Competing for Advantage

1
Competing for Advantage
PART III CREATING COMPETITIVE ADVANTAGE

• Chapter 10
• International Strategy

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The Strategic Management Process
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International Strategy

• Key Terms
• International diversification
• Strategy through which a firm expands the sales
  of its goods or services across the borders of
  global regions and countries into different
  geographic locations or markets

4
International Strategy
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International Strategy

• Key Terms
• International strategy
• Strategy through which the firm sells its goods
  or services outside the domestic market

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Incentives for Using an International Strategy

• Increased market size
• Greater returns on major capital investments or
  on investments in new products and processes
• Greater economies of scale, scope, or learning
• Potential for competitive advantage(s) based on
  location

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Market Size

• Limited domestic economies or growth
  opportunities
• Both opportunities and challenges in emerging
  markets
• Impact of local cultures and customs
• Impact of international market size
• Extended product life cycle

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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.

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Economies of Scale, Scope, and Learning

• Expand size or scope of markets to achieve
  economies of scale
• Spread costs over a larger sales base
• Increase profit per unit

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Location Advantages

• Competitive advantages are available in low cost
  markets
• Access to critical resources
• Raw materials
• Low-cost factors of production
• Low-cost labor
• Key customers
• Energy
• Other natural resources

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Expanding Internationally

• Type of expansion approach
• How to use distinctive competencies to create
  advantages
• Mode of entry into new markets

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International Corporate-Level Strategies

• Key Terms
• International corporate-level strategy
• Strategy which focuses on the scope of a firms
  operations through both product and geographic
  diversification

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International Scope

• Worldwide Presence
• or
• Regionalization

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Regionalization

• Trade agreements and institutions
• Ability to understand the cultures, legal and
  social norms, and other factors that are
  important for effective competition in specific
  markets
• Sequential market entry

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Liability of Foreignness

• Liabilities associated with being a foreign
  business in a highly different business
  environment can make competing on a worldwide
  scale risky and expensive.
• Employment contracts and labor forces differ.
• Host governments make different demands and
  requirements to compete in their markets.
• Understanding customers may be difficult.

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International Corporate-Level Strategies
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Multidomestic Strategy

• Key Terms
• Multidomestic strategy
• International strategy in which strategic and
  operating decisions are decentralized to the
  strategic business unit in each country to allow
  that unit to tailor products to the local market
• Worldwide geographic area structure
• Organizational structure which emphasizes
  national interests and facilitates the firms'
  efforts to satisfy local or cultural differences
  (used to implement the multidomestic strategy)

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Maximizing Local Responsiveness

• Focus on variations of competition within each
  country
• Customize products to meet specific needs and
  preferences of local customers
• Decentralize decisions to business units in each
  country
• Compete in industry segments most affected by
  differences among local countries

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Effects of a Multidomestic Strategy

• Expands the firms local market share
• Maximizes competitive responsiveness to local
  conditions
• Establishes protected market positions
• Isolates the firm from global competitive forces
• Lowers efficiency levels
• Increases uncertainty

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Worldwide Geographic Area Structure
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Global Strategy

• Key Terms
• Global strategy
• International strategy through which the firm
  offers standardized products across country
  markets, with the competitive strategy being
  dictated by the home office
• Worldwide product divisional structure
• Organizational structure in which decision-making
  authority is centralized in the worldwide
  division headquarters to coordinate and integrate
  decisions and actions among divisional business
  units (used to implement the global strategy)

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Maximizing Global Integration

• Integrate interdependent strategic business units
  operating in each country
• Emphasize economies of scale
• Share resources across country boundaries
• Centralize decisions at the home office
• Utilize innovations developed at the corporate
  level or in one country in other markets

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Effects of a Global Strategy

• Maximizes integration across business units
• Produces standardization
• Lowers risk
• Fosters a shared vision of the firms strategy
• Lowers responsiveness to local needs and
  preferences
• Permits missed opportunities in local markets
• Reduces effectiveness of learning processes
• Adds management complexity

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Worldwide Product Divisional Structure
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Transnational Strategy

• Key Terms
• Transnational strategy
• International strategy through which the firm
  seeks to achieve both global efficiency and local
  responsiveness
• Flexible coordination
• Building a shared vision and individual
  commitment through an integrated network
• Worldwide combination structure
• Organizational structure in which characteristics
  and mechanisms are drawn from both the worldwide
  geographic area structure and the worldwide
  product divisional structure (used to implement
  the transnational strategy)

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Worldwide Combination Structure

• Assets and operations may be centralized/decentral
  ized
• Functions may be integrated/nonintegrated
• Relationships may be formal/informal
• Coordination mechanisms may leverage
  efficiency/flexibility
• Mandates to subsidiaries may be
  global/specialized-contribution/localized-implemen
  tation

