chapter 7 international strategy: creating value in global markets

Chapter Chapter 77

International Strategy: International Strategy: Creating Value in Global Creating Value in Global

MarketsMarkets

TopicsTopics

Why international expansion?Why international expansion? Determinants of national competitive Determinants of national competitive

advantage.advantage. Motivations and risks of global Motivations and risks of global

expansion.expansion. Two opposing forces—cost reduction Two opposing forces—cost reduction

and adaptation to local markets.and adaptation to local markets. International Strategies. Entry strategies

Drivers of GlobalizationDrivers of Globalization

► increased similarity of lifestyles increased similarity of lifestyles ►global communications global communications ►fast communicationfast communication►pressures to reduce costspressures to reduce costs

Population of Selected NationsPopulation of Selected Nations

ChinaChina 1,284,303,0001,284,303,000

IndiaIndia 1045,845,0001045,845,000

United StatesUnited States 280,562,000280,562,000

JapanJapan 126,974,000126,974,000

GermanyGermany 83,251,00083,251,000

Country July 2002 (estimated)

Exhibit 7.2 Populations of Selected Nations

Source: www.brainyatlas.com/geos/gm.html.

Motivations for International ExpansionMotivations for International Expansion

Increase Market SizeIncrease Market SizeDomestic market may lack the size to support efficient Domestic market may lack the size to support efficient scale manufacturing facilitiesscale manufacturing facilities



Japanese electronics or automobile manufacturersJapanese electronics or automobile manufacturers


Large investment projects may require global markets to Large investment projects may require global markets to justify the capital outlaysjustify the capital outlays



Return on InvestmentReturn on Investment


Large investment projects may require global markets to Large investment projects may require global markets to justify the capital outlaysjustify the capital outlays

Aircraft manufacturers Boeing or AirbusAircraft manufacturers Boeing or Airbus


Return on InvestmentReturn on Investment


Economies of Scale or LearningEconomies of Scale or LearningEconomies of Scale or LearningEconomies of Scale or Learning

- Can spread costs over a larger sales base- Can spread costs over a larger sales base

- Increase profit per unit- Increase profit per unit


Expanding size or scope of markets helps to achieve Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as economies of scale in manufacturing as well as marketing, R & D or distributionmarketing, R & D or distribution

Motives for Int’l ExpansionMotives for Int’l Expansion

►Optimize the physical location for Optimize the physical location for every activity in its value chainevery activity in its value chain Performance enhancementPerformance enhancement Cost reductionCost reduction Risk reductionRisk reduction

Porter’s Determinants of National AdvantagePorter’s Determinants of National Advantage

Home country Home country of origin is crucial to of origin is crucial to International successInternational success

Factor ConditionsFactor ConditionsFactor ConditionsFactor Conditions

Basic FactorsBasic Factors- Land, labor- Land, labor

Advanced FactorsAdvanced Factors- Highly educated workers- Highly educated workers- Digital communications- Digital communications

Generalized FactorsGeneralized Factors- Capital, infrastructure- Capital, infrastructure

Specialized FactorsSpecialized Factors- Skilled personnel- Skilled personnel

Porter’s Determinants of National AdvantagePorter’s Determinants of National AdvantageHome country Home country of origin is crucial to International successof origin is crucial to International success

Factor ConditionsFactor Conditions

►To achieve competitive advantage, To achieve competitive advantage, factors of production must be createdfactors of production must be created Industry specificIndustry specific Firm specificFirm specific Pool of resources at a firm’s or country’s Pool of resources at a firm’s or country’s

disposal is less important than the speed disposal is less important than the speed and efficiency with which the resources and efficiency with which the resources are deployedare deployed



Advanced FactorsAdvanced Factors- Highly educated workers- Digital communications- Highly educated workers- Digital communications



Demand Demand ConditionsConditionsDemand Demand

ConditionsConditions

Home country Home country may support may support scale efficient scale efficient operations by operations by

itselfitself

Porter’s Determinants of National AdvantagePorter’s Determinants of National AdvantageHome country Home country of origin is crucial to International successof origin is crucial to International success

Demand ConditionsDemand Conditions

►Demands that consumers place on an Demands that consumers place on an industry for goods and servicesindustry for goods and services Demanding consumers push firms to move Demanding consumers push firms to move

ahead of companies from other nationsahead of companies from other nations Demanding consumers drive firms in a Demanding consumers drive firms in a

country tocountry to►Meet high standardsMeet high standards►Upgrade existing products and servicesUpgrade existing products and services►Create innovative products and servicesCreate innovative products and services

