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Chapter 8 - Chapter 8 - International StrategyInternational Strategy
MGNT428 BUSINESS POLICY & STRATEGYMGNT428 BUSINESS POLICY & STRATEGYDr. Gar Wiggs,Dr. Gar Wiggs,
InstructorInstructor
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Knowledge ObjectivesKnowledge Objectives
• Studying this chapter should provide you with the strategic management knowledge needed to:– Explain traditional and emerging motives for firms to pursue
international diversification.
– Explore the four factors that lead to a basis for international business-level strategies.
– Define the three international corporate-level strategies: multidomestic, global, and transnational.
– Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization.
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Knowledge Objectives (cont’d)Knowledge Objectives (cont’d)
• Studying this chapter should provide you with the strategic management knowledge needed to:
Name and describe the five alternative modes for entering international markets.
Explain the effects of international diversification on firm returns and innovation.
Name and describe two major risks of international diversification.
Explain why the positive outcomes from international expansion are limited.
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Figure 1.1Figure 1.1
Copyright © 2004 South-Western. All rights reserved.
The Strategic The Strategic Management Management
ProcessProcess
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Opportunities and Outcomes of Opportunities and Outcomes of International StrategyInternational Strategy
Figure 8.1Figure 8.1
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Identifying International Identifying International OpportunitiesOpportunities
• International strategy
– A strategy through which the firm sells its goods or services outside its domestic market
• Reasons to having an international strategy
– International markets yield potential new opportunities
– New market expansion extends product life cycle
– Needed resources can be secured
– Greater potential product demand
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Classic Rationale for International Classic Rationale for International Diversification: Extend Product’s Life Diversification: Extend Product’s Life
CycleCycle
Production is standardized and Production is standardized and relocated to low cost countries.relocated to low cost countries.
Product DemandProduct DemandDevelops and FirmDevelops and FirmExports ProductsExports Products
Firm IntroducesFirm IntroducesInnovation inInnovation in
Domestic MarketDomestic Market
ForeignForeignCompetitionCompetition
Begins ProductionBegins Production
Firm BeginsFirm BeginsProduction AbroadProduction Abroad
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International Strategy BenefitsInternational Strategy Benefits
• Increase market share
– Domestic market may lack the size to support efficient scale manufacturing facilities
• Return on investment
– 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
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International Strategy Benefits International Strategy Benefits (cont’d)(cont’d)
• Economies of scale or learning– Expanding size or scope of markets helps to
achieve economies of scale in manufacturing as well as marketing, R&D or distribution
– Can spread costs over a larger sales base– Can increase profit per unit
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International Strategy Benefits (cont’d)International Strategy Benefits (cont’d)
• Competitive advantage through location
– Low cost markets aid in developing competitive advantage by providing access to:
• Raw materials
• Lower cost labor
• Key customers
• Energy
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Determinants of National Determinants of National AdvantageAdvantage
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. Figure 8.2Figure 8.2
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Determinants of National Determinants of National AdvantageAdvantage
• Factors of production: the inputs necessary to compete in any industry– Labor Land Natural resources– Capital Infrastructure
• Basic factors include natural and labor resources
• Advanced factors include digital communication systems and an educated workforce
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Determinants of National Determinants of National Advantage Advantage (cont’d)(cont’d)
• Demand conditions: characterized by the nature and size of buyers’ needs in the home market for the industry’s goods or services– Size of the market segment can lead to scale-
efficient facilities– Efficiency can lead to domination of the industry
in other countries– Specialized demand may create opportunities
beyond national boundaries
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Determinants of National Determinants of National Advantage Advantage (cont’d)(cont’d)
• Related and supporting industries: supporting services, facilities, suppliers and so on
– Support in design
– Support in distribution
– Related industries as suppliers and buyers
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Determinants of National Determinants of National Advantage Advantage (cont’d)(cont’d)
• Firm strategy, structure and rivalry: the pattern of strategy, structure, and rivalry among firms
– Common technical training
– Methodological product and process improvement
– Cooperative and competitive systems
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Selecting an International Selecting an International Corporate-Level StrategyCorporate-Level Strategy
• The type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies
– Some strategies provide individual country units with the flexibility to choose their own strategies
– Others dictate business-level strategies from the home office and coordinate resource sharing across units
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International Corporate-Level International Corporate-Level StrategyStrategy
• Focuses on the scope of operations:– Product diversification– Geographic diversification
• Required when the firm operates in:– Multiple industries, and– Multiple countries or regions
• Headquarters unit guides the strategy– But business or country-level managers can
have substantial strategic input
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International International Corporate-Corporate-
Level Level StrategiesStrategies
Figure 8.3Figure 8.3
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Multidomestic StrategyMultidomestic Strategy
• Strategy and operating decisions are decentralized to strategic business units (SBU) in each country
• Products and services are tailored to local markets
• Business units in one country are independent of each other
• Assumes markets differ by country or regions
• Focus on competition in each market
• Prominent strategy among European firms due to broad variety of cultures and markets in Europe
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Global StrategyGlobal Strategy• Products are standardized across national
markets
• Decisions regarding business-level strategies are centralized in the home office
• Strategic business units (SBU) are assumed to be interdependent
• Emphasizes economies of scale
• Often lacks responsiveness to local markets
• Requires resource sharing and coordination across borders (hard to manage)
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Transnational StrategyTransnational Strategy
• Seeks to achieve both global efficiency and local responsiveness
• Difficult to achieve because of simultaneous requirements:
– Strong central control and coordination to achieve efficiency
– Decentralization to achieve local market responsiveness
• Must pursue organizational learning to achieve competitive advantage
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Environmental TrendsEnvironmental Trends
• Liability of foreignness– Legitimate concerns about the relative attractiveness
of global strategies– Global strategies not as prevalent as once thought– Difficulty in implementing global strategies
• Regionalization– Focusing on particular region(s) rather than on global
markets– Better understanding of the cultures, legal and social
norms
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Choice of International Entry Choice of International Entry ModeMode
Type of EntryType of Entry CharacteristicsCharacteristics
ExportingExporting High cost, low controlHigh cost, low control
LicensingLicensing Low cost, low risk, little control, low Low cost, low risk, little control, low returnsreturns
Strategic alliancesStrategic alliances Shared costs, shared resources, shared Shared costs, shared resources, shared risks, problems of integrationrisks, problems of integration
AcquisitionAcquisition Quick access to new market, high cost, Quick access to new market, high cost, complex negotiations, problems of complex negotiations, problems of merging with domestic operationsmerging with domestic operations
New wholly owned New wholly owned subsidiarysubsidiary
Complex, often costly, time consuming, Complex, often costly, time consuming, high risk, maximum control, potential high risk, maximum control, potential above-average returnsabove-average returns
Table 8.1Table 8.1
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Dynamics of Mode of EntryDynamics of Mode of Entry
The firm has no foreign manufacturing expertise and requires investment only in distribution.
