17 International Strategies

1.1 Learning Objectives

1.2 Introduction

1.3 International Strategies

1.4 Reasons for Going International

1.5 International Strategies

1.5 a Expansion Strategy

1.5 b International Market  entry strategy

A.   Exporting

B.  Sourcing

C.  Licensing

D.  Franchising

E.  Investment

F.   Strategic Alliances

1.6 How to decide what to export and when

1.7 Summary

1.1 Learning Objectives

Following are the objectives of the current lesson:

4. To help students define international strategies

5. To help students understand why a firm would want to expand internationally and the relationship between international strategy and competitive advantage

6.Describe different vehicles for international expansion

1.2 Introduction

Today when you go to a mall or to a park for your morning walk you will see people wearing Nike or Reebok, with their apple ipods or Dell computers, listening to Hindi rock or a English rock band or working on their smart phone branded by a company in developed country but probably made in China. You’ll find people driving BMS or an Audi on Indian roads. This convergence of consumer needs across globe has translated for companies as opportunity to continue gaining double digit growth rates by venturing abroad. It was this convergence of needs that today you’ll find Kentucky Fried Chicken (KFC), Coach, Nike, Reebok, IBM etc all having a presence in many countries outside their home country. This is referred to as international strategy. The current lesson tries to answer why companies go international, when does a company adopt this strategy and how.

1.3 International Strategies

International expansion is a form of diversification because the company has chosen to operate in a different market. A firm’s international strategy is how it approaches the cross-border business activities of its own company and competitors and how it contemplates doing so in the future. International strategy reflects the choices a firm’s executives make about sourcing and selling its goods in foreign markets.

1.4 Reasons for Going International

The reasons for companies exploring new markets could be either one of the following

1.Saturation of their domestic markets and as a result stagnation in the growth rates of these companies. In such cases to realize their sales and profit targets companies have to move out.

2. In some cases companies enter new segments or markets because of their customer or client demand. For example when Suzuki entered into India with Maruti they brought Asahi glass along with them.

3. In some cases the companies move out because of attractive cost structures. For example the development of Indian service sector and Chinese manufacturing sector are success stories of cost advantages which companies could reap in these countries. The labor cost and competitiveness motivated companies to relocate their operations from developed countries across the Globe to India.

4.    Countries and continents are in different stages of development. Sometimes companies go global with a product which might have become obsolete in their own market would be considered as a new product in another market. For example Apple Iphone has used this strategy very successfully with a phased new product introduction strategy. Under this strategy a product which has been phased out in USA or Europe is introduce and sold as a product range in a developing country.

5.    Some companies go global in pursuit of competitiveness and perfection. Technically because of difference in factors of production, each country has competitiveness in some industry. For example Italy is known for leather products, Switzerland for chocolates and cheese and Germans for their automobile know how. So if an Indian company wants to increase its competitiveness about fashion it might enter Italian market or for automobile knowledge enter German market before the competition is motivated to come to Indian market.

Figure 1: Reasons for Companies Going Global

6.    Emerging markets are another reason which motivate companies to go global. Sometimes markets which were earlier inaccessible because of transportation of policies of the government become available for trade and the market scope and ease of doing business of these emerging markets motivates companies to go global.

7.    Internet and its capacity to integrate wide spread global value chains also motivates companies to go global. Earlier companies outsourced only in close proximity for want of control and cooperation from the outsourced partner. However, internet has made it possible to cooperate and control firms in the virtual world making it possible for companies to locate across the globe. For example look under the hood of your car, your carburetor cap would be made in India, Engine in Germany, air bag in China and so on.

Whatever the reasons, for companies exploring new markets, the end result of the search and entry is that companies have deal with more complex market structures and environment. International strategies takes place when a company explores new market outside the national boundary of the country that it originated in.

1.5 International Strategies

Domestic strategies conceptually state that a company should not try and expand until it has gained a strong foothold in its first to market. When the growth rate in this initial market starts to stagnate the company should think about expanding. A company has two options to choose from

1.  Seek a new market segment in the home country

2.  Seek new country markets.

International strategies happen when a company chooses second one of the above mentioned options. Once decided the company needs to chose the market expansion strategy.

1.5 a Expansion Strategy

This choice would narrow down the list of ways to enter the global market.

a. Strategy option 1: a company can chose to concentrate on a few segments in few countries. The segments and countries are chosen so that optimization can be achieved in resources and market investment needs.

b. Strategy option 2: this option is opposite of option number 1. In this option a company decides to concentrate on only a few countries but they decide to serve a large number of segments within these few countries

c. Strategic option 3: in this option companies try to diversify the countries that they are present in but opt to concentrate in terms of a market segment. This is classic global strategies strategy where companies seek out similarities across the market and hence world market for a product.

d. Strategic Option 4: in this option the companies try to diversify both in terms of countries portfolio as well as the segment portfolio.

Figure 2 International Market Entry Strategies

A company needs to decide which international market expansion strategy it wants to adopt. The choice between the four options would determine the extent of resources and commitment required from the company. This will also determine the risk a company is ready to bear in global marketing.

