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SM Lecture Nine (A) - International Strategy

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SM Lecture Nine (A) - International Strategy

  1. 1. Strategic Management BUSM 3200 These Lecture Slides summarize the key points covered in the respective chapters in your recommended text; these slides do NOT substitute, at all, the required reading of the assigned chapter from the text. These slides also may contain additional supplementary material extracted from other texts and sources outside your text book.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-1
  2. 2. Learning outcomes Assess the internationalisation potential of different markets. Identify sources of competitive advantage in international strategy, through both global sourcing and exploitation of local factors. Distinguish between four main types of international strategy. Rank markets for entry or expansion, taking into account attractiveness, cultural and other forms of distance and competitor retaliation threats. Assess the relative merits of different market entry modes, including joint ventures, licensing and foreign direct investment.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-2
  3. 3. International strategy framework Figure 8.1 International strategy frameworkBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-3
  4. 4. International v global strategy International strategy refers to a range of options for operating outside an organisation’s country of origin. Global strategy involves high coordination of extensive activities dispersed geographically in many countries around the world. N.B. Global strategy is just one kind of international strategy.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-4
  5. 5. The Strategic Motives Why Companies Decide To Enter Foreign Markets WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS To gain access to To spread business new customers risk across a wider To exploit core market base competencies To achieve lower To access resources costs and economies and capabilities in of scale foreign markets 9(A)-5Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–5
  6. 6. WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY MAKING MORE COMPLEX Industry competitiveness factors that 1. vary from country to country Location-based advantages for certain 2. countries Differences in government policies 3. and economic conditions 4. Currency exchange rate risks Differences in cultural, demographic, 5. and market conditions 9(A)-6Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–6
  7. 7. Internationalisation drivers Professor George Yip’s Model Figure 8.2 Drivers of internationalisation Source: Adapted from G. Yip, Total Global Strategy II, Financial Times Prentice Hall, 2003, Chapter 2BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-7
  8. 8. Geographical Sources of Advantages Geographical location of activities is a crucial source of competitive advantage Organization can improve the configuration of its value chain and network by taking advantage of country-specific differences Two principal opportunities available: 1. Locational Advantages 2. International Value NetworkBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-8
  9. 9. Location advantages: Porter’s diamond (1) Porter’s Diamond – explains why some locations tend to produce firms with sustained competitive advantages in some industries more than others. The four drivers in Porter’s Diamond stem from: local factor conditions local demand conditions local related and supporting industries local firm strategy structure and rivalry.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-9
  10. 10. The Diamond Framework ♦ Answers important questions about competing on an international basis by: ● Predicting where new foreign entrants are likely to come from and their strengths. ● Highlighting foreign market opportunities where rivals are weakest. ● Identifying the location-based advantages of conducting certain value chain activities of the firm in a particular country. 9(A)-10Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–10
  11. 11. Location advantages: Porter’s diamond (2) Figure 8.3 Porter’s Diamond – the determinants of national advantages Source: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc., from The Competitive Advantage of Nations by Michael E. Porter. Copyright © 1990, 1998 by Michael E. Porter. All rights reservedBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-11
  12. 12. 1. Factor Conditions• Factors of production include not only labor, capital, and natural resources (e.g., land and minerals) but also factors that can be created.• The latter are more relevant to developed nations that are seeking competitive advantage over firms in other countries.• These include a skilled human resource pool as well as the supporting infrastructure of a country, e.g., communication and transportation systems as well as a stable banking system.
  13. 13. 2. Demand Conditions• Demand conditions refer to the demands that consumers place on an industry for goods and services.• Consumers who demand highly specific, sophisticated products and services force firms to be more innovative to meet such demand.• Such consumer pressure presents challenges to a country’s industries to also make it more competitive in international markets.
  14. 14. 3. Related and Supporting Industries• Related and supporting industries enable firms to more effectively manage inputs.• For example, countries with a strong supplier base benefit by adding efficiency in downstream activities.• That is because a competitive supplier base helps a firm obtain inputs using cost-effective, timely methods it contributes to reducing manufacturing costs.
  15. 15. 4. Firm Strategy, Structure and Rivalry • Firms develop strategies and structures to compete with other firms in the same country that are trying to capture the same customer market. • Rivalry is particularly intense in nations with strong consumer demand conditions, strong supplier bases, and high new entrant potential from related industries. • Such rivalry provides a strong impetus for firms to innovate and find new sources of competitive advantage.
