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CHAPTER 7
International Strategy:
Creating Value in Global
Markets

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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Learning Objectives
After reading this chapter, you should be able to:
1. Understand the importance of international expansion as a viable
diversification strategy.
2. Identify the sources of national advantage; that is, why an industry
in a given country is more (or less) successful than the same
industry in another country.
3. Explain the motivations (or benefits) and the risks associated with
international expansion, including the emerging trend for greater
offshoring and outsourcing activity.
4. Explain the two opposing forces – cost reduction and adaptation to
local markets – that firms face when entering international markets.
5. Identify the advantages and disadvantages associated with each of
the four basic strategies: international, global, multidomestic, and
transnational.
6. Understand the difference between regional companies and truly
global companies.
7. Identify the four basic types of entry strategies and the relative
benefits and risks associated with each of them.
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 Looking Ahead

The Global Economy: A Brief Overview

Factors Affecting a Nation’s Competitiveness
International Expansion: A Company’s
Motivations and Risks
Achieving Competitive Advantage in Global
Markets
Entry Modes of International Expansion

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 International Strategy 1

Consider …
The global marketplace provides many
opportunities for firms to increase their
revenue base and their profitability.
However, managers face many opportunities
and risks when they diversify abroad.
What should a firm do in order to create
value and attain a competitive advantage in
this global marketplace?

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 International Strategy: Globalization
Globalization has to do with the rise of market
capitalization around the world.
• International exchanges have increased.
• Trade in goods and services.
• Exchange of money, information, and ideas.
• Laws, rules, norms, values, and ideas are growing
more similar across countries.
Challenges include balancing between emerging
markets and developed markets.
• How to meet the needs of customers at very
different income levels?
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 Factors Affecting a Nation’s
Competitiveness
Michael Porter’s diamond of national
advantage explains why some nations and
their industries outperform others.
• Factor endowments.
• Demand conditions.
• Related and supporting industries.
• Firm strategy, structure, and rivalry.

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 Factors Affecting a Nation’s
Competitiveness: Factor Endowments
Factor endowments involve factors of
production.
• Land.
• Capital.
• Labor.

Factors of production must be industry and firm

specific.
• Must be rare, valuable, difficult to imitate, and
rapidly and efficiently deployed.

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 Factors Affecting a Nation’s
Competitiveness: Demand Conditions
Demand conditions refer to the demands that
consumers place on an industry.
Demanding consumers drive firms in that country
to:
• Meet high standards.
• Upgrade existing products and services.
• Create innovative products and services.
• Better anticipate future global demand.
• Proactively respond to product and service
requirements.

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 Factors Affecting a Nation’s
Competitiveness: Related and
Supporting Industries
Related and supporting industries enable
firms to manage inputs more effectively via:
• A competitive supplier base.
• Reduces manufacturing costs.
• Close working relationships with suppliers.
• Allows for joint research and development.
• Development of related industries.
• Forces existing firms to practice cost control,
product innovation, better distribution methods.
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 Factors Affecting a Nation’s
Competitiveness: Firm Strategy

Firm strategy, structure, and rivalry

affect competitiveness via:
• Strong consumer demand.
• Strong supplier base.
• High new entrant potential from related
industries.
Domestic rivalry leads to a search for new
markets.
Intense domestic competition is a strong
indicator of global competitive success.
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 Question 1

All of the factors below have made India’s

software services industry extremely
competitive on a global scale except:
A. a large pool of skilled workers.
B. a large network of public and private
educational institutions.
C. tax and antitrust legislation that protect
the dominant players in the industry.
D. a large, growing market, and sophisticated
customers.

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 Example: Factors Affecting a Nation’s
Competitiveness

Exhibit 7.1
India’s
Software
Diamond
Source: From Kampur
D., and Ramamurti
R., “India’s Emerging
Competition
Advantage in
Services,” Academy of
Management
Executive: The
Thinking Managers
Source. Copyright ©
2001 by Academy of
Management.

