General Electric(GE) is a multi national conglomerate in New York City. For decades, GE has been at the forefront of the move in shifting production offshore from high cost locations within U.S. to cheaper locations like China.
However, wage rates in China and other developing nations have been rising fast. This has closed the differences between costs in the U.S. and overseas. In terms of U.S. Dollars, wage rates in China were five times higher in 2012 than they were in 2020 and they are still rising fast.
This gap between Chinese and U.S. is further closing down with the rise in labor productivity in U.S. Furthermore, high oil prices have raised the cost of shipping products across oceans. On the other hand, there is so much of cheap natural gas in the U.S, which helps to lower production costs.
For example, considering GE’s Geo Spring Water Heater, it was originally designed in the U.S. and manufactured in China. This was then shipped back for sale in U.S.
However, in 2010, with the macro trends in labor productivity and energy prices, GE decided to see what would happen if it brought some of its appliance products back to U.S. With the Geo Spring being considered not easy to manufacture due to poor design, GE redesigned the product, eliminating about 25% of material costs. As a result, Ge could produce the product within 2 hours in U.S. in comparison to 10 hours in China. Thus, GE’s material costs and labor requirement went down and product quality went up.
Therefore, GE could reduce the price of Geo Spring by 20% than the Chinese Manufacturing cost and still maintain a profit margin. This improved the time to market too; reducing it from 5 weeks to a number of days. This led to improved inventory management too.
Thereby, now GE is trying to get the other productions also done in U.S. Accordingly, GE plans to have 75% of the revenue from American made appliances.
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Arthritis is a common progressive condition that can cause people pain, even limit their daily activities. Commonly, what we most often deal with is called osteoarthritis. This is a typically degenerative condition that is a breakdown of cartilage.
Along with that breakdown of cartilage, you tend to get a buildup of bone or some spurring of the bone. Osteo arthritis can be age-related, injury-related or genetic.
The most common place to develop the condition is the knee, hip, hands and feet. When you’re dealing with a painful joint a lot of times you make unnecessary or accommodations that can be debilitating or cause other injuries or harm to other joints. But, physical therapy can teach patients safe ways to stay active.
The best things for a joint that’s arthritic is for it to actually move. Some of the advantages of therapy and movement in general is that it helps infuse the joint with some synovial fluid which is like a natural lubrication.
In addition to teaching patients safe movements, physical therapy can also educate patients on appropriate footwear, braces and assistive devices. Usually you can’t fully get rid of arthritis. But, there are ways that you can either maintain your healthy lifestyle or improve it. Maintaining a safe and active lifestyle can help patients manage their arthritis and prevent a future injury.
There are natural things patients can do to minimize the pain without taking medication. The food we eat can increase the inflammation levels in our body.
So, therefore if we are able to follow an anti-inflammatory diet with more antioxidants, we can help control some of the symptoms of arthritis or inflammation antioxidants lower levels of inflammation throughout the body. The goal is to minimize the overall symptoms.
So, the ache and the pain from arthritis may have a lower dependency on some of the medications. Food that are high in antioxidants like blueberries, grapes and greens can help with joint inflammation. But, foods that are processed high in fat and high in sugar can keep your joints inflamed.
Not only do we need our blues and our purples, we need red, yellow, orange and green nutrients, so plant-based materials every day to a regular healthy diet can help with day to day pain and swelling. Eating blueberries one time isn’t going to make your knee feel better. It’s your habit of including a healthy diet high in antioxidants, low in inflammatory foods like high fatty processed meats or high sugar foods that overtime is going to help lower the inflammation in your body.
In addition to fruits and vegetables, health experts also recommend patients maintain an active lifestyle to help prevent joint stiffness.
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Considering a global value chain, companies should take every link in the chain and find the optimum location for it.
If a company that makes products requiring such components does not have a market share that is large enough to justify building a plant to make them, it is forced to outsource that component. But, if the company that has the plant is also a manufacturer of the end product, possession of the components is a strong barrier to entry to new competitors in the final product market.
However, some industries consist of independent businesses taking care of different parts of the supply chain. For example, in garment industry, various parts of the production of fabric are often done by different businesses and the garments finished in a cut, manufacture and trim plant. In this case, the garment themselves may be designed and marketed by other, totally independent businesses. And, each part of the business can be located wherever it makes most sense for the business.