  16. 16. International Value Network: Global sourcing Global sourcing refers to purchasing services and components from the most appropriate suppliers around the world regardless of their location. The advantages include:  Cost advantages include labour costs, transportation and communications costs, taxation and investment incentives.  Unique local capabilities.  National market characteristics and reputation.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-16
  17. 17. The concept of ‘value chain networks’ Global strategy requires the firm to decide where exactly it wants to ‘optimally locate’ its core activities If you go back to the model of the value chain, you can then extend it beyond the domestic market and consider how it is to be configured and then integrated across a set of countries in order to create a globally integrated network The network itself provides the global firm with competitive advantagesBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-17
  18. 18. The concept - dispersion and configuration of the value chain in a global network Concentrate R&D in the US Concentrate MFG in China Coordinate Marketing © GDS and Sales from AUSTBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-18
  19. 19. Reasons for Locating Value Chain Activities for Competitive Advantage ♦ Lower wage rates ♦ Proximity to suppliers ♦ Higher worker and technologically productivity related industries ♦ Lower energy costs ♦ Proximity to customers ♦ Fewer environmental ♦ Lower distribution costs regulations ♦ Availableunique ♦ Lower tax rates natural resources ♦ Lower inflation rates 9(A)-19Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–19
  20. 20. INTERNATIONAL STRATEGIES The global–local dilemma relates to the extent to which products and services may be standardised across national boundaries or need to be adapted to meet the requirements of specific national markets.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-20
  21. 21. International strategies Figure 8.4 Four international strategies Source: Adapted ‘Changing patterns of international competition’, pp. 9–39, Figure 5 (Porter, M. 1987). Copyright © 1987, by The Regents of the University of California. Reprinted from the California Management Review, vol. 28, no. 2. By permission of The Regents. cmr berkeley.edu. All right reserved. This article is for personal viewing by individuals accessing this website. It is not to be copied, reproduced or otherwise disseminated without written permission from the California Management Review. By viewing this document, you here by agree to these terms. For permission or reprints, contact: cmr@haas. berkeley.edu electronic formats.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-21
  22. 22. International Strategies Simple Export:  Concentration of activities (particularly manufacturing) in one country, most likely the country of origin  Marketing such as pricing and distribution is decided at the local level  Take advantage of locational advantages Multi-domestic  Dispersion of activities (manufacturing, marketing, product development) in overseas countries  Each market is treated independently  Local adaptations to meet local market needsBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-22
  23. 23. International Strategies Complex Export  Location of activities in one country  Involves coordinated marketing Global Strategy  Mature form of international strategy  Uses international value chain networks  Geographical location is determined according to the locational advantage for each activity so that product development, manufacturing and marketing functions might be located in different countries.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-23
  24. 24. Approaches to International Strategy ♦ Multidomestic Strategy ● Varies product offerings and competitive approaches from country to country. ♦ Global Strategy ● Employs the same basic competitive approach in all countries where the firm operates. ♦ Transnational Strategy ● Is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies. 9(A)-24Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–24
  25. 25. Three Approaches for Competing Internationally 9(A)-25Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–25
  26. 26. Two Opposing Pressures: Reducing Costs and Adapting to Local Markets Ted Levitt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  Are based on three assumptions  Customer needs and interests worldwide are becoming more homogeneous  People (worldwide) prefer lower prices at high quality  Economies of scale in production and marketing can be achieved through supplying global markets
  27. 27. Two Opposing Pressures: Reducing Costs and Adapting to Local MarketsBut those three assumptions may not always be true  Product markets vary widely between nations (customer needs and interests?)  In many product and service markets, there appears to be a growing interest in multiple product features, quality and service (preference for low price?)  Technology permits flexible production, cost of production may not be critical to product cost, and firm’s strategy should not be product-driven
  28. 28. Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches Multidomestic ApproachAdvantages Disadvantages• Can meet the specific needs of • Hinders resource and capability each market more precisely sharing or cross-market transfers• Can respond more swiftly to • Higher production and distribution localized changes in demand costs• Can target reactions to the • Not conducive to a worldwide moves of local rivals competitive advantage• Can respond more quickly to local opportunities and threats 9(A)-28Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–28
  29. 29. Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches (cont’d) Global ApproachAdvantages Disadvantages• Lower costs due to scale and • Unable to address local needs scope economies precisely• Greater efficiencies due to the • Less responsive to changes in ability to transfer best practices local market conditions across markets • Higher transportation costs and• More innovation from knowledge tariffs sharing and capability transfer • Higher coordination and integration• The benefit of a global brand costs and reputation 9(A)-29Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–29
