Chap007.doc

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International Strategy: Creating Value in Global Markets

True / False Questions

1. The trend towards worldwide markets makes it easier to predict where competitors will spring up.

True False

2. Because many countries are investing in countries other than their own, each country is becoming more autonomous and independent.

True False

3. An advantage of international expansion is that competition within foreign countries is generally very similar to that of the United States.

True False

4. In Michael Porter's "diamond of national advantage," there are four broad attributes that, as a system, constitute a nation's competitiveness in an industry.

True False

5. The factor endowments of a country are inherited and cannot be created. True False

6. With regard to "factor conditions," the pool of resources that a firm (or nation) has is much more important than the speed and efficiency with which these resources are deployed. True False

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7. Demanding domestic consumers tend to push firms to move ahead of companies in other countries where consumers are less demanding and more complacent.

True False

8. High levels of environmental awareness in Denmark have led to a decline in Denmark's industrial competitiveness in the international marketplace.

True False

9. Countries with a strong supplier base benefit by adding efficiency to downstream activities.

True False

10. Typically, intense rivalry in domestic markets does not force firms to look outside their national boundaries for new markets.

True False

11. Many international firms are increasing their efforts to market their products and services to countries such as India and China as the ranks of their middle class continue to increase. True False

12. International expansion can extend the life cycle of a product that is in its maturity stage in a firm's home country.

True False

13. An advantage of international expansion is that it can enable a firm to optimize the location of every activity in its value chain.

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14. The laws, and the enforcement of laws, associated with the protection of intellectual property rights, represent a significant currency and management risk to multinational firms. True False

15. Differences in foreign markets such as culture, language, and customs can represent significant management risks when firms enter foreign markets.

True False

16. Offshoring takes place when a firm decides to shift an activity that they were previously performing in a domestic location to a foreign location.

True False

17. Two opposing pressures that managers face when they compete in foreign markets are cost reduction and adaptation to local markets.

True False

18. Theodore Levitt has argued that people around the world are willing to sacrifice

preferences in product features, functions, and design if they are offered lower prices and high quality.

True False

19. Among Theodore Levitt's assumptions that would favor a global strategy is that consumers around the world are becoming less price-sensitive.

True False

20. Within a worldwide market, the most effective strategies are neither purely multidomestic nor purely global.

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21. Industries in which proportionally more value is added in upstream activities are more likely to benefit from a global strategy than those in which more value is added downstream (closer to the customer).

True False

22. In a global strategy a firm operates all its businesses under a single common strategy regardless of location.

True False

23. A multidomestic strategy is the most appropriate strategy for international operations because it drives economies of scale as far as possible and provides a middle-of-the-road product appealing to the largest number of consumers in every market.

True False

24. The need to attain economies of scale encourages multinational firms to operate under a multidomestic strategy.

True False

25. Corporations with multiple foreign operations that act very independently of one another are following a multidomestic strategy.

True False

26. A multidomestic strategy would likely include the use of high volume, centralized production facilities to maximize economies of scale.

True False

27. A limitation of a multidomestic strategy is that it may lead to "overadaptation" as conditions change.

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28. Multinational firms following a transnational strategy strive to optimize the trade-offs associated with efficiency, local adaptation, and learning.

True False

29. A key tenet of a transnational strategy is improved adaptation to all competitive situations as well as flexibility by capitalizing on communication and knowledge flows throughout the organization.

True False

30. According to studies by Rugman and Verbeke, most of the world's 500 firms are global, not regional or biregional.

True False

31. A franchise generally expires after a few years whereas a license is designed to last into perpetuity.

True False

32. Typically, joint ventures involve less control and risk than franchising. True False

33. Typically, the best method of entry into a foreign market is the establishment of a wholly owned foreign subsidiary so that the parent organization can maintain a high level of control. True False

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Multiple Choice Questions

34. A major trend in international developments includes A. greater international trade and operations.

B. a growing recognition of an international managerial perspective. C. a large increase in international investment.

D. all of these.

35. The reasons that explain why some governments make better use of the inflows from foreign investment and know-how than others include all of the following EXCEPT A. governmental practices that are business-friendly.

B. local entrepreneurs that can train workers and invest in modern technology.

C. high tariffs and taxes on foreign investors and multinational corporations provide income to improve living conditions.

D. sound management of broader economic factors such as interest rates and inflation.

36. Michael Porter's framework all of the following factors affect a nation's competitiveness EXCEPT

A. factor conditions. B. demand characteristics.

C. related and supported industries.

D. policies that protect the nation's domestic competitors.

37. Rivalry is intense in nations with conditions of __________ consumer demand,

__________ supplier bases, and __________ new entrant potential from related industries. A. weak; weak; high

B. strong; strong; low C. strong; strong; high D. weak; weak; low

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38. According to Michael Porter, firms that have experienced intense domestic competition are

A. unlikely to have the time or resources to compete abroad.

B. most likely to design strategies aimed primarily at the domestic market.

C. more likely to design strategies and structures that allow them to successfully compete abroad.

D. more likely to demand protection from their governments.

39. All of the factors below have made India's software services industry extremely competitive on a global scale EXCEPT

A. large pool of skilled workers.

B. large network of public and private educational institutions.

C. tax and antitrust legislation that protect the dominant players in the industry. D. large, growing market and sophisticated customers.

