International Strategy:

Creating Value in Global Markets

Chapter Seven

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

After reading this chapter, you should have a good understanding of:

LO7.1 The importance of international expansion as a viable diversification strategy.

LO7.2 The sources of national advantage, that is, why an industry in a given country is more (or less)

successful than the same industry in another country.

LO7.3 The motivations (or benefits) and the risks associated with international expansion, including the emerging trend for greater offshoring and outsourcing activity.

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Learning Objectives (cont.)LO7.4 The two opposing forces—cost reduction and

adaptation to local markets—that firms face when entering international markets.

LO7.5 The advantages and disadvantages associated with each of the four basic strategies:

international, global, multi-domestic, and transnational.

LO7.6 The difference between regional companies and truly global companies.

LO7.7 The four basic types of entry strategies and the relative benefits and risks associated with

each of them.

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The Global Economy: A Brief Overview

Globalization the increase in international exchange,

including trade in goods and services as well as exchange of money, information, ideas, and information.

the growing similarity of laws, rules, norms, values, and ideas across countries.

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The Global Economy: A Brief Overview

The economies of East Asia have attained rapid growth

Income in Latin America grew by only 6 percent in the past two decades

Average incomes in sub- Saharan Africa and the old Eastern European bloc have actually declined

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Factors Affecting a Nation’s Competitiveness

Factor endowments The nation’s position in factors of production,

such as skilled labor or infrastructure, necessary to compete in a given industry.

Demand conditions The nature of home-market demand for the

industry’s product or service.

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Factors Affecting a Nation’s Competitiveness (cont.)

Related and supporting industries The presence or absence in the nation of

supplier industries and other related industries that are internationally competitive.

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Factors Affecting a Nation’s Competitiveness (cont.)

Firm strategy, structure, and rivalry The conditions in the nation governing how

companies are created, organized, and managed, as well as the nature of domestic rivalry.

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Factor Endowments

To achieve competitive advantage, factors of production must be developed Industry specific Firm specific

The pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed

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Demand Conditions

Demanding consumers drive firms in a country to Meet high standards Upgrade existing products and services Create innovative products and services

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Related and Supporting Industries

Related and supporting industries Enable firms to manage inputs more

effectively Allow joint efforts among firms

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Firm Strategy, Structure and Rivalry

Rivalry is intense in nations with conditions of: Strong consumer demand Strong supplier bases High new entrant potential from related

industries

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Firm Strategy, Structure and Rivalry

Competitive rivalry increases the efficiency with which firms Develop within the home country Market within the home country Distribute products and services within the

home country

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India’s Diamond in Software

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Exhibit 7.1

QUESTION

All of the factors below have made India's software services industry extremely competitive on a global scale except: A. Large pool of skilled workersB. Large network of public and private educational institutionsC. Tax and antitrust legislation that protect the dominant players in the industryD. Large, growing market and sophisticated

customers

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Motivations for International Expansion

Increase the size of potential marketsTaking advantage of arbitrage

opportunitiesExtend a product’s life cycleOptimize the location of value chain

activitiesExplore reverse innovation

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International Country Risk Ratings

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Exhibit 7.3

Potential Risks of International Expansion

Political and economic risk Social unrest Military turmoil Demonstrations Violent conflicts and terrorism Laws and their enforcement

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Example: Transparency International Corruption Perceptions Index

The 2010 Transparency International Corruption Perceptions Index (CPI) reveals the most corrupt countries in the world

The scores range from ten (squeaky clean) to zero (highly corrupt).

The five most corrupt countries are Somalia (CPI Score: 1.1) Myanmar (CPI Score: 1.4) Afghanistan (CPI Score 1.4) Iraq (CPI Score: 1.5) Sudan (CPI Score: 1.6) Uzbekistan (CPI Score: 1.6)

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Potential Risks of International Expansion

Currency risks Currency exchange fluctuations Appreciation of the U.S. dollar

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Potential Risks of International Expansion

Management risks Culture Customs Language Income levels Customer preferences Distribution system

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Outsourcing

Outsourcing occurs when a firm decides to utilize other

firms to perform value-creating activities that were previously performed in-house.

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Offshoring

Offshoring takes place when a

firm decides to shift an activity that they were previously performing in a domestic location to a foreign location.

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Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

Strategies that favor global products and brands Should standardize all of a firm’s products for

all of their worldwide markets Should reduce a firm’s overall costs by

spreading investments over a larger market

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Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

Three assumptions1. Customer needs and interests worldwide are

becoming more homogeneous

2. People are willing to sacrifice product preferences for lower prices at high quality

3. Economies of scale in production and marketing can be achieved through supplying global markets

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Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

Assumptions may not always be trueProduct markets vary widely between nations In many product and service markets, there

appears to be a growing interest in multiple product features, quality and service

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Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

Technology permits flexible production Cost of production may not be critical to

product costFirm’s strategy should not be product-driven

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Opposing Pressures and Four Strategies

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Exhibit 7.4

International Strategy

An international strategy is based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets.

The primary goal of the strategy is worldwide exploitation of the parent firm’s knowledge and capabilities.

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Strengths and Limitations of International strategies

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Exhibit 7.5

Global Strategy

Competitive strategy is centralized and controlled largely by corporate office

Emphasizes economies of scale

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Strengths and Limitations of Global Strategies

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Exhibit 7.6

Multi-domestic Strategy

Emphasis is differentiating products and services to adapt to local markets

Authority is more decentralized

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Strengths and Limitations ofMulti-domestic Strategies

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Exhibit 7.7

Transnational Strategy

Optimization of tradeoffs associated with efficiency, local adaptation, and learning

Firm’s assets and capabilities are dispersed according to the most beneficial location for a specific activity

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Strengths and Limitations ofTransnational Strategies

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Exhibit 7.8

Entry Modes of International Expansion

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Exhibit 7.10

Entry Modes of International Expansion

Exporting Producing goods in one country to sell to

residents of another country.

Licensing company receives a fee in exchange for the

right to use its intellectual property.

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Entry Modes of International Expansion

Wholly owned subsidiary a business in which a

multinational company owns 100 percent of the stock.

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QUESTION

Fees that a multinational receives from a foreign licensee in return for its use of intellectual property are usually called: A.Transfer pricesB.DividendsC.RoyaltiesD.Intra-corporate inflows

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