Strat man Chapter 9

Coca Cola dealing w/economic distance

How does coke sell in Tokyo high end and in africa urban? GDP/person in US is 51k/year. In ghana it was 2014$/year. More than 28% of the populatin in ghana lived on less than 2$ a day. Coke can sell someone earning 142$/day but how does it reach those making 2$/day? Lower prices so even the poor can afford it. Coke's components are that low but the bottles/distribution are expensive. So coke used an innovative distribution model in poor areas in ghana/africa. They sell a daily franchise right to small scale entrepreneurs in poor areas. They pay a fee and get a crate of coke products in glass botles. Using bikes/carts they sell the products on street corners. Custoemrs drink the product on the spot so the entrepreneurs can return empty bottles and a portion of profits to coke at the end of the day. This reduces transport costs and allows them to sell to the poor.

Geographic distance

How far you are from one country to another. Companies are more likely to suceed in nearby countries cause of physical proximity that lowers transportation/comms cost. This is the one reaosn most U.S. companies expand to Canada then Mexico. Even in our tech heavy world, a 1% increase in distance between countries is a 1% decrease in firms selling in those countries. Ease of travel is also super important. Firms enter countries with more seaports than they do landlocked ones. Companies also enter countries with good transportation infrastructure. Not all firms are as impacted by this. Google is much better at this than cement company. Cause distribution for google is instant online. BUT google still needs local offices for local things and product needs to be localized (travelling from california isn't always practical).

Cultural Distance

Refers to differences in language/culture and the way people live/think. Firms are 42% less likely to do business in a country w/a differen language. Language differences are relatively easy to fix but potential problems increase rapidly when companies move into countries w/deeper and more diffuclt types of cultural distance. Including: religion, ethnicity, trust of outsiders, how genders are xpected to behave, how genders are expected to behave, the degree to which the culture is focused on individulity/collective action, how people accept ambiguity or follow rules/law, degree to which ppl allow abuses of political/mkt power. • If you sell corn, wheat, oil, or cement, you don't usually have a diffuclty with cultural distance. But if you have products w/linguistic content (music, movies, books) youneed to be careful.

Caution

STILL the internationalization affects the success due to increased complexity: Customer tastes, needs and income level, government regulations, legal systems, public tolerance for foreign firms, reliability, and existence of basic infrastructure, strength of supporting industries, including distribution channels to customers.

Global integration:

Standardization of processes within a single business in different locations around the world.

Phillips 1900-1980:

Started w/lightbulb business. Two brothers worked together. Trie to compete: could one produce more than the other could sell? They agreed that strong basic R&D and product development were vital to their success so they made R&D/development high priorities. They rivaled GE in early 1900 electric lamp industry. In 1914 they created research lab dedicated to breakthrough tech in lighting. They moved this into other areas, going into xray tubes, electric shavers, and small generators. Their most succesful prodct was radios. They captured 20% world MKT share 10 years after introduction. Due to small size of NL they expanded internationally to leverage investment in R&D and get econs of scale. They went to US, France, russia, brazil, canada , australia, jap. In lead up to WW2, they shited operations away from NL and decentralized managemnet to the national organizations in each country. Then postwar they made 14 product divisions with the responsibility for each product development, production, global distribution. This was done to better coordinate across country markets. Real power remained with Nos where are highly autonomous and repoted directly to management board. Phillips produced smaller volumes of more tailored products in most countries. Panasonic/sony produced large volumes of standardized products in low wage countries in asia. So Phillips MKT share fell. They responded by shifting production to low-wage countries and reorganizing the company to core/noncore businesses. The CEO then tried to centralize and cut 22% of people. The first round of layoffs cost 700 million because of european laws on layoffs. (15 months of pay). He closed a LOT of companies/factories. They couldn't compete w/Koreans who had fewer busineses to focus on and did well. He consolidated then increased advertising by 40% to increase awarenes sof the brand and de-emphacise most of the other 150 brands it supported worldwide. The trend continued in new century and they outsourced most of teir consumer electronics to china poland or mexico. By 212 phillips had still 118 plants in 24 countries. They then cut adverising again!

Distance

You want to expand where there is less risk. so you go to places where there is the LEAST distance. there are 4 types: a) geographic, b) cultural, c) economic, d) administrative. the lower the distance between the two, the greater the likelihood of success.

Why go international?

