1. LOGO
Chapter 7
International Strategy:
Creating Value in
Global Markets
Arriola, Alice Elaine
Caparida, Regine
Guintaran, Christy
Hamelarin, Irene
Igoy, Carolyn

2. Topics
 Why international expansion?
 Determinants of national competitive
advantage.
 Motivations and risks of global expansion.
 Two opposing forces—cost reduction and
adaptation to local markets.
 International Strategies.
 Entry strategies

3. Drivers of Globalization
 increased similarity of lifestyles
 global communications
 fast communication
 pressures to reduce costs

4. Population of Selected Nations
Country July 2002 (estimated)
China 1,284,303,000
India 1045,845,000
United States 280,562,000
Japan 126,974,000
Germany 83,251,000
Exhibit 7.2 Populations of Selected Nations
Source: www.brainyatlas.com/geos/gm.html.

5. Motivations for International Expansion
Increase Market Size
Domestic market may lack the size to support efficient
scale manufacturing facilities

6. Motivations for International Expansion
Increase Market Size
Domestic market may lack the size to support efficient
scale manufacturing facilities
Japanese electronics or automobile manufacturers

7. Motivations for International Expansion
Increase Market Size
Domestic market may lack the size to support efficient
scale manufacturing facilities
Japanese electronics or automobile manufacturers
Return on Investment
Large investment projects may require global markets to
justify the capital outlays

8. Motivations for International Expansion
Increase Market Size
Domestic market may lack the size to support efficient
scale manufacturing facilities
Japanese electronics or automobile manufacturers
Return on Investment
Large investment projects may require global markets to
justify the capital outlays
Aircraft manufacturers Boeing or Airbus

9. Motivations for International Expansion
Economies of Scale or Learning
Expanding size or scope of markets helps to achieve
economies of scale in manufacturing as well as
marketing, R & D or distribution
- Can spread costs over a larger sales base
- Increase profit per unit

10. Motives for Int’l Expansion
 Optimize the physical location for
every activity in its value chain
 Performance enhancement
 Cost reduction
 Risk reduction

11. Porter’s Determinants of National Advantage
Home country of origin is crucial to
International success

12. Porter’s Determinants of National Advantage
Home country of origin is crucial to International success
Factor Conditions
Basic Factors
- Land, labor
Advanced Factors
- Highly educated workers
- Digital communications
Generalized Factors
- Capital, infrastructure
Specialized Factors
- Skilled personnel

13. Factor Conditions
 To achieve competitive advantage,
factors of production must be created
 Industry specific
 Firm specific
 Pool of resources at a firm’s or country’s
disposal is less important than the speed and
efficiency with which the resources are
deployed

14. Porter’s Determinants of National Advantage
Home country of origin is crucial to International success
Factor Conditions Demand
Basic Factors Conditions
- Land, labor
Advanced Factors Home country
- Highly educated workers may support
- Digital communications scale efficient
Generalized Factors operations by
- Capital, infrastructure itself
Specialized Factors
- Skilled personnel

15. Demand Conditions
 Demands that consumers place on an
industry for goods and services
 Demanding consumers push firms to move
ahead of companies from other nations
 Demanding consumers drive firms in a
country to
• Meet high standards
• Upgrade existing products and services
• Create innovative products and services

16. Porter’s Determinants of National Advantage
Home country of origin is crucial to International success
Related & Supporting
Industries
- Japanese cameras & copiers
Factor Conditions - Italian shoes & leather
Basic Factors
- Land, labor Demand
Advanced Factors Conditions
- Highly educated workers Home country may
- Digital communications support scale efficient
Generalized Factors operations by itself
- Capital, infrastructure
Specialized Factors
- Skilled personnel

17. Related and Supporting Industries
 Related and supporting industries
 Enable firms to manage inputs more
effectively
• Strong supplier base adds efficiency to
downstream activities
• Competitive supplier base lets a firm obtain inputs
using cost-effective, timely methods
 Allow joint efforts among firms
 Create the probability that new entrants will
enter the market

18. Porter’s Determinants of National Advantage
Home country of origin is crucial to International success
Related & Supporting
Industries
- Japanese cameras & copiers
Factor Conditions - Italian shoes & leather
Basic Factors
- Land, labor Demand
Advanced Factors Conditions
- Highly educated workers Home country may
- Digital communications support scale efficient
Generalized Factors operations by itself
- Capital, infrastructure
Specialized Factors Firm Strategy, Structure
- Skilled personnel
& Rivalry
Intense rivalry fosters
industry competition

