Chapter 9:Entry Strategies and Organizational Structures Paul Taylor Hannah Smith Jeremy Bourne
First of all… Please refrain from using your laptops (Mike)
Agenda Entry Strategies and Ownership Structures Basic Organizational Structures Nontraditional Organizational Arrangements Organizational Characteristics of MNCs Case Study
Objectives Identify common entry strategies for MNCs, such as joint ventures and fully owned subsidiaries Explore business organizational charts Define keiretsus and describe their advantages Discuss formalization, specialization and centralization in the context of organizational structures
Entry Strategies and Ownership Structures Wholly owned subsidiary Merger/acquisition Alliance Joint venture (JV) Licensing Franchising Chart p. 288
Export/Import Advantages: Easy way to go international Requires minimum investment Disadvantages: Regulations in other countries More transitional in nature
Wholly Owned Subsidiary Overseas operation that is totally owned and controlled by an MNC Advantages: Avoid transaction costs Full control, managerial efficiency High profits Disadvantages: High risk in one area Not efficient entering multiple countries Host countries feel MNC trying to take control Home country see this as exporting jobs Ex: Mizuho Financial Group
Mergers/Acquisitions Cross-border purchase or exchange of equity involving two or more companies Advantages: Quickly expand resources Construct high-profit products in new markets Disadvantages: Cultural differences Time constraints Transaction costs Ex: Proctor and Gamble acquired Gillette, British Petroleum acquired Amoco Mergers
Alliances and Joint Ventures (JV) Alliance – any type of cooperative relationship among different firms JV – a specific alliance where two or more partners own or control a business Nonequity venture – one group’s merely providing a service for another (consulting, construction, mining) Equity joint venture – involves a financial investment by MNC in a business with local partner Ex: Area Energy (Exxon Mobil and Royal Dutch Shell)
Alliances and JV(cont.) Advantages: Improvement of efficiency (economies of scale & scope, spread risk) Access to local partners’ knowledge of customers, market Local partner can help deal with political factors Overcome limits on foreign competition Disadvantages: Market may not be large enough for desired goods and services Parties may not be on same page, not all in agreement Advice: Know partners well, work on relationship to build trust Expect differences in objectives among partners in different countries A company having the desired resource profile may not be best partner Be sensitive to partner’s needs
Licensing An agreement that allows one party to use an industrial property right (patent, trademark, logo, etc.) in exchange for payment to the other party (usually based on sales) Advantages: Avoid entry costs Don’t need lots of financial or managerial resources Disadvantages: Time limit on license License may become obsolete due to competition
Franchising A business arrangement under which one party allows another to operate using its trademark, logo, product line, and methods of operation in return for a fee. Advantages: New stream of income for franchisor Quickly brought to market for franchisee Disadvantages: Franchisor will impose restrictions on franchisee
Discussion Question 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?
Answer: Joint Ventures are so popular because it allows companies to improve efficiency and create economies of scale and scope while spreading the risk between the partners. It also gives the MNC access to the knowledge of its local partner that will help them better understand the market and its customers in that region, as well as the political issues going on in the region. It also lets the MNC overcome limits on foreign companies by becoming part of the insider group. Although a fully owned subsidiary would allow total control by the MNC and may produce higher profits, it is not a better choice because risks are higher, requires more investment, and host and home countries may have negative views of it.
Internet Exercise, pg. 309 www.ford.com www.vw.com What type of organizational arrangement(s) do you see the two firms using in coordinating their worldwide operations? Which of the two companies’ arrangements is more modern? Does this increase that firm’s efficiency, or does it hamper the company’s efforts to contain costs and be more competitive?
Basic Organizational Structures Initial Division Structure - initial process of entering a market by way of joint ventures or import/export subsidiaries
Basic Organizational Structures International Division Structure - a multinational structural arrangement that combines elements of function, product, and geographic designs, while relying on a network arrangement to link worldwide subsidiaries
Basic Organizational Structures International Division Structure
Basic Organizational Structures Global Structural Arrangements Global Product Division Structure - a structural arrangement in which domestic divisions are given worldwide responsibility for product groups Global Area Division Structure - a structure under which global operations are organized on a geographic rather than a product basis Global Functional Structure - a structure that organizes worldwide operations primarily based on function and secondarily on product
Basic Organizational Structures Global Structural Arrangements Global Product Division Structure
Basic Organizational Structures Global Structural Arrangements Global Area Division Structure
Basic Organizational Structures Global Structural Arrangements Global Functional Structure
Basic Organizational Structures Mixed Organizational Structure - a structure that is a combination of a global product, area, or functional arrangement Multinational Matrix Structure
Basic Organizational Structures Transnational Network Structures - a multinational structural arrangement that combines elements of function, product, and geographic designs, while relying on a network arrangement to link worldwide subsidiaries Chart p. 297
Nontraditional Organizational Structures Mergers and Acquisitions JVs and Strategic Alliances Keiretsus Electronic Network Product Integration Information Technology
Mergers & Acquisitions In recent years, the annual value of worldwide M&A’s has reached as high as $6 Trillion Firms try and fashion a structural arrangement that attempts to promote synergy while encouraging local initiative Addresses the needs of both firms
Keiretsus Definition: a large, often vertically integrated group of companies that cooperate and work closely with each other.
Keiretsus Example Mitsubishi Motors 3 flagships firms within the keiretsus Mitsubishi Corporation Mitsubishi Bank Mitsubishi Heavy Industries
Discussion Question Why are keiretsus popular? What benefits do they offer? How can small international firms profit from these structures? Give an example.
Discussion Question Keiretsus create economies of scale and give you a competitive advantage through vertical integration. Small firms can benefit because they have an increased amount of resources through the MNC.
Organizational Characteristics of MNCs Formalization Specialization Centralization
Discussion Question In what way do 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 effects of these three characteristics.
Crossword activity Get excited
Case Study: Getting in on the Ground Floor (p. 311) What type of organization design would you recommend that Ruehter use?
Case Study: Getting in on the Ground Floor (p. 311) Initial division structure
First worldwide subsidiary
Just starting out, need to approach global market cautiously
Case Study: Getting in on the Ground Floor (p. 311) If there were joint R&D efforts, would this be a problem?
Case Study: Getting in on the Ground Floor (p. 311) No
No reason to fear joint R&D
Dutch company already has strong R&D prowess and seems to have huge potential