sm lecture nine (a) - international strategy

Strategic Management BUSM 3200

These Lecture Slides summarize the key points covered in the respective chapters in your

recommended text; these slides do NOT substitute, at all, the required reading of the assigned

chapter from the text. These slides also may contain additional supplementary material extracted

from other texts and sources outside your text book.

9(A)-1 BUSM 3200- Strategic Management (Jan 2013) GDS

Learning outcomes

Assess the internationalisation potential of different markets.

Identify sources of competitive advantage in international strategy, through both global sourcing and exploitation of local factors.

Distinguish between four main types of international strategy.

Rank markets for entry or expansion, taking into account attractiveness, cultural and other forms of distance and competitor retaliation threats.

Assess the relative merits of different market entry modes, including joint ventures, licensing and foreign direct investment.


International strategy framework

Figure 8.1 International strategy framework


International v global strategy

International strategy refers to a range of options for operating outside an organisation’s country of origin.

Global strategy involves high coordination of extensive activities dispersed geographically in many countries around the world.

N.B. Global strategy is just one kind of international strategy.


7–5 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

To exploit core

competencies

To spread business

risk across a wider

market base

To gain access to

new customers

To achieve lower

costs and economies

of scale

To access resources

and capabilities in

foreign markets

WHY COMPANIES DECIDE TO

ENTER FOREIGN MARKETS

9(A)-5

The Strategic Motives Why Companies

Decide To Enter Foreign Markets


WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY MAKING MORE COMPLEX

1. Industry competitiveness factors that

vary from country to country

2. Location-based advantages for certain

countries

3. Differences in government policies

and economic conditions

4. Currency exchange rate risks

5. Differences in cultural, demographic,

and market conditions

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Internationalisation drivers

Figure 8.2 Drivers of internationalisation Source: Adapted from G. Yip, Total Global Strategy II, Financial Times Prentice Hall, 2003, Chapter 2

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Professor George Yip’s Model

BUSM 3200- Strategic Management (Jan 2013) GDS

Geographical Sources of Advantages

Geographical location of activities is a crucial source of competitive advantage

Organization can improve the configuration of its value chain and network by taking advantage of country-specific differences

Two principal opportunities available:

1. Locational Advantages

2. International Value Network


Location advantages: Porter’s diamond (1)

Porter’s Diamond – explains why some locations tend to produce firms with sustained competitive advantages in some industries more than others.

The four drivers in Porter’s Diamond stem from:

local factor conditions

local demand conditions

local related and supporting industries

local firm strategy structure and rivalry.



The Diamond Framework

♦ Answers important questions about

competing on an international basis by:

● Predicting where new foreign entrants are

likely to come from and their strengths.

● Highlighting foreign market opportunities

where rivals are weakest.

● Identifying the location-based advantages

of conducting certain value chain activities

of the firm in a particular country.

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Location advantages: Porter’s diamond (2)

Figure 8.3 Porter’s Diamond – the determinants of national advantages Source: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc., from The Competitive Advantage of Nations by Michael E. Porter. Copyright © 1990, 1998 by

Michael E. Porter. All rights reserved


1. Factor Conditions

• Factors of production include not only labor, capital, and natural resources (e.g., land and minerals) but also factors that can be created.

• The latter are more relevant to developed nations that are seeking competitive advantage over firms in other countries.

• These include a skilled human resource pool as well as the supporting infrastructure of a country, e.g., communication and transportation systems as well as a stable banking system.

2. Demand Conditions

• Demand conditions refer to the demands that consumers place on an industry for goods and services.

• Consumers who demand highly specific, sophisticated products and services force firms to be more innovative to meet such demand.

• Such consumer pressure presents challenges to a country’s industries to also make it more competitive in international markets.

3. Related and Supporting Industries

• Related and supporting industries enable firms to more effectively manage inputs.

• For example, countries with a strong supplier base benefit by adding efficiency in downstream activities.

• That is because a competitive supplier base helps a firm obtain inputs using cost-effective, timely methods it contributes to reducing manufacturing costs.

4. Firm Strategy, Structure and Rivalry

• Firms develop strategies and structures to compete with other firms in the same country that are trying to capture the same customer market.

• Rivalry is particularly intense in nations with strong consumer demand conditions, strong supplier bases, and high new entrant potential from related industries.

• Such rivalry provides a strong impetus for firms to innovate and find new sources of competitive advantage.

International Value Network: Global sourcing

Global sourcing refers to purchasing services and components from the most appropriate suppliers around the world regardless of their location.

The advantages include:

Cost advantages include labour costs, transportation and communications costs, taxation and investment incentives.

