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2/05/2020

MGT30005 Strategic Planning in Dynamic Environments

Strategy Narrative 9

International Strategy

CRICOS 00111D TOID 3059

Introduction

• This session examines the strategy implications of the international business environment.

• The discussion will differentiate between international strategies, local and international operations and international trade

• International market entry mode; benefits and challenges in each and every entry mode.

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Case study: Kaufland • On 22 January 2020, Kaufland, the grocery giant which has for three

years been making big promises about its Australian expansion,

has decided to abandon its plans, despite having invested $523 million in

paid capital.

• Back in 2017 Global German supermarket chain Kaufland decided to

enter in Australia’s $90 billion grocery sector and aimed to compete with

the nation’s leading supermarket giants, Woolworths, Coles and Aldi.

How can companies like Kaufland

evaluate the advantages of moving

into particular international markets?

What strategic factors need to be

taken into account when a business

expands into international markets?

International strategy

Definition

–a strategy through which a firm sells its

goods or services outside its domestic

market

–focuses on creating and exploiting

opportunities

–a process that a firm can use to increase

its international awareness.

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• The international context is the arena of two or more

nations in which the firm can operate. Key question is to

what extent firms should work in a standardised and

integrated manner across international boundaries.

The International Context (De Wit & Meyer, 2010)

• Globalisation is the process of increasing world-wide similarity and integration. Managers want to coordinate their activities across international boundaries as the world merges into one global economic and cultural system.

• The global convergence perspective emphasises the importance of globalisation.

– “You may say I'm a dreamer, but I'm not the only one; I hope some day you'll join us, and the world will live as one.” (John Lennon)

Globalisation: Convergence (De Wit & Meyer, 2010)

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• Localisation is the process of increasing regional dis-similarity and fragmentation. Managers want to adapt their activities to local demands as the world remains a loose system of semi-independent economies and cultures.

• The international diversity perspective emphasises the importance of localisation.

– “When I am at Milan, I do as they do at Milan; but when I go to Rome, I do as Rome does.” (ST. Augustine)

Globalisation: Diversity (De Wit & Meyer, 2010)

Tension: Convergence vs Diversity (De Wit & Meyer, 2010)

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Analysing an international market

• Analysis of an international market is one of the

most important aspects of the structured entry

approach

• Most organisations find that an international

market is rarely as attractive as their

assessment indicated

• The analysis of a foreign market should

incorporate knowledge of the market and a

sensitivity analysis to determine the impact of inaccuracies in the analysis

National competitive advantage Porter’s Diamond Model

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The elements of Porter’s model

Porter’s diamond framework is based on the following elements:

• Factor conditions are operational issues in the country or region — cost of capital, cost and skill of labour, and cost and availability of resources, including technology and information — as well as infrastructure.

• Demand conditions are the number and nature of customer preferences.

• Related and supporting industries help develop efficiencies along the supply chain.

• Industry strategy, structure and rivalry may force organisations to develop strategies and structures to make them more effective, in order to stay in business.

Internationalisation Drivers Yip’s Model

Source: Adapted from G. Yip, Total Global Strategy II, Financial Times Prentice Hall, 2003, Chapter 2

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Comparative Advantage:

Impact of Local Conditions

• The term comparative advantage refers to the relative efficiencies of producing different products

• Comparative advantage refer to the advantage gained by production of a product or service in one nation/region over another due to local external conditions such as skill levels. It does not apply to specific organisational capabilities

Table 11.1

Comparative Advantage:

Selected OECD Countries (ca. 2018)

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Assessing Country Markets Country markets can be assessed according to

three criteria:

Market attractiveness to the new entrant

 The likelihood and extent of defenders’ reaction

Defenders’ clout – the relative power of defenders to

fight back.

