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8: Chapter International Strategy Chapter 8 International Strategy KNOWLEDGE OBJECTIVES 1. Explain traditional and emerging motives for firms to pursue international diversification. 2. Identify the four major benefits of an international strategy. 3. Explore the four factors that provide a basis for international business-level strategies. 4. Describe the three international corporate-level strategies: multidomestic, global, and transnational. 5. Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization. 6. Name and describe the five alternative modes for entering international markets. 7. Explain the effects of international diversification on firm returns and innovation. 8. Name and describe two major risks of international diversification. CHAPTER OUTLINE Opening Case Entry into China by Foreign Firms and Chinese Firms Reaching for Global Markets IDENTIFYING INTERNATIONAL OPPORTUNITIES: INCENTIVES TO USE AN INTERNATIONAL STRATEGY Increased Market Size Return on Investment Economies of Scale and Learning Location Advantages INTERNATIONAL STRATEGIES International Business-Level Strategy International Corporate-Level Strategy Strategic Focus Country Conditions Spawn Successful High Tech Firms in Emerging Markets ENVIRONMENTAL TRENDS Liability of Foreignness Regionalization CHOICE OF INTERNATIONAL ENTRY MODE Exporting Licensing Strategic Alliances Acquisitions New Wholly Owned Subsidiary Dynamics of Mode of Entry STRATEGIC COMPETITIVE OUTCOMES International Diversification and Returns International Diversification and Innovation Complexity of Managing Multinational Firms RISKS IN AN INTERNATIONAL ENVIRONMENT Political Risks Economic Risks Limits to International Expansion: Management Problems Strategic Focus The Continuing Threat to Legitimate Companies from Counterfeit or Fake Products SUMMARY REVIEW QUESTIONS EXPERIENTIAL EXERCISES VIDEO CASE NOTES 8-1 Chapter 8: International Strategy LECTURE NOTES Chapter Introduction: This chapter examines opportunities facing firms as they seek to develop and exploit core competencies by diversifying into global markets. In addition, it addresses different problems, complexities, and threats that might accompany use of the firms international strategies. Although national boundaries, cultural differences, and geographical distances all pose barriers to entry into many markets, significant opportunities draw businesses into the international arena. A business that plans to operate globally must formulate a successful strategy to take advantage of these global opportunities. Furthermore, to mold their firms into truly global companies, managers must develop global mind-sets. Especially in regard to managing human resources, traditional means of operating with little cultural diversity and without global sourcing are no longer effective. These themes are all emphasized in the chapter. OPENING CASE Entry into China by Foreign Firms and Chinese Firms Reaching for Global Markets Over the years foreign firms have opted to operate in the Chinese market because it is so large and potentially lucrative. Firms that manufacture in China often have significant cost advantages. Both of these reasons have lured automobile firms to China. General Motors has a successful venture with Shanghai Automotive Industry Corporation (SAIC) and is seeking to extend its presence in China by entering into new ventures with other firms. SAIC also have a joint venture with Volkswagen. Another GM partner in China, Liuzhous Wuling Motors Co., is planning to develop its own vehicles. Because the U.S. and other mature auto markets elsewhere in the world have experienced recent declines as a result of the global recession which began in 2008, the Chinese market is becoming increasingly important. For example, Porsche expects to sell more vehicles in China in 2009 than in the U.S. The Chinese market is also important to service providers. Google has partnered with the four largest music labels to try to take business from the Chinese firm Baidu. Some Chinese firms actually compete more effectively in foreign markets than in their home markets. Huawei Technologies Bo. Ltd. is making inroads into the U.S. market for telelcom equipment. It has also become a major vendor in Europe. Huawei and another firm competing better away from home, ZTE, are strong players in wireless networks. These companies have government support for new wireless technologies and are deeply undercutting competitors prices and now are beating out their old rivals around the world including China. In addition, these firms have access to large credit lines from stateowned Chinese banks and low cost land which allows them pricing flexibility and the ability to operate on low margins. Chinese firms continue to develop resources and capabilities that allow them to create value for their customers and earn above-average returns. Have students look at the benefits that influence firms to use international strategies and identify which ones are prompting companies (from different countries) to engage in global business. Discuss why so many firms use a strategic alliance when operating internationally. Do you think this situation is likely to change in the future? Why or why not? Although national boundaries, cultural differences, and geographical distances all pose barriers to entry into many markets, significant opportunities draw businesses into the international arena. Global firms must formulate a successful strategy to take advantage of international opportunities. Managers must develop global mind-sets. Operating with little cultural diversity and without global sourcing is no longer effective. 8-2 Chapter 8: International Strategy Global firms must develop relationships with suppliers, customers, and partners, and then learn from these. Figure Note: Figure 8.1 provides an overview of the various choices and outcomes of strategic competitiveness. FIGURE 8.1 Opportunities and Outcomes of International Strategy The following opportunities and outcomes of international strategy are illustrated in Figure 8.1: Firms should first identify international opportunities related to increasing market size, return on investment, economies of scale and learning, and location-related advantages. Once international opportunities have been identified, firms must develop international strategies based on firm resources and capabilities. A mode of entry should be selected to take advantage of the firms core competencies. A firms ability to realize strategic competitiveness is tempered by managements ability to manage effectively and efficiently a complex organization with locations in multiple countries and the economic and political risks that accompany firm internationalization. The strategic outcomes from the process can include better performance and more innovation. 1 Explain traditional and emerging motives for firms to pursue international diversification. IDENTIFYING INTERNATIONAL OPPORTUNITIES: INCENTIVES TO USE AN INTERNATIONAL STRATEGY International strategy refers to selling products in markets outside of the firms domestic market to expand the market for their products. This is explained by Vernons adaptation of the product life cycle concept formulated to explain internationalization. 1. A firm introduces an innovation (new product) in its domestic market. 2. Product demand develops in other countries and exports are provided from domestic operations. 3. As demand increases, foreign rivals produce the product; then, firms justify investing in production abroad. 4. As products become standardized, firms relocate production to low-cost countries. Some firms implement an international strategy to secure critical resources, such as petroleum reserves (for the oil industry), bauxite (for the manufacture of aluminum), or rubber (for tire manufacturing). Traditional motives persist, but other emerging motives also drive international expansion. Pressure has increased for global integration of operations, driven mostly by universal product demand. In some 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. New large-scale, emerging markets, such as China and India, provide a strong internationalization incentive because of the potential demand in them. Companies seeking to expanding operations in Europe, as elsewhere, need to understand the pressure on them to respond to local, national, or regional customs, especially where goods or services require customization because of cultural differences or effective marketing to entice customers to try a different product. Firms adapt products to local tastes as they move into new national markets. Local repair/service capabilities are another factor that increases desire for local country responsiveness. Transportation costs of large products and their parts may preclude a firms suppliers from following the firm into an international market. 