Lecture 1:

Strategy: is an integrated and coordinated set of commitments and actions, designed to exploit core competencies (roots of organization, things that your firms do better than everybody else), to gain a competitive advantage (same things as competitors, but than in an better way than your competitors, consumers are willing to pay a higher price or producers can produce at lower costs)

Strategic management: is the ongoing process that evaluates the company, its competitors and set goals and strategies to meet all existing and potential competitors and then reassesses these to determine whether is has succeeded or needs replacement by new strategy.

International strategic management: is a management planning process aimed at developing strategies to allow an organization to expand abroad and compete internationally.

But why bother expanding internationally? And why do we need to manage that process?

1. Domestic configuration: we operate in one country, source in one country and supply in one country. Example: growing wheat, processing wheat to brew beer and then sell beer all in the same country

• How is value generated: labour+ capital is product. Consumers prefer beer to the money and (consumer surplus) consumers pay more than the cost of production (producer surplus)
• What is the role for the international manger: nothing, because everything is made in the same country
• What is the problem with a domestic configuration: small market, limited growth potential and high market dependence.

2. Export configuration: differentials in price (willing to pay more) and/or demand (they are able to consume more of the product) create opportunities abroad.

• How is value generated: if the differential in price and demand are high enough and the costs of supply (transportation costs) are low enough, profit can be created
• What is the role of the international business manager: defining market attractiveness. Selecting export markets, what makes and attractive export market. Is it the size or the once who consume most of the product or even historical trend
• What is the problem with an export configuration: transport costs create an inefficiency

3. The multinational configuration: replicating the firms operations, avoid transportation costs. Replicate operation in different countries

• How is value generated: transportation costs are minimized, foreign consumers pay foreign prices for domestic goods
• What is the role for the international business manager: in addition to choosing markets, the manger must consider: organizing subsidiary: what to set up, where and with who? And managing international staff: who to hire or to send abroad
• What is the problem with the multinational configuration: duplication of functions and inefficient use of resources

4. The global configuration: firms split their supply chains across countries to maximize profits at each stage, to exploit regional differentials in cost, supply and demand.

• How is value generated: functions which are unprofitable in one country are moved to locations in which they are profitable. Value maximized across the entire supply chain
• What is the role for the international business manager: in addition to the tasks in the previous models, the manager must: assign functions to countries, circulate managers and staff between functions, ensure communication between functions
• What is the problem with the global configuration: nothing, it’s the most efficient model we know. Global businesses have been made possible by globalization, however and that may make it vulnerable.

Globalization is the process of international integration arising from the interchange of world views , products, ideas and other aspects of culture. Globalization comes from:

1. Political factors: Free trade (WTO), deregulation (EU, NAFTA), foreign investment (FDI) and free-market economic school (free-trade creates the most gains). Several parties have argued for this
2. Technological factors: a reduction in travel costs, increase in communications, economies of scale. From inventions to commercialization
3. Social factors: linguistic standards, advertising and tastes, cultural convergence à people everywhere want the same things
4. Competitive factors: pushed to compete and lower costs

Clearly internationalizing provide the firm with significant advantages:

1. Costs benefits: lower production costs, lower transportation costs
2. Revenue benefits: bigger markets with more consumers
3. Learning benefits: learn form international failures, learn from the host country
4. Arbitrage benefits: find expensive resources cheaper

And it all goes well right? Nope

• Straddler et al (2015) looked at 20,000 firms in 30 countries and compared performance of those that stayed home with those who internationalized
•  Overall looking at performance, domestic expansion is more profitable for the average firm

Critical things we need to be aware of (IMPORTANT):

1. Liability of foreignness: the set of costs based on a particular company’s unfamiliarity with and lack of roots in a local environment (a stranger in a strange land). So why select for example an Indonesian firm instead of a Dutch. It could be that you do not have the same success, you will incur more costs in the foreign market. Question for you: how large is the liability for your firm and is internationalization then still worth your while
2. Localization advantage: localization advantages are the advantages that come when the firm chooses to focus on serving one (local) market, rather than all (global) markets. These advantages come from:

• Cultural factors: tastes, attitudes, behaviour and social norms
• Commercial factors: distribution, customization and responsiveness
• Technical factors: standards, spatial presence, transportation and language
• Legal factors: regulations and national security issues

In a market with location advantages internationalization implies

• Loss of flexibility
• Loss of proximity
• Loss of quick response abilities

In other words: in every industry there is one force pushing us to globalize and another pushing us to localize: which force dominates in your industry?

3. Creation of disadvantages: threat of discrimination
4. Location-bound advantages: not all firms can internationalize. To understand why, we must:

•  Identify the firms competitive advantage
• Determine if it is location-bound (can you move it to another country?). Only non-location bound advantages can be transferred across borders!

Competitive advantages are location bound if they:

• Use immobile resources
• Are based on things like local market reputation or knowledge

Non-location bound competitive advantages are a necessary but not a sufficient condition for international success

In all setting concerning an international expansion your first question should always be irrespective of the topic:

• What are the firms advantages
• Are the firms advantages location bound

If the firm does not have location bound advantages and it cannot create them, then it should reconsider internationalization

Lecture 2:

Firms internationalize because of location advantage according to Dunner and Porter

Location advantages: the advantages conferred upon the firm form its presence at a specific (geographic) location. Two types:

1. Home country location advantages (Porter) à these are the advantages that a firm has by virtue of the fact that it is founded in one country and not another. Example: dutch water management. According to Porter, firms internationalize to take advantage of home country location advantages. Home country location advantages lead to porter’s diamond model:

2. Host country location advantages (Dunning) à these are the advantages from operating in the host country. Firms internationalize because they want to take advantage of host-country advantages Dunning classified host country location advantages in terms of motive underlying the decision to invest in them:

• Market seeking: the search for new customers and new markets
• Resource seeking: search for resources, such as physical or human resources, in the host country
• Strategic resource seeking: search for advanced resources, such as up- or down-stream knowledge or reputational resources
• Efficiency seeking: search for efficiency, from technology or regulation

