1 International Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 9.

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International Strategy

Robert E. Hoskisson

Michael A. Hitt

R. Duane Ireland

Chapter 9Chapter 9

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Exporting

Licensing

Strategic alliances

Acquisitions

Establishment of a new subsidiary

International business-level strategy

Multidomestic strategy

Global strategy

Transnational strategy

Opportunities and Outcomes of International Strategy

Increased market size

Return on investment

Economies of scale and learning

Advantage in location

Identify International Opportunities

Explore Resources and Capabilities

Use Core Competence

International Strategies Modes of Entry

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International Corporate-Level Strategy

Need for Local Responsiveness

Ne

ed

fo

r G

lob

al In

teg

rati

on

LowLow

HighHigh

LowLow HighHigh

GlobalGlobalstrategystrategy

TransnationalTransnationalstrategystrategy

MultidomesticMultidomesticstrategystrategy

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Pressures for Global Integration & Local Responsiveness

High

HighLowLow

Global Integration

Local Responsiveness Pressures

Country Differences in - consumer tastes/preferences- infrastructure/practices- distribution channels- host government needs

Ball bearings,wheat

Cosmetics, food,household goods

Cost ReductionPressures

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Better Better performanceperformance

InnovationInnovation

Opportunities and Outcomes of International Strategy: Continued

ExportingExporting

LicensingLicensing

Strategic Strategic alliancesalliances

AcquisitionsAcquisitions

Establishment of Establishment of a new subsidiarya new subsidiary

Use Core Use Core CompetenceCompetence

Modes of EntryModes of Entry Managementproblems andrisk

Managementproblems andrisk

Strategic Strategic Competitiveness Competitiveness OutcomesOutcomes

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Return to Discussion Questions

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Motivations for International Expansion

Increase Market ShareIncrease Market Share domestic market may lack the size to support efficient scale domestic market may lack the size to support efficient scale

manufacturing facilitiesmanufacturing facilities Return on InvestmentReturn on Investment

large investment projects may require global markets to large investment projects may require global markets to justify the capital outlaysjustify the capital outlays

weak patent protection in some countries implies that firms weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt should expand overseas rapidly in order to preempt imitatorsimitators

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Motivations for International Expansion Economies of Scale or LearningEconomies of Scale or Learning

expanding size or scope of markets helps to achieve expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as economies of scale in manufacturing as well as marketing, R & D or distributionmarketing, R & D or distribution

can spread costs over a larger sales’ basecan spread costs over a larger sales’ base increase profit per unitincrease profit per unit

Location AdvantagesLocation Advantages low cost markets may aid in developing competitive low cost markets may aid in developing competitive

advantageadvantage may achieve better access to:may achieve better access to:

• Raw materialsRaw materials• Lower cost laborLower cost labor

• Key customersKey customers• EnergyEnergy

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International Business-Level Strategy: Determinants of National Advantage

Factors ofFactors ofproductionproduction

Related andRelated andsupportingsupportingindustriesindustries

DemandDemandconditionsconditions

Firm strategy,Firm strategy,structure, andstructure, and

rivalryrivalry

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International Business-Level Strategy: Determinants of National Advantage Factors of production:Factors of production: the inputs necessary to the inputs necessary to

compete in any industrycompete in any industry laborlabor landland natural resourcesnatural resources capitalcapital infrastructureinfrastructure basic factors include natural and labor resourcesbasic factors include natural and labor resources advanced factors include digital communication systems advanced factors include digital communication systems

and educated workforceand educated workforce

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International Business-Level Strategy: Determinants of National Advantage Demand conditions:Demand conditions: characterized by the nature and characterized by the nature and size of buyers’ needs in the home market for the size of buyers’ needs in the home market for the industry’s goods or servicesindustry’s goods or services size of market segment can lead to scale-efficient facilitiessize of market segment can lead to scale-efficient facilities efficiency can lead to domination of the industry in other efficiency can lead to domination of the industry in other

countriescountries specialized demand may create opportunities beyond specialized demand may create opportunities beyond

national boundariesnational boundaries

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International Business-Level Strategy: Determinants of National Advantage Related and supporting industries:Related and supporting industries: supporting supporting services, facilities, suppliers and so onservices, facilities, suppliers and so on support in designsupport in design support in distributionsupport in distribution related industries as suppliers and buyersrelated industries as suppliers and buyers

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International Business-Level Strategy: Determinants of National Advantage Firm strategy, structure, and rivalry:Firm strategy, structure, and rivalry: the pattern of the pattern of strategy, structure, and rivalry among firmsstrategy, structure, and rivalry among firms common technical trainingcommon technical training methodological product and process improvementmethodological product and process improvement cooperative and competitive systemscooperative and competitive systems

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International Corporate-Level Strategy

Type of corporate strategy selected will have an Type of corporate strategy selected will have an impact on the selection and implementation of the impact on the selection and implementation of the business-level strategiesbusiness-level strategies

Some corporate strategies provide individual Some corporate strategies provide individual country units with flexibility to choose their own country units with flexibility to choose their own strategiesstrategies

