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Entry Strategies and Organizational Structures Chapter 9 Entry Strategies and Organizational Structures

Learning Objectives Describe how an MNC develops and implements entry strategies and ownership structures Examine the major types of entry strategies and organizational structures used in handling international operations Analyze the advantages and disadvantages of each type of organizational structure, including the conditions that make one preferable to others

Learning Objectives (continued) Describe the recent, nontraditional organizational arrangements coming out of mergers, joint ventures, keiretsus, and other new designs including electronic networks and product development structures Explain how organizational characteristics such as formalization, specialization, and centralization influence how the organization is structured and functions

Entry Strategies and Ownership Structures Export/import operations Wholly owned subsidiaries Mergers/acquisitions Alliances and joint ventures Licensing Franchising

Export/Import Only available choices for small and new firms wanting to go international Permits larger firms to begin international expansion with minimum investment and risk Paperwork can be turned over to an export management company or handled through the firm’s export department Permits easy access to overseas markets Strategy is usually transitional in nature

Wholly Owned Subsidiary Overseas operation that is totally owned and controlled by an MNC Based on the belief that managerial efficiency is better without outside partners Prohibited in many newly developing countries as some countries: Worry that MNCs could drive out local enterprises View this as an attempt to export jobs Faces high risk with large investments in one area

Mergers and Acquisitions Cross-border purchase or exchange of equity involving two or more companies Opted by MNCs to quickly expand resources or construct high-profit products in a new market Cultural differences and time constraints are the major barriers Transition costs pose a problem in the postmerger environment

Alliances and Joint Ventures Alliance: Any type of cooperative relationship among different firms Joint venture (JV): Agreement under which two or more partners own or control a business Called international join venture(IJV) when the partners are from different countries Types - Nonequity ventures and equity joint ventures

Advantages of Alliances and Joint Ventures Improvement of efficiency Access to knowledge Mitigating political factors Overcoming collusion or restriction in competition

Strategic Alliance Recommendations Know the partners well before an alliance is formed Expect differences in alliance objectives among partners from different countries Realize that the desired resource profiles need not be complementary to the firm’s resources Be sensitive to the alliance partner's needs Work on developing a relationship of trust after identifying the best partner

Licensing Agreement that allows one party to use an industrial property right in exchange for payment to the owning party Used when: A product is in the mature stage of the product life cycle with strong competition and declining profit Foreign countries require newly entering firms to make a substantial direct investment Licensor is a small firm lacking financial and managerial resources

Licensing (continued) Likely licensors - Companies spending large amounts on R&D Likely licensees - Companies spending little on R&D

Franchising One party (the franchisor) permits another (the franchisee) to operate an enterprise using its trademark, logo, product line, and methods of operation in return for a fee Franchisor gets a new stream of income Franchisee gets a time-proven concept and products or services that can be quickly brought to market

Figure 9.1 - Organizational Expectations of Internationalization

Initial Division Structure Subsidiary Common organizational arrangement for operations that require an on-site presence from the start On-site manufacturing operations Set up because of the pressure by the local governments when overseas sales increase Help reduce transportation costs

Initial Division Structure (continued) Export arrangement Common first choice among manufacturing firms, especially those with technologically advanced products Allows firms to reduce the risk and size of investment in establishing significant international operations while testing the size of international markets

Figure 9.2 - Use of Subsidiaries during the Early Stage of Internationalization

International Division Structure Structural arrangement that handles all international operations out of a division Adopted by firms that are in developmental stages of international business operations Advantages Ensures that the international focus receives top management's attention Allows companies to develop a unified approach to international operations

International Division Structure (continued) Disadvantages Separates the domestic and international managers Makes difficult for the home office to think and act strategically and to allocate resources on a global basis Most R&D efforts are domestically oriented Ideas for new products or processes in the international market often are given low priority

Figure 9.3 - International Division Structure

Global Structural Arrangements Focuses on greater expansion and integration among international operations Types Global product division Global area division Global functional division

Types of Global Structural Arrangements Structure under which domestic divisions are given worldwide responsibility for product groups Global product division Structure under which global operations are organized on a geographic basis rather than a product basis Global area division Structure that organizes worldwide operations primarily based on function and secondarily on product Global functional division

Figure 9.4 - Global Product Division Structure

Global Product Division: Advantages and Disadvantages Operates as profit centers Provides a direct line of communication between customer and organization Enables R&D to work on development of products to serve the customer needs Permits managers to gain expertise in technical and marketing aspects of products Disadvantages Need for duplicating facilities and staff within each division Pursuit of currently attractive geographic prospects and neglect of others with better long-term potential Loss of time in tapping local rather than international markets

