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What is international strategy? “An international strategy is a strategy through which the firm sells its goods or services outside its domestic market” (Hill 378). One of the primary reasons for implementing an international strategy (as opposed to a strategy focused on the domestic market) is that international markets yield potential new opportunities.
Raymond Vernon captured the classic rationale for international diversification (Vernon 191). He suggested that, typically, a firm discovers an innovation in its home-country market, especially in an advanced economy such as that of the United States. Some demand for the product may then develop in other countries, and exports are provided by domestic operations. Increased demand in foreign countries justifies direct foreign investment in production capacity abroad, especially because foreign competitors also organize to meet increasing demand. “As the product becomes standardized, the firm may rationalize its operations by moving production to a region with low manufacturing costs” (Vernon 203). Vernon, therefore, suggests that firms pursue international diversification to extend a product’s life cycle.
“Firms can derive four basic benefits from using international strategies: 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 (for example, access to low-cost labor, critical resources, or customers)” (Hill 381).
Increased Market Size
Firms can expand the size of their potential market by moving into international markets. As part of its expansion efforts, Whirlpool learned how to be successful in emerging markets. In India, the firm conducted 14 months of research on local tastes and values. The company also provided incentives to Indian retailers to stock its products, and its uses local contractors to collect payment and deliver appliances throughout India. Since implementing this strategy in 1996, Whirlpool’s sales in India had grown 80% by 2001. “The ability to market its appliances overseas is important to Whirlpool because U.S. demand is forecast to stay flat through 2009, but international demand should grow 17%, to 293 million units” (Engardio).
Although changing consumer tastes and practices linked to cultural values or traditions is not simple, following an international strategy is a particularly attractive option to firms competing in domestic markets that have limited growth opportunities. The size of an international market also affects a firm’s willingness to invest in R&D to build competitive ad vantages in that market. Larger markets usually offer higher potential returns and thus pose less risk for a firm’s investments. The strength of the science base in the country in question also can affect a firm’s foreign R&D investments. Most firms prefer to invest more heavily in those countries with the scientific knowledge and talent to produce value-creating products and processes from the R&D activities. However, “research indicates that simultaneously pursuing R&D and collaborative foreign R&D joint ventures reduces effectiveness” (Shrader 47).
Return on Investment
The primary reason for making investments in international markets is to generate above-average returns on investments. For example, with domestic growth in the low single digits, Tricon Global Restaurants, owner of KFC, Pizza Hut, and Taco Bell, has increased its overall growth by expanding globally, Tricon has around 5,000 KFC restaurants in the U.S. currently and has opened over 6,000 internationally. Overall the company operates more than 30,000 restaurants in over 100 countries worldwide-more than any other restaurant company. Even though the firm focused on growth, its global expansion realized an improved return on investment. “Tricon’s margin on its investments was up to just over 15% in 2001 from 11.6% in 1997, and the company’s stock value doubled in 2001 compared to August of 2000” (O’Keefe 104). This success has come from the company’s strategy of adapting to local tastes and preferences in international markets.
Expected returns from the investments represent a primary predictor of firms moving into international markets. Still, firms from different countries have different expectations and use different criteria to decide whether to invest in international markets.
Economies of scale, scope, and learning
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” (Mauri & Phatak 234).
“Firms may be able to exploit core competencies in international markets through resource and knowledge sharing between units across country borders” (Hill 384). This sharing generates synergy, which helps the firm produce higher-quality goods or services at lower cost. In addition, working across international markets provides the firm with new learning opportunities. Multinational firms have substantial occasions to learn from the different practices they encounter in separate international markets. Even firms based in developed markets can learn from operations in emerging markets.
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” (Daniels, Radebaugh, & Sullivan 107). Other location advantages include access to 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.
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: cost leadership, differentiation, focused cost leadership, focused differentiation, or integrated cost leadership/differentiation. There are three corporate-level international strategies: multidomestic, global, or transnational (a combination of multidomestic and global)” (Hill 390).
International Business-Level Strategy
Each business must develop a competitive strategy focused on its own domestic market. International business-level strategies have some unique features. “In an international business-level strategy, the home country of operation is often the most important source of competitive advantage” (Hill 391). The resources and capabilities established in the home country frequently allow the firm to pursue the strategy into markets located in other countries. However, as a firm continues its growth into multiple international locations, research indicates that the country of origin diminishes in importance as the dominant factor.
International Corporate-Level Strategy
The international business-level strategies are based at least partially on the type of international corporate-level strategy the firm has chosen. Some firms pursue corporate strategies that give individual country units the authority to develop their own business-level strategies; other corporate strategies dictate the business-level strategies in order to standardize the firm’s products and sharing of resources across countries.
