Deze samenvatting is gebaseerd op het studiejaar 2013-2014.
Most complex issues in international business strategy revolve around seven concepts:
See page 5, figure 1.1
MNEs (Multinational Enterprises) need certain internal strengths to overcome additional costs of doing business abroad, those are called: internationally transferable, or non-location bound FSAs (Firm Specific Advantages)
1. Internationally transferable FSAs
These FSAs will keep their value when an MNE is crossing borders.
There is a paradox of an internationally transferable FSA. When a FSA exists of easily codifiable knowledge, it is cheap and easily to transfer, but it can also be easily imitated by other firms. This makes the transfer costs low, but also the value that can be derived from it, may also be low. On the other hand, when a FSA exists of tacit knowledge, which requires person-to-person communication and sending human resources abroad to build up experience over time by learning, it will be expensive and time-consuming, but also difficult to imitate and thus a valuable FSA. So tacit knowledge is a major source of competitive advantage abroad.
The most important bundle of tacit knowledge is contained in the MNEs heritage (the key routines developed by the firm since its inception). There are four archetypes of administrative heritage:
- Centralized exporter: standardized products manufactured at home, embody the firm’s FSAs and make the exporting firm successful in international markets. This all happens without doing any activity in the host country, so no development of new FSAs in the host country. So this is only exporting the product.
- International projector: Knowledge-based (operative) FSAs from home country are copied. Only the internationally transferable FSAs are taken to the host country. No development of location bound FSAs in the host country.
- International coordinator: efficiency seeking MNE which is specialized in specific value-added activities and forming vertical value chains abroad. Is doing different parts of the production process in different countries, so they are good at logistics.
- Multi-centred MNE: does everything (produce, sell, etc) in the host country. Adapts to the host country, so local responsiveness is its foundation. Transfers only the key routines from the home country and builds up new Location-Bound FSAs in the host country.
See page 35 and 36, figure 1.3, 1.4, 1.5 and 1.6 for the visualization of the four archetypes.
2. Non-transferable (or location-bound) FSAs
Exists of four main types:
- Stand-alone resources: linked to location advantages, such as a certain market or a network, which are immobile.
- Other resources: do not have the same value abroad, because they are not applicable to the host country or they are not as valuable as in the home country. Such as local knowledge or reputations.
- Local best practices: routines which are highly effective and efficient in the home country, but which might not be the same abroad.
- Domestic recombination capability: engaging in product diversification or innovation, taking the FSAs and/or product from the home country and recombine it to adapt to the host country.
With location-bound FSAs, the corresponding FSA in each host country will need to be created or acquired from third parties operating in the foreign market.
3. Location advantages
Represent the strengths of a specific location, useable for all the firms operation in that location, the reason why an MNE would go there.
FDI (Foreign Direct Investment): the allocation of resource bundles (physical, financial, human, knowledge, reputational sources) by an MNE in a host country, with the purpose of performing business activities over which the MNE contains strategic control there.
4 motivations to perform activities rather abroad (location advantage relative to home country):
- Natural resource seeking: the search for physical, financial of human resources. Precondition, is access is.
- Market seeking: the search for customers. It is not the same as the centralized exporter, because this involves business activities in the host country.
- Strategic resource seeking: searching for access to advanced resources such as upstream knowledge (product- and process related technological knowledge), downstream knowledge (critical for interface with customers), administrative knowledge (knowledge regarding the functioning of the organisation) and reputational sources.
- Efficiency seeking: desire to capitalize on environmental changes that make specific locations more attractive.
4. Value creation through recombination
Recombination: being able to grow by innovating and diversifying, means combining existing resources with newly accessed resources. Recombination capability is the MNEs highest order FSA, because this helps the MNE to transfer its existing set of FSAs, it creates new knowledge, integrates this with the existing knowledge, and exploits the resulting. It requires:
- Entrepreneurial skills managers/employees
- Slack/unused productive resources
- In an international context: melding existing resources with newly accessed resources
The paradox here is that strong routines can be detrimental to recombination.
5. Complementary resources of external actors
By going abroad some ingredients may be missing, those can be provided by external actors (provider, distributors, licensees, partners, etc from the host country), this will help to overcome the distance. Two conditions:
- Internal development of required strengths has lower net value than relying upon external actors
- It is realizable and does not threat expansion project.
Two problems by going abroad:
6. Bounded rationality (imperfect assessment)
The problem is the access to information and even if they have the right information, another problem is the capability to process complex information bundles. Information is partial and incomplete, cognitive limitations of managers, and differences in cognitive decision making between home and host country.
7. Bounded reliability (imperfect effort)
Agents do not always carry through on their expressed intentions to try to achieve a particular outcome or performance level. One source is opportunism which involves false promises. The second source is benevolent preference reversal, the actor’s promise is made in good faith but preferences change overtime.
Bounded rationality is about the imperfect assessment of a present or future state of affairs, thereby leading to incorrect beliefs, caused by a lack of information. Bounded reliability is about imperfect effort, leading to incomplete fulfilment of promises.
C.K Prahalad and Gary Hamel have the idea that core competencies (company’s most important FSA, its vital routines and recombination capabilities) constitute the most important source of an MNEs success. Core competencies include shared knowledge, organized in routines, and the ability to integrate multiple technologies, or routines/recombination capabilities, carried by the key employees.
Core competencies produce core products; technological leadership in the form of key components from which end products are developed and created.
Sources of competitiveness:
- Core competencies (routines/recombination capabilities à produce to...
- ... core products à put together to create ...