Figure 9.5 - Global Area Division Structure

Global Area Division: Advantages and Disadvantages Managers are responsible for all business operations in a designated geographic area Allows managers to make decisions to accommodate environmental changes Enables reduction of cost per unit and helps offer a competitive price Disadvantages Difficult to reconcile a product emphasis with a geographic orientation New R&D efforts are often ignored because divisions are selling goods that are in the maturity stage

Figure 9.6 - Global Functional Structure

Global Functional Division: Advantages and Disadvantages Emphasis on functional expertise Tight centralized control Relatively lean managerial staff Disadvantages Coordination of manufacturing and marketing is difficult Managing multiple product lines can be challenging as production and marketing are separated into different departments Only the CEO can be held accountable for the profits

Mixed Organization Structures Combination of global product, area, or functional arrangement Advantage Allow the organization to create the specific type of design that best meets its needs Disadvantage Coordinating the personnel and getting everyone to work toward common goals becomes difficult with an increased complexity of matrix design

Figure 9.7 - Multinational Matrix Structure

Transnational Network Structures Combine elements of function, product, and geographic designs, while relying on network arrangements to link worldwide subsidiaries Help MNCs make use of global economies of scale while also being responsive to local customer demands Have nodes at their centers Nodes - Units charged with coordinating product, functional, and geographic details

Transnational Network Structures (continued) Different product line units and geographic area units have different structures Basic structural framework consists of: Dispersed subunits Specialized operations Interdependent relationships Complex and continually changing and are difficult to draw in the form of an organization chart

Table 9.3 - Control Mechanisms Used in Select Multinational Organization Structures

Nontraditional Organizational Arrangements Mergers and acquisitions Involve a substantial financial risk because of the high sales price Keiretsus Joint ventures Developed to help partners address and meld their different values, management styles, action orientation, and organization preferences Strategic alliances

Nontraditional Organizational Arrangements (continued) Joint ventures and strategic alliances: Provide MNCs with the opportunity to access a wide variety of competencies Reduce own costs while ensuring that they have a reliable provider

Electronic Network Organization Electronic freelancers Individuals who work on a project for a company, usually via the Internet, and move on to other employment when the assignment is done Delivers outsourcing functions online Different version of the matrix design People are temporary, contingent employees, but never see each other, and communicate exclusively in an electronic environment

Organizing for Product Integration Cross-functional approach can lead to product teams that are autonomous, thus failing to integrate overall efforts with an organization Emerging trend - Toyota's organizational mechanisms Mutual adjustment Ensures that employees remain dedicated to their primary functional area Use of direct, technically skilled supervisors

Organizing for Product Integration (continued) Use of integrated leadership Providing in-house training and restricting job rotation within only one function Creation of standard milestones by the project leader and the use of simple forms and procedures Maintenance of design standards by people who are doing the work Standards are continually changed to meet new demands

Formalization Use of defined structures and systems in decision making, communicating, and controlling Types - Objective and subjective Firms can achieve competitive advantage by: Developing internal networks of international subsidiaries in major national or regional markets Forging external networks of strategic alliances with firms around the world

Specialization Assigning of individuals to specific, well-defined tasks Horizontal specialization: Individuals are given a particular function to perform and tend to stay within the confines of this area Vertical specialization: Individuals are collectively responsible for performance as work is assigned to groups or departments Results in greater job routinization

Centralization Important decisions are made by the top management Decentralization: Involves pushing decision making down the line and getting the lower-level personnel involved Can help promote creativity, entrepreneurial effort, and personal responsibility

Be the International Management Consultant If you worked as a consultant for the NFL, would you recommend to the league commissioner that the number of annual games played in Mexico be increased? What about starting a new franchise in Mexico City? What aspects of the country would be causes for concern?

Be the International Management Consultant (continued) Does Mexico’s history of state regulation over telecommunications and energy affect your decision for growth through television? What other concerns might you have?

Review and Discuss One of the most common entry strategies for MNCs is the joint venture Why are so many companies opting for this strategy? Would a fully owned subsidiary be a better choice?

Review and Discuss (continued 1) A small manufacturing firm believes that there is a market in Europe for handheld tools that are carefully crafted for local markets and decides to manufacture these tools What type of organization structure would be of most value to this firm in its initial efforts to go international?

Review and Discuss (continued 2) If the company finds a major market for its products in Europe and decides to expand into Asia, would you recommend any change in its organization structure? If yes, what would you suggest? If no, why not? If the company finds after three years of international effort that it is selling 50 percent of its output overseas, what type of organizational structure would you suggest for the future?

Review and Discuss (continued 3) In what way do the concepts of formalization, specialization, and centralization have an impact on MNC organization structures? In your answer, use a well-known firm such as IBM or Ford to illustrate the practical expressions of these three characteristics