CHAPTER 7 STRATEGIES FOR COMPETING IN INTERNATIONAL MARKETS WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS To gain access to new customers To further exploit core competencies To achieve lower costs through economies of scale, experience, and increased purchasing power To spread business risk across a wider market base To gain access to resources and capabilities located in foreign markets 7–2 WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY-MAKING MORE COMPLEX 1. Different countries have different homecountry advantages in different industries 2. Location-based value chain advantages for certain countries 3. Differences in government policies, tax rates, and economic conditions 4. Currency exchange rate risks 5. Differences in buyer tastes and preferences for products and services 7–3 FIGURE 7.1 The Diamond of National Advantage 7–4 THE DIAMOND FRAMEWORK ◆ Answers important questions about competing on an international basis by: ● Predicting where new foreign entrants are likely to come from and their strengths. ● Highlighting foreign market opportunities where rivals are weakest. ● Identifying the location-based advantages of conducting certain value chain activities of the firm in a particular country. 7–5 REASONS FOR LOCATING VALUE CHAIN ACTIVITIES ADVANTAGEOUSLY ♦ Lower wage rates ♦ Higher worker productivity ♦ Proximity to suppliers and technologically related industries ♦ Lower energy costs ♦ Proximity to customers ♦ Fewer environmental regulations ♦ Lower distribution costs ♦ Lower tax rates ♦ Available\unique natural resources ♦ Lower inflation rates 7–6 THE IMPACT OF GOVERNMENT POLICIES AND ECONOMIC CONDITIONS IN HOST COUNTRIES ♦ Positives ● ● ● ● ● Tax incentives Low tax rates Low-cost loans Site location and development Worker training ♦ Negatives ● ● ● ● ● ● ● ● Environmental regulations Subsidies and loans to domestic competitors Import restrictions Tariffs and quotas Local-content requirements Regulatory approvals Profit repatriation limits Minority ownership limits 7–7 CORE CONCEPT ♦ Political risks stem from instability or weaknesses in national governments and hostility to foreign business. ♦ Economic risks stem from the stability of a country’s monetary system, economic and regulatory policies, the lack of property rights protections. 7–8 THE RISKS OF ADVERSE EXCHANGE RATE SHIFTS ◆ Effects of Exchange Rate Shifts: ● Exporters experience a rising demand for their goods whenever their currency grows weaker relative to the importing country’s currency. ● Exporters experience a falling demand for their goods whenever their currency grows stronger relative to the importing country’s currency. 7–9 STRATEGIC MANAGEMENT PRINCIPLE ♦ Fluctuating exchange rates pose significant economic risks to a firm’s competitiveness in foreign markets. ♦ Exporters are disadvantaged when the currency of the country where goods are being manufactured grows stronger relative to the currency of the importing country. 7–10 STRATEGIC MANAGEMENT PRINCIPLE ♦ Domestic companies facing competitive pressure from lower-cost imports benefit when their government’s currency grows weaker in relation to the currencies of the countries where the lower-cost imports are being made. 7–11 CROSS-COUNTRY DIFFERENCES IN DEMOGRAPHIC, CULTURAL, AND MARKET CONDITIONS To customize offerings in each country market to match the tastes and preferences of local buyers Key Strategic Considerations To pursue a strategy of offering a mostly standardized product worldwide. 7–12 STRATEGIC OPTIONS FOR ENTERING AND COMPETING IN INTERNATIONAL MARKETS 1. Maintain a home country production base and export goods to foreign markets. 2. License foreign firms to produce and distribute the firm’s products abroad. 3. Employ a franchising strategy in foreign markets. 4. Establish a subsidiary in a foreign market via acquisition or internal development. 5. Rely on strategic alliances or joint ventures with foreign companies. 