Others dictate business-level strategies from the Others dictate business-level strategies from the home office and coordinate resource sharing across home office and coordinate resource sharing across unitsunits

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MultidomesticMultidomesticstrategystrategy

International Corporate-Level Strategy: Multidomestic Strategy• Strategy and operating decisions are Strategy and operating decisions are

decentralized to strategic business units (SBU) decentralized to strategic business units (SBU) in each countryin each country

• Products and services are tailored to local Products and services are tailored to local marketsmarkets

• Business units in one country are independent Business units in one country are independent of each other of each other

• Assumes markets differ by country or regionsAssumes markets differ by country or regions• Focus on competition in each marketFocus on competition in each market• Prominent strategy among European firms Prominent strategy among European firms

due to broad variety of cultures and markets due to broad variety of cultures and markets in Europein Europe

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• product characteristics product characteristics tailored to local tailored to local preferencespreferences

• isolation from global isolation from global competitioncompetition

– establish protected establish protected market positionsmarket positions–compete in industry compete in industry segments most segments most affected by affected by differences among differences among local countrieslocal countries

Worldwide Geographic Area Structure:

MultinationalMultinationalHeadquartersHeadquarters

EuropeEurope

UnitedUnitedStatesStates

MiddleMiddleEast/East/

AfricaAfrica

AsiaAsia

AustraliaAustralia

LatinLatinAmericaAmerica

Multidomestic StrategyMultidomestic Strategy

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International Corporate-Level Strategy: Global Strategy

GlobalGlobalstrategystrategy

• Products are standardized across national Products are standardized across national marketsmarkets

• Decisions regarding business-level strategies are Decisions regarding business-level strategies are centralized in the home officecentralized in the home office

• Strategic business units (SBU) are assumed to be Strategic business units (SBU) are assumed to be interdependentinterdependent

• Emphasizes economies of scaleEmphasizes economies of scale• Often lacks responsiveness to local marketsOften lacks responsiveness to local markets• Requires resource sharing and coordination Requires resource sharing and coordination

across borders (which also makes it difficult to across borders (which also makes it difficult to manage)manage)

• Historically prominent among Japanese firmsHistorically prominent among Japanese firms

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• standardized products standardized products across countriesacross countries

• economies of scope economies of scope and scaleand scale

• outsource some outsource some primary or support primary or support activities to the activities to the world’s best providersworld’s best providers

• decision-making decision-making authority centralized authority centralized in worldwide division in worldwide division headquartersheadquarters

Worldwide Product Divisional Structure:

GlobalGlobalCorporateCorporate

HeadquartersHeadquarters

WorldwideWorldwideProductsProductsDivisionDivision

WorldwideWorldwideProductsProductsDivisionDivision

WorldwideWorldwideProductsProductsDivisionDivision

WorldwideWorldwideProductsProductsDivisionDivision

WorldwideWorldwideProductsProductsDivisionDivision

WorldwideWorldwideProductsProductsDivisionDivision

Global StrategyGlobal Strategy

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TransnationalTransnationalstrategystrategy

International Corporate-Level Strategy: Transnational Strategy• Seeks to achieve both global efficiency and local Seeks to achieve both global efficiency and local

responsivenessresponsiveness• Difficult to achieve because of simultaneous Difficult to achieve because of simultaneous

requirementsrequirements strong central control and coordination to strong central control and coordination to

achieve efficiency achieve efficiency decentralization to achieve local market decentralization to achieve local market

responsivenessresponsiveness• Must pursue organizational learning to achieve Must pursue organizational learning to achieve

competitive advantagecompetitive advantage

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Using the Combination Structure:

The combination structure has characteristics and The combination structure has characteristics and mechanisms that result in an emphasis on both mechanisms that result in an emphasis on both geographic and product structuresgeographic and product structures local responsiveness (multidomestic strategy) local responsiveness (multidomestic strategy) global efficiency (global strategy)global efficiency (global strategy)

Transnational StrategyTransnational Strategy

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Environmental Trends

Liability of Foreignness security risks tighter immigration policies

Regionalization location can affect value creation may wish to narrow focus to a particular region of

the world enter regional markets sequentially, beginning

with the most familiar market

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Type of EntryType of Entry CharacteristicsCharacteristics

Exporting High cost, low control

Licensing Low cost, low risk, little control, low returns

Strategic alliances Shared costs, shared resources, shared risks, problems of integration

Acquisition Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations

New wholly owned subsidiary

Complex, often costly, time consuming, high risk, maximum control, potential above-average returns

Global Market Entry: Choice of Entry Mode

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Value Creation Outcomes: Returns

International diversification and returnsInternational diversification and returns:: firm expands firm expands the sales of its goods or services across the borders of global the sales of its goods or services across the borders of global regions and countries into different geographic locations or regions and countries into different geographic locations or marketsmarkets may increase a firm’s returnsmay increase a firm’s returns such firms usually achieve the most positive stock such firms usually achieve the most positive stock

returnsreturns firm may achieve economies of scale and experience, firm may achieve economies of scale and experience,

location advantages, increased market size and location advantages, increased market size and opportunity to stabilize returnsopportunity to stabilize returns

