Chapter 5
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This document discusses various multinational and participation strategies for companies operating globally. It covers the content and formulation of multinational strategies, including the global-local dilemma and four broad strategies: multidomestic, transnational, international, and regional. It also discusses participation strategies like exporting, licensing, strategic alliances, and foreign direct investment. For each strategy, it provides details on their key aspects and how companies can evaluate and select the appropriate strategies.
Chapter 5
- 1. Chapter 5 Multinational and Participation Strategies: Content and Formulation © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 2. Learning Objectives •• Appreciate the complexities of the global-local dilemma Appreciate the complexities of the global-local dilemma •• Understand the content of the multinational strategies Understand the content of the multinational strategies •• Formulate a multinational strategy Formulate a multinational strategy •• Understand the content of the participation strategies Understand the content of the participation strategies •• Formulate a participation strategy Formulate a participation strategy •• Understand political risk and how multinational Understand political risk and how multinational companies can manage such risks companies can manage such risks © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 3. Multinational Strategies: Dealing with the Global-Local Dilemma •• Local-responsiveness solution: respond to differences Local-responsiveness solution: respond to differences in markets/customize to country or regional differences in markets/customize to country or regional differences •• Global integration solution: conduct business similarly Global integration solution: conduct business similarly throughout the world throughout the world •• Global-local dilemma: choice between a local- Global-local dilemma: choice between a local- responsiveness or global approach to a multinational’s responsiveness or global approach to a multinational’s strategies strategies •• Forms basic strategic orientation of a multinational Forms basic strategic orientation of a multinational company company © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 4. Multinational Strategies: Dealing with the Global-Local Dilemma •• Four broad multinational strategies Four broad multinational strategies -- Multidomestic Multidomestic -- Transnational Transnational -- International International -- Regional Regional © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 5. Multidomestic Strategy •• The company attempts to offer products or services The company attempts to offer products or services that attract customers by closely satisfying their that attract customers by closely satisfying their cultural needs and expectations cultural needs and expectations •• Emphasizes local-responsiveness issues Emphasizes local-responsiveness issues -- Ex.: different packages, colors Ex.: different packages, colors -- Costs more to produce, need to charge higher prices Costs more to produce, need to charge higher prices to recoup to recoup -- In many respects, a form of differentiation strategy In many respects, a form of differentiation strategy -- Not limited to large multinationals Not limited to large multinationals © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 6. Transnational Strategy •• Two goals get top priority: Two goals get top priority: -- Seeking location advantages Seeking location advantages -- Gaining economic efficiencies from operating Gaining economic efficiencies from operating worldwide worldwide © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 7. Transnational Strategy (cont.) •• Location advantages: dispersing value-chain activities Location advantages: dispersing value-chain activities anywhere in the world where they can be done best or anywhere in the world where they can be done best or cheapest cheapest •• Global platform: country location where a firm can Global platform: country location where a firm can better perform some of its value-chain activities better perform some of its value-chain activities © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 8. Transnational strategy (cont.) •• With location advantages, the transnational can: With location advantages, the transnational can: -- Set up global platforms to gain better quality and low costs Set up global platforms to gain better quality and low costs -- Locate subunits near cheap manufacturing Locate subunits near cheap manufacturing -- Be close to key and most demanding customers Be close to key and most demanding customers •• Location advantages can exist for all activities of the Location advantages can exist for all activities of the value chain value chain © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 9. Transnational Strategy (cont.) •• Comparative advantage: advantages of nations over Comparative advantage: advantages of nations over other nations other nations -- Quality advantages associated with a specific nation Quality advantages associated with a specific nation -- No longer only available to domestic firms No longer only available to domestic firms © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 10. International Strategy •• International strategy: selling global products and International strategy: selling global products and using similar marketing techniques worldwide using similar marketing techniques worldwide -- A compromise approach to global-local dilemma A compromise approach to global-local dilemma -- Limited adaptations in product offerings and Limited adaptations in product offerings and marketing strategies marketing strategies -- Upstream and support activities remain concentrated Upstream and support activities remain concentrated at home country, unlike transnational companies at home country, unlike transnational companies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 11. Regional Strategy •• Regional strategy: managing raw-material sourcing, Regional strategy: managing raw-material sourcing, production, marketing, and support activities within a production, marketing, and support activities within a particular region particular region -- Another compromise strategy Another compromise strategy -- Attempts to gain economic advantages from regional Attempts to gain economic advantages from regional network network -- Attempts to gain local adaptation advantages from Attempts to gain local adaptation advantages from regional adaptation regional adaptation -- Attempts to balance between other three strategies Attempts to balance between other three strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 12. Exhibit 6.1: Content of the Four Basic Multinational Strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 13. Resolving the Global-Local Dilemma: Formulating a Multinational Strategy •• Selection of strategy depends on degree of Selection of strategy depends on degree of globalization in an industry globalization in an industry •• Globalization drivers: conditions in an industry that Globalization drivers: conditions in an industry that favors transnational or international strategies favors transnational or international strategies •• Four categories of global drivers: Four categories of global drivers: •• Markets Markets •• Costs Costs •• Governments Governments •• Competition Competition © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 14. Global Markets •• Are there common customer needs? Are there common customer needs? •• Are there global customers? Are there global customers? •• Can you transfer marketing? Can you transfer marketing? © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 15. Costs •• Are there global economies of scale? Are there global economies of scale? •• Are there cheaper sources of low-cost raw materials? Are there cheaper sources of low-cost raw materials? •• Are there cheaper sources of highly skilled labor? Are there cheaper sources of highly skilled labor? © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 16. Governments •• Do the targeted countries have favorable trade Do the targeted countries have favorable trade policies? policies? •• Do the target countries have regulations that restrict Do the target countries have regulations that restrict operations? operations? © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 17. The Competition •• What strategies do your competitors use? What strategies do your competitors use? •• What is the volume of imports and exports in the What is the volume of imports and exports in the industry? industry? © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 18. Exhibit 6.2: Pressures for Globalization vs. Localization © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 19. Transnational or International: Which Way for the Global Company? •• Select a transnational over an international strategy Select a transnational over an international strategy when: when: •• Benefits of dispersing activities worldwide offset the Benefits of dispersing activities worldwide offset the costs of coordinating a more complex organization costs of coordinating a more complex organization •• Select an international strategy over a transnational Select an international strategy over a transnational when: when: •• Cost savings of centralization offset the lower costs Cost savings of centralization offset the lower costs of higher quality raw materials/labor from worldwide of higher quality raw materials/labor from worldwide locations locations © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 20. Participation Strategies: The Content Options •• Participation strategies: options for entering foreign Participation strategies: options for entering foreign markets and countries markets and countries -- Exporting Exporting -- Licensing Licensing -- Strategic alliances Strategic alliances -- Foreign direct investment Foreign direct investment © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 21. Exporting •• Easiest way to sell a product in international market Easiest way to sell a product in international market •• Passive exporter: company that treats and fills Passive exporter: company that treats and fills overseas orders like domestic orders overseas orders like domestic orders •• At the other extreme, companies can put extensive At the other extreme, companies can put extensive resources into exporting with dedicated export resources into exporting with dedicated export department or division with an international sales force department or division with an international sales force © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 22. Exporting Strategies •• After companies move beyond passive exporting, two After companies move beyond passive exporting, two general export strategies: general export strategies: •• Indirect Indirect •• Direct Direct © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 23. Export Strategies •• Indirect exporting: uses intermediaries or go-between Indirect exporting: uses intermediaries or go-between firms to provide knowledge and contacts overseas firms to provide knowledge and contacts overseas •• The most common intermediaries: The most common intermediaries: -- Export Management Company (EMC) Export Management Company (EMC) •• Specialize in products, countries, or regions Specialize in products, countries, or regions •• Provide ready-made access to markets Provide ready-made access to markets •• Have networks of foreign distributors Have networks of foreign distributors -- Export Trading Company (ETC) Export Trading Company (ETC) •• Takes title to product before exporting Takes title to product before exporting © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 24. Export Strategies •• Direct exporting: take on duties of intermediaries and Direct exporting: take on duties of intermediaries and make direct contact with customers in the foreign make direct contact with customers in the foreign market market •• More aggressive exporting strategy More aggressive exporting strategy •• Requires more contact with foreign companies Requires more contact with foreign companies •• Uses foreign sales representatives, distributors, or Uses foreign sales representatives, distributors, or retailers retailers •• May require own branch offices in foreign countries May require own branch offices in foreign countries © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 25. Export Strategies (cont.) •• Channels in direct exporting Channels in direct exporting -- Sales representatives use the company’s Sales representatives use the company’s promotional literature