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Multinational and Participation Strategies: Content and Formulation

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harveyzjq@126.com

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
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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 localresponsiveness or global approach to a multinationals strategies

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Multinational Strategies: Dealing with the Global-Local Dilemma Four broad multinational strategies
- Multidomestic - Transnational - International - Regional

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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

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Transnational Strategy
Two goals get top priority
- Seeking location advantages - Gaining economic efficiencies from operating worldwide

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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

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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

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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

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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

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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

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Exhibit 6.1: Content of the Four Basic Multinational Strategies

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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

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Global Markets
Are there common customer needs? Are there global customers? Can you transfer marketing?

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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?

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Governments
Do the targeted countries have favorable trade
policies? Do the target countries have regulations that restrict operations?

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The Competition
What strategies do your competitors use? What is the volume of imports and exports in the
industry?

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 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

Competitive Advantage in the Value Chain

Downstream advantages: marketing, sales,

service
- Favor multidomestic strategy

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 Mixed conditions

Competitive Advantage in the Value Chain (cont.)

- Competitive strength downstream in industry with strong globalization drivers - Competitive strength upstream in industries with local adaptation pressures Both favor regional strategies

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Exhibit 6.2: Pressures for Globalization vs. Localization

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 Select a transnational over an international strategy

when:

Transnational or International: Which Way for the Global Company?

- 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

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 Participation strategies: the choice of how to

enter each international market
Exporting Licensing Strategic alliances Foreign direct investment

Participation Strategies: The Content Options

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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

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Export Strategies
Indirect exporting: uses intermediaries or gobetween 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

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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

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Export Strategies (cont.)

Channels in direct exporting
- Sales representatives use the companys promotional literature and samples - Foreign distributors resell the products - Sell directly to foreign retailers or end users

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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

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Exhibit 6.3: Contents of a Licensing Agreement

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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

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International Strategic Alliances

Cooperative agreements between firms from
different countries to participate in business activities May include any value-chain activity

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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

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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

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Exhibit 6.5: Worlds Top Companies Ranked by Foreign Assets

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Exhibit 6.5: Worlds Top Companies Ranked by Foreign Assets

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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 companys multinational strategy

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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?

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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

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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.
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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.

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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

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Licensing: Disadvantages
Gives up control May create new competitors Often generates only low revenues Opportunity costs (barriers to other participation
strategies)

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Motivations for Strategic Alliances

Partners knowledge of the market Government requirements To share risks To share technology Economies of scale Low cost raw materials or labor

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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 companys objectives? What is expected payoffs?

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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

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Disadvantages of FDI
Increased capital investment Increased investment of managerial and other
resources Greater exposure of the investment to political and financial risks

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Exhibit 6.6: Advantages and Disadvantages of FDI

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Choosing Participation Strategy: Strategic Considerations

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

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Choosing Participation Strategy: Strategic Considerations (cont.) 5.Geographic and cultural distance 6.Financial risk of the investments 7.Need for control

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Exhibit 6.7: The Risk versus Control Tradeoff

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Exhibit 6.8: Decision Matrix for Formulating Participation Strategies

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 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.

Participation Strategies and the Multinational Strategies

A mix of participation strategies often support

the basic multinational strategy

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Exhibit 6.9: Participation Strategies and the Multinational Strategies

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Participation Strategies: Synopsis

The selection of a participation strategy depends
on a complex array of factors, including the companys 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

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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

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