7–13 EXPORT STRATEGIES ♦ Advantages ● Low capital requirements ● ♦ Disadvantages ● Economies of scale in utilizing existing production capacity Maintaining relative cost advantage of home-based production ● Transportation and shipping costs ● No distribution risk ● Exchange rates risks ● No direct investment risk ● Tariffs\import duties ● Loss of channel control 7–14 LICENSING AND FRANCHISING STRATEGIES ♦ Advantages ♦ Disadvantages ● Low resource requirements ● Maintaining control of proprietary know-how ● Income from royalties and franchising fees ● Loss of operational and quality control ● Adapting to local market tastes and expectations ● Rapid expansion into many markets 7–15 FOREIGN SUBSIDIARY STRATEGIES ♦ Advantages ♦ Disadvantages ● High level of control ● Costs of acquisition ● Quick large-scale market entry ● Complexity of acquisition process ● Avoids entry barriers ● ● Access to acquired firm’s skills Integration of the firms’ structures, cultures, operations and personnel 7–16 CORE CONCEPT ♦ A greenfield venture is a subsidiary business that is established by setting up the entire operation from the ground up. 7–17 FOREIGN SUBSIDIARY STRATEGIES ◆ A greenfield strategy is appealing when: ● Creating an internal startup is cheaper than making an acquisition. ● Adding new production capacity will not adversely impact the supply–demand balance in the local market. ● A startup subsidiary has the ability to gain good distribution access. ● A startup subsidiary will have the size, cost structure, and resource strengths to compete head-to-head against local rivals. 7–18 GREENFIELD STRATEGIES ♦ Advantages ♦ Disadvantages ● High level of control over venture ● Capital costs of initial development ● “Learning by doing” in the local market ● ● Direct transfer of the firm’s technology, skills, business practices, and culture Risks of loss due to political instability or lack of legal protection of ownership ● Slowest form of entry due to extended time required to construct facility 7–19 BENEFITS OF ALLIANCE AND JOINT VENTURE STRATEGIES ◆ Gaining partner’s knowledge of local market conditions ◆ Achieving economies of scale through joint operations ◆ Gaining technical expertise and local market knowledge ◆ Sharing distribution facilities and dealer networks, and mutually strengthening each partner’s access to buyers. ◆ Directing competitive energies more toward mutual rivals and less toward one another ◆ Establishing working relationships with key officials in the host-country government 7–20 STRATEGIC MANAGEMENT PRINCIPLE ♦ Collaborative strategies involving alliances or joint ventures with foreign partners are a popular way for companies to edge their way into the markets of foreign countries. 7–21 STRATEGIC MANAGEMENT PRINCIPLE ♦ Cross-border alliances enable a growthminded firm to widen its geographic coverage and strengthen its competitiveness in foreign markets; at the same time, they offer flexibility and allow a firm to retain some degree of autonomy and operating control. 7–22 THE RISKS OF STRATEGIC ALLIANCES WITH FOREIGN PARTNERS ◆ Outdated knowledge and expertise of local partners ◆ Cultural and language barriers ◆ Costs of establishing the working arrangement ◆ Conflicting objectives and strategies and/or deep differences of opinion about joint control ◆ Differences in corporate values and ethical standards. ◆ Loss of legal protection of proprietary technology or competitive advantage ◆ Overdependence on foreign partners for essential expertise and competitive capabilities. 7–23 INTERNATIONAL STRATEGY: THE THREE MAIN APPROACHES Competing Internationally Multidomestic Strategy Global Strategy Transnational Strategy 7–24 CORE CONCEPTS ♦ An international strategy is a strategy for competing in two or more countries simultaneously. ♦ A multidomestic strategy is one in which a firm varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions. It is a think-local, act-local type of international strategy, facilitated by decision making decentralized to the local level. 7–25 CORE CONCEPTS ♦ A global strategy is one in which a firm employs the same basic competitive approach in all countries where it operates, sells much the same products everywhere, strives to build global brands, and coordinates its actions worldwide with strong headquarters control. It represents a think-global, act-global approach. ♦ A transnational strategy is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies. 7–26 FIGURE 7.2 Three Approaches for Competing Internationally 7–27 7–28 7–29 7–30 INTERNATIONAL OPERATIONS AND THE QUEST FOR COMPETITIVE ADVANTAGE Build Competitive Advantage in International Markets Use international location to lower cost or differentiate product Share resources and capabilities Gain cross-border coordination benefits 7–31 USING LOCATION TO BUILD COMPETITIVE ADVANTAGE To customize offerings in each country market to match tastes and preferences of local buyers Key Location Issues To pursue a strategy of offering a mostly standardized product worldwide. 