© Ram Mudambi, Temple University and University of Reading, 2007 Lecture 6 Strategy in the Global Environment BA 951 Policy Formulation and Administration

© Ram Mudambi, Temple University and University of Reading, Learning outcomes  Understanding the strategy underlying multinational operations  The role of governments – the policy perspective  Integrating the strategy and policy perspectives

© Ram Mudambi, Temple University and University of Reading, Outline  Basic factors  What are multinational firms and why do they exist?  Location and the value chain  Strategy types  Entry decisions and subsidiary roles  Alliances

© Ram Mudambi, Temple University and University of Reading, What is the motivation for competing internationally? Gain access to new customers Capitalize on resource strengths and competencies Need to achieve lower costs Spread business risk across wider market base Obtain access to valuable resources Market-seeking Asset-seeking

© Ram Mudambi, Temple University and University of Reading, Basic factors governing multi-country operations  Country resource conditions  Tradability issues  Industry-specific conditions  Firm-specific competitive advantages

© Ram Mudambi, Temple University and University of Reading, Government trade policies  Import tariffs or quotas  Local content requirements  Price control policies  Other regulations  Technical standards  Product certification  Minority ownership by local citizens  Prior approval of capital spending projects  Withdrawal of funds from country

© Ram Mudambi, Temple University and University of Reading,  What are multinational corporations (MNCs)?  Why do they exist?

© Ram Mudambi, Temple University and University of Reading, The Stage Theory Ray Vernon (1966) studied US firms in the post-1945 period He discovered that most firms that operated in more than one country had followed that same path LicensingFranchisingWholly Controlled Subsidiaries DEGREE OF CONTROL Low High Domestic Operations HOME Exports HOST

© Ram Mudambi, Temple University and University of Reading, The MNC – A simple view Home country operations Host country operations International Firm Multinational Firm National border

© Ram Mudambi, Temple University and University of Reading, What are MNCs? International Firms Foreign activities are predominantly exports (low control)Foreign activities are predominantly exports (low control) Limited operations in host (foreign) countryLimited operations in host (foreign) country Multinationals (MNCs) Foreign activities are predominantly high controlForeign activities are predominantly high control Significant operational presence in host (foreign) countrySignificant operational presence in host (foreign) country

© Ram Mudambi, Temple University and University of Reading, Why do MNCs exist?  Pull factors: There are advantages to internalizing transactions within the firm, i.e., undertaking multinational operations  Ownership advantages, e.g., control of sales / service (reputation)  Location advantages, e.g., local resources (raw materials, labor)  Internalization advantages, e.g., coordination and standardization  Push factors: There are costs to using markets, i.e., undertaking international operations, (trust in agents for sales & service, etc.)  Pressures for cost reductions  Pressures for local responsiveness

© Ram Mudambi, Temple University and University of Reading, Why do investors value multinationality? The classic study of Morck and Yeung (1991)  global diversification of operations creates little in terms of shareholder value. The classic study of Morck and Yeung (1991)  global diversification of operations creates little in terms of shareholder value. It is intangibles that MNCs can leverage across borders to create value It is intangibles that MNCs can leverage across borders to create value  Marketing intangibles  R&D intangibles

© Ram Mudambi, Temple University and University of Reading, Location and the value chain Identify  key activities in the value chain  principal requirements for each activity  possible locations which meet the requirements Final location decision must consider overall strategic objectives Activities dictate location Linkages dictate location

© Ram Mudambi, Temple University and University of Reading, Inputs MarketsValueAddedR&DKnowledge MarketingKnowledge VALUE CHAIN DISAGGREGATION Location 1Location 2Location 3Location 4 The Smile of Value Creation* Vertically integrated firm * Mudambi, JIBS 2007

© Ram Mudambi, Temple University and University of Reading, Inputs Markets R&DKnowledge MarketingKnowledge VALUE CHAIN DISAGGREGATION Location 1Location 2Location 3Location 4 The Smile of Value Creation* * Mudambi, JIBS 2007 Rich Countries Rich Countries Rich Countries Rich Countries Poor Countries Poor Countries Intangibles Tangibles Services Manufacturing Catch-up Industry creation Industry creation Industry creation Industry creation

© Ram Mudambi, Temple University and University of Reading, Location Economics Pontiac LeMans Design Germany Parts Singapore Taiwan Japan Assembly South Korea Advertising The U.K. Sales The U.S.

