Chapter 8 – International Strategy

1. Chapter 8 – International Strategy

2. Agenda • Introduction to International Strategy • International Corporate-Level Strategy • International Mode of Entry • Returns and Risks of International Strategy

3. Opportunities and Outcomes of International Strategy • International strategy • A strategy through which the firm sells its goods or services outside its domestic market

4. Product Demand Develops and Firm Exports Products Foreign Competition Begins Production Firm Begins Production Abroad Firm Introduces Innovation in Domestic Market Production is standardized and relocated to low cost countries. Classic Rationale: Extend Product’s Life Cycle

5. International Strategy Benefits • Increase market size • Increased revenues due to access to new customers • 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

6. International Strategy Benefits – cont’d • Economies of scale or learning • Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D or distribution • Can spread costs over a larger sales base • Can increase profit per unit • Competitive advantage through location • Low cost markets aid in developing competitive advantage by providing access to: • Raw materials  Lower cost labor • Key customers  Energy

7. Agenda • Introduction to International Strategy • International Corporate-Level Strategy • International Mode of Entry • Returns and Risks of International Strategy

8. Determinants of National Advantage

9. International Corporate-Level Strategies

10. Multidomestic Strategy • Strategy and operating decisions are decentralized to strategic business units (SBU) in each country • Products and services are tailored to local markets • Business units in one country are independent of each other • Assumes markets differ by country or regions • Focus on competition in each market • Prominent strategy among European firms due to broad variety of cultures and markets in Europe

11. Global Strategy • Products are standardized across national markets • Decisions regarding business-level strategies are centralized in the home office • Strategic business units (SBU) are assumed to be interdependent • Emphasizes economies of scale • Often lacks responsiveness to local markets • Requires resource sharing and coordination across borders (hard to manage)

12. Transnational Strategy • Seeks to achieve both global efficiency and local responsiveness • Difficult to achieve because of simultaneous requirements: • Strong central control and coordination to achieve efficiency • Decentralization to achieve local market responsiveness • Must pursue organizational learning to achieve competitive advantage

13. Environmental Trends • Liability of foreignness • Legitimate concerns about the relative attractiveness of global strategies • Global strategies not as prevalent as once thought • Difficulty in implementing global strategies • Regionalization • Focusing on particular region(s) rather than on global markets • Better understanding of the cultures, legal, and social norms

14. Agenda • Introduction to International Strategy • International Corporate-Level Strategy • International Mode of Entry • Returns and Risks of International Strategy

15. Choice of International Entry Mode Complexity, risks, control Type of Entry Characteristics Exporting High cost, low control Licensing Low cost, low risk, little control, low returns Strategic alliances Shared costs, shared resources, shared risks, problems of integration Acquisition Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations New wholly owned subsidiary Complex, often costly, time consuming, high risk, maximum control, potential above-average returns

16. Optimal Solution Situation Dynamics of Mode of Entry What’s the best solution? The firm has no foreign manufacturing expertise and requires investment only in distribution. Export

17. Optimal Solution Situation Dynamics of Mode of Entry What’s the best solution? Licensing The firm needs to facilitate the product improvements necessary to enter foreign markets.

18. Optimal Solution Situation Dynamics of Mode of Entry What’s the best solution? The firm needs to connect with an experienced partner already in the targeted market. Strategic Alliance

19. Optimal Solution Situation Dynamics of Mode of Entry What’s the best solution? Strategic Alliance The firm needs to reduce its risk through the sharing of costs.

20. Optimal Solution Situation Situation Dynamics of Mode of Entry What’s the best solution? Wholly-owned Subsidiary The firm’s intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.

21. Agenda • Introduction to International Strategy • International Corporate-Level Strategy • International Mode of Entry • Returns and Risks of International Strategy

22. International Diversification & Returns • Expanding sales of goods or services across global regions and countries and into different geographic locations or markets: • May increase a firm’s returns (such firms usually achieve the most positive stock returns) • May achieve economies of scale and experience, location advantages, increased market size, and opportunity to stabilize returns • Provides exposure to new products and processes in international markets; generates additional knowledge leading to innovations

23. Complexity of Managing Global Firms • Expansion into global operations in different geographic locations or markets: • Makes implementing international strategy increasingly complex • Can produce greater uncertainty and risk • May result in the firm becoming unmanageable • May cause the cost of managing the firm to exceed the benefits of expansion

24. Risks in the International Environment Political Risks Economic Risks • Political risks include: • Instability in national governments • War, both civil and international • Potential nationalization of a firm’s resources

25. Risks in the International Environment – cont’d Political Risks Economic Risks • Economic risks are interdependent with political risks and include: • Differences and fluctuations in the value of different currencies • Differences in prevailing wage rates • Difficulties in enforcing property rights

26. Limits to International Expansion • Management Problems • Cost of coordination across diverse geographical business units • Institutional and cultural barriers • Understanding strategic intent of competitors • The overall complexity of competition