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STRATEGIC
ACTIONS:
STRATEGY
FORMULATIO
N
CHAPTER 8
INTERNATIONAL
STRATEGY
Authored by:
Marta Szabo White, PhD.
Georgia State University
THE STRATEGIC
MANAGEMENT PROCESS
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
KNOWLEDGE
OBJECTIVES
KNOWLEDGE
OBJECTIVES
Explain the five modes firms use to enter
international markets.
Discuss the two major risks of using
international strategies.
Discuss the strategic competitiveness
outcomes associated with international
strategies particularly with an international
diversification strategy.
Explain two important issues firms should
have knowledge about when using international
strategies.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
OPENING CASE
INTERNATIONAL STRATEGY: CRITICAL TO
STARBUCKS FUTURE SUCCESS
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OPENING CASE
INTERNATIONAL STRATEGY: CRITICAL TO
STARBUCKS FUTURE SUCCESS
DOMESTIC VERSUS
GLOBAL MARKETS
DOMESTIC
MARKETS
GLOBAL
MARKETS
Stable
Predictable
Less complex
Globalization is
reducing the
number of domesticonly markets
Unstable
Unpredictable
Complex and risky
Globalization is
enabling global
markets
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
INTRODUCTION
The purpose of this chapter is to discuss how
international strategies can be a source of global
strategic competitiveness. It addresses:
Factors
FIGURE 8.1
Opportunitie
s and
Outcomes of
International
Strategy
OPPORTUNITIES AND
OUTCOMES OF
INTERNATIONAL
STRATEGY
IDENTIFYING
INTERNATIONAL
OPPORTUNITIES
International
Strategy: a strategy through
which the firm sells its goods or services
outside its domestic market
Reasons for having an international
strategy
International markets yield new
opportunities
Needed resources can be secured
Greater potential product demand
Borderless demand for globally branded
products
Pressure for global integration
New market expansion extends product
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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IDENTIFYING
INTERNATIONAL
OPPORTUNITIES
Many firms choose direct investment
in assets over indirect investment
because it:
Provides better protection for
assets
Develops relationships with key
resources faster
May provide reduction in risk
due to direct connections
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FIGURE 8.2
Incentives
and Basic
Benefits of
International
Strategy
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IDENTIFYING
INTERNATIONAL
OPPORTUNITIES
INCENTIVES TO USE
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IDENTIFYING
INTERNATIONAL
OPPORTUNITIES
CLASSIC RATIONALE:
EXTENDING THE PRODUCTS
Product demand
Foreign
LIFE
CYCLE
develops and firm
competition
exports products
begins production
Firm introduces
innovation in
domestic market
Firm begins
production abroad
Production is standardized
and relocated to low cost
countries
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IDENTIFYING
INTERNATIONAL
OPPORTUNITIES
THREE BASIC BENEFITS OF
INTERNATIONAL STRATEGY
1. INCREASED MARKET SIZE
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IDENTIFYING
INTERNATIONAL
OPPORTUNITIES
THREE BASIC BENEFITS OF
INTERNATIONAL STRATEGY
IDENTIFYING
INTERNATIONAL
OPPORTUNITIES
THREE BASIC BENEFITS OF
INTERNATIONAL STRATEGY
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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IDENTIFYING
INTERNATIONAL
OPPORTUNITIES
THREE BASIC BENEFITS OF
INTERNATIONAL STRATEGY
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IDENTIFYING
INTERNATIONAL
OPPORTUNITIES
THREE BASIC BENEFITS OF
INTERNATIONAL STRATEGY
3. LOCATION ADVANTAGES
Certain markets may offer
superior access to critical
resources, e.g., raw materials,
lower-cost labor, energy,
suppliers, key customers
Cultural influences may be
advantageousa strong cultural
match facilitates international
business transactions
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INTERNATIONAL
STRATEGIES
Cost leadership
Differentiation
Focused cost leadership
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INTERNATIONAL
STRATEGIES
International Corporate-level
strategies
Multidomestic
Global
Transnational (the
combination of the
multidomestic and global
strategies)
Each international strategy
the firm uses must be based
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INTERNATIONAL
STRATEGIES
INTERNATIONAL
BUSINESS-LEVEL
International firms
first develop
domestic STRATEGY
strategies (at the
business level and at the
corporate level if the firm has
diversified at the product level).
Firms may be able to leverage
some of their domestic
capabilities and core
competencies as the foundation
for their international
competitive success, however,
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INTERNATIONAL
STRATEGIES
INTERNATIONAL
Home country BUSINESS-LEVEL
is usually the
STRATEGY
most important
source of
competitive advantage:
Domestic resources and
capabilities are the building
blocks for international
capabilities and core
competencies.
