Chapter 7
International Strategy: Creating Value in
Global Markets…………………………………………………………………………………………………………. 212 (7-2)
The Global Economy: A Brief Overview….…….……..…….……..……..…….…......…....…..…....… 214 (7-4)
Factors Affecting a Nation’s Competitiveness……..…….……..…….……..……..…….…..…..…...... 215 (7-5)
Factor Endowments…………………………………………………………………………………………………….. 215 (7-5)
Demand Conditions…………………………………………………………………………………………………….. 216 (7-6)
Related and Supporting Industries……………………………………………………………….….……….…… 216 (7-7)
Firm Strategy, Structure, and Rivalry………………………………………………………………………..…... 216 (7-7)
Concluding Comment on Factors Affecting a Nation’s Competitiveness….……..……...…....…..... 218 (7-7)
International Expansion: A Company’s Motivation and Risks…….……..…….……..…….….…. 218 (7-8)
Motivations for International Expansion……………………………………………………………………..…. 218 (7-8)
Potential Risks of International Expansion………………………………………………………….……….… 221 (7-11)
Global Dispersion of Value Chains: Outsourcing and Offshoring…………………………………..….. 225 (7-13)
Achieving Competitive Advantage in Global Markets…..…….……..…….……....…....…....….... 229 (7-14)
Two Opposing Pressures: Reducing Costs and Adapting to Local Markets………..……..…….…... 229 (7-14)
International Strategy………………………………………………………………………………………………….. 230 (7-14)
Global Strategy……………………………………………………………………………………….….……….…….. 231 (7-15)
Multidomestic Strategy…………………………………………………………………………………………..….… 233 (7-16)
Transnational Strategy……………………………………………………………………………………….…….…. 235 (7-17)
Global or Regional? A Second Look at Globalization………………………………………………….…… 237 (7-19)
Entry Modes of International Expansion………….……..…….……..……..…….……...…....…....….. 238 (7-20)
Exporting…………………………………………………………………………………………………………………... 239 (7-20)
Licensing and Franchising………………………………………………………………………………….….……. 239 (7-21)
Strategic Alliances and Joint Ventures……………………………………………………………………………. 240 (7-21)
Wholly Owned Subsidiaries………………………………………………………………………………………….. 241 (7-22)
Issue for Debate…………………………………………………………………………………………..…….……… 242 (7-23)
Reflecting on Career Implications………………………………………………………………………………. 243 (7-25)
Summary………………………………………………………………………………………………………………….. 243 (7-27)
Chapter 7
International Strategy:
Creating Value in Global Markets
Summary/Objectives
The global marketplace provides many opportunities for firms to increase their revenue base and
profitability. Also, in today’s knowledge-based economy there are opportunities to create advantages by
leveraging firm knowledge across national boundaries. However, along with the potential benefits there
are pitfalls that all firms must avoid in order to be successful.
After some introductory comments on the global economy, we address this topic in four major
sections:
1. We draw on Porter’s “diamond of national advantage” as a framework to explain the level of
2. We address some of the motivations as well as the risks (or pitfalls) associated with
3. We address how firms can attain a competitive advantage in the global marketplace. Here, we
focus on the two opposing forces that firms face when entering international markets—cost
4. The final section addresses the four entry strategies that firms typically choose from when
entering foreign markets. These vary along a continuum from low-investment/low-control
Lecture/Discussion Outline
The opening case in LEARNING FROM MISTAKES discusses the struggles that SAIC, a major
Chinese auto manufacturer, had when it acquired SsangYong, a struggling Korean auto firm. This
acquisition was hampered by cultural differences, union relationships in SsangYong that were different
Discussion Question 1: What lessons should SAIC learn from its acquisition of SsangYong?
Response guidelines: Students should understand some lessons directly from the facts in the case. When a
firm acquires another firm in a different country, it is important to understand how business is done in that
country. Failure to understand different business practices can be costly. In particular, SAIC should learn
that:
Cultural differences between managers in from different national cultures can reduce the
Dealing with a unionized workforce requires a specialized management skill.
It is important to consider the external environment in the foreign country such as possible shifts
Discussion Question 2: When buying a firm in another country, what issues should the acquiring firm
think about to limit the risks they will face with the acquisition?
