International Business Midterm

CHAPTER 1

MULTINATIONAL MANAGEMENT IN A CHANGING WORLD

Learning Objectives

1. Define multinational management
2. Understand the characteristics of a multinational company
3. Understand the nature of the global economy and the key forces that drive globalization
4. Know the basic classification of the world’s economies
5. Be able to identify the characteristics of the next generation of multinational managers

Introduction

6. Businesses of all sizes, whether from the old or new economy, increasingly see the entire world as a source of business opportunities
7. Why? • World is becoming one connected economy • Any company from any country can become a competitor • The internet crosses national boundaries – the click of a mouse allows even the smallest of businesses to go global immediately • Companies can no longer afford the luxury of assuming that success in their home market equates to long-term profitability □ An integrated global economy is not without its challenges and threats • Terrorism, wars, SARS, and effects of recessions on interlinked economies represent threats to multinational companies
8. With companies increasingly looking at global rather than domestic markets, managers of the next century will have little to choice but to be multinational in outlook and strategies • Consequently, all students of business should have at least a basic background in multinational management
9. Multinational management is the formulation of strategies and the design of management systems that successfully take advantage of international opportunities and respond to international threats
10. To provide basic background in multinational management, this book introduces students to the latest information on how managers throughout the world respond to the challenges of globalization
11. The book also provides you with insights into the real world of multinational management through • Preview Cases in Point – show you examples of how multinational companies are dealing with a key issue discussed in the text • Cases in Point – give information on how actual multinational companies deal with the issues currently under review in the text • Multinational Management Briefs – give you further detail and examples that extend the discussions in the chapters • Multinational Management Challenges – describe problems and dilemmas faced by real multinational managers

The Nature of the Multinational Company

12. The multinational company is broadly defined here as any company that engages in business functions beyond its domestic borders • This is a broad definition to include all types of companies, large and small, that engage in international business
13. Most multinational companies, however, are also multinational corporations • Smaller, nonpublic multinational companies are also becoming increasingly important as it becomes more common for smaller organizations to compete globally □ What kinds of activities might make a company multinational? • The apparent activity, of course, is international sales • However, as you will see in more detail, crossing national borders opens up more international options than simply selling internationally

See Exhibit 1.1 The 30 Largest Companies in the World Ranked By Sales Revenue

The Globalizing Economy: A Changing (But Not Always Stable) Environment for Business

□ Globalization: the world wide trend of economic integration across boarder allowing businesses to expand beyond their domestic boundaries • Trade barriers are falling • World trade among countries in goods and services has grown faster than domestic productions • Money is flowing more freely across national borders • Is not however a simple uniform evolutionary process – not all countries are participating equally

14. Several key trends are globalizing the world economy and driving businesses to become more multinational to survive and prosper • Falling borders • Growing cross-border trade and investment • Rise of global products and global customers • Growing use of Internet and sophisticated information technology • Privatization of former government owned companies • Emergence of new competitors in the world market • Rise of global standards of quality and production

Countries of the World: The Arrived and the Coming, And the Struggling

Exhibit 1.2 shows some divisions of the world’s economies based roughly on classifications used by the United Nations and The Economist

15. Developed countries have mature economies with substantial per capita GDPs and international trade and investments
16. The developing countries, such as Hong Kong, Singapore, South Korea, and Taiwan, have growing economies that, in spite of the setbacks of the late 1990s
17. Other developing economies to watch are what the UN calls the transition economies of the Czech Republic, Hungary, Poland, and Russia and the developing economies of Indonesia, Malaysia, the Philippines, Vietnam, and Thailand
18. Transition economies are countries in the process of changing their economic systems from government-controlled to a more free market capitalism
19. Less developed countries (LDCs) have yet to show much progress in the evolving global economy
20. Most of the LDCs, located mostly in Central and South America, Africa, and the Middle East, are often plagued with unstable political regimes, high unemployment, and unskilled workers

See Exhibit 1.3 The Globalizing Economy

Borders are Disintegrating: The World Trade Organization and Free Trade Areas

21. In 1947, the General Agreement on Tariffs and Trade (GATT) negotiations began • Several nations began negotiating to limit tariffs and encourage free trade • Seven rounds of negotiations reduced average tariffs on manufactured goods from 45% to less than 7%
22. Negotiations continued in Uruguay in 1986 and ended in 1993 with agreements to reduce tariffs even further • The Uruguay talks also established the World Trade Organization (WTO) • The WTO provides a formal structure for continued negotiations and for settling trade disputes • There are 144 nations now in the WTO, up from 92, including 29 of the Un-classified least developed countries. Thirty more countries, including Russia, seek membership in the WTO. □ In March 1997, trade ministers from countries representing 92% of world trade in information technology products agreed to end tariffs on trade in software, computer chips, telecommunications equipment, and computers • By 2005, this $500 billion a year trade should be mostly tariff free • With tariff eliminated, high-tech exports to Europe from Asia and the U.S. should double • Developing countries will also benefit • Prices should go down on products such as phones, faxes, and computers that are produced in tariff-free locations □ Is free trade working? • The WTO thinks so – data shows that world trade has grown at more than four times the world’s gross domestic product • But critics argue that the WTO favors more developed nations because poorer nations have more difficulty to compete in an unregulated environment • Commercial interests have priority over environment, health, and safety
23. The WTO is not the only group encouraging the elimination of free trade. Regional trade agreements or free trade areas are agreements among groups of nations to reduce tariffs and develop similar technical and economic standards • Such agreements have usually led to more trade among the member nations and are often seen a step toward a complete globalization
24. The three largest groups account for nearly half of the world’s trade. These groups are: the EU, NAFTA, and APEC • The EU includes Austria, Belgium, Britain, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and Sweden plus Norway and Switzerland in the related European Free Trade Area
25. Since 1992, the European Union countries allow goods and services to move across borders without customs duties and quotas
26. The North American Free Trade Agreement (NAFTA) links the U.S., Canada, and Mexico in an economic bloc that allows freer exchange of goods and services
27. The Asia-Pacific-Economic Cooperation (APEC) is a more loose confederation of 19 nations with less specific agreements on trade facilitation

Sell Anywhere, Locate Anywhere: Trade and Foreign Investment are Growing

28. World trade among countries (imports and exports) has grown at an average rate of 6.5% per year between 1990 and 2000
29. Nearly half of the over $5 trillion in trade is among the European Union, the United States, and Japan, also known as the TRIAD trading group

Exhibit 1.4 shows the world’s leading exporters and importers

□ The September 11th attack on the united States and the following world wide economic stagnation resulted in a setback to world trade • Double-digit growth in worldwide exporting of merchandize in 2000 was followed by a over a 4% decline in the following two years □ However, while most of the world has seen a decline in trade, some countries, particularly China, has benefited during this period

Exhibit 1.5 shows the globalization takes a bump: post 9/11 and a global recession

30. Not only are multinational companies trading more across borders with exports and imports, but they are locating their supply, production, and sales units in more places throughout the globe
31. The result is that cross-border ownership, called Foreign Direct Investment, is on the rise • Foreign direct investment (FDI) occurs when a multinational company from one country has an ownership position in an organizational unit located in another country • FDI soared by over 36% between 1996 and 2000 and reached a record of over $1.5 trillion in 2000 • But in 2001, FDI declined to $735 billion and declined another 25% in 2002 □ Accentuated by the September 11 events in the United States, this decline resulted from an almost simultaneous slowdown in the major world economies and a weakening of business confidence

Exhibit 1.6 Who Owns the Most in Foreign Countries?

32. Who gives and who gets these investments in the global economy? • In spite of a decline in FDI of over 55%, the united States led all other countries as a recipient of investor in FDI in 2001 • Although the developed countries still lead the world with nearly 69% of the inward investments, the share of FDI for developing nations increased to nearly 30% in the same period • The smallest 100 countries, most of which are LDCs, had minimal FDI—all of Africa received approximately 2% of FDI
33. What does this mean for individual companies? • Perhaps the most important implication is that multinational companies now manufacture and sell anywhere

Exhibit 1.7 shows the current links among Honda’s operations in Europe and the founding date of each operation

□ Although TRIAD countries dominate the bulk of FDI, astute managers are looking to other areas of the world for future investments
34. However, although countries may provide great opportunities, they are also among the risky locations
35. Two types of risk • Political risk – anything a government might do that might adversely affect a company • Economic risk – all factors of a nation’s economic climate that may affect a foreign investor

Exhibit 1.8 Risk Ratings for Selected Countries

The Internet and Information Technology is Making it All Easier

36. The explosive growth in the capabilities of information technology increases the multinational company’s ability to deal with a global economy
37. Internet makes it easier for a company to go global since any Web site can be accessed anywhere in the world
38. Companies and individuals can shop anywhere and sell anywhere
39. Information technology expands the global reach of organizations
40. Information technology is also spurring a borderless finance
41. Small companies can now have computer power that only the largest multinationals could have afforded just a few years ago

The Rise of Global Products and Global Customers

42. Needs of customers for many products and services are growing more similar
43. Global customers search the world for their supplies paying attention to price and quality without regard for national boundaries

The State is Getting out of Business

44. Privatization is the sale of government owned businesses to private investors • The total value of government sell-offs has risen sharply since 1990, peaking at $160 billion in 1998 • From 1988-1998, Western Europe had 52%; Asia and the Pacific region had 23%; and Latin America had 15% • By 2002, European privatizations lowed to less than $20 billion – low stack prices and previous sales accounted for much of the drop
45. Two types of privatization are heating up the global economy—one in the developed world and another in the developing world • The developed countries are using privatization to make formerly government-controlled enterprises more competitive in the global economy • The developing countries are using privatizations to jump-start their economies or to speed the transition from a communist to a capitalist system □ Multinational firms often acquire the best companies in the developing world

New Competition are Emerging

□ The free-market reforms in emerging countries are creating a potential group of new competitors in the world market • Korean, Russian, Taiwanese, and Mexican companies dominate the tip ranking but Chinese companies are on the move as well

Exhibit 1.9 shows the top 25 companies from the Business Week annual scoreboard of the top 200 emerging market companies

□ Global trade has two important effects in developing new competitors • First, when the large multinationals use developing countries as low-wage platforms for high-tech assembly, they facilitate the transfer of technology • Second, aggressive multinational companies from emerging-market countries are also expanding beyond their own borders

The Rise of Global Standards

46. Increasingly, especially in technical industries, global product standards are common
47. Why? Companies can make one or only a few versions of a product for the world market
48. As new products are introduced into the world market, there is increasing competitive pressure to save money by developing one product for everyone
49. Consistency in quality has also become a requirement to do business in many countries
50. International Organization for Standardization (ISO) in Geneva, Switzerland has developed a set of technical standards known originally as ISO 9000
51. In 1992, ISO compliance became part of product-safety laws in many European countries

The Next Generation of Multinational Managers

Next Generation of Successful Multinational Managers Will Have the Following Traits

52. A global mindset: A person with a global mindset understands that the world of business is changing rapidly and the world is more interdependent in business transactions
53. The ability to work with people from diverse backgrounds: The next generation of multinational managers will build on their awareness of cultural differences to succeed in these cross-cultural relationships
54. A long range perspective: A short term view seldom succeeds in the new global economy
55. The ability to manager change and transition: Because the global economy is volatile and unpredictable, leaders need the skills to implement effectively many organizational changes
56. The ability to create systems for learning and changing organizations: It is the responsibility of the next generation of multinational leaders to build the organizations that can meet the needs of evolving strategies for global competition
57. The talent to motivate all employees to achieve excellence: The ability to motivate has always been hallmark of leadership
58. Accomplished negotiation skills: Leaders in the global economy will spend considerably more time negotiating cross-culturally
59. The willingness to seek overseas assignments: The next generation of leaders will have significant international assignment experiences
60. An understanding of national cultures: No multinational leader or business can succeed without a deep understanding of the national cultures in which they do business

Multinational Management: A Strategic Approach

61. Why should you study multinational management? In today’s internet connected world, one has little choice but to be a multinational manager
62. Foreign competition and doing business in foreign markets are daily facts of life for today’s managers
63. This book takes a strategic approach to multinational management • This strategic approach considers how multinational managers formulate and implement strategies to compete successfully in the global economy
64. Strategy is defined here as the maneuvers or activities that managers use to sustain and increase organizational performance • Strategy formulation is process of choosing or crafting a strategy • Strategy implementation includes all the activities that managers and an organization must to achieve strategic objectives
65. A fundamental assumption of the book is that successful multinational management requires that managers understand their potential competitors and collaborators
66. Multinational companies and managers must be prepared to compete with firms from other countries
67. In addition, they must also be prepared to collaborate with companies and people from any country as suppliers, alliance partners, customers, and so on
68. To accomplish these tasks means that multinational managers must understand more than the basics of national culture
69. This book provides such a background to tackle such challenges

Summary and Conclusions

70. This Chapter provided key background information that supports the study of multinational management
71. Because we exist in a globalizing world, the chapter devoted considerable attention to the forces the drive globalization
72. Multinational managers of the next generation will need skills not always considered necessary for domestic-only managers
73. After reading this text, you should have the foundation for understanding the latest challenges and practices of multinational management

CHAPTER 2

CULTURE AND MULTINATIONAL MANAGEMENT

Learning Objectives

Define and understand the basic components of culture
Identify instances of cultural stereotyping and ethnocentrism
Understand how various levels of culture influence multinational operations
Apply Hofstede and 7d models to diagnose and understand the impact of cultural differences on management processes
Appreciate the complex differences among cultures and use these differences for building better organizations

What is Culture?

