At the end of each chapter in this book we use Real Cases to illustrate some of the ways MNEs use the ideas that have been presented. In this opening chapter we introduced the world of international business and showed the impact of the triad on international trade and investment. We also noted that the major world economies are beginning to slow down and this, of course, is putting increased pressure on multinational enterprises to maintain growth and profitability. In this section we want to address three areas that are important in understanding how companies are coping with this international environment. First, we are going to look at some of the misconceptions that people have about multinational enterprises and how they formulate their international strategies. Second, we are going to look at some of the criteria that are important to MNEs in achieving strategic competitive advantage. Third, we are going to examine some examples of MNEs that are using concepts that we have introduced in this chapter.
Regional triad strategies
There are a number of misconceptions that people have about the world of international business, and it is important to dispel these at the very start of this book. One is the belief that multinationals have far-flung operations and earn most of their revenues overseas.
Nestlé is often cited as an example. This company sells over 8,500 products in more than 100 countries and earns more than 65 per cent of its revenues outside of Switzerland.17 Although this is true, Nestlé is an exception to the rule. Most MNEs earn the bulk of their revenues either within their home country or by selling in nearby locales. In fact, recent research reports that:
More than 85 per cent of all automobiles sold in North America are built in North American factories owned by General Motors, Ford, DaimlerChrysler, or European or Japanese MNEs; over 90 per cent of the cars produced in the EU are sold there; and more than 93 per cent of all cars registered in Japan are manufactured domestically.
In the specialty chemicals sector over 90 per cent of all paint is made and used regionally by triad based MNEs and the same is true for steel, heavy electrical equipment, energy, and transportation.
In the services sector, which now employs approximately 70 per cent of the work force in North America, Western Europe, and Japan, these activities are all essentially local or regional.18
To be successful, MNEs need to create strategies that are regional, not worldwide, in focus and they need to be responsive to local consumers as opposed to being global in nature and uniform throughout.
Another misunderstanding about MNEs is the belief that they are globally monolithic and excessively powerful in political terms. Actually, the latest research shows that, of the 500 largest MNEs, 203 are headquartered in North America, 153 are in the EU, and 123 are in Japan/Asia. We discuss this further in Chapter 2, Table 2.1. In short, these firms are not spread out around the world but are clustered in the triad. This relatively even distribution across the three regions of the triad implies not a dominant MNE culture but the interaction of different cultures in the international business arena. Recent research has also shown that the vast majority of MNEs have not been able to spread their marketing operations evenly across the world but depend on their own regions of the triad for over half of their revenue.19These companies are engaged not in global competition but in triad/regional competition; and this rivalry is so strong that it has effectively eliminated the possibility of their either achieving sustainable long-term profits or building strong, enduring political advantage. In fact, it is now common to find MNEs joining forces with local firms who can help them in their efforts to penetrate local markets. In recent years the strategic alliance, a business relationship in which two or more companies work together to achieve a collective advantage, has become extremely popular with MNEs who now realize that they need to develop strategies with a regional or local focus if they hope to succeed.
A third misunderstanding is the belief that MNEs develop homogeneous products for the world market and through their efficient production techniques are able to dominate local markets everywhere. In fact, multinationals have to adapt their products for the local mar- ket. For example, there is no worldwide, global car. Rather, there are regionally based auto factories that are supported by local and regional suppliers who provide steel, plastic, paint, seats, tires, radios, and other necessary inputs for producing cars for that geographic region.
Additionally, the car designs that are popular in one area of the world are typically rejected by buyers in other geographic areas. The Toyota Camry that dominates the American auto market is a poor seller in Japan and does even poorer in Europe.20And the Volkswagen Golf, which does extremely well in Europe, has not made much of an impact in North America.
And pharmaceutical firms, which manufacture medicines that are often referred to as
“universal products,” have to modify their goods to satisfy national and state regulations, thus making centralized production and worldwide distribution economically difficult.21
In this book we are going to use examples throughout of what is happening in the international environment and show how an understanding of international business concepts can be useful to companies in addressing these developments. In many cases you will find that things you believed to be true are not. There is a great deal of misinformation about the world of international business. One of these misperceptions is that MNEs are giant corporations that are world dominant. In fact, their success comes most heavily from formulating and implementing strategies on a regional and local basis.
