session 6 to 11
DESCRIPTION
International Business ManagementTRANSCRIPT
Taking the Decision on Entering a New Market
Session 6
Trading Global Industries Industries --aerospace --automobiles --military hardware --oil --diamond mining --semiconductors --agriculture --consumer electronics
Domestic Multidomestic Industries Industries --railroads --laundries/dry cleaning --retail banking --hairdressing --hotels --milk --consulting
Inte
rnat
ion
al T
rad
e
Foreign Direct Investment
LO
W
LOW
HIG
H
HIGH
Patterns of Internationalisation
Internationalisation is the process through which a firm expands its business outside the national (domestic) market. Eventually, international firms may develop into:
Multinational corporations (MNC): a firm that carries out its value chains in more than one country. It is generally headquartered in one home country while it also operates in one or more host countries.
Trans-national corporations (TNC): a MNC that does not identify itself with any specific nation, but acquires truly international (i.e., not country-dependent) features and high local responsiveness.
International Strategy Framework
Internationalstrategy
Internationalisationdrivers
Sources of competitive advantage
Marketselection
Mode of entry
Drivers of Internationalisation
• Differences in cost across countries• Potential for economies of scale/scope• Potential for learning• Transportation costs
MarketDrivers
Competitive Drivers
GovernmentDrivers
CostDrivers
• Existence of trade barriers• Similarity of technical standards• Similarity of regulations• Differences in taxes
• Similarity of customer needs & tastes• Existence of global customers• Similarity of distribution channels• Transferability of marketing know-how
• Globalization of competitors• Industry concentration• Differences in industry concentration across countries• Feasibility of protecting intangibles
Forces favoring global integration/
local responsiveness
Adapted from: G. S. Yip, “Global Strategy… in a World of Nations?” Sloan Management Review 31(1) (Fall 1989), pp. 29-41.
EconomicValue
Margin
VolumeCompetitive AdvantageCost driversDifferentiation
drivers
IndustryAttractiveness/
Bargaining Power+
Uncertainty/ Risk
Dynamics (Learning)
G
DECREASING COSTS
ECONOMIES OF SCALE,UTILIZATION…
DIFFERENTIATING
GENERATING KNOWLEDGE AND OTHER RESOURCES
NORMALIZING RISK
INTENSIFYING COMPETITION
ADDING VOLUME
SourcesofValue (ADDING)
Source: Pankaj Ghemawat, What are the real gains from a successful Doha Round? WTO Workshop, November 2010
Levers of Value and Adding Value
World Market
Locations Economies
Economies of Scale
Economies of Scope
To seek lower production factor costs
To expand sales and production volume
To exploit proprietary assets
Principal Motives for International Expansion
Motives for Internationalization
Proactive• Profit and growth goals• Managerial urge• Technology competence• Foreign market
opportunities• Economies of scale• Tax benefits
Reactive• Competitive pressures• Domestic market• Overproduction• Unsolicited foreign orders• Extend sales of seasonal
products• Proximity to international
customers
BUSINESS STRATEGY DIAMOND
Staging
Differentiators
Economic logic
Vehicles
Arenas
• What will be our speed and sequence of moves?– Speed of expansion?– Sequence of initiatives
Staging
• How will returns be obtained?– Lowest costs through scale
advantages?– Lowest costs through scope and
replication advantages– Premium prices due to unmatchable
service?– Premium prices due to proprietary
product features?
Economic logic
• How will we get there?– Internal development?– Joint ventures?– Licensing/franchising?– Experimentation?– Acquisitions?
Vehicles
• How will we win?– Image?– Customization?– Price?– Styling?– Product reliability?– Speed to market?
Differentiators
• Where will we be active? (and with how much emphasis?)– Which product categories?– Which channels?– Which market segments?– Which geographic areas?– Which core technologies– Which value-creation
strategies?
Arenas
INTERNATIONAL STRATEGY AND THE STRATEGY DIAMOND
Economiclogic
Arenas
VehiclesStaging
Differentiators
Arenas
• Which geographic areas will we enter?
• Which channels will we use in those areas?
• Which international market-entry strategies will we use? Alliances? Acquisitions? Greenfield investments?
Vehicles
• How does being international make our products more attractive to our customers?
Differentiators
• How does our international strategy lower our costs, raise the prices we can charge, or create synergies between our business?
Economic logic
• When will we go international?
• How quickly will we expand into international markets?
• In what sequence will we implement our entry tactics?
