International Strategy Hitt, Ireland, and Hoskisson Chapter 8 International Strategy Hitt, Ireland, and Hoskisson This chapter examines opportunities facing firms as they seek to develop and exploit core competencies by diversifying into global markets. In addition, we discuss different problems, complexities, and threats that might accompany a firm’s international strategy. Although national boundaries, cultural differences, and geographical distances all pose barriers to entry into many markets, significant opportunities motivate businesses to enter international markets. A business that plans to operate globally must formulate a successful strategy to take advantage of these global opportunities. Furthermore, to mold their firms into truly global companies, managers must develop global mind-sets.

Increase in international strategies Use of international strategies is increasing Traditional motives extending the product life cycle securing key resources having access to low-cost labor Emerging motives integration of the Internet and mobile telecommunications, which facilitates global transactions. demand for commodities becomes borderless An international strategy is a strategy through which the firm sells its goods or services outside its domestic market. One of the primary reasons for implementing an international strategy (as opposed to a strategy focused on the domestic market) is that international markets yield potential new opportunities. One reason why firms pursue international diversification is to extend a product’s life cycle. Another traditional motive for firms to become multinational is to secure needed resources. Other emerging motivations also drive international expansion. For instance, pressure has increased for a global integration of operations, mostly driven by more universal product demand. As nations industrialize, the demand for some products and commodities appears to become more similar. This borderless demand for globally branded products may be due to similarities in lifestyle in developed nations. Increases in global communication media also facilitate the ability of people in different countries to visualize and model lifestyles in different cultures. In some industries, technology drives globalization because the economies of scale necessary to reduce costs to the lowest level often require an investment greater than that needed to meet domestic market demand. Companies also experience pressure for cost reductions, achieved by purchasing from the lowest-cost global suppliers. Copyright © 2008 Cengage

Benefits of international strategy Increased market size Earning a return on large investments Economies of scale and learning Advantages of location Increased market size - Firms can expand the size of their potential market—sometimes dramatically—by moving into international markets. Earning a return on large investments – International expansion provides larger markets, and those larger markets can be particularly attractive in many industries because they expand the opportunity for the firm to recoup significant capital investments and large-scale R&D expenditures. Economies of scale and learning - By expanding their markets, firms may be able to enjoy economies of scale, particularly in their manufacturing operations. To the extent that a firm can standardize its products across country borders and use the same or similar production facilities, thereby coordinating critical resource functions, it is more likely to achieve optimal economies of scale. Advantages of location - Firms may locate facilities in other countries to lower the basic costs of the goods or services they provide. These facilities may provide easier access to lower-cost labor, energy, and other natural resources. Other location advantages include access to critical supplies and to customers. Once positioned favorably with an attractive location, firms must manage their facilities effectively to gain the full benefit of a location advantage. Copyright © 2008 Cengage

Porter’s model International business-level strategies are usually grounded in one or more home-country advantages, as Porter’s model suggests. Porter’s model factors of production demand conditions related and supporting industries patterns of firm strategy, structure, and rivalry Michael Porter’s model describes the factors contributing to the advantage of firms in a dominant global industry and associated with a specific home country or regional environment. The first dimension in Porter’s model is the factors of production. This dimension refers to the inputs necessary to compete in any industry—labor, land, natural resources, capital, and infrastructure (such as transportation, postal, and communication systems). There are basic factors (for example, natural and labor resources) and advanced factors (such as digital communication systems and a highly educated workforce). Other production factors are generalized (highway systems and the supply of debt capital) and specialized (skilled personnel in a specific industry, such as the workers in a port that specialize in handling bulk chemicals). If a country has both advanced and specialized production factors, it is likely to serve an industry well by spawning strong home-country competitors that also can be successful global competitors. The second dimension in Porter’s model, demand conditions, is characterized by the nature and size of buyers’ needs in the home market for the industry’s goods or services. A large market segment can produce the demand necessary to create scale efficient facilities. Related and supporting industries are the third dimension in Porter’s model. Italy has become the leader in the shoe industry because of related and supporting industries; a well-established leather-processing industry provides the leather needed to construct shoes and related products. Firm strategy, structure, and rivalry make up the final country dimension and also foster the growth of certain industries. The types of strategy, structure, and rivalry among firms vary greatly from nation to nation. Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage of Nations, by Michael E. Porter, p. 72. Copyright ©1990, 1998 by Michael E. Porter. Copyright © 2008 Cengage