Thus, businesses can find market niches at various points of the value chain and for various functions. Also, within the manufacturing part of the value chain, minimum cost operations will not always give competitive advantage because every business tries to generate some competitive advantage through differentiation.
Thereby, according to Hill and Hult (2017), an international firm should decide where to locate its production activities to best minimize its costs and improve product quality. Thereby, firms which engage in international production have to consider several factors like country factors, technological factors and production factors.
This includes political and economic systems, culture and relative factor costs. In this case, in some industries, the presence of global concentrations of activities at certain locations are required.
Also, externalities can play a major role in deciding where to locate production activities. For example, due to a cluster of semi conductor manufacturing plants in Taiwan, labor with experience in the semi conductor business have developed in Taiwan.
The same has happened in Hyderabad and Bangalore, in India where both Western and Indian companies have established operations. For example, locals refer to an area of Hyderabad as Cyberabad. This is the area where Microsoft, IBM, Infosys and Qualcomm have major facilities.
However, formal and informal trade barriers influence location decisions. Also, expected future movements in its exchange rate is another key country factor to consider. That is, adverse changes in exchange rates can quickly alter a country’s attractiveness as a manufacturing base. In simple, currency appreciation can transform a low cost location into a high cost location.
For example, the relatively low value of the yen on foreign exchange markets between 1950 and 1980 helped strengthen Japan’s position as a low cost location for manufacturing. More recently, the yen’s steady appreciation against the dollar increased the dollar cost of products exported from Japan. This made Japan less attractive as a manufacturing location. Therefore, many Japanese firms moved their manufacturing offshore to lower cost locations in East Asia.
In this case, firms should consider three key things; fixed costs, minimum efficient scale and the flexibility of technology.
Considering fixed costs, when there is a relatively low level of fixed costs, it is much economical to perform a particular activity in several locations at once. This permits the firm to better accommodate demands for local responsiveness. This helps the firm to avoid being dependent on one single location. Specially, being dependent on one location is very risky in the presence of floating exchange rates.
Considering minimum efficient scale, the level of output at which most plant level scale economies are used is known as the minimum efficient scale of output. Therefore, this is the scale of output that a plant must operate to realize all major plant level scale of economies.
Hence, the larger the minimum efficient scale of a plant relative to global demand, the greater the better to centralize production in a single location or limited locations. For example, the low level of minimum efficient scale in relation to global demand, for PCs makes it better for companies like Dell and Lenovo to assemble PCs in multiple locations.
Flexible manufacturing and mass customization is the next technological factor to be considered. Here the trade off is between unit costs and product variety. Accordingly, the way to increase efficiency is to limit product variety and produce a standardized product in large volumes.
The above view of production efficiency has been challenged by the rise of flexible manufacturing technologies or lean production. This covers a range of manufacturing technologies designed to
- reduce setup times for complex equipment
- increase the utilization of individual machines through better scheduling
- improve quality control at all stages of the manufacturing process
Thus, flexible manufacturing technologies allow the company to produce a wider variety of end products at a unit cost that could only be achieved through mass production. This indicates that mass customization is possible through flexible manufacturing technologies.
For example, Toyota’s flexible manufacturing system was developed by Ohno. The development begins with Ohno having completed 5 years at Toyota and visiting Ford’s U.S. plants.
Ohno identified several problems with mass production. First, massive inventory held up due to long production runs meant high costs for warehousing. Second, when the initial machine settings were wrong, long production runs resulted in the production of a large number of defects. Third, the mass production system was unable to accommodate consumer preferences for product diversity.
As a response to these identifications, Ohno developed a number of techniques to reduce setup times for production equipment. This made small production runs economical resulting in lower warehousing costs. Waste was also reduced. With all of these innovations, Toyota could produce a more diverse product range at a lower unit cost.
Another flexible manufacturing technology that is common is flexible machine cells. This is a grouping of various types of machinery, a common materials handler and a centralized cell controller. A typical cell is dedicated to the production of a family of parts or products. The settings on these machines are computer controlled and allows each cell to switch quickly between the production of different parts or products.
Through flexible machine cells, setup times are reduced and the production flow is coordinated by the computer. This eliminates bottlenecks and improves capacity utilization. Also, the tight coordination between machines also reduces work in progress. Adding on top of them, waste is reduced because of the ability of computer controlled machinery to identify ways to transform inputs to outputs while producing minimum waste.
