International Purchasing

Chapter 8: International Strategy
Chapter 8
International Strategy
KNOWLEDGE OBJECTIVES
1. Explain traditional and emerging motives for firms to pursue international diversification.
2. Identify the four major benefits of an international strategy.
3. Explore the four factors that provide a basis for international business-level strategies.
4. Describe the three international corporate-level strategies: multidomestic, global, and transnational.
5. Discuss the environmental trends affecting international strategy, especially liability of foreignness and
regionalization.
6. Name and describe the five alternative modes for entering international markets.
7. Explain the effects of international diversification on firm returns and innovation.
8. Name and describe two major risks of international diversification.
CHAPTER OUTLINE
Opening Case Shanghai Automotive Industry Corporation: Reaching for Global Markets
IDENTIFYING INTERNATIONAL OPPORTUNITIES: INCENTIVES TO USE AN INTERNATIONAL
STRATEGY
Increased Market Size
Return on Investment
Economies of Scale and Learning
Strategic Focus Does General Motors Survival Depend on International Markets?
Location Advantages
INTERNATIONAL STRATEGIES
International Business-Level Strategy
International Corporate-Level Strategy
ENVIRONMENTAL TRENDS
Liability of Foreignness
Regionalization
CHOICE OF INTERNATIONAL ENTRY MODE
Exporting
Licensing
Strategic Alliances
Acquisitions
New Wholly Owned Subsidiary
Strategic Focus Has the Largest Automaker in the World Made Mistakes with Its International Strategy?
Dynamics of Mode of Entry
STRATEGIC COMPETITIVE OUTCOMES
International Diversification and Returns
International Diversification and Innovation
Complexity of Managing Multinational Firms
RISKS IN AN INTERNATIONAL ENVIRONMENT
Political Risks
Economic Risks
Limits to International Expansion: Management Problems
SUMMARY
REVIEW QUESTIONS
EXPERIENTIAL EXERCISES
NOTES
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LECTURE NOTES
Chapter Introduction: This chapter examines opportunities facing firms as they seek to
develop and exploit core competencies by diversifying into global markets. In addition, it
addresses different problems, complexities, and threats that might accompany use of the
firms international strategies. Although national boundaries, cultural differences, and
geographical distances all pose barriers to entry into many markets, significant opportunities
draw businesses into the international arena. A business that plans to operate globally must
formulate a successful strategy to take advantage of these global opportunities. Furthermore,
to mold their firms into truly global companies, managers must develop global mind-sets.
Especially in regard to managing human resources, traditional means of operating with little
cultural diversity and without global sourcing are no longer effective. These themes are all
emphasized in the chapter.
OPENING CASE
Shanghai Automotive Industry Corporation: Reaching for Global Markets
The Shanghai Automotive Industry Corporation (SAIC) is one of Chinas leading automotive companies.
The firm manufactures cars, tractors, motorcycles, trucks, buses, and automotive parts. SAIC has had
highly successful joint ventures with General Motors and Volkswagen to produce GM and VW automobiles
for the growing Chinese automobile market. The majority of SAICs sales in the 1990s and 2000s have
come from these joint ventures. In fact, driving in any major city in China shows the popularity
of the GM (e.g., Buick) and VW autos in that country. In addition to these joint ventures, SAIC also owns
almost 51 percent of the Korean automaker, SSangyong, and the intellectual property rights to the Rover 25
and 75 models, as well as the K-series engine. SAIC started manufacturing the Rover 75 (redesigned for
the Chinese market) in 2007.
SAIC learned much from its partnerships, and with the licensed technology, it decided to launch and
promote its own branded vehicles. The Chinese government is emphasizing the importance of Chinese
companies to develop their own brands partly because foreign brands are controlling many of the Chinese
markets. Additionally, for these firms to become successful globally competitive companies, they need their
own brands. In keeping with this goal, Chinese executives have a favorite term, zizhu pinpai, meaning self-
owned brand. Actually, zizhu means to be ones own master. In 2007, SAIC began selling its own
automobile brand, named the Roewe, in Chinese markets.
SAIC is currently among the top three automobile companies in China, and it has a goal of becoming
among the top ten global auto competitors. To do so, it has a goal of entering and competing effectively in
the U.S. auto market, which is the largest automobile market in the world.
SAIC has a very lofty goal. The automotive market in the United States is the largest market in the world,
but all major automobile companies compete there. This undertaking will represent a major challenge to
SAIC as evidenced by Hyundais failed attempt to make inroads in the US auto market despite major
improvements in quality and lower prices than comparable cars.
Chinese exposure to the global auto market has been minimal, and very few Chinese cars are exported to
the United States. Although the market share of U.S. automakers has been falling for the last several years,
most of the gains in market share have been obtained by Japanese auto manufacturers, especially Toyota.
Chinese exports are expected to reach 500,000 autos in 2007, but most are targeted for South America,
Southeast Asia, and Eastern Europe. Yet, analysts predict Chinese automakers success in global markets,
including the United States, over time, and SAIC is likely to be one of the leaders.
This case raises two very basic questions, specifically, why does SAIC feel that it can succeed in the
United States automobile market when other ex-US firms have been unsuccessful? And, will
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American buyers consider spending significant dollars on Chinese produced automobiles in light of a
barrage of Chinese product recalls? Would your students buy a Chinese automobile? What major
challenges face SAIC managers in expansion to the United States? Will these hurdles rise or fall as
time goes on? These are some of the basic issues that must be address when considering
international strategic decisions.
Please note that the Strategic Focus articles in Chapter 8 specifically address SAICs
partners/competitors referenced in this Opening Case. You may do well to read the first Strategic
Focus describing General Motors and the second that targets Toyota before discussing the above
SAIC case.
Although national boundaries, cultural differences, and geographical distances all pose barriers to entry into
many markets, significant opportunities draw businesses into the international arena.
Global firms must formulate a successful strategy to take advantage of international opportunities.
Managers must develop global mind-sets.
Operating with little cultural diversity and without global sourcing is no longer effective.
Global firms must develop relationships with suppliers, customers, and partners, and then learn from these.
Figure Note: Figure 8.1 outlines the relationships between opportunities, international
strategy decisions, and outcomes covered in Chapter 8.
FIGURE 8.1
Opportunities and Outcomes of International Strategy
The following opportunities and outcomes of international strategy are illustrated in Figure 8.1:
Firms should first identify international opportunities related to increasing market size, return on investment,
economies of scale and learning, and location-related advantages.
Once international opportunities have been identified, firms must develop international strategies based on
firm resources and capabilities.
A mode of entry should be selected to take advantage of the firms core competencies.
A firms ability to realize strategic competitiveness is tempered by managements ability to manage
effectively and efficiently a complex organization with locations in multiple countries and the economic and
political risks that accompany firm internationalization.
The strategic outcomes from the process can include better performance and more innovation.
Explain traditional and emerging motives for firms to pursue

1 international diversification.
IDENTIFYING INTERNATIONAL OPPORTUNITIES: INCENTIVES TO USE AN

