International
Strategy:
Creating Value
in Global
Markets
chapter 7
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
.
Learning Objectives
7-2
After reading this chapter, you should have a
good understanding of:
LO7.1 The importance of international expansion as
a viable diversification strategy
6-2
LO7.2 The sources of national advantage; that is,
why an industry in a given country is more (or less)
successful than the same industry in another country.
LO7.3 The motivations (or benefits) and the risks
associated with international expansion, including
the emerging trend for greater off shoring and
outsourcing activity.
Learning Objectives
7-3
LO7.4 The two opposing forces – cost reduction and
adaptation to local markets – that firms face when
entering international markets.
LO7.5 The advantages and disadvantages associated
with each of the four basic strategies: international,
global, multidomestic, and transnational.
LO7.6 The difference between regional companies
and true global companies.
LO7.7 The four basic types of entry strategies and
the relative benefits and risks associated with each of
them.
International Strategy
7-4
Consider…
The global marketplace provides many
opportunities for firms to increase their
revenue base and their profitability.
However, managers face many opportunities
and risks when they diversify abroad.
What should a firm do in order to attain a
competitive advantage in this global
marketplace?
International Strategy
7-5
 Globalization
has to do with the rise of
market capitalization around the world:
 International
exchanges have increased
 Trade
in goods & services
 Exchange of money, information, & ideas
 Laws,
rules, norms, values, and ideas are
growing more similar across countries
 Challenges
include balancing between
emerging markets & developed markets
 How
to meet the needs of customers at very
different income levels
International Strategy
7-6
Exhibit 7.1 Growth in GDP per Person from 2001 to 2011 by Region
Source: A game of catch-up. The Economist, September 24: 3-6.
Factors Affecting a Nation’s
Competitiveness
7-7
 Michael
Porter’s diamond of national
advantage explains why some nations and
their industries outperform others:
 Factor
endowments
 Demand conditions
 Related and supporting industries
 Firm strategy, structure, & rivalry
Factors Affecting a Nation’s
Competitiveness
7-8
 Factor
endowments involve factors of
production:
 Land
 Capital
 Labor
 Factors
of production must be industry &
firm specific
 Must
be rare, valuable, difficult to imitate,
and rapidly & efficiently deployed
Factors Affecting a Nation’s
Competitiveness
7-9
 Demand
conditions refer to the demands
that consumers place on an industry
 Demanding consumers drive firms in that
country to:
 Meet
high standards
 Upgrade existing products and services
 Create innovative products and services
 Better anticipate future global demand
 Proactively respond to product & service
requirements
Factors Affecting a Nation’s
Competitiveness
7-10
 Related
and supporting industries enable
firms to manage inputs more effectively:
A
competitive supplier base
 Reduces
 Close
manufacturing costs
working relationships with suppliers
 Allows
for joint research & development
 Development
 Forces
of related industries
existing firms to practice cost control,
product innovation, better distribution methods
Factors Affecting a Nation’s
Competitiveness
7-11
 Firm
strategy, structure, & rivalry due to
 Strong
consumer demand
 Strong supplier base
 High new entrant potential from related
industries
 Domestic
rivalry leads to a search for new
markets
 Rivalry is a strong indicator of global
competitive success
Question?
7-12

All of the factors below have made India’s
software services industry extremely competitive
on a global scale except
A.
B.
C.
D.
a large pool of skilled workers.
a large network of public and private educational
institutions.
tax and antitrust legislation that protect the
dominant players in the industry.
A large, growing market, and sophisticated
customers.
Example: Factors Affecting a
Nation’s Competitiveness
7-13
Exhibit 7.2 India’s Diamond in Software
Source: From Kampur D.,and Ramamurti R., “India’s Emerging Competition Advantage in Services,” Academy of
Management Executive: The Thinking Managers Source. Copyright © 2001 by Academy of Management.
Reproduced with permission of Academy of Management via Copyright Clearance Center..
International Expansion:
Motivations
7-14
A
company decides to become a
multinational firm in order to:
 Increase
 Attain
 Take
 In
market size
economies of scale
advantage of arbitrage opportunities
every stage of the value chain
 Enhance
a product’s growth potential
 Reinvigorating
the product life cycle
International Expansion:
Motivations
7-15
A
company decides to become a
multinational firm in order to:
 Optimize
the location of value chain activity
 To
enhance performance
 To
reduce cost
 To
reduce risk
 Explore
reverse innovation
 Design
& manufacture products locally
 Export
no-frills products to developed markets
International Expansion:
Risks
7-16
 Multinational
firms also encounter risks:
 Political
risk due to social unrest, military
turmoil, demonstrations, terrorism, absence
of the rule of law can lead to
 Destruction
 Disruption
of property
of operations
 Non-payment
 Arbitrary
 Economic
for goods and services
government decisions
risk due to piracy and
counterfeiting
International Expansion:
Risks
7-17
 Multinational
firms also encounter risks:
 Currency
risk due to fluctuations in the local
currency’s exchange rate
 Affects
cost of production or net profit
 Management
risk due to culture, customs,
language, income level, customer
preferences, distribution systems
 Could
lead to the need for local adaptation of
apparently standard products
International Expansion:
Risks
7-18
Exhibit 7.3 A Sample of Country Risk Ratings, January 2013
Source: euromoneycountryrisk.com
Example:
Risks from Corruption
7-19



The Transparency International Corruption
Perceptions Index (CPI) reveals the most corrupt
countries in the world
The scores range from 100 (very clean) to 0
(highly corrupt).
The most corrupt countries are:




Somalia, North Korea, & Afghanistan (CPI scores: 8)
Sudan (CPI score: 13)
Myanmar (CPI score: 15)
Uzbekistan & Turkmenistan (CPI scores: 17)
International Expansion:
Managing Risks
7-20
 Managing
political risk through
 Market
diversification
 Developing stakeholder coalitions
 Wooing key influencers
 Putting key stakeholders on their boards
 Managing
economic risk through global
dispersion of value chains
 Outsourcing
 Offshoring
International Expansion:
Managing Risks
7-21
 Offshoring
may be costly
 Common savings from offshoring include:
 Lower
wages, benefits, energy costs,
regulatory costs, taxes
 Hidden
costs from offshoring include:
 Higher
total wage & indirect costs
 Increased coordination costs
 Increased inventory due to longer lead time
 Reduced market responsiveness
 Cost of protecting intellectual property
International Strategies:
Opposing Pressures
7-22
Cost reduction or adaptation to local markets?
that favor global products &
brands should do the following:
 Strategies
 Standardize
all products for all markets
 Reduce overall costs by spreading
investments over a larger market
 Assumes:
 Homogenous
customer needs & interests
 People prefer lower prices at high quality
 Global markets produce economies of scale
International Strategies:
Opposing Pressures
7-23
Cost reduction or adaptation to local markets?
 Assumptions
may be incorrect:
 Product
markets DO vary widely between
nations – local adaptations work.
 There is a growing interest in multiple product
features, product quality, & service.
 Technology permits flexible production; cost of
production may not be critical to product cost;
and a firm’s strategy should not be solely
product driven.
 “One
size fits all” does NOT generally apply.
International Strategies:
Opposing Pressures
7-24
Exhibit 7.4 Opposing Pressures and Four Strategies
International Strategy
7-25
 An
international strategy requires diffusion
& adaptation of the parent company’s
knowledge & expertise to foreign markets.
 The primary goal is worldwide exploitation
of the parent firm’s knowledge &
capabilities.
 All
sources of core competencies are
centralized.
 Pressure for both local adaptation & low costs
are rather low
International Strategy
7-26
Exhibit 7.5 Strengths and Limitations of International Strategies in the
Global Marketplace
Global Strategy
7-27
A
global strategy implies a firm is
interested in lowering costs:
 Competitive
strategy is centralized &
controlled by the corporate office
 Products are standardized, operations
centralized, producing economies of scale
 Worldwide volume supports R&D
 There’s a standard level of quality worldwide
 Pressure for reducing cost is high; pressure
for adaptation to local markets is weak
Global Strategy
7-28
Exhibit 7.6 Strengths and Limitations of Global Strategies
Multidomestic Strategy
7-29
A
multidomestic strategy puts emphasis
on differentiating products & services to
adapt to local markets
 Decisions
are decentralized
 Products & services are tailored to local use
 Consider
language, culture, income levels,
customer preferences, distribution systems
 Markets
can expand rapidly
 Prices are differentiated by market
 Pressure for local adaptation is high;
pressure for lowering costs is low
Multidomestic Strategy
7-30
Exhibit 7.7 Strengths and Limitations of Multidomestic Strategies
Transnational Strategy
7-31
A
transnational strategy seeks global
competitiveness via trade-offs:
 Efficiency
versus local adaptation versus
organizational learning
 Assets & capabilities are disbursed according
to the most beneficial location for a specific
activity; some value chain activities are
centralized, some are decentralized.
 Economies
 Pressures
of scale, increased knowledge flows
for both local adaptation and
lowering costs are high
Transnational Strategy
7-32
Exhibit 7.8 Strengths and Limitations of Transnational Strategies
Question?
7-33

In order to realize the strongest competitive
advantage, firms engaged in worldwide
competition must
A.
B.
C.
D.
require that all of their various business units
follow the same strategy regardless of location.
ensure that all business units follow a strategy
strictly tailored to their respective locations.
pursue a strategy that combines the uniformity of
a global strategy and the specificity of a
multidomestic strategy in order to achieve
optimal results.
attempt to use the strategy that was most
successful in their home country.
International Strategies:
Global or Regional?
7-34
 It
may be unwise for companies to rush
into full-scale globalization
 Regionalization may be more reasonable
 Distance
still matters
 Commonalities of language, culture,
economics, legal & political systems, and
infrastructure all make a difference
 Trading blocs and free trade zones ease
trade restrictions, taxes, & tariffs
Example: International Strategies Regional Difficulties
7-35
 eBay
has successfully expanded into
Europe & Latin America through joint
ventures & acquisitions
 Appropriate
partners allow quick
adaptation to local needs
 eBay
has struggled in Asia
 Limited
local market know-how, lack of
innovative products & processes in the local
market, centralized management style
 Are these insurmountable local market
differences?
Question?
7-36

A domestic corporation considering expanding
into international markets for the first time will
typically
A.
B.
C.
D.
start off by implementing a wholly-owned foreign
subsidiary so it can maintain standards identical
to those at home.
consider licensing or franchising its operations.
consider implementing a low risk/low control
strategy such as exporting.
form a joint venture with a reputable foreign
producer.
International Strategies:
Entry Modes
7-37
 Options
for international market
expansion include:
 Exporting
 Licensing
or Franchising
 Strategic Alliance or Joint Venture
 Wholly-Owned Subsidiary
International Strategies:
Entry Modes
7-38
Exhibit 7.9 Entry Modes for International Expansion
Example: International Strategies Does Size Matter?
7-39
 Small
& Medium-sized Business
Enterprises (SMEs) should engage in
International SMEs
cross-border trade
Domestic SMEs
26%
13%
Outperform
Other
Outperform
Other
74%
87%
SMEs that trade internationally are twice
as likely to outperform those that don’t