Strategic Management CH 8

Strategic Management: Concepts and Cases
Part II: Strategic Actions: Strategy Formulation Chapter 8: International Strategy
The Strategic Management Process
Chapter 8: International Strategy (IS)

Overview: Eight content areas Traditional vs. emerging motives Four major benefits of International Strategies (IS) Four factors as basis for international business strategy Three international corporate-level strategies Environmental trends affecting IS Five alternative modes for entering international markets Effects of international diversification on returns & innovation 2 major risks of international diversification
Shanghai Automotive Industry Corp (SAIC): Reaching for Global Markets

One of Chinas oldest automotive companies and
among top three auto companies in China

Goal: Become one of the worlds top 10 auto companies Of note, as all major auto co.s compete in US market
Produces autos, tractors, motorcycles, trucks and is
also involved with car leasing and financing Successful joint ventures (JV) with GM and VW Owns 51% of Korean automaker SsangYong, IP right to Rover SAIC learned much from partnerships and with licensed technology launched own branded vehicles
4
Introduction
Many firms choose direct investment in assets over
indirect investment
Provides better protection for assets
Opportunities and Outcomes of International Strategy

Identifying International Opportunities: Incentives to Use an International Strategy (IS)

International Strategy (IS): firm sells its goods or
services outside the domestic market Reasons for an IS
International markets yield potential new opportunities International diversification: innovation occurs in homecountry market, especially in an advanced economy, and demand for product develops in other countries, so exports provided by domestic organization Multinational strategy: Secure need resources Other motives exist (i.e., pressure for global integration, borderless demand for globally branded products)
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Identifying International Opportunities: Incentives to Use an International Strategy (IS) (Contd)

Four primary reasons 1. Increased market size
Domestic market may lack the size to support efficient scale manufacturing facilities
2. Return on Investment (ROI)
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
Identifying International Opportunities: Incentives to Use an International Strategy (IS)

(Contd)
Four primary reasons (Contd) 3. Economies of Scale and Learning
Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D, or distribution
Costs are spread over a larger sales base

Profit per unit is increased aid in developing competitive advantage achieve better access to critical resources:
4. Location advantages: Low cost markets may

i.e., raw materials, lower cost labor, key customers, energy

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11
International Strategies (IS)

Firms choose one or both of two basic type of IS:
Business level and/or corporate level International business-level strategy Follows generic strategies of cost-leadership, differentiation, focused or broad International corporate-level strategy (N=3) Home country usually most important source of competitive advantage
Resources and capabilities frequently allow firm to pursue markets in other countries The determinants of national advantage includes 4 factors
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Determinants of National Advantage
13
International Corporate-Level Strategies
14
(Contd)
International corporate-level strategies (N=3) 1. Multidomestic
(Contd)
Decentralized strategic & operating decisions by strategic business-unit (SBU) in each country allows units to tailor products to local markets Focuses on variations of competition within each country Customized products to meet local customers specific needs and preferences Takes steps to isolate the firm from global competitive forces

Establish protected market positions Compete in industry segments most affected by differences among local countries
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Deals with uncertainty due to differences across markets

2. Global
(Contd)
Firm offers standardized products across country markets, with the competitive strategy being dictated by the home office
Emphasizes economies of scale Facilitated by improved global reporting standards (i.e., accounting and financial) Strategic & operating decisions centralized at home office
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2. Global (Contd)
(Contd)
Involves interdependent SBUs operating in each country

Home office attempts to achieve integration across SBUs, adding management complexity
Produces lower risk

Is less responsive to local market opportunities Offers less effective learning processes (pressure to conform and standardize)
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3. Transnational
(Contd)
Firm seeks to achieve both global efficiency and local responsiveness these are competing goals! Requires both global coordination and local flexibility with this strategy/structure combination
Flexible Coordination: Building a shared vision and individual commitment through an integrated network
Challenging, but becoming increasingly necessary to compete in international markets Growing number of global competitors heightens need to keep costs down while greater information flow and desire for specialized products pressures firms to differentiate and even customize products nonetheless, Increasingly used as a strategy
18

19
Environmental Trends
Transnational strategy hard to implement Two new trends 1. Liability of foreignness Increased after terrorists attacks and Iraq War Global strategies not as prevalent today, still difficult to implement even with Internet-based strategies Regional focus allows firms to marshal resources to compete effectively in regional markets 2. Regionalization Focus to a particular region of the world

Increases understanding of market Achieve some exonomies Trade agreements (I.e., EU, OAS, NAFTA) promote flow of trade 20 across country boundaries with their respective regions

21
International Entry Modes (N = 5)

Follows the selection of an IS
Five main entry modes

1. Exporting 2. Licensing 3. Strategic Alliances 4. Acquisitions 5. New Wholly-Owned Subsidiary
22

1. Exporting
(Contd)
Involves low expense to establish operations in host country

Often involves contractual agreements
Involves high transportation costs

May have some tariffs imposed Offers low control over marketing and distribution
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2. Licensing
(Contd)
Involves low cost to expand internationally