INTERNATIONAL STRATEGY
International strategy refers to selling products in markets outside of the firms domestic market to expand the
market for their products. This is explained by Vernons adaptation of the product life cycle concept formulated
to explain internationalization.
1. A firm introduces an innovation (new product) in its domestic market.
2. Product demand develops in other countries and exports are provided from domestic operations.
3. As demand increases, foreign rivals produce the product; then, firms justify investing in production abroad.
4. As products become standardized, firms relocate production to low-cost countries.
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Some firms implement an international strategy to secure critical resources, such as petroleum reserves (for the
oil industry), bauxite (for the manufacture of aluminum), or rubber (for tire manufacturing).
Traditional motives persist, but other emerging motives also drive international expansion.
Pressure has increased for global integration of operations, driven mostly by universal product demand.
In some industries, technology drives globalization because the economies of scale necessary to reduce costs
to the lowest level often require an investment greater than that needed to meet domestic market demand.
New large-scale, emerging markets, such as China and India, provide a strong internationalization incentive
because of the potential demand in them.
Companies seeking to expanding operations in Europe, as elsewhere, need to understand the pressure on them
to respond to local, national, or regional customs, especially where goods or services require customization
because of cultural differences or effective marketing to entice customers to try a different product.
Firms adapt products to local tastes as they move into new national markets.
Local repair/service capabilities are another factor that increases desire for local country responsiveness.
Transportation costs of large products and their parts may preclude a firms suppliers from following the
firm into an international market.
Employment contracts and labor forces differ. Host governments demand joint ownership and frequently
require a high percentage of local procurement, manufacturing, and R&D. These issues increase the need
for local investment.
Accompanying these traditional and emerging reasons for international expansion, other opportunities available
to firms through an international strategy include:
increasing the size of potential markets
achieving greater returns on capital and/or investment in new product/process developments
gaining economies of scale, scope, or learning
gaining location-based competitive advantage
Teaching Note: Firms expanding into international markets must recognize that many
countries have characteristics that are unique and may differ significantly from the traditional
European markets into which U.S. firms have expanded. Thus, firms must recognize this and:
be capable of managing multiple riskse.g., financial, economic, political risks
be aware of increased pressure for local country or regional responsiveness, especially
where cultural differences require customization of goods or services
weigh the potential advantages of enhancing the firms strategic competitiveness relative
to the costs of meeting managerial challenges and product/geographic diversification
requirements in international markets
Increased Market Size
Expanding internationally enables firms to increase greatly the size of the potential market for their products.
This may be of critical importance if the domestic market is too small to support scale-efficient manufacturing
facilities (e.g., the pharmaceutical firms push into China).
The size of a particular international market affects a firms willingness to invest in R&D to build advantages in
that market, with larger markets tending to provide higher returns and lower risk.
The strength of the science base in a country also can affect a firms foreign R&D investments, so most firms
prefer to invest more heavily in those countries with the scientific knowledge and talent that produce more
effective new products and processes from their R&D.
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Return on Investment
When firms make large investments in such items as plants and equipment and/or research and development,
they may need to search beyond their domestic market to be able to earn an adequate return on their investment.
Teaching Note: To illustrate, aircraft manufacturersBoeing and Airbus Industries (a

European entity)must be able to sell in international as well as domestic markets if they are
to be strategically competitive and achieve satisfactory returns on their enormous investment.
As the pace of technology development acceleratesand products become obsolete much fasterfirms must
be able to recoup R&D investments as quickly as possible.
Teaching Note: This may be a good place to discuss reverse engineering. Reverse
engineering is where a firm takes apart a competing product, learns the technology, and then
develops a similar product that mirrors or imitates the new technology and successfully meets
customer preferences. In other words, imitation and reverse engineering may shorten the
time during which an innovative firm can profit from its innovation. Because of this, innovative
firms often seek international markets so that they can increase their opportunities to recoup
significant capital investment and R&D expenditures.
Economies of Scale and Learning
By expanding the size and scope of their markets, firms may be able to achieve economies of scale in
manufacturing (and in other operations, such as marketing, research and development, and distribution) by
standardizing products across national borders and spreading fixed costs over a larger sales base.
Teaching Note: Economies of scale are critical in the global auto industry. Honda has been
a largely successful firm with substantial competencies in the manufacture of engines;
however, it has sometimes struggled to compete against larger and more resource-rich auto
makers (e.g., Ford and GM). To have a chance to survive, Honda achieved economies of
scale in the development and application of its engines (e.g., by providing engines for many
applications [e.g., lawnmowers, weed trimmers, snowmobiles] and forming an alliance with
GM to produce engines). Thus, Honda may excel as an independent engine manufacturer.
Firms may also be able to exploit core competencies in international markets through resource and knowledge
sharing between units across country borders. This sharing generates synergy, which helps the firm produce
higher-quality goods or services at lower cost. In addition, working across international markets provides the
firm with new learning opportunities.
STRATEGIC FOCUS
Does General Motors Survival Depend on International Markets?
In order for this Strategic Focus to have maximum value, students should have read and discussed the
Opening Case about Shanghai Industry Corporation (SAIC). These two cases complement each other.
For 76 years, General Motors (GM) was the global industry sales leader, but in 2007, Toyota became the
worlds largest automaker. In addition to market share deterioration, GM has been struggling to earn
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positive returns in recent years. It finally returned to profitability in 2007 after experiencing several years of
significant losses. Many of GMs problems stem from its competitive capabilities in the North American
market, where Toyota and other foreign auto makers have made substantial gains. Interestingly, GMs
return to profitability is not due to success in its North American operations as it continues to lose money
there. Its recent profits have come from GMs international operations, especially sales in the Chinese
market. China surpassed Japan to become the second largest vehicle market in the world. GM has the
second highest market share in the Chinese market behind Volkswagen.
GMs sales in China come from a 50-50 joint venture with the Shanghai Automotive Industry Corporation
(SAIC) named Shanghai General Motors. In 2006, this joint venture manufactured more than 400,000
passenger automobiles. GM predicts that Shanghai General Motors will produce 1 million passenger cars
by 2010. Of course, the Chinese market for autos continues to grow and is expected to eventually become
the largest auto market in the world. GMs competitive advantage is clear because Toyota sold slightly
more than 275,000 cars in China during the same period. Thus, GM has made large investments in Asia to
offset Toyotas gains elsewhere.
Even as GM is experiencing success in Asia and is hoping for more in Latin America, it faces many
challenges in the next decade. Importantly, its partner in China may become a critical competitor. The
transfer to technology and managerial capabilities to SAIC through the joint venture has helped it to
develop its own branded auto that will compete with the GM Buicks sold in China. But equally critical is
SAICs intentions to introduce its cars into the Untied States market. As a result, GM must employ
effective strategies to maintain its current competitive advantages in China and other Asian markets and it
must also try to stem the tide of lost market share in other markets (e.g., the United States and Western
Europe).
GM has a real dilemma with its China exposure. This situation might best be referred to as
double jeopardy. SAIC is currently a partner in one of GMs few bright spots, but has developed
the capability to become an intense competitor in both China and the United States. And GM has
been SAICs mentor. What sort of international strategy should GM implement to protect its
recently developed China turf as well as protect its United States market from interlopers? Ask
students to identify strategic alternatives that GM should consider. Is it reasonable to do nothing
to protect its shrinking market share in the United States and rely on its current U.S. competitors
to protect the U.S. market?
Location Advantages
Firms also may be able to achieve a comparative advantage and lower the basic costs of their products by
locating facilities in low-cost markets for critical raw materials, cheap labor, key suppliers, energy, customers,
and/or natural resources.
Teaching Note: The large and unified market of the European Union is attracting
considerable investment from international companies, and European markets and firms are
undergoing substantial changes to take advantage of the economies of scale, potential
learning, and advantages of location. The common currency and integration of capital
markets have reduced financial risks and made available significant amounts of capital that
were previously unavailable in the separate country markets. (This may be a good place to
discuss the euro and its impact on global business.)
Other factors that may impact location advantages are as follows:

the needs of intended customers,
cultural influences (if there is a strong match between the cultures involved, the liability of foreignness is
lower than if there is high cultural distance),
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regulation distances which influence the ownership positions of multinational firms as well as their
strategies for managing expatriate human resources.
INTERNATIONAL STRATEGIES
International strategies available to firms are business-level and corporate-level (cf. Chapters 4 and 6).
Business-level strategy choices are generic, extending our earlier discussion of cost leadership,
differentiation, focus, and integrated cost leadership/differentiation strategies.
Corporate-level strategies are dependent on the complexity and scope of product and geographic
diversification, and these include multidomestic, global, and transnational (hybrid) strategies.
Explore the four factors that provide a basis for international

2 business-level strategies.
International Business-Level Strategy
Each business must develop a competitive strategy focused on its own domestic market. Business-level generic
strategies are discussed in Chapter 4, but international business-level strategies have some unique features.
In an international business-level strategy, the home country of operation is often the most important source
of competitive advantage.
The resources and capabilities established in the home country frequently allow the firm to pursue the
strategy into markets located in other countries.
As a firm continues its growth into multiple international locations, research indicates that the country of
origin diminishes in importance as the dominant factor.
Figure Note: Porters Diamond of Advantage model can be used to introduce the discussion
of Figure 8.2.
FIGURE 8.2
Determinants of National Advantage
As Figure 8.2 illustrates, four interrelated national or regional factors contribute to the competitive advantage of
firms competing in global industries.
Factor conditions or the factors of production
Demand conditions
Related and supporting industries
Firm strategy, structure, and rivalry
Note: Each of these factors is discussed in the following section.
Perhaps the most basic factor in the model, factor conditions or factors of production, refers to the inputs
necessary to compete in any industry. These include such factors as labor, land, natural resources, capital, and
infrastructure (such as highway, postal, and communications systems).
These factors can be subdivided into four categories:

Basic factors, such as labor and natural resources
Advanced factors, including digital communications systems and highly-educated work forces
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Generalized factors (required by all industries), such as highway systems and a supply of capital
Specialized factors that are most valuable in specific uses (e.g., skilled personnel employed at a port who
specialize in the handling of bulk chemicals)
Nations having both advanced and specialized factors are likely to be characterized by growth in new firms that
are strong global competitors.
Ironically, countries often develop advanced and specialized factors because they lack critical basic resources.
Some Asian countries, such as South Korea, lack abundant natural resources but offer a strong work ethic, a
large number of engineers, and systems of large firms to create expertise in manufacturing.
Germany developed a strong chemical industry, partially because Hoechst and BASF spent years creating a
synthetic indigo dye to reduce their dependence on imports, unlike Britain, whose colonies provided large
supplies of natural indigo.
The second factor that determines national advantage is demand conditions, which are characterized by the
nature and size of buyers needs in the home market for the industrys products or services. The size of the
segment can create demand sufficient to justify the construction of scale-efficient facilities.
Related and supporting industries are the third factor of the national advantage model. National firms may be
able to develop competitive advantage when industries that provide either materials or components, or that
support the activities of the primary industry are present.
Italian firms are world leaders in the shoe industry because of the related and supporting industries present in
Italy (e.g., a mature leather processing industry and design and manufacture of leather-working machinery).
In Japan, copiers and cameras are related, as are cartoon, consumer electronics, and video game industries.
Growth in certain industries is fostered by the fourth factorfirm strategy, structure, and rivalry. As expected,
patterns of firm strategy, structure, and competitive rivalry among firms in an industry vary between nations.
In Italy, the national pride of the countrys designers has spawned strong industries in sports cars, fashion
apparel, and furniture.
In the United States, competition among computer manufacturers and software producers has favored the
development of these industries.
As described, the four basic factors of Porters Diamond of Advantage model emphasize the impact or influence
of the environmental or structural attributes of a nations economy that may contribute to a national advantage
for its firms in specific industries.
In spite of the presence of the four factors and government support, the factors leading to national advantage are
likely to result in a firm achieving competitive advantage only when the firm develops and implements
strategies that enable it to take advantage of country-specific factors.
Define the three international corporate-level strategies:

3 multidomestic, global, and transnational.
International Corporate-Level Strategy
The type of corporate-level strategy adopted by a firm will have an impact on the selection and implementation
of its international business-level strategy.
Some corporate-level strategies provide individual country units with the flexibility to develop country-specific
strategies, while others dictate all country business-level strategies from the home office and coordinate
activities across units for the purposes of resource-sharing and product standardization.
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International corporate-level strategy can be distinguished from international business-level strategy by the
scope of operations, in terms of both product and geographic diversification.
Figure Note: The three types of international corporate-level strategies are illustrated in
Figure 8.3, while relationships between structural arrangements and strategy type will be
discussed further in Chapter 11.
FIGURE 8.3
International Corporate Strategies
As Figure 8.3 illustrates, a firm should choose its international corporate strategy based on the need for both
local responsiveness and for global integration.
When the need for global integration is high and there is little need for local market responsiveness, the firm
should adopt a global strategy.
When the need for global integration is low, but there is great need for local market responsiveness, the firm
should adopt a multidomestic strategy.
When there is a great need for both global integration and local market responsiveness, the firm should
adopt a transnational strategy.
Multidomestic Strategy
Multidomestic strategy is one where strategic and operating decisions are decentralized to the strategic business
unit in each country in order to tailor products and services to the local market. The multidomestic strategy:
assumes business units in different countries are independent of one another
contends that markets differ and can be segmented by national borders
focuses on competition within each country
suggests products and/or services can be customized to meet individual markets needs or preferences
assumes economies of scale are not possible because of demand for market-specific customization
Teaching Note: A few years back, Sonys entertainment business changed its strategy from
global to multidomestic when it decided to produce films and television programs for local
markets around the world through production facilities and television channels in most larger
Latin American and Asian countries. In 1999, Sony produced approximately 4,000 hours of
foreign-language programs and about 1,700 hours of English-language programs. Sony now
has more than 24 channels operating across 62 countries, and some of these channels are
highly successful.
The use of multidomestic strategies:

usually expands the firms local market share because the firm can pay attention to the needs of local buyers
results in more uncertainty for the corporation as a whole, because of the differences across markets and thus
the different strategies employed by local country units
does not allow for the achievement of economies of scale and can be more costly
decentralizes a firms strategic and operating decisions to the business units operating in each country
Global Strategy
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A global strategy is one where standardized products are offered across country markets and competitive
strategy is dictated by the home office. The global strategy:
assumes strategic business units operating in each country are interdependent
attempts to achieve integration across businesses and national markets, as directed by the home office
emphasizes economies of scale
offers greater opportunities to use innovations developed at home or in one country in other markets
often lacks responsiveness to local market needs and preferences
is difficult to manage because of the need to coordinate strategies and operating decisions across borders
requires resource-sharing and an emphasis on coordination across national borders
Teaching Note: U.K.-based temporary energy provider, Aggreko, operates in 48 countries

and employs a global strategy. The firms fleet of equipment is integrated globally, which
allows it to shift equipment to different regions of the world to meet specific needs. Its global
strategy also allows Aggreko to design and assemble its equipment in-house to meet the
needs of its customers.
Cemex: A Mini-Case
Cemex is the third largest cement company in the world behind Frances Lafarge and Switzerlands
Holcim and the largest producer of Ready-mix, a prepackaged product that contains all the ingredients
needed to make localized cement products. In 2005, Cemex acquired RMC for $4.1 billion. RMC is a
large U.K. cement producer with two-thirds of its business in Europe. Cemex was already the number
one producer in Spain through its acquisition of a Spanish company in 1992. In 2000 Cemex acquired
Southdown, a large manufacturer in the U.S. Accordingly, Cemex has strong market power in the
Americas as well as in Europe. Because Cemex pursues a global strategy effectively, its integration of
its centralization process has resulted in a quick payoff for its merger integration process. To integrate its
businesses globally, Cemex uses the Internet as one way of increasing revenue and lowering its cost
structure. By using the Internet to improve logistics and manage an extensive supply network, Cemex
can significantly reduce costs. Connectivity between the operations in different countries and universal
standards dominate its approach.
Transnational Strategy
A transnational strategy is a corporate strategy that seeks to achieve both global efficiency and local (national
market) responsiveness.
It is difficult to achieve because of requirements for both strong central control and coordination to achieve
efficiency and local flexibility and decentralization to achieve local responsiveness.
A transnational strategy mandates building of a shared vision and individual commitment through an
integrated network to produce a core competence that would result in strategic competitiveness (that
competitors would find difficult to imitate).
Effective implementation of a transnational strategy often produces higher performance than does
implementation of either the multidomestic or global international corporate-level strategies.
Teaching Note: Students sometimes find the transnational strategy difficult to grasp. This
has prompted some to refer to this option as an idealized form, suggesting that this it not
possible to achieve in reality. This also suggests, however, that this model represents a
worthy goal for the international firm. It is worth asking students if they believe it will ever be
possible to be truly transnational and ask what would be needed to make this a reality.
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Teaching Note: Refer back to Figure 8.3 to summarize relationships between the need for
global integration and local responsiveness and international corporate-level strategies.
Teaching Note: DaimlerChrysler employed a transnational strategy to design and

manufacture The Crossfire, a product that was introduced in 2003 and features a sleek
Chrysler design, but 40 percent of its components are from Mercedes Benz. This global
integration has facilitated lower costs for the vehiclecomponents already engineered were
adapted from elsewhere and design enhancements produced an attractive car for the U.S.
market.
Discuss the environmental trends affecting international