8-3 Chapter 8: International Strategy Employment contracts and labor forces differ. Host governments demand joint ownership and frequently require a high percentage of local procurement, manufacturing, and R&D. These issues increase the need for local investment. Accompanying these traditional and emerging reasons for international expansion, other opportunities available to firms through an international strategy include: increasing the size of potential markets achieving greater returns on capital and/or investment in new product/process developments gaining economies of scale, scope, or learning gaining location-based competitive advantage Teaching Note: Firms expanding into international markets must recognize that many countries have characteristics that are unique and may differ significantly from the traditional European markets into which U.S. firms have expanded. Thus, firms must recognize this and: be capable of managing multiple riskse.g., financial, economic, political risks be aware of increased pressure for local country or regional responsiveness, especially where cultural differences require customization of goods or services weigh the potential advantages of enhancing the firms strategic competitiveness relative to the costs of meeting managerial challenges and product/geographic diversification requirements in international markets Increased Market Size Expanding internationally enables firms to increase greatly the size of the potential market for their products. This may be of critical importance if the domestic market is too small to support scale-efficient manufacturing facilities (e.g., the pharmaceutical firms push into China). The size of a particular international market affects a firms willingness to invest in R&D to build advantages in that market, with larger markets tending to provide higher returns and lower risk. The strength of the science base in a country also can affect a firms foreign R&D investments, so most firms prefer to invest more heavily in those countries with the scientific knowledge and talent that produce more effective new products and processes from their R&D. Return on Investment When firms make large investments in such items as plants and equipment and/or research and development, they may need to search beyond their domestic market to be able to earn an adequate return on their investment. Teaching Note: To illustrate, aircraft manufacturersBoeing and Airbus Industries (a European entity)must be able to sell in international as well as domestic markets if they are to be strategically competitive and achieve satisfactory returns on their enormous investment. As the pace of technology development acceleratesand products become obsolete much fasterfirms must be able to recoup R&D investments as quickly as possible. Teaching Note: This may be a good place to discuss reverse engineering. Reverse engineering is where a firm takes apart a competing product, learns the technology, and then develops a similar product that mirrors or imitates the new technology and successfully meets 8-4 Chapter 8: International Strategy customer preferences. In other words, imitation and reverse engineering may shorten the time during which an innovative firm can profit from its innovation. Because of this, innovative firms often seek international markets so that they can increase their opportunities to recoup significant capital investment and R&D expenditures. Economies of Scale and Learning By expanding the size and scope of their markets, firms may be able to achieve economies of scale in manufacturing (and in other operations, such as marketing, research and development, and distribution) by standardizing products across national borders and spreading fixed costs over a larger sales base. Teaching Note: Economies of scale are critical in the global auto industry. Honda has been a largely successful firm with substantial competencies in the manufacture of engines; however, it has sometimes struggled to compete against larger and more resource-rich auto makers (e.g., Ford and GM). To have a chance to survive, Honda achieved economies of scale in the development and application of its engines (e.g., by providing engines for many applications [e.g., lawnmowers, weed trimmers, snowmobiles] and forming an alliance with GM to produce engines). Thus, Honda may excel as an independent engine manufacturer. Firms may also be able to exploit core competencies in international markets through resource and knowledge sharing between units across country borders. This sharing generates synergy, which helps the firm produce higher-quality goods or services at lower cost. In addition, working across international markets provides the firm with new learning opportunities. Location Advantages Firms also may be able to achieve a comparative advantage and lower the basic costs of their products by locating facilities in low-cost markets for critical raw materials, cheap labor, key suppliers, energy, customers, and/or natural resources. Teaching Note: The large and unified market of the European Union is attracting considerable investment from international companies, and European markets and firms are undergoing substantial changes to take advantage of the economies of scale, potential learning, and advantages of location. The common currency and integration of capital markets have reduced financial risks and made available significant amounts of capital that were previously unavailable in the separate country markets. (This may be a good place to discuss the euro and its impact on global business.) Other factors that may impact location advantages are as follows: the needs of intended customers, cultural influences (if there is a strong match between the cultures involved, the liability of foreignness is lower than if there is high cultural distance), regulation distances which influence the ownership positions of multinational firms as well as their strategies for managing expatriate human resources. 8-5 Chapter 8: International Strategy INTERNATIONAL STRATEGIES International strategies available to firms are business-level and corporate-level (cf. Chapters 4 and 6). Business-level strategy choices are generic, extending our earlier discussion of cost leadership, differentiation, focus, and integrated cost leadership/differentiation strategies. Corporate-level strategies are dependent on the complexity and scope of product and geographic diversification, and these include multidomestic, global, and transnational (hybrid) strategies. 2 Explore the four factors that provide a basis for international business-level strategies. International Business-Level Strategy Each business must develop a competitive strategy focused on its own domestic market. Business-level generic strategies are discussed in Chapter 4, but international business-level strategies have some unique features. In an international business-level strategy, the home country of operation is often the most important source of competitive advantage. The resources and capabilities established in the home country frequently allow the firm to pursue the strategy into markets located in other countries. As a firm continues its growth into multiple international locations, research indicates that the country of origin diminishes in importance as the dominant factor. Figure Note: Porters Diamond of Advantage model can be used to introduce the discussion of Figure 8.2. FIGURE 8.2 Determinants of National Advantage As Figure 8.2 illustrates, four interrelated national or regional factors contribute to the competitive advantage of firms competing in global industries. Factor conditions or the factors of production Demand conditions Related and supporting industries Firm strategy, structure, and rivalry Note: Each of these factors is discussed in the following section. Perhaps the most basic factor in the model, factor conditions or factors of production, refers to the inputs necessary to compete in any industry. These include such factors as labor, land, natural resources, capital, and infrastructure (such as highway, postal, and communications systems). These factors can be subdivided into four categories: Basic factors, such as labor and natural resources Advanced factors, including digital communications systems and highly-educated work forces Generalized factors (required by all industries), such as highway systems and a supply of capital Specialized factors that are most valuable in specific uses (e.g., skilled personnel employed at a port who specialize in the handling of bulk chemicals) Nations having both advanced and specialized factors are likely to be characterized by growth in new firms that are strong global competitors. 8-6 Chapter 8: International Strategy Ironically, countries often develop advanced and specialized factors because they lack critical basic resources. Some Asian countries, such as South Korea, lack abundant natural resources but offer a strong work ethic, a large number of engineers, and systems of large firms to create expertise in manufacturing. Germany developed a strong chemical industry, partially because Hoechst and BASF spent years creating a synthetic indigo dye to reduce their dependence on imports, unlike Britain, whose colonies provided large supplies of natural indigo. The second factor that determines national advantage is demand conditions, which are characterized by the nature and size of buyers needs in the home market for the industrys products or services. The size of the segment can create demand sufficient to justify the construction of scale-efficient facilities. Related and supporting industries are the third factor of the national advantage model. National firms may be able to develop competitive advantage when industries that provide either materials or components, or that support the activities of the primary industry are present. Italian firms are world leaders in the shoe industry because of the related and supporting industries present in Italy (e.g., a mature leather processing industry and design and manufacture of leather-working machinery). In Japan, copiers and cameras are related, as are cartoon, consumer electronics, and video game industries. Growth in certain industries is fostered by the fourth factorfirm strategy, structure, and rivalry. As expected, patterns of firm strategy, structure, and competitive rivalry among firms in an industry vary between nations. In Italy, the national pride of the countrys designers has spawned strong industries in sports cars, fashion apparel, and furniture. In the United States, competition among computer manufacturers and software producers has favored the development of these industries. As described, the four basic factors of Porters Diamond of Advantage model emphasize the impact or influence of the environmental or structural attributes of a nations economy that may contribute to a national advantage for its firms in specific industries. In spite of the presence of the four factors and government support, the factors leading to national advantage are likely to result in a firm achieving competitive advantage only when the firm develops and implements strategies that enable it to take advantage of country-specific factors. STRATEGIC FOCUS Country Conditions Spawn Successful High Tech Firms in Emerging Markets SunTech Power Holdings is a Chinese firm that manufactures solar panels in China for the world market. Its biggest markets are in Europe with German companies providing the most revenues. Estimates of solar panel production for 2009 indicate that 11.1 gigawatts of panels, a 62 percent increase from 2008, will result in significant industry