LOGO
Chapter 7
International Strategy: Creating Value in
Global Markets
Arriola, Alice ElaineCaparida, RegineGuintaran, ChristyHamelarin, IreneIgoy, Carolyn
Topics
Why international expansion? Determinants of national competitive
advantage. Motivations and risks of global expansion. Two opposing forces—cost reduction and
adaptation to local markets. International Strategies. Entry strategies
Drivers of Globalization
increased similarity of lifestyles global communications fast communicationpressures to reduce costs
Population of Selected Nations
China 1,284,303,000India 1045,845,000United States 280,562,000Japan 126,974,000Germany 83,251,000
Country July 2002 (estimated)
Exhibit 7.2 Populations of Selected Nations
Source: www.brainyatlas.com/geos/gm.html.
Motivations for International ExpansionMotivations for International Expansion
Increase Market SizeIncrease Market SizeDomestic market may lack the size to support efficient Domestic market may lack the size to support efficient scale manufacturing facilitiesscale manufacturing facilities
Motivations for International ExpansionMotivations for International Expansion
Increase Market SizeIncrease Market SizeDomestic market may lack the size to support efficient Domestic market may lack the size to support efficient scale manufacturing facilitiesscale manufacturing facilities
Japanese electronics or automobile manufacturersJapanese electronics or automobile manufacturers
Motivations for International ExpansionMotivations for International Expansion
Large investment projects may require global markets to Large investment projects may require global markets to justify the capital outlaysjustify the capital outlays
Increase Market SizeIncrease Market SizeDomestic market may lack the size to support efficient Domestic market may lack the size to support efficient scale manufacturing facilitiesscale manufacturing facilities
Japanese electronics or automobile manufacturersJapanese electronics or automobile manufacturers
Return on InvestmentReturn on Investment
Motivations for International ExpansionMotivations for International Expansion
Large investment projects may require global markets to Large investment projects may require global markets to justify the capital outlaysjustify the capital outlays
Aircraft manufacturers Boeing or AirbusAircraft manufacturers Boeing or Airbus
Increase Market SizeIncrease Market SizeDomestic market may lack the size to support efficient Domestic market may lack the size to support efficient scale manufacturing facilitiesscale manufacturing facilities
Return on InvestmentReturn on Investment
Japanese electronics or automobile manufacturersJapanese electronics or automobile manufacturers
Economies of Scale or LearningEconomies of Scale or LearningEconomies of Scale or LearningEconomies of Scale or Learning
- Can spread costs over a larger sales base- Can spread costs over a larger sales base
- Increase profit per unit- Increase profit per unit
Motivations for International ExpansionMotivations for International Expansion
Expanding size or scope of markets helps to achieve Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as economies of scale in manufacturing as well as marketing, R & D or distributionmarketing, R & D or distribution
Motives for Int’l Expansion
Optimize the physical location for every activity in its value chain Performance enhancement Cost reduction Risk reduction
Porter’s Determinants of National AdvantagePorter’s Determinants of National Advantage
Home country Home country of origin is crucial to of origin is crucial to International successInternational success
Factor ConditionsFactor ConditionsFactor ConditionsFactor Conditions
Basic FactorsBasic Factors- Land, labor- Land, labor
Advanced FactorsAdvanced Factors- Highly educated workers- Highly educated workers- Digital communications- Digital communications
Generalized FactorsGeneralized Factors- Capital, infrastructure- Capital, infrastructure
Specialized FactorsSpecialized Factors- Skilled personnel- Skilled personnel
Porter’s Determinants of National AdvantagePorter’s Determinants of National Advantage
Home country Home country of origin is crucial to International successof origin is crucial to International success
Factor Conditions
To achieve competitive advantage, factors of production must be created Industry specific Firm specific Pool of resources at a firm’s or country’s
disposal is less important than the speed and efficiency with which the resources are deployed
Factor ConditionsFactor Conditions
Basic FactorsBasic Factors- Land, labor- Land, labor
Advanced FactorsAdvanced Factors- Highly educated workers- Digital communications- Highly educated workers- Digital communications
Generalized FactorsGeneralized Factors- Capital, infrastructure- Capital, infrastructure
