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8/23/Exam Summary 18 January 2016Chapter 6 – International InnovationLearning objectives: - Why decentralize R&D? Describe difference between ‘home-base-exploiting’ and ‘home-base- augmenting’. - Highlight key stages in the development of foreign R&D units. - Why do subsidiar...

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Intro to IB 4/30/21 Exam Summary 18 January 2016

Chapter 6 – International Innovation Learning objectives: - Why decentralize R&D? Describe difference between ‘home-base-exploiting’ and ‘home-baseaugmenting’. - Highlight key stages in the development of foreign R&D units. - Why do subsidiaries innovation initiatives get destroyed by ‘corporate immune system’? - How to access another firm’s knowledge base to create upstream FSAs - Examine potential conflicts between host country research sites and HQ. The Idea - Kuemmerle’s idea is that many MNEs (international projectors) decentralize R&D by building worldwide networks of R&D labs. He established 2 types of labs:  Home base exploiting  Primarily receive information from the central lab in the home country and adapt products to local demand  Home Base Augmenting  Primarily access local knowledge and send information back to the central lab o He strongly recommends that both types of labs should interact regularly with the firms other R&D units. Why does this happen? - First, many MNEs feel they need to be present in various knowledge and innovation clusters scattered around the world o Host country presence is often essential in order to monitor and absorb new developments.  Typically, complementary resources from foreign input providers such as competitors, universities and scientific communities. - Second, to move quickly from innovation to market, MNEs must integrate their R&D facilities more closely with host country manufacturing operation, to support complex production tasks. o Often involves: complementing existing, internationally transferrable FSA in the up stream, technological knowledge sphere with a set of LB FSAs in HC. - Third, offshoring of advanced tasks is also possible because ICT revolution, physical proximity no longer always needed. o Lecture 6: Slide 23 What has Kummerle discovered? - Kummerle observed the internationalization of the R&D function over time. o This built upon the ‘home base’ concept of Porter. - Two distinct types of host country R&D facilities based on their strategic role in an MNE o Home base exploiting  Support manufacturing facilities in foreign countries or adapt standard product to the demand there.  Information flows to the foreign laboratory from the central lab at home o Home base augmenting  Act as the firm’s eye’s and ears in host countries, and access knowledge from rival and research institutions there.  Information flows from the foreign laboratory to the central lab at home

Intro to IB 4/30/21

Chapter 6 – International Innovation -

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Kummerle outlined three key stages in the development of Foreign R&D units o Selecting Decision Makers  Most MNEs set up a tech-steering committee  These members have technical and organizational expertise  This approach reduces the bounded rationality problems faces by the MNE  Because it reduces uncertainty involved in assessing alternative, high distance locations. o The set of decisions and actions that strengthen the facility’s initial capabilities  Home bases exploiting  Should be close to key markets and the MNEs own foreign manufacturing units so that the firm’s technological innovations can be rapidly adapted to host country requirements if needed, and absorbed by host country manufacturing operations. o This is an example of how adapting to key markets sometimes requires building new LB FSAs in HC (produced by the HBE) to link the MNEs internationally transferrable FSAs more effectively with the location advantages of the host country’s output market.  Place leadership in hands of managers who are intimately familiar with the company’s culture and systems.  Difficulty: reduce distance between home country R&D and host country o Solution: put managers in charge in foreign lab that know the firm and central lab well.  Home base augmenting  Should be located in critical knowledge clusters relevant to the MNEs businesses, where they will be well positioned to tap into new sources of innovation.  Difficulty: MNE cannot access knowledge and use while not being an insider o Solution: strengthen ties with local community and make sure the knowledge is useful for manufacturing operations o The decisions and actions designed to maximize the lab’s contributions to the MNEs goals  Each lab (especially home base exploiting) should regularly interact with other R&D units (&firms manufacturing + marketing)  The home based augmenting lab should, remain focused on their insider status in their host country scientific communities.  Regarding the internal knowledge, sharing that knowledge is required.  Senior managers must ensure that contributions complement the MNEs existing FSA base, including applications relevant to manufacturing operations.  This cannot be achieved if labs work as islands. Four qualities the best candidates for HBA and HBE. o They are at once respected scientists or engineers; o They are able to integrate the new site into the company’s existing R&D; o They have comprehensive understanding of technology trends; o Able to overcome formal barriers when they seek access to new ideas in local universities.

