International Strategy Individual Work
ALVAROBA
SESSION4.pdf
INTERNATIONAL STRATEGY
Associate professor Director, Smart City Institute HEC Liège
Nathalie Crutzen Anthony Santino
Principal Roland Berger
3
Date Session Company Speaker
Jacques Galloy
Jean-Manuel Fontaine
Eric Pottier
Marijke De Pelsemaeker
Pierre Dumont
Grégoire Dallemagne
5/02
19/02
26/02
05/03
12/03
19/03
Business-level strategy
Strategy and internationalization
Digital strategy
Strategy evaluation
Introduction to strategy and strategic analysis
Strategic position: external and internal analyses
Corporate-level strategy
Mergers, acquisitions and alliances
4
IV. Internationalization
5
Operating in different geographical markets (i.e. going international) is a specific but important kind of market development
2 Strategic motivations for going international (Why?)
3
4 Multinational strategies and structures
Overview of main foreign market entry strategies > Market selection (where to enter?) > Entry mode (How to enter?) > Entry timing (when to enter?)
1 Drivers of internationalization
Agenda of the session
6
One of the most pervasive changes in Business environment over the last decades has been the internationalization of companies, industries and economies
2 Strategic motivations for going international
3
4 Multinational strategies and structures
Overview of main foreign market entry strategies > Market selection (where to enter?) > Entry mode (How to enter) > Entry timing (when to enter)
1 Drivers of internationalization
7
Global trade flows show strong inter- and intraregional relationships – competition is now global
69%51%
20%
16%
19%
52%
South/Central America
Europe Russia/CIS
Africa
Middle East Asia Pacific
North America
Interregional trade flows (larger than USD 40 bn)Trade within respective region as share of total trade of the respective region
24%
Interregional and intraregional trade flows worldwide in 2015
Source: WTO International Trade Statistics, IMF Direction of Trade Statistics, IHS Markit, Roland Berger
8
The first step is to analyze which aspects of industries are more or less prone to internationalization
Yip's drivers of international-
lization framework
Market drivers
> Presence of similar customer needs or tastes
> The presence of global customers
> Transferrable or replicable marketing
Government drivers
> Level of trade and investment barriers
> Level of liberalization and free markets policies
> Level of technological standardization
Competitive drivers
> Existence of interdependence between countries
> Presence of global competitors
Cost drivers
> Reaching economies of scale > Possibility to take advantage of
country-specific advantages > Existence of favorable
logistics
Yip's drivers of internationalization
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Each industry has therefore its own international profile, with factors that support internationalization and others that inhibit it Applying the framework for 2 different strategies
Key outcomes of Yip's drivers framework
> Obtain a realistic assessment of the true scope for internationalization in the particular industry
> Have a clear view on which aspects of industries and markets are global and which are local
> The key insight from Yip's framework is that the international potential of industries is variable. Industries and markets differ vastly in the extent to which they are globalized
> Customer needs
> Global customers
> Transferrable marketing
> Interdependence between countries
> Global competitors
> Economies of scale
> Country specific advantage
> favorable logistics
> Presence of trade barriers
> Lack of legislation
> Level of technical standardization
Increasing international potential
Local Global
Not at all Fully
Not at all Fully
Low High
Low High
Low High
Yes No
High Low
Inexistant Fully
None
Local players
To a larger extent
Global players
Snacks Aircraft
10
Michaël Porter argues that competitive advantage in the global context is intimately bound to location
Porter's diamond framework – the determinants of location advantages
Factor Condition
The price or availability of some factors of production (raw materials, land, labour) that go into making a product/service can be an advantage
Home demand conditions
Dealing with sophisticated and demanding customers at home helps train a company to be effective abroad
Related and supporting industries
Regional clusters of related and mutually supporting industries can be an important source of competitive advantage
Firm strategy, industry structure & rivalry
A competitive local industry structure is also helpful as it pushes companies to excel and not become complacent
D e s c ri
p ti
o n
E x a m
p le
s
Cheap energy (shale gaz) prices favor the aluminum industry
Availability of multi-lingual professionals support the banking industry
Tech-savvy customers supported the rise of electronics firms
Sophisticated customers helped develop the fashion industry
The Sillicon Valley forms a cluster of hardware, software, R&D and VCs
Strong ecosystem has developed around automotive and suppliers (Mittelstand)
Number of banks and investments firms made of London the finance capital
Fierce competition between luxury car brands, pushes them to innovate
11
The first question any company should ask is What it means to achieve by going international?
