Chapter 7

A company decides to become a multinational firm in order to:

"firms that manage operations in more than one country'" -To increase the size of potential markets for firms' products and services. Expanding a firm's global presence also automatically increases its scale of operations, providing it with a larger revenue and asset base, which potentially enables the firm to attain ECONOMIES OF SCALE. -Take advantage of ARBITRAGE OPPORTUNITIES (Applied to every stage of the value chain) -Enhancing the growth rate of a product that is in its maturity stage in a firm's home country, but that has greater demand potential elsewhere is another benefit of international expansion.

Challenges of Globalization

- Determining how to meet the needs of customers at very different income levels. In many developing economies, distributions of income remain much wider than they do in the developed world, leaving many impoverished even as the economies grow. "bottom of the pyramids"

Assumptions may be incorrect.:

-Product markets DO vary widely between nations - local adaptations work. -There is a growing interest in multiple product features, product quality, & service. -Technology permits flexible production; cost of production may not be critical to product cost; and a firm's strategy should not be solely product driven. Based on the above, we would have a hard time arguing that it is wise to develop the same product or service for all markets throughout the world.

Options for international market expansion include: (entry modes)

-exporting: producing goods in one country to sell to residents of another country. This strategy enables the firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. However, the firm has a limited ability to tailor its products to meet local market needs - Licensing or franchising: Limits risk; but licensor gives up control & profit - Strategic alliance or joint venture: Shares risk; but trust & culture issues can lead to conflict -Wholly owned subsidiary: Greatest control, highest returns; but expensive, greater potential for miss-steps

Related and supporting industries (diamond national advantage)

A home country's industries can become a source of competitive advantage when related and supporting industries are developed. -Countries with a strong supplier base benefit by adding efficiency to downstream activities. A competitive supplier base helps a firm obtain inputs using cost-effective, timely methods, thus reducing manufacturing costs. -close working relationships with suppliers provide the potential to develop competitive advantages through joint research and development and the ongoing exchange of knowledge -Related industries create the probability that new companies will enter the market, increasing competition and forcing existing firms to become more competitive through efforts such as cost control, product innovation, and novel approaches to distribution. Combined, these give the home country's industries a source of competitive advantage. The Italian footwear industry is given as an example.

International Expansion: Risks (2)

CURRENCY RISK due to fluctuations in the local currency's exchange rate -Affects cost of production or net profit MANAGEMENT RISK DUE to culture, customs, language, income level, customer preferences, distribution systems -Could lead to the need for local adaptation of apparently standard products

Offshoring may be costly

Common savings from offshoring include: -Lower wages, benefits, energy costs, regulatory costs, taxes Hidden costs from offshoring include: -Higher total wage & indirect costs, wage inflation -Increased inventory due to longer lead time -Reduced market responsiveness Increased coordination costs -Cost of protecting intellectual property

International Expansion: Managing Risks

Managing economic risk can be done through global dispersion of value chains. Various activities of the firm's value chain can be spread across several countries & continents via -Outsourcing -Offshoring

A company also decides to become a multinational firm in order to:

Optimize the location of value chain activity -To enhance performance -To reduce cost -To reduce risk Take advantage of learning opportunities Explore REVERSE INNOVATION -Design & manufacture products locally -Export no-frills products to developed markets

International Expansion: Risks

POLITICAL RISK due to social unrest, military turmoil, demonstrations, terrorism, absence of the RULE OF LAW can lead to -Destruction of property -Disruption of operations -Non-payment for goods and services -Arbitrary government decisions ECONOMIC RISK due to piracy and COUNTERFEITING

Bottom of the pyramids

Refers to the practice of a multinational firm targeting its goods and services to the nearly 5 billion poor people in the world who inhabit developing countries.

Multidomestic Strategy: Strengths, Limitations (Opposing pressure and four strategies)

STRENGTHS -Ability to adapt products and services to local market conditions. -Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue. LIMITATIONS -Decreased ability to realize cost savings through scale economies. -Possibility of leading to "overadaptation" as conditions change.

Transnational Strategy: Strengths, Limitations (Opposing pressure and four strategies)

STRENGTHS -Ability to attain economies of scale. -Ability to adapt to local markets. -Ability to locate activities in optimal locations. -Ability to increase knowledge flows and learning. LIMITATIONS -Unique challenges in determining optimal locations of activities to ensure cost and quality. -Unique managerial challenges in fostering knowledge transfer.