4 strategy, especially liability of foreignness and regionalization.
ENVIRONMENTAL TRENDS
Implementing a transnational strategy is difficult; however, firms are challenged to do so because of these facts:
There is an increased emphasis on local requirements e.g., customization to meet government regulations
within particular countries or to fit customer tastes and preferences.
Most multinational firms desire coordination and sharing of resources across country markets to hold down
costs.
Some products and industries may be more suited than others for standardization across country borders.
Liability of Foreignness
Research shows that firms may focus less on truly global strategies and more on regional adaptation. Even
Internet-based strategies now require local adaptation.
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Lands End Adjusts to the Liability of Foreignness: A Mini-Case
The globalization of businesses with local strategies is demonstrated by the online operation of Lands' End,
Inc. (now owned by Sears), which uses local Internet portals to offer its products for sale. Lands End,
formerly a direct-mail catalog business, launched its Web-based business in 1995. The firm established
Websites in the U.K. and Germany in 1999, and in France, Italy, and Ireland in 2000all of this prior to
initiating a catalog business in those countries. Not only are catalogs very expensive to print and mail
outside the United States, but they also must be sent to the right people, and buying mailing lists is
expensive. With limited online advertising and word-of-mouth, a Website business can be built in a foreign
country without a lot of initial marketing expenses. Once the online business is large enough, a catalog
business can be launched with mailing targeted to customers who have used the business online.
Sam Taylor, vice president of international operations for Lands End, indicated that the firm has a
centralized Internet team (handling development, design, etc.) at the home office, but a local presence is also
needed. So the firm hired local Internet managers, designers, marketing support, and so on, to gain insight
into the nuances of local markets. He also explained that each additional Website was cheaper to implement.
For example, to set up the Websites for Ireland, France, and Italy, the firm cloned the U.K. site and partnered
with Berlitz for French and Italian translations. This made the process cheaperi.e., 12 times less than the
U.K. site for France and 16 times less for Italy. Lands End now gets 16 percent of its total revenues from
Internet sales and ships to 185 countries, primarily from its Dodgeville, Wisconsin, corporate headquarters.
This shows that smaller companies can sell their goods and services globally when facilitated by electronic
infrastructure without having significant (brick-and-mortar) facilities outside of their home location. But
significant local adaptation is still needed in each country or region.
Regionalization
A firm competing in international markets must decide whether to compete in all (or many) world markets or to
focus its efforts on a specific region or regions.
Competing in many markets may enable the firm to achieve economies of scale because of the size of the
combined markets, but only if customer preferences in multiple markets do not differ significantly. If customer
preferences vary significantly among national markets, a firm might be better served by narrowing its focus to a
specific region. A regional focus may enable the firm to better understand cultures, legal and social norms, and
other factors that may be important to achieving strategic competitiveness.
Teaching Note: At this point, it might useful to draw a parallel between competing in multiple
national markets and owning businesses in multiple industries. Firms may be better
positioned by focusing on a specific region where markets are more similar, thus allowing a
degree of integration and resource sharing. In Chapter 7, a similar comment was made
regarding disadvantages that often accompany overdiversification and the prescribed
downscoping to refocus the firm more on related, as opposed to, unrelated diversification.
Regional strategies also are being promoted by groups of countries that have developed trade agreements to
enhance the economic power of a region. Examples include the following:
Membership in the European Union (EU) is limited to Western European countries, but it is being expanded
to include other Western European countries as well as countries in Central and Eastern Europe.
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The North American Free Trade Agreement (NAFTA) is an integration designed to facilitate trade among the
U.S., Canada, and Mexico (and it may be expanded to include some South American countries).
South Americas Organization of American States (OAS) is a system of country associations that developed
trade agreements to promote the flow of trade across country boundaries within their respective regions.
CAFTA is a U.S. trade agreement with Central American nations that is designed to reduce tariffs with five
countries in Central America plus the Dominican Republic in the Caribbean Sea.
Teaching Note: The movement of investment funds has not been only from the U.S. to
Mexico as Mexican investors have made significant investments in the U.S., and some
European firms have invested in Canada to gain access to this unified market.
Most firms enter regional markets sequentially, beginning in markets with which they are more familiar. And
they introduce their largest and strongest lines of business into these markets first, followed by their other lines
of business once the first lines are successful. They also usually invest in the same area as their original
investment location.
Name and describe the five alternative modes for entering

5 international markets.
CHOICE OF INTERNATIONAL ENTRY MODE
Firms have a variety of alternative means of expanding internationally as indicated in Table 8.1.
Table Note: Students can refer to Table 8.1 as you discuss each of the modes of entry into
international markets.
TABLE 8.1
Global Market Entry: Choice of Entry Mode
Table 8.1 presents five alternative entry modes available to firms for international expansion:
exporting
licensing
strategic alliances
acquisition
new, wholly owned subsidiary
The next section of this chapter discusses characteristics of each mode, including cost/control trade-offs.
Exporting
A commonbut not necessarily the least costly or most profitableform of international expansion is for firms
to export products from the home country to other markets.
Exporters have no need to establish operations in other countries.
Exporters must establish channels of distribution and outlets for their goods, usually by developing
contractual relationships with firms in the host country to distribute and sell products.
However, exporting also has disadvantages:
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Exporters may have to pay high transportation costs.

Tariffs may be charged on products imported to the host country.
Exporters have less control over the marketing and distribution of their products.
Because of the potentially significant transportation costs and the usually greater similarity of geographic
neighbors, firms often export mostly to countries that are closest to its facilities.
Small businesses are the most likely to use exporting. One of the largest problems with which small businesses
must deal is currency exchange rates, a challenge for which only large businesses are likely to have specialists.
Licensing
Through licensing, a firm authorizes a foreign firm to manufacture and sell its products in a foreign market.
The licensing firm (licensor) generally is paid a royalty payment on every unit that is produced and sold.
The licensee takes the risks, making investments in manufacturing and paying marketing/distribution costs.
Licensing is the least costly (and potentially the least risky) form of international expansion because the
licenser does not have to make capital investments in the host countries.
Licensing is a way to expand returns based on previous innovations, even if product life cycles are short.
Teaching Note: Counterfeiting is one risk to licensing strategies. Sony and Philips
codesigned the audio CD. In the past, they licensed the rights to companies to make CDs
and Sony and Philips collected 5 cents for every CD sold. However, the returns to Sony and
Philips from CD sales were threatened by cheap counterfeit disks. Sales of counterfeit disks
in China alone are estimated to exceed $1 billion annually.
The costs or potential disadvantages of licensing include the following:

The licensing firm has little control over manufacture and distribution of its products in foreign markets.
Licensing offers the least revenue potential as profits must be shared between licensor and licensee.
The licensee can learn the firms technology and, upon license expiration, may create a competing product.
Strategic Alliances
Strategic alliances enable firms to:

share the risks and resources required to enter international markets
facilitate the development of new core competencies that yield strategic competitiveness
Most strategic alliances represent ventures between a foreign partner (which provides access to new products
and new technology) and a host country partner (which has knowledge of competitive conditions, legal and
social norms, and cultural idiosyncrasies that will enable the foreign partner to successfully manufacture or
develop and market a competitive product or service in the host country market).
Strategic alliances also present potential problems and risks due to (1) selection of incompatible partners and (2)
conflict between partners.
Several factors may cause a relationship to sour. Trust between the partners is critical and is affected by a
number of fundamental issues:
the initial condition of the relationship
the negotiation process to arrive at an agreement
partner interactions
external events
the country cultures involved in the alliance or joint venture
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Note: Strategic alliances will be covered in much greater depth in Chapter 9.
Teaching Note: British Telecommunications planned to create a virtual shopping mall in

