Aureus SummaryInternational Strategy (lectures)

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Lecture Notes

1

International Strategy

To Keep in Mind

- Three main successive questions discussed in each lecture:

1. What are the opportunities and threats stemming from the international institutional

and competitive environments?

2. What are the entry motives for a specific firm and how to choose foreign

locations?3. How to successfully enter the targeted product/service market and

implement the entry mode selected?

Lecture One: Globalisation and Four International Strategies

- A small group of giant companies dominate the global economy. Think of Facebook,

Ikea, Starbucks, Walt Disney, Coca Cola, Amazon, et cetera.

- The world is becoming more interconnected than ever in human history - especially,

the relation between international trade, communication, and politics.

- Globalisation can be seen as an opportunity, but also as a new challenge.

Globalisation is difficult to define, but one thing is clear. The terms economy, ecology,

society, and politics are no longer limited to the national level because the world has

become so interdependent.

- Modern communication technology and mass media are global standard. This means

that information can be distributed worldwide in real time at affordable prices. Also,

the cost for transportation of products has dropped significantly since 1930 due to low

fuel prices and the development of new means of transportation - in particular,

container shipping. These are a result of technological advancements.

- Since the 1980s the richer, more industrialised countries, work towards removing

trade barriers, such as tariffs, import quotas and bans worldwide.

- New technologies, decreasing transportation costs, and the liberalisation of

international trade has made it possible and profitable for major companies to produce

and sell worldwide.

Lecture Notes

2

- The three main areas of globalisation:

- Area 1 - Economy. It is a major catalyst for globalisation and is also the most affected

area. International exports and foreign direct investment of companies/governments

have increased substantiality. Also many companies are searching for new markets in

new countries with low wages and soft environmental regulations, leading to an

increase in multinational companies.

- Area 2 - Politics. Policy issues like climate change, the financial crisis, or terrorism,

do not care about borders - such problems can not be solved by a single state alone.

Thus, politics tries to react by attempting to make decisions in broader groups of

countries, like the EU and the UN. Moreover, there are more international pressure

groups, that do not belong to a particular state. These so-called non-governmental

organisations are able to exert influence in politics related to their field of work, such

as Greenpeace.

- Area 3 - Culture. The term mik world describes how the western culture becomes

dominant and destroys cultural diversity. Global distribution of western music, news,

products, and the English language promotes the milk world effect.

- Globalisation is a very complicated concept. Some countries benefit more, others

benefit less. Countries such as Brazil, China, India, South Korea, and Taiwan gain an

advantage from their integration into the world economy - they can build up their

factories with foreign direct investment and sell their products internationally. Due to

low wages in these countries, their products are very competitive on the world market.

On the other hand, there are huge regions that are currently not benefitting from

globalisation. Think of most of African countries, which are not prepared sufficiently for

tightened international competition. The cheap products produced by industrial and

newly industrialised countries flood the local markets and destroy local production

facilities.

- Globalisation is both a threat and an opportunity for industrialised countries. On the

one hand, they can acquire new markets for their industrial goods (opportunity). On

Lecture Notes

3

the other hand, they are facing the competition of newly industrialised countries that

can produce at lower costs (threat).

- Dimension of globalisation:

• Firms - global vs local (worldwide scope)

• Products - global vs locally tailored (worldwide similarity)

• Markets - globally linked vs isolated markets (worldwide integration)

- Levels of globalisation:

• Firm (Micro) - globalisation of production, where the value chain is spread around

the world. Think of a car producer having a facility in Germany, but also in China.

• Market (MESO) - globalisation of markets. Porter's Five Forces with same

competitors, suppliers, or taste of customers throughout the world. Think of the PS4

which is sold around the globe in different market.

- Advantages of disadvantages of globalisation:

Advantages Disadvantages

Expanding the market: leveraging products and comeptences

Liabilities of newness and foreigners (risks)

Location economics: global web of resources Cost of governance and coordination

Experience effects: learning effects - economies of scale

Diseconomies of scale and scope

Leveraging subsidiary skills Differences in customer tastes and preferences

Capital markets and employees favour fast-growing firms

Multipoint competition

-

Lecture Notes

4

- Understanding host-country institutional and competitive environments is a difficult

task.

- The PESTEL, or also known as, STEEPLE Framework is a business tool that

enables companies to analyse their environment in terms of Social, Technological,

Environment, Ecological, Legal, and Economic.

- To go from Macro, to Meso, to Micro, a firm must identify changes, to develop

responses. In doing so it must:

1. Select key variable

2. Forecast changes

3. Estimate Impacts

4. Devise a Strategy (as a result of step 1 to 3)

Lecture Notes

5

- Companies can benefit from having a home environment that is forward-looking,

dynamic and challenging - a National Competitive Advantage. Porter created a

national competitive advantage model, as follows:

- To illustrate how to apply this model, an example is displayed below questioning why

Japan succeeds in electronics and other countries fail:

Lecture Notes

6

- Government is a proactive economic development plan initiated by the government,

often in collaboration with the private sector, that aims to develop or support particular

industries within the nation. Any country can attain economic prosperity by cultivating

new and superior factor endowments through proactive National Industrial Policy,

such as:

• Tax incentives to encourage investments in R&D, plant, equipment and worker skills

• Monetary and fiscal policies

• Rigorous educational systems in high value-adding areas

• Development and maintenance of strong national infrastructure

• Strong legal and regulatory systems to ensure citizens' confidence

- In modern society, the most important source of national advantage are the

Knowledge and Skills possessed by individuals, firms, industries and countries.

Countries must invest in R&D, education and infrastructures. Think of Silicon Valley

and Bangalore in India, which are major leading business clusters.

- There are two types of competitive pressures:

1. Pressures for Cost Reduction

• Cost reduction through scale economies

• Uniform service to global consumers

• Conduct global sourcing of resources

• Monitor and respond to global competitors

• Take advantage of media

2. Pressures for Local Responsiveness

• Leverage national endowments

• Cater to local customer needs

• Accommodate differences in distribution channels

• Respond to local competition

• Adjust to cultural differences

Lecture Notes

7

- The competitive pressures can devise a strategy:

- Global Standardisation Strategy: world as a single market via economies of scale,

learning effects, and location economies; low cost strategy on a global scale.

- Localisation Strategy (Multinational): each market is unique via local customisation;

high costs imposed the duplication of the value chain worldwide must be

compensated by a higher price.

- Internationalisation Strategy: main competitive weapons stay at home with

duplications of the value chain worldwide; permitted by universal needs and low

competition.

- Transnational Strategy: core competencies and skills spread worldwide via limited

standardisation and search for global scale. The strategy requires global learning:

• Multidirectional transfer of skills between subsidiaries, and between subsidiaries and

the corporate centre

• Foreign subsidiaries must keep freedom to develop their own skills and

competencies

Lecture Notes

8

Lecture Two: Corporate Strategy

- Corporate-level Strategy is concerned with the overall purpose and scope of an

organization and how value will be added to the different business units.

- Questions raised at corporate level are:

• What is the core business unit of the organization?

• What are the levels of growth and profitability of each business unit?

• How to allocate resources among business units? In which business units to invest

or divest?

• How to create value at the group level through synergies between business units?

- Ansoff Matrix: a strategic planning tool that provides four main directions on a

corporate level.

