Chapter 7- International Strategy: Creating Value in Global Markets

The global marketplace provides many opportunities for firms to increase their ___________ and their ____________

Revenue base and profitability

What is globalization?

The rise of market capitalization around the world

creates business opportunities for multinational corporations

what is the challenge of globalization?

Balancing emerging markets and developed markets

What does the diamond of national advantage explain?

why some nations and their industries outperform others.

What are the components of Michael Porter's Diamond of National Advantage?

1. Factor Endowments

2. Demand Conditions

3. Related and Supporting Industries

4. Firm Strategy, Structure, and Rivalry

What are Factor Endowments?

The nation's position in factors of production (land, labour, capital) necessary to compete in a given industry

eg. Japan's 'just in time' inventory management due to little land availability

Factors of production must be ___________

-industry & firm specific

-Must be rare, valuable, difficult to imitate, and rapidly & efficiently deployed

what are demand conditions?

demand conditions refer to the demands that consumers plakce on an industry

eg. denmark demands enviornmentally friendly products/services

Demanding consumers drive firms in that country to:

-Meet high standards.

-Upgrade existing products and services.

-Create innovative products and services.

-Better anticipate future global demand.

-Proactively respond to product and service requirements.

what are related and supporting industries?

The presence or absence in the nation of supplier industries and other related industries that are internationally competitive

Related and supporting industries enable firms to manage inputs more effectively via:

- A competetive supplier base (reduces manufacturing costs)

- Close working relationships with suppliers (allows for joint R&D)

- Development of related industries (forces existing firms to practice cost control, innovation, and better distribution models)

how do firm strategy, structure, and rivalry affect competetiveness?

Rivalry is particularly intense in nations with conditions of:

1. Strong consumer demand

2. Strong supplier base

3. High new entrant potential from related industries

intense domestic competition is a strong indicator of ___________

global competetive success.

All of the factors below have made India's software services industry extremely competitive on a global scale except:

A. a large pool of skilled workers.

B. a large network of public and private educational institutions.

C. tax and antitrust legislation that protect the dominant players in the industry.

D. a large, growing market, and sophisticated customers.

C. tax and antitrust legislation that protect the dominant players in the industry.

- this would actually reduce competition.

A company decides to become a multinational firm in order to:

- Increase the size of potential markets (Attain economies of scale)

- take advantage of arbitrage opportunities (Applied to every stage of the value chain)

- Enhance a product's growth potential (reinvigorate the product life cycle)

- optimize the location of value chain activity (to enhance performance, reduce risk, reduce cost)

- take advantage of learning opportunities

- Explore reverse innovation

what are arbitrage opportunities?

buying something where it is cheap and elling it where it commands a higher price

what is reverse innovation?

when companies initially develop products for niche or underdeveloped markets, and then expand them into their original or home markets

eg. India's hub and spoke system

what are the risks multinational firms encounter?

1. currency risk

2. management risk

3. political risk

4. economic risk

what is currency risk?

the risk that the local currency exchange rate will fluctuate (affecting cost of production or net profit)

what is management risk?

risk that is due to culture, customs, language, income level, customer preferences, and/or distribution systems

could lead to the need for local adaptation of apparently standard products

what is political risk?

risk that is due to social unrest, military turmoil, terrorism, demonstrations, absence of the rule of law

what can political risk lead to?

- destruction of property

-disruption of operations

- non-payment for goods and services

- arbitrary government decisions

what is economic risk?

risk due to piracy and counterfeiting

Managing economic risk can be done through ___________

global dispersion of value chains

Various activities of the firm's value chain can be spread across several countries and continents via:

1. outsourcing

2. offshoring

what is outsourcing?

Firm decides to use other firms to perform value-creating activities that were previously performed in-house

what is offshoring

Firm decides to shift an activity that it was performing in a domestic location to a foreign location

what are the common savings from offshoring?

Lower wages, benefits, energy costs, regulatory costs, taxes.

what are the hidden costs from offshoring

Higher total wage and indirect costs, wage inflation.

Increased inventory due to longer lead time.

Reduced market responsiveness.

Increased coordination costs.

Cost of protecting intellectual property.

Disruption of global supply chains.

Levitt suggested strategies that favor global products and brands should do the following:

Standardize all products for all markets.

Reduce overall costs by spreading investments over a larger market.

levitt's suggestions assume:

Customers have homogenous needs and interests.

People prefer lower prices at high quality.

Global markets produce economies of scale.

why might these assumptions be incorrect?

one size fits all does not generally apply

- Product markets DO vary widely between nations

-There is a growing interest in multiple product features, product quality, and service.