Intro to IB 4/30/21

Chapter 6 – International Innovation In Short - Senior R&D lab managers must be able to marshal the resources necessary for the lab to be successful (including creation of FSAs) o They do this by connecting the lab with other resources  HBA effectively tap into the external environment of host markets - Examples: o Xerox  HBA in continental Europe o Eli Lilly  HBE lab in Japan o Matshushita  Set up both labs  Units can communicate directly rather than using central R&D office o Increases the level of knowledge transfer and resource recombination - These examples show Kuemmerle’s view that MNEs are increasingly adopting an interlinked network to improve R&D efforts. Limitations - Ignores tension between host country and central HQ o Subs managers vs top mangers o Does the sub actually contribute to corporate strategy - Does not include the possibility of joint ventures or strategic alliances as options to tap into foreign knowledge - Hidden costs of offshoring

Chapter 7 – International Sourcing and Production Learning Objectives - Describe changes in IB environment leading to new roles assigned to international factories - Explain two key parameters underlying the roles of foreign manufacturing plants and highlight the 6 generic factory roles. - Explain contribution of tools such as flexible manufacturing systems, jit and total quality management when making location decisions - Develop understanding of the difficulties associated with transferring manufacturing knowledge in high tech firms. - Identify the limitations of a strategy aimed at upgrading foreign manufacturing plants. The Idea - Ferdows’ idea that senior MNE managers should try to upgrade their host country factories to give them the ability to develop FSA - Ferdow think that a factory’s ability to create FSA is as important as low costs o However, this will require senior managers to invest in each factory for the long term

Intro to IB 4/30/21

Chapter 7 – International Sourcing and Production How will this happen? - Ferdows provides a detailed argument in support of the market seeking and strategic resource seeking arguments for FDI in the context of international manufacturing. - How can MNE’s tap their foreign factories? - Ferdows question: “How can a factory located outside of a home country be used as a competitive weapon not only in the market by directly serves but also in every market served by the company?” o Depends on the mindset of home country senior mangers  What is the role of the foreign factory? What has Ferdow observed? - The most successful manufacturing MNEs view their foreign factories as sources of FSAs beyond the ability to save costs as with conventional offshoring - Three changes in the IB environment driving the assignment of these new foreign factory roles o International trade tariffs declined substantially  Need to establish plants to overcome trade barriers isn’t as important o Modern manufacturing is increasingly technologically sophisticated (capital intensive)  Low wages aren’t as important, mostly productivity. Including tech and infra. o The time frame to move from manufacturing to marketing has become shorter  MNEs increasingly co-locate development & manufacturing (broad mandates for subsidiaries) - Six possible roles for foreign manufacturing facilities o Offshore: access to low-cost production factors as an implementer on the input side & plants manufacturing output is determined by senior management. o Server: Manufacture goods to local market, probably because of trade barriers. Little autonomy o Outpost: gather valuable information, but manufacturing is mainly done by previous 2 = no FSA. o Source: besides low cost production, it receives resources to engage in resource recombination and to develop FSAs that will turn in into a ‘best practice’ plant. This type of factory might be a strategic leader on the input side of the value chain but nonetheless has a narrow character. o Contributor: not only manufacturing to local market but is responsible for resource recombination in the form of process improvements, new product development etc. o Lead: this type is the most important one in terms of resource recombination and new FSA development. (research labs) - Upgrading Foreign Factories (involves substantial resource recombination spread over 3 stages) o Enhancing internal performance  Employee training, education, self management, JIT manufacturing o Accessing and developing external resources  Strengthening the plant’s supplier network and improving logistics o Developing new knowledge that can benefit the overall network - When FF upgrade they focus on intangible strengths (recombination capabilities) rather than tangible (low cost)

