Chapter 8Looking at International Strategies

2

OBJECTIVES

Define international strategy and identify its implications for the strategy diamond

1

Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage

2

Describe different vehicles for international expansion

3

Apply different international strategy configurations4

Outline the international strategy implications of the static and dynamic perspectives

5

3

DELL GOES TO CHINA

Dell becameChina’s largest

computer system provider in just

5 years

If we’re not in what will soon be the second-biggest PC market in the world, then how can Dell possibly be a global player?

Strategic decisions

Vehicles

Staging Consumersfirst, then corporations

U.S.

Assemble and distributeitself

Corporationsfirst

China

Partner

4

INTERNATIONAL PRESENCE OF SELECTED MULTINATIONAL CORPORATIONS (MNCs)

1

32

52

59

65

96

37,031

29,378

1,540

8,279

2,165

917

Cell phones

Automobiles

Audioequipment

Computers,electronics

Online auctions

Pizza

Finland

Germany

Japan

U.S.

U.S.

U.S.

Nokia

Audi

Clarion

Apple

eBay

Papa John’s

Sales in domestic

market Percent

Total sales$ Millions Products

DomesticmarketCompany

Sales in

foreign markets

Percent99

68

48

41

35

4

What is international strategy? Planning for future cross-border activities.

International presence varies widely

5

INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND

Economiclogic

Arenas

VehiclesStaging

Differentiators

Arenas

• Which geographic areas will we enter?

• Which channels will we use in those areas?

• Which international market-entry strategies will we use? Alliances? Acquisitions? Greenfield investments?

Vehicles

• How does being international make our products more attractive to our customers?

Differentiators

• How does our international strategy lower our costs, raise the prices we can charge, or create synergies between our business?

Economic logic

• When will we go international?

• How quickly will we expand into international markets?

• In what sequence will we implement our entry tactics?

Staging

6

WHY EXPAND INTERNATIONALLY?

Domestic markets in developed countries have slow growth, while capital markets expect high growthThe pressure for cost reductions and efficiency continues to grow

Necessitates examining cost savings by sourcing across bordersChicken and egg problem

Knowledge is not uniformly distributed around the worldCreates opportunities for knowledge rich countries

Customers are becoming global (both consumers and corporations)Competitors are globalizing

7

PROS VS. CONS OF INTERNATIONAL EXPANSION

• Pepsi’s ambitious expansion in the 1990s resulted in a decreased international market share

• Wal-Mart’s international businesses perform poorly relative to its U.S. business

Many international expansions fail

Newness can be a disadvantage (e.g., your firm must moveup the learning curve)

Foreignness can be a liability (e.g., your managers may notunderstand local culture)

Governance and coordination costs increase as you manage from a distance

Why?

8

KEY FACTORS – GLOBAL ECONOMIES OF SCALE

Key factors

Global economies of scale • Pharmaceutical firms such as Pfizer, can

leverage large R&D budgets

• CitiGroup, McDonald’s, and Coca-Cola can leverage brands

• MITY can leverage its excess capacity to produce chairs and thereby reduce average costs

Global expansion may be attractive if it allows you to leverage fixed assets over new markets

9

KEY FACTORS – LOCATION

Key factors

Global economies of scale

Location • Input costs

• Competitors

• Demand conditions

• Regulatory environment

• Presence of complements

Choosing the right location canprovide advantages in terms of

10

THE CAGE DISTANCE FRAMEWORK

Attributes creating distance

Industries or products affected by distance

Cultural distance Administrative distance Geography distance Economic distance

Different languages

Different ethnicities; lack of connective ethnic or social networks

Different religions

Different social norms

Products have high linguistic content (TV)

Products affect cultural or national identity of consumers (foods)

Product features vary in terms of size (cars), standards (electrical appliances), or packaging

Products carry country-specific quality associations (wines)

Absence of colonial ties

Absence of shared monetary or political association

Political hostility

Government policies

Institutional weakness

Government involvement is highin industries that are• Producers of staple goods

(electricity)• Producers of other

“entitlements” (drugs)• Large employers (framing)• Large suppliers to government

(mass transportation)• National champions

(aerospace)• Vital to national security

(telecom)• Exploiters of natural resources

(oil, mining)• Subject to high sunk costs

(infrastructure)

