CH 7 – International Strategy: Creating Value in Global Markets

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Diamond of National Advantage

a model that explains why a country fosters successful multinational corporations

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Demand Conditions

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the home market demand for the industry’s product or service

  • strong trait of the U.S ; more willing to try NEW products/innovations than other countries

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13 Terms

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Diamond of National Advantage

a model that explains why a country fosters successful multinational corporations

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Demand Conditions

the home market demand for the industry’s product or service

  • strong trait of the U.S ; more willing to try NEW products/innovations than other countries

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Factor Endowments

a nation’s position in the factors of production

  • another factor U.S is strong in ; many laborers and land

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Firm Strategy, Structure, and Rivalry

 the conditions in the nation for which companies are created, organized, and managed, as well as the nature of domestic competition/rivalry 

  • aka: business knowledge ; need the skill and knowledge/info to manage 

  • another factor U.S is strong in

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Related Supporting Industries

the presence, absence, and quality in the nation of suppliers industries — better for the prosperity if suppliers to firm are WITHIN the SAME country

  • “controversial” ; external suppliers are good but it gives more bargaining power to external countries rather than stating within firm’s own country 

  • a WEAKNESS for U.S due to the reliance on external suppliers and countries

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International Expansion [Desire to Enter Global Markets]: 

1. Motivations

Increase Market Size — increases demand when more people are reached

Take Advantage of Arbitrage: buy a product where it is cheap and sell it where it is expensive 

Optimize the Location of Value-Chain Activities: performance enhancement, cost reduction, risk reduction — by going into other parts of the world, performance increases due to access to new information, cheaper labor, more gov’t/legal support, more effective R&D, etc.

  • DON’T invest on cheap financing, won't always translate to great profits 

2. Risk

Political Risks

Economic Risk and Counterfeiting

Currency Risks — fluctuations within currency exchanges

Management Risk — entering a new country and not adhering to their culture

Management Risk: WHY do Expatriate Management Fail?

many American expatriates FAIL when they do business outside of the U.S.

  • due to cultural differences of SPOUSE 

  • Expatriates: a person who leaves outside their native/home countries

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Outsourcing

using other firms to perform value-creating activity that were previously performed in-house

  • first, done WITH-IN house, then, finding an OUTSIDE firm to do the work

    • usually done for cheaper costs

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Offshoring

shifting a value-creating activity from a domestic location to a foreign location

  • service of firm completed OUTSIDE of the FIRM and OUTSIDE OF NATIVE/HOME COUNTRY

    • first few years = cheaper for firm

    • AFTER 5 years = cost reductions are completely NEUTRALIZED 

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Hidden Cost of Offshoring:

  • Higher number of hours to produce the same product

  • More training and supervision costs

  • Intellectual property risks

  • Wage inflation

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Achieving Competitive Advantage in Global Markets

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4 Strategies to Compete Globally

Strategy 

Example

Major Strength 

Major Risk

International Strategy

Merick

Leverage knowledge and core competencies

Limited ability to adapt to local markets

Global Strategy

Sony 

Economies of Scale

COST EFFECTIVE

Dependence on a single facility

Multidomestic Strategy

Kraft

Adapt products to local markets

Low cost savings

Product Diversification = high costs

Transnational Strategy

McDonald’s

Adapt products to local markets AND pursue economies of scale

(cost efficient and adaptable)

High managerial challenges for knowledge transfer

COMPLEX

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Entry Modes of International Expansion

* the more you want to own and control = greater the investment and risk

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Strength and Risks of Entry Modes

Factor

Definition

Major Strength 

Major Risk

Example

Exporting 

Producing goods in one country to sell them in another country

Inexpensive to enter foreign markets 

Difficulty to meet local market needs

Diamond Company

Licensing & Franchising

- Contract for the right to use IP

- Contract for the right to use IP & monitoring and training 

Little risk and need to invest

Forgoes potential revenues and profits

Franchising: hotels 

Strategic Alliance & Joint Ventures

- Cooperation relationship b/w two or more firms

- ALLIANCE involving the contribution of equity to form a NEW ENTITY

Share risks and enhance learning 

Cultural issues can lead to conflict

Joint Venture: Cars/automobiles

Wholly Owned Subsidiary

A business in which a multinational company owns 100% of the stock

Possibly highest return

Most expensive and risky