INTERNATIONAL STRATEGY: CREATING VALUE IN GLOBAL MARKETS STRATEGIC MANAGEMENT BUAD 4980

INTERNATIONAL STRATEGY Overview of the Global Economy Globalization The increase in international exchange, including trade in goods and services as well as exchange of money, information, ideas, and information. The growing similarity of laws, rules, norms, values, and ideas across countries. STRATEGIC MANAGEMENT – BUAD 4980 2 2

INTERNATIONAL STRATEGY Overview of the Global Economy Extremes in the effects of global capitalism: The economies of East Asia have attained rapid growth and improved standards of living Income in Latin America grew by only 6 percent in the past two decades Average incomes in sub-Saharan Africa and the old Eastern European bloc have actually declined STRATEGIC MANAGEMENT – BUAD 4980 3 3

INTERNATIONAL STRATEGY Porter’s Diamond of National Advantage STRATEGIC MANAGEMENT – BUAD 4980 4 4

Global Factors Affecting a Nation’s Competitiveness INTERNATIONAL STRATEGY Global Factors Affecting a Nation’s Competitiveness Factor Endowments The nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry. Demand Conditions The nature of home-market demand for the industry’s product or service. STRATEGIC MANAGEMENT – BUAD 4980 5 5

Global Factors Affecting a Nation’s Competitiveness INTERNATIONAL STRATEGY Global Factors Affecting a Nation’s Competitiveness Related and Supporting Industries The presence or absence in the nation of supplier industries and other related industries that are internationally competitive. Firm Strategy, Structure, and Rivalry The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry. STRATEGIC MANAGEMENT – BUAD 4980 6 6

INTERNATIONAL STRATEGY Factor Endowments To achieve competitive advantage, factors of production must be created Industry and Firm specific: The pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed Firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate and rapidly and efficiently deployed are the factors that create national competitive advantage STRATEGIC MANAGEMENT – BUAD 4980 7 7

INTERNATIONAL STRATEGY Demand Conditions The demands that consumers place on an industry for goods and services Demanding consumers drive firms in a country to: Meet high standards Upgrade existing products and services Create innovative products and services STRATEGIC MANAGEMENT – BUAD 4980 8 8

INTERNATIONAL STRATEGY Related and Supporting Industries Enable firms to manage inputs more effectively Allow joint efforts among firms Share technical capabilities and infrastructure STRATEGIC MANAGEMENT – BUAD 4980 9 9

INTERNATIONAL STRATEGY Firm Strategy, Structure and Rivalry Rivalry is intense in nations with conditions of: Strong consumer demand Strong supplier bases High new entrant potential from related industries Competitive rivalry stimulates innovation and new means of achieving competitive advantage STRATEGIC MANAGEMENT – BUAD 4980 10 10

INTERNATIONAL STRATEGY Firm Strategy, Structure and Rivalry Competitive rivalry increases the efficiency with which firms Develop within the home country Market within the home country Distribute products and services within the home country Firms faced with intense domestic competitive rivalry will often develop business strategies and structures allowing them to compete outside their domestic markets STRATEGIC MANAGEMENT – BUAD 4980 11 11

Porter’s Diamond of National Advantage – Applied to India INTERNATIONAL STRATEGY Porter’s Diamond of National Advantage – Applied to India STRATEGIC MANAGEMENT – BUAD 4980 12 12

Motivation for Companies to Expand Internationally INTERNATIONAL STRATEGY Motivation for Companies to Expand Internationally Increase the size of potential markets Attain economies of scale Take advantage of “arbitrage” opportunities Extend the life cycle of a product Optimize the physical location for every activity in its value chain STRATEGIC MANAGEMENT – BUAD 4980 13 13

Motivation for Companies to Expand Internationally INTERNATIONAL STRATEGY Motivation for Companies to Expand Internationally Optimizing the location for every activity in a firm’s value chain can result in Performance Enhancement Cost Reduction Risk Reduction STRATEGIC MANAGEMENT – BUAD 4980 14 14

