INTRODUCTION This essay will firstly analyse three principal benefits, namely, earn a greater return on core competencies, realise location economies and realise experience curve effects, and give example to show how they are available to a firm moving from a domestic to an international strategy. Then the second part will respectively discuss the principal influences on the choice between a multidomestic, global and transnational strategy that international firms take. This discussion will identify why a firm will take a certain strategy out of these three and what the advantages and disadvantages are. Then shortly give a conclusion about these three strategies. THREE PRINCIPAL BENEFITS Earn a great return on core competencies The first benefit is that a firm moving from a domestic to an international strategy can earn a greater return on core competencies. This means the firm can get many advantages on resources and capabilities over its rival.
One example is Starbucks! foreign investment. In 1995, because of the saturation of the United States! market, Starbucks, an international coffee house chain, started to expand its business overseas. Firstly, Starbucks went to Japanese market by establishing a joint venture with a local retailer. By 2001, Starbucks had more than 150 stores and plans to continue its success at a brisk pace. By managing joint venture, which became one of Starbucks! core competencies that allow Starbucks to exercise great control and earn the benefits of a local operating partner, Starbucks was able to embark on aggressive expansions and successfully open foreign markets (by 2001, Starbucks had more than 600 stores out of America).
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L. Hill, 2002, p 203) The Starbucks! management of joint venture is not easily matched or imitated by its competitors. By expending its business internationally, Starbucks was able to access larger markets and get greater and faster return. Realise location economies Secondly, by moving to an international strategy, a firm can also realize location economies, which can lead the firm to be success in different countries with different cultures. Because countries have different economic, political and cultural systems, sometimes, which affect the benefits, costs and risks of doing business, a firm cannot run business successfully without adapting to location economies. Therefore, the firm has to understand how to do business in different location environments.
The experience of KFC, an international fast food chain, may prove this point. After initial entry into Japanese market, KFC rapidly realized that it was necessary to adapt to Japanese market by taking three specific strategies. First, the shape and size of product were unpopular toward Japanese, since Japanese prefer morsel-sized food. Second, the locations of KFC shops had to be moved into crowded city eating areas and away from independent sites. Third, contracts for supply of appropriate quality chickens had to be negotiated locally, although KFC provided all technical advice and standards.
After taking these adaptations to the product and the site, KFC have been successful in Japan. (Susan Segal-Horn & David Faulkner, 1999, p 63) Realize experience curve effects The third available benefit to an international firm is experience curve economies, which means the firm can systematically reduce production costs over the life of a product. As the tariffs are not high in some countries that international firms do business within, these firms can concentrate their manufacture section in several favorite places. The realize experience curve benefit that available to an international firm comes from two factors. One is! ^0 learn by doing! +/-, which means when a firm initiate producing a new product and the complex processes are repeated, the employees! skills have increased, thus productivity has increased. Another one is! ^0 economies of scale! +/-, the large scale of output which means more products are made.
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Because the fixed cost has not changed, firms with large economies of scale can significantly reduce the product price. An international firm can get the greatest effect on experience curve economies as a first mover when industries need high fixed cost. By learn experience curve economies, the first mover can sell product on low price, which is unavailable to second mover and late mover. Then we can see the greatest effect of experience curve economies by learning the example of how Matsushita reduced the price of VCR.
By 1984, Matsushita! s VCR production increased 33-fold than that of 1977, from 205, 000 units to 6. 8 m units. By producing from one location they were able to drop prices by 50% within five years. Matsushita was the world! s major VCR producer in 1983 with a 45% share of the world market, compared with the next biggest producer Hitachi with 11.
1% of world production in 1983! +/- (Peter Enderwick, 2003) THE PRINCIPAL INFLUENCE BETWEEN A MULTIDOMESTIC, GLOBAL AND TRANSNATIONAL STRATEGY These differences influences on the choice among a multidomestic, global and transnational strategy may weaken or strengthen a company! s competitive power. The reason why international firms choose a certain strategy out of these three strategies, namely, multidomestic, global and transnational strategies is based on the pressure of local responsiveness and price reduction that these firms have. Influence of a Multidomestic strategy While there are many different customer preferences among different countries, and the customisation is more important than price, then international firms are likely to take the multidomestic strategy, which means these firms need more local responsiveness but less price pressure. When international firms have taken the multidomestic strategy, these firms treat each country market as independent and best served by a whole set of value-creation subsidiaries, including production, marketing and R&D, dedicated to meet its local needs and conditions. By taking such strategy, an international firm can greatly focus on local responsiveness. The success of Nest”|! s multidomestic strategies will prove this point.
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Nestle, the Swiss-based international food and beverages company, has over 200 operating subsidiaries. It has a philosophy of decentralization and dispersion of activities. Its organization structure systems and culture emphasize the importance of local responsiveness, and the considerable autonomy of local managers. (Susan Segal-Horn & David Faulkner, 1999, p 138) Because of the less price pressure, multidomestic firms are normally unable to realize the value of experience curve effects and location economies. Therefore, ! ^0 many multidomestic firms have a high cost structure. ! +/- (Charles W.
L. Hill, 2002, p 423) Another weakness associated with multidomestic strategy is the tendency for many multidomestic firms to develop into decentralized federations in which each national subsidiaries function quite autonomously. This was exemplified by the failure of Philips NV to establish its V 2000 VCR format as the standard in the industry during the late 1970 s. Its U. S. subsidiary refused to adopt the V 2000 format; instead, it bought VHS-format VCRs produced by Matsushita and put its own label on them! ! +/- (Charles W.
L. Hill, 2002, 423) Influence of Global strategy When international firms face the strong price competition and the markets are less customization or consumers will choose standardized products when the price is lower enough, these firms tend to take the global strategies. In contrast to the multidomestic firms, as more price and less local responsiveness pressures that global firms take, they will put different subsidiaries in different countries and manage them from center, which means them can put research branches in some countries with plenty of high educated people and produce their product in low labor cost countries. Thus, firms that pursue a global strategy get increasing profitability by reaping the cost reductions that come from experience curve effects and location economies. Therefore, Global firms tend not to customize their product offering and marketing strategy to local conditions because customization raises costs. Instead, global firms prefer to market a standardized product worldwide so they can rep the maximum benefits from the economies of scale that underlie the experience curve.
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This strategy makes most sense where there are strong pressures for cost reductions and where demands for local responsiveness are minimal. (Charles W. L. Hill, 2002, 423) The great success of Gillette is a good example about firms operating global strategies. Gillette refuses to pay tribute to cultural differences. Gillette! s one-size-fits-all strategy has been effective.
Its net income has grown 16 per cent a year in the past five years, and its share price has risen by an average of 33 per cent a year since 1987. The group makes items almost everyone in the world buys at one time or another, including shavers, batteries and pens. The scale of economies and flexibility are the main advantages of reverse parochialism. R&D cost less when Gillette applied to a world market. (Susan Segal-Horn & David Faulkner, 1999, p 145) Global strategy can also apply increased competitive leverage.
This is global strategy provides more points for counterattack of competitors. For instance, Becton Dickinson, a major US medical products company, was afraid of Japanese company breaking into US market. To limit Japanese expansion Becton Dickinson entered Hong Kong, Singapore and the Philippines. (Peter Enderwick, 2003) There are also some shortages among global firms. International firms may significant increase their management costs through increased coordination.
When a firm gets into global strategy, the aspiration to earn market participation can force a firm to incur earlier or greater commitment to a market than is warranted on its own merits. One example, Motorola got great red in Japan for the market participation. The activity concentration can distance customers and lower responsiveness and flexibility. The product standardization can result in a product that does not satisfy any customers.
For example, P&G Cheer laundry detergent in Japan gave customers inappropriate message (washes in all temperatures) and neglected the amount of fabric softener used. Global strategy may also lead to less local responsiveness, which means global strategy can reduce a firm! s effectiveness in individual countries. (Peter Enderwick, 2003) Influence of a transnational strategy The definition of the transnational strategy is that the transnational is attempting to build and benefit from interdependent networks worldwide, which both develop and share specific knowledge and expertise held at dispersed international locations. (Susan Segal-Horn & David Faulkner, 1999, p 9) A transnational strategy makes sense when a firm faces high pressures for cost reductions, high pressures for local responsiveness. In some ways, firms that pursue a transnational strategy are trying to simultaneously achieve cost and differentiation advantages. (Charles W.
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L. Hill, 2002, 423) Therefore transnational firms have both advantages on cost reduction and local responsiveness. These firms have similar subsidiaries to global firms but their branches are interdependent, and managed worldwide integrated. The case of Caterpillar can prove the point. In the 1980 s, Caterpillar had to compete with low-cost competitors such as Komatsu and Hitachi of Japan, which forced Caterpillar to look for greater cost economies, and, meanwhile, because of variations in construction practices and government regulations across countries, Caterpillar had to remain responsive to local demands.
Therefore, Caterpillar was confronted with significant pressures for cost reductions and for local responsiveness. To deal with cost pressures, Caterpillar redesigned its products to use many identical components and invested in a few large-scale component-manufacturing facilities, sited at favorable locations, to fill global demand and realize scale economics. As to cope with the local responsiveness, Caterpillar also augmented the centralized manufacturing of components with assembly plants in each of its major global markets and added local product features, tailoring the finished product to local needs. By pursuing this strategy, Caterpillar realized many of the benefits of global manufacturing while also responding to pressures for local responsiveness by differentiating its product among national markets.
(Charles W. L. Hill, 2002, 425) Although the benefits of taking transnational strategies are sound, because simultaneously trying achieve cost reduction and local responsiveness places contradictory demands on an organization, it is a complex and difficult task to carry transnational strategies. Conclusion Considering the advantages and disadvantages among these three strategies, people may think transnational is the best one and the final strategy an international firm are going to take. The author of this essay agrees that firms should take transnational to get the most benefits when only thinking about the advantages and disadvantages. But, the most important thing for a firm to choose an international strategy is to identify its business situation and choose a most suitable strategy.
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That is why there are still many successful multidomestic and global firms. (2047 words).