Creating Value beyond Borders

Creating Value beyond Borders

Creating Value beyond BordersDr. Shalini R TiwariIMT GhaziabadOpportunities and Outcomes of International Strategy2

2Identifying International Opportunities: Incentives to Use an International Strategy (IS)International Strategy (IS): firm sells its goods or services outside the domestic market Reasons for an ISInternational markets yield potential new opportunitiesInternational diversification: innovation occurs in home-country market, especially in an advanced economy, and demand for product develops in other countries, so exports provided by domestic organizationMultinational strategy: Secure need resourcesOther motives exist (i.e., pressure for global integration, borderless demand for globally branded products)33Identifying International Opportunities: Incentives to Use an International Strategy (IS) (Contd)Four primary reasons1. Increased market sizeDomestic market may lack the size to support efficient scale manufacturing facilities2. Return on Investment (ROI)Large investment projects may require global markets to justify the capital outlaysWeak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators44Identifying International Opportunities: Incentives to Use an International Strategy (IS) (Contd)Four primary reasons (Contd)3. Economies of Scale and LearningExpanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D, or distributionCosts are spread over a larger sales baseProfit per unit is increased4. Location advantages: Low cost markets may aid in developing competitive advantage achieve better access to critical resources:i.e., raw materials, lower cost labor, key customers, energy55International Strategies (IS)Firms choose one or both of two basic type of IS: Business level and/or corporate levelInternational business-level strategyFollows generic strategies of cost-leadership, differentiation, focused or broadInternational corporate-level strategy (N=3)Home country usually most important source of competitive advantageResources and capabilities frequently allow firm to pursue markets in other countriesThe determinants of national advantage includes 4 factors66Determinants of National Advantage7

7International Corporate-Level Strategies8

8International Strategies (IS) (Contd)International corporate-level strategies (N=3) (Contd)1. MultidomesticDecentralized strategic & operating decisions by strategic business-unit (SBU) in each country allows units to tailor products to local marketsFocuses on variations of competition within each countryCustomized products to meet local customers specific needs and preferencesTakes steps to isolate the firm from global competitive forcesEstablish protected market positionsCompete in industry segments most affected by differences among local countriesDeals with uncertainty due to differences across markets99International Strategies (IS) (Contd)2. GlobalFirm offers standardized products across country markets, with the competitive strategy being dictated by the home officeEmphasizes economies of scaleFacilitated by improved global reporting standards (i.e., accounting and financial) Strategic & operating decisions centralized at home office 1010International Strategies (IS) (Contd)2. Global (Contd)Involves interdependent SBUs operating in each country Home office attempts to achieve integration across SBUs, adding management complexityProduces lower riskIs less responsive to local market opportunitiesOffers less effective learning processes (pressure to conform and standardize)1111International Strategies (IS) (Contd)3. TransnationalFirm seeks to achieve both global efficiency and local responsiveness these are competing goals!Requires both global coordination and local flexibility with this strategy/structure combinationFlexible Coordination: Building a shared vision and individual commitment through an integrated networkChallenging, but becoming increasingly necessary to compete in international markets Growing number of global competitors heightens need to keep costs down while greater information flow and desire for specialized products pressures firms to differentiate and even customize products nonetheless,Increasingly used as a strategy1212Environmental TrendsTransnational strategy hard to implementTwo new trends1. Liability of foreignnessIncreased after terrorists attacks and Iraq WarGlobal strategies not as prevalent today, still difficult to implement even with Internet-based strategiesRegional focus allows firms to marshal resources to compete effectively in regional markets2. RegionalizationFocus to a particular region of the worldIncreases understanding of marketTrade agreements (I.e., EU, OAS, NAFTA) promote flow of trade across country boundaries with their respective regions1313International Entry Modes (N = 5)Follows the selection of an IS Five main entry modes1. Exporting2. Licensing3. Strategic Alliances4. Acquisitions5. New Wholly-Owned Subsidiary

