MNEs
A good definition:
An enterprise having a substantial
direct investment in foreign countries
engaged in active management of
such offshore assets and regarding
those operations strategically and
organizationally as integral part of it.
Motivations for international operations:
Capitalize on all potential advantages
Traditional:
Secure key supplies. Eg: ONGC in
Russia
Seek markets abroad in pursuit of
economies of scale: Mahindra in US
Seek access to low cost factors of
production. CEAT in Sri Lanka
These push factors can be related to the
product Life Cycle Theory
Emerging motivations – Beyond overseas
sales and production operations:
Set of forces I
 Increasing scale economies
 expanding R&D investments
 shortening product life cycles
II
 global scanning and learning
capability (on raw materials,
markets, products, technologies)
III
 Competitive positioning (eg. Crosssubsidisation of markets)
Process of Internationalization:
Countervailing strategic advantage of an
MNE over a domestic company:
Superior knowledge or skills as regards
technology, marketing, R&D, Scale
economies or
some other part of its value chain
Options for entry in markets abroad
Exports
Licensing
Franchising
Joint venture
Wholly owned subsidiary
Uppsala Model of internationalization:
Go through cycles of investment treating
market entry as a learning process:
Step I :
Initial commitment of
resources to the foreign
market to know about
customers, competitors
and regulatory conditions.
II : On this basis, evaluate
current activities and
opportunities for additional
investment.
III: Make a subsequent resource
commitment, eg. buy out local
distributor or invest in a
manufacturing plant.
IV:
With additional knowledge and
several cycles of investment,
develop capability and market
knowledge to compete in the
foreign market.
STRATEGIC MANAGEMENT
A critical part: Deciding how a company should
compete abroad.
All companies make money through value
creation.
3 general strategies for value creation:
• Differentiating products or services from those of
competitors (eg. Mercedes Benz.)
• Cost leadership (eg. ACER of Taiwan)
• Niche strategy – Focusing a specific line of
products/services relative to competitors who
operate more broadly (eg. PORSCHE of Germany
for Upscale sports cars. Slogan “There is no
substitute”)
Regardless of this basic approach, companies are
A LINKED SET OF VALUE CHAINS.
So, companies can add value by
• Changing any of their primary activities
(manufacturing, marketing)
• Changing any of their supporting activities (materials
procurement, HR)
either alone or in combination.
So a company’s international strategy is about choices on
- How value chain activities are configured (eg.
Where do value chain activities happen? ) and
Coordinated (eg. Are dispersed activities tightly
controlled from HQ? or
Do they remain under local control?)
OFTEN COMPANIES CHANGE THESE ACTIVITIES
TO IMPROVE THEIR CORE COMPETENCIES
(i.e: skills that are hard for competitors to imitate)
CORE COMPETENCIES CAN BE LOCATED ANYWHERE IN
THE FIRM’S VALUE CHAIN AND PROVIDE THE BASIS FOR
INTERNATIONAL COMPETITIVENESS.
Examples:

Logistical execution

Product innovation

Manufacturing Quality



-
Wal-Mart
3M
Toyota
Location Economies: cost effective availability of benefits
exclusive to locations.
Scattering certain value chain activities to locations that
offer such benefits can provide a source of competitiveness.
But sustainable competitive advantage comes from:
ability to constantly change and adapt which allows
many individual firms to outperform their competitors.
Success factors for cos in specific industries:
Processed Foods
•
•
•
•
•
Taste
Sales promotion
Price
Distr. Channels
Brand identification
•
•
•
•
Product efficiency
Product innovation
Patents held / filed
Co. image
•
•
•
•
•
•
Styling
Service
Quality
Price
Fuel efficiency
Distr. system
Pharmaceuticals
Autos
Strategic Approaches used by MNEs:
(International, multidomestic global and
transactional)
Diverse MNEs are networks of relationships
among many dispersed organizations, each
with somewhat different goals and
perspectives (eg: GE)
Understanding strategy in this context
involves figuring out
- the internal movements of information,
people, resources and products
through the MNE’s entire web of linkages.
Perspectives on MNE Strategy
Evolution of strategic role of MNEs’ foreign
operations:
4 stages/ strategic approaches/ mentalities:
International :Overseas operations
considered as appendages.
Technology and other
knowledge transferred from
parent company to overseas
operators.
Multidomestic: Multiple, nationally responsive
(Localization Strategy)
strategies by the company’s
worldwide subsidiaries
Global
: Treats the world as its unit of
analysis through global
products and manufacture on
global scale.
Transnational: Combines local responsiveness
with global-scale competitive
efficiency.
Note: An MNE might operate with any
one of these strategic approaches,
depending on the industry, the
company’s strategic position and a
variety of other factors.
More likely, most companies will bear
some characteristics of each of these
approaches.
Exercise:
Organisational set-up for the four
strategic approaches.
Process of developing international
strategy – A template:
Step 1 – The Mission Statement
Step 2 – Conducting a SWOT (environmental
scanning)
Step 3 – Evaluate alternatives, set strategic
goals
Step 4 – Developing implementation
tactics and plans
Step 5 – Putting control and
evaluation procedures in place.
A Model:
DETERMINATION OF
A FIRM’S COMPETITIVE POSITION IN INTERNATIONAL BUSINESS
HANS MUHLBACHER et al
CUSTOMER & MAJOR
STAKEHOLDERS
MACRO-ENVIRONMENT
SUCCESS FACTORS
COMPETITOR ANALYSIS
COMPETITIVE ENVIRONMENT
ASSESSMENT OF
• CORPORATE POLICY
 CORPORATE STRATEGY
 MANAGEMENT SYSTEMS
 OPERATIONS
INTERNAL ANALYSIS