“International corporate-level strategy focuses on the scope of a firm’s operations through both product and geographic diversification” (Hill 391). International corporate-level strategy is required when the firm operates in multiple industries and multiple countries or regions. The headquarters unit guides the strategy, although business or country-level managers can have substantial strategic input, given the type of international corporate level strategy followed. The three international corporate-level strategies are multidomestic, global, and transnational.
“A multidomestic strategy is an international strategy in which strategic and operating decisions are decentralized to the strategic business unit in each country to allow that unit to tailor products to the local market” (Hill 392). A multidomestic strategy focuses on competition within each country. It assumes that the markets differ and therefore are segmented by country boundaries. With multidomestic strategies, the can customize its products to meet the specific needs and preferences of local customers. Therefore, these strategies should maximize a firm’s competitive response to the idiosyncratic requirements of each market.
In contrast to a multidomestic strategy, a global strategy assumes more standardization of products across country markets. As a result, a global strategy is centralized and controlled by the home office. The strategic business units operating in each country are assumed to be interdependent, and the home office attempts to achieve integration across these businesses. “A global strategy is an international strategy through which the firm offers standardized products across country markets with competitive strategy being dictated by the home office” (Hill 393). Thus, a global strategy emphasized economies of scale and offers greater opportunities to utilize innovations developed at the corporate level or in one country in other markets.
“A transnational strategy is an international strategy through which the firm seeks to achieve both global efficiency and local responsiveness” (Hill 393). Realizing these goals is difficult: one requires close global coordination while the other requires local flexibility. “Flexible coordination”-building a shared vision and individual commitment through an integrated network-is required to implement the transnational strategy. In reality, it is difficult to successfully use the transnational strategy because of the conflicting goals. On the positive side, effective implementation of a transnational strategy often produces higher performance than does implementation of either the multidomestic or global international corporate-level strategies.
Although the transnational strategy is difficult to implement, emphasis on global efficiency is increasing as more industries begin to experience global competition. To add to the problem, there is also an increased emphasis on local requirements: global goods and services often require some customization to meet government regulations within particular countries or to fit customer tastes and preferences. In addition, most multinational firms desire coordination and sharing of resources across country markets to hold down costs. Furthermore, some products and industries may be more suited than others for standardization across country borders.
As a result, most large multinational firms with diverse products employ a multidomestic strategy with certain product lines and a global strategy with others. Many multinational firms may require this type of flexibility if they are to be strategically competitive, in part due to trends that change over time.
Choice of International Entry Mode
After the firm selects its international strategies and decides whether to employ them in regional or world markets, it must choose a market entry mode. “International expansion is accomplished by exporting products, licensing arrangements, strategic alliances, acquisitions, and establishing new wholly owned subsidiaries” (Hill 434). 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
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 possible tariffs placed on incoming goods” (Hill 434). Furthermore, the exporter has less control over the marketing and distribution of its products in the host country and must either pay the distributor or allow the distributor to add to the price to recoup its costs and earn a profit. As a result, it may be difficult to market a competitive product through exporting or to provide a product that is customized to each international market. However, evidence suggests that cost leadership strategies enhance that performance of exports in developed countries, whereas differentiation strategies are more successful in emerging economies.
Licensing is one form of organizational network that is becoming common, particularly among smaller firms. “A licensing arrangement allows a foreign firm to purchase the right to manufacture and sell the firm’s products within a host country or set of countries” (Hill 436). The licenser is normally paid a royalty on each unit produced and sold the licensee 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.
Licensing is also a way to expand returns based on previous innovations. Even if product life cycles are short, licensing may be a useful tool. For instance, because the toy industry faces relentless change and unpredictable buying patterns, licensing is used and contracts are often completed in foreign markets where labor may be less expensive.
In recent years, strategic alliances have become a popular means of international expansion. “Strategic alliances allow firms to share the risks and the resources required to enter international markets” (Daniels, Radebaugh, & Sullivan 414). Moreover, strategic alliances can facilitate the development of new core competencies that contribute to the firm’s future value creation.
Most strategic alliances are formed with a host-country firm that knows and understands the competitive conditions, legal, and social norms, and cultural idiosyncrasies of the country, which should help the expanding firm manufacture and market a competitive product. In return, the host-country firm may find its new access to the expanding firm’s technology and innovative products attractive. Each partner in an alliance brings knowledge or resources to the partnership. Indeed, partners often enter an alliance with the purpose of learning new capabilities. Common among those desired capabilities are technological skills.
Not all alliances are successful; in fact, many fail. The primary reasons for failure include incompatible partners and conflict between the partners. International strategic alliances are especially difficult to manage. Several factors may cause a relationship to sour. Trust between the partners is critical and is affected by at least four fundamental issues: the initial condition of the relationship, the negotiation process to arrive at an agreement, partner interactions, and external events.
