Chapter 9: International Strategy Flashcards
Foreign direct investment definition (FDI)
Direct investment in production or
business in one country by a
business from another country.
Multinational firms
Firms that sell or produce in multiple countries.
Some of the differences between countries
that increase complexity and affect the success of international strategies include variations in:
- Customer tastes, needs, and income levels
- Government regulations
- Legal systems
- Public tolerance for foreign firms
- Reliability, and even existence, of basic infrastructure, such as roads and electricity
- Strength of supporting industries, including distribution channels to customers
This chapter addresses the complexity of international strategy by answering three questions strategists ask when thinking about going international:
- Why should we go international? What specific cost
or revenue advantages might we gain? - Where should we expand? Of all the countries we
could enter, which are the right ones? - How should we expand? What international strategy
should we employ? How can we tell if we
have the right one? And, what strategic options do
we have for entering a foreign country?
Globalization
The spread of businesses across national borders.
Why Firms Expand Internationally
1) Growth
2) Efficiency
3) Managing risk
4) Knowledge
5) Responding to customers or competitors
1) Growth
The need to grow sales is one of the biggest reasons that firms expand internationally
Example: This is one of the primary reasons that Harley-Davidson started selling in
foreign markets
2) Efficiency
Many firms enter additional markets in order to become more efficient.
Efficiency takes a number of forms, including
- obtaining lower-cost resources,
- extending the lifespan of products,
- achieving economies of scale and scope.
Product life cycle
The stages a product or service goes through
during its lifespan.
3) Managing risk
Operating in more than one country can also provide firms with a measure of protection against
disaster, both economic and natural
4) Knowledge
Another reason for expanding into other countries is to acquire valuable knowledge, the basis for innovation.
When a firm sells in different countries, to people with different tastes and needs, it often gains new insights about its products and services
5) Responding to customers or competitors
Last, but not least, firms may expand internationally in response to either customers or competitors.
This is particularly true of business-to-business (B2B) firms that perform intermediate
steps of the value chain for large customers
where to expand?
The easiest answer is to enter the country with the largest number of potential customers— often, a country with a huge population, such as China or India
Four types of distance (CAGE)
cultural,
administrative,
geographic,
economic
_________________ determined by a CAGE analysis, with an emphasis on the distance that most affects your specific industry, the greater the likelihood of a successful expansion.
The lower the distance
Cultural Distance
The degree of difference between the cultures of
two nations.
Examples: refers to differences in language and culture, the way people live and think about the world. People in another country might hold different beliefs about a host of significant issues, including how people should interact and how business should be conducted
Administrative Distance
The degree of differences between the
legal and regulatory frameworks of two nations.
Example: refers to differences in the legal, political, and regulatory institutions between countries. For example, are laws and government policies similar or different between two countries?
Administrative distance is low among countries that
(1) use the same legal system, such as the common law system used in the Anglo sphere (the United
Kingdom and its former colonies, including the United States, Canada, Australia, and India);
(2) used to be part of a colonizer/colony network, such as some European countries and their
former African colonies;
(3) use the same currency; or
(4) are part of the same trading bloc, such
as NAFTA in North America or the European Union.
Industries most directly affected by administrative distance are those in which
governments are most likely to have a stake
Example: This includes industries that provide equipment or services critical to national security, such as providers of steel or telecommunications;
those that employ large numbers of people; those that serve government directly, such as
mass-transportation equipment manufacturers; those that extract natural resources; and
those that produce staple goods that most people buy, such as rice in Thailand or corn in Mexico
Geographic Distance
The distance in miles, or kilometers,
between two countries.
Companies are more likely to succeed in nearby countries, because physical proximity lowers
both transportation and communication costs
That’s one reason most US companies expand
first to Canada and Mexico
Economic Distance
The degree of difference between the average
income of people in two different countries.
-usually measured as per capita GDP (gross domestic product
Firms from wealthy nations tend to expand to other wealthy nations because the customers there earn enough income to buy similar products.
The industries most affected by economic distance are those for which
the demand for the demand for products is very elastic—meaning demand changes dramatically as prices go up or down
Local responsiveness
A firm’s adjustments to products, services,
and processes in order to account
for local culture and needs.
In general, the more a company tailors a product or service to a local market,
the higher the cost
Global integration
The standardization of processes within a single business in different locations around the world.
