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Chapter 8
International Strategy
CHAPTER OVERVIEW
LEARNING OBJECTIVES
LECTURE NOTES
8-1 IDENTIFYING INTERNATIONAL OPPORTUNITIES
8-1a Incentives to Use International Strategy
8-1b Three Basic Benefits of International Strategy
8-2 INTERNATIONAL STRATEGIES
8-2a International Business-Level Strategy
8-2b International Corporate-Level Strategy
8-3 ENVIRONMENTAL TRENDS
8-3a Liability of Foreignness
8-3b Regionalization
8-4 CHOICE OF INTERNATIONAL ENTRY MODE
8-4a Exporting
8-4b Licensing
8-4c Strategic Alliances
8-4d Acquisitions
8-4e New Wholly Owned Subsidiary
8-4f Dynamics of Mode of Entry
8-5 RISKS IN AN INTERNATIONAL ENVIRONMENT
8-5a Political Risks
8-5b Economic Risks
8-6 STRATEGIC COMPETITIVENESS OUTCOMES
8-6a International Diversification and Returns
8-6b Enhanced Innovation
8-7 THE CHALLENGE OF INTERNATIONAL STRATEGIES
8-7a Complexity of Managing International Strategies
8-7b Limits to International Expansion
ANSWERS TO REVIEW QUESTIONS
MINI CASE: The Global Soccer Industry and the Effect of the FIFA Scandal
ADDITIONAL QUESTIONS AND EXERCISES
© 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
1
Chapter 8: International Strategy
INSTRUCTOR’S NOTES FOR MINDTAP

What Would You Do?
Video Quiz
Guided Case
You Make The Decision
Group Project
CHAPTER OVERVIEW
Chapter 8 begins by explaining how more and more firms need to compete in regions and
markets beyond their domestic markets in order to grow. However, because global
markets are less stable and more unpredictable, global firms must adopt international
strategies.
Incentives to use these strategies include extending a product’s life cycle; gaining access
to critical raw materials, sometimes including relatively inexpensive labor; integrating a
firm’s operations on a global scale to better serve customers in different countries;
enhancing the use of rapidly changing technologies; and meeting the increasing demand
for goods and services that is surfacing in emerging markets. When used effectively,
international strategies yield three basic benefits: increased market size, economies of
scale and learning, and location advantages.
The next section of the chapter distinguishes between international business-level and
international corporate-level strategies, both of which may be used to geographically
diversify operations. Conditions or factors in a firm’s home market either hinder or
support the firm’s efforts to use an international business-level strategy for the purpose of
establishing a competitive advantage internationally. These four determinants are factors
of production; demand conditions; related and supporting industries; and patterns of firm
strategy, structure, and rivalry.
There are three types of international corporate-level strategies. A multidomestic strategy

focuses on competition within each country in which the firm competes. Firms using a
multidomestic strategy decentralize strategic and operating decisions to the business units
operating in each country, so that each unit can tailor its products to local conditions. A
global strategy assumes more standardization of products across country boundaries;
therefore, a competitive strategy is centralized and controlled by the home office.
Commonly, large multinational firms, particularly those with multiple, diverse products
being sold in many different markets, use a multidomestic strategy with some product
lines and a global strategy with others. A transnational strategy seeks to integrate
characteristics of both multidomestic and global strategies for the purpose of being able to
simultaneously emphasize local responsiveness and global integration.
2
In the next section, students learn how two global environmental trends—liability of
foreignness and regionalization—are influencing firms’ choices of international strategies
as well as their implementation. Liability of foreignness requires firms to analyze how
distance between their domestic and international markets affects their ability to compete.
Some firms choose to concentrate their international strategies on regions (e.g., the EU,
Asia, Latin America) rather than on individual country markets.
Students must understand that firms can use one or more of five possible entry modes to
enter international markets: exporting, licensing, strategic alliances, acquisitions, and new
wholly owned subsidiaries, often referred to as greenfield ventures. Most firms begin with
exporting or licensing because of their lower costs and risks. Later, they tend to use
strategic alliances and acquisitions as well. The most expensive and risky means of
entering a new international market is establishing a new wholly owned subsidiary
(greenfield venture). On the other hand, such subsidiaries provide the advantages of
maximum control by the firm and, if successful, the greatest returns. Large,
geographically diversified firms often use most or all five entry modes across different
markets when implementing international strategies.
Implementing international strategies is not without risk, as students discover in the next
section. The two major categories of risks firms need to understand and address when
diversifying geographically through international strategies are political risks (risks
concerned with the probability that a firm’s operations will be disrupted by political forces
or events, whether they occur in the firm’s domestic market or in the markets the firm has
entered) and economic risks (risks resulting from fundamental weaknesses in a country’s
or a region’s economy with the potential to adversely affect a firm’s ability to implement
its international strategies).
In the final two sections of the chapter, students learn about the outcomes and challenges
of international strategies. The successful use of international strategies (especially an
international diversification strategy) contributes to a firm’s strategic competitiveness in
the form of improved performance and enhanced innovation. In general, international
diversification helps to achieve above-average returns, but this assumes that the
diversification is effectively implemented and that the firm’s international operations are
well managed. International diversification provides greater economies of scope and
learning, which, along with greater innovation, help produce above-average returns.
Finally, firm using international strategies to pursue strategic competitiveness often

experience complex challenges that must be overcome. Some limits also constrain the
ability to manage international expansion effectively. International diversification
increases coordination and distribution costs, and management problems are exacerbated
by trade barriers, logistical costs, and cultural diversity, among other factors.
3
LEARNING OBJECTIVES
1. Explain incentives that can influence firms to use an international strategy.
2. Identify three basic benefits firms gain by successfully implementing an international
strategy.
3. Explore the determinants of national advantage as the basis for international business-
level strategies.
4. Describe the three international corporate-level strategies.
5. Discuss environmental trends affecting the choice of international strategies, particularly
international corporate-level strategies.
6. Identify and explain the five modes firms use to enter international markets.
7. Discuss the two major risks of using international strategies.
8. Discuss the strategic competitiveness outcomes associated with international strategies,
particularly with an international diversification strategy.
9. Explain two important issues firms should have knowledge about when using
international strategies.
Lecture Notes
Chapter Introduction: This chapter examines opportunities facing firms as they seek to
develop technological innovation and exploit core competencies by diversifying into
global markets. In addition, it addresses different problems, complexities, and threats that
might accompany use of the firm’s international strategies. Although national boundaries,
cultural differences, and geographical distances all pose barriers to entry into many
markets, significant opportunities draw businesses into the international arena. A business
that plans to operate globally must formulate a successful strategy to take advantage of
these global opportunities. Furthermore, to mold their firms into truly global companies,
managers must develop global mind-sets. Especially in regard to managing human
resources, traditional means of operating with little cultural diversity and without global
sourcing are no longer effective. These themes are all emphasized in this chapter.
OPENING CASE
Netflix Achieves Substantial Growth Through International Expansion, But Such
Growth Also Is Attracting Significant Competition
Netflix is a content streaming company that provides a broad selection of on-demand original
content, as well as content produced by movie studios and network television. Having reached
a near saturation point in the United States, Netflix has been expanding its services abroad in
recent years. It now serves nearly all the countries of the world. The high cost of global
licenses, translating content into a wide array of languages, and competition from new and
4
existing entrants like Amazon and Disney have presented significant challenges, yet Netflix
has emerged as the current market leader internationally.
Teaching Note
Engage students by asking whether they are Netflix customers. Encourage them to
identify other firms that have reached or could reach the saturation point in the United
States (technology firms come to mind) and are responding by adopting an international
strategy. Using one of those examples, ask students to identify some challenges the firm
has faced or will face.
Although national boundaries, cultural differences, and geographical distances all pose
barriers to entry into many markets, significant opportunities draw businesses into the
international arena.
• Global firms must formulate a successful strategy to take advantage of international
opportunities.
• Managers must develop global mind-sets.
• Operating with little cultural diversity and without global sourcing is no longer effective.
• Global tech firms must work within local laws and obtain local licenses to grow their
customer base.
Figure Note
Figure 8.1 provides an overview of the various choices and outcomes of strategic
competitiveness.
FIGURE 8.1
Opportunities and Outcomes of International Strategy
The following opportunities and outcomes of international strategy are illustrated in

Figure 8.1:
• Firms should first identify international opportunities related to increasing market size,
return on investment, economies of scale and learning, and location-related advantages.
• Once international opportunities have been identified, firms must develop international
strategies based on firm resources and capabilities.
• A mode of entry should be selected to take advantage of the firm’s core competencies.
• A firm’s ability to realize strategic competitiveness is tempered by management’s ability to
manage effectively and efficiently a complex organization with locations in multiple
countries and the economic and political risks that accompany firm internationalization.
5
• The strategic outcomes from the process can include better performance and more
innovation.
Explain incentives that can influence firms to use an

