AB3601/2

Strategic Management

Week #7
International Strategy
Case: Shopee in India Part II

Leow Foon Lee

AY2023-24 Semester 2
Jan-Apr 2024

0
 International Strategy - Lesson Outcomes

 Categorise different types of international

strategy (geographic diversification)
 Explain the motives for geographic
diversification
 Identify the sources of national advantage
 Identify different entry modes
International Strategy - Learning Objectives
• Explain incentives that can influence firms to use an international
strategy.
• Identify three basic benefits firms gain by successfully implementing an
international strategy.
• Explore the determinants of national advantage as the basis for
international business-level strategies.
• Describe the three international corporate-level strategies.
• Discuss environmental trends affecting the choice of international
strategies, particularly international corporate-level strategies.
• Identify and explain the five modes firms use to enter international
markets.
• Discuss the two major risks of using international strategies.
• Discuss the strategic competitiveness outcomes associated with
international strategies, particularly with an international
diversification strategy.
• Explain two important issues firms should have knowledge about when
using international strategies.
 International Strategy

• International strategy: firm sells goods or services outside

domestic market.
• Incentives for firms to diversify operations
geographically.
• Three basic benefits:
1. Increased market size
2. Economies of scale and learning
3. Location advantages
 Benefits of International Strategy
(slide 1 of 3)

1. Increased Market Size

• Firms can expand potential market size to establish stronger
positions outside their domestic market.
• Larger international markets:
• Offer higher potential returns
• Pose less risk
• Have a strong science base, which is needed to facilitate
efforts to more effectively sell and/or deliver products
that create value for customers
 Benefits of International Strategy
(slide 2 of 3)

2. Economies of Scale and Learning

• Expand number of markets and enjoy economies of scale by
reducing costs and increase the value creation for customers.
• Exploit core competencies in international markets through
resource and knowledge sharing between units and
network partners to create synergy in delivering higher
quality products at lower cost.
• International markets provide firms with new learning research
and development (R&D) activities to enhance innovation.
 Benefits of International Strategy
(slide 3 of 3)

3. Location Advantages
• Reduce costs e.g. labor
• Energy
• Natural resources
• Critical supplies
• Customers
• Location advantages is affected by:
- Manufacturing and distribution costs
- Nature of international customers’ needs
- Cultural and country laws (e.g. laws and regulations)
 Incentives to Use
International Strategy
 Extend product’s life cycle
 Gain access to critical raw materials and inexpensive
labor
 Integrate firm’s operations on global scale to better serve
customers in different countries
 Better serve customers with global communications
media and Internet’s capabilities to inform
 Meet increasing demand for goods and services in
emerging markets
Benefits of International Strategy
 International Strategies

• Types of international strategy:

• Business-level international strategy
• Corporate-level international strategy
• Each international strategy must be based on core competences
• Generic strategies at business level:
• Cost leadership
• Differentiation
• Focused cost leadership
• Focused differentiation
• Integrated cost leadership/differentiation
• International strategies at corporate level:
• Multidomestic
• Global
• Transnational
Opportunities and Outcomes of
International Strategy
 International Strategies Based On Specific
Reasons and Desired Outcomes
Reasons for Geographic International Outcomes of Geographic
Diversification Strategies Diversification
Demand from Increased
Overseas Global Market Size
Seeking Strategy
Improved
Economies
Returns
of Scale
Secure Transnational Economies of
Resources / Strategy Scale, Scope,
Raw Materials Learning
Diversifying
Competitive
Risk (Currency, Multidomestic Advantage
Income) Strategy

* Note that the takeaway for geographic diversification is similar to product diversification

Understanding External Assumptions, Characteristics & Proper Implementation and

Environment and Firm’s Constraints Traits of Each Option Understanding of Constraints

Choice of Expansion Dependent on Firm’s Unique Strengths &

Weaknesses and External Factors
Three Types of International Strategies
 1. Business-Level Strategy (slide 1 of 2)

• Firms considering use of any international strategy first develop

domestic-market strategies.
• Capabilities and core competencies developed in
domestic market may be used as foundation in
international markets.
• However, conditions in firm’s domestic market affect degree to
which firm can build on capabilities and core competencies
established in international markets.
 Business-level International Strategies

