CH-5-6 Strategic Management in the Multinational Company: Content and Formulation – Multinational Management: A Strategic Approach : Chapter Notes

This Document Contains Chapters 5 to 6 CHAPTER 5 STRATEGIC MANAGEMENT IN THE MULTINATIONAL COMPANY: CONTENT AND FORMULATION Learning Objectives •Define the generic strategies of differentiation and low cost •Understand how low-cost and differentiation strategists make money •Recall multinational examples of the use of the generic strategies •Understand competitive advantage and the value chain and how they apply to multinational operations •Understand how multinational firms use offensive and defensive strategies •Understand the basics of multinational diversification •Understand how to apply the traditional strategy formulation techniques, industry, and competitive analysis to the multinational company •Realize that the national context affects both the convergence and divergence in the strategies used by multinational companies Basic Strategic Content Applied to the Multinational Company •Strategy – the central, comprehensive, integrated, and externally oriented set of choices of how a company will achieve its objectives •A strategy needs to address important areas: •Which business a company wants to be in •What the company will use to create presence in a market •How the company will win customers •For MNCs, a major question is which country to enter at what time or what products to produce •Multi companies use many of the same strategies practiced by domestic companies Competitive Advantage and Multinational Applications of Generic Strategies •Generic strategies – ways that both domestic and multinational companies keep and achieve competitive advantage •Competitive advantage – when a company can outmatch its rivals in attracting and maintaining its targeted customers •Two primary generic strategies •Differentiation strategy – strategy based on finding ways to provide superior value to customers o Exceptional product quality, unique product features, or high quality service •Low cost strategy – producing products or services equal to those of competitors at a lower cost o Lower cost by increasing efficiency – quality level acceptable to customers is not sacrificed How Do Low-Cost and Differentiation Firms Make Money? •Differentiation: people will often pay a higher price for the extra value of a superior product or service •Low cost: products or services similar to competitors in price and value yield additional profits from cost savings Exhibit 5.1 Costs, Prices, and Profits for Differentiation and Low-Cost Strategies (Shows how the relationships among costs, prices, and profits work for the differentiator and the low-cost strategists, compared to the average competitor) •Focus strategy – applying a differentiation or low-cost strategy to a narrow market •Competitive scope – how broadly a firm targets its products or service o Companies with narrow competitive scope may focus on limited products, certain types of buyers, or specific geographical areas o Companies with broad competitive scope may have many products targeted at a wide range of buyers Exhibit 5.2 Porter’s Generic Strategies (Shows the four subdivisions of Porter’s generic strategies, including the basic differentiations and cost-leadership strategies with their broad-market or narrow-market options) Competitive Advantage and the Value Chain •A firm can gain competitive advantage by finding sources of lower cost or differentiation in any of its activities •Value chain – all the activities that a firm uses to design, produce, market, deliver, and support its product Exhibit 5.3 Value Chain (Shows a picture of a value chain) •Value chain – Primary and Support activities •Primary activities involve the physical actions of creating (or serving), selling, and providing after-sale service of products o Upstream refers to early activities in the value chain, such as R&D and dealing with suppliers o Downstream refers to later value chain activities, such as sales and dealing with distribution channels •Support activities include systems for human resources management, organizational design and control, and a firm's basic technology •Value chain enables companies to determine its internal cost structure to for benchmarking efficiency against industry or other competitors •Outsourcing – the deliberate decision to have outsiders or strategic allies perform certain activities in the value chain •About half of U.S. manufacturing jobs will be outsourced to more than 28 emerging countries over the next 10 years •In general, outsourcing makes sense if an outsider can perform a value-chain task better or more cheaply •Tasks that are crucial to the company’s ability to achieve competitive advantage should not be outsourced Distinctive Competencies •Distinctive competencies – strengths that allow companies to outperform rivals •Distinctive competencies come from two major sources •Resources – inputs into the production or service processes (tangible or intangible) •Capabilities – the ability to assemble and coordinate resources effectively (ways that lead to lower costs or differentiated output) Sustaining Competitive Advantage •Sustainable - characteristic of strategies that are not easily defeated by competitors •Capabilities that lead to competitive advantage must have four characteristics •Valuable capabilities create demand for a company’s services or products or give companies cost advantages •Rare capabilities are those that a company possess but no or few competitors possess •Difficult-to-imitate capabilities are not easily copied by competitors •Non-substitutable capabilities have no strategic equivalent for competitors Exhibit 5.4 How Distinctive Competencies Lead to Successful Strategies (Summarizes the relationships among resources, capabilities, distinctive competencies, and eventual profitability) Offensive and Defensive Competitive Strategies in International Markets •Competitive strategies – moves multinational firms use to defeat competitors •In offensive strategies, companies directly target rivals from whom they wish to capture market share •In defensive strategies, companies seek to beat back or discourage their rival’s offensive strategies •Offensive competitive strategies – direct attacks, end-run offenses, pre-emptive strategies, and acquisitions •Direct attacks: price cutting, adding new features, comparison advertisements that show lesser quality in competitor’s products, or going after severely neglected or poorly served market segments •End-run offensives: avoid direct competition and seek unoccupied markets •Preemptive competitive strategies: being the first to gain some advantageous position •Acquisitions: firm buys its competitors •Defensive competitive strategies – attempts to reduce the risks of being attacked, to convince an attacking firm to seek other targets, or to blunt the impact of any attack •Counterparry – fending of a competitor's attack in one country by attacking them in another country, usually the competitor's home country Multinational Diversification Strategy •Business-level strategies – those for a single business operation •Corporate-level strategies – how companies choose their mixtures of different businesses (or diversification) •Two types of diversification •Related diversification – a mix of businesses with similar products and markets o Three reasons to chose related diversification: sharing activities, transferring core competencies, and developing market power •Unrelated diversification – a mix of businesses in any industry o Main concern is only whether an acquisition is a good financial investment •Like domestic companies, multinationals also pursue diversification strategies •A quick way to gain a presence •Allows coordination and use of resources from different businesses located anywhere •Can more easily to establish global brand names for different but related products •Allows crosssubsidization, both across countries and across companies •Diversification is good up to a certain point – its benefits need to be weighed against