Chapter 9 Entry Strategies and Organizational Structures
Entry Strategies and Organizational Structures • The specific objectives of this chapter are to • DESCRIBE how an MNC develops and implements entry strategies and ownership structures. • EXAMINE major types of entry strategies and organizational structures used in handling international operations. • ANALYZE the advantages and disadvantages of each type of organizational structure, including conditions that make one preferable to others. • DESCRIBE recent, nontraditional organization arrangements coming out of mergers, joint ventures, keiretsus, and other new designs including electronic networks and product development. • EXPLAIN how organizational characteristics such as formalization, specialization, and centralization influence how the organization is structured and functions.
Entry Strategies and Ownership Structures • Export/Import • Wholly Owned Subsidiary • Mergers/Acquisitions • Alliances and Joint Ventures • Licensing • Franchising
Entry Strategies and Ownership StructuresExport/Import • Exporting and importing often are the only available choices for small and new firms wanting to go international • Also permits larger firms to begin international expansion with minimum investment and minimum risk • Paperwork can be turned over to export management company or handled through the firm’s export department • Permits easy access to overseas markets • Strategy is usually transitional in nature.
Entry Strategies and Ownership Structures Wholly Owned Subsidiary • Wholly owned subsidiary • An overseas operation is totally owned and controlled by an MNC. • MNCs using a wholly owned subsidiary want total control and believe that managerial efficiency is better without outside partners • Some host countries worry that the MNC could drive out local enterprises • Home country unions sometimes view foreign subsidiaries as an attempt to “export jobs” • Today many MNCs opt for a merger, alliance, or joint venture rather than a wholly owned subsidiary
Entry Strategies and Ownership Structures Mergers and Acquisitions • Mergers and acquisitions are the cross-border purchase or exchange of equity involving two or more companies. • Cultural differences and time constraints are the 2 most pervasive barriers. • Once a merger/acquisition occurs, it may be difficult to clearly communicate new goals to subsidiary. • Transition costs also pose a problem in the post-merger environment. • Managers need to be wary of complications and attempt to move forward by enhancing communication and operational efficiency.
Entry Strategies and Ownership Structures Alliances and Joint Ventures • Alliance • Any type of cooperative relationship among different firms. • Some are temporary, some more permanent. • International joint venture (IJV) • Agreement under which two or more partners from different countries own or control a business. • There are two types of alliances and joint ventures • Nonequity ventures • Equity joint ventures • Advantages of alliances and joint ventures include • Improvement of efficiency • Access to knowledge • Mitigating political factors • Overcoming collusion or restriction in competition
Strategic Alliance Recommendations • Suggestions regarding participation in alliances: • Know their partner well before alliance is formed. • Expect differences in alliance objectives among potential partners in different countries. • Realize that having desired resource profiles does not guarantee that they are complementary to the firm’s resources. • Be sensitive to alliance partner needs. • After identifying the best partner, work on developing a relationship of trust.
Entry Strategies and Ownership Structures Licensing • Licensing: An agreement that allows one party to use an industrial property right in exchange for payment to the other party. • Reasons for licensing: • Licensor less expensively enters foreign market; licensee adds a product to its line. • The licensee may avoid entry costs by licensing to a firm already there. • Licensor usually is a small firm lacking financial and managerial resources. • Research and development • Likely licensors: companies spending large amounts on R&D • Likely licensees: companies spending little on R&D
Entry Strategies and Ownership Structures Franchising • Franchising • An arrangement in which one party (the franchisor) permits another (the franchisee) to operate an enterprise using its trademark, logo, product line, and method of operation in return for a fee • Widely used in fast-food and hotel/motel industries • With minor adjustments for the local market, this can result in highly profitable international business. • The franchisor gets a new stream of income and the franchisee gets a proven concept and products or services that can quickly be brought to market.
