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International Strategy and Organization (ISO) (Advanced Topics: Networks of the MNC)
Josef WindspergerProfessor of Organization and Management
International Strategy and Organization (ISO) (Advanced Topics: Networks of the MNC)
Lecturer: Josef Windsperger
E-mail: [email protected]
Homepage: www.univie.ac.at/IMPhone: 00431-4277-38180
The course consists of two parts (Hs. 4):A.Lectures on ISO: 7. 4. , 28. 4., 5.5. 2006, 9.00 – 13.00 (course material is published on the web page: www.univie.ac.at/im under ‘Lehrveranstaltungen’).B.Case Studies on ISO: 12.5. (9-13.00) , 19. 5. (9 – 14.30) and 16.6. 2006 (9.00 – 13.00) and 17. 6. 2006 (9 – 13.00)
The public lectures are on Friday (11.00 – 12.30); for details see www.univie.ac.at/im.1. Public Lecture: May 5, 2006: 11.00, Hs. 4Headquarter-Advantages of Vienna in CEE (Mag. Thumser, CEO Henkel Austria 2. Public Lecture: May 19, 2006: 11.00, Hs. 4 International Market Entry through Franchising (Mag. W.Martius, Synchon International)
ContentPart I
1 MNC as Global Network: Existence and Evolution1.1 Product Life Cycle Theory1.2 Transaction Cost Theory1.3 Eclectic Theory1.4 Network Approach
2 Culture, Strategy and Organization of the MNC2.1 Country and Organization Culture2.2 Strategy and Organization Design
3. Theoretical Foundations of Networks3.1 Economic Approaches of Networks3.2 Efficiency of Network Design3.3 Networks, Trust and IT
Content
Part II
4 Design und Management of Networks of the MNC
4.1 International Licensing
4.2 International Strategic Alliances, Joint Ventures and Consortia
4.3 International Franchising-Networks
4.4 Networks and M&As
4.5 Market Entry through Networks: An Integrative Approach
4.6 Internationalization through Countertrade
4.7 International Clusters
5 Networks versus Hierarchies of the MNC of the Future
4.1. International Licensing
Market for Technology Licensing
low market entry barriers
increase of competition
short product life cycles
in-house R&D too expensive
Licensing vs. Internalization
Complementary and contractible assets Licensing possible when
• easy to replicate• property rights are well defined• difficult to imitate
TC and Licensing
TC
Specifity,Know-how Complexity
Licensing Network Hierarchy
S1 S2 S3
Property Rights-Explanation
ContractibleKnow-how
Non-contractible Know-how
Contractible Know-how Non-contractible Know-how
B
A
NetworkA to B:
Licensing
B to A:Licensing
Market Contract
Licensing as Coordination Form for Technological Innovations (1)
„Innovation is the engine that drives competition in capitalist economies.“
Schumpeter (1942)
process of „creative destruction“
should the innovating firm license its technology to competitors or not?
what factors determine the appropriate choice?
Licensing as Coordination Form for Technological Innovations (2)
Strategic RENTS generated from innovations = function of the RATE OF IMITATION by rivals
RATE OF IMITATION depends on
1. incentive to imitate
2. barriers to imitation
3. rivals’ ability to imitate
Licensing as Coordination Form (3) Incentive to Imitate
competitive intensity
– benign environment weak incentive to imitate » strong demand» substantial entry barriers» high concentration» product ≠ commodity
– hostile environment high incentive to imitate» weak demand» high exit barriers» high fixed costs» low concentration» product = commodity
Licensing as Coordination Form (4) Barriers to Imitation
= factors that inhibit rivals from imitating a firm’s innovation
patents
R&D in secrete
causal ambiguity – ambiguity concerning the nature of the causal connections between
actions (development of an innovation) and results (profitable exploitation)
Licensing as Coordination Form (4) Rivals’ Ability to Imitate
R&D skills
– ability to reverse engineer an innovation and quickly develop a new product
access to complementary assets
– key determinant of the rate of imitation
STRATEGIC OPTIONS
Licensing and National Culture
Does the national culture influence the choice between licensing and foreign direct investments?
