ibs revision

8/2/2019 IBS Revision

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IBS REVISION

CHAPTER 12/13

1. Overview of global expansion, profitability and profit growthGlobal expansion helps firm to increase their profitability and rate of profit growth

in ways not available to purely domestic enterprises. Company might face certain

constraints by the need to customize its product offering, marketing strategy and

business strategy to differing national conditions. Here are some advantages enjoyed by

international firm:

i. Expanding the market: leveraging products and competencies Increase growth by selling goods or services developed at home internationally

o E.g.: Microsoft developed its software in the US from its earliest days thecompany has always focused on selling their software globally

The returns are greater if indigenous competitors in the host country lackcomparable products

Success of firms that expand internationally depends ono The goods or services they sello Their core competency skills within the firm that competitors cannot easilymatch or imitate

Exists in any of firms value creation activities production,marketing, R&D, HR, etc.

Bedrock of a firms competitive advantage, allowing it to reduce costsof value creations or to create perceived value in such a way that

premium pricing is possible

For some service company like retailers, restaurant chains, expanding market fortheir service is equivalent to replicating their business model in foreign nations

o E.g.: Starbucks, McDonalds

ii. Location economies (b) Economies arising from performing a value creation activity in the optimal location

for that activity, wherever in the world that might be

Lowers costs of value creation and help firm achieve a low-cost position Enables a firm to differentiate its product offerings from those of competitors


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Creating a global webo By take advantage of location economies in different parts of the worldo Different stages of the value chain are dispersed to locations where perceived

value is maximized or where cost of value creation is minimizedo E.g.:

Airbus & Boeing produce airplanes but parts are produce elsewheresuch as in Singapore for the door mechanism

Apple productsdesigned in US, parts made in China, assembles inTaiwan

Limitations:o Transportation costs and trade barriers

E.g.: NZ becomes an uneconomical location serving global market dueto high transportation cost despite competitive advantage in mobile

assembly operationso Assessing political and economic risks when making location decision

E.g., despite having a pool of cheap semi-skilled labors, Thailandmight not be an ideal location as other developing economies like

Vietnam or China due to political instability and natural disasters. Inappropriate economic policies imposed by the government could lead

to foreign exchange risk making the location unfavorable.

iii. Experience effects (c) Systematic reductions in production costs occurring over the product life

o By moving down the experience curve, firms reduce the cost of creating value Produce more, more experience & expertise gained -> able to cut cost

To get down the experience curve quickly, firms can use a single plant to serveglobal market

Can be explained by learning effects and economies of scale Learning effects cost savings coming from learning by doing

o When labor productivity increases Individuals learn the most efficient ways to perform particular tasks Managers learn how to manage new operation more efficiently


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Economies of scale referstoreductions in unit

cost achieved

by producing

a large volume of

a producto Source of EOS include:

Spreading fixed costs over a large volume Utilizing production facilities more intensively Increasing bargaining power with suppliers

Strategic significanceo Moving down the experience curve allows firm to reduce its cost of creating

value and increase profitability Firm can have a cost advantage vis--vis its competitors

o As underlying sources of experience-based cost economies are plant based,one method to progress downward for firm is to increase volume produced by

a single plant as rapid as possibleo International firm serving global market will be able to build accumulated

volume the domestic ones or those with multiple production locations.o Combining these two factors we have serving a global market from a single

location which establishes a low-cost position Firm now can act as a barrier to new competition

o Example: Intel mustpursue experience curve effect, serving world marketfrom a limited number of plants due to heavy investment required in building

state-of-the-art facility to produce microprocessors.

iv. Earn a greater return Leverage skills developed in foreign operations and transfer them elsewhere in the

firm

d) (i) The pressure of international business


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Firms that compete in the global market place face 2 conflicting types of competitivepressure

o Pressureslimit the firms ability to realize location economies andexperience effects, leverage products and transfer skills within the firm

Pressure for cost reductions force firm to lower unit costso E.g. Dell Computers cut down unit cost by

Directly selling to customer without intermediaries -> allowcustomization

Built manufacturing plant in Penang to serve Asia Pacific regiono Greatest under the following circumstances:

In industry producing commodity type product that fill universalneeds (exist when the tastes and preferences of consumers in differentnations are similar if not identical) where price is the main

competitive weapon

When major competitors are based in low cost locations Sony (consumer electronics) almost went out of biz since it

continued to produce in Japan while others had moved to

countries where labors are cheaper such as Malaysia, Thailand

Where there is persistent excess capacity Ability to deal with emergencies like natural disasters,

economic downturns

Where consumers are powerful and face low switching costs Consumers nowadays are more technical savvy, they face low

switching cost when change from one device to another

Pressures to be locally responsive require the firm to adapt its product to meetlocal demands in each marketa strategy that raises cost

o Rationale: Difference in consumer tastes and preferences. E.g., for skincare

product, Asian customers prefer whitening product while the

Scandinavians like ultra-moisturizing products due to dry weather

Differences in traditional practices and infrastructure. E.g., cars inSingapore and Britain are right-hand drive

Differences in distribution channels Host government demands. E.g., strict health regulations for any food

products entering France; advertisements banned in certain countries

due to political reasono Insurance company cannot have the same package offered to the whole world

due to different life expectancy in different countries, e.g., 80 in Singapore

but in Africa it would be lower.

(ii) The four basic international business strategies


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Each strategy has its advantages and disadvantages. The appropriateness of each

strategy varies with the extent of pressures for cost reductions and local responsiveness.

FIGURE 1 - FOUR BASIC STRATEGIES

International take pdts 1st produced for the domestic market and sell theminternationally with only minimal local customization

o Make sense when there are low cost pressures and low pressures for localresponsiveness

o Firms tend to centralize product development functions at home (e.g., R&D).o However, they also tend to establish manufacturing and marketing functions

in each major country in which they do business although the head office

retains tight control

o E.g., Procter & Gamble has traditionally had production facilities in all itsmajor markets outside the United States, including Britain, Germany, and

Japan.

These facilities, however, manufactured differentiated products thathad been developed by the US parent firm and were often marketed

using the marketing message developed in the United States.

Historically, local responsiveness at P&G has been limited. Global standardization focus on increasing profitability and profit growth by

reaping the cost reduction from EOS, learning effects and location economieso Strategic goal is to pursue a low-cost strategy on a global scaleo Make sense when there are strong pressures for cost reductions and demands

for local responsiveness are minimalo E.g., semiconductor manufacturer like Intel pursues global standardization

strategy


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Localization increase profitability by customizing goods or services so that theymatch tastes and preferences in different national markets

o Appropriate when there substantial differences across nations with regard toconsumer tastes and preferences and when cost pressure are not too intense

o By customizing the product offering, firm increase value of the product in thelocal market

o However, there might be limitation in cost cutting due to involvement ofsome duplications of functions and smaller production runs

o E.g.: Windows OS and Microsoft did well locally and international thenpenetrated the European market by localizing Windows (different language

packs for friendly usage) Transnational strategy tryingto simultaneously achieve low cost through location

economies, EOS and learning effects, differentiate product offering across geographic

markets to account for local differences; and foster a multidirectional flow of skills

between different subsidiaries in the firms global network of operationso Make senses when cost pressures are intense and pressure for local

responsiveness are intense

o E.g., Caterpillar (standard earth-moving machine, mining equipment) nowhas to compete with Komatsu products (high local adaptability and low cost)

produce modular designs in large quantity, mix and match of partsand bodies

By pursuing this strategy, Caterpillar realized many of the benefits ofglobal manufacturing while responding to pressures for local

responsiveness by differentiating its product among national markets.

lower the cost overall and higher local responsiveness Meanwhile, Komatsu and Hitachi, which are still wedded to a Japan-

centric global strategy, have seen their cost advantages evaporate and

have been steadily losing market share to Caterpillar.