40. All of the following would be viewed as advantages of global diversification EXCEPT A. fewer social and political risks than domestic operations.

B. a firm not being solely dependent on the domestic market.

C. a firm with large margins at home helping subsidize its operations in other nations. D. the potential to lower costs of operation even if the primary market is at home.

41. Optimizing the location of every activity in the value chain can yield all of the following strategic advantages EXCEPT

A. performance enhancement. B. cost reduction.

C. extending the life cycle of the product of service. D. risk reduction.

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42. Microsoft decided to establish a corporate research laboratory in Cambridge, England A. because England is an ally of the United States.

B. to access the outstanding technical and professional talent available there so that they can attain world-class excellence in selected value-creating activities.

C. because the local language is English.

D. because the company views the United States as a risky place to expand due to the actions of the U.S. Department of Justice.

43. The sale of Boeing's commercial aircraft and Microsoft's operating systems in many countries enable these companies to benefit from

A. higher prices in their domestic markets. B. economies of scale.

C. optimizing the location for many activities in their value chain. D. reducing their exposure to currency risks.

44. Many U.S. multinational companies set up maquiladora operations south of the U.S.-Mexico border primarily

A. to sell products into the growing Mexican market.

B. as part of US government-initiated measures to discourage illegal immigration. C. to take advantage of the lower tax rates in Mexico.

D. to take advantage of the low cost of labor.

45. Appreciation of the U.S. dollar will have the following impact on McDonald's: A. lower sales abroad because foreign customers cannot afford McDonalds' products. B. more transfer of ingredients from the U.S. to branches abroad to take advantage of the higher dollar.

C. lower profits, because foreign profits will be reduced when measured in dollars. D. no impact at all.

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46. __________ occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house.

A. Offshoring B. A global strategy C. Outsourcing

D. A transnational strategy

47. Which one of the following is one of Theodore Levitt's assumptions supporting a pure global strategy?

A. Consumers are willing to pay more for specific product features. B. Customer needs and interests are becoming more dissimilar.

C. If the world markets are treated as heterogeneous, substantial economies of scale are easily achieved.

D. MNCs can compete with aggressive pricing on low cost products that meet the common needs of global consumers.

48. Pressures to "reduce costs" require that

A. a company should not trade idiosyncratic preferences in product features for higher economic returns.

B. a company must pursue what is economically beneficial to the company including maximizing economies of scale and learning curve effects.

C. the manager should follow a multidomestic strategy to maximize the economic benefits to the company.

D. the company needs to supplement the local foreign economy in a manner specified by the local government.

49. Low pressure for local adaptation combined with low pressure for lower costs would suggest what type of strategy?

A. international B. global

C. multidomestic D. transnational

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50. High pressure for local adaptation combined with low pressure for lower costs would suggest what type of international strategy?

A. Global

B. Multidomestic C. Transnational

D. Overall cost leadership

51. Software Tech, Inc., a company in the computer software industry, invests heavily in R&D and product design. Thus, most of its value is added

A. upstream.

B. in its infrastructure. C. downstream. D. midstream.

52. Industries in which proportionally more value is added in __________ activities are more likely to benefit from a __________ strategy.

A. downstream; global B. upstream; multidomestic C. upstream; global

D. manufacturing; multidomestic

53. Which of the following types of international firms are most likely to benefit from a global strategy as opposed to a multidomestic strategy?

A. Firms that compete in industries in which consumer preferences vary substantially in each country.

B. Firms in industries that are expanding very rapidly.

C. Firms in industries that have value added by sales and marketing departments.

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54. Recent trends that might lead managers of multinational corporations (MNCs) to adopt a more decentralized strategy for their operations would include all of the following EXCEPT A. customers' needs, interests, and tastes are becoming increasingly homogenized or similar. B. consumers around the world are increasingly willing to tradeoff idiosyncratic preferences in product features for lower price.

C. flexible manufacturing trends have allowed a decline in the minimum volume required to reach acceptable levels of production efficiency.

D. fluctuating exchange rates.

55. Firms following a global strategy strive to offer __________ products and services as well as locate manufacturing, R&D, and marketing activities in __________ locations.

A. a wide variety of; several B. a wide variety of; few C. standardized; several D. standardized; few

56. Gillette's worldwide success with its Sensor razor demonstrates A. the importance of merging global and multidomestic strategies.

B. the values of establishing joint ventures with several multinational corporations. C. that a global marketing effort can sometimes be successful.

D. the usefulness of a multidomestic strategy.

57. As in the case of Siebel Systems (now part of Oracle), elements of a global strategy may facilitate the competitive advantage of differentiation by

A. increased freedom of individual business units to adapt to local tastes.

B. the creation of a worldwide network to achieve consistent service regardless of location. C. flexibility in applying R&D to meet country-specific needs.