the added costs Exhibit 5.5 Examples of Diversified Multinationals (Shows a selection of Global Fortune 500 diversified multinational companies with major lines of businesses) Strategy Content: Brief Conclusions •First section of chapter provided an overview of basic strategies – generic, competitive, and diversified •Next section review traditional strategy formulation Strategy Formulation: Traditional Approaches •Strategy formulation – process by which managers select the strategies to be used by their company •Popular analyses for successful strategy formulation help managers understand the following: •The competitive dynamics of the industry •Their company's competitive position in the industry •The opportunities and threats faced by their company •Their organization’s strengths and weaknesses Industry and Competitive Analyses •Industries are the main competitive arenas of a company's business activities •Managers must understand the forces affecting the industry, its economic characteristics, and the driving forces of change and competition within it •Porter’s five forces model – a popular technique that can help a multinational firm understand the major forces at work in the industry and the degree of attractiveness •First force – the degree of competition in the industry •Second force – the threat of new entrants – based on the barriers to entry •Third force – the bargaining power of buyers – the degree to which buyers can influence competitors within the industry •Fourth force – the bargaining power of suppliers – the degree to which suppliers exert influence on the industry •Fifth force – the threat of substitutes – the extent to which competitors are confronted with alternatives for their products •Economic characteristics that influence strategy selection: market size, ease of entry and exit, and whether there are economies of scale in production •Driving forces of change should be monitored – includes the speed of new product innovations, technological changes, and changing society attitudes and lifestyles •Extent of competition also affects the industry •Key success factors (KSFs) – important characteristics of a company or its product that lead to success in an industry •Examples: innovative technology or products, broad product line, effective distribution channels, price advantages, effective promotion, superior physical facilities or skilled labor, experience of firm in business, cost position for raw materials, cost position for production, R&D quality, financial assets, product quality, and quality of human resources •Competitor analysis – profile of a competitor’s strategies and objectives •Four steps to the analysis 1. Identify the strategic intents of competitors 2. Identify current and anticipated generic strategies used by competitors 3. Identify current and anticipated offensive and defensive competitive strategies used by rivals 4. Assess the current positions of competitors Exhibit 5.6 Hypothetical Country-by-Country Competitive Analysis of Rivals (Shows hypothetical competitive profiles of four companies in different countries) Company-Situation Analysis •The most common tool for a company situation analysis is called the SWOT •SWOT – analysis of an organization’s internal strengths and weaknesses and the opportunities or threats from the environment •Strength: a distinctive capability, resource, skill, or other advantage of an organization relative to its competitors •Weakness: any competitive disadvantage of a company relative to its competitors •Opportunities: favorable conditions in a firm's environment •Threats: unfavorable conditions in the environment •The SWOT analysis for the multinational company is more complex than for the domestic company •More complex general and operating environments because they operate in two or more countries •Each country provides its own national context, representing different opportunities and threat •Import and export barriers •Volatile exchange rates •Local inflation affects international markets •Governmental policies affecting repatriation of earnings •A country-by-country SWOT is probably the most prudent approach Corporate Strategy Selection •The major strategic question is which businesses in the portfolio are targets for growth and investment and which are targets for divestment or harvesting •Matrix analysis is one way of assessing a corporate business portfolio •The BCG growth-share matrix – one popular choice that is used to decide how much of its resources a corporation should devote to any unit o Divides businesses into four categories based on the industry growth rate and the relative market share of the business in question 1. Stars – the most attractive businesses – located in fast growing industries where a company has a relatively large market share 2. Dogs – businesses with relatively low market shares in low-growth industries 3. Cows – businesses in slow-growth industries where the company has a strong market share 4. Problem children – business in high-growth industries where the company has a poor market share Exhibit 5.7 BCG Growth-Share Matrix for a Diversified Multinational Company (Shows that for each type of business, the growth-share matrix has a suggested strategy) •GE portfolio matrix – another popular choice •Contains nine cells based on high, medium, and low levels of industry attractiveness and on strong, average and weak levels of a business’s competitive position in the industry •Used to determine the competitive position of a business in its industry •For the diversified multinational company, the portfolio assessment becomes more complex •Portfolio analyses must be conducted for each business in each country or region of operation The National Context and Organizational Strategy: Overview and Observations •The national context affects organizational design and strategy formulation and content through the following processes •The social institutions and national and business cultures encourage or discourage certain forms of businesses and strategies in each nation •Each nation must rely on its available factor conditions for developing industries and the firms within industries •Social institutions and culture determine which resources are used, how they are used, and which resources are developed •Multinational managers can generalize and apply these ideas in order to understand the actions of rivals or alliance partners in any country where their firms do business Summary and Conclusions •Few students will work in industries untouched by global competition •Even the managers of domestic firms need a good understanding of multinational business strategy •Competitive strategies must be considered on a country-by-country basis •Despite global trends of convergence in strategies, the institutional and cultural conditions favor different strategies by competitors from different nations •Strategy is a combination of planned intent and adaptive reactions to changing circumstances (new opportunities and threats) •Beyond the traditional strategic questions facing all managers, the multinational manager must confront other issues related to strategy, discussed in Chapter 6 Chapter 5 Harley-Davidson, Inc.: Troubled Times Increase H-D’s Reliance on International Sales Synopsis This case describes Harley Davidson and its experiences going international. The case describes the heavyweight motorcycle industry in the light of the luxury goods market. The case discusses the main markets of luxury goods and how Harley Davidson has fared in these various markets. The case also describes Harley Davidson’s many competitors such as Ducati, BMW, Honda, Suzuki, Kawasaki and Yamaha. The case also discusses Harley Davidson as selling a product to a traditional customer base built on nostalgia/comfort and design to evoke an earlier image while the other main competitors focus on other competitive bases such as technological development, performance, style and performance. Learning Objectives This case is well suited for a good discussion of strategic management issues facing a luxury company like