Case assignment
Learning Objectives
After reading this chapter, you should have a good understanding of:
7-1 The importance of international expansion as a viable diversification strategy.
7-2 The sources of national advantage; that is, why an industry in a given country is more (or less) successful than the same industry in another country.
7-3 The motivations (or benefits) and the risks associated with international expansion, including the emerging trend for greater offshoring and outsourcing activity.
7-4 The two opposing forces – cost reduction and adaptation to local markets – that firms face when entering international markets.
7-5 The advantages and disadvantages associated with each of the four basic strategies: international, global, multidomestic, and transnational.
7-6 The difference between regional companies and truly global companies.
7-7 The four basic types of entry strategies and the relative benefits and risks associated with each of them.
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7.1 and 7.2 today
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International Strategy
Consider . . .
The global marketplace provides many opportunities for firms to increase their revenue base and their profitability by increasing sales.
However, there are risks when firms diversify abroad.
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The trade among nations has increased dramatically in recent years and it is estimated that by 2025, 45 percent of the Fortune Global 500 will be based in emerging economies, which are now producing world-class companies with huge domestic markets and a commitment to invest in innovation. This makes international expansion a viable diversification strategy. In a variety of industries such as semiconductors, automobiles, commercial aircraft, telecommunications, computers, and consumer electronics, it is almost impossible to survive unless firms scan the world for competitors, customers, human resources, suppliers, and technology. Firms need to know how to be successful and create value when diversifying into global markets. Some of the questions that need to be answered include: What explains the level of success of a given industry in a given country? What are some of the major motivations and risks associated with international expansion? How can firms handle the opposing forces of cost reduction and local adaptation – should firms pursue international, global, multidomestic, or transnational strategies? What entry strategies should a firm choose in order to enter a foreign market?
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International Strategy: Globalization
Globalization has to do with the rise of market capitalization around the world.
International exchanges have increased.
Trade of goods & services
Exchange of money, information, & ideas
Laws, rules, norms, values, and ideas are growing more similar across countries.
Challenges include balancing between emerging markets & developed markets.
How to meet the needs of customers at very different income levels?
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In many developing economies, distributions of income remain much wider than they do in the developed world, leaving many impoverished.
The concept “bottom of the pyramid” refers to the practice of a multinational firm targeting its goods and services to the nearly 5 billion poor people in the world who inhabit developing countries.
Confusing need with demand is a common problem among organizations serving the bottom of the pyramid. Many firms have wasted time and resources trying to market products that are designed for the poor but that consumers do not actually want. A research with microfinance customers in rural India showed that when given a choice between beneficial products, such as solar-powered lanterns and low-energy stoves, and aspirational products like mobile phones and gold coins, 85 percent of customers opted for the latter.
It is usually difficult to make the economics work for a product if demand must be generated, because marketing costs typically swamp efforts to keep prices extremely low. Companies should focus on areas where they can meet existing demand, with either lower-cost and better-quality products than the existing options, or simply with cheaper ones.
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Factors Affecting a Nation’s Competitiveness
Michael Porter’s diamond of national advantage explains why some nations and their industries outperform others.
Factor endowments
Demand conditions
Related and supporting industries
Firm strategy, structure, & rivalry
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These four attributes jointly determine the playing field that each nation establishes and operates for its industries.
Factor endowments = a nation’s position in factors of production.
Demand conditions = the nature of home-market demand for the industry’s product or service.
Related and supporting industries = the presence, absence and quality in the nation of supplier industries and other related industries that supply services, support, or technology to firms in the industry value chain.
Firm strategy, structure, and rivalry = the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
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Factors Affecting a Nation’s Competitiveness: Factor Endowments
Factor endowments involve factors of production.
Land
Capital
Labor
Factors of production must be industry & firm specific.
Must be rare, valuable, difficult to imitate, and rapidly & efficiently deployed
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For example, a country or industry dependent on scientific innovation must have a skilled human resource pool to draw upon. This resource pool is not inherited; it is created through investment in industry–specific knowledge and talent.
The island nation of Japan is given as an example – JIT systems
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Factors Affecting a Nation’s Competitiveness: Demand Conditions
Demand conditions refer to the demands that consumers place on an industry.
Demanding consumers drive firms in that country to:
Meet high standards.
Upgrade existing products and services.
Create innovative products and services.
Better anticipate future global demand.
Proactively respond to product & service requirements.
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Consumers who demand highly specific, sophisticated products and services force firms to create innovative, advanced products and services to meet the demand.
The conditions of consumer demand influence how firms view a market. This, in turn, helps the nation’s industries to better anticipate future global demand conditions and proactively respond to product and service requirements.