Maintaining economic competitiveness
During the 1980s US businesses saw some of their economic competitiveness eroded by Japanese and European competitors. By the mid-1990s, however, American firms had bounced back strongly and, despite a recession in the early 2000s, by 2004 the United States continued to be the most competitive nation in the world.22How did American companies manage to achieve and then maintain this international competitive advantage? One way was by continuing to be innovative. In the computer industry, for example, Intel’s research and development (R&D) arm created a continuing flow of new-age computer chips – each more powerful than its predecessor. And at the upper end of this market, IBM’s R&D Strategic alliance
A business relationship in which two or more companies work together to achieve a collective ad- vantage
prowess helped it capture more and more of the business demand for powerful computers, while at the lower end Dell Computer dominated the field with its high-quality PCs that were sold at rock bottom prices. In other industries as well, from industrial equipment to financial services and from shipping to entertainment, American companies led the way thanks to their ability to innovate. In looking more closely at these developments, a likely question is: Why are some firms able to innovate consistently while others cannot? Michael Porter of Harvard University has provided one of the best answers to this question. After conducting a comprehensive study of 100 industries in 10 countries, Porter found that the success of nations in international competition is determined by four broad attributes that individually and interactively determine national competitive advantage: factor conditions, demand conditions, related and supporting industries, and the environment in which firms compete.23These four determinants are briefly discussed below.
Factor conditions
According to basic international trade theory, a nation will export those goods that make most use of the factor conditions with which it is relatively well endowed. These factor conditions include land, labor, and capital. As a result, if a country has a large, relatively uneducated work- force, it will seek to export goods that are highly labor-intensive. On the other hand, if the workforce is highly educated, the country will seek to produce goods and services that tap the intellectual abilities of these people. However, there is more to international trade theory than merely capitalizing on these basic factors. To maintain a competitive position, a country must continually upgrade or adjust its factor conditions. For example, Denmark has two hospitals that specialize in studying and treating diabetes; Denmark also is a world leader in the export of insulin. By creating specialized factors and then working to upgrade them, the country has maintained its premier position in the health-care field. Similarly, the Netherlands, the world’s leading exporter of flowers, has created research institutes in the cultivation, packaging, and shipping of flowers. As a result, no one has been able to dislodge that country’s foothold in the international flower industry.
Factor conditions Land, labor, and capital
✔ Active learning check
Review your answer to Active Learning Case question 2 and make any changes you like. Then compare your answer with the one below.
2 How did Coke improve its factor conditions in Europe?
Coke’s factor conditions include land, labor, and capital. The company is using land and capital to build new bot- tling plants that are more efficient and better suited to meet market demand. It is working to improve the effect- iveness of the labor force by getting the personnel to become more market oriented and to sell the product more vigorously throughout Europe.
Demand conditions
Porter states that a nation’s competitive advantage is strengthened if there is strong local demand for its goods and services. This demand provides a number of benefits. First, it helps the seller understand what buyers want. Second, if changes become necessary, such as customer desires for a product that is smaller, lighter, or more fuel efficient, the local seller has early warning and can adjust or innovate for the market before more distant competi- tors can respond. In fact, the more sophisticated the local buyers, the greater the advantage to the local seller. For example, one reason that Japanese firms pioneered small, quiet
air-conditioning units is that many Japanese live in small houses and apartments where loud noise can be a problem. Japanese firms also developed units that were powered by energy-saving rotary compressors because customers complained that the price of energy was very high and they wanted a more fuel-efficient unit. Similarly, Sweden, long con- cerned with helping the disabled, has spawned a competitive industry that focuses on the special needs of these people, and Denmark’s environmental concern has resulted in Danish companies developing highly effective water-pollution control equipment and windmills. In the United States, consumers helped to develop a highly efficient fast-food industry, and as the desire for this cuisine spread worldwide, US franchisors like McDonald’s and Pizza Hut have been able to tap international demand for their products.
