INTERNATIONALIZATION BY MICHAEL MCDERMOTT. The Role of Strategy Strategy must drive the internationalisation process Not vice versa.

INTERNATIONALIZATION

BY

MICHAEL MCDERMOTT

The Role of Strategy

• Strategy must drive the internationalisation process

• Not vice versa

International Market Entry Modes

Various options exist1. Exports2. Contractual3. Investment4. Alliances

Export Entry Modes

• Indirect exports

• Direct agent/distributor

• Direct branch/subsidiary

Contractual Entry Modes

• Licensing• Franchising• Contract manufacture• Other

Foreign Investment Modes

• Greenfield investment – build a plant;• Acquisition• Joint Venture.

Strategy

Internationalisation

Other (Inappropriate?) Drivers of Internationalisation

• Company history– Often the past, domestic growth trajectory determines the

future, international process– Despite sea-change in corporate stratgey

• Similarities in national cultures• Managerial preferences• Follow the crowd• Fall in love with a particular market (eg China)

Key Questions Requiring Answers

• Should we expand internationally?• What products/services should be supplied to

international markets?• Do these need to be adapted or can they be

standardised?• Which foreign markets should we target?

Key Questions

• Should we concentrate or spread our marketing efforts?

• Which market entry mode is best suited for the target market(s)?

• How do we decide on the right entry mode(s)?• What international marketing mix issues will

influence our choice?

International Marketing – Key Questions

• What?• Who?• When?• Where?• How?

Internationalisation and Selling Products/Services Overseas

• Consider the Push factors for companies based in:– USA – slow growth, saturation, may be very

competitive, weak US$, regulations;

– Singapore – small domestic market

– China – high levels of competition; may be a lack of local demand

Internationalisation and Selling Products/Services Overseas

• Consider the Pull factors for companies based in:

– USA – Large market opportunities, rapidly growing markets, can achieve premium prices, less competitive markets, strong currencies of potential buyer markets;

All Motives for Internationalisation

• Access resources – eg raw materials, technology

• Access lower costs – low cost labor

• Access markets

• Access experience (ie learn before going after major prize; experiment in a market that is not a strategic priority)

Access resources

• Natural resources• Technology• Relationships• Local competencies

Access market

• Market size• Market growth• Market status/prestige• Market strategic importance• Exchange of threat

Access lower costs

• Land• Labour• Capital• Transportation• Telecommunications

Access experience (ie learn before going after major prize)

• Target small market that is very similar to large, vital market

• Use this as a ‘laboratory’• Learn before entering the crucial market• Consider where such markets might be in each

major regional market

Key Considerations for any company in the Internationalisation Process – “3CRST”

• The Commitment• The Control• The Costs• The Risks• The Speed• The Timing

International Market Entry Modes

• Various options exist– Exports– Contractual– Investment– Alliances

Export Entry Modes

Indirect exports

• sell to Walmart or a major US company such as Apple

Direct Exports• rely upon a third party – an

agent/distributor

– Many companies here choose very unwisely

• establish your own branch/subsidiary

Contractual Entry Modes

• Licensing – allow others to use your brand name

• Franchising – eg commonly used in retailing and fast foods

• Contract manufacture – eg make clothes for Gap, shoes for Nike, products for Apple

Investment Entry Modes

• Sole venture–New establishment–Acquisition – increasingly common

and renowned for high failure rate• Joint venture

–Very common in Emerging Markets, often after failed sole ventures

Extremes

• Indirect Exports is low cost, and low risk• Foreign direct investment is high cost, high risk

Internationalisation arises due to...

• Due to ‘push’ factors

• Due to ‘pull’ factors

• Or combination of both

Assessing the Suitability of Each Entry Mode

• Consider the following:1. Nature of the product or service provided2. The extent of management commitment3. Host country legislation4. The company’s marketing objectives

© McDermott 2011 27

The End of Global Strategy

By

Michael McDermott

28

Globalization Defined

• The production and distribution of products and services of a homogenous type and quality on a worldwide basis.

• Simply put - providing the same output to countries everywhere.

29

Is Globalization a Myth

• Yes – there are major regional differences• And companies must take these into account• This challenge is pretty overwhelming• So in fact few companies are ‘global’• Instead they are regional champions – or bi-

regional

30

International Trade

• It is not dominated by inter-Triad trade

• Is China the largest trade partner with the USA?

• But intra-Triad trade

• No Canada is

Intra-Triad trade dominates

31

32

But some industries may be global?

• Are some industries populated by companies that are more prone to ‘global’ status?

