86. (p. 402) What is strategy? How does strategy relate to a firm's profitability?

Strategy Can be defined as the actions that managers take to attain the goals of the firm. For most firms, the key goal is to maximize the value of the firm for its owners. To maximize the value of the firm, managers must pursue strategies that increase profitability, or rate of return the firm makes on its invested capital. Increase Managers can increase profitability by pursuing strategies that lower costs and profitability strategies that add value to the firm's products. 87. (p. 402) What is the difference between profitability and profit growth? **In general, the value of the firm will increase when both profitability and profit growth are high. Probability Profit growth Rate of return that the firm makes on its invested The percentage increase in net profits capital which is calculated by dividing the net over time. profits of the firm by total invested capital. 88. (p. 403) How can a firm increase its profitability or the rate of return on invested capital? ** needs to create more value. Create more value The difference between a firm's cost of production and the value that customers place on a firm's products is equal to the amount of value the firm creates. Therefore, a firm has high profits when it creates more value for its customers and does so at a lower cost. 89. Discuss Michael Porter's interpretation of value creation and competitive advantage. Michael Porter Low cost and differentiation are two basic strategies for creating value and attaining a competitive advantage in an industry. Argues that those firms that create superior value will achieve superior profitability It is not necessary for a firm to have the lowest cost structure or create the most valuable product; rather it is only important that the gap between value and the cost of production be greater than that of competitors. Discuss strategic positioning. How does strategic positioning relate to the efficiency frontier? Efficiency Shows all of the different positions that a firm can adopt with regard to adding frontier value to the product and low cost assuming that its internal operations are configured efficiently to support a particular position. Important It is important that managers decide where a firm should be positioned with due to regard to value and cost, configure operations accordingly, and manage them efficiently to ensure the firm is operating on the efficiency frontier. 91. (p. 405-407) Consider the firm in terms of a value chain. What is the difference between primary activities and support activities? Provide examples of each. Value The operations of a firm can be thought of as a value chain composed of a series chain of distinct value creation activities. Primary Have to do with the design, creation, and delivery of the product; its marketing; activities and its after-sale-service. Normally, primary activities are divided into R&D, production, marketing and sales, and customer service. 1

Support activities

The support activities of the value chain provide inputs that allow the primary activities to occur. Support activities include information systems, company infrastructure, logistics, and human resources.

92. (p. 406-408) How can the marketing and sales functions of a firm create value? Brand positioning and If the firm can create a favorable impression of the firm's advertising product in the minds of consumers, it can increase the price that can be charged. Identifying consumer needs Marketing and sales can also create value by identifying consumer needs and passing that information along to the R&D department. Resolving customer's Resolving customer's problems and supporting customers after problems and supporting they have purchased the product can also create the perception customers of superior value. 93. (p. 408) Describe the benefits of global expansion for firms. Capture many Allows firm to capture many opportunities not open to firms that opportunities remain focused purely on the domestic market. Sell product in Firms that operate globally have the opportunity to sell their product in larger marketplace a much larger marketplace. Location economies Location economies can be realized through global expansion by can be realized dispersing value creation activities to the optimal location in the world. Greater cost International expansion allows a firm to realize greater cost economies economies from experience effects. Greater return Global expansion provides firms with the opportunity to earn a greater return by leveraging any skills developed in foreign operations and transferring them within the organization.

94. (p. 409) What is a core competence? Why is it essential to the success of the firm? Core Refers to skills within the firm that competitors cannot easily match or imitate. competence These skills may exist in any of the firm's value creation activities. Core competencies are the bedrock of a company's competitive advantage. In fact, the success of many MNEs that expand globally is dependent not just on the goods or services they sell, but also on core competencies that underlie the development, production, and marketing of the goods or services. 95. (p. 409-411) Explain the concept of location economies. Location Economies that arise from performing a value creation activity in the optimal economies location for that activity, wherever in the world that might be. - For a firm that is trying to survive in a competitive global market, basing each value creation activity it performs at that location where economic, political, and cultural conditions are most conducive to the performance of that activity will provide benefits to the firm. - As firms pursue location economies, they may also be in the process of creating a global web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or the costs of value creation are minimized. 2

96. How can firms successfully leverage the skills developed at the subsidiary level? Firms can successfully leverage skills developed at the subsidiary level by doing four things. First Managers must have the humility to recognize that valuable skills that lead to competencies can arise anywhere within the firm's global network, not just at the corporate center. nd 2 The firm must establish an incentive system that encourages local employees to acquire new skills. rd 3 Managers must have a process for identifying when valuable new skills have been created in a subsidiary. Final Managers must act as facilitators helping to transfer valuables skills within the firm. 97. (p. 415-416) What are the two types of competitive pressures that firms competing in the global marketplace face? How do firms respond to these pressures? Requires that a firm try to minimize its unit costs. Can be particularly intense in industries producing : 1) Commodity-type products where meaningful differentiation on non-price factors is difficult and price is the main competitive weapon. These conditions are true of products that serve universal needs such as bulk chemicals, petroleum, steel, and sugar. 2) Also intense in industries where major competitors are based in low-cost locations, where there is persistent excess capacity, and where consumers are powerful and face low switching costs. Pressures to be Requires that a firm differentiate its product offering and marketing strategy from country to country in an effort to accommodate the diverse locally demands arising from national differences in consumer tastes and responsive preferences, business practices, distribution channels, competitive conditions, and government policies. ** These competitive pressures place conflicting demands on a firm. Itll affect their ability to realize location economies and experience effects, to leverage products and transfer competencies and skills within the enterprise. Pressures for cost reductions 98. (p. 416) Using examples, describe the situations where pressure for cost reduction is especially intense . 99. (p. 416-418) Discuss the factors that lead to pressure for local responsiveness. There are many factors that contribute to the need for local responsiveness. Consumer tastes and preferences differ A firm's products and marketing message must significantly between countries be customized to the local market. Differences in infrastructure and traditional May require the firm to delegate manufacturing practices among countries and production facilities to foreign subsidiaries. A firm's marketing strategies May have to be responsive to differences in distribution channels among countries. Economic and political demands imposed May require local responsiveness. by host country governments

