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1. Companies “go international” for many reasons, including reactive ones, such as international competition, trade barriers, and customer demands. Proactive reasons include seeking economies of scale, new international markets, resource access, cost savings, and local incentives.
2. International expansion and the realization of a firm's strategy results from both rational planning and responding to emergent opportunities.
3. The steps in the rational planning process for developing an international corporate strategy comprise defining the mission and objectives of the firm, scanning the environment for threats and opportunities, assessing the internal strengths and weaknesses of the firm, considering alternative international entry strategies, and deciding on strategy. The strategic management process is completed by putting into place the operational plans necessary to implement the strategy and then setting up control and evaluation procedures.
4. Competitive analysis is an assessment of how a firm's strengths and weaknesses vis- those of its competitors affect the opportunities and threats in the international environment. Such assessment allows the firm to determine where the company has distinctive competences that will give it strategic advantage or where problem areas exist.
5. Corporate-level strategic approaches to international competitiveness include globalization and regionalization. Many MNCs have developed to the point of using an integrative global strategy. Entry and ownership strategies are exporting, licensing, franchising, contract manufacturing, turnkey operations, management contracts, joint ventures, and fully owned subsidiaries. Critical environmental and operational factors for implementation must be taken into account.
6. Companies of all sizes are increasingly looking to the Internet as a means to expand their global operations. However, localizing Internet operations is complex.
The process of strategic formulation for global competitiveness is a daunting task in the volatile international arena and is further complicated by the difficulties involved in acquiring timely and credible information. However, early insight into global developments provides a critical advantage in positioning a firm for future success.
When an entry strategy is selected, the international manager focuses on translating strategic plans into actual operations. Often this involves strategic alliances; always it involves functional level activities for strategic implementation. These subjects are covered in the next chapter.
In addition, strategic choices at various levels often are influenced by cultural factors, such as a long-term versus a short-term perspective. Hofstede found that most people in countries such as China and Japan generally had a longer-term horizon than those in Canada and the United States.78 Whereas Americans, then, might make strategic choices with a heavy emphasis on short-term profits, the Japanese are known to be more patient in sacrificing short-term results in order to build for the future with investment, research and development, and market share.
Risk orientation was also found by Pan and Tse to explain the choice between equity and nonequity modes.79 Risk orientation relates to Hofstede's uncertainty avoidance dimension. Firms from countries where, generally speaking, people tend to avoid uncertainty (for example Latin American and African countries) tend to prefer nonequity entry modes in order to minimize exposure to risk. Managers from firms from low uncertainty avoidance countries are more willing to take risks and therefore are more likely to adopt equity entry modes.81
Choice of equity versus nonequity mode has been found also to be related to level of power distance. According to Hofstede, a high power distance country
(such as Arab countries and Japan) is one where people observe interpersonal in- equality and hierarchy.82 Pan and Tse found that firms from countries tending toward high power distance are more likely to use equity modes of entry abroad.83
These are but a few of the examples of the relationships between culture and the choices that are made in the strategic planning and implementation phase. They serve to remind us that it is people who make those decisions and that the ways people think, feel, and act are based on their ingrained societal culture. People bring that context to work and it influences their propensity toward or against certain types of decisions.
As with McDonald's, international strategic formulation requires a long-term perspective. Entry strategies, therefore, need to be conceived as part of a well- designed, overall plan. In the past, many companies have decided on a particular means of entry that seemed appropriate at the time, only to find later that it was shortsighted. For instance, if a company initially chooses to license a host-country company to produce a product, then later decides that the market is large enoughto warrant its own production facility, this new strategy will no longer be feasible because the local host-country company 4lready owns the rights.
The strategic choice of one or more of the entry strategies will depend on (1. a critical evaluation of the advantages (and disadvantages) of each in relation to the firm's capabilities, (2. the critical environmental factors, and (3. the contribution that each choice would make to the overall mission and objectives of the company. Exhibit 6-7 summarized the advantages and the critical success factors for each entry strategy discussed. However, when it comes down to a choice of entry strategy or strategies for a particular company, there are more specific factors relating to that firm's situation that must be taken into account. These include factors relating to the firm itself, the industry in which it operates, location factors, and venture-specific factors, as summarized in Exhibit 6-8.
After consideration of the factors for the firm as shown in Exhibit 6-8, as well as what is available and legal in the desired location, some entry strategies will no
doubt fall out of the feasibility zone. With those options remaining, then, strategic planners need to decide which factors are more important to the firm than others. One method is to develop a weighted assessment to compare the overall impact of factors such as those in Exhibit 6-?, relative to the industry the location, and the specific venture on each entry strategy. Specific evaluation ratings, of course, would depend on the country conditions at a given point in time, the nature of the industry, and the focal company.
