Chapter 8

Global Expansion Observations

1. Capital markets and employees favor fast-growing firms, and many domestic markets are becoming saturated. 2. Efficiencies in all value-chain activities are linked across borders, and the linkages and pressures for efficiencies continue to escalate. 3. New market opportunities are present in developing economies 4. Knowledge is not uniformly distributed around the world, and new ideas increasingly are coming from emerging economies 5. Customers are becoming global at both the organizational level in terms of the growth and proliferation of multinationals and at the individual level in terms of customer preferences 6. Competitors are globalizing

International Strategy Activities

1. Designed to augment a firm's business strategy to become more competitive within a core business (i.e. sourcing key factors of production to cheaper labor markets). or 2. Represent key elements of a corporate strategy (i.e. entering new business or new markets).

Exports

1. Direct exports 2. Indirect exports 3. Others

Phase 1:

1. Does the firm need human resources from other countries in order to succeed? 2. Does the firm need financial capital from other countries in order to succeed? 3. If the firm goes global, will target customers prefer its services over those of competitors? 4. Can the firm put an international system in place more quickly than domestic competitors? 5. Does the firm need global scale and scope to justify the financial and human capital investment in the venture? 6. Will a purely domestic focus now make it harder for the firm to go global in the future?

Key Factors in International Expansion that Contribute to Competitive Advantages

1. Economies of scale and scope 2. Location 3. Multipoint competition 4. Learning

Contractual Agreement (aspect of strategic alliances)

1. Licensing/franchising 2. Turnkey projects 3. Contracted R&D 4. Comarketing

International Strategy Configurations

1. Multinational vision 2. International vision 3. Transnational Vision 4. Global vision

Global Trends to Watch

1. Shifting of economic activity between countries and regions 2. Shifting of economic activity within countries and regions 3. Growing number of consumers in emerging economies 4. Increasing availability of knowledge and the ability to exploit it. 5. Increasing global labor and talent markets 6. Resource and environmental strains

Wholly Owned Subsidiaries

1. greenfield investments 2. acquisition 3. others

Alliances and Joint Ventures (aspect of strategic alliances)

1. minority joint ventures 2. 50/50 joint ventures 4. majority joint ventures

Ownership and Production Location with Vehicles

100% ownership/100% exports: FDI 0% ownership/100% exports: exports 100% ownership/100% local production: FDI through acquisition 50% ownership/100% local production: Alliance 0% ownership/100% local production: Alliance and exports

Global Perspective

A combination of specific knowledge and skills. Knowledge: have an appreciation for the fact that countries and their people differ culturally, socioeconomically, and sociopolitically. Views differences as potential opportunities, not threats. Link differences (including management process differences) to necessary adaptations in business operations. Skills: exposed to problem-solving situations in different business environments.

Arbitrage Opportunity

Age-old practice of buying something in one market and selling it in another market where it garners a higher price. I.e. build a competitive advantage and improve performance by optimizing the location of value-chain activities.

Contractual Agreements

An exchange of promises or agreement between parties that is often enforceable by law. (agreement can be verbal or an extensive legal document). Firm relies on another to manage their market presence. 4 types: 1. Licensing and franchising 2. Turnkey projects (foreign firm agrees to build a factory) 3. R&D contracts (foreign firm agrees to conduct a specific R&D project) 4. Comarketing (foreign firm agrees to comarket or cobrand a product)

Five Elements in International Strategy (Strategy Diamond)

Arenas: 1. Which geographic arenas? 2. Which channels in those arenas? 3. Which value chain activities? Vehicles: 1. International market entry tactics? (greenfield, alliance, acquisition) Staging and Pacing: 1. When do we go international? 2. Speed of international expansion? 3. Sequence of entry tactics? Economic Logic: 1. How does our international strategy contribute to the economic logic of our business and corporate strategies? Differentiators: 1. How does being international differentiate us from our competitors? 2. Does expanding internationally make our products more attractive to existing or future customers? 3. Will our existing differentiators be effective in these new markets?

