HANDOUT 4 STRATEGIC ALTERNATIVES

INTERNATIONAL STRATEGIC MANAGEMENT

International strategic management – is a

comprehensive and ongoing management planning
process aimed at formulating and implementing
strategies that enable a firm to compete effectively
internationally.

Strategic planning – the process of developing a

particular international strategy Figure 11.1 Strategic Alternatives

FUNDAMENTAL QUESTIONS
• What products and/or services does the firm intend to
sell?
• Where and how will it make those products or
services?
• Where and how will it sell them?
• Where and how will it acquire the necessary
resources?
• How does it expect to outperform its competitors?

FACTORS AFFECTING INTERNATIONAL STRATEGIC

MANAGEMENT:
• Language • Financing
COMPONENTS OF INTERNATIONAL STRATEGY
• Culture • Market research
• Politics • Advertising
• Economy • Money
• Governmental •Transportation/
interference communication
• Labor • Control
• Labor relations • Contracts

SOURCES OF COMPETITIVE ADVANTAGE: DISTINCTIVE COMPETENCE

■ Answers the question:
What do we do exceptionally well, especially as
compared to our competitors?
■ Represents important resource to the firm

SCOPE OF OPERATION
■ Answers the question:
Where are we going to conduct business?
■ Aspects of scope
– Geographical region
GLOBAL EFFICIENCIES: – Market or product niches within regions
– Specialized market niches

RESOURCE DEPLOYMENT
■ Answers the question:
Given that we are going to compete in these
markets, how will we allocate our resources to
them?
■ Resource specifics
– Product lines
– Geographical lines
LOCATION EFFICIENCIES Synergy
Mercedes-Benz has achieved economies of scale by Answers the question:
focusing production of its M-class at its assembly plant How can different elements of our business
in Vance, Alabama. benefit each other?
**Goal is to create a situation where the whole is
greater than the sum of the parts
DEVELOPING INTERNATIONAL STRATEGIES The Value Chain

STEPS IN INTERNATIONAL STRATEGY

FORMULATION:

🞆 Strategic goals are the major objectives the firm

wants to accomplish through pursuing a particular
course of action

🞆 Control Framework is the set of managerial and

organizational processes that keep the firm moving
toward its strategic goals.
MISSION STATEMENTS
TACTICAL GOALS AND PLANS
🞆 Clarifies the organization’s purpose, values,
🞆 Middle management issues
direction
🞆 Details of implementation
🞆 Communicates firm’s strategic direction
Examples: Hiring, Compensation, Career paths,
🞆 Specifies firm’s target customers and markets,
Distribution and logistics
principal products, geographical domain, core
technologies, concerns for survival, plans for growth
and profitability, basic philosophy, and desired
public image LEVELS OF INTERNATIONAL STRATEGY
🞆 Wells Fargo
• Satisfy all our customers’ financial needs,
help them succeed financially, be known as
one of America’s great companies and the
number-one financial services provider in
each of our markets
🞆 Carpenter Technology
• Major, profitable, and growing international
producer and distributor of specialty alloys,
materials, and components

SWOT Analysis
🞆 Strengths
🞆 Weaknesses Corporate Strategy
🞆 Opportunities 🞆 Single-Business Strategy
🞆 Threats 🞆 Related Diversification
🞆 Unrelated Diversification
Environmental Scan is a systematic collection of data
about all elements of the firm's external and internal Advantages of Related Diversification:
environments, including markets, regulatory issues, 🞆 Less dependence on single product
competitors' actions, production costs, and labor 🞆 Greater economies of scale
productivity. 🞆 Entry into additional markets more efficient and
effective

BUSINESS STRATEGY: FUNCTIONAL STRATEGIES:

HANDOUT 5 MOTIVATIONS FOR EXPORTING

STRATEGIES FOR ANALYZING AND ENTERING

FOREIGN MARKETS

FOREIGN MARKET ANALYSIS

– Assess alternative markets
– Evaluate the respective costs, benefits, and risks of
entering each
– Select those that hold the most potential for entry or
expansion FORMS OF EXPORTING:

CRITICAL FACTORS IN ASSESSING NEW MARKET

OPPORTUNITIES:
• Product-market • Potential target markets
dimensions • Relevant trends
• Major product-market • Explanation of change
differences • Success factors
• Structural • Strategic options
characteristics of national INDIRECT EXPORTING
market
• Competitor analysis

