Lecture 7 - PowerPoint Presentation

							International Strategies

Competing in Foreign Markets
         Useful References
• Thompson and Strickland Ch 5
• Fred David Ch 1
      International Strategy

• Organization can pursue international
  growth while pursuing other corporate
  growth strategies

• International growth issues
  – Advantages and drawbacks
  – General approach
  – Ways to enter a foreign market
      Why Expand into Foreign
             Markets
• Gain access to new customers
   – Offers potential for increased revenues
   – Particularly when domestic markets are mature or
     saturated
• Achieve lower costs and enhance firm’s
  competitiveness
   – Domestic sales volume is not large enough to fully
     capture economies of scale
   – Smaller European countries, eg Ireland grow has come
     from exports as domestic demand is insufficient to
     sustain growth
      Why Expand into Foreign
          Markets cont.
• To capitalise on its core competencies
   – A firm may be able to leverage its competencies in
     foreign countries as well as its domestic market, eg.
     Nokia
• To spread business risk across a wider market base
   – Spread business risk by operating in a number of
     countries rather than depending on its domestic market
     entirely, EG. Downturn in the Japanese economy
       Other Reasons for International
                 Diversity
Market-based                               Exploit cultural/
                                           geographic differences
Globalisation of markets & competition Cash in on differences in culture

Following customers                        Administrative differences
                                           Specific geographical/
                                           economic differences
Utilise strategic capabilities             Economic benefits
Broaden market size                        Economies of scale
Internationalise value-adding activities   Stabilisation of earnings across markets

Enhance knowledge
                      KEY INTERNATIONALISING
                      DECISIONS
Domestic or
International
Expansion

                Which
                International
                Markets

                                  How to Enter
                                  these Markets

                                                  Operationalising
     WHICH MARKETS TO
         CHOOSE
• Most text books advocate a logical and
  sequential process for choosing
  international markets
  – Geographical and cultural proximity
• In practice a number of approaches can be
  used
            Macro level Research (general     R
Filter 1
            market potential)
                                              E
                                              J

Filter 2     General market relating to       E
             product/service
                                              C
                                              T

Filter 3     Micro level Research (specific   E
             factors affecting the product)   D



 Filter 4     Target Markets



             Countries Priority List
Factors for Market Selection and Entry
• Macro-economic conditions
• Political environment
• Infrastructure
  – Transport and communication
  – Availability of local resources
  – Tariff and non-tariff trade barriers
• Cultural norms and social structures
Factors for Market Selection and Entry
• Political & legal risks
  – Sovereign risk
  – Absence of regulation and control
     • Protection of intellectual property
     • Corruption
  – International risk
  – Security risk
    Ways to Enter a Foreign Market

Exporting
Licensing
Franchising
Direct investment
Strategic Alliance
Joint Venture
 Entry Modes

                          Risk &
                          Return

LEVEL
                                               Direct
OF                                             Investment
INVOVE
MENT
                                     Joint Ventures   Control
                                     & S. A

