Miles A. Zachary
MGT 4380
 The rise of international business has followed
globalization and the development of BRIC economies
 Good or Bad?
 Good
 Access to new customers
 Lower costs—access to cheaper raw goods and labor
 Diversification of business risk
 Bad
 Political risk
 Economic risk
 Cultural risk
 Moving into an international market provides access to
new customers
 US population accounts for only 5% of global
consumers
 What are some new emerging markets into which US
businesses could enter?
 Different cost advantages can be gained by
internationally-diverse firms
 Increasing volume lowers production costs (economies
of scale)
 Access to cheaper labor/raw goods
 Offshoring: relocating a business activity to another country
 Despite these advantages, some firms are finding that
offshoring is not appropriate for their business
 Led to reshoring—jobs and businesses return to their
home country
 Business risk is the potential that business operations
might fail
 Firms located in a single country are open to “monodirectional” business risk—either up or down
 However, international firms operate in a variety of
markets and therefore less susceptible to monodirectional business risk
 Similar to the idea of diversifiable or unsystematic risk
 Political risk-the potential for government upheaval or
interference with business to harm an operation
within a country
 Difficult to plan business operations
 Possibility of excessive hostility toward foreign
businesses
 In rare but extreme cases, a countries government could
nationalize an industry or industries, eliminating
foreign control
 Underdeveloped countries tend to have the highest
political risk(s)
 Economic risk-the potential for a country’s economic
conditions and policies, property rights, protections,
and currency exchange rates to harm business
operations
 Dynamic economic conditions make it difficult to know
how to anticipate economic risks
 Cultural risk-the potential for a company’s operations
in a country to struggle because of differences in
language, customs, norms, and customer preferences
 Businesses should research local customs and be
prepared to adapt business operations
 In some ways, globalization has decreased the
advantages gained and disadvantages lost to operating
in one country over another
 In others, research has suggested that business still
derive advantages and disadvantages from locating in
specific countries
 Michael Porter at HBS developed the Diamond Model
of National Advantage (1990) to help determine the
potential for firm success in a given international
environment
 The model helps determine a firm’s ability to compete
in a particular country
 Four dimensions:
Home demand conditions
2. Home factor conditions
3. Home related and supporting industries
4. Firm strategy, structure, and domestic rivalry
1.
 Home demand conditions refer to the local demand
characteristics and nature of domestic customers
 Local customers with high standards help prepare firms for
competing on a global scale
 E.g., Toyota and Japanese consumers
 Home factor conditions refers to the nature of raw
materials and other inputs needed to create goods and
services
 Includes land, labor, capital, and entrepreneurial ability
 While some countries have their advantages, overcoming
disadvantages can have its benefits
 E.g., Japan develops the JIT inventory system due to space shortages
 Home related and supporting industries refers to the
extent to which a firm’s domestic suppliers and other
complementary industries are developed and helpful
 How does the value chain support our business?
 E.g., US cattle industry is supported well by incredible
productive capabilities of US farmers
 Firm strategy, structure, and domestic rivalry
determines how challenging it is to survive domestic
competition
 Companies that survive intense competition among domestic
competitors are better equipped to handle foreign
competitors
 E.g., Toyota had to contend with other Japanese auto firms
 A multinational corporation (MNC) is a firm that
has operations in more than one country
 Such firms must choose how to structure their
international strategy
 Three (3) main strategies
 Multidomestic
 Global
 Transnational
 Focuses on responsiveness to local requirements while
sacrificing efficiency
 Many times firms must adapt their products to fit in a
variety of domestic markets
 Coca-cola has dozens of brands with distinct flavors in
different countries
 A global strategy sacrifices responsiveness to local
requirements in favor of efficiency
 It is the opposite of the multidomestic strategy
 While some minor modifications may occur, the
products and services remain generally unaltered for
foreign markets
 E.g., Microsoft products are only adapted to meet local
language needs, but are otherwise homogenous
 Firms following a transnational strategy try to balance
the desire for efficiency with the need to adjust to local
preferences
 In between a multidomestic strategy and global
strategy
 E.g., KFC and McDonald’s keep a core menu while
making some concessions in local markets such as
poutine in McDonald’s in Canada
 Once an firm decides to enter a foreign market, it must
then determine how to do so
 Five (5) basic entry options
 Exporting
 Wholly-owned subsidiary
 Franchising
 Licensing
 Joint venture or strategic alliance
 These options vary in the amount of control a business has
on operations, how much risk is involved, and what share
of the foreign operation’s profits a firm gets to keep
 Exporting refers to creating goods within a firm’s home
country and then shipping them to another country where
they are sold to customers by a local firm
 Typically seen as a starting point for most firms starting
international operations
 A lower-cost way to determine foreign preferences and
demand for a firm’s products
 After the products become desirable in a foreign market,
exporting becomes a unattractive
 Firms loose control of goods once they enter a foreign
market—potentially allowing local merchants to hurt the
brand
 A wholly owned subsidiary is a business operation
in a foreign country that a firm fully owns
 Can occur in two (2) ways:
 Greenfield venture in which the firm creates the entire
operation itself
 Acquiring a foreign operator
 Attractive because the firm maintains complete
control over the operation and keeps all the profits
 Can be risky since a firm must pay all the expenses to
setup and operate the business
 Franchising is when an organization (franchisor)
grants the right to use its brand name, products, and
processes to another organization (franchisee)
 Usually occurs in exchange for up-front payment
(franchise fee) and a percentage of revenues (royalty
fee)
 Attractive because it requires little investment
 But, franchisors enjoy only some of the profits, must
monitor franchisees for undesirable behavior, and
must provide a clear and effective business model
 In licensing, one organization grants another
organization the right to create its products, often
using patented technology, in exchange for a fee
 Most frequently used in manufacturing industries
 Attractive because granting firms deflect costs, but
lose control over how technology is used and limits
their profitability
 Foreign joint ventures and strategic alliances occur
when a firm believes it to be beneficial to work with
one or more local partners
 In a joint venture, two or more organization contribute
to a new organization
 In a strategic alliance, two or more organizations work
together without establishing a new organization
 Attractive because local organizations can supply
valuable local knowledge and facilitate local
acceptance
 Can be difficult to manage when firms have trouble
getting along