Chapter 5

Multinational and Participation

Strategies: Content and Formulation

Copyright© 2004 Thomson Learning All

 Learning Objectives

•• Appreciate
Appreciate the
the complexities
complexities of
of the
the
global-local
global-local dilemma
dilemma
•• Understand
Understand thethe content
content of
of the
the
multinational
multinational strategies
strategies
•• Formulate
Formulate aa multinational
multinational strategy
strategy
•• Understand
Understand thethe content
content of
of the
the
participation
participation strategies
strategies
•• Formulate
Formulate aa participation
participation strategy
strategy
Copyright© 2005 South-Western/Thomson Learning
 Multinational Strategies:
Dealing with the Global-Local
Dilemma
•• Local-responsiveness
Local-responsiveness solution:
solution:
customize
customize to to country
country or
or regional
regional
differences
differences
•• Global
Global integration
integration solution:
solution: conduct
conduct
business
business similarly
similarly throughout
throughout the
the world
world
•• Global-local
Global-local dilemma:
dilemma: choice
choice between
between aa
local-responsiveness
local-responsiveness or or global
global
approach
approach to to aa multinational’s
multinational’s strategies
strategies

Copyright© 2005 South-Western/Thomson Learning

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

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 Multidomestic Strategy

•• Emphasizing
Emphasizing local-responsiveness
local-responsiveness
issues
issues
••Ex.:
Ex.: different
different packages,
packages, colors
colors
••Costs
Costs more
more to to produce,
produce, need
need to
to
charge
charge higher
higher prices
prices to
to recoup
recoup
••AA form
form ofof the
the differentiation
differentiation strategy
strategy
••Not
Not limited
limited to to large
large multinationals
multinationals

Copyright© 2005 South-Western/Thomson Learning

 Transnational Strategy

•• Two
Two goals
goals get
get top
top priority
priority
••Seeking
Seeking location
location advantages
advantages
••Gaining
Gaining economic
economic efficiencies
efficiencies from
from
operating
operating worldwide
worldwide
•• Location
Location advantages:
advantages: dispersing
dispersing value-
value-
chain
chain activities
activities anywhere
anywhere in in the
the world
world
where
where they
they can
can be
be done
done best
best oror
cheapest
cheapest
Copyright© 2005 South-Western/Thomson Learning
 Transnational Strategy (cont.)

•• Global
Global platform:
platform: country
country location
location where
where
aa firm
firm can
can better
better perform
perform some
some ofof its
its
value-chain
value-chain activities
activities
•• Comparative
Comparative advantage:
advantage: advantages
advantages of of
nations
nations over
over other
other nations
nations
••No
No longer
longer only
only available
available toto domestic
domestic
firms
firms
•• Location
Location advantages
advantages can can exist
exist for
for all
all
activities
activities of
of the
the value
value chain
chain
Copyright© 2005 South-Western/Thomson Learning
 International Strategy

•• International
International strategy:
strategy: selling
selling global
global
products
products and
and using
using similar
similar marketing
marketing
techniques
techniques worldwide
worldwide
••AA compromise
compromise approach
approach
••Limited
Limited adjustment
adjustment inin product
product
offerings
offerings and
and marketing
marketing strategies
strategies
••Upstream
Upstream and
and support
support activities
activities
remain
remain concentrated
concentrated at at home
home country
country

Copyright© 2005 South-Western/Thomson Learning

 Regional Strategy

•• Regional
Regional strategy:
strategy: managing
managing raw-raw-
material
material sourcing,
sourcing, production,
production,
marketing,
marketing, and
and support
support activities
activities within
within
aa particular
particular region
region
••Another
Another compromise
compromise strategy
strategy
••Attempts
Attempts toto gain
gain economic
economic
advantages
advantages from
from regional
regional network
network
••Attempts
Attempts toto gain
gain local
local adaptation
adaptation
advantages
advantages from
from regional
regional adaptation
adaptation
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.1: Content of the Four
Basic Multinational Strategies

Copyright© 2005 South-Western/Thomson Learning

 Resolving the Global-Local
Dilemma: Formulating a
Multinational Strategy
•• Selection
Selection of
of strategy
strategy depends
depends on on
degree
degree of
of globalization
globalization in in an
an industry
industry
•• Globalization
Globalization drivers:
drivers: conditions
conditions inin aa
industry
industry that
that favor
favor transnational
transnational or or
international
international strategies
strategies
•• Four
Four categories
categories of of global
global drivers:
drivers:
markets,
markets, costs,
costs, governments,
governments, and and
competition
competition

Copyright© 2005 South-Western/Thomson Learning

 Global Markets

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

Copyright© 2005 South-Western/Thomson Learning

 Costs

•• Are
Are there
there global
global economies
economies of of scale?
scale?
•• Are
Are there
there global
global sources
sources of
of low-cost
low-cost
raw
raw materials?
materials?
•• Are
Are there
there cheaper
cheaper sources
sources of
of highly
highly
skilled
skilled labor?
labor?
•• Are
Are product-development
product-development costs
costs high?
high?

