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
Worldwide markets Worldwide location of separate value chain activities Global products Global marketing Global competitive moves

Transnational International
Yes Yes Yes No

Multidomestic Regional
No No No No

Yes Yes Resources from any country used to attack or defend

Yes Yes Attacks and defenses in all countries resources HQ

No No No, competitive moves planned and financed by country units

No No 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 Regional Strategy Compromise

High Pressures for Globalization High Pressures for Local Responsive -ness

Transnational Strategy or International Strategy

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 symbolizes the highest stage of internationalization Mergers and acquisitions versus greenfield

and control directly a foreign operation

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

Deciding on an export strategy, continued

to design/execute international promotional activities to support extensive international travel or possibly an expatriate sales force to develop overseas contacts and networks

When Should Companies License?

Based on three factors 1. characteristics of the product 2. 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?

Partners 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

FDI Strategic Alliances

Risk

Licensing Direct Export

Indirect Low Export Low Control

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