Summary

The advantages and disadvantages of each of the four strategies discussed above are summarized in Figure 12.6. While a transnational strategy appears to offer the most advantages, implementing a transnational strategy raises difficult organizational

Strategy	Advantages	Disadvantages
Global	Exploit experience curve effects Exploit location economies	Lack of local responsiveness
International	Transfer distinctive competencies to foreign markets	Lack of local responsiveness Inability to realize location economies Failure to exploit experience curve effects
Multidomestic	Customize product offerings and marketing in accordance with local responsiveness	Inability to realize location economies Failure to exploit experience curve effects Failure to transfer distinctive competencies to foreign markets
Transnational	Exploit experience curve effects Exploit location economies Customize product offerings and marketing in accordance with local responsiveness Reap benefits of global learning	Difficult to implement due to organizational problems

Figure 12.6

The Advantages and Disadvantages of the Four Strategies

issues. As shown in Figure 12.3, the appropriateness of each strategy depends on the relative strength of pressures for cost reductions and pressures for local responsiveness.

Chapter Summary

This chapter reviewed the various ways in which firms can profit from global expansion and the strategies that firms which compete globally can adopt, discussed the optimal choice of entry mode to serve a foreign market, and looked at the issue of strategic alliances. This chapter made the following points:

1. For some firms, international expansion represents a way of earning greater returns by transferring the skills and product offerings derived from their core competencies to markets where indigenous competitors lack those skills.

2. Due to national differences, it pays a firm to base each value creation activity it performs where factor conditions are most conducive to the performance of that activity. We refer to this strategy as focusing on the attainment of location economies.

3. By building sales volume more rapidly, international expansion can assist a firm moving down the experience curve.

4. The best strategy for a firm to pursue may depend on a consideration of the pressures for cost reductions and the pressures for local responsiveness.

5. Pressures for cost reductions are greatest in industries producing commodity-type products where price is the main competitive weapon.

6. Pressures for local responsiveness arise from differences in consumer tastes and preferences, national infrastructure and traditional practices, distribution channels, and from host government demands.

7. Firms pursuing an international strategy transfer the skills and products derived from distinctive competencies to foreign markets, while undertaking some limited local customization.

8. Firms pursuing a multidomestic strategy customize their product offering, marketing strategy, and business strategy to national conditions.

9. Firms pursuing a global strategy focus on reaping the cost reductions that come from experience curve effects and location economies.

10. Many industries are now so competitive that firms must adopt a transnational strategy. This involves a simultaneous focus on reducing costs, transferring skills and products, and being locally responsive. Implementing such a strategy may not be easy.

Critical Discussion Questions

1. In a world of zero transportation costs, no trade barriers, and nontrivial differences between nations with regard to factor conditions, firms must expand internationally if they are to survive. Discuss.

2. Plot the position of the following firms on Figure 12.3; Procter & Gamble, IBM, Coca-Cola, Dow Chemical, US Steel, McDonald's. In each case justify your answer.

3. Are the following global industries or multidomestic industries: bulk chemicals, pharmaceuticals, branded food products, movie making, television manufacture, personal computers, airline travel?

4. Discuss how the need for control over foreign operations varies with the strategy and core competencies of a firm. What are the implications of this for the choice of entry mode?

5. What do you see as the main organizational problems that are likely to be associated with a transnational strategy?

Closing Case Sweden's IKEA

Established in the 1940s in Sweden by Ingvar Kamprad, IKEA has grown rapidly in recent years to become one of the world's largest retailers of home furnishings. In its initial push to expand globally, IKEA largely ignored the retailing rule that international success involves tailoring product lines closely to national tastes and preferences. Instead, IKEA stuck with the vision, articulated by founder Kamprad, that the company should sell a basic product range that is "typically Swedish" wherever it ventures in the world. The company also remained primarily production oriented; that is, the Swedish management and design group decided what it was going to sell and then presented it to the worldwide public--often with little research as to what the public wanted. The company also emphasized its Swedish roots in its international advertising, even insisting on a "Swedish" blue and gold color scheme for its stores.

