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To understand the strategic planning options available to a corporation, its managers need to
recognize that different types of industry-based competition exist. Specifically, they must
identify the position of their industry along the global versus multidomestic continuum and
then consider the implications of that position for their firm.
The differences between global and multidomestic industries about the location and
coordination of functional corporate activities necessitate the differences in strategic
emphasis. As an industry becomes global, managers of firms within that industry must
increase the coordination and concentration of functional activities.
As a starting point for global expansion, the firm’s mission statement needs to be reviewed
and revised. As global operations fundamentally alter the direction and strategic capabilities
of a firm, its mission statement, if originally developed from a domestic perspective, must be
globalized. Lastly, movement of a firm toward globalization often follows a systematic
pattern of development. Commonly, businesses begin their foreign nation involvements
progressively through niche market exporting, license-contract manufacturing, franchising,
joint ventures, foreign branching, and foreign subsidiaries.
0Learning Objectives
0Lecture Outline
I0. Globalization
1. Such markets are most commonly created by end consumers that prefer
lower-priced, standardized products over high-priced, customized products
and by global corporations that use their worldwide operations to compete in
local markets.
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2. Global corporations headquartered in one country with subsidiaries in other
countries experience difficulties that are understandably associated with
operating in several distinctly different competitive arenas.
1. The first level has minimal effect on the existing management orientation or
on existing product lines.
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4. The most involved level is characterized by a substantial increase in foreign
investment, with foreign assets comprising a significant portion of total
assets.
B. Some firms down play their global nature (to never appear distracted from their
domestic operations), whereas others highlight it. Examples include:
2. IBM – operates in 125 countries, uses 30 languages, and more than 100
currencies
A. The technological advantage once enjoyed by the U.S. has declined dramatically
during the past 30 years.
1. Through globalization, U.S. firms often can reap benefits from industries and
technologies developed abroad.
a) Direct penetration of foreign markets can drain vital cash flows from a
foreign competitor’s domestic operations.
b) The resulting lost opportunities, reduced income, and limited production
can impair the competitor’s ability to invade U.S. markets.
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B. Strategic Orientations of Global Firms
a) U.S. e-tailers have attempted to blend their own corporate structure and
expertise with that of European corporations.
3. Exhibit 5.5, Orientation of a Global Firm, shows the effects of each of the
four orientations on key activities of the firm.
A. External and internal assessments are conducted before a firm enters global markets
2. Political status can be gauged by the host nation’s power in and impact on
global affairs.
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3. The resources that should be analyzed include, in particular, technical and
managerial skills, capital, labor, and raw materials.
4. The global capabilities that should be analyzed include the firm’s product
delivery and financial management systems.
A. Global strategic planning is more complex than purely domestic planning. Note the
following five contributory factors:
a) For an example of the challenges for global firms in India, see Exhibit
5.8, Strategy in Action.
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A. An inherent complicating factor for many global firms is that their financial policies
typically are designed to further the goals of the parent company and pay minimal
attention to the goals of the host countries.
1. This built-in bias creates conflict between the different parts of the global
firm, between the whole firm and its home and host countries, and between
the home country and the host countries themselves.
2. The conflict is accentuated by the use of the various schemes to shift earnings
from one country to another in order to avoid taxes, minimize risk, or achieve
other objectives.
D. Although such problems are an aspect of the global environment, rather than a
consequence of poor management, they are often most effectively reduced through
increased attention to strategic planning.
1. Such planning will aid in coordinating and integrating the firm’s direction,
objectives, and policies around the world.
5. A company that shares this view is GE. Jeffrey Immelt is profiled in Exhibit
5.9, Top Strategist.
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A. The strategic decisions of a firm competing in the global marketplace become
increasingly complex.
1. Multidomestic Industries
(1) Thus, the global strategy of such an industry is the sum of the
strategies developed by subsidiaries operating in different
countries.
(2) The primary difference between a domestic firm and a global firm
competing in a multidomestic industry is that the latter makes
decisions related to the countries in which it competes and to how
it conducts business abroad.
(1) The need for customized products to meet the tastes or preferences
of local customers.
(2) Fragmentation of the industry, with many competitors in each
national market.
(3) A lack of economies of scale in the functional activities of firms in
the industry.
(4) Distribution channels unique to each country.
