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International Business
Strategy: Rethinking the
Foundations of Global
Corporate Success
Alain Verbeke
Cambridge University Press, 2013
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TABLE OF CONTENTS 1
! Introduction and overview of the book’s framework
! Part one. Core concepts
1. Conceptual foundations of international business
strategy
2. The critical role of firm-specific advantages
3. The nature of home country location advantages
4. The problem with host country location advantages
5. Combining firm-specific advantages and locationadvantages in an MNE network
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TABLE OF CONTENTS (2)
! Part two. Functional issues
6. International innovation
7. International sourcing and production
8. International finance9. International marketing
10. Managing managers in the multinational enterprise
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TABLE OF CONTENTS (3)
! Part three. Dynamics of global strategy
11. Entry mode dynamics 1: foreign distributors
12. Entry mode dynamics 2: strategic alliancepartners
13. Entry mode dynamics 3: mergers and acquisitions
14. The role of emerging economies
15. Emerging economy MNEs (EMNEs)
16a. International strategies of corporate social
responsibility16b. International strategies of environmental
sustainability4
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Chapter One: Conceptual
Foundations of InternationalBusiness Strategy
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Five learning objectives
1. To develop an understanding of the sevenconcepts of this book’s unifying framework .
2. To link specific types of transfers of firm-specific
advantages (FSAs) across borders with the four
corresponding MNE archetypes of administrativeheritage.
3. To describe the various motivations for foreign
direct investment (FDI) and to explain the linkagesamong non-location-bound (or internationally
transferable) FSAs, location-bound (or non- transferable) FSAs and location advantages within
each of the four MNE archetypes.6
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4. To define the ten often-observed patterns of FSAdevelopment and resource recombination ininternational business.
5. To explain the need for complementary resources
of external actors and the potential reasons forbounded rationality and bounded reliability whendoing international business.
7
Five learning objectives
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Definition of
international business strategy
! International business strategy means effectively andefficiently matching a multinational enterprise’s (MNE’s)
internal strengths (relative to competitors) with the
opportunities and challenges found in geographically
dispersed environments that cross international borders.! Such matching is a precondition to creating value and
satisfying stakeholder goals, both domestically and
internationally.
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The seven concepts of the
unifying framework
! Internationally transferable (or non-location bound)firm-specific advantages (FSAs)
! Non-transferable (or location-bound) FSAs
! Location advantages
! Investment in – and value creation through – resource
recombination
! Complementary resources of external actors (notshown explicitly in Figure 1.1)
! Bounded rationality! Bounded reliability
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10
Location advantages
home country
Non-transferable (or
location-bound) FSAshome country
Internationally transferable (or
non-location bound) FSAs
International
border
Figure 1.1 Core concepts
Stand-alone
FSAs
Routines
Re-combination
capabilities
Host
Country
Home
Country
Boundedrationality
Boundedreliability
The triangular shape in the model represents
the pyramidal nature of the firm’s advantages:
on the broad base of the location advantages
(LAs) of its home country (left) it builds a
smaller subset of FSAs that are location-
bound (LB; middle), and then a still smaller
subset that are non-location bound (NLB;
right). Bounded rationality and bounded
reliability influence the ability of these non-
location bound FSAs to be transferred across
the international border to the host country.
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The MNE
s unique resource base
! Physical resources (natural resources, buildings, plantequipment).
! Financial resources (equity and loan capital)
! Human resources (individuals and teams, entrepreneurial and
operational skills).! Upstream knowledge (sourcing knowledge, product and
process-related technological knowledge).
! Downstream knowledge (marketing, sales, distribution and
after sales service).
! Administrative knowledge (organizational structure, culture
and systems).
! Reputational resources (reputation for honest business
dealings). 11
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The MNE
s unique resource base
! Building upon its resource base, as well as its accessto location advantages, the MNE will develop stand-
alone FSAs (e.g., brand names, patents) and routines,
and will also engage in resources recombination.
! FSAs reflect the firm’s distinct strengths vis-à-vis
rivals, and are the source of competitive advantage in
the marketplace.
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Routines
! The distinct ability to combine further the firm’sresources, in unique ways valued by the firm’s
stakeholders.
! Routines are stable patterns of decisions and actions
that coordinate the productive use of resources, andthereby generate value, whether domestically or
internationally.
! The combination ability expressed in routines is ahigher-order FSA.
! Case example: Federal Express.
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Recombination
! Constitutes the heart of international business strategy.
! Artful orchestration of resources, especially
knowledge bundles, as a response to differences
between national and foreign environments, and to
satisfy new stakeholder demands in these foreignenvironments.
! Entrepreneurial judgment is at the heart of the MNE’s
recombination capability.
! Precondition to value creation and satisfying
stakeholder needs in complex international settings.
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International transferability of
FSAs?
! Paradox:
If the FSA consists of easily codifiable knowledge (i.e.,
if it can be articulated explicitly, as in a handbook or
blueprint), then it can be cheaply transferred abroad,
but it can also be easily imitated by other firms.
Though expensive and time-consuming to transfer tacit
knowledge across borders, the benefit to the MNE is
that this knowledge is also difficult to imitate. It is oftena key source of competitive advantage when doing
business abroad.
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Some FSAs are not transferable
abroad: location-bound FSAs
Four main types:
! Stand-alone resources linked to location advantages
(privileged retail locations).
! Local marketing knowledge and reputational
resources, such as brand names (may not be applicableto a host country context, or valued to the same extent).
! Local best practices (i.e. routines), such as incentivesystems or buyer-supplier relations (may not work
abroad).
! Domestic recombination capability (may not work in
foreign markets).
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Some FSAs are not transferable
abroad: location-bound FSAs
! Even if transferability of the relevant resources weretechnically possible, this does not mean the transfer of
the potential for profitable deployment , i.e., the
resource bundles that may be transferable from a
technical perspective (e.g., the way in which a product ismarketed at home), do not constitute an FSA abroad.
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Location advantages
! Entire set of strengths of a location, and accessible byfirms in that location.
! Should always be assessed relative to the strengths of
other locations.
! Instrumental to FSAs.
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Motivations for foreign expansion
! Natural resource seeking.
! Market seeking.
! Strategic resource seeking.
! Efficiency seeking.
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Stand-alone
FSAs
Routines
Re-combinationcapabilities
Location advantages
home country
Non-transferable (or
location-bound) FSAshome country
Internationally
transferable (or non-location bound) FSAs
Non-transferable (or
location-bound) FSAshost country
Internationally
transferable (or non-location bound) FSAs
Location advantages
host country
International
border Home Country Host Country
Figure 1.2 The essence of international business strategy
C o m p
l e m e n t a r
y
r e s o u
r c e s
The shading of the middle of the
host country triangle emphasizes the
importance of developing new, LB
FSAs in the host country. These LB
FSAs complement the FSAs the
firm has transferred from the home
country, and are critical to achieve
the firm’s goals, in terms of
accessing and benefiting from the
location advantages (LAs) of thehost country. If the firm commands
insufficient FSAs internally to
access and benefit from these LAs,
it may draw upon complementary
resources of external economic
actors to achieve its goals in the
host country.
