Chapter

Chapter88
INTERNATIONAL
Strategy

MGT 406 STRATEGIC MANAGEMENT

Group
Project
Sandra Haro
Learning Objective:
Explain incentives that can influence firms to use an
international strategy.
Identify three basic benefits firms achieve by successfully
implementing an international strategy.
Explore the determinants of national advantage as the
basis for international business-level strategies.
Describe the three international corporate-level
strategies.
Discuss environmental trends affecting the choice of
international strategies, particularly international
corporate-level strategies.
Learning Objective:
Explain the five modes firms use to enter
international markets.
Discuss the two major risks of using international
strategies.
Discuss the strategic competitiveness outcomes
associated with international strategies, particularly
with an international diversification strategy.
Explain two important issues firms should have
knowledge about when using international
strategies.
Figure
Figure 8.1
8.1 Opportunities
Opportunities and
and Outcomes
Outcomes of
of International
International Strategy
Strategy
Identifying International Opportunities
An international strategy is a strategy
through which the firm sells its goods or
services outside its domestic market.
In some instances, firms using an
international strategy become quite
diversified geographically as they compete in
numerous countries or regions outside their
domestic market.
Identifying International Opportunities
In other cases, firms engage in less
international diversification because they
compete in a smaller number of markets
outside their “home” market.
There are incentives for firms to use an
international strategy and to diversify their
operations geographically, and they can gain
three basic benefits when they successfully do
so.
 Incentives
Incentivesto
toUse
Use
International
InternationalStrategy
Strategy
Raymond Vernon expressed the classic rationale for an
international strategy. He suggested that typically a firm
discovers an innovation in its home-country market,
especially in advanced economies such as those in
Germany, France, Japan, Sweden, Canada, and the
United States.
Engaging in an international strategy has the potential
to help a firm extend the life cycle of its product(s).
Gaining access to needed and potentially scarce
resources is another reason firms use an international
strategy.
Increased pressure to integrate operations on a global
scale is another factor influencing firms to pursue an
international strategy.
Technologies are the foundation for efforts to bind
together disparate markets and operations across the
world. International strategy also makes it possible for
firms to use technologies to organize their operations into
a seamless whole.
The potential of large demand for goods and services from
people in emerging markets such as China and India is
another strong incentive for firms to use an international
strategy.
 Figure 8.1
Opportunities and
Outcomes of
International
Strategy
 THREE
THREEBASIC
BASICBENEFITS
BENEFITSOF
OF
INTERNATIONAL
INTERNATIONALSTRATEGY
STRATEGY
Increased Market Size
Firms can expand the size of their potential market—
sometimes dramatically—by using an international
strategy to establish stronger positions in markets
outside their domestic market.
An international market’s overall size also has the
potential to affect the degree of benefit a firm can accrue
as a result of using an international strategy.
 THREE
THREEBASIC
BASICBENEFITS
BENEFITSOF
OF
INTERNATIONAL
INTERNATIONALSTRATEGY
STRATEGY
Increased Market Size

In general, larger international markets

offer higher potential returns and pose less
risk for the firm choosing to invest in those
markets.
ECONOMIES
ECONOMIESOF
OFSCALE
SCALE
AND
ANDLEARNING
LEARNING
By expanding the number of markets in
which they compete, firms may be able to
enjoy economies of scale, particularly in
manufacturing operations.
More broadly, firms able to make continual
process improvements enhance their ability
to reduce costs while, hopefully, increasing
the value their products create for customers.
 Economies
Economiesof
ofScale
Scaleand
and
Learning
Learning
Firms may also be able to exploit core
competencies in international markets through
resource and knowledge sharing between units
and network partners across country borders.
By sharing resources and knowledge in this
manner, firms can learn how to create synergy,
which in turn can help each firm learn how to
produce higher quality products at a lower cost.
Economies
Economiesof
ofScale
Scaleand
and
Learning
Learning
Operating in multiple international markets
also provides firms with new learning
opportunities,perhaps even in terms of
research and development (R&D) activities.
Increasing the firm’s R&D ability can
contribute to its efforts to enhance
innovation, which is critical to both short-
and long-term success.
LOCATION
LOCATIONADVANTAGES
ADVANTAGES
Locating facilities outside their
domestic market can sometimes
help firms reduce costs.
Once positioned in an attractive
location, firms must manage their
facilities effectively to gain the full
benefit of a location advantage.
Location
LocationAdvantages
Advantages
Cultural influences may also affect
location advantages and disadvantages.
