Preliminary Business Plan Report Rubrics 1. Completi

Preliminary Business Plan Report Rubrics
1. Completing the table below: 10 points
Product Concept
Company Name
Company Home
Location
New International
Location
Similar Products in
market
Industry(ies):
2. Carry out SWOT analysis. 20 points
3. Subsequently, develop strategies on how to move
internationally (i.e.
exporting, strategic alliance, subsidiary etc.). 30 points

4. Carry out QSPM. 30 points
5. Writing style and format. 10 points
CHAPTER 7
International Strategy: Creating Value in Global Markets
Copyright Anatoli Styf/Shutterstock
1
Learning Objectives
After reading this chapter, you should have a good
understanding of:
7-1 The importance of international expansion as a viable
diversification strategy.
7-2 The sources of national advantage; that is, why an industry
in a given country is more (or less) successful than the same
industry in another country.
7-3 The motivations (or benefits) and the risks associated with
international expansion, including the emerging trend for
greater offshoring and outsourcing activity.
7-4 The two opposing forces – cost reduction and adaptation to
local markets – that firms face when entering international

markets.
7-5 The advantages and disadvantages associated with each of
the four basic strategies: international, global, multidomestic,
and transnational.
7-6 The difference between regional companies and truly
global companies.
7-7 The four basic types of entry strategies and the relative
benefits and risks associated with each of them.
©McGraw-Hill Education.
2
International Strategy
(1 of 2)
Consider . . .
The global marketplace provides many opportunities for firms
to increase their revenue base and their profitability.
However, managers face many opportunities and risks when
they diversify abroad.
What should a firm do in order to create value and attain a
competitive advantage in this global marketplace?
The trade among nations has increased dramatically in recent
years and it is estimated that by 2025, 45 percent of the Fortune
Global 500 will be based in emerging economies, which are now
producing world-class companies with huge domestic markets
and a commitment to invest in innovation. This makes
international expansion a viable diversification strategy. In a
variety of industries such as semiconductors, automobiles,
commercial aircraft, telecommunications, computers, and
consumer electronics, it is almost impossible to survive unless

firms scan the world for competitors, customers, human
resources, suppliers, and technology. Firms need to know how
to be successful and create value when diversifying into global
markets. Some of the questions that need to be answered
include: What explains the level of success of a given industry
in a given country? What are some of the major motivations and
risks associated with international expansion? How can firms
handle the opposing forces of cost reduction and local
adaptation – should firms pursue international, global,
multidomestic, or transnational strategies? What entry strategies
should a firm choose in order to enter a foreign market?
3
International Strategy: Globalization
Globalization has to do with the rise of market capitalization
around the world.
International exchanges have increased.
Trade in goods & services
Exchange of money, information, & ideas
Laws, rules, norms, values, and ideas are growing more similar
across countries.
Challenges include balancing between emerging markets &
developed markets.
How to meet the needs of customers at very different income
levels?
Globalization = has two meanings. One is the increase in
international exchange, including trade in goods and services as
well as exchange of money, ideas, and information. Two is the
growing similarity of laws, rules, norms, values, and ideas
across countries. Globalization has undeniably created
tremendous business opportunities for multinational
corporations. One of the challenges with globalization is
determining how to meet the needs of customers at very

different income levels. In many developing economies,
distributions of income remain much wider than they do in the
developed world, leaving many impoverished even as the
economies grow. The concept “bottom of the pyramid” refers to
the practice of a multinational firm targeting its goods and
services to the nearly 5 billion poor people in the world who
inhabit developing countries.
4
Factors Affecting a Nation’s Competitiveness
Michael Porter’s diamond of national advantage explains why
some nations and their industries outperform others.
Factor endowments
Demand conditions
Related and supporting industries
Firm strategy, structure, & rivalry
Some nations and their industries are more competitive than
others. Understanding these differences helps a firm create a
competitive advantage when it expands internationally.
Diamond of national advantage = a framework for explaining
why countries foster successful multinational corporations,
consisting of four factors – factor endowments; demand
conditions; related and supporting industries; and firm strategy,
structure, and rivalry. These four attributes jointly determine
the playing field that each nation establishes and operates for i ts
industries. Factor endowments = a nation’s position in factors
of production. Demand conditions = the nature of home-market
demand for the industry’s product or service. Related and
supporting industries = the presence, absence and quality in the
nation of supplier industries and other related industries that
supply services, support, or technology to firms in the industry
value chain. 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.
5
Factors Affecting a Nation’s Competitiveness: Factor
Endowments
Factor endowments involve factors of production.
Land
Capital
Labor
Factors of production must be industry & firm specific.
Must be rare, valuable, difficult to imitate, and rapidly &
efficiently deployed
Factors of production are the building blocks that create usable
consumer goods and services. Companies in advanced nations
seeking competitive advantage over firms in other nations
create many of these factors of production. For example, a
country or industry dependent on scientific innovation must
have a skilled human resource pool to draw upon. This resource
pool is not inherited; it is created through investme nt in
industry–specific knowledge and talent. The actual pool of
resources is less important than the speed and efficiency with
which these resources are deployed. Thus, firm-specific
knowledge and skills created within a country that are rare,
valuable, difficult to imitate, and rapidly and efficiently
deployed are the factors of production that ultimately lead to a
nation’s competitive advantage. The island nation of Japan is
given as an example.
6
Factors Affecting a Nation’s Competitiveness: Demand
Conditions
Demand conditions refer to the demands that consumers place

