Hitt M.A., Ireland R.D., Hoskisson R.E. Strategic Management: Competitiveness and Globalization: Concepts

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Part 2: Strategic Actions: Strategy Formulation

to the business units operating in each country. Historically, Unilever, a large European

consumer products firm, has had a highly decentralized approach to managing its

international operations. This approach allows regional managers considerable autonomy

to adapt the product offerings to fit the market needs. However, more recently it has

sought to have better coordination between its independent country subsidiaries and

develop a strong global brand presence.

Global Strategy

In contrast to a multidomestic strategy, a global strategy assumes more standardization

of products across country markets.

As a result, a global strategy is centralized and

controlled by the home office. The strategic business units operating in each country

are assumed to be interdependent, and the home office attempts to achieve integration

across these businesses.

The firm uses a global strategy to offer standardized products

across country markets, with competitive strategy being dictated by the home office.

Thus, a global strategy emphasizes economies of scale and offers greater opportunities to

take innovations developed at the corporate level or in one country and utilize them in

other markets.

Improvements in global accounting and financial reporting standards

are facilitating this strategy.

Although a global strategy produces lower risk, it may cause the firm to forgo growth

opportunities in local markets, either because those markets are less likely to be identi-

fied as opportunities or because the opportunities require that products be adapted to the

local market.

The global strategy is not as responsive to local markets and is difficult

to manage because of the need to coordinate strategies and operating decisions across

country borders. Yahoo! and eBay experienced these challenges when they moved into

specific Asian markets. For example, eBay was unsuccessful in both the Japanese and

Chinese markets when attempting to export its business model and approach from

Need for Global Integration

Need for Local Responsiveness

High

Low

Multidomestic

strategy

High

Low

Global

strategy

Transnational

strategy

Figure 8.3 International Corporate-Level Strategies

global strategy is an

international strategy

through which the ﬁ rm

offers standardized

products across country

markets, with competitive

strategy being dictated by

the home ofﬁ ce.

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Chapter 8: International Strategy

North America to these two countries. It has reentered China but Meg Whitman, former

CEO of eBay, suggested that she had no plans to reenter the Japanese market. Yahoo! has

had rough times in China, going through several CEOs and trying to find the right for-

mula to compete effectively in the Chinese market.

Also, as the Opening Case indicates,

Google has had difficulty penetrating foreign markets such as China and competing

against local competitors such as Baidu.

Achieving efficient operations with a global strategy requires sharing resources and

facilitating coordination and cooperation across country boundaries, which in turn

require centralization and headquarters control. Furthermore, research suggests that

the performance of the global strategy is enhanced if it deploys in areas where regional

integration among countries is occurring, such as the European Union.

Many Japanese

firms have successfully used the global strategy.

CEMEX is the third largest cement company in the world, behind France’s Lafarge

and Switzerland’s Holcim, and is the largest producer of ready mix, a prepackaged prod-

uct that contains all the ingredients needed to make localized cement products.

CEMEX has strong market power in the Americas as well as in Europe. CEMEX

serves customers in more than 50 countries with more than 50,000 employees globally.

Because CEMEX pursues a global strategy effectively, its centralization process has facili-

tated the integration of several businesses it acquired in the United States, Europe, and

Asia. To integrate its businesses globally, CEMEX uses the Internet to improve logis-

tics and manage an extensive supply network, thereby increasing revenue and reducing

costs. Connectivity between the operations in different countries and universal standards

dominates its approach. However, because of its recent acquisition of Ringer, a large

Australian cement producer, it took on too much debt during the downturn and has had

a very difficult time meeting its debt obligations.

Because of increasing global competition

and the need to be cost efficient while simultaneously providing high-quality differ-

entiated products, a number of firms have begun to pursue the transnational strategy,

which is described next.

Transnational Strategy

A transnational strategy is an international strategy through which the firm seeks to

achieve both global efficiency and local responsiveness. Realizing these goals is dif-

ficult: One requires close global coordination while the other requires local flexibil-

ity. “Flexible coordination”—building a shared vision and individual commitment

through an integrated network—is required to implement the transnational strategy.

Such integrated networks allow a firm to manage its connections with customers, sup-

pliers, partners, and other parties more efficiently rather than using arm’s-length trans-

actions.

The transnational strategy is difficult to use because of its conflicting goals

(see Chapter 11 for more on the implementation of this and other corporate-level

international strategies). On the positive side, the effective implementation of a trans-

national strategy often produces higher performance than does the implementation of

either the multidomestic or global international corporate-level strategies, although it

is difficult to accomplish.