Staging
Entry Decision Making Under Uncertainty: Trade-off Between Flexibility and Commitment
• Timing: When is a good time to enter?– Potential gain from
waiting– Cost of delay
• Scale of entry– Small scale: Establish a
foothold to learn– Large scale: Acquire first
mover advantage
• Speed of expansion: How fast to grow?– Value of learning – Preemption of competitors– Constraints of internal
resources
• Mode– Some modes have more
flexibility embedded– Some modes reduce resource
requirements
Timing of entry: First MoverAdvantages
• Preempt rivals; establish strong brand name; capture demand
• Build sales volume; ride down experience curve ahead of competitors; cost advantage
• Create switching costs for that tie customers to 1st mover’s products
• Establish social ties ahead of following foreign competitors– important in high-context
cultures
Disadvantages; pioneering costs
• Time spent to learn dos-don’ts; competitors can learn from 1st mover
• If 1st mover introducing a new industry, it builds infrastructure
• 1st mover “trains” customers for followers
• Break through host country’s adjustment to “foreignness” issues– Regulations may change as a
result of 1st mover’s entry
Choosing the Mode of Entry• Decision Criteria for Mode of Entry:
– Market Size and Growth– Risk– Government Regulations– Competitive Environment/Cultural Distance– Local Infrastructure
• Classification of Markets:– Platform Countries (Singapore & Hong Kong)– Emerging Countries (Vietnam & the Philippines)– Growth Countries (China & India)– Maturing and established countries (examples: South Korea, Taiwan &
Japan)• Company Objectives– Need for Control– Internal Resources, Assets and Capabilities– Flexibility
Method for Prescreening Market Opportunities
THE CAGE DISTANCE FRAMEWORK Attributes creating distance
Industries or products affected by distance
Cultural distance Administrative distance Geography distance Economic distance
Different languages
Different ethnicities; lack of connective ethnic or social networks
Different religions
Different social norms, values, beliefs
Hofstede’s Culture Study
Products have high linguistic content (TV)
Products affect cultural or national identity of consumers (foods)
Product features vary in terms of size (cars), standards (electrical appliances), or packaging
Products carry country-specific quality associations (wines)
Absence of colonial ties
Absence of shared monetary or political association
Political hostility
Government policies
Institutional weakness
Regulatory interactions
Government involvement is highin industries that are• Producers of staple goods
(electricity)• Producers of other
“entitlements” (drugs)• Large employers (framing)• Large suppliers to
government (mass transportation)
• National champions (aerospace)
• Vital to national security (telecom)
• Exploiters of natural resources (oil, mining)
• Subject to high sunk costs (infrastructure)
Physical remoteness
Lack of a common border
Lack of sea or river access
Size of country
Weak transportation or communication links
Differences in climates
Products have a low value-of-weight or bulk ratio (cement)
Products are fragile or perishable (glass, fruit)
Communications and connectivity are important (financial services)
Local supervision and operational requirements are high (many services)
Differences in consumer incomes
Differences in costs andquality of
• Natural resources• Financial resources• Human resources• Infrastructure• Intermediate inputs• Information or knowledge
Nature of demand varies with income level (cars)
Economies of standardization or scale are important (mobile phones)
Labor and other factor cost differences are salient (garments)
Distribution or business systems are different (insurance)
Companies need to be responsive and agile (home appliances )
Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.
Factors affecting decision
EXPORTING
INTERNATIONAL CONTRACTING
INVESTMENT
Joint VentureGreenfieldBrownfield (M&A)
LicensingFranchisingContract manufacturing Management contractTurnkey projects
Indirect exportDirect export
Internet EntryB2BB2C
With the channels of International
Express
Different Modes of Entry
Implications of Internationalizationfor Industry Analysis
INDUSTRY STRUCTURE
• Lower entry barriers around national markets
• Increased industry rivalry --- lower seller concentration
--- greater diversity of competitors
• Increased buyer power: wider choice for dealers & consumers
COMPETITION
• Increased intensity of competition
PROFITABILITY
• Other things remaining equal, internationalization tends to reduce an industry’s margins & rate of return on capital
Barriers hindering the process of internationalization
General market risks• Comparative market risks• Competition from other firms• Differences in product usage • Language and cultural differences• Difficulties in finding the right
distributor• Differences in product specifications• Complexity of shipping servicesCommercial risks
• Exchange rate fluctuations• Failure of export customers to pay due
to contract disputes, bankruptcy, refusal to accept product, or fraud
• Delays and/or damage in the export shipment and distribution process
• Difficulties in obtaining export financing
Political risks• Foreign government restrictions • National export policy• Foreign exchange controls imposed by host
governments• Lack of governmental assistance in
overcoming export barriers• Lack of tax incentives• High value of domestic currency relative to
export markets• High foreign tariffs on imported products• Confusing foreign import regulations and
procedures• Complexity of trade documentation• Enforcement of national legal codes
regulating exports• Civil strife, revolution, and wars disrupting
foreign markets
Risk-management strategies
Avoid exporting to high-risk markets
Diversify overseas markets
Insure risks when possible
Structure export business so that buyer bears most risk
Exit Strategies• Reasons for Exit:
– Sustained losses– Volatility– Premature entry– Ethical reasons– Intense competition– Resource reallocation
