1. International Management
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2. Entry Strategies and Organizational Structures
Chapter 9
Entry Strategies and Organizational Structures

3. Learning Objectives
Describe how an MNC develops and implements entry strategies and ownership structures
Examine the 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 the conditions that make one preferable to others

4. Learning Objectives (continued)
Describe the recent, nontraditional organizational arrangements coming out of mergers, joint ventures, keiretsus, and other new designs including electronic networks and product development structures
Explain how organizational characteristics such as formalization, specialization, and centralization influence how the organization is structured and functions

5. Entry Strategies and Ownership Structures
Export/import operations
Wholly owned subsidiaries
Mergers/acquisitions
Alliances and joint ventures
Licensing
Franchising

6. Export/Import
Only available choices for small and new firms wanting to go international
Permits larger firms to begin international expansion with minimum investment and risk
Paperwork can be turned over to an export management company or handled through the firm’s export department
Permits easy access to overseas markets
Strategy is usually transitional in nature

7. Wholly Owned Subsidiary
Overseas operation that is totally owned and controlled by an MNC
Based on the belief that managerial efficiency is better without outside partners
Prohibited in many newly developing countries as some countries:
Worry that MNCs could drive out local enterprises
View this as an attempt to export jobs
Faces high risk with large investments in one area

8. Mergers and Acquisitions
Cross-border purchase or exchange of equity involving two or more companies
Opted by MNCs to quickly expand resources or construct high-profit products in a new market
Cultural differences and time constraints are the major barriers
Transition costs pose a problem in the postmerger environment

9. Alliances and Joint Ventures
Alliance: Any type of cooperative relationship among different firms
Joint venture (JV): Agreement under which two or more partners own or control a business
Called international join venture(IJV) when the partners are from different countries
Types - Nonequity ventures and equity joint ventures

10. Advantages of Alliances and Joint Ventures
Improvement of efficiency
Access to knowledge
Mitigating political factors
Overcoming collusion or restriction in competition

11. Strategic Alliance Recommendations
Know the partners well before an alliance is formed
Expect differences in alliance objectives among partners from different countries
Realize that the desired resource profiles need not be complementary to the firm’s resources
Be sensitive to the alliance partner's needs
Work on developing a relationship of trust after identifying the best partner

12. Licensing
Agreement that allows one party to use an industrial property right in exchange for payment to the owning party
Used when:
A product is in the mature stage of the product life cycle with strong competition and declining profit
Foreign countries require newly entering firms to make a substantial direct investment
Licensor is a small firm lacking financial and managerial resources

13. Licensing (continued)
Likely licensors - Companies spending large amounts on R&D
Likely licensees - Companies spending little on R&D

14. Franchising
One party (the franchisor) permits another (the franchisee) to operate an enterprise using its trademark, logo, product line, and methods of operation in return for a fee
Franchisor gets a new stream of income
Franchisee gets a time-proven concept and products or services that can be quickly brought to market

15. Figure 9.1 - Organizational Expectations of Internationalization

16. Initial Division Structure
Subsidiary
Common organizational arrangement for operations that require an on-site presence from the start
On-site manufacturing operations
Set up because of the pressure by the local governments when overseas sales increase
Help reduce transportation costs

17. Initial Division Structure (continued)
Export arrangement
Common first choice among manufacturing firms, especially those with technologically advanced products
Allows firms to reduce the risk and size of investment in establishing significant international operations while testing the size of international markets

18. Figure 9.2 - Use of Subsidiaries during the Early Stage of Internationalization

19. International Division Structure
Structural arrangement that handles all international operations out of a division
Adopted by firms that are in developmental stages of international business operations
Advantages
Ensures that the international focus receives top management's attention
Allows companies to develop a unified approach to international operations

20. International Division Structure (continued)
Disadvantages
Separates the domestic and international managers
Makes difficult for the home office to think and act strategically and to allocate resources on a global basis
Most R&D efforts are domestically oriented
Ideas for new products or processes in the international market often are given low priority

21. Figure 9.3 - International Division Structure

22. Global Structural Arrangements
Focuses on greater expansion and integration among international operations
Types
Global product division
Global area division
Global functional division

23. Types of Global Structural Arrangements
Structure under which domestic divisions are given worldwide responsibility for product groups
Global product division
Structure under which global operations are organized on a geographic basis rather than a product basis
Global area division
Structure that organizes worldwide operations primarily based on function and secondarily on product
Global functional division

