MULTINATIONAL ENTRY MODE STRATEGIES (Chapter 5 and 6)

STRATEGY FORMULATION: The Traditional Approach

Strategy formulation is the process by which managers select the strategies to be

used by their companies.

The traditional analyses that provides managers with information to choose a strategy,
help managers understand:

1.- the competitive dynamics of the industry

2.- their company´s competitive position in the industry

3.- the opportunities and threats faced by the company

4.- their organization´s strengths and weaknesses.

Industry and Competitive Analyses

Companies compete within industries and Industries are the main competitive arenas
of a Company´s business activities.

Managers need to understand the industry well and know the forces affecting the
industry.

Porter´s five forces model is a technique that can help a multinational manager
understand the major forces at work. The forces are:

a.- The degree of competition in the industry (auto manufacturers industry)

b.- The threat of new entrants.

c.- The bargaining power of buyers. This is the degree in which buyers of the
industry´s products can influence competitors within the industry. It appears buyers
are becoming globally more sophisticated and have a great influence on most
industries.

d.- The bargaining power of suppliers (DeBeers controls a significant part of the
market and of the supply of diamonds).

e.- The threat of substitutes. The extent to which competitors are confronted with
alternatives to their products. Netflix is threatened by web-based movies on demand.

This model allows industries to also analyse their position in other countries. It allows
industries to analyse their impact, attractiveness etc.
Other areas that industries need to understand include: Dominant Economic
Characteristics.

Market size, ease of entry and exit, if there are economies of scale. Porter believes that
companies should monitor the speed of new product innovation, technology changes,
changing societal attitudes and life styles. The extent of competition is also important.

The factors that lead to success are called KEY SUCCESS FACTORS (KSF). Some of
these KSF are:

 Innovative technology or products.

 A broad product line.
 Effective distribution channels.
 Price advantages.
 Effective promotion.
 Superior physical facilities or skilled labor.
 Experience of the firm in business.
 The cost position of raw materials.
 The cost position for production.
 R&D quality.
 Financial assets.
 Product quality.
 The quality of human resources.

It is also important for managers to IDENTIFY THEIR COMPETITORS ANALYSIS.

It has 4 steps:

1.- Identifying the basic strategic intent of competitors.

2.- Identifying the generic strategies used and anticipated to be used by competitors.

3.- Identifying the offensive and defensive competitive strategies currently used or
anticipated to be used by rivals.

4.- Assessing the current position of competitors.

COMPANY SITUATION ANALYSIS

It is important that companies understand clearly where they are and what they can
and cannot do. SWOT helps identify the strengths, weaknesses, opportunities and
threats of each company.

A strength is a distinctive capability, resource, skill, or other advantage.

A weakness is a competitive disadvantage.

An opportunity are favourable conditions in a firm´s environment.

Threats are unfavourable conditions in a firm´s environment.

TYPES OF STRATEGIES-GLOBAL-LOCALDILEMA

 The pressure to respond to the unique needs of each market in each

country in which the MNC operates is strong. When it responds this is
called: LOCAL RESPONSIVENESS SOLUTION.

 However there are also pressures to de-emphasise local differences and to

conduct business in similar ways.
 This dilemma global-local, the choice between local responsiveness and
global integration forms part of the strategy of MNC´s.

 And it affects the design and management systems of the MNC.

 Companies who stress the need for local-responsiveness

solutions stress customizing their organizations and products to
accommodate country or regional differences, with the focus on tailoring
products or services to satisfy local customer needs.

 MNC´s that lean toward a global integration solution attempt to

reduce costs to the largest degree possible by using standardized
products, promotional strategies and distributions channels in every
market they enter.
 Some MNC´s exploit the differences among the countries in which they
operate and to do this they locate value chain activities in different
countries seeking sources of lower costs or higher quality anywhere
in the world.

For each product or business MNC´s should decide carefully how globally or locally to
orient their strategies.
There are 4 broad strategies that offer solutions:
A.- MULTIDOMESTIC STRATEGIES

B.- TRANSNATIONAL STRATEGY

C.- INTERNATIONAL STRATEGY

D.- REGIONAL STRATEGY

A.- Multidomestic strategies

 This gives priority to local responsiveness.