Copyright© 2005 South-Western/Thomson Learning

 Governments

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

Copyright© 2005 South-Western/Thomson Learning

 The Competition

•• What
What strategies
strategies do do your
your competitors
competitors
use?
use?
•• What
What is
is the
the volume
volume ofof imports
imports and
and
exports
exports inin the
the industry?
industry?

Copyright© 2005 South-Western/Thomson Learning

 Competitive Advantage in the
Value Chain

•• Location
Location of of competitive
competitive advantage
advantage in in value
value
chain
chain determines
determines choice
choice of
of generic
generic strategy
strategy
•• Upstream
Upstream advantages:
advantages: low-cost
low-cost or
or high-
high-
quality
quality design
design
••Favor
Favor transnational
transnational strategy
strategy or
or an
an
international
international strategy
strategy
•• Downstream
Downstream advantages:
advantages: marketing,
marketing, sales,
sales,
service
service
••Favor
Favor multidomestic
multidomestic strategy
strategy

Copyright© 2005 South-Western/Thomson Learning

 Competitive Advantage in the
Value Chain (cont.)

•• Mixed
Mixed conditions
conditions
••Competitive
Competitive strength
strength downstream
downstream in in
industry
industry with
with strong
strong globalization
globalization
drivers
drivers
••Competitive
Competitive strength
strength upstream
upstream inin
industries
industries with
with local
local adaptation
adaptation
pressures
pressures
••Both
Both favor
favor regional
regional strategies
strategies

Copyright© 2005 South-Western/Thomson Learning

Exhibit 5.2: Pressures for
Globalization vs. Localization

Copyright© 2005 South-Western/Thomson Learning

 Transnational or International:
Which Way for the Global
Company?
•• Select
Select aa transnational
transnational over
over an
an international
international
strategy
strategy when:
when:
••Benefits
Benefits ofof dispersing
dispersing activities
activities worldwide
worldwide
offset
offset the
the costs
costs of
of coordinating
coordinating aa more
more
complex
complex organization
organization
•• Select
Select an
an international
international strategy
strategy over
over aa
transnational
transnational when:
when:
••Cost
Cost savings
savings of of centralization
centralization offset
offset the
the
lower
lower costs
costs ofof higher
higher quality
quality raw
raw
materials/labor
materials/labor fromfrom worldwide
worldwide locations
locations
Copyright© 2005 South-Western/Thomson Learning
 Participation Strategies:
The Content Options

•• Participation
Participation strategies:
strategies: the
the choice
choice of
of
how
how to
to enter
enter each
each international
international market
market
••Exporting
Exporting
••Licensing
Licensing
••Strategic
Strategic alliances
alliances
••Foreign
Foreign direct
direct investment
investment

Copyright© 2005 South-Western/Thomson Learning

 Exporting

•• Easiest
Easiest way
way to
to sell
sell aa product
product inin
international
international market
market
•• Passive
Passive exporter:
exporter: company
company thatthat treats
treats
and
and fills
fills overseas
overseas orders
orders like
like domestic
domestic
orders
orders
•• Alternatively,
Alternatively, aa company
company can can put
put
extensive
extensive resources
resources into
into exporting
exporting with
with
dedicated
dedicated export
export department
department

Copyright© 2005 South-Western/Thomson Learning

 Export Strategies

••Indirect
Indirect exporting:
exporting: uses
uses intermediaries
intermediaries oror go-
go-
between
between firms
firms
••The
The most
most common
common intermediaries
intermediaries
••Export
Export Management
Management Company
Company (EMC)
(EMC) and
and Export
Export
Trading
Trading Company
Company (ETC)
(ETC)
••Specialize
Specialize in
in products,
products, countries,
countries, or
or regions
regions
••Provide
Provide ready-made
ready-made access
access to
to markets
markets
••Have
Have networks
networks ofof foreign
foreign distributors
distributors

Copyright© 2005 South-Western/Thomson Learning

 Export Strategies

••Direct
Direct exporting:
exporting: direct
direct contact
contact with
with customers
customers
in
in the
the foreign
foreign market
market
••More
More aggressive
aggressive exporting
exporting strategy
strategy
••Requires
Requires more
more contact
contact with
with foreign
foreign
companies
companies
••Uses
Uses foreign
foreign sales
sales representatives,
representatives,
distributors,
distributors, oror retailers
retailers
••May
May require
require branch
branch offices
offices in
in foreign
foreign
countries
countries

Copyright© 2005 South-Western/Thomson Learning

 Export Strategies (cont.)