This reasoning is grounded in
Michael Porters analysis of why
some nations/industries are more
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INTERNATIONAL
STRATEGIES
INTERNATIONAL
BUSINESS-LEVEL
International business-level
STRATEGY
strategy is
selected based on
structural characteristics of an
economy, as identified by
Porters four determinants of
national advantage (see Figure
8.3).
Porters core argument is that
conditions/ factors in a firms
domestic market either help or
hinder the firms international
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INTERNATIONAL
STRATEGIES
FIGURE 8.3
Determinant
s of National
Advantage
DETERMINANTS OF NATIONAL
ADVANTAGE
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INTERNATIONAL
STRATEGIES
DETERMINANTS OF NATIONAL
Factors of production
ADVANTAGE
The inputs necessary to compete
in any industry
Labor
Land
Natural
resources
Capital Infrastructure
Basic factors
Advanced factors
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INTERNATIONAL
STRATEGIES
DETERMINANTS OF NATIONAL
Demand conditions:
ADVANTAGE
characterized by the nature and size
of buyers needs in the home
market for the industrys goods or
services
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INTERNATIONAL
STRATEGIES
DETERMINANTS OF NATIONAL
ADVANTAGE
Related and
supporting
industries: supporting services,
facilities, suppliers, etc.
Support in design
Support in distribution
Related industries as suppliers
and buyers
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INTERNATIONAL
STRATEGIES
DETERMINANTS OF NATIONAL
ADVANTAGE
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INTERNATIONAL
STRATEGIES
Firm
strategy, structure,
and
DETERMINANTS
OF NATIONAL
rivalry ADVANTAGE
EXAMPLES
Germany - the excellent technical training
system fosters a strong emphasis on
continuous product and process
improvements
Japan - unusual cooperative and
competitive systems facilitate the crossfunctional management of complex
assembly operations
Italy - the national pride of the countrys
designers spawns strong industries in
shoes, sports cars, fashion apparel, and
furniture
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INTERNATIONAL
STRATEGIES
INTERNATIONAL
CORPORATE-LEVEL
The
type of corporate
strategy selected
will have anSTRATEGY
impact on the selection
and implementation of the businesslevel strategies
Some strategies provide individual
country units with the flexibility to
choose their own strategies
Other strategies dictate businesslevel strategies from the home
office and coordinate resource
sharing across units
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INTERNATIONAL
STRATEGIES
INTERNATIONAL
CORPORATE-LEVEL
Focuses on the scope of
STRATEGY
operations:
Product diversification
Geographic diversification
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INTERNATIONAL
STRATEGIES
FIGURE 8.4
International
CorporateLevel
Strategies
INTERNATIONAL CORPORATE-LEVEL
STRATEGY
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INTERNATIONAL
STRATEGIES
INTERNATIONAL CORPORATE-LEVEL
STRATEGIES
Multidomestic
strategy
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INTERNATIONAL
STRATEGIES
INTERNATIONAL CORPORATE-LEVEL
STRATEGIES
Multidomestic
strategy
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INTERNATIONAL
STRATEGIES
INTERNATIONAL CORPORATE-LEVEL
STRATEGIES
Global
strategy
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INTERNATIONAL
STRATEGIES
INTERNATIONAL CORPORATE-LEVEL
STRATEGIES
Global
strategy
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
INTERNATIONAL
STRATEGIES
INTERNATIONAL CORPORATE-LEVEL
STRATEGIES
Transnational
strategy
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
INTERNATIONAL
STRATEGIES
INTERNATIONAL CORPORATE-LEVEL
STRATEGIES
Transnational
strategy
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
INTERNATIONAL
STRATEGIES
INTERNATIONAL CORPORATE-LEVEL
STRATEGIES
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
INTERNATIONAL
STRATEGIES
INTERNATIONAL CORPORATE-LEVEL
STRATEGIES
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ENVIRONMENTAL TRENDS
LIABILITY OF FOREIGNESS
TWO NEW TRENDS
Brazil, Russia, India, and China (BRIC)
represent major international market
opportunities and threats.
1. Liability of foreignness: costs
associated with entering foreign
markets
Increased after terrorists attacks and
Iraq War
Four types of distances:
Cultural differences
Administrative (unfamiliar operating
environments)
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ENVIRONMENTAL TRENDS
REGIONALIZATION
TWO NEW TRENDS
2. Regionalization
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ENVIRONMENTAL TRENDS
REGIONALIZATION
TWO NEW TRENDS
2. Regionalization (contd)
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FIGURE 8.5
CHOICE OF
INTERNATIONAL ENTRY
MODE
Modes of
Entry and
Their
Characteristi
cs
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CHOICE OF
INTERNATIONAL ENTRY
MODE
Following the selection of an
international strategy, the five
main entry modes are:
1.
