INTERNATIONAL STRATEGIC CHOICES

Many aspiring companies have failed in their bid to "internationalize" their oper­ations. One reason is the tendency to view the company`s international or global effort as an "add on" to its existing strategies. Some companies approach interna­tional markets as a mere extension of their domestic markets. Assumptions of these types can be deadly. Other companies have copied their industry leader`s international strategy. This, too, can cause failure. Whether the company should compete using one of the above four models depends on many factors, especially the desired extent and type of international participation. This section focuses on this important factor.

Mapping the company`s international strategy involves three steps:

  • Determining the company`s preparedness for international operations.

  • Selecting the company`s mode of entry into different markets or countries.

  • Developing the organizational structure that supports the chosen strategy.

Determining the Company`s Preparedness for International Operations

This phase requires attention to two important areas: (1) analysis of the company`s internationalization drivers and potential and (2) determining the extent of the company`s readiness for international operations. Results from these analyses complement one another and are useful in selecting the company`s international strategy.

Analyzing the Industry`s Internationalization Drivers and Potential. This phase of the analysis requires identifying the industry-related factors that encour­age internationalization. These factors relate to market conditions, competitive forces in the target industry and market, and government regulations. Executives typically consider several variables within each area 6.

Market Factors. These variables refer to the attractiveness of the industry as a target market. In particular, internationalization is attractive when:

  • Market needs do not vary considerably from one country to another. Although diversity of needs offers opportunities to exploit, similarity of needs can facilitate production and marketing activities, lower costs, and reduce risks.

  • Customers are not widely dispersed globally. When customers are widely dispersed, serious coordination problems may arise.

  • The company can build on its well-known brands or its advertising cam­paigns. Internationalization is attractive when the company`s brand names are well known, and these require little effort to position them in local markets. Similarly, when advertising themes or campaigns can be used in new markets, the cost of internationalization is reduced.

  • International distribution channels exist. In this case, access to international markets will be easier and less costly.

Competitive Factors. Two issues deserve attention here:

  • The extent to which the company`s key rivals have internationalized their operations. As mentioned, internationalization can be used to defend the com­pany`s market. When rivals internationalize their operations, they can achieve economies of scale and increase their ability to create new products. Sometimes, this may prompt some companies to internationalize their own operations to remain internationally viable.

  • Competitive interdependence among countries. If success in one market requires participation in other markets, international entry is desirable. This inter­dependence can be a potent source of innovation and economies of scale.

Government Regulations. Here, managers need to examine several factors:

  • To what extent do national trade policies protect domestic producers? If trade policies are designed to protect domestic producers, the attractiveness of the target industry as an international arena is diminished.

  • To what extent is the industry`s (or country`s) technical standards compati­ble with the company`s engineering and manufacturing skills? If the standards are compatible with the company`s products, the attractiveness of the industry is enhanced.

  • What is the nature and extent of marketing regulations in the countries under consideration? If different regulations exist, they may increase cost, require customization, and serve as an entry barrier. These regulations reduce the attrac­tiveness of an industry as an international opportunity.

Evaluating a company`s international preparedness demands an analysis of its structure, managerial process, culture, and people. Managers should ask sev­eral questions:

  • How will the company`s increased international participation affect its mis­sion and competitive approach? How will internationalization influence the com­pany`s ability to achieve its goals?

  • To what extent does the company have an international identity? Has it always defined itself as a domestic competitor, or does it have some international recognition?

  • What is the level of existing international expertise in the company? Who among the senior executives has international expertise? Does the company value international expertise in hiring, evaluating, and promoting its executives? Does the company hire foreign nationals?

  • How will the internationalization process affect the company`s structure, authority lines, and communication flows?

  • If the company had some previous international activities, to what extent has it coordinated those operations with its domestic operations? To what extent are the existing international operations themselves coordinated? For instance, does the company develop and use global budgets? Does it use global perfor­mance reviews?

  • If the company has some previous international experience, to what extent does the current structure accommodate the needs of international and domestic operations?

Considering the Mode of Entry

Several approaches can be used to enter foreign markets. These approaches require different levels of international experience and financial investments.

Initially, the company may rely on exporting activities to gain a foothold in an international market. Next, with increased international expertise, the company may use licensing agreements to broaden its market reach. Alternatively, the com­pany may engage in franchising by authorizing others to use its products, services, and logos in new markets. The company may enter a joint venture with foreign partner(s).

Exporting. Exporting represents an initial stage in a company`s international participation. Exporting has many advantages, including:

  • Offering the company an opportunity to learn and develop appropriate familiarity with international markets.

  • Helping the company reduce business risk by providing a broader customer base that serves as a hedge against unfavorable domestic markets.

  • Enabling the company to achieve economies of scale because of increased production volume.

  • Not requiring major initial startup costs, making this option feasible for even small and startup companies.

The factors that stimulate or impede a company`s exporting activities fall into two types: external and internal. External factors relate to the company`s compet­itive setting. Internal factors pertain to the company`s unique skills and attitudes of its executives about exporting. Both external and internal factors play a major role in the company`s decision to export.