•• Channels
Channels inin direct
direct exporting
exporting
••Sales
Sales representatives
representatives use use the
the
company’s
company’s promotional
promotional literature
literature and
and
samples
samples
••Foreign
Foreign distributors
distributors resell
resell the
the
products
products
••Sell
Sell directly
directly to
to foreign
foreign retailers
retailers or
or end
end
users
users
Copyright© 2005 South-Western/Thomson Learning
 Licensing

•• Licensing:
Licensing: contractual
contractual agreement
agreement
between
between aa domestic
domestic licensor
licensor and
and aa
foreign
foreign licensee
licensee
•• Licenser
Licenser hashas valuable
valuable patent,
patent, know-
know-
how,
how, or
or trademark
trademark
•• Foreign
Foreign licensee
licensee pays
pays royalties
royalties for
for use
use

Copyright© 2005 South-Western/Thomson Learning

Exhibit 5.3: Contents of a
Licensing Agreement

Copyright© 2005 South-Western/Thomson Learning

 Special Licensing Agreements

•• International
International franchising:
franchising: the
the franchisor
franchisor
grants
grants the
the use
use ofof aa whole
whole business
business
operation
operation
•• Contract
Contract manufacturing:
manufacturing: production
production
following
following the
the foreign
foreign companies’
companies’
specifications
specifications
•• Turnkey
Turnkey operation:
operation: multinational
multinational company
company
makes
makes aa project
project fully
fully operational
operational before
before the
the
foreign
foreign owner
owner takes
takes control
control

Copyright© 2005 South-Western/Thomson Learning

 International Strategic
Alliances

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

Copyright© 2005 South-Western/Thomson Learning

 Types of International
Strategic Alliances

•• Equity
Equity International
International Joint
Joint Ventures
Ventures (IJV):
(IJV):
two
two or
or more
more firms
firms from
from different
different
countries
countries have
have anan equity
equity position
position inin aa
separate
separate company
company
•• International
International Cooperative
Cooperative Alliance
Alliance
(ICA):
(ICA): two
two or
or more
more firms
firms from
from different
different
countries
countries agree
agree toto cooperate
cooperate in in any
any
value-chain
value-chain activity
activity

Copyright© 2005 South-Western/Thomson Learning

 Foreign Direct Investment

•• Companies
Companies ownown and
and control
control directly
directly aa
foreign
foreign operation
operation
••Symbolizes
Symbolizes the
the highest
highest stage
stage of
of
internationalization
internationalization
•• Greenfield
Greenfield investments:
investments: starting
starting
foreign
foreign operations
operations from
from scratch
scratch

Copyright© 2005 South-Western/Thomson Learning

Exhibit 5.5: World’s Top
Companies Ranked by Foreign
Assets

Copyright© 2005 South-Western/Thomson Learning

Exhibit 5.5: World’s Top
Companies Ranked by Foreign
Assets

Copyright© 2005 South-Western/Thomson Learning

 Formulating Participation
Strategy

•• Must
Must take
take into
into account
account several
several issues:
issues:
••Basic
Basic functions
functions ofof each
each participation
participation
strategy
strategy
••Strategic
Strategic considerations
considerations and
and intent
intent of
of
company
company
••How
How best
best to
to support
support company’s
company’s
multinational
multinational strategy
strategy

Copyright© 2005 South-Western/Thomson Learning

 Deciding on Export Strategy

•• Does
Does management
management need need to
to control
control sales,
sales,
customer
customer credit,
credit, and
and sale
sale of
of the
the product?
product?
••IfIf yes,
yes, choose
choose direct
direct exporting
exporting
•• Does
Does company
company have
have resources
resources to to
manage
manage export export operations?
operations?
••IfIf not,
not, use
use indirect
indirect exporting
exporting
•• Does
Does company
company have
have resources
resources to to
design/execute
design/execute international
international promotional
promotional
activities?
activities?
••IfIf not,
not, use
use foreign
foreign intermediaries
intermediaries andand
indirect
indirect exporting
exporting
Copyright© 2005 South-Western/Thomson Learning
 Export Strategy

••Does
Does company
company havehave resources
resources to to support
support extensive
extensive
international
international travel
travel or
or possibly
possibly anan expatriate
expatriate sales
sales
force?
force? IfIf so,
so, choose
choose direct
direct exporting.
exporting.
••Does
Does company
company havehave time
time andand expertise
expertise toto develop
develop
overseas
overseas contacts
contacts and
and networks?
networks? IfIf not,
not, rely
rely on
on
foreign
foreign intermediaries
intermediaries or or indirect
indirect exporting.
exporting.
••Will
Will time
time and
and resources
resources affect
affect domestic
domestic operations?
operations? IfIf
not,
not, choose
choose direct
direct exporting.
exporting.

