CH-7 International Strategy: Creating Value in Global Markets – Strategic Management: Creating Competitive Advantages : Book Guide

Chapter 7 International Strategy: Creating Value in Global Markets Summary/Objectives The global marketplace provides many opportunities for firms to increase their revenue base and profitability. Also, in today’s knowledge-based economy there are opportunities to create advantages by leveraging firm knowledge across national boundaries. However, along with the potential benefits there are pitfalls that all firms must avoid in order to be successful. After some introductory comments on the global economy, we address this topic in four major sections: 1. We draw on Porter’s “diamond of national advantage” as a framework to explain the level of success for an industry in a given country. 2. We address some of the motivations as well as the risks (or pitfalls) associated with international expansion, including the emerging trend toward greater offshoring and outsourcing. 3. We address how firms can attain a competitive advantage in the global marketplace. Here, we focus on the two opposing forces that firms face when entering international markets — cost reduction and local adaptation. Depending on the intensity of these forces, firms should select among four basic (or generic) strategies: international, global, multidomestic, and transnational. 4. The final section addresses the four entry strategies that firms typically choose from when entering foreign markets. These vary along a continuum from low-investment/low-control (exporting) to high-investment/high-control (wholly owned subsidiaries and greenfield ventures). Lecture/Discussion Outline The opening case discusses the struggles that SAIC, a major Chinese auto manufacturer, had when it acquired SsangYong, a struggling Korean auto firm. This acquisition was hampered by cultural differences, union relationships in SsangYong that were different than SAIC had experienced in China, and declining demand for SsangYong’s vehicles due to rising fuel prices and the global recession. Since this was SAIC’s first acquisition outside of China, they did not anticipate all of these challenges and eventually decided to right off its investment and walk away from SsangYong.  Discussion Question 1: What lessons should SAIC learn from its acquisition of SsangYong? Response guidelines: Students should understand some lessons directly from the facts in the case. When a firm acquires another firm in a different country, it is important to understand how business is done in that country. Failure to understand different business practices can be costly. In particular, SAIC should learn that: • Cultural differences between managers in from different national cultures can reduce the effectiveness of management processes such as technology transfer and capital budgeting. • Dealing with a unionized workforce requires a specialized management skill. • It is important to consider the external environment in the foreign country such as possible shifts in demand away from small SUVs. Answer: SAIC should learn the importance of thorough due diligence and cultural compatibility when acquiring international companies. Ensuring alignment in operational practices and understanding local market dynamics are crucial for successful integration and realizing synergies.  Discussion Question 2: When buying a firm in another country, what issues should the acquiring firm think about to limit the risks they will face with the acquisition? Response guidelines: Students should understand that there are a great number of issues to consider. In addition to those specific issues mentioned above, many factors, including possibly any part of the general, competitive, or internal environment could be a risk. For class discussion purposes, instructors could pick an environmental factor at random and, for the case with SAIC, consider the possible issues that could arise. Any issue would represent an aspect of the business environment that differs between China and Korea. The result is that cross-border acquisitions, especially for firms with limited experience in the foreign country, are very risky and require a comprehensive investigation prior to the acquisition. The limited understanding that some firms have suggests the need for a sequential, gradual, increase in involvement with foreign countries. The gradual escalation of commitment would allow acquiring firms the time to learn how to cope in the foreign country. Answer: When buying a firm in another country, the acquiring firm should consider cultural differences, regulatory compliance, and economic stability to limit risks. Understanding local business practices, legal requirements, and market conditions can help ensure a smoother integration and reduce potential challenges.  Discussion Question 3: How can a firm bridge cultural differences between their home market and a country they are moving into? Response guidelines: Students should understand that cross border acquisitions require managers from different national and organizational cultures to work together as a team. Students should understand the process of team formation, as they have formed teams in sports, clubs, work colleagues, and families. The process is analogous. The process of team formation, such as “forming, storming, norming, and performing” that is commonly taught in management principles classes, applies. Team formation is a difficult process, but some organizations succeed. Some of the success factors include: • Spending time together in retreats or work teams • Regular communication • Tolerance of different opinions – some team strategies involve requiring groups to share complaints about each other, and then to address these complaints • Willingness to change policies and values in order to accommodate the different culture • Strong support of senior management. But in spite of all efforts, students should understand that cultural differences are difficult to overcome. Success may take years and require all sides to change the way they think about the business. Answer: A firm can bridge cultural differences by investing in cross-cultural training for employees and hiring local experts to guide market entry strategies. Building strong local partnerships and adapting business practices to align with local customs can also facilitate smoother integration. I. The Global Economy: A Brief Overview As the title indicates, our objective here is to provide a brief summary of some key issues in the global economy. We emphasize the increase in global trade and point out that it is estimated that by the year 2015 that there will be more trade between nations than within nations. We also point out that globalization has led to tremendous growth opportunities in emerging markets, with over half the world’s output now coming from emerging markets. Exhibit 7.1 shows the dramatic differences in growth rates in different markets over the 2001-2011 period. STRATEGY SPOTLIGHT 7.1 provides an interesting perspective on international trade– marketing to the “bottom of the pyramid.” Collectively, this market of 5 billion people represents $14 trillion in purchasing power. The SUPPLEMENT below illustrates the importance of estimating demand for customers in the bottom of pyramid.  Extra Example: What Do People Need and Demand at the Bottom of the Pyramid? Confusing need with demand is a common problem among organizations serving the bottom of the pyramid. Many firms have wasted time and resources trying to market products that are designed for the poor but that consumers do not actually want. A research with microfinance customers in rural India showed that when given a choice between beneficial products, such as solar-powered lanterns and low-energy stoves, and aspirational products like mobile phones and gold coins, 85 percent of customers opted for the latter. It is usually difficult to make the economics work for a product if demand must be generated, because marketing costs typically swamp efforts to keep prices extremely low. Companies should focus on areas where they can meet existing demand, with either lower-cost and better-quality products than the existing options, or simply with cheaper ones. Safaricom’s hugely successful M-Pesa, for example, offered money transfers by mobile phone in Africa at 33 percent of the cost of Western Union--and at 20 percent of the cost of (and much greater security than) long-distance bus companies, the customary provider. Source: Karamchandani, A., Kubzansky, M. & Lalwani, N. 2011. Is the bottom of the pyramid really for you? Harvard Business Review. 89(3): 107.  Discussion Question 4: What is the implication of the example stated above? Answer: The implication of bridging cultural differences is that successful international expansion requires more than just financial investment; it demands a deep understanding and respect for local cultures. By investing in cross-cultural training and hiring local experts, firms can navigate market nuances effectively, enhancing their integration and operational success. This approach reduces the risk of cultural missteps, fosters better relationships with local stakeholders, and ultimately increases the likelihood of achieving strategic objectives in new markets. Discussion Question 5: Can the bottom of the pyramid prove to be a profitable, long-term market? Answer: Yes, the bottom of the pyramid can be a profitable, long-term market as it represents a large and underserved segment with growing purchasing power. Companies that innovate to offer affordable, high-value products and services tailored to these consumers can capture significant market share. Successful strategies often involve local partnerships and adaptable business models to meet specific needs and preferences. Over time, as economic conditions improve, this segment can provide substantial returns and growth opportunities. The next section discusses “Porter’s diamond” and sets forth a useful context for explaining competitiveness at the national level. (This provides a framework to address how firms can create competitive advantages in the balance of the chapter.) II. Factors Affecting a Nation’s Competitiveness After conducting a four-year study, Michael Porter concluded that there are four broad attributes of nations that individually, and as a system, constitute what is termed “the diamond of national advantage.” These attributes collectively determine the playing field that each nation establishes for its industries. These factors are: • Factor Conditions; • Demand Conditions; • Related and Supporting Industries; • Firm Strategy, Structure, and Rivalry. The balance of this section will briefly address each of these factors and then provide an integrative example — the Indian software industry.  Discussion Question 6: How do these factors — individually or jointly — affect industries in countries with which you are familiar? Answer: In countries like India and Brazil, factors such as economic growth, cultural diversity, and regulatory environments affect industries significantly. Economic growth increases consumer spending power, expanding market potential, while cultural diversity requires tailored products and marketing strategies. Regulatory environments shape business operations and entry strategies, influencing the ease of doing business. Together, these factors drive industry adaptation and innovation, impacting competitive dynamics and market opportunities. A. Factor Endowments Factors of production include not only labor, capital, and natural resources (e.g., land and minerals) but also factors that can be created. The latter are more relevant to developed nations that are seeking competitive advantage over firms in other countries. These include a skilled human resource pool as well as the supporting infrastructure of a country, e.g., communication and transportation systems as well as a stable banking system. We give the example of Japan’s expertise in JIT Systems — in part necessary because of Japan’s expensive land costs. The SUPPLEMENT below addresses how the United Kingdom is striving to build and leverage the factor conditions necessary to be a major player in the computing technology industry.  Extra Example: Britain Aims to Build a Competency in Computeing When we think of computer software and hardware, most people think of Silicon Valley in California or Seattle, Washington as the core centers of technology development. But Britain has the aim to become a major player in this game. To do so, public officials and entrepreneurs in the region have been working to build the factor conditions needed to build centers of excellence in computing technology in Britain. In its own “Silicon Gorge” near the city of Bristol, there are signs of success. The technological entrepreneurs in this region have typically either been trained at or have ties to the University of Bristol, a school ranked in the top-30 of in the QS World University Rankings with very strong programs in Computer Science, Electrical and Electronic Engineering, and Mathematics. For example, David May is both a professor of computer science at Bristol University and also the Chief Technology Officer at Xmos, a microchip design firm. The absence of certain factor conditions have also led to differentiated capabilities. British designers argue that they excel at lean hardware designs – the ability to design hardware quickly and efficiently – since Britain has not developed deep pools of venture capital funding to support entrepreneurial firms. This ability to design efficient hardware appears to be well positioned for mobile systems where miniaturized and customized hardware design is valued. British officials are also trying to support a second technology center in London. In its “Silicon Roundabout,” entrepreneurs have no major universities to provide graduates and faculty expertise. Instead, entrepreneurs are striving to leverage the arts culture built into the Soho section of London to build firms that offer very creative social network and other software. Source: Anonymous. 