A Tale of Two Chinas

DIRECT EXPORTING

Choosing a Mode of Entry

INTRACORPORATE TRANSFERS

EXPORTING
Advantages Disadvantages
– Relatively low financial – Vulnerability to tariffs
exposure and NTBs
– Permit gradual market – Logistical complexities ADDITIONAL CONSIDERATIONS FOR EXPORTING
entry – Potential conflicts with
– Acquire knowledge distributors
about local market
– Avoid restrictions on
foreign investment
TYPES OF EXPORT INTERMEDIARIES LICENSING
Advantages Disadvantages
🠶 Low financial risks 🠶 Limited market
🠶 Low-cost way to opportunities/profits
assess market 🠶 Dependence on
potential licensee
🠶 Avoid tariffs, NTBs, 🠶 Potential conflicts
restrictions on with licensee
foreign investment 🠶 Possibility of
🠶 Licensee provides creating future
Export management company (EMC) – is a firm that
knowledge of local competitor
acts as its client's export department by managing the
markets
legal, financial, and logistical details of exporting, and
providing advice about consumer needs and available
distribution channels in the foreign markets the exporter A franchising agreement allows an independent
wants to penetrate. entrepreneur or organization, called the franchisee, to
operate a business under the name of another, called
Webb-Pomerene Association – is a group of U.S. firms the franchisor, in return for a fee.
that operate within the same industry and that are
allowed by law to coordinate their export activities Basic Issues in International Franchising:
without fear of violating U.S. antitrust laws. – Does a differential advantage exist in the domestic
market?
Five Largest Soga Soshas – Are these success factors transferable to foreign
🠶 Mitsubishi Corporation locations?
🠶 Mitsui & Company – Has franchising been a successful domestic strategy?
🠶 Marubeni
🠶 Sumitomo Group FRANCHISING
🠶 Itochu Corporation
Advantages Disadvantages
• Low financial risks • Limited market
OTHER INTERMEDIARIES:
• Low-cost way to assess opportunities/profits
market potential • Dependence on
• Avoid tariffs, NTBs, franchisee
restrictions on foreign • Potential conflicts with
investment franchisee
• Maintain more control • Possibility of creating
than with licensing future competitor
• Franchisee provides
knowledge of local
market
Licensing is when a firm, called the licensor, leases the
right to use its intellectual property—technology, work
methods, patents, copyrights, brand names, or SPECIALIZED ENTRY MODES FOR INTERNATIONAL
trademarks—to another firm, called the licensee, in BUSINESS:
return for a fee.

Basic Issues in International Licensing:

🠶 Set the boundaries of the agreement
🠶 Establish compensation rates
🠶 Agree on the rights, privileges, and constraints
conveyed in the agreement
🠶 Specify the duration of the agreement

THE LICENSING PROCESS

■ CONTRACT MANUFACTURING HANDOUT 6
Advantages Disadvantages
– Low financial risks – Reduced control (may INTERNATIONAL TRADE AND INVESTMENT
– Minimize resources affect quality, delivery
devoted to manufacturing schedules, etc.) • Trade – voluntary exchange of goods, services, assets,
– Focus firm’s resources – Reduce learning or money between one person or organization and
on other elements of the potential another.
value chain – Potential public • International Trade – trade between residents of two
relations problems countries.

■ MANAGEMENT CONTRACTS
◾ Why Does International Trade Occur?
– Both parties to the transaction benefit
Advantages Disadvantages – Exports spark additional economic activity
– Focus firm’s resources – Potential returns limited – Improve competitiveness
on its area of expertise by contract expertise
– Minimal financial – May unintentionally International Trade and the World Economy
exposure transfer proprietary
knowledge and
techniques to contractee

■ TURNKEY PROJECTS
Advantages Disadvantages
– Focus firm’s resources – Financial risks:
on its area of expertise - Cost overruns
– Avoid all long-term – Construction risks
operational risks - Delays
- Problems with
suppliers CLASSICAL COUNTRY-BASED TRADE THEORIES

A. Early Country-Based Theories

■ FOREIGN DIRECT INVESTMENT
🠶 Focused on the individual country
Advantages Disadvantages 🠶 Useful for describing trade in commodities
– High profit potential – High financial and 🠶 Price is an important component of the
– Maintain control over managerial investments customer’s purchase decision
operations – Higher exposure to
– Acquire knowledge of political risk B. Modern Firm-Based Theories
local market – Vulnerability to 🠶 Focus on the firm’s role in promoting
– Avoid tariffs and NTBs restrictions on foreign international trade
investment 🠶 Useful in describing patterns of trade in
– Greater managerial differentiated goods
complexity 🠶 Brand Name is an important component of
the customer’s purchase decision
Foreign Direct Investment
Classical Country-Based Trade Theories:
🠶 Building new facilities (the greenfield strategy)
Mercantilism
🠶 Buying existing assets in a foreign country
🠶 Gold and Silver
(acquisition strategy)
🠶 Increased Exports
🠶 Participating in a joint venture
🠶 Reduced Imports
🠶 Neomercantilistsor Protectionists
1. Greenfield Strategy
🠶 Best site
Classical Country-Based Trade Theories: Absolute
🠶 Modern facilities

