International Strategy: Key Benefits and Approaches for Firms

School

The Hang Seng University of Hong Kong**We aren't endorsed by this school

Course

MANAGEMENT 4001

Subject

Management

Date

Dec 12, 2024

Pages

Uploaded by SargentGalaxy5295

CHAPTER 8: INTERNATIONAL STRATEGYDr. Amy WangMGT4001 Business Policy and Strategy1

2ANALYSIS (INTERNAL AND EXTERNAL)STRATEGY FORMULATION

LEARNING OBJECTIVES1.Explain incentivesthat can influence firms to use an international strategy.2.Identify threebasic benefits firms achieve by successfully implementing an international strategy.3.Explore the determinants of national advantage as the basis for international business-level strategies.4.Describe thethreeinternational corporate-level strategies.5.Discuss environmental trends affecting the choice of international strategies, particularly international corporate-level strategies.6.Explain the fivemodes firms use to enter international markets.7.Discuss the twomajor risksof using international strategies.3

WHAT IS INTERNATIONAL STRATEGY?•International strategy: a strategy through which the firms sells its goods or services outside its domestic market

6EXAMPLE:EXAMPLE:

Incentives:Extend a product’s life cycleGain easier access to raw materialsOpportunities to integrate operations on a global scaleOpportunities to better use rapidly developing technologiesGain access to customers in emerging markets1. Firm introduces innovation in domestic market2. Product demand develops and firm exports products3. Foreign competition begins production4. Firm begins production abroad5. Production is standardized and relocated to low cost countriesCLASSIC RATIONALE FOR INTERNATIONAL STRATEGY

8Home CountryInnovationGlobal AdoptionIncentives:Extend a product’s life cycleGain easier access to raw materialsOpportunities to integrate operations on a global scaleOpportunities to better use rapidly developing technologiesGain access to customers in emerging markets

9E.G.GETTING ACCESS TO NEEDED AND POTENTIALLY SCARCE RESOURCESIncentives:Extend a product’s life cycleGain easier access to raw materialsOpportunities to integrate operations on a global scaleOpportunities to better use rapidly developing technologiesGain access to customers in emerging markets

10E.G. GETTING ACCESS TO NEEDED AND POTENTIALLY SCARCE RESOURCESIncentives:Extend a product’s life cycleGain easier access to raw materialsOpportunities to integrate operations on a global scaleOpportunities to better use rapidly developing technologiesGain access to customers in emerging markets

11E.G. OPPORTUNITIES TO INTEGRATE OPERATIONS ON A GLOBAL SCALEAS NATIONS INDUSTRIALIZE, DEMAND FOR SIMILAR PRODUCTSIncentives:Extend a product’s life cycleGain easier access to raw materialsOpportunities to integrate operations on a global scaleOpportunities to better use rapidly developing technologiesGain access to customers in emerging markets

12E.G. OPPORTUNITIES TO BETTER USE RAPIDLY DEVELOPING TECHNOLOGIESIncentives:Extend a product’s life cycleGain easier access to raw materialsOpportunities to integrate operations on a global scaleOpportunities to better use rapidly developing technologiesGain access to customers in emerging markets

13E.G. GAIN ACCESS TO CONSUMERS IN EMERGING MARKETSIncentives:Extend a product’s life cycleGain easier access to raw materialsOpportunities to integrate operations on a global scaleOpportunities to better use rapidly developing technologiesGain access to customers in emerging markets

BENEFITS OF INTERNATIONAL STRATEGY14Increased market size•Stagnant domestic market versus broad international marketEconomies of scale, scope and/or learning•Resources sharing in manufacturing, marketing, R&D or distributionLocation advantages (low cost markets)•Access to low cost resources•Access to critical supplier and customers

INTERNATIONAL STRATEGIES•Cost leadership•Differentiation •Focused cost leadership•Focused differentiation•Integrated cost leadership/differentiationBusiness level international strategies•Multidomestic•Global•Transnational international Corporate level international strategies15

