I. Identifying International Opportunities: Incentives to Use an International Strategy

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1 Chapter 8- International Strategy I. Identifying International Opportunities: Incentives to Use an International Strategy International strategy: is a strategy through which the firm sells its goods or services outside its domestic market. Reasons to use this strategy: o Increased demand in foreign countries o To extend a product s life cycle. o To secure needed resources (key supplies of raw material, lower production costs,) o Universal product demand- borderless demand for globally branded products may be due to similarities in lifestyle in developed nations. o Increases in global communication facilitate to visualize and model lifestyles in different cultures. o In some industries, technology drives globalization because the economies of scale necessary to reduce costs to the lowest level often require an investment greater than that need to meet domestic market demand. Traditional motives extending the product life cycle securing key resources having access to low-cost labor Emerging motives Risks: o Employment contracts and labor forces different significantly in internal markets. o Joint ownership with a local company in order to invest in local operations--- this allows the foreign firm to avoid tariffs. o Host governments frequently require a high percentage of procurements, manufacturing, and R&D to use local sources. Incentives that influence firms to use international strategies (four basic benefits): o Increased market size Following an international strategy is an attractive option to firms competing in domestic markets that have limited growth opportunities. The size of an international market also affects a firm s willingness to invest in R&D to build competitive advantages in that market. Larger markets usually offer higher potential returns and thus pose less risk for a firm s investments. o Return on investment Large markets may be crucial for earning return on significant investments, such as plant and capital equipment or R&D. Therefore, most R&D intensive industries such as electronics are international. Recoup investments more quickly due to : The pace of new technology increase (more products become absolute more rapidly) and competitors can imitate the technologies relatively quick. o Economies of scale and learning Enjoy economies of scale particularly in manufacturing operations

2 o To the extent that a firm can standardize its products across country borders and use the same or similar production facilities, thereby coordinating critical resources functions, it is more likely to achieve optimal economies of scale. Exploit core competencies in international markets through resource and knowledge sharing between units and network partners across country borders. (also creates new learning opportunities) However, research finds that to take advantage o international R&D investments, firms need to already have a strong R&D system in place to absorb the knowledge. Location advantages Firms may locate facilities in other countries to lower the basic costs of the goods or services they provide (easier access to lower-cost labor, energy, and other natural resources). Such location advantages can be influenced by costs of production and transportation requirements as well as by the needs of the intended customers. High cultural distance= disadvantages Regulation distances influence the ownership positions of multinational firms as well as their strategies for managing local and expatriate human resources. II. International Strategies Firms choose to use one or both of 2 basic types of international strategies: business-level international strategy and corporate-level international strategy. Business level- generic strategies: cost leadership, differentiation, focused, or integrated Corporate level international strategy= 3 strategies: multidomestic, global or transnational. To create competitive advantage, each strategy must utilize a core competence based on difficult to-imitate resources and capabilities. a. International Business-Level Strategy Each business must develop a competitive strategy focused on its own domestic market. However, research indicates that as a firm continues its growth into multiple international locations, the country of origin is less important for competitive advantage. International business-level strategies are usually grounded in one or more home-country advantages, as Porter s model suggests. The four basic dimensions of this model emphasize the environmental or structural attributes of a national economy that contribute to national advantage. Government policy also clearly contributes to the success and failure of many firms and industries. The factors in this model are likely to produce competitive advantages only when the firm develops and implements an appropriate strategy that takes advantage of distinct country factors. Thus, these distinct country factors must be given thorough consideration when making a decision regarding the business-level strategy to use in an international context (i.e. cost leadership, differentiation, focused, integrated, etc.) Porters model: Factors of production: this dimension refers to the inputs necessary to compete in any industry. o There are basic factors (natural and labor resources) and advanced factors (communication system, highly educated workforce). o There are : generalized production factors (highway systems and the supply of debt capital) and specialized production factors (skilled personnel in a specific industry)

3 o if a country has both advanced and specialized production factors, it is likely to serve an industry well by generating strong home-country competitors that also can be successful global competitors. Demand conditions: characterized by the nature and size of buyers needs in the home market for the industry s goods or services. o a large market segment can produce the demand necessary to create scale-efficient facilities. Related and supporting industries: Italy has become the leader in the show industry because of related and supporting industries; a well-established leather-processing industry provides the leather needed to construct shoes and related products. Firm strategy, structure, and rivalry: can also further the growth of certain industries. o The types of strategy, structure and rivalry among firms vary greatly from nation to nation. In Italy, the national pride of the country s designers has spawned strong industries in sports cars, fashion apparel and furniture. In the U.S., competition among computer manufacturers and software produces has contributed to the development of these industries. b. International Corporate-Level Strategy Some corporate-level strategies give individual country units the authority to develop their own business-level strategies; others dictate the business-level strategies in order to standardize the firm s products and sharing of resources across countries. International corporate-level strategy focuses on the scope of a firm s operations through both product and geographic diversification. 3 corporate-level strategies: o Multidomestic strategy: Focuses on competition within each country in which the firm competes. Decentralizes strategic and operating decisions to the business units operating in each country so each unit can tailor its goods and services to the local market. o Global strategy: Assumes more standardization of products across country boundaries so competitive strategy is centralized and controlled by the home office. This strategy emphasizes economies of scale and offers greater opportunities to take innovations developed at the corporate level or in one country and utilized them in other markets. This strategy is not responsive to local markets and is difficult to manage because of the need to coordinate strategies and operating decisions across country borders. Coordination and cooperation require centralization and headquarters control. Companies can use the Internet to improve logistics and manage an extensive supply network, thereby increasing revenue and reducing costs--- connectivity between the operations in different countries and universal standards dominates this approach. o Transnational strategy: Integrates characteristics of multi-domestic and global strategies to emphasize both local responsiveness and global integration and coordination. This strategy is difficult to implement, requiring an integrated network and a culture of individual commitment. This strategy is becoming increasingly necessary to compete in international markets. The growing number of global competitors heightens the requirement to hold costs down. However, the increasing sophistication of markets with greater information flow (Internet) and the desire for specialized products to meet consumers needs pressures firms to differentiate and even customize their products in local markets.

