1. Chapter 8 Looking at International Strategies

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

3. 2 DELL GOES TO CHINA Dell became China’s largest computer system provider in just 5 years If we’re not in what will soon be the second-biggest PC market in the world, then how can Dell possibly be a global player? Strategic decisions Vehicles StagingConsumers first, then corporations U.S. Assemble and distribute itself Corporations first China Partner

4. 3 INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND Economic logic Arenas VehiclesStaging Differentiators Arenas Which geographic areas will we enter? Which channels will we use in those areas? Which international market-entry strategies will we use? Alliances? Acquisitions? Greenfield investments? Vehicles How does being international make our products more attractive to our customers? Differentiators How does our international strategy lower our costs, raise the prices we can charge, or create synergies between our business? Economic logic When will we go international? How quickly will we expand into international markets? In what sequence will we implement our entry tactics? Staging

5. 4 PROS VS. 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?

6. 5 KEY FACTORS – GLOBAL ECONOMIES OF SCALE 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

7. 6 KEY FACTORS – LOCATION Key factors  Global economies of scale  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

8. 7 KEY FACTORS – MULTIPOINT COMPETITION Key factors  Global economies of scale  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

9. 8 KEY FACTORS – 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 of scale  Location  Multipoint competition  Learning and knowledge sharing

10. 9 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, values, beliefs Hofstede’s Culture Study 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) Absence of colonial ties Absence of shared monetary or political association Political hostility Government policies Institutional weakness Regulatory interactions 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 ) Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.

11. 10 ADMINISTRATIVE DISTANCE Legal concerns for US firms Free Trade Agreements FTA’s Open foreign markets to US exports Import Laws Antidumping Foreign Corrupt Practices Act Anti-bribery provisions Intellectual Property Protection Patent Cooperation Treaty USPTO

12. 11 ADMINISTRATIVE DISTANCE NAFTA Historical Political Hostilities Decreased distance between US, Mexico, and Canada Increased distance between Cuba and US

13. 12 ECONOMIC DISTANCE “Bottom of the pyramid” 4 billion people Deliberate Targeting Ex: shampoo for cold water

14. 13 CHOICE OF ENTRY MODES Choice of entry mode Nonequity modes Equity (FDI) modes 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

15. 14 VEHICLES FOR ENTERING FOREIGN MARKETS 100% Exports100% Local Exports versus local production Degree of ownership control over activities per- formed in the foreign market 0% 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 Source: Examples drawn from in Gupta, A., and V. Govindarajan, “Managing Global Expansion: A Conceptual Framework,” business Horizons, March/April 2002, 45-54

16. 15 EXPORTING OPTIONS Shipping Most common option in relatively close markets and for products with lower shipping costs Licensing and franchising 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) Special agreements 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)

17. 16 ALLIANCES U.S. firm Until recently, China did not allow non-Chinese companies in China … … so U.S. companies formed alliances to gain access Chinese Firm

18. 17 FOREIGN DIRECT INVESTMENT 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 Foreign company Local company Home country/ market Acquires

19. 18 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 “Domestic” company Home country Country A Production Country B Customer service Country C Logistics

20. 19 INTERNATIONAL STRATEGY CONFIGURATIONS Relatively few opportunities to gain global efficiencies Many opportunities to gain global efficiencies Relatively high local responsiveness Relative low 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. 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)

21. 20 BORN – GLOBAL FIRMS More and more firms, even young, small ones, have operations that bridge national borders Founded by 2 Italians 1 Swiss R&D California Switzerland Production Ireland Taiwan 30% of global PC mouse busi- ness by 1989 Logitech

22. 21 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

23. 22 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 mindset Global perspective Global skills

24. 23 EXPATRIATES AND INPATRIATES Expatriates From the home country Inpatriates From the local or host country

25. 24 HOW WOULD YOU DO THAT? Fewer than 15% of executives have substantive international experience If you were CEO, how would you build a global perspective in your executives? TacticAction steps Teams? Training? Transfers? ???? 1 2 3 4