International Management
International
Ninth Edition
Management
Luthans | Doh
Fred Luthans
Jonathan P. Doh
Ninth Edition
Chapter 9
Entry Strategies and Organizational
Structures
International Management
Ninth Edition
Luthans | Doh
Entry Strategies and Organizational
Structures
• The specific objectives of this chapter are to
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 used in handling international operations.
ANALYZE the advantages and disadvantages of each type of
organizational structure, including conditions that make 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.
EXPLAIN how organizational characteristics such as
formalization, specialization, and centralization influence how
the organization is structured and functions.
International Management
Ninth Edition
Luthans | Doh
Entry Strategies and Ownership
Structures
•
•
•
•
•
•
Export/Import
Wholly Owned Subsidiary
Mergers/Acquisitions
Alliances and Joint Ventures
Licensing
Franchising
International Management
Ninth Edition
Luthans | Doh
Entry Strategies and Ownership Structures
Export/Import
• Exporting and importing often are the only
available choices for small and new firms wanting
to go international
• Also permits larger firms to begin international
expansion with minimum investment and
minimum risk
– Paperwork can be turned over to export management
company or handled through the firm’s export
department
– Permits easy access to overseas markets
• Strategy is usually transitional in nature.
International Management
Ninth Edition
Luthans | Doh
Entry Strategies and Ownership Structures
Wholly Owned Subsidiary
• Wholly owned subsidiary
– An overseas operation is totally owned and controlled by
an MNC.
– MNCs using a wholly owned subsidiary want total control
and believe that managerial efficiency is better without
outside partners
• Some host countries worry that the MNC could drive
out local enterprises
• Home country unions sometimes view foreign
subsidiaries as an attempt to “export jobs”
• Today many MNCs opt for a merger, alliance, or joint
venture rather than a wholly owned subsidiary
International Management
Ninth Edition
Luthans | Doh
Entry Strategies and Ownership Structures
Mergers and Acquisitions
• Mergers and acquisitions are the cross-border
purchase or exchange of equity involving two or
more companies.
– Cultural differences and time constraints are the 2
most pervasive barriers.
– Once a merger/acquisition occurs, it may be difficult
to clearly communicate new goals to subsidiary.
– Transition costs also pose a problem in the postmerger environment.
– Managers need to be wary of complications and
attempt to move forward by enhancing
communication and operational efficiency.
International Management
Ninth Edition
Luthans | Doh
Entry Strategies and Ownership Structures
Alliances and Joint Ventures
• Alliance
– Any type of cooperative relationship among different firms.
– Some are temporary, some more permanent.
• International joint venture (IJV)
– Agreement under which two or more partners from different countries
own or control a business.
– There are two types of alliances and joint ventures
1.
2.
Nonequity ventures
Equity joint ventures
• Advantages of alliances and joint ventures include
–
–
–
–
Improvement of efficiency
Access to knowledge
Mitigating political factors
Overcoming collusion or restriction in competition
International Management
Ninth Edition
Luthans | Doh
Strategic Alliance Recommendations
• Suggestions regarding participation in alliances:
– Know their partner well before alliance is formed.
– Expect differences in alliance objectives among
potential partners in different countries.
– Realize that having desired resource profiles does not
guarantee that they are complementary to the firm’s
resources.
– Be sensitive to alliance partner needs.
– After identifying the best partner, work on developing
a relationship of trust.
International Management
Ninth Edition
Luthans | Doh
Entry Strategies and Ownership Structures
Licensing
• Licensing: An agreement that allows one party to use an
industrial property right in exchange for payment to the
other party.
• Reasons for licensing:
– Licensor less expensively enters foreign market; licensee adds a
product to its line.
– The licensee may avoid entry costs by licensing to a firm already
there.
– Licensor usually is a small firm lacking financial and managerial
resources.
• Research and development
– Likely licensors: companies spending large amounts on R&D
– Likely licensees: companies spending little on R&D
International Management
Ninth Edition
Partial Comparison of Global
Strategic Alliances
Luthans | Doh
International Management
Ninth Edition
Luthans | Doh
Entry Strategies and Ownership Structures
Franchising
• Franchising
– An arrangement in which 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
– Widely used in fast-food and hotel/motel industries
• With minor adjustments for the local market, this
can result in highly profitable international
business.
– The franchisor gets a new stream of income and the
franchisee gets a proven concept and products or
services that can quickly be brought to market.
International Management
Ninth Edition
Organizational Expectations
of Internationalization
Luthans | Doh
International Management
Ninth Edition
Luthans | Doh
Basic Organizational Structures
Initial Division Structure
• 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
• Helps to reduce transportation costs
– Subsidiary
• Common for finance-related businesses or other
operations that require onsite presence from the start
International Management
Ninth Edition
Luthans | Doh
Use of Subsidiaries during the Early
Stage of Internationalization
International Management
Ninth Edition
Luthans | Doh
Basic Organizational Structures
International Division Structure
• International division structure
– Structural arrangement that handles all international operations
out of a division created for this purpose.
• Advantages
– Assures international focus receives top management attention
– Unified approach to international operations
– Often adopted by firms still in developmental states of
international business operations
• Disadvantages
– Separates domestic from international managers
– May find it difficult to think and act strategically, or to allocate
resources on a global basis
International Management
Ninth Edition
Luthans | Doh
An International Division Structure
International Management
Ninth Edition
Luthans | Doh
Basic Organizational Structures
Global Structural Arrangements
• There are three types of global structures
1. Global Product Division
2. Global Area Division
3. Global Functional Division
International Management
Ninth Edition
Luthans | Doh
Basic Organizational Structures
Global Product Division
• Global Product Division
– Structural arrangement in which domestic divisions are given worldwide
responsibility for product groups.