For another example consider Unilever. Once a classic multidomestic firm, Unilever has

had to shift toward more of a transnational strategy. A rise in low-cost competition, which

increased cost pressures, has forced Unilever to look for ways of rationalizing its detergents

business. During the 1980s, Unilever had 17 different and largely self-contained detergents

operations in Europe alone. The duplication in assets and marketing was enormous. Also,

because Unilever was so fragmented it could take as long as four years for the firm tointroduce a new product across Europe. Now Unilever is trying to weld its European

operation into a single entity, with detergents being manufactured in a handful of cost-

efficient plants, and standard packaging and advertising being used across Europe.

According to company estimates, the result could be an annual cost saving of over $200

million. At the same time, however, due to national differences in distribution channels and

brand awareness, Unilever recognizes that it must still remain locally responsive, even


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while it tries to realize economies from consolidating production and marketing at the

optimal locations.

o Difficult to achieveSimultaneously trying to achieve cost efficiencies, global learning, and localresponsiveness places contradictory demands on an organization. Differentiating the

product to respond to local demands in different markets raise costs, which runs counter

the goal of reducing cost.Firms that attempt to pursue a transnational strategy can become

bogged down in an organizational morass that only leads to inefficiencies. While no one

doubts that in some industries the firm that can adopt a transnational strategy will have a

competitive advantage, but in other industries, global, localization, and international

strategies remain viable. In the semiconductor industry, for example, pressures for local

customization are minimal and competition is purely a cost game, in which case a global

strategy, not a transnational strategy, is optimal. This is the case in many industrial goods

markets where the product serves universal needs. But the argument can be made that tocompete in certain consumer goods markets, such as the automobile and consumer

electronics industry, a firm has to try to adopt a transnational strategy.

Solution: using global matrix structure Horizontal differentiation proceeds along 2 dimensions: product division and

geographic area reinforcing the idea of dual responsibilitydual hierarchy

structure which can lead tp conflict and perpetual power struggles between

the areas and product divisions

Firm tends to mix relatively high degree of centralization for some operatingdecisions (particularly production and R&D) with high degree of

decentralization for other operating decisions (like marketing due to high

requirement for local responsiveness)

Need for coordination between subunits is high due to high level ofinterdependence of subunits implied by use of an array of formal and

informal integrating mechanisms which can result in significant performance

ambiguity, in turn, raising cost control -> output and bureaucratic control to

reduce

In short, while a transnational strategy appears to offer the most advantages,

implementing a transnational strategy raises difficult organizational issues.

Strategy Advantages Disadvantages


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Global

standardization Exploit experience curve effects Exploit location economies Lack of local responsiveness

International Transfer distinctive competencies toforeign markets

Lack of local responsiveness Inability to realize location

economies Failure to exploit experience

curve effects

Localization Customize product offerings and marketingin accordance with local responsiveness

Inability to realize locationeconomies

Failure to exploit experiencecurve effects

Failure to transfer distinctivecompetencies to foreign markets

Transnational Exploit experience curve effects Exploit location economies Customize product offerings and marketing

in accordance with local responsiveness

Reap benefits of global learning

Difficult to implement due toorganizational problems

FIGURE 2 - THE ADVANTAGES AND DISADVANTAGES OF THE FOUR STRATEGIES

f) Vertical integration A firm's vertical differentiation determines where in its hierarchy the decision-

making power is concentrated. For example, are production and marketing decisions

centralized in the offices of upper-level managers, or are they decentralized to lower-level

managers? There are arguments for centralization and other arguments for

decentralization.

i. Arguments for Centralization Facilitate coordination

For example, consider a firm that has a component-manufacturing operation in

Taiwan and an assembly operation in Mexico. There may be a need to coordinate the

activities of these two operations to ensure a smooth flow of products from the component

operation to the assembly operation. This might be achieved by centralizing production

scheduling decisions at the firm's head office.


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Ensure that decisions are consistent with organizational objectivesWhen decisions are decentralized to lower-level managers, those managers may make

decisions at variance with top management's goals.

Give top-level managers the means to bring about needed majororganizational changes. By concentrating power and authority in one

individual or a top-management team,

Avoid the duplication of activitiescarried on by various subunits within theorganization.

For example, many international firms centralize their R&D functions at one or two

locations to ensure that R&D work is not duplicated. Similarly, production activities may be

centralized at key locations for the same reason.

ii. Arguments for Decentralization Relieves the burden of centralized decision-making

o Overburden can result in poor decisions Shown to motivate individuals

o Behavioral scientists have long argued that people are willing to givemore to their jobs when they have a greater degree of individual

freedom and control over their work

Permits greater flexibility

o More rapid response to environmental changes--because decisions donot have to be "referred up the hierarchy" unless they are exceptional.

Result in better decisionso Decisions are made closer to the spot by individuals who (presumably)

have better information than managers several levels up in a

hierarchy.

Increase control.o Can be used to establish relatively autonomous, self-contained

subunits within an organization.

oSubunit managers can then be held accountable for subunitperformance since they have fewer alibis

iii. Strategy and Centralization in an International BusinessThe choice between centralization and decentralization depends on the type of

decision and the firm's strategy. Decisions regarding overall firm strategy, major financial

expenditures, financial objectives, and the like are typically centralized at the firm's


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headquarters. However, operating decisions--such as those relating to production,

marketing, R&D, and human resource management--may or may not be centralized

depending on the firm's international strategy.

Consider firms pursuing a global strategy. They must decide how to disperse the

various value creation activities around the globe so location and experience economies canbe realized. The head office must decide where to locate R&D, production, marketing, and

so on. In addition, the globally dispersed web of value creation activities that facilitates a

global strategy must be coordinated. All this creates pressures for centralizing some

operating decisions.

In contrast, the emphasis on local responsiveness in MNCs creates strong pressures

for decentralizing operating decisions to foreign subsidiaries. Thus, in the classic

multidomestic firm, foreign subsidiaries have autonomy in most production and marketing

decisions. International firms tend to maintain centralized control over their core

competency and to decentralize other decisions to foreign subsidiaries. This typicallycentralizes control over R&D and/or marketing in the home country and decentralizes

operating decisions to the foreign subsidiaries. Microsoft Corporation, which fits the

international mode, centralizes its product development activities (where its core

competencies lie) at its Redmond, Washington, headquarters and decentralizes marketing

activity to various foreign subsidiaries. Thus, while products are developed at home,

managers in the various foreign subsidiaries have significant latitude for formulating

strategies to market those products in their particular settings.