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Four MNE archetypes:
1. Centralized exporter
! Standardized products manufactured at home embodythe firm’s FSAs (themselves developed on the basis of a
favourable home country environment, including local
clustering) and make the exporting firm successful in
international markets.! Case example: motion picture studios.
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Location advantages
home country
Non-transferable (or
location-bound) FSAs
home country
Internationally
transferable (or non-
location bound) FSAs
Non-transferable (or
location-bound) FSAs
host country
Internationally
transferable (or non-
location bound) FSAs
Location advantages
host country
Internationalborder
Host Country
Figure 1.3 Centralized exporter
Home Country
The arrow cutting through dotted
areas represents the direct link
between home country NLB
FSAs, and the host country’s
LAs (i.e. the foreign market),
without development of new, LB
FSAs in the host country, or
formal transfer of existing NLBFSAs to the host country (the
NLB FSAs are embodied in the
centralized exporter’s products).
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Four MNE archetypes:
2. International projector
! Knowledge-based FSAs developed in the home countryare transferred to subsidiaries in host countries. The
international projector MNE seeks international
expansion by projecting its home country success
recipes abroad.! Case examples: Ford, Disney.
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Location advantages
home country
Non-transferable (or
location-bound) FSAs
home country
Internationally
transferable (or non-
location bound) FSAs
Non-transferable (or
location-bound) FSAs
host country
Internationally
transferable (or non-
location bound) FSAs
Location advantages
host country
International
border Home Country
Figure 1.4 International projector
Host Country
The dotted area of LB FSAs in
the middle of the host country
triangle reflects the international
projector’s lack of development
of LB FSAs in the host country,
where operations simply clone
those prevailing in the home
country. Extant NLB FSAs
suffice to access and benefit
from host country LAs.
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Four MNE Archetypes:
3. International coordinator
! International operations are specialized in specific valueadded activities and form vertical value chains across
borders. The MNE’s key FSAs are in efficiently linking
these geographically dispersed operations through
seamless logistics.! Case example: BP.
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Figure 1.5 International coordinator
Host
Country B
Home
Country
International
border
Host
Country A
Host
Country C
The different sizes of the shaded
areas in the various host countries
reflect the different types and levels
of home country NLB FSAs to be
transferred to different host
environments in function of the LAs
the firm wishes to access. The circle
linking the various countries reflects
the international coordinator’sstrengths in putting together a value
chain based upon access to the
coveted LAs of each country where
the firm operates.
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Four MNE archetypes:
4. Multi-centred MNE
! The multi-centred MNE consists of a set ofentrepreneurial subsidiaries abroad which are key to
knowledge-based FSA development. National
responsiveness is the foundation of the international
strategy. The non-location-bound FSAs that hold thesefirms together are minimal: common financialgovernance and the identity and specific business
interests of the founders or main owners.
! Case examples: Philips, Lafarge.
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Figure 1.6 Multi-centered MNE
Home
Country
Stand-alone
FSAs
Routines
Re-combination
capabilities
International
border
Host
Country B
Host
Country A
Host
Country C
The multi-centered MNE
transfers only key routines
from the home country to host
countries. The large, shaded
middle areas in the host
countries represent the
necessity to build new, LB
FSAs in each host country. The
double-headed arrows reflect
the close alignment the host
country operations must
develop between their own LB
FSAs and the host’s LAs.
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MNE strategy in practice
! Most large, established MNEs with sophisticatedinternational operations do not simply conform to a
single archetype, even if in-depth knowledge on their
foundation and early history will typically allow
positioning them as one of the four archetypes.! As firms grow internationally, several patterns of FSA
development and transfer can typically be identified in
single firms, see Figure 1.7.
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Generic FSA-type
Internationally transferable
(Non location-bound) FSAsGeographic
source
Home country
operation
Host country
operation
Network
Non-transferable (location-bound) FSAs
Internationally transferable (Non
location-bound) FSAs
Explicit headquarters’ control
Reflects FSA upgrading from LB to NLB
Reflects NLB FSA transfer
Reflects corporate headquarters’ control
Key:
II
III
IV
V
VI
VII
VIII
IX
X
I
Figure 1.7 Ten patterns of FSA development in MNEs
Non-transferable
(location-bound) FSAs
+
+
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Complementary resources of
external actors
! Needed from external actors (technology providers,licensees, local distributors, joint venture partners, etc.)
to be successful abroad.
! Reason: cultural, economic, institutional and spatial
‘distance’ (meaning: missing success ingredients).! Conditions: (1) attempts at internal development
would lead to lower NPV or are not feasible; (2) external
actors are able and willing to provide the resources.
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Bounded rationality
Scarcity of mind : managers responsible for makingdecisions and engaging in purposive action in the firm
always face information problems:
! One source is poor access to information sufficient in
quality and quantity.! Another source is the limited mental capability to
process complex information bundles.
! Example of Xerox and Fuji-Xerox .
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Bounded reliability
Scarcity of effort to make good on open-ended promises
! One source is opportunism (ex-ante false promises;
ex-post reneging on promises).
! A second source is benevolent preference reversal
(e.g., good faith local prioritization: distance in timefrom punishment; distance in space from the
headquarters’ monitoring apparatus; proximity to - and
intrinsic satisfaction from - focusing on local opportunitieswith immediate local rewards. Scaling back on
overcommitment ).
! Need for safeguards.
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Bounded rationality versus
bounded reliability
! Bounded rationality is about the imperfectassessment of a present or future state of affairs,
thereby leading to incorrect beliefs; bounded reliability is
about imperfect effort towards pre-specified goal
achievement, thereby leading to incomplete fulfilment ofpromises.
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Key questions in international
business strategy (2/2)
! Do we have the required resource recombinationcapability in-house?
! What are the costs and benefits of using
complementary resources of external actors to fill
resource gaps?! What are the main bounded rationality and bounded
reliability problems we will face when extending the
geographic scope of our firm’s activities, given thechanged boundaries of the firm, the changed linkages
with outside stakeholders and the changes in our internalfunctioning?
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Chapter Two: The Critical Role of
Firm-Specific Advantages (FSAs)
C.K. Prahalad and G. Hamel,
'The Core Competence of the Corporation',
Harvard Business Review 68 (1990), 79-91
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Five learning objectives
1. To describe the four characteristics of corecompetencies, which are higher-order FSAs.
2. To explain the importance of the firm’s ‘strategic
architecture’ in the context of core competencies.
3. To develop an understanding of influence of an
industry’s national environment on competitivepositioning strategies and firm-level core competencies.
4. To identify the bounded rationality problemsassociated with an MNE expanding internationally and
trying to transfer its FSAs across borders.
5. Based on the conceptual framework in Chapter 1, to
analyze the managerial implications of an ill-
conceived sole focus on core competences.38
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Focus on higher-order FSAs
! Firm is a portfolio of ‘core competencies’ : higher-orderFSAs, i.e., the firm’s routines and recombination
capabilities.
! A core competence ultimately takes the form of: shared
knowledge, organized into routines, ànd the ability tointegrate multiple technologies, reflecting the
recombination of internal resources.