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58. All of the following are risks associated with a global strategy EXCEPT

A. a firm with only one manufacturing location must export its product—some of which may be a great distance from the operation.

B. the geographic concentration of any activity may also tend to isolate that activity from the targeted markets.

C. concentrating an activity in a single location makes the rest of the firm dependent on that location.

D. the pressures for local adaptation may elevate the firm's cost structure.

59. All of the following are limitations of a global strategy EXCEPT A. limited ability to adapt to local markets.

B. the ability to locate activities in optimal locations.

C. the concentration of activities may increase dependence on a single facility. D. single locations may lead to higher tariffs and transportation costs.

60. Elements of a multidomestic strategy may facilitate the competitive advantage of cost leadership by

A. flexibility in adjusting to local laws and customs.

B. decreased duplication of inventories which are often involved in having multiple plants producing similar products.

C. decreased shipping and transportation costs inherent in local production.

D. economies of scale gained through centralized production of standardized products.

61. All of the following are limitations of a multidomestic strategy EXCEPT A. less ability to realize cost savings through scale economies.

B. greater difficulty in transferring knowledge across countries. C. single locations may lead to higher tariffs and transportation costs. D. may lead to "overadaptation" as conditions change.

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62. High pressure for local adaptation combined with high pressure for lower costs would suggest what type of international strategy?

A. global

B. multidomestic C. transnational D. differentiation

63. Units coordinate their activities with headquarters and with one another, units adapt to special circumstances only they face, and the entire organization draws upon relevant corporate resources. These are all attributes of which type of strategy?

A. global B. transnational C. international D. multidomestic

64. Which of the following is a disadvantage of a transnational strategy? A. Less ability to realize cost savings through scale economies.

B. Limited ability to adapt to local markets.

C. Unique managerial challenges in fostering knowledge transfer. D. Single locations may lead to higher tariffs and transportation costs.

65. In order to realize the strongest competitive advantage, firms engaged in worldwide competition must

A. require that all of their various business units follow the same strategy regardless of location.

B. ensure that all business units follow a strategy strictly tailored to their respective locations. C. pursue a strategy that combines the uniformity of a global strategy and the specificity of a multidomestic strategy in order to achieve optimal results.

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66. According to studies by Rugman and Verbeke, approximately how many of the world's largest 500 firms are global, that is, they have at least 20% of their total revenues each in North America, Asia, and Europe?

A. 9 B. 59 C. 79 D. 159

67. Which of the following describes the most typical order of entry into foreign markets? A. franchising, licensing, exporting, joint venture, and wholly owned subsidiary

B. exporting, licensing, franchising, joint venture, and wholly owned subsidiary C. licensing, exporting, franchising, joint venture, and wholly owned subsidiary D. exporting, franchising, licensing, joint venture, and wholly owned subsidiary

68. A domestic corporation considering expanding into international markets for the first time will typically

A. start off by implementing a wholly owned foreign subsidiary so it can maintain standards identical to those at home.

B. consider licensing or franchising its operations.

C. consider implementing a low risk/low control strategy such as exporting. D. form a joint venture with a reputable foreign producer.

69. The form of entry strategy into international operations that offers the lowest level of control would be

A. franchising. B. licensing. C. joint venture. D. exporting.

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70. Fees that a multinational receives from a foreign licensee in return for its use of intellectual property (trademark, patent, trade secret, technology) are usually called A. transfer prices.

B. dividends. C. royalties.

D. intra-corporate inflows.

71. The difference between a franchise and licensing contract is that A. a franchise contract is more specific and usually longer in duration. B. a franchise contract must include a foreign government.

C. a licensing contract covers more aspects of operations. D. a franchise contract involves less control and less risk.

72. __________ entail the creation of a third-party legal entity, whereas __________ do not. A. Licensing agreements; joint ventures

B. Joint ventures; strategic alliances C. Strategic alliances; joint ventures

D. Franchising agreements; strategic alliances

73. A __________ is a business in which a multinational company owns 100 percent of the stock.

A. joint venture B. strategic alliance

C. wholly owned subsidiary D. franchising operation

74. __________ are most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations in many countries. A. Joint ventures

B. Strategic alliances C. Licensing agreements D. Wholly owned subsidiaries

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Essay Questions

75. Explain Michael Porter's "diamond of national advantage."

76. Summarize the most important benefits and risks associated with diversification into global markets.

77. What are the main benefits of offshoring and outsourcing?

78. Explain how the two opposing forces facing MNC managers, cost reduction and local adaptation, create pressures to operate with a global or multidomestic strategy, respectively.

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79. According to Theodore Levitt, what are the three assumptions that favor the pursuit of a "pure" global strategy? Briefly provide counterarguments to each assumption.

80. What are some of the primary benefits and risks of transnational strategies?

81. What are the key arguments that Rugman and Verbeke make in favor of regional strategies as opposed to global strategies?

