Chapter 8.pdf

Silvia Regina 29113323 / YP 50 B International Strategy

This chapter focuses on the incentives to internationalize. After a firm decides to compete internationally, it must select its strategy and choose a mode of entry into international markets. The relationships among international opportunities, the resources and capabilities that result from such strategies and the modes of entry that are based on core competencies are explored in this chapter. An international strategy is a strategy through which the firm sells its goods or services outside its domestic market. One of the primary reasons for implementing an international strategy is that international markets yield potential new opportunities. The figure below provides an overview of the various choices and outcomes of strategic competitiveness competitiveness in international strategy. strategy.

When these strategies are successful, firms can derive four basic benefits: Increased Market Size

4 benefits of international strategy

By moving into international markets, firms seeking to manage different consumer tastes and practices linked to cultural values or traditions are not simple, following an international strategy is a particularly attractive option to firms competing in domestic markets that have limited growth opportunities. The size of an international market also affects a firm’s willingness to invest in R& D to build competitive advantages in that market. Most firms prefer to invest more heavily in those countries with the scientific knowledge and talent to produce value-creating products and processes from their R&D activities.

Return on Investment The primary reason for investing in international markets is to generate above-average returns on investments. Large markets may be crucial for earning a return on significant investments, such as plant and capital equipment or R&D. The larger markets provided by international expansion are particularly attractive in many industries, because they expand the opportunity for the firm to recoup significant capital investments and large scale R&D expenditures.

Economies of Scale & Learning By expanding their markets, firms may be able to enjoy economies of scale, particularly in their manufacturing operations. To the extent that a firm can standardize its products across country borders and use the same or similar production facilities, thereby coordinating critical resource functions. 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. This sharing generates synergy, which helps the firm produce higher-quality goods or services at lower cost.

Location Advantages Firms may locate facilities in other countries to lower the basic costs of the goods or services they provide. These facilities may provide easier access to lower-cost labor, energy, and other natural resources. Other location advantages include access to critical supplies and to customers.

International Strategies Firms can choose to use one or both of two basic types of international strategies: business-level international strategy and corporate-level international strategy. To create competitive advantage, each strategy must utilize a core competence based on difficult-toimitate resources and capabilities.

Silvia Regina 29113323 / YP 50 B International Business-Level Strategy

Each business must develop a competitive strategy focused on its own domestic market. In an international business-level strategy, the home country of operation is often the most important source of competitive advantage. The resources and capabilities established in the home country frequently allow the firm to pursue the strategy into markets located in other countries. Research indicates that as a firm continues its growth into multiple international locations, the country of origin is less important for competitive advantage. Michael Porter’s model, illustrated in figure below, describes the factors contributing to the advantage of firms in a dominant global industry and associated with a specific home country or regional environment.

The factors of production

Refers to the inputs necessary to compete in any industry, basic factors, and advanced factors. Other production factors are generalized and specialized. If a country has both advanced and specialized production factors, it is likely to serve an industry well by spawning strong home-country competitors that also can be successful global competitors

Demand conditions

Characterized by the nature and size of buyers’ needs in the home market for the industry’s goods or services. A large market segment can produce the demand necessary to create scale efficient facilities

Related and supporting industries

It contributes to the success of its own industry, and also supports its own related industries

Firm strategy, structure, and rivalry

These vary greatly from nation to nation, and make up the final country dimension and also foster the growth of certain industries

The four basic dimensions of the “diamond”  model emphasize the environmental or structural attributes of a national economy that contribute to national advantage. Each firm must create its own success, not all firms will survive to become global competitors, not even those operating with the same country factors that spawned other successful firms. The factors above are likely to produce competitive advantages only when the firm develops and implements an appropriate strategy that takes advantage of distinct country factors. Thus, these distinct country factors must be given thorough consideration when making a decision regarding the business-level strategy to use in an international context.

International Corporate-Level Strategy

International corporate-level strategy focuses on the scope of a firm’s operations through both product and geographic diversification. International corporate-level strategy is required when the firm operates in multiple industries and multiple countries or regions. The three international corporate-level strategies are multidomestic, global, and transnational, as shown in figure below.

