Strategic
Management:
Concepts and Cases
9e
Part II: Strategic Actions:
Strategy Formulation
Chapter 8: International Strategy
©2011 Cengage Learning. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
Identifying International Opportunities
• International Strategy
 A strategy through which the firm sells its goods or
services outside its domestic market.
• Reasons to having an international strategy
 International markets yield potential new opportunities.
 New market expansion extends product life cycle.
 Needed resources can be secured.
 Greater potential product demand.
©2011 Cengage Learning. All rights reserved.
8–2
Opening Case
(page 217)
• Foreign firms have opted to operate in the Chinese
market because it is so large and potentially lucrative
• Firms that manufacture in China often have
significant cost advantages
• General Motors has a successful venture with
Shanghai Automotive Industry Corporation (SAIC)
• Some Chinese firms actually compete more
effectively in foreign markets than in their home
markets
©2011 Cengage Learning. All rights reserved.
8–3
International Strategy Benefits
• Increased Market Size
 Domestic market may lack the size to support efficient scale
manufacturing facilities.
• Return on Investment
 Large investment projects may require global markets to
justify the capital outlays.
• Need fast return on investments before products become
obsolete
 Weak patent protection in some countries implies that firms
should expand overseas rapidly in order to preempt imitators.
©2011 Cengage Learning. All rights reserved.
8–4
International Strategy Benefits
• 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.
©2011 Cengage Learning. All rights reserved.
8–5
International Strategy Benefits
• Location Advantages
 Low-cost markets aid in developing competitive advantage
by providing access to:
• Raw materials
• Transportation
• Lower costs for labor (no longer just manufacturing
labor)
• Key customers
• Energy
©2011 Cengage Learning. All rights reserved.
8–6
Determinants of National Advantage
• Factors of production
 The inputs necessary to compete in any industry
•
•
•
•
•
Labor
Land
Natural resources
Capital
Infrastructure
• Basic factors
 Natural and labor resources
• Advanced factors
 Digital communication systems and an educated workforce
©2011 Cengage Learning. All rights reserved.
8–7
Three International Corporate-Level Strategies
• Corporate HQ decides which of three strategies to use
to serve the market
 Multidomestic
 Global
 Transnational
• SBU (country) strategies are then based on corporatelevel strategy
©2011 Cengage Learning. All rights reserved.
8–8
Multidomestic Strategy
• SBUs are independent in each country
 Usually produce and sell in the same country
• Products are tailored to the local market
• Competition is normally restricted to host country
• Strategic and operating decisions are decentralized to
the SBU in each country
• Resources are obtained independently
• Example: Sony Entertainment produces films and
television programs for local markets around the
world through local production facilities and
television channels.
©2011 Cengage Learning. All rights reserved.
8–9
Global Strategy
• Products are standardized across national markets. (More difficult than it
seems—taste preference, transportation, refrigeration/storage, packaging, sizes,
etc.)
• Business-level strategic decisions are centralized in the home office
• Strategic business units (SBU) are assumed to be interdependent
• Emphasizes economies of scale
 HQ often dictates where to procure raw products, produce, and sell
• Often lacks responsiveness to local markets
• Requires resource sharing and coordination across borders (hard to manage)
• Example: CEMEX is the world's largest building materials supplier and third
largest cement producer. Based in Monterrey, Mexico. CEMEX has operations
production facilities on four continents in 50 countries with 66 cement plants,
2,000 ready-mix-concrete facilities, 400 quarries, 260 distribution centers and
80 marine terminals. Cemex uses the Internet to improve logistics and manage
an extensive supply network, wich significantly reduces costs. Connectivity
between the operations in different countries and universal standards dominate
its approach.
©2011 Cengage Learning. All rights reserved.
8–10
Transnational Strategy
• Seeks to achieve global efficiency and local
responsiveness
• Tries to combine the best of the Multidomestic
Strategy and the Global Strategy
• Requires tight networking and integration with
customers, suppliers, partners, HQ, and other SBUs
 Procure raw materials, produce, and sell from anywhere to
anywhere
• Tough to implement, but when done effectively can
produce very high performance
• Example: ExxonMobil, Shell, Unilever, Caterpillar,
IKEA
©2011 Cengage Learning. All rights reserved.
8–11
TABLE
8.1
Global Market Entry: Choice of Mode of Entry
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 (e.g., two
corporate cultures)
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
©2011 Cengage Learning. All rights reserved.
