IBS Exam 3

Market Entry

Where, when, and on what scale?
a. The question of “where” a multinational should invest in productive assets is a
function of a number of factors already covered in this course (ex: The
Eclectic Paradigm, market access, the C.A.G.E. framework, opportunities for
location economies, etc…).
b. The question of “when” to enter a foreign market will require a careful
analysis of the advantages and disadvantages of being either a first-mover or a
later entrant into a market

First mover Advantages

Preempting rivals by
establishing a brand in a
nation early on
• Ability to build sales
volume early on, resulting
in cost advantages over later
entrants
• Ability of first entrants to
create switching costs that
tie customers to their
products

First mover disadvantages

First movers have
“pioneering costs,” or the
time, effort, and expense
devoted to learning about
doing business in a new
market
• Pioneer costs associated
with “educating” local
consumers on new product
categories
• Host countries often adjust
regulations governing an
industry after their initial
experiences with foreign
competition

Late Entrant Advantages

• Later entrants can essential
learn from the mistakes &
trials of first movers,
allowing them to avoid
some learning costs
• After first entrants have
“educated” local consumers
about a product category,
later entrants have the
advantage of a market that
is familiar with their
product offering
• Later entrants are less likely
to face uncertainty in terms
of host-government
regulations

Late entrant Disadvantages

Late entrants enter as lessknown brands
• Late entrants often face
rivals with greater local
sales volume and lower
costs
• There may be established
switching costs for
consumers, & this may
make it more difficult to
capture market share

Scale

The “scale” of an initial investment into a foreign market is tied to a number
of different strategic issues and the advantages and disadvantages to both
large- and small-scale entries need to be considered at lengt

Large-scale entry

(Especially common in
multinationals from lowuncertainty avoidance
countries)

Large-scale Advantage

Large-scale entries show
customers, distributors, and
local governments that you
are committed to a market
• Large-scale entries create
perceived entry barriers for
potential later entrants
• Large-scale entries are more
likely to result in firstmover advantages (Ex:
scale economies, switching
costs, etc.)
• The resulting lack of
strategic flexibility may
actually encourage
multinationals to do
everything possible to
succeed in a new market

Large-scale disadvantages

It is difficult to reverse
large-scale entry
commitments
• Large-scale entries tie up
resources and decrease
overall strategic flexibility
of multinationals
• Big investments amplify the
risks of investing in
operations in new markets
(you have more to lose)

Small-scale entry

(Especially common in
multinationals from highuncertainty avoidance
nations)

Small scale entry Advantages

• Small-scale entry allows a
multinational to limit
exposure while learning
about a market
• After experiencing a market
through small-scale entry, a
firm can decide to increase
its commitment to that
market
• Experience gained through
small-scale entry can reduce
risks associated with later
investments into the market

Small-scale entry disadvantages

It is difficult to achieve
first-mover advantages with
small-scale entries (Ex:
scale economies, switching
costs, etc.)
• Because resource
commitments are smaller, it
is easier to “reason” a
divestment of an
investment, meaning a loss
• Small-scale entries do not
signal long-term
commitment to local
distributors, consumers, and
governments

Entry Modes

How a firm decides to INITIALLY enter a foreign market

Entry modes

exporting, licensing, franchising, joint ventures, wholly owned subsidiaries

Exporting

Shipping goods from production centers in one country (often the
multinational’s home country, but not always) to different national markets

Licensing

An arrangement whereby a licensor grants the rights to intangible
property (intellectual property, brands, processes, recipes, etc…) to a licensee
for a specified period, and in return, the licensor receives a royalty fee from
the licensee

Franchising

A specialized form of licensing in which the franchiser not only
sells intangible property (normally a trademark) to the franchisee, but also
insists that the franchisee agrees to abide by strict rules as to how it does
business

Joint Ventures

Establishing a firm that is jointly owned by two or more
otherwise independent firms (joint venture partners can be either local, or
other foreign firms).

