chapter 3human resource

1(c) 2009 by Nelson Education Ltd.

Chapter Three

The Context of Cross-Border Alliances and

SMEs

Agenda

• Review Discussion Questions Chapter 2• Module Test 1&2• Lecture ~ Chapter 3 • Case • True & False


3(c) 2008 by Nelson, a division of Thomson Canada Limited.

Chapter 2: Discussion Questions

1. What are the stages a firm typically goes through as it grows internationally and how does each stage affect the HR function?

2. What are the specific HRM challenges in a networked firm?

3. Country of origin influences the firm’s approach to organization structure. As MNEs from China and India internationalize, to what extent are they likely to differ from that observed for Japanese, European and US MNEs?

Module Test 1&2

• Chapters 1&2• Write your student number on the top• When completed raise hand and I will collect your paper• Remain quiet please


Chapter Focus

• Role of HRM and the challenges it faces in international mergers and acquisitions

• Particular attention to small and medium sized businesses



Chapter Learning Objectives

After reading this chapter, you should be able to:• define cross-border mergers and acquisitions (M&As)¹

the different stages of formation, and phase-specific strategic HR requirements

• describe the formation process of international joint ventures (IJVs) and identify HR measures and roles relevant in the development of such cross-border alliances

• discuss the internationalization of small and medium-sized enterprises (SMEs) and their approaches to international human resource management


Opening Vignette

Mergers and Acquisitions: The Dynamics of Globalization

• increased level of internationalization through M & A’s

M&A’s

• Strong M&A’ trend in industries such as car manufacturing and natural resources

• Both sectors in which many Canadian companies have been involved such as the auto industry and mining



Cross-Border Alliances

• The Strategic importance of alliances has increased in the course of globalization

• Cross Boarder Alliances are cooperative agreements between two or more firms from different national backgrounds, which are intended to benefit all partners


Non-Equity Cross-Border Alliance

• investment vehicle in which profits and other responsibilities are assigned to each party according to a contract


Equity Modes

• foreign direct investor’s purchase of shares of an enterprise in a country other than its own

• Equity as well as non-equity cross-border alliances pose specific challenges to international human resource management

• The difference in HRM in equity and non-equity is supposed to lie in the differing extent to which specific HR measures are used

• Research deficit with respect to non-equity cross border alliances and beyond scope of chatper



Equity and Non-Equity Modes of Foreign Operation (Figure 3.1)


Cross-Border Mergers and Acquisitions

Merger• result of an agreement between two companies to join

their operations together

Acquisition• one company buys another company intending to control

the activities of the combined operations

M&A’s

• Merger usually results in the formation of a new company, while an acquisition involves the acquiring firm keeping its legal identity and integrating a new company into its own activities (Figure 3.2)



The Formation Processes of M & A’s and HR Challenge (Figure 3.2)


HR Challenges in M&As

• creating new HR practices and strategies that meet the requirements of the M & A


Reason to Engage in M&As

• facilitate the rapid entry into new markets


Facts Firms Take into Consideration When Deciding on a Target Country

• the growth aspiration of the acquiring company• risk diversification• technological advantages• a response to government policies in a particular country• exchange rate advantages• favourable political and economic conditions• effort to follow clients

Trends

• Cross-border M&A’s have seen tremendous growth over the last two decades, largely due to globalization

• Both the value and number of M&A’s rose in 2005 to $716 billion, an 88% increase

• Between 1197 & 2002, Canadian firms acquired 447 foreign companies worth 124 billion, while foreign companies acquired 345 Canadian companies worth 144 billion



Mergers and Acquisitions in US Billions (Figure 3.3)

M&A’s

• Despite the high yearly growth rates in the area of M&A’s there seems to be a gap between the expected added value and the benefits realized from an M&A

• There is growing appreciation that the way the M&A is managed during the different phases (especially in the post-merger integration phase) has an impact of its performance, and in turn on the added value created.



IHRM and its Role in Employee Relations (M&A)

The quality of employee relations, ranging from employee support to employee resistance is influenced by variables such as the

• similarity between management styles of the two organizations

• type of cross-border combinations• combination potential in terms of efficiency gains• extent of organizational integration


Employee Resistance

• Evidence that employee resistance endangers M&A performance

• It is important that all M&A’s effectively manage issues where employee resistance is encountered

• HRM can play a major role in this


Employee Resistance Endangers M&A Performance

HRM role (task and human integration)• visibility and continuity of leadership• communication processes• integrating mechanisms• acquired personnel retained• voluntary personnel loss


Human Integration Process

• especially difficult to manage and takes time• both firms are embedded in their own national,

institutional and cultural settings


Typical Cross-Border M&A Problems

• within first year of merger, up to 20% of executives may be lost. Over a longer time frame, this tends to increase even further.

