MGT CHPT 7

Two Opposing Pressures: Reducing Costs and Adapting to Local Markets

2 opposing forces that firms face when expanding globally: Cost reduction Adaption to local markets Many years ago, the famed marketing strategist Theodore Levitt advocated strategies that favored global products and brands. He suggested that firms should standardize all of their products and services for all of their worldwide markets. Such an approach would help a firm lower its overall costs by spreading its investments over as large a market as possible. Levitt's approach rested on three key assumptions: 1. Customer needs and interests are becoming increasingly homogeneous 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

Entry modes of international expansion

A firm has many options available to it when it decides to expand into international markets. Given the challenges associated with such entry, many firms first start on a small scale and then increase their level of investment and risk as they gain greater experience with the overseas market in question various types of entry form a continuum ranging from exporting (low investment and risk, low control) to a wholly owned subsidiary (high investment and risk, high control): Exporting Licensing Franchising Strategic Alliance Joint Venture Wholly Owned Subsidiary

Global dispersion of value chains: outsourcing and offshoring

A major recent trend has been the dispersion of the value chains of multinational corporations across different countries; that is, the various activities that constitute the value chain of a firm are now spread across several countries and continents. Such dispersion of value occurs mainly through increasing offshoring and outsourcing

why are so few firms "global" pt 2

Another reason for regional expansion is the rise of trading blocs and free trade zones. A number of regional agreements have been created that facilitate the growth of business within these regions by easing trade restrictions and taxes and tariffs. These have included the European Union (EU), North American Free Trade Agreement (NAFTA), Association of Southeast Asian Nations (ASEAN), and MERCOSUR (a South American trading block). trading bloc - groups of countries agreeing to increase trade between them by lowering trade barriers

reverse innovation example, motivation, and implications

As $3,000 cars, $300 computers, and $30 mobile phones bring what were previously considered as luxuries within the reach of the middle class of emerging markets, it is important to understand the motivations and implications of reverse innovation. First, it is impossible to sell first-world versions of products with minor adaptations in countries where the average annual income per person is between $1,000 and $4,000, as is the case in most developing countries. To sell in these markets, entirely new products must be designed and developed by local technical talent and manufactured with local components. Second, although these countries are relatively poor, they are growing rapidly. Third, if the innovation does not come from first-world multinationals, there are any number of local firms that are ready to grab the market with low-cost products. Fourth, as the consumers and governments of many first-world countries are rediscovering the virtues of frugality and are trying to cut down expenses, these products and services originally developed for the first world may gain significant market shares in developing countries as well.

Exporting Risk, Limitations, and Benefits

Benefit: Such an approach definitely has its advantages. After all, firms start from scratch in sales and distribution when they enter new markets. Because many foreign markets are nationally regulated and dominated by networks of local intermediaries, firms need to partner with local distributors to benefit from their valuable expertise and knowledge of their own markets. Multinationals, after all, recognize that they cannot master local business practices, meet regulatory requirements, hire and manage local personnel, or gain access to potential customers without some form of local partnership. Multinationals also want to minimize their own risk. They do this by hiring local distributors and investing very little in the undertaking. In essence, the firm gives up control of strategic marketing decisions to the local partners—much more control than they would be willing to give up in their home market. Risks and Limitations Exporting is a relatively inexpensive way to enter foreign markets. However, it can still have significant downsides. Most centrally, the ability to tailor the firm's products to meet local market needs is typically very limited. In a study of 250 instances in which multinational firms used local distributors to implement their exporting entry strategy, the results were dismal. In the vast majority of the cases, the distributors were bought (to increase control) by the multinational firm or were fired.