International business transactions are
easier for a firm to complete when there
is a strong cultural match with which the
firm is involved while implementing its
international strategy.
International
InternationalStrategies
Strategies
Firms choose to use one or both basic types of
international strategy: business-level international
strategy and corporate-level international strategy.
At the business-level, firms select from among the
generic strategies of cost leadership,
differentiation, focused cost leadership, focused
differentiation, and integrated cost leadership/
differentiation.
International
InternationalStrategies
Strategies
At the corporate level, multidomestic, global, and
transnational international strategies (the transnational is
a combination of the multidomestic and global
strategies) are considered.
To contribute to the firm’s efforts to achieve strategic
competitiveness in the form of improved performance
and enhanced innovation, each international strategy
the firm uses must be based on one or more core
competencies.
INTERNATIONAL BUSINESS-LEVEL STRATEGY
Firms considering the use of any international strategy first
develop domestic-market strategies (at the business level and at
the corporate level if the firm has diversified at the product
level).
Porter’s core argument is that conditions or factors in a firm’s
home base—that is, in its domestic market—either hinder or
support the firm’s efforts to use an international business-level
strategy for the purpose of establishing a competitive
advantage in international markets.
International Business-Level Strategy
Porter identifies four factors as
determinants of a national
advantage that some countries
possess. Interactions among
these four factors influence a
firm’s choice of international
business-level strategy.
Figure 8.3 Determinants
of National Advantage
Determinants
Determinants
of
ofNational
National
Advantage
Advantage
 FACTORS
FACTORSOF
OFPRODUCTION
PRODUCTION
This determinant refers to the
inputs necessary for a firm to
compete in any industry. Labor,
land, natural resources, capital,
and infrastructure
(transportation, delivery, and
communication systems)
represent such inputs.
 Factors
Factorsof
ofProduction
Production
There are basic factors (natural and labor resources) and
advanced factors (digital communication systems and a
highly educated workforce).
Other factors of production 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).
DEMAND
DEMANDCONDITIONS
CONDITIONS
It is characterized by the
nature and size of customers’
needs in the home market for
the products firms competing
in an industry produce.
RELATED
RELATEDAND
ANDSUPPORTING
SUPPORTING
INDUSTRIES
INDUSTRIES
Italy has become the leader in the shoe industry
because of related and supporting industries.
Supporting industries in leather-working
machinery and design services also contribute to
the success of the shoe industry.
In fact, the design services industry supports its
own related industries, such as ski boots, fashion
apparel, and furniture.
 FIRM
FIRMSTRATEGY,
STRATEGY,
STRUCTURE,
STRUCTURE,AND
ANDRIVALRY
RIVALRY
Firm strategy, structure, and rivalry make
up the final determinant of national
advantage and also foster the growth of
certain industries.
The types of strategy, structure, and rivalry
among firms vary greatly from nation to
nation.
International Corporate-Level Strategy
International corporate-level strategy focuses on the scope
of a firm’s operations through geographic diversification.
International corporate-level strategy is required when the
firm operates in multiple industries that are located in
multiple countries or regions (e.g., Southeast Asia or the
European Union) and in which it sells multiple products.
 FIGURE 8.4
INTERNATIONAL
CORPORATE-
LEVEL
STRATEGIES
 International
Corporate-
Level Strategy
MULTIDOMESTIC STRATEGY
A multidomestic strategy is an international strategy in
which strategic and operating decisions are decentralized to
the strategic business units in individual countries or
regions for the purpose of allowing each unit the
opportunity to tailor products to the local market.
With this strategy, the firm’s need for local responsiveness is
high while its need for global integration is low.
Multidomestic Strategy
A multidomestic strategy focuses on competition
within each country because market needs are
thought to be segmented by country boundaries.
The multidomestic strategy is most appropriate for
use when the differences between the markets a
firm serves and the customers in them are
significant.
 GLOBAL STRATEGY
A global strategy is an international strategy in which a
firm’s home office determines the strategies that business
units are to use in each country or region. This strategy
indicates that the firm has a high need for global integration
and a low need for local responsiveness.
Compared to a multidomestic strategy, a global strategy
seeks greater levels of standardization of products across
country markets.
 Global Strategy
The global strategy offers greater
opportunities to take innovations developed
at the corporate-level, or in one market, and
apply them in other markets.
A global strategy is most effective when the
differences between markets and the
customers the firm is serving are
insignificant.
 Global Strategy
Efficient operations are required to
successfully implement a global strategy.