Based on a study of over 10,000 foreign entry activities into China between 1979 and 1998, Pan and Tse concluded that managers tend to follow a hierarchy of decision-sequence in choosing an entry mode. As depicted in Exhibit 6-9, managers first decide between equity-based and non-equity based. Then, equity modes are split into wholly owned operations and equity joint ventures (EJVs); nonequity modes are divided into contractual agreements and export. Pan and Tse found that the location choice - specifically the level of country risk - was the primary influence factor at the level of deciding between equity and nonequity modes. Host- country government incentives also encouraged the choice of equity mode.
Gupta and Govindarajan also propose a hierarchy of decision factors but consider two initial choice levels. The first is the extent to which the firm will export or produce locally; the second is the extent of ownership control over activities that will be performed locally in the target market. As shown in Exhibit 6-10, there is an array of choice combinations within those two dimensions. Gupta and Govindarajan point out that, among the many factors to take into account, affiance-based entry modes are more suitable under the following conditions:
• Physical, linguistic, and cultural distance between the home and host countries is high.
• The subsidiary would have low operational integration with the rest of the multinational operations
The risk of asymmetric learning by the partner is low
• The company is short of capital
• Government regulations require local equity participation
The choice of entry strategy for McDonald's, for example, varies around the world according to the prevailing conditions in each country With its 4,700 foreign stores, McDonald's is, according to Fortune, “a virtual blueprint for taking a service organization global.” CEO Mike Quinlan notes that, in Europe, the company prefers wholly owned subsidiaries, since European markets are similar to those in the United States and can be run similarly. Those subsidiaries in theUnited States both operate company-owned stores and license out franchises. Approximately 70 percent of McDonald's stores around the world are franchised. In Asia, joint ventures are preferred so as to take advantage of partners' contacts and local expertise and their ability to negotiate with bureaucracies such as the CMnese government. Headed by billionaire Den Fujita, McDonald's has over 1,000 stores in Japan; in China it had 23 stores in 1994, with more planned, in spite of conflicts with the Chinese government, such as when it made McDonald's move from its leased tiananmen Square restaurant. In other markets, such as in Saudi Arabia, McDonald's prefers to limit its equity risk by licensing the name - adding strict quality standards - and keeping an option to buy later. Some of McDonald's implementation policies are given in the next chapter.
Business units [in Europe] still tend to focus on individual countries and in OCUS managerial practices still follow long-standing national patterns.
For firms within Europe, the euro eliminates currency risk, and so “Pan Euro pea thinking becomes not only practicable but essential.” The success of
companies within Europe, then, will depend on their efficiency in streamlining
and consolidating its processes and in integrating product and marketing plans
across Europe. The challenge is to balance the national and the continental view,
because a common currency does not bring about cultural or linguistic union.
Clearly, both European and non-European companies will need to recon side their European, and indeed global strategies, now that the EU has become
a reality, complete with common currency, the euro. “Foreign” managers, for ex ample need to develop an action program to ensure that their products have
continued access to the EU and to adapt their marketing efforts to encompass
the whole EU. The latter task is difficult, if not impossible, however, because the
“citizen of Europe” is a myth; national cultures and tastes cannot be homogenized. With many different languages and distinctive national customs and cultures, companies trying to sell in Europe must thread their way through a maze of varying national preferences. These and other challenges lie ahead, along with numerous opportunities.
UPS is one of many firms experiencing this double-edged sword. Its managers realize that Europe is still virgin territory for service companies, and they expect revenue to grow by 15 percent a yeas there. However, it has run into many conflicts, both practical and cultural. Some of the surprises “big Brown” had as it put its brown uniforms on 25,000 Europeans and sprayed brown paint on 10,000 delivery trucks around Europe were:
indignation in France, when drivers were told they couldn't have wine
with lunch; protests in Britain, when drivers' dogs were banned from
delivery trucks; dismay in Spain, when it was found that the brown UPS trucks resembled the local hearses; and shock in Germany, when brown shirts were required for the first time since 1945.
