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A. Potential Risks of International Expansion
There are also many potential risks associated with international expansion. To help
companies assess such risks, rating systems have been developed. EXHIBIT 7.3 depicts a sample
Next, we address the four main types of risk: political, economic, currency, and
management.
1. Political and Economic Risk
As indicated in EXHIBIT 7.3, countries vary significantly in their level of political risk.
We also address the enforcement of laws associated with the protection of property rights
and discuss how Renault was threatened with the loss of its investment in Russia if it didn’t
STRATEGY SPOTLIGHT 7.3 addresses a key threat to the pharmaceutical industry—
counterfeit drugs.
Discussion Question 17: What actions can and should developed nations take to combat
counterfeit pharmaceuticals?
2. Currency Risks
Currency fluctuations can pose substantial risks. A company with operations in several
countries must constantly monitor the exchange rate between its own currency and that of the
3. Management Risks
Management risks may be considered the challenges and risks that managers face when
they must respond to the inevitable differences that they encounter in foreign markets. These take
We also provide examples of how cultural differences are manifested in interpersonal
interactions with business colleagues in Hong Kong. The SUPPLEMENT below addresses some
Extra Example: Protocol Issues in Hong Kong
Gestures:
Members of the same sex may hold hands to signify friendship, but members of the opposite
sex may not.
Although women may cross their legs, men should keep their feet on the floor. Place your
hands in your lap while sitting.
The Chinese may communicate in closer proximity than is common in the United States.
Do not pat people on the shoulder or initiate any physical contact. It is not appreciated.
“Come here” is signified by turning the palm face down and waving the fingers.
Gifts:
Gift giving is an intricate and important custom in Hong Kong. The best-intentioned
businessperson can offend counterparts by giving
1. Clocks (they connote death)
2. Books (they represent a “Curse to Lose” for gamblers)
3. Blankets (they stifle the recipient’s prosperity)
4. Unwrapped gifts (this is rude)
5. Gifts wrapped in blue (the color of mourning)
Source: Morrison, T., Conaway, W. & Borden, G. 2000. Kiss, Bow, or Shake Hands. Diane Publishing
Company: 159.
We also discuss a humorous example of how a local custom “lucky day” delayed the
opening of a manufacturing plant in Singapore for a few months.
Discussion Question 18: What would be some of the dysfunctional aspects of U.S.
culture? (Hint: The discussion could deal with aspects such as short–term orientation,
need for instant gratification, high-risk preference, etc.)
Teaching Tip: Cross-cultural examples are typically very interesting to students.
Although we provide examples in this section, as well as in the SUPPLEMENT above, it
Terrie Campbell, a Vice President or Ricoh Americas, discusses how her firm responds to
the opportunities and challenges of global markets in this chapter’s INSIGHTS FROM
EXECUTIVES.
C. Global Dispersion of Value Chains: Outsourcing and Offshoring
This section addresses two of the emerging trends in international business—outsourcing
and offshoring. Outsourcing occurs when a firm decides to utilize other firms to perform value-
It is important to point out that the movement of jobs offshore in the manufacturing
sector was repeated by the service sector as well in the mid-1990s. However, the trend that began
The SUPPLEMENT below addresses a “global delivery” approach, which is indicative of
Extra Example: Outsourcing’s global delivery model
The use of offshore providers of information technology, human resource management, and other services is central
to today’s global expansion. In fact, many service providers are pursuing a global delivery model that permits them
to fulfill their outsourcing obligations from offices around the world. For example, BT (formerly British Telecom),
the UK telecom giant, outsourced its human resources operation to Accenture. To fulfill this task, Accenture used
offices in India, the Czech Republic, and the U.S., and the U.K. Dutch bank ABN Amro outsourced its IT operations
to five companies. One of them is Tata Consultancy, which used employees in Mumbai, Bangalore, Budapest and
Luxembourg to do the work. In another deal, Tata signed a joint agreement with Microsoft and a branch of the
Chinese government to create a software joint venture to supply IT outsourcing services. Nearly half of the 5,000
employees Tata used for the job are employed in Latin America—Brazil, Uruguay, and Chile.
Source: Dolan, K. A. 2006. Offshoring the Offshorers. Forbes, April 17: 74–76.
