Session 11: MNC Strategies: Entering Developed and Emergin Markets

Question 1

4 strategis to choose from

Answer 1

1. Global standardization strategy
2. Transnational strategy
3. International strategy
4. Localization strategy

Question 2

Global Standardization Strategy

Answer 2

Firms that pursue a global standardization strategy focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies.

Question 3

Localization Strategy

Answer 3

A localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national or regional markets

Question 4

Transnational Strategy

Answer 4

• simultaneously achieve low costs through location economies, economies of scale, and learning effects;
• differentiate their product offering across geographic markets to account for local differences; and
• foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations

Question 5

International Strategy

Answer 5

• International strategy is taking products first produced for their domestic market and selling them
  internationally with only minimal local customization.
• Firms are selling a product that serves universal needs, but they do not face significant competitors;
• Firms are not confronted with pressures to reduce their cost structure

Question 6

Advantages and disadvantages of global strategy

Answer 6

Advantages: 1.Exploit experience curve effects 2.Exploit location economies

Disadvantages: 1.Lack of local responsiveness

Question 7

Advantages and disadvantages of international strategy

Answer 7

Advantages: 1.Transfer core competencies to foreign
markets

Disadvantages: 1.Lack of local responsiveness 2.Inability to realize location economies 3.Failure to exploit experience curve effects

Question 8

Advantages and disadvantages of localization strategy

Answer 8

Advantages: 1.Customize product offerings and marketing in accordance with local responsiveness

Disadvanatages: 1.Inability to realize location economies 2.Failure to exploit experience curve effects 3.Failure to transfer core competencies to foreign markets

Question 9

Advantages and disadvantages of transanational strategy

Answer 9

Advantages: 1.Exploit experience curve effects 2.Exploit location economies 3.Customize product offerings and marketing in accordance with local
responsiveness 4.Reap benefits of global learning

Disadvantages: 1.Difficult to implement due to organizational proble

Question 10

MNC Strategy: Entering A New Market

Answer 10

1. Three basic decisions that firms contemplating foreign expansion must make:
   A. Which markets to enter
   B. When to enter
   C. On what scale.
2. Different modes that firms use to enter foreign markets.
3. Factors that influence a firm’s choice of entry mode.
4. Pros and cons of acquisitions versus greenfield ventures as an entry strategy.

Question 11

Mode of market entry. Opening Case: IKEA in India

Answer 11

• Swedish operations seldom customized
• Consider Advantages and Disadvantages for every mode of entry
• Focus on understanding the Indian customers’ mindset,
• Experiential Centre – IKEA Hej – 5 year research

Indian Market
* Swedish furniture with an “Indian flavor.

Question 12

Basic Entry Decisions. Which Foreign Markets?

Answer 12

• 195 countries
• Uneven opportunities and profit potential
• Base Decision on an assessment of a nation’s long-run revenue potential
• Balance the benefits, costs and risks associated with doing
  business in that country

Question 13

Timing of Entry; go early or late?

Answer 13

First or Early Mover
* Advantages – Establish Brand, Sales Volume, Experience Curve
* Disadvantages - Pioneering Costs (Promotion, Regulation)

Late Movers or Entrants
* Advantages: Experience, Avoid Pioneering Costs
* Disadvantages: Switching Costs, Cost Disadvantage

Question 14

Scale of Entry and Strategic Commitments

Answer 14

• Large scale of entry requires the commitment of significant resources and rapid entry.
• A large strategic commitment has a long-term impact, and it cannot be easily reversed, yet it can capture first-mover advantages.
• Large commitment to one country often means less resources to support expansion in other markets.
• Small-scale entry limits the firm’s exposure to just one market, while allowing it to both learn about the market and diversify.

Question 15

Market Entry Summary

Answer 15

• No “right” decision, difference in risk and reward levels
• Entering a large developing nations such as China or India before other international businesses in the firm’s industry, and entering on a large scale, will be associated with:
  ✓high levels of risks and
  ✓high rewards
• Businesses from developing countries looking to become late entrants in global markets: Success depends on their ability to serve market niches and benchmark their operations and performance.

Question 16

6 Entry Modes

Answer 16

1. Exporting
2. Turnkey Projects
3. Licensing
4. Franchising
5. Joint Ventures
6. Wholly Owned Subsidiary

Question 17

Exporting advantages

Answer 17

1. Avoids the often-substantial
   costs of establishing manufacturing operations in the host country.
2. May help a firm achieve
   experience curve and location economies.

Question 18

Exporting disadvantages

Answer 18

1. May not be appropriate if there are lower-cost manufacturing locations abroad.
2. High transport costs can make exporting uneconomical, particularly for bulk products.
3. Tariff barriers can make exporting uneconomical.
4. Foreign agents often carry the products of competing firms and so have divided loyalties

Question 19

Turnkey projects definition

Answer 19

Turnkey projects occur when a contractor handles all details of a
project for a foreign client, including the training of operating
personnel.
At the completion of the contract, the foreign client is handed the
“key” to a plant that is ready for full operation.

