Competing for ADVANTAGE

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Chapter 10International Strategy

PART IIICREATING COMPETITIVE ADVANTAGE

The Strategic Management Process

International Strategy

Key Terms

International diversification

Strategy through which a firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets

International Strategy

International Strategy

Key Terms

International strategy

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

Incentives for Using an International Strategy

Increased market size Greater returns on major capital

investments or on investments in new products and processes

Greater economies of scale, scope, or learning

Potential for competitive advantage(s) based on location

Market Size

Limited domestic economies or growth opportunities

Both opportunities and challenges in emerging markets

Impact of local cultures and customs

Impact of international market size

Extended product life cycle

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.

Economies of Scale, Scope, and Learning

Expand size or scope of markets to achieve economies of scale

Spread costs over a larger sales base

Increase profit per unit

Location Advantages

Competitive advantages are available in low cost markets

Access to critical resources: Raw materials Low-cost factors of production Low-cost labor Key customers Energy Other natural resources

Expanding Internationally

Type of expansion approach How to use distinctive

competencies to create advantages

Mode of entry into new markets

International Corporate-Level Strategies

Key Terms International corporate-level

strategyStrategy which focuses on the scope of a firm’s operations through both product and geographic diversification

International Scope

Worldwide Presence

or

Regionalization

Regionalization

Trade agreements and institutions Ability to understand the cultures,

legal and social norms, and other factors that are important for effective competition in specific markets

Sequential market entry

Liability of Foreignness

Liabilities associated with being a foreign business in a highly different business environment can make competing on a worldwide scale risky and expensive.

Employment contracts and labor forces differ.

Host governments make different demands and requirements to compete in their markets.

Understanding customers may be difficult.

International Corporate-Level Strategies

Multidomestic Strategy

Key Terms

Multidomestic strategy

International strategy in which strategic and operating decisions are decentralized to the strategic business unit in each country to allow that unit to tailor products to the local market

Worldwide geographic area structure

Organizational structure which emphasizes national interests and facilitates the firms' efforts to satisfy local or cultural differences (used to implement the multidomestic strategy)

Maximizing Local Responsiveness

Focus on variations of competition within each country

Customize products to meet specific needs and preferences of local customers

Decentralize decisions to business units in each country

Compete in industry segments most affected by differences among local countries

Effects of a Multidomestic Strategy

Expands the firm’s local market share Maximizes competitive responsiveness

to local conditions Establishes protected market positions Isolates the firm from global

competitive forces Lowers efficiency levels Increases uncertainty

Worldwide Geographic Area Structure

Global Strategy Key Terms

Global strategy

International strategy through which the firm offers standardized products across country markets, with the competitive strategy being dictated by the home office

Worldwide product divisional structure

Organizational structure in which decision-making authority is centralized in the worldwide division headquarters to coordinate and integrate decisions and actions among divisional business units (used to implement the global strategy)

Maximizing Global Integration

Integrate interdependent strategic business units operating in each country

Emphasize economies of scale

Share resources across country boundaries

Centralize decisions at the home office

Utilize innovations developed at the corporate level or in one country in other markets

Effects of a Global Strategy

Maximizes integration across business units

Produces standardization

Lowers risk

Fosters a shared vision of the firm’s strategy

Lowers responsiveness to local needs and preferences

Permits missed opportunities in local markets

Reduces effectiveness of learning processes

Adds management complexity

Worldwide Product Divisional Structure

Transnational Strategy Key Terms

Transnational strategy

International strategy through which the firm seeks to achieve both global efficiency and local responsiveness

Flexible coordination

Building a shared vision and individual commitment through an integrated network

Worldwide combination structure

Organizational structure in which characteristics and mechanisms are drawn from both the worldwide geographic area structure and the worldwide product divisional structure (used to implement the transnational strategy)

Worldwide Combination Structure

Assets and operations may be centralized/decentralized

Functions may be integrated/nonintegrated

Relationships may be formal/informal Coordination mechanisms may

leverage efficiency/flexibility Mandates to subsidiaries may be

global/specialized-contribution/localized-implementation

Role of Subsidiaries

Global Mandate

Specialized Contribution

Local Implementation

Requirements of a Combination Structure Strong educational component to

support the culture Adaptation of core competencies in

local economies to gain competitive benefits

Effective corporate headquarters to foster leadership, shared vision, and strong corporate identity

