chapter 6 multinational and participation strategies: content and formulation
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CHAPTER 6
MULTINATIONAL AND
PARTICIPATION STRATEGIES:
CONTENT AND
FORMULATION
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Multinational Strategies and the Global-- Local Dilemma
• The local responsiveness solution
• The global integration solution
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Local Solution
• Customize organizations and products to country or regional differences
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Global Integration Solution
• Reduce costs with worldwide standardized products, uniform promotional strategies and distribution channels
• Seek lower costs or higher quality anywhere in the value chain and in the world
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Four Broad Multinational Strategies
• Solutions to the global--local responsiveness dilemma – multidomestic – transnational– international– regional
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Multidomestic Strategy
• Gives top priority to local responsiveness issues
• A form of the differentiation strategy
• Not limited to large multinationals
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Transnational Strategy
• Gives two goals top priority: – seek location advantages
•global platforms– gain economic efficiencies from worldwide networks
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International Strategy
• A compromise approach • Global products, similar
marketing techniques worldwide
• Upstream and support activities remain concentrated at home country
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Regional Strategy
• A compromise strategy• Attempts to gain economic
advantages from regional network
• Attempts to gain local adaptation advantages from regional adaptation
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Regional Trading Blocks
• Encourage regional strategies• Reduce differences in
government and industry required specifications for products
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EXHIBIT 6.1 MULTINATIONAL STRATEGY CONTENT
Content Transnational International Multidomestic Regional Worldwide markets
Yes Yes No No
Worldwide location of separate value chain activities
Yes No No No
Global products
Yes Yes No No
Global marketing
Yes Yes No No
Global competitive moves
Resources from any country used to attack or defend
Attacks and defenses in all countries - resources HQ
No, competitive moves planned and financed by country units
No, but resources from region can be used
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Mixed Strategies
• Seldom do companies adopt pure forms
• Different strategies for each business
• Different strategies for product differences
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The Local-global Dilemma: Diagnostic Questions for Strategy Formulation
• The KEY question:– how global is the industry?
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What makes an industry global?
• Globalization drivers– four categories of global drivers: •markets, costs, governments, and competition
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Global Markets
• Are there?– common customer needs? – global customers?
• Can you transfer marketing? • What is the volume of imports
and exports in the industry?
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Costs
• Are there?– global economies of scale? – global sources of low cost raw materials?
– cheaper sources of high skilled labor?
– high product development costs?
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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
• Successful strategies of competitors
• Volume of imports and exports in industry
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Competitive Advantage in the Value Chain
• Upstream advantages – favor transnational strategy or an international strategy
• Downstream advantages– favor multidomestic strategy
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Mixed Conditions• Competitive strength downstream
in industry with strong globalization drivers
• Competitive strength upstream in industries with local adaptation pressures– both favor regional strategies
• See summary Exhibit 6.2 next
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Global/ Local Pressures
Primary Source of Competitive Advantage in Value Chain
Upstream Downstream
High Pressures for
Global-ization
Transnational
Strategy or International
Strategy
Regional Strategy
Compromise
High Pressures for Local Responsive-ness
Regional Strategy
Compromise
Multidometic
Strategy
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Select an International Strategy over a Transnational When:
• Cost savings of centralization offset the lower costs or higher quality raw materials or labor available from worldwide locations
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Participation Strategies
• The choice of how to enter each international market – exporting, licensing, strategic alliances, and foreign direct investment
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Exporting
• The easiest• Passive exporting • Active export strategies
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Export Strategies
• Indirect exporting– uses intermediaries
• Direct exporting
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Export Management and Trading Companies (EMCs and ETCs)• Specialize in products,
countries or regions • Provide ready-made access to
markets • Have networks of foreign
distributors
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Direct Exporting
• More aggressive• Requires more contact with foreign
companies• Uses foreign sales representatives,
distributors, or retailers• May require branch offices in
foreign countries
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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
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Licensing
• International licensing is a contractual agreement between a domestic licensor and a foreign licensee
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Other contractual agreements
• International franchising• Contract manufacturing• Turnkey operations
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The International Strategic Alliance
• Cooperative agreements between two or more firms from different countries to participate in a business activity
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Two Basic Types
• Equity international joint ventures (IJV)
• International cooperative alliance (ICA)
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Foreign Direct Investment (FDI)
• FDI means that companies own and control directly a foreign operation – symbolizes the highest stage of internationalization
• Mergers and acquisitions versus greenfield
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Reasons to Invest in Foreign Countries
• To extract raw materials• To find low cost sources of
labor, components, parts, or finished goods
• To penetrate new markets, the major motivation
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Formulating a Participation Strategy
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Deciding on an Export Strategy
• Assess control needs for: sales, customer credit, and the eventual sale of the product
• Assess financial and human resources capabilities – to manage export operations
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– to design/execute international promotional activities
– to support extensive international travel or possibly an expatriate sales force
– to develop overseas contacts and networks
Deciding on an export strategy, continued
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When Should Companies License?
• Based on three factors 1. characteristics of the product2. characteristics of the target country
3. nature of the licensing company
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Disadvantages of Licensing
• Gives up control• May create new competitors• Often generates only low
revenues• Opportunity costs (barriers to
other participation strategies
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Why Seek Strategic Alliances?• Partner’s different capabilities• Partner's 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
• Pick partners carefully• Seek win-win ventures-last much
longer • Assess need for the alliance • Estimate ability to succeed Plan
for design and management
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Which Type?
• IJV probably more secure• ICA probably more flexible and
less visible
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Advantages of FDI
• Greater control• Lower costs of supplying host
country• Avoid import quotas • Greater opportunity to adapt
product to the 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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General Strategic and Operational Considerations
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Strategic Intent
• Immediate profit, or..• Other goals
– e.g., being first in a market with potential or learning a new technology
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Company Capabilities
• What can a company afford? • Human resources • Production capabilities • Commitment to using
resources
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Local Government Regulations
• Import or export tariffs, duties, or restrictions
• Laws regarding foreign ownership• Other legal and regulatory issues
– patent, consumer protection, labor, and tax laws
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Characteristics Of The Target Product /Market (e.g.s)
• Products that spoil quickly or are difficult to transport – poor candidates for exporting
• Products that need little local adaptation– good candidates for licensing,
joint ventures, or FDI
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Geographic Distance
• Transportation costs • Management of FDI and equity
strategic alliances more difficult
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Cultural Distance
• With very different cultures, direct investment more risky
• Joint ventures, licensing and exporting– local partners deal with local cultural issues
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Risk• Financial risk• Economic risk
– currencies, markets, etc.• Political risk
– governments change – policies regarding foreign firms
change
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Need for Control
• Key areas for concern – product quality in the manufacturing
process, product price, advertising and other promotional activities, where the product is sold, and after market service
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The control versus risk tradeoff
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High
Low
Risk
Control
DirectExport
IndirectExport
Licensing
StrategicAlliances
FDI
Low High
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Multinational and Participation Strategies
• What is the strategic reason to be in the market? – location advantages versus market penetration•e.g., source of raw materials, R&D, production, etc.
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Multinational strategy and participation strategies, continued
• A mix of participation strategies often support the basic multinational strategy– see Exhibit 6.9
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Conclusions• Dealing with the global--local
responsiveness dilemma• Four strategies
– multidomestic – transnational– international– regional
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• Participation strategies– all can be used for sales– others besides exporting serve more value chain activities