Chapter 10 International Strategy

1. Chapter 10International Strategy 0

2. LEARNING OBJECTIVES • 1. Define international strategy and identify its implications for the strategy diamond. • 2. Understand why a company would want to expand internationally and explain the relationship between international strategy and competitive • advantage. • 3. Use the CAGE framework to identify desirable international arenas. • 4. Describe different vehicles for international expansion. • 5. Apply different international strategy configurations. • 6. Outline the international strategy implications of the static and dynamic • perspectives.

3. Staging & Pacing • Arenas • When will we go international? • How quickly will we expand into international markets? • In what sequence will we implement our entry tactics? • Which geographic areas will we enter? • Which channels will we use in those arenas? • Which value chain activities? International Strategy - THE FIVE ELEMENTS IN INTERNATIONAL STRATEGY • Arenas • Vehicles • Economiclogic • Staging • Vehicles • Which international market entry tactics will we use? Alliances? Acquisitions? Greenfield investments? • Differentiators • Economic Logic • Differentiators • How does our international strategy contribute to the economic logic of our business and corporate strategies? • How does being international make our products more attractive to our customers?

4. 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 • Coca-Cola, McDonald’s, and RIM can leverage brands • LSG Skychefs has operations around the world providing catering for airlines including Alitalia, Alaska, American, Lufthansa, Malaysia, Northwest, SAS, US Airways, United, and Qantas Why an International Strategy? - GLOBAL ECONOMIES OF SCALE AND SCOPE • Key factors •  • Global economies of scale and scope

5. Choosing the right location canprovide advantages in terms of • Input costs • Competitors • Demand conditions • Regulatory environment • Presence of complements • A five-forces analysis can help revealthe attractiveness of a location Why an International Strategy? – LOCATION • Key factors •  • Global economies •  • Location

6. Why an International Strategy? – 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. • Key factors •  • Global economies •  • Location •  • Multipoint competition

7. Why an International Strategy? – 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. • Key factors •  • Global economies •  • Location •  • Multipoint competition •  • Learning and knowledge sharing

8. Why an International Strategy? - CONS OF INTERNATIONAL EXPANSION • Many international expansions fail • Why? • Pepsi’s ambitious expansion in the 1990s resulted in a decreased international market share • Wal-Marts international businesses perform poorly relative to its U.S. business • Newness can be a disadvantage (e.g., your firm must moveup the learning curve) • Foreignness can be a liability (e.g., your managers may notunderstand local culture) • Governance and coordination costs increase as you manage from a distance

9. Absence of colonial ties • Absence of shared monetary or political association • Political hostility • Government policies • Institutional weakness • Physical remoteness • Lack of a common border • Lack of sea or river access • Size of country • Weak transportation or communication links • Differences in climates • Differences in consumer incomes • Differences in costs andquality of • Natural resources • Financial resources • Human resources • Infrastructure • Intermediate inputs • Information or knowledge • Government involvement is highin 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) • 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) • Nature of demand varies with income level (cars) • Economies of standardization or scale are important (mobile phones) • Labour and other factor cost differences are salient (garments) • Distribution or business systems are different (insurance) • Companies need to be responsive and agile (home appliances ) Where to Grow Internationally - THE CAGE DISTANCE FRAMEWORK • Cultural distance • Administrative distance • Geography distance • Economic distance • Attributes creating distance • Different languages • Different ethnicities; lack of connective ethnic or social networks • Different religions • Different social norms • Industries or products affected by distance • Products have high linguistic content (TV) • Products affected by 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) Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.

10. Where to Grow Internationally – CULTURAL DISTANCE • ■power distance: the extent to which individuals accept the existence of • inequalities between subordinates and superiors within a hierarchical structure • ■uncertainty avoidance: individuals’ willingness to coexist with uncertainty about • the future • ■individualism: how the individuals in a society value individualistic behaviours • as opposed to collective ones • ■predominant values: regarding quantity or quality of life, that is, whether • more importance is given to material aspects or a stronger emphasis is laid on • interpersonal relationships • ■long-term or short-term orientation: the focus on future rewards or the concern • about the maintenance of the stability related to the past and the present

11. Legal concerns for Canadian firms Where to Grow Internationally - ADMINISTRATIVE DISTANCE • Free Trade • Agreements • FTA’s • Open foreign markets to Canadian exports • Antidumping • Import Laws • Anti-bribery provisions • Foreign Corrupt • Practices • International standards • Accounting • Standards • Intellectual • Property • Protection • Patent Cooperation Treaty

12. Where to Grow Internationally - ADMINISTRATIVE DISTANCE • Decreased distance between U.S., Mexico, and Canada • Historical Political Hostilities • NAFTA Increased distance between Cuba and U.S.