Wholly-owned Subsidiaries

The multinational owns 100% of the equity in a
foreign subsidiary

Exporting Advantages

Ability to realize location &
Experience economies
• Simplicity

Exporting Disadvantages

High transport costs
• Trade Barriers
• Problems with local agents

Licensing Advantages

Low development costs &
risks

Licensing Disadvantages

Lack of control over
technology
• In ability to realize location
and experience curve
economies
• In ability to engage in
global strategic
coordination

Franchising Advantages

Low development costs &
risks

Franchising Disadvantages

Lack of control over quality
• Inability to engage in global
strategic coordination

Joint venture advantages

Access to local partner’s
knowledge
• Sharing development costs
& risks
• Politically acceptable

Joint Ventures Disadvantages

• Lack of control over
technology
• Inability to engage in global
strategic coordination
• Inability to realize location
& experience economies

Wholly-owned subsidiaries advantages

Protection of technology
• Ability to engage in global
strategic coordination
• Ability to realize location &
experience economies

Wholly-owned subsidiaries Disadvantages

high costs and risks

Strategic Alliances

Cooperative agreements between potential, or actual,
competitors (the focus in this course is on strategic alliances between firms from
different home nations).

Strategic Alliances Advantages

Alliances can facilitate entry into a foreign
market (Ex: joint venture)
• Strategic alliances allow firms to share the
fixed costs, and associated risks, of
developing new products (this is extremely
common in pharmaceuticals)
• Alliances are a way to bring together
complimentary skills and assets that neither
company could easily (in terms of time and
expense) develop on their own
• Alliances make sense if they help to establish
technological standards for the industry that
will benefit the firm

Strategic Alliances Disadvantages

Alliances can give competitors a low-cost
route to new technology (“hollowing out”
their partner)
• Alliances can give competitors a low-cost
route to new markets (taking over their
partner’s neighborhood)
*A firm can give away more than it receives if it
is not careful

Making alliances work

Alliance success seems to be a function of 3 factors:
partner selection, alliance structure, and the manner in which an alliance is
managed.

Partner selection

1. The partner must have some capability that can help you to
achieve your strategic goals.
2. The partner has a compatible vision for the purpose of the
alliance (“win-win” intentions).
3. The partner is unlikely to try to opportunistically exploit the
alliance for its own ends (expropriating their partner’s
capabilities while giving away little in return).

Alliance structure

1. Design the alliance in such a way that you protect, or “wall
off,” the technology, processes, and capabilities that you do not
want to transfer. This might mean separating these activities so
that take place outside of the alliance.
2. Use contractual safeguards in alliance agreements to guard
against the risk of opportunism.
3. Agree in advance to swap the skills that each partner wants, and
then do everything possible to make sure that this equitable
exchange is successful (without transferring more).
4. Require a credible commitment, in order to discourage
opportunism (Ex: exchange equity, or invest in a 50/50 joint
venture).

Managing the alliance

Be a student-teacher, and not a teacher-student

The first decision: MAKE or buy?

a. The advantages of making part, or all, of a product in house include: 1)
lowering costs over time, 2) avoiding dependency on independent suppliers, 3)
safe-guarding technological capabilities from being transferred to suppliers, 4)
and more efficient/tighter coordination and control over the flow of parts to
value-producing activities.

The first decision: Make or BUY?

The advantages of buying part, or all, of a product from an independent
supplier include: 1) the ability to shift orders to different suppliers/locations as
conditions change (e.g. anticipated exchange rates change, government
policies change, local economic/political instability, etc…); 2) in cases when
in-house production causes extreme complexity and increased coordination
costs, the activity is unrelated to existing capabilities, the activity is not a
crucial source of competitive advantage to be developed over time, and it is
difficult to internally assess the value of components, then it may be more cost
effective to buy; 3) and if you source/buy many parts from a particular country,
it may result in preferential treatment from the local government

Production

The activities involved in creating a product (or service). In general, the
major strategic decision is to centralize production in one (or a few) locations, or
decentralize production in many locations.

(Industry Agglomeration)

iii. Expected future movements in exchange rates can also make a nation
attractive (or unattractive).

Fixed costs

If the fixed cost of setting up a production plant is low,
then it is economical to flexibly produce in multiple locations to
arbitrage institutional differences and shift production with regulatory
changes and exchange rate fluctuations.