Harley-Davidson. Specifically, the following issues can be highlighted: •Is a differentiation strategy appropriate for Harley Davidson? Will this strategy work in all countries? •Is the strategic bases for Harley Davidson (nostalgia, comfort) adequate to ensure sustainable competitive advantage? Should they be concerned about other companies’ efforts to manufacture heavyweight motorcycles based on performance, design, and technology? •The case also provides enough information for a good discussion of Porter’s five forces model. Specifically, the case also provides some understanding of the application of five forces model across countries and cultures. •The case also illustrates a comprehensive comparison of the competition as relevant to global and local markets. Case Discussion Questions 1. Which of Porter’s generic strategies is Harley Davidson using? Will this strategy work for all of the countries described in the case? Why or why not? Porter’s Generic Strategies: • Differentiation Strategy: Harley-Davidson is using a differentiation strategy by offering products that are distinct due to their nostalgia, design, and comfort, which appeal to a specific demographic (traditional riders). The company emphasizes its brand identity, evoking an emotional connection with customers through the iconic image of American freedom, heritage, and craftsmanship. • Focused Differentiation: Harley-Davidson focuses on a niche market of heavyweight motorcycles and aims to differentiate itself within that category. The brand primarily targets an older, affluent customer base that values the emotional appeal of nostalgia and tradition rather than cutting-edge performance or technology. Effectiveness Across Countries: • United States & Western Markets: Harley-Davidson’s differentiation strategy works well in markets where nostalgia, craftsmanship, and brand heritage are highly valued. In the U.S., the brand resonates with an established, loyal customer base that associates Harley-Davidson with a sense of freedom, rebellion, and Americana. • Emerging Markets: The strategy may not be as effective in emerging markets, where customers might prioritize affordability, performance, and technological features over nostalgia. Additionally, younger consumers in international markets might be less influenced by Harley-Davidson’s brand heritage and more interested in competitors like Ducati or BMW, which emphasize innovation and performance. • Europe & Asia: In markets like Europe and Asia, where competitors (BMW, Ducati, Honda, Yamaha) have strong reputations for performance and technology, Harley-Davidson’s focus on nostalgia may limit its appeal. Customers in these markets may prefer more modern, high-performance motorcycles, making it difficult for Harley to penetrate or expand its presence without adapting its strategy. In conclusion, while Harley-Davidson’s differentiation strategy works well in markets that value tradition and brand identity, it may need to adapt its approach in countries where performance, design, and technology are the dominant factors for consumer decisions. 2. What does a Porter’s five forces analysis reveal about the strategies Harley Davidson has employed in recent years? Porter’s Five Forces Analysis: 1. Threat of New Entrants (Moderate): • Barriers to Entry: Harley-Davidson benefits from strong brand loyalty and high barriers to entry due to the significant capital investment required to enter the heavyweight motorcycle market. However, the global luxury motorcycle market is attractive, and new entrants could try to capture niche markets. • Response: Harley has used its brand heritage and loyal customer base as a shield against new entrants, but its reliance on a niche market could make it vulnerable to competitors targeting younger or more tech-savvy customers. 2. Bargaining Power of Suppliers (Low): • Limited Influence: Harley-Davidson’s supply chain is well-established, and suppliers have little bargaining power due to the company’s size and scale. • Response: The company’s long-standing relationships with suppliers reduce the risk of cost increases, allowing Harley to maintain stable production costs. 3. Bargaining Power of Buyers (High): • Luxury Goods Market: In the luxury motorcycle market, buyers have significant power because they can easily switch to other premium brands like Ducati, BMW, or Honda. Harley’s customers are loyal, but they are also discerning and expect high quality for the price they pay. • Response: Harley-Davidson’s strategy has been to differentiate itself by emphasizing its unique brand story and heritage to reduce buyer power. However, this could be a double-edged sword, as consumers in some markets may prioritize other factors, such as innovation or price. 4. Threat of Substitutes (High): • Substitutes: Consumers have several substitutes for heavyweight motorcycles, including cars, electric motorcycles, and even public transportation. For younger generations, electric or performance-driven motorcycles from brands like Tesla or Zero Motorcycles may become attractive substitutes. • Response: Harley-Davidson has recently invested in developing electric motorcycles (such as the LiveWire) to counter the threat of substitutes. However, it remains to be seen whether this will help the company appeal to a broader market. 5. Rivalry Among Competitors (High): • Intense Competition: Harley-Davidson faces fierce competition from established players like BMW, Ducati, and Japanese manufacturers (Honda, Yamaha, Suzuki, Kawasaki), which compete on performance, technology, and price. The competition is particularly intense in international markets. • Response: Harley’s strategy has focused on maintaining its niche in heavyweight motorcycles and appealing to its traditional customer base. However, the company has struggled to compete in markets where technological innovation and performance are more important than nostalgia. Harley’s heavy reliance on the U.S. market also leaves it vulnerable to economic downturns or shifts in consumer preferences in its home market. In summary, the five forces analysis reveals that Harley-Davidson faces significant challenges from competitors and substitutes, and the company’s ability to maintain its competitive edge will depend on how well it can adapt to changing market dynamics, particularly in international markets. 3. How does Harley Davidson compare to its competitors? Harley-Davidson vs. Competitors: • BMW and Ducati (Premium Brands): • Focus on Performance and Innovation: Competitors like BMW and Ducati focus heavily on performance, technological innovation, and style. These companies have established strong reputations for producing high-performance motorcycles that appeal to younger, more tech-savvy consumers. • International Appeal: BMW and Ducati have broader international appeal, especially in Europe and Asia, where consumers value performance, speed, and cutting-edge technology over nostalgia. Their competitive advantage lies in their ability to innovate and offer motorcycles that cater to different preferences across markets. • Harley’s Position: In contrast, Harley-Davidson’s strategy of focusing on nostalgia and comfort limits its appeal to a more niche market. While it excels in evoking an emotional connection with its loyal customers, it struggles to attract younger or performance-oriented riders. • Honda, Yamaha, Suzuki, and Kawasaki (Mass Market and Performance Brands): • Mass Market Appeal: Japanese manufacturers like Honda, Yamaha, Suzuki, and Kawasaki dominate the mass market with affordable, reliable, and performance-oriented motorcycles. These companies produce a wide range of motorcycles that appeal to various market segments, from entry-level to high-performance models. • Technological Innovation: Honda and Yamaha, in particular, are known for their technological advancements, including electric motorcycles and hybrid models. This gives them an edge in markets where environmental concerns and innovation are prioritized. • Harley’s Position: Harley-Davidson does not compete as effectively on price or performance