Session 2
International Management and Cultural Diversity
2
Measuring International
Competitiveness
Relative Unit Labour Cost (RULC)
Relative Labour Cost Relative Exchange
Relative Labour Productivity Rate
3
Ranking multinational enterprises
(MNEs)
Transnationality Index (TNI)
TNI is the average of three ratios:
Foreign sales : total sales
Foreign employment : total employment
Foreign assets : total assets
4
Opportunities and Outcomes of
International Strategy
Figure 8.1
This is a
“must know”
model
5
Identifying International Opportunities
What is an international strategy? A strategy through which the firm sells its
goods or services outside its domestic market
Reasons to have an international diversification 1. Increased market size
2. Greater returns on investment
3. Greater economies of scale and learning
4. Location advantages
6
Classic Rationale for International
Diversification: Extend Product’s Life Cycle
Production is standardized and
relocated to low cost countries
Product DemandDevelops and FirmExports Products
Firm Introduces
Innovation in
Domestic Market
ForeignCompetition
Begins Production
Firm Begins
Production Abroad
7
International Strategy Benefits
Increase market share
Domestic market may lack the size to support efficient
scale manufacturing facilities
Return on investment
Large investment projects may require global markets
to justify the capital outlays
Weak patent protection in some countries implies that
firms should expand overseas rapidly in order to
preempt imitators
8
International Strategy Benefits (cont’d)
Economies of scale and learning
Expanding size or scope of markets helps to achieve
economies of scale in manufacturing as well as
marketing, R&D or distribution
Can spread costs over a larger sales base
Can increase profit per unit
Competitive advantage through location
Low cost markets aid in developing competitive
advantage by providing access to: raw materials, lower
cost labor, key customers, energy
9
Types of International Strategies
International business-level strategies
Cost leadership strategy
Differentiation strategy
Focus strategies
Porter’s “Diamond Model” of National Advantage
International corporate-level strategies
Multidomestic strategy
Global strategy
Transnational strategy—combination of the above two
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Determinants of National Advantage
SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group,
from Competitive Advantage of Nations, by Michael E. Porter, p. 72. Copyright ©1990, 1998 by Michael E. Porter.
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Determinants of National Advantage – 1
Factors of Production
The inputs necessary to compete in any industry
Labor Land Natural resources
Capital Infrastructure
Basic factors include natural and labor resources
Advanced factors include digital communication
systems and an educated workforce
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Determinants of National Advantage – 2
Demand Conditions
Characterized by the nature and size of buyers’
needs in the home market for the industry’s goods
or services
Size of the market segment can lead to scale-efficient
facilities
Efficiency can lead to domination of the industry in other
countries
Specialized demand may create opportunities beyond
national boundaries
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Determinants of National Advantage – 3
Related and Supporting Industries
Supporting services, facilities, suppliers
and so on
Support in design
Support in distribution
Related industries as suppliers and buyers
14
Determinants of National Advantage – 4
Firm Strategy, Structure, and Rivalry
The pattern of strategy, structure, and
rivalry among firms
Common technical training
Methodological product and process
improvement
Cooperative and competitive systems
15
International
Corporate-Level
Strategies
16
Multidomestic Strategy
Strategy and operating decisions are decentralized to strategic business units (SBU) in each country
Products and services are tailored to local markets
Business units in one country are independent of each other
Assumes markets differ by country or regions
Focus on competition in each market
Prominent strategy among European firms due to broad variety of cultures and markets in Europe
17
Global Strategy
Products are standardized across national markets
Decisions regarding business-level strategies are
centralized in the home office
Strategic business units (SBU) are assumed to be
interdependent
Emphasizes economies of scale
Often lacks responsiveness to local markets
Requires resource sharing and coordination across
borders (hard to manage)
18
Transnational Strategy
Seeks to achieve both global efficiency and local
responsiveness
Difficult to achieve because of simultaneous
requirements:
Strong central control and coordination to achieve
efficiency
Decentralization to achieve local market responsiveness
Must pursue organizational learning to achieve
competitive advantage
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Environmental Trends
Liability of foreignness
Legitimate concerns about the relative attractiveness of
global strategies
Global strategies not as prevalent as once thought
Difficulty in implementing global strategies
Regionalization
Focusing on particular region(s) rather than on global
markets
Better understanding of the cultures, legal and social norms
20
Choice of International Entry Mode
Type of Entry Pros & Cons
Exporting High cost, low control
Licensing Low cost, low risk, little control, low
returns
Strategic alliances Shared costs, shared resources, shared
risks, problems of integration
Acquisition Quick access to new market, high cost,
complex negotiations, problems of
merging with domestic operations
New wholly owned
subsidiary
Complex, often costly, time consuming,
high risk, maximum control, potential
above-average returns
21
What is licensing?