INTERNATIONAL STRATEGY Potential Risks of International Expansion Political and Economic Risk Social unrest Military turmoil Demonstrations Violent conflicts and terrorism Laws and their enforcement Unstable governments STRATEGIC MANAGEMENT – BUAD 4980 15 15

INTERNATIONAL STRATEGY International Risk Rankings Source: Transparency International, 2010 STRATEGIC MANAGEMENT – BUAD 4980 16 16

INTERNATIONAL STRATEGY Corruption Perceptions Index (CPI) The Transparency International 2010 CPI ranks the most corrupt countries in the world The scores range from ten (least corrupt) to zero (highly corrupt) The five most corrupt countries are Somalia (CPI Score: 1.1) Myanmar (CPI Score: 1.4) Afghanistan (CPI Score: 1.4) Iraq (CPI Score: 1.5) Uzbekistan (CPI Score: 1.6) STRATEGIC MANAGEMENT – BUAD 4980 17 17

INTERNATIONAL STRATEGY International Risk Rankings STRATEGIC MANAGEMENT – BUAD 4980 18 18

INTERNATIONAL STRATEGY Potential Risks of International Expansion Currency Risk Currency exchange fluctuations Appreciation (strengthening) of the US Dollar Government management of monetary policy and intervention in financial markets STRATEGIC MANAGEMENT – BUAD 4980 19 19

INTERNATIONAL STRATEGY Potential Risks of International Expansion Management Risks Different culture Different customs Different language Different income levels / standard of living Country-specific customer preferences Less developed distribution system / infrastructure STRATEGIC MANAGEMENT – BUAD 4980 20 20

INTERNATIONAL STRATEGY Global Dispersion of Value Chains Outsourcing Utilizing firms in other countries to perform value-creating activities that were previously performed in-house within the firm’s home country STRATEGIC MANAGEMENT – BUAD 4980 21 21

INTERNATIONAL STRATEGY Global Dispersion of Value Chains Offshoring Shifting an activity that was previously performed in a domestic location to a foreign location. STRATEGIC MANAGEMENT – BUAD 4980 22 22

Achieving Competitive Advantage in Global Markets INTERNATIONAL STRATEGY Achieving Competitive Advantage in Global Markets Distinct global strategies emerge from the opposing pressures of Reducing Costs and Adapting to Local Markets Lowering unit costs maintains competitiveness in pricing in global markets May require locating facilities where a cost advantage can be achieved Adapting to local markets requires modifying product attributes to satisfy varying consumer preferences in different countries May add costs to differentiate products STRATEGIC MANAGEMENT – BUAD 4980 23 23

Achieving Competitive Advantage in Global Markets INTERNATIONAL STRATEGY Achieving Competitive Advantage in Global Markets STRATEGIC MANAGEMENT – BUAD 4980 24 24

Achieving Competitive Advantage in Global Markets INTERNATIONAL STRATEGY Achieving Competitive Advantage in Global Markets International Strategy Based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets The primary goal of the strategy is worldwide exploitation of the parent firm’s knowledge and capabilities that foreign competitors lack Low degree of global adaptation Core competencies associated with centralized headquarters location Low pressures for local adaptation and lowering costs STRATEGIC MANAGEMENT – BUAD 4980 25 25

Achieving Competitive Advantage in Global Markets INTERNATIONAL STRATEGY Achieving Competitive Advantage in Global Markets International Strategy – Strengths / Limitations STRATEGIC MANAGEMENT – BUAD 4980 26 26

Achieving Competitive Advantage in Global Markets INTERNATIONAL STRATEGY Achieving Competitive Advantage in Global Markets Global Strategy Competitive strategy is centralized and controlled largely by corporate administration Emphasizes achievement of economies of scale to lower global costs Pressure for adaptation is low and pressure for lowering costs is high STRATEGIC MANAGEMENT – BUAD 4980 27 27

Achieving Competitive Advantage in Global Markets INTERNATIONAL STRATEGY Achieving Competitive Advantage in Global Markets Global Strategy – Strengths / Limitations STRATEGIC MANAGEMENT – BUAD 4980 28 28

