CHAPTER 8 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.

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.

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.

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.

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.