Bilingual Series-Strategic Management Chapter 8

International Strategy

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

International Strategy Opportunities and Outcomes Identify International Opportunitie s Explore Resources and Capabilities Use Core Competenc e Strategic Competitivenes s Outcomes International Strategies Modes of Entry Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business- Level Strategy Multidomesti c Strategy GlobalStrategy Transnation al Strategy Exporting Establishment of New Subsidiary Exporting StrategicAlliances Acquisition Management Problems and Risk Management Problems and Risk Higher Performance Returns Innovatio n Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage

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

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

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

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 Related & Supporting Industries - Japanese cameras & copiers - Italian shoes & leather Firm Strategy, Structure & Rivalry Intense rivalry fosters industry competition Porter’s Determinants of National Advantage Home Country of Origin Is Crucial to International Success

International Strategy Opportunities and Outcomes Identify International Opportunitie s Explore Resources and Capabilities Use Core Competenc e Strategic Competitivenes s Outcomes International Strategies Modes of Entry Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business- Level Strategy Multidomesti c Strategy GlobalStrategy Transnation al Strategy Exporting Establishment of New Subsidiary Exporting StrategicAlliances Acquisition Management Problems and Risk Management Problems and Risk Higher Performance Returns Innovatio n

International Differentiation Countries with advanced or specialized factor conditions most likely to use this strategy Example: Japan, Germany, U.S. 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 Business-Level International Strategies

International Focus Strategies 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 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 Business-Level International Strategies

Three Corporate Strategies Global Strategy Transnational Strategy Multi-Domestic Strategy 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

Multi-Domestic Strategy 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 Strategy and operating decisions are decentralized to strategic business units (SBU) in each country Products and services are tailored to local markets Corporate-Level International Strategies

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) Global Strategy Corporate-Level International Strategies

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 Transnational Strategy Corporate-Level International Strategies

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

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

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

International Strategy Opportunities and Outcomes Identify International Opportunitie s Explore Resources and Capabilities Use Core Competenc e Strategic Competitivenes s Outcomes International Strategies Modes of Entry Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business- Level Strategy Multidomesti c Strategy GlobalStrategy Transnation al Strategy Exporting Establishment of New Subsidiary Exporting StrategicAlliances Acquisition Management Problems and Risk Management Problems and Risk Higher Performance Returns Innovatio n

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

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

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

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

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

International Strategy Opportunities and Outcomes Identify International Opportunitie s Explore Resources and Capabilities Use Core Competenc e Strategic Competitivenes s Outcomes International Strategies Modes of Entry Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business- Level Strategy Multidomesti c Strategy GlobalStrategy Transnation al Strategy Exporting Establishment of New Subsidiary Exporting StrategicAlliances Acquisition Management Problems and Risk Management Problems and Risk Higher Performance Returns Innovatio n

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

International Strategy Opportunities and Outcomes Identify International Opportunitie s Explore Resources and Capabilities Use Core Competenc e Strategic Competitivenes s Outcomes International Strategies Modes of Entry Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business- Level Strategy Multidomesti c Strategy GlobalStrategy Transnation al Strategy Exporting Establishment of New Subsidiary Exporting StrategicAlliances Acquisition Management Problems and Risk Management Problems and Risk Higher Performance Returns Innovatio n

Political Risk Major Risks of International Diversification 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

Economic Risk Major Risks of International Diversification 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 China’s overall trade surplus increased twentyfold in first half of 1997.

Management Problems Limits To International Expansion Cost of Coordination across diverse geographical business units Institutional and cultural barriers Understanding strategic intent of competitors The overall complexity of competition