2.
3.
4.
5.
Exporting
Licensing
Strategic Alliances
Acquisitions
New Wholly Owned Subsidiary
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CHOICE OF
INTERNATIONAL ENTRY
MODE
EXPORTING
LICENSING
STRATEGIC ALLIANCES
ACQUISITIONS
RISK
INCREASE
S
NEW WHOLLY
OWNED SUBSIDIARY
CONTROL
INCREASES
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CHOICE OF
INTERNATIONAL ENTRY
MODE
EXPORTING
1. Exporting:
the firm sends
products it produces in its
domestic market to international
markets
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
CHOICE OF
INTERNATIONAL ENTRY
MODE
LICENSING
2. Licensing:
an agreement is
formed that allows a foreign
company to purchase the right
to manufacture and sell a
firms products within a host
countrys market or a set of
markets
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CHOICE OF
INTERNATIONAL ENTRY
MODE
LICENSING
2. Licensing
(contd)
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CHOICE OF
INTERNATIONAL ENTRY
MODE
STRATEGIC
ALLIANCES
3. Strategic
alliance:
collaboration
with a partner firm for international
market entry
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CHOICE OF
INTERNATIONAL ENTRY
MODE
ACQUISITIONS
4. Acquisitions
Cross-border acquisition: a firm
from one country acquires a stake
in or purchases 100% of a firm
located in another country
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CHOICE OF
INTERNATIONAL ENTRY
MODE
NEW WHOLLY OWNED
5. New Wholly Owned Subsidiary
SUBSIDIARY
Greenfield venture: a firm invests
directly in another country/market
by establishing a new wholly owned
subsidiary
Is costly
Involves complex processes
Allows for maximum control
Has the highest potential returns
Carries high risk
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CHOICE OF
INTERNATIONAL ENTRY
MODE
DYNAMICS OF MODE OF
Use the bestENTRY
suited mode of
entry to the situation at hand;
affected by several factors:
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
CHOICE OF
INTERNATIONAL ENTRY
MODE
DYNAMICS OF MODE OF
Wholly owned subsidiary may be
ENTRY
preferred if:
Intellectual Property (IP) rights in
emerging economy are not well
protected
Number of firms in industry is
accelerating
Need for global integration is high
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CHOICE OF
INTERNATIONAL ENTRY
MODE
EXPORTING
Whats
the best solution?
Situation
The
The firm
firm has
has no
no
foreign
foreign
manufacturing
manufacturing
expertise
expertise and
and
requires
requires investment
investment
only
only in
in distribution.
distribution.
Optimal Solution
Exporting
Exporting
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
CHOICE OF
INTERNATIONAL ENTRY
MODE
LICENSING
Whats
the best solution?
Situation
The
The firm
firm needs
needs to
to
facilitate
facilitate the
the product
product
improvements
improvements
necessary
necessary to
to enter
enter
foreign
foreign markets.
markets.
Optimal Solution
Licensing
Licensing
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CHOICE OF
INTERNATIONAL ENTRY
MODE
STRATEGIC
ALLIANCES
Whats the best
solution?
Situation
The
The firm
firm needs
needs to
to
connect
connect with
with an
an
experienced
experienced partner
partner
already
already in
in the
the
targeted
targeted market.
market.
Optimal Solution
Strategic
Strategic
Alliance
Alliance
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CHOICE OF
INTERNATIONAL ENTRY
MODE
STRATEGIC
ALLIANCES
Whats the best
solution?
Situation
Optimal Solution
The
The firm
firm needs
needs to
to
reduce
reduce its
its risk
risk
through
through the
the sharing
sharing
of
of costs.
costs.
Strategic
Strategic
Alliance
Alliance
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CHOICE OF
INTERNATIONAL ENTRY
MODE
STRATEGIC
ALLIANCES
Whats the best
solution?
Situation
The
The firm
firm is
is facing
facing
uncertain
uncertain situations
situations
such
such as
as an
an emerging
emerging
economy
economy in
in its
its
targeted
targeted market.
market.
Optimal Solution
Strategic
Strategic
Alliance
Alliance
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CHOICE OF
INTERNATIONAL ENTRY
MODE
ACQUISITIONS
Whats
the best solution?
