CHAPTER 6 MULTINATIONAL AND PARTICIPATION STRATEGIES: CONTENT AND FORMULATION

CHAPTER 6

MULTINATIONAL AND

PARTICIPATION STRATEGIES:

CONTENT AND

FORMULATION

Multinational Strategies and the Global-- Local Dilemma

• The local responsiveness solution

• The global integration solution

Local Solution

• Customize organizations and products to country or regional differences

Global Integration Solution

• Reduce costs with worldwide standardized products, uniform promotional strategies and distribution channels

• Seek lower costs or higher quality anywhere in the value chain and in the world

Four Broad Multinational Strategies

• Solutions to the global--local responsiveness dilemma – multidomestic – transnational– international– regional

Multidomestic Strategy

• Gives top priority to local responsiveness issues

• A form of the differentiation strategy

• Not limited to large multinationals

Transnational Strategy

• Gives two goals top priority: – seek location advantages

•global platforms– gain economic efficiencies from worldwide networks

International Strategy

• A compromise approach • Global products, similar

marketing techniques worldwide

• Upstream and support activities remain concentrated at home country

Regional Strategy

• A compromise strategy• Attempts to gain economic

advantages from regional network

• Attempts to gain local adaptation advantages from regional adaptation

Regional Trading Blocks

• Encourage regional strategies• Reduce differences in

government and industry required specifications for products

EXHIBIT 6.1 MULTINATIONAL STRATEGY CONTENT

Content Transnational International Multidomestic Regional Worldwide markets

Yes Yes No No

Worldwide location of separate value chain activities

Yes No No No

Global products

Yes Yes No No

Global marketing

Yes Yes No No

Global competitive moves

Resources from any country used to attack or defend

Attacks and defenses in all countries - resources HQ

No, competitive moves planned and financed by country units

No, but resources from region can be used

Mixed Strategies

• Seldom do companies adopt pure forms

• Different strategies for each business

• Different strategies for product differences

The Local-global Dilemma: Diagnostic Questions for Strategy Formulation

• The KEY question:– how global is the industry?

What makes an industry global?

• Globalization drivers– four categories of global drivers: •markets, costs, governments, and competition

Global Markets

• Are there?– common customer needs? – global customers?

• Can you transfer marketing? • What is the volume of imports

and exports in the industry?

Costs

• Are there?– global economies of scale? – global sources of low cost raw materials?

– cheaper sources of high skilled labor?

– high product development costs?

Governments

• Do the targeted countries have favorable trade policies?

• Do the target countries have regulations that restrict operations?

The Competition

• Successful strategies of competitors

• Volume of imports and exports in industry

Competitive Advantage in the Value Chain

• Upstream advantages – favor transnational strategy or an international strategy

• Downstream advantages– favor multidomestic strategy

Mixed Conditions• Competitive strength downstream

in industry with strong globalization drivers

• Competitive strength upstream in industries with local adaptation pressures– both favor regional strategies

• See summary Exhibit 6.2 next

Global/ Local Pressures

Primary Source of Competitive Advantage in Value Chain

Upstream Downstream

High Pressures for

Global-ization

Transnational

Strategy or International

Strategy

Regional Strategy

Compromise

High Pressures for Local Responsive-ness

Regional Strategy

Compromise

Multidometic

Strategy

Select an International Strategy over a Transnational When:

• Cost savings of centralization offset the lower costs or higher quality raw materials or labor available from worldwide locations

Participation Strategies

• The choice of how to enter each international market – exporting, licensing, strategic alliances, and foreign direct investment

Exporting

• The easiest• Passive exporting • Active export strategies

Export Strategies

• Indirect exporting– uses intermediaries

• Direct exporting

Export Management and Trading Companies (EMCs and ETCs)• Specialize in products,

countries or regions • Provide ready-made access to

markets • Have networks of foreign

distributors

Direct Exporting

• More aggressive• Requires more contact with foreign

companies• Uses foreign sales representatives,

distributors, or retailers• May require branch offices in

foreign countries

Channels in Direct Exporting

• Sales representatives: use the company's promotional literature and samples

• Foreign distributors: resell the products

• Sell directly to foreign retailers or end users

Licensing

• International licensing is a contractual agreement between a domestic licensor and a foreign licensee