“The national differences in levels of trust impact the choice of foreign market entry mode” (Shane, 1994)
Results - High Trust Countries → Licensing - Low Trust Countries → Foreign Direct Investment
“Resorting to hierarchies is less common where trust among people is greater.” (Shane, 1994)
4. 2 International Joint Ventures, Strategic Alliances and Consortia as stable Networks
JV
A B
Joint Venture
Strategic alliance
A B
a b
a, b
Consortium: NewPC-Consortium in Taiwan
Stable Networks
Characteristics:– High transaction-specific investments, high
uncertainty and/or– Complemetary firm-specific resources and
organizational capabilities– Joint Ventures: Allocation of decision and
ownership rights– Strategic alliances: Allocation of decision rights,
no ownership rights– Weak Ties:
Trust instead of formal coordination mechanisms
Motives for Joint Ventures
New markets To take existing products to foreign markets
To diversify into a new business
Existing markets To strenghten the existing business
To bring foreign products to local
markets
Existing products
New products
Determinants of Residual Decision and Ownership Rights
Hennart 1988: „When knowledge is tacit, it cannot be effectively transferred in codified form; its exchange must rely on intimate human contact“ (366)
- According to the PR-theory, the contractibility of assets determines the governance structure.- Noncontractible assets require the transfer of residual decision and ownership rights.- Intangible Assets refer to organizational, marketing, courtry-specific and technological know how.
Property Rights-Explanation
ContractibleKnow-how
Non-contractible Know-how
Contractible Know-how Non-contractible Know-how
B
A
Joint VentureA to B:
Licensing
B to A:Licensing
Market Contract
Markt Entry through Joint Venture
- Licensing
- Joint venture
- Wholly-owned subsidiary
Market Entry and Control
Licensing: low control Joint Ventures: shared control Subsidiary (WOS): Decision and ownership
rights have the foreign headquarter
Licensing: Low
Joint Venture: Medium
Wholly-owned Subsidiary: High
Market Entry and Resource Commitments
Market Entry and Diffusion Risk
Licensing: High
Joint Venture: Medium
Wholly-owned Subsidiary: Low
Form of Market Entry
Strategic Variables
1. National Differences
2. Scale Economies
3. Global Concentration
4. Market Potential
Environmental Variables
1. Counrtry Risks
2. Cultural Distances
3. Demand Uncertainty
4. Competitive Dynamics
Resource Variables
1. Value of the Firm-specific KH
2. Tacit Knowledge
3. International Experience
Eclectic Theory: Hill et al. 1990
Latin „consortium“: association, society
= a temporary collaboration to perform a certain task or to provide a spedific service or product more efficiently
= association of two or more individuals, companies, universities, or governments (or any combination)
Separate legal status Control over each participant is generally limited to
activities involving the joint endeavor
Consortia
Consortia vs. Internalization
Firms have to decide how much of the R&D they should internally procured
- not possible to procure all R&D from outside - in-house R&D is necessary for implementation- absorptive capacity
This decision depends on a number of factors:- transaction costs- technological and organizational capabilities
Transaction Cost Explanation (1)
Transaction costs arise out of market imperfections
- asymmetric information distribution- opportunistic behaviour
internal transactions less costly through hierarchy and authority
but influence costs are higher
Transaction Cost Explanation (2)
Organization has to balance transaction costs with incentives
– Firm is more likely to integrate R&D activities (in-house) where transaction costs are high
– Firm is more likely to procure R&D from external partners where incentives can be enhanced with market competition
Organizational Capability Theory (1)
Schumpeter (1912, 1942) and Penrose(1959)
resource based viewcapabilities of the firm result in competitive
advantagescapabilities have to be enhanced through innovation
and learning
-
Organizational Capability Theory (2)
R&D transactions: companies acquire scientific knowledge from outside and form alliances with other firms with different capabilities.
