- What incentives influence firms to use international strategies? What are the three basic benefits firms can gain by successfully implementing an international strategy? Why?
- Determine why, given the advantages of international diversification, some firms choose not to expand internationally. Provide specific examples to support your response.
- As firms attempt to internationalize, they may be tempted to locate their facilities where business regulation laws are lax. Discuss the advantages and potential risks of such an approach, using specific examples to support your response.
*Classmate response below, only respond with 3-5 meaningful sentences*
International Strategy
A firm would use an international strategy to sell its goods and services within the global market. Usually the company produces the goods within their country and then sells the products to other countries. The strategy involves producing the product within an advanced economy and then once it thrives within that economy, the demand rises as other countries develop interest. Therefore firms would want to use international strategies for several reasons; international markets are sources of new opportunities where they can explore maximum possibilities to improve their business performance. The company has the ability to increase their product life cycle since once the products are produced in the home country; they have a chance to explore the global market which allows their product to receive more visibility. They can easily access more customers especially in economies that are just developing. Once they move to foreign markets it is easy to have access to economies of scale whereby they are able to reduce costs of labor and produce standardized products across the borders, they can increase their scope and can learn how different markets operate giving them a competitive advantage.
Through this strategy, the company is able to explore evolving technology which is a trend for all companies seeking to gain competitive advantage in recent times. International markets offer companies a chance to increase their market size and to generate a return on investment that is above average. Other basic strategies include corporate level strategies that involve multidomestic, global and transnational strategies that companies engage in so as to penetrate the international markets. The corporate level strategies are used when a company operates in many industries and in many countries and for the success of these strategies it is imperative that they use products and capabilities that are difficult to imitate. A multinational strategy allows for the company to secure need resources and a global demand for branded products.
There are three basic benefits that firms can gain by successfully implementing an international strategy; they gain the advantage of increasing the market size since they may lack the necessary support of the domestic market, they are able to receive returns on investment in that large investment projects would need to thrive in global markets so as to justify their capital expenditures and lastly they are able to expand their economies of scale in terms of manufacturing, research and development and distribution. Having economies of scale allows the companies to spread their costs over a large area thus gaining much returns in terms of profits earned.
Despite the advantages of international diversification, some firms choose to not expand internationally due to political risks, flow of capital between countries may face restrictions, countries have different laws in regards to trading different from the home country and the exchange risk which involves a danger that the exchange rate may not favor the company (Bogdan et al., 2016). An example of a successful company that was unable to succeed in the international front is ebay china. It was not as successful as other companies like TaoBao because it did not have a certain function on instant messaging and was not able to succeed in china despite its popularity in ecommerce (Ofili, 2016). It was also unable to take off in Japan since they did not adjust to the local preferences and so their strategies and purchasing methods did not work properly in that market. In order to complete a purchase, the clients had to input their credit card details and this had not yet been a popular thing in Japan hence ebay was unable to successfully take off.
Business regulation in different countries has become a subject of controversy as it is not understood how it impacts the growth of the economy of that country. Another aspect on business regulation is whether the presence of lax laws may lead the hosting country to be a ‘pollution haven’ (Dechezleprêtre & Sato, 2017). The presence of strict laws and regulations may cause a company to rethink investing in that country. This causes higher chances of corruption or bribery that may contribute to the poor performance of the company in that specific country. Strict regulations hinder liquidity within the country and thus foreign investment finds it difficult to sustain the companies within that country. Therefore leading to high production costs on the company investing there (Hassaballa, 2014). A company therefore would want to invest in a country that has lax regulation since the production costs are reduced and there is a chance of receiving cheap labor while creating comparative advantage that improves the performance of the company.
BUS
4
9
9, 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 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. |
Senior Seminar in Business Administration
BUS 499
International Strategy
Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (2009). BUS499: Strategic management: Competitiveness and globalization, concepts and cases: 2009 custom edition (8th ed.). Mason, OH: South-Western Cengage Learning.
Welcome to Senior Seminar in Business Administration.
In this lesson we will discuss International Strategy.
Please go to the next slide.
Objectives
Upon completion of this lesson, you will be able to:
Identify various levels and types of strategy in a firm
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.
Supporting Topics
Identifying international opportunities: incentives to use an international strategy
International strategies
Environmental trends
Choice of international entry mode
Strategic competitive outcomes
Risks in an international environment
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.
Overview
International strategy
Demand develops in other countries
Secure needed resources
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.
Overview, continued
Increased market size
Return on investment
Economies of scale and learning
Location advantages
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.
International Strategy
Business-level
Cost leadership
Differentiation
Focused cost leadership
Integrated cost leadership/differentiation
Corporate-level
Multidomestic
Global
Transnational
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.
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.
Please go to the next slide.
Environmental Trends
Liability of foreignness
Regionalization
7
Types of Entry
Exporting
Licensing
Strategic alliances
Acquisitions
New wholly owned subsidiary
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.
Strategic Competitive Outcomes
International diversification and returns
International diversification and innovation
Complexity of manging
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.
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.
Please go to the next slide.
International Risks`
Political risks
Economic 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.
Check Your Understanding
Summary
Return on investment
Economies of scale and learning
International strategy
Types of entry
International diversification
International risks
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.
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