Chapter 8 -

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Nov 20, 2013 (4 years and 1 month ago)

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Chapter 8
-

International Strategy



MGNT428 BUSINESS POLICY & STRATEGY

Dr. Gar Wiggs,

Instructor

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Knowledge Objectives


Studying this chapter should provide you with
the strategic management knowledge needed
to:


Explain traditional and emerging motives for firms to pursue
international diversification.


Explore the four factors that lead to a basis for international
business
-
level strategies.


Define the three international corporate
-
level strategies:
multidomestic, global, and transnational.


Discuss the environmental trends affecting international strategy,
especially liability of foreignness and regionalization.

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Knowledge Objectives (cont’d)


Studying this chapter should provide you with
the strategic management knowledge needed
to:


Name and describe the five alternative modes for entering
international markets.


Explain the effects of international diversification on firm
returns and innovation.


Name and describe two major risks of international
diversification.


Explain why the positive outcomes from international
expansion are limited.

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Figure 1.1

Copyright © 2004 South
-
Western. All rights reserved.

The Strategic
Management
Process

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Opportunities and Outcomes of
International Strategy

Figure 8.1

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Identifying International
Opportunities


International strategy


A strategy through which the firm sells its goods or
services outside its domestic market


Reasons to having an international strategy


International markets yield potential new
opportunities


New market expansion extends product life cycle


Needed resources can be secured


Greater potential product demand

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Classic Rationale for International
Diversification: Extend Product’s Life
Cycle

Production is standardized and
relocated to low cost countries.

Product Demand

Develops and Firm

Exports Products

Firm Introduces

Innovation in

Domestic Market

Foreign

Competition

Begins Production

Firm Begins

Production Abroad

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International Strategy Benefits


Increase market share


Domestic market may lack the size to support efficient
scale manufacturing facilities


Return on investment


Large investment projects may require global markets
to justify the capital outlays


Weak patent protection in some countries implies that
firms should expand overseas rapidly in order to
preempt imitators

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International Strategy Benefits
(cont’d)


Economies of scale or learning


Expanding size or scope of markets helps to
achieve economies of scale in manufacturing
as well as marketing, R&D or distribution


Can spread costs over a larger sales base


Can increase profit per unit

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International Strategy Benefits (cont’d)


Competitive advantage through location


Low cost markets aid in developing
competitive advantage by providing access to:


Raw materials



Lower cost labor


Key customers


Energy

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Determinants of National
Advantage

SOURCE:

Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group,
from
Competitive Advantage of Nations,
by Michael E. Porter, p. 72. Copyright ©1990, 1998 by Michael E. Porter.

Figure 8.2

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Determinants of National
Advantage


Factors of production: the inputs
necessary to compete in any industry


Labor


Land



Natural resources


Capital


Infrastructure


Basic factors include natural and labor
resources


Advanced factors include digital
communication systems and an educated
workforce

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Determinants of National
Advantage
(cont’d)


Demand conditions: characterized by the
nature and size of buyers’ needs in the
home market for the industry’s goods or
services


Size of the market segment can lead to scale
-
efficient facilities


Efficiency can lead to domination of the
industry in other countries


Specialized demand may create opportunities
beyond national boundaries

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Determinants of National
Advantage
(cont’d)


Related and supporting industries:
supporting services, facilities, suppliers
and so on


Support in design


Support in distribution


Related industries as suppliers and buyers

15

Determinants of National
Advantage
(cont’d)


Firm strategy, structure and rivalry: the
pattern of strategy, structure, and rivalry
among firms


Common technical training


Methodological product and process
improvement


Cooperative and competitive systems

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Selecting an International
Corporate
-
Level Strategy


The type of corporate strategy selected will have an
impact on the selection and implementation of the
business
-
level strategies


Some strategies provide individual country units with
the flexibility to choose their own strategies


Others dictate business
-
level strategies from the
home office and coordinate resource sharing across
units

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International Corporate
-
Level
Strategy


Focuses on the scope of operations:


Product diversification


Geographic diversification


Required when the firm operates in:


Multiple industries, and


Multiple countries or regions


Headquarters unit guides the strategy


But business or country
-
level managers can
have substantial strategic input

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International
Corporate
-
Level
Strategies

Figure 8.3

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Multidomestic Strategy


Strategy and operating decisions are
decentralized to strategic business
units (SBU) in each country


