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: josef.windsperger@univie.ac.at

Homepage: www.univie.ac.at/IMPhone: 00431-4277-38180

3

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 and Joint Ventures

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 Organization Design of the MNC of the Future

1 MNC als Global Network 1.1 Product Life Cycle Theory

Vernon (1966):

Extension of the product life cycle view to

explain the internationalization of the firm.

1.2 Transaction Cost Theory

Transaction costs =» costs of using the price mechanism (Coase 1937)

Search costs

Information costs

Costs of decision making

Negotiation costs

Planning period:Ex ante costs

Transaction Costs

Monitoring or control costs Contract execution costsAdjustement costs

Contract execution period: Ex post costs

Transaction Cost Theory O. E. Williamson (1975)

Atmosphere

Bounded Rationality Uncertainty/Complexity

‚Information Impactedness‘

Opportunism Transaction Specifity

Market and Hierarchy

CCTransaction costs Organizational costs

(Setup-costs)

Degree of organization

Quasi-Rents, Specific Investments and Hold-up

g AB

A‘s quasi-rent: QRAB = (gAB – gAC)

A Bg BA

CD g ACg BD

A‘s profit with B: gAB B‘s profit with A: gBA

B‘s quasi-rent: QRBA = (gBA – gBD)

HOLD-UP Potential of B (HB)Quasi-rent of A (QRBA) =

Transaction Cost Theory of the MNC from Teece

1.3 Dunning‘s Eclectic Theory

1.4 Network Approach

Degree of the Internationalization of the Market

Low High

Degree of the internatio-nalisation

0f the firm

Low“The Early

Starter”“The Late Starter”

High“The Lonely

International”“The International

Among Others”

2 Culture, Strategy and Organization of MNC2.1 Country and Organization Culture

•“Culture is the collective programming of the mind.”

Geert Hofstede

Hofstede

Individualism/collectivism

Masculinity/femininity

Uncertainty avoidance

Power distance

Power Distancebeschreibt

The extent to which people tollerate unequal distribution of power in economy and society.

Individualismbeschreibt

The degree of integration of individuals in groups

Individualism:

Individual values, individual responsibility, goal orientation

Collectivism:

Group values, loyal behavior, common responsibility

Masculinitybeschreibt

How strong are masculin values (for instance achievement, success, money) compared to feminin values (security, life quality, social contact)?

Uncertainty Avoidancebeschreibt

How tolerant are the people concerning new and unstructured situations?

high UA: Many Rules, regulations and legal norms to minimize risk

Model of Hofstede

Country Comparison

Village market (nordic)-Decentralized, flexible-Coordination through personal and informal communication

Family or tribe (Asiatic)-Centralized decision making-Loyal, personal relationships-Sozial control (clan control)

Well-oiled machine(Germanic)-Decentralized decision making-Strong role of experts-Coordination through rules and routines

Traditional bureaucracy„Pyramid of people“ (Latin)-Centralized decision making-Central personal coordination-Informal relationships

highlow

high

low

Powerdistance

Uncertainty Avoidance

Hierarchy

Form

aliz

ati

on

Model of Trompenaars:Country and Organization Culture

Guided Missile

Eiffel Tower

Incubator

Family

Decentralization

Centralization

Goal Orientation

(formal)

Persons

(informal)

2.2 Strategy und Organization design of the MNC2.2.1 Strategies of the MNC

What is a competitive advantage?Sustainable cost and/or revenue advantages compared to the best competitor

StrategyRessources Capabilities

Industry structure

I. Strategic Approaches: Porter‘s Model

Competitive advantage through low costs and differentiation

Low-cost, differentiation and focus strategy

monopolistic Rents

Resource-based Approach (Barney, Wernerfelt)

Strategy

Competitive advantage

Competencies

Resources Tangible and intangible resources

Change of the resource bundle

Strategic Rents

II. International Strategies: Perlmutter

Ethnocentric Strategy

Polycentric Strategy

Geocentric Strategy

Regiocentric Strategy

Perlmutter‘s Model

Bartlett/Ghoshal-Model

high

highlow

low

Cost pressures

Pressure for local responsiveness

Global Strategy

International

Strategy

Multi-national Strategy

Trans-national Strategy

2.2.2 Strategy and Organisation Design

Chandler (1962): „Structure follows Strategy“

Matrix structure Product-/geographic Structure Functional Structur

Differentiation strategy Low-cost strategy

Barlett/Ghoshal-Model

International Division

CEO

HR Finance R & D Int. Division

Europe

Middle East

Brazil

Staff

Global Geographic Structure

CEO

Pacific Division

European Division

Latin American Division

Corporate

Staff

Long Term Planning

ProductCoordination

ABB

Comparison

Global Heterarchy (Hedlund)Transnational Organization (Bartlett/Ghoshal)

