Fluent Essays

Read and reflect on the assigned readings for the week. Then post what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding in each assigned textbook chapter. Your initial post should be based upon the assigned reading for the week, so the textbook should be a source listed in your reference section and cited within the body of the text. Other sources are not required but feel free to use them if they aid in your discussion. Also, provide a graduate-level response to each of the following questions: The Internet has lowered the entry barriers for smaller firms that wish to diversify into international markets. Why is this so? Provide an example. [Your post must be substantive and demonstrate insight gained from the course material. Postings must be in the students own words - do not provide quotes!] [Your initial post should be at least 450+ words and in APA format (including Times New Roman with font size 12 and double spaced) CHAPTER 7 International Strategy: Creating Value in Global Markets Copyright Anatoli Styf/Shutterstock 1 Learning Objectives After reading this chapter, you should have a good understanding of: 7-1 The importance of international expansion as a viable diversification strategy. 7-2 The sources of national advantage; that is, why an industry in a given country is more (or less) successful than the same industry in another country. 7-3 The motivations (or benefits) and the risks associated with international expansion, including the emerging trend for greater offshoring and outsourcing activity. 7-4 The two opposing forces – cost reduction and adaptation to local markets – that firms face when entering international markets. 7-5 The advantages and disadvantages associated with each of the four basic strategies: international, global, multidomestic, and transnational. 7-6 The difference between regional companies and truly global companies. 7-7 The four basic types of entry strategies and the relative benefits and risks associated with each of them. ©McGraw-Hill Education. 2 International Strategy (1 of 2) Consider . . . The global marketplace provides many opportunities for firms to increase their revenue base and their profitability. However, managers face many opportunities and risks when they diversify abroad. What should a firm do in order to create value and attain a competitive advantage in this global marketplace? ©McGraw-Hill Education. The trade among nations has increased dramatically in recent years and it is estimated that by 2025, 45 percent of the Fortune Global 500 will be based in emerging economies, which are now producing world-class companies with huge domestic markets and a commitment to invest in innovation. This makes international expansion a viable diversification strategy. In a variety of industries such as semiconductors, automobiles, commercial aircraft, telecommunications, computers, and consumer electronics, it is almost impossible to survive unless firms scan the world for competitors, customers, human resources, suppliers, and technology. Firms need to know how to be successful and create value when diversifying into global markets. Some of the questions that need to be answered include: What explains the level of success of a given industry in a given country? What are some of the major motivations and risks associated with international expansion? How can firms handle the opposing forces of cost reduction and local adaptation – should firms pursue international, global, multidomestic, or transnational strategies? What entry strategies should a firm choose in order to enter a foreign market? 3 International Strategy: Globalization Globalization has to do with the rise of market capitalization around the world. International exchanges have increased. Trade in goods & services Exchange of money, information, & ideas Laws, rules, norms, values, and ideas are growing more similar across countries. Challenges include balancing between emerging markets & developed markets. How to meet the needs of customers at very different income levels? ©McGraw-Hill Education. Globalization = has two meanings. One is the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information. Two is the growing similarity of laws, rules, norms, values, and ideas across countries. Globalization has undeniably created tremendous business opportunities for multinational corporations. One of the challenges with globalization is determining how to meet the needs of customers at very different income levels. In many developing economies, distributions of income remain much wider than they do in the developed world, leaving many impoverished even as the economies grow. The concept “bottom of the pyramid” refers to the practice of a multinational firm targeting its goods and services to the nearly 5 billion poor people in the world who inhabit developing countries. 4 Factors Affecting a Nation’s Competitiveness Michael Porter’s diamond of national advantage explains why some nations and their industries outperform others. Factor endowments Demand conditions Related and supporting industries Firm strategy, structure, & rivalry ©McGraw-Hill Education. Some nations and their industries are more competitive than others. Understanding these differences helps a firm create a competitive advantage when it expands internationally. Diamond of national advantage = a framework for explaining why countries foster successful multinational corporations, consisting of four factors – factor endowments; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry. These four attributes jointly determine the playing field that each nation establishes and operates for its industries. Factor endowments = a nation’s position in factors of production. Demand conditions = the nature of home-market demand for the industry’s product or service. Related and supporting industries = the presence, absence and quality in the nation of supplier industries and other related industries that supply services, support, or technology to firms in the industry value chain. 