Minimum Efficient Scale

The minimum efficient scale is the level of
output at which most plant-level scale economies are exhausted. If the
minimum efficient scale is large, then it may be better to limit
production to one, or a few, locations. If the minimum efficient scale is
low, then it may be advantageous to disperse production among more
plants (technological advances are decreasing average minimum
efficient scales in most industries).

Flexible Manufacturing & Mass Customization

Flexible
manufacturing technologies improve efficiency and lower costs, while
also allowing firms to efficiently and cost effectively customize to
smaller consumer groups. As a consequence, flexible manufacturing
decreases the pressures to localize production in foreign markets to
customize to local tastes.

Manufacturing Technological Factors

Fixed Costs, minimum efficient scale, flexible manufacturing and mass customization

Product Factors

Value to weight, Serves a universal need

Value-to-weight

If the ratio of value to weight is high, then
transportation costs will be lower relative to the overall cost of the
product. Hence, a high value-to-rate ratio means that there is a weaker
argument for locating production in various markets served to avoid
transportation costs.

Serves a universal need

If a product serves a universal need (ex:
industrial products), then it is less sensitive to local preferences and it
means that there is a weaker argument for local production in various
markets served to localize and cater to differences in tastes.

Logistics

The activity that controls the transmission of physical materials through the
value chain, from procurement through production and into distribution. Potential cost
savings from efficient logistics is considerable.

Just-in-time (JIT) inventory

Coordinating the flow of inputs such that
materials for manufacturing arrive just in time to be utilized in the production
process. By not having these materials arrive earlier, firms save on inventory
holding costs.

Advantages of JIT

Cost savings, and it is easier/cheaper to correct
deficiencies in quality when there is not already a stockpile of deficient
input materials.

Disadvantages of JIT

Not having a stockpile of inputs makes it
difficult to respond to unanticipated spikes in demand, and not having
a stockpile means that if supply lines are interrupted it is difficult to
continue with production. However, having a dispersed network of
suppliers in different locations, utilizing differing amounts of slack in
their production capabilities, can help to overcome these disadvantages.

Information Technology and the Internet

Electronic data interchange
(EDI) systems allow real time integration of suppliers, shippers, and
customers via the internet. As a result, communication and coordination costs
have fallen dramatically in logistics and it has become ever more feasible to
effectively establish and utilize complex systems of production and delivery
that reduce costs.

The evolving Strategic Role of International HRM

Given the importance of
culture, incentives, controls, and people for organizational architecture and the
strategic focus that it supports, it is not surprising that HRM is a key part of
international strategy. Additionally, HRM decisions (such as staffing decisions) can
support or hinder international strategies (e.g. global standardization strategies,
localization strategies, transnational strategies)

Staffing Policy Ethnocentric vs Polycentric vs Geocentric Approach

The selection of employees for particular jobs.

The Ethnocentric Approach

This approach emphasizes a preference for
placing nationals of the multinational’s home country in foreign subsidiary
management positions. The arguments for using an ethnocentric approach to
fill a position include 1) a lack of qualified individuals locally, 2) it allows
firms to maintain a unified corporate culture across subsidiaries, 3) it makes it
easier to transfer core competencies, and 4) it allows headquarters to maintain
tighter controls over key functions (i.e. finance) in foreign subsidiaries.
i. Strategic appropriateness: International strategies
ii. In practice, a multinational rarely uses any one of these approaches
across its entire multinational network, and ethnocentric staffing
decisions in foreign subsidiaries are most common for the finance
function and in subsidiaries located in developing countries.
iii. The dangers of an ethnocentric approach are in the lack of localization
and resulting host-country employee resentment, turnover, lower
productivity, and etc.