Licensing is an agreement where the owner of a product, trademark, brand name, service, or other valuable good allows another entity to produce that good and sell it, in exchange for a monetary payment to the owner
The payment is normally in the form of a royalty per unit produced and sold
22
How to Choose Mode of Entry
Cost?
Speed?
Risk?
Control?
Intellectual property protection?
23
Dynamics of Mode of Entry
Wholly-
owned
Subsidiary
Best
for
early
entry
No foreign manufacturing expertise and
require investment only in distribution Export
Need to facilitate the product
improvements necessary to enter
foreign markets
Licensing
Face uncertain situations such as an
emerging economy in its targeted
market
Strategic
Alliance
Need to protect intellectual property
rights; the need for global integration is
high
AcquisitionNeed to overcome entry barriers to the
foreign market
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Outcomes of International Strategies
Better performance
May increase a firm’s returns (such firms usually achieve the most positive stock returns)
May achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns
More innovation
May yield potentially greater returns on innovations (a larger market)
Can generate additional resources for investment in innovation
Provides exposure to new products and processes in international markets; generates additional knowledge leading to innovations
Issue: complexity of managing multinational firms
Can produce greater uncertainty and risk
May result in the firm becoming unmanageable
May cause the cost of managing the firm to exceed the benefits of expansion
Exposes the firm to possible instability of some national governments
25
Risk in the International Environment
Political risks include:
• Instability in national governments
• War, both civil and international
• Potential nationalization of a firm’s resources
Political Risks Economic Risks
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Risk in the International Environment
Economic risks are interdependent with political
risks and include:
• Differences and fluctuations in the value of
different currencies
• Differences in prevailing wage rates
• Difficulties in enforcing property rights
• Unemployment
Political Risks Economic Risks
27
Limits to International Expansion
Management Problems
Cost of coordination across diverse geographical
business units
Institutional and cultural barriers
Understanding strategic intent of competitors
The overall complexity of competition
28
Sensitivity to Cultural Differences
Cultural sensitivity (awareness of
customs; adapting behavior)
Multicultural worker (believes all
cultures are good)
Minimize cultural mistakes
29
Challenges Facing Global Managerial
Worker
Developing global leadership skills
Currency fluctuations
Balance of trade problems
Human rights violation and corruption
Culture shock (“I can’t take this place.”)
Piracy of property rights and merchandise,
including “knock-offs”
30
Success Factors in the Global Marketplace
Think globally, act locally.
Recruit and select talented nationals
and domestic workers.
Hire and develop multicultural workers.
Research and assess potential markets.
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Competitive Advantage of Diversity
1. Marketing advantage including more sales
and profits
2. Reduced costs (less turnover)
3. Recruit additional talent
4. Useful ideas for publicity/advertising
5. Fewer cultural bloopers
6. Creativity advantage (diverse ideas)
32
Potential Problems with Diversity
1. Diverse group members may not work harmoniously with each other.
2. Potential for conflict is high if group members
a. do not support each other,
b. do not share knowledge.
3. Groups may be less cohesive.
33
Organizational Practices
to Encourage Diversity
Corporate policies favoring diversity
(e.g., monitor promotions)
Employee network groups (e.g., Latino
Employee Network at Frito-Lay )
Diversity training (encourages harmony
by developing empathy for differences)