McGraw-Hill/Irwin International Management © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. International Management Phatak, Bhagat, and Kashlak

McGraw-Hill/Irwin International Management © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 6 Strategies for International Competition

6-3 Learning Objectives Discuss the roots of international strategy including ethnocentric, polycentric and geocentric organizations. Explain the facilitators of international expansion of firms. Employ various analytical and portfolio thinking to understand to which countries firms decide to expand. Distinguish among the global, multi-domestic and transnational mindsets of firms and industries. Describe the fit of various value-chain activities into a firm’s total international strategy. Explain the various levels of strategic integration including Stand-Alone, Simple Integration, Complex Integration. Integrate the specific firm-level initiatives of Core Competency Leveraging, Counterattack and Glocalization to a firm’s international strategy.

6-4 Chapter Topics The Roots of International Strategy Strategically Expanding Overseas Strategic Planning for Foreign Market Entry Managing a Portfolio of Country Subsidiaries Modern International Strategic Orientations Worldwide Dispersal and Re-Integration of Value Chain Activities Firm-Level Strategies for International Competitiveness

6-5 Fig 6-1:International Orientations The Ethnocentric Firm The Polycentric Firm The Geocentric Firm

6-6 Types of Firm Orientation Ethnocentric It looks at everything that originates from an organization’s home country as the best in the world. Extreme orientation. Polycentric There are vast differences among the various countries because of differences in culture, language, race, and in their economic, political, and legal systems. Because of these great differences, it would be impossible for the home country nationals to really understand the foreign environments. Hence, management in the parent company should give foreign subsidiaries as much freedom as possible to manage their own affairs. Extreme opposite of ethnocentrism. Geocentric There is no predisposition regarding degree of control or centralization. Rather, there is emphasis on interdependence among headquarters and all foreign subsidiaries. World-oriented attitude.

6-7 Fig 6-2: Macro-Environmental Facilitators of Internationalization Political Forces Competitive Forces Market Forces Technological Forces Internationalization

6-8 Factors in Country Attractiveness Ratings Political Risk Cultural Distance Geographic Distance Economic Environment Foreign Exchange Volatility Market size Market Growth Regulatory Environment

6-9 Ex 6-1: An Analytical Hierarchy Approach to International Expansion (2003) FactorWeightingChileBrazilEcuadorVenezuela Political Stability Market Size Cultural Nearness Regulatory Leniency Repatriation of Profits Total Score Total Wt. Score

6-10 Steps in Foreign Market Entry 1) Identify the company’s objective in its foreign market entry 2) Preliminary country screening 3) What are the opportunities and constraints in the target market? 4) What capabilities, resources, and skills are needed to succeed in the foreign market? 5) Does the company have the core capabilities and resources to score high on the key success factors? What are our strengths and weaknesses on the key success factors? 6) Should the company enter the target market, and how? 7) Compare and rank the targeted countries

6-11 Fig 6-3: Managing a Portfolio of International Subsidiaries Host Country Attractiveness High Low Firm-Level Competitive Strength in Each Host Country Low High Growth Strategies Collaborative Strategies Cross-Subsidization Strategies Defensive Strategies

6-12 Measuring the Firm’s Competitive Strength in Host Country Factors include: Relative Market Share Relative Market Support Technology Fit with the Host Country Relative Contribution Margin Brand Recognition

6-13 Fig 6-4:International Risk-Return Portfolio Host Country Risk High (Under- Developed Countries) Expected Profits in Each Host Country Medium (Emerging Economies Low (Developed Countries) Negative to Low Medium High Harvest & Divest or Licensing Cross- Subsidize Grow Increase Resources To Match Risk or IJVs Industry Leadership Selectively Grow