1.5 b International Market  entry strategy

Market entry refers to a company deciding how it actually wants to get the physical product to the customers of the target market segment. Up to this stage the market that has been planning and hypothesizing what he wants to this is the point where he would actually decide how to do what he wants to.

There are multiple modes of entry into a market. A company chooses the model of entry on basis of not only its market expansion strategy but also on basis of amount of risk it wants to take in an economy and amount of commitment it wants to make to an economy. There are multiple modes of entry into a global market namely importing, exporting, sourcing, licensing, franchising, investment and strategy alliances. All of these routes of entry are discussed in the following sections one by one.

Figure 3 Modes of entry into Foreign Markets

a.  Exporting

One of the routes of entry into a global market is through exporting. Ideally speaking importing and exporting are two sides of the same coin. There has to be an importer for export to happen and vice versa. However, the stakes of an importer and exporter a completely different and hence these two have been discussed as separate routes of entry into global markets.

It is important for students to understand that export selling is different activity from export marketing. Export selling involves selling a standardized product with a standardized strategies mix in different places where as export strategies works with adapting the strategies mix to international customers. As a route of market entry we are referring to export selling.

Stages of Exporting Strategies:

Evolution of exporting as a route of entry can be divided into following stages:

the first stage is where the Company is unwilling to export the product out of the home country and is not looking for any sort of expansion of markets. The second stage is where a company fills unsolicited export orders. This is a phase where the company is not actively pursuing a foreign market however, does not refuse an order when it comes it way. For example while exploring the Internet you find a supplier in China who is not present in India not of strategies for Indian people. However when you pursue him he’s ready to make an exception for you. This is referred to as unsolicited exports.

As the number of unsolicited exports increases the company is motivated to explore the feasibility of exporting to the other country or countries.

In this stage, stage IV, the company undertakes exporting as an experiment to test the strategies model and environmental enablers in the target segment.

In this stage, the company  is an experienced exporter.

In this stage, the market the company of exporting to has increased in size and therefore consist gain its own demand and manufacturing but the company does not want to set up a manufacturing unit in the host country. Therefore it pursues exporting strategy to enter the market but also pursues country-focused marketing.

It is important to note that it is the commitment of the company that is changing across these six stages.

Types of export

as discussed in the earlier section a company can engage in export activity by deciding to conduct it as a

part-time activity performed by domestic employees. through an export partner

through an export department

through an export department within an international division

for multidivisional companies, each possibility exists within each division

for ease of understanding, these have been clustered together into three categories (cateora, 2008)

i. Indirect exporting

ii.  cooperative exporting

iii.  direct exporting.

i. Indirect exporting: this kind of exports happens when the company sells its product to a global market through an intermediary located in the home country but with some connections in the host country. In this case company might decide to hire a stakeholders like export management company to help out with the process.

ii.   Cooperative Exporting. This kind of exports happen when the company decides on a middle ground between direct and indirect exporting. This method of entering foreign markets is usually adopted by companies who will not want to commit resources to set up own distribution channels but still want control over their strategies processes and sub processes.

iii.  Direct Exporting. This kind of exports happen when the company decides to sell its product to the global market not through an intermediary but directly either through its own exporting department or an exclusive intermediary in the foreign market.

B. Sourcing

Sourcing decisions refer to decisions regarding purchase of raw materials, compliments or services from companies located in other countries on basis of their price and comparable quality.

These days customer value is tied into customer value and has been referred to as country of origin decisions For example, nationalistic customers perceive “made in India” as superior. Similarly, customers across the globe perceive those products manufactured in America are of superior quality and value.

These days a company’s competitive advantage is also tied into sourcing decisions. For example companies in USA have been able to deal with cost competitiveness across the globe by sourcing products, raw materials or services from countries like India and China. By leveraging company know how and cost advantages from these countries, these global marketers have been able to tap into new opportunities across the globe.

C. Licensing

Another important means of entry into a host economy is through licensing. Licensing refers to a contractual arrangement between two companies where the licensor makes an asset available to the licensee for a fixed fee referred to as royalties, license fees, or some other form of compensation (kotabe 2009). The license might be regarding any asset available with the licensor company for example a patent, trade secret, brand name and product formulation, or company name.

Main advantages of Licensing are

i. allows companies to enter foreign markets with little initial investment.

ii.  it helps company recover the R&D costs it as incurred on develop this unique asset that other want to license.

iii.  it helps company gain easy access to foreign market.

iv.  licensor would have low exposure to political and economic risks.

v. allows company to find a way around the tariffs and non tariff barriers in a target host country.

Main disadvantages of Licensing are

i.   opportunity costs because it is a limited form of participation.

ii.  technology risks as the licensor lacks control over the licensee’s strategies program.

iii.  the is also a financial risk because of this lesser degree of control.

iv. might lead to creating of competition in the market. The agreement may be short lived if the licensee develops its own expertise.

D. Franchising

Franchising is a licensing strategy. A franchise is a contract between two companies i.e. a franchisor and a franchisee. The contract allows the franchisee to operate a business developed by the franchisor in return for a fee and adherence to a wide policies and practices( Kotabe, 2009). This method tries to circumvent one of the major limitations of licensing route of entry i.e. lack of control over the licensee activities.

