Policy Notes

Expanding Abroad

Why do nations trade?

- Creation of value
- Benefits for exporters
o Higher prices
o Increased volume
o Lower cost per unit
- Benefits for importers
o Lower prices
o Greater variety and increased quality
o Diversification of supply
o More selection

MNE – Multinational Enterprise?

Characteristics of true MNE

- Substantial Direct Investment in foreign countries (not just trading relationship of being exporter and
importer business)
- Active Coordinated Management of these offshore assets (not simply holding them as passive financial
portfolio)
- Strategy and Organizational Integration of ops located in diff country

Motivations to internationalize

- Traditional motivators
o Market Seeking: fill cap, exploit competitive advantage + econ of scales and scope
o Resource seeking:
 Secure key supplier
 Exploit factor cost differences (access low-cost factors of production)
- Emerging motivators
o Industry internationalization forces: scale econ, ballooning R&D investments, shortening product
life cycles
o Global scanning and learning capability: Access emerging trends, new tech, and best skills
worldwide
o Comp positioning: use global ops to pre-empt others, cross subsidize markets

When should company not internationalize?

- When company does not have solid footing in current market

- Lacking in resources
- Company is incapable of shipping supplies to foreign areas
- Too many global competitors

When can Internationalization be successful?

- Potential benefits
- Management skills
- Benefits outweigh costs
When you should not go global? Simple Test:

- Are there benefits for our company?

- Do we have the necessary management skills?
- Will the costs outweigh the benefits?

Means of internationalization

- Classic internationalization process:

o Incremental process of increasing commitment and understanding of foreign market (Uppsala
Model)
- Today many comp short-cuts this process
o In an internet age, many comp are even born global (FB, google, …)

Mentalities and Strategic Approaches to Internationalization

- International Mentality: Products developed for domestic market and only subsequently sold
internationally; resources are transferred from the parent firm to the foreign ops; international ops as
distant outposts that support the domestic parent company; firm regards itself as domestic with foreign
attachments
- Multinational Mentality; Company overseas markets as portfolio of local opportunities local adaptations
to products and strats; considerable independence of subsidiaries forms hq
- Global Mentality: company views world as single unit of analysis; products are developed for the global
market; emphasis on global efficiency ops managed centrally
- Transnational Mentality; Company simultaneously responds to local needs and global demands; balance
local responsiveness and global efficiency; dispersed, specialized, and integrated global activities
 Understanding the International Context

External Demands

1. Need for cross-market integration

2. National Responsiveness
3. Worldwide Innovation and learning

Force for global integration and coordination

- Econ of scale + scope

- Factor cost differentials (labor, raw materials)
- Increasingly liberalized environment for trade (EU NAFTA WTO)
- Expanding Spiral of Globalization

Global Competitors as Change Agents

For Industry globalization to take place:

- Underlying drivers (econ of scale and scope, etc.) have to be in place

- Always triggered by actions of one or two global “change agents”
- Examples:
 o By changing national tastes and behavior (Starbucks, premium coffee shops)
o By standardizing product formulations (P&G)
o By Transferring practices and know-how
o By playing “global chess’ (British Airways)

Why do firms need to be locally responsive?

- Cultural differences
- National Infrastructure
o Technical standards
o Distribution channels
- Government Demands
o National laws and regulations
o Host country pressures and demand
- Local Competitors
o Appeal to nationalism
- Customs
o Income, preferences, habits
- Economy
o GDP, disposable income, inflation, growth

Environmental Forces: Political Risks

- Impact of politics on markets

- Influenced by all the factors that might politically stabilize or destabilize a country
- Measures the stability of individual countries based on factors grounded in gov, society, security, and the
econ

Economic risk analysis tells corporate leaders whether a particular country can pay its debt, where as political risk
analysis tells them whether country will pay its debt

2 elements to political risk: shock and stability

- Shocks can occur external or internal

- Shocks alone are not a sign of instability

MNEs analyze a country’s political risk by assessing its stability, assessing:

1. Its political leaders’ capacity to implement the policies they want even amidst shocks
2. Their ability to avoid generating shocks of their own

Stability and Openness

- U.S. is stable due to its openness: info flows widely, people express themselves freely, institutions matter
more than personalities
- North Korea also stable for its closed
- China, political closed economically open

Techniques MNEs use to manage country political risk include:

- Recruiting local partners

- Limit/restrain R&D in nations with leaky intel property protection, like Russia
- Insurance against political risks such as expropriation of property, political violence, currency
inconvertibility, and breach of contract
CAGE Framework: Dimensions of distance

