International Strategy: Creating Value in Global Markets

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International Strategy: Creating Value in Global Markets

  1. 1. LOGO Chapter 7 International Strategy: Creating Value in Global Markets Arriola, Alice Elaine Caparida, Regine Guintaran, Christy Hamelarin, Irene Igoy, Carolyn
  2. 2. Topics Why international expansion? Determinants of national competitive advantage. Motivations and risks of global expansion. Two opposing forces—cost reduction and adaptation to local markets. International Strategies. Entry strategies
  3. 3. Drivers of Globalization increased similarity of lifestyles global communications fast communication pressures to reduce costs
  4. 4. Population of Selected Nations Country July 2002 (estimated) China 1,284,303,000 India 1045,845,000 United States 280,562,000 Japan 126,974,000 Germany 83,251,000Exhibit 7.2 Populations of Selected NationsSource: www.brainyatlas.com/geos/gm.html.
  5. 5. Motivations for International ExpansionIncrease Market SizeDomestic market may lack the size to support efficientscale manufacturing facilities
  6. 6. Motivations for International ExpansionIncrease Market SizeDomestic market may lack the size to support efficientscale manufacturing facilitiesJapanese electronics or automobile manufacturers
  7. 7. Motivations for International ExpansionIncrease Market SizeDomestic market may lack the size to support efficientscale manufacturing facilities Japanese electronics or automobile manufacturersReturn on InvestmentLarge investment projects may require global markets tojustify the capital outlays
  8. 8. Motivations for International ExpansionIncrease Market SizeDomestic market may lack the size to support efficientscale manufacturing facilities Japanese electronics or automobile manufacturersReturn on InvestmentLarge investment projects may require global markets tojustify the capital outlays Aircraft manufacturers Boeing or Airbus
  9. 9. Motivations for International ExpansionEconomies of Scale or LearningExpanding size or scope of markets helps to achieveeconomies of scale in manufacturing as well asmarketing, R & D or distribution - Can spread costs over a larger sales base - Increase profit per unit
  10. 10. Motives for Int’l Expansion Optimize the physical location for every activity in its value chain  Performance enhancement  Cost reduction  Risk reduction
  11. 11. Porter’s Determinants of National AdvantageHome country of origin is crucial to International success
  12. 12. Porter’s Determinants of National Advantage Home country of origin is crucial to International success Factor ConditionsBasic Factors - Land, laborAdvanced Factors - Highly educated workers - Digital communicationsGeneralized Factors - Capital, infrastructureSpecialized Factors - Skilled personnel
  13. 13. Factor Conditions To achieve competitive advantage, factors of production must be created  Industry specific  Firm specific  Pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed
  14. 14. Porter’s Determinants of National Advantage Home country of origin is crucial to International success Factor Conditions DemandBasic Factors Conditions - Land, laborAdvanced Factors Home country - Highly educated workers may support - Digital communications scale efficientGeneralized Factors operations by - Capital, infrastructure itselfSpecialized Factors - Skilled personnel
  15. 15. Demand Conditions Demands that consumers place on an industry for goods and services  Demanding consumers push firms to move ahead of companies from other nations  Demanding consumers drive firms in a country to • Meet high standards • Upgrade existing products and services • Create innovative products and services
  16. 16. Porter’s Determinants of National Advantage Home country of origin is crucial to International success Related & Supporting Industries - Japanese cameras & copiers Factor Conditions - Italian shoes & leatherBasic Factors - Land, labor DemandAdvanced Factors Conditions - Highly educated workers Home country may - Digital communications support scale efficientGeneralized Factors operations by itself - Capital, infrastructureSpecialized Factors - Skilled personnel
  17. 17. Related and Supporting Industries Related and supporting industries  Enable firms to manage inputs more effectively • Strong supplier base adds efficiency to downstream activities • Competitive supplier base lets a firm obtain inputs using cost-effective, timely methods  Allow joint efforts among firms  Create the probability that new entrants will enter the market
  18. 18. Porter’s Determinants of National Advantage Home country of origin is crucial to International success Related & Supporting Industries - Japanese cameras & copiers Factor Conditions - Italian shoes & leatherBasic Factors - Land, labor DemandAdvanced Factors Conditions - Highly educated workers Home country may - Digital communications support scale efficientGeneralized Factors operations by itself - Capital, infrastructureSpecialized Factors Firm Strategy, Structure - Skilled personnel & Rivalry Intense rivalry fosters industry competition
  19. 19. Firm Strategy, Structure and Rivalry Rivalry is intense in nations with conditions of  Strong consumer demand  Strong supplier bases  High new entrant potential from related industries Competitive rivalry increases the efficiency with which firms develop, market, and distribute products and services within the home country
  20. 20. Firm Strategy, Structure and Rivalry Competitive rivalry increases the efficiency with which firms  Develop within the home country  Market within the home country  Distribute products and services within the home country
  21. 21. Firm Strategy, Structure and Rivalry Domestic rivalry provides a strong impetus for firms to  Innovate  Find new sources of competitive advantage Domestic rivalry forces firms to look beyond national borders for new markets
  22. 22. Porter’s Diamond of National Advantage: As Applied to IndiaAdapted from Exhibit 7.1 India’s Virtual Diamond in Software
  23. 23. Potential Risks of International Expansion Political and economic risk  Social unrest  Military turmoil  Demonstrations  Violent conflict and terrorism  Laws and their enforcement