1414International Entry Modes (N = 5) (Contd)1. ExportingInvolves low expense to establish operations in host countryOften involves contractual agreementsInvolves high transportation costsMay have some tariffs imposedOffers low control over marketing and distribution1515International Entry Modes (N = 5) (Contd)2. LicensingInvolves low cost to expand internationallyAllows licensee to absorb risksHas low control over manufacturing and marketingOffers lower potential returns (shared with licensee)Involves risk of licensee imitating technology and product for own useMay have inflexible ownership arrangement1616International Entry Modes (N = 5) (Contd)3. Strategic AlliancesInvolve shared risks and resourcesFacilitate development of core competenciesInvolve fewer resources and costs required for entryMay involve possible incompatibility, conflict, or lack of trust with partnerAre difficult to manage1717International Entry Modes (N = 5) (Contd)4. AcquisitionsAllow for quick access to marketInvolve possible integration difficultiesAre costlyHave complex negotiations and transaction requirements1818International Entry Modes (N = 5) (Contd)5. New Wholly-Owned SubsidiaryIs costlyInvolves complex processesAllows for maximum controlHas the highest potential returnsCarries high risk 1919International Entry Modes (N = 5) (Contd)Dynamics of Mode of Entry: Use the best suited to the situation at hand; affected by several factorsExport, licensing and strategic alliance: good tactics for early market developmentStrategic alliance: used in more uncertain situationsWholly-owned subsidiary may be preferred if IP rights in emerging economy not well protectedNumber of firms in industry is growing fastNeed for global integration is highAcquisitions or greenfield ventures: secure a stronger presence in international markets2020Strategic Competitive Outcomes (N = 3)International diversification: firm expands sales of its goods or services across the borders of global regions and countries into different geographic locations or marketsImplementation follows selection of international strategy and mode of entry (N=3)1. International diversification and returns2. International diversification and innovation3. Complexity of managing multinational firms

2121Strategic Competitive Outcomes (N = 3) (Contd)1. International diversification and returnsAs international diversification increases, firms returns initially decrease, but the increase quickly as firm learns to manage international expansion2. International diversification and innovationExposure to new products and marketsOpportunity to integrate new knowledge into operationsGeneration of resources to sustain innovation efforts

2222Strategic Competitive Outcomes (N = 3) (Contd)3. Complexity of managing multinational firmsGeographic dispersionCosts of coordinationLogistical costsTrade barriersCultural diversityHost government

2323Risks in International Environment2 major risks1. Political2. EconomicLimits to international expansions: management problems

2424Risk in the International Environment25

25Risks in International Environment (Contd)1. Political risksGovernment instabilityConflict or warGovernment regulationsConflicting and diverse legal authoritiesPotential nationalization of private assetsGovernment corruptionChanges in government policies

2626Risks in International Environment (Contd)2. Economic risksDifferences and fluctuations in currency valuesInvestment losses due to political risksLimits to international expansions: management problemsGeographic dispersionTrade barriersLogistical costsCultural diversityOther differences by countryRelationship between organization and host country2727The Quest for CompetitiveAdvantage in Foreign MarketsThree ways to gain competitive advantage1. Locating activities among nations in ways that lowercosts or achieve greater product differentiation2. Efficient/effective transfer of competitivelyvaluable competencies and capabilities fromcompany operations in one country to company operations in another country3. Coordinating dispersed activities in ways a domestic-only competitor cannot

Locating Activities to Build aGlobal Competitive AdvantageTwo issuesWhether to Concentrate each activity in afew countries orDisperse activities to manydifferent nationsWhere to locate activitiesWhich country is best location for which activity?29Activities should be concentrated whenCosts of manufacturing or other value chain activities are meaningfully lower in certain locations than in othersThere are sizable scale economiesin performing the activityThere is a steep learning curve associatedwith performing an activity in a single locationCertain locations haveSuperior resourcesAllow better coordination of related activities orOffer other valuable advantages

Concentrating Activities to Builda Global Competitive AdvantageDispersing Activities to Build aGlobal Competitive Advantage Activities should be dispersed whenThey need to be performed close to buyersTransportation costs, scale diseconomies, ortrade barriers make centralization expensiveBuffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed

31Transferring Valuable Competencies to Build a Global Competitive AdvantageTransferring competencies, capabilities, and resource strengths across borders contributes toDevelopment of broader competencies and capabilitiesAchievement of dominating depth in some competitively valuable areaDominating depth in a competitively valuable capability is a strong basis for sustainable competitive advantage overOther multinational or global competitors andSmall domestic competitors in host countries

Coordinating Cross-Border Activities to Build a Global Competitive AdvantageAligning activities located in different countries contributes to competitive advantage in several waysChoose where and how to challenge rivalsShift production from one location toanother to take advantage of most favorablecost or trade conditions or exchange ratesUse online systems to collect ideas for newor improved products and to determine whichproducts should be standardized or customizedEnhance brand reputation by incorporatingsame differentiating attributes in itsproducts in all markets where it competes

33What Are Profit Sanctuaries?Profit sanctuaries are countrymarkets where a firmHas a strong, protected marketposition and Derives substantial profitsGenerally, a firms most strategicallycrucial profit sanctuary is its home market

Profit sanctuaries are a valuablecompetitive asset in global industries!

