Chapter 8

International Strategy

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

2000 South-Western College Publishing
Ch8-1

Strategic Inputs

Chapter 2 External Environment Strategic Intent Chapter 3 Internal Environment Strategic Mission

The Strategic Management Process

Strategy Implementation
Chapter 10 Corporate Governance
Chapter 12 Strategic Leadership Chapter 11 Structure & Control Chapter 13
Entrepreneurship

Strategy Formulation
Chapter 4 Business-Level Strategy Chapter 5 Competitive Dynamics Chapter 8 International Strategy Chapter 6 Corporate-Level Strategy Chapter 9 Cooperative Strategies

Strategic Actions

Chapter 7 Acquisitions & Restructuring

& Innovation

Outcomes

Strategic

Feedback

Strategic Competitiveness Above Average Returns

Ch8-2

International Strategy Opportunities and Outcomes

Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Management Outcomes Problems and Risk

International
Strategies Increased Market Size Return on Investment Economies of Scale and Learning International Business-Level Strategy Multidomestic Strategy Global Strategy

Modes of Entry
Exporting Exporting Strategic Alliances Acquisition

Higher Performance Returns

Location Advantage

Transnational Strategy

Establishment of New Subsidiary

Management Problems and Risk

Innovation

Ch8-3

International Strategy Lifecycle

Selling Products or Services Outside a Firms Domestic Market

Product Demand Develops and Firm Exports Products Foreign Competition Begins Production

Firm Introduces Innovation in Domestic Market

Production Becomes Standardized and is Relocated to Low Cost Countries

Firm Begins Production Abroad

Ch8-4

Motivations for International Expansion

Increase Market Share
Domestic market may lack the size to support efficient scale manufacturing facilities Example: Japanese electronics or automobile manufacturers

Return on Investment
Large investment projects may require global markets to justify the capital outlays

Example: Aircraft manufacturers Boeing or Airbus

Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators
Ch8-5

Motivations for International Expansion

Economies of Scale or Learning
Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R & D or distribution - Can spread costs over a larger sales base - Increase profit per unit

Location Advantages
Low cost markets may aid in developing competitive advantage May achieve better access to: - Raw materials - Lower cost labor - Key suppliers - Key customers - Energy - Natural resources

Ch8-6

Porters Determinants of National Advantage

Home Country of Origin Is Crucial to International Success
Related & Supporting Industries Factor Conditions
- Japanese cameras & copiers - Italian shoes & leather

Basic Factors Demand - Land, labor Advanced Factors Conditions - Highly educated workers Home country may - Digital communications support scale efficient Generalized Factors operations by itself - Capital, infrastructure Specialized Factors Firm Strategy, Structure & - Skilled personnel Rivalry

Intense rivalry fosters industry competition

Ch8-7

International Strategy Opportunities and Outcomes

Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Management Outcomes Problems and Risk

International
Strategies Increased Market Size Return on Investment Economies of Scale and Learning International Business-Level Strategy Multidomestic Strategy Global Strategy

Modes of Entry
Exporting Exporting Strategic Alliances Acquisition

Higher Performance Returns

Location Advantage

Transnational Strategy

Establishment of New Subsidiary

Management Problems and Risk

Innovation

Ch8-8

Business-Level International Strategies

International Low Cost
Usually located in home country Export to international markets Low value added operations in foreign countries High value added operations in home country

International Differentiation
Countries with advanced or specialized factor conditions most likely to use this strategy Example: Japan, Germany, U.S.
Ch8-9

Business-Level International Strategies

International Focus Strategies
Technologically advanced firms follow focused low cost strategy Focused differentiation firms compete on the basis of image & design Third group competes on low price by imitating

International Integrated Low Cost/Differentiation

Can be most effective in dealing with diverse markets Often relies upon flexible manufacturing, total quality management or rapid communication networks
Ch8-10

Corporate-Level International Strategies

Type of Corporate Strategy selected will have an impact on the selection and implementation of the business-level strategies

Some Corporate strategies provide individual country units with flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units

Three Corporate Strategies

Multi-Domestic Strategy
Global Strategy Transnational Strategy
Ch8-11

Corporate-Level International Strategies

Multi-Domestic Strategy
Strategy and operating decisions are decentralized to strategic business units (SBU) in each country Products and services are tailored to local markets

Business units in each country are independent of each other

Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe
Ch8-12

Corporate-Level International Strategies

Global Strategy
Products are standardized across national markets Decisions regarding business-level strategies are centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale

Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (which also makes it difficult to manage)
Ch8-13

Corporate-Level International Strategies

Transnational Strategy
Seeks to achieve both global efficiency and local responsiveness Difficult to achieve because of simultaneous requirements for strong central control and coordination to achieve efficiency and local flexibility and decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage
Ch8-14