- ... end products
Acquiring FSAs through external SAs à dangers
- Ensure clear understanding of FSAs to be build and to be protected
- May lead to loss FSAs or no more FSA development
Bartmess and Cerry: assess need for co-locating activities for further recombination
- Level of interaction needed
- Similarity background/expertise
- Requirement prior relationship
- Concreteness information
5 main weaknesses Prahalad and Hamel:
- Do not mention location advantages
- Overlook importance of geographical embeddedness of competence carriers
- Overlook role of sub-level capabilities
- Bounded rationality/reliability not mentioned
- No distinction between back end and customer end of value chain
There are 3 characteristics to identify core competencies, a core competence should:
- Be difficult for competitors to imitate
- Provide potential access to a wide variety of markets
- Make a significant contribution to the perceived customer benefits of the end product
The extra fourth one is especially important for a large MNE:
- The loss of the core competence would have an important negative effect on the firm’s present and future performance
Strategic management is needed to develop a strategic architecture to allow this. Thus, to develop a road map of the future that identifies core competencies to build the required technologies.
Key critique on core competence approach is that Prahalad and Hamel do not include country factors in their analysis. They overestimate’ the role of strategic management and underestimate role of (host) country location factors.
This is where Porter comes in, see chapter C: Porter’s diamond of national competitive advantage.
Michael Porter argues that a company’s ability to compete abroad is based on a set of location advantages in its home country. The idea is that when a company experiences a high level of pressure in the home country it will push the firm to innovate and upgrade systematically. This will create new FSAs, which will be the instruments for the expansion to foreign markets. A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Innovation and firm-level productivity improvements lead to long-term competitiveness.
So Porter says that the most important aspect of international business strategy is the four key home country location advantages. Those are combined in Porter’s Diamond. The four key sets of country attributes are:
- Factor conditions: like natural resources and created factor conditions (such as skilled labor, knowledge, and infrastructure). These are particularly valuable when specialized, so when they are customized towards effective deployment in specific economic activities and companies. Firms need to continuously develop new skills, like continuous learning of employees and continuous innovation of machines. Disadvantages can be turned into advantages (lack of warehouse space à jit system).
- Demand conditions: not only domestic market size, but also domestic buyer sophistication. When buyers are demanding, the external pressure on the firm increases and so the competitiveness increases.
- Related and supporting industries: the need for high-quality, internationally competitive suppliers.
- Firm strategy, industry structure and rivalry: a competitive industry, an efficient macro-level governance and several domestic rivals may help the firm in that industry to become more internationally competitive.
Those 4 variables plus 2 external variables (government and chance) determine the competitiveness in international markets.
See page 109, figure 3.1 for the visualization of Porter’s Diamond
To get a strong diamond, there are certain requirements per country attribute:
- Factor conditions: the company needs to be continuously upgraded through the development of skills and the creation of new knowledge.
- Demand conditions: companies must respond to new customer demands by pushing the envelope of existing technology and by designing new features.
- Related and supporting industries: high competitive firms at home, especially suppliers, are crucial to enhance innovation. Needed for the ongoing exchange of ideas, timely feedback and short lines of communications.
- Firm strategy, industry structure and rivalry: rivalry forces companies to develop unique FSAs, beyond the generally available location advantages in their home base. In this way companies get motivated to enter international markets and exploit these FSAs
Porter denies the multi-centred MNE and the international coordinator, and only focuses on the centralized exporter and the international projector.
When having a strong diamond, the creation of non-location bound FSAs will be stimulated. With those non-location bound FSAs, a company can go abroad.
- The need for location-bound FSAs in host countries is ignored. FSAs in Porter’s theory are completely domestically determined. Porter places too much emphasis on the home country as the appropriate level of analysis.
- The theory does not take into account differences in country size and power, for instance it might be different for a small country with big, powerful neighbors (example US and Canada page 110).
- Inward FDI as a force for upgrading a local economy is not really considered.
- The theory is tautological; it always is right. Success follows from strong home country determinants and if those determinants are weak than they are the push factor for innovation to overcome that disadvantage.
- It is questionable whether the country level is the appropriate level of analysis.
Pankaj Ghemawat has the idea that the distance between two countries gives extra risks and cost to entering new markets. He concludes that higher inter-country distance correspond with lower inter-country trade levels, implying a lower profitability of success.
There are 4 basic categories of distance:
- Cultural distance: results from differences in national cultural attributes.
- Administrative/institutional distance: differences in societal institutions. This distance is low when there is a shared history, political ties, trading between the two or synchronized politics.
- Geographic/spatial distance: the physical distance, taking into account the ease of transport between both. Is high when there are differences in topography and climate. Is low when there is a good transportation and communication network.
- Economic distance: differences in wealth, income level, infrastructures and costs and quality of natural, financial and human resources.
The higher those distances, the lower the trade levels will be.
Details of the distance, by what it can be affected and which industries are being affected:
- Cultural distance: is higher when there is a preference for locally produced products or when there are no tolerances or copyright infringements. Affected industries: soft items, such as food, which are selected on taste, are more sensitive for this distance than hard items such as machinery and bulk items.
- Administrative/institutional distance: governments can raise barriers for protecting domestic industries, there can be a higher distance through unilateral measures, like forbidding certain things. Distance can be higher through institutional infrastructure, such as corruption. Affected industries: industries with large numbers of employees which are producing essential goods and the ones that exploit a host country’s key natural resources.
- Geographic distance: also man-made elements such as transportation networks and communication infrastructure can make the distance higher. Affected industries: low-value-to-weight products, perishable products and trade in services and capital, because of information and infrastructure.
- Economic distance: there are two broad approaches to expanding abroad. Replicating existing competitive advantages, building upon scale and scope economies, which is typical for the centralized exporter and the international projector. This is more effective with small economic distance, it requires standardization. The second approach is exploiting differences in input costs or prices between markets through economic arbitrage, which is typical for international coordinators. Vertical intergraded MNEs embrace economic distance, because that possesses FSAs that allow it to exploit and link the diverse location advantages of high distance countries.
