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 firms 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 Broaden market size Internationalise value-adding activities Enhance knowledge Economic benefits Economies of scale Stabilisation of earnings across markets

KEY INTERNATIONALISING
Domestic or International Expansion

DECISIONS

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

Filter 1

Macro level Research (general market potential)

R E J

Filter 2

General market relating to product/service

E C T

Filter 3

Micro level Research (specific factors affecting the product)

E 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 OF INVOVE MENT

Direct Investment Joint Ventures & S. A Licensing & Franchising Exporting

Control

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 franchisers 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 companys 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 partners 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 companys 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