International Strategy:
Creating Value in Global Markets
Chapter Seven
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
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.
7-2
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
7-3
Factors Affecting
a Nation’s Competitiveness
• Factor endowments
 The nation’s position in factors of production,
such as skilled labor or infrastructure,
necessary to compete in a given industry.
• Demand conditions
 The nature of home-market demand for the
industry’s product or service.
7-4
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.
7-5
Factors Affecting
a Nation’s Competitiveness (cont.)
• 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.
7-6
Factor Conditions
• To achieve
competitive
advantage, factors of
production must be
created
 Industry specific
 Firm specific
• The 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
7-7
Demand Conditions
• Demanding consumers drive firms in a
country to
 Meet high standards
 Upgrade existing products and services
 Create innovative products and services
7-8
Related and Supporting Industries
• Related and supporting industries
 Enable firms to manage inputs more
effectively
 Allow joint efforts among firms
7-9
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
7-10
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
7-11
Porter’s Diamond of National
Advantage: As Applied to India
7-12
QUESTION
All of the factors below have made India's
software services industry extremely
competitive on a global scale except
A. Large pool of skilled workers
B. Large network of public and private
educational institutions
C. Tax and antitrust legislation that protect the
dominant players in the industry
D. Large, growing market and sophisticated
customers
7-13
A Company’s Motivation for
International Expansion
• Increase the size of potential markets
• Attain economies of scale
• Taking advantage of arbitrage
opportunities
• Extend the life cycle of a product
• Optimize the physical location for every
activity in its value chain
7-14
International Country Risk Ratings
7-15
Potential Risks of
International Expansion
• Political and economic risk





Social unrest
Military turmoil
Demonstrations
Violent conflicts and terrorism
Laws and their enforcement
7-16
Example: Transparency International
Corruption Perceptions Index
• The 2008 Transparency International Corruption
Perceptions Index (CPI) reveals the most corrupt
countries in the world
• The scores range from ten (squeaky clean) to zero
(highly corrupt).
• The five most corrupt countries are
 Somalia (CPI Score: 1.0)
 Myanmar (CPI Score: 1.3)
 Iraq (CPI Score: 1.3)
 Haiti (CPI Score: 1.4)
 Afghanistan (CPI Score: 1.5)
7-17
Potential Risks of
International Expansion
• Currency risks
 Currency exchange fluctuations
 Appreciation of the U.S. dollar
7-18
Potential Risks of
International Expansion
• Management risks






Culture
Customs
Language
Income levels
Customer preferences
Distribution system
7-19
Outsourcing
• Outsourcing
 occurs when a firm decides to utilize other
firms to perform value-creating activities that
were previously performed in-house.
7-20
Offshoring
• Offshoring
 takes place when a
firm decides to shift
an activity that they
were previously
performing in a
domestic location to a
foreign location.
7-21
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
7-22
Two Opposing Pressures: Reducing Costs and
Adapting to Local Markets
Three assumptions
1. Customer needs and interests worldwide are
becoming more homogeneous
2. People are willing to sacrifice product
preferences for lower prices at high quality
3. Economies of scale in production and
marketing can be achieved through supplying
global markets
7-23
Two Opposing Pressures: Reducing Costs
and Adapting to Local Markets
Assumptions may not always be true
• Product markets vary widely between nations
• In many product and service markets, there
appears to be a growing interest in multiple
product features, quality and service
7-24
Two Opposing Pressures: Reducing Costs and
Adapting to Local Markets
• Technology permits flexible production
• Cost of production may not be critical to product
cost
• Firm’s strategy should not be product-driven
7-25
Opposing Pressures and Four
Strategies
7-26
International Strategy
• An international
strategy is based on
diffusion and
adaptation of the
parent company’s
knowledge and
expertise to foreign
markets.
• The primary goal of
the strategy is
worldwide exploitation
of the parent firm’s
knowledge and
capabilities.
7-27
Strengths and Limitations of
International strategies
7-28
Global Strategy
• Competitive strategy
is centralized and
controlled largely by
corporate office
• Emphasizes
economies of scale
7-29
Strengths and Limitations of Global
Strategies
7-30
Multi-domestic Strategy
• Emphasis is differentiating products and
services to adapt to local markets
• Authority is more decentralized
7-31
Strengths and Limitations of
Multi-domestic Strategies
7-32
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
7-33
Strengths and Limitations of
Transnational Strategies
7-34
Entry Modes of International
Expansion
7-35