Managing in a Global Context

Peter Zettinig
Spring 2016

Global Management
Session 2
Overall question in this course:

Which factors determine successful management of MNCs?

Today we focus on the questions:
How can MNCs strategic orientations be explained?
What are the implications for organising and managing?
AND
ENTRY MODE and OPERATIONAL DECISIONS

Global Management
Session 2
But first:

What did we take away from last session?

Discuss with your neighbour:
Vernons (1966) shift in IB/MNC theory
Buckley & Casson (1975) central explanation why MNCs exist
Dunnings eclectic paradigm framework its components

INTRODUCTION

FOUNDATIONS
What determines international success of MNEs in general?
Or in Strategy jargon: The MNEs competitive advantage?
Especially when we think of competition against local firms.
According to John Dunning (1988): MNE enjoys following advantages:

Ownership advantages

(i.e. to own assets in oil producing & oil

importing countries: coordination)

Location advantages

(i.e. different countries have different

advantages; i.e. Hong Kong World P&GDP)

Internalisation

(i.e. reduce transaction costs by internalising

market transactions inside the firm)

What would the competitive advantage of local firms be?

Global Management
Session 2

Lets try to use Dunnings OLI to make it valuable for strategic decision making:
Lets build a simple model of the organisation of work in an automotive MNE.
What do we need to consider?

Schematic example
Now: Lets think of a highly evolved industry: Automotive
Imagine: We have developed a particular technology that combines:
- electric drive train;
- electronics;
- revolutionary battery;
- high design user interface
We decide to start a company:
- The goal is to enter the global market for luxury sports cars.
- To create a firm that produces, manufactures and markets the car worldwide.
What needs to be done?

Global Management
Session 2

Lets try to use Dunnings OLI to make it valuable for strategic decision making:
Lets build a simple model of the organisation of work in an automotive MNE.
Processes
Resources
Relationships
Industry environment
Institutional and regulatory environments
Non-institutional environments
Value, value creation and value co-creation

Fundamental Concepts:
VALUE

Value

Value

Idiosyncratic

Value

Context Dependent

The question of success in business has always something to do with

the question of VALUE.
Conventional LOGIC:
You propose value (guessing),
And hope others agree.

The question of success in business has always something to do with

the question of VALUE.
Alternative LOGIC:
You define value
with others = value co-creation
And input your own parts into the realization of value.

You define value

with others = value co-creation.

THIS MEANS THAT YOU FORGET ABOUT

TRANSACTIONAL VALUE
BUT THINK
VALUE IN USE and VALUE IN THE MAKING
This is never only about MARKETING or SALES or PR but about the
WHOLE FIRM
BUSINESS CONCEPT INNOVATION

Any examples?

Overused examples

are:

The worlds biggest:

- video rental that does not own a shelf
- hotel that does not own a bed
- taxi company that does not own a car

Business
Concepts Innovation
A platform for global business-level strategy..?

Global Management
From Session 1
Back to Dunning

Components of Framework:
Ownership specific advantages...
Locations specific advantages...
Internalisation specific advantages...
...help us to understand why MNEs survive/are successful(?!)

The eclectic paradigm

The OLI or eclectic paradigm is a framework consisting of three theoretical perspectives

which helps us understand why the Multinational Corporation has been such a successful
organisational form (e.g. Vis--vis local competition).

The eclectic paradigm

O Ownership-specific advantages
Firm specific advantages (FSA)
and competencies

Usually intangible
Can be transferred at low cost
Create higher revenues/lower cost

MNC has to overcome higher cost (e.g. distance, foreignness, coordination, market
knowledge, networks, institutional diversity, complexity)
Usually three types of FSA:
-Monopolistic advantage (privileged access to input/output markets of scarce res.)
-Technology & Knowledge (innovation activities)
-Economies of large size (economies of scale & scope, learning, organisation,
diversification of assets and risks)

The eclectic paradigm

The eclectic paradigm

L Location-specific advantages (LSA).
The MNC enters new countries which provide LSA.
It then transfers its FSA and combines them with LSA.
The result is the creation of new value (new products; services, technologies, cost
structures, idea of co-creation, etc.).
Three general classes of LSA:
A. Economic advantages (factors of production, size of markets, infrastructure, etc)
B. Political advantages (Trade locations, FDI subsidiaries, specific policies, etc)
C. Social & cultural advantages (psychic distance, language, attitudes towards
business; etc).

The eclectic paradigm

The eclectic paradigm

I Internalisation advantages (IA).
The MNC enters new countries utilising a variety of entry modes.
Entry modes:

From arms lengths transactions (markets, exports, licensing), to

Hierarchy (wholly owned subsidiaries), to
Hybrid modes (international joint ventures, SAs, partnerships,
franchising).