The situation in transnational firms is more complex. The need to realize location

and experience curve economies requires some degree of centralized control over globalproduction centers (as it does in global firms). However, the need for local responsiveness

dictates the decentralization of many operating decisions, particularly for marketing, to

foreign subsidiaries. Thus, in transnational firms, some operating decisions are relatively

centralized, while others are relatively decentralized. A substantial degree of

decentralization is required if subsidiaries are going to have the freedom to develop their

own skills and competencies. So for this reason too, the pursuit of a transnational strategy

requires a high degree of decentralization


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g) Horizontal integration Concerned with how the firm decides to divide itself into subunits on the basis of

function, type of business, or geographical area.

Most firms begin with no formal structure and as they grow, organization istypically split into functions reflecting the firm's value creation activities (e.g.,finance, production, marketing, R&D)functional structure

o These functions are typically coordinated and controlled by a top-management team

o Decision making in this functional structure tends to be centralized. Further horizontal differentiation may be required if the firm significantly

diversifies its product offering.

For example, although Philips NV started as a lighting company, it now also has

activities in consumer electronics (e.g., visual and audio equipment), industrial electronics

(integrated circuits and other electronic components), and medical systems (CT scannersand ultrasound systems). In such circumstances, problems of coordination and control arise

when different business areas are managed within the framework of a functional structure.

It becomes difficult to identify the profitability of each distinct business area, and it is

difficult to run a functional department, such as production or marketing.

To solve the problems of coordination and control, most firms switch to a productdivision structureo ith a product division structure, each division is responsible for a distinct

product line (business area).

Thus, Philips has divisions for lighting, consumer electronics, industrial electronics, and

medical systems. Each product division is set up as a self-contained, largely autonomous

entity with its own functions. The responsibility for operating decisions is typically

decentralized to product divisions, which are then held accountable for their performance.

Headquarters is responsible for the overall strategic development of the firm and for the

financial control of the various divisions.

When firms have expanded abroad they have typically grouped all theirinternational activities into an international division

Regardless of the firm's domestic structure, its international division tends to beorganized on geography. In time it might prove viable to manufacture the product in each country, and so

production facilities would be added on a country-by-country basis.

o For firms with a functional structure at home, this might mean replicatingthe functional structure in the foreign market.


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o For firms with a divisional structure, this might mean replicating thedivisional structure in the foreign market.

Problem arises -inherent potential for conflict and coordination problems betweendomestic and foreign operations.

o This can inhibit the worldwide introduction of new products, the transfer ofcore competencies between domestic and foreign operations, and theconsolidation of global production at key locations so as to realize location

and experience curve economies

Firms that continue to expand internationally abandon this structure and adopto worldwide product division structure adopted by diversified firms that have

domestic product divisions

appropriate for firms pursuing global or international strategies allows for worldwide coordination of value creation activities of each

product division

designed to help overcome the coordination problems that arise withthe international division and worldwide area

provides an organizational context in which it is easier to pursue theconsolidation of value creation activities at key locations necessary for

realizing location and experience curve economies

facilitates the transfer of core competencies within a division'sworldwide operations and the simultaneous worldwide introduction of

new products

Main problem: limited voice given to area or country managersresulting in a lack of local responsiveness,

o worldwide area structureadopted by undiversified firms whose domesticstructures are based on functions

divides the world into geographic areas which tends to be a self-contained, largely autonomous entity with its own set of value

creation

decentralize operations authority and strategic decisions, withheadquarters retaining authority for the overall strategic direction of

the firm and overall financial control

facilitates local responsiveness each area can customize product offerings, marketing strategy,

and business strategy to the local conditions.

Weakness: encourages fragmentation of the organization into highlyautonomous entities.

difficult to transfer core competencies between areas and toundertake the rationalization in value creation activities

required for realizing location and experience curve economies.

consistent with a localization strategy


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Global Matrix Structure firms attempt to minimize the limitations of worldwidearea structure and worldwide product divisional structure

o allows for horizontal differentiation along two dimensions: product divisionand geographical area

o dual responsibility is reinforced by giving product divisions and geographicalareas equal status within the organization

o can be clumsy and bureaucratic. It can require so many meetings that it isdifficult to get any work done

o Lead to conflict and perpetual power struggles between the areas and theproduct divisions, catching many managers in the middle.

o Result in Such finger pointing between division as something goes wrong Compromise accountability, enhance conflict, and allow headquarters

to lose control over the organization.

h) Performance ambiguity The key to understanding the relationship between international strategy and

control systems is the concept of performance ambiguity.

Exists when the causes of a subunit's poor performance are ambiguous.o common when a subunit's performance depends partly on the performance of

other subunits; or, when there is a high degree of interdependence between

subunits within the organization

Raises the costs of control. Low when firms with a localization strategy High in international firms

o Integration is required to facilitate the transfer of core competencies.o Since the success of a foreign operation depends partly on the quality of the

competency transferred from the home country, performance ambiguity can

exist.

Higher in firms with global standardization strategyo the pursuit of location and experience curve economies leads to the

development of a global web of interdependent value creation activities

Highest of all in transnational firms.o Because they emphasize the multidirectional transfer of core competencieso The extremely high level of integration within transnational firms implies a

high degree of joint decision making, and the resulting interdependenciescreate plenty of alibis for poor performance.


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i)Synthesis: Strategy and ArchitectureStrategy

Structure and

Controls Multidomestic International Global TransnationalVertical

Differentiation

Decentralized Core competency

centralized; restdecentralized

Some centralized Mixed

centralized and

decentralized

Horizontal

Differentiation

Worldwide area

structure

Worldwide product division Worldwide

product division

Informal Matrix

Need for

coordination

Low Moderate High Very high

Integrating

mechanisms

None Few Many Very many

Performance

ambiguity

Low Moderate High Very high

Need for cultural

controls

Low Moderate High Very High


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CHAPTER 14

a) Entry modesTurnkey Projects

Firms that specialize in the design, construction, and start-up of turnkey plants arecommon in some industries.

o Contractor agrees to handle every detail of the project for a foreign client,including the training of operating personnel.

o At completion of the contract, the foreign client is handed the "key" to aplant that is ready for full operation--hence, the term turnkey.

Means of exporting process technology to other countries. Most common in the chemical, pharmaceutical, petroleum refining, and metal

refining industries, all of which use complex, expensive production technologies.

Licensing An arrangement whereby a licensor grants the rights to intangible property to

another entity (the licensee) for a specified period, and in return, the licensor

receives a royalty fee from the licensee.

o Intangible property includes patents, inventions, formulas, processes,designs, copyrights, and trademarks.

For example, to enter the Japanese market, Xerox, inventor of the photocopier,

established a joint venture with Fuji Photo that is known as Fuji-Xerox. Xerox then

licensed its xerographic know-how to Fuji-Xerox. In return, Fuji-Xerox paid Xerox a royalty

fee equal to 5 percent of the net sales revenue that Fuji-Xerox earned from the sales of

photocopiers based on Xerox's patented know-how. In the Fuji-Xerox case, the license was

originally granted for 10 years, and it has been renegotiated and extended several times

since. The licensing agreement between Xerox and Fuji-Xerox also limited Fuji-Xerox's

direct sales to the Asian Pacific region.

Franchising Similar to licensing but tends to involve longer-term commitments than licensing. Franchiser not only sells intangible property to the franchisee (normally a

trademark), but also insists that the franchisee agree to abide by strict rules as to

how it does business.

Franchiser will also often assist the franchisee to run the business on an ongoingbasis.


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Franchiser typically receives a royalty payment, which amounts to some percentageof the franchisee's revenues.