Now we know why we might internationalize. Entry modes  describe the way in which we internationalize:

1. The Uppsala model: entry is a process. Based on the observation by Swedish researchers of the internationalization process of Swedish companies. Observed that:

• First gained experience of their domestic markets
• Began to operate abroad in a nearby market, an then slowly penetrated far away markets
• Chose to enter markets through export, instead of using sales or manufacturing subsidiaries of their own
• Only after several years of doing so the company established wholly owned or majority-owned operations

How does the domestic firm become a fully multinational firm:

Domestic firmà closer distance à few resource commitment (e.g. hiring a distributor à more resource commitment (hiring a full staff) à fully multinational firm. After this worked you can go to more further distance companies (often countries that are geographically close)

Distance can mean two things in the model:

• Physical distance:
• Psychic distance: cultural distance

Companies go to markets they can most easily understand/low market uncertainty.

The model suggest increasing commitment. However, the level of commitment may also decrease – or cease – if performance and prospect are not sufficiently met. Uppsala thus includes some safe-guards:

• It allows us to avoid large scale investment losses
• It allows us to test one market at a time

Who uses the Uppsala model: For example Netflix

2. The born global concept: originated with McKinsey in 1993. Due to increased information, firms can directly enter even very distant markets almost immediately, without having to build a domestic base. It is easy to find, information, contacts, globalization and knowledge. Research shows that born global firms can and do this, but non-born Global’s cannot successfully internationalise in the same way. Instead research suggest that that born globals are a specific type of firm. They share similar set of feature regarding

• they tend to be born in small markets
• they tend to supply niche markets, which forces them to internationalise to achieve scale, or to operate in products and services that have significant first mover advantages
• they tend to have multinational customers, and often internationalise simply to follow their customers (piggy-backing)
• achieve 25% revenue internationally in 5 years

Who follows the born global model: for example Spotify

Both are used and both are therefore still relevant

But, lets go back a step:

Before describing how to enter a market, we need to choose a market. To do so, we need to access the target countries attractiveness

The idea of country attractiveness:

A number of organisations prepare and sell country risk reports. The leading commercial publishers of country risk analysis includes several organizations that found these things out for you. The international business literature offers a number of tools to help mangers come to their own description of the levels of risk in a country. We present two:

1. A generic country attractiveness framework: which identifies risks and opportunities at the country, market and industry levels
2. The cage model: which focuses on distance as the main source of risk

Country attractiveness (frameworks to help chose between countries):

1. Country risk analysis

• Political risks à assets destruction (invest in company and assets destroyed in the process) and asset spoliation (assets be taken by the government) therefore political risk insurance
• Economic risk à economic growth, (hyper) inflation, input costs and exchange risks (big mac index, which currencies are overvalued and which are undervalued)
• Operational risk à employee risks (kidnappings and sexual harassment) and operational risks (labour unrest, racketeering, corruption, infrastructure, financial restrictions, taxes and charges and discrimination)
• Cultural risk à Hofstede’s dimensions: power distance, individualism, masculinity, uncertainty avoidance, long term orientation, indulgence

So there is no place like home. The way it is organized in your country, does not have to be the way in all countries

2. Market opportunities

• Market size: how big is the market, how many people are going to consume your product
• Market growth: size doesn’t matter. At least the size of the market doesn’t matter if we’re making long term investments. Then, the forecast matters more. Middle class effect: A 20% rise in the average GDP per capita, so 60% rise of the middle class. (e.g. in China between 2005-2015, about 60% entered the middle class)
• Market quality: generic segmentation: high end (differentiated product, functionality and performance, less price-sensitive), low end (undifferentiated products, mass production and distribution and price-sensitive). In developed more high end and low end in undeveloped countries. Can also look at profitability of both countries.

Point: to understand that your market might be not so attractive there

3. Industry opportunities

• Industry competitive structure: porter’s five forces model can be used to discuss the quality of the competitive climate. He considers: New entrants, supplier bargaining power, customers bargaining power, substitutes, intensity of competitive rivalry
• Resource endowments: resources that attract foreign investors

1. Natural resources
2. Human resources
3. Infrastructure and support industries

• Investment incentives granted by government: governments have designed and implemented a series of incentives to attract foreign investors

1. Fiscal
2. Financial
3. Competitive (e.g. monopoly)
4. Operational (e.g. make roads for you)

Point: understand that your industry might be radically different

All for an systematic way of evaluating a countries attractiveness à country a is more attractive than b

Why is it called generic: the analysis must be tailored to the needs of the firm (e.g. market size and quality isn’t relevant to a firm that is outsourcing)

The cage model: firms developed countries have less difficulty entering other developed countries than they do in emerging markets. Firms from emerging markets are better than firms from developed countries at internationalising à emerging countries are more similar to each other than they are to developed countries and visa versa. What matters is the degree of similarity/distance. Closer countries are more attractive)

Cage model:

• Cultural distance
• Administrative and political distance
• Geographic distance
• Economic/wealth distance

Lecture 3:

Division of labour: specialisation and trade with others= superior gains. However, this requires coordination. Two coordination mechanisms: Markets (external) and organisation (internal)

Transaction cost economics is dedicated to answering the question of where a transaction should take place: internally or externally. Transactions are for example, hiring a cleaner, lawyer etc. transaction costs are the costs of making an economic trade. 3 categories:

1. Search and information costs
2. Bargaining costs
3. Policing and enforcement costs

Whether a particular transaction is allocated to the market, or the job is done internally by the organisation, it is a matter of cost minimisation. (internal vs external).  Firms exist because in some cases the cost of internalisation must be lower than the costs of market transactions. So what is a firm? à a bundle of contracts. These points change over time (at which point it is more profitable to do it external)

Transaction cost economics thus suggest:

