Chapter 8 Looking at International Strategies

FIRST - A NOTE ON THE PRESENTATION SCHEDULE & CASES Added March, 2011 FIRST - A NOTE ON THE PRESENTATION SCHEDULE & CASES August 4: Stakeholder Analysis Role of Vision & Mission Netflix Whole Foods August 9: Smartphones Strategic Partnerships – China Red Bull Cirque du Soleil Southwest Airlines Please email a copy of the presentation the night before. Thank you. Cases: 4 opportunities remain to submit a case analysis. The very last opportunities to submit cases are July 28 (Balanced Scorecard) and August 2 (Daimler Chrysler). Final case – this is due on August 11. This case analysis is an individual effort. Case: Corporate Solutions at Jones Lang LaSalle (2001) – Harvard Business School, Rev: July 1, 2010, 9-409-111

OBJECTIVES 1 Define international strategy and identify its implications for the strategy diamond 2 Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage Use the CAGE framework to identify desirable international arenas 3 Describe different vehicles for global expansion 4 5 Apply different international strategy configurations 6 Outline the international strategy implications of the static and dynamic perspectives

Dell became China’s largest computer system provider in just 5 years DELL GOES TO CHINA “ Strategic decisions Vehicles Staging Consumers first, then corporations U.S. Assemble and distribute itself Corporations first China Partner Dell became China’s largest computer system provider in just 5 years If we’ve not in what will soon be the second-biggest PC market in the world, then how can Dell possibly be a global player? “

INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND Updated March, 2011 INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND When will we go international? How quickly will we expand into international markets? In what sequence will we implement our entry tactics? Staging Arenas Which geographic areas will we enter? Which channels will we use in those areas? Which value chain activities? Arenas Vehicles Which international market-entry strategies will we use? Alliances? Acquisitions? Greenfield investments? Economic logic Staging Vehicles Differentiators Economic logic Differentiators How does our international strategy lower our costs, raise the prices we can charge, or create synergies between our business and corporate strategies? How does being international make our products more attractive to our customers? Will our existing differentiators be effective in these new markets?

THREE KEY QUESTIONS IN THE MODEL OF INTERNATIONALIZATION Why should we go? Positive economic logic? Supported by our differentiators? Strengthens or adds to our differentiators? If not – STOP. Consider another strategy. If the “why” is positive – move to “Where” and “How” Evaluate hard criteria, soft criteria, and Fit before reaching a final decision

PROS VS. CONS OF INTERNATIONAL EXPANSION Many international expansions fail Why? 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 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

KEY FACTORS – GLOBAL ECONOMIES OF SCALE Pharmaceutical firms such as Pfizer, can leverage large R&D budgets CitiGroup, McDonald’s, and Coca-Cola can leverage brands MITY can leverage its excess capacity to produce chairs and thereby reduce average costs Global expansion may be attractive if it allows you to leverage fixed assets over new markets Key factors Global economies of scale 

KEY FACTORS – 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 Key factors Global economies of scale  Location 

KEY FACTORS – 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 Key factors Global economies of scale  Location  Multipoint competition 

KEY FACTORS – LEARNING AND KNOWLEDGE SHARING 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. Key factors Global economies of scale  Location  Multipoint competition   Learning and knowledge sharing

THE CAGE DISTANCE FRAMEWORK Cultural distance Administrative distance Geography distance Economic distance Attributes creating distance Different languages Different ethnicities; lack of connective ethnic or social networks Different religions Different social norms 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) Labor and other factor cost differences are salient (garments) Distribution or business systems are different (insurance) Companies need to be responsive and agile (home appliances ) Industries or products affected by distance Products have high linguistic content (TV) Products affect 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) Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.

RELATIONSHIP PREFERENCES IMPACT BUSINESS BEHAVIORS – CULTURAL DISTANCE Added March, 2011 Power distance: the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally Uncertainty Avoidance: the extent to which the members of a culture feel threatened by ambiguous or unknown situations Individualism: stands for a society in which the ties between individuals are loose: everyone is expected to look after him- or herself and his or her immediate family only (the opposite of collectivism) Masculinity: stands for a society in which emotional gender roles are clearly distinct: men are supposed to be assertive, tough, and focused on material success; women are supposed to be more modest, tender, and concerned with the quality of life Confucian dynamism: a dimension of national cultures found through research among student samples using the Chinese Value Survey. Used by Hofstede to describe long-term vs. short-term orientation. Long-term orientation: the fostering of pragmatic virtues oriented toward future rewards, such as perseverance, thrift, and adapting to changing circumstances Short-term orientation: fostering of virtues related to the past and present, such as national pride, respect for tradition, preservation of face, and fulfilling social obligations Power distance: relationship between superiors and subordinates (Hofstede, Cultures and Organizations, Software of the Mind, 2010)* Individualism vs. collectivism United States is clearly different from Japan Risk-taking behavior Uncertainty avoidance Trust Future orientation Fatalism 5 key indices: Power distance, uncertainty avoidance, individualism, masculinity, Confucian dynamism Original edition - 1991