Apart from improving efficiency and lowering costs, flexible manufacturing technologies enable companies to customize products to the demands of small consumer groups. Thus, mass customization can be achieved.
For example, Ford’s introduction of flexible manufacturing technologies enabled Ford to produce multiple models from the same line and to switch products from one model to another much quickly than in the past.
In this case, product features, locating production facilities and strategic roles for production facilities are key things to be considered.
Considering product features, first the value to weight ratio affects the location decision because of its influence on transportation costs. For example, electronic components and pharmaceuticals have high value to weight ratios. Therefore, there is high pressure to produce them in optimal locations and to serve the world from there on.
The choice of whether the product serves universal needs, also influences the location decision. If there are few national differences in consumer taste and preference for such products, the attractiveness of concentrating production at an optimal location increases.
Accordingly, for locating production facilities, a firm can either concentrate them in a centralized location and serve the world market from there, or decentralize them in various regional or national locations that are near to major markets.
The correct strategy of the two will be based on country specific, technological and product factors. Accordingly, concentration of production makes most sense in the following circumstances.
- Differences among countries in factor costs, political economy and culture have a substantial impact on the costs of manufacturing in various countries.
- Low trade barriers
- Externalities arising from the concentration of entreprises favor certain locations.
- Important exchange rates are expected to remain relatively stable.
- Presence of high fixed costs and high minimum efficient scale relative to global demand.
- Presence of flexible manufacturing technology.
- High product’s value to weight ratio.
- Product serves universal needs.
Another factor to consider in location decisions include global learning. This means that valuable knowledge does not reside in a firm’s domestic operations; it may be found in foreign subsidiaries. In simple, foreign factories upgrade their capabilities over time. This creates valuable knowledge.
These foreign factories can have a number of strategic roles like offshore factory, source factory, server factory, contributor factory, outpost factory and lead factory.
Offshore factory is a factory that is developed and set up mainly for producing component parts of finished goods at a lower cost than producing them anywhere else. In such factories, investments in technology and managerial resources should ideally be kept to a minimum, in order to achieve greater cost efficiencies. But, some strategic decisions are expected to include input from the offshore factory personnel.
Source factory is one that drives down costs in the global supply chain. In this type of factory, the managers have a say in certain decisions like purchase of raw materials and component parts. Thereby, these factories should be located where production costs are low and infrastructure is well developed. It should also be relatively easy to find a knowledgeable and skilled workforce to make the products.
A server factory is a factory which supplies a specific country or regional markets around the globe. This type of factory is usually to setup to overcome intangible and tangible barriers in the global market place. Also, managers at a server factory usually have more authority to make minor customizations to satisfy their customers.
Considering a contributor factory, this factory has more choice in terms of which suppliers to use for raw materials and component parts. This type of factory has its own infrastructure when it comes to development, engineering and production. Therefore, this type of factory is more of a standalone one.
The next type, outpost factory is an intelligence gathering unit. This is often placed near a competitor’s headquarters or main operations, near the most demanding customers or key suppliers of unique and critically important parts.
A lead factory is intended to create new processes, products and technologies that can be used throughout the global firm in all parts of the world. A lead factory should set a high bar for how the global firm wants to provide products to customers. Therefore, it should be located in an area where highly skilled employees can be found. This implies that managers and employees at the site have a direct connection to suppliers, the designs implemented and other core competencies of the firm.
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When profits are generated from brands rather than products in a competitive global market, brand acquisition may be the best way to increase profits. This is mainly because the process of developing global brands is slow. A way of shortening it is to acquire existing brands.
For example, TCL which had established itself as a well-known brand in its domestic market, it realized that in order to survive abroad, it has to purchase an international brand. This was also partly because high level of domestic competition is what drove TCL to expand abroad if it wished to survive.
Considering TCL, TCL is a Chinese conglomerate with a broad range of audio-visual products, white goods, PCs and electrical equipment. TCL expanded into emerging markets like Vietnam, Phillipines and Chile with its own brand. But, its expansion into the European market has been through brand acquisition and licensing.
TCL has along term plan to replace these international brands with TCL. Some of the strengths to do this include the position of TCL brand in China. In China, the TECL brand is positioned in the mid to high end of the market. Thereby, TCL enjoys an image of trust and reliability.
In international markets, TCL follows a multi product brand strategy which involves first and second tier branded goods. This is mainly because its core competencies include branded electronic goods manufacturing, product development and service provision.
