OBJECTIVES Define international strategy and identify its implications for the strategy diamond 1 Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage 2 Use the CAGE framework to identify desirable international arenas 3 Describe different vehicles for global expansion 4 Apply different international strategy configurations 5 Outline the international strategy implications of the static and dynamic perspectives 6
DELL GOES TO CHINA If we’ve not in what will soon be the second-biggest PC market in the world, then how can Dell possibly be a global player? “ Dell became China’s largest computer system provider in just 5 years Strategic decisions Vehicles Staging Consumers first, then corporations U.S. Assemble and distribute itself Corporations first China Partner “
INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND Economic logic Arenas Vehicles Staging Differentiators
Which international market-entry strategies will we use? Alliances? Acquisitions? Greenfield investments?
How does being international make our products more attractive to our customers?
How does our international strategy lower our costs, raise the prices we can charge, or create synergies between our business?
Economic logic Arenas
Which geographic areas will we enter?
Which channels will we use in those areas?
When will we go international?
How quickly will we expand into international markets?
In what sequence will we implement our entry tactics?
PROS VS. CONS OF INTERNATIONAL EXPANSION
Pepsi’s ambitious expansion in the 1990s resulted in a decreased international market share
Wal-Marts international businesses perform poorly relative to its U.S. business
Many international expansions fail
Newness can be a disadvantage (e.g., your firm must move up the learning curve)
Foreignness can be a liability (e.g., your managers may not understand local culture)
Governance and coordination costs increase as you manage from a distance
KEY FACTORS – GLOBAL ECONOMIES OF SCALE Key factors
Global economies of scale
Pharmaceutical firms such as Pfizer, can leverage large R&D budgets
CitiGroup, McDonald’s, and Coca-Cola can leverage brands
MITY can leverage its excess capacity to produce chairs and thereby reduce average costs
Global expansion may be attractive if it allows you to leverage fixed assets over new markets
KEY FACTORS – LOCATION Key factors
Global economies of scale
Presence of complements
Choosing the right location can provide advantages in terms of A five-forces analysis can help reveal the attractiveness of a location
KEY FACTORS – MULTIPOINT COMPETITION Key factors
Global economies of scale
Expanding into a new market may provide an opportunity for a “stronghold assault” For example, French tire maker Michelin had negligible presence in the U.S. in the 1970s. It learned of Goodyear’s plans to expand into Europe, so it launched a counter attack. It started selling tires in the U.S. at or below cost, and thereby forced Goodyear to drop prices and cut profits in its core market
KEY FACTORS – LEARNING AND KNOWLEDGE SHARING Key factors Expanding into a new market can create opportunities to innovate, improve existing products in existing markets, or develop ideas for new markets SC Johnson, for example, used technology developed in its European operation (a product for repelling mosquitoes in homes) to create the “ Glade Plug-ins” air freshener in the U.S.
Global economies of scale
Learning and knowledge sharing
THE CAGE DISTANCE FRAMEWORK Attributes creating distance Industries or products affected by distance Cultural distance Administrative distance Geography distance Economic distance Different languages Different ethnicities; lack of connective ethnic or social networks Different religions Different social norms Products have high linguistic content (TV) Products affect cultural or national identity of consumers (foods) Product features vary in terms of size (cars), standards (electrical appliances), or packaging Products carry country-specific quality associations (wines) Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf. Absence of colonial ties Absence of shared monetary or political association Political hostility Government policies Institutional weakness
Government involvement is high in industries that are
Producers of staple goods (electricity)
Producers of other “entitlements” (drugs)
Large employers (framing)
Large suppliers to government (mass transportation)
National champions (aerospace)
Vital to national security (telecom)
Exploiters of natural resources (oil, mining)
Subject to high sunk costs (infrastructure)
Physical remoteness Lack of a common border Lack of sea or river access Size of country Weak transportation or communication links Differences in climates Products have a low value-of-weight or bulk ratio (cement) Products are fragile or perishable (glass, fruit) Communications and connectivity are important (financial services) Local supervision and operational requirements are high (many services)
Differences in consumer incomes
Differences in costs and quality of
Information or knowledge
Nature of demand varies with income level (cars) Economies of standardization or scale are important (mobile phones) Labor and other factor cost differences are salient (garments) Distribution or business systems are different (insurance) Companies need to be responsive and agile (home appliances )
ADMINISTRATIVE DISTANCE Free Trade Agreements
Open foreign markets to US exports
Foreign Corrupt Practices Act
Intellectual Property Protection
Patent Cooperation Treaty
Legal concerns for US firms
ADMINISTRATIVE DISTANCE NAFTA Historical Political Hostilities Decreased distance between US, Mexico, and Canada
Increased distance between Cuba and US
ECONOMIC DISTANCE “ Bottom of the pyramid” 4 billion people Deliberate Targeting Ex: shampoo for cold water
CHOICE OF ENTRY MODES Choice of entry mode Strategic alliances (within dotted areas) Source: Adapted from Pan, Y. and D. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, 31 (2000), 535-545 Nonequity modes Equity (FDI) modes Greenfield investments Minority JVs Direct exports Licensing/ franchising Acquisition 50/50 JVs Indirect exports Turnkey projects Others Majority JVs Others Contracted R&D Wholly owned subsidiaries Alliances and joint ventures (JVs) Exports Contractual agreements Comarketing