1 Drivers of internationalization
3
4 Multinational strategies and structures
Overview of main foreign market entry strategies > Market selection (where to enter?) > Entry mode (How to enter) > Entry timing (when to enter)
2 Strategic motivations for going international (Why?)
12
There are generally four common objectives – distinct but not mutually exclusive – for developing business abroad
Four objectives of going international (Why?)
Efficiency enhancing: companies' quest to single out the most efficient locations featuring combination of scale economies and low-cost factors
Capability-enhancing: companies' quest for new ideas and technologies that upgrade their own technological and managerial capabilities
Natural resource seeking: companies' quest to access particular resources (minerals, oil, renewable resource) that a company needs in its production process
Market seeking: companies' quest to go after countries that offer strong demand for their products and services
13
A critical step of any international strategy is the selection of the country or region to enter – A key source of location advantage
1 Drivers of internationalization
Multinational strategies and structures
2 Strategic motivations for going international
3 Overview of main foreign market entry strategies • Market selection (where to enter?) • Entry mode (How to enter?) • Entry timing (when to enter?)
4
14
H ig
h M
e d
iu m
L o
w
HighMediumLow
Country 7
Country 3
F e
a s
ib il
it y
t o
e n
tr y
Market attractiveness
Country 6 Country 5
Country 8
Country 4
Country 2
Country 1
An "attractiveness-feasibility" matrix is a pragmatic approach allowing to classify countries according to their potential
2 key dimensions for market selection
M a
rk e
t
a tt
ra c ti
v e
n e
s s
Size of individual market
Not candidate at this stagePotential candidates
Source: Roland Berger
Attractiveness-Feasibility matrix for market selection (where?)
F e
a s
ib il
it y
to e
n te
r
> Selection of hard (market size and growth, price levels, etc.) and soft factors (laws, infrastructure, education) in order to assess country attractiveness
> A global score is computed per country as follow:
– Give weight (determine importance) of criteria
– Collect data
– Rate countries on all retained indicators
– Compute overall weighted score for each country and establish ranking
> Use Cage Framework in order to measures the match between countries and companies according to 4 dimensions of distances
> Assess the likelihood and ferocity of potential competitors reactions in the selected countries towards new entrants
15
The attractiveness filter will combine hard and soft factors, that will be weighted to compute an attractivity score
Attractiveness filtering – selection of factors that can be selected
> GDP per capita
> GDP growth
> Inflation rate
> Unemployment rate
> FDI in % of GDP
> Labor costs
> Corporate tax rate
Hard factors
> Degree of economic freedom
> Country credit rating
> Real exchange rate
> Corruption index
> etc.
> ...
> Education of workforce
> IP rights & legislation
> Compliance with international agreements
> Government intervention in corporate investment
> Burden of regulation
Soft factors
> Cultural differences
> Transparency of government policymaking
> Freedom of the press
> Educational/language skills
> Labor legislation
F ilt
e r
e xa
m p le
s
16
The CAGE framework emphasizes the importance of cultural, administrative, geographical and economic distance
Distance between 2 countries increases with…
Distance most affect industries or products….
Cultural Administrative Geographic Economic > Different languages > Different ethnicities; > Different religions > Different social norms > Lack of social network > Lack of trust and
mutual respect
> Absence of trading bloc > Absence of shared
currency, monetary or political association
> Political hostility > Weak legal and
political institutions
> Physical remoteness > Lack of a common
border > Weak transportation
or communication links > Differences in climates
or time zones
> Different consumer incomes
> Different costs and quality of natural, financial and human resources
> Different information or knowledge
> With high linguistic content (TV)
> Related to national or religious identify (food)
> Carrying country- specific quality associatons
> That a foreign government views as
– Staples (electricity)
– Building national reputation (aerospace)
– Vital national security (telecommunications)
– Exploiters of natural resources (oil, mining)
> With low value-to- weight ratio (cement)
> That are fragile or perishable (glass, meats)
> in which communications are vital (financial services)
> For which demand varies by income (cars)
> In which labor and other costs differences matter (textiles)
> Distribution or business systems are different (insurance)
Feasibility filtering - The CAGE framework
distance distance distance& political distance
17
Once a particular market is selected, entry modes strategies differ in the degree of resource commitment
Choice of entry mode (how?)