CORPORATE POLICY
CORPORATE STRATEGY
MANAGEMENT SYSTEMS
OPERAITONS
DISTINCIVE COMPETENCIES
• PROFILE OF STRENGTHS & WEAKNESSESS
 COMPARISON OF PROFILES OF STRENGTHS & WEKNESSES
COMPETITIVE ADVANTAGES
Advantages and disadvantages of different foreign
market entry options.
Advantages
Disadvantages
Exporting
·fairly inexpensive
·easy foreign access
·no ownership risks
·Missed location economies
·logistical difficulties
Licensing
·Fairly inexpensive
·Useful where trade barriers/
tariffs hinder exporting
·Leverages location economies
without ownership concerns
·Risky where IPR protection
is weak
·Control ceded to licensee
may inhibit coordination
·May help create new
competitors
Franchising
·Low cost, low risk
·Offers more control than
licensing
·Builds presence fast
·Control still an issue
·Franchisee may not be
motivated to adhere to
franchisor’s standards
Management
Contracts
·Very inexpensive
·Low risk revenue
·No long term presence
·May create competitors
Turnkey projects
·An option if direct
investment is out
·Lowers risk if long term
instability exists
·No long-term presence
·May create competitors
·Vulnerable to political
and legislative changes
Greenfield subsidiaries
·Allows high control
·Offers location economies
·Can pick own site, workers,
technology.
·Very expensive to set up
·Time-consuming to set
up
·Requires considerable
international expertise
·Risky due to ownership
Acquired subsidiaries
·Allows high control
·Rapid market entry
·Offers location economies
·Risky due to ownership
·Cultural differences may
be formidable
·May be buying problems
Joint ventures
·Less financial risk than
subsidiaries
·Leverages partner’s
resources, know-how
·Risks giving some
control on technology to
partner
·Still some ownership risk
Other types of International Strategic
Alliances than JVs.