in this segment. Its brand image is less relevant in markets where customers seek affordability and advanced technology. Additionally, the rapid growth of electric and hybrid motorcycles may challenge Harley’s market position unless it invests more aggressively in innovation. Key Comparisons: • Innovation: Harley-Davidson lags behind competitors like BMW, Ducati, and Honda in terms of technological innovation and performance. This is a key area where Harley must improve to stay relevant, particularly in international markets. • Brand Strength: Harley’s brand remains one of its greatest strengths. Its iconic status, built on American heritage and nostalgia, allows it to maintain a loyal customer base in the U.S. and certain Western markets. However, this strength may not resonate as much with international consumers. • Product Range: Competitors offer a broader range of motorcycles, catering to both luxury and mass markets. Harley’s narrow focus on heavyweight motorcycles limits its ability to compete with brands that offer a more diverse portfolio. In conclusion, Harley-Davidson’s strategy of focusing on nostalgia and comfort works well in some markets but is less effective in countries where consumers prioritize innovation, performance, and price. To remain competitive, Harley will need to adapt its strategy and product offerings, particularly in international markets where its competitors are gaining ground. Analysis 1. Which of Porter’s generic strategies is Harley Davidson using? Will this strategy work for all of the countries described in the case? Why or why not? For this section, it is necessary to first discuss the various generic strategies available. The two generic strategies are low cost and differentiation. More specifically, companies can try to reduce costs as much as possible (low cost strategy) and target either the broad market (cost leadership - general) or specific narrower segment in the market (cost leadership – focused). Alternatively, companies can produce and sell products at a premium price by incorporating additional desirable traits (differentiation strategy), and target either the broad (general) market or narrow (niche) market. By examining Harley Davidson’s strategic approaches, it is clear that they are manufacturing a product that incorporates unique characteristics (nostalgia, comfort, American image, etc.) and selling their motorcycles at a premium price. It is therefore easy to conclude that they are pursuing a differentiation strategy. The next key issue is whether they are targeting the broad market or a narrow segment of the market. It should be clear from the case that they are targeting certain types of buyers and offering a somewhat limited range of products. Thus, H-D is pursuing a focused or niche market strategy. Harley Davidson is therefore a focused differentiator. It seems likely that this strategy will work in all countries because it is customized enough to accommodate local preferences. Harley Davidson is very keen on preserving their image and reputation for highly exclusive motorcycles. By targeting a narrower segment and maintaining exclusivity, they are more likely to maintain their image and reputation. 2. What does a Porter’s five forces analysis reveal about the strategies Harley Davidson has employed in recent years? At this point, it is useful to discuss Porter’s five forces model and what each force represents. You can break the class in groups and ask each group to focus on each of the geographic areas mentioned in the text (i.e., U.S., Europe, Japan, China, India and Russia). The ensuing discussion will hopefully reveal that the forces are different from one region to the other. U.S. • Degree of competition among existing rivals – moderate. There is some significant competition although Harley Davidson clearly enjoys the dominant position with a 55% market share in 2008. • Threat of new entrants – weak. The heavyweight motorcycle industry already has a number of significant competitors. Harley Davidson’s brand name represents a strong barrier to entry that will be difficult to match. • Bargaining power of buyers – weak to moderate. Heavyweight motorcycle buyers clearly prefer Harley Davidson in the U.S. because of its iconic status. H-D enjoys a strong loyalty from its customer base, and H-D manages its supply carefully so that their bikes are “not too easy to come by” • Bargaining power of suppliers – weak to moderate. Because Harley Davidson fully involves their suppliers in the design and manufacture of their products, suppliers can obviously have more power on Harley Davidson. However, it is important to note that Harley Davidson strives for mutually beneficial, long-term relationships with suppliers, and requires that its suppliers be committed to annual cost reductions. • Threat of substitutes – weak. Most buyers in the U.S. buy Harley’s because of the perceived image of freedom and adventure that is afforded by a Harley, its iconic status that is essentially unmatchable by other substitutes. Europe • Degree of competition among existing rivals – strong. -Harley Davidson faces a number of strong European companies (Ducati, BMW) that offer products with characteristics that Harley Davidson doesn’t offer • Bargaining power of buyers – strong. European buyers are not necessarily looking for nostalgia in their motorcycles. They are more willing to go for style and performance of European manufacturers and are less likely to buy into Harley’s iconic status in the U.S. • Other forces - similar to the U.S. Japan • Degree of competition among existing rivals – strong. Harley has to contend with strong companies in the Asia-Pacific region • Bargaining power of buyers - strong - Japanese buyers have more choice • Other forces - similar to the U.S. China and India • Degree of competition among existing rivals – moderate. These markets are new and attracting competitors. Import tariffs and emission standards provide significant barriers to H-D entering these markets, so other competitors are taking advantage. • Bargaining power of buyers – high. Price is the competitive issues in these markets. Since motorcycles are often the preferred mode of transportation in these markets, a competitive price and quality product are the preference, as opposed to high-end iconic products like Harley Davidson. • Other forces - similar to the U.S. Australia and New Zealand • Degree of competition among existing rivals – weak to moderate. These markets enjoy a similar following to that seen in the United States. H-D is seen as a symbol of freedom of the open road in these places, where their roads and landscapes are similar to that of the U.S. • Bargaining power of buyers – moderate. The growth segment in the Australian motorcycle market is off-road or dirt bikes with 40% of the market • Other forces – similar to the U.S. 3. How does Harley Davidson compare to its competitors? On the whole, Harley-Davidson produces a good quality bike; however, the technology of their bikes lags behind their competitors. This is, of course, largely intentional because they rely on other factors to sell their product. All of Harley’s major competitors have their headquarters outside of the U.S., and most operate units of large diversified companies. H-D does have some newer domestic brands such as Big Dog and Polaris, who focus on the ultrahigh-end motorcycle market. An overview of the competition is as follows: Ducati Motor Holdings • European market • Sells style and performance based on technologically-advanced designs • Dominates the Superbike Championships • Customer tends to be younger and somewhat less affluent than H-D’s BMW • Strategy based on premium pricing, and setting the standard in technology, environment, and safety • Production concentrated on 3 different series • Focus on sophistication and class • High resale value, but high purchase price limits market share Honda • World leader in motorcycle manufacturing • Combination of excellent engineering and quality with highly automated manufacturing to achieve economies of scale for low-cost