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Figure 8.1: Opportunities and Outcomes of International Strategy

8-1: Identifying International Opportunities

An international strategy is a strategy through which the firm sells its goods or services outside its domestic market. 3 In some instances, firms using an international strategy become quite diversified geographically as they compete in numerous countries or regions outside their domestic market. This is the case for ABB in that it competes in about 100 countries. In other cases, firms engage in less international diversification in that they only compete in a small number of markets outside their “home” market.

An international stries is a strategy through which the firm sells its goods or services outside its domestic market.

There are incentives for firms to use an international strategy and to diversify their operations geographically, and they can gain three basic benefits when they successfully do so. 4 We show international strategy’s incentives and benefits in Figure 8.2 .

Figure 8.2: Incentives and Basic Benefits of International Strategy

8-1a: Incentives to Use International Strategy

Raymond Vernon expressed the classic rationale for an international strategy. 5 He suggested that typically a firm discovers an innovation in its home-country market, especially in advanced economies such as those in Germany, France, Japan, Sweden, Canada, and the United States. Often demand for the product then develops in other countries, causing a firm to export products from its domestic operations to fulfil that demand. Continuing increases in demand can subsequently justify a firm’s decision to establish operations outside of its domestic base. As Vernon noted, engaging in an international strategy has the potential to help a firm extend the life cycle of its product(s).

Gaining access to needed and potentially scarce resources is another reason firms use an international strategy. Key supplies of raw material—especially minerals and energy—are critical to firms’ efforts in some industries to manufacture their products. Of course energy and mining companies have operations throughout the world to gain access to the raw materials they in turn sell to manufacturers requiring those resources. Rio Tinto is a leading international mining group. Operating as a global organization, the firm has 71,000 employees across six continents to include Australia, North America, Europe, South America, Asia and Africa. Rio Tinto uses its capabilities of technology and innovation (see first incentive noted above), exploration, marketing, and operational processes to identify, extract, and market mineral resources throughout the world. 6 In other industries where labor costs account for a significant portion of a company’s expenses, firms may choose to establish facilities in other countries to gain access to less expensive labor. Clothing and electronics manufacturers are examples of firms pursuing an international strategy for this reason.

Increased pressure to integrate operations on a global scale is another factor influencing firms to pursue an international strategy. As nations industrialize, the demand for some products and commodities appears to become more similar. This borderless demand for globally branded products may be due to similarities in lifestyle in developed nations. Increases in global communications also facilitate the ability of people in different countries to visualize and model lifestyles in different cultures. 7 In an increasing number of industries, technology drives globalization because the economies of scale necessary to reduce costs to the lowest level often require an investment greater than that needed to meet domestic market demand. Moreover, in emerging markets the increasingly rapid adoption of technologies such as the Internet and mobile applications permits greater integration of trade, capital, culture, and labor. In this sense, technologies are the foundation for efforts to bind together disparate markets and operations across the world. International strategy makes it possible for firms to use technologies to organize their operations into a seamless whole. 8

The potential of large demand for goods and services from people in emerging markets such as China and India is another strong incentive for firms to use an international strategy. 9 This is the case for French-based Carrefour Group. This firm is the world’s second-largest retailer (behind only Walmart) and the largest in Europe. Carrefour operates five main grocery store formats—hypermarkets, supermarkets, cash & carry, hypercash stores, and convenience stores. The firm also sells products online. 10 In 2011, Carrefour acquired minority stakes in three mainland Chinese retailers to strengthen its presence there, as this market is critical to its growth plans. 11

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Even though India, another emerging market economy, differs from Western countries in many respects, including culture, politics, and the precepts of its economic system, it also offers a huge potential market and its government is becoming more supportive of foreign direct investment. 12 However, differences among Chinese, Indian, and Western-style economies and cultures make the successful use of an international strategy challenging. In particular, firms seeking to meet customer demands in emerging markets must learn how to manage an array of political and economic risks,13 such as those we discuss later in the chapter.

We’ve now discussed incentives that influence firms to use international strategies. Firms derive three basic benefits by successfully using international strategies: (1) increased market size; (2) increased economies of scale and learning; and (3) development of a competitive advantage through location (e.g., access to low-cost labor, critical resources, or customers). These benefits will be examined here in terms of both their costs (such as higher coordination expenses and limited access to knowledge about host country political influences)14 and their challenges.

