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Slide 1: CONFIDENTIAL Chapter 8 Looking at International Strategies Document Date This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.
Slide 2: OBJECTIVES Unit of measure 1 Define international strategy and identify its implications for the strategy diamond 2 Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage 3 Describe different vehicles for international expansion 4 Apply different international strategy configurations 5 Outline the international strategy implications of the static and dynamic perspectives * Source: Footnote Source 2
Slide 3: DELL GOES TO CHINA Unit of measure Strategic decisions If we’re not in what will soon be the second-biggest PC market in the world, then how can Dell possibly be a global player? U.S. Vehicles Assemble and distribute itself Consumers first, then corporations China Partner Dell became China’s largest computer system provider in just 5 years Staging Corporations first * Source: Footnote Source 3
Slide 4: INTERNATIONAL PRESENCE OF SELECTED MULTINATIONAL CORPORATIONS (MNCs) Unit of measure What is international strategy? Planning for future cross-border activities. Sales in domestic Company Nokia Audi Clarion Apple eBay Papa John’s * Footnote Source Sales in foreign markets 99 Percent 68 48 41 35 4 Domestic market Finland Germany Japan U.S. U.S. U.S. Products Cell phones Automobiles Audio equipment Computers, electronics Online auctions Pizza Total sales $ Millions 37,031 29,378 1,540 8,279 2,165 917 market Percent 1 32 52 59 65 96 International presence varies widely 4 Source:
Slide 5: INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND Unit of measure Staging Arenas • When will we go international? • How quickly will we expand into international markets? • Which geographic areas will we enter? • Which channels will we use in those areas? Arenas Vehicles • In what sequence will we implement our entry tactics? • Which international Staging Economic logic Vehicles market-entry strategies will we use? Alliances? Acquisitions? Greenfield investments? Differentiators Economic logic Differentiators • How does our international strategy lower our costs, raise the prices we can charge, or create synergies between our business? * Source: Footnote Source • How does being international make our products more attractive to our customers? 5
Slide 6: WHY EXPAND INTERNATIONALLY? Unit of measure Domestic markets in developed countries have slow growth, while capital markets expect high growth The pressure for cost reductions and efficiency continues to grow Necessitates examining cost savings by sourcing across borders Chicken and egg problem Knowledge is not uniformly distributed around the world Creates opportunities for knowledge rich countries Customers are becoming global (both consumers and corporations) Competitors are globalizing * Source: Footnote Source 6
Slide 7: PROS VS. CONS OF INTERNATIONAL EXPANSION Unit of measure Many international expansions fail Why? • Pepsi’s ambitious expansion in the 1990s resulted in a decreased international market share  Newness can be a disadvantage (e.g., your firm must move up the learning curve) • Wal-Mart’s international businesses perform poorly relative to its U.S. business  Foreignness can be a liability (e.g., your managers may not understand local culture)  Governance and coordination costs increase as you manage from a distance * Source: Footnote Source 7
Slide 8: KEY FACTORS – GLOBAL ECONOMIES OF SCALE Unit of measure Key factors   Global economies of scale Global expansion may be attractive if it allows you to leverage fixed assets over new markets • Pharmaceutical firms such as Pfizer, can leverage large R&D budgets • CitiGroup, McDonald’s, and Coca-Cola can leverage brands • MITY can leverage its excess capacity to produce chairs and thereby reduce average costs * Source: Footnote Source 8
Slide 9: KEY FACTORS – LOCATION Unit of measure Key factors   Global economies of scale   Location Choosing the right location can provide advantages in terms of • • • • • Input costs Competitors Demand conditions Regulatory environment Presence of complements * Source: Footnote Source 9
Slide 10: THE CAGE DISTANCE FRAMEWORK Unit of measure Cultural distance Attributes creating distance Different languages Different ethnicities; lack of connective ethnic or social networks Different religions Different social norms Absence of colonial ties Absence of shared monetary or political association Political hostility Government policies Institutional weakness Physical remoteness Lack of a common border Lack of sea or river access Size of country Weak transportation or communication links Differences in climates Industries or products affected by distance Government involvement is high in industries that are • Producers of staple goods Products affect cultural or (electricity) national identity of • Producers of other consumers (foods) “entitlements” (drugs) Product features vary in • Large employers (framing) terms of size (cars), • Large suppliers to government standards (electrical (mass transportation) appliances), or packaging • National