“It was the best of times, it was the worst of times....” Charles Dickens, A Tale of Two Cities McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

7-2  Domestic vs. International Expansion  Ansoff and Internationalization  Motives to Internationalize  Internationalization/Market Entry Theory International Product Life Cycle  Uppsala Model  Born Global Transaction Cost Analysis OLI Market Expansion Screening  Concentration v. Diversification

7-3  Internationalization occurs when a firm makes a strategic decision to enter foreign markets and adapts its operations to international environments. Decision to expand abroad Locate specific market opportunities Expansion strategy determined  Concentrated  Diversified Selection of entry mode

7-4 Ansoff suggests four ways in which firms can expand their operations: Figure 7-1

7-5  To gain higher market share in existing markets using existing products Resources are dedicated to more aggressive advertising, sales promotion and customer service and relationship enhancements Example: Fuller’s London Pride  Of the four growth strategies, market penetration has the lowest risk

7-6  Offer new products to current markets Requires developing or acquiring new products, or line expansion Example: Mount Blanc

7-7  New markets may be solely domestic or both domestic and global Example: Tesco

7-8  Offering new products to new markets  Example: Apple Computers Originally marketed to the graphic design market Now marketed to the final consumer Expanded product offering Expanded globally

7-9  Internationalization has been defined as the process of adapting a firm’s operations to international environments  Technically only market development fits this definition  Successful global firms have expanded operations both domestically and internationally with Ansoff’s strategies.

7-10

7-11  Stem from management’s beliefs that there are firm-specific assets that can be exploited abroad  4 categories of proactive motives Market seeking  Enter markets to preempt competition, better serve customers or exploit competitive advantages Resource seeking  Firms invest abroad in order to acquire resources Efficiency seeking  Firms seek to gain economies of scale and scope Strategic resource seeking  Attain competitive advantage by acquiring assets for long term objectives

7-12 Figure 7-3

7-13  A response to unfavorable conditions in current markets Increased competitive pressure Excess capacity Declining domestic market Improving or overcoming internal problems  Reactive motives are usually regarded as negative Example: Heineken

7-14  Internationalization theory explains the conditions under which it is more efficient for a firm to create an internal market rather than enter foreign markets  Criteria are based on: the transaction costs of information opportunism asset specificity  Firms do internationalize in spite of higher transaction costs by internalizing firm-specific advantages Foreign direct investment occurs when the benefits of internalization outweigh its costs.

7-15 Figure 7-4

7-16  Raymond Vernon suggests that : Stage One  Firms first develop products for the home market  Demand for the product emerges in overseas markets, and the firm exports to accommodate Stage Two  Product evolves into a commodity  Production abroad commences  Competition to the originator arises globally  Originator must produce in lower cost labor markets

7-17 Figure 7-5

7-18  Firms first enter into markets that are close psychically (psychic distance) to their home base and later enter more distant markets First Stage – sporadic exports Second Stage – regular exporting Third Stage – foreign sales subsidiary organized Fourth stage – manufacturing subsidiary is established

7-19 Figure 7-6

7-20  One exception to the concept of international product life cycles, and the theories’ most glaring weakness, is the existence of the ‘born global’ firm.  This firm is initiated with the intent to immediately do business in all accessible global markets. Infomedia is an ideal example.

7-21  Propones the occurrence and importance of having international networks. Network participants are governed by exchange relationships rather than through the market. Because many small companies do not have infinite resources, network collaborations are seen as an important internationalization strategy.

7-22 Figure 7-7

7-23

7-24  Definition: cost of making an economic exchange  Three types of costs … Search and information costs Bargaining costs Monitoring (governance) costs  And three cost scenarios based on entry mode  Production at home for export  Licensing  Production abroad

7-25  Entry mode decisions are based on three conditions  Ownership (who will produce abroad)  Location (where to produce)  Internalization (why produce rather than license)  Foreign direct investment will be the preferred mode when three conditions are fulfilled: the firm must have net ownership advantages over competing firms it must be more profitable for the firm possessing these unique assets to use them itself rather than transfer the rights to others it must be advantageous for the firm to exploit its unique assets through production outside its home country rather than by exporting

7-26  Purpose of screening is to select those markets that have the best potential for expansion in foreign markets The first step is to define the criteria that are relevant to the firm's environment  Then, market selection narrows down a set of entry targets quantitatively Multiple factor indices Directional policy matrices Decision matrices

7-27

7-28 Figure 7-8

7-29 Figure 7-9

7-30  Concentration Strategy Involves focusing marketing effort and resources in one or a few key markets in the short run and gradual expansion into other markets in the long run  Diversification Strategy Requires investing marketing effort and resources into a larger number of markets in the short run

7-31

7-32 A calculation that relates the value of the investment in marketing to revenue or profit generation An S shaped curve suggests a concentration strategy is required A concave function recommends diversification Figure 7-10

7-33

7-34  Firms can expand domestically or internationally If a firm decides to internationalize, it must determine the best route to do so through market search  Market screening involves choosing a method that can select those markets that have the best potential for the firm’s products and services  Two possible entry strategies are available: Concentration or diversification  Final stage in the internationalization involves choosing an initial entry mode