Topic 8 International Strategy

CHAPTER
8
International Strategy
Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
LEARNING OBJECTIVES (slide 1 of 2)
Studying this chapter should provide you with the strategic
management knowledge needed to:
8-1 Explain incentives that can influence firms to use an international
strategy.
8-2 Identify three basic benefits firms gain by successfully
implementing an international strategy.
8-3 Explore the determinants of national advantage as the basis for
international business-level strategies.
8-4 Describe the three international corporate-level strategies.
8-5 Discuss environmental trends affecting the choice of international
strategies, particularly international corporate-level strategies.
LEARNING OBJECTIVES (slide 2 of 2)
Studying this chapter should provide you with the strategic
management knowledge needed to:
8-6 Identify and explain the five modes firms use to enter international
markets.
8-7 Discuss the two major risks of using international strategies.
8-8 Discuss the strategic competitiveness outcomes associated with
international strategies, particularly with an international
diversification strategy.
8-9 Explain two important issues firms should have knowledge about
when using international strategies.
Figure 8.1
Opportunities and Outcomes of International Strategy
8-1 Identifying
International Opportunities
• An international strategy is a strategy through
which the firm sells its goods or services outside
its domestic market.
• There are incentives for firms to use an international
strategy and to diversify their operations
geographically, and they can gain three basic benefits
when they successfully do so.
Figure 8.2
Incentives and Basic Benefits of International Strategy
8-1a Incentives to Use
International Strategy
• Multiple factors and conditions are influencing the
increasing use of international strategies, including
opportunities to:
• Extend a product’s life cycle
• Gain access to critical raw materials, sometimes including
relatively inexpensive labor
• Integrate a firm’s operations on a global scale to better serve
customers in different countries
• Better serve customers whose needs appear to be more alike
today as a result of global communications media and the
Internet’s capabilities to inform
• Meet increasing demand for goods and services that is surfacing
in emerging markets
8-1b Three Basic Benefits of
International Strategy (slide 1 of 3)
• When used effectively, international strategies yield three basic
benefits:
1. Increased market size
2. Economies of scale and learning
3. Location advantages
Increased Market Size

• Firms can expand their potential market size by using an international
strategy to establish stronger positions outside their domestic market.
• In general, larger international markets:
• Offer higher potential returns
• Pose less risk
• Have a strong science base, which is needed to facilitate efforts to more
effectively sell and / or deliver products that create value for customers
Economies of Scale and Learning
• By expanding the number of markets in which they compete, firms
may be able to enjoy economies of scale.
• Firms that make continual process improvements enhance their ability to
reduce costs and increase the value their products create for customers.
• Firms may be able to exploit core competencies in international
markets through resource and knowledge sharing between units
and network partners across country borders.
• By sharing resources and knowledge, firms can learn how to create
synergy, which in turn can help each firm learn how to deliver higher
quality products at a lower cost.
• International markets provide firms with new learning opportunities,
perhaps even in terms of research and development (R & D)
activities.
• Increasing R & D ability can contribute to the firm’s efforts to enhance
innovation.
Location Advantages
• Locating facilities outside their domestic market can sometimes help
firms reduce costs.
• Other location advantages include easier access to:
• Lower cost labor
• Energy
• Natural resources
• Critical supplies
• Customers
• The degree of benefit a firm can capture through a location
advantage is affected by:
• Manufacturing and distribution costs
• The nature of international customers’ needs
• Cultural and formal country institutions (e.g., laws and regulations)
8-2 International Strategies (slide 1 of 2)
• Firms choose to use one or both basic types of