100. (p. 419-422) What are the four basic strategies that firms use to compete in international markets? Under what conditions is each strategy most appropriate? It is most appropriate when there is low pressure for local responsiveness International and low pressure for cost reduction. strategy When there is high pressure for cost reduction, but low pressure for local Global standardization responsiveness the global standardization strategy makes sense. strategy It is appropriate when pressure for local responsiveness is high, but Localization pressure for cost reduction is low. strategy When pressure for both cost reduction and local responsiveness is high, Transnational the transnational strategy is best. strategy 101. (p. 419-420) Explain why a firm would choose a global standardization strategy. Firms that pursue a global standardization strategy focus on By reaping the cost reductions that come from economies of Increasing profitability scale, learning effects, and location economies. and profit growth The strategic goal of firms following a global standardization Low cost strategy and a strategy is to pursue a low cost strategy and a global scale. global scale This strategy makes most sense in those cases where there are Demands for local strong pressures for cost reductions, and where demands for responsiveness are local responsiveness are minimal. minimal. 102. (p. 420-421) Describe localization strategy. What type of firm is likely to follow a localization strategy? Localization Focuses on increasing profitability by customizing the firm's goods or services so that they provide a good match to tastes and preferences in strategy different national markets. This strategy is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences. MTV is an example of a company that has successfully expanded internationally using a localization strategy. Localization was imperative for MTV if the company was to gain market share from local competitors. However, the firm also had to be aware of the costs nvolved in developing local programming. Consider a transnational strategy. Why would a firm choose this strategic alternative? What are the disadvantages of this strategy? Transnational Firms that are pursuing a transnational strategy are trying to simultaneously achieve low costs through: strategy - Location economies, economies of scale, and learning effects. - Differentiate their product offering across geographic markets to account for local differences; - Foster a multidirectional flow of skills between different subsidiaries in the firm's global network of operations. Because this strategy puts conflicting demands on the company, it is Disadvantages difficult to achieve. Building an organization that is capable of supporting a transnational strategic posture is complex and difficult. In essence, a transnational strategy requires a firm to simultaneously achieve cost efficiencies, global learning, and local responsiveness. This strategy makes sense when a firm faces high pressures for cost reductions and high pressures for local responsiveness. 4

104. (p. 422) What is an international strategy? When is this type of strategy appropriate? International When a firm is facing low cost pressures and low pressures for local strategy responsiveness, an international strategy whereby the firm takes products initially developed for the domestic market and sells them internationally with only minimal local customization, may be appropriate. Not face Firms in this position generally sell a product that serves universal needs, but does not face significant competition. Transferring Firms that pursue an international strategy try to create value by transferring valuable skills valuable skills and products to foreign markets where indigenous and products competitors lack those skills and products. These firms tend to centralize to foreign product development functions at home, and establish manufacturing and markets marketing functions in each major country in which they do business. Valuable core An international strategy makes sense if a firm has a valuable core competence competence that indigenous competitors in foreign markets lack and if the firm faces relatively weak pressures for local responsiveness and cost reductions. Typically, local responsiveness is fairly modest. 105. (p. 423-424) Discuss the evolution of strategy. How does cost become important in the long-term? Not long-term An international strategy is typically not considered to be a sustainable longstrategy term strategy. Over time, more efficient competitors emerge, forcing firms to make cost reductions or risk losing significant market share. Move toward To survive, companies following an international strategy need to move global toward a global standardization strategy or a transnational strategy prior to standardization the emergence of competition. Localization Instead, companies following a localization strategy need to reduce their strategy is not cost structures, and the only way to achieve that are to move toward a a long-term transnational strategy. strategy.

92. (p. 432) What are the three challenges related to strategy and structure that firms must accomplish if they are to achieve superior profitability? Superior enterprise profitability requires that firms fulfill three conditions. 1) The different elements of a firm's organizational architecture must be internally consistent 2) The organizational architecture of the firm must be consistent with its strategy. 3) The strategy and the structure must not only be consistent with each other, they must also be consistent with the competitive conditions prevailing in the marketplace. 93. (p. 433) Explain organizational structure. A firm's organizational structure refers to three things. 1) The term refers to the formal division of the organization into subunits such as product divisions, national operations, and functions 2) The location of decision-making responsibilities within the formal structure. 3) Organizational structure refers to the establishment of integrating mechanisms to coordinate the activities of subunits including cross-functional teams and/or pan-regional committees.

94. (p. 433) Discuss the relationship between a firm's control systems and a firm's incentive system. Why is this relationship important? The relationships between a firm's control systems and incentive systems is a close one. Control systems The metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits. The devices used to reward appropriate managerial behavior. Incentives The relationship between these two areas is important because incentives are very closely tied to performance metrics. For example, the incentives of a manager in charge of a national operating subsidiary might be linked to the performance of that company. Specifically, he/she might receive a bonus if her subsidiary exceeds its performance targets.

95. (p. 434) What are the three dimensions of organizational structure? Organizational structure can be thought of in terms of three dimensions: 1) Vertical differentiation, or the location of decision- making responsibilities within the firm. 2) Horizontal differentiation, or the formal division of the organization into subunits. 3) The establishment of integrating mechanisms that coordinate subunits. 96. (p. 434-435) Why should a firm centralize its decision-making? Firms should centralize their decision-making for four main reasons. 1) Centralization can facilitate coordination. 2) Centralization can help ensure that decisions are consistent with organizational objectives. 3) By concentrating power and authority in one individual or a management team, centralization can give top-level managers the means to bring about needed major organizational changes. 4) Centralization can avoid the duplication of activities that occurs when similar activities are carried on by various subunits within the organization.