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Value Creation Outcomes: Innovation

International diversification and innovationInternational diversification and innovation:: firm firm expands the sales of its goods or services across the borders expands the sales of its goods or services across the borders of global regions and countries into different geographic of global regions and countries into different geographic locations or marketslocations or markets potentially greater returns on innovations (larger markets)potentially greater returns on innovations (larger markets) generate additional resources for investment in generate additional resources for investment in

innovationinnovation exposed to new products and processes in international exposed to new products and processes in international

markets, generates additional knowledge leading to markets, generates additional knowledge leading to innovationsinnovations

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Risks in an International Environment

Political RisksPolitical Risks Economic RisksEconomic Risks

Political risks includePolitical risks include• instability in national governmentsinstability in national governments• war, both civil and internationalwar, both civil and international• potential nationalization of a firm’s resourcespotential nationalization of a firm’s resources

Political RisksPolitical Risks

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Risks in an International Environment

Economic risks are interdependent with political risks Economic risks are interdependent with political risks and includeand include

• differences and fluctuations in the value of different differences and fluctuations in the value of different currenciescurrencies

• differences in prevailing wage ratesdifferences in prevailing wage rates• difficulties in enforcing property rightsdifficulties in enforcing property rights• unemploymentunemployment

Political RisksPolitical Risks Economic RisksEconomic RisksPolitical RisksPolitical Risks

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Risk Rankings

McGraw-Hill/IrwinStrategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

1 Luxembourg 99.51 25.00 24.51 20.00 30.002 Switzerland 98.84 23.84 25.00 20.00 30.003 United States 98.37 23.96 24.41 20.00 30.00

40 China 71.27 18.93 16.87 19.73 15.7455 Poland 57.12 18.56 13.97 9.36 15.2363 Vietnam 52.04 14.80 11.91 18.51 6.8286 Russia 42.62 11.47 8.33 17.99 4.83

114 Albania 34.23 8.48 5.04 19.62 1.09161 Mozambique 21.71 3.28 2.75 13.85 1.83178 Afghanistan 3.92 0.00 3.04 0.00 0.88

Total of Credit

Total and AccessTotal Risk Economic Political Debt to Finance

Rank Country Assessment Performance Risk Indicators Indicators

Exhibit 7.3 A Sample of International Country Risk RankingsSource: Adapted from worldbank.org/html/prddr/trans/so96/art7.htm.

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National Differences in Political Economy

Economic Systems Market economy: what is produced in what quantity

is determined by supply/demand and signaled to producers through a price system

Command economy: planned by government Mixed economy: a balance of both of the above State-Directed economy: the state directly influences

the investment activities of private enterprise through “industrial policy.”

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National Differences in Political Economy A Legal System is:

rules - laws - that regulate behavior

process through which laws are enforced grievances are redressed

Businesses must observe Home country laws Host country laws International Laws and

Treaties

Different Legal Systems Common Law Civil Law Theocratic Law Bureaucratic Law

Dispute resolution Where to arbitrate? Validity of contracts and

decisions

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Legal Systems and International Business

Legal Systems and International Business property rights

use of a resource use made of income from resource enforcement issues Public vs private action violations

protection of Intellectual Property patent: inventors’ exclusive rights to manufacture, use, sale an

invention copyright: same for authors, composers, artists, publishers trademarks: unique designs and names, often officially

registered Paris Convention for the Protection of Industrial Property (96

countries) WTO/GATT

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Legal Systems and International Business

product safety and product liability

criminal / civil liability

contract law document that specifies

conditions under which an exchange will happen rights/obligations of parties

differences based on legal tradition common law system civil law system

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Language and Culture Language, spoken

“private” does not exist as a word in many languages Eskimos: 24 words for snow Words which describe moral concepts unique to countries

or areas: “face” in Asian cultures, “filotimo” in Greece Spoken language precision important in low-context

cultures

Language, unspoken Context... more important than spoken word in low context

cultures

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Relative Ranking of Four Countries on Cultural Values

Adapted from Figure 3.2

Ranking

out

of

50

countries

50

40

30

20

10

Cultural Value Dimension

PowerDistance

UncertaintyAvoidance

Individualism Masculinity ConfucianDynamics

Rank Numbers: 1 = Highest; 50 = Lowest

Source: Adapted from G. Hofstede and M. H. Bond. The Confucius connection:From cultural roots to economic growth. Organization Dynamics, Spring 1988, pp. 12-13

Canada

Canada

USA

USATaiwan

Taiwan

Japan

Japan

3.7

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Limits to International Expansion: Management Problems Cost of coordination across diverse geographical Cost of coordination across diverse geographical business unitsbusiness units

Institutional and cultural barriersInstitutional and cultural barriers Understanding strategic intent of competitorsUnderstanding strategic intent of competitors The overall complexity of competitionThe overall complexity of competition