1) Increase sales. -> what if you increase sales but don't profit on these? well most companies that expand have the "liability of foreignness". You arent as profitable as you are at home. Smart companies expand internationally to achieve strategic objectives tat help create unique value for customers. 2) Cut costs: you expand to cut costs even though it increases transport and comms cost. You may go to china to get lower labour. Or you can sell more units to tap into econs of scale or spread R&D costs. This lowers cost/unit. 3) Manage risks: you lower finanical/operational risk. There is variation in how well countries do over time. When you have custmers in many countries you can protect yourself against countries going badly. If a country has bad hardships like currency devaluation. Mexican cement did badly, but the intl one did very well because of other markets. 4) Learn new things: this helps you differentiate. Customers in different countries want different things which leads to different product features. In rural china -> GE created portable ultrasound machines for them. BUT this then sold in their other markets too! It was a great move!

How to expand?

1) Multi domestic: This treats every country/region as a different market with different customer needs. You adapt business operations to each country you enter. GE/Samsung sell different types of fridges in different places in the world. This approach is costly. You design/manufacture a new product in each country/region. So you need customers who want to pay for differentiated offering. 2) Global: single market where customers in every country wants similar things. Boeing -> sells a similar plane around the world. Doesn't tailor their planes around the world. They try to standardize products/marketing/operations. This means centralized control over business to maximize econs of scale. The downside -> not all customers worldwide want same thing. Greater the distance, the greater they will want something different. So in some cases they try to localize their business- > Mcdonalds tries to localize menu -> parmesan cheese mcnuggets in italy! 3) Arbitrage: exploiting differences in cost/quality of resources between countries. Hire software prodgrammers/callers in India. Hyundai exanded to california to get creative auto desginers not in korea. a. Cultural arbitrage -> sell products in one country in another because of the cachet that comes w/country's label name. So KFC is upscale in China! Because of US brand.

Three strategies to do business internationally

1) Multidomestic, 2) global strategy, 3) arbitrage. NOTE: we can combine these strategies. They are NOT mutually exclusive.

How to enter an intl market?

1) export, 2) licensing/franchising, 3) joint venture, 4) wholly owned subsidiaries. There are pros and cons to each entry mode. The best is based on which intl strategy the firm has chosen: global, multidomestic, or arbitrage. Each mode has differnet risk/control profiles.

What are risks?

1) market risks: will foreign customers buy? Will distribution work the same? 2) political: will the government enact policies or laws that will hurt you? Such as tariffs that increase the cost of foreign products or build local requirements? Or even the uneven application of local laws. 3) economic in nature: not all markets are equally stable. Some countries are more susceptible to economic recessions, directly affecting the bottom line of the firms selling in those markets. There are also monetary crises.

Two pressures in going international

1) pressure toward local responsiveness, and 2) cost reduction.

What are the 3 questions concerning international strategy?

1) why should I expand internationally, 2) where should I expand, 3) how do I expand. Remember: Intl strategy -> expand to compete across national borders. 3/4 of sales in US are from international firms. Either foreign firms selling locally or local firms selling abroad.

Porter's diamond of national competitive advantage

4 factors help push organization toward greater innovation w/those companies that innovate the most having an advantage in intl competition: 1) Factor conditions: an abudance of critical resources, incl skilled labor, technologically advanced knowledge base, easy access to capital, solid infrastructure, provide a base to innovate. Germany has educated/manufacturing focused work force -> this means they excel at machine tools. 2) Demand conditions: the more a country's customers demand innovation, the more likely they are to be at the forefront of innovation. Japan -> they want innovation in cameras so their firms are the best. 3) Related and supporting industries: if a country has multiple parts of the value chain co-located its easier to coordinate innovation (speeding up the pace). Italy is known not just for leatherworking but leatherworking machinery, fashion, and shoes. These industries being together means greater coordination and innovation. 4) Firm strategy, structure, and rivalry: Different types f firm structure are suited to particular types of industries. Laws governing how firms are started and how they interact with labor have a large impact on the intl strategies they pursue. Rivalry plays a large role. While it tends to REDUCE profit, it also SPURS innovation. Firms that survive high levels of rivalry are usually better at intl competition.

4) Knowledge

Another reason to expand into other countries is to generate more knowledge (as the basis for innovation). When you sell in new countries you get new insights about your products/services. Like GE's portable ultrasound machine.

