Silvia Regina

29113323 / YP 50 B
International Strategy

This chapter focuses on the incentives to internationalize. After a firm decides to

compete internationally, it must select its strategy and choose a mode of entry into
international markets. The relationships among international opportunities, the resources
and capabilities that result from such strategies and the modes of entry that are based on
core competencies are explored in this chapter. An international strategy is a strategy
through which the firm sells its goods or services outside its domestic market. One of the
primary reasons for implementing an international strategy is that international markets
yield potential new opportunities. The figure below provides an overview of the various
choices and outcomes of strategic competitiveness in international strategy.

When these strategies are successful, firms can derive four basic benefits:
Increased Market Size

4
benefits
of
international
strategy

By moving into international markets, firms seeking to manage different consumer tastes and practices linked to cultural values or
traditions are not simple, following an international strategy is a particularly attractive option to firms competing in domestic markets
that have limited growth opportunities. The size of an international market also affects a firms willingness to invest in R&D to build
competitive advantages in that market. Most firms prefer to invest more heavily in those countries with the scientific knowledge and
talent to produce value-creating products and processes from their R&D activities.

Return on Investment
The primary reason for investing in international markets is to generate above-average returns on investments. Large markets may be
crucial for earning a return on significant investments, such as plant and capital equipment or R&D. The larger markets provided by
international expansion are particularly attractive in many industries, because they expand the opportunity for the firm to recoup
significant capital investments and large scale R&D expenditures.

Economies of Scale & Learning

By expanding their markets, firms may be able to enjoy economies of scale, particularly in their manufacturing operations. To the
extent that a firm can standardize its products across country borders and use the same or similar production facilities, thereby
coordinating critical resource functions. 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. This sharing generates synergy, which helps the
firm produce higher-quality goods or services at lower cost.

Location Advantages
Firms may locate facilities in other countries to lower the basic costs of the goods or services they provide. These facilities may provide
easier access to lower-cost labor, energy, and other natural resources. Other location advantages include access to critical supplies and
to customers.

International Strategies
Firms can choose to use one or both of two basic types of international strategies:
business-level international strategy and corporate-level international strategy. To create
competitive advantage, each strategy must utilize a core competence based on difficult-toimitate resources and capabilities.

Silvia Regina
29113323 / YP 50 B
International Business-Level Strategy
Each business must develop a competitive strategy focused on its own domestic
market. In an international business-level strategy, the home country of operation is often
the most important source of competitive advantage. The resources and capabilities
established in the home country frequently allow the firm to pursue the strategy into
markets located in other countries. Research
indicates that as a firm continues its growth into
multiple international locations, the country of
origin is less important for competitive advantage.
Michael Porters model, illustrated in figure
below, describes the factors contributing to the
advantage of firms in a dominant global industry
and associated with a specific home country or
regional environment.

The factors of
production

Refers to the inputs necessary to compete in any industry, basic factors, and advanced factors. Other production
factors are generalized and specialized. If a country has both advanced and specialized production factors, it is likely to
serve an industry well by spawning strong home-country competitors that also can be successful global competitors

Demand
conditions

Characterized by the nature and size of buyers needs in the home market for the industrys goods or services. A large
market segment can produce the demand necessary to create scale efficient facilities

Related and
supporting
industries

It contributes to the success of its own industry, and also supports its own related industries

Firm strategy,
structure, and
rivalry

These vary greatly from nation to nation, and make up the final country dimension and also foster the growth of
certain industries

The four basic dimensions of the diamond model emphasize the environmental or
structural attributes of a national economy that contribute to national advantage. Each firm
must create its own success, not all firms will survive to become global competitors, not
even those operating with the same country factors that spawned other successful firms.
The factors above are likely to produce competitive advantages only when the firm develops
and implements an appropriate strategy that takes advantage of distinct country factors.
Thus, these distinct country factors must be given thorough consideration when making a
decision regarding the business-level strategy to use in an international context.
International Corporate-Level Strategy
International corporate-level strategy focuses on
the scope of a firms operations through both product and
geographic diversification. International corporate-level
strategy is required when the firm operates in multiple
industries and multiple countries or regions. The three
international corporate-level strategies are multidomestic,
global, and transnational, as shown in figure below.