Denmark holds a world-class position in water pollution control equipment. In part due to the nation’s environmental awareness and demands for environmentally safe products.
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Factors Affecting a Nation’s Competitiveness: Related & Supporting Industries
Related and supporting industries enable firms to manage inputs more effectively.
A competitive supplier base
Reduces manufacturing costs
Close working relationships with suppliers
Allows for joint research & development
Development of related industries
Forces existing firms to practice cost control, product innovation, better distribution methods
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A strong supplier base benefit by adding efficiency to downstream activities.
A competitive supplier base helps a firm obtain inputs using cost effective, timely methods, thus reducing manufacturing costs.
Close working relationships with suppliers provide the potential for joint research and development and the ongoing exchange of knowledge.
Related industries increases probability that new companies will enter the market, increasing competition and forcing existing firms to become more competitive through efforts such as:
cost control
product innovation
novel approaches to distribution.
The Italian footwear industry is given as an example.
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Factors Affecting a Nation’s Competitiveness: Firm Strategy
Firm strategy, structure, & rivalry due to
Strong consumer demand
Strong supplier base
High new entrant potential from related industries
Domestic rivalry leads to a search for new markets.
Response to rivalry is a strong indicator of global competitive success.
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This competitive rivalry increases the efficiency with which firms develop, market, and distribute products and services within the home country.
Domestic rivalry provides impetus for firms to innovate and find new sources of competitive advantage, such as new markets
Domestic rivalry is the strongest indicator of global competitive success.
Firms that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete in world markets.
The European grocery retail industry is given as an example.
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Example: Factors Affecting a Nation’s Competitiveness
Exhibit 7.2 India’s Diamond in Software
Source: From Kampur D.,and Ramamurti R., “India’s Emerging Competition Advantage in Services,” Academy of Management Executive: The Thinking Managers Source. Copyright © 2001 by Academy of Management.
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Factor Endowments: India’s universities and software firms invested in human resource development with a focus on industry-specific knowledge. .
Demand conditions: consumer demand conditions in developed nations created the consumer demand necessary to propel India’s software makers toward sophisticated software solutions.
Related Industries: rapid technological changes in IT hardware meant latecomers like India were not locked into older-generation technologies. Relationships among knowledge workers in IT hardware and software industries provided the social network for ongoing exchange, providing an environment to further enhance existing products.
Rivalry: 800 firms in the software services industry. Rivalry is the primary factor driving Indian software firms to develop overseas distribution channels.
Firms that succeed in global markets have first succeeded in intensely competitive home markets.
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Question
Increasing international exchange in goods and services can run into the difficulty of one offering that meets the needs of customers at differing income levels.
True
False
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True – One of the challenges with globalization is determining how to meet the needs of customers at very different income levels. In many developing economies, distributions of income remain much wider than they do in the developed world, leaving many impoverished even as the economies grow.
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Question
All of the factors below have made India’s software services industry extremely competitive on a global scale except
a large pool of skilled workers.
a large network of public and private educational institutions.
tax and antitrust legislation that protect the dominant players in the industry.
a large, growing market, and sophisticated customers.
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Answer: C.
Factor conditions, demand characteristics, and the existence of related and supporting industries are all factors that affect a nation’s competitiveness.
Policies that protect the nation’s domestic competitors do not lead to a nation’s competitive advantage on the worldwide stage.
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Question
Rivalry is intense in nations with conditions of _____ consumer demand, ______ supplier bases, and ______ new entrant potential from related industries.
weak; weak; high
Strong; strong; low
Weak; weak; low
Strong; strong; high
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Factors Affecting Competitiveness
Porter’s diamond of national advantage:
Factor endowments – nation’s position relative to land, capital, labor, infrastructure; firms often create labor and/or infrastructure
Demand conditions – home-market demand; consumer pressure push firm’s for higher quality and greater innovation
Related and supporting industries –supplier industries and/or related industries
Firm strategy, structure, & rivalry – governs how firm’s are created, organized and managed within a country; nature of domestic rivalry
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Examples:
Universities in India created a skilled labor market around software development, which facilitated national development and a middle-class
Japan developed JIT systems, which provided a temporary competitive advantage for production in the U.S.
Demand Examples:
Reliance Steel – diversified to aerospace and automotive markets
Expanded overseas
Supporting Examples:
Electronics production in China – cheap labor, manufacturing & shipping infrastructure
Defense industry – limited suppliers
Construction industry – limited suppliers after recession
Strategy Examples:
Aldi – 2 brothers in Germany
Small stores, removed merchandise that didn’t sell, cheapest food source
Split in 1960 (financially and legally separate companies) appear as a single company when negotiating with suppliers. (Nord or Sud)
Nord purchased Trader Joe’s; Sud operates at Aldi US
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Question
Which of the points on the Porter diamond of national advantage is the strongest indicator of global competitive success?