Quiz

Porter's National diamond describes:

• a. The strategies of different countries

• b. How national conditions influence the

dynamics of resource and capability

development in different industries

• c. A process of development of a national

economy

• d. The evolution of De Beers over time

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EXPORTING

LICENSING

STRATEGIC ALLIANCES

ACQUISITIONS

NEW WHOLLY OWNED SUBSIDIARY

RISK INCREASES

CONTROL INCREASES

Choice of International Entry Mode

Exporting

Advantages

• No need for

operational facilities

in host country

• Economies of scale

in the home country

• Internet can facilitate

exporting marketing

opportunities

Disadvantages

• Lose any location advantages in the host country

• Dependence on export intermediaries

• Exposure to trade barriers

• Transportation costs

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Licensing / Franchising

Advantages

• Contractual source

of income

• Limited economic

and financial

exposure

Disadvantages

• Difficult to identify

good partner

• Loss of competitive

advantage

• Limited benefits

from host nation

Joint Ventures and Strategic Alliances

Advantages

• Shared investment

risk

• Complementary

resources

• Maybe required for

market entry

Disadvantages

• Difficult to find good

partner

• Relationship

management

• Loss of competitive

advantage

• Difficult to integrate

and coordinate

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Foreign direct investment Advantages

• Full control

• Integration and coordination possible

• Rapid market entry through acquisitions

• Greenfield investments are possible and may be subsidised

Disadvantages

• Substantial

investment and

commitment

• Acquisitions may

create integration/

coordination issues

• Greenfield

investments are

time consuming and

unpredictable

• Traditional approach to internationalisation – “Stage” model

– Company first grows solidly in home market

– Then starts exploring opportunities for expansion (especially into adjacent countries in the region)

• Born global or international new ventures (INVs) – Definition 1: Business organisations that, from inception,

seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries.

– Definition 2: Companies who have reached a share of foreign sales of at least 25 per cent within a timeframe of two to three years after their establishment.

“Traditional Internationalisation” vs

“Born Global”

www.london.edu/lbsr/born-global

http://www.london.edu/lbsr/born-global

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• Technological advances that better enable delivery of products and services into global markets;

• Relatively small domestic market for a company's products or services – a feature particularly relevant to technology firms whose services or products have scalability/applicability across a wide range of markets;

• Born global founders may have established international networks, an international market background and/or an international vision enabling them to exploit market opportunities;

• Greater need to open up offices overseas (supports tailored customer servicing for services firms that benefit from closer proximity to customers).

Australian Context: Some Reasons for

Increasing Number of “Born Global”

There are several reasons that explain the limits to the positive effects of the diversification associated with international strategies:

• Geographic dispersion • Trade barriers • Logistical costs • Cultural diversity and barriers • Complexity of competition • Relationship between firm and host country • Other country differences.

Challenges and Limits to International Expansion

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Quiz

Which of the following entry-modes involves

the lowest resource commitment?

• a. Strategic alliances

• b. Licensing

• c. Wholly-owned subsidiary

• d. Exporting

Selecting an entry mode

• What is the source of organisation’s competitive

advantage?

• Is the product tradable and what are the barriers

to trade?

• Does the organisation possess the resources

and for establishing a competitive advantage?

• Can the organisation directly appropriate the

returns to its resources?

• What transaction costs are involved?

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Dunning’s eclectic theory

Dunning’s eclectic theory provides a useful approach

for selecting the best market entry mode

It argues that, for a successful entry:

– the organisation must possess a competitive advantage

that it can use in that market

– the best (highest return) use of the organisation’s

capabilities is through market entry, rather than exporting

– the location selected must provide at least one desirable

characteristic that can be combined with these capabilities

advantageously • Dunning, John H., Towards an Eclectic Theory of International Production: Some Empirical Tests. Journal of International Business Studies, Vol. 11, Issue 1, pp. 9-31,

1980.

The structured entry approach

• Structured entry refer to a systematic approach

to planning and implementing foreign market

entry

• The following steps should be considered:

• assess the products in relation to the markets

• set up objectives and goals

• choose the entry mode

• design the marketing plan • Source: Erin Anderson, and Hubert Gatignon, 1986

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Quiz

The superiority of firms competing on a global basis, over

those competing on a national basis, stems from:

• a. The globalisation of customers' preferences, and

economies of scale

• b. Economies of scale, and financial power

• c. The power of influencing international organisations in

charge of regulating the world trade, and the knowledge

of foreign markets

• d. The cross-subsidisation and predatory pricing

practices

Summary

• Internationalisation potential in any particular market is determined by Yip’s four drivers: market, cost, government and competitors’ strategies.

• Sources of advantage in international strategy can be drawn from both global sourcing through the international value network and national sources of advantage, as captured in Porter’s Diamond.

• There are five main types of international strategy, varying according to extent of coordination and geographical configuration.

• Born global firms are an emerging phenomenon.