◾
Advantage
🠶 Economic development incentives
Adam Smith attacked the intellectual basis of
🠶 Clean slate
mercantilism
– Weakens a country
2. Acquisition
– Squanders a country’s resources
acquiring an existing firm conducting business in

◾
– Reduce a country’s wealth
the host country.
Smith advocated free trade among countries
– Enlarges a country’s wealth
Adam Smith’s Absolute Advantage Theory INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT
– Official name of the World Bank
– Help finance reconstruction of the war-torn European
economies
– Build the economies of the world’s developing
countries
– Three affiliated organizations:
(1) International Development Association
(2) International Finance Corporation

◾ France has an absolute advantage in the production (3) Multilateral Investment Guarantee
Agency

◾ Japan has an absolute advantage in the production

of wine

◾ Trade: Both will be better off

of clock radios

HANDOUT 7

THE INTERNATIONAL MONETARY SYSTEM

AND THE BALANCE OF PAYMENTS
Griffin & Pustay

HISTORY OF THE INTERNATIONAL MONETARY

SYSTEM: The Gold Standard
INTERNATIONAL MONETARY FUND
– Under the gold standard, countries agree to buy or sell
1. Boost international monetary cooperation
their paper currencies in exchange for gold
2. Facilitate international trade
– In 1821 the United Kingdom became the first country
3. Stabilize exchange arrangements
to adopt the gold standard
4. Foster multilateral payment system
– The gold standard effectively created a fixed exchange
5. Build confidence of members
rate system
6. Adjust international balance of payments

◾ Fixed exchange rate system INTERNATIONAL MONETARY FUND: Quotas

– the price of a given currency does not change relative
to each other currency and Voting Power
– Sterling-based Gold Standard: Most firms accepted – As of 2013, 188 countries were members
either gold or British pounds in settlement of – To join, a country must pay a quota
transactions. – A country’s quota determines
– Country’s voting power within the IMF
– Country’s borrowing power from the IMF
HISTORY OF THE INTERNATIONAL MONETARY
– IMF conditionality

◾ World War I
SYSTEM: Collapse of the Gold Standard

– normal commercial transactions between the Allies

(France, Russia, and the United Kingdom) and the
Central Powers (Austria-Hungary, Germany, and the
Ottoman Empire) ceased
– The Great Depression
– Competitive Devaluations

◾ Beggar-Thy-Neighbor Policies
– Most countries also raised the tariffs they imposed on
imported goods in the hope of protecting domestic jobs
in import-competing industries
– World War II

HISTORY OF THE INTERNATIONAL MONETARY

◾ U.S. Dollar–Based Gold Standard

DOLLAR-BASED GOLD STANDARD
◾ Bretton Woods conferees agreed to:
SYSTEM: Bretton Woods Era

◾ Fixed Exchange Rate

◾ The creation of two new international organizations:
– Renew the gold standard on a greatly modified basis
– Under the agreement, each country pledged to
– International Bank for Reconstruction and maintain the value of its currency within a range

◾
Development-World Bank of ± 1 percent of its par value.
– International Monetary Fund Adjustable Peg System
– adjust its currency’s par value.
HISTORY OF THE INTERNATIONAL MONETARY FINANCIAL CRISIS
SYSTEM: The End of the Bretton Woods 🠶 International Debt Crisis
A . The Baker Plan
◾ Speculative “Runs on the Bank”
System
– stressed several points: the importance of debt
– there was little risk in converting a suspect rescheduling, tight IMF-imposed controls over
domestic monetary and fiscal policies, and
◾
currency into dollars.
Triffin Paradox continued lending to debtor countries so that
– Foreigners needed to increase their holdings economic growth would allow them to repay
of dollars to finance international trade, but the their creditors
more dollars they owned, the less faith they had B. The Brady Plan
that the United States could redeem dollars for – focused on the need to reduce the debts of the
troubled countries by writing off parts of the
◾
gold
Special Drawing Rights (SDRs) debts or by providing the countries with funds to
– IMF members could use SDRs to settle official buy back their loan notes at below face value
transactions at the IMF. Unfortunately, SDRs did not
Asian Currency Crisis
◾
reduce the glut of dollars held by foreigners.

◾
Nixon’s 1971 Speech – erupted in July 1997, when Thailand, which
Smithsonian Conference had pegged its currency to a dollar-dominated
– held in Washington, D.C., in December 1971, central basket of currencies, was forced to unpeg its
bank representatives from the Group of Ten agreed to currency, the baht, after investors began to
restore the fixed exchange rate system but with distrust the abilities of Thai borrowers to repay
restructured rates of exchange between the major their foreign loans and of the Thai government to
trading currencies. maintain the baht’s value.