Foreign rivalry
Domestic rivalry
Global rivalry
International rivalry
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Competitive Advantage
Rivalry is intense in nations with strong consumer demand, strong supplier bases, and high new-entrant potential from related industries.
Of the points on Porter’s diamond of national advantage, domestic rivalry is the strongest indicator of global competitive success.
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Reasons for Failure
What is the biggest reason firm’s fail when expanding internationally?
Not understanding the general environment (political, environmental, socio-cultural, technological, demographic) or the competitive industry (Porter’s 5 forces) – covered in Chapter 2
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People in different countries were turned off by foods, products and strategies that simply didn’t suit their cultural tastes. Who would have guessed not everyone wants to live American style?
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American Brands that Struggled
Best Buy – Europe, China, Turkey
Europeans prefer smaller shops to large box stores
Lack of differentiation of product lines from local retailers
Not adapting to local consumers’ shopping preferences for smaller, more conveniently located retailers
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Which general environment
Where on Porter’s 5 forces
How could they have differentiated
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Ebay – China, Japan
Competitor offered built-in instant messaging system vs. Ebay’s seller rating system; Chinese prefer to develop trust through personal interactions rather than other users’ ratings
Didn’t adjust purchasing methods to local preferences – Japanese prefer cash-on-delivery versus inputting credit card information
Ebay learned from these mistakes and successfully returned to both countries several years later
American Brands that Struggled
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Which general environment
Where on Porter’s 5 forces
How could they have differentiated
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Groupon - China
Staffed largely by foreign managers; lacked strong understanding of Chinese purchasing landscape
Used marketing tactics counter to what Chinese consumers typically respond positively to
American Brands that Struggled
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Which general environment
Where on Porter’s 5 forces
How could they have differentiated
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Starbucks – Australia, Israeli
Locals preferred homespun hospitality and boutique qualities
Not original enough, no compelling reason to choose it over more interesting and diverse roasts
Unfamiliar with coffee cultural; misinterpreted local consumer base’s tastes
American Brands that Struggled
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Which general environment
Where on Porter’s 5 forces
How could they have differentiated
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Taco Bell
Yum Food’s (parent company) successful with KFC, however …
Hard to market Mexican food in China
Returned to South Korea later opening in 2 areas frequented by foreigners familiar with the brand
American Brands that Struggled
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Which general environment
Where on Porter’s 5 forces
How could they have differentiated
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Walmart – Japan associates low prices with cheap quality
Wendy’s - Japanese didn’t fall in love with greasy goodness
McDonalds – High barriers in the Caribbean and a slow economy
American Brands that Struggled
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Which general environment
Where on Porter’s 5 forces
How could they have differentiated
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Confusing Need with Demand
Many firms have wasted time and resources trying to market products that are designed for the poor but that consumers do not actually want.
A research with microfinance customers in rural India showed that when given a choice between beneficial products, such as solar-powered lanterns and low-energy stoves, and aspirational products like mobile phones and gold coins, 85 percent of customers opted for the latter.
It is usually difficult to make the economics work for a product if demand must be generated, because marketing costs typically swamp efforts to keep prices extremely low.
Companies should focus on areas where they can meet existing demand, with either lower-cost and better-quality products than the existing options, or simply with cheaper ones.
Safaricom’s hugely successful M-Pesa, for example, offered money transfers by mobile phone in Africa at 33 percent of the cost of Western Union—and at 20 percent of the cost of (and much greater security than) long-distance bus companies, the customary provider.
Source: Karamchandani, A., Kubzansky, M. & Lalwani, N. 2011. Is the bottom of the pyramid really for you? Harvard Business Review. 89(3): 107.
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What is the implication of the example stated above?
Market research
First-mover disadvantage
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Learning Objectives
7-3 The motivations (or benefits) and the risks associated with international expansion, including the emerging trend for greater offshoring and outsourcing activity.
7-4 The two opposing forces – cost reduction and adaptation to local markets – that firms face when entering international markets.
7-5 The advantages and disadvantages associated with each of the four basic strategies: international, global, multidomestic, and transnational.
7-6 The difference between regional companies and truly global companies.
7-7 The four basic types of entry strategies and the relative benefits and risks associated with each of them.
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International Expansion: Motivations
A company decides to become a multinational firm in order to:
Increase size of potential markets
Attain economies of scale
Take advantage of arbitrage opportunities
Applied to every stage of the value chain
Enhance a product’s growth potential
Reinvigorate the product life cycle
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Multinational firms = firms that manage operations in more than one country.