Achieving Competitive Advantage in Global Markets INTERNATIONAL STRATEGY Achieving Competitive Advantage in Global Markets Multidomestic Strategy Emphasis is differentiating products and services to adapt to local markets Decision-making is more decentralized Pressure for local adaptation is high and pressure for lowering costs is low STRATEGIC MANAGEMENT – BUAD 4980 29 29

Achieving Competitive Advantage in Global Markets INTERNATIONAL STRATEGY Achieving Competitive Advantage in Global Markets Multidomestic Strategy – Strengths / Limitations STRATEGIC MANAGEMENT – BUAD 4980 30 30

Achieving Competitive Advantage in Global Markets INTERNATIONAL STRATEGY Achieving Competitive Advantage in Global Markets Transnational Strategy Optimization of tradeoffs associated with efficiency, local adaptation, and learning Firm’s assets and capabilities are dispersed according to the most beneficial location for a specific activity Pressures for both local adaptation and lowering costs is high STRATEGIC MANAGEMENT – BUAD 4980 31 31

Achieving Competitive Advantage in Global Markets INTERNATIONAL STRATEGY Achieving Competitive Advantage in Global Markets Transnational Strategy – Strengths / Limitations STRATEGIC MANAGEMENT – BUAD 4980 32 32

INTERNATIONAL STRATEGY Global vs. Regional Expansion Advantages of regional vs. global expansion Geographic proximity Cultural, language, customer preference similarities Linked infrastructure and distribution Favorable trading relationships Most companies are involved in regional or bi-regional expansion, not global expansion STRATEGIC MANAGEMENT – BUAD 4980 33 33

INTERNATIONAL STRATEGY Entry Modes of International Expansion STRATEGIC MANAGEMENT – BUAD 4980 34 34

INTERNATIONAL STRATEGY Entry Modes of International Expansion Exporting Producing goods in one country to sell to residents of another country STRATEGIC MANAGEMENT – BUAD 4980 35 35

INTERNATIONAL STRATEGY Entry Modes of International Expansion Exporting Benefits Simplest way to enter a market with least investment risk Foreign distribution partners facilitate entry Exporting Risks / Limitations Little control over local distribution practices Potential competition with other distributor products STRATEGIC MANAGEMENT – BUAD 4980 36 36

INTERNATIONAL STRATEGY Entry Modes of International Expansion Licensing / Franchising Contractual agreement in which a company receives a royalty or fee in exchange for the right to use its intellectual property Restrictions on use of intellectual property are part of any licensing or franchising agreement STRATEGIC MANAGEMENT – BUAD 4980 37 37

INTERNATIONAL STRATEGY Entry Modes of International Expansion Licensing or Franchising Benefits Low investment risk Avoid trade barriers and currency risk exposure Licensing or Franchising Risks / Limitations Loss of control Lower profits due to royalty / fees paid to licensee Intellectual property rights potentially at risk STRATEGIC MANAGEMENT – BUAD 4980 38 38

INTERNATIONAL STRATEGY Entry Modes of International Expansion Strategic Alliances and Joint Ventures Partnership arrangements with foreign firms or other multinationals Strategic alliances usually are limited to resource sharing arrangements, marketing and distribution Joint Ventures involve the creation of a third-party enterprise with joint ownership and/or shared assets STRATEGIC MANAGEMENT – BUAD 4980 39 39

INTERNATIONAL STRATEGY Entry Modes of International Expansion Strategic Alliances and Joint Ventures -Benefits Shared risks with less investment than wholly-owned subsidiaries Gain market or technical knowledge and operating expertise from partners Shared revenues and profits STRATEGIC MANAGEMENT – BUAD 4980 40 40

INTERNATIONAL STRATEGY Entry Modes of International Expansion Strategic Alliances and Joint Ventures - Risks / Limitations Success usually requires the following: Defined strategy that is mutually acceptable Defined responsibilities and contributions Mutual trust Unifying “common culture” Detailed procedures and documentation defining all aspects of the partnership arrangement STRATEGIC MANAGEMENT – BUAD 4980 41 41

