Week 13 International Strategy :Creating Value in Global Markets

Intended learning outcomes

• Porter’s diamond model

• International level strategy– Motivations & potential risks

• Opposing pressures and 3 international strategies– Global, Transnational, Multidomestic

• Final exam

Revision of last lecture

• Diversification– Related diversification– 4 means to create value

• Leveraging core competencies, Sharing activities, Pooled negotiating power, Vertical integration

– Unrelated diversification• Corporate parenting• Restructuring• Portfolio analysis

With the globalizationmore firms going abroad

• Some made extreme successes• But some failed

• A “successful” case: KFC

A “failure” case: Wal-Mart in South Korea• Wal-Mart entered South Korea in 1998, but exit in

2006• Main reason: “Wal-Mart is a typical example of a

global giant who has failed to localize its operations in South Korea.”

The problem for Wal-Mart in South Korea

• Inability to adapt to local markets• Sticking to Western marketing strategies

– Concentrate on dry goods– Rivals focused on food and beverages– Fresh, quality food is key ingredient of success– E-Mart owned farms

• Membership approach used in Western contexts• Difficulty to invest in resources necessary for

customer-serve initiatives

In the end…

• Wal-Mart lost $10.4 million in 2005• Sold all 16 outlets in May 2006 to Shinsgae, a

local retailer

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.

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

Factors Affecting a Nation’s Competitiveness

• Factor endowments– The nation’s position in factors of production

• skilled labor• infrastructure, necessary to compete in a given industry

• Demand conditions– The nature of home-market demand for the industry’s

product or service.

7-10

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.

• 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.

7-11

Factor Conditions

• Nation’s position in factors of production– Land– Capital – Skilled labor– Infrastructure

• Factors of production must be created as – industry specific– firm specific

Example

• The island of Japan has little land mass• But pioneering just-in-time inventory management• Create a infrastructure/land factor competitive

condition

Demand conditions

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

Example

• Demand from consumers for environmental safe products has spurred Danish manufacturers to become leaders in water pollution control equipment

Related and supporting industries

• Enable firms to manage inputs more effectively• Allow joint efforts among firms

Example

• Italian footwear industry– Geographic proximity of shoe manufacturers related to

leather suppliers

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

• 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

Example• Fierce competition in US PC industry, IBM, HP…• Intense rivalry has spurred companies such as

Dell to find innovative ways to produce and distribute its products

Porter’s Diamond of National Advantage: As Applied to India

Porter’s Diamond model

• Examples of innovative countries:– Germany: high performance automobiles, chemicals

– Switzerland: banking, pharmaceuticals

– Italy: footwear & textile

– US: commercial aircraft, motion pictures, biotechnology

– South Korea: pianos, games

Motivations & potential risks of international expansion

• Motivations:– Ultimate goal: increase / improve company

performance and profits– Reactive motivations vs proactive motivations

• Potential risks:– Political, economic, currency, management– Country risk must be evaluated in details before going

international

Country risk analysis - checklist

Analysis of local financial markets

Credit risk ratings reflecting trade, policy and

political threats Economic growth and

financial indicators International financial flows Pointers for lenders and

investors Two-year projection of

external finances

Environmental issues Exchange controls External debt Foreign investment Foreign trade and payments GDP growth and its

components Industrial policy Infrastructure Interest and exchange rates Political scene Tax regimes Ten-year growth picture Wage and price inflation

Source: The Economist Intelligence Unit, Thompson Learning

International Country Risk Rankings

Cultural challenges

• Middle East– Handshakes can be

long in Middle East

– Holding hands among men is very common

– Business relationships are built on mutual friendship and trust

• Communication style– Americans & Germans

• Very direct

– France• Direct

– Latin American and Asian countries• Indirect

Example• Cultural symbols may evoke deep feelings• When white marble columns of the Parthenon that

crowns the Acropolis in Athens were turned into Coke bottles, Greeks became outraged

International expansion 2 opposing forces

• Conflicting demands on firms as they strive to be competitive:–Reducing Costs :

• Should you offer a standardized products worldwide?

• Can one size fits all?

–Adapting to Local Markets : • Should we tailor our products to demand in

local markets

Opposing Pressures and Four Strategies

International Strategy

• Pressure for both local adaptation and low costs are rather low

• Based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets

• Primary goal is worldwide exploitation of the parent firm’s knowledge and capabilities

International Strategy

• Strengths– Leverage and diffusion of a parent firm’s knowledge

and core competencies– Lower costs because of less need to tailor products and

services

• Limitations– Limited ability to adapt to local markets– Inability to take advantage of new ideas and

innovations occurring in local markets

International Strategy

• Ericsson, a Swedish telecommunication firm• Home market is too small• Transfer and adapt its innovative product and

process technologies to international markets

Global Strategy• Competitive strategy is centralized and controlled

largely by corporate office• Emphasizes economies of scale

Global Strategy• Strengths

– Larger production plants– Efficient logistics and distribution networks– Supports high levels of investment in R&D– Standard level of quality throughout the world

• Limitations– Limited ability to adapt to local markets– Concentration of activities may increase dependence

on a single facility– Single locations may lead to higher tariffs and

transportation costs

Global Strategy

• Siebel Systems, developer of e-business application software

• “our customers expect the same high level of service and quality…we have one brand, one image, one set of corporate colors, and one set of messages, across every place on the planet”

Multidomestic Strategy• Emphasis is differentiating products and

services to adapt to local markets• Authority is more decentralized

Multidomestic Strategy• Benefits include

– Ability to adapt product and services to local market conditions

– Ability to detect potential opportunities for attractive niches

• Risks include– Increased cost structure– Potential problems with local adaptations– Finding optimal degree of local adaptation is difficult

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

• Avoids the tendency to either– Concentrate activities in a central location– Disperse them across many locations to enhance

adaptation

Transnational Strategy• Strengths

– Ability to attain economies of scale– Ability to adapt to local markets– Ability to locate activities in optimal locations– Ability to increase knowledge flows and learning

• Limitations– Unique challenges in determining optimal locations

of activities to ensure cost and quality– Unique managerial challenges in fostering

knowledge transfer

Entry Modes of International Expansion

Entry modes of international expansion

• Exporting– Produce goods in one country to sell in another

• Licensing & Franchising– Both are contractual arrangement that allow foreign firms to produce and

distribute your product or use your technology – Franchising generally includes a broader range of factors in an operation

and have a longer time period than licensing

• Joint Venture– Entail the creation of a third-party legal entity used to enter into a new

market

• Strategic Alliance– Does not entail the creation of a third-party legal entity

Entry modes of international expansion

• Wholly owned subsidiaries– A business in which a multinational company owns

100 percent of the stock• 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

Häagen-Dazs’s unique entry strategy

• Three-step processes• First use high-end retailers to introduce the brand• Second find high-traffic areas to build company-

owned stores• Finally sell Häagen-Dazs products in convenience

stores and supermarkets

Reminder! Powerpoint cannot replace lecture notes or textbook!

• This powerpoint file is designed to provide guidance on learning during class. It should be served as a complement, and not a replacement of lecture notes, nor the textbook.

• Students are strongly recommended to read the textbook and supplementary readings in details and make their own notes during revision.