Chapter Four

International
Competitive Strategies
and Entry Modes

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

 Study about international competitive

strategies of enterprises.

 Learn about methods of foreign entries that

the international business can choose.

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 Content

• Factors to choose international business

International strategy
Competitive • International business strategies
Strategies • Trends of strategic transformation of
international business enterprises

• Methods of entry in international

business
Entry modes • Select the appropriate penetration
method

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 International Competitive Strategies

Factors to choose international

business strategy

International business strategies

Trends of strategic transformation of

international business enterprises

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 What is International Strategy?

 International strategy refers to the way firms make

choices about acquiring and using scarce resources in
order to achieve their international objectives
 It involves
 decisions about which markets to enter with which
products, when and how
 all the various functions and activities of the
company and how they interact
 ensuring that strategy is consistent across
functions, products, and regional units
 a variety of unique demands associated with
operating internationally
LO1
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 International Strategy

 A company’s goal is to achieve and maintain a

unique and valuable position both within a nation and
globally
 Competitive advantage refers to the ability of a
company to have higher rates of profits than its
competitors

LO1
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 International Strategy
V = Consumption value
V-P
P = Market price
C = Production cost
P- C
V
P V – P = Consumer surplus
C V-C
P – C = Profit
V – C = Value added

To create a competitive Find and implement activities to

advantage, a company reduce the cost and/or differentiate
needs to create a higher (adapt) the company's products
through design, quality, service and
value-added (V-C) than
other functional activities.
its competitors.
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 Competitive Advantage

 To create a sustainable competitive advantage, a

company tries to develop skills that
 create value for customers
 are rare
 are difficult to imitate or substitute for
 are organized in a way that the company can fully
exploit

LO1
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 The Value Chain

Adapted from M. E. Porter, Competitive Advantage, New York: Free Press, 1985
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 Formulate Competitive Strategies
For the International Market Place
 Formulation of international strategy must consider two
opposing forces
 Reduction of costs: achieved best through standardization
and global integration of operations
 Adaptation to local markets: achieved best through more
local autonomy
 Basic strategy types address pressures for cost reduction and
local adaptation
 Home Replication
 Multidomestic
 Regional
 Global
 Transnational

LO4
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 Cost and Adaptation Pressures and Their
Implications for International Strategies

Adapted from C. Bartlett and S. Ghoshal. Managing Across Borders: The Transnational Solution, 2002
2nd ed., Cambridge: Harvard Business Press LO4
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 Home Replication Strategy
 The home replication strategy centralizes product
development functions in the home country
 developed products are then transferred to
foreign markets in order to capture additional
value
 microsoft, mcdonald’s
 The company has to possess a distinctive
competence that local companies lack
 Headquarters maintains control over marketing and
product strategy
 Subsidiaries leverage the home country capabilities
LO4
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 Multidomestic Strategy

 The multidomestic strategy is used when there is

strong pressure for adaptation to local market
 Decision making is decentralized, allowing for quick
change
 Leads to an increased cost structure
 Excessive adaptation may take away from product’s
distinctiveness
 Cost and complexity of coordination can be
substantial

LO4
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 Global Strategy

 The global strategy is used when a company faces

strong pressure to reduce costs and limited
pressure to adapt products for local markets
 Strategy and decision making centralized
 Company offers standardized products and services
 Value chain activities are in only one or a few areas
 Limited ability to adjust to meet customer needs
 Higher transportation costs for physical products

LO4
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 Transnational Strategy
 The transnational strategy is used when pressures for
cost effectiveness and local adaptation are equally
important
 Company locates activities where most beneficial for
the firm globally
 Upstream value chain activities will be more
centralized
 Downstream activities will be more localized
 Achieving an optimal balance is challenging
 Strategic decisions, structures and systems will be
complex