Wholly Owned Subsidiaries Risk, Limitations, and Benefits

Benefits Establishing a wholly owned subsidiary is the most expensive and risky of the various entry modes. However, it can also yield the highest returns. In addition, it provides the multinational company with the greatest degree of control of all activities, including manufacturing, marketing, distribution, and technology development. Wholly owned subsidiaries are most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations. Examples range from restaurants to semiconductor manufacturers. To lower costs, for example, Intel Corporation builds semiconductor plants throughout the world—all of which use virtually the same blueprint. Knowledge can be further leveraged by hiring managers and professionals from the firm's home country, often through hiring talent from competitors. Risks and Limitations As noted, wholly owned subsidiaries are typically the most expensive and risky entry mode. With franchising, joint ventures, or strategic alliances, the risk is shared with the firm's partners. With wholly owned subsidiaries, the entire risk is assumed by the parent company. The risks associated with doing business in a new country (e.g., political, cultural, and legal) can be lessened by hiring local talent.

Strategic Alliances and Joint Ventures Risk, Limitations, and Benefits

Benefits: As we discussed in Chapter 6, these strategies have been effective in helping firms increase revenues and reduce costs as well as enhance learning and diffuse technologies. These partnerships enable firms to share the risks as well as the potential revenues and profits. Also, by gaining exposure to new sources of knowledge and technologies, such partnerships can help firms develop core competencies that can lead to competitive advantages in the marketplace. Risks and Limitations Managers must be aware of the risks associated with strategic alliances and joint ventures and how they can be minimized. First, there needs to be a clearly defined strategy that is strongly supported by the organizations that are party to the partnership. Otherwise, the firms may work at cross-purposes and not achieve any of their goals. Second, and closely allied to the first issue, there must be a clear understanding of capabilities and resources that will be central to the partnership. Without such clarification, there will be fewer opportunities for learning and developing competencies that could lead to competitive advantages. Third, trust is a vital element. Phasing in the relationship between alliance partners permits them to get to know each other better and develop trust. Without trust, one party may take advantage of the other by, for example, withholding its fair share of resources and gaining access to privileged information through unethical (or illegal) means. Fourth, cultural issues that can potentially lead to conflict and dysfunctional behaviors need to be addressed. An organization's culture is the set of values, beliefs, and attitudes that influence the behavior and goals of its employees

Licensing and Franchising Risk, Limitations, and Benefits

Benefits: In international markets, 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. In many cases, the country also benefits from the product being manufactured locally. For example Yoplait yogurt is licensed by General Mills from Sodima, a French cooperative, for sale in the United States. The logos of college and professional athletic teams in the United States are another source of trademarks that generate significant royalty income domestically and internationally. Franchising has the advantage of limiting the risk exposure that a firm has in overseas markets. At the same time, the firm is able to expand the revenue base of the company. Risks and Limitations The licensor gives up control of its product and forgoes potential revenues and profits. Furthermore, the licensee may eventually become so familiar with the patent and trade secrets that it may become a competitor; that is, the licensee may make some modifications to the product and manufacture and sell it independently of the licensor without having to pay a royalty fee. this potential situation is aggravated in countries that have relatively weak laws to protect intellectual property. Additionally, if the licensee selected by the multinational firm turns out to be a poor choice, the brand name and reputation of the product may be tarnished. With franchising, the multinational firm receives only a portion of the revenues, in the form of franchise fees. Had the firm set up the operation itself (e.g., a restaurant through direct investment), it would have had the entire revenue to itself.

learning opportunities

By expanding into new markets, corporations expose themselves to differing market demands, R&D capabilities, functional skills, organizational processes, and managerial practices. This provides opportunities for managers to transfer the knowledge that results from these exposures back to their home office and to other divisions in the firm. Thus, expansion into new markets provides a range of learning opportunities

hidden costs from outsourcing and offshoring

Common savings from offshoring, such as lower wages, benefits, energy costs, regulatory costs, and taxes, are all easily visible and immediate. In contrast, there are a host of hidden costs that arise over time and often overwhelm the cost savings of offshoring. These hidden costs include: (first 3 most important) Total wage costs indirect costs increased inventory reduced market responsiveness coordination costs intellectual property rights wage inflation