Basic Organizational StructuresInitial Division Structure • Initial Division Structures • Export arrangement • Common among manufacturing firms, especially those with technologically advanced products • On-site manufacturing operations • In response to local governments when sales increase • Helps to reduce transportation costs • Subsidiary • Common for finance-related businesses or other operations that require onsite presence from the start
Use of Subsidiaries during the Early Stage of Internationalization
Basic Organizational Structures International Division Structure • International division structure • Structural arrangement that handles all international operations out of a division created for this purpose. • Advantages • Assures international focus receives top management attention • Unified approach to international operations • Often adopted by firms still in developmental states of international business operations • Disadvantages • Separates domestic from international managers • May find it difficult to think and act strategically, or to allocate resources on a global basis
Basic Organizational Structures Global Structural Arrangements • There are three types of global structures • Global Product Division • Global Area Division • Global Functional Division
Basic Organizational Structures Global Product Division • Global Product Division • Structural arrangement in which domestic divisions are given worldwide responsibility for product groups. • Advantages • Global product divisions operate as profit centers • Provides a direct line of communication from customer • Helps R&D to work on development of products that serve the world customer • Permits managers to gain expertise in technical and marketing aspects of products • Disadvantages • Duplication of facilities and staff personnel within divisions • Division manager may pursue currently attractive geographic prospects and neglect others with long-term potential • Division managers may spend too much time tapping local rather than international markets
Basic Organizational Structures Global Area Division • Global area division • Structure under which global operations organized on geographic basis rather than a product basis. • Advantages • International operations put on same level as domestic operations • Global division mangers are responsible for all business operations in designated geographic area • Often used by firms in mature businesses with narrow product lines • Firm is able to reduce cost per unit and price competitively by manufacturing in a region • Disadvantages • Difficult to reconcile a product emphasis with geographic orientation • New R&D efforts often ignored because divisions are selling in mature market
Basic Organizational Structures Global Functional Division • Global functional division • Structure that organizes worldwide operations primarily based on function and secondarily on product. • Approach used mainly by extractive companies such as oil and mining • Advantages • Emphasizes functional expertise • Centralized control • Relatively lean managerial staff • Disadvantages • Coordination of manufacturing and marketing often difficult • Managing multiple product lines can be very challenging because of separation of production and marketing into different departments. • Only the CEO can be held accountable for the profits.
Basic Organizational Structures Mixed Organization Structures • Mixed organization structure • Structure is a combination of global product, area, or functional arrangements. • Advantages • Allows the organization to create the specific type of design that best meets its needs • Disadvantages • As matrix design’s complexity increases, coordinating personnel and getting everyone to work toward common goals often become difficult. • Too many groups go their own way.
Transnational Network Structures • Transnational network structure • A multinational structural arrangement combining elements of function, product, geographic design, while relying on network arrangement to link worldwide subsidiaries. • At center of the transnational network structures are nodes, which are units charged with coordinating product, functional, and geographic information. • Different product line units and geographic area units have different structures depending on what is best for their particular operation.
Nontraditional Organizational Arrangements • Organizational arrangements from mergers, acquisitions, joint ventures, and strategic alliances • These organizational arrangements do not use traditional hierarchical structures and cannot be shown graphically • Main objective: Help the partners address and effectively meld their different values, management styles, action orientation, and organization preferences
Nontraditional Organizational ArrangementsThe Emergence of the Electronic Network Form of Organization • Electronic Freelancers • Individuals who work on a project for a company, usually via the Internet, and move on to other employment when the assignment is done • Temporary companies • Serve a particular, short-term purpose and then go on to other assignments • Outsourcing function (can be delivered online) • Electronic network is a version of the matrix design • Many of the people in the structure are temporary contingent employees, never see each other and communicate exclusively in an electronic environment
Organizing for Product Integration • Recent organizing development is the emergences of designs that are tailored toward helping multinationals integrate product development into their worldwide operations • Cross-functional coordination has been used. • Resulted in people spending less time within their functions and thus becoming less knowledgeable regarding developments that are occurring in their specialized areas. • Often leads to product teams becoming autonomous and thus failing to integrate their overall efforts with the organization at large
Organizational Characteristics of MNCs • Formalization • Use of defined structures and systems in decision making, communicating, and controlling. • Specialization • Assigning individuals to specific, well-defined tasks. • Horizontal specialization • Vertical specialization • Centralization • Important decisions are made at the top. • Decentralization: Decision making is pushed down the line and lower-level personnel are involved.
Review and Discuss • 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? • A small manufacturing firm believes there is a market for handheld tools that are carefully crafted for local markets. After spending two months in Europe, the president of this firm believes that his company can create a popular line of these tools. What type of organization structure would be of most value to this firm in its initial efforts to go international?
Review and Discuss • If the company in question 2 finds a major market for its products in Europe and decides to expand into Asia, would you recommend any change in its organization structure? If yes, what would you suggest? If no, why not? • If this same company finds after three years of international effort that it is selling 50 percent of its output overseas, what type of organizational structure would you suggest for the future?
Review and Discuss • In what way do the concepts of 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 practical expressions of these three characteristics.