2011. Start me up. The Economist, August 6: 45-47. B. Demand Conditions 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 be more innovative to meet such demand. Such consumer pressure presents challenges to a country’s industries to also make it more competitive in international markets. We provide the example of Denmark’s world-class position in water pollution control equipment. This is, in part, due to the nation’s environmental awareness and demands for environmentally safe products. The SUPPLEMENT below discusses the growth of the international box office as the demand for imported movies grows when more fancy cinemas opened overseas.  Extra Example: Hollywood Films Need Foreign Viewers Hollywood has always been an international business. In recent years, it has become dramatically more so. In the past decades total international box office has more than doubled. The growth of box office spending overseas is a result of a cinema boom in the emerging world, a concerted effort by the major studios to make films that might play well outside the U.S. and a global marketing push to make sure they do. Russia’s efforts to build superior domestic film production has helped created demand. However, the big Hollywood studios muscle domestic film-makers aside. The imported films made more than five times as much as the home-grown products in Russia in 2010. Source: Anonymous. 2011. Hollywood goes global; Bigger abroad. The Economist. February 19: 69.  Discussion Question 7: Would the growth of the international box office alter the strategy of big Hollywood studios? How so? Answer: The growth of the international box office would likely alter Hollywood studios' strategies by increasing their focus on global markets, adapting content to diverse cultural preferences, and investing in international marketing. Studios may also pursue more strategic partnerships and co-productions to enhance their global reach and profitability. Discussion Question 8: How can local producers successfully compete with Hollywood? What can Hollywood do to successfully compete with local producers? Answer: Local producers can compete with Hollywood by leveraging regional cultural narratives, offering unique content that resonates with local audiences, and optimizing production costs. Hollywood can compete by collaborating with local talent, tailoring content to regional tastes, and investing in local market research to better understand and address audience preferences. C. Related and Supporting Industries Related and supporting industries enable firms to more effectively manage inputs. For example, countries with a strong supplier base benefit by adding efficiency in downstream activities. That is because a competitive supplier base helps a firm obtain inputs using cost-effective, timely methods it contributes to reducing manufacturing costs. We provide the example of the Italian shoe manufacturing industry and the Swiss pharmaceutical industry. D. Firm Strategy, Structure, and Rivalry Firms develop strategies and structures to compete with other firms in the same country that are trying to capture the same customer market. Rivalry is particularly intense in nations with strong consumer demand conditions, strong supplier bases, and high new entrant potential from related industries. Such rivalry provides a strong impetus for firms to innovate and find new sources of competitive advantage. The example that we provide is the European grocery retail industry with competitors such as Aldi and Tesco. STRATEGY SPOTLIGHT 7.2 and EXHIBIT 7.2 provide the integrative example of the Indian software industry. (This should be a rather interesting example to students because many of them may think that most of the software development is in the developed countries in North America, Europe, and Asia).  Discussion Question 9: What do you believe will be the implications of the intensifying global competition in the Indian software industry? Answer: Intensifying global competition in the Indian software industry will likely drive innovation and improve service quality as firms seek to differentiate themselves. It may also lead to increased pressure on pricing and margins, encouraging companies to adopt more advanced technologies and operational efficiencies to remain competitive. Discussion Question 10: How can India maintain its position as a leading provider of software services as the labor costs in India continue to rise? Answer: India can maintain its position as a leading software services provider by focusing on value-added services, advanced technology adoption, and skilled talent development. Investing in emerging technologies such as AI and blockchain, and moving up the value chain with strategic consulting and complex solutions, can help offset rising labor costs and sustain competitiveness. E. Concluding Comment on Factors Affecting a Nation’s Competitiveness Porter’s conclusions were based on case histories from more than 100 industries. A common theme did emerge: Firms that succeeded in global markets had first succeeded in intense competition in home markets. Thus, successful global firms often result from relentless, continuing improvement, innovation, and change. We will now turn to the level of the individual firm. In the next section, we’ll discuss a company’s motivations and risks associated with international expansion. III. International Expansion: A Company’s Motivations and Risks A. Motivations for International Expansion There are many motivations for a firm to pursue expansion into global markets. The most obvious one is to increase the size of potential markets. We note the explosive growth in middle class consumers in Asian markets, with one estimate projecting that 60 percent of global middle class consumption will come from Asia by 2020.  Discussion Question 11: What are the implications of the growth in middle income consumers for consumer goods and services producers? Answer: The growth in middle-income consumers expands market potential for consumer goods and services producers, creating opportunities for new product lines and enhanced service offerings. Producers can benefit from increased demand for higher-quality and premium products, as well as greater spending on discretionary items. This demographic shift also drives competition, prompting companies to innovate and tailor their offerings to meet evolving preferences. Additionally, firms may need to adapt marketing strategies and distribution channels to effectively reach and serve this growing consumer base. The SUPPLEMENT below illustrates how Abbott Labs is undertaking a major change in which it is changing both its core product areas and its geographic market focus as it strives to increase its growth.  Extra Example: Abbott Labs Focuses on New Markets For over 100 years, Abbott Labs has been one of the leading pharmaceutical firms in the world. However, it is now dramatically reshaping itself, morphing from focusing on breakthrough medicines to nutritional supplements and generic drugs. With this change, the firm is also altering its geographic focus, putting much greater emphasis on emerging markets where there is a tremendous need for and increasing ability to pay for nutriceuticals, foods and nutritional supplements that improve health. For example, Abbott and its Indian partner, Biocon Ltd., are working to develop products that will have local appeal and offer strong benefits. For example, the firms are launching a supplement for diabetics that will control glucose spikes and will come in flavors, such as cumin and hot chili, that match Indian tastes. With this shift in focus, Abbott aims to have 47% of its sales come from emerging markets in 2015, up from 26% in 2011. Source: Anonymous. 2011. China’s luxury boom: The Middle Blingdom. The Economist. February 19: 71-72.  Discussion Question 12: What are some of the pros/cons of Abbott shifting its focus from cutting edge, high margin pharmaceuticals in developed markets to nutritional supplements and generic drugs in emerging markets? Answer: Pros of Abbott shifting focus include accessing high-growth potential in emerging markets with increasing demand for affordable healthcare and nutritional products. This strategy can diversify revenue streams and reduce dependency on high-margin pharmaceuticals. Cons involve potentially lower profit margins from generic drugs and nutritional supplements compared to high-end pharmaceuticals. Additionally, Abbott may face intensified competition and market entry challenges in emerging markets, requiring substantial adaptation of its business model and operational strategies. The SUPPLEMENT below illustrates an even more extreme shift in demand, the dramatic increase of demand for luxury goods in China. Some big brands adapt well in the Chinese market, as the Chinese culture somehow promotes the demand for luxury goods both in the casual and business setting.  Extra Example: The Demand for Bling in China The term “luxury” may mean different things to people in China nowadays. Sales of luxury goods exploded and a forecast conducted by broker CLSA estimates that sales of luxury goods will grow rapidly by as much as 25 percent per year. CLSA also predicts that China’s share of the global luxury market will triple, to 44 percent, by 2020. Richemont, the world’s biggest jeweler, captured a 57 percent increase in Asian sales in the last quarter of 2010. The long queues of “bling-hungry” mainlanders outside big brand stores in Hong Kong paints a picture of prosperous Chinese who are less shy to show off their wealth than people in other countries. The business culture in China agrees that gifts lubricate business and many Chinese believe that the more something costs, the better it is. Source: Anonymous. 2011. China’s luxury boom: The Middle Blingdom. The Economist. February 19: 71-72.  Discussion Question 13: What are some of the pros/cons of the growing market of luxury goods in China? Answer: Pros of the growing luxury goods market in China include access to a large, affluent consumer base with increasing disposable income, leading to substantial growth opportunities. Cons involve high competition, potential market volatility, and the risk of over-reliance on a single market, which can be affected by economic fluctuations or regulatory changes. Discussion Question 14: Should luxury goods producers focus a large portion of their marketing goods on China? What are some of the risks and/or benefits? Answer: Luxury goods producers should consider focusing a significant portion of their marketing on China due to its rapidly growing affluent consumer segment and strong demand for premium products. Benefits include tapping into a lucrative market and enhancing brand visibility. Risks include potential overexposure to market fluctuations, geopolitical tensions, and regulatory challenges that could impact business operations and profitability. Potential benefits of international expansion include (with examples we discuss): 1. Increase Market Size (Boeing’s commercial aircraft; Microsoft; Hollywood films) 2. Take Advantage of Arbitrage Opportunities (financial services firms) 3. Enhance a Product’s Growth Potential (soft drink producers PepsiCo and Coca-Cola; Procter & Gamble’s personal care products) 4. Optimize the Location of every Value Chain activity (Microsoft) The last item — optimize the location of every activity in its value chain — can yield three strategic advantages: a. Performance Enhancement We provide the example of Microsoft’s decision to locate a corporate research facility in Cambridge, U.K. in order to draw upon superb technical and professional talent. b. Cost Reduction We discuss Nike’s decision to source the manufacture of athletic shoes from Asian countries such as China, Vietnam, and Indonesia; and the decision of Volkswagen to build a production facility in Chattanooga, TN. c. Risk Reduction Here, we address the risks associated with erratic swings of exchange ratios of the U.S. dollar and other currencies (such as the Japanese yen and the Euro). Firms can cope with such risks by spreading high-cost elements of their manufacturing operations across a few carefully chosen locations around the world. Such decisions can help lower the overall risk profile of a firm with regard to currency, economic, and political risk. The SUPPLEMENT below discusses Airbus’ logic for building an aircraft production plant in Alabama to both cut costs and reduce currency risks.  Extra Example: Airbus in Alabama Airbus, the European aircraft manufacturer, announced in 2012 that it was going to begin manufacturing jets in North America. Its chosen location for this plant is Mobile, Alabama. The logic for moving production to the United States is multi-faceted. First, it gets Airbus closer to its customers. By having these planes “made in the USA,” Airbus hopes to lessen the concerns of U.S. airlines and military defense buyers regarding buying from a foreign manufacturer. This decision also allows Airbus to cut costs and minimize currency risks. Labor costs in Alabama are significantly lower and work rules are much more flexible than they are in Airbus’ European plants. Also, Airbus lessens its currency risk. When it builds planes in Europe to sell in the United States, a currency shift can wipe out all of the profits associated with the sale of the planes. However, with parts being procured in the United States and labor costs being in dollars, Airbus is not as nearly affected by currency fluctuations. Sources: Anonymous, 2012. Coming to America. The Economist. July 7: 63.  Discussion Question 15: What are some other examples of firms that help to illustrate the benefits from international expansion? Answer: Starbucks exemplifies international expansion benefits through its global brand recognition and market penetration, driving significant revenue growth. Nike leverages its international presence to access diverse markets and enhance brand value, benefiting from global consumer trends. Samsung illustrates how expanding into international markets can boost innovation and production scale, achieving economies of scale and increased market share. Apple also showcases the advantages by tapping into global consumer demand, driving profitability and brand loyalty across diverse regions. 