Production alliance - Motivation may include
desire to acquire complex manufacturing
expertise from each other or reducing costs of
production.
R&D alliance - to develop new products or
technologies
Financial alliance - partners reduce their financial
exposure in risky projects by sharing costs
Marketing alliance - partners share services or
expertise in marketing related areas in ways that
generate additional profits for both.
Why SAs?
 Local partner’s knowledge of the
market
 Government regulations
 Sharing risks
 Sharing technology
 Economies of scale
 Low-cost raw materials or labour
Key considerations in the SA decision:
Could other participation better satisfy
strategic objectives?
Does the firm have management and
capital resources to contribute to the SA?
Can a partner really benefit the
company’s objectives?
What is the expected payoff of the
venture?
Pre-alliance process: Building an SA
-
-
-
-
Partner selection: Strategic and
organisational analysis.
Avoidance of wrong choices and
unrealistic expectations.
Determination of scope of the
alliance.
Opt for simplicity and flexibility.
Managing an SA
Structuring the interface.
Managing knowledge flows.
Adopt appropriate structure for
governance.
Perspectives on SAs
-
-
Viewed as second best option.
Alliances need not be permanent.
Flexibility is essential.
An internal knowledge network is also a
must for organisational learning.
Evolution of the strategic role of an MNE in
terms of its overseas operations:
International (ethnocentric)
Multinational (polycentric)
Global (geocentric)
Transnational (dispersed but
specialized resources and activities
integrated into an interdependent
worldwide network)
For readings: Characteristics and aspects of
organizational architecture of
these strategies.
Challenges and opportunities for
each of these strategies.
Going global: first movers and
late movers
Advantages of first movers:
Preempt rivals and capture demand by
establishing a strong brand name.
Capture scale economies ahead of later
entrants
Benefit from a lower cost structure which
later entrants find difficult to match.
Create high switching costs making it
difficult for later entrants to win
business.
Disadvantages:
Pioneering costs can be heavy.
Chances of survival better if a firm enters
after others have already created
potential.
Regulations can change to the benefit of
later entrants.
Factors that may prevent companies
from venturing abroad:
“Liabilities of Origin” – Christopher
Bartlett & Samanthra Ghoshal
Feeling trapped “in prison of local
standards” and of strong domestic
demand for products
Being unaware of the company’s global
potential
Limited exposure to global competition,
leaving companies overconfident or
blind to potential dangers
But successful emerging MNEs have
overcome these constraints through:
—Push from home – eg. SAMSUNG from
South Korea and Thermax from India
—Pull from abroad – eg. Ranbaxy of India
Strategies for Late Movers:
(Bartlett & Ghoshal)
Benchmark and sidestep
eg. Jollibee of Philippines against McDonald
Confront and Challenge
eg. BRL Hardy against established wine
exporters in Europe
Learning how to learn
• Protect the past
• Build the future
Exercise:
How MNEs can manage conflicting
demands of
 global integration
 local responsiveness
 world wide learning
Focus on MNE strategy and Organization
Main preoccupations :



Internal consistency and cohesion of the
organizational set-up
Compatibility of organizational features
with the strategy of the company or the fit
between strategy and organization
Fit between company strategy and
organization on the one hand and the
competitive conditions in the market
These make demands on;

Structure of the company in its
operational aspects :
Decision-making
− Division into subunits
− Coordination / integration
−




Control systems and incentives
Processes
Organizational culture
Capacity to change, innovate and
learn
Structuring International Business Operations
Organizational structure typically changes:
As firms expand their international operations or modify their strategic
approach.
A common sequence:
An Export Department