Country competence centersCountry competence centers

Local and global advantagesLocal and global advantages

Decentralisation of decision makingDecentralisation of decision making

Centralization of controlCentralization of control

IT-enabled strategyIT-enabled strategy

Organization culture as clan controlOrganization culture as clan control

3. Theoretical Foundations of Networks

Hierarchy Stable Network

Internal Dynamic

Network Network

One Firm Several Firms

High

Inte

ractio

n L

evel

low

Cooperation

Licensing

Cross-Licensing

Franchising

Countertrade

Consortium

Joint Venture

CompetitionCooperation Propensity

Cooperation

Cluster

External Networks

Keiretsu

Other Financial Institutions Banks Insurance Companies

Trading Companies Production Companies

Subcontractors A B C D F

InternalNetwork

External Network

Equity:Finance:Goods:

Consortium: NewPC-Consortium in Taiwan

3. 1 Economic Theories of Networks

Transaction Cost Theory

Property Rights-Theory

Strategic or Resource-based Theory

Transaction Cost Theory

TC

Spezifity

Market Network Hierarchy

S1 S2 S3

Property Rights-Theory

a. the right to use the goodb. the right to change the goodc. the right to capture the profit or to bear the lossd. the right to sell the good and to receive the liquidation

value

a + b = Residual decision rightsc + d = Residual income or ownership rights

Contractibility (due to intangibility) of assets determines the structure of residual rights

Example: Franchising-Network

Intangible assets of the franchisor:Brand name assets, system-specific know-how

Intangible assets of the franchisee:Outlet-specific knowledge

ao and a1 are tangible – market coordination

ao is intangible, a1 is tangible – internal coordination

ao and a1 are intangible – network coordination

Resource-based Theory

Resources

Organizational Capabilities

Strategic Rents (SR)

(Schumpeterian and Ricaridian Rents)

Resource Characteristics

Intangible, tangible resources and organizational capabilities

Heterogenity

Imitability

Substitutability

Firm specifity

Contractibility

+

3.2. Organizational Efficiency of NetworksA) Transaction Costs

‚Organization for efficient exploitation of knowledge differences‘

(knowledge exploitation‘ – March 1991)

Coordination efficiency:

coordination costs

Motivations efficiency:

motivation costs (Agency costs)

Efficient Organization Design

Centralization Degree of Delegation

Coordination Costs

Motivation Costs (Agency Costs)

B) Criteria of the Resource-based Theory

‚Organization design for efficient knowledge creation‘(‚knowledge exploration‘ – March 1991)

Strategic rents (SR):Schumpeterian und Ricardian Rents

- Schumpeterian rents due to dynamic capabilities- Ricardianian rents due to heterogenity of resources and capabilities

Organisational Efficiency: SR – TC

3.3 Networks, Trust and IT

g AB

A‘s Quasi-Rents: QRAB = (gAB – gAC)

A Bg BA

CD g ACg BD

A‘s Reputation capital: RA B‘s Reputation capital: RB

B‘s Quasi-Rents: QRBA = (gBA – gBD)

Quasi-Rents of A (QRAB) + reputation capital of A (RA)

HA - cooperative behaviorHA - opportunistic behavior

><

Strategic Rents, Hold-up and Reputation

g FBGM

FB GMg GMFB

CD g FBCg GMD

GM‘s strategic rents under market coordination: SRGMFB

GM‘s strategic rents under internal coordination: SRGMGM

GM‘s SR-advantage under market coordination: SRGM = (SRGMFB – SRGMGM)

(QRGM + SRGM + RGM - HGM) > 0 is „self-enforcing range“ (Klein 1995)

Quasi-Rents of GM (QRGM) + strategic rent advantage under market coordination of GM ( SRGM)

><

HGM - cooperative HGM - opportunistic

Transaction Costs and IT

Transaction Costs

Communication Information Processing

Specifity

Move to the Network

TC

Specifity

Market Network Hierarchy

S1 S2 S3