13. Where to Grow Internationally – GEOGRAPHIC DISTANCE • Geographic distance deals with how far apart trading • partners are in physical terms: the size of the • country, differences in climates, and nature of • transportation and information networks. • You can think of geographic distance as absolute, in • terms of the miles or kilometres that separate a • company from another market or supplier.

14. Where to Grow Internationally - ECONOMIC DISTANCE • Economic distance captures fundamental differences • relating to income, the distribution of wealth, and the • relative purchasing power of segments of a • geographic market. • Economic distance has been a major barrier to • companies that have been successful selling • products in developed markets that then want to • sell in emerging markets.

15. Nonequity vehicles • Equity (FDI) vehicles • Wholly OwnedSubsidiaries • Contractual Agreements • Alliances and Joint Ventures (JVs) • Exports • Greenfieldinvestments • Licensing/franchising • Direct exports • Minority JVs • Acquisition • Indirect exports • Turnkey projects • 50/50 JVs • Others • Others • Contracted R&D • Majority JVs • Comarketing How to Enter Foreign Markets - CHOICE OF ENTRY VEHICLES • Choice of entry vehicles Source: Adapted from Pan, Y. and D. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, 31 (2000), 535-545 Strategic alliances (within dotted areas)

16. Honda’s initial entry into the U.S. market • Bridgestone’s acquisition of U.S.-based Firestone • FDI through acquisition • FDI • Ford-MazdaGenentech-Hoffman LaRoche • Alliance • Exports • Champion International’s paper exports through independent brokers • KFC’s franchisees in India • Alliance and exports How to Enter Foreign Markets - VEHICLES FOR ENTERING FOREIGN MARKETS • 100% • Degree of ownership control overactivities per-formed in theforeign market • 0% • 100% 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

17. How to Enter Foreign Markets - EXPORTING OPTIONS • Most common option in relatively close markets and for productswith lower shipping costs • Direct Export • 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) • Licensing and franchising • A firm may enter Turnkey project agreements, R&D contracts, or co-marketing initiatives (e.g., a German firm Bayer AG contracts large R&D projects to a U.S. firm) • Specialagreements

18. U.S. firm • Chinese Firm • … so U.S. companies formed alliances to gain access How to Enter Foreign Markets - ALLIANCES AND JOINT VENTURES • Until recently, China did not allow non-Chinese companies in China … û

19. Foreigncompany • Localcompany • Home country/market How to Enter Foreign Markets - FOREIGN DIRECT INVESTMENT • Acquires • DaimlerChrysler and BMW each invested $250 million to start local factories in Brazil

20. How to Enter Foreign Markets - 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 • “Domestic”company • Home country • Customerservice • Country C • Logistics

21. How to Manage International Strategy Configurations - INTERNATIONAL STRATEGY CONFIGURATIONS AND LOCAL/GLOBAL TRADEOFFS • Relatively few opportunities to gainglobal efficiencies • Many opportunities togain global efficiencies • Relatively highlocalresponsiveness • Multinational visionBuild flexibility to respond to national differences 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 • Transnational visionDevelop 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-centre 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 lowlocalresponsiveness • International visionExploit 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 visionBuild 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)

22. Born – Global Companies • More and more firms, even young, small ones, have operations that bridge national borders. • Logitech • Founded by • R&D • Production • 30% ofglobal PC mouse busi-ness by1989 • 2 Italians • California • Ireland • 1 Swiss • Switzerland • Taiwan

23. Born – Global Companies - HOW TO SUCCEED AS A GLOBAL START-UP • If yes, Put together tools you will need to move into global market • Consider if you should be aglobal start-up • Do you need human resources from other countries to succeed? • Strong management team with inter-national experience • Do you need financial capital fromother countries to succeed? • Broad and deep international networkamong suppliers, customers,and complements • If you go global, will target customers prefer your services over competitor's? • Preemptive marketing or technology to provide first-mover advantage • Can you put an international system in place more quickly than domestic competitors? • Strong intangible assets • Do you need global scale and scope to justify the financial and human capital investment? • Ability to keep customers locked in by linking new products and services to core business while you innovate • Will a purely domestic focus now make it harder for you to go global in the future? • Close worldwide coordination and com-munication among business units, suppliers, complements and customers

24. International Strategy in Stable and Dynamic Contexts – GLOBAL CONTEXT AND INDUSTRY LIFE CYCLE • First-Mover Advantage • Staging and Geographic Markets • Role of Arenas in Global Strategies • Resources and Global Strategy • Capabilities and Global Strategy

25. International Strategy in Stable and Dynamic Contexts - DEVELOPING A GLOBAL MINDSET • 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 workforce • Global perspective • Global skills

26. Expatriates • From the home country • Inpatriates • From the local • or host country International Strategy in Stable and Dynamic Contexts - EXPATRIATES AND INPATRIATES