1
international strategy.
8-1 IDENTIFYING INTERNATIONAL OPPORTUNITIES

International strategy refers to selling products in markets outside of the firm’s domestic
market to expand the market for its products.
Figure Note
Figure 8.2 provides a side-by-side comparison of the incentives and basic benefits of
international strategy.
FIGURE 8.2
Incentives and Basic Benefits of International Strategy
The following five incentives and three basic benefits of international strategy are listed in
Figure 8.2:
• Five benefits of international strategy are extending a product’s life cycle, gaining easier
access to raw materials, finding opportunities to integrate operations on a global scale,
identifying opportunities to better use rapidly developing technologies, and gaining access
to consumers in emerging markets.
• Three basic benefits of international strategy are increased market size, economies of scale
and learning, and location advantages.
8-1a Incentives to Use International Strategy

Raymond Vernon adapted the product life cycle concept to explain internationalization.
1. A firm introduces an innovation (new product) in its domestic market.
2. Product demand develops in other countries and exports are provided from domestic
operations.
3. As demand increases, foreign rivals produce the product; then firms justify investing in
production abroad.
4. As products become standardized, firms relocate production to low-cost countries.
6
Some firms implement an international strategy to secure critical resources, such as

petroleum reserves (for the oil industry), bauxite (for the manufacture of aluminum), or
rubber (for tire manufacturing).
Traditional motives persist, but other emerging motives also drive international expansion.
• Pressure has increased for global integration of operations, driven mostly by universal
product demand.
• In some industries, technology drives globalization because the economies of scale
necessary to reduce costs to the lowest level often require an investment greater than that
needed to meet domestic market demand.
• New large-scale, emerging markets such as China and India provide a strong
internationalization incentive because of the potential demand in them.
Companies seeking to expand operations internationally need to understand the pressure

on them to respond to local, national, or regional customs, especially where goods or
services require customization due to cultural differences or effective marketing to entice
customers to try a different product.
• Firms adapt products to local tastes as they move into new national markets.
• Local repair/service capabilities are another factor that increases desire for local country
responsiveness.
• Transportation costs of large products and their parts may preclude a firm’s suppliers from
following the firm into an international market.
• Employment contracts and labor forces differ. Host governments demand joint ownership
and frequently require a high percentage of local procurement, manufacturing, and R&D.
These issues increase the need for local investment.
Opportunities available to firms through an international strategy include:

• Increasing the size of potential markets
• Achieving greater returns on capital and/or investment in new product/process
developments
• Gaining economies of scale, scope, or learning
• Gaining location-based competitive advantage
7
Teaching Note
Firms expanding into international markets must recognize that many countries have
characteristics that are unique and may differ significantly from the traditional
European markets into which U.S. firms have expanded. Thus, firms must recognize
this and:
• Be capable of managing multiple risks—e.g., financial, economic, and political
risks
• Be aware of increased pressure for local country or regional responsiveness,
especially where cultural differences require customization of goods or services
• Weigh the potential advantages of enhancing the firm’s strategic competitiveness
relative to the costs of meeting managerial challenges and product/geographic
diversification requirements in international markets
Identify three basic benefits firms gain by successfully

2
implementing an international strategy.
8-1b Three Basic Benefits of International Strategy

Increased Market Size
Expanding internationally enables firms to increase greatly the size of the potential market
for their products. This may be of critical importance if the domestic market is too small to
support scale-efficient manufacturing facilities.
The size of a particular international market affects a firm’s willingness to invest in it with
larger markets tending to provide higher returns and lower risk.
The strength of the science base in a country also can affect a firm’s foreign R&D
investments, so most firms prefer to invest more heavily in those countries with the
scientific knowledge and talent that produce more effective new products and processes
from their R&D.
Economies of Scale and Learning

By expanding the size and scope of their markets, firms may be able to achieve economies
of scale in manufacturing (and in other operations, such as marketing, research and
development, and distribution) by standardizing products across national borders and
spreading fixed costs over a larger sales base.
8
Teaching Note
Economies of scale are critical in the global auto industry. Honda has been a largely
successful firm with substantial competencies in the manufacture of engines; however,
it has sometimes struggled to compete against larger and more resource-rich auto
makers (e.g., Ford and GM). To have a chance to survive, Honda achieved economies
of scale in the development and application of its engines [e.g., by providing engines
for many applications (lawnmowers, weed trimmers, snowmobiles, etc.) and forming
an alliance with GM to produce engines]. Thus, Honda may excel as an independent
engine manufacturer.
Firms may also be able to exploit core competencies in international markets through
resource and knowledge sharing between units across country borders. This sharing
generates synergy, which helps the firm produce higher-quality goods or services at lower
cost. In addition, working across international markets provides the firm with new
learning opportunities.
Location Advantages
Firms also may be able to achieve a comparative advantage and lower the basic costs of
their products by locating facilities in low-cost markets for critical raw materials, cheap
labor, key suppliers, energy, customers, and/or natural resources.
Other factors that may impact location advantages are as follows:

• The needs of intended customers
• Cultural influences (if there is a strong match between the cultures involved, the liability of
foreignness is lower than if there is high cultural distance)
• Physical distances that influence the firms’ location choice and how facilities are managed
Explore the determinants of national advantage as

3
the basis for international business-level strategies.
8-2 INTERNATIONAL STRATEGIES

International strategies available to firms are business-level and corporate-level (see
Chapters 4 and 6).
• Business-level strategy choices are generic, extending our earlier discussion of cost
leadership, differentiation, focus, and integrated cost leadership/differentiation strategies.
9
• Corporate-level strategies are dependent on the complexity and scope of product and
geographic diversification, and these include multidomestic, global, and transnational
(hybrid) strategies.
8-2a International Business-Level Strategy

Each business must develop a competitive strategy focused on its own domestic market.
Business-level generic strategies are discussed in Chapter 4, but international business-
level strategies have some unique features.
• In an international business-level strategy, the home country of operation is often the most
important source of competitive advantage.
• The resources and capabilities established in the home country frequently allow the firm to
pursue the strategy into markets located in other countries.
• As a firm continues its growth into multiple international locations, research indicates that
the country of origin diminishes in importance as the dominant factor.
Figure Note
Porter’s Diamond of Advantage model can be used to introduce the discussion of
Figure 8.3.
FIGURE 8.3
Determinants of National Advantage
As Figure 8.3 illustrates, four interrelated national or regional factors contribute to the
competitive advantage of firms competing in global industries.
• Factor conditions or the factors of production
• Demand conditions
• Related and supporting industries
• Firm strategy, structure, and rivalry
Note: Each of these factors is discussed in the following section.
Perhaps the most basic factor in the model, factor conditions or factors of production,
refers to the inputs necessary to compete in any industry. These include labor, land,
natural resources, capital, and infrastructure (such as highway, postal, and
communications systems).
10
These factors can be subdivided into four categories:

• Basic factors, such as labor and natural resources
• Advanced factors, including digital communications systems and highly educated
workforces
• Generalized factors (required by all industries), such as highway systems and a supply of
capital
• Specialized factors that are most valuable in specific uses (e.g., skilled personnel employed
at a port who specialize in the handling of bulk chemicals)
Nations having both advanced and specialized factors are likely to be characterized by
growth in new firms that are strong global competitors.
Ironically, countries often develop advanced and specialized factors because they lack
critical basic resources.
• Some Asian countries, such as South Korea, lack abundant natural resources but offer a
strong work ethic, a large number of engineers, and systems of large firms to create
expertise in manufacturing.
• Germany developed a strong chemical industry, partially because Hoechst and BASF spent
years creating a synthetic indigo dye to reduce their dependence on imports, unlike Britain,
whose colonies provided large supplies of natural indigo.
The second factor that determines national advantage is demand conditions, which are
characterized by the nature and size of buyers’ needs in the home market for the industry’s
products or services. The size of the segment can create demand sufficient to justify the
construction of scale-efficient facilities.
Related and supporting industries are the third factor of the national advantage model.
National firms may be able to develop competitive advantage when industries that provide
either materials or components or that support the activities of the primary industry are
present.
• Italian firms are world leaders in the shoe industry because of the related and supporting
industries present in Italy (e.g., a mature leather processing industry and design and
manufacture of leather-working machinery).
• In Japan, copiers and cameras are related, as are cartoon, consumer electronics, and video
game industries.
11
Growth in certain industries is fostered by the fourth factor—firm strategy, structure, and
rivalry. As expected, patterns of firm strategy, structure, and competitive rivalry among
firms in an industry vary between nations.
• In Italy, the national pride of the country’s designers has spawned strong industries in
sports cars, fashion apparel, and furniture.
• In the United States, competition among computer manufacturers and software producers
has favored the development of these industries.
As described, the four basic factors of Porter’s Diamond of Advantage model emphasize
the impact or influence of the environmental or structural attributes of a nation’s economy
that may contribute to a national advantage for its firms in specific industries.
In spite of the presence of the four factors and government support, the factors leading to
national advantage are likely to result in a firm achieving competitive advantage only
when the firm develops and implements strategies that enable it to take advantage of
country-specific factors.
4 Describe the three international corporate-level strategies.
8-2b International Corporate-Level Strategy

