1 International Strategy Chapter 8 How do we become a Global Corporation?

2 ExportingLicensing Strategic alliances Acquisitions Establishment of a new subsidiary International business-level strategy Multidomestic strategy Global strategy Transnational strategy Opportunities and Outcomes of International Strategy Increased market size Return on investment Economies of scale and learning Advantage in location Identify International Opportunities Explore Resources and Capabilities Use Core Competence International Strategies Modes of Entry

3 International Strategy Life Cycle Production Becomes Standardized and is Relocated to Low Cost Countries Product Demand Develops and Firm Exports Products Firm Introduces Innovation in Domestic Market ForeignCompetition Begins Production Firm Begins Production Abroad Selling Products or Services Outside a Firm’s Domestic Market

4 Motivations for International Expansion Increase Market Share Increase Market Share –domestic market may lack the size to support efficient scale manufacturing facilities Return on Investment 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

5 Motivations for International Expansion Economies of Scale or Learning 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 Location Advantages –low cost markets may aid in developing competitive advantage –may achieve better access to: Raw materialsRaw materials Lower cost laborLower cost labor Key customersKey customers EnergyEnergy

6 International Business-Level Strategy: Determinants of National Advantage Factors of production Related and supportingindustries Demandconditions Firm strategy, structure, and rivalry

7 International Business-Level Strategy: Determinants of National Advantage Factors of production: the inputs necessary to compete in any industry the inputs necessary to compete in any industry basic factors include natural and labor resources basic factors include natural and labor resources –land –labor –capital –natural resources advanced factors include digital communication systems and educated workforce advanced factors include digital communication systems and educated workforce –technology –infrastructure

8 International Business-Level Strategy: Determinants of National Advantage Demand conditions: the nature and size of buyers’ needs in the home market for the industry’s goods or services the nature and size of buyers’ needs in the home market for the industry’s goods or services –size of 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

9 International Business-Level Strategy: Determinants of National Advantage Related and supporting industries: supporting services, facilities, suppliers and so on Related and supporting industries: supporting services, facilities, suppliers and so on –support in design –support in distribution –related industries as suppliers and buyers

10 International Business-Level Strategy: Determinants of National Advantage Firm strategy, structure, and rivalry: Firm strategy, structure, and rivalry: the pattern of strategy, structure, and rivalry among firms the pattern of strategy, structure, and rivalry among firms –common technical training –methodological product and process improvement –cooperative and competitive systems

11 International Corporate-Level Strategy Type of corporate strategy selected will have an impact on the selection and implementation of the business-level 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 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 Others dictate business-level strategies from the home office and coordinate resource sharing across units

12 International Corporate-Level Strategy Need for Local Responsiveness Need for Global Integration Low High LowHigh Globalstrategy Transnationalstrategy Multidomesticstrategy

13 Multidomesticstrategy International Corporate-Level Strategy: Multidomestic Strategy Strategy and operating decisions are decentralized to strategic business units (SBU) in each countryStrategy and operating decisions are decentralized to strategic business units (SBU) in each country Products and services are tailored to local marketsProducts and services are tailored to local markets Business units in one country are independent of each otherBusiness units in one country are independent of each other Assumes markets differ by country or regionsAssumes markets differ by country or regions Focus on competition in each marketFocus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in EuropeProminent strategy among European firms due to broad variety of cultures and markets in Europe Examples: Unilever, Breweries

14 International Corporate-Level Strategy: Global Strategy Globalstrategy Products are standardized across national marketsProducts are standardized across national markets Decisions regarding business-level strategies are centralized in the home officeDecisions regarding business-level strategies are centralized in the home office Emphasizes economies of scaleEmphasizes economies of scale Often lacks responsiveness to local marketsOften lacks responsiveness to local markets Requires resource sharing and coordination across borders (which also makes it difficult to manage)Requires resource sharing and coordination across borders (which also makes it difficult to manage) Examples: Cemex, Computer Hardware

15 Transnationalstrategy International Corporate-Level Strategy: Transnational Strategy Seeks to achieve both global efficiency and local responsivenessSeeks to achieve both global efficiency and local responsiveness Difficult to achieve because of simultaneous requirementsDifficult to achieve because of simultaneous requirements  strong central control and coordination to achieve efficiency  decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantageMust pursue organizational learning to achieve competitive advantage Examples: Fast Foods, Wal-mart

16 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 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 Global Market Entry: Choice of Entry Mode

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

18 Choice of International Entry Mode LicensingLicensing 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

19 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

20 Choice of International Entry Mode AcquisitionsAcquisitions 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

21 New Wholly-Owned Subsidiary Choice of International Entry Mode 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

22 Risks in an International Environment Political Risks Economic Risks instability in national governmentsinstability in national governments war, both civil and internationalwar, both civil and international potential nationalization of a firm’s resourcespotential nationalization of a firm’s resources Political Risks

23 Risks in an International Environment Economic Risks Economic risks are interdependent from political risks and can include: differences and fluctuations in the value of different currenciesdifferences and fluctuations in the value of different currencies differences in prevailing wage ratesdifferences in prevailing wage rates difficulties in enforcing property rightsdifficulties in enforcing property rights unemploymentunemployment Political Risks