CHAPTER 7: INTERNATIONAL STRATEGY: CREATING VALUE IN GLOBAL MARKETS Globalization- rise of market capitalism around the world - Increase

in international exchange, including trade in goods and services as well as exchange of money, ideas, and information - Growing similarity of rules, norms, values, and ideas across countries FACTORS AFFECTING NATIONS COMPETITIVENESS (DIAMOND OF NATIONAL ADVANTAGE) Factor Endowments- the nations position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry - Land, labor, capital, entrepreneur - Industry and firm specific - Pool of resources is less important than speed and efficiency with which these resources are deployed Demand Conditions- demands that consumers place on an industrys product or service - Demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and serviceshelps industries to better anticipate future demand conditions and proactively respond to product service and requirement Related and Supporting Industries- the presence or absence in the nation of supplier industries and other related industries that are internationally competitive - Enable firms to manage inputs more effectively by joint research and development and the ongoing exchange of knowledge Firms strategy, structure, and rivalry- the condition in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry - Intense rivalry forces firms ti look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness MOTIVATIONS TO PURSUE INTERNATIONAL EXPANSION o Increase the size of potential markets o Attain economies of scale o Taking advantage of arbitrage opportunities- buying something from where it is cheap and selling it somewhere where it commands a higher price o Larger size enables them to buy in large volumes, increasing the bargaining power with suppliers o Extending the life cycle of a product in maturity stage o Optimizing the physical location for every activity in its value chain Advantages: Performance enhancement Cost reduction- China, Vietnam, Indonesia/India Risk Reduction POTENTIAL RISKS OF INTERNATIONAL EXPANSION Political risk- potential threat to a firms operations in a country due to the ineffectiveness of the domestic political system - Social unrest, military turmoil, demonstrations, and even violent conflict and terrorism Economic risk- potential threat to a firms operations in a country due to economic policies and condition, including property rights laws and enforcement of those laws

Currency risk- potential threat to a firms operations in a country due to the fluctuation in local currencys exchange rate Management risk- potential threat to a firms operations in a country due to the problems that managers have making decisions in the context of foreign markets - Culture, customs, language, income levels, customer preferences, distribution systems DISPERSION OF VALUE CHAINS Outsourcing- occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house; domestic or foreign Offshoring- firm decides to shift an activity that they were performing in a domestic location to a foreign corporation
*Each value creating activity is performed in the location where the cost is lowest or the quality is the best.

2 OPPOSING FORCES THAT FIRMS FACE WHEN THEY EXPAND INTO GLOBAL MARKETS Cost reduction Adaptation to local markets 4 BASIC STRATEGIES International strategy- a strategy based on firms diffusion and adaptation of the parent companies knowledge and expertise to foreign markets, used in industries where the pressures for both local adaptation and lowering cost are low - Country units are allowed to make minor adaptations to products and ideas coming from the head office - Less independence and autonomy compared to multidomestic companies - Most suitable in situations where a firm has distinctive competencies that local companies in foreign markets lack Strengths: o Leverage and diffusion of a parent firms knowledge and core competencies o Lower costs because of less need to tailor products and services Weaknesses: o Limited ability to adapt to local markets o Inability to take advantage of new ideas and innovations occurring in local markets Global strategy- a strategy based on the firms centralization and control by the corporate office, with the primary emphasis on controlling costs, and used in industries where the pressure for local adaptation is low and the pressure for lowering costs is high - Corporate office strives to achieve a strong level of coordination and integration across the various businesses Strengths: o Strong integration across various businesses o Standardization leads to higher economies of scale, which lowers costs. o Helps create uniform standards of quality throughout the world. Limitations: o Limited ability to adapt to local markets o Concentration of activities may increase dependence on a single facility o Single locations may lead to higher tariffs and transportation costs

Multidomestic strategy- a strategy based on firms differentiating their products and services to adapt to local markets, used in industries where the pressure for local adaptation is high and the pressure for lowering cost is low - Decisions are decentralized Strengths: o Ability to adapt products and service to local market conditions o Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue Limitations: o Decreased ability to realize cost saving through scale economies o Greater difficulty in transferring knowledge across countries o May lead to overadaptation as conditions change Transnational strategy- a strategy based on firms; optimizing the trade-offs associated with efficiency, local adaptation, and learning, used in industries where the pressures for both local adaptation and lowering costs are high - seeks efficiency not for its own sake but as means to achieve global competitiveness - recognizes the importance of local responsiveness but as a tool for flexibility in international operations - downstream ( closer to customer ) requires more decentralization in order to adapt to local market conditions (marketing and sales, service) - upstream - centralized because there is less need for adapting these activities to local markets and the firm can benefit from economies of scale Strengths: o Ability to attain economies of scale o Ability to adapt to local markets o Ability to locate activities in optimal locations o Ability to increase knowledge flows and learning Limitations: o Unique challenges in determining optimal locations of activities to ensure cost and quality o Unique managerial challenges in fostering knowledge transfer Global or Regional? Global at least 20% of sales in each of the three major economic regions (North America, Europe, and Asia) ENTRY MODES OF INTERNATIONAL EXPANSION Exporting- producing goods of one country ti sell in another - less local employment - firms need to partner with local distributors o benefit from their valuable expertise and knowledge of their own markets - inexpensive, very crucial to takeover or acquisition Licensing- a contractual agreement in which a company receives s royalty or fee in exchange to use the trademark, patent, trade secret or other valuable intellectual property Franchising- a contractual agreement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising

Risks: Licensee may become so familiar with the patent or trade secrets that it may become a competitor - had the firm set up the operation itself, it would have had the entire revenue to itself Strategic Alliance (focus on initiatives that are smaller in scope) and Joint Ventures (entails the creation of a third party entity) Benefits: o Enables firm to share risks as well as potential revenues and profits o Effective in helping firms increase revenues and reduce costs as well as enhance learning and diffuse technologies o Developing core competencies that can lead to competitive advantages in the marketplace by gaining exposure to new sources of technology o Provides very useful information on local market tastes, competitive conditions, legal matters and cultural nuances Risks: o Need of a clearly defined strategy that is strongly supported by the organizations that are party to the partnership o There must be a clear understanding of the capabilities and resources that will be central to the partnership o Trust is a vital element. o Cultural issues that can potentially lead to conflict and dysfunctional behaviours need to be addressed Wholly owned subsidiary- a business in which a multinational company owns 100percent of the stock a. acquire an existing company in the home country b. develop a totally new operation (greenfield venture) Benefits: o Can yield the highest returns with greatest degree of control o Most appropriate where a firm already has appropriate knowledge and capabilities that it can leverage rather easily through hiring talent from competitors Risks: o Most expensive and risky (entire risk is assumed by the parent company)