82. What are the major advantages and disadvantages of the four types of entry strategies for international expansion?

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Chapter 07 International Strategy: Creating Value in Global Markets

Answer

Key

True / False Questions

1. (p. 241) The trend towards worldwide markets makes it easier to predict where competitors

will spring up. FALSE

The rise of globalization, meaning the rise of market capitalism around the world, means competitors can now come from just about anywhere.

AACSB: Analytic Blooms: Understand

Learning Objective: 07-01 The importance of international expansion as a viable diversification strategy. Level of Difficulty: 2 Medium

Topic: The Global Economy: A Brief Overview

2. (p. 241) Because many countries are investing in countries other than their own, each country

is becoming more autonomous and independent. FALSE

Globalization, which is on the rise, has two meanings. One is the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information. The second is the growing similarity of laws, rules, norms, values, and ideas across countries.

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3. (p. 241) An advantage of international expansion is that competition within foreign countries

is generally very similar to that of the United States. FALSE

Countries throughout the world vary on many dimensions, including different track records of business-friendly policies to attract multinationals and local entrepreneurs to train workers, invest in modern technology, and nurture local suppliers and managers. In addition, there are differences in broader economic factors, such as interest rates, inflation, and unemployment, as well as legal systems that protect property rights, strong educational systems, and societies where prosperity is widely shared.

4. (p. 242) In Michael Porter's "diamond of national advantage," there are four broad attributes

that, as a system, constitute a nation's competitiveness in an industry. TRUE

Porter concluded that there are four broad attributes of nations that individually, and as a system, constitute what is termed "the diamond of national advantage." In effect, these attributes jointly determine the playing field that each nation establishes and operates for its industries.

AACSB: Analytic Blooms: Remember

Learning Objective: 07-02 The sources of national advantage; that is; why an industry in a given country is more (or less) successful than the same industry in another country.

Level of Difficulty: 1 Easy

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5. (p. 243) The factor endowments of a country are inherited and cannot be created.

FALSE

Classical economics suggests that factors of production such as land, labor, and capital are the building blocks that create usable consumer goods and services. However, companies in advanced nations seeking competitive advantage over firms in other nations create many of the factors of production, such as skilled human resources.

Level of Difficulty: 2 Medium

Topic: Factors Affecting a Nation's Competitiveness

6. (p. 243) With regard to "factor conditions," the pool of resources that a firm (or nation) has is

much more important than the speed and efficiency with which these resources are deployed. FALSE

The pool of resources is less important than the speed and efficiency with which these

resources are deployed. Thus, firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to a nation's competitive advantage.

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7. (p. 243) Demanding domestic consumers tend to push firms to move ahead of companies in

other countries where consumers are less demanding and more complacent. TRUE

Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. Denmark is known for its environmental awareness. Demand from consumers for environmentally safe products has spurred Danish manufacturers to become leaders in water pollution control equipment, products it successfully exported.

8. (p. 243) High levels of environmental awareness in Denmark have led to a decline in

Denmark's industrial competitiveness in the international marketplace. FALSE

Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. Denmark is known for its environmental awareness. Demand from consumers for environmentally safe products has spurred Danish manufacturers to become leaders in water pollution control equipment, products it successfully exported.

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9. (p. 243) Countries with a strong supplier base benefit by adding efficiency to downstream

activities. TRUE

Related and supporting industries enable firms to manage inputs more effectively. Countries with a strong supplier base benefit by adding efficiency to downstream activities. A

competitive supplier base helps a firm obtain inputs using cost-effective, timely methods, thus reducing manufacturing costs.

10. (p. 244) Typically, intense rivalry in domestic markets does not force firms to look outside

their national boundaries for new markets. FALSE

Domestic rivalry provides a strong impetus for firms to innovate and find new sources of competitive advantage. This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness.

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11. (p. 244) Many international firms are increasing their efforts to market their products and

services to countries such as India and China as the ranks of their middle class continue to increase.

TRUE

Many multinational firms are intensifying their efforts to market their products and services to countries such as India and China as the ranks of their middle class have increased over the past decade. These include Procter & Gamble's success in achieving a 50 percent share in China's shampoo market as well as PepsiCo's impressive inroads in the Indian soft-drink market.

Learning Objective: 07-03 The motivations (or benefits) and the risks associated with international expansion; including the emerging trend for greater offshoring and outsourcing activity.

Topic: International Expansion: A Company's Motivations and Risks

12. (p. 247-248) International expansion can extend the life cycle of a product that is in its

maturity stage in a firm's home country. TRUE

Extending the life cycle of a product that is in its maturity stage in a firm's home country but that has greater demand potential elsewhere is a benefit of international expansion. In recent decades, U.S. soft-drink producers such as Coca-Cola and PepsiCo have aggressively pursued international markets to attain levels of growth that simply would not be available in the United States.

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13. (p. 248) An advantage of international expansion is that it can enable a firm to optimize the

location of every activity in its value chain. TRUE

Optimizing the physical location for every activity in its value chain is another benefit of international expansion. Optimizing the location for every activity in the value chain can yield one or more of three strategic advantages: performance enhancement, cost reduction, and risk reduction.