The type of corporate-level strategy adopted by a firm has an impact on the selection and
implementation of its international business-level strategy.
Some corporate-level strategies provide individual country units with the flexibility to
develop country-specific strategies, whereas others dictate all country business-level
strategies from the home office and coordinate activities across units for the purposes of
resource-sharing and product standardization.
International corporate-level strategy can be distinguished from international business-

level strategy by the scope of operations, in terms of both product and geographic
diversification.
Figure Note
The three types of international corporate-level strategies are illustrated in Figure 8.4,
and relationships between structural arrangements and strategy type are discussed
further in Chapter 11.
12
FIGURE 8.4
International Corporate-Level Strategies
As Figure 8.4 illustrates, a firm should choose its international corporate-level strategy
based on the need for both local responsiveness and global integration.
• When the need for global integration is high and there is little need for local market
responsiveness, the firm should adopt a global strategy.
• When the need for global integration is low but there is great need for local market
responsiveness, the firm should adopt a multidomestic strategy.
• When there is a great need for both global integration and local market responsiveness, the
firm should adopt a transnational strategy.
Multidomestic Strategy
A multidomestic strategy is one where strategic and operating decisions are decentralized
to the strategic business unit in each country in order to tailor products and services to the
local market. The multidomestic strategy:
• Assumes business units in different countries are independent of one another
• Contends that markets differ and can be segmented by national borders
• Focuses on competition within each country
• Suggests products and/or services can be customized to meet individual market needs or
preferences
• Assumes economies of scale are not possible because of demand for market-specific
customization
Teaching Note
A few years back, Sony’s entertainment business changed its strategy from global to
multidomestic when it decided to produce films and television programs for local
markets around the world through production facilities and television channels in most
larger Latin American and Asian countries. In 1999, Sony produced approximately
4,000 hours of foreign-language programs and about 1,700 hours of English-language
programs. Sony now has more than 24 channels operating across 62 countries, and
some of these channels are highly successful.
13
The use of multidomestic strategies:

• Usually expands the firm’s local market share because the firm can pay attention to the
needs of local buyers
• Results in more uncertainty for the corporation as a whole, because of the differences
across markets and thus the different strategies employed by local country units
• Does not allow for the achievement of economies of scale and can be more costly
• Decentralizes a firm’s strategic and operating decisions to the business units operating in
each country
Global Strategy
A global strategy is one where standardized products are offered across country markets
and competitive strategy is dictated by the home office. The global strategy:
• Assumes strategic business units operating in each country are interdependent
• Attempts to achieve integration across business and national markets, as directed by the
home office
• Emphasizes economies of scale
• Offers greater opportunities to use innovations developed at home or in one country in
other markets
• Often lacks responsiveness to local market needs and preferences
• Is difficult to manage because of the need to coordinate strategies and operating decisions
across borders
• Requires resource sharing and an emphasis on coordination across national borders
Teaching Note
U.K.-based temporary energy provider, Aggreko, operates in 48 countries and employs
a global strategy. The firm’s fleet of equipment is integrated globally, which allows it to
shift equipment to different regions of the world to meet specific needs. Its global
strategy also allows Aggreko to design and assemble its equipment in-house to meet the
needs of its customers.
14
STRATEGIC FOCUS
IKEA’s Global Strategy in the Age of Digitalization and Urbanization
Headquartered in Sweden, IKEA has pursued a global strategy in developing its well-
designed, but inexpensive retail furniture. As with most companies pursuing a global
strategy, it emphasizes global efficiencies, such as standardized product offerings,
efficient packaging, and lower transportation costs. Currently, IKEA is pursuing
international growth through online retailing and by targeting nations that have a strong
emerging middle class, such as Chile, Colombia, Peru, and India, and building stores in
primarily suburban areas where the middle classes typically reside.
Teaching Note
Begin by asking if students have shopped at IKEA and are familiar with the company’s
products. Share with them that IKEA has standardized its product offerings around the
world, and that it achieves economies of scale through standardization, efficient
packaging, and lower transportation costs. This information should enable students to
correctly identify IKEA’s strategy as a global strategy. Encourage them to brainstorm
suggestions for avoiding some pitfalls of a global strategy, such as a perceived lack of
responsiveness to local tastes and preferences.
Transnational Strategy
A transnational strategy is a corporate strategy that seeks to achieve both global
efficiency and local (national market) responsiveness.
• It is difficult to achieve because of requirements for both strong central control and
coordination to achieve efficiency and local flexibility and decentralization to achieve local
responsiveness.
• A transnational strategy mandates building a shared vision and individual commitment
through an integrated network to produce a core competence that would result in strategic
competitiveness (that competitors would find difficult to imitate).
• Effective implementation of a transnational strategy often produces higher performance
than does implementation of either the multidomestic or global international corporate-
level strategies.
Teaching Note
Students sometimes find the transnational strategy difficult to grasp. This has prompted
some to refer to this option as an “idealized form,” suggesting that this is not possible
to achieve in reality. This also suggests, however, that this model represents a worthy
goal for the international firm. It is worth asking students if they believe it will ever be
possible to be truly transnational and what would be needed to make this a reality.
15
Teaching Note
Refer back to Figure 8.4 to summarize relationships between the need for global
integration and local responsiveness and international corporate-level strategies.
Discuss environmental trends affecting the choice of international

5
strategies, particularly international corporate-level strategies.
8-3 ENVIRONMENTAL TRENDS

Implementing a transnational strategy is difficult; however, firms are challenged to do so
because of these facts.
• There is an increased emphasis on local requirements (e.g., customization to meet
government regulations within particular countries or to fit customer tastes and
preferences).
• Most multinational firms desire coordination and sharing of resources across country
markets to hold down costs.
• Some products and industries may be more suited than others for standardization across
country borders.
8-3a Liability of Foreignness

Research shows that firms may focus less on truly global strategies and more on regional
adaptation. Even Internet-based strategies now require local adaptation.
8-3b Regionalization
A firm competing in international markets must decide whether to compete in all (or
many) world markets or to focus its efforts on a specific region or regions.
Competing in many markets may enable the firm to achieve economies of scale because of
the size of the combined markets, but only if customer preferences in multiple markets do
not differ significantly. If customer preferences vary significantly among national markets,
a firm might be better served by narrowing its focus to a specific region. A regional focus
may enable the firm to better understand cultures, legal and social norms, and other factors
that may be important to achieving strategic competitiveness.
16
Teaching Note
At this point, it might useful to draw a parallel between competing in multiple national
markets and owning businesses in multiple industries. Firms may be better positioned
by focusing on a specific region where markets are more similar, thus allowing a degree
of integration and resource sharing. In Chapter 7, a similar comment was made
regarding disadvantages that often accompany overdiversification and the prescribed
downscoping to refocus the firm more on related as opposed to unrelated
diversification.
Lands’ End Adjusts to the Liability of Foreignness: A Mini-Case