Question 20

Turnkey advantages and disadvanatages

Answer 20

Advantages: Way to earn great economic benefits from a technologically complex project where FDI is limited

Disadvantages: No long-term interest in the foreign market and creating a competitor

Question 21

Licensing definition and example

Answer 21

A licensing agreement is an arrangement where a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee.
Intangible Property: inventions, formulas, designs, copyrights,
trademarks and processes.
- Disney licenses characters to companies worldwide for use on products like toys, clothing and stationary.

Question 22

Licensing advantages and disadvantages

Answer 22

Advantages: Firm does not have to bear developmental costs and risks, appropriate for markets where it would be prohibited by barriers to investment.

Disadvantages: Loss of control over manufacturing, marketing and
strategy → firm does no realize experience curve and location economies.

Question 23

Franchising definition and example

Answer 23

Franchising is a specialized form of licensing in which a franchiser not
only sells intangible property (normally a trademark) to a franchisee, but also insists that the franchisee agrees to bide by strict rules as to how the business is conducted.
- McDonald’s operates through franchising in many countries, where local business owners run individual stores following McDonald’s brand and operational standards.

Question 24

Franchising advantages and disadvantages

Answer 24

Advantages: Similar to licensing, the franchisee assumes all the costs and risks.

Disadvantages: The firm does no realize experience curve and
location economies and quality control.

Question 25

Joint Venture definition and example

Answer 25

A joint venture entails establishing a firm that is jointly owned by
two or more otherwise independent firms.

Question 26

Joint venture advantages and disadvantages

Answer 26

Advantages: A firm benefits from local partner’s knowledge of the
host country’s competitive environment and shares with the local firm the developmental costs and risks. In some countries, joint
ventures are the only feasible entry mode.

Disadvantages: A firms risks giving control of its technology to its
partner, lack of control over subsidiary needed to realize experience curve or location economies and shared ownership arrangements can lead to conflicts over control.

Question 27

Wholly Owned Subsidiaries definition and example

Answer 27

Wholly-owned subsidiaries occur when a firm owns 100 percent of its stock. By establishing a wholly-owned subsidiary in a foreign market:
1. The firm can either set up a new operation in the host country
(Greenfield venture); or
2. The firm acquires an established firm in the host nation and uses that firm to promote its products.
- Tesla owns a manufacturing plant in Shanghai, China, which is a fully owned subsidiary of Tesla Inc.

Question 28

Wholly owned subsidiaries advnatages and disadvantages

Answer 28

Advantages: Reduces the risk of loosing control over technological
competence necessary for engaging in global strategic coordination
and allows the firm to realize location and experience curve economies

Disadvantages: It is the most costly method of serving a foreign market, firms bear all the costs and risks and have to learn about new cultures or acquire enterprises in the host country.

Question 29

Technological Know-How

Answer 29

If a firm’s competitive advantage is based on control over proprietary
technological know-how, licensing and joint venture should be avoided to minimize the risk of losing control over that technology

Question 30

Management Know-How

Answer 30

• The competitive advantage of many service firms is based on management know how (e.g., McDonald’s).
• For such firms, the risk of losing control over the management skills to franchisees or joint-venture partners is not that great.
• These firms’ valuable asset is their brand name, and brand names are generally well protected by international laws pertaining to trademarks.

Question 31

Pressures for Cost Reduction and Entry Mode

Answer 31

• The greater the pressure for cost reduction the more likely the firm will pursue a combination or exporting and wholly owned subsidiaries
• The firms strategy (i.e. global standardization or transnational) play an important part when choosing an entry mode.

Question 32

Pros and Cons of acquisitions

Answer 32

PROS:
* A firm can rapidly build its presence in the target foreign market
* pre-empt competitors
* Managers believe acquisitions are less risky than Greenfield ventures

CONS:
* Firms often overpay for the assets of the purchased firm
* clash between the cultures of the acquiring and acquired firm
* Differences in management philosophy

Question 33

Pros and Cons of Greenfield Ventures

Answer 33

PROS:
* A firm’s greater ability to build the
kind of subsidiary company it wants
* It is much easier to establish a set of operating routines in a new subsidiary

CONS:
* Greenfield ventures are slower to establish
* Greenfield ventures are risky

Question 34

Why do Acquisitions Fail?

Answer 34

1. The acquiring firms often overpay for the assets of the purchased firm. E.g., the price of the target firm can get bid up if more than one firm is interested in its purchase.
2. There is a clash between the cultures of the acquiring and
   acquired firm. E.g., after an acquisition, many acquired
   companies experience high management turnover, possibly because their employees do not like the acquiring company’s way of doing things