5. Explore Reverse Innovation Reverse innovation has become a recent important motivation for international expansion. Here, companies such as GE have committed significant resources to developing products that meet the needs of developing nations—and such innovations provide opportunities for success in wealthier companies. We discuss the potential for $3,000 cars, $300 computers, and $30 mobile phones—which are now reaching the emerging middle class in developing economies. We also address many of the implications of reverse innovation. STRATEGY SPOTLIGHT 7.3 discusses several examples of reverse innovation: GE’s ultrasound machines, Deere & Co.’s tractors, Walmart’s small mart stores, and Pepsi’s global innovation center.  Discussion Question 16: Can you think of other industries where there is a significant potential for reverse innovation? What would be some of the challenges? Answer: Industries like healthcare and automotive have significant potential for reverse innovation, where innovations developed in emerging markets are adapted for developed markets. In healthcare, affordable diagnostic tools and mobile health solutions from emerging economies could revolutionize care in developed regions. In automotive, cost-effective, fuel-efficient technologies could influence the design of vehicles in developed markets. Challenges include adapting these innovations to meet stringent regulatory standards, integrating them with existing infrastructure, and addressing differences in consumer preferences and technological capabilities. B. Potential Risks of International Expansion There are also many potential risks associated with international expansion. To help companies assess such risks, rating systems have been developed. EXHIBIT 7.3 depicts a sample of country risk ratings from the 178 countries that Euromoney evaluates. In the EXHIBIT, note that the lower the score, the higher the country’s expected level of risk. Next, we address the four main types of risk: political, economic, currency, and management. 1. Political and Economic Risk As indicated in EXHIBIT 7.3, countries vary significantly in their level of political risk. Such risk can lead to such problems as the destruction of property, nonpayment of goods and services, and the appropriation of a firm’s assets in a country. STRATEGY SPOTLIGHT 7.4 discusses actions firms can take to minimize the political risks the firm faces. We also address the enforcement of laws associated with the protection of property rights and discuss how Renault was threatened with the loss of its investment in Russia if it didn’t transfer valuable technology to its Russian alliance. We also discuss how Microsoft has lost billions of dollars in potential revenue through the piracy of its software products in many countries such as China. STRATEGY SPOTLIGHT 7.5 addresses a key threat to the pharmaceutical industry – counterfeit drugs.  Discussion Question 17: What actions can and should developed nations take to combat counterfeit pharmaceuticals? Answer: Developed nations can combat counterfeit pharmaceuticals by strengthening regulatory frameworks to enhance drug tracking and verification processes. They should implement advanced technologies such as blockchain and digital authentication to ensure drug authenticity. International collaboration and information sharing can help curb cross-border counterfeit trade. Additionally, raising public awareness about counterfeit risks and increasing penalties for offenders can deter illegal activities and protect public health. 2. Currency Risks 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. We provide a hypothetical example of negative implications for an American company with overseas operations. 3. Management Risks 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, language, income levels, customer preferences, distribution systems, and so on. As an example, we discuss problems that Coca-Cola had with the Greeks when they “insulted” the Acropolis. We also provide examples of how cultural differences are manifested in interpersonal interactions with business colleagues in Hong Kong. The SUPPLEMENT below addresses some additional protocol issues that multinational firms doing business in Hong Kong must be aware of in order to be successful. Note how they vary from customs in the United States.  Extra Example: Protocol Issues in Hong Kong Gestures: • Members of the same sex may hold hands to signify friendship, but members of the opposite sex may not. • Although women may cross their legs, men should keep their feet on the floor. Place your hands in your lap while sitting. • The Chinese may communicate in closer proximity than is common in the United States. • Do not pat people on the shoulder or initiate any physical contact. It is not appreciated. • “Come here” is signified by turning the palm face down and waving the fingers. Gifts: • Gift giving is an intricate and important custom in Hong Kong. The best-intentioned businessperson can offend counterparts by giving 1. Clocks (they connote death) 2. Books (they represent a “Curse to Lose” for gamblers) 3. Blankets (they stifle the recipient’s prosperity) 4. Unwrapped gifts (this is rude) 5. Gifts wrapped in blue (the color of mourning) Source: Morrison, T., Conaway, W. & Borden, G. 2000. Kiss, Bow, or Shake Hands. Diane Publishing Company: 159. We also discuss a humorous example of how a local custom “lucky day” delayed the opening of a manufacturing plant in Singapore for a few months.  Discussion Question 18: What would be some of the dysfunctional aspects of U.S. culture? (Hint: The discussion could deal with aspects such as short–term orientation, need for instant gratification, high risk preference, etc.) Answer: Some dysfunctional aspects of U.S. culture include a short-term orientation that prioritizes immediate results over long-term planning, leading to potential neglect of sustainable practices. The need for instant gratification can drive consumer behavior and business decisions that overlook long-term value and stability. Additionally, a high risk preference might encourage speculative ventures or excessive financial risk-taking, which can lead to economic volatility. These cultural traits can result in challenges such as reduced investment in long-term projects and increased susceptibility to economic instability. Teaching Tip: Cross-cultural examples are typically very interesting to students. Although we provide examples in this section as well as in the SUPPLEMENT above, it is always useful to ask students what examples they can come up with — both from their business courses as well as from personal experience. It also provides an opportunity to get some insights from the international students in the class. C. Global Dispersion of Value Chains: Outsourcing and Offshoring This section addresses two of the emerging trends in international business — outsourcing and offshoring. Outsourcing occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house. Offshoring takes place when a firm decides to shift an activity that they were previously performing in a domestic location to a foreign location. It is important to point out that the movement of jobs offshore in the manufacturing sector was repeated by the service sector as well in the mid-1990s. However, the trend that began with low-level programmers and data entry work to countries such as India has grown many-fold to include a wide variety of white collar and professional activities ranging from call centers to R&D. To survive, companies have to locate each stage of the value chain in places where factor conditions are most conducive. The SUPPLEMENT below addresses a “global delivery” approach which is indicative of the extent to which outsourcing and offshoring have become part of global commerce.  Extra Example: Outsourcing’s global delivery model The use of offshore providers of information technology, human resource management, and other services is central to today’s global expansion. In fact, many service providers are pursuing a global delivery model that permits them to fulfill their outsourcing obligations from offices around the world. For example, BT (formerly British Telecom), the UK telecom giant, recently outsourced its human resources operation to Accenture. To fulfill this task, Accenture is using offices in India, the Czech Republic, and the U.S as well as the U.K. Dutch bank ABN Amro outsourced its IT operations to five companies. One of them is Tata Consultancy which uses employees in Mumbai, Bangalore, Budapest and Luxembourg to do the work. In another deal, Tata signed a joint agreement with Microsoft and a branch of the Chinese government to create a software joint venture to supply IT outsourcing services. Nearly half of the 5,000 employees Tata will need for the job will be employee in Latin America – Brazil, Uruguay, and Chile. Source: Dolan, K. A. 2006. Offshoring the Offshorers. Forbes, April 17: 74-76. We also discuss the challenges of offshoring and why many firms are finding the realized cost benefits from offshoring to be much less than they anticipated. STRATEGY SPOTLIGHT 7.6 discusses several examples of small firms that are re-shoring activities. Many students may be concerned about the potential of having their job (or future job) “offshored.” The SUPPLEMENT below provides some useful insights on how one may help to inoculate themselves against such a fate.  Extra Example: Inoculating Oneself Against Having Your Job “Offshored” The safest bet is having a job that absolutely requires your physical presence, such as being a barber, electrician, or a brain surgeon. Failing that, sustainable careers typically are those that involve deep relationships with customers and extensive knowledge of local market conditions. It helps if you have multidisciplinary skills that aren’t yet common in many low-cost countries. (Think computer science plus biology, or law and international business.) Bonus points go to those who perform well in person with the boss. The face-time factor was one of the variables that Alan S. Blinder, a professor at Princeton University, built into the “offshorability index” he published in March, 2007. At the top of Blinder’s list of the most likely white collar jobs to be sent overseas are software programmers, data entry clerks, draftsmen, and computer research scientists. Overall in the U. S., Blinder classifies 8.2 million people’s current jobs as “highly offshorable” and 20.7 million more as “offshorable.” “The message is: If your job can be done by a person in India who is just as smart as you but works for a fraction of the wage, you’re in a perilous occupation”, he says. Source: Hamm, S. 2007. The changing talent game. Business Week, August 20 & 27: 68-71. IV. Achieving Competitive Advantages in Global Markets In this section, we begin by addressing the two opposing forces that firms face when they expand into global markets — cost reduction and adaptation to local markets. Then, we address the four basic types of international strategies that they may pursue – international, global, multidomestic, and transnational. A. Two Opposing Pressures: Reducing Costs and Adapting to Local Markets Approximately two decades ago, Ted Levitt advocated strategies that favored global products and brands that rested on three key assumptions. • Customer needs and interests are becoming increasingly homogeneous worldwide. • People around the world are willing to sacrifice preferences in product features, functions, design and the like for lower prices at high quality • Substantial economies of scale in production and marketing can be achieved through supplying global markets. We provide evidence that refutes each of the three assumptions. There are, of course brands such as Boeing and Coca-Cola that have developed products that are relatively unchanged throughout the world.  Discussion Question 19: What are some other examples of global products and services that defy these assumptions? Answer: Luxury goods like Swiss watches and high-end fashion defy the assumption of instant gratification by emphasizing craftsmanship and timeless value, appealing to consumers seeking long-term satisfaction. Sustainable products, such as eco-friendly technologies and organic foods, challenge short-term orientation by focusing on long-term environmental impact. Healthcare services, especially preventive and holistic care, often prioritize long-term health benefits over immediate results. These examples show that some global products and services prioritize enduring value, quality, and sustainability over immediate rewards or high risk. EXHIBIT 7.4 shows the conditions under which each of the strategies — international, global, multidomestic, and transnational — would be most appropriate. The strategies reflect their position on the two opposing forces — lowering costs and local adaptation It is important to note that the following strategies are considered to be “basic” or “generic.” In practice, all firms will tend to have some elements of international, global, multidomestic, and transnational strategies. B. International Strategy As indicated in EXHIBIT 7.4, a firm without a strong emphasis on either differentiating their product and service offerings in order to adapt to local markets or lowering costs, is following an international strategy. An international strategy is based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets. Although country units are allowed to make minor adaptations to local markets, they have far less autonomy than local managers who operate under a multidomestic strategy. 1. Risks and Challenges Some of the risks of an international strategy include: • The international strategy, with its tendency to concentrate most of its activities in one location, fails to take advantage of the optimally distributed value chain. • The strategy is susceptible to high levels of currency and political risks. Being too closely identified with a single country, an increase in the value of the currency may make the product or service unattractive abroad. EXHIBIT 7.5 summarizes the strengths and weaknesses of international strategies in the global marketplace. C. Global Strategy As indicated in EXHIBIT 7.4, a firm whose emphasis is on lowering costs tends to follow a global strategy. A global strategy emphasizes economies of scale — due to the standardization of products and services as well as the centralization of operations in a few locations. We provide the example of Siebel Systems (now part of Oracle Corp.), the $2 billion developer of e-business applications software. Their CEO and founder, Tom Siebel, emphasizes global standardization. 