! Routines/recombination abilities are at least parly'carried' by key employees (so-called competence
carriers) that can be deployed across business units.
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Characteristics of a
core competence
! Difficult for competitors to imitate (internal coordinationand learning).
! Provides potential access to wide variety of markets.
! Makes a significant contribution to perceived customer
benefits from the end products.
! We add a fourth characteristic: the loss of a core
competence would have an important negative effect onthe firm’s present and future performance, in terms of
value creation and satisfying stakeholder objectives.
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Organizational implications
!
Senior management should not just make strategic plans
with growth and profitability targets for the firm’s product
lines and SBUs, but it should also develop a ‘strategicarchitecture’ (road map) to guide the corporation in
building and acquiring core competencies.
!
Necessary to overcome the challenge of decentralized
SBUs acting in their own self-interest.
! Senior management should reallocate competence
carriers, with deep knowledge of routines and
instrumental to resource recombination across functionaland business units so as to yield the highest return forthe firm as a whole .
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Dangers of outsourcing
! The company must have a clear understanding of theFSAs it is trying to build through the outsourcing
partnership, and those it is seeking to protect from being
transferred to potential competitors.
! Outsourcing of e.g., key components in manufacturing,
as a shortcut to increase short-term profitability , may
lead to the loss of FSAs.
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Context – First complementary
perspective (1/2)
! William G. Egelhoff (SMR ): contrasts mainstreamJapanese and US approaches to strategy
(semiconductor firms).
! US firms: short-term profitability considerations lead to
frequent repositioning of products, the rapid move tolicensing standardized products, and exit from niches
with strong price competition.
! Japanese firms: focus on improving process technologyfor standard products and have a long-term perspective.
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Context – First complementary
perspective (2/2)
! US-approach effective in industries with fundamentaltechnological change and related commercial
breakthroughs: not fine-tuning strategy implementation
counts (as in Japanese firms), but the correct
anticipation of future dominant industry standards,and rapid profit building by attracting buyers tocustomized niches.
! Different industries require different FSA types
! Implication: Japanese firms may be better equipped to
adopt a core competence approach.
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Context – Second
complementary perspective (1/3)
Andrew Bartmess and Keith Cerny (CMR):
! Often two wrong assumptions when attempting to
access host country location advantages in
manufacturing.
! The validity of the two assumptions should be checked
when thinking about exploiting core competences
abroad:
1. Manufacturing knowledge is a stand-alone FSA.
2. This FSA can be effortlessly recombined with foreign
location advantages.
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Context – Second
complementary perspective (2/3)
Reality:
1. Knowledge in a single functional area (R&D or
marketing) is not a core competence: this involves
combining stand-alone knowledge bundles found in
different functions into routines. Thus: co-location isimportant.
2. There are complexities involved in successfully
exploiting and further augmenting FSAs abroad(importance of managing the required linkages).
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Five criteria to assess the need for co-locating activitiesinstrumental to further recombination:
1. Complexity of information to be transferred.
2. Required level of interaction: higher uncertainty and
need for two-way information flows (mutualadjustment).
3. Similarity of background and expertise of peopleinvolved at home and abroad.
4. Prior relationships affecting communication on
sensitive issues.
5. Concreteness of information (emotions, feelings,cultural values embedded?).
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Context – Second
complementary perspective (3/3)
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Management Insights
! Prahalad and Hamel: Limited to Pattern I in Figure 1.7
! Focus on bounded innovation and emprisoned
resources in SBUs.
! Essence of Prahalad and Hamel’s view: Figure 2.1.
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Generic FSA-type
Internationally transferable
(Non location-bound) FSAsGeographic
source
Home country
operation
Host country
operation
Network
Non-transferable (location-bound) FSAs
Internationally transferable (Non
location-bound) FSAs
Explicit headquarters’ control
Reflects FSA upgrading from LB to NLB
Reflects NLB FSA transfer
Reflects corporate headquarters’ control
Key:
II
III
IV
V
VI
VII
VIII
IX
X
I
Figure 1.7 Ten patterns of FSA development in MNEs
Non-transferable
(location-bound) FSAs
+
+
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Figure 2.1. Non-location bound (or internationally
transferable) FSAs as drivers of economies of
scope across markets and products
International
border
Home
CountryHost
Country B
Host
Country C
HostCountry A
The shading of the NLB FSA
area in the home country and the
dotted outline of the rest of the
home country triangle indicate
the emphasis on NLB FSAs and
the assumed irrelevance of home
country LAs and LB FSAs in this
model. The dotted middle section
of the triangle in each host
country reflects the lack of
emphasis on the development of
LB FSAs by host country
operations. Extant NLB FSAs
suffice to access and benefit from
host country Las.
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Five main weaknesses
1) Location advantages? FSA-transfer costs Location- bound FSAs? A strategic architecture alone will not
lead to successful exploitation of core competences
abroad.
2) Geographical embeddedness of competencecarriers? Co-location matters here too.
3) Naïve view of corporate headquarters versus SBU
relationships (idem versus subsidiaries). In practice,FSA transfer is very difficult (cf. concept of subsidiary-
specific advantage in Chapter 1).
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Five main weaknesses
4) Naïve preference for hierarchical control andcentralized decision-making. In practice,
multidivisional governance economizes on bounded
rationality and bounded reliability.
5) Neglect to distinguish between the back end andcustomer end of the value chain. Especially the
latter needs adaptation in function of location; if not
core competences will become core rigidities.
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Five management takeaways
1. Identify and nurture your company’s corecompetencies, and differentiate their treatment from
that given to less critical FSAs.
2. Develop a ‘strategic architecture’ to guide yourcompany in building and acquiring core competencies.
3. Understand the economic potential and drawbacks of
acquiring FSAs through external strategic alliances.
4. Do not overestimate the transferability of your FSAsacross borders, and understand the costs of
successful resource recombination.5. Reflect on co-location requirements when expanding
internationally and investing abroad.53
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Chapter Three:The Nature of Home Country
Location Advantages
Michael E. Porter
‘The competitive advantage of nations’,
Harvard Business Review 68 (1990), 73-93
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Five learning objectives
1.
To describe the relationship between a firm’s strengthsrelative to international rivals and the competitiveness of
its home country .
2.
To explain ‘Porter’s diamond’ and the interaction among
the four diamond attributes.
3. To develop an understanding of the different
international expansion trajectories of newly
established firms.
4.
To identify the role of ‘diamond connectors’ in the
context of location advantages held by different countries.
5.
To discuss the managerial relevance of a ‘national
diamond-based’ analysis on the competitive advantage
of nations. 55
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Porter
s diamond
! Any company’s ability to compete internationally isbased on location advantages in its home country.
! Pressure in the home base pushes innovation and
upgrading, resulting in FSA creation.
! It is the interaction among four sets of parameters that
counts.
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Porter
s diamond
! Factor conditions: focus on created factor conditions(skilled labour, scientific knowledge and infrastructure)
that are specialized.
! Demand conditions: size and sophistication of
domestic demand.! Related and supporting industries (world class
suppliers).
! Firm strategy, industry structure, and rivalry : highlycompetitive domestic industry helps international
competitiveness.