14. (p. 251) The laws, and the enforcement of laws, associated with the protection of intellectual

property rights, represent a significant currency and management risk to multinational firms. FALSE

There are four main types of risk: political risk, economic risk, currency risk, and

management risk. The laws, and the enforcement of laws, associated with the protection of intellectual property rights can be a major potential economic risk (rather than currency or management risk) in entering new countries.

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15. (p. 253) Differences in foreign markets such as culture, language, and customs can represent

significant management risks when firms enter foreign markets. TRUE

Management risks may be considered the challenges and risks that managers face when they must respond to the inevitable differences that they encounter in foreign markets. These take a variety of forms: culture, customs, language, income levels, customer preferences, distribution systems, and so on.

16. (p. 254) Offshoring takes place when a firm decides to shift an activity that they were

previously performing in a domestic location to a foreign location. TRUE

Offshoring takes place when a firm decides to shift an activity that they were performing in a domestic location to a foreign location. For example, both Microsoft and Intel now have R&D facilities in India, employing a large number of Indian scientists and engineers.

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17. (p. 255) Two opposing pressures that managers face when they compete in foreign markets

are cost reduction and adaptation to local markets. TRUE

There are two opposing forces that firms face when they expand into global markets: cost reduction and adaptation to local markets.

Learning Objective: 07-04 The two opposing forces-cost reduction and adaptation to local markets-that firms face when entering international markets.

Topic: Achieving Competitive Advantage in Global Markets

18. (p. 255-256) Theodore Levitt has argued that people around the world are willing to sacrifice

preferences in product features, functions, and design if they are offered lower prices and high quality.

TRUE

Levitt advocated global product and brand strategies based on three assumptions: customer needs and interests are becoming increasingly homogeneous worldwide, people around the world are willing to sacrifice preferences in features, design, and the like for lower prices at high quality, and substantial economies of scale in production and marketing can be achieved through supplying global markets.

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19. (p. 255-256) Among Theodore Levitt's assumptions that would favor a global strategy is that

consumers around the world are becoming less price-sensitive. FALSE

Levitt advocated global product and brand strategies based on three assumptions: customer needs and interests are becoming increasingly homogeneous worldwide, people around the world are willing to sacrifice preferences in features, design, and the like for lower prices at high quality, and substantial economies of scale in production and marketing can be achieved through supplying global markets.

20. (p. 257) Within a worldwide market, the most effective strategies are neither purely

multidomestic nor purely global. TRUE

All firms must balance the need to lower costs (where highly standardized products are preferred) with the need to be responsive to local pressures (where differentiating offerings is required). Most strategies incorporate some elements of both.

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21. (p. 264) Industries in which proportionally more value is added in upstream activities are

more likely to benefit from a global strategy than those in which more value is added downstream (closer to the customer).

TRUE

Typically, primary activities that are "downstream" (e.g., marketing or service), or closer to the customer, require more decentralization to adapt to local market conditions (a

multidomestic strategy). "Upstream" primary activities (e.g., logistics and operations), tend to be centralized (a global strategy) because there is less need for adapting them to local markets and the firm benefits from economies of scale.

Learning Objective: 07-05 The advantages and disadvantages associated with each of the four basic strategies: international; global; multidomestic; and transnational.

22. (p. 259) In a global strategy a firm operates all its businesses under a single common strategy

regardless of location. TRUE

With a global strategy, competitive strategy is centralized and controlled to a large extent by the corporate office.

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23. (p. 260) A multidomestic strategy is the most appropriate strategy for international operations

because it drives economies of scale as far as possible and provides a middle-of-the-road product appealing to the largest number of consumers in every market.

FALSE

A firm whose emphasis is on differentiating its product and service offerings to adapt to local markets follows a multidomestic strategy. Decisions evolving from a multidomestic strategy tend to be decentralized to permit the firm to tailor its products and respond rapidly to changes in demand.

24. (p. 258, 260, 262) The need to attain economies of scale encourages multinational firms to

operate under a multidomestic strategy. FALSE

According to Exhibit 7.4, a firm whose emphasis is on differentiating its product and service offerings to adapt to local markets follows a multidomestic strategy. This typically results in lower ability to leverage economies of scale and higher cost structures.

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25. (p. 260) Corporations with multiple foreign operations that act very independently of one

another are following a multidomestic strategy. TRUE

A firm whose emphasis is on differentiating its product and service offerings to adapt to local markets follows a multidomestic strategy. Decisions evolving from a multidomestic strategy tend to be decentralized to permit the firm to tailor its products and respond rapidly to changes in demand.

26. (p. 258, 260, 262) A multidomestic strategy would likely include the use of high volume,

centralized production facilities to maximize economies of scale. FALSE

According to Exhibit 7.4, a firm whose emphasis is on differentiating its product and service offerings to adapt to local markets follows a multidomestic strategy. This typically results in lower ability to leverage economies of scale and higher cost structures.

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27. (p. 263) A limitation of a multidomestic strategy is that it may lead to "overadaptation" as

conditions change. TRUE

While the multidomestic strategy is based on adaptation to local conditions, the optimal degree of local adaptation evolves over time. Firms must recalibrate the need for local adaptation on an ongoing basis; excessive adaptation extracts a price as surely as underadaptation.