Transnational strategies are challenging to implement but are becoming increasingly

necessary to compete in international markets. The growing number of global competitors

heightens the requirement to hold costs down. However, the increasing sophistication of

markets with greater information flow (e.g., based on the diffusion of the Internet) and

the desire for specialized products to meet consumers’ needs pressures firms to differen-

tiate and even customize their products in local markets. Differences in culture and insti-

tutional environments also require firms to adapt their products and approaches to local

environments. However, some argue that most multinationals pursue more regional

strategies and as such transnational strategies and structures may not be as necessary as

once thought.

A transnational

strategy is an

international strategy

through which the ﬁ rm

seeks to achieve both

global efﬁ ciency and

local responsiveness.

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Environmental Trends

Although the transnational strategy is difficult to implement, emphasis on global

efficiency is increasing as more industries begin to experience global competition. To

add to the problem, an increased emphasis on local requirements means that global

goods and services often demand some customization to meet government regulations

within particular countries or to fit customer tastes and preferences. In addition, most

multinational firms desire coordination and sharing of resources across country markets

to hold down costs, as illustrated by the CEMEX example.

Furthermore, some products

and industries may be more suited than others for standardization across country

borders.

As a result, some large multinational firms with diverse products employ a

multidomestic strategy with certain product lines and a global strategy with others.

Many multinational firms may require this type of flexibility if they are to be strategically

competitive, in part due to trends that change over time. Two important trends are the

liability of foreignness, which has increased since the terrorist attacks and the war in Iraq,

and regionalization.

Liability of Foreignness

The dramatic success of Japanese firms such as Toyota and Sony in the United States and

other international markets in the 1980s was a powerful jolt to U.S. managers and awak-

ened them to the importance of international competition in markets that were rapidly

becoming global markets. In the twenty-first century, China, India, Brazil, and Russia rep-

resent major international market opportunities for firms from many countries, including

the United States, Japan, Korea, and the European Union.

However, there are legiti-

mate concerns about the relative attractiveness of global strategies, due to the extra costs

incurred to pursue internationalization, or the liability of foreignness relative to domes-

tic competitors in a host country.

This is illustrated by the experience of Walt Disney

Company in opening theme parks in foreign countries. For example, Disney suffered

“lawsuits in France, at Disneyland Paris, because of the lack of fit between its transferred

personnel policies and the French employees charged to enact them.”

Disney executives

learned from this experience in building the firm’s newest theme park in Hong Kong.

Research shows that global strategies are not as prevalent as they once were and are

still difficult to implement, even when using Internet-based strategies.

In addition, the

amount of competition vying for a limited amount of resources and customers can limit

firms’ focus to regional rather than global markets. A regional focus allows firms to mar-

shal their resources to compete effectively in regional markets rather than spreading their

limited resources across many international markets.

As such, firms may focus less on truly global markets and more on regional adapta-

tion. Although parallel developments in the Internet and mobile telecommunication

facilitate communications across the globe, as noted earlier, the implementation of Web-

based strategies also requires local adaptation. The globalization of businesses with local

strategies is demonstrated by the strategy that Google is using (see the Opening Case) by

developing an online music download business in China.

Regionalization

Regionalization is a second trend that has become more common in global markets.

Because a firm’s location can affect its strategic competitiveness,

it must decide whether

to compete in all or many global markets, or to focus on a particular region or regions.

Competing in all markets provides economies that can be achieved because of the com-

bined market size. Research suggests that firms that compete in risky emerging markets

can also have higher performance.

However, a firm that competes in industries where the international markets differ

greatly (in which it must employ a multidomestic strategy) may wish to narrow its focus

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Chapter 8: International Strategy

to a particular region of the world. In so doing, it can better understand the cultures,

legal and social norms, and other factors that are important for effective competition

in those markets. For example, a firm may focus on Far East markets only rather than

competing simultaneously in the Middle East, Europe, and the Far East. Or the firm may

choose a region of the world where the markets are more similar and some coordination

and sharing of resources would be possible. In this way, the firm may be able not only to

better understand the markets in which it competes, but also to achieve some economies,

even though it may have to employ a multidomestic strategy. For instance, research sug-

gests that most large retailers are better at focusing on a particular region rather than

being truly global.

