BUS499 International Strategy Lesson

Senior Seminar in Business Administration
BUS 499
International Strategy
Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (2009). BUS499:
Strategic management: Competitiveness and globalization,
concepts and cases: 2009 custom edition (8th ed.). Mason, OH:
South-Western Cengage Learning.
Welcome to Senior Seminar in Business Administration.
In this lesson we will discuss International Strategy.
Please go to the next slide.
Objectives
Upon completion of this lesson, you will be able to:
Identify various levels and types of strategy in a firm
Identify various levels and types of strategy in a firm.
Supporting Topics
Identifying international opportunities: incentives to use an
international strategy
International strategies

Environmental trends
Choice of international entry mode
Strategic competitive outcomes
Risks in an international environment
In order to achieve this objective, the following supporting
topics will be covered:
international strategy;
International strategies;
Environmental trends;
Choice of international entry mode;
Strategic competitive outcomes; and
Risks in an international environment.
Overview
International strategy
Demand develops in other countries
Secure needed resources
An international strategy is a strategy through which the firm
sells its goods or services outside its domestic market. One of
the primary reasons for implementing an international strategy
is that international markets yield potential new opportunities.
Typically, a firm discovers an innovation in its home-country
market, especially in an advanced economy such as that of the
United States. Often demand for the product then develops in
other countries, and exports are provided by domestic
operations. Increased demand in foreign countries justifies
making investments in foreign operations, especially to fend off

foreign competitors.
Another traditional motive for firms to become multinational is
to secure needed resources. Key supplies of raw material,
especially minerals and energy, are important in some
industries. Other industries, such as clothing, electronics, watch
making, and many others, have moved portions of their
operations to foreign locations in pursuit of lower production
costs.
Overview, continued
Increased market size
Return on investment
Economies of scale and learning
Location advantages
When international strategies are successful, firms can derive
four basic benefits:
Increased market size;
Greater returns on major capital investments or on investments
in new products and processes;
Greater economies of scale, scope, or learning; and
A competitive advantage through location.
Firms can expand the size of their potential market by moving
into international markets.
The primary reason for investing in international markets is to
generate above-average returns on investments. Still, firms from
different countries have different expectations and use different
criteria to decide whether to invest in international markets.
By expanding their markets, firms may be able to enjoy

economies of scale, particularly in their manufacturing
operations. To the extent that a firm can standardize its products
across country borders and use the same or similar production
facilities, thereby coordinating critical resource functions, it is
more likely to achieve optimal economies of scale.
Firms may locate facilities in other countries to lower the basic
costs of the goods or services they provide. These facilities may
provide easier access to lower-cost labor, energy, and other
natural resources. Other location advantages include access
critical supplies and to customers. Once positioned favorably
with an attractive location, firms must manage their facilities
effectively to gain the full benefit of a location advantage.
Business-level
Cost leadership
Differentiation
Focused cost leadership
Integrated cost leadership/differentiation
Corporate-level
Multidomestic
Global
Transnational
Firms choose to use one or both of two basic types of
international strategies: business-level international strategy
and corporate-level international strategy.
At the business level, firms follow generic strategies:
Cost leadership;
Differentiation:
Focused cost leadership;

Focused differentiation; or
Integrated cost leadership/differentiation.
The three corporate-level international strategies are
multidomestic, global, or transnational. To create competitive
advantage, each strategy must utilize a core competence based
on difficult-to-imitate resources and capabilities.
Environmental Trends
Liability of foreignness
Regionalization
7
Types of Entry
Exporting
Licensing
Strategic alliances
Acquisitions
New wholly owned subsidiary
International expansion is accomplished by exporting products,
participating in licensing arrangements, forming strategic
alliances, making acquisitions, and establishing new wholly
owned subsidiaries. Each means of market entry has its
advantages and disadvantages. Thus, choosing the appropriate
mode or path to enter international markets affects the firm’s
performance in those markets.
Many industrial firms begin their international expansion by
exporting goods or services to other countries. Exporting does

