Chapter 8
International Strategy
Part 2 Strategic Actions: Strategy Formulation
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Presentation design
by Charlie Cook
Learning Objectives
Studying this chapter should provide you with
the strategic management knowledge needed to:
1. Explain incentives that can influence firms to use an international strategy.
2. Identify three basic benefits firms achieve by successfully implementing an
international strategy.
3. Explore the determinants of national advantage as the basis for
international business-level strategies.
4. Describe the three international corporate-level strategies.
5. Discuss environmental trends affecting the choice of international
strategies, particularly international corporate-level strategies.
6. Explain the five modes firms use to enter international markets.
7. Discuss the two major risks of using international strategies.
8. Discuss the strategic competitiveness outcomes associated with
international strategies particularly with an international diversification
strategy.
9. Explain two important issues firms should have knowledge about when
using international strategies.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
8–2
Figure 8.1
Opportunities and Outcomes of International Strategy
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8–3
Identifying International Opportunities
• International Strategy
– A strategy through which the firm sells its goods or
services outside its domestic market.
• Incentives to use international strategy
– New market expansion extends product life cycle.
– Gain access to materials and resources.
– Integration of operations on a global scale
– Better use of rapidly developing technologies
– International markets yield potential new opportunities.
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8–4
Classic Rationale for International Diversification:
Extend a Product’s Life Cycle
Firm introduces
innovation in
domestic market
Product demand
develops and firm
exports products
Production is standardized and
relocated to low cost countries
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Foreign
competition
begins production
Firm begins
production abroad
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International Strategy Benefits
• Increased Market Size
– Domestic market may lack the size to support efficient
scale manufacturing facilities.
• Economies of Scale (or Learning)
– Expanding size or scope of markets helps to achieve
economies of scale in manufacturing as well as
marketing, R&D or distribution.
– Can spread costs over a larger sales base.
– Can increase profit per unit.
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8–6
International Strategy Benefits (cont’d)
• Location Advantages
– Low cost markets aid in developing competitive
advantage by providing access to:
• Raw materials
• Transportation
• Lower costs for labor
• Key customers
• Energy
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8–7
Figure 8.2
Incentives and Basic Benefits of International Strategy
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8–8
Figure 8.3
Determinants of National Advantage
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8–9
Determinants of National Advantage
• Factors of production
– The inputs necessary to compete in any industry
 Labor
Land
Natural resources
 Capital
Infrastructure
• Basic factors
– Natural and labor resources
• Advanced factors
– Digital communication systems and an educated
workforce
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8–10
Determinants of National Advantage
(cont’d)
• Demand Conditions
– Characterized by the nature and size of buyers’ needs
in the home market for the industry’s goods or
services.
• Size of the market segment can lead to scale-efficient facilities.
• Efficiency can lead to domination of the industry in other
countries.
• Specialized demand may create opportunities beyond national
boundaries.
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8–11
Determinants of National Advantage
(cont’d)
• Related and Supporting Industries
– Supporting services, facilities, suppliers and so on.
• Support in design
• Support in distribution
• Related industries as suppliers and buyers
• Firm Strategy, Structure and Rivalry
– The pattern of strategy, structure, and rivalry
among firms.
• Common technical training
• Methodological product and process improvement
• Cooperative and competitive systems
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8–12
Selecting an International
Corporate-Level Strategy
• The type of corporate strategy selected will have
an impact on the selection and implementation
of the business-level strategies.
– Some strategies provide individual country units with
the flexibility to choose their own strategies.
– Other strategies dictate business-level strategies from
the home office and coordinate resource sharing
across units.
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8–13
International Corporate-Level Strategy
• Focuses on the scope of operations:
– Product diversification
– Geographic diversification
• Required when the firm operates in:
– Multiple industries, and
– Multiple countries or regions
• Headquarters unit guides the strategy
– But business or country-level managers can have
substantial strategic input.
