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- 1. International Management: Managing AcrossBorders and Cultures Tenth Edition Chapter 6 Formulating Strategy Copyright © 2021, 2017, 2014 Pearson Education, Inc. All Rights Reserved
- 2. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Learning Objectives 6.1 To understand the reasons companies engage in international business 6.2 To become familiar with the strategic formulation process 6.3 To learn the steps in global strategic planning, including assessing entry strategies for different markets 6.4 To understand the need for strategic planning for emerging markets
- 3. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Opening Profile: Why Ford Is Stalling in China While Toyota Succeeds • Ford is one of several carmakers cutting production in China, the world’s largest car market. • Passenger vehicle sales fell 4 percent to 23m last year, their first annual decline in almost three decades. • Sales at Toyota’s joint venture with Guangzhou Automobile surged nearly 35 percent last year, while BMW’s venture with Brilliance Auto saw a 20 percent sales rise. • Their differing fates show that factors—from investment in new models, competitive exposure to local brands, dealer relations, after sales service, and quality perceptions—determine a brand’s success or failure in China.
- 4. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Strategic Planning and Strategy Strategic Planning • More complex than domestic strategic planning because of more complex variables Strategy • The basic means by which the firm competes
- 5. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Learning Objective 6.1 To understand the reasons companies engage in international business
- 6. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Reasons for Going International Reactive/Defensive Proactive/Aggressive • Globalization of competitors • Trade barriers • Regulations and restrictions • Customer demands • Economies of scale • Growth opportunities • Resource access and cost savings • Incentives
- 7. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Comparative Management in Focus: Global Companies Take Advantage of Opportunities in Africa Opportunities in Africa have spurred business because of: • Decline in armed conflicts • New educational opportunities • Mobile phone technology Firms dealt with environmental challenges by: • Investing in themselves and partners • Investing in training programs • Using mobile and social computing, and big data analysis
- 8. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Africa Map 6-1
- 9. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Learning Objective 6.2 To become familiar with the strategic formulation process
- 10. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved The Strategic Management Process Exhibit 6-1
- 11. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Learning Objective 6.3 To learn the steps in global strategic planning, including assessing entry strategies for different markets
- 12. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Steps in Developing Strategies • Establish Mission and Objectives • Assess External Environment • Assess Internal Factors • Evaluate Global and International Strategic Alternatives • Evaluate Entry Strategy Alternatives
- 13. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Step 1: Establish Mission and Objectives (1 of 2) Exhibit 6-2 Objectives that flow from the ‘mission’: Marketing • Worldwide, regional, national market share Production • Production volume • Economies of scale Finance • Tax burden • Capital structure
- 14. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Step 1: Establish Mission and Objectives (2 of 2) Exhibit 6-2 Profitability • Long-term profit growth • Return on Investment, equity, and assets • Annual rate of profit growth Research & Development • Develop new products and global patents • Develop proprietary technologies • Worldwide research and development labs
- 15. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Step 2: Assess External Environment (1 of 2) Exhibit 6-3 Global Risks • Political Turmoil/Wars • Economic and Financial Risk • Energy Availability and prices • Shifting Production & Consumption • Currency Wars • Varying Fiscal Strategies
- 16. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Step 2: Assess External Environment (2 of 2) Exhibit 6-3 Regional Risks • Regional Instability • Financial & Currency Instability • Economic & Fiscal Policies National Risks • Legal Protection • Technology Rights • Nationalism/Expropriation
- 17. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Institutional Effects on International Competition Attractiveness of Overseas Markets The extent to which countries have institutions to promote the rule of law to outside investors Entry Barriers and Industry Attractiveness Creating barriers to entry in certain industries and making those industries more attractive (profitable) for incumbent firms Antidumping as an Entry Barrier The current U.S. antidumping laws place a foreign entrant at a disadvantage if accused of “dumping”.