• Activities are internalised when the (transaction) costs of internalisation are lower than the costs of outsourcing
• Activities are out-sourced when the (transaction) costs of out-sourcing are lower than the costs of internalising

We must complicate the story by asking:

1. Where do transaction costs come from:

• Bounded rationality: the capacity of human beings to formulate and solve complex problems is limited, our decisions are bounded. Chess is solvable, but simply to complex. Therefore the choices we make can be rational, but sub-optimal. Solving for (choosing) the best for example beer in AH possible. So we can choose beer rationality. E.g. try and rank all them. But what kind of choices can we not make in a fully rational sense à complex ones (e.g. best book in the world). Same applies for example for hiring the best cleaner. And efforts to overcome this constitute are labelled as transaction costs. Therefore the more complex the transaction, the higher the costs
• Bounded reliability: human beings are self-interested. Faced with the decision to enrich oneself, or to enrich another, a rational individual will choose to enrich himself. Opportunistic behaviour will damage your reputation (and increase transaction costs). If I know that you’ll always try to cheat me, to maximise your profits, then I will think and talk badly about you. This risk is present in all reputation. Reputation only matters when there is a lot of competition. A monopolist does not care what you think of him. Thus, while opportunistic behaviour is present in all relationships, the threat increases as the number of trading partners decreases
• Both together general transaction costs

2. And are they constant in all deals: No, bounded rationality varies in the level of complexity and the effect of bounded reliability varies in the numbers. For a particular transaction, the level of additional transaction costs incurred depends on 3 critical factors:

• Assets specificity: supported by transaction-specific assets. An asset is transaction-specific if it cannot be redeployed to alternative use, without a significant reduction in value. E.g. low for computers and high for newspaper printing press.  High-asset-specificity implies fewer potential suppliers, which implies higher rental costs. High assets-specificity implies that the transaction should be done internally
• Uncertainty/complexity: we already saw that bounded rationality is a problem only for transaction with a high degree of uncertainty (buying a house from blue-prints is uncertain and complex. With certainty we know to outcome. With more uncertainty, the outcome is less clear. High uncertainty/complexity implies higher contracting costs. Such transactions are cheaper done internally
• Frequency: it may be cheaper to buy a printing press than to rent one, but not if you’re only printing something once a year. High frequency of use implies that costs can be spread, high frequency transactions are cheaper done internally
• All together particular transactions costs (including small numbers and complexity

And the decision to internalise (build, develop, buy) or externalise (rent, outsource) depends whether these costs or lower in the firm or on the market

When moving to the market we introduce the agent. The agent is someone your hire/rent to do a job for you.

Agency theory was introduced, to describe the problem that arises when the managers and shareholders have different goals. Agency theory and the separation of ownership and control, suggests that such situations lead to the creation of costs or agency losses

The principal-agent problem arise:

1. The principal pays the performing certain acta that are useful to the principal and costly to the agent. This means that the principle and the agent have different objectives: the agent wants it done and the principal wants it done right
2. There are elements of performance that are difficult or costly for the principal to observe. This means that the principle cannot distinguish between good and bad agents, or between done and done right.

The difference between done and done right may relate to:

• Effort invested: the manager shirks or put in less effort than promised
• Time horizon: the manager prefers short term to long-term project
• Risk: the manager, who is more dependent on the firm for an income, prefers less risk than well-diversified shareholders
• Asset use: the manager expropriate assets, which could otherwise be used to create shareholder value

The agency costs bourn by the principal is the sum of:

1. Costs of setting up the relationship (the bonding costs)
2. The difference between what the agent did and what the principle would have done (the residual costs)
3. The costs incurred by the principle to mitigate the loss caused by the agent (the monitoring costs)

Agency costs increase in any contract with:

1. Information asymmetry: some party has more of better information than the other

• Adverse selection: the type of agent impacts the principal
• Moral hazard: the agents action affects the principal

2. Uncertainty: neither party can know everything, the weather tomorrow is uncertain. More outcomes = more uncertainty = higher potential for agency

Solution:

• Fully specify all contracts: remove any and all risks, reduce uncertainty as far as possible and eliminate all information asymmetries
• Monitor all agents of the firm: trust no one and ensure that everyone always is acting in the wider interests of the principal and not in his own

At a certain point, the marginal costs will be outweighed by the marginal benefits. The preferred solution therefore is to take all reasonable precautions, while recognizing that agency implies cost

The issue:

To enter a new market, the firm needs information on local regulations, business practices and culture. It needs both physical and human resources and needs access to its customers. How should the firm access its resources

How can we enter a foreign market: (from up (decreasing levels of commitment and outsourcing to the market) to down (increasing levels of commitment and integrating within the organisation)). Choice of entry depends on transaction costs)

• Franchise/licencing agreement (outsourcing)
• Foreign distributor (outsourcing)
• Strategic alliances (co-developing)
• Joint venture (co-developing)
• Mergers and acquisitions (buying)
• Greenfield investment (buying)

The foreign distributor:

• Local distributors have this knowledge
• By contracting a local distributor, the firm can rent these resources at a lower cost than it could build or acquire/buy them in the host country

The big idea:

• We contract with an independent FD to minimize its up-front risks:  he can provide us with local market and potential major customers at a lower cost
• For firms the FD is a low-risk, low investment beachhead strategy
• If everything goes to plan, the long term strategy of the firm may be to eventually take direct control of the operation and to squeeze the FD out
• The beachhead strategy place the responsibility to succeed on the FDs shoulders. From its experience, the firm decides whether to invest or not to invest
• We give him more control of the strategic and marketing decision and hope for the best

Reality:

• The FD had a short-term perspective: he knows if he is successful, the firm will enter and replace hum, so he underinvests
• The firm does not invest in the FD, and does not give him the resources to match their goals, because views the FD as a replaceable outsider
• Therefore there is a vicious circle: the lack of long-term commitment, reduces the abilities and efforts made by the FD, which in turn reduces the probability that the entry will succeed

Solution:

