CHAPTER 8 International Strategy © 2007 Thomson/South-Western. All rights reserved.

KNOWLEDGE OBJECTIVES Studying this chapter should provide you with the strategic management knowledge needed to: Explain traditional and emerging motives for firms to pursue international diversification. Explore the four factors that lead to a basis for international business-level strategies. Define the three international corporate-level strategies: multidomestic, global, and transnational. Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization. © 2007 Thomson/South-Western. All rights reserved.

KNOWLEDGE OBJECTIVES (cont’d) Studying this chapter should provide you with the strategic management knowledge needed to: Name and describe the five alternative modes for entering international markets. Explain the effects of international diversification on firm returns and innovation. Name and describe two major risks of international diversification. Explain why the positive outcomes from international expansion are limited. © 2007 Thomson/South-Western. All rights reserved.

FIGURE 8.1 Opportunities and Outcomes of International Strategy © 2007 Thomson/South-Western. All rights reserved.

Identifying International Opportunities International Strategy A strategy through which the firm sells its goods or services outside its domestic market. Reasons to having an international strategy International markets yield potential new opportunities. New market expansion extends product life cycle. Needed resources can be secured. Greater potential product demand. © 2007 Thomson/South-Western. All rights reserved.

Production is standardized and relocated to low cost countries. Classic Rationale for International Diversification: Extend a Product’s Life Cycle Product Demand Develops and Firm Exports Products Foreign Competition Begins Production Firm Introduces Innovation in Domestic Market Firm Begins Production Abroad Production is standardized and relocated to low cost countries. © 2007 Thomson/South-Western. All rights reserved.

International Strategy Benefits Increased Market Size Domestic market may lack the size to support efficient scale manufacturing facilities. Return on Investment Large investment projects may require global markets to justify the capital outlays. Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators. © 2007 Thomson/South-Western. All rights reserved.

International Strategy Benefits (cont’d) 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. Can increase profit per unit. © 2007 Thomson/South-Western. All rights reserved.

International Strategy Benefits (cont’d) Location Advantages Low cost markets aid in developing competitive advantage by providing access to: Raw materials Transportation Lower costs for labor Key customers Energy © 2007 Thomson/South-Western. All rights reserved.

FIGURE 8.2 Determinants of National Advantage 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. © 2007 Thomson/South-Western. All rights reserved.

Determinants of National Advantage Factors of production The inputs necessary to compete in any industry Labor Land Natural resources Capital Infrastructure Basic factors Natural and labor resources Advanced factors Digital communication systems and an educated workforce © 2007 Thomson/South-Western. All rights reserved.

Determinants of National Advantage (cont’d) Demand Conditions Characterized by the nature and size of buyers’ needs in the home market for the industry’s goods or services. Size of the market segment can lead to scale-efficient facilities. Efficiency can lead to domination of the industry in other countries. Specialized demand may create opportunities beyond national boundaries. © 2007 Thomson/South-Western. All rights reserved.

Determinants of National Advantage (cont’d) Related and Supporting Industries Supporting services, facilities, suppliers and so on. Support in design Support in distribution Related industries as suppliers and buyers Firm Strategy, Structure and Rivalry The pattern of strategy, structure, and rivalry among firms. Common technical training Methodological product and process improvement Cooperative and competitive systems © 2007 Thomson/South-Western. All rights reserved.

Selecting an International Corporate-Level Strategy The type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies. Some strategies provide individual country units with the flexibility to choose their own strategies. Other strategies dictate business-level strategies from the home office and coordinate resource sharing across units. © 2007 Thomson/South-Western. All rights reserved.

International Corporate-Level Strategy Focuses on the scope of operations: Product diversification Geographic diversification Required when the firm operates in: Multiple industries, and Multiple countries or regions Headquarters unit guides the strategy But business or country-level managers can have substantial strategic input. © 2007 Thomson/South-Western. All rights reserved.

FIGURE 8.3 International Corporate-Level Strategies © 2007 Thomson/South-Western. All rights reserved.

Multidomestic 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 one 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. Multidomestic strategy © 2007 Thomson/South-Western. All rights reserved.