1. Risks and Challenges There are, of course, some risks associated with a global strategy. These include: • A firm can enjoy scale economies by concentrating scale-sensitive resources and activities in one or a few locations. Decisions about locating facilities must weigh the potential benefits from concentration against higher transportation and tariff costs. • The geographical concentration of any activity may also tend to isolate that activity from the targeted markets. • Concentrating an activity in a single location also makes the rest of the firm dependent on that location. EXHIBIT 7.6 summarizes the strengths and weaknesses of global strategies.  Discussion Question 20: Can you think of other global strategies that failed? Why did they fail? Answer: Google Glass is an example of a global strategy that failed due to issues with privacy concerns, limited practical applications, and societal resistance to wearable technology. PepsiCo’s “Pepsi Crystal” launched globally but failed due to a lack of differentiation and market acceptance. Target’s expansion into Canada struggled because of logistical challenges and failure to adapt to local market preferences. These failures highlight the importance of understanding market needs, addressing potential concerns, and adapting strategies to local conditions. D. Multidomestic Strategy As indicated in EXHIBIT 7.4, a firm whose emphasis is on differentiating their product and service offerings in order to adapt to local markets follows a multidomestic strategy. In contrast to a global strategy, which tends to be highly centralized, decisions are more decentralized to enable the firm to tailor its products and services to rapidly respond to changes in demand. To illustrate, we provide the example of how Kraft adapted the Oreo cookie and some of its other iconic brands to better match the tastes of customers in several countries. In STRATEGY SPOTLIGHT 7.7, we discuss how Procter & Gamble tailored a range of business activities to meet the market conditions in Vietnam. The SUPPLEMENT below discusses the changing views on bribery and its mixed consequences.  Extra Example: The Economics of Bribery Managers of multinational firms often experience dilemmas when it comes to adjusting to the norms of foreign countries in which they operate. One especially difficult choice is whether or not to participate in bribery to get projects moving forward or to get approvals needed. According to a survey by Ernst & Young, 39 percent of businesses say that corruption is a common problem in the countries where they competed. Interestingly, the proportion of managers who believe it is justified to bribe an official to win business in difficult times rose from 9 percent in 2011 to 15 percent in 2012. From one perspective, this rise may be logical. One study looked at the costs and benefits of bribery and found some evidence that bribery pays off. This research found that firms who bribed public officials to win a contract, experienced positive returns for its shareholders to the effect of 10-11 times the cost of the bribe. However, the payoff may be short lived. A second study found that when firms faced a bribery enforcement action, the stock price of the firm dropped by 9 percent. Source: Anonymous, 2012. You get what you pay for. The Economist. June 2: 89.  Discussion Question 21: Are their situations where it is justified to bribe an official to win a contract? Does it make it more acceptable if it makes economic sense? Answer: Bribing an official is generally unjustifiable, as it undermines ethical standards, promotes corruption, and can lead to legal consequences regardless of economic benefits. Ethical business practices and compliance with laws should be prioritized over short-term gains. Even if it seems economically advantageous, bribery can damage a company's reputation, distort market competition, and perpetuate systemic corruption, ultimately harming broader societal and business interests. 1. Risks and Challenges As one might expect, there are some risks associated with a multidomestic strategy. These include: • Typically, local adaptation of products and services will increase a company’s cost structure. • At times, local adaptations, even well intentioned may backfire. • Consistent with other aspects of global marketing, the optimal degree of local adaptation evolves over time. EXHIBIT 7.7 summarizes the strengths and weaknesses of multidomestic strategies. E. Transnational Strategy Multinational firms following a transnational strategy strive to optimize the tradeoffs associated with efficiency, local adaptation, and learning. It seeks efficiency not for its own sake, but as a means to achieve global competitiveness. It recognizes the value of local responsiveness, but as a tool for flexibility in international operations. Also, a core tenet of the transnational model is that a firm’s assets and capabilities are dispersed according to the most beneficial location for a specific activity. We provide the perspective of Peter Brabeck, Nestle’s former Chairman. He points out both the multidomestic and global aspects of his firm’s strategy. It also illustrates whether or not to centralize or decentralize a value chain activity. Generally speaking, activities that are “downstream” (such as marketing and sales) tend to be decentralized because of the need to be closer to the customer. On the other hand, activities that are “upstream” (such as logistics and operations) tend to be centralized because there are generally few reasons to tailor them to local market conditions. We provide the example of ABB to illustrate the importance of leveraging knowledge flows between units — another key attribute of a transnational strategy. The SUPPLEMENT below discusses how the Cheesecake Factory strives to balance the needs for globalization and local market responsiveness in bringing its chain of restaurants to the Middle East.  Extra Example: The Cheesecake Factory – A Transnational Restaurant David Overton, the founder and CEO, of the Cheesecake Factory restaurant chain is a control freak. When trying out new recipes, he doesn’t rely on a focus group. He tastes them himself. He is adamant that a given food item should taste exactly the same at all of the chains’ restaurants. He attends all new openings to ensure that the customer experience is consistent across all locations. He had to adjust his mindset to successfully as he expanded his chain to the Middle East. He wanted the menu to remain the same. He wanted the food preparation to remain the same. But this was not entirely possible. The local market needs would not allow him to do it all the same. Working with M.H. Alshaya, a Kuwaiti store and restaurant operator, Overton found a way to balance the need for global consistency with local market responsiveness. The menu has stayed largely the same, but some adjustments had to be made to succeed in Islamic countries. Cocktails are out, but mocktails and a wide selection of bottled waters are in. Food preparation was changed to fit within Islamic dietary laws. At times, this resulted in the use of different ingredients, such as replacing pork bacon with a specially ordered type of beef bacon. It also involved changes in preparation techniques and kitchen rules. It involved training of the staff and changes to the menu to make sure that there were no misunderstandings about the food items. For example, before the training, it wasn’t clear to the wait staff that turtle cheesecake didn’t contain turtle. Similarly, the staff received training on what a luau was so that they had the spirit of a Polynesian party in mind when they prepared and presented a luau salad. Finally, the Cheesecake Factory had to alter its sourcing policies so that they met with the import laws of the countries in which it began operating. For example, food can only be imported to Lebanon if it comes directly from its country of origin. Overton believes that if you enter a Cheesecake Factory in the Middle East, you will see that it looks just like one in the U.S., and the food will taste the same as one back in the U.S., but he also knows that there have been a number of changes to meet the needs of his customers and the rules of the markets in which he operates. Source: Kowitt, B., 2012. The mystery company importing Americana to the Mideast. Fortune. 90-96.  Discussion Question 22: What are some other companies that have successfully maintained global efficiency and consistency while also tailoring some their operations to meet local needs? Answer: McDonald's successfully maintains global efficiency and consistency while tailoring its menu to local tastes, such as offering McSpicy Paneer in India and Teriyaki burgers in Japan. Coca-Cola uses standardized production and marketing strategies but adapts its flavors and packaging to local preferences. Unilever balances global brand consistency with local product variations, such as different formulations of Dove soap for various skin types. Starbucks standardizes its store design but customizes its product offerings to regional tastes and cultural preferences. 1. Risks and Challenges As with global and multidomestic strategies, there are some unique risks and challenges associated with transnational strategies: • The choice of a seemingly optimal location cannot guarantee that the quality and cost of factor inputs (i.e., labor, materials, etc.) will be optimal. Managers must ensure that the relative advantage of a location is actually realized, not squandered because of weaknesses in productivity and the quality of internal operations. • Although knowledge transfer can be a key source of competitive advantages, it does not take place “automatically.” It is important that business units and the headquarter office both recognize the potential value of such “know how.” • EXHIBIT 7.8 summarizes the relative advantages and disadvantages of transnational strategies. The SUPPLEMENT below addresses how Johnson & Johnson successfully implements elements of a transnational strategy. With transnational strategies, some value creating activities are centralized (usually upstream and support activities) and some value creating activities are decentralized (generally downstream activities). However, with decentralization, control and coordination become major challenges. The SUPPLEMENT below discusses how Johnson & Johnson has successfully dealt with this challenge.  Extra Example: J&J’s Decentralized Structure Johnson & Johnson today operates in 57 countries with 250 operating companies. How does one manage a company with so many different products and operations in so many different countries? Obviously, trying to concentrate all decision making authority at the New Brunswick, N.J., corporate office would create a huge bottleneck. So what is J&J’s solution? Decentralization. But at J&J, decentralization has been carried to an extent that most other companies would find impossible to replicate. Because of its extreme decentralization, the managing directors of operating companies have enormous freedom to run their businesses. But where do you find that many entrepreneurial managers to run its highly decentralized businesses? This is where management development plays a crucial part. Managers in their early years are rotated through different business segments systematically so that they become broadly developed. For example, Sheri McCoy, the incoming head of pharma, started in consumer R&D, and then served in the devices and diagnostics group before being promoted to the head of pharma. Decentralization of such a scale can potentially have two negative consequences. First, the corporate office can lose control. Second, efficiencies and scale advantages may be lost. How does J&J avoid these undesirable outcomes? They standardize processes in staff and support areas like procurement, human resources, and IT, but not in operations. The standardization of processes ensures control and cost reduction while decentralization facilitates operational freedom. Source: Colvin, G., & Shambora, J. 2009. J&J: Secrets of success. Fortune. May 4: 117-121.  Discussion Question 23: What are some of the control challenges J&J would face as they expand into more countries? Answer: As Johnson & Johnson expands into more countries, it faces control challenges such as maintaining consistent quality and compliance with diverse regulatory standards across different markets. Cultural differences can complicate management and integration, requiring adaptation of business practices. Coordination and communication become more complex with a larger, geographically dispersed workforce. Additionally, ensuring effective oversight and aligning global operations with corporate strategies can strain resources and require robust control mechanisms. F. Global or Regional? A Second Look at Globalization Full scale globalization may not be the best strategic move for many types of firms. Recent research indicates that most companies are regional or, at best, bi-regional rather than global. Considering the advances in communication why is this so? Several reasons are suggested: distance still matters, despite improved communications; trading blocs exercise power over regions; and regional integration occurs faster than global integration. The SUPPLEMENT below extends the discussion of the importance of regional growth in the overall globalization trend.  