Unique local capabilities.

National market characteristics and reputation.


The concept of ‘value chain networks’

Global strategy requires the firm to decide where exactly it wants to ‘optimally locate’ its core activities

If you go back to the model of the value chain, you can then extend it beyond the domestic market and consider how it is to be configured and then integrated across a set of countries in order to create a globally integrated network

The network itself provides the global firm with competitive advantages


The concept - dispersion and configuration of the value chain in a global network

9(A)-18

Concentrate R&D in the US Concentrate

MFG in China

Coordinate Marketing and Sales from AUST © GDS



Reasons for Locating Value Chain Activities for Competitive Advantage

♦ Lower wage rates

♦ Higher worker

productivity

♦ Lower energy costs

♦ Fewer environmental

regulations

♦ Lower tax rates

♦ Lower inflation rates

♦ Proximity to suppliers

and technologically

related industries

♦ Proximity to customers

♦ Lower distribution costs

♦ Available\unique

natural resources

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INTERNATIONAL STRATEGIES

The global–local dilemma relates to the extent to which products and services may be standardised across national boundaries or need to be adapted to meet the requirements of specific national markets.


International strategies

Figure 8.4 Four international strategies Source: Adapted ‘Changing patterns of international competition’, pp. 9–39, Figure 5 (Porter, M. 1987). Copyright © 1987, by The Regents of the University of California. Reprinted from

the California Management Review, vol. 28, no. 2. By permission of The Regents. cmr berkeley.edu. All right reserved. This article is for personal viewing by individuals accessing this

website. It is not to be copied, reproduced or otherwise disseminated without written permission from the California Management Review. By viewing this document, you here by agree

to these terms. For permission or reprints, contact: cmr@haas. berkeley.edu electronic formats.


International Strategies

Simple Export:

Concentration of activities (particularly manufacturing) in one country, most likely the country of origin

Marketing such as pricing and distribution is decided at the local level

Take advantage of locational advantages

Multi-domestic

Dispersion of activities (manufacturing, marketing, product development) in overseas countries

Each market is treated independently

Local adaptations to meet local market needs


International Strategies

Complex Export

Location of activities in one country

Involves coordinated marketing

Global Strategy

Mature form of international strategy

Uses international value chain networks

Geographical location is determined according to the locational advantage for each activity so that product development, manufacturing and marketing functions might be located in different countries.



Approaches to International Strategy

♦ Multidomestic Strategy

● Varies product offerings and competitive approaches

from country to country.

♦ Global Strategy

● Employs the same basic competitive approach in all

countries where the firm operates.

♦ Transnational Strategy

● Is a think-global, act-local approach that incorporates

elements of both multidomestic and global strategies.

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Three Approaches for Competing Internationally

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Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

Strategies that favor global products and brands

Should standardize all of a firm’s products for all of their worldwide markets

Should reduce a firm’s overall costs by spreading investments over a larger market

Are based on three assumptions

Customer needs and interests worldwide are becoming more homogeneous

People (worldwide) prefer lower prices at high quality

Economies of scale in production and marketing can be achieved through supplying global markets

Ted Levitt

Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

But those three assumptions may not always be true

Product markets vary widely between nations (customer needs and interests?)

In many product and service markets, there appears to be a growing interest in multiple product features, quality and service (preference for low price?)

Technology permits flexible production, cost of production may not be critical to product cost, and firm’s strategy should not be product-driven


Advantages and Disadvantages of Multidomestic,

Global, and Transnational Approaches

Multidomestic Approach

Advantages Disadvantages

• Can meet the specific needs of

each market more precisely

• Can respond more swiftly to

localized changes in demand

• Can target reactions to the

moves of local rivals

• Can respond more quickly to

local opportunities and threats

• Hinders resource and capability

sharing or cross-market transfers

• Higher production and distribution

costs

• Not conducive to a worldwide

competitive advantage

9(A)-28



Global, and Transnational Approaches (cont’d)

Global Approach


• Lower costs due to scale and

scope economies

• Greater efficiencies due to the

ability to transfer best practices

across markets

• More innovation from knowledge

sharing and capability transfer

• The benefit of a global brand

and reputation

• Unable to address local needs

precisely

• Less responsive to changes in

local market conditions

• Higher transportation costs and

tariffs

• Higher coordination and integration

costs

9(A)-29



Global, and Transnational Approaches (cont’d)

Transnational Approach


• Offers the benefits of both local

responsiveness and global

integration

• Enables the transfer and sharing

of resources and capabilities

across borders

• Provides the benefits of flexible

coordination

• More complex and harder to

implement

• Conflicting goals may be difficult to

reconcile and require trade-offs

• Implementation more costly and

time-consuming

9(A)-30

MARKET SELECTION AND ENTRY

Not all countries are equally attractive

Need to do country PESTEL analysis

Then decide on the appropriate Market Entry Mode


Market characteristics

Four elements of the PESTEL framework are particularly important in comparing countries for entry:

Political. Political environments vary widely between countries and can alter rapidly.