Access the text alternative for slide images.

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 International Expansion: Motivations 1

A company pursues international expansion for

many reasons. A company decides to become a
multinational firm in order to:
• Increase size of potential markets.
• Attain economies of scale.
• Take advantage of arbitrage opportunities.
• Applied to every stage of the value chain.
• Enhance a product’s growth potential.
• Reinvigorate the product life cycle.

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 International Expansion: Motivations 2

A company also decides to become a

multinational firm in order to:
• Optimize the location of value chain activity.
• To enhance performance.
• To reduce cost.
• To reduce risk.
• Take advantage of learning opportunities.
• Explore reverse innovation.
• Design and manufacture products locally.
• Export no-frills products to developed markets.
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 International Expansion: Risks 1

Multinational firms also encounter risks.

• Political risk due to social unrest, military
turmoil, demonstrations, terrorism, absence of
the rule of law can lead to:
• Destruction of property.
• Disruption of operations.
• Non-payment for goods and services.
• Arbitrary government decisions.
• Economic risk due to piracy and
counterfeiting.
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 International Expansion: Risks 2

Multinational firms also encounter other risks.

• Currency risk due to fluctuations in the local
currency’s exchange rate.
• Affects cost of production or net profit.
• Management risk due to culture, customs,
language, income level, customer preferences,
distribution systems.
• Could lead to the need for local adaptation of
apparently standard products.

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 International Expansion: Managing
Risks 1

Managing economic risk can be done through

global dispersion of value chains.
Various activities of the firm’s value chain can be
spread across several countries and continents
via:
• Outsourcing.
• Offshoring.

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 International Expansion: Managing
Risks 2

Offshoring may be costly.

Common savings from offshoring include:
• Lower wages, benefits, energy costs, regulatory
costs, taxes.
Hidden costs from offshoring include:
• Higher total wage and indirect costs, wage inflation.
• Increased inventory due to longer lead time.
• Reduced market responsiveness.
• Increased coordination costs.
• Cost of protecting intellectual property.
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 International Strategies: Opposing
Pressures 1

Cost reduction or adaptation to local markets?

Levitt suggested strategies that favor global
products and brands should do the following:
• Standardize all products for all markets.
• Reduce overall costs by spreading investments
over a larger market.
Assumes:
• Customers have homogenous needs and interests.
• People prefer lower prices at high quality.
• Global markets produce economies of scale.
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 International Strategies: Opposing
Pressures 2

Cost reduction or adaptation to local markets?

Assumptions may be incorrect.
• Product markets DO vary widely between nations –
local adaptations work.
• There is a growing interest in multiple product
features, product quality, and service.
• Technology permits flexible production; cost of
production may not be critical to product cost; a
firm’s strategy should not be solely product driven.
“One size fits all” does NOT generally apply.

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 International Strategies: Opposing
Pressures, Chart
Exhibit 7.3
Opposing
Pressures and
Four Strategies

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 International Strategy 2

An international strategy requires diffusion

and adaptation of the parent company’s
knowledge and expertise to foreign markets.
The primary goal is worldwide exploitation of the
parent firm’s knowledge and capabilities.
• All sources of core competencies are centralized.
• Pressure for both local adaptation and low costs
are rather low.

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 International Strategy: Strengths,
Limitations
Strengths Limitations
Leverage and diffusion Limited ability to adapt
of a parent firm’s to local markets.
knowledge and core
competencies.
Lower costs because of Inability to take
less need to tailor advantage of new ideas
products and services. and innovations
occurring in local
markets.
Exhibit 7.4 Strengths and Limitations of International
Strategies in the Global Marketplace

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 Global Strategy
A global strategy implies a firm is interested in
lowering costs.
• Competitive strategy is centralized and controlled
by the corporate office.
• Products are standardized, operations centralized,
producing economies of scale.
• Worldwide volume supports research and
development.
• There’s a standard level of quality worldwide.
• Pressure for reducing cost is high; pressure for
adaptation to local markets is weak.