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. 5 Factors Affecting a Nation’s Competitiveness: Factor Endowments Factor endowments involve factors of production. Land Capital Labor Factors of production must be industry & firm specific. Must be rare, valuable, difficult to imitate, and rapidly & efficiently deployed ©McGraw-Hill Education. Factors of production are the building blocks that create usable consumer goods and services. Companies in advanced nations seeking competitive advantage over firms in other nations create many of these factors of production. For example, a country or industry dependent on scientific innovation must have a skilled human resource pool to draw upon. This resource pool is not inherited; it is created through investment in industry–specific knowledge and talent. The actual pool of resources is less important than the speed and efficiency with which these resources are deployed. Thus, firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to a nation’s competitive advantage. The island nation of Japan is given as an example. 6 Factors Affecting a Nation’s Competitiveness: Demand Conditions Demand conditions refer to the demands that consumers place on an industry. Demanding consumers drive firms in that country to: Meet high standards. Upgrade existing products and services. Create innovative products and services. Better anticipate future global demand. Proactively respond to product & service requirements. ©McGraw-Hill Education. Consumers who demand highly specific, sophisticated products and services force firms to create innovative, advanced products and services to meet the demand. This consumer pressure presents challenges to a country’s industries. Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. The conditions of consumer demand influence how firms view a market. This, in turn, helps the nation’s industries to better anticipate future global demand conditions and proactively respond to product and service requirements. Denmark is given as an example. 7 Factors Affecting a Nation’s Competitiveness: Related & Supporting Industries Related and supporting industries enable firms to manage inputs more effectively. A competitive supplier base Reduces manufacturing costs Close working relationships with suppliers Allows for joint research & development Development of related industries Forces existing firms to practice cost control, product innovation, better distribution methods ©McGraw-Hill Education. A home country’s industries can become a source of competitive advantage when related and supporting industries are developed. Countries with a strong supplier base benefit by adding efficiency to downstream activities. A competitive supplier base helps a firm obtain inputs using cost effective, timely methods, thus reducing manufacturing costs. Also, close working relationships with suppliers provide the potential to develop competitive advantages through joint research and development and the ongoing exchange of knowledge. Related industries create the probability that new companies will enter the market, increasing competition and forcing existing firms to become more competitive through efforts such as cost control, product innovation, and novel approaches to distribution. Combined, these give the home country’s industries a source of competitive advantage. The Italian footwear industry is given as an example. 8 Factors Affecting a Nation’s Competitiveness: Firm Strategy Firm strategy, structure, & rivalry due to Strong consumer demand Strong supplier base High new entrant potential from related industries Domestic rivalry leads to a search for new markets. Response to rivalry is a strong indicator of global competitive success. ©McGraw-Hill Education. Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new entrant potential from related industries. This competitive rivalry in turn increases the efficiency with which firms develop, market, and distribute products and services within the home country. Domestic rivalry thus provides a strong impetus for firms to innovate and find new sources of competitive advantage. This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness. Domestic rivalry is perhaps the strongest indicator of global competitive success. Firms that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete in world markets. The European grocery retail industry is given as an example. 9 Question (1 of 3) All of the factors below have made India’s software services industry extremely competitive on a global scale except a large pool of skilled workers. a large network of public and private educational institutions. tax and antitrust legislation that protect the dominant players in the industry. a large, growing market, and sophisticated customers. ©McGraw-Hill Education. Answer: C. See the discussion of Porter’s diamond of national advantage and Strategy Spotlight 7.1. Factor conditions, demand characteristics, and the existence of related and supporting industries are all factors that affect a nation’s competitiveness. Policies that protect the nation’s domestic competitors do not lead to a nation’s competitive advantage on the worldwide stage. 10 Example: Factors Affecting a Nation’s Competitiveness Exhibit 7.2 India’s Diamond in Software Source: From Kampur D.,and Ramamurti R., “India’s Emerging Competition Advantage in Services,” Academy of Management Executive: The Thinking Managers Source. Copyright © 2001 by Academy of Management. Jump to Appendix 1 for long description. ©McGraw-Hill Education. Firms that succeed in global markets have first succeeded in intensely competitive home markets. Competitive advantage for global firms typically grows out of relentless, continuing improvement and innovation. The Indian software industry offers a clear example of how the attributes in Porter’s “diamond” interact to lead to the conditions for a strong industry to grow. See Strategy Spotlight 7.1 for information on how mutually reinforcing elements work in this market. 