We also discuss the challenges of offshoring and why many firms are finding the realized
cost benefits from offshoring to be much less than they anticipated. This has led a number of
IV. Achieving Competitive Advantages in Global Markets
In this section, we begin by addressing the two opposing forces that firms face when they
expand into global markets—cost reduction and adaptation to local markets. Then, we address
A. Two Opposing Pressures: Reducing Costs and Adapting to Local Markets
Approximately two decades ago, Ted Levitt advocated strategies that favored global
products and brands that rested on three key assumptions.
Customer needs and interests are becoming increasingly homogeneous worldwide.
People around the world are willing to sacrifice preferences in product features,
Substantial economies of scale in production and marketing can be achieved
We provide evidence that refutes each of the three assumptions. There are, of course
Discussion Question 19: What are some other examples of global products and services
that defy these assumptions?
EXHIBIT 7.4 shows the conditions under which each of the strategies—international,
It is important to note that the following strategies are considered to be “basic” or
B. International Strategy
As indicated in EXHIBIT 7.4, a firm without a strong emphasis on either differentiating
their product and service offerings in order to adapt to local markets or on lowering costs is
following an international strategy. An international strategy is based on diffusion and adaptation
1. Risks and Challenges
Some of the risks of an international strategy include:
The international strategy, with its tendency to concentrate most of its
The strategy is susceptible to high levels of currency and political risks.
EXHIBIT 7.5 summarizes the strengths and weaknesses of international strategies in the
global marketplace.
C. Global Strategy
As indicated in EXHIBIT 7.4, a firm whose emphasis is on lowering costs tends to follow
We provide the example of Siebel Systems (now part of Oracle Corp.), the $2 billion
1. Risks and Challenges
There are, of course, some risks associated with a global strategy. These include
that
A firm can enjoy scale economies by concentrating scale-sensitive resources
The geographical concentration of any activity may also tend to isolate that
Concentrating an activity in a single location also makes the rest of the firm
EXHIBIT 7.6 summarizes the strengths and weaknesses of global strategies.
Discussion Question 20: Can you think of other global strategies that failed? Why did
they fail?
D. Multidomestic Strategy
As indicated in EXHIBIT 7.4, a firm whose emphasis is on differentiating their product
and service offerings in order to adapt to local markets follows a multidomestic strategy. In
To illustrate, we provide the example of how Kraft adapted the Oreo cookie and some of
its other iconic brands to better match the tastes of customers in several countries. In
STRATEGY SPOTLIGHT 7.5, we discuss how Honda has acted to improve its market
responsiveness.
The SUPPLEMENT below discusses the changing views on bribery and its mixed
consequences.
Extra Example: The Economics of Bribery
Managers of multinational firms often experience dilemmas when it comes to adjusting to the norms of foreign
countries in which they operate. One especially difficult choice is whether or not to participate in bribery to get
projects moving forward or to get approvals needed. According to a survey by Ernst & Young, 39 percent of
businesses say that corruption is a common problem in the countries where they competed. Interestingly, the
proportion of managers who believe it is justified to bribe an official to win business in difficult times rose from 9
percent in 2011 to 15 percent in 2012.
From one perspective, this rise may be logical. One study looked at the costs and benefits of bribery and found some
evidence that bribery pays off. This research found that firms who bribed public officials to win a contract
experienced positive returns for its shareholders to the effect of 10–11 times the cost of the bribe. However, the
payoff may be short lived. A second study found that when firms faced a bribery enforcement action, the stock price
of the firm dropped by 9 percent.
Source: Anonymous, 2012. You get what you pay for. The Economist. June 2: 89.
Discussion Question 21: Are their situations where it is justified to bribe an official to
win a contract? Does it make it more acceptable if it makes economic sense?
1. Risks and Challenges
As one might expect, there are some risks associated with a multidomestic strategy. These
include that
Typically, local adaptation of products and services will increase a company’s cost
At times, local adaptations, even well-intentioned, may backfire.
Consistent with other aspects of global marketing, the optimal degree of local
EXHIBIT 7.7 summarizes the strengths and weaknesses of multidomestic strategies.
E. Transnational Strategy
Multinational firms following a transnational strategy strive to optimize the trade-offs
associated with efficiency, local adaptation, and learning. It seeks efficiency not for its own sake,
We provide the perspective of Peter Brabeck, Nestle’s former Chairman. He points out
both the multidomestic and global aspects of his firm’s strategy. It also illustrates whether or not
STRATEGY SPOTLIGHT 7.6 discusses how Panasonic has balanced the tensions
and leveraged the benefits of a transnational strategy.