External Stimuli and Impediments. Several external factors encourage a com­pany to export, especially:

  • Poor domestic economic conditions, such as a recession.

  • Intense competitive conditions in the firm`s major industry.

  • Government support through tax incentives or other means.

However, several other external factors may discourage exporting by limiting the attractiveness of the target markets. These factors include:

  • The existence of strong trade barriers in foreign markets, such as quotas or tariffs.

  • The intensity of competition in the target market.

  • Poor demand in the target market.

  • Poor profit potential in the target market.

Internal Stimuli and Impediments. Several internal factors can influence the company`s decision to export. These include managerial beliefs, attitudes, and practices. Managerial beliefs that encourage exporting include:

  • A belief that exporting can contribute positively to the company`s growth and profitability.

  • A belief that the risks and costs associated with exporting are offset by benefits from this activity.

  • A belief that exporting is more profitable than purely domestic operations.

  • A belief that the initial exporting effort does not depend on the incentives offered by the government.

  • A belief that the company has a unique product or a distinct competitive advantage.

Unfortunately, sometimes the company holds beliefs that can handicap exporting activities. These beliefs develop from limited international exposure. They include:

  • The belief that the risks associated with exporting are greater than any potential gains.

  • The belief that initiating exporting activities are very costly.

  • The belief that the company will encounter major difficulties in initiating its exporting programs.

  • The belief that exporting is suitable only for very well-established large companies.

Managerial beliefs about exporting should be examined to determine their accuracy. Further, to be a successful exporter, the company should:

  • Obtain qualified export counseling and develop an international marketing plan before starting an export business.

  • Secure a commitment from top management to overcome the initial financial requirements of exporting.

  • Take sufficient care in selecting overseas distributors. Establish a basis for profitable operations and orderly growth. Devote continuing attention to the export business when the U.S. market booms.

  • Treat international distributors on an equal basis with domestic counterparts.

  • Differentiate its marketing approach. The company should not assume that a given market technique and product will automatically be successful in all countries.

  • Be willing to modify products to meet regulations or cultural preferences of other countries.

  • Print service, sales, and warranty material in locally understood languages.

  • Provide readily available servicing for the product. A product without the necessary service support can acquire a bad reputation quickly.

Licensing and Other Contractual Agreements. In addition to exporting, the company can use licensing as a means of entering foreign markets. Thus, for a fee, the company transfers one or more of its intangible assets (such as a trade secret, patent, or trademark) to foreign companies. Licensing has been widely used in many industries, such as civilian aircraft manufacturing, PC, semiconductors, electronics, and hotels.

Several factors encourage companies to engage in licensing agreements:

  • Licensing diffuses the technology and establishes it as the industry`s domi­nant standard. Licensing encourages others to use its technology so it can control the market or preempt rival technologies. For example, with the use of licensing agreements, Microsoft`s Windows became a worldwide success.

  • Royalties generated from licensing are a major source of revenue on prod­ucts already considered mature in the domestic markets.

  • The company may use cross-licensing to obtain information about other technologies, products, or processes. For instance, a company may allow another company to use its technology in return for access to that company`s new tech­nology.

  • International licensing keeps the company`s technology or trademark in use.

  • Sometimes the R&D activities of a company generate products or technolo­gies that fall outside the company`s mission. In this case, the company uses licens­ing to make use of its technology, without assuming the risks associated with its marketing.

  • For users, licensing can speed up access to vital technological innova­tion. It can also help fill voids in these companies` technological programs.

As a mode of entry into foreign markets, licensing offers a company three advantages:

  • It helps the company overcome trade barriers, without much cost or equity investment.

  • It allows the company to overcome limits on investments imposed by other countries or governments.

  • It may encourage the company to adapt its technology for local markets, thereby reviving it for use in other countries or applications.

Still, there are several shortcomings for licensing as a mode of entry. For exam­ple, the income generated from licensing may not match the income that can be gained by using other modes of entry. There is also the possibility that licensing can create a competitor for the company, as happened with U.S. companies` expe­rience with Japanese and Korean companies. After gaining access to U.S. technology through licensing, Japanese companies offered products that became substi­tutes to U.S.-made products.

Franchising. This approach is fast becoming a popular mode of entering foreign markets. In franchising, a company authorizes other companies to do business in a specific manner. Soft-drink and fast-food companies have used franchising to expand internationally.

Franchising has many advantages for both the franchisors and franchisees. For franchisors, it offers a quick way of entering foreign markets, thus expanding their operations and achieving higher profitability. For franchisees, it gives them access to a successful business concept and reduces business risk.

Despite the increasing popularity of international franchising, companies fre­quently face major problems, including red tape by host governments, high duties imposed by host countries, monetary uncertainties, logistical problems, lack of control over the franchisees, patent or trademark protection, and imitation by local companies.

