1. Copyright © 2012 Pearson Canada Inc. 00 Chapter 10 International Strategy

2. Copyright © 2012 Pearson Canada Inc. 1 Why an International Strategy? - GLOBAL ECONOMIES OF SCALE AND SCOPE Key factors  Global economies of scale and scope Pharmaceutical firms such as Pfizer can leverage large R&D budgets Coca-Cola, McDonald’s, and RIM can leverage brands LSG Skychefs has operations around the world providing catering for airlines including Alitalia, Alaska, American, Lufthansa, Malaysia, Northwest, SAS, US Airways, United, and Qantas Global expansion may be attractive if it allows you to leverage fixed assets over new markets

3. Copyright © 2012 Pearson Canada Inc. 2 Why an International Strategy? – LOCATION Key factors  Global economies  Location Input costs Competitors Demand conditions Regulatory environment Presence of complements Choosing the right location can provide advantages in terms of A five-forces analysis can help reveal the attractiveness of a location

4. Copyright © 2012 Pearson Canada Inc. 3 Why an International Strategy? – MULTIPOINT COMPETITION Key factors  Global economies  Location  Multipoint competition Expanding into a new market may provide an opportunity for a “stronghold assault” For example, French tire maker Michelin had negligible presence in the U.S. in the 1970s. It learned of Goodyear’s plans to expand into Europe, so it launched a counter attack. It started selling tires in the U.S. at or below cost, and thereby forced Goodyear to drop prices and cut profits in its core market.

5. Copyright © 2012 Pearson Canada Inc. 4 Why an International Strategy? – LEARNING AND KNOWLEDGE SHARING Key factors Expanding into a new market can create opportunities to innovate, improve existing products in existing markets, or develop ideas for new markets SC Johnson, for example, used technology developed in its European operation (a product for repelling mosquitoes in homes) to create the “ Glade Plug-ins” air freshener in the U.S.  Global economies  Location  Multipoint competition  Learning and knowledge sharing

6. Copyright © 2012 Pearson Canada Inc. 5 Why an International Strategy? - CONS OF INTERNATIONAL EXPANSION Pepsi’s ambitious expansion in the 1990s resulted in a decreased international market share Wal-Marts international businesses perform poorly relative to its U.S. business Many international expansions fail  Newness can be a disadvantage (e.g., your firm must move up the learning curve)  Foreignness can be a liability (e.g., your managers may not understand local culture)  Governance and coordination costs increase as you manage from a distance Why?

7. Copyright © 2012 Pearson Canada Inc. 6 Where to Grow Internationally - THE CAGE DISTANCE FRAMEWORK Attributes creating distance Industries or products affected by distance Cultural distanceAdministrative distanceGeography distanceEconomic distance Different languages Different ethnicities; lack of connective ethnic or social networks Different religions Different social norms Products have high linguistic content (TV) Products affected by cultural or national identity of consumers (foods) Product features vary in terms of size (cars), standards (electrical appliances), or packaging Products carry country- specific quality associations (wines) Absence of colonial ties Absence of shared monetary or political association Political hostility Government policies Institutional weakness Government involvement is high in industries that are Producers of staple goods (electricity) Producers of other “entitlements” (drugs) Large employers (framing) Large suppliers to government (mass transportation) National champions (aerospace) Vital to national security (telecom) Exploiters of natural resources (oil, mining) Subject to high sunk costs (infrastructure) Physical remoteness Lack of a common border Lack of sea or river access Size of country Weak transportation or communication links Differences in climates Products have a low value-of- weight or bulk ratio (cement) Products are fragile or perishable (glass, fruit) Communications and connectivity are important (financial services) Local supervision and operational requirements are high (many services) Differences in consumer incomes Differences in costs and quality of Natural resources Financial resources Human resources Infrastructure Intermediate inputs Information or knowledge Nature of demand varies with income level (cars) Economies of standardization or scale are important (mobile phones) Labour and other factor cost differences are salient (garments) Distribution or business systems are different (insurance) Companies need to be responsive and agile (home appliances ) Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.

8. Copyright © 2012 Pearson Canada Inc. 7 Where to Grow Internationally – CULTURAL DISTANCE ■ power distance: the extent to which individuals accept the existence of inequalities between subordinates and superiors within a hierarchical structure ■ uncertainty avoidance: individuals’ willingness to coexist with uncertainty about the future ■ individualism: how the individuals in a society value individualistic behaviours as opposed to collective ones ■ predominant values: regarding quantity or quality of life, that is, whether more importance is given to material aspects or a stronger emphasis is laid on interpersonal relationships ■ long-term or short-term orientation: the focus on future rewards or the concern about the maintenance of the stability related to the past and the present

9. Copyright © 2012 Pearson Canada Inc. 8 How to Enter Foreign Markets - CHOICE OF ENTRY VEHICLES Choice of entry vehicles Nonequity vehicles Equity (FDI) vehicles Greenfield investments Minority JVsDirect exports Licensing/ franchising Acquisition50/50 JVsIndirect exportsTurnkey projectsOthersMajority JVsOthersContracted R&D Wholly Owned Subsidiaries Alliances and Joint Ventures (JVs) Exports Contractual Agreements Comarketing Strategic alliances (within dotted areas) Source: Adapted from Pan, Y. and D. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, 31 (2000), 535-545

10. Copyright © 2012 Pearson Canada Inc. 9 How to Manage International Strategy Configurations - INTERNATIONAL STRATEGY CONFIGURATIONS AND LOCAL/GLOBAL TRADEOFFS Relatively few opportunities to gain global efficiencies Many opportunities to gain global efficiencies Relatively high local responsiveness Relative low local responsiveness Multinational vision Build flexibility to respond to national differences through strong, resourceful, entrepreneurial, and somewhat independent national or regional operations. Requires decentralized and relatively self-sufficient units Example: MTV initially adopted an international configuration (using only American programming in foreign markets) but then changed its strategy to a multinational one. It now tailors its Western European programming to each market, offering eight channels, each in a different language Transnational vision Develop global efficiency, flexibility, and worldwide learning. Requires dispersed, interdependent, and specialized capabilities simultaneously Example: Nestle has taken steps to move in this direction, starting first with what might be described as a multinational configuration Today, Nestle aims to evolve from a decentralized, profit-centre configuration to one that operates as a single, global company. Firms like Nestle have taken lessons from leading consulting firms such as McKinsey and Company, which are globally dispersed but have a hard-driving, one-firm culture at their core International vision Exploit parent-company knowledge and capabilities through worldwide diffusion, local marketing, and adaptation. The most valuable resources and capabilities are centralized; others, such as local marketing and distribution, are decentralized Example: When Wal-Mart initially set up its operations in Brazil, it used its U.S. stores as a model for international expansion Global vision Build cost advantages through centralized, global- scale operations. Requires centralized and globally scaled resources and capabilities Example: Companies such as Merck and Hewlett- Packard give particular subsidiaries a worldwide mandate to leverage and disseminate their unique capabilities and specialized knowledge worldwide Source: Bartlett, C., S. Ghoshal, & J. Birkenshaw, Transnational Management (New York: Irwin, 2004)

11. Copyright © 2012 Pearson Canada Inc. 10 International Strategy in Stable and Dynamic Contexts - EXPATRIATES AND INPATRIATES Expatriates From the home country Inpatriates From the local or host country