• personnel issues are often neglected.

• a high number of M & As fail or do not produce the intended results.


Task and Human Integration Process

Low Integration• if the M&A is carried out for portfolio reasons both

companies remain separate cultures

High Integration• crucial for the M&A to meet the HR requirements of the

phases


Phases of Cross-Border M & A

• Typically mergers and acquisitions are characterized by different phases.

1. Pre M&A Phase2. Due Diligence Phase3. Integration Phase4. Implementation Phase



• pre- M & A phase (a screening of alternative partners based on an analysis of their strengths and weaknesses)

• due diligence phase (analyzing the potential benefits of the merger, product-market combinations, tax regulations, and compatibility with respect to HR and cultural issues)

• integration planning phase (planning for the new company)

• implementation phase (action plan)



• Various studies have shown that HR becomes increasingly involved in the phases as the process evolves

• One study indicated HR issues were only seriously considered once the integration strategy was defined

• Firms that included HR early in the process were more successful than others with low HR involvement

• Strongest involvement of the HR Department took place in the last two phases


HR Activities in the Phases of a Cross-Border M & A (IHRM Notebook 3.1)


Strategic HRM and the Role of the HR Function in M&As

Starting points in HRM practices• high HRM involvement early in the M&A process• fit between business, M&A and HR strategies• decisions about resources involve staffing and retention

issues, with termination decisions being particularly important

• training and development programs• appraisal and reward systems



• values that shape employees priorities and decision making

• strategic approach and aligning the HRM activities with the M&A strategy with respect to resources, processes and values



• create a strong team including a mix of both expatriates and local members of top management

• language skills and sensitivity toward cultural differences crucial skills for M&A success



IHRM roles• strategic partner• administrative expert• employee champion• change agent

A Comparative Approach to HRM in M&A Processes

Post-integration trends in HRM practices • The content of HR measures appears to depend much on

the nationality and culture of the firms involved • Convergence across nationalities in HRM policies

(performance-related pay, training and team-based product development)

• Adjustments to suit the local culture• American HRM reflected a short-term individualistic

national business culture

(c) 2009 by Nelson Education Ltd.

IHRM Notebook 3.1 & 3.2

• Review IHRM Notebook 3.2 first • Then review IHRM Notebook 3.1 to compare the different

countries and the factors in the M&A process


Different Countries

• Performance related pay more popular in US than Japan or Germany

• Recruitment in US tends to be rather short term as compared to Germany and UK, while Japan the lifetime orientation is less than before but still a long term focus

• Training & career planning most extensive in the US


A Comparative Approach to HRM in M&A Processes

• Japanese HRM reflected long-term, consensual, team-based, collectivist national philosophies

• French companies displayed an ethnocentric approach

• German companies were the most anxious to adopt international practices



Post-Acquisition Trends in HRM Practices (IHRM Notebook 3.3)

Cross Border International Equity Joint Ventures

Joint Venture• legal entity representing holdings of parent

firms located outside the country of operation

• Joint ventures can have two or more parent companies however most involve just two


Cross Border International Equity Joint Ventures

• The equity division between the parent companies of the join venture may differ

• In some cases the ration is 50:50, the dominant partner becomes more obvious with a ration of 51:49

• In contrast to M&As the parent companies keep their legal identity and an additional new legal identity representing the joint venture is established



Formation of an International Equity Joint Venture (Figure 3.6)


The Main Reasons for Engaging in an IJV

• to gain knowledge and to transfer that knowledge• host government insistence• increased economies of scale• to gain local knowledge• to obtain vital raw materials


The Main Reasons for Engaging in an IJV

• to spread the risks (e.g. share financial risks)• to improve competitive advantage in the face of increasing

global competition• provide a cost effective and efficient response forced by

the globalization of markets


The Main Reasons for IJV Failure

• lack of interest in HRM• cross cultural management aspects


IJV Development Stages and HR Implications (IHRM Notebook 3.4)

Strategic HRM and the Role of the HR Function in JIVs

• IJVs are embedded in their own national, institutional, and cultural settings

• the IHRM challenge is to balance the various interests and manage these cross cultural differences.



There exists interface and intra-IJV IHRM challenges.

