Chapter 7: Multinational Formation Keith Head Sauder School of Business.
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Transcript of Chapter 7: Multinational Formation Keith Head Sauder School of Business.
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Chapter 7: Multinational Formation
Keith HeadSauder School of
Business
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The “take-away” for this chapter
• Chapter 7 asks “Where should we do the things we do?”– At home: the country where top mgmt
is based.– Abroad: offshore, overseas, in a foreign
country • The answer: “It all depends on the 4
elements of MN strategy: trade costs, factor advantages, PLEoS, market sizes.”
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Nestle
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IBM worldwide
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LG Electronics (part of LG Group, formerly Goldstar
Electronics)
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Levels of Multinational Strategy
• Who is the we in “Where should we do it”?– An individual business unit business
strategy– A collection of business units under the
same ownership corporate strategy– A collection of business units linked
through a mix of equity ties and long term contractual arrangements network strategy
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Multinational (single) “Business” Strategy
Home Country Foreign Country Home Centralization
(Exporting)
Replication
Foreign Centralization(Importing)
H-form
F-form
R-form
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Examples of Centralization
• Home Centralization:– Boeing commercial aircraft assembly in
U.S. (mainly Seattle)– Airbus commercial aircraft assembly in EU
(mainly Toulouse)
• Foreign Centralization:– Mattel’s Barbie dolls (2 factories in
Dongguan, China +1 in Malaysia +1 in Indon.)
– Matsushita’s TVs (Malaysia)
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Boeing’s Everett Factory:the largest building in the world
(472 million cubic feet of space )
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Boeing’s Everett Factory:sole location of 747 assembly
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Boeing’s 747
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Nestle, the Replicator
Area Sales
Factories
Employees
Americas 40% 32% 41%
Europe (Switz.)
40%(1.6%)
41%(1.8%)
34%(2.6%)
Asia, Africa & Oceania
20% 27% 25%
254,000 Employees in 508 Factories in 85 Countries(2002 Management Report)
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Critical Foreign Market Size to Justify Overseas “Replication”
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Critical Distance to Justify Overseas “Replication”
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At Home, Abroad, or Both?The Answer Depends (in part) on
Where Demand Is
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Home Centralization benefits from
• Strong PLEoS• Low trade costs to export to foreign
country• Large home market• Home country has factor advantages
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Foreign Centralization benefits from
• Strong PLEoS• Low trade costs to import from
foreign country• Large foreign market• Foreign country has factor
advantages
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Replication Form benefits from
• Weak PLEoS• Both markets are large• High trade costs impede exports &
imports• Unimportant factor advantages:
costs of production similar across countries.
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Multi-product Multinationals
• Corporate multinational strategy considers best form for firms operating in more than one business (product).
• Relationships between products:– Unrelated– Vertical (intermediate inputs vs final
outputs)– Horizontal (complements vs substitutes)– Joint products
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Multinational Forms: Vertically Related Products
• Upstream (U) creates inputs• Downstream (D) uses U inputs to create
outputs• Examples:
– Teaching: U is PPT preparation, D is presentation to students
– Movies: U is writing & casting, D is filming & editing (or U is movie production and D is movie exhibition)
– Steel: U is blast furnace, D is steel furnace & rolling mill
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Bao Steel’s integrated works
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ExxonMobil
• Upstream: exploration in 37 countries and “production” in 26 countries
• Downstream: refining and “marketing”– Owns 45 refineries, located in 25 countries – Operates 37,000 retail sites in 100+
countries
• “presence in about 200 countries”
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ExxonMobil’s “Upstream” Sites
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ExxonMobil’s “Downstream” Sites
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Multinational Forms for 2 vertically related products
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Vertical Specialization good if
• Strong PLEoS• Low trade costs to export U to
foreign country• Low trade costs to import D from
foreign country• Home country has factor adv. for U• Foreign country has factor adv. for
D
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Branching Form
• Examples: – Coca Cola’s concentrate (U) and bottling
(D)– Subaru’s engines (U) and car assembly (D)
• Benefits from– Low trade costs on U, high on D– Low PLEoS on D, high on U– Home factor adv. in U, weak factor advs. in
D
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Multisourcing form• Defn: procuring same input from
multiple source countries• Examples:
– Refinery in one country, sourcing crude oil from multiple drilling sites (in different countries)
– Nike’s “network” strategy in shoe mnfg.• Benefits from
– Low trade costs (for U & D)– Diseconomies of scale for U– Uncertain (unpredictable) factor adv. for
U.
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Forms for 2 horizontally related products, served by upstream
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Key trends in world economy
• Falling trade costs– More efficient transportation
(containers, EDI, use of air transport)– Lower tariffs, WTO oversight of
disguised protection– Technology-powered improvements in
long distance communication
• Rising economies of scale?
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Implications for Multinationals
• Less Replication• More Vertical Specialization• Firms face very different industry
conditions– Contrast Nestle, Boeing, Mattel– Will continue to pursue divergent
strategies