1. International Strategy: Creating Value in Global Markets
chapter 7

2. Learning Objectives
After reading this chapter, you should have a good understanding of: LO7.1 The importance of international expansion as a viable diversification strategy LO7.2 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. LO7.3 The motivations (or benefits) and the risks associated with international expansion, including the emerging trend for greater off shoring and outsourcing activity.
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3. Learning Objectives
LO7.4 The two opposing forces – cost reduction and adaptation to local markets – that firms face when entering international markets. LO7.5 The advantages and disadvantages associated with each of the four basic strategies: international, global, multidomestic, and transnational. LO7.6 The difference between regional companies and true global companies. LO7.7 The four basic types of entry strategies and the relative benefits and risks associated with each of them.

4. International Strategy
Consider…
The global marketplace provides many opportunities for firms to increase their revenue base and their profitability.
However, managers face many opportunities and risks when they diversify abroad.
What should a firm do in order to attain a competitive advantage in this global marketplace?
The trade among nations has increased dramatically in recent years and it is estimated that by 2015, the trade across nations will exceed the trade within nations. This makes international expansion a viable diversification strategy. In a variety of industries such as semiconductors, automobiles, commercial aircraft, telecommunications, computers, and consumer electronics, it is almost impossible to survive unless firms scan the world for competitors, customers, human resources, suppliers, and technology. Firms need to know how to be successful and create value when diversifying into global markets. Some of the questions that need to be answered include: what explains the level of success of a given industry in a given country? What are some of the major motivations and risks associated with international expansion? How can firms handle the opposing forces of cost reduction and local adaptation – should firms pursue international, global, multidomestic, or transnational strategies? What entry strategies should a firm choose in order to enter a foreign market?

5. International Strategy
Globalization has to do with the rise of market capitalization around the world:
International exchanges have increased
Trade in goods & services
Exchange of money, information, & ideas
Laws, rules, norms, values, and ideas are growing more similar across countries
Challenges include balancing between emerging markets & developed markets
How to meet the needs of customers at very different income levels
Globalization = has two meanings. One is the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information. Two is the growing similarity of laws, rules, norms, values, and ideas across countries. Globalization has undeniably created tremendous business opportunities for multinational corporations. One of the challenges with globalization is determining how to meet the needs of customers at very different income levels. In many developing economies, distributions of income remain much wider than they do in the developed world, leaving many impoverished even as the economies grow. The concept “bottom of the pyramid” refers to the practice of a multinational firm targeting its goods and services to the nearly 5 billion poor people in the world who inhabit developing countries. See Strategy Spotlight 7.1.

6. International Strategy
The rapid rise in global capitalism has had dramatic effects on the growth in different economic zones. The growth experienced by developed economies in the first decade of the 2000s was anemic, while the growth in developing economies was robust. This trend is continuing, with emerging markets growing 4% faster than developed markets in 2011 and This has resulted in a dramatic shift in the structure of the global economy. As of 2013, over half the world’s output will come from emerging markets. This fact affects a firm’s international strategy.
Exhibit 7.1 Growth in GDP per Person from 2001 to 2011 by Region
Source: A game of catch-up. The Economist, September 24: 3-6.

7. Factors Affecting a Nation’s Competitiveness
Michael Porter’s diamond of national advantage explains why some nations and their industries outperform others:
Factor endowments
Demand conditions
Related and supporting industries
Firm strategy, structure, & rivalry
Some nations and their industries are more competitive than others. Understanding these differences helps a firm create a competitive advantage when it expands internationally. Diamond of national advantage = a framework for explaining why countries foster successful multinational corporations, consisting of four factors – factor endowments; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry. These four attributes jointly determine the playing field that each nation establishes and operates for its industries. Factor endowments = a nation’s position in factors of production. Demand conditions = the nature of home-market demand for the industry’s product or service. Related and supporting industries = the presence, absence, and quality in the nation of supplier industries and other related industries that supply services, support, or technology to firms in the industry value chain. 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.

