International Strategy

CB4303: Lecture Week 10

Chya-Yi Liaw, Emily

Department of Management
City University of Hong Kong
 Strategic Management Process

• Three ongoing, interrelated processes:

Strategic
Analysis

• Business-Level
Strategic Strategic • Corporate-Level
Implement Formulation • International

2
 Topics Overview

• Defining international strategy

• International expansion: Motives
• Early vs. current theories
• International expansion: How
• Entry mode choice
• Managing global operations
• Global efficiency vs. local responsiveness

3
 International Strategy

• A strategy that guides operations that take

place in more than one country
• Goal is to gain and sustain competitive advantage
• Part of a firm’s corporate strategy
• Focus on multinational enterprises (MNEs)

4
 International Expansion: Motives
• Early explanations:
• Capital – flow theory: Take advantage of
differences in currency strength
• Diversification explanation: Reduce risk through
country diversification
• Oligopolistic reactions: Follow competitors in a
specific industry in order not to lose strategic
advantages (follow the leader)
• Current view: Eclectic paradigm
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 Current View - Eclectic Paradigm

• Distinguish three motivations of expansion:

• Resource seeking
• Market seeking
• Strategic incentives: e.g., reinvigorating product
life cycle

6
 International Expansion: How

Non-Equity Type Equity Type

• Export • Direct Investment
• Controlled (e.g. sales branch) • Joint venture
• Wholly owned
(greenfield vs. acquisitive)
• Contractual • Capital participation
• License
• Franchise
• Management/Service
contracts
• Cooperative agreements
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Entry Mode Alternatives

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 Exporting

• Exporting is producing goods in one country

and selling to customers of another country

Dupont
(US)
Non-stick
cookware End user
(final product) (CN)

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 Exporting

Benefits
• Lower investment than
other foreign entry modes
• Lower risk to expand
• Retain core competency
within firm
Disadvantages
• Limited by trade barriers
(e.g., tariff, subsidy)
• Fluctuation in foreign
exchange rate
• Lack of ability to adapt to
local needs

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 Licensing and Franchising

• Licensing: Enables a company to receive a royalty fee

in exchange for the rights to use its intellectual
property (e.g., trademark, patent, trade secret)
• Franchising: Same as above, but include a broader
range of factors in operation, with a longer time
period contract
• Often includes factors such as monitoring, operations,
training, and advertising
• Both are contractual arrangements

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Licensing and Franchising (cont’d)

Coating technology

Dupont Cookware maker

(US) (CN)
$

Non-stick cookware
(final product)
End user
(CN)

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Licensing and Franchising (cont’d)
Benefits
• Licensor/Franchisor rely on
local knowledge of its
partner
• Licensee/Franchisee can
save on costs of starting its
own businesses
Disadvantages
• Licensor/Franchisor only
gain a portion of revenue
(i.e., royalty fees)
• Incur additional costs to
control licensor-licensee
and franchisor-franchisee
relationship
• Local partner can turn into
potential competitors
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 Joint Venture

• Joint venture entails creating a 3rd party legal entity

Dupont Cookware maker

Coating tech Cookware
%π ($) ($)
(1-%) π
JV company (CN)
Non-stick cookware

End user (CN)

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 Joint Venture (cont’d)
Benefits
• Reduce cost by pooling
resources
• Develop and diffuse new
technology
• Local partner’s information
about local market
Disadvantages
• Improper partners
• Difficult to build trust
• Risk of learning race
• Conflicts due to cultural
issues
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 Wholly Owned Subsidiaries

• A business in which a multinational company owns

100 % of the stock
• Acquire existing firm
• Develop new operation (“greenfield venture”)

Benefits
• Greatest control of all
foreign activities
• Can involve higher return
Disadvantages
• Most expensive and risky
entry mode
• Additional costs in
managing and organizing
the whole corporation
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 Managing Global Operations

Two opposing pressures:

• Pressure for global efficiency
• Generate economies of scale (cost saving)
• Focus on standardized products and brands
• Pressure for local responsiveness
• The need to tailor product and service offerings
to fit local customer preferences (higher costs)