Risk and challenges of international strategy

Different activities in the value chain typically have different optimal locations. That is, R&D may be optimally located in a country with an abundant supply of scientists and engineers, whereas assembly may be better conducted in a low-cost location. Nike, for example, designs its shoes in the United States, but all the manufacturing is done in countries like China or Thailand. The international strategy, with its tendency to concentrate most of its activities in one location, fails to take advantage of the benefits of an optimally distributed value chain. The lack of local responsiveness may result in the alienation of local customers. Worse still, the firm's inability to be receptive to new ideas and innovation from its foreign subsidiaries may lead to missed opportunities.

increased inventory

Due to the longer delivery times, firms often need to tie up more capital in work in progress and inventory.

enhancing a product's growth potential

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. products (and industries) generally go through a four-stage life cycle of introduction, growth, maturity, and decline. In recent decades, U.S. soft-drink producers such as Coca-Cola and PepsiCo have aggressively pursued international markets to attain levels of growth that simply would not be available in the United States. The differences in market growth potential have even led some firms to restructure their operations. For example, Procter & Gamble relocated its global skin, cosmetics, and personal care unit headquarters from Cincinnati to Singapore to be closer to the fast-growing Asian market

Global or regional?

Extensive analysis of the distribution data of sales across different countries and regions led Alan Rugman and Alain Verbeke to conclude that there is a stronger case to be made in favor of regionalization than globalization. According to their study, a company would have to have at least 20 percent of its sales in each of the three major economic regions—North America, Europe, and Asia—to be considered a global firm. However, they found that only 9 of the world's 500 largest firms met this standard! Even when they relaxed the criterion to 20 percent of sales each in at least two of the three regions, the number only increased to 25. Thus, most companies are regional or, at best, biregional—not global—even today. regionalization - increasing international exchange of goods, services, money, people, ieas, and information; and the incrreasinig similarity of culture, laws, rules, and norms within a region such as Europe, NA, or Asia Globalization promotes the integration of economies across state borders all around the world but, regionalization is precisely the opposite because it is dividing an area into smaller SEGMENTS

risk reduction

Given the erratic swings in the exchange ratios between the U.S. dollar and the Japanese yen (in relation to each other and to other major currencies), an important basis for cost competition between Ford and Toyota has been their relative ingenuity at managing currency risks. One way for such rivals to manage currency risks has been to spread the high-cost elements of their manufacturing operations across a few select and carefully chosen locations around the world. Location decisions such as these can affect the overall risk profile of the firm with respect to currency, economic, and political risks

indirect costs

In addition to higher labor costs, there are also a number of indirect costs that pop up. If there are problems with the skill level of workers, the firm will find the need for more training and supervision of workers, more raw material and greater scrap due to the lower skill level, and greater rework to fix quality problems. The firm may also experience greater need for security staff in its facilities.

Motivations for international expansion

Increase market size take advantage of arbitrage enhancing a product's growth potential optimize the location of value-chain activities learning opportunities explore reverse innovation

Strategic Alliances and Joint Ventures

Joint ventures and strategic alliances have recently become increasingly popular These two forms of partnership differ in that joint ventures entail the creation of a third-party legal entity, whereas strategic alliances do not. In addition, strategic alliances generally focus on initiatives that are smaller in scope than joint ventures

Total wage costs

Labor cost per hour may be significantly lower in developing markets, but this may not translate into lower overall costs. If workers in these markets are less productive or less skilled, firms end up with a higher number of hours needed to produce the same quantity of product. This necessitates hiring more workers and having employees work longer hours.