Interface IHRM Challenges (initial stages of IJV formation process)

• manage the relationships at the interfaces of the parent companies to integrate dualities of rules and practices

• focuses on the compatibility of the respective partners



Intra-IJV IHRM Challenges (initial stages of IJV formation process)

• develop IHRM strategies and practices for the new IJV entity.

• focus on managing the mutual learning processes between the parent companies andthe new joint venture entity.



Strategic HRM and the Roles of the HR Function in IJVs

IHRM roles• partnership• change facilitator and strategy implementer• innovator • collaborator

Partnership Role

• HR managers should take all stakeholder’s needs into account and demonstrate a thorough understanding of the business and market


Change Facilitator & Strategy Implementer

• HR managers should be able to conceptualize and implement new strategies involving trust-based communication and cooperation with relevant partners


Innovator

• HR Manager should be able to identify talent for executing joint venture strategies and adapting to changes through the stages


Collaborator

• The HR Manager’s strengths should lie in creating win-win situations characterized by sharing rather than competing between the different entities engaged in the joint venture



The Importance of Cross-Cultural Management ( M&As and IJVs)

• different national, institutional, and

cultural environments; cultural differences matter in collaboration, decision making and loyalty

• top management multicultural team; different cultural expectations, management styles and strategic objectives


Top Management Team and Role in Joint Ventures

• Top management has a high impact on the performance of a joint venture

• Top management is usually composed of individuals from different cultural context due to high competition for these roles

To avoid intercultural conflicts some firms have started to recruit country experts rather than internal staff


SME’s: Strategic Importance and Barriers to Internationalization

• No standard definition for SME’s, differs per country• Some base on headcount, turnover, annual balance or

combo• In Canada small businesses are defined as companies with

up to 49 employees and annual revenue between $30 000 and 5 million

• Medium companies between 50 – 500 employees and annual total revenues between 5 million and $50 million


EU Defining Standards for SME’s (Table 3.1)


FACTS: Page 90

• 2001: 0.2% of Canadian firms had 500 plus employees, 92% fewer than 20 employees

• Europe: less than 1% of large firms, rest SME’s• Most countries 80% SME’s

Strong position of SME’s is not reflected to the same extent in the international business environment.

Most have less experience and less power to withstand the demand of host governments, financial resources,

reputation, etc.


Access Barriers to International

Markets by SMEs (IHRM Notebook 3.5)

• shortage of working capital to finance exports• identifying foreign business opportunities• limited information to locate/analyze markets• inability to contact potential overseas customers• obtaining reliable foreign representation• lack of managerial time to deal with internationalization


Access Barriers to International

Markets by SMEs (IHRM Notebook 3.5)

• inadequate quantity of and/or untrained personnel for internationalization

• difficulty in managing competitor’s prices• lack of home government assistance/incentives• excessive transportation/insurance costs


Typical Challenges for IHRM in Internationalized SMEs

• importance of the founder/owner• recruitment, selection, and retention• human resource development; the challenge of learning• expatriate management• limited resources of the HR department and outsourcing


Importance of the Founder/Owner

Specific skills of the founder have an impact on the internationalization process of SMEs

• international work experience or established networks and relationships abroad

• positive perceptions of the international environment


Recruitment, Selection and Retention

SMEs • more difficulties than large firms in recruiting adequate

international managers• perceived to lack legitimacy as employers with a strong

international orientation• perceived as having disadvantages; career/international

work opportunities, pay/benefits, progressiveness of company, training


Recruitment, Selection and Retention

IHRM activities for SMEs• communicate the company has a strong position in

international markets and offers international career opportunities

• use selection criteria that defines international competencies

• improve and emphasize benefits; training, career paths, financial


SME Employer Image and

Internationalization (Figure 3.8)


Human Resource Development: The Challenge of Learning

SMEs• short term oriented• informal learning• tacit knowledge


Human Resource Development: The Challenge of Learning

IHRM activities for SMEs• learning processes are critically important• improve capacity to perceive relevant environmental

developments: strategy and communication training• resist the temptation to impose “large firm thinking”


Learning in Small Organizations (IHRM Notebook 3.6)


Expatriate and Limited IHRM Resources

SMEs• informal

IHRM activities for SMEs• cultural integration• outsourcing IHRM


Case: HR in the Daimler Chrysler Merger

1. Why do you think the board member responsible for human resources was not included in the Chairman’s Integration Council? Can you think of any consequences for the two companies?

2. How could the HR function of the two merging companies have addressed organizational and national cultural differences before they became problems?

chapter 3human resource

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