• Risks of Exit:– Fixed costs of exit– Disposition of assets– Signal to other markets– Long-term opportunities
• Guidelines:– Contemplate and assess
all options to salvage the foreign business
– Incremental exit– Migrate customers
Evaluating different modes of Entry
Session 7
Entry strategies into foreign markets include:
• Merely exporting a firm’s products into a foreign market, possibly with the support of trade brokers
• Licensing a firm’s production and marketing process, or asking for royalties to be paid for the use of firm’s assets and resources
• Franchising a firm’s business
• Directly undertaking production and selling in a foreign country• a) through a ‘multinational approach’ by adapting to local
markets• b) through a ‘global approach’ by mass-marketing the same
product
• Strategic alliances and joint ventures with foreign firms
Different Modes of Entry
Risk
Control
Export Based Modes
•Direct Exporting•Indirect Exporting
Contract Based Modes•Licensing•Franchising•Contract Manufacturing•Turnkey Operations•Management Contracts
Equity - Based Modes
•International JVs•Wholly owned subsidiaries
oBrownfieldoGreenfield
Trade-off between Risk and Control
Host CountryHome Country
Forms of FDI: Ownership
MNE
New Entity
Local Firm
Joint Venture
Full Acquisition (i.e., 100%)
Green Field100% Owned
Partial Acquisition (e.g., 50%)
Ownership = s%
Ownership = (1 - s)%
Complementarity of ResourcesMNE’s
Resources• Innovative
capabilities• Advanced
technology and know-how
• Industry-specific marketing expertise
• Global Best Practices
Local Firm’s Resources
• Imitating capabilities
• Older technology and know-how
• Country-specific marketing expertise
• Country specific organization skills
Value Chain ComponentValue Chain Component
• R&D
• Production
• Marketing & Sales
• Organization structure and systems
Joint Venture Company
Licensing
Acquisition
Joint Venturing
Local Firm
New Subsidiary Company
“Green Field” Entry
HOME COUNTRY HOST COUNTRY
ExportMNE
Common Market Entry Modes
CHOICE OF ENTRY MODES Choice of entry
mode
Non-equity modes
Equity (FDI) modes
Greenfieldinvestments
Minority JVsDirect exportsLicensing/franchising
Acquisition50/50 JVsIndirect exports Turnkey projects
OthersMajority JVsOthers Contracted R&D
Wholly ownedsubsidiaries
Alliances and joint ventures (JVs)
Exports Contractual agreements
Comarketing Strategic alliances (within dotted areas)Strategic alliances (within dotted areas)
Source: Adapted from Pan, Y. and D. Tse, “The Hierarchical Model of Market Entry Modes,” Journal of International Business Studies, 31 (2000), 535-545
HOME COUNTRY HOST COUNTRY
Export of Goods
MNE
Revenues
Customers
Going it Alone: Export
Going it Alone: ExportAdvantages
• Low initial investment• Reach customers quickly• Complete control over
production• Benefit of learning for
future expansion
Disadvantages• Potential costs of trade
barriers– Transportation cost– Tariffs and quotas
• Foregoes potential location economies
• Difficult to respond to customer needs well
When Is Export Appropriate?•Low trade barriers•Home location has cost advantage•Customization not crucial
When Is Export Appropriate?•Low trade barriers•Home location has cost advantage•Customization not crucial
Export Modes
R&D
R&D
R&D
R&D
R&D
Production
Production
Production
Production
Production
Marketing
Marketing
A B
Export buying agent
C
Indirect export
Direct export
Cooperative export
R&D Production
Note: A1, A2, A3, A are n=manufactures of products /services B: is an independent intermediary/(agent) C: is the customer
A1
A2
A3
A
Marketing
Agent, distributor
Export marketing group (with a local agent of B
C
CB
B
A Rider B
B’s international sales organization
PiggybackC
Home country or third Country
Sales and service
Sales and service
Sales and service
Sales and service
Foreign Target Market
Border
Local Firm
Licensing of TechnologyHOME COUNTRY HOST COUNTRY
MNE
Fees and Royalties
Licensing Agreement
Licensing AgreementAdvantages
• Low initial investment • Avoids trade barriers• Potential for utilizing
location economies• Access to local knowledge• Easier to respond to
customer needs
Disadvantages• Lack of control over operations• Difficulty in transferring tacit
knowledge– Negotiation of a transfer price– Monitoring transfer outcome
• Potential for creating a competitor
When is Licensing Appropriate?•Well codified knowledge•Strong property rights regime•Location advantage
When is Licensing Appropriate?•Well codified knowledge•Strong property rights regime•Location advantage
Local FirmInvestment
HOME COUNTRY HOST COUNTRY
MNE
Profit
Foreign Acquisition
Foreign AcquisitionAdvantages
• Access to target’s local knowledge
• Control over foreign operations
• Control over own technology
Disadvantages• Uncertainty about target’s
value• Difficulty in “absorbing”
acquired assets • Infeasible if local market for
corporate control is underdeveloped
When is Acquisition Appropriate?•Developed market for corporate control•Acquirer has high “absorptive” capacity•High synergy
When is Acquisition Appropriate?•Developed market for corporate control•Acquirer has high “absorptive” capacity•High synergy
New Subsidiary Company
Investment
HOME COUNTRY HOST COUNTRY
MNEProfit
Going it Alone: “Green Field” Entry
Going it Alone: “Green Field” EntryAdvantages
• Normally feasible• Avoids risk of
overpayment• Avoids problem of
integration • Still retains full control
Disadvantages• Slower startup• Requires knowledge of
foreign management• High risk and high
commitment
When is “Green Field” Entry Appropriate?•Lack of proper acquisition target•In-house local expertise•Embedded competitive advantage
When is “Green Field” Entry Appropriate?•Lack of proper acquisition target•In-house local expertise•Embedded competitive advantage
Management Fees
Local Firm
Technological Inputs
HOME COUNTRY HOST COUNTRY
Profit
MNE
Wholly-Owned Subsidiary
Managerial Service
Management Contract
Management ContractAdvantages
• Access to local management skills
• Avoids buying unwanted assets
• Retains strategic control
Disadvantages• Potential incentive problem• Potential adverse selection
problem – How do you know the
competencies of the manager?
