Strategic Business Plan Report

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Week 5 Objectives 1. Explain incentives that can influence firms to use an international

strategy;

2. Identify basic benefits firms achieve by successfully implementing an

international strategy;

3. Explore the determinants of national advantage as the basis for

international business-level strategies;

4. Describe the three international corporate-level strategies;

5. Explain the modes firms use to enter international markets; and

6. Discuss the major risks of using international strategies.

A strategy through which a firm sells its goods or

services outside its domestic market (across border).

Incentives to pursue an international strategy:

• Extend a product’s life cycle (especially if domestic industry is mature with

stagnant growth)

• Gain easier access to raw materials

• Opportunities to integrate operations on a global scale- borderless demand for

globally branded products

• Opportunities to better use rapidly developing

technologies

• Gain access to consumers in emerging markets

International Strategy

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International Expansion Example: Proctor & Gamble 1837 – P & G established in the US - Soaps and candles

1915 – Canadian plant established

1930 – Purchased Hedley & Sons in England

1948 – Established an overseas division to manage growing international

division

1963 – Established European Technical Centre in Belgium

1973 – Entered Japanese market

1995 – Sales outside US had reached 50% of total sales. Organisation

structure changed to four regional sectors: North America; Latin America;

Asia and Europe; and the Middle East and Africa. All regional sectors

reported to the Chief Operating Officer

2004 – P & G had the workings of a global company in terms of its structure.

A three-axis matrix structure in which the organisational responsibilities

are divided among regional marketing; product-based R & D and

manufacturing; and regional logistics.

1. Increased Market Size

• Domestic market is too small to support efficient scale manufacturing facilities.

• Higher demand growth and income level.

• Larger markets offer higher potential returns and therefore pose less risk.

• Strong markets may facilitate production/marketing efforts to create value for

customers.

Benefits of International Strategy

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2. Economies of Scale and Learning

• Expanding size or scope of markets helps achieve economies of scale in

manufacturing as well as marketing, R&D or distribution.

• Exploit core competencies in international markets through resource and

knowledge sharing between units and network partners across country borders.

– By sharing resources and knowledge, firms can learn how to create synergy,

which in turns helps each firm learn how to produce higher-quality products

at a lower cost.

• Working in multiple international markets also provides firms with new learning

opportunities.

Benefits of International Strategy

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3. Location Advantages

• Location advantages offer superior access to critical resources, such as raw

materials, lower-cost labour, energy, suppliers and key customers.

• Strong cultural match facilitates international business transactions.

• Close proximity to customers- physical distances affect cost (e.g. transportation

costs) and influence firms’ location choices.

• Often involves incentives (such as taxation or interest benefits) to build industry

or economy.

• Access to industry or knowledge spillover due to geographic cluster of

specialized suppliers.

Benefits of International Strategy

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• Companies from a given nation are most likely to succeed in industries in which

the four attributes (see over) are favourable.

• The attributes form a mutually reinforcing system in which the affect of one

attribute is dependent on the state of the others.

Helps managers:

• Predicting where new foreign entrants are likely to come from and their strengths.

• Identifying the location-based advantages of conducting certain value chain activities of the firm in a particular country.

• Assessing the ease of entry into foreign markets,

and highlighting foreign market opportunities

where rivals are weakest.

National Competitive Advantage: Porter’s Diamond

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The Diamond of National Advantage

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Factors of production are the inputs necessary to compete in any industry. These

include labour, land, natural resources, capital, and infrastructure.

• Basic factors include natural and labour resources.

• Advanced factors include digital communication systems and an educated

workforce.

Demand conditions are characterised by:

• The nature and size of buyers’ needs in the home market

• Size of market segment, which produces demand necessary for creating scale-

efficient facilities

• Efficiency, which can lead to domination of the industry in other countries

• Opportunities from specialised demand.

National Competitive Advantage: Porter’s Diamond

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Related and supporting industries include supporting services, facilities and

suppliers, particularly:

• Support in design

• Support in distribution

• Related industries involving suppliers and buyers.

The pattern of firm strategy, structure and rivalry among firms may relate to:

• Common technical training

• Methodological product and process improvement

• Cooperative and competitive systems.

National Competitive Advantage: Porter’s Diamond

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A firm’s international strategy can be

categorised based on its relative

emphasis on the following two

dimensions:

1. The need for global integration

• Strategy is determined by the

home office, with coordinated

resource sharing across units

2. The need for local responses

• Where individual country units

need flexibility to choose their

own strategies

International Strategies

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Multi-domestic (Localization) Strategy

• A firm varies its product offering and competitive approach from country to

country

• Responsive to differing buyer preferences and market conditions.

• It is a think-local, act-local approach

• Facilitated by decision making decentralized to local level.

International Strategies

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• EXAMPLE: MTV- Popularity of superstars differ

depending on local tastes. Digital & satellite

technology made localization of programming cheaper

and easier, one satellite transponder beaming dozens

of MTV Networks. MTV US has control over creative

and frenetic presentations, while sharing of

programming and content are localized.

Multi-domestic (Localization) Strategy

Key characteristics

• Strategy and operating decisions are decentralised to strategic business

units (SBU) in each country.

• Products and services are tailored to local markets.

• Business units in each country are independent.

• The strategy assumes markets differ by country or regions.

• The focus is on competition in each market.

Limitations

• Less knowledge sharing for the corporation as a whole.