24. Figure 9.4 - Global Product Division Structure

25. Global Product Division: Advantages and Disadvantages
Operates as profit centers
Provides a direct line of communication between customer and organization
Enables R&D to work on development of products to serve the customer needs
Permits managers to gain expertise in technical and marketing aspects of products
Disadvantages
Need for duplicating facilities and staff within each division
Pursuit of currently attractive geographic prospects and neglect of others with better long-term potential
Loss of time in tapping local rather than international markets

26. Figure 9.5 - Global Area Division Structure

27. Global Area Division: Advantages and Disadvantages
Managers are responsible for all business operations in a designated geographic area
Allows managers to make decisions to accommodate environmental changes
Enables reduction of cost per unit and helps offer a competitive price
Disadvantages
Difficult to reconcile a product emphasis with a geographic orientation
New R&D efforts are often ignored because divisions are selling goods that are in the maturity stage

28. Figure 9.6 - Global Functional Structure

29. Global Functional Division: Advantages and Disadvantages
Emphasis on functional expertise
Tight centralized control
Relatively lean managerial staff
Disadvantages
Coordination of manufacturing and marketing is difficult
Managing multiple product lines can be challenging as production and marketing are separated into different departments
Only the CEO can be held accountable for the profits

30. Mixed Organization Structures
Combination of global product, area, or functional arrangement
Advantage
Allow the organization to create the specific type of design that best meets its needs
Disadvantage
Coordinating the personnel and getting everyone to work toward common goals becomes difficult with an increased complexity of matrix design

31. Figure 9.7 - Multinational Matrix Structure

32. Transnational Network Structures
Combine elements of function, product, and geographic designs, while relying on network arrangements to link worldwide subsidiaries
Help MNCs make use of global economies of scale while also being responsive to local customer demands
Have nodes at their centers
Nodes - Units charged with coordinating product, functional, and geographic details

33. Transnational Network Structures (continued)
Different product line units and geographic area units have different structures
Basic structural framework consists of:
Dispersed subunits
Specialized operations
Interdependent relationships
Complex and continually changing and are difficult to draw in the form of an organization chart

34. Table 9.3 - Control Mechanisms Used in Select Multinational Organization Structures

35. Nontraditional Organizational Arrangements
Mergers and acquisitions
Involve a substantial financial risk because of the high sales price
Keiretsus
Joint ventures
Developed to help partners address and meld their different values, management styles, action orientation, and organization preferences
Strategic alliances

36. Nontraditional Organizational Arrangements (continued)
Joint ventures and strategic alliances:
Provide MNCs with the opportunity to access a wide variety of competencies
Reduce own costs while ensuring that they have a reliable provider

37. Electronic Network 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
Delivers outsourcing functions online
Different version of the matrix design
People are temporary, contingent employees, but never see each other, and communicate exclusively in an electronic environment

38. Organizing for Product Integration
Cross-functional approach can lead to product teams that are autonomous, thus failing to integrate overall efforts with an organization
Emerging trend - Toyota's organizational mechanisms
Mutual adjustment
Ensures that employees remain dedicated to their primary functional area
Use of direct, technically skilled supervisors

39. Organizing for Product Integration (continued)
Use of integrated leadership
Providing in-house training and restricting job rotation within only one function
Creation of standard milestones by the project leader and the use of simple forms and procedures
Maintenance of design standards by people who are doing the work
Standards are continually changed to meet new demands

40. Formalization
Use of defined structures and systems in decision making, communicating, and controlling
Types - Objective and subjective
Firms can achieve competitive advantage by:
Developing internal networks of international subsidiaries in major national or regional markets
Forging external networks of strategic alliances with firms around the world

41. Specialization
Assigning of individuals to specific, well-defined tasks
Horizontal specialization: Individuals are given a particular function to perform and tend to stay within the confines of this area
Vertical specialization: Individuals are collectively responsible for performance as work is assigned to groups or departments
Results in greater job routinization

42. Centralization Important decisions are made by the top management
Decentralization: Involves pushing decision making down the line and getting the lower-level personnel involved
Can help promote creativity, entrepreneurial effort, and personal responsibility

43. Be the International Management Consultant
If you worked as a consultant for the NFL, would you recommend to the league commissioner that the number of annual games played in Mexico be increased?
What about starting a new franchise in Mexico City?
What aspects of the country would be causes for concern?

44. Be the International Management Consultant (continued)
Does Mexico’s history of state regulation over telecommunications and energy affect your decision for growth through television?
What other concerns might you have?

45. 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?

46. Review and Discuss (continued 1)
A small manufacturing firm believes that there is a market in Europe for handheld tools that are carefully crafted for local markets and decides to manufacture these tools
What type of organization structure would be of most value to this firm in its initial efforts to go international?

47. Review and Discuss (continued 2)
If the company 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 the 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?

48. Review and Discuss (continued 3)
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