champions Products carry country(aerospace) specific quality • Vital to national security associations (wines) (telecom) • Exploiters of natural resources (oil, mining) • Subject to high sunk costs * Footnote (infrastructure) Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf. Source: Source Products have high linguistic content (TV) Products have a low value-ofweight or bulk ratio (cement) Products are fragile or perishable (glass, fruit) Communications and connectivity are important (financial services) Local supervision and operational requirements are high (many services) Differences in consumer incomes Differences in costs and quality of Administrative distance Geography distance Economic distance • • • • • • Natural resources Financial resources Human resources Infrastructure Intermediate inputs Information or knowledge Nature of demand varies with income level (cars) Economies of standardization or scale are important (mobile phones) Labor and other factor cost differences are salient (garments) Distribution or business systems are different (insurance) Companies need to be responsive and agile (home appliances ) 10
Slide 11: KEY FACTORS – MULTIPOINT COMPETITION Unit of measure Key factors   Global economies of scale   Location   Multipoint competition Expanding into a new market may provide an opportunity for a “stronghold assault” For example, French tire maker Michelin had negligible presence in the U.S. in the 1970s. It learned of Goodyear’s plans to expand into Europe, so it launched a counter attack. It started selling tires in the U.S. at or below cost, and thereby forced Goodyear to drop prices and cut profits in its core market * Source: Footnote Source 11
Slide 12: KEY FACTORS – LEARNING AND KNOWLEDGE SHARING Unit of measure Key factors   Global economies of scale   Location   Multipoint competition   Learning and knowledge sharing Expanding into a new market can create opportunities to innovate, improve existing products in existing markets, or develop ideas for new markets SC Johnson, for example, used technology developed in its European operation (a product for repelling mosquitoes in homes) to create the “ Glade Plug-ins” air freshener in the U.S. * Source: Footnote Source 12
Slide 13: CHOICE OF ENTRY MODES Unit of measure Choice of entry mode Equity (FDI) modes Nonequity modes Exports Contractual agreements Alliances and joint ventures (JVs) Wholly owned subsidiaries Direct exports Licensing/ franchising Minority JVs Greenfield investments Indirect exports Turnkey projects 50/50 JVs Acquisition Others Contracted R&D Majority JVs Others Comarketing * Footnote Source Strategic alliances (within dotted areas) 13 Source: Source: Adapted from Pan, Y. and D. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, 31 (2000), 535-545
Slide 14: VEHICLES FOR ENTERING FOREIGN MARKETS Unit of measure 100% Honda’s initial entry into the U.S. market FDI Ford-Mazda Genentech-Hoffman Exports Champion International’s paper exports through independent brokers 100% Exports Exports versus local production Source: Examples drawn from in Gupta, A., and V. Govindarajan, “Managing Global Expansion: A Conceptual Framework,” business * Footnote Horizons, March/April 2002, 45-54 Source: Source 14 Bridgestone’s acquisition of U.S.-based Firestone FDI through acquisition Degree of ownership control over activities performed in the foreign market Alliance LaRoche KFC’s franchisees in India 100% Local Alliance and exports 0%
Slide 15: EXPORTING OPTIONS Unit of measure Shipping Most common option in relatively close markets and for products with lower shipping costs Licensing and franchising A firm may form an alliance or franchise giving a local partner the right and responsibility to operate the firm’s business in their home market (e.g., Burger King’s expansion in Europe) Special agreements A firm may enter Turnkey project agreements, R&D contracts, or joint-marketing initiatives (e.g., a German firm Bayer AG contracts large R&D projects to a U.S. firm) * Source: Footnote Source 15
Slide 16: ALLIANCES Unit of measure Until recently, China did not allow non-Chinese companies in China … U.S. firm Chinese Firm … so U.S. companies formed alliances to gain access * Source: Footnote Source 16
Slide 17: FOREIGN DIRECT INVESTMENT Unit of measure Foreign company Acquires Local company Home country/ market • South African Breweries purchase Miller Brewing in 2002 to gain access to U.S. customers and brewing capacity • DaimlerChrysler and BMW each invested $250 million to start local factories in Brazil * Source: Footnote Source 17
Slide 18: IMPORTING Unit of measure Importing is often a “stealth” form of internationalization because a firm will claim to have no international operations and yet directly or indirectly base production or service delivery abroad Country A Production Country B Customer service Country C Logistics “Domestic” company Home country * Source: Footnote Source 18
