chapter seven international strategy: creating value in global markets

Chapter Seven

International Strategy:Creating Value in Global

Markets

CHAPTER 7McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights

reserved.

STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

After studying this chapter, you will have a good understanding of: • The importance of international expansion as a viable diversification

strategy

• 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

• The motivations (or benefits) and the risks associated with international expansion

• The two opposing forces—cost reduction and adaptation to local markets—that firms face when entering international markets

• The advantages and disadvantages associated with each of the three basic international strategies—global, multidomestic, and transnational

• The four basic types of entry strategies and their relative benefits and risks that are associated with each of them

Learning Objectives

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Engardio, P. & Belton, C. 2000. Global Capitalism: Can it be made to work better? Business Week, November 6: 72-98.

Exhibit 7.1 The Extremes of Global Capitalism: One Size Does Not Fit All

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EXPORTS HAVE SURGED FOR TWO DECADES. . .

EASTERN EUROPE/CENTRAL ASIA

0 100 200 300 400 500

EAST ASIA

LATIN AMERICA

SOUTH ASIA

SUB-SAHARAN AFRICA

BILLIONS OF DOLLARS MERCHANDISE EXPORTS

1980 1998

. . . WHILE FOREIGN INVESTMENT HAS EXPANDED. . .

0 15 30 45 60


EAST ASIA

LATIN AMERICA

SOUTH ASIA

SUB-SAHARAN AFRICA

BILLIONS OF DOLLARS FOREIGN DIRECT INVESTMENT

1990 1998

. . . BUT GROWTH HAS BEEN UNEVEN. . . . . . AND POVERTY IS STILL WIDESPREAD

-2.5 0 2.5 5.0 7.5


EAST ASIA

LATIN AMERICA

SOUTH ASIA

SUB-SAHARAN AFRICA

0 10 20 30 40 50


EAST ASIA

LATIN AMERICA

SOUTH ASIA

SUB-SAHARAN AFRICA

PERCENT AVERAGE ANNUAL GDP GROWTH

1980-90 1990-98

PERCENT

PERCENT OF POPULATION MAKING UNDER $1 A DAY

1990 1998

PERCENT


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India’s Virtual Diamond in Software

Domestic rivalry

No regulatory barriers to entry or startup; 800 firms, mostly small, in fierce rivalry; growing number of MNC software-development centers in India

Related and supporting industries

Factor conditions

Domestic demand

conditions

U.S. demand conditions

Large, growing market; sophisticated customers; cutting-edge applications

Large pool of skilled labor; low salaries; English-language capability Large network of public and private educational

institutions; weak but rapidly improving communications infrastructure; duty-free access to imported computers and software, following

economic liberalization

Note: Dashed lines represent weaker interactions.

Source: Kapar, D. & Ramamurti, R. 2001. India’s emerging competitive advantage in services. Academy of Management Executive, 15(2): 20-31.

Exhibit 7.2TRANSPARENCY-62


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2001 Census Statistics

Country 2001 Census

China 1,273,111,290

India 1,029,991,145

Germany 83,030,000

United States 278,058,881

Japan 126,635,626

Sources: U.S. Bureau of the Census. World Population Profile; 2001. Washington: U.S. Government Printing Office, 2001.



reserved.


A Sample of International Country Risk Rankings

Rank COUNTRY

Total

Risk Assessment

Economic Performance

Political Risk

Total of Debt

Indicators

Total of Credit and Access to

Finance Indicators

1 Luxembourg 99.51 25.00 24.51 20.00 20.00

2 Switzerland 98.84 23.84 25.00 20.00 20.00

3 United States 98.37 23.96 24.41 20.00 20.00

40 China 71.27 18.93 16.87 19.73 15.74

55 Poland 57.12 18.56 13.97 9.36 15.23

63 Vietnam 52.04 14.80 11.91 18.51 6.82

86 Russia 42.62 11.47 8.33 17.99 4.83

114 Albania 34.23 8.48 5.04 19.62 1.09

161 Mozambique 21.71 3.28 2.75 13.85 1.83

178 Afghanistan 3.92 0.00 3.04 0.00 0.88

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



reserved.


Opposing Pressures and Three International Strategies

Globalstrategy Transnational

strategy

Multidomesticstrategy

High

Low

Low High

Pressures for Local Adaptation

Pre

ssur

es t

o L

ower

Cos

ts



reserved.


Strengths and Limitations of Various International Strategies

Exhibit 7.6

• Less ability to realize cost savings throughscale economies

• Greater difficulty in transferring knowledge across countries

• May lead to “overadaptation” as conditions change

• Ability to adapt products and services to local market conditions

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

Multidomestic

• 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

• 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

Global

LimitationsStrengthsStrategy

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

• Unique managerial challenges in fostering knowledge transfer

• 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

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Entry Modes for International Expansion

Low

Degree of Ownership and Control

High

Low High

Ext

ent

of I

nve

stm

ent

and

Ris

k

ExportingExporting

LicensingLicensing

FranchisingFranchising

Strategic AllianceStrategic Alliance

Joint VentureJoint Venture

Wholly Owned Subsidiary

Wholly Owned Subsidiary


chapter seven international strategy: creating value in global markets

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