- Market Penetration Strategy: increasing the market shares in the existing markets

with the existing products. To succeed: economies of scale, learning effect and

greater bargaining power towards suppliers and customers. The challenges include

retaliation from competitors leading to possible price wars, and national and

international anti-trust commissions.

- Product Development Strategy: maintain or increase market shares in the existing

markets thanks to new products. To succeed: important level of R&D. Challenges

includes that it is risky and costly to launch new product, the need for new capabilities,

and uncertainty surrounding success of product.

- Market Development Strategy: maintain or increase market shares with existing

products in new markets. To succeed: either tackling new customers' segments,

Lecture Notes

9

developing new uses of existing products of tackling new geographical markets. The

challenges include a trade-off between global standardisation and customisation.

- Diversification Strategy: maintain or increase market shares in new markets with

new products. Challenges include high controversiality due to possible inability of the

CEO to understand and cope with the difficulties existing in very different markets,

possible lack of synergies between the business units, and criticism of shareholders

that prefer to diversify their portfolio themselves. To succeed two conditions must

hold, a valuable economy of scope among the business units and less costly for

CEOs inside firms to realize these economies of scope than for outside shareholders.

- Unrelated Diversification versus Related Diversification

- Value Chain: the process or activities by which a company adds value to an article,

including production, marketing, and the provision of after-sales service.

- Vertical Integration: a firm enters other businesses upstream or downstream its

value chain and within its own industry.

Lecture Notes

10

- Horizontal Integration: a firm enters complementary businesses within or outside its

own industry

Advantages of MAKE (vertical integration) Advantages of BUY (vertical desintegration)

Lowering costs Strategic flexibility

Facilitating specialised investments Lower costs by reducing internal bureaucratic and control costs, avoiding lack of internal incentives to reduce costs, and not having to determine appropriate transfer prices between business units

Protecting proprietary product technology Offsets (i.e., capturing more orders from a country)

Accumulating dynamic capabilities

Improving scheduling

Disadvantages of MAKE (vertical integration) Disadvantages of BUY (vertical desintegration)

Structure and administration costs Search for a partner

Possibly inappropriate allocation of resources Negotiation with a small number of potential partners

Lack of incentives and competition in spirit Price determination

Contract adjustment and renegotiation over time

- Advantages and disadvantages of vertical integration - with respect to Make or Buy

Decision:

Lecture Notes

11

- Organizational Architecture

- Three important conditions should be fulfilled for reaching performance:

• Internal consistency

• Fit with the strategy of the firm

• In line with competitive conditions prevailing in the firm's markets

- Organizational Structure involves:

1. The location of decision-making responsibilities (vertical differentiation;

centralisation vs decentralisation)

2. The formal division of the organization into subunits (horizontal differentiation;

function, product division, geographic area)

3. The establishment of integrating mechanisms to coordinate the activities of

subunits: cross-functional teams and/or pan-regional committees

- Vertical Differentiation - Centralization:

1. Facilitate coordination

2. Ensure that decisions are consistent with organisational objectives

3. Give top-level managers the means to bring about the needed major organisational

changes

4. Avoid duplication of activities

- Vertical Differentiation - Decentralization:

1. Avoid overburdened authority and poor decisions

2. Boost motivations

3. Permit greater flexibility and more rapid response to the environmental changes

4. Deliver better decisions

5. Increase control by creating self-contained subunits, accountable for their

performance

Lecture Notes

12

- Decisions regarding overall firm strategy, major financial expenditures, financial

objectives, and legal issues are typically centralized at the firm’s headquarters.

- Operating decisions, such as those relating to production, marketing, R&D, and

human resource management, may or may not be centralized depending on the firm’s

strategy.

Lecture Notes

13

- Structures with respect to Horizontal Differentation

• Domestic Firm

• Product Divisional Firm

• International Division

• Worldwide Area Structure

• Worldwide Product Divisional Structure

• Global Matrix Structure

- Formal Integrating Mechanisms:

1. Direct contact between subunit managers

2. Liaison role taken by one person in each subunit on a regular basis

3. Temporary or permanent teams composed of subunit individuals

4. Matrix

structures -

tend to be

bureaucrati

c, inflexible

and

characterise

d by conflict

Lecture Notes

14

- Informal Integrating Mechanisms:

1. Knowledge networks, which tend to be particularly appropriate for transnational

strategies

2. Use of telecommunications information systems, of rotation of managers through

various business units, of management education programs, etc.

- Knowledge Network: a network for transmitting information within an organisation

that is based not on formal organisational structure, but on informal contacts between

managers within an enterprise and on distributed information systems.

- Control: to ensure the actions of the subunits of the firm are consistent with the firm's

overall strategic and financial objectives.

- Control - Direct/Explicit:

• Personal Control: control by personal contact with subordinates, most widely used

in small firms

• Bureaucratic Control: control through a system of rules and procedures that directs

the actions of subunits.

- Control - Indirect/Implicit:

• Output Control: setting goals for subunits to achieve and expressing those goals in

terms of relatively objective performance metrics.

• Cultural Control: employees buy into the norms and value systems of the firm.

- Culture: a system of values and norms that are shared among people.

- Three main sources of culture:

1. Founders and leaders

2. Broader social culture of the nation

3. History of the enterprise

- How does a firm maintain organisational culture over time?

• Hiring and promotional practices

• Reward strategies

• Communication strategy

• Socialisation processes

Lecture Notes

15

Lecture Three: Internationalization at FrieslandCampina

- FrieslandCampina is owned by 19,000 ambitious member farmers. This means it is a

cooperative model. It is owned and established by the farmers themselves.

- Key facts and figures:

• 11.3 billion in euro revenue

• 22,049 employees

• Facilities in 32 countries

• Export to over 120 countries, sell in 150 countries and there are 196 countries in the

world

• Key brands: Friso, Dutch Lady, Friso

• Key products: Cheese, Dairy Beverages, IFT (Infant food)

- Hub: is one group of factories that produces more or less the same. They do not need

to be in the same location. FrieslandCampina supplies 8 out of 10 RFC hubs, this

means they sell a lot of different products from the Netherlands. The hubs can be

anywhere in the world.

- In the African region FrieslandCampina sells Dairy Beverages (dominance in East-

and West-Africa) and Cheese (dominance in Northern Africa).

- FrieslandCampina may have local people in Africa.

- FrieslandCampina partner with local distributors in order to sell products in various

channels:

• Wholesale: compare this to Makro, difference is that in the Netherlands you will have

20 outlets, here you will have probably one that is individually owned.

• Semi-wholesale

• Supermarkets: individual owned, not really a chain

• Over the counter street shops

• Self service street shops

• Table tops: open markets on the street

(Bottom three usually where you find the FrieslandCampina products)

- These countries do not have big supermarket chains. To sell to a consumer, you have

to be in all these small shops, with difficult communications because they are all

individually owned.

- Can you sell cheese in the street shops? How do you keep your cheese cool?

FrieslandCampina has cooled supply chains. It is difficult to keep it cool in the small

street shops and markets. Currently, arguments with distributors on the chilled chain,

which they can control. Small shops don't have cooling elements, but they do sell

Lecture Notes

16

cheeses. This is actually one of their challenges that regard quality control. They don't

look fresh and they small bad - due to the temperature in the African countries.

- FrieslandCampina does not have many markets left to enter. Typically, they conduct a

MaBa analysis (Market-and Business attractiveness). They prioritise

country/category combinations on business- and market attractiveness. Business

attractiveness in terms of can they leverage a position, are there strong competitors

present/how competitive is it. They also look at how attractive the market is; is the

dairy consumption growing, can we access this market.

