Strategic Analysis 2

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Strategic Management

Jeff Dyer

Third Edition

Chapter 9

International Strategy

Professor’s Goals for this Lecture

There are many types of problems that can be solved for a company by doing a cost analysis. A cost analysis can be used to solve problems as diverse as marketing (e.g., how much to spend to acquire additional customers) or HR (how much labor costs go down per unit with increases in volume). The principle tools to be learned in this chapter are designed to help the student examine the relationship between a company’s size (measured in volumes produced or market share) and cost per unit. This is primarily reinforced by teaching students how to create a scale/experience curve (both done in the same way with “cost per unit” on the “Y” axis but the scale curve uses volume for a given year on the “X” axis whereas the experience curve uses cumulative volume on the “X” axis. The students will have the opportunity to examine the relationship between scale/experience in the following assignments:

- the homework assignment involving calculating an experience curve in semiconductors

- Fry’s Credit Card Mini-case (in lecture); considers the relationship between total number of subscribers (X axis) and cost per subscriber (Y axis)

- the Southwest Case (after lecture); considers the relationship between total passengers flown (or market share) and performance (profitability) in the industry

What is an “International” Strategy

Strategy

A strategy is a goal and set of policies designed to achieve competitive advantage in a particular marketplace

Global Strategy

A global strategy is a goal and set of policies to achieve advantage by leveraging resources, assets, and knowledge across geographic markets

Globalization of Business

Foreign Direct Investment- Direct investment in production or business in one country by a business from another country.

Multinational Firms- Firms that sell or produce in multiple countries.

Some of the differences between countries that increase complexity and affect the success of international strategies include variations in:

• Customer tastes, needs and income levels

• Government regulations

• Legal systems

• Public tolerance for foreign firms

• Reliability, and even existence, of basic infrastructure, such as roads and electricity

Strategic Objectives

Efficiency

Managing

Risk

Learning

National

Differences

Economies

Scale

Economies

Scope

Why Firms Expand Internationally

Reasons for going global: Growth, Efficiency, Managing Risk and Learning

These are the three reasons people tend to expand internationally.

Strategic Objectives

Efficiency

Managing

Risk

Learning

National Differences

Economies of

Scale

Economies of

Scope

Differences in factor costs

Extend product life cycle

First mover/only provider advantages

Cross subsidization

Diversify macroeconomic risk

Diversify operational risk

Learning from differences between countries

Innovation occurring in more, diverse units

Why Firms Expand Internationally Cont.

National Differences

Economies of Scale

Economies of Scope

- Differences in factor costs

- Extend product life cycle

- First mover/only provider advantages

- Cross subsidization

- Diversify macroeconomic

risk

- Diversify operational risk

- Learning from differences

between countries

- Innovation occurring in

more, diverse units

* Economies of

scale

* Cross over

customers

* Increased

movement

down learning

curve

Strategic Objectives

Efficiency

Managing

Risk

Learning

Why Firms Expand Internationally Cont.

National Differences

Economies of Scale

Economies of Scope

- Differences in factor costs

- Extend product life cycle

- First mover/only provider

advantages

- Cross subsidization

- Diversify macroeconomic

risk

- Diversify operational risk

- Learning from differences

between countries

- Innovation occurring in

more, diverse units

Economies of

scale

Cross over

customers

- Increased

movement

down learning

curve

* Sharing investments

across products,

markets, businesses

* Sharing costs across

products, markets,

businesses

* Portfolio diversification

* Creation of options

and side-bets

* Shared learning across

products, markets,

businesses

Strategic Objectives

Efficiency

Managing

Risk

Learning

Why Firms Expand Internationally

Where Firms Should Expand: CAGE

Geographic Distance

Cultural Distance

Economic Distance

Administrative Distance

Determinants

of Success

The smaller the distance the better

The CAGE model is a very common one and important to understand. Gives a good framework to make the decision to expand internationally

Attributes

Different languages

Different ethnicities

Different religions

Different social norms

Products/Industries Affected

1. High linguistic content

2. Affects consumer national identity

3. Carries country specific associations

4. Product features vary easily (size,

packaging, standards, etc.)

Cultural Distance

Administrative Distance

Attributes

Absence of colonial ties

Absence of shared monetary system

Political hostility

Government policies

Institutional weakness

Products/Industries Affected

1. Producers of staple goods

2. Producers of “entitlements”

3. Large employers

4. Large suppliers to government

5. National champions

Geographic Distance

Attributes

Physical remoteness

Lack of common border

Lack of sea or river access

Size of country

Weak transportation infrastructure

Differences in climate

Products/Industries Affected

1. Low value to weight ratio

2. Fragile or perishable

3. Communication or connectivity

important

4. Local supervision important

Economic Distance

Attributes

Differences in consumer income

Differences in cost or quality of:

Natural, financial, human

resources

Infrastructure

Intermediate outputs

Information or knowledge

Products/Industries Affected

1. Nature of demand varies with income

2. Economies of scale important

3. Factor cost differences important

Different distribution systems

Global Strategies Comparison

	Multi-Domestic	Global	Arbitrage
Competitive Advantage	Achieve local relevance through national focus while achieving some economies of scale	Achieve scale and scope economies through international standardization	Achieve absolute economies through international specialization
Configuration	Mainly in foreign countries that are similar to home base (limit effects of distance)		In a more diverse set of countries (exploit distance)
Coordination	By country (emphasis on local presence)	By business, region, or customer with emphasis on horizontal relationships for cross-border economies of scale	By function, with emphasis on vertical relationships, even across org. boundaries

