Chapter 8 Looking at International Strategies

1. Chapter 8Looking at International Strategies

2. 1 • Define international strategy and identify its implications for the strategy diamond 2 • Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage 3 • Describe different vehicles for international expansion 4 • Apply different international strategy configurations OBJECTIVES 5 • Outline the international strategy implications of the static and dynamic perspectives

3. Strategic decisions • U.S. • China • Dell becameChina’s largest computer system provider in just5 years • Vehicles • Assemble and distributeitself • Partner • Staging • Consumersfirst, then corporations • Corporationsfirst “ DELL GOES TO CHINA “ • If we’re not in what will soon be the second-biggest PC market in the world, then how can Dell possibly be a global player?

4. 1 • 99 • 32 • 68 • 52 • 48 • 59 • 41 • 65 • 35 • 96 • 4 INTERNATIONAL PRESENCE OF SELECTED MULTINATIONAL CORPORATIONS (MNCs) What is international strategy? Planning for future cross-border activities. • Sales in domestic market Percent • Sales in foreign markets Percent • Domesticmarket • Total sales$ Millions • Company • Products • Nokia • Finland • Cell phones • 37,031 • Audi • Germany • Automobiles • 29,378 • Clarion • Japan • Audioequipment • 1,540 • Apple • U.S. • Computers,electronics • 8,279 • eBay • U.S. • Online auctions • 2,165 • Papa John’s • U.S. • Pizza • 917 International presence varies widely

5. Staging • Arenas • When will we go international? • How quickly will we expand into international markets? • In what sequence will we implement our entry tactics? • Which geographic areas will we enter? • Which channels will we use in those areas? INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND • Arenas • Vehicles • Which international market-entry strategies will we use? Alliances? Acquisitions? Greenfield investments? • Economiclogic • Staging • Vehicles • Differentiators • Economic logic • Differentiators • How does our international strategy lower our costs, raise the prices we can charge, or create synergies between our business? • How does being international make our products more attractive to our customers?

6. WHY EXPAND INTERNATIONALLY? • Domestic markets in developed countries have slow growth, while capital markets expect high growth • The pressure for cost reductions and efficiency continues to grow • Necessitates examining cost savings by sourcing across borders • Chicken and egg problem • Knowledge is not uniformly distributed around the world • Creates opportunities for knowledge rich countries • Customers are becoming global (both consumers and corporations) • Competitors are globalizing

7. PROS VS. CONS OF INTERNATIONAL EXPANSION • Many international expansions fail • Why? • Pepsi’s ambitious expansion in the 1990s resulted in a decreased international market share • Wal-Mart’s international businesses perform poorly relative to its U.S. business • Newness can be a disadvantage (e.g., your firm must moveup the learning curve) • Foreignness can be a liability (e.g., your managers may notunderstand local culture) • Governance and coordination costs increase as you manage from a distance

8. Global expansion may be attractive if it allows you to leverage fixed assets over new markets • Pharmaceutical firms such as Pfizer, can leverage large R&D budgets • CitiGroup, McDonald’s, and Coca-Cola can leverage brands • MITY can leverage its excess capacity to produce chairs and thereby reduce average costs KEY FACTORS – GLOBAL ECONOMIES OF SCALE • Key factors •  • Global economies of scale

9. Choosing the right location canprovide advantages in terms of • Input costs • Competitors • Demand conditions • Regulatory environment • Presence of complements KEY FACTORS – LOCATION • Key factors •  • Global economies of scale •  • Location