Thus, TCL evolved from selling to other emerging markets using its own brand, to an original equipment manufacturer in the U.S. in terms of brand acquisition, to acquisition and joint ventures in Europe via combination of brand acquisition and licensing.
TCL entered into U.S through brand acquisition because of the bad experiences of other companies like Konka and the desire to upgrade skills through forced compliance with U.S. regulations.
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The core of Vestel’s business is to design and manufacture products on a contract basis. This firm does not plan to compete in the European market with its own brand. The main competencies of this firm include assembly, outsourcing, logistics. Vestel is a supplier of B-market consumer electronics. They target the brand owners and retailers.
Vestel is successful in competition with Chinese television manufacturers because of the flexibility of manufacturing, delivery costs and delivery items. Considering Vestel’s desire to enter Europe, Vestel with an operating profit margin of 7.8% may find it hard in Europe. Considering the productivity, it is higher in Turkey than in China, but there are labor cost differences which do not give a competitive advantage of entering Europe.
Also, since majority of TV sales are for flat screen technology, there should be a reliable source of flat screens and controls. So, delivery times should be cut from 1.5 to 2 months to 1-2 weeks or a Chinese competitor should build a plant in or closer to Europe.
An alternative will be to build or acquire a brand or brands in the A market and gain the earning from the brand, rather than from the manufacturing process.
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Elixir technology’s main product is Elixir Report which is designed for both software developers and end-users. This product forms part of the reporting function for customer companies. The core competencies of Elixir include code writing in Java, adaptation of the product for different languages and cultures and professional support service provision.
Elixir mainly serves a broad spread of companies, from small to large including software developers, governments as well as companies. Elixir localized its products by translating its software into customers’ languages. Furthermore, Elixir software is aligned with the cultural context without being specific what that means.
The localization of Elixir software was done by developing their own understanding of the market or partnering with somebody who already understands the cultural context. Also, Elixir occupied a niche in flexible reporting software, customized to local markets. This was done by using a product that was 50% cheaper than its competitors.
Elixir’s customers were IT directors of companies and government departments. However, Elixir did not follow cost leadership and differentiation across the market. Yet, the feature of bi-directional text writing seems to have given it one unique part of the market.
Elixir’s strategy was to be cheap and differentiated. With this, the need for cost competitiveness and localization was also seen. Thereby, they used a multi domestic strategy.
Elixir’s entry into the international market, specially to Japan was made possible through its initial partner who was able to communicate in English and was already selling complementary products. The firms were sensitive to the local market and therefore used own branding.
However, Elixir was less successful in China. This is mainly because Chinese partners wanted something for nothing. Thereby, when trying to enter Middle East, Elixir wants an active partner.
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HIV is a tiny virus carried in the blood in male and female sex fluids. HIV infected fluids can enter a person’s body through breaks in the skin and enter the blood.
Tiny poly cells are present in the blood to protect a person from germs that cause infections such as TB and flu. These poly cells are called CD4 cells. HIV harms the body by attacking the CD4 cells and making the body more prone to other illness causing germs.
The good news is that a person with HIV who lives a healthy lifestyle, gets regular medical care and takes medication, can live for 25 years or more after infection. However, the individual who fails to take these steps will experience a series of infections; lose weight and usually die within 10 to 12 years.
A person who has HIV but does not get treatment by a doctor or nurse will go through the following stages.
Acute HIV infection at some time during the first month or so. After HIV enters the body, the person may have a flu-like illness. Symptoms may include fever, a tea rash headache, swollen lymph nodes and sore throat.
Some people have no symptoms at all. The viral levels at this time are very high because at first, the body is unable to fight the virus. During this time, the HIV antibody test is negative. This is called the window period.
Within about one to two months, the body begins to produce antibodies to fight the virus and viral levels drop. The rapid HIV antibody test detects these antibodies.
A blood test can be done in the hospital or clinic to measure how many CD4 cells a person has. This test is called the CD4 count. During this time of acute HIV infection, the CD4 count goes from a normal level of 1200 down to about 900.
The viral levels at this time are very high because at first the body is unable to fight the virus within about one to two months. The body begins to produce antibodies to fight the virus and viral levels drop after the initial infection.
The body can effectively fight the HIV for about five years. This period is called stage 1. During this time, the CD4 poly cell levels drop from about 900 to 500.