INTERNATIONAL STRATEGY Entry Modes of International Expansion Wholly Owned Subsidiaries A business in which a multinational company owns 100 percent of the stock. STRATEGIC MANAGEMENT – BUAD 4980 42 42

INTERNATIONAL STRATEGY Entry Modes of International Expansion Wholly Owned Subsidiaries - Benefits Provides greatest degree of control of all company activities Highest investment cost and risk – but can lead to highest returns No revenue or profit sharing STRATEGIC MANAGEMENT – BUAD 4980 43 43

INTERNATIONAL STRATEGY Entry Modes of International Expansion Wholly Owned Subsidiaries – Risks / Limitations Highest investment risk – assumed entirely by parent company Must go through learning curve relating to cultural, political and legal environment in the host country STRATEGIC MANAGEMENT – BUAD 4980 44 44

Case Analysis: Marketing to the “Bottom of the Pyramid” INTERNATIONAL STRATEGY Case Analysis: Marketing to the “Bottom of the Pyramid” For years, companies focused on the upper portion of the income pyramid to market products Recently, more companies have found success marketing to the poorer populations of developing countries Micro Loans have become an industry in itself, catering to low income families wishing to start businesses Some companies, like Unilever, have modified packaging and item quantity marketed to low income customers to meet the restrictions of their standards of living STRATEGIC MANAGEMENT – BUAD 4980 45 45

Case Analysis: India and the Diamond of National Advantage INTERNATIONAL STRATEGY Case Analysis: India and the Diamond of National Advantage Over one-fifth of Fortune 1000 companies outsource their software requirements to Indian firms Indian software exports have increased from $5.9 billion in 2000 to a projected $80 billion in 2010 The Indian software industry has grown at a 25% annual rate over the past decade More than 800 firms in India are involved in software services as their primary activity STRATEGIC MANAGEMENT – BUAD 4980 46 46

Case Analysis: India and the Diamond of National Advantage INTERNATIONAL STRATEGY Case Analysis: India and the Diamond of National Advantage Software and IT firms in India are projected to employ 2.3 million people by 2010 The IT sector is expected to contribute 7% of India’s GDP in 2010 India has focused on educating students in IT to provide the labor resources necessary to staff this industry Global demand conditions for software continue to increase as more developed countries rely more heavily on complex software systems to increase efficiency India now has both the supplier base and competitive advantage against rivals in the software development industry STRATEGIC MANAGEMENT – BUAD 4980 47 47

Case Analysis: India and the Diamond of National Advantage INTERNATIONAL STRATEGY Case Analysis: India and the Diamond of National Advantage STRATEGIC MANAGEMENT – BUAD 4980 48 48

Case Analysis: How Wal-Mart Profits from Arbitrage INTERNATIONAL STRATEGY Case Analysis: How Wal-Mart Profits from Arbitrage Wal-Mart’s above-average profitability has been attributed to factors such as superior logistics, strict overhead control, and effective use of information systems Wal-Mart is aggressively pursuing international expansion across the globe Another key factor in Wal-Mart’s success has been its ability to purchase large volumes of goods at very cheap prices, sourcing more and more from foreign countries such as China It is estimated that China alone may be supplying between $50 - $70 billion annually, generating savings of $16 - $23 billion annually STRATEGIC MANAGEMENT – BUAD 4980 49 49

Case Analysis: How Deere & Co. Learned From its Indian Operations INTERNATIONAL STRATEGY Case Analysis: How Deere & Co. Learned From its Indian Operations In an attempt to enter the Indian agricultural market for farm equipment, Deere engineered small no-frills tractors for he Indian market Deere didn’t consider these basic tractors would appeal to US customers when it first introduced them to India Ironically, Indian manufacturer Mahindra was beginning to market small, basic tractors to US consumers needing basic features for their personal properties Deere has introduced slightly modified versions of its Indian tractor design for use in the US, with great success STRATEGIC MANAGEMENT – BUAD 4980 50 50