1. Multinational Management Peter Zettinig Spring 2015

2. Multinational Management Session 3 Overall question in this course: Which factors determine successful management of MNCs? In literature (Madhok, 1997) it has been suggested that organisational capabilities provide the richest explanation and best prediction of entry mode choice in foreign markets. Firm-specific resources (RbV) are seen as drivers of strategy Ekeledo & Sivakumar (2003). Today we focus on the questions: How do firm-specific resources determine entry mode choice? and What are choice implications for managing a MNC?

3. Multinational Management Session 3 But first: What did we take away from last session? Discuss with your neighbour: (1) What are the structural implications of different strategies using the typology of Bartlett & Ghoshal (GI-LR Organising Framework)?

4. Multinational Management Session 3 But first: What did we take away from last session? Discuss with your neighbour: (2) How do different ‘archetypical’ MNE forms rationalise on (a) firm-specific advantages of the firm? (b) location-specific advantages; and (c) internalization Advantages?

5. Multinational Management Session 2Strategic Management & Structure GLOBAL INTEGRATION AND LOCAL RESPONSIVENESS FRAMEWORK EXERCISE Use the GI-LR Framework as a practical tool to explain potential (or actual?) strategic goal differences and/or differences in attaining these goals, when you compare Nokia’s and Apple’s Smartphone positions. Session 3

6. Multinational Management Session 3 CASE 1: General Electric Medical Systems (GEMS) Global Product Company (GPC) vs. ‘In China for China’ Task. Analyse the overall challenges of GEMS in 2002 (i.e. Developed vs developing world; Bio-tech vs. Machine engineering; demographic changes). Discuss the strengths and potential weaknesses of the Global Product Company (GPC) approach introduced by Immelt utilising conceptual frameworks used so far in this course. Make a recommendation for Hogan, whether to adopt the ‘In China for China’ approach. Be prepared to defend your arguments.

7. Multinational Management Session 3 International Market Entry: What are the requirements? Overall MNC objective: To create strategic advantages from their worldwide presence and businesses. In the 1980s many influential prescriptions for achieving this were developed. Theodore Levitt (1983) The Globalisation of Markets T Hout, ME Porter & E Rudden (1982) How Global Companies Win Out G Hamel & CK Prahalad (1985) Do you really have a global strategy? Do we know the essential prescriptions of these classics?

8. Multinational Management Session 3 International Market Entry: What are the requirements? Overall MNC objective: To create strategic advantages from their worldwide presence and businesses. Theodore Levitt (1983) Effective global strategy is the successful practice of just one approach: Product standardisation. One model, process and approach in all fits everywhere. T Hout, ME Porter & E Rudden (1982) To succeed in global strategy you need to develop many different approaches. E.g. Exploit economies of scale through global volume; take pre-emptive positions through quick and large investments and manage interdependently to get synergies across different activities. G Hamel & CK Prahalad (1985) Instead of standardised products develop portfolio. Investments in technology and distribution can be shared. Competition is a chess game and cross-subsidising across products is a winning strategy.

9. Multinational Management Session 3 International Market Entry: What are the requirements? Rose, Elizabeth L.; Ito, Kiyohiko (2009) Past Interactions and New Foreign Direct Investment Location Decisions: Firm-Specific Analysis in the Global Tire Industry Management International Review, Vol. 49, No. 5 Abstract: Analyzing the nature of competitive interaction among multinational firms in the tire industry, we find that the histories of the interactions between particular rivals matter. The decision to enter a new foreign market in the era of global consolidation is related to the identities of rivals in the market, characteristics of the firm and the market, and the extent of past competitive interactions with the international pioneering firm. Results suggest that, in an oligopolistic environment, aspects of multimarket competition are important to foreign direct investment decisions. Contributes to Oligopolistic Reaction Theory (Knickerbocker, 1973)

10. Multinational Management Session 3 International Market Entry: What are the requirements? Overall MNC objective: To create strategic advantages from their worldwide Presence and businesses. Advise shows that the nature of IB is complex and suggestions can be confusing. So, how to achieve a winning concept for MNCs? What are the goals of a winning concept? What are the means for achieving these? What are the implications for deciding on entry modes? How to manage sets of different operational modes across markets?

11. Multinational Management Session 3 International Market Entry: What are the requirements? So how to achieve a winning concept for MNCs? Goals:(1) Achieve Global Efficiency (see: Prahalad & Doz, 1987) (2) Maintain Multinational Flexibility (see: Kogut, 1985) (3) Learn from Worldwide Operations ( Bartlett, Ghoshal & Birkinshaw, 2005) What are the goals for a winning concept? What are the means for achieving these? What are the implications for deciding on entry modes? How to manage sets of different operational modes across markets?