7–32 STRATEGIC MANAGEMENT PRINCIPLE ♦ Companies that compete internationally can pursue competitive advantage in world markets by locating their value chain activities in whatever nations prove most advantageous. 7–33 WHEN TO CONCENTRATE ACTIVITIES IN A FEW LOCATIONS ◆ The costs of manufacturing or other activities are significantly lower in some geographic locations than in others. ◆ There are significant scale economies in production or distribution. ◆ There are sizable learning and experience benefits associated with performing an activity in a single location. ◆ Certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages. 7–34 SHARING AND TRANSFERRING RESOURCES AND CAPABILITIES TO BUILD COMPETITIVE ADVANTAGE ◆ Build a Resource-Based Competitive Advantage By: ● Using powerful brand names to extend a differentiation-based competitive advantage beyond the home market. ● Coordinating activities for sharing and transferring resources and production capabilities across different countries’ domains to develop market dominating depth in key competencies. 7–35 CORE CONCEPT ♦ When the same companies compete against one another in multiple geographic markets, the threat of cross-border counterattacks may be enough to deter aggressive competitive moves and encourage mutual restraint among international rivals. 7–36 CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Walt Disney Company Michael Eisner Era: 1984 - 2005 Theme park operations (%) Consumer products (%) 1984 77 1995 33 22 18 Filmed 1 entertainment (%) Total profits 49 $242 million $1.38 billion Media networks (%) Park and resorts (%) Studio entertainment (%) Consumer products (%) Interactive (%) Total profits 2005 41 2013 45 28 31 24 13 7 8 $2.53 billion ($31.94 b) 3 $6.14 billion ($45.14b) General Electric (GE) Product segment % of Revenues Power & Water 18 Oil & Gas 12 5 Energy Management Aviation 16 Healthcare 12 Transportation Appliances & Lighting GE Capital 4 5 28 Geographic segment United States Europe Asia % of Revenues 48 17 16 Americas Middle East & Africa 9 10 WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL? Step 1 Picking new industries to enter and deciding on the means of entry. Step 2 Pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage. Step 3 Establishing investment priorities and steering corporate resources into the most attractive business units. Step 4 Initiating actions to boost the combined performance of the cooperation’s collection of businesses. 8–4 CORE CONCEPT ♦ To add shareholder value, a move to diversify into a new business must pass the three Tests of Corporate Advantage: 1. The Industry Attractiveness Test 2. The Cost of Entry Test 3. The Better-off Test 8–5 BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING ◆ ◆ ◆ The Attractiveness Test: ● Are the industry’s profits and return on investment as good or better than present business(es)? The Cost of Entry Test: ● Is the cost of overcoming entry barriers so great as to long delay or reduce the potential for profitability? The Better-Off Test: ● How much synergy (stronger overall performance) will be gained by diversifying into the industry? 8–6 CORE CONCEPT ♦ Creating added value for shareholders via diversification requires building a multibusiness company in which the whole is greater than the sum of its parts—such 1 + 1= 3 effects are called synergy. 8–7 BETTER PERFORMANCE THROUGH SYNERGY Evaluating the Potential for Synergy through Diversification Firm A purchases Firm B in another industry. A and B’s profits are no greater than what each firm could have earned on its own. No Synergy (1+1=2) Firm A purchases Firm C in another industry. A and C’s profits are greater than what each firm could have earned on its own. Synergy (1+1=3) 8–8 APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP Diversifying into New Businesses Existing business acquisition Internal new venture (start-up) Joint venture 8–9 DIVERSIFICATION BY ACQUISITION OF AN EXISTING BUSINESS ◆ ◆ Advantages: ● Quick entry into an industry ● Barriers to entry avoided ● Access to complementary resources and capabilities Disadvantages: ● Cost of acquisition—whether to pay a premium for a successful firm or seek a bargain in struggling firm ● Underestimating costs for integrating