Week 3 - Developing Transnational Strategies

Question 1

What are the 3 strategic objectives of developing a transnational strategy?

Answer 1

1. Global efficiency
2. Multinational flexibility
3. Worldwide learning

Question 2

What is global efficiency and how could it be enhanced?

Answer 2

• The ratio of the value of the MNE’s outputs to the value of its inputs
• Efficiency could be enhanced by increasing the value of outputs (i.e., securing higher revenues), lowering the value of its inputs (i.e., lowering costs), or doing both.

Question 3

What is multinational flexibility?

Answer 3

• The ability of a company to manage the risks and exploit the opportunities that arise from the diversity and volatility of the global environment.
• Multinational flexibility requires management to scan its broad environment to detect changes and discontinuities and then respond to the new situation in the context of the worldwide business.

Question 4

Explain the following risks:

1. Macroeconomic risks
2. Political risks
3. Competitive risks
4. Resource risks

Answer 4

• Macroeconomic risks that are completely outside the control of the MNE, such as changes in prices, factor costs, or exchange rates caused by wars, natural calamities, or economic cycles.
• Political risks that arise from policy actions of national government, such as managed changes in exchange rates or interest rate adjustments, or events that are related to political instability.
• Competitive risks that arise from the uncertainties of competitors’ responses to the MNE’s own strategies.
• Resource risks, such as the availability of raw materials, capital, or managerial talent.

Question 5

Why is worldwide learning important for MNEs?

Answer 5

A key asset of the MNE is the diversity of environments in which it operates. This diversity exposes the MNE to multiple stimuli, allows it to develop diverse capabilities, and provides it with broader learning opportunities than are available to a purely domestic firm.

Question 6

What are the 3 ways that MNEs can achieve their strategic objectives of developing a transnational strategy?

Answer 6

1. National differences
2. Scale economies
3. Scope economies

Question 7

How can national differences help the MNE achieve its 3 strategic objectives?

Answer 7

A firm can gain cost advantages by configuring its value chain so that each activity is located in the country that has the least cost for its most intensively used factor.

1. Achieving efficiency in current operations - benefiting from differences in factor costs - wages and cost of capital
2. Managing risks through multinational flexibility - Managing different kinds of risks arising from market or policy-induced changes in comparative advantages of different countries.
3. Innovation, learning, and adaptation - Learning from societal differences in organizational and managerial processes and systems

Question 8

How can scale economies help the MNE achieve its 3 strategic objectives?

Answer 8

The higher volume that helps a firm to exploit scale benefits also allows it to accumulate learning, which leads to progressive cost reduction as the firm moves down its learning curve.

1. Achieving efficiency in current operations - Expanding and exploiting potential scale economies in each activity
2. Managing risks through multinational flexibility - Balancing scale with strategic and operational flexibility
3. Innovation, learning, and adaptation - Benefiting from experience - cosy reduction and innovation

Question 9

How can scope economies help the MNE achieve its 3 strategic objectives?

Answer 9

The strategic importance of scope economies arises from a diversified firm’s ability to share investments and costs across the same or different value chains – a source of economies that competitors without such internal and external diversity cannot match.

1. Achieving efficiency in current operations - Sharing of investments and costs across markets and businesses
2. Managing risks through multinational flexibility - Portfolio diversification of risks and creation of options and side bets
3. Innovation, learning, and adaptation - Shared learning across organizational components in different products, markets, or businesses

Question 10

Describe the international strategy.

Answer 10

• Focus on creating and exploiting innovations on a worldwide basis, using all the different means to achieve this end.
• At least initially, their internationalization process relied heavily on transferring new products, processes, or strategies developed in the home country to less advanced overseas markets.
• Tends to centralize resources that are key to developing innovations but decentralize others to allow its innovations to be adapted worldwide.

Question 11

Describe the multinational strategy.

Answer 11

• Companies adopting this approach tend to focus on the revenue side, usually by differentiating their products and services in response to national differences in customer preferences, industry characteristics, and government regulations.
• Typically disperses its resources among its different national operations to be able to respond to local needs.

Question 12

What are local-for-local innovations?

Answer 12

Local-for-local innovations – a process requiring the subsidiary to not only identify local needs but also use its own local resources to respond to those needs.

Question 13

Describe the global strategy.

Answer 13

• Depend primarily on developing global efficiency, use all the different means to achieve the best cost and quality positions for their products.
• Such efficiency comes with some compromises of both flexibility and learning:
o Companies that centralize R&D for efficiency reasons often find they are constrained in their ability to capture new developments in countries outside their home markets or to leverage innovations created by foreign subsidiaries in the rest of their worldwide operations.
• Tends to concentrate all its resources – either in its home country or in low-cost overseas locations – to exploit the scale economies available in each activity.

Question 14

Describe the transnational strategy.

Answer 14

• Recognizes that each of the traditional approaches (international, multinational, and global) is partial, that each has its own merits, but none represents the whole truth.
• Focuses on exploiting each and every goals-means combination to develop layers of competitive advantage by exploiting efficiency, flexibility, and learning simultaneously.
• Decides which key resources and capabilities are best centralized within the home-country operation, not only to realize scale economies but also to protect certain core competencies and provide the necessary supervision of corporate management.

