MGMK 4710
INTERNATIONAL BUSINESS
CHAPTER 12. STRATEGY OF INTERNATIONAL BUSINESS
https://www.youtube.com/watch?v=DhHHmUd6xfo McDonald’s
https://www.youtube.com/watch?v=59lAz0-KpSo McDonald’s in China is different
I. INTRODUCTION
This chapter shifts the focus from external factors that exert influence on the international business to internal decision-making that helps determine how effectively a given firm competes in its industry. First, the chapter will discuss how an MNE can create the most value in order to compete in international markets. Then it will examine the strategies that MNEs can adopt to be competitive in the global marketplace.
II. VALUE CHAIN ANALYSIS
When competing, firms need to address the question of how to create value so customers can buy its products. A framework developed to discuss how firms can create value is called value chain analysis.
A. Value creation:
Value refers to either low cost or differentiation. Firms create low cost value by making their products for a lower cost than any other firm in their industry. Firms create differentiation value by making products with distinctive characteristics that consumers want (when customers value differentiation, they must be willing to pay a premium price).
B. Value Chain:
The value chain is a representation of the firm as a series of discrete value creating activities. Value chain is comprised of primary activities and support activities. Primary activities are involved in the physical movement of raw materials and finished products, the production of goods and services, marketing and subsequent services of the outputs of the business. Performing primary activities requires the general infrastructure of a firm. This infrastructure is composed of support activities such as procurement, technology and system development, human resource management, and firm infrastructure.
C. Value chain analysis:
To be successful, a firm needs to create the most value (compared to competitors). Value chain analysis is a framework used to determine how a firm can effectively create the most value. Managers should focus their efforts in performing the activities in which the firm has the expertise (core competencies) to either reduce costs (low cost value) or develop distinctive features (differentiation value). The activities where the firm lacks expertise should be outsourced, that is, purchased from independent suppliers.
Configuration of the value chain refers to the process of dispersing value chain activities to those locations around the globe where the MNE can maximize value. Every MNE looks to establish elements of its value chain in the best location in the world. Location economies arise when MNEs locate activities in the optimal location for that activity, wherever in the world that may be. Because MNEs’ activities are dispersed around the world, coordination is necessary.
Coordination of the value chain describes the process of integrating dispersed activities into a cohesive, coherent whole. The task of coordinating the different activities that go into making and moving a product around the world has emerged as the basis of the superior performance that separates good from great MNEs.
III. TYPES OF MNEs STRATEGIES
After the identification of the value customers prefer (either low cost or differentiation), and the determination of how to create the most value, MNEs’ managers are in a position to decide the strategies to use in order to achieve above-average performance. To determine the types of international strategies, MNEs’ need to make two sets of international strategic choices: choices about how to enter foreign markets (international entry strategies), and choices about how to compete in foreign markets (international competitive strategies).
A. International entry strategies
MNEs have a wider choice of entry strategies, some of them involving collaboration.
1. Exporting: An international entry strategy whereby an MNE makes goods in its
home country and then sells them to foreign markets. This is usually the first entry strategy. As
the exporting MNE is not yet familiar with foreign environments, it minimizes risks by simply
shipping goods to foreign importers
2. Entry strategies involving collaboration:
a. Licensing: Under a licensing agreement, an MNE (the licensor) grants rights to intangible property to a foreign firm (the licensee) to use in a specified geographic area for a specified period of time; in exchange, the licensee ordinarily pays a royalty to the licensor. Intangible property may include patents, inventions, formulas, brand names, methods, procedures. Licensor’s motives include faster start-up, lower costs. Licensee’s motives are no product development costs.
b. Franchising: Franchising represents a special form of licensing in which the
franchisor not only sells an independent franchisee the use of the intangible property essential to
the franchisee’s business, but also operationally assists and exercises control over the
franchisee.
c. Management Contracts: A management contract represents an arrangement in
which an MNE provides management personnel to perform general or specialized functions to
another firm for a fee. A firm usually pursues such contracts when it believes a partner can
manage certain operations more efficiently and effectively than it can itself.
d. Turnkey Operations: Turnkey operations represent a type of collaborative
arrangement in which an MNE contracts with a foreign entity to build complete, ready-to-operate facilities. Usually, the MNE is an industrial-equipment and construction company. Often, the foreign entity is a government agency or a large MNE
e. Joint Ventures: A joint venture represents a direct investment in which two or more firms share ownership of a new company in a foreign country. Forms of joint ventures include
two firms from one country joining together in a foreign market, a foreign firm joining with a local firm, companies from two or more countries establishing a joint venture in a third country, a private firm and a local government forming a joint venture, a private firm joining a government-owned firm in a third country.
f. Equity Alliances: An equity alliance represents a collaborative arrangement in which
at least one of the collaborating firms takes an ownership position (usually a minority) in the other(s).
