Session 2

International Management and Cultural Diversity

2

Measuring International

Competitiveness

Relative Unit Labour Cost (RULC)

Relative Labour Cost Relative Exchange

Relative Labour Productivity Rate

3

Ranking multinational enterprises

(MNEs)

Transnationality Index (TNI)

TNI is the average of three ratios:

Foreign sales : total sales

Foreign employment : total employment

Foreign assets : total assets

4

Opportunities and Outcomes of

International Strategy

Figure 8.1

This is a

“must know”

model

5

Identifying International Opportunities

What is an international strategy? A strategy through which the firm sells its

goods or services outside its domestic market

Reasons to have an international diversification 1. Increased market size

2. Greater returns on investment

3. Greater economies of scale and learning

4. Location advantages

6

Classic Rationale for International

Diversification: Extend Product’s Life Cycle

Production is standardized and

relocated to low cost countries

Product DemandDevelops and FirmExports Products

Firm Introduces

Innovation in

Domestic Market

ForeignCompetition

Begins Production

Firm Begins

Production Abroad

7

International Strategy Benefits

Increase market share

Domestic market may lack the size to support efficient

scale manufacturing facilities

Return on investment

Large investment projects may require global markets

to justify the capital outlays

Weak patent protection in some countries implies that

firms should expand overseas rapidly in order to

preempt imitators

8

International Strategy Benefits (cont’d)

Economies of scale and learning

Expanding size or scope of markets helps to achieve

economies of scale in manufacturing as well as

marketing, R&D or distribution

Can spread costs over a larger sales base

Can increase profit per unit

Competitive advantage through location

Low cost markets aid in developing competitive

advantage by providing access to: raw materials, lower

cost labor, key customers, energy

9

Types of International Strategies

International business-level strategies

Cost leadership strategy

Differentiation strategy

Focus strategies

Porter’s “Diamond Model” of National Advantage

International corporate-level strategies

Multidomestic strategy

Global strategy

Transnational strategy—combination of the above two

10

Determinants of National Advantage

SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group,

from Competitive Advantage of Nations, by Michael E. Porter, p. 72. Copyright ©1990, 1998 by Michael E. Porter.

11

Determinants of National Advantage – 1

Factors of Production

The inputs necessary to compete in any industry

Labor Land Natural resources

Capital Infrastructure

Basic factors include natural and labor resources

Advanced factors include digital communication

systems and an educated workforce

12

Determinants of National Advantage – 2

Demand Conditions

Characterized by the nature and size of buyers’

needs in the home market for the industry’s goods

or services

Size of the market segment can lead to scale-efficient

facilities

Efficiency can lead to domination of the industry in other

countries

Specialized demand may create opportunities beyond

national boundaries

13

Determinants of National Advantage – 3

Related and Supporting Industries

Supporting services, facilities, suppliers

and so on

Support in design

Support in distribution

Related industries as suppliers and buyers

14

Determinants of National Advantage – 4

Firm Strategy, Structure, and Rivalry

The pattern of strategy, structure, and

rivalry among firms

Common technical training

Methodological product and process

improvement

Cooperative and competitive systems

15

International

Corporate-Level

Strategies

16

Multidomestic Strategy

Strategy and operating decisions are decentralized to strategic business units (SBU) in each country

Products and services are tailored to local markets

Business units in one country are independent of each other

Assumes markets differ by country or regions

Focus on competition in each market

Prominent strategy among European firms due to broad variety of cultures and markets in Europe

17

Global Strategy

Products are standardized across national markets

Decisions regarding business-level strategies are

centralized in the home office

Strategic business units (SBU) are assumed to be

interdependent

Emphasizes economies of scale

Often lacks responsiveness to local markets

Requires resource sharing and coordination across

borders (hard to manage)

18

Transnational Strategy

Seeks to achieve both global efficiency and local

responsiveness

Difficult to achieve because of simultaneous

requirements:

Strong central control and coordination to achieve

efficiency

Decentralization to achieve local market responsiveness

Must pursue organizational learning to achieve

competitive advantage

19

Environmental Trends

Liability of foreignness

Legitimate concerns about the relative attractiveness of

global strategies

Global strategies not as prevalent as once thought

Difficulty in implementing global strategies

Regionalization

Focusing on particular region(s) rather than on global

markets

Better understanding of the cultures, legal and social norms

20

Choice of International Entry Mode

Type of Entry Pros & Cons

Exporting High cost, low control

Licensing Low cost, low risk, little control, low

returns

Strategic alliances Shared costs, shared resources, shared

risks, problems of integration

Acquisition Quick access to new market, high cost,

complex negotiations, problems of

merging with domestic operations

New wholly owned

subsidiary

Complex, often costly, time consuming,

high risk, maximum control, potential

above-average returns

21

What is licensing?

Licensing is an agreement where the owner of a product, trademark, brand name, service, or other valuable good allows another entity to produce that good and sell it, in exchange for a monetary payment to the owner

The payment is normally in the form of a royalty per unit produced and sold

22

How to Choose Mode of Entry

Cost?

Speed?

Risk?

Control?

Intellectual property protection?

23

Dynamics of Mode of Entry

Wholly-

owned

Subsidiary

Best

for

early

entry

No foreign manufacturing expertise and

require investment only in distribution Export

Need to facilitate the product

improvements necessary to enter

foreign markets

Licensing

Face uncertain situations such as an

emerging economy in its targeted

market

Strategic

Alliance

Need to protect intellectual property

rights; the need for global integration is

high

AcquisitionNeed to overcome entry barriers to the

foreign market

24

Outcomes of International Strategies

Better performance

May increase a firm’s returns (such firms usually achieve the most positive stock returns)

May achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns

More innovation

May yield potentially greater returns on innovations (a larger market)

Can generate additional resources for investment in innovation

Provides exposure to new products and processes in international markets; generates additional knowledge leading to innovations

Issue: complexity of managing multinational firms

Can produce greater uncertainty and risk

May result in the firm becoming unmanageable

May cause the cost of managing the firm to exceed the benefits of expansion

Exposes the firm to possible instability of some national governments

25

Risk in the International Environment

Political risks include:

• Instability in national governments

• War, both civil and international

• Potential nationalization of a firm’s resources

Political Risks Economic Risks

26

Risk in the International Environment

Economic risks are interdependent with political

risks and include:

• Differences and fluctuations in the value of

different currencies

• Differences in prevailing wage rates

• Difficulties in enforcing property rights

• Unemployment

Political Risks Economic Risks

27

Limits to International Expansion

Management Problems

Cost of coordination across diverse geographical

business units

Institutional and cultural barriers

Understanding strategic intent of competitors

The overall complexity of competition

28

Sensitivity to Cultural Differences

Cultural sensitivity (awareness of

customs; adapting behavior)

Multicultural worker (believes all

cultures are good)

Minimize cultural mistakes

29

Challenges Facing Global Managerial

Worker

Developing global leadership skills

Currency fluctuations

Balance of trade problems

Human rights violation and corruption

Culture shock (“I can’t take this place.”)

Piracy of property rights and merchandise,

including “knock-offs”

30

Success Factors in the Global Marketplace

Think globally, act locally.

Recruit and select talented nationals

and domestic workers.

Hire and develop multicultural workers.

Research and assess potential markets.

31

Competitive Advantage of Diversity

1. Marketing advantage including more sales

and profits

2. Reduced costs (less turnover)

3. Recruit additional talent

4. Useful ideas for publicity/advertising

5. Fewer cultural bloopers

6. Creativity advantage (diverse ideas)

32

Potential Problems with Diversity

1. Diverse group members may not work harmoniously with each other.

2. Potential for conflict is high if group members

a. do not support each other,

b. do not share knowledge.

3. Groups may be less cohesive.

33

Organizational Practices

to Encourage Diversity

Corporate policies favoring diversity

(e.g., monitor promotions)

Employee network groups (e.g., Latino

Employee Network at Frito-Lay )

Diversity training (encourages harmony

by developing empathy for differences)