International Division Structure with either
Geography or
Product Line as the basis for sub-division
Global Area Structure with countries or regions as basis
Or
Global Product Structure where a company organizes around a diversified set of
products or businesses
Global Matrix Structure
Where geographic and product division structures
overlap and decision making is shared between
product and geographic managers.
Thinking beyond the Matrix structure.
Organizational structure typically
changes:
When firms expand their international
operations or
They modify their strategic approach.
I A common first step:
An export manager with some staff
Or
An export department
Functional Divisions
Product Division
Structure
OR
Geographical
Area Structure
Global Product Structures
Global Area
Structure
OR
Global Product
Structure
Global Matrix Structure
Flexible Matrix Structure
Typical firm Structure:
I . Firm with a narrow product line:
CEO
FINANCE
PRODUCTION
HR
MARKETING
EXPORT DEPT
FOREIGN
REPS/BUYERS
II. Firm with a wide product line:
CEO
FINANCE
Small
Appliances
PRODN
HR
Large
Appliances
MARKETING
Industrial
Equipment
EXPORT DEPT
Financial
Services
Note: Export manager and staff may report directly
to CEO.
III. International Division on Product
Structure Basis:
International
Division President
Snack
foods
Beverages
Restaurants
Catering /
Supplies
IV. International Division on Area
Structure Basis:
International Division
President
NORTH
AMERICA
ASIA
SOUTH
AMERICA
EUROPEAN
UNION
Example: Harley – Davidson of U.S
V. The Global area structure:
CORP.STAFF
PRODN
CEO
MARKETING
FINANCE
EXPORT DEPT
R&D
Line Management
N. AMERICA
EUROPE
L. AMERICA
ASIA
INDIA
CHINA
INDONESIA
V. The Global Product Structure:
CEO
CORP.STAFF
PRODN
MARKETING
FINANCE
PERSONNEL
R&D
Line Management
Product
Divn. A
Product
Divn. B
Product
Divn. C
Product
Divn. C
EUROPE
ASIA
MIDEAST
AFRICA
Product
Divn. E
INDIA
CHINA
INDONESIA
Marketing
Production
Finance
VI. The Global Matrix Structure :
CEO
PRODN
MARKETING
Europe
Tractors
GM,
Tractors,
Europe
FINANCE
Asia
GM,
Tractors,
Asia
PERSONNEL
R&D
Other area
& Product
Divisions
Political Risk Rating Method –
A Model (IMR)
Type of
Risk
Pol./ Econ.
Environment
Examples
Minimum
Score
Maximum
Score
Pol. Stability
3
14
Possibility of Internal conflicts
0
14
External threat to stability
0
12
Degree of econ. Control
5
9
Dependability as trading
partner
4
12
Constitutional guarantees
2
12
Effectiveness of public
administration
2
12
Quality of labour relations /
social peace
3
15
Type of Risk
Domestic Econ.
Conditions
Examples
Minimum
Score
Maximum
Score
Pop. Size
4
8
Per cap. income
2
10
Econ. Growth last 5 years
2
7
Potential growth last 3
years
3
10
Inflation last 2 years
2
10
Openness of cap. Mkt for
foreigners
3
7
Availability of high quality
labour
2
8
Ability to hire foreigners
2
8
Availability of energy
resources
2
14
Regulations on envrt
4
8
Standard of infrast.
2
14
Type of Risk
External Econ.
Relations
Examples
Minimum
Score
Maximum
Score
Import restrictions
2
10
Export restrictions
2
10
FDI restrictions
3
9
Brand / T. Mark protection
3
9
Rstres on money transfers
2
8
Currency revaluation
previous 5 years
2
7
BOP condition
2
9
Amount of oil/energy
imports
3
14
Intl financial standing
3
8
Currency exchange
restrictions
2
8
Approaches to managing risk
Direct
Defensive /
Reactive
Indirect
Legal action
Risk insurance
(eg: ECGC of India)
Make operations
dependent on parent co.
Contingency planning
methods
Control makeup of
management
Home country
government pressure
Long-term agreements
Lobbying foreign
governments
JVs
Becoming good
corporate citizen to
host country
Linking / Merging
Promoting host goals
MODEL FOR ECONOMIC VIABILITY PROFILE
WITH WEIGHTS FOR DIFFERENT SETS
Criteria
Indicator
Growth Rate
Change of GDP
Weight
Level of Development GDP Per Capita
Inflation
Rate
Investments
as % of GDP
Fiscal Policy
Net Budget Deficit as % of GDP
External Debt
as % of Exports
Debt Repayment
as % of Exports
International Trade
Liquidity
Balance of Trade in % of GDP
Foreign Exchange reserves in % of
Imports
40%
30%
30%
EUROMONEY: COUNTRY RISK ASSESSMENT










