Lecture 9

Exploring Strategy
11th edition
Text and Cases
Chapter 9
International strategy
Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved
Learning outcomes
• Assess the internationalisation drivers and potential of
different markets.
• Identify sources of competitive advantage in international
strategy, through both exploitation of local factors and global
sourcing.
• Understand the difference between global integration and
local responsiveness and four main types of international
strategy.
• Rank markets for entry or expansion, taking into account
attractiveness, cultural and other forms of distance and
competitor retaliation threats.
• Assess the relative merits of different market entry modes,
including joint ventures, licensing and and franchising and
wholly owned subsidiaries.
International strategy: main themes
International and global strategy
• International strategy refers to a range of
options for operating outside an organisation’s
country of origin.
• Global strategy involves high coordination of
extensive activities dispersed geographically in
many countries around the world.
N.B. Global strategy is just one kind of international

strategy.
Internationalisation drivers (1 of 4)
1. Market drivers –BRICs & MINTs
− The presence of similar customer needs and taste
(e.g. credit cards).
− Presence of global customers (e.g. Ford and Toyota
have internationalised and required standardised
components for their factories around the world. car
components).
− Transferable marketing promotes market
globalisation: brands such as (e.g. Coca-Cola) are still
successfully marketed in very similar ways across the
world.
Internationalisation drivers (2 of 4 )
2. Cost drivers- costs can be reduced by operating
internationally.
− Scale economies - both on the production side and in
purchasing of supplies.Increasing volume beyond what a
national market might support can give scale economies
(e.g. R&D in aircraft manufacturing)
− Country-specific differences -companies locate the
manufacturing of clothing in Africa or Bangladesh where
labour is still considerably cheaper but to design activities
in cities such as New York, Paris, Milan..
− Favourable logistics (e.g. low cost of transporting
microchips).
3. Government drivers
− Trade policies (e.g. reduction of trade barriers in the EU) has
accelerated internationalisation. During the last couple of
decades national governments have reduces restrictions on
both flow of goods and capital. The World Trade Organization
(WTO) has been instrumental in reducing trade barriers
globally. –(ASEAN, EU has promoted this development).
− The liberalisation and adoption of free markets in many
countries around the globe have also encouraged
international trade and investments.
− Technical standardisation (e.g. in electronics)-compatible
technical standards make it easier for company to access
different markets as they enter many markets with the same
product or service without adapting to local idiosyncratic
standards.
4. Competitive drivers
− Interdependence (e.g. global coordination between subsidiaries
in different countries).
− Global competitors (e.g. rivals may use profits to cross subsidise
aggressive moves).
− Interdependence between company operations increases the
pressure for global coordination.
− E.g. A business with plan in Mexico that sources parts in Brazil
and serves both the US and the Japanese markets has to
coordinate carefully between the different locations; surging
sales in one country, or a collapse in another will have significant
knock-on effects on the other countries.
Locational advantage:
Porter’s Diamond
Porter’s Diamond – explains why some locations
tend to produce firms with competitive
advantages in some industries more than
others.
The four drivers in Porter’s Diamond arise from:
•local factor conditions;
•local demand conditions;
•local related and supporting industries;
•local firm strategy, industry structure and rivalry.
Porter’s Diamond – the determinants of
national advantages
Source: Adapted with permission of The Free Press, a Division of Simon & Schuster, Inc., from The Competitive Advantage of Nations by Michael E. Porter.
Copyright © 1990, 1998 by Michael E. Porter. All rights reserved.
Global sourcing
Global sourcing refers to purchasing services and
components from the most appropriate suppliers
around the world, regardless of their location.
The advantages include:
• Cost advantages: e.g. labour costs, transportation and
communications costs, taxation and investment
incentives.
• Unique local capabilities: e.g. centres of excellence in
R&D clusters globally.
• National market characteristics and national
reputation for a particular product.
Locational advantages
Locational advantages can be due to:
•Cost advantages including labour costs,
transportation and communications costs and taxation
and investment incentives e.g. employing software
engineers in India.
•Unique local capabilities. European pharma firms
locating in Boston and California to tap into local
research expertise.
•National market characteristics. Differentiated
product offerings aimed at different market segments
e.g. Gibson guitars.
The global–local dilemma
The global–local dilemma relates to the