6-14 Global Integration and Coordination Pressures High Low Local Responsiveness Pressures LowHigh Transnational Orientation (Pharmaceuticals, Telecommunications, Financial Services) Global Orientation (Chemicals, Heavy Metals, Extractive Industries) Multidomestic Orientation (Consumer Non-Durables) International Orientation (Cement, Fabric Mills) Fig 6-5: Strategic Orientations of International Firms presentation

6-15 The Value Chain “The value chain groups a firm’s activities into several categories, distinguishing between those directly involved in producing, marketing, delivering and supporting a product or service; those that create, source, and improve inputs and technology; and those performing overarching functions such as raising capital, or overall decision making” Michael Porter

6-16 Fig 6-6: Upstream, Support, and Downstream Activities and Competitive Advantage Firm Infrastructure Human Resource Management Technology Development Procurement Inbound Logistics Operations Outbound Logistics Marketing and Sales After-Sales Service M a r g i n Support Activities Primary Activities Value What buyers are willing to pay?

6-17 Principles in Redesigning Value Chains for International Firms (Gupta and Govindarajan) 1) Redesigning the set of activities as well as the interfaces across activities, such as supplier and customer linkages 2) Redesigning in order to benefit significant gains in the firm’s cost structure, asset investment and/or speed of responsiveness to external environmental changes 3) Redesigning to ensure rapid growth in market share and economies of scope expansion into other related products and services

6-18 Factors Inducing the Dispersal of Value Chain Activities Absence of Comparative advantage of the country (competitive input costs, low levels of political risk, market size, proximity to major markets or supply sources, availability of knowledge and skills in the population, etc.) Inefficiency gains from economies of scale and scope that can be derived from an increased internal functional specialization and international division of labor Competitive pressures from domestic and foreign-based companies and the necessity to compete in the competitors’ home and third country markets

6-19 Factors Inducing the Dispersal of Value Chain Activities (contd.) The benefits of flexibility and risk reduction derived from multiple sourcing points and destination points for components, products, and capital The opportunities to innovate and learn from diverse cultures and economic systems The fact that human, capital, material, and knowledge-based resources are dispersed throughout the world and not concentrated in any one country or region; and tariff and non- tariff barriers that prevent market penetration via exports

6-20 Level of Integration of Value Chain Activities 1.Stand-alone 2.Simple integration 3.Complex integration

6-21 International Outsourcing Outsourcing is performing some activities in the value chain in foreign countries and linking them to work done elsewhere, mainly in the home country. International outsourcing is the farming out of some value chain activities to countries other than the home country and the major market countries of the product or service

6-22 Fig 6-7: Integration Strategies and Antecedent Factors Integration StrategyType of Intra-firm Linkage Degree of IntegrationEnvironment Stand-Alone Strategy; Multidomestic Orientation; Polycentric Firm Ownership, technology, intracompany trade in goods and services Weak, self-contained affiliates Host country barriers; market entry allowed via direct investment Simple Integration Strategy; Early Global Orientation; Ethnocentric Firm Financial, technology, components, uni- or multi-directional Strong at some links in the value chain, frequent outsourcing to independent contractors Moderate financial, political, currency risks; significant differences in comparative advantages of countries; free trade Complex Integration Strategy; Later Global and Transnational Orientations: Geocentric Firm All functions, multi- directional network Strong linkages and interdependencies throughout value chain links Free trade, trade blocs, convergence of consumer tastes, intense competition from global competitor

6-23 Core Competency and Core Products Core Competency: The distinctive ability to excel in a key area, upon which a company can build a variety of businesses and develop new generations of products, some of which customers may need but have not yet imagined Core Products: the intermediate linkages between core competencies and core products

6-24 Glocalization Firm-level strategic response that parallels the industry-level, total firm transnational orientation Thinking globally but acting locally

6-25 Key Terms and Concepts Ethnocentrism Polycentrism Geocentrism International expansion Value chain dispersal Simple integration strategy Multidomestic orientation Global orientation

6-26 Key Terms and Concepts (contd.) Transnational orientation Core competency leveraging Counterattack Glocalization