on an industry.
Demanding consumers drive firms in that country to:
Meet high standards.
Upgrade existing products and services.
Create innovative products and services.
Better anticipate future global demand.
Proactively respond to product & service requirements.
Consumers who demand highly specific, sophisticated products
and services force firms to create innovative, advanced products
and services to meet the demand. This consumer pressure
presents challenges to a country’s industries. Countries with
demanding consumers drive firms in that country to meet high
standards, upgrade existing products and services, and create
innovative products and services. The conditions of consumer
demand influence how firms view a market. This, in turn, helps
the nation’s industries to better anticipate future global demand
conditions and proactively respond to product and service
requirements. Denmark is given as an example.
7
Factors Affecting a Nation’s Competitiveness:
Related & Supporting Industries
Related and supporting industries enable firms to manage inputs
more effectively.
A competitive supplier base
Reduces manufacturing costs
Close working relationships with suppliers
Allows for joint research & development
Development of related industries
Forces existing firms to practice cost control, product
innovation, better distribution methods

A home country’s industries can become a source of
competitive advantage when related and supporting industries
are developed. Countries with a strong supplier base benefit by
adding efficiency to downstream activities. A competitive
supplier base helps a firm obtain inputs using cost effective,
timely methods, thus reducing manufacturing costs. Also, close
working relationships with suppliers provide the potential to
develop competitive advantages through joint research and
development and the ongoing exchange of knowledge. Related
industries create the probability that new companies will enter
the market, increasing competition and forcing existing firms to
become more competitive through efforts such as cost control,
product innovation, and novel approaches to distribution.
Combined, these give the home country’s industries a source of
competitive advantage. The Italian footwear industry is given as
an example.
8
Factors Affecting a Nation’s Competitiveness: Firm Strategy
Firm strategy, structure, & rivalry due to
Strong consumer demand
Strong supplier base
High new entrant potential from related industries
Domestic rivalry leads to a search for new markets.
Response to rivalry is a strong indicator of global competitive
success.
Rivalry is particularly intense in nations with conditions of
strong consumer demand, strong supplier bases, and high new
entrant potential from related industries. This competitive
rivalry in turn increases the efficiency with which firms
develop, market, and distribute products and services within the
home country. Domestic rivalry thus provides a strong impetus

for firms to innovate and find new sources of competitive
advantage. This intense rivalry forces firms to look outside their
national boundaries for new markets, setting up the conditions
necessary for global competitiveness. Domestic rivalry is
perhaps the strongest indicator of global competitive success.
Firms that have experienced intense domestic competition are
more likely to have designed strategies and structures that allow
them to successfully compete in world markets. The European
grocery retail industry is given as an example.
9
Question
(1 of 3)
All of the factors below have made India’s software services
industry extremely competitive on a global scale except
a large pool of skilled workers.
a large network of public and private educational institutions.
tax and antitrust legislation that protect the dominant players in
the industry.
a large, growing market, and sophisticated customers.
Answer: C. See the discussion of Porter’s diamond of national
advantage and Strategy Spotlight 7.1. Factor conditions, demand
characteristics, and the existence of related and supporting
industries are all factors that affect a nation’s competitiveness.
Policies that protect the nation’s domestic competitors do not
lead to a nation’s competitive advantage on the worldwide
stage.
10
Example: Factors Affecting a Nation’s Competitiveness
Exhibit 7.2 India’s Diamond in Software
Source: From Kampur D.,and Ramamurti R., “India’s Emerging