- Cultural distance; diff languages, diff religions, social norms

- Administrative and political distance: Trade and political unions, common currency, tariffs, trade quotas,
restrictions on foreign direct investment, subsidies to local firms, property rights, local content clauses,
corruption, weak institutions, political instability
- Geographic distance; distance to country, within country distances, access to waterways and oceans,
transpo and communication infrastructures
- Economic Distance: wealth and income of customers, resource and factor costs

Forces for Worldwide innovation and learning

- Shorter product life cycle

- Increased R&D costs, look for cheaper places to develop
- Global standards emerging
- Competitors’ ability to develop and diffuse innovation globally

Responding to diverse forces simultaneously

1. Global industries
a. Capitalizing on highly centralized, scale-intensive manu and R&D ops and leveraging them
through worldwide exports of standardized global products
b. Rates world as single integrated strategic unit
2. Multinational industries
a. Building strong, resourceful national subsidiaries that are sensitive to local market needs and
opportunities and allowing these subsidiaries to manage their local businesses by developing or
adapting products and strategies to respond to the powerful localizing forces
b. Treats the world as a portfolio of national opportunities
3. International industries
a. Exploiting tech forces by creating new products and processes in one’s home market effectively
and diffusing these innovations to foreign affiliates sequentially
b. Treats overseas units as offshoots of domestic strat

Responding to diverse forces simultaneously

- Increasingly industries are becoming transnational

- Transnational strat: responding to all 3 diverse and competing sets of cores: global integration, national
responsiveness, and worldwide learning

Developing Transnational Strategies

Goals: Means

Efficiency: National Differences

Flexibility: Econ of Scope – More different products, average production cost becomes cheaper

Learning: Scale of Econ

Efficiency = Value of outputs/Value of Inputs

High outputs the better, low inputs the better

Global Integration lowers the cost of inputs

Local responsiveness increases the value of outputs

Multinational Flexibility: the ability to manage risks and exploit opportunities due to changes in global
environment

Sources of Diversity and Volatility

- Ricks in price changes Macroeconomic Risks

- Political Risks
- Competitive Risks
- Resource Risks (avail of raw materials)

Building Multinational Flexibility

- Constitutes:
o Understanding plus managing different forms of risks
o Scanning and responding to discontinuities in global environment
o Selecting most attractive markets

Building Worldwide Learning

- Capture external diversity

o Worldwide stimuli as potential source of competitive info advantage
- Leverage internal variety
o Worldwide hr and capabilities as potential sources of comp adv
o Opportunity to leverage central and local innovations
o Create true global innovation by linking sensing, response, and implementation capabilities

Means to Achieve Strategic Goals

3 Fundamental tools for building worldwide comp advantage:

1. National Difference:
a. Differences in Factor Costs
i. Diff nations have diff factor levels
ii. Diff functions of MNE have diff factor requirements
iii. Locate functions in countries that fit the factor requirements best
b. Differences in output Markets
i. Counties have diff customer tastes and preferences, distribution systems, gov
regulations
ii. Exploit by reshuffling business models
2. Scale of econ
a. Macroeconomic theory: Cost per unit of output decrease with increase in sales
 b. Learning and progressive cost reductions
3. Scope of econ
a. Share investments and costs across the same or diff value chains
b. Sharing can take place across segments, markets, or products and may involve join use of diff
kinds of assets (production machinery, ICT, marketing, etc.)

Review Charts in 4th Lesson, Slides: 12

How a company can respond to the strategic challenges?

1. Defend worldwide dominance

a. Competitive environment forces firms to develop new capabilities
b. New balancing act required:
i. Reinforce existing competencies and develop new assets and capabilities
ii. Compensate for deficiency or approximate competitor’s source of advantage

2. Challenging the global leader

a. Step by step approach to building competitive position
i. Find and exploit niche
ii. Expand your position on both product and geographic dimensions
iii. Become Original Equipment Manufacturer (OEM) for competitors
iv. Move rapidly to convert niche position into global business or use acquisitions
3. Protecting domestic niches
a. Defend against competitors’ global advantage by changing industry structures and market
conditions (influence consumer preferences, tying up key distribution channels)
b. Offset the competitors global advantage (lobby for tariff protection, gain gov sponsorship)
c. Approximate the competitors advantage by linking up in some form of alliance or with viable
global company

Managing Differences – The central challenge of global strategies: The AAA Triangle – New Framework for Global
Integration

Adaptation: increase revs and market share by customizing processes and offerings; extreme cases local units in
each national market carry out all the steps in the supply chain

Aggregation: delivery economics of scale thru regional or global ops; standardization of product or service offerings

Arbitrage: exploitation of differences between national and regional markets; locating parts of the supply chain in
different places

Why do transformation efforts fail?