Global Strategies Comparison

	Multi-Domestic	Global	Arbitrage
Controls	Excessive variety or complexity	Excessive standardization	Narrowing spreads
Change Blockers	Entrenched country chiefs	All-powerful unit, regional, or account heads	Heads of key functions
Corporate Diplomacy	Address issues of concern with discretion, emphasis on cultivating local presence	Avoid appearance of homogeneity or hegemonism (especially if US firm)	Address exploitation or displacement of suppliers, channels, or intermediaries
Corporate Strategy	Scope selection Variation Decentralization Partitioning Modularization Flexibility Partnership Recombination Innovation	Regions and other country groupings Product or business Function Platform Competence Client Industry	Exploiting Distance

A Framework: Global Integration - Local Differentiation

High

Low

Pressures for Standardization

Pressures for Local Responsiveness

Global Strategy

(aggregation)

Multi-domestic Strategy

(adaptation)

EXAMPLE: THE MULTI-DOMESTIC APPROACH

Some Companies Emphasizing this Approach:

Philips

KPMG

FedEx

Unilever

Carrefour

Nestle

BASF

pwc

These companies have “country heads” so that the company may not look exactly the same in each nation

EXAMPLE: THE GLOBAL STRATEGY

Some Companies Emphasizing this Approach:

Panasonic

Toyota

American Express

Coca-Cola

Boeing

Sony

IBM

Intel

CAT

These are global in the sense that there is a head and each country strives to be the same

High

Low

Same

Different

Global

Strategy

(Cost)

Transnational or

Mass Customization

Strategy

(some functions are

global, some are local)

Multi-Domestic

Strategy

(Differentiation)

TYPES OF INTERNATIONAL STRATEGY

Pressures for Standardization

Pressures for Local Responsiveness

Function/Activity

National

Regional

Global

Research & Development

Product Design

Components

Assembly

Marketing

Sales & Distribution

Service

Trans-national: Achieving both Integration and Differentiation

EXAMPLE: THE TRANSNATIONAL STRATEGY

Some Companies Emphasizing this Approach:

Samsung

McDonald’s

P&G

Merck

Whirlpool

Hyundai

Exporting

Conditions favoring Exporting

Limited sales potential in target country; little product adaptation required

Good available distribution channels; close to existing production plants

High target country production costs

Liberal import policies (low tariffs); high political risk

Advantages

Minimizes risk, investment

Speed in entering market

Maximizes scale, utilization of existing facilities

Disadvantages

Trade barriers, tariffs (5%+)

Transportation costs

Limits access to local information

Company viewed as outsider

Licensing/Franchising

Conditions favoring Licensing/Franchising

Import and investment barriers that increase cost, limit FDI (high tariffs)

Institutional environment that secures legal protection

Tangible or intangible assets can be fairly priced

Low sales potential in target country; large cultural distance

Licensee lacks ability/resources to become competitor

Advantages

Minimizes risk, investment

Speed in entering market

Able to circumvent trade barriers

High return on investment; average license royalty was 8.5% of licensee revenues (2002).

Disadvantages

Lack control over use of assets

Licensee may become competitor

Potential for knowledge spillovers

Return is for limited period

Wholly Owned Operations

Conditions favoring Sole Ownership

Import barriers that increase import costs (e.g., tariffs)

Tangible or intangible assets can’t be fairly priced; a unique product or service; want to minimize spillover and exploit the unique product

Cultural distance between home/host countries is small

High sales potential in target country

Advantages

Greater knowledge on local market and customer

Increases ability to appropriate specialized skills

Minimizes knowledge transfers

Can be viewed as insider

Disadvantages

Most risky and expensive way to enter a market (investment, resources, commitment)

Inability to manage local resources in local market

Joint Ventures/Alliances

Conditions favoring JVs/Alliances

Similar to sole ownership plus: cultural distance is large

Government restrictions on foreign ownership

Local company can provide complementary skills

Local knowledge, resources, distribution, brand name, etc.

Advantages

Overcome ownership restrictions and cultural distance

Combines resources of two companies, potential for learning

Viewed as insider

Reduces investment; can spread faster into more markets and not be as constrained by funds

Disadvantages

Difficulties in managing JV

Dilution of management control

Greater risk (than export, license)

Partner may become competitor; potential for knowledge spillovers

Choosing Between Greenfield, Acquisition, and Joint Venture

Company owns proprietary product/ process technology

Cultural Distance between home and target country is small.

Low political risk, neutral or positive attitude toward foreign owners.

Important to achieve high level of integration/ coordination with home country operations.

Greenfield

Acquisition

Foreign company owns or controls scarce resources

Cultural Distance between home and target country is small.

Low political risk, neutral or positive attitude toward foreign owners.

Important to achieve high level of integration/ coordination with home country operations.

Need to reduce rivalry, eliminate a competitor

Joint Venture

Foreign company owns or controls scarce resources.

Cultural Distance between home and target country is large.

High degree of political risk; negative attitude toward foreign acquirers

Important to reduce rivalry, eliminate a competitor

Need local autonomy and flexibility to succeed (not high level of coordination)

Strategy: Global Strategy (Integration) Multi-domestic Strategy (Differentiation)

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

More control and integration Less control but more autonomy

Firm capabilities are most important Local resources/knowledge are most important

Ownership Test

Can you achieve the same results without having to put forth the capital and managerial time necessary to own?

Experience and Entry Modes

Table 9.2 Entry Modes

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	Exporting	Licensing / Franchising	Alliance / Joint Venture	Wholly Owned Subsidiary
Investment required	Low	Low	Medium	High
Level of risk	Low	Low	Medium	High
Overcome trade barriers?	No	Yes	Yes	Yes
Speed of entry	Fast	Fast	Medium	Slow (faster for acquisition than greenfield)
Acquire local resources, including knowledge?	No	No	Yes	Yes
Viewed as insider or outsider?	Outsider	Insider	Possibly Insider	Possibly Insider
Degree of control	Low	Low	Medium	High