© Ram Mudambi, Temple University and University of Reading, 2007 Lecture 6 Strategy in the Global Environment BA 951 Policy Formulation and Administration

© Ram Mudambi, Temple University and University of Reading, 2007

Lecture 6Lecture 6

Strategy in the Global EnvironmentStrategy in the Global Environment

BA 951BA 951Policy Formulation and Policy Formulation and

AdministrationAdministration

© Ram Mudambi, Temple University and University of Reading, 20077-2

Learning outcomesLearning outcomes

Understanding the strategy underlying Understanding the strategy underlying multinational operationsmultinational operationsThe role of governments – the policy The role of governments – the policy perspectiveperspectiveIntegrating the strategy and policy Integrating the strategy and policy perspectivesperspectives


OutlineOutline

Basic factorsBasic factors What are multinational firms and why do What are multinational firms and why do they exist?they exist?Location and the value chain Location and the value chain Strategy typesStrategy types Entry decisions and subsidiary rolesEntry decisions and subsidiary roles AlliancesAlliances


What is the motivation for What is the motivation for competing internationally?competing internationally?

Gain access to

new customers

Capitalizeon resource

strengths andcompetencies

Need toachieve

lower costsSpread business risk across wider

market base

Obtain access to valuable

resourcesMarket-seeking

Market-seeking

Asset-seekingAsset-seeking

Asset-seeking


Basic factors governing multi-Basic factors governing multi-country operationscountry operations

Country resource conditionsCountry resource conditions

Tradability issuesTradability issues

Industry-specific Industry-specific conditions conditions

Firm-specific Firm-specific competitive advantagescompetitive advantages


Government trade policiesGovernment trade policies

Import tariffs or quotasImport tariffs or quotas Local content requirementsLocal content requirements Price control policiesPrice control policies Other regulationsOther regulations

Technical standardsTechnical standards Product certificationProduct certification Minority ownership by local citizensMinority ownership by local citizens Prior approval of capital spending projectsPrior approval of capital spending projects Withdrawal of funds from countryWithdrawal of funds from country


What are multinational What are multinational corporations (MNCs)?corporations (MNCs)?

Why do they exist?Why do they exist?


The Stage TheoryThe Stage Theory

Ray Vernon (1966) studied US firms in the Ray Vernon (1966) studied US firms in the post-1945 periodpost-1945 period

He discovered that most firms that operated in He discovered that most firms that operated in more than one country had followed that more than one country had followed that same pathsame path

Licensing Franchising WhollyControlledSubsidiaries

DEGREE OF CONTROL

Low High

DomesticOperations

HOME

Exports

HOST


The MNC – A simple viewThe MNC – A simple view

Home countryoperations

Host countryoperations

International Firm

Multinational Firm

National borderNational border


What are MNCs?What are MNCs?

International FirmsInternational Firms•Foreign activities are Foreign activities are predominantly exports predominantly exports ((low controllow control))•Limited operations in Limited operations in host (foreign) countryhost (foreign) country

Multinationals (MNCs)Multinationals (MNCs)•Foreign activities are Foreign activities are predominantly predominantly high controlhigh control•Significant operational Significant operational presence in host (foreign) presence in host (foreign) countrycountry


Why do MNCs exist?Why do MNCs exist? Pull factorsPull factors: There are advantages to internalizing : There are advantages to internalizing transactions within the firm, i.e., undertaking transactions within the firm, i.e., undertaking multinational operationsmultinational operations

Ownership advantages, e.g., control of sales / service (reputation)Ownership advantages, e.g., control of sales / service (reputation) Location advantages, e.g., local resources (raw materials, labor)Location advantages, e.g., local resources (raw materials, labor) Internalization advantages, e.g., coordination and standardizationInternalization advantages, e.g., coordination and standardization

Push factorsPush factors: There are costs to using markets, i.e., : There are costs to using markets, i.e., undertaking international operations, (trust in agents for undertaking international operations, (trust in agents for sales & service, etc.) sales & service, etc.)

Pressures for cost reductionsPressures for cost reductions Pressures for local responsivenessPressures for local responsiveness


Why do investors value Why do investors value multinationality?multinationality? The classic study of Morck and Yeung The classic study of Morck and Yeung

(1991) (1991) global diversification of global diversification of operations creates little in terms of operations creates little in terms of shareholder value.shareholder value.