The firm uses a global strategy to

offer standardized products across
country markets, with competitive
strategy being dictated by the home
office. Thus, a global strategy
emphasizes economies of scale and
offers greater opportunities to take
innovations developed at the
corporate level or in one country and
utilize them in other markets. The
performance of the global strategy is
enhanced if it deploys in areas where
regional integration among countries
is occurring.

Transnational Strategy

A multidomestic strategy is an
international strategy in which
strategic and operating decisions are
decentralized to the strategic
business unit in each country so as to
allow that unit to tailor products to
the local market. A multidomestic
strategy focuses on competition
within each country. The
multidomestic strategy uses a highly
decentralized approach, allowing
each division to focus on a
geographic area, region, or country.
The use of multidomestic strategies
usually expands the firms local
market share because the firm can
pay attention to the needs of the
local clientele.

Global Strategy

Multidomestic Strategy

Silvia Regina
29113323 / YP 50 B
A transnational strategy is an
international strategy through which
the firm seeks to achieve both global
efficiency and local responsiveness.
The transnational strategy is difficult
to use because of its conflicting
goals. On the positive side, the
effective implementation of a
transnational strategy often
produces higher performance than
does the implementation of either
the multidomestic or global
international corporate-level
strategies, although it is difficult to
accomplish.

Environmental Trends
Most multinational firms desire coordination and sharing of resources across country
markets to hold down costs. Many multinational firms may require type of flexibility if they
are to be strategically competitive, in part due to trends that change over time. Two
important trends are the liability of foreignness, and regionalization.
Liability of Foreignness

Regionalization

There are legitimate concerns about the relative

attractiveness of global strategies, due to the extra costs
incurred to pursue internationalization, or the liability of
foreignness relative to domestic competitors in a host
country. Research shows that global strategies are not as
prevalent as they once were and are still difficult to
implement, even when using Internet-based strategies. The
amount of competition vying for a limited amount of
resources and customers can limit firms focus to regional
rather than global markets. A regional focus allows firms to
marshal their resources to compete effectively in regional
markets rather than spreading their limited resources
across many international markets.

Regionalization is a second trend that has become more

common in global markets. Because a firms location can
affect its strategic competitiveness, it must decide whether
to compete in all or many global markets, or to focus on a
particular region or regions. Countries that develop trade
agreements to increase the economic power of their
regions may promote regional strategies. After the firm
selects its international strategies and decides whether to
employ them in regional or world markets, it must choose a
market entry mode.

Choice of International Entry Mode

International
expansion
is
accomplished by many ways. Entering
international
markets
and
their
characteristics are shown in table below.

Exporting
Many industrial firms begin their international
expansion by exporting goods or services to
other countries. The disadvantages of
exporting include the often-high costs of
transportation and tariffs placed on some
incoming goods. Furthermore, the exporter has
less control over the marketing and distribution
of its products in the host country and must
either pay the distributor or allow the
distributor to add to the price to recoup its
costs and earn a profit. As a result, it may be
difficult to market a competitive product
through exporting or to provide a product that
is customized to each international market.

Licensing

Strategic Alliances

Licensing is an increasingly common form of

organizational network, particularly among
smaller firms. A licensing arrangement allows a
foreign company to purchase the right to
manufacture and sell the firms products within
a host country or set of countries. Licensing is
possibly the least costly form of international
expansion. Licensing is also a way to expand
returns based on prior innovations. Licensing
can also lead to inflexibilities, and as such it is
important that a firm think ahead and consider
the consequences of each entry, especially in
international markets.

Strategic alliances allow firms to share the risks

and the resources required to enter
international markets. Strategic alliances can
facilitate the development of new core
competencies that contribute to the firms
future strategic competitiveness. International
strategic alliances are especially difficult to
manage. Trust between the partners is critical
and is affected by at least four fundamental
issues: the initial condition of the relationship,
the negotiation process to arrive at an
agreement, partner interactions, and external
events.