International Corporate Strategy

When is each strategy appropriate?
High

Need for Global Integration MultiDomestic

Low
Low High
Ch8-15

Need for Local Market Responsiveness

International Corporate Strategy

When is each strategy appropriate?
High

Global Strategy Need for Global Integration MultiDomestic

Low
Low High
Ch8-16

Need for Local Market Responsiveness

International Corporate Strategy

When is each strategy appropriate?
High

Global Strategy Need for Global Integration

Transnational

MultiDomestic
Low
Low High
Ch8-17

Need for Local Market Responsiveness

International Strategy Opportunities and Outcomes

Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Management Outcomes Problems and Risk

International
Strategies Increased Market Size Return on Investment Economies of Scale and Learning International Business-Level Strategy Multidomestic Strategy Global Strategy

Modes of Entry
Exporting Exporting Strategic Alliances Acquisition

Higher Performance Returns

Location Advantage

Transnational Strategy

Establishment of New Subsidiary

Management Problems and Risk

Innovation

Ch8-18

Choice of International Entry Mode

Exporting
Common way to enter new international markets No need to establish operations in other countries Establish distribution channels through contractual relationships

May have high transportation costs

May encounter high import tariffs May have less control on marketing and distribution Difficult to customize products
Ch8-19

Choice of International Entry Mode

Licensing
Firm authorizes another firm to manufacture and sell its products Licensing firm is paid a royalty on each unit produced and sold Licensee takes risks in manufacturing investments Least risky way to enter a foreign market Licensing firm loses control over product quality and distribution Relatively low profit potential A significant risk is that licensor learns technology and competes when license expires
Ch8-20

Choice of International Entry Mode

Strategic Alliances
Enable firms to shares risks and resources to expand into international ventures
Most joint ventures (JVs) involve a foreign company with a new product or technology and a host company with access to distribution or knowledge of local customs, norms or politics May experience difficulties in merging disparate cultures

May not understand the strategic intent of partners or experience divergent goals
Ch8-21

Choice of International Entry Mode

Acquisitions
Enable firms to make most rapid international expansion
Can be very costly

Legal and regulatory requirements may present barriers to foreign ownership

Usually require complex and costly negotiations Potentially disparate corporate cultures
Ch8-22

Choice of International Entry Mode

New Wholly-Owned Subsidiary
Most costly and complex of entry alternatives Achieves greatest degree of control Potentially most profitable, if successful Maintain control over technology, marketing and distribution May need to acquire expertise and knowledge that is relevant to host country
Could require hiring host country nationals or consultants at high cost
Ch8-23

International Strategy Opportunities and Outcomes

Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Management Outcomes Problems and Risk

International
Strategies Increased Market Size Return on Investment Economies of Scale and Learning International Business-Level Strategy Multidomestic Strategy Global Strategy

Modes of Entry
Exporting Exporting Strategic Alliances Acquisition

Higher Performance Returns

Location Advantage

Transnational Strategy

Establishment of New Subsidiary

Management Problems and Risk

Innovation

Ch8-24

Strategic Competitiveness Outcomes

International diversification facilitates innovation in the firm Provides larger market to gain more and faster returns form investments in innovation

May generate resources necessary to sustain a largescale R&D program

Generally related to above-average returns, assuming effective implementation and management of international operations

International diversification provides greater economies of scope and learning

Ch8-25

International Strategy Opportunities and Outcomes

Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Management Outcomes Problems and Risk

International
Strategies Increased Market Size Return on Investment Economies of Scale and Learning International Business-Level Strategy Multidomestic Strategy Global Strategy

Modes of Entry
Exporting Exporting Strategic Alliances Acquisition

Higher Performance Returns

Location Advantage

Transnational Strategy

Establishment of New Subsidiary

Management Problems and Risk

Innovation

Ch8-26

Major Risks of International Diversification

Political Risk
Rebel fighting in Chechnya (Russia) and Liberia (Africa) Continual warfare among Middle Eastern nations

Potential renationalization of privatized enterprises in Russia

Failure of European Community in quest for economic superpower status because of intercountry disagreements
Ch8-27

Major Risks of International Diversification

Economic Risk
Mexicos effect on world trade with low wages and high quality but strong currency risks Chinas difficulty in enforcing intellectual property rights on CDs, software, etc.

Germanys struggle with high unemployment, high interest rates, sagging competitiveness, and cuts in social programs
Chinas trade policies. $44 billion trade surplus with United States in 1977. Chinas overall trade surplus increased twentyfold in first half of 1997.

Ch8-28

Limits To International Expansion

Management Problems
Cost of Coordination across diverse geographical business units

Institutional and cultural barriers

Understanding strategic intent of competitors The overall complexity of competition

Ch8-29