Intro to IB 4/30/21 o Resulting in robust networks of factories that are quickly able to adapt. In Short - According to Ferdows, MNE strategic manufacturing planning should focus on specializing foreign factories o Each plant should take on a leadership role in a specific area and avoiding duplication of R&D efforts. o Whenever feasible, foreign factory’s ultimate missions should include a world class specialty - Examples: o National Cash Register Company  One “server” plant was upgraded to a “leader” and saved the company o Sony  “Server” plant to “leader” - Obstacles you might come across when upgrading: (Why Upgrading doesn’t take place) o Fear of relying on foreign operations for critical skills; o Treating overseas factories like cash cows and neglecting long term investment; o Creating instability by shifting production in reaction to fluctuating exchange rates; o Enticement of government relocation incentives to move factories to places with no potential to upgrade Limitations - Ferdows believes that management should upgrade all factories (not necessarily true - He underestimates the value of low cost (highly efficient) factories in host countries (might be important) - The choice for permanent offshoring can be a good one if the firm’s FSA is the capability to flexibly offshore activities

Chapter 8 – International Finance Learning Objectives - Define various economic exposure and its strategic significance for the MNE - Describe the various approaches to manage and minimize economic exposure - Explain short and long term effects of a global cash management system - Justify why MNEs try to overcome market imperfection by using financial management tools - Explains the linkages between the MNE’s administrative heritage and its organization of the risk exposure management function. The Idea - Lessard and Lightstone have recommendations on for how MNEs should deal with economic pressure o Economic pressure (operating pressure) is the impact (effect on future net value) of changes in real exchange rates relative to the MNE’s competitors. To minimize the impact:  Senior managers should strive to have a flexible souring structure  Be able to shift production from one country to another quickly  Attain the capability to engage in exchange rate pass through (capability to raise prices in response to exchange rate fluctuations without losing sales) - Other strategies to tackle economic pressure will be discussed

Intro to IB 4/30/21

Chapter 8 – International Finance Why is EE a problem? - May result in negative effects on MNE income compared to rivals - Adds uncertainty to value of a firm’s location advantages - MNEs are active in multiple countries and need to look at their overall economic exposure: not just one country, but the overall risk (country diversification) - It affects the strategic decision to locate in a certain country o However, Prof. Rugman argues that economic exposure must never drive/determine strategy. - Not all MNE’s suffer to the same extent because exposed to different risks (depending on which country they’re in) and different strategies. What have Lessard and Lightstone observed? - 3 elements of economic exposure are important o It should be viewed as a parameter that has adds certainty to the value of the firms location advantages  Geographic location advantages might not hold up to the exchange rate disadvantages o The concept also implies that the location advantages benefiting an MNE should be considered on a country to country basis and as a portfolio of potential risks for cash flows. o MNEs can choose to develop specific FSAs allowing risk mitigation in foreign currency area by ‘immunizing’ their products to economic exposure, thereby allowing full ‘exchange rate pass through’.  Pass through: pass price changes due to exchange fluctuations on to its customers - Lessard and Lightstond’s Matrix o Exposure absorption: how easily can you adjust your cost position relative to rivals. 1 3 Strong o Exchange Rate Pass: How easily can you pass your exchange rate price over to Exposure absorption your customer? capability on the input o Quadrant 3: Ideal situation 2 4 market side Weak o Quatrant 2: not ideal  sells commodity products, lack strong market position in host country Strong Weak - Three non financial strategies Exchange rate pass o Separate business unit model through on the output  Each unit configures its own operations in such a way as market side to reduce economic pressure.  This strategy entails a trade-off between increased production costs and lowered risks o Company wide portfolio model  A portfolio of businesses and operational structures is selected with offsetting exposures, which balance each other.  The result: a lower total rate of exposure, even though individual might be higher o Flexible operational planning model  Switching production between factories  Increased costs of excess capacity vs reduce economic exposure

Intro to IB 4/30/21

Chapter 8 – International Finance In Short - Managers who cannot set company policy on economic exposure should not be held responsible for the economic exposure effects of volatile exchange rates - When assessing performance, senior managers should reduce bounded rationality by adjusting performance indicators or goal-based expectations. o This will be difficult because real bounded rationality reduction would require substantial investment.

