International

Strategy
International Strategy
• International Strategy
 A strategy through which the firm sells its goods or
services outside its domestic market.
• Reasons to having an international strategy
 International markets yield potential new
opportunities.
 New market expansion extends product life cycle.
 Needed resources can be secured.
 Greater potential product demand.

8–2
How is internationalisation Pursued?
Firms generally go international by exporting their products first, then
by establishing sale representatives in the foreign countries, and
then possibly setting up production facilities

Eventually, international firms may develop into:

Multinational corporations (MNC): a firm that carries out its value

chains in more than one country. It is generally headquartered in
one home country while it also operates in one or more host
countries.

Trans-national corporations (TNC): a MNC that does not identify

itself with any specific nation, but acquires truly international (i.e.,
not country-dependent) features and high local responsiveness

British East India Siemens, Berlin, Royal Dutch

Company, est. 1600 est. 1847 Shell, est. 1907
Classic Rationale for International Diversification:
Extend a Product’s Life Cycle

Product Demand Foreign

Develops and Firm Competition
Exports Products Begins Production

Firm Introduces
Firm Begins
Innovation in
Production Abroad
Domestic Market

Production is standardized and

relocated to low cost countries.

8–4
International Strategy Benefits
• Increased Market Size
 Domestic market may lack the size to support efficient
scale manufacturing facilities.

• Return on Investment
 Large investment projects may require global markets
to justify the capital outlays.
 Weak patent protection in some countries implies that
firms should expand overseas rapidly in order to
preempt imitators.

8–5
International Strategy Benefits (cont’d)
• Economies of Scale (or Learning)
 Expanding size or scope of markets helps to achieve
economies of scale in manufacturing as well as
marketing, R&D or distribution.
 Can spread costs over a larger sales base.
 Can increase profit per unit.

8–6
International Strategy Benefits (cont’d)
• Location Advantages
 Low cost markets aid in developing competitive
advantage by providing access to:
• Raw materials
• Transportation
• Lower costs for labor
• Key customers
• Energy

8–7
 FIGURE 8.2 Determinants of National Advantage

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.
8–8
Determinants of National Advantage
• Factors of production
 The inputs necessary to compete in any industry
• Labor Land Natural resources
• Capital Infrastructure

• Basic factors
 Natural and labor resources
• Advanced factors
 Digital communication systems and an educated
workforce

8–9
Determinants of National Advantage (cont’d)
• Demand Conditions
 Characterized by the nature and size of buyers’ needs
in the home market for the industry’s goods or
services.
• Size of the market segment can lead to scale-efficient
facilities.
• Efficiency can lead to domination of the industry in other
countries.
• Specialized demand may create opportunities beyond national
boundaries.

8–10
Determinants of National Advantage (cont’d)
• Related and Supporting Industries
 Supporting services, facilities, suppliers and so on.
• Support in design
• Support in distribution
• Related industries as suppliers and buyers

• Firm Strategy, Structure and Rivalry

 The pattern of strategy, structure, and rivalry among
firms.
• Common technical training
• Methodological product and process improvement
• Cooperative and competitive systems

8–11
Selecting an International Corporate-Level
Strategy
• The type of corporate strategy selected will have
an impact on the selection and implementation of
the business-level strategies.
 Some strategies provide individual country units with
the flexibility to choose their own strategies.
 Other strategies dictate business-level strategies from
the home office and coordinate resource sharing
across units.

8–12
International Corporate-Level Strategy
• Focuses on the scope of operations:
 Product diversification
 Geographic diversification
• Required when the firm operates in:
 Multiple industries, and
 Multiple countries or regions
• Headquarters unit guides the strategy
 But business or country-level managers can have
substantial strategic input.

8–13
FIGURE 8.3 International Corporate-Level Strategies

8–14
Multidomestic Strategy
• Strategy and operating decisions are
decentralized to strategic business units
Multidomestic (SBU) in each country.
strategy • Products and services are tailored to local
markets.
• Business units in one country are
independent of each other.
• Assumes markets differ by country or
regions.
• Focus on competition in each market.
• Prominent strategy among European firms
due to broad variety of cultures and markets
in Europe.

8–15
Global Strategy
• Products are standardized across
Global national markets.
strategy • Business-level strategic decisions are
centralized in the home office.
• Strategic business units (SBU) are
assumed to be interdependent.
• Emphasizes economies of scale.
• Often lacks responsiveness to local
markets.
• Requires resource sharing and
coordination across borders (hard to
manage).
8–16
Transnational Strategy
• Seeks to achieve both global
efficiency and local responsiveness.
Transnational
strategy • Difficult to achieve because of
simultaneous requirements:
 Strong central control and coordination to
achieve efficiency
 Decentralization to achieve local market
responsiveness
• Firm must pursue organizational
learning to achieve competitive
advantage.