Employed primarily by service firmsMcDonald's is a good example of a firm that has grown by using a franchising strategy.

McDonald's has strict rules as to how franchisees should operate a restaurant. These rulesextend to control over the menu, cooking methods, staffing policies, and design and location

of a restaurant. McDonald's also organizes the supply chain for its franchisees and provides

management training and financial assistance.

Joint Ventures Establishing a firm that is jointly owned by two or more otherwise independent

firms.

Fuji-Xerox, for example, was set up as a joint venture between Xerox and Fuji Photo A popular mode for entering a new market. The most typical joint venture is a 50/50 venture, in which there are two parties,

each of which holds a 50 percent ownership stake and contributes a team of

managers to share operating control.

Wholly Owned Subsidiaries Firm owns 100 percent of the stock. Can be done two ways.

o Either set up a new operation in that country; oro

Acquire an established firm and use that firm to promote its products (asMerrill Lynch did when it acquired various assets of Yamaichi Securities).

Entry Mode Advantage Disadvantage

Exporting Avoids the often-substantial costs of

establishing manufacturing

operations in the host country

Ability to realize location andexperience curve economiesThis is how Sony came to dominate the

global TV market, how Matsushita came

to dominate the VCR market, and how

many Japanese auto firms made inroads

into the US auto market.

Not be appropriate if there are lower-cost

locations for mfg. pdt abroad

Many US electronics firms have moved someof their manufacturing to the Far Eastbecause of the availability of low-cost, highlyskilled labor; then export from that location

to the rest of the world, including US

High transport costs

Trade barriersAn implicit threat by the US Congress toimpose tariffs on imported Japanese autosled many Japanese auto firms to set upmanufacturing plants in the United States.


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Problems with local marketing agents

Foreign agents often carry the products ofcompeting firms and so have dividedloyalties

Turnkey

contracts

Ability to earn returns from process

technology skills in countries where

FDI is restrictedGovt. of many oil-rich countries have set

out to build their own petroleum refining

industries, so they restrict FDI in their

oil and refining sectors. But because

many of these countries lacked

petroleum-refining technology, they

gained it by entering into turnkey

projects with foreign firms that had the

technology

Less risky than conventional FDI.In a country with unstable political and

economic environments, a longer-terminvestment might expose the firm to

unacceptable political and/or economic

risks (e.g., the risk of nationalization or

of economic collapse).

Lack of long-term market presence

Creating efficient competitorsMany of the Western firms that sold oil refining

technology to firms in Saudi Arabia, Kuwait, and

other Gulf states now find themselves competing

with these firms in the world oil market

If the firm's process technology is a source of

competitive advantage, then selling this

technology through a turnkey project is also

selling competitive advantage to potential

and/or actual competitors

Licensing Low development costs and risks

(attractive for firms lacking the

capital to develop operations

overseas)

When a firm is unwilling to commit

substantial financial resources to an

unfamiliar or politically volatileforeign market.

When a firm wishes to participate in

a foreign market but is prohibited

from doing so by barriers to

investment.Formation of the Fuji-Xerox joint

venture Xerox wanted to participate in

the Japanese market but was prohibited

from setting up a wholly owned

subsidiary by the Japanese government.

So Xerox set up the joint venture with

Fuji and then licensed its know-how tothe joint venture.

When a firm possesses some

intangible property that might have

business applications, but it does not

want to develop those applications

itself.Coca-Cola has licensed its famous

Lack of control over manufacturing, marketing

Inability to realize location and experience

curve economies

Inability to engage in global strategic

coordination

Lack of control over technologyRCA Corporation, for example, once licensed its

color TV technology to Japanese firms including

Matsushita and Sony. The Japanese firms quickly

assimilated the technology, improved on it, and

used it to enter the US market. Now the Japanese

firms have a bigger share of the US market than the

RCA brand


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trademark to clothing manufacturers,

who have incorporated the design into

their clothing (e.g., Coca-Cola T-shirts).

Franchising Low development costs and risksA service firm can build up a global

presence quickly and at a relatively lowcost and risk, as McDonald's has.

Inhibit firms ability to take profits our of onecountry to support competitive attacks in

another

Lack of control over quality due to geographicdistance from the firm and franchiseeA business traveler checking in at a Hilton

International hotel in Hong Kong can reasonably

expect the same quality of room, food, and service

that she would receive in New York. The Hilton

name is supposed to guarantee consistent product

quality. However, if the business traveler has a bad

experience at the Hilton in Hong Kong, she may

never go to another Hilton hotel and may urge her

colleagues to do likewise

Joint

ventures

Access to local partner's knowledgeFor many US firms, joint ventures have

involved the US company providing

technological know-how and products

and the local partner providing the

marketing expertise and the local

knowledge necessary for competing in

that country. This was the case with the

Fuji-Xerox joint venture.

Sharing development costs and risks

Politically acceptable

Lack of control over technologyThe joint venture between Boeing and a consortium

of Japanese firms to build the 767 airliner raised

fears that Boeing was unwittingly giving away its

commercial airline technology to the Japanese.

Inability to realize location and experience

economiesConsider the entry of Texas Instruments (TI) into

the Japanese semiconductor market. When TI

established semiconductor facilities in Japan, it did

so for the dual purpose of checking Japanese

manufacturers' market share and limiting their cash

available for invading TI's global market. The

strategy required the Japanese subsidiary to run at a

loss if necessary. Few if any potential joint venture

partners would have been willing to accept such

conditions, since it would have necessitated a

willingness to accept a negative return on their

investment.

Potential conflicts and battles for controlbetween the investing firms due todifferences in objectives

Whollyowned

subsidiaries

Protection of technology/ corecompetenciesMany high-tech firms prefer this entry

mode for overseas expansion (e.g., firms

in the semiconductor, electronics, and

pharmaceutical industries)

Ability to engage in global strategic

coordination due to tight control

High costs and risks


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over operations

Ability to realize location and

experience economies

b) Greenfield or Acquisition? Greenfield strategy build a subsidiary from the ground up Acquisition strategy acquire an existing company


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c) Strategic Alliance Cooperative agreements between potential or actual competitors Run the range from formal joint ventures, in which two or more firms have equity

stakes (e.g., Fuji-Xerox), to short-term contractual agreements, in which two

companies agree to cooperate on a particular task (such as developing a newproduct).

Advantages facilitate entry into a foreign marketFor example, Motorola initially found it very difficult to gain access to the Japanese

cellphone market. The turning point for Motorola came in 1987 when it allied itself with

Toshiba to build microprocessors. Toshiba provided Motorola with marketing help,

including some of its best managers and helped Motorola in the political game of securinggovernment approval to enter the Japanese market and getting radio frequencies assigned

for its mobile communications systems.

allow firms to share the fixed costs (and associated risks) of developing new productsor processes

Motorola's alliance with Toshiba also was partly motivated by a desire to share the high

fixed costs of setting up an operation to manufacture microprocessors. The microprocessor

business is so capital intensive-Motorola and Toshiba each contributed close to $1 billion to

set up their facility-that few firms can afford the costs and risks by themselves. Similarly,the alliance between Boeing and a number of Japanese companies to build the 767 was

motivated by Boeing's desire to share the estimated $2 billion investment required to

develop the aircraft.

