Chapter Copyright© 2007 Thomson Learning All rights reserved 6 Multinational and Participation Strategies: Content and Formulation
Copyright© 2007 South-Western/Thomson Learning All rights reserved Learning Objectives Appreciate the complexities of the global-local dilemma Understand the content of the multinational strategies Formulate a multinational strategy Understand the content of the participation strategies Formulate a participation strategy Understand political risk and ways companies can manage such risks Appreciate the complexities of the global-local dilemma Understand the content of the multinational strategies Formulate a multinational strategy Understand the content of the participation strategies Formulate a participation strategy Understand political risk and ways companies can manage such risks
Copyright© 2007 South-Western/Thomson Learning All rights reserved Multinational Strategies: 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 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Multinational Strategies: Dealing with the Global-Local Dilemma Four broad multinational strategies - Multidomestic - Transnational - International - Regional Four broad multinational strategies - Multidomestic - Transnational - International - Regional
Copyright© 2007 South-Western/Thomson Learning All rights reserved Multidomestic Strategy The company attempts to offer products or services that attract customers by closely satisfying their cultural needs and expectations 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 The company attempts to offer products or services that attract customers by closely satisfying their cultural needs and expectations 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Transnational Strategy Two goals get top priority - Seeking location advantages - Gaining economic efficiencies from operating worldwide Two goals get top priority - Seeking location advantages - Gaining economic efficiencies from operating worldwide
Copyright© 2007 South-Western/Thomson Learning All rights reserved Transnational Strategy (cont.) 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 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Transnational strategy (cont.) With upstream location advantages, the transnational can: -Locate subunits near cheap sources of high-quality raw material -Locate subunits near centers of research and innovation -Locate subunits near sources of high-quality or low-cost labor -Seek low-cost financing anywhere in the world -Share discoveries and innovations made in one part of the world with operations in other parts of the world With upstream location advantages, the transnational can: -Locate subunits near cheap sources of high-quality raw material -Locate subunits near centers of research and innovation -Locate subunits near sources of high-quality or low-cost labor -Seek low-cost financing anywhere in the world -Share discoveries and innovations made in one part of the world with operations in other parts of the world
Copyright© 2007 South-Western/Thomson Learning All rights reserved Transnational Strategy (cont.) 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 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 6.1: Content of the Four Basic Multinational Strategies
Copyright© 2007 South-Western/Thomson Learning All rights reserved Resolving the Global-Local Dilemma: Formulating a Multinational Strategy Selection of strategy depends on degree of globalization 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 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Global Markets Are there common customer needs? Are there global customers? Can you transfer marketing? Are there common customer needs? Are there global customers? Can you transfer marketing?
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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? 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?
Copyright© 2007 South-Western/Thomson Learning All rights reserved Governments Do the targeted countries have favorable trade policies? Do the target countries have regulations that restrict operations? Do the targeted countries have favorable trade policies? Do the target countries have regulations that restrict operations?
Copyright© 2007 South-Western/Thomson Learning All rights reserved The Competition What strategies do your competitors use? What is the volume of imports and exports in the industry? What strategies do your competitors use? What is the volume of imports and exports in the industry?
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Competitive Advantage in the Value Chain (cont.) Mixed conditions - Competitive strength downstream in industry with strong globalization drivers - Competitive strength upstream in industries with local adaptation pressures Both favor regional strategies Mixed conditions - Competitive strength downstream in industry with strong globalization drivers - Competitive strength upstream in industries with local adaptation pressures Both favor regional strategies
Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 6.2: Pressures for Globalization vs. Localization
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Participation Strategies: The Content Options 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Export Strategies Indirect exporting: uses intermediaries or go-between firms The most common intermediaries - 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 Indirect exporting: uses intermediaries or go-between firms The most common intermediaries - 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Export Strategies 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 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Export Strategies (cont.) Channels in direct exporting - Sales representatives use the company’s promotional literature and samples - Foreign distributors resell the products - Sell directly to foreign retailers or end users Channels in direct exporting - Sales representatives use the company’s promotional literature and samples - Foreign distributors resell the products - Sell directly to foreign retailers or end users
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 6.3: Contents of a Licensing Agreement
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved International Strategic Alliances Cooperative agreements between firms from different countries to participate in business activities May include any value-chain activity Cooperative agreements between firms from different countries to participate in business activities May include any value-chain activity
Copyright© 2007 South-Western/Thomson Learning All rights reserved Types of International Strategic Alliances 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 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Foreign Direct Investment (FDI) 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 6.5: World’s Top Companies Ranked by Foreign Assets
Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 6.5: World’s Top Companies Ranked by Foreign Assets
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Export Strategy Exporting is the easiest and cheapest participation strategy, although it may not always be the most profitable It is a way to begin to internationalize or t test new markets Which form of exporting should it choose? Exporting is the easiest and cheapest participation strategy, although it may not always be the most profitable It is a way to begin to internationalize or t test new markets Which form of exporting should it choose?
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Deciding on Export Strategy 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 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.