At the same time, the HIV levels in the blood slowly rise. Although generally symptom-free, a person in this stage can still pass the virus on to others from about six to nine years.
After infection, a person is in stage two of HIV infection. During this phase, the CD4 count may go down from about 500 to 350. At the same time, the HIV levels in the blood slowly rise, swollen glands appear in the neck, armpits or in the groin. A person may feel weak and tired and experience fevers and weight loss.
The number of CD4 cells is now so low that other germs that cause infections find it easier to invade the body. This makes it so prone to coughs and colds, skin rashes, shingles, fungal nail infections. And, mouth sores become more common in this stage.
After about nine to eleven years of HIV infection, the CD4 count drops below 350 and the person enters stage 3. HIV viral levels continue to increase. In addition to all areas, sometimes listed a person may have abdominal pain, ongoing diarrhea, cough and headaches.
Additionally, painful blisters of the mouth or genitals may happen again and again within about 11 or 12 years of HIV infection. Without medical treatment, a person enters stage four.
Another name for stage 4 is AIDS. The CD4 count drops below 200 and the body begins to lose its long battle against HIV. Viral levels are high in the blood. Severe life-threatening infections or care in this stage.
ARVs work better if started before the later stages of HIV. The decision of when to start ARVs is made by your health care provider. These can dramatically reduce the HIV in the blood.
Other medicines may be prescribed to prevent and treat other infections such as TB. It is very important that once ARVs are started that they are taken as directed. If doses are missed or the ARV stopped entirely, the ARVs may stop working against the HIV in the future. The good news is that ARVs can give a person many more healthy years of life.
HIV tests used to take weeks. Now, it’s just a minute.
Three little vials and a drop of blood is all it takes. For a clear diagnosis, a community clinic performs 9,000 HIV tests on people a year. In Canada, the demand is as strong as ever and getting these kits on pharmacy shelves and in people’s hands could meet the need.
A real option of a fast test but also a private test and something they can get outside the health authorities. According to research and health institutes, Canada’s HIV numbers aren’t going down, there’s a new diagnosis every four hours. It’s an infection rate similar to the European Union’s.
But, Canada is falling behind high-income countries like Germany, Sweden and Australia and some Canadians are more vulnerable than others. Black and indigenous people are less than 9% of Canadian population. Yet, they make up almost half of new HIV cases.
Experts estimate as many as a quarter of people with HIV have not been tested for it. Stigma is part of the problem. People don’t want to go to a overcrowded sexual health clinic to get tested.
People still fear facing homophobia from their doctor. These things can be addressed with a home self testing kit inside your self testing kit. That’s why the European Union approved the same take home tests for sale three years ago.
Health Canada wants clinical trial evidence from Canada before it does the same. The researcher heading that trial says Canada is playing catch-up not just in approving the tests for sale but in attitudes towards HIV self testing.
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Firms can use 6 different modes to enter a foreign market. Each entry mode is both advantageous and disadvantageous. By comparing each of them, managers need to decide the best mode of entry.
This mode of entry avoids substantial costs of establishing manufacturing operations in the host country. Also, it may help achieve experience curve and location economies.
Furthermore, by manufacturing the product in a centralized location and exporting it to other national markets, the businesses may realize substantial economies of scale from its global sales volume.
However, if lower cost locations for manufacturing the product are found in the host country, exporting will be a failure. Therefore, manufacturing must occur in a place where the mix of factor conditions are most favorable from a value creation perspective. Thereafter, the products can be exported from that location.
For example, many U.S. electronic firms have moved some of their manufacturing to the Far East due to the availability of low-cost, highly skilled labor. They then export to the rest of the world.
Another problem with exporting is the high transport costs which can make exporting uneconomical, specially for bulk products. One way to solve this is is to manufacture the required bulk products regionally. Thus, they can realize economies of scale.
But, there is also the tariff drawback. That includes the tariff barriers which can make exporting uneconomical. Also, with exports the distribution company may not provide a good service as the manufacturer.
The main solution for these problems are to set up wholly owned subsidiaries in foreign nations. They will handle the local marketing and sales .
In this type of entry, the contractor agrees to handle every detail of the project for a foreign client. At completion of the contract, the foreign client is handed the ‘key’ to a plant that is ready for full operation.
Thus, turnkey projects are a means of exporting process technology to other countries. These are most common in the chemical, pharmaceutical, petroleum refining and metal refining industries.