acquired firm ● Overestimating the acquisition’s potential to deliver added shareholder value 8–10 CORE CONCEPT ♦ An acquisition premium is the amount by which the price offered exceeds the preacquisition market value of the target firm. 8–11 Disney’s Acquisition of 21st Century Fox ◆ On December 14, 2017, The Walt Disney Company announced a definitive agreement to acquire 21st Century Fox for $52.4 billion in stock. ◆ Comcast made their own offer on June 13, 2018, with a $65 billion all cash proposal to acquire the Fox assets that Disney was set to purchase, touching off a major bidding war between the two companies. ◆ A week later, Disney counterbid with a $71.3 billion offer. Disney and Fox shareholders approved the acquisition on July 27, 2018. The deal is expected to close by June 2019. Did Comcast’s bidding on 21st Century Fox have an impact on Disney’s acquisition premium? 8–12 ENTERING A NEW LINE OF BUSINESS THROUGH INTERNAL DEVELOPMENT ◆ ◆ Advantages of New Venture Development: ● Avoids pitfalls and uncertain costs of acquisition. ● Allows entry into a new or emerging industry where there are no available acquisition candidates. Disadvantages of Intrapreneurship: ● Must overcome industry entry barriers. ● Requires extensive investments in developing production capacities and competitive capabilities. ● May fail due to internal organizational resistance to change and innovation. 8–13 CORE CONCEPT ♦ Corporate venturing (or new venture development) is the process of developing new businesses as an outgrowth of a firm’s established business operations. It is also referred to as corporate entrepreneurship or intrapreneurship since it requires entrepreneurial-like qualities within a larger enterprise. 8–14 Google’s New Ventures ◆ 2017: Google has launched a new venture capital program focused on artificial intelligence. ◆ Google declined to comment on the report, which states that the initiative will be led by longtime Google VP of engineering Anna Patterson and involve a rotating cast of engineers instead of the venture investors who work for Alphabet Inc.’s corporate venture unit, GV. ◆ GV was founded as Google Ventures in 2009. 8–15 WHEN TO ENGAGE IN INTERNAL DEVELOPMENT Availability of in-house skills and resources Ample time to develop and launch business Cost of acquisition is higher than internal entry Factors Favoring Internal Development Low resistance of incumbent firms to market entry Added capacity does affect supply and demand balance Low resistance of incumbent firms to market entry 8–16 WHEN TO ENGAGE IN A JOINT VENTURE Is the opportunity too complex, uneconomical, or risky for one firm to pursue alone? Evaluating the Potential for a Joint Venture Does the opportunity require a broader range of competencies and know-how than the firm now possesses? Will the opportunity involve operations in a country that requires foreign firms to have a local minority or majority ownership partner? 8–17 USING JOINT VENTURES TO ACHIEVE DIVERSIFICATION ◆ Joint ventures are advantageous when diversification opportunities: ● Are too large, complex, uneconomical, or risky for one firm to pursue alone. ● Require a broader range of competencies and know-how than a firm possesses or can develop quickly. ● Are located in a foreign country that requires local partner participation and/or ownership. 8–18 DIVERSIFICATION BY JOINT VENTURE ◆ Joint ventures have the potential for developing serious drawbacks due to: ● Conflicting objectives and expectations of venture partners. ● Disagreements among or between venture partners over how best to operate the venture. ● Cultural clashes among and between the partners. ● The venture dissolving when one of the venture partners decides to go their own way. 8–19 Google’s Joint Ventures ◆ Alphabet Inc is in talks with Saudi Aramco, a government-owned oil company, related to a potential joint venture to build large technology hubs in Saudi Arabia, according to The Wall Street Journal (02/2018). ◆ GSK, Britain’s biggest drug company, said it would form a joint venture with Verily Life Sciences, a division of Alphabet, to work on research into bioelectronic medicines. GSK will own 55% of Galvani Bioelectronics, and Verily will hold 45% (2016). 