Culture is the pervasive and shared beliefs, norms, values, and symbols that guide everyday life • Cultural norms prescribe and proscribe behaviors • Cultural values tell us what is good, beautiful, etc. • Cultural beliefs represent our understanding of what is true • Culture is pervasive in societies • A culture must be shared by a group of people in order to exist
Transmitted by symbols, stories and rituals
Often taken-for-granted
9. Culture is pervasive in society – it affects almost everything we do
Although culture is pervasive, not all aspects of culture are easily observable • Easily observable part of culture – front stage of culture • Only insiders can understand some aspects of the culture – backstage aspects of culture
Another key component of the definition of culture is that cultural values, norms and beliefs must be shared by a group of people
To succeed cross-culturally, multinational managers must learn as much as they can about important cultural norms, values and beliefs of the societies in which they work

Levels of Culture

The international businessperson must be aware of the three levels of culture that may influence multinational operations
National culture is the dominant culture within the political boundaries of the nation-state • All major social institutions are closely intertwined with culture
Business culture represents norms, values, and beliefs that pertain to all aspects of doing business in a culture
Occupational culture represents the culture of different occupational groups such a physicians, lawyers, accountants, and the craftspeople also have distinctive cultures
Organizational culture is "the set of important understandings (often unstated) that members of a community share in common" • Seldom do organizations have one organizational culture

Exhibit 2.1 Levels of Culture in Multinational Management

Cultural Differences and Basic Values: Two Diagnostic Models to Aid the Multinational Manager

Hofstede Model of National Culture
7d culture model – more recent model

Hofstede’s Model of National Culture

To describe national cultures, Hofstede uses five dimensions of basic cultural values • Expectations regarding equality among people, called “power distance” • Expectations regarding reactions to situations considered different and dangerous, called “uncertainty avoidance” • Relationship between the individual and the group in society, called “individualism” • Expectations regarding gender roles, called “masculinity” • Orientation toward time, called “long term orientation”

Hofstede’s Cultural Model Applied to Organizations and Management

1. Human resources management
Management selection (how people are chosen for jobs)
Training (what is the focus of job training)
Evaluation and promotion (what counts to get ahead)
Remuneration (what accounts for differences in pay)
2. Leadership styles (how do leader behave)
3. Motivational assumptions (beliefs regarding how people respond to work)
4. Decision making and organizational design (how do managers structure their organizations and make decisions)
5. Strategy (what are some cultural effects on selecting and implementing strategies)

Power Distance

25. Concerns how cultures deal with inequality
26. It focuses on the norms that tell superiors (bosses, leaders, etc.) how much they can determine the behavior of their subordinates
27. Based on values and beliefs that superiors and subordinates are fundamentally different

High Power Distance Countries Have Norms, Values, And Beliefs Such As

Inequality is fundamentally good
Everyone has a place, some are high, some are low
Most people should be dependent on a leader
The powerful are entitled to privileges
The powerful should not hide their power

Exhibit 2.2 Management Implications of Power Distance

Uncertainty Avoidance

Relates to norms, values, and beliefs regarding a tolerance for ambiguity
A higher uncertainty avoidance culture seeks to structure social systems (political, educational, business) where order and predictability are paramount • Rules and regulations predominate • People are very stressed by risky situations and avoid behaviors such as changing jobs

High Uncertainty Avoidance Countries Have Norms, Values, And Beliefs Such As

Conflict should be avoided
Deviant people and ideas should not be tolerated
Laws are very important and should be followed
Experts and authorities are usually correct
Consensus is important

Exhibit 2.3 Management Implications of Uncertainty Avoidance

Individualism/Collectivism

The values, norms, and beliefs associated with individualism focus on the relationship between the individual and the group • Individualistic cultures view people as unique • People are valued in term of their own achievement, status, and other unique characteristics
Collectivist cultures view people largely in terms of the groups to which they belong. • Social groups such as family, social class, organization, and team all take precedence over the individual

Countries High On Individualism Have Norms, Values, And Beliefs Such As

People are responsible for themselves
Individual achievement is ideal
People are not emotionally dependent on organizations or groups

Collectivist Countries Have Norms, Values, And Beliefs Such As

Self identity based on group membership
A belief that group decision making is best
A belief that groups protect you in exchange for loyalty

Exhibit 2.4 Management Implications of High Individualism vs. Collectivist (Low Individualism)

Masculinity

48. The tendency of a culture to support the traditional masculine orientation.
49. Higher masculinity means the business culture of a society takes on more traditional masculine values such as an emphasis on advancement and earnings

High Masculinity Countries Have Norms, Values, And Beliefs Such As

Clear definitions of gender roles
Men are assertive and dominant
Support for machismo or exaggerated maleness in men
People and especially men should be decisive
Work takes priority over other duties such as family
Advancement, success, and money are important

Exhibit 2.5 Major Effects of High Masculinity on Work and Organizations

Long-Term Orientation

□ Long-term (Confucian) orientation: a basic orientation toward time that values patience • Managers in cultures high on the long-term orientation are selected based on the fit of their personal and educational characteristics to the company • Skills have less importance in the hiring decision than they do in cultures with short-term orientation • Training and socialization for a ling-term commitment to the organization compensate for any initial weaknesses in work-related skills • Value security and leaders work on developing social obligations □ Short-term orientation • Must focus immediately on usable skills • Managers do not assume that employees will remain with the company for an extended time • They cannot be assured of a return on any investment in employee training and socialization • Leaders focus on and pay and rapid promotion

Exhibit 2.6 Managerial Implications of Long-Term (Confucian) orientation

Exhibit 2.7 Hofstede’s National Culture Scores For Selected Countries □ Country clusters: groups of countries, such as North American, Latin American, and Latin European, with similar cultural patterns □ Although cultures differ within these broad classifications, such summaries are useful to condense cultural information

7d Cultural Dimensions Model

Understands cultures by examining how humans deal with basic problems of survival
Five of the 7 dimensions deal with the challenges of how people relate to each other • Universalism vs. particularism • Collectivism vs. individualism • Neutral vs. affective • Diffuse vs. specific • Achievement vs. ascription
Two final dimensions deal with how a culture manages time and how it deals with nature • Past, present, future or a mixture • “Control of” vs. “accommodation” with nature

Exhibit 2.8 Summary of 7d Model and Issues Addressed by Each Dimension

Universalism vs. Particularism

Pertain to how people from a culture treat each other based on equally applied rules vs. relationships
In universalistic cultures, the right way to deal with people is based on abstract principles such as rules of law, religion, etc.
In particularistic cultures, the right way to deal with people is to examine the situation and the person no matter what the rules say
No culture is purely universalistic or particularistic
However, tendency to lean in one direction influences business practices

Exhibit 2.9 Managerial Implications of Universalism vs. Particularism

Individualism vs. Collectivism

Considers the same distinctions as Hofstede’s dimensions
However, rankings do not match exactly – can be probably explained by the more recent data used by Trompenaars

Exhibit 2.10 Differences and Managerial Implications of Individualism vs. Collectivism

Neutral vs. Affective

Concerns the acceptability of expressing emotions
In more neutral cultures, people expect that interactions are objective and detached – the focus is more on the task
In more affective orientations, all forms of emotions are appropriate in almost every situation

Exhibit 2.11 Brief Description and Managerial Implications of Neutral vs. Affective

Specific vs. Diffuse

Addresses the extent to which an individual’s life is involved in their work relationship
In specific oriented cultures, business is segregated from other parts of life
In diffuse oriented cultures, business relationships are more encompassing and involving • Preference is for involvement of multiple areas and levels of life simultaneously • Truly private and segregated spaces in life are small

Exhibit 2.12 Brief Description and Managerial Implications of Specific vs. Diffuse

Achievement vs. Ascription

Addressed the manner by which a particular society accords or gives status
In achievement-oriented societies, people earn status based on their performance and accomplishments
In ascription-oriented societies, one’s inherent characteristics or association define status

Exhibit 2.13 Brief Description and Managerial Implications of Achievement vs. Ascription

Time Orientation

The time horizon concerns the way cultures deal with the past, present, future, and boundaries among these time zones
In future-oriented societies, it is assumed that individuals can work hard to influence the future
In past-oriented societies, people often assume that life follow a preordained course based on the traditions or will of God

Exhibit 2.14 Summarizes the Cultural Characteristics of Different Time Horizons and Gives Some Managerial Implications

Internal vs. External Control

Concerns beliefs regarding one’s fate – best reflected in how people interact with their natural environment
Does nature dominate us or do we dominate nature?
In cultures where it is believed that nature dominates people, managers are likely to be fatalistic
In contrast, where cultural values support the notion that people dominate nature, managers tend to be proactive

Exhibit 2.15 Summarizes the Internal vs. External Cultural Dimension and Its Managerial Implications

Exhibit 2.16 Percentile Rankings for the 7d View of Culture for Selected Countries

Propensity to Trust: A Cultural Dimension of Increasing Importance

Growing concern is the development of trusting relationships with business partners
Common hypothesis is that individualistic cultures with their focus on self-interested behaviors, have values that allow one person to take advantage of another person
Evidence from research shows the opposite – it seems that people from more individualistic cultures are more predisposed to trust others than people from collectivist cultures
Recent research from the World Values Survey provides perhaps the most comprehensive information on cultural values regarding trust
Nordic countries had the highest levels of trust
U.S. ranked ahead of the more collectivist countries of Japan and South Korea

Exhibit 2.17 Shows the Percentage of Respondents in Each Society Responding to the Statement “Most People Can be Trusted”

Exhibit 2.18 Shows that Proverbs Provide Less Formal Insights Into National Cultures

Caveats and Cautions

Stereotyping: assuming that all people within one culture behave, believe, feel, and act the same
Ethnocentrism occurs when a person believes that the only correct norms, values, and beliefs come from his or her culture
Cultural relativism is the view held by many anthropologists that all cultures, no matter how different, are correct and moral for people of those cultures

Summary and Conclusions

After completing this chapter, you should know that culture has a variety of levels that affect multinational managers and organizations
Models of cultural values proposed by Trompenaars and Hofstede provide basic concepts for analyzing cultural differences
Most successful multinational manager will realize that understanding a different culture is a never-ending process

CHAPTER 3

THE INSTITUTIONAL CONTEXT OF MULTINATIONAL MANAGEMENT

Learning Objectives □ Understand the national context and how it affects the business environment □ Understand the influence of the institutional context of countries on individuals and organizations □ Define social institutions and understand the basic forms of social institutions □ Understand how social institutions influence both people and organizations □ Understand the basic economic systems and influence on multinational operations □ Understand the basic stages of industrialization and implications for multinationals □ Understand the world’s basic religions and how they shape the local business environment □ Develop an understanding of education and its effects on multinational operations □ Understand the convergence perspective on organizations □ Understand the importance of the national context and its connection with other international management areas

Introduction □ There are other elements besides national culture that can produce important business-related differences among societies. □ Understanding the institutional context of countries is thus extremely critical to better multinational management. □ At a basic level, a complete understanding of any society cannot be fully achieved unless both the national culture and the institutional context are examined.

Exhibit 3.1 Shows A Model Of How The National Context (I.E., Institutional Context, National Culture, And Business Culture) Leads To National Differences That Have Implications For The Business Environment Of Any Country.

□ The national context is made up of the respective national cultures and social institutions of any society. □ However, closely intertwined with national cultural forces are social institutions such as the economic system, religion and education. • They represent significant influence on norms, values and beliefs of people that have implications for the business culture. □ Social institutions evolve within the constraints of national culture to not only shape the values and beliefs of individuals but to also provide the business context within which some organizational forms can exist and some industries can flourish. □ Social institutions have important influences on individuals and the business environment in any society. • In concert with national culture, social institutions help shape the business culture. • It also creates induced-factor conditions that add to the resources of any society. • In turn, this national context provides the environment that influences how firms are formed and how they approach multinational strategic management. □ This chapter will provide you with a basic understanding of the institutional context of societies.

Social Institutions and Influence of Society □ A social institution can be defined as a complex of positions, roles, norms, and values organizing relatively stable patterns of human resources with respect to sustaining viable societal structure within a given environment. • It has profound effects on people’s immediate conditions of life and provides the context that affects psychological differences among people. • It provides boundaries and norms that prescribe how people will behave. □ There are three key social institutions that have been shown to be most likely to influence the business environment. • Economic systems (e.g., capitalism or socialism), the level of industrialization, and the types of religion • Educational system as it has also been linked to a lesser degree with the business environment • Family is also an important social institution. • However, the family has a more significant effect on the non-work aspect of individuals and less substantial influence on the business environment. □ How do social institutions affect individuals? • A regulative social institution constrains and regularizes behaviors through its capacity to establish rules, to inspect and review conformity, and to manipulate consequences to reinforce behaviors. • The cognitive dimension refers to the widely shared knowledge regarding how things are done in a society. • The normative dimension refers to the values and norms promulgated by the social institutions. □ Social institutions have effects on individuals as well as organizations. □ However, in the case of organizations, social institutions, especially the legal and political systems, help define what are legitimate and correct management practices in a particular society. □ The pressure from social institutions to follow similar paths in management practices is called organizational isomorphism. □ Within a nation, isomorphism leads organizations to become similar to each other, but different from organizations located in other nations. □ Experts identify three types of isomorphism (or pressures for similarity) that are important for organizations • Coercive isomorphism means that social institutions coerce or force organizations to adopt certain practices. • Mimetic isomorphism means that organizations purposefully copy the strategies of the most successful organizations. • Normative isomorphism means that organizations indirectly copy the designs, cultures, and strategies of other organizations by conforming to professional and technical norms. Normative isomorphism differs from mimetic isomorphism because copying occurs largely without conscious effort.

Economic Systems □ The economic system is the “interrelated network or system of beliefs (concerning work, property, constructs, and wealth), activities (extraction, production, and distribution), organizations (business firms, labor unions, consumer associations, regulatory agencies) and relationships (ownership, management, employment, sales) that provide the goods and services consumed by the members of a society. • Economic systems are usually reflected in their governments’ influence, specifically in terms of whether productive activities are state owned or privately owned. □ Economic systems can be typified by the extremes of capitalism and socialism with mixtures of elements of both in the mixed economy. • The capitalist or market economy refers to an economic system where production activities are “decentralized to private-property-rights holders (or their agents) who carry out these activities for the purpose of making profits in a competitive market”. • In contrast, the socialist or command economy is one where production resources are owned by the state and production decisions are centrally coordinated. • The mixed economy combines aspects of the capitalist and socialist economic systems. □ Economic systems have three major implications for strategic multinational management. • As a rough guide, multinational managers may want to consider the index of economic freedom to determine the extent of governmental intervention in different countries

Exhibit 3.2 Shows Selected Top And Bottom 10 Countries On The 2003 Score.

□ A second important implication for multinational strategic management related to economic systems are the market transitions that many societies are going through as they move from socialism to a more market based system • An important component of this transition is to understand what people and organizations go through to better understand workers’ reactions to market mechanisms • Drastic measures have to be taken to turn around formerly inefficient firms • Managers’ thinking have to be changed so that they understand management functions • Financial system and firms have to be left unregulated □ A third and final implication that is closely related to the second implication is privatization efforts in many countries including Russia, China and some African countries • Privatization refers to the transfer of state ownership to private individuals

Exhibit 3.3 Shows Selected Countries And The Amount Of Money Raised By Privatization Efforts In 2000.