Global Strategy Products are standardized across national markets. Business-level strategic decisions 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 (hard to manage). Global strategy © 2007 Thomson/South-Western. All rights reserved.

Transnational Strategy Seeks to achieve both global efficiency and local responsiveness. Difficult to achieve because of simultaneous requirements: Strong central control and coordination to achieve efficiency Decentralization to achieve local market responsiveness Firm must pursue organizational learning to achieve competitive advantage. Transnational strategy © 2007 Thomson/South-Western. All rights reserved.

Environmental Trends Liability of Foreignness Regionalization Legitimate concerns about the relative attractiveness of global strategies Global strategies not as prevalent as once thought Difficulty in implementing global strategies Regionalization Focusing on particular region(s) rather than on global markets Better understanding of the cultures, legal and social norms © 2007 Thomson/South-Western. All rights reserved.

TABLE 8.1 Global Market Entry: Choice of Entry Type of Entry Characteristics Exporting High cost, low control Licensing Low cost, low risk, little control, low returns Strategic alliances Shared costs, shared resources, shared risks, problems of integration (e.g., two corporate cultures) Acquisition Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations New wholly owned subsidiary Complex, often costly, time consuming, high risk, maximum control, potential above-average returns © 2007 Thomson/South-Western. All rights reserved.

Dynamics of Mode of Entry What’s the best solution? Situation Optimal Solution The firm has no foreign manufacturing expertise and requires investment only in distribution. Export © 2007 Thomson/South-Western. All rights reserved.

Dynamics of Mode of Entry (cont’d) What’s the best solution? Situation Optimal Solution The firm needs to facilitate the product improvements necessary to enter foreign markets. Licensing © 2007 Thomson/South-Western. All rights reserved.

Dynamics of Mode of Entry (cont’d) What’s the best solution? Situation Optimal Solution The firm needs to connect with an experienced partner already in the targeted market. Strategic Alliance © 2007 Thomson/South-Western. All rights reserved.

Dynamics of Mode of Entry (cont’d) What’s the best solution? Situation Optimal Solution The firm needs to reduce its risk through the sharing of costs. Strategic Alliance © 2007 Thomson/South-Western. All rights reserved.

Dynamics of Mode of Entry (cont’d) What’s the best solution? Situation Optimal Solution The firm is facing uncertain situations such as an emerging economy in its targeted market. Strategic Alliance © 2007 Thomson/South-Western. All rights reserved.

Dynamics of Mode of Entry (cont’d) What’s the best solution? Situation Optimal Solution 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 Subsidiary © 2007 Thomson/South-Western. All rights reserved.

International Diversification and Returns Expanding sales of goods or services across global regions and countries and into different geographic locations or markets: May increase a firm’s returns (such firms usually achieve the most positive stock returns). May achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns. © 2007 Thomson/South-Western. All rights reserved.

International Diversification and Innovation Expansion sales of goods or services across global regions and countries and into different geographic locations or markets: May yield potentially greater returns on innovations (a larger market). Can generate additional resources for investment in innovation. Provides exposure to new products and processes in international markets; generates additional knowledge leading to innovations. © 2007 Thomson/South-Western. All rights reserved.

Complexity of Managing Multinational Firms Expansion into global operations in different geographic locations or markets: Makes implementing international strategy increasingly complex. Can produce greater uncertainty and risk. May result in the firm becoming unmanageable May cause the cost of managing the firm to exceed the benefits of expansion. Exposes the firm to possible instability of some national governments. © 2007 Thomson/South-Western. All rights reserved.

Risks in an International Environment Political Risks Instability in national governments War, both civil and international Potential nationalization of a firm’s resources Economic Risks Differences and fluctuations in the value of different currencies Differences in prevailing wage rates Difficulties in enforcing property rights Unemployment ? ? ? ? © 2007 Thomson/South-Western. All rights reserved.

FIGURE 8.4 Risk in the International Environment © 2007 Thomson/South-Western. All rights reserved.

Limits to International Expansion: Management Problems Cost of coordination across diverse geographical business units Institutional and cultural barriers Understanding strategic intent of competitors The overall complexity of competition © 2007 Thomson/South-Western. All rights reserved.