International Strategy: Creating Value in Global Market

A Company’s Motivations and Risks of Competing in International Markets

International business has become a huge segment of the world’s overall economic activity.
Amazingly, current projections suggest that, within a few years, the total dollar value of trade
across national borders will be greater than the total dollar value of trade within all of the world’s
countries combined. One driver of the rapid growth of international business over the past two
decades has been the opening up of large economies such as China and Russia, which had been
mostly closed off to outside investors and producers.

The United States, as a single country, has the world’s largest economy. Collectively, the
European Union (EU) has a higher GDP than the United States, but of course it is composed of a
group of nations.

The Economist, a well-respected international magazine, has predicted that the economy of
China, just 20 years ago a closed economic backwater, will be larger than that of the United
States by 2019, based on real GDP growth, inflation, and the appreciation of the value of the
yuan, China’s currency (S.C. & D.H., 2014). Economics suggests that the core reason for this
remarkable growth has been the gradual opening of China’s border to trade. Their initially low
salary scale, unlimited labor force, and few manufacturing restrictions have made China a major
manufacturing and trade nation. More recently an emerging middle class has begun to fuel
national consumption, further increasing the economic wealth of the nation (Wikipedia, 2014).

 Motivations for International Expansion

 Access to New Customers

Perhaps the most obvious reason to compete in international markets is gaining access to new
customers. Although the United States currently has the largest economy in the world, it
accounts for less than 5 percent of the world’s population. Canada ranks at 0.5 percent of the
world’s population. Selling goods and services to the other 95 percent of people on the planet
can be very appealing, especially for companies whose home market is saturated.

Few companies have a stronger “American” identity than McDonald’s. Yet McDonald’s is
increasingly reliant on sales outside the United States. In 2006, the United States accounted for
34 percent of McDonald’s revenue, while Europe accounted for 32 percent, and Asia, the Middle
East, and Africa accounted for 14 percent. By 2012 Europe was McDonald’s biggest source of
revenue (39 percent), the U.S. share had fallen to 32 percent, and the collective contribution of
Asia, the Middle East, and Africa had jumped to 23 percent. With less than one-third of its sales
being generated in its home country, McDonald’s is truly a global powerhouse.

 Lowering Costs

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Offshoring has become a popular yet controversial means of trying to reduce costs. Offshoring
involves relocating a business activity to another country. Many Canadian and U.S. companies
have closed down operations at home in favor of creating new operations in countries such as
China and India that offer cheaper labor. While offshoring can reduce a firm’s costs of doing
business, the job losses in the firm’s home country can devastate local communities, leading to
negative publicity.

Many firms that compete in international markets hope to gain cost advantages. When a firm
increases sales volume by entering a new country, for example, it may generate economies of
scale that lower its overall and average production costs. Economics of scale may be linked to
greater production from existing faciltities (sharing fixed costs across larger sales) and other
shared costs such as research and development (R&D) and marketing. It also has the potential to
diversify risks. As well, going international has implications for dealing with suppliers. The
growth that overseas expansion creates leads many businesses to purchase supplies in greater
amounts and from suppliers in multiple countries, reducing risk. This can provide a firm with
stronger leverage when negotiating prices with its existing suppliers.

 Take advantage of Arbitrage

Arbitrage opportunities involve buying something from where it is cheap and selling it
somewhere where it commands a higher price. A big part if Walmart’s success can be attributed
to the company’s expertise in arbitrage. The possibilities for arbitrage are not necessarily
confined to simple trading opportunities. It can be applied to virtually any factor of production
and every stage of the value chain.

 Extend a Product’s Life Cycle:

Extending the life cycle of a product that is in its maturity stage in a firm’s home country but that
has greater demand potential elsewhere is another benefit of international expansion.