Increasing the efficiency of a firm’s
international operations mandates
resource sharing and greater
coordination and cooperation across
market boundaries.
TRANSNATIONAL
TRANSNATIONALSTRATEGY
STRATEGY
A transnational strategy is an international
strategy through which the firm seeks to
achieve both global efficiency and local
responsiveness.
· “Flexible coordination”— building a shared
vision and individual commitment through an
integrated network—is required to
implement the transnational strategy.
 Transnational
TransnationalStrategy
Strategy
The transnational strategy is difficult to
use because of its conflicting goals. On the
positive side, effectively implementing a
transnational strategy can produce higher
performance than implementing either
the multidomestic or global strategies if
the circumstances are right.
Transnational
TransnationalStrategy
Strategy
Transnational strategies are becoming
increasingly necessary to successfully
compete in international markets.
The complexities of competing in
global markets increase the need for
the use of a transnational strategy.
 ENVIRONMENTAL
ENVIRONMENTALTRENDS
TRENDS
Although the transnational strategy is difficult to
implement, an emphasis on global efficiency is increasing
as more industries, and the companies competing within
them, encounter intensified global competition.
Some large multinational firms with diverse products use a
multidomestic strategy with certain product lines and a
global strategy with others when diversifying
geographically
 Environmental
EnvironmentalTrends
Trends
Many multinational firms may require this type of
flexibility if they are to be strategically competitive, in part
due to trends that change over time.
Liability of foreignness and regionalization are two
important trends influencing a firm’s choice and use of
international strategies, particularly international
corporate-level strategies.
 LIABILITY
LIABILITYOF
OFFOREIGNNESS
FOREIGNNESS
A set of costs associated with various issues firms face when
entering foreign markets, including unfamiliar operating
environments; economic, administrative, and cultural
differences; and the challenges of coordination over
distances.
Four types of distances commonly associated with liability of
foreignness are cultural, administrative, geographic, and
economic.
REGIONALIZATION
REGIONALIZATION
Regionalization is a second global
environmental trend influencing a firm’s
choice and use of international strategies.
This trend is becoming prominent largely
because where a firm chooses to compete
can affect its strategic competitiveness.
 Regionalization
Regionalization
As a result, the firm considering using
international strategies must decide if it should
enter individual country markets or if it would be
better served by competing in one or more
regional markets.
A regional focus allows a firm to marshal its
resources to compete effectively rather than
spreading their limited resources across
multiple country-specific international markets.
 Regionalization
Regionalization
Countries that develop trade agreements to
increase the economic power of their regions may
promote regional strategies.
The European Union and South America’s
Organization of American States (OAS) are country
associations that developed trade agreements to
promote the flow of trade across country
boundaries within their respective regions.
 Regionalization
Regionalization
Regionalization is important to most
multinational firms, even those competing
in many regions across the globe.
Managing businesses by regions helps
multinational enterprises (MNEs) deal
with the complexities and challenges of
operating in multiple international
markets.
 CHOICE
CHOICEOF
OFINTERNATIONAL
INTERNATIONAL
ENTRY
ENTRYMODE
MODE
Five modes of entry into international markets are
available to firms.
Each means of market entry has its advantages and
disadvantages, suggesting that the choice of entry mode
can affect the degree of success the firm achieves by
implementing an international strategy.
Many firms competing in multiple markets may use one
or more or all five entry modes.
 Figure 8.5
Modes of Entry and
their Characteristics
 EXPORTING
For many firms, exporting is the initial mode of entry used.
Exporting is an entry mode through which the firm sends
products it produces in its domestic market to
international markets.
Exporting is a popular entry mode choice for small
businesses to initiate an international strategy.
 Exporting
By exporting, firms avoid the expense of establishing
operations in host countries (e.g., in countries outside their
home country) in which they have chosen to compete.
However, firms must establish some means of marketing
and distributing their products when exporting. Usually,
contracts are formed with host-country firms to handle
these activities.
 Exporting
Evidence suggests that, in general, using an international
cost leadership strategy when exporting to developed
countries has the most positive effect on firm
performance, while using an international
differentiation strategy with larger scale when exporting
to emerging economies leads to the greatest amount of
success.
 Exporting
Firms export mostly to countries
that are closest to their facilities
because usually transportation
costs are lower and there is
greater similarity between
geographic neighbors.
 LLIIC
CEEN
NSSIIN
NGG
Licensing is an entry mode in which an agreement is formed that allows
a foreign company to purchase the right to manufacture and sell a firm’s
products within a host country’s market or a set of host countries’
markets.
