Chapter 7 - Global Strategy

Question 1

• Globalization

Answer 1

a term that has two meanings: (1) the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information; (2) the growing similarity of laws, rules, norms, values, and ideas across countries.

Question 2

• Four factors affecting Nation’s Competitiveness (diamond of national advantage)

Answer 2

o a framework for explaining why countries foster successful multinational corporations; consists of four factors—factor endowments; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry.

Question 3

o Factor endowments/conditions

Answer 3

The nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry.
 Tangible factors.
 To achieve competitive advantage, factors of production must be industry specific and firm specific.
 Pool of resources is less important than the speed at which resources are deployed.

Question 4

o Demand conditions.

Answer 4

The nature of home-market demand for the industry’s product or service.
 Demanding customers drive firms in a country to meet high standards, upgrade existing products and services, create innovative products and services

Question 5

o Related and supporting industries.

Answer 5

The presence or absence in the nation of supplier industries and other related industries that are internationally competitive.
 Enable firms to manage inputs more effectively
 Allow join efforts among firms

Question 6

o Firm strategy, structure, and rivalry.

Answer 6

The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
 Rivalry is intense in nation with conditions of strong consumer demand, strong supplier bases, high new entrant potential from related industries

Question 7

Motivations for international expansion

Answer 7

o Increase market size
o Taking advantage of arbitrage opportunities:
o Enhancing a product’s growth potential
o Optimize the location of value chain activities
o Explore reverse innovation

Question 8

Risks of international expansion

Answer 8

o Political and economic risk:
o currency
o Management risks:

Question 9

o Outsourcing:

Answer 9

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

Question 10

o Offshoring:

Answer 10

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

Question 11

• Two Opposing Pressures in International Expansion: Reducing Costs and Adapting to Local Markets

Answer 11

Reducing Costs and Adapting to Local Markets

Question 12

o Four strategies for international expansion

Answer 12

 International strategy:
 Global Strategy:
 Multidomestic strategy:
 Transnational strategy:

Question 13

International strategy

Answer 13

low pressure to lower costs, low pressure for local adaptation
• a strategy based on firms’ diffusion and adaptation of the parent companies’ knowledge and expertise to foreign markets; used in industries where the pressures for both local adaptation and lowering costs are low.
• The primary goal of the strategy is worldwide exploitation of the parent firm’s knowledge and capabilities.
• Strengths:
o Leverage of parent firm’s knowledge and core competencies
o Lower costs because of less need to tailor products
• Weaknesses:
o Limited ability to adapt to local markets
o Inability to take advantage of new ideas in local markets

Question 14

Global Strategy

Answer 14

high pressure to lower costs, low pressure for local adaptation
• a strategy based on firms’ centralization and control by the corporate office, with the primary emphasis on controlling costs; used in industries where the pressure for local adaptation is low and the pressure for lowering costs is high.
• Emphasizes economies of scale
• Strengths:
o Strong integration across various businesses
o Standardization leads to higher exonomies of scale which lowers costs
o Helps create uniform standard of quality throughout the world
• Weaknesses
o Limited ability to adapt to local markets
o Concentration of activities may increase dependence on a single facility
o Single locations may lead to higher tariffs and transportation costs

Question 15

Multidomestic strategy

Answer 15

low pressure to lower costs, high pressure for local adaptation
• a strategy based on firms’ differentiating their products and services to adapt to local markets; used in industries where the pressure for local adaptation is high and the pressure for lowering costs is low.
• Authority is decentralized
• Strengths:
o Ability to adapt products and services to local market conditions
o Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue
• Weaknesses:
o Decreased ability to realize cost savings through scale economies
o Greater difficulty in transferring knowledge across countries
o May lead to “overadaptation” as conditions change

Question 16

Transnational strategy

Answer 16

high pressure to lower costs, high pressure for local adaptation
• a strategy based on firms’ optimizing the trade-offs associated with efficiency, local adaptation, and learning; used in industries where the pressures for both local adaptation and lowering costs are high.
• Firm’s assets and capabilities are dispersed according to the most beneficial location for a specific activity
• Strengths:
o Economies of scales
o Adapt to local market
o Ability to locate activities in optimal locations
o Increase knowledge flows and learning
• Weaknesses:
o Unique challenges in determining optimal locations of activities to ensure cost and quality
o Unique managerial challenges in fostering knowledge transfer

Question 17

• Entry Modes of International Expansion

Answer 17

• Exporting
• Licensing
• Franchising
• Strategic Alliance
• Joint Venture
• Wholly Owned Subsidiary

Question 18

Exporting

Answer 18

producing goods in one country to sell to residents of another country.

Question 19

Licensing

Answer 19

a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual property.

Question 20

Franchising

Answer 20

a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; franchising usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising.

Question 21

Strategic alliance

Answer 21

an arrangement between two companies to undertake a mutually beneficial project while each retains its independence.

Question 22

Joint venture

Answer 22

A joint venture is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance

Question 23

Wholly Owned Subsidiary

Answer 23

a business in which a multinational company owns 100 percent of the stock.

Question 24

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?

Answer 24

a. Factor endowments/conditions. The nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry.
i. Tangible factors.
b. Demand conditions. The nature of home-market demand for the industry’s product or service.
c. Related and supporting industries. The presence or absence in the nation of supplier industries and other related industries that are internationally competitive.
d. Firm strategy, structure, and rivalry. The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
e. Porter’s Diamond Model of National Advantage explains why some industries in some countries are so much more developed and competitive compared to industries elsewhere on the planet. Helps firms analyze domestic competition and competition of expanding into international market