Transcript Chapter 5 Multinational and Participation Strategies: Content and Formulation

Chapter 5
Multinational and Participation
Strategies: Content and Formulation
Dealing with the Global-Local
Dilemma
• Local-responsiveness solution: customize to country or
regional differences
• Global integration solution: conduct business similarly
throughout the world
• Global-local dilemma: choice between a localresponsiveness or global approach to a multinational’s
strategies
• Four broad multinational strategies: Multidomestic,
Transnational, International, and Regional
Multidomestic Strategy
• Emphasizing local-responsiveness issues
• Ex.: different packages, colors
• Costs more to produce, need to charge higher
prices to recoup
• A form of the differentiation strategy
• Not limited to large multinationals
Transnational Strategy
• Two goals get top priority
• Seeking location advantages
• Gaining economic efficiencies from operating worldwide
• Location advantages: dispersing value-chain activities anywhere in the
world where they can be done best or cheapest
• Global platform: country location where a firm can better perform some of
its value-chain activities
• Comparative advantage: advantages of nations over other nations
• No longer only available to domestic firms
• Location advantages can exist for all activities of the value chain
International Strategy
• International strategy: selling global products and using
similar marketing techniques worldwide
• A compromise approach
• Limited adjustment in product offerings and
marketing strategies
• Upstream and support activities remain
concentrated at home country
Regional Strategy
• Regional strategy: managing raw-material sourcing,
production, marketing, and support activities within a
particular region
• Another compromise strategy
• Attempts to gain economic advantages from
regional network
• Attempts to gain local adaptation advantages from
regional adaptation
Exhibit 5.1: Content of the Four
Basic Multinational Strategies
Resolving the Global-Local
Dilemma: Formulating a
Multinational Strategy
• Selection of strategy depends on degree of
globalization / standardization in an industry
• Globalization drivers: conditions in a industry that
favor transnational or international strategies
• Four categories of global drivers: markets, costs,
governments, and competition
Global Markets & Costs
Global Markets
• Are there common customer needs?
• Are there global customers?
• Can you transfer marketing?
Costs
• Are there global economies of scale?
• Are there global sources of low-cost raw materials?
• Are there cheaper sources of highly skilled labor?
• Are product-development costs high?
Governments & Competition
Governments
• Do the targeted countries have favorable trade
policies?
• Do the target countries have regulations that restrict
operations?
Competition
• What strategies do your competitors use?
• What is the volume of imports and exports in the
industry?
Competitive Advantage in the
Value Chain
• Location of competitive advantage in value chain determines choice of
generic strategy
• Upstream advantages: low-cost or high-quality design
• Favor transnational strategy or an international strategy
• Downstream advantages: marketing, sales, service
• Favor multidomestic strategy
• Mixed conditions
• Competitive strength downstream in industry with strong globalization
drivers
• Competitive strength upstream in industries with local adaptation
pressures
• Both favor regional strategies
Exhibit 5.2: Pressures for
Globalization vs. Localization
Transnational or International:
Which Way for the Global
Company?