-Technology permits flexible production; cost of production may not be critical to product cost; a firm's strategy should not be solely product driven

what is the opposing pressures chart?

what is an international strategy

a strategy which requires diffusion and adaptation of the parent company's knowledge and expertise to foreign markets

primary goal is worldwide explotation of the parent firm's knowledge and capabilities

in an international strategy, pressure for local adaptation is ___________ and pressure for low costs is _____________

low and low

what are the strengths of international strategy

- Leverage and diffusion of a parent firms knowledge and core competencies

- lower costs becasue of less need to tailor products and services

what are the limitations of international strategy

- Limited ability to adapt to local markets

- inability to take advantage of new ideas and innovations occuring in local markets

what is a global strategy

one which implies a firm is interested in lowering costs

- competetive strategy is centralized and controlled by the corporate office

- products are standardized, operations centralized, producing economies of scale

- worldwide volume supports research and development

- there's a standard level of quality worldwide

in an global strategy, pressure for local adaptation is ___________ and pressure for low costs is _____________

low and high

what are the strengths of the global strategy

strong integration across various businesses;

standardization leads to higher economies of scale, which lowers costs;

helps create uniform standards of quality throughout the world

what are the limitations of the global strategy

limited ability to adapt to local markets,

concentration of activities may increase dependence on single facility,

single locations may lead to higher tariffs and transportation costs

what is a multidomestic strategy

a strategy that puts emphasis on differentiating products and services to adapt to local markets

- decisions are decentralized

- products and services are tailored to local use (consider language, culture, customer preference, etc)

- markets can expand rapidly

- prices are differenciated by market

in a multidomestic strategy, pressure for local adaptation is ___________ and pressure for low costs is _____________

high

Low

what are the strengths of the multidomestic strategy

- ability to adapt products and services to local market conditions

- ability to detect potential opportunities for attractive niches in a given market

what are the limitations of the multidomestic strategy?

-decreased ability to realize cost savings through scale economies

- greater difficulty in transferring knoweldge across countries. Possibility of leading to 'over adaptation' as conditions change

what is a transnational strategy

one which seeks global competetiveness via trade offs

- efficiency versus local adaptation versus organizational learning

- assets and capabilities are disbursed according to the most beneficial location for a specific activity; some value chain activities centralized, some decentralized.

Central philosophy: enhanced adaptation to all competitive situations as well as flexibility by capitalizing on communication and knowledge flows throughout the organization

in a transnational strategy, pressure for local adaptation is ___________ and pressure for low costs is _____________

high and high

what are the strenghts of the transnational strategy

- Ability to attain economies of scale

- Ability to adapt to local markets

- Ability to locate activities in optimal locations

- Ability to increase knowledge flows and learning

what are the limitations of the transnational strategy?

- unique challenges in determining optimal locations of activities to ensure cost and quality

- unique managerial chalenges in fostering knowledge transfer.

In order to realize the strongest competitive advantage, firms engaged in worldwide competition must:

A. require that all of their various business units follow the same strategy regardless of location.

B. ensure that all business units follow a strategy strictly tailored to their respective locations.

C. pursue a strategy that combines the uniformity of a global strategy and the specificity of a multidomestic strategy in order to achieve optimal results.

D. attempt to use the strategy that was most successful in their home country.

C. pursue a strategy that combines the uniformity of a global strategy and the specificity of a multidomestic strategy in order to achieve optimal results.

what is regionalization

Regionalization in international strategy means that a company focuses on growing its business in specific parts of the world (like Asia, Europe, or North America). It does this to take advantage of similarities in culture, economy, and customer needs within each region.

- distance still matters

-commonalities of language, culture, economics, etc all make a difference

-trading blocs and free trade zones ease trade restrictions

A domestic corporation considering expanding into international markets for the first time will typically:

A. start off by implementing a wholly owned foreign subsidiary so it can maintain standards identical to those at home.

B. consider licensing or franchising its operations.

C. consider implementing a low risk/low control strategy such as exporting.

D. form a joint venture with a reputable foreign producer.

C. consider implementing a low risk/low control strategy such as exporting.

what are the options for international market expansion?

1. exporting

2. licensing or franchising

3. strategic alliance or joint venture

4. wholly owned subsidiary

what is exporting

the sale of goods and services to foreign markets

Low risk, locals know more; but products may not meet local needs.

what is licensing?

Form of contractual arrangement, enables company to receive a royalty or fee in exchange for the right to use its trademark or other valuable item of intellectual property

Limits risk; but licensor gives up control and profit. (brand name could also be tarnished)

what is franchising?

Right to use a company name of business process in a specific way.

Limits risk; but licensor gives up control and profit.

what is strategic alliance

partnership where there is no creation of a third-party legal entity but generally focuses on initiatives that are smaller in scope than joint ventures.

Shares risk; but trust and culture issues can lead to conflict.

what is joint venture

partnership where there is a creation of a third-party legal entity.

Shares risk; but trust and culture issues can lead to conflict.

what is a wholly owned subsidiary

Business in which a multinational company owns 100% of the stock by either:

1. Acquiring an existing company in the home country

2. Developing a totally new operation (greenfield venture)

Greatest control, highest returns; but expensive, greater potential for mis-steps.

entry modes chart