Question 15

What are 3 different strategies for developing a worldwide competitive advantage?

Answer 15

1. Defending worldwide dominance
2. Challenging the global leader
3. Protecting domestic niches

Question 16

How can the major worldwide players defend their worldwide dominance?

Answer 16

• Companies that are among the major worldwide players in their business must focus on defending their dominance while also building new sources of advantage.
• Concentrate at least as much on defending and reinforcing their existing assets and capabilities as on developing new ones.
• Most successful adaptors looked for ways to compensate for their deficiency or approximate a competitor’s source of advantage, rather than trying to imitate its asset structure or task configuration.

Question 17

How can smaller global players challenge the global leader?

Answer 17

• Focusing on a narrow niche – often one specific product within one specific market – and developing a strong competitive position within that niche.
• Limited and carefully selected expansion along both product and geographic dimensions and extending the step-by-step improvement of both cost and quality to this expanded portfolio.
• Acquisitions

Question 18

How can companies protect their domestic niches from global competitors?

Answer 18

• Superior resources and multiple sources of competitive advantage.

• Might be able to foil the attempts of a global competitor by taking action to influence industry structure or market conditions to the national company’s advantage.
o Influencing consumer preference to demand a more locally adapted or service-intensive product
o Tying up key distribution channels
o Pre-empting local sources of critical supplies

• Offset the competitor’s global advantage
o Lobby for government assistance in the form of tariff protections
o Gain government sponsorship to develop equivalent global capabilities through funding of R&D, subsidizing exports, and financing capital investments.

• Approximate the competitor’s global advantages by linking up in some form of alliance or coalition with a viable global company.

Question 19

Identify and describe the 3 As of the AAA triangle.

Answer 19

• ADAPTATION seeks to boost revenues and market share be maximizing a firm’s local relevance.
• AGGREGATION attempts to deliver economies of scale by creating regional or sometimes global operations; it involves standardizing the product or service offering and grouping together the development and production processes.
• ARBITRAGE is the exploitation of differences between national or regional markets, often by locating separate parts of the supply chain in different places – for instance, call centers in India, factories in China, and retail shops in Western Europe.

Question 20

How does the AAA triangle concept apply to global companies?

Answer 20

• The AAA Triangle allows managers to see which of the three strategies – or which combination – is likely to afford the most leverage for their companies or in their industries overall.
• Most companies will emphasize different A’s at different points in their evolution as global enterprises, and some will run through all three.

Managers should pay attention to any scores above the median because, most likely, those are areas that merit strategic focus. Scores above the 90th percentile may be perilous to ignore.

Question 21

Provide examples of income statement items that represent the importance of each of the three A’s.

Answer 21

ADAPTATION - Companies that do a lot of ADVERTISING will need to adapt to the local market.

AGGREGATION - Those that do a lot of R&D may want to aggregate to improve economies of scale, since many R&D outlays are fixed costs.

ARBITRAGE - For firms whose operations are LABOUR intensive, arbitrage will be of particular concern because labour costs vary greatly from country to country.

Question 22

Explain the challenges of pursuing 2 of the 3 As, and how doing so gives companies a edge over competitors.

Answer 22

Although many companies will (and should) follow a strategy that involves the focused pursuit of just one of the three A’s, some leading-edge companies are attempting to perform two A’s particularly well.
o In some cases, a company wins because it actually beats competitors along both dimensions at once.
o More commonly, a company wins because it manages the tensions between two A’s better than its competitors do.

The pursuit of AA strategies requires considerable organizational and material innovation.

Question 23

What are some of the constraints on the ability of any one organization to use all three A’s simultaneously with great effectiveness?

Answer 23

1. The complexity of doing so collides with limited managerial bandwidth.
2. Many people think an organization should have only one culture, and that can get in the way of hitting multiple strategic targets.
3. Capable competitors can force a company to choose which dimension it is going to try to beat them on.
4. External relationships may have a focusing effect

Question 24

What are some of the broader lessons/practical implications of the AAA triangle?

Answer 24

• Focus on one or two of the A’s
• Make sure the new elements of a strategy are a good fit organizationally
• Employ multiple integration mechanisms
• Think about externalizing integration
• Know when not to integrate

Question 25

What are the advantages and disadvantages of the pioneer strategy?

Answer 25

Advantages:

• Pioneer returns through temporary monopoly
• Publicity and image advantages
• Faster realization of economies of scale
• Establishment of relationships with customers and suppliers, networking

Disadvantages:

• High costs of market development
• Free rider effects
• Risk of false estimation of market volume

Question 26

What are the advantages and disadvantages of the follower strategy?

Answer 26

Advantages:

• Availability of information about the market and the acceptance of foreign products
• Learning from the pioneer’s errors
• Follower-related lower costs

Disadvantages:

• Entry barriers set by pioneer
• Requires breaking into existing business links
• Disadvantages in terms of experience and volume compared to the pioneer