international strategic management - SUDZUCKER company Germany

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CORP 5039: International Strategic Management, Markets and Resources International strategy and new market entry

Outline

The phenomenon of globalisation, drivers/ patterns of internationalisation and international strategies

Implications of international competition for industry analysis and the analysis of competitive advantage in an international context (theory of comparative advantage, Porter’s national diamond framework)

Determining the international location of production

Foreign market entry methods

Globalisation

Globalisation: the increasing economic interdependence among countries as reflected in the flow of goods and services, financial capital, and knowledge across country borders (see Hitt et al, Strategic Management: Competitiveness and Globalization 2005: 10)

Global competition increases performance standards in many dimensions e.g. quality, cost, productivity and operational efficiency

However differences in institutional frameworks in countries means there is no one best globalisation strategy.

Rather, firms have to vary their strategies according to the institutional environments in those countries

Drivers of Internationalization

Market Drivers

Similar Customer needs

Cost Drivers

Scale Economies

Favourable logistics

Government Drivers

Trade policies

Global Customers

Transferable marketing

Country specific differences

Technical standards

Host government policies

Competitive Drivers

Competitors’ global strategies

Interdependence between countries

Patterns of Internationalization

www.contemporarystrategyanalysis.com

Main trading blocks

High concentration trading blocks:

EU – 28 countries – population approximately 0.5bn. World’s single largest market, with approx 73% of total output by the EU traded within its borders.

Mercosur (1991) Currently 4 countries

NAFTA (1994) (3 countries)

ASEAN (1967) (10 countries)

WTO - formerly GATT (1995) (164 countries) accession of China (11 December 2001), India (1995).

International strategies 1

Johnson et al (2014), 10th ed.

International strategies 2

There are four basic strategies firms may employ to enter and compete in a foreign market include:

Export strategy: Advantageous when both forces for global integration and local responsiveness are low

Leverages home country capabilities, innovations and products in different foreign countries

Companies that have distinctive capabilities together with strong reputation and brand names often achieve success following this strategy

The limits of a home country centralised view of the business and risks of skilled local competitors getting ahead are the strategy’s downsides

International strategies 3

Multidomestic strategy: Where the focus is on maximising local responsiveness

Firms customise product and marketing strategies to suit local needs of the market

Encourages local product development and R&D centres, but may give rise to high cost base

International strategies 4

Global strategy: One in which firms exploit experience curve effects and economies of scale through standardisation of products across country markets

Production, marketing and product development activities are concentrated in small numbers of advantageous locations

It produces lower risk but may cause firms to forego growth opportunities in local markets

Requires resource sharing and coordination across borders, making it difficult to manage

International strategies 5

Transnational strategy: an international strategy through which the firm seeks to achieve both global efficiency and local responsiveness

Difficult to achieve due to simultaneous requirement for strong centralised control for efficiency and high level of flexibility to achieve local market responsiveness

However, effective implementation can produce higher performance than either multi-domestic or global strategies

The Benefits/Costs of Global Strategy (Forces for Globalization)

Cost Economies from Scale and Replication: Accessing global scale economies in purchasing, manufacturing, product development, marketing. Replicating knowledge assets.

Serving Global Customers

Exploiting National Resources

Learning Benefits: Accessing and integrating knowledge from multiple locations

Competing Strategically: Exploiting global strength to win local wars

The Benefits/Costs of Global Strategy (Forces for National Differentiation)

Transportation and communication costs arising from geographical distance and remoteness

Differences in customer needs and behavioural norms arising from cultural factors (including institutional, governmental, regulatory and political differences

Market and infrastructure differences arising from differences in level of economic development

www.contemporarystrategyanalysis.com

The CAGE framework- snowballing exercise

Cultural

distance

Administrative and

political distance

Geographic

distance

Economic/wealth

distance

Johnson et al (2014), 10th ed.

Implications of Internationalization for Industry Analysis 1

Internationalization usually results in increased intensity of competition within national markets and tends to reduce an industry profitability

Between 1976-2009, US automobile market went from 3 major players (GM, Ford, & Chrysler having 84% market share) to 14 firms with auto plants (reducing share of the former big three to 43% of auto sales).

From an industry analysis viewpoint, internationalization has direct influence on three of Porter’s 5 Forces:

Competition from potential entrants

Rivalry among existing firms

Increasing bargaining power of buyers

Implications of Internationalization for Industry Analysis 2

Competition from potential entrants

Lowered entry barriers due to factors such as reductions in tariff, falling real costs of transportation and convergence of customer preferences

Competitive rivalry among existing firms

Increased internal rivalry resulting from increased number of firms competing in national market and hence lowering of seller concentration

Also, intensified rivalry may result from greater diversity of competitors

Increased buyer power: wider choice of suppliers for distributors and consumers

Competitive Advantage within an International Context

www.contemporarystrategyanalysis.com

Theory of Absolute Advantage 1

Mexico

Wheat

bushels/hr.

Bananas

lbs./hr.

Exchange

Rate:

1 bu. = 1 lb.