Arbitrage – buying something where cheap; selling where it commands a higher price. Applied to any factor of production, every stage of the value chain.
Growth potential: Pepsi, Coke, Procter & Gamble’s personal care products
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International Expansion: Motivations
A company also decides to become a multinational firm in order to:
Optimize the location of value chain activity
To enhance performance
To reduce cost
To reduce risk
Take advantage of learning opportunities
Explore reverse innovation
Design & manufacture products locally
Export no-frills products to developed markets
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Value chain optimization – Microsoft
Performance – affect quality through availability of talent, speed of learning, qualify of coordination activities. Microsoft located a corporate research facility in Cambridge, U.K.
Cost – can achieve cost leadership and differentiation. Oracle set up in India benefited from lower labor costs and suberbly talented software professionals
Risk – by managing swings in exchange rates by spreading high-cost activities across various locations around the world. Location decisions affect overall risk relative to currency, economic and political risks. Airbus, a European aircraft manufacturer, located a plant in Alabama. A U.S. location lessens concerns about buying from a foreign manufacturer, cuts costs, and minimizes current risks. A currency shift can wipe out all profits associated with the sale of planes manufactured in Europe and sold to the U.S.
Learning – managers experience different market demands, R&D capabilities, functional skills, organizational processes, and management practices. Knowledge can be transferred back to their home office.
Reverse – Companies invest in product development of products meeting the needs of developing nations. Often these products have value in developed markets as well. Example: $3,000 cars, $300 computers, $30 mobile phones.
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Question
Which of the following is not a source of political risk in many countries?
The presence of social unrest
The presence of the rule of law
The presence of military turmoil
The presence of violent conflict
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International Expansion: Risks
Multinational firms also encounter risks.
Political risk due to social unrest, military turmoil, demonstrations, terrorism, absence of the rule of law can lead to
Destruction of property
Disruption of operations
Non-payment for goods and services
Arbitrary government decisions
Economic risk due to piracy and counterfeiting
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Risks = political, economic, currency, and management.
Government decisions:
Companies are concerned about government decisions in developing markets, issues have become of concern in developed countries as well.
Governmental hurdles of doing business in the U.S. have become a greater challenge in recent years.
In a recent survey, U.S. was one of only a few countries surveyed where doing business has become more burdensome.
Privacy of intellectual property is a risk, Microsoft experienced piracy of software products produced in China.
Counterfeiting of products manufactured overseas is also a risk.
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International Expansion: Risks
Currency risk due to fluctuations in the local currency’s exchange rate
Affects cost of production or net profit
Management risk due to culture, customs, language, income level, customer preferences, distribution systems
Could lead to the need for local adaptation of apparently standard products
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Currency – Even a small fluctuation can result in significant difference in cost of production or net profit.
When US dollar increases, US goods can be more expensive to cosumers in foreign countries.
Management – U.S. managers are challenged by culture, customs, language, income levels, customer preferences, distribution systems, etc. - some degree of local adaptation is necessary.
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Cultural Risks in Branding
Coca-Cola’s brand name, when it first marketing in China, was sometimes translated as “Bite the Wax Tadpole.”
Coors translated its slogan, “Turn It Loose,” into Spanish, where it is a colloquial term for having diarrhea.
Gerber marketed baby food in Africa with a cute baby on the label without known that, in Ethiopia, for example, products usually have pictures on the label of what’s inside because many consumers can’t read.
KFC made Chinese consumers a bit apprehensive when “finger-licking good” was translated as “eat your fingers off.”
Mercedes-Benz entered the Chinese market under the brand name “Bensi,” which means “rush to die.”
Nike had to recall thousands of products when a decoration intended to resemble fire on the back of the shoes resembled the Arabic word for Allah.
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Cultural Risks
Gestures:
Members of the same sex may hold hands to signify friendship, but members of the opposite sex may not.
Although women may cross their legs, men should keep their feet on the floor. Place your hands in your lap while sitting.
The Chinese may communicate in closer proximity than is common in the United States.
Do not pat people on the shoulder or initiate any physical contact. It is not appreciated.
“Come here” is signified by turning the palm face down and waving the fingers.
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Cultural Risks
Gifts:
Clocks (they connote death)
Books (they represent a “Curse to Lose” for gamblers)
Blankets (they stifle the recipient’s prosperity)
Unwrapped gifts (this is rude)
Gifts wrapped in blue (the color of mourning)
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International Expansion: Managing Risks
Risk can be managed through global dispersion of value chains.
