Download - International Strategy
Strategic Management
International Strategy
Dr. Nandakumar M.K.
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International Strategy (IS)
Overview: Eight content areas Motives for internationalisation Four major benefits of International Strategies (IS) Four factors as basis for international business strategy Three international corporate-level strategies Environmental trends affecting IS Five alternative modes for entering international markets Effects of international diversification on returns & innovation 2 major risks of international diversification
© 2007 Thomson/South-Western. All rights reserved.
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Opportunities and Outcomes of International Strategy
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Motives for Internationalisation
International Strategy (IS): firm sells its goods or services outside the domestic market
Traditional Motives International markets yield potential new opportunities International Diversification: Extend a product’s life
cycle Multinational strategy: Secure needed resources
Emerging Motives Other motives exist (i.e., pressure for global integration,
borderless demand for globally branded products)
© 2007 Thomson/South-Western. All rights reserved.
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Classic Rationale for International Diversification: Extend a Product’s Life Cycle
Production is standardized and relocated to low cost countries.
Product DemandDevelops and FirmExports Products
Firm IntroducesInnovation in
Domestic Market
ForeignCompetition
Begins Production
Firm BeginsProduction Abroad
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PROS VS. CONS OF INTERNATIONAL EXPANSION
• Pepsi’s ambitious expansion in the 1990s resulted in a decreased international market share
• Wal-Marts international businesses perform poorly relative to its U.S. business
Many international expansions fail
Newness can be a disadvantage (e.g., your firm must moveup the learning curve)
Foreignness can be a liability (e.g., your managers may notunderstand local culture)
Governance and coordination costs increase as you manage
from a distance
Why?
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Benefits of Internationalisation
Five primary reasons 1. Increased market size
Domestic market may lack the size to support efficient scale manufacturing facilities
2. Return on Investment (ROI) 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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Benefits of Internationalisation (Cont’d)
Five primary reasons (Cont’d)
3. Economies of Scale and Learning Expanding size or scope of markets helps to achieve
economies of scale in manufacturing as well as marketing, R&D, or distribution
Costs are spread over a larger sales base Profit per unit is increased
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GLOBAL ECONOMIES OF SCALE
Key factors
Global economies of scale
• Pharmaceutical firms such as Pfizer, can
leverage large R&D budgets
• CitiGroup, McDonald’s, and Coca-Cola can leverage brands
• MITY can leverage its excess capacity to produce chairs and thereby reduce average costs
Global expansion may be attractive if it allows you to leverage fixed assets over new markets
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LEARNING AND KNOWLEDGE SHARING
Key factors Expanding into a new market can create opportunities to innovate, improve existing products in existing markets, or develop ideas for new markets
SC Johnson, for example, used technology developed in its European operation (a product for repelling mosquitoes in homes) to create the “ Glade Plug-ins” air freshener in the U.S.
Learning and knowledge sharing
Benefits of Internationalisation (Cont’d)
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4. Location advantages: Low cost markets may…… aid in developing competitive advantage
… achieve better access to critical resources:
i.e., raw materials, lower cost labor, key customers, energy
5. Multipoint Competition
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LOCATION
Key factors
Location • Input costs
• Competitors
• Demand conditions
• Regulatory environment
• Presence of complements
Choosing the right location canprovide advantages in terms of
A five-forces analysis can help revealthe attractiveness of a location
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MULTIPOINT COMPETITION
Key factors
Multipoint competition
Expanding into a new market may provide an opportunity for a “stronghold assault”
For example, French tire maker Michelin had negligible presence in the U.S. in the 1970s. It learned of Goodyear’s plans to expand into Europe, so it launched a counter attack. It started selling tires in the U.S. at or below cost, and thereby forced Goodyear to drop prices and cut profits in its core market
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International Strategies (IS)
Firms choose one or both of two basic type of IS: Business level and/or corporate level
International business-level strategy Follows generic strategies of cost-leadership,
differentiation, focused or broad International corporate-level strategy
The type of corporate-level strategy adopted by the firm will have an impact on the selection and implementation of its international business-level strategy
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.
