Foundations of Strategy Chapter 8:Global Strategies and the Multinational Company

Jacob FeltySabrea Hebb Alexandra HillShaady IbrahimCallie MyersColby Wulf

Patterns of Internationalization

Occurs through:◦ Trade – the sale

and shipment of goods and services from one country to another

◦ Direct Investment – building or acquiring productive assets in another country

USA China

Internationalization of Industries

Sheltered Industries – protected from trade and direct investment

Trading Industries – engaged in trade, not direct investment

Multidomestic Industries – engaged in direct investment, not trading

Global Industries – trade and direct investment involved

Trading Industries- Airbus

- De Beers

Global Industries

- ExxonMobil- LG

Sheltered Industries- Gandy’s - Mahon Cleaners

Multidomestic Industries

- McDonald’s- Hilton

Foreign Direct InvestmentLow High

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iona

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deHi

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Competitive Advantage in an International World

Achieved when internal strengths in resources and capabilities to the key success factors of the industry are matched

Comparative Advantage: a country intensively uses those resources they have in abundance◦ Large home market is an

additional source

Natural Environme

nt: - Raw

Materials like Sugar- Relatively

little government

control- Logistics Services

Firm Resources

and Capabilities:

- Great Reputation

- Huge Financial

Resources - Physical Resources

Industry Environme

nt:- Taste

- Availability

Coca – Cola Competitive Advantage

Porter’s National Diamond Framework

Factor Conditions – constraints or freedoms, beyond control

Related and Supporting Industries – clusters of inter-related and interdependent industries

Demand Conditions – domestic demand drives innovation and quality

Strategy, Structure, and Rivalry – intense domestic competition vital to success

Factor Conditions:Lack of rubber trees

leads to development of synthetic rubber

Strategy, Structure and

Rivalry:Microsoft vs.

Google vs. Apple

Demand Conditions:

Cheap fast-food

Related and Supported Industries:

Wichita Falls, Kansas

Limitations of the Diamond ModelFirst Perspective:

◦ Fails to consider attributes of home country’s trading partners

◦ Not applicable to smallest nations

◦ Ignores the role of multinational corporations in influencing competitive success of nations

Second Perspective:◦ Too general, lacks value◦ Insufficiently precise to

generate predictions

Would countries rich in cheap labor, such as Bangladesh, be competitive without clothing companies such as Gap?

International Location of Production

Firms consider several factors for locating production:National resource availability – Finding

countries where resource supplies are good (ex: oil industry in the Gulf of Mexico)

Firm-specific competitive advantages – a firm’s competitive advantage dependent on internal resources need to find locations where they are located◦ Goldman Sachs and Toyota have succeeded in

transferring their competitive advantage abroad

International Location of Production

Tradability – the harder it is to transport product, the more local production must become ◦ Trade barriers (i.e. tariffs, quotas) or government

restrictions (licensing) factor into the choice◦ Services are best produced nearby consumption

Political considerations – Location decision is affected by government incentives, penalties, and restrictions

Freedom House - Economic Freedom Index

Location and Value Chain A vertical chain of activities comprises the

production of goods. But advantages for any stage varies by country

Consumer electronics is costly in capital and R&D. Neither is always in the same location

ECCO produces ‘leisure casual branded footwear’. The firm uses a vertically-integrated production chain (“from cow to consumer”)

Design, R&D, leather production, and distribution are handled in very different locations like Denmark, Portugal, Indonesia, China, Hong Kong, etc.

Factors of Entering Foreign Markets

Competitive Advantage: ◦ firm specific vs. country specific (Toyota)

Firm specific = production/management capabilities Country specific = Low domestic cost base

Tradability of product & barriers of trade◦ Barriers to trade

transportation constraints import restrictions

Range of resources and capabilities◦ To establish competitive advantage

Directly appropriating Returns on resources◦ Licensing arrangement factors:

Reliability and capabilities of local licensee Transaction costs involved

◦ transport costs & tariffs, exchange rate risk, information costs

◦ McDonald’s vs. Starbucks

Entering Foreign Markets

Location?

