Chapter 8 International Strategy

MGNT428 BUSINESS POLICY & STRATEGY Dr. Gar Wiggs, Instructor

Knowledge Objectives
Studying this chapter should provide you with the strategic management knowledge needed to:
Explain traditional and emerging motives for firms to pursue international diversification. Explore the four factors that lead to a basis for international business-level strategies. Define the three international corporate-level strategies: multidomestic, global, and transnational. Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization.
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Knowledge Objectives (contd)

Studying this chapter should provide you with the strategic management knowledge needed to:
Name and describe the five alternative modes for entering international markets. Explain the effects of international diversification on firm returns and innovation. Name and describe two major risks of international diversification. Explain why the positive outcomes from international expansion are limited.
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The Strategic Management Process

Figure 1.1
Copyright 2004 South-Western. All rights reserved.

Opportunities and Outcomes of International Strategy

Figure 8.1

Identifying International Opportunities

International strategy

A strategy through which the firm sells its goods or services outside its domestic market
Reasons to having an international strategy

International markets yield potential new opportunities

New market expansion extends product life cycle

Needed resources can be secured

Greater potential product demand
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Classic Rationale for International Diversification: Extend Products Life Cycle

Product Demand Develops and Firm Exports Products
Foreign Competition Begins Production

Firm Introduces Innovation in Domestic Market

Firm Begins Production Abroad

Production is standardized and relocated to low cost countries.

International Strategy Benefits

Increase market share

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

Large investment projects may require global markets to justify the capital outlays
Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

International Strategy Benefits (contd)

Economies of scale or learning
Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D or distribution Can spread costs over a larger sales base Can increase profit per unit

International Strategy Benefits (contd)

Competitive advantage through location
Low cost markets aid in developing competitive advantage by providing access to:
Raw materials Lower cost labor Key customers Energy
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Determinants of National Advantage

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

Figure 8.2

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Determinants of National Advantage

Factors of production: the inputs necessary to compete in any industry
Labor Land Natural resources Capital Infrastructure

Basic factors include natural and labor resources Advanced factors include digital communication systems and an educated workforce
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Determinants of National Advantage (contd)

Demand conditions: characterized by the nature and size of buyers needs in the home market for the industrys goods or services
Size of the market segment can lead to scaleefficient facilities Efficiency can lead to domination of the industry in other countries Specialized demand may create opportunities beyond national boundaries
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Determinants of National Advantage (contd)

Related and supporting industries: supporting services, facilities, suppliers and so on
Support in design Support in distribution Related industries as suppliers and buyers

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Determinants of National Advantage (contd)

Firm strategy, structure and rivalry: the pattern of strategy, structure, and rivalry among firms
Common technical training Methodological product and process improvement

Cooperative and competitive systems

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Selecting an International Corporate-Level Strategy

The type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies Some strategies provide individual country units with the flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units

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International Corporate-Level Strategy

Focuses on the scope of operations:
Product diversification Geographic diversification

Required when the firm operates in:

Multiple industries, and Multiple countries or regions

Headquarters unit guides the strategy

But business or country-level managers can have substantial strategic input
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International CorporateLevel Strategies

Figure 8.3

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Multidomestic Strategy
Strategy and operating decisions are decentralized to strategic business units (SBU) in each country
Products and services are tailored to local markets Business units in one country are independent of each other Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe
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Global Strategy
Products are standardized across national markets

Decisions regarding business-level strategies are centralized in the home office

Strategic business units (SBU) are assumed to be interdependent

Emphasizes economies of scale

Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (hard to manage)

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Transnational Strategy
Seeks to achieve both global efficiency and local responsiveness Difficult to achieve because of simultaneous requirements: Strong central control and coordination to achieve efficiency Decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage

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Environmental Trends
Liability of foreignness Legitimate concerns about the relative attractiveness of global strategies Global strategies not as prevalent as once thought Difficulty in implementing global strategies Regionalization Focusing on particular region(s) rather than on global markets Better understanding of the cultures, legal and social norms

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Type of Entry
Exporting Licensing

Choice of International Entry Mode

Characteristics
High cost, low control Low cost, low risk, little control, low returns Shared costs, shared resources, shared risks, problems of integration Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations Complex, often costly, time consuming, high risk, maximum control, potential above-average returns
Table 8.1

Strategic alliances Acquisition

New wholly owned subsidiary

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Dynamics of Mode of Entry

Whats the best solution?
Situation
The firm has no foreign manufacturing expertise and requires investment only in distribution.

Optimal Solution
Export

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Dynamics of Mode of Entry

Whats the best solution?
Situation
The firm needs to facilitate the product improvements necessary to enter foreign markets.

Optimal Solution
Licensing

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Dynamics of Mode of Entry

Whats the best solution?
Situation
The firm needs to connect with an experienced partner already in the targeted market.

Optimal Solution
Strategic Alliance

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Dynamics of Mode of Entry

Whats the best solution?
Situation
The firm needs to reduce its risk through the sharing of costs.

Optimal Solution
Strategic Alliance

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Dynamics of Mode of Entry

Whats the best solution?
Situation
The firm is facing uncertain situations such as an emerging economy in its targeted market.

Optimal Solution
Strategic Alliance

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Dynamics of Mode of Entry

Whats the best solution?
Situation
The firms intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.

Optimal Solution
Wholly-owned Subsidiary

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International Diversification and Returns

Expanding sales of goods or services across global regions and countries and into different geographic locations or markets: May increase a firms returns (such firms usually achieve the most positive stock returns) May achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns

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International Diversification and Innovation

Expansion sales of goods or services across global regions and countries and into different geographic locations or markets: May yield potentially greater returns on innovations (a larger market) Can generate additional resources for investment in innovation Provides exposure to new products and processes in international markets; generates additional knowledge leading to innovations

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Complexity of Managing Multinational Firms

Expansion into global operations in different geographic locations or markets: Makes implementing international strategy increasingly complex Can produce greater uncertainty and risk May result in the firm becoming unmanageable May cause the cost of managing the firm to exceed the benefits of expansion Exposes the firm to possible instability of some national governments
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Risk in the International Environment

Political Risks Economic Risks

Political risks include:

Instability in national governments War, both civil and international Potential nationalization of a firms resources
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Risk in the International Environment

Political Risks Economic Risks

Economic risks are interdependent with political risks and include: Differences and fluctuations in the value of different currencies Differences in prevailing wage rates Difficulties in enforcing property rights Unemployment
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Risk in the International Environment

Figure 8.4a

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Risk in the International Environment (contd)

Figure 8.4b

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Limits to International Expansion

Management Problems
Cost of coordination across diverse geographical business units
Institutional and cultural barriers Understanding strategic intent of competitors The overall complexity of competition

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