12. Multinational Management Session 3 International Market Entry: What are the requirements? So how to achieve a winning concept for MNCs? Goals:(1) Achieve Global Efficiency (see: Prahalad & Doz, 1987) (2) Maintain Multinational Flexibility (see: Kogut, 1985) (3) Learn from Worldwide operations ( Bartlett, Ghoshal & Birkinshaw, 2005) Ad (1) Higher revenues; lower cost; - both approaches can increase efficiency, also together...how... economic principle: same output with less input, more output with same input. How to shift both....is it possible? Ad (2) Ability of firm to manage risks and take advantages that arise from diversity and volatility of the global environment. Ad (3) Most theories of the MNC look at it as an instrument to extract additional revenues from internalised capabilities: Exploit more profits from existing technology, brand name, ability to manage around the world. This third point underlines the opportunity to learn from different operating environments, institutional differences, localised knowledge, etc and utilise it in operations elsewhere. WHAT ARE THE MEANS TO ACHIEVE THESE GOALS?

13. Week 4 MEANS Economies of Scale Economies of Scope National Differences Microeconomic theory that suggests that size has a positive effect On costs (=static effect). Dynamic scale effect is the learning effect. The learning curve describes a cost reduction over time… Cost of joint production leads to decreasing cost effects. The Diversified firm’s capability to share investments and costs across The same or different value chains. National Differences (differences in factor endowment – different Factor costs – configuration of value chain to places that provide Advantages). Differences in output markets – tailoring of offerings. Multinational Management Session 3

14. Scope Economies in Product and Market Diversification Sources of Scope Economies Product DiversificationMarket Diversification Shared AssetsFlexible production lineGlobal Brand Name (Coke) capable of producing diff. products (at Ford) Shared External RelationsUsing shared distributionServicing MNCs worldwide channels for multiple (Citibank) products (Matsuhita) Shared LearningShared R&D in computerPooling knowledge and communication businessdeveloped in different (NEC)markets (P&G) Bartlett, Ghoshal & Birkinshaw, 2004, 208. Multinational Management Session 3 Compare to Igor Ansoff’s Matrix (1957)

15. G O A L S M E A N S Ends and Means Sources of competitive advantage Strategic objectives National differences Scale economies Scope economies Achieving efficiency In current operations Managing risks Through Multi- National Flexibility Innovation, learning And adaptation Benefit from diff. in factor costs (wages, capital costs) Managing different kind Of risks arising from Market or policy-induced Changes in comparative Advantages of diff. countries Learning from societal Differences in org. and Managerial processes and systems Expanding and Exploiting potential Scale economies in Each activity Balancing scale with Strategic and operat. Flexibility Benefiting from Experience-cost Reduction and innovation Sharing of investments And costs across Products,markets and Businesses Portfolio diversification Of risks and creation of Options and side-bets Shared learning across Organisational Components in different Products, markets or businesses (Ghoshal, 1987)

16. Multinational Management Session 3 International Market Entry: What are the requirements? Means Scale Econ Scope Econ Nat. Diff What are the implications for deciding on entry modes? How to manage sets of different operational modes across markets? Goals Efficiency Flexibility Learning

17. Multinational Management Session 3Entry Mode Choices GROUP 3. Introduce Sharma & Erramilli (2004) resource-based explanation of entry mode choice. What is the basis of the argument that their explanation is newer, better, theoretically more sound and managerially more useful? How does this resource-based contribution to the decision augment the behavioural, market-imperfection and market failure approaches that dominate this type of literature? How can this knowledge be made useful for managers specifically? Develop a suggestion. Session 3

18. Multinational Management Session 3Entry Mode Choices Williamsonian Transaction cost economics (TCE) and its influence on Internalisation Theory (e.g. Buckley & Casson, 1976) is assuming opportunism. Internalisation has been the traditional view on how to look at entry mode decisions (e.g. Hennart, 1988). In this internalisation view the entry mode decision is especially a decision that defines the boundaries of the firm (in a Coase’en, 1937 way). Ekeledo & Sivakumar (2004) among others revise this approach and look at the decision from a resource/capabilities perspective (RbV). Are there ways to look at entry mode decisions (managerial imperative: ‘make or buy’) in ways that combine TCE with RbV? [We will look into this more specifically in the next session: Kogut & Zander, 1993, 2003)] Session 3

19. Multinational Management Session 3Entry Mode Choices GROUP 4. Introduce the framework and findings of Ekeledo & Sivakumar (2004). Evaluate their resource-based approach to entry mode selection and contrast it to a market imperfection-type of approach (Internalisation, Eclectic Theory). From this evaluation, create a practical tool that managers of a MNC in a specific context (if you need to choose, then choose industry, size, degree of internationalisation, concrete firm example, country market etc) could realistically apply to make more advanced market entry mode decisions. Defend your decision making tool. Session 3

20. Multinational Management Session 3Entry Mode Choices: Hierarchical Internalisation View Session 3 Source: Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538), Journal of International Business Studies, 31: 535–554. Adapted graphic by Peng (2005).

21. Multinational Management Session 3Entry Mode Choices : CONCLUSIONS How do firm-specific resources determine entry mode choice? What are choice implications for managing a MNC? RbV and Location Decisions RbV and Ownership Decisions RbV and Modal Choice of Entry How do they relate to Bartlett, Ghoshal & Birkinshaw (2004) prescription to achieve efficiency, flexibility and learning via scale, scope economies and by reaping benefits from national differences? Session 3

22. CASE Metropolitan WASTE MANAGEMENT Envisioning technology, service & system innovations Zettinig Peter

23. Metropolitan WASTE MANAGEMENT Assumption No 1. Only one of us in this room who have deep insights into professional waste management on communal level.