• Advantages
– Global product divisions operate as profit centers
– Provides a direct line of communication from customer
– Helps R&D to work on development of products that serve the world
customer
– Permits managers to gain expertise in technical and marketing aspects of
products
• Disadvantages
– 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
International Management
Ninth Edition
Luthans | Doh
A Global Product Division Structure
International Management
Ninth Edition
Luthans | Doh
Basic Organizational Structures
Global Area Division
• Global area division
– Structure under which global operations organized on geographic
basis rather than a product basis.
• Advantages
– International operations put on same level as domestic operations
– Global division mangers are 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
• Disadvantages
– Difficult to reconcile a product emphasis with geographic orientation
– New R&D efforts often ignored because divisions are selling in mature
market
International Management
Ninth Edition
Luthans | Doh
A Global Area Division Structure
International Management
Ninth Edition
Luthans | Doh
Basic Organizational Structures
Global Functional Division
• Global functional division
– Structure that organizes worldwide operations primarily based on
function and secondarily on product.
• Approach used mainly by extractive companies such as oil and mining
• Advantages
– Emphasizes functional expertise
– Centralized control
– Relatively lean managerial staff
• Disadvantages
– Coordination of manufacturing and marketing often difficult
– Managing multiple product lines can be very challenging because of
separation of production and marketing into different departments.
– Only the CEO can be held accountable for the profits.
International Management
Ninth Edition
A Global Functional Structure
Luthans | Doh
International Management
Ninth Edition
Luthans | Doh
Basic Organizational Structures
Mixed Organization Structures
• Mixed organization structure
– Structure is a combination of global product, area, or
functional arrangements.
• Advantages
– Allows the organization to create the specific type of
design that best meets its needs
• Disadvantages
– As matrix design’s complexity increases, coordinating
personnel and getting everyone to work toward
common goals often become difficult.
– Too many groups go their own way.
International Management
Ninth Edition
Luthans | Doh
A Multinational Matrix Structure
International Management
Ninth Edition
Luthans | Doh
Transnational Network Structures
• Transnational network structure
– A multinational structural arrangement combining
elements of function, product, geographic design,
while relying on network arrangement to link
worldwide subsidiaries.
– At center of the transnational network structures are
nodes, which are 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.
International Management
Ninth Edition
Luthans | Doh
The Network Structure of N.V. Phillips
International Management
Ninth Edition
Luthans | Doh
Control Mechanisms Used in Select
Multinational Organization Structures
International Management
Ninth Edition
Luthans | Doh
Nontraditional Organizational
Arrangements
• Organizational arrangements from mergers,
acquisitions, joint ventures, and strategic
alliances
– These organizational arrangements do not use
traditional hierarchical structures and cannot be
shown graphically
– Main objective: Help the partners address and
effectively meld their different values,
management styles, action orientation, and
organization preferences
International Management
Ninth Edition
Luthans | Doh
A Comparison of Asian and Western
Management Features
International Management
Ninth Edition
Luthans | Doh
Nontraditional Organizational Arrangements
The Emergence of the 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 online)
• 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
International Management
Ninth Edition
Luthans | Doh
Organizing for Product Integration
• Recent organizing development is the
emergences of designs that are tailored toward
helping multinationals integrate product
development into their worldwide operations
• Cross-functional coordination has been used.
– Resulted in people spending less time within their
functions and thus becoming less knowledgeable
regarding developments that are occurring in their
specialized areas.
– Often leads to product teams becoming autonomous
and thus failing to integrate their overall efforts with
the organization at large
International Management
Ninth Edition
Luthans | Doh
Organizational Characteristics of MNCs
• Formalization
– Use of defined structures and systems in decision
making, communicating, and controlling.
• Specialization
– Assigning individuals to specific, well-defined tasks.
– Horizontal specialization
– Vertical specialization
• Centralization
– Important decisions are made at the top.
– Decentralization: Decision making is pushed down the
line and lower-level personnel are involved.
International Management
Ninth Edition
Managers’ Influence in U.S.
and Japanese Firms in Taiwan
Luthans | Doh
International Management
Ninth Edition
Luthans | Doh
Review and Discuss
1. One of the most common entry strategies for MNCs is
the joint venture. Why are so many companies opting
for this strategy? Would a fully owned subsidiary be a
better choice?
2. A small manufacturing firm believes there is a market
for handheld tools that are carefully crafted for local
markets. After spending two months in Europe, the
president of this firm believes that his company can
create a popular line of these tools. What type of
organization structure would be of most value to this
firm in its initial efforts to go international?
International Management
Ninth Edition
Luthans | Doh
Review and Discuss
3. If the company in question 2 finds a major
market for its products in Europe and decides to
expand into Asia, would you recommend any
change in its organization structure? If yes, what
would you suggest? If no, why not?
4. If this same company finds after three years of
international effort that it is selling 50 percent of
its output overseas, what type of organizational
structure would you suggest for the future?
International Management
Ninth Edition
Luthans | Doh
Review and Discuss
5. In what way do the concepts of
formalization, specialization, and
centralization have an impact on MNC
organization structures? In your answer, use
a well-known firm such as IBM or Ford to
illustrate the practical expressions of these
three characteristics.