When is a Management Contract Appropriate?•Manager has a reputation to protect
HotelsConsulting companies
•Performance-based contract provides no perverse incentives
When is a Management Contract Appropriate?•Manager has a reputation to protect
HotelsConsulting companies
•Performance-based contract provides no perverse incentives
Joint Venture Company
Inputs
MNE Local Firm
HOME COUNTRY HOST COUNTRY
Inputs
Share of Profit
Share of Profit
Joint Venture
Joint VentureAdvantages
• Access to partner’s local knowledge
• Reduction of concern about overpayment
• Both parties have some performance incentives
• Significant control over operation
Disadvantages• Potential loss of proprietary
knowledge• Potential conflicts between
partners• Neither partner has full
performance incentive• Neither partner has full
control
When is a Joint Venture Appropriate?•Both partners contribute hard-to-measure inputs•Large expected mutual gains in the long-run•Trade secrets can be walled off
When is a Joint Venture Appropriate?•Both partners contribute hard-to-measure inputs•Large expected mutual gains in the long-run•Trade secrets can be walled off
Exporting Contractual Agreement
Joint Venture
Acquisition Greenfield Investment
Risk Low Low Moderate High High
Return Low Low Moderate High High
Control Moderate Low Moderate High High
Integration Negligible Negligible Low Moderate High
Source: V. Kumar and V. Subramaniam, “A Contingency Framework for the Mode of Entry Decision,” Journal of World Business, vol. 32 (1), 1997, pp. 53-72.
Framework for Mode of Entry Decision
Criteria Weight Exporting
Contractual Agreement
(Licensing or Franchising or Management Contract or
Turnkey)
Joint Venture Acquisition Greenfield
Investment
Risk
Return
Control
Knowledge
Investment
Ease of Implementation
Integration
Overall Score 1
Evaluating the Alternate Modes of Entry Decision
Advantages and Disadvantages of Different Modes of Entry
Managing International Partners and Licenses
Session 9
Stages of Strategic Alliance
• Initial Euphoria• Honeymoon period• Dawning realization• Aftershock• Damage control
Conceptual model of alliance development
• Alliance conceptualization• Alliance pursuance• Alliance confirmation• Alliance implementation/continuity
Steps in SA Implementation
• Contractual negotiations– Ownership– Credit terms– Ordering decisions– Performance measures
• Develop or integrate information systems• Develop effective forecasting techniques• Develop a tactical decision support tool to assist in
coordinating inventory management and transportation policies
Assessing the International Partnership
• Right country?• Right partnering?• Right partner?• Right structure?• Right leadership?
Alliance Partner Strategic Resources & Capabilities
Strategic Deficiencies
Desired Strategic Outcome
Partner 1
Partner 2
Criteria for AssessingCriteria Questions Ye
sNo Don’t Know
Test the Strategic Logic
Do you really need a partner?
Does your partner?
Will adequate returns be likely?
Is a Alliance the best option for both?
Partnership and Fit
Do congruent performance measures exist?
Will you get access to your partner’s skills?
Will you be compatible/comfortable?
Can you arrange an engagement period?
Shape and Design Is the Partnership’s scope of activity clear?
Its ownership structure?
Dispute resolution mechanisms?
Governance structure?
Doing the Deal Is there adequate capitalization?
Have exit arrangements been agreed to?
Is there commitment?
Making the Partnership Work
Will the partnership receive ongoing attention from parents?
Can cultural differences be managed?
Is there flexibility?
Is there commitment?
Is there sound leadership?Source: Paul W. Beamish, “Engaging in Cross-Border Collaboration: Managing Across Corporate Boundaries,” Chapter 6 in C. Bartlett and P. Beamish (eds.), Transnational Management: Text, Readings, and Cases in Cross-Border Management, 6/E, Irwin McGraw Hill, Burr Ridge, Illinois, 2010.
Partner Choice – 5 Cs or 6 Cs• Competence (rather than convenience) — Two weak do not make
one strong. Does the partner have what is needed to deliver results in this market?