8–12
X
Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm has no foreign
manufacturing expertise
and requires investment
only in distribution.
Export
©2011 Cengage Learning. All rights reserved.
8–13
X
Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm needs to
facilitate the product
improvements
necessary to enter
foreign markets.
Licensing
©2011 Cengage Learning. All rights reserved.
8–14
X
Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm needs to
connect with an
experienced partner
already in the targeted
market.
Strategic Alliance
©2011 Cengage Learning. All rights reserved.
8–15
X
Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm needs to
reduce its risk through
the sharing of costs.
Strategic Alliance
©2011 Cengage Learning. All rights reserved.
8–16
X
Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm is facing
uncertain situations
such as an emerging
economy in its
targeted market.
Strategic Alliance
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8–17
Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
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.
Wholly-owned
Subsidiary
©2011 Cengage Learning. All rights reserved.
8–18
Complexity of Managing Multinational 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.
 Exposes the firm to possible instability of some national
governments.
©2011 Cengage Learning. All rights reserved.
8–19
Risks in an International Environment
• Political Risks
• Economic Risks
 Instability in national
governments
 War, both civil and
international
 Potential nationalization of a
firm’s resources
?
 Differences and fluctuations
in the value of different
currencies
 Differences in prevailing
wage rates
 Difficulties in enforcing
property rights
 Unemployment
?
?
?
©2011 Cengage Learning. All rights reserved.
8–20
FIGURE
8.4
Risk in the International Environment
Venezuela, North Korea, Cuba,
Pakistan, Mexico, China, Iran, Iraq,
Afghanistan, ad nauseum
©2011 Cengage Learning. All rights reserved.
8–21
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
• Bottom Line: Do NOT try to go international without
knowing what you are doing and all of the pitfalls!
Hire an Expert!!!!
©2011 Cengage Learning. All rights reserved.
8–22
Finally, a definition of globalization I can understand and to which I can relate:
Question: What is the truest definition of Globalization?
Answer: Princess Diana's death.
Question: Why?
Answer:
An English princess with an Egyptian boyfriend crashes in a French tunnel,
driving a German car with a Dutch engine, driven by a Belgian who was
drunk on Scottish whisky, followed closely by Italian Paparazzi, on
Japanese motorcycles; treated by an American doctor, using Brazilian
medicines.
This was sent to you by a Canadian, using Bill Gates' technology, and you're
probably reading this on your computer, that uses Taiwanese chips, and a
Korean monitor, assembled by Bangladeshi workers in a Singapore plant,
transported by Indian lorry-drivers, hijacked by Indonesians, unloaded by
Sicilian longshoremen, and trucked to you by Mexican illegals!
That, my friends, is Globalization!
©2011 Cengage Learning. All rights reserved.
8–23
Chongqing’s Go-West Strategy
9/3/2011
• Chongqing GDP was 100B RMB in 2000, 960B fcst for 2011
• Different strategy than east coast cities—no access to ships
• Mayor’s vision is to be the central point of a new “Silk Road”
to Europe
 A new “inland port”
 Chongqing rail to Xinjiang, Kazakhstan, Russia, Poland, Belarus
• Vertical integration
 Manufacture components locally near OEMs, too costly to ship in
• HP already procures 80% of computer parts/components locally
• Go from model of 70% investment and 30% export in 2000, to
50% domestic consumption, investment 30%, exports just 20%
©2011 Cengage Learning. All rights reserved.
8–24
Outbound M&As
2011H1
• $62B in 2010, on target for same in 2011 in spite of
earthquake in Japan and global economic problems
 Largest markets are for energy and resources—32% of
2011H1 investments
• 20% of M&As over $500M each
• Need to secure raw materials primary drive now
 Also crowded domestic markets competing for resources
 Acquire new technologies
 Create partnerships in China to expand more overseas
• Resource M&As also are mostly money deals without
as much need for sophisticated management talent
©2011 Cengage Learning. All rights reserved.
8–25
Foreign Direct Investments
• At the end of 2010, China's total ODI was $317.2
billion with investments in 178 nations and regions.
 Asia-Pacific region and Latin America were the top two
destinations, but the EU and Oceania witnessed the most
rapid growth in recent years
• FDI expanded to $114.7 billion in 2010 from $46.9
billion in 2001, and China has opened its
manufacturing sectors and more than 100 service
sectors since 2001.
 Attracting FDI was cited as a priority in the 12th Five-Year
Plan (2011-2015).
©2011 Cengage Learning. All rights reserved.
8–26
8–27