International Strategies

1
International Strategies

• Competing in Foreign Markets

2
Useful References

• Thompson and Strickland Ch 5
• Fred David Ch 1

3
International Strategy

• Organization can pursue international growth
  while pursuing other corporate growth strategies
• International growth issues
• Advantages and drawbacks
• General approach
• Ways to enter a foreign market

4
Why Expand into Foreign Markets

• Gain access to new customers
• Offers potential for increased revenues
• Particularly when domestic markets are mature or
  saturated
• Achieve lower costs and enhance firms
  competitiveness
• Domestic sales volume is not large enough to
  fully capture economies of scale
• Smaller European countries, eg Ireland grow has
  come from exports as domestic demand is
  insufficient to sustain growth

5
Why Expand into Foreign Markets cont.

• To capitalise on its core competencies
• A firm may be able to leverage its competencies
  in foreign countries as well as its domestic
  market, eg. Nokia
• To spread business risk across a wider market
  base
• Spread business risk by operating in a number of
  countries rather than depending on its domestic
  market entirely, EG. Downturn in the Japanese
  economy

6
Other Reasons for International Diversity
7
KEY INTERNATIONALISING DECISIONS
Domestic or International Expansion
Which International Markets
How to Enter these Markets
Operationalising
8
WHICH MARKETS TO CHOOSE

• Most text books advocate a logical and sequential
  process for choosing international markets
• Geographical and cultural proximity
• In practice a number of approaches can be used

9
Macro level Research (general market potential)
R E J E C T E D
Filter 1
General market relating to product/service
Filter 2
Micro level Research (specific factors affecting
the product)
Filter 3
Filter 4
Target Markets
Countries Priority List
10
Factors for Market Selection and Entry

• Macro-economic conditions
• Political environment
• Infrastructure
• Transport and communication
• Availability of local resources
• Tariff and non-tariff trade barriers
• Cultural norms and social structures

11
Factors for Market Selection and Entry

• Political legal risks
• Sovereign risk
• Absence of regulation and control
• Protection of intellectual property
• Corruption
• International risk
• Security risk

12
Ways to Enter a Foreign Market

• Exporting
• Licensing
• Franchising
• Direct investment
• Strategic Alliance
• Joint Venture

13
Entry Modes
Risk Return
LEVEL OF INVOVEMENT
Direct Investment
Joint Ventures S. A
Control
Licensing Franchising
Exporting
Time
14
Exporting

• Indirect Exporting
• Via a domestic client
• Piggy backing
• Direct Export
• Via distributors
• Direct selling
• Mail order
• On-line

15
Advantages Disadvantages

• Advantages
• Easiest and least costly way
• Gain from local knowledge of agent or distributor
• Relatively low investment costs
• Internet access for small firms

16
Exporting

• Disadvantages
• Lower profit potential
• Loss of control over marketing
• Lack of feed back from market
• Identifying suitable agent/distributor
• Agency agreements of agent
• Transportation costs

17
Licensing

• An international licensing agreement grants the
  rights of a firm in the host country to either
  produce or sell a product or both in return for
  royalty payments (Deresky, 2000)
• Useful when a firm has neither the resources or
  capabilities to directly enter foreign markets
• Patents
• Trademarks

18
Advantages

• Rapid entry to foreign markets
• Does not require large capital investment
• Reduces problems
• Trade barriers
• Foreign ownership issues
• Avoids committing resources in unstable,
  politically volatile countries

19
Disadvantages

• Creates a competitor
• Control over licensee and product quality
• Safeguarding IP
• If the royalty potential is considerable

20
Franchising

• One of the most rapidly growing methods of
  foreign market entry
• Often better suited to the global expansion of
  retail and services enterprises
• EG. McDonalds. KFC, Hilton Hotels, Holiday Inn

21
Franchising- advantages

• Rapid entry and market penetration can be
  achieved
• The franchisee bears most of the costs and risks
  of establishing in foreign locations
• Franchiser bears costs of training, support and
  monitoring

22
Franchising- Disadvantages

• The big problem the franchiser faces is
  maintaining quality control, standards and
  consistency
• Will the franchisee modify to the franchisers
  product?

23
Joint Ventures

• Seeking a foreign partner with which to establish
  a new separate business entity owned jointly by
  the 2 parents.
• Undertaking by the entities to achieve business
  goals through a collaborative effort and to share
  profits and losses by doing so.