□ Privatization of state businesses is seen as an effective way to encourage companies to become more efficient. □ Private owners are given a new powerful incentive to turnaround formerly state run businesses, namely profits. □ Multinationals have the prospect of investing in companies that present significant opportunities in terms of access to local markets and to relatively cheaper local labor. □ In the case of privatization in former socialist societies, companies have to face similar challenges outlined earlier. • Often privatization involves the laying off of large number of employees, dealing with poorly trained managers and also to remove job security for workers. • Such changes are painful but necessary in the short term where multinationals face the most challenges. □ Special efforts have to be taken in order to understand what workers are experiencing. • It is not realistic to expect these workers to give up decades of economic expectations and to suddenly adopt the market based approach. □ Economic systems have important implications for strategic management of multinationals • Economic systems impact relationships among companies and how these companies are structured. • The transition of many former socialist countries to a market based approach present significant challenges for multinationals. • However, economic systems also affect individuals.

Industrialization □ Industrialization refers to the cultural and economic changes that are brought about by fundamental changes in terms of how production is organized and distributed in society. □ Pre-industrial society is that agriculture dominates and shapes the economic environment. • In pre-industrial societies, religious norms and tradition are emphasized while social mobility is discouraged. • Occupational placement tends to be based on ascription (family background) and social status is largely determined through inheritance. □ An industrial society tends to be characterized by the dominance of the manufacturing or secondary sectors. • Such societies reflect the prevalence of technological development that makes rapid economic growth possible. • Industrial societies tend to require wider ranges of skills in their workforce relative to pre-industrial societies. • Occupational placement is based on universalistic criteria such as achievement. □ Finally, the postindustrial society emphasizes the service sector. • The dominance of employment by the service sector leads to a drastic expansion of the role of formal education, as there is a need for highly skilled workers with specialized skills.

Exhibit 3.4 Shows Selected Countries And The Distribution Of Employment By Primary, Secondary And Tertiary Sectors

□ It is critical to understand the level of industrialization as the latter has important implications for strategic multinational management. □ Pre-industrial societies tend to be the least economically developed. • Given that the long-term prospect of a business in any country is dependent on the market size and income, pre-industrial societies tend to provide fewer opportunities. • However, it is also important to note that pre-industrial societies also provide relatively cheap labor compared to more industrialized societies. • Pre-industrial societies tend to have poorer infrastructure and business support. It may be more costly to operate in such societies because the multinational may have to provide its own infrastructure and support services. • Many African countries are unfortunately found in the pre-industrial category and multinationals have generally shunned most of them because of political instability. • However, the future for some African countries is bright and multinationals have to be aware of the role they can play in such developments.

Exhibit 3.5 Shows The Political Democracy Indices For Selected African Countries

□ Industrial societies tend to be more economically developed than pre-industrial societies. • As technological development makes it possible to shift production to the manufacturing sector, there are important changes in the economic environment of the society that impacts strategic management. • As opposed to an emphasis on tradition and communal obligations heavily influenced by religious norms typical of pre-industrial societies, industrial societies tend to favor innovation and individualism. • Economic achievement becomes the top priorities for industrial societies and discipline and achievement-oriented norms predominate. • Industrial societies tend to present significant opportunities for multinationals. • Multinationals have access to an environment that is very favorable to businesses and a labor force that is often educated and motivated. • Additionally, industrialized societies tend to have governments that are usually favorable to businesses. • Industrial nations tend to present less non-market risks, such as government appropriation, to businesses.

Exhibit 3.6 Shows Materialist Scores Of Selected Countries □ A postindustrial society is characterized by the domination of the service sectors in production activities. • The source of productivity and growth tend to come from the generation of knowledge as applied to all economic sectors through information processing. • Because services delivery becomes important, there is a significant rise of ‘information-rich’ occupations such as managerial, professional and technical jobs. • As societies become more postindustrial, an increasing share of jobs requires higher skills and advanced educational achievements. • Post-industrialization is leading to a postmodern shift in many societies. • The disciplined and achievement-oriented norms and values typical of industrialized societies have reached a peak. • In postindustrial societies, the “emphasis on economic achievement as the top priority is now giving way to an increasing emphasis on the quality of life”. • As such, people are more likely to espouse individual expression values and a movement towards a more humane society.

Exhibit 3.7 Shows Selected Countries And Their Scores On The Post-Materialist Scale
Religion
□ A religion can be defined as a shared set of beliefs, activities, and institutions that have basis upon faith in supernatural forces. □ Religions continue to be an important aspect of most societies. □ Religions and work and their interrelationships form the very foundations of human society. □ Religions have important influences on society. • Religions through their faiths provide individuals with the way of dealing with issues that reflect individual wishes and activities. □ Four religions that are practiced by a large percentage of the world’s populations are Christianity, Hinduism, Islam and Buddhism.

Exhibit 3.8 Shows The Distribution Of Religions Around The World Both In Terms Of Percentage Of The World Population And Number Of Followers

□ Christianity is a faith based on the life, teachings, deaths and resurrection of Jesus” and is clearly the most practiced religion around the world. • Christianity started with the birth of Jesus Christ around 2003 years ago and has evolved considerably into different forms because of many internal feuds and divisions. • Despite the many divisions among Christianity, Christians all share the same belief that Jesus is the incarnation of God who was sent to clean sinfulness of humanity. • With regards to multinational strategic management, the impact of Protestantism on the development of capitalism is seen as a major evidence of the link between religion and economic structuring of societies because Protestantism emphasized wealth and hard work for the glory of God, it allowed the focus on goals attached to economic development and wealth accumulation. • In general, Christians agree “on the value and dignity of human life, labor and happiness”. There is a general support for the freedom to accumulate wealth and possessions. • However, human greed and selfishness is nevertheless viewed with contempt and attempts are made to ensure that there is equality of opportunity and fairness for the less fortunate. • Ten Commandments provide the basis for what is considered as ethical behaviors. □ The essence of Islam as described in the Qur’an is the submission to the will of Allah (God). • Islam can be traced back to Muhammad, a prophet born in 570 A.D. • Muslims do not ascribe divinity to Muhammad - rather, he is seen as the purveyor of Allah’s (God) revelations and the last in a line of prophets starting with Adam, through Moses, Jesus and Abraham. • The Muslim lives in a society that is heavily influenced by Islamic standards and norms. • Islam provides encompassing guidance in all spheres of life, both social and economic. • The Shari’ah requires Muslims to live based on five pillars, namely Confession, Prayer, Alms-giving, Fasting, and Pilgrimage to Mecca. • The above pillars have important implications to multinational strategic management. • The alms-giving pillar also has critical implications for multinational strategic management and how Islam views business. • In general, the Qur’an is supportive of entrepreneurship and earning of profits through legitimate business activities. The Qur’an also allows accumulation and protection of private property. • Muslims are likely to condemn the pursuit of profits through exploitation of others. • Muslims (and organizations) are required to share the accumulated wealth by charitable giving to the poor. • Multinationals may thus be well served by participating in such donations. • An important consequence of Islam’s condemnation of exploitation of other’s is that Islam prohibits the payment or receipt of interest. • Islam regards payment or acceptance of interest a very serious sin. • In some countries, governments have instituted financial laws that see interest as illegal. • However, many Muslim societies have been working in profit sharing plans to avoid the payment or receipt of interest. • Multinationals are likely going to be presented with significant opportunities in the Muslim countries over the next few years. • A final multinational strategic management implication of Islam pertains to the role of women in Muslim countries. • Although the Qur’an puts men and women on equal footing as individuals, there are different guidelines regarding the role of men and women. • Multinationals thus have to be aware of implications of their business actions based on gender roles. □ Hinduism is a broad and inclusive term referring to those individuals who respect and accept the ancient traditions of India, “especially the Vedic scriptures and the social class structure with its special respect for Brahmans (the priestly class)”. • Unlike Christianity and Islam, Hinduism has no specific founder and Hindus place no special significance on historical events or sequences of events. • Hinduism through the Vedic scriptures is seen as timeless and eternal. • Many of the Hindus outside of India typically share ancestors from India. • The quest for Brahman is the ultimate goal for most Hindus. • Brahman refers to the ultimate reality and truth and to the “sacred power that pervades and maintains all things. • Hinduism generally believes in the reincarnation of the atma based on one’s karma, or the effects of one’s past actions. • As such, if one tries hard to live life according to the principles of dharma or principles of righteousness and moral order, one will get reincarnated in successively favorable atmas until one reaches Brahman. • The importance of spiritual achievement is a very important value for most Hindus. • Hindus believe that the sole pursuit of wealth accumulation makes search for Brahman difficult. • One aspect of Hinduism that is most likely to have implications for multinationals in India is the caste system. • The caste system refers to ordering of Indian society based on four occupational groups. • The highest caste includes the priests, followed by the kings and warriors, and merchants and farmers, and the fourth caste includes the manual laborers and artisans. • As such, multinationals operating in India have to be aware of the caste system. • Hinduism provides clear guidelines regarding ethical behaviors, among which respect for one’s parents and performing one’s duty are prominent. • The Hindu’s respect for their parents also has business implications. • Multinationals will often find that families run Indian businesses and that the elder males in the business typically make major decisions. • Multinationals should be aware that Hinduism does not condemn the pursuit of material possessions and that they can generally expect an environment that is conducive to business and wealth accumulation. □ Buddhism refers to the broad and multifaceted religious tradition that focuses primarily on the reality of worldly suffering and on the ways one can be freed from such suffering. • Gautama Buddha, born as a prince around the six century BC in India, founded Buddhism. • Buddha proposed that to remove the suffering, one had to follow the Eightfold path of Right understanding, Right intention, Right speech, Right action, Right livelihood, Right effort, Right mindfulness, and Right concentration. • Buddhism also believes that the way to end suffering is to meditate to train and soothe the mind to ultimately reach enlightenment or nirvana. • Buddha’s teachings suggest that Buddha saw poverty as the major reason for ethical behavior decline in society. • Buddhism therefore prescribed a work ethic that encouraged workers to engage in their best efforts and qualities such as taking of initiative, persistence and hard work. • As such, multinationals should expect workers who have a generally positive view of work. • However, it is important for multinationals to be aware that Buddhism proposes a work ethic that emphasizes teamwork and ethical means to achieve success at work • Buddhism is also based on the notion that there is no separate self and that all beings are interconnected and interdependent. • Multinationals should thus be aware of their actions and ensure that decisions are made within such ethical boundaries. • Although Buddhism does not necessarily condemn wealth creation and profit, multinationals nevertheless need to understand that a company exists for the betterment of society and other beings. • Given that Buddhism has a stronger emphasis on compassion and love, it has even been suggested that Western profit oriented companies should adopt Buddhist principles. • Furthermore, the compassion and love inherent in considering others as close relatives may be helpful to deal with the employee diversity of multinationals. • Buddhist principle is the acknowledgement that the positive action of others makes life possible. • It is important to understand that although work is a key component of life, there are other areas that need to be balanced. • Multinationals can thus follow the latter and respect a balanced work design for their workers. □ A final issue multinationals should be aware of is religiosity. • Religiosity is an indication of the importance of acceptance of the core philosophies of religion in one’s life. • Understanding country level religiosity is useful because it gives multinationals a general indication of how responsive they need to be to such religious needs • Religiosity has been shown to be positively linked to favorable attitudes towards work and also to be linked to how people allocate their times

Exhibit 3.9 Shows The Religiosity Of Selected Countries From The World Values Survey.

Education □ Education refers to the “organized networks of socializing experiences which prepare individuals to act in society”. □ “Is also a central element in the table of organization of society, constructing competencies and helping create professions and professionals”. □ Education is seen as a critical path to economic development and progress. □ Education has obvious implications for multinational strategic management. • At a basic level, educational levels give an indication of the skill and productivity of workers in any society. • The more educated workers are, the more skills they possess and the more likely they are to contribute to a country’s production, both in terms of products and services. • The educational systems determine the nature of the workforce. • Additionally, having an abundant supply of well-educated individuals allows countries to facilitate the absorption of technology from developed countries. □ Multinationals can thus gauge the educational levels of various countries they are involved in to determine what to expect from their workers.

Exhibit 3.10 Shows The Educational Attainment Scores For A Selected Number Of Countries □ Multinationals may thus be also interested in the skills and experience that can be potentially gained from the educational system of the country. □ They should also consider the test scores of students on internationally comparable tests. • If a multinational is engaged in high level research and development, it may find that location in countries with high mathematics and science scores provide access to an abundance of skilled workforce which is naturally inclined towards scientific projects.

Exhibit 3.11 And 3.12 Shows The Mathematics And Science Scores For The Top 10 Countries Respectively □ A final issue is the extent to which educational systems actually encourage students to be innovative and creative. • In that context, many Asian societies have been grappling with the redesign of educational systems that are extremely competitive at the secondary level but that rely heavily on rote learning. • Given that the educational systems tend often to be based on rote memorization, multinationals have to be aware that their workforce in such societies has gone through such schooling experiences • This is not to suggest that Asian countries are not creative • However, different training methods may be necessary to encourage the workforce to be creative

Organizations Alike: Globalization and Convergence □ Some experts believe that many management practices, especially those related to strategy and structure, are becoming more similar. □ This increasing similarity of management practices is called convergence. □ Coercive, mimic, and normative isomorphic pressures for similarity described earlier not only work within countries but are also beginning to work cross-nationally. □ Cross-border competition, trade, mergers, and acquisitions provide more opportunities to learn about and copy successful managerial practices from anywhere in the world. □ Normative pressures for similarity come from the internationalization of business education and the movement of managers across borders. □ The points below show in more detail how globalization pushes organizations to be more similar. • Global customers and products • Growing levels of industrialization and economic development • Global competition and global trade • Cross-border mergers, acquisitions, and alliances • Cross-national mobility of managers • Internationalization of business education • However, in spite of the trend toward convergence, social institutional differences still affect the way many firms compete via their choices of strategies and designs and how they manage their human resources. □ Savvy multinational managers must understand these differences for if they want to be successful.

The National Context and International Management □ Social institutions are thus key aspects of understanding the business environment in any country. □ Social institutions shape norms, values and beliefs that determine acceptable and unacceptable business practices. □ However, the national context’s role is not only limited to shaping of business practices. The national context has significant influence on a company’s strategy. □ The national context determines the comparative advantage of nations, which ultimately determines which strategies multinationals choose. • The concept of comparative advantage refers to the idea that countries prosper when they can produce goods with the lowest relative cost of production. • Thus, countries that have educational systems that emphasize sciences have a comparative advantage through the supply of skilled but cheaper workforce. • The national context also determines the global platform, namely the areas of business that can be performed the best in a country. • The national context also plays an important role in terms of the human aspect of international management. • The national context is also seen as a determinant of the nature of the relationship between workers and their superiors. • Furthermore, the national context also determines how people view work and sets the stage for motivation in an international context. • Finally, the national context also influences how multinationals approach human resource management policies.

