International Business Bartlett and Ghoshal Chapter 2

International BusinessInternational Business

Bartlett and Ghoshal Chapter 2Jeff ShayUniversity of Montana

Class BusinessClass Business

Readings for next weekFocus on the Yip articleCore Competence article is a “classic”

Case study due next weekKomatsu Project GFollow guidelines in syllabusOne overhead from your exhibits

Integration/Responsiveness FrameworkIntegration/Responsiveness Framework

GlobalCoordination,Integration

High

High

Low

Low

Global

International

Transnational

Multi-national

Local responsiveness

Economic Forces for Global CoordinationEconomic Forces for Global Coordination

Economies of scaleSpreading fixed costs (i.e., plant & equipment) over a greater number of products

Economies of ScopeLowering costs through the production of a wide variety of productsSpreads fixed costs over more products or services

Factor costsAcquiring resources at lowest possible cost

Cultural Forces for Local DifferentiationCultural Forces for Local Differentiation

BehavioralGeert Hofstede’s Study117,000 IBM respondentsSurfaced four cultural dimensions:

• Power Distance• Uncertainty Avoidance• Masculinity/Femininity• Individualism/Collectivism

Differences in tastesHeineken: US versus EuropeSnickers: US versus Australia

Government Forces and the MNCGovernment Forces and the MNC

MNC represents:Source of fundsTechnologyExpertiseJobs

Government support for the MNC represents:Local-market or resources accessProfit and growth opportunitiesImproved competitive position

HOWEVER…

Host Country Government’s View of Host Country Government’s View of MNCsMNCs

Avoids or evades taxesRigs intercompany transfer pricingRun by foreigners from far awayImports (or doesn’t) foreign labor practicesOverpays (or underpays)Competes unfairly with local firms (or is in collusion with local firms)Transfers old technologies to the Third WorldWon’t they come invest (won’t they please go home)

MNC-Host Government Relationship:MNC-Host Government Relationship:A Study in “Love-Hate”A Study in “Love-Hate”

MNC MNC MNC

Host government

Sought forcapital,technology, andmanagement

Contributionsto social andeconomic needs

Courted for itsglobal efficiencyand world marketaccess

++

MNC MNC MNC

Resented for the nation’sdependence on it

Disliked for itsimpact on society

Feared for its powerand independence

--

Sources of Conflict: MotivatorsSources of Conflict: Motivators

MNCStrategic viability

Global competitiveness

Operational viabilityProfit maximization

Host GovernmentNational independence

Social, economic, and political

International competitiveness

Sources of Conflict: ObjectivesSources of Conflict: Objectives

MNCAccess to markets world-wideAbility to transfer resources freelyFreedom to integrate operations globally

Host GovernmentProtect national sovereignty from external influence

Economic dependenceSocial disruptionPolitical interference

Capture global benefits of:

Export marketsEfficient industrial baseLeading edge technology

Sources of Conflict: MeasuresSources of Conflict: Measures

MNCPrimarily financial

ProfitROIMarket share

Host GovernmentSocial cost/benefitPolitical returnIndustrial policy “fit”

MNC-HCG Relationship: The HCG’s MNC-HCG Relationship: The HCG’s Changing MotivationsChanging Motivations

Screeningforeign

investment

Influence operating conditions:-Import/Export-Transfer payments-Employment-Technology

Implementing industrial policy goals:-Sectorial plans-Functional programs

Implies a changing government role:

Attracting/ rejecting

investment proposals

Controlling flows:-Goods-Funds-Technology-People

Involvement in strategy:-Ownership-Local facilities functions-Strategic priorities

MNC-HCG Relationship: The MNC’s MNC-HCG Relationship: The MNC’s Changing MotivationsChanging Motivations

Seeking newmarket

opportunities

Capitalizing on accessto world-wide sourcing

TechnologyMarkets

Capitalizing on accessto world-wide sourcing

TechnologyMarkets

Developing a globalnetwork of integratedoperations

Implies a changing MNC role:

Building volume, market share

Efficiency drive:Movement of materials and funds to maximize profits

Implementing a global strategy, with each subsidiary having a contributing role

Shaping the Relationship:Shaping the Relationship:Sources of PowerSources of Power

MNCNo investment or exit optionAccess to needed resource (capital, technology, etc.)Willingness and ability to align with national prioritiesDevelopment of local support (shareholders, suppliers, etc.)Position in global economy (market, scale, competitivenessHome country support