Level of resources commitment
Choice of entry mode
Nonequity modes Equity modes
Greenfield
investments Minority JVsDirect exports
Licensing/
franchising
Acquisition50/50 JVsIndirect exports Comarketing
OthersMajority JVsOthers Contracted R&D
Wholly owned
subsidiaries
Alliances and
joint ventures (JVs) Exports Contractual
agreements
S tra
te g ic a
llia n ce
s
18
Each entry mode involves important trade-offs between various factors
Advantages Disadvantages
> Not too expensive > Limited-risk > Fast set-up > Non binding
Exports and commercial agreements
1 > Lack of control on local operations> Transportation costs affects competitiveness
> Sharing costs, risks and profits > Access to partners' local expertise,
knowledge and assets > Politically acceptable
Alliances and joint-venture2
> Possible divergent goals and interests of partners > Limited equity/operational control > Difficult to coordinate globally > Intellectual property at stake
> Full control of local activities > High reactivity > Better protection of know-how
Greenfield3 > Huge investments and non reversible > Slow deployment/entry speed > Add new capacity to the industry
> Immediate access to the market > Complete equity/operational control > Reduced local competition
Acquisition4 > High upfront capital needs > Post-acquisition integration challenges > Sometimes politically-sensitive
20
The Uppsala model suggests that firms progressively increase their level of commitment in a slow, stage-by-stage process
The Uppsala model – Dynamic process of internationalization
> The essence of this model is that internationalization is a dynamic process of learning in which firms take decisions over their next steps based on what they know at the time
> As a consequence, some scholars interpret this model as prescribing that firms need to go through distinct gates before they can successfully make direct equity investments abroad
> These stage models suggest that firms go through a sequence of modes that reflect an increasing degree of commitment (i.e. first licensing, then Joint-venture and then wholly-owned subsidiaries)1943-1963: only
active in Sweden 1963: 1st partnership in Norway
As from 1970: focus on European expansion
As from 1990: Full internationalization
Example
M a rk
e t
(c o
u n
tr y )
Market A
Market B
Market C
Market D
Market N
Mode of operation
No regular export (sporadic export)
Independent representatives (export modes)
Foreign sales subsidiary
Foreign production and sales subsidiary
FDI (Foreign direct Investment)
In cre
a sin
g g
e o
g ra
p h
ic d ive
rsifica tio
n
Increasing market commitment
Key insights
21
This traditional model is being challenged for several years by the rise of "Born Globals" or "International new venture" firms
C o m
m o n t
ra its
o f
b o rn
g lo
b a l fir
m s > They leverage advanced
communications and information technologies… but can be found in most industries
> Managers have a strong international outlook, international background and international entrepreneurial orientation
> They often emphasize differentiation strategy and superior product quality
> They typically use external independent intermediate for distribution in foreign markets – rather low resources requirements
Concept of Born global firms
Classically, born global or international new ventures are defined as business organizations that, from inception, seek to derive significant competitive advantage
from the use of resources and the sale of outputs in multiple countries
22
Conscientious entry timing considerations center on whether there are compelling reasons to be early or late entrants
First-mover advantages
> Proprietary, technological leadership & reputation
> Economies of scale and scope
> Pre-emption of scarce resources
> Establishment of entry barriers for late entrants
> Relationships and connections with key stakeholders such as customers and governments
Late-mover advantages
> Opportunity to free-ride on first-mover investments
> Resolution of technological and market uncertainty
> First-mover's difficulty to adapt to market changes
Successful early movers Unsuccessful early movers
Entry timing (when to enter)
23
Once the share of business abroad gets bigger, the full international strategy and organization design must be decided
1 Drivers of internationalization
3 Overview of main foreign market entry strategies> Market selection (where to enter?) > Entry mode (How to enter) > Entry timing (when to enter)
2 Strategic motivations for going international
4 Multinational strategies and structures
24
The main issue in formulating an international strategy is to balance pressures for global integration vs. those for local responsiveness
Overview of the four main international strategies
> Export strategy leverages home country capabilities, innovations and products in different foreign countries
> Multi-domestic strategy is based on different product or service offerings and operations in each country depending on local market conditions and customer preferences
> Global strategy sees the world as one single market with standardized products and services that fully exploits integration and efficiency in operations
> Transnational strategy combines local responsiveness with global coordination through networking resources and capabilities
Description
Need for local responsivenessLow High
High
Low
N e
e d
f o
r g
lo b
a l in
te g
ra ti
o n
Transnational strategy
Multi-domestic strategy
Global strategy
Export or international strategy
"Global standards"
"Integrated network"
"Home replication"
"Localization approach"
25
Each strategy has its advantages and inconvenient and is not suited for the same types of companies
Advantages and disadvantages of each type of strategy
A d
v a
n t-
a g
e s
D ra
w -
b a
c k
s W
h e
n i s
s
u it
e d
?
