INTERNATIONAL STRATEGY:

Creating Value In Global Market

Learning Objectives:

• The importance of international expansion as a variable diversification strategy.

• The source of national advantage; that is why an industry in a given country is more (or less) successful than same

industry in another country.

• The motivations and the risks associated with international expansion, including the emerging trend for greater

offshoring and outsourcing activity.

• The opposing forces-cost reduction and adaptation to local markets-that firms face when entering international markets.

• The advantages and disadvantages associated with each of the four basic strategies; international, global, multi

domestic , and transnational.

• The difference between regional companies and truly global companies.

• The four basic types of entry strategies and relative benefits and risk associated with each of them.
 THE GLOBAL ECONOMY
Managers face many opportunities and risks when they
diversify abroad. The trade among nation has increase
dramatically in recent years and it is estimated that bay 2015, the
trade across the nations will exceed the trade within nations. In a
variety of industries such as semiconductors, automobiles,
commercial aircraft, telecommunications, computers, and
consumers electronics, it is almost impossible to survive unless
firms scan the world for competitors, consumers, human resource,
suppliers, and technology.
GE’s wind energy business benefits by tapping into talent around the world.
The firm has built research centers in Chine, Germany, India, and U.S. “We did
it,” says CEO Jeffrey Immelt, “to access the best brains everywhere in the world”.
All four centers have played key role in GE’s development of huge 92-ton
turbines:
• Chinese researcher in Shanghai designed the microprocessors that control
the pitch of the table.
• Mechanical engineers from India (Bangladore) devised mathematical
models to maximize the efficiency of materials in turbine.
• Power system expert in the U.S. (Niskayuna, Newyork), which has
researchers from 55 countries , do the designed work.
• Technicians in Munich, Germany have created a “smart” turbine that can
calculate wind speeds and signal sensors in other turbines to produce
maimum electricity.
GLOBALIZATION
Globalization has two meanings

• One is the increase in • Two is the growing

international exchange, similarity of laws, rules,
including trade in goods and norms, values, and ideas
services as well as exchange across countries.
of money, ideas, and
information.
FACTORS AFFECTING A NATION’S COMPETITIVENESS

• Factor endowment (national advantage)

- The nation’s position in factors of production, such as
skilled labor or infrastructure, necessary to compete in
given industry.
• Demand conditions (national advantage)
- The nature of home market demand for the industry’s
product or services.
FACTORS AFFECTING A NATION’S
COMPETITIVENESS

• Related and supporting industries (national advantage)

- The presence, absence, and quality in the nation of supplier industries
and other related industries that are internationally competitive.
• Firm strategy, structure, and rivalry (national advantage)
- The conditions in the nation governing how companies are created,
organized, and managed as well as the nature of domestic rivalry.
INTERNTIONAL EXPANSION: A
COMPANY’S MOTIVATIONS AND RISKS
The are many motivations for a company to pursue international
expansion. The most obvious one is to increase the size of potential
markets for a firm’s products and services. By early 2009, the world’s
population exceeded 6.7 billion, with the U.S. representing less than
5 percent.
INTERNTIONAL EXPANSION: A
COMPANY’S MOTIVATIONS AND RISKS

Many multinational firms are intensifying their efforts to market their products
and services to countries such as India and China as the ranks of their middle class
have increase over the past decade. These include Procter and Gamble’s success for
achieving a 50 percent share in China’s shampoo market as well as PepsiCo’s
impressive inroads in the India soft-drinks market.
China’s Emerging Middle Class
 China’s middle class has finally attained a critical mass- between 35 million and
200 million people, depending on what definition is used. The larger number is
preferred by Fan Gong, director of China’s National Economic Research Institute,
who fixes the lower boundary of “middle” as a family income of $10,000.
 The central government’s emphasis on science and technology has boosted the
rapid development of higher education, which is the incubator of the middle
 THREE STRATEGIC ADVANTAGES

Critical decision as to where each activities will take place . Optimizing the
location for every activity in the value chain can yield one or more of three
strategic advantages;