- Example of a MaBa Analysis:

- Sometimes they also simply sell into a market because they have milk left over.

Since it is owned by farmers, they have the duty to sell what the farmers supply

them with.

- FrieslandCampina does not only buy milk from their own farmers. They often source

from there local farmers - these don't join the cooperative, but these have long

standing relationships with the firm.

Lecture Notes

17

- Currently, FrieslandCampina has a development program running with farmers in

Africa. There are not many local farmers in Africa. If it was up to FrieslandCampina,

they would do so. Hence, source local suppliers.

- Healthy cows, have more protein, which makes a healthier product.

- Predominantly edam cheese sold in the north of Africa. Make our main business with

others hubs, such as chocolate, yoghurt.

- Business Models

Growing export business requires different business models per growth stage.

- FrieslandCampina has offices in Cairo, Algeria, and Casablanca.

- Is there another way? Growing locally adding value!

- Business Model Canvas is a really nice tool to think about the business model.

Giving structure to things you have to think about.

- Difference between hard, semi-hard, and soft cheese? Soft cheese is soft cheeses

you have in France, brie. Hard, semi-hard is the cheese we have in the supermarket.

Relationship based

trading

Distributor

management and

brand control

Distributor

management and

channel control

Distributor

management and

commercial

control

Logistic services

providing and full

commercial

control

Exporting

consumer

products

from the

Netherlands

Supply

raw

materials

for local

packing/sli

cing in

Supply

raw

materials

for local

promotion

of

Develop

local

farmers

to supply

milk for

local

Fully

independent

operating

company

Lecture Notes

18

- Gouda cheese contains no lactose.

- The cheese market in Algeria:

Eating is part of your daily habits, and eating habits are very social in the Northern

African country. Look at the GDP of the countries, what do they have to spend? How

much money do they have to spend on a day? For how much should the cheese be

sold?

- How does FrieslandCampina apply the canvas model?

- People in Northern America are used to FrieslandCampina cheese, because they

have been selling for many years so far.

- Bel is a big competitor to FrieslandCampina. Bel sells a broader product portfolio,

predominantly in the processed cheese model. They only sell hard, semi-hard cheese.

FrieslandCampina believes they have better quality.

- In Africa, there are many challenges. For instance, there is an import ban in Algeria.

No finished goods can enter the market, because they want to protect their own

economy. They want to protect their own value. They pack and slice their own cheese

in Algeria, this gives them an advantage of selling they products.

- Bel was already in Algeria when FrieslandCampina entered the Algerian market. It all

started with a partnership with their local farmers. You can try with local authorities.

Lecture Notes

19

- Value chain of FrieslandCampina in Algeria - office since 2015, one distributor, pack

facilities (cut and slice). Ship blocks and wheels to Algeria.

- Sustainable footprint is very important! Also in African. Western society is more aware

of this though.

- Sometimes FrieslandCampina acquires another company - they once did a merger

and acquisition in Pakistan. They go straight to the logistic service providing and full

commercial control.

- Algeria is a French speaking country, Bel is a French speaking company.

FrieslandCampina does not believe that this gives Bel a competitive advantage. They

believe they have a competitive advantage because they have a Algerian farmers on

their payroll.

- In terms of marketing they do ATL communication, traditional media, television, radio,

billboarding, Facebook (some countries more subscriptions to mobile phone than

people living in a country, such as in Algeria - this is a great opportunity for

FrieslandCampina to market through mobile phone).

Lecture Notes

20

Lecture Four: Business Strategy - An International Perspective

- There are three units of analysis through which we can use several tools:

- The Five Forces of Porter are five threats; threats of entry, threats of substitutes,

bargaining power of buyers, bargaining power of suppliers, and threat of rivalry.

- The Five Forces of Porter over time:

- Smart, connected products dramatically expand opportunities for product

differentiation, moving competition away from price alone. Knowing how customers

actually use the products enhances a company’s ability to segment customers,

customize products, set prices to better capture value, and extend value-added

Lecture Notes

21

services. Smart, connected products also allow companies to develop much closer

customer relationships. Through capturing rich historical and product-usage data,

buyers’ costs of switching to a new supplier increase. In addition, smart, connected

products allow firms to reduce their dependency in distribution or service partners, or

even disintermediate them, thereby capturing more profit. All of this serves to mitigate

or reduce buyer’s bargaining power. (Retrieved from How smart, connected products

are transforming competition - Porter and Heppelmann)

- One exploiting industry structure opportunity is structure itself. There are four

predominant types of Industry Structures:

Where, the opportunity in each industry structure includes:

- Process Innovations relate to design, production, and selling activities.

- Two main criteria for identifying appropriate business units:

• Market-based Criteria: each business unit is targeting one customer type, through

one sort of distribution channels and faces each specific competitors.

• Capabilities-based Criteria: each business unit is requiring specific identical

capabilities.

Two additional issues to considers on the international scene:

• Differences between countries in the structure of market segments

• Existence of segments that transcend national borders

- Business-level Strategy: what are the key success factors for improving my position

and building a long-lasting competitive advantage in a particular market.

Lecture Notes

22

- Porter's three generic business strategies:

- Value Creation is measured by the difference between the value of the product to an

average consumer and the cost of production per unit.

- Cost Leadership: focuses on gaining advantages by reducing its costs to below those

of all its competitors.

- Product Differentiation: focuses on gaining advantages by increasing the perceived

value of its products or services relative to perceived value of other firms' products or

services.

- How do firms achieve cost leadership?

• Economies of Scale; lowering per unit production costs

• Learning Effect; costs of production are reduced of a same percentage when the

cumulated quantity produced doubles.

• Location Economies; arise from performing a value creation activity in the optimal

location for that activity, wherever in the world that might be.

- How do firms achieve differentiation?

1. Product features

2. Product complexity

3. Links with other firms

Lecture Notes

23

4. Product mix

5. Timing of product introduction

6. Product customisation

7. Location

8. Distribution channel

9. Product/service - bundle of attributes

- Across countries, cultural differences, economic development and technical standards

must be accounted for while differentiating products.

- Focused Strategy (or Niche Strategy) involves gaining a competitive advantage

either via cost leadership or differentiation on a limited segment, even unique

segment, with a highly differentiated offer:

> Particular buyer group;

> Different segment of a product line;

> Or different geographic market.

- Conditions to succeed in a focused strategy: the size of the targeted market must be

rather small and specific assets must be required.

- Price Discrimination across Countries: when consumers in different countries are

charged different prices for the same product.

- Strategic Pricing:

• Predatory Pricing: to drive weaker competitors out of a national market.

• Multipoint Pricing: a firm's pricing strategy in one country has an impact on its

rivals' pricing strategy in another country.

• Experience Curve Pricing: unit costs fall due to experience effects and economies

of scale.

- Regulatory Influences of Prices include antidumping regulations and competition

policy.

Lecture Notes

24

- To illustrate the pricing strategies:

1. To accept initial losses for imposing a substitution product (Dumping)

2. To adapt low costs with low prices (Domination)

3. To maintain the prices for gaining margins (Umbrella)

4. To buy market shares (Rattrapage)

5. To progressively quit the market will maximising the profitability (Abandon)

- The above five types of pricing strategies are at a stage of their life cycle. The firm

here is either dominating or dominated in the industry.