overcapacity. As a result of this and the global recession, Sun Techs expansion plans have been put on hold. Sun Techs beg advantage comes from low-cost production systems. Its goal is to achieve grid parity which means the cost of producing solar energy will be the same as energy produced from fossil fuels. Currently Sun Tech produces energy at $.35 per kilowatt (grid parity is at $.14 per kilowatt). Still, the company is optimistic that new collection technologies and low cost manufacturing can make grid parity a reality. In addition, the company is hopeful that Obama administration policies (subsidies) will spur demand for solar energy. Yandex is Russias largest online search company the equivalent of Google in the U.S. It has two-thirds of all of the revenue from search ads in Russia and has three billion hits a month. While it realizes a dominant position at present, Yandex understand the importance of ongoing innovation. It has opened up a lab close to Google headquarters and is intent on staying abreast of technological developments. Yahoo!, Microsoft, and Google have all made offers to acquire the company but so far it has turned down all suitors. Russia has the fastest growing internet market in Europe and Yandex is well-positioned in it. The company is focused on continued success and possibly even becoming a formidable competitor in the U.S. 8-7 Chapter 8: International Strategy Both the Chinese and Russian markets continue to develop at a rapid pace. In these markets, however, world-class companies are emerging. This strategic focus allows students to look at the success of Sun Tech and Yandex from the perspective of National Advantage, which is discussed in the chapter. In addition, students should be encouraged to explore the international strategies that these firms are using by employing the international corporate strategies discussed in the chapter. Ask students to identify and discuss which international strategy each firm is using and why they think the firm made the choice that it did. 3 Define the three international corporate-level strategies: multidomestic, global, and transnational. International Corporate-Level Strategy The type of corporate-level strategy adopted by a firm will have an impact on the selection and implementation of its international business-level strategy. Some corporate-level strategies provide individual country units with the flexibility to develop country-specific strategies, while others dictate all country business-level strategies from the home office and coordinate activities across units for the purposes of resource-sharing and product standardization. International corporate-level strategy can be distinguished from international business-level strategy by the scope of operations, in terms of both product and geographic diversification. Figure Note: The three types of international corporate-level strategies are illustrated in Figure 8.3, while relationships between structural arrangements and strategy type will be discussed further in Chapter 11. FIGURE 8.3 International Corporate Strategies As Figure 8.3 illustrates, a firm should choose its international corporate strategy based on the need for both local responsiveness and for global integration. When the need for global integration is high and there is little need for local market responsiveness, the firm should adopt a global strategy. When the need for global integration is low, but there is great need for local market responsiveness, the firm should adopt a multidomestic strategy. When there is a great need for both global integration and local market responsiveness, the firm should adopt a transnational strategy. Multidomestic Strategy Multidomestic strategy is one where strategic and operating decisions are decentralized to the strategic business unit in each country in order to tailor products and services to the local market. The multidomestic strategy: assumes business units in different countries are independent of one another contends that markets differ and can be segmented by national borders focuses on competition within each country suggests products and/or services can be customized to meet individual markets needs or preferences assumes economies of scale are not possible because of demand for market-specific customization 8-8 Chapter 8: International Strategy Teaching Note: A few years back, Sonys entertainment business changed its strategy from global to multidomestic when it decided to produce films and television programs for local markets around the world through production facilities and television channels in most larger Latin American and Asian countries. In 1999, Sony produced approximately 4,000 hours of foreign-language programs and about 1,700 hours of English-language programs. Sony now has more than 24 channels operating across 62 countries, and some of these channels are highly successful. The use of multidomestic strategies: usually expands the firms local market share because the firm can pay attention to the needs of local buyers results in more uncertainty for the corporation as a whole, because of the differences across markets and thus the different strategies employed by local country units does not allow for the achievement of economies of scale and can be more costly decentralizes a firms strategic and operating decisions to the business units operating in each country Global Strategy A global strategy is one where standardized products are offered across country markets and competitive strategy is dictated by the home office. The global strategy: assumes strategic business units operating in each country are interdependent attempts to achieve integration across businesses and national markets, as directed by the home office emphasizes economies of scale offers greater opportunities to use innovations developed at home or in one country in other markets often lacks responsiveness to local market needs and preferences is difficult to manage because of the need to coordinate strategies and operating decisions across borders requires resource-sharing and an emphasis on coordination across national borders Teaching Note: U.K.-based temporary energy provider, Aggreko, operates in 48 countries and employs a global strategy. The firms fleet of equipment is integrated globally, which allows it to shift equipment to different regions of the world to meet specific needs. Its global strategy also allows Aggreko to design and assemble its equipment in-house to meet the needs of its customers. Cemex: A Mini-Case Cemex is the third largest cement company in the world behind Frances Lafarge and Switzerlands Holcim and the largest producer of Ready-mix, a prepackaged product that contains all the ingredients needed to make localized cement products. In 2005, Cemex acquired RMC for $4.1 billion. RMC is a large U.K. cement producer with two-thirds of its business in Europe. Cemex was already the number one producer in Spain through its acquisition of a Spanish company in 1992. In 2000 Cemex acquired Southdown, a large manufacturer in the U.S. Accordingly, Cemex has strong market power in the Americas as well as in Europe. Because Cemex pursues a global strategy effectively, its integration of its centralization process has resulted in a quick payoff for its merger integration process. To integrate its businesses globally, Cemex uses the Internet as one way of increasing revenue and lowering its cost structure. By using the Internet to improve logistics and manage an extensive supply network, Cemex can significantly reduce costs. Connectivity between the operations in different countries and universal standards dominate its approach. 8-9 Chapter 8: International Strategy Transnational Strategy A transnational strategy is a corporate strategy that seeks to achieve both global efficiency and local (national market) responsiveness. It is difficult to achieve because of requirements for both strong central control and coordination to achieve efficiency and local flexibility and decentralization to achieve local responsiveness. A transnational strategy mandates building of a shared vision and individual commitment through an integrated network to produce a core competence that would result in strategic competitiveness (that competitors would find difficult to imitate). Effective implementation of a transnational strategy often produces higher performance than does implementation of either the multidomestic or global international corporate-level strategies. Teaching Note: Students sometimes find the transnational strategy difficult to grasp. This has prompted some to refer to this option as an idealized form, suggesting that this it not possible to achieve in reality. This also suggests, however, that this model represents a worthy goal for the international firm. It is worth asking students if they believe it will ever be possible to be truly transnational and ask what would be needed to make this a reality. Teaching Note: Refer back to Figure 8.3 to summarize relationships between the need for global integration and local responsiveness and international corporate-level strategies. Teaching Note: DaimlerChrysler employed a transnational strategy to design and manufacture The Crossfire, a product that was introduced in 2003 and features a sleek Chrysler design, but 40 percent of its components are from Mercedes Benz. This global integration has facilitated lower costs for the vehiclecomponents already engineered were adapted from elsewhere and design enhancements produced an attractive car for the U.S. market. 4 Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization. ENVIRONMENTAL TRENDS Implementing a transnational strategy is difficult; however, firms are challenged to do so because of these facts: There is an increased emphasis on local requirements e.g., customization to meet government regulations within particular countries or to fit customer tastes and preferences. Most multinational firms desire coordination and sharing of resources across country markets to hold down costs. Some products and industries may be more suited than others for standardization across country borders. Liability of Foreignness Research shows that firms may focus less on truly global strategies and more on regional adaptation. Even Internet-based strategies now require local adaptation. 