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International Strategies

International Strategies. Competing in Foreign Markets. Useful References. Thompson and Strickland Ch 5 Fred David Ch 1. International Strategy. Organization can pursue international growth while pursuing other corporate growth strategies International growth issues

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International Strategies

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  1. International Strategies Competing in Foreign Markets

  2. Useful References • Thompson and Strickland Ch 5 • Fred David Ch 1

  3. International Strategy • Organization can pursue international growth while pursuing other corporate growth strategies • International growth issues • Advantages and drawbacks • General approach • Ways to enter a foreign market

  4. Why Expand into Foreign Markets • Gain access to new customers • Offers potential for increased revenues • Particularly when domestic markets are mature or saturated • Achieve lower costs and enhance firm’s competitiveness • Domestic sales volume is not large enough to fully capture economies of scale • Smaller European countries, eg Ireland grow has come from exports as domestic demand is insufficient to sustain growth

  5. Why Expand into Foreign Markets cont. • To capitalise on its core competencies • A firm may be able to leverage its competencies in foreign countries as well as its domestic market, eg. Nokia • To spread business risk across a wider market base • Spread business risk by operating in a number of countries rather than depending on its domestic market entirely, EG. Downturn in the Japanese economy

  6. Other Reasons for International Diversity

  7. KEY INTERNATIONALISING DECISIONS Domestic or International Expansion Which International Markets How to Enter these Markets Operationalising

  8. WHICH MARKETS TO CHOOSE • Most text books advocate a logical and sequential process for choosing international markets • Geographical and cultural proximity • In practice a number of approaches can be used

  9. Macro level Research (general market potential) R E J E C T E D Filter 1 General market relating to product/service Filter 2 Micro level Research (specific factors affecting the product) Filter 3 Filter 4 Target Markets Countries Priority List

  10. Factors for Market Selection and Entry • Macro-economic conditions • Political environment • Infrastructure • Transport and communication • Availability of local resources • Tariff and non-tariff trade barriers • Cultural norms and social structures

  11. Factors for Market Selection and Entry • Political & legal risks • Sovereign risk • Absence of regulation and control • Protection of intellectual property • Corruption • International risk • Security risk

  12. Ways to Enter a Foreign Market • Exporting • Licensing • Franchising • Direct investment • Strategic Alliance • Joint Venture

  13. Entry Modes Risk & Return LEVEL OF INVOVEMENT Direct Investment Joint Ventures & S. A Control Licensing & Franchising Exporting Time

  14. Exporting • Indirect Exporting • Via a domestic client • Piggy backing • Direct Export • Via distributors • Direct selling • Mail order • On-line

  15. Advantages & Disadvantages • Advantages • Easiest and least costly way • Gain from local knowledge of agent or distributor • Relatively low investment costs • Internet access for small firms

  16. Exporting • Disadvantages • Lower profit potential • Loss of control over marketing • Lack of feed back from market • Identifying suitable agent/distributor • Agency agreements of agent • Transportation costs

  17. Licensing • An international licensing agreement grants the rights of a firm in the host country to either produce or sell a product or both in return for royalty payments (Deresky, 2000) • Useful when a firm has neither the resources or capabilities to directly enter foreign markets • Patents • Trademarks

  18. Advantages • Rapid entry to foreign markets • Does not require large capital investment • Reduces problems • Trade barriers • Foreign ownership issues • Avoids committing resources in unstable, politically volatile countries

  19. Disadvantages • Creates a competitor • Control over licensee and product quality • Safeguarding IP • If the royalty potential is considerable

  20. Franchising • One of the most rapidly growing methods of foreign market entry • Often better suited to the global expansion of retail and services enterprises • EG. McDonalds. KFC, Hilton Hotels, Holiday Inn

  21. Franchising- advantages • Rapid entry and market penetration can be achieved • The franchisee bears most of the costs and risks of establishing in foreign locations • Franchiser bears costs of training, support and monitoring

  22. Franchising- Disadvantages • The big problem the franchiser faces is maintaining quality control, standards and consistency • Will the franchisee modify to the franchiser’s product?

  23. Joint Ventures • Seeking a foreign partner with which to establish a new separate business entity owned jointly by the 2+ parents. • Undertaking by the entities to achieve business goals through a collaborative effort and to share profits and losses by doing so.