Copyright© 2005 South-Western/Thomson Learning

 Licensing Decision

•• Based
Based onon three
three factors
factors
••Characteristics
Characteristics of of the
the products
products
•Best
•Best products
products are are older
older or
or soon-to-be
soon-to-be
replaced
replaced
••Characteristics
Characteristics of of the
the target
target country
country
•Situation
•Situation in in target
target country
country
••Nature
Nature ofof the
the licensing
licensing company
company
•Company
•Company may may lack
lack resources
resources to
to go
go
international
international
Copyright© 2005 South-Western/Thomson Learning
 Licensing: Disadvantages

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

Copyright© 2005 South-Western/Thomson Learning

 Motivations for Strategic
Alliances

•• Partner’s
Partner’s knowledge
knowledge ofof the
the market
market
•• Government
Government requirements
requirements
•• To
To share
share risks
risks
•• To
To share
share technology
technology
•• Economies
Economies of of scale
scale
•• Low
Low cost
cost raw
raw materials
materials or
or labor
labor

Copyright© 2005 South-Western/Thomson Learning

 Key Considerations for
Alliances

•• Could
Could other
other participation
participation strategies
strategies
better
better satisfy
satisfy strategic
strategic objectives?
objectives?
•• Does
Does firm
firm have
have management
management and and
capital
capital resources
resources to
to contribute?
contribute?
•• Can
Can partner
partner benefit
benefit the
the company’s
company’s
objectives?
objectives?
•• What
What isis expected
expected payoffs?
payoffs?

Copyright© 2005 South-Western/Thomson Learning

 Foreign Direct Investment
(FDI)

•• Most
Most experienced
experienced international
international firms
firms
choose
choose FDIFDI
•• Advantages
Advantages
••Greater
Greater control
control
••Lower
Lower costs
costs ofof supplying
supplying host
host country
country
••Avoid
Avoid import
import quotas
quotas
••Greater
Greater opportunity
opportunity to to adapt
adapt product
product toto
local
local markets
markets
••Better
Better local
local image
image of of the
the product
product
Copyright© 2005 South-Western/Thomson Learning
 Disadvantages of FDI

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

Copyright© 2005 South-Western/Thomson Learning

Exhibit 5.6: Advantages and
Disadvantages of FDI

Copyright© 2005 South-Western/Thomson Learning

Exhibit 5.6: Advantages and
Disadvantages of FDI

Copyright© 2005 South-Western/Thomson Learning

 Choosing Participation
Strategy: Strategic
Considerations
•• Company’s
Company’s strategic
strategic intent
intent regarding
regarding
profits
profits vs.
vs. learning
learning
•• Company
Company capabilities
capabilities
•• Local
Local government
government regulations
regulations
•• Characteristics
Characteristics of of the
the target
target product
product
and
and market
market

Copyright© 2005 South-Western/Thomson Learning

 Choosing Participation
Strategy: Strategic
Considerations (cont.)
•• Geographic
Geographic andand cultural
cultural distance
distance
•• Political
Political and
and financial
financial risk
risk of
of investment
investment
•• Need
Need for
for control
control

Copyright© 2005 South-Western/Thomson Learning

Exhibit 5.7: The Risk versus
Control Tradeoff

Copyright© 2005 South-Western/Thomson Learning

Exhibit 5.8: Decision Matrix for
Formulating Participation Strategies

Copyright© 2005 South-Western/Thomson Learning

 Participation Strategies and
the Multinational Strategies

•• What
What isis the
the strategic
strategic reason
reason to
to be
be in
in the
the
market?
market?
••Location
Location advantages
advantages vs.vs. market
market
penetration
penetration
••E.g.,
E.g., source
source of
of raw
raw materials,
materials, R&D,
R&D,
production,
production, etc.
etc.
•• AA mix
mix ofof participation
participation strategies
strategies often
often
support
support thethe basic
basic multinational
multinational strategy
strategy

Copyright© 2005 South-Western/Thomson Learning

Exhibit 5.9: Participation Strategies
and the Multinational Strategies

Copyright© 2005 South-Western/Thomson Learning

Exhibit 5.9: Participation Strategies
and the Multinational Strategies

Copyright© 2005 South-Western/Thomson Learning