Competition Advantage in Services,” Academy of Management
Executive: The Thinking Managers Source. Copyright © 2001
by Academy of Management.
Jump to Appendix 1 for long description.
Firms that succeed in global markets have first succeeded in
intensely competitive home markets. Competitive advantage for
global firms typically grows out of relentless, continuing
improvement and innovation. The Indian software industry
offers a clear example of how the attributes in Porter’s
“diamond” interact to lead to the conditions for a strong
industry to grow. See Strategy Spotlight 7.1 for information on
how mutually reinforcing elements work in this market.
11
International Expansion: Motivations
(1 of 2)
A company pursues international expansion for many reasons. A
company decides to become a multinational firm in order to:
Increase size of potential markets
Attain economies of scale
Take advantage of arbitrage opportunities
Applied to every stage of the value chain
Enhance a product’s growth potential
Reinvigorate the product life cycle
Multinational firms = firms that manage operations in more than
one country. Companies pursue international expansion in order
to increase the size of potential markets for firms’ pr oducts and
services. Expanding a firm’s global presence also automatically
increases its scale of operations, providing it with a larger

revenue and asset base, which potentially enables the firm to
attain economies of scale. This can also spread fixed cos ts such
as R&D over a larger volume of production. Arbitrage
opportunities = an opportunity to profit by buying and selling
the same good in different markets. In its simplest form,
arbitrage involves buying something from where it is cheap and
selling it somewhere where it commands a higher price.
Arbitrage can be applied to virtually any factor of production
and every stage of the value chain. Walmart is an example.
Enhancing the growth rate of a product that is in its maturity
stage in a firm’s home country, but that has greater demand
potential elsewhere is another benefit of international
expansion.
12
International Expansion: Motivations
(2 of 2)
A company also decides to become a multinational firm in order
to:
Optimize the location of value chain activity
To enhance performance
To reduce cost
To reduce risk
Take advantage of learning opportunities
Explore reverse innovation
Design & manufacture products locally
Export no-frills products to developed markets
A firm has to decide where to locate the various activities that it
must engage in to produce products and services. Primary
activities, such as inbound logistics, operations, and marketing,
as well as support activities, such as procurement, R&D, and
human resource management must be located in areas where the
firm can see performance enhancement, cost reduction, and risk

reduction. Location decisions can affect the quality with which
any activity is performed in terms of the availability of needed
talent, speed of learning, and the quality of external and internal
coordination. Location decisions can affect the cost structure in
terms of local manpower and other resources, transportation and
logistics, and government incentives and the local tax structure.
Nike’s manufacture of shoes in Asia is an example. Erratic
swings in the exchange ratios between global currencies
requires firms to manage these currency risks by spreading the
high cost elements of their manufacturing operations across a
few select and carefully chosen locations around the world. In
addition, by expanding into new markets, corporations expose
themselves to differing market demands, R&D capabilities,
functional skills, organizational processes, and managerial
practices. This provides opportunities for managers to transfer
the knowledge that results from these exposures back to their
home office and to other divisions in the firm. Thus, expansion
into new markets provides a range of learning opportunities.
Reverse innovation = new products developed by developed-
country multinational firms for emerging markets that have
adequate functionality at a low cost. Many leading companies
are discovering that developing products specifically for
emerging markets can pay off in a big way. When products can
deliver adequate functionality at a fraction of the cost, these
products can subsequently find success in value segments in
wealthy countries as well.
13
International Expansion: Risks
(1 of 2)
Multinational firms also encounter risks.
Political risk due to social unrest, military turmoil,
demonstrations, terrorism, absence of the rule of law can lead to
Destruction of property
Disruption of operations
Non-payment for goods and services

Arbitrary government decisions
Economic risk due to piracy and counterfeiting
Political risk = potential threat to a firm’s operations in a
country due to ineffectiveness of the domestic political system.
Countries that are viewed as high risk are less attractive for
most types of businesses. Another source of political risk in
many countries is the absence of the rule of law. Rule of law = a
characteristic of legal systems where behavior is governed by
rules that are uniformly enforced. The absence of rules or the
lack of uniform enforcement of existing rules leads to what
might often seem to be arbitrary and inconsistent decisions by
government officials. This can make it difficult for foreign
firms to conduct business. The laws, and the enforcement of
laws, associated with protection of intellectual property rights
can be a major potential economic risk in entering new
countries. Economic risk = potential threat to a firm’s
operations in the country due to economic policies and
conditions, including property rights laws and enforcement of
those laws. Firms rich in intellectual property have encountered
financial losses as piracy or imitations of their products have
grown due to a lack of law enforcement of intellectual property
rights. Counterfeiting = selling of trademarked goods without
the consent of the trademark holder. Counterfeiting, a direct
form of theft of intellectual property rights, is a significant and
growing problem.
14
International Expansion: Risks
(2 of 2)
Multinational firms also encounter other risks.
Currency risk due to fluctuations in the local currency’s
exchange rate
Affects cost of production or net profit