24
Joint Ventures- Types

• Dominant parent
• A venture where one of the parents is clearly
  dominant in terms of size and market share
• Independent child
• The joint subsidiary operates at arms length from
  the corporate parents
• Multi-parent
• Where there are several parent companies, eg.
  Airbus

25
Reasons for Joint Ventures

• To acquire market expertise/knowledge/distribution
  channels in unfamiliar overseas markets
• Expansion with limited outlay of capital.
• The risks and costs of international expansion
  are shared.
• Necessary to gain entry into certain markets,
  when, for example, government legislation
  requires local participation, eg. China
• To improve sales prospects, particularly in terms
  of government and public sector contracts

26
Issues with Joint Ventures

• Conflicting objectives of partners
• EG. Profit/dividend policy, sourcing, production
  and pricing issues
• Trade-off between the drive for control and the
  quest for additional resources (Stopford Wells,
  1972)
• Lack of synergy
• High divorce rate
• 45 judged as successful
• 60 lasted longer than 4 years
• 14 lasted more than 10 years

27
Strategic Alliances

• Companies from different parts of the world have
  formed S.A.s to strengthen their mutual ability
  to serve whole continents and move toward global
  market participation
• USA and Japanese firms forming S.A.s with
  European firms to enter the E.U with an eye to
  the emerging markets of the new states
• S.A.s are increasingly undertaken for strategic
  reasons to achieve competitive advantage in terms
  of technology and product development, cost
  reduction and marketing,
• Examples, Rover/Honda, Volvo/Renault,
  Philips/Matsushita

28
Types of Strategic Alliances

• Porter and Fuller (1986) suggest that strategic
  alliances can occur at any point along the value
  chain
• Technology development
• Operations and logistics
• Marketing sales and service
• Multiple activity
• Type X
• Divide value chain activities among themselves,
  eg aircraft industry
• Type Y
• Firms co-operate in the same value chain
  activities

29
Motivation for Strategic Alliances

• Learning
• Organisational
• Technology
• geographical
• Cost minimisation
• Financial/marketing/research/sourcing
• Market positioning
• Market access

30
Issues with Strategic Alliances

• Managing relationship. Eg Northwest Airlines and
  KLM in Detroit and Amsterdam
• Implications of downside risk when the
  relationship fails, and how that affects the
  companys value chain. eg. Honda/Rover
• Suggests that firms need to have an exit strategy

31
Issues with Strategic Alliances

• Rigidity of decision making flexibility of
  response and policy changes could be more
  difficult as a result of international
  collaboration. Eg. BT and ATT 8 months to find a
  CEO
• Hidden Agenda? Is one partner using the coalition
  to acquire the partners IP and expertise
• Dependability. S.A could prevent one partner from
  moving down the experience curve

32
Guidelines for Successful S.A.s

• Complementary
• Agreement on Objectives
• Compatible Strategies
• Compatible cultures
• Comparable rewards
• Stakeholder blessing
• Thorough and lengthy planning process

33
Foreign Direct Investment (FDI)

• The control of manufacturing plants or other
  productive assets in the foreign market place
  through whole or part ownership
• Via acquisition mergers dominant mode of FDI
• Greenfield operation Seagate, Ford in Valencia,
  Volkswagen/Skoda in Czech Rep
• Equity buy-out Toyota/General Motors

34
Advantages of FDI

• Control of resources/capabilities
• Integration/coordination of activities across
  countries
• Acquisitions rapid entry
• Greenfield state of art and government finance
  try
• Attractiveness of host country
• Low wages, lower Corp. tax, government subsidies

35
Disadvantages of FDI

• Substantial investment financial exposure
• Problems of integration/coordination of
  acquisitions
• Greenfield time consuming and unpredictable
  cost
• Political and economic risk exposure

36
International Mergers and Acquisitions

• Acquisitions and Mergers involve change in
  corporate ownership
• Friendly acquisition agreed by management
• Hostile acquisition contested by the targeted
  companys management

37
Reasons for International MA

• Strategic objectives
• Reinforce competitive position achieve profits
• Corporate growth
• Faster than by organic growth
• Pursuit of size and synergy and scale
• Benefiting from resources and scale advantages
  that come with increased size

38
Reasons for International MA

• Market dominance, Defence of market share
• Pursuing market power, eliminating competition

39
Problems with International MA

• While the acquired and merged firms show ve
  results in terms of size their share price and
  profitability have not had such ve outcomes
  (Porter, 1987 Auerbach, 1988)
• Cost of acquisition
• price is often excessive -1.6B Ford/Jaguar
  2.5B Nestle/Rowntree
• -ve NPV results

40
Problems with International MA

• Management failure
• Management has seen the acquisition as an end in
  itself, and has failed to manage the post
  acquisition integration
• Strategic mismatch- extends the company beyond
  the range of its core competencies
• Government anti-trust and competition policies

41
Cultural Considerations

• Material culture level of economic/technology
  development
• Language
• Aesthetics
• Education
• Religious beliefs

42
Internationalising Issues

• The main issues in international expansion
  concern
• Cost
• Control
• Risk
• Return
• Resource allocation