Bring together complementary skills and assets that neither company could easilydevelop on its own

An example is the alliance between France's Thomson and Japan's JVC to

manufacture videocassette recorders. JVC and Thomson are trading core competencies;

Thomson needs product technology and manufacturing skills, while JVC needs to learn

how to succeed in the fragmented European market. Similarly AT&T struck a deal in

1990 with NEC Corporation of Japan to trade technological skills. AT&T gave NEC

some of its computer-aided design technology and NEC is giving AT&T access to the

technology underlying its advanced logic computer chips.

firm establish technological standards for the industry that will benefit the firm.


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For example, in 1992, Philips NV allied with its global competitor, Matsushita, to

manufacture and market the digital compact cassette (DCC) system Philips had

developed. Philips's motive was that this linking with Matsushita would help it

establish the DCC system as a new technological standard in the recording and

consumer electronics industries. The issue was important because Sony had developed a

competing "mini compact disk" technology that it hoped to establish as the newtechnical standard. Since the two technologies did very similar things, there was at

most only room for one new standard. Philips saw its alliance with Matsushita as a

tactic for winning the race.

Disadvantages give competitors a low-cost route to new technology and marketsFor example, US and Japanese firms are part of an implicit Japanese strategy to keep

higher-paying, higher-value-added jobs in Japan while gaining the project engineering andproduction process skills that underlie the competitive success of many US companies.

Japanese successes in the machine tool and semiconductor industries were largely built on

US technology acquired through strategic alliances. US managers are aiding the Japanese

in achieving their goals by entering alliances that channel new inventions to Japan and

provide a US sales and distribution network for the resulting products. Although such deals

may generate short-term profits, , in the long run the result is to "hollow out" US firms,

leaving them with no competitive advantage in the global marketplace.

Making Alliances Work Partner Selectiona good ally/partner

o helps the firm achieve its strategic goals and has capabilities that thefirm lacks and that it values

o shares the firm's vision for the purpose of the allianceo will not exploit the alliance for its own ends; t

to expropriate the firm's technological know-how while giving awaylittle in return.

For example, IBM is involved in so many strategic alliances that it would not pay

the company to trample roughshod over individual alliance partners. This would tarnish

IBM's reputation of being a good ally and would make it more difficult for IBM to attract

alliance partners. Since IBM attaches great importance to its alliances, it is unlikely to

engage in the kind of opportunistic behavior. Similarly, their reputations make it less likely

(but by no means impossible) that such Japanese firms as Sony, Toshiba, and Fuji, which


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have histories of alliances with non-Japanese firms, would opportunistically exploit an

alliance partner.

Alliance Structureo designed to make it difficult (if not impossible) to transfer technology not

meant to be transferred

In the alliance between General Electric and Snecma to build commercial air craft

engines, for example, GE reduced the risk of excess transfer by walling off certain sections

of the production process. The modularization effectively cut off the transfer of what GE

regarded as key competitive technology, while permitting Snecma access to final assembly.

Similarly, in the alliance between Boeing and the Japanese to build the 767, Boeing walled

off research, design, and marketing functions considered central to its competitive position,

while allowing the Japanese to share in production technology. Boeing also walled off new

technologies not required for 767 production.

o Contractual safeguards can be written into an alliance agreement toguard against the risk of opportunism by a partner

o Allow for skills and technologies swaps with equitable gain. Cross-licensing agreements are one way to achieve this goal.

For exjample, in the alliance between Motorola and Toshiba, Motorola has licensed

some of its microprocessor technology to Toshiba, and in return, Toshiba has licensed some

of its memory chip technology to Motorola.

oReduce risk of opportunism by an alliance partner.

The long-term alliance between Xerox and Fuji to build photocopiers for the Asian

market perhaps best illustrates this. Rather than enter into an informal agreement or a

licensing arrangement (which Fuji Photo initially wanted), Xerox insisted that Fuji invest

in a 50/50 joint venture to serve Japan and East Asia. This venture constituted such a

significant investment in people, equipment, and facilities that Fuji Photo was committed

from the outset to making the alliance work in order to earn a return on its investment. By

agreeing to the joint venture, Fuji essentially made a credible commitment to the alliance.

Given this, Xerox felt secure in transferring its photocopier technology to Fuji.

Managing the Allianceo Building Trustbuilding interpersonal relationships between the firms'

managers.

o Learning from Partnersdiffusion of knowledgeFor example, consider the 10-year alliance between General Motors and Toyota constituted

in 1985. Toyota quickly learned about US supply, transportation, management of US


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workers and opened its own plant in 1988. On the other hand, possibly all GM got was a

new product, the Chevrolet Nova.

d) Selecting entry mode

A firm expanding internationally must decideo which markets to entero when to enter them and on what scaleo how to enter them (the choice of entry mode)

i. Which Foreign Markets? Firms need to assess the long run profit potential of each market The most favorable markets are politically stable developed and developing nations

with free market systems, low inflation, and low private sector debt

The less desirable markets are politically unstable developing nations with mixed orcommand economies, or developing nations where speculative financial bubbles have

led to excess borrowing

Success firms usually offer products that have not been widely available in themarket and that satisfy an unmet need

ii. Timing of Entry Entry is early when an international business enters a foreign market before other

foreign firms

Entry is late when a firm enters after other international businesses have alreadyestablished themselves in the market

Firms entering a market early can gain first mover advantagesincluding


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o the ability to pre-empt rivals and capture demand by establishing a strongbrand name

o the ability to build up sales volume in that country and ride down theexperience curve ahead of rivals and gain a cost advantage over later

entrants

o the ability to create switching costs that tie customers into their products orservices making it difficult for later entrants to win business

o First mover disadvantages are the disadvantages associated with entering aforeign market before other international businesses

o These may result in pioneering costs (costs that an early entrant has to bearthat a later entrant can avoid) such as

o the costs of business failure if the firm, due to its ignorance of the foreignenvironment, makes some major mistakes

o the costs of promoting and establishing a product offering, including the costof educating the customers

iii. Scale of Entry and Strategic Commitments Firms that enter foreign markets on a significant scale make a major strategic

commitment that changes the competitive playing field

o This involves decisions that have a long term impact and are difficult toreverse

Small-scale entry can be attractive because it allows the firm to learn about aforeign market, but at the same time it limits the firms exposure to that market

There are no right decisions with foreign market entry, just decisions that areassociated with different levels of risk and reward

Firms in developing countries can learn from the experiences of firms in developedcountries


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CHAPTER 7

a) Internalization (market imperfection) theory An extension of the market imperfection theory: to obtain a higher return on its

investment, a firm will transfer its superior knowledge to a foreign subsidiary ratherthan sell it in the open market

Market imperfectionsare factors that inhibit markets from working perfectly. Arise in two circumstances:

o when there are impediments to the free flow of products between nations,o when there are impediments to the sale of know-how

Impediments to Exporting Governments are the main source By placing tariffs on imported goods, governments can increase the cost of exporting

relative to FDI and licensing.

By limiting imports through the imposition of quotas, governments increase theattractiveness of FDI and licensing.

For example, the wave of FDI by Japanese auto companies in the United States during

the 1980s was partly driven by protectionist threats from Congress and by quotas on the

importation of Japanese cars. For Japanese auto companies, these factors have decreased

the profitability of exporting and increased the profitability of FDI.