                       Licensing &
                       Franchising

           Exporting



               Time
                   Exporting
• Indirect Exporting
  – Via a domestic client
  – Piggy backing
• Direct Export
  –   Via distributors
  –   Direct selling
  –   Mail order
  –   On-line
  Advantages & Disadvantages
• Advantages
  – Easiest and least costly way
  – Gain from local knowledge of agent or
    distributor
  – Relatively low investment costs
  – Internet access for small firms
                    Exporting
• Disadvantages
  –   Lower profit potential
  –   Loss of control over marketing
  –   Lack of feed back from market
  –   Identifying suitable agent/distributor
  –   Agency agreements of agent
  –   Transportation costs
                  Licensing
• An international licensing agreement grants the
  rights of a firm in the host country to either
  produce or sell a product or both in return for
  royalty payments (Deresky, 2000)
• Useful when a firm has neither the resources or
  capabilities to directly enter foreign markets
   – Patents
   – Trademarks
               Advantages
• Rapid entry to foreign markets
• Does not require large capital investment
• Reduces problems
  – Trade barriers
  – Foreign ownership issues
• Avoids committing resources in unstable,
  politically volatile countries
               Disadvantages
•   Creates a competitor
•   Control over licensee and product quality
•   Safeguarding IP
•   If the royalty potential is considerable
              Franchising
• One of the most rapidly growing methods of
  foreign market entry
• Often better suited to the global expansion
  of retail and services enterprises
  – EG. McDonalds. KFC, Hilton Hotels, Holiday
    Inn
      Franchising- advantages
• Rapid entry and market penetration can be
  achieved
• The franchisee bears most of the costs and
  risks of establishing in foreign locations
  – Franchiser bears costs of training, support and
    monitoring
    Franchising- Disadvantages
• The big problem the franchiser faces is
  maintaining quality control, standards and
  consistency
• Will the franchisee modify to the
  franchiser’s product?
             Joint Ventures
• Seeking a foreign partner with which to
  establish a new separate business entity
  owned jointly by the 2+ parents.
• Undertaking by the entities to achieve
  business goals through a collaborative effort
  and to share profits and losses by doing so.
         Joint Ventures- Types
• Dominant parent
  – A venture where one of the parents is clearly dominant
    in terms of size and market share
• Independent child
  – The joint subsidiary operates at arms length from the
    corporate parents
• Multi-parent
  – Where there are several parent companies, eg. Airbus
     Reasons for Joint Ventures
• To acquire market
  expertise/knowledge/distribution channels in
  unfamiliar overseas markets
• Expansion with limited outlay of capital.
• The risks and costs of international expansion are
  shared.
• Necessary to gain entry into certain markets,
  when, for example, government legislation
  requires local participation, eg. China
• To improve sales prospects, particularly in terms
  of government and public sector contracts
      Issues with Joint Ventures
• Conflicting objectives of partners
   – EG. Profit/dividend policy, sourcing, production and
     pricing issues
• Trade-off between the drive for control and the
  quest for additional resources (Stopford & Wells,
  1972)
• Lack of synergy
• High “divorce” rate
   – 45% judged as successful
   – 60% lasted longer than 4 years
   – 14% lasted more than 10 years
            Strategic Alliances
• Companies from different parts of the world have
  formed S.A.s to strengthen their mutual ability to
  serve whole continents and move toward global
  market participation
   – USA and Japanese firms forming S.A.s with European
     firms to enter the E.U with an eye to the emerging
     markets of the new states
• S.A.s are increasingly undertaken for strategic
  reasons to achieve competitive advantage in terms
  of technology and product development, cost
  reduction and marketing,
   – Examples, Rover/Honda, Volvo/Renault,
     Philips/Matsushita
       Types of Strategic Alliances
• Porter and Fuller (1986) suggest that strategic
  alliances can occur at any point along the value
  chain
   –   Technology development
   –   Operations and logistics
   –   Marketing sales and service
   –   Multiple activity
• Type X
   – Divide value chain activities among themselves, eg
     aircraft industry
• Type Y
   – Firms co-operate in the same value chain activities
      Motivation for Strategic
            Alliances
• Learning
  – Organisational
  – Technology
  – geographical
• Cost minimisation
  – Financial/marketing/research/sourcing
• Market positioning
  – Market access
  Issues with Strategic Alliances
• Managing relationship. Eg Northwest
  Airlines and KLM in Detroit and
  Amsterdam
• Implications of downside risk when the
  relationship fails, and how that affects the
  company’s value chain. eg. Honda/Rover
  – Suggests that firms need to have an exit
    strategy
  Issues with Strategic Alliances
• Rigidity of decision making : flexibility of
  response and policy changes could be more
  difficult as a result of international collaboration.
  Eg. BT and AT&T 8 months to find a CEO
• Hidden Agenda? Is one partner using the coalition
  to acquire the partner’s IP and expertise
• Dependability. S.A could prevent one partner from
  moving down the experience curve
    Guidelines for Successful S.A.s
•   Complementary
•   Agreement on Objectives
•   Compatible Strategies
•   Compatible cultures
•   Comparable rewards
•   Stakeholder blessing
•   Thorough and lengthy planning process
Foreign Direct Investment (FDI)
The control of manufacturing plants or other
   productive assets in the foreign market
   place through whole or part ownership
 – Via acquisition & mergers –dominant mode of
   FDI
 – Greenfield operation –Seagate, Ford in
   Valencia, Volkswagen/Skoda in Czech Rep
 – Equity buy-out – Toyota/General Motors
            Advantages of FDI
• Control of resources/capabilities
• Integration/coordination of activities across
  countries
• Acquisitions – rapid entry
• Greenfield – state of art and government finance
  try
• Attractiveness of host country
   – Low wages, lower Corp. tax, government subsidies
        Disadvantages of FDI
• Substantial investment – financial exposure
• Problems of integration/coordination of
  acquisitions
• Greenfield – time consuming and
  unpredictable cost
• Political and economic risk exposure
     International Mergers and
            Acquisitions
• Acquisitions and Mergers involve change in
  corporate ownership
• “Friendly” acquisition = agreed by
  management
• “Hostile” acquisition= contested by the
  targeted company’s management
 Reasons for International M&A
• Strategic objectives
  – Reinforce competitive position & achieve
    profits
• Corporate growth
  – Faster than by organic growth
• Pursuit of size and synergy and scale
  – Benefiting from resources and scale advantages
    that come with increased size
 Reasons for International M&A
• Market dominance, Defence of market
  share
  – Pursuing market power, eliminating
    competition
    Problems with International
              M&A
While the acquired and merged firms show
  +ve results in terms of size their share price
  and profitability have not had such +ve
  outcomes (Porter, 1987; Auerbach, 1988)
• Cost of acquisition –
  – price is often excessive -£1.6B Ford/Jaguar:
    £2.5B Nestle/Rowntree
  – -ve NPV results
    Problems with International
              M&A
• Management failure
  – Management has seen the acquisition as an end
    in itself, and has failed to manage the post
    acquisition integration
• Strategic mismatch- extends the company
  beyond the range of its core competencies
• Government anti-trust and competition
  policies
      Cultural Considerations
• Material culture – level of
  economic/technology development
• Language
• Aesthetics
• Education
• Religious beliefs
      Internationalising Issues
• The main issues in international expansion
  concern
• Cost
• Control
• Risk
• Return
• Resource allocation