This theory includes the centralized exporter (focusing on scale economies) and the international projector (focusing on scope economies), both engaging in market seeking foreign expansion.
Another article argues that not only low-distance country should be sought for, as diversifying reduces risk. A second perspective is offered in that for the Asian market, a well-developed branding strategy is necessary, because this FSA may not be that easily transferable there (right brand name, right image, different perception of quality).
Limitations of Ghemawat’s distance framework
- Macro level distance, does not always hold for all firms (distance for a firm ≠ distance for all firms)
- A firm’s FSA can be that it is able to deal with these distances
- Impact of distance differs for part of the value chain
- Ghemawatt assumes that FSAs are developed in the home market, but firms may also develop FSA in a host country
- Ghemawatt does not discuss cooperative entry modes (like JV or strategic alliance) and how they may help to reduce distance (because they are complementary resources)
Chris Bartlett and Sumantra Ghoshal suggest that large MNEs are making a mistake when they adopt
- Homogenization: treating all subsidiaries the same
- Centralization: all strategic decisions at the headquarters
These MNEs do not see, that the subsidiary can develop their own unique strengths and augment further the MNEs existing FSA bundles. Strategic decision making and control in the home country can lead to enormous bounded reliability and rationality challenges. Bartlett and Sumantra argue that giving subsidiaries more power and decision making authority may help in building a FSA in the host country.
Senior management frequently adopts two simplifying strategies:
- Universal/ United Nations model of multinational management: the mistake of homogenization, giving each subsidiary the same roles and responsibilities. This approach involves subsidiary independence (as in multi-centered MNEs) or complete dependence (as in centralized exporters and international projectors). Universal response helps to deal with the coordination problem, but sometimes it is better to allow limited subs authorization.
- Headquarters hierarchy syndrome: the mistake of centralization, where the subsidiaries are seen as units that act as implementers and adapters. Views that the organization consists of two levels, the dominant layer and the subordinates that will implement.
Problems with the two simplifying strategies
Those two strategies cause tensions between the headquarters and the subsidiaries, which want to fight for more interdependence. Next to that, opportunities are missed by local subs because the headquarters may kill entrepreneurial spirit in subsidiaries.
Solution, the subsidiary classification system
To decide how much authority to give a subsidiary, Bartlett and Ghoshal decided that subsidiary autonomy depends on:
- The strategic importance of each market
- How strong are the subs’ resources like labor, technology, marketing achievements, R&D.
Therefore, they made a subsidiary classification system which distinguishes four types:
- Black hole: weak in resources, but located in a strategically important market. Being used to maintain a presence in this key market to keep ahead of new innovations by competitors. In the long run this unit wants to commit more resources to build up.
- Implementer: weak in resources and low in the strategic importance of the market. Most subsidiaries fit in this type. This unit is the key to a firm’s overall success, because it generates a steady stream of cash flow and it may help to build competitive advantage by contributing to company-wide scale and scope economics
- Strategic leader: high in resources and high in the strategic importance of the market. The role of this unit is to assist the headquarters in identifying industry trends and developing new FSAs in response to emerging opportunities and threats.
- Contributor: high in resources, but low on importance of strategically local market. This unit is typically for developing new FSAs. Its subsidiary specific, specialized resource base might benefit other units, if the headquarters understand its potential economic value for the entire MNE
See page 155, figure 5.1 for the visualization of this classification. This is especially applicable to the international projector
There are some complementary perspectives. The first one concerns due process (procedural justice). It says that decision making should respect five principles:
- Corporate HQ’s familiarity with the local situation at the sub level
- Effective communication between HQ and subs
- Consistency in decision making across subs
- Possibility for sub managers to challenge the dominant perspective at HQ
- Transparent explanation of final decision made by HQ
These principles will reduce bounded rationality and bounded reliability.
Another study investigated why Japanese MNEs are superior in engineering and production management but not in subsidiary management practices:
- Centralized, autocratic approach
- Little confidence in ability of non-Japanese managers in host countries
- Relationship of trust only built between a few key managers
- Staffing policies are ethnocentric
- Avoidance of unions and discrimination against women and minorities
Three limitations Bartlett and Ghoshal’s work:
- Good ideas can also come from subs. So simple allocation of roles and resources may not recognize this. To make sure that subs contribute to FSA development:
- Giving seed money to new initiatives
- Formally requesting proposals
- Using subs as incubators
- Creating internal subs networks
- The division between ‘low’ and ‘high’ may be too simple
- There is no differentiation between the host country as input market or as output market.
The latter could be added. We make two pictures. One with keep strategic importance of the local market as market for inputs on the vertical axis and upstream sub competencies on the horizontal axis and one with strategic importance of the local market as market for inputs on the vertical axis and downstream sub competencies on the horizontal one. Another distinction may be considering the extent of regional unification and the commodification of the competencies in terms of resource recombination. So then you get ‘regional unification of national environments as a market for inputs’ on the vertical axis combined with ‘commodification of upstream sub competencies’ on the horizontal one and ‘regional unification of national environments as a market for outputs’ on the vertical axis combined with ‘commodification of downstream sub competencies’ on the horizontal one. For pictures see page 164 and 167.
There are three types of modes for entering a host country; foreign distributors, strategic alliances and merger and acquisition. The foreign distributor, strategic alliance, and merger and acquisition. The first one has the lowest level of commitment and the last one the highest.