Physical remoteness

Lack of a common border

Lack of sea or river access

Size of country

Weak transportation or communication links

Differences in climates

Products have a low value-of-weight or bulk ratio (cement)

Products are fragile or perishable (glass, fruit)

Communications and connectivity are important (financial services)

Local supervision and operational requirements are high (many services)

Differences in consumer incomes

Differences in costs andquality of

• Natural resources• Financial resources• Human resources• Infrastructure• Intermediate inputs• Information or knowledge

Nature of demand varies with income level (cars)

Economies of standardization or scale are important (mobile phones)

Labor and other factor cost differences are salient (garments)

Distribution or business systems are different (insurance)

Companies need to be responsive and agile (home appliances )

Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.

11

KEY FACTORS – MULTIPOINT COMPETITION

Key factors

Global economies of scale

Location

Multipoint competition

Expanding into a new market may provide an opportunity for a “stronghold assault”

For example, French tire maker Michelin had negligible presence in the U.S. in the 1970s. It learned of Goodyear’s plans to expand into Europe, so it launched a counter attack. It started selling tires in the U.S. at or below cost, and thereby forced Goodyear to drop prices and cut profits in its core market

12

KEY FACTORS – LEARNING AND KNOWLEDGE SHARING

Key factors Expanding into a new market can create opportunities to innovate, improve existing products in existing markets, or develop ideas for new markets

SC Johnson, for example, used technology developed in its European operation (a product for repelling mosquitoes in homes) to create the “ Glade Plug-ins” air freshener in the U.S.

Global economies of scale

Location

Multipoint competition

Learning and knowledge sharing

13

CHOICE OF ENTRY MODES

Choice of entry mode

Nonequity modes

Equity (FDI) modes

Greenfieldinvestments

Minority JVsDirect exportsLicensing/franchising

Acquisition50/50 JVsIndirect exports Turnkey projects

OthersMajority JVsOthers Contracted R&D

Wholly ownedsubsidiaries

Alliances and joint ventures (JVs)

Exports Contractual agreements

Comarketing Strategic alliances (within dotted areas)Strategic alliances

(within dotted areas)

Source: Adapted from Pan, Y. and D. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, 31 (2000), 535-545

14

VEHICLES FOR ENTERING FOREIGN MARKETS

100% Exports 100% Local

Exports versus local production

Degree of ownership control overactivities per-formed in the foreign market

0%

100%

FDI

Exports

Alliance

Champion International’s paper exports through independent brokers

Honda’s initial entry into the U.S. market

FDI through acquisition

Bridgestone’s acquisition of U.S.-based Firestone

Ford-MazdaGenentech-Hoffman

LaRoche

Alliance and exports

KFC’s franchisees in India

Source: Examples drawn from in Gupta, A., and V. Govindarajan, “Managing Global Expansion: A Conceptual Framework,” businessHorizons, March/April 2002, 45-54

15

EXPORTING OPTIONS

ShippingMost common option in relatively close markets and for productswith lower shipping costs

Licensing and franchising

A firm may form an alliance or franchise giving a local partner the right and responsibility to operate the firm’s business in their home market (e.g., Burger King’s expansion in Europe)

Specialagreements

A firm may enter Turnkey project agreements, R&D contracts, or joint-marketing initiatives (e.g., a German firm Bayer AG contracts large R&D projects to a U.S. firm)

16

ALLIANCES

U.S. firm

Until recently, China did not allow non-Chinese companies in China …

… so U.S. companies formed alliances to gain access

Chinese Firm

17

FOREIGN DIRECT INVESTMENT

• South African Breweries purchase Miller Brewing in 2002 to gain access to U.S. customers and brewing capacity

• DaimlerChrysler and BMW each invested $250 million to start local factories in Brazil

Foreigncompany

Localcompany

Home country/market

Acquires

18

IMPORTING

Importing is often a “stealth” form of internationalization because a firm will claim to have no international operations and yet directly or indirectly base production or service delivery abroad

“Domestic”company

Home country

Country A

Production

Country B

Customerservice

Country C

Logistics

19

HOW WOULD YOU DO THAT? – LAURA ASHLEY

In the early 1990s, U.S. executive Jim Maxmin was brought in as CEO to turn around Laura Ashley.

