Chapter 8: International Strategy
foreign partner to successfully manufacture or develop and market a competitive product
or service in the host country market).
Strategic alliances also present potential problems and risks due to (1) selection of
incompatible partners and (2) conflict between partners.
Several factors may cause a relationship to sour. Trust between the partners is critical and
is affected by a number of fundamental issues:
• The initial condition of the relationship
Note: Strategic alliances are covered in much greater depth in Chapter 9.
Teaching Note
British Telecommunications (BT) planned to create a virtual shopping mall in Spain
through its joint venture with Banco Popular, a retail-focused Spanish bank. The two
8-4d Acquisitions
Cross-border acquisitions have also been increasing significantly. In recent years, cross-
border acquisitions have comprised more than 45 percent of all acquisitions completed
worldwide.
Chapter 8: International Strategy
Beyond the disadvantages previously discussed for domestic acquisitions (Chapter 7),
international acquisitions also can be quite expensive (because of debt financing) and
require difficult and complex negotiations due to:
• The same disadvantages as domestic acquisitions
Teaching Note
Emphasize that firms often use multiple entry strategies. For example, Walmart has
used multiple entry strategies as it globalizes its operations, ranging from joint ventures
in China and Latin America to acquisitions in Germany and the United Kingdom.
8-4e New Wholly Owned Subsidiary
Firms that choose to establish new, wholly owned subsidiaries are said to be undertaking a
greenfield venture. This is the most costly and complex of all international market entry
alternatives.
The advantages of establishing a new wholly owned subsidiary include:
Though the profit potential is high, establishing a new wholly owned subsidiary is risky
for two reasons.
• This alternative carries the highest costs of all entry alternatives since a firm must build
Chapter 8: International Strategy
8-4f Dynamics of Mode of Entry
The choice of a market entry strategy is determined by a number of factors. However,
initial market development strategies generally are selected to establish a firm’s products
in the new market.
• Exporting does not require foreign manufacturing expertise; it only requires an investment
in distribution.
If intellectual property rights in an emerging economy are not well protected, the number
of firms in the industry is growing fast, and the need for global integration is high, entry
modes such as joint ventures or wholly owned subsidiaries are preferred.
However, the entry strategy should be matched to the particular situation. In some cases, a
firm may pursue entry strategies in sequential order—beginning with exporting and
ending with greenfield ventures. The entry mode decision should be based on the
following conditions:
• The industry’s competitive conditions
Chapter 8: International Strategy
8-5 RISKS IN AN INTERNATIONAL ENVIRONMENT
Political and economic risks complicate the management of international diversification.
One reason is that these risks result in competitive conditions that may differ significantly
from what was expected.
FIGURE 8.6
Risks in the International Environment
This figure presents some specific examples of political and economic risks that
multinational firms face.
8-5a Political Risks
Political risks are those related to instability in national governments and to civil or
international war.
Teaching Note
For a useful way to identify the political risk associated with different countries, see the
National government instability creates multiple potential problems for internationally
diversified firms. Economic risks come up as governments react to a variety of events,
reflected in uncertainty in terms of:
Teaching Note
A number of national governments attempt to minimize political risk (to themselves) by
Chapter 8: International Strategy
STRATEGIC FOCUS
The Global Delivery Services Industry: Economic Disruption of Tariffs and Trade
Wars
Thanks to the explosive growth in online retailing, the market for package delivery has
been expanding rapidly. Worldwide, the three largest package delivery services are DHL,
FedEx, and UPS, and the four largest markets for these services are the United States,
Teaching Note
Engage students by asking how often they or people they know purchase products
online and have them delivered. Lead students in a discussion of the domino effect of
8-5b Economic Risks
Economic risks are interdependent with political risks; however, some economic risks are
specific to international diversification. For example, differences and fluctuations in the
value of the different currencies are a primary concern to internationally diversified firms.
Chapter 8: International Strategy
8-6 STRATEGIC COMPETITIVENESS OUTCOMES
Once its international strategy and mode of entry have been selected, the firm turns its
8-6a International Diversification and Returns
Recall that in Chapter 6 the discussion centered on product diversification where a firm
manufactures and sells a diverse variety of products.
Based on the advantages discussed earlier, international diversification should be
8-6b Enhanced Innovation
As mentioned in Chapter 1, developing new technology is critical to strategic
competitiveness. In fact, Porter indicates that a nation’s competitiveness depends on the
innovativeness of its industries and that firms achieve strategic competitiveness in
international markets through innovation (see Figure 8.2).
Chapter 8: International Strategy
As stated earlier in this chapter, one of the advantages of international expansion is having
A complex relationship exists among international diversification, innovation, and
performance. This leads, in fact, to the following circular relationship:
• Some level of performance is necessary to provide the resources required to diversify
internationally.
It also is possible that international diversification may result in improved returns for
product-diversified firms (referred to as unrelated diversification) by increasing the size of
the potential market for each of the firm’s products. But managing a firm that is both
product and internationally diversified is very complex.
Cultural diversity may enable a firm to compete more effectively in international markets.
8-7 THE CHALLENGE OF INTERNATIONAL STRATEGIES
8-7a Complexity of Managing International Strategies
Managers of internationally diversified firms face a number of complex challenges.
• Firms face multiple risks from being in several countries.
Chapter 8: International Strategy
8-7b Limits to International Expansion
As mentioned before, firms generally earn positive returns by diversifying internationally.
However, there are limits to the advantages of international diversification.
• Greater geographic dispersion across country borders increases the costs of coordination
between units and the distribution of products.
Teaching Note
The complex nature of the management challenges that face internationally diversified
firms is illustrated by the following cases:
• Robert Shapiro, CEO of Monsanto, assumed that Europe was similar to the United
States, but the firm’s genetically engineered seeds have been strongly rejected in
Europe.
Chapter 8: International Strategy
ANSWERS TO REVIEW QUESTIONS
1. What incentives influence firms to use international strategies?
Traditional incentives that cause firms to expand internationally are to gain access to
2. What are the three basic benefits firms can gain by successfully implementing an
international strategy?
Firms can derive three basic benefits from international strategies. These benefits are as
follows:
Chapter 8: International Strategy
3. What four factors are determinants of national advantage and serve as a basis for
international business-level strategies?
According to Michael Porter, the resources and capabilities established in a firm’s home
country often enable the firm to pursue its strategy beyond the domestic market. Porter
4. What are the three international corporate-level strategies? What are the
advantages and disadvantages associated with these strategies?
The three international corporate-level strategies are multidomestic, global, and
transnational (see Figure 8.4).
Firms following multidomestic strategies assume that markets are different and should be
Chapter 8: International Strategy
5. What are some global environmental trends affecting the choice of international
strategies, particularly international corporate-level strategies?
Global strategies require integration and coordination across units (and across national
boundaries) and enable the achievement of economies of scale and efficiency. On the
Chapter 8: International Strategy
6. What five entry modes do firms use to enter international markets? What is the
typical sequence in which firms use these entry modes?
Choice of mode of entry is determined by a number of factors, and the following modes
are listed in a sequence that is typical in practice. Initial market entry will often be
through export because this requires no foreign manufacturing expertise and demands