Competing For Advantage Part III – Creating Competitive Advantage Chapter 10 – International Strategy

The Strategic Management Process

International Strategy Key Terms International Diversification – strategy through which a firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets

International Strategy

Key Terms International Strategy – strategy through which the firm sells its goods or services outside the domestic market

Incentives for Using an International Strategy Increased market size Greater returns on major capital investments or on investments in new products and processes Greater economies of scale, scope, or learning A competitive advantage through location

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

Economies of Scale, Scope, and Learning Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D, or distribution Costs are spread over a larger sales base Profit per unit is increased

Location Advantages Low-cost markets may aid in developing competitive advantage Low-cost markets may achieve better access to critical resources: Raw materials Lower cost labor Key customers Energy

Expanding Internationally Decide whether the firm will follow an international corporate-level strategy (one that emphasizes a different approach to each international market), a standardized approach, or something in between Determine how to use the firm's distinctive competencies to create advantages in international markets through a business- level strategy Choose a mode for entering new markets

International Corporate-Level Strategies Type of corporate strategy selected will have an impact on the selection and implementation of business-level strategies Some corporate strategies provide each individual country unit with the flexibility to choose its own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units

Advantages of Regionalization Firms are better able to understand the cultures, legal and social norms, and other factors that are important for effective competition in those markets Entering regional markets sequentially (beginning in markets that are most familiar and have the largest and strongest product lines) can be an effective way of launching an international strategy

Liability of Foreignness Liabilities associated with foreign businesses in a highly different business environment can make competing on a worldwide scale risky and expensive Several factors make operating a business in a foreign country difficult: Employment contracts and labor forces differ Host governments make different demands and requirements to compete in their markets Customers are not always understood Given these conditions, regional adaptation may be favored over a broad, global market approach

International Corporate-Level Strategies

Multidomestic Strategy Key Terms Multidomestic Strategy – international strategy in which strategic and operating decisions are decentralized to the strategic business-unit (SBU) in each country to allow the units to tailor products to local markets Worldwide Geographic Area Structure – organizational structure that emphasizes national interests and facilitates efforts to satisfy local or cultural differences (used to implement the multidomestic strategy)

Multidomestic Strategy – Features Focuses on variations of competition within each country Customizes products to meet specific needs and preferences of local customers Decentralizes the firm's strategic and operating decisions to business units in each country Takes steps to isolate the firm from global competitive forces Establish protected market positions Compete in industry segments most affected by differences among local countries Deals with uncertainty due to differences across markets

Worldwide Geographic Area Structure

Global Strategy Key Terms Global Strategy – international strategy through which the firm offers standardized products across country markets, with the competitive strategy being dictated by the home office Worldwide Product Divisional Structure – organizational structure in which decision-making authority is centralized in the worldwide division headquarters to coordinate and integrate decisions and actions among divisional business units (used to implement the global strategy)

Global Strategy – Features Emphasizes economies of scale Is facilitated by improved global accounting and financial reporting standards Centralizes the firm's strategic and operating decisions at the home office Involves SBUs operating in each country that are interdependent

Global Strategy – Features (cont.) Home office attempts to achieve integration across SBUs, adding management complexity Produces lower risk Is less responsive to local market opportunities Offers less effective learning processes due to the pressure to conform and standardize

Worldwide Product Divisional Structure

Transnational Strategy Key Terms Transnational Strategy – international strategy through which the firm seeks to achieve both global efficiency and local responsiveness Flexible Coordination – building a shared vision and individual commitment through an integrated network Worldwide Combination Structure – organizational structure in which characteristics and mechanisms are drawn from both the worldwide geographic area structure and the worldwide product divisional structure (used to implement the transnational strategy)

Worldwide Combination Structure – Competing Objectives Assets and operations may be centralized/decentralized Functions may be integrated/nonintegrated Relationships may be formal/informal Coordination mechanisms may leverage efficiency/flexibility Mandates to subsidiaries may be global/specialized-contribution/localized- implementation

Worldwide Combination Structure – Developments Strong educational component to support the culture Adaptation of core competencies in local economies to gain competitive benefits Effective corporate headquarters to foster leadership, shared vision, and strong corporate identity Centers of excellence to foster multiple and dispersed capabilities

Determinants of National Advantage

Choice of International Entry Mode

Exporting Involves low expense to establish operations in host country Often involves contractual agreements Involves high transportation costs May have some tariffs imposed Offers low control over marketing and distribution

Licensing Involves low cost to expand internationally Allows licensee to absorb risks Has low control over manufacturing and marketing Offers lower potential returns (shared with licensee) Involves risk of licensee imitating technology and product for own use May have inflexible ownership arrangements

Strategic Alliances Involve shared risks and resources Facilitate development of core competencies Involve fewer resources and costs required for entry May involve possible incompatibility, conflict, or lack of trust with partner Are difficult to manage

Acquisitions Allow for quick access to market Involve possible integration difficulties Are costly Have complex negotiations and transaction requirements

New Wholly Owned Subsidiary Is costly Involves complex processes Allows for maximum control Has the highest potential returns Carries high risk

International Diversification and Returns Key Terms Offshoring – offshore outsourcing

Multinational Firms – Potential Advantages Economies of scale and experience Location advantages Increased market size Stabilized returns Reduce overall firm risk

International Diversification and Innovation Exposure to new products and markets Opportunity to integrate new knowledge into operations Generation of resources to sustain innovation efforts

International Expansion Risks Political risks Economic risks

Political Risks of International Expansion Government instability Conflict or war Government regulations Conflicting and diverse legal authorities Potential nationalization of private assets Government corruption Changes in government policies

Economic Risks Differences and fluctuations in currency values Investment losses due to political risks

Complexity of Managing Multinational Firms Geographic dispersion Costs of coordination Logistical costs Trade barriers Cultural diversity Host government

Ethical Questions As firms internationalize, they may be tempted to locate facilities where product liability laws are lax in testing new products. Is this an acceptable practice? Why or why not?

Ethical Questions Regulation and laws regarding the sale and distribution of tobacco products are stringent in the U.S. market. What are the ethical implications for U.S. pursuing marketing strategies for tobacco products in other countries that would be illegal in the U.S.?

Ethical Questions Some companies outsource production to firms in foreign countries to save money. To what extent is a company morally responsible for the ways that workers are treated by the firms in those countries?

Ethical Questions Global and multidomestic strategies call for different competitive approaches. What ethical concerns might surface when firms try to market standardized products globally? When should firms develop different products or approaches for each local market?

Ethical Questions Is a company morally responsible to support the U.S. government as it imposes trade sanctions on other countries, such as China, because of human rights violations? What if a significant amount of its international business involves one of those countries?

Ethical Questions Latin America has been experiencing significant changes in both political orientation and economic development. What strategies should foreign international businesses implement, if any, to influence government policy in these countries? Can businesses realistically expect to influence political changes?