International Strategy

What is international strategy?

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

What are the reasons for international expansion?

•International markets yield potential new opportunities.

•New market expansion extends product life cycle.

•Needed resources can be secured.

•Greater potential product demand.

What is the process of diversification as a means to extend a product's lifecycle?

1. Introduction - Firm introduces innovation in domestic market

2. Growth: Product demand develops, exports begin

3. Maturity: Only cost leaders win, exports become important source of revenue

4. Standardized Product: Demand in original country wanes, production facilities relocated to counter price competition and to meet local demand

What are the major facilitators of international expansion?

•Technology

•Mobility

•Increased demand homogeneity worldwide

•Comfort with (embrace of) diversity

•Global industrialization

•Capitalism

•Falling trade barriers

What are incentives for international strategy?

•Extend a product's life cycle

•Gain easier access to raw materials

•Opportunities to integrate operations on a global scale

•Opportunities to better use rapidly developing technologies

•Gain access to consumers in emerging markets

What are the basic benefits of international strategy?

•Increased market size

•Economies of scale and learning

•Location advantages

Why is increased market size a benefit of international strategy?

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

•Generally, larger international markets (as opposed to small international markets) offer higher potential returns and pose less risk for firms

•The strength of international markets may facilitate efforts to more effectively sell and/or produce products that create value for customers

larger international markets (as opposed to small international markets) offer _____

higher potential returns and pose less risk for firms

The strength of international markets may facilitate efforts to more effectively sell and/or produce products that ____

create value for customers

Why is economies of scale and learning a benefit of international strategy?

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

•Costs are spread over a larger sales base, profit per unit is increased

•Firms may also be able to exploit core competencies in international markets through resource and knowledge sharing between units and network partners across country borders

•By sharing resources and knowledge in this manner, firms may be able to create synergies, which in turn can help each firm (or units within a firm) learn how to produce higher-quality products at a lower cost

•However, to take advantage of international R&D investments, firms need to already have a strong system in place to absorb resulting R&D knowledge

How can firms exploit core competencies in international markets ?

through resource and knowledge sharing between units and network partners across country borders

By sharing resources and knowledge in this manner, firms are able to do what?

they may be able to create synergies, which in turn can help each firm (or units within a firm) learn how to produce higher-quality products at a lower cost

In order to take advantage of international R&D investments, firms need to do what?

they need to already have a strong system in place to absorb resulting R&D knowledge

Why are location advantages a benefit of international strategy?

•Certain markets may offer superior access to critical resources, e.g., raw materials, lower-cost labor, energy, suppliers, key customers

•Cultural influences may be advantageous—a strong cultural match facilitates international business transactions

•Physical distances influence firms' location choices, i.e., transportation costs

What are the Determinants of National Advantage in Porter's Model?

factors of production

demand conditions

firm strategy, structure, and rivalry

related and supporting industries

When discussing Factors of Production (in Porters Model), what are the inputs necessary to compete in any industry?

•Labor

•Land

•Natural resources

•Capital

•Infrastructure

When discussing Factors of Production (in Porters Model), what are the basic factors?

Natural and labor resources

When discussing Factors of Production (in Porters Model), what are the advanced factors?

Digital communication systems and an educated workforce

When discussing Demand Conditions (in Porters Model), how are firms categorized?

they are characterized by the nature and size of buyers' needs in the home market for the industry's goods or services

When discussing Demand Conditions (in Porters Model), what are the 3 things to consider?

•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

When discussing Related and Supporting Industries (in Porters Model), what are some examples?

•Support in design

•Support in distribution

•Related industries as suppliers and buyers

When discussing Firm Strategy, Structure and Rivalry (in Porters Model), what does this mean ?

The pattern of strategy, structure, and rivalry among firms

When discussing Firm Strategy, Structure and Rivalry (in Porters Model), what are some examples ?

•Common technical training

•Methodological product and process improvement

•Cooperative and competitive systems

When selecting an international corporate level strategy, what 3 things should we look at?

- Focuses on the scope of operations: either product diversification or

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

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

What are the characteristics of global strategy?

