Chapter 2

Chapter Two
Choosing an International
Competitive Strategy
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Chapter Objectives
 To understand the meaning of business strategy,
especially in an international context
 To appreciate that well-conceived strategies
improve performance
 To grasp the advantages of international operations
that motivate managers to undertake them
 To discern the advantages of entering international
markets via acquisitions versus new venturing
 To realize how multidomestic, global, and
transnational strategies help companies fulfill
international objectives
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 Managers of companies must decide whether to
exploit the limited resources domestically or
 Opportunities may include sales to untapped markets
or lower production costs
 Constraints include competition, national operating
environments, and restrictions to moving goods,
services, and assets among countries
 Companies’ strategies are the necessary linchpins to
bring about successful operations in a globalizing
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Chapter Introduction
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The Concept of International
Business Strategy
 Strategy: the specific group of decisions
managers take to maximize their companies’
 Mission: a guideline stating what the company
seeks to do and become over the long term
 Strategic intent: consists of the goals that
stretch the company’s performance credibly so
that employees believe the goals can be reached
and will work toward their achievement
 Objectives: specific performance targets
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Why Study International
Business Strategy?
 The major reason for studying international business
strategy is that some companies consistently perform
better than others within their same industries
 Another reason is because managers often suboptimize
their companies’ international performance
• This occurs usually for three reasons:
Risk-avoidance behavior
Choosing locations that do not fit with a wellconceived strategy
Failure to know how best to implement decisions in
different foreign environments
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Why Study International
Business Strategy?
 Risk-avoidance behavior
• Managers often avoid excessive risk in international operations
when they or their companies have little international experience
Managers should make decisions for either domestic or
international expansion based on a strategy that examines
opportunities and risks realistically
Nonfit with strategy
• Locating in areas that do not fit with a well-conceived strategy
can adversely affect performance
The lack of fit is sometimes due to a bandwagon mentality
Implementation problems
• Managers may not have the know-how to best implement
strategies in foreign environments
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Why Study International
Business Strategy?
 Core competencies: those assets that are valuable for improving
business, are difficult for competitors to imitate, and can be
extended as a value-creating capability for use in other product or
geographic markets
Three basic groups include:
 Superior technological know-how
 Reliable innovative processes
 Close relationships with external parties
 Barriers to entry: those conditions that limit easy entry of new
competitors into an industry
• Usually classified as one of four types:
 Brand loyalty
 Absolute cost advantage
 High capital costs
 Government regulations
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Motives for Foreign Operations
 Sales expansion motives
• Three factors often trigger companies to increase sales through
international expansion:
Maturity of their domestic markets
a continuum that consists of four stages –
introduction, growth, maturity, and decline
Mature market: sales growth slows
o Product life cycle:
Slower domestic than foreign growth rates
o Companies may encounter differences in potential demand
growth due to differences among countries in economic growth
Triad market: United States, Japan, and Western Europe
According to World Bank forecasts, China will surpass the
United States as the world’s largest economy by the year 2020
Ability to gain product capabilities
o Managers seek foreign product capabilities for which they can
use core competencies to expand domestic sales
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Motives for Foreign Operations
 Cost reduction motives:
• Cost minimization is essential for companies that
compete primarily on the basis of price
• Companies’ international expansion may reduce
their costs by 1) spreading their fixed expenses, 2)
by enabling them to produce with cheaper inputs or
in cheaper operating locations, and 3) by achieving
vertical integration
• Experience curve: cutting costs by 20-30% each
time output doubles
 Rationalized production: (global supply chain)
depending on different countries for supplies of the
different components or products in their lines
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Motives for Foreign Operations
 Value chain integration:
• Value chain: the linked activities that transform
inputs into the outputs that eventually reach end
Backward integration: adding a link away from
the end customer
Forward integration: adding a link toward the
end customer
 Three possible cost advantages of value chain
integration are:
• Saving transaction costs
• Building bargaining power with suppliers or
• Minimizing stock-out and overcapacity costs
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Motives for Foreign Operations
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Motives for Foreign Operations
Risk-reduction motives:
• Smoothing sales and profits
To minimize swings in sales and profits, managers may seek
out foreign markets because the timing of business cycles
differs among countries
Lessening dependence on existing customers and suppliers
By increasing its number of suppliers, a company becomes
less vulnerable in supply shortages
• Preventing competitors’ advantage
Oligopolistic industries: those with few sellers
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Acquisitions Versus New Venturing
 Acquisitions:
include buying other companies in whole
or in part and buying capabilities from other companies
• A company gets a known product or process, thus
reducing the risk from internal development
• Cost savings
• Faster results
 New venturing:
includes new products or processes
from the companies’ own R & D, hiring of personnel
with expertise, and building new facilities
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Implementation Strategies
Regardless of the motive for international
expansion, a company must have a strategy
for fulfilling its motives
• Multidomestic: the company allows each of
its foreign-country operations to act fairly
• Global: the company integrates its operations
that are located in different countries
• Transnational: the company develops
different capabilities and contributions from
different countries and shares them in
integrated worldwide operations
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A Mix of Strategies
 Different products, capabilities, and operating
locations dictate a mix of approaches to
maximize performance
 Avon’s International Activities
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Operational Decisions
 The choice of whether to use multidomestic,
global, or transnational strategy interrelates with
a number of operational decisions
 The alternatives that companies face include:
Location of value-added activities
Location of sales target
Level of involvement
Product and services strategy
Production strategy
Competitive moves
Factor movements and start-up strategy
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