Seeking to Exploit Local Advantages and Global Efficiencies

Attempt to capitalize on both local responsiveness and global efficiency. Enables economies of scale, cross-subsidization across markets, and the ability to engage in retaliatory and responsive competition across markets. Really hard to balance the cost of efficiencies and the ability to customer to local tastes and standards.

Learning on a Worldwide Scale

Based on the success of global perspective. Capacity to learn from participation in one geographic market and transfer that knowledge to other operations elsewhere in the world. Expatriates: someone from a home country who has moved abroad temporarily. Inpatriates: a manager recruited from the local market for their local business savvy

Global Vision

Build cost advantages through centralized, global-scale operations. Requires centralized and globally scaled resources and capabilities. Many opportunities to gain global efficiencies and relatively low local responsiveness

Mutinational Vision

Build flexibility to respond to national differences through strong, resourceful, entrepreneurial, and somewhat independent national or regional operations. Requires decentralized and relatively self-sufficient units. Relatively high local responsiveness and few opportunities to gain global efficiencies

Emphasizing Global Efficiencies with Some Local Advantages

Centralizes some resources, such as global brand and distribution capabilities, to achieve cost savings. Decentralize others, such as marketing, in order to achieve some level of localization. Common strategy for firms that have created something in a home market and want to replicate it in a foreign market.

Alliances

Chosen because of government regulations. Used because: 1. management's lack of familiarity with the local cultures or institutions 2. complexity of operating internationally requires firm to focus on the activities it does best and to outsource the rest. 3 factors: 1. regulations 2. market familiarity, 3. operational complexity

Transnational Vision

Develop global efficiency, flexibility, and worldwide learning. Requires dispersed, interdependent, and specialized capabilities simultaneously. Many opportunities to gain global efficiencies and Relatively high local responsiveness

Costs Associated with Governance and Coordination

Disadvantages that tend to increase as international diversification increases Examples: 1. Information distortion as it is transferred and translated across borders 2. Coordination difficulties and possible misalignment between headquarters and divisional managers in international firms The more countries a firm deals with, the greater the difficulty and cost of coordinating operations across the diverse environment.

International Vision

Exploit parent-company knowledge and capabilities through worldwide diffusion, local marketing and adaptation. The most valuable resources and capabilities are centralized; others, such as local marketing and distribution, are decentralized. Relatively low local responsiveness and few opportunities to gain global efficiencies

Learning and Knowledge Sharing

Firms must learn to cope with different institutional, legal, and cultural environments. For most firms, international expansion is used for product innovation, improving existing products in existing markets, or coming up with new ideas for new markets. Hard for US firms to learn and adapt to new countries/cultures. Firms that operate in different countries have the ability to increase innovation and transfer knowledge from one geographic market to another. Firms can locate in highly competitive areas in order to learn from competitors. Exploit opportunities for inter-business-unit collaboration to create knowledge sharing. enables firms to: 1. Transfer best practices across national and business-unit boundaries 2. Uncover revenue-enhancement opportunities.

Born-Global Firms

Firms whose operations often span the globe early in their existence. Position themselves globally, exploiting a combination of exporting and FDI. Common Characteristic: offerings complement the products or capabilities of other global players, take advantage of global IT infrastructure, or otherwise tap into a demand for a product or service that is somewhat uniform across national geographic markets.

Emphasizing Global Efficiencies

Focus is only on global efficiency. Tradeoff between local responsiveness and the lower costs associated with global efficiency. Production and sourcing decisions are designed to achieve the greatest economies of scale.

Foreign Direct Investment (FDI)

Foreign-country entry vehicle by which a firm commits to the direct ownership of a foreign subsidiary or division. Involves making a financial investment to facilitate the startup of a new venture. Most expensive international entry tactic because of high time and resource commitments. Implemented through: 1. Greenfield investment 2. acquisitions (rapid entry) 3. equity alliances (used when need to really understand culture)

Exporting

Foreign-country entry vehicle in which a firm uses an intermediary to perform most foreign marketing functions. Exporting firm will generally only be successful to the extent that it can deliver a product or service that meets customers' needs. Low physical entry barriers, importer is generally responsible for everything! Costs of exporting: relatively minimal. Main costs are with transportation and meeting the packaging requirements of the target company. Most common when when international markets are close to the home markets.