not require the expense of establishing operations in the host
countries, but exporters must establish some means of
marketing and distributing their products. Usually, exporting
firms develop contractual arrangements with host country firms.
The disadvantages of exporting include the often high costs of
transportation and tariffs placed on some incoming goods.
Licensing is an increasingly common form of organizational
network, particularly among smaller firms. A licensing
arrangement allows a foreign company to purchase the right to
manufacture and sell the firm’s products within a host country
or set of countries. The licensor is normally paid a royalty on
each unit produced and sold. The license takes the risks and
makes the monetary investments in facilities for manufacturing,
marketing, and distributing the goods or services. As a result,
licensing is possibly the least costly form of international
expansion.
In recent years, strategic alliances have become popular means
of international expansion. Strategic alliances allow firms to
share the risks and the resources required to enter international
markets. Moreover, strategic alliances can facilitate the
development of new core competencies that contribute to the
firm’s future strategic competitiveness.
As free trade has continued to expand in global markets, cross-
border acquisitions have also been increasing significantly.
Acquisitions can provide quick access to a new market. In fact,
acquisitions often provide the fastest and the largest initial
international expansion of any of the alternatives. Thus, entry is
much quicker than by other modes.
The establishment of a new wholly owned subsidiary is referred
to as a greenfield venture. The process of creating such ventures
is often complex and potentially costly, but it affords maximum
control to the firm and has the most potential to provide above-

average returns.
Strategic Competitive Outcomes
International diversification and returns
International diversification and innovation
Complexity of manging
Firms have numerous reasons to diversify internationally.
International diversification is a strategy through which a firm
expands the sales of its goods or services across the borders of
global regions and countries into different geographic locations
or markets. Because of its potential advantages, international
diversification should be related positively to firms’ returns.
Research has shown that, as international diversification
increases, firms’ returns decrease initially but then increase
quickly as firms learn to manage international expansion. In
fact, the stock market is particularly sensitive to investments in
international markets. Firms that are broadly diversified into
multiple international markets usually achieve the most positive
stock returns, especially when they diversify geographically
into core business areas.
Many factors contribute to the positive effects of international
diversification, such as potential economies of scale and
experience, location advantages, increased market size, and the
opportunity to stabilize returns. The stabilization of returns
helps reduce a firm’s overall risk. All of these outcomes can be
achieved by smaller and newer ventures, as well as by larger
and established firms.

International Risks`
Political risks
Economic risks
International diversification carries multiple risks. Because of
these risks, international expansion is difficult to implement
and manage. The chief risks are political and economic.
Political risks are related to instability in national governments
and to war, both civil and international. Instability in a national
government creates numerous problems, including:
Economic risks and uncertainty created by government
regulation;
The existence of many, possibly conflicting, legal authorities or
corruption; and
The potential nationalization of private assets.
Economic risks are interdependent with political risks. If firms
cannot protect their intellectual property, they are highly
unlikely to make foreign direct investments. Countries therefore
need to create and sustain strong intellectual property rights and
enforce them in order to attract desired foreign direct
investment. Another economic risk is the security risk posed by
terrorists.
Check Your Understanding
Summary

Return on investment
Economies of scale and learning
International strategy
Types of entry
International diversification
International risks
We have reached the end of this lesson. Let’s take a look at
what we have covered.
First, we discussed return on investment. The primary reason
for investing in international markets is to generate above-
average returns on investments.
Next, we went over economies of scale and learning. By
expanding their markets, firms may be able to enjoy economies
of scale, particularly in their manufacturing operations.
We then discussed international strategy. Firms choose to use
one or both of two basic types of international strategies:
business-level international strategy and corporate-level
international strategy.
Next, we talked about types on entry into the international
market. These include exporting, licensing, strategic alliances,
acquisitions, and new wholly owned subsidiaries.
We then discussed international diversification. International
diversification is a strategy through which a firm expands the
sales of its goods or services across the borders of global
regions and countries into different geographic locations or
markets.
We concluded the lesson with a discussion on international
risks. International diversification carries multiple risks.