Copyright© 2007 South-Western/Thomson Learning All rights reserved Deciding on Export Strategy 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 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.
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Licensing: Disadvantages Gives up control May create new competitors Often generates only low revenues Opportunity costs (barriers to other participation strategies) Gives up control May create new competitors Often generates only low revenues Opportunity costs (barriers to other participation strategies)
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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 Partner’s knowledge of the market Government requirements To share risks To share technology Economies of scale Low cost raw materials or labor
Copyright© 2007 South-Western/Thomson Learning All rights reserved Key Considerations for 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? 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?
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Disadvantages of FDI Increased capital investment Increased investment of managerial and other resources Greater exposure of the investment to political and financial risks Increased capital investment Increased investment of managerial and other resources Greater exposure of the investment to political and financial risks
Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 6.6: Advantages and Disadvantages of FDI
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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 1.Company’s strategic intent regarding profits vs. learning 2.Company capabilities 3.Local government regulations 4.Characteristics of the target product and market
Copyright© 2007 South-Western/Thomson Learning All rights reserved Choosing Participation Strategy: Strategic Considerations (cont.) 5.Geographic and cultural distance 6.Financial risk of the investments 7.Need for control 5.Geographic and cultural distance 6.Financial risk of the investments 7.Need for control
Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 6.7: The Risk versus Control Tradeoff
Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 6.8: Decision Matrix for Formulating Participation Strategies
Copyright© 2007 South-Western/Thomson Learning All rights reserved 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
Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 6.9: Participation Strategies and the Multinational Strategies
Copyright© 2007 South-Western/Thomson Learning All rights reserved Participation Strategies: Synopsis The selection of a participation strategy depends on a complex array of factors, including the company’s multinational strategy, its strategic intent, and its need for control of its products Most multinational companies will choose a mixture of participation strategies to fit different products or different businesses The selection of a participation strategy depends on a complex array of factors, including the company’s multinational strategy, its strategic intent, and its need for control of its products Most multinational companies will choose a mixture of participation strategies to fit different products or different businesses
Copyright© 2007 South-Western/Thomson Learning All rights reserved Political Risk Refers to the impact of political decisions or events on the business climate in a country such that a multinational’s profitability and feasibility of its global operations are negatively affected
Copyright© 2007 South-Western/Thomson Learning All rights reserved Political Risk Why should a multinational company be concerned about political risk? Because it can have a serious impact on their profitability World is dependent on energy coming from locations with high political risk World is so interconnected Why should a multinational company be concerned about political risk? Because it can have a serious impact on their profitability World is dependent on energy coming from locations with high political risk World is so interconnected
Copyright© 2007 South-Western/Thomson Learning All rights reserved Political Risk Some of the factors that influence political risk in a society - Changes in the government - Sudden shift in governmental policies or ideology - Social unrest - Passage of new laws - Leadership changes and potential or unrest after such leadership changes - Level of corruption Some of the factors that influence political risk in a society - Changes in the government - Sudden shift in governmental policies or ideology - Social unrest - Passage of new laws - Leadership changes and potential or unrest after such leadership changes - Level of corruption
Copyright© 2007 South-Western/Thomson Learning All rights reserved Political Risk Key questions which provide some preliminary insights into the political risk of a market that a multinational firm is choosing to enter How durable and resilient is the political system? How peaceful have governmental transitions been in the past? What roles do other nongovernmental organizations play in the country’s political stability? Key questions which provide some preliminary insights into the political risk of a market that a multinational firm is choosing to enter How durable and resilient is the political system? How peaceful have governmental transitions been in the past? What roles do other nongovernmental organizations play in the country’s political stability?
Copyright© 2007 South-Western/Thomson Learning All rights reserved Political Risk Key questions which provide some preliminary insights into the political risk Are there internal factors that could result in social unrest or civil war? What is the level of corruption? How reliable is the rule of law? What is the likelihood that the country can be hit by natural disasters? Key questions which provide some preliminary insights into the political risk Are there internal factors that could result in social unrest or civil war? What is the level of corruption? How reliable is the rule of law? What is the likelihood that the country can be hit by natural disasters?
Copyright© 2007 South-Western/Thomson Learning All rights reserved Political Risk The Economist Intelligence Unit assesses a number of country risks including: - Security risk - Political stability risk - Labor market risk - Legal and regulatory risk - Infrastructure risk - Tax policy risk The Economist Intelligence Unit assesses a number of country risks including: - Security risk - Political stability risk - Labor market risk - Legal and regulatory risk - Infrastructure risk - Tax policy risk
Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 6.10: Risk Ratings for Selected Countries on Selected Risk Criteria
Copyright© 2007 South-Western/Thomson Learning All rights reserved Conclusion Multinational manager faces array of complex strategic issues All companies must deal with global-local dilemma Multinationals also face the challenges of choosing participation strategies Political risk is also becoming an important factor Multinational manager faces array of complex strategic issues All companies must deal with global-local dilemma Multinationals also face the challenges of choosing participation strategies Political risk is also becoming an important factor