• Recognize that the phases are predictable and to align the firms and the FD’s interests

Strategic alliances:

The issue:

• How do you scale-up from a foreign distributor, while keeping the benefits without having to buy or build another position in the foreign market

What is it:

• Strategic alliances are formal agreements between otherwise independent firms, who pool resources, to achieve a mutually agreed goal

The big idea: allows firms to

• Share risks and share costs
• Access the partner complimentary resources
• Further develop capabilities
• Access scare resources (such as human talent)

The problem:

• When working with an (actual or potential rival) how can the firm:
• Gain in the same way it did with an FD
• Learn as much new knowledge as possible, while
• Sharing as little as possible with its rival

Reality:

• About 50% of alliances fail and typically end with winners and losers. Three risks to be aware of
• Outsourcing capabilities
• Learning races
• Reverse entry

Solution:

• Recognize the threat
• To protect the firm the alliance should:
• Limit its scope to a well-defined learning area
• Have the alliance in physically different location of firm’s
• To protect the alliance, participant should create alliance specific advantages which cannot be captured fully by any individual firm. They are only transferable to other locations not to other economic agents.

Merger and acquisitions à in acquisition a larger acquirer buys and integrates a smaller target a merger means that two relatively equal sized firms join together to create a new firm. Effect is the same: two become one, with aligned interests (free from agency) and a combined set of shared resources:

The issue:

• Once firms have decided to cooperate, they can choose to form a strategic alliance, or they can choose to acquire the firm and its resources directly
• Strategic alliances are preferred when:

1. Each firm only needs a subset of the resources/FSAs held by the partner
2. With an acquisition, it would be difficult to dispose of the prospective partners unusable, firm-specific resources

• M&A preferred when:

3. The firm wants full and direct control of the foreign market
4. The potential to create new FSA is thought to be too high risk an alliance partner form learning them
5. The net costs associated with an acquisition are lower than the costs of FDs and SAs

The problem:

• The costs of integrating the target are often underestimated:

1. Financial costs: costs of buying and acquiring costs of making it effective
2. Managerial costs: costs of negotiating, managing, corporate and ethnic cultures
3. Business costs: costs of delays, disruptions and loss of talent

• The expected benefits from the deal are often over-estimated:

1. Synergies fail to materialise
2. Cost-cutting advantages lower than expected
3. Revenue growth difficult
4. Delays, disruption and reduced efficiency costs the firm

• Results of bounded rationality
• Bounded reliability can also be a problem. A number of managerial theories suggest value-destruction:

1. Hubris theory à managers overestimate their own abilities
2. Empire building theory à manager will prefer new subsidiary in other country
3. Entrenchment theory à M&A to protect my job and myself

Solution:

• We do not know

Lecture 4:

Benefits of crossing borders to achieve economies of scale and ultimately and ability to out-compete local competitors:

1. Costs benefits: arising from the economies of scale
2. Revenue benefits: arising from access to a bigger market
3. Learning benefits: arising from the coordinated transfer of knowledge
4. Arbitrage benefits: arising by transferring resources to one country from another

Advantages of staying local:

1. Flexibility: understanding the customer leads to greater customisation
2. Proximity: by being closer to the market, the firm can anticipate demand
3. Quick response time: by being close the firm can better supply the market

Two opposing forces: one pushing the firm to globalise and one pushing the firm to localise

Tow things we need to know:

1. Not all industries have the same mix of pressures: some more pressures for global integration:

• Economies of scale: few locations, centralisation
• Convergent consumer trends: global products
• Uniform services: central services are easier to standardise
• Global sourcing or raw material, components, energy and labour
• Global competition: global perspective is necessary to monitor
• Availability of media that reaches customers in multiple markets

more pressure for local responsiveness:

• Diversity of local needs: local adaption
• Differences in distribution channels: Japan vs Europe
• Local competition: greater pressure to compete locally
• Cultural differences: local level adaption and marketing
• Host government requirements and regulations

Three types of competitive situations in terms of industries and industry segments:

• Global forces: global forces dominate. Few advantages for local adaption and responsiveness like cars and microchips. No customisation necessary
• Local forces: local forces dominate, few advantages to globalisation and standardisation, like food which is highly customised and depended on the country and region it is supplied to
• Mix of global and local: mix of forces. Pressure to globalise and standardize: telecommunications are tailored to markets, both female and male voices as standard

2. Different pressure lead to different strategies and organisational forms

1. Global strategy:

• Strategy: internationalise for efficiency, consistency, standardisation and cost competitiveness
• Value: created by converting location economies into global price competitiveness
• Organizational form: centralised
• Think: intel: one product, global manufacturing

2. International strategy:

• Strategy: export parent company’s knowledge and capabilities to capitalise on foreign market opportunities
• Value: created by exporting advantages
• Organisational form: centralised
• Think: Starbucks, little localisation, same everywhere and little globalisation, few economies of scale

3. Transnational strategy

• Strategy: internationalise to exploit location economies, to leverage core competencies and respond locally
• Value: created by exploiting location economies to create global products which can customising locally
• Organisational form: centralised, coordinating local units
• Think: pharmaceuticals

4. Multi-domestic strategy:

• Strategy: internationalise into markets where the firms products can be locally customised
• Value: created by giving local mangers the authority to respond locally to unique cultures etc.
• Organisational form: decentralised, self-sufficient units
• Think McDonalds: standardised but localised

The theory of integration-responsiveness is a tool for understanding what organisational form, at the industry level, is the best, given the relative importance of the globalisation and the localisation force

The implications seems to be:
there is an optimal way to organise the firm, given the forces that dominate the industry. In other words, in any given industry, with the resultant pressures, the firms should structure themselves the same way (don’t fall into the decentralization trap)

Centralisation and decentralisation describe the organisation of the firm in terms of where the decision making occurs. How are firms organised (are national)