Meanwhile, adventurous European businesses are spreading their wings across neighboring countries as they realize that open markets can offer as much growth and profitability as does protectionism - probably more. British Airways, for example, took the German market under its wing by buying 49 percent of a local airline and using a new Euroname, Deutsche BA. And, in one of Europe's biggest mergers, the Zeneca Group P.L.C., of Britain acquired Astra A.B., of Sweden. The resulting pharmaceutical giant was deemed necessary to fund new drug research and to compete in a market dominated by U.S. corporations. Early European mergers were dominated by British companies. But now that Continental European companies will have their shares denominated in euros, there wifi likely be more cross-border deals among those countries because they will be free of currency-exchange problems.
Companies within the EU are gaining great advantages by competing in a continental-scale market and thereby avoiding duplication of administrative procedures, production, marketing, and distribution. The Italian company Benneton Group SPA is one such company - competing by being technologically efficient. For insiders, a single EU internal market means greater efficiencies and greater economic growth through economies of scale and the removal of barriers, with the consequent lowering of unit costs.
Stiffer competition, however, has resulted both within the market and outside of it, leading to a shakeout of firms; mergers and acquisitions will increase so that larger firms will be strong enough to survive. The twelve “Euroland” countries already have a combined 19 percent of world trade, compared to 17 percent for the United States and 8 percent for Japan, and continued strong growth is projected.
Companies based outside the EU enjoy the same advantages if they have a subsidiary in at least one member state. But they sometimes feel discrimination simply because they will be outside what for the member states is a domestic market. In other words, the EU may build a protectionist wall - of tariffs, quotas, and competitive tactics - to keep out the United States and Japan. However, the EU will also create opportunities for nonmembers - a market with a potential purchasing power of $2.5 trillion, for instance. Many companies, especially MNCs, will start from a better position than some firms based inside the community because of (1. their superior competitiveness and research and development, (2. an existing foothold in the market, and (3. reduced operating expenses (one subsidiary for the whole EU instead of several). But, European harmonized standards, while seeking to eliminate trade barriers within Europe, serve to limit access to EU markets by outside companies through the standardized specifications of products allowed to be sold in Europe. The harmonization laws set minimum standards for exports and imports that are EU-wide. However, those standards also frequently hinder European companies from efficient sourcing of raw materials or component parts from “foreign” companies. Opinions differ about the long-term impact on U.S. firms: the EU could unify its markets, adversely affecting some U.S. industries; market access could be reduced; and demands for reciprocal market access in the United States may ensue.
Others feel that the new single market provides little threat to and considerable opportunity for Americans. Many U.S. firms (in anticipation of protectionism) have invested in Europe since the beginning of the Common Market in 1958, and they now feel satisfied with their current positions. Indeed, U.S. companies (GE, Dow, 3M, Hewlett-Packard) who already have well-es- tablished European presences enjoy the same free flow of goods, services, capital, and people as Europeans.
Those U.S. companies not yet established in Europe must examine the EU internal market to decide on their most effective “European strategy.” Many firms are opting for joint ventures with European partners, sacrificing their usual preference of 100 percent ownership (or majority control) to extend operations around Europe; this strategy also opens doors to markets dominated by public procurement, as with the AT&T - Philips venture to produce telecommunications equipment. But for a number of firms - both foreign and European operating in Europe has become cost prohibitive. The average Western European earns more, works fewer hours, takes longer vacations, and receives more social entitlements and job protection than those in Asia and North America. European MNCs have the highest labor and taxation costs among the TRIAD nations.7 Siemens AC of Germany, for example, shifted almost all its semiconductor assembly work from its plants in Germany - where it was not permitted to operate around the clock or on weekends - to a plant in Singapore, where it operates 24 hours a day, 365 days a year, and pays $4.40 an hour for workers.
Suzuki, Toyota, Nissan, and other Japanese companies are also experiencing the dilemma of operating in Europe. They are reluctant to freely pour yen into Europe, but they want to keep a foothold in the market. Suzuki, for example, found that in its Spanish plant it took five times the number of workers and cost 46 percent more to produce a Suzuki Samurai than in Japan.
In countries where a fully owned subsidiary is permitted, an MNC wishing total control of its operations can start its own product or service business from scratch, or it may acquire an existing firm in the host country. Philip Morris acquired the Swiss food firm Jacobs Suchard to gain an early inside track in the European Common Market and to continue its diversification away from its aging tobacco business. With this move, PM became the second U.S. company, after Mars, to assure itself a place in Europe's food industry. Such acquisitions by MNCs allow rapid entry into a market with established products and distribution networks and pro- vide a level of acceptability not likely to be given to a “foreign” firm. These advantages offset, somewhat, the greater level of risk stemming from the larger capital investments, compared with other entry strategies.