8. Factors Affecting a Nation’s Competitiveness
Factor endowments involve factors of production:
Land
Capital
Labor
Factors of production must be industry & firm specific
Must be rare, valuable, difficult to imitate, and rapidly & efficiently deployed
Factors of production are the building blocks that create usable consumer goods and services. Companies and advanced nations seeking competitive advantage over firms and other nations create many of these factors of production. For example, a country or industry dependent on scientific innovation must have a skilled human resource pool to draw upon. This resource pool is not inherited; it is created through investment in industry–specific knowledge and talent. The actual pool of resources is less important than the speed and efficiency with which these resources are deployed. Thus, firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to a nation’s competitive advantage. The island nation of Japan is given as an example.

9. Factors Affecting a Nation’s Competitiveness
Demand conditions refer to the demands that consumers place on an industry
Demanding consumers drive firms in that country to:
Meet high standards
Upgrade existing products and services
Create innovative products and services
Better anticipate future global demand
Proactively respond to product & service requirements
Consumers who demand highly specific, sophisticated products and services force firms to create innovative, advanced products and services to meet the demand. This consumer pressure presents challenges to a country’s industries. Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. The conditions of consumer demand influence how firms view a market. This, in turn, helps the nation’s industries to better anticipate future global demand conditions and proactively respond to product and service requirements. Denmark is given as an example.

10. Factors Affecting a Nation’s Competitiveness
Related and supporting industries enable firms to manage inputs more effectively:
A competitive supplier base
Reduces manufacturing costs
Close working relationships with suppliers
Allows for joint research & development
Development of related industries
Forces existing firms to practice cost control, product innovation, better distribution methods
A home country’s industries can become a source of competitive advantage when related and supporting industries are developed. Countries with a strong supplier base benefit by adding efficiency to downstream activities. A competitive supplier base helps a firm obtain inputs using cost effective, timely methods, thus reducing manufacturing costs. Also, close working relationships with suppliers provide the potential to develop competitive advantages through joint research and development and the ongoing exchange of knowledge. Related industries create the probability that new companies will enter the market, increasing competition and forcing existing firms to become more competitive through efforts such as cost control, product innovation, and novel approaches to distribution. Combined, these give the home country’s industries a source of competitive advantage. The Italian footwear industry is given as an example.

11. Factors Affecting a Nation’s Competitiveness
Firm strategy, structure, & rivalry due to
Strong consumer demand
Strong supplier base
High new entrant potential from related industries
Domestic rivalry leads to a search for new markets
Rivalry is a strong indicator of global competitive success
Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new entrant potential from related industries. This competitive rivalry in turn increases the efficiency with which firms develop, market, and distribute products and services within the home country. Domestic rivalry thus provides a strong impetus for firms to innovate and find new sources of competitive advantage. This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness. Domestic rivalry is perhaps the strongest indicator of global competitive success. Firms that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete in world markets.

12. 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.
a large network of public and private educational institutions.
tax and antitrust legislation that protect the dominant players in the industry.
A large, growing market, and sophisticated customers.
Answer: C. See the discussion of Porter’s diamond of national advantage. Factor conditions, demand characteristics, and the existence of related and supporting industries are all factors that affect a nation’s competitiveness. Policies that protect the nation’s domestic competitors do not lead to a nation’s competitive advantage on the worldwide stage.

13. Example: Factors Affecting a Nation’s Competitiveness
Firms that succeed in global markets have first succeeded in intensely competitive home markets. Competitive advantage for global firms typically grows out of relentless, continuing improvement, and innovation. The Indian software industry offers a clear example of how the attributes in Porter’s “diamond” interact to lead to the conditions for a strong industry to grow. See Strategy Spotlight 7.2 for information on how mutually reinforcing elements work in this market.
Exhibit 7.2 India’s Diamond in Software
Source: From Kampur D.,and Ramamurti R., “India’s Emerging Competition Advantage in Services,” Academy of Management Executive: The Thinking Managers Source. Copyright © 2001 by Academy of Management. Reproduced with permission of Academy of Management via Copyright Clearance Center..