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Porter
s diamond
! Home country diamond cannot be identified for anational or regional economy as a whole, but only for
specific industries.
! Industry-specific pressures lead to innovation and
productivity improvements.! Findings resulted from four-year study over 100
industry groups in ten nations (Denmark, Germany,
Italy, Japan, Korea, Singapore, Sweden, Switzerland,the United Kingdom and the United States).
! Empirical work was aimed mainly at validating , not
testing, the diamond framework.
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Context – First complementary
perspective!
Walter Kuemmerle (SMR): entrepreneur ’s‘path to
global expansion’.
! Early internationalization usually entails low-cost, low-
risk experiments in neighbouring countries, whereby thefirm’s mix of internationally transferable knowledge and
location-bound knowledge requires only incrementalchange.
! Two patterns of more aggressive internationalexpansion: exploitation of substantial cross-border
opportunities in output markets and tapping into foreign
input markets for resources such as (venture) capital.! More to competitive success than domestic diamond
conditions, even at the early stages of firm growth.59
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Context – Second
complementary perspective (1/3)
! David Teece (CMR): inward FDI in Silicon Valley .Porter-type, single diamond thinking breaks down
when foreign investors provide resources, instrumental
to domestic, firm-level sustainability and expansion.
! Foreign MNE activity through inward FDI acts as a
bridge between the location advantages of two different
nations.
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Context – Second
complementary perspective (2/3)
! Japanese investors bring FSAs derived from theJapanese diamond : ‘patient capital, engineering talent,
manufacturing excellence, and access to the Japanese
market’
! Japanese companies benefit from unique access to US
entrepreneurial capabilities, early-stage technology
developments in innovation-driven sectors, and a more
general window on new trends
! Japanese companies can take risks unacceptable in
Japan and gain privileged access to US distributionchannels
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Context – Second
complementary perspective (3/3)
! Effective melding of location advantages of US andJapanese diamonds through Japanese FDI in Silicon
Valley is not easy: long-term efforts required to
develop personal relationships between Japanese
and US actors as diamond connectors.
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Management Insights
! Porter has a narrow view on FSA creation: homecountry national diamond attributes determine a firm’s
innovation capabilities and related productivity
improvements.
! The MNE is either a centralized exporter or an
international projector .
! Porter implicitly rejects the relevance of a multi-centred
MNE or an international coordinator.
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64
LAs LAs LB FSAs Non-LB FSAsStrong domestic
diamond
Home
country
Host
country
A
B
C
D
LAs LAs LB FSAs
Weak
domestic
diamond A
B
C
D
A. Factor conditions
B. Related and supporting industries
C. Demand conditions
D. Firm strategy, industry structure, and rivalry
Figure 3.1 Domestic “diamond” determinants as drivers of
home-base location advantages, and subsequent FSAs
Where the domestic diamond
is strong (pictured here as a
large diamond), this model
predicts the creation of NLB
FSAs will be stimulated,
while this will not occur
where the diamond is weak
(pictured here as a small
diamond).
LAs LB FSAs
Figure 3 2 Porter’s analysis of FSA development in MNEs
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Generic FSA-type
Internationally transferable
(Non location-bound) FSAsGeographic
source
Home country
operation
Host country
operation
Network
Key:
II
Figure 3.2 Porter s analysis of FSA development in MNEs
Non-transferable
(location-bound) FSAs
Non-transferable (location-bound) FSAs
Internationally transferable (Non
location-bound) FSAs
Reflects FSA upgrading from LB to NLB
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Five main weaknesses
1. EU and NAFTA cases suggest a double diamond (ormultiple diamond): important to the FSA development
process.
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Figure 3.3 Porter’s single diamond model
and the double diamond model
Canada
Internationalborder
USA
NAFTA
LAs
Canada
The single diamond
The double diamond
LAsCanada
LAs
USA
LAsUSA
With the single diamond model, the home country LAs determine whatever FSAs a company may
develop. With the double diamond model, firms also draw on LAs of other nations than the home
country to strengthen their own FSAs. Trade and investment liberalization (as with NAFTA)
institutionalizes this possibility of freely accessing and drawing upon the resources present in a host
country diamond to strengthen FSAs. This is why the trapezoids representing Canadian and US
location advantages are shown as being similar in size, though NAFTA obviously does not eliminate
completely country borders.
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Five main weaknesses
2. Inward FDI as a force for upgrading a local economyis neglected.
Porter neglects a country’s location advantages being
instrumental to inward FDI (rather than only outward
FDI).
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Five main weaknesses
3. Porter ignores the need for location-bound FSAs inhost countries.
Assumes that FSA development depends initially on
domestic market factors, but can then be decoupled
from the home location, Pattern II in Figure 1.7.
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Five main weaknesses
4. Porter ’s framework is tautological:
! Selective factor disadvantages may actually drive
domestic innovation and upgrading.
! Ex post , success follows from strong home country
determinants, unless some of these determinantshappen to be weak , in which case they are interpreted
as selective factor disadvantages that have pushed
domestic firms to overcome this weakness throughinnovation.
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Five main weaknesses
5. Porter places too much emphasis on the country as theappropriate geographic level of analysis.
Wrong assumption that an MNE has unconstrained
access to location advantages in the home country
diamond and also host country diamonds are largelyoff-limits.
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Competitive performance
Local
State/provincial
NationalForeign
Global
Factor conditions Demand conditions
Related and supporting
industries
Firm strategy, industry
structure, and rivalry
Local
State/provincial
National
Foreign
Global
Local
State/provincial
NationalForeign
Global
Local
State/provincial
National
ForeignGlobal
Figure 3.4 A multi-level analysis of
the diamond determinants
Strengths
Weaknesses
Opportunities
Threats
Strengths
Weaknesses
OpportunitiesThreats
Strengths
Weaknesses
Opportunities
Threats
Strengths
Weaknesses
OpportunitiesThreats
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Five management takeaways
1. Apply the ‘diamond’ framework to evaluate the sectoralstrengths and weaknesses of your domestic industry.
2. Reflect on the relevance of national diamond
characteristics to explain the short- and long-term
competitiveness of your own firm.3. Define industry-specific pressures that can
strengthen your FSAs through absorbing – or building
upon – the complementary resources present in yourindustry environment.
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Five management takeaways
4. Analyze the economic potential of foreign diamonds,i.e., foreign input markets for providing resources to
your firm, and foreign output markets for absorbing its
end products.
5. Assess the suitability of the diamond framework foranalyzing your industry and adjust/add determinants
and sub-factors according to your firm-specific needs.
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Chapter Four: The Problem withHost Country Location
Advantages
Pankaj Ghemawat,‘Distance still matters: The hard reality of
global expansion’
Harvard Business Review 79 (2001), 147
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Distance components
! Cultural distance
! Administrative (or institutional) distance
! Geographic (or spatial) distance
! Economic distance
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Case study:
Tricon (now YUM! brands)
! When the four dimensions of distance are factored-into complement traditional country portfolio analysis, a
revised and more accurate picture of the
opportunities and risks becomes clear.
