Chapter 8 Looking at International Strategies

OBJECTIVES

1 Define international strategy and identify its implications for the strategy diamond 2 Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage 3 Describe different vehicles for international expansion 4 Apply different international strategy configurations 5 Outline the international strategy implications of the static and dynamic perspectives 1

DELL GOES TO CHINA

If we’re not in what will soon be the second-biggest PC market in the world, then how can Dell possibly be a global player?

Strategic decisions Vehicles U.S.

Assemble and distribute itself

Staging

Consumers first, then corporations

China

Partner Corporations first

Dell became China’s largest computer system provider in just 5 years

2

INTERNATIONAL PRESENCE OF SELECTED MULTINATIONAL CORPORATIONS (MNCs)

What is international strategy? Planning for future cross-border activities.

Company

Nokia Audi Clarion Apple eBay Papa John’s

Domestic market Products

Finland Cell phones Germany Automobiles Japan U.S.

Audio equipment Computers, electronics U.S.

U.S.

Online auctions Pizza

Total sales

$ Millions 37,031

Sales in domestic market

Percent 1

Sales in foreign markets

Percent 99 29,378 32 68 1,540 52 48 8,279 2,165 917 59 65 96 41 35 4

International presence varies widely

3

INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND

• • •

Staging

When will we go international?

How quickly will we expand into international markets?

In what sequence will we implement our entry tactics?

Arenas

• •

Arenas

Which geographic areas will we enter?

Which channels will we use in those areas?

Staging Economic logic Vehicles

•

Vehicles

Which international market-entry strategies will we use? Alliances? Acquisitions? Greenfield investments?

•

Economic logic

How does our international strategy lower our costs, raise the prices we can charge, or create synergies between our business?

Differentiators

•

Differentiators

How does being international make our products more attractive to our customers?

4

WHY EXPAND INTERNATIONALLY?

Domestic markets in developed countries have slow growth, while capital markets expect high growth The pressure for cost reductions and efficiency continues to grow Necessitates examining cost savings by sourcing across borders Chicken and egg problem Knowledge is not uniformly distributed around the world Creates opportunities for knowledge rich countries Customers are becoming global (both consumers and corporations) Competitors are globalizing 5

PROS VS. CONS OF INTERNATIONAL EXPANSION

Many international expansions fail

• Pepsi’s ambitious expansion in the 1990s resulted in a

decreased

international market share • Wal Mart’s international businesses perform poorly relative to its U.S. business

Why?



Newness

can be a disadvantage (e.g., your firm must move up the learning curve) 

Foreignness

can be a liability (e.g., your managers may not understand local culture) 

Governance

and coordination costs increase as you manage from a distance 6

KEY FACTORS – GLOBAL ECONOMIES OF SCALE

Key factors

Global economies of scale Global expansion may be attractive if it allows you to leverage fixed assets over new markets • Pharmaceutical firms such as Pfizer, can leverage large R&D budgets • CitiGroup, McDonald’s, and Coca-Cola can leverage brands • MITY can leverage its excess capacity to produce chairs and thereby reduce average costs 7

KEY FACTORS – LOCATION

Key factors

Global economies of scale Location • • • • Choosing the right location can • provide advantages in terms of Input costs Competitors Demand conditions Regulatory environment Presence of complements 8

THE CAGE DISTANCE FRAMEWORK

Cultural distance Attributes creating distance Administrative distance

Different languages Different ethnicities; lack of connective ethnic or social networks Different religions Different social norms Absence of colonial ties Absence of shared monetary or political association Political hostility Government policies Institutional weakness

Geography distance

Physical remoteness Lack of a common border Lack of sea or river access Size of country Weak transportation or communication links Differences in climates

Industries or products affected by distance

Products have high linguistic content (TV) Products affect cultural or national identity of consumers (foods) Product features vary in terms of size (cars), standards (electrical appliances), or packaging Products carry country specific quality associations (wines) Government involvement is high • • • • in industries that are • Producers of staple goods (electricity) • Producers of other “entitlements” (drugs) Large employers (framing) Large suppliers to government (mass transportation) National champions (aerospace) Vital to national security (telecom) • Exploiters of natural resources (oil, mining) • Subject to high sunk costs (infrastructure) Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.

