Ch 1 Expanding Abroad: Motivations, means

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Ch 1Expanding Abroad Motivations, means
Mentalities
Part 1 The Strategic Imperatives

• INB / MGT 352
• International Management
• Spring 2008

Transnational Management, Text, Cases, and
Readings in Cross-Border Management, Christopher
Barlett, Sumantra Ghoshal Palu Beamish, 5th
Edition, 2008
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Definition of a Multinational Enterprise (MNE)

• MNE have substantial direct investment in
  foreign countries (1) and actively (not
  passively) manage and coordinate these offshore
  assets, and their operations as integral parts of
  the company, both strategically an
  organizationally.
• MNEs include ExxonMobil, Royal Dutch Shell, BP,
  Toyota, Ford, DaimlerChrysler, GE, Wal-Mart, GM,
  ChevronTexaco
• In addition, definition of MNEs includes Intel,
  Unilever, Samsung, Singapore Airlines, McKinsey
  Co., and Starbucks

Note 1 These are not simply trading
relationships of an import/export business.
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Explosive Growth (MNE)

• Number of International Companies
• UNCTAD - United Nations agency in charge of all
  matters relating to FDI and international
  corporations.
• 1995 45,000 parent companies with 280,000
  foreign affiliates (7 trillion in sales)
• 2004 70,000 parent companies with 690,000
  foreign affiliates (19 trillion in sales)

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Economic Importance of MNEs

• MNEs are equivalent in economic importance to
  medium-sized economies of Chile, Hungary, or
  Pakistan
• MNEs have considerable influence
• Employ high percentage of business graduates
• Pose the most complex strategic and
  organizational challenges for their managers

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Top 500 MNEs

• 70 of world trade
• 85 of world automobiles
• 70 of computers
• 35 of toothpaste
• 65 of soft drinks

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Largest 100 MNE

• In 2003, excluding banking and finance, the
  largest 100 MNEs accounted for over
• 8 Trillion in worldwide assets, of which
• 4.0 trillion was located outside there
  respective home countries.

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Motivations (the Why) of MNE Intl Expansion

• Traditional Motivations
• Securing key supplies (aluminum, rubber, oil,
  etc.)
• Market-seeking behavior (Nestle, Bayer, Ford)
• Access to low-cost factors of production
  (clothing, electronics, household appliances,
  watches,
• Emerging Motivations
• Scale economies
• Economies of scale and scope
• Economies of scope
• Ballooning RD investments
• Shortening product life cycles
• Scanning and learning capability
• Competitive positioning

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Motives to Go International
Market-Seeking Motives
The Historically Indigenous Firm
Cost-Reduction Motives
Strategic Motives
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Global Strategy An Organizing Framework
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What Forces Drive MNEs Toward Global Integration
Coordination?

• Economies of scale
• Economies of scope
• National differences in the availability cost
  of productive resources

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Economies of scale

• How do new technologies make an economy of scale
  possible?
• Why are capital-intensive industries susceptible
  to economies of scale?
• How do I quantify an economy of scale?
• What might threaten the benefits sought under an
  economy of scale?

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Economies of scope

• What is an economy of scope?
• What factors or changes might enable an economy
  of scope to develop?
• What threats to an economy of scope could exist?

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MNE Advantages Intl Operations

• Ensuring critical supplies
• Entering new markets
• Tapping low-cost factors of production
• Leveraging their global information access
• Capitalizing on competitive advantage of multiple
  market positions
• Use strength to play strategic game of global
  chess

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Means (the How?) of Internationalization
Prerequisites and Processes

• Prerequisites for Internationization

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Scale Economies Use of Scale for Competitive
Advantage Higher Volume Inhibits
Flexibility Political Risks Resource
Risks Competitive Risks Scope Economies Cost
of Joint Production For Two or More
Products Provides Sharing of Physical
Resources Provides for Shared External
Relationships Provides for Shared Knowledge
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Tremendous Growth in International Trade
Commerce
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Foreign Market Entry Modes
Foreign Market Entry Modes
Wholly-owned subsidiaries
Joint Venture (e.g., w/local partner)
Franchising
Level of control over foreign services
Licensing
Export (e.g., through agent or distributor)
Indirect export

