Chapter 6: Crossing Borders PDF

Chapter 6: Crossing Borders Centre for Foundation ,Language and General Studies © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Topic and Structure of the lesson Entering and existing Markets T...

Chapter 6: Crossing Borders Centre for Foundation ,Language and General Studies © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Topic and Structure of the lesson Entering and existing Markets The evolution of multinationals Greenfield VS acquisition Divestments Alliances and constellations Subsidiaries and hybrids © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Entering and existing markets fgjfjNot The ‘classic’ organizational form was a wholly owned affiliate, but this has always Multinational follows an incremental process as coexisted with a range of they enter and evolve in a foreign market. equity and nonequity Eg Manufacturing company modes including joint Establishing ventures, cartels, of a Export Selling through agents licensing, franchising and distribution long-term contracts. company Firm-, industry-, location-, Local production and time-specific factors Multinational investment Develop local capabilities influenced which ( resources ) mode was employed at any Develop market knowledge one time. NOT all multinational go through this process some opted using acquisition for entry to foreign market © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Entering and Existing Markets The move from one mode to another was often triggered by external causes and origin. The move from one mode to another was Imposition of Tariffs often triggered by external causes and origin. Competitive structure of a industry The internal dynamics of decision-making within firms was a major determinant of entry modes in foreign markets. Each firm had its own unique combination of resources, including entrepreneurial ability. Although systematic patterns can be observed, diversity has been the norm rather than the exception. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Greenfield versus Acquisition The establishment of a wholly owned subsidiary in a foreign country is done either by creating a new firm through a greenfield investment or by acquiring another firm. A number of theories have sought to explain the choice that firms have made between these two modes. It has been suggested that firms initially going A company that possessed new technologies abroad prefer to enter foreign markets by GREENFIELD which limited the opportunities to acquire acquisition in order to reduce uncertainty. appropriate companies in foreign markets. In Late entrants into oligopolistic markets might prefer acquisitions in order to speed up their the new and emergent industries of the first response to the entry of leaders in foreign global economy, there were far fewer markets, ACQUISITION Higher acquisition rates might occur in faster- potential acquisitions. growing markets because they provide a quicker means of entering such markets Large and established multinationals Acquisition has also been suggested as a might be more willing to undertake suitable method of entry when a target market is static or declining. greenfield investment to reduce uncertainty. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Acquisition The use of acquisition strategies accelerated after World War II. US manufacturing firms made increased use of acquisitions worldwide They became a means of consolidating highly fragmented industries such as ice cream. From the late 1950s, Unilever, which had only previously sold ice cream in Germany and Britain, built an international ice cream business by acquiring small, and often family owned businesses throughout Europe, as well as in the United States, Australia and elsewhere. By the 1980s, Unilever held 30 percent of the European ice cream market Fragmented market A marketplace where there is no one company that can exert enough influence to move the industry in a particular direction. The market consists of several small to medium-sized companies that compete with each other and large enterprises. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Acquisition Acquisitions were much less frequent in developing Buying companies often involved complicated and time consuming negotiations with family owners as well as much political sensitivity. Yet, they were not entirely absent. In Brazil, where Unilever had a small soap and detergents manufacturing operation since the interwar years, the Anglo- Dutch company acquired its main competitor Companhia Gessy Industrial, which was about twice Unilever's existing size in that country, in 1960. The new Gessy Lever, created by merging the two companies, became the dominant manufacturer of soap and detergents. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Acquisition The use of acquisition strategies was facilitated from the mid- 1950s as the phenomenon of the ‘hostile’ takeover bid made against the wishes of incumbent directors became established in the British and US business systems (Roberts 1992). However, hostile acquisitions remained rare in Continental Europe and Japan. Most large European companies only began making hostile acquisitions in the 1980s or even later. Vodaphone's acquisition of Mannesmann in 2000 was the first large-scale hostile acquisition of a German company by a foreign firm. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Risk of acquisition Acquisitions involve risks which derive both from the process itself—sellers of a firm typically have better information than buyers—and from the post-acquisition problems of managing pre-existing firms. Value added often went mainly to the shareholders of acquired firms. Acquisitions were often conducted by managers seeking to maximize their own utilities rather than shareholder value. Cross-border acquisitions faced additional risks because of differences in cultures, legal environments and accounting standards. In aggregate, foreign acquirers often paid too much for acquisitions in the United States or acquired US firms with below average profitability © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Risk of acquisition Common for foreign firms to experience post-acquisition management problems in the United States, including difficulties retaining senior management. The high level of job mobility in the United States made this a problem for all acquisitions, but foreign acquirers were particularly affected. Senior US executives were often not comfortable with foreign firms, perhaps because their own career prospects were limited, or because of cross cultural tensions. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Risk of acquisition Cross-border acquisitions pose acute organizational issues. The process involves the integration of firms with wholly different corporate cultures and routines than the acquirer, and these characteristics are rooted in different national management systems. Frequently the managers of the acquired and acquiring firm speak a different language. Further complexities arise because if an acquired foreign firm is totally absorbed into the systems and structures of the parent, it will probably lose the distinctive attributes that made it desirable, such as local knowledge and contacts. If it is not integrated at all, transfers of knowledge and corporation-wide efficiency will suffer. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Acquisition During the last decades of the twentieth century, post-acquisition management inside many large multinationals moved from being an ad hoc process to being almost routinized. Unilever, which acquired 540 companies between 1965 and 1990, developed systematic procedures to absorb acquired firms which were known inside the firm as‘Unileverization’. This involved the introduction of corporate accounting systems, and changes to salaries and pensions to conform to corporate practice. Unilever also strove to retain good managers, including former familyowners, at least for a time. The pace of ‘Unileverization’ speeded up overtime. During the 1970s it could take up to a decade. However, within two years of Unilever's acquisition of the US personal care company Cheseborough Ponds in 1986, only 6,000 of the original 23 000 staff remained. Sales of unwanted assets reduced the acquisition cost from $3.1 billion to $2 billion © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Alliances and constellations Joint Ventures During the interwar years, financial pressures and risk sharing was particularly prominent in joint ventures and collaboration, including cartel agreements. Joint ventures were employed in a number of industries where there was a high degree of political risk and capital demands also grew. During the 1930s, joint ventures were widely used in production, refining and marketing operations in the Middle East and elsewhere,sometimes because of political futures. The formation of the Kuwait Oil Company in 1934, jointly owned by Gulf Oil and Anglo- Persian, reflected the concerns of the British authorities that controlled Kuwait to prevent a wholly-owned US company from controlling the oil fields. In other cases risk-sharing drove collaboration, as when Standard Oil of California and Texaco formed a joint venture in 1936 to search for oil in Saudi Arabia © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Collaborative Arrangements Capital shortage often led firms into collaborative arrangements. The predecessors of IG Farben had lost their investments and their trademarks in the United States as a result of World War I. Following its German firm sought to re-establish its position without too much capital expenditure using technological advantage asa bargaining tool. IG Farben acquired equity stakes in US chemical and pharmaceutical companies, but only took full ownership in a limited number of cases. This strategy enabled the German company to reacquire a strong market position without extensive capital investment © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Licensing Licensing was used by firms to access foreign markets without a large managerial or financial commitment. During the interwar years the small Dutch family firm of Océ van der Grinten, which developed an innovative process for manufacturing copying paper, expanded abroad by making licensing agreements with firms throughout Europe, the United States, Latin America and Japan. Many of these licensees were also small family firms. This strategy provided both income and an export market for the specialty chemicals used to make the bulk copying paper. Managers from the Dutch company made regular visits to their licensees, and were able also to accumulate knowledge about foreign markets. This strategy continued in place until the 1960s, when Océ, which had grown in size and become a public company, began establishing its own factories © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Thank you Address Telephone Website University of Cyberjaya 03 - 8313 7000 www.cyberjaya.edu.my Persiaran Bestari, Cyber 11, 63000 Cyberjaya, Facsimile Email Selangor Darul Ehsan, Malaysia. 03 – 8313 7001 [email protected]