- FOREIGN DISTRIBUTOR
David Arnold has the idea that, when selling in foreign markets, MNEs should maintain relationships with local distributors over the long term, even when they already established their own local network. The first step in internationalization is often establishing a relation with a foreign distributor, because:
- They have the knowledge about the local market, regulations and business practices
- They know where to hire the appropriate staff
- They know potential customers
- Their FSA is location bound and helps overcome the distance that the internationalizing firm has to deal with
Local distributors often serve as a beachhead in the first stage of internationalization. A beachhead strategy means that when you go into the host country, you need to focus your strength and concentrate on winning a small area, which is the beachhead, that becomes the stronghold from which you will have advance into the rest of the market. It is a ´hands-off’ approach because the local distributor takes care of the critical areas and the MNE sees what happens with this little effort.
The distribution strategy often follows a pattern:
1st stage: initial success. Success is easy to capture as the low hanging fruit. A new product in a new market sells itself. There are new and enthusiastic partners.
2nd stage: flattening success and sometimes even declining. After the first success, the market becomes more difficult, because there are new entrants and the competition increases.
3rd stage: the MNE starts questioning its local partner and may
- Take over control of distribution channel
- Build a self owned distribution channel
Because it thinks it is better to do it yourself. As a result, the local partner and MNE will not invest in each other anymore. The solution to these common problem s between MNEs and their foreign distributors according to Arnold is to recognize that the phases are predictable and that MNEs should plan for them in a way that is less disruptive and costly than the beachhead strategy. Successful firms often go from a beachhead strategy into developing a long term relationship with the local partner, in combination with direct distribution by the MNE itself.
The key for the MNE is to find the balance between three competing objectives:
- To maintain strategic control over important customers
- To benefit from the local partner’s market knowledge and market access
- To reduce risk associated with high demand uncertainty in the host market
Arnold’s list of seven guidelines for MNEs when dealing with local distributors:
- Proactively select locations and only then suitable distributors; select your distributors, do not let them select you.
- Focus on distributors’ market development capabilities; look for distributors capable of developing markets, rather than those with a few obvious customer contacts.
- Manage distributors as long-term partners; this will make distributors willing to invest more in strategic marketing and long-term development.
- Provide resources (managerial, financial and knowledge-based) to support distributors for market development purposes.
- Do not delegate marketing strategy to distributors; distributors should be able to adapt to the MNEs marketing strategy, but the MNE should hold clear leadership.
- Secure shared access to the distributors’ critical market and financial intelligence; this will reduce the MNEs bounded rationality problems, because it improves its understanding of the local market.
- Link national distributors with each other, especially at the regional level (spanning several countries).
These 7 guidelines are especially relevant to the centralized exporter.
A complementary perspective is that firms also should focus on the distribution at home. Many firms have focused on their production and forgot the sales and distribution sides. Distribution is especially important if a large part is done by big stores such as Wal-Mart which have market power. They pressure for lower prices which has led to offshoring which serves the distributors rather than the manufacturers. So manufacturers should regain control. That is in line with Arnold’s recommendation but the difference is that Arnold is in favor of good relationships with distributors whereas these authors suggest direct sales.
A second complementary perspective concerns uncertainty. The bullwhip effect is when ‘the amplification of order variability as one goes upstream along a supply chain’, that can occur if there is poor planning or execution by the foreign distributor. So enough information on demand should be available. Uncertainty can be managed by customizing end products as late as possible. Joint coordination and planning with suppliers and distributors is necessary.
FSA development is normally not the goal for both the distributor and the MNE. The MNE cedes strategic decision making control to the distributor but he is only focuses on short-term growth. They both assume that the partnership will only be short-term. But a long-term partnership can be successfully established. Mutual commitment only makes sense if there is a company fit. Arnold says a mix of establishing subs for the international marketing strategy (transferable FSAs) and retaining relationships with external distributors (LB FSAs) is the best option.
- Recommendation for internalizing is based on customer’s size but other variables might be more important. This can be incorporated. If we make a square with on the vertical axis ‘requirements for technical customization/adaptation (location unrelated)’ and on the horizontal axis ‘requirements for location-determined customization/adaptation’ we get 4 quadrants. The ones on the right can be split into a low or high need for outsourcing. A picture is to be found on page 297. If the first variable is high, internalization of distribution is necessary.
- Focus on distribution, rest of supply chain forgotten.
- STRATEGIC ALLIANCE PARTNERS
(Hamel et al.)
The second entry mode implies you start to cooperate with a rival, in forming a strategic alliance. The challenge here is to learn as much as possible from this partner, while giving away as few of your own FSAs as possible. The advantage is that you share risks and costs (R&D), you learn from your partner’s complementary resources, and there is quicker development of capabilities to deliver products and services.
4 key principles:
- Collaboration is competition in a different form
- Harmony is not the most important measure of success
- Cooperation has limits. Companies must defend against competitive compromise
- Learning from partners is paramount
Asian firms benefit more because they were more willing to put effort into learning, because they saw alliances as an opportunity to develop new FSAs, they defined clear learning objectives and their contribution was not easily imitated or transferable.
While some companies gain competitive strength from alliances, others fall behind. The costs of an alliance are:
- The own FSA could be appropriated by the alliance partner (so it is important to develop safeguards against such reverse knowledge flows).
- A risky learning race starts; how to learn more from your partner than your partner learns from you.
- Knowledge sharing becomes dysfunctional because of bounded reliability; partners want to contribute as little as possible.
- Managers pay too much attention to the learning race and forget about the goal of the strategic alliance in the first place.
- When an MNE has too many strategic alliances, this reduces coherence and increases management problems.
