Strategic Management

International Strategy

Dr. Nandakumar M.K.

1

2

International Strategy (IS)

Overview: Eight content areas Motives for internationalisation Four major benefits of International Strategies (IS) Four factors as basis for international business strategy Three international corporate-level strategies Environmental trends affecting IS Five alternative modes for entering international markets Effects of international diversification on returns & innovation 2 major risks of international diversification

© 2007 Thomson/South-Western. All rights reserved.

8–3

Opportunities and Outcomes of International Strategy

4

Motives for Internationalisation

International Strategy (IS): firm sells its goods or services outside the domestic market

Traditional Motives International markets yield potential new opportunities International Diversification: Extend a product’s life

cycle Multinational strategy: Secure needed resources

Emerging Motives Other motives exist (i.e., pressure for global integration,

borderless demand for globally branded products)

© 2007 Thomson/South-Western. All rights reserved.

8–5

Classic Rationale for International Diversification: Extend a Product’s Life Cycle

Production is standardized and relocated to low cost countries.

Product DemandDevelops and FirmExports Products

Firm IntroducesInnovation in

Domestic Market

ForeignCompetition

Begins Production

Firm BeginsProduction Abroad

6

PROS VS. CONS OF INTERNATIONAL EXPANSION

• Pepsi’s ambitious expansion in the 1990s resulted in a decreased international market share

• Wal-Marts international businesses perform poorly relative to its U.S. business

Many international expansions fail

Newness can be a disadvantage (e.g., your firm must moveup the learning curve)

Foreignness can be a liability (e.g., your managers may notunderstand local culture)

Governance and coordination costs increase as you manage

from a distance

Why?

7

Benefits of Internationalisation

Five primary reasons 1. Increased market size

Domestic market may lack the size to support efficient scale manufacturing facilities

2. Return on Investment (ROI) Large investment projects may require global markets to justify

the capital outlays

Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

8

Benefits of Internationalisation (Cont’d)

Five primary reasons (Cont’d)

3. Economies of Scale and Learning Expanding size or scope of markets helps to achieve

economies of scale in manufacturing as well as marketing, R&D, or distribution

Costs are spread over a larger sales base Profit per unit is increased

9

GLOBAL ECONOMIES OF SCALE

Key factors

Global economies of scale

• Pharmaceutical firms such as Pfizer, can

leverage large R&D budgets

• CitiGroup, McDonald’s, and Coca-Cola can leverage brands

• MITY can leverage its excess capacity to produce chairs and thereby reduce average costs

Global expansion may be attractive if it allows you to leverage fixed assets over new markets

10

LEARNING AND KNOWLEDGE SHARING

Key factors Expanding into a new market can create opportunities to innovate, improve existing products in existing markets, or develop ideas for new markets

SC Johnson, for example, used technology developed in its European operation (a product for repelling mosquitoes in homes) to create the “ Glade Plug-ins” air freshener in the U.S.

Learning and knowledge sharing

Benefits of Internationalisation (Cont’d)

11

4. Location advantages: Low cost markets may…… aid in developing competitive advantage

… achieve better access to critical resources:

i.e., raw materials, lower cost labor, key customers, energy

5. Multipoint Competition

12

LOCATION

Key factors

Location • Input costs

• Competitors

• Demand conditions

• Regulatory environment

• Presence of complements

Choosing the right location canprovide advantages in terms of

A five-forces analysis can help revealthe attractiveness of a location

13

MULTIPOINT COMPETITION

Key factors

Multipoint competition

Expanding into a new market may provide an opportunity for a “stronghold assault”

For example, French tire maker Michelin had negligible presence in the U.S. in the 1970s. It learned of Goodyear’s plans to expand into Europe, so it launched a counter attack. It started selling tires in the U.S. at or below cost, and thereby forced Goodyear to drop prices and cut profits in its core market

14

International Strategies (IS)

Firms choose one or both of two basic type of IS: Business level and/or corporate level

International business-level strategy Follows generic strategies of cost-leadership,

differentiation, focused or broad International corporate-level strategy

The type of corporate-level strategy adopted by the firm will have an impact on the selection and implementation of its international business-level strategy

Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage of Nations, by Michael E. Porter, p. 72. Copyright ©1990, 1998 by Michael E. Porter.

Determinants of National Advantage

International Corporate-Level Strategies

17

International Strategies (IS) (Cont’d)

International corporate-level strategies 1. Multidomestic

Decentralized strategic & operating decisions by strategic business-unit (SBU) in each country allows units to tailor products to local markets

Focuses on variations of competition within each country Customized products to meet local customers’ specific

needs and preferences Takes steps to isolate the firm from global competitive forces

Establish protected market positions Compete in industry segments most affected by differences

among local countries Deals with uncertainty due to differences across markets

18

International Strategies (IS) (Cont’d)

2. Global Firm offers standardized products across country

markets, with the competitive strategy being dictated by the home office

Emphasizes economies of scale

Facilitated by improved global reporting standards (i.e., accounting and financial)

Strategic & operating decisions centralized at home office

19

International Strategies (IS) (Cont’d)

2. Global (Cont’d)

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

Offers less effective learning processes (pressure to conform and standardize)