Organizational Capability theory Organizational Capability theory - lack of knowledge and sufficient capabilities of the firms- advantage of utilizing the higher/new capabilities of
external partners can exceed the coordinaton cost disadvantages
Sakakibara‘s ModelMotives
Economic View Economic View Cost-sharing MotivesCost-sharing Motives
- Assumptions– symmetrical firms in terms of capabilities or knowledge – same industry & outcome– one efficient way
Organizational View Organizational View Skill-Sharing Motives Skill-Sharing Motives- Assumptions
– heterogeneous capabilities – direct competitors in the product market – cooperation ≈ portfolio of core competencies– knowledge base
tacit knowledge difficult to transmit complementary knowledge
Sakakibara‘s Model
Conditions
Transaction costs conditionTransaction costs condition» investments in transaction-specific or relation-specific assets» uncertainties regarding R&D outcomes » execution and monitoring of the agreement» exclusion of knowledge creation
Appropriability conditionAppropriability condition» industries with high spillovers » alternatives to improve appropriability
Capability heterogeneity conditionCapability heterogeneity condition» breadth of technological capabilities that firms possess» skill-sharing vs cost-sharing
Sakakibara‘s ModelEffects on R&D
(1) increase in R&D efficiency(1) increase in R&D efficiency economies of scale and avoidance of wasteful duplications (cost-
sharing) easier acquisition of complementary resources for R&D (skill-
sharing)
(2) spillover of a firm’s own R&D on others’ R&D (2) spillover of a firm’s own R&D on others’ R&D productivityproductivity
internalizing the externality
((3) learning capability3) learning capability large for skill-sharing motivated firms small for cost-sharing motivated firms
Sakakibara‘s ModelSummary
Motives Motives Cost-sharingCost-sharing Skill-sharingSkill-sharingcompetition in R&D consortia
single-industry competition
wide industry participation
firm capabilities in R&D consortia
homogeneous, substitutable
heterogeneous, complementary
role of R&D consortia
divide tasks create/transfer knowledge
private R&D spending
can decrease can increase
constraints firms face
financial resources Research capabilities
Sakakibara‘s Empirical Results (1)
Hypothesis 1: The skill-sharing motive is relatively more important where the participants possess more heterogeneous capabilities
Hypothesis 2: The importance of the cost-sharing motive is positively associated with project size
Hypothesis 3: Firms which are motivated relatively more by skill-sharing concerns to participate in cooperative R&D are likely to increase R&D spending as a result of their participation, while firms whose relatively greater motivation is cost-sharing will likely decrease their R&D spending
Sakakibara‘s Empirical Results (2)
consortia with government involvement 5753 observations Cox’s maximum-likelihood proportional hazard model Pattern of R&D consortia participation varies from firm to firm Example:
0
2
4
6
8
10
12
14
59 62 65 68 71 74 77 80 83 86 89 92
Toshiba
Sony
Sakakibara‘s Empirical Results (3)
Positive relation between the R&D consortia formation rate and– weak appropriability conditions – the degree of a firm’s R&D insensitivity – the number of companies a firm encounters in product markets
Negative relation between the R&D consortia formation rate and– the degree of industry competition
No clear relation between the R&D consortia formation rate and the experience of past participation
4. 3 Franchising-Networks
to
Franchisor: System-specific Know-howFranchisee: Initial FeeSpecific Investments
t
Royalties
Characteristics:-Franchisees and franchisor are entrepreneurs.- Intangible Assets: FG‘s brand name, systemspecific KHFN‘s local market KH-Incentive system:Royalties and intial fees
Explanations
Agency-Theory: The franchisor has high agency cost under internal organization. Franchisees are more motivated than outlet managers.Signalling-Theory: High initial fees and specific investments signal a strong brand name.Screening-Theory: High initial fees and royalties attract franchisees with high capabilities.Search cost theory: The franchisor has not enough knowledge of the local market at the beginning of the contract period. The franchisees have this local market knowledge.Property rights-theory: The distribution of decision and ownership rights depends on the distribution of intangible assets.
Transaction Cost Theory
TC
Specifity,Uncertainty
Licensing FranchisingCompany-owned Subsidiaríes
S1 S2 S3
‚Hostage Model‘
A Property Rights View
The more important the fanchisor´s intangible assets relative to the franchisee´s for the creation of residual income, the more PR must be transferred to him, and the higher is the franchisor‘s portion of residual decision and ownership rights (PCO and royalties).
Intangible assetsSystem-specific und local market knowledge
Residual decision rights
Proportion ofcompany-owned Outlets (PCO)
Royalties/Initial Fees
‚Governance Structure‘ of the Franchising Firm
Ownership rights (Residual income rights)
H1
H2
H3
How is the knowledge distrubutedBetween the franchisor and the franchisee?
Who is the residual decision maker (whose decisions influences the residual income)?
How are the ownership rights allocated?