Other contractual agreements

• International franchising• Contract manufacturing• Turnkey operations

The International Strategic Alliance

• Cooperative agreements between two or more firms from different countries to participate in a business activity

Two Basic Types

• Equity international joint ventures (IJV)

• International cooperative alliance (ICA)

Foreign Direct Investment (FDI)

• FDI means that companies own and control directly a foreign operation – symbolizes the highest stage of internationalization

• Mergers and acquisitions versus greenfield

Reasons to Invest in Foreign Countries

• To extract raw materials• To find low cost sources of

labor, components, parts, or finished goods

• To penetrate new markets, the major motivation

Formulating a Participation Strategy

Deciding on an Export Strategy

• Assess control needs for: sales, customer credit, and the eventual sale of the product

• Assess financial and human resources capabilities – to manage export operations

– to design/execute international promotional activities

– to support extensive international travel or possibly an expatriate sales force

– to develop overseas contacts and networks

Deciding on an export strategy, continued

When Should Companies License?

• Based on three factors 1. characteristics of the product2. characteristics of the target country

3. nature of the licensing company

Disadvantages of Licensing

• Gives up control• May create new competitors• Often generates only low

revenues• Opportunity costs (barriers to

other participation strategies

Why Seek Strategic Alliances?• Partner’s different capabilities• Partner's knowledge of the market • Government requirements • To share risks • To share technology • Economies of scale • Low cost raw materials or labor

Key Considerations for Alliances

• Pick partners carefully• Seek win-win ventures-last much

longer • Assess need for the alliance • Estimate ability to succeed Plan

for design and management

Which Type?

• IJV probably more secure• ICA probably more flexible and

less visible

Advantages of FDI

• Greater control• Lower costs of supplying host

country• Avoid import quotas • Greater opportunity to adapt

product to the local markets• Better local image of the product

Disadvantages of FDI

• Increased capital investment• Increased investment of

managerial and other resources

• Greater exposure of the investment to political and financial risks

General Strategic and Operational Considerations

Strategic Intent

• Immediate profit, or..• Other goals

– e.g., being first in a market with potential or learning a new technology

Company Capabilities

• What can a company afford? • Human resources • Production capabilities • Commitment to using

resources

Local Government Regulations

• Import or export tariffs, duties, or restrictions

• Laws regarding foreign ownership• Other legal and regulatory issues

– patent, consumer protection, labor, and tax laws

Characteristics Of The Target Product /Market (e.g.s)

• Products that spoil quickly or are difficult to transport – poor candidates for exporting

• Products that need little local adaptation– good candidates for licensing,

joint ventures, or FDI

Geographic Distance

• Transportation costs • Management of FDI and equity

strategic alliances more difficult

Cultural Distance

• With very different cultures, direct investment more risky

• Joint ventures, licensing and exporting– local partners deal with local cultural issues

Risk• Financial risk• Economic risk

– currencies, markets, etc.• Political risk

– governments change – policies regarding foreign firms

change

Need for Control

• Key areas for concern – product quality in the manufacturing

process, product price, advertising and other promotional activities, where the product is sold, and after market service

The control versus risk tradeoff

High

Low

Risk

Control

DirectExport

IndirectExport

Licensing

StrategicAlliances

FDI

Low High

Multinational and Participation Strategies

• What is the strategic reason to be in the market? – location advantages versus market penetration•e.g., source of raw materials, R&D, production, etc.

Multinational strategy and participation strategies, continued

• A mix of participation strategies often support the basic multinational strategy– see Exhibit 6.9

Conclusions• Dealing with the global--local

responsiveness dilemma• Four strategies

– multidomestic – transnational– international– regional

• Participation strategies– all can be used for sales– others besides exporting serve more value chain activities