international strategy:
• Business-level international strategy
• Corporate-level international strategy
• To contribute to the firm’s efforts to achieve
strategic competitiveness in the form of
improved performance and enhanced
innovation, each international strategy the firm
uses must be based on one or more core
competencies.
8-2 International Strategies (slide 2 of 2)
• At the business level, firms select from among the
generic strategies of:
• Cost leadership
• Differentiation
• Focused cost leadership
• Focused differentiation
• Integrated cost leadership / differentiation
• At the corporate level, the following international
strategies are considered:
• Multi domestic
• Global
• Transnational
8-2a International
Business-Level Strategy (slide 1 of 3)
• Firms considering the use of any international
strategy first develop domestic-market
strategies.
• This is important because some of the capabilities
and core competencies a firm has developed in its
domestic market may possibly be used as the
foundation for competitive success in international
markets.
• However, conditions in a firm’s domestic market affect the
degree to which the firm can build on capabilities and core
competencies it established to create capabilities and core
competencies in international markets.
8-2a International
• Research suggests that there are four
determinants of national advantage:
1. Factors of production
• Factors of production refer to the inputs necessary for a firm
to compete in any industry:
• Labor
• Land
• Natural resources
• Capital
• Infrastructure (transportation, delivery, and communication
systems)
2. Related and supporting industries
8-2a International
3. Demand conditions
• Demand conditions is characterized by the nature and size of
customers’ needs in the home market for the products firms
competing in an industry produce.
• Meeting customers’ demand allows the firm to develop scale-
efficient facilities and enhance the capabilities and core
competencies required to use those facilities, as well as use
those enhanced capabilities and core competencies to its benefit
as the firm diversifies geographically.
4. Patterns of firm strategy, structure, and rivalry
• Interactions among the four determinants
influence a firm’s choice of international
business-level strategy.
Figure 8.3
Determinants of National Advantage
8-2b International
Corporate-Level Strategy (slide 1 of 5)
• International corporate-level strategy:
• Is based, at least partially, on a firm’s international
business-level strategy
• Focuses on the scope of a firm’s operations through
geographic diversification
• Is required when the firm operates in multiple
industries that are located in multiple countries or
regions and in which it sells multiple products
• Is guided by the headquarters unit
• However, business- or country-level managers can have
substantial strategic input depending on the type of
international corporate-level strategy the firm uses.
8-2b International
• There are three international corporate-level
strategies:
1. Multi domestic
2. Global
3. Transnational
• The three international corporate-level strategies
vary in terms of two dimensions:
1. The need for global integration
2. The need for local responsiveness
Figure 8.4
International Corporate-Level Strategies
8-2b International
Multi domestic Strategy
• A multi domestic strategy is an international strategy in which
strategic and operating decisions are decentralized to the strategic
business units in individual countries or regions for allowing each
unit the opportunity to tailor products to the local market.
• A multi domestic strategy:
• Focuses on competition within each country in which the firm competes
• Is most appropriate for use when the differences between the markets a
firm serves and the customers in them are significant
• Usually expands the firm’s local market share because the firm focuses
its attention on the local clientele’s needs
• Results in less knowledge sharing for the corporation as a whole
because of the differences between markets, decentralization, and the
different international business-level strategies employed by local units
• Does not allow economies of scale to develop and thus can be more costly
8-2b International
Global Strategy
• A global strategy is an international strategy in which a firm’s home
office determines the strategies that business units are to use in
each country or region.
• A firm using a global strategy:
• Seeks to develop economies of scale
• Assumes customers throughout the world have similar needs
• A global strategy:
• Assumes more standardization of products across country boundaries
• Offers greater opportunities to take innovations developed at the
corporate level, or in one market, and apply them to other markets
• Is most effective when the differences between markets and the
customers the firm is serving are insignificant
• Requires efficient operations in order to be implemented successfully
8-2b International
Transnational Strategy
• A transnational strategy is an international strategy through which
the firm seeks to achieve both global efficiency and local
responsiveness.
• A transnational strategy:
• Integrates characteristics of both multi domestic and global strategies
• Requires “flexible coordination”—building a shared vision and individual
commitment through an integrated network—in order to be implemented
• Is difficult to use because of its conflicting goals
• Can produce higher performance than multi domestic or global
strategies if implemented effectively
• Is becoming increasingly necessary to successfully compete in
international markets
8-3 Environmental Trends
• Two important trends influencing a firm’s choice

and use of international strategies, particularly
international corporate-level strategies, are:
1. Liability of foreignness
2. Regionalization
8-3a Liability of Foreignness
• Liability of foreignness is a set of costs

