Topic 7 International Strategy International Strategy Definition International

Topic 7 International Strategy

International Strategy, Definition International Strategy (Diversification): A strategy through which the firm expands its value chain activities across national borders. This includes sourcing inputs, having operations, or selling goods or services in other countries.

International Expansion: Market Motivations • Increase Market Size Ø Offensive motive – seize market opportunities in foreign countries • World’s population in 2019, 7. 7 billion; US – 4. 27% of that Country Population China 1. 42 billion India 1. 37 billion US 329 million Japan 129 million Germany 83 million Ø Defensive motive • Avoid falling behind a domestic rival that is internationalizing and taking advantage of favorable international opportunities • Respond to a foreign rival entering your domestic market by entering their domestic market

International Expansion: Economic Motivations • Economies of scale Ø Spread fixed costs (investments) over a larger volume of production and sales • R&D, marketing, brands • Ex: Microsoft investing in Windows and selling it worldwide Ø Leads to lower cost per unit • Spread risk through geographic diversification Ø Reduce risk in revenues and earnings by expanding in more countries, with different institutional and economic conditions

International Expansion: Economic Motivations • Location Advantages, benefits from differences in: Ø Natural resources Ø Lower cost of labor or other inputs Ø Sources of capital • Listing on a major stock exchange Ø Regulation and regulatory treatment • Tax havens Ø Knowledge and expertise (major) • Science and technology clusters • Ex: Silicon Valley; Bengaluru, India Note: Traditionally, location advantages related to low cost, such as labor, dominate explanations for international expansion. However, in the modern economy, more than half of all FDI is knowledge-based. Organizations seek unique knowledge, expertise, and skills, as major value-adding inputs.

International Expansion: Strategic Motivations • Leverage Core Competences: Ø Build upon value chain and capabilities developed in home country • Be the First Mover Ø Blue Ocean strategy – enter uncontested markets Ø Enter before others and gain advantages by being first • First movers also take on more risk and may make more mistakes • Follow a Customer Ø If a customer goes global, then a supplier may also go global Ø It is in the interest of both parties because of familiarity, quality standards, trust and relational capital Note: Strategic motivations always go together with some of the market or economic motivations

Performance or Innovation Internationalization and Firm Performance Domestic Some countries, moderate distance, risk, and commitment Many countries, high distance, risk, and commitment Level of Internationalization

Risks in an International Environment • Political Risks • Economic Risks Ø Instability in national governments Ø Violent conflicts Ø Social unrest Ø Corruption ? ? ? ? Ø Differences and fluctuations in the value of different currencies Ø Weak economic institutions (regulatory system governing free markets, legal system, courts, agencies, law enforcement) Ø Terrorism and informal business Ø Difficulties in enforcing property rights and other laws

Management Risks • Differences in: Ø Ø Culture Language Income levels Customer preferences. . • Increased complexity due to: Ø Ø Note: Liability of foreignness is a concept that captures the “automatic” competitive disadvantages of a foreign business, just because it is foreign. The implication is that foreign businesses need to overcome this liability. However, in some cases “foreignness” may be an advantage. For example, in the US, German cars are perceived positively because of beliefs about quality engineering; Italian restaurants are received well because Italian cuisine is popular, and much enjoyed; French bakeries are welcome because. . well, who bakes better than the French! Multiple countries with different profiles Difficulty in learning in each country Difficulty in transferring knowledge (tacit especially) Need to implement global systems for coordination ‘Liability of Foreignness’ The costs of doing business abroad that result in a competitive disadvantage for a foreign unit. Includes all risks and challenges discussed so far. Implies lower performance than domestic firms for a given period

Foreign Entry Modes • Exporting Ø Producing goods in one country to sell to residents of another country through a local distributor • Licensing and Franchising Ø A foreign licensor grants specified property rights to the local licensee for a specified period in exchange for a royalty fee Ø The franchisor generally maintains the right to control the quality of products and services offered by the franchisee, and the contract lasts longer • Strategic Alliances and Joint Ventures (partnerships) Ø A joint-venture is different from a strategic alliance. It requires setting up a separate entity, with its own finances, management, and operations Ø An alliance is direct collaboration between two or more entities but does not require the establishment of a separate entity. • Wholly-owned subsidiaries Ø Greenfield investment – build a brand-new operation Ø Acquisition – purchase of an existing domestic business (acquisition may be partial, which results in a joint-venture)

Foreign Entry Modes Note: The key implication from this chart is that benefits from greater ownership and control come at the expense of greater investment and risk. Note: Ownership only applies to joint ventures and wholly-owned subsidiaries. With the other modes, the foreign firm has no ownership.