Management risk due to culture, customs, language, income
level, customer preferences, distribution systems
Could lead to the need for local adaptation of apparently
standard products
Currency risk = potential threat to a firm’s operations in the
country due to fluctuations in the local currency’s exchange
rate. Even a small change in the exchange rate can result in a
significant difference in the cost of production or net profit
when doing business overseas. An example includes the U.S.
dollar appreciating against other currencies, making U.S. goods
more expensive to consumers in foreign countries. Management
risk = potential threat to a firm’s operations in a country due to
the problems that managers have making decisions in the
context of foreign markets. Managers must respond to the
inevitable differences that they encounter when doing business
in multiple countries. Cultural differences can pose unique
challenges. Even in the case of apparently standard products,
some degree of local adaptation may become necessary.
15
International Expansion: Managing Risks
(1 of 2)
Managing economic risk can be done through global dispersion
of value chains.
Various activities of the firm’s value chain can be spread across
several countries & continents via
Outsourcing
Offshoring
To manage economic risk, firms can disburse their value chains
across several countries and continents. The distribution of

value of an U.S. car is given as an example: only 37 percent of
the production value is generated in the U.S. Outsourcing =
using other firms to perform value-creating activities that were
previously performed in-house. The firm may be perfectly
capable of doing this activity but chooses to have someone else
perform it for cost or quality reasons. Outsourcing can be to
either a domestic or foreign firm. Offshoring = shifting a value-
creating activity from a domestic location to a foreign location.
Value-creating activities should be performed in the location
where the cost is lowest or where the quality is the best.
16
International Expansion: Managing Risks
(2 of 2)
Offshoring may be costly.
Common savings from offshoring include:
Lower wages, benefits, energy costs, regulatory costs, taxes
Hidden costs from offshoring include:
Higher total wage & indirect costs, wage inflation
Increased inventory due to longer lead time
Reduced market responsiveness
Increased coordination costs
Cost of protecting intellectual property
In the 1990s, for manufacturing industries especially, the rapid
decline in transportation and coordination costs enabled firms to
disperse their value chains over different locations. Yet while
offshoring offers the potential to cut costs in corporations
across a wide range of industries, many firms are finding the
benefits of offshoring to be more elusive and the costs greater
than they anticipated. For instance, labor cost per hour may be
significantly lower in developing markets, but this may not
translate into lower overall costs. If there are problems with the
skill level of workers, the firm will find the need for more

training and supervision of workers, more raw material and
greater scrap due to the lower skill level, and greater rework to
fix quality problems. Wages in developing markets can be
volatile and spike unexpectedly. For instance, wages in China
have been increasing recently. Due to longer delivery times,
firms often need to tie up more capital in work in progress and
inventory. The long supply lines from low-cost countries may
make firms less responsive to shifts in customer demands. The
cost of coordinating product development and manufacturing
with operations undertaken in different countries can hamper
innovation. Finally, firms operating in countries with weak
intellectual property protection can wind up losing their trade
secrets or taking costly measures to protect these secrets. Firms
need to take into account all of these costs in determining
whether or not to move their operations offshore.
17
International Strategies:
Opposing Pressures (1 of 2)
Cost reduction or adaptation to local markets?
Strategies that favor global products & brands should do the
following:
Standardize all products for all markets.
Reduce overall costs by spreading investments over a larger
market.
Assumes:
Homogenous customer have needs & interests.
People prefer lower prices at high quality.
Global markets produce economies of scale.
Firms face two opposing forces when they expand into global
markets: cost reduction and adaptation to local markets. Many
years ago, the famed marketing strategist Theodore Levitt
advocated strategies that favored global products and brands.