10. Absence of colonial ties • Absence of shared monetary or political association • Political hostility • Government policies • Institutional weakness • Physical remoteness • Lack of a common border • Lack of sea or river access • Size of country • Weak transportation or communication links • Differences in climates • Differences in consumer incomes • Differences in costs andquality of • Natural resources • Financial resources • Human resources • Infrastructure • Intermediate inputs • Information or knowledge • Government involvement is highin industries that are • Producers of staple goods (electricity) • Producers of other “entitlements” (drugs) • Large employers (framing) • Large suppliers to government (mass transportation) • National champions (aerospace) • Vital to national security (telecom) • Exploiters of natural resources (oil, mining) • Subject to high sunk costs (infrastructure) • Products have a low value-of-weight or bulk ratio (cement) • Products are fragile or perishable (glass, fruit) • Communications and connectivity are important (financial services) • Local supervision and operational requirements are high (many services) • Nature of demand varies with income level (cars) • Economies of standardization or scale are important (mobile phones) • Labor and other factor cost differences are salient (garments) • Distribution or business systems are different (insurance) • Companies need to be responsive and agile (home appliances ) THE CAGE DISTANCE FRAMEWORK • Cultural distance • Administrative distance • Geography distance • Economic distance • Attributes creating distance • Different languages • Different ethnicities; lack of connective ethnic or social networks • Different religions • Different social norms • Industries or products affected by distance • Products have high linguistic content (TV) • Products affect cultural or national identity of consumers (foods) • Product features vary in terms of size (cars), standards (electrical appliances), or packaging • Products carry country-specific quality associations (wines) Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.

11. KEY FACTORS – MULTIPOINT COMPETITION • Expanding into a new market may provide an opportunity for a “stronghold assault” • For example, French tire maker Michelin had negligible presence in the U.S. in the 1970s. It learned of Goodyear’s plans to expand into Europe, so it launched a counter attack. It started selling tires in the U.S. at or below cost, and thereby forced Goodyear to drop prices and cut profits in its core market • Key factors •  • Global economies of scale •  • Location •  • Multipoint competition

12. KEY FACTORS – LEARNING AND KNOWLEDGE SHARING • Expanding into a new market can create opportunities to innovate, improve existing products in existing markets, or develop ideas for new markets • SC Johnson, for example, used technology developed in its European operation (a product for repelling mosquitoes in homes) to create the “ Glade Plug-ins” air freshener in the U.S. • Key factors •  • Global economies of scale •  • Location •  • Multipoint competition •  • Learning and knowledge sharing

13. Nonequity modes • Equity (FDI) modes • Wholly ownedsubsidiaries • Contractual agreements • Alliances and joint ventures (JVs) • Exports • Greenfieldinvestments • Licensing/franchising • Direct exports • Minority JVs • Acquisition • Indirect exports • Turnkey projects • 50/50 JVs • Others • Others • Contracted R&D • Majority JVs • Comarketing CHOICE OF ENTRY MODES • Choice of entry mode Strategic alliances (within dotted areas) Source: Adapted from Pan, Y. and D. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, 31 (2000), 535-545

14. Honda’s initial entry into the U.S. market • Bridgestone’s acquisition of U.S.-based Firestone • FDI through acquisition • FDI • Ford-MazdaGenentech-Hoffman LaRoche • Alliance • Exports • Champion International’s paper exports through independent brokers • KFC’s franchisees in India • Alliance and exports VEHICLES FOR ENTERING FOREIGN MARKETS • 100% • Degree of ownership control overactivities per-formed in the foreign market • 0% • 100% Exports • 100% Local • Exports versus local production Source: Examples drawn from in Gupta, A., and V. Govindarajan, “Managing Global Expansion: A Conceptual Framework,” business Horizons, March/April 2002, 45-54

15. EXPORTING OPTIONS • Most common option in relatively close markets and for productswith lower shipping costs • Shipping • A firm may form an alliance or franchise giving a local partner the right and responsibility to operate the firm’s business in their home market (e.g., Burger King’s expansion in Europe) • Licensing and franchising • A firm may enter Turnkey project agreements, R&D contracts, or joint-marketing initiatives (e.g., a German firm Bayer AG contracts large R&D projects to a U.S. firm) • Specialagreements

16. U.S. firm • Chinese Firm • … so U.S. companies formed alliances to gain access ALLIANCES • Until recently, China did not allow non-Chinese companies in China … û

17. Foreigncompany • Localcompany • Home country/market FOREIGN DIRECT INVESTMENT • Acquires • South African Breweries purchase Miller Brewing in 2002 to gain access to U.S. customers and brewing capacity • DaimlerChrysler and BMW each invested $250 million to start local factories in Brazil

18. IMPORTING • Importing is often a “stealth” form of internationalization because a firm will claim to have no international operations and yet directly or indirectly base production or service delivery abroad • Country A • Production • Country B • “Domestic”company • Home country • Customerservice • Country C • Logistics

