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International

Business
GLOBALIZATION
AND
INTERNATIONAL
BUSINESS

THE CONTEXT OF
INTERNATIONAL
BUSINESS

COMPETING IN A
GLOBAL MARKET
PLACE

Introduction to globalization
and international business

Regional economic
differences

Entry into foreign


markets

International trade and foreign


direct investment

National culture differences

Organisation of
multinational business

Chapter 5
Entry into
Foreign Markets

Explain the concept of strategy in an international setting


Recognize how firms can profit by expanding globally
Understand how pressures for cost reductions and pressures
for local responsiveness influence strategic choices
Identify the different strategies for competing globally and
their pros and cons

Entry into Foreign Markets


Topic Outline

5.1 The strategy of international business


5.2 Basic entry decisions
5.3 Entry modes
In previous chapters, we focused on the environments in which
companies operate; now we will focus on the firm itself
What actions can managers take to compete more effectively in a
global economy? Managers must consider:

the benefits of expanding into foreign markets


which strategies to pursue in foreign markets
the value of collaboration with global competitors
the advantages of strategic alliances
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5.1. The Strategy of International Business

They tipically
focus on
-profitability (ROI)
and
-profit growth
(% increase in net
profits over time)

The actions that managers take


to attain the goals of the firm

Determinants of Enterprise Value

What is Strategy?

5.1. The Strategy of International Business


The two basic strategies for creating value are:
Differenciation: higher price for a unique product
Low Cost: similar product at lower cost
Strategic Positioning

The company position on the


efficiency frontier

Ex: Airline Industry

Differenciation

British Airways

No Value
Provided
GO
Ryanair
Cost Leadership

5.1. The Strategy of International Business

The Determinants of Culture

Strategic Positioning

To maximize profitability, a firm must


pick a position on the efficiency frontier that is viable in the
sense that there is enough demand to support that choice
configure its internal operations so that they support that
position
make sure that the firm has the right organization structure
in place to execute its strategy
So, a firms strategy, operations, and organization must all be
consistent with each other in order to achieve a competitive
advantage and superior profitability
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5.1. The Strategy of International Business


Operations: The Firm as a Value Chain

The Value Chain

Firms are essentially value chains composed of distinct value creation


activities supported by an infrastructure
Value creation activities can be primary or support

5.1. The Strategy of International Business


Strategic Fit
Ryanair
Client
Service

No frequent
flyers
Outsourcing

No seat assign.

Homogeneous
fleet

No extras

Operations

No connections

Internet

Secondary
airports

COST
Focus

Control
No agencies

Strong
Leadership

No
freight

Negociation
with airports

Image
Negociation
No unions

Relations

The activities of a company must be internally and externally


consistent and reinforce each other
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5.1. The Strategy of International Business


Strategic Fit

Social Stra4ca4on

To attain superior
performance and
earn a high R.O.I a
firms strategy must
make sense given
the market conditions
The operations of the
firm must support the
firms strategy
The organizational
architecture of the
firm must also match
operations and
strategy
And if market conditions shift, the firms strategy, operations, and
organization have to adapt

5.1. The Strategy of International Business

The Determinants of Culture

Global Expansion and Profits

Why do firms go global?

1. To expand the market for their domestic product offerings by


selling them in international markets
2. To realize location economies dispersing value creation
activities to locations where can be performed most efficiently
3. To realize cost economies from experience effects by serving
an expanded global market from a central location
4. To earn a greater return by leveraging valuable skills
developed in foreign operations and transferring them to other
entities within the firms global network of operations
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5.1. The Strategy of International Business


Competitive Pressures
Firms that compete in the global marketplace typically face two types
of competitive pressures that place conflicting demands on the firm

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5.1. The Strategy of International Business

Individuals and Groups

Competitive Pressures
Cost Reduction

Local Responsiveness

Pressures for cost reductions are


greatest
in industries producing
commodity type products that
fill universal needs
(consumers tastes and
preferences are similar
across countries)
when major competitors are
based in low cost locations
where there is persistent
excess capacity
where consumers are
powerful and face low
switching costs
To respond to these pressures,
firms need to lower the costs of
value creation

Pressures for local


responsiveness arise from
differences in consumer
tastes and preferences
differences in traditional
practices and
infrastructure
FIRM
GOING
GLOBAL

differences in distribution
channels
host government
demands
Firms facing these pressures
need to differentiate their
products and marketing
strategy in each country

Consider discussing how Chinese firms are adapting their strategies in order to compete in foreign markets
Go to {http://www.businessweek.com/globalbiz/content/dec2008/gb2008121_644935.htm}.