advantage • Highly diversified company with many product lines Kawasaki • World leader in the transportation equipment and industrial good industries with diverse product lines for each category • High performance and low maintenance products • Offering of multiple models of motorcycles to suit different purposes • Large international presence Suzuki • Third larges manufacturer of motorcycles • Significant international presence – over 190 countries • Joint manufacturing efforts and direct sales subsidiaries • Efficiency is the backbone of their low-cost position Yamaha • Tailors its products to local market conditions • Diverse produce line – boats, generators, golf carts, ATVs, snowmobiles, etc. • Full line of motorcycles ranging from scooters to heavyweights • Competitive advantage focuses on speedy and high performance racing bikes Lessons • Provides a key example of how competitors fare in the heavyweight motorcycle industry • Good understanding of how to apply Porter’s five forces model in different regions/countries • Understanding how to evaluate competitors • Appropriate understanding of the luxury markets and growing demand from emerging markets CHAPTER 6 MULTINATIONAL AND ENTRY-MODE STRATEGIES: CONTENT AND FORMULATION Learning Objectives •Appreciate the complexities of the global-local dilemma facing the multinational company •Understand the content of the multinational strategies: transnational, international, multidomestic, and regional •Formulate a multinational strategy by applying the diagnostic questions that aid multinational companies in solving the global-local dilemma •Understand the content of the entry-mode strategies: exporting, alliances/international joint ventures (IJVs), licensing, and foreign direct investment •Formulate an entry-mode strategy based on the strengths and weaknesses of each approach and the needs of the multinational company •Understand political risk and how multinational can manage such risks Multinational Strategies: Dealing With the Global-Local Dilemma •Fundamental dilemma faced by all multinationals when competing internationally – the global-local dilemma •Local-responsiveness solution – responding to differences in the markets in all the countries in which a company operates •Customize organization and products to accommodate country-related or regional differences •Satisfies local customer needs by tailoring produces or services •Global integration solution – conducting business similarly throughout the world and locating company units wherever there is high quality and low cost •Reduce costs by using standardized products, promotional strategies, and distribution channels in every country •Seek sources of lower cost and higher quality anywhere in the value chain and anywhere in the world •Global-local dilemma – choice between a local-responsiveness or global approach to a multinational’s strategies •This choice forms the basic strategic orientation of the company •This strategic orientation affects the design of organization and management systems as well as supporting functional strategies in areas such as production, marketing, and finance •Firms must choose carefully how globally or locally to orient their strategies •Four broad multinational strategies •Multidomestic •Transnational •International •Regional •Multidomestic and the transnational strategies are bipolar reactions to one side of the global-local dilemma •International and regional strategies reflect compromise positions, attempt to balance conflicting drives Multidomestic Strategy •Multidomestic strategy – emphasizing local-responsiveness issues •Gives top priority to local responsiveness issues •A form of the differentiation strategy – company attracts customers by selling products and services tailored to different countries’ needs •Usually costs more – hence higher prices must be charged to recoup cost •Not limited to large multinationals – smaller firms that export may adapt to local preferences Transnational Strategy •Transnational strategy – An approach that seeks location advantages and economic efficiency through operating worldwide •Location advantages – dispersing value chain activities anywhere in the world where the company can do them best or cheapest •Value chain activities (e.g., manufacturing, R&D, sales, etc.) anywhere in the world where the company can "do it best or cheapest" as the situation requires •Global platform – country location where a firm can best perform some, but not necessarily all, of its value chain activities o Induced or natural resources in a location provide competitive advantages in cost and quality •Comparative advantage – that arising from cost, quality, or resource advantages associated with a particular nation o Refers to advantages of nations over other nations, as opposed to competitive advantage, which is firms over other firms o Organizations use their nation’s comparative advantages to gain competitive advantages over rivals from other nations •The transnational views any country as a global platform where it can perform any value-chain activity •Location advantages provide the transnational company with cost or quality gains for different value-chain activities •To reduce cost even further, transnational firms strive for uniform marketing and promotional activities throughout the world – thereby gaining economies of scale International Strategy •International strategies – selling global products and using similar marketing techniques worldwide •A compromise approach •Global products, similar marketing techniques worldwide •Do not locate value-chain activities anywhere in the world •Upstream and support activities remain concentrated at home country headquarters •The international strategist hopes that the concentration of its R&D and manufacturing strengths at home brings greater economies of scale and quality than the dispersed activities of the transnational •When necessary for economic or political reasons, companies with international strategies frequently do set up sales and production units in major countries or operation •Home-country headquarters retains control of local strategies, marketing, R&D, finances, and production Regional Strategy •Regional strategy – An approach that manages raw material sourcing, production, marketing, and support activities within a particular region •A compromise strategy •Attempts to gain some economic advantages similar to transnational and international •Attempts to gain some of the local-adaptation advantages of the multilocal strategy •Regional trading blocks (i.e. NAFTA, EU) provide relative uniformity of customer needs government requirements, and industry specifications •Encourage regional strategies A Brief Summary and Caveat •Discussed strategies are general descriptions of multinational strategic options •Seldom do companies adopt pure form of multinational strategy •Companies with more than one business may adopt different multinational strategies for each business Exhibit 6.1 Multinational Strategy Content (Summarizes the content of the four basic multinational strategies) Resolving the Global-Local Dilemma: Formulating a Multinational Strategy •Strategy selection depends on the degree of globalization of the industry in which the company competes •Globalization drivers – conditions in an industry that favor transnational or international strategies over multilocal or regional strategies •Types of globalization drivers •Four categories: markets, costs, governments, and competition •The more positive the answer to the questions in each category (below), the more likely it is that the company should select a global transnational or international strategy Exhibit 6.2 The Balancing Act of Multinational Strategy Formulation A graphic that shows the balancing of Global Integration pressures and Local Responsiveness pressures. Global Markets •Are there common customer needs? •Are there global customers? •Can you transfer marketing? Costs •Are there global economies of scale? •Are there global sources of low-cost raw materials? •Are there cheaper sources of high skilled