  30. 30. Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches (cont’d) Transnational ApproachAdvantages Disadvantages• Offers the benefits of both local • More complex and harder to responsiveness and global implement integration • Conflicting goals may be difficult to• Enables the transfer and sharing reconcile and require trade-offs of resources and capabilities • Implementation more costly and across borders time-consuming• Provides the benefits of flexible coordination 9(A)-30Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–30
  31. 31. MARKET SELECTION AND ENTRY Not all countries are equally attractive Need to do country PESTEL analysis Then decide on the appropriate Market Entry ModeBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-31
  32. 32. Market characteristics Four elements of the PESTEL framework are particularly important in comparing countries for entry:  Political. Political environments vary widely between countries and can alter rapidly.  Economic. Key comparators are levels of Gross Domestic Product and disposable income which indicate the potential size of the market.  Social. Factors like population characteristics and lifestyle as well as cultural differences.  Legal. Countries vary widely in their legal regime.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-32
  33. 33. Political and Economic Risks ♦ Political Risks ● Stem from instability or weaknesses in national governments and hostility to foreign business. ♦ Economic Risks ● Stem from the stability of a country’s monetary system, economic and regulatory policies, lack of property rights protections, and risks due to exchange rate fluctuation. 9(A)-33Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–33
  34. 34. The Impact of Government Policies and Economic Conditions in Host Countries ♦ Positives ♦ Negatives ● Tax incentives ● Environmental regulations ● Low tax rates ● Subsidies and loans to ● Low-cost loans domestic competitors ● Site location and ● Import restrictions development ● Tariffs and quotas ● Worker training ● Local-content requirements ● Regulatory approvals ● Profit repatriation limits ● Minority ownership limits 9(A)-34Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–34
  35. 35. The Risks of Adverse Exchange Rate Shifts ♦ Effects of Exchange Rate Shifts: ● Exporters experience a rising demand for their goods whenever their currency grows weaker relative to the importing country’s currency. ● Exporters experience a falling demand for their goods whenever their currency grows stronger relative to the importing country’s currency. 9(A)-35Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–35
  36. 36. The CAGE framework Proposed by Professor Ghemawat Cultural Administrative and distance political distance Geographic Economic/ wealth distance distance 9(A)-36BUSM 3200- Strategic Management (Jan 2013) GDS
  37. 37. International cross-cultural comparison Figure 8.5 International cross-cultural comparison Source: M. Javidan, P. Dorman, M. de Luque and R. House, ‘In the eye of the beholder: cross-cultural lessons in leadership from Project GLOBE’, Academy of Management Perspectives, February 2006, pp. 67–90 (Figure 4: USA vs China, p. 82). (GLOBE stands for ‘Global Leadership and Organizational Behavior Effectiveness’.)BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-37
  38. 38. Assessing country markets Country markets can be assessed according to three criteria:  Market attractiveness to the new entrant  The likelihood and extent of defenders’ reaction  Defenders’ clout – the relative power of defenders to fight back.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-38
  39. 39. International competitor retaliation Figure 8.6 International competitor retaliation Source: Reprinted by permission of Harvard Business Review. Exhibit adapted from ‘Global gamesmanship’ by I. MacMillan, S. van Putter and R. McGrath, May 2003. Copyright © 2003 by the Harvard Business School Publishing Corporation. All rights reservedBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-39
  40. 40. The staged international expansion model The staged international expansion model proposes a sequential process whereby companies gradually increase their commitment to newly entered markets, as they build market knowledge and capabilities. This is challenged by two phenomena:  ‘Born-global’ firms - new small firms that internationalise rapidly (usually in new technologies)  Emerging-country multinationals - building unique capabilities in the home market but exploiting them in international markets very quickly.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-40
  41. 41. Modes of entry Exporting Joint ventures and alliances Licensing Foreign direct investment 9(A)-41BUSM 3200- Strategic 41
  42. 42. Entry Modes of International Expansion
  43. 43. Modes of international market entry Figure 8.7 Modes of international market entryBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-43
  44. 44. ExportingAdvantages DisadvantagesNo need for Lose any location operational facilities advantages in the in host country host countryEconomies of scale in Dependence on the home country exportInternet can intermediaries facilitate exporting Exposure to trade marketing barriers opportunities Transportation costs 9(A)-44
  45. 45. Joint ventures and alliancesAdvantages DisadvantagesShared investment Difficult to find good risk partnerComplementary Relationship resources managementMaybe required for Loss of competitive market entry advantage Difficult to integrate and coordinate 9(A)-45
  46. 46. LicensingAdvantages DisadvantagesContractual source of Difficult to identify income good partnerLimited economic Loss of competitive and financial advantage exposure Limited benefits from host nation 9(A)-46
  47. 47. Foreign direct investmentAdvantages DisadvantagesFull control SubstantialIntegration and investment and coordination possible commitmentRapid market entry Acquisitions may through acquisitions create integration/Greenfield coordination issues investments are Greenfield possible and may be investments are subsidised time consuming and unpredictable 9(A)-47