Economic Data (25% weight)
Political Risk (25% weight)
Debt indicators (10% weight)
Debt defaulted/rescheduled (10%)
Credit ratings (10%)
Access to bank finance (5%)
Access to short-term finance (5%)
Access to international bond/syndicated
loan
markets (5%)
Access to forfaiting (5%)
Indian Corporate Acquisitions Abroad
2007 – Deals worth $42.6 b. (China 2007 - $13b. Russia - $15 b)
Largest: Tata – Corus; Hindalco – Novelis (Canada)
Between 2003 – 2004: Value of foreign acquisitions more than
doubled each year, with a compound annual growth of 108%
Success rate : Between 2003 and 2004 in 42 Indian deals, about
one-third generated 10% above the normal index for foreign
acquisitions.
Bains’ Study 2005: Only one-third of all foreign deals are
successful one year after announcement.
Indian companies, on average are as successful as these US and
European peers.
Some important ones:
Tata – Tetlee
Videocon – Thomson (color picture tube plants) 2005
VSNL – Teleglobe (Canada) – 2006
Dr. Reddy Labs – Betapharm (Germany) – 2006
Apollo – Dunlop South Africa (2006)
Mahindra – Valtra (Finnish truck co.)
United Breweries (Whyte & MackKay – Scotland)
Godrej – Keyline (FMCG firm, UK)
Jindal Steel & Power – iron ore mine in Bolivia (2006)
Tata Tea – Energy Brands (US)
Tata Motors – Jaguar / Land Rover
ONGC Videsh – Ominex, Columbia
Suzlon Energy – Hansen Transmission, Belgium
Indian IT could do substantial global acquisitions,
but the larger acquisitions so far have been in other
areas.
Acquisitions give Indian firms:
 a global scale
 a portfolio of recognized brands
 access to huge markets
But also involve as key challenges:
 difficult integration processes between different
management mindsets
 Stark cultural differences
 Out-of-sync operational processes
 HRs, deriving value through organizational structures
 Navigating complex labour laws
Indian MNCs in Boston Consulting
Group’s Challengers 100
Bajaj Auto
- Automotive Equipment
Bharat Forge
Birla Hindalco
- Non-ferrous metals
Cipla
- Pharmaceuticals
Cromption Graves
- Engineered Products
Dr. Reddy’s
- Pharmaceuticals
Infosys Technologies
- IT Services / BPO
Larsen & Toubro
- Engineering Services
Mahindra & Mahindra
- Automotive Equipment
Satyam Computer Services – IT Services / BPO
Suzlon Energy
Tata Consultancy Services
Tata Motors
Tata Steel
Tata Tea
Videocon Industries
VSNL
Wipro Technologies
-
Wind energy
IT Services / BPO
Automotive Equipment
Steel
Food and Beverages
Consumer Electronics
Telecom Networks
IT Services / BPO
China Challengers (41)
Bay steel
BYD
Changhong
Cherry Automobiles
China Mobiles
CIMC
CNOOC
FAW
Haier
Hisense
Huawei Technologies
Johnson Electric
Lenovo
Petro China
TCL Corporation
ZTE
– Consumer Electronics
– Home Appliances
–
–
–
–
–
–
–
–
–
–
–
Shipping
Oil
Auto equipment
Home appliances
Consumer Electronics
Telcom Equipment
Engineering products
Computers
Oil
Consumer Electronics
Telcom Equipment
Off-shoring Services
Widely used as a particular subcategory of
“outsourcing”
So 4 types of ‘outsourcing’ based on location and
control / ownership are:
1.
Captive onshore outsourcing: shift of intra-firm
supplies to an affiliated firm in the home country
2.
Non-captive: if shift benefits a non-affiliated firm
in the home economy
3.
captive offshoring: when supplies sourced from
an affiliated firm abroad
4.
Non captive offshoring: When supplies are
source from a non-affiliated firm abroad.
Outsourcing is not a new phenomenon.
Potential for offshoring depends on:
• technical and institutional separability
• to what extent the task is standardised
• transaction and managerial costs within the firm relative
to outside suppliers
• production costs
• size of the market
The location of offshored services depends on:
•
•
•
•
•
•
labour costs
trade costs
quality of institutions, specially legal framework
tax and investment regime
quality of infrastructure – esp. telecoms
skills – esp. language and computer skills.
Two-thirds of offshoring is estimated to be captive
offshoring
Estimates of size of offshoring services
in IT and Business Process:
OECD (2005): $32 b. (2001)
McKinsey (2003): $35 b. (2001)
India’s ranking:
In computer & Information
Services: 1(@ $ 31 b.)
In computer Information and
other business services: 8
Analyse:
India’s strengths
Weaknesses
Data on Indian IT exports
FY – 07
IT software
ITes – BPO
Total
FY (est.) 08
$22.9 b.
$ 8.4 b.
$31.4 b.
$ 28 – 29 b.
$10.5 – 11 b.
$ 39 – 40 b.
Industry employment in FY 07 - 1.6 million
indirect employment due to
IT – ITes
nearly 6 million
Total
7.5 million
Process of International Marketing
Motives for international marketing
− Growth
− Profitability
− Risk spread
− Access to imported inputs
− Uniqueness of product / services
− Life cycle-oriented marketing
opportunities
− Spreading R&D costs
SWOT Analysis
Decision to enter international markets
International marketing decisions
–
–
–
–
–
Market identification and targeting (Segments)
Choice of entry mode
Product decisions
Distribution channel decisions
Market promotion decisions
Enter international markets
Review performance
Consolidate marketing efforts for global
marketing
Computation of Market Potential
Is evaluated, according to one method by 8
dimensions with weights attached to each:
Measures Used
Market Size
10/50
Urban, rural populations –
Electricity consumption etc
Market growth rate
6/50
GDP growth rate
Market intensity
7/50
GNI per capita as per PPP –
private consumption.
Market consumption
capacity
5/50
Percentage of middle class in
consumption
Commercial infrastructure
7/50
Telephone and road density,
retail outlets etc
Market receptivity
6/50
Trade as percentage of GDP
Country risk
4/50
Analysis of international markets
2 Models :
BCG Matrix:
Classification of markets on the basis of growth rate and
market share:




High – growth High – share products (stars)
Low – growth High – share products (cash cows)
High – growth Low – share products (Question marks)
Low – growth Low – share products (Dogs)
Market attractiveness / company strength matrix:
Combining market attractiveness and competitive
strength of a company, both based on various
factors. Firm’s focus is to be at the point where
the two are very high.