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8–14
Figure 8.4
International Corporate-Level Strategies
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8–15
Multidomestic Strategy
• Strategy and operating decisions are decentralized to
strategic business units (SBU) in each country.
• Products and services are tailored to local markets.
• Business units in one country are independent of each
other.
• Assumes markets differ by country or regions.
• Focus on competition in each market.
• Prominent strategy among European firms due to broad
variety of cultures and markets in Europe.
Multidomestic
strategy
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8–16
Global Strategy
• Products are standardized across national markets.
• Business-level strategic decisions are centralized in the
home office.
• Strategic business units (SBU) are assumed to be
interdependent.
• Emphasizes economies of scale.
• Often lacks responsiveness to local markets.
• Requires resource sharing and coordination across
borders (hard to manage).
Global
strategy
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8–17
Transnational Strategy
• Seeks to achieve both global efficiency and local
responsiveness.
• Difficult to achieve because of simultaneous
requirements for:
– Strong central control and coordination to achieve efficiency
– Decentralization to achieve local market responsiveness
– Pursuit of organizational learning to achieve competitive
advantage.
Transnational
strategy
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8–18
Environmental Trends
• Liability of Foreignness
– Legitimate concerns about the relative attractiveness
of global strategies
– Global strategies not as prevalent as once thought
– Difficulty in implementing global strategies
• Regionalization
– Focusing on particular region(s) rather than on global
markets
– Better understanding of the cultures, legal and social
norms
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8–19
Figure 8.5
Modes of Entry and
their Characteristics
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8–20
Choice of International Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm has no foreign
manufacturing expertise
and requires investment
only in distribution.
Exporting
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8–21
Choice of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm needs to
facilitate the product
improvements
necessary to enter
foreign markets.
Licensing
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8–22
Choice of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm needs to
connect with an
experienced partner
already in the targeted
market and to reduce
its risk through the
sharing of costs.
Strategic Alliance
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8–23
Choice of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm is facing
uncertain situations
such as an emerging
economy in its
targeted market.
Strategic Alliance
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8–24
Choice of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm needs rapid
cross-border access to
new international
markets
Acquisitions
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8–25
Choice of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm’s intellectual
property rights in an
emerging economy are
not well protected, the
number of firms in the
industry is growing fast,
and the need for global
integration is high.
Wholly-owned
Subsidiary
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8–26
Risks in an International Environment
• Political Risks
• Economic Risks
– Instability in national
governments
– War, both civil and
international
– Potential nationalization of
a firm’s resources
?
?
?
– Differences and
fluctuations in the value
of different currencies
– Differences in prevailing
wage rates
– Difficulties in enforcing
property rights
– Unemployment
?
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8–27
Figure 8.6
Risks in the International Environment
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8–28
International Diversification and Returns
• Expanding sales of goods or services across
global regions and countries and into different
geographic locations or markets:
– May increase a firm’s returns (such firms usually
achieve the most positive stock returns).
– May achieve economies of scale and experience,
location advantages, increased market size and
opportunity to stabilize returns.
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8–29
International Diversification
and Innovation
• Expansion sales of goods or services across
global regions and countries and into different
geographic locations or markets:
– May yield potentially greater returns on innovations (a
larger market).
– Can generate additional resources for investment in
innovation.
– Provides exposure to new products and processes in
international markets; generates additional knowledge
leading to innovations.
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8–30
Complexity of Managing
Multinational Firms
• Expansion into global operations in different
geographic locations or markets:
– Makes implementing international strategy
increasingly complex.
– Can produce greater uncertainty and risk.
– May result in the firm becoming unmanageable
– May cause the cost of managing the firm to exceed
the benefits of expansion.
– Exposes the firm to possible instability of some
national governments.
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8–31
Limits to International Expansion
• Management Problems
– Cost of coordination across diverse geographical
business units
– Institutional and cultural barriers
– Understanding strategic intent of competitors
– The overall complexity of competition
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8–32