The Polycentric Approach

This approach emphasizes a preference for
placing host-country nationals in management positions in the host country.
The arguments for using a polycentric approach to fill a position include 1)
cultural understanding in managers and 2) lower costs than maintaining
foreign managers in a host country.
i. Strategic appropriateness: Localization strategies
ii. In practice, a multinational rarely uses any one of these approaches
across its entire multinational network, and polycentric staffing
decisions in foreign subsidiaries are most common for the marketing
and HR functions in foreign subsidiaries.
iii. The dangers of a polycentric approach are in the lack of integration
with headquarters and other subsidiaries of the multinational. The
results can make it difficult to coordinate and communicate, transfer
capabilities, and build trust between home- and host-country managers

The Geocentric Approach

This approach to staffing seeks to place the best
people in key jobs across the multinational, regardless of their nationality. The
arguments for using a geocentric approach to fill positions include: 1) the ability to place human resources in their optimal positions an 2) the ability for
the multinational to build a cadre of culturally literate executives.
i. Strategic appropriateness: Global standardization and transnational
strategies
ii. In practice, a multinational rarely uses any one of these approaches
across its entire multinational network, and geocentric staffing
decisions in foreign subsidiaries are most common for the operations
that require a high level of coordination and integration between
subsidiaries (e.g. transnational and global standardization strategies).
iii. The dangers of a geocentric approach include difficult immigration
policies, expensive training and compensation, and the very real
possibility of executives being poached by competitors after they have
experience and (costly) training.

Expatriate Managers

The ethnocentric and geocentric approaches require firms to
utilize expatriate managers, or “expats,” to fill positions. However, selecting and
maintaining Expats can be a tricky process, given high expatriate failure rates and the
difficulty in finding individuals who meet the appropriate selection criteria

Expatriate failure

This term refers to the premature return of an expatriate
manager to his/her home country. In general, failure rates are high in
multinationals from almost every country and common causes include the
failure of spouses to adjust, difficulty in cultural adjustment, the feeling of
isolation from headquarters (and resulting paranoia… “I am out of the loop
and will be forgotten”), and other issues.

expatriate selection

To reduce expatriate failure rates, firms need to use appropriate expatriate
selection processes. To begin with, this means realizing that domestic
performance does not automatically translate to international performance. In
addition, when selecting expatriate managers, firms need to consider the selforientation, emotional intelligence, cultural intelligence, and cultural
toughness/tolerance of candidates.

Self-orientation

Self-esteem, self-confidence, and mental well-being

Emotional intelligence

The ability to communicate, empathize, and
develop relationships with others.

Cultural intelligence

The ability to understand cultural differences
and act in ways that avoid cross-cultural clashes/conflicts. Or, the
person’s ability to effectively interact with those from different
cultures.

Cultural toughness

The ability to deal with and operate in foreign
cultures with various intensities of differences. For example, US
managers would find Canada, Britain, and Australia to be a somewhat
smooth adjustment, but working in Burma would require a greater
effort to adjust

Training

Cultural language and practical training

Cultural training

Given the difficulty in adjusting to a new culture
(for the manager and the manager’s family), many companies are
starting to emphasize the importance to familiarizing expats with all
aspects of a host-country’s culture before departure.

Language training

Even if the working language of a foreign
subsidiary is the same as the home nation of a multinational, at least a 3 basic understanding of the local language will facilitate expat
adjustment and will be appreciated by locals

Practical training

Expats and their families should be made aware of
the local communities and resources that they will have access to, as
these support systems will lessen the difficulty of adjusting to a new
culture.

Repatriation of expatriates

Repatriation is often opaque and poorly
executed. As a result, returning managers often feel as though their status
positions have fallen, experience difficulty in readjusting to their home culture,
and frequently leave the multinational within the first few years of return. To
reduce the negative impacts of repatriation, firms need to offer emotional
support, clearly communicated return plans (including the position and
responsibilities that the expat will hold upon return), and frequently pay for
return trips home throughout the foreign assignment.

Management development and strategy

Given the importance of human
resources in international strategies (and transnational strategies in particular),
it is important to view expatriate experiences as opportunities for managerial
development. In addition, by bringing managers together in one location for
extended periods of time and rotating them through various expatriate
assignments, firms will be better able to develop managers who can integrate
across the multinational (standardization/integration), while simultaneously
taking local differences (localization) into account.

Performance Appraisal

When evaluating the performance of a manager in a foreign
subsidiary there is no easy answer on the ONE approach because of large distances
and home-country biases. Instead, the best practice is to base performance appraisals
on quantitative and qualitative assessments from as many different sources as possible
given cost and time restrictions (Note: this is a different answer from the one given in
the book).

