Chapter Seven

Chapter Seven: International Strategy: Creating Value in Global Markets 1. What are some of the advantages and disadvantages associated with a firm’s expansion into international markets? 2. What are the four factors described in Porter’s diamond of national advantage? How do the four factors explain why some industries in a given country are more successful than others? Factor endowments: Demand conditions: Related and supporting industries: Firm strategy, structure, and rivalry: 3. Explain the two opposing forces –  forces – cost cost reduction and adaptation to local markets —  markets — that that firms must deal with when they go global. The opposing pressures that managers face place conflicting demands on firms as they strive to be competitive. On the one hand, competitive pressures require that firms do what they can to lower unit costs so that consumers will not perceive their product and service offerings as too expensive. exp ensive. This may lead them to consider locating manufacturing facilities where labor costs are low and developing products that are highly highl y standardized across multiple countries. In addition to responding to pressures to lower costs, managers also mu st strive to be responsive to local pressures in order to tailor their products to the demand of  the local market in which they the y do business. This requires differentiating their offerings and strategies from country to country to reflect consumer tastes and preferences and making changes to reflect differences in distribution channels, human resource practices, and governmental regulations. However, since the strategies and tactics to differentiate products and services to local markets can involve additional expenses, a firm’s costs will tend to rise. The two opposing pressures result in four different basic strategies that compa nies can use to compete in the global marketplace: international, global, multidomestic, and transnational. The strategy that a firm selects depends on the degree of pressure that is facing for cost reductions and the importance of  adapting to local markets. 4. There are four basic strategies---international, global, multidomestic, and transnational. What are the advantages and disadvantages associated with each? International 

Strengths Leverage and diffusion of a  parent firm’s knowledge and

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Limitations Limited ability to adapt to local markets

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core competencies Lower costs because of less need to tailor products and services

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Inability to take advantage of  new ideas and innovations occurring in local markets

Global 

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Strengths Strong integration across various businesses Standardization leads to higher economies of scale, which lowers costs Helps create uniform standards of quality throughout the world

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Limitations Limited ability to adapt to local markets Concentration of activities may increase dependence on a single facility Single locations may lead to higher tariffs and transportation costs

Multidomestic 

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Strengths Ability to adapt products and services to local market conditions Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue

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Limitations Decreased ability to realize cost savings through scale economies Greater difficulty in transferring knowledge across countries

May lead to ―over adaptation‖ as conditions change.

Transnational 

Strengths Ability to attain economies of  scale

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Ability to adapt to local markets

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Limitations Unique challenges in determining optimal locations of activities to ensure cost and quality Unique managerial challenges in fostering knowledge transfer

Ability to locate activities in optimal locations Ability to increase knowledge flows and learning

5. What is the basis of Alan Rugman’s argument that most multinationals are still more regional than global? What factors inhibit firms from becoming truly global?

Extensive analysis of the distribution data of sales across different countries and regions led Rugman and Verbeke to conclude that there is a stronger case to be made in favor of regionalization than globalization. According to their study, a company would have to have at least 20 percent of its sales in each of the three major economic regions – North America, Europe, and Asia – to be considered a global firm. They found that only 9 of the world’s 500 largest firms met this standard. Most companies are regional, or, at best, bi-regional — not global---even today. 6. Describe the basic entry strategies that firms have available when they enter international markets. What are the relative advantages and disadvantages of each? Exporting Licensing and Franchising Strategic Alliances and Joint Ventures Wholly Owned Subsidiaries