 The Company attempts to offer products or services that attract customers by
closely satisfying cultural needs and expectations unique to particular
countries.
 It usually costs more to produce and sell unique products or services
than to standardize for all countries. There are extra costs to adapt, such
as different package sizes, colours etc.
 Normally then, a multidomestic strategy, requires the company to
charge more to recoup the cost of tailoring products or services.

See Wal-Mart´s and Tesco´s experiences in South Korea.

 A multidomestic strategy is not limited to MNC´s, even small firms that

export only its products may use a multidomestic strategy by
extensively adapting its product line to different countries and
cultures.

However for MNC´s using a multidomestic strategy means treating foreign

subsidiaries as independent businesses. Each country´s subsidiary is free to
manage its operation as necessary, but it must generate a profit to receive resources.

B.- TRANSNATIONAL STRATEGY

It gives two goals top priority:

 Seeking location advantages

 Gaining economic efficiencies from operating worldwide

Using location advantages means that the transnational company

disperses or locates its value chain activities anywhere in the world where the
company can do its best or cheapest (3rd world countries etc).

Michael Porter thinks that MNC´s should look at countries not only as
potential customers but also as global platforms.
 Global Platforms are country locations where a firm can best
perform some of its value chain activities.

Costs or quality advantages associated with a particular nation are called

national COMPARATIVE ADVANTAGES (Nation v Nation).

This refers to advantages of nations over other nations. Nations can use their
comparative advantage to gain competitive advantage over
rivals from other nations.

This is different from competitive advantage which refers to the advantage

of individual firms over other firms (Firm v Firm).

Nowadays however, comparative advantage of a nation no longer gives

competitive advantage only to domestic firms. The natural resources
available in different nations provide the transnational company with
potential global platforms for location based competitive advantages in
costs and quality.

A transnational strategy enables a company to base activities upstream

(early activities in the value chain such as R&D, Input Logistics, Operations)
in its value chain not only on lower costs but also on the potential for
creating additional value for its products or services.

This transnational strategy views any country as a global platform where it

can perform any value chain activity. Thus the comparative advantage is no
longer just for locals.

With increasingly free and open borders any firm, regardless of its nation of ownership,
can turn any national advantage into a competitive advantage, if the firm has the
flexibility to locate anywhere.

However we need to be aware that some of the location advantages of producing in

low-cost countries may be eroding.

To reduce costs even further, transnational firms strive for uniform

marketing and promotional activities throughout the world, it can take
advantage of economies of scale.

C.- INTERNATIONAL STRATEGY

MNC´s taking this approach (Toys “R” Us, Boeing) take a compromise
approach to the global-local-dilemma.

Firms pursuing this kind of strategy attempt to sell global products and use
similar marketing techniques worldwide.

Adaptation to local culture is limited to minor adjustments in

product offerings and marketing strategies.
However they differ from transnational strategies in that they choose to
avoid locating their value chain activities anywhere in the world.

In particular upstream (The upstream stage of the production process involves

searching for and extracting raw materials. The upstream part of the production process
does not do anything with the material itself, such as processing the material. This part
of the process simply finds and extracts the raw material. Thus, any industry that relies
on the extraction of raw materials commonly has an upstream stage in its production
process. In a more general sense, "upstream" can also refer to any part of the production
process relating to the extraction stages) and support activities remain
concentrated at home country headquarters.

They believe/hope that the concentration of its R&D and manufacturing

strengths at home will bring greater economies of scale and quality
and lower coordination costs than the dispersed activities of the transnational.

When necessary for economic and political reasons, companies with international
strategies frequently set up sales and production units in major countries of operation.
However, the home country headquarters retains control of local strategies, marketing,
R&D, finances and production.

D.- REGIONAL STRATEGY

The regional strategy is another compromise strategy. It attempts to balance

the economic efficiency and location advantages of the transnational
and international strategies with some of the local-adaptation
advantages of the multidomestic strategy.

