1. International Strategy: Creating Value in Global Markets
Chapter Seven
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
After reading this chapter, you should have a good understanding of:
LO1 The importance of international expansion as a viable diversification strategy.
LO2 The sources of national advantage, that is, why an industry in a given country is more (or less) successful than the same industry in another country.
LO3 The motivations (or benefits) and the risks associated with international expansion, including the emerging trend for greater offshoring and outsourcing activity.
7-2

3. Learning Objectives (cont.)
LO4 The two opposing forces—cost reduction and adaptation to local markets—that firms face when entering international markets.
LO5 The advantages and disadvantages associated with each of the four basic strategies: international, global, multi-domestic, and transnational.
LO6 The difference between regional companies and truly global companies.
LO7 The four basic types of entry strategies and the relative benefits and risks associated with each of them.
7-3

4. The Global Economy: A Brief Overview
Globalization
the increase in international exchange, including trade in goods and services as well as exchange of money, information, ideas, and information.
the growing similarity of laws, rules, norms, values, and ideas across countries.
7-4

5. The Global Economy: A Brief Overview
The economies of East Asia have attained rapid growth
Income in Latin America grew by only 6 percent in the past two decades
Average incomes in sub- Saharan Africa and the old Eastern European bloc have actually declined
7-5

6. Factors Affecting a Nation’s Competitiveness
Factor endowments
The nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry.
Demand conditions
The nature of home-market demand for the industry’s product or service.
7-6

7. Factors Affecting a Nation’s Competitiveness (cont.)
Related and supporting industries
The presence or absence in the nation of supplier industries and other related industries that are internationally competitive.
7-7

8. Factors Affecting a Nation’s Competitiveness (cont.)
Firm strategy, structure, and rivalry
The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
7-8

9. Factor Conditions
To achieve competitive advantage, factors of production must be created
Industry specific
Firm specific
The pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed
7-9

10. Demand Conditions Demanding consumers drive firms in a country to
Meet high standards
Upgrade existing products and services
Create innovative products and services
Demands that consumers place on an industry for goods and services
Demanding consumers push firms to move ahead of companies from other nations
7-10

11. Related and Supporting Industries
Enable firms to manage inputs more effectively
Allow joint efforts among firms
Strong supplier base adds efficiency to downstream activities
Competitive supplier base lets a firm obtain inputs using cost-effective, timely methods
7-11

12. Firm Strategy, Structure and Rivalry
Rivalry is intense in nations with conditions of:
Strong consumer demand
Strong supplier bases
High new entrant potential from related industries
7-12

13. Firm Strategy, Structure and Rivalry
Competitive rivalry increases the efficiency with which firms
Develop within the home country
Market within the home country
Distribute products and services within the home country
7-13

14. Porter’s Diamond of National Advantage: As Applied to India
7-14

15. QUESTION
All of the factors below have made India's software services industry extremely competitive on a global scale except  A. Large pool of skilled workers B. Large network of public and private educational institutions C. Tax and antitrust legislation that protect the dominant players in the industry D. Large, growing market and sophisticated customers
Answer: C. Tax and antitrust legislation that protect the dominant players in the industry
7-15

16. A Company’s Motivation for International Expansion
Increase the size of potential markets
Attain economies of scale
Taking advantage of arbitrage opportunities
Extend the life cycle of a product
Optimize the physical location for every activity in its value chain
Optimize the physical location for every activity in its value chain
Performance enhancement
Cost reduction
Risk reduction
7-16

17. International Country Risk Ratings
7-17

18. Potential Risks of International Expansion
Political and economic risk
Social unrest
Military turmoil
Demonstrations
Violent conflicts and terrorism
Laws and their enforcement
7-18

19. Example: Transparency International Corruption Perceptions Index
The 2008 Transparency International Corruption Perceptions Index (CPI) reveals the most corrupt countries in the world
The scores range from ten (squeaky clean) to zero (highly corrupt).
The five most corrupt countries are
Somalia (CPI Score: 1.0)
Myanmar (CPI Score: 1.3)
Iraq (CPI Score: 1.3)
Haiti (CPI Score: 1.4)
Afghanistan (CPI Score: 1.5)
The least corrupt countries are Finland, Iceland, and New Zealand. Haiti is perceived to be the most corrupt. Corruption is defined by this index as the use of public office for private gains.
7-19

