IBS REVISION

CHAPTER 12/13

1. Overview of global expansion, profitability and profit growth

Global expansion helps firm to increase their profitability and rate of profit growth in ways not available to purely domestic enterprises. Company might face certain constraints by the need to customize its product offering, marketing strategy and business strategy to differing national conditions. Here are some advantages enjoyed by international firm: i. Expanding the market: leveraging products and competencies Increase growth by selling goods or services developed at home internationally o E.g.: Microsoft developed its software in the US from its earliest days the company has always focused on selling their software globally The returns are greater if indigenous competitors in the host country lack comparable products Success of firms that expand internationally depends on o The goods or services they sell o Their core competency skills within the firm that competitors cannot easily match or imitate Exists in any of firms value creation activities production, marketing, R&D, HR, etc. Bedrock of a firms competitive advantage, allowing it to reduce costs of value creations or to create perceived value in such a way that premium pricing is possible For some service company like retailers, restaurant chains, expanding market for their service is equivalent to replicating their business model in foreign nations o E.g.: Starbucks, McDonalds

ii. Location economies (b) Economies arising from performing a value creation activity in the optimal location for that activity, wherever in the world that might be Lowers costs of value creation and help firm achieve a low-cost position Enables a firm to differentiate its product offerings from those of competitors

Creating a global web

o o o By take advantage of location economies in different parts of the world Different stages of the value chain are dispersed to locations where perceived value is maximized or where cost of value creation is minimized E.g.: Airbus & Boeing produce airplanes but parts are produce elsewhere such as in Singapore for the door mechanism Apple products designed in US, parts made in China, assembles in Taiwan Transportation costs and trade barriers E.g.: NZ becomes an uneconomical location serving global market due to high transportation cost despite competitive advantage in mobile assembly operations Assessing political and economic risks when making location decision E.g., despite having a pool of cheap semi-skilled labors, Thailand might not be an ideal location as other developing economies like Vietnam or China due to political instability and natural disasters. Inappropriate economic policies imposed by the government could lead to foreign exchange risk making the location unfavorable.

Limitations:
o

iii. Experience effects (c) Systematic reductions in production costs occurring over the product life o By moving down the experience curve, firms reduce the cost of creating value Produce more, more experience & expertise gained -> able to cut cost To get down the experience curve quickly, firms can use a single plant to serve global market Can be explained by learning effects and economies of scale Learning effects cost savings coming from learning by doing o When labor productivity increases Individuals learn the most efficient ways to perform particular tasks Managers learn how to manage new operation more efficiently

Economies of scale refers to reductions in unit cost achieved by producing a large volume of a product o Source of EOS include: Spreading fixed costs over a large volume Utilizing production facilities more intensively Increasing bargaining power with suppliers Strategic significance o Moving down the experience curve allows firm to reduce its cost of creating value and increase profitability Firm can have a cost advantage vis--vis its competitors o As underlying sources of experience-based cost economies are plant based, one method to progress downward for firm is to increase volume produced by a single plant as rapid as possible o International firm serving global market will be able to build accumulated volume the domestic ones or those with multiple production locations. o Combining these two factors we have serving a global market from a single location which establishes a low-cost position Firm now can act as a barrier to new competition o Example: Intel must pursue experience curve effect, serving world market from a limited number of plants due to heavy investment required in building state-of-the-art facility to produce microprocessors. iv. Earn a greater return Leverage skills developed in foreign operations and transfer them elsewhere in the firm

d) (i) The pressure of international business

Firms that compete in the global market place face 2 conflicting types of competitive pressure o Pressures limit the firms ability to realize location economies and experience effects, leverage products and transfer skills within the firm Pressure for cost reductions force firm to lower unit costs o E.g. Dell Computers cut down unit cost by Directly selling to customer without intermediaries -> allow customization Built manufacturing plant in Penang to serve Asia Pacific region o Greatest under the following circumstances: In industry producing commodity type product that fill universal needs (exist when the tastes and preferences of consumers in different nations are similar if not identical) where price is the main competitive weapon When major competitors are based in low cost locations Sony (consumer electronics) almost went out of biz since it continued to produce in Japan while others had moved to countries where labors are cheaper such as Malaysia, Thailand Where there is persistent excess capacity Ability to deal with emergencies like natural disasters, economic downturns Where consumers are powerful and face low switching costs Consumers nowadays are more technical savvy, they face low switching cost when change from one device to another Pressures to be locally responsive require the firm to adapt its product to meet local demands in each market a strategy that raises cost o Rationale: Difference in consumer tastes and preferences. E.g., for skincare product, Asian customers prefer whitening product while the Scandinavians like ultra-moisturizing products due to dry weather Differences in traditional practices and infrastructure. E.g., cars in Singapore and Britain are right-hand drive Differences in distribution channels Host government demands. E.g., strict health regulations for any food products entering France; advertisements banned in certain countries due to political reason o Insurance company cannot have the same package offered to the whole world due to different life expectancy in different countries, e.g., 80 in Singapore but in Africa it would be lower.

(ii) The four basic international business strategies

Each strategy has its advantages and disadvantages. The appropriateness of each strategy varies with the extent of pressures for cost reductions and local responsiveness.

FIGURE 1 - FOUR BASIC STRATEGIES

International take pdts 1st produced for the domestic market and sell them
internationally with only minimal local customization o Make sense when there are low cost pressures and low pressures for local responsiveness o Firms tend to centralize product development functions at home (e.g., R&D). o However, they also tend to establish manufacturing and marketing functions in each major country in which they do business although the head office retains tight control o E.g., Procter & Gamble has traditionally had production facilities in all its major markets outside the United States, including Britain, Germany, and Japan. These facilities, however, manufactured differentiated products that had been developed by the US parent firm and were often marketed using the marketing message developed in the United States. Historically, local responsiveness at P&G has been limited.

Global standardization focus on increasing profitability and profit growth by

reaping the cost reduction from EOS, learning effects and location economies o Strategic goal is to pursue a low-cost strategy on a global scale o Make sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal o E.g., semiconductor manufacturer like Intel pursues global standardization strategy

Localization increase profitability by customizing goods or services so that they

match tastes and preferences in different national markets o Appropriate when there substantial differences across nations with regard to consumer tastes and preferences and when cost pressure are not too intense o By customizing the product offering, firm increase value of the product in the local market o However, there might be limitation in cost cutting due to involvement of some duplications of functions and smaller production runs o E.g.: Windows OS and Microsoft did well locally and international then penetrated the European market by localizing Windows (different language packs for friendly usage)

Transnational strategy trying to simultaneously achieve low cost through location

economies, EOS and learning effects, differentiate product offering across geographic markets to account for local differences; and foster a multidirectional flow of skills between different subsidiaries in the firms global network of operations o Make senses when cost pressures are intense and pressure for local responsiveness are intense o E.g., Caterpillar (standard earth-moving machine, mining equipment) now has to compete with Komatsu products (high local adaptability and low cost) produce modular designs in large quantity, mix and match of parts and bodies By pursuing this strategy, Caterpillar realized many of the benefits of global manufacturing while responding to pressures for local responsiveness by differentiating its product among national markets. lower the cost overall and higher local responsiveness Meanwhile, Komatsu and Hitachi, which are still wedded to a Japancentric global strategy, have seen their cost advantages evaporate and have been steadily losing market share to Caterpillar.