•Products are standardized across national markets

•Decisions regarding strategies, marketing, and operations are centralized in the home office

•Business units are assumed to be interdependent

•Emphasizes economies of scale

•Often lacks responsiveness to local markets

•Requires resource sharing and coordination across borders (can be complex and difficult to manage)

What are examples of global strategy?

iphone, coca cola, mcdonald's

What are the characteristics of Multidomestic strategy?

•Strategy, marketing, and operating decisions are decentralized to business units in each country (or region)

•Products and services are tailored to local markets

•Business units in one country are independent of units elsewhere

•Assumes that markets differ by country or region

•Focus on competition in each market

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

•Also important for products where national culture strongly influences purchasing/usage habits

What are examples of multidomestic strategy?

food industry (customizing labels and food sourcing), entertainment industry, IKEA

What are the characteristics of 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

•Organizational learning, organizational information processing, and flexible manufacturing skills important

What are the two environmental trends?

liability of foreignness

regionalization

Liability of Foreignness -

costs associated with entering foreign markets

What are some things that fall under liability of foreignness (when talking about environmental trends)?

•Legitimate concerns about the relative attractiveness of global strategies

•Global strategies not as prevalent as once thought

•Difficulty in implementing global strategies

What are the four types of distances in liability of foreignness (when talking about environmental trends)?

•Cultural differences

•Administrative (unfamiliar operating environments)

•Geographic (challenges of coordination over distances)

•Economic

Regionalization -

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

What are some things that fall under regionalization (when talking about environmental trends)?

•Global strategies not as prevalent today; difficult to implement even with Internet-based strategies

•Regional focus allows firms to marshal resources to compete effectively in regional markets

•Increases understanding of market: cultures, legal and social norms

•Achieve some economies through coordination and sharing of resources

•Trade agreements (e.g., EU, OAS, NAFTA) promote trade flows across country boundaries with their respective regions

•Most firms enter regional markets sequentially, beginning in more familiar markets, introducing their largest and strongest lines of business first

What are the different types of mode of entry?

exporting

licensing

strategic alliances

acquisitions

new wholly owned subsidiary

Exporting -

the firm sends products it produces in its domestic market to international markets

Exporting involves all of the following (when talking about Mode of entry)?

•Involves low expense to establish operations in host country

•Often involves contractual agreements

•Involves high transportation costs

•Tariffs maybe imposed

•Low control over marketing and distribution

Licensing -

an agreement that allows a foreign company to purchase the right to manufacture and sell a firm's products within a host country's market or set of markets

Licensing involves all of the following (when talking about Mode of entry)?

•Involves low cost to expand internationally

•Allows licensee to absorb risks

•Has low control over manufacturing and marketing

•Offers lower potential returns (shared with licensee)

•Involves risk of licensee imitating technology and product for own use

•May have inflexible ownership arrangement

Strategic alliance -

collaboration with a partner firm for international market entry

Strategic alliances involves all of the following (when talking about Mode of entry)?

•Involves shared risks and resources

•Facilitates development of core competencies

•Involves fewer resources and costs required for entry

•May involve possible incompatibility, conflict, or lack of trust with partner

•Is difficult to manage

Acquisitions (Cross-border acquisition) -

a firm from one country acquires a stake in or purchases 100% of a firm located in another country

Acquisitions involves all of the following (when talking about Mode of entry)?

•Allows for quick access to market

•Involves possible integration difficulties

•Is costly (debt financing)

•Has complex negotiations and transaction requirements

What is another name for acquisitions?

can be called Brown Field as opposed to Green Field.

ex: Daimler ---> Chrysler

Green field venture (investment) -

a firm establishes a new wholly owned subsidiary in another country/market by building its operations in the foreign country from the ground up

New Wholly Owned Subsidiary (or green field venture) involves all of the following (when talking about Mode of entry)?