• Complementarity (Resources) — Does the partner fill in the gaps well? (If we are similar, then one of us is not needed.)
• Congruence (Goals) — Do our goals mesh well with those of the partner?
• Compatibility — Do we have similar cultures, values and worldviews?
• Chemistry — Can I work with my partner? Sometimes the most strategic fit may not be the best personal fit. If executives dislike each other, then it is impossible to create value through partnership.
• How about “C” for “Competitor”? Can you partner with a potential future competitor?
Requirements for Effective Strategic Alliance
• Advanced information systems• Top management commitment
– Information must be shared– Power and responsibility within an organization might
change (for example, contact with customers switches from sales and marketing to logistics)
• Mutual trust– Information sharing– Management of the entire supply chain– Initial loss of revenues
Success Factors• Selection:
– evaluate which upstream & downstream members should be included in the supply chain to create a highly competitive & efficient supply network
– should be based on company’s goals, objectives & values system.– partners should have competencies in collaboration & those who already
have a proven ability to work in a collaborative environment.• Intention:
– Both partners should acknowledge their mutual dependence & their willingness to work for the survival & prosperity of the relationship.
• Trust: – Existence of trust in a relationship reduces perception of risk associated with
opportunistic behavior as this generates greater profits & serve customers better
• Communication: – allows partners to understand alliance goals, roles, responsibilities & helps
with the sharing & dissemination of individual experiences• Conflict Resolution:
– Firms should be motivated to engage in joint problem solving
Success Factors cont’d
• Developing a focused winning strategy for the alliance:– Based on distinctive competencies and competitive advantages of the partners
in the selected target market (s).– To ensure there will not be a goal divergence or conflict between alliance
partners.– To be able to manage the company cultural challenges that may arise between
the alliance partners.• Partners should be in vulnerable strategic positions:
– (i.e., in need of resources) or when they are in strong social positions (i.e., possess valuable resources to share). seeking complementary or similar resources for transferring or pooling.
• Progressive learning & value capturing: – Learning involves significant transfer of tacit, specialized & complex knowledge.
Learning requires close collaboration of both firms to overcome transfer challenges as knowledge, values, culture and organizational forms.
• Respect and protect the brand of each partner.• Determine and align decision rights:
– To define what decisions are important to the alliance, which partner should make them and how the decisions will be made and monitored.
• Exit Strategy:– Agree upon an exit strategy for the alliance. It Is important to have agreement in
advance on how the alliance will be concluded if and when it may fail and/or when it has fulfilled its mission and achieved its goals and objectives
Mistakes Leading to Failure
• Alliance business is viewed internally by one partner.
• One of the partners is too dependant on the other’s capabilities.
• Problems and dilemmas of mistrust.• Cultural & language barriers. • Collaboration in competitively sensitive areas
can be difficult.• A clash of egos might occur.
Static conceptual model of strategic alliance failure causes
Source: SHENG-YUE, H. and XU, R. “Analyses of strategic alliance failure: a dynamic model” in International Conference on Management Science and Engineering - ISTP, 2005, Harbin Institute of Technology, Russia, 2005.
Example of Alliance Failures• Daimler AG bought a 37 percent stake in Mitsubishi Motors Corp. in
2000 and 2001. The holding was unwound in 2005 after two years of sales declines at the Japanese carmaker. Revenue plunged after Mitsubishi Motors admitted to hiding defects, pushing it to a record 215.4 billion yen loss in the year ended March 2004.
• Volkswagen and Suzuki Motor Corp agreed their tie-up in December 2009, pledging to cooperate on technology such as hybrid and electric cars and on expanding in emerging economies such as India. Suzuki filed for international arbitration in November 2011 after VW repeatedly refused to sell back a 19.9 percent stake in the Japanese carmaker that it acquired in January 2010 for 1.7 billion euros ($2.3 billion) as part of a cooperation tie-up.
• In November 2008, NTT Docomo invested $2.2 billion in Tata Teleservices, at ₹117 a share for a 26.5% stake in the latter. On 25 April 2014, NTT Docomo had announced that they would sell all of their shares in Tata DoCoMo and exit the Indian telecom industry as they had incurred a total loss of $1.3 billion.
Dealing with Competition
Session 10
The Environment & DecisionsComplex
Simple
Static
Organic Extreme
Mechanistic Extreme
Dynamic
Source: Turton, R. (1991), Behaviour in a Business Context, London, Chapman Hall.
7-S Framework
Strategy
• Ways to achieve competitive advantage.
• Examples.– Low-cost strategy through economic production
or delivery– Product differentiation through distinct features
or innovative sales.
Structure
• Ways in which task and people are specialized and divided, and authority is distributed.
• Four main structures– Functional Structure– Divisional Structure– Matrix Structure– Network Structure
Systems• Formal processes and procedures to manage the
organization.
• Examples:– Performance Measurements– Reward Systems– Planning– Budgeting– Resource Allocation– Information System– Distribution System
Staffing
• People, their background and competencies.