8-10 Chapter 8: International Strategy Lands End Adjusts to the Liability of Foreignness: A Mini-Case The globalization of businesses with local strategies is demonstrated by the online operation of Lands' End, Inc. (now owned by Sears), which uses local Internet portals to offer its products for sale. Lands End, formerly a direct-mail catalog business, launched its Web-based business in 1995. The firm established Websites in the U.K. and Germany in 1999, and in France, Italy, and Ireland in 2000all of this prior to initiating a catalog business in those countries. Not only are catalogs very expensive to print and mail outside the United States, but they also must be sent to the right people, and buying mailing lists is expensive. With limited online advertising and word-of-mouth, a Website business can be built in a foreign country without a lot of initial marketing expenses. Once the online business is large enough, a catalog business can be launched with mailing targeted to customers who have used the business online. Sam Taylor, vice president of international operations for Lands End, indicated that the firm has a centralized Internet team (handling development, design, etc.) at the home office, but a local presence is also needed. So the firm hired local Internet managers, designers, marketing support, and so on, to gain insight into the nuances of local markets. He also explained that each additional Website was cheaper to implement. For example, to set up the Websites for Ireland, France, and Italy, the firm cloned the U.K. site and partnered with Berlitz for French and Italian translations. This made the process cheaperi.e., 12 times less than the U.K. site for France and 16 times less for Italy. Lands End now gets 16 percent of its total revenues from Internet sales and ships to 185 countries, primarily from its Dodgeville, Wisconsin, corporate headquarters. This shows that smaller companies can sell their goods and services globally when facilitated by electronic infrastructure without having significant (brick-and-mortar) facilities outside of their home location. But significant local adaptation is still needed in each country or region. Regionalization A firm competing in international markets must decide whether to compete in all (or many) world markets or to focus its efforts on a specific region or regions. Competing in many markets may enable the firm to achieve economies of scale because of the size of the combined markets, but only if customer preferences in multiple markets do not differ significantly. If customer preferences vary significantly among national markets, a firm might be better served by narrowing its focus to a specific region. A regional focus may enable the firm to better understand cultures, legal and social norms, and other factors that may be important to achieving strategic competitiveness. Teaching Note: At this point, it might useful to draw a parallel between competing in multiple national markets and owning businesses in multiple industries. Firms may be better positioned by focusing on a specific region where markets are more similar, thus allowing a degree of integration and resource sharing. In Chapter 7, a similar comment was made regarding disadvantages that often accompany overdiversification and the prescribed downscoping to refocus the firm more on related, as opposed to, unrelated diversification. Regional strategies also are being promoted by groups of countries that have developed trade agreements to enhance the economic power of a region. Examples include the following: Membership in the European Union (EU) is limited to Western European countries, but it is being expanded to include other Western European countries as well as countries in Central and Eastern Europe. 8-11 Chapter 8: International Strategy The North American Free Trade Agreement (NAFTA) is an integration designed to facilitate trade among the U.S., Canada, and Mexico (and it may be expanded to include some South American countries). South Americas Organization of American States (OAS) is a system of country associations that developed trade agreements to promote the flow of trade across country boundaries within their respective regions. CAFTA is a U.S. trade agreement with Central American nations that is designed to reduce tariffs with five countries in Central America plus the Dominican Republic in the Caribbean Sea. Teaching Note: The movement of investment funds has not been only from the U.S. to Mexico as Mexican investors have made significant investments in the U.S., and some European firms have invested in Canada to gain access to this unified market. Most firms enter regional markets sequentially, beginning in markets with which they are more familiar. And they introduce their largest and strongest lines of business into these markets first, followed by their other lines of business once the first lines are successful. They also usually invest in the same area as their original investment location. 5 Name and describe the five alternative modes for entering international markets. CHOICE OF INTERNATIONAL ENTRY MODE Firms have a variety of alternative means of expanding internationally as indicated in Table 8.1. Table Note: Students can refer to Table 8.1 as you discuss each of the modes of entry into international markets. TABLE 8.1 Global Market Entry: Choice of Entry Mode Table 8.1 presents five alternative entry modes available to firms for international expansion: exporting licensing strategic alliances acquisition new, wholly owned subsidiary (greenfield venture) The next section of this chapter discusses characteristics of each mode, including cost/control trade-offs. Exporting A commonbut not necessarily the least costly or most profitableform of international expansion is for firms to export products from the home country to other markets. Exporters have no need to establish operations in other countries. Exporters must establish channels of distribution and outlets for their goods, usually by developing contractual relationships with firms in the host country to distribute and sell products. However, exporting also has disadvantages: 8-12 Chapter 8: International Strategy Exporters may have to pay high transportation costs. Tariffs may be charged on products imported to the host country. Exporters have less control over the marketing and distribution of their products. Because of the potentially significant transportation costs and the usually greater similarity of geographic neighbors, firms often export mostly to countries that are closest to its facilities. Small businesses are the most likely to use exporting. One of the largest problems with which small businesses must deal is currency exchange rates, a challenge for which only large businesses are likely to have specialists. Licensing Through licensing, a firm authorizes a foreign firm to manufacture and sell its products in a foreign market. The licensing firm (licensor) generally is paid a royalty payment on every unit that is produced and sold. The licensee takes the risks, making investments in manufacturing and paying marketing/distribution costs. Licensing is the least costly (and potentially the least risky) form of international expansion because the licenser does not have to make capital investments in the host countries. Licensing is a way to expand returns based on previous innovations, even if product life cycles are short. Teaching Note: Counterfeiting is one risk to licensing strategies. Sony and Philips codesigned the audio CD. In the past, they licensed the rights to companies to make CDs and Sony and Philips collected 5 cents for every CD sold. However, the returns to Sony and Philips from CD sales were threatened by cheap counterfeit disks. Sales of counterfeit disks in China alone are estimated to exceed $1 billion annually. The costs or potential disadvantages of licensing include the following: The licensing firm has little control over manufacture and distribution of its products in foreign markets. Licensing offers the least revenue potential as profits must be shared between licensor and licensee. The licensee can learn the firms technology and, upon license expiration, may create a competing product. Strategic Alliances Strategic alliances enable firms to: share the risks and resources required to enter international markets facilitate the development of new core competencies that yield strategic competitiveness Most strategic alliances represent ventures between a foreign partner (which provides access to new products and new technology) and a host country partner (which has knowledge of competitive conditions, legal and social norms, and cultural idiosyncrasies that will enable the foreign partner to successfully manufacture or develop and market a competitive product or service in the host country market). Strategic alliances also present potential problems and risks due to (1) selection of incompatible partners and (2) conflict between partners. Several factors may cause a relationship to sour. Trust between the partners is critical and is affected by a number of fundamental issues: the initial condition of the relationship the negotiation process to arrive at an agreement partner interactions external events the country cultures involved in the alliance or joint venture 8-13 Chapter 8: International Strategy Note: Strategic alliances will be covered in much greater depth in Chapter 9. Teaching Note: British Telecommunications planned to create a virtual shopping mall in Spain through its joint venture with Banco Popular, a retail-focused Spanish bank. The two firms jointly developed a Website for business-to-business transactions. They were to use BTs portal in Spain to develop a client base of small and medium size businesses. BT would provide the common portal free of charge for the first year and Banco Popular would charge only a nominal commission for brokering sales. Research suggests that alliances are more favorable when uncertainty is high and where cooperation is needed to access knowledge dispersed between partners and where strategic flexibility is important; acquisitions work best in situations with less need for flexibility and when the transaction supports economies of