Slide 19: HOW WOULD YOU DO THAT? – LAURA ASHLEY Unit of measure In the early 1990s, U.S. executive Jim Maxmin was brought in as CEO to turn around Laura Ashley. The company’s distribution system was in shambles and Maxmin needed to fix it Maxmin realized he needed a partner that satisfies 3 key conditions 1. Complementary needs and competencies 2. Similar management styles and operating systems 3. Divergent strategic objectives • Why were each of these three conditions important? • Who did Maxmin choose as a partner? * Source: Footnote Source 19
Slide 20: INTERNATIONAL STRATEGY CONFIGURATIONS Unit of measure Relatively few opportunities to gain global efficiencies Relatively high local responsiveness Multinational configuration Build flexibility to respond to national difference through strong, resourceful, entrepreneurial, and somewhat independent national or regional operations. Requires decentralized and relatively self-sufficient units Example : MTV initially adopted an international configuration (using only American programming in foreign markets) but then changed its strategy to a multinational one. It now tailors its Western European programming to each market, offering eight channels, each in a different language Many opportunities to gain global efficiencies Transnational configuration Develop global efficiency, flexibility, and worldwide learning. Requires dispersed, interdependent, and specialized capabilities simultaneously Example : Nestle has taken steps to move in this direction, starting first with what might be described as a multinational configuration Today, Nestle aims to evolve from a decentralized, profit-center configuration to one that operates as a single, global company. Firms like Nestle have taken lessons from leading consulting firms such as McKinsey and Company, which are globally dispersed but have a hard-driving, one-firm culture at their core. Global configuration Build cost advantages through centralized, globalscale operations . Requires centralized and globally scaled resources and capabilities Example : Companies such as Merck and HewlettPackard give particular subsidiaries a worldwide mandate to leverage and disseminate their unique capabilities and specialized knowledge worldwide Relative low local responsiveness International configuration Exploit parent-company knowledge and capabilities through worldwide diffusion, local marketing, and adaptation. The most valuable resources and capabilities are centralized; others, such as local marketing and distribution, are decentralized Example : When Wal-Mart initially set up its operations in Brazil, it used its U.S. stores as a model for international expansion * Footnote Source: Bartlett, C., S. Ghoshal, & J. Birkenshaw, Transnational Management (New York: Irwin, 2004) Source: Source 20
Slide 21: BORN – GLOBAL FIRMS Unit of measure More and more firms, even young, small ones, have operations that bridge national borders Logitech Founded by R&D Production 30% of global PC mouse business by 1989 • 2 Italians • 1 Swiss • California • Switzerland • Ireland • Taiwan * Source: Footnote Source 21
Slide 22: HOW TO SUCCEED AS A GLOBAL START-UP Unit of measure Consider if you should be a global start-up If yes, Put together tools you will need to move into global market • Do you need human resources from other countries to succeed?  Strong management team with international experience • Do you need financial capital from other countries to succeed?  Broad and deep international network among suppliers, customers, and complements • If you go global, will target customers prefer your services over competitor's?  Preemptive marketing or technology to provide first-mover advantage • Can you put an international system in place more quickly than domestic competitors?  Strong intangible assets  Ability to keep customers locked in by linking new products and services to core business, while you innovate • Do you need global scale and scope to justify the financial and human capital investment? • Will a purely domestic focus now make it harder for you to go global in the future? * Source: Footnote Source  Close worldwide coordination and communication among business units, suppliers, complements and customers 22
Slide 23: DEVELOPING A GLOBAL MIND-SET Unit of measure Global mindset Having an appreciation for the differences between countries and people and seeing these differences as opportunities Global perspective * Source: Footnote Source Global skills Having developed skills for managing diverse teams in a worldwide work force 23
Slide 24: HOW WOULD YOU DO THAT? Unit of measure If you were CEO, how would you build a global perspective in your executives? Tactic 1 Fewer than 15% of executives have substantive international experience 2 3 4 Teams Training Transfers ??? Action steps ? ? ? ? * Source: Footnote Source 24
Slide 25: SUMMARY Unit of measure 1 Define international strategy and identify its implications for the strategy diamond 2 Understand why a firm would want to expand internationally and explain the relationship between international strategy and competitive advantage 3 Describe different vehicles for international expansion 4 Apply different international strategy configurations 5 Outline the international strategy implications of the static and dynamic perspectives * Source: Footnote Source 25