International corporate-level strategies Multidomestic strategy Focuses on competition within each country in which the firm competes. Decentralizes strategic and operating decisions to the business units operating in each country so each unit can tailor its goods and services to the local market. Global strategy Assumes more standardization of products across country boundaries – so competitive strategy is centralized and controlled by the home office. Transnational strategy Integrates characteristics of multi-domestic and global strategies to emphasize both local responsiveness and global integration and coordination. This strategy is difficult to implement, requiring an integrated network and a culture of individual commitment. A multidomestic strategy is an international strategy in which strategic and operating decisions are decentralized to the strategic business unit in each country so as to allow that unit to tailor products to the local market. A multidomestic strategy focuses on competition within each country. A global strategy is an international strategy through which the firm offers standardized products across country markets, with competitive strategy being dictated by the home office. A transnational strategy is an international strategy through which the firm seeks to achieve both global efficiency and local responsiveness. Copyright © 2008 Cengage

Influence of environmental trends Although the transnational strategy’s implementation is a challenge, environmental trends are causing many multinational firms to consider the need for both global efficiency and local responsiveness. Many large multinational firms, particularly those with many diverse products, use a multidomestic strategy with some product lines and a global strategy with others. Although the transnational strategy is difficult to implement, emphasis on global efficiency is increasing as more industries begin to experience global competition. To add to the problem, an increased emphasis on local requirements means that global goods and services often demand some customization to meet government regulations within particular countries or to fit customer tastes and preferences. In addition, most multinational firms desire coordination and sharing of resources across country markets to hold down costs. Furthermore, some products and industries may be more suited than others for standardization across country borders. Copyright © 2008 Cengage

International risks Liability of foreignness Regionalization The threat of wars and terrorist attacks increase the risks and costs of international strategies. Furthermore, research suggests that the liability of foreignness is more difficult to overcome than once thought. Regionalization Some firms decide to compete only in certain regions of the world. This allows them to focus their learning on specific markets, cultures, locations, resources, and other factors. Two important trends are the liability of foreignness and regionalization. Research shows that global strategies are not as prevalent as they once were and are still difficult to implement, even when using Internet-based strategies. Regionalization is a second trend that has become more common in global markets. Because a firm’s location can affect its strategic competitiveness, it must decide whether to compete in all or many global markets, or to focus on a particular region or regions. Competing in all markets provides economies that can be achieved because of the combined market size. Research suggests that firms that compete in risky emerging markets can also have higher performance. Copyright © 2008 Cengage

Market entry Forms of international expansion Exporting Licensing Strategic alliances Acquisitions New wholly-owned subsidiaries Most firms begin with exporting or licensing, because of their lower costs and risks, but later they might use strategic alliances and acquisitions to expand internationally. The most expensive and risky means of entering a new international market is through the establishment of a new wholly owned subsidiary. On the other hand, such subsidiaries provide the advantages of maximum control by the firm and, if it is successful, the greatest returns. Copyright © 2008 Cengage