VEHICLES FOR ENTERING FOREIGN MARKETS 100% Exports 100% Local Exports versus local production Degree of ownership control over activities per-formed in the foreign market 0% 100% Source: Examples drawn from in Gupta, A., and V. Govindarajan, “Managing Global Expansion: A Conceptual Framework,” business Horizons, March/April 2002, 45-54 FDI Exports Alliance Champion International’s paper exports through independent brokers Honda’s initial entry into the U.S. market FDI through acquisition Bridgestone’s acquisition of U.S.-based Firestone Ford-Mazda Genentech-Hoffman LaRoche Alliance and exports KFC’s franchisees in India
EXPORTING OPTIONS Shipping Most common option in relatively close markets and for products with lower shipping costs Licensing and franchising A firm may form an alliance or franchise giving a local partner the right and responsibility to operate the firm’s business in their home market (e.g., Burger King’s expansion in Europe) Special agreements A firm may enter Turnkey project agreements, R&D contracts, or joint-marketing initiatives (e.g., a German firm Bayer AG contracts large R&D projects to a U.S. firm)
ALLIANCES Until recently, China did not allow non-Chinese companies in China … û U.S. firm … so U.S. companies formed alliances to gain access Chinese Firm
FOREIGN DIRECT INVESTMENT
South African Breweries purchase Miller Brewing in 2002 to gain access to U.S. customers and brewing capacity
DaimlerChrysler and BMW each invested $250 million to start local factories in Brazil
Acquires Foreign company Local company Home country/ market
IMPORTING Importing is often a “stealth” form of internationalization because a firm will claim to have no international operations and yet directly or indirectly base production or service delivery abroad “ Domestic” company Home country Country A Production Country B Customer service Country C Logistics
INTERNATIONAL STRATEGY CONFIGURATIONS Relatively few opportunities to gain global efficiencies Many opportunities to gain global efficiencies Relatively high local responsiveness Relative low local responsiveness Multinational configuration Build flexibility to respond to national difference through strong, resourceful, entrepreneurial, and somewhat independent national or regional operations. Requires decentralized and relatively self-sufficient units Example : MTV initially adopted an international configuration (using only American programming in foreign markets) but then changed its strategy to a multinational one. It now tailors its Western European programming to each market, offering eight channels, each in a different language Transnational configuration Develop global efficiency, flexibility, and worldwide learning. Requires dispersed, interdependent, and specialized capabilities simultaneously Example : Nestle has taken steps to move in this direction, starting first with what might be described as a multinational configuration Today, Nestle aims to evolve from a decentralized, profit-center configuration to one that operates as a single, global company. Firms like Nestle have taken lessons from leading consulting firms such as McKinsey and Company, which are globally dispersed but have a hard-driving, one-firm culture at their core. International configuration Exploit parent-company knowledge and capabilities through worldwide diffusion, local marketing, and adaptation. The most valuable resources and capabilities are centralized; others, such as local marketing and distribution, are decentralized Example : When Wal-Mart initially set up its operations in Brazil, it used its U.S. stores as a model for international expansion Global configuration Build cost advantages through centralized, global-scale operations . Requires centralized and globally scaled resources and capabilities Example : Companies such as Merck and Hewlett-Packard give particular subsidiaries a worldwide mandate to leverage and disseminate their unique capabilities and specialized knowledge worldwide Source: Bartlett, C., S. Ghoshal, & J. Birkenshaw, Transnational Management (New York: Irwin, 2004)
BORN – GLOBAL FIRMS More and more firms, even young, small ones, have operations that bridge national borders Founded by
30% of global PC mouse busi-ness by 1989 Logitech
HOW TO SUCCEED AS A GLOBAL START-UP If yes, Put together tools you will need to move into global market Consider if you should be a global start-up
Do you need human resources from other countries to succeed?
Strong management team with inter- national experience
Do you need financial capital from other countries to succeed?
Broad and deep international network among suppliers, customers, and complements
If you go global, will target customers prefer your services over competitor's?
Preemptive marketing or technology to provide first-mover advantage
Can you put an international system in place more quickly than domestic competitors?
Strong intangible assets
Do you need global scale and scope to justify the financial and human capital investment?
Ability to keep customers locked in by linking new products and services to core business, while you innovate
Will a purely domestic focus now make it harder for you to go global in the future?
Close worldwide coordination and com- munication among business units, suppliers, complements and customers
DEVELOPING A GLOBAL MIND-SET Having an appreciation for the differences between countries and people and seeing these differences as opportunities Having developed skills for managing diverse teams in a world-wide work force Global mindset Global perspective Global skills
EXPATRIATES AND INPATRIATES Expatriates From the home country Inpatriates From the local or host country
HOW WOULD YOU DO THAT? Fewer than 15% of executives have substantive international experience If you were CEO, how would you build a global perspective in your executives? Tactic Action steps Teams ? Training ? Transfers ? ??? ? 1 2 3 4