Miles A. Zachary MGT 4380. The rise of international business has followed globalization and the...
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Transcript of Miles A. Zachary MGT 4380. The rise of international business has followed globalization and the...
Miles A. Zachary
MGT 4380
Competing in International Markets
Chapter 7
The rise of international business has followed globalization and the development of BRIC economies
Good or Bad?Good
Access to new customersLower costs—access to cheaper raw goods and laborDiversification of business risk
BadPolitical riskEconomic riskCultural risk
Competing in New Markets
Moving into an international market provides access to new customers
US population accounts for only 5% of global consumers
What are some new emerging markets into which US businesses could enter?
Access to New Customers
Different cost advantages can be gained by internationally-diverse firmsIncreasing volume lowers production costs
(economies of scale)Access to cheaper labor/raw goods
Offshoring: relocating a business activity to another country
Despite these advantages, some firms are finding that offshoring is not appropriate for their business
Led to reshoring—jobs and businesses return to their home country
Lowering Costs
Business risk is the potential that business operations might fail
Firms located in a single country are open to “mono-directional” business risk—either up or down
However, international firms operate in a variety of markets and therefore less susceptible to mono-directional business risk
Similar to the idea of diversifiable or unsystematic risk
Diversification of Business Risk
Political risk-the potential for government upheaval or interference with business to harm an operation within a countryDifficult to plan business operationsPossibility of excessive hostility toward foreign
businessesIn rare but extreme cases, a countries
government could nationalize an industry or industries, eliminating foreign control
Underdeveloped countries tend to have the highest political risk(s)
International Business Risks
Economic risk-the potential for a country’s economic conditions and policies, property rights, protections, and currency exchange rates to harm business operationsDynamic economic conditions make it difficult
to know how to anticipate economic risksCultural risk-the potential for a company’s
operations in a country to struggle because of differences in language, customs, norms, and customer preferencesBusinesses should research local customs and
be prepared to adapt business operations
International Business Risk
In some ways, globalization has decreased the advantages gained and disadvantages lost to operating in one country over another
In others, research has suggested that business still derive advantages and disadvantages from locating in specific countries
Michael Porter at HBS developed the Diamond Model of National Advantage (1990) to help determine the potential for firm success in a given international environment
Competing in International Markets
The model helps determine a firm’s ability to compete in a particular country
Four dimensions:1. Home demand conditions2. Home factor conditions3. Home related and supporting industries4. Firm strategy, structure, and domestic rivalry
Diamond Model
Home demand conditions refer to the local demand characteristics and nature of domestic customersLocal customers with high standards help prepare firms
for competing on a global scaleE.g., Toyota and Japanese consumers
Home factor conditions refers to the nature of raw materials and other inputs needed to create goods and services Includes land, labor, capital, and entrepreneurial abilityWhile some countries have their advantages,
overcoming disadvantages can have its benefitsE.g., Japan develops the JIT inventory system due to space
shortages
Diamond Model
Home related and supporting industries refers to the extent to which a firm’s domestic suppliers and other complementary industries are developed and helpfulHow does the value chain support our business?E.g., US cattle industry is supported well by incredible
productive capabilities of US farmersFirm strategy, structure, and domestic rivalry
determines how challenging it is to survive domestic competitionCompanies that survive intense competition among
domestic competitors are better equipped to handle foreign competitors
E.g., Toyota had to contend with other Japanese auto firms
Diamond Model
A multinational corporation (MNC) is a firm that has operations in more than one country
Such firms must choose how to structure their international strategy
Three (3) main strategiesMultidomesticGlobalTransnational
Types of International Strategies
Focuses on responsiveness to local requirements while sacrificing efficiency
Many times firms must adapt their products to fit in a variety of domestic markets
Coca-cola has dozens of brands with distinct flavors in different countries
Multidomestic Strategy
A global strategy sacrifices responsiveness to local requirements in favor of efficiency
It is the opposite of the multidomestic strategy
While some minor modifications may occur, the products and services remain generally unaltered for foreign markets
E.g., Microsoft products are only adapted to meet local language needs, but are otherwise homogenous
Global Strategy
Firms following a transnational strategy try to balance the desire for efficiency with the need to adjust to local preferences
In between a multidomestic strategy and global strategy
E.g., KFC and McDonald’s keep a core menu while making some concessions in local markets such as poutine in McDonald’s in Canada
Transnational Strategy
Once an firm decides to enter a foreign market, it must then determine how to do so
Five (5) basic entry optionsExportingWholly-owned subsidiaryFranchisingLicensing Joint venture or strategic alliance
These options vary in the amount of control a business has on operations, how much risk is involved, and what share of the foreign operation’s profits a firm gets to keep
Options for Competing in Int’l Markets
Exporting refers to creating goods within a firm’s home country and then shipping them to another country where they are sold to customers by a local firm
Typically seen as a starting point for most firms starting international operationsA lower-cost way to determine foreign preferences
and demand for a firm’s productsAfter the products become desirable in a foreign
market, exporting becomes a unattractiveFirms loose control of goods once they enter a foreign
market—potentially allowing local merchants to hurt the brand
Exporting
A wholly owned subsidiary is a business operation in a foreign country that a firm fully owns
Can occur in two (2) ways:Greenfield venture in which the firm creates
the entire operation itselfAcquiring a foreign operator
Attractive because the firm maintains complete control over the operation and keeps all the profits
Can be risky since a firm must pay all the expenses to setup and operate the business
Creating a Wholly Owned Subsidiary
Franchising is when an organization (franchisor) grants the right to use its brand name, products, and processes to another organization (franchisee)
Usually occurs in exchange for up-front payment (franchise fee) and a percentage of revenues (royalty fee)
Attractive because it requires little investment
But, franchisors enjoy only some of the profits, must monitor franchisees for undesirable behavior, and must provide a clear and effective business model
Franchising
In licensing, one organization grants another organization the right to create its products, often using patented technology, in exchange for a fee
Most frequently used in manufacturing industries
Attractive because granting firms deflect costs, but lose control over how technology is used and limits their profitability
Licensing
Foreign joint ventures and strategic alliances occur when a firm believes it to be beneficial to work with one or more local partnersIn a joint venture, two or more organization
contribute to a new organizationIn a strategic alliance, two or more organizations
work together without establishing a new organization
Attractive because local organizations can supply valuable local knowledge and facilitate local acceptance
Can be difficult to manage when firms have trouble getting along
Joint Ventures and Strategic Alliances