Response guidelines: Students should understand that there are a great number of issues to consider. In
addition to those specific issues mentioned above, many factors, including possibly any part of the
The result is that cross-border acquisitions, especially for firms with limited experience in the foreign
country, are very risky and require a comprehensive investigation prior to the acquisition. The limited
Discussion Question 3: How can a firm bridge cultural differences between its home market and a
country it is moving into?
Response guidelines: Students should understand that cross border acquisitions require managers from
different national and organizational cultures to work together as a team. Students should understand the
process of team formation, as they have formed teams in sports, clubs, with work colleagues, and
Spending time together in retreats or work teams
Regular communication
Tolerance of different opinions—some team strategies involve requiring groups to share
Willingness to change policies and values in order to accommodate the different culture
Strong support of senior management.
But in spite of all efforts, students should understand that cultural differences are difficult to overcome.
I. The Global Economy: A Brief Overview
As the title indicates, our objective here is to provide a brief summary of some key issues in the
We also point out that globalization has led to tremendous growth opportunities in emerging
markets, with over half the world’s output now coming from emerging markets. Exhibit 7.1 shows the
dramatic differences in growth rates in different markets over the 2001–2011 period. One of the areas of
The SUPPLEMENT below illustrates the importance of estimating demand for customers in the
bottom of pyramid.
Extra Example: What Do People Need and Demand at the Bottom of the Pyramid?
Confusing need with demand is a common problem among organizations serving the bottom of the
pyramid. Many firms have wasted time and resources trying to market products that are designed for the
poor but that consumers do not actually want. A research with microfinance customers in rural India
showed that when given a choice between beneficial products, such as solar-powered lanterns and low-
energy stoves, and aspirational products like mobile phones and gold coins, 85 percent of customers opted
for the latter.
It is usually difficult to make the economics work for a product if demand must be generated, because
marketing costs typically swamp efforts to keep prices extremely low. Companies should focus on areas
where they can meet existing demand, with either lower-cost and better-quality products than the existing
options, or simply with cheaper ones. Safaricom’s hugely successful M-Pesa, for example, offered money
transfers by mobile phone in Africa at 33 percent of the cost of Western Union—and at 20 percent of the
cost of (and much greater security than) long-distance bus companies, the customary provider.
Source: Karamchandani, A., Kubzansky, M. & Lalwani, N. 2011. Is the bottom of the pyramid really for
you? Harvard Business Review. 89(3): 107.
Discussion Question 4: What is the implication of the example stated above?
Discussion Question 5: Can the bottom of the pyramid prove to be a profitable, long-term
market?
The next section discusses “Porter’s diamond” and sets forth a useful context for explaining
II. Factors Affecting a Nation’s Competitiveness
After conducting a four-year study, Michael Porter concluded that there are four broad attributes
of nations that individually, and as a system, constitute what is termed “the diamond of national
advantage.” These attributes collectively determine the playing field that each nation establishes for its
industries. These factors are
Factor Conditions;
Demand Conditions;
The balance of this section will briefly address each of these factors and then provide an
Discussion Question 6: How do these factors—individually or jointly—affect industries in
countries with which you are familiar?
A. Factor Endowments
Factors of production include not only labor, capital, and natural resources (e.g., land and
minerals) but also factors that can be created. The latter are more relevant to developed nations that are
We give the example of Japan’s expertise in JIT Systems—in part necessary because of Japan’s
expensive land costs.
The SUPPLEMENT below addresses how the United Kingdom is striving to build and leverage
Extra Example: Britain Aims to Build a Competency in Computing
When we think of computer software and hardware, most people think of Silicon Valley in California or
Seattle, Washington as the core centers of technology development. But Britain has the aim to become a
major player in this game. To do so, public officials and entrepreneurs in the region have been working to
build the factor conditions needed to build centers of excellence in computing technology in Britain. In its
own “Silicon Gorge” near the city of Bristol, there are signs of success. The technological entrepreneurs
in this region have typically either been trained at or have ties to the University of Bristol, a school ranked
in the top-30 of in the QS World University Rankings with very strong programs in Computer Science,
Electrical and Electronic Engineering, and Mathematics. For example, David May is both a professor of
computer science at Bristol University and also the Chief Technology Officer at Xmos, a microchip
design firm. The absence of certain factor conditions have also led to differentiated capabilities. British
designers argue that they excel at lean hardware designs—the ability to design hardware quickly and
efficiently—since Britain has not developed deep pools of venture capital funding to support
entrepreneurial firms. This ability to design efficient hardware appears to be well positioned for mobile
systems where miniaturized and customized hardware design is valued.