© Ram Mudambi, Temple University and University of Reading, Strategic Choice International strategy International strategy  Create value by transferring skills and products abroad. Multi-domestic strategy Multi-domestic strategy  Maximize local responsiveness by customizing products and marketing strategy for local markets. Global strategy Global strategy  Pursue low-cost status, offer standardized global products. Transnational strategy Transnational strategy  Use global learning to achieve low-cost status, differentiation, and local responsiveness simultaneously.

© Ram Mudambi, Temple University and University of Reading, Four Basic Strategies Importance of Local Responsiveness Importance of Scale economies LowHigh Low High INTERNATIONALMULTI-DOMESTIC GLOBALTRANSNATIONAL Late 19 th century European firms Post WW2 US firms Most modern knowledge- intensive multinationals

© Ram Mudambi, Temple University and University of Reading, International Strategy MNC Parent Subsidiaries Pre-dominant Knowledge flow – Parent to subsidiary Minimal local adaptation

© Ram Mudambi, Temple University and University of Reading, Multi-domestic Strategy MNC Parent Subsidiaries Knowledge flows – Parent to subsidiary Considerable local influences

© Ram Mudambi, Temple University and University of Reading, Global Strategy MNC Parent Subsidiaries Pre-dominant Knowledge flow – Parent to subsidiary Virtually no local adaptation

© Ram Mudambi, Temple University and University of Reading, Trans-national Strategy MNC Parent Subsidiaries Knowledge flows – Parent to subsidiary Subsidiary to parent Subsidiary to subsidiary Considerable local influences

© Ram Mudambi, Temple University and University of Reading, The International Structural Stages Model Global Matrix (“Grid”) Area Division Worldwide Product Division International Division Alternate Paths of Development Foreign Product Diversity Foreign Sales as a Percentage of Total Sales

© Ram Mudambi, Temple University and University of Reading, Comparing the Four Basic International Business Strategies StrategyInter-dependencePerformance Ambiguity Costs of Control Multi-domesticLow InternationalModerate GlobalHigh TransnationalVery high

© Ram Mudambi, Temple University and University of Reading, Basic Entry Decisions Where? Which foreign markets?  Politically and financially stable  Developed and developing nations  Free market systems When? Timing of entry  Pioneering costs versus first-mover advantages. How? Scale of entry and strategic commitments  Scale of entry affects the nature of competition in the national market. Implications of risks and benefits must be weighed carefully.

© Ram Mudambi, Temple University and University of Reading, How - The Choice of Entry Mode ExportingExporting LicensingLicensing FranchisingFranchising Joint VenturesJoint Ventures Wholly Owned SubsidiariesWholly Owned Subsidiaries Increasing control Distinctive Competencies and Entry ModeDistinctive Competencies and Entry Mode Pressures for Cost Reduction and Entry ModePressures for Cost Reduction and Entry Mode

© Ram Mudambi, Temple University and University of Reading, Competence-ExploitingCompetence-Creating Assembly-typeResearch-related Market-seekingAsset-seeking Multi-domestic Transnational, heterarchical Home-base exploiting Home-base augmenting Local mandate Center of excellence mandate Subsidiary Roles

© Ram Mudambi, Temple University and University of Reading, Typical Int’l Business JV/Alliance R&D knowledge Foreign partner – Technology (R&D knowledge) Marketing knowledge Domestic partner – Distribution channels (Marketing knowledge ) FINAL MARKET

© Ram Mudambi, Temple University and University of Reading, Joint Ventures and Strategic Alliances Advantages  Facilitate entry into foreign markets.  Enable partners to share fixed costs and risks associated with new products and processes.  Facilitate transfer of complementary skills between companies.  Help establish technological standards. Disadvantages  Risk of giving away technological know-how.  Risk of opening local market access to foreign alliance partner.  Risk of not getting anything in return.

© Ram Mudambi, Temple University and University of Reading, Policing cooperation: Punishment Strategies Optimal punishment depends on the opportunity cost of resources lost by partners’ cheating Outcome Action

© Ram Mudambi, Temple University and University of Reading, Stability of Cooperation  Lower error probabilities increase effectiveness  Communication  Monitoring  Alliance structure  Stability is enhanced by effective punishment  SWIFT & SURE

© Ram Mudambi, Temple University and University of Reading, Lowering error probabilities: Structuring alliances to reduce opportunism “Walling off”

© Ram Mudambi, Temple University and University of Reading, Summary  Why compete internationally?  Why do MNCs exist?  Basic corporate strategy choices for MNCs  Foreign market entry decisions  Subsidiary roles  Alliances and joint ventures