Importance of national competitive advantage:

 Conditions in a firm’s domestic market affect the degree to
which firms can build capabilities that can be leveraged when
expanding to foreign markets

 Economy
 Skilled Labour
 Tech Innovation
 Infrastructure
 Capital availability
 1. Business-Level Strategy (slide 2 of 2)

• Four determinants of national advantage:

1. Factors of production – Labor, Land, Natural resources,
Capital and Infrastructure (transportation, delivery and
communication systems)
2. Supporting industries - ecosystems
3. Demand conditions - nature and size of customers’ needs
in home market. Meeting customers’ demand allows firm
to develop scale-efficient facilities and enhance
capabilities and core competencies as firm diversifies
geographically.
4. Firm strategy, structure and rivalry
• Interactions among four determinants influence firm’s
choice of international business-level strategy.
 Determinants of National Advantage

 Economy
 Skilled Labour
 Tech Innovation
 Infrastructure
 Capital availability
 Corporate-level International Strategies

 Global – MNC views the world as a

single market. Operations are
controlled centrally from the
corporate office.
 Multidomestic – Several
subsidiaries operating as stand-
alone business units in multiple
countries.
 Transnational – Specialised facilities
permit local responsiveness.
Complex coordination mechanisms
provide global integration.
 2. Corporate-Level Strategy (slide 1 of 5)

• International corporate-level strategy:

• Based on firm’s international business-level
strategy
• Focuses on scope of firm’s operations through
geographic diversification
• Required when firm operates in multiple industries that
are located in multiple countries or regions and in which
it sells multiple products
• Guided by the headquarters unit
- However, business- or country-level managers have
substantial strategic input depending on type of
international corporate-level strategy.
 2. Corporate-Level Strategy (slide 2 of 5)

• Three international corporate-level strategies:

1. Multidomestic
2. Global
3. Transnational
• Two dimensions:
1. Global integration
2. Local responsiveness
2. Corporate-Level Strategies
 2. Corporate-Level Strategy (slide 3 of 5)

A. Multidomestic Strategy
• Strategic and operating decisions are decentralized to Business Units
(BUs) in individual countries or regions to allow each unit tailor
products to local market.
• Focuses on competition within each country
• Most appropriate for use when differences between markets and
customers are significant
• Expands firm’s local market share because firm focuses attention on
local clientele’s needs
• Results in less knowledge sharing for corporation because of
differences between markets, decentralization and different
international business-level strategies employed by local units
• Does not allow economies of scale to develop. Can be more costly
 2. Corporate-Level Strategy (slide 4 of 5)

B. Global Strategy
• Firm’s home office determines strategies that business units are to use
in each country or region.
• Seeks to develop economies of scale
• Assumes customers throughout the world have similar needs
• Assumes more standardization of products across country boundaries
• Offers greater opportunities to take innovations developed at
corporate level and apply them to other markets
• Most effective when differences between markets and customers are
insignificant
• Requires efficient operations in order to be implemented successfully
 2. Corporate-Level Strategy (slide 5 of 5)

C. Transnational Strategy
• Firm seeks to achieve both global efficiency and local responsiveness.
• Integrates characteristics of both multidomestic and global strategies
• Requires “flexible coordination”—building shared vision and
individual commitment through integrated network
• Difficult to use because of conflicting goals
• Can produce higher performance than multidomestic or global
strategies
• Becoming increasingly necessary to successfully compete in
international markets
 Environmental Trends

• Two important trends influencing firm’s choice and use of

international strategies, particularly international
corporate-level strategies:
1. Liability of foreignness
2. Regionalization
 1. Liability of Foreignness

• Liability of foreignness - set of costs associated with various

issues firms face when entering foreign markets:
• Unfamiliar operating environments
• Economic, administrative and cultural differences
• Challenges of coordination over distances
• Four types of distances associated with liability of
foreignness:
1. Cultural
2. Administrative
3. Geographic
4. Economic
Liability of Foreignness
 2. Regionalization

• Firms choose to concentrate international strategies on

regions (e.g. European Union, Asia, Latin America) rather
than on individual country markets.
• Allows firm to marshal resources to compete effectively rather
than spread limited resources across multiple country-specific
international markets.
• Focusing on particular region allows firm to better
understand cultures, legal and social norms.
• Markets may be more similar, which would allow
coordination and sharing of resources.
 Dynamics of Mode of Entry