He suggested that firms should standardize all of their products
and services for all of their worldwide markets. Such an
approach would help a firm lower its overall costs by spreading
its investments over as large a market as possible. This
approach rested on three key assumptions: 1. Customer needs
and interests are becoming increasingly homogenous worldwide.
2. People around the world are willing to sacrifice preferences
in product features, functions, design, and the like for lower
prices at high quality. 3. Substantial economies of scale in
production and marketing can be achieved through supplying
global markets.
18
Opposing Pressures (2 of 2)
Cost reduction or adaptation to local markets?
Assumptions may be incorrect.
Product markets DO vary widely between nations – local
adaptations work.
There is a growing interest in multiple product features, product
quality, & service.
Technology permits flexible production; cost of production may
not be critical to product cost; and a firm’s strategy should not
be solely product driven.
“One size fits all” does NOT generally apply.
Theodore Levitt’s assumptions may be incorrect. Regarding the
homogeneity of customer needs and interests, yes, companies
have identified global customer segments and developed
products and brands targeted to those segments, but other
companies have successfully adapted product lines to
idiosyncratic country preferences and developed local brands
targeted to local market segments. Pineapple and ham pizza is
an example. Second, while there is invariably a price sensitive

segment in many product markets, there is no indication that
this is increasing. In contrast, there is a growing interest in
products with multiple features, quality, and service. Third,
although standardization may lower manufacturing costs, such a
perspective does not consider three critical and interrelated
points: technological developments in flexible factory
automation enable economies of scale to be obtained at lower
levels of output; cost of production is only one component in
determining the total cost of a product; and the firm’s strategy
should not be solely product driven. Based on the above, we
would have a hard time arguing that it is wise to develop the
same product or service for all markets throughout the world.
19
Opposing Pressures, Chart
Exhibit 7.3 Opposing Pressures and Four Strategies
The opposing pressures that managers face place conflicting
demands on firms as they strive to be competitive. On the one
hand, competitive pressures require that firms do what they can
to lower unit costs so that consumers will not perceive their
product and service offerings as too expensive. This may lead
them to consider locating manufacturing facilities where labor
costs are low and developing products that are highly
standardized across multiple countries. In addition to
responding to pressures to lower costs, managers must also
strive to be responsive to local pressures in order to tailor their
products to the demand of the local market in which they do
business. This requires differentiating their offerings and
strategies from country to country to reflect consumer tastes and
preferences and making changes to reflect differences in

distribution channels, human resource practices, and
governmental regulations. However, since the strategies and
tactics to differentiate products and services to local markets
can involve additional expenses, a firm’s costs will tend to rise.
The two opposing pressures result in four different basic
strategies that companies can use to compete in the global
marketplace: international, global, multidomestic, and
transnational. The strategy that a firm selects depends on the
degree of pressure that it is facing for cost reductions and the
importance of adapting to local markets. See the following
Cases for examples of various international strategies:
Heineken, eBay, Greenwood Resources, Tata Starbucks.
20
International Strategy
(2 of 2)
An international strategy requires diffusion & adaptation of the
parent company’s knowledge & expertise to foreign markets.
The primary goal is worldwide exploitation of the parent firm’s
knowledge & capabilities.
All sources of core competencies are centralized.
Pressure for both local adaptation & low costs are rather low.
International strategy = a strategy based on a firm’s diffusion
and adaptation of the parent company’s knowledge and
expertise to foreign markets, used in industries where the
pressures for both local adaptation and lowering costs are low.
With an international strategy, country units are allowed to
make some minor adaptations to products and ideas coming
from the head office, but they have far less independence and
autonomy compared to multidomestic companies. There are only
a small number of industries in which this strategy still applies.
With increasing pressures to reduce costs due to global
competition, especially from low-cost countries, opportunities

to successfully employ international strategy are becoming more
limited. This strategy is most suitable in situations where a firm
has distinctive competencies that local companies in foreign
markets lack.
21
International Strategy:
Strengths, LimitationsStrengthsLimitationsLeverage and
diffusion of a parent firm’s knowledge and core
competencies.Limited ability to adapt to local markets.Lower
costs because of less need to tailor products and
servicesInability to take advantage of new ideas and innovations
occurring in local markets.
Exhibit 7.4 Strengths and Limitations of International Strategies
in the Global Marketplace
Although an international strategy does leverage and diffuse a
parent firm’s knowledge and core competencies, leading to
lower costs because of less need to tailor products and services,
it does mean a firm has a limited ability to adapt to local
markets, and, therefore, it cannot take advantage of new ideas
and innovations occurring in that market. The international
strategy, with its tendency to concentrate most of its activities
in one location, fails to take advantage of the benefits of an
optimally distributed value chain. The lack of local
responsiveness may result in the alienation of local customers,
and the firm’s inability to be receptive to new ideas and
innovation from its foreign subsidiaries may lead to missed
opportunities globally.
22
Global Strategy
A global strategy implies a firm is interested in lowering costs.