For another example consider Unilever. Once a classic multidomestic firm, Unilever has had to shift toward more of a transnational strategy. A rise in low-cost competition, which increased cost pressures, has forced Unilever to look for ways of rationalizing its detergents business. During the 1980s, Unilever had 17 different and largely self-contained detergents operations in Europe alone. The duplication in assets and marketing was enormous. Also, because Unilever was so fragmented it could take as long as four years for the firm to introduce a new product across Europe. Now Unilever is trying to weld its European operation into a single entity, with detergents being manufactured in a handful of costefficient plants, and standard packaging and advertising being used across Europe. According to company estimates, the result could be an annual cost saving of over $200 million. At the same time, however, due to national differences in distribution channels and brand awareness, Unilever recognizes that it must still remain locally responsive, even

while it tries to realize economies from consolidating production and marketing at the optimal locations. o

Difficult to achieve

Simultaneously trying to achieve cost efficiencies, global learning, and local responsiveness places contradictory demands on an organization. Differentiating the product to respond to local demands in different markets raise costs, which runs counter the goal of reducing cost. Firms that attempt to pursue a transnational strategy can become bogged down in an organizational morass that only leads to inefficiencies. While no one doubts that in some industries the firm that can adopt a transnational strategy will have a competitive advantage, but in other industries, global, localization, and international strategies remain viable. In the semiconductor industry, for example, pressures for local customization are minimal and competition is purely a cost game, in which case a global strategy, not a transnational strategy, is optimal. This is the case in many industrial goods markets where the product serves universal needs. But the argument can be made that to compete in certain consumer goods markets, such as the automobile and consumer electronics industry, a firm has to try to adopt a transnational strategy. Solution: using global matrix structure Horizontal differentiation proceeds along 2 dimensions: product division and geographic area reinforcing the idea of dual responsibility dual hierarchy structure which can lead tp conflict and perpetual power struggles between the areas and product divisions Firm tends to mix relatively high degree of centralization for some operating decisions (particularly production and R&D) with high degree of decentralization for other operating decisions (like marketing due to high requirement for local responsiveness) Need for coordination between subunits is high due to high level of interdependence of subunits implied by use of an array of formal and informal integrating mechanisms which can result in significant performance ambiguity, in turn, raising cost control -> output and bureaucratic control to reduce In short, while a transnational strategy appears to offer the most advantages, implementing a transnational strategy raises difficult organizational issues.

Strategy

Advantages

Disadvantages

Global standardization International

Exploit experience curve effects Exploit location economies Transfer distinctive competencies to foreign markets

Lack of local responsiveness

Lack of local responsiveness Inability to realize location economies Failure to exploit experience curve effects Inability to realize location economies Failure to exploit experience curve effects Failure to transfer distinctive competencies to foreign markets Difficult to implement due to organizational problems

Localization

Customize product offerings and marketing in accordance with local responsiveness

Transnational

Exploit experience curve effects Exploit location economies Customize product offerings and marketing in accordance with local responsiveness Reap benefits of global learning

FIGURE 2 - THE ADVANTAGES AND DISADVANTAGES OF THE FOUR STRATEGIES

f) Vertical integration
A firm's vertical differentiation determines where in its hierarchy the decisionmaking power is concentrated. For example, are production and marketing decisions centralized in the offices of upper-level managers, or are they decentralized to lower-level managers? There are arguments for centralization and other arguments for decentralization. i. Arguments for Centralization

Facilitate coordination

For example, consider a firm that has a component-manufacturing operation in Taiwan and an assembly operation in Mexico. There may be a need to coordinate the activities of these two operations to ensure a smooth flow of products from the component operation to the assembly operation. This might be achieved by centralizing production scheduling decisions at the firm's head office.

Ensure that decisions are consistent with organizational objectives

When decisions are decentralized to lower-level managers, those managers may make decisions at variance with top management's goals.

Give top-level managers the means to bring about needed major organizational changes. By concentrating power and authority in one
individual or a top-management team, Avoid the duplication of activities carried on by various subunits within the organization.

For example, many international firms centralize their R&D functions at one or two locations to ensure that R&D work is not duplicated. Similarly, production activities may be centralized at key locations for the same reason.

ii.

Arguments for Decentralization

Relieves the burden of centralized decision-making

o o Overburden can result in poor decisions Behavioral scientists have long argued that people are willing to give more to their jobs when they have a greater degree of individual freedom and control over their work

Shown to motivate individuals

Permits greater flexibility

More rapid response to environmental changes--because decisions do not have to be "referred up the hierarchy" unless they are exceptional. Result in better decisions o Decisions are made closer to the spot by individuals who (presumably) have better information than managers several levels up in a hierarchy. Increase control. o Can be used to establish relatively autonomous, self-contained subunits within an organization. o Subunit managers can then be held accountable for subunit performance since they have fewer alibis o

iii.

Strategy and Centralization in an International Business

The choice between centralization and decentralization depends on the type of decision and the firm's strategy. Decisions regarding overall firm strategy, major financial expenditures, financial objectives, and the like are typically centralized at the firm's

headquarters. However, operating decisions--such as those relating to production, marketing, R&D, and human resource management--may or may not be centralized depending on the firm's international strategy. Consider firms pursuing a global strategy. They must decide how to disperse the various value creation activities around the globe so location and experience economies can be realized. The head office must decide where to locate R&D, production, marketing, and so on. In addition, the globally dispersed web of value creation activities that facilitates a global strategy must be coordinated. All this creates pressures for centralizing some operating decisions. In contrast, the emphasis on local responsiveness in MNCs creates strong pressures for decentralizing operating decisions to foreign subsidiaries. Thus, in the classic multidomestic firm, foreign subsidiaries have autonomy in most production and marketing decisions. International firms tend to maintain centralized control over their core competency and to decentralize other decisions to foreign subsidiaries. This typically centralizes control over R&D and/or marketing in the home country and decentralizes operating decisions to the foreign subsidiaries. Microsoft Corporation, which fits the international mode, centralizes its product development activities (where its core competencies lie) at its Redmond, Washington, headquarters and decentralizes marketing activity to various foreign subsidiaries. Thus, while products are developed at home, managers in the various foreign subsidiaries have significant latitude for formulating strategies to market those products in their particular settings. The situation in transnational firms is more complex. The need to realize location and experience curve economies requires some degree of centralized control over global production centers (as it does in global firms). However, the need for local responsiveness dictates the decentralization of many operating decisions, particularly for marketing, to foreign subsidiaries. Thus, in transnational firms, some operating decisions are relatively centralized, while others are relatively decentralized. A substantial degree of decentralization is required if subsidiaries are going to have the freedom to develop their own skills and competencies. So for this reason too, the pursuit of a transnational strategy requires a high degree of decentralization

g) Horizontal integration
Concerned with how the firm decides to divide itself into subunits on the basis of function, type of business, or geographical area. Most firms begin with no formal structure and as they grow, organization is typically split into functions reflecting the firm's value creation activities (e.g., finance, production, marketing, R&D) functional structure o These functions are typically coordinated and controlled by a topmanagement team o Decision making in this functional structure tends to be centralized. Further horizontal differentiation may be required if the firm significantly diversifies its product offering.