(5) A low technological dependence of subsidiaries on R&D provided
by the global firm.
2. Global Industries
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(1) In a global industry, a firm’s strategic moves in one country can be
significantly affected by its competitive position in another
country.
(2) The very rapidly expanding list of global industries includes
commercial aircraft, automobiles, mainframe computers, and
electronic consumer equipment.
(3) Many authorities are convinced that almost all product-oriented
industries soon will be global.
d) Among the factors that make for the creation of a global industry are:
e) Six factors that drive the success of global companies are listed in
Exhibit 5.11, Factors That Drive Global Companies.
1. Each global firm must decide which of its corporate functional activities
should be performed where and what degree of coordination should exist
among them.
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a) Typical functional activities of a firm include purchases of input
resources, operations, research and development, marketing and sales,
and after-sales service.
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1. Businesses have discovered that being successful in foreign markets often
demands much more than simply shipping their well-received domestic
products overseas.
2. Similarly, products can be arrayed along a continuum from products that are
not subject to frequent product innovations to products that are often
upgraded.
a) Products with a fast rate of change include computer chips and industrial
machinery, while steel and chocolate bars are products that fit in the
slow rate of change category.
3. Exhibit 5.13 shows that the two dimensions can be combined to enable
companies to simultaneously assess both customer need for product
standardization and rate of product innovation.
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VIII. Competitive Strategies for Firms in Foreign Markets
A. Strategies for firms that are attempting to move toward globalization can be
categorized by the degree of complexity of each foreign market being considered
and by the diversity in a company’s product line (see Exhibit 5.15, Escalating
Commitments to International Markets).
1. Complexity refers to the number of critical success factors that are required to
prosper in a given competitive arena.
2. When a firm must consider many such factors, the requirements of success
increase in complexity.
3. Diversity, the second variable, refers to the breadth of a firm’s business lines.
When a company offers many product lines, diversity is high.
1. The primary niche market approach for the company that wants to export is to
modify select product performance or measurement characteristics to meet
special foreign demands.
2. Combining product criteria from both the U.S. and the foreign markets can be
slow and tedious.
3. There are a number of expansion techniques that provide the U.S. firm with
the know-how to exploit opportunities in the new environment.
3. U.S. firms that use either licensing option will benefit from lowering the risk
of entry into the foreign markets.
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a) Clearly, alliances of this type are not for everyone.
b) They are used best in companies large enough to have a combination of
international strategic activities and for firms with standardized products
in narrow margin industries.
a) One is the possibility that the foreign partner will gain the experience
and evolve into a major competitor after the contract expires.
b) The experience of some U.S. electronics firms with Japanese companies
shows that licensees gain the potential to become powerful rivals.
c) The other potential problem stems from the control that the licensor
forfeits on production, marketing, and general distribution of its
products.
d) This loss of control minimizes a company’s degrees of freedom as it
reevaluates its future options.
D. Franchising
E. Joint Ventures
1. As the multinational strategies of U.S. firms mature, most will include some
form of joint venture (JV) with a target nation firm.
2. Compared with full ownership of the foreign entity, JVs provide a variety of
benefits to each partner.
3. JVs speed up the efforts of U.S. firms to integrate into the political, corporate,
and cultural infrastructure of the foreign environment, often with a lower
financial commitment than acquiring a foreign subsidiary.
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4. Although joint ventures can address many of the requirements of complex
markets and diverse product lines, U.S. firms considering either equity- or
non-equity-based JVs face many challenges.
a) For example, making full use of the native firm’s comparative advantage
may involve managerial relationships where no single authority exists to
make strategic decisions or solve conflicts.
b) Additionally, dealing with a host-company management requires the
disclosure of proprietary information and the potential loss of control
over production and marketing quality standards.
c) Addressing such challenges with well-defined covenants agreeable to all
parties is difficult.
d) Equally important is the compatibility of partners and their enduring
commitments to mutually supportive goals.
e) Without this compatibility and commitment, a joint venture is critically
endangered.
F. Foreign Branching
a) Host countries may require that the branch be “domesticated,” that is,
have some local managers in middle and upper-level positions.
b) The branch most likely will be outside any U.S. legal jurisdiction,
liabilities may not be restricted to the assets of the given branch, and
business licenses for operations may be of short duration, requiring the
company to renew them during changing business regulations.