• Do not allow the development of economies of scale and thus more costly.

International Strategies

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Global Strategy

• A company employs the same basic competitive approach in all countries

where it operates, sells much the same products everywhere,

• Strives to build global brands, and coordinates its actions worldwide with

strong headquarters control.

• It represents a think-global, act-global approach.

• EXAMPLE: CEMEX is a global building materials company that centralises

operations in order to gain scale economies, among other benefits.

International Strategies

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Global Strategy

Key characteristics

• Firm offers standardised products across country markets, with the

competitive strategy being dictated by the home office.

• Strategic and operating decisions are centralised at the home office.

• This involves interdependent SBUs operating in each country .

• The home office attempts to achieve integration across SBUs, adding

management complexity.

Limitations

• Less responsive to local market opportunities.

• More effective in areas where regional integration is occurring.

International Strategies

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Transnational Strategy

• A think-global, act-local approach that incorporates elements of both multi-

domestic and global strategies.

• It requires both:

– Centralisation – global coordination and control

– Decentralisation – local flexibility.

• The global competitive landscape fosters intense competition, thus pressures

to reduce costs. At the same time, information sharing has intensified the

desire for specialised, customised, differentiated products.

• EXAMPLE: Starbucks in China standardises operations and simultaneously

decentralises some decision making for local responsiveness.

International Strategies

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There are five available modes of entry into international markets for firms:

International Entry Modes

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Risk increases

Control increases

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Exporting

• Occurs when a firm sends products it produces in its domestic market to

international markets

– Avoids expense to establish operations in the host country

– Involves contractual agreements

– Export costs mainly include: high transportation costs and imposed tariffs

• Firms export mostly to countries that are closest to their facilities

• Can be either positively or negatively affected by trade policies, such as Free

Trade Agreements (FTAs), such as NAFTA, APTA and EU FTAs

• Limitations:

– There is little control over marketing and distribution.

International Entry Modes

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Licensing & Franchising

• Licensing involves an agreement that allows a foreign company to purchase

the right to manufacture and sell a firm’s products within a host country’s

market or a set of markets.

• Licensor is normally paid a royalty on each unit produced and sell.

• Limitations:

– Less control over selling and distribution

– International firms may learn the technology of the party with whom it

formed an agreement and then produce & sell a similar competitive

products after licensing expires

International Entry Modes

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Licensing & Franchising

• Franchising is a type of licensing where a firm (the franchisor) uses a

franchise as a contractual relationship to describe and control the sharing of

its resources and capabilities with partners (franchisees).

• Examples: McDonald’s, Hilton International, Subway, Harvey Norman

• Franchising spreads risks and enables firms to use resources, capabilities

and competencies without merging or acquiring another company.

– Especially attractive in fragmented industries such as retail and hotels

• Also attractive to franchisee: the business model is available, the brand is

established, training/systems usually provided, and it usually has

demonstrated success.

International Entry Modes

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Strategic Alliances

• It is collaboration with a partner firm for international market entry

– Involves shared risks and resources

– Facilitates development of core competencies

– Involves fewer resources and costs required for entry

• Limitations:

– Incompatibility and conflict between partner

– Lack of trust between partners

– Difficult to manage

International Entry Modes

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Acquisitions

• In a cross-border acquisition, a firm from one country acquires a stake in or

purchases 100 per cent of a firm located in another country.

• Allows for quick access to market.

• Limitations:

– Involves possible integration difficulties

– Costly (debt financing)

– Has complex negotiations and transaction requirements

International Entry Modes

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New Wholly Owned Subsidiaries (Greenfield Venture)

• In a greenfield venture, a firm invests directly in another country or market by

establishing a new wholly owned subsidiary. The venture:

– Is costly and involves complex processes

– Allows for maximum control

– Has the highest potential returns, carries high risk

• When to set up subsidiaries:

– Internal start-up is cheaper than making an acquisition.

– Adding production capacity will not adversely impact the supply–demand

balance in the local market.

– A start-up subsidiary has the ability to gain good distribution access.

– A start-up subsidiary will have the size, cost structure, and resource

strengths to compete head-to-head against local rivals.

International Entry Modes

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International Entry Modes

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Situation Appropriate Entry Mode

A firm has no foreign manufacturing expertise and requires investment only in distribution

Exporting

A firm needs to facilitate the product improvements necessary to enter foreign markets

Licensing & Franchising

A firm needs to connect with an experienced partner already in the target market, reduce its risk through the sharing of costs, and/or is facing uncertain situations such as an emerging economy in its target market

Strategic Alliances & Joint Ventures

A firm must act quickly to gain rapid access to its new market, where corruption is not an issue

Acquisitions

A firm’s IP rights in an emerging economy are not well protected, the number of firms in the industry is growing fast and the need for global integration is high

New Wholly Owned Subsidiary

Risks in an International Environment

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• Geographic dispersion increases coordination costs.

• Trade barriers (such as tariffs and import quotas), logistical costs, cultural

diversity (both in terms of language and cultural values/customs) and other

differences by country complicate the implementation of an international

diversification strategy.

– Even the reduction of trade barriers, though the establishment of things

such as FTAs, will not necessarily guarantee the viability of an

international strategy, eg. Australian car industry

• Resource and risk sharing through inter-organisational networks (e.g.,

strategic alliances) is one way that firms can build flexibility.

The Challenge of International Strategies

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