International strategy

1
International strategy

• Creating value in global markets

2
International strategy Overview

• International diversification as strategy
• Sources of national industry advantage
• Motivations and risks of expanding abroad
• Two opposing strategic forces cost reduction and
  local adaptation
• Four basic strategies
• Four basic types of entry modes

3
International diversification as strategy

• International diversification presents
  opportunities for performance enhancement
• Trade across nations to exceed trade within
  nations by 2015
• Markets often dispersed across the globe
• Investment in developing nations

4
Economic inequities across globe persist

• Latin American incomes grew by 6 in two decades
• Average income declines in Eastern Europe and
  sub-Saharan Africa
• 1.3 billion people live on less than 1 per day

5
Economic inequities present opportunities

• Such populations also have unsatisfied needs
• 2006 Nobel peace prize awarded to Grameen Bank
• Offers micro loans as low as 20
• Supports investment in such capital expenditures
  such as buying a cow
• Why do economies develop at different rates?

6
Factors affecting national competitiveness

• Four attributes affect a nations competitiveness
  in a particular industry
• Factor conditions
• Demand conditions
• Related and supporting industries
• Firm strategy, structure, and rivalry

7
Factor conditions

• Factors of production that are industry and firm
  specific
• Labor
• Skill level, education
• Infrastructure
• Transportation systems
• Telecommunications systems
• Banking system

8
Demand conditions

• Customer expectations set performance standards
  for local firms
• Higher local demand leads local firms to develop
  national advantage
• Strong, trend-setting local market helps local
  firms anticipate global trends

9
Related and supporting industries

• Supplying industries
• Enables efficient management of production inputs
• Strong supplier base adds downstream efficiency
• Related industries
• Enables coordination within industry
• High probability of new entrants forces existing
  firms to become more competitive

10
Firm strategy, structure, and rivalry

• Rivalry puts pressure on local firms to innovate
  and improve
• Local conditions affect firm strategy
• German companies tend to be hierarchical
• Italian companies tend to be smaller and run more
  like extended families
• Strategy and structure help to determine in which
  types of industries a nation's firms will excel

11
Factors affecting national competitiveness Final
word

• Firms successful in global markets usually first
  succeeded in intensely competitive home markets

12
Diamond of national advantage
13
Factors to consider in going abroad
Foreign market
Home market
Foreign competition
Existing producers
Existing producers
Overseas expansion
Economies of scale Reduced home market
dependence Customers expanding abroad
14
International expansion motivations

• Motivations
• Increased market size enhances economies of scale
• Increased revenue and asset base
• Extending life cycle of product when home market
  cycle in maturity
• Optimizing physical location of value chain
  activities

15
International expansion motivations

• Optimizing physical location of value chain
  activities
• Performance enhancement through location
  resources
• Cost reductions through lower labor and operating
  costs
• Downside risks of exploitation
• Risk reduction management of currency
  fluctuations

16
Outsourcing and offshoring

• Outsourcing farming out value chain activities
  to other firms
• Offshoring shifting value chain activity from
  domestic to foreign location
• Both increasing due to several factors
• Decrease in transportation and coordination costs
• Homogenization of customer needs
• Growth of market philosophy and decline of
  command economies

17
International expansion risks

• Political risk
• Terrorism (e.g. 9/11, kidnappings of 1970s and
  1980s)
• Unresolved conflicts (Israeli-Palestinian
  conflict, Kashmir, former Soviet republics,
  Yugoslavia, Latin American drug wars, the war on
  terror)
• Political integration of divided nations
  (Germany, Koreas, Chinas)

18
International expansion risks

• Economic risks
• National fiscal and monetary systems
• Currency fluctuations
• Growth of WTO and trade blocs
• Trade barriers
• Privatization in Eastern Europe and China

19
International expansion risks

• Organizational and management risks
• Coordination costs
• Logistics
• Cultural diversity and other country differences
• Marketing and product modifications

20
International expansion risks

• Cultural risks variations in culture across the
  globe

21
Opposing forces in international strategy

• Pressure to lower costs
• Competitive pressures drive firms toward
  increased efficiency
• Pressure for local adaptation
• National and cultural differences drive firms to
  tailor products to local preferences
• Relative strength of opposing forces leads to
  four basic strategic choices

22
Strategic choices
23
International strategic choices

• International
• Multidomestic
• Global level
• Transnational

24
International strategy

• Pressures for cost reduction and local adaptation
  are low
• Standardized product extending into foreign
  markets
• Local adaptation very limited
• Centralization of some value chain activities
• E.g., McDonalds and Kellogg centralize RD and
  product development but decentralize production
  and marketing

25
International strategy risks

• Centralization may fail to take full advantage of
  optimally distributed value chain
• Lack of local adaptation risks customer alienation

26
Global strategy

• High emphasis on cost reduction and control and
  little on local adaptation
• Economies of scale
• Corporate office provides central coordination

27
Global strategy risks

• Concentration of activities in one location
• Output must be exported
• Isolated from target markets
• Makes rest of company dependent one or few
  locations
• Mistakes multiplied across international
  operations

28
Multidomestic strategy

• High emphasis on local adaptation with low
  emphasis on cost efficiencies
• Decentralized subsidiaries operate independently
  from each other
• Adaptation may not be limited only to product but
  may extend to other activities (e.g., personnel
  practices)
• Array of potential adaptation options

29
Multidomestic strategy risks

• Local adaptation
• Cost
• Specific needs often difficult to identify
• Increased complexity difficult to manage

30
Transnational Strategy

• Tradeoffs of efficiency, local adaptation,
  learning
• High levels of decentralization
• Downstream activities more likely to be
  decentralized
• Upstream activities more likely to be centralized
• Interdependent divisions may produce components
  and products for one another

31
International strategic choices
32
Modes of entry into international markets

• Exporting
• Licensing
• Franchising
• Strategic alliance
• Joint venture
• Wholly owned subsidiary

33
Exporting

• Standardized product extending into foreign
  markets
• Domestic-based export department, overseas sales
  branch, traveling sales representative,
  foreign-based distributors or export agents

34
Exporting

• Advantage avoids expense of establishing
  operations in host country
• Disadvantages
• High costs of transportation and possible tariffs
• Low control over handling of products in foreign
  market

35
Licensing

• Firm sells rights to foreign firm to manufacture
  and market products in host country in exchange
  for royalty
• Advantage licensee assumes risks (fixed and
  variable costs of mfg., and mktg.)
• Disadvantages little control, limited returns,
  risk that licensee will learn how to develop
  product on its own

36
Franchising

• Special case of licensing
• Broader range of factors and longer term of
  license
• Often involves complete business model (e.g.,
  fast food franchises)

37
Strategic alliances and joint ventures

• Shares risk and resources with firm in host
  country
• Host country firm knows the market
• Risks of failure from partner incompatibility and
  conflict
• Often an intermediate step towards wholly owned
  subsidiary

38
Wholly owned subsidiary

• Direct investments in other countries
• Foreign direct investment (FDI/DFI)
• Home firm puts up 100 of equity
• Virtually complete control within legal and
  regulatory constraints
• Decentralized subsidiaries operate independently
  from each other

39
(No Transcript)
40
International strategy summary

• International business another form of
  diversification
• National advantage in specific industries a
  product of four factors diamond of national
  advantage (Exhibit 7.1, p. 233)
• Motivations and risks

41
International strategy summary

• Four basic strategies
• International
• Global
• Multidomestic
• Transnational
• Four basic modes of entry
• Exporting, licensing and franchising, strategic
  alliances and joint ventures, wholly owned
  subsidiaries