2. Session objectives
• Introduce the concept of strategy
• Discuss internationalisation and international strategy
• Understand the entry modes for internationalisation
• Porter’s concept of generic
strategies; cost leadership,
differentiation or focus
• Cost leadership: pursuit of
efficiencies that make the firm the
lowest cost in the industry
• Differentiation: offering something
different, extra, distinctively special,
• Focus: positions a firm within a
particular industry segment
4. Cost leadership
• Lean operations
• Economies of scale
• Ownership of technology
• Better access to raw materials and/or other
production factors (i.e. human capital)
• What examples of businesses that follow
this strategy can you think of?
• Must continuously improve productivity and
• Can be differentiated by tangible or intangible features
• What examples of each can you think of?
• Brand image
• Technology (access, payment options, upgrades)
• Better/unique/added features
• Superior customer service
• CSR performance
• Need to make imitation by competitors difficult
• Be willing and able to adapt to changing consumer
• Can often charge premium price
• What examples of businesses that follow this strategy
can you think of?
8. International decisions
of value chain
• What activities to do, where?
• Concentrated or dispersed dependent on advantages of
• Business environment (opportunity for investment,
incentives, ease of doing business)
• Cluster effects (opportunities to collaborate, learn
from, make use of competitor and supplementary
• Innovation (promotion and capacity of innovation in
• Labour costs
• Political risk; such as?
• Economies of scale
10. Choosing a Strategy
• The global standardization strategy focuses on increasing profitability
and profit growth by reaping the cost reductions that come from
economies of scale, learning effects, and location economies.
11. Choosing a Strategy
• The localization strategy focuses on
increasing profitability by customizing the
firm's goods or services so that they provide
a good match to tastes and preferences in
different national markets.
12. Choosing a Strategy
• The international strategy involves taking products first produced for
the domestic market and then selling them internationally with only
minimal local customization.
13. Choosing a Strategy
• The transnational strategy tries to
simultaneously: achieve low costs
through location economies,
economies of scale, and learning
effects & Differentiate the product
offering across geographic markets
to account for local differences.
• Foster a multidirectional flow of skills
between different subsidiaries in the
firm's global network of operations.
14. Market entry strategy
• What examples can you find for each?
• Exporting is a common first step in the international
expansion process for many manufacturing firms.
• Later, many firms switch to another mode to serve the
16. Management contract & Turnkey project
• An organization may pay for a
Management contract when it believes
another can manage its operation more
efficiently than it can.
• In a Turnkey project, the contractor
agrees to handle every detail of the
project for a foreign client, including the
training of operating personnel.
• Licensing agreement is an arrangement whereby a licensor grants the
rights to intangible property to the licensee for a specified time
period and receives a royalty fee in return.
• Intangible property includes patents, inventions, formulas, processes,
designs, copyrights, and trademarks.
• Franchising is a specialized form of licensing in which the franchisor
not only sells intangible properly to the franchisee, but also insists
that the franchisee agree to abide by strict rules as to how it does
• Franchising is used primarily by service firms.
19. Joint venture
• Joint venture is the establishment of a firm that is jointly owned by
two or more otherwise independent firms.
• Most joint ventures are 50:50 partnerships.
20. Wholly Owned Subsidiary
Firms can establish a wholly owned subsidiary in
a country by:
• Using an acquisition strategy
• Using a greenfield strategy - building a
subsidiary from the ground up
21. Born globals
• Evolutionary internationalisation
or born global?
• Technology (and internet
specifically) have contributed to
• What examples can you think of
where firms have operated
internationally from the outset?
• Choose an international company
• What was their internationalisation
• What entry strategy did they adopt?
• Were they a success?
• Now find 5 journal articles that
discuss international strategies,
internationalisation or market entry
modes for international firms
Introduce the concept of strategy & the value chain
In this chapter, we will learn about the decision of which products to make, where to make them & how to compete.
After that, we will look at how managers assess and enter foreign markets.
Value in economic terms is the difference between the cost of making a product and the price that customers are willing to pay for it. If you can sell product for more than the costs to make it, it generates profits, and
hence, creates value.