As free trade has continued to expand in global markets, cross-border acquisitions have also been increasing significantly. “In recent years,
cross-border acquisitions have comprised more than 45% of all acquisitions completed worldwide” (Daniels, Radebaugh, & Sullivan 416). Acquisitions can provide quick access to a new market. In fact, acquisitions may provide the fastest, and often the largest, initial international expansion of any of the alternatives.
Although acquisitions have become a popular mode of entering international markets, they are not without costs. International acquisitions carry some of the disadvantages of domestic acquisitions. In addition, they can be expensive and often require debt financing, which also carries an extra cost. International negotiations for acquisitions can be exceedingly complex and are generally more complicated than domestic acquisitions. For example, it is estimated that only 20% of the cross-border bids made lead to a completed acquisition, compared to 40% for domestic acquisitions. Dealing with the legal and regulatory requirements in the target firm’s country and obtaining appropriate information to negotiate an agreement frequently present significant problems. Finally, the problems of merging the new firm into the acquiring firm often are more complex than in domestic acquisitions. The acquiring firm must deal not only with different corporate cultures, but also with potentially different social cultures and practices. Therefore, while international acquisitions have been popular because of the rapid access to new markets they provide, they also carry with them important costs and multiple risks.
New Wholly Owned Subsidiary
The establishment of a new wholly owned subsidiary is referred to as a Greenfield venture. This process is often complex and potentially costly, but it affords maximum control to the firm and has the most potential to provide above-average returns. This potential is especially true of firms with strong intangible capabilities that might be leveraged through a Greenfield venture.
The risks are also high, however, because of the costs of establishing new business operation in a foreign country. The firm may have to acquire the knowledge and expertise of the existing market by hiring either host-country nationals, possibly from competitors, or consultants, which can be costly. Still, the firm maintains control over the technology, marketing, and distribution of its products. Alternatively, “the company must build new manufacturing facilities, establish distribution networks, and learn and implement appropriate marketing strategies to compete in the new market” (Daniels, Radebaugh, & Sullivan 417).
Risks in an International Environment
International entry mode carries multiple risks. Because of these risks, international expansion is difficult to implement, and it is difficult to manage after implementation. The chief risks are political and economic. Taking these risks into account, highly internationally diversified firms are accustomed to market conditions yielding competitive situations that differ from what was predicted. Sometimes, these situations contribute to the firm’s value creation; on other occasions, they have a negative effect on the firm’s efforts.
Political risks are risks 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 regulations; the existence of many, possibly conflicting, legal authorities; and the potential nationalization of private assets” (Daniels, Radebaugh, & Sullivan 389).
Economic risks are interdependent with political risks. Foremost among the economic risks of international diversification are the differences and fluctuations in the value of different currencies. The value of the dollar relative to other currencies determines the value of the international assets and earnings of U.S. firms; for example, “an increase in the value of the U.S. dollar can reduce the value of U.S. multinational firms’ international assets and earnings in the countries” (Jacque & Vaaler 826). Furthermore, the value of different currencies can also dramatically affect a firm’s competitiveness in global markets because of its effect on the prices of goods manufactured in different countries.
Limits to International Expansion: Management Problems
Firms tend to earn positive returns on early international diversification, but the returns often level off and become negative as the diversification increases past some point. There are several reasons for the limits to the positive effects of international diversification. First, “greater geographic dispersion across country borders increases the costs of coordination between units and the distribution of products” (Rose & Wincoop 388). Second, “trade barriers, logistical costs, cultural diversity, and other differences by country greatly complicate the implementation of an international diversification strategy” (Rose & Wincoop 388).
Institutional and cultural factors can present strong barriers to the transfer of a firm’s competitive advantages from one country to another. Marketing programs often have to be redesigned and new distribution networks established when firms expand into new countries. In addition, firms may encounter different labor costs and capital charges.
The amount of international diversification that can be managed will vary from firm to firm and according to the abilities of each firm’s managed. The problems of central coordination and integration are mitigated if the firm diversifies into more friendly countries that are geographically close and have cultures similar to its own country’s culture. In that case, there are likely to be fewer trade barriers, the laws and customs are better understood, and the product is easier to adapt to local markets.
Management must also be concerned with the relationship between the host government and the multinational corporation. Although “government policy and regulations are often barriers, many firms, such as Toyota and General Motors, have turned to strategic alliances to over those barriers” (Manev & Stevenson 299). By forming interorganizational networks, firms can share resources and risks but also build flexibility.
The use of international strategies is increasing not only because of traditional motivations, but also for emerging reasons. Traditional motives include extending the product life cycle, securing key resources, and having access to low-cost labor. Emerging motivations focus on the combinations of the Internet and mobile telecommunications, which facilitates global transactions. Also, there is increased pressure for global integration as the demand for commodities becomes borderless, and yet pressure is also increasing for local country responsiveness.