14. International Expansion: Motivations
A company decides to become a multinational firm in order to:
Increase market size
Attain economies of scale
Take advantage of arbitrage opportunities
In every stage of the value chain
Enhance a product’s growth potential
Reinvigorating the product life cycle
Multinational firms = firms that manage operations in more than one country. Companies pursue international expansion in order to increase the size of potential markets for firms’ products and services. Expanding a firm’s global presence also automatically increases its scale of operations, providing it with a larger revenue and asset base, which potentially enables the firm to attain economies of scale. This can also spread fixed costs such as R&D over a larger volume of production. Arbitrage opportunities = an opportunity to profit by buying and selling the same good in different markets. In its simplest form, arbitrage involves buying something from where it is cheap and selling it somewhere where it commands a higher price. Arbitrage can be applied to virtually any factor of production and every stage of the value chain. Walmart is an example. Enhancing the growth rate of a product that is in its maturity stage in a firm’s home country, but that has greater demand potential elsewhere is another benefit of international expansion.

15. International Expansion: Motivations
A company decides to become a multinational firm in order to:
Optimize the location of value chain activity
To enhance performance
To reduce cost
To reduce risk
Explore reverse innovation
Design & manufacture products locally
Export no-frills products to developed markets
A firm has to decide where to locate the various activities that it must engage in to produce products and services. Primary activities, such as inbound logistics, operations, and marketing, as well as support activities, such as procurement, R&D, and human resource management must be located in areas where the firm can see performance enhancement, cost reduction, and risk reduction. Location decisions can affect the quality with which any activity is performed in terms of the availability of needed talent, speed of learning, and the quality of external and internal coordination. Location decisions can affect the cost structure in terms of local manpower and other resources, transportation and logistics, and government incentives and the local tax structure. Nike’s manufacture of shoes in Asia is an example. Erratic swings in the exchange ratios between global currencies requires firms to manage these currency risks by spreading the high cost elements of their manufacturing operations across a few select and carefully chosen locations around the world. Reverse innovation = new products developed by developed country multinational firms for emerging markets that have adequate functionality at a low cost. Many leading companies are discovering that developing products specifically for emerging markets can pay off in a big way. When products can deliver adequate functionality at a fraction of the cost, these products can subsequently find success in value segments in wealthy countries as well. See Strategy Spotlight 7.3.

16. International Expansion: Risks
Multinational firms also encounter risks:
Political risk due to social unrest, military turmoil, demonstrations, terrorism, absence of the rule of law can lead to
Destruction of property
Disruption of operations
Non-payment for goods and services
Arbitrary government decisions
Economic risk due to piracy and counterfeiting
Political risk = potential threat to a firm’s operations in the country due to ineffectiveness of the domestic political system. Countries that are viewed as high risk are less attractive for most types of businesses. Another source of political risk in many countries is the absence of the rule of law. Rule of law = a characteristic of legal systems where behavior is governed by rules that are uniformly enforced. The absence of rules or the lack of uniform enforcement of existing rules leads to what might often seem to be arbitrary and inconsistent decisions by government officials. This can make it difficult for foreign firms to conduct business. The laws, and the enforcement of laws, associated with protection of intellectual property rights can be a major potential economic risk in entering new countries. Economic risk = potential threat to a firm’s operations in the country due to economic policies and conditions, including property rights laws and enforcement of those laws. Firms rich in intellectual property have encountered financial losses as piracy or imitations of their products have grown due to a lack of law enforcement of intellectual property rights. Counterfeiting = selling of trademarked goods without the consent of the trademark holder. Counterfeiting, a direct form of theft of intellectual property rights, is a significant and growing problem.

17. International Expansion: Risks
Multinational firms also encounter risks:
Currency risk due to fluctuations in the local currency’s exchange rate
Affects cost of production or net profit
Management risk due to culture, customs, language, income level, customer preferences, distribution systems
Could lead to the need for local adaptation of apparently standard products
Currency risk = potential threat to a firm’s operations in the country due to fluctuations in the local currency’s exchange rate. Even a small change in the exchange rate can result in a significant difference in the cost of production or net profit when doing business overseas. An example includes the U.S. dollar appreciating against other currencies, making U.S. goods more expensive to consumers in foreign countries. 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. Managers must respond to the inevitable differences that they encounter when doing business in multiple countries. Cultural differences can pose unique challenges. Even in the case of apparently standard products, some degree of local adaptation may become necessary.

