chapter nine
Entry Strategies and
Organizational Structures
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.
Chapter Objectives
Five Chapter Objectives
1.
2.
3.
4.
5.
DESCRIBE how an MNC develops and implements entry strategies
and ownership structures
EXAMINE major types of entry strategies and organizational
structures
ANALYZE advantages and disadvantage of each type of
organizational structure, including conditions making one preferable to
others
DESCRIBE recent, nontraditional organization arrangements coming
out of mergers, joint ventures, keiretsus, and other new designs
including electronic networks and product development structures
EXPLAIN how organizational characteristics such as formalization,
specialization, and centralization influence how organization is
structured and functions
9-2
Alternative Market-Entry Strategies
• An entry strategy into the international market should reflect on
analysis of market characteristics such as:
– Potential sales
– Strategic importance
– Strengths of local resources
– Cultural differences
– Country restrictions
• Companies most often begin with modest export involvement.
• A company has four different modes of foreign market entry from
which to select:
– Exporting
– Contractual agreements
– Strategic alliances
– Direct foreign investments
9-3
Alternative Market-Entry Strategies
• Insert Exhibit 11.2
9-4
Entry Strategies and
Ownership Structures
•
•
•
•
•
•
Export/import
Wholly-owned subsidiary
Mergers/acquisitions
Alliances/joint ventures
Licensing
Franchising
9-5
Entry Strategies and
Ownership Structures:
Export/Import
– Often the only available choices for small
and new firms wanting to go international
– Also permits larger firms to begin
international expansion with minimum
investment
– Paperwork can be turned over to export
management company or through firm’s
export department
– Permits easy access to overseas markets
– Strategy is usually transitional in nature
9-6
Entry Strategies and
Ownership Structures:
Export/Import
◦ Constraints
 Reliance on foreign distributors and suppliers
 Competitive risk
 Strategy is usually transitional in nature
9-7
Exporting
• Direct exporting - the company sells to a
customer in another country.
• Indirect exporting – the company sells to a
buyer (importer or distribution) in the
home country, who in turn exports the
product.
9-8
Exporting
• The Internet
– Initially, Internet marketing focused on
domestic sales, however, a surprisingly large
number of companies started receiving
orders from customers in other countries,
resulting in the concept of international
Internet marketing (IIM).
• Direct sales
– Particularly for high technology and big ticket
industrial products.
9-9
Entry Strategies and
Ownership Structures:
Wholly Owned Subsidiary
• Overseas operation is totally owned and
controlled by an MNC
• MNC’s desire for total control and belief that
managerial efficiency is better without outside
partners
• Some host countries concerned that MNC will
drive out local enterprises
• Home country unions sometimes view foreign
subsidiaries as an attempt to “export jobs”
• Today many MNCs opt for merger, alliance, or
joint venture than a fully owned subsidiary
9-10
Wholly Owned Subsidiary
• The most common way that control of a subsidiary is
achieved is through the ownership of shares in the
subsidiary by the parent.
• These shares give the parent the necessary votes to
determine the composition of the board of the subsidiary
and so exercise control.
• This gives rise to the common presumption that 50% plus
one share is enough to create a subsidiary.
• There are, however, other ways that control can come
about and the exact rules both as to what control is needed
and how it is achieved can be complex (see below).
9-11
Wholly Owned Subsidiary
• A subsidiary may itself have subsidiaries, and these, in
turn, may have subsidiaries of their own.
• A parent and all its subsidiaries together are called a
group, although this term can also apply to cooperating
companies and their subsidiaries with varying degrees of
shared ownership.
9-12
Entry Strategies and
Ownership Structures:
Mergers and Acquisitions
• The cross-border purchase or exchange
of equity involving two or more
companies
• The strategic plan of merged companies
often calls for each to contribute a series
of strengths toward making the firm a
highly competitive operation
9-13
Merger
• a merger is a combination of two companies into one
larger company.
• Such actions are commonly voluntary and involve stock
swap or cash payment to the target.
– Stock swap is often used as it allows the shareholders of the
two companies to share the risk involved in the deal.
• A merger can resemble a takeover but result in a new
company name (often combining the names of the
original companies) and in new branding;
• In some cases, terming the combination a "merger"
rather than an acquisition is done purely for political or
marketing reasons.
9-14
Distinction between Mergers and
Acquisitions
• When one company takes over another and clearly
established itself as the new owner, the purchase is called
an acquisition.
– From a legal point of view, the target company ceases to exist, the
buyer "swallows" the business and the buyer's stock continues to
be traded.
• A merger happens when two firms, often of about the same
size, agree to go forward as a single new company rather
than remain separately owned and operated.
• "merger of equals".
– Both companies' stocks are surrendered and new company stock is
issued in its place.
– For example, both Daimler-Benz and Chrysler ceased to exist when
the two firms merged, and a new company, DaimlerChrysler, was
9-15
created.
Entry Strategies and
Ownership Structures:
Alliances and Joint Ventures
• Alliance
– Any type of cooperative relationship among different firms
• International joint venture (IJV)
– Agreement under which two or more partners from different
countries own or control a business
– Nonequity venture
– Equity joint venture
• Advantages
–
–
–
–
Improvement of efficiency
Access to knowledge
Political factors
Collusion or restriction in competition
9-16
Strategic Alliance Recommendations
1. Know partner well before alliance is formed.
2. Expect differences in alliance objectives
among potential partners headquartered in
different countries.
3. Having desired resource profiles does not
guarantee other has complementary to firm’s
resources.
4. Be sensitive to alliance partner needs.
5. After identify best partner, work on
developing relationship of trust.