Various activities of the firm’s value chain can be spread across several countries & continents via
Outsourcing
Offshoring
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Outsourcing = using other firms to perform value-creating activities that were previously performed in-house. Outsourcing can be to either a domestic or foreign firm.
British Telecom outsourced HR to Accenture. Accenture used offices in India, the Czech Republic, and the US.
U.K. Dutch Bank, outsourced IT operations to Tata Consultancy, which used employees in Mumbai, Bangalore, Budapest, and Luxembourg.
Offshoring = shifting a value-creating activity from a domestic location to a foreign location. It makes sense to shift value-creating activities to another location where the cost is lower or where the quality is higher.
Offshoring common for information technology, HR management.
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Question
In considering the decision to offshore, which of the following generally is not one of the hidden costs?
Total wage costs and indirect costs
Wage deflation
Reduction in intellectual property rights
Increased inventory and coordination costs
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International Expansion: Managing Risks
Common savings from offshoring include:
Lower wages, benefits, energy costs, regulatory costs, taxes
Hidden costs from offshoring include:
Higher total wage & indirect costs, wage inflation
Increased inventory due to longer lead time
Reduced market responsiveness
Increased coordination costs
Cost of protecting intellectual property
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Labor cost per hour may be significantly lower in developing markets, but this may not translate into lower overall costs. If there are problems with the skill level of workers, the firm will need to provide more training and supervision of workers. They will need more raw material because they will have greater scrap due to the lower skill level, and increased rework to fix quality problems.
Hidden costs:
Wages in developing markets can be volatile and spike unexpectedly eliminating the cost savings.
Due to longer delivery times, firms often need to tie up more capital in work in progress and inventory.
The long supply lines from low-cost countries may make firms less responsive to shifts in customer demands.
The cost of coordinating product development and manufacturing with operations undertaken in different countries can hamper innovation.
Finally, firms operating in countries with weak intellectual property protection can wind up losing their trade secrets or taking costly measures to protect these secrets. Firms need to take into account all of these costs in determining whether or not to move their operations offshore.
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NTT Moves to U.S.
Japan’s biggest telecommunications group is making a strong push to grow in overseas markets. As part of this push, Nippon Telegraph & Telephone Corporation (NTT) is committing billions of dollars on acquisitions, primarily in the United States. The firm spent $2.4 billion on investments outside of Japan in 2014 alone. This included the establishment of a research center in California’s Silicon Valley.
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Q: Why would NTT expand to Silicon Valley?
Japanese market is stagnant
Growth opportunities
Expanding to areas of cutting edge, user-centered communications technology allows:
Recruitment of talent and knowledge incorporation
Easier to build relations and sales with new customers
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International Strategies
Exhibit 7.3 Opposing Pressures and Four Strategies
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Conflicting demands on firms as they strive to be competitive.
Competitive pressures require that firms do what they can to lower unit costs so that consumers will not perceive their product and service offerings as too expensive.
Consider locating manufacturing facilities where labor costs are low and developing products that are highly standardized across multiple countries.
Managers must also strive to be responsive to local pressures in order to tailor their products to the demand of the local market in which they do business.
This requires differentiating their offerings and strategies from country to country to reflect consumer tastes and preferences and making changes to reflect differences in distribution channels, human resource practices, and governmental regulations.
Since the strategies and tactics to differentiate products and services to local markets can involve additional expenses, a firm’s costs will tend to rise.
These two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace.
The strategy that a firm selects depends on the degree of pressure that it is facing for cost reductions and the importance of adapting to local markets.
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International Strategy
An international strategy requires diffusion & adaptation of the parent company’s knowledge & expertise to foreign markets.
The primary goal is worldwide exploitation of the parent firm’s knowledge & capabilities.
All sources of core competencies are centralized.
Pressure for both local adaptation & low costs are rather low.
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International strategy = a strategy based on a firm’s diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets. This strategy is used in industries where the pressures for both local adaptation and lowering costs are low.
Country units are allowed to make minor adaptations to products and ideas coming from the head office, but they have far less independence and autonomy compared to multidomestic companies.
There are only a small number of industries in which this strategy still applies.
This strategy is most suitable in situations where a firm has distinctive competencies that local companies in foreign markets lack. Text example: drug company for rare diseases.
