International Competition and Management

1. International Competition and Management CHAPTER 11

2. Introduction • Swedish forest and paper products firm Svenska Cellulosa Anktiebolaget (SCA) had a successful internationalization strategy • Based on FDI in corrugated box and recycled newsprint in many Western European countries • However important questions remain • Was there anything characterizing the homebase of SCA that contributed to its competitive success or competitive advantage? • When a firm such as SCA distributes its production facilities over many countries, does its management techniques need to change? • This chapter provides you with some initial answers to these questions

3. The Porter Diamond and the Role of the Home Base • A competitive firm can choose from a number of trade, contractual, and investment modes of foreign market entry • Why can a particular firm in a particular home country develop and maintain its competitiveness as it moves through the trade, contractual, and investment modes of globalization? • Why do particular firms accumulate the tangible and intangible assets that support international competitiveness? • Has a lot do with the home base of the firm

4. The Porter Diamond and the Role of the Home Base • Porter introduced a diagram—the Porter diamond—that has become very well known • Focuses on four central aspects of the home base, which Porter views as the determinants of competitive advantage • Factor conditions • Demand conditions • Related and supporting industries • Firm strategy, structure, and rivalry • Main argument: “Nations are most likely to succeed in industries or industry segments where the national ‘diamond’ is most favorable”

5. Figure 11.1 The Porter Diamond

6. Porter Diamond • Factor conditions • Porter considers labor, land, natural resources, and physical capital to be basic factors that are largely inherited • More important from Porter’s point of view are advanced factors that are created which include • Sophisticated infrastructure • Labor educated and trained in very specific ways • Focused research institutions • Porter also makes a distinction between • Generalized factors—can be used in a number of different industries • Specialized factors—tailored for use in specific industries

7. Porter Diamond • Demand conditions • Stresses three aspects in the home base • Demand composition • Sophisticated, demanding, and anticipatory (anticipates trends in global demand) home demand contributes to firms’ success • Demand size and pattern of growth • Large, rapidly-growing, and early home demand are positive aspects of the home base • Degree of internationalization • The more home demand is synchronized with international demand trends, the more it contributes to firms’ competitiveness

8. Porter Diamond • Related and supporting industries • Supplying industries in the home base has several advantages in downstream industries • Efficient, early, rapid, and sometimes preferential access to the most cost-effective inputs • Ongoing coordination • Innovation and upgrading • A competitive domestic supplier industry is better than relying on well-qualified foreign suppliers

9. Porter Diamond • Firm strategy, structure, and rivalry • One country differs from another with regard to managerial systems and philosophies and with regard to capital markets • Institutional environments that allow firms to take a long-term view contribute positively to competitiveness • Presence of a large number of competing firms or rivals in the domestic industry • Competition among firms is necessary for allocative efficiency in a market system, but domestic rivalry contributes to dynamic, technological efficiency

10. Porter Diamond Interactions • Most important Interactions—all related to rivalry • Domestic rivals—particularly when clustered in a geographic region—contribute to the creation of factors • Especially specialized, advanced factors • A group of domestic rivals contribute to the presence of specialized and sophisticated suppliers • Rivalry among domestic firms producing differentiated products enlarges home demand and makes it more sophisticated

11. Figure 11.2 Interaction in the Porter Diamond

12. Spatial Clusters in the World Economy • Flexibility and home base concepts converge in spatial clustering • Interlinked firms/activities that exist in the same local and regional setting (in terms of economic, social, cultural and institutional factors) • AKA clusters, networks, centers of excellence, and industrial districts • First noticed in Silicon Valley in the United States, in what is now known as the Third Italy, in Southern Germany, and in East Asia • Much productive knowledge cannot be codified into explicit forms • Rather, communicated via a highly social process of face-to-face interaction over a relatively long period of time • Consequently, innovation and learning is a spatially-located, social and collective process among a group of firms

13. Spatial Clusters in the World Economy • Why do spatial clusters contribute to the productivity of firms? • Concentrated communication made possible by a cluster increases learning and innovation • Contributes to the dynamic, technological efficiency of firms in the cluster • Trust increases over time which facilitates contracting and exchange among firms • Common business culture develops which reduces uncertainty

14. Spatial Clusters in the World Economy • A cluster exists within a milieu which consists of • Cluster’s firms • Knowledge embedded within the cluster • Institutional environment • Ties of the cluster’s firms to customers, research institutions, educational institutions, and local government • Milieu supports the cluster with rules and norms for business activity, social cohesion, business culture, and government support