British officials are also trying to support a second technology center in London. In its “Silicon
Roundabout,” entrepreneurs have no major universities to provide graduates and faculty expertise.
Instead, entrepreneurs are striving to leverage the arts culture built into the Soho section of London to
build firms that offer very creative social network and other software.
Source: Anonymous. 2011. Start me up. The Economist, August 6: 45–47.
B. Demand Conditions
Demand conditions refer to the demands that consumers place on an industry for goods and
services. Consumers who demand highly specific, sophisticated products and services force firms to be
We provide the example of Denmark’s world-class position in water pollution control equipment.
The SUPPLEMENT below discusses the growth of the international box office as the demand for
Extra Example: Hollywood Films Need Foreign Viewers
Hollywood has always been an international business. In recent years, it has become dramatically more
so. In the past decades total international box office has more than doubled. The growth of box office
spending overseas is a result of a cinema boom in the emerging world, a concerted effort by the major
studios to make films that might play well outside the United States and a global marketing push to make
sure they do. Russia’s efforts to build superior domestic film production has helped create demand.
However, the big Hollywood studios muscle domestic film-makers aside. The imported films made more
than five times as much as the home-grown products in Russia in 2010.
Source: Anonymous. 2011. Hollywood goes global; Bigger abroad. The Economist. February 19: 69.
Discussion Question 7: Would the growth of the international box office alter the strategy of big
Hollywood studios? How so?
Discussion Question 8: How can local producers successfully compete with Hollywood? What
can Hollywood do to successfully compete with local producers?
C. Related and Supporting Industries
Related and supporting industries enable firms to more effectively manage inputs. For example,
countries with a strong supplier base benefit by adding efficiency in downstream activities. That is
We provide the example of the Italian shoe manufacturing industry and the Swiss pharmaceutical
industry.
D. Firm Strategy, Structure, and Rivalry
Firms develop strategies and structures to compete with other firms in the same country that are
trying to capture the same customer market. Rivalry is particularly intense in nations with strong
The example that we provide is the European grocery retail industry with competitors such as
Aldi and Tesco.
STRATEGY SPOTLIGHT 7.1 and EXHIBIT 7.2 provide the integrative example of the Indian
software industry. (This should be a rather interesting example to students because many of them may
Discussion Question 9: What do you believe will be the implications of the intensifying global
competition in the Indian software industry?
Discussion Question 10: How can India maintain its position as a leading provider of software
services as the labor costs in India continue to rise?
E. Concluding Comment on Factors Affecting a Nation’s Competitiveness
Porter’s conclusions were based on case histories from more than 100 industries. A common
theme did emerge: Firms that succeeded in global markets had first succeeded in intense competition in
We will now turn to the level of the individual firm. In the next section, we’ll discuss a
III. International Expansion: A Company’s Motivations and Risks
A. Motivations for International Expansion
There are many motivations for a firm to pursue expansion into global markets. The most obvious
one is to increase the size of potential markets. We note the explosive growth in middle-class consumers
Discussion Question 11: What are the implications of the growth in middle-income consumers
for consumer goods and services producers?
The SUPPLEMENT below illustrates how NTT is striving to enhance its growth potential and
competitiveness by expanding outside the Japanese market.
Extra Example: NTT Moves Boldly Beyond Its Home Market
Japan’s biggest telecommunications group is making a strong push to grow in overseas markets. As part
of this push, Nippon Telegraph & Telephone Corporation (NTT) is committing billions of dollars on
acquisitions, primarily in the United States. The firm spent $2.4 billion on investments outside of Japan in
2014 alone. This included the establishment of a research center in California’s Silicon Valley.
NTT is taking on this effort for three primary reasons. First, the Japanese market, where NTT generates
90 percent of its $100 billion in annual revenue, is stagnant. Its goal is to grow non-Japanese sales to 23
percent of total revenue by 2016. Going overseas provides NTT with enhanced growth opportunities.
Second, NTT is trying to plug into markets where cutting edge, user-centered communications technology
is being developed. Building a presence in Silicon Valley offers NTT the opportunity to recruit talent and
incorporate knowledge that will allow the firm to design more advanced and user–friendly systems.
Finally, having operations in a given country makes it easier to build relationships and sales with
customers based in that country. For example, after the firm began to build its operations in the US, NTT
won contracts with Yum Brands, the parent firm of KFC and Pizza Hut, as well as the Texas Department
of Transportation.