labor? Governments •Do the targeted countries have favorable trade policies? •Do the target countries have regulations that restrict operations? Competition •What strategies do your competitors use? •What is the volume of imports and exports in the industry? Caution •The increasingly popular strategy of going global by making uniform products for the worlds market can sometimes backfire – cultural and national differences still exist •Regional strategy is often selected when there are: •Downstream competitive advantages with strong globalization drivers •Upstream competitive advantages with strong pressures for local adaptation Exhibit 6.3 Multinational Strategies, Value Chain Locations of Competitive Advantages, and Pressures for Globalization of Local Responsiveness (Shows how various factors and the pressures for globalization and local responsiveness combine to suggest different multinational strategies) Transnational or International: Which Way for the Global Company? •Select a transnational over an international strategy when: benefits from world wide dispersed activities will offset the coordination costs of a more complex organization •Select an international strategy over a transnational when: centralizing key activities such as R&D reduces coordination costs and gives economies of scale • Cost savings offset the lower costs or high-quality raw materials and labor that the transnationalist can find by locating worldwide Entry-Mode Strategies: The Content Options •Entry-mode strategies – options multinational companies have for entering foreign markets and countries •The choice of how to enter each international market •Several popular entry-mode strategies include: exporting, licensing, strategic alliances, and foreign direct investment Exporting •The easiest way to sell a product in the international market •Passive exporting – treating and filling overseas orders like domestic orders •At the other extreme, a multinational company can put extensive resources into exporting •Although export is an easy strategy, it is still an important one •Most governments understand the importance of the economy, and provide assistance to small companies interested in exporting Export Strategies •Indirect exporting – intermediary or go-between firms provide the knowledge and contacts necessary to sell overseas •Export management company (EMC) – intermediary specializing in particular types of products or particular countries or regions o Provide ready-made access to international markets o Have established networks of foreign distributors o Know their products and countries very well •Export trading company (ETC) – intermediary similar to EMC, but it usually takes title to the product before exporting •Direct exporting – exporters take on the duties of intermediaries and make direct contact with customers in the foreign market •More aggressive exporting strategy than indirect exporting •Uses foreign sales representatives, foreign distributors, or foreign retailers to get their products to end users in the foreign markets •Sales representatives use the company's promotional literature and samples to sell the company's products to foreign buyers •Foreign distributors buy products from domestic sellers to resell in foreign market at a profit Licensing •International licensing – contractual agreement between a domestic licensor and a foreign licensee •The licensor usually has a valuable patent, technological know-how, a trademark, or a company name that it provides to the foreign licensee •In return, the foreign licensee provides royalties to the domestic licenser •Licensing provides one of the easiest, lowest cost, and lowest risk mechanisms for companies to go international Exhibit 6.4 Content of a Licensing Agreement (Shows the contents of a typical licensing agreement) Some Special Licensing Agreements •International franchising – comprehensive licensing agreement where the franchisor grants to the franchisee the use of a whole business operation •Contract manufacturing – producing products for a foreign companies following the foreign companies’ specifications •Turnkey operations – multinational company makes a project fully operational and trains local managers and worker before the foreign owner takes control The International Strategic Alliances •International strategic alliances – agreement between two or more firms from different countries to cooperate in any value chain activity from R&D to sales •Becoming one of the dominant entry-mode strategies for multinational firms Foreign Direct Investment •Foreign direct investment – multinational firm’s ownership, in part or in whole, of an operation in another country •FDI reflects the highest stage of internationalization •Cross-border mergers and acquisitions are now the major driving force in increasing FDI •Different from Greenfield investments – starting foreign operations from scratch •In 2007, main recipients of FDI were U.S., France, U.K., and Canada •FDI is increasing in Eastern European countries •China is investing more in developing countries like Africa rather than industrialized nations •Market penetration is the major motivation to invest abroad •Scale of FDI often changes as companies gain greater returns from their investments or perceive less risk in running their foreign operations Formulating a Entry-mode Strategy •Formulating a entry-mode strategy must take into account several issues •Basic functions of each entry-mode strategy •General strategic considerations regarding the company and its strategic intent, products, and markets •How best to support the company’s multinational strategy Basic Functions of Entry-mode Strategies Deciding on an Export Strategy •Exporting is the cheapest and easiest entry-mode strategy – although not always the most profitable •Good way to internationalize or test new markets •Diagnostic questions for selecting the best export strategy •Does management believe it must control foreign sales, customer credit, and the eventual sale of the product and customer? o If yes, choose a form of direct exporting •Does the company have the financial and human resources for creating an organizational position or department to manage export operations? o If not, choose a form of indirect exporting •Does the company have the financial and human resources to design and execute international promotional activities (for example, international trade shows and foreign language advertisements)? o If not, rely on the expertise of intermediaries and choose a form of indirect exporting •Does the company have the financial and human resources to support extensive international travel or possibly an expatriate sales force? o If yes, choose a form of direct exporting •Does the company have the time and expertise to develop its own overseas contacts and networks? o If not, rely on the expertise of intermediaries and choose a form of indirect exporting •Will the time and resources required for the export business affect domestic operations? o If not, favor direct exporting When Should a Company License? •Based on three factors: •The characteristics of the product selected for licensing •The characteristics of the target country in which the product will be licensed •The nature of the licensing company •The Product •The best products to license use older or a soon-to-be-replaced technology •Licensed products often no longer have domestic sales potential •Older technologies may remain attractive to the international market for several reasons: o Other countries may not have competitors with new technology o Foreign licenses may not have production facilities capable of producing new technology o The licensee may still have an opportunity to learn from the old technology •The Target Country •Added costs of (e.g.) tariffs and quotas may make exporting unprofitable •Sometimes it is the only option due to government requirements or political risk •Market may simply be too small to support an investment larger than licensing •The Company •Some lack adequate of financial, technical, or managerial resources to export or