Modes of market entry Type of Entry Characteristics Exporting High cost, low control Licensing Low cost, low risk, little control, low returns Strategic alliances Shared costs, shared resources, shared risks, problems of integration (e.g., two corporate cultures) Acquisition Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations New wholly owned subsidiary Complex, often costly, time consuming, high risk, maximum control, potential above-average returns Exporting - Many industrial firms begin their international expansion by exporting goods or services to other countries. Exporting does not require the expense of establishing operations in the host countries, but exporters must establish some means of marketing and distributing their products. Usually, exporting firms develop contractual arrangements with host country firms. The disadvantages of exporting include the often high costs of transportation and tariffs placed on some incoming goods.The exporter has less control over the marketing and distribution of its products in the host country and must either pay the distributor or allow the distributor to add to the price to recoup its costs and earn a profit. As a result, it may be difficult to market a competitive product through exporting or to provide a product that is customized to each international market. Licensing - Licensing is an increasingly common form of organizational network, particularly among smaller firms. A licensing arrangement allows a foreign company to purchase the right to manufacture and sell the firm’s products within a host country or set of countries. The licensor is normally paid a royalty on each unit produced and sold. The licensee takes the risks and makes the monetary investments in facilities for manufacturing, marketing, and distributing the goods or services. As a result, licensing is possibly the least costly form of international expansion. Strategic alliances - In recent years, strategic alliances have become a popular means of international expansion. Strategic alliances allow firms to share the risks and the resources required to enter international markets. Moreover, strategic alliances can facilitate the development of new core competencies that contribute to the firm’s future strategic competitiveness. Acquisition - As free trade has continued to expand in global markets, cross-border acquisitions have also been increasing significantly. Acquisitions often provide the fastest and the largest initial international expansion of any of the alternatives. Thus, entry is much quicker than by other modes. Acquisitions also are the mode used by many firms to enter Eastern European markets. Although acquisitions have become a popular mode of entering international markets, they are not without costs. International acquisitions carry some of the disadvantages of domestic acquisitions. In addition, they can be expensive and also often require debt financing, which carries an extra cost. New wholly-owned subsidiary - The establishment of a new wholly owned subsidiary is referred to as a greenfield venture. The process of creating such ventures is often complex and potentially costly, but it affords maximum control to the firm and has the most potential to provide above-average returns. This potential is especially true of firms with strong intangible capabilities that might be leveraged through a greenfield venture. The risks are also high because of the costs of establishing a new business operation in a new country. The firm may have to acquire the knowledge and expertise of the existing market by hiring either host-country nationals, possibly from competitors, or consultants, which can be costly. Still, the firm maintains control over the technology, marketing, and distribution of its products. Furthermore, the company must build new manufacturing facilities, establish distribution networks, and learn and implement appropriate marketing strategies to compete in the new market. Research also suggests that when the country risk is high, firms prefer to enter with joint ventures instead of greenfield investments in order to manage the risk. Copyright © 2008 Cengage

Diversification facilitates innovation International diversification facilitates innovation in a firm because it provides a larger market to gain more and faster returns from investments in innovation. International diversification may generate the resources necessary to sustain a large-scale R&D program. In general, international diversification is related to above average returns, but this assumes that the diversification is effectively implemented and that the firm’s international operations are well managed. International diversification provides greater economies of scope and learning, which, along with greater innovation, help produce above-average returns. Copyright © 2008 Cengage

Risks of multinational operations 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 Political risks are risks related to instability in national governments and to war, both civil and international. Instability in a national government creates numerous problems, including economic risks and uncertainty created by government regulation; the existence of many, possibly conflicting, legal authorities or corruption; and the potential nationalization of private assets. Regarding economic risks, countries need to create and sustain strong intellectual property rights and enforcement in order to attract desired foreign direct investment. Another economic risk is the security risk posed by terrorists. Foremost among the economic risks of international diversification are the differences and fluctuations in the value of different currencies. Copyright © 2008 Cengage

Limits to International Expansion Some limits constrain the ability to effectively manage international expansion. International diversification increases coordination and distribution costs, and management problems are exacerbated by trade barriers, logistical costs, and cultural diversity, among other factors. After learning how to operate effectively in international markets, firms tend to earn positive returns on international diversification. But, the returns often level off and become negative as the diversification increases past some point. Several reasons explain the limits to the positive effects of international diversification. First, greater geographic dispersion across country borders increases the costs of coordination between units and the distribution of products. Second, trade barriers, logistical costs, cultural diversity, and other differences by country (e.g., access to raw materials and different employee skill levels) greatly complicate the implementation of an international diversification strategy. Institutional and cultural factors can present strong barriers to the transfer of a firm’s competitive advantages from one country to another. Marketing programs often have to be redesigned and new distribution networks established when firms expand into new countries. In addition, firms may encounter different labor costs and capital charges. In general, it is difficult to effectively implement, manage, and control a firm’s international operations. Copyright © 2008 Cengage