Summary International Business Strategy - Chapter 6-14 - Final exam summary PDF

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General essential information Centralized exporter Standardized products manufactured at home embody the FSAs and make the exporting successful in international markets. Only minor activities abroad. International projector FSAs developed in the home country are transferred to subsidiaries in host c...

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General essential information Centralized exporter = Standardized products manufactured at home embody the firm’s FSAs and make the exporting successful in international markets. Only minor value-creating activities abroad. International projector = Knowledge-based FSAs developed in the home country are transferred to subsidiaries in host countries. International expansion by projecting its home country success recipes abroad. International coordinator = Builds upon a tradition of managing international operations through a tightly controlled but still flexible logistics function. Key FSAs are in efficiently linking geographically dispersed operations through seamless logistics. (A lot of MNEs in natural resources industries) Multi-centered MNE = Consists of a set of subsidiaries abroad, which are key to knowledge-based FSA development. National responsiveness is the foundation of the international strategy. Not much non-location-bound FSAs (other than identity, financial governance, etc.) Entry modes Non-equity (piece of paper) Exporting

Equity (sense of ownership) Greenfield

Licensing

Acquisition

Franchising

Joint venture

Strategic alliances can be both non-equity and equity Licensing: A form of contracting where firm A licenses to firm B in another country the right to use firm A’s technology or trademark for a certain fee. Franchising: Firm B in a host country ues the business model developed by firm A, and firm A provides assistance in making the local activity a success. The franchisee has the right to use the franchisor’s logo, trademark, way of working, etc. for which the franchisor receives a fee. A higher degree of control compared to licensing.

E.g. McDonald’s. Greenfield: A firm expands to a foreign country by establishing a completely new firm from scratch (e.g. by building a new factory that it fully owns). Acquisition: A firm buys shares of a firm established in a foreign country. Full acquisition implies buying all shares, while partial acquisitions occur when a firm only buys part of the foreign firm’s shares. Joint venture (JV): Firm A from country 1 and firm B from country 2 join forces and jointly establish a new firm C in a foreign country, either country 1, 2 or a third one. Factors for determination of optimal entry mode (Hill, Hwang, Kim): 1) The degree of control (GF + acquisition = highest, licensing = lowest) 2) The level of resource commitment (GF + acquisition = highest, licensing = lowest); and 3) The dissemination risk (GF + full acquisition = lowest, licensing = highest). Kuemmerle

Many MNEs are decentralizing their R&Ds by

Ferdows

building worldwide networks of R&D labs. Senior MNE managers should try to upgrade their host country factories to give them the ability to develop FSAs.

Lesser and Lightstone

Recommendations for how MNEs should deal with economic exposure.

Levitt

MNEs should not worry very much about customizing to local preferences. Technology has largely homogenized consumer preferences – most consumers simply want quality, reliability and low prices.

Black and Gregersen

3 best practices to successfully manage expatriate (a person who lives outside their native country) managers:

1) Creating knowledge an developing global leadership skills; 2) Make sure that candidates have crosscultural skills to match their technical abilities; and 3) Prepare people to make the transition Arnold

back to their home offices. MNEs should maintain long-term relationships with local distributors, even after establishing their own local network. Local distributors have: -

Insight into local market;

-

Knowledge of local regulations and

business practices; -

Existing major customers at low cost;

-

Ability to hire appropriate staff; and

-

Ability to develop relationships with

potential customers. Hamel, Doz and

When pursuing strategic alliances with

Prahalad

partners who are also rivals, firms should try to learn as much as possible from their partners while giving away as few of their

Ghemawat and

FSAs as possible. Global M&N transactions usually do not make

Ghadar

economic sense.

Khanna, Palepu and

Emerging economies are primarily

Sinha

characterized by important institutional voids, and the primary challenge for MNEs operating in emerging economies is to understand and deal with these voids.

Dunn and Yamashita

MNEs can engage in initiatives that not only benefit their stakeholders but also fulfill the firms’ ‘corporate citizenship’ obligations to society.

Porter and Van der

Government-imposed environmental

Linde

regulations can enhance competitiveness by pushing companies to come up with innovative

ways to use resources more productively and potentially develop green FSAs.

Cultural distance Illusion of symmetry

Illusion of stability

CD between country A and B is similar to CD between country B and A. CD is assumed to be stable over time.

Illusion of linearity

Effect of CD might depend on the firm’s learning curve and is hence not linear.

Illusion of causality

CD shouldn’t be studied in isolation, but in relation to geographic, economical and institutional distance.

Illusion of discordance

Some CD’s matter more than others.

Assumption of corporate

Only incorporates variance at a

homogeneity

national level, but not on a corporate level.

Assumption of spatial

Only incorporates variance at a

homogeneity

national level, not on a regional level.

