IB Analysis: The global competitive

strategy- “Star Analysis”

•International business holds out the promise of large new

market areas, yet firms cannot simply jump into the
international marketplace and expect to be successful.
•They must adjust to needs and opportunities abroad,
have quality products, understand their customers, and do
their homework to comprehend the vagaries of
international markets.
•The “Star Analysis” provides a way to organize our
thoughts and knowledge about geography and
international business.
•The “Star Analysis” provides information for the
international business manager to develop a competitive
strategy.
The international business
firm’s competitive
advantage depends on five
major drivers
Home
country

Supplier Customer
countries countries
International
business

Partner Competitor
countries countries
 The international business
“Star Analysis”

Gather country Information needed

Star
data from to design
Analysis
global mosaic competitive
strategy
 Global Competitive Strategy
The international business firm’s competitive
advantage depends on five major drivers:
• Home country
• Supplier countries
• Customer countries
• Partner countries
• Competitor countries
 IB Analysis (Con’d)

•Home country features – headquarters

•Company history and culture
•Managers’ background
•Brand nationality
•Corporate governance
•Home market
•Political, legal, regulatory climate
 IB Analysis (Con’d)

•Supplier country features – production and

procurement
•Worker wages and productivity
•Technology
•Finance capital
•Factor supplies
•Supplier firms
•Political, legal, regulatory climate
•Operating costs/risks
 IB Analysis (Con’d)

•Customer country features – distribution

and sales
•Customer preferences
•Elasticity of demand
•Income per capita and income distribution
•Customer knowledge
•Distribution infrastructure
•Society and culture
•Political, legal and regulatory climate
 IB Analysis (Con’d)

•Partner countries – Demand-side and

supply-side complements
•Complementary products
•Complementary technology
•Complementary capabilities
•Market knowledge
•Political, legal, regulatory climate
 IB Analysis (Con’d)

•Competitor countries
•Home, supplier, customer, and partner
countries of competitors
•Global and local competitors
•Political, legal and regulatory climate –
trade agreements, home-country policies
 IB Analysis-summary

•Location, location, location – key role of

geography
•Where to produce and find suppliers?
•Where to target customer markets?
•Where to find best partners
•Where are competitors coming from
•Global competitive strategy – integrate
economic and geographic forces for competitive
advantage
 Foreign Market Entry Strategies

•The need for a solid market entry decision is an integral

part of a global market entry strategy.
•Entry decisions will heavily influence the firm’s other
marketing-mix decisions.
•Global marketers have to make a multitude of decisions
regarding the entry mode which may include:
•(1) the target product/market
•(2) the goals of the target markets
•(3) the mode of entry
•(4) The time of entry
•(5) A marketing-mix plan
•(6) A control system to check the performance in the
entered markets
Choosing Mode of Entry

•Decision Criteria for Mode of Entry:

•Market Size and Growth
•Risk
•Government Regulations
•Competitive Environment
•Cultural Distance
•Local Infrastructure
•Company Objectives
•Need for Control
•Internal Resources, Assets and Capabilities
•Flexibility
Choosing Mode of Entry (Con’d)

•Mode of Entry Choice: A Transaction Cost

Explanation
•Regarding entry modes, companies normally face
a tradeoff between the benefits of increased
control and the costs of resource commitment and
risk.
 Choosing Mode of Entry (Con’d)
• Entry mode is influenced by:
• Ownership advantages
• the firm’s core competencies,
• companies that have few ownership advantages
are less likely to engage in exporting.
• Location advantages
• the combination of sales opportunity and
investment risk that creates favorable locations in
foreign markets
• Internalization advantages
• reflect companies’ response to market
imperfections that often create uncertainties
• Internalization advantages can encourage
companies to export rather than engage in
licensing.
A Classification of International Entry Strategies
 Mode of Entry: Export

• Exporting: Sale of products or services to

customers located abroad, from a base in the
home country or a third country.
• In theory, exporting involves making a product,
packing it, and then shipping it.
• In reality though, it’s a bit more complex.
Approaches to Exporting

• Export approaches include:

•Direct exporting
•Direct exporters sell their product to
independent intermediaries in foreign countries
who then sell it to the end consumer.
•Indirect exporting
•Products are sold to an intermediary in the
domestic market, which then exports them
•Passively filling orders from domestic buyers
who then export the product
•Selling to domestic buyers who represent
foreign end users or customers
Why Export?

