Chapter 8 Looking at International Strategies

1. Chapter 8Looking at International Strategies

2. OBJECTIVES 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 Use the CAGE framework to identify desirable international arenas 3 Describe different vehicles for global expansion 4 5 Apply different international strategy configurations 6 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. 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?

5. 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-Marts 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

6. 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

7. Choosing the right location canprovide advantages in terms of • Input costs • Competitors • Demand conditions • Regulatory environment • Presence of complements A five-forces analysis can help revealthe attractiveness of a location KEY FACTORS – LOCATION Key factors  • Global economies of scale  • Location

8. 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

9. 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

10. Absence of colonial ties Absence of shared monetary or political association Political hostility Government policies Institutional weakness Regulatory interactions 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, values, beliefs Hofstede’s Culture Study 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. Legal concerns for US firms ADMINISTRATIVE DISTANCE Free Trade Agreements • FTA’s • Open foreign markets to US exports • Antidumping Import Laws • Anti-bribery provisions Foreign Corrupt Practices Act • Patent Cooperation Treaty • USPTO Intellectual Property Protection

12. ADMINISTRATIVE DISTANCE Decreased distance between US, Mexico, and Canada Historical Political Hostilities NAFTA • Increased distance between Cuba and US

13. ECONOMIC DISTANCE Deliberate Targeting “Bottom of the pyramid” 4 billion people Ex: shampoo for cold water

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

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. Expatriates From the home country Inpatriates From the local or host country EXPATRIATES AND INPATRIATES

25. 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