3. Explain the two opposing forces—cost reduction and adaptation to local markets—that
firms must deal with when they go global.
Response:
As firms go global, they gain an ability to reduce costs by exploiting economies of scale,
reducing costs of research and development, extending the product life cycle, and locating
On the other hand, as firms go global they face a number of country-specific risks. These risks
include political risk, economic risk, currency risks, and management risks. These risks usually
Therefore, what firms tend to do is to adopt some mix of operations. In some ways they are
standardized and efficient. In other ways they are unique to each country. The result is often
4. There are four basic strategies—international, global, multidomestic, and transnational.
What are the advantages and disadvantages associated with each?
Response:
The four strategies are presented in Exhibit 7.4 on p. 230. Firms with international operations
will be in industries that face two pressures, one for local adaptation and one for lower costs. An
international strategy faces low pressures for local adaptation and low pressures for lower costs.
International strategies require minimal effort by firms to either adapt operations to national
markets or to reduce costs. However, there is a tendency for firms in these industries to centralize
Global strategies face high pressures for lower costs and low pressures for local adaptation.
Usually, firms exploit scale economies, standardize products and processes, reduce costs
throughout the value chain, locate activities in cost minimizing locations, and centralize
Multidomestic strategies face high pressures for local adaptation and low pressures for lower
costs. Operations tend to be decentralized and dispersed across national markets. The advantages
are that firms can maximize revenue by adapting products and marketing to various national
Transnational strategies face both high pressures for local adaptation and for lower costs.
Operations tend to reflect a mix of centralization, for upstream activities, and decentralization,
for downstream activities close to the customer. The organization is flexible in order to respond
5. What is the basis of Alan Rugman’s argument that most multinationals are still more
regional than global? What factors inhibit firms from becoming truly global?
Response:
Rugman and Verbeke found that very few firms were truly global. Rather, they tended to
concentrate their sales in their home region—North America, Europe, or Asia. The reasons for
this concentration probably are that distance matters. It is easier to do business and compete
6. Describe the basic entry strategies that firms have available when they enter
international markets. What are the relative advantages and disadvantages of each?
Response:
The basic entry modes are ways for firms to expand into international markets. They include
exporting, licensing and franchising, strategic alliances and joint ventures, and wholly owned
Licensing and franchising are contractual arrangements where a foreign partner pays a royalty or
fee in exchange for the right to use a firm’s intellectual property (patent, copyright, trademark, or
trade secret). The advantages are that the firm does not have a large investment and does not
Strategic alliances and joint ventures are cooperative agreements where a firm would work with
a partner, usually a firm from the foreign country, to market its products. The firm would offer
the product and technical expertise, while the partner would offer marketing expertise. Usually,
the goal of each partner is to learn from the other. The advantages are the effectiveness of
Wholly owned subsidiaries are foreign operations that are 100 percent owned by the expanding
firm. The advantages are that the firm retains all revenue from operations and has full control
Experiential Exercise
The United States is considered a world leader in the motion picture industry. Using
Porter’s diamond framework for national competitiveness, explain the success of this
industry.
Response:
Answers for this question can be quite wide-ranging depending on the students’ knowledge
The position of the United States as the world’s leader in the entertainment industry can be
Factor conditions: The United States has one of the world’s most highly skilled manpower and
most developed infrastructure in this industry. There are several universities offering high-level
programs in film production, music, and other forms of entertainment. Hollywood is the world’s
most regarded place for film production, and this has occurred as a result of decades of
Demand conditions: One of the key reasons for the sophistication in the entertainment industry
is the existence of very sophisticated consumers who demand high-quality entertainment. By the
very culture that encourages individualism, people do not hesitate having the best entertainment
Related and Supporting Industries are also very well developed. Suppliers are highly
Firm strategy, structure and rivalry: There is intense competition in this industry, and there is
also a high potential for entry from related industries. Domestic rivalry thus promotes higher
levels of innovation for gaining competitive advantages over one another. High domestic rivalry
in this industry is certainly an indicator of global competitive success. Also, the creation,
All of these attributes of the United States create its “national competitive advantage” in the
entertainment industry.
