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Study Guide in (CBMEC 102 Strategic Management)

Module No. 01

STUDY GUIDE FOR MODULE NO. 07

International Strategy: Creating Value in Global Markets

MODULE OVERVIEW

Overview
The global marketplace provides many opportunities for firms to increase their revenue
base and profitability. Also, in today’s knowledge-based economy there are opportunities to
create advantages by leveraging firm knowledge across national boundaries. However, along
with the potential benefits there are pitfalls that all firms must avoid in order to be successful.
After some introductory comments on the global economy, we address this topic in four
major sections:
1. We draw on Porter’s “diamond of national advantage” as a framework to explain the
level of success for an industry in a given country.
2. We address some of the motivations as well as the risks (or pitfalls) associated with
international expansion, including the emerging trend toward greater offshoring and
outsourcing.
3. We address how firms can attain a competitive advantage in the global marketplace.
Here, we focus on the two opposing forces that firms face when entering international
markets — cost reduction and local adaptation. Depending on the intensity of these
forces, firms should select among four basic (or generic) strategies: international,
global, multidomestic, and transnational.
4. The final section addresses the four entry strategies that firms typically choose from
when entering foreign markets. These vary along a continuum from low-
investment/low-control (exporting) to high-investment/high-control (wholly owned
subsidiaries and greenfield ventures).

MODULE LEARNING OBJECTIVES

After reading this module, the students are able to:

1. Recognize the importance of international expansion as a viable diversification
strategy.
2. Identify the sources of national advantage, that is why industry in a given is more (or
less) successful than the same industry in another country.
3. Determine the motivations(or benefits) and the risks associated with international
expansion, including the emerging trend for greater offshoring and outsourcing
activity.

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LEARNING CONTENTS (Strategic Management: Creating Competitive Advantage)

I. The Global Economy: A Brief Overview

Globalization refers to an economic condition that there is an increase in international
exchange, including trade in goods and services as well as exchange of money,
information and ideas.
II. Factors Affecting a Nation’s Competitiveness
Michael Porter concluded that there are four broad attributes of nations that individually,
and as a system, constitute what is termed “the diamond of national advantage,” in his
four-year study concluding with these attributes collectively determine the playing field
that each nation establishes for its industries. These factors are:
• Factor Endowments;
• Demand Conditions;
• Related and Supporting Industries;
• Firm Strategy, Structure, and Rivalry.
A. Factor Endowments
Factors of production include not only labor, capital, and natural resources (e.g., land and
minerals) but also factors that can be created. The latter are more relevant to developed
nations that are seeking competitive advantage over firms in other countries. These
include a skilled human resource pool as well as the supporting infrastructure of a country,
e.g., communication and transportation systems as well as a stable banking system.
B. Demand Conditions
Demand conditions refer to the demands that consumers place on an industry for goods
and services. Consumers who demand highly specific, sophisticated products and
services force firms to be more innovative to meet such demand. Such consumer
pressure presents challenges to a country’s industries to also make it more competitive
in international markets.
Example is the case of Denmark’s world-class position in water pollution control
equipment. This is, in part, due to the nation’s environmental awareness and demands
for environmentally safe products.
C. Related and Supporting Industries
Related and supporting industries enable firms to more effectively manage inputs. For
example, countries with a strong supplier base benefit by adding efficiency in downstream
activities. That is because a competitive supplier base helps a firm obtain inputs using
cost-effective, timely methods it contributes to reducing manufacturing costs.
D. Firm Strategy, Structure, and Rivalry
Firms develop strategies and structures to compete with other firms in the same country
that are trying to capture the same customer market. Rivalry is particularly intense in
nations with strong consumer demand conditions, strong supplier bases, and high new
entrant potential from related industries. Such rivalry provides a strong impetus for firms
to innovate and find new sources of competitive advantage.

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E. Concluding Comment on Factors Affecting a Nation’s Competitiveness

Porter’s conclusions were based on case histories from more than 100 industries. A
common theme did emerge: Firms that succeeded in global markets had first succeeded
in intense competition in home markets. Thus, successful global firms often result from
relentless, continuing improvement, innovation, and change.
We will now turn to the level of the individual firm. In the next section, we’ll discuss a
company’s motivations and risks associated with international expansion.
III. International Expansion: A Company’s Motivations and Risks
A. Motivations for International Expansion
There are many motivations for a firm to pursue expansion into global markets. The
most obvious one is to increase the size of potential markets.
Potential benefits of international expansion includes:

1. Increase market size

2. Take advantage of arbitrage opportunities
3. Extend a Product’s life cycle
4. Optimize the location of every value chain activities
The last item — optimize the location of every activity in its value chain — can yield
three strategic advantages:
a. Performance Enhancement
Decision to locate a corporate in order to draw upon superb technical and
professional talent.
b. Cost Reduction
Emphasis on where to source out raw materials of many multinational
companies.
c. Risk Reduction
Firms can cope with such risks by spreading high-cost elements of their
manufacturing operations across a few carefully chosen locations around the
world. Such decisions can help lower the overall risk profile of a firm with regard
to currency, economic, and political risk to outsourced manufacturing activities
offshore.
5. Explore Reverse Innovation

Reverse innovation has become a recent important motivation for international

expansion. Companies committed significant resources in developing their
products that meet the needs of developing nations—and such innovations
provide opportunities for success in wealthier companies.