extent to which products and services may
be standardised across national boundaries
or need to be adapted to meet the
requirements of specific national markets.
International strategies
Four international strategies (1 of 4)
Export strategy:
• Leverages home country capabilities, innovations and products
in foreign markets.
• Used when pressure for both global integration and local
responsiveness is low.
• Suitable for companies with strong brands (e.g. Google).
• The key risk – local skilled local competitors getting ahead. E.g.
Baidu in Google, Naver in Korea, Yandex in Russia.
• Google centralises its R&D in US and exploits its internationally
with minor adaptations except for local languages and
alphabets.
Multi-domestic strategy:
• Maximises local responsiveness – different product offerings
for different countries based on local market conditions and
customer preferences. .
• A low level of international coordination.
• Organisation is like a collection of relatively independent
units.
• Commonly found in marketing-orientated companies (e.g.
food companies).
• Risks include manufacturing inefficiencies, brand dilution and
cost.
• E.g. Frito Lays – adapts to local taste.
Global strategy:
• Maximises global integration with little or no local adaptation
of products/services.
• Standardised products are deemed to suit all markets and
efficient production is emphasised through economies of
scale.
• Geographically dispersed activities are centrally controlled
from headquarters.
• Common for commodity products (e.g. cement) but also
might include IKEA.
Transnational strategy:
• Complex strategy that maximises local responsiveness and global
coordination.
• Aims to maximise learning and knowledge exchange between
dispersed units.
• Efficient operations but products/services adapted to local conditions.
• The value chain configuration includes an intricate combination of
centralised manufacturing to increase efficiency combined with an
intricate assembly and local adaptations.
• Major advantage- its capacity to support efficiency and effectiveness
while at the same time being able to serve local needs and leverage
learning.
• Hard to achieve but General Electric is a possible example.
Market selection and entry
Market characteristics
Four elements of the PESTEL framework are particularly
important in comparing countries for entry:
• Political – political environments vary widely between
countries and can alter rapidly.
• Economic – key comparators are gross domestic
product and disposable income indicating the
potential size of the market.
• Social – factors like population characteristics and
lifestyle and cultural differences.
• Legal – countries vary widely in their legal regime. .
The CAGE framework (1 of 2)
Cultural Administrative and

distance political distance
Geographic Economic/wealth
distance distance
The CAGE framework (2 of 2)
• Cultural distance – differences in language,
ethnicity, religion and social norms.
• Administrative and political distance –
compatibility of administrative, political or legal
traditions.
• Geographic distance – not just miles but also
aspects such as size, sea-access and the quality
of communications.
• Economic/wealth distance – wealth and income
differences.
International cross-cultural comparison
Note: Based on a survey of managers on standard dimensions (selection presented here).

Source: M. Javidan, P. Dorman, M. de Luque and R. House, ‘In the eye of the beholder: cross-cultural lessons in leadership from Project GLOBE’, Academy of Management Perspectives (February
2006), pp. 67–90 (Figure 4: USA vs China, p. 82). (GLOBE stands for ‘Global Leadership and Organisational Behaviour Effectiveness’.)
Competitive characteristics
Country markets can be assessed according to
three criteria:
• Market attractiveness to the new entrant.
• The likelihood and extent of defender’s
reaction.
• Defenders’ clout – the relative power of
defenders to fight back.
International competitor retaliation
Note: Each bubble represents a country and its size indicates defender’s relative clout
Source: Reprinted by permission of Harvard Business Review. Exhibit adapted from ‘Global gamesmanship’ by I. MacMillan, S. van Putter and R. McGrath, May 2003.
Copyright © 2003 by the Harvard Business School Publishing Corporation. All rights reserved.
The staged international
expansion model
The staged international expansion model proposes a
sequential process whereby companies gradually
increase their commitment to newly entered markets, as
they build market knowledge and capabilities.
This is challenged by two phenomena:
• ‘Born-global firms’ – new, small firms that
internationalise rapidly (usually in new technology
industries).
• Emerging-country multinationals – building unique
capabilities in the home market but exploiting them in
international markets very quickly.
Modes of entry
Export
Licensing or franchising
Joint ventures
Wholly owned subsidiaries
Export
• Is the baseline option and has the advantages of
requiring relatively less investment of resources and
entailing lower costs and risks whilst offering speedy
entry and the potential to take full advantage of
production economies in existing facilities. However,
a potential disadvantage is of course transportation
costs and the possibility that products can be
manufactured cheaper locally. Limited control of
marketing and sales and possibly international trade
barriers are other drawbacks.
Licensing or franchising
• Involves a contractual agreement whereby a local

