CHAPTER 7

International Strategy:
Creating Value in
Global Markets

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 The Global Economy: A Brief Overview

-The rise of Globalization created tremendous business

opportunities for multinational corporations. Globalization has to
do with the rise of market capitalization around the world where:-
1. International exchanges have increased in:-
• Trade in goods & services
• Exchange of money, information, and ideas
2. Laws, rules, norms, values, and ideas are growing more similar
across countries.
-Globalization challenges include balancing between emerging
markets & developed markets.
-The global marketplace provides many opportunities for firms to
increase their revenues and their profitability. However, managers
face many risks when they diversify abroad.
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Factors affecting Nation’s Competitiveness

-A nation’s competitiveness depends on the capacity of

its leading industries to innovate and up grade.
-Michael Porter’s diamond of national advantage
explains why some nations and their industries are more
competitive and outperform others.
-Four attributes jointly determine the playing field that
each nation establishes for its industries to operate:-
1. Factor endowments.
2. Demand conditions.
3. Related and supporting industries.
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 Factors Affecting a Nation’s
Competitiveness: Factor Endowments

-Factor endowments: Classical economics suggests that

factors of production( ex. raw material, land, labor, capital)
are the building blocks that create consumer goods &
services and should be inherited to determine the flow of
trade.
-However, many nations’ industries seeking competitive
advantage over others create and develop many of the
factors of production that are industry- and firm-specific
(Ex. Japan-just-in-time technique)
- Firm-specific knowledge and skills created within a country
that are rare, valuable, difficult to imitate, rapidly &
efficiently deployed are the factors of production that
ultimately lead to a nation’s competitive advantage.
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 Factors Affecting a Nation’s
Competitiveness: Demand Conditions

-Demand conditions: Refer to consumers’ demands for

goods and services put on an industry. Consumers who
demand high standards, highly specific, sophisticated
products and services force firms to be creative and
innovative.
- Accordingly, demanding consumers drive firms in a country
to:
• Meet high standards.
• Upgrade existing products and services.
• Create innovative products and services.
• Better anticipate future global demand.
• Proactively respond to product & service requirements.
(Ex. In Denmark consumers’ demand for environmentally safe products has
encouraged Danish manufacturers to become leaders in water pollution control
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equipment—products)
Factors Affecting a Nation’s Competitiveness:
Related & Supporting Industries

-Related and supporting industries enable firms to

manage inputs more effectively. Countries with a strong
supplier base benefit by adding efficiency to downstream
activities. A competitive supplier base helps a firm to
reduce manufacturing costs.
-Regional proximity and close working relationships with
suppliers provide the potential to develop competitive
advantages through joint R&D and enhances an ongoing
exchange of knowledge.
-Related industries force existing firms to practice cost
control, product innovation and better distribution
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Factors Affecting a Nation’s
Competitiveness: Firm Strategy,
structure, & rivalry
- National circumstances affect how firms are created, organized and
managed, in addition to the nature of domestic rivalry.
- Ex. Italy, international competitors are SMEs that are privately owned.
German companies are hierarchical and top managers have technical
backgrounds. German management system works well in engineering-
oriented industries where complex products demand precision & disciplined
management [Link] success is rare in consumer goods where
image marketing and rapid new feature and model turnover are important.
- Countries also differ in goals that firms seek to achieve. Firm goals reflect
characteristics of capital markets and managers compensation.
- In Germany and Switzerland, banks are major shareholders, so shares
are held for long-term periods and are rarely traded. Thus, firms do well
in mature industries.
- In the USA, they stress more on risk capital and on the public trading of
firms. New industries do well.
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Factors Affecting a Nation’s Competitiveness:
Firm Strategy, structure, & rivalry

- Rivalry is intense in nations with conditions of strong consumer

demand, strong supplier bases, and high new-entrant potential from
related industries.
-Rivalry increases the efficiency with which firms develop, market,
and distribute products and services within home country. It provides
a strong drive for firms to innovate and find new sources of
competitive advantage.
-Intense rivalry forces firms to look outside their national borders for
new markets, setting up the conditions necessary for global
competitiveness.
-Domestic rivalry is the strongest indicator of global competitive
success. Firms that have experienced intense domestic competition
are more likely to have designed strategies and structures that allow
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 International Expansion:
Motivations

- A company pursues international expansion for

many reasons. A company decides to become a
multinational firm in order to:
• Increase size of its markets to attain
economies of scale
• Take advantage of arbitrage opportunities
(is the practice of taking advantage of a price difference
between two or more markets) to be applied to
every stage of the value chain.
• Enhance a product’s growth potential by
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 International Expansion:
Motivations

- A company also decides to become a

multinational firm in order to:
• Optimize the location of value chain activity
in order to:-
• To enhance performance
• To reduce cost
• To reduce risk
• Take advantage of learning opportunities
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 International Expansion:
Potential Risks

- Multinational firms also encounter risks.

• Political risk due to social unrest, military turmoil,
demonstrations, terrorism, absence of rule of law can lead to:-
• Destruction of property and property rights

• Disruption of operations

• Non-payment for goods and services

• Arbitrary government decisions

• Economic risk due to piracy and forging.