Impediments to the Sale of Know-How Increase the profitability of FDI relative to licensing Disadvantage of licensing

o when the firm has valuable know-how that cannot be adequatelyprotected by a licensing contract

o when the firm needs tight control over a foreign entity to maximize itsmarket share and earnings in that country

o when a firm's skills and know-how are not amenable to licensing. Although Toyota has certain products that can be licensed, its real competitive

advantage comes from its management and process know-how. These kinds of skills are

difficult to articulate or codify; they cannot be written down in a simple licensing contract.

They are organization-wide and have been developed over years. They are not embodied in

any one individual, but instead are widely dispersed throughout the company. Toyota's

skills are embedded in its organizational culture, and culture is something that cannot be

licensed. Thus, as Toyota moves away from its traditional exporting strategy, it has


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increasingly pursued a strategy of FDI, rather than licensing foreign enterprises to produce

its cars.

b) Strategic behavior (Knickerbocker) theory Knickerbocker looked at the relationship between FDI and rivalry in oligopolistic

industries (industries composed of a limited number of large firms) and suggested

that FDI flows are a reflection of strategic rivalry between firms in the global

marketplace

Consider an oligopoly in the United States in which three firms--A, B, and C--dominate

the market. Firm A establishes a subsidiary in France. Firms B and C reflect that if this

investment is successful, it may knock out their export business to France and give Firm A

a first-mover advantage. Furthermore, Firm A might discover some competitive asset in

France that it could repatriate to the United States to torment Firms B and C on their

native soil. Given these possibilities, Firms B and C decide to follow Firm A and establish

operations in France. For example, Toyota and Nissan responded to investments by Honda

in the United States and Europe by undertaking their own FDI in the United States and

Europe.

The theory can be extended to embrace the concept ofmultipoint competition (whentwo or more enterprises encounter each other in different regional markets, national

markets, or industries)

o Arises when two or more enterprises encounter each other in differentregional markets, national markets, or industries

o To ensure that a rival does not gain a commanding position in one marketand then use the profits generated there to subsidize competitive attacks

in other markets.

Kodak and Fuji Photo Film Co., for example, compete against each other around the

world. If Kodak enters a particular foreign market, Fuji will not be far behind. Fuji feels

compelled to follow Kodak to ensure that Kodak does not gain a dominant position in the

foreign market that it could then leverage to gain a competitive advantage elsewhere. The

converse also holds, with Kodak following Fuji when the Japanese firm is the first to enter

a foreign market.


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c) Product life cycle (Vernon) theory Vernons view is that firms undertake FDI at particular stages in the life cycle of a

product they have pioneered

Firms invest in other advanced countries when local demand in those countriesgrows large enough to support local production, and then shift production to low-cost

developing countries when product standardization and market saturation give rise

to price competition and cost pressures

Vernon fails to explain why it is profitable for firms to undertake FDI rather thancontinuing to export from home base, or licensing a foreign firm

E.g., Xerox introduced the photocopier in the United States, and it was Xerox thatset up production facilities in Japan (Fuji-Xerox) and Great Britain (Rank-Xerox) to

serve those markets.

d) Electic Paradigm (Dunning) theory location-specific advantages (that arise from using resource endowments or assets

that are tied to a particular location and that a firm finds valuable to combine with

its own unique assets) and externalities (knowledge spillovers that occur whencompanies in the same industry locate in the same area) must also be considered

when explaining both the rationale for and the direction of foreign direct

investment.

Firm must undertake FDI to exploit such foreign resources.o Explains the FDI undertaken by many of the world's oil companies, which

have to invest where oil is located to combine their technological and

managerial knowledge with this valuable location-specific resource.

o Firms locate their production facilities where the cost and skills of local laborare most suited to its particular production processes

One reason Electrolux is building factories in China is because Chinahas an abundant supply of low-cost but well-educated and skilled

labor.

Thus, other factors aside, China is a good location forproducing household appliances both for the Chinese market

and for export elsewhere.

Foreign computer and semiconductor firms to invest in research and (perhaps)production facilities so they too can learn about and utilize valuable new knowledge

before those based elsewhere, thereby giving them a competitive advantage in the

global marketplace.


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o Evidence suggests that European, Japanese, South Korean, and Taiwanesecomputer and semiconductor firms are investing in the Silicon Valley region,

precisely because they wish to benefit from the externalities that arise there.


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CHAPTER 17

a) Communication strategy Defines the process the firm will use in communicating the attributes of its product

to prospective customers

Barriers to International Communications The effectiveness of a firm's international communication can be jeopardized by

three potentially critical variables: cultural barriers, source effects, and noise levels.

Cultural Barriersdifficult to communicate messages across cultures.o A message that means one thing in one country may mean something quite

different in another.

For example, the Italian clothing manufacturer and retailer, has run into culturalproblems with its advertising. The company launched a worldwide advertising campaign in

1989 with the theme "United Colors of Benetton" that had won awards in France. One of its

ads featured a black woman breast-feeding a white baby, and another one showed a black

man and a white man handcuffed together. Benetton was surprised when the ads were

attacked by US civil rights groups for promoting white racial domination. Benetton

withdrew its ads and fired its advertising agency.

o Firm need to barriers is to develop cross-cultural literacy and use local input,such as a local advertising agency, in developing its marketing message.

Source and country of origin effectso Receiver of the message evaluates the message based on status or image of

the sender

Anti-Japan wave in US in 1990so Place of manufacturing influences product evaluations

Often used when consumer lacks more detailed knowledge of theproduct

Examples: French wines, Italian clothes and German luxury Noise Levelsthe amount of other messages competing for a potential consumer's

attention, and this too varies across countrieso Reduce the probability of effective communication.o In highly developed countries such as the United States, noise is extremely

high. Fewer firms vie for the attention of prospective customers in developing

countries, and the noise level is lower.


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Push versus Pull Strategies Push strategy emphasizes personal selling (non-consumer product)

o Requires intense use of a sales forceo Relatively costly

Pull strategy depends on mass media advertising (consumer product)o Can be cheaper for a large market segment

Determining factors of type of strategyo Product type and consumer sophistication

Pull strategy work well for firms in consumer goods selling to largemarket segment

Push strategy works well for industrial producto Channel length

Push strategy works better with longer distribution channel The longer the distribution channel, the more intermediaries

there are that must be persuaded to carry the product for it toreach the consumer, leading to inertia in the channel, which

can make entry very difficult

Push strategy emphasizes direct sellingIn Japan, products often pass through two, three, or even four wholesalers before

they reach the final retail outlet. This can make it difficult for foreign firms to break into

the Japanese market. Not only must the foreigner persuade a Japanese retailer to carry her

product, but she may also have to persuade every intermediary in the chain to carry the

product. Mass advertising may be one way to break down channel resistance in such

circumstances.

o Media availability A pull strategy relies on access to advertising media.

In the United States, a large number of media are available, including print media

(newspapers and magazines) and electronic media (television and radio). The rise of cable

television in the United States has facilitated extremely focused advertising (e.g., MTV for

teens and young adults, Lifetime for women, ESPN for sports enthusiasts).


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b) Pricing StrategyPrice Discrimination

Said to occur when consumers in different countries are charged different prices forthe same product

Two conditions necessaryo National markets kept separate to prevent arbitrage

Capitalization of price differentials by purchasing product in countrieswhere prices are lower and reselling where prices are higher

For example, many automobile firms have long practiced price discrimination in

Europe. A Ford Escort once cost $2,000 more in Germany than it did in Belgium. This

policy broke down when car dealers bought Escorts in Belgium and drove them to Germany,where they sold them at a profit for slightly less than Ford was selling Escorts in Germany.