97. (p. 435) Explain the five reasons why a firm should decentralize its decision-making. Overburdened Motivational research favors decentralization Permits greater flexibility Better decisions Top management can become overburdened when decision-making authority is centralized, and this can result in poor decisions. Motivational research favors decentralization - behavioral scientists have long argued that people are willing to give more to their jobs when they have greater degree of individual freedom & control over their work. Decentralization permits greater flexibility - more rapid response to environmental changes - because decisions do not have to be "referred up the hierarchy" unless they are exceptional. Decentralization can result in better decisions because decisions are made closer to the spot by individuals who have better information than managers several levels up in a hierarchy. Decentralization can increase control.

Increase control

98. (p. 435-437) Discuss the location of decision-making in a firm that is following a transnational strategy. Decision-making in a firm pursuing a transnational strategy is complex. Complex Realize location The need to realize location and experience curve economies requires some centralized control over global production centers. and experience Yet, the need for local responsiveness requires the decentralization of Need for local many operating decisions, particularly those for marketing, to foreign responsiveness subsidiaries. Decentralization Needed to allow subsidiaries the freedom to develop their own skills and competenciesa requirement that is necessary for the global learning of decisioncomponent of the transnational strategy. making 99. (p. 438-439) Describe the situation where an international division makes sense. How common is this structure? What are the disadvantages of the structure? When firms initially expand abroad, they often group all their Initially expand international activities into an international division. abroad Disadvantages The heads of foreign subsidiaries are not given as much voice in the Not given as much organization as the heads of domestic functions. voice The isolation between domestic and foreign operations can inhibit Isolation between domestic and foreign the introduction of new products, the transfer of core competencies, and the consolidation of global production at key locations. operations 100. (p. 439-440) What type of firms favor the worldwide area structure and why? What are the disadvantages of this type of structure? The worldwide area structure tends to be favored by firms with a Worldwide area structure: divides the low degree of diversification and a domestic structure based on world into geographic functions. areas, each area being Firms choose this structure because it facilitates local a self-contained, responsiveness. largely autonomous Decision-making is decentralized, allowing subsidiaries to unit. customize marketing to local needs. The fragmentation of the organization that ensues, making it Difficult to realize difficult to realize location and experience curve economies. Firms location and that choose this structure find it difficult to respond to pressures for experience cost reductions or to transfer core competencies within the firm. 7

101. (p. 440-441) Discuss the type of firm that uses the worldwide product division structure. What are the main strengths and weaknesses with this type of structure? In the worldwide product division structure, each division is a selfWorldwide product contained, largely autonomous entity with full responsibility for its division structure own value creation activities. The headquarters retains the responsibility for the overall strategic development and financial controls of the firm. Firms that adopt the worldwide product division structure are reasonably diversified and originally had domestic structures based on product divisions. Advantages Disadvantages It provides an organizational context in Limited voice it gives to area or country which it is easier to pursue the consolidation managers, since they are seen as subservient to of value creation activities at key locations the product division managers. necessary for realizing location and This can lead to a lack of local responsiveness. experience curve economies It also facilitates the transfer of core competencies within a division's worldwide operations and the simultaneous worldwide introduction of new products. 102. What is a knowledge network? What is the advantage of such a system? A network for transmitting information within an organization that is based Knowledge not on formal organizational structure, but on informal contacts between network managers within an enterprise and on distributed information systems. Advantages It can be used as a non-bureaucratic conduit for knowledge flows within an organization. 103. (p. 448) Consider the use of personal controls in international firms. In which type of firm is this control most common? Control by personal contact with subordinates. This type of control tends to Personal be most widely used in small firms, where it is seen in the direct supervision control of subordinates' actions. It also structures the relationships between managers at different levels in multinational enterprises. For example, the CEO may use a great deal of personal control to influence the behavior of his or her immediate subordinates, such as the heads of worldwide product divisions or major geographic areas. In turn, these heads may use personal control to influence the behavior of their subordinates, and so on down through the organization. 104. (p. 460) What are the two conditions with regard to firm architecture and strategy that are necessary for a firm to succeed? Consistent with the The firm's strategy must be consistent with the environment in which the firm operates. environment The firm's organization architecture must be consistent with its Consistent with its strategy. Without these fits, the firm is likely to experience strategy performance problems.

105. (p. 461) Discuss the sources of inertia in organizations. Is it easy to make organizational changes? Organizations are difficult to change. Within most organizations are strong inertia forces. These forces come from a number of sources. Existing distribution of Existing distribution of power and influence within an organization. Managers who are not happy with the changes are power and influence likely to resist and slow the process. Since value systems reflect deeply held beliefs, they can be very Existing culture hard to change. Senior managers' preconceptions about the appropriate business Senior managers' model or paradigm. Managers may not recognize the value in a preconceptions given business model that has been successful in the past. 106. (p. 462) What are the basic principles for successful organizational change? There are three basic principles for organizational change. Unfreeze the Unfreeze the organization through shock therapy and organization change the distribution of power and influence. Move to a new state Refreeze the organization Move the organization to a new state through proactive change in the architecture, so that it matches the desired new strategic posture. Refreeze the organization in its new state and socialize employees into the new way of doing things

85. (p. 470) What are the three basic decisions a firm contemplating foreign expansion must make? The three basic decisions a firm that is seeking to expand into foreign markets must make are: which markets to enter, when to enter those markets, and on what scale. The choice of which markets to enter should be driven by an assessment of relative long-run growth and profit potential. 86. (p. 471) What are first-mover advantages? Discuss the advantages associated with them. First-mover advantages: The advantages frequently associated with entering a market early. Advantages 1) The ability to preempt rivals and capture demand by establishing a strong brand name. 2) The ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants. 3) The ability of early entrants to create switching costs that tie customers into their products or services. Such switching costs make it difficult for later entrants to win business.