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B. Potential Risks of International Expansion

There are also many potential risks associated with international expansion.
The four main types of risk: political, economic, currency, and management.
1. Political and Economic Risk
Countries vary significantly in their level of political risk. Such risk can lead to such
problems as the destruction of property/ social unrest, military turmoil,
demonstrations, violent conflict and terrorism, nonpayment of goods and services,
and the appropriation of a firm’s assets in a country and enforcement of laws
associated with the protection of property rights addresses a key threat to global
trade – counterfeiting.
2. Currency Risks
Currency fluctuations can pose substantial risks. A company with operations in
several countries must constantly monitor the exchange rate between its own
currency and that of the host country.
3. Management Risks
Management risks may be considered the challenges and risks that managers face
when they must respond to the inevitable differences that they encounter in foreign
markets. These take a variety of forms: culture, language, income levels, customer
preferences, distribution systems, and so on.
C. Global Dispersion of Value Chains: Outsourcing and Offshoring
Two of the emerging trends in international business — outsourcing and offshoring.
Outsourcing occurs when a firm decides to utilize other firms to perform value-creating
activities that were previously performed in-house. Offshoring takes place when a firm
decides to shift an activity that they were previously performing in a domestic location to a
foreign location.
It is important to point out that the movement of jobs offshore in the manufacturing sector
was repeated by the service sector as well in the mid-1990s. However, the trend that began
with low-level programmers and data entry work to countries such as India has grown many-
fold to include a wide variety of white collar and professional activities ranging from call
centers to R&D. To survive, companies have to locate each stage of the value chain in places
where factor conditions are most conducive that addresses a “global delivery” approach
which is indicative of the extent to which outsourcing and offshoring have become part of
global commerce a new trend that overcomes some of the potential challenges associated
with offshoring: outsourcing tech services to low-cost locations.
Key potential benefits of offshoring: building capabilities and reaping the benefits of
increased specialization.
1. Offshoring generate saving via lower wages.
2. Consumers in the high growth emerging countries begin to realize that they can get
more value at lower cost through innovations of products and services
3. Creating value, executives adopts a more strategic and dynamic view of offshoring by
reexamining the most basic question: What business we are really in? To be clear
about their areas of expertise before they can leverage the specializations of their
resources.

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4. Many students may have the potential of having their job (or future job) “offshored.”
Most of the white-collar jobs to be sent overseas are software programmers, data entry
clerks, draftsmen, and computer research scientists. Current jobs as “highly
offshorable.”
IV. Achieving Competitive Advantages in Global Markets
A. Two Opposing Forces that firms face when they expand into global markets
— cost reduction and adaptation to local markets
• Customer needs and interests worldwide are becoming more homogeneous
• People around the world are willing to sacrifice preferences in product features,
functions, design and the like for lower prices at high quality
• Substantial economies of scale in production and marketing can be achieved
through supplying global markets.
Assumptions may not always be true
➢ Product market vary widely between nations
➢ In many product and services markets, there appears to be growing interest in
multiple product features, quality and service
➢ Technology permits flexible production
➢ Cost of production may not be critical to product cost
➢ Firm’s strategy should not be product-driven
B. International Strategy
A firm without a strong emphasis on either differentiating their product and service
offerings in order to adapt to local markets or lowering costs, is following an
international strategy. An international strategy is based on diffusion and adaptation of
the parent company’s knowledge and expertise to foreign markets. Although country
units are allowed to make minor adaptations to local markets, they have far less
autonomy than local managers who operate under a multidomestic strategy. The
primary goal of international strategy is worldwide exploitation of the parent firm’s
knowledge and capabilities
1. Risks and Challenges
Some of the risks of an international strategy include:
• The international strategy, with its tendency to concentrate most of its
activities in one location, fails to take advantage of the optimally distributed
value chain.
• The strategy is susceptible to high levels of currency and political risks.
Being too closely identified with a single country, an increase in the value of
the currency may make the product or service unattractive abroad.
C. Global Strategy
A firm’s emphasis in situation is on lowering costs tends to follow a global strategy.
A global strategy emphasizes economies of scale — due to the standardization of
products and services as well as the centralization of operations in a few locations.