20. Potential Risks of International Expansion
Currency risks
Currency exchange fluctuations
Appreciation of the U.S. dollar
currency risk
potential threat to a
firm’s operations in a
country due to fluctuations
in the local
currency’s exchange
rate.
7-20

21. Potential Risks of International Expansion
Management risks
Culture
Customs
Language
Income levels
Customer preferences
Distribution system
management risk
potential threat to a
firm’s operations in
a country due to
the problems that
managers have
making decisions
in the context of
foreign markets.
7-21

22. Outsourcing Outsourcing
occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house.
7-22

23. Offshoring Offshoring
takes place when a firm decides to shift an activity that they were previously performing in a domestic location to a foreign location.
7-23

24. Two Opposing Pressures: Reducing Costs and Adapting to Local Markets
Strategies that favor global products and brands
Should standardize all of a firm’s products for all of their worldwide markets
Should reduce a firm’s overall costs by spreading investments over a larger market
7-24

25. Two Opposing Pressures: Reducing Costs and Adapting to Local Markets
Three assumptions
Customer needs and interests worldwide are becoming more homogeneous
People are willing to sacrifice product preferences for lower prices at high quality
Economies of scale in production and marketing can be achieved through supplying global markets
7-25

26. Two Opposing Pressures: Reducing Costs and Adapting to Local Markets
Assumptions may not always be true
Product markets vary widely between nations
In many product and service markets, there appears to be a growing interest in multiple product features, quality and service
7-26

27. Two Opposing Pressures: Reducing Costs and Adapting to Local Markets
Technology permits flexible production
Cost of production may not be critical to product cost
Firm’s strategy should not be product-driven
7-27

28. Opposing Pressures and Four Strategies
7-28

29. International Strategy
An international strategy is based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets.
The primary goal of the strategy is worldwide exploitation of the parent firm’s knowledge and capabilities.
International strategy
a strategy based
on firms’ diffusion
and adaptation of
the parent companies’
knowledge and
expertise to foreign
markets, used in
industries where the
pressures for both
local adaptation and
lowering costs are
low.
7-29

30. Strengths and Limitations of International strategies
7-30

31. Global Strategy
Competitive strategy is centralized and controlled largely by corporate office
Emphasizes economies of scale
Global strategy a
strategy based on
firms’ centralization
and control by the
corporate office, with
the primary emphasis
on controlling costs,
and used in industries
where the pressure
for local adaptation is
low and the pressure
for lowering costs
is high.
7-31

32. Strengths and Limitations of Global Strategies
7-32

33. Multi-domestic Strategy
Emphasis is differentiating products and services to adapt to local markets
Authority is more decentralized
Multi-domestic
strategy a strategy
based on firms’
differentiating their
products and
services to adapt to
local markets, used
in industries where
the pressure for local
adaptation is high
and the pressure
for lowering costs
is low.
7-33

34. Strengths and Limitations of Multi-domestic Strategies
7-34

35. Transnational Strategy
Optimization of tradeoffs associated with efficiency, local adaptation, and learning
Firm’s assets and capabilities are dispersed according to the most beneficial location for a specific activity
transnational
strategy a strategy
based on firms’ optimizing
the trade-offs
associated with efficiency,
local adaptation,
and learning,
used in industries
where the pressures
for both local adaptation
and lowering
costs are high.
7-35

36. Strengths and Limitations of Transnational Strategies
7-36

37. Entry Modes of International Expansion
7-37

38. Entry Modes of International Expansion
Exporting
Producing goods in one country to sell to residents of another country.
Licensing
company receives a fee in exchange for the right to use its intellectual property.
7-38

39. Entry Modes of International Expansion
Wholly owned subsidiary
a business in which a multinational company owns 100 percent of the stock.
7-39

40. QUESTION
Fees that a multinational receives from a foreign licensee in return for its use of intellectual property are usually called:  A. Transfer prices B. Dividends C. Royalties D. Intra-corporate inflows
Answer: C. Royalties
7-40