Copyright© 2005 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© 2005 South-Western/Thomson Learning All rights reserved The Value Chain
Copyright© 2005 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© 2005 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© 2005 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© 2005 South-Western/Thomson Learning All rights reserved 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
Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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
Copyright© 2005 South-Western/Thomson Learning All rights reserved Transnational Strategy (cont.) 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 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
Copyright© 2005 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© 2005 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© 2005 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© 2005 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© 2005 South-Western/Thomson Learning All rights reserved Participation Strategy 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© 2005 South-Western/Thomson Learning All rights reserved Exporting Passive exporting: filling overseas orders as if they were domestic orders The most common intermediaries (indirect exporting) 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 Passive exporting: filling overseas orders as if they were domestic orders The most common intermediaries (indirect exporting) 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© 2005 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© 2005 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© 2005 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© 2005 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 Allows the co. to still make $ from an older product- demand may still be high for it in LDCs 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 Allows the co. to still make $ from an older product- demand may still be high for it in LDCs Characteristics of the target country Situation in target country Nature of the licensing company Company may lack resources to go international
Copyright© 2005 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© 2005 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© 2005 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© 2005 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 There are also non-equity joint ventures, no? 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 There are also non-equity joint ventures, no? International Cooperative Alliance (ICA): two or more firms from different countries agree to cooperate in any value-chain activity
Copyright© 2005 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© 2005 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© 2005 South-Western/Thomson Learning All rights reserved Foreign Direct Investment Companies own and control directly a foreign operation Symbolizes the highest stage of internationalization Greenfield investments: starting foreign operations from scratch Turn-key investment- when a company builds something (e.g. hydroelectric dam), trains the people, then turns it over to host country. Companies own and control directly a foreign operation Symbolizes the highest stage of internationalization Greenfield investments: starting foreign operations from scratch Turn-key investment- when a company builds something (e.g. hydroelectric dam), trains the people, then turns it over to host country.
Copyright© 2005 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© 2005 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© 2005 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 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
Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.7: The Risk versus Control Tradeoff
Copyright© 2005 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