Chapter 6: International Innovation Kuemmerle’s idea: Many MNEs are decentralizing their R&Ds by building worldwide networks of R&D labs. 1) Home-base-exploiting sites = receive information from the central lab in the home country and adapt products to local demand 2) Home-base-augmenting sites = access local knowledge and report information back to central lab Many MNEs, particularly international projectors are building networks of internationally located R&D labs, instead of keeping all R&D within the home country. Two main reasons for the trend: 1. Many MNEs feel the need to be present in various knowledge and innovation clusters around the world.  It’s often essential to be in a host country to spot development and see possibilities of local resource use; 2. Because of the need for fast implementation, R&D centers must be close to the manufacturing facilities; and 3. (Because of ICT revolution, physical proximity is not always necessary anymore.) He found two types of host country R&D facilities: 1. Home-base-exploiting sites = flow of information to the facility from the central lab (Support manufacturing and help adapt to local needs) 2. Home-base-augmenting sites = flow of information from the facility to the central lab (Acts as the firms eyes and ears) 3 key strategies in the development of foreign R&D units: 1. Selecting the decision makers 2. Selecting the decisions and actions that strengthen the facility’s maximal capabilities

3. Selecting decisions and actions to maximize the lab’s contributions to the MNE’s overall corporate strategic goals. 1: Most MNEs set up a technology steering committee. This approach reduces bounded rationality. 2: = capability-strengthening fase Home-base-exploiting sites: Close to key market and manufacturing facilities. Initial leadership should be in hands of highly regarded managers that are familiar with the company’s culture and systems. (Main problem = distance between host country manufacturing and home country R&D) Home-base-augmenting sites: In critical knowledge clusters, well positioned to tap into new sources of innovations. Leadership should be in hands of prominent local scientists to nurture ties between the MNE and local scientific communities. (Main problem = no access to knowledge resources available without becoming an insider) 3: To maximize lab’s contributions to MNE’s strategic goals, communication between R&D labs, manufacturing and marketing operations should be high (esp. home-base-exploiting). Home-baseaugmenting should remain focused on strengthening their insider status. Unit leader ideals:  Respected scientists or engineers and skilled managers;  Ability to integrate new site into the company’s existing R&D  

network; Comprehensive understanding of technology trends; and Ability to overcome formal barriers when seeking access to new ideas in local universities and scientific communities.

Proves MNEs are increasingly adopting an interlinked network of host country facilities to improve their R&D efforts. Labs can play different roles, depending on their primary purpose (exploiting or augmenting). Limitations: 1. Ignores tension between host country lab(s) and central HQ in setting the research agenda;

2. Does not include the possibility of JV or SA as options to tap into the foreign countries’ knowledge; and 3. Does not consider hidden costs of offshoring.

Chapter 7: International sourcing and production Ferdows’ idea: Senior MNE managers should try to upgrade their host country factories to give them the ability to develop FSAs. Main question in the research of dozens of MNEs: “How can a factory located outside of a company’s home country be used as a competitive weapon not only in the market that it directly serves but also in every market served by the company?” Answer: depends on the mindset of home country senior managers. Think of the factory as just a tool for low-cost production  that’s what you get. Not a lot of resources allocated. Expect higher performance with innovation and customer service  more resources and more in return. Most successful manufacturing MNEs view their foreign factories as sources of FSAs beyond the ability to save costs. Three changes in the international business environment driving the assignment of new foreign factories roles:  International trade tariffs declined;  Modern manufacturing is increasingly technologically sophisticated and has complex supply-chain requirements (result is selection of



location based on the overall productivity level instead of just the lowest price); and Time frame available to move development to manufacturing has become shorter.

The article distinguishes among 6 possible roles for foreign manufacturing facilities. Two parameters: 1. Strategic purpose of plant 2. Level of FSAs

Level of distinct FSAs Weak

Strong

Access to knowledge and skill

Strategic

Outpost

Leader

Server

Contributor

Offshore

Source

Proximity to market

purpose of the plant Access to low cost production



Offshore factory: primary purpose: access low-cost production as an implementer on the input side. Output is determined by senior



management in the home country. Server factory: manufacture goods and supply a predefined market. Trade barriers, logistics costs and foreign exchange exposure are

 

 

reasons for establishment. Outpost factory: similar to ‘black hole’. Gather valuable information from expert home country clusters. Source factory: also receives resources to engage in resource recombination and FSAs development.  Best practice. More autonomy, skilled workforce, good infrastructure. (Strategic leader on the input side) Contributor factory: Lead factory: Most important in terms of resource recombination and FSAs development.

MNEs should upgrade their outpost, server and offshore factories to source, contributor and lead factories, so that they are able to develop FSAs.

Three stages: 1. Enhancing internal performance; 2. Accessing and developing external resources; and 3. Developing new knowledge that can benefit the overall MNE network. But, this often does not take place because:  Fear of relying on foreign subsidiaries by HQ;  Treating overseas factories like cash cows, neglecting long term 

investment; Creating instability by shifting production in reaction to exchange



rates and wage costs; and Government entices MNEs to locate in sometimes unattractive locations.