28. (p. 263) Multinational firms following a transnational strategy strive to optimize the

trade-offs associated with efficiency, local adaptation, and learning. TRUE

A transnational strategy strives to optimize the trade-offs associated with efficiency, local adaptation, and learning. It seeks efficiency not for its own sake, but as a means to achieve global competitiveness. It recognizes the importance of local responsiveness but as a tool for flexibility in international operations.

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29. (p. 264) A key tenet of a transnational strategy is improved adaptation to all competitive

situations as well as flexibility by capitalizing on communication and knowledge flows throughout the organization.

TRUE

A central philosophy of the transnational organization is enhanced adaptation to all

competitive situations as well as flexibility by capitalizing on communication and knowledge flows throughout the firm. A principal characteristic is the integration of unique contributions of all units into worldwide operations.

30. (p. 265) According to studies by Rugman and Verbeke, most of the world's 500 firms are

global, not regional or biregional. FALSE

Extensive analysis of the distribution data of sales across different countries and regions led Alan Rugman and Alain Verbeke to conclude that there is a strong case to be made that most companies are regional or biregional, not global, even today.

Learning Objective: 07-06 The difference between regional companies and truly global companies. Level of Difficulty: 2 Medium

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31. (p. 268-269) A franchise generally expires after a few years whereas a license is designed to

last into perpetuity. FALSE

Licensing enables a company to receive a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable item of intellectual property. Franchising contracts generally include a broader range of factors in an operation and have a longer time period during which the agreement is in effect.

Learning Objective: 07-07 The four basic types of entry strategies and the relative benefits and risks associated with each of them. Level of Difficulty: 1 Easy

Topic: Entry Modes of International Expansion

32. (p. 267) Typically, joint ventures involve less control and risk than franchising.

FALSE

According to Exhibit 7.10, a joint venture has a higher degree of ownership (both investment and risk) and control than does franchising.

Refer to Exhibit 7.10

Learning Objective: 07-07 The four basic types of entry strategies and the relative benefits and risks associated with each of them. Level of Difficulty: 1 Easy

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33. (p. 271) Typically, the best method of entry into a foreign market is the establishment of a

wholly owned foreign subsidiary so that the parent organization can maintain a high level of control.

FALSE

Establishing a wholly owned subsidiary is the most expensive and risky of the various entry modes. However, it can also yield the highest returns. In addition, it provides the

multinational company with the greatest degree of control of all activities, including manufacturing, marketing, distribution, and technology development. Wholly owned subsidiaries are most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations.

Learning Objective: 07-07 The four basic types of entry strategies and the relative benefits and risks associated with each of them. Level of Difficulty: 2 Medium

Topic: Entry Modes of International Expansion

Multiple Choice Questions

34. (p. 241) A major trend in international developments includes A. greater international trade and operations.

B. a growing recognition of an international managerial perspective.

C. a large increase in international investment. D. all of these.

Globalization, which is on the rise, has two meanings. One is the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information. The second is the growing similarity of laws, rules, norms, values, and ideas across countries.

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35. (p. 241) The reasons that explain why some governments make better use of the inflows from

foreign investment and know-how than others include all of the following EXCEPT

A. governmental practices that are business-friendly.

B. local entrepreneurs that can train workers and invest in modern technology.

C. high tariffs and taxes on foreign investors and multinational corporations provide income to improve living conditions.

D. sound management of broader economic factors such as interest rates and inflation. Some governments make better use of inflows of foreign investment and know-how than others. Explanations include the need of governments to have track records of business-friendly policies to attract multinationals and local entrepreneurs to train workers, invest in modern technology, and nurture local suppliers and managers. Also, it means carefully managing the broader economic factors in an economy, such as interest rates, inflation, and unemployment.

36. (p. 242) Michael Porter's framework all of the following factors affect a nation's

competitiveness EXCEPT

A. factor conditions.

B. demand characteristics.

C. related and supported industries.

D. policies that protect the nation's domestic competitors.

Porter concluded that there are four broad attributes of nations that individually, and as a system, constitute what is termed "the diamond of national advantage." In effect, these attributes jointly determine the playing field that each nation establishes and operates for its industries. These factors are: factor endowments, demand condition, related and supporting industries, and firm strategy, structure, and rivalry.

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37. (p. 244) Rivalry is intense in nations with conditions of __________ consumer demand,

__________ supplier bases, and __________ new entrant potential from related industries.

A. weak; weak; high

B. strong; strong; low C. strong; strong; high

D. weak; weak; low

Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new entrant potential from related industries. This competitive rivalry increases the efficiency with which firms develop, market, and distribute products and

services within the home country.

38. (p. 244) According to Michael Porter, firms that have experienced intense domestic

competition are

A. unlikely to have the time or resources to compete abroad.

B. most likely to design strategies aimed primarily at the domestic market.

C. more likely to design strategies and structures that allow them to successfully compete abroad.

D. more likely to demand protection from their governments.

Competitive rivalry increases the efficiency with which firms develop, market, and distribute products and services within the home country. This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness.