19. HOW WOULD YOU DO THAT? – LAURA ASHLEY • In the early 1990s, U.S. executive Jim Maxmin was brought in as CEO to turn around Laura Ashley. • The company’s distribution system was in shambles and Maxmin needed to fix it • Maxmin realized he needed a partner that satisfies 3 key conditions • Why were each of these three conditions important? • Who did Maxmin choose as a partner? • Complementary needs and competencies • Similar management styles and operating systems • Divergent strategic objectives

20. INTERNATIONAL STRATEGY CONFIGURATIONS • Relatively few opportunities to gainglobal efficiencies • Many opportunities togain global efficiencies • Relatively highlocalresponsiveness • Multinational configurationBuild flexibility to respond to national difference through strong, resourceful, entrepreneurial, and somewhat independent national or regional operations. Requires decentralized and relatively self-sufficient units • Example : MTV initially adopted an international configuration (using only American programming in foreign markets) but then changed its strategy to a multinational one. It now tailors its Western European programming to each market, offering eight channels, each in a different language • Transnational configurationDevelop global efficiency, flexibility, and worldwide learning. Requires dispersed, interdependent, and specialized capabilities simultaneously • Example : Nestle has taken steps to move in this direction, starting first with what might be described as a multinational configuration • Today, Nestle aims to evolve from a decentralized, profit-center configuration to one that operates as a single, global company. Firms like Nestle have taken lessons from leading consulting firms such as McKinsey and Company, which are globally dispersed but have a hard-driving, one-firm culture at their core. • Relative lowlocalresponsiveness • International configuration Exploit parent-company knowledge and capabilities through worldwide diffusion, local marketing, and adaptation. The most valuable resources and capabilities are centralized; others, such as local marketing and distribution, are decentralized • Example : When Wal-Mart initially set up its operations in Brazil, it used its U.S. stores as a model for international expansion • Global configurationBuild cost advantages through centralized, global-scale operations . Requires centralized and globally scaled resources and capabilities • Example : Companies such as Merck and Hewlett-Packard give particular subsidiaries a worldwide mandate to leverage and disseminate their unique capabilities and specialized knowledge worldwide Source: Bartlett, C., S. Ghoshal, & J. Birkenshaw, Transnational Management (New York: Irwin, 2004)

21. BORN – GLOBAL FIRMS • More and more firms, even young, small ones, have operations that bridge national borders • Logitech • Founded by • R&D • Production • 30% ofglobal PC mouse busi-ness by1989 • 2 Italians • California • Ireland • 1 Swiss • Switzerland • Taiwan

22. HOW TO SUCCEED AS A GLOBAL START-UP • If yes, Put together tools you will need to move into global market • Consider if you should be aglobal start-up • Do you need human resources from other countries to succeed? • Strong management team with inter-national experience • Do you need financial capital fromother countries to succeed? • Broad and deep international networkamong suppliers, customers,and complements • If you go global, will target customers prefer your services over competitor's? • Preemptive marketing or technology to provide first-mover advantage • Can you put an international system in place more quickly than domestic competitors? • Strong intangible assets • Do you need global scale and scope to justify the financial and human capital investment? • Ability to keep customers locked in by linking new products and services to core business, while you innovate • Will a purely domestic focus now make it harder for you to go global in the future? • Close worldwide coordination and com-munication among business units, suppliers, complements and customers

23. DEVELOPING A GLOBAL MIND-SET • Global mindset • Having an appreciation for the differences between countries and people and seeing these differences as opportunities • Having developed skills for managing diverse teams in a world-wide work force • Global skills • Global perspective

24. Tactic • Action steps 1 • Teams • ? 2 • Training • ? 3 • Transfers • ? 4 • ??? • ? HOW WOULD YOU DO THAT? • If you were CEO, how would you build a global perspective in your executives? • Fewer than 15% of executives have substantive international experience

25. 1 • Define international strategy and identify its implications for the strategy diamond 2 • Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage 3 • Describe different vehicles for international expansion 4 • Apply different international strategy configurations 5 • Outline the international strategy implications of the static and dynamic perspectives SUMMARY