G. Equity Investment
a) These firms often enlist the support of a venture capital firm or private
equity company that invests its shareholders’ money in startups and
other risky but potentially very profitable small and medium-size
enterprises.
b) In exchange for a private equity stake, which is sometimes a majority or
controlling position, the VC or private equity company provides
investment capital and a range of business services, including
management expertise.
c) Exhibit 5.17, Strategy in Action, provides an example of the
importance of private equity firms to business development and strategic
renewal and of the difficulties that they can face in international
situations.
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1. Wholly owned foreign subsidiaries are considered by companies that are
willing and able to make the highest investment commitment to the foreign
market.
10. How does environmental analysis at the domestic level differ from global analysis?
As pointed out in the section titled “Complexity of the Global Environment” (pages
128-129), the global environment is more complex than the domestic environment for a
variety of reasons, which makes the analysis of this environment more complex. First, a
global firm has to analyze the political, etc. environments in each marketing area in
which it operates. Second, data may not be readily available, unlike the case of data in
the domestic environment. Finally, the data may not be reliable. All of these factors
make environmental analysis at the global level more challenging.
2. Which factors complicate environmental analysis at the global level? Which factors are
making such analysis easier?
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As pointed out above, the multiple political, economic, legal, social, and cultural
environments faced by global firms complicate the environmental analysis process.
Monitoring the constant changes in each market is difficult and time consuming. In
addition, data may not be available and the reliability of the available data may be
questionable.
3. Do you agree with the suggestion that soon all industries will need to evaluate global
environments?
It is very likely that soon all industries will need to evaluate global environments
because most businesses are becoming global. Take the example of a small clothing
retailer who competes only in the domestic market. Globalization affects this retailer
because its competitors may be sourcing their clothes from foreign countries. The local
retailer may not have a cost advantage and therefore may have to monitor the global
environment for opportunities and threats.
It is possible that certain types of service industries operate almost devoid of global
competition. Take a local company that does lawn mowing and snow plowing. Because
it is a service company where the service has to be performed at the client’s site (house),
it does not face foreign competition. That is the immunity it enjoys – the fact that one
cannot separate the service from the site outcomes of business strategies.
Increasingly, firms across the world are becoming global competitors capable of
threatening any domestic firm’s market share, product quality, innovation, and even
management quality. There are several key reasons for going global, both proactive and
reactive ones. The proactive include advantages and opportunities including the
following: additional resources, lower costs, incentives, new or expanded markets,
exploitation of firm-specific advantages, tax incentives, economies of scale, synergy,
power, prestige, and to protect the home market by taking the offensive in competitors’
markets. The reactive reasons are based on outside occurrences including: trade barriers,
international customers, international competition, regulations, and chance occurrence.
A firm’s globalizing often represents a strategic competitive move on the part of that
firm. The exhibit on page 125, “Reasons for Going Global” will help in this discussion.
There are four of these. Ethnocentric orientation means the firm believes that the values
and priorities of the parent organization should guide the strategic decision-making of
all its operations. Polycentric orientation indicates the culture of the country in which a
strategy is to be implemented is allowed to dominate the decision making process. In
contrast, a regiocentric orientation exists when the parent attempts to blend its own
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predispositions with those of the region under consideration, thereby arriving at a
region-sensitive compromise. Lastly, a corporation with a geocentric orientation adopts
a global systems approach to strategic decision-making, thereby emphasizing global
integration. See the section called “Strategic Orientations of Global Firms” on page124
for more information.
The section titled “Control Problems of the Global Firm” (pages 129-130) will help in
this discussion. An inherent complicating factor for many global firms is that their
financial policies typically are designed to further the goals of the parent company and
pay minimal attention to the host countries’ goals. Difficult financial environments
make normal standards of company behavior concerning the disposition of earnings,
sources of finance, and the structure of capital more problematic. Additionally,
important measurement and control systems differ among the regions or countries. Most
of the time, these problems are solved largely by good strategic management and
strategic planning.
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This answer falls in the large section in the text titled “Competitive Strategies for Firms
in Foreign Markets” on pages 137-142.
a. The primary niche market approach for the company that wants to export is to modify
select product performance or measurement characteristics to meet special foreign
demands. This can be slow and tedious, but some expansion techniques provide the
U.S. firm with the know-how to exploit opportunities in the new environment.