• Amount of resources committed to foreign market

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International Mindsets

• Specific pressures will affect competition in
  industries and firms that cross national
  boundaries causing
• a global orientation that relies on
  coordination of worldwide activities to maximize
  the collective organization, and
• a multidomestic orientation that responds to
  individual country opportunities and constraints.
• Increasingly, there are pressures for
  international companies to be both globally
  efficient and locally responsive.
• These pressures derive from environmental
  changes such as new technologies, unanticipated
  competition, and the convergence of industry
  boundaries.
• In such situations, firms exhibit a
  transnational mindset to simultaneously gain
  efficiency and local market benefits.

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International Mindsets
Multinational Systems
International Systems
Businesses that follow an international strategy
tend to have distributed GIS in which systems in
the central headquarters are connected to those
in the foreign operations.
Businesses that follow a multinational strategy
tend to have decentralized, or independent,
information systems for their central
headquarters and different foreign operations.
Transnational Systems
Global Systems
Business that follow the transnational strategy
require complex, integrated GIS in which the
central headquarters and all the foreign
operations participate equally
Businesses that follow a global strategy ten to
have highly centralized GIS determined by the
central headquarters.
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Foreign Market Entry Modes

• Exporting
• Countertrade
• Contract manufacturing
• Licensing
• Franchising
• Turnkey projects
• Non-equity strategic alliances
• Equity-based ventures such as wholly-owned
  subsidiaries and equity joint ventures

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Motives to Go International
Market-Seeking Motives
The Historically Indigenous Firm
Cost-Reduction Motives
Strategic Motives
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Evolutionary Stages
1-22

• Stage 1 Foreign Inquiry
• Stage 2 Export Manager
• Stage 3 Export Department and Direct Sales
• Stage 4 Sales Branches and Subsidiaries
• Stage 5 Assembly Abroad
• Stage 6 Production Abroad
• Stage 7 Integration of Foreign Affiliates

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International Strategy
Assets, responsibilities decentralized
Formal control systems
HQ
International mentality
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International Strategy

• Main role is to support the domestic parent
  company in different ways, such as contributing
  incremental sales to domestic manufacturing
  operations
• Products developed for domestic market sold
  abroad
• Technology and other knowledge are transferred
  from parent company to overseas operators
• Offshore manufacturing represents a means to
  protect companys home market
• Companies with this mentality regard themselves
  fundamentally as domestic with some foreign
  appendages
• Managers assigned to overseas operations are
  often domestic misfits who happen to know a
  foreign language or have previously lived abroad
• Decisions related to foreign operations tend to
  be made in an opportunistic or ad hoc manner

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An International Business Strategy Deploying
Global Information Systems (GIS)
International Strategy
International Diagram
Assets, responsibilities decentralized
Involves transferring knowledge and skills from
the central headquarters to the foreign
operations.
Formal control systems
International mentality
International Strategy
GIS Deployment Strategy
Businesses that follow an international strategy
tend to have distributed GIS in which systems in
the central headquarters are connected to those
in the foreign operations.
4-25
4-25
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Multinational Strategy
Loose controls strategic decisions remote
HQ
Financial reporting flows
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Multinational Strategy

• A multinational strategic mentality develops as
  managers begin to recognize and emphasize the
  differences among national markets and operating
  environments
• Companies adopt a more flexible approach to their
  intl operations by modifying their products,
  strategies, and even management practices country
  by country
• As they develop national companies that are
  increasingly sensitive and responsive to their
  local environments, these companies undertake a
  strategic approach that is literally
  multinational Their worldwide strategy is built
  on a foundation of the multiple, nationally
  responsive strategies of the companys worldwide
  subsidiaries.

