International Strategy

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Licensing Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Motivations for International Expansion Increase Market Share Domestic market may lack the size to support efficient scale manufacturing facilities Example: Japanese electronics or automobile manufacturers Large investment projects may require global markets to justify the capital outlays Return on Investment Example: Aircraft manufacturers Boeing or Airbus Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators 14

Motivations for International Expansion Economies of Scale or Learning Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R & D or distribution - Can spread costs over a larger sales base - Increase profit per unit Location Advantages Low cost markets may aid in developing competitive advantage May achieve better access to: - Raw materials - Lower cost labor - Key suppliers - Key customers - Energy - Natural resources 16

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Licensing Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Business-Level International Strategies International Low Cost Usually located in home country Export to international markets Low value added operations in foreign countries High value added operations in home country International Differentiation Countries with advanced or specialized factor conditions most likely to use this strategy Example: Japan, Germany, U.S. 26

Business-Level International Strategies International Focus Strategies Technologically advanced firms follow focused low cost strategy Focused differentiation firms compete on the basis of image & design International Integrated Low Cost/Differentiation Can be most effective in dealing with diverse markets Often relies upon flexible manufacturing, total quality management or rapid communication networks 30

Porter’s Determinants of National Advantage Home Country of Origin Is Crucial to International Success Related & Supporting Industries - Japanese cameras & copiers - Italian shoes & leather Factor Conditions Basic Factors - Land, labor Advanced Factors - Highly educated workers - Digital communications Generalized Factors - Capital, infrastructure Specialized Factors - Skilled personnel Demand Conditions Home country may support scale efficient operations by itself Firm Strategy, Structure & Rivalry Intense rivalry fosters industry competition In an international B_L strategy, the home country op operation is often the most important source of competitive advantage. The resources and capabilities established in the home country frequently allow the firm to pursue the strategy into markets located in other countries. However, as a firm continues its growth into multiple international locations, research suggests that the country of origin diminishes in importance. Porter’s model describes the factors contributing to the advantage of firms in a dominant global industry and associated with a specific country or regional environment. Factor conditions: Economics 101 21

Corporate-Level International Strategies Type of Corporate Strategy selected will have an impact on the selection and implementation of the business-level strategies Some Corporate strategies provide individual country units with flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units Three Corporate Strategies Multi-Domestic Strategy Global Strategy Transnational Strategy 34

Corporate-Level International Strategies Multi-Domestic Strategy Strategy and operating decisions are decentralized to strategic business units (SBU) in each country Products and services are tailored to local markets Business units in each country are independent of each other Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe 41

Corporate-Level International Strategies Global Strategy Products are standardized across national markets Decisions regarding business-level strategies are centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (which also makes it difficult to manage) 48

Corporate-Level International Strategies Transnational Strategy Seeks to achieve both global efficiency and local responsiveness Difficult to achieve because of simultaneous requirements for strong central control and coordination to achieve efficiency and local flexibility and decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage 52

International Corporate Strategy When is each strategy appropriate? Need for Global Integration Need for Local Market Responsiveness Low High Multi- Domestic 53

International Corporate Strategy When is each strategy appropriate? Need for Global Integration Need for Local Market Responsiveness Low High Global Strategy GLOBAL: Cemex is a global building materials company that centralizes operations in order to gain scale economies Multi- Domestic 53

International Corporate Strategy When is each strategy appropriate? Need for Global Integration Need for Local Market Responsiveness Low High Global Strategy Trans- national Transnational: Starbucks in China standardizes operations while simultaneous decentralizes some decision making for local responsiveness Multi- Domestic 53