18. International Expansion: Risks
When the company expands its international operations, it does so to increase its profits or revenues. As with any other investment, however, there are also potential risks. To help companies assess the risk of entering foreign markets, rating systems have been developed to evaluate political, economic, as well as financial and credit risks. Euromoney magazine publishes a semi annual “country risk rating” that evaluates political, economic, and other risks that entrants potentially face. Exhibit 7.3 presents a sample of country risk ratings, published by the World Bank, from the 178 countries that Euromoney evaluates. Note that the lower the score, the higher the country’s expected level of risk.
Exhibit 7.3 A Sample of Country Risk Ratings, January 2013
Source: euromoneycountryrisk.com

19. Example: Risks from Corruption
The Transparency International Corruption Perceptions Index (CPI) reveals the most corrupt countries in the world
The scores range from 100 (very clean) to 0 (highly corrupt).
The most corrupt countries are:
Somalia, North Korea, & Afghanistan (CPI scores: 8)
Sudan (CPI score: 13)
Myanmar (CPI score: 15)
Uzbekistan & Turkmenistan (CPI scores: 17)
See Looking at the Corruption Perceptions Index 2012, it's clear that corruption is a major threat facing humanity. Corruption destroys lives and communities, and undermines countries and institutions. It generates popular anger that threatens to further destabilise societies and exacerbate violent conflicts. The Corruption Perceptions Index scores countries on a scale from 0 (highly corrupt) to 100 (very clean). While no country has a perfect score, two-thirds of countries score below 50, indicating a serious corruption problem. Corruption translates into human suffering, with poor families being extorted for bribes to see doctors or to get access to clean drinking water. It leads to failure in the delivery of basic services like education or healthcare. It derails the building of essential infrastructure, as corrupt leaders skim funds. Corruption amounts to a dirty tax, and the poor and most vulnerable are its primary victims.

20. International Expansion: Managing Risks
Managing political risk through
Market diversification
Developing stakeholder coalitions
Wooing key influencers
Putting key stakeholders on their boards
Managing economic risk through global dispersion of value chains
Outsourcing
Offshoring
Strategy Spotlight 7.4 discusses how firms can manage the risks from political instability and adverse actions by governments. Competing in a range of geographic markets lessons the risk of actions by a single government or turmoil in a single nation. Firms can also develop coalitions with other multinationals investing within the country. Smart firms identify key influencers such as legislative leaders, regulators, and local officials who can become political supporters. These key stakeholders can be invited to join the firm’s board. This gives the locals a stake in the company’s success. To manage economic risk, firms can disburse their value chains across several countries and continents. Outsourcing = using other firms to perform value-creating activities that were previously performed in-house. The firm may be perfectly capable of doing this activity but chooses to have someone else perform it for cost or quality reasons. Outsourcing can be to either a domestic or foreign firm. Offshoring = shifting a value-creating activity from a domestic location to a foreign location. Value-creating activities should be performed in the location where the cost is lowest or where the quality is the best.

21. International Expansion: Managing Risks
Offshoring may be costly
Common savings from offshoring include:
Lower wages, benefits, energy costs, regulatory costs, taxes
Hidden costs from offshoring include:
Higher total wage & indirect costs
Increased coordination costs
Increased inventory due to longer lead time
Reduced market responsiveness
Cost of protecting intellectual property
In the 1990s, for manufacturing industries especially, the rapid decline in transportation and coordination costs enabled firms to disperse their value chains over different locations. Yet while offshoring offers the potential to cut costs in corporations across a wide range of industries, many firms are finding the benefits of offshoring to be more elusive and the costs greater than they anticipated. For instance, labor cost per hour may be significantly lower in developing markets, but this may not translate into lower overall costs. If there are problems with the skill level of workers, the firm will find the need for more training and supervision of workers, more raw material and greater scrap due to the lower skill level, and greater rework to fix quality problems. Wages in developing markets can be volatile and spike unexpectedly. For instance, wages in China have been increasing recently. Due to longer delivery times, firms often need to tie up more capital in work in progress and inventory. The long supply lines from low-cost countries may make firms less responsive to shifts in customer demands. The cost of coordinating product development and manufacturing with operations undertaken in different countries can hamper innovation. Finally, firms operating in countries with weak intellectual property protection can wind up losing their trade secrets or taking costly measures to protect these secrets. Firms need to take into account all of these costs in determining whether or not to move their operations offshore.