Despite breaking some key rules of international retailing, the formula of selling Swedish-designed products in the same manner everywhere seemed to work. Between 1974 and 1997, IKEA expanded from a company with 10 stores, only 1 of which was outside Scandinavia, and annual revenues of $210 million to a group with 138 stores in 28 countries and sales of close to $6 billion. Only 11 percent of its sales were generated in Sweden in 1997. Of the balance, 29.6 percent of sales came from Germany, 42.5 percent from the rest of Western Europe, and 14.4 percent from North America. IKEA is now expanding into Asia, with the opening of stores in mainland China.

The foundation of IKEA's success has been to offer consumers good value for their money. IKEA's approach starts with a global network of suppliers, which now numbers 2,400 firms in 65 countries. An IKEA supplier gains long-term contracts, technical advice, and leased equipment from the company. In return, IKEA demands an exclusive contract and low prices. IKEA's designers work closely with suppliers to build savings into the products from the outset by designing products that can be produced at a low cost. IKEA displays its enormous range of more than 10,000 products in out-of-town stores. It sells most of its furniture as kits for customers to assemble themselves. The firm reaps huge economies of scale from the size of each store and the big production runs made possible by selling the same products all over the world. This strategy allows IKEA to match its rivals on quality, while undercutting them by up to 30 percent on price and still maintaining a healthy after-tax return on sales of about 7 percent.

This strategy worked well until 1985 when IKEA decided to enter the North American market. Between 1985 and 1996 IKEA opened 26 stores in North America, but unlike the company's experience across Europe, the stores did not quickly become profitable. As early as 1990 it was clear that IKEA's North American operations were in trouble. Part of the problem was an adverse movement in exchange rates. In 1985, the exchange rate was $1=8.6 Swedish kronor; by 1990, it was $1=Skr5.8. At this exchange rate, many products imported from Sweden did not look inexpensive to American consumers.

But there was more to IKEA's problems than adverse movements in exchange rates. IKEA's unapologetically Swedish products, which had sold so well across Europe, jarred American tastes and sometimes physiques. Swedish beds were narrow and measured in centimeters. IKEA did not sell the matching bedroom suites that Americans liked. Its kitchen cupboards were too narrow for the large dinner plates. Its glasses were too small for a nation that adds ice to everything. The drawers in IKEA's bedroom chests were too shallow for American consumers, who tend to store sweaters in them. And the company made the mistake of selling European-sized curtains that did not fit American windows. As one senior IKEA manager joked later, "Americans just wouldn't lower their ceilings to fit our curtains."

By 1991, the company's top management realized that if it was going to succeed in North America, it would have to customize its product offering to North American tastes. The company set about redesigning its product range. The drawers in bedroom chests were made two inches deeper--and sales immediately increased by 30 to 40 percent. IKEA now sells American-style king and queen-sized beds, measured in inches, and it sells them as part of complete bedroom suites. It has redesigned its kitchen furniture and kitchenware to better appeal to American tastes. The company has also boosted the amount of products being sourced locally from 15 percent in 1990 to 45 percent in 1997, a move that makes the company far less vulnerable to adverse movements in exchange rates. By 1997, about one-third of IKEA's total product offerings were designed exclusively for the US market.

This break with IKEA's traditional strategy seems to be paying off. Between 1990 and 1994, IKEA's North American sales tripled to $480 million, and they nearly doubled again to about $900 million in 1997. The company claims it has been making a profit in North America since early 1993, although it does not release precise figures and does admit that its profit rate is lower in America than in Europe. Still, the company is pushing ahead with plans for further expansions in America, including the 1998 opening of a $50 million IKEA superstore in Illinois, which the company claims is the first of a new generation of larger stores.

http://www.ikea.com

Source: "Furnishing the World," The Economist, November 19, 1994, pp. 79 - 80; H. Carnegy, "Struggle to Save the soul of IKEA," Financial Times, March 27, 1995, p. 12; J. Flynn and L. Bongiorno, "IKEA's New Game Plan," Business Week, October 6, 1997, pp. 99 - 102; and IKEA's Web site at http://www.ikea.com.