Licensing and Franchising

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 Franchising - a contractual arrangement in which a company receives a royalty or free in exchange for the right to use its intellectual property; franchising usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising

Performance enhancement

Microsoft's decision to establish a corporate research laboratory in Cambridge, England, is an example of a location decision that was guided mainly by the goal of building and sustaining world-class excellence in selected value-creating activities. This strategic decision provided Microsoft with access to outstanding technical and professional talent. Location decisions can affect the quality with which any activity is performed in terms of the availability of needed talent, speed of learning, and the quality of external and internal coordination. Strategy&, the consulting unit of PWC, the giant accounting firm, produces an annual survey of the world's 1000 most innovative companies. It found that in 2015, firms that spent 60 percent or more of their R&D budgets overseas enjoyed significantly higher operating margins and return on assets, as well as faster growth in operating income, than their more domestically oriented rivals.

The opposing pressures that managers face place conflicting demands on firms as they strive to be competitive

On the one hand, competitive pressures require that firms do what they can to lower unit costs so that consumers will not perceive their product and service offerings as too expensive. This may lead them to consider locating manufacturing facilities where labor costs are low and developing products that are highly standardized across multiple countries. In addition to responding to pressures to lower costs, managers must strive to be responsive to local pressures in order to tailor their products to the demand of the local market in which they do business. This requires differentiating their offerings and strategies from country to country to reflect consumer tastes and preferences and making changes to reflect differences in distribution channels, human resource practices, and governmental regulations. However, since the strategies and tactics to differentiate products and services to local markets can involve additional expenses, a firm's costs will tend to rise.

optimize the location of value-chain activities

Optimizing the physical location for every activity in the firm's value chain is another benefit. the value chain represents the various activities in which all firms must engage to produce products and services. It includes primary activities, such as inbound logistics, operations, and marketing, as well as support activities, such as procurement, R&D, and human resource management. All firms have to make critical decisions as to where each activity will take place.Optimizing the location for every activity in the value chain can yield one or more of three strategic advantages: performance enhancement, cost reduction, and risk reduction.

Optimize the location of value -chain activities: three strategic advntages

Performance enhancement cost reduction risk reduction

Strengths and limitations of multi-domestic strategy

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. Greater difficulty in transferring knowledge across countries. Possibility of leading to "overadaptation" as conditions change.

Strengths and limitations of global strategy

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.

Strengths and limitations of International strategy

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 market

why are so few firms "global"

The most obvious answer is that distance still matters. After all, it is easier to do business in a neighboring country than in a faraway country, all else being equal. Distance, in the final analysis, may be viewed as a concept with many dimensions, not just a measure of geographic distance. For example, both Canada and Mexico are the same distance from the United States However, United States companies find it easier to expand operations into Canada than into Mexico. Why? Canada and the United States share many commonalities in terms of language, culture, economic development, legal and political systems, and infrastructure development. Thus, if we view distance as having many dimensions, the United States and Canada are very close, whereas there is greater distance between the United States and Mexico.

Four different basic strategies that companies can use to compete in the global market place

The two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace: international (low local adaption and low lower cost pressure) global (low local adaption and high lower cost pressure) multidomestic (high local adaption and low lower cost pressure) transnational. (high local adaption and high lower cost pressure) The strategy that a firm selects depends on the degree of pressure that it is facing for cost reductions and the importance of adapting to local markets.

cost reduction

Two location decisions founded largely on cost-reduction considerations are (1) Nike's decision to source the manufacture of athletic shoes from Asian countries such as China, Vietnam, and Indonesia and (2) the decision of Volkswagen to locate a new auto production plant in Chattanooga, Tennessee, to leverage the relatively low labor costs in the area as well as low shipping costs due to Chattanooga's close proximity to both rail and river transportation. Such location decisions can affect the cost structure in terms of local manpower and other resources, transportation and logistics, and government incentives and the local tax structure Performance enhancement and cost-reduction benefits parallel the business-level strategies (discussed in Chapter 5) of differentiation and overall cost leadership