Entry modes as means to organise governance are deployed for a number of

rationales, e.g.:
- access to demand/supply;
- access to technology/infrastructure;
- access to capital;
- access to knowledge, etc.

The eclectic paradigm

Dunnings eclectic theory has been criticised for being a shopping list of variables,
Kojima (1985). He questioned whether the framework has predictive power
(e.g. Can we predict where MNCs would invest next?)

The other major criticism was that it takes no account of the differences between
Strategic responses of firms to any given configuration of OLI variables.
(e.g. Can a past configuration preference be expected to be repeated?;
See later today also Rose & Ito (2009) oligopolistic reaction theory.
Dunning (1991) replied that responses to OLI configurations in the past would influence
future configurations (an argument developed by Neo-Schumpeterian scholars devoted
To Evolutionary Economics, such as Nelson and Winter (1982).
A third criticism was related to exogenous changes and how that may affect the I
Internalisation component of the framework (e.g. Government or Market driven market
Imperfections).
One way to look at OLI: Less prediction framework, more of a strategizing framework?

Why do MNCs exist?

Understanding the MNC

Global Management
Session 2

Think of OLI and discuss the context of the 1970s and 1980
when it has originally been developed.
What we like to find out:
Does this approach still hold in 2016?
Discuss with your neighbour:
What were the big changes in the last 35 years in the
international business environment and management of
firms and how might this have affected the usefulness and
theoretical soundness of OLI.
00

Why do MNCs exist?

Understanding the MNC

Global Management
Session 2

1. Emergence of intellectual capital as key

wealth creating asset.

See Dunnings (1999) JIBS Decade Award Winning Article

Why do MNCs exist?

Understanding the MNC

Global Management
Session 2

1. Emergence of intellectual capital as key wealth

creating asset.
-

Firms market value:

-

2,5 5 X of tangible assets (1990s)

1,5 X of tangible assets (1982)

What about 2016? Think of Apple being

one of the most expensive firms

Firms expenditure on IT systems now exceeds the

expenditure on production systems.
Knowledge component of manufactured goods: 20% in
1950s and 70% in 1995.
Knowledge creation/dissemination workforce in the US
increases from 42% (1960) to >60% (2000)
Services as part of GDP (45% in 1965 to 63% in 1995)
See Dunnings (1999) JIBS Decade Award Winning Article

Why do MNCs exist?

Understanding the MNC

Global Management
Session 2

1. Emergence of intellectual capital as key wealth

creating asset.
How does this put the MNE in a prime position for wealth
creation (via FSA capabilities)?

See Dunnings (1999) JIBS Decade Award Winning Article

Why do MNCs exist?

Understanding the MNC

Global Management
Session 2

2. Increasing globalization of economic activity

See Dunnings (1999) JIBS Decade Award Winning Article

Why do MNCs exist?

Understanding the MNC

Global Management
Session 2

2. Increasing globalization of economic activity

Development of transportation systems, information
and communication systems (technological advance)
Reduction of trade and investment barriers (e.g .WTO)
Ease/difficulty of transfer of intangible assets (while
some activities are dispersing others are
concentrating and clustering: Sticky within slippery
places) Globally Integrated Firm and Clusters!
PARADOX: apparent death of distance renewed significance of local clusters that are
poles of attraction to innovation and entrepreneurship
See Dunnings (1999) JIBS Decade Award Winning Article

Why do MNCs exist?

Understanding the MNC

Global Management
Session 2

3. Alliance Capitalism

See Dunnings (1999) JIBS Decade Award Winning Article

Why do MNCs exist?

Understanding the MNC
3. Alliance Capitalism

Global Management
Session 2

To achieve respective goals players engage increasingly in active

collaboration;
Inter-firm (horizontally and vertically) and intra-firm activities
intensifying (HQs and subsidiaries, subsidiaries subsidiaries);
See later today: The Global Integration Local Responsiveness
Framework and its typology.
Governments role to acknowledge this for the better good of
society.

See Dunnings (1999) JIBS Decade Award Winning Article

Global Management
Session 2

CONCLUSION
Why do MNCs exist?
Understanding the MNC
Subsequently we will look into some of the parsimoniously
selected issues that might help us to derive a fuller understanding
of the MNC and how it can successfully be managed.
Today makes the start with looking at MNC strategy and its
managerial implications regarding structure, control and complexity.

Global Management
Session 2
Session 2

Strategic Management & Structure

Group presentations:
GROUP 1.
Based on Akoorie and Scott-Kennel (2005) Chapter 9, Table 9.1:
Objective: We are building a consulting concept for our newly founded
consulting firm. Our mission is to use and build on sound scholarly
work to provide our clients with the best available tools to generate
business-level international strategy.
Make an expert selection of theoretical concepts and frameworks (use
table 9.1 as guide), introduce them briefly, state your motivation for
selection and show us an integrated framework that can be applied for
internationally active firms.