• Yes – consumer electronics, autos, pharmaceuticals

• Whenever standardization is the industry norm, the greater the likelihood of global companies

• But the danger is that some industries (e.g. drinks, food, retailing) demand strong localization, and yet companies want to be global giants

33

The Tension in Global Strategy

Local adaptation

Lower costs

Exhibit 8.4 Four international strategiesSource: Adapted from M.E. Porter, ‘Changing patterns of international competition’. Copyright © 1986, by The Regents of the University of California. Reprinted from the California Management Review, vol. 28, no. 2. By permission of The Regents

35

National Responsiveness

HighLow

Low

High

EconomicIntegration

1

2

3

4

THE INTERNATIONAL MANAGEMENT STRATEGY MATRIX

PURE GLOBAL STRATEGY

PURE NATIONALRESPONSIVENESS

STRATEGY

A BALANCED APPROACH

NON-VIABLE

36

When does a Pure Global Strategy prevail?

• This is likely to be chosen when we find economic, political, and cultural ‘’convergence’’

• This is the approach that tends to arouse most hostility from NGOs etc

37

Examples of Unsuccessful Pure Global

Coca-Cola – Global is out, local is in

Think local, act local

Push brands on a regional and local basis, not global;

Model citizen

Disney – Oui not Yes Euro Disney name changed to Paris Disneyland

38

Opposing Pressures and Four Strategies

39

Strategies that favor global products and brands

• Should standardize all of a firm’s products for all of their worldwide markets

• Should reduce a firm’s overall costs by spreading investments over a larger market

40

Three Main Assumptions of Global Strategies

1. Homogenization

of Customer needs and interests

2. Economies of scale in

production and marketing can be achieved

3. People prefer lower prices at

high quality

41

Three Realities and Global Strategies

1. Customer needs and

interests can vary across

borders

2. Flexible production can deliver important benefits

3. People make

purchase decisions on more than

price

42

International Strategy

• Favors standardization• Cost reduction is not

critical• So different activities in

the value chain wil have different optimal locations

• Susceptible to higher levels of currency and political risks

43

Global Strategy

• Competitive strategy is centralized and controlled largely by corporate office

• Emphasizes economies of scale

44

Advantages

• Larger production plants• Efficient logistics and

distribution networks• Supports high levels of

investment in R&D• Standard level of quality

throughout the world

Disadvantages

• Concentration on scale-sensitive resources and activities in one or few locations leads to higher transportation and tariff costs

• Activity is isolated from targeted markets

• The rest of the firm becomes dependent on that geographically isolated location

45

Multidomestic Strategy

• Emphasis is upon differentiating products and services to adapt to local markets

• Authority is more decentralized

• Risks include– Increased cost structure– Potential problems with local

adaptations– Finding optimal degree of

local adaptation is difficult

46

Transnational Strategy: Compromise

• Optimization of tradeoffs associated with efficiency, local adaptation, and learning

• Firm’s assets and capabilities are dispersed according to the most beneficial location for a specific activity

• Avoids the tendency to either– Concentrate activities in a

central location– Disperse them across many

locations to enhance adaptation

47

Transnational Strategy

• Unique risks and challenges–Choice of an “optimal” location cannot

guarantee that the quality and cost of factor inputs will be optimal

–Knowledge transfer can be a key source of competitive advantage, but it does not take place automatically

Typologies of subsidiary strategies

• White and Poynter, 1984• Bartlett and Ghoshal, 1986• Jarillo & Martinez, 1990 • Taggart, 1998• Subsidiaries evolve over time -

– through the accumulation of resources– Development of specialised capabilities

Relationship between Type of IB Strategy and Foreign Subsidiary Strategy

Type of IB Strategy

Type of Subsidiary Strategy

• Export-based strategy with decentralised marketing

• Marketing satellite

• Country centred • Miniature replica • High foreign investment with

extensive co-ordination among subsidiaries

• Rationalised manufacturer

• Purest global strategy • Product speciality (possibly strategic independent)

Overview of Foreign Subsidiary Strategy

Type of foreign subsidiary

Service Sales and Marketing

Distribution Production R&D MarketScope

Marketing Satellite

? ? ? X X Local

Miniature Replica

? ? ? ? X Local

Rationalised Manufacturer

? ? ? ? X Global

Product Specialist

? ? ? ? ? Global

Strategic Independent

? ? ? ? ? Global

Taggart 1998

Degree of Responsiveness

Degree ofIntegration

Low High

High

Low

ReceptiveSubsidiary

ActiveSubsidiary

AutonomousSubsidiary

QuiescentSubsidiary

Degree of Responsiveness

Degree ofIntegration

Low High

High

Low

ActiveSubsidiary

AutonomousSubsidiary

QuiescentSubsidiary

TraditionalCoca-ColaTerritory

ReceptiveSubsidiary

Degree of Responsiveness

Degree ofIntegration

Low High

High

Low

ReceptiveSubsidiary

ActiveSubsidiary

AutonomousSubsidiary

Foreign DivestmentCandidate

Exhibit 8.7 Subsidiary roles in multinational firmsSource: Reprinted by permission of Harvard Business School Press. From Managing Across Borders: The Transnational Solution by C.A. Bartlett and S. Ghoshal. Boston, MA 1989, pp. 105–11. Copyright © 1989 by the Harvard Business School Publishing Corporation; all rights reserved