- 18. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Sources of Environmental Information • Business information services • Clipping services • Field personnel • Internal sources of information
- 19. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Competitive Analysis Compared to competitors, a competitive analysis shows: • the firm’s capabilities • key success factors • current competitors—global and local—for the proposed market
- 20. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Porter’s Five Forces Industry-Based Model • The level of global and local competition in the industry • The level of threat of new competitors—ease of entry • The power of buyers • The bargaining power of suppliers • The level of threat of substitute products or services
- 21. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Step 3: Analyze Internal Factors Internal Analysis Competitive Analysis • Key Success Factors: a) Technological capability: Apple b) Distribution channels: Walmart c) Promotion capabilities: Disney • SWOT analysis • Distinctive competencies • Comparative advantage • E-Business
- 22. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Strategic Decision-Making Models Exhibit 6-6
- 23. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved The Strategy Diamond Exhibit 6-7
- 24. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Step 4: Evaluate Global and International Strategic Alternatives Alternative Strategies • Global • Localization/Regionalization • Global Integrative
- 25. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Pressures to Globalize • Increasing competitive clout resulting from regional trading blocs • Declining tariffs • Information Technology explosion
- 26. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Localization/Regionalization • Local markets are linked together within a region, allowing local responsiveness • The impetus: – Unique consumer preferences – Domestic subsidies – New production technologies
- 27. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved CAGE Distances Between Countries • Cultural Distance • Administrative Distance • Geographical Distance • Economic Distance
- 28. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Transnational Strategies • Achieving low cost through global efficiency • Providing differentiated products/service offerings • Accounting for local customer differences in geographic markets • Using e-business for global expansion—born global firms
- 29. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Using E-Business for Global Expansion Benefits of B2B Exhibit 6-8
- 30. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Change in World Internet Usage as of Q2 2018 Table 6-1 Regions Usage % of World, 2018 Usage % of World, 2014 Penetration Rates (%), 2018 Penetration Rates (%), 2014 Africa 11.0 9.8 36.1 26.5 Asia 49.0 45.7 49.0 34.7 Europe 16.8 19.2 85.2 70.5 Middle East 3.9 3.7 64.5 48.3 North America 8.2 10.2 95.0 87.7 Latin America/Caribbean 10.4 10.5 67.2 52.3 Oceana/AustraIia 0.7 0.9 68.9 72.9
- 31. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved E-Global or E-Local? E-Global When: E-Local When: • Trade is global in scope • Business does not involve delivering orders • When the business model can be easily hijacked by local competitors • Production and consumption are regional in scope • Customer behavior and market structures differ across regions, but are similar within a region • Supply-chain management is very important to success
- 32. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Step 5: Evaluate Entry Strategy Alternatives (1 of 2) • Exporting • Licensing • Franchising • Contract Manufacturing • Offshoring • Reshoring/Nearshoring
- 33. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Step 5: Evaluate Entry Strategy Alternatives (2 of 2) • Service Sector Outsourcing • Turnkey Operations • Management Contracts • International Joint Ventures • Fully Owned Subsidiaries • E-business
- 34. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Service Sector Outsourcing A. T. Kearney 2017 Global Services Location Index Ranks Exhibit 6-9 Rank 2017 Change in Rank since 2014 Country 1 0 India 2 0 China 3 0 Malaysia 4 1 Indonesia 5 3 Brazil 6 6 Vietnam 7 0 Philippines 8 -2 Thailand 9 4 Chile 10 33 Columbia 11 5 Sri Lanka 12 -1 Poland 13 -9 Mexico 14 -4 Egypt 15 -6 Bulgaria
- 35. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Learning Objective 6.4 To understand the need for strategic planning for emerging markets
- 36. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Management in Action: Strategic Planning for Emerging Markets • Increasing business opportunities for companies to set up operations in or export to emerging markets • Different countries are at different levels of development and have different risk/return profiles • Usually entails higher risk • One size does not fit all: different infrastructure, socio- economic and regulatory challenges, different environmental and geographic constraints • Potential for innovation, not just new customers
- 37. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Under the Lens: Revolut’s Russian Founder Stirs Up Lithuania’s Fintech Debate • The British digital bank Revolut is in a debate in Lithuania as it challenges the UK as Europe’s financial technology hub. • The digital bank is among many western companies that have flocked to Lithuania. • Lithuania is Europe’s second-largest fintech center. • Fintech executives ask if Revolut’s systems are vulnerable to criminal abuse.
- 38. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Step 6: Decide on Strategy The strategic choice of one or more of the entry strategies depends on: • a careful evaluation of the advantages and disadvantages of each in relation to the firm’s capabilities and resources • critical environmental factors • the contribution that each choice would make to the over- all mission and objectives of the company
- 39. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Factors Affecting Choice of International Entry Mode Exhibit 6-11 Source: Based on A. V. Phatak, International Management Concepts and Cases, 1997, Cincinnati, OH, Southwestern Publishing Company.
