CHAPTER 8 International Strategy BA 495 R. M. Zahrowski CHAPTER 8 International Strategy © 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 Return on Investment 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.

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.

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.

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.

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.

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.