Chapter Copyright© 2004 Thomson Learning All rights reserved 5 Multinational and Participation Strategies: Content and Formulation.

Chapter

Copyright© 2004 Thomson Learning All rights reserved

5Multinational and Participation Strategies: Content and Formulation

Copyright© 2005 South-Western/Thomson Learning All rights reserved

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

• 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


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

• 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


Multinational Strategies: Dealing with the Global-Local Dilemma

• Four broad multinational strategies• Multidomestic• Transnational• International• Regional

• Four broad multinational strategies• Multidomestic• Transnational• International• Regional


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

• 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


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

• 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


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

• 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


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

• 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


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

• 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


Exhibit 5.1: Content of the Four Basic Multinational Strategies


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

• 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


Global Markets

• Are there common customer needs?• Are there global customers?• Can you transfer marketing?

• Are there common customer needs?• Are there global customers?• Can you transfer marketing?


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?

• 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?


Governments

• Do the targeted countries have favorable trade policies?

• Do the target countries have regulations that restrict operations?

• Do the targeted countries have favorable trade policies?

• Do the target countries have regulations that restrict operations?


The Competition

• What strategies do your competitors use?• What is the volume of imports and exports in the

industry?

• What strategies do your competitors use?• What is the volume of imports and exports in the

industry?


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

• 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


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

• Mixed conditions• Competitive strength downstream in industry with

strong globalization drivers• Competitive strength upstream in industries with

local adaptation pressures• Both favor regional strategies


Exhibit 5.2: Pressures for Globalization vs. Localization


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

• 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


Participation Strategies: The Content Options

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

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


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

• 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


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

• 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


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

• 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


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

• 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


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

• 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


Exhibit 5.3: Contents of a Licensing Agreement


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

• 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


International Strategic Alliances

• Cooperative agreements between firms from different countries to participate in business activities

• May include any value-chain activity

• Cooperative agreements between firms from different countries to participate in business activities

• May include any value-chain activity


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

• 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


Foreign Direct Investment

• Companies own and control directly a foreign operation• Symbolizes the highest stage of internationalization

• Greenfield investments: starting foreign operations from scratch

• Companies own and control directly a foreign operation• Symbolizes the highest stage of internationalization

• Greenfield investments: starting foreign operations from scratch


Exhibit 5.5: World’s Top Companies Ranked by Foreign Assets


Exhibit 5.5: World’s Top Companies Ranked by Foreign Assets


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

• 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


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

• Does company have resources to design/execute international promotional activities?• If not, use foreign intermediaries and indirect

exporting

• 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

• Does company have resources to design/execute international promotional activities?• If not, use foreign intermediaries and indirect

exporting


Export Strategy

• Does company have resources to support extensive international travel or possibly an expatriate sales force? If so, choose direct exporting.

• 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.

• Does company have resources to support extensive international travel or possibly an expatriate sales force? If so, choose direct exporting.

• 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.


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

• 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


Licensing: Disadvantages

• Gives up control• May create new competitors• Often generates only low revenues• Opportunity costs (barriers to other participation

strategies)

• Gives up control• May create new competitors• Often generates only low revenues• Opportunity costs (barriers to other participation

strategies)


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

• Partner’s knowledge of the market• Government requirements• To share risks• To share technology• Economies of scale• Low cost raw materials or labor


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?

• 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?


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

• 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


Disadvantages of FDI

• Increased capital investment• Increased investment of managerial and other

resources• Greater exposure of the investment to political and

financial risks

• Increased capital investment• Increased investment of managerial and other

resources• Greater exposure of the investment to political and

financial risks


Exhibit 5.6: Advantages and Disadvantages of FDI


Exhibit 5.6: Advantages and Disadvantages of FDI


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

• Company’s strategic intent regarding profits vs. learning

• Company capabilities• Local government regulations• Characteristics of the target product and market


Choosing Participation Strategy: Strategic Considerations (cont.)

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

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


Exhibit 5.7: The Risk versus Control Tradeoff


Exhibit 5.8: Decision Matrix for Formulating Participation Strategies


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

• 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


Exhibit 5.9: Participation Strategies and the Multinational Strategies


Exhibit 5.9: Participation Strategies and the Multinational Strategies

Chapter Copyright© 2004 Thomson Learning All rights reserved 5 Multinational and Participation Strategies: Content and Formulation.

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