For instance, the iPhone 6. Technically, each unit costs approximately $200 in parts and labor. Apple also adds value through a strategy of differentiation with design, features, and marketing. Apple sells the iPhone 6 for $550, thereby generating $350 in gross value.
Value can be increased by 2 ways:
Adding value to a product so that customers are willing to pay more for it (differentiation strategy). The higher the value customers place on a firm's products, the higher the price the firm can charge for those products, and the greater the profitability of the firm.
Lowering costs - low cost strategy - profit goes to firms that create superior value by lowering the cost structure of the business.
An MNE implementing a cost leadership strategy aims to make a product at the lowest cost, relative to those by rivals, which attract to the largest number of customers.
Examples: Amazon, McDonald (US), IKEA, Walmart
Limitations: such as the price of inputs, physics of materials, or capacity for service.
A differentiation strategy is an approach businesses develop by providing customers with something unique, different and distinct from items their competitors may offer in the marketplace. The main objective of implementing a differentiation strategy is to increase competitive advantage.
Ex: Starbuck, Apple, Mercedes,..
Difficult to pursue both cost leadership and differentiation simultaneously. Some MNEs are able to offer low-cost & high-value products: Ex: Lexus delivers high-performance cars with features that offer greater value to price, than other luxury car brands.
Firms can increase growth by selling goods or services developed at home internationally.
The success of firms that expand internationally depends on the goods or services they sell, and on their core competencies (strength that competitors cannot match or imitate).
E.g: Toyota grew by developing products at home against local rivals in North America (Ford and GM). Toyota has a core competence in the production of cheap & reliable cars. It is able to produce high-quality, well-designed cars at a lower delivered cost than any other firm in the world. McDonald’s has a core competence in managing fast-food operations McDonald’s is famous for its international expansion strategy, which has taken the company into more than 120 nations.
When firms base each value creation activity at the location where economic, political, cultural conditions, and factor costs, are most beneficial, they realize location economies (the economies that arise from performing a value creation activity in the optimal location for that activity). Ex: United States - the production of computer software, and financial services (technology & economic factors); Switzerland - the production of precision instruments (skilled workforce); South Korea - the production of semiconductors; and Vietnam - the production of clothing (low labor costs and tax breaks).
By achieving location economies, firms can: Lower the costs of value creation and achieve a low cost position & Differentiate their product offering.
A firm's operations can be thought of a value chain composed of a series of distinct value creation activities & can be categorized into primary activities and support activities.
R&D: Online banking is an example of product development.
For services (banking or health care) “production” (operation) occurs when the service is delivered. For a retailer, “production” is concerned with selecting the merchandise, stocking the store.
The marketing function can increase the value that consumers perceive through brand positioning and advertising. E.g. Toyota 20k - Lexus 40k
Logistics are the activities necessary to get materials to a manufacturing facility, through the manufacturing process, and out through a distribution system to the user. The efficiency can significantly reduce cost
Service activity is to provide after-sale service and support. This function can create a perception of superior value. E.g: Caterpillar can get spare parts to any point in the world within 24 hours, thereby minimizing the amount of downtime.
The human resource function ensures the company has the right mix of skilled people & people are adequately trained, motivated, and compensated
systems for managing inventory, tracking sales, products, customer service inquiries. E
The choice of foreign markets will depend on their long run profit potential. Favorable markets are politically stable, developed/developing nations with free market systems, low inflation rates and debt. Markets are also more attractive when the product is not widely available and satisfies an unmet need (Netflix, Spotify). Firms that take advantage of location economies in different parts of the world, create a global system of value creation activities. Under this strategy, different stages of the value chain are Concentrate or dispersed to those locations around the globe where perceived value is maximized or the costs of value creation are minimized. (Location Advantages). Labor, capital, and resources costs are traditional determinants of location advantages.
Ex: Lenovo’s ThinkPad laptop computers (Lenovo purchased IBM’s personal computer operations in 2005). This product is designed in the United States. The case, keyboard, and hard drive are made in Thailand; the display screen and memory in South Korea; the wireless card in Malaysia; and the microprocessor in the United States. These components are then shipped to an assembly operation in China, where the product is assembled before being shipped to the United States for final sale. The marketing and sales strategy for North America is developed by Lenovo personnel in the United States.
Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product. Economies of scale comes from: Spreading fixed costs over a large volume, Utilizing production facilities more intensively and Increasing bargaining power with suppliers.
Ex: in the aircraft industry, where each time output of airframes was doubled, unit costs typically declined by 80 percent. The first 10 planes cost 100mil/each, the next 10 only cost 20mil.
Experience and Learning Effects are the cost savings that come from learning by doing. As the operation going, workers learn the most efficient ways to perform particular tasks, and manager learns how to manage the operation more efficiently.
Limitations: transportation costs, trade barriers, and political risks
Ex: After Donald Trump came into power in the U.S. during 2015, there have been several changes in the trading policies. There has been import regulations, primarily on Chinese goods, which caused a trade war situation, causing a business slowdown for Chinese companies.
E.g: the car industry in the 1990s moved toward the creation of “world cars.” The idea was that global companies such as General Motors, Ford, and Toyota would be able to sell the same basic vehicle.
McDonald’s hamburgers, Coca-Cola, Gap clothes, Apple iPhones, and Sony Playstation, all of which are sold globally as standardized products, are often cited as evidence of the increasing similarity of the global marketplace.
However, this argument may not hold in many consumer goods markets. North America, consumer electrical systems are based on 110 volts, whereas in some European countries, 240-volt systems are standard. In UK and Japan, people prefer traditional Tea over Coffee.
There are four basic strategies to compete in the international environment:
The suitability of each strategy depends on the pressures for cost reduction and local responsiveness in the industry.
Pressures for cost reductions:
In industries producing commodity type products that fill universal needs
Price is the main competitive weapon when major competitors are based in low-cost locations.
Consumers are powerful and face low switching costs.
Pressures for local responsiveness:
Differences in consumer tastes and preferences
Differences in traditional practices and infrastructure
The strategic goal is to pursue a low-cost strategy on a global scale.
People worldwide consume an increasing number of products increasingly in the same way. MNEs can produce low-cost, high-quality products share the same features and functionality, in order to develop the most compelling value proposition. The logic of standardization is straightforward. Repeatedly doing the same task the same way, by maximizing scale and learning effects, creates efficiencies that reduce costs without sacrificing quality. Concentrates value activities in a few, ideal locations; standardizes products to simplify design and support long production runs; uses aggressive pricing and direct distribution.
The global standardization strategy makes sense when:
There are strong pressures for cost reductions.
Demands for local responsiveness are minimal.
Limitations The cost sensitivity of the global strategy leaves MNEs little room to customize processes or products to local conditions; each change reduces efficiency.
The localization strategy makes sense when:
There are substantial differences across nations regarding consumer tastes and preferences
Where cost pressures are not too intense
The localization strategy helps subsidiaries build superior competitive positions in local markets on the strength of the parent’s global advantages.
Limits: Customizing products or processes requires different resource and capabilities, thereby increasing costs along the value chain. -> Firms pursuing a localization strategy still need to be efficient and, whenever possible, to capture some scale economies from their global reach.
Companies competing in markets marked by low pressures for global integration and local responsiveness have the flexibility to sell products designed for their home market, with minimal, if any, customization for foreign markets.
The international strategy transfers home-country-based competencies, such as production expertise, design skills, or brand power, to foreign markets.
Ex: Google, develops the core architecture of its web products and platforms at its headquarters in Mountain View, California. Local subsidiaries customize aspects of its web pages to deal with differences in languages.
Disadvantages: limited local adaptations -> miss opportunities, threats in foreign markets.
Limitation: Google, however, faces increasingly adept local rivals in South Korea and China, Naver and Baidu, respectively, whose native sensitivities to local search tendencies strongly position them in fast-growing Asian markets.
The international strategy makes sense when:
There are low-cost pressures
Low pressures for local responsiveness
Some companies successfully adopt an integrated cost leadership/differentiation strategy. requires managers standardize some activities while differentiating others.
The transnational strategy does not centralize authority in headquarters or decentralize it to local units. Instead, its advocates communication and collaboration between different units.