Potential risks of international expansion

When a company expands its international operations, it does so to increase its profits or revenues. As with any other investment, however, there are also potential risks To help companies assess the risk of entering foreign markets, rating systems have been developed to evaluate political and economic, as well as financial and credit, risks. Euromoney magazine publishes a semiannual "Country Risk Rating" that evaluates political, economic, and other risks that entrants potentially face Political and economic risks currency risks management risks

diamond of national advantage

a framework for explaining why countries foster successful multinational corps these four factors jointly determine the playing field that each national establishes and operates for its industries four factors: factor endowments demand conditions related and supporting industries firm strategy, structure, and rivalry Despite the differences in strategies employed by successful global competitors, a common theme emerged: Firms that succeeded in global markets had first succeeded in intensely competitive home markets. We can conclude that competitive advantage for global firms typically grows out of relentless, continuing improvement, and innovation.

take advantage of arbitrage

arbitrage opportunities - an opportunity to profit by buying and selling the same good in different markets Taking advantage of arbitrage opportunities is a second advantage of international expansion. In its simplest form, arbitrage involves buying something where it is cheap and selling it where it commands a higher price. A big part of Walmart's success can be attributed to the company's expertise in arbitrage. The possibilities for arbitrage are not necessarily confined to simple trading opportunities. It can be applied to virtually any factor of production and every stage of the value chain. For example, a firm may locate its call centers in India, its manufacturing plants in China or Vietnam, and its R&D in Europe, where the specific types of talented personnel may be available at the lowest possible cost. In today's integrated global financial markets, a firm can borrow anywhere in the world where capital is cheap and use it to fund a project in a country where capital is expensive. Such arbitrage opportunities are even more attractive to global corporations because their larger size enables them to buy in huge volume, thus increasing their bargaining power with suppliers.

Exporting

consists of producing goods in one country to sell in another. This entry strategy enables a firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. Many host countries dislike this entry strategy because it provides less local employment than other modes of entry. Multinationals often stumble onto a stepwise strategy for penetrating markets, beginning with the exporting of products. This often results in a series of unplanned actions to increase sales revenues. As the pattern recurs with entries into subsequent markets, this approach, named a "beachhead strategy," often becomes official policy.

currency risks

currency risk - potential threat to a firm's operations in a country due to fluctuations in the local currency's exchange rate Currency fluctuations can pose substantial risks. A company with operations in several countries must constantly monitor the exchange rate between its own currency and that of the host country to minimize currency risks. 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. When the U.S. dollar appreciates against other currencies, for example, U.S. goods can be more expensive to consumers in foreign countries. At the same time, however, appreciation of the U.S. dollar can have negative implications for American companies that have branch operations overseas. The reason for this is that profits from abroad must be exchanged for dollars at a more expensive rate of exchange, reducing the amount of profit when measured in dollars For example, consider an American firm doing business in Italy. If this firm had a 20 percent profit in euros at its Italian center of operations, this profit would be totally wiped out when converted into U.S. dollars if the euro had depreciated 20 percent against the U.S. dollar

Economic risks

economic risk - potential threat to a firm's operations in a country due to economic policies and conditions, including property rights laws and enforcement of those laws The laws, and the enforcement of laws, associated with the protection of intellectual property rights can be a major potential economic risk in entering new countries. Microsoft, for example, has lost billions of dollars in potential revenue through piracy of its software products in many countries, including China. Other areas of the globe, such as the former Soviet Union and some eastern European nations, have piracy problems as well. Firms rich in intellectual property have encountered financial losses as imitations of their products have grown due to a lack of law enforcement of intellectual property rights. Counterfeiting, a direct form of theft of intellectual property rights, is a significant and growing problem. The International Chamber of Commerce estimated that the value of counterfeit goods exceeded $1.7 trillion in 2015, over 2 percent of the world's total economic output. "The whole business has just exploded," said Jeffrey Hardy, head of the anticounterfeiting program at ICC. "And it goes way beyond music and Gucci bags." Counterfeiting has moved well beyond handbags and shoes to include chemicals, pharmaceuticals, and aircraft parts. According to a University of Florida study, 25 percent of the pesticide market in some parts of Europe is estimated to be counterfeit. This is especially troubling since these chemicals are often toxic counterfeiting - selling of trademarked goods without the consent of the trademark holder (fake gucci)