Firms commonly focus much of their international market entries

into countries adjacent to their home country, which might be referred to as their home

region.

Countries that develop trade agreements to increase the economic power of their

regions may promote regional strategies. The European Union (EU) and South America’s

Organization of American States (OAS) are country associations that developed trade

agreements to promote the flow of trade across country boundaries within their respective

regions.

Many European firms acquire and integrate

their businesses in Europe to better coordinate pan-

European brands as the EU creates more unity in

European markets. With this process likely to continue

as new countries are added to the agreement, some

international firms may prefer to pursue regional

strategies versus global strategies because the size of the

market is increasing.

The North American Free Trade Agreement

(NAFTA), signed by the United States, Canada, and

Mexico, facilitates free trade across country borders

in North America. NAFTA loosens restrictions

on international strategies within this region and

provides greater opportunity for regional international

strategies.

NAFTA does not exist for the sole purpose

of U.S. businesses moving across its borders. In fact,

Mexico is the number two trading partner of the

United States, and NAFTA greatly increased Mexico’s

exports to the United States. Research suggests that

managers of small- and medium-sized firms are

influenced by the strategy they implement (those

with a differentiation strategy are more positively

disposed to the agreement than are those pursuing a

cost leadership strategy) and by their experience and

rivalry with exporting firms.

Most firms enter regional markets sequentially, beginning in markets with which they

are more familiar. They also introduce their largest and strongest lines of business into

these markets first, followed by their other lines of business once the first lines achieve

success. They also usually invest in the same area as their original investment location.

However, research also suggests that the size of the market and industry characteristics

can influence this decision.

After the firm selects its international strategies and decides whether to employ them

in regional or world markets, it must choose a market entry mode.

Choice of International Entry Mode

International expansion is accomplished by exporting products, participating in licensing

arrangements, forming strategic alliances, making acquisitions, and establishing new

Orlando Sierra/AFP/Getty Images

US Secretary of State

Hillary Clinton and

Hondoran President

Manuel Zelaya meet with

reporters following the

2009 general assembly

meeting of the OAS in

Hondoras.

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Part 2: Strategic Actions: Strategy Formulation

wholly owned subsidiaries. These means of entering international markets and their

characteristics are shown in Table 8.1. Each means of market entry has its advantages

and disadvantages. Thus, choosing the appropriate mode or path to enter international

markets affects the firm’s performance in those markets.

Exporting

Many industrial firms begin their international expansion by exporting goods or services

to other countries.

Exporting does not require the expense of establishing operations in

the host countries, but exporters must establish some means of marketing and distrib-

uting their products. Usually, exporting firms develop contractual arrangements with

host-country firms.

The disadvantages of exporting include the often-high costs of transportation and tar-

iffs placed on some incoming goods. Furthermore, the exporter has less control over the

marketing and distribution of its products in the host country and must either pay the

distributor or allow the distributor to add to the price to recoup its costs and earn a profit.

As a result, it may be difficult to market a competitive product through exporting

or to provide a product that is customized to each international market.

However,

evidence suggests that cost leadership strategies enhance the performance of exports in

developed countries, whereas differentiation strategies with larger scale are more suc-

cessful in emerging economies.

Firms export mostly to countries that are closest to their facilities because of the lower

transportation costs and the usually greater similarity between geographic neighbors. For

example, United States’ NAFTA partners Mexico and Canada account for more than half

of the goods exported from Texas. The Internet has also made exporting easier. Even small

firms can access critical information about foreign markets, examine a target market,

research the competition, and find lists of potential customers.

Governments also use the

Internet to facilitate applications for export and import licenses. Although terrorist threat

is likely to slow its progress, high-speed technology is still the wave of the future.

Small businesses are most likely to use the exporting mode of international entry; up

to 50 percent of small U.S. firms will be involved in international trade by 2018, most of

them through export.

Currency exchange rates are one of the most significant problems

faced by small businesses. The United States in recent years has supported a weak dol-

lar against the euro, which makes imports to the United States more expensive to U.S.

consumers and U.S. goods less costly to foreign buyers, thus providing some economic

relief for U.S. exporters.

Licensing

Licensing is an increasingly common form of organizational network, particularly among

smaller firms.