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Role of Subsidiaries

• Global Mandate
• Specialized Contribution
• Local Implementation

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Requirements of a Combination Structure

• Strong educational component to support the
  culture
• Adaptation of core competencies in local
  economies to gain competitive benefits
• Effective corporate headquarters to foster
  leadership, shared vision, and strong corporate
  identity
• Centers of excellence to foster multiple and
  dispersed capabilities

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Developments for Multinational Firms

• Emphasis on global efficiency is increasing as
  more industries begin to experience global
  competition
• Emphasis on local requirements is also increasing
• Multinational firms desire coordination and
  sharing of resources across country markets to
  hold down costs
• Some products and industries are more suited than
  others for standardization across country borders

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International Business-Level Strategy
Global Corporate-Level Strategy Multidomestic Corporate-Level Strategy
Subsidiaries play the role of local implementer Subsidiaries have more control over approaches used in their own domestic markets
Usually associated with a cost leadership strategy Generic strategy depends on local conditions and capabilities
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Determinants of National Advantage
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Modes of Entry and Their Characteristics
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Exporting

• Low cost way to establish operations in host
  country
• Often through contractual agreements
• High transportation costs
• Potential for tariffs
• Low control over marketing and distribution

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Licensing

• Low cost way to expand internationally
• Risks absorbed by licensee
• Low control over manufacturing and marketing
• Lower potential returns (shared with licensee)
• Risk of imitation by licensee
• Ownership arrangements often inflexible

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Strategic Alliances

• Fewer entry resources and costs required
• Shared risks and resources
• Potential core competency development
• Possible partner incompatibility, conflict, or
  lack of trust
• Management difficulties

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Acquisitions

• Quick access to market
• Costly
• Possible integration difficulties
• Complex negotiations and transaction requirements

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New Wholly Owned Subsidiary

• Costly mode of entry
• High process complexity
• Maximum control
• Highest potential returns
• High risk

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Mode of Entry Dynamics
Strategy Use Strategy Use
Early stages of international expansion Export Licensing
Facing uncertainty Strategic Alliances
To secure a stronger presence Acquisitions Greenfield Ventures
Later stages of international expansion Acquisitions Greenfield Ventures
Valuable, transferrable core competencies are present Acquisitions Greenfield Ventures
Emerging economies Large Diversified Businesses Korean Chaebols
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Strategic Outcomes

• International Diversification and Returns
• International Diversification and Innovation
• International Diversification and Risk

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International Diversification and Returns

• Economies of scale and experience
• Location advantages
• Greater market size
• Stability of returns
• Lower overall firm risk
• Exploitation of core competencies
• Knowledge resource sharing
• Global scanning for opportunities
• Structural flexibility

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International Diversification and Innovation

• Access to larger and more markets
• Lower RD investment risk
• Exposure to new products and processes
• Opportunity to integrate new knowledge into
  operations
• Generation of resources to sustain innovation
  efforts

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Risks in an International Environment

• Political risks
• Economic risks
• Other formal institutional risks

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Political Risks

• Government instability
• Conflict/war
• Government regulations
• Conflicting and diverse legal authorities
• Potential nationalization of private assets
• Government corruption
• Changes in national leadership
• Changes in government policies

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Economic Risks

• Differences and fluctuations in currency values
• Investment losses due to political risks
• Potential infrastructure or financial system
  damage from major disasters

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Complexity of Managing Multinational Firms

• Geographic dispersion
• Costs of coordination
• Logistical costs
• Trade barriers
• Cultural diversity
• Barriers to competitive advantage transfer
• Host governments

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Ethical Question

• As firms internationalize, they may be tempted
  to locate facilities where product liability laws
  are lax in testing new products. Is this an
  acceptable practice? Why or why not?

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Ethical Question

• Regulation and laws regarding the sale and
  distribution of tobacco products are stringent in
  the U.S. market. What are the ethical
  implications of U.S. firms pursuing marketing
  strategies for tobacco products in other
  countries that would be illegal in the United
  States?

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Ethical Question

• Some companies outsource production to firms in
  foreign countries to save money. To what extent
  is a company morally responsible for the way
  workers are treated by the firms in those
  countries to which they outsource production?

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Ethical Question

• Global and multidomestic strategies call for
  different competitive approaches. What ethical
  concerns might surface when firms try to market
  standardized products globally? When should
  firms develop different products or approaches
  for each local market?

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Ethical Question

• Are companies morally responsible to support the
  U.S. government as it imposes trade sanctions on
  other countries, such as China, because of human
  rights violations? What if a significant amount
  of its international business is in one of those
  countries?

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Ethical Question

• Latin America has been experiencing significant
  changes in both political orientation and
  economic development. What strategies should
  foreign international businesses implement, if
  any, to influence government policy in these
  countries? Can businesses realistically expect
  to influence political changes?