Greenfield Investment

Form of FDI in which a firm starts a new foreign business from the ground up. Greatest risk, expense and time.

Economic Distance

Fundamental differences relating to income, distribution of wealth, and the relative purchasing power of segments of a geographic market. [Differences in consumer incomes, differences in costs and quality (natural resources, financial resources, human resources, infrastructure, intermediate inputs, information or knowledge.]

Phase 2:

If answer is yes to most of question in phase 1, then company moves on to phase 2. Some needed resources and capabilities: 1. Strong management team with international experience 2. Broad and deep international network among suppliers, customers and complements 3. Strong intangible assets 4. Ability to keep customers locked in by linking new products and services to the core business, while constantly innovating the core product or service.

Importing

Internationalization strategy by which a firm brings a good, service or capital into the home country from abroad. Must be knowledgable about customs requirements and informed about compliance with customers regulations, entry of goods, invoices, classification and value, determination and assessment of duty, special requirements, fraud, marketing, trade finance and insurance, and foreign trade zones.

Pros and Cons

Key is to align international expansion with the firm's strategy in a way to exploit and further develop firm resources and capabilities. Benefits > costs The key is for managers to find a way to exploit the possible advantages of economies of scale and scope, location and learning without having them offset by the excessive cost of internationalization. Costs: 1. Liabilities of newness and foreignness 2. Costs associated with governance and coordination

Liabilities of Newness and Foreignness

Liability of newness: a disadvantage (i.e. cost disadvantage or other) associated with being a new player in the market. Liability of foreignness: Disadvantage a firm faces by not being a local player (i.e. cultural misunderstanding or political misunderstanding) These disadvantages tend to dissipate over time as the firm gains local experience/knowledge.

Local Needs vs Global Standards

Meeting ideal tradeoff between customizing for local needs and achieving cost efficiencies requires further tradeoffs with respect to a firm's value chain regarding which activities will be standardized and which will be locally tailored. Market fragmentation: domination of local preferences over the search for global efficiencies.

Location

National and regional geographic location has an impact because of its implications for input costs, competitors, demand conditions and complements. Use 5 forces to determine the advantages of the location by assessing the desirability of investing in a specific market, competitive consequences of such an investment, and the value-chain activities needed to locate in each region,. . Value chain and 5 forces can be geographically segmented to consider how and why rivalry may play out differently in different geographic locations. Shows how to connect the dots for linking resources, capabilities and location

Economies of Global Scope

Numerous scope economies are available to firms that expand globally. Example: source lowest cost inputs and use lower local prices and service levels Hazards: strategy must be executed at the national level, which is hard because the same strategy does not work the same in all countries.

Outsourcing and Offshoring

Offshoring: moving a value chain activities or set of activities to another country, typically where key costs are lower. Business process outsources (BPO): delegation of one or more IT-intensive business processes to an external nondomestic provider which, in turn, owns, administers, and manages the selected process based on defined and measurable performance criteria.

Global Economies of Scale and Scope

Part of economic logic For example, firms with high R&D generate more profits if they are global.

2 Phases of Global Startups

Phase 1: Answer "should my firm be a global startup?" Phase 2: Need to build the appropriate resources and capabilities

Cross-subsidizing

Practice by which a firm uses profits from one aspect of a product, service or region to support other aspects of competitive activity.

International Strategy

Process by which a firm approaches the cross-border activities and those of competitors and plans to approach them in the future. Reflects the choices a firm's executives make with respect to sourcing and selling its goods in foreign markets, and dealing with foreign competitors who enter their markets. Needs to be considered when any single or potential competitor is not domestic (conducts business across borders). Must be thought about even when a firm has no international operations.

