1 chapter 8: opportunities and outcomes of international strategy

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Chapter 8: Opportunities and Outcomesof International Strategy

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Chapter 8: Opportunities and Outcomesof International Strategy

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Identifying International Opportunities: Incentives to Use an International Strategy

International Strategy: A strategy through which the firm sells its goods or services outside its domestic market

Also referred to as geographic diversification Implications at both corporate and business level Used as a growth strategy Level and type of geographic diversification

Level - # of countries, markets, or regions Type – Multidomestic, Global, Transnational Mode or means of entry

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Reasons for an International Strategy Potential new opportunities Apply innovations in domestic market to foreign markets Extend product life cycle Secure needed resources Pressure for global integration and globally branded products Global economies of scale High potential demand for products and services Currency fluctuations and tariffs Capitalize on core competencies Growth

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Four primary benefits Increased market size

Can expand size of potential market Domestic market may have limited growth opportunities Larger markets offer higher potential returns and pose less risk

for a firm’s investments

Greater return on investment (ROI) Large investment projects may require global markets to justify

the capital outlays Larger markets are more attractive To generate above average returns on investments

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Four primary benefits (Cont’d)

Greater economies of Scale, Scope, or Learning Expanding size or scope of markets can help firms achieve

economies of scale in manufacturing, marketing, R&D, distribution, and service activities

Can exploit core competencies in international markets through resource and knowledge sharing across borders

Competitive advantages through location Can help the firm reduce costs

Access to lower-cost labor, energy, and other natural resources

Access to critical supplies and to customers

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International Strategies

Firms can choose to use one or both of two basic types of International Strategy: International Business-level Strategy

Firms select from among the generic strategies of low cost, differentiation, focused low cost, focused differentiation, or integrated low cost and differentiation

International Corporate-level strategy Focuses on the scope of a firm’s operations through

geographic (and product) diversification 3 Types

Multidomestic Global Transnational

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International Corporate-Level Strategies

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Multidomestic Tailor products to each local market Strategic & operating decisions are decentralized to the

strategic business-unit (SBU) in each country Focuses on competition within each country Assumes that markets differ and are segmented by country

boundaries Customized products to meet local customers’ specific

needs and preferences Deals with uncertainty due to differences across markets Different competitive/business strategy in each market Think local and act local Addresses need for local responsiveness

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Global Firm offers standardized products across country markets Competitive strategy dictated by the home office Emphasizes economies of scale Strategic & operating decisions centralized at home office Involves interdependent SBUs operating in each country Home office attempts to achieve integration across SBUs,

adding management complexity Produces lower risk Is less responsive to local market opportunities Same competitive/business strategy in all markets Think global and act global Addresses need for global integration

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Transnational Firm seeks to achieve both global efficiency and local

responsiveness – these can be competing goals! Requires both global coordination and local responsiveness

Flexible Coordination Challenging, but becoming increasingly necessary to

compete in international markets Growing number of global competitors increases need to

lower costs while greater information flow and desire for specialized products pressures firms to differentiate and even customize products

Tailor strategy where needed Think global and act local Increasingly used as a strategy - Toyota

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Choosing an International Strategy Choice is dictated by the firms internal and external

environments Influenced by cross-country differences in market

conditions, culture, demographics, etc. Greater differences make things more complicated

for firms These differences also drive the pattern of

international competition that exists in an industry Greater differences then multidomestic Fewer differences then global

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International Entry Modes

Exporting Initial strategy used by many firms to test international

markets Involves low expense to establish operations in host

country Often involves contractual agreements with host country

firms May have some tariffs imposed Involves high transportation costs Offers low control over marketing and distribution

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Licensing Allows a foreign company to purchase the right to manufacture and

sell the firm’s products within a host country or set of countries Licensor paid royalty on units sold Involves low cost to expand internationally Allows licensee to absorb risks Has low control over manufacturing and marketing Offers lower potential returns (shared with licensee) Involves risk of licensee imitating technology and product for own

use May have inflexible ownership arrangement Works well for manufacturers (while franchising works well for

services and retailing)

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Strategic Alliances A cooperative strategy in which firms combine some of

their resources and capabilities to create a competitive advantage (Chapter 9)

Involve shared risks and resources Facilitate development of core competencies Involve fewer resources and costs required for entry May involve possible incompatibility, conflict, or lack of

trust with partner Are difficult to manage

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Acquisitions Allow for quick access to market Quicker entry than other modes Involve possible integration difficulties Are costly Have complex negotiations and transaction

requirements

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New Wholly-Owned Subsidiary Is costly Involves complex processes Allows for maximum control Has the highest potential for above average returns Carries high risk Greenfield venture: Establishment of a new wholly

owned subsidiary

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Dynamics of Mode of Entry: Use the mode best suited to the situation at hand; affected by several factors Export, licensing and strategic alliance: good tactics for early

market development Strategic alliance: used in more uncertain situations Wholly-owned subsidiary may be preferred if

Firm wants to maximize control and potential returns Firm has proprietary technology

Acquisitions, greenfield ventures, and joint ventures: used to secure a stronger presence in international markets

Figure 8.5 – Covers costs and control characteristics

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Strategic Competitive Outcomes

International diversification: A strategy through which a firm expands the sale of its goods or services across the borders of global regions and countries into different geographic locations or markets

Strategic Competitive Outcomes International diversification and returns

As international diversification increases, firms’ returns initially decrease, but then increase quickly as firm learns to manage international expansion

Firms that are broadly diversified into multiple international markets usually achieve the most positive stock returns

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Strategic Competitive Outcomes

Strategic Competitive Outcomes (cont.) International diversification and innovation

Potential to achieve greater returns on innovations while reducing risks of R&D investments

Exposure to new products and processes and the opportunity to integrate this new knowledge into operations

Provides incentives to innovate Competitive advantage potential

Locating activities Transferring competencies Coordinating activities Profit sanctuaries and cross market subsidization

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Risks in International Environment

Political Risks The possibility of the disruption of operations by political

forces or events in host countries, home country, or as a result of changes in the international environment

Economic Risks Fundamental weaknesses in a country or region's

economy with the potential to cause adverse effects on a firm's international strategies

Management Problems Larger more complex firms are more difficult to manage There are limits to international expansion

1 chapter 8: opportunities and outcomes of international strategy

Documents

international markets

international opportunities

international strategy

international strategies

growth strategy level

global markets

scope of markets

market size