11 International Expansion: Motivations (1 of 2) A company pursues international expansion for many reasons. A company decides to become a multinational firm in order to: Increase size of potential markets Attain economies of scale Take advantage of arbitrage opportunities Applied to every stage of the value chain Enhance a product’s growth potential Reinvigorate the product life cycle ©McGraw-Hill Education. Multinational firms = firms that manage operations in more than one country. Companies pursue international expansion in order to increase the size of potential markets for firms’ products and services. Expanding a firm’s global presence also automatically increases its scale of operations, providing it with a larger revenue and asset base, which potentially enables the firm to attain economies of scale. This can also spread fixed costs such as R&D over a larger volume of production. Arbitrage opportunities = an opportunity to profit by buying and selling the same good in different markets. In its simplest form, arbitrage involves buying something from where it is cheap and selling it somewhere where it commands a higher price. Arbitrage can be applied to virtually any factor of production and every stage of the value chain. Walmart is an example. Enhancing the growth rate of a product that is in its maturity stage in a firm’s home country, but that has greater demand potential elsewhere is another benefit of international expansion. 12 International Expansion: Motivations (2 of 2) A company also decides to become a multinational firm in order to: Optimize the location of value chain activity To enhance performance To reduce cost To reduce risk Take advantage of learning opportunities Explore reverse innovation Design & manufacture products locally Export no-frills products to developed markets ©McGraw-Hill Education. A firm has to decide where to locate the various activities that it must engage in to produce products and services. Primary activities, such as inbound logistics, operations, and marketing, as well as support activities, such as procurement, R&D, and human resource management must be located in areas where the firm can see performance enhancement, cost reduction, and risk reduction. Location decisions can affect the quality with which any activity is performed in terms of the availability of needed talent, speed of learning, and the quality of external and internal coordination. Location decisions can affect the cost structure in terms of local manpower and other resources, transportation and logistics, and government incentives and the local tax structure. Nike’s manufacture of shoes in Asia is an example. Erratic swings in the exchange ratios between global currencies requires firms to manage these currency risks by spreading the high cost elements of their manufacturing operations across a few select and carefully chosen locations around the world. In addition, by expanding into new markets, corporations expose themselves to differing market demands, R&D capabilities, functional skills, organizational processes, and managerial practices. This provides opportunities for managers to transfer the knowledge that results from these exposures back to their home office and to other divisions in the firm. Thus, expansion into new markets provides a range of learning opportunities. Reverse innovation = new products developed by developed-country multinational firms for emerging markets that have adequate functionality at a low cost. Many leading companies are discovering that developing products specifically for emerging markets can pay off in a big way. When products can deliver adequate functionality at a fraction of the cost, these products can subsequently find success in value segments in wealthy countries as well. 13 International Expansion: Risks (1 of 2) Multinational firms also encounter risks. Political risk due to social unrest, military turmoil, demonstrations, terrorism, absence of the rule of law can lead to Destruction of property Disruption of operations Non-payment for goods and services Arbitrary government decisions Economic risk due to piracy and counterfeiting ©McGraw-Hill Education. Political risk = potential threat to a firm’s operations in a country due to ineffectiveness of the domestic political system. Countries that are viewed as high risk are less attractive for most types of businesses. Another source of political risk in many countries is the absence of the rule of law. Rule of law = a characteristic of legal systems where behavior is governed by rules that are uniformly enforced. The absence of rules or the lack of uniform enforcement of existing rules leads to what might often seem to be arbitrary and inconsistent decisions by government officials. This can make it difficult for foreign firms to conduct business. The laws, and the enforcement of laws, associated with protection of intellectual property rights can be a major potential economic risk in entering new countries. Economic risk = potential threat to a firm’s operations in the country due to economic policies and conditions, including property rights laws and enforcement of those laws. Firms rich in intellectual property have encountered financial losses as piracy or imitations of their products have grown due to a lack of law enforcement of intellectual property rights. Counterfeiting = selling of trademarked goods without the consent of the trademark holder. Counterfeiting, a direct form of theft of intellectual property rights, is a significant and growing problem. 