 To enter global market, firm selects entry mode that is best

suited to its situation.
• Various options will be followed sequentially, beginning
with exporting and eventually leading to greenfield
ventures.
• Firm may use several different entry modes, each in
different markets.
 Decision regarding which entry mode to use due to:
• Industry’s competitive conditions
• Country’s situation and government policies
• Firm’s unique set of resources, capabilities, and core
competencies
 International Entry Mode

• Firms can use one or more of five entry modes to enter

international markets:
1. Exporting
2. Licensing
3. Strategic alliances
4. Acquisitions
5. New wholly owned subsidiaries
• Each means of market entry has advantages and disadvantages.
Choice of entry mode can affect degree of success the firm
achieves by implementing an international strategy.
 Entry Modes

High Commitment of Resources Low

New Wholly Owned

Acquisition Strategic Alliance Licensing Exporting
Subsidiary
Description Description Description Description Description
Internal Buying over another Partnership with Another firm Home-based
development / firm to gain entry another firm to purchases the right production coupled
organic growth combine expertise to manufacture and with a foreign-
Characteristics sell controlled forward
Characteristics • Quick access to Characteristics distribution channel
• Complex new markets • Shared costs Characteristics
• Often costly • High costs • Shared resources • Low cost Characteristics
• Time consuming • Complex • Shared risks • Low risk • High cost
• High risk negotiations • Problems of • Little control • Low control
• Maximum • Problems of integration (e.g., • Low returns
control merging with two corporate
• Potential above- domestic cultures)
average returns operations

An Understanding of the Foreign Market, Together with a

Firm’s Resources and Capabilities Drives Entry Mode Choice
 Entry Modes

Advantages Disadvantages
New Wholly • Maximum control • Complex
Owned • Potential above-average returns • Often costly
Subsidiary • Time consuming
• High risk
Acquisition • Quick access to new markets • High costs
• Complex negotiations
• Problems of merging with domestic
operations
Strategic • Shared costs • Problems of integration (e.g., two
Alliance • Shared resources corporate cultures)
• Shared risks
Licensing • Low cost • Little control
• Low risk • Low returns
Exporting • Scale economies • High transportation cost
• Low control
1. Exporting

• Exporting - firm sends products to international markets.

• Initial mode of entry used for many firms
• Popular entry mode choice for small businesses to initiate an
international strategy
• Requires no foreign manufacturing expertise
• Allows firms to avoid expense of establishing operations in host
countries
• Requires firms to establish marketing and distribution in host
countries
• Can have significant costs (e.g. transportation, tariffs)
• Made easier due to the Internet
2. Licensing

• Licensing - Agreement to allow foreign company to purchase right to

manufacture and sell firm’s products within host country’s market.
• Licensor is normally paid royalty on each unit produced and sold.
• Licensee takes risks and makes investments in facilities for
manufacturing, marketing, and distributing products.
• Least costly form of international diversification
• Attractive entry mode option for smaller and newer firms
• Allows firms to obtain larger market and faster returns
• Gives licensor little control over selling and distribution
• Provides least potential returns because returns must be shared
between licensor and licensee
• Risk of licensee learning licensor’s technology to produce and sell
competitive product after licensing agreement expires
3. Strategic Alliances (slide 1 of 2)

• Strategic alliance - firm collaborating with another company in

different setting to enter one or more international markets.
• Strategic alliances are popular entry mode because they allow
firm to connect with experienced partner already in market.
• Firms share risks and resources required to enter
international markets.
• Partners bring unique resources together to working
collaboratively.
• Facilitate developing new capabilities and core competencies
that may contribute to each firm’s strategic competitiveness.
3. Strategic Alliances (slide 2 of 2)

• Failure for strategic alliances due to:

• Incompatible partners
• Conflict between partners
• Difficulty in managing
• Establishing trust between partners is critical.
• Alliance success is correlated with amount of trust.
• Efforts to build trust are affected by:
- Initial condition of relationship
- Negotiation process to arrive at agreement
- Partner interactions
- External events
- Cultures of countries involved
- Relationships between countries’ governments
4. Acquisitions