Successfully implementing the transnational strategy opens tremendous opportunities to optimize productivity, create value, and sustain competitiveness
The transnational strategy makes sense when:
Cost pressures are intense
Pressures for local responsiveness are intense
Limitations The transnational strategy is tough to direct, difficult to configure, and prone to shortfalls.
These many different ways to enter a foreign market. Managers need to consider the advantages and disadvantages of each entry mode
There are no “right” decisions when deciding how to enter, just decisions that are associated with different levels of risk and reward
Avoids the costs of establishing local manufacturing operations.
Helps firms achieve experience curve and location economies.
There may be lower-cost manufacturing locations.
High transport costs and tariffs can make it uneconomical agents in a foreign country.
An organization may pay for managerial assistance under a Management contract when it believes another can manage its operation more efficiently than it can, usually because the contractor has industry-specific capabilities. British Airport Authority (BAA) has these for airport administration, and it manages some airports in the United States, Italy, and Australia. common when host governments want foreign skill, but do not want foreign ownership.
In a Turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation. Turnkey projects are common in the chemical, pharmaceutical, petroleum, and metal industries. Manufacturers also sometimes provide turnkey services when they are disallowed to invest. The customer for a turnkey operation is often a governmental agency.
In May 2018, Nestle and Starbucks entered into a $7.15 billion coffee licensing deal. Nestle (the licensee) agreed to pay $7 billion in cash to Starbucks (the licensor) for exclusive rights to sell Starbucks’ products around the world through Nestle’s global distribution network. Additionally, Starbucks will receive royalties from the packaged coffees and teas sold by Nestle.
The licensing agreement provided Starbucks with the ability to drive brand recognition outside of its American operations through Nestle’s distribution networks. For Nestle, the company gained access to Starbucks’ products and strong brand image.
Advantages: do not have to bear the development costs and risks associated with entering a foreign market. Avoid barriers to investment. Firms with intangible property can capitalize on market opportunities.
avoid costs and risks of opening up a foreign market. can quickly build a global presence
It may inhibit the firm's ability to take profits out of one country to support competition in another. The geographic distance can make poor quality products difficult to detect.
The British luxury car manufacturers entered into a joint venture with the Chinese company Chery Jaguar Land Rover Automotive Company.
In 2006, Siemens AG of Germany and Nokia Corp of Finland formed a joint venture called Nokia Siemens Networks U.S.
Fuji Xerox is a joint venture between the Japanese Fujifilm Holdings and the American Xerox to develop, produce and sell xerographic and document-related products and services in the Asia-Pacific region.
PROS:They allow the firm to benefit from a local partner's knowledge of the host country. The costs and risks of opening a foreign market are shared with the partner.
CONS: Risks of giving technology control to partners. Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time.
The volume of cross-border acquisitions has been growing at a rapid rate for two decades. 60% percent of all FDI inflows have been in the form of mergers and acquisitions.
1998, When the German automobile company Daimler-Benz decided it needed a bigger presence in the U.S. automobile market, it did not build new factories, a process that would have taken years. Instead, it acquired the number three U.S. automobile company, Chrysler, and merged the two operations to form DaimlerChrysler ($40 billion)
The main advantages of Acquisitions:
They are quick to execute.
They enable firms to prevent their competitors acquisitions
Less risky than greenfield ventures
inadequate pre-acquisition screening & Overpays for the acquired firm
The cultures of the acquiring and acquired firm might clash
There is A study by KPMG (an accounting and management consulting company) looked at 700 large acquisitions. The study found that only 30 percent of these actually created value for the acquiring company, 31 percent destroyed value, and the remainder had little impact.
Daimler acquired Chrysler in 1998 for $40 billion, more than 40 percent over the market value. In 2006, according to the Times, Chrysler posted a loss of $1.5 billion and fell behind Toyota to fourth place in the American car market. IN 2007 sell to private equity firm.
The main advantage of a Greenfield venture is that it gives the firm a greater ability to build the kind of subsidiary company that it wants.
However, greenfield ventures are slower to establish & Greenfield ventures are also risky.
For most firms, the goal is to maximize the value of the firm for its owners, its shareholders (EPS)