BUSI 2701 Chapter 16: Global Human Resource Management

Importance of Global Human Resource Management (HRM)

• Conducting international business is increasingly competitive.

• Technological supremacy does not last long, meaning that it cannot be considered a
strong advantage of a company.
• The economic environment is affected by many
uncontrollable factors, making a stable economic
situation uncertain.

The one area in which companies can become more

competitive is having the best people who can serve
consumers in the best way. It involves determining the
right person for the right position, the right location, and
the right pay.

Strategic Role of International HRM

HRM can help a firm reduce the costs of value creation and add value by better serving
consumer needs.
• It is often more complex for international businesses because there are differences in labour
markets, culture, and legal systems.
• HRM also must determine when to use expatriate managers.
• Who should be sent on foreign assignments?
• How should they be compensated?
• How should they be trained?
• How should they be reoriented when they return home?

Domestic vs International HRM

• New HR responsibilities
• Ex. International taxation, international relocation and orientation, services for
expatriates, host government relations, etc.
• Need for a broader perspective
• Ex. Establishing fair compensation, establishing comparable compensation, etc.
• Greater involvement in employees’ personal lives
• Ex. Housing arrangements, healthcare, children’s education, safety, etc.

Staffing Policies
Staffing policies: Strategies concerned with selecting employees for specific jobs. A firm’s
staffing policy can be a tool for developing and promoting corporate culture.

Ethnocentric staffing policy: Fills key management positions with parent country nationals.
• Firms pursuing an ethnocentric policy believe that there is a lack of qualified individuals in
the host country to fill senior management positions. They also may believe that it is the best
 way to pursue a unified corporate culture and value can be created by transferring core
competencies to a foreign operation via parent country nationals.
• Disadvantages include…
• Promotion opportunities are limited for host country nationals
• Can lead to cultural myopia, where a firm doesn’t truly understand of host country
cultural differences

Polycentric approach: Recruits host country nationals to manage subsidiaries in their own host
country and recruits parent country nationals for key positions at headquarters.
Advantages Disadvantages
• Can minimize cultural myopia • Creates a gap between home and host
• May be less expensive to implement than country operations, making it difficult to
an ethnocentric policy attain a unified corporate culture
• Host country nationals have limited
opportunities to gain experience outside
their own countries, making it difficult to
progress beyond senior positions at their
own subsidiaries

Geocentric approach: Recruits the best people for key positions throughout the organization,
regardless of nationality.
Advantages Disadvantages
• Consistent with building a strong unifying • Immigration policies can limit abilities to
culture and informal management hire certain individuals
network • Can be costly and difficult to implement
• Enables the firm to make the best use of because of the associated training and
its human resources relocation costs
• Builds a cadre of international executives
who feel at home working in several
different cultures
Expatriate Failure

Expatriate failure: Premature return of an expatriate manager to a home country.

American expatriates fail because…

1) The inability of an expatriate’s spouse to adapt
2) The manager’s inability to adjust
3) Other family-related issues
4) The manager’s personal/emotional maturity
5) An inability to cope with larger overseas responsibilities

European expatriates fail because…

1) The inability of an expatriate’s spouse to adapt

Japanese expatriates fail because…

1) An inability to cope with larger overseas responsibilities
2) Difficulties with the new environment
3) Personal or emotional problems
4) A lack of technical competence
5) The inability of an expatriate’s spouse to adapt

Expatriate Selection

1) Self-orientation- The expatriate’s self-esteem, self-confidence, and mental well-being.

2) Others-orientation- The ability to interact effectively with host-country nationals.
3) Perceptual ability- The ability to understand why people of other countries behave the
way they do.
4) Cultural toughness- The ability to adjust to another culture.

Training & Management Development

After selecting a manger for a position, training and developing programs should be
implemented.

• Cultural trainings: Fosters an appreciation for the host country’s culture.

• Language training: An exclusive reliance on English diminishes an expatriate’s ability to
interact with host country nationals so language training is necessary to facilitate
communication.
• Practical training: Helps the expatriate and their family ease themselves into day-to-day life
in the host country.
• Repatriation training: Prepares the expatriate managers for re-entry into their home
organization.