Demand ConditionsDemand

ConditionsHome country may support scale efficient operations by itself

Home country may support scale efficient operations by itself






Related & Supporting Related & Supporting IndustriesIndustries

Related & Supporting Related & Supporting IndustriesIndustries

- Japanese cameras & copiers- Japanese cameras & copiers- Italian shoes & leather- Italian shoes & leather

Home country Home country of origin is crucial to International successof origin is crucial to International success


Related and Supporting Related and Supporting IndustriesIndustries

►Related and supporting industriesRelated and supporting industries Enable firms to manage inputs more Enable firms to manage inputs more

effectivelyeffectively►Strong supplier base adds efficiency to Strong supplier base adds efficiency to

downstream activitiesdownstream activities►Competitive supplier base lets a firm obtain Competitive supplier base lets a firm obtain

inputs using cost-effective, timely methodsinputs using cost-effective, timely methods Allow joint efforts among firmsAllow joint efforts among firms Create the probability that new entrants Create the probability that new entrants

will enter the marketwill enter the market

Demand ConditionsDemand

ConditionsHome country may support scale efficient operations by itself

Home country may support scale efficient operations by itself






Firm Strategy, Structure Firm Strategy, Structure & Rivalry& Rivalry

Firm Strategy, Structure Firm Strategy, Structure & Rivalry& Rivalry

Intense rivalry fosters Intense rivalry fosters industry competitionindustry competition


Related & Supporting Industries

Related & Supporting Industries

- Japanese cameras & copiers- Italian shoes & leather- Japanese cameras & copiers- Italian shoes & leather

Home country Home country of origin is crucial to International successof origin is crucial to International success

Firm Strategy, Structure and Firm Strategy, Structure and RivalryRivalry

►Rivalry is intense in nations with Rivalry is intense in nations with conditions ofconditions of Strong consumer demandStrong consumer demand Strong supplier basesStrong supplier bases High new entrant potential from related High new entrant potential from related

industriesindustries►Competitive rivalry increases the Competitive rivalry increases the

efficiency with which firms develop, efficiency with which firms develop, market, and distribute products and market, and distribute products and services within the home countryservices within the home country


►Competitive rivalry increases the Competitive rivalry increases the efficiency with which firms efficiency with which firms Develop within the home countryDevelop within the home country Market within the home countryMarket within the home country Distribute products and services within Distribute products and services within

the home countrythe home country


►Domestic rivalry provides a strong Domestic rivalry provides a strong impetus for firms toimpetus for firms to InnovateInnovate Find new sources of competitive Find new sources of competitive

advantageadvantage

►Domestic rivalry forces firms to look Domestic rivalry forces firms to look beyond national borders for new beyond national borders for new marketsmarkets

Porter’s Diamond of National Porter’s Diamond of National Advantage: As Applied to IndiaAdvantage: As Applied to India

Adapted from Exhibit 7.1 India’s Virtual Diamond in Software

Potential Risks of International Potential Risks of International ExpansionExpansion

►Political and economic riskPolitical and economic risk Social unrestSocial unrest Military turmoilMilitary turmoil DemonstrationsDemonstrations Violent conflict and terrorismViolent conflict and terrorism Laws and their enforcementLaws and their enforcement

Risk RankingsRisk Rankings

1 Luxembourg 99.51 25.00 24.51 20.00 30.002 Switzerland 98.84 23.84 25.00 20.00 30.003 United States 98.37 23.96 24.41 20.00 30.00

40 China 71.27 18.93 16.87 19.73 15.7455 Poland 57.12 18.56 13.97 9.36 15.2363 Vietnam 52.04 14.80 11.91 18.51 6.8286 Russia 42.62 11.47 8.33 17.99 4.83

114 Albania 34.23 8.48 5.04 19.62 1.09161 Mozambique 21.71 3.28 2.75 13.85 1.83178 Afghanistan 3.92 0.00 3.04 0.00 0.88

Total of Credit

Total and AccessTotal Risk Economic Political Debt to Finance

Rank Country Assessment Performance Risk Indicators Indicators

Exhibit 7.3 A Sample of International Country Risk Rankings

Source: Adapted from worldbank.org/html/prddr/trans/so96/art7.htm.

