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International Strategies

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International Strategies Competing in Foreign Markets Useful References Thompson and Strickland Ch 5 Fred David Ch 1 Why Expand into Foreign Markets Gain access to ... – PowerPoint PPT presentation

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Title: International Strategies


1
International Strategies
  • Competing in Foreign Markets

2
Useful References
  • Thompson and Strickland Ch 5
  • Fred David Ch 1

3
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

4
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

5
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

6
Other Reasons for International Diversity
7
KEY INTERNATIONALISING DECISIONS
Domestic or International Expansion
Which International Markets
How to Enter these Markets
Operationalising
8
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

9
Macro level Research (general market potential)
R E J E C T E D
Filter 1
General market relating to product/service
Filter 2
Micro level Research (specific factors affecting
the product)
Filter 3
Filter 4
Target Markets
Countries Priority List
10
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

11
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

12
Ways to Enter a Foreign Market
  • Exporting
  • Licensing
  • Franchising
  • Direct investment
  • Strategic Alliance
  • Joint Venture

13
Entry Modes
Risk Return
LEVEL OF INVOVEMENT
Direct Investment
Joint Ventures S. A
Control
Licensing Franchising
Exporting
Time
14
Exporting
  • Indirect Exporting
  • Via a domestic client
  • Piggy backing
  • Direct Export
  • Via distributors
  • Direct selling
  • Mail order
  • On-line

15
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

16
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

17
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

18
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

19
Disadvantages
  • Creates a competitor
  • Control over licensee and product quality
  • Safeguarding IP
  • If the royalty potential is considerable

20
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

21
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

22
Franchising- Disadvantages
  • The big problem the franchiser faces is
    maintaining quality control, standards and
    consistency
  • Will the franchisee modify to the franchisers
    product?

23
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.

24
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

25
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

26
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

27
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

28
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

29
Motivation for Strategic Alliances
  • Learning
  • Organisational
  • Technology
  • geographical
  • Cost minimisation
  • Financial/marketing/research/sourcing
  • Market positioning
  • Market access

30
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

31
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 ATT 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

32
Guidelines for Successful S.A.s
  • Complementary
  • Agreement on Objectives
  • Compatible Strategies
  • Compatible cultures
  • Comparable rewards
  • Stakeholder blessing
  • Thorough and lengthy planning process

33
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

34
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

35
Disadvantages of FDI
  • Substantial investment financial exposure
  • Problems of integration/coordination of
    acquisitions
  • Greenfield time consuming and unpredictable
    cost
  • Political and economic risk exposure

36
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

37
Reasons for International MA
  • 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

38
Reasons for International MA
  • Market dominance, Defence of market share
  • Pursuing market power, eliminating competition

39
Problems with International MA
  • 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

40
Problems with International MA
  • 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

41
Cultural Considerations
  • Material culture level of economic/technology
    development
  • Language
  • Aesthetics
  • Education
  • Religious beliefs

42
Internationalising Issues
  • The main issues in international expansion
    concern
  • Cost
  • Control
  • Risk
  • Return
  • Resource allocation
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