Extra Example: Growth in Regional Trade Fuels Global Expansion In his Harvard Business Review article “Regional strategies for global leadership,” Pankaj Ghemawat explains that regional strategies are not just a halfway measure between local strategies and global strategies but represent a unique set of strategies that leverage economic, cultural and administrative similarities to boost company performance. This is evidenced in part by the extent to which regional initiatives dominant cross-country activity during the second half of the 20th century. For example, increases in intraregional trade have outpaced global trade in Oceania and Asia for over forty years. In 1958, 35 percent of the trade in Asia and Oceania occurred between countries in that geographic region. By 2000, within-region trade exceeded 50 percent of the trade in the Asia-Oceania region. Globally, between 1958 and 2000, the amount of trade within regions increased from 47 percent to 55 percent. These and other statistics led Ghemawat to conclude that “increasing economic integration through international trade has been accompanied by increasing rather than decreasing regionalization” (p. 101). Source: Ghemawat, P. 2005. Regional strategies for global leadership,” Harvard Business Review, December: 97- 108. V. Entry Modes of International Expansion A firm has many options available to it when it decides to expand into international markets. EXHIBIT 7.8 depicts a variety of modes of foreign entry that include: exporting, licensing, franchising, strategic alliances, joint ventures, and wholly owned subsidiaries. As the exhibit indicates, these various types of entry form a continuum that ranges from exporting (low investment, low risk) to wholly owned subsidiaries (high investment and risk, high control). A. Exporting Exporting consists of producing goods in one country and selling them in another. This mode enables a firm to invest the least amount of resources in terms of product, its organization, and its overall corporate strategy. Not surprisingly, many host countries dislike this entry strategy because it provides limited opportunities for local employment. 1. Benefits Exporting has both advantages and disadvantages. Its advantages are that it is a low cost/risk way to enter foreign markets and it may provide the firm with local distributors who can help them benefit from their valuable expertise and knowledge of local markets. After all, multinationals must recognize that they cannot immediately master local business practices, meet regulatory requirements, hire and manage local personnel, and gain access to potential customers. 2. Risks and Limitations There are also some disadvantages associated with exporting. Firms have little ability to tailor their products to match the local market demands. Also, along with the lower cost/risk benefit comes less control. A firm’s exporting partner may carry lines that compete with the firm’s products and they may not be willing to share market information with the exporting firm. Furthermore, the exporting firm has little control over how their products are marketed or sold in the foreign market. We provide some insights from a study that explored factors that explained the differential rates of success that companies found in using distributors. The SUPPLEMENT below discusses Loctite’s (a specialty adhesives company) insights on selecting partners to distribute their product.  Extra Example: LOCTITE’S INSIGHTS ON THE SELECTION OF DISTRIBUTORS IN INTERNATIONAL MARKETS “We increasingly look for what we have come to call ‘company fit’ — a partner with a culture and a strategy we feel comfortable with, in terms of the investment they’ll make, the training they’ll give their people, and the support they’ll ask from us,” says the Loctite executive. “In many cases, this leads us to partners who have no experience with our market. The first couple of times, this felt risky, but our success with some of these partnerships made us bolder in choosing distributors.” In effect, this means bypassing the obvious choice — a distributor who has the right customers and can therefore generate quick sales — in favor of a partner with a greater willingness to invest and an acceptance of an open relationship that draws on the multinational’s experience in marketing its own products. Source: Arnold, D. 2000. Seven rules of international distribution. Harvard Business Review, 78 (6): 135.  Discussion Question 24: What are some examples of successful (or unsuccessful) exporting? Answer: Successful exporting examples include Apple, which effectively exports its iPhones globally, leveraging a strong brand and consistent product quality to capture significant market share. IKEA also excels by exporting its affordable, flat-pack furniture worldwide, adapting store formats and product lines to local preferences. Unsuccessful exporting examples include Target’s expansion into Canada, which faced logistical challenges and failed to adapt to local market conditions, leading to its exit. Similarly, PepsiCo’s “Pepsi Crystal” struggled globally due to a lack of differentiation and market acceptance. B. Licensing and Franchising 1. Benefits Licensing and franchising are both forms of contractual arrangements. Franchise contracts typically include a broader range of factors in an operation and have a longer period during which the agreement is in effect. Franchising has the advantage of limiting the risk exposure that a firm has in overseas markets while expanding the revenue base of the parent company. 2. Risks and Limitations The other side of the coin, of course, is that the multinational firm receives only a portion of the revenues in the form of franchise fees instead of the entire revenue — as would be the case if they set up the operation themselves (such as a restaurant) through direct investment. C. Strategic Alliances and Joint Ventures 1. Benefits Joint ventures and strategic alliances have become an increasingly popular way for firms to enter and succeed in foreign markets in recent years. These two forms of partnerships 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. 2. Risks and Limitations In Chapter 6 (corporate-level strategy) we addressed some of the major advantages and disadvantages of these forms of collaboration. In addition to the usual issues, cultural differences can create additional challenges in making strategic alliances and joint ventures work. In the SUPPLEMENT below, Rosabeth Moss Kanter provides an interesting perspective on cultural issues in strategic alliances.  Extra Example: Managing International Strategic Alliances “Managing international alliances makes cultural differences especially salient. But my research…on foreign acquisitions of domestic companies made clear that national cultural differences are often less important sources of problems than company style differences. Those involved in alliances and partnerships must respect diverse cultural traditions and values, whatever their source. They must deal with fuzzy social variables such as trust and reputation and soft skills such as empathy and understanding to build relationships of mutuality. These fuzzy intangibles are increasingly recognized as having value for economies as well as businesses. The economic prosperity of nations, regions, and communities benefit from stocks of “social capital” and trust in institutions.” Source: Kanter, R. M. 1999. Change is everyone’s job: Managing the extended enterprise in a globally connected world. Organizational Dynamics, 28(1): 21. We also discuss how some companies such as Lotus Corporation and Hewlett-Packard have carefully documented alliance-management knowledge by creating guidelines and manuals to help them manage specific aspects of the entire alliance cycle.  Discussion Question 25: What are some other examples of successful (or unsuccessful) strategic alliances and joint ventures? Answer: Successful strategic alliances include Starbucks and PepsiCo, which effectively partnered to distribute Starbucks products globally, leveraging PepsiCo’s distribution network. BMW and Toyota formed a successful joint venture for developing hydrogen fuel cell technology, combining expertise to advance innovation. Unsuccessful examples include Daimler-Chrysler, where cultural and strategic differences led to integration challenges and eventual divestiture. Google and Motorola Mobility faced difficulties in merging operations and strategic misalignment, resulting in Google selling Motorola to Lenovo. These cases highlight the importance of alignment and integration in strategic partnerships. D. Wholly Owned Subsidiaries A wholly owned subsidiary is a situation in which a multinational company owns 100 percent of the stock in the venue. There are two means by which a firm can establish a wholly owned subsidiary: acquisition of an existing company or developing a totally new operation, termed a “greenfield venture.” 1. Benefits Wholly owned subsidiaries are most appropriate when a firm already has the appropriate knowledge and capabilities that can be readily leveraged through multiple locations. We provide the example of Intel’s building of semiconductor plants overseas. Knowledge can be further leveraged by hiring managers and professionals from the home country. 2. Risks and Limitations While assuring the most control, wholly owned subsidiaries also are typically the most expensive and risky of the various modes of entry. Unlike strategic alliances and joint ventures, for example, the entire risk is borne by the corporation. The risks associated with doing business in a new country – such as the political, cultural, and legal nuances – may be mitigated by hiring local talent.  Discussion Question 26: What are some other examples of successful (or unsuccessful) wholly owned subsidiaries? Answer: Successful wholly owned subsidiaries include Apple’s operations in China, which have helped Apple maintain control over its supply chain and manufacturing processes, contributing to its market dominance. Google’s acquisition of YouTube has also been successful, allowing Google to expand its video services while fully integrating YouTube's operations. Unsuccessful examples include General Motors' attempt to manage its operations in India through its wholly owned subsidiary, which struggled due to market misalignment and competition, leading to the sale of the unit. Walmart’s venture into Germany also failed, as its wholly owned subsidiary faced challenges with local market practices and consumer preferences, resulting in an exit from the market. We close with STRATEGY SPOTLIGHT 7.8. It discusses the rather interesting and unique entry strategy (a joint venture with two Indian firms) that PepsiCo used to expand into India. I VI. Issue for Debate The case focuses on the selling of probiotic drinks to women in developing countries in Asia. Danone has found this to be a very lucrative business, but there is also an ethical issue here. Danone is promoting these products as having digestive health benefits in these markets even though regulators in the United States and Europe have determined that these claims are not supported by strong scientific evidence. Danone argued with regulators in Europe and the U.S. that there is scientific evidence in support of their probiotic drinks, but the regulators were not convinced and concluded that the weight of scientific evidence says these drinks do not offer digestive health benefits. As a result, Danone has been barred from making these claims in the United States, yet it still makes these claims in marketing the products to consumers in developing markets. The case is designed to elicit discussion on how firms respond to the different market and institutional environments when competing in multiple nations. Focusing on the case specifics, should Danone present a consistent global marketing message for its products, especially when it comes to health claims? Or is it acceptable for Danone to make stronger claims about its products in markets that have more lenient regulations regarding advertising? More generally, this issue can then be extended to other issues, such as product safety.  Discussion Question 27: Is Danone providing a product that may offer help to people who otherwise have no means to solve digestive problems, or are they simply misleading unsophisticated customers to make a profit? Answer: On one side, students may argue that Danone is just a greedy capitalist firm that will use whatever message it can to sell their products to naïve customers who are easily swayed and in great need of better nutrition and easy and inexpensive medical treatment. Since its products have no benefits, at least in the eyes of regulators, Danone is simply a modern day snake oil salesman taking advantage of unsophisticated customers. On the other hand, some students to argue that these claims are not unethical since Actimel has some benefits and is, in no way, harmful. Even if the digestive benefits of Actimel and similar products are modest, any benefits are likely important to customers who would not otherwise get any health advice or treatment to help solve their digestive problems. Additionally, since these are yogurt products, they will offer some health benefits to most customers since they are high in calcium, protein, and important vitamins and minerals. The students who see this as an appropriate action may also argue that Danone may truly believe in the digestive benefits of its products and that the U.S. and European regulators’ decisions were misguided. Thus, Danone may believe that its health claims are justified and that the marketing is appropriate. Successful wholly owned subsidiaries include Apple’s operations in China and Google’s acquisition of YouTube, both of which facilitated market control and strategic integration. Unsuccessful examples are General Motors in India and Walmart in Germany, where market misalignment and local challenges led to operational difficulties and eventual exits.  