Spain through its joint venture with Banco Popular, a retail-focused Spanish bank. The two
firms jointly developed a Website for business-to-business transactions. They were to use
BTs portal in Spain to develop a client base of small and medium size businesses. BT would
provide the common portal free of charge for the first year and Banco Popular would charge
only a nominal commission for brokering sales.
Research suggests that alliances are more favorable when uncertainty is high and where cooperation is needed
to access knowledge dispersed between partners and where strategic flexibility is important; acquisitions work
best in situations with less need for flexibility and when the transaction supports economies of scale or scope.
Acquisitions
Cross-border acquisitions have also been increasing significantly. In recent years, cross-border acquisitions
have comprised more than 45 percent of all acquisitions completed worldwide.
As explained in Chapter 7, acquisitions can provide quick access to a new market. In fact, acquisitions may
provide the fastest and often the largest initial international expansion of any of the alternatives.
Beyond the disadvantages previously discussed for domestic acquisitions (Chapter 7), international acquisitions
also can be quite expensive (because of debt financing) and require difficult and complex negotiations due to:
the same disadvantages as domestic acquisitions
the great expense which often requires debt financing
the exceedingly complex international negotiations for acquisitionse.g., only about 20 percent of the
cross-border bids made lead to a completed acquisition, compared to 40 percent for domestic acquisitions
different corporate cultures
the challenges of merging the new firm into the acquiring firm, which often are more complex than with
domestic acquisitionsi.e., different corporate culture, but also different social cultures and practices
Teaching Note: Emphasize that firms often use multiple entry strategies. For example, Wal-
Mart has used multiple entry strategies as it globalizes its operations, ranging from joint
ventures in China and Latin America to acquisitions in Germany and the U.K.
New Wholly Owned Subsidiary
Firms that choose to establish new, wholly owned subsidiaries are said to be undertaking a greenfield venture.
This is the most costly and complex of all international market entry alternatives.
The advantages of establishing a new wholly-owned subsidiary include:

achieving maximum control over the venture
being potentially the most profitable alternative (if successful)
maintaining control over the technology, marketing, and distribution of its products
While the profit potential is high, establishing a new wholly-owned subsidiary is risky for two reasons:
This alternative carries the highest costs of all entry alternatives as a firm must build new manufacturing
facilities, establish distribution networks, and learn and implement the appropriate marketing strategies.
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The firm also may have to acquire knowledge and expertise that is relevant to the new market, often having
to hire host country nationals (in many cases from competitors) and/or costly consultants.
STRATEGIC FOCUS
Has the Largest Automaker in the World Made Mistakes with Its International Strategy?
In 2007, Toyota surpassed General Motors as the worlds leading automaker. Toyota sold 2.35 million
vehicles in the first quarter of 2007, 900,000 more than General Motors. The Toyota brand has come to
mean reliability at an affordable price.
While sales of Toyota vehicles have leveled off in Europe due to European Union policies designed to limit
their sales, the company plans to build five more large assembly plants in North America by 2016. That
would bring Toyotas total to 13 plants and 50,000 employees in North America. Toyota first entered the
Chinese market with exported cars built in Japan in the 1960s.
As mentioned earlier in the Opening Case, the two leaders in the Chinese auto market are VW and GM.
Toyota built manufacturing facilities in China as a part of a joint venture with FAW China. Toyota began
pushing the sales of a small modestly priced auto, the Vios, a similar strategy used for many emerging
economy countries. Although its initial sales were positive, they weakened as Chinese customers seemed
more interested in luxury cars. However, Toyota rebounded quickly with the introduction in 2006 of the
Camry, a popular auto in many international markets. Its sales reached 150,000 units in 2007. Toyota also
formed other joint ventures in China such as one with Guangzhou Automotive Group to manufactures
engines. Still Toyota must build its brand name in China and also has to fend off anti-Japanese sentiment
leftover from Japanese government actions during World War II. For these reasons and its late start, it has a
large gap in sales to overtake the market leaders.
But Toyota is not without serious problems. For example, in North America, the number of recalls of its
vehicles has tripled in recent years. And customer satisfaction has declined with the J.D. Powers ratings
listing Toyota 28th out of 36 in customer experience. Analysts suggest that the reason for these outcomes is
Toyotas relentless pressure to increase sales, sometimes at the expense of customer satisfaction.
Because of these problems, Toyota has begun a new program in North America with emphasis on
improving product planning, customer service, sales and marketing, along with the car dealerships. Chinas
major international initiative in the 2000s has been the Chinese market. It may have taken its eye off of
the North American market a little. But, it cannot afford to slip in the lucrative North American market
while it fights for market share in China. It will be interesting to observe whether Toyota can regain its
customer satisfaction in North America, continue to build market share there, and make gains in the
Chinese market simultaneously.
Toyota is sales focused. It recently passed GM as the worlds leading automaker. But has it lost
sight of what it requires to remain #1? Do your students feel that Toyota has diluted its
management resources to a point that something is going to slip? Is it a matter of prioritization
within the Toyota organization? Does expansion of Toyota dealers role offer a possible solution
to Toyotas current issues?
Dynamics of Mode of Entry
The choice of a market entry strategy is determined by a number of factors. However, initial market
development strategies generally are selected to establish a firms products in the new market.
Exporting does not require foreign manufacturing expertise; it only requires an investment in distribution.
Licensing also can facilitate direct market entry by enabling the firm to learn the technologies required to
improve its products in order to achieve success in international markets or to facilitate direct entry.
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Strategic alliances are also popular because the firm forms a partnership with a firm that is already
established in the new target market and reduces risks by sharing costs with the partner.
Firms interested in establishing a stronger presence (in most instances, in the later stages of the firms
international diversification strategy) and in controlling technology, marketing, and distribution adopt riskier,
more costly entry strategies, such as acquisitions or greenfield returns.
However, the entry strategy should be matched to the particular situation. In some cases, a firm may pursue
entry strategies in sequential orderbeginning with exporting and ending with greenfield ventures. The entry
mode decision should be based on the following conditions:
the industrys competitive conditions
the target countrys situation
government policies
the firms unique set of resources, capabilities, and core competencies
Explain the effects of international diversification on firm

6 returns and innovation.
STRATEGIC COMPETITIVE OUTCOMES
Once its international strategy and mode of entry have been selected, the firm turns its attention to
implementation issues (see Chapter 11). It is important to do this because international expansion is risky and
may not result in a competitive advantage (see Figure 8.1). The probability the firm will achieve success by
using an international strategy increases when that strategy is effectively implemented.
International Diversification and Returns
Recall that in Chapter 6, the discussion centered on product diversification where a firm manufactures and sells
a diverse variety of products.
Based on the advantages discussed earlier, international diversification should be positively related to firm
performance. Research has shown that, as international diversification increases, firms returns decrease and
then increase as firms learn to manage international expansion.
There are several reasons for the positive relationship between international diversification and performance.
Potential advantages from economies of scale and experience
Location advantages
Increased market size
The potential to stabilize returns
International Diversification and Innovation
As mentioned in Chapter 1, developing new technology is critical to strategic competitiveness. In fact, Porter
indicates that a nations competitiveness depends on the innovativeness of its industries and that firms achieve
strategic competitiveness in international markets through innovation (see Figure 8.2).
As stated earlier in this chapter, one of the advantages of international expansion is having larger potential
markets. Larger markets allow firms to achieve greater returns on innovation, which yields lower R&D-related
risk. Thus, international diversification provides firms with incentives to innovate.
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A complex relationship exits among international diversification, innovation, and performance. This leads, in
fact, to the following circular relationship:
Some level of performance is necessary to provide the resources required to diversify internationally.
International diversification provides incentives (advantages) to firms to invest in R&D (innovation).
If done properly, R&D and the resulting innovations should improve firm performance.
Improved performance provides resources for continued international diversification and investments in
R&D innovation.
It also is possible that international diversification may result in improved returns for product-diversified firms
(referred to as unrelated diversification) by increasing the size of the potential market for each of the firms
products. But managing a firm that is both product and internationally diversified is very complex.
Cultural diversity may enable a firm to compete more effectively in international markets.
Culturally diverse top management teams often have a greater knowledge of international markets.
An in-depth understanding of diverse markets among top-level managers facilitates inter-firm cooperation,
the use of strategically relevant, long-term criteria to evaluate managerial and business unit performance,
and improved innovation and performance.
Complexity of Managing Multinational Firms
Managers of internationally diversified firms face a number of complex challenges.

