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Chapter 8: The Strategy of

International Business and Entry
Strategy
Course Teacher: Dr. H. M. Mosarof Hossain
Professor
Department of Finance
University of Dhaka
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Introduction: In international business environment

there are different political, economic, and cultural
institutions of notions, the international monetary
system. In this global scenario, it is very important
for managers to take appropriate actions those can
compete more effectively. Managers should focus,
how firms can increase their profitability by
expanding their operations in foreign markets,
different strategies that firms pursue when competing
internationally and various factors that affect a firm’s
choice of strategy.
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Strategy and the Firm

A firm’s strategy can be defined as the actions that
managers take to attain the goals of the firm. For
most firms, the preeminent goal is to maximize the
value of the firm for its owners, its shareholders. To
maximize the value of a firm, managers must pursue
strategies that increase the profitability of the
enterprise and its rate of profit growth over time.
Profitability can be measured in a number of ways,
but for consistency it is applied the rate of return
that the firm makes on its invested capital, which is
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Strategy and the Firm

calculated by dividing the net profits of the

firm by total invested capital. Profit
growth is measured by the percentage
increase in net profits over time. Higher
profitability and higher rate of profit
growth will increase the value of an
enterprise and thus the returns generated
by its owners.
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Strategy and the Firm

Managers can increase the profitability of the firm by

pursuing strategies that lower costs or by pursuing
strategies that add value to the firm’s products, either
of which enables the firm to raise prices. Managers
can increase the rate at which the firm’s profits grow
over time by pursuing strategies to sell more
products in existing markets or by pursuing strategies
to enter new markets. Also, expanding
internationally can help managers boost the firm’s
profitability and increase the rate of profit growth
over time.
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Value Creation

The way to increase the profitability of a firm is

to create more value. The amount of value a
firm creates is measured by the difference
between its costs of production and the
value that consumers perceive in its
products. The more the value customers
place on a firm’s products, the higher the
price the firm can charge for those products.
The low cost and differentiation are two
basic strategies for creating value and
attaining a
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Value Creation

competitive advantage in an industry. Superior

profitability goes to those firms that can create
superior value, and the way to create superior
value is to drive down the cost structure of the
business or differentiate the product in some
way so that consumers value it more and are
prepared to pay a premium price.
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Strategic Positioning

A central tenet of the basic strategy paradigm is that to

maximize its profitability, a firm must do three
things: (a) pick a position on the efficiency frontier
that is viable in the sense that there is enough
demand to support that choice; (b) configure its
internal operations, such as manufacturing,
marketing, logistics, information systems, human
resources and so on, so that they support that
position; (c) make sure that the firm has the right
organization structure in place to execute its strategy.
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Operations: The Firm As A Value Chain

The operations of a firm can be thought of as a value chain

composed of a series of distinct value creation
activities including production, marketing and sales,
materials management, research & development,
human resources, information systems, and the firm
infrastructure. Value creation activities can be
categorized as primary activities and support activities
that must be consistent with its strategy.
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Operations: The Firm As A Value Chain

(a) Primary activities: these activities have to do with

the design, creation, and delivery of the product; its
marketing; and its support and after-sale service.
These are divided into four functions: research &
development, production, marketing and sales and
customer service.
(b) Support activities: these provide inputs that allow
primary activities to occur. These include the
electronic systems for managing inventory,
tracking sales, pricing products, selling products
and dealing with customer service inquiries etc.
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Global Expansion, Profitability and Profit Growth

Expanding globally allows firms to increase their profitability

and rate of profit growth in ways not available to purely
domestic enterprises. Firms that operate internationally
are able to
1. Expand the market for their domestic product offerings by
selling those products in international markets.
2. Realize location economies by dispersing individual value
creation activities those locations around the globe where
they can be performed most efficiently and effectively.
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Global Expansion, Profitability and Profit Growth

3. Realize greater cost economies from experience

effects by serving an expanded global market
from a central location, thereby reducing the costs
of value creation.
4. Earn a greater return by leveraging any valuable
skills developed in foreign operations and
transferring them to other entities within the firm’s
global network of operations.
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Expanding the Market: Leveraging Products

and Competencies
A company can increase its growth rate by taking goods
or services developed at home and selling them
internationally. Almost all multinationals started out
just doing this. The success of many multinational
companies that expand in this manner is based not
just upon the goods or services that they sell in
foreign nations but also upon the core competencies
that underlie the development, production, and
marketing of those goods or services. The term core
competencies refers to skills within the firm that
competitors cannot easily match.
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Location Economies

Location economies, which are the economies that arise

from performing a value creation activity in the
optimal location for that activity, wherever in the
world that might be. Locating a value creation
activity in the optimal location for that activity can
have one of two effects. It can lower the costs of
value creation and help the firm achieve a low-cost
position and it can enable a firm to differentiate its
product offering from those of competitors
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Experience Effects