For example, although Philips NV started as a lighting company, it now also has activities in consumer electronics (e.g., visual and audio equipment), industrial electronics (integrated circuits and other electronic components), and medical systems (CT scanners and ultrasound systems). In such circumstances, problems of coordination and control arise when different business areas are managed within the framework of a functional structure. It becomes difficult to identify the profitability of each distinct business area, and it is difficult to run a functional department, such as production or marketing. To solve the problems of coordination and control, most firms switch to a product division structure o ith a product division structure, each division is responsible for a distinct product line (business area).

Thus, Philips has divisions for lighting, consumer electronics, industrial electronics, and medical systems. Each product division is set up as a self-contained, largely autonomous entity with its own functions. The responsibility for operating decisions is typically decentralized to product divisions, which are then held accountable for their performance. Headquarters is responsible for the overall strategic development of the firm and for the financial control of the various divisions. When firms have expanded abroad they have typically grouped all their international activities into an international division Regardless of the firm's domestic structure, its international division tends to be organized on geography. In time it might prove viable to manufacture the product in each country, and so production facilities would be added on a country-by-country basis. o For firms with a functional structure at home, this might mean replicating the functional structure in the foreign market.

For firms with a divisional structure, this might mean replicating the divisional structure in the foreign market. Problem arises -inherent potential for conflict and coordination problems between domestic and foreign operations. o This can inhibit the worldwide introduction of new products, the transfer of core competencies between domestic and foreign operations, and the consolidation of global production at key locations so as to realize location and experience curve economies Firms that continue to expand internationally abandon this structure and adopt o worldwide product division structure adopted by diversified firms that have domestic product divisions appropriate for firms pursuing global or international strategies allows for worldwide coordination of value creation activities of each product division designed to help overcome the coordination problems that arise with the international division and worldwide area provides an organizational context in which it is easier to pursue the consolidation of value creation activities at key locations necessary for realizing location and experience curve economies facilitates the transfer of core competencies within a division's worldwide operations and the simultaneous worldwide introduction of new products Main problem: limited voice given to area or country managers resulting in a lack of local responsiveness, o worldwide area structure adopted by undiversified firms whose domestic structures are based on functions divides the world into geographic areas which tends to be a selfcontained, largely autonomous entity with its own set of value creation decentralize operations authority and strategic decisions, with headquarters retaining authority for the overall strategic direction of the firm and overall financial control facilitates local responsiveness each area can customize product offerings, marketing strategy, and business strategy to the local conditions. Weakness: encourages fragmentation of the organization into highly autonomous entities. difficult to transfer core competencies between areas and to undertake the rationalization in value creation activities required for realizing location and experience curve economies. consistent with a localization strategy o

Global Matrix Structure firms attempt to minimize the limitations of worldwide area structure and worldwide product divisional structure o allows for horizontal differentiation along two dimensions: product division and geographical area o dual responsibility is reinforced by giving product divisions and geographical areas equal status within the organization o can be clumsy and bureaucratic. It can require so many meetings that it is difficult to get any work done o Lead to conflict and perpetual power struggles between the areas and the product divisions, catching many managers in the middle. o Result in Such finger pointing between division as something goes wrong Compromise accountability, enhance conflict, and allow headquarters to lose control over the organization.

h) Performance ambiguity
The key to understanding the relationship between international strategy and control systems is the concept of performance ambiguity. Exists when the causes of a subunit's poor performance are ambiguous. o common when a subunit's performance depends partly on the performance of other subunits; or, when there is a high degree of interdependence between subunits within the organization Raises the costs of control. Low when firms with a localization strategy High in international firms o Integration is required to facilitate the transfer of core competencies. o Since the success of a foreign operation depends partly on the quality of the competency transferred from the home country, performance ambiguity can exist. Higher in firms with global standardization strategy o the pursuit of location and experience curve economies leads to the development of a global web of interdependent value creation activities Highest of all in transnational firms. o Because they emphasize the multidirectional transfer of core competencies o The extremely high level of integration within transnational firms implies a high degree of joint decision making, and the resulting interdependencies create plenty of alibis for poor performance.

i)Synthesis: Strategy and Architecture

Strategy Structure and Controls Vertical Differentiation Horizontal Differentiation Need for coordination Integrating mechanisms Performance ambiguity Need for cultural controls

Multidomestic Decentralized

International

Global

Transnational Mixed centralized and decentralized Informal Matrix Very high Very many Very high Very High

Core competency Some centralized centralized; restdecentralized Worldwide product division Moderate Few Moderate Moderate Worldwide product division High Many High High

Worldwide area structure Low None Low Low

CHAPTER 14

a) Entry modes
Turnkey Projects

Firms that specialize in the design, construction, and start-up of turnkey plants are common in some industries. o o Contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation--hence, the term turnkey.

Means of exporting process technology to other countries. Most common in the chemical, pharmaceutical, petroleum refining, and metal refining industries, all of which use complex, expensive production technologies.

Licensing

An arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee. o Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.

For example, to enter the Japanese market, Xerox, inventor of the photocopier, established a joint venture with Fuji Photo that is known as Fuji-Xerox. Xerox then licensed its xerographic know-how to Fuji-Xerox. In return, Fuji-Xerox paid Xerox a royalty fee equal to 5 percent of the net sales revenue that Fuji-Xerox earned from the sales of photocopiers based on Xerox's patented know-how. In the Fuji-Xerox case, the license was originally granted for 10 years, and it has been renegotiated and extended several times since. The licensing agreement between Xerox and Fuji-Xerox also limited Fuji-Xerox's direct sales to the Asian Pacific region. Franchising

Similar to licensing but tends to involve longer-term commitments than licensing. Franchiser not only sells intangible property to the franchisee (normally a trademark), but also insists that the franchisee agree to abide by strict rules as to how it does business. Franchiser will also often assist the franchisee to run the business on an ongoing basis.