Reasons to export include:

Profits (firms export to increase profits by
tapping new markets or selling products at
premium prices)
Productivity (exporting is also a way to boost
productivity in a firm by increasing scale effects
and improving knowledge flows)
Diversification (firms export in order to diversify
their activities and lower their risk)
 Import

• Importing or Sourcing: Focal firms procure numerous

parts, components, and services from suppliers around
the world
 Types of importers
Input optimizers (search around the world for
optimal inputs which are then used to produce the
firm’s products)
Opportunistic (exploit gaps in the market by
importing products that are available from foreign
suppliers)
Arbitrageurs (capitalize on price and quality
differences between markets. )
 Why Import?

Reasons to import:
Specialization of labor (Companies can take
advantage of the higher quality at lower prices that labor
specialization provides)
Global rivalry (global rivalry has forced companies to
use foreign suppliers to keep the costs of inputs low and
quality levels high)
Local unavailability (Sometimes because of the
unavailability of products locally, companies have no
choice but to import)
Diversification (like exporters, companies import as
part of a diversification strategy)
 Importing and Exporting: Problems and Pitfalls

Financial risks (especially a shortage of working

capital to finance an export strategy)
Customer management (the challenges of meeting
customer expectations in foreign markets)
Lack of international business experience
Marketing challenges/marketing barriers
Top management commitment
Government regulations and Trade documentation
requirements
 Collaborative Strategies and Direct Investment
• When exporting and importing is not possible, firms
must explore other options: collaborative strategies and
direct investment.
• Licensing: Granting the right to a foreign partner to
use certain intellectual property in exchange for
royalties
• A company grants intangible property rights to another
company to use in a specified geographic area for a
specified period in exchange for royalties
•Can be
•exclusive or nonexclusive
•used to protect intangible property
 Collaborative Strategies and Direct Investment

•Licensor and the licensee

•Benefits:
•Appealing to small companies that lack resources
•Faster access to the market
•Rapid penetration of the global markets
•Caveats of Licensing
•Other entry mode choices may be affected
•Licensee may not be committed
•Biggest danger is the risk of opportunism
•Licensee may become a future competitor
 Collaborative Strategies and Direct Investment

• Franchising: Granting the right to a foreign partner to use

an entire business system in exchange for fees and
royalties
• Franchising
•a specialized form of licensing
•includes providing an intangible asset and also operational
assistance on a continuing basis
• Companies can expand in foreign markets using individual
franchises, or by setting up a master franchisor which then
establishes sub-franchisees.

• Because the success of a franchise depends on product

and service standardization, high identification through
promotion, and effective cost controls, companies need to
be sure that operational modifications don’t compromise
what the company has to offer.
 Collaborative Strategies and Direct Investment

•Management contract
•A company is paid a fee to transfer management
personnel and administrative know-how abroad to
assist a company
•A company which wants to get management
assistance may pay for the required managerial
assistance when it believes another company can
better manage its operation.
•Foreign management contracts are used primarily
when the foreign company can manage better than
the owners
 Collaborative Strategies and Direct Investment

• Turnkey Contracting: Focal firms that finance and

implement all phases of a construction project & then hand
it over to foreign customers.
•One company contracts with another to build complete,
ready-to-operate facilities
•Most commonly performed by industrial-equipment,
construction, and consulting companies
•Then the contractor transfers project ownership [tangible
aspects (hardware) and intangible aspects (technological
knowledge)] upon completion.
•Often performed for a governmental agency
 Collaborative Strategies and Direct Investment