24. Metropolitan WASTE MANAGEMENT Assumption No 2. Waste management has an important role in the overall protection of the natural environment. Some facts:

25. Metropolitan WASTE MANAGEMENT Generation of waste, years 2004–2007 Source: Statistics Finland.

26. Metropolitan WASTE MANAGEMENT Generation of wastes by sectors, years 2004–2007 Source: Statistics Finland.

27. Metropolitan WASTE MANAGEMENT Assumption No 3. Environmentally-friendly behaviour is expensive for society and it erodes firms’ competitiveness. (see: Prahalad & Rangaswami, HBR September 2009) Concern by firms in OECD countries is that they loose competitiveness vis-a- vis competition from the developing world. Voluntary action by firms vs. tough regulation (and threat of firms relocating production).

28. Metropolitan WASTE MANAGEMENT GETTING TO WORK. Discuss with your neighbours and develop a mind map of your creative process. (1)How can environmental sustainability be improved in regard to municipal waste management? If it is helpful think of following solution approaches: (a)Political solutions(b) Economic solutions (c) Social solutions(d) Technological solutions

29. Metropolitan WASTE MANAGEMENT GETTING TO WORK. Discuss with your neighbours and develop a mind map of your creative process. (2) Think of concepts how your above ideas might develop into business opportunities potentially combining business and environmental sustainability.

30. Metropolitan WASTE MANAGEMENT One approach to the problem is at the centre of our next case. It combines political, social, economic and technological solutions and deals with the PROBLEM (OPPORTUNITY) holistically.

31. CASE Metro Taifun Technology, service & system innovation

32. CASE Introduction http://www.metrotaifun.com/automatic_solid_waste_collection_system /index.php/technology/technology http://www.metrotaifun.com/automatic_solid_waste_collection_system /index.php/technology/technology

33. After having seen this: What is your immediate reaction?

34. After having seen this: If you were offered 1% of this company would you invest € 100.000?

35. CASE SUMMARY What are the key points this innovation is proposing?

36. CASE SUMMARY Waste handling today High amount of heavy traffic High number of overfilled waste bins Labor intensive High operating costs Challenges of current situation Amount of waste increasing Challenge of finding labor Hygiene and odor problems Pollution and noise problem Handling fire risk The Problem

37. CASE SUMMARY Technically Safer and more reliable waste handling Greater recycling opportunities Improved fire safety Unique patented technology Continuous R&D Economically Lower operating costs Makes use of existing infrastructure ROI of only 5-10 years Proposed Benefits Environmentally Spares natural resources Greater recycling opportunities Reduces exhaust gas emissions Less garbage trucks and waste bins Improves the image of your city Creates pleasant surroundings Less noise and better hygiene Reduced pest issues (birds, rodents)

38. CASE SUMMARY Significantly less blow-out air Significantly less energy used No micro particles in the blow-out air Less odor from blow-out air Easy to clean the pipeline Reduced exhaust gas emissions Easy to dry the pipeline No suction line valves required Less noise and better hygiene Possible to utilize existing infrastructure Improved fire safety Less transport trucks Technical Details & Comparisons

39. Split in 4 groups Innovation at Work GROUP 1. Establish an estimate of the size of the business opportunity for a city like Paris. Assume a product life time of 40 years for this system and calculate the potential break-even-point with initial infrastructure set up costs of € 1 billion and annual fixed and operating costs of € 100 million.

40. Split in 4 groups Innovation at Work GROUP 2. Develop ideas for alternative business concepts for MetroTaifun. Develop three alternatives and briefly introduce them. For Example: You might think of the following approaches when developing your alternatives:(a) Outright sale of system, knowledge, license; (b) Charge subscription/membership fee; (c) Turn solution into a service; (d) Charge by the kilogram; (e) Make it a public good.

41. Split in 4 groups Innovation at Work GROUP 3. In South Korea a new law requires an automated municipal waste management system for new municipal developments. Develop three possible market entry strategies into the country. Consider what it takes to make a winning bid, including: (a) political influence, connections, networks; (b) local knowledge and capabilities paired with Finnish ‘knowledge’ by MetroTaifun (movable, intangible, cross-fungible) (c) long-term contracts and commitments; (e) running operations in a culturally distant country; (f) different phases of the project (turnkey construction; operation; utility services; etc.)

42. Split in 4 groups Innovation at Work GROUP 4. Imagine you target NEW YORK CITY for implementing this service. Develop a stakeholder analysis in consideration of: Who are the most critical stakeholders? What are their interests? What is their influence? How does their interest and influence interact with the ‘service’ Based on this develop a stakeholder lobbying strategy to win over ‘necessary and sufficient’ supporters for this project.

43. After having seen this: If you were offered 1% of this company would you invest € 100.000?

44. Innovation at Work Results from 5 groups What did we learn from this case and your analysis? -The nature of systems innovations – the international opportunity. -Commercialisation of new technology requires many innovations in the business system. -Developing entry strategies can be a huge contributor to value propositions and systemic innovations.