This entry mode is beneficial because it is a way of earning great economic returns from the technology and know how. This is specially beneficial when FDI is limited by host government regulations.
However, this entry mode can be risky specially under unstable political and economic environments. But, since most of the firms that enter in this way do not have a long term interest in the foreign country, it can be both beneficial and disadvantageous.
The next problem with this entry mode is that the firm that enters in this manner may create a competitor. For example, most of the Western firms that sold oil-refining technology to firms in the Middle East, now find themselves competing with these firms in the world oil market.
Also, if the firm’s process technology is a source of competitive advantage, then selling this technology through a turnkey project means also selling competitive advantage to potential competitors.
This is an arrangement where a licensor grants the rights to intangible property, to another entity (licensee) for a specified period. In return, the licensor receives a royalty fee from the licensee.
For example, Xeros licensed its xerographic know how to Fuji Xerox. In return, Fuji Xerox paid Xerox a royalty fee equal to 5% of the net sales revenue that Fuji Xerox earned from the sales of photocopiers based on Xerox’s patented know how.
The key benefits of this entry mode is that, the licensee puts up most of the capital necessary to get the overseas operation going. Therefore, the firm doesn’t have to bear the development costs and risks associated with opening a foreign market.
Therefore, this entry mode is very attractive for firms lacking the capital to develop operations overseas. It is also attractive when a firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market.
This entry mode is also used by firms that wish to participate in a foreign market, but are prohibited from doing so, due to barriers to investment. This is one major reason behind Fuji Xerox.
That is, Xerox wanted to participate in the Japanese market. But, it was prohibited from setting up a wholly owned subsidiary by the Japanese government. Therefore, Xerox set up the joint venture with Fuji and then licensed its know how to the joint venture.
Another instance in which licensing is used is when a firm possesses some intangible property that might have business applications, but they do not want to develop those applications themselves.
For example, Bell Laboratories at At&T originally invented the transistor circuit in the 1950s. But At&T decided that it did not want to produce transistors. So, it licensed technology to a number of other companies such as Texas Instruments.
Similarly, Coca Cola licensed its trademark to clothing manufacturers. Harley Davidson licenses its brand to Wolverine World Wide to make footwear.
However, licensing has several drawbacks. First, licensing does not give a firm the tight control over manufacturing, marketing and strategy that is required to realize experience curve and location economies. This is because, in this entry mode, the licensee sets up its own production operations.
Also, licensing limits a firm’s ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another.
Next, when technological know how is licensed, a firm can quickly lose control over its technology. For example, RCA corporation once licensed its color TV technology to Japanese firms including Sony and Matsushita. These firms quickly assimilated the technology, improved on it and entered the U.S. market.
This problem can be minimized by entering into a cross licensing agreement with a foreign firm. This is where valuable intangible property is licensed to a foreign partner. In this case, in addition to a royalty payment, the firm also requested that the foreign partner license some of its valuable know how to the firm.
Thus, cross licensing enables the firms to hold each other hostage. This reduces the probability that they will behave opportunistically towards each other.
Also, the risk of licensing can be reduced by linking an agreement to license know how with the formation of a joint venture in which the licensor and licensee takes important equity stakes.
This is similar to licensing. However, in this there are long term commitments than licensing. This entry mode is specially a form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchisee agrees to abide by strict rules.
This entry mode is primarily used by service firms. For example, Mc Donalds.
With this mode of entry, firms are relieved of many costs and risks of opening in the foreign market on its own. But, franchising may inhibit the firm’s ability to take profits out of one country, to support competitive attacks in another.
Also, there is a problem of quality control. However, this can be sorted by setting up a subsidiary in each country in which the firm expands. Then, the subsidiary will have the rights and obligations to establish franchisees in that country.
This entails establishing a firm that is jointly owned by two or more other independent firms. The key benefit of this is that firms benefit from the local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems and business.
Also, when the development costs of opening a foreign market are high, a firm might gain by sharing these costs or risks with a local partner. Furthermore, in many countries, political considerations make joint ventures the only feasible entry mode.
Based on research, joint ventures with local partners face a low risk of being subject to nationalization or adverse government interference. This is mainly because local equity partners may have some influence on host government policy.
However, a firm that enters into a joint venture risks giving control of its technology to its partner. However, joint venture agreements can be constructed, to minimize these risks.