Situation
The
The firm
firm must
must act
act
quickly
quickly to
to gain
gain rapid
rapid
access
access to
to this
this new
new
market,
market, where
where
corruption
corruption is
is not
not an
an
issue.
issue.
Optimal Solution
Acquisition
Acquisition
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CHOICE OF
INTERNATIONAL ENTRY
MODE
WHOLLY
OWNED
SUBSIDIARY
Whats
the best
solution?
Situation
The
The firms
firms intellectual
intellectual
property
property rights
rights in
in an
an
emerging
emerging economy
economy are
are
not
not well
well protected,
protected, the
the
number
number of
of firms
firms in
in the
the
industry
industry is
is growing
growing fast,
fast,
and
and the
the need
need for
for global
global
Optimal Solution
Wholly
Wholly
Owned
Owned
Subsidiary
Subsidiary
(Greenfield
(Greenfield
Venture)
Venture)
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RISKS IN AN
INTERNATIONAL
ENVIRONMENT
FIGURE 8.6
Risks in the
International
Environment
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RISKS IN AN INTERNATIONAL
ENVIRONMENT: POLITICAL
RISKS
Political risks: disruption of MNC
operations by political forces or events
whether they occur in host countries or
home country, or result from changes in
the international environment
Prior to implementing any of the five
modes of international entry, political risk
analysis should be conducted, where the
firm examines potential sources and
factors of noncommercial disruptions of
their foreign investments and the
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RISKS IN AN INTERNATIONAL
ENVIRONMENT: POLITICAL
RISKS
International strategy
implementation may be disrupted by
the following examples of political
risk:
Government instability
Conflict or war
Government regulations
Conflicting and diverse legal
authorities
Potential nationalization of
private assets
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RISKS IN AN INTERNATIONAL
ENVIRONMENT: ECONOMIC
RISKS
Economic risks: fundamental
weaknesses in a country or regions
economy with the potential to adversely
impact the successful implementation
of a firms international strategies
International strategy
implementation may be disrupted by
the following examples of economic
risk:
Foremost economic risk - currency
volatility
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RISKS IN AN INTERNATIONAL
ENVIRONMENT: ECONOMIC
RISKS
International strategy
implementation may be disrupted by
the following examples of economic
risk (contd):
Government oversight and control
of economic/financial capital.
Weak Intellectual Property (IP) rights
protections, impact FDI attractiveness.
Investment losses due to political
risks
Terrorism
Security risk of foreign firms
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EXAMPLES OF POLITICAL
AND ECONOMIC RISKS
?
?
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
STRATEGIC
COMPETITIVENESS
OUTCOMES
INTERNATIONAL
DIVERSIFICATION AND
International diversification: firm expands
RETURNS
sales of its goods
or services across the
borders of global regions and countries into
different geographic locations or markets
From Figure 8.1, the benefits of
implementing international strategies are
critical to strategic competitiveness, as
measured by improved performance and
enhanced innovation.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
STRATEGIC
COMPETITIVENESS
OUTCOMES
INTERNATIONAL
DIVERSIFICATION AND
Implementation
follows the
RETURNS
2.
3.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
STRATEGIC
COMPETITIVENESS
OUTCOMES
INTERNATIONAL
DIVERSIFICATION
AND
As
international diversification
increases,RETURNS
firms returns initially
decrease, but then increase quickly
as the firm learns to manage
international expansion.
Firms that are broadly diversified
into multiple international markets
usually achieve the most positive
stock returns, especially when they
diversify geographically into core
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
STRATEGIC
COMPETITIVENESS
OUTCOMES
INTERNATIONAL
DIVERSIFICATION
Many
factors contribute toAND
the positive
effects of international
RETURNS diversification:
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
STRATEGIC
COMPETITIVENESS
OUTCOMES
ENHANCED INNOVATION
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
STRATEGIC
COMPETITIVENESS
OUTCOMES
ENHANCED INNOVATION
THE CHALLENGE OF
INTERNATIONAL
STRATEGIES
THE COMPLEXITY OF
MANAGING INTERNATIONAL
Complexity of managing
STRATEGIES
multinational firmssix
considerations:
1.
2.
3.
4.
5.
6.
Geographic dispersion
Costs of coordination
Logistical costs
Trade barriers
Cultural diversity
Host government
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
THE CHALLENGE OF
INTERNATIONAL
STRATEGIES
LIMITS
TO INTERNATIONAL
There
are several
reasons that explain the
EXPANSION
limits to the positive
effects of the
diversification associated with international
strategies:
Geographic
dispersion
Trade barriers
Logistical costs
Cultural diversity and barriers
Complexity of competition
Relationship between firm and host country
Other country differences
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.