The globalization of businesses with local strategies is demonstrated by the online
operation of Lands’ End, Inc. (now owned by Sears), which uses local Internet
portals to offer its products for sale. Lands’ End, formerly a direct-mail catalog
business, launched its Web-based business in 1995. The firm established websites
in the United Kingdom and Germany in 1999 and in France, Italy, and Ireland in
2000—all of this prior to initiating a catalog business in those countries. Not only
are catalogs very expensive to print and mail outside the United States, but they
also must be sent to the right people, and buying mailing lists is expensive. With
limited online advertising and word of mouth, a website business can be built in a
foreign country without a lot of initial marketing expenses. Once the online
business is large enough, a catalog business can be launched with mailing targeted
to customers who have used the business online.
Sam Taylor, vice president of international operations for Lands’ End, indicated
that the firm has a centralized Internet team (handling development, design, etc.)
at the home office, but a local presence is also needed. So the firm hired local
Internet managers, designers, marketing support, and so on, to gain insight into
the nuances of local markets. He also explained that each additional website was
cheaper to implement. For example, to set up the websites for Ireland, France, and
Italy, the firm cloned the U.K. site and partnered with Berlitz for French and
Italian translations. This made the process cheaper—12 times less than the U.K.
site for France and 16 times less for Italy. Lands’ End now gets 16 percent of its
total revenues from Internet sales and ships to 185 countries, primarily from its
Dodgeville, Wisconsin, corporate headquarters. This shows that smaller
companies can sell their goods and services globally when facilitated by
electronic infrastructure without having significant (brick-and-mortar) facilities
outside of their home location. But significant local adaptation is still needed in
each country or region.
17
Regional strategies also are being promoted by groups of countries that have developed
trade agreements to enhance the economic power of a region. Examples include the
following:
• Membership in the European Union (EU) is limited to Western European countries, but it
is being expanded to include other Western European countries as well as countries in
Central and Eastern Europe.
• The North American Free Trade Agreement (NAFTA) is an integration designed to
facilitate trade among the United States, Canada, and Mexico (and it may be expanded to
include some South American countries).
• South America’s Organization of American States (OAS) is a system of country
associations that developed trade agreements to promote the flow of trade across country
boundaries within their respective regions.
• CAFTA is a U.S. trade agreement with Central American nations that is designed to reduce
tariffs with five countries in Central America plus the Dominican Republic in the
Caribbean.
Teaching Note
The movement of investment funds has not been only from the United States to Mexico
as Mexican investors have made significant investments in the United States, and some
European firms have invested in Canada to gain access to this unified market.
Most firms enter regional markets sequentially, beginning in markets with which they are
more familiar. And they introduce their largest and strongest lines of business into these
markets first, followed by their other lines of business once the first lines are successful.
They also usually invest in the same area as their original investment location.
Identify and explain the five modes firms use to enter

6
international markets.
8-4 CHOICE OF INTERNATIONAL ENTRY MODE

Firms have a variety of alternative means of expanding internationally as indicated in
Figure 8.5.
Figure Note
Students can refer to Figure 8.5 as you discuss each mode of entry into international
markets.
18
FIGURE 8.5
Modes of Entry and Their Characteristics
Figure 8.5 presents five alternative entry modes available to firms for international
expansion:
• Exporting
• Licensing
• Strategic alliances
• Acquisition
• New wholly owned subsidiary (greenfield venture)
The next section of this chapter discusses characteristics of each mode, including
cost/control trade-offs.
8-4a Exporting
A common—but not necessarily the least costly or most profitable—form of international
expansion is for firms to export products from the home country to other markets.
• Exporters have no need to establish operations in other countries.
• Exporters must establish channels of distribution and outlets for their goods, usually by
developing contractual relationships with firms in the host country to distribute and sell
products.
However, exporting also has disadvantages:

• Exporters may have to pay high transportation costs.
• Tariffs may be charged on products imported to the host country.
• Exporters have less control over the marketing and distribution of their products.
Because of the potentially significant transportation costs and the usually greater similarity
of geographic neighbors, firms often export mostly to countries that are closest to their
facilities.
Small businesses are the most likely to use exporting. One of the largest problems that
small businesses must deal with is currency exchange rates, a challenge for which only
large businesses are likely to have specialists.
19
8-4b Licensing
Through licensing, a firm authorizes a foreign firm to manufacture and sell its products in
a foreign market.
• The licensing firm (licensor) generally is paid a royalty payment on every unit that is
produced and sold.
• The licensee takes the risks, making investments in manufacturing and paying
marketing/distribution costs.
• Licensing is the least costly (and potentially the least risky) form of international expansion
because the licensor does not have to make capital investments in the host countries.
• Licensing is a way to expand returns based on previous innovations, even if product life
cycles are short.
Teaching Note
Counterfeiting is one risk to licensing strategies. Sony and Philips co-designed the
audio CD. In the past, they licensed the rights to companies to make CDs, and Sony
and Philips collected 5 cents for every CD sold. However, the returns to Sony and
Philips from CD sales were threatened by cheap counterfeit disks. Sales of counterfeit
disks in China alone are estimated to exceed $1 billion annually.
The costs or potential disadvantages of licensing include the following:

• The licensing firm has little control over manufacture and distribution of its products in
foreign markets.
• Licensing offers the least revenue potential as profits must be shared between licensor and
licensee.
• The licensee can learn the firm’s technology and, upon license expiration, may create a
competing product.
8-4c Strategic Alliances

Strategic alliances enable firms to:
• Share the risks and resources required to enter international markets
• Facilitate the development of new core competencies that yield strategic competitiveness
Most strategic alliances represent ventures between a foreign partner (that provides access
to new products and new technology) and a host country partner (that has knowledge of
competitive conditions, legal and social norms, and cultural idiosyncrasies that enable the
20
foreign partner to successfully manufacture or develop and market a competitive product

or service in the host country market).
Strategic alliances also present potential problems and risks due to (1) selection of
incompatible partners and (2) conflict between partners.
Several factors may cause a relationship to sour. Trust between the partners is critical and
is affected by a number of fundamental issues:
• The initial condition of the relationship
• The negotiation process to arrive at an agreement
• Partner interactions
• External events
• The country cultures involved in the alliance or joint venture
Note: Strategic alliances are covered in much greater depth in Chapter 9.
Teaching Note
British Telecommunications (BT) planned to create a virtual shopping mall in Spain
through its joint venture with Banco Popular, a retail-focused Spanish bank. The two
firms jointly developed a website for business-to-business transactions. They were to
use BT’s portal in Spain to develop a client base of small- and medium-sized
businesses. BT would provide the common portal free of charge for the first year, and
Banco Popular would charge only a nominal commission for brokering sales.
Research suggests that alliances are more favorable when uncertainty is high and where
cooperation is needed to access knowledge dispersed between partners and where strategic
flexibility is important; acquisitions work best in situations with less need for flexibility
and when the transaction supports economies of scale or scope.
8-4d Acquisitions
Cross-border acquisitions have also been increasing significantly. In recent years, cross-
border acquisitions have comprised more than 45 percent of all acquisitions completed
worldwide.
As explained in Chapter 7, acquisitions can provide quick access to a new market. In fact,
acquisitions may provide the fastest and often the largest initial international expansion of
any of the alternatives.
21
Beyond the disadvantages previously discussed for domestic acquisitions (Chapter 7),
international acquisitions also can be quite expensive (because of debt financing) and
require difficult and complex negotiations due to:
• The same disadvantages as domestic acquisitions
• The great expense that often requires debt financing
• The exceedingly complex international negotiations for acquisitions—only about 20
percent of cross-border bids lead to a completed acquisition, compared to 40 percent for
domestic acquisitions
• Different corporate cultures
• The challenges of merging the new firm into the acquiring firm, which often are more
complex than with domestic acquisitions—i.e., different corporate culture, but also
different social cultures and practices
Teaching Note
Emphasize that firms often use multiple entry strategies. For example, Walmart has
used multiple entry strategies as it globalizes its operations, ranging from joint ventures
in China and Latin America to acquisitions in Germany and the United Kingdom.
8-4e New Wholly Owned Subsidiary

Firms that choose to establish new, wholly owned subsidiaries are said to be undertaking a
greenfield venture. This is the most costly and complex of all international market entry
alternatives.
The advantages of establishing a new wholly owned subsidiary include:

• Achieving maximum control over the venture
• Being potentially the most profitable alternative (if successful)
• Maintaining control over the technology, marketing, and distribution of its products
Though the profit potential is high, establishing a new wholly owned subsidiary is risky
for two reasons.
• This alternative carries the highest costs of all entry alternatives since a firm must build
new manufacturing facilities, establish distribution networks, and learn and implement the
appropriate marketing strategies.
• The firm also may have to acquire knowledge and expertise relevant to the new market,
often having to hire host country nationals (in many cases from competitors) and/or costly
consultants.
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8-4f Dynamics of Mode of Entry

The choice of a market entry strategy is determined by a number of factors. However,
initial market development strategies generally are selected to establish a firm’s products
in the new market.
• Exporting does not require foreign manufacturing expertise; it only requires an investment
in distribution.
• Licensing also can facilitate direct market entry by enabling the firm to learn the
technologies required to improve its products in order to achieve success in international
markets or to facilitate direct entry.
• Strategic alliances are also popular because the firm forms a partnership with a firm that is
already established in the new target market and reduces risks by sharing costs with the
partner.
If intellectual property rights in an emerging economy are not well protected, the number
of firms in the industry is growing fast, and the need for global integration is high, entry
modes such as joint ventures or wholly owned subsidiaries are preferred.
Firms interested in establishing a stronger presence (in most instances, in the later stages
of the firm’s international diversification strategy) and in controlling technology,
marketing, and distribution adopt riskier, more costly entry strategies, such as acquisitions
or greenfield ventures.
However, the entry strategy should be matched to the particular situation. In some cases, a
firm may pursue entry strategies in sequential order—beginning with exporting and
ending with greenfield ventures. The entry mode decision should be based on the
following conditions:
• The industry’s competitive conditions
• The target country’s situation
• Government policies
• The firm’s unique set of resources, capabilities, and core competencies
7 Discuss the two major risks of using international strategies.
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8-5 RISKS IN AN INTERNATIONAL ENVIRONMENT