8–20 CHOOSING A MODE OF MARKET ENTRY The Question of Critical Resources and Capabilities Does the firm have the resources and capabilities for internal development? The Question of Entry Barriers Are there entry barriers to overcome? The Question of Speed The Question of Comparative Cost Is speed of the essence in the firm’s chances for successful entry? Which is the least costly mode of entry, given the firm’s objectives? 8–21 CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES Which Diversification Path to Pursue? Related Businesses Unrelated Businesses Both Related and Unrelated Businesses 8–22 CORE CONCEPTS ♦ Related businesses possess competitively valuable cross-business value chain and resource matchups. ♦ Unrelated businesses have dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level. 8–23 PURSUING RELATED DIVERSIFICATION ◆ Related diversification involves sharing or transferring specialized resources and capabilities. ● Specialized Resources and Capabilities ❖ Have very specific applications and their use is limited to a restricted range of industry and business types. 8–24 CORE CONCEPTS ♦ Specialized Versus Generalized Resources and Capabilities ● Specialized resources and capabilities have very specific applications and their use is limited to a restricted range of industry and business types.  ● Leveraged in related diversification General resources and capabilities can be widely applied and can be deployed across a broad range of industry and business types.  Leveraged in unrelated and related diversification 8–25 FIGURE 8.1 Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic Fit 8–26 IDENTIFYING CROSS-BUSINESS STRATEGIC FITS ALONG THE VALUE CHAIN R&D and Technology Activities Supply Chain Activities ManufacturingRelated Activities Potential Cross-Business Fits Sales and Marketing Activities DistributionRelated Activities Customer Service Activities 8–27 STRATEGIC FIT, ECONOMIES OF SCOPE, AND COMPETITIVE ADVANTAGE Using Economies of Scope to Convert Strategic Fit into Competitive Advantage Transferring specialized and generalized skills and\or knowledge Combining related value chain activities to achieve lower costs Leveraging brand names and other differentiation resources Using crossbusiness collaboration and knowledge sharing 8–28 ECONOMIES OF SCOPE DIFFER FROM ECONOMIES OF SCALE ◆ Economies of Scope ● ◆ Are cost reductions that flow from crossbusiness resource sharing in the activities of the multiple businesses of a firm. Economies of Scale ● Accrue when unit costs are reduced due to the increased output of larger-size operations of a firm. 8–29 FROM STRATEGIC FIT TO COMPETITIVE ADVANTAGE, ADDED PROFITABILITY AND GAINS IN SHAREHOLDER VALUE Capturing the Cross-Business Strategic–fit Benefits of Related Diversification Builds more shareholder value than owning a stock portfolio Is only possible via a strategy of related diversification Yields value in the application of specialized resources and capabilities Requires that management take internal actions to realize them 8–30 STRATEGIC MANAGEMENT PRINCIPLE ♦ Diversifying into related businesses where competitively valuable strategic-fit benefits can be captured puts a firm’s businesses in position to perform better financially as part of the firm than they could have performed as independent enterprises, thus providing a clear avenue for boosting shareholder value and satisfying the better-off test. 8–31 ILLUSTRATION CAPSULE 8.1 Microsoft’s Acquisition of Skype: Pursuing the Benefits of Cross-Business Strategic Fit ♦ What does the acquisition of Skype reveal about the importance of Microsoft’s efforts to execute a successful cross-business acquisition strategy? ♦ To what extent is decentralization required when seeking cross-business strategic fit? ♦ What should Microsoft do to ensure the continued success of its strategy? ♦ How will Microsoft keep Skype’s user base from moving to competing providers? 8–32 DIVERSIFICATION INTO UNRELATED BUSINESSES Can it meet corporate targets for profitability and return on investment? Evaluating the acquisition of a new business or the divestiture of an existing business Is it in an industry with attractive profit and growth potentials? Is it big enough to contribute significantly to the parent firm’s bottom line? 8–33 BUILDING SHAREHOLDER VALUE VIA UNRELATED DIVERSIFICATION Using an Unrelated Diversification Strategy to Pursue Value Astute corporate parenting by management Cross-business allocation of financial resources Acquiring and restructuring undervalued companies 8–34 BUILDING SHAREHOLDER VALUE VIA UNRELATED DIVERSIFICATION Astute Corporate Parenting by Management Cross-Business Allocation of Financial Resources Acquiring and Restructuring Undervalued Companies • Provide leadership, oversight, expertise, and guidance. • Provide generalized or parenting resources that lower operating costs and increase SBU efficiencies. • Serve as an internal capital market. • Allocate surplus cash flows from businesses to fund the capital requirements of other businesses. • Acquire weakly performing firms at bargain prices. • Use turnaround capabilities to restructure them to increase their performance and profitability. 