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39. (p. 245) All of the factors below have made India's software services industry extremely

competitive on a global scale EXCEPT

A. large pool of skilled workers.

B. large network of public and private educational institutions.

C. tax and antitrust legislation that protect the dominant players in the industry.

D. large, growing market and sophisticated customers.

According to Exhibit 7.1, India's diamond of national advantage for software includes a large pool of skilled workers, a large network of public and private educational institutions, a large, growing market, and sophisticated customers.

40. (p. 249) All of the following would be viewed as advantages of global diversification

EXCEPT

A. fewer social and political risks than domestic operations.

B. a firm not being solely dependent on the domestic market.

C. a firm with large margins at home helping subsidize its operations in other nations.

D. the potential to lower costs of operation even if the primary market is at home.

When a company expands its international operations, it does so to increase its profits or revenues. As with any other investment, however, there are also potential risks. The four main types of risk are political risk, economic risk, currency risk, and management risk.

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41. (p. 248) Optimizing the location of every activity in the value chain can yield all of the

following strategic advantages EXCEPT

A. performance enhancement.

B. cost reduction.

C. extending the life cycle of the product of service.

D. risk reduction.

Optimizing the location for every activity in the value chain can yield one or more of three strategic advantages: performance enhancement, cost reduction, and risk reduction.

42. (p. 248) Microsoft decided to establish a corporate research laboratory in Cambridge,

England

A. because England is an ally of the United States.

B. to access the outstanding technical and professional talent available there so that they can attain world-class excellence in selected value-creating activities.

C. because the local language is English.

D. because the company views the United States as a risky place to expand due to the actions of the U.S. Department of Justice.

Microsoft's decision to establish a corporate research laboratory in Cambridge, England, is an example of a location decision that was guided mainly by the goal of building and sustaining world-class excellence in selected value-creating activities. This strategic decision provided Microsoft with access to outstanding technical and professional talent.

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43. (p. 247) The sale of Boeing's commercial aircraft and Microsoft's operating systems in many

countries enable these companies to benefit from

A. higher prices in their domestic markets. B. economies of scale.

C. optimizing the location for many activities in their value chain.

D. reducing their exposure to currency risks.

Expanding a firm's global presence automatically increases its scale of operations, providing it with a larger revenue and asset base which potentially enables a firm to attain economies of scale. One advantage is the spreading of fixed costs such as R&D over a larger volume of production. Examples include the sale of Boeing's commercial aircraft and Microsoft's operating systems in many foreign countries.

44. (p. 248) Many U.S. multinational companies set up maquiladora operations south of the

U.S.-Mexico border primarily

A. to sell products into the growing Mexican market.

B. as part of US government-initiated measures to discourage illegal immigration.

C. to take advantage of the lower tax rates in Mexico. D. to take advantage of the low cost of labor.

Many multinational companies set up production operations just south of the U.S.-Mexico border to access lower-cost labor. These operations are called maquiladoras. Such location decisions can affect the cost structure in terms of local manpower and other resources, transportation and logistics, and government incentives and the local tax structure.

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45. (p. 252) Appreciation of the U.S. dollar will have the following impact on McDonald's: A. lower sales abroad because foreign customers cannot afford McDonalds' products.

B. more transfer of ingredients from the U.S. to branches abroad to take advantage of the higher dollar.

C. lower profits, because foreign profits will be reduced when measured in dollars.

D. no impact at all.

Appreciation of the U.S. dollar can have negative implications for American companies that have branch operations overseas. The reason for this is that profits from abroad must be exchanged for dollars at a more expensive rate of exchange, reducing the amount of profit when measured in dollars.

AACSB: Analytic Blooms: Apply

Level of Difficulty: 3 Hard

46. (p. 254) __________ occurs when a firm decides to utilize other firms to perform

value-creating activities that were previously performed in-house.

A. Offshoring

B. A global strategy C. Outsourcing

D. A transnational strategy

Outsourcing occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house. It may be a new activity that the firm is perfectly capable of doing but chooses to have someone else perform for cost or quality reasons. Outsourcing can be to either a domestic or foreign firm.

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47. (p. 255-256) Which one of the following is one of Theodore Levitt's assumptions supporting a

pure global strategy?

A. Consumers are willing to pay more for specific product features.

B. Customer needs and interests are becoming more dissimilar.

C. If the world markets are treated as heterogeneous, substantial economies of scale are easily achieved.

D. MNCs can compete with aggressive pricing on low cost products that meet the common needs of global consumers.

Levitt's approach supporting global products rested on three key assumptions: customer needs and interests are becoming increasingly homogeneous worldwide, people around the world are willing to sacrifice preferences in product features, functions, design, and the like for lower prices at high quality, and substantial economies of scale in production and marketing can be achieved through supplying global markets.

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48. (p. 250) Pressures to "reduce costs" require that

A. a company should not trade idiosyncratic preferences in product features for higher economic returns.

B. a company must pursue what is economically beneficial to the company including maximizing economies of scale and learning curve effects.

