Chapter 8
International Strategy
CHAPTER OVERVIEW
LEARNING OBJECTIVES
LECTURE NOTES
8-1 IDENTIFYING INTERNATIONAL OPPORTUNITIES
8-1a Incentives to Use International Strategy
8-4 CHOICE OF INTERNATIONAL ENTRY MODE
8-4a Exporting
8-4b Licensing
8-5 RISKS IN AN INTERNATIONAL ENVIRONMENT
8-5a Political Risks
8-5b Economic Risks
8-6 STRATEGIC COMPETITIVENESS OUTCOMES
8-6a International Diversification and Returns
8-6b Enhanced Innovation
Chapter 8: International Strategy
INSTRUCTOR’S NOTES FOR MINDTAP
What Would You Do?
Video Quiz
CHAPTER OVERVIEW
Chapter 8 begins by explaining how more and more firms need to compete in regions and
markets beyond their domestic markets in order to grow. However, because global
markets are less stable and more unpredictable, global firms must adopt international
strategies.
The next section of the chapter distinguishes between international business-level and
international corporate-level strategies, both of which may be used to geographically
diversify operations. Conditions or factors in a firm’s home market either hinder or
support the firm’s efforts to use an international business-level strategy for the purpose of
establishing a competitive advantage internationally. These four determinants are factors
of production; demand conditions; related and supporting industries; and patterns of firm
strategy, structure, and rivalry.
Chapter 8: International Strategy
In the next section, students learn how two global environmental trends—liability of
foreignness and regionalization—are influencing firms’ choices of international strategies
as well as their implementation. Liability of foreignness requires firms to analyze how
distance between their domestic and international markets affects their ability to compete.
Some firms choose to concentrate their international strategies on regions (e.g., the EU,
Asia, Latin America) rather than on individual country markets.
Implementing international strategies is not without risk, as students discover in the next
section. The two major categories of risks firms need to understand and address when
diversifying geographically through international strategies are political risks (risks
concerned with the probability that a firm’s operations will be disrupted by political forces
or events, whether they occur in the firm’s domestic market or in the markets the firm has
entered) and economic risks (risks resulting from fundamental weaknesses in a country’s
or a region’s economy with the potential to adversely affect a firm’s ability to implement
its international strategies).
Chapter 8: International Strategy
LEARNING OBJECTIVES
1. Explain incentives that can influence firms to use an international strategy.
2. Identify three basic benefits firms gain by successfully implementing an international
strategy.
3. Explore the determinants of national advantage as the basis for international business–
level strategies.
Lecture Notes
Chapter Introduction: This chapter examines opportunities facing firms as they seek to
develop technological innovation and exploit core competencies by diversifying into
global markets. In addition, it addresses different problems, complexities, and threats that
OPENING CASE
Netflix Achieves Substantial Growth Through International Expansion, But Such
Growth Also Is Attracting Significant Competition
Netflix is a content streaming company that provides a broad selection of on-demand original
content, as well as content produced by movie studios and network television. Having reached
Chapter 8: International Strategy
Teaching Note
Engage students by asking whether they are Netflix customers. Encourage them to
identify other firms that have reached or could reach the saturation point in the United
Although national boundaries, cultural differences, and geographical distances all pose
barriers to entry into many markets, significant opportunities draw businesses into the
international arena.
• Global firms must formulate a successful strategy to take advantage of international
opportunities.
Figure Note
Figure 8.1 provides an overview of the various choices and outcomes of strategic
competitiveness.
FIGURE 8.1
Opportunities and Outcomes of International Strategy
The following opportunities and outcomes of international strategy are illustrated in
Figure 8.1:
• Firms should first identify international opportunities related to increasing market size,
return on investment, economies of scale and learning, and location-related advantages.
Chapter 8: International Strategy
1
Explain incentives that can influence firms to use an
international strategy.
8-1 IDENTIFYING INTERNATIONAL OPPORTUNITIES
International strategy refers to selling products in markets outside of the firm’s domestic
market to expand the market for its products.
Figure Note
FIGURE 8.2
Incentives and Basic Benefits of International Strategy
The following five incentives and three basic benefits of international strategy are listed in
Figure 8.2:
• Five benefits of international strategy are extending a product’s life cycle, gaining easier
access to raw materials, finding opportunities to integrate operations on a global scale,
8-1a Incentives to Use International Strategy
Raymond Vernon adapted the product life cycle concept to explain internationalization.
1. A firm introduces an innovation (new product) in its domestic market.
Chapter 8: International Strategy
Some firms implement an international strategy to secure critical resources, such as
petroleum reserves (for the oil industry), bauxite (for the manufacture of aluminum), or
rubber (for tire manufacturing).
Traditional motives persist, but other emerging motives also drive international expansion.
