Multinational Strategies: Dealing with the Global-Local Dilemma

1. 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

2. The Value Chain

3. 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

4. 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

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

6. Multidomestic Strategy • 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

7. Transnational Strategy • Two goals get top priority • Seeking location advantages • Gaining economic efficiencies from operating worldwide • Location advantages: dispersing value-chain activities anywhere in the world where they can be done best or cheapest

8. Transnational Strategy (cont.) • Global platform: country location where a firm can better perform some of its value-chain activities • 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

9. 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

10. 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

11. 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

12. 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

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

14. Exporting • Passive exporting: filling overseas orders as if they were domestic orders • The most common intermediaries (indirect exporting) • 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

15. 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

16. 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

17. 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

18. Licensing Decision • Based on three factors • Characteristics of the products • Best products are older or soon-to-be replaced • Allows the co. to still make $ from an older product- demand may still be high for it in LDCs • Characteristics of the target country • Situation in target country • Nature of the licensing company • Company may lack resources to go international

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

20. 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

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

22. 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 • There are also non-equity joint ventures, no? • International Cooperative Alliance (ICA): two or more firms from different countries agree to cooperate in any value-chain activity

23. 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

24. 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?

25. Foreign Direct Investment • Companies own and control directly a foreign operation • Symbolizes the highest stage of internationalization • Greenfield investments: starting foreign operations from scratch • Turn-key investment- when a company builds something (e.g. hydroelectric dam), trains the people, then turns it over to host country.

26. 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

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

28. 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 • Geographic and cultural distance • Political and financial risk of investment • Need for control

29. Exhibit 5.7: The Risk versus Control Tradeoff

30. Participation Strategies and the Multinational Strategies • What is the strategic reason to be in the market? • Location advantages vs. market penetration • e.g., source of raw materials, R&D, production, etc. • A mix of participation strategies often support the basic multinational strategy