• Organization’s approach to recruitment, selection, socialization, training and employee development.
Skills
• Distinctive competencies in the organization.
• Can be of People, Management Practices, Systems and/or Technologies.
Style
• Leadership style of top management and overall operating style of organization.
• Impacts norms followed by people, how they work and interact with each other and customers.
Shared Values
• Core values shared in the organization and serve as guiding principles of what is important.
• Helps focus attention and provides a broader sense of purpose.
Using the 7-S Model• Each S is consistent with and reinforces the other
S’s.• Recognize the full range of elements that need to
be changed and focus on the ones that will have the greatest effects.
• All seven variables are interconnected- to make progress in one, adjustments need to be made in others also.
• No natural starting point for a change – it is decided by diagnosis of the alignment of the organization.
Managing Human Resources
Session 11
Dominance of the Largest Transnational Corporations
Three Top 10 Rankings
How Transnational is a Corporation?
• Corporations vary in range of international dimensions– Ratio of domestic to foreign operations– The number of foreign countries entered– The size of foreign direct investment– The geographic span of operations– The extent of global integration in the production
chain– The extent of national diversity among
shareholders, employees, managers, and directors
How Transnational is a Corporation?
• Transnationality index (TNI): The average of three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment
Calculating the Transnationality Index (TNI) for General Electric and Philips Electronics
The General Field of HR• Major Functions and Activities
– Human resource planning– Staffing
• Recruitment• Selection• Placement
– Performance management– Training and development– Compensation (remuneration) and benefits– Industrial relations– Administration
International Mergers and Acquisitions
Global Competition
Importance of Global Human
Resources Management
Foreign Human
Resources
Market Access
Opportunities
Increasing Importance of Global Human Resources Understanding
Key Issues in International HRM1. Worldwide Human Resources
Planning– Recruiting and Selection– Expatriate orientation and training– Repatriation– Performance appraisal
2. Compensation– Dealing with inflation and
unexpected changes in exchange rates
– Providing sufficient pay to keep individuals
– Should company pay hardship allowance?
– Dissatisfaction with cost of living allowances
3. Housing (Complex problems at home and overseas)
4. Benefits Planning– Developing equity among employees– Several plans necessary for different
categories of personnel
5. Taxation (Proliferation of new laws)
6. Communication of HR Policies and Programs Worldwide– Treat communication as a continuous
process– Face-to-Face contact frequently– Make policy manuals brief and simple– Be sensitive to needs of receiver– Send regular written explanations of
policy changes– Periodic rotation of overseas HR
managers desirable– Security
What does IHRM add into the Traditional Framework of HRM?
• Types of employees– Within and cross-cultural workforce diversity– Coordination– Communication
• Human resource activities– Procurement– Allocation– Utilization of human resources
• Nation/country categories where firms expand and operate– Host country– Parent country– Third country
Differences between Domestic HRM and IHRM
• More HR activities• The need for a broader perspective• More involvement in employees’ personal
lives• Changes in emphasis as the workforce mix
of expatriates and locals varies• Risk exposure• Broader external influences
More HR Activities
International• taxation• relocation and orientation• expatriate administrative services• host government relations• language translation services
The Need for a Broader Perspective
• administering programs that are equitable for more than one group.
More Involvement in Employee’s Personal Lives
Ensure expatriates understand• housing arrangements• healthcare• compensation (cost-of-living allowances,
premiums, taxes)• visa requirements• schooling
Risk Exposure
• expatriate failure• direct costs• indirect costs• militant activities• emergency evacuation
Broader External Influences
• government• economy• labour standards and costs• taxation• health and safety• laws, compliance regulations, codes of
conduct
International Business Strategies
• Multilocal– Decentralized– Collection of independently operating organizations
• Export Market– Parent company maintains centralized control
• Global approach– Hybrid combination of multilocal and export
Domestic vs. International HR
• Basic function and objective remains the same: procurement, allocation, and utilization of people.
• Primary difference between IHR and domestic HR lies in the complexity of operating in different countries with different cultures and laws.
• Degree of complexity depends on:– Extent of cultural diversity– Approach taken to multinational entry– Top management attitudes (parochialism)
Questions for HR professionals• Do we have a strategy for becoming an international firm?• What type of managers will we need to be successful?• How can I find out about the way that HRM is conducted in
other countries (laws, trade unions, labor market).• What will be the impact of cultural norms on our HR
policies.• How will we choose whether to send expatriates or use
local employees.• How do we move people to different locations• How do we manage transfer of knowledge across borders
International HR Strategies
• Ethnocentric– Centralized HR– Managed by Parent Country Nationals (PCNs) – Pay based on local market for employees; home country
for PCNs– Training aimed at KSAs to perform the job
• Polycentric– Decentralized HR– Managed by Home Country Nationals (HCNs) – Pay based on local market– Training given added importance
International HR Strategies
• Geocentric– Global workforce deployed throughout the world– Positions filled by most qualified regardless of
nationality: HCNs, PCNs, or TCNs,– Compensation based on value-added– Training and development emphasized
• Regiocentric
Whirlpool’s Globalization • Where to go among alternative markets?