A licensing arrangement allows a foreign company to purchase the right

Type of Entry Characteristics

Exporting High cost, low control

Licensing Low cost, low risk, little control, low returns

Strategic alliances Shared costs, shared resources, shared risks, problems of integration

(e.g., two corporate cultures)

Acquisition Quick access to new market, high cost, complex negotiations,

problems of merging with domestic operations

New wholly owned

subsidiary

Complex, often costly, time consuming, high risk, maximum control,

potential above-average returns

Table 8.1 Global Market Entry: Choice of Entry

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Chapter 8: International Strategy

to manufacture and sell the firm’s products within a host country or set of countries.

The licensor is normally paid a royalty on each unit produced and sold. The licensee

takes the risks and makes the monetary investments in facilities for manufacturing, mar-

keting, and distributing the goods or services. As a result, licensing is possibly the least

costly form of international expansion.

China is a large and growing market for cigarettes, while the U.S. market is shrinking

due to health concerns. But U.S. cigarette firms have had trouble entering the Chinese

market because state-owned tobacco firms have lobbied against such entry. As such, ciga-

rette company Philip Morris International (PMI), which was separated from its former

parent company Altria, had an incentive to form a deal with these state-owned firms.

Such an agreement provides the state-owned firms access to the most famous brand in the

world, Marlboro. Accordingly, both the Chinese firms and PMI have formed a licensing

agreement to take advantage of the opportunity as China opens its markets more fully.

Because it is a licensing agreement rather than a foreign direct investment by PMI,

China maintains control of the distribution. However, the Chinese state-owned tobacco

monopoly, as part of the agreement, also gets to have PMI’s help to distribute its own

brands in select foreign markets. “The question is whether it can pluck three cigarette

brands—RGD, Harmony and Dubliss—from relative obscurity and elevate them to an

international, or at least regional, presence.”

Licensing is also a way to expand returns based on prior innovations.

Even if product

life cycles are short, licensing may be a useful tool. For instance, because the toy industry

faces relentless change and unpredictable buying patterns, licensing is used and contracts

are often completed in foreign markets where labor may be less expensive.

Google, as

the Opening Case illustrates, facilitated license agreements with the top four music pro-

ducers in support of its strategy to gain more market share from Baidu in China.

Licensing also has disadvantages. For example, it gives the firm little control over

the manufacture and marketing of its products in other countries. Thus, license deals

must be structured properly.

In addition, licensing provides the least potential returns,

because returns must be shared between the licensor and the licensee. Additionally, the

international firm may learn the technology and produce and sell a similar competitive

product after the license expires. Komatsu, for example, first licensed much of its tech-

nology from International Harvester, Bucyrus-Erie, and Cummins Engine to compete

against Caterpillar in the earthmoving equipment business. Komatsu then dropped these

licenses and developed its own products using the technology it had gained from the

U.S. companies.

Like most global hotel chains, Starwood Hotels & Resorts Worldwide

Inc. uses a franchise licensing arrangement and does not own most of its hotels. While

focusing on other brands, it has let its Sheraton brand slip in quality. Given the current

economic downturn, it is going to be difficult to get the owners to invest in needed

design improvements and upgrades, especially given the owner differences in varying

geographic markets.

100

Thus licensing can also lead to inflexibilities, and as such it is

important that a firm think ahead and consider the consequences of each entry, espe-

cially in international markets.

101

Strategic Alliances

In recent years, strategic alliances have become a popular means of international

expansion.

102

Strategic alliances allow firms to share the risks and the resources required to

enter international markets.

103

Moreover, strategic alliances can facilitate the development

of new core competencies that contribute to the firm’s future strategic competitiveness.

104

As explained in the Opening Case, GM formed a joint venture with SAIC. This ven-

ture produced Buick and Cadillac automobiles for the Chinese market. The alliance

has been highly successful for both firms. Similar to this example, most international

strategic alliances are formed with a host-country firm that knows and understands the

competitive conditions, legal and social norms, and cultural idiosyncrasies of the coun-

try, which helps the expanding firm manufacture and market a competitive product.

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Part 2: Strategic Actions: Strategy Formulation

Often, firms in emerging economies want to form international alliances and ventures

to gain access to sophisticated technologies that are new to them. Gaining access to

new technologies and markets is one of ZTE’s goals in seeking alliances with the mobile

phone systems of Sprint, AT&T, and Verizon. ZTE, as introduced in the Opening Case,

is a telecommunications network gear producer; it also produces mobile phones. It now

is working on agreements with these three phone companies to produce “smartphones”

for 3G and 4G systems to advance its product portfolio.