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5.1. The Strategy of International Business


Choosing a Strategy (1 of 3)

Global
Standardization
Strategy

Transnational
Strategy

International
Strategy

Localization
Strategy

5.1. The Strategy of International Business


Choosing a Strategy (2 of 3)

Global
Standardiza.on
Strategy

Transna.onal
Strategy

Dominant Religions

Firms that pursue a global standardization strategy focus


on increasing profitability and profit growth by reaping the
cost reductions that come from economies of scale,
learning effects, and location economies.
Their strategic goal is to pursue a low-cost strategy on a
global scale.
This strategy makes sense when there are strong
pressures for cost reductions and demands for local
responsiveness are minimal.
Firms pursuing a transnational strategy are trying to
simultaneously achieve low costs, differentiate product
offerings across markets to account for local differences;
and foster a multidirectional flow of skills between different
subsidiaries in the firms global network of operations.
A transnational strategy makes sense when cost pressures
are intense, and simultaneously, so are pressures for local
responsiveness.

5.1. The Strategy of International Business


Choosing a Strategy (3 of 3)

Localiza.on
Strategy

Interna.onal
Strategy

A localization strategy focuses on increasing profitability


by customizing the firms goods or services so that they
provide a good match to tastes and preferences in different
national markets.
Localization is most appropriate when there are substantial
differences across nations with regard to consumer tastes
and preferences, and where cost pressures are not too
intense
When there are low cost pressures and low pressures for
local responsiveness, an international strategy is
appropriate.
An international strategy involves taking products first
produced for the domestic market and then selling them
internationally with only minimal local customization

5.1. The Strategy of International Business


The Evolution of Strategy
Global
Standardization
Strategy

Transnational
Strategy

International
Strategy

Localization
Strategy

Ex: GraceKennedy case (pg 433 in the book)

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5.1. The Strategy of International Business


Class Exercise
Plot the position of Procter & Gamble, IBM, Nokia, Coca-Cola, Dow
Chemical, US Steel, and McDonalds in the matrix.

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5.2. Basic Entry Decisions


Ques.on: What are the basic entry decisions for rms
expanding interna.onally?
Answer:
A rm expanding interna.onally must decide
which markets to enter
when to enter them and on what scale
how to enter them (the choice of entry mode)
There are no right decisions with foreign market entry, just
decisions that are associated with dierent levels of risk and
reward

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5.2. Basic Entry Decisions


Which Foreign Markets?
Firms need to assess the long run prot poten.al of each market
The most favorable markets are poli.cally stable developed and
developing na.ons with free market systems, low ina.on, and low
private sector debt
The less desirable markets are poli.cally unstable developing na.ons with
mixed or command economies, or developing na.ons where specula.ve
nancial bubbles have led to excess borrowing
Successful rms usually oer products that have not been widely available
in the market and that sa.sfy an unmet need

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5.2. Basic Entry Decisions


Timing of Entry
AOer a rm iden.es which market to enter, it must
determine the .ming of entry
Entry is early when an interna.onal business enters a foreign
market before other foreign rms
o First mover advantages/disadvantages
Entry is late when a rm enters aOer other interna.onal
businesses have already established themselves in the market

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5.2. Basic Entry Decisions


Timing of Entry

Firms entering a market early can


gain rst mover advantages
including
the ability to pre-empt rivals
and capture demand by
establishing a strong brand
name
the ability to build up sales
volume in that country and
ride down the experience
curve ahead of rivals and gain
a cost advantage over later
entrants
the ability to create switching
costs that .e customers into
their products or services
making it dicult for later
entrants to win business