Products have a low value-of weight or bulk ratio (cement) Products are fragile or perishable (glass, fruit) Communications and connectivity are important (financial services) Local supervision and operational requirements are high (many services)

Economic distance

Differences in consumer incomes Differences in costs and quality of • • • • • • Natural resources Financial resources Human resources Infrastructure Intermediate inputs Information or knowledge Nature of demand varies with income level (cars) Economies of standardization or scale are important (mobile phones) Labor and other factor cost differences are salient (garments) Distribution or business systems are different (insurance) Companies need to be responsive and agile (home appliances ) 9

KEY FACTORS – MULTIPOINT COMPETITION

Key factors

Global economies of scale Location Multipoint competition Expanding into a new market may provide an opportunity for a “stronghold assault” For example, French tire maker Michelin had negligible presence in the U.S. in the 1970s. It learned of Goodyear’s plans to expand into Europe, so it launched a counter attack. It started selling tires in the U.S. at or below cost, and thereby forced Goodyear to drop prices and cut profits in its core market 10

KEY FACTORS – LEARNING AND KNOWLEDGE SHARING

Key factors

Global economies of scale Location Multipoint competition Learning and knowledge sharing Expanding into a new market can create opportunities to innovate, improve existing products in existing markets, or develop ideas for new markets SC Johnson, for example, used technology developed in its European operation (a product for repelling mosquitoes in homes) to create the “ Glade Plug-ins” air freshener in the U.S.

11

CHOICE OF ENTRY MODES

Exports Direct exports Nonequity modes Contractual agreements Licensing/ franchising Choice of entry mode Equity (FDI) modes Alliances and joint ventures (JVs) Minority JVs Wholly owned subsidiaries Greenfield investments Indirect exports Turnkey projects 50/50 JVs Acquisition Others Contracted R&D Majority JVs Others Comarketing Strategic alliances (within dotted areas)

Source: Adapted from Pan, Y. and D. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, 31 (2000), 535-545 12

VEHICLES FOR ENTERING FOREIGN MARKETS

100% Honda’s initial entry into the U.S. market Bridgestone’s acquisition of U.S.-based Firestone FDI

Degree of ownership control over activities per formed in the foreign market

Exports Ford-Mazda Genentech-Hoffman LaRoche FDI through acquisition Alliance Champion International’s paper exports through independent brokers 0% 100% Exports KFC’s franchisees in India Alliance and exports 100% Local

Exports versus local production

Source: Examples drawn from in Gupta, A., and V. Govindarajan, “Managing Global Expansion: A Conceptual Framework,” business Horizons, March/April 2002, 45-54 13

EXPORTING OPTIONS

Shipping

Most common option in relatively close markets and for products with lower shipping costs

Licensing and franchising

A firm may form an alliance or franchise giving a local partner the right and responsibility to operate the firm’s business in their home market (e.g., Burger King’s expansion in Europe)

Special agreements

A firm may enter Turnkey project agreements, R&D contracts, or joint-marketing initiatives (e.g., a German firm Bayer AG contracts large R&D projects to a U.S. firm) 14

ALLIANCES

Until recently, China did not allow non Chinese companies in China …

U.S. firm Chinese Firm

… so U.S. companies formed alliances to gain access 15

FOREIGN DIRECT INVESTMENT

Foreign company

Acquires

Local company Home country/ market

• South African Breweries purchase Miller Brewing in 2002 to gain access to U.S. customers and brewing capacity • DaimlerChrysler and BMW each invested $250 million to start local factories in Brazil 16

IMPORTING

Importing is often a “stealth” form of internationalization because a firm will claim to have no international operations and yet directly or indirectly base production or service delivery abroad

Country A

Production

Country B

Customer service

Country C

Logistics “Domestic” company Home country 17

HOW WOULD YOU DO THAT? – LAURA ASHLEY

In the early 1990s, U.S. executive Jim Maxmin was brought in as CEO to turn around Laura Ashley. The company’s distribution system was in shambles and Maxmin needed to fix it

Maxmin realized he needed a partner that satisfies 3 key conditions

1. Complementary needs and competencies 2. Similar management styles and operating systems 3. Divergent strategic objectives • Why were each of these three conditions important?