Political and economic risks complicate the management of international diversification.
One reason is that these risks result in competitive conditions that may differ significantly
from what was expected.
Examples of political and economic risks related to international diversification are listed
in Figure 8.6.
Figure Note
Be sure to note any developments in the international risk situations noted in Figure 8.6
as well as the emergence of significant new issues.
FIGURE 8.6
Risks in the International Environment
This figure presents some specific examples of political and economic risks that
multinational firms face.
8-5a Political Risks

Political risks are those related to instability in national governments and to civil or
international war.
Teaching Note
For a useful way to identify the political risk associated with different countries, see the
map on page 105 of Small Business Management: An Entrepreneurial Emphasis, by
Longenecker, Moore, Petty, and Palich (2006, SWCP).
National government instability creates multiple potential problems for internationally

diversified firms. Economic risks come up as governments react to a variety of events,
reflected in uncertainty in terms of:
• Economic risks and uncertainty created by government regulation
• The existence of many, possibly conflicting, legal authorities or corruption
• The potential nationalization of private assets
Teaching Note
A number of national governments attempt to minimize political risk (to themselves) by
requiring that a significant portion of profits from investments be reinvested only in
that country (to achieve economic stability, which can reduce the probability of
political instability).
24
STRATEGIC FOCUS
The Global Delivery Services Industry: Economic Disruption of Tariffs and Trade
Wars
Thanks to the explosive growth in online retailing, the market for package delivery has
been expanding rapidly. Worldwide, the three largest package delivery services are DHL,
FedEx, and UPS, and the four largest markets for these services are the United States,
Europe, China, and Japan. All the firms in this industry could have expected continued
growth over the next several years, except that the United States has started something of
a trade war. In 2018, the United States implemented tariffs on many imported goods, and
many countries responded by implementing tariffs on U.S. goods imported into those
countries. If this trade war escalates, the global economy may see a decline in cross-border
purchases and a decreased GDP in many countries. Delivery services will suffer the
consequences of decreased demand.
Teaching Note
Engage students by asking how often they or people they know purchase products
online and have them delivered. Lead students in a discussion of the domino effect of
tariffs and counter-tariffs on retail purchases, national economies, and finally product
delivery services. Have students state whether they feel this is an example of a political
or an economic risk.
8-5b Economic Risks

Economic risks are interdependent with political risks; however, some economic risks are
specific to international diversification. For example, differences and fluctuations in the
value of the different currencies are a primary concern to internationally diversified firms.
• For U.S. firms, the value of international assets, liabilities, and earnings is affected by the
value of the dollar relative to other currencies (e.g., as the dollar value increases, the value
of foreign assets decreases).
The value of the dollar may make U.S. firms’ exports uncompetitive in international
markets because of price differentials (and, in turn, make imports from other countries
more attractive to U.S. customers).
25
Discuss the strategic competitiveness outcomes associated with

8 international strategies, particularly with an international
diversification strategy.
8-6 STRATEGIC COMPETITIVENESS OUTCOMES

Once its international strategy and mode of entry have been selected, the firm turns its
attention to implementation issues (see Chapter 11). It is important to do this because
international expansion is risky and may not result in a competitive advantage (see Figure
8.1). The probability the firm will achieve success by using an international strategy
increases when that strategy is effectively implemented. As an extension or elaboration of
international strategy, an international diversification strategy is a strategy through which
a firm expands the sales of its goods or services across the borders of global regions and
countries into a potentially large number of geographic locations or markets.
8-6a International Diversification and Returns

Recall that in Chapter 6 the discussion centered on product diversification where a firm
manufactures and sells a diverse variety of products.
Based on the advantages discussed earlier, international diversification should be

positively related to firm performance. Research has shown that, as international
diversification increases, firms’ returns decrease and then increase as they learn to manage
international expansion.
There are several reasons for the positive relationship between international diversification
and performance.
• Potential advantages from economies of scale and experience
• Location advantages
• Increased market size
• The potential to stabilize returns
8-6b Enhanced Innovation

As mentioned in Chapter 1, developing new technology is critical to strategic
competitiveness. In fact, Porter indicates that a nation’s competitiveness depends on the
innovativeness of its industries and that firms achieve strategic competitiveness in
international markets through innovation (see Figure 8.2).
26
As stated earlier in this chapter, one of the advantages of international expansion is having
larger potential markets. Larger markets allow firms to achieve greater returns on
innovation, which yields lower R&D-related risk. Thus, international diversification
provides firms with incentives to innovate.
A complex relationship exists among international diversification, innovation, and

performance. This leads, in fact, to the following circular relationship:
• Some level of performance is necessary to provide the resources required to diversify
internationally.
• International diversification provides incentives (advantages) to firms to invest in R&D
(innovation).
• If done properly, R&D and the resulting innovations should improve firm performance.
• Improved performance provides resources for continued international diversification and
investments in R&D innovation.
It also is possible that international diversification may result in improved returns for
product-diversified firms (referred to as unrelated diversification) by increasing the size of
the potential market for each of the firm’s products. But managing a firm that is both
product and internationally diversified is very complex.
Cultural diversity may enable a firm to compete more effectively in international markets.
• Culturally diverse top management teams often have a greater knowledge of international
markets.
• An in-depth understanding of diverse markets among top-level managers facilitates inter-
firm cooperation, the use of strategically relevant, long-term criteria to evaluate managerial
and business unit performance, and improved innovation and performance.
Explain two important issues firms should have knowledge about

9
when using international strategies.
8-7 THE CHALLENGE OF INTERNATIONAL STRATEGIES

8-7a Complexity of Managing International Strategies
Managers of internationally diversified firms face a number of complex challenges.
• Firms face multiple risks from being in several countries.
• Firms can grow only so large before they become unmanageable.
27
• The costs of managing large diversified firms may outweigh the benefits of diversification.
• Global markets are highly competitive.
• Firms must understand and effectively deal with multiple cultural environments.
• Systems and processes must exist to manage shifts in the relative values of multiple
currencies.
• Firms must scan the environment to be prepared for potential government instability.
8-7b Limits to International Expansion

As mentioned before, firms generally earn positive returns by diversifying internationally.
However, there are limits to the advantages of international diversification.

• Greater geographic dispersion across country borders increases the costs of coordination
between units and the distribution of products.
• Trade barriers, logistical costs, cultural diversity, and other differences by country greatly
complicate the implementation of an international diversification strategy.
• Institutional and cultural factors can present strong barriers to the transfer of a firm’s
competitive advantages from one country to another.
• Marketing programs often have to be redesigned and new distribution networks established
when firms expand into new countries.
• Firms may encounter different labor costs and capital charges.
• In general, it is difficult to effectively implement, manage, and control a firm’s
international operations.
Teaching Note
The complex nature of the management challenges that face internationally diversified
firms is illustrated by the following cases:
• Robert Shapiro, CEO of Monsanto, assumed that Europe was similar to the United
States, but the firm’s genetically engineered seeds have been strongly rejected in
Europe.
• Walmart made mistakes in some Latin American markets, for example, when it
learned that giant parking lots do not draw huge numbers of car-less customers.
And the lots were far from the bus stops used by many Mexicans, so potential
customers could not easily transport their goods home.
28
• Home Depot’s expansion into China fell flat due to the fact that, unlike in the
United States, the Do-It-Yourself market is very small. Customers in China are
considered to be Do-It-For-Me buyers, and Home Depot’s value proposition is not
important to them.
ANSWERS TO REVIEW QUESTIONS
1. What incentives influence firms to use international strategies?
Traditional incentives that cause firms to expand internationally are to gain access to
larger markets, to extend the product life cycle, to secure key resources, and to access
low-cost factors of production (e.g., cheap labor or raw materials).
Emerging motives include the increase in pressure for global integration (driven by
global communications, which lead to a global convergence of lifestyles and, in turn,
universal product demand), rising obligations for cost cutting (e.g., seeking the lowest
cost provider of resources or low-cost global suppliers), the realization that R&D
expertise for the next new product extension may not come from the domestic market,
and the emergence of large-scale markets.
2. What are the three basic benefits firms can gain by successfully implementing an
international strategy?
Firms can derive three basic benefits from international strategies. These benefits are as
follows:
Increased market size—firms can expand the size of their market, sometimes
dramatically, by entering foreign markets.
Economies of scale and learning—through international expansion, firms may be able to
realize economies of scale, especially in manufacturing operations. This is even more
important to the extent that firms can standardize their products across country borders.
In addition, operating across borders creates new opportunities for learning and this can
lead to process improvements.
Location advantages—firms can realize significant cost savings by locating operations at
the optimal place in the world. Location advantages include low labor, energy, and
natural material costs. Other advantages include access to critical suppliers and
customers.
29
3. What four factors are determinants of national advantage and serve as a basis for
international business-level strategies?
According to Michael Porter, the resources and capabilities established in a firm’s home
country often enable the firm to pursue its strategy beyond the domestic market. Porter
specified a model that describes the factors contributing to the advantage of firms in a
dominant global industry and associated with a specific country or regional environment.
These four factors are as follows:
• Factors of production, or the basic inputs necessary to compete in any industry, such as
labor, land, capital, and infrastructure.
• Demand conditions, or the nature and size of the buyers’ needs in the home market for
the industry’s products or services (reflected either by segment size, which enables a
firm to achieve economies of scale, or specialized demand, which enables the firm to
develop a higher level of competency in producing products/services).
• Related and supporting industries or the presence of other industries in the home
market that are either related to or support the primary industry. For example, the shoe
industry in Italy benefits from a well-established industry in leather processing, people
traveling to Italy to purchase leather goods, and an industry presence in leather-working
machinery and design services.
• Firm strategy, structure, and rivalry are interrelated as patterns of strategy that impact
(and are impacted by) industry structure, which in turn affect and are affected by
competitive rivalry.
4. What are the three international corporate-level strategies? What are the
advantages and disadvantages associated with these strategies?
The three international corporate-level strategies are multidomestic, global, and