First mover disadvantages - the


disadvantages associated with
entering a foreign market before
other interna.onal businesses
- These may result in pioneering
costs (costs that an early entrant
has to bear that a later entrant can
avoid) such as
the costs of business failure if
the rm, due to its ignorance of
the foreign environment,
makes some major mistakes
the costs of promo.ng and
establishing a product oering,
including the cost of educa.ng
the customers

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5.2. Basic Entry Decisions


Scale of Entry
Firms that enter foreign markets on a signicant scale make a
major strategic commitment that changes the compe..ve
playing eld
involves decisions that have a long term impact and are
dicult to reverse
Small-scale entry can be aTrac.ve because it allows the rm
to learn about a foreign market, but at the same .me it limits
the rms exposure to that market

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5.3. Entry Modes


Ques.on: What is the best way to enter a foreign market?
Answer:
Firms can enter foreign market through
1. Expor.ng
2. Turnkey projects
3. Licensing
4. Franchising
5. Joint ventures
6. Wholly owned subsidiaries

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5.3. Entry Modes Exporting


1. Expor.ng is oOen the rst method rms use to enter foreign
market

Expor.ng is aTrac.ve because


it is rela.vely low cost
rms may achieve
experience curve
economies

Expor.ng is not aTrac.ve when


lower-cost manufacturing
loca.ons exist
transport costs are high
tari barriers are high
foreign agents fail to in the
exporters best interest

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5.3. Entry Modes Exporting


Benets

The benets from expor.ng can be
great--the rest of the world is a much
larger market than the domes.c
market
Larger rms may be proac.ve in
seeking out new export
opportuni.es, but many smaller
rms take a reac.ve approach to
expor.ng
Many novice exporters have run into
signicant problems when rst trying
to do business abroad, souring them
on following up on subsequent
opportuni.es

Common PiFalls

Poor market analysis


Poor understanding of compe..ve
condi.ons
Lack of customiza.on for local
markets, poor distribu.on
arrangements, bad promo.onal
campaigns
General underes.ma.on of the
dierences and exper.se required for
foreign market penetra.on
Diculty dealing with the
tremendous paperwork and
formali.es involved

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5.3. Entry Modes Turnkey Projects


2. Turnkey projects involve a contractor that agrees to handle every detail of the
project for a foreign client, including the training of opera.ng personnel
at comple.on of the contract, the foreign client is handed the "key" to a plant
that is ready for full opera.on

Turnkey projects are aTrac.ve
Turnkey projects are not aTrac.ve
because
when
they allow rms to earn great
economic returns from the
know-how required to
assemble and run a
technologically complex
process
they are less risky in countries
where the poli.cal and
economic environment is such
that a longer-term investment
might expose the rm to
unacceptable poli.cal and/or
economic risk

the rm's process technology is a


source of compe..ve advantage

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5.3. Entry Modes - Licensing


3. Licensing - an arrangement whereby a licensor grants the rights to intangible property *
to another en.ty (the licensee) for a specied .me period, and in return, the licensor
receives a royalty fee from the licensee

Licensing is aTrac.ve when


the rm does not have to bear the
development costs and risks
associated with opening a foreign
market
the rm avoids barriers to investment
it allows a rm with intangible
property that might have business
applica.ons, but which doesnt want
to develop those applica.ons itself,
to capitalize on market opportuni.es

Licensing is unaTrac.ve when


the rm doesnt have the .ght control
over manufacturing, marke.ng, and
strategy necessary to realize
experience curve and loca.on
economies
the rms ability to coordinate
strategic moves across countries by
using prots earned in one country to
support compe..ve aTacks in another
is compromised
There is the poten.al for loss of
proprietary (or intangible) technology
or property
to reduce this risk, rms can use cross-
licensing agreements or link the
agreement with the decision to form a
joint venture

* intangible property includes patents, inven.ons, formulas, processes, designs, copyrights, and trademarks

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5.3. Entry Modes - Franchising


4. Franchising - a form of licensing in which the franchisor sells intangible property and
requires the franchisee agree to abide by strict rules as to how it does business

Franchising is aTrac.ve
because
can avoid costs and risks of
opening up a foreign
market