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 Global Strategy: Strengths, Limitations

Strengths
Strong integration occurs
across various businesses.
Standardization leads to
higher economies of scale,
which lower costs.
Creation of uniform
standards of quality
throughout the world is
facilitated.
Limitations
Limited ability exists to adapt
to local markets.
Concentration of activities
may increase dependence on
a single facility.
Single locations may lead to
higher tariffs and
transportation costs.

Exhibit 7.5 Strengths and Limitations of Global Strategies

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 Multidomestic Strategy
A multidomestic strategy puts emphasis on
differentiating products and services to adapt to
local markets.
• Decisions are decentralized.
• Products and services are tailored to local use.
• Consider language, culture, income levels, customer
preferences, distribution systems.
• Markets can expand rapidly.
• Prices are differentiated by market.
• Pressure for local adaptation is high; pressure for
lowering costs is low.
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 Multidomestic Strategy: Strengths,
Limitations

Strengths Limitations
Ability to adapt products and Decreased ability to realize
services to local market cost savings through scale
conditions. economies.

Ability to detect potential Greater difficulty in

opportunities for attractive transferring knowledge
niches in a given market, across countries. Possibility
enhancing revenue. of leading to “overadaption”
as conditions change.

Exhibit 7.6 Strengths and Limitations of Multidomestic

Strategies

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 Transnational Strategy
A transnational strategy seeks global
competitiveness via trade-offs.
• Efficiency versus local adaptation versus
organizational learning.
• Assets and capabilities disbursed according to the
most beneficial location for a specific activity;
some value chain activities centralized, some
decentralized.
• Economies of scale, increased knowledge flows.

• Pressures for both local adaptation and lowering

costs high.

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 Transnational Strategy: Strengths,
Limitations
Strengths Limitations
Ability to attain economies of Unique challenges in
scale. determining optimal locations
of activities to ensure cost
and quality.
Ability to adapt to local Unique managerial
markets. challenges in fostering
knowledge transfer.
Ability to locate activities in
optimal locations.
Ability to increase knowledge
flows and learning.
Exhibit 7.7 Strengths and Limitations of Transnational
Strategies

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 Question 2
In order to realize the strongest competitive advantage,
firms engaged in worldwide competition must:
A. require that all of their various business units
follow the same strategy regardless of location.
B. ensure that all business units follow a strategy
strictly tailored to their respective locations.
C. pursue a strategy that combines the uniformity of
a global strategy and the specificity of a
multidomestic strategy in order to achieve optimal
results.
D.attempt to use the strategy that was most
successful in their home country.

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 International Strategies: Global or
Regional?
It may be unwise for companies to rush into full-
scale globalization.
Regionalization may be more reasonable.
• Distance still matters.
• Commonalities of language, culture, economics,
legal and political systems, and infrastructure all
make a difference.
• Trading blocs and free trade zones ease trade
restrictions, taxes, and tariffs.

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 Question 3

A domestic corporation considering expanding

into international markets for the first time will
typically:
A. start off by implementing a wholly owned
foreign subsidiary so it can maintain standards
identical to those at home.
B. consider licensing or franchising its operations.
C. consider implementing a low risk/low control
strategy such as exporting.
D. form a joint venture with a reputable foreign
producer.

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 International Strategies: Entry Modes
Options for international market expansion:
• Exporting.
• Low risk, locals know more; but products may not meet
local needs.
• Licensing or franchising.
• Limits risk; but licensor gives up control and profit.
• Strategic alliance or joint venture.
• Shares risk; but trust and culture issues can lead to
conflict.
• Wholly owned subsidiary.
• Greatest control, highest returns; but expensive, greater
potential for miss-steps.
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 International Strategies: Entry Modes,
Chart

Exhibit 7.8
Entry Modes
for
International
Expansion

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