The SUPPLEMENT below discusses how firms need to respond to the contextual
Extra Example: The Need for Contextual Intelligence
Most entrepreneurs and managers agree, for example, that creating value and motivating talent are at the heart of
what they do. But once you drill below the homilies, differences quickly emerge over what constitutes value and
how to motivate people. That’s because conditions differ enormously from place to place, in ways that aren’t easy to
codify—conditions not just of economic development but of institutional character, physical geography, educational
norms, language, and culture.
Successful managers understand that their experiences may not directly translate to other markets. Thus, they strive
to develop contextual intelligence, which is defined as the ability to understand the limits of one’s knowledge and to
adapt that knowledge to an environment different from the one in which it was developed. Firms can develop
contextual intelligence in a number of ways. First, the firm should work to build a human resource set that provides
flexible and integrated knowledge. They can do this by hiring individuals “fluent” in more than one culture,
developing local talent in countries they wish to enter, rotate corporate employees into extended work roles in global
locations, and align incentives with local expectations and motives for cultural norms. The firm should also take the
time to research markets they are entering to better understand key cultural elements, the nation’s institutions, the
ways in which products are marketed and buying decisions are made, and how individual customers and employees
interact.
Source: Khanna, T. 2014. Contextual Intelligence. Harvard Business Review. September: 59–89.
The SUPPLEMENT below discusses how the Cheesecake Factory strives to balance the
Extra Example: The Cheesecake Factory—A Transnational Restaurant
David Overton, the founder and CEO of the Cheesecake Factory restaurant chain, is a control freak. When trying out
new recipes, he doesn’t rely on a focus group. He tastes them himself. He is adamant that a given food item should
taste exactly the same at all of the chains’ restaurants. He attends all new openings to ensure that the customer
experience is consistent across all locations.
He had to adjust his mindset to successfully expand his chain to the Middle East. He wanted the menu to remain the
same. He wanted the food preparation to remain the same. But this was not entirely possible. The local market needs
would not allow him to do it all the same. Working with M.H. Alshaya, a Kuwaiti store and restaurant operator,
Overton found a way to balance the need for global consistency with local market responsiveness. The menu has
stayed largely the same, but some adjustments had to be made to succeed in Islamic countries. Cocktails are out, but
mocktails and a wide selection of bottled waters are in. Food preparation was changed to fit within Islamic dietary
laws. At times, this resulted in the use of different ingredients, such as replacing pork bacon with a specially ordered
type of beef bacon. It also involved changes in preparation techniques and kitchen rules. It involved training of the
staff and changes to the menu to make sure that there were no misunderstandings about the food items. For example,
before the training, it wasn’t clear to the wait staff that turtle cheesecake didn’t contain turtle. Similarly, the staff
received training on what a luau was so that they had the spirit of a Polynesian party in mind when they prepared
and presented a luau salad. Finally, the Cheesecake Factory had to alter its sourcing policies so that they met with
the import laws of the countries in which it began operating. For example, food can be imported to Lebanon only if
it comes directly from its country of origin.
Overton believes that if you enter a Cheesecake Factory in the Middle East, you will see that it looks just like one in
the United States, and the food will taste the same as one back in the United States., but he also knows that there
have been a number of changes to meet the needs of his customers and the rules of the markets in which he operates.
Source: Kowitt, B., 2012. The mystery company importing Americana to the Mideast. Fortune. 90–96.
Discussion Question 22: What are some other companies that have successfully
maintained global efficiency and consistency while also tailoring some of their
operations to meet local needs?
1. Risks and Challenges
As with global and multidomestic strategies, there are some unique risks and challenges
associated with transnational strategies:
The choice of a seemingly optimal location cannot guarantee that the quality and
cost of factor inputs (i.e., labor, materials, etc.) will be optimal. Managers must
Although knowledge transfer can be a key source of competitive advantages, it
EXHIBIT 7.8 summarizes the relative advantages and disadvantages of transnational
strategies.
