Selecting Corporate-Level Strategy Chapter 8
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Transcript Selecting Corporate-Level Strategy Chapter 8
Miles A. Zachary
MGT 4380
The rise of international business has followed
globalization and the development of BRIC economies
Good or Bad?
Good
Access to new customers
Lower costs—access to cheaper raw goods and labor
Diversification of business risk
Bad
Political risk
Economic risk
Cultural risk
Moving into an international market provides access to
new customers
US population accounts for only 5% of global
consumers
What are some new emerging markets into which US
businesses could enter?
Different cost advantages can be gained by
internationally-diverse firms
Increasing volume lowers production costs (economies
of scale)
Access to cheaper labor/raw goods
Offshoring: relocating a business activity to another country
Despite these advantages, some firms are finding that
offshoring is not appropriate for their business
Led to reshoring—jobs and businesses return to their
home country
Business risk is the potential that business operations
might fail
Firms located in a single country are open to “monodirectional” business risk—either up or down
However, international firms operate in a variety of
markets and therefore less susceptible to monodirectional business risk
Similar to the idea of diversifiable or unsystematic risk
Political risk-the potential for government upheaval or
interference with business to harm an operation
within a country
Difficult to plan business operations
Possibility of excessive hostility toward foreign
businesses
In rare but extreme cases, a countries government could
nationalize an industry or industries, eliminating
foreign control
Underdeveloped countries tend to have the highest
political risk(s)
Economic risk-the potential for a country’s economic
conditions and policies, property rights, protections,
and currency exchange rates to harm business
operations
Dynamic economic conditions make it difficult to know
how to anticipate economic risks
Cultural risk-the potential for a company’s operations
in a country to struggle because of differences in
language, customs, norms, and customer preferences
Businesses should research local customs and be
prepared to adapt business operations
In some ways, globalization has decreased the
advantages gained and disadvantages lost to operating
in one country over another
In others, research has suggested that business still
derive advantages and disadvantages from locating in
specific countries
Michael Porter at HBS developed the Diamond Model
of National Advantage (1990) to help determine the
potential for firm success in a given international
environment
The model helps determine a firm’s ability to compete
in a particular country
Four dimensions:
Home demand conditions
2. Home factor conditions
3. Home related and supporting industries
4. Firm strategy, structure, and domestic rivalry
1.
Home demand conditions refer to the local demand
characteristics and nature of domestic customers
Local customers with high standards help prepare firms for
competing on a global scale
E.g., Toyota and Japanese consumers
Home factor conditions refers to the nature of raw
materials and other inputs needed to create goods and
services
Includes land, labor, capital, and entrepreneurial ability
While some countries have their advantages, overcoming
disadvantages can have its benefits
E.g., Japan develops the JIT inventory system due to space shortages
Home related and supporting industries refers to the
extent to which a firm’s domestic suppliers and other
complementary industries are developed and helpful
How does the value chain support our business?
E.g., US cattle industry is supported well by incredible
productive capabilities of US farmers
Firm strategy, structure, and domestic rivalry
determines how challenging it is to survive domestic
competition
Companies that survive intense competition among domestic
competitors are better equipped to handle foreign
competitors
E.g., Toyota had to contend with other Japanese auto firms
A multinational corporation (MNC) is a firm that
has operations in more than one country
Such firms must choose how to structure their
international strategy
Three (3) main strategies
Multidomestic
Global
Transnational
Focuses on responsiveness to local requirements while
sacrificing efficiency
Many times firms must adapt their products to fit in a
variety of domestic markets
Coca-cola has dozens of brands with distinct flavors in
different countries
A global strategy sacrifices responsiveness to local
requirements in favor of efficiency
It is the opposite of the multidomestic strategy
While some minor modifications may occur, the
products and services remain generally unaltered for
foreign markets
E.g., Microsoft products are only adapted to meet local
language needs, but are otherwise homogenous
Firms following a transnational strategy try to balance
the desire for efficiency with the need to adjust to local
preferences
In between a multidomestic strategy and global
strategy
E.g., KFC and McDonald’s keep a core menu while
making some concessions in local markets such as
poutine in McDonald’s in Canada
Once an firm decides to enter a foreign market, it must
then determine how to do so
Five (5) basic entry options
Exporting
Wholly-owned subsidiary
Franchising
Licensing
Joint venture or strategic alliance
These options vary in the amount of control a business has
on operations, how much risk is involved, and what share
of the foreign operation’s profits a firm gets to keep
Exporting refers to creating goods within a firm’s home
country and then shipping them to another country where
they are sold to customers by a local firm
Typically seen as a starting point for most firms starting
international operations
A lower-cost way to determine foreign preferences and
demand for a firm’s products
After the products become desirable in a foreign market,
exporting becomes a unattractive
Firms loose control of goods once they enter a foreign
market—potentially allowing local merchants to hurt the
brand
A wholly owned subsidiary is a business operation
in a foreign country that a firm fully owns
Can occur in two (2) ways:
Greenfield venture in which the firm creates the entire
operation itself
Acquiring a foreign operator
Attractive because the firm maintains complete
control over the operation and keeps all the profits
Can be risky since a firm must pay all the expenses to
setup and operate the business
Franchising is when an organization (franchisor)
grants the right to use its brand name, products, and
processes to another organization (franchisee)
Usually occurs in exchange for up-front payment
(franchise fee) and a percentage of revenues (royalty
fee)
Attractive because it requires little investment
But, franchisors enjoy only some of the profits, must
monitor franchisees for undesirable behavior, and
must provide a clear and effective business model
In licensing, one organization grants another
organization the right to create its products, often
using patented technology, in exchange for a fee
Most frequently used in manufacturing industries
Attractive because granting firms deflect costs, but
lose control over how technology is used and limits
their profitability
Foreign joint ventures and strategic alliances occur
when a firm believes it to be beneficial to work with
one or more local partners
In a joint venture, two or more organization contribute
to a new organization
In a strategic alliance, two or more organizations work
together without establishing a new organization
Attractive because local organizations can supply
valuable local knowledge and facilitate local
acceptance
Can be difficult to manage when firms have trouble
getting along