International Strategy Chapter 8 International Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing 1

The Strategic Management Process Strategy Formulation Chapter 2 The Strategic Management Process External Competitiveness Strategic Inputs Environment Strategic Intent Strategic Mission Chapter 3 Internal Environment Strategy Formulation Strategy Implementation Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11 Business-Level Competitive Corporate-Level Corporate Structure Strategy Dynamics Strategy Governance & Control Strategic Actions Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13 Acquisitions & International Cooperative Strategic Entrepreneurship & Innovation Restructuring Strategy Strategies Leadership Strategic Outcomes Strategic Competitiveness Above Average Feedback Returns 2

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

International Strategy Lifecycle Selling Products or Services Outside a Firm’s Domestic Market Product Demand Develops and Firm Exports Products 2 Firm Introduces Innovation in Domestic Market 1 Foreign Competition Begins Production 3 Production Becomes Standardized and is Relocated to Low Cost Countries 5 Firm Begins Production Abroad 4 10

Motivations for International Expansion Increase Market Share Domestic market may lack the size to support efficient scale manufacturing facilities Example: Japanese electronics or automobile manufacturers 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 Return on Investment Example: Aircraft manufacturers Boeing or Airbus 14

Motivations for International Expansion 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 - Increase profit per unit Location Advantages Low cost markets may aid in developing competitive advantage May achieve better access to: - Raw materials - Lower cost labor - Key suppliers - Key customers - Energy - Natural resources 16

Porter’s Determinants of National Advantage Home Country of Origin Is Crucial to International Success Related & Supporting Industries - Japanese cameras & copiers - Italian shoes & leather Factor Conditions Basic Factors - Land, labor Advanced Factors - Highly educated workers - Digital communications Generalized Factors - Capital, infrastructure Specialized Factors - Skilled personnel Demand Conditions Home country may support scale efficient operations by itself Firm Strategy, Structure & Rivalry Intense rivalry fosters industry competition 21

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Business-Level International Strategies International Low Cost Usually located in home country Export to international markets Low value added operations in foreign countries High value added operations in home country International Differentiation Countries with advanced or specialized factor conditions most likely to use this strategy Example: Japan, Germany, U.S. 26

Business-Level International Strategies International Focus Strategies Technologically advanced firms follow focused low cost strategy Focused differentiation firms compete on the basis of image & design Third group competes on low price by imitating International Integrated Low Cost/Differentiation Can be most effective in dealing with diverse markets Often relies upon flexible manufacturing, total quality management or rapid communication networks 30

Corporate-Level International Strategies Type of Corporate Strategy selected will have an impact on the selection and implementation of the business-level strategies Some Corporate strategies provide individual country units with flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units Three Corporate Strategies Multi-Domestic Strategy Global Strategy Transnational Strategy 34

Corporate-Level International Strategies Multi-Domestic 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 each 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 41

Corporate-Level International Strategies Global Strategy Products are standardized across national markets Decisions regarding business-level strategies 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 (which also makes it difficult to manage) 48

Corporate-Level International Strategies Transnational Strategy Seeks to achieve both global efficiency and local responsiveness Difficult to achieve because of simultaneous requirements for strong central control and coordination to achieve efficiency and local flexibility and decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage 52

International Corporate Strategy When is each strategy appropriate? Need for Global Integration Need for Local Market Responsiveness Low High Multi- Domestic 53

International Corporate Strategy When is each strategy appropriate? Need for Global Integration Need for Local Market Responsiveness Low High Global Strategy Multi- Domestic 53

International Corporate Strategy When is each strategy appropriate? Need for Global Integration Need for Local Market Responsiveness Low High Global Strategy Trans- national Multi- Domestic 53

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Choice of International Entry Mode Exporting Common way to enter new international markets No need to establish operations in other countries Establish distribution channels through contractual relationships May have high transportation costs May encounter high import tariffs May have less control on marketing and distribution Difficult to customize products 70

Choice of International Entry Mode Licensing Firm authorizes another firm to manufacture and sell its products Licensing firm is paid a royalty on each unit produced and sold Licensee takes risks in manufacturing investments Least risky way to enter a foreign market Licensing firm loses control over product quality and distribution Relatively low profit potential A significant risk is that licensor learns technology and competes when license expires 78

Choice of International Entry Mode Strategic Alliances Enable firms to shares risks and resources to expand into international ventures Most joint ventures (JVs) involve a foreign company with a new product or technology and a host company with access to distribution or knowledge of local customs, norms or politics May experience difficulties in merging disparate cultures May not understand the strategic intent of partners or experience divergent goals 83

Choice of International Entry Mode Acquisitions Enable firms to make most rapid international expansion Can be very costly Legal and regulatory requirements may present barriers to foreign ownership Usually require complex and costly negotiations Potentially disparate corporate cultures 89

Choice of International Entry Mode New Wholly-Owned Subsidiary Most costly and complex of entry alternatives Achieves greatest degree of control Potentially most profitable, if successful Maintain control over technology, marketing and distribution May need to acquire expertise and knowledge that is relevant to host country Could require hiring host country nationals or consultants at high cost 95

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Strategic Competitiveness Outcomes International diversification facilitates innovation in the firm Provides larger market to gain more and faster returns form investments in innovation May generate resources necessary to sustain a large-scale R&D program Generally related to above-average returns, assuming effective implementation and management of international operations International diversification provides greater economies of scope and learning 101

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Major Risks of International Diversification Political Risk Rebel fighting in Chechnya (Russia) and Liberia (Africa) Continual warfare among Middle Eastern nations Potential renationalization of privatized enterprises in Russia Failure of European Community in quest for economic superpower status because of intercountry disagreements 107

Major Risks of International Diversification Economic Risk Mexico’s effect on world trade with low wages and high quality but strong currency risks China’s difficulty in enforcing intellectual property rights on CDs, software, etc. Germany’s struggle with high unemployment, high interest rates, sagging competitiveness, and cuts in social programs China’s trade policies. $44 billion trade surplus with United States in 1977. China’s overall trade surplus increased twentyfold in first half of 1997. 112

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 112