! Countries with lower distance vis-à-vis the United
States, such as Mexico and Canada become top
choices. Those that are seemingly attractive in terms of
market size and growth, including Japan and Germany,
become less so.
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Context - First complementary
perspective (1/2)
Vestering, Rouse and Reinert (SMR):
! Focus is on the benefits of accessing multiple, highdistance input markets. Ghemawat focused on the
risks of too many high distance output markets.! Large MNEs should compose a portfolio of offshoring
countries based upon a particular bundle of locationadvantages offered by each country.
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Context – First complementary
perspective (2/2)
! FSA in offshoring : strategic offshoring decisions are notleft to individual business units, but are taken centrally,
to create cost advantages by “pooling resources, jointly
developing new suppliers or expanding economies of
scale in low-cost countries”.
! Substantial investments in location-bound FSAs,including local logistics, engineering and manufacturing
capabilities, prior to actual local production.
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Context – Second
complementary perspective
! Schmitt and Pan (CMR) focus on cultural distance when
penetrating high distance Asian markets.
! Attention to selecting the right corporate and product brand
names e.g., realizing that characters are meaningfullinguistic units in Asian languages.
!
Much attention should be devoted to creating the right
corporate image. More important than the image for an
individual product.
! Quality perceptions are important and comparative
advertising is inappropriate.
!
Much sophistication is required of the Western
companies’ recombination capability to overcome
distance. 81
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Management Insights
! Ghemawat clarifies that the international exploitationpotential of FSAs depends upon the type and level of
distance among countries.
! Because of bounded rationality , managers often
overestimate the international profit potential of theircompanies’ FSAs, and underestimate the efforts
required to penetrate international markets.
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LAs LB FSAs Non-LB FSAs
Domestic base “Distance” to foreign markets
Non-LB FSAs
Non-LB
FSAs
Non-LBFSAs
Figure 4.1 The MNE’s diminishing stock of internationally
transferable FSAs as a function of “Distance”
Greater “distance” leads to
weaker transferability and
exploitation potential of
NLB FSAs, as indicated by
the smaller NLB FSA
triangles.
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Domestic base “Distance” to foreign markets
Figure 4.2 The need for LB FSAs as a function of “Distance”
LB FSAs
LB FSAs
LB FSAs
LAs LB FSAs Non-LB FSAs
Greater “distance” leads
to higher investment
requirements in LB
FSAs, as indicated by
the larger size of the LB
FSA trapezoids
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Generic FSA-type
Internationally transferable
(Non location-bound) FSAsGeographic
source
Home country
operation
Host countryoperation
Network
Key:
III
Figure 4.3 Ghemawat’s perspective of
FSA development in MNEs
Non-transferable
(location-bound) FSAs
Non-transferable (location-bound) FSAs
Internationally transferable (Non
location-bound) FSAs
Reflects NLB FSA transfer
+
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Five limitations
1. Macro-level distance may be an important explanationfor lack of success in a foreign market, but only reflects
a macro-level reality .
Investments required to develop location-bound FSAs in
a foreign market will be different for each company (e.g.,US-based company with senior managers from Taiwan
expanding to Taiwan).
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Five limitations
2. Higher distance does not necessarily mean reducinggeographic scope:
! Design elements can foster a stronger recombination
capability, e.g., higher functional diversity of senior
management.! MNE should build into its human resources base and
key decision making routines a deep knowledge on
foreign markets.
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Five limitations
3. The impact of macro-level distance may be verydifferent in the various value chain activities, especially
input versus output markets, e.g., Levi Strauss.
Ghemawat’s analysis is appropriate for centralized
exporters and international projectors, but less so forinternational coordinators.
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Five limitations
4. With strategic asset seeking investment , a highdistance location, though creating high costs for the
firm, may also be instrumental to learning
opportunities unavailable in low distance locations.
Managerial prescription of reduced geographicscope is not equally valid for all foreign entry
motivations.
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Five limitations
5. Ghemawat’s model does not address cooperativeagreements to address the distance challenge.
Complementary resources may reduce distance.
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Five management takeaways
1. Pay attention to the four key dimensions of‘distance’ when evaluating the attractiveness of
foreign markets.
2. Analyze your company’s position in the realm of cost
leadership and thereby your potential (or need) todevelop an FSA in offshoring .
3. Consider the right corporate and product brand
names, the right image and the creation of the rightperception of quality when launching branded
consumer goods in high-distance markets.
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Five management takeaways
4. Reflect on the transferability, deployability and profitable exploitation of your FSAs across borders,
as well as on the need to create new FSAs, and on the
possibilities of resource recombination. Do not
overestimate the profit potential abroad of FSAs that
worked well at home.
5. Before making a final decision about entry in potential
host markets, do assess several firm- and host country-
specific characteristics, which amount to ‘distance’:evaluate whether strong but hypothetical profit
potential in foreign markets can actually be
achieved in practice, given the presence of distance.92
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Chapter Five: Combining Firm-Specific Advantages and Location Advantages
in a Multinational Network
C.A. Bartlett and S. Ghoshal
‘Tap your subsidiaries for global reach’
Harvard Business Review 64 (1986), 87-94.
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Five learning objectives
1. To describe the challenges of centralizing strategicdecision making and control in MNEs, and to highlight the
possible ineffectiveness thereof.
2. To develop a framework for classifying subsidiaries as
a function of the location advantages they can access and
the unique bundles of FSAs they command in specific
value chain activities.
3. To foster reflection on the ‘procedural justice’ concept
and its impact on organizational effectiveness.
4. To outline the strengths and weaknesses of prevailing,
Japanese MNE subsidiary management .
5.
To highlight the managerial implications of assigning
differentiated roles to MNE subsidiaries. 94
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Roles of subsidiaries
! Two common, wrong assumptions made by senior MNEmanagement:
1) United Nations model of multinational management:
treat each subsidiary in a similar manner.
Implies either subsidiary independence (multi-centered MNEs) or complete dependence (global exporters or
international projectors).
2) Headquarters hierarchy syndrome: corporateheadquarters rule (only valid in case of complete
dependence of subsidiaries).
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Dysfunctional effects on the MNE
! First assumption: important markets and subsidiaries
are treated in the same way as unimportant ones, and
therefore the opportunities they provide are not
optimally exploited.! Second assumption: subsidiaries with a distinct,
specialized resource base are unable to escape from an
implementer role, and loose their entrepreneurialmotivation.
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Solution 1
! An organizational model of differentiated rather thanhomogenous subsidiary roles and of dispersed rather
than concentrated responsibilities.
! Examples: EMI, P&G.
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Solution 2
! Simple normative model as a response to differentiatedsubsidiary role requirement:
1) Assess each market according to its strategic
importance.
2) Rate each subsidiary ’
s resource base in terms ofsales and marketing achievements, production
capabilities, research and development, or any other
strength contributing to competitiveness.
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Strategic
importance of
the local market
Resource base of
the subsidiary
Figure 5.1 A classification of subsidiary roles in the MNE
Low High
1High
Low 2
3
4
Context First complementary
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Context – First complementary
perspective (1/3)
! W. Chan Kim and Renée Mauborgne (SMR): MNEcorporate headquarters, faced with the need to make
difficult, centralized strategic management decisions,
often in the resource allocation sphere, frequently
demotivate subsidiary managers rather than bringing
out the best in them.