1. Partnerships: economies of scale in information gathering and risk-pooling. Difficult to obtain through the market transaction. So worker to worker
2. Peer group: a group of equals can cooperate and function without a hierarchy. As size increase, hierarchy is necessary to reduce shrinking (free-riding). As a student and without a boss, it is easier to manage a group of 2 student team members than a group of 10. So you have more workers
3. Simple hierarchy: reduces communication and decision making process and with a division of labour leads to efficiency. So you have one boss and more workers
4. U-form firm: efficient for employees to specialise. This leads to the formation of functional departments, with managers also specialising. So you have 1 CEO and several departments with workers
5. M-form firm: more products lines/business units. Decrease control and increases the risk of agency. The solution is to create a multi-divisional (M-form). So organise in product units

All can be internationalised. But as soon as we internationalise these structures, we talk about headquarters and subsidiaries and headquarter subsidiary relations

So how should we manage our subsidiaries:

1. Global functional model:

• Worldwide centralisation at the functional level so e.g. global R&D, Marketing etc
• All strategic decision are made at the HQ level
• Country subsidiaries are local legal entities: the heads of the country subsidiaries have responsibility only to make country-specific alterations
• PROS:

1. Strategic coherence
2. Optimisation
3. Specialisation
4. Economies of scale
5. Rapid transfer of knowledge

• CONS:

1. Inflexibility
2. Local dysfunctionality
3. Market rejection
4. Bureaucracy
5. Discourage initiative

2. The geographic model:

• Worldwide decentralisation of decision making so e.g. European manager and African manager
• Strategic decisions are made at the regional level
• Country managers develop strategies and adapt or select products which fit with their local markets
• PROS:

1. Flexibility
2. Local specificity
3. Tailor made service

• CONS:

1. Duplication
2. Fewer economies of scale
3. Less transfer of knowledge
4. When customers globalise- the firm loses its advantage

3. The single matrix model:

• Here equal power is given to both function and geography: European manager and global R&D manager
• The aim here is to encourage global thinking and local action by institutionalising the tensions that arise from the two competitive forces
• PROS:

1. Internalises the pressures for global efficiency, leverage and local responsiveness

• CONS:

1. Role ambiguity
2. Dilution of responsibility
3. Cost inefficiencies
4. Turf battles
5. Costs of compromise

4. The multi-business global product division model:

• Product mangers are given full strategic and operational responsibility for their products lines across territories, e.g. global pens manager and global sticky tape manager
• Division act independently, do not interact with other division in the same country. Within each of these division the manager chooses, functional, geographic or single matrix model. Therefore each manager could have a different model

5. The multi-business geographic model

• Country manager act autonomously and are given full strategic and operational responsibility for all product lines in their territory. E.G. European manager and African manager
• Regions act independently, managers in one region do not interact with those in another. Within each of these regions the manager chooses, functional, geographic or single matrix model. Therefore each manager could have a different model

6. The multi-business matrix model

• Shared power: function, region, products. E.G. European manager and chemicals manager and R&D manager

In each models, we identify a number of managerial roles;

1. Global business managers acting as products strategists
2. Country managers acting as sensors of local opportunities and threats
3. Functional managers acting as specialists, transferring best practice
4. Corporate managers acting as overall organisational leaders

Management specialisation means that efficiencies can be maximised at the functional, geographic or corporate level

But additional management levels come at a costs:

Agency costs are the losses that are made when the agent (manager) fails to act fully in the interest of the principle (owner) increase in:

• Information asymmetry
• Uncertainty

As the number of managerial levels increase, so do the levels of agency costs, associated with managerial decision making

Corporate governance refers to the collection of mechanisms, processes and relations used to control and to operate a firm. It specifies the distributions of rights and responsibilities to the firm’s participants and spells out the rules of the game. It describes the company objectives, the means of attaining those objectives and the ways the performance will be monitored. Roots VOC;

• Were international traders
• Global reach
• Mega firm
• Genocidal
• First finance basis, then became a public company
• Dividends in nutmeg and pepper (shareholders were pissed)
• Managers were paying themselves too much and were giving contracts to friends
• Isaac Le Maire said VOC was destroying shareholder value à company needed to do what shareholders wanted:

1. An overview of investment decisions
2. The right to appoint managers
3. Time limits or managerial positions
4. The right to adjust the managers pay
5. Limit the possibility of insider trading

How can managers act in the owners interest:

1. Incentive alignment à carrots

• Cash bonuses: managers receive a cash bonus if and when they achieve specified goals
• Share plans: managerial interest are aligned with a financial stake in the firm
• Stock options: managers are given the right to buy shares at a specified moment in the future for a fixed price. The value of the right increases with the performance of the firm
• Temporary contracts:  managerial employment contracts are for a fixed time, and for a limited duration, and are renewable only if the required performance is attained

2. Monitoring à sticks

• Internal

1. Monitoring by shareholders: this can be effective in cases with few shareholder, or large shareholding. But its effectiveness can be undermined by the free-riding problem
2. Monitoring by non-executive directors: in most countries, board are composed of inside directors (full-time managers) and outside directors (managers from other firms)
3. The two-tier board system: most common in Europe. Large companies are control by two board: the executive board is the firms top management team and supervisory board is populated with external members

• External:

1. Monitoring by auditing firms: auditors are appointed by the shareholders and without their approval of the firm’s position, management can have its access to capital blocked
2. Monitoring by stock analysts: stock analysts monitor performance, in an attempt to predict future behaviour. Their opinions effect share price and if share price drops, then shareholders will ask questions, reducing the information asymmetry
3. Monitoring by debt providers: firms with large cash reserves are free to make their own decisions. Taking on debt will introduce new parties to the agreement and these will attach debt covenants when making loans to the firm

• Competition based monitoring:

1. Competition in the product market: to compete effectively, the firm needs to position itself effectively and resources should be mobilised to win in each product market
2. Competition in managerial labour market: competition between managers will ensure that managers work to keep their positions
3. Competition in the stock market: through the market investors can put pressure on firms to operate efficiently and to maximise the value of the firm
4. Competition in the market for corporate control: shareholders can choose their management teams. New management teams will present themselves to firm doing less well than the average.