Silvia Regina
29113323 / YP 50 B

Acquisitions
Often provide the fastest and the largest initial
international expansion of any of the
alternatives. Thus, entry is much quicker than
by other modes. The merging of the new firm
into the acquiring firm is often more complex
than in domestic acquisitions. The acquiring
firm must deal not only with different
corporate cultures, but also with potentially
different social cultures and practices.
International acquisitions have been popular
because of the rapid access to new markets
they provide, they also carry with them
important costs and multiple risks.

New Wholly Owned Subsidiary

The establishment of a new wholly owned
subsidiary is referred to as a greenfield venture.
The process of creating such ventures is often
complex and potentially costly, but it affords
maximum control to the firm and has the most
potential to provide above-average returns.
This potential is especially true of firms with
strong intangible capabilities that might be
leveraged through a greenfield venture.

Dynamics of Mode of Entry

To enter a global market, a firm selects the
entry mode that is best suited to the situation
at hand. The decision regarding which entry
mode to use is primarily a result of the
industrys competitive conditions, the countrys
situation and government policies, and the
firms unique set of resources, capabilities, and
core competencies.

Strategic Competitive Outcomes

International diversification provides

the potential for firms to achieve
greater returns on their innovations
and reduces the often substantial risks
of R&D investments, and then the
firm uses its primary resources and
capabilities to diversify internationally
and thus earn further returns on these
capabilities. International
diversification improves a firms ability
to appropriate additional returns from
innovation before competitors can
overcome the initial competitive
advantage created by the innovation.
Managing the diverse business units
of a multinational firm requires skill,
not only in managing a decentralized
set of businesses, but also
coordinating diverse points of view
derived from regionalized businesses
without descending into chaos.

Complexity of Managing
Multinational Firms

International diversification is a
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.
Firms that are broadly diversified into
multiple international markets usually
achieve the most positive stock
returns, especially when they diversify
geographically into core business
areas. Many factors contribute to the
positive effects of international
diversification, such as private versus
government ownership, potential
economies of scale and experience,
location advantages, increased market
size, and the opportunity to stabilize
returns.

International Diversification
and Innovation

International Diversification
and Returns

Implementation is highly important, because international expansion is risky, making

it difficult to achieve a competitive advantage. The probability the firm will be successful
with an international strategy increases when it is effectively implemented.
Doing complex managing
multinational firms can produce
greater uncertainty. Multiple risks are
involved when a firm operates in
several different countries. Firms can
grow only so large and diverse before
becoming unmanageable, or before
the costs of managing them exceed
their benefits. Managers are
constrained by the complexity and
sometimes by the culture and
institutional systems within which
they must operate. Other
complexities include the highly
competitive nature of global markets,
multiple cultural environments,
potentially rapid shifts in the value of
different currencies, and the
instability of some national
governments.

Risks in an International Environment

International diversification carries multiple risks. Because of these risks,
international expansion is difficult to implement and manage. The table below describes
each risk in an international environment.
Political Risks
Political risks are risks related to instability in national governments and to war, both civil and international. Instability in a national government
creates numerous problems, including economic risks and uncertainty created by government regulation; the existence of many, possibly conflicting,
legal authorities or corruption; and the potential nationalization of private assets. Foreign firms that invest in another country may have concerns
about the stability of the national government and the effects of unrest and government instability on their investments or assets.

Economic Risks
If firms cannot protect their intellectual property, they are highly unlikely to make foreign direct investments. Another economic risk is the perceived
security risk of a foreign firm acquiring firms that have key natural resources or firms that may be considered strategic in regard to intellectual
property. Foremost, among the economic risks of international diversification are the differences and fluctuations in the value of different currencies.
Furthermore, the value of different currencies can also, at times, dramatically affect a firms competitiveness in global markets because of its effect on
the prices of goods manufactured in different countries.

Limits to International Expansion: Management Problems

Several reasons explain the limits to the positive effects of international diversification. First, greater geographic dispersion across country borders
increases the costs of coordination between units and the distribution of products. Second, trade barriers, logistical costs, cultural diversity, and other
differences by country (e.g., access to raw materials and different employee skill levels) greatly complicate the implementation of an international
diversification strategy. Thus, management must be concerned with the relationship between the host government and the multinational corporation.