Application Questions and Exercises
1. Data on the “competitiveness of nations” can be found at
http://www.imd.org/research/publications/wcy/index.cfm. This website provides a ranking
on 329 criteria for 59 countries. How might Porter’s diamond of national advantage help to
explain the rankings for some of these countries for certain industries that interest you?
Response:
IMD publishes the World Competitiveness Yearbook (WCY) in May of each year. Its
methodology uses variables in 4 categories: economic performance, government efficiency,
relationships might include the following:
Economic performance links closely to demand conditions, as stable prices reduce
distortions in consumer’s decisions, and trade allows firms to sell to foreign markets.
Government efficiency links closely with firm strategy, structure and rivalry, as a major focus of
these measures is the government competitiveness policy. An argument could also be made for
Business efficiency relates strongly to firm strategy, structure, and rivalry. It includes measures
of attitude and values, which relate to this part of the diamond. The measures for labor market
Infrastructure relates strongly to factor conditions.
2. The Internet has lowered the entry barriers for smaller firms that wish to diversify into
international markets. Why is this so? Provide an example.
Response:
The Internet enables firms to take orders from anywhere in the world. Also, customers can use
the Internet to collect information on products made anywhere in the world, compare product
features, and prices. So, firms are more able to export to foreign markets without first
establishing large promotional campaigns. Even when firms have a sales office, warehouse, or
(Note to instructors) Students may offer a number of very good examples. For each, ask students
to identify the entry barrier to small firms that is lowered. Also, ask students how effective the
3. Many firms fail when they enter into strategic alliances with firms that link up with
companies based in other countries. What are some reasons for this failure? Provide an
example.
Response:
Most failures relate to lack of understanding and trust in the working relationships between the
two organizations. Cultural differences are often at the heart of the problems, but contributory
(Note to instructors) The examples are very useful for getting students to understand the process
by which many international strategic alliances fail. Each failure is a unique story that often
We suggest that you use the analogy of a marriage or steady relationship that breaks up. Ask
students why some relationships break up. Then apply the reason to an interfirm alliance.
Usually, the reasons include misunderstanding, lack of trust, or unfaithfulness. Misunderstanding
4. Many large U.S.-based management consulting companies such as McKinsey and
Company and the BCG Group have been very successful in the international marketplace.
How can Porter’s diamond explain their success?
Response:
Looking at management consulting as an industry, and applying Porter’s diamond, is one way to
respond to the question. The U.S. management consulting industry has many firms that compete
vigorously. The competition hones their capabilities. So, firm strategy, structure and rivalry is
strong. For factor conditions, the United States has an abundance of human capital, which is
Ethics Questions
1. Over the past few decades, many American firms have relocated most or all of their
operations from the United States to countries such as Mexico and China that pay lower
wages. What are some of the ethical issues that such actions may raise?
Response:
Relocating operations to cost efficient locations is characteristic of the global strategy and, to a
lesser extent, the transnational strategy. As with any such restructuring, relocations may be unfair
to the individuals in the U. S. who lose their jobs, to the communities in the United States that
For the local community, the local economy is often hurt by the relocation. The livelihood of
many can be affected. To limit this loss, the firm can take certain measures such as phasing out
For the firm, the relocation can hurt the firm’s reputation. As a result, sales could be affected, and
unions or other groups could take legal and political actions against the firm. Firms should be
2. Business practices and customs vary throughout the world. What are some of the ethical
issues concerning payments that must be made in a foreign country to obtain business
opportunities?
Response:
Payments to obtain business opportunities are not necessarily unethical. For example, in the U.S.,
firms must be chartered and have a license to do business. These governmental approvals require
payments. The problem is when such payments are not transparent, and where they are a means
In addition, payments to individual officials are illegal under the U.S. Foreign Corrupt Practices