Chapter 8

Going international is a word we can read and hear more and more often. Of course the big
multinationals but also new SME’s try to start to go international. Indeed, it becomes easier to
try to sell abroad or to outsource abroad. There are also new opportunities or challenges (we
often hear about the BRICs economies).

1. Internationalisation drivers

However, develop a new international strategy is not as easy as it seems. So, take care.
George Yip found four internationalization drivers you have to evaluate if you want to expand
your operations abroad:

– Market drivers: similar customer needs and tastes, global customers and transferable
marketing allow a standardization of markets which facilitate internationalization.
– Cost drivers: scale economies, country-specific differences and favorable logistics can
reduce costs by operating internationally.
– Government drivers: trade policies, technical standards or host government policies
can facilitate international companies.
– Competitive drivers: interdependence between country operations and globalised
competitors show that companies wishing to expand abroad have also to think global.

2. National and International sources of advantage

In an international point of view, a company has to develop its strategy first by analyzing the
advantages he can take from the location of its activities. Besides, he first has to exploit some
national advantages. Indeed, a strong home market is important before exporting. Afterwards,
sourcing advantages overseas via an international network.

A strong presence in the home market helps the firm to develop competitive advantage which
will be a plus when the company will try to expand abroad. Because initially, coming with
competitive advantage from the home market, the company would arrive in the new market
with competitive disadvantage due to its lack of knowledge of the local market. Michael
Porter’s Diamond explains how strong competitive advantage in the home market would help
companies to overcome competitive disadvantages overseas.

– Factor conditions or factors of productions: “factor condition advantages at a national

level can translate into general competitive advantages for national firms in
international markets”1.
– Home demand conditions: the nature of the demand of domestic customers in the
home market would help the firms to deal with the demand of customers in some
another markets.
– Related and supporting industries: local clusters make personal interaction easier. This
collaboration between industries is an important source of advantage
– Firm strategy, industry structure and rivalry: can be the source of advantages. For
example, rivalry may help companies to become stronger because they know they
have to compete against other companies.

1 P.300
Another important source of advantage is the international configuration of the company
value network. A company can exploit other factors from the foreign companies such as the
skills and the resources. Therefore, you can exploit and locate each element of your value
chain more effectively and efficiently. You can do that by FDI, Joint Venture but also by
global sourcing which is to purchase services or components from the most appropriate
country of the world. These are some advantages of doing so:

– Cost advantages: labour costs, transportations and communications costs, taxation and
investment incentives.
– Unique capabilities: may increase competitive advantages of a firm.
– National characteristics: allow a firm to develop different variation of its product for
different market segments.

3. International Strategies

Now, when developing an international strategy, firms may face a lot of difficult questions
and problems called as global-local dilemma. This means for example that the requirements
for a product or service in a market are different for another market.

But an enterprise may pursue four kinds of strategy depending of their activities configuration
and the degree of coordination of those activities. You can of course vacillate between those
strategies over time.
low
Configuration of activities
high
high
Coordination Global Complex export
of activities
Multidomestic Simple export
low

– Simple export: needs a concentration of the activities in one country whereas the
market is generally managed overseas by agents.
– Multidomestic: on the contrary of simple export, activities are not concentrated. Goods
and services are usually produced in each national market. It increases your portfolio
and it is appropriated when few economies of scale are possible.
– Complex export: concentration of the activities but also of the marketing. Reason why
this strategy is more complex.
– Global strategy: is the most mature international strategy where all the activities and
marketing are located in each country.

4. Market selection and entry

After having decided of a strategy, it is important to know which country to select. However,
when analyzing a market, you have of course to identify the competition inside the market
and the characteristics of the market before choosing an entry mode.
To analyze the market characteristics, we usually refer to the PESTEL framework (Political,
Economic, Social, Technology, Environment, Legal). P E S and L are the most important.
However, according Pankaj Ghemawat, firms have also to assess the countries regard to their
“closeness” with the CAGE framework (Cultural distance, Administrative and political
distance, Geographical distance, Economic or Wealth distance).

The second element to analyze is the competition in the market. We can use the five forces of
Porter for that but also the Game Theory to understand retaliation potential relates to rivalry.
Therefore, by considering the attractiveness of a new country thanks to the PESTEL, CAGE
and five force of Porter and reactiveness of the defenders of the country, a firm can make a
good evaluation of which country is the most attractive.

Now, when a company has chosen a new national market, he has to consider how to enter in
this market. There are four main entry modes:
– Exporting
– Joint ventures and alliances
– Licensing and franchising
– Foreign direct investment

An entry mode is usually chosen at different stage of development of a company. This

strategy of staged international expansion means that an enterprise would first try to have the
knowledge of a new market to minimize the risks by a license. Only after, they would perhaps
consider a joint venture and then a FDI. This is common for big companies but we can see
than small firms or emerging market companies are going faster through those steps. They are
called “born global” firms.

5. Internationalisation and performance

While companies pursue economies of scale, outsource some of their production or when a
multinational has its activities in different countries, the organizational complexity becomes
higher and higher. To some extent, it may also surpass the benefit of internationalization.
Also, diversified firms with a lot of different products and international markets are likely to
have excessive costs of coordination and control. Which would decrease the performances of
the company?

Some researchers suggest that internationalization is not profitable for service sector firms.

6. Roles in an international portfolio

Last but not least, as product diversification, an international strategy may be different
according the relationship between subsidiaries and the headquarters of the company. It is
understandable because a main strategy may be more complex due to the different strategies
pursued by each subsidiary. Therefore, subsidiaries may play a different role to the level of
local resources and capabilities and the strategic importance of their local environment.

Level of resources and capabilities

low
high
high
Strategic
importance of the Black hole Strategic leader
local environment
 Implementer Contributor
low

– Strategic leaders: are subsidiaries that are important for competitive success.
– Contributors: have valuable internal resources and can play a key role.
– Implementers: can help generate financial resources. Can be seen as “cash cows”.
– Black holes: are subsidiaries located in countries really important for their competitive
success but have a lack of capabilities in this market. One way to find those
capabilities is to develop alliances.