- 40. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Foreign Direct Investment under Uncertainty Figure 6-1
- 41. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved The Influence of Culture on Strategic Choices • China and Japan have longer-term time horizons than the United States • High uncertainty avoidance cultures (e.g., Latin American, African countries) prefer non-equity modes of entry • High power distance cultures (e.g., Japan and Arab countries) tend to use more equity modes of entry abroad
- 42. Copyright © 2021,2017, 2014 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.
Editor's Notes
- #2 If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) MathType Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available)
- #4 Multinational companies operating in markets abroad need to develop effective strategies to be successful in those markets. They need to consider the actions of both other multinationals and local rivals. Emerging market firms have become more competitive in their home markets, and have made great strides in competing abroad.
- #5 Strategy includes a company’s choice of business or businesses in which to operate and the ways in which it differentiates itself from competitors.
- #7 If organizations allow their competitors to become entrenched in foreign markets, it becomes increasingly difficult to enter those markets at a later date. Additionally, the advantages competitors realize overseas may also translate into advantages at home. Tariffs, quotas, buy-local policies, and other restrictive trade practices can make exports to foreign markets too expensive and impractical to be competitive. Similarly, restrictions by a firm’s home government may become so expensive that companies seek out less foreign operating environments. Some foreign customers may demand that their supplying company operate in their local region so that they have better control over their supplies. For example, McDonald’s asks its domestic suppliers to follow it to foreign ventures. Achieving world-scale volume to make the fullest use of modern capital-intensive manufacturing equipment and to amortize research and development costs when facing brief product life cycles. Companies in mature markets in developed countries can grow by seeking opportunities in emerging markets. For example, FedEx has been able to grow in Asia because it entered the markets long before its competitors. The text also uses McDonald’s as examples. Labor and other resource costs can be much lower in foreign locations than they are at home. Governments wishing to attract new capital, technology, and know-how often provide incentives such as tax exemptions, tax holidays, subsidies, loans, and the use of property. These incentives decrease risk and increase profits for foreign firms.
- #8 Numerous African companies have expanded within the African continent. Morocco- based Saham Finances has embarked on an aggressive expansion within Africa. After becoming a dominant insurance company in Morocco, the company considered sub-Saharan Africa because of the low penetration rate. It then expanded into ten West Africa French-speaking countries.
- #9 The global formulation process parallels the domestic process, but it is more complex because of the greater difficulty in gaining accurate and timely information, the diversity of geographic locations, and the differences in political, legal, cultural, market, and financial processes. The strategic planning process identifies potential opportunities for (1) appropriate market expansion, (2) increased profitability, and (3) new ventures for exploiting strategic advantages. This figure demonstrates the process is comprised of two primary phases: planning and implementation. In reality, the stages depicted in this slide are rarely so linear. Instead, the process in continuous and intertwined. See Exhibit 6-1. Long Description: The diagram is divided into two parts, namely, strategic planning process and implementation process. The flow is from top to bottom and back up to the second and sixth boxes. Strategic Planning Process: Define or clarify mission and objectives Assess environment for threats, opportunities Assess internal strengths and weaknesses Consider alternative strategies using competitive analysis Choose strategy. Implementation Process: Implement strategy through complementary structure, systems, and operational processes Set up control and evaluation systems to ensure success, feedback to planning.
- #11 The global formulation process parallels the domestic process, but it is more complex because of the greater difficulty in gaining accurate and timely information, the diversity of geographic locations, and the differences in political, legal, cultural, market, and financial processes. The strategic planning process identifies potential opportunities for (1) appropriate market expansion, (2) increased profitability, and (3) new ventures for exploiting strategic advantages. This figure demonstrates the process is comprised of two primary phases: planning and implementation. In reality, the stages depicted in this slide are rarely so linear. Instead, the process in continuous and intertwined. See Exhibit 6-1. Long Description: The diagram is divided into two parts, namely, strategic planning process and implementation process. The flow is from top to bottom and back up to the second and sixth boxes. Strategic Planning Process: Define or clarify mission and objectives Assess environment for threats, opportunities Assess internal strengths and weaknesses Consider alternative strategies using competitive analysis Choose strategy. Implementation Process: Implement strategy through complementary structure, systems, and operational processes Set up control and evaluation systems to ensure success, feedback to planning.
