Week 13 International Strategy : Creating Value in Global Markets

Intended learning outcomes

Porters diamond model International level strategy
Motivations & potential risks

Opposing pressures and 3 international strategies

Global, Transnational, Multidomestic

Final exam

Revision of last lecture

Diversification
Related diversification 4 means to create value
Leveraging core competencies, Sharing activities, Pooled negotiating power, Vertical integration

Unrelated diversification
Corporate parenting Restructuring Portfolio analysis

With the globalization more firms going abroad

Some made extreme successes

But some failed A successful case: KFC

A failure case: Wal-Mart in South Korea

Wal-Mart entered South Korea in 1998, but exit in 2006 Main reason: Wal-Mart is a typical example of a global giant who has failed to localize its operations in South Korea.

The problem for Wal-Mart in South Korea

Inability to adapt to local markets Sticking to Western marketing strategies
Concentrate on dry goods Rivals focused on food and beverages Fresh, quality food is key ingredient of success

E-Mart owned farms

Membership approach used in Western contexts Difficulty to invest in resources necessary for customer-serve initiatives

In the end
Wal-Mart lost $10.4 million in 2005

Sold all 16 outlets in May 2006 to Shinsgae, a local retailer

The Global Economy: A Brief Overview

Globalization
the increase in international exchange, including trade in goods and services as well as exchange of money, information, ideas, and information. the growing similarity of laws, rules, norms, values, and ideas across countries.

The Global Economy: A Brief Overview

The economies of East Asia have attained rapid growth Income in Latin America grew by only 6 percent in the past two decades Average incomes in sub-Saharan Africa and the old Eastern European bloc have actually declined

Factors Affecting a Nations Competitiveness

Factor endowments
The nations position in factors of production
skilled labor

infrastructure, necessary to compete in a given industry

Demand conditions
The nature of home-market demand for the industrys product or service.

7-10

Factors Affecting a Nations Competitiveness (cont.)

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

Firm strategy, structure, and rivalry

The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.

7-11

Factor Conditions
Nations position in factors of production
Land Capital Skilled labor Infrastructure

Factors of production must be created as

industry specific firm specific

Example
The island of Japan has little land mass But pioneering just-in-time inventory management Create a infrastructure/land factor competitive condition

Demand conditions
Demanding consumers drive firms in a country to
Meet high standards
Upgrade existing products and services Create innovative products and services

Example
Demand from consumers for environmental safe products has spurred Danish manufacturers to become leaders in water pollution control equipment

Related and supporting industries

Enable firms to manage inputs more effectively
Allow joint efforts among firms

Example
Italian footwear industry
Geographic proximity of shoe manufacturers related to leather suppliers

Firm strategy, structure, and rivalry

Rivalry is intense in nations with conditions of:
Strong consumer demand Strong supplier bases High new entrant potential from related industries

Competitive rivalry increases the efficiency with which firms

Develop within the home country Market within the home country

Distribute products and services within the home country

Example
Fierce competition in US PC industry, IBM, HP

Intense rivalry has spurred companies such as Dell to find innovative ways to produce and distribute its products

Porters Diamond of National Advantage: As Applied to India

Porters Diamond model

Examples of innovative countries:
Germany: high performance automobiles, chemicals
Switzerland: banking, pharmaceuticals Italy: footwear & textile US: commercial aircraft, motion pictures, biotechnology South Korea: pianos, games

Motivations & potential risks of international expansion

Motivations:
Ultimate goal: increase / improve company performance and profits Reactive motivations vs proactive motivations

Potential risks:
Political, economic, currency, management Country risk must be evaluated in details before going international

Country risk analysis checklist

Analysis of local financial markets Credit risk ratings reflecting trade, policy and political threats Economic growth and financial indicators International financial flows Pointers for lenders and investors Two-year projection of external finances

Source: The Economist Intelligence Unit, Thompson Learning

Environmental issues Exchange controls External debt Foreign investment Foreign trade and payments GDP growth and its components Industrial policy Infrastructure Interest and exchange rates Political scene Tax regimes Ten-year growth picture Wage and price inflation