  48. 48. How do firms build competitive advantages in global business arena? Build Competitive Advantage in International Markets Use international Share resources, Gain cross-border location to lower competencies, coordination cost or differentiate and capabilities benefits product 9(A)-48Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–48
  49. 49. When to Concentrate Activities in a Few Locations ♦ The costs of manufacturing or other activities are significantly lower in some geographic locations than in others. ♦ There are significant scale economies in production or distribution. ♦ There are sizable learning and experience benefits associated with performing an activity in a single location. ♦ Certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages. 9(A)-49Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–49
  50. 50. When to Disperse Activities across Many Locations ♦ Buyer-related activities can be conducted at a distance. ♦ There are high transportation costs. ♦ There are diseconomies of large size. ♦ Trade barriers make a central location too expensive. ♦ Dispersing activities reduces exchange rate risks. ♦ Dispersion helps prevent supply interruptions. ♦ Dispersion helps avoid adverse political developments. ♦ Dispersion allows for location-based technology and production cost competitive advantages. 9(A)-50Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 7–50
  51. 51. Internationalization and performance Inverted U-curve – complexity may erode the advantages of internationalization Service sector disadvantages – internationalization may only work well for manufacturing firms Internationalisation and product diversity 9(A)-51
  52. 52. Subsidiary roles in an international portfolio Figure 8.8 Subsidiary roles in multinational firms Source: Reprinted by premission 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 reservedBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-52
  53. 53. Subsidiary roles Strategic leaders  Hold valuable resources; located in countries that have competitive success Contributors  Located in countries of lesser strategic significance but hold valuable internal capabilities Implementers  Not contributing substantially to competitive advantage but help to generate financial resources (‘cash cow’) Black holes  Located in countries that are crucial for competitive success but lack resources (‘question marks’)BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-53
  54. 54. Summary (1) Internationalisation potential in any particular market is determined by Yip’s four drivers: market, cost, government and competitors’ strategies. Sources of advantage in international strategy can be drawn from both global sourcing through the international value network and national sources of advantage, as captured in Porter’s Diamond. There are four main types of international strategy, varying according to extent of coordination and geographical configuration: simple export, complex export, multidomestic and global.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-54
  55. 55. Summary (2) Market selection for international entry or expansion should be based on attractiveness, multidimensional measures of distance and expectations of competitor retaliation. Modes of entry into new markets include export, licensing and franchising, joint ventures and overseas subsidiaries. Internationalisation has an uncertain relationship to financial performance, with an inverted U-curve warning against over-internationalisation. Subsidiaries in an international firm can be managed by portfolio methods just like businesses in a diversified firm.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-55
  56. 56. PRACTICE ESSAY QUESTIONS IMPORTANT NOTE: →  These questions are provided for your reference only – they are only INDICATIVE of the standard of questions you might expect in the final exam.  DO NOT use these questions to “spot”  The RMIT examiner will post advice on the exam on the Learning Hub closer to the exam; you are required to pay attention to that advise  The questions here show the range of topics that could be tested from this lecture; they are NOT exhaustive  To score a high grade it is important to LINK the theory to applications and examples. Where from?  You have been assigned specific cases to read from the text. Each case study will show you the kinds of strategic decisions the case company needs to make. You can draw from these examples.  You have selected a case company for your project; you may use examples from there.  You are supposed to read widely from the business press about local, regional and international companies strategies. You can use examples from there as well.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-56
  57. 57. Sample essay question  What are some of the benefits and risks associated with a firm implementing an international strategy If there are drawbacks in a specific international market, explain how these might be identified using Porters diamond model of national advantage. Give examples to support your answer.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-57
  58. 58. Sample essay question • Discuss the advantages and disadvantages associated with related and unrelated diversification strategy for international expansion. Illustrate your answer with examples from one case studied in this course.  Question is tricky: need to LINK two chapter material, one on diversification (Chapter 7) and one on international strategy (Chapter 8)  Only list the advs and disdvs of diversification from the point of going internationalBUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-58
  59. 59. Sample essay question What are four risks associated with international strategy? Give examples from the XYZ case studied in this course to illustrate how these risks might be managed to improve firm performance.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-59
  60. 60. Sample essay question Discuss the benefits and risks associated with expansion into international markets. Use specific examples in your answer to illustrate how potential risks might be managed effectively for a firm to gain sustainable competitive advantage.BUSM 3200- Strategic Management (Jan 2013) GDS 9(A)-60