Global strategy

global strategy - a strategy based on firm's centralization and control by the corporate office, with the primary emphasis on controlling costs; used in industries where the pressure for local adaption is low and the pressure for lowering costs is high Competitive strategy is centralized and controlled to a large extent by the corporate office. Since the primary emphasis is on controlling costs, the corporate office strives to achieve a strong level of coordination and integration across the various businesses. Firms following a global strategy strive to offer standardized products and services as well as to locate manufacturing, R&D, and marketing activities in only a few locations. A global strategy emphasizes economies of scale due to the standardization of products and services and the centralization of operations in a few locations. As such, one advantage may be that innovations that come about through efforts of either a business unit or the corporate office can be transferred more easily to other locations. Although costs may be lower, the firm following a global strategy may, in general, have to forgo opportunities for revenue growth since it does not invest extensive resources in adapting product offerings from one market to another. A global strategy is most appropriate when there are strong pressures for reducing costs and comparatively weak pressures for adaptation to local markets economies of scale become an important consideration

Rapid rise of global capitalism

had dramatic effects on the growth in different economic zones For example, Fortune magazine's annual list of the world's 500 biggest companies included 156 firms from emerging markets in 2015, compared to only 18 in 1995.5 McKinsey & Company predicts that by 2025 about 45 percent of the Fortune Global 500 will be based in emerging economies, which are now producing world-class companies with huge domestic markets and a commitment to invest in innovation. Over half the world's output now comes from emerging markets. this is leading to a convergence of living standards across the globe and is changing the face of business

International strategy

international strategy - based on firm's diffusion and adaption of the parent companies' knowledge and expertise to foreign markets; used in industries where the pressure for both local adaption and lower costs are low based on diffusion and adaptation of the parent company's knowledge and expertise to foreign markets. Country units are allowed to make some minor adaptations to products and ideas coming from the head office, but they have far less independence and autonomy compared to multi-domestic companies. The primary goal of the strategy is worldwide exploitation of the parent firm's knowledge and capabilities. All sources of core competencies are centralized. e.g McDonald's and Kellogg, although these companies do make some local adaption, they are of very limited nature This strategy is most suitable in situations where a firm has distinctive competencies that local companies in foreign markets lac

One challenge with globalization

is determining how to meet the needs of customers at very different income levels in many developing economies, distribution of income remains wider than they do in the developed world, leaving many impoverished even as the economies grow The challenge for multinational firms is to tailor their products and services to meet the needs of the "bottom of the pyramid." Global corporations are increasingly changing their product offerings to meet the needs of the nearly 5 billion poor people in the world who inhabit developing countries. Collectively, this represents a very large market with $14 trillion in purchasing power

Management Risks

management risks - 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 Management risks may be considered the challenges and risks that managers face when they must respond to the inevitable differences that they encounter in foreign markets. These take a variety of forms: culture, customs, language, income levels, customer preferences, distribution systems, and so on. As we will note later in the chapter, even in the case of apparently standard products, some degree of local adaptation will become necessary. Differences in cultures across countries can also pose unique challenges for managers For example, in a series of advertisements aimed at Italian vacationers, Coca-Cola executives turned the Eiffel Tower, Empire State Building, and Tower of Pisa into the familiar Coke bottle. So far, so good. However, when the white marble columns of the Parthenon that crowns the Acropolis in Athens were turned into Coke bottles, the Greeks became outraged. Why? Greeks refer to the Acropolis as the "holy rock," and a government official said the Parthenon is an "international symbol of excellence" and that "whoever insults the Parthenon insults international culture." Coca-Cola apologized.