It is intangibles that MNCs can leverage It is intangibles that MNCs can leverage across borders to create valueacross borders to create value Marketing intangiblesMarketing intangibles R&D intangiblesR&D intangibles


Location and the value chainLocation and the value chain

IdentifyIdentify key activities in the value chainkey activities in the value chain principal requirements for each activityprincipal requirements for each activity possible locations which meet the requirementspossible locations which meet the requirements

Final location decision must consider Final location decision must consider overall strategic objectivesoverall strategic objectives

Activities dictate location

Activities dictate location

Linkages dictate location

Linkages dictate location


Inputs Markets

ValueValue AddedAdded

R&DR&DKnowledgeKnowledge

MarketingMarketingKnowledgeKnowledge

VALUE CHAIN DISAGGREGATIONVALUE CHAIN DISAGGREGATION

Location 1 Location 2 Location 3 Location 4

The Smile of Value Creation*The Smile of Value Creation*

Vertically integrated firmVertically integrated firm

* Mudambi, JIBS 2007


Inputs Markets

R&DR&DKnowledgeKnowledge

MarketingMarketingKnowledgeKnowledge

VALUE CHAIN DISAGGREGATIONVALUE CHAIN DISAGGREGATION

Location 1 Location 2 Location 3 Location 4

The Smile of Value Creation*The Smile of Value Creation*

* Mudambi, JIBS 2007* Mudambi, JIBS 2007

• Rich Countries

• Rich Countries

• Rich Countries

• Rich Countries

• PoorCountries

• PoorCountries

• Intangibles• Intangibles • Intangibles• Intangibles

• Tangibles• Tangibles

• Services• Services • Services• Services

• Manufacturing• Manufacturing

Catch-upCatch-up Catch-upCatch-up

Industry creation

Industry creation

Industry creation

Industry creation


Location Economics

Pontiac LeMans

Design

GermanyGermany

Parts

Parts

Parts

SingaporeSingaporeTaiwanTaiwan

JapanJapan

Assembly

South KoreaSouth Korea

Advertising

The U.K.The U.K.

Sales

The U.S.The U.S.


Strategic ChoiceStrategic Choice

International strategyInternational strategy Create value by transferring skills Create value by transferring skills

and products abroad. and products abroad.

Multi-domestic strategyMulti-domestic strategy Maximize local responsiveness by Maximize local responsiveness by

customizing products and marketing customizing products and marketing strategy for local markets.strategy for local markets.

Global strategyGlobal strategy Pursue low-cost status, offer standardized global products.Pursue low-cost status, offer standardized global products.

Transnational strategyTransnational strategy Use global learning to achieve low-cost status, differentiation, Use global learning to achieve low-cost status, differentiation,

and local responsiveness simultaneously.and local responsiveness simultaneously.


Four Basic StrategiesFour Basic Strategies

Importance of Local Responsiveness

Imp

ort

ance

of

Sca

le e

con

om

ies

Low High

Low

High

INTERNATIONAL MULTI-DOMESTIC

GLOBAL TRANSNATIONAL

Late 19Late 19thth century European century Europeanfirmsfirms

Post WW2 US firmsPost WW2 US firms Most modern knowledge-Most modern knowledge-intensive multinationalsintensive multinationals


International StrategyInternational Strategy

MNC Parent

Subsidiaries

Pre-dominant Knowledge flow – • Parent to subsidiary• Minimal local adaptation


Multi-domestic StrategyMulti-domestic Strategy

MNC Parent

Subsidiaries

Knowledge flows – • Parent to subsidiary• Considerable local influences


Global StrategyGlobal Strategy

MNC Parent

Subsidiaries

Pre-dominant Knowledge flow – • Parent to subsidiary• Virtually no local adaptation


Trans-national StrategyTrans-national Strategy

MNC Parent

Subsidiaries

Knowledge flows – • Parent to subsidiary• Subsidiary to parent• Subsidiary to subsidiary• Considerable local influences


The International Structural Stages The International Structural Stages ModelModel

Global Matrix

(“Grid”)

