CHAPTER 7

International Strategy:
Creating Value in
Global Markets

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 Learning Objectives

After reading this chapter, you should have a good understanding of:
7-1 The importance of international expansion as a viable diversification strategy.
7-2 The sources of national advantage; that is, why an industry in a given country
is more (or less) successful than the same industry in another country.
7-3 The motivations (or benefits) and the risks associated with international
expansion, including the emerging trend for greater offshoring and
outsourcing activity.
7-4 The two opposing forces – cost reduction and adaptation to local markets –
that firms face when entering international markets.
7-5 The advantages and disadvantages associated with each of the four basic
strategies: international, global, multidomestic, and transnational.
7-6 The difference between regional companies and truly global companies.
7-7 The four basic types of entry strategies and the relative benefits and risks
associated with each of them.

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 International Strategy
(1 of 2)

Consider . . .
The global marketplace provides many
opportunities for firms to increase their revenue
base and their profitability.
However, managers face many opportunities and
risks when they diversify abroad.
What should a firm do in order to create value and
attain a competitive advantage in this global
marketplace?

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 International Strategy:
Globalization
Globalization has to do with the rise of market
capitalization around the world.
• International exchanges have increased.
• Trade in goods & services

• Exchange of money, information, & ideas

• Laws, rules, norms, values, and ideas are growing more

similar across countries.

Challenges include balancing between emerging

markets & developed markets.
• How to meet the needs of customers at very different
income levels?
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 Factors Affecting a Nation’s
Competitiveness

Michael Porter’s diamond of national

advantage explains why some nations and their
industries outperform others.
• Factor endowments
• Demand conditions
• Related and supporting industries
• Firm strategy, structure, & rivalry

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 Factors Affecting a Nation’s
Competitiveness: Factor Endowments

Factor endowments involve factors of

production.
• Land
• Capital
• Labor

Factors of production must be industry & firm

specific.
• Must be rare, valuable, difficult to imitate, and
rapidly & efficiently deployed

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 Factors Affecting a Nation’s
Competitiveness: Demand Conditions

Demand conditions refer to the demands that

consumers place on an industry.
Demanding consumers drive firms in that 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.

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Factors Affecting a Nation’s Competitiveness:
Related & Supporting Industries

Related and supporting industries enable

firms to manage inputs more effectively.
• A competitive supplier base
• Reduces manufacturing costs

• Close working relationships with suppliers

• Allows for joint research & development

• Development of related industries

• Forces existing firms to practice cost control, product
innovation, better distribution methods

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 Factors Affecting a Nation’s
Competitiveness: Firm Strategy

Firm strategy, structure, & rivalry due to

• Strong consumer demand
• Strong supplier base
• High new entrant potential from related industries

Domestic rivalry leads to a search for new

markets.
Response to rivalry is a strong indicator of global
competitive success.

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 Question
(1 of 3)

All of the factors below have made India’s

software services industry extremely competitive
on a global scale except
A. a large pool of skilled workers.
B. a large network of public and private educational
institutions.
C. tax and antitrust legislation that protect the
dominant players in the industry.
D. a large, growing market, and sophisticated
customers.

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 Example: Factors Affecting a Nation’s Competitiveness

Exhibit 7.2 India’s

Diamond in Software
Source: From Kampur D.,and Ramamurti R.,
“India’s Emerging Competition Advantage in
Services,” Academy of Management
Executive: The Thinking Managers Source.
Copyright © 2001 by Academy of
Management.

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scription.
 International Expansion:
Motivations
(1 of 2)

A company pursues international expansion for

many reasons. A company decides to become a
multinational firm in order to:
• Increase size of potential markets
• Attain economies of scale

• Take advantage of arbitrage opportunities

• Applied to every stage of the value chain

• Enhance a product’s growth potential

• Reinvigorate the product life cycle

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 International Expansion:
Motivations
(2 of 2)

A company also decides to become a multinational

firm in order to:
• Optimize the location of value chain activity
• To enhance performance

• To reduce cost

• To reduce risk

• Take advantage of learning opportunities

• Explore reverse innovation
• Design & manufacture products locally

• Export no-frills products to developed markets

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 International Expansion: Risks
(1 of 2)

Multinational firms also encounter risks.

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

• Disruption of operations

• Non-payment for goods and services

• Arbitrary government decisions

• Economic risk due to piracy and counterfeiting

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 International Expansion: Risks
(2 of 2)

Multinational firms also encounter other risks.

• Currency risk due to fluctuations in the local
currency’s exchange rate
• Affects cost of production or net profit

• Management risk due to culture, customs,

language, income level, customer preferences,
distribution systems
• Could lead to the need for local adaptation of
apparently standard products

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 International Expansion: Managing Risks
(1 of 2)

Managing economic risk can be done through

global dispersion of value chains.
Various activities of the firm’s value chain can be
spread across several countries & continents via
• Outsourcing
• Offshoring

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 International Expansion: Managing Risks
(2 of 2)

Offshoring may be costly.

Common savings from offshoring include:
• Lower wages, benefits, energy costs, regulatory costs, taxes

Hidden costs from offshoring include:

• Higher total wage & indirect costs, wage inflation
• Increased inventory due to longer lead time
• Reduced market responsiveness
• Increased coordination costs
• Cost of protecting intellectual property

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 International Strategies:
Opposing Pressures (1 of 2)

Cost reduction or adaptation to local markets?

Strategies that favor global products & brands should do
the following:
• Standardize all products for all markets.