Independent factors

Cost / availability of inputs

Foreign governme

nt incentives/ penalties

Internal resources

and capabilitie

s

Dependent factors

Firm’s business strategy

Coordination

benefits

International alliances and joint ventures

Strategic Alliances◦Collaborative arrangement between

firmsAccess the market knowledge,

distribution capabilities, and product development of local companies

Sharing resources and capabilities between the partners◦Helps minimize costs and increase

market share

International Strategic Alliances

Overseas

Market Entry

TransactionsLicensing

Patents/ other IP

Franchising

ExportingSpot Sales

Long-term Contract

Foreign agent/ distributor

Direct Investment

Joint Venture

Marketing/ Distribution

onlyFully

integratedWholly Owned

subsidiary

Marketing/ Distribution

onlyFully

integrated

Multinational Strategies: Global Integration vs. National Differentiation

◦The benefits of a global strategy◦The need for differentiation◦Reconciling global integration with national differentiation

The Benefits of a Global StrategyViews the world as a single,

segmented marketGlobal players usually win

◦Access to scale economies◦Barriers to exploiting these scale

economies are fast disappearing

Levitt’s Analysis of the Potential for Global StrategiesCost Benefits of Scale and

ReplicationServing Global CustomersExploiting National Resources –

Arbitrage BenefitsLearning BenefitsCompeting Strategically

Cost Benefits of Scale and ReplicationPrimary sources of scale

economy is product developmentReplication costs are a fraction of

the original cost of developing the product◦Disneyland theme parks

Serving Global Customers Investment BankingAudit servicesAdvertising

Exploiting National ResourcesExploiting the efficiencies from

locating different activities in different places

Search of resource opportunities◦Raw materials◦Low cost labor

Therefore, leads to a search for knowledge

Learning BenefitsRefers to

◦Ability to access and transfer local knowledge

◦Integration of this knowledge◦Creation of new knowledge learned

from interacting with different national environments

IKEA expansion

Competing StrategicallyInternational firms can fight more

aggressively with national firms using resources from other national markets

Can cut prices lower than national firms◦Can contradict standards set by the

World Trade Organization

The Need for National DifferentiationProducts designed to meet the needs of

a global customer tend to be unappealing to most customers

Costs of national differentiation are low if ◦Designs are basic◦Common major components remain the same

CAGE framework◦Cultural distance◦Administrative and political distance◦Geographical distance◦Economic distance

Reconciling Global Integration with National DifferentiationInternational strategy is a

tradeoff between global integration and national adaptation

Industries where scale economies are large global strategy

If national preferences are pronounced multi-domestic strategy

Reconciling conflicting forces is one of the greatest strategic challenges

Strategy and Structure of the Multinational CorporationThe strategy-structure mix for MNCs are

dependent on the ones they used to enter the international marketplace.

Over the past 100 years, different time periods have called for different strategies and structures.

However, radical changes are difficult and dangerous.

Three main eras in strategy-structure development:◦ Early 20th Century◦ Post World-War II◦ The 1970s and 1980s

Early 20th Century: era of the European MultinationalPioneers of multinational

expansion: Unilever, Shell, ICI, and Phillips.

Poor transportation and communication called for the invention of “multinational federations”.

Post World War II: era of the American Multinational

The dominance of the US economy was the basis for emergence of multinationals such as Ford and Coca-Cola.

US-based technology and resources were their primary competitive advantage at this time.

During WWII, Coke began representing itself as a patriotic brand, setting the stage for their multinational expansion.

The 1970s and 80s: the Japanese Challenge

Japanese MNCs such as Honda and Toyota dominated during this era.

R&D and manufacturing were based in Japan while sales and distribution were done overseas.

Globally standardized products were produced in large quantities, providing a cost and quality advantage.

Reconfiguring the MNCChanging the organization structure:Changes in structure must be backed

by changes in responsibilities, decision making, and coordination modes.

Escalating local customer needs calls for more decentralization. However, this should not stifle innovation and creation.

These factors introduce a new idea: “The Transnational Organization”.

The Transnational FirmThe transnational firm is

a concept and direction for strategy rather than a strategy itself.

P&G adopts global standardization for some products and national differentiation for others.

Aligning resources with these changing strategies may require a headquarters relocation.

Organizing R&D and NPDInnovation and creation requires

autonomy while distribution requires heavy coordination.

Assigning national subsidiaries can remedy this problem.