associated with various issues firms face when
entering foreign markets, including:
• Unfamiliar operating environments
• Economic, administrative, and cultural differences
• The challenges of coordination over distances
• Four types of distances associated with liability of
foreignness are:
1. Cultural
2. Administrative
3. Geographic
4. Economic
8-3b Regionalization
• Some firms choose to concentrate their international
strategies on regions (e.g., the European Union, Asia,
Latin America) rather than on individual country markets.
• Regionalization has numerous benefits:
• It allows a firm to marshal its resources to compete effectively rather
than spread its limited resources across multiple country-specific
international markets.
• Focusing on a particular region allows the firm to better understand
the cultures, legal and social norms, and other factors that are
important for effective competition.
• Markets may be more similar, which would possibly allow
coordination and sharing of resources.
8-4 Choice of
International Entry Mode
• Firms can use one or more of five entry modes to enter
international markets:
1. Exporting
2. Licensing
3. Strategic alliances
4. Acquisitions
5. New wholly owned subsidiaries
• Each means of market entry has its advantages and
disadvantages, suggesting that the choice of entry mode
can affect the degree of success the firm achieves by
implementing an international strategy.
Figure 8.5
Modes of Entry and Their Characteristics
8-4a Exporting
• Exporting is an entry mode through which the firm sends products it
produces in its domestic market to international markets.
• Exporting:
• Is the initial mode of entry used for many firms
• Is a popular entry mode choice for small businesses to initiate an
international strategy
• Requires no foreign manufacturing expertise
• Allows firms to avoid the expense of establishing operations in host
countries (e.g., in countries outside their home countries) in which they
have chosen to compete
• Requires firms to establish some means of marketing and distributing
their products in host countries in which they have chosen to compete
• Can have significant costs (e.g., transportation, tariffs)
• Has been made easier due to the Internet
8-4b Licensing
• Licensing is an entry mode in which an agreement is formed that
allows a foreign company to purchase the right to manufacture and
sell a firm’s products within a host country’s market.
• The licensor is normally paid a royalty on each unit produced and sold.
• The licensee takes the risks and makes the monetary investments in
facilities for manufacturing, marketing, and distributing products.
• Licensing:
• Is possibly the least costly form of international diversification
• Is an attractive entry mode option for smaller and newer firms
• Allows firms to obtain a larger market and faster returns for their products
• Gives the licensor little control over selling and distribution
• Provides the least potential returns because returns must be shared
between the licensor and the licensee
• Carries the risk of a licensee learning a licensor’s technology to produce
and sell a competitive product after the licensing agreement expires
8-4c Strategic Alliances (slide 1 of 2)
• A strategic alliance involves a firm collaborating with
another company in a different setting in order to enter
one or more international markets.
• Strategic alliances are a popular entry mode because
they allow a firm to connect with an experienced partner
already in the market.
• When using strategic alliances:
• Firms share the risks and the resources required to enter
international markets.
• Partners bring their unique resources together for the purpose of
working collaboratively.
• This can facilitate developing new capabilities and core competencies
that may contribute to each firm’s strategic competitiveness.
8-4c Strategic Alliances (slide 2 of 2)
• The primary reasons of failure for strategic alliances are:
• Incompatible partners
• Conflict between the partners
• Difficulty in managing
• Establishing trust between partners is critical.
• Alliance success is correlated with the amount of trust.
• Efforts to build trust are affected by the following issues:
• The initial condition of the relationship
• The negotiation process to arrive at an agreement
• Partner interactions
• External events
• The cultures of the countries involved
• The relationships between the countries’ governments
8-4d Acquisitions
• A cross-border acquisition is an entry mode through which a firm
from one country acquires a stake in or purchases all of a firm
located in another country.
• A cross-border acquisition:
• Often is the quickest means for a firm to enter an international market
• Is used less frequently to enter a market where corruption affects
business transactions
• Is more likely to be used as an entry mode when a firm’s operations are
human-capital intensive
• Is not easy to successfully complete and operate
• Compared to domestic acquisitions, cross-border acquisitions:
• Often require debt financing to complete
• Have more complicated negotiations
• Experience more difficulty in merging the two firms due to different
corporate cultures as well as different social cultures and practices
8-4e New Wholly Owned Subsidiary
• A greenfield venture is an entry mode through which a firm invests
directly in another country or market by establishing a new wholly
owned subsidiary.
• A greenfield venture:
• Is the most expensive and risky means of entering a new international
market
• Is complex to create
• Affords maximum control to the firm
• Has the greatest amount of potential to contribute to the firm’s strategic
competitiveness
• Is used more prominently when the firm’s business relies significantly on
the quality of its capital-intensive manufacturing facilities
• May require the hiring of a host-country national or consultant in order to
obtain knowledge and expertise about the new market
• May not be a preferable mode of entry when the country risk is high
8-4f Dynamics of Mode of Entry
• To enter a global market, a firm selects the entry mode
that is best suited to its situation.
• In some instances, the various options will be followed
sequentially, beginning with exporting and eventually leading to
greenfield ventures.
• In other cases, the firm may use several, but not all, of the
different entry modes, each in different markets.
• The decision regarding which entry mode to use is
primarily a result of:
• The industry’s competitive conditions
• The country’s situation and government policies
• The firm’s unique set of resources, capabilities, and core
competencies
8-5 Risks in an
International Environment
• The two major categories of risks firms need to
understand and address when diversifying
geographically through international strategies
are:
1. Political risks
2. Economic risks
Figure 8.6
Risks in the International Environment
8-5a Political Risks
• Political risks denote the probability of disruption of the operations of
multinational enterprises by political forces or events whether they
occur in host countries, home country, or result from changes in the
international environment.
• Possible disruptions to a firm’s operations when seeking to implement
its international strategy create numerous problems, including:
• Uncertainty created by government regulation
• The existence of many, possibly conflicting, legal authorities
• Corruption
• The potential nationalization of private assets
• Before entering a country or region, firms should conduct a political
risk analysis.
• Through political risk analysis, the firm examines potential sources and
factors of non-commercial disruptions of their foreign investments and
the operations flowing from them.
8-5b Economic Risks
• Economic risks include fundamental weaknesses in a
country or region’s economy with the potential to cause
adverse effects on firms’ efforts to successfully
implement their international strategies.
• Economic risks of using an international strategy include:
• The perceived security risk of a foreign firm acquiring companies
that have key natural resources or firms that may be considered
strategic with regard to intellectual property
• Terrorism
• Differences and fluctuations in the value of currencies
8-6 Strategic
Competitiveness Outcomes
• The degree to which firms achieve strategic
competitiveness through international strategies
is expanded or increased when they
successfully implement an international
diversification strategy.
• 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
• International diversification should be related positively
to a firm’s performance as measured by the returns it
earns on its investments.
• Firms that are broadly diversified into multiple international
markets usually achieve the most positive stock returns.
• Many factors contribute to the positive effects of
international diversification, such as:
• Private versus government ownership
• Potential economies of scale and experience
• Location advantages
• Increased market size
• The opportunity to stabilize returns
8-6b Enhanced Innovation
• International diversification facilitates innovation