20

International Strategies (IS) (Cont’d)

3. Transnational Firm seeks to achieve both global efficiency and local

responsiveness – these are competing goals! Requires both global coordination and local flexibility with

this strategy/structure combination Flexible Coordination: Building a shared vision and individual

commitment through an integrated network Challenging, but becoming increasingly necessary to

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

keep costs down while greater information flow and desire for specialized products pressures firms to differentiate and even customize products – nonetheless,

Increasingly used as a strategy

21

Environmental Trends

Transnational strategy is hard to implement but it many be necessary

Many large firms employ a multidomestic strategy with certain product lines and a global strategy with others

Firms may need this type of flexibility mainly due to the following important trends:

1. Liability of foreignness

2. Regionalization

22

THE CAGE DISTANCE FRAMEWORK

Attributes creating distance

Industries or products affected by distance

Cultural distance Administrative distance Geography distance Economic distance

Different languages

Different ethnicities; lack of connective ethnic or social networks

Different religions

Different social norms

Products have high linguistic content (TV)

Products affect cultural or national identity of consumers (foods)

Product features vary in terms of size (cars), standards (electrical appliances), or packaging

Products carry country-specific quality associations (wines)

Absence of colonial ties

Absence of shared monetary or political association

Political hostility

Government policies

Institutional weakness

Government involvement is highin industries that are• Producers of staple goods

(electricity)• Producers of other

“entitlements” (drugs)• Large employers (framing)• Large suppliers to

government (mass transportation)

• National champions (aerospace)

• Vital to national security (telecom)

• Exploiters of natural resources (oil, mining)

• Subject to high sunk costs (infrastructure)

Physical remoteness

Lack of a common border

Lack of sea or river access

Size of country

Weak transportation or communication links

Differences in climates

Products have a low value-of-weight or bulk ratio (cement)

Products are fragile or perishable (glass, fruit)

Communications and connectivity are important (financial services)

Local supervision and operational requirements are high (many services)

Differences in consumer incomes

Differences in costs andquality of

• Natural resources• Financial resources• Human resources• Infrastructure• Intermediate inputs• Information or knowledge

Nature of demand varies with income level (cars)

Economies of standardization or scale are important (mobile phones)

Labor and other factor cost differences are salient (garments)

Distribution or business systems are different (insurance)

Companies need to be responsive and agile (home appliances )

Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.

23

International Entry Modes

Follows the selection of an IS Five main entry modes 1. Exporting 2. Licensing 3. Strategic Alliances 4. Acquisitions 5. New Wholly-Owned Subsidiary

24

International Entry Modes (Cont’d)

1. Exporting Involves low expense to establish operations in host

country

Often involves contractual agreements

Involves high transportation costs

May have some tariffs imposed

Offers low control over marketing and distribution

25

International Entry Modes (Cont’d)

2. Licensing 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

26

International Entry Modes (Cont’d)

3. Strategic Alliances 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

27

International Entry Modes (Cont’d)

4. Acquisitions Allow for quick access to market

Involve possible integration difficulties

Are costly

Have complex negotiations and transaction requirements

28

International Entry Modes (Cont’d)

5. New Wholly-Owned Subsidiary Is costly

Involves complex processes

Allows for maximum control

Has the highest potential returns

Carries high risk

Greenfield venture: Establish entirely new subsidiary

29

International Entry Modes (Cont’d)

Dynamics of Mode of Entry: Use the 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

IP rights in emerging economy not well protected Number of firms in industry is growing fast Need for global integration is high

Acquisitions or greenfield ventures: secure a stronger presence in international markets

30

Strategic Competitive Outcomes

International diversification: firm expands sales of its goods or services across the borders of global regions and countries into different geographic locations or markets

Implementation follows selection of international strategy and mode of entry

1. International diversification and returns 2. International diversification and innovation 3. Complexity of managing multinational firms

31

Strategic Competitive Outcomes (Cont’d)

1. International diversification and returns As international diversification increases, firms’ returns

initially decrease, but the increase quickly as firm learns to manage international expansion

2. International diversification and innovation Exposure to new products and markets

Opportunity to integrate new knowledge into operations

Generation of resources to sustain innovation efforts

32

Strategic Competitive Outcomes (Cont’d)

3. Complexity of managing multinational firms Geographic dispersion

Costs of coordination

Logistical costs

Trade barriers

Cultural diversity

Host government

33

Risks in International Environment

2 major risks 1. Political 2. Economic

Limits to international expansions: management problems

34

Risks in International Environment (Cont’d)

1. Political risks Government instability

Conflict or war

Government regulations

Conflicting and diverse legal authorities

Potential nationalization of private assets

Government corruption

Changes in government policies

35

Risks in International Environment (Cont’d)

2. Economic risks Differences and fluctuations in currency values

Investment losses due to political risks

Limits to international expansions: management problems Geographic dispersion

Trade barriers

Logistical costs

Cultural diversity

Other differences by country

Relationship between organization and host country

Experiential Exercise

Evaluate the international strategy used by a foreign multinational company for entering the Indian market by identifying:

1. the type of international corporate-level strategy and2. the mode of entry

used by the firm. Explain the reasons for making these choices.

36