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Chapter7.pptxInternational Strategy (1 of 2)
Consider . . .
The global marketplace provides many opportunities for firms to increase their revenue base and their profitability.
However, managers face many opportunities and risks when they diversify abroad.
What should a firm do in order to create value and attain a competitive advantage in this global marketplace?
©McGraw-Hill Education.
The trade among nations has increased dramatically in recent years and it is estimated that by 2025, 45 percent of the Fortune Global 500 will be based in emerging economies, which are now producing world-class companies with huge domestic markets and a commitment to invest in innovation. This makes international expansion a viable diversification strategy. In a variety of industries such as semiconductors, automobiles, commercial aircraft, telecommunications, computers, and consumer electronics, it is almost impossible to survive unless firms scan the world for competitors, customers, human resources, suppliers, and technology. Firms need to know how to be successful and create value when diversifying into global markets. Some of the questions that need to be answered include: What explains the level of success of a given industry in a given country? What are some of the major motivations and risks associated with international expansion? How can firms handle the opposing forces of cost reduction and local adaptation – should firms pursue international, global, multidomestic, or transnational strategies? What entry strategies should a firm choose in order to enter a foreign market?
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International Strategy: Globalization
Globalization has to do with the rise of market capitalization around the world.
International exchanges have increased.
Trade in goods & services
Exchange of money, information, & ideas
Laws, rules, norms, values, and ideas are growing more similar across countries.
Challenges include balancing between emerging markets & developed markets.
How to meet the needs of customers at very different income levels?
©McGraw-Hill Education.
Globalization = has two meanings. One is the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information. Two is the growing similarity of laws, rules, norms, values, and ideas across countries. Globalization has undeniably created tremendous business opportunities for multinational corporations. One of the challenges with globalization is determining how to meet the needs of customers at very different income levels. In many developing economies, distributions of income remain much wider than they do in the developed world, leaving many impoverished even as the economies grow. The concept “bottom of the pyramid” refers to the practice of a multinational firm targeting its goods and services to the nearly 5 billion poor people in the world who inhabit developing countries.
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Factors Affecting a Nation’s Competitiveness
Michael Porter’s diamond of national advantage explains why some nations and their industries outperform others.
Factor endowments
Demand conditions
Related and supporting industries
Firm strategy, structure, & rivalry
©McGraw-Hill Education.
Some nations and their industries are more competitive than others. Understanding these differences helps a firm create a competitive advantage when it expands internationally. Diamond of national advantage = a framework for explaining why countries foster successful multinational corporations, consisting of four factors – factor endowments; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry. These four attributes jointly determine the playing field that each nation establishes and operates for its industries. Factor endowments = a nation’s position in factors of production. Demand conditions = the nature of home-market demand for the industry’s product or service. Related and supporting industries = the presence, absence and quality in the nation of supplier industries and other related industries that supply services, support, or technology to firms in the industry value chain. Firm strategy, structure, and rivalry = the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
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Factors Affecting a Nation’s Competitiveness: Factor Endowments
Factor endowments involve factors of production.
Land
Capital
Labor
Factors of production must be industry & firm specific.
Must be rare, valuable, difficult to imitate, and rapidly & efficiently deployed
©McGraw-Hill Education.
Factors of production are the building blocks that create usable consumer goods and services. Companies in advanced nations seeking competitive advantage over firms in other nations create many of these factors of production. For example, a country or industry dependent on scientific innovation must have a skilled human resource pool to draw upon. This resource pool is not inherited; it is created through investment in industry–specific knowledge and talent. The actual pool of resources is less important than the speed and efficiency with which these resources are deployed. Thus, firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to a nation’s competitive advantage. The island nation of Japan is given as an example.
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Factors Affecting a Nation’s Competitiveness: Demand Conditions
Demand conditions refer to the demands that consumers place on an industry.
Demanding consumers drive firms in that country to:
Meet high standards.
Upgrade existing products and services.
Create innovative products and services.
Better anticipate future global demand.
Proactively respond to product & service requirements.
©McGraw-Hill Education.
Consumers who demand highly specific, sophisticated products and services force firms to create innovative, advanced products and services to meet the demand. This consumer pressure presents challenges to a country’s industries. Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. The conditions of consumer demand influence how firms view a market. This, in turn, helps the nation’s industries to better anticipate future global demand conditions and proactively respond to product and service requirements. Denmark is given as an example.
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Factors Affecting a Nation’s Competitiveness: Related & Supporting Industries
Related and supporting industries enable firms to manage inputs more effectively.
A competitive supplier base
Reduces manufacturing costs
Close working relationships with suppliers
Allows for joint research & development
Development of related industries
Forces existing firms to practice cost control, product innovation, better distribution methods
©McGraw-Hill Education.
A home country’s industries can become a source of competitive advantage when related and supporting industries are developed. Countries with a strong supplier base benefit by adding efficiency to downstream activities. A competitive supplier base helps a firm obtain inputs using cost effective, timely methods, thus reducing manufacturing costs. Also, close working relationships with suppliers provide the potential to develop competitive advantages through joint research and development and the ongoing exchange of knowledge. Related industries create the probability that new companies will enter the market, increasing competition and forcing existing firms to become more competitive through efforts such as cost control, product innovation, and novel approaches to distribution. Combined, these give the home country’s industries a source of competitive advantage. The Italian footwear industry is given as an example.
