Summaries: book \" International Business Strategy \", Alain Verbeke - Summary of all chapters ! PDF

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Chapter A : the 7 concepts of a unifyingframeworkMost complex issues in international business strategy revolve around seven concepts:See page 5, figure 1.MNE’s (Multinational Enterprise) need certain internal strengths to overcome additional costs of doing business abroad, those are called: interna...

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Chapter A : the 7 concepts of a unifying framework Most complex issues in international business strategy revolve around seven concepts: See page 5, figure 1.1 MNE’s (Multinational Enterprise) need certain internal strengths to overcome additional costs of doing business abroad, those are called: internationally transferable, or nonlocation 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. 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.

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International projector: 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.

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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.

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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:

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Stand-alone resources: linked to location advantages, such as a certain market or a network, which are immobile.

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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.

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Local best practices: routines which are highly effective and efficient in the home country, but which might not be the same abroad.

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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 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: 

Natural resource seeking: contains the location advantage of the host country, it’s the search for physical, financial of human resources. Precondition, is that access is needed.

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Market seeking: the search for customers. Not for the centralized exporter, because this involves business activities in the host country.

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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.

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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 exploit the resulting.

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 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. To summarize: 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.

Chapter B: Prahalad’s and Harmerl’s core competencies 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 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. There are 3 characteristics to identify core competencies, a core competence should: 1. Be difficult for competitors to imitate 2. Provide potential access to a wide variety of markets 3. Make a significant contribution to the perceived customer benefits of the end product The extra fourth one is especially important for a large MNE: 4. 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.

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. 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: 1. 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 ccontinuous innovation of machines 2. 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. 3. Related and supporting industries: the need for high-quality suppliers. 4. Firm strategy, industry structure and rivalry: a competitive industry, not-sheltered protective markets and a well-functioning industry 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: 1. Factor conditions: the company needs to be continuously upgraded through the development of skills and the creation of new knowledge.

2. Demand conditions: companies must respond to new customer demands by pushing the envelope of existing technology and by designing new features. 3. 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. 4. 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 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. Key concern: FSAs are in Porter’s theory completely domestically determined. Porter places too much emphasis on the home country as the appropriate level of analysis.

Chapter D: Ghemewat’s distance theory 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.

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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.

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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.

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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.

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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: lowvalue-to-weight products, perishable products and trade in services and capital, because of information and infrastructure.

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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.

Limitations of Ghemawat’s distance framework 1. Macro level distance, does not always hold for all firms (distance for a firm ≠ distance for all firms) 2. A firm’s FSA can be that it is able to deal with these distances 3. Impact of distance differs for part of the value chain 4. G assumes that FSAs are developed in the home market, but firms may also develop FSA in a host country 5. G does not discuss cooperative entry modes (like JV or strategic alliance) and how they may help to reduce distance (because they are complementary resources).

Chapter E: Hofstede’s measurement of cultural distance CD (the cultural distance) is important because it increases complexity to deal with foreign workforce, hence more risky investments, as a result: relatively small investments or low level of commitment or no local partners. When CD is high, then local knowledge is required and firm from country A investing in culturally distant country B may wish to cooperate with another firm from country B as complementary resource. When CD increases: 1. Level of investment in culturally distant country decreases. 2. Type of investment changes from high to low level of commitment. 3. The investing firm will not want to cooperate with a local partner. Counterargument:

4. The investing firm needs to cooperate with local partner because host country is so different from home that all help is needed. The measurement of culture is done by Geert Hofstede in a 4 (or 5) dimensional framework; people from different societies differ on several key dimensions: 1. Uncertainty avoidance 2. Power distance 3. Individualism-collectivism 4. Masculinity-femininity 5. Long term orientation, later uncovered than the above 4. Kogut & Singh’s calculation for CD - CDj is the cultural distance between country j and the home country - Iij is country j’s score on the ith cultural dimension, - IiUS is the score of the home country on this dimension, - Vi is the variance of the score of the dimension

Critique on this calculation (Shenkar, 2001) 1. The illusion of symmetry; assumes that the CD is the same as the distance between the two countries, which is not true. 2. The illusion of stability: CD and its measures change over time, because cultures and the role of CD change. 3. The illusion of linearity: the effect of CD may depend on a firm’s learning curve, hence is not linear as assumed. 4. The illusion of causality: distance does not only consist of CD, but it should also be measured together with geographic distance and institutional distance. 5. The illusion of discordance: some dimensions of a culture matter more than others, this is not taken into account in the calculation, where all the dimensions have the same weight. 6. The assumption of corporate homogeneity: the calculation only incorporates variances at the national level, whilst there are also differences at corporate level. 7. The assumption of spatial homogeneity: in the calculation, the exact location of a firm in a country is not measured.

Chapter F: Barlett and Goshal’s subsidiaries theory Chris Bartlett and Sumantra Ghoshal suggest that large MNEs are making a mistake when they adopt

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Homogenization: treating all subsidiaries the same

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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.

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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

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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.

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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

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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.

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Contributor: high in resources, but low on importance of strategically...