• Reduce overall costs by spreading investments over a

larger market.

Assumes:
• Homogenous customer have needs & interests.

• People prefer lower prices at high quality.

• Global markets produce economies of scale.

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 International Strategies:
Opposing Pressures (2 of 2)

Cost reduction or adaptation to local markets?

Assumptions may be incorrect.
• Product markets DO vary widely between nations –
local adaptations work.
• There is a growing interest in multiple product
features, product quality, & service.
• Technology permits flexible production; cost of
production may not be critical to product cost; and a
firm’s strategy should not be solely product driven.

“One size fits all” does NOT generally apply.

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 International Strategies:
Opposing Pressures, Chart

Exhibit 7.3 Opposing Pressures and Four Strategies

Jump to Appendix 2 for long

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 International Strategy
(2 of 2)

An international strategy requires diffusion &

adaptation of the parent company’s knowledge &
expertise to foreign markets.
The primary goal is worldwide exploitation of the
parent firm’s knowledge & capabilities.
• All sources of core competencies are centralized.
• Pressure for both local adaptation & low costs are
rather low.

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 International Strategy:
Strengths, Limitations

Strengths Limitations
Leverage and diffusion of a Limited ability to adapt to local
parent firm’s knowledge and markets.
core competencies.

Lower costs because of less Inability to take advantage of

need to tailor products and new ideas and innovations
services occurring in local markets.

Exhibit 7.4 Strengths and Limitations of International Strategies in the

Global Marketplace
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 Global Strategy

A global strategy implies a firm is interested in

lowering costs.
• Competitive strategy is centralized & controlled by
the corporate office.
• Products are standardized, operations centralized,
producing economies of scale.
• Worldwide volume supports R&D.
• There’s a standard level of quality worldwide.
• Pressure for reducing cost is high; pressure for
adaptation to local markets is weak.

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 Global Strategy: Strengths, Limitations

Strengths Limitations
Strong integration occurs across Limited ability exists to adapt to
various businesses. local markets.
Standardization leads to higher Concentration of activities may
economies of scale, which lower increase dependence on a single
costs. facility.
Creation of uniform standards of Single locations may lead to
quality throughout the world is higher tariffs and transportation
facilitated. costs.

Exhibit 7.5 Strengths and Limitations of Global Strategies

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 Multidomestic Strategy

A multidomestic strategy puts emphasis on

differentiating products & services to adapt to local
markets.
• Decisions are decentralized.

• Products & services are tailored to local use.

• Consider language, culture, income levels, customer
preferences, distribution systems.

• Markets can expand rapidly.

• Prices are differentiated by market.

• Pressure for local adaptation is high; pressure for

lowering costs is low.
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 Multidomestic Strategy: Strengths, Limitations

Strengths Limitations

Ability to adapt products and Decreased ability to realize cost

services to local market savings through scale
conditions. economies.
Ability to detect potential Possibility of leading to
opportunities for attractive “overadaptation” as conditions
niches in a given market, change.
enhancing revenue.

Exhibit 7.6 Strengths and Limitations of Multidomestic Strategies

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 Transnational Strategy

A transnational strategy seeks global

competitiveness via trade-offs.
• Efficiency versus local adaptation versus
organizational learning
• Assets & capabilities disbursed according to the
most beneficial location for a specific activity;
some value chain activities centralized, some
decentralized
• Economies of scale, increased knowledge flows

• Pressures for both local adaptation and lowering

costs high
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 Transnational Strategy: Strengths, Limitations

Strengths Limitations

Ability to attain economies of Unique challenges in determining

scale. optimal locations of activities to
ensure cost and quality.
Ability to adapt to local markets. Unique managerial challenges in
fostering knowledge transfer.
Ability to locate activities in
optimal locations.
Ability to increase knowledge
flows and learning.

Exhibit 7.7 Strengths and Limitations of Transnational Strategies

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 Question
(2 of 3)

In order to realize the strongest competitive advantage, firms

engaged in worldwide competition must
A. require that all of their various business units
follow the same strategy regardless of location.
B. ensure that all business units follow a strategy
strictly tailored to their respective locations.
C. pursue a strategy that combines the uniformity of
a global strategy and the specificity of a
multidomestic strategy in order to achieve optimal
results.
D. attempt to use the strategy that was most
successful in their home country.

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 International Strategies:
Global or Regional?

It may be unwise for companies to rush into full-

scale globalization.
Regionalization may be more reasonable.
• Distance still matters.
• Commonalities of language, culture, economics,
legal & political systems, and infrastructure all
make a difference.
• Trading blocs and free trade zones ease trade
restrictions, taxes, & tariffs.

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 Question
(3 of 3)

A domestic corporation considering expanding into

international markets for the first time will typically
A. start off by implementing a wholly owned foreign
subsidiary so it can maintain standards identical
to those at home.
B. consider licensing or franchising its operations.

C. consider implementing a low risk/low control

strategy such as exporting.
D. form a joint venture with a reputable foreign
producer.

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 International Strategies: Entry Modes

Options for international market expansion include:

• Exporting
• Low risk, locals know more; but products may not meet local
needs

• Licensing or franchising
• Limits risk; but licensor gives up control & profit

• Strategic alliance or joint venture

• Shares risk; but trust & culture issues can lead to conflict

• Wholly owned subsidiary

• Greatest control, highest returns; but expensive, greater
potential for miss-steps

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 International Strategies:
Entry Modes, Chart

Exhibit 7.8 Entry Modes for International Expansion

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