LO4
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 Discussion. Unilever strategy
Before 1990, Unilever applied a strategy with features of
central for all decision-making. The same promotion and
marketing acted in the world. After 1990, Unilever
changed the strategy with features of releasing the right of
decision making independently. Each subsidies in
international net work had marketing, promotion, products
itself.
1. Identify the international strategy of Unilever before
and after 1990.
2. Is it a right way? Give advantages and disadvantages
of the two International strategies of Unilever

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 Organizational
Design and Control

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

 Organizational structure refers the way that an

organization formally
 arranges its domestic and international units and
activities
 sets relationships among the organization’s
various elements

LO1
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 Organization Design for ICs
 Organizational design refers to how an IC should
be organized in order to ensure it can efficiently
and effectively integrate its worldwide business
activities
 structures and systems must be consistent with
each other and with the environmental context
 size and complexity of business activities must
be considered for organization design
 Structure must be able to evolve over time in order
to
 respond to change
 reconfigure to integrate competencies and
resources
LO1
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Relationship Among Environment,
Strategy, and Structure

LO1
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 Design Dimensions

 Product and technical expertise regarding the IC’s

businesses
 Geographic expertise about countries and regions
where the IC operates
 Customer expertise regarding the client groups,
industries, market segments, or population groups
across national borders
 Functional expertise regarding the IC’s value chain
activities

LO2
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 Evolution of the
International Company
 International division: typically an IC’s early
organizational choice
 Responsible for all non-home country activities
 At the same level as the domestic division
 Once international business’ relative importance to
the company increases worldwide organizations are
established

LO3
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 Organizational architecture

 To maximize profitability a firm must achieve consistency

between the various components of its architecture 12-23

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A typical functional
structure

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A typical product divisional
structure

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 One Company’s
international division
structure

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A worldwide area structure

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A worldwide product division
structure

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A Global matrix structure

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Functional organizational
structure at Unilever

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 Discussion. Unilever design
Before 1990, Unilever applied a strategy with features of
central for all decision-making. The same promotion and
marketing acted in the world. After 1990, Unilever
changed the strategy with features of releasing the right
of decision making independently. Each subsidies in
international net work had marketing, promotion, products
itself.
1. Identify the best structure for each strategy of
Unilever
2. Give advantages and disadvantages of the two
International structure of Unilever

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 Where are IC Decisions Made?

 All at the headquarters

 All at subsidiary level
 Subsidiary or affiliate: company controlled
by the IC through voting stock control
 Mostly overseas for ICs
 Some at HQ and some at subsidiary level

LO5
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 Entry Modes

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 Pioneers vs. Fast Followers
 Pioneers
 Can gain and maintain competitive edge in new market
 May not perform as well in the long run as followers
 Are most successful when
 High entry barriers exist
 Firm has sufficient size, resources, and competencies
 Followers
 Many become followers by default
 May let pioneer take initial risks
 Are most successful when
 There are few legal, technological, cultural, or financial
barriers
 They have sufficient resources and competencies to
overwhelm the pioneer’s early advantage LO1
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 Entering Foreign Markets
Non Equity Modes
 Exporting and Countertrade
 Selling some regular production overseas
 Requires little investment
 Relatively free of risk
 Indirect exporting
 Direct exporting
 Subcontracting/Licensing/Franchising
 Contract Manufacturing

LO2
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 Non-Equity Mode
Turnkey Projects
 Turnkey projects are used to export
 technology
 management expertise
 capital equipment (some cases)
 Exporter of a turnkey project may be a
 contractor that specializes in designing and
erecting plants in a particular industry
 company that wishes to earn money from its
expertise
 producer of a factory
 After a trial run, the facility is turned over to the
purchaser LO2
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 Non-Equity Mode
Licensing
 Licensing refers to a contractual arrangement in
which one firm sells access to its patents, trade
secrets, or technology to another firm
 Licensee pays fixed sum and sales royalties (2%-
5%)
 Licensing is attractive because
 courts have begun upholding patent infringement
claims
 patent holders have started suing violators
 foreign governments have begun enforcement of
their patent laws
LO2
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 Non-Equity Mode
Franchising
 Franchising is a form of licensing in which one firm
contracts with another to operate a business
 The franchisee gets a
 well-established name
 proven set of procedures
 carefully controlled marketing strategy
 The franchisor retains the right to enforce processes
and strategy
 The franchisee expects operational, marketing, supply
chain, R&D, etc. support