4 III. Environmental Trends Although the transnational strategy s implementation is a challenge, environmental trends are causing many multinational firms to consider the need for both global efficiency and local responsiveness. Many large multinational firms, particularly those with many diverse products, use a multidomestic strategy with some product lines and a global strategy with others. Many multinational firms require flexibility if they want to be strategically competitive, in part due to trends that change overtime. o 2 important trends/ international risks= liability of foreignness, and regionalization. Liability of foreignness: The threat of wars and terrorist attacks increase the risks and costs of international strategies. o Furthermore, research suggests that the liability of foreignness is more difficult to overcome than once thought. Regionalization: Some firms decide to compete only in certain regions of the world. This allows them to focus their learning on specific markets, cultures, locations, resources, and other factors. IV. Choice of International Entry Mode Type of Entry Characteristics Exporting Usually, exporting firms develop contractual arrangements with host-country firms. High cost of transportation and tariffs placed on some incoming goods, The exporting firm has low control over the marketing and distribution of its products in the host country and must either pay the distributor or allow the distributor to add to the price to recoup its costs and earn a profit. Cost leadership= enhance the performance of exports in developed countries, whereas differentiation with larger scale are more successful in emerging economies. Mostly small businesses Currency exchange rates- most significant problem. Licensing A licensing arrangement allows a foreign company to purchase the right to manufacture and sell the firm s products within a host country or set of countries. Low cost, low risk, little control, low returns Little controls over the manufacture and marketing of its products n other countries. Thus, license deals must be structured properly. Licensing provides the least potential returns, because returns must be shared between the licensor and licensee. The international firm may learn the technology and produce and sell a similar competitive product after the license expires. Strategic alliances Most international strategic alliances are formed with a host-country firm that knows and understands the competitive conditions, legal and social norms, and cultural idiosyncrasies of the country, which helps the expanding firm manufacture and market a competitive product. Gain access to a market without paying any tariffs to do so. Shared costs, shared resources, shared risks, problems of integration (e.g., two corporate cultures) firms share the risks and resources required to enter international markets. Each partner in an alliance brings knowledge or resources to the partnership.

5 Reasons of failure: incompatible partners and conflict between partners due to trust between partners (influenced by country cultures). Trust is affected by: the initial condition of the relationship, the negotiation process to arrive to an agreement, partner interactions, and an external events. Acquisition Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations. Can be expensive and also often require debt financing. International negotiations can be exceedingly complex. Dealing with legal and regulatory requirements in the target firm s country. Deal with different cultures, social cultures and practices. Difficult to capture the potential synergy when integration is slowed because of cultural differences. New wholly owned subsidiary The establishment of a new wholly owned subsidiary is referred to as Greenfield venture. The process of creating such ventures is often complex and potentially costly but affords maximum control to the firm and has the most potential to provide above-average returns. Complex, often costly, time consuming, high risk, maximum control, potential above-average returns. High risks because of costs of establishing new business operation in a new country. the firm may have to acquire the knowledge and expertise of the existing market b hiring either host-country national from competitors, or through consultants, which can be costly. Still. The firm maintains control over the technology, marketing, distribution, of its products. The company must build new manufacturing facilities, establish distribution networks, and learn and implement appropriate marketing strategies to compete in the new market. When the country risk is high, firms prefer to enter with joint ventures instead of Greenfield investments in order to manage the risk. Export: requires no foreign manufacturing expertise and investment only in distribution; licensing: can facilitate product improvements necessary to enter foreign markets; strategic alliances: allow a firm to connect with an experienced partner already in the targeted market. Therefore, all of these 3 modes are good tactics for early market development. However, if intellectual property rights in the merging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high, a joint venture or wholly owned subsidiary entry mode is preferred. The decision regarding which entry mode to use is primarily a result of the industry s competitive conditions, the country s situation and government policies, and the firm s unique set of resources, capabilities, and core competencies. V. Strategic Competitive Outcomes The probability the firm will be successful with an international strategy increases when it is effectively implemented. International diversification and returns: o Many factors contribute to the positive effects (on returns) of international diversification, such as private versus government ownership, potential economies of scale and experience, location advantages, increased maker size, and the opportunity to stabilize returns.

6 International diversification and innovation: o international diversification facilitates innovation in a firm because it provides a larger market to gain more and faster returns from investments in innovation (i.e. R&D investments) Complexity of managing multinational firms: o Include: being overly focused on sales in a market resulting in reduced customer satisfaction; late entering in a market resulting in being behind the market leaders; highly competitive nature of global markets; multiple cultural environments; potentially rapid shifts in the value of different currencies; and, the instability of some national governments. VI. Risks in an International Environment Political risks o Instability in national governments o War, both civil and international o Potential nationalization of a firm s resources Economic risks o Differences and fluctuations in the value of different currencies o Differences in prevailing wage rates o Difficulties in enforcing property rights o Unemployment Limits to International Expansion: o Some limits constrain the ability to effectively manage international expansion. o International diversification increases coordination and distribution costs, and management problems are exacerbated by trade barriers, logistical costs, and cultural diversity, among other factors.