International Strategy

MM 4311 Strategic Management

Fall 2019
Today’s Agenda

 Why do firms go international?

 How to manage an international company?
 How should a firm enter a foreign country?

1
Hollywood Goes Global

• Hollywood movie: The quintessential American product

• However, non-US sales increased: 50% in 2000, and 70% in 2010
• Altered global strategic focus
• Movies that fit the global market by adapting foreign scripts,
hiring international actors/actresses…etc.
• Treat emerging markets as focal targets
• Not just filmmaking industries, but also the electronics industry
(example: Korea, China), and auto industry (example: India)

• Key questions: How can a company compete effectively in a

global market place?

2
Many large companies sell more outside
the country than inside
The biggest market in the world for luxury goods

% of overall revenue
Luxury Brands Country of Origin
from Japan (2005)
Louis Vuitton France The percentage
30% of
Gucci Italy their revenues
27% from
Hermes France Japan is:25%
Tiffany & Co. United States 20%
A – 60%-70%
Bulgari Italy 26%
B – 40%-60%
Burberry United Kingdom C – 20%-40%
36%
Ferragamo Italy D – 10%-20%
27%
Coach United States E – Less
22%than 10%

3
Why do firms go international?
• Gain access to new customers for current products / services
• Extend a product’s life cycle and increase its market size
• Greater economies of scale
• e.g., GM, Pfizer, Disney, Starbucks, Wal-Mart, Target, etc.

• Location advantages: Gain easier access to raw materials, such

as low-cost labor, energy, and other natural resources
• e.g., the increasing entry of clothing and electronics manufacturers
into China

• Learning new knowledge & skills in international markets

through resource sharing across country borders
• e.g., many of high-tech companies around the world opened their
R&D centers in Silicon Valley
4
Disadvantage of Expanding Internationally

• Liability of Foreignness
• Additional cost of doing business in an unfamiliar cultural
and economic environment

• Cost of coordinating across geographic distance

• Economic development may increase the cost of doing

business
• Rising wages with improved living standards
• e.g., labor costs in China
• Difficulty in protecting intellectual property (e.g., trademark,
copyright, patent, design...)

5
How does a firm decide WHERE to go?
• National institutions:
• Well-established legal and ethical pillars as well as well-
functioning economic institutions such as capital markets,
banks, and infrastructures

• National culture: "Programming of the mind"

• Geert Hofstede’s Cultural Dimensions
• Power distance
• Individualism / Collectivism
• Achieving / Nurturing orientation
(masculinity vs. femininity)
• Uncertainty-avoidance
• Long-term orientation
vs. Short-term normative orientation
6
How does a firm decide WHERE to go?
• Corporate tax rates: institutional difference matters

7
How does a firm decide WHERE to go?
• Culture map
• E.g., individual vs. group
merit pay, seniority
systems..

8
Where should a firm go for its international
expansion?
What was the major direction of Wal-Mart’s location choices
•for its international
Choice of Locationexpansion?
Year of No. of Stores in
Country Mode of Entry Initial No. of Stores
Entry 2002
1991 Mexico JV 1 595
1992 Puerto Rico Internal Expansion 1 55
1994 Canada Acquisition 122 213
1995 Brazil Internal Expansion 5 22
1995 Argentina Internal Expansion 3 11
1996 China JV 2 26
1996 Indonesia JV Not available Not available
1997 Germany Acquisition 95 94
1998 South Korea Acquisition 4 15
1999 Britain Acquisition 229 259
2002 Japan Stakeholder 400 400

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However, “entering into a similar market
first” is not always the case
• For instance…
• In 1996, Starbucks opened its first international store in Japan.

• In 1971, McDonalds opened its first international store in Japan.

