Creating Value beyond Borders

1. Creating Value beyond Borders Dr. Shalini R Tiwari IMT Ghaziabad

2. Opportunities and Outcomes of International Strategy

3. Identifying International Opportunities: Incentives to Use an International Strategy (IS) • International Strategy (IS): firm sells its goods or services outside the domestic market • Reasons for an IS • International markets yield potential new opportunities • International diversification: innovation occurs in home-country market, especially in an advanced economy, and demand for product develops in other countries, so exports provided by domestic organization • Multinational strategy: Secure need resources • Other motives exist (i.e., pressure for global integration, borderless demand for globally branded products)

4. Identifying International Opportunities: Incentives to Use an International Strategy (IS) (Cont’d) • Four primary reasons • 1. Increased market size • Domestic market may lack the size to support efficient scale manufacturing facilities • 2. Return on Investment (ROI) • Large investment projects may require global markets to justify the capital outlays • Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

5. Identifying International Opportunities: Incentives to Use an International Strategy (IS) (Cont’d) • Four primary reasons(Cont’d) • 3. Economies of Scale and Learning • Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D, or distribution • Costs are spread over a larger sales base • Profit per unit is increased • 4. Location advantages: Low cost markets may… • … aid in developing competitive advantage • … achieve better access to critical resources: • i.e., raw materials, lower cost labor, key customers, energy

6. International Strategies (IS) • Firms choose one or both of two basic type of IS: Business level and/or corporate level • International business-level strategy • Follows generic strategies of cost-leadership, differentiation, focused or broad • International corporate-level strategy (N=3) • Home country usually most important source of competitive advantage • Resources and capabilities frequently allow firm to pursue markets in other countries • The determinants of national advantage includes 4 factors

7. Determinants of National Advantage

8. International Corporate-Level Strategies

9. International Strategies (IS) (Cont’d) • International corporate-level strategies (N=3) (Cont’d) • 1. Multidomestic • Decentralized strategic & operating decisions by strategic business-unit (SBU) in each country allows units to tailor products to local markets • Focuses on variations of competition within each country • Customized products to meet local customers’ specific needs and preferences • Takes steps to isolate the firm from global competitive forces • Establish protected market positions • Compete in industry segments most affected by differences among local countries • Deals with uncertainty due to differences across markets

10. International Strategies (IS) (Cont’d) • 2. Global • Firm offers standardized products across country markets, with the competitive strategy being dictated by the home office • Emphasizes economies of scale • Facilitated by improved global reporting standards (i.e., accounting and financial) • Strategic & operating decisions centralized at home office

11. International Strategies (IS) (Cont’d) • 2. Global (Cont’d) • Involves interdependent SBUs operating in each country • Home office attempts to achieve integration across SBUs, adding management complexity • Produces lower risk • Is less responsive to local market opportunities • Offers less effective learning processes (pressure to conform and standardize)

12. International Strategies (IS) (Cont’d) • 3. Transnational • Firm seeks to achieve both global efficiency and local responsiveness – these are competing goals! • Requires both global coordination and local flexibility with this strategy/structure combination • Flexible Coordination: Building a shared vision and individual commitment through an integrated network • Challenging, but becoming increasingly necessary to compete in international markets • Growing number of global competitors heightens need to keep costs down while greater information flow and desire for specialized products pressures firms to differentiate and even customize products – nonetheless, • Increasingly used as a strategy

13. Environmental Trends • Transnational strategy hard to implement • Two new trends • 1. Liability of foreignness • Increased after terrorists’ attacks and Iraq War • Global strategies not as prevalent today, still difficult to implement even with Internet-based strategies • Regional focus allows firms to marshal resources to compete effectively in regional markets • 2. Regionalization • Focus to a particular region of the world • Increases understanding of market • Trade agreements (I.e., EU, OAS, NAFTA) promote flow of trade across country boundaries with their respective regions

14. International Entry Modes (N = 5) • Follows the selection of an IS • Five main entry modes • 1. Exporting • 2. Licensing • 3. Strategic Alliances • 4. Acquisitions • 5. New Wholly-Owned Subsidiary

15. International Entry Modes (N = 5) (Cont’d) • 1. Exporting • Involves low expense to establish operations in host country • Often involves contractual agreements • Involves high transportation costs • May have some tariffs imposed • Offers low control over marketing and distribution

16. International Entry Modes (N = 5) (Cont’d) • 2. Licensing • Involves low cost to expand internationally • Allows licensee to absorb risks • Has low control over manufacturing and marketing • Offers lower potential returns (shared with licensee) • Involves risk of licensee imitating technology and product for own use • May have inflexible ownership arrangement