4 principles when outsourcing:
- Outsourcing to provide a competitive product cannot replace the need to build FSA s over the long term
- Negative consequences should be considered (capability losses)
- Individual outsourcing decisions can have cumulative effects
- FSAs that are taken by the partner should be taken back and strengthened as quickly as possible
The challenge of a strategic alliance is to share enough skills to create advantage vis-à-vis companies outside the alliance, whilst preventing the transfer of core skills to the partner. The goal is to limit the transparency of their operations. The nature of the FSAs contributed by an MNE to an international alliance affects how easily these FSAs will diffuse to a partner. Two important variables:
- Mobility: the ease of moving the complete physical constructions of how to duplicate an FSA. The more mobile, the easier it may diffuse.
- Embeddedness: an FSA is embedded if it cannot easily be shared through actors outside the firm, without problems of interpretation or absorption across cultures. The more embedded the FSA, the less easily it is to diffuse.
Another perspective is that long-lasting relationships are the most vulnerable to bounded reliability. 6 safeguards:
- Regular re-evaluation of alliance relationship
- Continued focus on profitability rather than volume
- Continued attention to alternatives (‘back-ups’)
- Swapping hostages
- Setting and reassessing common goals
- Avoiding vicious cycles of suspicion and the resulting buildup of bounded reliability
Another perspective concerns JVs for market-seeking in emerging economies. These are often the only possibility. With a state-owned partner, the MNE might focus too much on maintaining a harmonious relationship. Also in the long-term a privately owned partner may be better because he may face stronger incentives to enter into a competitive learning race with the MNE.
Alliances are preferable over M&As when:
- Each firm only needs a subset of the FSAs of the other
- It is difficult to dispose of the unusable resources because they are firm-specific
The picture on page 325 shows the difference between going alone and establishing alliances, combined with the need for LB FSAs and NLB FSAs.
Limitations of trying to learn more from your partner than vice versa:
- Creating alliance specific advantages (ASAs) might be overlooked
- This goal may lead to a vicious cycle of bounded reliability
- Impact of culture is not addressed
- MERGERS AND ACQUISITIONS
The entry modes with the highest level of commitment are mergers and acquisitions. Those are done to create larger firms that are supposedly better able to deal with globalized markets. Next to that, when a firm is active in a mature industry with low growth, an M&A can be a strategic move to break the mould. An M&A serves as a radical break that changes the organization radically, which sometimes, is needed.
M&A is not easy because of:
- Pre – and post integration obstacles: each firm has its own FSA, which are partly location bound. If the distance is large, it will be more difficult to integrate these FSAs. Plus even for FSAs that are transferable, it is not easy to integrate these.
- Purchase price premiums: as a result of firms competing for a firm that can be taken over, the price increases.
Ghemawat and Ghader provide a list of six senior management biases, why managers like M&A. Those can all be interpreted as reflections of bounded rationality and, in some cases, also bounded reliability:
- Top line obsession: focus on growth of sales, not profits. The bounded reliability problem here is that managers only pursue their own interests.
- Stock price exploitation: in case of overvalued stock prices, managers would like to benefit from that. Here the bounded reliability problem is opportunistic behavior.
- Grooved thinking: “this is the way we always did it”.
- Herd behavior: copy paste behavior of managers, doing what the competitor does. The bounded reliability lies in the senior managers engaging primarily in self-serving behavior.
- Personal commitments: go through even though there is underperformance
- Trust in interested parties: Investment banks can push firms out of own interests. Here the source of bounded reliability problems resided with the external parties to the transaction; these parties act in their own interests instead of the interests of the firm that hired them.
- Pick up the scraps: use spin-offs and divestments that arise from M&As of other companies
- Stay home: improve competitive position locally
- Keep your eye on the ball: remain focus on developing and exploiting key FSAs
- Make friends: strategic alliances
- Appeal to the referee: slow M&As of others down by letting regulators review antitrust implications
- Stalk your target: wait and observe others before you make a move
- Sell out: it may be more profitable to be seller instead of buyer if there is consolidation
A first complementary perspective focuses on the success of large-scale M&As rather than the danger. It can be successful if senior management really knows what the industrial and strategic logic behind it is and if they engage in careful stakeholder management.
Another article focuses on failed M&As between European firms and technology firms in Silicon Valley. These failed because of differences in entrepreneurial culture, corporate governance practices, and other routines. Specifically:
- Time-consuming consensus-building strategies
- No clear and credible picture of future to the new staff
- European expatriates socialized only among themselves
- Confusion about the responsibility for strategic decision making
Melding of FSA bundles is difficult for two reasons:
- They are to some extent LB
- Unlikely that all of the routines and recombination capabilities will be able to reinforce each other
- M&A might be right choice, especially for MNEs that have a dominant position in a highly competitive, slow growth industry
- Even low consolidation levels may trigger M&As because MNEs can stay the major player and have a say in industry standard settings etc.
- A disappointing M&A does not say that another entry mode would have been better
SA (strategic alliance) versus M&A (merger and acquisition)
Alliance preferred over M&A when:
- Each firm only needs a subset of the FSAs of the partner
- It is difficult to dispose of the prospective partner’s unusable resources because they are firm specific: if you buy the whole firm and cannot sell the parts of it you do not like
The advantage of SA is that you only get those parts of the FSA of a partner that are really needed. That is why it is called a strategic alliance. But, there are also legal issues involved. Not every country allows in every industry to establish a SA or a merger. For example in the defense industry, or nuclear industry. Exactly because foreign firms should not be able to learn from the local firm. That is perceived by politicians as giving away knowledge to foreign partners.
INTERNATIONAL MARKETING - LEVITT
Levitt says that technology has homogenized consumer preferences so that MNEs should standardize their products and services worldwide. So international projectors and centralized exporters are taking over multi-centred MNEs. Two assumptions:
- Cultures and national tastes change continuously
- This convergence allows for standardization so that economies of scale can be achieved while delivering high-quality, low-cost goods
Consumers buy because of low price regardless of feature preferences and heavy promotion regardless of price. So a global marketing strategy can work but it depends on the effective organization and implementation.