Franchiser typically receives a royalty payment, which amounts to some percentage of the franchisee's revenues. Employed primarily by service firms

McDonald's is a good example of a firm that has grown by using a franchising strategy. McDonald's has strict rules as to how franchisees should operate a restaurant. These rules extend to control over the menu, cooking methods, staffing policies, and design and location of a restaurant. McDonald's also organizes the supply chain for its franchisees and provides management training and financial assistance. Joint Ventures

Establishing a firm that is jointly owned by two or more otherwise independent firms. Fuji-Xerox, for example, was set up as a joint venture between Xerox and Fuji Photo A popular mode for entering a new market. The most typical joint venture is a 50/50 venture, in which there are two parties, each of which holds a 50 percent ownership stake and contributes a team of managers to share operating control.

Wholly Owned Subsidiaries

Firm owns 100 percent of the stock. Can be done two ways. o Either set up a new operation in that country; or o Acquire an established firm and use that firm to promote its products (as Merrill Lynch did when it acquired various assets of Yamaichi Securities).

Entry Mode Advantage Avoids the often-substantial costs of Exporting establishing manufacturing operations in the host country Ability to realize location and experience curve economies

Disadvantage Not be appropriate if there are lower-cost locations for mfg. pdt abroad
Many US electronics firms have moved some of their manufacturing to the Far East because of the availability of low-cost, highly skilled labor; then export from that location to the rest of the world, including US

This is how Sony came to dominate the global TV market, how Matsushita came High transport costs to dominate the VCR market, and how many Japanese auto firms made inroads Trade barriers into the US auto market. An implicit threat by the US Congress to impose tariffs on imported Japanese autos led many Japanese auto firms to set up manufacturing plants in the United States.

Problems with local marketing agents

Foreign agents often carry the products of competing firms and so have divided loyalties

Turnkey contracts

Ability to earn returns from process technology skills in countries where FDI is restricted
Govt. of many oil-rich countries have set out to build their own petroleum refining industries, so they restrict FDI in their oil and refining sectors. But because many of these countries lacked petroleum-refining technology, they gained it by entering into turnkey projects with foreign firms that had the technology

Lack of long-term market presence Creating efficient competitors

Many of the Western firms that sold oil refining technology to firms in Saudi Arabia, Kuwait, and other Gulf states now find themselves competing with these firms in the world oil market

Less risky than conventional FDI.

In a country with unstable political and economic environments, a longer-term investment might expose the firm to unacceptable political and/or economic risks (e.g., the risk of nationalization or of economic collapse).

If the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors

Licensing

Low development costs and risks (attractive for firms lacking the capital to develop operations overseas) When a firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market. When a firm wishes to participate in a foreign market but is prohibited from doing so by barriers to investment.
Formation of the Fuji-Xerox joint venture Xerox wanted to participate in the Japanese market but was prohibited from setting up a wholly owned subsidiary by the Japanese government. So Xerox set up the joint venture with Fuji and then licensed its know-how to the joint venture.

Lack of control over manufacturing, marketing Inability to realize location and experience curve economies

Inability to engage in global strategic coordination Lack of control over technology

RCA Corporation, for example, once licensed its color TV technology to Japanese firms including Matsushita and Sony. The Japanese firms quickly assimilated the technology, improved on it, and used it to enter the US market. Now the Japanese firms have a bigger share of the US market than the RCA brand

When a firm possesses some intangible property that might have business applications, but it does not want to develop those applications itself.
Coca-Cola has licensed its famous

trademark to clothing manufacturers, who have incorporated the design into their clothing (e.g., Coca-Cola T-shirts).

Franchising

Low development costs and risks

A service firm can build up a global presence quickly and at a relatively low cost and risk, as McDonald's has.

Inhibit firms ability to take profits our of one country to support competitive attacks in another

Lack of control over quality due to geographic distance from the firm and franchisee
A business traveler checking in at a Hilton International hotel in Hong Kong can reasonably expect the same quality of room, food, and service that she would receive in New York. The Hilton name is supposed to guarantee consistent product quality. However, if the business traveler has a bad experience at the Hilton in Hong Kong, she may never go to another Hilton hotel and may urge her colleagues to do likewise

Joint ventures

Access to local partner's knowledge

For many US firms, joint ventures have involved the US company providing technological know-how and products and the local partner providing the marketing expertise and the local knowledge necessary for competing in that country. This was the case with the Fuji-Xerox joint venture.

Lack of control over technology

The joint venture between Boeing and a consortium of Japanese firms to build the 767 airliner raised fears that Boeing was unwittingly giving away its commercial airline technology to the Japanese.

Inability to realize location and experience economies

Consider the entry of Texas Instruments (TI) into the Japanese semiconductor market. When TI established semiconductor facilities in Japan, it did so for the dual purpose of checking Japanese manufacturers' market share and limiting their cash available for invading TI's global market. The strategy required the Japanese subsidiary to run at a loss if necessary. Few if any potential joint venture partners would have been willing to accept such conditions, since it would have necessitated a willingness to accept a negative return on their investment.

Sharing development costs and risks Politically acceptable

Wholly owned subsidiaries

Protection of technology/ core competencies

Many high-tech firms prefer this entry mode for overseas expansion (e.g., firms in the semiconductor, electronics, and pharmaceutical industries)

Potential conflicts and battles for control between the investing firms due to differences in objectives High costs and risks

Ability to engage in global strategic coordination due to tight control

over operations Ability to realize location and experience economies

b) Greenfield or Acquisition?

Greenfield strategy build a subsidiary from the ground up Acquisition strategy acquire an existing company

c) Strategic Alliance

Cooperative agreements between potential or actual competitors Run the range from formal joint ventures, in which two or more firms have equity stakes (e.g., Fuji-Xerox), to short-term contractual agreements, in which two companies agree to cooperate on a particular task (such as developing a new product).

Advantages

facilitate entry into a foreign market

For example, Motorola initially found it very difficult to gain access to the Japanese cellphone market. The turning point for Motorola came in 1987 when it allied itself with Toshiba to build microprocessors. Toshiba provided Motorola with marketing help, including some of its best managers and helped Motorola in the political game of securing government approval to enter the Japanese market and getting radio frequencies assigned for its mobile communications systems.

allow firms to share the fixed costs (and associated risks) of developing new products or processes

Motorola's alliance with Toshiba also was partly motivated by a desire to share the high fixed costs of setting up an operation to manufacture microprocessors. The microprocessor business is so capital intensive-Motorola and Toshiba each contributed close to $1 billion to set up their facility-that few firms can afford the costs and risks by themselves. Similarly, the alliance between Boeing and a number of Japanese companies to build the 767 was motivated by Boeing's desire to share the estimated $2 billion investment required to develop the aircraft.

Bring together complementary skills and assets that neither company could easily develop on its own

An example is the alliance between France's Thomson and Japan's JVC to manufacture videocassette recorders. JVC and Thomson are trading core competencies; Thomson needs product technology and manufacturing skills, while JVC needs to learn how to succeed in the fragmented European market. Similarly AT&T struck a deal in 1990 with NEC Corporation of Japan to trade technological skills. AT&T gave NEC some of its computer-aided design technology and NEC is giving AT&T access to the technology underlying its advanced logic computer chips.

firm establish technological standards for the industry that will benefit the firm.