The experience curve refers to systematic reductions in

production costs that have been observed to occur
over the life of a product. Two things explain this:
first one is, learning effects that refer to cost
savings that come from learning by doing. Labor,
for example, learns by repetition how to carry out a
task, such as assembling airframes, most
efficiently. Labor productivity increases over time
as individuals learn the most efficient ways to
perform particular tasks.
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Experience Effects

Equally important, in new production facilities

management typically learns how to manage
the new operation more efficiently over
time. Second one is economies of scale that
refer to the reductions in unit cost achieved
by producing a large volume of product.
Attaining economies of scale lowers a firm’s
unit costs and increases its profitability.
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Choosing a Strategy
1. Global standardization strategy: firms that pursue a global
standardization strategy focus on increasing profitability and
profit growth by reaping the cost reductions that come from
economies of scale, learning effects and location economies that
is their strategic goal is to pursue a low-cost strategy on a global
scale.
2. Localization strategy: a localization strategy focuses on
increasing profitability by customizing the firm’s goods or
services so they provide a good match to tastes and preferences in
different national markets. Localization is most appropriate
where consumer taste and preferences differ substantially across
nations and cost pressures are not too intense.
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Choosing a Strategy
3 Transnational strategy: firms that pursue a transnational strategy
are trying to simultaneously achieve low costs through location
economies, economies of scale and learning effects; differentiate
their product offering across geographic markets to account for
local differences and foster a multidirectional flow of skills
between different subsidiaries in the firm’s global network of
operations.
4. International strategy: firms pursue international strategy, taking
products first produced for their domestic market and selling
them internationally with only minimal local customization. They
tend to establish manufacturing and marketing functions in each
major country or geographic region in which they do business.
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Entry Strategy and Strategic Alliances

For entering into a market two closely related issues

are important such as: (1) the decision of which
foreign markets to enter, when to enter them and on
what scale; and (2) the choice of entry mode. Any
firm contemplating foreign expansion must first
struggle with the issue of which foreign markets to
enter and the timing and scale of entry. The choice of
which markets to enter should be driven by an
assessment of relative long-run growth and profit
potential. The choice of mode for entering a foreign
market is determined by transport costs, trade
barriers, political risks, economic risks, business risks
and firm strategy.
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Basic Entry Decisions

1. Which foreign markets? The choice of entering a
foreign market must be based on an assessment of a
nation’s long-run profit potential. This potential is a
function of several factors such as economic and
political factors, balancing of benefits and costs and
value an international business can create in a
foreign market. By considering such factors, a firm
can rank countries in terms of their attractiveness
and long-run profit potential. Preference is then
given to entering markets that rank highly.
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Basic Entry Decisions

2. Timing of entry: the timing of entry in

a foreign market is early when an
international business enters a foreign
market before other foreign firms and
late when it enters after other
international business have already
established themselves.
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Basic Entry Decisions

3. Scale of entry and strategic commitments: entering a

market on a large scale involves the commitment of
significant resources; it also implies rapid entry. The
consequences of entering on a significant scale –
entering rapidly – are associated with the value of
resulting strategic commitments. A strategic commitment
has a long-term impact and is difficult to reverse.
Deciding to enter a foreign market on a significant scale
is a major strategic commitment such as rapid large scale
market entry, can have an important influence on the
nature of competition in a market.
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Entry Modes

Once a firm decides to enter a foreign market, the

question arises as to the best mode of entry.
Firms can use the following six modes to enter
foreign markets:
1. Exporting 2. Turnkey projects
3. Licensing 4. Franchising
5. Joint ventures6. Wholly owned subsidiary
Selection of an entry mode depends on relative
advantages and disadvantages of each of the
mode mentioned above.
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Core Competencies and Entry Mode

Firms expand internationally to earn greater returns

from their core competencies, transferring the skills
and products derived from their core competencies to
foreign markets where indigenous competitors lack
those skills. The optimal entry mode for these firms
depends to some degree on the nature of their core
competencies. A distinction can be drawn between
firms whose core competency is in technological
know-how and those whose core competency is in
management know-how.
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Strategic Alliances
Strategic alliances refer to cooperative agreements
between potential or actual competitors concerned
specifically with strategic alliances between firms from
different countries. Strategic alliances run the range
from formal joint ventures, in which two or more firms
have equity stakes, to short-term contractual
agreements, in which two companies agree to cooperate
on a particular task. Collaboration between competitors
is fashionable; recent decades have seen an explosion in
the number of strategic alliances.
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Strategic Alliances

The advantages of alliances are that they facilitate

entry into foreign markets, enable partners to share
the fixed costs and risk associated with new products
and processes, facilitate the transfer of
complementary skills between companies, and help
firms establish technical standards. The
disadvantages of alliance is that the firm risks
giving away technological know-how and market
access to its alliance partner.