9-17
Global Strategic Alliances
9-18
Entry Strategies and Ownership
Structures: Licensing
• License is an agreement that allows one party
to use an industrial property right in exchange
for payment to other party
• Licensee may avoid entry costs by licensing to
a firm already there
• Licensor usually is a small firm lacking
financial and managerial resources
• Companies spending large share of revenues
of R&D are likely to be licensors
• Companies spending very little on R&D are
more likely to be licensees
9-19
Entry Strategies and
Ownership Structures: Franchising
• Franchise: one party (the franchisor) permits another (the
franchisee) to operate an enterprise using its trademark,
logo, product line, and method of operation in return for a
fee, for a percentage of gross monthly sales and a royalty
fee.
• Various tangibles and intangibles such as national or
international advertising, training, and other support
services are commonly made available by the franchisor.
• Agreements typically last from five to thirty years, with
premature cancellations or terminations of most contracts
bearing serious consequences for franchisees.
• Widely used in fast-food and hotel/motel industries
• With minor adjustments for local market, can result in
highly profitable international business.
9-20
Kumar & Subramaniam (1997)
A Contingency Framework for
the Mode of Entry Decision
• Risk
• Return
• Control
9-21
Modes of entry
Exporting Contractual
Agreeme
nt
Joint
Venture
Acquisition
Greenfield
Investm
ent
Risk
Low
Low
Moderate
High
High
Return
Low
Low
Moderate
High
High
Control
Moderate
Low
Moderate
High
High
Integration
Negligible
Negligible
Low
Moderate
High
9-22
Organizational Expectations of
Internationalization
9-23
Basic Organizational Structures
• Initial Division Structures
– Export arrangement
• Common among manufacturing firms, especially
those with technologically advanced products
– On-site manufacturing operations
• In response to local governments when sales
increase
• Need to reduce transportation cost
– Subsidiary
• Common for finance-related businesses or other
operations that require onsite presence from
start
9-24
Basic Organizational Structures
9-25
International Division Structure
– Structural arrangement that handles all
international operations out of a division created for
this purpose
• Assures international focus receives top
management attention
• Unified approach to international operations
• Often adopted by firms still in developmental
states of international business operations
• Separates domestic from international managers
(not good)
• May find it difficult to think and act strategically,
or to allocate resources on a global basis
9-26
International Division Structure
9-27
Global Structural Arrangements
• Global Product Division
– Structural arrangement in which domestic divisions are given
worldwide responsibility for product groups
• Global product divisions operate as profit centers
• Helps manage product, technology, customer diversity
• Ability to cater to local needs
• Marketing, production and finance coordinated on productby-product global basis
• Duplication of facilities and staff personnel within divisions
• Division manager may pursue currently attractive
geographic prospects and neglect others with long-term
potential
• Division managers may spend too much time tapping local
rather than international markets
9-28
Global Product Division
9-29
Global Area Division
• Structure under which global operations organized on
geographic basis
– International operations put on same level as domestic
– Global division mangers responsible for all business
operations in designated geographic area
– Often used by firms in mature businesses with narrow product
lines
– Firm is able to reduce cost per unit and price competitively by
manufacturing in a region
– Difficult to reconcile a product emphasis with geographic
orientation
– New R&D efforts often ignored because divisions are selling
in mature market
9-30
Global Area Division Structure
9-31
Global Functional Division Structure
• Structure that organizes worldwide operations
primarily based on function and secondarily on product
– Approach not used except by extractive companies such as
oil and mining
– Favored only by firms needing tight, centralized coordination
and control of integrated production processes and firms
involved in transporting products and raw materials between
geographic areas
– Emphasizes functional expertise, centralized control, relatively
lean managerial staff
– Coordination of manufacturing and marketing often difficult
– Managing multiple product lines can be very challenging
because of separation of production and marketing into
different deparments.
9-32
Global Functional Division Structure
9-33
Mixed Organizational Structures
• Structure is a combination of global
product, area, or functional
arrangements
– Allows organization to create specific type
of design that best meets its needs
– As matrix design’s complexity increases,
coordinating personnel and getting
everyone to work toward common goals
often become difficult
– Too many groups to their own way
9-34
Multinational Matrix Structure
9-35
Transnational Network Structures
• Multinational structural arrangement
combining elements of function, product,
geographic design, while relying on network
arrangement to link worldwide subsidiaries
– At center of transnational network structures are
nodes, units charged with coordinating product,
functional, and geographic information
– Different product line units and geographic area
units have different structures depending on what is
best for their particular operation
9-36
Transnational Network Structure
9-37
Control Mechanisms
9-38
Nontraditional Organizational
Arrangements
• Organizational arrangements for
mergers and acquisitions
• Organizational arrangements from joint
ventures and strategic alliances
• Organizational arrangements from
Keiretsus
9-39
Asian and Western
Management Features
9-40
Emergency of Electronic
Network Form of Organization
• Electronic Freelancers
– Individuals who work on a project for a company, usually via
the Internet, and move on to other employment when the
assignment is done
• Temporary companies
– Serve a particular, short-term purpose and then go on to other
assignments
• Outsourcing function (can be delivered on line)
• Electronic network is a version of the matrix design
– Many of the people in the structure are temporary contingent
employees, never see each other and communicate
exclusively in an electronic environment
9-41
Changing Role of Information
Technology in Organizing
9-42
Organizational Characteristics
of MNCs
• Formalization: use of defined structures
and systems in decision making,
communicating, and controlling
• Specialization: Assign individuals to
specific, well-defined tasks
• Centralization: Important decisions are
made at the top
9-43
Managers’ Influence in U.S. and
Japanese Firms in Taiwan
9-44
Review and Discuss
1. Why are so many companies opting for
the joint venture?
2. Why are keiretsus popular? What
benefits do they offer?
3. In what way do formalization,
specialization, and centralization have
an impact on MNC organization
structures?
9-45