Silvia Regina 29113323 / YP 50 B    y    g    e    t    a    r    t    S    c    i    t    s    e    m    o     d    i    t     l    u    M

A multidomestic strategy is an international strategy in which strategic and operating decisions are decentralized to the strategic business unit in each country so a s to allow that unit to tailor products to the local market. A multidomestic strategy focuses on competition within each country. The multidomestic strategy uses a highly decentralized approach, allowing each division to focus on a geographic area, region, or country. The use of multidomestic strategies usually expands the firm’s local market share because the firm can pay attention to the needs of the local clientele.

   y    g    e    t    a    r    t    S     l    a     b    o     l    G

The firm uses a global strategy to offer standardized products across country markets, with competitive strategy being dictated by the home office. Thus, a global strategy emphasizes economies of scale and offers greater opportunities to take innovations developed at the corporate level or in one country and utilize them in other markets. The performance of the global strategy is enhanced if it deploys in areas where regional integration among countries is occurring.

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A transnational strategy is an international strategy through which the firm seeks to achieve both global efficiency and local responsiveness. The transnational strategy is difficult to use because of its conflicting goals. On the positive side, the effective implementation of a transnational strategy often produces higher performance than does the implementation of either the multidomestic or global international corporate-level strategies, although it is difficult to accomplish.

Environmental Trends Most multinational firms desire coordination and sharing of resources across country markets to hold down costs. Many multinational firms may require type of flexibility if they are to be strategically competitive, in part due to trends that change over time. Two important trends are the liability of foreignness, and regionalization. Liability of Foreignness

Regionalization

• There are legitimate concerns about the relative attractiveness of global strategies, due to the extra costs incurred to pursue internationalization, or the liability of foreignness relative to domestic competitors in a host country. Research shows that global strategies are not as prevalent as they once were and are still difficult to implement, even when using Internet-based strategies. The amount of competition vying for a limited amount of resources and customers can limit firms’ focus to regional rather than global markets. A regional focus allows firms to marshal their resources to compete effectively in regional markets rather than spreading their limited resources across many international markets.

• Regionalization is a second trend that has become more common in global markets. Because a firm’s location can affect its strategic competitiveness, it must decide whether to compete in all or many global markets, or to focus on a particular region or regions. Countries that develop trade agreements to increase the economic power of their regions may promote regional strategies. After the firm selects its international strategies and decides whether to employ them in regional or world markets, it must choose a market entry mode.

Choice of International Entry Mode International expansion is accomplished by many ways. Entering international markets and their characteristics are shown in table below.

Exporting Many industrial firms begin their international expansion by exporting goods or services to other countries. The disadvantages of exporting include the often-high costs of transportation and tariffs placed on some incoming goods. Furthermore, the exporter has less control over the marketing and distribution of its products in the host country and must either pay the distributor or allow the distributor to add to the price to recoup its costs and earn a profit. As a result, it may be difficult to market a competitive product through exporting or to provide a product that is customized to each international market.

Licensing

Strategic Alliances

Licensing is an increasingly common form of organizational network, particularly among smaller firms. A licensing arrangement allows a foreign company to purchase the right to manufacture and sell the firm’s products within a host country or set of countries. Licensing is possibly the least costly form of international expansion. Licensing is also a way to expand returns based on prior innovations. Licensing can also lead to inflexibilities, and as such it is important that a firm think ahead and consider the consequences of each entry, especially in international markets.

Strategic alliances allow firms to share the risks and the resources required to enter international markets. Strategic alliances can facilitate the development of new core competencies that contribute to the firm’s future strategic competitiveness. International strategic alliances are especially difficult to manage. Trust between the partners is critical and is affected by a t least four fundamental issues: the initial condition of the relationship, the negotiation process to arrive at an agreement, partner interactions, and external events.

Silvia Regina 29113323 / YP 50 B

Acquisitions Often provide the fastest and the largest initial international expansion of any of the alternatives. Thus, entry is much quicker than by other modes. The merging of the new firm into the acquiring firm is often more complex than in domestic acquisitions. The a cquiring firm must deal not only with different corporate cultures, but also with potentially different social cultures and practices. International acquisitions have been popular because of the rapid access to new markets they provide, they also carry with them important costs and multiple risks.