For example, in 1992, Philips NV allied with its global competitor, Matsushita, to manufacture and market the digital compact cassette (DCC) system Philips had developed. Philips's motive was that this linking with Matsushita would help it establish the DCC system as a new technological standard in the recording and consumer electronics industries. The issue was important because Sony had developed a competing "mini compact disk" technology that it hoped to establish as the new technical standard. Since the two technologies did very similar things, there was at most only room for one new standard. Philips saw its alliance with Matsushita as a tactic for winning the race. Disadvantages

give competitors a low-cost route to new technology and markets

For example, US and Japanese firms are part of an implicit Japanese strategy to keep higher-paying, higher-value-added jobs in Japan while gaining the project engineering and production process skills that underlie the competitive success of many US companies. Japanese successes in the machine tool and semiconductor industries were largely built on US technology acquired through strategic alliances. US managers are aiding the Japanese in achieving their goals by entering alliances that channel new inventions to Japan and provide a US sales and distribution network for the resulting products. Although such deals may generate short-term profits, , in the long run the result is to "hollow out" US firms, leaving them with no competitive advantage in the global marketplace.

Making Alliances Work

Partner Selection a good ally/partner

o o o helps the firm achieve its strategic goals and has capabilities that the firm lacks and that it values shares the firm's vision for the purpose of the alliance will not exploit the alliance for its own ends; t to expropriate the firm's technological know-how while giving away little in return.

For example, IBM is involved in so many strategic alliances that it would not pay the company to trample roughshod over individual alliance partners. This would tarnish IBM's reputation of being a good ally and would make it more difficult for IBM to attract alliance partners. Since IBM attaches great importance to its alliances, it is unlikely to engage in the kind of opportunistic behavior. Similarly, their reputations make it less likely (but by no means impossible) that such Japanese firms as Sony, Toshiba, and Fuji, which

have histories of alliances with non-Japanese firms, would opportunistically exploit an alliance partner.

Alliance Structure
o designed to make it difficult (if not impossible) to transfer technology not meant to be transferred

In the alliance between General Electric and Snecma to build commercial air craft engines, for example, GE reduced the risk of excess transfer by walling off certain sections of the production process. The modularization effectively cut off the transfer of what GE regarded as key competitive technology, while permitting Snecma access to final assembly. Similarly, in the alliance between Boeing and the Japanese to build the 767, Boeing walled off research, design, and marketing functions considered central to its competitive position, while allowing the Japanese to share in production technology. Boeing also walled off new technologies not required for 767 production. o o Contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner Allow for skills and technologies swaps with equitable gain. Crosslicensing agreements are one way to achieve this goal.

For exjample, in the alliance between Motorola and Toshiba, Motorola has licensed some of its microprocessor technology to Toshiba, and in return, Toshiba has licensed some of its memory chip technology to Motorola. o Reduce risk of opportunism by an alliance partner.

The long-term alliance between Xerox and Fuji to build photocopiers for the Asian market perhaps best illustrates this. Rather than enter into an informal agreement or a licensing arrangement (which Fuji Photo initially wanted), Xerox insisted that Fuji invest in a 50/50 joint venture to serve Japan and East Asia. This venture constituted such a significant investment in people, equipment, and facilities that Fuji Photo was committed from the outset to making the alliance work in order to earn a return on its investment. By agreeing to the joint venture, Fuji essentially made a credible commitment to the alliance. Given this, Xerox felt secure in transferring its photocopier technology to Fuji.

Managing the Alliance

o o Building Trust building interpersonal relationships between the firms' managers. Learning from Partners diffusion of knowledge

For example, consider the 10-year alliance between General Motors and Toyota constituted in 1985. Toyota quickly learned about US supply, transportation, management of US

workers and opened its own plant in 1988. On the other hand, possibly all GM got was a new product, the Chevrolet Nova.

d) Selecting entry mode

A firm expanding internationally must decide o which markets to enter o when to enter them and on what scale o how to enter them (the choice of entry mode) Which Foreign Markets? Firms need to assess the long run profit potential of each market The most favorable markets are politically stable developed and developing nations with free market systems, low inflation, and low private sector debt The less desirable markets are politically unstable developing nations with mixed or command economies, or developing nations where speculative financial bubbles have led to excess borrowing Success firms usually offer products that have not been widely available in the market and that satisfy an unmet need Timing of Entry Entry is early when an international business enters a foreign market before other foreign firms Entry is late when a firm enters after other international businesses have already established themselves in the market Firms entering a market early can gain first mover advantages including

i.

ii.

o o

o o o o o

the ability to pre-empt rivals and capture demand by establishing a strong brand name the ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants the ability to create switching costs that tie customers into their products or services making it difficult for later entrants to win business First mover disadvantages are the disadvantages associated with entering a foreign market before other international businesses These may result in pioneering costs (costs that an early entrant has to bear that a later entrant can avoid) such as the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes the costs of promoting and establishing a product offering, including the cost of educating the customers

iii.

Scale of Entry and Strategic Commitments Firms that enter foreign markets on a significant scale make a major strategic commitment that changes the competitive playing field o This involves decisions that have a long term impact and are difficult to reverse

Small-scale entry can be attractive because it allows the firm to learn about a foreign market, but at the same time it limits the firms exposure to that market

There are no right decisions with foreign market entry, just decisions that are associated with different levels of risk and reward Firms in developing countries can learn from the experiences of firms in developed countries

CHAPTER 7

a) Internalization (market imperfection) theory

An extension of the market imperfection theory: to obtain a higher return on its investment, a firm will transfer its superior knowledge to a foreign subsidiary rather than sell it in the open market Market imperfections are factors that inhibit markets from working perfectly. Arise in two circumstances: o when there are impediments to the free flow of products between nations, o when there are impediments to the sale of know-how

Impediments to Exporting

Governments are the main source By placing tariffs on imported goods, governments can increase the cost of exporting relative to FDI and licensing. By limiting imports through the imposition of quotas, governments increase the attractiveness of FDI and licensing.

For example, the wave of FDI by Japanese auto companies in the United States during the 1980s was partly driven by protectionist threats from Congress and by quotas on the importation of Japanese cars. For Japanese auto companies, these factors have decreased the profitability of exporting and increased the profitability of FDI. Impediments to the Sale of Know-How

Increase the profitability of FDI relative to licensing Disadvantage of licensing o when the firm has valuable know-how that cannot be adequately protected by a licensing contract o when the firm needs tight control over a foreign entity to maximize its market share and earnings in that country o when a firm's skills and know-how are not amenable to licensing.