INTERNATIONAL BUSINESS-LEVELSTRATEGIES16•Firms considering the use of any international strategy must first develop domestic market strategies•Why is this important? because a firm’s success in its home country is often the foundation for its success in international markets•Therefore, it is important to know which domestic factorsor conditions influences the likelihood of a company’s successFirm A:Domestic Market StrategyFirm A:InternationalStrategyFactorsFactorsFactorsFactors

PORTER’S DIAMOND OF NATIONAL ADVANTAGE17•National Advantage: explains why some nations (and some industries within that nation) are more competitive than other nations•Home country conditions:(conditions or factors in a firm’s home base) affect the degree to which the firm can build on its capabilities and core competencies in its domestic market so that it has a higher likelihood of succeeding in international marketsFactor conditionsLocal demand conditionsCompetitiveness of related / supporting industriesFirm strategy and rivalryDETERMINANTS OF NATIONAL ADVANTAGE

18Determinants of National AdvantageFactor conditionsLocal demand conditionsCompetitiveness of related/supporting industriesFirm strategy and rivalryThe inputs necessary for a firm to compete in any industry (e.g.land, natural resources, capital, infrastructure, etc)The nature and size of customers’ needs in the home market for the products firms competing in an industry marketRelated supporting industries refers to upstream and downstream industries that facilitate innovation through exchanging ideas.Competition leads to businesses finding ways to increase production and to the development of technological innovations.PORTER’S DIAMOND OF NATIONAL ADVANTAGEDefinition:

19Determinants of National AdvantageFactor conditionsLocal demand conditionsCompetitiveness of related/supporting industriesFirm strategy and rivalryExamples:PORTER’S DIAMOND OF NATIONAL ADVANTAGE

20Factor Conditions: According to classical economic theory, factors of production such as labor, land, capital, infrastructure and natural resources are crucial for any industry to flourish. Demand Conditions: In a globalized world where domestic demand may seem redundant, Porter suggests domestic demand can further add to the competitive advantage of a company. A substantial domestic market can provide the primary driver for a company to innovate and upgrade before moving to foreign markets. Further, a nation can export its values and tastes in order to create a market in the foreign shores. For instance, the United States was able to create a market for its fast-food chains and credit card companies by creating a demand for American tastes.

21Firm Strategy, Structure and Rivalry: Domestic competition in any industry plays a big role in driving innovation. Intense domestic rivalry among Japanese car manufacturers helped the country’s automobile industry to innovate in the foreign marketsRelated and Supporting Industries: Presence of allied industries can further bolster the demand of the mother industry in international competitive markets.For instance, Italian Jewelry brands do well in foreign markets because Italian companies provide two-thirds of the world’s jewelry making and precious metal recycling machinery.

INTERNATIONAL CORPORATE-LEVEL STRATEGY22International corporate level strategy:focuses on the scope of a firm’s operations through geographic diversification. It is required when the firm operates in multiple industries that are located in multiple countries or regions in which they sell multiple productsthe process by which a company combines different activities around the world so that they operate using the same methods, etcLocal responsiveness refers to the decision to distribute work in many locales versus consolidating work in one or a few centralized locations.

INTERNATIONAL CORPORATE-LEVEL STRATEGY23•Pressures for global integration•Forces that compel firms to coordinate its activities across countries in an attempt to build efficient operations •Pressure for local responsiveness•Forces that compel firms to become locally responsive in the countries where it conducts business

INTERNATIONAL CORPORATE-LEVEL STRATEGY24•Global strategy: firms offer standardized products across country markets, with competitive strategy being dictated by the home office.•High global integration: product standardization across national market (and hence economies of scale)•Low local responsiveness: centralized control and strategic decisions•Connectivity between operations & learning

INTERNATIONAL CORPORATE-LEVEL STRATEGY25•Multi-domestic strategy: firms’ strategic and operating decisions are decentralized to the business units in host countries to tailor products to the local markets.•Low global integration: market difference and country-by-country customization•High local responsiveness: decentralized control and strategic decisions•Competition among national markets and less knowledge sharing, and hence more costly in operations