  24. Joint Ventures- Types • Dominant parent • A venture where one of the parents is clearly dominant in terms of size and market share • Independent child • The joint subsidiary operates at arms length from the corporate parents • Multi-parent • Where there are several parent companies, eg. Airbus

  25. Reasons for Joint Ventures • To acquire market expertise/knowledge/distribution channels in unfamiliar overseas markets • Expansion with limited outlay of capital. • The risks and costs of international expansion are shared. • Necessary to gain entry into certain markets, when, for example, government legislation requires local participation, eg. China • To improve sales prospects, particularly in terms of government and public sector contracts

  26. Issues with Joint Ventures • Conflicting objectives of partners • EG. Profit/dividend policy, sourcing, production and pricing issues • Trade-off between the drive for control and the quest for additional resources (Stopford & Wells, 1972) • Lack of synergy • High “divorce” rate • 45% judged as successful • 60% lasted longer than 4 years • 14% lasted more than 10 years

  27. Strategic Alliances • Companies from different parts of the world have formed S.A.s to strengthen their mutual ability to serve whole continents and move toward global market participation • USA and Japanese firms forming S.A.s with European firms to enter the E.U with an eye to the emerging markets of the new states • S.A.s are increasingly undertaken for strategic reasons to achieve competitive advantage in terms of technology and product development, cost reduction and marketing, • Examples, Rover/Honda, Volvo/Renault, Philips/Matsushita

  28. Types of Strategic Alliances • Porter and Fuller (1986) suggest that strategic alliances can occur at any point along the value chain • Technology development • Operations and logistics • Marketing sales and service • Multiple activity • Type X • Divide value chain activities among themselves, eg aircraft industry • Type Y • Firms co-operate in the same value chain activities

  29. Motivation for Strategic Alliances • Learning • Organisational • Technology • geographical • Cost minimisation • Financial/marketing/research/sourcing • Market positioning • Market access

  30. Issues with Strategic Alliances • Managing relationship. Eg Northwest Airlines and KLM in Detroit and Amsterdam • Implications of downside risk when the relationship fails, and how that affects the company’s value chain. eg. Honda/Rover • Suggests that firms need to have an exit strategy

  31. Issues with Strategic Alliances • Rigidity of decision making : flexibility of response and policy changes could be more difficult as a result of international collaboration. Eg. BT and AT&T 8 months to find a CEO • Hidden Agenda? Is one partner using the coalition to acquire the partner’s IP and expertise • Dependability. S.A could prevent one partner from moving down the experience curve

  32. Guidelines for Successful S.A.s • Complementary • Agreement on Objectives • Compatible Strategies • Compatible cultures • Comparable rewards • Stakeholder blessing • Thorough and lengthy planning process

  33. Foreign Direct Investment (FDI) The control of manufacturing plants or other productive assets in the foreign market place through whole or part ownership • Via acquisition & mergers –dominant mode of FDI • Greenfield operation –Seagate, Ford in Valencia, Volkswagen/Skoda in Czech Rep • Equity buy-out – Toyota/General Motors

  34. Advantages of FDI • Control of resources/capabilities • Integration/coordination of activities across countries • Acquisitions – rapid entry • Greenfield – state of art and government finance try • Attractiveness of host country • Low wages, lower Corp. tax, government subsidies

  35. Disadvantages of FDI • Substantial investment – financial exposure • Problems of integration/coordination of acquisitions • Greenfield – time consuming and unpredictable cost • Political and economic risk exposure

  36. International Mergers and Acquisitions • Acquisitions and Mergers involve change in corporate ownership • “Friendly” acquisition = agreed by management • “Hostile” acquisition= contested by the targeted company’s management

  37. Reasons for International M&A • Strategic objectives • Reinforce competitive position & achieve profits • Corporate growth • Faster than by organic growth • Pursuit of size and synergy and scale • Benefiting from resources and scale advantages that come with increased size

  38. Reasons for International M&A • Market dominance, Defence of market share • Pursuing market power, eliminating competition

  39. Problems with International M&A While the acquired and merged firms show +ve results in terms of size their share price and profitability have not had such +ve outcomes (Porter, 1987; Auerbach, 1988) • Cost of acquisition – • price is often excessive -£1.6B Ford/Jaguar: £2.5B Nestle/Rowntree • -ve NPV results

  40. Problems with International M&A • Management failure • Management has seen the acquisition as an end in itself, and has failed to manage the post acquisition integration • Strategic mismatch- extends the company beyond the range of its core competencies • Government anti-trust and competition policies

  41. Cultural Considerations • Material culture – level of economic/technology development • Language • Aesthetics • Education • Religious beliefs

  42. Internationalising Issues • The main issues in international expansion concern • Cost • Control • Risk • Return • Resource allocation

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