Centers of excellence to foster multiple and dispersed capabilities

Developments for Multinational Firms

Emphasis on global efficiency is increasing as more industries begin to experience global competition

Emphasis on local requirements is also increasing

Multinational firms desire coordination and sharing of resources across country markets to hold down costs

Some products and industries are more suited than others for standardization across country borders

International Business-Level Strategy

Global Corporate-Level

Strategy

Multidomestic Corporate-Level

StrategySubsidiaries play the role of local implementer

Subsidiaries have more control over approaches used in their own domestic markets

Usually associated with a cost leadership strategy

Generic strategy depends on local conditions and capabilities

Determinants of National Advantage

Modes of Entry and Their Characteristics

Exporting

Low cost way to establish operations in host country

Often through contractual agreements

High transportation costs Potential for tariffs Low control over marketing and

distribution

Licensing

Low cost way to expand internationally

Risks absorbed by licensee Low control over manufacturing and

marketing Lower potential returns (shared with

licensee) Risk of imitation by licensee Ownership arrangements often

inflexible

Strategic Alliances

Fewer entry resources and costs required

Shared risks and resources Potential core competency

development Possible partner incompatibility,

conflict, or lack of trust Management difficulties

Acquisitions

Quick access to market Costly Possible integration difficulties Complex negotiations and

transaction requirements

New Wholly Owned Subsidiary

Costly mode of entry High process complexity Maximum control Highest potential returns High risk

Mode of Entry Dynamics

Strategy Use

Early stages of international expansion

ExportLicensing

Facing uncertainty Strategic Alliances

To secure a stronger presence

AcquisitionsGreenfield Ventures

Later stages of international expansion

AcquisitionsGreenfield Ventures

Valuable, transferrable core competencies are present

AcquisitionsGreenfield Ventures

Emerging economies Large Diversified BusinessesKorean Chaebols

Strategic Outcomes

International Diversification and Returns

International Diversification and Innovation

International Diversification and Risk

International Diversification and Returns

Economies of scale and experience Location advantages Greater market size Stability of returns Lower overall firm risk Exploitation of core competencies Knowledge resource sharing Global scanning for opportunities Structural flexibility

International Diversification and Innovation

Access to larger and more markets Lower R&D investment risk Exposure to new products and

processes Opportunity to integrate new

knowledge into operations Generation of resources to sustain

innovation efforts

Risks in an International Environment

Political risks

Economic risks

Other formal institutional risks

Political Risks

Government instability

Conflict/war

Government regulations

Conflicting and diverse legal authorities

Potential nationalization of private assets

Government corruption*

Changes in national leadership

Changes in government policies

Economic Risks

Differences and fluctuations in currency values

Investment losses due to political risks

Potential infrastructure or financial system damage from major disasters

Complexity of Managing Multinational Firms

Geographic dispersion

Costs of coordination

Logistical costs

Trade barriers

Cultural diversity

Barriers to competitive advantage transfer

Host governments

ETHICAL QUESTION

As firms internationalize, they may be tempted to locate facilities where

product liability laws are lax in testing new products. Is this an acceptable

practice? Why or why not?

ETHICAL QUESTION

Regulation and laws regarding the sale and distribution of tobacco products are stringent in the U.S. market. What are

the ethical implications of U.S. firms pursuing marketing strategies for

tobacco products in other countries that would be illegal in the United States?

ETHICAL QUESTION

Some companies outsource production to firms in foreign countries to save

money. To what extent is a company morally responsible for the way workers

are treated by the firms in those countries to which they outsource

production?

ETHICAL QUESTION

Global and multidomestic strategies call for different competitive approaches. What ethical concerns might surface

when firms try to market standardized products globally? When should firms

develop different products or approaches for each local market?

ETHICAL QUESTION

Are companies morally responsible to support the U.S. government as it imposes trade sanctions on other

countries, such as China, because of human rights violations? What if a

significant amount of its international business is in one of those countries?

ETHICAL QUESTION

Latin America has been experiencing significant changes in both political

orientation and economic development. What strategies should foreign

international businesses implement, if any, to influence government policy in

these countries? Can businesses realistically expect to influence political

changes?