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Licensing Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy ENVIRONMENTAL TREND LIABILITY OF FOREIGNESS TWO NEW TRENDS Brazil, Russia, India, and China (BRIC) represent major international market opportunities and threats.  1. Liability of foreignness: costs associated with entering foreign markets Increased after terrorists’ attacks and Iraq War Four types of distances: Cultural differences Administrative (unfamiliar operating environments) Geographic (challenges of distance coordination) Economic 2. Regionalization Global strategies not as prevalent today; difficult to implement even with Internet-based strategies Regional focus allows firms to marshal resources to compete effectively in regional markets Increases understanding of market: cultures, legal and social norms Achieve some economies through coordination and sharing of resources Trade agreements (e.g., EU, OAS, NAFTA) promote trade flows across country boundaries with their respective regions Most firms enter regional markets sequentially, beginning in more familiar markets, introducing their largest and strongest lines of business first Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Choice of International Entry Mode Exporting Common way to enter new international markets No need to establish operations in other countries Establish distribution channels through contractual relationships May have high transportation costs May encounter high import tariffs May have less control on marketing and distribution Difficult to customize products 70

Choice of International Entry Mode Licensing Firm authorizes another firm to manufacture and sell its products Licensing firm is paid a royalty on each unit produced and sold Licensee takes risks in manufacturing investments Least risky way to enter a foreign market Licensing firm loses control over product quality and distribution Relatively low profit potential A significant risk is that licensor learns technology and competes when license expires 78

Choice of International Entry Mode Strategic Alliances Enable firms to shares risks and resources to expand into international ventures Most joint ventures (JVs) involve a foreign company with a new product or technology and a host company with access to distribution or knowledge of local customs, norms or politics May experience difficulties in merging disparate cultures May not understand the strategic intent of partners or experience divergent goals 83

Choice of International Entry Mode Acquisitions Enable firms to make most rapid international expansion Can be very costly Legal and regulatory requirements may present barriers to foreign ownership Usually require complex and costly negotiations Potentially disparate corporate cultures 89

Choice of International Entry Mode New Wholly-Owned Subsidiary Most costly and complex of entry alternatives Achieves greatest degree of control Potentially most profitable, if successful Maintain control over technology, marketing and distribution May need to acquire expertise and knowledge that is relevant to host country Could require hiring host country nationals or consultants at high cost 95

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Strategic Competitiveness Outcomes International diversification facilitates innovation in the firm Provides larger market to gain more and faster returns form investments in innovation May generate resources necessary to sustain a large-scale R&D program Generally related to above-average returns, assuming effective implementation and management of international operations International diversification provides greater economies of scope and learning 101

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Major Risks of International Diversification Political Risk International strategy implementation may be disrupted by the following examples of political risk: ● Government instability ● Conflict or war ● Government regulations ● Conflicting and diverse legal authorities ● Potential nationalization of private assets ● Government corruption ● Changes in government policies Unrest in Middle East Egy-pt / Iran /Iraq etc. Pakistan and India Challenge of integrating former Eastern European Block countires into European Union and Soviet Reaction Protectionist political trends as the economic downturn worsens 107

Major Risks of International Diversification Economic Risk International strategy implementation may be disrupted by the following examples of economic risk : ● Government oversight and control of economic/financial capital. ● Weak Intellectual Property (IP) rights protections, impact FDI attractiveness. ● Investment losses due to political risks ● Terrorism ● Security risk of foreign firms acquiring key natural resources or strategic IP. Economic risks: fundamental weaknesses in a country or region’s economy with the potential to adversely impact the successful implementation of a firm’s international strategies International strategy implementation may be disrupted by the following examples of economic risk: ● Foremost economic risk - currency volatility ● Currency effect on the prices of globally manufactured goods, thus exports/imports Challenges of China in implementing the WTO agreements Increased trend of counterfeit products and the lack of global policing of these products 112

Limits To International Expansion Management Problems Complexity of managing multinational firms–six considerations: Geographic dispersion Costs of coordination Logistical costs Trade barriers Cultural diversity Host government LIMITS TO INTERNATIONAL EXPANSION There are several reasons that explain the limits to the positive effects of the diversification associated with international strategies: Complexity of competition Other country differences 112