Specialized FactorsSpecialized Factors- Skilled personnel- Skilled personnel
Demand Demand ConditionsConditionsDemand Demand
ConditionsConditions
Home country Home country may support may support scale efficient scale efficient operations by operations by
itselfitself
Porter’s Determinants of National AdvantagePorter’s Determinants of National Advantage
Home country Home country of origin is crucial to International successof origin is crucial to International success
Demand Conditions
Demands that consumers place on an industry for goods and services Demanding consumers push firms to move
ahead of companies from other nations Demanding consumers drive firms in a
country to• Meet high standards• Upgrade existing products and services• Create innovative products and services
Demand ConditionsDemand
ConditionsHome country may support scale efficient operations by itself
Home country may support scale efficient operations by itself
Factor ConditionsFactor Conditions
Basic FactorsBasic Factors- Land, labor- Land, labor
Advanced FactorsAdvanced Factors- Highly educated workers- Digital communications- Highly educated workers- Digital communications
Generalized FactorsGeneralized Factors- Capital, infrastructure- Capital, infrastructure
Specialized FactorsSpecialized Factors- Skilled personnel- Skilled personnel
Related & Supporting Related & Supporting IndustriesIndustries
Related & Supporting Related & Supporting IndustriesIndustries
- Japanese cameras & copiers- Japanese cameras & copiers- Italian shoes & leather- Italian shoes & leather
Home country Home country of origin is crucial to International successof origin is crucial to International success
Porter’s Determinants of National AdvantagePorter’s Determinants of National Advantage
Related and Supporting IndustriesRelated and supporting industries
Enable firms to manage inputs more effectively
• Strong supplier base adds efficiency to downstream activities
• Competitive supplier base lets a firm obtain inputs using cost-effective, timely methods
Allow joint efforts among firms Create the probability that new entrants will
enter the market
Demand ConditionsDemand
ConditionsHome country may support scale efficient operations by itself
Home country may support scale efficient operations by itself
Factor ConditionsFactor Conditions
Basic FactorsBasic Factors- Land, labor- Land, labor
Advanced FactorsAdvanced Factors- Highly educated workers- Digital communications- Highly educated workers- Digital communications
Generalized FactorsGeneralized Factors- Capital, infrastructure- Capital, infrastructure
Specialized FactorsSpecialized Factors- Skilled personnel- Skilled personnel
Firm Strategy, Structure Firm Strategy, Structure & Rivalry& Rivalry
Firm Strategy, Structure Firm Strategy, Structure & Rivalry& Rivalry
Intense rivalry fosters Intense rivalry fosters industry competitionindustry competition
Porter’s Determinants of National AdvantagePorter’s Determinants of National Advantage
Related & Supporting Industries
Related & Supporting Industries
- Japanese cameras & copiers- Italian shoes & leather- Japanese cameras & copiers- Italian shoes & leather
Home country Home country of origin is crucial to International successof origin is crucial to International success
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
industriesCompetitive rivalry increases the
efficiency with which firms develop, market, and distribute products and services within the home country
Firm Strategy, Structure and Rivalry
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
Firm Strategy, Structure and Rivalry
Domestic rivalry provides a strong impetus for firms to Innovate Find new sources of competitive advantage
Domestic rivalry forces firms to look beyond national borders for new markets
Porter’s Diamond of National Advantage: As Applied to India
Adapted from Exhibit 7.1 India’s Virtual Diamond in Software
Potential Risks of International Expansion
Political and economic risk Social unrest Military turmoil Demonstrations Violent conflict and terrorism Laws and their enforcement
Risk Rankings
1 Luxembourg 99.51 25.00 24.51 20.00 30.002 Switzerland 98.84 23.84 25.00 20.00 30.003 United States 98.37 23.96 24.41 20.00 30.00
40 China 71.27 18.93 16.87 19.73 15.7455 Poland 57.12 18.56 13.97 9.36 15.2363 Vietnam 52.04 14.80 11.91 18.51 6.8286 Russia 42.62 11.47 8.33 17.99 4.83
114 Albania 34.23 8.48 5.04 19.62 1.09161 Mozambique 21.71 3.28 2.75 13.85 1.83178 Afghanistan 3.92 0.00 3.04 0.00 0.88
Total of Credit
Total and AccessTotal Risk Economic Political Debt to Finance
Rank Country Assessment Performance Risk Indicators Indicators
Exhibit 7.3 A Sample of International Country Risk Rankings
Source: Adapted from worldbank.org/html/prddr/trans/so96/art7.htm.