Compensation

Again, when setting compensation levels for expatriates, there is no
easy answer to the question: “to use local standards or some global standard for
equalizing pay?” Undoubtedly, compensation will be at least partially influenced by
the laws of supply and demand (scarce MBA qualified professionals with
international experience are relatively rare compared to freshly minted and
inexperienced BA qualified professionals, resulting in a pay differential). However,
beyond the basic influences of supply and demand, one approach is to offer base
salaries to expats that equate to home-country salaries. Additionally, these base
salaries should be complimented by a premium for foreign service (i.e. an incentive to
foreign service), allowances (i.e. “hardship pay”) for an equal quality of life between
the home- and host- countries, local income taxes (when the home and host countries
do not have a reciprocal tax treaty), and benefits.

International Labor Relations

In a nut shell, multinationals enjoy a high degree of
operational flexibility (e.g. the ability to shift production, transfer pricing, etc), and
this could reduce the bargaining powers of organized labor in host countries (which
reduces their ability to demand better pay, job security, and working conditions). As a
result, organized labor has attempted to lobby for international regulations and
governing bodies that at least improve the bargaining position of organized labor in
every location (these attempts have met with very little real success). The best
practice is almost certainly for the HRM function to seek harmony with organized
labor across its operations. In practice, for large multinationals, an effective working

Market segmentation

Identifying distinct groups of consumers whose purchasing
behavior differs from others in important ways.
a. Segmentation can be based upon a range of parameters (e.g. geography,
demography, sociocultural variables, psychological factors, etc.)
i. Country, regulatory/institutional, geographic, economic, and cultural
differences often mean that international marketing will require
significant segmentation based upon differences…with customized
marketing efforts for different segments (pressure for local
responsiveness).
ii. If there are market segments that transcend national borders, it
means that firms are better able to use global standardization strategies
and use the same basic marketing mix across markets.

Product attributes

Some argue that products are simply bundles of attributes, and
products sell well if the bundled attributes match consumer needs. Given this idea, if
there are universal needs across national markets, the same bundle of attributes
(product) can be sold across national markets. Alternatively, when consumer needs
differ across national markets, bundles of attributes (products) will need to be
customized depending upon differing factors (culture, economic development,
regulations, etc…).
i. Note: More recently, marketing scholars have offered what is known
as “service-dominant logic.” This approach suggests that services, not
goods, are the basis of exchange. Further, goods/products are actually
just the delivery mechanism for services. Hence, marketers need to
shift their focus from goods as a bundle of attributes to goods and their
attributes being vehicles for the delivery of services. This approach
changes how marketing messages are framed and changes the interface
between marketing and R&D (to focus on serving consumer needs
instead of product attributes that satisfy consumer needs).

Cultural differences

While many consumers in the world are trending
towards more cosmopolitan tastes (supporting Levitt’s argument for a global
convergence of consumer preferences; e.g. the industrialized diet), there are
still more cultural differences that are enduring (providing evidence contrary
to Levitt’s thesis). E.g. dietary traditions, taste preferences (root beer is largely
a North American flavor), fragrance preferences, preferences for
speed/convenience of consumption, (in)flexibility in interpreting tradition, etc.

Economic development

In markets where purchases represent lower portions
of a consumer’s overall income (developed nations), consumers are more
likely to require attributes that satisfy the basic needs associated with the
product. On the other hand, in developed countries, consumers are less likely
to sacrifice additional attributes for lower prices (contrary to Levitt’s thesis).

Product and technical standards

Differing government-mandated product
standards can rule out mass production and marketing of a standardized
product (a global standardization strategy).

Distribution strategy

The chosen strategy for delivering a firm’s product to
consumers.