Potential Risks of International Potential Risks of International ExpansionExpansion

►Currency risksCurrency risks Currency exchange fluctuationsCurrency exchange fluctuations Appreciation of the U.S. dollarAppreciation of the U.S. dollar

►Management risksManagement risks CultureCulture CustomsCustoms LanguageLanguage

• Income levels

• Customer preferences

• Distribution system

Strategy ImplementationStrategy Implementation

Hofstede’s Dimensions of

NationalCulture

Power distance (PD)

Uncertainty avoidance (UA)

Individualism-collectivism (I-C)

Masculinity-femininity (M-F)

Long-term orientation (LT)

Two Opposing Pressures: Two Opposing Pressures: Reducing Costs and Adapting to Reducing Costs and Adapting to

Local MarketsLocal Markets

►Strategies that favor global products Strategies that favor global products and brands and brands Should standardize all of a firm’s products Should standardize all of a firm’s products

for all of their worldwide marketsfor all of their worldwide markets Should reduce a firm’s overall costs by Should reduce a firm’s overall costs by

spreading investments over a larger spreading investments over a larger marketmarket



►Strategies that favor global products Strategies that favor global products and brands and brands

• Are based on three assumptions Customer needs and interests worldwide are

becoming more homogeneous People (worldwide) prefer lower prices at high

quality Economies of scale in production and marketing

can be achieved through supplying global markets



► But those three assumptions may not But those three assumptions may not always be truealways be true Product markets vary widely between nations Product markets vary widely between nations

(customer needs and interests?)(customer needs and interests?) In many product and service markets there In many product and service markets there

appears to be a growing interest in multiple appears to be a growing interest in multiple product features, quality and service product features, quality and service (preference for low price?)(preference for low price?)

Technology permits flexible production, cost of Technology permits flexible production, cost of production may not be critical to product cost, production may not be critical to product cost, and firm’s strategy should not be product-drivenand firm’s strategy should not be product-driven

Opposing Pressures and Four Opposing Pressures and Four StrategiesStrategies

Exhibit 7.5 Opposing Pressures and Four Strategies

International StrategyInternational Strategy

►Pressure for both local adaptation and Pressure for both local adaptation and low costs are rather lowlow costs are rather low

►Different activities in the value chain Different activities in the value chain have different optimal locationshave different optimal locations

►Susceptible to higher levels of Susceptible to higher levels of currency and political riskscurrency and political risks

International Strategy

Global StrategyGlobal Strategy

► Competitive strategy is centralized Competitive strategy is centralized and controlled largely by corporate officeand controlled largely by corporate office

► Emphasizes economies of scaleEmphasizes economies of scale► AdvantagesAdvantages

Larger production plantsLarger production plants Efficient logistics and distribution networksEfficient logistics and distribution networks Supports high levels of investment in R&DSupports high levels of investment in R&D Standard level of quality throughout the worldStandard level of quality throughout the world

Global Strategy

Global StrategyGlobal Strategy

► Competitive strategy is centralized and Competitive strategy is centralized and

controlled largely by corporate officecontrolled largely by corporate office► Emphasizes economies of scaleEmphasizes economies of scale► DisadvantagesDisadvantages

• Concentration on scale-sensitive resources and activities in one or few locations leads to higher transportation and tariff costs

• Activity is isolated from targeted markets

• The rest of the firm becomes dependent on that geographically isolated location

Global Strategy

Multidomestic StrategyMultidomestic Strategy

►Emphasis is differentiating Emphasis is differentiating products and services to adapt to products and services to adapt to local marketslocal markets

►Authority is more decentralizedAuthority is more decentralized►Risks includeRisks include

Increased cost structureIncreased cost structure Potential problems with local adaptationsPotential problems with local adaptations Finding optimal degree of local Finding optimal degree of local

adaptation is difficultadaptation is difficult

Multidomestic Strategy

Transnational StrategyTransnational Strategy

► Optimization of tradeoffs associated with Optimization of tradeoffs associated with efficiency, local adaptation, and learningefficiency, local adaptation, and learning

► Firm’s assets and capabilities are dispersed Firm’s assets and capabilities are dispersed according to the most beneficial location for according to the most beneficial location for a specific activitya specific activity

► Avoids the tendency to eitherAvoids the tendency to either Concentrate activities in a central locationConcentrate activities in a central location Disperse them across many locations to enhance Disperse them across many locations to enhance

adaptationadaptation

Transnational Strategy

Transnational StrategyTransnational Strategy

►Unique risks and challengesUnique risks and challenges Choice of an “optimal” location cannot Choice of an “optimal” location cannot

guarantee that the quality and cost of guarantee that the quality and cost of factor inputs will be optimalfactor inputs will be optimal

Knowledge transfer can be a key source of Knowledge transfer can be a key source of competitive advantage, but it does not competitive advantage, but it does not take place automaticallytake place automatically

Transnational Strategy

Strengths and Limitations of Strengths and Limitations of Various StrategiesVarious Strategies

International

Strategy Strengths Limitations

Exhibit 7.6 Strengths and Limitations of Various Strategies

• Leverage and diffuse parent’s knowledge and core competencies.

