1. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 8: International Strategy

2. ©2011 Cengage Learning. All rights reserved. 8–2 Identifying International Opportunities International Strategy  A strategy through which the firm sells its goods or services outside its domestic market. Reasons to having an international strategy  International markets yield potential new opportunities.  New market expansion extends product life cycle.  Needed resources can be secured.  Greater potential product demand.

3. Opening Case (page 217) Foreign firms have opted to operate in the Chinese market because it is so large and potentially lucrative Firms that manufacture in China often have significant cost advantages General Motors has a successful venture with Shanghai Automotive Industry Corporation (SAIC) Some Chinese firms actually compete more effectively in foreign markets than in their home markets ©2011 Cengage Learning. All rights reserved. 8–3

4. ©2011 Cengage Learning. All rights reserved. 8–4 International Strategy Benefits Increased Market Size  Domestic market may lack the size to support efficient scale manufacturing facilities. Return on Investment  Large investment projects may require global markets to justify the capital outlays. Need fast return on investments before products become obsolete  Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators.

5. ©2011 Cengage Learning. All rights reserved. 8–5 International Strategy Benefits 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.  Can increase profit per unit.

6. ©2011 Cengage Learning. All rights reserved. 8–6 International Strategy Benefits Location Advantages  Low-cost markets aid in developing competitive advantage by providing access to: Raw materials Transportation Lower costs for labor (no longer just manufacturing labor) Key customers Energy

7. ©2011 Cengage Learning. All rights reserved. 8–7 Determinants of National Advantage Factors of production  The inputs necessary to compete in any industry Labor Land Natural resources Capital Infrastructure Basic factors  Natural and labor resources Advanced factors  Digital communication systems and an educated workforce

8. ©2011 Cengage Learning. All rights reserved. 8–8 Three International Corporate-Level Strategies Corporate HQ decides which of three strategies to use to serve the market  Multidomestic  Global  Transnational SBU (country) strategies are then based on corporate- level strategy

9. ©2011 Cengage Learning. All rights reserved. 8–9 Multidomestic Strategy SBUs are independent in each country  Usually produce and sell in the same country Products are tailored to the local market Competition is normally restricted to host country Strategic and operating decisions are decentralized to the SBU in each country Resources are obtained independently Example: Sony Entertainment produces films and television programs for local markets around the world through local production facilities and television channels.

10. ©2011 Cengage Learning. All rights reserved. 8–10 Global Strategy Products are standardized across national markets. (More difficult than it seems—taste preference, transportation, refrigeration/storage, packaging, sizes, etc.) Business-level strategic decisions are centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale  HQ often dictates where to procure raw products, produce, and sell Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (hard to manage) Example: CEMEX is the world's largest building materials supplier and third largest cement producer. Based in Monterrey, Mexico. CEMEX has operations production facilities on four continents in 50 countries with 66 cement plants, 2,000 ready-mix-concrete facilities, 400 quarries, 260 distribution centers and 80 marine terminals. Cemex uses the Internet to improve logistics and manage an extensive supply network, wich significantly reduces costs. Connectivity between the operations in different countries and universal standards dominate its approach.

11. ©2011 Cengage Learning. All rights reserved. 8–11 Transnational Strategy Seeks to achieve global efficiency and local responsiveness Tries to combine the best of the Multidomestic Strategy and the Global Strategy Requires tight networking and integration with customers, suppliers, partners, HQ, and other SBUs  Procure raw materials, produce, and sell from anywhere to anywhere Tough to implement, but when done effectively can produce very high performance Example: ExxonMobil, Shell, Unilever, Caterpillar, IKEA

12. ©2011 Cengage Learning. All rights reserved. 8–12 TABLE 8.1 Global Market Entry: Choice of Mode of Entry Type of Entry Characteristics ExportingHigh cost, low control LicensingLow cost, low risk, little control, low returns Strategic alliances Shared costs, shared resources, shared risks, problems of integration (e.g., two corporate cultures) AcquisitionQuick access to new market, high cost, complex negotiations, problems of merging with domestic operations New wholly owned subsidiaryComplex, often costly, time consuming, high risk, maximum control, potential above-average returns

13. ©2011 Cengage Learning. All rights reserved. 8–13 Situation Optimal Solution Dynamics of Mode of Entry The firm has no foreign manufacturing expertise and requires investment only in distribution. Export What’s the best solution? X

14. ©2011 Cengage Learning. All rights reserved. 8–14 Situation Optimal Solution Dynamics of Mode of Entry The firm needs to facilitate the product improvements necessary to enter foreign markets.Licensing What’s the best solution? X