Competing in Foreign Markets

By

Dr. Michael McDermott

Lecture Objectives

• To identify key actors/issues in international strategy and explore some connections

• To show how two other disciplines inform international strategy

• To address some simplistic notions that are in danger of being perpetuated

Key Strategic Decisions in International Marketing Strategy

1. Why should the company look to overseas markets?

2. Where should the company seek to internationalize?

3. What market entry strategy should the company employ?

4. How should the company compete in international markets?

Key Questions Requiring Answers

• Should we expand internationally?• What products/services should be supplied to

international markets?• Do these need to be adapted or can they be

standardised?• Which foreign markets should we target?

Key Questions

• Should we concentrate or spread our marketing efforts?

• Which market entry mode is best suited for the target market(s)?

• How do we decide on the right entry mode(s)?• What international marketing mix issues will

influence our choice?

The Role of Strategy

• Strategy must drive the internationalisation process

• Not vice versa

Strategy

Internationalization

Other Inappropriate Drivers of Internationalisation

• Company history– Often the past, domestic growth trajectory determines the

future, international process– Despite sea-change in corporate stratgey

• Similarities in national cultures• Managerial preferences• Follow the crowd• Fall in love with a particular market (eg China)

Key Strategic Decisions in International Business

1. Why should the company internationalize?2. Where should the company seek to locate its

value-chain activities to maximize competitive advantage?

3. What entry mode should the company employ?

4. How should the company control and manage its international operations?

Key Decisions

International Marketing

1. Why expand overseas?2. Where to target?3. What entry mode?4. How to compete?

International Business

1. Why internationalize?2. Where to locate activities?3. What entry mode?4. How to control and manage operations?

Key Decisions: International Marketing

• Why expand overseas?

• Where to target?

• Market access– Push and Pull factors– Company Readiness

• Country-screening;• Market spreading vs concentration

Key Decisions: International Marketing

• What entry mode?

• How to compete?

• Exporting• Licensing• Franchising• Foreign Direct Investment (FDI)

• Competitive position• Standardization vs adaptation

Key Decisions: International Business

• Why internationalize?

• Where to Locate?

• Cost reduction• Market access• Technology access

• Identify optimum location(s) for each value chain activity

Key Decisions: International Business

• What entry mode?

• How to compete?

• As per IM, plus International Procurement, International Subcontracting,

• Management Contracts,

• Co-ordination and control• National responsiveness vs integration• Cross-subsidization

Competing in Foreign Markets

• IM is arguably not critical to the success of Wal-Mart

• IB is absolutely critical to the company’s success

Competing in Foreign Markets

• It offers a typical focus on differences between markets – and the adaptation versus standardization debate

• Is avoiding blunders the essence of successful international marketing?

• It does not examine really any of the issues from the perspective of an SME

Two Perspectives on One Issue of Major Concern

International Marketing

Adaptation

Standardization

International Business

Local Responsiveness

Integration

International Strategy

There are various actors/issues involved and each needs to be considered:

1. International organizations2. Countries/Markets3. Sectors4. Companies5. Locations6. Strategic Postures7. Modes of market entry

1. International Organizations

• Bodies such as The WTO and IMF have played a vital role in enhancing opportunities for international trade and business in emerging markets– Deregulation– Liberalization– Privatization

2. The Nature of Countries

• They differ by level of economic development – not to mention by culture and politics

• Country of origin effect• Country of destination effect

2. The nature of countries

Country of Origin

• Positive effect vs Negative effect

– German vs Malaysian car– German beer vs German wine– Korean TV vs Korean auto

Country of Destination

• Open vs Closed– The Political/Legal Environment

• High Growth vs Low Growth – the economic environment

• Low Barriers vs High Barriers– The competitive environment

2. The Nature of Countries

A nation’s level of economic development – and the source of its competitiveness - is likely to influence strongly the choice of:

• generic strategy, and

• international market entry mode by its indigenous companies

2. The Nature of Countries

• But as the economy develops, this cost advantage is eroded– Wages and land prices rise– The currency appreciates