- #13 In the planning phase of strategic management—strategic formulation—managers need to evaluate dynamic factors carefully,
- #14 The mission for an organization defines the company’s function in society. It determines the company’s direction and provides a basis for strategic decision making. Objectives flow from the mission. This slide summarizes Exhibit 6-2. As illustrated, a firm’s global objectives usually fall into the areas of marketing, profitability, finance, production, and research and development. Because of the greater risk involved, market volume and profitability goals are usually set higher for international operations than for domestic operations.
- #15 A firm’s global objectives usually fall into the areas of marketing, profitability, finance, production, research and development, and sustainability, as shown in Exhibit 6-2.
- #16 Levels of risk for strategic entry scanning. Environmental scanning should be conducted on three levels—global, regional, and national. Scanning should focus on the future interests of the firm and cover the major variables such as political and economic risk; major technological, legal, and physical constraints; and the global competitive arena as well as the opportunities available in different countries. See Exhibit 6-3
- #17 The objectives of the firm’s international affiliates should also be part of the global corporate objectives. A firm’s global objectives usually fall into the areas of marketing, profitability, finance, production, research and development, and sustainability, among others, as shown in Exhibit 6-2. Goals for market volume and profitability are usually set higher for international than for domestic operations because of the greater risk involved.
- #18 Various institutions can create opportunities or constrains for firms considering entry into specific global markets.
- #19 The success of environmental scanning depends on the ability of managers to take a global perspective and ensure that their sources of information and business intelligence are global. A variety of public resources is available to provide information.
- #20 Managers must judge the relative current and potential competitive position of firms in that market and location—whether that is a global position or one for a specific country or region.
- #21 The firm’s potential competitive position in its industry can be reviewed by using Michael Porter’s industry-based model of five forces that examines the dynamics within an industry,
- #22 There are a variety of public information sources available to provide information to organizations. Company’s also use clipping services. However, internal sources of information are usually preferable because they help eliminate unreliable information from secondary sources. Mitsubishi Trading Company employees more than 60,000 market analysts worldwide who gather, analyze, and feed market information to the parent company. Internal analysis involves weighing the company’s options relative to its strengths and weaknesses. Company’s must identify their key success factors and determine how they can help the firm exploit foreign opportunities. This slide shows several examples of key success factors for well-known companies. All companies have strengths and weaknesses, the challenge is to identify both and take appropriate action. See Exhibit 6-5. At this point executives must assess the firm’s capabilities and key success factors compared to those of its competitors. This process enables strategic planners to determine where the firm has distinctive competencies that might lead to sustainable competitive advantage. Most companies develop their strategies around these distinctive competencies, or key strengths. They are usually difficult for competitors to imitate. This strategic formulation is often called SWOT analysis.
- #23 This figure summarizes three leading strategic models. See Exhibit 6-6 Global, regional, and country factors and risks are part of the considerations in an institution-based theory of existing and potential risks and influences on the host area. The firm’s competitive position in its industry can be reviewed using Porter’s industry-based five-forces model. The resource based-view entails considering the unique value of the firm’s competencies and that of its products or services. Long Description: The two-part diagram shows a linear flow diagram and the flow from top to bottom is as follows: Identify Potentially Attractive Markets Threats or Opportunities Assessment of Market Attractiveness Strengths or Weaknesses Assessment of Strategic Fit Decide Strategy. Three interconnected boxes represent the grouping of variables in strategic decision making as follows: Industry dynamics: Rivalry among firms Entry barriers Power of suppliers Power of buyers Substitutes Institutional factors: Political risk Trade barriers Regulatory risk Currency risk Cultural distance Firm resources or competencies: Value Rarity Imitability Organization An arrow labelled Fit or No Fit? branches from the firm resources or competencies box into two decision possibilities as follows: GO: Entry Strategy? Independent, Non-equity Strategic Alliances, Equity. NO-GO Assess other locations Await further developments.
- #24 The diamond identifies five elements of the firm’s strategy. See Exhibit 6-7. Arenas answer: “In what businesses will we compete?” “Where will we be active and with what degree of emphasis? Arenas clarify the product categories, customer segments, geographic markets, and customer markets 2. Vehicles describe the manner in which the arenas will be served, “How will we get there?” 3. Differentiators describe how a firm will succeed in the marketplace. 4. Staging captures the pace and sequence of major strategic moves of a firm. 5. Economic logic stresses how a firm will generate profits. Long Description: The inner rhombus is labelled economic logic and its vertices are connected to those of the outer rhombus by line segments. Four sections thus formed between the two rhombuses are labelled staging, arenas, vehicles, and differentiators.