Combining strategies

As many industries have become increasingly global, the pressures for both local responsiveness and efficiecny that comes from standardization have become more intense. Some companies try to use a hybrid of the multidomestic/global strategy to be GLOCAL. They start w/a focusin one single strategy then work to minimize the downside associated w/that strategy as mcuh as possible as they implement the second strategy. They do this to achieve BOTH local responsiveness and standardization. This is called a TRANSNATIONAL strategy. These combinations can be any two or three of the three. P&G started in a multidomestic strategy then added a global one. They replicated operations in each country then they adapted and centralized decision making to allow greater econs of scale across countries. They established global business units fo each major product categor. They used IT systems to tie the two types of organizations together.

Choosing a mode of entry

Choosing is based on a firm's situation, including its access to capital and need for local resources/capabilities. As well as the firms primary intl strategy. Global strategies require more CTRL, moving firms toward exporting/wholly owned subs. Whereas multidomestic strategies encourage local innovation which could mean JV, franchising or autonomous wholly owned subs. Arbitrage strategies require ownership, suggesting that exporting/licensing/franchising will not be good choices. Its also based on a firm's intl xperience. Most firms start their intl expansion by first exporting/selling to target country wholesalers. Firms then move to JV then to whlly owned subs as they become more experience din foreign market. This is a learning path.

Coca Cola

Coke was not able to take the top sales spot from Iron ale in Scotland. The buy local sentiment is big and this si what caused this. Wherever there is anti coke sentiment, coke suffers. They have been around for 110 years. Scots love the drink. The character of the brand is closely linked to the character of scotland. It enjoys having a laugh. People in scotland want to be different. Teen market is critical to coke so their campaigns/outreach are anchored in teens.

How to suceed at multidomestic?

Cost pressures are too intense. So the key to successfully pursuing this strategy is to manage the variation that occurs across countries. Firms can manage variation 3 ways: 1) Focus adaptations: some firms manage the variation by tightly focusing on a particular product, customer segment, or geographic area. By going tight they manage costs. 2) Externalize adaptations: some firms externalize the work of adapting to local needs by arranging for local custoemrs to do it. Methods of externalization include franchising and alliances. 3) Design adaptability: designing a product so that it can be adapted while still maintaining econs of scale. Some companies design for cheap adaptation by investing in flexible manufacturing that reduces costs of short manufacturing runs. Others MODULARIZE their product -> creating interfaces that allow many types of alternatives to plug into one another.

FDI

Foreign direct investment (FDI) which is companies building factories and stores in foreign countries, increased more than 500%. Factors leading to this increase include low labour, low tax, low trade barriers, and favorable exchange rates.

Multidomestic

Emphasizes local responsiveness over standardizaton. adapt to fit the local market: this centers on tailoring products/operations to individual markets. Firms in industries where customer needs/preferences vary widely from country to country (food/media) often use this. By tailoring products/services to meet needs of customers, firms can maximize their responsiveness to local customers, increasing sales/mkt share in each country. This means they focus on differentiation, rather than cost leadership. This means replicating the significant parts of the value chain in each country ->they may have a product development and design lab, manufacturing plants, and sales/distribution personnel. Each country's functions come at significant costs. Firms find it hard to tap into econs of scale if they produce something new in each country. As companies decentralize operations to be locally responsive -> it also makes it hard to share valuable knowledge across the firm globally. Many firms pursuing this find it hard to develop a worldwide competitive advantage -- at best they produce a series of local competitive advantages.

Samsung: overtaking Phillips, Panasonic, and sony as the leader in consumer electronics:

In past century all these companies were leaders at differnet times. Each achieved leadership with a different international strategy, a different organization strategy and a differnet set of organizational capabilities. Phillips -> built worldwide federation of independent national organizations to gain access to the company's renowned tech prowess and then apply and adapt it to meet local market needs. They wre leaders from 00s to 70s. Panasonic during 80s they used overseas expansion to leverage its centralized, highy efficient operations in japan, exploiting global scale economies in R&D and production to offer lower cost products and overtake phillips. Sony leveraged its centralized operations in japan to produce standardized products. They invested far more in R&D then panasonic and became the tech leade. This was from 80-2005. by 2009, samsung came out of nowehre to become the world leader. Samsung - made large investments in R&D so it emerged as tech leader in TV/DVD and smart phones. They took a more decentralized approach than panasonic/sony and they customized products for specific markets.