Although Toyota has certain products that can be licensed, its real competitive advantage comes from its management and process know-how. These kinds of skills are difficult to articulate or codify; they cannot be written down in a simple licensing contract. They are organization-wide and have been developed over years. They are not embodied in any one individual, but instead are widely dispersed throughout the company. Toyota's skills are embedded in its organizational culture, and culture is something that cannot be licensed. Thus, as Toyota moves away from its traditional exporting strategy, it has

increasingly pursued a strategy of FDI, rather than licensing foreign enterprises to produce its cars.

b) Strategic behavior (Knickerbocker) theory

Knickerbocker looked at the relationship between FDI and rivalry in oligopolistic industries (industries composed of a limited number of large firms) and suggested that FDI flows are a reflection of strategic rivalry between firms in the global marketplace

Consider an oligopoly in the United States in which three firms--A, B, and C--dominate the market. Firm A establishes a subsidiary in France. Firms B and C reflect that if this investment is successful, it may knock out their export business to France and give Firm A a first-mover advantage. Furthermore, Firm A might discover some competitive asset in France that it could repatriate to the United States to torment Firms B and C on their native soil. Given these possibilities, Firms B and C decide to follow Firm A and establish operations in France. For example, Toyota and Nissan responded to investments by Honda in the United States and Europe by undertaking their own FDI in the United States and Europe.

The theory can be extended to embrace the concept of multipoint competition (when two or more enterprises encounter each other in different regional markets, national markets, or industries) o Arises when two or more enterprises encounter each other in different regional markets, national markets, or industries o To ensure that a rival does not gain a commanding position in one market and then use the profits generated there to subsidize competitive attacks in other markets.

Kodak and Fuji Photo Film Co., for example, compete against each other around the world. If Kodak enters a particular foreign market, Fuji will not be far behind. Fuji feels compelled to follow Kodak to ensure that Kodak does not gain a dominant position in the foreign market that it could then leverage to gain a competitive advantage elsewhere. The converse also holds, with Kodak following Fuji when the Japanese firm is the first to enter a foreign market.

c) Product life cycle (Vernon) theory

Vernons view is that firms undertake FDI at particular stages in the life cycle of a product they have pioneered Firms invest in other advanced countries when local demand in those countries grows large enough to support local production, and then shift production to low-cost developing countries when product standardization and market saturation give rise to price competition and cost pressures Vernon fails to explain why it is profitable for firms to undertake FDI rather than continuing to export from home base, or licensing a foreign firm E.g., Xerox introduced the photocopier in the United States, and it was Xerox that set up production facilities in Japan (Fuji-Xerox) and Great Britain (Rank-Xerox) to serve those markets.

d) Electic Paradigm (Dunning) theory

location-specific advantages (that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets) and externalities (knowledge spillovers that occur when companies in the same industry locate in the same area) must also be considered when explaining both the rationale for and the direction of foreign direct investment. Firm must undertake FDI to exploit such foreign resources. o Explains the FDI undertaken by many of the world's oil companies, which have to invest where oil is located to combine their technological and managerial knowledge with this valuable location-specific resource. o Firms locate their production facilities where the cost and skills of local labor are most suited to its particular production processes One reason Electrolux is building factories in China is because China has an abundant supply of low-cost but well-educated and skilled labor. Thus, other factors aside, China is a good location for producing household appliances both for the Chinese market and for export elsewhere. Foreign computer and semiconductor firms to invest in research and (perhaps) production facilities so they too can learn about and utilize valuable new knowledge before those based elsewhere, thereby giving them a competitive advantage in the global marketplace.

Evidence suggests that European, Japanese, South Korean, and Taiwanese computer and semiconductor firms are investing in the Silicon Valley region, precisely because they wish to benefit from the externalities that arise there.

CHAPTER 17

a) Communication strategy
Defines the process the firm will use in communicating the attributes of its product to prospective customers

Barriers to International Communications The effectiveness of a firm's international communication can be jeopardized by three potentially critical variables: cultural barriers, source effects, and noise levels. Cultural Barriers difficult to communicate messages across cultures. o A message that means one thing in one country may mean something quite different in another.

For example, the Italian clothing manufacturer and retailer, has run into cultural problems with its advertising. The company launched a worldwide advertising campaign in 1989 with the theme "United Colors of Benetton" that had won awards in France. One of its ads featured a black woman breast-feeding a white baby, and another one showed a black man and a white man handcuffed together. Benetton was surprised when the ads were attacked by US civil rights groups for promoting white racial domination. Benetton withdrew its ads and fired its advertising agency. o Firm need to barriers is to develop cross-cultural literacy and use local input, such as a local advertising agency, in developing its marketing message.

Source and country of origin effects

Receiver of the message evaluates the message based on status or image of the sender Anti-Japan wave in US in 1990s o Place of manufacturing influences product evaluations Often used when consumer lacks more detailed knowledge of the product Examples: French wines, Italian clothes and German luxury Noise Levels the amount of other messages competing for a potential consumer's attention, and this too varies across countries o Reduce the probability of effective communication. o In highly developed countries such as the United States, noise is extremely high. Fewer firms vie for the attention of prospective customers in developing countries, and the noise level is lower. o

Push versus Pull Strategies Push strategy emphasizes personal selling (non-consumer product) o Requires intense use of a sales force o Relatively costly Pull strategy depends on mass media advertising (consumer product) o Can be cheaper for a large market segment Determining factors of type of strategy o Product type and consumer sophistication Pull strategy work well for firms in consumer goods selling to large market segment Push strategy works well for industrial product o Channel length Push strategy works better with longer distribution channel The longer the distribution channel, the more intermediaries there are that must be persuaded to carry the product for it to reach the consumer, leading to inertia in the channel, which can make entry very difficult Push strategy emphasizes direct selling

In Japan, products often pass through two, three, or even four wholesalers before they reach the final retail outlet. This can make it difficult for foreign firms to break into the Japanese market. Not only must the foreigner persuade a Japanese retailer to carry her product, but she may also have to persuade every intermediary in the chain to carry the product. Mass advertising may be one way to break down channel resistance in such circumstances. o Media availability A pull strategy relies on access to advertising media.

In the United States, a large number of media are available, including print media (newspapers and magazines) and electronic media (television and radio). The rise of cable television in the United States has facilitated extremely focused advertising (e.g., MTV for teens and young adults, Lifetime for women, ESPN for sports enthusiasts).

b) Pricing Strategy
Price Discrimination Said to occur when consumers in different countries are charged different prices for the same product Two conditions necessary o National markets kept separate to prevent arbitrage Capitalization of price differentials by purchasing product in countries where prices are lower and reselling where prices are higher

For example, many automobile firms have long practiced price discrimination in Europe. A Ford Escort once cost $2,000 more in Germany than it did in Belgium. This policy broke down when car dealers bought Escorts in Belgium and drove them to Germany, where they sold them at a profit for slightly less than Ford was selling Escorts in Germany. To protect the market share of its German auto dealers, Ford had to bring its German prices into line with those being charged in Belgium. Ford could not keep these markets separate. However, Ford still practices price discrimination between Great Britain and Belgium. A Ford car can cost up to $3,000 more in Great Britain than in Belgium. Arbitrage has not been able to equalize the price, because right-hand-drive cars are sold in Great Britain and left-hand-drive cars in the rest of Europe. Because there is no market for lefthand-drive cars in Great Britain, Ford has been able to keep the markets separate. o Different price elasticities of demand in different countries Greater in countries with low income levels & highly competitive conditions Price elasticities for products such as television sets are greater in countries such as India, where a television set is still a luxury item, than in the United States, where it is considered a necessity.