• Equity joint venture : When a focal firm creates and jointly

owns a new legal entity created through an equity
investment or pooling of assets
• A consortium involves more than two organizations
•Benefits:
•Higher rate of return and more control over the operations
•Creation of synergy
•Sharing of resources
•Access to distribution network
•Ease of Contact with local suppliers and government officials
•Caveats:
•Lack of control
•Lack of trust
•Conflicts arising over matters such as strategies, resource
allocation, transfer pricing, ownership of critical assets like
technologies and brand names
 Collaborative Strategies and Direct Investment

• Project based, non-equity venture: When focal

firms collaborate on a specific project without creating
a new entity
• Partners in a project-based, non-equity venture
are focal firms that collaborate through a project, with
a relatively narrow scope and a well-defined timetable,
without creating a new legal entity.
• Advantages: Partners pool resources and expertise to
perform some mutually beneficial business task, such
as joint R&D or marketing, but they do not invest
equity to form a new enterprise.
 Collaborative Strategies and Direct Investment

•Equity alliances
•An arrangement in which at least one of the
companies takes an ownership position in the
other
•The purpose of the equity ownership is to solidify
a collaborating contract, such as a supplier-buyer
contract, so that it is more difficult to break
•particularly if the ownership is large enough to secure
a board membership for the investing company it
solidifies collaboration.
Collaborative Strategies and Direct Investment:
Comparison

Collaborative Strategy and Complexity of Control

 Problems with
Collaborative Arrangements

•Problems with collaborative arrangements include

•Relative importance
•Divergent objectives
•Questions of control
•Comparative contributions and appropriations
•Culture clashes
•Differences in corporate cultures
 Managing International Collaboration

•Collaborative arrangements are dynamic

•The motivation for collaboration can change over
time because of changes in
•the company’s capabilities
•the external environment
•Companies need to continually reassess the fit
between collaboration and strategy to determine if
it still makes sense.
 Managing International Collaboration

Country Attractiveness/Company Strength Matrix

 Managing International Collaboration

•Potential collaborative partners should be

evaluated in terms of
•the resources they will supply
•their motivation
•Compatibility
•Trust is essential in collaborative
arrangements.
 Managing International Collaboration

•Contracts should address

•Whether the contract will be terminated if the parties
do not adhere to the directives
•What methods will be used to test for quality
•What geographic limitations should be placed on an
asset’s use
•Which company will manage which parts of the
operation
•What each company’s future commitments will be
•How each company will buy from, sell to, or
otherwise use intangible assets that result from the
arrangement
 Managing International Collaboration

•When collaborating with another company,

managers must
•Continue to monitor performance
•Assess whether to change the form of operations
•Develop competency in managing a portfolio of
arrangements
Managing International Collaboration
• Managers must also look for ways to improve performance.
Collaborative arrangement must overcome differences in a
number of areas such as:
– Country cultures that may cause partners to obtain and
evaluate information differently
– National differences in governmental policies, institutions, and
industry structures that constrain companies from operating as
they would prefer
– Corporate cultures that influence ideologies and values
underlying company practices that strain relationships among
companies
– Different strategic directions resulting from partners’ interests
that cause companies to disagree on objectives and
contributions
– Different management styles and organizational structures
that cause partners to interact ineffectively
 Non-Collaborative Foreign Equity Arrangements

• Foreign direct investment (FDI): The transfer of assets to

another country or the acquisition of assets in that country
• When investing in a foreign country, companies can either
acquire an existing facility, or build a new one. The latter
option is known as a greenfield investment (FDI).
The advantages of acquiring an existing operation include:
• Adding no further capacity to the market
• Avoiding start-up problems
• Easier financing at times
• Companies may choose to build a new firm if:
• No desired company is available for acquisition
• Acquisition will lead to carryover problems
• Acquisition is harder to finance