The licensor is normally paid a royalty on each unit produced and sold.
Licensing is possibly the least costly form of international
diversification.
The benefit of licensing as an entry mode is the possibility of earning
greater returns from product innovations by selling the firm’s
innovations in international markets as well as in the domestic market.
 LLiicceennssiinngg
Licensing also has disadvantages. For example, after a firm
licenses its product or brand to another party, it has little
control over selling and distribution.
Licensing provides the least potential returns because returns
must be shared between the licensor and the licensee.
Another disadvantage is that the international firm may learn
the technology of the party with whom it formed an agreement
and then produce and sell a similar competitive product after
the licensing agreement expires.
 STRATEGIC ALLIANCES
A strategic alliance finds a firm collaborating with another
company in a different setting in order to enter one or more
international markets.
Firms share the risks and the resources required to enter
international markets when using strategic alliances.
Developing and learning how to use new capabilities and/or
competencies (particularly those related to technology) is often
a key purpose for which firms use strategic alliances as an entry
mode.
 Strategic Alliances
Firms should be aware that establishing trust between partners is
critical for developing and managing technology-based capabilities
while using strategic alliances.
Not all alliances formed for the purpose of entering international
markets are successful.
Another issue is that international strategic alliances are especially
difficult to manage.
If conflict in a strategic alliance formed as an entry mode is not
manageable, using acquisitions to enter international markets may be a
better option.
 ACQUISITIONS
ACQUISITIONS
When a firm acquires another company to
enter an international market, it has
completed a cross-border acquisition.
Specifically, a cross-border acquisition is an
entry mode through which a firm from one
country acquires a stake in or purchases all of a
firm located in another country.
The ability of cross-border acquisitions to
provide rapid access to new markets is a key
reason for their growth.
 Acquisitions
Acquisitions
The five entry modes, acquisitions often are the quickest
means for firms to enter international markets.
Firms use cross-border acquisitions less frequently to
enter markets where corruption affects business
transactions and, hence, the use of international
strategies.
A joint venture is a type of strategic alliance in which two
or more firms create a legally independent company and
share their resources and capabilities to operate it.
 Acquisitions
Acquisitions
Acquisitions as an entry mode are not without
costs, nor are they easy to successfully complete
and operate. Cross-border acquisitions have
some of the disadvantages of domestic
acquisitions.
Negotiations for cross-border acquisitions can
be exceedingly complex and are generally more
complicated than are the negotiations
associated with domestic acquisitions.
NEW WHOLLY OWNED SUBSIDIARY
A greenfield venture is an entry mode through which a firm invests
directly in another country or market by establishing a new wholly
owned subsidiary.
The process of creating a greenfield venture is often complex and
potentially costly, but this entry mode affords maximum control to
the firm and has the greatest amount of potential to contribute to
the firm’s strategic competitiveness as it implements international
strategies.
 New Wholly Owned Subsidiary
Research also suggests that “wholly owned subsidiaries and
expatriate staff are preferred” in service industries where “close
contacts with end customers” and “high levels of professional skills,
specialized know-how, and customization” are required.
Greenfield ventures are used more prominently when the firm’s
business relies significantly on the quality of its capital-
intensive manufacturing facilities.
 New Wholly Owned Subsidiary
The risks associated with greenfield ventures are significant in
that the costs of establishing a new business operation in a new
country or market can be substantial.
When the country risk is high, firms prefer to enter with joint
ventures instead of greenfield investments. However, if firms
have previous experience in a country, they prefer to use a
wholly owned greenfield venture rather than a joint venture.
DYNAMICS
DYNAMICSOF
OFMODE
MODEOF
OFENTRY
ENTRY
All three modes—export, licensing, and
strategic alliance—can be effective means of
initially entering new markets and for
developing a presence in those markets.
Acquisitions, greenfield ventures, and
sometimes joint ventures are used when firms
want to establish a strong presence in an
international market.
Dynamics
Dynamicsof
ofMode
Modeof
ofEntry
Entry
To enter a global market, a firm selects the
entry mode that is best suited to its situation.
In some instances, the various options will be
followed sequentially, beginning with
exporting and eventually leading to
greenfield ventures. In other cases, the firm
may use several, but not all, of the different
entry modes, each in different markets.
International strategies are risky, particularly those that
would cause a firm to become substantially more diversified
in terms of geographic markets served.
Firms entering markets in new countries encounter a
number of complex institutional risks.