Related and supporting industries
Porter’s third major determinant of national competitive advantage is the presence of related and supporting industries that are internationally competitive. When suppliers are located near the producer, these firms often provide lower-cost inputs that are not available to the producer’s distant competitors. In addition, suppliers typically know what is happening in the industry environment and are in a position to both forecast and react to these changes.
By sharing this information with the producer, they help the producer maintain its competi- tive position. The Italian shoe industry is an excellent example. Shoe producers interact on a regular basis with leather manufacturers, exchanging information that is useful to each in remaining competitive. This interaction is mutually beneficial to both parties.24
Firm strategy, structure, and rivalry
Porter’s fourth broad determinant of national advantage is the context in which the firms are created, organized, and managed, as well as the nature of domestic rivalry. No one man- agerial system is universally appropriate. Nations tend to do well in industries where the management practices favored by the national environment are suited to their industries’
sources of competitive advantage. In Italy, for example, successful firms typically are small or medium sized; operate in fragmented industries such as lighting, furniture, footwear, and packaging machines; are managed like extended families; and employ a focus strategy geared toward meeting the needs of small market niches. Germany, in contrast, tends to have hierarchical organizations that emphasize technical or engineering content (optics, chemicals, complicated machinery) that demand precision manufacturing, a careful devel- opment process, after-sale service, and a highly disciplined management structure. In Japan, successful firms are often those that require unusual cooperation across functional lines and that demand management of complex assembly operations. Auto production, television manufacturing, and computer assembly are examples of such industries.
National goals are also important. Some countries want rapid results. Others tend to do best in industries where long-term development is valued more. In the United States, for example, investors like fast financial returns. So US firms are more likely to invest in new industries such as software and biotechnology where success can come quickly. In Germany and Switzerland, investments are held for long-term appreciation and are rarely traded.
These countries are more likely to invest in mature industries where ongoing investment in research and development and new facilities are important but return on investment is only moderate.
Another area of importance is domestic rivalry. Researchers have found that vigorous domestic rivalry and competitive advantage are related. Nations with leading world positions often have a number of strong, local rivals. For example, in Switzerland, the pharmaceutical firms Roche and Novartis help the country to maintain its internationally competitive edge.
In Germany, BASF and Bayer help the country to keep ahead in chemicals.
✔ Active learning check
Review your answer to Active Learning Case question 3 and make any changes you like. Then compare your answer with the one below.
3 How is local rivalry helping to improve Coke’s competitive advantage?
Coke faces strong competition in Europe. Europeans do not drink as much Coke as do Americans; drinks like coffee and tea are more popular. As a result, Coke has had to modify its strategy to address this market. This includes the building of new bottling plants that can help drive down costs and make the company more price-competitive, and new marketing campaigns that are designed to draw customers away from competing products. Coke is also working to develop non-carbonated drinks to address local tastes. Finally, competition from locals who better understand their market is forcing Coke to “think local, act local.”
Porter’s determinants as a system
As noted earlier, each of Porter’s determinants of international competitiveness often depends on the others. For example, even if a country has sophisticated buyers that can provide a company with feedback about how to modify or improve its product (demand conditions), this information will not be useful if the firm lacks personnel with the skills to carry out these functions (factor conditions). Similarly, if suppliers can provide the com- pany with low-cost inputs and fresh ideas for innovation (related and supporting indus- tries) but the firm clearly and easily dominates the industry (firm strategy, structure, and rivalry) and does not feel a need to upgrade the quality of its products and services, it will eventually lose this competitive advantage.
Research shows that of Porter’s determinants of competitiveness, domestic rivalry/
geographic clustering is particularly important. Domestic rivalry promotes improvements in the other three determinants and geographic concentration magnifies the interaction of the four separate influences.25 The box International Business Strategy in Action:
The Italian tile industryillustrates how these influences helped Italy develop a premier position in the ceramic tile industry.
A firm’s international abilities and competitiveness can also be described through a combination of firm-specific advantages (FSAs) and country-specific advantages (CSAs).