Compensation
Most countries use the balance sheet approach. It equalizes purchasing power across countries,
so employees have the same living standard in their foreign posting as home and financial
incentives to go abroad.
International Labour Relations
Labour unions can limit a firm’s ability to pursue a
transnational or global strategy. Therefore, HRM needs to
minimize conflict between management and organized
labour.

Response of MNCs to concerns of organized labour:

• MNCs can counter union bargaining power by
threatening to move production to another country
• MNCs will farm out only low-skilled jobs to foreign
plants, making it easier to switch production locations
• MNCs will import employment practices and
contractual agreements from their home countries
and reduces the influence of unions

Response of organized labour to the increased bargaining power of MNCs:

• Trying to set-up their own international organizations
• Lobbying for national legislation to restrict MNCs
• Trying to achieve regulation of MNCs through international organizations such as the
International Labour Organization

Organized labour has very limited success with these measures.

Vocabulary

Human resource management (HRM): Activities an organization carries out to use its human
resources effectively.

Expatriate manager A citizen of a country working abroad in another location of a firm.

Corporate culture: An organization’s norms and value systems.

 BUSI 2701 Chapter 15: Global Production, Outsourcing, & Logistics

Production & Materials Management Functions

1) To increase product quality.

Product quality is increased by eliminating defective
products from both the supply chain and the
manufacturing process.

Improved quality reduces costs by:

• Increasing productivity since time is not wasted
manufacturing poor-quality products
• Reducing the number of products that cannot be
sold, directly reducing unit costs
• Lowering re-work and scrap costs
• Lowering warranty costs

Quality can be improved by:

• Minimizing variation in the manufacturing process
• Reducing the number of defects in products
• Eliminating waste in processes
• Reducing costs throughout the company
• Continuously improving processes by regularly
examining different processes and implementing
improvements.

International Organization for Standardization (ISO)

ISO 9000: A series of international quality management standards developed for the purpose of
increasing business efficiency and customer satisfaction.
• Many NA companies conducting business internationally often ask clients and suppliers to
adhere to ISO standards. Additionally, the EU requires firms to be certified under ISO 9000.
• The goal of ISO is to embed a quality management system within organizations, increasing
productivity, reducing costs, and ensuring quality of goods/services.
• With ISO organizations can identify the source of problems for various products and
services, finding solutions and maximizing products
• When multiple organizations use ISO, an internationally known supply chain with a high
degree of reliability can be created.

2) To lower costs.
Costs are lowered by dispersing production activities to various locations where each activity
can be performed the most efficiently.

Allocation should be done in a manner so that production and logistics are able to:
• Respond quickly to shifts in consumer demand
• Be locally responsive
• Be cost effective
Factors firms should consider when picking a location:
• Country factors- Political economy, national culture, relative cost factors, etc.
• Technological factors- Depending on the constraints associated with different technologies,
manufacturing may take place in a limited number of location or many locations.
• High fixed costs: In some cases, the fixed costs of setting up a manufacturing plant are
so high that a firm must reduce the number of plants it sets up.
• Flexible manufacturing and mass customization: Manufacturing technologies are
designed to reduce set-up times for complex equipment, increase the utilization of
individual machines through better scheduling and improve quality control at all stages
through the manufacturing process.
• Minimum efficient scale: A minimum scale of output a plant must operate at to realize the
minimum cost of production. The larger the minimum efficient scale of a plant, the
greater the argument is for centralizing production in a limited number of locations.
• Product factors
• Value-to-weight ratios affect transportation costs. The higher the value-to-weight ratio,
the more practical it is to produce a product in a limited number of locations.
• Universal needs affect location decisions because it directly affects a firm’s need for local
responsiveness. The less need for local responsiveness, the more practical it is to
produce a product in a limited number of locations.

Concentrated manufacturing is appropriate when:

• There are significant differences in country factors
• Trade barriers are low
• There are externalities arising from the
concentration of like enterprises favouring
certain locations
• Exchange rates are stable
• Flexible manufacturing technology exists
• The product has a high value-to-weight ratio
• The product serves universal needs

Sourcing Decisions
Advantages of making components internally:
• Lower costs- If the firm is more efficient at a production activity than other firms, it is more
cost-efficient to keep the production activity in-house.
• Facilitating specialized investments- When substantial investments in specialized assets are
required to manufacture a component, a firm will prefer to manufacture internally.
• Proprietary product technology protection-If a firm’s competitive advantage is its technology
or if a firm wishes to maintain control over its technology, outsourcing tends to be avoided.
• Improved scheduling- Manufacturing internally may make planning, coordinating, and
scheduling adjacent processes easily.
Advantages of outsourcing components:
• Lower costs-Manufacturing internally increases the scope and complexity of an organization,
which may increase costs.
• Strategic flexibility- Firms can switch between different suppliers whenever necessary to
drive down cost structures.
• Offsets- Outsourcing from independent suppliers based in other countries may help firms
capture more orders from the country of the supplier.

Growth of Global Sourcing

Key drivers of the growth of global sourcing include:
• Technological advances in communications
• Falling costs of conducting business internationally
• Entrepreneurship and rapid economic transformation in emerging markets

Implications for Businesses

1) Coordinating a global manufacturing system

Materials management: The activity that controls the transmission of material through the supply
chain from suppliers to consumers.

• Materials management has a significant impact on the cost structure of a firm.

2) Just-in-time

Just-in-Time (JIT): A manufacturing strategy that increases return on investment by reducing in-
process inventory and carrying costs.

• Reduces warehousing costs

• Helps identify and reduce defects
• Has no buffer stock to cope with unexpected demand or supply problems

3) The role of information technology

• Allows firms to optimize production scheduling

• Facilitates the tracking of inputs
• Allows suppliers and firms to communicate in real time

Vocabulary

Production: Activities involved in creating a product or service.

Supply chain: All parties involved in the production and distribution of a product or service.
Materials management: The activity that controls the transmission of material through the
supply chain from suppliers to consumers.
Total quality management (TQM): A management philosophy in which the central focus is the
need to improve the quality of a company’s products and services.
Logistics: Procurement and physical transmission of material through the supply chain from
suppliers to consumers.
ISO 9000: A certification process that requires certain quality standards that must be met.
 BUSI 2701 Chapter 14: Global Marketing and Research & Development

The Globalization of Markets and Brands

Theodore Levitt wrote in 1983 about the globalization of world markets. Technology drives the
world toward a converging commonality, the result of which is the emergence of global markets
for standardized consumer products on a previously unimagined scale of magnitude.

Advantages Disadvantages
• Global culture, markets • Localization
• Standardization of products, • Exceptions rather than rules
manufacturing • Trade barriers, technical standards
• Rise of global media

Global Marketing

Global marketing: A marketing strategy that view the world’s consumers as similar in their tastes
and preferences is consistent with the mass production of a standardized output.

By mass-producing a standardized output, the firm can realize substantial unit cost reductions
but ignoring country differences in consumer tastes and preferences can lead to failure.

• Thus, an international business’ marketing function needs to determine when product

standardization is appropriate and when it is not, and to adjust the marketing strategy
accordingly.

Marketing Segmentation

Identifying groups of consumers whose purchasing behavior differs from others important ways.

• Geography
• Demography
• Social-cultural factors (ex. Lifestyle choices)

Marketing mix: The set of choices that a firm offers its targeted markets.

The 4 elements of marketing mix are:

1. Product attributes
2. Place- Distribution strategy
3. Promotion- Communication strategy
4. Pricing strategy

Product attributes
Products can be viewed as a bundle of attributes. Issues that influence product attributes
include:
a) Cultural differences
• Ex. Tradition, social structure, language, education
b) Economic development
 • Consumer behaviour is influenced by the level of economic development in a country.
Firms based in highly developed countries tend to build a lot of extra performance
attributes into their product.
c) Product and technical standards
National differences can force firms to customize the marketing mix.
Little If Any Modifications Moderate Amounts of Extensive Modification Required
Modification
Heavy equipment, electronic Automobiles, clothing, High-style consumer goods,
watches, laptops, computers, appliances, cosmetics, pre-packaged foods,
chemical processes, cameras, pharmaceuticals, aircraft, educational products, health
tennis rackets, cigarettes running shoes, TVs, beer services, restaurant meals, cultural
products

Distribution Strategy
Distribution strategy: The means to deliver the product to the consumer.
Differences between countries include:
a) Retail concentration: The number of retailers in a market.
• In a concentrated retail system, a few retailers supply most of the market. This is common in
most developed countries.
• In a fragmented retail system there are many retailers, no one has a major share of the
market. This is common in developing countries.

Channel length: The number of intermediaries between the producer and the consumer.
Typically, the longer the channel is, the higher the price.
• Short channel: When the producer sells directly to the consumer, common in concentrated
systems.
• Long channel: When the producer sells through an import agent, a wholesaler, and a retailer,
common with fragmented retail systems.

b) Channel exclusivity: How difficult is it for outsiders to access the channel.

• Sometimes channels are exclusive because retailers like to carry well established brands
rather than take a chance on something new.
• Ex. It is often difficult for a new firm to get access to shelf space in supermarkets.

Ex. Japan’s exclusive system: Relationships between retailers, wholesalers and manufacturers in
Japan often go back decades and it can be virtually impossible for foreign companies to
break in. Many of these relationships are based on the understanding that distributors will
not carry the products of competing firms.

c) Channel quality: The expertise, competencies, and skills of established retailers in a

nation, and their ability to sell and support the products of international businesses.
• The quality of retailers is good in most developed countries but is variable at best in
emerging markets and less developed countries.
• Firms may have to devote considerable resources to upgrade channel quality.
The optimal strategy depends on the relative costs and benefits of each alternative. When price
is important, a shorter channel is better because each intermediary in a channel adds its own
markup to the products. When the retail sector is very fragmented, a long channel can be
beneficial because it economizes on selling costs and it can offer access to exclusive channels.

Promotion- Communication strategy

The effectiveness of a firm’s international communication can be jeopardized by:
a) Cultural barriers- Firms need to develop cross-cultural literacy and use local input when
developing marketing messages.
• Ex. Use local advertising agencies, develop a local sales force

b) Source and country of origin effects

Source effects occur when the receiver of the message evaluates the message base on the
status or image of the sender.
• Ex. When British Petroleum acquired U.S gas stations, it changed its name to BP.

Country of origin effects: the extent to which the place of manufacturing influences product
evaluations.

c) Noise levels: The number of other messages competing for a potential consumer’s
attention.
• In highly developed countries, noise is very high while in developing countries, noise levels
tend to be lower.

Push vs Pull Marketing Strategies:

Push strategy- A marketing strategy emphasizing personal selling rather than mass media
advertising.
Pull strategy- A marketing strategy emphasizing mass-media advertising as opposed to personal
selling.

Factors that determine which strategy to use include:

a) Product type and consumer sophistication
• Push strategy works better with firms selling consumer goods to a large market segment.
• Pull strategy works better for industrial products.

b) Channel length
• A pull strategy works better with longer distribution channels.

c) Media availability
• A pull strategy relies on access to advertising media.
• A push strategy may be better when media is not easily available.
 Push Strategies Push Strategies
• For industrial products and/or complex • For consumer goods.
products • When distribution channels are long
• When distribution channels are short • When sufficient print and electronic media
• When few print or electronic media are are available to carry the marketing
available message

Advantages of Standardized Advertising Disadvantages of Standardized Advertising

• Lowers the cost of value creation by • Cultural differences can cause failure.
spreading over many countries • Advertising regulations differ in countries.
• Creative talent is scarce so one large
effort will produce better results

Pricing Strategy
a) Factors influencing international pricing
• Customer expectations, purchasing power, price elasticity
• Nature of competitors’ offerings, prices, and strategy
• International customer costs
• Ex. Packaging labeling, documentation, financing costs, packing and container costs,
shipping, insurance, etc.
• Landed cost
• Ex. Tariffs, warehousing charges, local transportation
• Importer’s costs
• Ex. Value-added tax, other taxes, intermediary margins, cost of financing inventory
• Anticipated fluctuations in currency exchange rates.

b) Price discrimination: When firms charge consumers in different countries different prices
for the same product. For price discrimination to work, multinational corporations must
be able to keep national markets separate and countries must have different price
elasticities of demand.

c) Strategic pricing
i) Predatory pricing: Use profit gained in one market to support aggressive pricing
designed to drive competitors out in another market (ex. Matsushita TV’s).
ii) Multi-point pricing strategy: A firm’s pricing strategy in one market may have an
impact on a rival’s pricing strategy in another market (ex. Kodak and Fuji).
iii) Experience curve pricing: Price low worldwide to build global sales volumes as
rapidly as possible, even if this means taking large losses initially.

d) Regulatory influence on prices

i) Anti-dumping regulations
• Dumping occurs whenever a firm sells a product for a price that is less than the cost
of producing it.
ii) Competition policy
 • Most industrialized nations have regulations designed to promote competition and
restrict monopoly practices, which can limit the prices that a firm can charge.

Standardization vs customization is not an all or nothing concept, most firms standardize some
things and customize others. Firms should consider the costs and benefits of customizing and
standardizing some elements in the marketing mix.

Global R&D
• Firms today need to make product inventory a priority
• Competition is as much about technological innovation as anything else
• The pace of technological change is faster than ever, and product life cycles are often very
short
• New innovations can make existing products obsolete but at the same time, open the door to
a host of new opportunities
• Firms need to close links between R&D, marketing, and manufacturing
New Product Development
Firms that successfully develop and market new products can gain significant returns.

1. Location of R&D
New product ideas come from the interactions of scientific research, demand conditions, and
competitive conditions. The rate of new product development is greater in countries where:
• More money is spent on basic and applied research and development
• Demand is strong
• Consumers are affluent
• Competition is intense

2. Integrating R&D, Marketing and Production

New product development has a higher failure rate, so efforts should involve close coordination
between R&D, marketing, and production. Integration will ensure that:
• Customer needs drive product development
• New products are designed for ease of manufacture
• Development costs are kept in check
• Time to market is minimized

3. Cross Functional Teams

Cross functional integration is facilitated by cross-functional product development teams.
Effective cross-functional teams:
• Are led by a heavyweight project manager with status
• Members are from all the critical functional areas
• Members are all located together
• Clear goals are established
• There is an effective conflict resolution process
How can firms build global R&D capabilities?
• To adequately commercialize new technologies, firms need to integrate R&D and marketing
• To successfully commercialize new technologies, firms may need to develop different
versions for different countries.
• Ex, A firm may need R&D centers in North America, Asia and Europe that are linked
closely by formal and informal integrating mechanisms with marketing operations in each
country in their regions, and with the various manufacturing facilities.
 BUSI 2701 Chapter 12: Entering Foreign Markets

The choice of mode for entering a foreign market is a major issue which challenges multinational
corporations. Decisions that need to be made include:

• Which foreign markets to enter?

• When to enter them?
• On what scale?
• What is the choice of entry mode?
• Etc.

Which foreign markets to enter?

Factors to consider:
• Size of the market
• Demographics
• Present wealth
• Future wealth of consumers
• Economic growth rates

The choice of foreign markets will depend on their long-run profit potential.
Favourable Markets Less Desirable Markets
• Politically stable • Are politically unstable
• Free market systems • Has a mixed/command economy
• Economies with relatively low inflation • Economies with extensive levels of
rates borrowing
• Economies with a low private sector debt

Timing of Entry
Once attractive markets are identified, the firm must consider the timing of entry. Entry is early
when the firm enters a foreign market before other foreign firms. Entry is late when the firm
enters the market after other firms have established themselves in the market.

First mover disadvantages:

1. Pioneering costs- When the foreign business system is so different from the firm’s home
market that the firm must devote considerable time and resources to learning the rules of
the market.
a. The costs of business failure if the firm, due to its ignorance of the foreign
environment, makes some major mistakes.
b. The costs of promoting and establishing a product offering, including the cost of
educating customers.
2. Changes in regulations
 Scale of Entry & Strategic Commitments
After choosing a market and the timing entry, firms need to decide on the scale of market entry.
Significant Scale Small Scale Entry
• Entering a foreign market on a significant • Has the advantage of allowing the firm to
scale is a major strategic commitment to learn about a foreign market while limiting
the market the firm’s exposure to the market
• The decision has long-term impact and is • Can be difficult to build market share and
difficult to reverse to capture first or early-mover advantages

There are no ‘right’ decisions which markets to enter and the timing & the scale of entry.
Decisions are just associated with different levels of risk and reward.

How can firms enter foreign markets?

• Exporting
• Turnkey projects
• Licensing
• Franchising
• Joint ventures
• Wholly owned subsidiaries
• Etc.

Exporting
Most firms begin their international expansion with exporting.
Advantages Disadvantages
• It avoids the often-substantial costs of establishing • There may be lower-cost manufacturing locations
manufacturing operations in the host country • High transportation costs and tariffs can make it
• Exporting may help a firm achieve experience uneconomical
curve and location economies • Agents in a foreign country may not act in the
exporter’s best interest

Turnkey Projects
Occurs when a contractor handles all details of a project for a foreign client, including the
training of operating personnel. At the completion of the contract, the foreign client is handed
the “key” to a plant that is ready for full operation.
• Common in the chemical, pharmaceutical, petroleum refining, textiles, cement, and metal-
refining industries
Advantages Disadvantages
• Allows a way of earning economic return from the • The firm has no long-term interest in the foreign
knowledge required to assemble and run a country
technologically complex process • The firm may create a competitor
• Can be less risky than conventional foreign direct • If the firm’s process technology is a source of
investment competitive advantage, then selling this
technology through a turnkey project is also selling
competitive advantage to potential and/or actual
competitors
 Licensing
A licensing agreement is an arrangement where a licensor grants the rights to intangible
property to the licensee for a specified period, and in return, the licensor receives a royalty fee
from the licensee.
• Ex. Patents, inventions, formulas, processes, designs, copyrights, trademarks, etc.

Advantages Disadvantages
• The firm avoids development costs and risks • The firm does not have the tight control
associated with opening a foreign market required for realizing experience curve and
• The firm avoids barriers to investment location economies
• The firm can capitalize on market opportunities • The firm’s ability to coordinate strategies
without developing those applications itself moves across countries is limited
• Proprietary (or intangible) assets could be lost
• To reduce this risk, firms can use cross-
licensing agreements

Franchising
Franchising is a specialized form of licensing in which a franchiser not only sells intangible
property to a franchisee, but also insists on rules to conduct the business.
Advantages Disadvantages
• It avoids the costs and risks of opening up a • It inhibits the firm’s ability to take profits out of
foreign market one country to support competitive attacks in
• Firms can quickly build a global presence another
• The geographic distance of the firm from
franchisees can make it difficult to detect poor
quality

Joint Venture
A joint venture is establishing a firm that is jointly owned by two or more otherwise independent
firms.
Advantages Disadvantages
• Firms that benefit from a local partner’s • The firm risks giving control of its technology to
knowledge of local conditions, culture, political its partner
systems, business systems, language, etc. • The firm may not have the tight control to realize
• The costs and risks of opening a foreign experience curve or location economies
market are shared • Shared ownership can lead to conflicts and
• Most political considerations are satisfied for battles for control if goals and objectives differ or
market entry change over time

Wholly Owned Subsidiaries

Wholly owned subsidiaries: Firms own 100% of its stock.
Greenfield venture: A new operation in the host country.
Acquisition: The firm acquires an established firm in the host nation and uses that firm to
promote its products.
 Advantages Disadvantages
Wholly Owned • Reduces the risk of losing control • The firm bears the full cost and risk of
Subsidiary over core competencies setting up overseas operations
• Gives a firm the tight control over • The costliest method
operations in different countries that
is necessary for engaging in global
strategic coordination
• May be required to realize location
and experience curve economies
Acquisitions • A firm can rapidly build its presence • Firms often overpay for the assets of the
in the target foreign market purchased firm
• Pre-empt competitors • Clash between the cultures of the
• Managers believe acquisitions are acquiring and acquired firm
less risky than Greenfield ventures • Difference in management philosophy
Greenfield Ventures • A firm’s greater ability to build the • Greenfield ventures are slower to
kind of subsidiary company it wants establish
• It is much easier to establish a set of • Greenfield ventures are risky
operating routines in a new
subsidiary

Why do acquisitions fail?

1. The acquiring firms often overpay for the assets of the purchased firm.
2. Clash between the cultures of the acquiring and acquired firm.
3. Failure to realize synergies.
4. Inadequate pre-acquisition screening.

To avoid these problems, firms should:

1. Carefully screen the firm to be acquired.
2. Move rapidly to implement an integration plan.
Selecting an Entry Mode
1. Core competencies
a. Technological knowledge: If a firm’s competitive advantage is base on control over
proprietary technological knowledge, licencing and joing venture arrangements shoul
be avoided if possible to minimize the risk of losing control of that technology.
b. Management knowledge
• The competitive advantage of many service firms is based on management knowledge. For
such firms, the risk of losing control over the management skills to franchisees or joint-
venture partners is not that great.
• The valuable asset of these firms are their brand name and brand names are generally well
protected by international laws pertaining to trademarks. For such firms, licensing or
franchising is an attractive option.
• Ex. McDonald’s

2. Pressure for cost reductions an the trade-offs involve with the different entry methods.
When pressure for cost reductions is high, firms are more likely to pursue some combination of
exporting and wholly-owned subsiiaries.
• Allows the firm to achieve location scaled economies and retain some control over product
manufacturing and distribution
• Firms pursuing global standardization or transnational strategies prefer wholly owned
subsidiaries

Key Questions for Entering Foreign Markets

• Ownership advantages? Are
there advantages to own the
operations or the brand?
• Location advantages? Is it more
advantageous to be in the
country or export?
• Internalization advantages?
Does the firm need to
manufacture the
product/service, or can it be
subcontracted?
• Control needs? Does the
technology need to be kept
control of? Does ownership and
management need to be kept
control of?
• Legal constraints?
• Local knowledge? Is a local
partner needed for entry or not?
• What is the risk/reward balance?
 BUSI 1701 Chapter 11: Global Strategy

Strategies: Actions that managers take to attain the goals of the firm.

Profit: The difference between total revenues and total costs.

Profitability: A ratio or rate of return. Rate of return on sales= Profit/ Total Revenue

There are 5 key dimensions that a successful international firm must address:

1. Strategy
2. Organizational structure
3. Organizational processes
4. Organizational culture
5. Visionary leadership

How can a firm increase its value?

Value Creation: A group of activities that increase the

value of goods or services to consumers. The firm’s value
creation is the difference between the price that the firm
can charge for that product given competitive pressures
and the cost of producing that product.

2 basic conditions determine a firm’s profits:

1. Perceived value: The amount of value custmers

place on the firm’s goods or services.
2. The firm’s costs of production.

In general, the more value customers place on a firm’s

products, the higher the price the firm can charge for
those products.

Profits can be increased by:

1. Differentiation strategy: Adding value to a product. The higher the value customers place
on a firm’s products, the higher the price the firm can charge for those products.
2. Low cost strategy: Lowering production costs.

The price a firm charges for a good or service is typically less than the value placed on that food
or service by the customer vecause the customer captures some of that value in the form of
what economists call a consumer surplus. The customer can do this because the firm is
competing with other firms for the customer’s business.
The Firm As a Value Chain

Primary activities have to do with the design, creation, and delivery of the product; its marketing;
and its suppeort and after-sale service. Primary activities are broken up into 4 functions:

1. Research and development (R&D)

2. Production
3. Marketing and sales
4. Services

Support activities provide inputs that allow the

primary actvities to take place.

• Materials management (or logistics)

function
• Human resource function
• Information systems

The Role of Strategy

Strategy: Identifying and taking actions that will lower the costs of value creation and/or will
differentiate the firm’s product offering through superior design, quality, service, functionality,
etc.
• Makes things cheaper than the competition
• Make things good enough to interest consumers

Profiting from Global Expansion

Firms that operatioe international can:

1. Realize local economies- Countries differ along a range of dimensions including social,
technological, economical, political, and legal dimenions. These differences can either
raise or lower the costs of doing business in a country. Examples include:
• Transportation costs
• Trade barriers
• Political risks
• Natural disasters

2. Realize greater cost economies- Different stages of the value chain being dispersed to
those locations around the globe where perceived value is maximized or where the cost
of vlaue creation are minimized.

Experience curve: Sytematic reductions in a production costs that have been ovserved to occur
over the life of a product.
Learning effects: Cost savings that come from learning through experience (ex. Experienced
labour).
One key to progressing downward on the experience curve as rapidly as possible is to increase
the volume produced by a single plant as rapidly
as possible.

Economies of scale: Reductions in unit cost

achieved by producing a large volume of a
product.

Sources of economies of scale include:

• Spreading fixed costs over a large volume.
• Utilizing production facilities more
intensively.
• Increasing bargaining power with suppliers.

3. Earn a greater return by leveraging valuable skills developed in foreign operations.

Managers should:
• Recognize that valuable skills that could be applied elsewhere in the firm can arise anywhere
within the firm’s gloval network- not just at the corporate center.
• Establish an incentive system that encourages local employees to acquire new skills.
• Have a process for identifying when valuable new skills have been created in a subsidiary.
• Act as facilitators to help transfer skills within the firm.

Firms that compete in the gloval marketplace typically face two types of competitive pressure:
a) Cost reduction
b) Remain locally responsive

Unfortunately, these pressures typically place conflicting demands on the company.

Whe are pressures for cost reductions the greatest?

• In industries producing commodity type products that fill universal needs where price is the
main competitive weapon.
• When major competitors are based in low cost locations.
• When there is persistent excess capacity.
• Where consumers are powerful and face low switching costs.

Presures forLocal Responsiveness

• Differences in in consumer tastes and preferences.
• Differences in infrastructure and traditional practices.
• Difference in distribution channels.
• Host fovernment demands.
 What strategy should a firm choose?
Global Strategy Transnational Strategy Multidomestic International Strategy
(localization) Strategy
Definition Increase profitability Tries to simultaneously achieve Increase profitability Takes products first
and profit growth by low costs through location by customizing gooods produced for the
reaping the cost economies, economies of scale, or services so that domestic market and
reductions from and learning effects, differentiate they match tastes and sells them
economies of scale, the product across geographic preference in different internationally with
learning effects and markets to account for local national markets. only minimal local
location economies. differences, and foster a customization.
multidirectional flow of skills
between different subsidiaries in
the firm’s gloval network of
operations.
When to • Strong pressures • Cost pressures are intense • Substantial • Low cost
use each for cost reductions • Pressures for local differences across pressures
strategy • Demands for local responsiveness are also nations with regard • Low pressures
responsiveness intense to sonumer tastes for local
are minimal and preferences responsiveness
• Cost pressures are
not too intense
Notes/ 1. Pursue a low- 1. Standardize where Note** More
Goals cost strategy feasible and adapt when succerssful when
on a global appropriate. firms targetmarkets
scale. similar to their home
2. Standardized Note* most firms find market.
product implementing transnational
worldwide. strategy very challenging.
How does strategy evolve?

A firm may start out using an international or multidomestic strategy, but then find that it must
shift to a gloval standardization strategy or transnational strategy as competition increases.

An international strategy may not be viable in the long terms as firms may need to switch to
keep ahead of its competitors.

Localization may give a firm a competitive edge however if the firm is simultaneously facing
aggressive competitors, the company will also have to reduce its cost structures. This would
also require a shift towards a transnational strategy.