International Strategy: Two Forces • Pressure for Low Cost / Global Integration Ø Ø Increased global competition drives cost pressure up Availability of low-cost locations, for manufacturing or other activities Possible to standardize products/services across countries Customer needs are more homogeneous worldwide • Pressure for Differentiation / Local Adaptation Ø Customer needs are heterogeneous around the world Ø Need to account for national differences in business practices, demographic conditions, regulation, infrastructure, available business partners, cultural norms, local competition, lifestyles, income levels, etc. Ø Need to modify products/services to local conditions

Basic International Strategies Common sense suggests that multidomestic and transnational strategies should dominate. Yet, global strategy dominates, by far. Why? Managers are not devising their strategies based on the two pressures (dimensions on the chart). They go for low cost, economies of scale, and efficiencies because these are very attractive, even when they may benefit more from a different approach. Low Note: These strategies apply to MNEs, which have subsidiaries in host countries (JVs and whollyowned subsidiaries). They could also apply to the other modes, but these modes do not require subsidiaries. Pressures for Global Integration High Which one dominates? Which one should dominate? Low High Pressures for Local Adaptation

Global Strategy Global strategy HQ • Business-level strategic decisions are centralized in the home office. • Products are standardized across national markets. • Emphasizes economies of scale. • Country units are interdependent through the actions of the HQs. • HQ may suppress learning at individual country units and completely miss opportunities in host countries.

Global Strategy: Global Opportunities versus a Localized World “Globalizing the best that your company can offer: Traditional approaches to globalization start with taking a company’s best products/services to global markets” “Harnessing the best that the world has to offer: Sharp external focus, harness resources and ideas of others, aspire to achieve a large global footprint quickly. E. g. Airbnb Inc. , Uber Technologies Inc. , and Rocket Internet SE. The digital economy can enable these ventures, but the real differentiator is the managerial approach” Kerr, 2016, SMR Flat World approach: “Businesses largely ignore geographic boundaries when serving markets and building supply chains …[but] widely dispersed, low-cost supply chains make them vulnerable to protectionism, rising transportation costs, and quality issues” Ghemawat, 2011, HBR “Overall, global organizations are struggling to adapt. We have uncovered a globalization penalty: high-performing global companies consistently scored lower than more locally focused ones on several dimensions of organizational health” Dewhurst et al. 2012, MKQ Some quotes from the articles to illustrate global strategy and the benefits/challenges with it

Multidomestic Strategy Multidomestic strategy HQ • Strategy and operating decisions are decentralized to country units • Products and services are tailored to local markets. • Country units are independent of each other. • Local conditions, such as competition, regulation, infrastructure, culture, etc. are treated as distinct. • May have difficulty transferring core competences or knowledge across country units

Multidomestic Strategy: From Adaptation to Integration “The vast majority of firms are deeply rooted in their home countries… and it’s not just them. . . it’s also the people who are their customers, employees, investors, and suppliers” Ghemawat, 2011, HBR “As local companies win an increasing share of markets in emerging economies, multinationals need to let go of their global strategies and embrace a new mission: Integrate locally and adapt globally” “In dynamic markets, local adaptation is, at best, a catch-up strategy” Santos and Williamson, 2015, SMR “KFC in China: To succeed, the fast-food giant had to throw out its U. S. business model. Its success grew out of a deep understanding of the differences between established and developing markets and a willingness to radically alter the U. S. business model” Bell and Shelman, 2011, HBR Some quotes from the articles to illustrate multidomestic strategy and the benefits/challenges with it

Transnational Strategy Transnational strategy HQ • Seeks to achieve both global efficiency and local responsiveness. • Units coordinate their activities with headquarters and with one another • Units in various countries may adapt to special circumstances only they face • Entire organization draws upon relevant corporate resources wherever they are • Complexity in management and knowledge transfer becomes a huge issue

Transnational Strategy: Yes, but How? Increased Complexity of Operations “Global success requires that companies appreciate diversity and distance rather than seek to eliminate them” Ghemawat, 2011, HBR “Make products, marketing and distribution an integral part of the life of local communities … Integrate with local supplier networks through co-investment and open innovation … Engage with governments and regulators to shape the institutional environment” but also, “remain globally coordinated. This global adaption will be painful because it undermines orthodox cost efficiencies and traditional headquarters powers” Santos and Williamson, 2015, SMR “Develop a transnational character. The larger a multinational company becomes, the more important it is to develop a transnational character. That’s because when a company or an investor group is seen as having a clear national origin, it risks bearing the brunt of a political dispute” Chipman, 2016, HBR Some quotes from the articles to illustrate transnational strategy and the benefits/challenges with it

Transnational Strategy Example: Panasonic “Through its efforts in the Chinese market, Panasonic learned to bridge two strategies that are often seen as mutually exclusive: on the one hand, finding competitive advantage through expertise in integrated, worldwide operations, and on the other, focusing locally to meet consumers’ particular needs. The inherent tension is well understood: Worldwide integration (global strategy) calls for cooperation and uniformity; local adaptation values independence and diversity. The tension is especially high in multinationals that are chasing growth in emerging markets while desperately trying to keep costs down at home. In China, Panasonic learned to treat the two objectives as equally important. Indeed, it found a way to ensure that deeper localization invited greater worldwide integration, which in turn enabled even more localization. Over time, ideas began flowing from China to Japan. The company embarked on new initiatives to understand consumers all over the world, and Panasonic’s leaders began to think of the company as a global, rather than Japanese, powerhouse” Wakayama et al. , 2012, HBR Just an example from one of the articles