Chapter 8 Chapter 8

International Strategy

Michael A. Hitt Michael A. Hitt R. Duane Ireland R. Duane Ireland Robert E. Hoskisson Robert E. Hoskisson
2000 South-Western College Publishing

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Strategic Inputs

Chapter 2 External Environment Chapter 3 Internal Environment

Strategic Intent Strategic Mission

The Strategic Management Process

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

Strategy Formulation
Chapter 4 Business-Level Strategy Chapter 7 Acquisitions & Restructuring Chapter 5 Competitive Dynamics Chapter 8 International Strategy Chapter 6 Corporate-Level Strategy Chapter 9 Cooperative Strategies

Strategic Actions

Chapter 13

& Innovation

Outcomes

Strategic

Feedback

Strategic Competitiveness Above Average Returns

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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 Location Advantage International Business-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy

Modes of Entry
Exporting Exporting Strategic Alliances Acquisition Establishment of New Subsidiary

Higher Performance Returns

Innovation

Management Problems and Risk

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International Strategy Lifecycle

Selling Products or Services Outside a Firms Domestic Market

2 1

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

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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

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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 - Key customers - Lower cost labor - Energy - Key suppliers - Natural resources

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Porters Determinants of National Advantage

Home Country of Origin Is Crucial to International Success Related & Supporting Industries Factor Conditions
Basic Factors - Land, labor Advanced Factors - Highly educated workers - Digital communications Generalized Factors - Capital, infrastructure Specialized Factors - Skilled personnel - Japanese cameras & copiers - Italian shoes & leather

Home country may support scale efficient operations by itself

Demand Conditions

Firm Strategy, Structure & Rivalry

Intense rivalry fosters industry competition

Ch8

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 Location Advantage International Business-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy

Modes of Entry
Exporting Exporting Strategic Alliances Acquisition Establishment of New Subsidiary

Higher Performance Returns

Innovation

Management Problems and Risk

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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.

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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

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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

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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

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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)

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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

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International Corporate Strategy

When is each strategy appropriate?
High

Need for Global Integration MultiDomestic

Low Low High

Need for Local Market Responsiveness

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International Corporate Strategy

When is each strategy appropriate?
High

Global Strategy Need for Global Integration MultiDomestic

Low Low High

Need for Local Market Responsiveness

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International Corporate Strategy

When is each strategy appropriate?
High

Global Strategy Need for Global Integration

Transnational

MultiDomestic
Low Low High

Need for Local Market Responsiveness

Ch8-

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 Location Advantage International Business-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy

Modes of Entry
Exporting Exporting Strategic Alliances Acquisition Establishment of New Subsidiary

Higher Performance Returns

Innovation

Management Problems and Risk

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Choice of International Entry Mode

Exporting 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

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Choice of International Entry Mode

Licensing 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

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Choice of International Entry Mode

Strategic Alliances 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

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Choice of International Entry Mode

Acquisitions 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

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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-

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 Location Advantage International Business-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy

Modes of Entry
Exporting Exporting Strategic Alliances Acquisition Establishment of New Subsidiary

Higher Performance Returns

Innovation

Management Problems and Risk

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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

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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 Location Advantage International Business-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy

Modes of Entry
Exporting Exporting Strategic Alliances Acquisition Establishment of New Subsidiary

Higher Performance Returns

Innovation

Management Problems and Risk

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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 inter country disagreements

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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 twenty fold in first half of 1997.

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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

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