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 local- responsiveness or global approach to a multinational’s strategies Four broad multinational strategies: Multidomestic, Transnational, International, and Regional Local-responsiveness solution: customize to country or regional differences Global integration solution: conduct business similarly throughout the world Global-local dilemma: choice between a local- responsiveness 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 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 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 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 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 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? 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? 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 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 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 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 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 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 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 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 value- chain activity 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 value- chain 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 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 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. 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 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 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? 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 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

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 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 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