Samsung era: 2000-present

It started as a korean company that exported basic goods such as dried fish, vegetables and fruit. They then went into insurance securities and rail. In 1969 they decided to enter electronics and started samsung-sanyo. They were primarily a low-cost manufacturer of black and white TVs which they sold to other companies to resell under their own brand name. They had a way of imitating others design at low cost. Owner passed away and his son took on the company. By then Samsung was a leader in most markets and were largely components in semiconductors, TV screens, hard drives, and batteries. Japanese were leaders in analogy and used it in most tech and were reluctant to adopt DIGITAL tech. But the market was moving in the digital route. Lee of Samsung knew that this was a chance to overtake the competition. To take advantage of the rival's hesitancy, samsung needed to act quickly to prepare itself for digital. So they introduced NEW MANAGEMNET INITIATIVE -> emphasized four issues: 1) decentralization, 2) innovativeness, 3) globalization, 4) outward-looking management. The aim was to retain core compentencies in manufacturing/production processes while improving R&D, design, and marketing. They decentralized by establishing more produciton and R&D centers around the globe. They also hired a US based innovation design firm to help design their products. Before this engineers decided it so the products were imitations with no distinct design. The new management initaitive also empowered designers by requiring them to take a yearlong course in mechanical engineering so they could properly defend ideas. Engineers were also taught basic design ideas to better work with designers. Progress was slow at first. Their products were seen as cheap korean goods due to low-cost mass production. So management aimed to corect these with GE's Six Sigma which was customized to not involve just management but every samsung employee. They started to internationalize samsung so that it was no longer completely korea centric. Asian financial crisis toook a large toll on SK's economy. Moody's downgraded them. The won waekened from 800 per USD to 1700 per USD. Th effect for samsung was good and bad. They had to cut workforces doemstic by 26 and foreign by 33%. It sold nearly 2 billion in corporate assets. So they started to focus MORE on core businesses and think about how to best offer unique value. In the wake of the crises the company dropped debt from 15 billion to 4.6 billion. Net margins went from 3% to 13%. The post-crisis initiative was to focus on R&D, design, and brand value. They created a Global localization strategy -> enabled designers to develop product design blueprints according to global design standards/themes while being flexible to allow local design centers to accommodate specific market needs/ccultural contexts. For instance -> Tube Tvs were big in Inda. So they did that! Got a huge market share of the TV market. While japanese were adamant on selling LCD, they were fighting for 13% of the TV market which was LCD due to cost problems for locals. After 2000, till 2003, samsung posted net earnings higher than 5%. This is when 16/30 top SK companies ceased operating in wake of the crisis. By 2005 samsung topped sony.

Ethics/strategy -- is economic arbitrage ethical? Wont it lead to worker exploitation?

Mattel, the toy maker, exploited lax enforcement of labour laws to keep its costs low. Mistreatment of workers included: requiring excessive overtime work, failing to pay into employee social insurance funds, delaying payment of workers by as much as a month, sometimes refusing t pay if they complained, assessing workers large fines fo small infactions of rules, not providing safety equipment, disposing of toxic stuff in dangerous ways. Econ arbitrage itself isn't unethical -> but many firms pay better than average wages and bring improved safety/labor practices abroad. Nike/apple are doing this to decrase incidence of unethical exploitation of workers.

Change in global environment

Lower Tariffs! Also For strategy -> both production and the market for many product and services isn't national anymore. Its regional (a part of the world) or global. For most industries, the competition isn't just local or national, its also global. The WTO says that half of all the productive wealth in the world is generated by multinational firms that compete w/intl strategy.

Panasonic/sony leadership:

