International Strategy Hansen et al Chapter 7 Copyright Guy Harley 2004

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

International Strategy Lifecycle Selling products or services outside a firm’s domestic market Product Demand Develops and Firm Exports Products 2 Foreign Competition Begins Production 3 Firm Introduces Innovation into Domestic Market 1 4 Firm Begins Production Abroad Production Becomes Standardised and is Relocated to Low-Cost Countries 5 10

Regional Trade Agreements and Associations The European Union (EU) North American Free Trade Agreement (NAFTA) Asia-Pacific Economic Co-operation (APEC) Association of Southeast Asian Nations (ASEAN) Copyright Guy Harley 2004

International Selling with the Internet An indicator of the potential to sell products internationally using computer technology is the number of Internet hosts per 1000 people: 122.8 Finland 60.8 Australia 2.1 Mexico Copyright Guy Harley 2004

Corporate-Level International Strategies Increased Market Share Motivations for International Expansion Return on Investment Economies of Scale Location Advantages Copyright Guy Harley 2004 34

Increased Market Share Domestic market may be too small to support efficient-scale manufacturing facilities Copyright Guy Harley 2004

Return on Investment Large investment projects may require global markets to justify the capital outlays required Weak patent protection in some countries implies that firms should expand overseas rapidly in order to pre-empt imitators Copyright Guy Harley 2004

Economies of Scale Economies of Scale or Learning Expanding the size or scope of markets helps achieve economies of scale in manufacturing as well as marketing, R&D and/or distribution, and: Can spread costs over a larger sales base Can increase profit per unit Copyright Guy Harley 2004

Location Advantages Low-cost markets may aid in developing competitive advantage through achieving better access to: Raw materials Lower-cost labour Key suppliers Key customers Energy Natural Resources Copyright Guy Harley 2004

Porter’s Determinants of National Advantage Home country of origin is crucial to international success Related and Supporting Industries Factor Conditions Basic Factors: Land, labour Advanced Factors: Highly educated workers Digital communications Generalised Factors: Capital, infrastructure Specialised Factors: Skilled personnel Demand Conditions Home country may support scale-efficient operations by itself Firm Strategy, Rivalry & Structure Intense rivalry fosters industry competition 21

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Corporate-Level International Strategies International Low Cost Business Level International Strategies International Differentiation International Focus Low Cost\Differentiation Copyright Guy Harley 2004 34

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 Copyright Guy Harley 2004

International Differentiation Countries with advanced or specialised factor conditions are most likely to use this strategy Copyright Guy Harley 2004

International Focus International Focus Strategies Technologically advanced firms follow focused low-cost strategy Focused differentiation firms compete on the basis of image and design Third group competes on low price by imitating Copyright Guy Harley 2004

Low Cost\Differentiation 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 Copyright Guy Harley 2004

Corporate-Level International Strategies Type of corporate strategy selected will have an impact on the selection and implementation of business-level strategies Some corporate strategies provide individual country units with the flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units Copyright Guy Harley 2004 34

Corporate-Level International Strategies Multi-Domestic Strategy Three Corporate Strategies Global Strategy Transnational Strategy Copyright Guy Harley 2004 34

Multi-Domestic Strategy Strategy and operating decisions are decentralised to strategic business units (SBUs) 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 region Focus is on competition in each market A prominent strategy among European firms, due to the broad variety of cultures and markets in Europe Copyright Guy Harley 2004 41

Global Strategy Products are standardised across national markets Decisions regarding business-level strategies are centralised in the home office Strategic business units (SBU) are assumed to be interdependent Emphasises economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (which also makes it difficult to manage) Copyright Guy Harley 2004 48

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 decentralisation to achieve local market responsiveness Must pursue organisational learning to achieve competitive advantage Copyright Guy Harley 2004 52

International Corporate Strategy High Need for Global Integration Low Low High Copyright Guy Harley 2004 Need for Local Market Responsiveness 61

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Choice of International Entry Mode New Wholly-Owned Subsidiary Exporting Licensing Strategic Alliances Acquisitions New Wholly-Owned Subsidiary Copyright Guy Harley 2004 70

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 customise products Copyright Guy Harley 2004 70

Licensing Firm authorises 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 May not understand the strategic intent of partners, or may experience divergence of goals Copyright Guy Harley 2004 78

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 and/or politics May experience difficulties in merging disparate cultures May not understand the strategic intent of partners, or may experience divergence of goals Copyright Guy Harley 2004 83

Acquisitions Enable firms to achieve 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 Copyright Guy Harley 2004 89

New Wholly-Owned Subsidiary Most costly and complex of entry alternatives Achieves greatest degree of control Potentially most profitable, if successful Maintains control over technology, marketing and distribution May need to acquire expertise and knowledge that is relevant to host country, that is, may require hiring host-country nationals or consultants at high cost Copyright Guy Harley 2004 95

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Major Risks of International Diversification Political Risk Economic Risk Copyright Guy Harley 2004 107

Political Risk National government instability may create problems for internationally diversified firms Potential for changes in attitudes or regulations regarding foreign ownership Legal authority obtained from previous administrations may become invalid Potential for nationalisation of private firms’ assets Copyright Guy Harley 2004 107

Economic Risk Economic risks are interdependent with political risks Differences and fluctuations in international currencies may affect prices, the value of assets & liabilities, and ultimately the ability to compete Differences in inflation rates may affect an internationally diversified firm’s ability to compete Potential for nationalisation of private firms’ assets Copyright Guy Harley 2004 112

International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness Outcomes Management Problems and Risk International Strategies Modes of Entry Increased Market Size International Business-Level Strategy Exporting Higher Performance Returns Exporting Return on Investment Multidomestic Strategy Strategic Alliances Economies of Scale and Learning Global Strategy Acquisition Innovation Establishment of New Subsidiary Location Advantage Transnational Strategy Management Problems and Risk 3

Strategic Competitiveness Outcomes International diversification facilitates innovation in the firm Provides larger market to gain more and faster returns from investments in innovation May generate resources necessary to sustain a large-scale 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 Copyright Guy Harley 2004