19. Firm Strategy, Structure and Rivalry
 Rivalry is intense in nations with
conditions of
 Strong consumer demand
 Strong supplier bases
 High new entrant potential from related
industries
 Competitive rivalry increases the
efficiency with which firms develop,
market, and distribute products and
services within the home country

20. Firm Strategy, Structure and Rivalry
 Competitive rivalry increases the
efficiency with which firms
 Develop within the home country
 Market within the home country
 Distribute products and services within the
home country

21. Firm Strategy, Structure and Rivalry
 Domestic rivalry provides a strong
impetus for firms to
 Innovate
 Find new sources of competitive advantage
 Domestic rivalry forces firms to look
beyond national borders for new
markets

22. Porter’s Diamond of National Advantage: As
Applied to India
Adapted from Exhibit 7.1 India’s Virtual Diamond in Software

23. Potential Risks of International Expansion
 Political and economic risk
 Social unrest
 Military turmoil
 Demonstrations
 Violent conflict and terrorism
 Laws and their enforcement

24. Risk Rankings
Total of
Credit
Total and Access
Total Risk Economic Political Debt to Finance
Rank Country Assessment Performance Risk Indicators Indicators
1 Luxembourg 99.51 25.00 24.51 20.00 30.00
2 Switzerland 98.84 23.84 25.00 20.00 30.00
3 United States 98.37 23.96 24.41 20.00 30.00
40 China 71.27 18.93 16.87 19.73 15.74
55 Poland 57.12 18.56 13.97 9.36 15.23
63 Vietnam 52.04 14.80 11.91 18.51 6.82
86 Russia 42.62 11.47 8.33 17.99 4.83
114 Albania 34.23 8.48 5.04 19.62 1.09
161 Mozambique 21.71 3.28 2.75 13.85 1.83
178 Afghanistan 3.92 0.00 3.04 0.00 0.88
Exhibit 7.3 A Sample of International Country Risk Rankings
Source: Adapted from worldbank.org/html/prddr/trans/so96/art7.htm.

25. Potential Risks of International Expansion
 Currency risks
 Currency exchange fluctuations
 Appreciation of the U.S. dollar
 Management risks
 Culture • Income levels
 Customs
• Customer preferences
 Language
• Distribution system

26. Strategy Implementation
Power distance (PD)
Hofstede’s Uncertainty avoidance (UA)
Dimensions of
National Individualism-collectivism (I-C)
Culture
Masculinity-femininity (M-F)
Long-term orientation (LT)

27. Two Opposing Pressures: Reducing
Costs and Adapting to Local Markets
 Strategies that favor global products
and brands
 Should standardize all of a firm’s products for all
of their worldwide markets
 Should reduce a firm’s overall costs by
spreading investments over a larger market

28. Two Opposing Pressures: Reducing
Costs and Adapting to Local Markets
 Strategies that favor global products
and brands
• Are based on three assumptions
 Customer needs and interests worldwide are
becoming more homogeneous
 People (worldwide) prefer lower prices at high
quality
 Economies of scale in production and marketing
can be achieved through supplying global
markets

29. Two Opposing Pressures: Reducing
Costs and Adapting to Local Markets
 But those three assumptions may
not always be true
 Product markets vary widely between nations
(customer needs and interests?)
 In many product and service markets there appears
to be a growing interest in multiple product features,
quality and service (preference for low price?)
 Technology permits flexible production, cost of
production may not be critical to product cost, and
firm’s strategy should not be product-driven

30. Opposing Pressures and Four Strategies
Exhibit 7.5 Opposing Pressures and Four Strategies

31. International Strategy
 Pressure for both local adaptation and
low costs are rather low
 Different activities in the value chain
have different optimal locations
 Susceptible to higher levels of
currency and political risks

32. Global Strategy
 Competitive strategy is centralized
and controlled largely by
corporate office
 Emphasizes economies of scale
 Advantages
 Larger production plants
 Efficient logistics and distribution networks
 Supports high levels of investment in R&D
 Standard level of quality throughout the world