Direct Mode
Market Entry through Franchising
Choice of International Franchising
Level of Equity
Direct orIndirect mode
Equity franchisingmodes
Limited equityFranchising modes
Direct FranchisingArea Development
AgreementSubsidiary Master FranchisingJoint Venture
(Duniach-Smith, 2004)
Entry Forms
Choice of Market Entry
Choice of International Franchising
Level of Equity
Direct orIndirect mode
Equity franchisingmodes
Limited equityFranchising modes
Environmentaldeterminants
Environmentaldeterminants
Organizationaldeterminants
Organizationaldeterminants
Direct FranchisingArea Development
AgreementSubsidiary Master FranchisingJoint Venture
(Duniach-Smith, 2004)
Determinants: Environmental and Organisational Factors
- Geographic distance- Cultural distance
- Country risk
- Political risk
- Market volume and growth
- Resouces of the partner- Brand name assets- International experience
- Financial situation of the FG
Efficiency Comparison
Subsidiary (WO)High resource commitmentsCentral controlProtection of the system-specific KH Appropriate:
– High cultural and geographic distance– Strong brand name– Important system-specific KH – High market potential and growth– International experience
Area Development AgreementLower resource commitmentRelatively strong central controlFast market entry
Appropriate:– High geographic and cultural distances– Uncertain market development– Instable legal environment– Local market knowledge is very important– No international experience
Direct FranchisingHigh control and agency costs
Appropriate:– Low geographic and cultural differences
– Strong local market KH of the franchisees
– Relatively small market potential and growth
Joint VentureShared control
Know-how diffusion risk
Lower risk
Appropriate:
– Franchisor has not enough local market knowledge
– Uncertain market development
– High legal and political uncertainty
– Relatively high cultural differences
– Legal barriers
Master Franchising Lower central control
Appropriate:– High geografic and cultural differences– No international experience – High political risk– Strong market growth– High market uncertainty– Local market know-how is very important.
4.4 Networks and M&A
Unrelated M&A– NPV(A+B) = NPV(A) + NPV(B)– P = NPV(A+B) – NPV(A)– Only generates normal economic profit
Related M&A– NPV(A+B) > NPV(A) + NPV(B)– Generates strategic rents
The Related Case
Jensen and Ruback (1983):– To reduce production or distribution costs
1. Through economies of scale
2. Through vertical integration
3. Through the adoption of more efficient production or organizational technology
4. Through the increased utilization of the bidder’s management team
5. Through a reduction of agency costs by integrating organization-specific assets under common ownership
The Related Case (2)
Jensen and Ruback (1983) (cont.):– Financial motivations
1. To gain access to underutilized tax shields
2. To avoid bankruptcy costs
3. To increase leverage opportunities
4. To gain other tax advantages
– To gain market power in product markets– To eliminate inefficient target management
Networks versus M&A (1)
Alliances allow simultaneous and fast entering into multiple countries
Objective: achieve complementary capabilities or economies of scale
Do not have high risks of failure and high transaction costs
Networks versus M&A (2)
Acquisitions allow for a greater organizational integration than alliances
In alliances all decisions must be made by consensus among the partner firms
Alliances are transient in nature and must remain reversible
Networks versus M&A (3)
Future alliances might be formed as a first step toward a merger
Alliances make it possible to avoid the culture shock in the wake of an acquisition
Acquisitions versus Greenfield Investments
G > A
Know-how advantage of the MNC
High market potential
Longterm market growth
Few competitiors
Stable legal and political institutional factors
International Strategy: Impact onM&A and Network Form (1)
Choice depends on the pursued strategy: Global versus Multidomestic Strategy
Global Strategy: Subsidiaries are pipelines for headquarters & little/no response to local market conditions
Multidomestic Strategy:
Decentralized network & subsidiaries responsible for local market demands
International Strategy: Impact onM&A and Network Form (2)
Hypotheses:- Companies following Global Strategy higher proportion of Greenfield Investments- Companies following Multidomestic Strategy higher proportion of Acquisitions and Alliances
Synergy realization
Organizational integration
Combination potential
Employees‘
resistance
Postmerger-Integrations-Model
+
+
+
+
+
-
• The higher the combination potential, the larger the
synergy realisation.
• The stronger the organizational integration, the larger
the synergy realisation.
• The higher the employee resistance, the lower the
synergy realisation.
•The higher the combination potential, the greater the
organizational integration.
• Je higher the combination potential, the larger the
employee resistance.
• Je greater the organizational integration, the larger
the employee resistance.