MEI was created in a house w/KM's brother in law, wife, and 2 employees. they aimed to produce products 30% cheaper than competition. They were efective at efficient production and they grew to employ 1200 in 10 plants by 1931. KM wanted to produce as abundantly and as cheaply as tap water. This became panasonic and they further diversified through an IPO into doemstic appliances: TVs, radios, dishwashers, ovens. KM organized MEI intoproduct divisions and forced each division to become self-sufficient in various actiities including product development, poduciton, and marketing. This allowed him to better measure performance because each was semiautonomous business unit. If a division needed unding it needed to make a loan request to headquarters. If it was granted it was given by an interest rate comparable to mkt rate and headquarters received 60% of each divisions earnings and expected high performance from divisions. Internal rivalry among the 36 divisions was intense. Even the central R&D lab was udnerfunded which forced it to directly go to product divisions to ask for R&D projects that would be funded by them. This helped the company produce low-cost products and they became dominant. As MEI expanded, the direction and development of the company remained regulated by headquarters in japan. Panasonic overtakes phillips -> with VCR casettes, panasonic went into first place. Sony introduced Betamax the rival of VCR. BUT VHS became HUGE. Panasonic won by AGGRESSIVELY licensing the VHS format to a host of manufacturers. So they all adopted it and thus it was adopted as the main type. By late 1980s, VCRs were 30% of panasonic's sales/45% of their profits. In lae 80s panasonic took a more de-centralized approach. They launched operation localization in hopes of dispersing innovation development and increasing local customization. The change wa smet w/resistance because they were so used to centralization. Sony entered the fray! They started in 1946 in reconstruction of japan. They wante dto use the surplus of electricity left by wartime factories to create consumer electronics. They hired engineers w/desire to create new products and focus on innovation. They had success/failures but they then used a principle: Research makes the difference" so they focused on R&D on an amount 2-3 times greater than panasonic. They made the first all transistor TV, first VCR (betamax) the first walkman, first CD player, playstation, blu ray, etc. Japan went into recession so it was hard. There was a worldwide overcapacity. Samsung became popular new competitor by focusing on design/innovation to differentiate. They were rivaling sony by 2005 as a leder in innovation and design and their brand surpassed panasonic's in terms of general desirability by consumers. Panasonic wanst doing that hot, they had a 8 billion yen loss in 2012. their share price dropped 41%.

5) Responding to customers or competitors

Many firms expand in response to either customers or competitors. This is true of business to business firms that perform intermediate steps of the value chain for large customers. The big 4 accounting firms all expanded globally to better serve their largest clients. Sometimes they feel COMPELLED to go global because their rivas do. If the rival gains from the above advanages they may use them to subsidze aggressive sales and marketing in the home market. So you cant let this happen.

3) Managing Risk

Operating in more than one country can provide a measure of protection agianst disaster, economic and natural. When 2007 happened, GM was said to be hit hard, but china grew so they regained their position as largest auto company by relying on sales growth in China.

Arbitrage

Takes advantage of country-comparative advantages -- sources of low cost (e.g. cheap labour) or unique resources (e.g. skilled workers). The other two strategies view foreign markets as sales opportunities w/need to minimize differences between countries, the essence of arbitrage is to take advantage of those differences. Arbitrage is defined as buying and then selling in different markets to take advantage of the differences in prices between them. This can involve economic, cultural, admin or capital arbitrage. One of the most common modern forms of arbitrage is also one of the basic reasons firms expand internationally to find the lowest-cost source of labou/raw materials. This is econ arbitrage and involves offshoring manufacturing/R&D to lower labor cost countries. Capital arbitrge -> CEMEX a mexican cement manfuacturer operates plants in spain so it can raise capial in the EU where interest rates are lower than in mex. Cultural arbitrage takes advantage of differences between countries to sell products. This tades on the culture of one nation to sell in anotehr. US based fast food chains are popular worldwide because they embody US culture. France sells wine at premium because its french. Admin arbitrage: they take advantages of the different laws/policies/regulations between countries. Sometimes they incorporate in cayman islands because of low corporate tax rtes. 1/3 of all foreign capital flowing into china actually originates in china but investors process their transaction through HK to avoid government regulation.

Lincoln Electric learns some difficult lessons

The first time Lincoln electric tried to expand internationally, the company almost died. LE makes welding machinery and the sticks of metal that welders use to combine metals. In the last 20 years they captured most of the market in the US against big firms like GE. Then it went on to capture the largest market share in the entire world. They think the way they pay workers is a big part of the explanation -> if they pay them right they will be more productive. There are 3 cornerstones of their compensation policy: 1) Piecework: workers pay is based on the # of pieces they produce rather than # of hours they work. 2) Year-end bonuses: big bonuses are given on personal evaluations and company performance. This can double their yearly earnings. 3) Guaranteed employment: Since 1951, LE promised not to lay off employees no matter how difficult things became. Shortly after WW2 they went to canada, australia, and france. From 86 to 92, they feared a slowdown in US so they went global FAST. During this 6 year period they went from little intl presence to buying/building 3 overseas plants a year. They bought plants intending to rely on existing plant managers' local knowledge. They used local brands of the plants they bought because they assured lincoln that europeans in particular wouldn't buy U.S. branded products. LE wanted to implement their incentive system in its new plants but none of the foreign units did. In fact, some local laws forbid parts of the system! None of the foreign units, other than Canada/australia, were profitable. The CEO, wasn't really good at multinationals, ultimately retired. Their lsoses at the time were so huge they had to, for the first time, borrow money. The new CEO moved to the UK and spent a year overseing the plants in europe. He broke local unwritten cultural rules about taking amrket share from other local companies by aggressively selling LE US branded products at trade shows etc. He closed plants. Then made some plants create specific products so they wouldn't compete with their other plants. This chapter helps 3 questions concerning intl strategy: 1) why, 2) where, 3) how.