International strategies- strengths and limitations (Opposing pressure and four strategies)

STRENGTHS -Leverage and diffusion of a parent firm's knowledge and core competencies. -Lower costs because of less need to tailor products and services LIMITATIONS -Limited ability to adapt to local markets. -Inability to take advantage of new ideas and innovations occurring in local markets.

Global Strategy- strengths and limitations (Opposing pressure and four strategies)

STRENGTHS -Strong integration occurs across various businesses. -Standardization leads to higher economies of scale, which lower costs. -Creation of uniform standards of quality throughout the world is facilitated. LIMITATIONS -Limited ability exists to adapt to local markets. -Concentration of activities may increase dependence on a single facility. -Single locations may lead to higher tariffs and transportation costs.

Transnational Strategy (Opposing pressure and four strategies)

Seeks global competitiveness via trade-offs. Used in industries where the pressures for both local adaptation and lowering costs are high. -Efficiency versus local adaptation versus organizational learning -Assets & capabilities disbursed according to the most beneficial location for a specific activity; some value chain activities centralized, some decentralized (Economies of scale, increased knowledge flows) -Pressures for both local adaptation and lowering costs high

Michael Porter's DIAMOND OF NATIONAL ADVANTAGE explains why some nations and their industries outperform others.

Some nations and their industries are more competitive than others. Understanding these differences helps a firm create a competitive advantage when it expands internationally: A framework for explaining why countries foster successful multinational corporations, consisting of four factors - 1. factor endowments; 2. demand conditions; 3. related and supporting industries; 4. firm strategy, structure, and rivalry.

Firms face two opposing forces when they expand into global markets: cost reduction and adaptation to local markets.

Strategies that favor global products & brands should do the following: -Standardize all products for all markets. -Reduce overall costs by spreading investments over a larger market. Assumes: 1. Customer needs and interests are becoming increasingly homogenous worldwide. 2. People around the world are willing to sacrifice preferences in product features, functions, design, and the like for lower prices at high quality. 3. Substantial economies of scale in production and marketing can be achieved through supplying global markets.

International strategy: Globalization

Two meanings: 1. The increase in international exchange, including trade in goods and services as well as the exchange of money, ideas, and information 2. The growing similarity of laws, rules, norms, values, and ideas across countries.

Wholly owned subsidiary

a business in which a multinational company owns 100% of the stock. A firm can establish a ___ by acquiring an existing company in the home country or developing a totally new operation, often referred to as a "greenfield venture." This can be expensive and risky, and is most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations.

Rule of law

a characteristic of legal systems where behavior is governed by rules that are uniformly enforced. The absence of rules or the lack of uniform enforcement of existing rules leads to what might often seem to be arbitrary and inconsistent decisions by government officials. This can make it difficult for foreign firms to conduct business. The laws, and the enforcement of laws, associated with protection of intellectual property rights can be a major potential economic risk in entering new countries.

Franchising

a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; it usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising. ___ has the advantage of limiting the risk exposure that a firm has in overseas markets while, at the same time, the firm is able to expand the revenue base of the company. An advantage of licensing is that the firm granting a license incurs little risk, since it does not have to invest any significant resources into the country itself. In turn, the licensee (the firm receiving the license) gains access to the trademark, patent, and so on, and is able to potentially create competitive advantages. However, the licensor gives up control of its product and forgoes potential revenues and profits.

Licensing

a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual property.

factor endowments (diamond national advantage)

a nation's position in factors of production. -Land -Capital -Labor Factors of production must be industry & firm specific. -Must be rare, valuable, difficult to imitate, and rapidly & efficiently deployed For example, a country or industry dependent on scientific innovation must have a skilled human resource pool to draw upon. This resource pool is not inherited; it is created through investment in industry-specific knowledge and talent. The actual pool of resources is less important than the speed and efficiency with which these resources are deployed. The island nation of Japan is given as an example.

Global Strategy

a strategy based on firms' centralization and control by the corporate office, with the primary emphasis on controlling costs, and used in industries where the pressure for local adaptation is low and the pressure for lowering costs is high. A global strategy is most appropriate when there are strong pressures for reducing costs and comparatively weak pressures for adaptation to local markets.

arbitrage opportunities

an opportunity to profit by buying and selling the same good in different markets. In its simplest form, ___ involves buying something from where it is cheap and selling it somewhere where it commands a higher price. _____can be applied to virtually any factor of production and every stage of the value chain. Walmart is an example.