• Managers tend to be highly independent
  entrepreneurs, often nationals of the host
  country
• Using their local market knowledge and the parent
  companys willingness to invest in these growing
  opportunities, these entrepreneurial country
  managers often can build significant local growth
  and considerable independence from headquarters
• Results in a very responsive marketing approaches
  in the different national markets, it also gives
  rise to an inefficient manufacturing
  infrastructure within the company
• Plants are built more to provide local marketing
  advantages or improve political relations than to
  maximize production efficiency
• Similarly, the proliferation of products designed
  to meet local needs contributes to a general loss
  of efficiency in design, production, logistics,
  distribution, and other functional tasks

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An Multinational Strategy
Multinational Strategy
Multinational Diagram
Central home base decentralized production,
sales, marketing in other countries. The business
allows its foreign operations to function largely
independently.
Multinational Strategy
GIS Deployment Strategy
Businesses that follow a multinational strategy
tend to have decentralized, or independent,
information systems for their central
headquarters and different foreign operations.
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Global Strategy
Tight controls centrally driven strategy
HQ
One-way flows, goods, information, and resources
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Global Business Strategies

• In an operating environment of improving
  transportation and communication facilities and
  falling trade barriers, some companies adopt a
  very different strategic approach for their intl
  operations
• These companies think in terms of creating
  products for a world market and manufacturing
  them on a global scale in a few highly efficient
  plants, often at the corporate center
• Subscribe to Professor Levitts to make and sell
  the same thing, the same way, everywhere

• In an operating environment of improving
  transportation and communication facilities and
  falling trade barriers, some companies adopt a
  very different strategic approach for their intl
  operations
• These companies think in terms of creating
  products for a world market and manufacturing
  them on a global scale in a few highly efficient
  plants, often at the corporate center
• The underlying assumption is that national tastes
  and preferences are more similar than different
  or that they can be made similar by providing
  customers with standardized products at adequate
  cost and with quality advantages over those
  national varieties they know
• Strategic approach requires considerably more
  central coordination and control than the others
  and is typically associated with an
  organizational structure in which various product
  or business managers have worldwide
  responsibility
• RD and manufacturing activities are typically
  managed from headquarters, and most strategic
  decisions also take place at the center

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Global Strategy Example
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Global Business Strategies
All use global information systems (GISs) in
various ways
Multinational Strategy
International Strategy
Transnational Strategy
4-32
4-32
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A MNE Business Strategy Deploying Global
Business Systems
All use global information systems (GISs) in
various ways
Global Strategy

• The central headquarters coordinates the
  activities of the foreign operations closely.

Transnational Strategy
GIS Deployment Strategy
Business that follow the transnational strategy
require complex, integrated GIS in which the
central headquarters and all the foreign
operations participate equally
4-33
4-33
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Transnational Strategy
Complex controls high coordination skills,
coordinated strategic decision process
Heavy flows materials, people information,
technology
Distributed capabilities, resources decision
making

4-34
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Transnational Strategy

• The emerging requirement is for companies to
  become more responsive to local markets and
  political needs and pressures to develop
  global-scale competitive efficiency
• Key activities and resources are neither
  centralized in the parent company nor so
  decentralized that each subsidiary can carry out
  its own tasks on a local-for-local basis
• Instead, the resources and activities are
  dispersed but specialized, to achieve efficiency
  and flexibility at the same time

• These dispersed resources are integrated into an
  interdependent network of worldwide operations
• Transnational mentality recognizes the importance
  of flexible and responsive country-level
  operations hence a return of national into
  the terminology
• Compared to multinational approach, it provides
  for means to link and coordinate those operations
  to retain competitive efficetiveness and economic
  efficiency, as is indicated by the prefix trans
• The resulting need for intensive,
  organization-wide coordination and shared
  decision-making implies that this is a much more
  sophisticated and subtle approach to MNE
  management

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A Transnational Business Strategy Deploying
Global Business Systems
All use global information systems (GISs) in
various ways
Transnational Strategy
Transnational Diagram

• Truly global firm no national headquarters
  value-added activities managed from global
  perspective optimizes supply demand, taking
  advantage of local competitive strengths

Transnational Strategy
GIS Deployment Strategy
Business that follow the transnational strategy
require complex, integrated GIS in which the
central headquarters and all the foreign
operations participate equally
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Global Chess Between Large MNEs

• Customers demand differentiation along with the
  level of cost quality typical of global
  products
• Host governments have more aggressive development
  tax agendas
• MNEs fight for flexibility to continuously change
  product designs, sourcing, and pricing

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Multidomestic Strategy Example