8–35 CORE CONCEPT ♦ Corporate parenting is the role that a diversified corporation plays in nurturing its component businesses through the provision of: ● top management expertise ● disciplined control ● financial resources ● Other types of generalized resources and capabilities such as long-term planning systems, business development skills, management development processes, and incentive systems. 8–36 CORE CONCEPT ♦ A diversified firm has a parenting advantage when it is more able than other firms to boost the combined performance of its individual businesses through high-level guidance, general oversight, and other corporate-level contributions. 8–37 STRATEGIC MANAGEMENT PRINCIPLE ♦ An umbrella brand is a corporate brand name that can be applied to a wide assortment of business types. As such, it is a generalized resource that can be leveraged in unrelated diversification. 8–38 CORE CONCEPT ♦ Restructuring refers to overhauling and streamlining the activities of a business— combining plants with excess capacity, selling off underutilized assets, reducing unnecessary expenses, and otherwise improving the productivity and profitability of the firm. 8–39 THE PATH TO GREATER SHAREHOLDER VALUE THROUGH UNRELATED DIVERSIFICATION The attractiveness test Actions taken by upper management to create value and gain a parenting advantage Diversify into businesses that can produce consistently good earnings and returns on investment The cost-of-entry test The better-off test Negotiate favorable acquisition prices Provide managerial oversight and resource sharing, financial resource allocation and portfolio management, and restructure underperforming businesses 8–40 THE DRAWBACKS OF UNRELATED DIVERSIFICATION Demanding Managerial Requirements Monitoring and maintaining the parenting advantage Pursuing an Unrelated Diversification Strategy Limited Competitive Advantage Potential Potential lack of cross-business strategic-fit benefits 8–41 MISGUIDED REASONS FOR PURSUING UNRELATED DIVERSIFICATION Poor Rationales for Unrelated Diversification Seeking a reduction of business investment risk Pursuing rapid or continuous growth for its own sake Seeking stabilization to avoid cyclical swings in businesses Pursuing personal managerial motives 8–42 STRATEGIC MANAGEMENT PRINCIPLE ♦ Relying solely on leveraging general resources and the expertise of corporate executives to wisely manage a set of unrelated businesses is a much weaker foundation for enhancing shareholder value than is a strategy of related diversification. ♦ Only profitable growth—the kind that comes from creating added value for shareholders— can justify a strategy of unrelated diversification. 8–43 COMBINATION RELATED-UNRELATED DIVERSIFICATION STRATEGIES Related-Unrelated Business Portfolio Combinations DominantBusiness Enterprises Narrowly Diversified Firms Broadly Diversified Firms Multibusiness Enterprises 8–44 STRUCTURES OF COMBINATION RELATEDUNRELATED DIVERSIFIED FIRMS ◆ Dominant-Business Enterprises ● ◆ Narrowly Diversified Firms ● ◆ Are comprised of a few related or unrelated businesses. Broadly Diversified Firms ● ◆ Have a major “core” firm that accounts for 50 to 80% of total revenues and a collection of small related or unrelated firms that accounts for the remainder. Have a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both. Multibusiness Enterprises ● Have a business portfolio consisting of several unrelated groups of related businesses. 8–45 EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY Attractiveness of industries Strength of Business Units Cross-business strategic fit Diversified Strategy Fit of firm’s resources Allocation of resources New Strategic Moves 8–46 FIGURE 8.2 Three Strategy Options for Pursuing Diversification 8–47 
Purchase answer to see full attachment