87. (p. 471-472) Explain the relationship between first-mover disadvantages and pioneering costs. When a firm enters a market prior to other international businesses, it can First-mover disadvantages have first-mover disadvantages. These disadvantages may give rise to pioneering costs, costs that an early entrant has to bear that a later entrant can avoid. Arise when the business system in a foreign country is so different from that Pioneering in a firm's home market that the enterprise has to devote considerable effort, costs time, and expense to learning the rules of the game. Include the costs of promoting and establishing a product offering. Finally, an early entrant may be put at a disadvantage, relative to a later entrant, if regulations change in a way that diminishes the value of the early entrant's investments. 88. (p. 473-474) Discuss the trade-offs associated with large-scale entry versus small-scale entry. Large-scale entry Small-scale entry It is important for a firm to think through Small-scale entry allows a firm to learn about a the implications of large-scale entry into foreign market while limiting the firm's exposure a market and act accordingly. to that market. Of particular relevance is trying to Is a way to gather information about a foreign identify how actual and potential market before deciding whether to enter on a competitors might react to large-scale significant scale and how best to enter. entry into a market. Large-scale entrant is more likely than By giving the firm time to collect information, the small-scale entrant to be able to small-scale entry reduces the risks associated capture first-mover advantages associated with a subsequent large-scale entry. with demand preemption, scale economies, and switching costs. Balanced against the value and risks of But the lack of commitment associated with the commitments associated with largesmall-scale entry may make it more difficult for scale entry are the benefits of a smallthe small-scale entrant to build market share and scale entry. to capture first-mover or early-mover advantages. The risk-averse firm that enters a foreign market on a small scale may limit its potential losses, but it may also miss the chance to capture first-mover advantages. 89. (p. 474-475) Discuss Bartlett and Ghoshal's perspective on how firms from developing countries should approach international expansion. Companies based in developing countries should use the entry of Use the entry of foreign multinationals foreign multinationals as an opportunity to learn from these competitors by benchmarking their operations and performance as an opportunity to against them. learn Local company might be able to find ways to differentiate itself Local company finds from foreign companies by focusing on market niches that the differentiate itself multinational ignores or is unable to serve effectively if it has a standardized global product offering. The firm from the developing nation may then be in a position to Firm from the pursue its own international expansion strategy. developing nation

10

90. (p. 475-476) Why should a firm choose exporting as a means of foreign market expansion? Discuss the advantages and disadvantages of exporting. Advantages Disadvantages It avoids the often substantial costs of Exporting may not be appropriate if lowerestablishing manufacturing operations in the cost manufacturing locations are available host country. abroad Exporting may help a firm achieve High transportation costs may make experience curve and location economies. exporting uneconomical. Finally, tariff barriers may make exporting less attractive.

91. (p. 477-478) Explain the idea of a turnkey project. Why should a firm use this arrangement to expand internationally? In what industries are turnkey arrangements most common? Turnkey project The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation. The know-how required to assemble and run a technologically complex process is a valuable asset. Reasons should Turnkey projects are a way of earning great economic returns from that asset. a firm use this arrangement to The strategy is particularly useful where FDI is limited by hostgovernment regulations. expand A turnkey strategy can also be less risky than conventional FDI. internationally Turnkey projects are most common in the chemical, pharmaceutical, Most common petroleum refining, and metal refining industries. use in 92. (p. 478-479) Define licensing agreements. What are the advantages of this mode of international expansion? An arrangement whereby a licensor grants the rights to intangible Licensing property to another entity for a specified period in exchange for royalties. agreement Advantages The firm does not have to bear the development costs and risks x development associated with opening a foreign market. As a result, licensing is a very costs, risks attractive option for firms that lack the capital to open overseas markets. openforeign market Attractive option Licensing is also an attractive option when a firm is interested in pursuing a foreign market but does not want to commit substantial resources to an unfamiliar or potentially volatile foreign market. Licensing is also used when a firm wishes to participate in a foreign Participate in market, but is prohibited from doing so by barriers to investment. foreign market Used when a firm possesses some intangible property but does not want Possesses to pursue a potential application itself. intangible property

11

93. (p. 479) Why should a firm be cautious about entering a licensing agreement? In a licensing agreement, the licensor grants the rights to intangible property to the licensee for a specified period in exchange for royalty payments. Firms considering this type of arrangement should be cautious on three fronts. If a firm licenses any of its proprietary know-how (such as its Losing control production processes) to another company, it risks losing control over over this this knowledge by permitting access to it by another firm. knowledge Licensing is not an effective way of realizing experience curve and Not an effective location economies by manufacturing a product in a centralized way of realizing location. If these attributes are important to a firm, licensing may be a experience curve poor choice Competing in a global market may require a firm to coordinate strategic Using profits from one country moves across countries by using profits from one country to support competitive attacks in another. to support **Licensing severely limits a firm's ability to do this. A licensee is unlikely to allow a multinational firm to use its profits (beyond the royalty payments) to support a different licensee operating in another country. 94. (p. 478-479) What is intangible property? How can intangible property be protected in a licensing agreement? Intangible property Reduce losing Patents, inventions, formulas, processes, designs, copyrights, and trademarks. A licensor can reduce the risk of losing intangible property, or proprietary know-how, to a foreign partner by entering into a crosslicensing agreement. Under a cross-license agreement, a firm licenses some valuable intangible property (such as a production process) to a foreign partner, but in addition to royalty payments, the firm also requires the foreign partner to license some of its valuable know-how to the firm. Cross-licensing agreements enable firms to hold each other "hostage ," thereby reducing the risk they will behave in an opportunistic manner toward each other.