– $23/hr in the U.S. including the benefits– $3/hr in Mexico – $1/hr in China– $32/hr in Germany
• Mode of entry?– Acquisition of the major domestic appliances unit of Phillips
N.V. for more than $1 billion in 1991• Whirlpool’s total employees today:
– 23,000 in the U.S.– 45,000 overseas
Types of international work• Expatriates
– An employee sent by his/her company in one country to work in a different country.
• Global team project– Bringing together employees from different locations
to complete a specific team project.
• Short-term assignments– Sending employees on assignments, such as a three-month assignment,
to a foreign location.
• Virtual assignment. – Assignments requiring employees in different locations
to use information technology to communicate on job projects and tasks.
What is an expatriate?
• An employee who is working and temporarily residing in a foreign country– Some firms prefer to use the term “international
assignees”– Expatriates are PCNs from the parent country
operations, TCNs transferred to either HQ or another subsidiary, and HCNs transferred into the parent country
• Global flow of human resources
A Model of IHRM
Source: Adapted from P.V. Morgan, ‘International human resource management: Fact or fiction?’, Personnel Administrator, 31(9), 1986, p.44.
Types of employees in an MNE
• Parent-country nationals (PCNs)
– Employees who were born and live in a parent country.A parent (or home) country: the country in which a
company’s corporate headquarters is located.
• Host-country nationals (HCNs)
– Employees born and raised in a host country.Host country: a country in which the MNE seeks to locate or
has already located a facility.
• Third-country nationals (TCNs)
– Employees born in a country other than a parent or host country.
International Assignments Create Expatriates
Advantages of Different Sourcesfor Overseas Managers
Host Country Home Country
Third Country
•Less cost•Preference of host country government•Knowledge of environment•Language facility
•Talent available within company•Greater control•Company experience•Mobility•Experience provided to corporate executives
•Broad experience•International outlook•Multi-lingualism
Parent-country Nationals
Advantages Control and co-ordination
by HQ is maintained. Promising managers get
international experience. PCNs may be the best
people for the job. Assurance that the
subsidiary will comply with company objectives policies etc.
Disadvantages HCNs promotion
opportunities are limited. Adaptation to host
country may take a long time.
PCNs may impose an inappropriate HQ style.
Compensation differences between PCNs and HCNs may cause problems.
Host-country NationalsAdvantages• No problems with language
and culture. • Reduced hiring costs. • No work permits required. • Continuity of management
improves since HCNs stay longer in positions.
• Govt. policy may force hiring of HCNs.
• Promotional opportunities not limited - so higher morale among HCNs.
Disadvantages• HQ may have less control
over operations. • HCNs may still have limited
career opportunities outside the subsidiary.
• Hiring HCNs limits opportunities for PCNs to gain overseas experience.
• Hiring HCNs may encourage a federation of disintegrated national units rather than one integrated global unit.
Third-country NationalsAdvantages• Salary and compensation
may be lower than for PCNs.
• May be more familiar with host country than the PCNs.
Disadvantages• Transfers must consider
national animosities.• Host government may
resent TCNs as much as PCNs.
• TCNs may not comply with HQ style of management.
• TCNs may not want to return after assignment.
Why Do International Managers Fail?
• Does it change the essence of HR?• Culture Shock• Cultural arrogance (Parochialism)
• Cultural Insensitivity• The Key success factor?
– Cultural adaptability
CULTURAL ENVIRONMENT• Language• Communication styles
– Nonverbal– Direct vs. Indirect– Greeting: physical and verbal
• Space– Structural & interpersonal
• Time orientation– Punctuality– Monochronic vs. Polychronic
• Religion• Respect/formality• Consensus seeking
Composition of the Cultural Environment of International Business
Religionsacred objectsphilosophicalsystemsbeliefs & normsprayertaboosholidaysrituals
Technology and Material Culturetransportationenergy systemstools & objectscommunicationsurbanizationscienceinvention
Values and AttitudesToward:timeachievementworkwealthchangescientific methodrisk-takingEducationformal educationvocational trainingprimary educationsecondary educationhigher educationliteracy levelhuman resources planningSocial Organizationkinship social institutionsauthority structuresinterest groups social mobilitysocial stratificationstatus systems
Languagespokenwritten languageofficial languagelinguistic pluralismlanguage hierarchyinternational languagesmass media
Lawcommon lawcode lawforeign lawhome country lawantitrust policyinternational lawregulation
Politicsnationalismsovereigntyimperialismpowernational interestsideologiespolitical risk
HOFSTEDE’S DIMENSIONS
• Individualism vs. Collectivism• Power Distance• Uncertainty Avoidance• Masculinity vs. femininity• Long-term orientation
Major Reasons for Expatriate Failures in Foreign Environment
• Inability of the manager’s spouse to adjust to a different cultural environment.