A complementary perspective focuses on the potential of the internet. A network effect can for instance be achieved through the international availability and accessibility of certain services. Internet:
- Provides better access to international customers
- Allow immediate, worldwide information diffusion
- Reduces prices because of easy comparison
- Reduces bounded rationality because of all this
A limit of using internet is that brand names are vulnerable (problems are spread quickly).
A second article found two major dangers to effective implementation of global account management:
- Customer may be more internationally coordinated and may demand for a lower price.
- Bounded rationality and reliability occur if the supplier does not pay enough attention to implementation details. Long-term relationships with the customer should be sought for.
The model is similar to that of Prahalad and Hamel but they emphasize the knowledge bundles underlying the products rather than the products being of high-quality, low-cost, and reliable. Five main limitations of Levitt’s model:
- Little attention to importance of home country location advantages or host country location advantages
- Not taking into account cultural differences may result in overlooking a unique location advantage (because subs are not given any chance for initiatives) and the need for new LB FSAs
- Bounded rationality may occur: managers may become overly optimistic about international transferability, deployment, and exploitation potential of FSAs
- The effect of scale economies may not be that big
- He only talks about 2 types of corporations: MNEs (excessive national responsiveness) and global ones. But there are more types.
INTERNATIONAL MANAGING – BLACK AND GREGERSEN ON MANAGING EXPATS
J.S Black and H.B studied expatriate management and found four common problems in how firms manage their expatriates:
- Senior managers in the home country often underestimate the impact of cultural distance on organizational function, and as result, do not invest sufficiently in training programs.
- The responsibility for expatriates is often assigned to human resource managers which have no international experience, so they do not have any insight in the problems expatriates face.
- Senior management view expatriates as being well paid and well looked after, and therefore as having little to complain about.
- In many MNEs, a common misconception persists that expatriates do not need help readjusting after having returned home.
Black and Gregersen put up three best practices when it comes to successfully managing expatriate managers:
- Creating knowledge and developing global leadership skills: a key component here is that both senior management in the home country and the expatriate should share a clear understanding of the expatriate’s purpose and related expectations. This needs careful planning, which yields far more long-term benefits for both.
- Making sure that candidates have cross-cultural skills to match their technical abilities: effective resource combination requires a mix of technical and social skills.
- Devoting attention the re-integrating expatriates into their home country after their assignment.
Black and Gregersen suggest that all the MNE’s expatriate selection processes entail a trade-off between accuracy and cost. The assessment process formed by carefully routines is costly in the beginning, but also very accurate with selecting the right individuals for expatriation. This reduces the risk of costs resulting from failed expatriate assignments. In the end ‘the key to success is having a systematic way of assessing the cross-cultural aptitudes of people you may want to send abroad’.
A complementary perspective says that if senior management lacks ‘conventional substantive control’, they should change the organizational context. That should be gradual and collaborative. If there is a lot of control, it is usually immediate rather than gradual, and directive rather than collaborative. A lack of control may be the result of subs becoming too powerful, mistrust of HQ or high bounded reliability among subs. MNEs can be described using four orientations:
- Cognitive orientation (managers’ perception of relevant business environment)
- Strategic orientation (managers’ interpretation of changes in environment)
- Administrative orientation (info system)
- Power orientation (who has the power to do what)
Senior management at HQ and subs should agree on these. If senior management lacks control, they should change the power orientation. Successful change process included 8 steps:
- Appointment new key executive
- This executive spends a lot of time trying to alter cognitive orientations of sub managers
- The executive states the consequences of new environmental threats for firm strategy
- Data systems provided prove for restructuring
- There were multiple minor reallocations of authority
- These established the key executive as a powerful actor in the change process
- Due to that new position of power, the executive could engage in more drastic changes
- He supports and validates the new orientations using data tools, measurement systems, resource allocation procedures and budgeting procedures.
A second perspective is that it might be good to move away from pure centralized exporter or multi-centred MNE forms. The MNE can foster interdependencies among operations which requires extensive use of decision-making instruments. Managers with international experience and an international mindset are necessary.
Black and Gregersen’s central point is that expats can be used. Different purposes:
- International projector: transfer knowledge
- Multi-centred MNEs: foster sharing of core values, communication channel
- International coordinator: most important; creating effective international value chains, linking economic activities across borders
They can even be a NLB FSA in themselves.
- Expatriation can be a permanent way of life
- Failure of sending expats may be because of bad relationships between home and host country rather than wrongly managing the expat process
- External expatriation is not discussed (expatriation to partner firms or JVs)
Corporate social responsibility
Corporate social responsibility (CSR): good citizenship by the firm, by its obligations to society, especially when this is affected by the firm’s strategies and practices. With expanding abroad, MNEs are expected to show CSR in their host country. This requires a manager to consider his acts in terms of a whole social system, and holds him responsible for the effects of his acts anywhere in that system.
Debra Dunn and Keith Yamashita suggest that MNEs can engage in initiatives that benefit their stakeholders and the firm’s corporate citizenship obligations to society at the same time. So an MNE can do well and do good at the same time. Dunn and Yamashita detail seven business practices in citizenship efforts:
- Unearthing customer needs; divining the needs of customers by investigating at underlying problems and transferring this understanding to the innovation process.
- Fielding a diversely talented team; this means getting involved with human and other resources of the host country, which are the core of the firm’s more conventional FSAs. This gives the firm development skills with a broader range of knowledge, including line management knowledge, expertise in government affairs, and a rich understanding of culture.
- Adopting a systems approach; this does not attempt to optimize individual parts, but it views these parts in a broader context and wants to optimize the whole.
