Strategy Paper

MGMT 670: Week 8 Lecture

Week 8: International Business: This week, the students will study international business. Why does a company decide to compete internationally? How does the business’ global strategy affect the

company? They will learn how businesses enter foreign markets and use international operations to improve overall competitiveness.

Learning Objectives:

• Understand why companies choose to compete internationally.
• Understand the five general modes of entry into foreign markets.
• Analyze why and how differing market conditions across countries influence a company’s strategy choices.
• Understand how multinational companies are able to use international operations to improve overall competitiveness.

Introduction

Every company has to decide whether to compete internationally as part of its strategic plan. If a company does decide to expand internationally, it then has to decide how to compete.

Why do companies decide to expand internationally? “Some of the reasons include 1) faster growth,

• access to cheaper inputs (raw materials and labor), 3) new market opportunities from a vastly bigger customer base, and 4) diversification—less vulnerability to changes or events in specific

regions when the company is dealing with a number of regions of the world” (Conner, 2012). Many companies decide to expand for economies of scale, “reduction in unit costs associated with producing large volumes of a product” (Moskowitz, 2009).

There are some potential risks to global expansion: “1) increased costs, 2) the need to meet Foreign regulations and standards, 3) cash flow woes due to delayed methods of payment and 4) operational complexity, and 5) failure to understand local business norms and customs” (Conner, 2012).

Ways to Expand

There are five ways companies enter international markets:

Source: Carpenter & Dunung, 2012b.

Exporting

Exporting is the “sale of products and services in foreign countries that are sourced from the home country” (Carpenter & Dunung, 2012b). Using domestic plants as a production base for exporting

goods to foreign markets is an excellent initial strategy to test the international waters. The amount of capital is usually minimal, and existing production may be sufficient to make goods for export. A

manufacturer’s can limit its involvement in foreign markets by contracting with foreign wholesalers experienced in importing.

An export strategy is not the best choice when (1) manufacturing costs in the home country are substantially higher, (2) the costs of shipping goods overseas is high, or (3) adverse shifts in currency rates occur.

Licensing

Licensing is “granting of permission by the licenser to the licensee to use intellectual property rights, such as trademarks, patents, brand names, or technology, under defined conditions” (Carpenter & Dunung, 2012a). Licensing is an effective strategy when the firm has valuable technical know-how or a patent but does not have the organizational capability or resources to enter a foreign market.

Licensing can also be a good choice in markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky. The big disadvantage of licensing is providing technological know-how to foreign companies and losing some control over its use. In addition, monitoring licensees and safeguarding the company’s intellectual property can prove time-consuming and difficult.

Franchising

Franchising is when a “multinational firm grants rights on its intangible property, like technology or a brand name, to a foreign company for a specified period of time and receives a royalty in return.” (Carpenter & Dunung, 2012a). Franchising is often best for service and retail businesses. Franchising has many of the same benefits as licensing. The franchisee bears the costs of establishing a foreign

location; the franchisor is responsible for recruiting, training, supporting, and monitoring the

franchise. A big challenge with franchising is maintaining quality control, especially when the local culture does not stress quality or when local sources do not meet quality standards. An opportunity or challenge can be whether to allow franchisees to modify the product to better serve the local population.

Partnering, Joint Ventures, and Strategic Alliance

Partnering, joint ventures, and strategic alliances are cooperative agreements with foreign

companies to gain mutual benefit (Carpenter & Dunung, 2012b). Companies in industrialized nations have long partnered to have their products imported and sold by companies in emerging nations. In

addition to gaining access to new markets, such cooperative arrangements have been made to take advantage of economies of scale in production and marketing. By partnering with another firm,

companies can realize cost savings that they can’t achieve with their own small volumes. Other motivations include

• to gain access to expertise or knowledge of local markets
• to share distribution facilities or dealer networks
• to work together to outsell rivals, instead of spending energy competing against one another
• to establish working relationships with key officials in the host country’s government
• to gain agreement on technical standards.

Partnering, joint ventures, and strategic alliances allow each company to maintain its independence and save capital (that would be spent in an acquisition or merger). These sorts also are easier to disengage from once their purpose has been served.

Potential pitfalls of these sorts of arrangements include overcoming language and cultural barriers, trust-building, conflicting objectives and strategies, differences in ethics and values, and becoming overly dependent on the expertise of the foreign partner.

Acquisition

Acquisitions are when one firm acquires control over another firm Carpenter & Dunung, 2012b).

