prentice hall, 2002chapter 2 daniels 1 chapter two choosing an international competitive strategy

1Prentice Hall, 2002 Chapter 2Daniels

Chapter Two

Choosing an International Competitive Strategy


Chapter Objectives To understand the meaning of business strategy,

especially in an international context To appreciate that well-conceived strategies

improve performance To grasp the advantages of international operations

that motivate managers to undertake them To discern the advantages of entering international

markets via acquisitions versus new venturing To realize how multidomestic, global, and

transnational strategies help companies fulfill international objectives


Introduction Managers of companies must decide whether to

exploit the limited resources domestically or internationally

Opportunities may include sales to untapped markets or lower production costs

Constraints include competition, national operating environments, and restrictions to moving goods, services, and assets among countries

Companies’ strategies are the necessary linchpins to bring about successful operations in a globalizing economy


Chapter Introduction


The Concept of International Business Strategy

Strategy: the specific group of decisions managers take to maximize their companies’ performance

Mission: a guideline stating what the company seeks to do and become over the long term

Strategic intent: consists of the goals that stretch the company’s performance credibly so that employees believe the goals can be reached and will work toward their achievement

Objectives: specific performance targets


Why Study International Business Strategy?

The major reason for studying international business strategy is that some companies consistently perform better than others within their same industries

Another reason is because managers often suboptimize their companies’ international performance

• This occurs usually for three reasons:Risk-avoidance behaviorChoosing locations that do not fit with a well-

conceived strategyFailure to know how best to implement decisions in

different foreign environments



Risk-avoidance behavior

• Managers often avoid excessive risk in international operations when they or their companies have little international experience

• Managers should make decisions for either domestic or international expansion based on a strategy that examines opportunities and risks realistically

• Nonfit with strategy

• Locating in areas that do not fit with a well-conceived strategy can adversely affect performanceThe lack of fit is sometimes due to a bandwagon mentality

Implementation problems

• Managers may not have the know-how to best implement strategies in foreign environments



Core competencies: those assets that are valuable for improving business, are difficult for competitors to imitate, and can be extended as a value-creating capability for use in other product or geographic markets

Three basic groups include: Superior technological know-how Reliable innovative processes Close relationships with external parties

Barriers to entry: those conditions that limit easy entry of new competitors into an industry• Usually classified as one of four types:

Brand loyalty Absolute cost advantage High capital costs Government regulations


Motives for Foreign Operations Sales expansion motives

• Three factors often trigger companies to increase sales through international expansion:Maturity of their domestic markets

o Product life cycle: a continuum that consists of four stages – introduction, growth, maturity, and decline

o Mature market: sales growth slows

Slower domestic than foreign growth rateso Companies may encounter differences in potential demand

growth due to differences among countries in economic growth

o Triad market: United States, Japan, and Western Europe

o According to World Bank forecasts, China will surpass the United States as the world’s largest economy by the year 2020

Ability to gain product capabilitieso Managers seek foreign product capabilities for which they can

use core competencies to expand domestic sales


Motives for Foreign Operations Cost reduction motives:

• Cost minimization is essential for companies that compete primarily on the basis of price

• Companies’ international expansion may reduce their costs by 1) spreading their fixed expenses, 2) by enabling them to produce with cheaper inputs or in cheaper operating locations, and 3) by achieving vertical integration

• Experience curve: cutting costs by 20-30% each time output doublesRationalized production: (global supply chain)

depending on different countries for supplies of the different components or products in their lines


Motives for Foreign Operations Value chain integration:

• Value chain: the linked activities that transform inputs into the outputs that eventually reach end customersBackward integration: adding a link away from

the end customerForward integration: adding a link toward the

end customer Three possible cost advantages of value chain

integration are:• Saving transaction costs• Building bargaining power with suppliers or

customers• Minimizing stock-out and overcapacity costs


Motives for Foreign Operations


Motives for Foreign OperationsRisk-reduction motives:

• Smoothing sales and profitsTo minimize swings in sales and profits, managers may seek

out foreign markets because the timing of business cycles differs among countries

Lessening dependence on existing customers and suppliersBy increasing its number of suppliers, a company becomes

less vulnerable in supply shortages

• Preventing competitors’ advantageOligopolistic industries: those with few sellers


Acquisitions Versus New Venturing

Acquisitions: include buying other companies in whole or in part and buying capabilities from other companies

• A company gets a known product or process, thus reducing the risk from internal development

• Cost savings

• Faster results

New venturing: includes new products or processes from the companies’ own R & D, hiring of personnel with expertise, and building new facilities


Implementation StrategiesRegardless of the motive for international

expansion, a company must have a strategy for fulfilling its motives• Multidomestic: the company allows each of

its foreign-country operations to act fairly independently

• Global: the company integrates its operations that are located in different countries

• Transnational: the company develops different capabilities and contributions from different countries and shares them in integrated worldwide operations


A Mix of Strategies Different products, capabilities, and operating

locations dictate a mix of approaches to maximize performance

Avon’s International Activities


Operational Decisions The choice of whether to use multidomestic,

global, or transnational strategy interrelates with a number of operational decisions

The alternatives that companies face include:• Location of value-added activities

• Location of sales target

• Level of involvement

• Product and services strategy

• Marketing

• Production strategy

• Competitive moves

• Factor movements and start-up strategy

prentice hall, 2002chapter 2 daniels 1 chapter two choosing an international competitive strategy

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