Lecture Notes

25

Lecture Five: Competitive Intelligence (A Practitioner's Introduction) -

Part 1

- FrieslandCampina is a diary cooperative. They sell all over the world, where 50% of

the sales are made outside of Europe.

- Competitive Intelligence applies ethical and legal methods to understand company's

business environment:

- Ethics: e.g. how does my action contribute to our company's reputation when 'in

print' or 'online'?

- Compliance: e.g. FrieslandCampina compass global compliance program

- Competitive intelligence is essentially an instrument to map the world outside the

company. It is a member of the broader intelligence family. Its principal lies in the

private sector - marketing, strategy, and supply chain. Its target are the competitors,

where the typical requirements are competitor assets, financials and plans.

- Business Intelligence is about the companies' own data. For instance, all the data in

the sale system. In business intelligence you would extract this data. It tells you which

channel, what product, etc. In short, an analysis of a firms' own data.

- Customer intelligence is about the world around the company. The business, here, is

your internal data. A typical competitor intelligence focus question is "what will be the

impact of the appointment of the new CEO at Pear Phones on Pear's innovation

strategy?". To illustrate the difference, a typical market intelligence focus question is

"what is the growth percentage of the car market in Brazil in value?".

- Think in terms of questions. Which questions do I need to answer in order to reach my

objective? Decisions determine whether your execution wins. What will be your

marketing budget? Supply chain strategy? Sales channels? Only when you have

answered these questions, based on the facts, you will know what you need to know.

That's when you guide your strategy.

- Competitive intelligence questions have common features:

1. Future oriented

2. Open questions

3. Business environment-oriented

4. Factual, but usually require intelligence analysis methodologies

5. Top-down; usually to be answered by a report of the person asking

6. Input to decision-making

7. Are to be answered rapidly

8. Ambiguous

9. Are often driven by political or emotional rather than factual needs

Lecture Notes

26

- Avoid getting into the labyrinth of your own corporate finance.

- In competitive intelligence you distinguish a process and a project. A process is

shallow and broad, that is similar to a radar constantly screaming around the world for

new things. A project is narrow and deep, that you constantly monitor and seek for

facts.

- Threat* Analysis = Competency** + Intent + Surprise

- Threat Analysis: what is the competitor able to do?

- Competency: what can the competitor do?

- Intent: what does the competitor want to do?

- Surprise: a competitor that feels threatened may make unexpected moves

*Threat may also be opportunity

** Competency may also be capability

- You see a differences between competences and intent; that for instance, a

company wants to grow faster (intents) than its' balance sheets (their competences)

allows it. Then you see two options, the company goes downhill or the CEO is fired.

The competences also allow faster grows that their competences.

- Competences determine the competitive advantages. It is about actors and factors -

management excellences, sales channels, IP, balance sheet, profit pools, CEO, fixed

assets etc. Together they make up the basis of competitive advantage.

- Competences and capabilities and intent assessment both aim to prevent surprise.

Lecture Notes

27

Lecture Five: Strategic Analysis Tools as Hidden Driver behind Market

Victories - Part 2

- One of the tool that FrieslandCampina applies to competencies is the War-game

Approach. It is increasingly popular in business.

- When a company enters our market we anticipate Re-active. Whereas, when we

enter a company's market, we anticipate Pro-active. War-games are played to pro-

actively or re-actively anticipate our future competitive playing field.

- Capitalise on the thing in common, avoid investing in things you don't need.

- For war games we set soft and hard targets:

- If you've got a team that is more confident than another team, that team achieve more

with the same resources. The war game can contribute to this team spirit!

- Move around myths in a war-game setting! FrieslandCampina uses three questions;

that give structure to their work:

1. Do what?

2. So what?

3. Now what?

Lecture Notes

28

- How do we play? FrieslandCampina always use a standard two-round format, in

which it always playing. The adversary in the first round; Flow of the preparations and

the first round of the game:

- The second round we use to stress-test our attack or strengthen our defense plan by

post-game decision-making:

- To enhance ‘strategic intensity’ of the game we may use one or more gaming

instruments:

> Play the competitor’s CEO

> Visualize the adversary’s intent, to make strategy tangible

> During the first round wear competitor sticker, cap, T-shirt...

> Create fog of war

- Antecedent success factors are many: leadership and commitment stand out:

- Pre-Mortem Analysis is another tool. Post-mortem analysis means the business has

died, and how come the business had died, and what had led it to happen. Pre-

Mortem is the other around; we are here today, how can we believe an incredible path

to grow the business in three years with for e.g. a factor or 10.

- Le Groupe Bel's Challenge: keep FrieslandCampina out and strengthen your own

market share. The pre-mortem tool may help us to identify what should happen? So,

Pre-Mortem Analysis imagines a future situation and wonders what path has got us

there.

Lecture Notes

29

- Pre-mortem analysis steps:

0. What do you want? Identify a challenge?

1. Identify pathways in strategy - realised growth (consumer trends), develop new

sales channel, ready for a geo-political shift, ready for a regulatory shift, the first with a

new technology, first with a new raw material. Identify the strategic drivers for winning,

which could be the above mentioned.

2. What structure helps us best - autonomous growth, joint venture, acquisition.

3. Identify pathways towards resources - people, intellectual property, financial assets.

4. Determine profitability and plausibility - why can you do this?

5. Reconcile and evaluate - how logical is this step we are taking? how credible?

6. Report back to principal

- The objective for Bel is to keep FrieslandCampina out. You have different steps in the

war game:

Step 1: Understand competences of your competitor - key criteria include (for raw

material & procurement; first stage of your value chain) location, quality,

amount/volume, prices, internal/external. Key criteria include (for manufacturing)

lead time/order-to-delivery, internal (criteria: trade barriers, regulations, trust)/external

(criteria: sensitive technology will not enable us to outsource, we don't want it to be a

threat to us), economies of scale (leads to lower unit costs). Key criteria include (for

marketing and distribution) target/segment, consumer needs and behaviour (in

terms of which types of cheese they prefer), distribution channel (consumers needs

and distribution channel connect; if a consumer has an impulse driven buying

behaviour - come across some kiosk and just want a snack - that's are different

product need than a consumer that needs cheese for at home; this leads to different

distribution channels), marketing channel (where they advertise it), brand,

communication, price. You here determine the strengths and weaknesses of the

competitor! As a result of the first assignment, you can sense the strengths and

weaknesses of the competitor - in terms of, is it better positioned than I. Is national

cheese close to wine, when you buy are type and brands don't matter, or is

national cheese close to chocomel or coca-cola where brand does matter (so,

which consumer insight will you target)?

Step 2: You need to anticipate the move

If we had to imagine two moves per category, you think would think about

outsourcing, training the cows, buy a firm so you don't have to buy the milk (in arid

countries, there are many companies that don't source milk, but source grass - buy

grass, ship it to arid countries, to feed the cows) for raw materials and

procurement. For manufacturing you could consider, outsourcing (making the

cheese, slicing, packaging). For marketing you could consider sampling (for

promotion), play with the distribution channel, play with the brand.

Lecture Notes

30

- Objective is to understand the competitor and anticipate its move and therefore adapt

a strategy.

- Anything that is shipped and pre-packed faces very high import duties.

- If there is so much pressure for creating jobs from a country, you can think of ways in

which you can benefit to this in the country you aim to go to.