Exporting requires the least capital investment, and the organization maintains its
quality control standards over production processes and finished goods inventory.
The risk to the survival of the firm is typically minimal.
b. Establishing a contractual arrangement is the next step beyond exporting, but does
not involve establishing an equity position on foreign soil. Licensing involves the
transfer of some industrial property right from the U.S. licensor to a motivated
licensee. Most tend to be patents, trademarks, or technical know-how that are granted
to the licensee for a specified time in return for royalties or avoidance of tariffs or
import quotas. There are two major problems. First, there is a possibility the foreign
partner will gain experience and evolve into a major competitor for the domestic firm.
Second is the loss of control that the licensor assumes on such matters as production,
marketing, and general distribution.
c. Franchising is a special form of licensing that allows the franchisee to sell a highly
publicized product or service using the parent’s brand name, trademark, or special
procedures (for marketing or distribution). The franchisee pays a fee to the parent
company based on volume of sales in a defined market area. Franchising is very
popular worldwide.
f. Small and medium-sized enterprises with strong growth potential frequently have the
need for additional funds to be able to grow further before deciding to trade their
stock publicly in the marketplace. These firms enlist the support of private equity
companies that invest shareholder moneys in startups and other risky but potentially
very profitable small and medium-sized enterprises. The VC or private equity
company provides investment capital, business services, and management expertise.
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g. Wholly owned foreign subsidiaries are considered by companies that are willing and
able to make the highest investment commitment to the foreign market. These
companies insist on full ownership for reasons of control and managerial efficiency.
Policy decisions typically remain with the U.S. senior mangers. They can be started
either from scratch or through acquisitions in the host country. U.S. firms can benefit
significantly if the acquired company has complimentary product lines or an
established distribution or service network.
Case Summary
This case discusses counterfeit products and companies that are capitalizing on
counterfeiting, while others are battling the ever-increasing threat that counterfeiters pose to
legitimate manufacturers’ integrated foreign market shares. Kiwi Shoe Polish, Callaway Golf
clubs, Intel computer chips, Bosch power drills, BP oil, Pfizer prescriptions, and Hewlett-
Packard ink cartridges have all been the notable victims of counterfeiting. Pick any product
from any well-known brand, and chances are there’s a counterfeit version of it out there.
Counterfeiting has “grown up” according to the case, and that is scaring the multinational
firms. Knock-offs do terrible damage not only to market share, but threaten the consumers
themselves as well. The Pfizer example illustrates the larger reality. According to the World
Health Organization, up to 10% of medicines worldwide are counterfeited. This could be
costing pharmaceutical firms $46 billion per year collectively.
The scale of the counterfeiting threat is prompting new efforts by multinationals to stop, or at
least curb, the spread of counterfeits. Companies are deploying detectives around the globe in
greater force than ever, and they are pressuring governments—particularly in China, Brazil,
Taiwan, and Korea. China is “key to any solution”, according to Balfour. Since the country is
an economic gorilla, its counterfeiting is turning into quite the beast as well—accounting for
nearly two-thirds of all the fake and pirated goods worldwide. The Chinese government is
starting to take this problem more seriously because of uniform efforts on the part of the
U.S., Europe, and Japan to call the country out.
Slowing down counterfeiting will take heroic efforts. It thrives on the whole process of
globalization itself. Globalization is, after all, the spread of capital and know-how to new
markets, which in turn contribute low-cost labor to create the ideal export machine,
manufacturing first the cheap stuff, then moving up the value chain. Counterfeiting packs all
the punch of skilled labor, smart distribution, and product savvy without getting bogged
down in costly details such as research and brand-building. The counterfeiting industry is
starting to rival multinationals in speed, reach, and sophistication.
Many fakes are getting so good that even company execs say it takes a forensic scientist to
distinguish them from the real McCoy. The problem for the consumer arises months later
when brake pads, filters, or batteries (the GM example) wear out much earlier than they
should. One key to the counterfeit’s success is its perfect packaging duplicates that lend false
credibility to their products. As counterfeiters get more entrenched and more global, they will
be increasingly hard to eradicate. Their financing comes from all across the globe and their
sophistication just keeps improving.