  24. 24. Risk Rankings Total of Credit Total and Access Total Risk Economic Political Debt to Finance Rank Country Assessment Performance Risk Indicators Indicators 1 Luxembourg 99.51 25.00 24.51 20.00 30.00 2 Switzerland 98.84 23.84 25.00 20.00 30.00 3 United States 98.37 23.96 24.41 20.00 30.00 40 China 71.27 18.93 16.87 19.73 15.74 55 Poland 57.12 18.56 13.97 9.36 15.23 63 Vietnam 52.04 14.80 11.91 18.51 6.82 86 Russia 42.62 11.47 8.33 17.99 4.83 114 Albania 34.23 8.48 5.04 19.62 1.09 161 Mozambique 21.71 3.28 2.75 13.85 1.83 178 Afghanistan 3.92 0.00 3.04 0.00 0.88Exhibit 7.3 A Sample of International Country Risk RankingsSource: Adapted from worldbank.org/html/prddr/trans/so96/art7.htm.
  25. 25. Potential Risks of International Expansion Currency risks  Currency exchange fluctuations  Appreciation of the U.S. dollar Management risks  Culture • Income levels  Customs • Customer preferences  Language • Distribution system
  26. 26. Strategy Implementation Power distance (PD) Hofstede’s Uncertainty avoidance (UA)Dimensions of National Individualism-collectivism (I-C) Culture Masculinity-femininity (M-F) Long-term orientation (LT)
  27. 27. Two Opposing Pressures: Reducing Costs and Adapting to Local Markets 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
  28. 28. Two Opposing Pressures: Reducing Costs and Adapting to Local Markets Strategies that favor global products and brands • 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
  29. 29. 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
  30. 30. Opposing Pressures and Four StrategiesExhibit 7.5 Opposing Pressures and Four Strategies
  31. 31. International Strategy Pressure for both local adaptation and low costs are rather low Different activities in the value chain have different optimal locations Susceptible to higher levels of currency and political risks
  32. 32. Global Strategy Competitive strategy is centralized and controlled largely by corporate office Emphasizes economies of scale Advantages  Larger production plants  Efficient logistics and distribution networks  Supports high levels of investment in R&D  Standard level of quality throughout the world
  33. 33. Global Strategy Competitive strategy is centralized and controlled largely by corporate office Emphasizes economies of scale 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
  34. 34. Multidomestic Strategy Emphasis is 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
  35. 35. Transnational Strategy 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
  36. 36. 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
  37. 37. Strengths and Limitations of Various Strategies Strategy Strengths Limitations International • Leverage and diffuse • Limited ability to adapt to parent’s knowledge and local markets. core competencies. • Inability to take advantage of • Lower costs because of new ideas and innovations less need to tailor occurring in local markets. products and services. • Greater level of worldwide coordination Global • Strong integration across • Limited ability to adapt to various businesses. local markets. • Standardization leads to • Concentration of activities higher economies of scale may increase dependence which lowers costs. on a single facility. • Helps to create uniform • Single locations may lead to standards of quality higher tariffs and throughout the world. transportation costs.Exhibit 7.6 Strengths and Limitations of Various Strategies
  38. 38. Strengths and Limitations of Various Strategies Strategy Strengths Limitations Multidomestic • Ability to adapt products • Less ability to realize cost and services to local savings through scale market conditions. economies. • Ability to detect potential • Greater difficulty in opportunities for attractive transferring knowledge niches in a given market, across countries. enhancing revenue. • May lead to “overadaptation” as conditions change. Transnational • Ability to attain economies • Unique challenges in of scale. determining optimal locations • Ability to adapt to local of activities to ensure cost markets. and quality. • Ability to locate activities in • Unique managerial optimal locations. challenges in fostering • Ability to increase knowledge transfer. knowledge flows and learning.Exhibit 7.6 Strengths and Limitations of Various Strategies
  39. 39. Entry Modes of International Expansion High Wholly Owned Subsidiary Extent of Investment Risk Joint Venture Strategic Alliance Franchising Licensing Exporting Low Low High Degree of Ownership and ControlAdapted from Exhibit 7.7 Entry Modes for International Expansion
  40. 40. Exporting Consists of producing goods n one country to sell in another. Beach Head Strategy Local Partnership Successful distributors  Carry product lines that complement the multinational’s products  Behave as if they are business partners with the multinationals.  Invest in training, information systems, and advertising and promotion
  41. 41. Licensing and Franchising Franchisor receives a royalty or fee Franchisee gets to use trademark, patent, trade secret or other valuable intellectual property Disadvantages  Loss of control over its product  Licensee may become a competitor  Threat to brand name and reputation of products Advantages  Limited risk exposure  Expanded revenue base
  42. 42. Strategic Alliances and Joint Ventures Partnerships that enable firms to share risks and potential revenues and profits Partners  gain exposure to new knowledge and technologies  Develop core competencies that can lead to competitive advantages  Gain information on local markets conditions• Partnerships that enable firms to share risks and potential revenues and profits
  43. 43. Strategic Alliances and Joint Ventures Risks • Needs to be clearly defined strategy supported by both partners • Needs to be clear understanding of capabilities and resources that will be central to the partnership • Must be trust between partners • Cultural issues that can potentially lead to conflict and dysfunctional behavior need to be addressed. • The success of a firm’s alliance SHOULD NOT BE LEFT TO CHANCE.
  44. 44. Wholly Owned Subsidiaries Business owned by only one multinational company  Acquire an existing company in the home country  Develop a totally new operation (greenfield venture)  Most expensive and risky of all global entry strategies  Greatest control over all activities

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