Summary and Conclusions □ To get a full understanding of any society, it is essential to understand both national culture and the institutional context. □ Toward this goal, we first look at a model to examine how both national culture and social institution combine to form the national context that influences the business culture of any society. □ This chapter then complements chapter 2 by providing more specific background information on four important social institutions and their implications both for companies and the people they employ. □ First the chapter defined social institutions and an explanation of how social institutions affect individuals and organizations. □ We also describe how social institutions encourage organizations to become similar through isomorphic forces. □ The chapter described the economic systems especially with reference to the extreme types of economic systems. □ The chapter discussed pre-industrial, industrial and postindustrial societies and their implications for multinational strategic management. □ Religion is also an important social institution in most societies. □ We discussed four of the major religions around the world, namely Christianity, Islam, Hinduism and Buddhism. □ The final social institution discussed is education. □ Educational systems have important implications with regards to the available skills and experiences of the workforce in any society. □ Finally, we considered the possibility that the social institutions described in the chapter may actually be causing companies to become more similar than different. □ We conclude by arguing that successful multinational managers are the ones who can properly assess the institutional context of the society they operate in and design work environments that fit the institutional context

CHAPTER 4

STRATEGIC MANAGEMENT IN THE MULTINATIONAL COMPANY: CONTENT AND FORMULATION

Learning Objectives

Define the generic strategies of differentiation and low cost
Understand how low cost and differentiation strategists make money
Recall multinational examples of the use of the generic strategies
Understand competitive advantage and the value chain and how it applies to multinational operations
Understand how offensive and defensives strategies are used by multinational firms
Understand the basics of multinational diversification
Understand how the traditional strategy formulation techniques, industry, and company situation analysis are applied to the multinational company
Realize that the national context affects both the convergence and divergence in strategies used by multinational companies

Basic Strategy Content Applied To The Multinational Company

Firms must rapidly adjust their strategies in the new competitive landscape characterized by global competition
Multinational companies use many of the same strategies practiced by domestic companies
( Strategy content includes the strategic options available to companies

Competitive Advantage and Multinational Applications of Generic Strategies

Generic strategies represent very basic ways that both domestic and multinational companies use to keep and achieve competitive advantage
Competitive advantage occurs when a company can out match its rivals in attracting and maintaining its targeted customers
( Companies that Adopt a Differentiation Strategy • Find ways to provide superior value to customers such as exceptional product quality, unique product features, or high quality service
106. Companies That Adopt a Low Cost Strategy • Produce or deliver products or services equal to those of their competitors by finding the means to produce their products or to deliver their services more efficiently than the competition
( How Do Low Cost and Differentiation Firms Make Money? • Differentiation: people will often pay a higher price for the extra value provided by the superior product or service • Low cost: products or services similar to competitors in price and value yield additional profits from cost savings

Exhibit 4.1 Shows How The Relationships Among Prices, Costs, And Profits Work For The Differentiation And Low Cost Strategist As Compared To The Average Competitor

Competitive Scope • Represents how broadly a firm targets its products or services • Companies with narrow competitive scope focus on limited products, certain type of buyers or geographical areas • Companies with broad competitive scope have many products targeted at a large range of buyers

Exhibit 4.2 shows four subdivisions of Porter's generic strategies

Competitive Advantage and The Value Chain

A firm can gain competitive advantage by finding sources of lower cost or differentiation in its activities
One convenient way of thinking of a firm’s activities is the value chain
The Value Chain: Michael Porter uses the term value chain to represent all the activities that a firm uses " To design, produce, market, deliver, and support its product" (Porter 1985: 36).

Exhibit 4.3 shows a picture of the value chain

The Value Chain - Primary and Support Activities • Primary activities involve the physical actions of creating (or serving), selling, and aftermarket service of products • Support activities include systems for human resources management, organizational design and control, and a firm's basic technology • Upstream and Downstream • Early activities in the value chain, such as R&D and dealing with suppliers, are called upstream • Later value chain activities, such as sales and dealing with distribution, channel members represent downstream activities

Distinctive Competencies

Distinctive competencies are the strengths anywhere in the value chain that allows a company to outperform rivals in areas such as efficiency, quality, innovation, or customer service
Resources are the inputs into a company’s production or services processes
Capabilities represent the company’s ability to assemble and coordinate their available resources in ways that lead to lower costs or differentiated output

Sustaining Competitive Advantage

Sustainable means that strategies are not easily neutralized, copied, or attacked by competitors
116. Low Cost Labor: One of the most imitated sources of lower costs in the international market place is cheap labor • Quickly copied by competitors with access to the same international labor pools

Exhibit 4.4 How Distinctive Competencies Lead to Successful Strategies

Offensive and Defensive Competitive Strategies in International Markets

Besides using basic generic strategies, multinationals can also use strategic moves called competitive strategies
In offensive strategies, companies directly target rivals from whom they wish to capture market share
In defensive strategies, companies seek to beat back or discourage the offensive strategies of rivals
120. Examples of Offensive Competitive Strategies • Direct attacks: price cutting, adding new features, comparison advertisement • End-run offensives: avoid direct competition and seek unoccupied markets • Preemptive competitive strategies: being the first to gain some advantageous position • Acquisitions: firm buys its competitors
121. Defensive Competitive Strategies: Attempt to reduce the risks of being attacked, convince attacking firms to seek other targets, or blunt the impact of any attack • Counter-parry: A popular strategy for multinationals by fending off a competitor's attack in one country by attacking them in another country, usually their competitor's home country

Multinational Diversification Strategy

Contrasts with business level strategies
( Corporate level strategies concern how companies choose their mixtures of different businesses - diversification

Related and Unrelated Diversification

In related diversification, companies start or acquire businesses that are similar in some way to their original or core business
( In unrelated diversification, firms acquire businesses in any industry
Like domestic companies, multinationals also pursue diversification strategies • A quick way to gain a presence • Allows coordination and use resources from different businesses located anywhere • More easy to establish global brand names for different but related products • Allows cross subsidizing both across countries and across companies

Exhibit 4.5 Shows A Selection Of Fortune 500 Diversified Multinationals With Their Major Lines Of Businesses

Strategy Formulation: Traditional Approaches

Strategy Formulation
( The process by which managers select the strategy to be used by their company
( Popular Analysis Techniques Help Managers Understand • The competitive dynamics of the industry in which they compete • Their company's competitive position in the industry, • The opportunities and threats faced by their company, and • Their company's strengths and weaknesses
( These techniques allow managers to choose strategies that best fit their unique situations

Industry and Competitive Analyses

125. Industries: Identify the main competitive arenas of a company's businesses • Managers must understand the economic characteristics of the industry, the driving forces of change in the industry, and what drives competition in the industry
126. Industry traits that influence strategy selection: market size, ease of entry and exit, and whether there are economies of scale in production
127. Driving forces of change: include issues such the speed of new product innovations, technological changes, and changing society attitudes and lifestyles
128. Nature of competition in industry
( The Factors That Lead to Success in an Industry Are Called Key Success Factors (KSFs) • Examples of KSF: innovative technology, broad product line, distribution channel effectiveness, price advantages, promotion effectiveness, superior physical facilities, experience of firm in business, cost position for raw materials, cost position for production, R&D quality, financial assets, product quality, and quality of human resources

Formulating the Best Strategies

129. Know the industry and KSFs
130. Understand and anticipate your competitors' strategies

The Competitive Analysis

131. A competitive analysis develops profiles of your competitors' strategies and objectives
132. The Competitive Analysis Has Four Steps 1. Identify the strategic intents of competitors 2. Identify current and anticipated generic strategies used by competitors 3. Identify current and anticipated offensive and defensive competitive strategies used by rivals 4. Assess the current positions of competitors

Exhibit 4.6 Shows Hypothetical Competitive Profiles Of Four Companies In Different Countries

Company-Situation Analysis

133. The most common tool for a company situation analysis is called the SWOT
134. SWOT is an acronym for strengths, weaknesses, opportunities, and threats • A Strength: distinctive capability, resource, skill, or other advantage that an organization has vis-a-vis its competitors • A Weakness: any competitive disadvantage of a company vis-a-vis its competitors • Opportunities: favorable conditions in a firm's environment • Threats: unfavorable conditions in the environment
The SWOT analysis for the multinational company is more complex than for the domestic company
136. Multinationals • Face more complex external environments because they operate in two or more countries • Each country provides its own operating environment that may present opportunities or threats different from those in another country • A country-by-country SWOT is probably most prudent

Corporate Strategy Selection

The major strategic question is deciding which businesses in the portfolio are targets for growth and investment and which are targets for divestment or harvesting
( The most popular way of assessing a Corporate Business Portfolio is through a matrix analysis
( Several consultants and companies have developed their own business matrix systems to assess their business portfolios
138. The most popular is the growth-share matrix of the Boston consulting group (BCG) • The BCG Growth-share Matrix • Divides businesses into four categories based on the industry growth rate and the relative market share of the business in question • The Most Attractive Businesses - "Stars": Located in fast growing industries where a company has a relatively large market share when compared to the most successful firm in the industry • "Dogs": Businesses in low growth industries where a company has a relatively low market share • "Cash Cows": Business in slow growth industries where the company has a strong market share position • "Problem Children": Business in high growth industries but where the company has a poor market share performance
For the Diversified Multinational Company • The portfolio assessment becomes more complex • Portfolio analyses must be conducted for each business in each country or region of operation

Exhibit 4.7 Shows The BCG Growth Share Matrix For A Diversified Multinational Company

□ Another popular portfolio matrix is the GE Portfolio Matrix • Contains nine cell based on high, medium, and low levels of industry attractiveness and strong, average and weak levels of a business’ competitive position in the industry • Some indicators of industry strength are market size and growth rate • Competitive position is based on the strategic capabilities of a business such as lower costs for production • Used to determine the competitive position of a business in its industry □ Basic strategy formulation question • Are businesses in attractive industries? • Are most businesses growing? • Are there sufficient cash cows to finance other potential growth businesses? • Is the business portfolio well positioned for the future? • Do the business have some strategic synergies? □ For the diversified multinational company, the portfolio assessment becomes more complex • Market share and industry growth are seldom the same in all the countries in which a multinational competes

The National Context and Organizational Strategy: Overview and Observations

□ The national context affects organizational design and strategy formulation and content through the following processes • The social institutions and national and business cultures encourage or discourage certain forms of businesses and strategies in each nation • Social institutions and national culture serve as barriers to the easy transfer of competitive advantages among countries • Each nation must rely on its available factor conditions for developing industries and the firms within industries • Social institutions and culture determine which resources are used, how they are used, and which resources are developed □ Multinational managers can generalize and apply these ideas to understand the actions of rivals or alliance partners in any country where their firm dose business

Summary and Conclusions

140. Few students will work in industries not touched by global competition
141. Many will work for multinational companies or their subsidiaries
142. Others will work for companies that may source their raw materials from international suppliers, sell to international customers, or compete with multinationals (or all three)
143. Even the managers of domestic firms need a good understanding of multinational business strategy
144. Like domestic firms, multinational companies are based on general strategic management processes and employ generic strategies of low cost and differentiation
145. However, because of the additional complexities of a multi-country environment, the multinational manager always faces more complex situations and continuous challenges
146. The multinational manger must also realize that strategy is a combination of planned intent and adaptive reactions to changing circumstances
147. The manager determines the best game plan give the nature of his or her company and the competitive and general environment in which the company must survive
148. Modifying or changing strategies in responses to new opportunities and new threats in a necessity in today’s world of rapid cross-boarder competition

CHAPTER 5

MULTINATIONAL AND PARTICIPATION STRATEGIES: CONTENT AND FORMULATION

Learning Objectives

Appreciate the complexities of the global-local dilemma faced by the multinational company
Understand the content of the multinational strategies: transnational, international, multidomestic, and regional
Formulate a multinational strategy by applying the diagnostic questions that aid multinational companies in solving the global-local dilemma
Understand the content of the participation strategies: exporting, alliances/IJVs, licensing, and foreign direct investment
Be able to formulate a participation strategy based on the strengths and weaknesses of each approach and the needs of the multinational company

Multinational Strategies: Dealing With the Global--Local Dilemma

□ Fundamental dilemma faced by all multinationals is how to compete internationally – the global-local dilemma
Should the company emphasize responding to differences in the markets in all the countries in which it operates? • If the answer is yes, this is called the local responsiveness solution
Alternatively, should the company de-emphasize local differences and conduct business similarly throughout the world? • If the answer is yes, this is called the global solution □ The solution for the global-local dilemma, whether local responsiveness or global integration, forms the basic strategic orientation of a multinational company • This strategic orientation affects the design of organization and management systems as well as supporting functional strategies in areas such as production, marketing, and financ
Companies that lean toward the local responsiveness solution stress customizing their organizations and products to country or regional differences
Multinational companies that lean toward a global solution attempt to reduce costs by using standardized products and uniform promotional strategies and distribution channels in every country • Globally oriented multinationals seek sources of lower costs or higher quality anywhere in their value chain and anywhere in the world
Neither responding to local customer needs nor selling the same product is a guarantee of success
Solutions to the global--local responsiveness dilemma: four possibilities • Multidomestic, • Transnational, • International, • Regional • The multidomestic and the transnational strategies: Bipolar reactions to one side of the global-local dilemma • International and regional strategies: Compromise positions, attempt to balance conflicting drives

Multidomestic Strategy

160. Gives top priority to local responsiveness issues
161. A form of the differentiation strategy – company attracts customers by selling products tailored to different countries needs
162. Usually costs more – hence higher prices must be charged to recoup cost
163. Not limited to large multinationals
164. Even smaller firms exporting its products may use a multidomestic strategy by adapting its product line to different countries and cultures

Transnational Strategy

165. Gives two goals top priority: • Seeking location advantages • Gaining economic efficiencies from operating worldwide
166. Location advantages • Value chain activities (e.g., Manufacturing, R&D, sales, etc.) anywhere in the world where the company can "do it best or cheapest" as the situation requires • A global platform: Country location where a firm can best perform some, but not necessarily all, of its value chain activities • Provide the transnational firm with most of its location-based competitive advantages in costs and quality • Most often support upstream activities in the value chain such as R&D and production
167. With upstream location advantages, the transnational can: • Locate subunits near cheap sources of high-quality raw material • Locate subunits near centers of research and innovation • Locate subunits near sources of high-quality or low-cost labor • Seek low-cost financing anywhere in the world • Share discoveries and innovations made in one part of the world with operations in other parts of the world
( Thus, a company adopting a transnational strategy can locate the activities in its upstream value chain based not only on lower costs but also on the potential for creating additional value for its products or services □ Location advantages can also exist for other value-chain activities • Having locations for cheaper manufacturing • Being close to key customers • Locations that serve the most demanding customers ( Comparative advantage • Different from competitive advantage, which refers to the advantages of individual firms over other firms • Refers to advantages of nations over other nations • Organizations use their nation’s comparative advantages to gain competitive advantages over rivals from other nations • Traditionally, only indigenous or local organizational could benefit • The transnational strategy has made their view somewhat out-of-date • The transnational view any country as a global platform where it can perform any value-chain activity
( Location advantages provide the transnational company with cost or quality gains for different value-chain activities • To reduce cost even further, transnational firms strive for uniform marketing and promotional activities throughout the world; these companies use the same brand names, advertisements, and promotional brochures wherever they sell their products or services