 Performance Enhancement – Microsoft’s decision to establish a corporate

research laboratory in Cambridge, England is an example of a location decision
that was guided mainly by goal of building and sustaining world class
excellence in selected value creating activities.
 Cost Reduction – two location decision founded largely on cost reduction
considerations are (1) Nike’s decision to source the manufacture of athletic
shoes from Asian countries such as China, Vietnam, and Indonesia. (2) The
decision of many multinational companies set up production operations just
south of the U.S.-Mexico border to access lower cost labor.
 Risk Reduction – Given the erratic swings in the
exchange ratios between the U.S. dollar and the
Japanese yen, an important basis for cost competition
between Ford and Toyota has been their relative
ingenuity at managing currency risks. One way for such
rivals to manage currency risks has been to spread the
high cot elements of their manufacturing operations
across a few select and carefully chosen locations
around the world. Location decision such as these can
affect the overall risks profile of the firm with respect to
currency, economic, and political risks.
POTENTIAL RISKS OF INTERNATIONAL
EXPANSION

 Political Risk – potential threat to a firm’s operations in a country due to

ineffectiveness of the domestic political system.
 Economic Risk – potential threat to a firm’s operations in a country due to
economic policies and conditions, including property rights laws and
enforcement of those laws.
 Currency Risk – potential threat to firm’s operations in a country due to
fluctuations in local currency’s exchange rate.
 Management Risk – potential threat to a firm’s operation in a country due to
the problems that managers have making decisions in the context of foreign
markets.
 GLOBAL DISPERSION OF VALUE CHAINS:
OUTSOURCING AND OFFSHORING
A major recent trend has been the dispersion of the value
chains of multinational corporations across different countries;
that is, the various activities that constitute the value chain of a
firm are now spread across several countries and continents.
Such dispersion of value occurs mainly through increasing
offshoring and outsourcing.

• Outsourcing – using other firm’s to perform value creating

activities that were previously performed in house.
• Offshoring – shifting a value creating activity from a
domestic location to foreign location.
FOUR BASIC TYPES OF INTERNATIONAL
STRATEGIES
• International Strategy – a strategy based on firm’s diffusion and adaptation
of parent companies knowledge and expertise to foreign markets, used in
industries where the pressures for both local adaptation and lowering cost
are low.
• Global Strategy – a strategy based on firm’s centralization and control by the
corporate office, with the primary emphasis on controlling costs, and used in
industries where the pressure for local adaptation is low and the pressure
for lowering costs is high.
• Multi-domestic Strategy – a strategy based on firm’s differentiating their
products and services to adapt to local markets , used in industries where
the pressure for local adaptation is high and the pressure for lowering costs
is low
• Transnational Strategy – a strategy based on firm’s
optimizing the trade offs associated with efficiency, local
adaptation, and learning , use in industries where the
pressures for both local adaptation and lowering costs
are high
ENTRY MODES OF INTERNATIONAL
EXPANSION

A firm’s has many options available to it when it decides to expand into

international markets. Given the challenges associated with such entry, many firms
first start on a small scale and then increase their level of investment and risk as they
gain greater experience with the overseas market in question.

MODES OF FOREIGN ENTRY

 Exporting – producing goods in one country to sell to residents of another
country.
 Licensing – a contractual arrangement in which a company receives a royalty or
fee in exchange for the right to use its trademark, patent, trade secret, or other
valuable intellectual property.
  Franchising – a contractual arrangement in which a
company receives a royalty or fee in exchange for
the right to use its intellectual property, it usually
involves a longer time period than licensing and
includes other factors , such as monitoring of
operations, training, and advertising.
 Strategic Alliances and Joint Ventures – strategic alliance and joint
ventures have recently become increasingly popular. These two forms
of partnership differ in that joint ventures entail the creation of a third
party legal entity, where as strategic alliance do not. In addition,
strategic alliances generally focus on initiatives that are smaller in scope
than joint ventures.

 Wholly Owned Subsidiary – a business in which a multinational

company owns 100 percent of the stock.