Firms face multiple risks from being in several countries.
Firms can grow only so large before they become unmanageable.
The costs of managing large diversified firms may outweigh the benefits of diversification.
Global markets are highly competitive.
Firms must understand and effectively deal with multiple cultural environments.
Systems and processes must exist to manage shifts in the relative values of multiple currencies.
Firms must scan the environment to be prepared for potential government instability.
7 Name and describe two major risks of international diversification.
RISKS IN AN INTERNATIONAL ENVIRONMENT
Political and economic risks complicate the management of international diversification. One reason is that
these risks result in competitive conditions that may differ significantly from what was expected.
Examples of political and economic risks related to international diversification are listed in Figure 8.4.
Figure Note: Be sure to note any developments in the international risk situations noted in
Figure 8.4 as well as the emergence of significant new issues.
FIGURE 8.4
Risk in the International Environment
This figure presents some specific examples of political and economic risks that multinational firms face.
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Political Risks
Political risks are those related to instability in national governments and to war, civil or international.
Teaching Note: For a useful way of identifying the political risk associated with different
countries, see the map on page 105 of Small Business Management: An Entrepreneurial
Emphasis, by Longenecker, Moore, Petty, and Palich (2006, SWCP).
National government instability creates multiple potential problems for internationally diversified firms.
Economic risks come up as governments react to a variety of events, reflected in uncertainty in terms of:
economic risks and uncertainty created by government regulation
existence of many, possibly conflicting, legal authorities or corruption
the potential nationalization of private assets
Teaching Note: A number of national governments attempt to minimize political risk (to
themselves) by requiring that a significant portion of profits from investments be reinvested
only in that country (to achieve economic stability, which can reduce probability of political
instability).
Economic Risks
Economic risks are interdependent with political risks; however, some economic risks are specific to
international diversification. For example, differences and fluctuations in the value of the different currencies
are a primary concern to internationally diversified firms.
For U.S. firms, the value of international assets, liabilities, and earnings are affected by the value of the
dollar relative to other currencies (e.g., as the dollar value increases, the value of foreign assets decreases).
The value of the dollar may make U.S. firms exports uncompetitive in international markets because of
price differentials (and, in turn make imports from other countries more attractive to U.S. customers).
Explain why the positive outcomes from international

8 expansion are limited.
Limits to International Expansion: Management Problems
As mentioned before, firms generally earn positive returns by diversifying internationally.
However, there are limits to the advantages of international diversification.

Greater geographic dispersion across country borders increases the costs of coordination between units and
the distribution of products.
Trade barriers, logistical costs, cultural diversity, and other differences by country greatly complicate the
implementation of an international diversification strategy.
Institutional and cultural factors can present strong barriers to the transfer of a firms competitive advantages
from one country to another.
Marketing programs often have to be redesigned and new distribution networks established when firms
expand into new countries.
Firms may encounter different labor costs and capital charges.
In general, it is difficult to effectively implement, manage, and control a firms international operations.
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Teaching Note: The complex nature of the management challenges that face internationally
diversified firms is illustrated by the following cases:
Robert Shapiro, CEO of Monsanto, assumed that Europe was similar to the U.S., but the
firms genetically engineered seeds have been strongly rejected in Europe.
Wal-Mart made mistakes in some Latin American markets, for example, when it learned
that giant parking lots do not draw huge numbers of car-less customers. And the lots were
far from the bus stops used by many Mexicans, so potential customers could not easily
transport their goods home.
ANSWERS TO REVIEW QUESTIONS
1. What are traditional and emerging motives that cause firms to expand internationally? (pp. 213-217)
Traditional motives that are causing firms to expand internationally are to gain access to larger markets, to
extend the product life cycle, to secure key resources, and to access low-cost factors of production (e.g., cheap
labor or raw materials).
Emerging motives include the increase in pressure for global integration (driven by global communications,
which lead to a global convergence of lifestyles and, in turn, universal product demand), rising obligations for
cost cutting (e.g., seeking the lowest cost provider of resources or low-cost global suppliers), the realization that
R&D expertise for the next new product extension may not come from the domestic market, and the emergence
of large scale markets.
Figure 8.1 distills most of these motives into four opportunities that emerge from international expansion.
These benefits are (1) increased market size, (2) return on investment, (3) economies of scale and learning, and
(4) advantages in location.
2. What four factors provide a basis for international business-level strategies? (pp. 217-220)
According to Michael Porter, the resources and capabilities established in a firms home country often enable
the firm to pursue its strategy beyond the domestic market. Porter specified a model that describes the factors
contributing to the advantage of firms in a dominant global industry and associated with a specific country or
regional environment. These four factors are as follows:
factors of production, or the basic inputs necessary to compete in any industry, such as labor, land, capital,
and infrastructure
demand conditions, or the nature and size of the buyers needs in the home market for the industrys
products or services (reflected either by segment size, which enables a firm to achieve economies of scale, or
specialized demand, which enables the firm to develop a higher level of competency in producing
products/services)
related and supporting industries, or the presence of other industries in the home market that either are
related to or support the primary industry. For example, the shoe industry in Italy benefits from a well-
established industry in leather processing, people traveling to Italy to purchase leather goods, and an
industry presence in leather-working machinery and design services)
firm strategy, structure, and rivalry are interrelated as patterns of strategy that impact (and are impacted by)
industry structure, which in turn affect and are affected by competitive rivalry.
3. What are the three international corporate-level strategies? How do they differ from each other?
What factors lead to their development? (pp. 220-222)
The three international corporate-level strategies are multidomestic, global, and transnational (see Figure 8.3).
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Firms following multidomestic strategies assume that markets are different and should be segmented by national
boundary. They decentralize or delegate strategic and operating decisions to the strategic business unit in each
country to enable the flexibility necessary to tailor products and services to local market preferences. The use
of multidomestic strategies usually produces expansion of local market share because of the attention paid to
local demands; however, it also leads to greater uncertainty for the corporation as a whole (due to market
differences and the strategies designed to fit these). Multidomestic strategies do not allow for the achievement
of economies of scale and thus can be more costly, leading firms following this strategy to decentralize strategic
and operating decisions to the business units operating in each country.
Firms that follow a global strategy assume significant standardization of products across markets. The primary
focus is on efficiency through economies of scale and the leveraging of innovation across country markets.
Business-level strategy is centralized and controlled by the home office. It requires resource sharing and
coordination and cooperation between subsidiaries and across country boundaries. Thus, a global strategy
produces lower risk but may forego growth opportunities in local markets because they are less likely to
identify opportunities or these require product adaptation for local market preferences. Therefore, this strategy
lacks local market responsiveness and is difficult to manage because of the need to coordinate strategies and
operating decisions across country borders.
A transnational strategy seeks to achieve both global efficiency and local responsiveness. It is difficult to
realize the diverse goals of the transnational strategy because one goal requires close global coordination, while
the other requires local flexibility; thus, flexible coordination is required to implement the transnational
strategy. Management must build a shared vision and individual commitment through an integrated network.
Effective implementation of a transnational strategy often produces higher performance than either the global or
multidomestic strategy alone.
4. What environmental trends are affecting international strategy? (pp. 222-224)
Global strategies require integration and coordination across units (and across national boundaries) and enable
the achievement of economies of scale and efficiency. On the other hand, multidomestic strategies emphasize
responsiveness to local market needs and preferences, providing the opportunity to more effectively meet
customer needs and preferences. Successfully balancing the need for local responsiveness and global efficiency
implies that local responsiveness should facilitate competition based on an international differentiation strategy,
while global efficiency should facilitate competition based on an international cost leadership strategy.
The threat of wars and terrorist attacks increases the risks and costs of international strategies. Furthermore,
research suggests that the liability of foreignness is more difficult to overcome than once thought.
Competing in many markets may enable the firm to achieve economies of scale because of the size of the
combined markets, but only if customer preferences in multiple markets do not differ significantly. If customer
preferences vary significantly among national markets, a firm might be better served to narrow its focus to a
specific region. A regional focus may enable the firm to better understand cultures, legal and social norms, and
other factors that may be important to achieving strategic competitiveness.
Regional strategies also are being promoted by groups of countries that have developed trade agreements to
enhance the economic power of a region. Examples include the European Union (EU) and the Organization of
American States (OAS in South America). Another example of a regional market is the North American Free
Trade Agreement (NAFTA), which is designed to facilitate free trade among the U.S., Canada, and Mexico.
NAFTA may be expanded to include some South American countries and the movement of investment funds
has not been only from the U.S. to Mexico as Mexican investors have made significant investments in the U.S.
and some European firms have invested in Canada to gain access to this unified market.
5. What five modes of international expansion are available, and what is the normal sequence of their
use? (pp. 224-231)
Choice of mode of entry is determined by a number of factors, and the following modes are listed in a sequence
that is typical in practice. Initial market entry will often be through export because this requires no foreign
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manufacturing expertise and demands investment only in distribution. Licensing can also facilitate the product
improvement necessary to enter foreign markets. Strategic alliances have been popular because they allow
partnering with an experienced player already in the targeted market. Strategic alliances also reduce risk
through the sharing of costs. These modes therefore are best for early market development.
To secure a stronger presence, acquisitions or greenfield ventures may be required. Both acquisitions and
greenfield ventures are likely to come at later stages in the development of an international diversification
strategy. Additionally, these strategies tend to be more successful when the firm making the investment has
considerable resources, particularly in the form of valuable core competencies.
Thus, there are multiple means of entering new global markets. Firms select the entry mode that is best suited
to the situation at hand. In some instances, these options will be followed sequentially, beginning with
exporting and ending with greenfield ventures. In other cases, the firm may use several (but perhaps not all) of
the different entry modes. The decision regarding the entry mode to use is primarily a result of the industrys
competitive conditions, the countrys situation and government policies, and the firms unique set of resources,
capabilities, and core competencies.
6. What is the relationship between international diversification and innovation? How does
international diversification affect innovation? What is the effect of international diversification on a
firms returns? (pp. 231-233)
International diversification provides the potential for firms to achieve greater returns on their innovations
(through larger and/or more numerous markets) and thus lowers the often substantial risks of R&D investments.
Therefore, international diversification provides incentives for firms to innovate. In addition, international
diversification may be necessary to generate the resources required to sustain a large-scale R&D operation. The
accelerating trend toward rapid technological obsolescence makes it difficult to invest in new technology and
the capital-intensive operations required to take advantage of it; therefore, firms operating solely in domestic
markets may find it difficult to justify such investments due to the length of time required to recoup the original
investment. Even if the time frame is extended, it may not be possible to recover the investment before the
technology becomes obsolete. Thus international diversification improves the firms ability to appropriate
additional and necessary returns from innovation before competitors can overcome the initial competitive
advantage created by the innovation. Additionally, firms moving into international markets are exposed to new
products and processes, so they can learn and integrate this knowledge in an effort to facilitate the development
of more innovation.
The relationship among international diversification, innovation, and returns is complex. Some level of
performance is necessary to provide the resources to generate international diversification. International
diversification provides incentives and resources to invest in research and development. Research and
development, if done appropriately, should enhance the returns of the firm, thereby providing more resources
for continued international diversification and investment in R&D.
7. What are the risks of international diversification? What are the challenges of managing
multinational firms? (pp. 233-235)
Political risks are related to instability in national governments and to war, civil or international. Instability in a
national government creates multiple problems. Among these are economic risks and the uncertainty created in
terms of government regulation, the presence of many (possibly conflicting) legal authorities, and potential
nationalization of private assets. For example, foreign firms that are investing in Russia may have concerns
about the stability of the national government and what might happen to their investments/assets in Russia
should there be a major change in government. Different concerns exist for foreign firms investing in China
where foreign investors are less worried about the potential for major changes in Chinas national government
than about the uncertainty of Chinas regulation of foreign business investments.
Economic risks are highly interdependent with political risks. The primary economic risk is differences and
fluctuations in the value of different currencies that can affect the value of a firms assets, liabilities, and
earnings, as well as its price competitiveness in international markets.
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Although firms can realize many benefits by implementing an international strategy, doing so is complex and
can produce greater uncertainty. For example, multiple risks are involved when a firm operates in several
different countries. Firms can grow only so large and diverse before becoming unmanageable, or before the
costs of managing them exceed their benefits. Other complexities include the highly competitive nature of
global markets, multiple cultural environments, the security risks posed by terrorists, potentially rapid shifts in
the value of different currencies, and the possible instability of some national governments.
8. What factors limit the positive outcomes of international expansion? (p. 235)
There are multiple reasons for the limits to the positive effects of international diversification. For example,
greater geographic dispersion across country borders increases the costs of coordination between units and the
distribution of products. Additionally, trade barriers, logistical costs, cultural diversity, and other country
differences (e.g., access to raw materials, different employee skill levels) greatly complicate the implementation
of international diversification.
Institutional and cultural factors often represent strong barriers to the transfer of a firms competitive advantages
from one country to another. Marketing programs often have to be redesigned and new distribution networks
established when firms expand into new countries. In addition, they may encounter different labor costs and
capital charges. Therefore, it is difficult to effectively implement, manage, and control international operations.
Exercise 1: McDonalds: Global, Multicountry, or Transnational Strategy?
McDonalds is one of the worlds best-known brands: the company has approximately 30,000 restaurants
located in more than 100 countries, and serves 47 million customers every day. McDonalds opened its
first international restaurant in Japan in 1971. Its Golden Arches are featured prominently in two former
bastions of communism: Puskin Square in Moscow and Tiananmen Square in Beijing, China.
What strategy has McDonalds used to achieve such visibility? For this exercise, each group will be asked
to conduct some background research on the firm and then make a brief presentation to identify the
international strategy (i.e., global, multidomestic, or transnational) McDonalds is implementing.
Individual
Use the Internet to find examples of menu variations in different countries. How much do menu items differ
for a McDonalds in the United States from other locations outside the United States?
Groups
Review the characteristics of global, multidomestic, and transnational strategies. Conduct additional
research to assess what strategy best describes the one McDonalds is using. Prepare a flip chart with a
single page of bullet points to explain your reasoning.
Whole Class
Each group should have five to seven minutes to explain its reasoning. Following Q&A for each group, ask
class members to vote for the respective strategy choices.
Exercise 2: Country Analysis
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Black Canyon Coffee is a Bangkok-based company that operates a chain of coffee shops. Black Canyon
differentiates itself from other coffee chains (e.g., Starbucks, Caribou, Gloria Jeans) by offering a broad
menu of fusion Asian foods as well as a range of coffee products. Although the company operates
primarily in Thailand, it has retail shops in a number of neighboring countries as well.
For this exercise, assume that you have been hired by the Black Canyon management team as consultants.
Your group has been retained by management to conduct a preliminary review of several countries. The
purpose of this review is to help prioritize the areas that are the most promising targets for international
expansion.
Part One
Working in teams of five to seven persons, select three countries from the following list:
Malaysia Australia
Singapore New Zealand
Cambodia United Arab Emirates
Japan Taiwan
Indonesia Philippines
Conduct research on the selected countries for the following criteria:
Economic characteristics: gross national product, wages, unemployment, inflation, and so on. Trend
analysis of this data (e.g., are wages rising or falling, rate of change in wages, etc.) is preferable to single
point-in-time snapshots.
Social characteristics: life expectancy, education norms, income distributions, literacy, and so on.
Risk factors: economic and political risk assessment.
The following Internet resources may be useful in your research:
The Library of Congress has a collection of country studies.
BBC News offers country profiles online.
The Economist offers country profiles.
Both the United Nations and International Monetary Fund provide statistics and research reports.
The CIA World Factbook has profiles of different regions.
The Global Entrepreneurship Monitor provides reports with detailed information about economic
conditions and social aspects for a number of countries.
Links can be found at http://www.countryrisk.com to a number of resources that assess both