The biggest challenge for most firms is getting cooperation from China. For years, Chinese
have turned a blind eye to the problem, largely because most of the harm was inflicted on
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foreign brand owners and most counterfeiting was seen as a victimless offense. The only time
the authorities would act was when there was a clear threat to Chinese. Now, China is
toughening its legal sanctions. In December, Beijing lowered the threshold for criminal
prosecution of counterfeiters.
• Explain several elements of complexity faced by firms after they enter the global
environment. Can firms avoid the global environment? Please refer to the section titled
“Complexity of the Global Environment” on pages 128-129.
• Identify risks and problems associated with being a global firm. Please refer to the section
titled “Control Problems of the Global Firm” on pages 129-130 for some input on this
concept.
• Identify those types of firms in foreign markets that are vulnerable to counterfeiting efforts
in those markets. Please refer to the section titled “Competitive Strategies for Firms in
Foreign Markets” on pages 137-142.
1. How have the benefits of globalization extended to actually hurt businesses whose
products enjoy widely integrated international markets? Do you think globalization
itself will sustain the problem of counterfeits?
The case cites examples of how counterfeiting has benefited by globalization itself.
(Please refer to the case, page 144, paragraph 7.) “Globalization, after all, is the spread
of capital and know-how to new markets, which in turn contribute low-cost labor to
create the ideal export machine, manufacturing first the cheap stuff, then moving up the
value chain.” The most recent counterfeit efforts illustrate that those doing the
counterfeiting are progressing beyond soap, candles, or CDs to more sophisticated
products like intensely designed golf clubs, high-quality knockoffs of leather designer
handbags, and automotive parts that don’t break until it’s too late to tell a difference in
brand authenticity.
The counterfeiting example highlights both the benefits of globalization for the
counterfeit industry itself as well as the threats and challenges faced by those firms with
genuine products competing against fake products under the same labels. Without
globalization, firms like Callaway Golf and GM would not be present in any of the
Southeast Asian, Latin American, or other countries in the first place. The reality is that
there is a huge population and huge opportunity for firms to be present in all of the
global regions. The foreign markets that offer that opportunity are the same ones that
pose a threat.
The case focuses on China, and has said that the Chinese government is beginning to
crack down on counterfeiters. The real challenge for these firms, however, is that they
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must rely on a solution involving the Chinese government because it is likely more
profitable and makes more sense to have a foreign presence despite all the problems of
counterfeits in various regions. One reason is the fact that benefits outweigh potential
costs from counterfeits. Another reason they will remain global is that even if they do
not sell their products internationally, American retailers can still sell counterfeit
products manufactured, packaged, and distributed from other countries.
20. Do you think any companies can “immunize” themselves to the threat of counterfeits?
Why or why not? If so, how?
It is not likely that any firm, no matter how integrated or isolated, could immunize itself
from the threat posed by counterfeiters. Counterfeiting is becoming more sophisticated,
and it has proven to be very lucrative (refer to the case, page 146, paragraph 16). Firms
and the governments of various countries are the main participants who are actively
trying to curb the threat of counterfeiting. Some companies, like Pfizer, GM, Nokia, and
IT International (a cigarette maker), are spending more than ever to stop counterfeiters.
Companies themselves are spending millions on busts, investigations, and legal fees.
Some have hired full-time agents to scope out counterfeit operations worldwide, and
some firms are concentrating those agents to areas like Southeast Asia. Some firms are
creating actual anti-counterfeiting items in the company budget—spending on such
things as local informants and investigators. On the technological side of things,
manufacturers are using special holographic images, 20-digit ID codes, radio-frequency
ID tags, or rapidly changing packaging and tracking devices. This makes it more
difficult for counterfeiters to keep up with the companies’ changes.
Two additional efforts will be necessary to stop counterfeiters (on a case-by-case basis).
First, firms will have to identify retailers who are selling counterfeit products (some
may pay less and not mind that the products are counterfeit, so long as they sell).
Additionally, firms should enlist consumer efforts. This can only go so far, as many
consumers do not care if they $20 “Rolex” they buy in a back alley or on a busy city
street corner, so long as it looks the same as the real thing. Function is far less important
in that case than actual function or quality as the brand logo itself. Some consumers,
however, do care. Makers of luxury goods will do well to make sure their consumers are
highly discriminate as to the authenticity of the products by making sure consumers
understand all the brand-associated service, quality, and repairs (or maintenance) will
come only with the purchase of authentic products from licensed retailers.
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