multinational and participation strategies

7/27/2019 Multinational and Participation Strategies

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Multinational andParticipation Strategies:

Content and Formulation


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Multinational and Participation Strategies: Content and Formulation 52

Learning Objectives

Appreciate the complexities of the global-localdilemma

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


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Multinational Strategies: Dealing with theGlobal-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

multinationals strategies


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Multinational Strategies: Dealing with theGlobal-Local Dilemma

Four broad multinational strategies

- Multidomestic

- Transnational

- International- Regional


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Multidomestic Strategy

The company attempts to offer products orservices that attract customers by closelysatisfying 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


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Transnational Strategy

Two goals get top priority- Seeking location advantages

- Gaining economic efficiencies from operatingworldwide


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Transnational Strategy (cont.)

Location advantages: dispersing value-chainactivities 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


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Transnational strategy (cont.)

With upstream location advantages, thetransnational 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 worldwith operations in other parts of the world


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Transnational Strategy (cont.)

Comparative advantage: advantages of nationsover other nations

- No longer only available to domestic firms

Location advantages can exist for all activities of

the value chain


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International Strategy

International strategy: selling global productsand using similar marketing techniques

worldwide

- A compromise approach

- Limited adjustment in product offerings and marketingstrategies

- Upstream and support activities remain concentratedat home country


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Regional Strategy

Regional strategy: managing raw-materialsourcing, production, marketing, and support

activities within a particular region

- Another compromise strategy

- Attempts to gain economic advantages from regionalnetwork

- Attempts to gain local adaptation advantages fromregional adaptation


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Exhibit 6.1: Content of the Four BasicMultinational Strategies


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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 internationalstrategies

Four categories of global drivers: markets, costs,

governments, and competition


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Global Markets

Are there common customer needs?Are there global customers?

Can you transfer marketing?


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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?


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Governments

Do the targeted countries have favorable tradepolicies?

Do the target countries have regulations that

restrict operations?


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The Competition

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

industry?


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Competitive Advantage in theValue Chain

Location of competitive advantage in value chaindetermines choice of generic strategy

Upstream advantages: low-cost or high-quality

design

- Favor transnational strategy or an internationalstrategy

Downstream advantages: marketing, sales,

service- Favor multidomestic strategy


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Competitive Advantage in the ValueChain (cont.)

Mixed conditions- Competitive strength downstream in industry with

strong globalization drivers

- Competitive strength upstream in industries with local

adaptation pressuresBoth favor regional strategies


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Exhibit 6.2: Pressures for Globalization vs.

Localization


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Transnational or International: WhichWay for the Global Company?

Select a transnational over an international strategywhen:

- Benefits of dispersing activities worldwide offset the costs ofcoordinating a more complex organization

Select an international strategy over a transnationalwhen:

- Cost savings of centralization offset the lower costs of higherquality raw materials/labor from worldwide locations


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Participation Strategies:The Content Options

Participation strategies: the choice of how toenter each international market

- Exporting

- Licensing

- Strategic alliances

- Foreign direct investment


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Exporting

Easiest way to sell a product in internationalmarket

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


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Export Strategies

Indirect exporting: uses intermediaries or go-between firms

The most common intermediaries

- Export Management Company (EMC) and ExportTrading Company (ETC)

Specialize in products, countries, or regions

Provide ready-made access to markets

Have networks of foreign distributors


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Export Strategies

Direct exporting: direct contact with customers inthe foreign market

- More aggressive exporting strategy

- Requires more contact with foreign companies

- Uses foreign sales representatives, distributors, orretailers

- May require branch offices in foreign countries


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Export Strategies (cont.)

Channels in direct exporting- Sales representatives use the companys promotional

literature and samples

- Foreign distributors resell the products

- Sell directly to foreign retailers or end users


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Licensing

Licensing: contractual agreement between adomestic licensor and a foreign licensee

Licenser has valuable patent, know-how, or

trademark

Foreign licensee pays royalties for use


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Exhibit 6.3: Contents of a Licensing Agreement


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Special Licensing Agreements

International franchising: the franchisor grantsthe 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


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International Strategic Alliances

Cooperative agreements between firms fromdifferent countries to participate in business

activities

May include any value-chain activity


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Types of International Strategic Alliances

Equity International Joint Ventures (IJV): two ormore 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


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Foreign Direct Investment (FDI)

Companies own and control directly a foreignoperation

- Symbolizes the highest stage of internationalization

Greenfield investments: starting foreign

operations from scratch


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Exhibit 6.5: Worlds Top Companies Ranked byForeign Assets


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Exhibit 6.5: Worlds Top Companies Ranked byForeign Assets


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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 companys multinational strategy


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Export Strategy

Exporting is the easiest and cheapestparticipation 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?


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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


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Does company have resources todesign/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.


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Does company have time and expertise todevelop 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.


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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


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Licensing: Disadvantages

Gives up control

May create new competitors

Often generates only low revenues

Opportunity costs (barriers to other participationstrategies)


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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


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Key Considerations for Alliances

Could other participation strategies better satisfystrategic objectives?

Does firm have management and capital

resources to contribute?

Can partner benefit the companys objectives?

What is expected payoffs?


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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


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Disadvantages of FDI

Increased capital investment

Increased investment of managerial and other

resources

Greater exposure of the investment to political

and financial risks


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Exhibit 6.6: Advantages andDisadvantages of FDI


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Choosing Participation Strategy:Strategic Considerations

1.Companys strategic intent regarding profits vs.

learning

2.Company capabilities

3.Local government regulations

4.Characteristics of the target product and market


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Choosing Participation Strategy: StrategicConsiderations (cont.)

5.Geographic and cultural distance6.Financial risk of the investments

7.Need for control


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Exhibit 6.7: The Risk versus Control Tradeoff


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Exhibit 6.8: Decision Matrix for Formulating

Participation Strategies


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Participation Strategies and theMultinational 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


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Exhibit 6.9: Participation Strategies and theMultinational Strategies


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Participation Strategies: Synopsis

The selection of a participation strategy dependson a complex array of factors, including the

companys multinational strategy, its strategic

intent, and its need for control of its products

Most multinational companies will choose amixture of participation strategies to fit different

products or different businesses


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Conclusion

Multinational manager faces array of complexstrategic issues

All companies must deal with global-local

dilemma

Multinationals also face the challenges of

choosing participation strategies

Political risk is also becoming an important

factor

multinational and participation strategies

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