• The means of competing now has to change• Companies that are world class manufacturers

seek to become world class marketers

2. The Nature of Countries

• For companies in developed markets, they often face the opposite challenge

• The means of competing now has to change• Companies that are world class marketers

seek to remain world class manufacturers• Hence they need to source or assemble

products/services in low cost economies

2. The Nature of Countries

• Factors ‘push’ companies to invest overseas• But equally important, strong ‘pull’ factors

come to the fore• The very success of export-based strategies

often leads to protectionism in key export markets (e.g. the USA, the EU)

• Compelling a switch to local production in developed country market

2. CoO and Global Brands

• Name global brands from the following countries:– USA – so so easy– Japan – very easy– South Korea – (5 at a push?)– Taiwan – (less than 3?)– Singapore (less than 3?)– China (less than 5?)

Exhibit 8.3 Porter’s Diamond – the determinants of national advantagesSource: Adapted with permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from The Competitive Advantage of Nations by Michael E. Porter. Copyright © 1990, 1998 by Michael E. Porter. All rights reserved

Countries and Exporting

• The section in your textbook on ‘Exporting Strategies’ assumes that exporters are pursuing a generic strategy of low cost

• It suggests that exporting is unlikely to prove a viable long-term means of competing

• Exporters that pursue differentiation – and especially where the CoO is extremely positive – can enjoy enduring success as exporters

2. Understanding international markets and buyers

• PEST analysis• The competitive environment• The market

2. Common Errors

1. Companies often fail to undertake suitable PEST analysis2. The often fail to take adequate account of the competitive

environment3. They confuse size of population with market potential4. They focus on national averages rather than sub-national

trends5. They often assume that domestic market trends are easily

replicated in foreign markets6. They often exaggerate the benefits associated with a

positive CoO effect

Current Major Error

Obsession with China

3. Nature of Sector

• Product and service is standardized• Product and service requires adaptation• Product and service requires customization• Competitive environment allows an

independent approach• Competitive environment demands a

partnership approach– In BEMs, partnership often essential

4. The nature of international companies

• Exporters – the vast majority are SMEs• Born-globals• Born-again globals• Micro-multinationals• International players – active in many markets• Regional players – very strong in a specific region • Global Players – very strong globally

Exporting SMEs

Typical• Desperately react to sales opportunities• Country-screening is an alien concept• External and internal analysis is minimal• No market penetration

Exceptional“Hidden Champions: Lessons from 500 of the

World's Best Unknown Companies” • Hermann Simon

4. The nature of international companies

• A major weakness of many of the largest US companies is that they are not true global players

• Unlike their Japanese rivals• Japanese firms thus have much more

opportunity to cross-subsidize regions in the Triad

5. The nature of international locations

• Each location has location-specific advantages• Virtually all locations involve a trade-off

– Not many locations offer a large growing market, an abundant pool of low-cost labor, and world class technology

• Consequently companies locate activities in different locations according to the advantage of each

5. The nature of international locations

• It is thus vital that a location wishing to be competitive in the global economy excels in establishing a suitable competitive position and marketing itself

• Your textbook cites Ireland in the 1990s as an example – from rural backwater to the ‘Celtic Tiger’

• So what are your thoughts on Kentucky and its role in the global economy?

• Is it aggressive? Is it attractive?

5. The nature of international locations

Scotland

“The best small country in the world”

• Kentucky

• “Unbridled spirit”

6. Strategic Posturing

1. Think Local, Act Local2. Think Global, Act Global3. Think Global, Act Local

• Is there an option missing?

7. The nature of international entry modes

• International subcontracting• Exporting• Licensing• Franchising• Strategic alliances• Foreign direct investment

– Greenfield investment– Acquisitions– International Joint Ventures

Exhibit 8.6 Market entry modes: advantages and disadvantages

Exhibit 8.6 Market entry modes: advantages and disadvantages (Continued)

7. The nature of international entry modes

• Your textbook highlights the impact of currency fluctuations

• So presently the US dollar is very weak against all major foreign currencies

• What are the implications for US companies and foreign companies?

7. The nature of international entry modes

US Companies

• Exporting from the USA is very attractive• Importing is much less attractive• Investing overseas is less attractive

Foreign Companies

• Exporting to the USA becomes much more difficult• Investing in the USA becomes much more attractive• Exporting from any US plants becomes much more appealing,

and is a boost to the US subsidiary

Conclusions

• Strategy drives internationalization• Internationalization inconsistent with

corporate strategy must be avoided• The tools that you have learned thus far –

external analysis, internal analysis – are crucial in shaping international strategy

• Companies face a very complex world• Simple ‘either or” type solutions are grossly

misleading