Multinational and Participation Strategies: Content and Formulation

1. 6 Multinational and Participation Strategies: Content and Formulation

2. Learning Objectives • Appreciate the complexities of the global-local dilemma • Understand the content of the multinational strategies • Formulate a multinational strategy • Understand the content of the participation strategies • Formulate a participation strategy • Understand political risk and ways companies can manage such risks

3. Multinational Strategies: Dealing with the Global-Local Dilemma • Local-responsiveness solution: customize to country or regional differences • Global integration solution: conduct business similarly throughout the world • Global-local dilemma: choice between a local-responsiveness or global approach to a multinational’s strategies

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

5. Multidomestic Strategy • The company attempts to offer products or services that attract customers by closely satisfying their cultural needs and expectations • Emphasizing local-responsiveness issues - Ex.: different packages, colors - Costs more to produce, need to charge higher prices to recoup - A form of the differentiation strategy - Not limited to large multinationals

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

7. Transnational Strategy (cont.) • Location advantages: dispersing value-chain activities anywhere in the world where they can be done best or cheapest • Global platform: country location where a firm can better perform some of its value-chain activities

8. Transnational strategy (cont.) • With upstream location advantages, the transnational can: • Locate subunits near cheap sources of high-quality raw material • Locate subunits near centers of research and innovation • Locate subunits near sources of high-quality or low-cost labor • Seek low-cost financing anywhere in the world • Share discoveries and innovations made in one part of the world with operations in other parts of the world

9. Transnational Strategy (cont.) • Comparative advantage: advantages of nations over other nations - No longer only available to domestic firms • Location advantages can exist for all activities of the value chain

10. International Strategy • International strategy: selling global products and using similar marketing techniques worldwide - A compromise approach - Limited adjustment in product offerings and marketing strategies - Upstream and support activities remain concentrated at home country

11. Regional Strategy • Regional strategy: managing raw-material sourcing, production, marketing, and support activities within a particular region - Another compromise strategy - Attempts to gain economic advantages from regional network - Attempts to gain local adaptation advantages from regional adaptation

12. Exhibit 6.1: Content of the Four Basic Multinational Strategies

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

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

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

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

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

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

19. Competitive Advantage in the Value Chain (cont.) • Mixed conditions - Competitive strength downstream in industry with strong globalization drivers - Competitive strength upstream in industries with local adaptation pressures • Both favor regional strategies

20. Exhibit 6.2: Pressures for Globalization vs. Localization

21. Transnational or International: Which Way for the Global Company? • Select a transnational over an international strategy when: • - Benefits of dispersing activities worldwide offset the costs of coordinating a more complex organization • Select an international strategy over a transnational when: • - Cost savings of centralization offset the lower costs of higher quality raw materials/labor from worldwide locations

22. Participation Strategies: The Content Options • Participation strategies: the choice of how to enter each international market - Exporting - Licensing - Strategic alliances - Foreign direct investment

23. Exporting • Easiest way to sell a product in international market • Passive exporter: company that treats and fills overseas orders like domestic orders • Alternatively, a company can put extensive resources into exporting with dedicated export department

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

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

26. Export Strategies (cont.) • 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

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

28. Exhibit 6.3: Contents of a Licensing Agreement

29. Special Licensing Agreements • International franchising: the franchisor grants the use of a whole business operation • Contract manufacturing: production following the foreign companies’ specifications • Turnkey operation: multinational company makes a project fully operational before the foreign owner takes control

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

31. Types of International Strategic Alliances • Equity International Joint Ventures (IJV): two or more firms from different countries have an equity position in a separate company • International Cooperative Alliance (ICA): two or more firms from different countries agree to cooperate in any value-chain activity

32. Foreign Direct Investment (FDI) • Companies own and control directly a foreign operation - Symbolizes the highest stage of internationalization • Greenfield investments: starting foreign operations from scratch

33. Exhibit 6.5: World’s Top Companies Ranked by Foreign Assets

34. Exhibit 6.5: World’s Top Companies Ranked by Foreign Assets

35. Formulating Participation Strategy • Must take into account several issues: - Basic functions of each participation strategy - Strategic considerations and intent of company - How best to support company’s multinational strategy

36. Export Strategy • Exporting is the easiest and cheapest participation strategy, although it may not always be the most profitable • It is a way to begin to internationalize or t test new markets • Which form of exporting should it choose?

37. Deciding on Export Strategy • Does management need to control sales, customer credit, and sale of the product? • - If yes, choose direct exporting • Does company have resources to manage export operations? • - If not, use indirect exporting

38. Deciding on Export Strategy • Does company have resources to design/execute international promotional activities? • - If not, use foreign intermediaries and indirect exporting • Does company have resources to support extensive international travel or possibly an expatriate sales force? • - If so, choose direct exporting.

39. Deciding on Export Strategy • Does company have time and expertise to develop overseas contacts and networks? - If not, rely on foreign intermediaries or indirect exporting. • Will time and resources affect domestic operations? - If not, choose direct exporting.

40. Licensing Decision • Based on three factors - Characteristics of the products • Best products are older or soon-to-be replaced - Characteristics of the target country • Situation in target country - Nature of the licensing company • Company may lack resources to go international

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

42. Motivations for Strategic Alliances • Partner’s knowledge of the market • Government requirements • To share risks • To share technology • Economies of scale • Low cost raw materials or labor

43. Key Considerations for Alliances • Could other participation strategies better satisfy strategic objectives? • Does firm have management and capital resources to contribute? • Can partner benefit the company’s objectives? • What is expected payoffs?

44. Foreign Direct Investment (FDI) • Most experienced international firms choose FDI • Advantages - Greater control - Lower costs of supplying host country - Avoid import quotas - Greater opportunity to adapt product to local markets - Better local image of the product

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

46. Exhibit 6.6: Advantages and Disadvantages of FDI

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

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

49. Exhibit 6.7: The Risk versus Control Tradeoff

50. Exhibit 6.8: Decision Matrix for Formulating Participation Strategies