Lecture 5:

When the firm can create more value than its rivals and when this firm’s rivals cannot replicate the source of value that the firm creates. It allows you to increase prices or something that allows me to decrease my costs:

How does a firm create competitive advantage:

• Industry based view: Porter drew on insight from economist in industrial organizations, who points to the importance of industry when explaining firm performance: they described them in terms of market structures, barriers to entry. He applied this to the firm. This view suggest that the firm must position itself against five external, environmental forces. Competitive advantage comes from the firm’s ability to structure itself to face this. Porter describes 5 forces:

1. The threat of entry: what is the threat that new entrants appear in the market? Start-ups are one threat, diversifications are another
2. The threat of rivalry: how competitive is the industry? How intensive is the competition in our industry? Are we a monopolist or one of many? Are there exit barriers?
3. The threat of substitutes: can competitors substitute our products? How is the substitute prices? Is that what I am doing unique?
4. The threat of powerful suppliers and buyers (5): where is the power, are there few suppliers or many? Are there few customers or many? Can either integrate?

• Resource based view: focusses on the internal resources of the organization in considering the source of competitive advantage. RBV suggest that it is unique clusters of resources that determine profitability. Performance differences are explained by looking inside the organization.
• What are resources: factors that are owned or controlled by the firm. Inputs that allow the firm to carry out its activities. Firm-specific assets, such as patents, trademarks, brand-name and reputation, culture and specific knowledge. And they add a lot of value Resources can be:

1. Tangible: the physical assets that an organization possess
2. Intangible: intellectual and technological resources

• Resources are what the firm has (firm-specific but tradable). Capabilities are a special type of resource, an organizationally embedded non-transferable firm-specific resource whose purpose is to improve the productivity of the other resources possessed by the firm. What the firm can do with what it has. Capabilities have several characteristics:

1. They are valuable across multiple markets
2. They are embedded in organizational routines of the firm, this is how we do it
3. They are tacit: cannot be written down

• How can resources be used to create a competitive advantage: sustained competitive advantage of a competitive advantage. Sustained competitive advantage is determined by internal resources that are (VRIN framework):

1. Valuable àmust generate value for the firm
2. Rare à ideally, unique if it is to generate value
3. Inimitable à cannot be copies
4. Non-substitutable (à resources that ere very hard to neutralise with other resources to meet the same ends) à cannot be substituted
5. Organisational support is sometimes used for non-substitutable

Contrasting resource-based view with:

1. Industry based view: competitive advantage is based upon the way in which the firms structures itself or on the unique resources that the firm possesses.
2. Transaction cost economics: the firm is cost-minimizing bundle of contracts, or the firm is a value-creating bundle of resources and capabilities

How can we sustain out advantage:

• In either case, a competitive advantage is sustainable when it persists despite efforts by competitors or entrants to duplicate or neutralise it
• The term isolating mechanisms refers to the economic forces that limit the extent to which a competitive advantage can be duplicate:

1. Impediments to limitation:

• Legal restriction à patents
• Superior access to inputs and customers à buying shelf space
• Market size and scale economies à scale economies can be difficult to beat, as they allow the firm to under-price their customers
• Intangible barriers to imitation à causal ambiguity, historical circumstance and social complexity

2.  Earlier mover advantages:

• Learning curves: firms that sell more in early period will move further along the learning curve and achieve lower unit costs that its rivals
• Reputation and buyer uncertainty: most people are risk adverse, a prefer to use what they know. Reputation therefore matters
• Buyer switching costs: creating switching costs can ensure that customers stay loyal
• Network effects: customers often place higher value on products if other consumers use it (network externalities)

To be sustainable, a competitive advantage must be underpinned by resources and capabilities that are scare and imperfectly mobile. Innovation allows firms to create scarcity

Innovation is not limited to the radical new products that spring to mind by type:

1. Product
2. Process
3. Service
4. Marketing
5. Business model

By Level:

1. Radical: game changing innovation
2.  Incremental: marginal improvements

By Location:

1. Architectural: redesigning existing products
2. Component: redesigning parts of existing products

By Effect:

1. Competence enhancing: google moves from computers to phones
2. Destroying: Nokia moves form paper to phones

Human resources satisfy the VRIN framework (Human resources are matter of cost minimisation). But can we talk about that for human assets? à perhaps for unskilled workers. But maybe not about skilled workers or workers who are important for the firm

Human resource management is a field of theory and practice that deals with decisions relate to policies and practices, that together help to shape the relationship between the firm and its employees. It is suggested that:

1. Human capital can be a source of competitive advantage
2. That HR Practices have the most direct influence on the human capital of an organisation

Human resources can be a source of a competitive advantage. But failures by the HRM policy can turn human resources into a major source of disadvantage e.g. due to absenteeism, also the employee turnover matters

Strategic human resource management is not about the mundane questions in HRM, but more about how the firm an use HRM to attract and retain the best people, so as to provide the firm with a sustainable competitive advantage

Two topics are relevant:

• The HRM challenge: How do optimise the SHRM process

1. Assignment issue: there is a need to adopt a worldwide policy of international movement of personnel, differentiating in the pool of managers those who will follow a local and a global career path. But who goes where/ the staff are specialists in function, business or region. Recruited as subsidiary level, their career is within the local company. All managers depending on the organisational firm. Career is made up of successive appointments in different countries. These are considered expats. The profile of the human resource wheel is not the same in a company that has a adopted a global strategic posture as it is in a company that operates in a multi domestic mode. Multi-domestic organisation: there are few global managers, Mostly from a dominant nationality, they move from place to place. Local personnel progress within the subsidiary. Global design:  a larger number of multi-cultural global managers moving around managers integrate local personnel aspiring to a global career. Temporary assignments of local personnel to other subsidiaries.
2. The expatriates management issue: expatriates are people that live and work in their non-native countries (2-3 times more expensive then their equivalents in the host country). 6 major components:

• Strategic vision: what is the strategic purpose of out expat, filling positions, manager development and organisation development. Different goals ask for different managers
• Selection and preparation: the selection of expatriates is a function of induvial skills as well as the technical and competitive requirements of the company. Seven factors critical to success in international work assignments: tolerance of ambiguity, behavioural flexibility, goal orientation, sociability and interest in other people, empathy, non-judgementalness and meta-communication skill. Expats are confronted with a set of challenges and studies show that the main cause of failure with the internationalisation of personnel are the job and local insertion and family
• 

1. Flight: mine is best, I do not want to participate in yours (the isolated expat)
2. Fight: mine is best, its better than yours and I’ll show you why (the militant expat)
3. Fit: yours is best and better than mine, (assimilated expat) or yours is great, so is mine, lets make the most of both (the cosmopolitan expat)

• Compensation: salary must be adjusted to compensate for differences in the standard and cost of living. Moving costs and accommodation are typically covered. Many contracts also involve hardship clauses. Like accommodations or exchange prices
• Tenure: the length of assignments in a country is a function of four key factors:

1. The time needed to learn the rules of business in the country
2. The importance of personal relationship in the job
3. The contextual hardship of the country
4. The companies policy with regard to career development

• Support: success is very closely correlated with support. Support can be psychological and some companies have mentoring programmes
• Career follow-up: when the person is repatriated to their home country, they need to have the opportunities to develop their career. Having invested in their capabilities, as much as 25% of repatriated expats leave the company

3. localisation issue: there is a need to recruit and motivate local personnel, to maximise local opportunities. But how do we find good people locally? Although expatriate personnel serve to transfer knowledge, the long-term competitiveness of the global firm relies on the contribution and loyalty of the locally recruited personnel. Localisation helps break language barriers, is necessary because international recruitment isn’t enough and host governments require it. It also reduces costs
4. The skills-development issue: There is a need to develop skills fitted with the requirement of global managers at all levels. But who need what skills. Skills are a combination of the organisational roles that the manager has to fulfil and some set of key individual characteristics. Specific types of managers require a specific set of skills:

• Business managers: operate at corporate or regional headquarters, must recognise opportunities and risks nations and function
• Country managers: operate in local subsidiaries, must meet local customers needs, defend the market, satisfy government
• Functional managers: manage a function at corporate or regional headquarters. Must organiser and coordinate worldwide learning

Successful managers require:

1. Professional skills: about their profession
2. Negotiating skills: how to negotiate with partners
3. Relational skills: how to build professional relationships
4. Leaderships skills: how to set objectives, organise and motivate
5. Intellectual skills: how to balance global objectives with local realities
6. Flexibility skills: how to change when change is needed
7. Cultural skills: about how to deal with difference

• The cultural problem: How do we manage culture
• Global corporations are organisations that interact with customers, employees, partners and suppliers from different national cultures. This requires cross-cultural management. Culture matters in terms of:

1. Marketing and customer communications
2. Human resources management
3. Partnerships
4. Multi-cultural teams
5. Business practices
6. Negotiations

• Definition of culture: no universal, but everyone agrees on the three major layers that make a culture: basic assumptions and meanings (invisible, taken for granted, e.g. time is limited), values, beliefs and preferences (explicit, declared, e.g. time is money) and behaviour (Looking at a watch)
• Problem with culture: it look like a ice berg only 10% is visible.

1. Corporate culture: the accumulated assumptions, values, beliefs and behavioural norms resulting from the history of the company, its existing and past leadership imprint, it ownership structure and size.
2. Industry culture: any rules derived from the professional norms of a particular industry
3. Professional culture: derived from the training and professional norms, constraints or different functions within corporations, accountants, lawyers, sales
4. National or ethnic culture

Research on national cultural differences:

• Ethnological research: describes culture through six silent languages:

1. Perception of time
2. Perception of spaces and social distance
3. Language of material goods, family and education
4. The ease with which friendships are made and broken
5. The means of agreement
6. The influence of context: the who vs the what

• Managerial values and assumptions: Hofstede’s dimensions
• Country clusters (relatives are relatively small:

1. Hindu
2. Sinic
3. Islamic
4. Western
5. Orthodox
6. Latin
7. African
8. Japanese

• Hofstede concludes on cluster countries that while all national differ in cultural dimensions, westerns nations tend to be short-term, individual while Asian tend to  be long-them and collectivistic
• Max weber on country clusters: Protestantism encourage individual achievement leading to enterprise and Catholicism encouraged centralisation and induced state control

Conclusion:

1. Grouping cultures allow us to form general ideas
2. Each culture however has its own rules and regulations

To do business you must learn the rules of each cultures, you must make everything explicit and must assume nothing. You must not enter from a position of superiority: you may not agree with what they do, but you have to respect they do it their way

Lecture 6:

Institution based view:

Highlight the importance of:

• Formal institutions: such as laws and regulations
• Informal institutions: like cultural values and norms

Of explaining firm performanceà third pillar of strategy

Firms buy and build resources and they are embedded within a market, with its competitors and entry barriers. When choosing how to compete in terms of resources and position, they are confronted with pressures from outside the market. Their choices are constrained by the rules of the game.

The firm is therefore:

• Resource based view: bundle of resources
• TCE: A collection of contracts

Industry: customers, suppliers, competitors, buyers, substitutes.