Discussion Question 28: Is it ethical to use a marketing claim that has been deemed unjustified by regulators in developed countries to sell products in developing markets? Answer: This question may trigger strong reactions from students. Some may argue that human rights are universal, and corporations have used different rules for different markets, often at the expense of workers and customers in developing markets. Students may bring in (if not, you can bring in) troubling events, such as Nike’s and Apple’s suppliers and their treatment of workers in plants in China, Pakistan, and other countries. From this perspective, it is important for firms to have global ethical standards that insure that the firm’s stakeholders are treated fairly. One way to insure fair treatment is to have the firm look to an outside agency to assess its behavior. For example, Home Depot uses an outside group to ensure that its lumber suppliers use sustainable timber practices. Thus, students could argue that Danone should use the regulators’ ruling as an objective standard it will apply across all markets. Students may also argue that the burden of proof for their claims should be high for Danone since it is selling to unsophisticated customers. On the other hand, students may argue that Danone is simply tailoring its marketing to match the conditions in the markets in which it is competing. Since the regulatory standards for marketing are low in India and other Asian markets, Danone is simply competing by the rules in these markets. Making strong marketing claims may be necessary to succeed in these markets since the native competitors are likely to make strong health claims, and customers have likely come to expect such claims. Thus, Danone would leave itself at a strong competitive disadvantage in these markets if it followed the standards set by U.S. and European regulators. No, it is unethical to use a marketing claim deemed unjustified by regulators in developed countries to sell products in developing markets. This practice exploits regulatory gaps, misleads consumers, and undermines trust and fairness in the marketplace.  Discussion Question 29: Should there be consistent or varying standards for product design and marketing in developed and developing markets? For example, would you expect the safety features in a car in India to be the same as in Europe? Answer: This question is designed to elicit a discussion of how firms balance the desire for global consistency but also responding to the needs and level of development of different markets. In the example here, it is likely nearly impossible for a firm competing in the Indian car market to include all of the safety features of a car sold in Germany. It would make the car too expensive for the Indian market. At the same time, an automotive firm would not want to produce an unsafe car in India since any scandals regarding product safety in one country easily spill over and damage the firm’s reputation in other countries. Thus, firms need to strike a balance between global consistency and local responsiveness on issues such as product safety. Also, since European car manufacturers have experience with high safety standards, it may be to their benefit and put the native manufacturers at a disadvantage if the European manufacturers successfully lobby for higher safety standards in India.  VII. Reflecting on Career Implications Below, we provide some suggestions on how you can lead the discussion on the career implications for the material in Chapter 7.  International Strategy: Be aware of your organization’s international strategy. What percentage of the total firm activity is international? What skills are needed to enhance your company’s international efforts? How can you get more involved in your organization’s international strategy? For your career, what conditions in your home country might cause you to seek careers abroad? The goal of this reflection is to raise students’ awareness of the international scope of their firms’ operations, and how it may affect their careers. Students may not be aware of their firms’ international activity, and therefore instructors may have to provide an example from a well known-firm. Specific data are not really needed. The first step would be to describe what is meant by “total firm activity” that is foreign. Ask students what foreign activity is. Perhaps it refers to percent of sales in foreign markets, or percent of inputs obtained from abroad, or percent of new investments in foreign countries, or percent of competitors that are from foreign countries, or percent of stock owned by foreign residents. There are a great many ways that firms can be involved in international activity. The implication for students’ careers is that there is much more to managing in an international environment than taking a foreign assignment. During their careers, students are likely to negotiate supply contracts with foreigners, conduct competitor analysis of foreign firms, and deal with foreign shareholders. Much of the future business world is likely to be international. In this international environment, students may have to develop a range of new skills. Ask students what these skills may be? They are likely to include more than language skills. Cultural awareness, international geography, and establishing intercultural interpersonal relationships come to mind. These skills will take time and effort to for managers to develop. The point here is to increase students’ awareness of the human capital requirements for the international business environment. Can students have a domestically focused career? Ask students which ones plan to avoid the international business environment during their careers. For students who see their careers as involving foreign operations, ask how they plan to get involved. Taking a foreign assignment or handling a foreign account are possibilities. The sooner the students take these positions, the steeper their learning curve. There is much to learn, and these internationally-focused students will get a head start. For the domestic students, instructors can remind them that foreign investment in the US is increasing, as is trade as a percent of GNI. Why is the economy becoming international? Reasons include the need for low cost supplies, improved international trade, travel, communications, and financial infrastructures, and the growth of multinational corporations. The economy is becoming more international, and even “domestic” firms may be impacted.  Outsourcing and Offshoring: More and more organizations have resorted to outsourcing and offshoring in recent years. To what extent has your firm engaged in either? What activities in your organization can/should be outsourced or offshored? Be aware that you are competing in the global marketplace for employment and professional advancement. What is the likelihood that your own job may be outsourced or offshored? In what ways can you enhance your talents, skills, and competencies to reduce the odds that your job may be offshored or outsourced? Outsourcing and offshoring have been described in the chapter, as well as the conditions under which firms will engage in them. The goal of this discussion is to make the trends more relevant to students’ careers. It would be nice if there were some students who worked for large organizations that have a large involvement in international outsourcing and offshoring. If this were not the case, then instructors can refer to a typical Fortune 500 firm. Now ask students if their jobs could be outsourced. Could foreigners do their jobs for less money? Given that firms have the option to outsource and offshore a growing variety of positions, how can students reduce the chance that their jobs get done by foreigners? In the discussion, it may be relevant to refer to the resource-based view of students’ skills and capabilities. How can students make their skills rare, valuable, costly to imitate, and costly to substitute? In the discussion, note that technical skills, such as financial or accounting analysis, may be vulnerable. Less vulnerable are skills that are embedded in the firm’s social system. Linking the discussion to the types of nuanced and complex capabilities that result from experience may be relevant.  International Career Opportunities: Taking on overseas assignments in other countries can often provide a career boost. There are a number of ways in which you can improve your odds of being selected for an overseas assignment. Studying abroad for a semester or doing an overseas internship are two obvious strategies. Learning a foreign language can also greatly help. Anticipate how such opportunities will advance your short- and long-term career aspirations. One way to approach class discussion on this issue is to discuss the issue of moving. Some students may have moved away from home in order to go to college. Others may have travelled abroad for a period of 6 months or more. The experiences of international students may also be relevant. The point is that such moves are difficult. They involve loneliness, hardships, and personal adjustment challenges. However, there are benefits too. Learning to deal with moving can improve students’ intercultural capabilities, ability to be effective in international management, and therefore add value to their firms. The point is to suggest to students that experiences such as long-term travel, study abroad, or other international opportunities have merit and should be considered.  Management Risks: Explore ways in which you can develop cultural sensitivity. Interacting with people from other cultures, foreign travel, reading about foreign countries, watching foreign movies, and similar activities can increase your cultural sensitivity. Identify ways in which your perceptions and behaviors have changed as a result of increased cultural sensitivity In today’s global culture, many students may already be exposed to international culture. To get them to appreciate this exposure, instructors can ask students about their activities such as visiting websites about foreign places; watching foreign-based media such as British television, Asian movies, and interviews with foreigners; and friendships with foreigners. Are they aware of the US debate on immigration policy? Can students appreciate the challenges facing foreign nationals who are trying to succeed? It may also be useful to ask students to put themselves in the place of a foreigner. Can they understand what it feels like to be an “outsider” in a foreign country? Usually, some students in class will relate to these issues and can identify how they have changed as a result of these activities that increase cultural sensitivity. A useful method for bringing out some of the issues may be to have an extended discussion of the US immigration policy debate. Should there be an alternative “path to US citizenship”?  VIII. Summary We live in a highly interconnected global community where many of the best opportunities for growth and profitability lie beyond the boundaries of a company’s home country. Along with opportunities, of course, there are many risks associated with diversification into global markets. The first section of the chapter addressed the factors that determine a nation’s competitiveness in a particular industry. The framework was developed by Professor Michael Porter of Harvard University and was based on a four-year study that explored the competitive success of 10 leading trading nations. The four factors, collectively termed the “diamond of national advantage,” were factor conditions, demand characteristics, related and unrelated supporting industries, and firm strategy, structure, and rivalry. The discussion of Porter’s “diamond” helped, in essence, to set the broader context for exploring competitive advantage at the firm level. In the second section, we discussed the primary motivations and the potential risks associated with international expansion. The primary motivations included increasing the size of the potential market for the firm’s products and services, achieving economies of scale, extending the life cycle of the firm’s products, and optimizing the location of every activity in the value chain. On the other hand, the key risks included political and economic risk, currency risks, and management risks. Management risks are the challenges associated with responding to the inevitable differences that exist across countries such as customs, culture, language, customer preferences, and distribution systems. We also address the emerging trend of outsourcing and offshoring. Next, we addressed how firms can go about attaining competitive advantage in global markets. We began by discussing the two opposing forces — cost reduction and adaptation to local markets — which managers must contend with when entering global markets. The relative importance of these two factors plays a major part in determining which of the four basic types of strategies to select: international, global, multidomestic, or transnational. The chapter covered the benefits and risks associated with each type of strategy. The final section discussed the four types of entry strategies that managers may undertake when entering international markets. The key trade-off in each of these strategies is the level of investment or risk versus the level of control. In order of their progressively greater investment/risk and control, the strategies range from exporting to licensing and franchising, to strategic alliances and joint ventures, to wholly owned subsidiaries. The relative benefits and risks associated with each of these strategies are discussed. Chapter 7: International Strategy: Creating Value in Global Markets The United States is widely regarded as the world’s leader in the entertainment industry (i.e., movies, music, etc.). Explain the United States’ success in this industry by using Porter’s Diamond of National Competitiveness. Teaching suggestions: (We analyze the Indian software industry in Strategy Spotlight 7.2 and Exhibit 7.2.) Answers for this question can be quite wide-ranging depending on the students’ knowledge relating to this industry. One possible answer is given below: The position of the United States as the world’s leader in the entertainment industry can be understood in terms of the following four broad attributes of the nation that individually, and as a system, constitute “the diamond of national advantage” for this industry. Factor conditions: The United States has one of the world’s most highly skilled manpower and infrastructure in this industry. There are several universities offering high-level programs in film production, music and other forms of entertainment. Hollywood is the world’s most regarded place for film production and this has occurred as a result of decades of investments made towards that end. Access to capital for investment is another factor that contributes to competitive success in this industry. Perhaps the most critical is the copyright law that is so stringent. Such copyright protection encourages investments in creating high quality entertainment. A weak copyright protection regime would not leave much incentive for the artists or the producers to invest in creating ‘masterpieces.’ This is because they would not be able to appropriate the value created if the CDs or the movies created are copied and distributed freely like it happens in some other countries. Demand conditions: One of the key reasons for the sophistication in the entertainment industry is the existence of very sophisticated consumers who demand high quality entertainment. By the very culture that encourages individualism, people do not hesitate having the best entertainment that they deserve. It would be surprising for many international students that there are courses offered in the US universities on how to be sophisticated movie-goers. This is an example to show the kind of the customers in the United States as far as entertainment is concerned. Such demanding customers put pressure on the industry to deliver high quality products and thus it enhances the industry’s world standing. Related and Supporting Industries are also very well developed. Suppliers are highly sophisticated and thus production costs can be kept low. Components such as DVDs, graphics computers, digital imaging equipment, and suppliers of talent are in abundance. Firm strategy, structure and rivalry: There is intense competition in this industry and there is also a high potential for entry from related industries. Domestic rivalry thus promotes higher levels of innovation for gaining competitive advantages over one another. High domestic rivalry in this industry is certainly an indicator of global competitive success. Also, the creation, organization and management of companies are much easier in the United States whose culture encourages entrepreneurial firms and has favorable bankruptcy laws. Therefore, any group of talented individuals can come together and form a company much more easily in this country than many other countries in the world. All of these attributes of the United States create its ‘national competitive advantage’ in the entertainment industry. End of Chapter Teaching Notes Chapter 7: International Strategy: Creating Value in Global Markets Summary Review Questions 1. What are some of the advantages and disadvantages associated with a firm’s expansion into international markets? Response: Firms that expand internationally can gain revenue from selling abroad, can lower transportation and input costs by producing near those markets, and access knowledge from human capital worldwide. If managed effectively, know-how from various countries can be combined efficiently to form new sustainable competitive advantages. The international environment offers world-class suppliers, human resources, technology, and customers. The disadvantages include the challenges of dealing with governments that do not have business-friendly policies, with populations that are poor and illiterate, and with countries that do not have infrastructure or stable currencies. In addition, expansion internationally may subject firms to competition, which is both an advantage and a disadvantage. It is a disadvantage because competition may hurt profits in the shot-term. In the longer term, though, competition spurs firms to improve technology, products, services, and productivity, and therefore long-term survival prospects. Answer: Advantages of international expansion include access to new markets and revenue streams, increased economies of scale, and diversified business risks. Disadvantages can involve cultural and regulatory challenges, higher operational costs, and increased complexity in managing global operations. 2. What are the four factors described in Porter’s diamond of national advantage? How do the four factors explain why some industries in a given country are more successful than others? Response The four factors are 1) factor endowments, 2) demand conditions, 3) related and supporting industries, and 4) firm strategy, structure, and rivalry. Together, these four factors, individually and collectively, indicate the ability of a nation to foster globally competitive firms. Porter developed his model through analysis of more than 100 industries, and these four factors characterized countries with globally competitive industries. For example: • Countries with highly educated and skilled labor forces will tend to foster firms that are globally competitive in manufacturing. (ex. The Japanese automobile industry). • Countries with sophisticated consumers will tend to foster globally competitive firms that cater to consumer sensitivities (ex. Danish firms in water pollution controls). • Countries with clusters of advanced related and supporting industries will foster successful companies in products that involve integration of multiple inputs (ex. The Italian footwear industry). • Countries with highly developed rivalries among domestic firms will foster globally competitive firms (ex. The U.S. information technology industry). Answer: Porter's diamond of national advantage includes factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. These factors explain industry success by highlighting how a country's resources, market demands, supportive industries, and competitive dynamics create a conducive environment for competitive advantage. 3. Explain the two opposing forces—cost reduction and adaptation to local markets—that firms must deal with when they go global. Response: As firms go global, they gain an ability to reduce costs by exploiting economies of scale, reducing costs of research and development, extending the product life cycle, and locating operations optimally. Especially for firms that follow a cost leadership strategy, going global may be necessary to compete. Achieving these cost advantages increases to the extent that firms can standardize products and services across countries and consolidate operations into large, global-scale facilities. On the other hand, as firms go global they face a number of country-specific risks. These risks include political risk, economic risk, currency risks, and management risks. These risks usually imply that it is necessary to adapt firm operations to each country. Therefore, international firms will be limited in the extent they can standardize operations across countries and achieve low costs. Therefore, what firms tend to do is to adopt some mix of operations. In some ways they are standardized and efficient. In other ways they are unique to each country. The result is often captured in the phrase “Think global, act local.” We look at some of the relevant strategies below. Answer: Firms going global face the opposing forces of cost reduction and adaptation to local markets. Cost reduction aims for economies of scale and efficiency through standardized processes and global sourcing. In contrast, adaptation requires customizing products and practices to meet local consumer preferences and regulatory requirements, potentially increasing costs but improving market fit. Balancing these forces involves finding an optimal strategy that leverages global efficiencies while catering to local needs. 4. There are four basic strategies—international, global, multidomestic, and transnational. What are the advantages and disadvantages associated with each? Response: The four strategies are presented in Exhibit 7.4 on p. 258. Firms with international operations will be in industries that face two pressures, one for local adaptation and one for lower costs. An international strategy faces low pressures for local adaptation and low pressures for lower costs. A global strategy faces low pressures for local adaptation and high pressures for lower costs. A multidomestic strategy faces high pressures for local adaptation and low pressures for lower costs. And a transnational strategy faces high pressures for local adaptation and high pressures for lower costs. International strategies require minimal effort by firms to either adapt operations to national markets or to reduce costs. However, there is a tendency for firms in these industries to centralize operations in the home country. The advantages of this strategy are that firms incur few costs to expand internationally. The disadvantages are that firms may not locate operations optimally due to the home country preference, and that foreign customers may feel neglected. Global strategies face high pressures for lower costs and low pressures for local adaptation. Usually, firms exploit scale economies, standardize products and processes, reduce costs throughout the value chain, locate activities in cost minimizing locations, and centralize decision-making. The advantages of a global strategy include barriers to entry in the form of large-volume plants and efficient distribution networks. Another advantage is that firms can set global quality standards that other firms must follow. The disadvantages include inflexibility to pursue revenue opportunities because of the focus on large volume markets. Having few large plants, often linked vertically with the output from one plant being the input of another plant in another country, makes the firm vulnerable to political risk, tariffs and transportation costs. In addition, production may be isolated from markets by geographic distance, and the location decision, if sub optimal, can be very costly. Multidomestic strategies face high pressures for local adaptation and low pressures for lower costs. Operations tend to be decentralized and dispersed across national markets. The advantages are that firms can maximize revenue by adapting products and marketing to various national markets. The disadvantages of this strategy include the increased costs involved in adapting products to markets – economies of scale cannot be realized. Adapting products to national markets also is an imperfect art, and mistakes sometimes occur. In addition, it is difficult to determine the optimal level of adaptation. Transnational strategies face both high pressures for local adaptation and for lower costs. Operations tend to reflect a mix of centralization, for upstream activities, and decentralization, for downstream activities close to the customer. The organization is flexible in order to respond to various changes in the competitive and general environment. The advantages of this strategy are that the firm can respond to customer requirements and keep costs manageable. Operations can be located optimally, and knowledge and learning can be transferred throughout the organization. The disadvantages include the risks of choosing locations sub optimally. And knowledge transfer is difficult to manage given the dispersed decision-making and national cultural differences. Answer: International strategy offers simplicity and control but may lack local responsiveness. Global strategy provides cost efficiency through standardization but can miss local market nuances. Multidomestic strategy allows for strong local adaptation but can lead to higher costs and inefficiencies. Transnational strategy balances global efficiency with local responsiveness but is complex to implement and manage. 5. What is the basis of Alan Rugman’s argument that most multinationals are still more regional than global? What factors inhibit firms from becoming truly global? Response: Rugman and Verbeke found that very few firms were truly global. Rather, they tended to concentrate their sales in their home region – North America, Europe, or Asia. The reasons for this concentration probably are that distance matters. It is easier to do business and compete effectively in neighboring countries than far away ones. And distance is measured in miles but also in cultural distance. Another reason for firms to prefer doing business with neighbors is the rise of regional economic integration. Trading blocs such as the European Union and NAFTA make it easier to integrate operations within the bloc than between blocs. Answer: Alan Rugman argues that most multinationals are more regional than global due to their regional focus on specific markets that align with their core competencies and strategic interests. Factors inhibiting true global expansion include cultural differences, regulatory barriers, logistical complexities, and high costs associated with managing diverse global operations. These challenges often lead firms to concentrate on regional markets where they can leverage existing strengths and resources more effectively. 6. Describe the basic entry strategies that firms have available when they enter international markets. What are the relative advantages and disadvantages of each? Response: The basic entry modes are ways for firms to expand into international markets. They include exporting, licensing and franchising, strategic alliances and joint ventures, and wholly owned subsidiaries. Exporting is the least expensive method. The disadvantages of exporting are that the firm can’t customize products to meet local needs, is dependent on a foreign distributor, and unless there are incentives for the distributor to effectively promote the exporter’s product, the relationship is not likely to be adequate. Licensing and franchising are contractual arrangements where a foreign partner pays a royalty or fee in exchange for the right to use a firm’s intellectual property (patent, copyright, trademark, or trade secret). The advantages are that the firm does not have a large investment and does not have to have operations in the foreign market. The disadvantages are that the partner can appropriate the intellectual property. The firm has to share a portion of revenues with the partner. And because the firm has limited exposure to the foreign market, opportunities for it to learn from its foreign customers and from the foreign market are limited. Strategic alliances and joint ventures are cooperative agreements where a firm would work with a partner, usually a firm from the foreign country, to market its products. The firm would offer the product and technical expertise while the partner would offer marketing expertise. Usually, the goal of each partner is to learn from the other. The advantages are the effectiveness of enhancing learning and revenues, relative to licensing and franchising, as well as sharing of risks. As a result, firms can gain new core competencies and competitive advantages. The disadvantages are that the partners can work at cross-purposes, which would be the result of not agreeing to the goals of the collaboration. The partners must have a clear idea of what each contributes to the collaboration in order to allocate sufficient resources. The partners may not develop sufficient trust in each other, which can lead to various types of malfeasance. Lastly, international partnerships face the problem of dealing with cultural differences, which can lead to poor communication and misunderstanding. Wholly owned subsidiaries are foreign operations that are 100% owned by the expanding firm. The advantages are that the firm retains all revenue from operations and has full control over intellectual property and quality standards. The disadvantages are the expense and time involved in setting up operations. The firm has to make the necessary investments to learn how to deal with government, customers, and other players in the market. Answer: 1. Exporting: • Advantages: Low investment and risk, quick market entry. • Disadvantages: Limited control over market operations, potential trade barriers. 