International Strategy

168. A compromise approach • Global products, similar marketing techniques worldwide • Do not locate value-chain activities anywhere in the world • Upstream and support activities remain concentrated at home country headquarters
( The international strategist hopes that the concentration of its R&D and manufacturing strengths at home brings greater economies of scale and quality than the dispersed activities of the transnational
( When necessary for economic or political reasons, companies with international strategies frequently do set up sales and production units in major countries or operation
( However, home-country headquarters retains control of local strategies, marketing, R&D, finances, and production

Regional Strategy

169. A compromise strategy • Attempts to gain some economic advantages similar to transnational and international • Attempts to gain some of the local-adaptation advantages of the multilocal strategy • Regional trading blocks • Encourage regional strategies • Reduce differences in government and industry required specifications for products

Exhibit 5.1 Summarizes the Content of the Four Basic Multinational Strategies

Summary and Caveat

170. Discussed strategies are general descriptions of multinational strategic options
171. Seldom do companies adopt pure form of multinational strategy
172. Companies with more than one business may adopt different multinational strategies for each business

Resolving the Global-Local Dilemma: Formulating a Multinational Strategy

Major question: • How global is the industry? • What makes an industry global?
174. Globalization drivers: Conditions in an industry that favor transnational or international strategies over the multilocal or regional strategies
The globalization drivers (types) • Four categories: Markets, costs, governments, and competition
Global Markets • Are there common customer needs? • Are there global customers? • Can you transfer marketing?
Costs
• Are there global economies of scale? • Are there global sources of low cost raw materials? • Are there cheaper sources of high skilled labor? • Are product development costs high?
Governments
• Do the targeted countries have favorable trade policies? • Do the target countries have regulations that restrict operations?
The Competition • What strategies do your competitors use? • What is the volume of imports and exports in the industry?

Competitive Advantage in the Value Chain

Location in the value chain of primary sources of a firm's competitive advantage also influences the choice of a multinational strategy • Upstream competitive advantages: when generalized worldwide, transnational strategy or an international strategy becomes the likely choice • Downstream competitive advantages: strength in marketing, sales, and service favor the multilocal strategy, which serves each market individually
Mixed Conditions • Competitive strength downstream in industry with strong globalization drivers • Competitive strength upstream in industries for local adaptation • Favor regional strategy

Exhibit 5.2 Shows how Factors and Pressures for Globalization and Local Responsiveness Combine to Suggest Different Multinational Strategies

Transnational or International: Which Way for the Global Company?

Select a transnational over an international strategy when: benefits from world wide dispersed activities must offset the coordination costs of a more complex organization
Select an international strategy over a transnational when: centralizing key activities such as R&D reduces coordination costs and gives economies of scale • Cost savings offset the lower costs or high quality raw materials and labor that the transnationalist can find by locating worldwide
184. The future? • Many of the traditional international firms are developing more transnational characteristics

The Global Local Dilemma: Synopsis

Markets, costs, governments, and the competition drive the solution
As the world becomes more globalized, more companies are choosing transnational or international strategies
However, cultural and national differences still exist and they will continue to provide opportunities for companies with more local or regional orientations

The Participation Strategies: The Content Options

The choice of how to enter each international market • Several popular participation strategies include: exporting, licensing, strategic alliances, and foreign direct investment

Exporting

The easiest way to sell a product in the international market
The effort can be as little as treating and filling overseas orders like domestic orders, often called passive exporting
At the other extreme, a multinational company can put extensive resources into exporting
Although export is an easy strategy, it is still an important one

Export Strategies

Indirect exporters use intermediary firms to provide the knowledge and contacts necessary to sell overseas • Export Management Company (EMC) and the Export Trading Company (ETC) • The EMCs and ETCs: usually specialize in particular products, countries or regions • Provide ready-made access to international markets • Have established networks of foreign distributors • Know their products and countries very well
Direct Exporting • More aggressive exporting strategy than indirect exporting • Requires considerably more contact with foreign companies • Uses foreign sales representatives, foreign distributors, or foreign retailers to get their products to end users in the foreign markets • May require branch offices in foreign countries
195. Channels in Direct Exporting • Sales representatives: use the company's promotional literature and samples to sell the company's products to foreign buyers • Foreign distributors: buy products from domestic sellers to resell in foreign market at a profit • Some exporters sell directly to foreign retailers or end users

Licensing

196. International licensing is a contractual agreement between a domestic licensor and a foreign licensee • The licensor usually has a valuable patent, technological know-how, trademark, or company name that it provides to the foreign licensee • In return, the foreign licensee provides the domestic licensor royalties
197. Licensing provides one of the easiest, lowest cost, and lowest risk mechanisms for companies to go international

Exhibit 5.3 Shows the Contents of a Typical License Agreement

198. Some Special Licensing Agreements • International franchising: a form of comprehensive licensing agreement • Contract manufacturing: producing products for a foreign firm • Turnkey operations: the international company makes a project fully operational before turning it over to the foreign owner

Exhibit 5.4 Shows the Fees Associated with Opening a McDonalds Franchise in Ireland

The International Strategic Alliance

Cooperative agreements between two or more firms from different countries to participate in a buss activity
200. Two Types • An equity international joint venture (IJVs): when two or more firms from different countries have an equity (ownership) position in a separate company. An international company may have a majority, minority, or equal ownership • Non equity based international cooperative venture exists when two or more firms from different countries agree to cooperate in any value-chain activity • Does not require setting up a foreign company

Foreign Direct Investment

FDI symbolizes the highest stage of internationalization • Although IJVs are a form of direct investment, usually FDI means that companies own and control directly an overseas' operation • Most firms try other participation strategies before FDI • Cross-border mergers and acquisitions are now the major driving force in increasing FDI • As opposed to Greenfield investments where you start own foreign company from scratch, mergers and acquisitions provide speed and access to proprietary technology

Exhibit 5.5 Major Driving Forces behind Cross-Border Merger and Acquisitions

Scale of FDI often changes as companies gain greater returns from their investments or perceive less risk in running their foreign operations
( A multinational may start with a sales office to ultimately building or acquiring its own full-scale production facility

Exhibit 5.6 Shows the Leading FDI Companies in the World from the Developed and Developing Countries

Formulating a Participation Strategy

Deciding on an Export Strategy: Basic questions
Exporting is the cheapest and easiest participation strategy – although not always the most profitable
Good way to internationalize or test new markets
Does management believe it must control foreign sales, customer credit, and the eventual sale of the product and customer? • If yes, choose a form of direct exporting
Does the company have the financial and human resources for creating an organizational position or department to manage export operations? • If not, choose a form of indirect exporting
Does the company have the financial and human resources to design and execute international promotional activities (for example, international trade shows, foreign language advertisements)? • If not, rely on the expertise of intermediaries and choose a form of indirect exporting
Does the company have the financial and human resources to support extensive international travel or possibly an expatriate sales force? • If yes, choose a form of direct exporting
Does the company have the time and expertise to develop its own overseas contacts and networks? • If not, rely on the expertise of intermediaries and choose a form of indirect exporting
Will the time and resources required for the export business affect domestic operations? • If not, favor direct exporting

When Should a Company License? Based on three factors:
□ The characteristics of the product selected for licensing
□ The characteristics of the target country in which the product will be licensed
□ The nature of the licensing company
The target product • The best products to license use older or a soon to be replaced technology • Products that no longer have domestic sales potential
212. However, older technologies may remain attractive to the international market for several reasons: • Strong demand may still exist for the licensed product • The licensee's may not have new production technology • The licensee may still have an opportunity to learn production methods
The target country • Cost- e.g., trade barriers (tariffs, quotas) or transportation distance • Sometimes it is the only option
214. The company • Lacks adequate of financial, technical, or managerial resources to export or to invest directly in foreign operations – does not demand much from the licensing company
215. Disadvantages of Licensing • Gives up control • A company may create a new competitor • Low income • Opportunity costs

Why Do Companies Seek Strategic Alliances? • The local partner's knowledge of the market • Government requirements • Sharing risks • Sharing technology • Economies of scale • Low cost raw materials or labor
216. Key Consideration in the Strategic Alliance Decision: • Could other participation strategies better satisfy strategic objectives? • Does the firm have the management and capital resources to contribute to the relationship? • Can a partner really benefit the company’s objectives? • What is the expected payoff of the venture?

Exhibit 5.7 Summarizes Advantages and Disadvantages of FDI

Choosing a Participation Strategy: General Strategic Considerations

Strategic Intent • Although ultimately profit is the major goal of all firms, many companies enter international markets with less emphasis on short-term profit goal • Other goals such as being first in a market with potential or learning a new technology motivate their internationalization efforts
Company Capabilities • What can a company afford? • Company should also consider human resources and production capabilities • Committed to using these resources
Local Government Regulations • What kinds of import or export tariffs, duties, or restrictions exist? • What kinds of laws restrict foreign ownership or participation in local firms? • Other legal and regulatory issues also demand careful consideration • Patent laws, consumer protection laws, labor laws, tax laws, etc.
Characteristics of the Target Product and its Market • Products that spoil quickly or are difficult to transport might not be good candidates for exporting • Products that need little adaptation to local conditions might be good candidates for licensing, joint ventures, or direct investment
Geographic Distance • Exporting may be limited by excessive transportation costs • With direct investment, components or raw material are often shipped from the home country to the host country • More difficult for managers to communicate face-to-face and local managers may feel "out of the loop" in corporate decision making
Cultural distance represents the extent that two cultures differ on fundamental beliefs, attitudes, and values • With different cultures, avoid initially direct investment • Joint ventures allow local partners to deal with many local cultural issues • Licensing and exporting remove the foreign company from direct dealings with the local culture
Political and Financial Risk of the Investment • Governments change and policies towards foreign firms can change just as quickly • Hold off on equity investments until governments show some degree of stability. Firms that risk unstable political environments can gain first mover advantage • Unstable economic systems • Currencies fluctuate widely in value make international trade difficult • Excessive inflation or recession can affect the profitability • Most companies stick to licensing or exporting in risky economic environments
Need for Control • How important it is to monitor and control the overseas' operations • Key areas for concern over control include product quality in the manufacturing process, product price, advertising and other promotional activities, where the product is sold, and after market service • FDI provides the most control
The Control Versus Risk Tradeoff • Participation choices that increase control also have more risks

Exhibit 5.8 Shows the Tradeoffs Between Risk and Control for Common International-Participation Strategies

Exhibit 5.9 Decision Matrix for Formulating Participation Strategies

Participation Strategies and The Multinational Strategy

Questions of which participation strategy to use has no simple answer
Most multinational companies prefer a combination of participation strategies, depending on the reasons for being in a country
The basic diagnostic question for the multinational is what participation strategy best serves the firm’s objectives for being in a given country or region

Exhibit 5.10 Participation Strategies and the Multinational Strategies

Summary and Conclusions

Multinational managers face an array of complex strategic issues
All managers must deal with the global-local dilemma
Choice of strategy has costs and benefits
Balance costs and benefits and consider other complex factors
Complexities of choosing multinational and participation strategies represent significant challenges to multinational managers

CHAPTER 6

SMALL BUSINESS AS MULTINATIONAL COMPANIES: OVERCOMING BARRIERS AND FINDING OPPORTUNITIES

Learning Objectives

Understand the basic definitions of small business and entrepreneurship
Understand how small businesses can begin as global start-ups or follow the stages of internationalization
Understand how small businesses can overcome barriers to internationalization
Identify when a small business or entrepreneur should consider going international
Understand how small businesses or entrepreneurs can find customers, partners, or distributors abroad
Understand how new venture wedge strategies can be used in foreign markets

Introduction

Small businesses contribute significantly to most national economies • In Europe, North American, and Japan, over 98% of all businesses are small • They employ more than 50% of the work force and produce nearly 50% of the countries' GNPs • Small companies created more than 2/3 of the new jobs
Given the importance of small businesses to national economies, it is not surprising that small businesses seek opportunities outside their national boundaries
When going international, they can use the same participation strategies and multinational strategies available to larger businesses

What is a Small Business?
( Many definitions of what makes a “small” business • United Nations defined small and medium sized firms as those having less than 500 employees (UNCTD 1993: 201) • The popular press usually considers small businesses as those with less than 100 employees • The U.S. Small Business Administration definition varies by industry, sales revenue and the number of people

What is an Entrepreneur? • Creates new ventures that seek profit and growth • Faces risk and uncertainty of new and untested business
243. New ventures exist when • A company enters a new market • Offers a new product or service • Introduces a new method, technology, or innovative use of raw materials

Internationalization and The Small Business

The Small Business Stage Model of Internationalization • Stage 1--Passive exporting: fills international orders but does not seek export business • Stage 2--Export management: specifically seeking export sales • Stage 3--Export department: company uses significant resources to seek increased sales from exporting • Stage 4--Sales branches: setting up of local sales office • Stage 5--Production abroad: production in other countries, beyond downstream activities • Stage 6--The transnational: development of globally integrated network

Small Business Global Start-up
Global start-ups occur when companies begin as multinational companies
Require unique conditions and organizations • Dispersed human resources • International sources of venture capital • The existence of a global demand • The lack of a geographically protected market • T he necessity of worldwide sales to support the venture • The potential to avoid later resistance to internationalization
247. All new small business ventures face • A liability of newness and a liability of size: being new and small often make business failure more probable than success

Small-Business E-Commerce □ To a large extent, technology has helped to level the playing field for small companies □ Today, a small business in rural Maine can export machine parts to 38 countries, using the Internet □ A woman in Mississippi can export food products to Canada □ Handcrafted bowls from Colorado can be sold in Japan (US Small Business Administration 1999) ( Advantages • Ability of small firms to compete with other companies both locally, nationally, and internationally • Creates the possibility and opportunity for more diverse people to start a business • Convenient and easy way of doing business transactions • Hours of operation – open 24 hours • An inexpensive way for small business to compete with larger companies • Makes domestic products available in other countries • Small businesses, at least in the U.S. that utilize the Internet have higher revenues, averaging $3.79 million compared to $2.79 million overall ( Challenges • Managing upgrades • Managing upgrades in several languages • Managing shipping and returns • Assuring security for a Web site and the back-in integration with existing company system • Avoiding being a victim of fraudulent activities online • Receiving international payments • Costs required to maintain the site • Finding and retraining qualified employees

Overcoming Small Business Barriers to Internationalization

Conventional wisdom suggests that small businesses face many barriers that retard their becoming multinationals
Limitation: Small size • Often means limited financial and personnel resources • Lack of sufficient scale to produce goods or services as efficiently as larger companies
250. Limitation: top managers with limited international experience • Managers may have negative attitudes toward internationalization • Managers may view international ventures as too risky and not potentially profitable • View competition only as domestic • Smaller businesses often ignore international opportunities

Developing a Small-Business Global Culture

The Solution • Develop a Small Business Global Culture: managerial and worker values that view strategic opportunities as global and not just domestic • Members share a common language to describe international operations • Entrepreneurial owners develop a global mind-set for themselves and their companies
( Characteristics of the key decision makers that affect the development of a global culture • Perceived psychic distance to foreign markets • International experience • Risk aversion • Overall attitudes towards international strategies
252. Change Attitudes of Key Decision Makers • Begin close in culture and in geography • Overcome initial skepticism regarding the international markets • Positive attitudes towards international markets more necessary for global start-ups

Exhibit 6.1 Shows Attitudinal Differences Concerning Internationalization For Small Business Exporters And Non-Exporters

Gaining Experience: Duties and the Personal life of the Small Business CEO ( The owner of a small business is often the CEO: driving entrepreneurial force in the business ( Opening new markets is often the CEO's personal responsibility ( The CEO must be willing to incur more than economic costs for the venture ( Increased travel and stress from undertaking a new venture ( Can adversely affect family life □ Being away from the daily management of their businesses □ Job of the small business CEO may change

Exhibit 6.2 Shows Key Skills that CEOs Felt They Needed

Is Size a Barrier for Small Business Internationalization?