NTT also sees one additional potential benefit of growing its operations outside of Japan. The firm has
long been known as having a very cautious and conservative culture. Executives hope that its foreign
operations will be more competitively aggressive and risk tolerant, attributes that will help the firm thrive
in the dynamic, competitive global communications industry.
Source: Negishi, M. 2014. NTT makes renewed overseas push. Wsj.com. August 30: np.
Discussion Question 12: What should NTT do to ensure that it seizes the benefits and minimizes
the risks of growing rapidly outside of its home market?
The SUPPLEMENT below illustrates an even more extreme shift in demand, the dramatic increase of
Extra Example: The Demand for Bling in China
The term “luxury” may mean different things to people in China nowadays. Sales of luxury goods
exploded and a forecast conducted by broker CLSA estimates that sales of luxury goods will grow rapidly
by as much as 25 percent per year. CLSA also predicts that China’s share of the global luxury market will
triple, to 44 percent, by 2020. Richemont, the world’s biggest jeweler, captured a 57 percent increase in
Asian sales in the last quarter of 2010.
The long queues of “bling-hungry” mainlanders outside big brand stores in Hong Kong paints a picture of
prosperous Chinese who are less shy to show off their wealth than people in other countries. The business
culture in China agrees that gifts lubricate business and many Chinese believe that the more something
costs, the better it is.
Source: Anonymous. 2011. China’s luxury boom: The Middle Blingdom. The Economist. February 19:
71–72.
Discussion Question 13: What are some of the pros/cons of the growing market of luxury goods
in China?
Discussion Question 14: Should luxury goods producers focus a large portion of their marketing
goods on China? What are some of the risks and/or benefits?
Potential benefits of international expansion include (with examples we discuss):
1. Increase Market Size (Boeing’s commercial aircraft; Microsoft; Hollywood films)
2. Take Advantage of Arbitrage Opportunities (financial services firms)
3. Enhance a Product’s Growth Potential (soft drink producers PepsiCo and Coca-Cola;
The last item—optimize the location of every activity in its value chain—can yield three strategic
advantages:
a. Performance Enhancement
We provide the example of Microsoft’s decision to locate a corporate research facility in
b. Cost Reduction
We discuss Nike’s decision to source the manufacture of athletic shoes from Asian countries such
c. Risk Reduction
Here, we address the risks associated with erratic swings of exchange ratios of the U.S. dollar and
other currencies (such as the Japanese yen and the Euro). Firms can cope with such risks by spreading
The SUPPLEMENT below discusses Airbus’ logic for building an aircraft production plant in
Extra Example: Airbus in Alabama
Airbus, the European aircraft manufacturer, announced in 2012 that it was going to begin manufacturing
jets in North America. Its chosen location for this plant was Mobile, Alabama. The logic for moving
production to the United States was multi-faceted. First, it gets Airbus closer to its customers. By having
these planes “made in the USA,” Airbus believed it would lessen the concerns of U.S. airlines and
military defense buyers regarding buying from a foreign manufacturer. This decision also allowed Airbus
to cut costs and minimize currency risks. Labor costs in Alabama are significantly lower and work rules
are much more flexible than they are in Airbus’ European plants. Also, Airbus lessened its currency risk.
When it builds planes in Europe to sell in the United States, a currency shift can wipe out all of the profits
associated with the sale of the planes. However, with parts being procured in the United States and labor
costs being in dollars, Airbus is not nearly as affected by currency fluctuations.
Sources: Anonymous, 2012. Coming to America. The Economist. July 7: 63.
5. Learning Opportunities
Going global also allows firms to learn about different market conditions, R&D skills, marketing
skills, organizational processes, and managerial practices. Firms can then translate that knowledge back
Discussion Question 15: What are some other examples of firms that help to illustrate the
benefits from international expansion?
6. Explore Reverse Innovation
Reverse innovation has become a recent important motivation for international expansion. Here,
We discuss the potential for $3,000 cars, $300 computers, and $30 mobile phones—which are
STRATEGY SPOTLIGHT 7.2 discusses several examples of reverse innovation: GE’s ultrasound
machines, Deere & Co.’s tractors, Walmart’s small mart stores, and Pepsi’s global innovation center.
Discussion Question 16: Can you think of other industries where there is a significant potential
for reverse innovation? What would be some of the challenges?