scale or scope. Acquisitions Cross-border have acquisitions also been increasing significantly. In recent years, cross-border acquisitions have comprised more than 45 percent of all acquisitions completed worldwide. As explained in Chapter 7, acquisitions can provide quick access to a new market. In fact, acquisitions may provide the fastest and often the largest initial international expansion of any of the alternatives. Beyond the disadvantages previously discussed for domestic acquisitions (Chapter 7), international acquisitions also can be quite expensive (because of debt financing) and require difficult and complex negotiations due to: the same disadvantages as domestic acquisitions the great expense which often requires debt financing the exceedingly complex international negotiations for acquisitionse.g., only about 20 percent of the cross-border bids made lead to a completed acquisition, compared to 40 percent for domestic acquisitions different corporate cultures the challenges of merging the new firm into the acquiring firm, which often are more complex than with domestic acquisitionsi.e., different corporate culture, but also different social cultures and practices Teaching Note: Emphasize that firms often use multiple entry strategies. For example, WalMart has used multiple entry strategies as it globalizes its operations, ranging from joint ventures in China and Latin America to acquisitions in Germany and the U.K. New Wholly Owned Subsidiary Firms that choose to establish new, wholly owned subsidiaries are said to be undertaking a greenfield venture. This is the most costly and complex of all international market entry alternatives. The advantages of establishing a new wholly-owned subsidiary include: achieving maximum control over the venture being potentially the most profitable alternative (if successful) maintaining control over the technology, marketing, and distribution of its products While the profit potential is high, establishing a new wholly-owned subsidiary is risky for two reasons: This alternative carries the highest costs of all entry alternatives as a firm must build new manufacturing facilities, establish distribution networks, and learn and implement the appropriate marketing strategies. 8-14 Chapter 8: International Strategy The firm also may have to acquire knowledge and expertise that is relevant to the new market, often having to hire host country nationals (in many cases from competitors) and/or costly consultants. Dynamics of Mode of Entry The choice of a market entry strategy is determined by a number of factors. However, initial market development strategies generally are selected to establish a firms products in the new market. Exporting does not require foreign manufacturing expertise; it only requires an investment in distribution. Licensing also can facilitate direct market entry by enabling the firm to learn the technologies required to improve its products in order to achieve success in international markets or to facilitate direct entry. Strategic alliances are also popular because the firm forms a partnership with a firm that is already established in the new target market and reduces risks by sharing costs with the partner. Firms interested in establishing a stronger presence (in most instances, in the later stages of the firms international diversification strategy) and in controlling technology, marketing, and distribution adopt riskier, more costly entry strategies, such as acquisitions or greenfield returns. However, the entry strategy should be matched to the particular situation. In some cases, a firm may pursue entry strategies in sequential orderbeginning with exporting and ending with greenfield ventures. The entry mode decision should be based on the following conditions: the industrys competitive conditions the target countrys situation government policies the firms unique set of resources, capabilities, and core competencies 6 Explain the effects of international diversification on firm returns and innovation. STRATEGIC COMPETITIVE OUTCOMES Once its international strategy and mode of entry have been selected, the firm turns its attention to implementation issues (see Chapter 11). It is important to do this because international expansion is risky and may not result in a competitive advantage (see Figure 8.1). The probability the firm will achieve success by using an international strategy increases when that strategy is effectively implemented. International Diversification and Returns Recall that in Chapter 6, the discussion centered on product diversification where a firm manufactures and sells a diverse variety of products. Based on the advantages discussed earlier, international diversification should be positively related to firm performance. Research has shown that, as international diversification increases, firms returns decrease and then increase as firms learn to manage international expansion. There are several reasons for the positive relationship between international diversification and performance. Potential advantages from economies of scale and experience Location advantages Increased market size The potential to stabilize returns 8-15 Chapter 8: International Strategy International Diversification and Innovation As mentioned in Chapter 1, developing new technology is critical to strategic competitiveness. In fact, Porter indicates that a nations competitiveness depends on the innovativeness of its industries and that firms achieve strategic competitiveness in international markets through innovation (see Figure 8.2). As stated earlier in this chapter, one of the advantages of international expansion is having larger potential markets. Larger markets allow firms to achieve greater returns on innovation, which yields lower R&D-related risk. Thus, international diversification provides firms with incentives to innovate. A complex relationship exits among international diversification, innovation, and performance. This leads, in fact, to the following circular relationship: Some level of performance is necessary to provide the resources required to diversify internationally. International diversification provides incentives (advantages) to firms to invest in R&D (innovation). If done properly, R&D and the resulting innovations should improve firm performance. Improved performance provides resources for continued international diversification and investments in R&D innovation. It also is possible that international diversification may result in improved returns for product-diversified firms (referred to as unrelated diversification) by increasing the size of the potential market for each of the firms products. But managing a firm that is both product and internationally diversified is very complex. Cultural diversity may enable a firm to compete more effectively in international markets. Culturally diverse top management teams often have a greater knowledge of international markets. An in-depth understanding of diverse markets among top-level managers facilitates inter-firm cooperation, the use of strategically relevant, long-term criteria to evaluate managerial and business unit performance, and improved innovation and performance. Complexity of Managing Multinational Firms Managers of internationally diversified firms face a number of complex challenges. Firms face multiple risks from being in several countries. Firms can grow only so large before they become unmanageable. The costs of managing large diversified firms may outweigh the benefits of diversification. Global markets are highly competitive. Firms must understand and effectively deal with multiple cultural environments. Systems and processes must exist to manage shifts in the relative values of multiple currencies. Firms must scan the environment to be prepared for potential government instability. 7 Name and describe two major risks of international diversification. RISKS IN AN INTERNATIONAL ENVIRONMENT Political and economic risks complicate the management of international diversification. One reason is that these risks result in competitive conditions that may differ significantly from what was expected. Examples of political and economic risks related to international diversification are listed in Figure 8.4. Figure Note: Be sure to note any developments in the international risk situations noted in Figure 8.4 as well as the emergence of significant new issues. 8-16 Chapter 8: International Strategy FIGURE 8.4 Risk in the International Environment This figure presents some specific examples of political and economic risks that multinational firms face. Political Risks Political risks are those related to instability in national governments and to war, civil or international. Teaching Note: For a useful way of identifying the political risk associated with different countries, see the map on page 105 of Small Business Management: An Entrepreneurial Emphasis, by Longenecker, Moore, Petty, and Palich (2006, SWCP). National government instability creates multiple potential problems for internationally diversified firms. Economic risks come up as governments react to a variety of events, reflected in uncertainty in terms of: economic risks and uncertainty created by government regulation existence of many, possibly conflicting, legal authorities or corruption the potential nationalization of private assets Teaching Note: A number of national governments attempt to minimize political risk (to themselves) by requiring that a significant portion of profits from investments be reinvested only in that country (to achieve economic stability, which can reduce probability of political instability). Economic Risks Economic risks are interdependent with political risks; however, some economic risks are specific to international diversification. For example, differences and fluctuations in the value of the different currencies are a primary concern to internationally diversified firms. For U.S. firms, the value of international assets, liabilities, and earnings are affected by the value of the dollar relative to other currencies (e.g., as the dollar value increases, the value of foreign assets decreases). The value of the dollar may make U.S. firms exports uncompetitive in international markets because of price differentials (and, in turn make imports from other countries more attractive to U.S. customers). 