1. Not great enough sense of urgency

2. Not creating powerful enough guiding coalition
3. Lacking in vision
4. Under communicating the vision
5. Not removing obstacles to new vision
6. Not systematically planning for, and creating, short-term wins
7. Declaring victory too soon
 8. Not taking into consideration of corp cultures

Developing a Transnational ORG

Matrix Org

- Two reporting managers

- Two opinions, specialized level of expertise
- Product and functional manager
- Failures:
o Confusion, longer process of getting things done, require approval from both sides
o Overlapping responsibilities, turf battles, loss of accountability
o Very slow decision making

Decentralized federation

- Expanded abroad in period of high international barriers

- Strat based on understanding and responding to national markets
- Organization developed as a portfolio of national companies; heritage of management thru personal
relationships rather than formal structure
- Foreign units managed as offshore investments rather than single international business

Coordinated federation

- Expanded abroad in time of economic reconstruction: large advanced home market as knowledge source
- Organization built on strong links to the parent company based on transfer of expertise: heritage of
professional management, systems control
- Foreign units free to make adjustments to local markets, but dependent on parent firm for new products,
processes, and ideas
- Coordination and control of foreign subsidiaries thru hq

Centralized hub

- Expanded abroad in period of falling trade barriers

- Org grew, dependent foreign units tightly controlled from centre
- Strat based on capturing global scale econ
- Competitive strat demanded tight control over product development, procurement, and manu
Building and Managing the Transnational

3 Key Characteristics

1. Build multidimensional internal perspectives

a. Develop strong national subsidiary management, global biz management, and worldwide
functional management
b. Ensure multidimensionality in management perspectives and decision making
2. Build dispersed and interdependent physical assets and capabilities
a. Achieve efficiency by specializing the activities of selected units
b. Most efficient local plants might become regional or global production centers
c. Most effective R&D and innovative labs become centers of excellence
d. Most effective and creative marketing groups might become lead countries in developing
worldwide marketing strats
3. Build Flexible integrative processes
a. Benefits from central control and integration or local responsiveness might differ between biz
units, functions, and regions
b. Value or improve what the facility most needs based on region

Anatomy – cross functional teams, task forces

Physiology – volume, content, direction of info flows, higher complexity and uncertainty the greater the need for
info, informal and formal communication channels

Psychology – shared understanding of company’s mission, behavior of senior management, personnel policies

Emerging Markets and gaps they create

- Passion gap – lack of commitment to emerging markets

- Ambition gap – lack of aggressive investments to achieve high levels of growth
- Value proposition gap – revise biz models to meet the demands of customers
- Product line gap – design for emerging markets specifically
T-shaped structure

Front – end processes

- Highly localized
- Customer – facing processes should enjoy autonomy
- Alter incentives and opportunities offered to employees

Back-end processes

- Use emerging markets as platforms for globally segmented innovation and manu
- Break up R&D, relocate across several countries and integrate them globally
- Each country having its own area of expertise, and all areas necessary fro developing new products and
services

Tap subsidiaries for global reach

2 common assumptions on how to organize:

1. UN model: symmetrical treatment of subsidiaries

2. HQ hierarchy syndrome: HQs coordinate key decisions and control global resources; Subsidiaries are local
implementers of HQ decisions
Disadvan of the two models ^

1. Overresponsiveness to needs of less crucial markets and underressponsiveness to the needs of

strategically important countries
2. Underutilization of worldwide assets and capabilities
3. Demotivation of subsidiary managers

Strategic Leader – high competent sub; located in important markets; partner of HQ in developing and
implementing strat

Contributor: highly competent subs in relatively unimportant markets; but has distinctive capabilities that helps
the company

Implementer: are not exceptionally competent or located in strat markets; they carry out the corp strat and
generate satisfactory rev

Black: to exploit the learning potential; Not acceptable strat position, develop strat alliance
Shaping – setting course: strong, unifying sense of direction, otherwise more freedom will lead to chaos

Building differentiation: allocating roles and power

Directing the process

Culture

- The accumulated shared learning of group as it solves its problems of external adaptation and internal
integration; which as worked well enough to be considered valid and therefore to be taught to new
members
- Patter, or system of beliefs, values and behavioral norms
Creating Worldwide Innovation and Learning

