Strategies for Global Expansion: Implications and Organizational Challenges

1. Chapter 11Organizing Across Borders

2. Scope of Chapter 11 Globalization Strategies for global expansion Organizational implications of global strategies Characteristics of the MNC The TNC model – making it work Internationalization of SMEs

3. GLOBALIZATION

4. Drivers and Facilitators of Globalization Trade liberalization Internationalization of markets and tastes Information and Communications technology [ICT] Rising costs of R&D

5. International trade  Foreign direct investment  Multinational business organizations Multinational corporations [MNCs] are key actors in globalization Historical Trend

6. Significance of the Multinational Corporation [MNC] By 2001, over 500,000 foreign affiliates of c. 65,000 parent companies, plus many non-equity relationships with independent firms Largest 100 MNCs had US$ 2.2 trillion in global sales in 2001 Growing share of MNCs in world output - largest 100 MNCs accounted for 4.3% of world GDP in 2000 70% of all international royalties on technology are between MNC parents and their foreign affiliates Productivity is generally higher in MNC foreign affiliates than in domestic firms in host countries FDI outflows growing three times as fast as domestic investment

7. Not All MNCs are Large Small and medium sized MNCs (employing less than 500) comprised 80% of Swedish MNCs and 60% of Italian MNCs in 1996 Small and medium sized MNCs accounted for 55% of new foreign affiliates by Japanese firms in 1996 SMEs are playing an increasingly important role within networks of production linkages across borders

8. STRATEGIES FOR GLOBAL EXPANSION

9. Globalization and Localization Globalization economies of scale and specialization optimize sourcing of components & innovation power of international branding service global accounts Localization adaptation to local tastes and requirements transportation diseconomies political sensitivities

10. Multidomestic International Global Transnational [See Table 11.1, Chapter 11] Four Strategies for Global Expansion

11. ORGANIZATIONAL IMPLICATIONS OF GLOBAL STRATEGIES

12. Variation between Different Activity Areas within a Firm • The transnational model takes account of the fact that the balance between global integration and local responsiveness can vary according to the requirements of different activity areas within a firm. • See Table 11.2, Chapter 11 for factors affecting this balance

13. Different Global Integration and National Differentiation Needs within Unilever [See Figure 11.1, Chapter 11]

14. [See Table 11.3, Chapter 11] Strategy-Structure Relationships

15. [See Figures 11.2, 11.3 & 11.4, Chapter 11] Types of International Business Organization

16. CHARACTERISTICS OF THE TRANSNATIONAL MODEL [TNC]

17. The Aim of the TNC Model To combine the advantages of : global efficiency (the global strategy model) national responsiveness (the multi-domestic strategy model) Plus acquiring an ability to develop knowledge locally and exploit it worldwide

18. Steps Towards Achieving a Transnational Strategy Transfer core competences to the countries where they can be used most successfully to create value on the basis of both low costs and a differentiated appeal (esp. manufacturing & marketing) Create a global network to provide co-ordination allowing domestic and foreign divisions to share skills and resources to improve their core competences Assess benefits of global sourcing (procurement) and need to service global accounts

19. The TNC Model Poses an Organizational Challenge The TNC model requires new organizational solutions • involving greater internal differentiation and variation compensated by more effective integration • relying less on hierarchy and bureaucracy; more on internal networks and corporate culture.

20. The TNC Model Incurs High Organizational Costs Need to co-ordinate resources and skills required for customization, while at the same time to obtain the gains from global economies and sources of learning

21. Building and Managing the TNC Legitimize diverse perspectives and capabilities Develop multiple and flexible co-ordination processes Build shared vision and individual commitment; reliance on a well-developed corporate culture: “Creating a matrix in managers’ minds”

22. MAKING THE TNC WORK

23. ABB 1988-98 merger in 1988 of two century-old companies: ASEA and Brown Boveri 1,300 companies divided into 5,000 profit centres Chairman (Percy Barnevik): aim to develop a “multicultural multinational” structure how to bind such a disparate empire together? strong corporate culture: shared vision and aims relentless omnipresence of the CEO elite cadre of 500 global managers, carefully selected by CEO for cultural sensitivity and willingness to be mobile ABACUS: comprehensive information system open to all employees Getting to the TNC Model - Example 1

24. Getting to the TNC Model - Example 2 Eli Lilly See Michael Y. Yoshino and Thomas W. Malnight 1999. Eli Lilly – 1998 (b): Emerging Global Organization. Harvard Business School Case. Reference No: 9-399-174. Thomas W. Malnight. Emerging structural patterns within multinational corporations: Toward process-based structures. Academy of Management Journal, 44, 2001, pp. 1187-1210.

25. Requirements for Effective TNC Operation 1. Process must transcend structure 2. Focal global managers 3. Development of inter-cultural integration

26. 1. Process must Transcend Structure Stress on flexible roles rather than inflexible structures “Matrix in the mind” rather than in the form of rigid, costly, conflict-prone dual hierarchies Encourage open communications (backed by electronic integration) Develop core body of managers who share mutual trust and who convey a strong corporate culture

27. 2. Focal Global Managers Role as: • as boundary-spanners within networks and between levels • as co-ordinators • as transferors of information • as conveyors of corporate vision and of legitimacy for decentralization

28. How to Develop Global Managers? • Select for personal characteristics: adaptability, stability and internal drive • Career path to give exposure to both local and global tasks - may be as long as 20 years • Rotation between major functions, and some divisions, so as to develop well-rounded view and widely-based credibility • Establish a personal global network both inside and outside the company • Appropriate training (e.g. cultural sensitivity)

29. The Global Manager is the Future Top Manager “If you are a junior manager at Procter & Gamble, you have virtually no chance of making it into the top ranks of the company unless you combine superb on-the-job performance with extensive international experience”

30. 3. Development of Inter-Cultural Integration

31. Policy Options for Managing Cultural Diversity [See also Table 11.4, Chapter 11] Integration Yes No No Domination by one party Yes synthesis segmentation pluralism domination breakdown

32. Managing Cultural Differences At least four strategies employed by TNCs: 1. build a strong corporate culture internationally 2. develop a common technical or professional culture worldwide 3. apply a strong financial or planning system 4. leave each culture alone All except #4 require an attempt to develop inter-cultural integration

33. STEPS: 1. Cultural diagnosis how do cultures differ within a TNC to what degree they differ 2. Cultural confrontation get values and assumptions out into the open stage of “culture shock” Developing Inter-Cultural Integration (1)

34. 3. Cultural integration encourage enquiring, receptive, adaptable approach learn to express principles and practices within the meaning framework of other culture start to explore areas of potential synergy 4. Cultural synergy based on consensus and mutual respect aim to create a “third culture” for your unit Developing Inter-Cultural Integration (2)

35. Process of Developing Inter-Cultural Integration [See next slide]

36. Culture B Culture A National culture National culture Step 1 Cultural Diagnosis Step 2 Cultural Integration Step 3 Cultural Synergy Culture Shock Third Culture

37. Internationalization of SMEs SMEs can choose between four main modes of internationalization: • Exporting • Cooperation via alliances with foreign agents and partners • Network mode – maintaining a position within the value-chains of larger firms • Autonomous mode

38. Overcoming the Managerial Limitations of SME that are Organizing Across Borders • Intensive reporting of information from overseas affiliates, using ICT • Frequent personal visits by top managers (where feasible) • Appointing long-serving, trusted head office staff to set up and run overseas units • Where possible, hiring home-country nationals to staff operations in a foreign location • Entering into collaboration with trusted local business people – the trust may have been built up over time through previous trading relationships