The SUPPLEMENT below addresses how Johnson & Johnson successfully implements
With transnational strategies, some value creating activities are centralized (usually
upstream and support activities) and some value creating activities are decentralized (generally
Extra Example: J&J’s Decentralized Structure
Johnson & Johnson today operates in 57 countries with 250 operating companies. How does one manage a company
with so many different products and operations in so many different countries? Obviously, trying to concentrate all
decision-making authority at the New Brunswick, N.J., corporate office would create a huge bottleneck. So what is
J&J’s solution? Decentralization. But at J&J, decentralization has been carried to an extent that most other
companies would find impossible to replicate. Because of its extreme decentralization, the managing directors of
operating companies have enormous freedom to run their businesses.
But where do you find that many entrepreneurial managers to run its highly decentralized businesses? This is where
management development plays a crucial part. Managers in their early years are rotated through different business
segments systematically so that they become broadly developed. For example, Sheri McCoy, the incoming head of
pharma, started in consumer R&D, and then served in the devices and diagnostics group before being promoted to
the head of pharma.
Decentralization of such a scale can potentially have two negative consequences. First, the corporate office can lose
control. Second, efficiencies and scale advantages may be lost. How does J&J avoid these undesirable outcomes?
They standardize processes in staff and support areas like procurement, human resources, and IT, but not in
operations. The standardization of processes ensures control and cost reduction while decentralization facilitates
operational freedom.
Source: Colvin, G., & Shambora, J. 2009. J&J: Secrets of success. Fortune. May 4: 117–121.
Discussion Question 23: What are some of the control challenges J&J would face as
they expand into more countries?
F. Global or Regional? A Second Look at Globalization
Full-scale globalization may not be the best strategic move for many types of firms.
Recent research indicates that most companies are regional or, at best, bi-regional rather than
global. Considering the advances in communication why is this so? Several reasons are
The SUPPLEMENT below extends the discussion of the importance of regional growth
in the overall globalization trend.
Extra Example: Growth in Regional Trade Fuels Global Expansion
In his Harvard Business Review article “Regional strategies for global leadership,” Pankaj Ghemawat explains that
regional strategies are not just a halfway measure between local strategies and global strategies but represent a
unique set of strategies that leverage economic, cultural and administrative similarities to boost company
performance. This is evidenced in part by the extent to which regional initiatives dominant cross-country activity
during the second half of the 20th century. For example, increases in intraregional trade have outpaced global trade in
Oceania and Asia for over forty years. In 1958, 35 percent of the trade in Asia and Oceania occurred between
countries in that geographic region. By 2000, within-region trade exceeded 50 percent of the trade in the Asia-
Oceania region. Globally, between 1958 and 2000, the amount of trade within regions increased from 47 percent to
55 percent. These and other statistics led Ghemawat to conclude that “increasing economic integration through
international trade has been accompanied by increasing rather than decreasing regionalization” (p. 101).
Source: Ghemawat, P. 2005. Regional strategies for global leadership,” Harvard Business Review, December: 97–
108.
V. Entry Modes of International Expansion
A firm has many options available to it when it decides to expand into international
markets. EXHIBIT 7.9 depicts a variety of modes of foreign entry that include exporting,
A. Exporting
Exporting consists of producing goods in one country and selling them in another. This
mode enables a firm to invest the least amount of resources in terms of product, its organization,
1. Benefits
Exporting has both advantages and disadvantages. Its advantages are that it is a low
cost/risk way to enter foreign markets, and it may provide the firm with local distributors who
2. Risks and Limitations
There are also some disadvantages associated with exporting. Firms have little ability to
tailor their products to match the local market demands. Also, along with the lower cost/risk
We provide some insights from a study that explored factors that explained the
The SUPPLEMENT below discusses Loctite’s (a specialty adhesives company) insights
EXTRA EXAMPLE: Loctite’s Insights on the Selection of Distributors in International Markets
“We increasingly look for what we have come to call ‘company fit’—a partner with a culture and a strategy we feel
comfortable with, in terms of the investment they’ll make, the training they’ll give their people, and the support
they’ll ask from us,” says the Loctite executive. “In many cases, this leads us to partners who have no experience
with our market. The first couple of times, this felt risky, but our success with some of these partnerships made us
bolder in choosing distributors.”
In effect, this means bypassing the obvious choice—a distributor who has the right customers and can therefore
generate quick sales—in favor of a partner with a greater willingness to invest and an acceptance of an open
relationship that draws on the multinational’s experience in marketing its own products.
Source: Arnold, D. 2000. Seven rules of international distribution. Harvard Business Review, 78 (6): 135.
Discussion Question 24: What are some examples of successful (or unsuccessful)
exporting?