- Hold majority ownership in the venture, which allows the dominant partner to exercise greater control over its technology. Yet, it is difficult to find a foreign partner who is willing to settle for minority ownership.
- “Wall off” from a partner technology that is central to the core competence of the firm, while sharing other technology.
Another problem with joint ventures, is it does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Further, it does not give a firm the tight control over a foreign subsidiary, which might be needed to engage in coordinated global attacks against its rivals.
For example, when Texas Instruments established semi conductor facilities in Japan, the main aims were to check the Japanese manufacturers’market share and then limit their cash available for invading the global market. They used global strategic coordination.
To implement this strategy, TI’s subsidiary in Japan had to be prepared to take instructions from corporate head quarters regarding competitive strategy. This strategy also required the Japanese subsidiary to run at a loss if necessary.
Also, the shared ownership arrangement in joint ventures lead to conflicts and battles for control between the investing firms in most cases. Such conflicts are usually triggered by shifts in the relative bargaining power of venture partners. However, these problems have been limited by some joint ventures by entering into joint ventures in which one partner has a controlling interest.
Wholly owned subsidiaries
In a wholly owned subsidiary, the firm owns 100% of the stock. This can be done in two ways.
- Set up a new operation in that country(greenfield venture)
- Acquire an established firm in the host nation and use that firm to promote its products
One advantage of this entry mode is, when a firm’s competitive advantage is based on technological competence, this mode reduces risk of losing control over that competence.
Also, this entry mode gives a firm tight control over operations in different countries, which is usually required to engage in global strategic coordination.
Next, this entry mode allows realization of location economies and experience curve economies. It even gives a firm 100% share in the profits generated in a foreign market.
However, this is the most costly method of serving a foreign market, in terms of capital investment. This is because the firm must bear the full capital costs and risks of setting up overseas operations.
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Global strategies are usually multi-dimensional. They can include a variety of levers depending on the company and its situation. A global strategy network that has been used extensively for a couple of decades is the framework presented by George Yip and Tomas Hult in Total Global Strategy(2012).
This framework includes 5 levers that drive the locality or globalness of the company.
This involves the choice of countries in which to operate and the level of activity that the company decides to engage at in each country.
This involves the extent to which a multi national business offers the same or different products or services in different countries.
Supply chain management
This involves choosing where to locate each of the operational activities that constitute the supply chain.
This involves the extent to which a multinational business uses the same marketing mix
This involves the extent to which a multi national business makes competitive moves in different countries as part of a global competitive strategy.
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According to Achilles, when competitors emerge, if managers do not take steps to reduce their costs, efficient global competitors might outride them.
For example, let us consider the evolution of international business strategy at Procter and Gamble(P&G).
P&G was founded in 1837. Today, P&G has annual sales in excess of $80 billion, out of which about 54% are generated outside the U.S. P&G sells more than 300 brands like Tide, Pampers, Crisco to about 180 countries.
Initially, P&G developed new products in Cincinnati and relied on semi autonomous foreign subsidiaries to manufacture, market and distribute those products in different nations.
In many cases, foreign subsidiaries had their own production facilities and did the packaging, brand name, marketing message to local tastes and preferences. For years, this strategy delivered a steady stream of new products and reliable growth in sales and profits.
By 1990s, profit growth at P&G was slowing. This was mainly because the costs were too high due to duplication of manufacturing, marketing ad administrative facilities in different national subsidiaries.
For example, products produced in Great Britain could not be sold economically in Germany due to high tariffs on imports into Germany. Also, retailers who bought from P&G, like Walmart, Tesco, were demanding for low prices since they were growing.
Thereby, in 1990s, P&G embarked in a major reorganization in order to control its cost structure. About 30 manufacturing plants were shut around the globe and 13000 employees were laid off. With this being not successful enough, P&G launched another re-organization with the goal of Örganization 2005″”.
In this new re-organization, the company replaced the old organization which was based on countries and regions and replaced it with one based on seven self contained global business units, ranging from baby care to food products.
Each business unit rationalized production, concentrating in fewer larger facilities, trying to build global brands wherever possible. This eliminated marketing differences between countries and accelerated development and launch of new products. In the meantime, the costs savings from the factories they closed and employee lay offs, were used to reduce prices and increase spending on marketing. This strategy worked out.
For most of the 2000s, P&G reported strong growth in both sales and profits. Significantly, P&G’s global competitors like Unilever, Colgate were struggling during the same period.
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