political and economic risk for individual countries.
Part Two
Based on your research, prepare a memorandum (three to four pages maximum, single-spaced) that
compares and contrasts the attractiveness of the three countries selected. In your report, include a bullet
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point list of other topics that Black Canyon management should consider when evaluating its international
expansion opportunities.
INSTRUCTOR'S NOTES FOR
Exercise 1: McDonalds Global, Multicountry, or Transnational Strategy?
The purpose of this exercise is to help students understand the differences between a global, multicountry,
and transnational strategy. Key advantages of the exercise are that McDonalds is a familiar brand name,
and that some students in a typical class may have visited a McDonalds franchise in another country.
Additionally, the unique menu items in different locales often tempt students to mistakenly conclude that
the company is pursuing a multicountry or transnational strategy.
The first part of the assignment is to have students individually search for different menu items at
McDonalds stores outside the U.S. Some sample offerings include:
Australia beet root garnish

Brazil: grilled cheese
British Columbia cappuccino
China green tea ice cream and Pork Burger
France: Croque McDo ham & cheese
Germany Frankfurters and beer
Hong Kong: Fish McDippers with Thai sweet chili sauce
India McVeggie and Maharaja Mac two all lamb patties, special sauce, lettuce, cheese,
pickles, onions on a sesame seed bun
Mexico: Eggs with jalapeno peppers and refried beans
NZ: Panini sandwich and latte
South Africa marshmallow shake
Netherlands mayonnaise topping with French fries
Thailand Samurai Pork burger, teriyaki style
Uruguay McHuevo burger with poached egg topping
Philippines McSpaghetti pasta with hot dog chunks
Japan Chicken Tatsuta spicy fried chicken sandwich.
Student teams then review the characteristics of the three types of strategies, and decide which category
best describes McDonaldss. Teams then prepare a single page flip chart with a set of bullet points, and
make a short presentation to the class. At the end of presentations, ask for a show of hands for each of the
three strategy types.
Students will typically advocate multicountry and transnational options, using the different menu choices as
supporting evidence. However, the business description from a recent company 10-K filing paints a
different picture:
McDonalds restaurants serve a varied, yet-limited, value-priced menu

Highly rationalized processes and specs to ensure product consistency across locations
It is also important to emphasize that the tailored menu items represent only a small portion of the
companys food offerings. Additionally, store layout, processes, marketing and advertising, are all similar
8-25
across regions. In the discussion, you can emphasize how a few prominent modifications to the menu can
create the appearance of greater tailoring than actually exists.
A transnational strategy would have elements of both global coordination and local responsiveness. For
students who advocate this strategy, ask the following questions:
Q: What are the coordination and control mechanisms like?