8 Explain why the positive outcomes from international expansion are limited. Limits to International Expansion: Management Problems As mentioned before, firms generally earn positive returns by diversifying internationally. However, there are limits to the advantages of international diversification. Greater geographic dispersion across country borders increases the costs of coordination between units and the distribution of products. Trade barriers, logistical costs, cultural diversity, and other differences by country greatly complicate the implementation of an international diversification strategy. 8-17 Chapter 8: International Strategy Institutional and cultural factors can present strong barriers to the transfer of a firms competitive advantages from one country to another. Marketing programs often have to be redesigned and new distribution networks established when firms expand into new countries. Firms may encounter different labor costs and capital charges. In general, it is difficult to effectively implement, manage, and control a firms international operations. Teaching Note: The complex nature of the management challenges that face internationally diversified firms is illustrated by the following cases: Robert Shapiro, CEO of Monsanto, assumed that Europe was similar to the U.S., but the firms genetically engineered seeds have been strongly rejected in Europe. Wal-Mart made mistakes in some Latin American markets, for example, when it learned that giant parking lots do not draw huge numbers of car-less customers. And the lots were far from the bus stops used by many Mexicans, so potential customers could not easily transport their goods home. STRATEGIC FOCUS The Continuing Threat to Legitimate Companies from Counterfeit or Fake Products It is estimated that counterfeit products make up seven percent of the worlds goods. This issue is extremely important for firms competing globally and that have significant profit margins due to the high levels of intellectual property that is contained in the products. Counterfeiting firms continue to go up the value chain to copy more high-tech, high-margin products. Because of its ability to manufacture at very low costs and a lax legal environment one global hot spot for counterfeiters is China. However, not all knock-off products are high end. Philip Morris has made a formal complaint with the International Trade Commission concerning gray market cigarettes from China that contain Philip Morris trademarks. Philip Morris recognizes the necessity of protecting its brands and is trying to do so. Many of the counterfeit products are sold on the internet. French perfume producer LOreal has mounted a legal challenge against eBay for sales of counterfeit LOreal perfume on its website. eBays response is that LOreal needs to crack down on counterfeiters and the eBay is simply providing a trading platform. However, luxury good manufacturers LVMH and Hermes have won rulings in French courts similar to LOreals. eBay, on the other hand, won a similar case in a Belian court. Some counterfeit products are just dangerous. One firm discovered bogus pesticides that posed health risks. And, the U.S. military is facing a growing threat from fatal equipment failures and even foreign espionage through computer components that are embedded in planes, ships, and communication networks. Some defense contractors have traced Chinese producers o fake microchips as well as tiny electronic circuits found in computer equipment and other electronic gear. This strategic focus highlights the importance of protecting intellectual property. Ask students to what lengths they think companies should go to protect their intellectual property. Ask what role ethics should play and why counterfeiters are allowed to exist and operate openly in some countries. Why arent international trade groups stronger in stopping counterfeiters. In the end, students should realize that companies make significant investments to develop products and manufacture quality goods. Counterfeiters have the potential do serious damage to legitimate firms. Ask students to discuss some of the ways that companies can be proactive in dealing with the counterfeiting threat. ANSWERS TO REVIEW QUESTIONS 1. Explain traditional and emerging motives for firms to pursue international diversification. (pp. 219220) 8-18 Chapter 8: International Strategy Traditional motives that are causing firms to expand internationally are to gain access to larger markets, to extend the product life cycle, to secure key resources, and to access low-cost factors of production (e.g., cheap labor or raw materials). Emerging motives include the increase in pressure for global integration (driven by global communications, which lead to a global convergence of lifestyles and, in turn, universal product demand), rising obligations for cost cutting (e.g., seeking the lowest cost provider of resources or low-cost global suppliers), the realization that R&D expertise for the next new product extension may not come from the domestic market, and the emergence of large scale markets. 2. Identify the four major benefits of an international strategy. (pp. 220-223) Firms can derive four basic benefits from international strategies. These benefits are: Increased market size Firms can expand the size of their market, sometimes dramatically, by entering foreign markets. Return on investment Large markets may be crucial to earning an acceptable return on significant company investments (such as plant, equipment, R&D). Large markets can also help recoup investment costs more quickly. The bottom line is that international markets can help companies earn above-average returns. Economies of scale and learning through international expansion firms may be able to realize economies of scale, especially in manufacturing operations. This is even more important to the extent that firms can standardize its products across country borders. In addition, operating across borders creates new opportunities for learning and this can lead to process improvements. Location advantages firms can realize significant cost saving by locating operations at the optimal place in the world. Location advantages include low labor, energy and natural material costs. Other advantages include access to critical supplies and to customers. 3. Explore the four factors that provide a basis for international business-level strategies.. 225) (pp. 223- According to Michael Porter, the resources and capabilities established in a firms home country often enable the firm to pursue its strategy beyond the domestic market. Porter specified a model that describes the factors contributing to the advantage of firms in a dominant global industry and associated with a specific country or regional environment. These four factors are as follows: factors of production, or the basic inputs necessary to compete in any industry, such as labor, land, capital, and infrastructure demand conditions, or the nature and size of the buyers needs in the home market for the industrys products or services (reflected either by segment size, which enables a firm to achieve economies of scale, or specialized demand, which enables the firm to develop a higher level of competency in producing products/services) related and supporting industries, or the presence of other industries in the home market that either are related to or support the primary industry. For example, the shoe industry in Italy benefits from a wellestablished industry in leather processing, people traveling to Italy to purchase leather goods, and an industry presence in leather-working machinery and design services) firm strategy, structure, and rivalry are interrelated as patterns of strategy that impact (and are impacted by) industry structure, which in turn affect and are affected by competitive rivalry. 4. Describe the three international corporate-level strategies: multidomestic, global, and transnational. (pp. 225-229) The three international corporate-level strategies are multidomestic, global, and transnational (see Figure 8.3). 8-19 Chapter 8: International Strategy Firms following multidomestic strategies assume that markets are different and should be segmented by national boundary. They decentralize or delegate strategic and operating decisions to the strategic business unit in each country to enable the flexibility necessary to tailor products and services to local market preferences. The use of multidomestic strategies usually produces expansion of local market share because of the attention paid to local demands; however, it also leads to greater uncertainty for the corporation as a whole (due to market differences and the strategies designed to fit these). Multidomestic strategies do not allow for the achievement of economies of scale and thus can be more costly, leading firms following this strategy to decentralize strategic and operating decisions to the business units operating in each country. Firms that follow a global strategy assume significant standardization of products across markets. The primary focus is on efficiency through economies of scale and the leveraging of innovation across country markets. Business-level strategy is centralized and controlled by the home office. It requires resource sharing and coordination and cooperation between subsidiaries and across country boundaries. Thus, a global strategy produces lower risk but may forego growth opportunities in local markets because they are less likely to identify opportunities or these require product adaptation for local market preferences. Therefore, this strategy lacks local market responsiveness and is difficult to manage because of the need to coordinate strategies and operating decisions across country borders. A transnational strategy seeks to achieve both global efficiency and local responsiveness. It is difficult to realize the diverse goals of the transnational strategy because one goal requires close global coordination, while the other requires local flexibility; thus, flexible coordination is required to implement the transnational strategy. Management must build a shared vision and individual commitment through an integrated network. Effective implementation of a transnational strategy often produces higher performance than either the global or multidomestic strategy alone. 5. Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization. (pp. 230-231) Global strategies require integration and coordination across units (and across national boundaries) and enable the achievement of economies of scale and efficiency. On the other hand, multidomestic strategies emphasize responsiveness to local market needs and preferences, providing the opportunity to more effectively meet customer needs and preferences. Successfully balancing the need for local responsiveness and global efficiency implies that local responsiveness should facilitate competition based on an international differentiation strategy, while global efficiency should facilitate competition based on an international cost leadership strategy. The threat of wars and terrorist attacks increases the risks and costs of international strategies. Furthermore, research suggests that the liability of foreignness is more difficult to overcome than once thought. Competing in many markets may enable the firm to achieve economies of scale because of the size of the combined markets, but only if customer preferences in multiple markets do not differ significantly. If customer preferences vary significantly among national markets, a firm might be better served to narrow its focus to a specific region. A regional focus may enable the firm to better understand cultures, legal and social norms, and other factors that may be important to achieving strategic competitiveness. Regionalization is another trend that has become more common in global markets. Companies need to decide if they are going to compete in all markets or selectively choose specific regions within which to operate. Regional strategies also are being promoted by groups of countries that have developed trade agreements to enhance the economic power of a region. Examples include the European Union (EU) and the Organization of American States (OAS in South America). Another example of a regional market is the North American Free Trade Agreement (NAFTA), which is designed to facilitate free trade among the U.S., Canada, and Mexico. NAFTA may be expanded to include some South American countries and the movement of investment funds has not been only from the U.S. to Mexico as Mexican investors have made significant investments in the U.S. and some European firms have invested in Canada to gain access to this unified market. 6. Name and describe the five alternative modes for entering international markets. (pp. 231-236) 8-20 Chapter 8: International Strategy Choice of mode of entry is determined by a number of factors, and the following modes are listed in a sequence that is typical in practice. Initial market entry will often be through export because this requires no foreign manufacturing expertise and demands investment only in distribution. Licensing can also facilitate the product improvement necessary to enter foreign markets. Strategic alliances have been popular because they allow partnering with an experienced player already in the targeted market. Strategic alliances also reduce risk through the sharing of costs. These modes therefore are best for early market development. To secure a stronger presence, acquisitions or new wholly owned subsidiaries (greenfield venture) may be required. Both acquisitions and greenfield ventures are likely to come at later stages in the development of an international diversification strategy. Additionally, these strategies tend to be more successful when the firm making the investment has considerable resources, particularly in the form of valuable core competencies. Thus, there are multiple means of entering new global markets. Firms select the entry mode that is best suited to the situation at hand. In some instances, these options will be followed sequentially, beginning with exporting and ending with greenfield ventures. In other cases, the firm may use several (but perhaps not all) of the different entry modes. The decision regarding the entry mode to use is primarily a result of the industrys competitive conditions, the countrys situation and government policies, and the firms unique set of resources, capabilities, and core competencies. 7. Explain the effects of international diversification on firm returns and innovation. (pp. 237-238) International diversification provides the potential for firms to achieve greater returns on their innovations (through larger and/or more numerous markets) and thus lowers the often substantial risks of R&D investments. Therefore, international diversification provides incentives for firms to innovate. In addition, international diversification may be necessary to generate the resources required to sustain a large-scale R&D operation. The accelerating trend toward rapid technological obsolescence makes it difficult to invest in new technology and the capital-intensive operations required to take advantage of it; therefore, firms operating solely in domestic markets may find it difficult to justify such investments due to the length of time required to recoup the original investment. Even if the time frame is extended, it may not be possible to recover the investment before the technology becomes obsolete. Thus international diversification improves the firms ability to appropriate additional and necessary returns from innovation before competitors can overcome the initial competitive advantage created by the innovation. Additionally, firms moving into international markets are exposed to new products and processes, so they can learn and integrate this knowledge in an effort to facilitate the development of more innovation. The relationship among international diversification, innovation, and returns is complex. Some level of performance is necessary to provide the resources to generate international diversification. International diversification provides incentives and resources to invest in research and development. Research and development, if done appropriately, should enhance the returns of the firm, thereby providing more resources for continued international diversification and investment in R&D. 8. Name and describe two major risks of international diversification. (pp. 238-240) Political risks are related to instability in national governments and to war, civil or international. Instability in a national government creates multiple problems. Among these are economic risks and the uncertainty created in terms of government regulation, the presence of many (possibly conflicting) legal authorities, and potential nationalization of private assets. For example, foreign firms that are investing in Russia may have concerns about the stability of the national government and what might happen to their investments/assets in Russia should there be a major change in government. Different concerns exist for foreign firms investing in China where foreign investors are less worried about the potential for major changes in Chinas national government than about the uncertainty of Chinas regulation of foreign business investments. Economic risks are highly interdependent with political risks. The primary economic risk is differences and fluctuations in the value of different currencies that can affect the value of a firms assets, liabilities, and earnings, as well as its price competitiveness in international markets. 8-21 Chapter 8: International Strategy Although firms can realize many benefits by implementing an international strategy, doing so is complex and can produce greater uncertainty. For example, multiple risks are involved when a firm operates in several different countries. Firms can grow only so large and diverse before becoming unmanageable, or before the costs of managing them exceed their benefits. Other complexities include the highly competitive nature of global markets, multiple cultural environments, the security risks posed by terrorists, potentially rapid shifts in the value of different currencies, and the possible instability of some national governments. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES EXERCISE 1: MCDONALDS GLOBAL, MULTICOUNTRY, OR TRANSNATIONAL STRATEGY? The purpose of this exercise is to help students understand the differences between a global, multicountry, and transnational strategy. Key advantages of the exercise are that McDonalds is a familiar brand name, and that some students in a typical class may have visited a McDonalds franchise in another country. Additionally, the unique menu items in different locales often tempt students to mistakenly conclude that the company is pursuing a multicountry or transnational strategy. The first part of the assignment is to have students individually search for different menu items at McDonalds stores outside the U.S. Some sample offerings include: Australia beet root garnish Brazil: grilled cheese British Columbia cappuccino China green tea ice cream and Pork Burger France: Croque McDo ham & cheese Germany Frankfurters and beer Hong Kong: Fish McDippers with Thai sweet chili sauce India McVeggie and Maharaja Mac two all lamb patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun Mexico: Eggs with jalapeno peppers and refried beans NZ: Panini sandwich and latte South Africa marshmallow shake Netherlands mayonnaise topping with French fries Thailand Samurai Pork burger, teriyaki style Uruguay McHuevo burger with poached egg topping Philippines McSpaghetti pasta with hot dog chunks Japan Chicken Tatsuta spicy fried chicken sandwich. 