105

This type of arrangement can

also benefit the non-emerging economy firm, in that it gains access to a new market and

does not have to pay tariffs to do so (because it is partnering with a local company). In

return, the host-country firm may find its new access to the expanding firm’s technology

and innovative products attractive.

Each partner in an alliance brings knowledge or resources to the partnership. Indeed,

partners often enter an alliance with the purpose of learning new capabilities.

106

Common

among those desired capabilities are technological

skills. However, for technological knowledge to

be transferred in an alliance usually requires trust

between the partners.

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Managing these expecta-

tions can facilitate improved performance.

The alliance between GM and SAIC has been

successful over the years because of the way it is

managed. In fact, both firms are pleased with the

outcomes. Research suggests that company execu-

tives need to know their own firm well, understand

factors that determine the norms in different coun-

tries, know how the firm is seen by other partners

in the venture, and learn to adapt while remaining

consistent with their own company cultural val-

ues. Such a multifaceted and versatile approach has

helped the GM and SAIC alliance succeed.

Not all alliances are successful; in fact, many fail.

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The primary reasons for failure

include incompatible partners and conflict between the partners. International strategic

alliances are especially difficult to manage. Several factors may cause a relationship to

sour. Trust between the partners is critical and is affected by at least four fundamental

issues: the initial condition of the relationship, the negotiation process to arrive at an

agreement, partner interactions, and external events.

109

Trust is also influenced by the

country cultures involved in the alliance or joint venture.

110

Research has shown that equity-based alliances, over which a firm has more control,

tend to produce more positive returns.

111

(Strategic alliances are discussed in greater depth

in Chapter 9.) However, if trust is required to develop new capabilities in a research col-

laboration, equity can serve as a barrier to the necessary relationship building. If conflict

in a strategic alliance or joint venture is not manageable, an acquisition may be a better

option.

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Alliances can also lead to an acquisition, which is discussed next.

Acquisitions

As free trade has continued to expand in global markets, cross-border acquisitions have

also been increasing significantly. In 2008, cross-border acquisitions comprised about

40 percent of all acquisitions completed worldwide, down from 45 percent in previ-

ous years.

113

As explained in Chapter 7, acquisitions can provide quick access to a new

market. In fact, acquisitions often provide the fastest and the largest initial international

expansion of any of the alternatives.

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Thus, entry is much quicker than by other modes.

For example, Wal-Mart entered Germany and the United Kingdom by acquiring local

firms. Later, Wal-Mart withdrew from Germany.

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Although acquisitions have become a popular mode of entering international markets,

they are not without costs. International acquisitions carry some of the disadvantages

ZTE Corporation,

one of the largest Chinese

telecommunication

equipment manufacturers,

has set the goal of

becoming the third

largest global provider of

handsets by 2014 based

on sales of its newly

unveiled portfolio of

smartphones and other

wireless devices.

Xinhua /Landov

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Chapter 8: International Strategy

of domestic acquisitions (see Chapter 7). In addition, they can be expensive and also

often require debt financing, which carries an extra cost. International negotiations

for acquisitions can be exceedingly complex and are generally more complicated than

domestic acquisitions. For example, acquisitions are being used by firms in emerging

economies to enter developed economies. China has been buying firms in foreign

countries that have assets in natural resources. For instance, China Minmetals, a state-

owned mining firm, tried to acquire Oz Minerals, the world’s second largest zinc miner

based in Australia. However, this acquisition, like many others, has been opposed by the

government because of the potential for a sovereign power to take control of important

natural resources.

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Interestingly, acquirers make fewer acquisitions in countries with significant corruption.

They choose to use international joint ventures instead. However, these ventures fail

more often, although this is moderated by the acquiring firms’ past experience with such

deals. When acquisitions are made in such countries, acquirers commonly pay smaller

premiums to buy the target firms.

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Dealing with the legal and regulatory requirements in the target firm’s country and

obtaining appropriate information to negotiate an agreement are frequent problems.

Finally, the merging of the new firm into the acquiring firm is often more complex than

in domestic acquisitions. The acquiring firm must deal not only with different corporate

cultures, but also with potentially different social cultures and practices.

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These

differences make the integration of the two firms after the acquisition more challenging;

it is difficult to capture the potential synergy when integration is slowed or stymied

because of cultural differences.

119

Therefore, while international acquisitions have been

popular because of the rapid access to new markets they provide, they also carry with

them important costs and multiple risks.