2. Licensing: • Advantages: Low investment, access to local expertise, and revenue from royalties. • Disadvantages: Limited control over operations and quality, potential for creating future competitors. 3. Franchising: • Advantages: Rapid expansion with lower investment, leveraging local franchisee knowledge. • Disadvantages: Less control over franchisee operations, potential brand inconsistency. 4. Joint Ventures: • Advantages: Shared risk and resources, access to local partner’s market knowledge. • Disadvantages: Potential for conflict with partners, shared control may limit strategic flexibility. 5. Wholly Owned Subsidiaries: • Advantages: Full control over operations, complete integration with global strategy. • Disadvantages: High investment and risk, complex and costly to manage. Experiential Exercise The United States is considered a world leader in the motion picture industry. Using Porter’s diamond framework for national competitiveness, explain the success of this industry. Response: Some relevant considerations are: Factor endowments: • Developed talent from the existing movie industry • Talent is easily allocated to new projects, and not tied to studios with long-term contracts • Supply of graduates in the fine arts • Wide variety of geographical scenery Demand conditions: • Large home market • Market is highly educated and sophisticated, difficult to satisfy Firm strategy, structure, and rivalry • Multiple studios competing in the industry, including foreign-owned studios • Substitute forms of entertainment are available such as online gaming • Government support does not distort the competition Related and supporting industry • Well developed network of firms providing computer animation, set construction, financing and other support • High level of innovation and competition among the supporting industries Answer: Using Porter’s diamond framework, the success of the U.S. motion picture industry is driven by strong factor conditions (advanced technology and skilled talent) and demand conditions (a large, diverse domestic market). Additionally, related and supporting industries (such as tech and media) and firm strategy, structure, and rivalry (intense competition and innovation) further contribute to its global leadership. Application Questions Exercises 1. Data on the “competitiveness of nations” can be found at www.imd.ch/wcy/ranking/ . This website provides a ranking on a variety of criteria for 59 countries. How might Porter’s diamond of national advantage help to explain the rankings for some of these countries for certain industries that interest you? Response: IMD publishes the World Competitiveness Yearbook (WCY) in May of each year. Its methodology uses variables in 4 categories: economic performance, government efficiency, business efficiency, and infrastructure. Students probably can find linkages between each category of competitiveness and each part of Porter’s diamond. Some of the stronger relationships might include the following. Economic performance links closely to demand conditions, as stable prices reduce distortions in consumer’s decisions, and trade allows firms to sell to foreign markets. Another link is with firm strategy, structure and rivalry, as international investment enables foreign competitors to establish operations and compete. Government efficiency links closely with firm strategy, structure and rivalry, as a major focus of these measures is the government competitiveness policy. An argument could also be made for related and supporting industries, as competition within those industries is important in the diamond. Business efficiency relates strongly to firm strategy, structure, and rivalry. It includes measures of attitude and values, which relate to this part of the diamond. The measures for labor market also suggest a strong link to factor conditions. Note that many of the measures in this area pertain to outcomes or results of national competitiveness, not necessarily explanations. Infrastructure relates strongly to factor conditions. Answer: Porter’s diamond of national advantage helps explain rankings by highlighting how factor conditions (such as skilled labor and infrastructure), demand conditions (domestic market size and sophistication), related and supporting industries, and firm strategy and rivalry drive competitiveness. For example, countries with strong technological infrastructure and skilled labor might rank higher in tech industries, while those with robust local demand and innovative firms excel in consumer goods sectors. 2. The Internet has lowered the entry barriers for smaller firms that wish to diversify into international markets. Why is this so? Provide an example. Response: The Internet enables firms to take orders from anywhere in the world. Also, customers can use the Internet to collect information on products made anywhere in the world, compare product features, and prices. So, firms are more able to export to foreign markets without first establishing large promotional campaigns. Even when firms have a sales office, warehouse, or production facility abroad, the Internet can help facilitate sales through providing information, taking orders, and payments. The Internet is also an advertising medium and method for providing product support and after sales service. So in a nutshell, the Internet greatly reduces the costs of expanding to international markets, making it more affordable. (Note to instructors) Students may offer a number of very good examples. For each, ask students to identify the entry barrier to small firms that is lowered. Also, ask students how effective the Internet is likely to be at reducing this barrier. Note the lesson we learned from the bursting of the dot.com bubble in 2000, a physical presence is still beneficial in many industries. Answer: The Internet lowers entry barriers by providing cost-effective marketing and distribution channels and enabling global reach with minimal investment. For example, Etsy allows small craft and vintage sellers to access international markets directly, reducing the need for traditional distribution networks and costly market entry strategies. 3. Many firms fail when they enter into strategic alliances with firms that link up with companies based in other countries. What are some reasons for this failure? Provide an example. Response: Most failures relate to lack of understanding and trust in the working relationships between the two organizations. Cultural differences are often at the heart of the problems, but contributory factors include lack of understanding between the partners as to the goals of the alliance and lack of investment of corporate resources into the alliance. (Note to instructors) The examples are very useful for getting students to understand the process by which many international strategic alliances fail. Each failure is a unique story that often results from complex processes that most students do not have the life experience to understand. The press reports often lack sufficient detail for students to understand why the alliances fail. So it is often useful to go into some depth in class discussions to understand why these alliances fail. We suggest that you use the analogy of a marriage or steady relationship that breaks up. Ask students why some relationships break up. Then apply the reason to an interfirm alliance. Usually, the reasons include misunderstanding, lack of trust, or unfaithfulness. Misunderstanding is analogous to failure of partners to agree on goals. Lack of trust is analogous to the alliance case. Low trust leads to less commitment to the alliance and less investment of necessary resources to make the alliance successful. And unfaithfulness is analogous to a strategic redeployment of assets to either compete with the alliance or to establish another partnership with a competitor. And similar to interpersonal relationships, perceptions of problems lead to real problems. Answer: Firms often fail in international strategic alliances due to cultural differences, misaligned goals, and communication barriers. For example, the alliance between Walmart and Bharti Enterprises in India struggled due to mismatched business practices and market strategies, leading to operational challenges and ultimately Walmart’s exit from the Indian market. 4. Many large U.S.-based management consulting companies such as McKinsey and Company and the BCG Group have been very successful in the international marketplace. How can Porter’s diamond explain their success? Response: Looking at management-consulting as an industry, and applying Porter’s diamond, is one way to respond to the question. The U.S. management consulting industry has many firms that compete vigorously. The competition hones their capabilities. So, firm strategy, structure and rivalry is strong. For factor conditions, the U. S. has an abundance of human capital, which is refreshed by a healthy education system and an influx of experienced executives from the fluid labor market. For demand conditions, the U. S. has a good supply of large corporations that use management consultants. For related and supporting industries, the U.S. has healthy industries in the service sector including accounting, economics research, occupational therapy, and management education. These observations suggest that the U.S. has a strong position in the diamond, which in turn suggests that the management-consulting industry will be strong in the U.S. Answer: Porter’s diamond explains their success through strong factor conditions (access to top talent and advanced analytical tools) and demand conditions (high demand for consulting services from multinational corporations). Additionally, related and supporting industries (such as finance and technology) and firm strategy and rivalry (intense competition driving innovation) contribute to their global success. Ethics Questions 1. Over the past few decades, many American firms have relocated most or all of their operations from the United States to countries such as Mexico and China that pay lower wages. What are some of the ethical issues that such actions may raise? Response: Relocating operations to cost efficient locations is characteristic of the global strategy and, to a lesser extent, the transnational strategy. As with any such restructuring, relocations may be unfair to the individuals in the U. S. who lose their jobs, to the communities in the United States that are adversely affected, and to the corporation as a whole. For individuals, ethical concerns would be related to the suffering from loss of income. To limit this suffering, firms can give adequate severance pay, training, and opportunity for individuals to find other jobs. For the local community, the local economy is often hurt by the relocation. The livelihood of many can be affected. To limit this loss, the firm can take certain measures such as phasing out operations gradually so that the local economy can adjust, selling the operations to another firm, or government agency, which will bring replacement jobs to the local economy. The transition is likely to be fairer if the local community is a recognized stakeholder in the firm’s board of directors. For the firm, the relocation can hurt the firm’s reputation. As a result, sales could be affected, unions or other groups could take legal and political actions against the firm. Firms should be aware of these costs and take measures to minimize the loss through negotiation and compensation of various types. The potential costs should be matched by potential gains from the relocation, or else firm value will be eroded. Answer: Relocating operations to lower-wage countries raises ethical issues such as exploiting lower labor standards and displacing domestic workers, which can contribute to job losses and economic inequality in the home country. Additionally, it may involve supporting poor working conditions and inadequate labor rights in host countries. 2. Business practices and customs vary throughout the world. What are some of the ethical issues concerning payments that must be made in a foreign country to obtain business opportunities? Response: Payments to obtain business opportunities are not necessarily unethical. For example, in the U.S. firms must be chartered and have a license to do business. These governmental approvals require payments. The problem is when such payments are not transparent, and where they are a means for government officials, or other powerful group, for self-enrichment. These payments tend to be of different amounts for different firms, so they are unfair. And the payments go to individuals and not the system, so the business infrastructure and government do not benefit from the payments. In addition, payments to individual officials are illegal under the U.S. Foreign Corrupt Practices Act (FCPA). Firms that make such payments are subject to legal action and fines under the Act. Answer: Ethical issues concerning payments in foreign countries include bribery and corruption, which undermine fair competition and exploit regulatory gaps, and unethical facilitation payments, which may perpetuate systemic corruption and harm local economies. Solution Manual for Strategic Management: Creating Competitive Advantages Gregory G. Dess, Alan Eisner, G.T. (Tom) Lumpkin, Gerry McNamara 9780077636081, 9781259245558