• The manager’s inability to adapt to a different physical or cultural environment. Other family-related problems.
• The manager’s personality or emotional immaturity.• The manager’s inability to cope with the
responsibilities posed by the overseas work.• The manager’s lack of technical competence.• The manager’s lack of motivation to work overseas.
• empathy • flexibility • patience • openness • reliability • confidence • emotional stability • communication skills • tolerance for differences • humor • resourcefulness • sensitivity • teaching skills
ability to handle alcoholcuriositypositive regard for othersacceptability of assignmentdesire to be abroadnon ethnocentrismhigh motivationcourtesyadaptabilitytolerance for ambiguitylanguage skillsinterest in host culture
Traits expected from an International Expatriate
International Compensation
• If compensation is high then problems may be encountered on return to head office.
• If compensation is not adequate then there may be no incentive to go for the international assignment given the hardships that are usually involved in doing so.
International Compensation
Expatriation PremiumCost of Living Allowance Swamp Pay AllowanceShelter AllowanceEducational AllowanceHome Leave
Repatriation
• Virtually all repatriated personnel experienced some personal difficulty in reintegrating on return home. The main complaints were loss of status loss of autonomy lack of recognition of the value of the experience and lack of career direction.
Repatriation: Reverse Culture-shock
JOB RELATED FACTORS• “Out of sight out of mind”• International experience
devalued• Loss of status and pay relatively
peaking• Changes in the HQ
SOCIAL FACTORS• Expat assignment - different type
of social interaction (going from a very close expat community to where everyone is very busy with their own lives)
• Problems of spouse returning to the workforce
• Lack of peer support for teenagers
Flowchart of the Selection-Decision Process
Start the Selection Process
Can the position be filled by a local national?
Identify degree of interaction required with local community – using a 7- or 9- point scale, ranging from low to high, indicate the degree of interaction with local community required
for successful performance on the job.
Select local national and subject him/her to training basically aimed at improving technical
and managerial skills.
Emphasis* on tasks variables.
Second but by no means unimportant question is to ask whether the individual is willing to
serve abroad.
Is candidate willing?
Probably not suitable for position
Emphasis* on task variables
Identify degree of similarity / dissimilarity between cultures –
using a 7- or 9-point scale, ranging from similar to highly
diverse, indicate the magnitude of differences between the two
cultures,
Emphasis* on “relational abilities” factor.
“Family situation” factor must also be taken into consideration.
Start orientation (most rigorous)
Start orientation(moderate to high rigor)
Start orientation(moderate to high rigor)
Probably not suitable for position
YES
NO
YES
YES
NO
NO
HIGH
LOW
HIGHLY DIVERSE
VERY SIMILAR
Preparing for an International AssignmentStudy the following subjects:• Social and business etiquette.• History and folklore.• Current affairs, including relations between the country and the United
States.• The culture’s values and priorities.• Geography, especially the cities.• Sources of pride: artists, musicians, novelists, sports, great achievements of
the culture, including things to see and do.• Religion and the role of religion in daily life.• Political structure and current players.• Practical matters such as currency, transportation, time zones, hours of
business.• The language.
Recruitment
• Government Regulations• Work Permits Universally Required• Recruitment of Locals Varies• Guest Workers• Role of Church, Family, Politics
Selection• Merit Versus Best Family• Family Ties• Social Standing• Origin• Industrialized versus Less Developed
Training Issues
• Local Resources• Less Technical Capabilities• Apprenticeship Strengths in Europe• Management Development (US Leader)• Language (English Need)
Compensation
• Host Country Employees– Production Standard or Time or Combination– Benefits (often higher than U.S.)– Profit Sharing (may be Required)
• Managers– Narrowing of Salary Gap with USA
Expatriate Compensation
• Base Pay• Differentials• Incentives• Company Assistance• Cost: 3-4 times USA Rate
Compensation of Expatriate ManagersTo be effective, a compensation
program must:1. Provide an incentive to leave the united states.2. Maintain an American standard of living.3. Facilitate reentry into the united states.4. Provide for the education of children.5. Maintain relationships with family, friends, and business
associates.
Compensation Elements of an Expatriate
• Programs used by most MNCs have four elements:• Base pay – equal to pay of domestic counterparts in comparably
evaluated jobs.• Differentials – to offset the higher costs of overseas goods, services, and
housing.• Incentives – to compensate the person for separation from family, friends,
and domestic support systems.• Company assistance programs – to cover added costs such as moving and
storage costs, automobile, and education expenses.
The Price of an ExpatriateAn employer’s typical first-year expenses of sending a U.S.
executive abroad.Direct Compensation Costs
Base Salary 100%
Foreign-service premium 15%
Goods and services differential 20%
Housing costs 20-40%
Transfer Costs
Relocation allowance 5%
Air fare 2%
Moving household goods 25%
Other Costs
Company Car 15%
Schooling (two children) 20%
Annual home leave (four people) 5%
Personal income tax abroad 50%
Total = Salary plus 187-207%