Competitive strategy is centralized & controlled by the
corporate office.
Products are standardized, operations centralized, producing
economies of scale.
Worldwide volume supports R&D.
There’s a standard level of quality worldwide.
Pressure for reducing cost is high; pressure for adaptation to
local markets is weak.
Global strategy = a strategy based on firms’ centralization and
control by the corporate office, with the primary emphasis on
controlling costs, and used in industries where the pressure for
local adaptation is low and the pressure for lowering costs is
high. Since the primary emphasis is on controlling costs, the
corporate office strives to achieve a strong level of coordination
and integration across the various businesses. Firms following a
global strategy strive to offer standardized products and
services as well as to locate manufacturing, R&D, and
marketing activities in only a few locations. Although costs may
be lower, the firm following a global strategy may, in general,
have to forgo opportunities for revenue growth since it does not
invest extensive resources in adapting product offerings from
one market to another. Many industries requiring high levels of
R&D, such as pharmaceuticals, semiconductors, and jet air craft,
follow global strategies.
23
Global Strategy: Strengths,
LimitationsStrengthsLimitationsStrong integration occurs across
various businesses.Limited ability exists to adapt to local
markets.Standardization leads to higher economies of scale,
which lower costs.Concentration of activities may increase
dependence on a single facility.Creation of uniform standards of
quality throughout the world is facilitated.Single locations may

lead to higher tariffs and transportation costs.
Exhibit 7.5 Strengths and Limitations of Global Strategies
A global strategy is most appropriate when there are strong
pressures for reducing costs and comparatively weak pressures
for adaptation to local markets. Economies of scale becomes an
important consideration. However a firm can enjoy scale
economies only by concentrating scale-sensitive resources and
activities in one or a few locations. This may result in higher
transportation and tariff costs when output must be exported to
other markets. The geographic concentration of any activity
may also tend to isolate that activity from the target markets,
making the rest of the firm dependent on that location. Such
dependency implies that, unless the location has world-class
competencies, the firm’s competitive position can be eroded if
problems arise. Many firms have learned through experience
that if they concentrate activities and misjudge the market, the
mistake will be quickly magnified. Ford is given as an example.
24
Multidomestic Strategy
A multidomestic strategy puts emphasis on differentiating
products & services to adapt to local markets.
Decisions are decentralized.
Products & services are tailored to local use.
Consider language, culture, income levels, customer
preferences, distribution systems.
Markets can expand rapidly.
Prices are differentiated by market.
Pressure for local adaptation is high; pressure for lowering
costs is low.

Multidomestic strategy = 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. Decisions involving a
multidomestic strategy tend to be decentralized to permit the
firm to tailor its products and respond rapidly to changes in
demand. This enables the firm to expand its markets and to
charge different prices in different markets. For firms following
this strategy, differences in language, culture, income levels,
customer preferences, and distribution systems are only a few of
the many factors that must be considered. Even in the case of
relatively standardized products, at least some level of local
adaptation is often necessary.
25
Multidomestic Strategy: Strengths,
LimitationsStrengthsLimitationsAbility to adapt products and
services to local market conditions.Decreased ability to realize
cost savings through scale economies.Ability to detect potential
opportunities for attractive niches in a given market, enhancing
revenue.Possibility of leading to “overadaptation” as conditions
change.
Exhibit 7.6 Strengths and Limitations of Multidomestic
Strategies
A multidomestic strategy is appropriate where the pressure for
local adaptation is high and the pressure for lowering costs is
low. The firm emphasizes differentiation of products and
service offerings in order to adapt to local markets. This can
result in enhanced revenue due to a firm’s carve-out of
attractive niches in a given market. However, local adaptation
of products and services may increase a company’s cost

structure, so managers must determine the trade-off between
adaptation and cost. In addition, the optimal degree of local
adaptation evolves over time. In many industry segments, a
variety of factors, such as the influence of global media, greater
international travel, and declining income disparities across
countries, may lead to increasing global standardization. Firms
must recalibrate the need for local adaptation on an ongoing
basis; excessive adaptation extracts a price as surely as
underadaptation.
26
Transnational Strategy
A transnational strategy seeks global competitiveness via trade -
offs.
Efficiency versus local adaptation versus organizational
learning
Assets & capabilities disbursed according to the most beneficial
location for a specific activity; some value chain activities
centralized, some decentralized
Economies of scale, increased knowledge flows
Pressures for both local adaptation and lowering costs high
Transnational strategy = 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. The firm seeks
efficiency not for its own sake, but as a means to achieve global
competitiveness. It recognizes the importance of local
responsiveness, but as a tool for flexibility in international
operations. Innovations are regarded as an outcome of a larger
process of organizational learning that includes the
contributions of everyone in the firm. In a transnational model,
a firm’s assets and capabilities are disbursed according to the
most beneficial location for each activity. Thus, managers avoid