Because of these risks, international expansion is difficult to
implement and manage. The chief risks are political and
economic.
This completes this lesson.
BUS 499, Week 7: International Strategy
Slide #
Topic
Narration
1
Introduction
Welcome to Senior Seminar in Business Administration.
In this lesson we will discuss International Strategy.
2
Objectives
Identify various levels and types of strategy in a firm.
3
Supporting Topics
In order to achieve this objective, the following supporting
topics will be covered:
international strategy;
International strategies;
Environmental trends;
Choice of international entry mode;

Strategic competitive outcomes; and
Risks in an international environment.
4
Overview
An international strategy is a strategy through which the firm
sells its goods or services outside its domestic market. One of
the primary reasons for implementing an international strategy
is that international markets yield potential new opportunities.
Typically, a firm discovers an innovation in its home-country
market, especially in an advanced economy such as that of the
United States. Often demand for the product then develops in
other countries, and exports are provided by domestic
operations. Increased demand in foreign countries justifies
making investments in foreign operations, especially to fend off
foreign competitors.
Another traditional motive for firms to become multinational is
to secure needed resources. Key supplies of raw material,
especially minerals and energy, are important in some
industries. Other industries, such as clothing, electronics, watch
making, and many others, have moved portions of their
operations to foreign locations in pursuit of lower production
costs.
5
Overview, continued
When international strategies are successful, firms can derive
four basic benefits:
Increased market size;
Greater returns on major capital investments or on investments
in new products and processes;
Greater economies of scale, scope, or learning; and

A competitive advantage through location.
Firms can expand the size of their potential market by moving
into international markets.
The primary reason for investing in international markets is to
generate above-average returns on investments. Still, firms from
different countries have different expectations and use different
criteria to decide whether to invest in international markets.
By expanding their markets, firms may be able to enjoy
economies of scale, particularly in their manufacturing
operations. To the extent that a firm can standardize its products
across country borders and use the same or similar production
facilities, thereby coordinating critical resource functions, it is
more likely to achieve optimal economies of scale.
Firms may locate facilities in other countries to lower the basic
costs of the goods or services they provide. These facilities may
provide easier access to lower-cost labor, energy, and other
natural resources. Other location advantages include access
critical supplies and to customers. Once positioned favorably
with an attractive location, firms must manage their facilities
effectively to gain the full benefit of a location advantage.
6
Firms choose to use one or both of two basic types of
international strategies: business-level international strategy
and corporate-level international strategy.
At the business level, firms follow generic strategies of:
Cost leadership;
Differentiation:
Focused cost leadership;

Focused differentiation; or
Integrated cost leadership or differentiation.
In addition, distinct county factors must be given thorough
consideration when making a decision in an international
context.
International corporate-level strategy is required when the firm
operates in multiple industries and multiple countries or
regions. The three corporate-level international strategies are
multidomestic, global, or transnational. To create competitive
advantage, each strategy must utilize a core competence based
on difficult-to-imitate resources and capabilities.
Multidomestic strategy is an international strategy in which
strategic and operating decisions are decentralized to the
strategic business unit in each country so as to allow that unit to
tailor products to the local market. In contrast, global strategy
assumes more standardization of product across county market.
On the other hand, transnational strategy seeks to achieve both
global efficiency and local responsiveness using flexible
coordination, which is building a shared vision and individual
commitment through an integrated network.
7
Environmental Trends
Although the transnational strategy is difficult to implement,
emphasis on global efficiency is increasing as more industries
begin to experience global competition. Global competitions
demand some customization to meet government regulations
within particular countries or to fit customer tastes and
preferences. Two trends that are becoming more common in
global markets are liability of foreignness, which has increased
since the terrorist attacks and the war in Iraq, and
regionalization.

There are concerns about the relative attractiveness of global
strategies, due to the extra cost incurred to pursue
internationalization, or the liability of foreignness relative to
domestic competitors in a host country.
8
Types of Entry
International expansion is accomplished by exporting products,
participating in licensing arrangements, forming strategic
alliances, making acquisitions, and establishing new wholly
owned subsidiaries. Each means of market entry has its
advantages and disadvantages. Thus, choosing the appropriate
mode or path to enter international markets affects the firm’s
performance in those markets.
Many industrial firms begin their international expansion by
exporting goods or services to other countries. Exporting does
not require the expense of establishing operations in the host
countries, but exporters must establish some means of
marketing and distributing their products. Usually, exporting
firms develop contractual arrangements with host country firms.
The disadvantages of exporting include the often high costs of
transportation and tariffs placed on some incoming goods.
Licensing is an increasingly common form of organizational
network, particularly among smaller firms. A licensing
arrangement allows a foreign company to purchase the right to
manufacture and sell the firm’s products within a host country
or set of countries. The licensor is normally paid a royalty on
each unit produced and sold. The license takes the risks and
makes the monetary investments in facilities for manufacturing,
marketing, and distributing the goods or services. As a result,
licensing is possibly the least costly form of international
expansion.
In recent years, strategic alliances have become popular means

