BUS 499, Week 7: International Strategy Slide # Topic Narration 1 Introduction Welcome to Senior Seminar in Business Administration. In this lesson we will discuss International Strategy. Please go to the next slide. 2 Objectives Upon completion of this lesson, you will be able to: Identify various levels and types of strategy in a firm. Please go to the next slide. 3 Supporting Topics In order to achieve this objective, the following supporting topics will be covered: Identifying international opportunities: incentives to use an international strategy; International strategies; Environmental trends; Choice of international entry mode; Strategic competitive outcomes; and Risks in an international environment. Please go to the next slide. 4 Overview An international strategy is a strategy through which the firm sells its goods or services outside its domestic market. One of the primary reasons for implementing an international strategy is that international markets yield potential new opportunities. Typically, a firm discovers an innovation in its home-country market, especially in an advanced economy such as that of the United States. Often demand for the product then develops in other countries, and exports are provided by domestic operations. Increased demand in foreign countries justifies making investments in foreign operations, especially to fend off foreign competitors. Another traditional motive for firms to become multinational is to secure needed resources. Key supplies of raw material, especially minerals and energy, are important in some industries. Other industries, such as clothing, electronics, watch making, and many others, have moved portions of their operations to foreign locations in pursuit of lower production costs. Please go to the next slide. 5 Overview, continued When international strategies are successful, firms can derive four basic benefits: Increased market size; Greater returns on major capital investments or on investments in new products and processes; Greater economies of scale, scope, or learning; and A competitive advantage through location. Firms can expand the size of their potential market by moving into international markets. The primary reason for investing in international markets is to generate above-average returns on investments. Still, firms from different countries have different expectations and use different criteria to decide whether to invest in international markets. By expanding their markets, firms may be able to enjoy economies of scale, particularly in their manufacturing operations. To the extent that a firm can standardize its products across country borders and use the same or similar production facilities, thereby coordinating critical resource functions, it is more likely to achieve optimal economies of scale. Firms may locate facilities in other countries to lower the basic costs of the goods or services they provide. These facilities may provide easier access to lower-cost labor, energy, and other natural resources. Other location advantages include access critical supplies and to customers. Once positioned favorably with an attractive location, firms must manage their facilities effectively to gain the full benefit of a location advantage. Please go to the next slide. 6 International Strategy Firms choose to use one or both of two basic types of international strategies: business-level international strategy and corporate-level international strategy. At the business level, firms follow generic strategies of: Cost leadership; Differentiation: Focused cost leadership; Focused differentiation; or Integrated cost leadership or differentiation. In addition, distinct county factors must be given thorough consideration when making a decision in an international context. International corporate-level strategy is required when the firm operates in multiple industries and multiple countries or regions. The three corporate-level international strategies are multidomestic, global, or transnational. To create competitive advantage, each strategy must utilize a core competence based on difficult-to-imitate resources and capabilities. Multidomestic strategy is an international strategy in which strategic and operating decisions are decentralized to the strategic business unit in each country so as to allow that unit to tailor products to the local market. In contrast, global strategy assumes more standardization of product across county market. On the other hand, transnational strategy seeks to achieve both global efficiency and local responsiveness using flexible coordination, which is building a shared vision and individual commitment through an integrated network. Please go to the next slide. 7 Environmental Trends Although the transnational strategy is difficult to implement, emphasis on global efficiency is increasing as more industries begin to experience global competition. Global competitions demand some customization to meet government regulations within particular countries or to fit customer tastes and preferences. Two trends that are becoming more common in global markets are liability of foreignness, which has increased since the terrorist attacks and the war in Iraq, and regionalization. There are concerns about the relative attractiveness of global strategies, due to the extra cost incurred to pursue internationalization, or the liability of foreignness relative to domestic competitors in a host country. 