CORPORATE IMAGES ILLUSTRATE DIFFERENT CULTURES AND BEHAVIORS Samii/Mertz CORPORATE IMAGES ILLUSTRATE DIFFERENT CULTURES AND BEHAVIORS Added March, 2011 Egalitarian INCUBATOR GUIDED MISSLE Focus on self-expression and self-fulfillment Innovative; entrepreneurial Change – fast and spontaneous Emotional – “the journey is the reward” Employees are co-creators Management by enthusiasm Focus on reaching targets and strategic intent Task, not role oriented “whatever it takes” Egalitarian; cross-functional Loyalties are to professions and projects (not the company) Employees are specialists and experts Management by objectives US UK Norway Ireland Finland Sweden Denmark Switzerland Canada Some US UK Person Task FAMILY EIFFEL TOWER Greece Italy Japan Singapore South Korea Spain Person-oriented Promotion by age Long-term, devoted relationship to corp. High context Employees are family members Management by subjectives Bureaucratic division of labor Status is ascribed to the role Careers assisted by professional qualifications Structure, order, predictability Employees are human Resources Management by job description Germany Austria Other northwestern European and North American Hierarchical Source: Fons Trompenaars & Charles Hampden-Turner, Riding the Waves of Culture, 1998

ADMINISTRATIVE DISTANCE Updated March, 2011 ADMINISTRATIVE DISTANCE Free Trade Agreements FTA’s Open foreign markets to US exports Import Laws Antidumping (dumping – selling goods below cost in a foreign country) Legal concerns for US firms Foreign Corrupt Practices Act Anti-bribery provisions Intellectual Property Protection Patent Cooperation Treaty USPTO

ADMINISTRATIVE DISTANCE Decreased distance between US, Mexico, and Canada Historical Political Hostilities NAFTA Increased distance between Cuba and US

“Bottom of the pyramid”   ECONOMIC DISTANCE Deliberate Targeting “Bottom of the pyramid” 4 billion people Ex: shampoo for cold water

CHOICE OF ENTRY MODES Choice of entry mode Equity (FDI) modes Nonequity modes Exports Contractual agreements Alliances and joint ventures (JVs) Wholly owned subsidiaries Direct exports Licensing/ franchising Minority JVs Greenfield investments Indirect exports Turnkey projects 50/50 JVs Acquisition Others Contracted R&D Majority JVs Others 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

VEHICLES FOR ENTERING FOREIGN MARKETS 100% FDI Exports Alliance Champion International’s paper exports through independent brokers Honda’s initial entry into the U.S. market FDI through acquisition Bridgestone’s acquisition of U.S.-based Firestone Ford-Mazda Genentech-Hoffman LaRoche Alliance and exports KFC’s franchisees in India Degree of ownership control over activities per- formed in the foreign market 0% 100% Exports 100% Local Exports versus local production Source: Examples drawn from in Gupta, A., and V. Govindarajan, “Managing Global Expansion: A Conceptual Framework,” business Horizons, March/April 2002, 45-54

EXPORTING OPTIONS Most common option in relatively close markets and for products with lower shipping costs Shipping A firm may form an alliance or franchise giving a local partner the right and responsibility to operate the firm’s business in their home market (e.g., Burger King’s expansion in Europe) Licensing and franchising A firm may enter Turnkey project agreements, R&D contracts, or joint-marketing initiatives (e.g., a German firm Bayer AG contracts large R&D projects to a U.S. firm) Special agreements

ALLIANCES Until recently, China did not allow non-Chinese companies in China … û U.S. firm … so U.S. companies formed alliances to gain access Chinese Firm

FOREIGN DIRECT INVESTMENT Home country/ market Foreign company Local company Acquires South African Breweries purchase Miller Brewing in 2002 to gain access to U.S. customers and brewing capacity DaimlerChrysler and BMW each invested $250 million to start local factories in Brazil

IMPORTING Importing is often a “stealth” form of internationalization because a firm will claim to have no international operations and yet directly or indirectly base production or service delivery abroad Country A Production Country B “Domestic” company Customer service Home country Country C Logistics

INTERNATIONAL STRATEGY CONFIGURATIONS Updated March, 2011 INTERNATIONAL STRATEGY CONFIGURATIONS Relatively few opportunities to gain global efficiencies Many opportunities to gain global efficiencies Relatively high local responsiveness Multinational configuration Build flexibility to respond to national difference 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 configuration 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-center 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. Relative low local responsiveness International configuration 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 configuration 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)

30% of global PC mouse busi- ness by 1989 BORN – GLOBAL FIRMS More and more firms, even young, small ones, have operations that bridge national borders Logitech Founded by R&D Production 30% of global PC mouse busi- ness by 1989 2 Italians California Ireland 1 Swiss Switzerland Taiwan

HOW TO SUCCEED AS A GLOBAL START-UP If yes, Put together tools you will need to move into global market Consider if you should be a global start-up Do you need human resources from other countries to succeed? Strong management team with inter- national experience Do you need financial capital from other countries to succeed? Broad and deep international network among suppliers, customers, and complements If you go global, will target customers prefer your services over competitor's? Preemptive marketing or technology to provide first-mover advantage Can you put an international system in place more quickly than domestic competitors? Strong intangible assets Do you need global scale and scope to justify the financial and human capital investment? Ability to keep customers locked in by linking new products and services to core business, while you innovate Will a purely domestic focus now make it harder for you to go global in the future? Close worldwide coordination and com- munication among business units, suppliers, complements and customers

DEVELOPING A GLOBAL MIND-SET Having an appreciation for the differences between countries and people and seeing these differences as opportunities Having developed skills for managing diverse teams in a world- wide work force Global perspective Global skills

EXPATRIATES AND INPATRIATES From the home country Inpatriates From the local or host country

Fewer than 15% of executives have substantive international experience HOW WOULD YOU DO THAT? If you were CEO, how would you build a global perspective in your executives? Tactic Action steps Teams ? Training Transfers ??? 1 2 3 4 Fewer than 15% of executives have substantive international experience