• Cross-border acquisition - firm from one country acquires stake

in or purchases all of firm located in another country.
• Quickest means for firm to enter international market
• Used less frequently to enter market where corruption affects
business transactions
• More likely used when firm’s operations are human-capital
intensive
• Not easy to successfully complete and operate
• Often require debt financing to complete
• Have more complicated negotiations
• Experience more difficulty in merging two firms due to
different corporate and social cultures and practices
5. New Wholly-Owned Subsidiary

• Greenfield venture - firm invests directly in another country or

market by establishing new wholly-owned subsidiary.
• Most expensive and risky means of entering new international market
• Complex to create
• Affords maximum control to firm
• Greatest potential to contribute to firm’s strategic competitiveness
• Used more prominently when firm’s business relies significantly on
quality of capital-intensive manufacturing facilities
• May require hiring of host-country national or consultant in order to
obtain knowledge and expertise about new market
• May not be preferable mode of entry when country risk is high
 Risks in an International Environment

• Political Risks  Economic Risks

• Instability in national • Differences and fluctuations in
governments value of different currencies
• War, both civil and • Differences in prevailing wage
international rates
• Potential nationalization of a • Difficulties in enforcing
firm’s resources property rights
• Unemployment

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c.f. Hitt at al. Strategic Management: Competitiveness and Globalization. 12th Edition
Risks in International Environment
1. Political Risks

• Political risks - probability of disruption of operations of

multinational enterprises by political forces or events whether
they occur in host countries, home country or result from
changes in international environment.
• Possible disruptions to firm’s operations when seeking to
implement international strategy create numerous problems:
• Uncertainty created by government regulation
• Existence of many conflicting, legal authorities
• Corruption
• Potential nationalization of private assets
• Before entering country or region, firms should conduct
political risk analysis to examine potential sources and factors
of non-commercial disruptions of foreign investments and
operations.
2. Economic Risks

• Economic risks - fundamental weaknesses in country or region’s

economy with potential to cause adverse effects on firms’
efforts to successfully implement international strategies.
• Perceived security risk of foreign firm acquiring companies
that have key natural resources or firms that may be
considered strategic with regard to intellectual property
• Terrorism
• Differences and fluctuations in value of currencies
 Strategic Competitiveness
Outcomes
• Degree to which firms achieve strategic competitiveness
through international strategies is expanded when they
successfully implement an international diversification
strategy.
• International diversification strategy is strategy through which
firm expands sales of goods or services across borders of global
regions and countries into potentially large number of geographic
locations or markets.
Home Country Operations Can Be Important
Source Of Competitive Advantage
Determinants of National Advantage

Factors of
production

Firm
strategy, Demand
structure conditions
and rivalry

Related and
supporting
Industries

Understanding Interactions Between Determinants of National

Advantage is Key to Success
* Taken from Figure 8.2 of the Ireland / Hoskission / Hitt Textbook “The Management of Strategy, Concepts, Eighth Edition”. Originally from “Competitive Advantage of nations”, by Michael e. Porter, 1990,
1998.
 International Diversification
and Returns

• Firms that are broadly diversified into multiple international

markets usually achieve most positive stock returns.
• Many factors:
• Private versus government ownership
• Potential economies of scale and experience
• Location advantages
• Increased market size
• Opportunity to stabilize returns
 Enhanced Innovation

• International diversification facilitates innovation:

• Provides larger market to gain greater and faster
returns from investments in innovation
• Exposes firm to new products and processes
• Firm can integrate this knowledge into
operations, allowing further innovation to be
developed.
• Can generate resources necessary to sustain large-scale
R& D program
 Complexity of Managing
International Strategies

• More difficult to manage due to:

• Growth in firm’s size
• Greater operational complexity
• Different cultures and institutional practices (e.g. those
related to governmental agencies)
 Limits to International Expansion

• International diversification increases coordination and

distribution costs.
• Management problems exacerbated by:
• Trade barriers
• Logistical costs
• Cultural diversity
• Access to raw materials
• Differences in employee skill levels
• Differences in host countries’ governmental
policies and practices
Opportunities and Outcomes of International
Strategy: A summary