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Factors Affecting a Nation’s Competitiveness: Firm Strategy
Firm strategy, structure, & rivalry due to
Strong consumer demand
Strong supplier base
High new entrant potential from related industries
Domestic rivalry leads to a search for new markets.
Response to rivalry is a strong indicator of global competitive success.
©McGraw-Hill Education.
Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new entrant potential from related industries. This competitive rivalry in turn increases the efficiency with which firms develop, market, and distribute products and services within the home country. Domestic rivalry thus provides a strong impetus for firms to innovate and find new sources of competitive advantage. This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness. Domestic rivalry is perhaps the strongest indicator of global competitive success. Firms that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete in world markets. The European grocery retail industry is given as an example.
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Example: Factors Affecting a Nation’s Competitiveness
Exhibit 7.2 India’s Diamond in Software
Source: From Kampur D.,and Ramamurti R., “India’s Emerging Competition Advantage in Services,” Academy of Management Executive: The Thinking Managers Source. Copyright © 2001 by Academy of Management.
©McGraw-Hill Education.
Firms that succeed in global markets have first succeeded in intensely competitive home markets. Competitive advantage for global firms typically grows out of relentless, continuing improvement and innovation. The Indian software industry offers a clear example of how the attributes in Porter’s “diamond” interact to lead to the conditions for a strong industry to grow. See Strategy Spotlight 7.1 for information on how mutually reinforcing elements work in this market.
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International Strategies: Entry Modes
Options for international market expansion include:
Exporting
Low risk, locals know more; but products may not meet local needs
Licensing or franchising
Limits risk; but licensor gives up control & profit
Strategic alliance or joint venture
Shares risk; but trust & culture issues can lead to conflict
Wholly owned subsidiary
Greatest control, highest returns; but expensive, greater potential for miss-steps
©McGraw-Hill Education.
A firm has many options available to it when it decides to expand into international markets. Exporting = producing goods in one country to sell to residents of another country. This strategy enables the firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. However, the firm has a limited ability to tailor its products to meet local market needs. Licensing = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual property. Franchising = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; it usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising. Franchising has the advantage of limiting the risk exposure that a firm has in overseas markets while, at the same time, the firm is able to expand the revenue base of the company. An advantage of licensing is that the firm granting a license incurs little risk, since it does not have to invest any significant resources into the country itself. In turn, the licensee (the firm receiving the license) gains access to the trademark, patent, and so on, and is able to potentially create competitive advantages. However, the licensor gives up control of its product and forgoes potential revenues and profits. Strategic alliances and joint ventures allow firms to increase revenues and reduce costs as well as enhance learning and diffuse technologies. However, trust is a vital element. (Remember the discussion of this in Chapter 6.) Wholly Owned Subsidiary = a business in which a multinational company owns 100% of the stock. A firm can establish a wholly owned subsidiary by acquiring an existing company in the home country or developing a totally new operation, often referred to as a “greenfield venture.” This can be expensive and risky, and is most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations.
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International Strategies: Entry Modes, Chart
©McGraw-Hill Education.
Given the challenges associated with entry into international markets, many firms first start on a small-scale and then increase their level of investment and risk as they gain greater experience with the overseas market in question. The various types of entry form a continuum ranging from exporting (low investment and risk, low control) to a wholly owned subsidiary (high investment and risk, high control). Entry strategies can follow this progression. The key tradeoff in each of these strategies is the level of investment or risk versus the level of control, but many firms do not follow such an evolutionary approach, preferring to adopt one and develop as needed.
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International Strategies: Entry Modes
Refer to the smart book on LMS for the
Benefits
+
Risk and Limitations
For each Entry Mode
©McGraw-Hill Education.
A firm has many options available to it when it decides to expand into international markets. Exporting = producing goods in one country to sell to residents of another country. This strategy enables the firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. However, the firm has a limited ability to tailor its products to meet local market needs. Licensing = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual property. Franchising = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; it usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising. Franchising has the advantage of limiting the risk exposure that a firm has in overseas markets while, at the same time, the firm is able to expand the revenue base of the company. An advantage of licensing is that the firm granting a license incurs little risk, since it does not have to invest any significant resources into the country itself. In turn, the licensee (the firm receiving the license) gains access to the trademark, patent, and so on, and is able to potentially create competitive advantages. However, the licensor gives up control of its product and forgoes potential revenues and profits. Strategic alliances and joint ventures allow firms to increase revenues and reduce costs as well as enhance learning and diffuse technologies. However, trust is a vital element. (Remember the discussion of this in Chapter 6.) Wholly Owned Subsidiary = a business in which a multinational company owns 100% of the stock. A firm can establish a wholly owned subsidiary by acquiring an existing company in the home country or developing a totally new operation, often referred to as a “greenfield venture.” This can be expensive and risky, and is most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations.
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