SAIC acquired assets of the MG Rover Group, the British auto producer, which was

insolvent at the time. This acquisition gave the Chinese firm an entry point into Europe

and an opportunity to establish its own brand through the MG Rover label. SAIC previ-

ously considered a joint venture but decided to make the acquisition bid, worth $104

million. However, SAIC experienced formidable government opposition in the United

Kingdom and had to clear extra regulatory hurdles to receive approval. By 2008 it had not

produced one of the MG roadsters that it had intended because of “quality issues.”

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New Wholly Owned Subsidiary

The establishment of a new wholly owned subsidiary is referred to as a greenfield

venture.

The process of creating such ventures is often complex and potentially costly,

but it affords maximum control to the firm and has the most potential to provide

above-average returns. This potential is especially true of firms with strong intangible

capabilities that might be leveraged through a greenfield venture.

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A firm maintains

full control of its operations with a greenfield venture. More control is especially

advantageous if the firm has proprietary technology. Research also suggests that “wholly

owned subsidiaries and expatriate staff are preferred” in service industries where

“close contacts with end customers” and “high levels of professional skills, specialized

know-how, and customization” are required.

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Other research suggests that greenfield

investments are more prominent where physical capital-intensive plants are planned and

that acquisitions are more likely preferred when a firm is human capital intensive—that

is, where a strong local degree of unionization and high cultural distance would cause

difficulty in transferring knowledge to a host nation through a greenfield approach.

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The risks are also high, however, because of the costs of establishing a new business

operation in a new country. The firm may have to acquire the knowledge and expertise

of the existing market by hiring either host-country nationals, possibly from competi-

tors, or through consultants, which can be costly. Still, the firm maintains control over

the technology, marketing, and distribution of its products. Furthermore, the company

must build new manufacturing facilities, establish distribution networks, and learn and

The establishment of

a new wholly owned

subsidiary is referred

to as a greenﬁ eld

venture.

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Part 2: Strategic Actions: Strategy Formulation

implement appropriate marketing strategies to compete in the new market.

124

Research

also suggests that when the country risk is high, firms prefer to enter with joint ventures

instead of greenfield investments in order to manage the risk. However, if they have

previous experience in a country, they prefer to use a wholly owned greenfield venture

rather than a joint venture.

125

The globalization of the air cargo industry has implications for companies such as

UPS and FedEx. The impact of this globalization is especially pertinent to China and

the Asia Pacific region. China’s air cargo market is expected to grow 11 percent per year

through 2023. Accordingly, in 2008, both UPS and FedEx opened new hub operations

in Shanghai and Gangzhou, respectively; each firm has about 6,000 employees in China.

These hubs facilitated their distribution and logistics business during the Olympics in

Beijing. These investments are wholly owned because these firms need to maintain the

integrity of their IT and logistics systems in order to maximize efficiency. Greenfield

ventures also help the firms to maintain the proprietary nature of their systems.

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Dynamics of Mode of Entry

A firm’s mode of entry into international markets is affected by a number of factors.

127

Initially, market entry is often achieved through export, which requires no foreign

manufacturing expertise and investment only in distribution. Licensing can facilitate the

product improvements necessary to enter foreign markets, as in the Komatsu example.

Strategic alliances have been popular because they allow a firm to connect with an

experienced partner already in the targeted market. Strategic alliances also reduce risk

through the sharing of costs. Therefore, all three modes—export, licensing, and strategic

alliance—are good tactics for early market development. Also, the strategic alliance is

often used in more uncertain situations, such as an emerging economy where there is

significant risk, such as Venezuela or Colombia.

128

However, if intellectual property rights

in the emerging economy are not well protected, the number of firms in the industry is

growing fast, and the need for global integration is high, a joint venture or wholly owned

subsidiary entry mode is preferred.

129

To secure a stronger presence in international markets, acquisitions or greenfield

ventures may be required. Aerospace firms Airbus and Boeing have used joint ventures,

especially in large markets, to facilitate entry, while military equipment firms such as Thales

SA have used acquisitions to build a global presence. Japanese auto manufacturers, such

as Toyota, have gained a presence in the United States through both greenfield ventures

and joint ventures. Because of Toyota’s highly efficient manufacturing process, it wants

to maintain control over its auto manufacturing when possible. It has engaged in a joint

venture in the United States with General Motors,

130

but most of its manufacturing facilities

are greenfield investments. It opened a new plant in Canada in 2008 and plans on opening a

new plant in Mississippi in 2010, although this project may be delayed or postponed given

the economic downturn.