This theoretical framework is developed in Chapter 2. The Porter country diamond framework, discussed in this section, is an excellent framework to capture the CSAs. In Chapter 2, we will start to discuss the FSAs of the MNE. The CSAs and FSAs can then be combined into the matrix of Chapter 2. This becomes the building block for the book. For example, the CSAs will be explored in more detail in part two of the book (Chapters 4, 5, 6, and 7), which deal respectively with political, cultural, trade, and financial issues. These are all issues affecting the environment of international business. Then, part three of the book looks into strategies of the MNEs. These include how the firm develops FSAs in production, marketing, human resource management, political risk negotiation, and inter- national financial management.
Multinationals in action
In each chapter of this book we are going to provide examples of how MNEs are using the ideas that we have been presenting. In this first chapter we have examined the roles of importing, exporting, and FDI in international business, as well as discussing some of the things that MNEs have to do in order to create sustainable competitive advantage.
Here are examples of how three multinationals are using some of these ideas in their operations.
Volkswagen
Volkswagen (VW) is well known in the auto market, although like most MNEs it does much better in its regional market (Europe, where it has 71 per cent of its sales) than it does in other areas of the triad. North America, VW’s second largest market, accounts for just 17 per cent of total sales. The company’s VW and Audi brand groups collectively hold 18.2 per cent of the Western European new passenger car market and 4.8 per cent of the US market. In the last decade VW’s market share in both Europe and America has increased because the com- pany has been doing a number of things well. One is the use of innovative design. The top selling VW brands in the United States, for example, all have innovative features such as dash- board instruments like the speedometer and clock that light up in red at night, while those items that the driver touches, such as the radio, are backlit in blue. Commenting on these de- sign features, one auto researcher remarked, “It gives the vehicle some soul, which many of VW’s competitors lack horribly.”26A second factor accounting for VW’s success is its
The Italian tile industry
The Italian ceramic tile industry is an excellent example of how regional manufacturers can gain national, and even international, prominence. The heart of this industry is in Sassuolo near Bologna in northern Italy. Tile has been pro- duced here for over 700 years. So when Italy started rebuild- ing after World War II, the area began to flourish. Within 15 years the number of local tile companies had increased sevenfold and Sassuolo began to attract engineers and skilled workers.
At first the tile manufacturers had to import raw materials and machinery. There was no white clay in the region, so it was brought in from England. There were no tile equipment manufacturers, so kilns were purchased from Germany, the United States, and France; and presses for both forming and glazing tiles were bought overseas. However, the Italian tile producers soon learned how to modify the equipment to better fit their needs, and technicians began leaving the tile companies to set up their own equipment firms. By 1970 companies in the region were exporting tile kilns and presses.
At the same time, the local equipment producers were com- peting fiercely for the business of the tile companies, thus keeping down the cost of making tile; and supporting com- panies began to establish businesses in the Sassuolo region to offer molds, packaging materials, glazes, and transportation services. Specialized consulting companies soon emerged to give advice to tile producers on plant design, logistics, and commercial, advertising, and fiscal matters. The ceramic tile industry association, Assopiastrelle, started offering services of
common interest to the firms: bulk purchasing, foreign mar- ket research, and consulting on fiscal and legal matters. A consortium consisting of the University of Bologna, regional agencies, and the ceramic industry association was founded to conduct process research and product analysis.
While these developments occurred, Italian customers con- tinued to give the manufacturers feedback on product quality and ideas for innovative designs and features. This led to in- tense rivalry in the form of product offerings. At the same time the tile companies began working to improve their equip- ment and to lower their production costs. One result was a rapid single-fire process for tile making. This system reduced the number of workers by 60 per cent and cut the cycle time by 95 per cent, so more tiles could be made by fewer people.
This new equipment was also smaller and lighter than its pre- decessor and it found an eager international market. The manufacturers also developed a continuous, automated production system to replace the batch process and this, too, drove down costs and increased productivity.
Today the Italian ceramic tile industry is the world leader. In recent years Italy has accounted for 20 per cent of world pro- duction and 50 per cent of world exports.
Websites:www.italiatiles.comandwww.assopiastrelle.it.
Sources: Adapted from Michael J. Enright and Paolo Tenti, “How the Diamond Works: The Italian Ceramic Tile Industry,” Harvard Business Review, March–April 1990; www.assopiastrelle.it/welcome.html; and www.itse.com/exhibitor_pages/467.html.
INTERNATIONAL BUSINESS STRATEGY IN ACTION