Economic. Key comparators are levels of Gross Domestic Product and disposable income which indicate the potential size of the market.

Social. Factors like population characteristics and lifestyle as well as cultural differences.

Legal. Countries vary widely in their legal regime.



Political and Economic Risks

♦ Political Risks

● Stem from instability or weaknesses in

national governments and hostility to foreign

business.

♦ Economic Risks

● Stem from the stability of a country’s

monetary system, economic and regulatory

policies, lack of property rights protections,

and risks due to exchange rate fluctuation.

9(A)-33


The Impact of Government Policies and Economic Conditions in Host Countries

♦ Positives

● Tax incentives

● Low tax rates

● Low-cost loans

● Site location and

development

● Worker training

♦ Negatives

● Environmental regulations

● Subsidies and loans to

domestic competitors

● Import restrictions

● Tariffs and quotas

● Local-content requirements

● Regulatory approvals

● Profit repatriation limits

● Minority ownership limits

9(A)-34


The Risks of Adverse Exchange Rate Shifts

♦ Effects of Exchange Rate Shifts:

● Exporters experience a rising demand for

their goods whenever their currency grows

weaker relative to the importing country’s

currency.

● Exporters experience a falling demand for

their goods whenever their currency grows

stronger relative to the importing country’s

currency.

9(A)-35

The CAGE framework

Cultural

distance

Administrative and

political distance

Geographic

distance

Economic/ wealth

distance

Proposed by Professor Ghemawat


International cross-cultural comparison

Figure 8.5 International cross-cultural comparison Source: M. Javidan, P. Dorman, M. de Luque and R. House, ‘In the eye of the beholder: cross-cultural lessons in leadership from Project GLOBE’, Academy of Management

Perspectives, February 2006, pp. 67–90 (Figure 4: USA vs China, p. 82). (GLOBE stands for ‘Global Leadership and Organizational Behavior Effectiveness’.)


Assessing country markets

Country markets can be assessed according to three criteria:

Market attractiveness to the new entrant

The likelihood and extent of defenders’ reaction

Defenders’ clout – the relative power of defenders to fight back.


International competitor retaliation

Figure 8.6 International competitor retaliation Source: Reprinted by permission of Harvard Business Review. Exhibit adapted from ‘Global gamesmanship’ by I. MacMillan, S. van Putter and R. McGrath, May 2003.

Copyright © 2003 by the Harvard Business School Publishing Corporation. All rights reserved


The staged international expansion model

The staged international expansion model proposes a sequential process whereby companies gradually increase their commitment to newly entered markets, as they build market knowledge and capabilities.

This is challenged by two phenomena:

‘Born-global’ firms - new small firms that internationalise rapidly (usually in new technologies)

Emerging-country multinationals - building unique capabilities in the home market but exploiting them in international markets very quickly.


Modes of entry

Exporting

Joint ventures and alliances

Licensing

Foreign direct investment

9(A)-41 BUSM 3200- Strategic

Management (Jan 2013)

GDS

41

Entry Modes of International Expansion

Modes of international market entry

Figure 8.7 Modes of international market entry


Exporting

Advantages

No need for operational facilities in host country

Economies of scale in the home country

Internet can facilitate exporting marketing opportunities

Disadvantages

Lose any location advantages in the host country

Dependence on export intermediaries

Exposure to trade barriers

Transportation costs

9(A)-44

Joint ventures and alliances

Advantages

Shared investment risk

Complementary resources

Maybe required for market entry

Disadvantages

Difficult to find good partner

Relationship management

Loss of competitive advantage

Difficult to integrate and coordinate

9(A)-45

Licensing

Advantages

Contractual source of income

Limited economic and financial exposure

Disadvantages

Difficult to identify good partner

Loss of competitive advantage

Limited benefits from host nation

9(A)-46

Foreign direct investment

Advantages

Full control

Integration and coordination possible

Rapid market entry through acquisitions

Greenfield investments are possible and may be subsidised

Disadvantages

Substantial investment and commitment

Acquisitions may create integration/ coordination issues

Greenfield investments are time consuming and unpredictable

9(A)-47


How do firms build competitive advantages in global business arena?