Trading blocs

groups of countries agreeing to increase trade between them by lowering trade barriers. Regional economic integration has progressed at a faster pace than global economic integration, and trade and investment patterns of the largest companies reflect this reality

Global Strategy (Opposing pressure and four strategies)

implies a firm is interested in lowering costs. -Competitive strategy is centralized & controlled by the corporate office. -Products are standardized, operations centralized, producing economies of scale. -Worldwide volume supports R&D. -There's a standard level of quality worldwide. -Pressure for reducing cost is high; pressure for adaptation to local markets is weak.

Regionalization

increasing international exchange of goods, services, money, people, ideas, and information; and the increasing similarity of culture, laws, rules, and norms within a region such as Europe, North America, or Asia. -Distance still matters. -Commonalities of language, culture, economics, legal & political systems, and infrastructure all make a difference. -TRADING BLOCS and free trade zones ease trade restrictions, taxes, & tariffs.

Reverse innovation

new products developed by developed-country multinational firms for emerging markets that have adequate functionality at a low cost

Political risk

potential threat to a firm's operations in a country due to ineffectiveness of the domestic political system. Countries that are viewed as high risk are less attractive for most types of businesses

Management risk

potential threat to a firm's operations in a country due to the problems that managers have making decisions in the context of foreign markets. Managers must respond to the inevitable differences that they encounter when doing business in multiple countries. Cultural differences can pose unique challenges. Even in the case of apparently standard products, some degree of local adaptation may become necessary.

Economic risk

potential threat to a firm's operations in the country due to economic policies and conditions, including property rights laws and enforcement of those laws. Firms rich in intellectual property have encountered financial losses as piracy or imitations of their products have grown due to a lack of law enforcement of intellectual property rights

Currency risk

potential threat to a firm's operations in the country due to fluctuations in the local currency's exchange rate. Even a small change in the exchange rate can result in a significant difference in the cost of production or net profit when doing business overseas. An example includes the U.S. dollar appreciating against other currencies, making U.S. goods more expensive to consumers in foreign countries

Multidomestic Strategy (Opposing pressure and four strategies)

puts emphasis on differentiating products & services to adapt to local markets. -Decisions are decentralized. -Products & services are tailored to local use. -Consider language, culture, income levels, customer preferences, distribution systems. -Markets can expand rapidly. -Prices are differentiated by market. -Pressure for local adaptation is high; pressure for lowering costs is low For firms following this strategy, differences in language, culture, income levels, customer preferences, and distribution systems are only a few of the many factors that must be considered. Even in the case of relatively standardized products, at least some level of local adaptation is often necessary.

International strategy (Opposing pressure and four strategies)

requires diffusion & adaptation of the parent company's knowledge & expertise to foreign markets. The primary goal is worldwide exploitation of the parent firm's knowledge & capabilities. -All sources of core competencies are centralized. -Pressure for both local adaptation & low costs are rather low. With increasing pressures to reduce costs due to global competition, especially from low-cost countries, opportunities to successfully employ international strategy are becoming more limited. This strategy is most suitable in situations where a firm has distinctive competencies that local companies in foreign markets lack.

conterfeiting

selling of trademarked goods without the consent of the trademark holder. ___, a direct form of theft of intellectual property rights, is a significant and growing problem.

Offshoring

shifting a value-creating activity from a domestic location to a foreign location. Value-creating activities should be performed in the location where the cost is lowest or where the quality is the best.

Firm strategy, structure, and rivalry (diamond national advantage)

the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry. -Strong consumer demand -Strong supplier base -High new entrant potential from related industries Domestic rivalry leads to a search for new markets. Response to rivalry is a strong indicator of global competitive success. Firms that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete in world markets. The European grocery retail industry is given as an example.

Demand conditions (diamond national advantage)

the nature of home-market demand for the industry's product or service Demanding consumers drive firms in that country to: -Meet high standards. -Upgrade existing products and services. -Create innovative products and services. -Better anticipate future global demand. -Proactively respond to product & service requirements. The conditions of consumer demand influence how firms view a market. This, in turn, helps the nation's industries to better anticipate future global demand conditions and proactively respond to product and service requirements. Denmark is given as an example.

Outsourcing

using other firms to perform value-creating activities that were previously performed in-house. The firm may be perfectly capable of doing this activity but chooses to have someone else perform it for cost or quality reasons. ___can be to either a domestic or foreign firm