There are three primary strategies firms can use to manage this strategic tension:
- Multidomestic strategy—emphasizes local responsiveness over standardization
- Global strategy—emphasizes global standardization and economies of scale over local responsiveness
- Arbitrage strategy—takes advantage of country-comparative advantages—sources of low cost (e.g., cheap labor) or unique resources (e.g., skilled workers)
Multidomestic Strategy—Adapt to Fit the Local Market
Multidomestic Strategy—Adapt to Fit the Local Market
Multidomestic strategy
A strategy involving tailoring products or services to
local markets.
Firms can manage variation in three major ways:
- Focus adaptations
- Externalize adaptations
- Design adaptability
- Focus adaptations
Some firms manage the variation by tightly focusing on a particular product, customer segment, or geographic area. Such highly focused firms still tailor
their products, but the amount of variety they face is more manageable by maintaining a tight focus.
- Externalize adaptations
Some firms externalize the work of adapting the product for local needs, generally by arranging for local customers to do it. Methods of externalization
include franchising and alliances, which are discussed later in this chapter
- Design adaptability
A third method for managing the costs of localization involves designing a product so that it can be adapted while still maintaining some economies of
scale. Some companies design for cheap adaptation by investing in flexible manufacturing that reduces the costs of short manufacturing runs.
Factor conditions
Land, natural
resources, and labor that allow for
production of goods and services.
Demand conditions
The conditions in a market that
determine the degree of demand
for a product or service.
Related and supporting
industries
Industries that produce products or services that
are inputs or complements to the
industry you are studying
Global Strategy—Aggregate and Standardize to Gain
Economies of Scale
Global Strategy—Aggregate and Standardize to Gain
Economies of Scale
Global strategy
A strategy involving selling standardized
products, using standardized
processes, around the world
Example: Apple is a great example of a firm that standardizes its products to achieve economies of scale but differentiates them from other smartphones, computers, or tablets in order to increase
the price customers are willing to pay for them.
Arbitrage Strategy
Arbitrage Strategy
Arbitrage Strategy definition
A strategy involving buying where costs
are low and selling where prices are high.
Economic arbitrage
Capitalizing on differences in costs by buying
where costs are low and selling where prices are high. This is the traditional, age-old definition of
arbitrage.
One of the most common modern forms of arbitrage
Capital arbitrage
Capitalizing on differences in the cost of capital by
acquiring capital where it is less expensive.
Example: For example, CEMEX, a Mexican cement manufacturer, operates plants in Spain so that it can raise capital in the European Union, where
interest rates are often lower than they are in Mexico
Cultural arbitrage
Capitalizing on differences in culture between
countries by actively using the culture of one country as a selling point for products being marketed
in another country.
Example: US-based fast-food restaurant chains
are popular worldwide partly because they embody US culture
Administrative arbitrage
Capitalizing on differences in taxes, regulations, and laws between countries by operating where they
are lower or more lax.
Example: Many companies
incorporate in the Cayman Islands because of low corporate tax rates
Transnational strategy
A strategy involving a combination of both local responsiveness and standardization.
Strategy combinations, of course, can also include multidomestic
and arbitrage strategies or global and arbitrage strategies as well
Four different modes of international market entry:
(1) exporting,
(2) licensing and franchising,
(3) joint ventures and alliances
(4) wholly owned subsidiaries
Exporting
Sending goods or services to another
country for sale.
If cultural or administrative distance is
large,
exporting might be the right decision, because you avoid the challenges of managing a
culturally different workforce in a foreign country
Licensing and Franchising
both involve selling the rights to produce a firm’s products or services
Licensing
Granting another business the permission to use or
sell a firm’s product, technology, or process.
Example: Tokyo Disneyland
Franchising
A license that allows a person or firm access to a
business’s proprietary knowledge, processes, or trademarks in order to allow them to sell a product or
service under the business’s name
Example: McDonald’s
Alliances
An agreement between two businesses to cooperate on a mutually beneficial project. It usually involves the sharing of resources and/or knowledge
Complementary assets
Assets owned by another company that are needed in order to successfully commercialize and market a
product or service.
Joint venture
An alliance between firms involving the
creation of a new entity where both firms provide assets and/ or knowledge, processes, or
technology.
Wholly owned subsidiaries
A unit in a foreign country that is wholly
owned by the parent company.
There are two ways of entering with wholly owned subsidiaries:
(1) a greenfield investment,
in which the firm builds operations from scratch; or
(2) acquiring a local firm
Greenfield investment
A wholly owned subsidiary in which the firm involved builds the facility from the ground up