and samples to sell product promotional literature and samples to sell product -- Foreign distributors resell the products Foreign distributors resell the products -- Sell directly to foreign retailers or end users Sell directly to foreign retailers or end users © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 26. Licensing •• Licensing: contractual agreement between a domestic Licensing: contractual agreement between a domestic licensor and a foreign licensee licensor and a foreign licensee •• Licenser has valuable patent, know-how, or trademark Licenser has valuable patent, know-how, or trademark •• Foreign licensee pays royalties for use Foreign licensee pays royalties for use •• Provides easiest, least risky, and most low cost way to Provides easiest, least risky, and most low cost way to internationalize internationalize © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 27. Exhibit 6.3: Contents of a Licensing Agreement © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 28. Special Licensing Agreements •• International franchising: the franchisor grants the use International franchising: the franchisor grants the use of a whole business operation of a whole business operation •• Contract manufacturing: production following the Contract manufacturing: production following the foreign companies’ specifications foreign companies’ specifications •• Turnkey operation: multinational company makes a Turnkey operation: multinational company makes a project fully operational before the foreign owner takes project fully operational before the foreign owner takes control control © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 29. International Strategic Alliances •• Cooperative agreements between firms from different Cooperative agreements between firms from different countries to participate in business activities countries to participate in business activities •• May include any value-chain activity May include any value-chain activity © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 30. Foreign Direct Investment (FDI) •• Companies own and control directly a foreign Companies own and control directly a foreign operation operation -- Symbolizes the highest stage of internationalization Symbolizes the highest stage of internationalization •• Greenfield investments: starting foreign operations Greenfield investments: starting foreign operations from scratch from scratch © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 31. Exhibit 6.4: Cross Border Mergers and Acquisitions © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 32. Formulating a Participation Strategy •• Must take into account several issues: Must take into account several issues: -- Basic functions of each participation strategy Basic functions of each participation strategy -- Strategic considerations, intent, products, and Strategic considerations, intent, products, and markets markets -- How best to support company’s multinational How best to support company’s multinational strategy strategy © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 33. Deciding on Export Strategy •• Does management need to control sales, customer Does management need to control sales, customer credit, and sale of the product? credit, and sale of the product? •• If yes, choose direct exporting If yes, choose direct exporting •• Does company have resources to create positions to Does company have resources to create positions to manage export operations? manage export operations? •• If not, use indirect exporting If not, use indirect exporting © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 34. Deciding on Export Strategy •• Does company have resources to design/execute Does company have resources to design/execute international promotional activities? international promotional activities? •• If not, use foreign intermediaries and indirect If not, use foreign intermediaries and indirect exporting exporting •• Does company have resources to support extensive Does company have resources to support extensive international travel or possibly an expatriate sales international travel or possibly an expatriate sales force? force? •• If so, choose direct exporting. If so, choose direct exporting. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 35. Deciding on Export Strategy •• Does company have time and expertise to develop its Does company have time and expertise to develop its own overseas contacts and networks? own overseas contacts and networks? -- If not, rely on foreign intermediaries or choose If not, rely on foreign intermediaries or choose indirect exporting. indirect exporting. •• Will time and resources affect domestic operations? Will time and resources affect domestic operations? -- If not, choose direct exporting. If not, choose direct exporting. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 36. Deciding to License •• Based on three factors: Based on three factors: -- Characteristics of the products Characteristics of the products •• Best products are older or soon-to-be replaced Best products are older or soon-to-be replaced -- Characteristics of the target country Characteristics of the target country •• Situation in target country Situation in target country -- Nature of the licensing company Nature of the licensing company •• Company may lack resources to go international Company may lack resources to go international © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 37. Licensing: Disadvantages •• Gives up control Gives up control •• May create new competitors May create new competitors •• Often generates only low revenues Often generates only low revenues •• Opportunity costs (loses opportunities to enter he Opportunity costs (loses opportunities to enter he country with other means such as exporting or FDI) country with other means such as exporting or FDI) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 38. Foreign Direct Investment (FDI) •• Most experienced international firms choose FDI Most experienced international firms choose FDI •• Usually try other participation strategies first Usually try other participation strategies first © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 39. Exhibit 6.5: Advantages and Disadvantages of FDI © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 40. Choosing Participation Strategy: General Strategic Considerations 