Allows licensee to absorb risks Has low control over manufacturing and marketing
Offers lower potential returns (shared with licensee)

Involves risk of licensee imitating technology and product for own use
May have inflexible ownership arrangement
24

3. Strategic Alliances
(Contd)
Involve shared risks and resources

Facilitate development of core competencies Involve fewer resources and costs required for entry May involve possible incompatibility, conflict, or lack of trust with partner Are difficult to manage
25

4. Acquisitions
(Contd)
Allow for quick access to market

Involve possible integration difficulties Are costly Have complex negotiations and transaction requirements
26

5. New Wholly-Owned Subsidiary
(Contd)
Is costly
Involves complex processes Allows for maximum control Has the highest potential returns Carries high risk
Greenfield venture: Establish entirely new subsidiary
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(Contd)
Dynamics of Mode of Entry: Use the best suited to
the situation at hand; affected by several factors

Export, licensing and strategic alliance: good tactics for early market development Strategic alliance: used in more uncertain situations Wholly-owned subsidiary may be preferred if

IP rights in emerging economy not well protected Number of firms in industry is growing fast Need for global integration is high
Acquisitions or greenfield ventures: secure a stronger presence in international markets
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Strategic Competitive Outcomes (N = 3)

International diversification: firm expands sales of
its goods or services across the borders of global regions and countries into different geographic locations or markets Implementation follows selection of international strategy and mode of entry (N=3) 1. International diversification and returns 2. International diversification and innovation 3. Complexity of managing multinational firms
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(Contd)
1. International diversification and returns As international diversification increases, firms returns initially decrease, but the increase quickly as firm learns to manage international expansion 2. International diversification and innovation

Exposure to new products and markets Opportunity to integrate new knowledge into operations
Generation of resources to sustain innovation efforts
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3. Complexity of managing multinational firms
(Contd)
Geographic dispersion
Costs of coordination Logistical costs Trade barriers Cultural diversity
Host government
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Risks in International Environment

2 major risks 1. Political 2. Economic Limits to international expansions: management
problems
34
Risk in the International Environment
35

1. Political risks
(Contd)
Government instability
Conflict or war Government regulations Conflicting and diverse legal authorities Potential nationalization of private assets
Government corruption
Changes in government policies
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2. Economic risks
(Contd)
Differences and fluctuations in currency values

Investment losses due to political risks
Limits to international expansions: management problems

Geographic dispersion Trade barriers Logistical costs Cultural diversity Other differences by country Relationship between organization and host country
37

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Strategic Management: Concepts and Cases

Part II: Strategic Actions: Strategy Formulation Chapter 8: International Strategy

The Strategic Management Process

Chapter 8: International Strategy (IS)

Shanghai Automotive Industry Corp (SAIC): Reaching for Global Markets

among top three auto companies in China

Produces autos, tractors, motorcycles, trucks and is

Provides better protection for assets

Opportunities and Outcomes of International Strategy

Chapter 8: International Strategy (IS)

Identifying International Opportunities: Incentives to Use an International Strategy (IS)

services outside the domestic market Reasons for an IS

Identifying International Opportunities: Incentives to Use an International Strategy (IS) (Contd)

2. Return on Investment (ROI)

Identifying International Opportunities: Incentives to Use an International Strategy (IS)

Four primary reasons (Contd) 3. Economies of Scale and Learning

Costs are spread over a larger sales base

4. Location advantages: Low cost markets may

i.e., raw materials, lower cost labor, key customers, energy

Chapter 8: International Strategy (IS)

International Strategies (IS)

Determinants of National Advantage

International Corporate-Level Strategies

International Strategies (IS)

International corporate-level strategies (N=3) 1. Multidomestic

Deals with uncertainty due to differences across markets

International Strategies (IS)

International Strategies (IS)

Involves interdependent SBUs operating in each country

Produces lower risk

International Strategies (IS)

Chapter 8: International Strategy (IS)

Chapter 8: International Strategy (IS)

International Entry Modes (N = 5)

Five main entry modes

International Entry Modes (N = 5)

Involves low expense to establish operations in host country

Involves high transportation costs

International Entry Modes (N = 5)

Involves low cost to expand internationally

Offers lower potential returns (shared with licensee)

May have inflexible ownership arrangement

International Entry Modes (N = 5)

Involve shared risks and resources

International Entry Modes (N = 5)

Allow for quick access to market

International Entry Modes (N = 5)

Greenfield venture: Establish entirely new subsidiary

International Entry Modes (N = 5)

Dynamics of Mode of Entry: Use the best suited to

the situation at hand; affected by several factors

Acquisitions or greenfield ventures: secure a stronger presence in international markets

Chapter 8: International Strategy (IS)

Strategic Competitive Outcomes (N = 3)

Strategic Competitive Outcomes (N = 3)

Generation of resources to sustain innovation efforts

Strategic Competitive Outcomes (N = 3)

Chapter 8: International Strategy (IS)

Risks in International Environment