for the industry’s goods or in the home market for the industry’s goods or services.services.

• Size of the market segment can lead to scale-efficient Size of the market segment can lead to scale-efficient facilities.facilities.

• Efficiency can lead to domination of the industry in other Efficiency can lead to domination of the industry in other countries.countries.

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Determinants of National Advantage

• Related and Supporting IndustriesRelated and Supporting Industries Supporting services, facilities, and suppliers.Supporting services, facilities, and suppliers.

• Support in designSupport in design

• Support in distributionSupport in distribution

• Related industries as suppliers and buyersRelated industries as suppliers and buyers

• Firm Strategy, Structure and RivalryFirm Strategy, Structure and Rivalry The pattern of strategy, structure, and rivalry among The pattern of strategy, structure, and rivalry among

firms.firms.• Common technical trainingCommon technical training

• Methodological product and process improvementMethodological product and process improvement

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Selecting an International Corporate-Level Strategy

• The type of corporate strategy selected will have The type of corporate strategy selected will have an impact on the selection and implementation of an impact on the selection and implementation of the business-level strategies.the business-level strategies. Some strategies provide individual country units with Some strategies provide individual country units with

the flexibility to choose their own strategies.the flexibility to choose their own strategies.

Other strategies dictate business-level strategies from Other strategies dictate business-level strategies from the home office and coordinate resource sharing the home office and coordinate resource sharing across units.across units.

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International Corporate-Level Strategies

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Multidomestic Strategy• Strategy and operating decisions are Strategy and operating decisions are

decentralized to strategic business units in decentralized to strategic business units in each country.each country.

• Products and services are tailored to local Products and services are tailored to local markets.markets.

• Business units in one country are Business units in one country are independent of each other.independent of each other.

• Assumes markets differ by country or Assumes markets differ by country or regions.regions.

• Focus on competition in each market.Focus on competition in each market.

• Prominent strategy among European firms Prominent strategy among European firms due to broad variety of cultures and markets due to broad variety of cultures and markets in Europe.in Europe.

MultidomesticMultidomesticstrategystrategy

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Global Strategy

• Products are standardized across Products are standardized across national markets.national markets.

• Business-level strategic decisions are Business-level strategic decisions are centralized in the home office.centralized in the home office.

• Strategic business units are assumed Strategic business units are assumed to be interdependent.to be interdependent.

• Emphasizes economies of scale.Emphasizes economies of scale.• Often lacks responsiveness to local Often lacks responsiveness to local

markets.markets.• Requires resource sharing and Requires resource sharing and

coordination across borders (hard to coordination across borders (hard to manage).manage).

GlobalGlobalstrategystrategy

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Transnational Strategy

• Seeks to achieve both global Seeks to achieve both global efficiency and local efficiency and local responsiveness.responsiveness.

• Difficult to achieve because of Difficult to achieve because of simultaneous requirements:simultaneous requirements: Strong central control and Strong central control and

coordination to achieve efficiencycoordination to achieve efficiency

Decentralization to achieve local Decentralization to achieve local market responsivenessmarket responsiveness

TransnationalTransnationalstrategystrategy

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Environmental Trends• Liability of ForeignnessLiability of Foreignness

Even if applying global strategy, must take into Even if applying global strategy, must take into account differences in the international marketaccount differences in the international market

What will customers expect?What will customers expect? What aspects of the value chain must be performed What aspects of the value chain must be performed

differently?differently?

• RegionalizationRegionalization Focusing on particular region(s) rather than on global Focusing on particular region(s) rather than on global

marketsmarkets Better understanding of the cultures, legal and social Better understanding of the cultures, legal and social

normsnorms

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Methods of International Entry

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Type of Entry Type of Entry CharacteristicsCharacteristics

ExportingExporting High cost, low controlHigh cost, low control

LicensingLicensing Low cost, low risk, little control, low returnsLow cost, low risk, little control, low returns

Strategic alliancesStrategic alliances Shared costs, shared resources, shared Shared costs, shared resources, shared risks, problems of integration (e.g., two risks, problems of integration (e.g., two corporate cultures)corporate cultures)

AcquisitionAcquisition Quick access to new market, high cost, Quick access to new market, high cost, complex negotiations, problems of merging complex negotiations, problems of merging with domestic operationswith domestic operations

New wholly owned subsidiaryNew wholly owned subsidiary Complex, often costly, time consuming, Complex, often costly, time consuming, high risk, maximum control, potential high risk, maximum control, potential above-average returnsabove-average returns

Methods of International Entry

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SituationSituation Optimal SolutionOptimal Solution

Dynamics of Mode of Entry

The firm has no foreign manufacturing expertise and requires investment

only in distribution.