! Subsidiary managers attach substantial importance to
due process, i.e., to the way strategic decisions are
made, irrespective of the outcome.
100
Context First complementary
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Context – First complementary
perspective (2/3)
Five simple principles of procedural justice:
1. Corporate headquarters’
familiarity with the localsituation at the subsidiary level
2. Effective two-way communication between corporateheadquarters and subsidiaries
3. Consistency in decision-making across subsidiaries
4. Possibility for subsidiary managers to challenge the
dominant perspective at corporate headquarters
5. Transparent explanation of final decisions made by
corporate headquarters101
Context – First complementary
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Context – First complementary
perspective (3/3)
Rationale for procedural justice:
1. Due process is as an attempt to reduce boundedrationality.
2. The outcome of due process is a reduction ofbounded reliability problems.
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103
! Commitment
! Trust
! Compulsory
execution
Subsidiary facing
unfavorable resource
allocation decisions
Subsidiary benefiting
from favorable resource
allocation decisions
Procedural
justiceLow High
Low
High
Figure 5.2 The impact of procedural justice
Context – Second
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Context – Second
complementary perspective (1/3)
! Anant Neghandi, Golpira Eshghi and Edith Yuen(CMR): Japanese MNEs face serious problems in
subsidiary management.
104
Context – Second
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Context – Second
complementary perspective (2/3)
Five main problems:
1. Japanese MNEs adopt a centralized, autocratic
approach vis-à-vis their foreign subsidiaries.
2. Japanese MNEs have little confidence in
subordinate, non-Japanese managers.3. Relationships of trust are confined to a few key
managers.
4. Japanese staffing policies are ethnocentric.
5. Japanese MNEs discriminate against women and
minorities.
105
Context – Second
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Context Second
complementary perspective (3/3)
Conclusions:
1. Strong FSAs in technology, production and government
relations do not necessarily imply the MNE has strong
capabilities to manage a foreign subsidiary network.
2. United Nations approach and headquarters-hierarchysyndrome prevent many Japanese MNEs from
developing strategic leader subsidiaries.
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Management Insights
Bartlett and Ghoshal suggest that firms need to movebeyond the conventional global exporter, international
projector and multi-centred MNE models (they neglect
the existence of the international coordinator model).
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LAs LB FSAs Non-LB FSAs
Domestic base Foreign markets
Figure 5.3 MNE resource base – subsidiariesas driving factor
Strategic leader
Contributor
Implementer
Black hole
Each type of subsidiary builds upon a
different configuration and level of
LAs, LB FSAs and NLB FSAs, as
reflected by the different sizes of the
segments in each triangle. The double-
headed arrows reflect cases where the
flow of NLB FSAs is two-way. Here,
subsidiaries can play a key role in
driving international FSA transfers
(which could also occur between
subsidiaries).
Figure 5.4 Bartlett and Ghoshal’s perspective on FSA development in MNEs
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Generic FSA-type
Internationally transferable
(Non location-bound) FSAsGeographic
source
Home country
operation
Host country
operation
Network
Non-transferable (location-bound) FSAs
Internationally transferable (Non
location-bound) FSAs
Explicit headquarters’ control
Reflects NLB FSA transfer
Reflects corporate headquarters’ control
Key:
III
IV
VI
I
Non-transferable
(location-bound) FSAs
+
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Management Insights
Limitations
1. After subsidiary roles have been allocated ,
valuable subsidiary initiatives often arise in spite
of narrow charter.
Key challenge is not to classify subsidiaries in fourcategories, but to craft routines allowing valuable
initiatives to arise bottom-up and to provide support
for such initiatives.
In other words: the key challenge is to identify what
constitutes valuable knowledge?
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Management Insights
Best practices increase the likelihood that subsidiaryinitiatives will come to fruition:
a. Giving seed money to new initiatives.
b. Formally requesting proposals.
c. Using subsidiaries as incubators, avoiding. harassmentby the corporate immune system
d. Creating internal subsidiary networks.
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Management Insights
2) The importance of host country environments as inputmarkets and output markets are wrongly equated;
article’s focus is almost solely on output markets:
! For access to foreign input markets, the MNE must relyon subsidiary capabilities at the upstream end
(technology, sourcing).
! Many subsidiary roles are defined primarily by the
input market , not the output market in foreign nations,and by upstream FSAs, rather than downstream ones.
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Strategic
importance of the
local market as
market for inputs
Upstream subsidiary
competencies
Figure 5.5 Unbundling subsidiary roles in Bartlett and Ghoshal (1986)
Low High
1High
Low 2
3
4
Figure 5.5 A
Strategic
importance of the
local market as
market for outputs
Downstream subsidiary
competencies
Low High
1High
Low 2
3
4
Figure 5.5 B
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Management Insights
3) Bartlett and Ghoshal do not address fully subsidiaryrole dynamics, especially after regional integration
schemes:
a) Increase in overlap among markets as a result ofregional integration.
b) Increased internal competition among subsidiaries in
cases of strong regional market unification and
capability commodification.
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115
Regional
unification of
national
environments as a
market for inputs
Commodification of upstream
subsidiary competencies
Figure 5.6 The impact of regional integration on subsidiary dynamics
Low High
1High
Low 2
3
4
Figure 5.6 A
Low High
1High
Low 2
3
4
Figure 5.6 B
Commodification of downstream
subsidiary competencies
Regional
unification of
national
environments as a
market for outputs
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Locally managedBusinesses
Regionally managed
BusinessesGlobally managed
Businesses
Global Business Executive Officer
Market HeadZone Business Head/
Regional Business Head
Market
BusinessHead
Regional
BusinessHead
Global
BusinessHead
Product Unit
Manager
Country
BusinessManager
Business
ExecutiveManager
Division
Manager
Country
Manager Country Business Manager
Zone Executive Officer
Market Regional Business Market
Regional
Business
GlobalBusiness
Country
BusinessMarket Business Country
Country
Business
Figure 5.7 New organizational structure at Nestle proposed in 2004
Source: Nestle company website
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Five management takeaways
1. Assess the current organizational structure and decision-
making processes in your firm and reflect on the differentroles performed by your subsidiaries.
2. Classify your portfolio of subsidiaries as a function of thestrategic importance of each market where they operate and
the resource base they command.3. Respect the five components of due process in each
corporate head office decision that will affect subsidiaries.
4. Review the main problems faced by many Japanese
MNEs and learn from their mistakes.
5. Analyze best practices (inside your firm and industry) forFSA development in subsidiaries and reflect on the keydrivers of subsidiary roles and dynamics.