to invest directly in foreign operations – does not demand much from the licensing company •Multiple products make licensing more advantageous •Some Disadvantages of Licensing •Gives up control •A company may create a new competitor •Low income •Opportunity costs Why Do Companies Seek Strategic Alliances? •Given the importance of this topic, they are considered separately in Chapter 9 Some Advantages and Disadvantages of FDI •Summarized in Exhibit 6.5 Exhibit 6.5 Advantages and Disadvantages of FDI (Summarizes the advantages and disadvantages of FDI) Choosing a Entry-mode Strategy: General Strategic Considerations •Strategic Intent •Most firms enter international markets with a low emphasis on short-term profit •Firms are motivated by other goals, such as being first in a market with potential or learning a new technology •Company Capabilities •Company should consider human resources and production capabilities •Local Government Regulations •Characteristics of the Target Product and its Market •Products that spoil quickly or are difficult to transport might not be good candidates for exporting •Products that need little adaptation to local conditions might be good candidates for licensing, joint ventures, or direct investment •Must address the question of how to get the product to market •Geographic and Cultural Distance •Exporting may be limited by excessive transportation costs •With direct investment, components or raw material often must be shipped to the producing country •When there are distinctly different cultures, direct investment is avoided initially •Joint ventures allow local partners to deal with many local cultural issues •Licensing and exporting remove the foreign company from direct dealings with the local culture The Control-Versus-Risk Tradeoff: The Need for Control •How important it is to monitor and control the overseas' operations •Key areas for concern over control include product quality in the manufacturing process, product price, advertising and other promotional activities, where the product is sold, and after-market service •Entry-mode choices that increase control entail greater risk Exhibit 6.6 Risk-Versus-Control Tradeoff (Shows the tradeoffs between risk and control for common international entry-mode strategies) Exhibit 6.7 Decision Matrix for Formulating Entry-mode Strategies (Summarizes the preferred entry-mode strategies for companies facing different conditions) Entry-mode Strategies and the Multinational Strategies •Why a company is in a host country dictates its choice of a general multinational strategy •The basic diagnostic question for the multinational is what entry-mode strategy best serves the firm’s objectives for being in a given country or region Exhibit 6.8 Entry-mode Strategies and the Multinational Strategies (Describes how companies with various multinational strategies might use the different entry-mode options) Political Risk •Political risk – the impact of political decisions or events on the business climate in a country such that a multinational’s profitability and feasibility of its global operations are negatively affected •Why should a multinational company be concerned about political risk? •It can have a serious impact on profitability •Because the world is so connected, political uncertainties in one country can have substantial reverberations around the world •Given the importance of political risk, it is useful to understand some of the factors that influence political risk in any society •Some of the most common factors are changes in the government, sudden shift in governmental policies or ideology, social volatility, passage of new laws, leadership changes and the related potential of unrest, and the level of corruption •How can a multinational company assess these various factors? •Some multinational companies dedicate whole departments to assessing it •Various agencies provide risk assessment ratings •Index of democracy measures the extent of freedom in a society (suggesting freer operating environment) Exhibit 6.9 Political Risk in Selected Countries (Source: Based on data reported in info.worldbank.org/governance/wgi/pdf/PRS.xls from Political Risk Services International Country Risk Guide (PRS). •Given the impact of political risk on operations and profitability, MNCs must take the appropriate steps to assess and manage it •Some private organizations offer political risk insurance – however, it may be expensive, or offer no protection at all in some areas •MNCs can also rely on local partners to mitigate risk (i.e. joint ventures) •Political risk assessment is a very subjective exercise and can vary greatly by region or industry Summary and Conclusions •Multinational managers face an array of complex strategic issues •All managers must deal with the dilemma of local responsiveness versus the global solution •Multidomestic or regional strategy allows tailoring of products but has higher cost •International and transnational strategies have global products with global marketing, and produce high-quality products as efficiently as possible •Entry-mode in the international market may occur anywhere in the value chain •Entry-mode strategies range from exporting to foreign direct investment (FDI) •Complexities of choosing multinational and entry-mode strategies represent significant challenges to multinational managers – several factors are considered •Finally, political risk is becoming an increasingly important component of investment decisions Chapter 6 Case Notes Polaris 2008 Synopsis Securities firm, Polaris Financial Group (Polaris), founded and chaired by Wayne Pai, has been successful in his business ventures within Taiwan and subsequently, to Hong Kong. Pai led the development of the information technology infrastructure to lead markets in the online trading business. Due to their great success, Pai has announced the approval for expansion into more aggressive markets – Singapore, Vietnam, and Abu Dhabi. The complexities of each of these markets weighed heavy on Pai’s mind, as he wanted to take advantage of Polaris’s existing assets and experiences. Case Assignment Questions 1. What critical success factors led to Polaris’s launch of online stock trading and online transactions in Taiwan? Critical Success Factors for Polaris’s Success in Taiwan: 1. Strong Leadership & Vision: • Wayne Pai’s leadership played a pivotal role in Polaris’s success. His strategic vision to embrace online trading early positioned the firm as an industry leader in Taiwan. • Pai anticipated the future of the financial markets by focusing on information technology infrastructure to enhance user experience and streamline transactions. 2. Technological Infrastructure: • Polaris’s robust investment in developing a cutting-edge IT infrastructure was crucial. This allowed the company to provide seamless online trading platforms, enabling users to execute transactions easily and securely. • By leveraging advanced technology, Polaris became a pioneer in the online financial services industry, differentiating itself from traditional securities firms. 3. Early Adopter of Online Trading: • Polaris was among the first firms in Taiwan to adopt online trading, which gave it a first-mover advantage. This allowed the company to capture a significant market share before competitors caught up. • The early adoption also helped Polaris develop customer trust in its online platform, positioning the company as a reliable player in the market. 4. Customer-Centric Approach: • Polaris focused on enhancing the customer experience by making online trading convenient, fast, and accessible. The company’s user-friendly platform, combined with strong customer support, encouraged both novice and experienced investors to trade online. • Polaris tailored its services to meet the unique needs of Taiwanese customers, ensuring they had confidence in using online trading platforms. 