The company’s distribution system was in shambles and Maxmin needed to fix it

Maxmin realized he needed a partner that satisfies 3 key conditions

1. Complementary needs and competencies

2. Similar management styles and operating systems

3. Divergent strategic objectives

• Why were each of these three conditions important?

• Who did Maxmin choose as a partner?

20

INTERNATIONAL STRATEGY CONFIGURATIONS

Relatively few opportunities to gainglobal efficiencies

Many opportunities togain global efficiencies

Relatively highlocalresponsiveness

Relative lowlocalresponsiveness

Multinational configurationBuild flexibility to respond to national difference through strong, resourceful, entrepreneurial, and somewhat independent national or regional operations. Requires decentralized and relatively self-sufficient units

Example : MTV initially adopted an international configuration (using only American programming in foreign markets) but then changed its strategy to a multinational one. It now tailors its Western European programming to each market, offering eight channels, each in a different language

Transnational configurationDevelop global efficiency, flexibility, and worldwide learning. Requires dispersed, interdependent, and specialized capabilities simultaneously

Example : Nestle has taken steps to move in this direction, starting first with what might be described as a multinational configuration

Today, Nestle aims to evolve from a decentralized, profit-center configuration to one that operates as a single, global company. Firms like Nestle have taken lessons from leading consulting firms such as McKinsey and Company, which are globally dispersed but have a hard-driving, one-firm culture at their core.

International configuration Exploit parent-company knowledge and capabilities through worldwide diffusion, local marketing, and adaptation. The most valuable resources and capabilities are centralized; others, such as local marketing and distribution, are decentralized

Example : When Wal-Mart initially set up its operations in Brazil, it used its U.S. stores as a model for international expansion

Global configurationBuild cost advantages through centralized, global-scale operations . Requires centralized and globally scaled resources and capabilities

Example : Companies such as Merck and Hewlett-Packard give particular subsidiaries a worldwide mandate to leverage and disseminate their unique capabilities and specialized knowledge worldwide

Source: Bartlett, C., S. Ghoshal, & J. Birkenshaw, Transnational Management (New York: Irwin, 2004)

21

BORN – GLOBAL FIRMS

More and more firms, even young, small ones, have operations that bridge national borders

Founded by

• 2 Italians

• 1 Swiss

R&D

• California

• Switzerland

Production

• Ireland

• Taiwan

30% ofglobal PC

mouse busi-ness by

1989

Logitech

22

HOW TO SUCCEED AS A GLOBAL START-UP

If yes, Put together tools you will need to move into global market

Consider if you should be aglobal start-up

• Do you need human resources from other countries to succeed?

Strong management team with inter-national experience

• Do you need financial capital fromother countries to succeed?

Broad and deep international networkamong suppliers, customers,and complements

• If you go global, will target customers prefer your services over competitor's?

Preemptive marketing or technology to provide first-mover advantage

• Can you put an international system in place more quickly than domestic competitors?

Strong intangible assets

• Do you need global scale and scope to justify the financial and human capital investment?

Ability to keep customers locked in by linking new products and services to core business, while you innovate

• Will a purely domestic focus now make it harder for you to go global in the future?

Close worldwide coordination and com-munication among business units, suppliers, complements and customers

23

DEVELOPING A GLOBAL MIND-SET

Having an appreciation for the differences between countries and people and seeing these differences as opportunities

Having developed skills for managing diverse teams in a world-wide work force

Global mindset

Glo

bal

per

spec

tive

Glo

bal

ski

lls

24

HOW WOULD YOU DO THAT?

Fewer than 15% of executives

have substantive international experience

If you were CEO, how would you build a global perspective in your executives?

Tactic Action steps

Teams ?

Training ?

Transfers ?

??? ?

1

2

3

4

25

SUMMARY

Define international strategy and identify its implications for the strategy diamond

1

Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage

2

Describe different vehicles for international expansion

3

Apply different international strategy configurations4

Outline the international strategy implications of the static and dynamic perspectives

5