Chapter 8Looking at International Strategies
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OBJECTIVES
Define international strategy and identify its implications for the strategy diamond
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Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage
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Use the CAGE framework to identify desirable international arenas
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Describe different vehicles for global expansion4
Apply different international strategy configurations5
Outline the international strategy implications of the static and dynamic perspectives
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DELL GOES TO CHINA
Dell becameChina’s largest
computer system provider in just
5 years
If we’ve not in what will soon be the second-biggest PC market in the world, then how can Dell possibly be a global player?
Strategic decisions
Vehicles
Staging Consumersfirst, then corporations
U.S.
Assemble and distributeitself
Corporationsfirst
China
Partner
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INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND
Economiclogic
Arenas
VehiclesStaging
Differentiators
Arenas • Which geographic areas will we enter?• Which channels will we use in those areas?
• Which international market-entry strategies will we use? Alliances? Acquisitions? Greenfield investments?
Vehicles
• How does being international make our products more attractive to our customers?
Differentiators• How does our international
strategy lower our costs, raise the prices we can charge, or create synergies between our business?
Economic logic
• When will we go international?• How quickly will we expand into
international markets?• In what sequence will we
implement our entry tactics?
Staging
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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?
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KEY FACTORS – 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
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KEY FACTORS – LOCATION
Key factors Global economies of scale
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
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KEY FACTORS – MULTIPOINT COMPETITION
Key factors Global economies of scale
Location
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
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KEY FACTORS – 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.
Global economies of scale
Location
Multipoint competition
Learning and knowledge sharing
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THE CAGE DISTANCE FRAMEWORK
Attributes creating distance
Industries or products affected by distance
Cultural distance Administrative distance Geography distance Economic distance
Different languagesDifferent ethnicities; lack of connective ethnic or social networksDifferent religionsDifferent 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 packagingProducts carry country-specific quality associations (wines)
Absence of colonial tiesAbsence of shared monetary or political associationPolitical hostilityGovernment policiesInstitutional 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 remotenessLack of a common borderLack of sea or river accessSize of countryWeak transportation or communication linksDifferences 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 incomesDifferences 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.
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ADMINISTRATIVE DISTANCE
Legal concerns for US firms
Free TradeAgreements
• FTA’s• Open foreign markets to US exports
Import Laws• Antidumping
Foreign CorruptPractices Act
• Anti-bribery provisions
IntellectualPropertyProtection
• Patent Cooperation Treaty• USPTO
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ADMINISTRATIVE DISTANCE
NAFTAHistorical Political Hostilities
Decreased distance between US, Mexico, and Canada
Increased distance between Cuba and US
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ECONOMIC DISTANCE
“Bottom of the pyramid”4 billion people
Deliberate Targeting
Ex: shampoo for cold water
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CHOICE OF ENTRY MODES
Choice of entry mode
Nonequity modes
Equity (FDI) modes
GreenfieldinvestmentsMinority JVsDirect exports Licensing/
franchising
Acquisition50/50 JVsIndirect exports Turnkey projects
OthersMajority JVsOthers Contracted R&D
Wholly ownedsubsidiaries
Alliances and joint ventures (JVs)Exports Contractual
agreements
Comarketing Strategic alliances (within dotted areas)
Source: Adapted from Pan, Y. and D. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, 31 (2000), 535-545
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VEHICLES FOR ENTERING FOREIGN MARKETS
100% Exports 100% Local
Exports versus local production
Degree of ownership control overactivities per-formed in the foreign market
0%
100%
FDI
Exports
Alliance
Champion International’s paper exports through independent brokers
Honda’s initial entry into the U.S. market
FDI through acquisition
Bridgestone’s acquisition of U.S.-based Firestone
Ford-MazdaGenentech-Hoffman
LaRoche
Alliance and exports
KFC’s franchisees in India
Source: Examples drawn from in Gupta, A., and V. Govindarajan, “Managing Global Expansion: A Conceptual Framework,” businessHorizons, March/April 2002, 45-54
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EXPORTING OPTIONS
Shipping Most common option in relatively close markets and for productswith lower shipping costs
Licensing and franchising