firm receives the right to exploit a product
technology or a service concept commercially for a
fee during a specific period of time period.
• E.g. Soft-drinks companies like Coca-Cola use license
agreements for their drinks and brands
internationally and fast-food chains like McDonald’s
use franchise arrangements.
Joint ventures
• Jointly owned companies where the international
investors share assets, equity and risk with a local
partner. This implies that resource and financial
commitments are limited compared to full
ownership, and financial political risks are also
reduced.
• e.g. Sweden’s heavy truck maker Volvo has set up
joint ventures in China while it’s competitor Scania
has decided not to enter into Chinese joint ventures
due to risk of losing control.
• 100% control through setting up entirely new

greenfield operations or by acquiring a local firm.
This entry mode has the advantage of giving the
company strong control over technologies,
operations, sales and financial results. It also allows
for exploiting production and coordination
economies among diverse units globally.
Acquisition
• Common entry mode in the auto industry.
e.g.
• Tata Motors- Jaguar and Land Rover
• Fiat acquired Chrysler
• Michael Kors acquired Jimmy Choo.
Table 9.1 Comparison of entry mode strategies
Export
Advantages Disadvantages
• No need for operational • Lose any location
facilities in host country advantages in the host
• Economies of scale in country
the home country • Dependence on export
• Internet can facilitate intermediaries
export marketing • Exposure to trade
opportunities. barriers
• Fast entry and lower • Transportation costs.
risks.
Licensing and franchising
• Contractual source of • Difficult to identify good
income partner
• Loss of competitive advantage
• Limited economic and
financial exposure. • Limited benefits from host
nation.
• Resource commitment is
• Lack of control over
low as local partners bear
technologies and product and
the primary financial and service quality.
political risks.
• Risk of technological leakage.
Joint ventures
• Shared investment risk • Difficult to find good
• Complementary partners
resources • Relationship
• Maybe a requirement management issues
for market entry. – • Loss of competitive
China. advantage
• Build on local partner’s • Difficult to integrate and
knowledge of customer coordinate.
needs and local
institutions.
• Full control • Substantial investment
• Integration and co- and commitment
ordination possible • Acquisitions may create
• Rapid market entry integration/ coordination
through acquisitions issues
• Greenfield investments • Greenfield investments
are possible and may be are time consuming and
subsidized. unpredictable.
Subsidiary roles in multinational firms
Source: Reprinted by permission of Harvard Business School Press. From Managing across Borders: The Transnational Solution by C.A. Bartlett and S. Ghoshal. Boston, MA 1989, pp. 105–11 . Copyright
© 1989 by the Harvard Business School Publishing Corporation. All rights reserved.
Internationalisation and performance
Inverted U-curve – complexity may erode

the advantages of internationalisation
Service-sector disadvantages –
internationalisation may only work
well for manufacturing firms
Internationalisation and product diversity
Summary (1 of 2)
• Internationalisation potential in any particular market is
determined by Yip’s four drivers of internationalisation:
market, cost, government and competitors’ strategies.
• Besides firm-specific advantages (see Chapter 3), there
are geographic sources of advantage in international
strategy that can be drawn from both national sources of
advantage, as captured in Porter’s Diamond, and global
sourcing through the international value system.
• There are four main types of international strategy,
varying according to extent of coordination and
geographical configuration: export strategy, multi-
domestic strategy, global strategy and transnational
strategy.
Summary (2 of 2)
• Market selection for international entry or expansion
should be based on attractiveness, institutional voids
multi-dimensional measures of distance and expectations
of competitor retaliation.
• Entry mode strategies into new markets include export,
licensing and franchising, joint ventures and overseas
wholly owned subsidiaries.
• Subsidiaries in an international firm can be managed by
portfolio methods just like businesses in a diversified firm.
• Internationalisation has an uncertain relationship to
financial performance, with an inverted U-curve warning
against over-internationalisation.

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Lecture 9

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Exploring Strategy

N.B. Global strategy is just one kind of international

The global–local dilemma relates to the

Cultural Administrative and

Note: Based on a survey of managers on standard dimensions (selection presented here).

Wholly owned subsidiaries

• Involves a contractual agreement whereby a local

• 100% control through setting up entirely new

• Common entry mode in the auto industry.

Inverted U-curve – complexity may erode

Internationalisation and product diversity

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