Chapter 9

Chapter 9:Entry Strategies and Organizational StructuresPaul TaylorHannah SmithJeremy Bourne

First of all…

Please refrain from using your laptops (Mike)

Agenda

1. Entry Strategies and Ownership Structures

2. Basic Organizational Structures

3. Nontraditional Organizational Arrangements

4. Organizational Characteristics of MNCs

5. Case Study

Objectives• Identify common entry strategies for MNCs,

such as joint ventures and fully owned subsidiaries

• Explore business organizational charts

• Define keiretsus and describe their advantages

• Discuss formalization, specialization and centralization in the context of organizational structures

Entry Strategies and Ownership Structures

•Wholly owned subsidiary•Merger/acquisition•Alliance•Joint venture (JV)•Licensing•Franchising

•Chart p. 288

Export/Import

•Advantages:▫Easy way to go international▫Requires minimum investment

•Disadvantages:▫Regulations in other countries▫More transitional in nature

Wholly Owned Subsidiary• Overseas operation that is totally owned and

controlled by an MNC• Advantages:

▫Avoid transaction costs▫Full control, managerial efficiency▫High profits

• Disadvantages:▫High risk in one area▫Not efficient entering multiple countries▫Host countries feel MNC trying to take control▫Home country see this as exporting jobs

• Ex: Mizuho Financial Group

Mergers/Acquisitions• Cross-border purchase or exchange of equity involving two or more companies• Advantages:

▫Quickly expand resources▫Construct high-profit products in new markets

• Disadvantages:▫Cultural differences▫Time constraints▫Transaction costs

• Ex: Proctor and Gamble acquired Gillette, British Petroleum acquired Amoco

• Mergers

Alliances and Joint Ventures (JV)• Alliance – any type of cooperative

relationship among different firms• JV – a specific alliance where two or more

partners own or control a business• Nonequity venture – one group’s merely

providing a service for another (consulting, construction, mining)

• Equity joint venture – involves a financial investment by MNC in a business with local partner

• Ex: Area Energy (Exxon Mobil and Royal Dutch Shell)

Alliances and JV(cont.)• Advantages:

▫ Improvement of efficiency (economies of scale & scope, spread risk)

▫ Access to local partners’ knowledge of customers, market▫ Local partner can help deal with political factors▫ Overcome limits on foreign competition

• Disadvantages:▫ Market may not be large enough for desired goods and

services▫ Parties may not be on same page, not all in agreement

• Advice:▫ Know partners well, work on relationship to build trust▫ Expect differences in objectives among partners in

different countries▫ A company having the desired resource profile may not be

best partner▫ Be sensitive to partner’s needs

Licensing• An agreement that allows one party to use an

industrial property right (patent, trademark, logo, etc.) in exchange for payment to the other party (usually based on sales)

• Advantages:▫Avoid entry costs▫Don’t need lots of financial or managerial

resources• Disadvantages:

▫Time limit on license▫License may become obsolete due to competition

Franchising

•A business arrangement under which one party allows another to operate using its trademark, logo, product line, and methods of operation in return for a fee.

•Advantages:▫New stream of income for franchisor▫Quickly brought to market for franchisee

•Disadvantages:▫Franchisor will impose restrictions on

franchisee

Discussion Question

1. One of the most common entry strategies for MNCs is the joint venture. Why are so many companies opting for this strategy? Would a fully owned subsidiary be a better choice?

• Answer:▫ Joint Ventures are so popular because it allows companies to

improve efficiency and create economies of scale and scope while spreading the risk between the partners. It also gives the MNC access to the knowledge of its local partner that will help them better understand the market and its customers in that region, as well as the political issues going on in the region. It also lets the MNC overcome limits on foreign companies by becoming part of the insider group.

▫ Although a fully owned subsidiary would allow total control by the MNC and may produce higher profits, it is not a better choice because risks are higher, requires more investment, and host and home countries may have negative views of it.

Internet Exercise, pg. 309•www.ford.com•www.vw.com•What type of organizational arrangement(s)

do you see the two firms using in coordinating their worldwide operations?

•Which of the two companies’ arrangements is more modern?

•Does this increase that firm’s efficiency, or does it hamper the company’s efforts to contain costs and be more competitive?

Basic Organizational Structures

•Initial Division Structure - initial process of entering a market by way of joint ventures or import/export subsidiaries

Basic Organizational Structures

•Initial Division Structure

Basic Organizational Structures

•International Division Structure - a multinational structural arrangement that combines elements of function, product, and geographic designs, while relying on a network arrangement to link worldwide subsidiaries

Basic Organizational Structures

•International Division Structure

Basic Organizational Structures

•Global Structural Arrangements▫Global Product Division Structure - a

structural arrangement in which domestic divisions are given worldwide responsibility for product groups

▫Global Area Division Structure - a structure under which global operations are organized on a geographic rather than a product basis

▫Global Functional Structure - a structure that organizes worldwide operations primarily based on function and secondarily on product

Basic Organizational Structures

•Global Structural Arrangements▫Global Product Division Structure

Basic Organizational Structures

•Global Structural Arrangements▫Global Area Division Structure

Basic Organizational Structures

•Global Structural Arrangements▫Global Functional Structure

Basic Organizational Structures

•Mixed Organizational Structure - a structure that is a combination of a global product, area, or functional arrangement

▫Multinational Matrix Structure

Basic Organizational Structures

•Mixed Organizational Structure▫Multinational Matrix Structure

Basic Organizational Structures

•Transnational Network Structures - a multinational structural arrangement that combines elements of function, product, and geographic designs, while relying on a network arrangement to link worldwide subsidiaries

•Chart p. 297

Nontraditional Organizational Structures

•Mergers and Acquisitions•JVs and Strategic Alliances•Keiretsus•Electronic Network•Product Integration•Information Technology

Mergers & Acquisitions

•In recent years, the annual value of worldwide M&A’s has reached as high as $6 Trillion

•Firms try and fashion a structural arrangement that attempts to promote synergy while encouraging local initiative

•Addresses the needs of both firms

Keiretsus

•Definition: a large, often vertically integrated group of companies that cooperate and work closely with each other.

Keiretsus Example

•Mitsubishi Motors

•3 flagships firms within the keiretsus▫Mitsubishi Corporation▫Mitsubishi Bank▫Mitsubishi Heavy Industries

Discussion Question

2. Why are keiretsus popular? What benefits do they offer? How can small international firms profit from these structures? Give an example.

Discussion Question

2. Keiretsus create economies of scale and give you a competitive advantage through vertical integration. Small firms can benefit because they have an increased amount of resources through the MNC.

Organizational Characteristics of MNCs•Formalization

•Specialization

•Centralization

Discussion Question

3. In what way do formalization, specialization, and centralization have an impact on MNC organization structures? In your answer, use a well known firm such as IBM or Ford to illustrate the effects of these three characteristics.

Crossword activity

•Get excited

Case Study: Getting in on the Ground Floor (p. 311)

1. What type of organization design would you recommend that Ruehter use?

Case Study: Getting in on the Ground Floor (p. 311)

1. Initial division structure First worldwide subsidiary Just starting out, need to approach global

market cautiously

Case Study: Getting in on the Ground Floor (p. 311)

2. If there were joint R&D efforts, would this be a problem?

Case Study: Getting in on the Ground Floor (p. 311)

2. No No reason to fear joint R&D Dutch company already has strong R&D

prowess and seems to have huge potential

Questions?