in a firm because it:
• Provides a larger market to gain greater and faster
returns from investments in innovation
• Exposes the firm to new products and processes
• This enables the firm to integrate this knowledge into its
operations, allowing further innovation to be developed.
• Can generate the resources necessary to sustain a
large-scale R & D program
8-7 The Challenges of
International Strategies
• A firm using international strategies to pursue
strategic competitiveness often experiences
complex challenges that must be overcome.
8-7a Complexity of Managing
International Strategies
• A firm that pursues an international strategy may
become more difficult to manage due to:
• The growth in the firm’s size
• Greater operational complexity
• Different cultures and institutional practices (e.g.,
those associated with governmental agencies) that
are part of the countries in which the firm competes
8-7b Limits to
International Expansion
• Some limits constrain the ability to manage
international expansion effectively.
• International diversification increases coordination
and distribution costs.
• Management problems are exacerbated by:
• Trade barriers
• Logistical costs
• Cultural diversity
• Access to raw materials
• Differences in employee skill levels
• Differences in host countries’ governmental policies and
practices
APPENDIX
NOTE TO INSTRUCTOR: Choose from the following questions (also found in the text at the end of the chapter)
to conduct in-class discussions around key chapter concepts.
Discussion:
• What incentives influence firms to use

international strategies?
Discussion:
• What are the three basic benefits firms can gain

by successfully implementing an international
strategy?
Discussion:
• What four factors are determinants of national

advantage and serve as a basis for international
business-level strategies?
Discussion:
• What are the three international corporate-level

strategies? What are the advantages and
disadvantages associated with these strategies?
Discussion:
• What are some global environmental trends

affecting the choice of international strategies,
particularly international corporate-level
strategies?
Discussion:
• What five entry modes do firms use to enter

international markets? What is the typical
sequence in which firms use these entry modes?
Discussion:
• What are political risks and what are economic

risks? How should firms deal with these risks?
Discussion:
• What are the strategic competitiveness

outcomes firms can achieve through
international strategies, and particularly through
an international diversification strategy?
Discussion:
• What are two important issues that can

potentially affect a firm’s ability to successfully
use international strategies?

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CHAPTER

Increased Market Size

• Firms choose to use one or both basic types of

• Two important trends influencing a firm’s choice

• Liability of foreignness is a set of costs

• International diversification facilitates innovation

• What incentives influence firms to use

• What are the three basic benefits firms can gain

• What four factors are determinants of national

• What are the three international corporate-level

• What are some global environmental trends

• What five entry modes do firms use to enter

• What are political risks and what are economic

• What are the strategic competitiveness

• What are two important issues that can

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