15. ©2011 Cengage Learning. All rights reserved. 8–15 Situation Optimal Solution Dynamics of Mode of Entry The firm needs to connect with an experienced partner already in the targeted market. Strategic Alliance What’s the best solution? X

16. ©2011 Cengage Learning. All rights reserved. 8–16 Situation Optimal Solution Dynamics of Mode of Entry The firm needs to reduce its risk through the sharing of costs. Strategic Alliance What’s the best solution? X

17. ©2011 Cengage Learning. All rights reserved. 8–17 Situation Optimal Solution Dynamics of Mode of Entry The firm is facing uncertain situations such as an emerging economy in its targeted market. Strategic Alliance What’s the best solution? X

18. ©2011 Cengage Learning. All rights reserved. 8–18 Situation Optimal Solution Dynamics of Mode of Entry The firm’s intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high. Wholly-owned Subsidiary What’s the best solution?

19. ©2011 Cengage Learning. All rights reserved. 8–19 Complexity of Managing Multinational Firms Expansion into global operations in different geographic locations or markets:  Makes implementing international strategy increasingly complex.  Can produce greater uncertainty and risk.  May result in the firm becoming unmanageable  May cause the cost of managing the firm to exceed the benefits of expansion.  Exposes the firm to possible instability of some national governments.

20. ©2011 Cengage Learning. All rights reserved. 8–20 Risks in an International Environment Political Risks  Instability in national governments  War, both civil and international  Potential nationalization of a firm’s resources Economic Risks  Differences and fluctuations in the value of different currencies  Differences in prevailing wage rates  Difficulties in enforcing property rights  Unemployment ? ? ? ?

21. ©2011 Cengage Learning. All rights reserved. 8–21 FIGURE 8.4 Risk in the International Environment Venezuela, North Korea, Cuba, Pakistan, Mexico, China, Iran, Iraq, Afghanistan, ad nauseum

22. ©2011 Cengage Learning. All rights reserved. 8–22 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 Bottom Line: Do NOT try to go international without knowing what you are doing and all of the pitfalls! Hire an Expert!!!!

23. ©2011 Cengage Learning. All rights reserved. 8–23 Finally, a definition of globalization I can understand and to which I can relate: Question: What is the truest definition of Globalization? Answer: Princess Diana's death. Question: Why? Answer: An English princess with an Egyptian boyfriend crashes in a French tunnel, driving a German car with a Dutch engine, driven by a Belgian who was drunk on Scottish whisky, followed closely by Italian Paparazzi, on Japanese motorcycles; treated by an American doctor, using Brazilian medicines. This was sent to you by a Canadian, using Bill Gates' technology, and you're probably reading this on your computer, that uses Taiwanese chips, and a Korean monitor, assembled by Bangladeshi workers in a Singapore plant, transported by Indian lorry-drivers, hijacked by Indonesians, unloaded by Sicilian longshoremen, and trucked to you by Mexican illegals! That, my friends, is Globalization!

24. Chongqing’s Go-West Strategy 9/3/2011 Chongqing GDP was 100B RMB in 2000, 960B fcst for 2011 Different strategy than east coast cities—no access to ships Mayor’s vision is to be the central point of a new “Silk Road” to Europe  A new “inland port”  Chongqing rail to Xinjiang, Kazakhstan, Russia, Poland, Belarus Vertical integration  Manufacture components locally near OEMs, too costly to ship in HP already procures 80% of computer parts/components locally Go from model of 70% investment and 30% export in 2000, to 50% domestic consumption, investment 30%, exports just 20% ©2011 Cengage Learning. All rights reserved. 8–24

25. Outbound M&As 2011H1 $62B in 2010, on target for same in 2011 in spite of earthquake in Japan and global economic problems  Largest markets are for energy and resources—32% of 2011H1 investments 20% of M&As over $500M each Need to secure raw materials primary drive now  Also crowded domestic markets competing for resources  Acquire new technologies  Create partnerships in China to expand more overseas Resource M&As also are mostly money deals without as much need for sophisticated management talent ©2011 Cengage Learning. All rights reserved. 8–25

26. Foreign Direct Investments At the end of 2010, China's total ODI was $317.2 billion with investments in 178 nations and regions.  Asia-Pacific region and Latin America were the top two destinations, but the EU and Oceania witnessed the most rapid growth in recent years FDI expanded to $114.7 billion in 2010 from $46.9 billion in 2001, and China has opened its manufacturing sectors and more than 100 service sectors since 2001.  Attracting FDI was cited as a priority in the 12th Five-Year Plan (2011-2015). ©2011 Cengage Learning. All rights reserved. 8–26

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