•Is costly

•Involves complex processes

•Allows for maximum control

•Has the highest potential returns

•Carries high risk

The best mode of entry depends on the particular situation

true

When is exporting, licensing, and strategic alliance used?

good tactics for early market development

When should you use strategic alliance?

it is used in more uncertain situations

When would it be best to use a Wholly owned subsidiary?

may be preferred if:

•Intellectual Property (IP) rights in emerging economy are not well protected

•Number of firms in industry is accelerating

•Need for global integration is high

When would you use acquisitions or green field ventures?

when you want to secure a stronger presence in international markets

Which is more common: greenfield or brownfield investments?

Most cross-border investment is in the form of mergers and acquisitions (brownfield investment) rather than greenfield investments

What percentage of all FDI inflows per annum from 1998 to 2013 were in the form of mergers and acquisitions?

Between 40-80%

Why would a firm choose acquisitions over greenfield investment?

•May be faster, easier, and less risky for a firm to acquire desired assets than build them from the ground up

•Firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills

What percentage of cross-border M&As are acquisitions?

Over 95%

When is greenfield the exception to acquisitions?

in developing countries two-thirds of FDI is greenfield investment since there are fewer target companies

Match to the following mode of entry:

High cost, low control

Exporting

Match to the following mode of entry:

Low cost, low risk, little control, low returns

Licensing

Match to the following mode of entry:

Shared costs, shared resources, shared risks, problem of integration (e.g. two corporate cultures)

Strategic alliances

Match to the following mode of entry:

Quick access to new markets, high costs, complex negotiations, problems of merging with domestic operations

Acquisitions

Match to the following mode of entry:

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

New wholly owned subsidiary

What are the two types of risks of international environment?

political risks

economic risks

Political risks include what?

•Instability in national governments

•War, both civil and international

•Government regulations

•Conflicting and diverse legal authorities

•Potential nationalization of a firm's private assets

•Government corruption

•Changes in government policies

What should happen prior to implementing any of the five modes of international entry?

political risk analysis should be conducted, where the firm examines potential sources and factors of noncommercial disruptions of their foreign investments and the operations.

Economic risks -

fundamental weaknesses in a country or region's economy with the potential to adversely impact the successful implementation of a firm's international strategies

Economic risks include what?

•Differences and fluctuations in the value of different currencies

•Differences in prevailing wage rates

•Difficulties in enforcing property rights

•Unemployment

•Interdependent with political risks (e.g. Government oversight and control of economic/financial capital)

As international diversification increases, what happens to a firms' returns ?

they initially decrease, but then increase quickly as the firm learns to manage international expansion.

Firms that are broadly diversified into multiple international markets usually achieve what?

the most positive stock returns, especially when they diversify geographically into core business areas.

What are the limits to international expansion?

management problems

What are examples of management problems (when talking about limits to international expansion)?

•Cost of coordination across diverse geographical business units

•Institutional and cultural barriers

•Understanding strategic intent of competitors

•The overall complexity of competition and the business environment

•Shortage of internationally equipped leadership

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

Mode: Exporting

Why: Exporting allows a firm to manufacture products in its home country (avoiding the need for foreign manufacturing expertise) and focus its limited international investment specifically on distribution channels.

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

Mode: Strategic Alliances

Why: By sharing resources and research with a partner, a firm can more easily adapt its products to meet local standards or preferences.

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

Mode: Strategic Alliances

Why: This mode is designed for "sharing resources" and leveraging a partner's established knowledge of the local corporate culture and consumer base.

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

Mode: Strategic Alliances

Why: One of the core characteristics of an alliance is "shared costs" and "shared risks," making it ideal for expensive or uncertain ventures.

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

Mode: Licensing (or sometimes Exporting)

Why: Licensing is characterized by "low risk" and "low cost". If an economy is unstable, licensing allows the firm to gain some returns without sinking significant capital into a risky environment.

Situation: The firm must act quickly to gain rapid access to this new market, where corruption is not an issue

Mode: Acquisitions

Why: Acquisitions provide "quick access to new markets". The mention of "no corruption" is key because it reduces the "complex negotiations" and due-diligence risks often associated with buying a foreign company.

Situation: 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.

Mode: New Wholly Owned Subsidiary

Why: When intellectual property is at risk, you want "maximum control". This mode allows the firm to keep its secrets in-house rather than sharing them with a licensee or partner who might become a competitor.