Lecture Notes

31

Lecture Six: Internal Growth and M&A

- Greenfield Subsidiaries: internal growth (or organic growth) which involves the use

of organizations' own resources and competences. Investments here are supported

by non-distrusted profits or by the use of stock markets.

- Merger & Acquisition: external growth which involves the use of resources and

competences of other organizations.

- Compared to M&A and strategic alliances, scarce information on internal growth in

general is due to:

1. Difficulty of precisely delineating the internal growth in terms of scope or time, such

growth results from a succession of decisions and acts made over time

2. Confidentiality surrounding internal growth

3. The absence of consensus regarding the way to measure it (sales figures, number

of employees, production capacity, number of outlets, etc.)

- Internal growth is the most natural and intuitive way of growing.

- Internal growth can be aimed at:

• Developing new products in its industry - need for a strong innovation capacity

• Developing new products in related industries

• Expanding the geographic market

• Backward or forward integration

Advantages Disadvantages

100% control over operations Necessity to have rare and valuable competences and resources internally

100% of benefits Slow

Consistency between the firm and its subsidiaries - cultural and organizational compatibility

Costly compared to inter-firm alliances

Soft integration of new actvities Difficulty to bring novelty

Maintenance of secrecy around the technological competencies (commonly tacit)

Risky

No immediate need for significant financial resources like for M&A

Price war due to increased supply if mature industries

Location and experience curve economies

- Advantages and disadvantages of internal growth (make or buy):

- Mergers and acquisitions are an increasing trend, despite the huge failure rate (+/-

70%).

Lecture Notes

32

- A Merger is a combination of two organizations. For instance, A + B --> C.

- An Acquisition of an organization by another in order to transfer the ownership

(equity). For instance, A + B --> A.

- Acquisitions of listed organizations take place under the form of takeover bid, share

swap or a combination of takeover bid and share swap. They can be friendly or

hostile.

- Why form a M&A?

Economic Motivations

• Cost synergies (economies of scale and greater bargaining power towards clients

and suppliers)

• Revenue synergies (economies of scope, access to complementary resources)

• Value extraction by acquiring under-valued organisations

• Value extraction by better managing acquired organisations

• Value extraction by benefiting from fiscal advantage

Other Motivations

• To build empires

• To avoid being acquired by competitors (takeover bid)

• Imitation

- Senior manager's personal financial incentives might be tied to short-term growth

targets or share price targets that are more easily achieved by large and spectacular

acquisitions than the more gradualist and lower-profile alternative of organic growth

- Large acquisition attracts media attention, with opportunities to boost personal

reputations through flattering media interviews and appearance

- Acquisitions provide opportunities to give friends and colleagues greater

responsibility; helping to cement personal loyalty by developing individuals' careers

- Hostile: the would be acquirer offers a price for the target firm's shares without the

agreement of the target's management and the outcome is decided by which side

wins the support of the target firm's shareholders.

- Friendly: the acquirer and the target firm agree on the terms together, and the target's

management recommends acceptance to its shareholders.

- Stabilization Acquisitions are horizontal acquisitions (same industry, same stage in

the value chain) in a mature industry with over-capacity. Post-acquisition difficulties

include the lack of flexibility and the need for rationalisation.

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33

- Geographic Consolidation are horizontal acquisitions in an industry with a lower

degree of maturity, since competitors are still regional and not global. Post-acquisition

difficulties caused by the necessity of preserving local culture and key resources.

- Acquisitions to extend products and market are diversification acquisitions (related

or unrelated). Post-acquisition difficulties caused by the need for achieving synergies

and for preserving the identity of the acquired organization.

- Acquisitions as substitute to internal R&D are in an industry with high

technological intensity. Post-acquisition difficulties caused by the likely resignation of

key researchers and the loss of innovation and entrepreneurship spirit in big acquiring

structures.

- Vertical Acquisitions are forward or backward vertical acquisitions. Post-acquisition

difficulties due to the need for integrating a new stage in the value chain.

- The different forms of M&As can be summarised in the stages of industry life cycle:

- Negotiating the premium of a M&A:

• Intrinsic Value: market value fo the acquired organisation (independent of the

acquiring organisation)

• Relative Value: intrinsic value + expected value created.

- Difficulties of mergers and acquisitions are:

• Extra costs caused by control premium and important information asymmetry

between the acquiring and the acquired organizations

• Difficulties of fully benefiting from the acquired assets:

1. Long and costly integration process

2. Assets are possibly less interesting than anticipated

3. Possible cultural clashes

4. Intense pressure to recover the value of the control premium

5. Poor strategic fit or poor organizational fit

Lecture Notes

34

- Most of the time, the shareholders of the acquired firms are the actual winners!

- The management of M&A and integration process is defined by the need to maintain

the separateness of the acquired business:

• Structure: clustering of tasks and people into smaller groups

• Organizational Processes: arrangements, procedures and routines used to control

and coordinate various people and units within the organisation

• Organizational Culture: shared beliefs, value systems and preferences that guide

the behaviour of the organization members.

- Organizational Autonomy is high when the acquired firm has a very distinct culture,

is geographically distant, and is dominated by prima donna professionals or star

performers.

- The relation between organizational autonomy and strategic interdependence is as

follows:

Lecture Notes

35

- Choices between internal growth and mergers and acquisitions can be made using

the Ansoff Matrix:

Lecture Notes

36

Lecture Seven: Location Choice

- At a Macro-Level Globalization is a process driven by economies forces. Here, the

segmentation of the manufacturing process into multiple partial operations which

combined with the development of cheap transportation and communication networks,

has brought the increasing division of production into separate stages carried out in

different locations.

- Country-Specific Advantages (CSAs) reflect foreign countries having some

advantages vis-a-vis other countries, in terms of:

- Natural resources

- Factors of production

- Demand conditions

- Legal environment

- Political environment

- Broad institutional environment;

in which the firm operates, and that make some countries more attractive than others

(Dunning, 1977).

- But why do firms expand abroad? To take advantages of:

- Different resource endowment

- Different development trajectories and product life cycle

- Different characteristics of the players (governments, others firms, universities)

- Different social networks and dynamics

- Different institutional settings (tax regime, educational systems and regulations, etc.)

- Foreign Direct Investment (FDI) occurs when a firm invests directly in facilities to

produce or market a product in a foreign country.

- Once a firm undertakes FDI, it becomes a multinational enterprise.

- Forms of FDI:

• Greenfield Investment: the establishment of an entirely new firm in a foreign

country, including new operational facilities.

• Mergers and Acquisitions (M&A): a complete or partial purchase of, or merger

with, an existing firm in a foreign country.

- The Entry Motives to make a foreign direct investment include:

• Foreign-Market-Seeking FDI: being closer to customers and serving the market

directly. Market size; growth rate; access to both regional and global markets.

• Resource-Seeking FDI: to gain access to natural (or more affordable) resources,

e.g.: oil, gas, minerals or raw materials. Particularly if the domestic supply of such

inputs is scarce or has come under pressure by becoming more expensive.

• Strategic-Asset-Seeking FDI: to increase the acquiring firm's global portfolio of

Lecture Notes

37

strategic resources and to block competitors from obtaining access. The locations are

valued depending on the quality of the scientific, technological and educational

infrastructure they provide and on the availability of a rich pool of highly skilled labour.

In some cases, it also involves learning from the host country and technology

transfers.

