Global Strategy
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1) With respect to a high dispersion, high coordination strategy, a company is likely to be a “global scanner” whose product has high globalization potential and economies of scale which might not lend themselves to production in a few areas. Therefore, the typical product life cycle approach, an incremental sequencing of exporting at arm’s length from the home country to sales/service subsidiaries and later additional production facilities in dispersed locations, might not be the best approach. Rather, a high-commitment entry mode should be utilized because of the degree of control a company would have with respect to the consistency of a product in terms of various characteristics such as marketing/branding or distribution. An example of a highly dispersed, highly coordinated company is McDonalds, which tends to enter markets with higher levels of commitment (e.g. Russia) in the form of wholly owned stores and capital investment in distribution.
2) When distribution channels differ across countries and transportation costs of very high, a company is likely to lose the economies of scale and cost savings that come from a low dispersion strategy. Therefore, a higher dispersion strategy is needed. With regard to distribution channels, a company’s coordination needs may differ depending on its requirement for product quality. For example, to ensure its products (assuming production is dispersed) are created/distributed efficiently and with high quality, a company may need to adopt a higher coordination strategy despite the disparate distribution channels across countries. A company might also consider that because its home distribution expertise would not be successfully implemented in other countries, a lower coordination strategy would give more autonomy to other markets as to distribution.
3a) The following chart shows the number of parts each supplier should produce in order for IKEA to satisfy the local content rule AND minimize cost:
SCENARIO 1
A (trade bloc)
B (non trade bloc)
Total
Cost per part
$ 0.50
$ 0.10
Price to IKEA
$ 0.60
$ 0.12
Parts
24
76
100
$ 14.40
$ 9.12
$ 23.52
Content %
100%
3b)
SCENARIO 2
A (trade bloc)
B (non trade bloc)
Total
Cost per part
$ 0.50
$ 0.10
Price to IKEA
$ 0.60
$ 0.22
Parts
36
64
100
$ 21.60
$ 14.08
$ 35.68
Content %
100%
In Scenario 2, if IKEA includes the transportation cost of country B in its pricing, it will be raising the price per part of its non-trade bloc parts. This will harm the comparative cost advantage of importing from country B and therefore increase the number of parts which must be bought from country A. The net result is that the total cost of Scenario 1 would be $23.52, plus the shipping cost of $0.1 for 76 �B’ parts, or $7.60, for a total of $31.12, versus $35.68 in Scenario 2. Therefore, IKEA should not include transportation cost for country B in the calculation of the local content rule.
4a) Licensing agreements have the following advantages:
Licensing allows a firm to circumvent trade barriers or regulations that may prevent export or the establishment of a wholly owned subsidiary in the host country
The firm/licensor is able to enter the market more rapidly if it were to acquire another firm or start its own distribution network to export from the home country
A firm can achieve higher returns on investment because licensing requires very little capital investment
Acquisitions are advantageous for these reasons:
A firm can attain instant market share through acquisitions
Acquiring a company could allow for economies of scope, allowing the combined company to offer a broad array of products/product bundles or new side products
A firm can move up on the learning curve and develop expertise in acquiring and integrating future acquisitions
Exporting is advantageous because:
A firm can take advantage of economies of scale nurtured in the home market, especially if products are standardized
Minimizes risk and capital investment in a new market
A firm may be able to take advantage of home country advantages in terms of industry/product reputation and branding
4b) Licensing agreements
– Haagen-Dazs entered the Canadian market in 1982, in part to increase its attractiveness to potential acquirors as an international company, but also because of Canadian dairy trade regulations which would complicate matters if Haagen-Dazs wanted to open its own production facilities in Canada
– Haagen-Dazs continued its international expansion in 1983 by licensing to Pinedale of Hong Kong and Singapore. In a market that Haagen-Dazs did not know well (especially in contrast to the closer Canadian market), this was very important, and very successful
– McDonalds achieves much higher returns on its franchisees because its capital investment in those restaurants is minimal
Acquisitions: Santander/BBVA
– These banks were able to attain instant market share in a fragmented market. To do so de novo would have been difficult, expensive and time consuming
– After acquiring Latin American banks, Santander/BBVA were able to offer special products which would do well in that market, such as lottery accounts and pension management
– After initial acquisitions, the Spanish Conquistadors demonstrated increasing adeptness and were able to consolidate the Latin American banking