transnational (see Figure 8.4).
Firms following multidomestic strategies assume that markets are different and should be
segmented by national boundary. They decentralize or delegate strategic and operating
decisions to the strategic business unit in each country to gain the flexibility necessary to
tailor products and services to local market preferences. The use of multidomestic
strategies usually produces expansion of local market share because of the attention paid
to local demands; however, it also leads to greater uncertainty for the corporation as a
whole (due to market differences and the strategies designed to fit these). Multidomestic
strategies do not allow for the achievement of economies of scale and thus can be more
costly, leading firms following this strategy to decentralize strategic and operating
decisions to the business units operating in each country.
30
Firms that follow a global strategy assume significant standardization of products across
markets. The primary focus is on efficiency through economies of scale and the
leveraging of innovation across country markets. Business-level strategy is centralized
and controlled by the home office. It requires resource sharing and coordination and
cooperation between subsidiaries and across country boundaries. Thus, a global strategy
produces lower risk but may forgo growth opportunities in local markets because they are
less likely to identify opportunities, or these require product adaptation for local market
preferences. Therefore, this strategy lacks local market responsiveness and is difficult to
manage because of the need to coordinate strategies and operating decisions across
country borders.
A transnational strategy seeks to achieve both global efficiency and local
responsiveness. It is difficult to realize the diverse goals of the transnational strategy
because one goal requires close global coordination, whereas the other requires local
flexibility. Thus, “flexible coordination” is required to implement the transnational
strategy. Management must build a shared vision and individual commitment through an
integrated network. Effective implementation of a transnational strategy often produces
higher performance than either the global or multidomestic strategy alone.
5. What are some global environmental trends affecting the choice of international
strategies, particularly international corporate-level strategies?
Global strategies require integration and coordination across units (and across national
boundaries) and enable the achievement of economies of scale and efficiency. On the
other hand, multidomestic strategies emphasize responsiveness to local market needs and
preferences, providing the opportunity to more effectively meet customer needs and
preferences. Successfully balancing the need for local responsiveness and global
efficiency implies that local responsiveness should facilitate competition based on an
international differentiation strategy, whereas global efficiency should facilitate
competition based on an international cost leadership strategy.
The threat of wars and terrorist attacks increases the risks and costs of international
strategies. Furthermore, research suggests that the liability of foreignness is more difficult
to overcome than once thought.
Competing in many markets may enable the firm to achieve economies of scale because
of the size of the combined markets, but only if customer preferences in multiple markets
do not differ significantly. If customer preferences vary significantly among national
markets, a firm might be better served to narrow its focus to a specific region. A regional
focus may enable the firm to better understand cultures, legal and social norms, and other
factors that may be important to achieving strategic competitiveness.
31
Regionalization is another trend that has become more common in global markets.
Companies need to decide if they are going to compete in all markets or selectively
choose specific regions within which to operate. Regional strategies also are being
promoted by groups of countries that have developed trade agreements to enhance the
economic power of a region. Examples include the European Union (EU) and the
Organization of American States (OAS) in South America. Another example of a regional
market is the North American Free Trade Agreement (NAFTA), which is designed to
facilitate free trade among the United States, Canada, and Mexico. NAFTA may be
expanded to include some South American countries, and the movement of investment
funds has not been only from the United States to Mexico as Mexican investors have
made significant investments in the U.S. and some European firms have invested in
Canada to gain access to this unified market.
6. What five entry modes do firms use to enter international markets? What is the
typical sequence in which firms use these entry modes?
Choice of mode of entry is determined by a number of factors, and the following modes
are listed in a sequence that is typical in practice. Initial market entry will often be
through export because this requires no foreign manufacturing expertise and demands
investment only in distribution. Licensing can also facilitate the product improvement
necessary to enter foreign markets. Strategic alliances have been popular because they
allow partnering with an experienced player already in the targeted market. Strategic
alliances also reduce risk through the sharing of costs. These modes, therefore, are best
for early market development.
To secure a stronger presence, acquisitions or new wholly owned subsidiaries (greenfield
ventures) may be required. Both acquisitions and greenfield ventures are likely to come at
later stages in the development of an international diversification strategy. Additionally,
these strategies tend to be more successful when the firm making the investment has
considerable resources, particularly in the form of valuable core competencies.
Thus, there are multiple means of entering new global markets. The firm selects the entry
mode that is best suited to the situation at hand. In some instances, these options will be
followed sequentially, beginning with exporting and ending with greenfield ventures. In
other cases, the firm may use several (but perhaps not all) of the different entry modes.
The decision regarding the entry mode to use is primarily a result of the industry’s
competitive conditions, the country’s situation and government policies, and the firm’s
unique set of resources, capabilities, and core competencies.
32
7. What are political risks and what are economic risks? How should firms deal with
these risks?
Political risks are related to instability in national governments and to civil or