Value know-how

Reducing the risk

95. (p. 478, 480) Compare and contrast licensing agreements and franchising agreements. Licensing agreement Franchising agreement An arrangement whereby a licensor grants Basically a specialized form of licensing in the rights to intangible property to another which the franchiser not only sells intangible entity for a specified period in exchange for property to the franchisee, but also insists that royalties. the franchisee agree to abide by strict rules as to how it does business. Franchising tends to involve longer-term commitments than licensing.

12

97. (p. 481-482) What is a joint venture? What type of joint venture is most common? Provide an example of a joint venture. Establishing a firm that is jointly owned by two or more otherwise independent Joint firms. venture The most typical joint venture is a 50/50 venture, in which there are two parties, each of which holds a 50 percent ownership stake and contributes a team of managers to share operating control. Fuji-Xerox An example of a joint venture that was established between Fuji Photo and Xerox. Advantages Firms benefit from a local partner's knowledge of the host market. Benefit local partner Firm can share the costs and/or risks of operating in a foreign Share costs and risks market. Political consideration In many countries, political considerations make joint ventures the only feasible entry mode. Disadvantages A firm that enters into a joint venture risks giving control of its Give control of its technology to its partner. technology A joint venture does not give the firm the tight control over x give tight control subsidiaries that it might need in order to realize experience curve or over subsidiaries location economies. A joint venture might not be a good strategy because the shared Conflict and battle ownership structure can lead to conflicts and battles for control for control between the investing firms if their goals and objectives change or if they do not share a common vision for the venture. 98. (p. 481) Discuss the advantages of using a joint venture to enter foreign markets. There are several advantages to expanding into foreign markets via a joint venture. 99. (p. 481-482) Imagine that you are meeting with your superiors to discuss entering a foreign market. Your boss has asked you to analyze a joint venture prospect. Why might you tell your boss that the joint venture is not a good idea? 100 How can a firm protect its proprietary information in a joint venture arrangement? There are several things a firm can do to protect proprietary information in a joint venture arrangement. Hold majority ownership in the venture so that the firm has greater control Hold over the technology. majority ownership "Wall off" from a partner technology that is central to the core competence of Wall off the firm, while sharing other technology. 101. (p. 482) What are the two methods of entering foreign marketing using a wholly owned subsidiary? **Where the firm owns 100 percent of the stock, Wholly owned subsidiaries can take two forms, can either make the investment in a greenfield operation or in an acquisition. Greenfield Establishment of a new operation operation Acquisition Involves buying an established firm in the host country and using that firm to promote the company's products.

13

102. (p. 482-483) Consider why a firm should enter a market via a wholly owned subsidiary. What are the advantages and disadvantages of this type of strategy? Advantages Establishing a wholly owned subsidiary as an entry strategy into a foreign Technology market is appropriate when a firm's competitive advantage is based on competence technological competence. By establishing a wholly owned subsidiary, a firm reduces the risk of Reduce risk losing control over that competence. control Expanding via a wholly owned subsidiary gives a firm tight control over Tight control its operations in various countries. This strategy maximizes a firm's potential to engage in global strategic Maximize firm coordination. potential Realize location Wholly owned subsidiary strategy may be required if a firm is trying to realize location and experience curve economies. and experience Disadvantages Establishing a wholly owned subsidiary is generally the most costly Costly method method of serving a foreign market, and since the firm owns 100 percent of the operation, the risks are also the highest.

103. (p. 486-487) Why do acquisitions fail? Acquisitions fail for several reasons. The acquiring firm often overpays for the assets of the acquired firm. Overpays for the assets Many acquisitions fail because there is a clash between the cultures of the Clash acquired and the acquiring firms. Roadblocks and Many acquisitions fail because attempts to realize synergies by integrating take longer than the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast. forecast Many acquisitions fail due to inadequate preacquisition screening. Inadequate 104. (p. 488-489) Discuss strategic alliances. How successful are they? Why do firms form strategic alliances? Strategic alliance refers to cooperative agreements between potential or actual competitors Strategic alliances run the range from formal joint ventures, in which Successful they two or more firms have equity stakes, to short-term contractual are arrangements, in which two companies agree to cooperate on a particular task. Firms enter into strategic alliances for four main reasons Facilitate entry into a foreign market. Foreign market Allow firms to share the fixed costs of developing new products or Share fixed costs processes. Allow firms to bring together complementary skills and assets that Complementary neither company could develop easily on its own. skills and assets Help firms establish technological standards for an industry. Tech standard

14

101. (p. 570-571) What is Theodore Levitt's contribution to international business? Theodore Levitt wrote about the globalization of world markets in a now-classic Harvard Business Review article. Converging commonalty Levitt suggested that due to technology, the world was moving and global market for toward a converging commonalty and the emergence standardized of global markets for standardized consumer products. According to Levitt, this convergence creates an opportunity for the global corporation to serve the entire world as if it were a single entity, or in other words, sell the same thing in the same way everywhere. Most academics believe that Levitt has overstated his case Globalization in consumer products is probably the Exception for consumer exception rather than the rule. product Cultural and economic differences between countries will Cultural and economic continue to limit the effects of any movement toward the differences between countries standardization of consumer preferences and tastes. Trade barriers and differences Constrain a firm's ability to sell standardized products to global markets using a standardized marketing strategy. in product and technical standards

102. (p. 571-572) Define market segmentation. What is its goal? Refers to identifying distinct groups of consumers whose purchasing Market segmentation behavior differs from others in important ways. Can be segmented in numerous ways: by geography, demography, socialcultural factors, and psychological factors. Optimize the fit between the purchasing behavior of consumers in a given Its goal segment and the marketing mix, thereby maximizing sales to that segment.