- #25 The strategic planning process involves considering the advantages (and disadvantages) of various strategic alternatives in the light of the competitive analysis. While weighing alternatives, managers must take into account the goals of their firms and the competitive status of other firms in the industry.
- #26 Depending on the size of the firm, managers must consider two levels of strategic alternatives. The first is global strategic alternatives, which determine the overall approach to the global marketplace a firm wishes to take. This level primarily applies to MNCs. The second level is entry strategy alternatives. Global strategies or globalization refer to the establishment of worldwide operations and the development of standardized products and marketing. The rationale is to compete by establishing worldwide economies of scale, offshore manufacturing, and international cash flows. The impetus for globalization usually includes (1) increasing competitive clout resulting from regional trading blocs, (2) declining tariffs, which encourage trading across borders and open up new markets, and (3) the information technology explosion, which makes the coordination of worldwide operations easier and increases the commonality of consumer tastes. There are, however, challenges associated with a global strategy. It makes the firm more vulnerable to environmental risk, it is difficult to manage, companies often lose some of their original identities through denationalization, and there can be a lack of flexibility and responsiveness at the local level.
- #27 For firms in industries in which competitiveness is determined on a country-by-country basis rather than on a global basis, local/regional strategies are more appropriate.
- #28 Ghemawat argues that strategy cannot be decided either on a country-by-country basis or on a one-size-fits-all-countries basis but, rather, that both the differences and the similarities between countries must be taken into account. He bases his perspectives on the cultural, administrative, geographic, and economic (CAGE) distances between countries, Each company’s strategic approach should be unique in adapting to its own environment. Many firms may try to go global but act local to trade off the best advantages of each strategy
- #29 Many MNE firms face pressures to be both globally efficient and locally responsive. Many MNCs have developed their global operations to the point of being fully integrated— often both vertically and horizontally, including suppliers, productive facilities, marketing and distribution outlets, and contractors around the world.
- #30 E-business can facilitate rapid entrance into new geographic markets. However, it also is a strategy with several challenges, including cultural differences, varying business models, and questions over which country has jurisdiction and responsibility for cross-border electronic transactions. E-business is really a new industry, with a different pool of competitors and new sets of environmental issues. See Exhibit 6-8. Long Description: Horizontal axis represents percentage from 0 to 70 in increments of 10. Vertical axis represents various benefits of the business to business model. Approximate values represented by the bins are as follows: Expanded sales channels: 63% Lower operational costs: 61% Better customer service: 58% Rapid entrance into new geographic markets: 51% Improved customer loyalty: 42% Better relationships with distributors or channels: 38%.
- #31 Change in World Internet Usage as of Q2 2018 Regions
- #32 Although the internet is a global medium, companies still face decisions regarding how much products and services can be globalized versus how much they must be localized to regional and national markets. An e-global strategy is likely to work well for global B2B markets in steel, plastics, and electronic components. E-local strategies are suited to consumer retailing and financial services.
- #33 As a relatively low-risk alternative, many small firms seldom go beyond exporting, and large firms use this avenue for many of their products. Experienced firms may establish an export department or hire an export management company. When setting up an export system, particular care must be given to choosing a distributor, as many countries have regulations that make it difficult to remove an inefficient distributor. Jordan Toothbrush is a small toothbrush manufacturer in Norway. Licensing grants the rights to a firm in the host country to either produce or sell a product, or both. The agreement involves the transfer of rights to patents, trademarks, or technology for a specified period of time in return for a fee paid by the licensee. Anheuser-Busch has licensees in England, Japan, Australia, and Israel. Licensing is relatively low risk because it requires little investment. It makes sense in countries where entry by other means is prohibited and for products in the mature phase of the life-cycle—when competition is intense, margins decline, and production is relatively standardized. It also is useful for firms with rapidly changing technologies, diverse product lines, and small firms with few financial and managerial resources for direct investment abroad. With franchising, a franchisor licenses a company’s trademark, products and services, and operating principles to the franchisee for an initial fee and ongoing royalties. Franchising also is relatively low risk and is ideal for small businesses. Contract manufacturing involves contracting for the production of finished goods or component parts. These goods are then imported to the home or other countries for assembly or sale, or they are sold in the host country. Nike is an example of a company that uses contract manufacturing. Offshoring occurs when a company moves one or all of its factories to another country. Offshoring provides access to foreign markets and lower production costs, while avoiding trade barriers. According to the US Commerce Department, about 90% of the outcomes from US-owned offshore factories is sold to foreign consumers.