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1. Risks and Challenges

• A firm can enjoy scale economies by concentrating scale-sensitive
resources and activities in one or a few locations. Decisions about locating
facilities must weigh the potential benefits from concentration against higher
transportation and tariff costs.
• The geographical concentration of any activity may also tend to isolate that
activity from the targeted markets.
• Concentrating an activity in a single location also makes the rest of the firm
dependent on that location.

D. Multidomestic Strategy
Firm’s emphasis is on differentiating their product and service offerings in order to
adapt to local markets follows a multidomestic strategy. In contrast to a global
strategy, which tends to be highly centralized, decisions are more decentralized to
enable the firm to tailor its products and services to rapidly respond to changes in
demand.
Examples are Honda motorcycles they adapt their product to different markets.
Cultural issues may also force a firm to adapt their personnel policies when
expanding internationally. Cosmetics company is able to beat large multinational
firms by tailoring their products to local tastes.
1. Risks and Challenges

• Typically, local adaptation of products and services will increase a company’s

cost structure.
• At times, local adaptations, even well intentioned may backfire.
• Consistent with other aspects of global marketing, the optimal degree of local
adaptation evolves over time.
E. Transnational Strategy
Multinational firms following a transnational strategy strive to optimize the tradeoffs
associated with efficiency, local adaptation, and learning. It seeks efficiency not for
its own sake, but as a means to achieve global competitiveness. It recognizes the
value of local responsiveness, but as a tool for flexibility in international operations.
Also, a core tenet of the transnational model is that a firm’s assets and capabilities
are dispersed according to the most beneficial location for a specific activity.
Generally speaking, activities that are “downstream” (such as marketing and sales)
tend to be decentralized because of the need to be closer to the customer. On the
other hand, activities that are “upstream” (such as logistics and operations) tend to
be centralized because there are generally few reasons to tailor them to local
market conditions.
1. Risks and Challenges
Global and multidomestic strategies have unique risks and challenges associated
with transnational strategies:

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• The choice of a seemingly optimal location cannot guarantee that the quality
and cost of factor inputs (i.e., labor, materials, etc.) will be optimal. Managers
must ensure that the relative advantage of a location is actually realized, not
squandered because of weaknesses in productivity and the quality of internal
operations.
• Although knowledge transfer can be a key source of competitive advantages,
it does not take place “automatically.” It is important that business units and
the headquarter office both recognize the potential value of such “know how.”
With transnational strategies, some value creating activities are centralized (usually
upstream and support activities) and some value creating activities are decentralized
(generally downstream activities. However, with decentralization, control and
coordination become major challenges.
F. Global or Regional? A Second Look at Globalization
Full scale globalization may not be the best strategic move for many types of firms.
Recent research indicates that most companies are regional or, at best, bi-regional
rather than global. Considering the advances in communication why is this so?
Several reasons are suggested –distance still matters, despite improved
communications; trading blocs exercise power over regions; and, regional
integration occurs faster than global integration.
V. Entry Modes of International Expansion

A firm has many options available to it when it decides to expand into international
markets by a variety of modes of foreign entry that include: exporting, licensing,
franchising, strategic alliances, joint ventures, and wholly owned subsidiaries.
A. Exporting
Exporting consists of producing goods in one country and selling them in another. This
mode enables a firm to invest the least amount of resources in terms of product, its
organization, and its overall corporate strategy.
1. Benefits
Exporting has both advantages and disadvantages. Its advantages are that it is a low
cost/risk way to enter foreign markets and it may provide the firm with local distributors
who can help them benefit from their valuable expertise and knowledge of local markets.
After all, multinationals must recognize that they cannot immediately master local
business practices, meet regulatory requirements, hire and manage local personnel, and
gain access to potential customers.
2. Risks and Limitations
There are also some disadvantages associated with exporting. Along with the lower
cost/risk comes less control. A firm’s exporting partner may carry lines that compete with
the firm’s products and they may not be willing to share market information with the
exporting firm. Furthermore, the exporting firm has little control over how their products
are marketed or sold in the foreign market.