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TABLE OF CONTENTS 1
! Introduction and overview of the book’s framework
! Part one. Core concepts
1. Conceptual foundations of international business
strategy
2. The critical role of firm-specific advantages
3. The nature of home country location advantages
4. The problem with host country location advantages
5. Combining firm-specific advantages and location
advantages in an MNE network
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TABLE OF CONTENTS (2)
! Part two. Functional issues
6. International innovation
7. International sourcing and production
8. International finance9. International marketing
10. Managing managers in the multinational enterprise
119
TABLE OF CONTENTS (3)
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TABLE OF CONTENTS (3)
! Part three. Dynamics of global strategy
11. Entry mode dynamics 1: foreign distributors
12. Entry mode dynamics 2: strategic alliancepartners
13. Entry mode dynamics 3: mergers and acquisitions
14. The role of emerging economies15. Emerging economy MNEs (EMNEs)
16a. International strategies of corporate socialresponsibility
16b. International strategies of environmental
sustainability
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Chapter Six:International Innovation
Walter Kuemmerle
‘Building effective R&D capabilitiesabroad ’
Harvard Business Review 75 (1997), 61-70
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Five learning objectives
1.
To explain R&D decentralization and describe the
difference between home-base-exploiting and home- base-augmenting innovation sites.
2. To highlight the key stages in the development of foreignR&D units.
3.
To explain subsidiary initiatives in the innovation sphereand the functioning of the ‘corporate immune system’,
geared towards destroying such initiatives.
4. To foster understanding on how to access another firm’s
knowledge base and create upstream FSAs.
5.
To examine the potential conflicts between host countryresearch sites and the corporate office.
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Significance (1)
! Many MNEs are moving from centralizing R&D in the homecountry towards building international networks where
foreign R&D laboratories fulfill specific roles.
! Two main reasons:
- Need for presence in knowledge and innovation clusters
(input side), and
- Commercial requirement of moving quickly from
innovation to market (output side) so that MNEs must
integrate R&D facilities more closely with host country
manufacturing.
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Significance (2)
Kuemmerle observed the internationalization of the R&Dfunction:
! Two distinct types of R&D facilities: home-base exploiting
sites and home-base augmenting sites.
! Home-base exploiting sites “supporting manufacturing
facilities in foreign countries or to adapt standard products tothe demand there”, with “information flows to the foreign
laboratory from the central lab at home”.
!
Home-base augmenting sites have information flows “from
the foreign laboratory to the central lab at home”.
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Significance (3)
! Home-base exploiting labs: close to key markets and
MNE ’s foreign manufacturing units.
! Initial leadership in the hands of “highly regarded managers
from within the company intimately familiar with thecompany’s culture and systems to forge close ties between
the new lab’s engineers and the foreign community’smanufacturing and marketing facilities”.
! Bounded rationality problem reduced by these labs:lowering of distance between home-country R&D and
host-country manufacturing.
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Significance (4)
! Home-base augmenting operations in critical knowledge
clusters to tap into new sources of innovations.
! Initial senior managers “should be prominent local
scientists… to nurture ties between the new site and thelocal scientific community”.
! Main bounded rationality problem is the subsidiary cannot
access knowledge in foreign locations without becoming
an insider.
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Significance (5)
! Ideal profile of foreign R&D unit leaders, instrumental toknowledge recombination:
Four qualities:
(1) respected scientists or engineers and skilled managers;
(2) able to integrate the new site into the company’sexisting R&D network ;
(3) comprehensive understanding of technology trends;
(4) able to overcome formal barriers when seeking
access to new ideas in local universities and scientific
communities.
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Significance (6)
! Example of Xerox ’ home-base-augmenting site inGrenoble, France.
! Xerox hired a renowned French scientist instrumental to
recombining the firm’s existing FSAs with complementary
resources in the French environment.
! New staff visited other company R&D centers in order to
expedite the lab’s integration (transfer of NLB FSAs)
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Significance (7)
! Example of Eli Lilly ’s home-base exploiting lab in Kobe,Japan.
! Senior research manager with extensive knowledge of both
production and marketing activities was selected as leader.
! Existing R&D scientists were assigned to the new location and
new staff visited the other labs (resource recombination)
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Significance (8)
! Example of Matsushita: international R&D knowledgenetwork consisting of both knowledge exploiting and
augmenting labs.
! Units communicate directly with each other: facilitates andincreases knowledge transfer and resource recombination.
! R&D managers meet on a regular basis: international
transfer of non-location-bound FSAs in multiple directions.
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Context – First complementary
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perspective (1/5)
! The combination of international transferability of FSAs and
international access to resources with the need to have
value added operations physically embedded in specific
locations to reap the full benefits of clusters is the sticky places in slippery space’ – paradox.
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Context – First complementary
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perspective (2/5)
! Julian Birkinshaw and Nick Fry (SMR): focus on the driversof new development in large, established MNEs.
! Entrepreneurial managers in MNEs assume extended roles,
inconsistent with their unit’s formal charter.
! Subsidiary initiatives: “the proactive and deliberate pursuit
of a new business opportunity by a subsidiary company,undertaken with a view to expand the subsidiary’s scope of
responsibility, in a manner consistent with the MNCs strategic
goals”.
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Context – First complementary
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perspective (3/5)
! Distinction between ‘internal ’ and external ’ subsidiaryinitiatives.
! Internal initiatives: attempts by subsidiary managers to
become the chosen location for new corporate R&D
investments.
! External initiatives: foreign subsidiary managers
autonomously identify an opportunity in their business
environment and act on it.
After some initial positive results, subsidiary managers may go
to corporate headquarters with a strong case for funding and
for the de facto upgrading of their original corporatecharter.
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Context – First complementary
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perspective (4/5)
! Internal and external initiatives are attempts to earn home- base augmenting innovation charters.
! Senior management at corporate headquarters may provide
seed funds; invite initiatives through formal calls for proposals; allow initiatives to flourish in sheltered
circumstances; stimulate internal, social networking.
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Context – First complementary
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perspective (5/5)
! Key problem: ‘corporate immune system’.
! Supposed to protect the MNE’s dominant logic but becomes
an instrument of powerful stakeholders.
! Great challenge for MNEs to create an environment
empowering subsidiaries while maintaining an appropriate
level of initiative scrutiny.
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Context – Second
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complementary perspective (1/3)
! Andrew Inkpen (CMR): demonstrates that distant
knowledge can sometimes be accessed in the home-base itself.
! General Motors (GM), learned about the Toyota ProductionSystem (TPS), especially its ‘lean manufacturing’ principles
through NUMMI. ! GM did not set up a home-base augmenting or exploiting
R&D site in Japan.
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Context – Second
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complementary perspective (2/3)
! GM needed to overcome several bounded rationality challenges: the routines that drove the TPS system had a
large, tacit component leading to causal ambiguity and
substantial resistance inside GM.
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Context – Second
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complementary perspective (3/3)
! Learning system adopted by GM included:
- Study teams at NUMMI learning a specific task and paying
attention to implementation and follow-up;
-
Experimental learning at NUMMI itself;
- Documentation (codification) of TPS knowledge;
- Preparation of staff at NUMMI to re-enter GM;
-
Extensive tours of the NUMMI plant for GM employees;
- Formal training programs and promoting ‘NUMMI-alumni’ to
senior positions at GM.
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Figure 6.1 Home-base exploiting and augmenting foreign R&D units
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Old model
1
2
New model
International
border
Internationalborder
International
border
Home-base exploiting
foreign R&D units
Home-base
augmenting foreign
R&D units
LB FSAs in R&D
1
1
3
4
1. NLB FSAs related to R&D,
transferred from home to host
countries.