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Four Approaches to Manage Global
Operations
Pressure for global efficiency

High

Global Transnational
strategy strategy

International Multidomestic
strategy strategy
Low
Low High
Pressure for local responsiveness

Adapted from “Strategic Management: Text and Cases” (8th edition): International Strategy
18
Four Approaches to Manage Global
Operations
Pressure for global efficiency

High

International
strategy
Low
Low High
Pressure for local responsiveness

Adapted from “Strategic Management: Text and Cases” (8th edition): International Strategy
19
 International Strategy

• An international strategy requires diffusion

and adaptation of the parent company’s
knowledge and expertise to foreign markets
• Goal is worldwide exploitation of the parent
firm’s knowledge and capabilities
• All sources of core competencies are centralized
• Pressure for both global efficiency and local
responsiveness are rather low

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 International Strategy (cont’d)

• Strengths
• Leverage and diffusion of a parent firm’s
knowledge and core competencies
• Lower costs because of less need to tailor
products and services
• Limitations
• Limited ability to adapt to local markets
• Inability to take advantage of new ideas and
innovations occurring in local markets
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Four Approaches to Manage Global
Operations
Pressure for global efficiency

High

Global
strategy

International
strategy
Low
Low High
Pressure for local responsiveness

Adapted from “Strategic Management: Text and Cases” (8th edition): International Strategy
22
 Global Strategy

• Sacrifice responsiveness to local requirements

within each of its markets in favor of
emphasizing efficiency
• Possible actions taken by firms:
• Products are standardized, operations
centralized, producing economies of scale
• Strategy is centralized at the corporate office
• Worldwide volume supports R&D
• Standard level of quality worldwide
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 Global Strategy (cont’d)

• Strengths
• Strong integration across various businesses
• Standardization leads to higher economies of
scale, which lowers costs
• Helps create uniform standards of quality
throughout the world

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 Global Strategy (cont’d)

• Limitations
• Limited ability to adapt to local markets
• Concentration of activities may increase
dependence on a single facility
• Single locations may lead to higher tariffs and
transportation costs

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Four Approaches to Manage Global
Operations
Pressure for global efficiency

High

Global
strategy

International Multidomestic
strategy strategy
Low
Low High
Pressure for local responsiveness

Adapted from “Strategic Management: Text and Cases” (8th edition): International Strategy
26
 Multidomestic Strategy

• Sacrifice efficiency in favor of emphasizing

responsiveness to local requirements within
each of the company’s markets
• Possible actions taken by firms:
• Decisions are decentralized
• Products and services are tailored to local use
• Consider local language, culture, income levels,
customer preferences, distribution systems
• Prices are differentiated by market
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 Multidomestic Strategy (cont’d)
• Strengths:
• Ability to adapt products and services to local
market conditions
• Ability to detect potential opportunities for
attractive niches in a market, enhancing revenue
• Limitations:
• Decreased ability to realize cost savings
• Greater difficulty in transferring knowledge
across countries
• May lead to “overadaptation” 28
Four Approaches to Manage Global
Operations
Pressure for global efficiency

High

Global Transnational
strategy strategy

International Multidomestic
strategy strategy
Low
Low High
Pressure for local responsiveness

Adapted from “Strategic Management: Text and Cases” (8th edition): International Strategy
29
 Transnational Strategy

• Balancing the desire for efficiency with the need to

adjust to local preferences
• Goal is to develop relatively standardized, yet flexible
products and services suitable for multiple markets
• Some value chain activities are centralized, some
are decentralized
• Require good communication and knowledge
flows throughout the organization
• Example: Joint innovation by headquarter and
subsidiary
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 Transnational Strategy (cont’d)

• Strengths:
• Ability to attain economies of scale and adapt to
local markets
• Ability to locate activities in optimal locations
• Ability to increase knowledge flows and learning
• Limitations:
• Challenges in determining optimal locations of
activities to ensure cost and quality
• Challenges in fostering knowledge transfer
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 Week 11

• Case:
• Dupont Teflon: China Brand Strategy (Ivey case)

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