1. Chapter Copyright© 2004 Thomson Learning All rights reserved 5 Multinational and Participation Strategies: Content and Formulation

2. Copyright© 2005 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 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.1: Content of the Four Basic Multinational Strategies

11. 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

12. Copyright© 2005 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?

13. Copyright© 2005 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?

14. Copyright© 2005 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?

15. Copyright© 2005 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?

16. 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

17. 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

18. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.2: Pressures for Globalization vs. Localization

19. 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

20. Copyright© 2005 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

21. Copyright© 2005 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

22. Copyright© 2005 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

23. 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

24. 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

25. 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

26. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.3: Contents of a Licensing Agreement

27. 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

28. 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

29. 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 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

30. 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 Companies own and control directly a foreign operation Symbolizes the highest stage of internationalization Greenfield investments: starting foreign operations from scratch

31. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.5: World’s Top Companies Ranked by Foreign Assets

32. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.5: World’s Top Companies Ranked by Foreign Assets

33. Copyright© 2005 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

34. Copyright© 2005 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 company have resources to design/execute international promotional activities? If not, use foreign intermediaries and 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 Does company have resources to design/execute international promotional activities? If not, use foreign intermediaries and indirect exporting

35. Copyright© 2005 South-Western/Thomson Learning All rights reserved Export Strategy 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 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.

36. 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 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

37. 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)

38. 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

39. 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?

40. 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

41. 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

42. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.6: Advantages and Disadvantages of FDI

43. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.6: Advantages and Disadvantages of FDI

44. 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 1.Company’s strategic intent regarding profits vs. learning 2.Company capabilities 3.Local government regulations 4.Characteristics of the target product and market

45. Copyright© 2005 South-Western/Thomson Learning All rights reserved Choosing Participation Strategy: Strategic Considerations (cont.) 5.Geographic and cultural distance 6.Political and financial risk of investment 7.Need for control 5.Geographic and cultural distance 6.Political and financial risk of investment 7.Need for control

46. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.7: The Risk versus Control Tradeoff

47. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.8: Decision Matrix for Formulating Participation Strategies

48. 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

49. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.9: Participation Strategies and the Multinational Strategies

50. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 5.9: Participation Strategies and the Multinational Strategies