INTERNATIONAL CORPORATE-LEVEL STRATEGY26•Transnational strategy: firms seek to achieve both global efficiency and local responsiveness.•High global integration and local responsiveness: standardized where feasible, adapted where appropriate•Glocalisation: “World company”•Production and other value-chain activities on a global basis•Difficult implementation

TWO ENVIRONMENTAL TRENDS AFFECTING STRATEGIC CHOICES•Liability of 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•Global strategies still difficult to implement and not prevalent•Regionalization: focus to a particular region of the world•Higher market understanding and greater likelihood of economies•Promoted by trade agreements (i.e., EU, NAFTA, ASEAN)27

28How do companies enter foreign markets?

CHOICE OF INTERNATIONAL ENTRY MODE29Degree of Ownership / Investment RiskExportingLicensing Strategic alliance / Joint venture (IJV) M&AWholly-owned subsidiary (WOS)

MODES OF ENTRYExporting: the firm sends products it produces in its domestic market to international marketsExportingLicensing Strategic allianceM & AWOSBenefitsRisksLowest costs (i.e., no operational facilities needed in foreign country and avoids the expense of establishing operations in host country)High transportation costs (i.e., shipping to host countries)Appropriate when the firm has no foreign manufacturing expertiseLow control over marketing and distribution, and low responsivenessExposure to trade barriers (i.e., tariffs across borders)Limited opportunities to gain knowledge of local markets

Licensing: 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’ marketsExportingLicensingStrategic allianceM & AWOSMODES OF ENTRYBenefitsRisksLow risk as the licensee takes the risks and makes the monetary investments in facilities for manufacturing, marketing and distributing productsLittle control over selling and distributionAs a result of low risk, it is the least costly form of international diversificationAdditional risks of licensees imitating technology and productsPossibility of earner greater returns on innovative products →sell products internationally and domestically which captures greater market shareInflexible ownership agreement and hence potential returns - Returns must be shared between licensee and licensor

Strategic Alliance and joint-venture (IJV): a firm works together with another firm in a different setting in order to enter one or more international marketsExportingLicensingStrategic allianceM & AWOSMODES OF ENTRYBenefitsRisksFirms share the risk and the resources required to enter international marketsIncompatibility, conflict and trust issues among partiesFirm can connect with an experienced partner already in host country and to reduce the risks and uncertaintyDifficult to manage (especially with foreign partners)Can facilitate developing new capabilities and core competencies due to combined resources

Mergers and Acquisitions: a cross-border acquisition is when a firm from one country acquires a stake in or purchases all of a firm located in another countryBenefitsRisksAppropriate when the firm needs rapid cross-border access to new international marketsPotential integration difficultiesQuick access to new marketCostly mode of entryComplex negotiations and transaction requirementsExportingLicensingStrategic allianceM & AWOSMODES OF ENTRY

Wholly owned subsidiary (greenfield venture): a firm invests directly in another country or market by establishing a wholly owned subsidiaryBenefitsRisksMaximum control of operation, resources, and capabilitiesCostly mode of entryIntegration and coordination of activities across national bordersComplex, time-consuming, and unpredictableAppropriate when the intellectual property rights are not well-protected in host countries, and the need for global integration is highHighest potential returns (and hence highest risks)ExportingLicensingStrategic allianceM & AWOSMODES OF ENTRY

WHICH MODE OF ENTRY SHOULD YOU CHOOSE?35

COMPLEXITY OF MULTINATIONAL MANAGEMENTGeographic dispersionCosts of coordinationLogistical costsTrade barriersCultural diversityHost government

RISKS IN AN INTERNATIONAL ENVIRONMENTPolitical RisksInstability in national governmentsWar, both civil and internationalPotential nationalization of a firm’s resourcesEconomic RisksDifferences and fluctuations in the value of different currenciesDifferences in prevailing wage ratesDifficulties in enforcing property rightsUnemployment

39ANALYSIS (INTERNAL AND EXTERNAL)STRATEGY FORMULATIONNEXT CLASS –CH.10 & CASE STUDY!13