131

Therefore, Toyota uses some form of foreign direct investment

(e.g., greenfield ventures and joint ventures) rather than another mode of entry (although

it may use exporting in new markets as it did in China). Both acquisitions and greenfield

ventures are likely to come at later stages in the development of an international strategy.

Large diversified business groups, often found in emerging economies, not only gain

resources through diversification but also have specialized abilities in managing differ-

ences in inward and outward flows of foreign direct investment.

132

For instance, in India

such groups have facilitated the development of a thriving pharmaceutical industry.

133

Thus, to enter a global market, a firm selects the entry mode that is best suited to the

situation at hand. In some instances, the various options will be followed sequentially,

beginning with exporting and ending with greenfield ventures. In other cases, the firm

may use several, but not all, of the different entry modes, each in different markets.

The decision regarding which entry mode to use is primarily a result of the industry’s

competitive conditions, the country’s situation and government policies, and the firm’s

unique set of resources, capabilities, and core competencies.

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Chapter 8: International Strategy

Strategic Competitive Outcomes

After its international strategy and mode of entry have been selected, the firm turns its

attention to implementation issues (see Chapter 11). Implementation is highly impor-

tant, because international expansion is risky, making it difficult to achieve a competitive

advantage (see Figure 8.1). The probability the firm will be successful with an interna-

tional strategy increases when it is effectively implemented.

International Diversification and Returns

Firms have numerous reasons to diversify internationally.

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International diversification

is a strategy through which a firm expands the sales of its goods or services across the

borders of global regions and countries into different geographic locations or markets.

Because of its potential advantages, international diversification should be related positively

to firms’ returns. Research has shown that, as international diversification increases, firms’

returns decrease initially but then increase quickly as firms learn to manage international

expansion.

135

In fact, the stock market is particularly sensitive to investments in interna-

tional markets. Firms that are broadly diversified into multiple international markets usu-

ally achieve the most positive stock returns, especially when they diversify geographically

into core business areas.

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Many factors contribute to the positive effects of international

diversification, such as private versus government ownership, potential economies of scale

and experience, location advantages, increased market size, and the opportunity to stabilize

returns. The stabilization of returns helps reduce a firm’s overall risk.

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All of these out-

comes can be achieved by smaller and newer ventures, as well as by larger and established

firms.

Toyota has found that international diversification allows it to better exploit its core

competencies, because sharing knowledge resources across subsidiaries can produce

synergy. Also, a firm’s returns may affect its decision to diversify internationally. For

example, poor returns in a domestic market may encourage a firm to expand interna-

tionally in order to enhance its profit potential. In addition, internationally diversified

firms may have access to more flexible labor markets, as the Japanese do in the United

States, and may thereby benefit from scanning international markets for competition and

market opportunities. Also, through global networks with assets in many countries, firms

can develop more flexible structures to adjust to changes that might occur. “Offshore

outsourcing” has created significant value-creation opportunities for firms engaged in

it, especially as firms move into markets with more flexible labor markets. Furthermore,

offshoring increases exports to firms that receive the offshoring contract.

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International Diversification and Innovation

In Chapter 1, we indicated that the development of new technology is at the heart of strate-

gic competitiveness. As noted in Porter’s model (see Figure 8.2), a nation’s competitiveness

depends, in part, on the capacity of its industry to innovate. Eventually and inevitably, com-

petitors outperform firms that fail to innovate and improve their operations and products.

Therefore, the only way to sustain a competitive advantage is to upgrade it continually.

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International diversification provides the potential for firms to achieve greater returns on

their innovations (through larger or more numerous markets) and reduces the often substantial

risks of R&D investments. Therefore, international diversification provides incentives for firms

to innovate. Additionally, the firm uses its primary resources and capabilities to diversify inter-

nationally and thus earn further returns on these capabilities (e.g., capability to innovate).

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In addition, international diversification may be necessary to generate the resources

required to sustain a large-scale R&D operation. An environment of rapid technologi-

cal obsolescence makes it difficult to invest in new technology and the capital-intensive

operations necessary to compete in this environment. Firms operating solely in domestic

markets may find such investments difficult because of the length of time required to

International

diversiﬁ cation is

a strategy through

which a ﬁ rm expands

the sales of its

goods or services

across the borders of

global regions and

countries into different

geographic locations

or markets.