Harley Davidson, Rolex, Starbucks
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International Strategy: Strengths, Limitations
| Strengths | Limitations |
| Leverage and diffusion of a parent firm’s knowledge and core competencies. | Limited ability to adapt to local markets. |
| Lower costs because of less need to tailor products and services | Inability to take advantage of new ideas and innovations occurring in local markets. |
Exhibit 7.4 Strengths and Limitations of International Strategies in the Global Marketplace
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Although an international strategy does leverage and diffuse a parent firm’s knowledge and core competencies, leading to lower costs because of less need to tailor products and services, it does mean a firm has a limited ability to adapt to local markets, and, therefore, it cannot take advantage of new ideas and innovations occurring in that market. The international strategy, with its tendency to concentrate most of its activities in one location, fails to take advantage of the benefits of an optimally distributed value chain. The lack of local responsiveness may result in the alienation of local customers, and the firm’s inability to be receptive to new ideas and innovation from its foreign subsidiaries may lead to missed opportunities globally.
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Global Strategy
A global strategy implies a firm is interested in lowering costs.
Competitive strategy is centralized & controlled by the corporate office.
Products are standardized, operations centralized, producing economies of scale.
Worldwide volume supports R&D.
There’s a standard level of quality worldwide.
Pressure for reducing cost is high; pressure for adaptation to local markets is weak.
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Since the primary emphasis is on controlling costs, the corporate office strives to achieve a strong level of coordination and integration across the various businesses. Firms following a global strategy strive to offer standardized products and services as well as to locate manufacturing, R&D, and marketing activities in only a few locations. Although costs may be lower, the firm following a global strategy may, in general, have to forgo opportunities for revenue growth since it does not invest extensive resources in adapting product offerings from one market to another. Many industries requiring high levels of R&D, such as pharmaceuticals, semiconductors, and jet aircraft, follow global strategies.
Lenovo, Siemens Energy
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Global Strategy: Strengths, Limitations
| Strengths | Limitations |
| Strong integration occurs across various businesses. | Limited ability exists to adapt to local markets. |
| Standardization leads to higher economies of scale, which lower costs. | Concentration of activities may increase dependence on a single facility. |
| Creation of uniform standards of quality throughout the world is facilitated. | Single locations may lead to higher tariffs and transportation costs. |
Exhibit 7.5 Strengths and Limitations of Global Strategies
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A global strategy is most appropriate when there are strong pressures for reducing costs and comparatively weak pressures for adaptation to local markets.
Economies of scale becomes an important consideration. However a firm can enjoy scale economies only by concentrating scale-sensitive resources and activities in one or a few locations.
This may result in higher transportation and tariff costs when output must be exported to other markets. The geographic concentration of any activity may also tend to isolate that activity from the target markets, making the rest of the firm dependent on that location. Unless the location has world-class competencies, the firm’s competitive position can be eroded if problems arise.
Many firms have learned through experience that if they concentrate activities and misjudge the market, the mistake will be quickly magnified.
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Multidomestic Strategy
A multidomestic strategy puts emphasis on differentiating products & services to adapt to local markets.
Decisions are decentralized, unlike the global strategy.
Products & services are tailored to local use.
Consider language, culture, income levels, customer preferences, distribution systems.
Markets can expand rapidly.
Prices are differentiated by market.
Pressure for local adaptation is high; pressure for lowering costs is low.
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This strategy is used in industries where the pressure for local adaptation is high and the pressure for lowering costs is low.
Decisions involving a multidomestic strategy tend to be decentralized to permit the firm to tailor its products and respond rapidly to changes in demand.
This enables the firm to expand its markets and to charge different prices in different markets.
This strategy works well in with differences in language, culture, income levels, customer preferences, or distribution systems Even if products are relatively s
standardized, some level of local adaptation is often necessary.
Managers of multinational firms often experience dilemmas when it comes to adjusting to the norms of foreign countries in which they operate. One especially difficult choice is whether or not to participate in bribery to get projects moving forward or to get approvals needed. According to a survey by Ernst & Young, 39 percent of businesses say that corruption is a common problem in the countries where they competed. The proportion of managers who believe it is justified to bribe an official to win business in difficult times rose from 9 percent in 2011 to 15 percent in 2012.
The text provides examples of culture differences during negotiations.
Bridgestone, Nestle
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Multidomestic Strategy: Strengths, Limitations
| Strengths | Limitations |
| Ability to adapt products and services to local market conditions. | Decreased ability to realize cost savings through scale economies. |
| Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue. | Possibility of leading to “overadaptation” as conditions change. |
Exhibit 7.6 Strengths and Limitations of Multidomestic Strategies
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This strategy can result in enhanced revenue due to a firm’s carve-out of niches in a given market.
However, local adaptation of products or services may increase the company’s costs.
Managers must determine the trade-off between adaptation and cost.
The optimal degree of local adaptation evolves over time. In many segments of the industry global media, international travel, or declining income disparities may lead to increasing global standardization.
Firms must consider the need for local adaptation on an ongoing basis.