The firm has no foreign manufacturing expertise and requires investment

only in distribution.

ExportExportExportExport

What’s the best solution?What’s the best solution?

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SituationSituation Optimal SolutionOptimal Solution

Dynamics of Mode of Entry

The firm needs to facilitate the product

improvements necessary to enter foreign markets.

The firm needs to facilitate the product

improvements necessary to enter foreign markets.

LicensingLicensingLicensingLicensing

What’s the best solution?What’s the best solution?

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SituationSituation Optimal SolutionOptimal Solution

Dynamics of Mode of Entry

Strategic AllianceStrategic AllianceStrategic AllianceStrategic Alliance

What’s the best solution?What’s the best solution?

The firm needs to reduce its risk through the sharing of costs.

The firm needs to reduce its risk through the sharing of costs.

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SituationSituation Optimal SolutionOptimal Solution

Dynamics of Mode of Entry

AcquisitionAcquisitionAcquisitionAcquisition

What’s the best solution?What’s the best solution?

The firm wants to enter a market quickly and their business-level

strategy requires more control from the home

country.

The firm wants to enter a market quickly and their business-level

strategy requires more control from the home

country.

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SituationSituation Optimal SolutionOptimal Solution

Dynamics of Mode of Entry

The firm’s intellectual property rights in an

emerging economy are not well protected, the number of firms in the

industry is growing fast, and the need for global

integration is high.

The firm’s intellectual property rights in an

emerging economy are not well protected, the number of firms in the

industry is growing fast, and the need for global

integration is high.

Wholly-owned Wholly-owned SubsidiarySubsidiary

Wholly-owned Wholly-owned SubsidiarySubsidiary

What’s the best solution?What’s the best solution?

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Results of International Diversification

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International Diversification and Returns• Expanding sales of goods or services across Expanding sales of goods or services across

global regions and countries and into different global regions and countries and into different geographic locations or markets:geographic locations or markets:

May increase a firm’s returns (such firms usually May increase a firm’s returns (such firms usually achieve the most positive stock returns). achieve the most positive stock returns).

May achieve economies of scale and experience, May achieve economies of scale and experience, location advantages, increased market size and location advantages, increased market size and opportunity to stabilize returns.opportunity to stabilize returns.

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International Diversification and Innovation• Expansion sales of goods or services across Expansion sales of goods or services across

global regions and countries and into different global regions and countries and into different geographic locations or markets:geographic locations or markets: May yield potentially greater returns on innovations (a May yield potentially greater returns on innovations (a

larger market).larger market).

Can generate additional resources for investment in Can generate additional resources for investment in innovation.innovation.

Provides exposure to new products and processes in Provides exposure to new products and processes in international markets; generates additional knowledge international markets; generates additional knowledge leading to innovations.leading to innovations.

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Risks and Managerial Problems

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Complexity of Managing Multinational Firms• Expansion into global operations in different Expansion into global operations in different

geographic locations or markets:geographic locations or markets: Makes implementing international strategy Makes implementing international strategy

increasingly complex.increasingly complex.

Can produce greater uncertainty and risk.Can produce greater uncertainty and risk.

May result in the firm becoming unmanageable.May result in the firm becoming unmanageable.

May cause the cost of managing the firm to exceed May cause the cost of managing the firm to exceed the benefits of expansion.the benefits of expansion.

Exposes the firm to possible instability of some Exposes the firm to possible instability of some national governments.national governments.

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Limits to International Expansion: Management Problems• Cost of coordination across diverse geographical Cost of coordination across diverse geographical

business unitsbusiness units

• Institutional and cultural barriersInstitutional and cultural barriers

• Understanding strategic intent of competitorsUnderstanding strategic intent of competitors

• The overall complexity of competitionThe overall complexity of competition

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Risks in an International Environment• Political RisksPolitical Risks

Instability in national Instability in national governmentsgovernments

War, both civil and War, both civil and internationalinternational

Potential nationalization of Potential nationalization of a firm’s resourcesa firm’s resources

• Economic RisksEconomic Risks Differences and Differences and

fluctuations in the value of fluctuations in the value of different currenciesdifferent currencies

Differences in prevailing Differences in prevailing wage rateswage rates

Difficulties in enforcing Difficulties in enforcing property rightsproperty rights

UnemploymentUnemployment

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Wrap-up

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Wrap-up

• Rationale for international expansionRationale for international expansion• International business-level & corporate-International business-level & corporate-

level strategieslevel strategies• Methods of EntryMethods of Entry• Results of International DiversificationResults of International Diversification• Risks & Managerial ProblemsRisks & Managerial Problems• Questions & AnswersQuestions & Answers