Global Management
Session 2
Development of MNC Strategies & Structures
Stopford and Wells (1972) analyzed the behaviour of international firms
and drew a development path (stage model) of how MNCs organisational
structures develop depending on two functions:
-Foreign product diversity
-Foreign sales as share of total sales

Global Management
Session 2
Development of MNE Strategies
Foreign Product Diversity

Worldwide
Product
Division

Global Matrix
(or Grid)

Area Division
International
Division

Foreign Sales as a Percentage of Total Sales

Cf. Stopford and Wells (1972). Strategy and Structure of the Multinational Enterprise. Basic Books, NY.

100

Global Management
Session 2
Development of MNEs Organizational Structures
Foreign Product Diversity

Worldwide
Product
Division

Global Matrix
(or Grid)

Area Division
International
Division

Foreign Sales as a Percentage of Total Sales

100
Stopford and Wells (1972).

How do you evaluate this from a 2016 perspective?

Global Management
Session 2
Development of MNE Strategies & Structures
Porter (1980) Three generic strategies classification
What are the principles?

Global Management
Session 2
Development of MNE Strategies & Structures
Porter (1980) Three generic strategies classification
What are the principles?
(1) Cost advantages through standardisation of products, processes,
services (Levitt, 1983)
(2) Differentiation toward specific buyer groups
Rationales?
Mechanisms?
How to take this concept to an international level?
What are the managerial questions? And what are its implications?

Global Management
Session 2
Development of MNE Strategies & Structures
Bartlett and Ghoshals Global Integration and Local Responsiveness
Framework
-Concept
-Relationship to Porters (1980) generic strategy and Stopford and Wells
(1972) work
What managerial questions do we derive from these strategic
positions, and from the structural and developmental implications?

Global Management
Session 2

Strategic Management & Structure

Session 2

GROUP 2.
You are the new managing team of Nestl.
The supervisory board of the corporation gives you the mandate to
transform the company from a multi-domestic firm into a
transnational corporation.
Introduce your management of change concept leaning on Bartlett &
Ghoshals Global Integration and Local Responsiveness Organising
Framework.
Put special emphasis on (a) standardisation gains; (b) local adaptation;
(c) synergies in purchasing, production, R&D and marketing;
(d) control and coordination of these operations; (e) configuration of
activities; and (f) a view of the overall organisational structure after
implementation.
Wrap all of these into a winning presentation to the board to get their
approval.

Global Management
Session 2

Strategic Management & Structure Session 2

CONCLUSIONS
IB and MNE theories can be used to build business strategy.
Strategies and Structures are to be discussed in the same context, in a
dynamic picture - they influence each other over time.
Strategy and Structure have to be analysed in the temporal but also
historic context of the firm and its environment.
Evolutionary Economics (Nelson and Winter, 2002) suggests that firms
do what they have been doing in the past (very simplified put)
deploying its resource-based advantages (Barney, 1991) and dynamic
capabilites (Teece, 2007).
This has to do with behavioural characteristics and human factors
(e.g. Cyert and March, 1964) - resistant to change but also in
institutional heritages and structural characteristics (Bartlett, Ghoshal
and Birkinshaw, 2004)....we will discuss this further in a later session..
That may explain why changing strategic directions and organisational
structures are usually difficult.

Global Management
Session 2

Strategic Management & Structure

Lets try to apply this case GEMS

Session 2

Multinational Management
Session 2
CASE 1: General Electric Medical Systems (GEMS)

Global Product Company (GPC) vs. In China for China

Task.
Analyse the overall challenges of GEMS in 2002 (i.e. Developed vs developing world;
Bio-tech vs. Machine engineering; demographic changes).
Discuss the strengths and potential weaknesses of the Global Product Company
(GPC) approach introduced by Immelt utilising conceptual frameworks used
so far in this course.
Make a recommendation for Hogan, whether to adopt the In China for China
approach. Be prepared to defend your arguments.

Multinational Management
Session 2
CASE 1: General Electric Medical Systems (GEMS)

Global Product Company (GPC) vs. In China for China

Task.
Use the Ownership, Location and Internalization paradigm by Dunning and analyse
GEMS 2002 position.
Use the Global Integration and Local Responsiveness Framework by Bartlett and Ghoshal
To analyse the implications for the in-China-for-China approach.

Multinational Management
Session 2b
Overall question in this course:

Which factors determine successful management of MNCs?