Strategic Pricing

Predatory Pricing
o o o

Using price as a competitive weapon to drive weaker competition out of a national market Firms then raise prices to enjoy high profits Firms normally have profitable position in another national market

Matsushita has been accused of using this strategy to enter the US TV market. As one of the major TV producers in Japan, Matsushita earned high profits at home. It then used these profits to subsidize the losses it made in the United States during its early years there, when it priced low to increase its market penetration. Ultimately, Matsushita became the world's largest manufacturer of TVs.

Multipoint Pricing Strategy

o o

Two or more international firms compete against each other in two or more national markets A firms pricing strategy in one market may impact a rival in another market.

For example, multipoint pricing is an issue for Kodak and Fuji Photo because both companies compete against each other in different national markets for film products around the world. Fuji launched an aggressive competitive attack against Kodak in the American company's home market in January 1997, cutting prices on multiple-roll packs of 35mm film by as much as 50 percent. This price cutting resulted in a 28 percent increase in shipments of Fuji color film during the first six months of 1997, while Kodak's shipments dropped by 11 percent. This attack created a dilemma for Kodak; the company did not want to start price discounting in its largest and most profitable market. Kodak's response was to aggressively cut prices in Fuji's largest market, Japan. This strategic response recognized the interdependence between Kodak and Fuji and the fact that they compete against each other in many different nations. Fuji responded to Kodak's counterattack by pulling back from its aggressive stance in the United States.
o

The Kodak story illustrates an important aspect of multipoint pricing-aggressive pricing in one market may elicit a response from rivals in another market. Firms price low worldwide to build market share Incurred losses are made up as company moves down experience curve, making substantial profits Cost advantage over its less-aggressive competitors

Experience Curve Pricing

o o o

Regulatory Influences on Prices

Antidumping regulations
o o o

Selling a product for a price that is less than the cost of producing it Antidumping rules vague, but place a floor under export prices and limit a firms ability to pursue strategic pricing Article 6 of GATT, allows action against an importer if the product is sold at less than fair value and causes material injury to a domestic industry Regulations designed to promote competition and restrict monopoly practices Can limit the prices that a firm can charge

Competition policy
o o

c) New Product Development

The Location of R&D Rate of new product development greater in countries where o More money spent on R&D o Underlying demand is strong o Consumers are affluent o Competition is intense

Although US firms are still at the leading edge of many new technologies, Japanese and European firms are also strong players, with companies such as Sony, Sharp, Ericsson, Nokia, and Philips NV driving product innovation in their respective industries. Both Japan and Germany are now devoting a greater proportion of their GDP to nondefense R&D than is the United States. In addition, both Japan and the European Union are large, affluent markets, and the wealth gap between them and the United States is closing. For example, to expose themselves to the research and new-product development work being done in Japan, many US firms have set up satellite R&D centers in Japan. Kodak's $65 million R&D center in Japan employs approximately 200 people. The company hired about 100 professional Japanese researchers and directed the lab to concentrate on electronic imaging technology. US firms that have established R&D facilities in Japan include Corning, Texas Instruments, IBM, Digital Equipment, Procter & Gamble, Upjohn, Pfizer, Du Pont, and Monsanto. Integrating R&D, Marketing, and Production Ensures: o Project development driven by customer need o New products are designed for ease of manufacture

o o

Development costs are kept in check Time to market is minimized

HP's subsidiary in Singapore, for example, is responsible for the design and production of thermal ink-jet printers for Japan and other Asian markets. This subsidiary takes products originally developed in San Diego and redesigns them for the Asian market. In addition, the Singapore subsidiary has taken the lead from San Diego in the design and development of certain portable thermal ink-jet printers. HP delegated this responsibility to Singapore because this subsidiary has built important competencies in the design and production of thermal ink-jet products, so it has become the best place in the world to undertake this activity. High failure rate ratio o Between 33 % and 60% of new products fail to earn adequate profits Reasons for failure: o Limited product demand o Failure to adequately commercialize product o Inability to manufacture product cost-effectively

Cross-Functional Teams Objective of team to take a product development project from the initial concept development to market introduction Effective teams must have o Heavyweight project manager o One member from each key function o Physically co-located to facilitate communication o Clear plan and goals o Own process for communication and conflict resolution

For example, one product development team at Quantum Corporation, a Californiabased manufacturer of disk drives for personal computers, instituted a rule that all major decisions would be made and conflicts resolved at meetings that were held every Monday afternoon. This simple rule helped the team meet its development goals. In this case, it was also common for team members to fly in from Japan, where the product was to be manufactured, to the US development center for the Monday morning meetings Building global R&D capabilities Firm must build close links between its R&D centers and its various country operations. Integrating R&D, marketing, and production in an international business may require R&D centers in North America, Asia, and Europe that are linked by formal

and informal integrating mechanisms with marketing operations in each country in their regions and with the various manufacturing facilities. In addition, the international business may have to establish cross-functional teams whose members are dispersed around the globe. Establishing a global network of R&D centers for allocating product development responsibilities to various centers o Located in regions or cities where valuable scientific knowledge is being created and where there is a pool of skilled research talent (e.g., Silicon Valley in the United States, Cambridge in England, Kobe in Japan). These centers are the innovation engines of the firm. Their job is to develop the basic technologies that become new products. o At this level, emphasis is placed on commercialization of the technology and design for manufacturing. o If further customization is needed so the product appeals to the tastes and preferences of consumers in individual markets, such redesign work will be done by an R&D group based in a subsidiary in that country or at a regional center that customizes products for several countries in the region.

CHAPTER 18

a) The Strategic Role of International HRM

HRM can help the firm reduce cost of value creation and add value by better serving customer needs o More complex in an international business o Task complicated by profound differences between countries in labor markets, culture, legal and economic systems HRM policies should be congruent with the firms strategy and its formal and informal structure and controls o For example, a transnational strategy imposes very different requirements for staffing, management development, and compensation practices than a localization strategy does o Firms pursuing a transnational strategy need to build a strong corporate culture and an informal management network for transmitting information within the organization. Right People, Right Place, Right Time HRM must also determine when to use expatriate managers citizens of one country working abroad o Who should be sent on foreign assignment o How they should be compensated o How they should be trained o How they should be reoriented when they return home

b) Staffing Policy

Selecting individuals with requisite skills to do a particular job Tool for developing and promoting corporate culture

General Electric, for example, which is positioned toward the transnational end of the strategic spectrum, is not just concerned with hiring people who have the skills required for performing particular jobs; it wants to hire individuals whose behavioral styles, beliefs, and value systems are consistent with those of GE.

