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Essentials of strategy formulation in international business


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Essentials of strategy formulation in international business

  2. 2. BASIC FOREIGN EXPANSIONENTRY DECISIONS International Market Entry  Which markets to enter  When to enter these markets  What is the scale of entry
  3. 3. WHICH FOREIGN MARKETS Favorable  Politically stable developed and developing nations  Free market systems  No dramatic upsurge in inflation or private-sector debt Unfavorable  Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing
  4. 4. EARLY MARKET ENTRY Advantages  First-mover advantage.  Build sales volume.  Move down experience curve and achieve cost advantage.  Create high switching costs. Disadvantages  First mover disadvantage - pioneering costs.  Changes in government policy.
  5. 5. MARKET ENTRY SCALE Large scale entry  Strategic Commitments - a decision that has a long-term impact and is difficult to reverse.  May cause rivals to rethink market entry.  May lead to indigenous competitive response. Small scale entry  Time to learn about market.  Reduces exposure risk.
  6. 6. ENTRY MODES Exporting Turnkey Projects Licensing Franchising Joint Ventures Wholly Owned Subsidiaries Strategic Alliances
  7. 7. Exporting Advantages  Avoids cost of establishing manufacturing operations  May help achieve experience curve and location economies Disadvantages  May compete with low-cost location manufacturers  Possible high transportation costs  Tariff barriers  Possible lack of control over marketing reps14-8
  8. 8. Piggy backing Distribution of products is through utilising the international distribution network of other international manufacturers. Advantages  Effective entry strategy into developed countries  Cost-effective  Economies of Scale Disadvantages  Often poor channels of marketing communication  Locked into non strategic unsatisfactory arrangement.
  9. 9. Turnkey projects Contractor agrees to handle every detail of project for foreign client Advantages  Can earn a return on knowledge asset  Less risky than conventional FDI Disadvantages  No long-term interest in the foreign country  May create a competitor  Selling process technology may be selling competitive advantage as well14-10
  10. 10. Licensing Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties Advantages  Reduces development costs and risks of establishing foreign enterprise.  Lack capital for venture.  Unfamiliar or politically volatile market.  Overcomes restrictive investment barriers.  Others can develop business applications of intangible property.14-11
  11. 11. Franchising Franchiser sells intangible property and insists on rules for operating business. Advantages  Reduces costs and risk of establishing enterprise Disadvantages  May prohibit movement of profits from one country to support operations in another country  Quality control14-12
  12. 12. NATURE OF STRATEGICRange of assets possessed by Partner Range of assets possessed by ALLIANCE A in home country Partner B in international market Market access / distribution Product-market knowledge Manufacturing competence Franchising Market access/distribution Manufacturing competence Raw materials Licensing Process know-how Management Marketing Product-market knowledge Product-market know-how Partnership Market access / distribution Product process know – how Manufacturing competence Joint Product-market knowledge Raw materials ventures Raw materials Management Management (Bradley, 2005:241)
  13. 13. Joint Ventures A foreign company invites an outside partner to share stock ownership in the new unit. The ownership could vary for companies accepting minority or majority position in the Joint Venture. (Jeanet & Hennesey, 2004:300)
  14. 14. JOINT VENTURESAdvantages Access to new markets and distribution networks Benefit from local partner’s knowledge. Shared costs/risks with partner. Reduced political risk.
  15. 15. JOINT VENTURESDisadvantages Ambiguous objectives. Partners have different objectives for the joint venture Imbalance of Expertise Poor integration due to different management styles and cultures brought in. Early stages are difficult.
  16. 16. WHOLLY OWNED SUBSIDIARY  Subsidiaries could be Greenfield investments or acquisitions  Advantages  No risk of losing technical competence to a competitor  Tight control of operations.  Realize learning curve and location economies.  Disadvantage  Bear full cost and risk
  17. 17. STRATEGIC ALLIANCES Cooperative agreements between potential or actual competitors. Advantages  Facilitate entry into market  Share fixed costs  Bring together skills and assets that neither company has or can develop  Establish industry technology standards Disadvantages  Competitors get low cost route to technology and markets
  18. 18. Why Strategic Alliances High cost of technology development Reduction of Psychic Difference Good way to secure access to foreign markets Host country may require some local ownership
  19. 19. Global Alliances  Firms join to attain world leadership  Each partner has significant strength to bring to the alliance  A true global vision  Relationship is horizontal not vertical  When competing in markets not part of alliance, they retain their own identity
  20. 20. Partner selection Get as much information as possible on the potential partner Collect data from informed third parties  Former partners  Investment bankers  Former employees Get to know the potential partner before committing Expert Opinion
  21. 21. Characteristics of Strategic Alliances(HILL 2005:500) Independence of Participants Benefits Technology Control Products Shared Ongoing Benefits Contributions Markets Cooperation
  22. 22. Managing the alliance Build trust  Relational capital Learning from partners  Diffusion of knowledge
  23. 23. Wholly Owned Subsidiary Stage 4L installation of foreign production facilitiesEVE Stage 3L Franchising establishment of foreign sales affiliates Joint VentureO LicensingF Stage 2C export by independent ExportO representativesNTR Stage 1O no regular export Indirect ExportL activities Amount of Resources Committed - Foreign Market Approaches to Foreign Market Entry - Uppsala model (Bartlett, Ghoshal & Beamish, 2008:9)
  24. 24. Ohmaes (1990) 5-stage globalisation model (evolutionary)1. Export orientated company (develop strong product base in home market)2. Establish overseas branches3. Relocating production base to key markets4. Insiderisation: transferring corporate functions from parent firm HQ to new local environment5. Complete global company: establishing global branding (Ohmae, K. 1990, The Borderless World, Harper Business, New York.)
  25. 25. RISK & CONTROL IN MNE(Doole & Lowe, 2004:220) Cooperation Strategies Direct Invest’ Joint ventures Own subsidiary Strategic alliances Acquisition Assembly Direct Exporting CONTROL Distributors Agents Direct marketing/ E-commerce Franchising Management contracts Indirect Exporting Piggybacking Trading companies Export management companies Domestic purchasing RISK
  26. 26. PRESSURE OF GLOBAL GloballyINTEGRATION: Integrated• Importance of Multinational Transnational Strategy ProductCustomers Emphasis• Presence of MultinationalCompetitors Multifocal• Investment Intensity Oriented• Technology Intensity• Pressure for Cost Reduction Area• Universal Needs Emphasis• Access to Raw Materials &Energy Locally Responsive PRESSURE OF LOCAL RESPONSIVENESS: • Difference in Consumer Needs • Difference in Distribution Channels • Availability of Substitutes • Market Structure • Host Government Demands(Prahalad and Doz see Dicken, 2003:Figure 7.12;220)
  27. 27. References Bradley, F., 2005. International Marketing Strategy. 5th ed. England: Pearson Education Ltd. Bartlett, C., Ghoshal, S. & Beamish, P., 2008. Transnatonal Management. 5th ed. New York: McGraw-Hill/Irwin. Hill, C., 2005. International Business. 5th ed. New York: McGraw-Hill/Irwin. Dicken, P., 2003. Global Shift. 4th ed. London: SAGE Publications Ltd.
  28. 28. References (Continued) Jeanet, J. P., Hennessey, H. D., 2004. Global Marketing Strategies. 6th ed. USA: Houghton Mifflin Company Partneringalliances, 2008. Deliver the Value Your Strategic Alliance Partner Needs. Available via: Available at <> [Accessed : 28 November 2008] Doole, I., Lowe, R., 2004. International Marketing Strategy. 4th ed. London: Thomson Learning