Political and economic risks cannot be ignored by firms
using international strategies
FIGURE 8.6 RISKS IN THE INTERNATIONAL ENVIRONMENT
 POLITICAL RISKS
“denote the probability of disruption of the
operations of multinational enterprises by
political forces or events whether they occur in
host countries, home country, or result from
changes in the international environment.”
Political risk in one country often spreads to
others, firms should conduct a political risk
analysis of the countries or regions they may
enter using one of the five entry modes.
 POLITICAL RISKS
Through political risk analysis,
the firm examines potential
sources and factors of
noncommercial disruptions of
their foreign investments and the
operations flowing from them.
 POLITICAL RISKS
Occasionally firms might use political
(institutional) weaknesses as an opportunity
to transfer activities or practices that
stakeholder see as undesirable for their
operations in the home country to a new
market so they can continue earning returns
on these questionable practices.
 ECONOMIC RISKS
Economic risks include fundamental
weaknesses in a country or region’s
economy with the potential to cause
adverse effects on firms’ efforts to
successfully implement their
international strategies.
 ECONOMIC RISKS
In emerging economies, one of the significant economic risks is
the availability of important infrastructure to allow large
industry players, such as miners, to have sufficient electrical
power in national grids to meet their power usage
requirements.
Another economic risk is the perceived security risk of a foreign
firm acquiring firms that have key natural resources or firms
that may be considered strategic in regard to intellectual
property.
ECONOMIC RISKS
Economic risks include
fundamental weaknesses in a
country or region’s economy with
the potential to cause adverse
effects on firms’ efforts to
successfully implement their
international strategies.
Economic Risks
The differences and
fluctuations in the value
of currencies is among
the foremost economic
risks of using an
international strategy.
STRATEGIC
STRATEGICCOMPETITIVENESS
COMPETITIVENESS
OUTCOMES
OUTCOMES
The degree to which firms achieve
strategic competitiveness through
international strategies is
expanded or increased when they
successfully implement an
international diversification
strategy.
Strategic
StrategicCompetitiveness
Competitiveness
Outcomes
Outcomes
As an extension or elaboration of
international strategy, an international
diversification strategy is a strategy
through which a firm expands the sales
of its goods or services across the
borders of global regions and countries
into a potentially large number of
geographic locations or markets.
 INTERNATIONAL
INTERNATIONALDIVERSIFICATION
DIVERSIFICATION
AND
ANDRETURNS
RETURNS
Evidence suggests numerous reasons for firms to use an
international diversification strategy, meaning that
international diversification should be related positively to a
firm’s performance as measured by the returns it earns on its
investments.
As international diversification increases, a firm’s returns
decrease initially but then increase quickly as it learns how to
manage the increased geographic diversification it has
created.
Factors
Factorscontribute
contributeto
tothe
thepositive
positiveeffects
effectsof
of
international
internationaldiversification
diversification
private versus government ownership
potential economies of scale and experience,
location advantages
increased market size
the opportunity to stabilize returns
Large, well-established firms and entrepreneurial ventures
can both achieve these positive outcomes by successfully
implementing an international diversification strategy.
ENHANCED INNOVATION
The only way for individual nations and individual
firms to sustain a competitive advantage is to
upgrade it continually through innovation.
An international diversification strategy creates the
potential for firms to achieve greater returns on
their innovations (through larger or more numerous
markets) while reducing the often substantial risks
of R&D investments.
 Enhanced Innovation
The relationship among international geographic
diversification, innovation, and returns is
complex.
More culturally diverse top management teams
often have a greater knowledge of international
markets and their idiosyncrasies, but their
orientation to expand internationally can be
affected by the nature of their incentives.
 The Challenge
of International
Strategies
 COMPLEXITY OF MANAGING
INTERNATIONAL STRATEGIES
Pursuing international strategies, particularly
an international diversification strategy,
typically leads to growth in a firm’s size and the
complexity of its operations.
Firms have to build on their capabilities and
other advantages to overcome the challenges
encountered in international markets.
 LIMITS TO INTERNATIONAL
EXPANSION
1. greater geographic dispersion across country
borders increases the costs of coordination
between units and the distribution of products.
2. trade barriers, logistical costs, cultural
diversity, and other differences by country
greatly complicate the implementation of an
international strategy.
Limits to International Expansion
Institutional and cultural factors can be strong
barriers to the transfer of a firm’s core
competencies from one market to another.
The amount of diversification in a firm’s
international operations that can be managed
varies from company to company and is affected
by managers’ abilities to deal with ambiguity
and complexity.
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STRATEGIC MANAGMENT