Potential Risks of International Expansion
Currency risks Currency exchange fluctuations Appreciation of the U.S. dollar
Management risks Culture Customs Language
• Income levels
• Customer preferences
• Distribution system
Strategy Implementation
Hofstede’s Dimensions of
NationalCulture
Power distance (PD)
Uncertainty avoidance (UA)
Individualism-collectivism (I-C)
Masculinity-femininity (M-F)
Long-term orientation (LT)
Two Opposing Pressures: Reducing Costs and Adapting to Local Markets
Strategies that favor global products and brands Should standardize all of a firm’s products for all
of their worldwide markets Should reduce a firm’s overall costs by
spreading investments over a larger market
Two Opposing Pressures: Reducing Costs and Adapting to Local Markets
Strategies that favor global products and brands
• Are based on three 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
But those 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 firm’s strategy should not be product-driven
Two Opposing Pressures: Reducing Costs and Adapting to Local Markets
Opposing Pressures and Four Strategies
Exhibit 7.5 Opposing Pressures and Four Strategies
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
Global Strategy
Competitive strategy is centralized and controlled largely by corporate office
Emphasizes economies of scaleAdvantages
Larger production plants Efficient logistics and distribution networks Supports high levels of investment in R&D Standard level of quality throughout the world
Global Strategy
Competitive strategy is centralized and controlled largely by corporate officeEmphasizes economies of scaleDisadvantages
• 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
Multidomestic Strategy
Emphasis is differentiating products and services to adapt to local markets
Authority is more decentralizedRisks 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 StrategyUnique 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
Strengths and Limitations of Various Strategies
International
Strategy Strengths Limitations
Exhibit 7.6 Strengths and Limitations of Various Strategies
• Leverage and diffuse parent’s knowledge and core competencies.
• Lower costs because of less need to tailor products and services.
• Greater level of worldwide coordination
• Limited ability to adapt to local markets.
• Inability to take advantage of new ideas and innovations occurring in local markets.
Global • Strong integration across various businesses.
• Standardization leads to higher economies of scale which lowers costs.
• Helps to create uniform standards of quality throughout the world.
• 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.
Strengths and Limitations of Various Strategies
Multidomestic
Strategy Strengths Limitations
Exhibit 7.6 Strengths and Limitations of Various Strategies
• Ability to adapt products and services to local market conditions.
• Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue.
• Less ability to realize cost savings through scale economies.
• Greater difficulty in transferring knowledge across countries.
• May lead to “overadaptation” as conditions change.
Transnational • 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.
• 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
Ext
ent
of I
nves
tmen
t R
isk
High
LowLow High
Degree of Ownership and ControlAdapted from Exhibit 7.7 Entry Modes for International Expansion
Exporting
Licensing
Franchising
Strategic Alliance
Joint Venture
Wholly OwnedSubsidiary
ExportingConsists of producing goods n one
country to sell in another.Beach Head StrategyLocal PartnershipSuccessful distributors
Carry product lines that complement the multinational’s products
Behave as if they are business partners with the multinationals.
Invest in training, information systems, and advertising and promotion
Licensing and FranchisingFranchisor receives a royalty or feeFranchisee 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
Strategic Alliances and Joint Ventures
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 markets conditions• Partnerships that enable firms to share risks and potential revenues and profits
Strategic Alliances and Joint Ventures
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
• Cultural issues that can potentially lead to conflict and dysfunctional behavior need to be addressed.
• The success of a firm’s alliance SHOULD NOT BE LEFT TO CHANCE.
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
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