- Companies need to achieve balance of responsiveness and scale

- 3 Key Capabilities SRI
1. Sensing
2. Responding
3. Implementing

Traditional Innovation

Center for Global vs Local for local

Center for Global

- HQ sense opportunities
- Centralized assets and resources of parent company are used to create a new product or service
- Implementing strat decided centrally and executed locally
- Dominate in international and global companies

Con: Risk of market insensitivity, imperialism, technological/competitive advantage of home market may fade

Local for Local

- National units sense needs

- Distribute assets and resources allow local response
- Local-for Local implementation
- Fit with multinational strategic model

Con: Risk of duplication, reinventing the wheel

Locally Leveraged – use of special resources and capabilities of each national subsidiaries for other units as well
Globally Linked – Resources and capabilities of many unites (center and subsidiaries) pooled together to
create/manage activity

Why is Reverse Innovation relevant?

The purpose of reverse innovation is that a firm would start developing a product for markets in emerging
economies or developing countries. The concept that they have lower needs and standards of living, so by
satisfying their lower level of needs then moving into a well-developed country and progressing the developing of
the product to fit the needs of the developed market. In correlation to Maslow’s Hierarchy of needs, where one
tier of the pyramid is satisfied, it moves up to the next level. Along with the fact that, developing products are
cheaper in developing countries as to researching and developing in developed countries. Emerging Markets are
no longer small, they have larger growth rates.

Reverse Innovation Method:

- Establish Local Growth Teams (LGTs)

1. Shift power to where growth is
2. Build new offerings from ground up
3. Build LGT from ground up
4. Customize objects, targets, measure
5. Report to someone high in org

Collaboration as source of competitive advantage

- Global companies need to build compet adv based on ability of their biz units, functions and subsidiaries
to collaborate

Value created thru Inter-unit Collab

- Cost saving thru transfer of best practices

- Better decision making, thru advice from colleagues in diff subsidiaries
- Increased rev thru sharing of expertise and products among subsidiaries
 - Innovation thru collaboration of ideas
- Enhanced capacity for collective action that involves dispersed units

4 Barriers to Inter-unit collab

1. Unwillingness to seek input and learn from others

a. Not invented here syndrome: ideas, knowledge and inventions developed outside their own
group are rejected
2. Inability to seek/find expertise
a. Needle in a hay stack problem: someone in comp knows answer, but is hard to find the person
who has the expertise with the person who needs it
3. Unwillingness to help (hoarding of expertise problem)
4. Inability to work together and transfer knowledge (stranger problem)

Engaging in Cross Border Collaboration

- What is strategic alliance

o Formal and mutually agreed commercial collaboration between competitors
o The partners pool, exchange or integrate specific business resources
o They still remain separate biz

Key motivators for alliance formation

- Tech exchange
o Tech, resources, capabilities, and R&D firms need to compete beyond their scope therefore need
to exchange
o Need to collaborate is intensified by short product life cycles
- Global Competition
o Collab to compete globally
- Industry Convergence
o They are converging and req cross-indsutry alliances
o Strat alliances as a way to develop complex and interdisciplinary skills
- Econ of scale and reduction of risk
o Pool resources and focus activities to increase the scale of activities
o Risk diversification thru multi partnerships
- Alliances as alternative to mergers
o Countries do not allow foreign ownership in some countries

Risks of competitive collab

- Benefits from collab maybe asymmetrical

o Appropriation (Adoption) of partners knowledge and skills, while carefully protecting their own
assets
- One partner can develop a competitive edge over the other and erode the other’s competitive position
- Successful partnerships will lead to the strengthening of a competitor
- Collab with competitor might be precursor to takeover

Cost of Strat and org complexity

 - Creates management costs
o Unclear understanding of the risks and rewards with the evolving partnership
o Differences in administrative heritage
o Coordinate and manage the diff alliance related tasks, requires additional costs
o Constant monitoring and adaptation of goals, tasks, and management processes

Building and managing collaborative ventures

Pre-alliance tasks

1. Partner selection
i. Analysis of complementarity of assets and capabilities of potential partners (physucial
assets, less tangible assets, and org cap)
ii. Avail of info
iii. Barriers of culture and physical distance
b. Mitigation Strats:
i. Assess partners willingness to invest resources
ii. Ensure clear understanding of goals of potential project
iii. Monitor partnerships cont.
2. Escalating commitment
i. Unrealistic expectations and wrong choices
ii. Managers personal enthusiasm can cause an unrealistic assessment of the benefits and
consequences of partnership
b. Mitigations Strats:
i. Operational managers will be involved in implementation should be part of the pre-
decision negotiation process
3. Alliance scope
i. Define simple focused scope of partnership
ii. Keep complexity as low as possible
b. Mitigation Strats:
i. Expand the scope of an alliance gradually as partners develop a better understanding
and trust