MNEs tend to place greater emphasis on intangible internal strengths and location advantages than tangible ones (costs, taxes). End result = ‘robust’ network of factories with FSA-developing roles. This is conducive to stability and security or internal MNE functioning over long-term, even with ‘high-cost’ locations. = Sharp contrast with ‘footloose’ approach. (Low exit barriers and capability of relocating manufacturing operations rapidly in response to changing cost conditions) Each facility should take on a leadership role in a specific area, avoiding duplication of R&D activities. Critique on Ferdows: 1. Ferdows believes that management should upgrade all factories; not necessarily true; 2. Ferdows underestimates the value of low cost (highly efficient) factories in host countries. This may still be important; and 3. 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 Lesser and Lightstone’s recommendations for how MNEs should deal with economic exposure. Economic exposure = the impact of changes in real exchange rates relative to the MNEs competitors. To minimize this impact senior management should strive to: - Have a flexible sourcing structure; and - Attain the capability to engage in exchange rate pass through.  Obtain a market leadership position with highly differentiated products. Significance Fluctuations in foreign exchange rates create the risk of net present value reduction of the firm’s future income stream. = Different from transaction exposure (= risk of financial losses resulting form outstanding but unfulfilled contractual commitments. Can often be fulfilled in home country currency) = Different from translation exposure (= risk of losses from the translation of accounting statements expressed in foreign currencies) “Measurement of economic exposure requires understanding the structure of the markets in which the company and its competitors obtain labor and materials and sell their products, and also of the degree of their flexibility to change markets, product mix, sourcing and technology.” If two competitors have the same structure regarding concepts above, any changes in exchange rates will impact both firms equally and advantage neither firm. If one of them, or a third, is different, fluctuating exchange rates will affect the firms differently.  Strongest market position, most flexibility and most diverse products will be least negatively affected.

Also domestic firms can incur economic exposure if their competitors have a competitive position that is positively affected by exchange rates. ‘Nominal rates’ = direct exchange ratio between currencies. ‘Real exchange rates’ = changes in the nominal rate minus the difference in inflation rates between two countries. Changes in real exchange rates affect the level of economic exposure. Three important elements: 1) Economic exposure should be viewed as a parameter that adds uncertainty to the firm’s location advantages. 2) The economic exposure concept implies that the location advantages benefiting an MNE should be considered also as a portfolio of potential risks for future cash flows. 3) MNEs can choose to develop specific FSAs allowing risk mitigation in the foreign currency area by ‘immunizing’ their products to economic exposure, thereby allowing full ‘exchange rate pass through’. ‘Exchange rate pass through’ = Adjusting the price to offset any increased costs arising from economic exposure.

Exposure absorption capability on the input side

Strong

1

3

Weak

2

4

Weak

Strong

Vertical axes = capability to adjust its sourcing structure to a potential new exchange rate reality, relative to competitors. (Flexibility)

Exchange rate pass through on the output side

Horizontal axis = capability to ‘pass through’ changes in real exchange rates. (Market leading position) 3 = most desirable. Economic exposure effects are absent.

2 = least favorable. Lack of economic exposure reduction. Mostly commodity-type products. 1 + 4 = intermediate cases. 3 typical economic exposure management tactics: 1. Separate business unit model Each business unit is assessed individually.  Trade-off between economies of scale and lowered economic exposure risks. 2. Company-wide portfolio model A portfolio of businesses and operational structures with offsetting (tegen elkaar op wegende) exposures, balancing each other.  Total lower rate of exposure, even though individual units might have higher levels of risk on their own. 3. Flexible operational planning mode Exploiting fluctuating exchange rates by switching production between facilities.  Trade-off between increased costs of carrying excess capacity and economic exposure risks. Managers that cannot set policy on economic exposure should not be held responsible for the effects of volatile exchange rates.

Chapter 9: International marketing Theodore Levitt’s idea: MNEs should not worry very much about customizing to local preferences. Technology has largely homogenized consumer preferences – most consumers simply want quality, reliability and low prices. Significance “The world’s needs and desires have been irrevocably homogenized (make uniform or similar). This makes the multinational corporation obsolete and the global corporation absolute.” Multi-centered MNEs  international projectors and centralized exporters. Reason: MNEs traditionally customized their products to cater to perceived cultural differences across countries and regions. Now, these preferences are converging (samenkomen) as technology brings the world closer together into one global market. If quality, reliability and low price are present, customers accept globally standardized products. Levitt’s argument in favor of globalization: ‘Companies that grasp the new ‘global’ reality and manufacture simplified coming out of scale-efficient manufacturing processes win the competitive battles against rivals continuing to customize products.’ Argument rests on two foundations: 1) Cultures and national societal tastes are not fixed, but subject to continuous change, with technology guiding such change towards homogenization. Cultural preferences follow one of two paths: Either they become insignificant to economic decision-making, or they diffuse and become the substance of global trends. 2) Converging tastes now allow companies to offer globally standardized products, harnessing economies of scale to deliver highquality, dependable goods at low costs.

Levitt does not advocate the systemic disregard of local or national differences. Some customization might still be necessary, if all efforts to achieve acceptance or standardized products and to change local preferences have been exhausted. Context and complementary perspectives John Quelch and Lisa Klein: The Internet can have both revenue-enhancing and cost-reducing effects in international operations. Only on the revenue-enhancing side they focus on network effects. The number and distribution of existing customers affects the value that the service has to the next customer. Network externality = a customer contributes to the overall quality and value of th...