• Currency risk due to fluctuations in the local currency’s
exchange rate that affects cost of production or net profit
• Management risk due to culture, customs, language, income
level, customer preferences, distribution systems that could lead
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 Entry Modes of International Expansion

- A firm has many options available when it decides to

expand into international markets. Given the challenges
associated with each entry options, many firms first start
on a small scale and then increase their level of
investment and risk as they gain greater experience with
overseas market in question.
-Modes of foreign entry, include: Exporting, Licensing,
Franchising, Joint ventures, Strategic Alliances & Wholly
owned subsidiaries.
-The various types of entry form a continuum ranging
from exporting (low investment and risk, low control) to
a wholly owned subsidiary (high investment and risk,
high control).
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 International Strategies:
Entry Modes, Chart

Exhibit 7.8 Entry Modes for International Expansion

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 International Strategies: Entry Modes

[Link]: Consists of producing goods in one country to sell in

another. This entry strategy enables a firm to invest the least amount
of resources in terms of its product, its organization and its overall
corporate strategy. Many host countries dislike this entry mode
because it provides less local employment compared to other modes.
-Advantages: Firms start from scratch in sales and distribution
when they enter new markets. Because many foreign markets are
nationally regulated and dominated by networks of local
intermediaries, firms partner with local distributors to benefit from
their expertise and knowledge of their own markets.
-Risks and Limitations: although, exporting is a relatively
inexpensive way to enter foreign markets, however; it can have
major downsides. Ex. the ability to tailor firm’s products to meet local
market
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Education.
 International Strategies: Entry Modes

2. Licensing and Franchising: Both are contractual

arrangements forms.
- Licensing: enables a company to receive a royalty or
fee in exchange for the right to use its trademark, patent, trade
secret, or other item of intellectual property.
- Franchising: contracts generally include broader range of
factors in an operation and have a longer time period during which
the agreement is in effect.
-Licensing advantage: the firm granting a license incurs little risk,
since it does not have to invest any significant resources into the
country itself. In turn, the licensee gains access to the trademark,
patent and is able to potentially create competitive advantages. Also,
the country benefits from the product being manufactured locally.
-Franchising advantage: Limits risk exposure that a licensor has in
overseas markets.
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 International Strategies: Entry Modes

- Risks and Limitations:

-With Licensing: The licensor gives up control of its
product and forgoes potential revenues and profits. Also, the
licensee may become so familiar with the patent and trade
secrets that it may become a competitor; that is, the licensee
may make some modifications to the product & manufacture
& sell it independently of the licensor without paying a royalty
fee. This potential situation is aggravated in countries that
have relatively weak laws to protect intellectual [Link],
if the licensee turns out to be a poor choice, the product
brand name and reputation may be flawed.
-With Franchising: the multinational firm receives
only a portion of the revenues in the form of franchise fees.
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 International Strategies: Entry Modes

Strategic Alliances and Joint Ventures : These forms of .3

partnership differ in that joint ventures entail the creation of a
new third-party entity, whereas strategic alliances do not. In
addition, strategic alliances generally focus on initiatives that are
.smaller in scope than joint ventures
- Benefits:
1. Effective in helping firms to increase revenues and reduce costs.
2. Enhance learning and diffuse technologies.
3. Enable firms to share risks as well as potential revenues & profits.
4. By gaining exposure to new sources of knowledge & technologies,
partnerships can help firms to develop core competencies that can
lead to competitive advantages.
5. Can provide useful information on local market tastes, culture
competitive conditions and legal matters .

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 International Strategies: Entry Modes

-Risks and Limitations:

1. There must be a clear defined strategy that is supported by firms that will
have partnership. Otherwise, firms may work at cross-purposes and not achieve
any of their goals.
2. There must be a clear understanding of capabilities and resources that will
be central to the partnership. Otherwise, there will be fewer opportunities for
learning and developing competencies that could lead to competitive
advantages.
3. Trust is a vital element. Phasing in the relationship between partners permits
them to get to know each other better and develop trust. Without trust, one
party may take advantage of the other by, for example, withholding its fair
share of resources and gaining access to privileged information through
unethical (or illegal) means.
4. Cultural issues that can lead to conflict and dysfunctional behaviors need to
be addressed. An organization’s culture is the set of values, beliefs, and
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attitudes that influence the behavior and goals of its employees
 International Strategies: Entry Modes

4. Wholly owned subsidiaries: It is where a MNC owns 100 percent of the

stock. Two ways a firm can establish this entry mode:(1) Acquiring an
existing company in home country. (2) Developing a totally new operation.
-Benefits:
1. Can yield the highest returns. It provides the MNC with the greatest
degree of control on all activities (manufacturing, marketing, distribution
and technology development).
2. Are most appropriate where a firm already has the appropriate
knowledge and capabilities that can leverage easily through multiple
locations.
- Risks and Limitations:
1. Are the most expensive and risky entry mode (with other modes the risk
is shared with the firm’s partners).The entire risk is assumed by the parent
company. However, risks associated with doing business in a new country
can beEducation.
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