the tendency to either concentrate activities in a central location
(a global strategy) or disperse them across many locations to
enhance adaptation (a multidomestic strategy). Typically,
primary activities that are “downstream” (marketing and sales,
and service), or closer to the customer, tend to require more
decentralization in order to adapt to local market conditions.
Primary activities that are “upstream” (logistics and
operations), or further away from the customer, tend to be
centralized. This is because there is less need for adapting these
activities to local markets and the firm can benefit from
economies of scale. A central philosophy of the transnational
organization is enhanced adaptation to all competitive situations
as well as flexibility by capitalizing on communication and
knowledge flows throughout the organization. A principal
characteristic is the integration of the unique contributions of
all units into worldwide operations. Nestlé is given as an
example.
27
Transnational Strategy: Strengths,
LimitationsStrengthsLimitationsAbility to attain economies of
scale.Unique challenges in determining optimal locations of
activities to ensure cost and quality.Ability to adapt to local
markets.Unique managerial challenges in fostering knowledge
transfer.Ability to locate activities in optimal locations.Ability
to increase knowledge flows and learning.
Exhibit 7.7 Strengths and Limitations of Transnational
Strategies
A transnational strategy is appropriate in industries where the
pressures for both local adaptation and lowering costs are high.
When an organization adopts a transnational strategy, it can
adapt to all competitive situations by capitalizing on
communication and knowledge flows throughout the

organization. It also achieves economies of scale by locati ng
activities in optimal locations. However the choice of a
seemingly optimal location cannot guarantee that the quality
and cost of factor inputs (labor and materials) will be optimal.
Managers must ensure that the relative advantage of the location
is actually realized, not squandered because of weaknesses in
productivity and the quality of internal operations. Also,
although knowledge transfer can be a key source of competitive
advantage, it does not take place automatically. For knowledge
transfer to take place from one subsidiary to another, it is
important for the source of the knowledge, the target units, and
the corporate headquarters to recognize the potential value of
such unique know-how. Firms must create mechanisms to
systematically and routinely uncover the opportunities for
knowledge transfer.
28
Question
(2 of 3)
In order to realize the strongest competitive advantage, firms
engaged in worldwide competition must
require that all of their various business units follow the same
strategy regardless of location.
ensure that all business units follow a strategy strictly tailored
to their respective locations.
pursue a strategy that combines the uniformity of a global
strategy and the specificity of a multidomestic strategy in order
to achieve optimal results.
attempt to use the strategy that was most successful in their
home country.
Answer: C. See the trade-offs between adaptation and cost.
29

Global or Regional?
It may be unwise for companies to rush into full-scale
globalization.
Regionalization may be more reasonable.
Distance still matters.
Commonalities of language, culture, economics, legal &
political systems, and infrastructure all make a difference.
Trading blocs and free trade zones ease trade restrictions, taxes,
& tariffs.
Alan Rugman and Alain Verbeke argue that there is a stronger
case to be made in favor of regionalization than globalization.
Regionalization = increasing international exchange of goods,
services, money, people, ideas, and information; and the
increasing similarity of culture, laws, rules, and norms within a
region such as Europe, North America, or Asia. Distance
matters. The effects of geographic distance can be multiplied by
distance in terms of culture, language, religion, and legal and
political systems between two countries. The United States and
Australia are geographically distant yet the “true” distance is
less than that between the United States and China. In addition,
a number of regional agreements have been created that
facilitate the growth of business within these regions by easing
trade restrictions, taxes, and tariffs. These trading blocs and
free trade zones include the European Union (EU), the North
American Free Trade Agreement (NAFTA), the Association of
Southeast Asian Nations (ASEAN), and MERCOSUR, a south
American trading block. Trading blocs = groups of countries
agreeing to increase trade between them by lowering trade
barriers. Regional economic integration has progressed at a
faster pace than global economic integration, and trade and
investment patterns of the largest companies reflect this reality.
30