103. (p. 572, 594-595) What are the two main issues that managers must be aware of when considering market segmentation in foreign countries? There are two key issues that managers must be aware of when using market segmentation in foreign countries. Managers must consider the differences between countries in the structure of Differences market segments, which may differ significantly from country to country. between The firm may have to develop a unique marketing mix to appeal to the countries purchasing behavior of a certain segment in a given country. Aware of the Managers must be aware of the existence of segments that transcend existence of national borders. segments Such segments would enhance the ability of a company to view the global marketplace as a single entity and pursue a global strategy.

15

104. (p. 571-573) Discuss the notion of a product being a bundle of attributes. How can approaching a product in this manner help a firm reach its target market? A product can be viewed as a bundle of product attributes. Products sell when their attributes match consumer needs** Company builds these attributes into its cars Sell the same product worldwide if customer needs were the same across the world.

**BMW recognizes that its consumers have a need for luxury, quality, and performance. However, because consumer needs vary by country depending on culture and the level of economic development, a firm's ability to sell the same product will be constrained. 105. (p. 573-574) How do levels of economic development affect consumer behavior? What are the implications for marketing strategy? Consumers in the most advanced countries often shun globally standardized products that have been developed with the lowest common denominator in mind. They are willing to pay more for products that have additional features and attributes customized to their tastes and preferences. In response to this behavior, firms marketing to consumers in highly developed markets tend to build a lot of extra performance attributes into their products. In contrast, consumers in less-developed countries typically demand a more basic product. In addition, product reliability becomes more important as the purchase may account for a greater share of a consumer's income than for the advanced country consumer. Consequently, products sold in developing countries typically lack many of the features found in products sold in advanced countries. 106. (p. 576-578) Explain the difference between a concentrated retail system and a fragmented one. Why is this distinction important to international businesses? Concentrated retail system Fragmented retail system The retail system is a concentrated one where Involves many small stores that serve local there are large stores or shopping malls. neighborhoods. 107. (p. 576-578) What are the four main differences between distribution systems across countries? How many retailers supply most of the market Retail concentration The number of intermediaries between the producer and the consumer. Channel length Channel exclusivity How difficult it is for outsiders to access the channel. The expertise, competencies, and skills of established retailers in a Channel quality nation and their ability to sell and support the products of international businesses.

16

108. (p. 576-578) What are the three factors that contribute to the trend toward greater retail concentration in developed countries? How have these factors promoted retail concentration? Factor 1 The increase in car ownership. Factor 2 The increase in the number of households with refrigerators and freezers. Factor 3 The increase in the number of two-income households. All of these factors have changed shopping habits and facilitated the growth of large retail establishments sited away from traditional shopping areas. 109. (p. 576-577) What is channel length? What is the most important determinant of channel length? Mention two factors that shorten channel length. Channel length Refers to the number of intermediaries between the producer and the consumer. Most important The degree to which the retail system is fragmented. Fragmented retail systems tend to promote the growth of wholesalers to serve retailers, determinant which lengthens channels. Factors shorten The Internet and the entry of large discount superstores have served to channel lengths shorten channel lengths. 110. (p. 577) Describe an exclusive distribution channel. Consider the implications of channel exclusivity for outside firms. Exclusive distribution channel: Difficult for outsiders to access. Channel exclusivity very high in Japan makes the Japanese market so Other firm difficult to penetrate effectively. Firms from other countries may find it difficult to very difficult to break into the Japanese market as a result of this break into exclusivity. market

111. (p. 579) What factors affect the success of a firm's international communications? The effectiveness of a firm's international communications can be jeopardized by three critical variables. Make it difficult to communicate messages across cultures Cultural barriers Source effects occur when the receiver of the message evaluates the Source effects message based on the status or image of the sender. The amount of other messages competing for a potential consumer's Noise levels attention.

112. (p. 582) Compare and contrast push strategies and pull strategies. When developing its communications strategy, a firm must decide between a push and a pull strategy. Push strategy Pull Strategy Emphasizes personal selling rather than mass Depends more on mass media advertising to media advertising in the promotional mix. communicate the marketing message to This type of strategy requires intensive use of potential customers. a sales force and is relatively costly.

17

113 What are the arguments for standardized advertising across international markets? There are three main arguments supporting the notion of standardized advertising across markets. Such a campaign has significant economic advantages because it lowers the Significant cost of value creation by spreading the fixed costs of developing the economic advertisements across many countries. advantages Because of concerns about the scarcity of creative talent, one large effort to Scarcity of creative talent develop a campaign will produce better results than 40 or 50 smaller efforts. Many brand names are global. Global

114. (p. 587, 609) What is predatory pricing? Describe how a firm might use predatory pricing. Predatory pricing: Use of price as a competitive weapon to drive weaker competitors out of a national market. Once the competitors have left the market, the firm can raise prices and Raise prices and enjoy high profits enjoy high profits. Have a profitable For such a pricing strategy to work the firm must normally have a profitable position in another national market, which it can use to position subsidize aggressive pricing in the market it is trying to monopolize.

115. (p. 593) Discuss the notion of cross-functional teams and their role in cross-functional integration. What are the attributes that make a product development team successful? A firm can achieve cross-functional integration by establishing cross-functional product development teams comprised of representatives from R&D, marketing, and production. The objective of the team should be to take a product development project from the initial concept development to market introduction. The success of such teams is dependent on three attributes. The team should be led by "heavyweight" managers who have high status Led by within the organization, and who have the power and authority required to heavyweight get the financial and human resources the team needs to succeed. managers The team should be comprised of at least one member from each key At least one function. member Physically be in The team should physically be in one location if possible to create a sense one location of camaraderie and to facilitate communication.