international war. Instability in a national government creates multiple problems. Among
these are economic risks and uncertainty in government regulation, the presence of many
(possibly conflicting) legal authorities, and potential nationalization of private assets. For
example, foreign firms that are investing in Russia may have concerns about the stability
of the national government and what might happen to their investments/ assets in Russia
should there be a major change in government. Different concerns exist for foreign firms
investing in China where foreign investors are less worried about the potential for major
changes in China’s national government than about the uncertainty of China’s regulation
of foreign business investments.
Economic risks are highly interdependent with political risks. The primary economic
risks are differences and fluctuations in the value of currencies that can affect the value of
a firm’s assets, liabilities, and earnings, as well as its price competitiveness in
international markets.
Although firms can realize many benefits by implementing an international strategy,
doing so is complex and can produce greater uncertainty. For example, multiple risks are
involved when a firm operates in several different countries. Firms can grow only so
large and diverse before becoming unmanageable, or before the costs of managing them
exceed their benefits. Other complexities include the highly competitive nature of global
markets, multiple cultural environments, the security risks posed by terrorists, potentially
rapid shifts in the value of different currencies, and the possible instability of some
national governments.
8. What are the strategic competitiveness outcomes firms can achieve through
international strategies, and particularly through an international diversification
strategy?
International diversification provides the potential for firms to achieve greater returns on
their innovations (through larger and/or more numerous markets) and thus lowers the
often substantial risks of R&D investments. Therefore, international diversification
provides incentives for firms to innovate. In addition, international diversification may be
necessary to generate the resources required to sustain a large-scale R&D operation. The
accelerating trend toward rapid technological obsolescence makes it difficult to invest in
new technology and the capital-intensive operations required to take advantage of it;
therefore, firms operating solely in domestic markets may find it difficult to justify such
investments due to the length of time required to recoup the original investment. Even if
33
the time frame is extended, it may not be possible to recover the investment before the
technology becomes obsolete. Thus, international diversification improves the firm’s
ability to appropriate additional and necessary returns from innovation before competitors
can overcome the initial competitive advantage created by the innovation. Additionally,
firms moving into international markets are exposed to new products and processes, so
they can learn and integrate this knowledge in an effort to enhance their innovation
efforts.
The relationship among international diversification, innovation, and returns is complex.
Some level of performance is necessary to provide the resources to generate international
diversification. International diversification provides incentives and resources to invest in
research and development. Research and development, if done appropriately, should
enhance the returns of the firm, thereby providing more resources for continued
international diversification and investment in R&D.
9. What are two important issues that can potentially affect a firm’s ability to
successfully use international strategies?
Firms pursuing international strategies often find that success leads to growth in both
firm size and complexity. These conditions make it more difficult to manage. At some
point, the degree of geographic and product diversification may cause returns to become
flat or even negative. This occurs because geographic dispersion increases the costs of
operational coordination and product distribution. In addition, trade barriers, logistical
costs, cultural diversity, and other differences by country all serve to complicate the
implementation of international strategy.
Evidence suggests that international expansion is managed differently by different
companies—some do it better than others. Managers’ abilities to deal with complexity
and ambiguity are key determinants to the success of international strategies.
MINI CASE
The Global Soccer Industry and the Effect of the FIFA Scandal
Note: To prepare students for class discussion and to introduce them to the
fundamentals of the Strategic Management process, each chapter Mini-Case is
prepared as an auto-graded Guided Case Analysis activity in MindTap™. More
information below.
The Fédération Internationale de Football Association (FIFA) is an international sports
organization founded in Europe in the early 1900s. The organization, known for its World
34
Cup competition, has grown into an international force, especially in the last several
decades. However, because of the weak institutional infrastructure in many countries
where the game of soccer is played around the world, there is ripe opportunity for
corruption. Apparently, many involved in the FIFA infrastructure globally, regionally, and
within specific countries have taken advantage of this opportunity. With nearly 1 billion
worldwide viewers, the World Cup drew large corporate sponsorship under longtime
FIFA president Sepp Blatter. But in 2015, the U.S. Department of Justice and the FBI
announced a long list of indictments, and simultaneous arrests of FIFA officials were
made at the Zurich FIFA meetings in Switzerland. Blatter eventually stepped down from
his presidency. According to these allegations, intermediaries were paid exorbitant
amounts for contracts they helped to establish. Then these intermediaries funneled the
bribes to the leaders of the regional and country FIFA-related associations. Now, many of
the former large corporate sponsors, such as Adidas, Nike, and McDonald’s, are cautious
about supporting an organization that has been as tainted politically as has FIFA.
Teaching Note
Begin by asking students why large firms like Coca-Cola, Nike, Adidas, McDonald’s,
and Hyundai would want to become corporate sponsors for international sporting
events like FIFA’s World Cup. Help students understand that this annual event is
viewed by approximately ten times the number of people who watch the Super Bowl.
How does a scandal like this affect corporate sponsors? This might also be a good
opportunity for a discussion on business ethics as it relates to FIFA’s international
strategy for growth.
Answers to Case Discussion Questions

1. How does the FIFA scandal represent a form of political risk for companies operating in
foreign countries?
Although FIFA is a not-for-profit organization dedicated to promoting the growth of the
sport of football around the globe, it is still subject to both political and economic risk,
just like any other international organization or firm. Political risks that disrupt an
organization’s operation can take many forms, including uncertainty created by
government regulations and the nationalization of private assets. In this case, it was
corruption within the organization and within related organizations and businesses in
many countries that created the disruption in FIFA’s operations. The scandal has resulted
in significant turnover among the organization’s leadership and caused FIFA’s biggest
corporate sponsors to consider pulling their sponsorship.
35
2. What are the benefits to companies such as Nike and Coca-Cola acting as sponsors of
soccer organizations in foreign countries?
Soccer is perhaps the most popular sport worldwide. Consider that the 2010 World Cup
Final was viewed by approximately 1 billion people as compared to the NFL’s Super
Bowl, which was seen by only 114.4 million people that same year. The sponsorship of
soccer organizations around the globe presents unparalleled marketing opportunities for
international firms like Nike, Adidas, Coca-Cola, and McDonald’s.
3. What international strategy is being used by the major companies holding these
sponsorships? Please explain.
At the corporate level, major companies that sponsor sports organizations and sporting
events are probably following either a global strategy, in which the firm benefits from
high levels of standardization and efficient operations, or a transnational strategy, in
which the firm seeks to achieve both global efficiency and local responsiveness. Hyundai,
Coca-Cola, and McDonald’s, for example, are known for local responsiveness and are
thus pursuing a transnational strategy, whereas Nike and Adidas products are fairly
standardized around the world, suggesting a global strategy.
4. Given the process described for gaining sponsorships (e.g., through sports marketing
agencies), should Nike and other major companies realize that bribes and other corrupt
practices were taking place?
Students’ answers may vary on this opinion-based question. Some will argue that the
existence of a middleman in the process (the sports marketing agencies) should have been
questioned and scrutinized more thoroughly. Others may argue that these firms were
simply following the process they were given in order to achieve their aims, and that they
were not responsible for policing FIFA, its supporting organizations, and the sports
marketing agencies. Students need to support their opinions either way.
5. How can companies handle corrupt practices in foreign countries? Can they find ways to
compete there without engaging in these practices? Please explain.
In truth, while a firm may not want to, it may be forced to participate in at least a minimal
amount of corrupt practices if it wants to enter certain markets. It is important to
understand that corrupt practices and bribery are defined and viewed differently in
different countries. What some might consider corrupt in one country is seen as “the cost
of doing business” in another.
36
ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions

1. Given the advantages of international diversification, why do some firms choose not to
expand internationally?
2. How can a small firm diversify globally using the Internet?
3. How do firms choose among the alternative modes for expanding internationally and
moving into new markets (e.g., forming a strategic alliance versus establishing a wholly
owned subsidiary)?
4. Does international diversification affect innovation similarly in all industries? Why or
why not?
5. What is an example of political risk in expanding operations into Latin America or China?
6. Why do some firms gain competitive advantages in international markets? Explain.
7. Why is it important to understand the strategic intent of strategic alliance partners and
competitors in international markets?
8. What are some challenges associated with pursuing a transnational strategy? Explain.
Ethics Questions
1. As firms attempt to internationalize, they may be tempted to locate their facilities where
product liability laws are lax in testing new products. What are some examples in which
this motivation is the driving force behind international expansion?
2. Regulation and laws regarding the sale and distribution of tobacco products are stringent in
the U.S. market. Use the Internet to investigate selected U.S. tobacco firms to identify if
sales are increasing in foreign markets compared to domestic markets. In what countries
are sales increasing? Why? What is your assessment of this practice?
3. Some firms outsource production to foreign countries. The presumed rationale for such
outsourcing is to reduce labor costs. Examine the labor laws (e.g., the strictness of child
labor laws) and laws on environmental protection in another country. What does your
examination suggest from an ethical perspective?
4. Are there markets that the U.S. government protects through subsidies and tariffs? If so,
which ones and why? How will the continuing development of e-commerce potentially
affect these efforts?
5. Should the United States seek to impose trade sanctions on other countries, such as China,
because of human rights violations?
37
6. Latin America has been experiencing significant changes in both political orientation and
economic development. Describe these changes. What strategies should foreign
international businesses implement, if any, to influence government policy in these
countries? Is there a chance that the political changes will reverse?
INSTRUCTOR’S NOTES FOR MINDTAP

Cengage offers additional online activities, assessments and resources inside MindTap,
our online learning platform. Here is a comprehensive listing of the activities available
within each chapter of MindTap for Hitt, Ireland Hoskisson’s Strategic Management:
Competitiveness and Globalization, 13th edition:
Course Level Resource: Cornerstone to Capstone Diagnostic- features short quizzes in

the key business areas of: Finance, Marketing, Accounting, Management and Economics.
Averaging between 7-9 questions per topical area, these quizzes are designed to help
students review content from courses offered earlier in the business curriculum, so they
are prepared to succeed in the Strategic Management course.
Chapter Level Resources:

• What Would You Do Video
• MindTap Reader (eBook)
• Assignments:
o Multiple Choice Quiz
o Video Quiz
o Guided Case
o You Make the Decision (every other chapter)
o Group Project
• Student Study Tools:
o A+ Test Prep
o Concept Clip Videos (where applicable)
o Flashcards
Course Level Case Resources:
• Text Cases (Readings)
• Group Case Activities (Group Case Assignments)
• Supplemental Cases (Readings)
To view more information on each of these MindTap activities, along with the default
grading settings and additional support information, view or download the
“hitt_ins_manual_13e_ch00_mindTap Outline_final” file on the Instructor Companion
Site for this title.
38
ADDITIONAL INFORMATION FOR SELECT MINDTAP RESOURCES:
WHAT WOULD YOU DO? TOMBERLIN