17. International Entry Modes (N = 5) (Cont’d) • 3. Strategic Alliances • Involve shared risks and resources • Facilitate development of core competencies • Involve fewer resources and costs required for entry • May involve possible incompatibility, conflict, or lack of trust with partner • Are difficult to manage

18. International Entry Modes (N = 5) (Cont’d) • 4. Acquisitions • Allow for quick access to market • Involve possible integration difficulties • Are costly • Have complex negotiations and transaction requirements

19. International Entry Modes (N = 5) (Cont’d) • 5. New Wholly-Owned Subsidiary • Is costly • Involves complex processes • Allows for maximum control • Has the highest potential returns • Carries high risk

20. International Entry Modes (N = 5) (Cont’d) • Dynamics of Mode of Entry: Use the best suited to the situation at hand; affected by several factors • Export, licensing and strategic alliance: good tactics for early market development • Strategic alliance: used in more uncertain situations • Wholly-owned subsidiary may be preferred if • IP rights in emerging economy not well protected • Number of firms in industry is growing fast • Need for global integration is high • Acquisitions or greenfield ventures: secure a stronger presence in international markets

21. Strategic Competitive Outcomes (N = 3) • International diversification: firm expands sales of its goods or services across the borders of global regions and countries into different geographic locations or markets • Implementation follows selection of international strategy and mode of entry (N=3) 1. International diversification and returns 2. International diversification and innovation 3. Complexity of managing multinational firms

22. Strategic Competitive Outcomes (N = 3) (Cont’d) • 1. International diversification and returns • As international diversification increases, firms’ returns initially decrease, but the increase quickly as firm learns to manage international expansion • 2. International diversification and innovation • Exposure to new products and markets • Opportunity to integrate new knowledge into operations • Generation of resources to sustain innovation efforts

23. Strategic Competitive Outcomes (N = 3) (Cont’d) • 3. Complexity of managing multinational firms • Geographic dispersion • Costs of coordination • Logistical costs • Trade barriers • Cultural diversity • Host government

24. Risks in International Environment • 2 major risks • 1. Political • 2. Economic • Limits to international expansions: management problems

25. Risk in the International Environment

26. Risks in International Environment (Cont’d) • 1. Political risks • Government instability • Conflict or war • Government regulations • Conflicting and diverse legal authorities • Potential nationalization of private assets • Government corruption • Changes in government policies

27. Risks in International Environment (Cont’d) • 2. Economic risks • Differences and fluctuations in currency values • Investment losses due to political risks • Limits to international expansions: management problems • Geographic dispersion • Trade barriers • Logistical costs • Cultural diversity • Other differences by country • Relationship between organization and host country

28. The Quest for CompetitiveAdvantage in Foreign Markets • Three ways to gain competitive advantage 1.Locating activities among nations in ways that lowercosts or achieve greater product differentiation 2.Efficient/effective transfer of competitivelyvaluable competencies and capabilities fromcompany operations in one country to company operations in another country 3.Coordinating dispersed activities in ways a domestic-only competitor cannot

29. Locating Activities to Build aGlobal Competitive Advantage • Two issues • Whether to • Concentrate each activity in afew countries or • Disperse activities to manydifferent nations • Where to locate activities • Which country is best location for which activity?

30. Concentrating Activities to Builda Global Competitive Advantage • Activities should be concentrated when • Costs of manufacturing or other value chain activities are meaningfully lower in certain locations than in others • There are sizable scale economiesin performing the activity • There is a steep learning curve associatedwith performing an activity in a single location • Certain locations have • Superior resources • Allow better coordination of related activities or • Offer other valuable advantages

31. Dispersing Activities to Build aGlobal Competitive Advantage • Activities should be dispersed when • They need to be performed close to buyers • Transportation costs, scale diseconomies, ortrade barriers make centralization expensive • Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed

32. Transferring Valuable Competencies to Build a Global Competitive Advantage • Transferring competencies, capabilities, and resource strengths across borders contributes to • Development of broader competencies and capabilities • Achievement of dominating depth in some competitively valuable area • Dominating depth in a competitively valuable capability is a strong basis for sustainable competitive advantage over • Other multinational or global competitors and • Small domestic competitors in host countries

33. Coordinating Cross-Border Activities to Build a Global Competitive Advantage • Aligning activities located in different countries contributes to competitive advantage in several ways • Choose where and how to challenge rivals • Shift production from one location toanother to take advantage of most favorablecost or trade conditions or exchange rates • Use online systems to collect ideas for newor improved products and to determine whichproducts should be standardized or customized • Enhance brand reputation by incorporatingsame differentiating attributes in itsproducts in all markets where it competes

34. What Are Profit Sanctuaries? • Profit sanctuaries are countrymarkets where a firm • Has a strong, protected marketposition and • Derives substantial profits • Generally, a firm’s most strategicallycrucial profit sanctuary is its home market Profit sanctuaries are a valuablecompetitive asset in global industries!

