Business

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REV: DECEMBER 8, 2006

MODULE NOTE

Introduction to International Strategy
The Strategy course began with the study of business unit or competitive strategy, addressing the
question of how a firm becomes a superior performer within a single, clearly defined business. The
frameworks taught earlier enabled us to understand how Wal-Mart came to dominate the discount
retailingindustry, and why Edward Jones outperformed all other retail brokerages. Most firms start
out this way, competing within a single business, but as they grow they confront the question of
whether or not to expand their scope into other markets or businesses. Some firms choose to diversify
horizontally into new product markets, as Wal-Mart entered the grocery business with its supercenter format.Others choose to vertically integrate, as Apple’s i-Tunes service moved the hardware
company into the music distribution business. Yet others choose to expand geographically, as
Edward Jones has entered Canada and the U.K.
Whichever vector firms use to expand their scope of activities, they face similar strategic issues.
The previous module and note addressed issues of corporate strategy andvertical integration that
concern diversification into new product areas.1 Here we focus on the geographic dimension for
expansion by a successful company, and the issues that are raised by such a move—issues of
international strategy.

Economic Justification for Expanding Scope across Geographic Markets
International strategy has much in common with corporate strategy, since both fields addressthe
question of the optimal scope of the firm across markets. In corporate strategy, we were concerned
with the optimal scope of the firm across product markets. In international strategy, we are
concerned with the optimal scope of the firm across geographic markets. As a result, many of the
theoretical underpinnings of corporate strategy apply to international strategy.
Both strategiesbegin with the presumption that a firm has a competitive advantage in its core
business in the domestic market. Firms without an underlying competitive advantage will always
struggle to diversify, regardless of the direction in which they choose to diversify.2 Critically, both
strategies recognize that a firm is justified in diversifying into a new market if it can exploit scope
economies byvirtue of that multimarket activity. Therefore, an effective international strategy that
creates value through a firm’s activity across national borders must pass the same two tests as
effective corporate strategy.

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This module note was prepared by Professors David Collis and JordanSiegel to aid students in the Strategy course.
Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, ortransmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.

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Module Note—Introduction to International Strategy

The “Better off” test To justify its presence in more than one country, a firm must create some
value from performing an activity in the new market or country.3 This value can ariseeither from
introducing or leveraging something from its home country to the new market, or exploiting or
accessing something in the new market that is valuable in its home market.
The first can be thought of as a demand-side scope economy—selling the original domestic
product in a new country, or replicating the domestic strategy in the new market. Most traditional
horizontal multinationals,4...