- Creating a leading platform; standardized, generally accepted configuration of hardware etc (ICT).
- Building an ecosystem of partners; most sustainable communities have different stakeholders with an interest in a long-term solution. The alignment of interests offer protection from hazards associated with each partner’s bounded reliability. The ecosystem of partners bring their complementary resources to the initiative and are all dedicated to solving problems.
- Set a deadline for the project; deadlines create a sense of urgency, this keeps all participants focused.
- Solving, stitching and scaling; this eliminates the bounded rationality challenge of trying to figure out all the possible forms the solution will eventually take and customizes a solution for a single customer.
There are three CSR areas: privacy, the environment and e-inclusion (which means using technology to reduce economic and social divides).
For an MNE manager, the business value of a project is the routine from which the project was developed. There are four key phases of project development:
- Quick start; this phase tries to establish credibility and momentum by achieving a few quick successes.
- Ramp up; characterized by gathering resources for prototyping, evaluating solutions and training stakeholders so they can take ownership of the initiative. The key to this phase is to bring the ecosystem of international and local partners together.
- Consolidation phase; evaluating the intellectual property generated to date, helping local partners deciding which solutions to deploy and stopping sub-projects unlikely to reach their goals.
- Transition phase: identifying leaders and transferring knowledge and power to local participants.
Unfortunately, it is unlikely that doing good and doing well could be combined in the world’s extremely poor regions. The activity of an MNE is not able to replace the role of a government, in terms of taking care of public goods. Foreign investments get really costly because they are being forced to provide such public goods on a large scale. Next to that, it will force an MNE into a role it is not meant to fulfill, and it is unlikely that it will be fulfilled effectively and efficiently. For changes, it is important that there is a capable network to support it, which is missing in those extremely poor regions.
Richard Locke and Monica Romis (authors who provided a complementary perspective on CSR) argue that MNEs need to go beyond monitoring suppliers for compliance with labor codes of conduct and should instead collaborate closely with suppliers to attack problems of poor working conditions at their source. As the main problem in developing countries is a bounded rationality one, only monitoring will not measure the real workplace conditions, as suppliers can hide relevant information.
Sushil Vachani and N. Craig Smith’s (second complementary perspective on CSR) suggest that socially responsible pricing affects the bottom line immediately and directly. Social responsible pricing can mean fair trade; agreeing on paying a higher price on the input side, or on the output market side it can mean lowering prices. There are three main approaches used by MNEs to improve access to drugs in developing countries:
- The drug donation approach: increases the access to drugs by giving them free of charge. This approach gives the MNE tax benefits and the country social welfare benefits. A problem with this approach are the hidden costs in host countries, and the fact that this approach will not work for diseases that require extensive and long-term treatments.
- The out-licensing approach: this is the same as an international projector strategy of licensing. The host country manufacturer produces the drug under license. The advantage of this approach is that it gives the MNE distance from the lower prices in the developing country, this reduces the potential for price referencing, in which downward pressure on prices in developed markets is caused by reference to the lower price charged in developing economies. Another advantage is the positive media attention for the MNE. The problem with this approach though, is the limited complementary resource availability. Next to that, drug access may still be limited as the price may not be low enough, and the referencing problem is unlikely to disappear completely.
- Differential pricing: this is the most common approach and it means selling the same product at different prices in different markets. Advantage of this approach is that is provides the flexibility to balance pharmaceutical MNE revenues and social welfare. Problems with this approach are product diversion risks, price referencing, and high administrative overhead costs. Next to that, a risk of the drugs not taken as prescribed because of the lack of good infrastructure. The last problem is a bounded reliability one; MNE price reductions can reduce host government and donor efforts to provide appropriate financial support for drug access.
The three articles all emphasize the importance of engaging and partnering with multiple stakeholders. Dunn and Yamashita focus on an ecosystem of partners, Locke and Romis on local suppliers and Vachani and Smith on NGOs and governments. Litmitations:
- Focus on CSR solely within developing/emerging context. In developed countries CSR can be mandated by law, influential NGOs and the media. In less-developed countries CSR is usually philanthropic since they lack institutional baselines. Selection of location is important for CSR initiatives. The optimal location for CSR does not necessarily have to be the optimal location to do business.
- Lack of attention for different ways CSR initiatives can develop within MNE (external, internal, top-down, bottom-up).
- No attention devoted to bounded reliability (free riding may occur).
Corporate environmental sustainability
Michael Porter and Claas van der Linde argue that environmental regulations imposed by the government, can enhance competitiveness by forcing companies to come up with innovative ways to use resources more productively and potentially develop green FSAs. This can benefit the firms, because it might lead to cost efficiencies or value enhancement. So they suggest that strict environmental standards, may lead to new FSAs. The authors suggest a shift towards a dynamic, resource productivity model of environmental regulation; this opens a new way of looking at the full system costs and the value associated with any products. This resource productivity approach suggests that environmental initiatives should be embedded in the production system.
According to Porter and van der Linde, environmental regulation can trigger two broad forms of innovation:
- The first form involves technologies that reduce the costs of dealing with pollution.
- The second form addresses the root cause of pollution by improving resource productivity. This leads to better utilization of inputs, better product yields and better products.
There are five major features that make good for environmental regulations:
- Good environmental regulations create maximum opportunity for innovation by letting industries discover how to solve their own problems. The regulations do not specify the means, only the requirements on which results should be achieved.
- Regulations should be strict, which encourages real behavioral change in industry through innovations.
- Regulations should allow for a phasing-in period, this reflects the realities of researching, developing and adopting new technologies.
- Regulations should encourage a resource productivity approach rather than a conventional pollution control approach. So it should encourage environmental improvements as close as possible to the source of the pollution, like early in the value chain.