3. Wholly owned subsidiaries (no collaboration is involved): The MNE owns 100% of its foreign operations. This entry strategy can be accomplished in two ways: acquisitions, or greenfield investments.
B. International competitive strategies
To make the choice of which international competitive strategy to adopt, MNEs need to look at the types of pressures they are facing in foreign markets
1. Global integration versus local responsiveness pressures
Two types of pressures that challenge how an MNE configures and coordinates its value chain activities: pressures for global integration (also known as pressures for cost reduction), and pressures for local responsiveness.
Pressures for global integration:
There is a general trend toward rapid economic integration, which in turn increases pressures for global integration. Although many factors can explain this trend, the two primary factors behind pressures for global integration are the globalization of markets and the efficiency gains of standardization:
Globalization of markets: Global buying patterns and firm strategies suggest that consumers seek and accept standardized global products. Consumers are searching for products that meet their needs and provide superior value, regardless of where they originate. As communication and transportation infrastructures have become more integrated across borders, consumer preferences have begun to homogenize and companies’ abilities to meet those preferences on a global scale have increased. The resulting economies of scale translate to lower prices.
Standardization and efficiency: Standardization is the process of increasing the uniformity of a product or service by decreasing the extent of variation. Worldwide standardization of an MNE’s products, purchases, methods, and policies can significantly reduce the costs of its operations. Standardization is also a powerful means to exploit local economies, since value chain activities can be placed in optimal locations for global production and distribution.
Pressures for local responsiveness:
MNEs also face several pressures to tailor their operations to local market conditions. Consumer divergence and host-government policies are two of the major forces contributing to pressures for local responsiveness:
Consumer divergence: Contrary to the globalization of markets thesis, some argue that differences in consumer tastes and preferences across countries emerge and endure due to cultural predisposition, historical legacy, emergent nationalism, economic prosperity, and other factors. In some industries, like food production, products are unsuitable for standardization and local preferences remain strong.
Host-government policies: Differences in policies among host-country governments contribute to great variability in political, legal, and economic situations in various markets. Policies such as trade protectionism, local content rules, and national product standards require some degree of local responsiveness.
2. Types of international competitive strategies
Pressures for global integration and pressures for local responsiveness are the two dimensions used to derive the strategy an MNE can choose from. Based on whether those pressures are high or low, four strategies emerge: global strategy, multidomestic strategy, home replication strategy, and transnational strategy.
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Low High
Pressures for local responsiveness
Home replication strategy: The home replication strategy emphasizes the transfer of core competencies from the domestic operation to foreign subsidiaries. This strategy works well when industry conditions do not push the firm to improve its cost controls or to respond to local demand.
Multidomestic strategy: Firms following a multidomestic strategy adjust products, services, and business practices to meet the needs of individual countries and regions. Because pressures for local responsiveness are high, this strategy allows each of its foreign-country operations to act fairly independently. Management that chooses the multidomestic strategy believes in responding to the unique conditions prevailing in different markets.
Global strategy: A global strategy requires worldwide consistency and standardization in order to be effective. Firms that choose the global strategy face strong pressures for cost reductions but weak pressure for local responsiveness. Operationally, MNEs that adopt a global strategy usually are or aim to become the low-cost player in their industry. This generally requires global-scale production facilities in a few low-cost locations.
Transnational strategy: Transnational strategy aims to simultaneously exploit location economies, leverage core competencies, and pay attention to local responsiveness. It is arguably the most challenging strategy because MNEs face high pressures for both global integration and local responsiveness.
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INTERNATIONAL BUSINESS MGMK 4710
CHAPTER 12: INTERNATIONAL BUSINESS STRATEGY
https://www.youtube.com/watch?v=DhHHmUd6xfo McDonald’s
https://www.youtube.com/watch?v=59lAz0-Kp
So McDonald’s in China is different
I. INTRODUCTION
This chapter shifts the focus from external factors that exert influence on the international business to internal decision-making that helps determine how effectively a given firm competes in its industry. First, the chapter will discuss how an MNE can create the most value in order to compete in international markets. Then it will examine the strategies that MNEs can adopt to be competitive in the global marketplace.
II. VALUE CHAIN ANALYSIS
When competing, firms need to address the question of how to create value so customers can buy its products. A framework developed to discuss how firms can create value is called value chain analysis.