> Transfer core competencies in local market
> Exploit experience curve effects
> Exploit location economies
> Customized product offerings
> Marketing in accordance with local responsiveness
> Aims to unite the key advantages of the multi- domestic and global strategies
> Inability to realize location economies
> Lack of local responsiveness
> Lack of local responsiveness
> Inability to realize location economies
> failure to exploit experience curve effects
> Very complex, i.e. difficult to implement and organizational complexities
> For companies that have distinctive capabilities together with strong reputation and brand names..
> Most beneficial when there are substantial costs or quality efficiency benefits from standardization or when customer needs are homogenous
> Appropriate when there are strong benefits to adapting to local needs an when there are limited efficiency gains from integration
> Ideal strategy on paper but also the most complex
Export strategy
Global strategy
Multi-domestic strategy
Transnational strategy
26
in practice, the 4 strategies are sometimes not completely distinct and companies are located between them
High
Low
N e e d
f o
r g
lo b
a l in
te g
ra ti
o n
Overview of some well-known examples
Attention points
Need for local responsivenessLow High
Transnational strategy
Multi-domestic strategy
Global strategy
Export/international strategy
> Often, Regions (e.g. Europe) play a larger role in international expansion than individual countries
> Depending on the type of international strategies, different relationships between subsidiary operations and the corporate center (or Headquarter) will develop
> Subsidiaries may play different roles according to the level of local resources and capabilities available to them and the strategic importance of their local environment
27
> text to come
More specifically, here are 4 examples of firms having adopted very different international business strategies
International firm
Multi-domestic firm
Global firm
Transnational firm
> Nestlé owns 8000 brand names worldwide. Yet, only 750 are registered in more than 1 country. Only 80 are registered in more than 10 countries
> Nestlé adjusts its product attributes to the needs, tastes and preferences of the local consumers
> Delhaize has built and developed a strong local position over the years
> It has replicated the positioning, with success and failures, in several international markets
> Components of the Airbus come from across Europe
> However, production activities are centralized in one market (Toulouse) to serve a global market
> The competitive advantage is developed on a global basis
> Toyota has developed some models specifically for some markets and has slightly adapted others depending on local tastes
> Each unit operates independently but provides capabilities for other units
> National units specializes on behalf of the whole structure
28
There are 4 organizational structures approximatively matching the 4 international strategy just outlined
Global product division
> Each division is a stand-alone entity at global scale
> Enable to reach cost efficiencies by avoiding regional duplicates
Global Matrix Structure
> Sharing and coordination of responsibilities between product and geographical divisions
> Complex and unclear accountabilities
International division structure
> Matches the export strategy, mainly used when international sales are limited
> The international division is a silo with little coordination
Geographic area structure
> Led by a country or region manager
> The division can be stand- alone
> Mainly appropriate if the multinationals has a single line of products
Product
division A
Product
division B
Product
division C
Headquarters
Home division International
division
Headquarters
Regional
division A
Regional
division B
Regional
division C
Headquarters
Headquarters
Asia Europe
Product Division 1
Product Division 2Types of
Organizational structures for internationalization
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References
Exploring Strategy (11th edition).
Johnson, G., Whittington, R., Scholes, K., Angwin, D., Regnér, P.(2017)
Harlow, United Kingdom: Pearson.