 Diversification of Business Risk

A familiar cliché warns “don’t put all of your eggs in one basket.” Applied to business, this
cliché suggests that there is a certain risk for firms operating in only one country. Business risk
refers to the potential that an operation might fail. If a firm is completely dependent on one
country, from either a supply or market perspective, negative economic, political, or natural
disasters in that country can create significant difficulty, as the Japanese earthquake of 2011
proved. Just like spreading one’s eggs into multiple baskets reduces the chances that all eggs will
be broken, business risk is reduced when a firm diversifies across multiple countries.

Consider, for example, natural disasters such as the earthquakes and tsunami that hit Japan in
2011. If Japanese automakers such as Toyota, Nissan, and Honda sold cars only in their home
country, the financial consequences could have been grave. Because these firms operate in many
countries, however, they were protected from being ruined by events in Japan. In other words,
these firms diversified their business risk by not being overly dependent on their Japanese
operations.

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Potential Risks of International Expansion:

 Political Risk

Although competing in international markets offers important potential benefits, such as access
to new customers, the opportunity to lower costs, and the diversification of business risk, going
overseas also poses daunting challenges. Political risk refers to the potential for government
upheaval or interference with business to harm an operation within a country.

 Economic Risk

Economic risk refers to the potential for a country’s economic conditions and policies, property
rights protections, and currency exchange rates to adversely affect a firm’s operations within a
country. Executives who lead companies that do business in many different countries have to
take stock of these various dimensions and try to anticipate how the dimensions will affect their
companies. Because economies are unpredictable, economic risk presents executives with
tremendous challenges.

Hyundai and Kia are flagship companies of Hyundai Motor Group, the world’s fifth-largest
automotive conglomerate. Car sales by Hyundai Motor Co. backtracked in Europe in 2013 amid
weak overall market conditions, while its smaller sibling Kia Motors Corp. managed to increase
its presence on the continent (The Korean Herald, 2014).

Consider, for example, Kia’s operations in Europe. Kia has achieved sales volume growth in
Europe every year since 2008, increasing market share from 1.7 percent to 2.7 percent in 2013.
This success, often going against the overall market downturn, is a tribute to Kia’s design,
product range, quality, and warranty. As Kia’s executives planned for the future, they needed to
wonder how economic conditions would influence Kia’s future performance in Europe. If
inflation and interest rates were to increase in a particular country, this would make it more
difficult for consumers to purchase new Kias. If currency exchange rates were to change such
that the euro became weaker relative to the South Korean won, this would make a Kia more
expensive for European buyers (Kia.com, 2014).

 Cultural Risk 

Cultural risk refers to the potential for a company’s operations in a country to struggle because
of differences in language, customs, norms, and customer preferences. The history of business is
full of colorful examples of cultural differences undermining companies.

A refrigerator manufacturer experienced poor sales in the Middle East because of another
cultural difference. The firm used a photo of an open refrigerator in its prints ads to demonstrate
the large amount of storage offered by the appliance. Unfortunately, the photo prominently
featured pork, a type of meat that is not eaten by the Jews and Muslims who make up most of the
area’s population. 

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Types of International Strategies
A firm that has operations in more than one country is known as a multinational corporation
(MNC).  The largest MNCs are major players within the international arena. Walmart’s annual
worldwide sales, for example, are larger than the dollar value of the entire economies of Austria,
Norway, and Saudi Arabia. Although Walmart tends to be viewed as an American retailer, the
firm earns more than one-quarter of its revenues outside the United States. Walmart owns
significant numbers of stores, as of mid-2014, in Mexico (2,207),  Brazil (556), Japan (437), the
United Kingdom (577), Canada (390), Chile (386), Argentina (105), and China (400). Walmart
also participates in joint ventures in China (328 stores) and India (5). Even more modestly sized
MNCs are still very powerful. If Kia were a country, its current sales level of approximately $42
billion (in 2012) would place it in the top 75 among the more than 180 nations in the world
(Wal-Mart Stores Inc., 2014).

Multinationals such as Kia and Walmart have chosen an international strategy to guide their
efforts across various countries. There are three main international strategies available: (1)
multidomestic, (2) global, and (3) transnational. Each strategy involves a different approach to
trying to build efficiency across nations while remaining responsive to variations in customer
preferences and market conditions.