Use international

location to lower

cost or differentiate

product

Share resources,

competencies,

and capabilities

Gain cross-border

coordination

benefits

Build Competitive Advantage

in International Markets

9(A)-48


When to Concentrate Activities in a Few Locations

♦ The costs of manufacturing or other activities are

significantly lower in some geographic locations than

in others.

♦ There are significant scale economies in production

or distribution.

♦ There are sizable learning and experience benefits

associated with performing an activity in a single

location.

♦ Certain locations have superior resources, allow

better coordination of related activities, or offer other

valuable advantages.

9(A)-49


When to Disperse Activities across Many Locations

♦ Buyer-related activities can be conducted at a distance.

♦ There are high transportation costs.

♦ There are diseconomies of large size.

♦ Trade barriers make a central location too expensive.

♦ Dispersing activities reduces exchange rate risks.

♦ Dispersion helps prevent supply interruptions.

♦ Dispersion helps avoid adverse political developments.

♦ Dispersion allows for location-based technology and

production cost competitive advantages.

9(A)-50

Internationalization and performance

Inverted U-curve – complexity may erode

the advantages of internationalization

Service sector disadvantages –

internationalization may only work

well for manufacturing firms

Internationalisation and product diversity

9(A)-51

Subsidiary roles in an international portfolio

Figure 8.8 Subsidiary roles in multinational firms Source: Reprinted by premission of Harvard Business School Press. From Managing across Borders: The Transnational Solution by C.A. Bartlett and S. Ghoshal. Boston, MA 1989, pp.

105–11. Copyright © 1989 by the Harvard Business School Publishing Corporation. All rights reserved


Subsidiary roles

Strategic leaders

Hold valuable resources; located in countries that have competitive success

Contributors

Located in countries of lesser strategic significance but hold valuable internal capabilities

Implementers

Not contributing substantially to competitive advantage but help to generate financial resources (‘cash cow’)

Black holes

Located in countries that are crucial for competitive success but lack resources (‘question marks’)


Summary (1)

Internationalisation potential in any particular market is determined by Yip’s four drivers: market, cost, government and competitors’ strategies.

Sources of advantage in international strategy can be drawn from both global sourcing through the international value network and national sources of advantage, as captured in Porter’s Diamond.

There are four main types of international strategy, varying according to extent of coordination and geographical configuration: simple export, complex export, multidomestic and global.


Summary (2)

Market selection for international entry or expansion should be based on attractiveness, multidimensional measures of distance and expectations of competitor retaliation.

Modes of entry into new markets include export, licensing and franchising, joint ventures and overseas subsidiaries.

Internationalisation has an uncertain relationship to financial performance, with an inverted U-curve warning against over-internationalisation.

Subsidiaries in an international firm can be managed by portfolio methods just like businesses in a diversified firm.


PRACTICE ESSAY QUESTIONS

IMPORTANT NOTE: →

These questions are provided for your reference only – they are only INDICATIVE of the standard of questions you might expect in the final exam.

DO NOT use these questions to “spot”

The RMIT examiner will post advice on the exam on the Learning Hub closer to the exam; you are required to pay attention to that advise

The questions here show the range of topics that could be tested from this lecture; they are NOT exhaustive

To score a high grade it is important to LINK the theory to applications and examples. Where from?

You have been assigned specific cases to read from the text. Each case study will show you the kinds of strategic decisions the case company needs to make. You can draw from these examples.

You have selected a case company for your project; you may use examples from there.

You are supposed to read widely from the business press about local, regional and international companies strategies. You can use examples from there as well.

9(A)-56


Sample essay question

What are some of the benefits and risks

associated with a firm implementing an international strategy

If there are drawbacks in a specific international market, explain how these might be identified using Porter's diamond model of national advantage. Give examples to support your answer.



• Discuss the advantages and disadvantages associated with related and unrelated diversification strategy for international expansion. Illustrate your answer with examples from one case studied in this course.

Question is tricky: need to LINK two chapter material, one on diversification (Chapter 7) and one on international strategy (Chapter 8)

Only list the advs and disdvs of diversification from the point of going international


What are four risks associated with international strategy?

Give examples from the XYZ case studied in this course to illustrate how these risks might be managed to improve firm performance.



Discuss the benefits and risks associated with expansion into international markets.

Use specific examples in your answer to illustrate how potential risks might be managed effectively for a firm to gain sustainable competitive advantage.



sm lecture nine (a) - international strategy

Business

importing countrys currency

sample essay question

enter foreign markets

california management review

porters diamond

joint ventures

reducing costs

international markets