Chapter 11 - International Strategies

Internationalization

• Reasons for Expanding Internationally:

  • Market Seeking

  • Efficiency Seeking

  • Natural Resource Seeking

  • Strategic Asset Seeking

• The motive for internationalization influences the location advantages desired by the firm.

Location Advantages

• Definition: Entire set of strengths afforded by a location accessible to firms.

• Assessment: Must be relative to other locations' strengths to develop competitive advantages.

• Key Point: International success hinges on combining firm capabilities/resources with location advantages of host countries.

Competitive Advantage in an International Context

Firm Resources

• Categories of Resources:

  • Financial Resources

  • Physical Resources

  • Technology

  • Reputation

  • Functional Capabilities

  • General Management Capabilities

The Industry Environment

• Key Success Factors:

  • Conditions of the national environment including:

    • National resources and capabilities (raw materials, culture, human resources, transport, communication, legal infrastructure)

    • Domestic market conditions

    • Government policies

    • Exchange rates

    • Related and supporting industries

Demand Conditions

• Factors Affecting Demand:

  • Home-market size and buyer needs.

  • Proximity of suppliers, end users, and supporting industries.

Firm Strategy, Structure, and Rivalry

• Consideration of management styles and extent of local rivalry.

Factor Conditions

• Evaluation of input availability, quality, and costs (labor, materials).

Porter’s Diamond Framework

• A model analyzing the competitive advantage of nations based on:

  • Demand Conditions

  • Factor Conditions

  • Related/Supplying Industries

  • Firm Strategy, Structure, and Rivalry

The Role of Government

• Interplay between government initiatives and firm strategies in various regions (example: Cleveland, Ohio, Houston, Texas).

Cross-Border Activities Risks

• International activities involve distinct challenges compared to domestic operations.

• Firms must identify the types of risks and how to manage them.

The Concept of Distance

Key Perspectives

• Theodore Levitt, 1983: Global markets becoming homogenized.

• Pankaj Ghemawat, 2001: Businesses often misestimate foreign market attractiveness due to various distances.

CAGE Framework - Four Dimensions of Distance:

• Cultural: Language, religion, social norms differences.

• Administrative: Institutional and political differences.

• Geographic: Physical distance and associated transport/communication ease.

• Economic: Variations in consumer wealth, income distribution, business practices.

Ghemawat’s CAGE Framework: Assessing Country Differences

• Assessing cultural, administrative, geographic, and economic distances informs country selection.

Industries Most Affected by Distance

• Cultural industries (TV, publishing, food).

• Governmentally prioritized sectors (energy, defense).

• Low value-to-weight and fragile goods (cement, glass, perishables).

Determining Optimal Location of Value Chain Activities

• Considerations in choosing location:

  • Cost and availability of input

  • Government incentives

  • Firm’s resources and capabilities

  • Business strategy alignment

  • Coordination benefits from proximity.

How to Enter a Foreign Market

• Methods of Entry: Exporting, Licensing, Franchising, Wholly-owned subsidiaries, Greenfield investments, Acquisitions, Alliances (Equity and Non-equity).

Alternative Modes of Overseas Market Entry

• Evaluation of:

  • Transactions: Direct investment, exporting, licensing, joint ventures, subsidiaries.

  • Profiles: Each mode involves varying levels of resource commitment and risk.

Choosing Modes of Overseas Market Entry: Key Questions

1. Firm advantage based on firm-specific or country-specific resources?

2. Is the product tradable and what trade barriers exist?

3. Does the firm have necessary resources for competitive advantage abroad?

4. Can the firm secure returns from its resources?

5. What transaction costs are involved?

Exporting

• Characteristics of Exporting:

  • Using domestic facilities for international sales.

  • Advantages:

    • Low capital requirements

    • Economies of scale

    • No distribution or investment risks

  • Disadvantages:

    • Cost maintenance of production

    • Shipping costs

    • Exchange rate risks

    • Loss of control over distribution.

Licensing and Franchising

• Distinction: Licensing grants rights; Franchising includes operational guidelines.

• Advantages:

  • Low resource needs

  • Revenue from royalties

  • Fast market expansion

• Disadvantages:

  • Control over proprietary knowledge

  • Risk of dissatisfaction in operational quality.

Wholly Owned Subsidiary

• Involves foreign direct investment via Greenfield or Acquisition strategies.

• Comparison of advantages/disadvantages of each method.

Greenfield Strategies

• Advantages:

  • High control

  • Personalized adaptation to local context

• Disadvantages:

  • High initial capital requirements

  • Politically unstable environments risk.

Acquisition

• Advantages:

  • Rapid market entry

  • Access to established skills and resources

• Disadvantages:

  • High acquisition costs

  • Integration complexities.

International Alliances and Joint Ventures

• Definition: Collaborative arrangements between firms, involving international partnerships to leverage local market knowledge and resources.

Benefits of Alliance and Joint Venture Strategies

• Access to local market knowledge, economies of scale, technical expertise, distribution sharing, and competitive focus.

Risks of Strategic Alliances with Foreign Partners

• Potential issues include outdated local knowledge, cultural barriers, conflicting objectives, and legal risks concerning proprietary technology.