15. Figure 11.3 A Value Chain Within a Spatial Cluster

16. Spatial Clusters and Milieus • In its home base, a MNE obviously has the possibility of contributing to the local cluster and milieu • Also possible that a MNE can tap into selected foreign clusters and milieus • In the local milieu where the (MNE) controls full-fledged operations • Can be characterized as an insider • Linked to other firms in both formal and informal networks • Typically maintains close linkages to local research and education facilities, governmental bodies, etc. • Provide channels for rapid dissemination of knowledge and information • Provide a basis for co-operation leading to a continuous stream of improvements • Spatial clusters are important in both the home base and in the foreign operations of MNEs

17. Multinational Management: The Local-Global Paradox • Ownership advantages offset the extra costs of doing business internationally • As a firm globalizes its production system it must decide upon • Locationof the components of the multinational value network • Coordinationamong these components • Summarize some issues raised in book Managing Across Borders: The Transnational Solution by Bartlett and Ghoshal (2002) • A recurring theme relating to a creative tension between the local and the global—local-global paradox

18. Multinational Management: The Local-Global Paradox • Strategic challenges faced by MNEs • Global efficiency • Obtained from economies of scale and scope • Local responsiveness • Involves using local facilities and personnel to tailor goods and services to the needs and preferences of local consumers • Global innovation • Refers to the combined and complementary use of innovations from many parts of the multinational value network

19. Bartlett and Ghoshal (2002) • “Multinational” Firm • Subsidiaries are distinct entities allowed to be very responsive to their local environments • Traditionally associated with European MNEs • Good at delivering local responsiveness, but lacking in the areas of global efficiency and innovation • Global Firm • Subsidiaries are little more than means to deliver uniform goods and services to local markets • Home office of the global firm is very important in planning the realization of global economies of scale and scope • Traditionally associated with Japanese MNEs • Good at delivering global efficiency; less effective in the areas of local responsiveness and global innovation

20. Bartlett and Ghoshal (2002) • International Firm • Pursues a strategy concerned with disseminating the parent company’s knowledge to the foreign markets • Parent retains considerable influence and control, but less than in a classic global company • National units can adopt products and ideas coming from the center, but have less independence and autonomy than ‘multinational’ subsidiaries • Traditionally associated with US-based MNEs • Good at delivering global innovation but not local responsiveness and global efficiency

21. Bartlett and Ghoshal (2002) • Argue in favor of a transnational model of global management • A “flexible centralization/coordination” or an “integrated network” • Role of subsidiaries is differentiated throughout the multinational value network, differing among countries • One subsidiary might only be involved in sales, while another is involved in R&D • Coordination of the multinational value network is achieved using multiple methods • Flows of goods are coordinated through centralization • Flows of resources are coordinated through formalization • Flows of information are coordinated through socialization • Bartlett and Ghoshal advocate the rotation of personel throughout the network • Disparate elements of the MNE are tied together in a coherent mission through the use of vision and innovative human resource development policies

22. Table 11.1. Examples of Multi-Home-Based MNEs

23. Schools of Thought on MNEs • Home-based—originates from a strategic and environmental perspective of how MNEs develop and sustain international competitive advantage • Porter emphasizes the importance of the home base in the process of upgrading competitive advantage • Heterarchical—originates from the field of organization and management of the MNE • A common theme • MNE builds increasingly complex organizational structures and management processes

24. Schools of Thought on MNEs • Sölvell and Zander stress that the two models have a common ground • The mechanisms for fluid exchange of information and upgrading of competitive advantage which cannot be easily imitated by “outsiders” • Home-based model—mechanisms are related to the country or regional level • Heterarchical MNE—related to the organizational level, linking diverse influences from around the world through corporate culture • Knowledge is an important connection among the OLI framework, the Porter diamond, spatial clusters, and the transnational model • Any understanding of the role of MNEs must include an understanding of the development, transmission, and application of knowledge

25. Cultural Issues • Another difficulty faced by MNEs is culture • Adler (2002) argues that cross-cultural business activities typically tend towards either highly effective outcomes or highly ineffective outcomes • Managing these sorts of relationships can involve a search for cultural synergy

26. Cultural Issues • Cultural dominance • MNE that imposes its own national or business culture on its foreign subsidiaries • More powerful companies tend to use this approach • Cultural accommodation • MNE tries to blend into their host country culture at all costs • Cultural avoidance • Both MNE and hosts pretend as if there were no cultural differences • Weak base on which to build long-term business relationships across cultures • Cultural compromise • MNE and partners meet each other half way, sometimes literally, conducting business in a third country • Another method • Look for ways in which the two cultures can reinforce each other or compromise in specific ways that benefit both sides

27. Figure 11.4 The Search for Cultural Synergies