Chapter 9 – International Marketing Learning Objectives - Define term: global standardization and to understand intellectual arguments in favor of it - Describe revenue-enhancing and cost-reducing effects of intranet - Explain new types of intermediaries and to highlight limitation to internet - Examine potential and the constraints of global account management - Identify managerial challenges associated with simplistic views on globalization The Idea - Levitt sees the multi-centered MNE being gradually replaced by centralized exporters and international projectors. - He argues that advances in tech, communication and travel have revolutionized commerce around the globe. - This adds value to NLB FSAs and strengthening an MNEs ability to deploy such NLBFSAs irrespective of cultural, economic, institutional or spatial distance. Should MNEs adapt their marketing to local or make it global? Why is this an issue? - Levitt says that the majority of the world’s consumers want the same thing: o High quality, reliable products and low prices.  Thus, often willing to accept globally standardized products instead of customization What are Levitt’s observations? - His arguments in favor of global standardization rest on two foundations o Cultures and national societal tastes are not fixed, but subject to continuous change with technology guiding change to harmonization.  Technology brings the world to have the same tastes, overpowering traditional differences.  As a result, cultural preferences follow one of two paths: o They eventually lose relevance to economic global trends o They diffuse to other groups and become the substance of global trend.  Not only commodity products but also ‘high touch’ goods. o Converging tastes now allow companies to offer globally standardized products, harnessing economies of scale to deliver high quality, dependable goods at low cost.  He says high quality and low cost are not mutually exclusive but can be achieved through innovation and efficiency. - There is no one write way that works for everybody. It comes down to administrative heritage and corporate culture.

Intro to IB 4/30/21

Chapter 9 – International Marketing What are others observations? - The internet helped in achieving the shipment of standardized products around the world. (Quelch and Klein) - The internet should be used as a tool to reduce bounded rationality problems faced by the MNE and its potential customers in host countries. o Specifically: MNEs could use the internet as a communication tool especially to market products, thus resulting in lower investments in LB FSAs. - Authors predict growth of intermediaries acting as international projectors. (courier companies)  Other intermediaries could be websites such as beslist.com - Authors recommend a single, centrally managed websites for each brand name as to avoid confusion. o This is also to ensure standardized service bundles. - A worldwide approach to crisis management and maintain reputational resources is required o Because brand names will become vulnerable to isolated instances of problems with quality, price and availability.  Worldwide dissemination of information about such problems may lead to a decline in sales. - Government imposed restriction may limit international, internet-based sales so an internet MNE should have: o 24 order taking for customer service response capability o regulatory and customs-handling expertise to ship internationally o in-depth understanding of foreign marketing environments to assess the relative advantages of its own products and services.  Senior Managers should not mistake of assuming away cultural distance between home and host country environments. o (Authors find difficulty in local after sales.) (Arnold, Birkinshaw and Toulan) - What are the potential limits of global account management? o GAM: dedicating specialized resources, typically involving non-location-bound routine, to serve internationally operating customers in an integrated fashion  This implies a move towards standardized supply contracts with these customers, as well as a consistent international platform of predetermined service content.  This may mean host country subsidiaries lose their ability to alter the marketing mix when serving local operation of international customers with global account status. o Positive points  GAM can be interpreted as a logical reaction to the internationalization of large customers eager to gain a tighter grip on their supply chain.  Suppliers: they think that the practice is also in line with the strategy of crafting a stronger customer orientation across borders. o According to Arnold there are two major pitfalls to effective implementation of GAM:  If the customer/potential GA is more internationally coordinated that the supplier, then the main effect of global account ...