14 International Expansion: Risks (2 of 2) Multinational firms also encounter other risks. Currency risk due to fluctuations in the local currency’s exchange rate Affects cost of production or net profit Management risk due to culture, customs, language, income level, customer preferences, distribution systems Could lead to the need for local adaptation of apparently standard products ©McGraw-Hill Education. Currency risk = potential threat to a firm’s operations in the country due to fluctuations in the local currency’s exchange rate. Even a small change in the exchange rate can result in a significant difference in the cost of production or net profit when doing business overseas. An example includes the U.S. dollar appreciating against other currencies, making U.S. goods more expensive to consumers in foreign countries. Management risk = potential threat to a firm’s operations in a country due to the problems that managers have making decisions in the context of foreign markets. Managers must respond to the inevitable differences that they encounter when doing business in multiple countries. Cultural differences can pose unique challenges. Even in the case of apparently standard products, some degree of local adaptation may become necessary. 15 International Expansion: Managing Risks (1 of 2) Managing economic risk can be done through global dispersion of value chains. Various activities of the firm’s value chain can be spread across several countries & continents via Outsourcing Offshoring ©McGraw-Hill Education. To manage economic risk, firms can disburse their value chains across several countries and continents. The distribution of value of an U.S. car is given as an example: only 37 percent of the production value is generated in the U.S. Outsourcing = using other firms to perform value-creating activities that were previously performed in-house. The firm may be perfectly capable of doing this activity but chooses to have someone else perform it for cost or quality reasons. Outsourcing can be to either a domestic or foreign firm. Offshoring = shifting a value-creating activity from a domestic location to a foreign location. Value-creating activities should be performed in the location where the cost is lowest or where the quality is the best. 16 International Expansion: Managing Risks (2 of 2) Offshoring may be costly. Common savings from offshoring include: Lower wages, benefits, energy costs, regulatory costs, taxes Hidden costs from offshoring include: Higher total wage & indirect costs, wage inflation Increased inventory due to longer lead time Reduced market responsiveness Increased coordination costs Cost of protecting intellectual property ©McGraw-Hill Education. In the 1990s, for manufacturing industries especially, the rapid decline in transportation and coordination costs enabled firms to disperse their value chains over different locations. Yet while offshoring offers the potential to cut costs in corporations across a wide range of industries, many firms are finding the benefits of offshoring to be more elusive and the costs greater than they anticipated. For instance, labor cost per hour may be significantly lower in developing markets, but this may not translate into lower overall costs. If there are problems with the skill level of workers, the firm will find the need for more training and supervision of workers, more raw material and greater scrap due to the lower skill level, and greater rework to fix quality problems. Wages in developing markets can be volatile and spike unexpectedly. For instance, wages in China have been increasing recently. Due to longer delivery times, firms often need to tie up more capital in work in progress and inventory. The long supply lines from low-cost countries may make firms less responsive to shifts in customer demands. The cost of coordinating product development and manufacturing with operations undertaken in different countries can hamper innovation. Finally, firms operating in countries with weak intellectual property protection can wind up losing their trade secrets or taking costly measures to protect these secrets. Firms need to take into account all of these costs in determining whether or not to move their operations offshore. 17 International Strategies: Opposing Pressures (1 of 2) Cost reduction or adaptation to local markets? Strategies that favor global products & brands should do the following: Standardize all products for all markets. Reduce overall costs by spreading investments over a larger market. Assumes: Homogenous customer have needs & interests. People prefer lower prices at high quality. Global markets produce economies of scale. ©McGraw-Hill Education. Firms face two opposing forces when they expand into global markets: cost reduction and adaptation to local markets. Many years ago, the famed marketing strategist Theodore Levitt advocated strategies that favored global products and brands. He suggested that firms should standardize all of their products and services for all of their worldwide markets. Such an approach would help a firm lower its overall costs by spreading its investments over as large a market as possible. This approach rested on three key assumptions: 1. Customer needs and interests are becoming increasingly homogenous worldwide. 2. People around the world are willing to sacrifice preferences in product features, functions, design, and the like for lower prices at high quality. 3. Substantial economies of scale in production and marketing can be achieved through supplying global markets. 