- Countries should develop regulations before other countries. This allows domestic industries to gain first-mover advantages on the international stage.
Environmental management is playing an important role in MNE corporate responsibility approaches. The global warming concerns have put the environment at the forefront of consumer and non-governmental organization advocacy efforts. Stakeholders examine MNEs carefully at their environmental footprints.
Stuart Hart and Mark Milstein (who provide a social activist perspective complementing Porter and van der Linde) distinguish three types of economies:
- Developed or consumer market: represents an economy of one billion wealthy consumers with an advanced infrastructure. Within this market, an MNEs ecological footprint should be reduced by reinventing products and processes.
- Emerging economies: roughly two billion people, customers who can meet their basic needs but have minimum purchasing power. MNEs should keep the expanding demand for products by population growth, in balance with the limited physical capacity of these countries to provide necessary infrastructure and institutional context.
- Survival economies: three billion potential customers, largely rural, individuals not meeting their basic needs, minimal infrastructure. MNEs should recognize the opportunity presented by this group.
Ans Kolk and Jonathan Pinkse (second complement to Porter and van der Linde) focus on climate change and classify and analyze the strategies that firms can use to mitigate their climate change impact. They focus on two strategic goals at firm level:
- Innovation: means that firms can improve their business performance through FSA development. This will be driving the reduction of emissions. This is an approach for managers who see the potential business opportunities of climate change policy.
- Compensation: transferring or trading emissions or emission-generating activities. This is an approach that managers who see climate change as a business risk, tend to.
Kolk and Pinkse suggest that firms fall into six broad types:
- Cautious planners: firms preparing for action but who show little activity related to any of the potential climate change strategic options. This firm mention measures to reduce greenhouse emissions, but does not provide any specific details on what might be used to achieve this goal.
- Emergent planners: do not have implemented climate change measures yet. However, they have set targets for the greenhouse gas reduction. So it has well-developed targets, but no long-term plans to reach those.
- Internal explorers: firms with a strong internal focus, bringing as a result a combination of targets and improvements in their production process.
- Vertical explorers: firms with a strong focus on environmental measures within their supply chains. The reason for this company to focus on upstream and downstream activities: it relies on natural resources that are vulnerable to extreme weather conditions and/or its manufacturing process had low climatic impact compared to the consumption of its products.
- Horizontal explorers: firms that seek opportunities to mitigate their climate change impact in markets outside their current business scope.
- Emission traders: these firms trade on emission markets and participate in offset projects.
In the end, both corporate social responsibility and corporate environmental sustainability may lead to new FSAs. Done by local adaptation (one unit or one country) or by universal approach (multiple countries, one approach). The question is to adapt or not, and if so how, is particularly relevant for emerging markets where institutions (law and government) are often weak. It is especially relevant in emerging markets because of the so-called institutional voids that create uncertainty.
3 limitations Porter and van der Linde:
- Impact of environmental regulations on location advantages in international context not addressed. They say that strict regulations are a location advantage that can provide new LB FSAs. But for governments in small open economies it is dangerous. That doesn’t say that they should become a ‘pollution haven’!
- Lack of focus on possible patterns of environmental FSA development
- There is no distinction of firm categories. We can distinguish 3:
- Distinctive, high-profile environmental issues (oil, electricity, automobiles). Environmental impact mitigation may be a source of competitive advantage here. FSAs must be developed through internal investment.
- Firms that specialize in goods/services instrumental to mitigating environmental impacts. FSAs must be developed through internal investment.
- Firms that can outsource their environmental impact mitigation (buy green tools, comply with law). so they don’t develop FSAs by being environmentally responsible.
The building blocks considered in this book were FSAs (LB and NLB), location advantages, value creation through resource recombination, complementary resources of other economic actors, bounded rationality and bounded reliability. We will now conclude on the four themes discussed.
Dominance of regional over global strategies
Most international business strategy is conducted regionally, there are only a few truly global firms. The first focus of senior management should be on the geographic area that represents more than 50% of sales. Then they expand to regions (Asia, Europe) rather than specific countries. Intra-regional distance is decreasing. The NLB nature of FSAs should not be overestimated. A balance should be sought between adaptation, scale and scope, and exploiting national differences.
The ‘new forms’ of international expansion
There are emerging economies which do business differently than the conventional western firm. Also new forms of outsourcing/offshoring emerge which go far beyond conventional cost-reduction purposes.
The tension between radical innovation and internal coherence
A balance should be sought between all the new opportunities and retaining control over international operations. Subs managers must play a vital role in decisions so that locally available knowledge is fully applied. Process characteristics such as respect and procedural justice should be present. The reasons for a mix between central decision making and decision making on sub level:
- Specialization in decision making by corporate HQ and the division
- Selectivity in inter-divisional interactions
- Standardized, quantitative monitoring and incentive systems
- Specific roles for corporate HQ and the divisions in general innovation strategy
- Careful and informed management of the tensions that may arise between incremental and breakthrough innovations
The rising importance of recombination capabilities
Governance models used by MNEs could serve as a best practice for the future public institutions of international and global governance. MNEs often play a role in improving economic efficiency, intercultural understanding, environmental sustainability, and social justice. The reason of this role lies in their vulnerabilities:
- Breakthrough, resource recombination efforts from existing or new international rivals
- The problems posed by running dispersed internal affiliate networks
- The actors providing complementary resources in a wide array of international cooperative business arrangements
- The decision of sovereign governments, and a multitude of other stakeholders, including host country customers and employees
- The scrutiny of the international media and internationally operating pressure groups
Because of these vulnerabilities, new resource recombination emerges and leads to change inside the MNE. Managers should continuously reflect on their business to be able to reinvent resource recombinations. There are also losers (for instance if business are de-internalized).