1) Growth

The need to grow sales is one of the biggest reasons--since domestic markets may be saturated.

Why go international?

There are many reasons why firms choose to compete in intl markets. They include increasing sales to grow the company beyond what the home market can offer, becoming more efficient (raise profits by lowering costs), managing better risks, learning from consumers in other markets, and responding to the globalization moves of other firms. 1) growth, 2) efficiency, 3) managing risk, 4) knowledge, 5) respond to customers/competitors.

Alliances and JV

These involve sharing resources, risks, and rewards. They are an increasingly favored way to enter mkts that are distant--and more risky--from the home market. Companies use alliances to access complementary assets. A common way to enter a distance foreign mkt is to create an alliance w/local company that knows what consumers want/know to navigate local government/regulations/distribution channels. A local firm might also help mitigate the foreignness of the entering firm. This allows the alliance to be perceived by government and consumers as local. Sometimes this is the ONLY WAY TO ENTER a MKT. india for instance didn't allow foreign retailers to enter w/o a partnership w/a local firm. Alliances are faster and less risky than wholly owned subsidiaries, but they also present signif management challenges. Overcoming cultural/linguistic barriers to bring together temas of managers from both companies increases difficulty of operations. Each party in the alliance may also hold diff strategic goals. Lack of control can create srs problems by allowing the partner firm to develop resource/capabilities that enable it to become a competitor.

Cost reduction

This comes through standardization, either of products or processes. This is known as global integration.

Economic Distance

This is the distances in average income of customers in two countries. Usually measured as GDP per capita. Firms from wealthy nations tend to expand to other wealthy nations because the customers there earn enough to buy similar proucts. Industries most affected by econ distance are those in which the demand for produts is very elastic -> i.e. demand changes dramatically as prices go up/down. Demand is impacted by purchasing power and producer's ability to lower prices.

Global

emphasizes global standardization and econs of scale over local responsiveness. A global strategy centers on capturing the efficiencies that can come with expanding overseas. Particularly econs of scale, learning, leveraging firm capabilities. Most companies that pursue a global strategy standardize their products, marketing, and operational practices, and aggregate or centralize them in only a few locations to achieve econs of scale. Individual coutry-level units are tasked mostly w/implementing decisions made at a central headquarters and the firm uses the same start in almost every country. The most EXTREME is wher ethey have one central location with country units only overseeing local sales. You can have just one bigass factory producing and shiping globally. Or you can have many factories around the world and maybe learn form them all. Global strategy is generally a low-cost strategy using SCALE. It can also be differentiation that the company applies to the same custoemr segment worldwide -> apple is a good example. They standardize products to get scale bt differentiates from other smart phones/computers/tablets to increase price. This is the same as semiconductor chips for intel/arm. They standardize and sell global. Global firms may not be able to compete in as many markets as multidomestic firms and they may not be able to penetrate those markets as deeply. Another disadvantage is that, although global firms share knowledge between units w/greater ease than multidomestic firms, a global firm generates less knowledge overall because it isn't as actively trying ot met a wider variety of customer needs. There are ways to deal with excessive centralization and standardization in global firms: a firm need not centralize all parts of the value chain. Greatest cost savings from scale occur in R&D/manufacturing. A global firm can centralize some functions while localizing others to penetrate markets more fully.

National competitive advantage

how do some companies like Apple, google, and microsfot, contorl the worldwide industries? Michael porter develoepd the Porter's diamond of national competitive advantage that explains how this happens.