HCGLegislative power

• Regulate operating and strategic decisions

Market power-government as a customerIncentives, supportsAttractiveness to competitorsLocal operations linkage to global position (“hostage”)Shift in power after investment (“obsolete bargain”)

Basis for cooperation or conflict:Basis for cooperation or conflict:Types of corporate responsesTypes of corporate responses

•National champion•Recipient of subsidies•Control of domestic market

•Cooperation-Technology-Market access

•Technology retention•Leverage global capabilities•Progressive escalation of commitment

•National consolidation

•Support through international market access•Diversification within host country

•Risk sharing•International resources and mkt access as bargaining chip

* National champion

•Local face•Highlight local benefits•Good citizenship

•Increase the cost of government•Reduce the value of local operation as a stand-alone unit

National companiesNationally responsive

MNCs Integrated MNCs

Gov

t. In

terv

entio

n L

ogic

sG

ovt.

Inte

rven

tion

Log

ics

Developmentof emergingindustries

Adjustment of declining

industries

Assertion ofnational

independence

MNC-HCG negotiations: A poker gameMNC-HCG negotiations: A poker game

ChipsNeed to assess the stakes of both sidesNeed to assess the relative bargaining power and means of leverage

• Shift over time?

CardsUnderstand both parties’ goals/priorities

• Internal diversity/disunity

Understand other party’s decision process• Who has the power/influence?• Negotiator’s personal position?

MNC-HCG negotiations: A poker gameMNC-HCG negotiations: A poker game

SkillDevelop clear negotiation posture and strategy

• Which arguments in which sequence?• Posture shifts (e.g., competitive to collaborate to

compromise

Think through tactics (time, location, format, negotiators)

• A human process

MNC Strategies and HCG PoliciesMNC Strategies and HCG Policies

Globally integrated strategiesShare benefits of integration with HCG (tax, citizenship costs)Need to specialize and integrate national operations

• Dislocation during rationalization – Rationalization – producing different components or

different portions of a product line in different parts of the world to take advantage of comparative advantages in labor, capital or raw materials

• Dependency on global network

Host government influence and control limited

MNC Strategies and HCG PoliciesMNC Strategies and HCG Policies

Multi Focal StrategiesAttempt global integration but negotiate strategic roles of national units with host governmentsLower ability to share economic benefits offset by higher host government’s influenceGreater host government influence traded for increased support

MNC Strategies and HCG PoliciesMNC Strategies and HCG Policies

Nationally Responsive StrategiesForego global integration to respond to host country’s national prioritiesExchange of value

• MNC applies resources and skills to local needs• Host government protects and subsidizes to offset

economic penalty• Host government influence in strategy and

operations is high

Nature of MNC-HCG RelationshipNature of MNC-HCG Relationship

What type of relationship is it?Involved partner (new EuroDisney)Interested stakeholder (Spain and Ford)Active adversary (Airbus countries and Boeing)

Depends on:Alignment of Interests and Distribution of Power

Varies by:Host country’s strategic importance (LDC v. EU countries)Industry structure and characteristics (shoes v. computers)Company’s competitive position and strategic posture

• IBM versus Honeywell

Pattern of industrial activity as a function of Pattern of industrial activity as a function of competitiveness of local production and capabilities of competitiveness of local production and capabilities of national firmsnational firms

Domestic production,

extensive exports

Foreign investment by

local companies

Imports, no national

production

Local investment by foreign firms

Strong

Strong

Domestic production,

extensive exports

Weak

Weak

Competitiveness oflocal factors

Capabilities oflocal firms

StrongStrong Weak

Weak

Competitiveness oflocal factors

Capabilities oflocal firms

However, the situation is not static: The government aspires tobuild national competitiveness

Step 1Import restrictions throughprotection: Pent-up demand

Step 2Import substitution: Acquiremissing factors

Step 3Fast market growth: Assistanceto infant domestic industry

Step 4Active competitionSelect winners, weed out losers

Step 5Build exports: Tradeand investment liberalization

Step 6Foreign investment by localcompanies when home countryfactor competitiveness deteriorates

Negotiating Mentality:Negotiating Mentality:A search for a “Win-Win” SolutionA search for a “Win-Win” Solution

Management perceptions and attitudes are key

Assumption of an adversarial relationship results in failed or flawed negotiationsAssumption of a collaborative relationship can lead to enduring solutions

Negotiations are the beginning of a lasting relationship

Require trust, fairnessVariable sum game allows “Win-Win” solution

Search for a “Win-Win” SolutionSearch for a “Win-Win” Solution

Converging Interests(e.g., global

competitiveness)

Underlying differences(e.g., measurement

criteria)