22. International Strategies: Opposing Pressures
Cost reduction or adaptation to local markets?
Strategies that favor global products & brands should do the following:
Standardize all products for all markets
Reduce overall costs by spreading investments over a larger market
Assumes:
Homogenous customer needs & interests
People prefer lower prices at high quality
Global markets produce economies of scale
Firms face two opposing forces when they expand into global markets: cost reduction and adaptation to local markets. Many years ago, the famed marketing strategist Theodore Levitt advocated strategies that favored global products and brands. He suggested that firms should standardize all of their products and services for all of their worldwide markets. Such an approach would help a firm lower its overall costs by spreading its investments over as large a market as possible. This approach rested on three key assumptions: 1. Customer needs and interests are becoming increasingly homogenous worldwide. 2. People around the world are willing to sacrifice preferences in product features, functions, design, and the like for lower prices at high quality. 3. Substantial economies of scale in production and marketing can be achieved through supplying global markets.

23. International Strategies: Opposing Pressures
Cost reduction or adaptation to local markets?
Assumptions may be incorrect:
Product markets DO vary widely between nations – local adaptations work.
There is a growing interest in multiple product features, product quality, & service.
Technology permits flexible production; cost of production may not be critical to product cost; and a firm’s strategy should not be solely product driven.
“One size fits all” does NOT generally apply.
Theodore Levitt’s assumptions may be incorrect. Regarding the homogeneity of customer needs and interests, yes, companies have identified global customer segments and developed products and brands targeted to those segments, but other companies have successfully adapted product lines to idiosyncratic country preferences and developed local brands targeted to local market segments. Pineapple and ham pizza is an example. Second, while there is invariably a price sensitive segment in many product markets, there is no indication that this is increasing. In contrast, there is a growing interest in products with multiple features, quality, and service. Third, although standardization may lower manufacturing costs, such a perspective does not consider three critical and interrelated points: technological developments in flexible factory automation enable economies of scale to be obtained at lower levels of output; cost of production is only one component in determining the total cost of a product; and the firm’s strategy should not be solely product driven. Based on the above, we would have a hard time arguing that it is wise to develop the same product or service for all markets throughout the world.

24. International Strategies: Opposing Pressures
The opposing pressures that managers face place conflicting demands on firms as they strive to be competitive. On the one hand, competitive pressures require that firms do what they can to lower unit costs so that consumers will not perceive their product and service offerings as too expensive. This may lead them to consider locating manufacturing facilities where labor costs are low and developing products that are highly standardized across multiple countries. In addition to responding to pressures to lower costs, managers must also strive to be responsive to local pressures in order to tailor their products to the demand of the local market in which they do business. This requires differentiating their offerings and strategies from country to country to reflect consumer tastes and preferences and making changes to reflect differences in distribution channels, human resource practices, and governmental regulations. However, since the strategies and tactics to differentiate products and services to local markets can involve additional expenses, a firm’s costs will tend to rise. The two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace: international, global, multidomestic, and transnational. The strategy that a firm selects depends on the degree of pressure that it is facing for cost reductions and the importance of adapting to local markets. See the following Cases for examples of various international strategies: 10: Heineken, 13: Ebay in Asia, 23: Beiersdorf, and 24: Louis Vuitton.
Exhibit 7.4 Opposing Pressures and Four Strategies

25. International Strategy
An international strategy requires diffusion & adaptation of the parent company’s knowledge & expertise to foreign markets.
The primary goal is worldwide exploitation of the parent firm’s knowledge & capabilities.
All sources of core competencies are centralized.
Pressure for both local adaptation & low costs are rather low
International strategy = a strategy based on a firm’s diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets, used in industries where the pressures for both local adaptation and lowering costs are low. With an international strategy, country units are allowed to make some minor adaptations to products and ideas coming from the head office, but they have far less independence and autonomy compared to multidomestic companies. There are only a small number of industries in which this strategy still applies. With increasing pressures to reduce costs due to global competition, especially from low-cost countries, opportunities to successfully employ international strategy are becoming more limited. This strategy is most suitable in situations where a firm has distinctive competencies that local companies in foreign markets lack.

