The Impact of Transnationals and FDI 1/11/2011 1:29:00 PM
Why do businesses “go global”?
Firms seek to increase profits through international production and
sales
Two general strategies
o Differentation: adding value to a product so consumers will
pay more for it
o Low-cost: providing value to consumers at a lower cost than
competitors
Porter: to increase sales, either be so different, or low cost
Examples of Primary activities:
Smelting
Auto manufacturing
Software design
Example of Support activities:
IT support
Inventory distribution
-The efficiency of the primary and support value chain activities affect the
profitability of the firm
-Doing what you do best- ie. Your “core competence” is a more efficient use
of money
-Higher efficiency=higher profit
-firms tend to maximize efficiency by doing what they do (primary activities)
and outsourcing what they have to do to support what they do (support
activities) to places that can do them more efficiently (ie. Cheaper)
ex. IT services, customer support centers to India
-firms become more efficient through the conversion of resources into
capabilities or competencies
-Resources:
factors that a firm possesses which, when utilized provide value
-Capabilities/competencies:
the ability to effectively use the resources a firm possesses to
create value -Examples of firm resources:
organizational culture
patents
proprietary technology
-Examples of capabilities/competencies:
excellent service
new product development
marketing research
back to idea of firms going global:
-firms that operate internationally tend to:
possess resources and capabilities that are unique and transferable
beyond their home market and earn greater rewards from them
have become as efficient as they can operating in their home
market
-operating internationally allows firms to gain greater efficiencies by
capturing location economies
-Location economies:
** locating different value chain activities in the optimal location
(regardless of which country it is) to capitalize on lower factor costs
or particular skills associates with each activity
-Location economies arise from the fact that difernt countries have different
national comparative advantages
-National comparative advantages:
different resource endowments or competencies or cost advantages
that are prevalent within and relatively unique to a given country or
society
Sources of a Nation’s Comparative Advantage:
Strategy, Structure and Rivalry
Factor Endowments Demand Conditions
Related & Supporting Industries
-all 4 must be present
Strategy, structure and rivalry: -given industry in the given country, what is the strategy, structure,
is the industry competitive and innovative, non innovative will not
provide a non comparative
-private or publically owned? in a monopoly or government/state
owned company, they don’t need to compete
Factor endowments:
Literacy levels, lack of pollution, water
Natural resources around the world are not planned, by luck
These factor endowments allow or create a dynamic, creative,
healthy workforce
Demand conditions:
For companies to go global and be good at something, they need
money, because most start small, they start locally then global,
need critical mass of users within their domestic environment
USA can become huge internationally, Canada has to go global
before it can reach the same numbers as the US
-Examples of National Comparative Advantages:
India, software development, IT services
Germany-product engineering, chemicals
Japan- mirco electronics, automobiles
Switzerland- banking, pharmaceuticals
Mexico- auto parts
Canada-natural resources- extracting, banking
-Capturing location economies has two effects:
1) firms can differentiate product offerings by capitalizing on the
particular competency prevalent in that country
o knowing that a diamond comes from NWT or that a car has
“German engineering” has some “value” to the consumer,
know it wont be a blood diamond
2) it can lower the costs of value creation by capitalizing on low
costs of production
o buying raw materials form a low-cost source or manufacturing
products in a country with low labour costs will reduce the
end-users’ cost -Sales side-operating internationally allows firms to gain greater efficiencies
by capturing scale economies
-Scale economies:
reduction in unit costs by producing large numbers. Cost reduction
comes from more efficient use of equipment and experience
-the Experience Curve
unit costs to accumulated output, as you move from first, it will be
expensive, by the millionth one, it will cost pennies
-firms may have saturated their home market with their products to a point
where further profit growth is limited
-there may be other markets in the world where they can sell their products
-the more firms can sell of the same thing the more efficient (profitable)
they will be
-but…….
Strategy and Competitive Advantage
firms cannot always sell the same thing everywhere, so they have
to develop the right strategy for their industry, company and the
context in which they operate
generally there are two pressures that determine the type of
strategy international business will follow:
o 1)cost reduction
o 2) local responsiveness
pressures for cost reductions:
o firms will likely respond by mass-producing a standard
product in the optimal locations worldwide
o greatest in industries producing commodity type products
where price is the main competitive weapon, when there are
many strong competitors, excess capacity, powerful
consumers and low switching costs
examples of industries that face cost reduction pressure:
o nickel
o computer hardware
o pulp and paper o auto parts
o clothing and shoes
o food
Pressures to be locally responsive
o Differences in consumer tastes and preferences between
countries
o Differences in infrastructure and traditional practices
o Differences in distribution channels
o Differences in host government demands
Firms use 4 basic strategies to compete in the international
environment: ***chart in text
o International strategy
o Multi-domestic strategy
o Global stragegy
o Transnational strategy
(Cost pressures, pressure for local responsiveness on chart, 4 fit in, global
top left, international bottom left, transnational top, multi-domestic bottom)
International Strategy:
o Firms transfer resources and capabilities developed in the
home market to foreign markets while undertaking some
limited local customization
o They may suffer form a lack of extensive local responsiveness
and an inability to exploit location and scale economies
Multi-domestic Strategy:
o Firms customize their products, marketing and business
strategy to national conditions
o They may suffer from an inability to transfer resources,
capabilities and products between countries and therefore
may not be able to exploit scale and location economies
Global Strategy:
o Firms focus on reaping cost reductions from scale and location
economies, producing large numbers of the same product.
So-called “world products”
o May suffer from a lack of local responsiveness Transnational Strategy:
o Firms exploit scale and location economies, transfer resources
and capabilities throughout the firm and pay attention to local
preferences. There needs to be an effective flow of knowledge
within the transnational firm
o Sounds simple right?
International business strategy is complex and affected by
numerous factors that are difficult to judge and analyze
That is why although many firms go global, few do so successfully,
and they t
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