The institutions/non-market environment: the public, stakeholders, governments and the media

Institutional theory highlights the pressure emanating from the institutional environment. Two claims:

1. That individuals and organisations are limited by what is expected of them by their institutional environment
2. Conforming to expectations confers legitimacy

In doing so, institutional theory helps us to understand similarities across firms, even in the face of what, ostensibly may be inefficient behaviours. Inefficiencies are the consequence of the firm meeting the institutional obligation placed upon it, by the formal and informal institutional forces

Non market strategy is about:

• Porter: positioning against the five forces
• Barney: Accessing/ acquiring VRIN resources and capabilities
• Baron: using institutions to advantage for our firms, disadvantage for our competitors. Changing the rules and creating new market

1. Conduct a non-market analysis (to help you ask the right questions):

• Issues: are what non-market strategies address
• Institutions: relevant set of bosies that the firm must interact with in the course of its non-market behaviour
• Interests: individuals and groups with preferences about or stake in the non-market discussion
• Information: pertains to what the interested parties know or believe to know about the matter in had

2. Decide how to engage with the non-market

It is important to know what are the opportunities, are they controlled by the market or the government. Value increases in government control

Market analysis determines significant of non-market issues and the non-market shapes business opportunities. Both are an integrated strategy

Non-market strategies:

1. Acquiesce: habit, imitate, comply
2. Compromise: balance, pacify, bargain
3. Avoid: conceal, buffer, escape
4. Defy: dismiss, challenge, attack
5. Manipulate: co-opt, influence and control

Comply, pacify, buffer, challenge, influence are more active (corporate social responsibility), comply, bargain, conceal, buffer and escape are more passive. Bargain, challenge, attack, co-opt, influence and control are more corporate political activity

Corporate social responsibility:

A self-regulating mechanism, which encourages the firm to comply with the spirit, rather than the rule of law. ESG stands for environmental, social, governance. It is sometimes said to be the core of CSR. In both is the goal to make a positive social impact

Big idea:

• Firms impact their employees, customers, suppliers, community
• They make use of public investments in infrastructure and education
• They are often more powerful partner in relationship
• Firm should always use their power in a positive way

Hardcore economic argument

• The ethical responsibility of the manger is to act legally and to take those actions that maximise shareholder value (of the owners)
• The responsibility to increase profits, the business of business is business
• Form this business perspective, voluntary making pro-social decisions over more profitable alternatives is only justified if:

1. Branding benefits: turn sustainability into profitability
2. Capital access benefits: these days ESG pays
3. Risk management benefits: the regulation is coming. Self-regulation now can help us prepare
4. Political benefits: build credits to reduces the LoF and otr voluntarily adopt standards to keep government out

CSR can be used to diminish non-market based threat

CSR can be as a market based marketing tool

CSR can be true corporate philanthropy

CSR can be all of the above

CSR is a win win situation

Corporate political activity:

Involves the activities taken by organization to acquire, develop and use power to obtain an advantage. This can be seen as negative.

Three strategic tools:

1. Financial-incentives strategy: business provides incentives to influence government policymakers to act. à political contributions, economic leverage, political consulting aid, office personnel
2. Constituency-building strategy: businesses seek to gain from other affected organizations to better influence government policymakers to act in a way that helps them. Stakeholders coalitions (businesses influence politics by mobilizing various stakeholders to support its political agenda. Advocacy advertising (advertisement that focus on a company’s view on controversial political issues). Logical challenges (business seek to overturn a law)
3. Information strategy: business provide government policy makers with information to influence their actions. Lobbying: lobbyist communicate with and try to persuade other to support an organization’s interest or stake as they consider a particular law, policy or regulation

Lobbying:

• Is a huge industry in the USA, rules:

1. Both lobbyists and their targets are regulated
2. Members of the US Congress, for example, are not allowed to accept gifts worth more than 50 dollar
3. The American bar associations guidelines: 800 pages
4. Fines of up to 200,000 and imprisonment of up to five years for breach of the code
5. Many gaps in the regulations: lobbyists that spend a part of their time working for a non-profit need not register for example

• European Union, second largest industry rules:

1. Limited rules
2. Register since 2011
3. Max gift of 150
4. Many gaps, the commissions official have to disclose all meetings with lobbyists. Only applies for 250/30.000 for example

• The Netherlands: don’t know, rules:

1. BVPA-association of 600 lobbyists, has a voluntary code of conduct which requires its members to behave ethically
2. Disclose gifts worth more than 50 euro
3. Gaps: lobbyists that do not meet in person with Parliament do not need to register

• China unknown how big the industry is, because: west says conflict is possible, but conflict is a threat to social harmony. So the western lobbying style does not fit and there are no official lobbyists. However they do: the social contract is that the state supports the entrepreneur and in return the entrepreneur supports the state. Government co-define the mission and vision and in return grants access to government officials and political institutions. Westerns firms do not comply. They seek support at home, so trying to let states negotiate with China for firms. This is an outsider approach. Inside approach supporte the state, so support the company that made that happen

Is lobbying effective? à today the firm depends on the ability of the manger to shape their regulatory framework as much on their ability to success directly in the market place

Best à ExxonMobile

1. They mislead the public
2. Fund the deniers
3. Get a seat at the top table (influence at a high level)

Were they right to do this>

• If business has a duty to it stakeholders not, if the business of business is business than yes

Lecture 7:

Markets in the long run are going in one direction (up). Challenges on the horizon:

• Globalisation has been a force for good, almost every indicator is going in the right direction.
• Countries that embrace globalisation the most become the richest, it has created strong economies and even stronger firms
• However governments haven’t always caught up.
• But globalisation has created imbalances, capitalism isn’t designed to share. Governments hasn’t stepped in. some have won others have lost à poverty force example
• An increasing rejection of globalisation on the left and rise and a rise in nationalism is consequence
• An increase in protectionism even when it is expensive and unfair
• Also an increasingly political business area

In the future will the inequalities even be worse (e.g. automatization)

• Climate change will be a problem, where will the people go who will be fictional

Maybe we are at the end of an era. Maybe we’re entering the post-globalisation era and the walls will go back up

However history tells us that these things go in cycles and a new period may create new opportunities. Always relevance;

In fact that is why we learn theory: time changes and when they do we learn how to adapt to them. Same applies for tools. Includes tactics

In exam:

1. Define
2. Explain
3. Example