These transactions can be made using cash, stocks, or a combination (“Types of transactions,” 2016).

Acquisitions are used to give a company quick access to a new market and are often used when the

industry is consolidating. Downsides of this strategy to expand globally include high costs and limits on ownership by foreign firms in some countries. Acquisitions also don’t always increase the

company’s value (“Mergers and acquisitions,” 2016). An important question to ask when considering a merger or acquisition is “Can [the] firm achieve lower average costs or higher average prices by

including multiple business units in same firm?” (“Mergers and acquisitions,” 2016).

Greenfield Venture

A wholly owned subsidiary is called a “greenfield venture” (Carpenter & Dunung, 2012a). Such ventures are complex and can be costly, but they provide the firm with the maximum amount of

control and have the most potential to provide above-average returns. To be successful, the firm may have to acquire knowledge of the existing market by hiring either host-country nationals—possibly

from competitive firms—or costly consultants. An advantage is that the firm retains control of all its operations. Potential disadvantages include corruption or red tape in the host country and cultural and language barriers.

Strategies for Global Expansion

There are two strategies a company can use to expand globally: multi-domestic (think globally, act locally) or global (think globally, act globally) (“Global strategic management,” 2010).

Multi-domestic

In this strategy, there is local decision making and the product is customized for the local market. This strategy allows for local market conditions while reaping the benefits of corporate standardization. In this approach, the company uses the same competitive strategy (low-cost, focused, or differentiation) but allows local managers to make country-specific variations in product, production methods, or

distribution to satisfy the local market and take advantage of local market conditions. This strategy can result in high costs because of the many variations across countries. Time to market can be slow because national approval is required for introduction of new products.

Global

In this strategy, the product is the same in all countries and control is centralized; there is little decision-making authority on the local level. Advantages of this strategy are lower costs, quicker

introduction of new products, and coordinated activities. This strategy works best when there are few cultural and market differences in the countries in which the company is operating.

Improving Overall Competitiveness

There are two important ways in which a company can improve its overall competitiveness by expanding globally:

• Use location to lower costs or improve product differentiation
• Use cross-border coordination in ways a domestic competitor can’t.

Using Location

When a company decides to expand globally, it must analyze its value chain to decide whether to make any changes. Should certain elements of the value chain be concentrated in one or a few

countries? Which countries are the best for each element of the value chain? In making those decisions, companies should consider:

• Whether the costs of any activity (e.g., manufacturing) are lower in some countries.
• Whether there are economies of scale that occur because of the expansion.
• What the learning curve is in performing an activity.
• Whether certain locations offer access to superior resources or other advantages.

Cross-Border Coordination

Resources accessed because of the expansion should be carefully examined for how they can add to the firm’s competitive advantage. More efficient manufacturing and transportation, underutilized

capacity, and knowledge gained in a new market can all be used to enhance competitive advantage and increase market share in competition with domestic-only firms.

Conclusion

There are many ways in which a company can choose to expand global. Each has potential rewards—and potential risks. A company considering global expansion must consider all the factors before deciding whether and how to expand.

References

Carpenter, M. A., & Dunung, S. P. (2012a). Exporting, importing, and global sourcing. In Challenges and opportunities in international business. Retrieved from

http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s13-

exporting-importing-and-global.html

Carpenter, M. A., & Dunung, S. P. (2012b). International-expansion entry modes. In Challenges and opportunities in international business. Retrieved from

http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/s12-03-

international-expansion-entry-.html

Conner, C. (2012, Aug 14). Ready to go global? Six tips to help you decide. Forbes. Retrieved from

http://www.forbes.com/sites/cherylsnappconner/2012/08/14/ready-to-go-global-six-tips-to-help-you-

decide/#3f45e69280a1

Global strategic management. (2010). In QuickMBA. Retrieved from

http://www.quickmba.com/strategy/global/

Mergers and acquisitions. (2016, May 26). In Boundless business. Retrieved from

https://courses.lumenlearning.com/boundless-business/chapter/corporate-growth/

Moskowitz, S. (2009). Economies of scale. In C. Wankel (Ed.), Encyclopedia of business in today's world (pp. 568-569). Thousand Oaks, CA: SAGE Publications Ltd. doi:

10.4135/9781412964289.n326. Retrieved from

http://sk.sagepub.com.ezproxy.umuc.edu/reference/businesstoday/n326.xml

Types of transactions. (2016, May 26). In Boundless finance. Retrieved

from https://courses.lumenlearning.com/boundless-finance/chapter/types-of-transactions/