• Select a transnational over an international strategy
when:
• Benefits of dispersing activities worldwide offset the
costs of coordinating a more complex organization
• Select an international strategy over a transnational
when:
• Cost savings of centralization offset the lower costs
of higher quality raw materials/labor from worldwide
locations
Participation (Entry)
Strategies
• Participation strategies: the choice of how to enter
each international market
• Exporting
• Licensing
• Strategic alliances
• Foreign direct investment
Exporting
• Easiest way to sell a product in international market
• Passive exporter: company that treats and fills
overseas orders like domestic orders
• Alternatively, a company can put extensive resources
into exporting with dedicated export department
Export Strategies
• Indirect exporting: uses intermediaries or go-between firms
• The most common intermediaries are: Export Management Company
(EMC) and Export Trading Company (ETC)
• Specialize in products, countries, or regions
• Provide ready-made access to markets
• Have networks of foreign distributors
• Direct exporting: direct contact with customers in the foreign market
• More aggressive exporting strategy
• Requires more contact with foreign companies
• Uses foreign sales representatives, distributors, or retailers
• May require branch offices in foreign countries
• Channels in direct exporting: 1) Sales representatives use the company’s
promotional literature and samples; 2) Foreign distributors resell the
products, and 3) Sell directly to foreign retailers or end users
Licensing
• Licensing: contractual agreement between a domestic
licensor and a foreign licensee
• Licenser has valuable patent, know-how, or trademark
• Foreign licensee pays royalties for use
Exhibit 5.3: Contents of a
Licensing Agreement
Special Licensing Agreements
• International franchising: the franchisor grants the use
of a whole business operation
• Contract manufacturing: production following the
foreign companies’ specifications
• Turnkey operation: multinational company makes a
project fully operational before the foreign owner takes
control
International Strategic
Alliances
• Cooperative agreements between firms from different countries
to participate in business activities
• May include any value-chain activity
• Two Types:
• Equity International Joint Ventures (IJV): two or more firms
from different countries have an equity position in a
separate company
• International Cooperative Alliance (ICA): two or more firms
from different countries agree to cooperate in any valuechain activity
Foreign Direct Investment
• Companies own and control directly a foreign
operation
• Symbolizes the highest stage of internationalization
• Greenfield investments: starting foreign operations
from scratch
Formulating Participation
Strategy
• Must take into account several issues:
• Basic functions of each participation strategy
• Strategic considerations and intent of company
• How best to support company’s multinational
strategy
Deciding on Export Strategy
• Does management need to control sales, customer credit, and sale of the
product? If yes, choose direct exporting
• Does company have resources to manage export operations? If not, use
indirect exporting
• Does company have resources to design/execute international
promotional activities? If not, use foreign intermediaries and indirect
exporting
• Does company have resources to support extensive international travel
or possibly an expatriate sales
force? If so, choose direct exporting.
• Does company have time and expertise to develop overseas contacts
and networks? If not, rely on foreign intermediaries or indirect exporting.
• Will time and resources affect domestic operations? If not, choose direct
exporting.
Licensing Decision
• Based on three factors
• Characteristics of the products
• Best products are older or soon-to-be replaced
• Characteristics of the target country
• Situation in target country
• Nature of the licensing company
• Company may lack resources to go international
• Disadvantages:
• Gives up control
• May create new competitors
• Often generates only low revenues
• Opportunity costs (barriers to other participation strategies
Motivations for Strategic
Alliances
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Partner’s knowledge of the market
Government requirements
To share risks
To share technology
Economies of scale
Low cost raw materials or labor
Key Considerations for Strategic Alliances:
• Could other participation strategies better satisfy strategic objectives?
• Does firm have management and capital resources to contribute?
• Can partner benefit the company’s objectives?
• What is expected payoffs?
Foreign Direct Investment
(FDI)
• Most experienced international firms choose FDI
• Advantages
• Greater control
• Lower costs of supplying host country
• Avoid import quotas
• Greater opportunity to adapt product to local markets
• Better local image of the product\
• Disadvantages
• Increased capital investment
• Increased investment of managerial and other resources
• Greater exposure of the investment to political and financial risks
Exhibit 5.6: Advantages and
Disadvantages of FDI
Exhibit 5.6: Advantages and
Disadvantages of FDI
Choosing Participation
Strategy: Strategic
Considerations
1. Company’s strategic intent regarding profits vs.
learning
2. Company capabilities
3. Local government regulations
4. Characteristics of the target product and market
5. Geographic and cultural distance
6. Political and financial risk of investment
7. Need for control
Exhibit 5.7: The Risk versus
Control Tradeoff
Exhibit 5.8: Decision Matrix for
Formulating Participation Strategies
Participation Strategies and
the Multinational Strategies
• What is the strategic reason to be in the market?
• Location advantages vs. market penetration
• E.g., source of raw materials, R&D, production,
etc.
• A mix of participation strategies often support the basic
multinational strategy
Exhibit 5.9: Participation Strategies
and the Multinational Strategies
Exhibit 5.9: Participation Strategies
and the Multinational Strategies