Question
(3 of 3)
A domestic corporation considering expanding into international
markets for the first time will typically
start off by implementing a wholly owned foreign subsidiary so
it can maintain standards identical to those at home.
consider licensing or franchising its operations.
consider implementing a low risk/low control strategy such as
exporting.
form a joint venture with a reputable foreign producer.
Answer: C. See the continuum of entry options ranging from
exporting (low investment and risk, low control) to a wholly
owned subsidiary (high investment and risk, high control).
31
International Strategies: Entry Modes
Options for international market expansion include:
Exporting
Low risk, locals know more; but products may not meet local
needs
Licensing or franchising
Limits risk; but licensor gives up control & profit
Strategic alliance or joint venture
Shares risk; but trust & culture issues can lead to conflict
Wholly owned subsidiary
Greatest control, highest returns; but expensive, greater
potential for miss-steps
A firm has many options available to it when it decides to

expand into international markets. Exporting = producing goods
in one country to sell to residents of another country. This
strategy enables the firm to invest the least amount of resources
in terms of its product, its organization, and its overall
corporate strategy. However, the firm has a limited ability to
tailor its products to meet local market needs. Licensing = 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. Franchising
= a contractual arrangement in which a company receives a
royalty or fee in exchange for the right to use its intellectual
property; it usually involves a longer time period than licensing
and includes other factors, such as monitoring of operations,
training, and advertising. Franchising has the advantage of
limiting the risk exposure that a firm has in overseas markets
while, at the same time, the firm is able to expand the revenue
base of the company. An advantage of licensing is that the firm
granting a license incurs little risk, since it does not have to
invest any significant resources into the country itself. In turn,
the licensee (the firm receiving the license) gains access to the
trademark, patent, and so on, and is able to potentially create
competitive advantages. However, the licensor gives up control
of its product and forgoes potential revenues and profits.
Strategic alliances and joint ventures allow firms to increase
revenues and reduce costs as well as enhance learning and
diffuse technologies. However, trust is a vital element.
(Remember the discussion of this in Chapter 6.) Wholly Owned
Subsidiary = a business in which a multinational company owns
100% of the stock. A firm can establish a wholly owned
subsidiary by acquiring an existing company in the home
country or developing a totally new operation, often referred to
as a “greenfield venture.” This can be expensive and risky, and
is most appropriate where a firm already has the appropriate
knowledge and capabilities that it can leverage rather easily
through multiple locations.
32

Entry Modes, Chart
Exhibit 7.8 Entry Modes for International Expansion
Given the challenges associated with entry into international
markets, many firms first start on a small-scale and then
increase their level of investment and risk as they gain greater
experience with the overseas market in question. The various
types of entry form a continuum ranging from exporting (low
investment and risk, low control) to a wholly owned subsidiary
(high investment and risk, high control). Entry strategies can
follow this progression. The key tradeoff in each of these
strategies is the level of investment or risk versus the level of
control, but many firms do not follow such an evolutionary
approach, preferring to adopt one and develop as needed.
33
APPENDICES
Description of Images
34
Appendix 1 Example: Factors Affecting a Nation’s
Competitiveness
Return to slide.
The graphic is laid out as a map, or organizational chart. Please
also refer to Strategy Spotlight 7.1 in the text.

First, the element factor endowments relates to all other
elements. Factor endowments include a large pool of skilled
labor, low salaries, and English-language capability.
Second, domestic demand conditions are weakly related to
domestic rivalry, factor endowments, as well as related and
supporting industries. India has a globalized software industry.
Third, and related to factor endowments, domestic rivalry, and
U.S. demand conditions are related and supporting industries.
India has a large network of public and private educational
institutions; they are weak but rapidly improving
communications infrastructure. There is duty-free access to
imported computers and software, following economic
liberalization.
U.S. demand conditions refers to a large and growing market,
sophisticated customers, and cutting-edge applications.
At the top of the graphic is domestic rivalry. India has no
regulatory barriers to entry or start-up. There are 800 firms,
mostly small and in fierce rivalry. There is a growing number of
M N C software-development centers in India.
35
Appendix 2 International Strategies:
Opposing Pressures, Chart
Return to slide.
Global strategy has high pressure to lower costs and low
pressure for local adaptation.
Transnational strategy has high pressure to lower costs and high
pressure for local adaptation.
Multidomestic strategy has high pressure for local adaptation
and low pressure to lower costs.
International strategy has low pressures to lower costs and for
local adaptation.

36
Appendix 3 International Strategies:
Entry Modes, Chart
The chart of foreign entry modes for expansion has an y axis
that is the extent of investment and risk going from low to high.
The x axis is the degree of ownership and control going from
low to high.
Starting from low extent of investment and risk and low degree
of ownership and control to the highest degree in both are:
Exporting (lowest investment and risk with lowest control)
Licensing
Franchising
Strategic Alliance
Joint Venture
Wholly Owned Subsidiary (highest investment and risk, with
highest control)
Return to slide.
37

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