The firm has no foreign manufacturing expertise and requires investment only in distribution.
ExportExport
What’s the best solution?What’s the best solution?
SituationSituation Optimal SolutionOptimal Solution
2525
Dynamics of Mode of EntryDynamics of Mode of Entry
The firm needs to facilitate the product improvements necessary to enter foreign markets.
The firm needs to facilitate the product improvements necessary to enter foreign markets.
LicensingLicensing
What’s the best solution?What’s the best solution?
SituationSituation Optimal SolutionOptimal Solution
2626
Dynamics of Mode of EntryDynamics of Mode of Entry
The firm needs to connect with an experienced partner already in the targeted market.
The firm needs to connect with an experienced partner already in the targeted market.
Strategic AllianceStrategic Alliance
What’s the best solution?What’s the best solution?
SituationSituation Optimal SolutionOptimal Solution
2727
Dynamics of Mode of EntryDynamics of Mode of Entry
The firm needs to reduce its risk through the sharing of costs.
The firm needs to reduce its risk through the sharing of costs.
Strategic AllianceStrategic Alliance
What’s the best solution?What’s the best solution?
SituationSituation Optimal SolutionOptimal Solution
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Dynamics of Mode of EntryDynamics of Mode of Entry
The firm is facing uncertain situations such as an emerging economy in its targeted market.
The firm is facing uncertain situations such as an emerging economy in its targeted market.
Strategic AllianceStrategic Alliance
What’s the best solution?What’s the best solution?
SituationSituation Optimal SolutionOptimal Solution
2929
Dynamics of Mode of EntryDynamics of Mode of Entry
The firm’s intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.
The firm’s intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.
Wholly-owned Subsidiary
Wholly-owned Subsidiary
What’s the best solution?What’s the best solution?
SituationSituation Optimal SolutionOptimal Solution
3030
International Diversification and International Diversification and ReturnsReturns
• Expanding sales of goods or services across global regions and countries and into different geographic locations or markets:
– May increase a firm’s returns (such firms usually achieve the most positive stock returns)
– May achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns
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International Diversification and International Diversification and InnovationInnovation
• Expansion sales of goods or services across global regions and countries and into different geographic locations or markets:– May yield potentially greater returns on innovations (a
larger market)– Can generate additional resources for investment in
innovation– Provides exposure to new products and processes in
international markets; generates additional knowledge leading to innovations
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Complexity of Managing Complexity of Managing Multinational FirmsMultinational Firms
• Expansion into global operations in different geographic locations or markets:
– Makes implementing international strategy increasingly complex
– Can produce greater uncertainty and risk
– May result in the firm becoming unmanageable
– May cause the cost of managing the firm to exceed the benefits of expansion
– Exposes the firm to possible instability of some national governments
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Risk in the International Risk in the International EnvironmentEnvironment
Political risks include:Political risks include:
• Instability in national governmentsInstability in national governments
• War, both civil and internationalWar, both civil and international
• Potential nationalization of a firm’s resourcesPotential nationalization of a firm’s resources
Political Political RisksRisks
Economic Economic RisksRisks
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Risk in the International Risk in the International EnvironmentEnvironment
Economic risks are interdependent with political risks and include:
• Differences and fluctuations in the value of different currencies
• Differences in prevailing wage rates• Difficulties in enforcing property rights• Unemployment
Political Political RisksRisks
Economic Economic RisksRisks
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Risk in the International Risk in the International EnvironmentEnvironment
Figure 8.4aFigure 8.4a
3636
Risk in the International Environment Risk in the International Environment (cont’d)(cont’d)
Figure 8.4bFigure 8.4b
3737
Limits to International ExpansionLimits to International Expansion
• Management Problems
– Cost of coordination across diverse geographical business units
– Institutional and cultural barriers
– Understanding strategic intent of competitors
– The overall complexity of competition