8–17
Environmental Trends
• Liability of Foreignness
 Legitimate concerns about the relative attractiveness
of global strategies
 Global strategies not as prevalent as once thought
 Difficulty in implementing global strategies
• Regionalization
 Focusing on particular region(s) rather than on global
markets
 Better understanding of the cultures, legal and social
norms

8–18
3. How do firms go international?

Entry strategies into foreign markets include:

Merely exporting a firm's products into a foreign market, possibly

with the support of trade brokers

Licensing a firm's production and marketing process, or asking for

royalties to be paid for the use of firm's assets and resources

Franchising a firm's business

Directly undertaking production and selling in a foreign country

a) through a 'multinational approach' by adapting to local markets
b) through a 'global approach' by mass-marketing the same product

Strategic alliances and joint ventures with foreign firms

How do firms go international?
Entry strategies into foreign markets include:

Merely exporting

Licensing or asking for royalties

Franchising a firm's business

“Multinational approach”

“Global approach”

Strategic alliances and joint ventures

TABLE 8.1 Global Market Entry: Choice of 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

8–21
Dynamics of Mode of Entry

What’s the best solution?

Situation Optimal Solution
The
Thefirm
firmhas
hasnonoforeign
foreign Export
Export
manufacturing
manufacturingexpertise
expertise
and
andrequires
requiresinvestment
investment
only
onlyinindistribution.
distribution.

8–22
Dynamics of Mode of Entry (cont’d)

What’s the best solution?

Situation Optimal Solution
The
Thefirm
firmneeds
needsto
to Licensing
Licensing
facilitate
facilitatethe
theproduct
product
improvements
improvements
necessary
necessaryto toenter
enter
foreign
foreignmarkets.
markets.

8–23
Dynamics of Mode of Entry (cont’d)

What’s the best solution?

Situation Optimal Solution
The
Thefirm
firmneeds
needstoto Strategic
StrategicAlliance
Alliance
connect
connectwith
withan
an
experienced
experiencedpartner
partner
already
alreadyininthe
thetargeted
targeted
market.
market.

8–24
Dynamics of Mode of Entry (cont’d)

What’s the best solution?

Situation Optimal Solution
The
Thefirm
firmneeds
needstoto Strategic
StrategicAlliance
Alliance
reduce
reduceitsitsrisk
riskthrough
through
the
thesharing
sharingof ofcosts.
costs.

8–25
Dynamics of Mode of Entry (cont’d)

What’s the best solution?

Situation Optimal Solution
The
Thefirm
firmis
isfacing
facing Strategic
StrategicAlliance
Alliance
uncertain
uncertainsituations
situations
such
suchasasananemerging
emerging
economy
economyin inits
its
targeted
targetedmarket.
market.

8–26
Dynamics of Mode of Entry (cont’d)

What’s the best solution?

Situation Optimal Solution
The
Thefirm’s
firm’sintellectual
intellectual Wholly-owned
Wholly-owned
property
propertyrights
rightsin
inan
an Subsidiary
Subsidiary
emerging
emergingeconomy
economyare are
not
notwell
well protected,
protected, the
the
number
numberof offirms
firmsininthe
the
industry
industryis isgrowing
growingfast,
fast,
and
andthe
theneed
needfor forglobal
global
integration
integrationis ishigh.
high.

8–27
International Diversification and Returns
• Expanding sales of goods or services across
global regions and countries and into different
geographic locations or markets:
 May increase a firm’s returns (such firms usually
achieve the most positive stock returns).
 May achieve economies of scale and experience,
location advantages, increased market size and
opportunity to stabilize returns.

8–28
International Diversification and Innovation
• Expansion sales of goods or services across
global regions and countries and into different
geographic locations or markets:
 May yield potentially greater returns on innovations (a
larger market).
 Can generate additional resources for investment in
innovation.
 Provides exposure to new products and processes in
international markets; generates additional knowledge
leading to innovations.

8–29
Complexity of Managing Multinational Firms
• Expansion into global operations in different
geographic locations or markets:
 Makes implementing international strategy
increasingly complex.
 Can produce greater uncertainty and risk.
 May result in the firm becoming unmanageable
 May cause the cost of managing the firm to exceed
the benefits of expansion.
 Exposes the firm to possible instability of some
national governments.

8–30
Risks in an International Environment
• Political Risks • Economic Risks
 Instability in national  Differences and
governments fluctuations in the value of
 War, both civil and different currencies
international  Differences in prevailing
 Potential nationalization of wage rates
a firm’s resources  Difficulties in enforcing
property rights
 Unemployment

? ?
?
?
8–31
FIGURE 8.4 Risk in the International Environment

8–32
Limits to International Expansion:
Management Problems
• Cost of coordination across diverse geographical
business units
• Institutional and cultural barriers
• Understanding strategic intent of competitors
• The overall complexity of competition

8–33