Chapter 7: Multinational Formation

Keith HeadSauder School of

Business

The “take-away” for this chapter

• Chapter 7 asks “Where should we do the things we do?”– At home: the country where top mgmt

is based.– Abroad: offshore, overseas, in a foreign

country • The answer: “It all depends on the 4

elements of MN strategy: trade costs, factor advantages, PLEoS, market sizes.”

Nestle

IBM worldwide

LG Electronics (part of LG Group, formerly Goldstar

Electronics)

Levels of Multinational Strategy

• Who is the we in “Where should we do it”?– An individual business unit business

strategy– A collection of business units under the

same ownership corporate strategy– A collection of business units linked

through a mix of equity ties and long term contractual arrangements network strategy

Multinational (single) “Business” Strategy

Home Country Foreign Country Home Centralization

(Exporting)

Replication

Foreign Centralization(Importing)

H-form

F-form

R-form

Examples of Centralization

• Home Centralization:– Boeing commercial aircraft assembly in

U.S. (mainly Seattle)– Airbus commercial aircraft assembly in EU

(mainly Toulouse)

• Foreign Centralization:– Mattel’s Barbie dolls (2 factories in

Dongguan, China +1 in Malaysia +1 in Indon.)

– Matsushita’s TVs (Malaysia)

Boeing’s Everett Factory:the largest building in the world

(472 million cubic feet of space )

Boeing’s Everett Factory:sole location of 747 assembly

Boeing’s 747

Nestle, the Replicator

Area Sales

Factories

Employees

Americas 40% 32% 41%

Europe (Switz.)

40%(1.6%)

41%(1.8%)

34%(2.6%)

Asia, Africa & Oceania

20% 27% 25%

254,000 Employees in 508 Factories in 85 Countries(2002 Management Report)

Critical Foreign Market Size to Justify Overseas “Replication”

Critical Distance to Justify Overseas “Replication”

At Home, Abroad, or Both?The Answer Depends (in part) on

Where Demand Is

Home Centralization benefits from

• Strong PLEoS• Low trade costs to export to foreign

country• Large home market• Home country has factor advantages

Foreign Centralization benefits from

• Strong PLEoS• Low trade costs to import from

foreign country• Large foreign market• Foreign country has factor

advantages

Replication Form benefits from

• Weak PLEoS• Both markets are large• High trade costs impede exports &

imports• Unimportant factor advantages:

costs of production similar across countries.

Multi-product Multinationals

• Corporate multinational strategy considers best form for firms operating in more than one business (product).

• Relationships between products:– Unrelated– Vertical (intermediate inputs vs final

outputs)– Horizontal (complements vs substitutes)– Joint products

Multinational Forms: Vertically Related Products

• Upstream (U) creates inputs• Downstream (D) uses U inputs to create

outputs• Examples:

– Teaching: U is PPT preparation, D is presentation to students

– Movies: U is writing & casting, D is filming & editing (or U is movie production and D is movie exhibition)

– Steel: U is blast furnace, D is steel furnace & rolling mill

Bao Steel’s integrated works

ExxonMobil

• Upstream: exploration in 37 countries and “production” in 26 countries

• Downstream: refining and “marketing”– Owns 45 refineries, located in 25 countries – Operates 37,000 retail sites in 100+

countries

• “presence in about 200 countries”

ExxonMobil’s “Upstream” Sites

ExxonMobil’s “Downstream” Sites

Multinational Forms for 2 vertically related products

Vertical Specialization good if

• Strong PLEoS• Low trade costs to export U to

foreign country• Low trade costs to import D from

foreign country• Home country has factor adv. for U• Foreign country has factor adv. for

D

Branching Form

• Examples: – Coca Cola’s concentrate (U) and bottling

(D)– Subaru’s engines (U) and car assembly (D)

• Benefits from– Low trade costs on U, high on D– Low PLEoS on D, high on U– Home factor adv. in U, weak factor advs. in

D

Multisourcing form• Defn: procuring same input from

multiple source countries• Examples:

– Refinery in one country, sourcing crude oil from multiple drilling sites (in different countries)

– Nike’s “network” strategy in shoe mnfg.• Benefits from

– Low trade costs (for U & D)– Diseconomies of scale for U– Uncertain (unpredictable) factor adv. for

U.

Forms for 2 horizontally related products, served by upstream

Key trends in world economy

• Falling trade costs– More efficient transportation

(containers, EDI, use of air transport)– Lower tariffs, WTO oversight of

disguised protection– Technology-powered improvements in

long distance communication

• Rising economies of scale?

Implications for Multinationals

• Less Replication• More Vertical Specialization• Firms face very different industry

conditions– Contrast Nestle, Boeing, Mattel– Will continue to pursue divergent

strategies