1. Company’s strategic intent regarding profits vs. 1. Company’s strategic intent regarding profits vs. learning learning 2. Company capabilities 2. Company capabilities 3. Local government regulations 3. Local government regulations 4. Characteristics of the target product and market 4. Characteristics of the target product and market © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 41. Choosing Participation Strategy: Strategic Considerations (cont.) 5. Geographic and cultural distance 5. Geographic and cultural distance 6. Trade off between risk and control 6. Trade off between risk and control © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 42. Exhibit 6.6: The Risk versus Control Tradeoff © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 43. Exhibit 6.7: Decision Matrix for Formulating Participation Strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 44. Participation Strategies and the Multinational Strategies •• What is the strategic reason to be in the market? What is the strategic reason to be in the market? -- Location advantages vs. market penetration Location advantages vs. market penetration •• E.g., source of raw materials, R&D, production, E.g., source of raw materials, R&D, production, etc. etc. •• This reason dictates choice of multinational strategy This reason dictates choice of multinational strategy •• Basic diagnostic question: which participation strategy Basic diagnostic question: which participation strategy best serves firm’s objectives to be in the country best serves firm’s objectives to be in the country © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 45. Exhibit 6.8a: Participation Strategies and the Multinational Strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 46. Exhibit 6.8b: Participation Strategies and the Multinational Strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 47. Political Risk •• Refers to the impact of political decisions or events on Refers to the impact of political decisions or events on the business climate in a country such that a the business climate in a country such that a multinational’s profitability and feasibility of its global multinational’s profitability and feasibility of its global operations are negatively affected operations are negatively affected © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 48. Political Risk •• Why should a multinational company be concerned Why should a multinational company be concerned about political risk? about political risk? •• It can have a serious impact on its profitability It can have a serious impact on its profitability •• World is dependent on energy coming from World is dependent on energy coming from locations with high political risk locations with high political risk •• World is so interconnected, political uncertainties in World is so interconnected, political uncertainties in one country can have worldwide impact one country can have worldwide impact © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 49. Political Risk •• Some of the factors that influence political risk in a Some of the factors that influence political risk in a society society -- Changes in the government Changes in the government -- Sudden shift in governmental policies or ideology Sudden shift in governmental policies or ideology -- Social volatility Social volatility -- Passage of new laws Passage of new laws -- Leadership changes and potential for related unrest Leadership changes and potential for related unrest -- Level of corruption Level of corruption © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 50. Political Risk •• Key questions which provide some preliminary insights Key questions which provide some preliminary insights into the political risk of a market that a multinational into the political risk of a market that a multinational firm is choosing to enter: firm is choosing to enter: •• How durable and resilient is the political system? How durable and resilient is the political system? •• How peaceful have governmental transitions been How peaceful have governmental transitions been in the past? in the past? •• What roles do other nongovernmental organizations What roles do other nongovernmental organizations play in the country’s political stability? play in the country’s political stability? © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 51. Political Risk •• Key questions which provide some preliminary insights Key questions which provide some preliminary insights into the political risk: into the political risk: •• Are there internal factors that could result in social Are there internal factors that could result in social unrest or civil war? unrest or civil war? •• What is the level of corruption? What is the level of corruption? •• How reliable is the rule of law? How reliable is the rule of law? •• What is the likelihood that the country can be hit by What is the likelihood that the country can be hit by natural disasters? natural disasters? © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 52. Political Risk •• MNCs have several options to assess and manage MNCs have several options to assess and manage risk. Private and government agencies offer insurance: risk. Private and government agencies offer insurance: -- Political risk insurance Political risk insurance -- Political violence insurance Political violence insurance -- Foreign currency inconvertability insurance Foreign currency inconvertability insurance -- Expropriation insurance Expropriation insurance -- Business interruption insurance Business interruption insurance © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 53. Exhibit 6.9: Index of Democracy © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
- 54. Conclusion •• Multinational manager faces array of complex strategic Multinational manager faces array of complex strategic issues issues •• All companies must deal with global-local dilemma All companies must deal with global-local dilemma •• Multinationals also face the challenges of choosing Multinationals also face the challenges of choosing participation strategies participation strategies •• Political risk is also becoming an important component Political risk is also becoming an important component of investment decisions overseas of investment decisions overseas © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.