18 International Strategies: Opposing Pressures (2 of 2) Cost reduction or adaptation to local markets? Assumptions may be incorrect. Product markets DO vary widely between nations – local adaptations work. There is a growing interest in multiple product features, product quality, & service. Technology permits flexible production; cost of production may not be critical to product cost; and a firm’s strategy should not be solely product driven. “One size fits all” does NOT generally apply. ©McGraw-Hill Education. Theodore Levitt’s assumptions may be incorrect. Regarding the homogeneity of customer needs and interests, yes, companies have identified global customer segments and developed products and brands targeted to those segments, but other companies have successfully adapted product lines to idiosyncratic country preferences and developed local brands targeted to local market segments. Pineapple and ham pizza is an example. Second, while there is invariably a price sensitive segment in many product markets, there is no indication that this is increasing. In contrast, there is a growing interest in products with multiple features, quality, and service. Third, although standardization may lower manufacturing costs, such a perspective does not consider three critical and interrelated points: technological developments in flexible factory automation enable economies of scale to be obtained at lower levels of output; cost of production is only one component in determining the total cost of a product; and the firm’s strategy should not be solely product driven. Based on the above, we would have a hard time arguing that it is wise to develop the same product or service for all markets throughout the world. 19 International Strategies: Opposing Pressures, Chart Exhibit 7.3 Opposing Pressures and Four Strategies Jump to Appendix 2 for long description. ©McGraw-Hill Education. The opposing pressures that managers face place conflicting demands on firms as they strive to be competitive. On the one hand, competitive pressures require that firms do what they can to lower unit costs so that consumers will not perceive their product and service offerings as too expensive. This may lead them to consider locating manufacturing facilities where labor costs are low and developing products that are highly standardized across multiple countries. In addition to responding to pressures to lower costs, managers must also strive to be responsive to local pressures in order to tailor their products to the demand of the local market in which they do business. This requires differentiating their offerings and strategies from country to country to reflect consumer tastes and preferences and making changes to reflect differences in distribution channels, human resource practices, and governmental regulations. However, since the strategies and tactics to differentiate products and services to local markets can involve additional expenses, a firm’s costs will tend to rise. The two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace: international, global, multidomestic, and transnational. The strategy that a firm selects depends on the degree of pressure that it is facing for cost reductions and the importance of adapting to local markets. See the following Cases for examples of various international strategies: Heineken, eBay, Greenwood Resources, Tata Starbucks. 20 International Strategy (2 of 2) An international strategy requires diffusion & adaptation of the parent company’s knowledge & expertise to foreign markets. The primary goal is worldwide exploitation of the parent firm’s knowledge & capabilities. All sources of core competencies are centralized. Pressure for both local adaptation & low costs are rather low. ©McGraw-Hill Education. International strategy = a strategy based on a firm’s diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets, used in industries where the pressures for both local adaptation and lowering costs are low. With an international strategy, country units are allowed to make some minor adaptations to products and ideas coming from the head office, but they have far less independence and autonomy compared to multidomestic companies. There are only a small number of industries in which this strategy still applies. With increasing pressures to reduce costs due to global competition, especially from low-cost countries, opportunities to successfully employ international strategy are becoming more limited. This strategy is most suitable in situations where a firm has distinctive competencies that local companies in foreign markets lack. 21 International Strategy: Strengths, Limitations Strengths Limitations Leverage and diffusion of a parent firm’s knowledge and core competencies. Limited ability to adapt to local markets. Lower costs because of less need to tailor products and services Inability to take advantage of new ideas and innovations occurring in local markets. Exhibit 7.4 Strengths and Limitations of International Strategies in the Global Marketplace ©McGraw-Hill Education. Although an international strategy does leverage and diffuse a parent firm’s knowledge and core competencies, leading to lower costs because of less need to tailor products and services, it does mean a firm has a limited ability to adapt to local markets, and, therefore, it cannot take advantage of new ideas and innovations occurring in that market. The international strategy, with its tendency to concentrate most of its activities in one location, fails to take advantage of the benefits of an optimally distributed value chain. The lack of local responsiveness may result in the alienation of local customers, and the firm’s inability to be receptive to new ideas and innovation from its foreign subsidiaries may lead to missed opportunities globally. 22 Global Strategy A global strategy implies a firm is interested in lowering costs. Competitive strategy is centralized & controlled by the corporate office. Products are standardized, operations centralized, producing …