- #34 Service sector outsourcing is outsourcing “white-collar” jobs. The text lists several examples companies outsourcing white collar jobs. Historically, India has been a primary location for IT outsourcing. However, as wages in India are beginning to rise, many companies are beginning to outsource to the Philippines, South Africa, Hungary, and the Czech Republic. Turnkey operations entail designing and constructing a facility abroad (e.g., a chemical plant), training local personnel, and turning the keys over to local management for a fee. The text provides the example of a Fiat company constructed in the former Soviet Union. With management contracts, a contract gives a foreign company the rights to manage the daily operations of a business but not to make decisions regarding ownership, financing, or strategic and policy changes. Usually, management contracts are enacted in combination with other agreements, such as joint ventures. International joint ventures are agreements between two or more companies to produce a product or service together. Whereas they offer considerable opportunities, joint ventures also are more risky than most of the strategies discussed thus far. Joint ventures facilitate rapid entry into new markets, are a means to overcome trade barriers, help achieve economies of scale, can help secure access to additional raw materials, help acquire managerial and technological skills, and can spread the risk associated with operating in a foreign environment. Wholly owned subsidiaries entail starting a product or service from scratch or acquiring an existing firm in the host country. Acquisitions allow for rapid entry in markets with established products and distribution networks. Wholly owned subsidiaries represent the highest risk entry strategy, but the company has full control over the operation.
- #35 Source: Selections from the A. T. Kearney 2017 Global Services Location Index. The 2017 Global Services Location index (GSLI) ranks. In ranked countries based on three criteria: financial attractiveness, people skills and availability, and business environment. The findings confirm that Asia continues to dominate service sector outsourcing, in particular India, due to its highly educated and English-language staff availability. Exhibit 6-9.
- #37 There continue to be many indicators of the increasing business opportunities available for companies wanting to set up operations in or export to the emerging markets, in particular in light of the slowdown in growth in many developed economies brought about by economic problems. Washburn and Hunsaker have found that forward-thinking global managers (they call them bridgers) have identified and developed innovations in emerging markets (often with the insight of the local managers) and been able to integrate those ideas and improvements into their companies’ product lines.
- #38 Revolut, a digital bank, is among dozens of western companies that have flocked to Lithuania, which is now Europe’s second-largest fintech centre measured by numbers of regulated companies.
- #39 When it comes down to a choice of entry strategy or strategies for a company, specific factors relating to that firm’s situation must be taken into account.
- #40 After consideration of those factors for the firm as well as considering what is available and legal in the desired location, some entry strategies will no doubt fall out of the feasibility zone. With the options remaining, then, strategic planners need to decide which factors are more im- portant to the firm than others. One method is to develop a weighted assessment to compare the overall impact of factors such as those in Exhibit 6-11 relative to the industry, the location, and the specific venture—on each entry strategy. Specific evaluation ratings, of course, would depend on the country conditions at a given point in time, the nature of the industry, and the local company. Long Description: The details of factor categories with examples are as follows: Internal factors: Global experience of firm and managers Distinctive competencies, patents, technology Corporate culture and structure Global objectives Long-term strategy Financial assets. External factors: Industry globalization Industry growth rate Barriers to entry Level of global competition Opportunities and incentives Extent of scale and location economies Country risk—political, economic, legal Cultural distance Knowledge of local market Potential of local market Competition in local market. Venture-specific factors: Value of firm—assets risked in foreign location Ability to protect proprietary technology Costs of making or enforcing contracts with local partners Size of planned foreign venture Intent to conduct research and development with local partners.
- #41 Figure 6-1 offers potential entry decisions for firms based on the nature of their ownership advantages and the importance of early mover advantage into that particular country. Long Description: The horizontal dimension represents importance of country early mover advantage, from low to high. The vertical dimension represents nature of ownership advantages, from non-monopolistic to monopolistic. The details of the quadrants are as follows: Monopolistic nature of investment and low importance of country early advantage: Easy to delay, wait for information to arrive. Monopolistic nature of investment and high importance of country early advantage: Get toes wet or investigate alternative mode. Non-monopolistic nature of investment and low importance of country early advantage: Wait for competitors’ moves and follow if they invest. Non-monopolistic nature of investment and high importance of country early advantage: Control delay, invest now.