8-1b: Three Basic Benefits of International Strategy

As noted, effectively using one or more international strategies can result in three basic benefits for the firm. These benefits facilitate the firm’s effort to achieve strategic competitiveness (see Figure 8.1 ) when using an international strategy.

Increased Market Size

Firms can expand the size of their potential market—sometimes dramatically—by using an international strategy to establish stronger positions in markets outside their domestic market. As noted, access to additional consumers is a key reason Carrefour sees China as a major source of growth.

Takeda, a large Japanese pharmaceutical company, acquired Swiss drug maker Nycomed in 2011, which exemplifies one form of its growth strategy. Buying Nycomed made Takeda a major player in European markets. More significantly, the acquisition broadened Takeda’s distribution capability in emerging markets. The company is focusing on the development of its global business operations in emerging markets and developed economy countries, and organic growth through scientific and business process innovation. 15 Along with Starbucks, Carrefour and Takeda are two additional companies relying on international strategy as the path to increased market size in China and other regions of the world.

Firms such as Starbucks, Carrefour, and Takeda understand that effectively managing different consumer tastes and practices linked to cultural values or traditions in different markets is challenging. Nonetheless, they accept this challenge because of the potential to enhance the firm’s performance. Other firms accept the challenge of successfully implementing an international strategy largely because of limited growth opportunities in their domestic market. This appears to be at least partly the case for major competitors Coca-Cola and PepsiCo, firms that have not been able to generate significant growth in their U.S. domestic (and North America) markets for some time. Indeed, most of these firms’ growth is occurring in international markets. An international market’s overall size also has the potential to affect the degree of benefit a firm can accrue as a result of using an international strategy. In general, larger international markets offer higher potential returns and thus pose less risk for the firm choosing to invest in those markets. Relatedly, the strength of the science base of the international markets in which a firm may compete is important in that scientific knowledge and the human capital needed to use that knowledge can facilitate efforts to more effectively sell and/or produce products that create value for customers. 16

An SAS Airbus A319. Airbus and Boeing achieve economies of scale by manufacturing in several regions of the world.

Economies of Scale and Learning

By expanding the number of markets in which they compete, firms may be able to enjoy economies of scale, particularly in their manufacturing operations. More broadly, firms able to standardize the processes used to produce, sell, distribute, and service their products across country borders enhance their ability to learn how to continuously reduce costs while hopefully increasing the value their products create for customers. For example, rivals Airbus SAS and Boeing have multiple manufacturing facilities and outsource some activities to firms located throughout the world, partly for the purpose of developing economies of scale as a source of being able to create value for customers.

Economies of scale are critical in a number of settings in addition to the airline manufacturing industry. Automobile manufacturers certainly seek economies of scale as a benefit of their international strategies. Ford employs 166,000 people worldwide and operates in six global regions: North America, Europe, Central and South America, Middle East, Africa, and Asia Pacific. Competing in these global markets, Ford Motor Company is planning on increasing sales in each region but especially in Asia. 17 Overall, Ford seeks to increase the annual number of products it sells outside of North America. For example, it increased its market share in Europe in 2013. Demonstrating the use of this international strategy is the fact that Ford is now run as a single global business developing cars and trucks that can be built and sold throughout the world. 18 Firms may also be able to exploit core competencies in international markets through resource and knowledge sharing between units and network partners across country borders. 19 By sharing resources and knowledge in this manner, firms can learn how to create synergy, which in turn can help 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,20 perhaps even in terms of research and development activities. Increasing the firm’s R&D ability can contribute to its efforts to enhance innovation, which is critical to both short- and long-term success. However, research results suggest that to take advantage of international R&D investments, firms need to already have a strong R&D system in place to absorb knowledge resulting from effective R&D activities. 21

Location Advantages

Locating facilities in markets outside their domestic market can sometimes help firms reduce costs. This benefit of an international strategy accrues to the firm when its facilities in international locations provide easier access to lower-cost labor, energy, and other natural resources. Other location advantages include access to critical supplies and to customers. Once positioned in an attractive location, firms must manage their facilities effectively to gain the full benefit of a location advantages. 22

A firm’s costs, particularly those dealing with manufacturing and distribution, as well as the nature of international customers’ needs, affect the degree of benefit it can capture through a location advantage. 23 Cultural influences may also affect location advantages and disadvantages. International business transactions are less difficult for a firm to complete when there is a strong match among the cultures with which the firm is involved while implementing its international strategy. 24 Finally, physical distances influence firms’ location choices as well as how to manage facilities in the chosen locations. 25