7.2 International Strategy Formulation

Global business strategies offer diverse paths for international expansion. From low-risk exporting to high-commitment foreign direct investment, companies can choose approaches that align with their resources and goals. These strategies vary in terms of control, investment, and risk exposure.

Formulating an international strategy requires careful consideration of internal capabilities, market potential, and external factors. Companies must assess their competitive advantages, evaluate market opportunities, and navigate cultural, political, and economic challenges to succeed in foreign markets.

International Strategy Options

Options for international strategies

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• Exporting involves selling products or services to foreign markets without significant investment in foreign operations
  • Advantages include low risk, low commitment, and flexibility
  • Disadvantages include limited control over distribution, potential trade barriers (tariffs), and transportation costs
• Licensing and franchising involve granting rights to foreign entities to use intellectual property (patents), trademarks, or business models in exchange for royalties or fees
  • Advantages include rapid expansion, low investment, and leveraging local expertise
  • Disadvantages include limited control over operations, potential quality issues, and risk of creating future competitors
• Joint ventures and strategic alliances involve partnering with foreign firms to share resources, risks, and rewards in international markets
  • Advantages include access to local knowledge (regulations), shared costs, and risk mitigation
  • Disadvantages include potential conflicts of interest, management challenges, and limited control
• Foreign direct investment (FDI) involves establishing wholly-owned subsidiaries or acquiring existing firms in foreign markets
  • Advantages include full control over operations, access to local resources (talent), and potential for higher returns
  • Disadvantages include high investment, high risk, and cultural and regulatory challenges (compliance)

International Strategy Formulation

Alignment of strategy with firm resources

• Assess the firm's internal strengths and weaknesses
  • Financial resources determine the ability to invest in international expansion (capital)
  • Technological capabilities impact the competitiveness of products or services in foreign markets (R&D)
  • Human capital includes the skills and experience of employees to navigate international challenges (language skills)
  • Brand reputation influences consumer perception and trust in foreign markets (global recognition)
• Identify the firm's unique competitive advantages
  • Cost leadership enables offering products at lower prices than competitors (economies of scale)
  • Differentiation involves offering unique or superior products or services (innovative features)
  • Focus on niche markets targets specific customer segments with specialized needs (luxury goods)
• Evaluate the transferability of competitive advantages to foreign markets
  • Adaptability of products or services to local preferences and regulations (customization)
  • Relevance of brand positioning to cultural values and expectations (localization)
  • Applicability of business models to local market conditions and infrastructure (e-commerce)
• Align international strategy with the firm's overall mission and goals
  • Growth objectives determine the scale and pace of international expansion (market share targets)
  • Profitability targets influence the choice of markets and entry modes (return on investment)
  • Risk tolerance shapes the willingness to engage in high-risk, high-reward ventures (emerging markets)

Factors in international strategy choice

• Market potential
  1. Size and growth rate of foreign markets indicate the revenue potential (population, GDP growth)
  2. Consumer preferences and purchasing power influence demand for products or services (income levels)
  3. Infrastructure and distribution channels affect the ease of reaching customers (transportation networks)
• Competition
  • Presence and strength of local and international competitors impact market share and profitability (market leaders)
  • Barriers to entry, such as regulations or capital requirements, affect the ease of market penetration (licenses)
  • Intensity of rivalry determines the level of price competition and margin pressure (price wars)
• Political and economic risk
  • Stability of foreign governments affects the predictability of the business environment (regime changes)
  • Regulatory environment influences the ease of doing business and compliance costs (permits)
  • Currency fluctuations impact the value of revenues and investments (exchange rates)
  • Intellectual property protection affects the ability to safeguard proprietary assets (patents)
• Cultural differences
  • Language and communication barriers can hinder effective marketing and negotiations (translations)
  • Business practices and norms vary across countries and require adaptation (gift-giving)
  • Consumer behavior and expectations are shaped by cultural values and preferences (individualism vs. collectivism)

Role of alliances in strategy formulation

• Benefits of strategic alliances
  • Access to local market knowledge accelerates learning and reduces risk (consumer insights)
  • Sharing of risks and costs lowers the financial burden of international expansion (joint investments)
  • Complementary resources and capabilities enhance competitiveness (technology sharing)
• Types of strategic alliances
  • Joint ventures involve shared ownership and control of a separate entity (50/50 ownership)
  • Licensing agreements grant rights to use intellectual property in exchange for royalties (technology transfer)
  • Co-marketing or co-branding partnerships combine marketing efforts to reach new customers (bundled offerings)
• Criteria for selecting alliance partners
  • Strategic fit ensures alignment of goals and complementary strengths (shared vision)
  • Cultural compatibility facilitates effective communication and trust (similar values)
  • Financial stability reduces the risk of partner default or bankruptcy (strong balance sheet)
  • Reputation and track record signal reliability and performance (successful collaborations)
• Managing strategic alliances
  • Clear definition of roles and responsibilities prevents misunderstandings and conflicts (governance structure)
  • Effective communication and trust-building foster a collaborative relationship (regular meetings)
  • Performance monitoring and evaluation ensure progress towards goals (key performance indicators)
  • Conflict resolution mechanisms address disagreements and maintain the partnership (mediation)