The History Of Multidomestic Strategies

Published Date: 02 Nov 2017

The question arises when once the firm decides to enter a foreign market as to the best mode of entry. There are six different modes to enter a foreign market which are exporting, turnkey projects, licensing, franchising, setting up joint ventures with a host country firm and setting up a new wholly owned subsidiary in the host country. There advantages and disadvantages in each modes whereby managers need to take in account when making decision which one to use. (Hill, 2005)

2.1 Exporting

Most manufacturing firms start their international expansion by exporting and only later change to another mode for serving a foreign market. The advantages of exporting, avoids often-substantial costs of setting up manufacturing operation in the host country. Exporting also may help a firm to achieve location economies and experience curve. The firm may realise substantial scale economies from its global sales volume by manufacturing the product in a centralized location and exporting it to global other national markets. The disadvantage of exporting arise when a firm pass on its sales marketing, and service in each country where it does business to another firms. This is a usually approach for manufacturing firm that just started to expand internationally. The treat of tariff barriers by the host-country government can also lead to uneconomical and risky exporting. Besides that, if there are lower-cost location economies for manufacturing the product aboard, exporting from the firm’s home base may not be appropriate. (Hill, 2005)

2.2 Turnkey Projects

In turnkey projects, firms usually specialize in construction design and start up of turnkey plans are very common in some industries. Turnkey projects are most common in the pharmaceutical, chemical, metal refining industries and petroleum refining, of all which use expensive, complex production technologies. Advantages of turnkey project are to assemble and run a technologically complex process such as refining steel or petroleum is a valuable asset. To make a great economically return from that asset, turnkey project is the way to earn it. In country which has political and economical instability, a long-term investment may expose the firm to unacceptable political or economical risk. If that country consequently proves to be a main market for the output of the process that has been exported, this could be a disadvantages. Besides, the firm go into a turnkey project with foreign firm venture might unintentionally create a competitor. (Hill, 2005)

2.3 Licensing

According to Kotabe & Helsen (2001), "licensing is a contractual transaction where the firm the licensor offers some proprietary assets to a foreign company the licensee in exchange for royalty fees". Example some asset that can include in a licensing agreement which is patents, trademarks and production processes. The advantage of licensing for companies is to be profitable means for making a way through foreign markets. On the company’s resources, licensing is not demanding therefore it is appealing to small companies with lack of resources and the means to invest in foreign facilities. To reduce their exposure to political and economic instabilities in their foreign markets, some companies use licensing as their global expansion strategy. The disadvantage, when licensing agreement consists of trademark, there is a risk also that wrong moves made ​​by the licensee tarnish the trademark covered by the agreement. Other risk includes failure to produce in a timely manner, not getting paid and loss of control of the marketing of the products.

2.4 Franchising

In the global marketplace, franchising is used by service industry companies to capture opportunities. Franchising is related to licensing. In an agreement of franchising, the franchisor gives the franchisee the right to use franchisors’ trademarks and trade names. The advantage of franchising is clear. With a minimum of investment, companies can take advantages on a winning business strategy by expanding overseas. Political risk for the rights-owner a very slim just as with licensing. Franchisees are highly motivated because profits are tied to their efforts. By capitalising on the local franchisees’ knowledge of the local market place, the franchisor will have more understanding of laws and local customs than the foreign firm. The disadvantage of franchising is firm with no recognition will face a big challenge finding partners that are interested in the foreign market. Finding suitable franchisees can be a problem in many markets. In some countries, franchising as a business model is not understood. This is because there is lack of control over the franchisees process.

2.5 Joint Ventures

In the host country, foreign companies agree to share equity and other resources with other partners to set up a new entity. These partners are local companies whereby there also can be local government, a blend of local and foreign companies or a foreign company. (Hill, 2005) The advantage of joint venture compared to licensing is the return potential. Joint venture has more control over operations than any other modes. In much country, the local government forbid wholly owner ventures in particular industries. Under such situation, joint ventures are the temporary solution. These inputs, combined resources and foreign partners’ skill are the key to successful market entry. Conflicts can occur in resources allocation, strategies, transfer pricing, brand names and ownership of technologies. In many cases, the conflicts begin in the beginning of the joint venture. When trouble weakens the joint venture, partners can try to solve the conflicts through mechanisms built the agreement. The joint venture will be dissolved or scaled back if equal acceptable resolution has not been achieved.

2.6 Wholly Owned Subsidiaries

The firm owns 100 percent of the stock in wholly owned subsidiaries. The firm can establish a new operation in foreign country. It can acquire establish firm in host country and use that firm to promote its products or the firm can establish a new establish a new operation in that country. Fully owned enterprises allow the foreign investor to control and manage its tasks and process in production, marketing, sourcing decision and logistics. It send strong commitment signal to the local market by establishing fully owned subsidiaries also. With local companies that will takes years of negotiations before their final takeoff in some markets, wholly owned subsidiaries can be constructed much faster than joint ventures. The disadvantages of wholly owned subsidiaries, the risk of complete ownership cannot easily to be reduced because full ownership meaning that the parent firm will have to carry the possible losses and burden. On the firm’s resources, developing a foreign firm without the help of third party is very demanding.

3.0 Review of International Business Strategies

3.1 International Strategies

 International strategy also known as home replication strategy of home based competencies like distribution, production sales and brand power. In international strategy the firm in its home country usually centralized product development function. Firm sees international business as its domestic business and opportunity to generate sales for domestic product lines. When a firm purses an international strategy, it replaces competencies it enjoys in the host country in its expansion into foreign market. The advantages of international strategies is firm could reduce the production cost beginning of the investment subject to the R & D and centralization of product. Firms often connect to international strategy as it firstly expands into foreign markets subject to its easy implementation and low cost. The disadvantage of this strategy is within in the international strategy, a firm most likely alter its structure to add and international division. This international division is separate from exporting, franchising, and licensing which can cause critical problems. (Hoang, 2013)

3.2 Multidomestic Strategies

3.3 Global Strategies

There are many advantages and disadvantages when large and small multinational firms turning into a global business. With the era of technology, it allows business to be global operation. For example, even a small business can have consumers in every different part of the world. With different country and different culture that have difference tastes and preferences what are selling in one part of the world might not be selling in another part or the world. But still there are some firms who pursuing a global strategy selling the same product all around the world. Example for the firm is Coca Cola. The advantage of global strategy is that it allows firms to leverage economics of scale. When the firm sells the products all around the world, they can buy the product’s raw materials in bulk and potentially they are saving large sum of money. Global strategy is also useful in the matter of product life cycle. A firm can eliminate the release of products with the introduction of older products saving the launch of the latest version of a product for well developed markets. Disadvantage of using global strategy is that markets that have certain tastes or preferences are more sensitive to pricing. If the firm estimates wrongly the mistake could make the firm to lost large sum of money. (O'Farrell, 2013)

3.4 Transnational Strategies

4.0 Recommendation

5.0 Conclusion