New Wholly Owned Subsidiary The establishment of a new wholly owned subsidiary is referred to as a greenfield venture. The process of creating such ventures is often complex and potentially costly, but it affords maximum control to the firm and has the most potential to provide above-average returns. This potential is especially true of firms with strong intangible capabilities that might be leveraged through a greenfield venture.

Dynamics of Mode of Entry To enter a global market, a firm selects the entry mode that is best suited to the situation at hand. The decision regarding which entry mode to use is primarily a result of the industry’s competitive conditions, the country’s situation and government policies, and the firm’s unique set of resources, capabilities, and core competencies.

Strategic Competitive Outcomes Implementation is highly important, because international expansion is risky, making it difficult to achieve a competitive advantage. The probability the firm will be successful with an international strategy increases when it is effectively implemented. International diversification is a    n   s    n strategy through which a firm expands    o    r    i    t    uthe sales of its goods or services    a   t across the borders of global regions    c    i    eand countries into different     f    R    i    s geographic locations or markets.    r    d Firms that are broadly diversified into    e   n    v   amultiple international markets usually    i    D achieve the most positive stock     l especially when they diversify    a returns,    n geographically into core business areas. Many factors contribute to the    o    i    t positive effects of international    a diversification, such as private versus    n    r government ownership, potential    e economies of scale and experience,    t    n location advantages, increased market    I size, and the opportunity to stabilize returns.

   n   nInternational diversification provides    o    othe potential for firms to achieve    i    t    i    t greater returns on their innovations    a   aand reduces the often substantial risks    c    i    v     f    oof R&D investments, and then the    i    nfirm uses its primary resources and    s    r    n    e   I capabilities to diversify internationally    v    dand thus earn further returns on these    i    D   ncapabilities. International     l    adiversification improves a firm’s ability    a to appropriate additional returns from    n innovation before competitors can    o    i    t overcome the initial competitive    a advantage created by the innovation.    n    r Managing the diverse business units    e of a multinational firm requires skill,    t    n not only in managing a decentralized    I set of businesses, but also coordinating diverse points of view derived from regionalized businesses without descending into chaos.

   g   s Doing complex managing    n multinational firms can produce    i    m    g   r    i greater uncertainty. Multiple risks are    a   Finvolved when a firm operates in    n    l several different countries. Firms can    a   a    ngrow only so large and diverse before    M    i becoming unmanageable, or before     f    o    o   t    athe costs of managing them exceed    y their benefits. Managers are    n    i    t    i    l    t constrained by the complexity and    x   usometimes by the culture and    e     l institutional systems within which    p   M must operate. Other    m they    o complexities include the highly    C competitive nature of global markets, multiple cultural environments, potentially rapid shifts in the value of different currencies, and the instability of some national governments.

Risks in an International Environment International diversification carries multiple risks. Because of these risks, international expansion is difficult to implement and manage. The table below describes each risk in an international environment. Political Risks • Political risks are risks related to instability in national governments and to war, both civil and international. Instability in a national government creates numerous problems, including economic risks and uncertainty c reated by government regulation; the existence of many, possibly conflicting, legal authorities or corruption; and the potential nationalization of private assets. Foreign firms that invest in another country may have concerns about the stability of the national government and the effects of unrest and government instability on their investments or assets.

Economic Risks • If firms cannot protect their intellectual property, they are highly unlikely to make foreign direct investments. 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. Foremost, among the economic risks of international diversification are the differences and fluctuations in the value of different currencies. Furthermore, the value of different currencies can also, at times, dramatically affect a firm’s competitiveness in global mar kets because of its effect on the prices of goods manufactured in different countries.

Limits to International Expansion: Management Problems

• Several reasons explain the limits to the positive effects of international diversification. First, greater geographic dispersion across country borders increases the costs of coordination between units and the distribution of products. Second, trade barriers, logistical costs, cultural diversity, and other differences by country (e.g., access to raw materials and different employee skill levels) greatly complicate the implementation of an international diversification strategy. Thus, management must be concerned with the relationship between the host government and the multinational corporation.