81. (p. 604) Discuss the complexities of human resource management in an international firm. What are the key issues facing firms in this area? The activities an organization carries out to use its human resources effectively are referred to as human resource management. These activities include determining the firm's human resource strategy, staffing, performance evaluation, management development, compensation, and labor relations. Strategic More complex in an international business, where profound differences between role of countries in labor markets, culture, legal systems, economic systems, and the like HRM complicate staffing, management development, performance evaluation, and compensation activities. 18

82. (p. 605) What are the four strategies pursued by international companies, and what is the role of HRM in these? HRM policies must be congruent with the firm's strategy. The four strategies pursued by international businesses are: Where value is created by emphasizing local responsiveness Localization Where value is created by transferring products and competencies overseas International Where value is created by realizing experience curve and location Global standardization economies Where value is created by doing all of these things simultaneously. Transnational 83. What is the relationship between a firm's staffing policy and its corporate culture? Staffing policy A firm's selection of employees for particular jobs Not only involves the selection of individuals who have the skills required to do a particular job, it also can be a tool for developing and promoting the desired corporate culture, or norms and values systems, of the firm. 84. (p. 606-608) What are the three types of staffing policies in international business? Briefly describe each one. Which is the most attractive approach and why? There are three types of staffing approaches in international business. Ethnocentric One in which all key management positions are filled by parent- country nationals. approach Involves recruiting host-country nationals to manage subsidiaries while Polycentric parent-country nationals occupy key positions at corporate headquarters. approach Seeks the best people for key jobs throughout the organization, regardless of Geocentric nationality. policy This approach is probably the most attractive because it enables the firm to make the best use of its human resources, and it allows the firm to build a cadre of international executives who feel at home working in a number of cultures. 85. (p. 606-607) Why should a firm pursue an ethnocentric approach to staffing? What are the disadvantages of this approach? Firms pursue an ethnocentric staffing policy for three reasons. Lack of qualified Firm may believe there is a lack of qualified individuals in the host country to fill senior management positions. individuals Maintain unified Firm may see an ethnocentric staffing policy as the best way to maintain corporate culture a unified corporate culture. If the firm is trying to create value by transferring core competencies to a foreign operation, it may feel that the best way to do this is to transfer parent-country nationals who have knowledge of that competency to the foreign operation. The ethnocentric approach to staffing is on the wane for two reasons. The policy limits advancement opportunities for host-country nationals, Policy limits advancement which can lead to resentment, lower productivity, and increased opportunities turnover among that group. The policy can lead to cultural myopia. Cultural myopia

19

86. (p. 607) You are the vice-president of human resources for your firm. Your boss has asked you to research the advantages and disadvantages of a polycentric approach to staffing. What will you tell your boss? Polycentric staffing policy: requires host-country nationals to be recruited to manage subsidiaries, while parent-country nationals occupy key positions at corporate headquarters. Advantages Disadvantages Firm is less likely to suffer from cultural myopia. Because host-country nationals have limited opportunities for Host-country managers are unlikely to make the advancement, resentment may mistakes arising from cultural misunderstandings that arise. expatriate managers are subject to. Less expensive than other approaches to implement. Gap form between host-country managers and parent-country By hiring host-countrypersonnel to fill managers leading to a lack of management positions, the firm will not incur a integration between corporate significant amount of expatriate expense. headquarters and foreign subsidiaries.

87. (p. 609-610) What is expatriate failure? How prevalent is the problem? What is the cost to a firm of a failed assignment? Represents a failure of the firm's selection policies to identify individuals Expatriate failure who will not thrive abroad. Premature return from a foreign posting and high resignation rates. Consequences **For American firms, expatriate failure is particularly high among expatriates who are sent to developing countries. Almost 70 percent of such employees will return home early as compared to the 16 to 40 percent of employees sent to developed nations that return prior to the completion of their assignments. 88. (p. 610) Discuss the reasons why expatriate managers fail to complete their foreign assignment. Do the reasons for expatriate failure differ by nationality? The question of why expatriates fail to complete their foreign assignments was studied by R. L. Tung who found that U.S. firms experienced a significantly higher failure rate than either European or Japanese firms. American (1) inability of spouse to adjust, (2) manager's inability to adjust, firms (3) other family problems, (4) the manager's personal or emotional maturity (5) inability to cope with larger overseas responsibilities. Japanese (1) inability to cope with larger overseas responsibilities, (2) difficulties with new environment, firm (3) personal or emotional problems, (4) lack of technical competence, (5) inability of spouse to adjust. European firms gave only one reason to explain expatriate failure: the inability of a spouse to adapt.

20

89. (p. 611) Failure of the spouse to adjust was the top reason given for expatriate failure in American firms, the only reason given for expatriate failure in European firms, and the number five reason given by Japanese firms. Discuss the reasons behind the difficulties a spouse faces in adapting to a new country. The failure of spouse to adjust appears to be related to a several factors. Often spouses find themselves in a foreign country without the familiar Without familiar network of family network of family and friends. Language differences make it difficult for them to make new friends, Language making the spouse feel trapped at home. differences Immigration rules If immigration rules prohibit employment, the spouse may find it even more difficult to adapt.

90. (p. 611-613) Discuss Mendenhall and Oddou's assertion that an executive who performs well in a domestic setting may not adapt to a different cultural setting. According to Mendenhall and Oddou, many managers tend to equate domestic performance with overseas performance potential. However, the researchers suggest that success in a foreign job posting depends not on domestic performance, but instead on four dimensions. Expatriate's self-orientation will affect performance. Expatriates Expatriate's selfwith high self-esteem, self-confidence, and mental well-being are orientation more likely to succeed in foreign jobs. The more effectively an expatriate interacts with host-country Others-orientation nationals, the more likely he/she is to succeed. An expatriate's perceptual abilities are important to success. Expatriate's Managers need to be able to understand why people of other perceptual abilities countries behave the way they do. Cultural toughness is a measure of how well an expatriate adjusts to Cultural toughness a particular situation, especially when the assignment involves a culture that is very different from the home-country culture. 91. (p. 614-615) What are the three types of training for expatriate managers? Why is this type of training so important to managers and their families? Training can help a manager and spouse cope with issues of adjusting to the foreign environment. Three types of training are important. 1) Cultural training seeks to fosteran appreciation for the host country's culture. 2) The belief is that understanding a host country's culture will help the manager empathize with the culture, which will enhance his/her effectiveness in dealing with host-country nationals. 3) Language training is vital to an expatriate's ability to interact with host-country nationals. Practical training is aimed at helping the expatriate manager and family ease themselves into day-to-day life in the host country.