At the highest level of risk is the strategy of starting a business from scratch in the host country - that is, establishing a new wholly owned foreign manufacturing or service company or subsidiary with products aimed at the local market or targeted for export. Japanese automobile manufacturers - Honda, Nissan, and Toyota - have successfully used this strategy in the United States to get around American import quotas.
This strategy exposes the company to the full range of risk, to the extent of its investment in the host country As evidenced by events in South Africa and China, political instability can be devastating to a wholly owned foreign subsidiary. Add to this risk a number of other critical environmental factors - local attitudes toward foreign ownership, currency stability and repatriation, the threat of expropriation and nationalism - and you have a high-risk entry strategy that must be carefully evaluated and monitored. There are advantages to this strategy, however, such as full control over decision making and efficiency as well as the ability to integrate operations with overall companywide strategy
Exhibit 6-7 summarizes the advantages and critical success factors of these entry strategies which must be taken into account when selecting one or a combination of strategies depending on the location, the environmental factors and competitive analysis discussed here, and the overall strategy in which the company approaches world markets.
Complex situational factors face the international manager as she or he considers strategic approaches to world markets; along with which entry strategies might be appropriate, as illustrated in the accompanying Comparative Management in Focus: Strategic Formulation for the EU Market.
At a much higher level of investment and risk (though usually less risk than a wholly owned plant), joint ventures present considerable opportunities unattainable through other strategies. A joint venture involves an agreement by two or more companies to produce a product or service together In an IJV ownership is shared, typically by an Ml'JC and a local partner, through agreed-upon proportions of equity. This strategy facilitates an MNC's rapid entry into new markets by means of an already established partner who has local contacts and familiarity with local operations. IJVs are a common strategy for corporate growth around the world; they also are a means to overcome trade barriers, to achieve significant economies of scale for development of a strong competitive position, to secure access to additional raw materials, to acquire managerial and technological skills, and to spread the risk associated with operating in a foreign environment. Not surprisingly, larger companies are more inclined to take a high equity stake in the ijv engage in global industries, and are less vulnerable to the risk conditions in the host country. The joint venture reduces the risks of expropriation and harassment by the host country; indeed, it. may be the only means of entry into certain countries, like Mexico and Japan, that stipulate proportions of local ownership and local participation.
In recent years, lJVs have made up about 20 percent of direct investments by MNCs in other countries, including such deals as the robotics venture between Fujitsu and General Electric and the fiber-optic venture between Siemens AG. and Corning Glass Works. Many companies have set up joint ventures with European companies to gain the status of an “insider” in the European Common Market. Most of these alliances are not just tools of convenience but are important - perhaps critical - means to compete in the global arena. To compete globally, firms have to incur, and defray, immense fixed costs, and they need partners to help them in this.
Sometimes countries themselves need such alliances to improve economic conditions: the Commonwealth of Independent States (CIS) has recently opened its doors to joint ventures, seeking an infusion of capital and management expertise. Philip Morris, discussed earlier, entered a joint venture with Artovaz, a Russian auto manufacturer, to produce Marlboro cigarettes at a converted plant in Samara.
International joint ventures are one of many forms of strategic global alliances that are further discussed in the next chapter.
In a joint venture, the level of relative ownership and specific contributions must be worked out by the partners. The partners must share management and decision making for a successful alliance. The company seeking such a venture must maintain sufficient control, however, because without adequate control, the company's managers may be unable to implement their desired strategies. Initial partner selection and the development of a mutually beneficial working agreement are therefore critical to the success of a joint venture. In addition, managers must ascertain that there will be enough of a “fit” between the partners' objectives, strategies, and resources - financial, human, and technological - to make the venture work. Unfortunately, too often the need for preparation and cooperation is given insufficient attention, resulting in many such marriages ending in divorce. In fact, about 60 percent of IJVs fail, usually because of ineffective managerial decisions regarding the type of it'?, its scope, duration and administration, as well as careless partner selection.6' The list of cross-cultural disappointments is getting longer - Chrysler-Mitsubishi and Fiat-Nissan have, according to Business Week, “produced as much rancor as rewards.” After years of arguments, GM pulled out of its operations with Korea's Daewoo Motors, citing insufficient care given to their relationship.
A management contract gives a foreign company the rights to manage the daily operations of a business, but not to make decisions regarding ownership, financing, or strategic and policy changes.55 Usually, management contracts are enacted in combination with other agreements, such as joint ventures. By itself, a management contract is a relatively low-risk entry strategy, but it is likely to be short- term and to provide limited income unless it leads to another more permanent position in the market.