MutualInterest

Joint GainsCompetitiverelationship

Conflicting Goals

Evaluating markets:Evaluating markets:To Enter or Not to EnterTo Enter or Not to Enter

Opportunity cost:Cost of not participating

Precedent setting+Added managerial cost of diversity

vs

Strategiccountries

Tactical markets

Opportunisticmarkets

StrategicImportance

High

High

LowLow Government

Restrictions

Structural Response: Differentiate Posture by Market Structural Response: Differentiate Posture by Market (Ericsson example)(Ericsson example)

GlobalCoordination,Integration

High

High

Low

LowLocal responsiveness

Ecuador

Holland

Denmark

Brazil

Mexico

FranceItaly

IndustryCharacteristics

Firm’sCompetitive

Posture

HCGPolicies

Interdependenciesacross Businesses Linkages

ViableStrategicOptions

•Differentiation andselectivity in marketparticipation•Governments as protectors,partners, or adversaries•Required organizational andmanagerial capabilities

Industry Structure: Nature and CharacteristicsIndustry Structure: Nature and Characteristics

•Polarized industry categorization- Most industries have global and local aspects

Characteristics:National industry characteristics-Differentiated markets-National scale economies-Local competition

Global industry characteristics-Interdependent markets-Extra-national economies-Cross-market competition

Industry distribution:-Cement

-Metal containers

-Packaged goods

-INDUSTRIAL MACHINERY

-Automobiles-Consumer electronics-Semiconductors

-Air frames

Task distribution:

Service

Sales

Engineering

Manufacturing

Sourcing

Resources

Industry Structure: Forces of ChangeIndustry Structure: Forces of Change

Diverse forces of change are further breaking down polarized industry categories

Environmental influences• Market evolution• Government policies

Industry economics• Technological evolution• Changing logistics

Company actions• Triggers or impedes macro forces• Engaging in “global chess”

Developing Entry Strategies:Developing Entry Strategies:An Opportunistic ApproachAn Opportunistic Approach

Simple internationalization motivations

(e.g. market seeking)

Undeveloped management perspectives

(e.g. “international”)

Opportunistic, incremental entry decisions

May lead to expansion in:

* wrong business

* wrong country

* wrong mode

Developing Entry Strategies:Developing Entry Strategies:A Strategic ApproachA Strategic Approach

Sophisticated internationalization motivations

(e.g. markets and resource seeking, scanning and positioning

Developed management perspectives

(e.g. “transnational”)

Strategic entry decisions

* integrated into corporate objectives

* dependent on business an country analysis

* linked to internal resource and capabilities

The Big PictureThe Big Picture Corporate Strategic Objectives

Business analysis-Industry analysis (structures, economics)-Competitor analysis (share, position, intent)-Company competitive analysis (competitiveadvantages and vulnerabilities)

Country analysis-Market analysis (demand, channels, price)-Investment climate, risk (political, social,economic)-Host government conditions/concessions(tariffs, restrictions, incentives)

Internationalization Motivation and Objectives

Company Resources and Capabilities-Resource and skill audit (financial, technology, materials, management, and org.)-Risk Profile

Internationalization Strategy

Entry Strategy

Corporate Strategic Objectives

Business analysis Country analysis

Internationalization Motivation and Objectives

Company Resources and Capabilities

Internationalization Strategy

Entry Strategy

The Big PictureThe Big Picture

Product/marketobjectives andpriorities

Infrastructure:Value chain configuration

Mode of entry(ownership)

Penetrationandoperating plan

Organizationand control

Entry Mode AlternativesEntry Mode Alternatives

ExportIndirect, Direct (e.g., agent), Controlled (e.g., sales branch

ContractualLicense, Franchise, Management or Services Contract, Cooperation Agreements

InvestmentGreenfield, Acquisition, Joint Venture

Entry Mode AlternativesEntry Mode Alternatives

Each mode has distinctive costs and benefits and requires different managementChoice should be linked to strategic objective of market entryNeed to see operating mode as a dynamic option that evolves with environmental and strategic changes

Entry Mode and Strategic ObjectiveEntry Mode and Strategic Objective

Domestic production,

extensive exports

High

Good

Entry Mode: Joint Venture

Resources required: Moderate

Management demand:

Entry Mode: License

Resources required: Little or none

Management demand: Low

Entry Mode: Distributor

Resources required: Limited

Management demand: Moderate

Entry Mode: Wholly Owned Subsidiary

Resources required: High

Management demand: Very high

Low

Low

External AttractivenessPolitical and Investment Climate

InternalFit