To protect the market share of its German auto dealers, Ford had to bring its German

prices into line with those being charged in Belgium. Ford could not keep these markets

separate. However, Ford still practices price discrimination between Great Britain and

Belgium. A Ford car can cost up to $3,000 more in Great Britain than in Belgium. Arbitrage

has not been able to equalize the price, because right-hand-drive cars are sold in Great

Britain and left-hand-drive cars in the rest of Europe. Because there is no market for left-

hand-drive cars in Great Britain, Ford has been able to keep the markets separate.

o Different price elasticities of demand in different countries Greater in countries with low incomelevels & highly competitive

conditions

Price elasticities for products such as television sets are greater incountries such as India, where a television set is still a luxury item,

than in the United States, where it is considered a necessity.


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Strategic Pricing Predatory Pricing

o Using price as a competitive weapon to drive weaker competition out of anational market

o Firms then raise prices to enjoy high profitso Firms normally have profitable position in another national market

Matsushita has been accused of using this strategy to enter the US TV market. As one

of the major TV producers in Japan, Matsushita earned high profits at home. It then used

these profits to subsidize the losses it made in the United States during its early years

there, when it priced low to increase its market penetration. Ultimately, Matsushita

became the world's largest manufacturer of TVs.

Multipoint Pricing Strategyo Two or more international firms compete against each other in two or more

national markets

o A firms pricing strategy in one market may impact a rival in anothermarket.

For example, multipoint pricing is an issue for Kodak and Fuji Photo because both

companies compete against each other in different national markets for film products

around the world. Fuji launched an aggressive competitive attack against Kodak in the

American company's home market in January 1997, cutting prices on multiple-roll packs of

35mm film by as much as 50 percent. This price cutting resulted in a 28 percent increase in

shipments of Fuji color film during the first six months of 1997, while Kodak's shipmentsdropped by 11 percent. This attack created a dilemma for Kodak; the company did not want

to start price discounting in its largest and most profitable market. Kodak's response was to

aggressively cut prices in Fuji's largest market, Japan. This strategic response recognized

the interdependence between Kodak and Fuji and the fact that they compete against each

other in many different nations. Fuji responded to Kodak's counterattack by pulling back

from its aggressive stance in the United States.

o The Kodak story illustrates an important aspect of multipoint pricing--aggressive pricing in one market may elicit a response from rivals in another

market.

Experience Curve Pricingo Firms price low worldwide to build market shareo Incurred losses are made up as company moves down experience curve,

making substantial profits

o Cost advantage over its less-aggressive competitors


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Regulatory Influences on Prices Antidumping regulations

o Selling a product for a price that is less than the cost of producing ito Antidumping rules vague, but place a floor under export prices and limit a

firms ability to pursue strategic pricingo Article 6 of GATT, allows action against an importer if the product is sold at

less than fair value and causes material injury to a domestic industry

Competition policyo Regulations designed to promote competition and restrict monopoly practiceso Can limit the prices that a firm can charge

c) New Product Development

The Location of R&D Rate of new product development greater in countries where

o More money spent on R&Do Underlying demand is strongo Consumers are affluento Competition is intense

Although US firms are still at the leading edge of many new technologies, Japanese

and European firms are also strong players, with companies such as Sony, Sharp, Ericsson,

Nokia, and Philips NV driving product innovation in their respective industries. BothJapan and Germany are now devoting a greater proportion of their GDP to nondefense

R&D than is the United States. In addition, both Japan and the European Union are large,

affluent markets, and the wealth gap between them and the United States is closing.

For example, to expose themselves to the research and new-product development

work being done in Japan, many US firms have set up satellite R&D centers in Japan.

Kodak's $65 million R&D center in Japan employs approximately 200 people. The company

hired about 100 professional Japanese researchers and directed the lab to concentrate on

electronic imaging technology. US firms that have established R&D facilities in Japan

include Corning, Texas Instruments, IBM, Digital Equipment, Procter & Gamble, Upjohn,

Pfizer, Du Pont, and Monsanto.

Integrating R&D, Marketing, and Production Ensures:

o Project development driven by customer needo New products are designed for ease of manufacture


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o Development costs are kept in checko Time to market is minimized

HP's subsidiary in Singapore, for example, is responsible for the design and production

of thermal ink-jet printers for Japan and other Asian markets. This subsidiary takes

products originally developed in San Diego and redesigns them for the Asian market. Inaddition, the Singapore subsidiary has taken the lead from San Diego in the design and

development of certain portable thermal ink-jet printers. HP delegated this responsibility to

Singapore because this subsidiary has built important competencies in the design and

production of thermal ink-jet products, so it has become the best place in the world to

undertake this activity.

High failure rate ratioo Between 33 % and 60% of new products fail to earn adequate profits

Reasons for failure:o Limited product demando Failure to adequately commercialize producto Inability to manufacture product cost-effectively

Cross-Functional Teams Objective of team to take a product development project from the initial concept

development to market introduction

Effective teams must haveo Heavyweight project managero One member from each key functiono Physically co-located to facilitate communicationo Clear plan and goalso Own process for communication and conflict resolution

For example, one product development team at Quantum Corporation, a California-

based manufacturer of disk drives for personal computers, instituted a rule that all major

decisions would be made and conflicts resolved at meetings that were held every Monday

afternoon. This simple rule helped the team meet its development goals. In this case, it was

also common for team members to fly in from Japan, where the product was to be

manufactured, to the US development center for the Monday morning meetings

Building global R&D capabilities Firm must build close links between its R&D centers and its various country

operations.

Integrating R&D, marketing, and production in an international business mayrequire R&D centers in North America, Asia, and Europe that are linked by formal


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and informal integrating mechanisms with marketing operations in each country in

their regions and with the various manufacturing facilities.

In addition, the international business may have to establish cross-functional teamswhose members are dispersed around the globe.

Establishing a global network of R&D centers for allocating product developmentresponsibilities to various centers

o Located in regions or cities where valuable scientific knowledge is beingcreated and where there is a pool of skilled research talent (e.g., Silicon

Valley in the United States, Cambridge in England, Kobe in Japan). These

centers are the innovation engines of the firm. Their job is to develop the

basic technologies that become new products.

o At this level, emphasis is placed on commercialization of the technology anddesign for manufacturing.

o If further customization is needed so the product appeals to the tastes andpreferences of consumers in individual markets, such redesign work will be

done by an R&D group based in a subsidiary in that country or at a regionalcenter that customizes products for several countries in the region.


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CHAPTER 18

a) The Strategic Role of International HRM HRM can help the firm reduce cost of value creation and add value by better serving

customer needso More complex in an international businesso Task complicated by profound differences between countries in labor markets,

culture, legal and economic systems

HRM policies should be congruent with the firms strategy and its formal andinformal structure and controls

o For example, a transnational strategy imposes very different requirements forstaffing, management development, and compensation practices than a

localization strategy does

o Firms pursuing a transnational strategy need to build a strong corporateculture and an informal management network for transmitting informationwithin the organization.