2. Internal links between host country
R&D and local manufacturing.
3. External links between host
country R&D and local output market.
4. Reverse transfer of new, NLB
FSAs related to R&D, from host
country operation to home.
M t I i ht (1)
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Management Insights (1)
! Traditional approach of R&D activities centralized in the
home-base reflects pattern I.
! Home-base augmenting: analogous to pattern VI
! R&D sites classified as home-base exploiting are more
representative of pattern III.
! Various host labs working directly together reflects pattern
VIII and pattern IX.
140
Generic FSA-type
Figure 6.2 Patterns of FSA development in home-base
exploiting and augmenting research centers in MNEs
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141
Internationally transferable
(Non location-bound) FSAsGeographic
source
Home country
operation
Host country
operation
Network
III
VI
VIII
IX
I
Non-transferable
(location-bound) FSAs
Non-transferable (location-bound) FSAs
Internationally transferable (Non
location-bound) FSAs
Explicit headquarters’ control
Reflects NLB FSA transfer
Reflects corporate headquarters’ control
Key:
+
+
M t I i ht (2)
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Management Insights (2)
Two main limitations:1. Senior managers in the central lab face the challenge of
determining whether subsidiary initiatives in the R&Dsphere are compatible with overall corporate strategy.
2. Omits any discussion of the role of joint ventures and
strategic alliances:
! Especially for home-base augmenting R&D labs, MNE may be
unable to access autonomously host country location
advantages.
! Acquisitions could also eliminate the opportunity for
learning if the complementary specialization and resource
bundles of the firms acquired are destroyed.
.142
Five management takeaways
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g y
1. Analyze your firm’s portfolio of international R&D
facilities, and categorize these according to their home-base-exploiting versus home-base-augmenting status.
2. Assess whether your knowledge-generating activities arelocated in the best possible knowledge clusters with
optimal access to specialized resources.
3.
When exploring the drivers of innovation inside the firm,examine the potential of subsidiary initiatives.
4. Reflect on the potential to partner in alliances, so as to
absorb new knowledge in your industry.
5. Align R&D initiatives in host country labs with overall
corporate goals and consider alternative paths to accessnew knowledge (e.g., acquisitions).
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Chapter Seven: InternationalSourcing and Production
Kasra Ferdows,
‘Making the most of foreign factories’,Harvard Business Review 75 (1997), 73-88
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Si ifi (1)
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Significance (1)
! Focus on key issues of location advantages, transferability of
home country FSAs & build-up of host country LB FSAs.
! Most successful manufacturing MNEs view their foreign
factories as sources of FSAs beyond the ability to savecosts .
! “How can a factory located outside of a company’s home
country be used as a competitive weapon not only in the
market that it directly serves but also in every market served
by the company?”
! Foreign factory senior managers’ attitude is critical.
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Si ifi (2)
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Significance (2)
Changes in the international business environment drivingassignment of new foreign factory roles:
1. International trade tariffs declined substantially in the
second half of the 20th century, so foreign factories can be
more than branch plants.
2. Modern manufacturing increasingly technologicallysophisticated , so that location in sophisticated knowledge
clusters makes sense.
3. Shortened product life-cycles, requiring close linkages
between knowledge development and production.
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Significance (3)
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Significance (3)
Possible roles of foreign manufacturing facilities result from:
! Host country location advantages the MNE wants to
access.
!
Level of distinct FSAs held by the plant.
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Figure 7.1 Six roles of foreign manufacturing plants
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149
Level of distinct FSAs
held by the plant
Strategic
purpose of
the plant
Access to
knowledge and
skills
Proximity to
market
Access to lowcost production
Weak Strong
Offshore
Server
Outpost
Source
Contributor
Leader
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Si ifi (5)
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Significance (5)
3. Outpost factory : gathers valuable information from
advanced, host country clusters, mainly on input side;
manufacturing combined with offshore/server factory role.
4. Source factory : accesses low-cost input production factors;receives resources; engages in resource recombination;
develops FSAs to build ‘best practice’ plant in MNE’s
network; more autonomy; in locations with good infrastructure
and skilled workforce; may be a strategic leader at input side;
narrow charter.
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Si ifi (7)
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Significance (7)
! Upgrading process for foreign plants is critical.
! End result : ‘robust network ’ of factories with FSA-
developing roles, able to adapt swiftly to changes in the
marketplace.
! In sharp contrast with the popular view that many MNEs
operate a footloose set of plants.
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Significance (8)
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Significance (8)
Common obstacles to upgrading of foreign factories:
! Fear of relying on foreign operations for critical skills.
! Treating overseas factories like cash cows andneglecting long-term investment.
! Creating instability by shifting production in reaction to
fluctuating exchange rates and costs.
! Responding to government relocation incentives tomove factories to new locations that possess minimal
potential for upgrading .
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Context – First complementary
perspective (1/2)
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perspective (1/2)
MacCormack, Newman & Rosenfield (SMR) “The NewDynamics of Global Manufacturing Site Location”
! Senior managers under bounded rationality constraints,
often favour easily quantifiable variables to assesslocations, neglecting critical, longer run elements such as
local workforce knowledge and skills.! Regionalization trend : MNEs seek manufacturing presence
in each region to mitigate political and economic risks typically faced by international exporters.
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Context – First complementary
perspective (2/2)
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perspective (2/2)
! Emerging manufacturing technologies (FMS, JIT, TQM) place
heavy burden on host country workforce, which is viewedas an important location advantage.
! MNE’s recombination capabilities are crucial to access,
exploit and augment skilled human resources in sites selected
for manufacturing operations.
156
Context – Second
complementary perspective (1/2)
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complementary perspective (1/2)
J.Galbraith (CMR) “Transferring core manufacturingtechnologies in high-technology firms”.
! Observed firms locked into a situation of ‘ profitless
prosperity ’ (e.g., scale advantages linked to price wars).
! Solution: move towards system of flexible, smaller
manufacturing plants that can easily adapt to changes, atdemand and supply sides.
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Context – Second
complementary perspective (2/2)
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complementary perspective (2/2)
! Problem: conventional manufacturing technology transfers
entail substantial resource costs (pre-transfer planning/
engineering, post-transfer management/control), as well as
productivity and know-how losses (start-up phase).
! Initial productivity losses averaged 34% and several months to
attain pre-transfer levels.! Bounded rationality problem: more pre-transfer training did not
reduce productivity losses.
! Bounded reliability problem: donor facility personnel refused to
provide long-term support to the recipient facility.
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Figure 7.1 Six roles of foreign manufacturing plants
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161
Level of distinct FSAs
held by the plant
Strategic
purpose ofthe plant
Access to
knowledge and
skills
Proximity to
market
Access to lowcost production
Weak Strong
Offshore
Server
Outpost
Source
Contributor
Leader
Generic FSA-type
Internationally transferable
(Non location-bound) FSAs
Figure 7.2 Ferdows’ analysis of FSA development in MNEs
Non-transferable
(location-bound) FSAs
8/1