Differences between countries

Retail concentration, channel length, Channel Exclusivity, Channel quality

Retail concentration

Level of Retail concentration: In highly concentrated retail systems,
there are fewer retailers that supply most of the market. In less
concentrated, or fragmented, retail systems, there are many retailers
that supply the market. In general (but certainly not always), economic
development is associated with higher retail concentration

Channel length

Channel length refers to the number of intermediaries
between a producer and consumer. When producers sell directly to
consumers, the channel is very short. However, if importers,
wholesalers, retailers, and etc are used, the channel is longer. In
general, highly concentrated retail systems facilitate shorter
distribution channels because producers can supply larger product
volumes to big retailers. However, in fragmented retail systems,
producers are more likely to sell to large wholesalers who place larger
orders (resulting in lower selling expenses than would be incurred by
targeting a large number of smaller retailers).
1. The use of internet sales and internationalization of large
retailers such as Wal-Mart may shorten channel length in some
markets with fragmented retail systems.

Channel exclusivity

In highly exclusive distribution channels, it can
be difficult (or impossible) for outsiders or new firms to access the
channel. In some countries, producer-retailer relationships have
developed over very long periods of time and have resulted in tacit
agreements that exclude new comers, allowing producers to avoid
competition and retailers to enjoy greater mark ups on price

Channel quality

Channel quality refers to the expertise,
competencies, and skills of established retailers in a nation, and their
ability to sell and support the products of an international business.
Channel quality will invariably differ across nations

Choosing a distribution strategy

The distribution strategy will be
determined by relative costs and benefits of alternatives. In general, longer
retail channels increase final prices for consumers and decrease profit margins
(not good for a low-cost strategy). However, if a market’s retail system is
highly fragmented, selling to a large wholesaler can decrease selling costs. In
addition, if distribution channels are very exclusive, then selling to a local
wholesaler/importer can help a firm to place its products with exclusive
retailers.

Communication strategy

How does a firm communicate product attributes to
customers (direct selling, sales promotion, direct marketing, advertising, etc).

Barriers to international communications

Cultural, Source and country of origin effects and noise level

Cultural barriers

Cultural differences limit a firm’s ability to use the
same marketing message and selling approach worldwide. In the face
of significant cultural differences, firms may need to develop crosscultural literacy, seek local input, and localize

Source and country of origin effects

In some cases, consumers may
interpret messages and products with reference to the image and status
of a seller (source effects), or the country of manufacturing origin
(country-of-origin effects)

Noise levels

Noise levels refer to the number of other messages
competing for a consumer’s attention.

Push strategy

This approach emphasizes personal selling, as opposed
to mass-media advertising in the promotional mix. This approach tends
to be emphasized for 1) industrial or complex new products, 2) markets
where distribution channels are short, and 3) markets where there are
few print or electronic media vehicles available

Pull strategy

This approach attempts to create demand by utilizing
mass-media advertising to communicate the marketing message to
potential consumers. This approach tends to be emphasized for 1)
consumer goods, 2) markets where distribution channels are long, and
3) markets where there are sufficient print and electronic media to
carry the marketing message.

Global advertising

(to standardize, or not to standardize? That is the
question):

In favor of standardization

1) standardization lowers costs, 2)
creative talent is scarce and one large effort might yield better than
dozens of smaller campaigns of variable quality, and 3) many brands
are global and would like to project a single consistent brand image to
avoid confusion

Against standardization

1) Cultural differences make
standardization difficult to execute, and 2) differences in (advertising)
regulations may make it impossible to standardize

The transnational approach

Some firms have attempted to combine
elements of standardization and localization in their global advertising.
Specifically, these firms select some elements to include in all of their
advertising, while selecting other elements to adjust based upon local
markets.

Price discrimination

Price discrimination refers to charging different prices
for the same product in different markets. This is possible where 1) a firm can
keep its national markets separate, and 2) there are different price elasticities
of demand in different countries (elastic demand means that a small change in
price results in a large change in demand; while inelastic demand means that a
large change in price produces only a small change in demand) .

Strategic/competitive Pricing

Predatory ,multipoint and experience curve pricing

Predatory pricing

The use of price as strategic weapon to drive
weaker competition out of a national market. Firms engaging in
predatory pricing need to be wary of anti-dumping regulations and
competition policies to avoid government sanctions.

Multipoint pricing

Multipoint pricing refers to competitive industry
behaviors where one firm’s pricing strategy in a national market
(usually the home market of a rival), may result in a retaliatory pricing
strategy in another market by a competitor (usually the rival will lower