• Pressure has increased for global integration of operations, driven mostly by universal
product demand.
Companies seeking to expand operations internationally need to understand the pressure
on them to respond to local, national, or regional customs, especially where goods or
services require customization due to cultural differences or effective marketing to entice
customers to try a different product.
• Firms adapt products to local tastes as they move into new national markets.
Opportunities available to firms through an international strategy include:
• Increasing the size of potential markets
Chapter 8: International Strategy
Teaching Note
Firms expanding into international markets must recognize that many countries have
characteristics that are unique and may differ significantly from the traditional
European markets into which U.S. firms have expanded. Thus, firms must recognize
this and:
• Be capable of managing multiple risks—e.g., financial, economic, and political
risks
8-1b Three Basic Benefits of International Strategy
Increased Market Size
Expanding internationally enables firms to increase greatly the size of the potential market
for their products. This may be of critical importance if the domestic market is too small to
support scale-efficient manufacturing facilities.
Economies of Scale and Learning
By expanding the size and scope of their markets, firms may be able to achieve economies
of scale in manufacturing (and in other operations, such as marketing, research and
Chapter 8: International Strategy
Teaching Note
Economies of scale are critical in the global auto industry. Honda has been a largely
successful firm with substantial competencies in the manufacture of engines; however,
Firms may also be able to exploit core competencies in international markets through
resource and knowledge sharing between units across country borders. This sharing
Location Advantages
Firms also may be able to achieve a comparative advantage and lower the basic costs of
their products by locating facilities in low-cost markets for critical raw materials, cheap
labor, key suppliers, energy, customers, and/or natural resources.
Other factors that may impact location advantages are as follows:
• The needs of intended customers
8-2 INTERNATIONAL STRATEGIES
International strategies available to firms are business-level and corporate-level (see
Chapters 4 and 6).
Chapter 8: International Strategy
8-2a International Business-Level Strategy
Each business must develop a competitive strategy focused on its own domestic market.
Business-level generic strategies are discussed in Chapter 4, but international business–
level strategies have some unique features.
• In an international business-level strategy, the home country of operation is often the most
important source of competitive advantage.
FIGURE 8.3
Determinants of National Advantage
As Figure 8.3 illustrates, four interrelated national or regional factors contribute to the
competitive advantage of firms competing in global industries.
• Factor conditions or the factors of production
Chapter 8: International Strategy
These factors can be subdivided into four categories:
• Basic factors, such as labor and natural resources
Nations having both advanced and specialized factors are likely to be characterized by
growth in new firms that are strong global competitors.
Ironically, countries often develop advanced and specialized factors because they lack
critical basic resources.
• Some Asian countries, such as South Korea, lack abundant natural resources but offer a
The second factor that determines national advantage is demand conditions, which are
characterized by the nature and size of buyers’ needs in the home market for the industry’s
products or services. The size of the segment can create demand sufficient to justify the
construction of scale-efficient facilities.
Related and supporting industries are the third factor of the national advantage model.
National firms may be able to develop competitive advantage when industries that provide
Chapter 8: International Strategy
Growth in certain industries is fostered by the fourth factor—firm strategy, structure, and
rivalry. As expected, patterns of firm strategy, structure, and competitive rivalry among
firms in an industry vary between nations.
• In Italy, the national pride of the country’s designers has spawned strong industries in
sports cars, fashion apparel, and furniture.
4
Describe the three international corporate-level strategies.
8-2b International Corporate-Level Strategy
The type of corporate-level strategy adopted by a firm has an impact on the selection and
implementation of its international business-level strategy.
Figure Note
The three types of international corporate-level strategies are illustrated in Figure 8.4,
and relationships between structural arrangements and strategy type are discussed
further in Chapter 11.
Chapter 8: International Strategy
FIGURE 8.4
International Corporate-Level Strategies
As Figure 8.4 illustrates, a firm should choose its international corporate-level strategy
based on the need for both local responsiveness and global integration.
• When the need for global integration is high and there is little need for local market
Multidomestic Strategy
A multidomestic strategy is one where strategic and operating decisions are decentralized
to the strategic business unit in each country in order to tailor products and services to the
local market. The multidomestic strategy:
• Assumes business units in different countries are independent of one another
• Contends that markets differ and can be segmented by national borders
Teaching Note
A few years back, Sony’s entertainment business changed its strategy from global to
multidomestic when it decided to produce films and television programs for local
markets around the world through production facilities and television channels in most
Chapter 8: International Strategy
The use of multidomestic strategies:
• Usually expands the firm’s local market share because the firm can pay attention to the
needs of local buyers
Global Strategy
A global strategy is one where standardized products are offered across country markets
and competitive strategy is dictated by the home office. The global strategy:
• Assumes strategic business units operating in each country are interdependent
• Attempts to achieve integration across business and national markets, as directed by the
home office
Teaching Note
U.K.-based temporary energy provider, Aggreko, operates in 48 countries and employs
a global strategy. The firm’s fleet of equipment is integrated globally, which allows it to
shift equipment to different regions of the world to meet specific needs. Its global
strategy also allows Aggreko to design and assemble its equipment in-house to meet the
needs of its customers.