Determinants of National Advantage
International Corporate-Level Strategies
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International Strategies (IS) (Cont’d)
International corporate-level strategies 1. Multidomestic
Decentralized strategic & operating decisions by strategic business-unit (SBU) in each country allows units to tailor products to local markets
Focuses on variations of competition within each country Customized products to meet local customers’ specific
needs and preferences Takes steps to isolate the firm from global competitive forces
Establish protected market positions Compete in industry segments most affected by differences
among local countries Deals with uncertainty due to differences across markets
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International Strategies (IS) (Cont’d)
2. Global Firm offers standardized products across country
markets, with the competitive strategy being dictated by the home office
Emphasizes economies of scale
Facilitated by improved global reporting standards (i.e., accounting and financial)
Strategic & operating decisions centralized at home office
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International Strategies (IS) (Cont’d)
2. Global (Cont’d)
Involves interdependent SBUs operating in each country
Home office attempts to achieve integration across SBUs, adding management complexity
Produces lower risk
Is less responsive to local market opportunities
Offers less effective learning processes (pressure to conform and standardize)
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International Strategies (IS) (Cont’d)
3. Transnational Firm seeks to achieve both global efficiency and local
responsiveness – these are competing goals! Requires both global coordination and local flexibility with
this strategy/structure combination Flexible Coordination: Building a shared vision and individual
commitment through an integrated network Challenging, but becoming increasingly necessary to
compete in international markets Growing number of global competitors heightens need to
keep costs down while greater information flow and desire for specialized products pressures firms to differentiate and even customize products – nonetheless,
Increasingly used as a strategy
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Environmental Trends
Transnational strategy is hard to implement but it many be necessary
Many large firms employ a multidomestic strategy with certain product lines and a global strategy with others
Firms may need this type of flexibility mainly due to the following important trends:
1. Liability of foreignness
2. Regionalization
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THE CAGE DISTANCE FRAMEWORK
Attributes creating distance
Industries or products affected by distance
Cultural distance Administrative distance Geography distance Economic distance
Different languages
Different ethnicities; lack of connective ethnic or social networks
Different religions
Different social norms
Products have high linguistic content (TV)
Products affect cultural or national identity of consumers (foods)
Product features vary in terms of size (cars), standards (electrical appliances), or packaging
Products carry country-specific quality associations (wines)
Absence of colonial ties
Absence of shared monetary or political association
Political hostility
Government policies
Institutional weakness
Government involvement is highin industries that are• Producers of staple goods
(electricity)• Producers of other
“entitlements” (drugs)• Large employers (framing)• Large suppliers to
government (mass transportation)
• National champions (aerospace)
• Vital to national security (telecom)
• Exploiters of natural resources (oil, mining)
• Subject to high sunk costs (infrastructure)
Physical remoteness
Lack of a common border
Lack of sea or river access
Size of country
Weak transportation or communication links
Differences in climates
Products have a low value-of-weight or bulk ratio (cement)
Products are fragile or perishable (glass, fruit)
Communications and connectivity are important (financial services)
Local supervision and operational requirements are high (many services)
Differences in consumer incomes
Differences in costs andquality of
• Natural resources• Financial resources• Human resources• Infrastructure• Intermediate inputs• Information or knowledge
Nature of demand varies with income level (cars)
Economies of standardization or scale are important (mobile phones)
Labor and other factor cost differences are salient (garments)
Distribution or business systems are different (insurance)
Companies need to be responsive and agile (home appliances )
Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.
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International Entry Modes
Follows the selection of an IS Five main entry modes 1. Exporting 2. Licensing 3. Strategic Alliances 4. Acquisitions 5. New Wholly-Owned Subsidiary
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International Entry Modes (Cont’d)
1. Exporting Involves low expense to establish operations in host
country
Often involves contractual agreements
Involves high transportation costs
May have some tariffs imposed
Offers low control over marketing and distribution
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International Entry Modes (Cont’d)
2. Licensing Involves low cost to expand internationally
Allows licensee to absorb risks
Has low control over manufacturing and marketing
Offers lower potential returns (shared with licensee)
Involves risk of licensee imitating technology and product for own use
May have inflexible ownership arrangement
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International Entry Modes (Cont’d)
3. Strategic Alliances Involve shared risks and resources
Facilitate development of core competencies
Involve fewer resources and costs required for entry
May involve possible incompatibility, conflict, or lack of trust with partner
Are difficult to manage
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International Entry Modes (Cont’d)
4. Acquisitions Allow for quick access to market
Involve possible integration difficulties
Are costly
Have complex negotiations and transaction requirements
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International Entry Modes (Cont’d)
5. New Wholly-Owned Subsidiary Is costly
Involves complex processes
Allows for maximum control
Has the highest potential returns
Carries high risk
Greenfield venture: Establish entirely new subsidiary
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International Entry Modes (Cont’d)
Dynamics of Mode of Entry: Use the best suited to the situation at hand; affected by several factors Export, licensing and strategic alliance: good tactics
for early market development Strategic alliance: used in more uncertain situations Wholly-owned subsidiary may be preferred if
IP rights in emerging economy not well protected Number of firms in industry is growing fast Need for global integration is high
Acquisitions or greenfield ventures: secure a stronger presence in international markets
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Strategic Competitive Outcomes
International diversification: firm expands sales of its goods or services across the borders of global regions and countries into different geographic locations or markets
Implementation follows selection of international strategy and mode of entry
1. International diversification and returns 2. International diversification and innovation 3. Complexity of managing multinational firms
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Strategic Competitive Outcomes (Cont’d)
1. International diversification and returns As international diversification increases, firms’ returns
initially decrease, but the increase quickly as firm learns to manage international expansion
2. International diversification and innovation Exposure to new products and markets
Opportunity to integrate new knowledge into operations
Generation of resources to sustain innovation efforts
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Strategic Competitive Outcomes (Cont’d)
3. Complexity of managing multinational firms Geographic dispersion
Costs of coordination
Logistical costs
Trade barriers
Cultural diversity
Host government
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Risks in International Environment
2 major risks 1. Political 2. Economic
Limits to international expansions: management problems
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Risks in International Environment (Cont’d)
1. Political risks Government instability
Conflict or war
Government regulations
Conflicting and diverse legal authorities
Potential nationalization of private assets
Government corruption
Changes in government policies
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Risks in International Environment (Cont’d)
2. Economic risks Differences and fluctuations in currency values
Investment losses due to political risks
Limits to international expansions: management problems Geographic dispersion
Trade barriers
Logistical costs
Cultural diversity
Other differences by country
Relationship between organization and host country
Experiential Exercise
Evaluate the international strategy used by a foreign multinational company for entering the Indian market by identifying:
1. the type of international corporate-level strategy and2. the mode of entry
used by the firm. Explain the reasons for making these choices.
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