Products and services are tailored to
local markets


Business units in one country are
independent of each other


Assumes markets differ by country or
regions


Focus on competition in each market


Prominent strategy among European
firms due to broad variety of cultures
and markets in Europe

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Global Strategy


Products are standardized across national
markets


Decisions regarding business
-
level
strategies are centralized in the home office


Strategic business units (SBU) are
assumed to be interdependent


Emphasizes economies of scale


Often lacks responsiveness to local markets


Requires resource sharing and coordination
across borders (hard to manage)

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Transnational Strategy


Seeks to achieve both global efficiency and
local responsiveness


Difficult to achieve because of simultaneous
requirements:


Strong central control and coordination to
achieve efficiency


Decentralization to achieve local market
responsiveness


Must pursue organizational learning to
achieve competitive advantage

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Environmental Trends


Liability of foreignness


Legitimate concerns about the relative attractiveness
of global strategies


Global strategies not as prevalent as once thought


Difficulty in implementing global strategies


Regionalization


Focusing on particular region(s) rather than on global
markets


Better understanding of the cultures, legal and social
norms

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Choice of International Entry
Mode

Type of Entry

Characteristics

Exporting

High cost, low control

Licensing

Low cost, low risk, little control, low
returns

Strategic alliances

Shared costs, shared resources, shared
risks, problems of integration

Acquisition

Quick access to new market, high cost,
complex negotiations, problems of
merging with domestic operations

New wholly owned
subsidiary

Complex, often costly, time consuming,
high risk, maximum control, potential
above
-
average returns

Table 8.1

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Dynamics of Mode of Entry

The firm has no foreign
manufacturing
expertise and requires
investment only in
distribution.

Export

What’s the best solution?

Situation

Optimal Solution

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Dynamics of Mode of Entry

The firm needs to
facilitate the product
improvements
necessary to enter
foreign markets.

Licensing

What’s the best solution?

Situation

Optimal Solution

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Dynamics of Mode of Entry

The firm needs to
connect with an
experienced partner
already in the targeted
market.

Strategic Alliance

What’s the best solution?

Situation

Optimal Solution

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Dynamics of Mode of Entry

The firm needs to
reduce its risk through
the sharing of costs.

Strategic Alliance

What’s the best solution?

Situation

Optimal Solution

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Dynamics of Mode of Entry

The firm is facing
uncertain situations
such as an emerging
economy in its targeted
market.

Strategic Alliance

What’s the best solution?

Situation

Optimal Solution

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Dynamics of Mode of Entry

The firm’s intellectual
property rights in an
emerging economy are
not well protected, the
number of firms in the
industry is growing fast,
and the need for global
integration is high.

Wholly
-
owned
Subsidiary

What’s the best solution?

Situation

Optimal Solution

30

International Diversification and
Returns


Expanding sales of goods or services across global
regions and countries and into different geographic
locations or markets:


May increase a firm’s returns (such firms usually
achieve the most positive stock returns)


May achieve economies of scale and experience,
location advantages, increased market size and
opportunity to stabilize returns

31

International Diversification and
Innovation


Expansion sales of goods or services across global
regions and countries and into different geographic
locations or markets:


May yield potentially greater returns on innovations (a
larger market)


Can generate additional resources for investment in
innovation


Provides exposure to new products and processes in
international markets; generates additional knowledge
leading to innovations

32

Complexity of Managing
Multinational Firms


Expansion into global operations in different geographic
locations or markets:


Makes implementing international strategy
increasingly complex


Can produce greater uncertainty and risk


May result in the firm becoming unmanageable


May cause the cost of managing the firm to exceed
the benefits of expansion


Exposes the firm to possible instability of some
national governments

33

Risk in the International
Environment

Political risks include:


Instability in national governments


War, both civil and international


Potential nationalization of a firm’s resources

Political Risks

Economic Risks

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Risk in the International
Environment

Economic risks are interdependent with political
risks and include:


Differences and fluctuations in the value of
different currencies


Differences in prevailing wage rates


Difficulties in enforcing property rights


Unemployment

Political Risks

Economic Risks

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Risk in the International
Environment

Figure 8.4a

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Risk in the International Environment
(cont’d)

Figure 8.4b

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Limits to International Expansion


Management Problems


Cost of coordination across diverse
geographical business units


Institutional and cultural barriers


Understanding strategic intent of competitors


The overall complexity of competition