HISTORY OF THE INTERNATIONAL MONETARY Subprime Meltdown

– resulted from the bursting of the U.S. housing
◾ Flexible (or Floating) Exchange Rate System
SYSTEM: Performance of the IMF Since 1971
bubble. The problems created by this collapse
– supply and demand for a currency determine affected financial markets throughout the world.

◾
its price in the world market.
Managed Float (or, a Dirty Float) BOP ACCOUNTING SYSTEM
– exchange rates are not determined purely by 🠶 The current account records four types of

◾
private sector market forces transactions among residents of different
Jamaica Agreement countries:
– Flexible exchange rate system legitimized 1. Exports and imports of goods: The balance
– Pegged exchange rate on merchandise trade is the difference between a

◾
– Crawling pegs country’s merchandise exports and merchandise
European Monetary System (EMS) imports.
2. Exports and imports of services: The
difference between a country’s exports of services
◾ The Plaza Accord
OTHER POST–WORLD WAR II CONFERENCES
and its imports of services is called the balance on
– the central banks agreed to let the dollar’s services trade.
3. Investment income: Income that a country’s
◾
value fall on currency markets.
The Louvre Accord residents earn from foreign investments is viewed
– This accord signaled the commitment of these as an export of the services of capital. Income
five countries to stabilizing the dollar’s value. earned by foreigners from their investments in a
country is viewed as an import of the services of
INTERNATIONAL DEBT CRISIS capital by that country.
4. Gifts (or unilateral transfers): Private gifts
between residents of one country and residents in
another country are called unilateral transfers.
Governmental aid is a public unilateral transfer. In
either case, recipients don’t need to provide any
compensation to the donors.

◾ records financial transactions—purchases and sales

CAPITAL ACCOUNT

of assets—between residents of one country and those

of other countries. Account transactions can be divided
Soaring Oil Prices (1973 – 1974) and (1978 – 1979) into two categories: foreign direct investment and foreign
portfolio investment.
◾ is any investment made for the purpose of controlling
Foreign Direct Investment (FDI) – The foreign-exchange market comprises buyers and
sellers of currencies issued by the world’s countries.
the organization in which the investment is made. A
typical means of obtaining this goal is through ownership Foreign-Exchange Trading
of significant blocks of common stock with voting – The largest center for foreign exchange trading is
privileges. London, followed by New York and Tokyo.

Foreign portfolio investment (FPI) Figure 8.5 Currencies Involved in

– is any investment made for purposes other than Foreign-Exchange Market Transactions
control.
• FPIs are divided into two subcategories:
short-term investments and long-term investments.
Short-term foreign portfolio investments are
financial instruments with maturities of one year or
less: (e.g., commercial paper, checking accounts,
time deposits, and trade receivables). Long-term
foreign portfolio investments include stocks,
bonds, and other financial instruments that have
maturities greater than one year.

OFFICIAL RESERVES ACCOUNT

◾ Buy or sell major traded currencies
The Role of Banks

◾ Markets
– Records the level of official reserves held by a national
government
– Official reserves comprise 4 types of assets: – Wholesale market
1. Gold – Retail market
2. Convertible currencies
3. Special Drawing Rights (SDRs) Map 8.1 A Day of Foreign-Exchange Trading
4. Reserve positions at the IMF

HANDOUT 8

FOREIGN EXCHANGE AND INTERNATIONAL

FINANCIAL MARKETS

Foreign exchange – is a commodity that consists of

currencies issued by countries other than one’s own.

Foreign-Exchange Rates
A. Direct exchange rate
– Direct quote Bank Foreign Exchange Clients
– Price of the foreign currency in terms of home currency
A. Commercial customers
B. Indirect exchange rate
– engage in foreign-exchange transactions as
– Indirect quote
part of their normal commercial activities, such
– Price of the home country in terms of the foreign
as exporting or importing goods and services,
currency
paying or receiving dividends and interest from
foreign sources, and purchasing or selling
Figure 8.4 Direct and Indirect Exchange Rates foreign assets and investments.
B. Speculators
– deliberately assume exchange rate risks by
acquiring positions in a currency, hoping that
they can correctly predict changes in the
currency’s market value.
C. Arbitrageurs
– attempt to exploit small differences in the price
of a currency between markets. They seek to
obtain riskless profits by simultaneously buying
the currency in the lower-priced market and
selling it in the higher-priced market.

Structure of the Foreign-Exchange Markets Foreign-Exchange Trading

The Tel Aviv foreign-exchange trader is an important link
in the $3.2 trillion-per-day global exchange market

Spot and Forward Markets

A. Spot Market
– foreign exchange transactions that are
consummated immediately.
B. Forward Market
– foreign exchange transactions that are to
occur sometime in the future.