• Efficiency (cost reduction)-Seeking FDI: Takes place when companies try to

exploit economies of scale and scope across the value chain (product specialization)

and along the value chain (process specialization). The company will slice its

production chain by allocating different parts or tasks to countries that allow low-cost

production (vertical fragmentation), particularly where the cost of labour is taken into

account.

- In summary, the entry motives:

- The primary determinant of FDI is (still) market-seeking. More than 45% of FDI

projects driven by access to domestic markets, 33% of FDI projects driven by

proximity to (regional) markets and customers.

- The second motive of FDI are regulations/business climates and skilled workforce

availability.

- Why are industries concentrated in cities?

• The pooling of demands for specialised intellectual talent

• The development of specialised intermediate goods industries

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38

• The network of informal contacts

• Knowledge spillovers among the firms in an industry

- The Hub-and-Spoke Model: a feature of many global markets is the use of regional

production and distribution hubs, where several neighbouring countries are serviced

from the same location. The regional hub offers superior flexibility. A regional hub

offers a compromise location strategy. As the hub is nearer to each market that is the

home location, it reduces transport costs, and offers better information capture. Also,

because it is close to several markets, it avoids exclusive commitment to any one. If

one market declines, production can be switched to other markets instead.

- The Uppsala Model: suggests a sequential pattern of entry into successive foreign

markets, coupled with a progressive deepening of commitment to each market.

Increasing commitment is particularly important. The model is closely associated with

the notion of psychic distance, which attempts to conceptualise and, to some degree,

measure the cultural distance between countries and markets. In this model,

internationalization is a cumulative, path-dependent process. It is a function of the

firm's past international experience and knowledge based.

- The benefits of FDI to the home country arise from three sources:

• Inward flow of direct foreign earnings

• Positive employment effects (when the foreign subsidiary creates demand for home-

country exports)

• The learning effect (the home country can learn valuable skills from its exposure to

foreign markets - reverse resource transfer or home-base augmentation)

- The costs of FDI to the home country arise from three sources:

• The initial capital outflow required to finance the FDI

• Serve the home market from a low-cost production location may reduce home-

country employment

• If the FDI is a substitute for direct exports

- The risks of FDI to the home country may include:

• Political risk

• Institutional risk

• Economic risk

• Legal risk

(Here you can also make use of the "PEST" framework)

- Liability of Foreignness: FDI is risky because of the problems associated with doing

business in a different culture where the rules of the game may be very different.

Relative to indigenous firms, there is a greater probability that a foreign firm

undertaking FDI in a country for the first time will make costly mistakes due to its

ignorance.

Lecture Notes

39

- The overall attractiveness of a country as a market or investment site depends on

balancing the likely long-term benefits of doing business in the country against the

likely costs and risks.

- Factors to consider with respect to benefits of FDI:

• The size of the market

• The present wealth of consumers in the market

• The likely future wealth of consumers

- The importance of these different factors depend on the industry in which the MNE is

engaged and the nature of the activity in which it planned to invest:

• When an MNE is planning to distribute its product or services to local consumers,

the size of the market and the local standard of living are important factors

• When an MNE is planning to serve a wider market, embracing neighbouring

countries, then access to a local transport hub is important

• When the MNE is planning a large export-oriented production plant, then cheap

labour is important

- Innovation is stimulated by the interactions of scientific research, demand conditions,

and competitive conditions. Other things being equal, the following factors will greatly

benefit innovation:

• The money spent on basic and applied R&D

• Underlying demand is strong

• Consumers are affluent

• Competition is intense

- As the world develops, leading-edge research is now carried out in many locations

around the world:

• Establishing a global network of R&D centres; these centres are usually located in

regions or cities where valuable scientific knowledge is being created and where there

is a pool of skilled research talent.

- The location choice of production activity can help to best minimise costs and improve

product quality. A number of factors need to be considered:

1. Country factors

2. Technology factors

3. Product factors

- Product Factors:

• Value-to-Weight Ratio - high value-to-weight ratio implies that the products are

expensive and they do not weigh very much, whereas low value-to-weight ratio means

that the products are relatively inexpensive and they weigh a lot.

• Product Standardisation - high standardisation indicates concentrating production

Lecture Notes

40

at an optimal location and low standardisation indicates decentralising production

close to their local market.

- The location choice of marketing and sale depends on market size, purchasing power,

product and technical standards, product life cycle, consumer sophistication, and

market growth.

Lecture Notes

41

Lecture Eight: Strategic Alliances and Joint Ventures

- Steps taken to devise an international strategy:

- When contemplating foreign expansion, a firm must make three decisions:

• Step 1: Which foreign markets?

• Step 2: Time of entry?

• Step 3: Scale of entry and strategic commitments

- When firms engage in Alliances, managers invariability have to face the following

dilemmas:

> Is an alliance really preferable to pure internal growth?

> What firms will turn out to be suitable partners? Strategic fit and organizational fit?

> How should the alliance be organized?

> Is a simple contract sufficient or should a joint subsidiary be set up?

etc.

- An Alliance is a medium/long term cooperation, decided at the highest level and

being strategically important for involved companies:

• Bilateral in general

• Often linking competitors or potential competitors

• Focused on a well-defined growth project

• Implemented by coordinating competences and resources of partners to develop,

produce, and/or commercialise products and services

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42

• Based on a shared decision-making process, which is slow

• May involve a reciprocal exclusivity clause

- Different modes of partnerships:

- How to choose a partner:

• Strategic Fit: the degree of compatibility between the goals each of the companies

has for the alliance, and the extent to which the resulting combination of resources is

appropriate to carry out the alliance project.

• Organizational Fit: the extent to which the companies will be able to work well

together.

• Operational Fit: the extent to which it is in fact feasible that the resources each

company contributes to the alliance be combined efficiently.

• Human Fit: the extent to which the people involved in the alliance may feel

comfortable collaborating.

- External motivations for engaging in alliances:

• Business Globalization by gathering resources in order to produce a global product

and to distribute it worldwide.

• Technological Evolution by sharing costs and risks to combine complementary

competences and to quickly cover a wider final market.

• Softening of Competition Law

- Internal motivations for engaging in alliances:

• To make economies of scale and scope

Lecture Notes

43

• To combine complementary competences

• To learn

• To remain protected against more powerful competitors

• To create a strategic option for the future

- Pitfalls of alliances:

Pitfall 1: To under-exploit the synergies

Structures rarely optimal in terms of efficiency:

> Each partner protects its assets, technologies and employees - possibly limited

rationalization, existence of doublons, and limited economies of scale.

> Significant negotiation costs, coordination costs and control costs

Pitfall 2: To cooperate or not to cooperate

> Partner potentially opportunistic: tugging between the wish to cooperate loyally and

the temptation to behave as a free rider

> 3 ways of cheating in partnerships: adverse selection/moral hazard/hold up

- Adverse Selection: the partner may lie concerning the value of its future and likely

contribution before starting the alliance.

- Moral Hazard: the partner may benefit from the contributions of its counterpart, while

not contributing itself as expected (free riding).

- Hold Up: the partner may wait for its counterpart to be stuck in the partnership and

take advantage of this vulnerable position for renegotiating some terms.

- Two forms of joint ventures:

Lecture Notes

44

- Reasons for failures of alliances:

• Partners' expectations were too optimistic

• Changes in the environment

• Poor communications

• Lack of common benefits

• Strong cultural differences

• Weak leadership

• Slow results

- The Licensor owns the IP right, the Licensee receives the rights to use this IP under

agreed conditions and in exchange for payment.

