Lecture 7 The Evolving Multinational

1. Lecture 7 The Evolving Multinational

2. Introduction Multinational firms should be thought of as multicentered organizational forms with subsidiaries playing different roles within a larger network structure to gain global integration as well as local responsiveness. By adopting an internally differentiated form, rather than insisting on identical roles for each foreign subsidiary, the MNC can tap the distinctive capabilities of each subsidiary and optimize its worldwide operations.

3. Dimensions of Evolution Geographic Expansion Geographic Proximity Cultural Similarity Similarity in Economic Development Line of Business Diversification Liability of Foreignness Functional Migration

4. Geographic Expansion 1. Geographic Proximity △Entering a neighbor country is a natural first step, as the firm can more easily identify market opportunities and gather vital information about competitive reactions and government policies in a nearby country than in a distant one. △Once the firm has expanded into nearby countries, it may then move sequentially into countries that are farther away, minimizing the incremental distance of each move.

5. Geographic Expansion 2. Cultural Similarity △Success in a foreign country requires an understanding of local customs and consumer habits: effective communication with customers, suppliers, and employees; and good relations with governmental bodies. △Firms often prefer to enter countries that are relatively similar in culture, i.e., where the “psychic distance” is low.

6. Geographic Expansion 3. Similarity in Economic Development △ MNCs are often attracted to foreign markets where consumer buying habits and levels of disposable income are similar to those of home market consumers. △ As the MNC learns how to compete effectively in foreign markets of similar economic standing, it develops capabilities that allow it to enter increasingly different foreign markets.

7. Line of Business Diversification For many MNCs, line of business diversification represents a second dimension of evolution. It has been more common to speak of “the country subsidiary” as if it were monolithic, yet it is clear that most MNCs ramp up their activities over time, rather than entering in all lines of business at once.

8. Typical Pattern of Line of BusinessDiversification Competitive advantage versus local firms LOB 1 LOB 2 LOB 3 LOB 4 Time Liability of foreignness

9. Liability of Foreignness Line of business diversification is driven by a process of evaluation, action, monitoring, and further action. With each successive entry the firm adds to its resources: it develops a reputation as a good employer and as a good customer for local suppliers, it learns about local regulations, and in general it accumulates capabilities that make it possible for the firm to enter additional lines of business.

10. Functional Migration A third dimension of evolution, called functional migration, takes place within each line of business. It speaks to the development of activities performed by lines of business within a country. It depends on an intra-firm decision process. Migrating to higher levels of functionality is not an easy matter. At early steps, the most important impediments involve the effective transfer of technical know-how and the ability to secure resources locally. Later stages encounter very different obstacles as the objective is not merely to replicate existing functions in a foreign market, but to shift functions from the home country to a foreign subsidiary.

11. Typical Pattern of Functional Migration Strategic Leadership Business Planning Local Design and Procurement Assembly Marketing and Distribution Time

12. MNC Evolution – An Integrated Process Accelerated Evolution △ The accumulation of knowledge allows MNCs to evolve along each of three dimensions. △ Experience gained by a line of business addition in one country not only leads to greater knowledge of that country, it can also lead to greater knowledge of the line of business, which can be leveraged across countries to speed up the entry of that business in other countries. △ Functional migration can also be accelerated across lines of business in the same country.

13. MNC Evolution – An Integrated Process 2. Punctuated Evolution △ Leveraging knowledge among dimensions of an MNC can also lead to evolution that is discontinuous, or that skips steps, which is called punctuated evolution. △ By identifying and taking advantage of economies of scale and scope, firms may be able to share capabilities across dimensions, obviating the need to perform every step.

14. MNC Evolution – An Integrated Process 3. Reverse Evolution △As global competition has intensified due to a convergence of consumer demand, increasing opportunities for economies of scale and scope, and rising levels of industrialization around the world, many MNCs have begun to restructure their worldwide operations. △In some instances they have consolidated existing functions and lines of business, and in other instances have shut down entire subsidiaries.

15. Top Multinationals

16. Lenovo’s organizational life cycle 1. Domestic dominance stage (1984–1997): It took Lenovo 14 years to become No. 1 in PC business in China via local distribution of foreign brands and innovative marketing of its own products. 2. Restructuring stage (1998–2003): It took Lenovo another 4 years to restructure its business offering and internal organization, including corporate spin-off, diversification and ownership restructuring. 3. Globalization stage (2004–present): Lenovo started its initial internationalization program in 1988 in Hong Kong, but only recently it has become serious and aggressive in pursuing a globalization goal of joining Global Top 500 with a well-known global brand

17. TCL’s organizational life cycle 1. Domestic dominance stage (1981–1995): It took TCL fourteen years to become No. 1 in China in the areas of telephone and TV via innovative marketing. 2. Diversification stage (1996–1998): It took TCL another two years to diversify and broaden its product offerings into personal computer and other segments of information industry. 3. Globalization stage (1999–present): TCL has been undertaking an internationalization program, termed as “Dragon and Tiger Plan” (with “dragon” sub-plan for international operation and “tiger” sub-plan for domestic operation). Its strategic intent is to join Global Top 500 with multiple global brands.

18. Summary Multinational firms are increasingly viewed as multicentered and internally differentiated firms. By identifying opportunities for scale and scope economies, and by actively leveraging knowledge across dimensions, MNCs can evolve toward an optimal configuration. It has become important for firms to think clearly about the distinct dimensions of evolution, about the impediments faced on each dimension, and about ways to leverage learning across dimensions.