Underadaptation results in lower sales, however, excessive adaptation increases costs.
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Transnational Strategy
A transnational strategy seeks global competitiveness via trade-offs.
Efficiency versus local adaptation versus organizational learning
Assets & capabilities disbursed according to the most beneficial location for a specific activity; some value chain activities centralized, some decentralized
Economies of scale, increased knowledge flows
Pressures for both local adaptation and lowering costs high
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Transnational strategy optimizes efficiency, local adaptation and learning.
The firm seeks efficiency as a means to achieve global competitiveness.
Innovations are the outcome of a larger process of organizational learning that includes contributions of everyone in the firm.
A firm’s assets and capabilities are disbursed according to the most beneficial location for each activity. Managers avoid the tendency to concentrate activities in a central location (a global strategy) or disperse them across many locations to enhance adaptation (a multidomestic strategy).
Typically, primary activities that are “downstream” (marketing and sales, and service), or closer to the customer, tend to require more decentralization in order to adapt to local market conditions. Primary activities that are “upstream” (logistics and operations), or further away from the customer, tend to be centralized. This is because there is less need for adapting these activities to local markets and the firm can benefit from economies of scale.
Transnational strategy is used in industries where the pressures for both local adaptation and lowering costs are high.
P&G
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Transnational Strategy: Strengths, Limitations
| Strengths | Limitations |
| Ability to attain economies of scale. | Unique challenges in determining optimal locations of activities to ensure cost and quality. |
| Ability to adapt to local markets. | Unique managerial challenges in fostering knowledge transfer. |
| Ability to locate activities in optimal locations. | |
| Ability to increase knowledge flows and learning. |
Exhibit 7.7 Strengths and Limitations of Transnational Strategies
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When an organization adopts a transnational strategy, it can adapt to all competitive situations by capitalizing on communication and knowledge flows throughout the organization.
It also achieves economies of scale by locating activities in optimal locations. However the choice of a seemingly optimal location cannot guarantee that the quality and cost of factor inputs (labor and materials) will be optimal.
Managers must ensure that the relative advantage of the location is actually realized, not squandered because of weaknesses in productivity and the quality of internal operations.
Although knowledge transfer can be a key source of competitive advantage, it does not take place automatically.
For knowledge transfer to take place from one subsidiary to another. Firms must create mechanisms to systematically and routinely uncover the opportunities for knowledge transfer.
Johnson & Johnson today operates in 57 countries. Trying to concentrate all decision-making authority corporate office would create a huge bottleneck. At J&J, the managing directors of operating companies have enormous freedom to run their businesses. In their early years managers are rotated through different business segments systematically so that they become broadly developed.
Decentralization on such a scale can potentially have two negative consequences. First, the corporate office can lose control. Second, efficiencies and scale advantages may be lost. J&J developed standardized processes in staff and support areas like procurement, human resources, and IT, but not in operations. The standardization of processes ensures control and cost reduction while decentralization facilitates operational freedom.
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Question
In order to realize the strongest competitive advantage, firms engaged in worldwide competition must
require that all of their various business units follow the same strategy regardless of location.
ensure that all business units follow a strategy strictly tailored to their respective locations.
pursue a strategy that combines the uniformity of a global strategy and the specificity of a multidomestic strategy in order to achieve optimal results.
attempt to use the strategy that was most successful in their home country.
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Answer: C. See the trade-offs between adaptation and cost.
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International Strategies: Global or Regional?
It may be unwise for companies to rush into full-scale globalization.
Regionalization may be more reasonable.
Distance still matters.
Commonalities of language, culture, economics, legal & political systems, and infrastructure all make a difference.
Trading blocs and free trade zones ease trade restrictions, taxes, & tariffs.
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Globalization is measured in terms of its foreign sales as a percentage of total sales. One definition states that a company would need to have at least 20% of its sales in each of the 3 major economic regions – North America, Europe and Asia – to be considered a global firm.
Distance matters. The effects of geographic distance can be multiplied by distance in terms of culture, language, religion, and legal and political systems between two countries. The United States and Australia are geographically distant yet the “true” distance is less than that between the United States and China.
In addition, a number of regional agreements have been created that facilitate the growth of business within regions by easing trade restrictions, taxes, and tariffs. These trading blocs and free trade zones include the European Union (EU), the North American Free Trade Agreement (NAFTA), the Association of Southeast Asian Nations (ASEAN), and MERCOSUR, a south American trading block.
Regional economic integration has progressed at a faster pace than global economic integration.
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Question
A domestic corporation considering expanding into international markets for the first time will typically
start off by implementing a wholly owned foreign subsidiary so it can maintain standards identical to those at home.
consider licensing or franchising its operations.
consider implementing a low risk/low control strategy such as exporting.
form a joint venture with a reputable foreign producer.