- Why license?

• Efficient Commercialization: to match technology with the complementary assets

needed to succeed in the marketplace.

• Technology Exchange: cross-licensing to avoid infringement problems, and

achieve the reciprocal exchange of complementary technologies.

• Market Enhancement: to establish a new product or process in the market, or to

help establish new product standards.

• Royalty Generation

- A Patent is a grant the inventor of a new product or process exclusive rights for a

defined period to the manufacture, use, or sale of that invention. The way something

looks = design. The way something works = utility.

- Franchising: is a form of business organisation in which a firm that already has a

successful product or service (franchisor) licenses its trademark and method of doing

business to another business (frnachisee) in exchange for an initial franchise fee and

an ongoing royalty.

- Many retail and service organisations find Franchising to be an attractive form of

business ownership and growth. The failure rate is relatively high, but its popularity

increases.

- Advantages for the franchisor:

• Rapid, low-cost market expansion

• Income from franchise fees and royalties

• Franchisee motivation

• Access to ideas and suggestions

• Cost savings

• Increased buying power

- Disadvantages for the franchisor:

• Profit sharing

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45

• Loss of control - non competition clause

• Friction with or between franchisees

• Managing growth

• Differences in required business skills

- Product and Trademark Franchise: to grant the right to buy products and use a

trade name.

- Business Format Franchise: to provide a formula for doing business along with

training, advertising, and other forms of assistance (the most common one).

- What are the qualities to look for in prospective franchisees?

Good work ethic, ability to follow instructions, ability to operate with minimal

supervision, team oriented, experience in the industry in which the franchise

competes, adequate financial resources and a good credit history, ability to make

suggestions without becoming confrontational or upset if the suggestions are not

adopted, and represents the franchisor in a positive manner.

- Advantages and disadvantages of each mode described above:

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46

Lecture Nine: Managing Headquarter-Subsidiary Relationships

- Organizational Architecture refers to the totality of a firm's organization, including

formal organisational structure, control systems and incentives, processes,

organizational culture and people.

- The strategy and architecture of the firm must not only be consistent with each other,

but make sense given the competitive conditions prevailing in the firm's markets.

- The organizational architecture must match or fit the strategy of the firm.

- The different elements of a firm's organizational architecture must be internally

consistent: the control and incentive systems used in the firm must be consistent with

the structure of the firm.

- The Organizational Structure is the formal division of the organisation into subunits

such as product division, national operations, and functions. The location of decision-

making responsibilities within that structure (e.g, centralised or decentralised). The

establishment of integration mechanisms to coordinate the activities of subunits,

including cross-functional teams and/or pan-regional committees.

- Incentives are the devices used to reward appropriate managerial behaviour.

- Control Systems are the metrics used to measure the performance of subunits and

make judgements about how well managers are running those subunits.

- The Organizational Culture refers to the norms and value systems that are shared

among the employees of an organization.

- Processes include the manner in which decisions are made and work is performed

within the organization.

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47

- People include not only the employees of the organisation but also the strategy used

to recruit, compensate, and retain those individuals and the type of people that they

are in terms of their skills, values, and orientation.

- Organizational structure has three dimensions:

• Vertical Differentiation (i.e. centralisation versus decentralisation)

• Horizontal Differentiation

• Integration Mechanisms

- Centralisation is when in the organisation's hierarchy, the decision-making power is

concentrated to upper-level managers;

• Centralisation can facilitate coordination

• Centralisation can help ensure decisions are consistent with organizational

objectives

• Centralisation can give top-level managers the means to bring about needed major

organizational changes

• Centralisation can avoid the duplication of activities

- Decentralisation is when in the organisation's hierarchy the decision-making power is

concentrated to lower-level managers;

• Decentralisation gives top management time to focus on critical issues by delegating

more routine issues to lower-level managers

• Decentralisation is beneficial to increase people's motivation

• Decentralisation permits greater flexibility and more rapid response to environmental

changes

• Decentralisation can result in better decisions

• Decentralisation can increase control

- How to choose between centralisation and decentralisation? Two criteria:

1. The type of decision - decisions regarding overall firm strategy are typically

centralised at the firm's headquarters.

2. The firm's strategy - operating decisions may or may not be centralised, depending

on the firm's strategy.

- How does a firm decide to divide itself into sub-units (horizontal differentiation)?

• Function

• Product Division

• Geographical Area

- An International Division is when firms initially expand abroad, they group all their

international activities into an international division.

- The Worldwide Area Division is suitable for firms with a low degree of diversification

and a domestic structure based on function. It is divided into geographic areas,

Lecture Notes

48

operations and strategic decisions are decentralised to each area, greatly facilities

local responsiveness.

- The Worldwide Product Division is suitable for firms that are reasonably diversified

and originally had domestic structures based on product divisions. It enhances the

consolidation of value creation activities within the division, and facilitates knowledge

transfers.

- The Global Matrix Structure has two dimensions: product division and geographic

area. Dual responsibility and decision-making shared by the product division and the

various areas of the firm.

- There are two types of integration mechanisms:

• Formal: the greater the need for coordination, the more complex the formal

integration mechanisms need to be (e.g., teams, liaison roles, direct contact).

• Informal: knowledge networks that value teamwork and cross-unit cooperations

(e.g., information systems and management development policies).

- Incentive Systems refer to the devices used to reward appropriate employee

behaviour. The most common form is annual bonus pay, employees may be given a

share of any profits above those targeted. In particular in international business,

significant cooperation between managers in different sub-units are often required.

These different units need to cooperate closely with each other if the firm is to be

successful. One way of encouraging the managers to cooperate is to link incentives to

performance at a higher level in the organisation.

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49

- Control systems and incentives:

- Two types of control mechanisms:

• Direct Control (Explicit) - personal centralised control, bureaucratic formalised

control

• Indirect Control (Implicit) - output control, cultural

- Personal Control is control by person contract with subordinates, most widely used

in small firms in the form of direct supervision of subordinates' actions.

- Bureaucratic Control is control through a system of rules and procedures that directs

the actions of subunits. The most important ones are budgets and capital spending

rules.

- Output Control involves setting goals for subunits to achieve and expressing those

goals in terms of relatively objective performance metrics such as profitability,

productivity, growth, market share, and quality.

- Cultural Control is when employees "buy into" the norms and value systems of the

firm. Employees under this type of control tend to control their own behaviour, which

reduces the need for direct supervision, e.g. McDonald's franchisees and suppliers.

- Which type of control to choose?

• Independence: the subsidiary is barely or not at all dependent on headquarters or

other subsidiaries and is operating as a standalone entity.

• Dependence: the subsidiary is mainly dependent on headquarter.

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50

• Inter-dependence: the subsidiary, headquarters and other subsidiaries all form part

of an interdependent network.

- The level of inter-dependence and the level of control are positively correlated:

• A higher level of inter-dependence leads to a higher level of control.

• The extent of subsidiary embeddedness is positively related to the amount of control

exercised by headquarters.

• The extent of local responsiveness is negatively related to the total level of control

exercised by headquarters.

- In International Companies the total level of control is high, socialisation and

network control is low, and expatriate present in subsidiaries is high (to monitor local

operations).

- In Global Companies the total level of control is rather high, socialisation and

network control is low, and expatriate presence in subsidiaries is rather high.

