Chapter 7 International Strategy: Creating Value in Global Markets 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 communication ► pressures to reduce costs Motivations for International Expansion Increase Market Size Domestic market may lack the size to support efficient scale manufacturing facilities Motivations for International Expansion Increase Market Size Domestic market may lack the size to support efficient scale manufacturing facilities Japanese electronics or automobile manufacturers Motivations for International Expansion Increase Market Size Domestic market may lack the size to support efficient scale manufacturing facilities Japanese electronics or automobile manufacturers Return on Investment Large investment projects may require global markets to justify the capital outlays Motivations for International Expansion Increase Market Size Domestic market may lack the size to support efficient scale manufacturing facilities Japanese electronics or automobile manufacturers Return on Investment Large investment projects may require global markets to justify the capital outlays Aircraft manufacturers Boeing or Airbus Motivations for International Expansion 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 - Increase profit per unit 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 Advantage Home country of origin is crucial to International success Porter’s Determinants of National Advantage Home country of origin is crucial to International success Factor Conditions Basic Factors - Land, labor Advanced Factors - Highly educated workers - Digital communications Generalized Factors - Capital, infrastructure Specialized Factors - Skilled personnel Porter’s Determinants of National Advantage Home country of origin is crucial to International success Factor Conditions Basic Factors - Land, labor Advanced Factors - Highly educated workers - Digital communications Generalized Factors - Capital, infrastructure Specialized Factors - Skilled personnel Demand Conditions Home country may support scale efficient operations by itself Porter’s Determinants of National Advantage Home country of origin is crucial to International success Related & Supporting Industries - Japanese cameras & copiers Factor Conditions - Italian shoes & leather Basic Factors - Land, labor Advanced Factors - Highly educated workers - Digital communications Generalized Factors - Capital, infrastructure Specialized Factors - Skilled personnel Demand Conditions Home country may support scale efficient operations by itself Porter’s Determinants of National Advantage Home country of origin is crucial to International success Related & Supporting Industries Factor Conditions - Japanese cameras & copiers - Italian shoes & leather Basic Factors - Land, labor Advanced Factors - Highly educated workers - Digital communications Generalized Factors - Capital, infrastructure Specialized Factors Firm - Skilled personnel Demand Conditions Home country may support scale efficient operations by itself Strategy, Structure & Rivalry Intense rivalry fosters industry competition Potential Risks of International Expansion ► Political and economic risk Social unrest Military turmoil Demonstrations Violent conflict and terrorism Laws and their enforcement Risk Rankings Rank Country 1 2 3 40 55 63 86 114 161 178 Total Risk Economic Political Assessment Performance Risk Luxembourg Switzerland United States China Poland Vietnam Russia Albania Mozambique Afghanistan 99.51 98.84 98.37 71.27 57.12 52.04 42.62 34.23 21.71 3.92 25.00 23.84 23.96 18.93 18.56 14.80 11.47 8.48 3.28 0.00 24.51 25.00 24.41 16.87 13.97 11.91 8.33 5.04 2.75 3.04 Total of Credit Total and Access Debt to Finance Indicators Indicators 20.00 20.00 20.00 19.73 9.36 18.51 17.99 19.62 13.85 0.00 30.00 30.00 30.00 15.74 15.23 6.82 4.83 1.09 1.83 0.88 Potential Risks of International Expansion ► Currency risks Currency exchange fluctuations Appreciation of the U.S. dollar ► Management Culture Customs Language risks • Income levels • Customer preferences • Distribution system Strategy Implementation Power distance (PD) Hofstede’s Dimensions of National Culture 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 brands that favor global products and 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 brands that favor global products and • 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 Opposing Pressures and Four Strategies Pressures to Reduce Cost Pressures for Adaptation Two Opposing Pressures: Reducing Costs and Adapting to Local 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 International Strategy ► Pressure International Strategy 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 Global Strategy ► Competitive strategy is centralized controlled largely by corporate office ► Emphasizes economies of scale ► Advantages Larger production plants Efficient logistics and distribution networks Supports high levels of investment in R&D Standard level of quality throughout the world and Global Strategy Global Strategy ► Competitive strategy is centralized and controlled largely by corporate office ► Emphasizes economies of scale ► Disadvantages • 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 Multidomestic Strategy ► Emphasis is differentiating products and services to adapt to local markets ► Authority is more decentralized ► Risks include Increased cost structure Potential problems with local adaptations Finding optimal degree of local adaptation is difficult Transnational Strategy 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 Transnational Strategy ► Unique 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 Strategy Strengths Limitations International • 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 • 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. • Inability to take advantage of new ideas and innovations occurring in local markets. Global Exhibit 7.6 Strengths and Limitations of Various Strategies • 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 Strategy Strengths Multidomestic • Ability to adapt products and services to local market conditions. • Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue. Limitations • 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 • Unique challenges in of scale. determining optimal locations of activities to ensure cost • Ability to adapt to local and quality. markets. • Unique managerial • Ability to locate activities challenges in fostering in optimal locations. knowledge transfer. • Ability to increase knowledge flows and learning. Exhibit 7.6 Strengths and Limitations of Various Strategies Entry Modes of International Expansion Wholly Owned Subsidiary Extent of Investment Risk High Joint Venture Strategic Alliance Franchising Licensing Exporting Low Low High Degree of Ownership and Control Adapted from Exhibit 7.7 Entry Modes for International Expansion Exporting ► Relatively inexpensive way to enter foreign market ► Minimal risk ► Successful 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 Franchising ► Franchisor receives a royalty or fee ► Franchisee 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 Strategic Alliances and Joint Ventures • Partnerships that enable firms to share risks and potential revenues and profits • 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 Wholly Owned Subsidiaries ► Business company owned by only one multinational 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