1. CHAPTER 8 International Strategy
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2. KNOWLEDGE OBJECTIVES
Studying this chapter should provide you with the strategic management knowledge needed to:
Explain traditional and emerging motives for firms to pursue international diversification.
Explore the four factors that lead to a basis for international business-level strategies.
Define the three international corporate-level strategies: multidomestic, global, and transnational.
Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization.
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3. KNOWLEDGE OBJECTIVES (cont’d)
Studying this chapter should provide you with the strategic management knowledge needed to:
Name and describe the five alternative modes for entering international markets.
Explain the effects of international diversification on firm returns and innovation.
Name and describe two major risks of international diversification.
Explain why the positive outcomes from international expansion are limited.
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4. FIGURE 8.1 Opportunities and Outcomes of International Strategy
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5. 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.
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6. 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.
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7. 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.
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8. 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.
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9. 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
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10. FIGURE 8.2 Determinants of National Advantage
Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage of Nations, by Michael E. Porter, p. 72. Copyright ©1990, 1998 by Michael E. Porter.
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11. 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
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12. 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.
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13. 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
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14. 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.
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15. 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.
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16. FIGURE 8.3 International Corporate-Level Strategies
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17. 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
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18. 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
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19. 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
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20. 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
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21. TABLE 8.1 Global Market Entry: Choice of Entry
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 (e.g., two corporate cultures)
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
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22. Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm has no foreign manufacturing expertise and requires investment only in distribution.
Export
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23. Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm needs to facilitate the product improvements necessary to enter foreign markets.
Licensing
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24. Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm needs to connect with an experienced partner already in the targeted market.
Strategic Alliance
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25. Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm needs to reduce its risk through the sharing of costs.
Strategic Alliance
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26. Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm is facing uncertain situations such as an emerging economy in its targeted market.
Strategic Alliance
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27. Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm’s intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.
Wholly-owned Subsidiary
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28. 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.
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29. 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.
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30. 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.
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31. 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 ? ? ? ?
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32. FIGURE 8.4 Risk in the International Environment
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33. 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
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