View People as Resource ($ in profit out) Types of Staffing Policy o Ethnocentric o Polycentric o Geocentric

Ethnocentric policy Key management positions filled by parent-country nationals

Firms such as Procter & Gamble, Philips NV, and Matsushita originally followed it. In the Dutch firm Philips, for example, all important positions in most foreign subsidiaries were at one time held by Dutch nationals who were referred to by their non-Dutch colleagues as the Dutch Mafia. In many Japanese and South Korean firms today, such as Toyota, Matsushita, and Samsung, key positions in international operations are still often held by home-country nationals. According to the Japanese Overseas Enterprise Association, in 1996 only 29 percent of foreign subsidiaries of Japanese companies had presidents that were not Japanese. In contrast, 66 percent of the Japanese subsidiaries of foreign companies had Japanese presidents. Advantages: o Overcomes lack of qualified managers in host nation o Unified culture Many Japanese firms prefer their foreign operations to be headed by expatriate Japanese managers because these managers will have been socialized into the firm's culture while employed in Japan o Helps transfer core competencies (and skills back) Disadvantages: o Produces resentment in host country Lower productivity, and increased turnover among that group Because it limits advancement opportunities for host-country nationals o Can lead to cultural myopia Expatriate managers may fail to appreciate how product attributes, distribution strategy, communications strategy, and pricing strategy should be adapted to host-country conditions The Japanese managers may have failed to realize that behavior that would be viewed as acceptable in Japan was not acceptable in the United States

Polycentric Policy Host-country nationals manage subsidiaries Parent company nationals hold key headquarter positions Best suited to firm pursuing localization strategy Advantages: o Alleviates cultural myopia.

Host-country managers are unlikely to make the mistakes arising from cultural misunderstandings that expatriate managers are vulnerable to o Inexpensive to implement reducing the costs of value creation. Expatriate managers can be very expensive to maintain. o Helps transfer core competencies Disadvantages: o Limits opportunity to gain experience of host-country nationals outside their own country. o Can create gap between home-and host-country operations Language barriers, national loyalties, and a range of cultural differences may isolate the corporate headquarters staff from the various foreign subsidiaries

After decades of pursing a polycentric staffing policy, food and detergents giant Unilever found that shifting from a localization strategy to a transnational strategy was very difficult. Unilever's foreign subsidiaries had evolved into quasi-autonomous operations, each with its own strong national identity. These "little kingdoms" objected strenuously to corporate headquarters' attempts to limit their autonomy and to rationalize global manufacturing. Geocentric Policy Seek best people, regardless of nationality o not always possible Best suited to Global and trans-national businesses Advantages: o Enables the firm to make best use of its human resources o Equips executives to work in a number of cultures o Helps build strong unifying culture and informal management network o Builds a cadre of international executives who feel at home working in a number of different cultures Disadvantages: o National immigration policies may limit implementation o Expensive to implement due to training and relocation o Compensation structure can be a problem.

c) International labor relations Key Issue o Degree to which organized labor can limit the choices of an international business Aims to foster harmony and minimize conflicts between firms and organized labor

The Concerns of Organized Labor Multinational can counter union bargaining power with threats to move production to another country o Ford, for example, very clearly threatened British unions with a plan to move manufacturing to Continental Europe unless British workers abandoned work rules that limited productivity, showed restraint in negotiating for wage increases, and curtailed strikes and other work disruptions Multinational will keep highly skilled tasks in its home country and farm out only low-skilled tasks to foreign plants o Easy to switch locations if economic conditions warrant o Bargaining power of organized labor is reduced Attempts to import employment practices and contractual agreements from multinationals home country o This concern has surfaced in response to Japanese multinationals that have been trying to export their style of labor relations to other countries o For example, much to the annoyance of the United Auto Workers (UAW), most Japanese auto plants in the United States are not unionized. As a result, union influence in the auto industry is declining.

The Strategy of Organized Labor

Attempts to establish international labor organizations o Although national unions may want to cooperate, they also compete with each other to attract investment from international businesses, and hence jobs for their members. For example, in attempting to gain new jobs for their members, national unions in the auto industry often court auto firms that are seeking locations for new plants. One reason Nissan chose to build its European production facilities in Great Britain rather than Spain was that the British unions agreed to greater concessions than the Spanish unions did. As a result of such competition between national unions, cooperation is difficult to establish. Lobby for national legislation to restrict multinationals Attempts to achieve international regulations on multinationals through such organizations as the United Nations

Approaches to Labor Relations Many firms are centralizing labor relations to enhance the bargaining of the multinational vis--vis organized labor o In the past, labor relations were decentralized to individual subsidiaries o International firms' attempts to rationalize their global operations o Many firms are now using the threat to move production to another country in their negotiations with unions to change work rules and limit wage increases The way work is organized within a plant can be a major source of competitive advantage. o Much of the competitive advantage of Japanese automakers, for example, has been attributed to the use of self-managing teams, job rotation, crosstraining, and the like in their Japanese plants. o The headquarters of many Japanese firms bargains directly with local unions to get union agreement to changes in work rules before committing to an investment. o For example, before Nissan decided to invest in northern England, it got a commitment from British unions to agree to a change in traditional work practices. By its very nature, pursuing such a strategy requires centralized control over the labor relations function.

d) Compensation
National Differences in Compensation Substantial differences exist in the compensation of executives at the same level in various countries.

For example, the average CEO of a large public company in the United States made $2.3 million in salary and bonuses in 1996, and this went up to $5.8 million when stock options were included. The CEO of a large public Japanese firm, such as Sony or Matsushita, makes $1.2 million to $1.5 million per year. These figures underestimate the true differential because many US executives earn considerable sums of money from stock options and grants, while the practice of granting options is still rare in other nations. Two issues: o Pay executives in different countries according to the standards in each country?; or equalize pay on a global basis? Many firms have recently moved towards a compensation structure based on global standard, esp. impt. In firm with a geocentric staffing policy But most firms still set pay acc. To the prevailing standards in each country

Expatriate Pay The most common approach to expatriate pay is the balance sheet approach. o Equalizes purchasing power to maintain same standard of living across countries o Provides financial incentives to offset qualitative differences between assignment locations. o Pay for Schools, health care, etc. 5 components of compensation package o Base Salary Same range as a similar position in the home country o Foreign ser o vice premium Extra pay for work outside country of origin o Allowances Hardship, housing, cost-of-living and education allowances o Taxation Firm pays expatriates income tax in the host country o Benefits Level of medical and pension benefits identical overseas