Chapter 8: International Strategy
STRATEGIC FOCUS
IKEA’s Global Strategy in the Age of Digitalization and Urbanization
Headquartered in Sweden, IKEA has pursued a global strategy in developing its well-
designed, but inexpensive retail furniture. As with most companies pursuing a global
Teaching Note
Begin by asking if students have shopped at IKEA and are familiar with the company’s
products. Share with them that IKEA has standardized its product offerings around the
Transnational Strategy
A transnational strategy is a corporate strategy that seeks to achieve both global
efficiency and local (national market) responsiveness.
• It is difficult to achieve because of requirements for both strong central control and
coordination to achieve efficiency and local flexibility and decentralization to achieve local
Teaching Note
Students sometimes find the transnational strategy difficult to grasp. This has prompted
some to refer to this option as an “idealized form,” suggesting that this is not possible
to achieve in reality. This also suggests, however, that this model represents a worthy
goal for the international firm. It is worth asking students if they believe it will ever be
possible to be truly transnational and what would be needed to make this a reality.
Chapter 8: International Strategy
Teaching Note
Refer back to Figure 8.4 to summarize relationships between the need for global
5
Discuss environmental trends affecting the choice of international
strategies, particularly international corporate-level strategies.
8-3 ENVIRONMENTAL TRENDS
Implementing a transnational strategy is difficult; however, firms are challenged to do so
because of these facts.
• There is an increased emphasis on local requirements (e.g., customization to meet
8-3a Liability of Foreignness
8-3b Regionalization
A firm competing in international markets must decide whether to compete in all (or
many) world markets or to focus its efforts on a specific region or regions.
Competing in many markets may enable the firm to achieve economies of scale because of
Chapter 8: International Strategy
Teaching Note
At this point, it might useful to draw a parallel between competing in multiple national
markets and owning businesses in multiple industries. Firms may be better positioned
Lands’ End Adjusts to the Liability of Foreignness: A Mini-Case
The globalization of businesses with local strategies is demonstrated by the online
operation of Lands’ End, Inc. (now owned by Sears), which uses local Internet
portals to offer its products for sale. Lands’ End, formerly a direct-mail catalog
business, launched its Web-based business in 1995. The firm established websites
Sam Taylor, vice president of international operations for Lands’ End, indicated
that the firm has a centralized Internet team (handling development, design, etc.)
at the home office, but a local presence is also needed. So the firm hired local
Internet managers, designers, marketing support, and so on, to gain insight into
the nuances of local markets. He also explained that each additional website was
Chapter 8: International Strategy
Regional strategies also are being promoted by groups of countries that have developed
trade agreements to enhance the economic power of a region. Examples include the
following:
• Membership in the European Union (EU) is limited to Western European countries, but it
is being expanded to include other Western European countries as well as countries in
Central and Eastern Europe.
Teaching Note
The movement of investment funds has not been only from the United States to Mexico
as Mexican investors have made significant investments in the United States, and some
8-4 CHOICE OF INTERNATIONAL ENTRY MODE
Firms have a variety of alternative means of expanding internationally as indicated in
Figure 8.5.
Figure Note
Students can refer to Figure 8.5 as you discuss each mode of entry into international
markets.
Chapter 8: International Strategy
FIGURE 8.5
Modes of Entry and Their Characteristics
Figure 8.5 presents five alternative entry modes available to firms for international
expansion:
• Exporting
8-4a Exporting
A common—but not necessarily the least costly or most profitable—form of international
expansion is for firms to export products from the home country to other markets.
However, exporting also has disadvantages:
• Exporters may have to pay high transportation costs.
Because of the potentially significant transportation costs and the usually greater similarity
of geographic neighbors, firms often export mostly to countries that are closest to their
facilities.
Chapter 8: International Strategy
8-4b Licensing
Through licensing, a firm authorizes a foreign firm to manufacture and sell its products in
a foreign market.
• The licensing firm (licensor) generally is paid a royalty payment on every unit that is
produced and sold.
Teaching Note
Counterfeiting is one risk to licensing strategies. Sony and Philips co-designed the
audio CD. In the past, they licensed the rights to companies to make CDs, and Sony
The costs or potential disadvantages of licensing include the following:
• The licensing firm has little control over manufacture and distribution of its products in
foreign markets.
8-4c Strategic Alliances
Strategic alliances enable firms to: