C H A P T E R 2
The multinational enterprise
Chapter objectives
2. Explain the internationalization process.
4. Discuss the strategic philosophy of these firms.
6. Study some of the ways in which these firms use strategic management.
Chapter summary
1. A multinational enterprise is a company that is headquartered in one country but has
operations in two or more countries. There are a series of characteristics that are common to
2. Multinationals, especially large industrial enterprises, account for a large percentage of
3. The internationalization process is one of going abroad at incremental stages, on the premise
4. Companies become MNEs for a number of reasons: (a) a desire to protect themselves from
the risks and uncertainties of the domestic business cycle; (b) a growing world market for
5. Multinational enterprises have a strategic philosophy that is different from that of home
country businesses. In particular, MNEs do not see their company as an extension of the
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6. Successful MNEs rely on the strategic management process, which has five major phases:
7. Managers of most MNEs use strategies that build upon firm-specific advantages (FSAs) and
country-specific advantages (CSAs). The FSAs are strengths or benefits specific to a firm
9. Thomas Friedman, a New York Times journalist, makes one point in his book The World is
Flat that today a large proportion of international business takes place through offshoring
leading to globalization. The FSACSA analysis counters this simplistic notion. The world
is not flat, because there remain strong barriers as a business attempts to cross the
boundaries of triad regions. It is necessary to investigate the manner in which a firms
business model may need to be adapted such that its FSAs can overcome the liability of
interregional foreignness.
Chapter outline
Introduction
The nature of multinational enterprises
Characteristics of multinational enterprises
The internationalization process
Why firms become multinational enterprises
The strategic philosophy of multinational enterprises
Strategic management and multinational enterprises
A framework for global strategies: the FSACSA matrix
The FSACAS matrix
Its regional, not flat
Rugman and Collinson, International Business, 6th edition, Instructor’s Manual
Multinationals in action
Solectron
BMW
Levi Strauss
Canon
Zara
Lecture outline
A. Introduction
1. An MNE is a firm headquartered in one country with operations in other countries.
B. The nature of multinational enterprises
1. Multinational enterprises (MNEs) have a number of characteristics including the
following: (a) responsiveness to environmental forces such as competitors, customers,
2. Under the premise that foreign markets are risky, companies expand their operations
abroad incrementally and cautiously. Setting up a wholly owned subsidiary is usually
the last stage of doing business abroad. A typical internationalization process for a firm
3. Firms become multinationals for a number of reasons. Some of these include the
following: (a) a desire to protect themselves from the risks and uncertainties of the
4. Multinational enterprises are different from companies that confine their activities to the
domestic market. MNEs make decisions based primarily on what is best for the
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1. The strategic management process involves four major functions: strategy formulation,
strategy implementation, evaluation and the control of operations.
2. Strategic planning typically begins with a review of the companys basic mission. This
is determined by answering the questions: What is the firms business? What is its
reason for existence? By answering these questions, the company reaffirms the direction
3. After determining its mission, the MNE will evaluate the external and internal
4. Internal and external analysis helps the MNE identify both long-range goals (typically
two to five years) and short-range goals (less than two years). The plan is then broken
D. A framework for global strategies: the FSACSA matrix
1. Much of the material in this book can be synthesized within a single analytical
framework. There are two basic building blocks that determine the competitive
2. Figure 2.5, the competitive advantage matrix, provides a useful framework for the
3. Quadrants 1, 2 and 3 correspond broadly to the three generic strategies suggested by
Porter (1980): cost leadership, differentiation and focus. Quadrant 3 firms generally can
follow any of the strategies. Firms in quadrant 4 are generally differentiated firms with
strong FSAs in marketing and customization. Basically, these firms follow a
4. In terms of business strategy, quadrants 3 and 2 are unambiguous in their implications.
A quadrant 3 firm can benefit from the strategies of both low-cost and differentiation.
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5. Quadrants 4 and 1 are credible positions for different types of firms. For instance, a
quadrant 4 firm that has strong FSAs in marketing (customization) can operate globally
6. The FSACSA framework in Figure 2.5 can be reconciled with the OLI framework of
Dunning (1981). In this eclectic paradigm, Dunning has location factors (L),
E. Its regional, not flat
1. Thomas Friedman, the New York Times journalist, has sold over 3 million copies of his
2. Indeed, much manufacturing and cost innovation takes place in China with service
sector activities, especially in information technology sectors, taking place in India.
3. The FSACSA analysis counters Friedmans simplistic notion. It can be seen that
Friedmans book is mainly about cell 1, and that he presents no evidence of the way
F. Multinationals in action
1. Most MNEs are not giant corporations, but the giants are almost all MNEs. Some of the
2. Multinational enterprises (MNEs) range from extremely large to fairly small in terms of
both sales, employment and they can also be found in a variety of different industries.
Rugman and Collinson, International Business, 6th edition, Instructor’s Manual
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Answers to review and discussion questions
1. What is a multinational enterprise? Is it likely that the number of MNEs will increase
during the next decade? Why?
2. What are the three common characteristics of an MNE? Identify and briefly describe
3. Why do firms become multinational enterprises? Identify and discuss four reasons.
4. How are CSAs different than FSAs?
5. How successful are the large industrial MNEs? What accounts for this?
Many large industrial MNEs have been particularly successful, though there have been some
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6. What are the five basic steps in the strategic management process? Identify and briefly
describe each.
The five basic steps in the strategic management process are these: (a) identify the firms basic
mission: the reason that a firm is in existence; (b) analyze the external and internal
7. How has Zara used the strategic management process to help it become a successful
multinational?
8. How has Levi Strauss used the strategic management process to help it improve its
competitiveness?
Answers to real cases
Starbucks
1. Why does Starbucks rely on licenses for most of its international operations? Does the
firm risk the dissipation of its managerial or technological advantages?
Local owners with local knowledge and a similar strategic vision to that of Starbucks can do
better than US managers that do not understand the local market and business environment. This
2. Can you argue that Starbucks is a global company regardless of the strong dominance
of its home region in terms of sales and locations? Explain.
3. What accounts for the discrepancy between percentage of foreign locations and
percentage of foreign revenues?
4. What are some of the reasons why Starbucks chooses to retain operational control of
its domestic operations?
The reasons that Starbucks chooses not to rely on licensing in its home region are as follows.
Sony
1. Is Sony a multinational enterprise?
2. If the vast majority of Sonys consumer electronics business is based and developed in
Japan and the vast majority of Sonys music and movie business is based in the United
States, does Sony make decisions that are best for the entire company regardless of
location?
3. Why does Sony need to license its technology to competitors?