Multi domestic strategy

multi domestic strategy - a strategy is based on firms' differentiation their product and service to adapt to local market; used in industries where the pressure for local adaption is high and the pressure for lowering costs is low a firm whose emphasis is on differentiating its product and service offerings to adapt to local markets follows a multi-domestic strategy. Decisions evolving from a multi-domestic strategy tend to be decentralized to permit the firm to tailor its products and respond rapidly to changes in demand. This enables a firm to expand its market and to charge different prices in different markets. 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. Consider, for example, the Oreo cookie. Kraft has tailored the iconic cookie to better meet the tastes and preferences in different markets. For example, Kraft has created green tea Oreos in China, chocolate and peanut butter Oreos for Indonesia, and banana and dulce de leche Oreos for Argentina. Kraft has also lowered the sweetness of the cookie for China and reduced the bitterness of the cookie for India. The shape is also on the table for change. Kraft has even created wafer-stick-style Oreos.

Increase market size

multinational firms - firms that manage operations in more than one country There are many motivations for a company to pursue international expansion. The most obvious one is to increase the size of potential markets for a firm's products and services Many multinational firms are intensifying their efforts to market their products and services to countries such as India and China as the ranks of their middle class have increased over the past decade. The potential is great. Expanding a firm's global presence also automatically increases its scale of operations, providing it with a larger revenue and asset base. As we noted in Chapter 5 in discussing overall cost leadership strategies, such an increase in revenues and asset base potentially enables a firm to attain economies of scale. This provides multiple benefits. One advantage is the spreading of fixed costs such as R&D over a larger volume of production. Examples include the sale of Boeing's commercial aircraft and Microsoft's operating systems in many foreign countries Film-making is another industry in which international sales can help amortize huge developmental costs.14 For example, 77 percent of the $1.1 billion box-office take for Transformers: Age of Extinction came from overseas moviegoers. Similarly, the market for kids' movies is largely outside the U.S., with 70 percent of Frozen's $1.3 billion in box-office take coming from overseas.

Offshoring

outsourcing - shifting a value-creating activity from a domestic location to a foreign location takes place when a firm decides to shift an activity that it was performing in a domestic location to a foreign location. For example, both Microsoft and Intel now have R&D facilities in India, employing a large number of Indian scientists and engineers. Often, offshoring and outsourcing go together; that is, a firm may outsource an activity to a foreign supplier, thereby causing the work to be off-shored as well.

Outsourcing

outsourcing - using other firms to perform value-creating activities that were previously performed in-house occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house. It may be a new activity that the firm is perfectly capable of doing but chooses to have someone else perform for cost or quality reasons. Outsourcing can be to either a domestic or foreign firm.

Political risks

political risks - potential threat to a firm's operations in a country due to ineffectiveness of domestic political system Generally speaking, the business climate in the United States is very favorable. However, some countries around the globe may be hazardous to the health of corporate initiatives because of political risk. Forces such as social unrest, military turmoil, demonstrations, and even violent conflict and terrorism can pose serious threats. Consider, for example, the ongoing tension and violence in the Middle East associated with the revolutions and civil wars in Egypt, Libya, Syria, and other countries. Such conditions increase the likelihood of destruction of property and disruption of operations as well as nonpayment for goods and services. Thus, countries that are viewed as high risk are less attractive for most types of business. Another source of political risk in many countries is the absence of the rule of law. 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. rule of law - a characteristic of legal systems whereby behavior is governed by rules that are uniformly enforced

explore reverse innovation

reverse innovation - new products developed by developed-country multinational firms for emerging markets that have adequate functionality at low cost Finally, exploring possibilities for reverse innovation has become a major motivation for international expansion. Many leading companies are discovering that developing products specifically for emerging markets can pay off in a big way. In the past, multinational companies typically developed products for their rich home markets and then tried to sell them in developing countries with minor adaptations. However, as growth slows in rich nations and demand grows rapidly in developing countries such as India and China, this approach becomes increasingly inadequate. Instead, companies like GE have committed significant resources to developing products that meet the needs of developing nations, products that deliver adequate functionality at a fraction of the cost. Interestingly, these products have subsequently found considerable success in value segments in wealthy countries as well. Hence, this process is referred to as reverse innovation, a new motivation for international expansion.