8 Types of Entry International expansion is accomplished by exporting products, participating in licensing arrangements, forming strategic alliances, making acquisitions, and establishing new wholly owned subsidiaries. Each means of market entry has its advantages and disadvantages. Thus, choosing the appropriate mode or path to enter international markets affects the firm’s performance in those markets. Many industrial firms begin their international expansion by exporting goods or services to other countries. Exporting does not require the expense of establishing operations in the host countries, but exporters must establish some means of marketing and distributing their products. Usually, exporting firms develop contractual arrangements with host country firms. The disadvantages of exporting include the often high costs of transportation and tariffs placed on some incoming goods. Licensing is an increasingly common form of organizational network, particularly among smaller firms. A licensing arrangement allows a foreign company to purchase the right to manufacture and sell the firm’s products within a host country or set of countries. The licensor is normally paid a royalty on each unit produced and sold. The license takes the risks and makes the monetary investments in facilities for manufacturing, marketing, and distributing the goods or services. As a result, licensing is possibly the least costly form of international expansion. In recent years, strategic alliances have become popular means of international expansion. Strategic alliances allow firms to share the risks and the resources required to enter international markets. Moreover, strategic alliances can facilitate the development of new core competencies that contribute to the firm’s future strategic competitiveness. As free trade has continued to expand in global markets, cross-border acquisitions have also been increasing significantly. Acquisitions can provide quick access to a new market. In fact, acquisitions often provide the fastest and the largest initial international expansion of any of the alternatives. Thus, entry is much quicker than by other modes. The establishment of a new wholly owned subsidiary is referred to as a greenfield venture. The process of creating such ventures is often complex and potentially costly, but it affords maximum control to the firm and has the most potential to provide above-average returns. Please go to the next slide. 9 Strategic Competitive Outcomes Firms have numerous reasons to diversify internationally. International diversification is a strategy through which a firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets. Because of its potential advantages, international diversification should be related positively to firms’ returns. Research has shown that, as international diversification increases, firms’ returns decrease initially but then increase quickly as firms learn to manage international expansion. In fact, the stock market is particularly sensitive to investments in international markets. Firms that are broadly diversified into multiple international markets usually achieve the most positive stock returns, especially when they diversify geographically into core business areas. International diversification provides the potential for firms to achieve greater returns on their innovations and reduces the often substantial risks of R&D investments. Many factors contribute to the positive effects of international diversification, such as potential economies of scale and experience, location advantages, increased market size, and the opportunity to stabilize returns. The stabilization of returns helps reduce a firm’s overall risk. All of these outcomes can be achieved by smaller and newer ventures, as well as by larger and established firms. Although firms can realize many benefits bu implementing an international strategy, doing so is complex and can produce greater uncertainty. The complexity includes problems in managing diverse international operations, multiple cultural environments, potentially rapid shifts in the value of different currencies and the instability of some national governments. Please go to the next slide. 10 International Risks International diversification carries multiple risks. Because of these risks, international expansion is difficult to implement and manage. The chief risks are political and economic. Political risks are related to instability in national governments and to war, both civil and international. Instability in a national government creates numerous problems, including: Economic risks and uncertainty created by government regulation; The existence of many, possibly conflicting, legal authorities or corruption; and The potential nationalization of private assets. Economic risks are interdependent with political risks. If firms cannot protect their intellectual property, they are highly unlikely to make foreign direct investments. Countries therefore need to create and sustain strong intellectual property rights and enforce them in order to attract desired foreign direct investment. Another economic risk is the security risk posed by terrorists. Please go to the next slide. 11 Check Your Understanding 12 Summary We have reached the end of this lesson. Let’s take a look at what we have covered. First, we discussed return on investment. The primary reason for investing in international markets is to generate above-average returns on investments. Next, we went over economies of scale and learning. By expanding their markets, firms may be able to enjoy economies of scale, particularly in their manufacturing operations. We then discussed international strategy. Firms choose to use one or both of two basic types of international strategies: business-level international strategy and corporate-level international strategy. Next, we talked about types on entry into the international market. These include exporting, licensing, strategic alliances, acquisitions, and new wholly owned subsidiaries. We then discussed international diversification. International diversification is a strategy through which a firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets. We concluded the lesson with a discussion on international risks. International diversification carries multiple risks. Because of these risks, international expansion is difficult to implement and manage. The chief risks are political and economic. This completes this lesson.