- In Multinational Companies the total level of control is rather low, socialisation and

network control is high, and expatriate presence in subsidiaries is relatively low.

- In Transnational Companies the total level of control is relatively lower than for

global companies, socialisation and network control is high, and expatriate presence

in subsidiaries is relatively high.

- Thus, the relationship between international strategy and the control mechanisms:

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51

- Performance Ambiguity occurs when the causes of a subunit's poor performance

are not clear (in particular if there is a high degree of interdependence among

subunits).

- Cultural Control - encouraging managers to assume the organisation's norms and

value systems, gives managers of interdependent subunits an incentive to work out

problems that arise between them.

- The relation between strategy, performance ambiguity, and control:

- Firm-Specific Advantages (FSAs): firms engaging in overseas innovation and

production must have some form of proprietary advantage to compensate for their

natural disadvantage of competing with established firms in a foreign land:

• Asset advantages - the exclusive privileged possession of income generating

assets.

• Transaction advantages - the firm's ability to economise on transaction costs as a

result of multinational coordination and control of assets.

- Location-Bound FSAs:

• FSAs that benefit a company only in a particular location

• Leads to benefits of national responsiveness

• Cannot easily be transferred as an intermediate good and requires significant

adaptation in order to be used in other locations

- Non-Location-Bound FSAs:

• FSAs that can be exploited globally, and lead to benefits of scale, scope, or

exploitation of national differences

• Typically lead to scope economies and can be transferred abroad at low marginal

costs and used effectively in foreign operations without substantial adaptation.

Lecture Notes

52

- In Subsidiary Initiatives the focus lies on innovative combinations of both home and

host country-specific advantages, and the firm-specific advantages held by the

multinational's units in these countries. Four main different roles of subsidiaries have

been identified:

• Local Implementer: limited geographic scope, limited functional scope, severely

constrained product or value-added scope, the subsidiary to adapt global products to

the needs of the local market, and are typically found in a multinational strategy.

• Specialised Contributor: the subsidiary has considerable expertise in certain

specific functions or activities, the subsidiary's activities are tightly coordinated with

the activities of other subsidiaries.

• Black Hole: the subsidiary offers high potential for CSAs to the MNC, but has low

firm-specific capabilities and is similar to low-performing world mandate subsidiary or

high-potential local implementer.

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• World Mandate: works with headquarters to develop and implement strategy, the

subsidiary has world-wide or regional responsibility for a product line or entire

business, activities are integrated worldwide, but managed from the subsidiary, not

the head office (decentralised, centralised).

- Innovative combinations of both FSAs and CSAs can ultimately generate new types of

FSAs across the multinational network and strengthen the multinational's overall

competitive advantage.

- In the MNE worldwide network, subsidiaries are the:

• Market access providers

• Recipients of partner company's technology transfers

• Active participants in the formulation and implementation of strategy

- MNEs are gradually shifting from being the sole concern of the parent company, to

undertaking a collective responsibility for the corporate network.

- The Hierarchy Model:

• Pre-specified and stable relationships

• Instrumentality and additivity of parts

• Uni-directionality and universality

• The coincidence of action, knowledge and people hierarchies

- Benefits of the hierarchy model:

• Coordination costs are economised by grouping tasks according to the geographic

or product markets on which they are focused

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• Lateral relationships are avoided between subsidiaries

• Critical resources are held at the centre to ensure the most efficient use of scarce

resources

• An appropriate system to monitor and contra divisional mangers ensures that the

likelihood of opportunistic behaviour is minimised

- The Heterarchy Model:

• The inability of top management of fully understand the complexities of various

subsidiaries and peripheral operations

• Advocate the use of multiple informal systems and mechanisms

• Actively seeking advantages originating in the global spread of the firm

• Lateral relationships between subsidiaries

• Activities are coordinated along multiple dimensions

- The two control mechanisms are overlaid - any given subsidiary - parent relationship

will exhibit both types to varying degrees:

1. Vertical Linkages: the world mandate is the most heterarchy-like by virtue of its

higher level of strategic autonomy.

2. Lateral Linkages: the specialised contributor is most hierarchy-like, the other two

types both displaying significantly greater independence, either in product flows or

value-chain configuration.

3. Subsidiary Specialization: the specialised contributor and world mandate roles

should have specialised capabilities in upstream activities relative to local

implementers that typically specialise in downstream activities.

- The creation of innovation in subsidiaries and a high contributory roles for the

subsidiary is associated with:

> High autonomy

> High parent-subsidiary communication

> High normative integration

- Potential pitfalls of subsidiary integration:

1. The subsidiary becomes overly powerful and overly independent

2. Co-opetition among subsidiaries

- Solutions to possible pitfalls of subsidiary communication:

1. The relevant subsidiary competencies and capabilities must incorporate knowledge

that is tacit and fundamentally context-specific

2. Sustainable subsidiary-specific advantages must reflect the existence of a

capability gap with the other MNE affiliates

3. Subsidiary-specific advantages can only be sustained in the long run, and there is

perceived absence of negative externalities on its other operations

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4. There must be interest interest interdependence

(these above four conditions should be meet simultaneously)

Lecture Ten: Cultural Differences

- Culture is a system of values and norms that are shared among a group of people

and that when taken together constitute a design for living.

- Value include abstract ideas about what a group believes to be good, rights, and

desirable. Thus, how things ought to be.

- Norms include the social rules and guidelines that prescribe approveriate behaviour in

particular situations.

- Society refers to a group of people sharing a common set of value and norms.

- A society's Social Structure refers to its basic social organisation. Two dimensions

are particularly important here:

1. The degree to which the basic unit of social organisation is the individual, as

opposed to the group

2. The degree to which a society is stratified into classes or castes (which impact

social mobility)

- The liability of foreignness implies that multinational enterprises doing business

abroad face costs. Specifically, unfamiliarity of the environment, cultural, political and

economic differences, and the need for coordination across geographic distance.

- Cross-cultural differences can imply challenges. For instance, nova means star in

Spanish, but the sound no va means it doesn't go. Hence, a spoken language is an

important cross-cultural thing to be aware of. Also, things such as unspoken

languages (so, gestures and personal space) are cross-cultural things to consider.

- People with Achieved Status favour individual achievements.

- People with Ascribed Status are born in a family that give them status.

- Task-oriented people feel that nurturing relationships with clients or co-workers is

less important than simply getting the work done and getting it done quickly.

- Relationships-oriented people maintain a harmonious relationship with customers

and co-workers and than accomplish tasks.

- Femininity versus masculinity focuses on the degree to which masculine values like

competitiveness and the acquisition of wealth are valued over feminine values like

relationship-building and quality of life. A high masculinity ranking indicates the society

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values assertive and aggressive 'masculine' traits. A low masculinity ranking typifies

societies in which nurturing and caring feminine characteristics predominate.

- Hofstede Dimensions:

- Power Distance is defined as the extent to which the less powerful members of

institutions and organisations within a country expect and accept that power is

distributed unequally.

- Uncertainty Avoidance focuses on the level of tolerance for uncertainty and

ambiguity within the society.

- Individualism pertains to societies in which the ties between individuals are loose:

everyone is expected to look after himself or herself and his or her immediate family.

- Long-term orientation focuses on the degree the society embraces, or does not

embrace, long-term devotion to traditional values.

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- Edward Hall's Time Orientations: monochronic versus polychromic culture.