This exercise introduces students to strategic decisions as they are made in the real world.
Students should come to class prepared to discuss this exercise, and why they chose the
answer they did. All answers are graded as correct – the point of the exercise is to engage
your student's interest.
Students watch a brief video about Tomberlin cars, and they have to make a decision
about whether to continue manufacturing the cars in China, or to move manufacturing
operations to the United States. The answer tells students that while Tomberlin decided to
continue manufacturing in China, they filed for bankruptcy in 2013, and they were bought
by a company that manufactures only in the U.S. in 2015. The question is a good way to
get students to start thinking about globalization. Tomberlin wanted to manufacture in
China because of the availability of excellent manufacturing facilities and workers
overseas. Especially for a car manufacturer, what other aspects of the business would you
have to take into consideration when deciding where to manufacture your cars? Students
should talk about where the cars are marketed, how to ensure quality control over the
manufacturing, tariffs, transportation costs, etc.
VIDEO QUIZ: TOMBERLIN

Title: Tomberlin
RT: 2:23
Topic Key: International strategy, Business-level strategy, Corporate-level strategy,
National advantage
American small businesses often find it hard to operate in the US, given the high costs of
developing the infrastructure to produce goods. One option overseas offers some
businesses a cheaper solution — China’s booming manufacturing industry. Mike
Tomberlin, found and CEO of U.S. company Tomberlin Automotive has partnered with a
Chinese vehicle manufacturer to assemble his vehicles. Sales for his electric vehicles are
brisk, but Tomberlin says his company is still too small to invest in building its own
manufacturing hub in the United States. He says the access to manufacturing in China
allows the company to focus on building the brand and channel.
Suggested Discussion Questions and Answers

• What are some of the benefits of the strategic alliance between Tomberlin Automotive
and the Chinese manufacturing plant?
In the strategic alliance between Tomberlin Automotive and the Chinese
39
manufacturing plant, they are sharing the risks and resources of operations.
Strategic alliances are the most common arrangements for outsourcing and
offshoring. Tomberlin Automotive has cheaper access to manufacturing facilities
and skilled labor, while the Chinese manufacturer benefits from increased
investment in his factories and access to U.S. supply chain.
40
• What benefits does Tomberlin Automotive receive from its international strategy by
manufacturing in China?
By manufacturing in China, Tomberlin Automotive can reduce costs through
lower-cost labor.
• What risks are associated with Tomberlin Automotive moving its manufacturing
operations to China?
If the country doesn’t maintain proper infrastructure for shipping the product
overland and exporting it back to the U.S. The ability to carry out successful
manufacturing operations is dependent on the infrastructure of where the
operations are taking place, which is an economical risk. In addition, new laws and
regulations could impact the company’s cost of business in China, which is a
political risk.
GUIDED CASE: THE GLOBAL SOCCER INDUSTRY

This auto-graded activity asks students to read the short end-of-chapter case on The
Global Soccer Industry, and answer questions in the areas of Analysis, Strategy, and
Implementation & Performance.
Once exclusive to European countries, FIFA, the international soccer federation, has
grown over the last century to include nations from South America, the Caribbean, and
beyond. The now global organization, which sponsors World Cup soccer matches, along
with many of its regional and country affiliates have come under heavy scrutiny for
possible corrupt practices in recent years. Much of the alleged corruption that has taken
place has been indirectly supported by the countries where soccer is popular, especially in
less developed countries. Bribes were alleged to have been paid for Africa to receive the
World Cup, and FIFA’s recent decisions to allow Russia and Qatar to host the games in
2018 and 2022 have come under question. The scandal has had a negative impact on
FIFA’s corporate sponsors, including McDonald’s, Nike, Adidas, Hyundai, and Coca-
Cola, that fear being tainted by their association with the organization.
41
In answering the Guided Case Questions, students will review these concepts:
• International diversification strategy
• Transnational strategy
• Political risk
• Incentives and benefits
YOU MAKE THE DECISION: LULULEMON

You Make the Decision branching exercises are real-world activities that allow each
student to work through challenges by choosing from different decision-making options.
These exercises provide students with the opportunity to practice strategic management in
a business scenario utilizing company case studies. Students are placed in the role of a
decision maker and asked to consider the needs and priorities of stakeholders as they
determine strategy recommendations for a company.
Lululemon athletica is a yoga-inspired athletic apparel company that produces a clothing

line and runs international clothing stores from its company based in Vancouver, British
Columbia, Canada.
Students will choose among competing strategies for developing an international strategy
as lululemon athletica enters the Chinese market. It is important to guide the discussion to
focus on themes presented throughout this chapter such as risks and advantages of
international strategies, as well as business- and corporate-level strategies. In particular, be
42
Solution Manual for Strategic Management: Competitiveness and Globalization, 13th Edition, M
sure that the class is addressing issues such as increased coordination and distribution
costs, management problems that arise as a result of factors like trade barriers, licensing,
logistical costs, and cultural diversity.
Students will review these concepts:

• Different strategies that companies use to compete in the global marketplace
• Global versus transnational strategy
• Export versus licensing
• Export versus wholly owned subsidiary
• Liability of foreignness
• Regionalization
The ideal path that earns a perfect score is the following:

• Select a transnational strategy
• Choose to export from an existing supplier network
• Customize products aimed at Chinese customers
• Export products to China aimed specifically at the Chinese market
GROUP PROJECT: INTERNATIONAL EXPANSION: IS IT

FOR EVERYONE?
The purpose of this exercise is to investigate the feasibility of a company expanding

internationally. Students will learn if international expansion makes sense for all industries
or just for some. In this group project, students will have the opportunity to practice
valuable strategic management skills, including team building, data analysis, critical
thinking, and research management. In this exercise, each team will act as a consultant to
a multinational fast-food restaurant company that is trying to increase its international
exposure in the near future.
This exercise also can be used as an individual assignment.
43
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INSTRUCTOR’S NOTES FOR MINDTAP

There are three types of international corporate-level strategies. A multidomestic strategy

Finally, firm using international strategies to pursue strategic competitiveness often

The following opportunities and outcomes of international strategy are illustrated in

Explain incentives that can influence firms to use an

8-1 IDENTIFYING INTERNATIONAL OPPORTUNITIES

8-1a Incentives to Use International Strategy

Some firms implement an international strategy to secure critical resources, such as

Companies seeking to expand operations internationally need to understand the pressure

Opportunities available to firms through an international strategy include:

Identify three basic benefits firms gain by successfully

8-1b Three Basic Benefits of International Strategy

Economies of Scale and Learning

Other factors that may impact location advantages are as follows:

Explore the determinants of national advantage as

8-2 INTERNATIONAL STRATEGIES

8-2a International Business-Level Strategy

Note: Each of these factors is discussed in the following section.

These factors can be subdivided into four categories:

4 Describe the three international corporate-level strategies.

8-2b International Corporate-Level Strategy

International corporate-level strategy can be distinguished from international business-

The use of multidomestic strategies:

Discuss environmental trends affecting the choice of international

8-3 ENVIRONMENTAL TRENDS

8-3a Liability of Foreignness

Lands’ End Adjusts to the Liability of Foreignness: A Mini-Case

Identify and explain the five modes firms use to enter

8-4 CHOICE OF INTERNATIONAL ENTRY MODE

However, exporting also has disadvantages:

The costs or potential disadvantages of licensing include the following:

8-4c Strategic Alliances

foreign partner to successfully manufacture or develop and market a competitive product

Note: Strategic alliances are covered in much greater depth in Chapter 9.

8-4e New Wholly Owned Subsidiary

The advantages of establishing a new wholly owned subsidiary include:

8-4f Dynamics of Mode of Entry

7 Discuss the two major risks of using international strategies.

8-5 RISKS IN AN INTERNATIONAL ENVIRONMENT

8-5a Political Risks

National government instability creates multiple potential problems for internationally

8-5b Economic Risks

Discuss the strategic competitiveness outcomes associated with

8-6 STRATEGIC COMPETITIVENESS OUTCOMES

8-6a International Diversification and Returns

Based on the advantages discussed earlier, international diversification should be

8-6b Enhanced Innovation

A complex relationship exists among international diversification, innovation, and

Explain two important issues firms should have knowledge about

8-7 THE CHALLENGE OF INTERNATIONAL STRATEGIES

8-7b Limits to International Expansion

However, there are limits to the advantages of international diversification.

ANSWERS TO REVIEW QUESTIONS