2) Efficiency

many firms enter additional mkts to become more efficient. a. Lower cost resources: In many cases key resources can be cheaper in foreign countries. One of the most common that firms seek abroad is low-cost labor which is usually referred to as offshoring or outsourcing. Now US is seeing increase in foreign companies fracking in the US! ○ China has low cost labour but also relatively skilled, and has excellent comms/transportation infrastructure. And a strable political climate. So it is very attractive for low cost labour. b. Longer product life: Sometimes they want to lengthen a product's life by leveraging their investment in assets/equipment. Think about Nokia -> they are not the global leader but they STILL sell their older model phones in Afirca, middle east, and southeast asia! You can leverage capabilities when you enter into new markets -> mcdonalds does this well by entering new markets. c. Econs of scale and scope: you can gain by using scale. This means lowering your R&D costs etc by having larger scale.

Pressure toward local responsiveness

tailoring their roducts/marketing/distribution strategies to the local customers in the foreign country. Coke for instance tailors its drink in many countries. This isn't cheap -> it costs a lot to tailor products/services to a local market. This means higher costs and therefore less competitiveness with local firms who are operating where they are good at.

Licensing and franchising

these involve selling the rights to produce a firm's product/service. The licensee/franchisee typically pays a negotiated fee of 5-10% as royalty based on # units sold. Franchising is a special form of licensing which is longer-term. Licensing/franchising are good entry modes for firms that have unique know-how or a solid brand that can be easily valued (so price of the license/franchise can be negotiated) but do not have the capital/resources and capabilities to expand abroad themselves. The lower risk and speed of entry make these attractive entry chices when the risk is otherwise high due to large distances between countries (any of the 4). • Downsides: 1) they offer the least amount of control of all the modes of entry. Firms may try to include K safeguards but the franchisee/licensee is in charge of manufacturing/marketing. Sometimes they don't invest enough in the business so quality goes down. 2) there is a risk that the firm licensing the product/service can become a competitor. If you let them manfuacture/operate your business they gain critical abilities. RCA was a US based color TV maker and met its death this way by licensing to Japanese firms only to have them enter the U.s. after licences ran out.

Wholly owned subsidiaries

they are local units owned outright by the entering firm. This entry requires the most investment and creates the most risk. The firm has to put up all of the capital itself. Wholly owned subs can, however, overcome trade and transportation barriers by producing locally. This also helps them appear more local to host country governments/consumers. This give sthe firm the MOST CONTROL over what its local sub does. Many high tech firms do this to contorl tech and avoid leaks to a licensee/partner. You might manufacture all in one spot then ship components and assemble locally. Two ways to enter w/wholly owned sub: 1) greenfield - This is also the slowest mode of entry because you need to build the capabilities. It also takes time to learn about llocal market and government, 2) acquisition. This means buying a local firm and this allows the entering firm to acquire local resources/knowledge/expertise while maintaining control.

Exporting

this involves producing goods in a single location and selling them in foreign markets. Although most exporting happens from a home country, firms can also use it w/arbitrage by producing in a low-cost location then exporting from there. This is usually the first entry mode. It allows firms to ramp up produciton in a single location (econs of scale). • It works best when there is little adaptation needed and good distribution netwrosk are in place in the market. It is also the LEAST risky entry mode and involves the least investment in foreign country. • If cultural/admin distance is large, exporting might be best decision because you don't have to manage culturally different workforce. ALSO GOOD IF SPEED IS IMPORTANT as you can ship fast. • Limitations -> Transportation costs and government tariffs can increase cost of selling in a foreign market. Your products will also be seen as foreign which may hurt.

Administrative Distance

this refers to the differences in legal, political, and regulatory institutions between countries. Are laws/government policies similar or different? You can have best product at cheapest price, but if you don't understand how Ks will be enforced or how local/national policies apply to foreign firms, you may fail. Admin distance can cause some challenges for U.S> firms in industrialized nations like france which relies on a different legal system than the US/UK. Low admin distance can increase the rate of entry by foreign firms by as much as 300%. Admin distance is low among countries that: 1) use the same legal system (such as ommon law), 2) used to be part of a colonizer/colony network, 3) use the same currency, 4) are part of the same trading bloc, such as NAFTA/EU. • Industries most AFFECTED by admin distance -> those where governments are likely to have a stake. This includes industries that provide equipment/services critical to national security (providers of steel/telecoms). A firm may have increased amin distance if they compete head-to-head with a local champion (local firm that the government likes).