of international expansion. Strategic alliances allow firms to
share the risks and the resources required to enter international
markets. Moreover, strategic alliances can facilitate the
development of new core competencies that contribute to the
firm’s future strategic competitiveness.
As free trade has continued to expand in global markets, cross-
border acquisitions have also been increasing significantly.
Acquisitions can provide quick access to a new market. In fact,
acquisitions often provide the fastest and the largest initial
international expansion of any of the alternatives. Thus, entry is
much quicker than by other modes.
The establishment of a new wholly owned subsidiary is referred
to as a greenfield venture. The process of creating such ventures
is often complex and potentially costly, but it affords maximum
control to the firm and has the most potential to provide above-
average returns.
9
Strategic Competitive Outcomes
Firms have numerous reasons to diversify internationally.
International diversification is a strategy through which a firm
expands the sales of its goods or services across the borders of
global regions and countries into different geographic locations
or markets. Because of its potential advantages, international
diversification should be related positively to firms’ returns.
Research has shown that, as international diversification
increases, firms’ returns decrease initially but then increase
quickly as firms learn to manage international expansion. In
fact, the stock market is particularly sensitive to investments in
international markets. Firms that are broadly diversified into
multiple international markets usually achieve the most positive

stock returns, especially when they diversify geographically
into core business areas.
International diversification provides the potential for firms to
achieve greater returns on their innovations and reduces the
often substantial risks of R&D investments.
Many factors contribute to the positive effects of international
diversification, such as potential economies of scale and
experience, location advantages, increased market size, and the
opportunity to stabilize returns. The stabilization of returns
helps reduce a firm’s overall risk. All of these outcomes can be
achieved by smaller and newer ventures, as well as by larger
and established firms.
Although firms can realize many benefits bu implementing an
international strategy, doing so is complex and can produce
greater uncertainty. The complexity includes problems in
managing diverse international operations, multiple cultural
environments, potentially rapid shifts in the value of different
currencies and the instability of some national governments.
10
International Risks
International diversification carries multiple risks. Because of
these risks, international expansion is difficult to implement
and manage. The chief risks are political and economic.
Political risks are related to instability in national governments
and to war, both civil and international. Instability in a national
government creates numerous problems, including:
Economic risks and uncertainty created by government
regulation;
The existence of many, possibly conflicting, legal authorities or
corruption; and
The potential nationalization of private assets.

Economic risks are interdependent with political risks. If firms
cannot protect their intellectual property, they are highly
unlikely to make foreign direct investments. Countries therefore
need to create and sustain strong intellectual property rights and
enforce them in order to attract desired foreign direct
investment. Another economic risk is the security risk posed by
terrorists.
11
Check Your Understanding
12
Summary
We have reached the end of this lesson. Let’s take a look at
what we have covered.
First, we discussed return on investment. The primary reason
for investing in international markets is to generate above-
average returns on investments.
Next, we went over economies of scale and learning. By
expanding their markets, firms may be able to enjoy economies
of scale, particularly in their manufacturing operations.
We then discussed international strategy. Firms choose to use
one or both of two basic types of international strategies:
business-level international strategy and corporate-level
international strategy.
Next, we talked about types on entry into the international
market. These include exporting, licensing, strategic alliances,
acquisitions, and new wholly owned subsidiaries.
We then discussed international diversification. International

diversification is a strategy through which a firm expands the
sales of its goods or services across the borders of global
regions and countries into different geographic locations or
markets.
We concluded the lesson with a discussion on international
risks. International diversification carries multiple risks.
Because of these risks, international expansion is difficult to
implement and manage. The chief risks are political and
economic.
This completes this lesson.

BUS499 International Strategy Lesson

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