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B. Licensing and Franchising

1. Benefits
Licensing and franchising are both forms of contractual arrangements. Franchise
contracts typically include a broader range of factors in an operation and have a longer period
during which the agreement is in effect. Franchising has the advantage of limiting the risk
exposure that a firm has in overseas markets while expanding the revenue base of the parent
company.
2. Risks and Limitations
The other side of the coin, of course, is that the multinational firm receives only a
portion of the revenues in the form of franchise fees instead of the entire revenue — as would
be the case if they set up the operation themselves (such as a restaurant) through direct
investment.
C. Strategic Alliances and Joint Ventures
1. Benefits
Joint ventures and strategic alliances have become an increasingly popular way for
firms to enter and succeed in foreign markets in recent years. These two forms of
partnerships differ in that joint ventures entail the creation of a third-party legal entity,
whereas strategic alliances do not. In addition, strategic alliances generally focus on
initiatives that are smaller in scope than joint ventures.
2. Risks and Limitations
In module 6 (corporate-level strategy) we addressed some of the major advantages
and disadvantages of these forms of collaboration. In addition to the usual issues, cultural
differences can create additional challenges in making strategic alliances and joint
ventures work.
D. Wholly Owned Subsidiaries
A wholly owned subsidiary is a situation in which a multinational company owns 100
percent of the stock in the venue. There are two means by which a firm can establish a
wholly owned subsidiary: acquisition of an existing company or developing a totally new
operation, termed a “greenfield venture.”
1. Benefits
Wholly owned subsidiaries are most appropriate when a firm already has the
appropriate knowledge and capabilities that can be readily leveraged through multiple
locations. We provide the example of Intel’s building of semiconductor plants overseas.
Knowledge can be further leveraged by hiring managers and professionals from the home
country.
2. Risks and Limitations
While assuring the most control, wholly owned subsidiaries also are typically the most
expensive and risky of the various modes of entry. Unlike strategic alliances and joint
ventures, for example, the entire risk is borne by the corporation. The risks associated with
doing business in a new country – such as the political, cultural, and legal nuances – may be
mitigated by hiring local talent.

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LEARNING ACTIVITY

Application Questions Exercises:

1. Business practices and customs vary throughout the world. What are some of the ethical
issues concerning payments that must be made in a foreign country to obtain business
opportunities?
2. Many firms fail when they enter into strategic alliances with firms that link up with
companies based in other countries. What are some reasons for this failure? Provide an
example.

SUMMARY

We live in a highly interconnected global community where many of the best

opportunities for growth and profitability lie beyond the boundaries of a company’s home
country. Along with opportunities, of course, there are many risks associated with
diversification into global markets.
The first section of the module addressed the factors that determine a nation’s
competitiveness in a particular industry. The framework was developed by Professor Michael
Porter of Harvard University and was based on a four-year study that explored the
competitive success of 10 leading trading nations. The four factors, collectively termed the
“diamond of national advantage,” were factor conditions, demand characteristics, related and
unrelated supporting industries, and firm strategy, structure, and rivalry.
The discussion of Porter’s “diamond” helped, in essence, to set the broader context
for exploring competitive advantage at the firm level. In the second section, we discussed the
primary motivations and the potential risks associated with international expansion. The
primary motivations included increasing the size of the potential market for the firm’s products
and services, achieving economies of scale, extending the life cycle of the firm’s products,
and optimizing the location of every activity in the value chain. On the other hand, the key
risks included political and economic risk, currency risks, and management risks.
Management risks are the challenges associated with responding to the inevitable
differences that exist across countries such as customs, culture, language, customer
preferences, and distribution systems. We also address the emerging trend of outsourcing
and offshoring.
Next, we addressed how firms can go about attaining competitive advantage in global
markets. We began by discussing the two opposing forces — cost reduction and adaptation
to local markets — which managers must contend with when entering global markets. The
relative importance of these two factors plays a major part in determining which of the four
basic types of strategies to select: international, global, multidomestic, or transnational. The
chapter covered the benefits and risks associated with each type of strategy.
The final section discussed the four types of entry strategies that managers may
undertake when entering international markets. The key trade-off in each of these strategies
is the level of investment or risk versus the level of control. In order of their progressively
greater investment/risk and control, the strategies range from exporting to licensing and
franchising, to strategic alliances and joint ventures, to wholly owned subsidiaries. The
relative benefits and risks associated with each of these strategies are discussed.

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REFERENCES

Dess, Gregory G., Lumpkin G.T. Eisner, Alan B., eBook Online Access for Strategic
Management: Text and Cases 2019 Edition
Dess, Gregory G., eBook Online Access for Strategic Management: Creating
Competitive Advantage, 2019 Edition
Gamble, John, Thompson, Arthur, and Peteraf, Essentials of Strategic Management 4th
Edition
Clerc, Strategic Intelligence For The Future 1: A New Strategic and Operational
Approach
Yjone, Gareth. And Hill Charles W.L. Strategic Management Theory and Cases,
Cengage Asia Pte. 10th Edition
Ireland Duane R., Hoskisson Robert E., & Hitt, Michael E., The Management of Strategy
Concepts and Cases, Cengage Learning Asia Pte Ltd. 12th Edition
David, Fred R., Strategic Management An Integrated Approach, Pearson Education
South Asia Pte Ltd. 2018 Edition

Prepared By:

NARCISO F. CASTRO, DBA

Associate Professor V

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