33. Global Strategy
 Competitive strategy is centralized and
controlled largely by corporate office
 Emphasizes economies of scale
 Disadvantages
• Concentration on scale-sensitive resources and
activities in one or few locations leads to higher
transportation and tariff costs
• Activity is isolated from targeted markets
• The rest of the firm becomes dependent on that
geographically isolated location

34. Multidomestic Strategy
 Emphasis is differentiating
products and services to adapt to
local markets
 Authority is more decentralized
 Risks include
 Increased cost structure
 Potential problems with local adaptations
 Finding optimal degree of local adaptation is
difficult

35. Transnational Strategy
 Optimization of tradeoffs associated
with efficiency, local adaptation, and
learning
 Firm’s assets and capabilities are
dispersed according to the most
beneficial location for a specific
activity
 Avoids the tendency to either
 Concentrate activities in a central location
 Disperse them across many locations to enhance
adaptation

36. Transnational Strategy
 Unique risks and challenges
 Choice of an “optimal” location cannot
guarantee that the quality and cost of factor
inputs will be optimal
 Knowledge transfer can be a key source of
competitive advantage, but it does not take
place automatically

37. Strengths and Limitations of Various Strategies
Strategy Strengths Limitations
International • Leverage and diffuse • Limited ability to adapt to
parent’s knowledge and local markets.
core competencies. • Inability to take advantage of
• Lower costs because of new ideas and innovations
less need to tailor occurring in local markets.
products and services.
• Greater level of worldwide
coordination
Global • Strong integration across • Limited ability to adapt to
various businesses. local markets.
• Standardization leads to • Concentration of activities
higher economies of scale may increase dependence
which lowers costs. on a single facility.
• Helps to create uniform • Single locations may lead to
standards of quality higher tariffs and
throughout the world. transportation costs.
Exhibit 7.6 Strengths and Limitations of Various Strategies

38. Strengths and Limitations of Various Strategies
Strategy Strengths Limitations
Multidomestic • Ability to adapt products • Less ability to realize cost
and services to local savings through scale
market conditions. economies.
• Ability to detect potential • Greater difficulty in
opportunities for attractive transferring knowledge
niches in a given market, across countries.
enhancing revenue. • May lead to “overadaptation”
as conditions change.
Transnational • Ability to attain economies • Unique challenges in
of scale. determining optimal locations
• Ability to adapt to local of activities to ensure cost
markets. and quality.
• Ability to locate activities in • Unique managerial
optimal locations. challenges in fostering
• Ability to increase knowledge transfer.
knowledge flows and
learning.
Exhibit 7.6 Strengths and Limitations of Various Strategies

39. Entry Modes of International
Expansion
High Wholly Owned
Subsidiary
Extent of Investment Risk
Joint Venture
Strategic Alliance
Franchising
Licensing
Exporting
Low
Low High
Degree of Ownership and Control
Adapted from Exhibit 7.7 Entry Modes for International Expansion

40. Exporting
 Consists of producing goods n one
country to sell in another.
 Beach Head Strategy
 Local Partnership
 Successful distributors
 Carry product lines that complement the
multinational’s products
 Behave as if they are business partners with the
multinationals.
 Invest in training, information systems, and
advertising and promotion

41. Licensing and Franchising
 Franchisor receives a royalty or fee
 Franchisee gets to use trademark,
patent, trade secret or other valuable
intellectual property
 Disadvantages
 Loss of control over its product
 Licensee may become a competitor
 Threat to brand name and reputation of products
 Advantages
 Limited risk exposure
 Expanded revenue base

42. Strategic Alliances and Joint Ventures
 Partnerships that enable firms to share
risks and potential revenues and profits
 Partners
 gain exposure to new knowledge and technologies
 Develop core competencies that can lead to competitive
advantages
 Gain information on local markets conditions
• Partnerships that enable firms to share risks
and potential revenues and profits

43. Strategic Alliances and Joint Ventures
 Risks
• Needs to be clearly defined strategy supported by
both partners
• Needs to be clear understanding of capabilities and
resources that will be central to the partnership
• Must be trust between partners
• Cultural issues that can potentially lead to conflict
and dysfunctional behavior need to be addressed.
• The success of a firm’s alliance SHOULD NOT BE
LEFT TO CHANCE.

44. Wholly Owned Subsidiaries
 Business owned by only one
multinational company
 Acquire an existing company in the home country
 Develop a totally new operation (greenfield venture)
 Most expensive and risky of all global entry strategies
 Greatest control over all activities