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MGT 490 CH 7 - International Strategy

Terms in this set (25)

Why are the 2 reasons why Globalization exist and what challenge exists?
Exists because of growing market capitalization due to:
1) International exchanges have increased
-->Trade in goods & services
-->Exchange of money, information, & ideas
2) Laws, rules, norms, values, and ideas are growing more similar across countries

Challenges include balance between developed and emerging markets
1) How to meet the needs of customers at different income levels?

*Firms target from the bottom to the top of the pyramid
Four elements of Michael Porter's Diamond of National Advantage
1) Factor Endowments
2) Demand Conditions
3) Related and Supporting Industries
4) Firm strategy, structure, & rivalry
What are the 3 aspects of Factor Endowments? What 3 conditions must exist for these factors (of production)?
Factor Endowments
-Land
-Labor
-Capital

These Factors of Production must be:
-Rare
-Valuable
-Difficult to imitate
-Rapidly & efficiently deployed

*The island of Japan is given as an example
What are Demand Conditions and how do they drive firms in that country to meet customer needs?
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 & service requirements

*Denmark is an example
How do Related & Supporting Industries help a firm?
Related and Supporting Industries help a firm manage inputs more efficiently:
-A competitive supplier base > reduces manufacturing costs
-Close working relationships with suppliers > allows for joint research & development
-Development of related industries >forces existing firms to practice cost control, product innovation, and better distribution methods

*example is the Italian footwear industry
What 3 factors affect a Firm's Strategy, Structure & Rivalry?
1) strong consumer demand
2) Strong supplier base
3) High new entrant potential from related industries

*example is the Indian software industry (has all 3) = very competitive
Domestic Rivalry leads to....
a search for new markets
Rivalry is a strong indicator of...
global competitive success
What 5 aspects motivate International Expansion, or for a firm to become a Multinational Firm?
1) Increase market size > thereby increasing/attaining economies of scale
2) Take advantage of arbitrage opportunities > in all stages of the value chain
--> can be applied to literally any factor of production
--> arbitrage is just buying something cheaper somewhere and selling higher elsewhere
3) Enhance a product's growth potential > reinvigorating the product life cycle
4) Optimize the location of value chain activity > enhances performance, reduces cost, reduces risk
5) Explore reverse innovation > design & manufacture products locally, export no-frills products to developed markets
What are some risks a Multinational Firm can encounter when expanding Internationally?
1) 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
2) Economic Risks: due to piracy and counterfeiting (usually using the firms trademark without permission)
3) Currency Risk: due to exchange fluctuations
-Affects cost of production and net profit
4) 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
-This comes from managements difficulty to make decisions in the context of foreign markets

*Corruption Risk (CPI index - 100 is very clean), structural risk, debt indicators, and access to capital are also mentioned
How does a firm manage Political Risk?
Managing political risk through:
-Market diversification
-Developing stakeholder coalitions
-Wooing key influences
-Putting key stakeholders on their boards
How does a firm manage Economic Risk?
-Outsourcing
-Offshoring
What is the difference between Outsourcing and Offshoring?
Outsourcing = using other firms to perform value-creating activities that were previously performed in-house. The firm may be perfectly capable of doing this activity but chooses to have someone else perform it for cost or quality reasons. Outsourcing can be to either a domestic or foreign firm.

Offshoring = shifting a value-creating activity from a domestic location to a foreign location. Value-creating activities should be performed in the location where the cost is lowest or where the quality is the best.
Pros & cons of Offshoring?
Pros:
-Lower wages, benefits, energy costs, regulatory costs, taxes

Cons:
-may be costly
-Hidden costs from offshoring include:
-->Higher total wage & indirect costs
-->Increased coordination costs
-->Increased inventory due to longer lead time
-->Reduced market responsiveness
-->Cost of protecting intellectual property
Strategies that favor global production and brands should...
Strategies that favor global products & brands should do the following:
-Standardize all products for all markets
-Reduce overall costs by spreading investments over a larger market

*"One size fits all" does NOT generally apply
What are the 4 International Strategies?
1) International Strategy
2) Global Strategy
3) Multidomestic Strategy
4) Transnational Strategy
International Strategy
The primary goal is worldwide exploitation of the parent firm's knowledge & capabilities.
-All sources of core competencies are centralized.
-Pressure for both local adaptation & low costs are rather low

Strengths:
1) Leverage and diffuse a firms knowledge and core competencies
2) Lower costs because of less need to tailor products and services
Weaknesses:
1) Limited ability to adapt to local markets
2) Inability to take advantage of new ideas and innovations occurring in local markets
Global Strategy
Is interested in LOWERING COSTS

Strengths:
1) Strong integration across various businesses
2) Standardization leads to higher economies of scale, which reduce costs
3) Help create uniform standards of quality throughout world
Weaknesses:
1) Limited ability to adapt to local markets
2) Concentration of activities may increase dependence on single facility
3) Single locations may lead to higher tariffs and transportation costs
Multidomestic Strategy
-Emphasizes DIFFERENTIATING products & services to adapt to local markets

Strengths:
1) Ability to adapt products and services to local market conditions
2) Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue
Weaknesses:
1) Decreased ability to realize cost savings through economies of scale
2) Greater difficulty transferring knowledge across countries
3) May lead to over adaptation as conditions change
Transnational Strategy
Seeks global competitiveness via TRADE-OFFS

Strengths:
1) Ability to attain economies of scale
2) Ability to adapt to local markets
3) Ability to locate activities in optimal locations
4) Ability to increase learning & knowledge flows
Weaknesses:
1) Unique challenges determining optimal location of activities to ensure cost and quality
2) Unique managerial challenges in fostering knowledge flows (firms must create mechanisms)
Alternatives to Globalization
1) Regionalization
-Distance still matters
-Commonalities of language, culture, economics, legal & political systems, and infrastructure all make a difference
2) Trading Blocs
-and free trade zones ease trade restrictions, taxes, & tariffs
eBay
eBay has successfully expanded into Europe & Latin America through joint ventures & acquisitions
-Appropriate partners allow quick adaptation to local needs
eBay has struggled in Asia
-Limited local market know-how, lack of innovative products & processes in the local market, centralized management style
Are these insurmountable local market differences?
A domestic corporation considering expanding into international markets for the first time will typically
consider implementing a low risk/low control strategy such as exporting.
Options for international market expansion include:
Exporting
Licensing or Franchising
Strategic Alliance or Joint Venture
Wholly-Owned Subsidiary

*These progress from top to bottom with increasing ownership and extent of investment/risk
Small and Medium Businesses should....
Small & Medium-sized Business Enterprises (SMEs) should engage in cross-border trade
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