A: Many standardized rules and processes, and very little lateral communication among units in different
regions.
Q: How does decision-making work?

A: Largely top-down.
Q: Are there extensive resource flows across regions?

A: Minimal.
Overall, there is little evidence to support the argument for a transnational strategy.
Exercise 2: Country Analysis
In this exercise, students role play as consultants to Black Canyon Coffee, a Bangkok-based coffeehouse
chain. The company offers an extensive menu of Asian foods along with traditional coffee beverages.
Additional information on the company is available at their Website: http://www.blackcanyoncoffee.com/
Students are told that the company is considering expansion to other regions. Teams are asked to collect
basic information on three countries from the following list:
Malaysia Australia
Singapore New Zealand
Cambodia United Arab Emirates
Japan Taiwan
Indonesia Philippines
As of 2007, the company had a very limited focus outside the core Thailand market. Indonesia was their
largest foreign presence with twelve locations, followed by four locations in the United Arab Emirate.
There were single stores only in Cambodia, India, Malaysia, Myanmar (formerly Burma), and Singapore.
Teams are asked to compare the three regions based on the following criteria:
Economic characteristics
Social characteristics
Risk factors
The main purpose of the exercise is to acquaint students with different Internet resources for collecting
information about the various countries. Several Web-based resources are listed in the student assignment.
If your course has an online component (e.g., WebCT or Blackboard), a useful supplement to this exercise
is to have teams post descriptions and links to other information resources that they discovered on their
own. Additionally, another resource for information for some of the countries is the Association for
Southeast Asian Nations (http://www.aseansec.org/).
8-26
ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as homework.
Application Discussion Questions
1. Given the advantages of international diversification, why do some firms choose not to expand
internationally?
2. How can a small firm diversify globally using the Internet?
3. How do firms choose among the alternative modes for expanding internationally and moving into new
markets (e.g., forming a strategic alliance versus establishing a wholly owned subsidiary)?
4. Does international diversification affect innovation similarly in all industries? Why or why not?
5. What is an example of political risk in expanding operations into Latin America or China?
6. Why do some firms gain competitive advantages in international markets? Have the students explain their
answers.
7. Why is it important to understand the strategic intent of strategic alliance partners and competitors in
international markets?
8. What are the challenges associated with pursuing the transnational strategy? Have the students explain their
answers.
Ethics Questions
1. As firms attempt to internationalize, they may be tempted to locate their facilities where product liability
laws are lax in testing new products. What are some examples in which this motivation is the driving force
behind international expansion?
2. Regulation and laws regarding the sale and distribution of tobacco products are stringent in the U.S. market.
Use the Internet to investigate selected U.S. tobacco firms to identify if sales are increasing in foreign
markets compared to domestic markets. In what countries are sales increasing and why? What is your
assessment of this practice?
3. Some firms outsource production to foreign countries. Although the presumed rationale for such outsourcing
is to reduce labor costs, examine the labor laws (for instance, the strictness of child labor laws) and laws on
environmental protection in another country. What does your examination suggest from an ethical
perspective?
4. Are there markets that the U.S. government protects through subsidies and tariffs? If so, which ones and
why? How will the continuing development of e-commerce potentially affect these efforts?
5. Should the United States seek to impose trade sanctions on other countries, such as China, because of human
rights violations?
6. Latin America has been experiencing significant changes in both political orientation and economic
development. Describe these changes. What strategies should foreign international businesses implement, if
any, to influence government policy in these countries? Is there a chance that the political changes will
reverse?
Internet Exercise
Convenience stores in Japan, such as the corner Seven-Eleven, and supermarkets in Britain are capitalizing on
Internet commerce by offering their customers easy access, e-service, and attractive prices and selections.
Located at http://www.7dream.com, Seven-Eleven allows shoppers to surf, order, and pay for merchandise with
cash, the most trusted method of payment in Japan, a country with a comparatively low crime rate. Locate the
website of Britains large supermarket chain, Tesco, at http://www.tesco.com. What types of services offered
would appeal to you? What do you see as a deterrent to introducing these and other e-commerce services into
supermarkets, hypermarkets, and convenience stores in the United States?
8-27
*e-project: This chapter explains the different methods of entering foreign markets. Using sources on the
Internet provided by your governments trade division, the U.S. State Department (http://www.state.gov), the
U.S. Dept. of Commerce (http://www.commerce.gov), and private resources such as http://www.china-
venture.com, plan the export of a new line of USA-brand baseball hats to Shanghai and Beijing, China.
Assume that you plan to manufacture the hats inside China and distribute them through local stores within
those two cities.
8-28

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Chapter 8: International Strategy

Explain traditional and emerging motives for firms to pursue

IDENTIFYING INTERNATIONAL OPPORTUNITIES: INCENTIVES TO USE AN

Increased Market Size

Teaching Note: To illustrate, aircraft manufacturersBoeing and Airbus Industries (a

Economies of Scale and Learning

Other factors that may impact location advantages are as follows:

Explore the four factors that provide a basis for international

International Business-Level Strategy

Note: Each of these factors is discussed in the following section.

These factors can be subdivided into four categories:

Define the three international corporate-level strategies:

International Corporate-Level Strategy

The use of multidomestic strategies:

Teaching Note: U.K.-based temporary energy provider, Aggreko, operates in 48 countries

Teaching Note: DaimlerChrysler employed a transnational strategy to design and

Discuss the environmental trends affecting international

Lands End Adjusts to the Liability of Foreignness: A Mini-Case

Name and describe the five alternative modes for entering

CHOICE OF INTERNATIONAL ENTRY MODE

However, exporting also has disadvantages:

Exporters may have to pay high transportation costs.

The costs or potential disadvantages of licensing include the following:

Strategic alliances enable firms to:

Note: Strategic alliances will be covered in much greater depth in Chapter 9.

Teaching Note: British Telecommunications planned to create a virtual shopping mall in

New Wholly Owned Subsidiary

The advantages of establishing a new wholly-owned subsidiary include:

Dynamics of Mode of Entry

Explain the effects of international diversification on firm

STRATEGIC COMPETITIVE OUTCOMES

International Diversification and Returns

International Diversification and Innovation

Complexity of Managing Multinational Firms

Managers of internationally diversified firms face a number of complex challenges.

7 Name and describe two major risks of international diversification.

RISKS IN AN INTERNATIONAL ENVIRONMENT

Explain why the positive outcomes from international

Limits to International Expansion: Management Problems

As mentioned before, firms generally earn positive returns by diversifying internationally.

However, there are limits to the advantages of international diversification.

ANSWERS TO REVIEW QUESTIONS

4. What environmental trends are affecting international strategy? (pp. 222-224)

Exercise 1: McDonalds: Global, Multicountry, or Transnational Strategy?

Exercise 2: Country Analysis

Conduct research on the selected countries for the following criteria:

Risk factors: economic and political risk assessment.

The following Internet resources may be useful in your research:

The Library of Congress has a collection of country studies.

BBC News offers country profiles online.

The Economist offers country profiles.

The CIA World Factbook has profiles of different regions.

Links can be found at http://www.countryrisk.com to a number of resources that assess both

INSTRUCTOR'S NOTES FOR

Exercise 1: McDonalds Global, Multicountry, or Transnational Strategy?

Australia beet root garnish

McDonalds restaurants serve a varied, yet-limited, value-priced menu

Q: What are the coordination and control mechanisms like?

Q: How does decision-making work?

Q: Are there extensive resource flows across regions?

Exercise 2: Country Analysis

ADDITIONAL QUESTIONS AND EXERCISES

Application Discussion Questions

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