• Who did Maxmin choose as a partner?

18

INTERNATIONAL STRATEGY CONFIGURATIONS

Relatively high local responsiveness Relatively few opportunities to gain global efficiencies Multinational configuration

Build flexibility to respond to national difference through strong, resourceful, entrepreneurial, and somewhat independent national or regional operations. Requires decentralized and relatively self-sufficient units

Example :

MTV initially adopted an international configuration (using only American programming in foreign markets) but then changed its strategy to a multinational one. It now tailors its Western European programming to each market, offering eight channels, each in a different language

Many opportunities to gain global efficiencies Transnational configuration

Develop global efficiency, flexibility, and worldwide learning. Requires dispersed, interdependent, and specialized capabilities simultaneously

Example :

Nestle has taken steps to move in this direction, starting first with what might be described as a multinational configuration Today, Nestle aims to evolve from a decentralized, profit-center configuration to one that operates as a single, global company. Firms like Nestle have taken lessons from leading consulting firms such as McKinsey and Company, which are globally dispersed but have a hard-driving, one-firm culture at their core.

Relative low local responsiveness International configuration

Exploit parent-company knowledge and capabilities through worldwide diffusion, local marketing, and adaptation. The most valuable resources and capabilities are centralized; others, such as local marketing and distribution, are decentralized

Example :

When Wal-Mart initially set up its operations in Brazil, it used its U.S. stores as a model for international expansion

Global configuration

Build cost advantages through centralized, global scale operations . Requires centralized and globally scaled resources and capabilities

Example :

Companies such as Merck and Hewlett Packard give particular subsidiaries a worldwide mandate to leverage and disseminate their unique capabilities and specialized knowledge worldwide Source: Bartlett, C., S. Ghoshal, & J. Birkenshaw, Transnational Management (New York: Irwin, 2004) 19

BORN – GLOBAL FIRMS

More and more firms, even young, small ones, have operations that bridge national borders

Logitech Founded by

• 2 Italians • 1 Swiss

R&D

• California • Switzerland

Production

• • Ireland Taiwan

30% of global PC mouse busi ness by 1989

20

HOW TO SUCCEED AS A GLOBAL START-UP

Consider if you should be a global start-up

• Do you need human resources from other countries to succeed?

• Do you need financial capital from other countries to succeed?

• If you go global, will target customers prefer your services over competitor's?

• Can you put an international system in place more quickly than domestic competitors? • Do you need global scale and scope to justify the financial and human capital investment?

• Will a purely domestic focus now make it harder for you to go global in the future?

If yes, Put together tools you will need to move into global market

 Strong management team with inter national experience  Broad and deep international network among suppliers, customers, and complements  Preemptive marketing or technology to provide first-mover advantage  Strong intangible assets  Ability to keep customers locked in by linking new products and services to core business, while you innovate  Close worldwide coordination and com munication among business units, suppliers, complements and customers 21

DEVELOPING A GLOBAL MIND-SET

Global mindset

Having an appreciation for the differences between countries and people and seeing these differences as opportunities Having developed skills for managing diverse teams in a world wide work force 22

HOW WOULD YOU DO THAT?

Fewer than 15% of executives have substantive international experience

1 If you were CEO, how would you build a global perspective in your executives?

Tactic Action steps

Teams ?

2 Training ?

3 Transfers 4 ???

?

?

23

SUMMARY

1 Define international strategy and identify its implications for the strategy diamond 2 Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage 3 Describe different vehicles for international expansion 4 Apply different international strategy configurations 5 Outline the international strategy implications of the static and dynamic perspectives 24