Area Division

Worldwide Product Division

International Division

Alternate Paths of Development

Foreign Product Diversity

Foreign Sales as a Percentage of Total Sales


Comparing the Four Basic Comparing the Four Basic International Business StrategiesInternational Business Strategies

Strategy Inter-dependence PerformanceAmbiguity

Costs ofControl

Multi-domestic Low Low Low

International Moderate Moderate Moderate

Global High High High

Transnational Very high Very high Very high


Basic Entry DecisionsBasic Entry Decisions

Where?Where? Which foreign markets? Which foreign markets? Politically and financially stablePolitically and financially stable Developed and developing nationsDeveloped and developing nations Free market systemsFree market systems

When?When? Timing of entry Timing of entry Pioneering costs versus Pioneering costs versus

first-mover advantages.first-mover advantages.

How?How? Scale of entry and strategic commitments Scale of entry and strategic commitments Scale of entry affects the nature of competition in the national Scale of entry affects the nature of competition in the national

market. Implications of risks and benefits must be weighed market. Implications of risks and benefits must be weighed carefully.carefully.


How - The Choice of Entry ModeHow - The Choice of Entry Mode

•ExportingExporting

•LicensingLicensing

•FranchisingFranchising

•Joint VenturesJoint Ventures

•Wholly Owned SubsidiariesWholly Owned Subsidiaries

Increasingcontrol

•Distinctive Competencies and Entry ModeDistinctive Competencies and Entry Mode

•Pressures for Cost Reduction and Entry ModePressures for Cost Reduction and Entry Mode


Competence-ExploitingCompetence-Exploiting Competence-CreatingCompetence-Creating

Assembly-typeAssembly-type Research-relatedResearch-related

Market-seekingMarket-seeking Asset-seekingAsset-seeking

Multi-domesticMulti-domestic Transnational, Transnational, heterarchicalheterarchical

Home-base exploitingHome-base exploiting Home-base augmentingHome-base augmenting

Local mandateLocal mandate Center of excellence Center of excellence mandatemandate

Subsidiary RolesSubsidiary Roles


Typical Int’l Business Typical Int’l Business JV/AllianceJV/Alliance

Foreign partner – Technology (R&D knowledgeR&D knowledge)

Domestic partner – Distribution channels (Marketing knowledgeMarketing knowledge)

FINAL MARKETFINAL MARKET


Joint Ventures and Strategic Joint Ventures and Strategic AlliancesAlliancesAdvantagesAdvantages

Facilitate entry into foreign Facilitate entry into foreign markets.markets.

Enable partners to share Enable partners to share fixed costs and risks fixed costs and risks associated with new associated with new products and processes.products and processes.

Facilitate transfer of Facilitate transfer of complementary skills complementary skills between companies.between companies.

Help establish Help establish technological standards.technological standards.

DisadvantagesDisadvantages Risk of giving away Risk of giving away

technological know-how.technological know-how. Risk of opening local Risk of opening local

market access to foreign market access to foreign alliance partner.alliance partner.

Risk of not getting Risk of not getting anything in return.anything in return.


Policing cooperation: Policing cooperation: Punishment StrategiesPunishment Strategies

TRUTH TABLE True Action

Cooperate Cheat No Correct

decision Type II error

Punishment

Yes Type I error

Correct decision

Optimal punishment depends on the opportunity cost of resources lost by partners’ cheating

Outcome

ActionAction


Stability of CooperationStability of Cooperation

Lower Lower error probabilitieserror probabilities increase increase effectivenesseffectiveness

CommunicationCommunicationMonitoringMonitoringAlliance structureAlliance structure

Stability is enhanced by Stability is enhanced by effectiveeffective punishment punishmentSWIFT & SURESWIFT & SURE


Lowering error probabilities:Lowering error probabilities:Structuring alliances to reduce Structuring alliances to reduce opportunismopportunism

“Walling off”


SummarySummary

Why compete internationally?Why compete internationally? Why do MNCs exist?Why do MNCs exist? Basic corporate strategy choices for MNCsBasic corporate strategy choices for MNCs Foreign market entry decisionsForeign market entry decisions

Subsidiary rolesSubsidiary roles Alliances and joint venturesAlliances and joint ventures

Documents

© Ram Mudambi, Temple University and University of Reading, 2007 Lecture 6 Strategy in the Global Environment BA 951 Policy Formulation and Administration