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International Management Entry Strategies And Organisational Structures Notes

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Entry Strategies and Organisational Structures

TERMS

Wholly Owned Subsidiary - An overseas operation that is totally owned and controlled by an MNC.

Merger/Acquisition - The cross border purchase or exchange of equity involving two or more companies.

Alliance - Any type of cooperative relationship among different firms.

Joint Venture - An agreement under which two or more partners own or control a business.

License - An agreement that allows one party to use an industrial property right in exchange for payment to the owning party.

Franchise - A business agreement under which one party (the franchisor) allows another (the franchisee) to operate an enterprise using its trademark, logo, product line and methods of operation in return for a fee.

International division Structure - A structural agreement that handles all international operations out of a division created for this purpose.

Global Product Division - A structural agreement in which domestic divisions are given worldwide responsibility for product groups.

Global Area Division - A structure under which global operations are organised on a geographic rather than a product basis.

Global Functional Division - A structure that organises worldwide operations primarily based on function and secondarily on a product,

Mixed Organisation Structure - A structure that is a combination of a global product, area, or functional arrangement.

Transnational Network Structure - A multinational structural arrangement that combines elements of function, product and geographic designs, while relying on a network arrangement to link worldwide subsidiaries.

Formalisation - The use of defined structures and systems in decision making, communicating and controlling.

Specialisation - An organisational characteristic that assigns individuals to specific, well defined tasks.

Horizontal Specialisation - The assignment of jobs so that individuals are given a particular function to perform and tend to stay within the confines of this area.

Vertical Specialisiation - The assignment of work to groups or departments where individuals are collectively responsible for performance.

Centralisation - A management system in which important decisions are made at the top.

Decentralisation - Pushing decision making down the line and getting the lower level personnel involved.

ENTRY STRATEGIES AND OWNERSHIP STRUCTURES

There are a number of common entry strategies and ownership structures in international operations.

The most common entry approaches are wholly owned subsidiaries, mergers and acquisitions, alliances and joint ventures, licensing, franchising and basic export and import operations.

Depending on the situation, any one of these can be a very effective way to implement an MNC's strategy

Export/Import

New ventures, exporting and importing often are the only available choices for small and new firms wanting to go international.

These choices also provide an avenue for larger firms that want to begin their international expansion with minimum investment and risk.

The paperwork associated with documentation and foreign currency exchange can be turned over to an export management company to handle, or the firm can handle things itself by creating its own export department.

Additionally the firm can turn to major banks, or other specialists that for a fee, will provide a variety of services including letters of credit, currency conversion and related financial assistance.

A number of potential problems face firms that plan to exports.

An MNC with a contractual agreement with a distributor could be stuck with that distributor. On the other hand if the firm decides to get more actively involved it may make direct investments in marketing facilities such as warehouses, sales offices and

transportation equipment without making direct investment in manufacturing facilities overseas.

When importing goods many MNC's source products from a wide range of suppliers from all over the world.

Exporting and importing can provide easy access to overseas markets; however the strategy usually is transitional in nature. If the firm wishes to continue doing business internationally, it will need to get more actively involved in terms of investment and take on new risks.

Wholly Owned Subsidiary

This option is often pursued by smaller companies especially if international or transaction costs such as the cost of negotiating and transferring information are high.

When MNC's make an initial investment in the form of a wholly owned subsidiary in a foreign country, it is sometimes referred to as greenfield investment.

The primary reason for the use of wholly owned subsidiaries is a desire by the MNC for total control and the belief that managerial efficiency will be better without outside partners.

Due to the sole ownership it has been found that profits can be higher with this venture and that there are clearer communications and shared visions.

However, there are some drawbacks. Typically wholly owned subsidiaries face a high risk with such a large investment in one area and are not very efficient with entering multiple countries or markets. This can also lead to low international integration or multinational involvement.

Furthermore, host countries often feel that the MNC is trying to gain economic control by setting up local operations but refusing to include local partners.

Some countries are concerned that the MNC will drive out local enterprises as opposed to helping developing them.

In dealing with these concerns many newly developing countries prohibit wholly owned subsidiaries.

Another drawback is that home country unions sometimes oppose the creation of foreign subsidiaries which they see as an attempt to export jobs particularly when the MNC exports goods to another country and the decides to set up manufacturing operations there.

As a result today many multinationals opt for a merger, alliance or joint venture rather than a wholly owned subsidiary.

Mergers/Acquisitions

In recent years a growing number of multinational have acquired their subsidiaries through mergers/acquisitions.

MNC's may choose this route in order to quickly expand resources of construct high profit products in a new market.

Purchasing a majority interest in another company is an expedient way to expand.

Cultural differences and time constraints are the two most pervasive barriers. Even before agreements are reached time is of great concern.

While managers do not want to force negotiations or rush a potential subsidiary's decision, waiting too long could result in missed opportunities due to bids from competitors or a rapid change in the market.

Once a merger or acquisition occurs, managers may find it difficult to clearly communicate new operational goals to the foreign subsidiary, which not only highlights cultural differences but also adds time and risk to a company's activities.

Transition costs also pose a problem in the post-merger environment.

Alliances and Joint Ventures

An international alliance is composed of wo or more firms from different countries.

Some alliances are temporary, others are permanent.

An international joint venture is a joint venture composed of two or more firms from different countries.

Alliances and joint ventures can take a number of different forms, including cross marketing arrangements, technology sharing agreements. Production contracting deals and equity agreements.

In some instances two parties may create a third independent entity expressly for the purpose of developing a collaborative relationship outside their core operations.

Just like mergers and acquisitions, alliances and joint ventures can pose substantial managerial challenges.

There are two types of alliances and joint ventures. The first type is the non-equity venture, which is characterised by one group merely providing a service for another. The group providing the service typically is more active than the other.

The second type is the equity joint venture which involves a financial investment by the MNC parties involved. Many variations of this arrangement adjust the degree of control that each of the parties will have and the amount of money, technological expertise and managerial expertise each will contribute to the joint venture.

Most MNC's are more interested in the amount of control they will have over the venture rather than their share of profits.

Similarly local partners feel the same way, which can result in problems.

Nevertheless alliances and joint ventures have become popular in recent years because of the significant operational benefits they offer to both parties. Some of the most commonly cited advantages include: o

Improvement of efficiency - the creation of an alliance or joint venture can help the partners achieve economies of scale and scope that would be difficult for one firm operating alone to accomplish. Additionally the partners can spread the risks among themselves and the profit from the synergies that arise from the complementary resources.

o

Access to knowledge - in alliances and joint ventures each partner has access to the knowledge and skills of the others. So one partner may bring financial and technological resources to the venture while another brings knowledge of the customer and market channels.

o

Mitigating political factors - a local partner can be very helpful in dealing with political risk factors such as a hostile government or restrictive legislation.

o

Overcoming collusion or restriction in competition - alliances and joint ventures can help partners overcome the effects of local collusion or limits being out on foreign competition by becoming part of an insider group.

Alliance and joint venture partners can often complement each other and can thus reduce the risks associated with their operations and entering a foreign market.

Alliances and joint ventures are proving to be particularly popular as a means for doing business in emerging market countries.

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