1. Multidomestic Strategy
A firm using a multidomestic strategy sacrifices efficiency in favor of emphasizing
responsiveness to local requirements within each of its markets. Rather than trying to force all of
its American-made shows on viewers around the globe, MTV customizes the programming that
is shown on its channels within dozens of countries, including New Zealand, Portugal, Pakistan,
and India.

Similarly, food company H. J. Heinz adapts its products to match local preferences. Because
some Indians will not eat garlic and onion, for example, Heinz offers them a version of its
signature ketchup that does not include these two ingredients.

2. Global Strategy
A firm using a global strategy sacrifices responsiveness to local requirements within each of its
markets in favor of emphasizing efficiency. This strategy is the complete opposite of a
multidomestic strategy. Some minor modifications to products and services may be made in
various markets, but a global strategy stresses the need to gain economies of scale by offering
essentially the same products or services in each market.

Microsoft, for example, offers the same software programs around the world but adjusts the
programs to match local languages. Similarly, consumer goods maker Procter & Gamble
attempts to gain efficiency by creating global brands whenever possible. Global strategies also
can be very effective for firms whose product or service is largely hidden from the customer’s

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view, such as silicon chip maker Intel. For such firms, variance in local preferences is not very
important.

3. Transnational Strategy
A firm using a transnational strategy seeks a middle ground between a multidomestic strategy
and a global strategy. Such a firm tries to balance the desire for efficiency with the need to adjust
to local preferences within various countries. For example, large fast-food chains such as
McDonald’s and KFC rely on the same brand names and the same core menu items around the
world. These firms make some concessions to local tastes too. In France, for example, wine can
be purchased at McDonald’s. This approach makes sense for McDonald’s because wine is a
central element of French diets.

Options for Competing in International Markets

When the executives in charge of a firm decide to enter a new country, they must decide how
best to do it. There are five basic options available: (1) exporting, (2) creating a wholly owned
subsidiary, (3) franchising, (4) licensing, and (5) creating a joint venture or strategic alliance
These options vary in terms of how much control a firm has over its operation, initial cost of
entry, how much risk is involved, and what share of the operation’s profits the firm gets to keep.

1. Exporting

Exporting involves creating goods within a firm’s home country and then shipping them to
another country. Once the goods reach foreign shores, the exporter’s role is over. A local firm
then sells the goods to local customers. Many firms that expand overseas start out as exporters
because exporting offers a low-cost method to find out whether a firm’s products are appealing
to customers in other lands. Some Asian automakers, for example, first entered the U.S. market
though exporting. Small firms may rely on exporting because it is a low-cost option.

2. Licensing

While franchising is an option within service industries, licensing is most frequently used in

manufacturing industries. Licensing involves granting a foreign company the right to create a
company’s product within a foreign country in exchange for a fee. These relationships often
center on patented technology. A firm that grants a license avoids absorbing a lot of startup costs,
but typically loses some control over how its technology is used, including quality control.
Profits are limited to the fees that it collects from the local firm and firms must be aware of the
degree of risk to intellectual property loss. 

3. Franchising

Franchising has been used by many firms that compete in service industries to develop a
worldwide presence. Subway, the UPS Store, and Hilton Hotels are just a few of the firms that
have done so. Franchising involves an organization (called a franchisor) granting the right to use

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its brand name, products, and processes to other organizations (known as franchisees) in
exchange for an upfront payment (a franchise fee) and a percentage of franchisees’ revenues (a
royalty fee).

Franchising is an attractive way to enter foreign markets because it requires little financial
investment by the franchisor. Indeed, local franchisees must pay the vast majority of the
expenses associated with getting their businesses up and running. On the downside, the decision
to franchise means that a firm will get to enjoy only a small portion of the profits made under its
brand name.