26. International Strategy
Although an international strategy does leverage and diffuse a parent firm’s knowledge and core competencies, leading to lower costs because of less need to tailor products and services, it does mean a firm has a limited ability to adapt to local markets, and therefore it cannot take advantage of new ideas and innovations occurring in that market. The international strategy, with its tendency to concentrate most of its activities in one location, fails to take advantage of the benefits of an optimally distributed value chain. The lack of local responsiveness may result in the alienation of local customers, and the firm’s inability to be receptive to new ideas and innovation from its foreign subsidiaries may lead to missed opportunities globally.
Exhibit 7.5 Strengths and Limitations of International Strategies in the Global Marketplace

27. Global Strategy
A global strategy implies a firm is interested in lowering costs:
Competitive strategy is centralized & controlled by the corporate office
Products are standardized, operations centralized, producing economies of scale
Worldwide volume supports R&D
There’s a standard level of quality worldwide
Pressure for reducing cost is high; pressure for adaptation to local markets is weak
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. Since the primary emphasis is on controlling costs, the corporate office strives to achieve a strong level of coordination and integration across the various businesses. Firms following a global strategy strive to offer standardized products and services as well as to locate manufacturing, R&D, and marketing activities in only a few locations. Although costs may be lower, the firm following a global strategy may, in general, have to forgo opportunities for revenue growth since it does not invest extensive resources in adapting product offerings from one market to another. Many industries requiring high levels of R&D, such as pharmaceuticals, semiconductors, and jet aircraft, follow global strategies.

28. Global Strategy
A global strategy is most appropriate when there are strong pressures for reducing costs and comparatively weak pressures for adaptation to local markets. Economies of scale becomes an important consideration. However a firm can enjoy scale economies only by concentrating scale-sensitive resources and activities in one or a few locations. This may result in higher transportation and tariff costs when output must be exported to other markets. The geographic concentration of any activity may also tend to isolate that activity from the target markets, making the rest of the firm dependent on that location. Such dependency implies that, unless the location has world-class competencies, the firm’s competitive position can be eroded if problems arise. Finally, many firms have learned through experience that products that work in one market may not be well received in other markets. Apple is given as an example. See Case Six: Apple Inc., for more details.
Exhibit 7.6 Strengths and Limitations of Global Strategies

29. Multidomestic Strategy
A multidomestic strategy puts emphasis on differentiating products & services to adapt to local markets
Decisions are decentralized
Products & services are tailored to local use
Consider language, culture, income levels, customer preferences, distribution systems
Markets can expand rapidly
Prices are differentiated by market
Pressure for local adaptation is high; pressure for lowering costs is low
Multidomestic strategy = 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. Decisions involving from a multidomestic strategy tend to be decentralized to permit the firm to tailor its products and respond rapidly to changes in demand. This enables the firm to expand its markets and to charge different prices in different markets. For firms following this strategy, differences in language, culture, income levels, customer preferences, and distribution systems are only a few of the many factors that must be considered. Even in the case of relatively standardized products, at least some level of local adaptation is often necessary. See Strategy Spotlight 7.7 for how Proctor & Gamble has done this in Vietnam.

30. Multidomestic Strategy
A multidomestic strategy is appropriate where the pressure for local adaptation is high and the pressure for lowering costs is low. The firm emphasizes differentiation of products and service offerings in order to adapt to local markets. This can result in enhanced revenue due to a firm’s carve-out of attractive niches in a given market. However, local adaptation of products and services may increase a company’s cost structure, so managers must determine the trade-off between adaptation and cost. In addition, the optimal degree of local adaptation evolves over time. In many industry segments, a variety of factors, such as the influence of global media, greater international travel, and declining income disparities across countries, may lead to increasing global standardization. Firms must recalibrate the need for local adaptation on an ongoing basis; excessive adaptation extracts a price as surely as underadaptation.
Exhibit 7.7 Strengths and Limitations of Multidomestic Strategies