Larger firms: more likely to enter export markets • Have more resources to absorb the risk • Often have a greater incentive to export when domestic markets become saturated
Size problem may exist only in the initial internationalization decision-later not a problem
International sales intensity: the amount of international sales divided by the total sales of the company • Small firms can outperform larger companies on international sales intensity

Using the Small Business Advantage

Smaller organizations innovate faster • Can change products and internal operations faster
Speed can overcome size disadvantages when larger companies are slow to react to rapidly changing conditions
Being first to the market may mean that they catch significant sales before larger companies

The Future: Falling Barriers to Small Businesses and More Global Start-Ups

Government programs that support small business exporting and sales are expanding
Trade agreements make trade less complex and reduce the resource requirements
Increase in the number of small businesses engaged in international activities
Makes it easier for other businesses to develop a global culture
More managers gain experience in international business

When Should A Small Business Go International?

Do we have a global product or service?
Do we have the managerial, organizational, and financial resources to internationalize?

Exhibit 6.3 Shows The Questions To Consider In The Small Business Internationalization Decision

Even if we have the resources, are we willing to commit those resources and face the risks of internationalization?
Is there a country in which we feel comfortable doing business?
Is there a profitable market for our product or service?
Which country should we enter?

Exhibit 6.4 Shows The Steps In Finding Customers Abroad

Do we have a unique product or service that is not easily copied by larger multinational corporations or local entrepreneurs?
Do location advantages exist upstream in the value chain?
Can we afford not to be a multinational?

Exhibit 6.5 Country Ratings on Entrepreneurial Activity

Getting Connected to the International Market

273. Participation Strategies • Same participation options as do larger firms, including exporting, licensing, joint ventures, and foreign direct investment • Most often exporting
274. Finding Customers and Partners: Small businesses must find ways to reach their foreign customers
275. Common customer contact techniques • Trade Shows • Catalogue Expositions • International Advertising Agencies and Consulting Firms • Government-Sponsored Trade Missions • Direct contact

See Exhibit 6.6 Shows Some Selected U.S. Government Programs For Making International Contacts

See Exhibit 6.7 Shows Some Sources To Find International Trade Leads On The World Wide Web!

Ready to Go and Connected: A Synopsis

Finding the right overseas partner may be the most crucial decision of all
Even with the right company, the right product, and a potential customer, a small business needs a good wedge to break into a new market

New Venture Strategies for Small Multinational Companies

New ventures need some type of entry wedge to gain an initial position in a business opportunity
Entry wedge: " A strategic competitive advantage for breaking into the established pattern of commercial activity" (Vesper)

New Product or First-Mover Advantage

Basic types of entry wedges • First mover advantage: first to introduce product or service • Occurs when the entrepreneur moves quickly into a new venture and establishes the business before other firms can react to the opportunity • Must be innovative • Must be comprehensive • Meet customer expectations in areas such as warranty, customer service, and expected components • Technological leadership – provides the most common source of first-mover advantages • First access to natural and social resources • Close relationships with research universities • The best locations not only for raw materials but also for proximity to customers • Best access to social relationships • Customer switching costs

Copycat Businesses

Copy Cat Businesses: "me too" strategy • A company adopts existing products or services • Do not copy existing businesses identically • They find a niche or slight innovation to attract customers away from existing businesses
282. Suggestions for successful copycats include • Be the first to change to a new standard • Go after the toughest customers • Play to minor differences in customer needs • Transfer the location • Become a dedicated supplier or distributor • Seek abandoned or ignored markets • Acquire existing business

Summary and Conclusions

Small businesses are a key factor in the economies of all nations
They provide the most jobs, the most economic growth, and the most innovation
Small businesses must face the challenges of entering the international marketplace
The small business faces some unique problems and prospects when entering global competition
Small businesses can go international - through stages or through global start-ups
Global start-ups are replacing stages of internationalization for high tech entrepreneurial companies
A small business must overcome certain traditional barriers that may inhibit its internationalization
A small business can develop a global culture, change the attitudes of key decision makers, gain crucial international experience, and overcome the size barrier of internationalization
Small businesses have the same participation strategy options as larger firms
There are many public and private resources available to the business community wishing to do business abroad
Entering the international market is an entrepreneurial venture
Entrepreneurial ventures require successful entry wedge strategies

CHAPTER 7

ORGANIZATIONAL DESIGNS FOR MULTINATIONAL COMPANIES

Learning Objectives

295. Understand the components of organizational design
296. Know the basic building blocks of organizational structure
297. Understand the structural options for multinational companies
298. Know the choices multinationals have in the use of subsidiaries
299. See the links between multinational strategies and structures
300. Understand the basic mechanisms of organizational coordination and control
301. Know how coordination and control mechanisms are used by multinational companies

Introduction

302. Best multinational strategies do not ensure success
303. Implementation of a multinational business strategy requires that the managers build the right type of organization
304. Organizational design – represents how organizations structure subunits and coordination and control mechanisms to achieve their strategic goals

The Nature of Organizational Design

305. Basic questions of organizational design are:
1) How shall we divide the work the organization’s subunits?
2) How shall we coordinate and control the efforts of the units we create?
306. In very small organizations, everyone does the same thing and does everything
307. However, as organizations grow, managers divide work into specialized jobs
308. Once an organization has specialized subunits, managers must develop mechanisms that coordinate and control the efforts of each unit • Some companies monitor their subunits very closely • They centralize decision making at company headquarters to make certain that the production and delivery of products or services conform to rigid standards • Other companies give subunits greater flexibility by decentralizing decision making control
309. It is important to remember that there is no one best organizational design – choice is dependent on choice of strategy

A Primer on Organizational Structures

310. Organizations usually divide work into departments or divisions based on functions, geography, products, or combinations of these choices
311. Each way has its advantages and disadvantages

The Basic Functional Structure

Exhibit 7.1 Shows A Basic Functional Structure

312. Simplest of organizations
313. When organizations have few products, few locations, or few types of customers a functional structure is often most efficient.
314. Works best when an organization faces a stable environment and uses a routine technology
315. Gets its efficiency from economies of scale in each function
316. Coordination of units can be difficult as functional subunits are separate from each other

The Basic Product and Geographic Structures

317. Product or geographic organizations must still perform the functional tasks of a business
318. However, functions are not concentrated in separate units
319. Usually less efficient than the functional organization
320. Allows a company to serve customer needs that vary by region
321. Duplication of functions is the biggest weakness of this structure

Exhibits 7.2 And 7.3 Show The Simple Product And Geographic Structures

322. When? • Product or a area sufficiently unique to require focused functional efforts on one type of product or service
323. Few organizations adopt pure organizational forms.
324. Organizations mix structures to best implement strategies
325. Mixed form organizations called hybrid structures

Organizational Structures To Implement Multinational Strategies

326. When a company first goes international, it seldom changes the structure • Acts first as passive exporters • When international sales become more central to success, appropriate structure is adopted to fit with more sophisticated multinational strategy

The Export Department

327. Exports become a significant percentage of company sales
328. A company wishes greater control over its export operations
329. Functions of the export department • Deals with international customers for all products • Often controls pricing and promotion of international products • May have specialists for particular country or product • Deal with export management companies • Overseas sales representatives also may report to the export department

Exhibit 7.4 Shows A Functional Structure With An Export Department

Foreign Subsidiaries

330. Subunits of the multinational company located in different countries other than the location of the parent company’s headquarters
331. There are 65,000 multinational corporations with over 850,000 foreign subsidiaries worldwide employing 25 million people
332. Several types: minireplica and transnational subsidiary
333. The minireplica subsidiary: A smaller version of the parent company • Same technology and same products as the parent company • Runs on a smaller scale • Use few expatriate managers • Often little influence from headquarters • Usually a profit center

Transnational subsidiary

334. Opposite end of the spectrum from the minireplica subsidiary • Supports a more global strategy for the multinational firm • No set form or function • May focus on one activity or combine activities
335. Transnational activities • Respond to local conditions • Contribute the overall corporate efficiency • Or contribute to organizational learning
336. Subsidiary Location • To take advantage of factor costs (cheaper labor or raw materials) • To take advantage of other resources (for example, educated work force or unique skills)
337. Most subsidiaries are neither pure replicas nor pure transnationals
338. Rather, they may take different forms and have different functions
339. Multi companies choose the mix of functions for their foreign subsidiaries based on several issues, including • The firm’s multinational strategy or strategies • The subsidiaries’ capabilities and resources • The economic and political risk of building and managing a subunit in another country • How the subsidiaries fit into the overall multinational organizational structure

International Division
340. As companies increase the size of their overseas sales force and set up manufacturing operations in other countries, the export department often grows into an international division
341. International division, in addition to managing exporting and an international sales force, usually oversees foreign subsidiaries that perform a variety of functions

Exhibit 7.5 Gives An Example Of An International Division In A Domestic Product Structure

342. International-division structure has recently declined in popularity
343. For multi-product companies operating in many countries, it is not considered an effective multinational structure • Too many products overwhelm capacities of international division • Difficult for international division to manage multi-domestic or regional adaptations when number of locations in different countries • International division makes it more difficult to implement international strategies using worldwide products or location advantages

Worldwide Geographic and Worldwide Product Structure

344. In the worldwide geographic structure, regions or large-market countries become the geographical divisions of the multinational company
345. The prime reason to choose a worldwide geographic structure is to implement a multidomestic or regional strategy
346. Regional or country-based organizations have the flexibility to tailor or develop products that meet the particular needs of local or regional markets
347. Even for the multi-domestic strategy, country-level divisions exist only when a market is sufficiently large

Exhibit 7.6 Shows Apple’s Worldwide Geographic Structure

□ Worldwide product structure gives product divisions responsibility to produce and sell their products or services throughout the world

Exhibit 7.7 Shows The Worldwide Product Structure

348. The product structure supports international strategies because they provide an efficient way to organize and centralize the production and sales of similar products across the world
349. It sacrifices regional- or local- adaptations strengths derived from a geographic structure to gain product-development and manufacturing economies of scale

Hybrids and The Worldwide Matrix Structure

350. Both the worldwide product structure and the worldwide area structure have advantages and disadvantages for international strategy implementation
351. The product structure supports strategies that emphasize global products and rationalization
352. The geographic structure supports strategies that emphasize local adaptation (managers are often from the area and are sensitive to local needs)
353. Most multinational companies adopt strategies that include both concerns for local adaptation needs and concern for globalization.
354. Structures tend to be hybrids, or mixtures of product and area units
355. The nature of the product determines the emphasis given to the product or geographic side of the matrix • How global are the products? • How complex and different are the major markets? □ One evolving form of hybrid structure that attempts to solve global product and local markets needs is called the front-back hybrid structure □ The front-back hybrid divides the organization into two line sub-organizations • The front side has units based on geography to provide a multidomestic or regional focus • The backside has units based on product groups to capture global economies of scale in R&D and production

Exhibit 7.8 Shows a Chart for a Front-Back Hybrid Structure for Tetra Pak □ Worldwide matrix structure is a symmetrical organization, usually with equal emphasis on worldwide product groups and regional geographical divisions • Balance the benefits produced by area and product structures
356. Create lines of authority for product groups and for area divisions
357. Requires near equal demands from the environment for local adaptation and for economies of scale
358. Requires extensive resources for communication and coordination of the units
359. Requires middle and upper level managers with good human relations skills
360. Geographical divisions focus on national responsiveness and product divisions focus on find global efficiencies
361. Is the matrix worth the effort? • During the 1980s, it was a popular organizational solution to the global-local dilemma • Has come under fire recently – because consensus decision making between product and geographic managers have proved slow and cumbersome • In many organizations, the matrixes have become too bureaucratic, with too many meetings and too much conflict • The result has also been that many organizations have redesigned their matrix structures to become more flexible – speedier decision making on either product or geographic side depending on the need

Exhibit 7.9 Shows A Worldwide Matrix Structure

The Transnational Network Structure

362. Represents the newest solution to the complex demands of being locally responsive, while taking advantage of global economies of scale and global sources of knowledge • Combines functional, product, and area subunits • Unlike the matrix, the transnational has no basic form • Is a network that links different types of subsidiaries throughout the world • Resources, people, and ideas flow in all directions • Nodes or centers in the network coordinate product, functional, and geographic information 1. Has no symmetry or balance in its structural form
363. Transnational units evolve to take advantage of resources, talent, and market opportunities wherever they exist in the world through dispersed subunits, specialized operations, and interdependent relationships

Exhibit 7.10 Shows The Geographic Links in the Philips Transnational Structure

Exhibit 7.11 Shows The Product Links in the Philips Transnational Structure

Dispersed subunits

364. Management locates subsidiaries anywhere in the world where they can benefits the company
365. Take advantage of lower factor costs (for example, lower labor costs)
366. Provide information on new technologies, new strategies, and consumer trends
367. All subunits try to tap worldwide managerial and technical talent

