Lecture 5:

Global strategic complexities

Economics and
environmental impacts
 Contents

I. Rationale for international expansion

II. Planning for international expansion

III. PESTLE analysis

IV. International-expansion entry modes

 I. Rationale for
international expansion
• Companies embark on an expansion strategy
for one or more of the following reasons:
– To improve the cost-effectiveness of their
operations
• E.g. Microprocessor maker Intel is building
manufacturing facilities in China to take advantage of
the less costly and increasingly sophisticated
production capabilities:
– Intel built a semiconductor manufacturing plant in Dalian,
China for $2.5bn whereas a similar state-of-the-art
microprocessor plant in US can cost $5bn. Besides, Intel
has also built plants in Chengdu and Shanghai, China and
in other Asian countries (Vietnam and Malaysia) to take
advantage of lower costs.
 I. Rationale for
international expansion
(cont.)
– To expand into new markets for new customers
• E.g. US chemical firm Dupont, Brazilian aerospace
conglomerate Embraer are all investing in China to gain new
customers.
– To follow global customers
• E.g. Schneider Logistics initially entered a new market
(Germany) not to get new customers but to retain existing
customers who needed third-party logistics firm in Germany.
Thus Schneider followed its customers to Germany.
 I. Rationale for
international expansion
(cont.)
– International expansion
consideration
 II. Planning for
international expansion
• Planning for international expansion involves
doing a thorough due diligence on the potential
markets into which the country is considering
expanding.
• International market due diligence involves
analyzing foreign markets for their potential size,
accessibility, cost of operations, and buyer
needs and practices to aid the company in
deciding whether to invest in entering that
market.
 II. Planning for
international expansion
(cont.)
• Evaluating whether to enter a new market is like
peeling an onion – there are many layers. For
example: when evaluating whether to enter China
market:
– First layer: the advantage most people see is its large
market size
– Second layer: further analysis shows that the majority
people in that market can’t afford US products
– Third layer: deeper analysis shows that while Chinese
people are poor, the number of people who can afford
consumer products is increasing.
 II. Planning for
international expansion
(cont.)
• A thorough due diligence includes:
– Understanding the regional differences within markets
– The needs of local customers
– The firm’s own capabilities in relation to the dynamics
of the industry.
• Common mistakes that firms make when entering
a new market:
– Not doing a thorough research prior to entry
– Not understanding the competition
– Not offering a truly targeted value proposition for
buyers in the new market.
 III. PESTEL analysis

• PESTEL analysis is an important and widely used tool

that helps to show the big picture of a firm’s external
environment, particularly as related to foreign market.
• PESTEL analysis examines a target market’s political,
economic, sociocultural, technological, environmental
and legal dimensions in terms of both its current state
and possible trends.
 III. PESTEL analysis
1. Political factor

– How stable is the political environment in the

prospective country?
– What are the local taxation policies? How do these
affect your business?
– Is the government involved in trading agreements,
such as the European Union (EU), the North
American Free Trade Agreement (NAFTA), or the
Association of Southeast Asian Nations (ASEAN)?
– What are the country’s foreign-trade regulations?
– What are the country’s social-welfare policies?
 III. PESTEL analysis
2. Economic factor

– What are the current and forecast interest rates?

– What is the current level of inflation in the prospective
country? What is it forecast to be? How does this
affect the possible growth of your market?
– What are local employment levels per capita, and
how are they changing?
– What are the long-term prospects for the country’s
economy, gross domestic product (GDP) per capita,
and other economic factors?
– What are the current exchange rates between critical
markets, and how will they affect production and
distribution of your goods?
 III. PESTEL analysis
3. Sociocultural
– What are the local lifestyle trends?
– What are the country’s current demographics, and how are
they changing?
– What is the level and distribution of education and
income?
– What are the dominant local religions, and what influence
do they have on consumer attitudes and opinions?
– What is the level of consumerism, and what are the
popular attitudes toward it?
– What pending legislation could affect corporate social
policies (e.g., domestic-partner benefits or maternity and
paternity leave)?
– What are the attitudes toward work and leisure?
 III. PESTEL analysis
4. Technological factor

– To what level do the local government and industry

fund research, and are those levels changing?
– What is the local government’s and industry’s level of
interest and focus on technology?
– How mature is the technology?
– What is the status of intellectual property issues in the
local environment?
– Are potentially disruptive technologies in adjacent
industries creeping in at the edges of the focal
industry?
 III. PESTEL analysis
5. Environmental factor

– What are the local environmental issues?

– Are there any pending ecological or environmental
issues relevant to your industry?
– How do the activities of international activist groups
(e.g., Greenpeace, Earth First!, and People for the
Ethical Treatment of Animals [PETA]) affect your
business?
– Are there environmental-protection laws?
– What are the regulations regarding waste disposal
and energy consumption?
 III. PESTEL analysis
6. Legal factor

– What are the local government’s regulations

regarding monopolies and private property?
– Does intellectual property have legal protections?
– Are there relevant consumer laws?
– What is the status of employment, health and safety,
and product safety laws?
 III. PESTEL analysis
Example of PESTEL analysis

Source: 24Point0 Website, 2017

 IV. International
expansion entry modes
• The five most common modes of international
expansion market entry are:
– Exporting: the sale of products and services in
foreign countries that are sourced from the home
country.
– Licensing: an international entry mode involving the
granting of permission by the licenser to the licensee
to use intellectual property rights, such as
trademarks, patents, or technology, under defined
conditions.
– Partnering and strategic alliance: an international
entry mode involving a contractual agreement
between two or more enterprises stipulating that the
involved parties will cooperate in a certain way for a
certain time to achieve a common purpose
 IV. International
expansion entry modes
• The five most common modes of international
expansion market entry are (cont.):
– Acquisition: an international entry mode in which a
firm gains control of another firm by purchasing its
stock, exchanging stock or in the case of a private
firm, paying the owners a purchase price.
– Greenfield venturing: an international entry mode
involving the establishment of a new, wholly owned
subsidiary.
 IV. International
expansion entry modes
Type of entry Advantages Disadvantages

Low control, low local knowledge,

Exporting Fast entry, low risk potential negative environmental
impact of transportation
Less control, licensee may become a
Licensing and competitor, legal and regulatory
Fast entry, low cost, low risk
Franchising environment (IP and contract law) must
be sound
Shared costs reduce investment Higher cost than exporting, licensing,
Partnering and
needed, reduced risk, seen as local or franchising; integration problems
Strategic Alliance
entity between two corporate cultures

Fast entry; known, established High cost, integration issues with home
Acquisition
operations office
Greenfield Venture
Gain local market knowledge; can be
(Launch of a new, High cost, high risk due to unknowns,
seen as insider who employs locals;
wholly owned slow entry due to setup time
maximum control
subsidiary)

Table 8.1.: Advantages and disadvantages of each entry mode (Course book, p.423-424)
 IV. International
expansion entry modes
Choosing the “right” entry mode?
• Which entry mode a firm chooses depends on:
– The pros and cons of each entry mode
– The firm’s size, financial strength
– The economic and regulatory conditions of the target country.
E.g.: A small firm will likely begin with an export strategy. Large
firms or firms with deep pockets might begin with an acquisition
to gain quick access or to achieve economies of scale. If the
target country has sound rule of law and strong adherence to;
business contracts, licensing, franchising, or partnerships may
be middle-of-the-road approaches that are neither riskier nor
more expensive than the other options.