Franchising is unaTrac.ve
because
it may inhibit the rm's ability
to take prots out of one
country to support
compe..ve aTacks in
another
the geographic distance of
the rm from its foreign
franchisees can make poor
quality dicult for the
franchisor to detect

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5.3. Entry Modes Joint Ventures


5. Joint ventures involve the establishment of a rm that is jointly owned by two or
more otherwise independent rms

Joint ventures are aTrac.ve


because
a rm can benet from a local
partner's knowledge of the
host country's compe..ve
condi.ons, culture, language,
poli.cal systems, and
business systems
the costs and risks of opening
a foreign market are shared
with the partner
they can help rms avoid the
risk of na.onaliza.on or
other adverse government
interference

Joint ventures can be unaTrac.ve


because
the rm risks giving control of
its technology to its partner
the rm may not have the .ght
control over subsidiaries that it
might need to realize
experience curve or loca.on
economies
shared ownership can lead to
conicts and baTles for control
if goals and objec.ves dier or
change over .me

Ex: Grameen Danone http://www.youtube.com/watch?v=AV4WQV32ijs

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5.3. Entry Modes Wholly owned subsidiary


6. Wholly owned subsidiaries involve 100 percent ownership of the stock of the
subsidiary

Wholly owned subsidiaries are


aTrac.ve because
they reduce the risk of losing
control over core
competencies
they gives the rm the .ght
control over opera.ons in
dierent countries that is
necessary for engaging in
global strategic coordina.on
they may be required if a rm
is trying to realize loca.on and
experience curve economies

Wholly owned subsidiaries are


unaTrac.ve because rms bear
the full costs and risks of sefng up
overseas opera.ons

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5.3. Entry Modes Wholly owned subsidiary


Firms establishing a wholly owned subsidiary can 1) set up a new opera.on in that
country (greeneld strategy) or 2) acquire an established rm

Disadvantages

Advantages

Acquisitions
are quick to execute
enable rms to preempt their
compe.tors
can be less risky than green-
eld ventures
the rm overpays for the assets of the
acquired rm
there is a clash between the cultures
of the acquiring and acquired rm
aTempts to realize synergies by
integra.ng the opera.ons of the
acquired and acquiring en..es run
into roadblocks and take much longer
than forecast
there is inadequate pre-acquisi.on
screening

Greenfield Strategies
- they allow the rm to build the
kind of subsidiary company that
it wants


are slower to establish
are risky because they have no
proven track record
can be problema.c if a compe.tor
enters via acquisi.on and quickly
builds market share

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5.3. Entry Modes Strategic alliances

What are strategic alliances


Cooperative agreements
between potential or actual competitors (joint
ventures are structured alliances)

Advantages
Strategic alliances are aTrac.ve
because they
facilitate entry into a foreign market
allow rms to share the xed costs
(and associated risks) of developing
new products or processes
bring together complementary skills
and assets that neither partner
could easily develop on its own
can help establish technological
standards for the industry that will
benet the rm

Disadvantages
Strategic alliances also present
drawbacks:

They can give compe.tors low-cost
routes to new technology and
markets

Unless a rm is careful, it can give
away more in a strategic alliance
than it receives

5.3. Entry Modes Strategic alliances


Making Alliances Work
High rate of failure, particularly in international alliances (33%).
Success is a factor of:
Partner Selection: A good partner:
i)

Helps the firm achieve its strategic goals (mkt access, cost sharing, product
developmenti or accesing core competencies)

ii)

Shares the firms vision for the purpose of the alliance (same agendas)

iii) Is unlikely to opportunistically exploit the alliance for its own ends (fair play)

Alliance Structure, reducing the risk of giving away too much.


i)

Make it difficult to transfer technology not meant to be transferred

ii)

Include safeguards against the risk of opportunism by a partner

iii) Include provisions for swapping skills and technologies

Alliance Management,
i)

Be sensitive to cultural differences

ii)

Build trust, build interpersonal relationships, get to know each other, build an
informal network between the 2 firms managers

iii) Learn from your partner (and apply that knowledge within your organization)

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