C. the manager should follow a multidomestic strategy to maximize the economic benefits to the company.

D. the company needs to supplement the local foreign economy in a manner specified by the local government.

An example is Narayana Hrudayalaya Hospital in Bangalore, which performs open heart surgeries at about $2000, which is a fraction of the $20,000 to $100,000 that it would cost in a U.S. hospital. The hospital has 1000 beds, roughly eight times the size of an American

hospital, and performs 600 operations a week. The large volume allows the hospital to benefit from both economies of scale (that reduce cost) and, even more importantly, experience curve effects that improve the success rate.

49. (p. 257-258) Low pressure for local adaptation combined with low pressure for lower costs

would suggest what type of strategy? A. international

B. global

C. multidomestic

D. transnational

An international strategy is used in industries where the pressures for both local adaptation and lowering costs are low.

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50. (p. 258, 260) High pressure for local adaptation combined with low pressure for lower costs

would suggest what type of international strategy?

A. Global

B. Multidomestic

C. Transnational

D. Overall cost leadership

A multidomestic strategy is used in industries where the pressure for local adaptation is high and the pressure for lowering costs is low.

51. (p. 264) Software Tech, Inc., a company in the computer software industry, invests heavily in

R&D and product design. Thus, most of its value is added A. upstream.

B. in its infrastructure.

C. downstream.

D. midstream.

R&D and product design are primary activities in the value-chain that are far from the customer, and are therefore considered "upstream" activities. Such activities are often centralized in transnational organizations.

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52. (p. 264) Industries in which proportionally more value is added in __________ activities are

more likely to benefit from a __________ strategy.

A. downstream; global

B. upstream; multidomestic C. upstream; global

D. manufacturing; multidomestic

Primary activities that are "downstream" (e.g., marketing and sales, and service), or closer to the customer, tend to require more decentralization in order to adapt to local market

conditions (a multidomestic strategy). Primary activities that are "upstream" (e.g., logistics and operations), or further away from the customer, tend to be centralized (a global strategy). This is because there is less need for adapting these activities to local markets and the firm can benefit from economies of scale.

53. (p. 264) Which of the following types of international firms are most likely to benefit from a

global strategy as opposed to a multidomestic strategy?

A. Firms that compete in industries in which consumer preferences vary substantially in each country.

B. Firms in industries that are expanding very rapidly.

C. Firms in industries that have value added by sales and marketing departments.

D. Firms in industries that have much value added in research and design or manufacturing. Primary activities that are "downstream" (e.g., marketing and sales, and service), or closer to the customer, tend to require more decentralization in order to adapt to local market

conditions (a multidomestic strategy). Primary activities that are "upstream" (e.g., R&D, design, or manufacturing), or further away from the customer, tend to be centralized (a global strategy). This is because there is less need for adapting these activities to local markets and the firm can benefit from economies of scale.

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54. (p. 260) Recent trends that might lead managers of multinational corporations (MNCs) to

adopt a more decentralized strategy for their operations would include all of the following EXCEPT

A. customers' needs, interests, and tastes are becoming increasingly homogenized or similar.

B. consumers around the world are increasingly willing to tradeoff idiosyncratic preferences in product features for lower price.

C. flexible manufacturing trends have allowed a decline in the minimum volume required to reach acceptable levels of production efficiency.

D. fluctuating exchange rates.

A decentralized strategy such as that seen within the multidomestic organization, allows for greater adaptation at the local level, which would not be necessary if customers were becoming more homogenous.

55. (p. 259) Firms following a global strategy strive to offer __________ products and services

as well as locate manufacturing, R&D, and marketing activities in __________ locations.

A. a wide variety of; several

B. a wide variety of; few

C. standardized; several D. standardized; few

Firms following a global strategy strive to offer standardized products and services as well as to locate manufacturing, R&D, and marketing activities in only a few locations.

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56. (p. 259) Gillette's worldwide success with its Sensor razor demonstrates A. the importance of merging global and multidomestic strategies.

B. the values of establishing joint ventures with several multinational corporations. C. that a global marketing effort can sometimes be successful.

D. the usefulness of a multidomestic strategy.

A global strategy is most appropriate when there are strong pressures for reducing costs and comparatively weak pressures for adaptation to local markets. Economies of scale becomes an important consideration. Such would be the case for Gillette's Sensor razor.

57. (p. 259) As in the case of Siebel Systems (now part of Oracle), elements of a global strategy

may facilitate the competitive advantage of differentiation by

A. increased freedom of individual business units to adapt to local tastes.

B. the creation of a worldwide network to achieve consistent service regardless of location.

C. flexibility in applying R&D to meet country-specific needs.

D. tailoring products to meet country-specific needs.

One advantage of a global strategy is that it can enable a firm to create a standard level of quality throughout the world. Tom Siebel, former chairman of Siebel Systems (now part of Oracle), e-business application software developer, says, "Our customers, global companies like IBM, Zurich Financial Services, and Citicorp, expect the same high level of service and quality, and the same licensing policies, no matter where we do business with them around the world."