International Joint Ventures. International joint ventures (IJVs) are an impor­tant mode of entry to foreign markets. IJVs can help companies overcome trade barriers, achieve economies of scale, facilitate the acquisition of managerial and technological skills, secure access to raw materials, and reduce the risks associated with complex projects. Companies participate in IJVs to minimize the cost of oper­ations, improve their competitive position, and learn new skills.

Despite an impressive record of achievements, IJVs are risky. Many IJVs fail because of: ineffective managerial decisions about the type, scope, duration, and administration of IJVs, the careless selection of partners, and the company`s fail­ure to link IJVs to their strategy.

Several factors encourage the use of international joint ventures, including:

  • The company`s major industry is experiencing technological volatility. In this case, an IJV allows the company to reduce the costs and risks associated with developing new technologies. These reasons may explain why companies in the pharmaceutical industry have been among the most active in IJVs.

  • High demand uncertainty also favors the use of IJVs. An IJV helps reduce uncertainty by sharing knowledge and resources.

  • Significant entry barriers exist in the target foreign market.

  • There is a need for major economies of scale. Specifically, potential savings in production, distribution, and marketing are important for gaining or sustaining a strong competitive position.

  • The company has expertise in international operations. Companies with extensive international business expertise are more likely to succeed than compa­nies without IJV experience.

Despite their growing popularity, IJVs are considered a risky strategic option. A major contributor to this high rate of failure is the poor selection of IJV partners. To minimize the risks associated with IJVs, exec­utives should consider the following issues in selecting prospective partners.

  • How do partners define their current business? How do they intend to change their business concept if they are contemplating such a change? How does the IJV fit into the partners` current and future business definitions?

  • How critical is the proposed IJV to the partners` goals, mission, and strategy?

  • Who is championing the IJV in the future partner firm? What are their expectations of the venture? What is their track record?

  • What is the partner`s international expertise?

  • How compatible are the managerial styles and organizational systems of the partners?

Another factor that contributes to the high rate of IJV failure is disagreements among partners on the scope of the venture. Success demands agreement on the scope and objectives of the IJV, the legal form, the contributions of the partners to the venture, the management, the venture`s relationship with the parent company, the life span of the venture, and the conditions under which the IJV will be dis­banded. These issues require careful and diligent negotiations.

Still, despite good intentions, additional factors may cause IJVs to fail. For example:

  • Partners may delay the transfer of technology to the IJV and cause its failure.

  • Organizational or national cultural clashes among IJV managers and employees may cause the venture to fail.

  • Differing management styles and disagreements on goals or policies may lead to failure.

  • The venture may be initiated during poor economic conditions, or local authorities may respond negatively to the venture.

Wholly owned subsidiaries. Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market. Companies doing this have to bear the full costs and risks associated with setting up overseas operations (in contrast with joint ventures, where the costs and risks are shared, or licensing, where the licensee bears most of the costs and risks). Despite this considerable disadvantage, however, two clear advantages are associated with setting up a wholly owned subsidiary.

First, when a company`s competitive advantage is based on control over a technological competence, a wholly owned subsidiary is normally the preferred entry mode because it reduces the risk of losing control over that competence. For this reason, many high-tech companies prefer to set up wholly owned subsidiaries overseas rather than enter into joint ventures or licensing arrangements. Thus wholly owned subsidiaries tend to be the favored entry mode in the semiconductor, electronics, and pharmaceutical industries. Second, a wholly owned subsidiary gives a company the kind of tight control over operations in different countries that is necessary if a company is going to pursue a global strategy. When the pressures for global integration are high, it may pay a company to configure its value chain in such a way that value-added at each stage is maximized. Thus a national subsidiary may specialize in manufacturing only part of the product line or certain components of the end product, exchanging parts and products with other subsidiaries in the company`s global system. Establishing such a global manufacturing system necessarily requires a high degree of control over the operations of national affiliates. Different national operations have to be prepared to accept centrally determined decisions about how they should produce, how much they should produce, and how their output should be priced for transfer between operations. Licensees or joint-venture partners are unlikely to accept such a subservient role.

Global Strategic Alliances. The term global strategic alliances refers to cooperative agreements between potential or actual multinational competitors. Alliances range from formal joint ventures, in which two or more multinational companies have an equity stake, to short-term contractual agreements in which two companies may agree to cooperate on a particular problem (such as developing a new product). Critics warn that global strategic alliances, like formal joint ventures, give competitors a low-cost route to gain new technology and market access. On the other hand, strategic alliances can be to the advantage of both parties. However, in order for this to occur, alliances must be structured so that (1) a company does not unintentionally give away proprietary technology to its alliance partner and (2) a company learns important skills from its alliance partner. Alliances can be seen as a way of sharing the high fixed costs and high risks associated with new product development or with the opening up of new markets. Further, an alliance can be seen as a way of bringing together complementary skills and assets that neither company could easily develop on its own.

EXHIBIT 1
ADVANTAGES AND DISADVANTAGES OF DIFFERENT ENTRY MODES

Having discussed the different modes of entry, a question now arises: How can a company choose an appropriate mode of entry? The next section answers this important question.

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