Specialized operations

368. Subunits can specialize in particular product lines, different research areas, and different marketing areas
369. Specialization builds on the diffusion of subunits by tapping specialized expertise anywhere and everywhere in the company’s subsidiaries

Interdependent relationships

370. Must exist to manage dispersed and specialized subunits
371. Units share information and resources continuously

Beyond the transnational: Is There a New Structure for the Multinational? □ Some evidence suggests that the transnational network is not the end of the evolution of the structure of the multinational □ A new structure is emerging called the metanational which is a large, entrepreneurial multinational that is able to tap into hidden pockets of innovation, technology, and market know scattered around the world, especially in emerging markets □ Characteristics of the metanational include • Nonstandard business formulas for any local activity • Looking to emerging markets as sources of knowledge and ideas, not just for local labor • Creating a culture and advanced communication systems that support global learning • Extensive use of strategic alliances to gain knowledge for varied sources • High levels of trust between partners to encourage knowledge sharing • A centerless organization that moves strategic functions away from headquarters and to major markets • A decentralization of decision making away from headquarters and to mangers who serve the key customers and strategic partners

Multinational Strategy and Structure: An Overview

Exhibit 7.12 Multinational Strategy, Structure, and Evolution
372. Most companies support their early internationalization with export departments or international divisions
373. Later, they evolve into worldwide product or geographic structures
374. Most companies never reach the pure forms

Implications for Small Companies

375. Small companies can still implement all the multinational strategies with modifications
376. Can develop special departments to be more responsive globally
377. Small companies can have transnational subsidiaries to take advantage of resources throughout the world

Control and Coordination Systems

378. Top managers must design organizational systems to control and coordinate the activities of their subunits.
379. Control systems help link the organization vertically, up and down the organizational hierarchy
380. Two basic functions of control systems • Control systems measure or monitor the performances of subunits regarding their assigned roles in the firm’s strategy • Control systems provide feedback to subunit managers regarding the effectiveness of their units
381. Coordination systems • Provide information flows among subsidiaries so that they can coordinate their respective activities • Coordination systems link the organization horizontally across subunits
382. Control Systems
383. Four broad types of control: output control, bureaucratic control, decision making control, and cultural control • Output control systems assess the performance of a unit based on results, not on the processes used to achieve those results – most common form is the profit center • Bureaucratic control focuses on managing behaviors within the organization • Typically includes budgets (to set financial expenditures during specific time periods), Statistical reports (to provide information to top management on non financial outcomes) and Standard operating procedures (to provide the rules and regulations that identify approved ways of behaving) • Decision making control represents the level in the organizational hierarchy where managers have the authority to make decisions • Cultural control systems use the organizational culture to control behaviors and attitudes of employees
384. Cultural control is the favored control mechanism for transnational network structures

Exhibit 7.13 Shows The Relationship Between The Control Mechanisms And Basic Multinational Organizational Structures

Design Options For Coordination Systems

385. There are six basic horizontal coordination systems: paperwork (memos, reports), direct contact, liaison roles, task forces, full-time integrator, and teams • Paperwork • Direct contact means that managers or workers interact face-to-face. • For multinational companies, direct contact often requires sophisticated video conferencing and knowledge of a common language • Liaison roles are specific job responsibilities of a person in one department to communicate • Usually, a liaison role is only part of a manger’s job responsibilities • Task forces are temporary teams created to solve a particular organizational problem such as entering a new market • Full-time integrators have coordination as their sole job responsibility • Teams are the strongest coordination mechanisms. • Unlike task forces, teams are permanent units of the organization

Summary and Conclusions

386. Having the right structure is necessary to carry the good multinational strategies
387. Organizational design concerns the choice of subunits (how to divide work) and the choice of coordination and control mechanisms
388. As companies internationalize, they progress from using an export department or international division to more complex structures
389. Organizational structure is not complete without integration mechanisms – they link subunits and coordinate activities

CHAPTER 8

INTERNATIONAL STRATEGIC ALLIANCES: DESIGN AND MANAGEMENT

Learning Objectives

390. Know the steps for implementation of successful international strategic alliances
391. Understand how multinational companies link value chains in international strategic alliances
392. Understand the importance of choosing the right partners for alliances
393. Know the important characteristics to look for in potential alliance partners
394. Know the difference between equity-based international joint ventures and other types of international cooperative alliances
395. Know the basic components of an international strategic alliance contract
396. Understand the control systems and management structures used in alliance organizations
397. Appreciate the unique problems in human resource management faced by managers in alliance organizations
398. Realize the importance of inter-firm commitment and trust for building successful international strategic alliances
399. Understand how multinational companies assess the performance of their international strategic alliances
400. Know when companies should continue or dissolve their international strategic alliances

Introduction

401. Because strategic alliances are fast and flexible ways of gaining complementary resources, they are among the most popular strategies that companies use to develop new products and to expand into new areas.
402. Although strategic alliances are attractive, they are inherently unstable and risky.
403. Failure rate of 30 to 60%
404. Even profitable alliances can be torn by conflict
405. Successful alliances must not only make strategic sense but also require good implementation.

Exhibit 8.1 Shows The Steps In Implementation Of Strategic Alliances

Where to Link in the Value Chain?

Exhibit 8.2 Shows Two Value Chains And The Common Areas That Companies Link To Gain Strategic Benefits From An Alliance

406. Alliances that combine the same value-chain activities to so to gain efficient scale of operations, to merge compatible talents, or to share risks • In operations alliances, multinational companies often combine manufacturing or assembly activities to reach a profitable volume of activity. • Marketing and sales alliances allow companies to increase the scope and number of products sold. • Operations/marketing alliances can also provide access to markets.
407. For U.S. companies, the majority of international strategic alliances occur in operations.

Exhibit 8.3 Value-Chain Links in US International Strategic Alliances

Choosing a Partner: The Most Important Choice?

408. Most experts attribute success or failure of strategic alliances to how well the partners get along.
409. Experts identify several key criteria for picking an appropriate alliance partner • Seek strategic complementary - exists when alliances have strategic objectives that do not conflict • Pick a partner with complementary skills. Each partner must contribute some skills or resources that complement that partner’s. • Seek out companies with compatible management styles. • Seek a partner that will provide the “right” level of mutual dependency. With a balanced dependency, both partners feel equally dependent on the outcome of the venture. • Avoid the “anchor” partner - partner that holds back the venture because they cannot or will not provide their share of the funding • Be cautious of the “elephant and the ant” complex which occurs when two companies are unequal in size.

Exhibit 8.4 Shows International Strategic Alliances For Small Companies: Incentives And Concerns

• Assess operating policy differences - need to work out day-to-day operational differences • Assess the difficulty of cross-cultural communication with a likely partner

Choosing an Alliance Type

410. Three main types of strategic alliances • Informal international cooperative alliances • Formal international cooperative alliances • International joint ventures

Exhibit 8.5 Shows Types And Characteristics of International Strategic Alliances

Informal Cooperative Alliances

411. Informal ICAs are non-legally binding agreements between companies from two or more countries.
412. Agreements of any kind and provides links between companies anywhere on the value chain
413. No legal protection from contracts
414. Limited involvement between companies
415. Companies use the informal agreement as a test for more formal agreements.

Formal Cooperative Alliances

416. Higher degree of involvement than informal ICAs
417. Formal contract specifying exactly the contribution of each company
418. Sharing of sensitive information increases involvement
419. Very popular in some high tech industries because of high costs and risks

International Joint Ventures

420. Separate legal entity owned by parent companies from different countries – companies have an equity or ownership position in an independent company
421. The simplest IJV occurs when two parent companies have 50/50 ownership of the venture
422. Not necessarily two partners, large number of partners is called a consortium (example: Airbus) – although two-partner join ventures are the most common
423. No need for equal ownership
424. Difficulty arises in determining ownership from equity contributions other than cash
425. Choice of participation type is similar to the choice of participation agreement

Negotiating the Agreement

426. After picking a partner for a joint venture or formal alliance, it is necessary to negotiate and sign formal agreements.
427. Similar to licensing agreements, alliance contracts are the legal documents that bind partners together.
428. The formal agreement is not as important as the ability of managers to get along.
429. In general, experts recommend that negotiation teams with technical and negotiation experience negotiate any alliance agreement.

Exhibit 8.6 Shows Selected Questions For A Strategic-Alliance
Agreement

Building the Organization: Organization in Strategic Alliances

430. Depends on the type of alliance chosen
431. Informal ICAs have no formal design issues
432. Formal ICAs may require a separate organization
433. Some formal ICAs share information with minimal organizational requirements

Decision Making Control

434. Two major areas need to be considered: operational decision making and strategic decision making • Majority ownership does not necessarily mean control
435. Operational decisions focus on the day-to-day running of the organizations
436. Strategic decisions focus on long term survival of the IJV organization • Usually at the level of the IJV’s board of directors or the top management team
437. Operational decision making • Usually by people serving as mid to lower level managers

Management Structures

438. Dominant Parent • One parent controls or dominates strategic and operational decision making • The dominant parent usually has majority ownership of the IJV • The dominant parent treats the IJV as if it was a wholly owned subsidiary
439. Shared Management • Both parents contribute approximately the same number of managers to the board of directors, the top management team, and functional area management
440. Split Control • The split control structure is similar to the shared management structure • Partners usually share strategic decision making • At the functional level, partners make decisions independently
441. Independent Management • Alliance managers act more like managers from a separate company • Alliances often recruit managers in this structure from outside the parent companies
442. Rotating Management • Key positions in the management hierarchy rotate among partners • Popular for IJV partners from developing countries • Serves to train management talent and transfer this expertise to the developing country

Choosing A Strategic Alliance Management Structure

443. If one parent has dominant position, then dominant management structure is favored
444. Equal ownership shares or equal resource contribution: more balanced management structure such as shared, split, or rotating management structures
445. Technology • If partners have similar technologies or know-how and they contribute this knowledge equally to the venture, IJV partners prefer a shared management structure. • If partners have different technologies or know-how and they contribute this knowledge equally to the venture, IJV partners prefer split management structures. • If the venture has more strategic importance to one partner, a dominant management structure is more likely. • Mature joint ventures move to independent structures as the joint venture’s management gains more expertise. • Joint ventures in countries with a high degree of government intervention produce IJVs with local partner dominance. • Independent management structures more likely when the market is expanding, the venture does not require much capital, or the venture does not require much R&D input from its parents.

Building the Organization: Human Resource Management in Strategic Alliances

446. The HRM functions of international strategic alliances include recruiting and staffing for all alliance positions and evaluation alliance personnel • These issues are made more complex because managers and other employees come from two or more companies and from two or more national cultures.

Critical HRM Issues in Strategic Alliances

447. HRM Planning • Companies spend considerable time planning strategic alliances • Also important is the necessity to communicate strategic intent to employees • Employees at all levels need to know why alliance exists and what are parent’s goals for the alliance
448. Parent Involvement • Depends largely on the age, size, and intended life span of the IJV • Initially tend to maintain HRM practices inherited from parent companies • As IJVs get older and larger, they tend to develop their own organizational cultures and their own HRM practices
449. Staffing The Alliance Management And Technical Personnel • Managers must have both technical and cross-cultural management skills • Companies must resist the temptation to unload unwanted managers on the IJV • Parent companies must realize that IJV managers may never return to their parent company
450. Staffing The Alliance Workforce • Determine if local workers with the required skills are available at the IJV location • Assess local labor supply, labor laws, and local cultural values regarding work
451. Assigning Managers Strategic Or Operations Tasks • Managers with strategic level decision making responsibility • Usually have more experience and come from higher levels of management • Operations level managers, such as a production manager, • Usually come from lower levels of parent company management
452. Performance Assessment • Whenever two or more companies cooperate, it is unlikely that performance assessment techniques match exactly. • Initial performance judgments may follow parent company guidelines • Managers their parent companies’ performance evaluation systems • Usually best to avoid adopting the system of one parent
453. Loyalty • Managers may feel a dual loyalty—to the parent organization and to the joint venture organization • Loyalty tends to vary with the term of the joint venture assignment • Managers “on loan” from their home organization, they will usually remain loyal to the parent • Managers long term assignments usually develop a stronger loyalty to the IJV
454. Management Career Development • Assignment must be relevant to a future career and provide some job security • The career ladder may exist entirely within the joint venture
455. Cultural Differences • Operate at all levels of culture, especially the national, business, and organizational levels
456. Training • The need for training in cross-cultural interaction skills

See Exhibit 8.7 For Key Issues In Strategic Alliance HRM

Commitment and trust: the soft side of alliance management

□ Joint ventures are inherently unstable.
457. Estimates of failure rates range from 30 to 60 percent.
458. Without trust and commitment, the alliance will fail entirely or fail to reach its potential.

The Importance of Commitment and Trust

459. Commitment - means taking care of each other and putting forth extra effort to make it work
460. Facets of commitment • Attitudinal commitment: Committed partners are willing to dedicate resources and efforts and risk to make the venture work; venture will then develop on the principle of fair exchange • Calculative commitment – Comes from expectations, evaluations, and concerns about the future potential for gaining rewards in a relationship
461. Why is commitment important? • Different cultures create a strong potential for conflict and mistrust. • Without a sense of mutual obligation, partners often fail to work out problems.
462. Trust – the confidence that the partner will deliver on their expected contributions to the joint venture
463. Trust and commitment go hand in hand – Two types • Credibility trust – Confidence that the partner has the intent and ability to meet their obligations and make their promised contributions to the alliance • Benevolent trust – Confidence that the partner will behave with goodwill and with fair exchange • Builds in “trust cycles”: initially hesitant but then gradually suspicion declines

Exhibit 8.8 Shows The Trust Commitment Cycle
464. Why is trust important? • Successful cooperation requires that alliance participants contribute quality inputs into the relationship. • Formal contracts can never identify all the issues that arise in alliances.

Building and Sustaining Trust and Commitment • Pick your partner carefully. Avoid future conflict by finding a compatible partner first. • Know your strategic goals and your partner’s. Realize that strategic goals for the IJV may change. • Seek win-win situations. Maintain a balance in which side gains from the IJV. • Go slowly. A joint venturer must realize that problems arise and take time to work out. • Invest in cross-cultural training. • Invest in direct communication. • Find the right level of trust and performance.

Exhibit 8.9 Shows The Trade-Off Between Vulnerabilities That Come With Trust And Commitment And Their benefits

Assessing the Performance of an International Strategic Alliance

465. Assessing alliance performance demands that parents match the strategic objectives of their IJVs with the measures used to assess the alliances. • Standard efficiency measures of performance used when immediate results needed
466. However, strategic alliances provide direct and indirect benefits.
467. Direct Benefits • Stand alone profit centers provide direct financial benefits to parents
468. Other alliances provide mostly indirect strategic contributions to their parents.
469. Indirect Benefits • Penetrate risky markets, • Learn new markets or technologies, • Overcome local political barriers,
470. Financial performance measures • Seldom good indicators of performance for strategic alliances created for indirect strategic benefits
471. Subjective performance criteria • Harmony among the partners, • Identifying product adaptations for a new market, • Capturing market share

Exhibit 8.10 Shows A List Of Selected Performance Measures For Strategic Alliances

If The Alliance Does Not Work

472. Negotiate an end to agreements or improve implementation
473. Know when to quit or invest more
474. Problems with “escalation of commitment”
475. Plan end from beginning - “prenuptial agreements”
476. Death should not be confused with failure - some are short-term

Learning to Partner: Building a Dedicated Strategic Alliance Unit

477. Alliances are so common today that companies are developing specialized units to manage the design of strategic alliances.
478. Experiences companies that have had many strategic alliances are taking the experiences of what has worked and has failed and are developing templates of successful practices.
479. However, alliance management units do not work for all companies.
480. Typically, only the very large multinational companies have enough alliances to dedicate the resources necessary to create a specialized unit.

Summary and Conclusions

481. The use of strategic alliances continues to grow.
482. The most important decision in strategic alliances management is picking the right partner.
483. Strategic alliances have no set structure in ownership, decision-making control, of management control.
484. Partners negotiate structures that support their strategic goals.
485. Parent firms must come to some agreement regarding HRM practices.
486. Most experts consider trust and commitment as basic foundations for successful alliances.
487. Because strategic goals for strategic alliances are varied and subtle, strategic alliances performance is difficult to determine.
488. Achieving objectives such as organizational learning and market penetration often determine strategic alliances performance.

CHAPTER 9

MULTINATIONAL E-COMMERCE: STRATEGIES AND STRUCTURES

Learning Objectives

74. Define the forms of e-commerce
75. Appreciate the growing presence of e-commerce in the global economy
76. Understand the structure of the Internet economy
77. Identify the basic components of a successful e-commerce strategy
78. Understand the attractions of and deterrents to building a multinational e-commerce business
79. Know the basic multinational e-commerce business models
80. Identify the practicalities of running a multinational e-commerce business
81. Understand the functions of enablers in e-commerce operations

Introduction

82. Although still small by comparison to the traditional economy, the Internet economy is booming and growing faster than any other business trend in history.
83. Many of the issues faced in doing multinational business over the World Wide Web are similar to those faced by traditional multinational companies.

The Internet Economy

What is E-Commerce?

84. E-commerce refers to the selling of goods or services over the internet.
85. Two types of e-commerce transactions • B2C – business to consumer transactions – such as buying toys from eToys • B2B – business to business transactions • B2B make up of 70-85% of current e-commerce business
86. Significance of B2B comes from the revolution in supply chain management made possible by electronic links between businesses and suppliers

Exhibit 9.1 Shows How E-Commerce Activities Work Along the Value Chain
87. New forms of business are spawning through the use of the Internet
88. C2C – consumer to consumer – eBay is a global player in business of auctions
89. C2B – consumer to business – price comparisons Web sites
90. What is current global presence of e-commerce? • Measured by two indicators • Secure server – an Internet host that allows users to send encrypted data so that those outside • Internet hosts – any computer connected to the World Wide Web with its own unique address • OECD (Organization for Economic Cooperation and Development) countries dominate the Internet with over 90% of the world’s Internet hosts

Exhibit 9.2 Shows Secure Servers and Internet Host Rankings for Selected countries in the OECD
91. Basis of e-commerce has expanded geometrically from early 1990s to the present • In 1991, 3 million people used the Internet and almost none used it for e-commerce. • In contrast, the majority of the over half billion current users make purchases from electronic commerce sites. □ Projections are that, in less than 5 years, at least 5% of business-to-business transactions. (B2B) and business- to-consumer transactions (B2C) will be based on e-commerce
92. Impact of growth of internet or the World Wide Web for e-commerce is difficult to estimate. • The Internet will have more impact on the world than the industrial revolution. • Just in one year between 2001 and 2002, U.S. consumers spent over $1.3 billion, an increase of over 90%

Exhibit 9.3 Shows the Number of People Online in Different Parts of the World According to Recent Estimates

The Internet Economy

93. Internet Economy has four layers
94. Layer 1 includes the backbone of the Internet including the Internet Service Providers—companies include • Communications (Qwest, MCI, Worldcom) • Internet Service Providers (Mindspring, AOL, Earthlink) • Networking (Cisco, Lucent, 3Com) • Hardware (Dell, Compaq, HP)
95. Layer 2 includes companies and consultants that build Web systems and supporting software—companies on this level include • Consultants (Scient) • Commerce Applications (Netscape, Sun, IBM) • Web development software (Adobe, Netobjects) • Search engines (Verity) • Web-enabled databases (Oracle)
96. Layer 3 includes a new type of company that provides linking services on the Internet and derives its revenues from commissions, advertising, and membership fees—examples include • Online travel agencies (TravelWeb, Travelocity.com) • Online brokerages (Etrade) • Content aggregators (Cnet, Zdnet) • Online advertising (Yahoo!)
97. Level 4 includes companies that conduct commercial transactions on the web—examples include • E-retailers (wine.com, diamond.com) • Manufacturers selling directly (hpshopping.com, Dell) • Subscription-based companies (vrbo.com) • Transportation services (most airlines) • Shipping services (FedEx, UPS)

Exhibit 9.4 Shows the Net Businesses Ranked Business Week’s Information Technology 100

Fundamentals of E-Commerce Strategy And Structure

98. E-commerce is evolving quickly
99. However, the failure of many start-ups in 2000 shows that the Internet economy is not without risk
Exhibit 9.5 Provides a Summary of Threats and Opportunities of Internet Economy

Five Steps For Successful E-Commerce Strategy

100. Build on current business models and experiment with new e-commerce models – search for ways to reduce costs or enhance the business
101. Meet the challenge of developing an e-commerce organization – not only senior management, but the entire firm must be prepared to embrace the e-commerce model
102. Allocate resources to the e-commerce business – commit financial, human, and technological resources to develop e-commerce capabilities
103. Build a superior e-commerce infrastructure as a basis of differentiation strategy
104. Make sure entire management team aligns with e-commerce agenda

E-Commerce Strategies: Integrated Or Autonomous

105. Each company needs to decide how e-commerce fits into its existing organizational design and management systems.
106. Traditional business operations are called the “brick and mortar” part of the company.
107. Degree of interaction between brick and mortar operations can occur anywhere in the value chain
108. The degree of integration can range from the near seamless operations of an Office Depot to the mostly independent operations of Barnes & Nobles and BarnesandNoble.com.
109. Each choice has benefits • The independent operation can move faster and be more entrepreneurial when freed from corporate bureaucracy and it can seek funding from deep pockets of venture capitalists. • The integrated operation can benefit from cross-promotion of shared products, shared customer information, increased large-quantity purchase leverage, and economies of scale by using the same distribution channels.
110. Choice is seldom simple or clear
111. Best option for companies is something in between

Exhibit 9.6 Shows The Key Decisions In The Web Business
Integration Versus Separation Decision

Additional Operational Challenges For An E-Commerce Business

112. Companies face many management issues when running an e-business • Finding partnerships and alliances with customers or third parties is critical for success. • Because of shortage of people with e-commerce skills, it is difficult to attract, retain, and develop employees in the e-commerce unit. • Training and development in e-commerce are not yet adequate. • Finding ways to provide individuals with growth opportunities and job fulfillment drives employee retention in e-commerce • Deciding what e-commerce functions to outsource is difficult
113. How can companies meet these challenges? • Develop information and management systems to respond to rapid growth • Maintain rapid decision making, creativity, innovation, and flexibility • Build external relationship with e-commerce support companies and customers • Attract and retain e-commerce-capable talent • Develop an effective management team
114. Traditional companies with e-commerce must: • Build a common vision and commitment to the e-commerce operation throughout the organization • Change the organization structure to emphasize quick reconfiguration of assets and capabilities • Change the organization culture to create a supporting environment for e-commerce • Attract and retain e-commerce-skilled employees • Alter HR programs to suit the different skill requirements of e-commerce employees

Exhibit 9.7 Shows the Organizational Changes Multinational Companies are Making to Implement Their E-Commerce Strategies

Globalizing Through The Internet

115. Although a Web site immediately gives the entire world access to a company’s products or services, many of the challenges of globalization faced by traditional brick-and-mortar companies remain • A company must still solve the global-local dilemma

Multinational E-Commerce Strategy Formulation

The Nature Of the Business
116. What kind of e-business is easiest to make global? • Depends to a large degree on the types of products or services offered through e-commerce
117. E-Commerce companies work in three areas • Some move bits or computerized information • Others move money in payment flows • Others move physical products
118. Each type of operation requires an infrastructure to support the transactions.
119. Ease of taking e-commerce international depends mostly on the mix of infrastructures needed
120. There is a hierarchy of difficulty in e-commerce depending on infrastructure requirements. • Portals and infomediaries, are the simplest, and provide gateways to the internet. • At the next level are businesses such as Travelocity, digital music, and software vendors – although they do not rely on moving physical products, they must still rely on local infrastructure to take payments for their products. • Most difficult to globalize are e-commerce businesses that rely on a physical structure
121. Large multinational firms that enter e-commerce with an existing global presence often have an advantage.
122. Smaller firms and firms new to the complexities of multinational commerce face more challenges when establishing an international presence.

Basic Opportunities and Threats Of Multinational E-Commerce

123. Major attractions of e-commerce globalization are: • Cost reduction – less expensive to reach customers via Web • Technology – is already available • Efficiencies – more efficient • Convenience – Web is in operation all the time regardless of location • Speed of access – company’s products or services can be accessed from anywhere in the world
124. Some deterrents include: • Return/receipt burden and cost of delivery – if pattern follows catalogue sales, companies should expect 30-40% return rate • Costs of site construction, maintenance, upgrades – can cost millions of dollars per year • Channel conflicts – a company’s Web sites can conflict with distributors and retailers selling the company’s products • Easily copied models – competitors can easily see and copy business model • Cultural differences – Web sites must present a format that is appropriate culturally • Traditional cross-border complexities – exchange rates, different taxes, and government regulations

Picking A Market

125. Web entrepreneurs should target countries based on two factors • Attractive market for e-commerce are those with market inefficiencies – ex: formerly state-controlled economies • Target markets with attractive demographics – includes locations such as • Internet population of at least 5% • High literacy rate • A country that participates in at least one free trade agreement • Government with viable legal system
126. E-commerce potential is great in South America because of the Mercosur trading group and in those Southeast Asian countries in the ASEAN trade group.
127. The European Union is the next boom for e-commerce because many countries such as France, Italy have retained market inefficiencies of the pre-Union days.
128. Not all countries are equally e-commerce ready • The population must have access to computers and infrastructure links to the Internet. • Governments and financial institutions must be ready to protect and process e-commerce transactions.

Exhibit 9.8 A Ranking of the E-Commerce Readiness of Selected Countries
129. Growth in e-commerce shows the benefits of e-commerce – however, the competition is also heating up.
130. Achieving sustainable competitive advantage is difficult where competitors can easily copy business models.

Multinational E-Commerce Strategy Implementation
131. Successful implementation of a multinational e-commerce strategy requires building an appropriate organization and developing the necessary technical capabilities to conduct electronic transactions.

The Multinational E-Commerce Organization
132. What is the organization of a multinational e-business?
133. Amazon.com and Yahoo! provide the most likely models three-tiered mixing global and local functions • Headquarters provide the vision, strategy, and leadership that drive the electronic marketing of worldwide products and services. • Local subsidiaries, which actually deliver goods, take charge of functions better done locally such as the supply chain and dealing with local regulations. • These organizations solve the global-local dilemma with the global integration of similar technical functions such as Web server design while still making necessary local adaptations such as Web site translations.

Exhibit 9.9 Pictures The Levels And Functions Of The Multinational Corporation

Technical Capabilities And Implementation Options For Multinational E-Commerce

134. Components of a successful multinational online presence require electronic capabilities throughout the value chain and include: • Software to process pricing in multiple currencies • Systems that calculate and show purchase information on international shipping, duties, and local taxes such as VAT • Systems that check regulatory compliance with local and international laws • Ability to provide support in multilingual service centers • Fraud protection • Electronic payment models in addition to credit cards – many areas of the world do not use credit and debit cards

To Build Or Outsource Technical Capabilities?

135. Similar to companies choosing an export strategy, e-commerce companies that wish to globalize have two basic options – they can run all e-commerce functions themselves or they can outsource these functions to fulfillment specialists called e-commerce enablers.
136. The enablers provide services and software that translate Web sites, calculate shipping, value-added taxes, duties, and other charges unique to each country.
137. E-commerce enablers exist because many companies do not have the internal resources or capabilities to conduct all e-commerce functions.
138. Many enablers now exist that specialize in helping companies globalize their e-commerce.
139. For some companies, localizations of Web sites are minimal (Dell).
140. However, other companies tailor their sites to local cultural needs.
141. Numerous companies also provide Web translations.
142. Some have automated the process.
143. However, culturally sensitive enablers go beyond simple translation – the Web site must be sensitive to cultural and religious difference.
144. Some “mission critical” factors that a corporate Web site must use to communicate to a global audience include • Linking all international sites to the corporate Web site • It site includes feedback or comment sections, it should also contain all non-electronic contact information • Provide a prominent list of languages used by the company’s Web site • If site includes downloads, use a page for Global Downloads for different languages • Localize by language the parts of the parent company Web site that receive the most access • Provide a site map for the parent company Web site that includes links to all local content • Provide the firm’s privacy statement in all languages • Guard against local piracy by putting your policies in local languages • Localize your graphics as well as your written material • Localize content management
145. Developing a global Web site adds additional challenges to organizations beyond cultural sensitivity and language differences.
146. Need to adapt organization to the information flow and customer demands created by Web locations from anywhere in the world
147. Resulted in changes in organizational structure and changes in internal information systems to make the company more integrated globally

Exhibit 9.10 Shows Major Problems Identified Web-Site Globalization

Summary and Conclusions

148. Chapter introduced basic concepts of e-commerce in general and multinationals
149. E-commerce is expanding geometrically.
150. Although the US dominates e-commerce, other areas of the world are catching up.
151. Fundamentals of e-commerce strategy emphasize building on traditional business models and experimenting with cost reductions and areas of differentiation that Internet use might provide.
152. Companies conducting multinational operations via the Internet face some of the same challenges faced by brick-and-mortar multinationals.
153. World Wide Web will probably be one of the most important drivers of globalization in the future.