Right People, Right Place, Right Time HRM must also determine when to use expatriate managerscitizens of one

country working abroad

o Who should be sent on foreign assignmento How they should be compensatedo How they should be trainedo How they should be reoriented when they return home

b) Staffing Policy Selecting individuals with requisite skills to do a particular job Tool for developing and promoting corporate cultureGeneral Electric, for example, which is positioned toward the transnational end of the

strategic spectrum, is not just concerned with hiring people who have the skills required for

performing particular jobs; it wants to hire individuals whose behavioral styles, beliefs, and

value systems are consistent with those of GE.

View People as Resource ($ in profit out) Types of Staffing Policy

o Ethnocentrico Polycentrico Geocentric


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Ethnocentric policy Key management positions filled by parent-country nationalsFirms such as Procter & Gamble, Philips NV, and Matsushita originally followed it. In

the Dutch firm Philips, for example, all important positions in most foreign subsidiarieswere at one time held by Dutch nationals who were referred to by their non-Dutch

colleagues as the Dutch Mafia. In many Japanese and South Korean firms today, such as

Toyota, Matsushita, and Samsung, key positions in international operations are still often

held by home-country nationals. According to the Japanese Overseas Enterprise

Association, in 1996 only 29 percent of foreign subsidiaries of Japanese companies had

presidents that were not Japanese. In contrast, 66 percent of the Japanese subsidiaries of

foreign companies had Japanese presidents.

Advantages:o Overcomes lack of qualified managers in host nationo Unified culture

Many Japanese firms prefer their foreign operations to be headed byexpatriate Japanese managers because these managers will have been

socialized into the firm's culture while employed in Japan

o Helps transfer core competencies (and skills back) Disadvantages:

o Produces resentment in host country Lower productivity, and increased turnover among that group Because it limits advancement opportunities for host-country

nationalso Can lead to cultural myopia

Expatriate managers may fail to appreciate how product attributes,distribution strategy, communications strategy, and pricing strategy

should be adapted to host-country conditions The Japanese managers may have failed to realize that behavior that

would be viewed as acceptable in Japan was not acceptable in the

United StatesPolycentric Policy

Host-country nationals manage subsidiaries Parent company nationals hold key headquarter positions Best suited to firm pursuing localization strategy Advantages:

o Alleviates cultural myopia.


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Host-country managers are unlikely to make the mistakes arisingfrom cultural misunderstandings that expatriate managers are

vulnerable to

o Inexpensive to implement reducing the costs of value creation. Expatriate managers can be very expensive to maintain.

o Helps transfer core competencies Disadvantages:

o Limits opportunity to gain experience of host-country nationals outside theirown country.

o Can create gap between home-and host-country operations Language barriers, national loyalties, and a range of cultural

differences may isolate the corporate headquarters staff from the

various foreign subsidiaries

After decades of pursing a polycentric staffing policy, food and detergents giantUnilever found that shifting from a localization strategy to a transnational strategy was

very difficult. Unilever's foreign subsidiaries had evolved into quasi-autonomous

operations, each with its own strong national identity. These "little kingdoms" objected

strenuously to corporate headquarters' attempts to limit their autonomy and to rationalize

global manufacturing.

Geocentric Policy Seek best people, regardless of nationality

o not always possible Best suited to Global and trans-national businesses Advantages:

o Enables the firm to make best use of its human resourceso Equips executives to work in a number of cultureso Helps build strong unifying culture and informal management networko Builds a cadre of international executives who feel at home working in a

number of different cultures

Disadvantages:o National immigration policies may limit implementationo Expensive to implement due to training and relocationo Compensation structure can be a problem.


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c) International labor relations Key Issue

o Degree to which organized labor can limit the choices of an internationalbusiness

Aims to foster harmony and minimize conflicts between firms and organized laborThe Concerns of Organized Labor

Multinational can counter union bargaining power with threats to move productionto another country

o Ford, for example, very clearly threatened British unions with a plan to movemanufacturing to Continental Europe unless British workers abandoned

work rules that limited productivity, showed restraint in negotiating for wage

increases, and curtailed strikes and other work disruptions

Multinational will keep highly skilled tasks in its home country and farm out onlylow-skilled tasks to foreign plants

o Easy to switch locations if economic conditions warranto Bargaining power of organized labor is reduced

Attempts to import employment practices and contractual agreements frommultinationals home country

o This concern has surfaced in response to Japanese multinationals that havebeen trying to export their style of labor relations to other countries

o For example, much to the annoyance of the United Auto Workers (UAW),most Japanese auto plants in the United States are not unionized. As a

result, union influence in the auto industry is declining.

The Strategy of Organized Labor


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Attempts to establish international labor organizationso Although national unions may want to cooperate, they also compete with

each other to attract investment from international businesses, and hence

jobs for their members.

For example, in attempting to gain new jobs for their members,national unions in the auto industry often court auto firms that areseeking locations for new plants.

One reason Nissan chose to build its European production facilities inGreat Britain rather than Spain was that the British unions agreed to

greater concessions than the Spanish unions did. As a result of such

competition between national unions, cooperation is difficult to

establish.

Lobby for national legislation to restrict multinationals Attempts to achieve international regulations on multinationals through such

organizations as the United Nations

Approaches to Labor Relations Many firms are centralizing labor relations to enhance the bargaining of the

multinational vis--vis organized labor

o In the past, labor relations were decentralized to individual subsidiarieso International firms' attempts to rationalize their global operationso Many firms are now using the threat to move production to another country

in their negotiations with unions to change work rules and limit wage

increases

The way work is organized within a plant can be a major source of competitiveadvantage.

o Much of the competitive advantage of Japanese automakers, for example, hasbeen attributed to the use of self-managing teams, job rotation, crosstraining,

and the like in their Japanese plants.

o The headquarters of many Japanese firms bargains directly with local unionsto get union agreement to changes in work rules before committing to an

investment.

o For example, before Nissan decided to invest in northern England, it got acommitment from British unions to agree to a change in traditional work

practices. By its very nature, pursuing such a strategy requires centralizedcontrol over the labor relations function.


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d) CompensationNational Differences in Compensation

Substantial differences exist in the compensation of executives at the same level invarious countries.

For example, the average CEO of a large public company in the United States made

$2.3 million in salary and bonuses in 1996, and this went up to $5.8 million when stock

options were included. The CEO of a large public Japanese firm, such as Sony or

Matsushita, makes $1.2 million to $1.5 million per year. These figures underestimate

the true differential because many US executives earn considerable sums of money from

stock options and grants, while the practice of granting options is still rare in other

nations. Two issues:

o Pay executives in different countries according to the standards in eachcountry?; or equalize pay on a global basis?

Many firms have recently moved towards a compensation structurebased on global standard, esp. impt. In firm with a geocentric staffing

policy

But most firms still set pay acc. To the prevailing standards in eachcountry

Expatriate Pay

The most common approach to expatriate pay is the balance sheet approach.o Equalizes purchasing power to maintain same standard of living across

countries

o Provides financial incentives to offset qualitative differences betweenassignment locations.

o Pay for Schools, health care, etc. 5 components of compensation package

o Base Salary Same range as a similar position in the home country

o Foreign sero

vice premium Extra pay for work outside country of origin

o Allowances Hardship, housing, cost-of-living and education allowances

o Taxation Firm pays expatriates income tax in the host country

B fi

ibs revision

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