Strengths and limitations of transnational strategy

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.

firm strategy, structure, and rivalry

the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new-entrant potential from related industries. This competitive rivalry in turn increases the efficiency with which firms develop, market, and distribute products and services within the home country. Domestic rivalry thus provides a strong impetus for firms to innovate and find new sources of competitive advantage This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness. Among all the points on Porter's diamond of national advantage, domestic rivalry is perhaps the strongest 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

Factor endowments

the nation's position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry Classical economics suggests that factors of production such as land, labor, and capital are the building blocks that create usable consumer goods and services However, companies in advanced nations seeking competitive advantage over firms in other nations create many of the factors of production 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 supporting infrastructure of a country—that is, its transportation and communication systems as well as its banking system—is also critical Factors of production must be developed that are industry- and firm-specific. In addition, the pool of resources is less important than the speed and efficiency with which these resources are deployed. Thus, firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to a nation's competitive advantage

demand conditions

the nature of home-market demand for the industry's product or service (Demand conditions refer to the demands that consumers place on an industry for goods and services) Consumers who demand highly specific, sophisticated products and services force firms to create innovative, advanced products and services to meet the demand. This consumer pressure presents challenges to a country's industries. But in response to these challenges, improvements to existing goods and services often result, creating conditions necessary for competitive advantage over firms in other countries. Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. The conditions of consumer demand influence how firms view a market. This, in turn, helps a nation's industries to better anticipate future global demand conditions and proactively respond to product and service requirements e.g. Denmark, for instance, is known for its environmental awareness. Demand from consumers for environmentally safe products has spurred Danish manufacturers to become leaders in water pollution control equipment—products it has successfully exported

related and supporting industries

the presence or absence, and quality in the nation of supplier industries and other related industries that are internationally competitive (Related and supporting industries enable firms to manage inputs more effectively) e.g. For example, 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. Also, 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 offer similar opportunities through joint efforts among firms. In addition, 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 e.g. In the Italian footwear industry the supporting industries enhance national competitive advantage. In Italy, shoe manufacturers are geographically located near their suppliers. The manufacturers have ongoing interactions with leather suppliers and learn about new textures, colors, and manufacturing techniques while a shoe is still in the prototype stage. The manufacturers are able to project future demand and gear their factories for new products long before companies in other nations become aware of the new styles

Globalization

three meanings: 1. the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information 2. the growing similarity of laws, rules, norms, values, and ideas across countries 3. the rise of market capitalism around the world has undeniably created tremendous business opportunities for multinational corporations e.g. while smartphone sales declined in Western Europe in the third quarter of 2014, they grew at a 50 percent rate in Eastern Europe, the Middle East, and Africa.

Transnational strategy

transnational strategy - a transnational strategy is based on firms' optimizing the trade-offs associated with efficiency, local adaption, and learning; used in industries where the pressure for both local adapation and lowering costs are high strives to optimize the trade-offs associated with efficiency, local adaptation, and learning.55 It seeks efficiency not for its own sake but as a means to achieve global competitiveness.56 It recognizes the importance of local responsiveness as a tool for flexibility in international operations A central philosophy of the transnational organization is enhanced adaptation to all competitive situations as well as flexibility by capitalizing on communication and knowledge flows throughout the organization

Wholly Owned Subsidiaries

wholly owned subsidiaries - business in which a multinational company owns 100 percent of the stock Two ways a firm can establish a wholly owned subsidiary are to (1) acquire an existing company in the home country or (2) develop a totally new operation (often referred to as a "greenfield venture"