8-22 Chapter 8: International Strategy Student teams then review the characteristics of the three types of strategies, and decide which category best describes McDonaldss. Teams then prepare a single page flip chart with a set of bullet points, and make a short presentation to the class. At the end of presentations, ask for a show of hands for each of the three strategy types. Students will typically advocate multicountry and transnational options, using the different menu choices as supporting evidence. However, the business description from a recent company 10-K filing paints a different picture: McDonalds restaurants serve a varied, yet-limited, value-priced menu Highly rationalized processes and specs to ensure product consistency across locations It is also important to emphasize that the tailored menu items represent only a small portion of the companys food offerings. Additionally, store layout, processes, marketing and advertising, are all similar across regions. In the discussion, you can emphasize how a few prominent modifications to the menu can create the appearance of greater tailoring than actually exists. A transnational strategy would have elements of both global coordination and local responsiveness. For students who advocate this strategy, ask the following questions: Q: What are the coordination and control mechanisms like? A: Many standardized rules and processes, and very little lateral communication among units in different regions. Q: How does decision-making work? A: Largely top-down. Q: Are there extensive resource flows across regions? A: Minimal. Overall, there is little evidence to support the argument for a transnational strategy. EXERCISE 2: DOES THE WORLD NEED MORE BURRITOS? In this exercise, students role play as consultants to the management team of Chipotle Mexican Grill (CMG) who is considering an international expansion. With only one unit outside the US, and with that being in Toronto, the management team of CMG wonders if moving overseas, more expansion in Canada, or south into Mexico, Central or South America is wise. Students will likely recognize the Chipotle brand and after 14 years since its founding and as of 2009 operating over 830 locations. According to the 2008 annual report the firm increased revenue to $1.3b, an increase of 22% from the prior year. It also opened 136 8-23 Chapter 8: International Strategy new restaurants fully funded from operations and instituted a share buyback program. The company has also instituted a strong commitment to using locally grown produce (Food with Integrity program) which can complicate any expansion efforts as local resources need to be in place to support this strategy. Also according to the annual report there are plans in 2009 to open a store in London, which would be their first move overseas. Over the last few years the firm has acquired all of their franchise units so all operations are company owned as of the 2008 fiscal year, ending 12-2008. Students are told that the company is considering expansion to other regions. Teams are asked to choose between four options for expansion from the following list: Canada Europe (any country) Mexico Continue mainly UC centric strategy Teams are asked to compare the three regions based on the following criteria: Economic characteristics Social characteristics Risk factors The main purpose of the exercise is to acquaint students with different Internet resources for collecting information about the various countries and for them to strategically think through the issues of international expansion for a company that requires significant local resources. Several Web-based resources are listed in the student assignment. If your course has an online component (e.g., WebCT or Blackboard), a useful supplement to this exercise is to have teams post descriptions and links to other information resources that they discovered on their own. To wrap up each team presents their thoughts on expansion to their assigned location. The instructor should prepare a matrix as each presentation is made which can then be highlighted to the class when all four options are completed. The matrix should follow Porters determinants of national advantage and also allow for the inclusion of which corporate level strategy the team chose. This matrix can then by displayed to the class in which a lively discussion can be held on the best option for the firm. The instructor might also add in an X factor which could be a discussion of the management of the firm, its financial position vis--vis a long distance expansion or one close to home etc. 8-24 Chapter 8: International Strategy US Mexico Canada UK Corporate Level Strategy Proposed Factors of Production Firm Strategy Demand Conditions Related and supporting industries X Factor INSTRUCTOR'S NOTES FOR VIDEO EXERCISES According to the text an international strategy is one in which a firm sells its goods or services outside its domestic markets. Mr. Sherman provides some cautionary advice that all international expansion is not necessarily good business. The organization must understand and research its markets and maintain its core capabilities. What provides a competitive advantage in the home market should be utilized in the international expansion markets according to Sherman. Initially the instructor should engage the students by having some recount experience of international travel and associate international businesses with familiar brands (McDonalds, Starbucks, Pizza Hut, etc.). Did Mr. Shermans analogy with pizza hold true. This is a good place to reinforce the concepts of multidomestic, global, and transnational strategies. This is also a good place to reinforce the concepts of core competency and international business level strategy. In what ways should companies more internationally? After this discussion the instructor should lead students through the text concepts of illuminated in figure 8.1 as they relate to the video. INSTRUCTOR'S NOTES FOR STRATEGY RIGHT NOW 1. The SAP NetWeaver Master Data Management system is an IT system designed to improve data accuracy across Unilevers operations in Africa, the Middle-East, 8-25 Chapter 8: International Strategy and Turkey. The system is designed to help Unilever make quick and accurate decisions about its product mix which spans 400 brands in five countries in this region. 2. Conditions driving the need for more unified and accurate information in emerging markets are intense competition, increased costs for raw materials, and a constantly evolving business landscape. 3. Better data management should help Unilever deliver more accurate metrics and reporting and provide a better basis for a global view of business objectives and performance criteria; reduce costs by simplifying the IT environment and eliminate redundant systems; and allow future IT system flexibility to respond to changing business models, product portfolio, and organization. The bottom line is that Unilever believes that, with more timely and accurate information, it will be in a better position to make operational and supply chain decisions that will enhance its profitability and lead to increased success. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Given the advantages of international diversification, why do some firms choose not to expand internationally? 2. How can a small firm diversify globally using the Internet? 3. How do firms choose among the alternative modes for expanding internationally and moving into new markets (e.g., forming a strategic alliance versus establishing a wholly owned subsidiary)? 4. Does international diversification affect innovation similarly in all industries? Why or why not? 5. What is an example of political risk in expanding operations into Latin America or China? 6. Why do some firms gain competitive advantages in international markets? Have the students explain their answers. 7. Why is it important to understand the strategic intent of strategic alliance partners and competitors in international markets? 8. What are the challenges associated with pursuing the transnational strategy? Have the students explain their answers. Ethics Questions 1. As firms attempt to internationalize, they may be tempted to locate their facilities where product liability laws are lax in testing new products. What are some examples in which this motivation is the driving force behind international expansion? 8-26 Chapter 8: International Strategy 2. Regulation and laws regarding the sale and distribution of tobacco products are stringent in the U.S. market. Use the Internet to investigate selected U.S. tobacco firms to identify if sales are increasing in foreign markets compared to domestic markets. In what countries are sales increasing and why? What is your assessment of this practice? 3. Some firms outsource production to foreign countries. Although the presumed rationale for such outsourcing is to reduce labor costs, examine the labor laws (for instance, the strictness of child labor laws) and laws on environmental protection in another country. What does your examination suggest from an ethical perspective? 4. Are there markets that the U.S. government protects through subsidies and tariffs? If so, which ones and why? How will the continuing development of e-commerce potentially affect these efforts? 5. Should the United States seek to impose trade sanctions on other countries, such as China, because of human rights violations? 6. Latin America has been experiencing significant changes in both political orientation and economic development. Describe these changes. What strategies should foreign international businesses implement, if any, to influence government policy in these countries? Is there a chance that the political changes will reverse? Internet Exercise Convenience stores in Japan, such as the corner Seven-Eleven, and supermarkets in Britain are capitalizing on Internet commerce by offering their customers easy access, e-service, and attractive prices and selections. Located at, Seven-Eleven allows shoppers to surf, order, and pay for merchandise with cash, the most trusted method of payment in Japan, a country with a comparatively low crime rate. Locate the website of Britains large supermarket chain, Tesco, at What types of services offered would appeal to you? What do you see as a deterrent to introducing these and other e-commerce services into supermarkets, hypermarkets, and convenience stores in the United States? *e-project: This chapter explains the different methods of entering foreign markets. Using sources on the Internet provided by your governments trade division, the U.S. State Department (, the U.S. Dept. of Commerce (, and private resources such as, plan the export of a new line of USA-brand baseball hats to Shanghai and Beijing, China. Assume that you plan to manufacture the hats inside China and distribute them through local stores within those two cities. 8-27 ... View Full Document

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