• Lower costs because of less need to tailor products and services.

• Greater level of worldwide coordination

• Limited ability to adapt to local markets.

• Inability to take advantage of new ideas and innovations occurring in local markets.

Global • Strong integration across various businesses.

• Standardization leads to higher economies of scale which lowers costs.

• Helps to create uniform standards of quality throughout the world.

• Limited ability to adapt to local markets.

• Concentration of activities may increase dependence on a single facility.

• Single locations may lead to higher tariffs and transportation costs.

Strengths and Limitations of Strengths and Limitations of Various StrategiesVarious Strategies

Multidomestic

Strategy Strengths Limitations

Exhibit 7.6 Strengths and Limitations of Various Strategies

• Ability to adapt products and services to local market conditions.

• Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue.

• Less ability to realize cost savings through scale economies.

• Greater difficulty in transferring knowledge across countries.

• May lead to “overadaptation” as conditions change.

Transnational • Ability to attain economies of scale.

• Ability to adapt to local markets.

• Ability to locate activities in optimal locations.

• Ability to increase knowledge flows and learning.

• Unique challenges in determining optimal locations of activities to ensure cost and quality.

• Unique managerial challenges in fostering knowledge transfer.

Entry Modes of International Entry Modes of International ExpansionExpansion

Ext

ent

of I

nves

tmen

t R

isk

High

LowLow High

Degree of Ownership and ControlAdapted from Exhibit 7.7 Entry Modes for International Expansion

Exporting

Licensing

Franchising

Strategic Alliance

Joint Venture

Wholly OwnedSubsidiary

ExportingExporting

► Relatively inexpensive way to enter foreign Relatively inexpensive way to enter foreign marketmarket

► Minimal riskMinimal risk► Successful distributorsSuccessful distributors

Carry product lines that complement the Carry product lines that complement the multinational’s productsmultinational’s products

Behave as if they are business partners with the Behave as if they are business partners with the multinationals.multinationals.

Invest in training, information systems, and Invest in training, information systems, and advertising and promotionadvertising and promotion

Licensing and FranchisingLicensing and Franchising

► Franchisor receives a royalty or feeFranchisor receives a royalty or fee► Franchisee gets to use trademark, patent, Franchisee gets to use trademark, patent,

trade secret or other valuable intellectual trade secret or other valuable intellectual propertyproperty

► DisadvantagesDisadvantages Loss of control over its productLoss of control over its product Licensee may become a competitorLicensee may become a competitor Threat to brand name and reputation of productsThreat to brand name and reputation of products

► AdvantagesAdvantages Limited risk exposureLimited risk exposure Expanded revenue baseExpanded revenue base

Strategic Alliances and Joint Strategic Alliances and Joint VenturesVentures

► Partnerships that enable firms to share risks Partnerships that enable firms to share risks and potential revenues and profitsand potential revenues and profits

► PartnersPartners gain exposure to new knowledge and gain exposure to new knowledge and

technologiestechnologies Develop core competencies that can lead to Develop core competencies that can lead to

competitive advantagescompetitive advantages Gain information on local markets conditionsGain information on local markets conditions

• Partnerships that enable firms to share risks and potential revenues and profits

Strategic Alliances and Joint Strategic Alliances and Joint VenturesVentures

• Risks

• Needs to be clearly defined strategy supported by both partners

• Needs to be clear understanding of capabilities and resources that will be central to the partnership

• Must be trust between partners

Wholly Owned SubsidiariesWholly Owned Subsidiaries

► Business owned by only one multinational Business owned by only one multinational companycompany Acquire an existing company in the home Acquire an existing company in the home

countrycountry Develop a totally new operation (greenfield Develop a totally new operation (greenfield

venture)venture) Most expensive and risky of all global entry Most expensive and risky of all global entry

strategiesstrategies Greatest control over all activitiesGreatest control over all activities

chapter 7 international strategy: creating value in global markets

Documents

investment slide

international success

distribution slide

deployed slide

factors capital

international strategies

entry strategies slide

international strategy