Administrative Distance

Reflect the historical and present political and legal associations between trading partners. [Absence of colonial ties, absence of shared monetary or political association, political hostility, government policies, institutional weaknesses] Trade practices created by law (p. 272): 1. Free Trade Agreements 2. Import Laws 3. Foreign Corrupt Practices Act (FCPA) 4. Intellectual Property Protection

Geographic Distance

The absolute, in terms of miles, that separate a firm from another market or supplier. [Physical remoteness, lack of a common border, lack of sea or river access, size of country, weak transportation or communication links, differences in climates]

Scale and Operating Efficiency

The larger scale that accompanies global expansion only creates competitive advantage if the firm translates scale into operating efficiency. Potential scale from global expansion include spreading fixed costs over a larger sales and asset base and increasing purchasing power. Attempts to gain scale advantages must be focused on resources and activities that are scale sensitive and are concentrated in a few locations (ensure that they do not become isolated from key markets)

Cultural Distance

The possible differences existing in relation to the way individuals from different countries observe certain values and behaviors. [Different languages, different ethnicities (lack of connective ethnic or social networks), different religions, different social norms.] Power distance: the extent to which individuals accept the existence of inequalities between subordinates and superiors within a hierarchical structure. Uncertainty avoidance: individuals willingness to coexist with uncertainty about the future. Individualism: how individuals in a society value individualistic behaviors as opposed to collective ones Predominate values: regarding quantity or quality of life LT/ST orientation: the focus on future rewards or the concern about the maintenance of the stability related to the past and the present. Companies with a lot of managers from different countries will be less affected by this distance then a company with managers all from the home market.

1-2-3- Model

Three basic questions must be answered: 1. Why 2. Where 3. How Explanation: 1. Why should we expand into another geographic arena (economic logic and differentiators apply?) 2. Where is the new geographic arena(s)? 3. How - which vehicles and staging and pacing?

CAGE Framework

Tool that considers the dimensions of culture, administration, geography, and economics to assess the distance created by global expansion. The greater distance covered the greater the value differences between the disconnected markets, the greater the profit potential that arises from arbitrage. CAGE-related risks most relevant where language/cultural identify are important, the gov views the products as staples or as essential to national security, or income or input costs are key determinants of product demand/cost. Application of CAGE asks managers to identify attractive locations based on raw material costs, access to markets or consumers, or other key decision criteria. Used to address questions related to arenas and vehicles, as well as staging and pacing.

Global Mindset

Two components: 1. Global perspective 2. Learning on a worldwide scale

Vehicles of International Strategy

Two key choices: 1. To enter a foreign country with a vehicle that requires the firm to put some, or a lot of, capital at risk. 2. What type of vehicle based on desired level of ownership and local presence Done as a staged process using specific vehicles. Stages are more descriptive than predictive. Different entry vehicles have differing degrees of risk and control

Equity Vehicles

Types of Vehicles: 1. Alliances and joint ventures 2. Wholly owned subsidiaries

Nonequity Vehicles

Types of Vehicles: 1. Exports 2. Contractual Agreements

Emphasizing Local Responsiveness

Use cross-subsidizing to create a portfolio of geographically removed business units that have devoted most of their resources and capabilities to maximizing local responsiveness and uniqueness. Objective is to develop a global presence, but may or may no use the same brand names in each market or consolidate their buying power or distribution capabilities.

Multipoint Competition

When a firm competes against another firm in multiple product markets or multiple geographic markets (or both). Stronghold assault: competitive actions a firm takes in another firm's key markets, particularly when the attacking firm has little presence in that market. (for globalization, it is when a firm attacks the geographic markets). Used to underprice a competitor's products in the home market and to eliminate the competitor's home market monopoly. Usually benefits the customers initially until a new market equilibrium is reached. Firm's need to understand when to stop price competition though, or else it will deteriorate the market.

International Strategy in Stable and Dynamic Contexts

read page 286-287