Main advantages of Franchising.

a.   Companies can capitalise on a asset overseas with a minimum of investment

b.   Political risks are very limited

c.   Franchisor can reap Profits with less investment in the foreign country

d.   Local knowledge can be secured and used by the franchisor and franchisee.

Companies can capitalise on a asset overseas with a minimum of investment

Political risks are very limited

Franchisor can reap Profits with less

investment in the foreign country

Local knowledge can be secured and

used by the franchisor and franchisee.

Main disadvantages of Franchising.

a.   The income stream is lower than through exporting or ownership

b.   Lesser of control over foreign operations than investments

c.   Cultural hurdles can be problems

E. Investment Companies can choose to enter into foreign country or economy through foreign direct investment. This method of entry helps companies realize their desire for partial or full ownership outside the home country.

Foreign direct investment (FDI) reflect investment flows out of the home country as companies invest in or acquire plants, equipment, or other assets. Foreign direct investment allows companies to produce, sell, and compete locally in key markets

Investment via Ownership or Equity Stake The most extensive form of participation is foreign economy is achieved by start-up of new operations in foreign economy by investing in the operations (Greenfield invest) or by merger or acquisition (M&A) of an existing enterprise (Brownfield investment).

F.  Strategic Alliances

Strategic alliances are partnerships between businesses with the purposes of achieving common goals while minimizing risk, maximizing leverage. These alliances are motivated y the desire of the companies to benefit from those facets of their operations that complement each other

a.   Surprisingly, many old competitive rivals choose this form of market expansion

b.  Cooperative relationships have increased mainly because firms no longer have the capacity to develop all their technologies in-house

5.4.6 a Types of strategic alliances

a.   licensing

b.  Franchising

c.   Joint Venture

e.  Global Strategic Partnerships.

These are discussed in diversification strategies lessons.

Figure 5 Types of Strategic Alliances

The logic behind strategic alliances

Companies enter strategic alliances to

a.   Defend their market position in the market.

b.   Catch-Up with the market leader or leapfrog to a market leader position

c.   Remain and restructure in the business

1.6 How to decide what to export and when

Life cycle concept of global trade highlights a sequential model for global trade. It states that a company goes through and exporting phase before switching first to market seeking FDI and then to cost oriented FDI. In brief this model states that by the end of international product lifecycle the exporter will become an importer of goods.

In this concept Raymond Vernon1 states that there is a distinction between developed countries and developing countries in terms of resources available. The new product development process requires large number of resources which are relatively easily available in a developed economy than a developing one. Over a period of time as the product starts approaching maturity stage the company starts looking for growth options. The motivation in this stage is to find the market which is similar to the home country so that minimum additional costs have to be incurred in adaptation of the product. Therefore, the company would ideally start exporting to other countries which are at the same level of development and have similar nuances of demand.

1 Vernon, R. (1979). The product cycle hypothesis in a new international environment. Oxford bulletin of economics and statistics, 41(4), 255-267.

Source:Adapted from Raymond Vernon and Louis T. Wells, Jr, The Manager in the International Economy (Englewood Cliffs NJ: Prentice-Hall, 1991), p. 85.

However, the country B, having the similar resources does not appreciate high degree of imports from country A and starts investing in reverse engineering and product substitution. It is important to note that since these companies from country B, dont have to make exorbitant investments in research and development, they are able to get the product to the market at the lower cost. This increases the cost pressures on companies from country A start looking for destinations where the product can be produced at lower costs. This differential is usually achieved by relocating to a developing country where factors of production are available at a lower cost than in country A. or country B. Eventually, both country A and country B may end up importing the goods from this third country. This will also make resources in country A and Country B available for newer technologies. With standardized products developing countries offer competitive advantages as production locations. This model can be used to explain the relocation of call centre activities by many US companies to India. This was a strategic move by the companies to take advantage of well-educated, English-speaking, young work force which was available at lower cost than in their home countries. Therefore, the company might enter a developing country for market oriented FDI and to stabilize its growth but it will eventually end up investing in form of production oriented FDI.

Therefore, the industry life cycle indicated that the market conditions change over time because of industry evolution. Industry evolution makes an industry more or less attractive as an investment opportunity. The concept of product life cycle is useful in understanding the course of evolution of industry. The main idea behind the life cycle is that every product evolves through a cycle of four stages – introduction, growth, maturity and decline which represents the rate of growth of sales of the company in the industry.

1.7 Summary

The current lessons talks about international strategies. International expansion is a form of diversification because the company has chosen to operate in a different market. A firm’s international strategy is how it approaches the cross-border business activities of its own company and competitors and how it contemplates doing so in the future. International strategy reflects the choices a firm’s executives make about sourcing and selling its goods in foreign markets. The lesson discusses three aspect of international strategies i.e. why companies would go international, how do they go international and when do they go international. In how do they go international the lesson talks about market entry strategies or routes. Market entry refers to a company deciding how it actually wants to get the physical product to the customers of the target market segment. Up to this stage the market that has been planning and hypothesizing what he wants to this is the point where he would actually decide how to do what he wants to. In when to go international we discuss the international product life cycle.