21

92. (p. 615) Discuss why the repatriation process is so difficult for so many expatriates. How could the difficulties associated with repatriationbe alleviated? Preparing expatriates for reentry into their home-country organization is generally overlooked, yet represents a huge challenge for firms. Often when expatriates return home after a stint abroad they face an organization Why it difficult that doesn't know what they have done for the last few years, doesn't know how to use their new knowledge, and doesn't particularly care. In the worst cases, reentering employees have to scroungefor jobs, or firms create standby positions that don't use the expatriate's skills and capabilities and fail to make the most of the business investment the firm has made in that individual. Solution Good human resource planning. The HRM function needs to develop good programs for reintegrating expatriates back into work life within their home-country organization, for preparing them for changes in their physical and professional landscape, and for utilizing the knowledge they acquired while abroad. 93. (p. 615-617) Describe the notion of management development programs as a tool for increasing the overall skill levels of managers. What is the goal of this type of program? Management development programs are designed to increase the overall skill levels of managers through a mix of ongoing management education and rotations of managers through a number of jobs within the firm to give them a broad range of experience. Goal International business Corporate culture Rotating managers Improve overall productivity and quality of the firm's management resources. As a strategic tool, management development programs can play an important role in international businesses. Help a firm build a corporate culture that is sensitive to international business issues. By rotating managers, firms can build informal management networks, networks that can then be used as a conduit for exchanging information within an organization.

94. (p. 617) Discuss the issue of how to evaluate performance of expatriate managers. What problems arise for companies as they make such evaluations? Unintentional bias It can be very difficult to evaluate the performance of expatriate managers objectively because of unintentional bias. A host-country manager may be biased by own cultural frame of reference and expectations, A home-country manager may be biased by distance and his own lack of experience working abroad. Rely on hard data In fact, home-country managers tend to rely on hard data to evaluate an expatriate's performance, data that may reflect factors outside the expatriate's control. This reliance on hard data has led many expatriates to complain that because "soft" variables are also important to their success, they are not getting fair evaluations.

22

95. (p. 617-618) How can firms reduce the bias in performance appraisals of expatriate managers? Unintentional bias makes it difficult to evaluate the performance of expatriate managers objectively. This bias can be reduced in several ways. Most expatriates believe that more weight should be given to an on-site On-sites manager manager's appraisal than to an off-site manager's appraisal. appraisal If the on-site manager is of the same nationality as the expatriate manager, cultural bias can also be reduced. When the policy is for foreign on-site managers to write performance Consult home-office evaluations, home-office managers, in an effort to avoid cultural manager misunderstandings, should be consulted before an on-site manager completes a formal termination evaluation.

96. (p. 618) Should a firm pay executives in different countries according to the prevailin standards in each country, or should it equalize pay on a global basis? Substantial differences exist in the compensation of executives at the same level in various countries. These differences raise the question of whether a firm should pay its expatriate managers the prevailing wage rate in the country that they are working in, or whether the firm should pay all of its expatriate managers at the same level of responsibility a similar amount of pay. For a U.S. firm, this could mean raising the compensation of foreign nationals to U.S. levels, a policy that could prove to be very expensive. Yet, if a firm does not equalize pay, it could cause considerable resentment among foreign nationals who work with U.S. managers. 97. (p. 619-620) What is the most common approach to expatriate pay? Explain what comprises this form of compensation. What is the advantage of this approach? The most common approach to expatriate pay is the balance sheet approach. The typical expatriate compensation package is comprised of a base salary, a foreign-service premium, allowances of various types, tax differentials, and benefits. Advantages Equalizing purchasing Employees can enjoy the same living standard in their foreign power across countries posting as they enjoyed at home. Provides financial incentives to offset qualitative differences Financial incentives between locations. 98. (p. 621) Consider the allowance component of a typical expatriate compensation package. What types of allowance are included in this component? There are four types of allowances that are usually included in an expatriate's compensation package. Paid when the expatriate is being sent to a location where basic Hardship allowance amenities are grossly deficient as compared to the home country. Included to ensure that the expatriate can afford the same quality of Housing allowance housing in the foreign country as in the home country Paid to ensure that the expatriate enjoys the same standard of living Cost-of-living in the foreign location as at home. allowance Education allowances Included to ensure that an expatriate's children receive adequate schooling

23

99. (p. 622) Discuss the concerns of organized labor. A principle concern of domestic unions about multinational firms is that a company can counter its bargaining power with the power to move production to another country. Another concern is that an international business will keep highly skilled tasks in its home country and farm out only low-skilled tasks to foreign plants. A final concern arises when an international business attempts to import employment practices and contractual agreements from its home country. When these practices are alien to the host country, organized labor fears the change will reduce its influence and power. 100. (p. 622) What are the three actions taken by organized labor to respond to the increased bargaining power of multinationals? How successful have these efforts been? Organized labor has responded to the increased bargaining power of multinationals by taking three actions. 1) Trying to establish international labor organizations. 2) Labor is lobbying for national legislation to restrict multinationals. 3) Organized labor is trying to achieve international regulations on multinationals through organizations such as the UN. To date, success in these efforts has been limited.

24