International Strategy: Creating Value in Global Markets

Chapter Seven

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

The Global Economy: A Brief Overview

• Globalization the increase in international exchange,

including trade in goods and services as well as exchange of money, information, ideas, and information.

the growing similarity of laws, rules, norms, values, and ideas across countries.

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The Global Economy: A Brief Overview

• The economies of East Asia have attained rapid growth

• Income in Latin America grew by only 6 percent in the past two decades

• Average incomes in sub- Saharan Africa and the old Eastern European bloc have actually declined

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Factors Affecting a Nation’s Competitiveness

• Factor endowments The nation’s position in factors of production,

such as skilled labor or infrastructure, necessary to compete in a given industry.

• Demand conditions The nature of home-market demand for the

industry’s product or service.

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Factors Affecting a Nation’s Competitiveness (cont.)

• Related and supporting industries The presence or absence in the nation of

supplier industries and other related industries that are internationally competitive.

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Factors Affecting a Nation’s Competitiveness (cont.)

• Firm strategy, structure, and rivalry The conditions in the nation governing how

companies are created, organized, and managed, as well as the nature of domestic rivalry.

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Factor Conditions

• To achieve competitive advantage, factors of production must be created Industry specific Firm specific

• The pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed

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Demand Conditions

• Demanding consumers drive firms in a country to Meet high standards Upgrade existing products and services Create innovative products and services

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Related and Supporting Industries

• Related and supporting industries Enable firms to manage inputs more

effectively Allow joint efforts among firms

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Firm Strategy, Structure and Rivalry

• Rivalry is intense in nations with conditions of: Strong consumer demand Strong supplier bases High new entrant potential from related

industries

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Firm Strategy, Structure and Rivalry

• Competitive rivalry increases the efficiency with which firms Develop within the home country Market within the home country Distribute products and services within the

home country

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Porter’s Diamond of National Advantage: As Applied to India

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QUESTION

All of the factors below have made India's software services industry extremely competitive on a global scale except A. Large pool of skilled workersB. Large network of public and private educational institutionsC. Tax and antitrust legislation that protect the dominant players in the industryD. Large, growing market and sophisticated customers

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A Company’s Motivation for International Expansion

• Increase the size of potential markets

• Attain economies of scale

• Taking advantage of arbitrage opportunities

• Extend the life cycle of a product

• Optimize the physical location for every activity in its value chain

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International Country Risk Ratings

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Potential Risks of International Expansion

• Political and economic risk Social unrest Military turmoil Demonstrations Violent conflicts and terrorism Laws and their enforcement

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Example: Transparency International Corruption Perceptions Index

• The 2008 Transparency International Corruption Perceptions Index (CPI) reveals the most corrupt countries in the world

• The scores range from ten (squeaky clean) to zero (highly corrupt).

• The five most corrupt countries are Somalia (CPI Score: 1.0) Myanmar (CPI Score: 1.3) Iraq (CPI Score: 1.3) Haiti (CPI Score: 1.4) Afghanistan (CPI Score: 1.5)

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Potential Risks of International Expansion

• Currency risks Currency exchange fluctuations Appreciation of the U.S. dollar

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Potential Risks of International Expansion

• Management risks Culture Customs Language Income levels Customer preferences Distribution system

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Outsourcing

• Outsourcing occurs when a firm decides to utilize other

firms to perform value-creating activities that were previously performed in-house.

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Offshoring

• Offshoring takes place when a

firm decides to shift an activity that they were previously performing in a domestic location to a foreign location.

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Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

• Strategies that favor global products and brands Should standardize all of a firm’s products for

all of their worldwide markets Should reduce a firm’s overall costs by

spreading investments over a larger market

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Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

Three assumptions1. Customer needs and interests worldwide are

becoming more homogeneous

2. People are willing to sacrifice product preferences for lower prices at high quality

3. Economies of scale in production and marketing can be achieved through supplying global markets

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Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

Assumptions may not always be true• Product markets vary widely between nations

• In many product and service markets, there appears to be a growing interest in multiple product features, quality and service

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Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

• Technology permits flexible production • Cost of production may not be critical to product

cost• Firm’s strategy should not be product-driven

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Opposing Pressures and Four Strategies

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International Strategy

• An international strategy is based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets.

• The primary goal of the strategy is worldwide exploitation of the parent firm’s knowledge and capabilities.

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Strengths and Limitations of International strategies

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Global Strategy

• Competitive strategy is centralized and controlled largely by corporate office

• Emphasizes economies of scale

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Strengths and Limitations of Global Strategies

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Multi-domestic Strategy

• Emphasis is differentiating products and services to adapt to local markets

• Authority is more decentralized

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Strengths and Limitations ofMulti-domestic Strategies

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Transnational Strategy

• Optimization of tradeoffs associated with efficiency, local adaptation, and learning

• Firm’s assets and capabilities are dispersed according to the most beneficial location for a specific activity

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Strengths and Limitations ofTransnational Strategies

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Entry Modes of International Expansion

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