Welcome to class of Evolving Multinationals by Dr. Satyendra Singh

Objective Identical Role of Subsidiaries –Traditional –Affiliate CEO ≈ Parent CEO –Affiliates do what parents do Internally Differentiated Form –Different capabilities from different affiliate –Optimize its worldwide operation –Gain efficiency – Global structure –Achieve network flexibility –Develop capability  Evolve

Dimensions of Evolution Geographic Expansion –Geographic proximity –Cultural similarity –Similarity in economic development Line of Business Diversification –Liability of foreignness Functional Migration

Geographic Expansion Geographic Proximity –1 st enter neighboring country/countries –Sequential move to farther places Cultural Similarity –1 st in a country with similar culture (eg language) –↑ effective communications –↑ understanding of local customs and markets Similarity in Economic Development –1 st  country similar to home country/PPP –Similar buying habits as home market consumers –Product adaptation is modest –Learn 1 st, develop capability, then go diff. country

Example – Geographic Expansion HO: USA (Colgate-Pamolive) Geographic expansion 1 st Canada  2 nd Mexico  … Culturally similar  Anglo-Saxon 1 st Australia, NZ, UK… Modest adaptation – language Learn  more culturally different market Latin America (different language, trade barrier) Relative importance of the factors Internet, economic development…

Line of Business Diversification 1 st add strongest single LOB  profitable Profit can offset unfamiliarity of local market Then add 2 nd LOB with less comp adv Learn how to compete in local environment Then add with no comp adv Learn from IJV/acquisition from superior partner Time Competitive advantage versus local firms LOB 1 LOB 2 LOB 3 LOB 4 Liability of foreignness

Example – Line of Business HO: Japan (SONY) Enter US with TV Enjoy competitive position over US Good profit  justifies greenfield operation Then AUDIO, then Magnetic Tape Took advantage of favorable exchange rate New LOB, if benefits offset disadvantage in mkt Then, wished to develop capability in Data Storage System Began to make acquisitions

Functional Migration Development of activities performed by lines of business within a country Greenfield (demand > supply) Acquire for vertical integration Acquisition accelerates functional migration Marketing and Distribution  only is not enough  Good for local knowledge Assembly Local Design and Procurement Business Planning Strategic Leadership Time  worldwide

Example – Functional Migration HO: Japan (SONY), Enters US with TV But all manufacturing was in Japan  SONY wanted SONY got accused of dumping SONY made FDI in US  assembly only Product and Process knowledge transferred from Japanese exec to US exec SONY generated resources in US Began full manufacturing Plant was monitored initially by Japanese SONY is not replicating functions abroad, but shifting abroad  highest being strategic leadership worldwide

MNC Evolution – Integrated Process Accelerated Evolution MNC evolves along all the dimensions at the same time Punctuated Evolution Discontinuous  skips steps  no duplication Share functions b/w existing LOB  Finance, legal… Across countries within a single LOB  R&D, Mrf  Common in trading blocks  EU, NAFTA… Skip functions where more efficiently performed Efficient evolution  Economies of scale and scope Reverse Evolution Restructuring of operations Consolidation of lines of business and shutting down subsidiaries  examine multidomestic structure