Rather than having worldwide products and worldwide value chain, the regional
strategist manages raw material sourcing, production, marketing and
some support activities within a particular region.

This strategy not only gives some cost savings similar to those of the transnational and
international strategists but also gives the firm flexibility for regional
responsiveness.

Managers have the opportunity to deal regionally with regional problems, such as
competitive position, product mix, promotional strategy and sources of capital.

Regional trading blocs such as the EU and NAFTA have led to relative uniformity
of customer needs and expectations within member nations. And they also
reduce differences in government-and-industry-required specifications for products.
Summary and conclusions: MNC´s rarely use only one strategy. The norm is
to use different ones in different places.

RESOLVING THE GLOBAL-LOCAL DILEMMA

To choose one of the strategies mentioned before MNC´s need to consider the
degree of globalization within all the industries in which they compete.

WHAT MAKES AN INDUSTRY GLOBAL? The trends that globalize an industry are
industry drivers: These are the conditions in an industry that
called
favour the more globally oriented transnational or
international strategies over the locally oriented multidomestic or
regional strategies.

There are 4 categories of drivers: MARKETS, COSTS,

GOVERNMENTS AND COMPETITION. The key diagnostic questions they need
to ask themselves are:

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 highly skilled labour?

GOVERNMENTS:

 Do the targeted countries have favourable 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 industry
CAUTION

Going global by making uniform products for the world market can sometimes backfire.
Cultural and national differences still exist and there is always a need to
adjust to national or regional needs.

TRANSNATIONAL OR INTERNATIONAL: WHICH WAY FOR THE GLOBAL

COMPANY?

 To select a transnational over an international strategy the MNC manager must

believe that the benefits of dispersing activities worldwide offset the costs of
coordinating a more complex organization.
 The international strategist believes that centralizing key activities such
as R&D reduces coordination costs and produces economies of
scale. The cost savings offset the lower costs or higher-quality raw materials
or labour that the transnationals can find by locating worldwide.

Once they select a basic internationalization strategy they need to select the
ENTRY MODE:

ENTRY MODE STRATEGIES:

A.-EXPORTING:

Passive exporting: which is about treating exports like domestic orders.

Other options would imply the use and set up of an export depart. With
specialised people.

Export Strategies:

 Direct exporting this is more aggressive and the company contacts directly
with other companies to sell them their products or services. They may set up a
branch abroad. They use the company´s promotional literature and samples.
 Indirect exporting in this option an intermediary or go-between firm provides
knowledge and contacts necessary to sell overseas. It provides the support of
not going alone.

Typical support companies are called EMC export management

companies and also ETC export trading company. They specialize in a
particular product or country.

B.-LICENSING

It is a contractual agreement between a domestic licenser and a foreign

licensee.
A licenser 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.

It is one of the easiest, low cost and less risky mechanism to go international.
Examples Disneyland Tokyo.

The licensing agreement or contract provides the legal specifications of the relationship
between the licensee and the licensor.

Some examples are:

 International franchising granting the use of a whole business model

including trademarks, business organization, technologies, know-how
and training. (Holiday Inn, McDonalds, 7-Eleven, KFC)
 Contract manufacturing where an international company sometimes
contracts with local foreign firms to produce its products overseas.
However the international firm still sells their products (as well as the ones
made locally) and controls their marketing.
 Turnkey operations where the international company makes a project
fully operational before turning it over to the foreign owner.
(Construction Companies).

C.- INTERNATIONAL STRATEGIC ALLIANCES

These are cooperative agreements between two or more firms from

different countries to participate in business activities.

D.- FOREIGN DIRECT INVESTMENT

In this case an MNC owns, in part or in whole, an operation in another

country. Unlike the IJV the parent companies do not create a separate
company.

MNC´s can use the FDI to set up from the beginning any kind of subsidiary
in a country. This is called a GREENFIELD INVESTMENT. This allows you to use
your own people and technical resources.

Other options are acquiring existing companies in other countries. This gives
access to an existing workforce and organization and it provides a quicker start up.