LO2
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 Non-Equity Mode
Contracts
 Management Contract
 Arrangement by which one firm provides
management in all or specific areas to another
firm
 Contract Manufacturing
 Arrangement in which one firm contracts with
another to produce products to its specifications
but assumes responsibility for marketing

LO2
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 Equity-Based Modes of Entry

 Equity-based entry modes include

 wholly owned subsidiaries
 joint ventures
 strategic alliances
 mergers and acquisitions

LO2
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 Equity-Based Mode
Wholly Owned Subsidiary
 In a wholly owned subsidiary, the company has full
equity ownership of the foreign entity
 Entry strategies
 build a new plant (greenfield investment)
 acquire a going concern
 purchasing the company that used to be the local
distributor allows the firm to obtain an established
distribution network

LO2
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 Equity-Based Mode
Joint Venture
 A joint venture is
 a corporate entity formed by international
company and local owners
 a corporate entity formed by two international
companies for the purpose of doing business
in a third market
 a corporate entity formed by the international
company and a government entity
 a cooperative undertaking between two or
more firms for a limited-duration project
LO2
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 Equity-Based Mode
Joint Venture
 Disadvantages of joint ventures
 Shared profits
 Loss of control
 Minority ownership control is possible if
 Foreign firm holds 49% of shares, gives another
2% to local law firm or trusted national, balance
owned by local firm
 There is a local majority partner (sleeping partner)
 Management contract stipulates that global
partner controls specific key aspects of a joint
venture even though it holds only a minority
position LO2
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Equity or Non-Equity Based Mode
Strategic Alliances
 Strategic alliances involve partnerships between
competitors, customers, or suppliers
 Can take various equity or non-equity forms
 The goals of strategic alliances include
 Faster market entry and start-up
 Access to new products, technologies, and
markets
 Cost-savings by sharing costs, resources, and
risks

LO2
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 Equity or Non-Equity Based Mode
Strategic Alliances
 Strategic alliances can be joint ventures
 Pooling alliances are driven by similarity and
integration
 Trading alliances are driven by the contribution of
dissimilar resources
 Alternatives to mergers and acquisitions
 Future of Alliances
 Many fail or are taken over by a partner
 Difficult to manage due to diverging, strategies,
operating practices, and organizational cultures
 Partner may acquire technological or other
competencies and become competitor LO2
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 Competitive advantage Objective of
(core values) cutting down the costs

Technologic Management
Which al advance Advantage
entry
method?
-Does that method
help cut costs?
What costs to cut?
-Risks due to
-High/low tech technology -Companies
controllability control pursuing a global
restrictions do or multinational
not affect strategy often use a
-Ability to
much wholly owned
copy
competitor enterprise.
-Companies in
technology a service
sector
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 Discussion
A small Canadian company has developed a number of valuable,
new pharmaceutical products using the company's unique
biotechnology techniques. The company is researching the best
market entry method for the European single market. Knowing that
the cost to invest in the factory is the main concern of this
company. If the company has only 3 options below, which market
entry method do you think the company should choose? Explain
why?
 Manufacture products at the company in Canada, then export
and let foreign sales agents do the marketing themselves.
 Make products at the company in Canada, then open a wholly
owned business in Europe and assign marketing tasks to this
company.
 Form a 50/50 joint venture with a large European
pharmaceutical manufacturing company, the product being
manufactured in this European company and marketed by this
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 Discussion
If competitive advantage (core value) is the main concern of the
company when choosing a method of entry, evaluate the ability
to control this competitive advantage according to the methods
of market entry.

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