In literature (Madhok, 1997) it has been suggested that organisational
capabilities provide the richest explanation and best prediction of entry mode
choice in foreign markets. Firm-specific resources (RbV) are seen as drivers of
strategy Ekeledo & Sivakumar (2003).

Next we focus on the questions:

How do firm-specific resources determine entry mode choice?
and
What are choice implications for managing a MNC?

Multinational Management
Session 3
International Market Entry: What are the requirements?
Overall MNC objective: To create strategic advantages from their worldwide presence
and businesses.
In the 1980s many influential prescriptions for achieving this were developed.
Theodore Levitt (1983) The Globalisation of Markets
T Hout, ME Porter & E Rudden (1982) How Global Companies Win Out
G Hamel & CK Prahalad (1985) Do you really have a global strategy?
Do we know the essential prescriptions of these classics?

Multinational Management
Session 3
International Market Entry: What are the requirements?
Overall MNC objective: To create strategic advantages from their worldwide presence
and businesses.
Theodore Levitt (1983)
Effective global strategy is the successful practice of just one approach:
Product standardisation. One model, process and approach in all fits everywhere.
T Hout, ME Porter & E Rudden (1982)
To succeed in global strategy you need to develop many different approaches. E.g.
Exploit economies of scale through global volume; take pre-emptive positions
through quick and large investments and manage interdependently to get synergies
across different activities.
G Hamel & CK Prahalad (1985)
Instead of standardised products develop platforms. Investments in technology and
distribution can be shared. Competition is a chess game and cross-subsidising across
products is a winning strategy.

Multinational Management
Session 3
International Market Entry: What are the requirements?
Rose, Elizabeth L.; Ito, Kiyohiko (2009) Past Interactions and New Foreign Direct
Investment Location Decisions: Firm-Specific Analysis in the Global Tire Industry
Management International Review, Vol. 49, No. 5
Abstract:
Analyzing the nature of competitive interaction among multinational firms in the tire
industry, we find that the histories of the interactions between particular rivals matter.
The decision to enter a new foreign market in the era of global consolidation is related
to the identities of rivals in the market, characteristics of the firm and the market, and
the extent of past competitive interactions with the international pioneering firm.
Results suggest that, in an oligopolistic environment, aspects of multimarket competition
are important to foreign direct investment decisions.
Contributes to Oligopolistic Reaction Theory (Knickerbocker, 1973)

Multinational Management
Session 3
International Market Entry: What are the requirements?
Overall MNC objective: To create strategic advantages from their worldwide
Presence and businesses.
Advise shows that the nature of IB is complex and suggestions can be confusing.

So, how to achieve a winning concept for MNCs?

Multinational Management
Session 3
International Market Entry: What are the requirements?

So how to achieve a winning concept for MNCs?

Goals:

(1) Achieve Global Efficiency (see: Prahalad & Doz, 1987)

(2) Maintain Multinational Flexibility (see: Kogut , 1985)
(3) Learn from Worldwide Operations ( Bartlett, Ghoshal & Birkinshaw, 2005)

What are the goals for a winning concept?

What are the means for achieving these?
What are the implications for deciding on entry modes?
How to manage sets of different operational modes across markets?

Multinational Management
Session 3

Entry Mode Choices

Session 3

Williamsonian Transaction cost economics (TCE) and its influence on

Internalisation Theory (e.g. Buckley & Casson, 1976) is assuming opportunism.
Internalisation has been the traditional view on how to look at entry mode
decisions (e.g. Hennart, 1988).
In this internalisation view the entry mode decision is especially a decision that
defines the boundaries of the firm (in a Coaseen, 1937 way).
Ekeledo & Sivakumar (2004) among others revise this approach and look at the
decision from a resource/capabilities perspective (RbV).
Are there ways to look at entry mode decisions (managerial imperative: make or
buy) in ways that combine TCE with RbV?
[We will look into this more specifically in the next session: Kogut & Zander, 1993,
2003)]

Multinational Management
Session 2

Entry Mode Choices

Session
2
th

19 January, 2016

GROUP 3.
Introduce the framework and findings of Ekeledo & Sivakumar (2004).
Evaluate their resource-based approach to entry mode selection and
contrast it to a market failure approach (Internalisation, Eclectic
Theory).
From this evaluation, create a practical tool that managers of a MNC in
a specific context (if you need to choose, then choose industry, size,
degree of internationalisation, concrete firm example, country market
etc) could realistically apply to make more advanced market entry
mode decisions.
Defend your decision making tool.
Kaikkonen
Karvinen
Krebs
Le
Maaranen

Multinational Management
Session 3

Session 3

Entry Mode Choices: Hierarchical Internalisation View

Source: Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538),
Journal of International Business Studies, 31: 535554. Adapted graphic by Peng (2005).

T.b.c. on Thursday.