4. Joint Ventures and Strategic Alliances

Within each market entry option, a firm must choose between maintaining strong control of
operations (wholly owned subsidiary) or turning most control over to a local firm (exporting,
franchising, and licensing). In some cases, however, executives find it beneficial to work closely
with one or more local partners in a joint venture or a strategic alliance. In a joint venture, two or
more organizations each contribute to the creation of a new entity. In a strategic alliance, firms
work together cooperatively, but no new organization is formed. In both cases, the firm and its
local partner or partners share decision-making authority, control of the operation, and any
profits that the relationship creates.

Joint ventures and strategic alliances are especially attractive when a firm believes that working
closely with locals will provide it with important knowledge about local conditions and facilitate
acceptance of their involvement by government officials and consumers.

5. Creating a Wholly Owned Subsidiary

A wholly owned subsidiary is a business operation in a foreign country that a firm fully owns. A
firm can develop a wholly owned subsidiary through a greenfield venture meaning that the firm
creates the entire operation itself. Another possibility is purchasing an existing operation from a
local company or another foreign operator.

Regardless of whether a firm builds a wholly owned subsidiary “from scratch” or purchases an
existing operation, having a wholly owned subsidiary can be attractive because the firm
maintains complete control over the operation and gets to keep all of the profits (or losses) that
the operation makes. A wholly owned subsidiary can be quite risky, however, because the firm
must pay all of the expenses required to set it up and operate it. Kia, for example, spent $1 billion
to build its U.S. factory. Many firms are reluctant to spend such sums, especially in more volatile
countries, because they fear that they may never recoup their investments.

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 Case on International Strategy

KIA Picks Up Speed

On June 2, 2011, South Korean automaker Kia announced plans for a major expansion of its
American production facility. Capacity at Kia Motors Manufacturing Georgia Inc. (KMMG)
was slated to expand 20 percent from 300,000 to 360,000 vehicles per year. In addition to the
crossover utility vehicle Sorento, the plant would begin making a sedan named the Optima in
September 2011. The expansion of the plant was estimated to cost $100 million and was
expected to create 1,000 new jobs (The Newsmarket.com, 2011).

This ambitious growth was made possible by Kia’s superb performance in the U.S. market.
KMMG had started building vehicles less than two years earlier after being constructed for a
cost of $1 billion. In 2010, yearly sales in the United States climbed above 350,000 vehicles.
Kia’s overall share of the U.S. market increased in 2010 for the sixteenth consecutive year. In
May 2011, Kia sold more than 48,000 cars and trucks in United States, an increase of more
than 53 percent from May 2010 sales levels. The Optima led the way with a whopping 210
percent increase in sales.

Kia was not the only beneficiary of its success. KMMG’s location of West Point, Georgia,
had been economically devastated when its homegrown textile company, WestPoint Home,
shut down its local factories to take advantage of lower labor prices overseas. Following a
fierce competition with towns in Mississippi, Kentucky, and other states, West Point was
selected in 2006 as the site of Kia’s first U.S. manufacturing facility. To win the plant, state
and local authorities offered Kia more than $400 million worth of incentives, including tax
breaks, free land, and infrastructure creation.

Georgia’s return on this investment included 2,000 new jobs at the plant as well as hundreds
of jobs at suppliers that set up shop to support KMMG. The neighboring state of Alabama
benefited from KMMG’s success too. As of June 2011, nearly sixty companies spread across
twenty-three Alabama counties supplied parts or services to KMMG (Kent, 2011).

The name “Kia” means to arise or come up out of Asia (Kia.ca, 2014). This name is very
appropriate; Kia rose from humble beginnings as a maker of bicycle parts in 1944 to become
a global player in the automobile industry. As of 2011, Kia was producing more than 2.1
million vehicles per year in eight countries. Kias were sold in 172 countries. By 2102, Kia
had sold 500,000 vehicles in Canada.  Kia employed more than 44,000 people and enjoyed
annual revenues in excess of $20 billion. Fellow South Korean automaker Hyundai owned
just over 33 percent of Kia, and the two firms strengthened each other through collaboration.
When taking all of these facts into consideration, Kia’s slogan—The Power to Surprise—had
to make its rivals wonder what surprises the Korean upstart might have in store for them
next.

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