International Country Risk Rankings

Cultural challenges
Middle East Communication style

Handshakes can be long in Middle East Holding hands among men is very common Business relationships are built on mutual friendship and trust

Americans & Germans Very direct France Direct

Latin American and Asian countries Indirect

Example
Cultural symbols may evoke deep feelings When white marble columns of the Parthenon that crowns the Acropolis in Athens were turned into Coke bottles, Greeks became outraged

International expansion 2 opposing forces

Conflicting demands on firms as they strive to be competitive:

Reducing Costs :
Should you offer a standardized products worldwide? Can one size fits all?

Adapting to Local Markets :

Should we tailor our products to demand in local markets

Opposing Pressures and Four Strategies

International Strategy
Pressure for both local adaptation and low costs are rather low
Based on diffusion and adaptation of the parent companys knowledge and expertise to foreign markets Primary goal is worldwide exploitation of the parent firms knowledge and capabilities

International Strategy
Strengths
Leverage and diffusion of a parent firms knowledge and core competencies Lower costs because of less need to tailor products and services

Limitations
Limited ability to adapt to local markets Inability to take advantage of new ideas and innovations occurring in local markets

International Strategy
Ericsson, a Swedish telecommunication firm

Home market is too small

Transfer and adapt its innovative product and process technologies to international markets

Global Strategy
Competitive strategy is centralized and controlled largely by corporate office Emphasizes economies of scale

Global Strategy
Strengths
Larger production plants Efficient logistics and distribution networks Supports high levels of investment in R&D Standard level of quality throughout the world

Limitations
Limited ability to adapt to local markets
Concentration of activities may increase dependence on a single facility

Single locations may lead to higher tariffs and transportation costs

Global Strategy
Siebel Systems, developer of e-business application software our customers expect the same high level of service and qualitywe have one brand, one image, one set of corporate colors, and one set of messages, across every place on the planet

Multidomestic Strategy
Emphasis is differentiating products and services to adapt to local markets Authority is more decentralized

Multidomestic Strategy
Benefits include
Ability to adapt product and services to local market conditions
Ability to detect potential opportunities for attractive niches

Risks include
Increased cost structure

Potential problems with local adaptations

Finding optimal degree of local adaptation is difficult

Transnational Strategy
Optimization of tradeoffs associated with efficiency, local adaptation, and learning
Firms assets and capabilities are dispersed according to the most beneficial location for a specific activity Avoids the tendency to either
Concentrate activities in a central location Disperse them across many locations to enhance adaptation

Transnational Strategy
Strengths
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

Limitations
Unique challenges in determining optimal locations of activities to ensure cost and quality Unique managerial challenges in fostering knowledge transfer

Entry Modes of International Expansion

Entry modes of international expansion

Exporting
Produce goods in one country to sell in another

Licensing & Franchising

Both are contractual arrangement that allow foreign firms to produce and distribute your product or use your technology Franchising generally includes a broader range of factors in an operation and have a longer time period than licensing

Joint Venture

Entail the creation of a third-party legal entity used to enter into a new market

Strategic Alliance

Does not entail the creation of a third-party legal entity

Entry modes of international expansion

Wholly owned subsidiaries
A business in which a multinational company owns 100 percent of the stock
Acquire an existing company in the home country

Develop a totally new operation

Greenfield venture

Most expensive and risky of all global entry strategies Greatest control over all activities

Hagen-Dazss unique entry strategy

Three-step processes First use high-end retailers to introduce the brand Second find high-traffic areas to build companyowned stores

Finally sell Hagen-Dazs products in convenience stores and supermarkets

Reminder! Powerpoint cannot replace lecture notes or textbook!

This powerpoint file is designed to provide guidance on learning during class. It should be served as a complement, and not a replacement of lecture notes, nor the textbook. Students are strongly recommended to read the textbook and supplementary readings in details and make their own notes during revision.