Post-Alliance Tasks

1. Managing the boundary

a. Management thru joint committees, admin control and governance mechanisms, or by creating a
separate legal entity
2. Managing knowledge flows
a. Ensure full exploitation of learning potential
b. Prevent the outflow of info or knowledge that should not be shared
c. Ensure that gatekeeps transfer relevant info to other parts of the org
3. Providing strategic direction
a. Equal distribution of decision making power can hinder effective management
b. Integrative quality: clear leadership in each task and each partner takes the responsibility for
each diff tasks
Implementing the Strat The future of trinational

Strats to develop a transnational org:

- Develop global efficiency and competitiveness

- Create worldwide innovation and learning
- Establish multinational responsiveness

3 Key management positions in the Transnational Company

- The global biz manager

- Worldwide functional manager
- Country subsidiary manager

Implementing the Strat

Global biz manager

Responsibilities:

Develop global efficiency and competitiveness

Roles:

1. Global biz strategist

a. Worldwide perspective on strategic position
b. Incorporate perspectives and interests of geographic and functional managers
c. Keep consistency of biz strat with corporate strat
d. Reconcile different views and prepare an integrated strat
 2. Architect of assert and resource configuration
a. Oversee the worldwide distribution of key assets and resources
b. Shape the future configuration by leveraging existing resources and capabilities
c. Link resources and capabilities in a configuration that resembles the integrated network form
3. Cross-border coordination
a. Decide on sourcing pattern
i. Building on the most capable national ops and capitalize on locations of strat
importance
b. Organize Cross-border transfer processes
i. Direct central control: for products of high strategic importance
ii. Develop internal market mechanisms: for commodity-like products

Worldwide Functional Manager

- Responsibility: Provide support to line managers, particularly by diffusing innovations and transferring
knowledge on a worldwide basis
- Role:
1. Worldwide intel scanner
a. Capture and transmit leading-edge info across national boundaries in order to track
trends, developments, and potential challenges and make appropriate adjustments
b. Establish functional specialist info channels to link local technologists, marketers
and production experts
2. Cross-pollinator of “best practices”
a. Identify plus evaluate leading-edge practices
b. Take initiatives that will expose others to new idea
c. Informal contacts
d. Formal reviews
e. Cross-unit visits and transfers
3. Champion of transnational innovation
a. Locally leveraged
i. Identify local innovations that have applications elsewhere by scanning the
company’s worldwide ops
b. Globally linked
i. Exploit company’s access to worldwide info and expertise by linking and
leveraging intel sources with internal centers of excellence

Geographic Subsidiary Manager/Country Managers:

- Link Global efficiency with Worldwide learning to Multinational responsiveness

- Responsibility: Defend company’s market position against global competitors, responding to local
customers and host govs, leveraging local resources and capabilities to strengthen the company’s comp
position worldwide

Roles:

1. Bicultural Interpreter
a. Local expert in needs of local market, competitor strategies, demands of the host government
b. Interpret information for corporate management
c. Communicate the importance of information to organizational members whose perceptions
might be biased by ethnocentric mindsets
 d. Interpret + apply corp goals and strats to local level of ops
e. Communicate corp strats to local employees
2. National Defender + Advocate
a. Defend need for national responsiveness
b. Ensure that the needs and opportunities that exist in the local environment are understood and
incorporated into decision making process
c. Advocate for role of subsidiary within the global ops
d. Identify and rep their national org’s key assets and capabilities and the ways in which they can
contribute to the MNE as a whole
3. Frontline implementer of strat
a. Convert corp strat plans into actions for subsidiaries while responding to host country demands
and pressures
b. Action needs to respect diverse local population, and be realistic enough to achieve the expected
corp outcome
c. Implement something the manager was against

Top Level corp Management

1. Provide long-term direction and purpose

a. Clarity: simplicity, relevance, reinforcement, etc.
b. Continuity: commitment to direction and purpose
c. Consistency: shared by all
2. Leverage corp performance
a. Provide controls, support, and coordination to leverage resources and capabilities to their
highest level of performance
3. Ensure cont renewal
a. Ensure an external orientation
b. Develop a questioning attitude
c. Legitimize new initiatives

Check slides for 4 MNES