35. Fig. 7.3: Profit Sanctuary Potential of Domestic-Only,International, and Global Competitors

36. What Is Cross-Market Subsidization? • Involves supporting competitive offensives in one market with resources/profits diverted from operations in other markets • Competitive power of cross-market subsidization results from a global firm’s ability to • Draw upon its resources and profits in other country markets to mount an attack on single-market or one-country rivals and • Try to lure away their customers with • Lower prices • Discount promotions • Heavy advertising • Other offensive tactics

37. Thank you!

38. Global Strategic Offensives Three Options • Attack a foreign rival’s profit sanctuaries • Approach places a rival on the defensive, forcing it to • Spend more on marketing/advertising • Trim its prices • Boost product innovation efforts • Take actions raising its costs and eroding its profits • Employ cross-market subsidization • Attractive offensive strategy for companies competing in multiple country markets with multiple products • Dump goods at cut-rate prices • Approach involves a company selling goods in foreign markets at prices • Well below prices at which it sells in its home market or • Well below its full costs per unit

39. Achieving GlobalCompetitiveness via Cooperation • Cooperative agreements with foreign companies are a means to • Enter a foreign market or • Strengthen a firm’s competitivenessin world markets • Purpose of alliances • Joint research efforts • Technology-sharing • Joint use of production or distribution facilities • Marketing / promoting one another’s products

40. Strategic Appeal of Strategic Alliances • Gain better access to attractive country markets from host country’s government to import and market products locally • Capture economies of scale in production and/or marketing • Fill gaps in technical expertise or knowledge of local markets • Share distribution facilities and dealer networks • Direct combined competitive energiestoward defeating mutual rivals • Take advantage of partner’s local marketknowledge and working relationships withkey government officials in host country • Useful way to gain agreement onimportant technical standards

41. Pitfalls of Strategic Alliances • Overcoming language and cultural barriers • Dealing with diverse or conflicting operating practices • Time consuming for managers in terms of communication, trust-building, and coordination costs • Mistrust when collaborating in competitively sensitive areas • Clash of egos and company cultures • Dealing with conflicting objectives, strategies, corporate values, and ethical standards • Becoming too dependent on another firm for essential expertise over the long-term

42. Characteristics of Competingin Emerging Foreign Markets • Tailoring products for big, emerging markets often involves • Making more than minor product changes and • Becoming more familiar with local cultures • Companies have to attract buyers withbargain prices as well as better products • Specially designed and/or speciallypackaged products may be needed toaccommodate local market circumstances • Management team must usually consistof a mix of expatriate and local managers

43. Strategic Options: How to Competein Emerging Country Markets • Prepare to compete on the basis of low price • Be prepared to modify aspects ofthe company’s business model toaccommodate local circumstances • Try to change the local market to better match the way the company does business elsewhere • Stay away from those emerging markets where it is impractical or uneconomic to modify the company’s business model to accommodate local circumstances

44. Fig. 7.4: Strategy Options for Local Companiesin Competing Against Global Challengers

45. Strategic Options for Local Companies:Use Home-Field Advantages • Concentrate on advantages enjoyed in the home market • Cater to customers who prefer a local touch • Accept loss of customers attracted to global brands • Astutely exploit its local orientation based on • Familiarity with local preferences • Expertise in traditional products • Long-standing customer relationships • Cater to the local market in ways thatpose difficulties for global rivals

46. Strategic Options for Local Companies:Transfer Expertise to Cross-Border Markets • When a local company trying to defend against a global challenger has resource strengths and capabilities suitable for competing in other country markets, then it should consider • Launching initiatives to transfer its expertise tocross-border markets • Becoming more of an international competitor • Such a move to enter foreign markets can help • Build a bigger customer base (to offset any losses in its home market) • Grow sales and profits • Put in a stronger position to contend with global challengers in its home market

47. Strategic Options for Local Companies: Dodging Rivalsby Shifting to a New Business Model or Market Niche • When industry pressures to globalize are high, viable strategic options for a local company trying to defend against global challengers in its home market include • Shifting the business to a piece of the industryvalue chain where the firm’s expertise/resourcesprovide a defendable position or maybe even a competitive advantage • Entering a joint venture with a globally competitive partner • Selling out to a global entrant into its home market

48. Strategic Options for Local Companies:Contend on a Global Level • If a local company has resources and capabilities that it can transfer to operations in other countries, it can launch a strategy aimed at • Entering markets of other countries as rapidly as possible • Shifting to a more globalized strategy • Building brand recognition and a brand image that extends to more and more countries • Gradually establishing the resources and capabilities to go head-to-head against large global rivals