Transcript Informationsverteilungen

International Strategy
and Organization (ISO)
(Advanced Topics: Networks of the MNC)
Josef Windsperger
Professor of Organization and Management
International Strategy and
Organization (ISO)
(Advanced Topics: Networks of the MNC)
Lecturer:
Josef Windsperger
E-mail:
Homepage:
[email protected]
www.univie.ac.at/IM
Phone:
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. 4
Headquarter-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)
Content
Part I
1 MNC as Global Network: Existence and Evolution
1.1 Product Life Cycle Theory
1.2 Transaction Cost Theory
1.3 Eclectic Theory
1.4 Network Approach
2 Culture, Strategy and Organization of the MNC
2.1 Country and Organization Culture
2.2 Strategy and Organization Design
3. Theoretical Foundations of Networks
3.1 Economic Approaches of Networks
3.2 Efficiency of Network Design
3.3 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
 short
of competition
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
Licensing
S1
S2
Network Hierarchy
S3
Specifity,
Know-how
Complexity
Property Rights-Explanation
Contractible Know-how
Contractible
Know-how
Market Contract
A
Non-contractible Know-how
B to A:
Licensing
B
Noncontractible
Know-how
A to B:
Licensing
Network
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
Joint Venture
A
B
b
a
JV
Strategic alliance
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
Existing markets
To take existing products
to foreign markets
To diversify into a
new business
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
Contractible Know-how
Contractible
Know-how
Market Contract
A
Non-contractible Know-how
B to A:
Licensing
B
Noncontractible
Know-how
A to B:
Licensing
Joint Venture
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
Market Entry and Resource Commitments
Licensing: Low
Joint Venture: Medium
Wholly-owned Subsidiary: High
Market Entry and Diffusion Risk
Licensing: High
Joint Venture: Medium
Wholly-owned Subsidiary: Low
Eclectic Theory: Hill et al. 1990
Strategic Variables
Environmental
Variables
1. National Differences
1. Counrtry Risks
2. Scale Economies
2. Cultural Distances
3. Global Concentration
3. Demand Uncertainty
4. Market Potential
4. Competitive
Dynamics
Form of Market
Entry
Resource Variables
1. Value of the Firm-specific KH
2. Tacit Knowledge
3. International Experience
Consortia
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 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 (inhouse) 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 view
capabilities of the firm result in competitive
advantages
capabilities 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
- 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 Model
Motives
Economic View  Cost-sharing Motives
- Assumptions
–
–
–
symmetrical firms in terms of capabilities or knowledge
same industry & outcome
one efficient way
Organizational View  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 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 condition
» industries with high spillovers
» alternatives to improve appropriability
Capability heterogeneity condition
» breadth of technological capabilities that firms possess
» skill-sharing vs cost-sharing
Sakakibara‘s Model
Effects on R&D
(1) increase in R&D efficiency


economies of scale and avoidance of wasteful duplications (costsharing)
easier acquisition of complementary resources for R&D (skillsharing)
(2) spillover of a firm’s own R&D on others’ R&D
productivity

internalizing the externality
(3) learning capability


large for skill-sharing motivated firms
small for cost-sharing motivated firms
Sakakibara‘s Model
Summary
Motives
Cost-sharing
Skill-sharing
competition in R&D
consortia
firm capabilities in
R&D consortia
role of R&D
consortia
private R&D
spending
constraints firms
face
single-industry
competition
homogeneous,
substitutable
divide tasks
wide industry
participation
heterogeneous,
complementary
create/transfer
knowledge
can increase
can decrease
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
14
 Example:

12
10
8
Toshiba
6
Sony
4
2
92
89
86
83
80
77
74
71
68
65
62
59
0
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
Royalties
to
Franchisor: System-specific Know-how
Franchisee: Initial Fee
Specific Investments
Characteristics:
-Franchisees and franchisor are entrepreneurs.
- Intangible Assets:
FG‘s brand name, systemspecific KH
FN‘s local market KH
-Incentive system:
Royalties and intial fees
t
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
Licensing
Company-owned
Franchising Subsidiaríes
‚Hostage Model‘
S1
S2
S3
Specifity,
Uncertainty
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).
‚Governance
Structure‘ of the Franchising Firm
Intangible assets
System-specific und local market knowledge
H1
How is the knowledge distrubuted
Between the franchisor and the
franchisee?
Residual decision rights
H2
Who is the residual decision maker
(whose decisions influences
the residual income)?
Ownership rights
(Residual income rights)
Proportion of
company-owned
Outlets (PCO)
H3
Royalties/
Initial Fees
How are the ownership
rights allocated?
Market Entry through Franchising
Choice of International Franchising
Level of Equity
Limited equity
Franchising modes
Equity franchising
modes
Direct or
Indirect mode
Direct Franchising
Area Development
Agreement
Subsidiary
Joint Venture
Master Franchising
Direct Mode
(Duniach-Smith, 2004)
Entry Forms
Choice of Market Entry
Choice of International Franchising
Environmental
determinants
Limited equity
Franchising modes
Equity franchising
modes
Environmental
determinants
Direct Franchising
Area Development
Agreement
Organizational
determinants
Level of Equity
Organizational
determinants
Direct or
Indirect mode
Subsidiary
Joint Venture
Master Franchising
(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 commitments
Central control
Protection 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 Agreement
Lower resource commitment
Relatively strong central control
Fast market entry
Appropriate:
–
–
–
–
–
High geographic and cultural distances
Uncertain market development
Instable legal environment
Local market knowledge is very important
No international experience
Direct Franchising
High control and agency costs
Appropriate:
– Low geographic and cultural differences
– Strong local market KH of the franchisees
– Relatively small market potential and growth
Joint Venture
Shared 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.
2.
3.
4.
5.
Through economies of scale
Through vertical integration
Through the adoption of more efficient production or
organizational technology
Through the increased utilization of the bidder’s
management team
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.
2.
3.
4.
–
–
To gain access to underutilized tax shields
To avoid bankruptcy costs
To increase leverage opportunities
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 on
M&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 on
M&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
Postmerger-Integrations-Model
Combination
potential
+
Synergy
realization
+
-
+
Organizational
integration
+
+
Employees‘
resistance
Hypotheses
•
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.
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
Industrial
Countertrade
Commercial
Countertrade
Barter
Direct
Offset
Offsets
Buybacks
Indirect
Offset
Full
Compensation
Export
Cooperative
Processing
Ventures
Evidence
Accounts
Partial
Compensation
Counterpurchase
Bilateral
Clearing
Swaps
Switch
Forms of Counter Trade (2)
 Classical
barter
Clearing arrangement
Switch Trading
 Buy-Back
Loan and Import
 Counterpurchase
 Offset
Use of Counter Trade
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
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
Licensing Countertrade Hierarchy: DI
‚Hostage-effect‘
S1
S2
S3
Specifity,
Uncertainty
4. 7 Internationalization through Clusters
Which factors influence a host country’s national
competitiveness?
Foreign subsidiary
characteristics
subsidiary
level
strategy
of technology
training
(formal, informal)
international
interdependence
National competitiveness
Firm level resources
Nation-level
resources
unemployment
technical
skilled
standard
workforce
competitiveness
innovative
firms
and managerial
skills
product
and process
technology
capability
Published in: S. O’Donnel, T.Blumentritt/Journal of International Management 5 (1999)
rate
of living
of local
Porter‘s Diamond Model
Chance
Firm Strategy,
Structure and
Rivalry
Demand
Conditions
Factor Conditions
Related and
Supporting
Industries
Government
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
„Clusters are geographic concentrations of interconnected companies
and institutions in a particular field.“ (Michael E.Porter)



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.
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 KnowHow-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
Organisation
Self-organizing teams and Hierarchy with
networks
decentralized structures