5. Brand Reputation & Market Knowledge: • Polaris leveraged its strong reputation in the financial sector and its deep knowledge of the Taiwanese market. The company’s established presence in Taiwan’s financial industry gave it credibility, which was crucial in attracting online trading clients. • Polaris also used its local market insights to offer products and services that were relevant to Taiwanese investors, ensuring alignment with customer expectations. 2. How did Polaris transfer its Taiwanese success to Hong Kong? Transfer of Success to Hong Kong: 1. Replicating the IT Infrastructure: • Polaris successfully replicated the technological infrastructure it had developed in Taiwan to Hong Kong. The company used its experience in building a seamless online trading platform to offer the same services to Hong Kong investors. • The reliable, secure, and efficient online trading platform that worked in Taiwan was adapted to suit the regulatory environment and investor preferences in Hong Kong. 2. Leveraging Reputation and Experience: • Polaris leveraged its strong reputation from Taiwan as a pioneer in online trading to build credibility in Hong Kong’s competitive financial market. • The company used its track record of success in Taiwan to attract investors in Hong Kong, positioning itself as a trustworthy and innovative securities firm. 3. Market Adaptation: • Polaris adapted its services to align with the regulatory and market conditions in Hong Kong. While Hong Kong’s financial market was more mature and competitive, Polaris was able to offer unique value through its advanced online trading platform and customer-oriented services. • The company conducted thorough research on the Hong Kong market, identifying the needs and behaviors of local investors. Polaris adjusted its platform and product offerings to cater to Hong Kong’s more international and sophisticated investor base. 4. Strategic Partnerships: • Polaris formed strategic partnerships with local financial institutions and key market players in Hong Kong to increase its presence and influence. These partnerships helped Polaris navigate the complexities of the Hong Kong market while strengthening its competitive position. 5. Capitalizing on Cross-Border Opportunities: • Polaris was able to capitalize on the growing trend of cross-border trading between Taiwan and Hong Kong. The firm used its presence in both markets to facilitate easier transactions for investors looking to trade across borders, offering an integrated solution that attracted both Taiwanese and Hong Kong investors. 3. What advice would you give Wayne Pai? Key Advice for Wayne Pai: 1. Thorough Market Research & Customization: • As Polaris expands into new, more aggressive markets such as Singapore, Vietnam, and Abu Dhabi, it is critical to conduct in-depth market research to understand local regulations, investor preferences, and market dynamics. • Each market will have different legal, cultural, and technological environments. Pai should ensure Polaris tailors its product offerings and services to meet the specific demands of each market. For example: • In Singapore, with its highly regulated and sophisticated financial environment, the focus could be on offering advanced trading tools for institutional investors. • In Vietnam, which has an emerging market, it might be important to offer educational resources and simpler trading platforms to attract retail investors. • In Abu Dhabi, Polaris should align its services with the preferences of high-net-worth individuals and institutional investors, emphasizing trust and reliability. 2. Strategic Partnerships in New Markets: • Entering foreign markets like Vietnam and Abu Dhabi will require strong partnerships with local financial institutions, regulatory bodies, and technology providers. Pai should focus on building relationships with local stakeholders to ensure Polaris can navigate the regulatory and business landscape smoothly. • These partnerships could also help Polaris gain access to local market insights, reduce operational risks, and establish credibility more quickly in foreign markets. 3. Compliance with Local Regulations: • As Polaris expands into new markets, it is crucial to ensure full compliance with local financial regulations. Pai should prioritize building a strong compliance team that understands the legal frameworks of each target market and ensures Polaris meets the necessary requirements. • Adhering to regulations not only avoids legal challenges but also builds trust with local investors, which is vital for long-term success. 4. Diversification of Services: • In more aggressive markets, Polaris should consider diversifying its services to offer a broader range of financial products, including wealth management, insurance, and alternative investments. This would allow Polaris to attract different segments of investors and create multiple revenue streams. • As international markets evolve, Pai should ensure Polaris stays ahead by introducing innovative products that meet the changing needs of investors, such as ESG (Environmental, Social, and Governance) investments, cryptocurrency trading, or fintech-driven solutions. 5. Focus on Technological Innovation: • Polaris’s success has been built on its technology infrastructure, so Pai should continue to invest in technological innovation. This will ensure Polaris remains competitive in the rapidly evolving financial markets of Singapore, Vietnam, and Abu Dhabi. • Exploring opportunities in areas like AI-driven trading, blockchain, or digital currency trading could give Polaris a competitive edge in these markets. 6. Cultural Sensitivity and Localization: • Expanding into foreign markets also requires understanding the cultural nuances of each region. Pai should ensure that Polaris’s marketing, customer support, and communication strategies are culturally sensitive and localized to resonate with investors in Singapore, Vietnam, and Abu Dhabi. • Having local teams in each market that understand customer behavior, language, and business etiquette would enhance Polaris’s ability to connect with potential clients and build a strong local presence. By focusing on these strategic areas, Wayne Pai can position Polaris for successful international expansion while leveraging the company’s existing assets and experience. Analysis 1. What critical success factors led to Polaris’s launch of online stock trading and online transactions in Taiwan? Prior to the launch of online stock trading and transactions in Taiwan, Polaris had: •Established a solid securities firm •Focused on wealth management •An established successful brokerage team, which took over the online component •Innovative information technology It is also worth noting that the success of Polaris – and the subsequent launch of Polaris’s online business – was, in no small part, due to the entrepreneurial spirit possessed by Pai, in addition to the fact that he owned 20% of Polaris Securities’ stock, which gave have significant influence over the fate of the company. Had those two facts not been present, Polaris’s successful online business may not have been realized. 2. How did Polaris transfer its Taiwanese success to Hong Kong? The transfer into Hong Kong was rooted in taking advantage of the financial innovation and information technology success Polaris had realized in Taiwan. The similarities in cultures, including the homogeneous language, facilitated the transfer as well. 3. What advice would you give Wayne Pai? One of the significant keys to Polaris’s success is the continuous improvement and update of its information technology and trading product offerings. In entering new markets like Singapore, Vietnam, and Abu Dhabi, Pai will have to ensure that these offerings meet the local legal and customer requirements. The relative ease of transition into the Taiwanese market may not be quite as simple in these newer, more diverse markets. Lessons •This case demonstrated an example of entry-mode strategy •This case provides a glimpse into the online stock trading business •It also explores the factors involved in a decision to enter new markets, and how to do so Instructor Manual for Multinational Management: A Strategic Approach John B. Cullen, Praveen K. Parboteeah 9781285094946