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Answer: C. See the continuum of entry options ranging from exporting (low investment and risk, low control) to a wholly owned subsidiary (high investment and risk, high control).
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International Strategies: Entry Modes, Chart
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Given the challenges associated with entry into international markets, many firms first start on a small-scale and then increase their level of investment and risk as they gain greater experience with the overseas market in question.
Exporting = enables the firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. Exporting is low risk, but the firm has a limited ability to tailor its products to meet local market needs.
Licensing = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual property. Licensing limits risk but licensor gives up control of its product and forgoes potential revenues and profits.
Franchising = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; it usually involves a longer time period than licensing and includes monitoring of operations, training, and advertising. Franchising has the advantage of limiting the risk exposure that a firm has in overseas markets while, at the same time, the firm is able to expand the revenue base of the company.
Strategic alliances and joint ventures allow firms to increase revenues and reduce costs as well as enhance learning and diffuse technologies. However, trust is a vital element. Lack of trust or cultural differences can lead to conflict. Wholly Owned Subsidiary = a business in which a multinational company owns 100% of the stock. A firm can establish a wholly owned subsidiary by acquiring an existing company in the home country or developing a totally new operation. This can be expensive and risky, and is most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations.
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Issue for Debate
Is Medtronic justified in moving its legal home to Ireland?
How should firms balance the desire to limit taxes to maximize cash generation with the need to be a good corporate citizen?
How should the U.S. government respond to the increasing frequency of tax inversions?
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1. Pros
Following legal rules in U.S. and Ireland
Providing the highest value to shareholders
Competes in a global market – at a disadvantage if forced to pay higher tax rate than competitors
U.S. burdens corporations by placing a higher tax burden on them than other countries – places then at a disadvantage
Cons
Greedy capitalist taking advantage of a legal loophole to avoid paying taxes
Corporations should act to benefit the larger society and nation
2. Pros
Corporations should focus on creating cash to fund growth and/or return to shareholders
Cons
Corporations should be more socially oriented. Corporate corruption and greed needs to stop.
Consider the firm’s mission statement. Zappos and Toms Shoes are clear in their social mission. Goldman Sachs and Apple are fairly clear that they are capitalist firms emphasize winning competitive markets and creating value for shareholders.
3.
Push for regulations to limit tax-inversion acquisitions (limited success so far)
Allow deals but require firms pay income tax on all profits held in foreign countries prior to completing the deal. (short term income tax boost; less attractive to corporation)
Align tax code with other countries, lower rate, less loop holes
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Medtronic
Tax-inversion acquisition occurs when a corporation acquires a target firm bssed in a lower-tax country and, as part of th etransacton, moes its legal headquarters to the target firm’s nation.
Taxes are based on the lower rate in the new country.
Completely legal as long as target firm’s shareholders own at least 20 percent of the combined firm.
If a multinational corporation makes profits in a foreign country, the firm pays taxes on those profits to the foreign govnermnet at the rate the foreign country charges (12.5% in Ireland)
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If corporation wants to bring profits to home country to invest I new facilities or distrubte as dividends, it has to pay ta on profits earned in foreign markets. (difference in the foreign country tax rate and the U.S. rate)
Corporations undertake tax inversions to save taxes and benefit shareholders by being able to invest more in the firm to help it grow and/or return higher levels of dividends to shareholders.
Inverters change legal residence but keep their corporate headquarters in U.S. and remain on U.S. stock exchange.
Medtronic
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Benefit from U.S. financial markets, military might, intellectual property rights, infrastructure, human capital base, etc.
Wins government contracts, hires students from top Universities, files patients in the U.S.
Chooses not to pay taxes to support the U.S. infrastructure.
Medtronic
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Discussion Questions
IBM has 70% of its employees outside the U.S. and earns almost 2/3 of its revenue from outside the country, what is an appropriate definition of a “U.S.” Firm?
Should IKEA be considered a Swedish firm with less than 6% of sales earned from the Swedish market?
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CAGE Framework
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Global or Regional – “distance matters” – slide 44
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Clif Bars
Clif Bar is a privately held company with 400 employees.
20% of the company is owned by employees.
Majority of sales are in the U.S.
Some sales in Canada, the U.K. Austria, Australia, France, Germany, Ireland, Japan, New Zealand, and Switzerland
1. Apply the CAGE framework to the foreign countries. What is the relative distance to the U.S. Rank the order in terms of relative distance.
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Q: What entrance strategy should the firm employ in expanding the business to new countries? Why?
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