31. Transnational Strategy
A transnational strategy seeks global competitiveness via trade-offs:
Efficiency versus local adaptation versus organizational learning
Assets & capabilities are disbursed according to the most beneficial location for a specific activity; some value chain activities are centralized, some are decentralized.
Economies of scale, increased knowledge flows
Pressures for both local adaptation and lowering costs are high
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. The firm seeks efficiency not for its own sake, but as a means to achieve global competitiveness. It recognizes the importance of local responsiveness, but as a tool for flexibility in international operations. Innovations are regarded as an outcome of a larger process of organizational learning that includes the contributions of everyone in the firm. In a transnational model, a firm’s assets and capabilities are disbursed according to the most beneficial location for each activity. Thus, managers avoid the tendency to either concentrate activities in a central location (a global strategy) or disperse them across many locations to enhance adaptation (a multidomestic strategy). Typically, primary activities that are “downstream” (marketing and sales, and service), or closer to the customer, tend to require more decentralization in order to adapt to local market conditions. Primary activities that are “upstream” (logistics and operations), or further away from the customer, tend to be centralized. This is because there is less need for adapting these activities to local markets and the firm can benefit from economies of scale. A central philosophy of the transnational organization is enhanced adaptation to all competitive situations as well as flexibility by capitalizing on communication and knowledge flows throughout the organization. A principal characteristic is the integration of the unique contributions of all units into worldwide operations. Nestlé is given as an example.

32. Transnational Strategy
A transnational strategy is appropriate in industries where the pressures for both local adaptation and lowering costs are high. When an organization adopts a transnational strategy, it can adapt to all competitive situations by capitalizing on communication and knowledge flows throughout the organization. It also achieves economies of scale by locating activities in optimal locations. However the choice of a seemingly optimal location cannot guarantee that the quality and cost of factor inputs (labor and materials) will be optimal. Managers must ensure that the relative advantage of the location is actually realized, not squandered because of weaknesses in productivity and the quality of internal operations. Also, although knowledge transfer can be a key source of competitive advantage, it does not take place automatically. For knowledge transfer to take place from one subsidiary to another, it is important for the source of the knowledge, the target units, and the corporate headquarters to recognize the potential value of such unique know-how. Firms must create mechanisms to systematically and routinely uncover the opportunities for knowledge transfer.
Exhibit 7.8 Strengths and Limitations of Transnational Strategies

33. Question?
In order to realize the strongest competitive advantage, firms engaged in worldwide competition must
require that all of their various business units follow the same strategy regardless of location.
ensure that all business units follow a strategy strictly tailored to their respective locations.
pursue a strategy that combines the uniformity of a global strategy and the specificity of a multidomestic strategy in order to achieve optimal results.
attempt to use the strategy that was most successful in their home country.
Answer: C. See the trade-offs between adaptation and cost.

34. International Strategies: Global or Regional?
It may be unwise for companies to rush into full-scale globalization
Regionalization may be more reasonable
Distance still matters
Commonalities of language, culture, economics, legal & political systems, and infrastructure all make a difference
Trading blocs and free trade zones ease trade restrictions, taxes, & tariffs
Alan Rugman and Alain Verbeke argue that there is a stronger case to be made in favor of regionalization than globalization. Regionalization = increasing international exchange of goods, services, money, people, ideas, and information; and the increasing similarity of culture, laws, rules, and norms within a region such as Europe, North America, or Asia. Distance matters. The effects of geographic distance can be multiplied by distance in terms of culture, language, religion, and legal and political systems between two countries. U.S. and Australia are geographically distant yet the “true” distance is less than that between U.S. and China. In addition, a number of regional agreements have been created that facilitate the growth of business within these regions by easing trade restrictions, taxes, and tariffs. These trading blocs and free trade zones include the European Union (EU), the North American Free Trade Agreement (NAFTA), the Association of Southeast Asian Nations (ASEAN), and MERCOSUR, a south American trading block. Trading blocs = groups of countries agreeing to increase trade between them by lowering trade barriers. Regional economic integration has progressed at a faster pace than global economic integration, and trade and investment patterns of the largest companies reflect this reality.