A firm may form an alliance or franchise giving a local partner the right and responsibility to operate the firm’s business in their home market (e.g., Burger King’s expansion in Europe)
Specialagreements
A firm may enter Turnkey project agreements, R&D contracts, or joint-marketing initiatives (e.g., a German firm Bayer AG contracts large R&D projects to a U.S. firm)
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ALLIANCES
U.S. firm
Until recently, China did not allow non-Chinese companies in China …
… so U.S. companies formed alliances to gain access
Chinese Firm
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FOREIGN DIRECT INVESTMENT
• South African Breweries purchase Miller Brewing in 2002 to gain access to U.S. customers and brewing capacity
• DaimlerChrysler and BMW each invested $250 million to start local factories in Brazil
Foreigncompany
Localcompany
Home country/market
Acquires
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IMPORTING
Importing is often a “stealth” form of internationalization because a firm will claim to have no international operations and yet directly or indirectly base production or service delivery abroad
“Domestic”company Home country
Country A
Production
Country B
Customerservice
Country C
Logistics
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INTERNATIONAL STRATEGY CONFIGURATIONS
Relatively few opportunities to gainglobal efficiencies
Many opportunities togain global efficiencies
Relatively highlocalresponsiveness
Relative lowlocalresponsiveness
Multinational configurationBuild flexibility to respond to national difference through strong, resourceful, entrepreneurial, and somewhat independent national or regional operations. Requires decentralized and relatively self-sufficient unitsExample : MTV initially adopted an international configuration (using only American programming in foreign markets) but then changed its strategy to a multinational one. It now tailors its Western European programming to each market, offering eight channels, each in a different language
Transnational configurationDevelop global efficiency, flexibility, and worldwide learning. Requires dispersed, interdependent, and specialized capabilities simultaneouslyExample : Nestle has taken steps to move in this direction, starting first with what might be described as a multinational configurationToday, Nestle aims to evolve from a decentralized, profit-center configuration to one that operates as a single, global company. Firms like Nestle have taken lessons from leading consulting firms such as McKinsey and Company, which are globally dispersed but have a hard-driving, one-firm culture at their core.
International configuration Exploit parent-company knowledge and capabilities through worldwide diffusion, local marketing, and adaptation. The most valuable resources and capabilities are centralized; others, such as local marketing and distribution, are decentralizedExample : When Wal-Mart initially set up its operations in Brazil, it used its U.S. stores as a model for international expansion
Global configurationBuild cost advantages through centralized, global-scale operations . Requires centralized and globally scaled resources and capabilitiesExample : Companies such as Merck and Hewlett-Packard give particular subsidiaries a worldwide mandate to leverage and disseminate their unique capabilities and specialized knowledge worldwide
Source: Bartlett, C., S. Ghoshal, & J. Birkenshaw, Transnational Management (New York: Irwin, 2004)
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BORN – GLOBAL FIRMS
More and more firms, even young, small ones, have operations that bridge national borders
Founded by
• 2 Italians
• 1 Swiss
R&D
• California
• Switzerland
Production
• Ireland
• Taiwan
30% ofglobal PC
mouse busi-ness by
1989
Logitech
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HOW TO SUCCEED AS A GLOBAL START-UP
If yes, Put together tools you will need to move into global market
Consider if you should be aglobal start-up
• Do you need human resources from other countries to succeed?
Strong management team with inter-national experience
• Do you need financial capital fromother countries to succeed?
Broad and deep international networkamong suppliers, customers,and complements
• If you go global, will target customers prefer your services over competitor's?
Preemptive marketing or technology to provide first-mover advantage
• Can you put an international system in place more quickly than domestic competitors?
Strong intangible assets
• Do you need global scale and scope to justify the financial and human capital investment?
Ability to keep customers locked in by linking new products and services to core business, while you innovate
• Will a purely domestic focus now make it harder for you to go global in the future?
Close worldwide coordination and com-munication among business units, suppliers, complements and customers
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DEVELOPING A GLOBAL MIND-SET
Having an appreciation for the differences between countries and people and seeing these differences as opportunities
Having developed skills for managing diverse teams in a world-wide work force
Global mindset
Glo
bal p
ersp
ectiv
e
Glo
bal s
kills
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EXPATRIATES AND INPATRIATES
Expatriates
From the home country
Inpatriates
From the localor host country
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HOW WOULD YOU DO THAT?
Fewer than 15% of executives
have substantive international experience
If you were CEO, how would you build a global perspective in your executives?
Tactic Action steps
Teams ?
Training ?
Transfers ?
??? ?
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