• Is it a coincidence? If not, what are possible reasons of their

choice of Japan as their first international store?
• Market size: Japan was the 2nd biggest economic nation in the
world!
• Industry characteristics: they expected less competition with local
players in Japan. Compared to European countries, special coffee
stores or fast food restaurants were less developed.
• Consumers’ attitudes and perceptions: Japanese consumers tend
to have positive attitudes about the Western culture.
•…
10
 HOW should a firm enter a foreign country?
Type of Entry Advantages Disadvantages
• Low commitment • High transportation costs
• Low investment risk • High tariffs
Exporting
• Less control over marketing
/ distribution
• Low cost • Less control over
• Low risk manufacturing / marketing
Licensing
• Low returns
• Knowledge diffusion
• Sharing costs, resources, and • Coordination problems
Joint Venture
risks • Knowledge diffusion
• Quick access to a new • Complexity of the process
Acquisitions market (legal and regulatory issues)
• Full control • Post acquisition integration
Wholly Owned • Maximum control • Complex and costly
Subsidiary • High risks
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 Entry modes of international expansion

Wholly owned
High Subsidiary

Acquisition
Extent of
Investment Risk Joint Venture

Licensing
Low
Exporting

Low High
Degree of Ownership and Control
12
Let’s look at the globalization of air cargo
industry
• China’s air cargo market is expected to grow 11 % per year
through 2023. Accordingly, both UPS and FedEx were
planning to enter into China in 2008.

• What would be the best entry mode? Licensing, Joint

ventures, acquisitions, or wholly owned subsidiaries? And
why?

• UPS and FedEx opened new hub operations in Shanghai and

Guangzhou, respectively; each has 6,000 employees in
China.
• These investments are wholly owned subsidiaries
• Because they need to 1) maintain the integrity of their IT and
logistics systems in order to maximize efficiency and 2)
maintain the proprietary nature of their systems
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Choice of international entry mode
• Export, licensing, and joint ventures are good tactics for early
market development, while acquisitions and greenfield ventures
(wholly owned subsidiaries) are likely to come at later stages

• The various options will be followed sequentially from exporting

through greenfield ventures. However….
• What if intellectual property rights in a country are not well
protected?
• What if the number of firms in the industry is growing fast?
• What if the need for global integration is high?

• This decision should be primarily a result of 1) the industry’s

competitive conditions, 2) the country’s situation and
government policies, and 3) the firm’s unique set of resources,
capabilities, and core competencies 14
Strategy around the world:
Local Responsiveness vs. Cost Reduction
• Local responsiveness:
• Tailor product and service offerings to fit local
consumer preferences and host-country requirements
• Higher cost
• Example: McDonald’s uses mutton in India

• Cost reduction:
• MNEs enter global marketplace with the intention to
reduce operation cost
• Example: Toyota Prius, Volkswagen

15
 Which international strategy is the best?

High

Global Transnational
Strategy Strategy

Need for Global

Integration

International Multi-domestic
Strategy strategy

Low
Low High
Need for Local
Responsiveness

16
 Examples

High

Need for Global

Integration

Low
Low High
Need for Local
Responsiveness

17
 International corporate strategies
Types of International Strategies

Multi-domestic Transnational
Global
(localization) (borderless)
Orientation Home country Host country World
• Extensive knowledge • Understanding of
• Simpler structure of foreign market global issues
• More tightly • More support from • Balanced local and
Advantages
controlled host gov’t global objectives
• Economy of scale • Committed local • Best people and work
managers approaches
• More ineffective
• Duplication of work • Difficult to achieve
management
• Reduced efficiency • Managers must have
Drawbacks • Inflexibility
• Difficult to maintain local and global
• Social and political
global objectives knowledge
backlash
18
How to manage international firms
• Recent findings from research in international business
• Transnational strategies are challenging to
implement, but are becoming increasingly necessary
to compete in international markets

• Some large firms with diverse products use a multi-

domestic strategy with certain product lines and a
global strategy with others

• Some firms focus on a region rather than being truly

global to avoid spreading their limited resources
across many international markets

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For the Next Class

• Agenda: Corporate Governance

• Reading: Google founders’ IPO letter to shareholders

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