35. Example: International Strategies - Regional Difficulties
eBay has successfully expanded into Europe & Latin America through joint ventures & acquisitions
Appropriate partners allow quick adaptation to local needs
eBay has struggled in Asia
Limited local market know-how, lack of innovative products & processes in the local market, centralized management style
Are these insurmountable local market differences?
See and Case 13: eBay in Asia. Properly balancing its global and local market strategies will define eBay’s future success in the region.

36. Question?
A domestic corporation considering expanding into international markets for the first time will typically
start off by implementing a wholly-owned foreign subsidiary so it can maintain standards identical to those at home.
consider licensing or franchising its operations.
consider implementing a low risk/low control strategy such as exporting.
form a joint venture with a reputable foreign producer.
Answer: C. See the continuum of entry options ranging from exporting (low investment and risk, low control) to a wholly owned subsidiary (high investment and risk, high control).

37. International Strategies: Entry Modes
Options for international market expansion include:
Exporting
Licensing or Franchising
Strategic Alliance or Joint Venture
Wholly-Owned Subsidiary
A firm has many options available to it when it decides to expand into international markets. Exporting = producing goods in one country to sell to residents of another country. This strategy enables the firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. However, the firm has a limited ability to tailor its products to meet local market needs. Licensing = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual property. Franchising = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; it usually involves a longer time than licensing and includes other factors, such as monitoring of operations, training, and advertising. Franchising has the advantage of limiting the risk exposure that a firm has in overseas markets while, at the same time, the firm is able to expand the revenue base of the company. An advantage of licensing is that the firm granting a license incurs little risk, since it does not have to invest any significant resources into the country itself. In turn, the licensee (the firm receiving the license) gains access to the trademark, patent, and so on, and is able to potentially create competitive advantages. However, the licensor gives up control of its product and forgoes potential revenues and profits. Strategic alliances and joint ventures allow firms to increase revenues and reduce costs as well as enhance learning and diffuse technologies. However, trust is a vital element. (Remember the discussion of this in Chapter 6.) Wholly Owned Subsidiary = a business in which a multinational company owns 100% of the stock. A firm can establish a wholly owned subsidiary by acquiring an existing company in the home country or developing a totally new operation, often referred to as a “greenfield venture”. This can be expensive and risky, and is most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations.

38. International Strategies: Entry Modes
Given the challenges associated with entry into international markets, many firms first start on a small-scale and then increase their level of investment and risk as they gain greater experience with the overseas market in question. The various types of entry form a continuum ranging from exporting (low investment and risk, low control) to a wholly owned subsidiary (high investment and risk, high control).
Exhibit 7.9 Entry Modes for International Expansion

39. Example: International Strategies - Does Size Matter?
Small & Medium-sized Business Enterprises (SMEs) should engage in cross-border trade
SO, is an international strategy a viable means of diversification? Does having an international strategy help a firm gain a competitive advantage? YES, and the size of the business doesn’t matter… As reported by a recent global survey conducted for DHL Express by consulting firm IHS Global Insight posits that International trade and cooperation are key drivers for small business success. The study which surveyed 410 small and medium-sized enterprises (SMEs) in so-called G7 economies – the U.S., U.K., France, Germany, Italy, Canada, and Japan – along with firms in Brazil, Russia, India, China and Mexico (BRICM) revealed that companies engaged in international markets are twice as likely to be successful as those that only operate domestically, based on three-year compound annual growth rates. Of the SMEs surveyed by IHS on behalf of DHL, 26% of those that traded internationally also significantly outperformed the market, while only 13% of domestic-only SMEs also outperformed the market. DHL’s study also discerned that inadequate business infrastructure can constrain a company’s competitiveness due to the reduction of business efficiency. For example, SMEs have to work harder to overcome infrastructure inefficiencies, particularly compared to larger companies with greater resources. The main challenges in this arena are: a lack of available information on foreign markets; high customs duties; the difficulty of establishing contacts with foreign partners; and ability to successfully generate an overseas customer base. See also
SMEs that trade internationally are twice as likely to outperform those that don’t