UK: 2 hrs. = 6 bu. Wheat and 4 lbs. Banana, or

2 hrs. = 12 bu. Wheat

By trading, UK can get:

6 bu. Wheat and 6 lbs. Bananas

Gains from Trade

A ½ hour gain

from trade!

Theory of Absolute Advantage 2

Mexico

Wheat

bushels/hr.

Bananas

lbs./hr.

Exchange

Rate:

1 bu. = 1 lb.

Mexico: 2 hrs. = 1 bu. Wheat and 5 lbs. Bananas, or

2 hrs. = 10 lbs. Bananas

By trading, Mexico can get:

5 bu. Wheat and 5 lbs. Bananas

Gains from Trade

A 4 hour gain

from trade!

Theory of Comparative Advantage

Absolute advantage is fine when each country party to the trade has an absolute advantage.

What if (using our previous example) the UK also had an absolute advantage in producing bananas over Mexico?

Ricardo (1817) suggests specialise where you have a Comparative advantage – or where you may be relatively less inefficient.

National Influences on Competitiveness: Comparative Advantage

Comparative advantage refers to the relative efficiencies of producing different products

The theory states that a country has comparative advantage in those products that make intensive use of the resources that are abundant within that country. E.g.

Philippines relatively more efficient in the production of footwear, apparel, and assembled electronic products than in the production of chemicals and automobiles.

U.S. is relatively more efficient in the production of semiconductors and pharmaceuticals than shoes or shirts.

When exchange rates are well-behaved, comparative advantage translates into competitive advantage

www.contemporarystrategyanalysis.com

Porter’s Competitive Advantage of Nations

Porter notes the following:

International competitive advantage is about companies not countries—the role of the national environment is providing a home base for the company.

Sustained competitive advantage depends upon dynamic factors-- innovation and the upgrading of resources and capabilities

The critical role of the national environment is its impact upon the dynamics of innovation.

Porter’s National Diamond Framework

FACTOR CONDITIONS—“Home grown” resources/capabilities more important than natural endowments.

RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters”

DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation

STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.

www.contemporarystrategyanalysis.com

Porter’s Determinants of National Advantage 1

Factor Conditions (Production)

Resources: skills, knowledge, capital, infrastructure

Demand Conditions (Home markets)

Clusters of excellence (Airbus in EU), buyer sophistication, position of product life cycle

Related and Support Industries

Innovation processes (EG Silicon Valley), competitive advantage in related industries (skills in leather make Italy a fashion centre for boots)

Porter’s Determinants of National Advantage 2

Firm Strategy, Structure and Rivalry

Domestic industry structures (e.g. corporate cultures of Kaizen and TQM in Japan), level of sustained commitment and level of risk taking in investment

Chance

Pure inventions, shifts in financial markets or exchange rates, discontinuities (eg: new medical alternatives)

Government

Influences the 4 determinants.

International Location of Production

3 considerations:

National resource conditions: What are the major resources which the product requires? Where are these available at low cost?

Firm-specific advantages: to what extent is the company’s competitive advantage based upon firm-specific resources and capabilities, and are these transferable?

Tradability issues: Can the product be transported at economic cost? If not, or if trade restrictions exist, then production must be close to the market.

www.contemporarystrategyanalysis.com

Determining the Optimal Location of Value Chain Activities

www.contemporarystrategyanalysis.com

Globally-Dispersed Production: Boeing 787 Dreamliner

www.contemporarystrategyanalysis.com

Production of the iPhone

www.contemporarystrategyanalysis.com

Item	Supplier	Location
Design and operating system	Apple	USA
Flash memory	Samsung Electronics	S. Korea
DRAM memory	Samsung Electronics; Micron Technologies	S. Korea USA
Application processor	Murata	Japan/Taiwan
Baseband	Infineon; Skyworks; Triquint	Taiwan USA
Power management	Dialog Semiconductor	Taiwan
Audio	Texas Instruments	USA
Touchscreen control	Cirrus Logic	USA
Accel. and gyroscope	ST Microelectronics	Italy
E-compass	AKM Semiconductor	Japan
Assembly	Foxconn	China

Alternative Modes of Overseas Market Entry

www.contemporarystrategyanalysis.com

Choice of Market Entry Modes 1

Potential for establishing competitive advantage is crucial to the means by which firms enter foreign markets

Key considerations in choice of entry modes include:

Breadth of competitive advantage

Tradability of product and barriers to trade

Choice of Market Entry Modes 2

Johnson et al (2014), 10th ed.

Alliances and Joint Ventures: Management Issues 1

Benefits:

Combining resources and capabilities of different companies

Learning from one another

Reducing time-to-market for innovations

Risk sharing

Problems:

Management differences between the two partners. Conflict most likely where the partners are also competitors.

Alliances and Joint Ventures: Management Issues 2

Benefits are seldom shared equally. Distribution of benefits determined by:

Strategic intent of the partners- which partner has the clearer vision of the purpose of the alliance?

Appropriability of the contribution - which partner’s resources and capabilities can more easily be captured by the other?

Absorptive capacity of the company - which partner is the more receptive learner?