International Strategy: Creating Value in Global Markets

1
Chapter 7

• International Strategy Creating Value in Global
  Markets

2
Discussion Objectives

• The sources of national advantage
• The motivations and the risks associated with
  international expansion
• The advantages and disadvantages associated with
  each of the four basic strategies international,
  global, multidomestic, and transnational.
• The four basic types of entry strategies and the
  relative benefits and risks associated with each
  of them

3
The Global Economy

• Opportunities and risks when firms diversify
  abroad
• Trade across nations will exceed trade within
  nations
• Rise of market capitalism around the world
• Transfer of money from rich to poor countries
• Equity
• Bond Investments
• Commercial loans

4
The Global Economy Cont.

• Opportunities and risks when firms diversify
  abroad
• Economies of East Asia have grown rapidly, but
  little progress in the rest of the world
• Poor education levels in many countries
• Failure to manage broader economic factors in
  some countries
• Interest rates
• Inflation
• Unemployment

5
Factors Affecting a Nations Competitiveness

• Factor conditions
• Nations position in factors of production
• Skilled labor
• Infrastructure
• Demand conditions
• Nature of home-market demand
• Industrys product
• Industrys service

6
Factors Affecting a Nations Competitiveness

• Related and supporting industries
• Presence or absence in the nation of
  internationally competitive supplier industries
  and other related industries
• Firm strategy, structure, and rivalry
• Conditions in the nation governing how companies
  are Created, Organized, Managed
• Nature of domestic rivalry

7
Motivation to Expand

• Increase the size of potential markets
• Attain economies of scale
• Reducing the costs of RD as well as operating
  costs
• Extend the life cycle of a product
• Optimize the physical location for every activity
  in its value chain
• Performance enhancement
• Cost reduction
• Risk reduction

8
Political Economic Risk

• Social unrest
• Military turmoil
• Demonstrations
• Violent conflicts and terrorism
• Laws and their enforcement

9
Currency Management Risk

• Currency risks
• Currency exchange fluctuations
• Appreciation of the U.S. dollar
• Management risks
• Culture
• Customs
• Language
• Income levels
• Customer preferences
• Distribution systems

10
Outsourcing Offshoring

• Outsourcing occurs when a firm decides to utilize
  other firms to perform value-creating activities
  that were previously performed in-house.
• Offshoring takes place when a firm decides to
  shift an activity that they were previously
  performing in a domestic location to a foreign
  location.

11
Cost Reduction Adaption Tradeoff

• Strategies that favor global products and brands
• Should standardize all of a firms products for
  all of their worldwide markets
• Should reduce a firms overall costs by spreading
  investments over a larger market
• Based on 3 assumptions
• Customer needs and interests worldwide are
  becoming more homogeneous
• People (worldwide) prefer lower prices at high
  quality
• Economies of scale in production and marketing
  can be achieved through supplying global markets

12
Cost Reduction adaption Tradeoff

• Three assumptions may not always be true
• Product markets vary widely between nations
  (customer needs and interests?)
• In many product and service markets, there
  appears to be a growing interest in multiple
  product features, quality and service (preference
  for low price?)
• Technology permits flexible production, cost of
  production may not be critical to product cost,
  and firms strategy should not be product-driven

13
Four Strategies for Opposing Pressures
14
International Strategy

• Pressure for both local adaptation and low costs
  are rather low
• Different activities in the value chain have
  different optimal locations
• Susceptible to higher levels of currency and
  political risks

15
Global Strategy

• Competitive strategy is centralized and
  controlled largely by corporate office
• Emphasizes economies of scale
• Advantages
• Larger production plants
• Efficient logistics and distribution networks
• Supports high levels of investment in RD
• Standard level of quality throughout the world

16
Global Strategy Cont.

• Disadvantages
• Concentration on scale-sensitive resources and
  activities in one or few locations leads to
  higher transportation and tariff costs
• Activity is isolated from targeted markets
• The rest of the firm becomes dependent on that
  geographically isolated Location.

17
Multidomestic Strategy

• Emphasis is differentiating products and services
  to adapt to local markets
• Authority is more decentralized
• Risks include
• Increased cost structure
• Potential problems with local adaptations
• Finding optimal degree of local adaptation is
  difficult

18
Transnational Strategy

• Optimization of tradeoffs associated with
  efficiency, local adaptation, and learning
• Firms assets and capabilities are dispersed
  according to the most beneficial location for a
  specific activity
• Avoids the tendency to either
• Concentrate activities in a central location
• Disperse them across many locations to enhance
  adaptation

19
Transnational Strategy Cont.

• Unique risks and challenges
• Choice of an optimal location cannot guarantee
  that the quality and cost of factor inputs will
  be optimal
• Knowledge transfer can be a key source of
  competitive advantage, but it does not take place
  automatically

20
Strategies
Entry Modes of International Expansion

21
Exporting

• Relatively inexpensive way to enter foreign
  market
• Minimal risk
• Successful distributors
• Carry product lines that complement the
  multinationals products
• Behave as if they are business partners with the
  multinationals
• Invest in training, information systems, and
  advertising and promotion

22
Licensing Franchising

• Franchisor receives a royalty or fee
• Franchisee gets to use trademark, patent, trade
  secret or other valuable intellectual property
• Disadvantages
• Loss of control over its product
• Licensee may become a competitor
• Threat to brand name and reputation of products
• Advantages
• Limited risk exposure
• Expanded revenue base

23
Strategic Alliances JVs

• Partnerships that enable firms to share risks and
  potential revenues and profits
• Partners
• Gain exposure to new knowledge and technologies
• Develop core competencies that can lead to
  competitive advantages
• Gain information on local market conditions

24
Strategic Alliances Cont.

• Risks
• Needs to be clearly defined strategy supported by
  both partners
• Needs to be clear understanding of capabilities
  and resources that will be central to the
  partnership
• Must be trust between partners

25
Wholly Owned Subsidiaries

• Business owned by only one multinational company
• Acquire an existing company in the home country
• Develop a totally new operation (greenfield
  venture)
• Most expensive and risky of all global entry
  strategies
• Greatest control over all activities

26
Discussion Objectives

• The sources of national advantage
• The motivations and the risks associated with
  international expansion
• The advantages and disadvantages associated with
  each of the four basic strategies international,
  global, multidomestic, and transnational.
• The four basic types of entry strategies and the
  relative benefits and risks associated with each
  of them