Hypotheses
4. 6 Internationalization through Countertrade
- Explanation:Market failure at the international product and financial markets
Advantages for the MNC: Realization of a higher market potential
- Informal coordination mechanisms (reputation capital, trust) instead of formal coordination mechanisms
Forms of Counter Trade (1)
Countertrade
IndustrialCountertrade
CommercialCountertrade
Barter Counterpurchase
Offsets BuybacksEvidenceAccounts
BilateralClearing
Swaps Switch
DirectOffset
IndirectOffset
FullCompensation
PartialCompensation
ExportProcessing
CooperativeVentures
Forms of Counter Trade (2)
Classical barterClearing arrangementSwitch Trading
Buy-BackLoan and Import
Counterpurchase Offset
Use of Counter Trade
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Barter Offset Buyback Counterpurchase Switches
Barter
Clearing arrangement:
- purchase equal value of goods and services
- long time periods
- a large number of goods
Switch-trading:
goods that are useless to the trading country can be sold or transferred to a third country
Buy-Back (1)
Transfer of technology, plant, equipment and technical assistance
Purchase of a certain percentage of the output Long-term orientation
Buy-Back (2)
Loan and Import Seller of an input provides financing or
equipment Development of a new source of supply Borrower repays this loan with his revenue
TC and Countertrade (1)
Technology
Very high buyer uncertainty-> buy-back contract Loan & Import
Markets with high transportation costs, scale economies or transaction specific investments -> loan and import
Distribution
Reducing costs of international marketing of products
TC and Counter Trade (2)
Narrow market- Scale economies
- Need to make transaction-specific investments
> solution: loan and import
TC and Counter Trade (3)
Distribution- costs for arranging international marketing
- Seller has no commitment to the product
- No quality guarantee
- No after-sale services
> solution: counter purchase
Hostage Model of Countertrade (Williamson 1983)
TC
Specifity,Uncertainty
Licensing Countertrade Hierarchy: DI
S1 S2 S3
‚Hostage-effect‘
Foreign subsidiary characteristics
subsidiary strategy
level of technology
training (formal, informal)
international interdependence
Nation-level resources
skilled workforce
innovative capability
National competitiveness
unemployment rate
standard of living
competitiveness of local firms
Firm level resources
technical and managerial skills
product and process technology
Which factors influence a host country’s national competitiveness?
Published in: S. O’Donnel, T.Blumentritt/Journal of International Management 5 (1999)
4. 7 Internationalization through Clusters
Firm Strategy, Structure and
Rivalry
Factor Conditions
Related and Supporting Industries
Demand Conditions
Chance
Government
Porter‘s Diamond Model
Diamond Model - Factor conditions
Sophisticated/high-tech industries are the backbone of any economy
•Skilled human resources
•Scientific base
Diamond Model - Demand conditions
Character of demand
sophisticated buyers and
buyers who anticipate or shape needs of buyers abroad prepare companies for operating in foreign markets
Diamond Model -
Related and supporting industries
Competitiveness of supporting industries is important because they provide
Cost-effective inputs
Innovation and upgrading
Diamond Model –
Firm Strategy, Structure and Rivalry
Strong local rivals motivate the company to build competitive advantage
Competitive Advantage through Clusters
They include an array of linked industries and other entities important to competition.
Many clusters include governmental and other institutions that provide specialized training, education, information, research and technical support.
Clusters can be extended downstream, horizontally and laterally.
„Clusters are geographic concentrations of interconnected companies and institutions in a particular field.“ (Michael E.Porter)
Organisation Design of Clusters
Characteristics:
– Stable network based on the core competencies of partner firms
– Location-bound
– Institutional support Configuration:
– Less formal coordination
- Exclusive brand name at the market
- Stable pool of cooperation partners Soft Integration Factors:
– Trust as coordination mechanism IT-supported network relations
Advantages of clusters (I)
Clusters have a better access to employees and suppliers:
Can recruit from a pool of specialized and experienced employees lowers search and transactions costs
Offer a specialized supplier base minimizes the need for inventory eliminates delays lowers the opportunism risk
Advantages of clusters (II)
Preferred access to specialized information: Extensive market, technical and competitive
information accumulates within a cluster
Access to institutions and public goods: Investments by government or other public
institutions and universities can enhance a company’s productivity
Advantages of clusters (III)
Higher motivation and easier performance measurement:
Local rivalry is highly motivating Peer pressure leads to competitive pressure Easier to compare and measure performances
because of local competition
Location-specific Competitive Advantage
Innovation und Know-How-Upgrading
Strong local
competition
Suppliers with high
capabilities
Sophisticated demand
Specific
resources
5. Networks or Hierarchies: Organization Design of the ‘MNC of the Future’
Theses:
I. Evolution of ‘virtual countries’
II. Evolution of networks
„Shifting Networks“ „Virtual Countries“
Processes External Internal
Employment Ad hoc projects with independent partners
Employees
Marketing Partner-specific branding Umbrella branding
OrganisationSelf-organizing teams and networks
Hierarchy with decentralized structures