34Fig. 7.3: Profit Sanctuary Potential of Domestic-Only,International, and Global Competitors

Involves supporting competitive offensives in one market with resources/profits diverted from operations in other marketsCompetitive power of cross-market subsidization results from a global firms ability toDraw upon its resources and profits in other country markets to mount an attack on single-market or one-country rivals andTry to lure away their customers with Lower pricesDiscount promotionsHeavy advertisingOther offensive tactics

What Is Cross-Market Subsidization?36Thank you!

Global Strategic OffensivesAttack a foreign rivals profit sanctuaries Approach places a rival on the defensive, forcing it toSpend more on marketing/advertisingTrim its pricesBoost product innovation effortsTake actions raising its costs and eroding its profitsEmploy cross-market subsidizationAttractive offensive strategy for companies competing in multiple country markets with multiple productsDump goods at cut-rate pricesApproach involves a company selling goods in foreign markets at pricesWell below prices at which it sells in its home market orWell below its full costs per unitThree Options

Achieving GlobalCompetitiveness via CooperationCooperative agreements with foreign companies are a means toEnter a foreign market orStrengthen a firms competitivenessin world marketsPurpose of alliancesJoint research effortsTechnology-sharingJoint use of production or distribution facilitiesMarketing / promoting one anothers products

39Strategic Appeal of Strategic AlliancesGain better access to attractive country markets from host countrys government to import and market products locallyCapture economies of scale in production and/or marketingFill gaps in technical expertise or knowledge of local marketsShare distribution facilities and dealer networksDirect combined competitive energiestoward defeating mutual rivalsTake advantage of partners local marketknowledge and working relationships withkey government officials in host country Useful way to gain agreement onimportant technical standards40Pitfalls of Strategic AlliancesOvercoming language and cultural barriersDealing with diverse or conflicting operating practicesTime consuming for managers in terms of communication, trust-building, and coordination costsMistrust when collaborating in competitively sensitive areas Clash of egos and company culturesDealing with conflicting objectives, strategies, corporate values, and ethical standardsBecoming too dependent on another firm for essential expertise over the long-term

41Tailoring products for big, emerging markets often involvesMaking more than minor product changes andBecoming more familiar with local culturesCompanies have to attract buyers withbargain prices as well as better productsSpecially designed and/or speciallypackaged products may be needed toaccommodate local market circumstancesManagement team must usually consistof a mix of expatriate and local managers

Characteristics of Competingin Emerging Foreign MarketsStrategic Options: How to Competein Emerging Country Markets Prepare to compete on the basis of low priceBe prepared to modify aspects ofthe companys business model toaccommodate local circumstancesTry to change the local market to better match the way the company does business elsewhereStay away from those emerging markets where it is impractical or uneconomic to modify the companys business model to accommodate local circumstances

Fig. 7.4: Strategy Options for Local Companiesin Competing Against Global Challengers

44Strategic Options for Local Companies:Use Home-Field AdvantagesConcentrate on advantages enjoyed in the home marketCater to customers who prefer a local touchAccept loss of customers attracted to global brandsAstutely exploit its local orientation based onFamiliarity with local preferencesExpertise in traditional productsLong-standing customer relationshipsCater to the local market in ways thatpose difficulties for global rivals

Strategic Options for Local Companies:Transfer Expertise to Cross-Border MarketsWhen a local company trying to defend against a global challenger has resource strengths and capabilities suitable for competing in other country markets, then it should consider Launching initiatives to transfer its expertise tocross-border markets Becoming more of an international competitorSuch a move to enter foreign markets can helpBuild a bigger customer base (to offset any losses in its home market)Grow sales and profits Put in a stronger position to contend with global challengers in its home market

Strategic Options for Local Companies: Dodging Rivalsby Shifting to a New Business Model or Market NicheWhen industry pressures to globalize are high, viable strategic options for a local company trying to defend against global challengers in its home market includeShifting the business to a piece of the industryvalue chain where the firms expertise/resourcesprovide a defendable position or maybe even a competitive advantageEntering a joint venture with a globally competitive partnerSelling out to a global entrant into its home market

If a local company has resources and capabilities that it can transfer to operations in other countries, it can launch a strategy aimed at Entering markets of other countries as rapidly as possibleShifting to a more globalized strategy Building brand recognition and a brand image that extends to more and more countries Gradually establishing the resources and capabilities to go head-to-head against large global rivalsStrategic Options for Local Companies:Contend on a Global Level