The Art of Going Global: A Practical Guide to a Firm's International Growth [1st ed.] 9783030210434, 9783030210441

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A Practical Guide to a Firm’s International Growth

Olga E. Annushkina Alberto Regazzo

The Art of Going Global

Olga E. Annushkina • Alberto Regazzo

The Art of Going Global A Practical Guide to a Firm’s International Growth

Olga E. Annushkina SDA Bocconi School of Management L.Bocconi University Milan, Italy

Alberto Regazzo Long Term Partners S.r.l. Milan, Italy

ISBN 978-3-030-21043-4    ISBN 978-3-030-21044-1 (eBook) https://doi.org/10.1007/978-3-030-21044-1 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Foreword

This book is a tool: it will enable you to rationalize internationalization decisions and to make things happen for your firm in your effort to take it global. Globalization is both a test and a solution to the sustainability of your business. Believing that Italian Companies are generally too small to compete in global markets, mainly in the top segments, in recently years I invested in the built up of international groups of Italian origin and guided them in their growth on both domestic and global markets. Going global is probably the most challenging and the most rewarding growth strategy, in particular for the Italian and European firms: by taking your business abroad you are setting yourself against the best global competitors. Going global is not only about exporting. The first wave of globalization in 1960s was driven by firms who managed to sell their products to non-­domestic customers: the core business activities remained at home. Today, exporting is not enough. The globalization process, regardless short-­ term slowdowns, is irreversible. The markets will continue being opened up and become increasingly interconnected across the globe. Your firm’s business model will be necessarily exposed to global events. Independently of your will (and, most probably, thanks to your international competitors) your firm’s scope will become global. Over the last two decades globalization has drastically transformed the rules of competition in such industries as apparel, footwear, furniture and interior design goods. Luxury and premium segments in most consumer goods industries became global and interconnected as customer tastes started their convergence towards universal standards, partly influenced by Western lifestyles. Firms operating as suppliers to other businesses (b2b) are v

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experiencing less immediate, even if already ingrained, structural changes in their industries. Going global is an art: the winning recipe is unique for every firm and may change in time. The decision-making processes in many large firms, among which I could also name some Italian multinationals, are well structured to anticipate and to manage risks related to globalization. Small and medium firms often face additional internal challenges: • lack of professional management: the authoritative leadership of the entrepreneur in decision-making processes pose important limits to the possibility to grow people internally and to attract talents from global job markets; entrepreneurs are unwilling to delegate: many of them arrived at their success by centralizing power and decisions; • lack of language and cross-cultural skills (and often any kind of pragmatic support by the government to overcome them); • lack of financial resources and possibility to access them: it largely limits the possibilities to scale up on global markets as internationalization requires investments and some kind of safety cushion to invest in adaptation and to compensate for almost certain errors that will be committed on the way. While I don’t believe in replicating someone else’s “best practices” for global strategies, I do believe in method. The method that is used to make decisions (as opposed to stall and stick to “business as usual”) and, in case of need, to rapidly correct them and limit further waste of resources. For me, the three guiding principles of this method include: • we make decisions with a limited set of data yet with solid logic, explicitly acknowledging our assumptions and inherent risks; • we commit to our decisions by dedicating people and resources that are needed; we carefully analyze the characteristics of people and of foreign markets to achieve the best possible fit; • we constantly monitor the international strategy implementation by a simple and immediate set of indicators, to introduce eventual corrections and adjustments. This “decision”-“commitment”-“monitoring”-“eventual correction” loop allows testing the initial decision. The role of people in subsidiaries, motivated and sufficiently autonomous, becomes paramount: from signaling an eventual opportunity or a threat to elaborating a new solution. Once the first loop gets

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off, the subsequent ones, for both formal and informal decisions, become more fluid: all participants learn from the field and learn to collaborate and to trust each other. The rapid evolution of global markets makes acquisitions for many firms almost an inevitable choice. I am an investor, domestic and cross-border acquisitions are my bread. I believe in acquisitions to accelerate international growth, if coherent with your firm’s underlying strategy and appropriately used to implement it. Cross-border acquisitions are used to grow your business in the target market, to increase your share in the industry’s profit pool at the global level, to overcome limits posed by supplier’s capacities. Implementing a cross-border acquisition is a science. A cross-border acquisition should not lead to the waste of your firm’s resources: the decision to invest should take into account the price of the target and the probability of success. The decision to invest should consider the cultural fit with the target firm. We should also remember, that we do not “invest in firms”: we invest in assets, in clients and in people. When you buy a successful business you “buy” (and must keep!!) a successful management team well integrated in the local market. Growing on global markets means that the decisions become scalable too. From one decision for one new foreign market we move to a multitude of decisions for more markets. This progress is impossible without delegation: right people in pivot positions for decisions, operating with a good level of autonomy and a direct and continuous dialogue with the CEO or entrepreneur. This shift from centralized decision-making to delegation does not alter the decision-making method: we still need to assure that “decision”“commitment”-“monitoring”-“eventual correction” loop is rigorous and running, at all levels. Gradual delegation and replication of decision-making method assures finding the right level of adaptation on each of global markets and, at the end, achieving business model scalability. To condensate my experience of implementation of global growth in chemical, shipbuilding, tanning, logistics, furniture industries, to name a few, I list the following “good practices” of decision-making for internationalizing firms: • learn to anticipate and manage uncertainties where possible; • learn to live with uncertainty and to make decisions under uncertainty; • know your key indicators of success and learn to monitor and to manage them; • learn to adapt; without the myth of 100% synergies; • understand the scalability elements of your business and learn to scale it up.

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• choose and retain right people and assure their participation to the decision-­ making processes, also at the top levels of the firm (CEO/entrepreneur). Keep them in direct and close contact, do not “forget” them because they are far away. Olga and Alberto crafted a useful and concise guide to decision-making processes for managers and entrepreneurs ready to take their businesses global. In their book they will tip you how to define your internationalization goals, how to choose a right level of adaption, how to craft and implement your strategy under uncertainty, how to organize your firm and to involve people in decision-making. They do not reveal secrets of success or “best practices”: they equip you with a tool to develop your own method for “going global”. Globalization is a fascinating trip towards unknown. I wish you to enjoy the ride. Milan, Italy Paolo Colonna  Paolo Colonna, 30+years of experience in private equity, focus on creation of scalable industrial groups, co-founder of Italian Design Brands, a hub created to implement global growth strategies for high quality furniture producers, co-founder of Permira Funds where he served as President and CEO and followed more than 60 deals including Ferretti Group, Valentino, Marazzi Group, Grandi Navi Veloci, Azelis, TFL. In 2015 he founded and managed Creazione di Valore Srl, an investment company focused on private equity operations. He also spent 5 years with McKinsey & Company in Chicago and Milan. Paolo Colonna has a degree in Chemical Engineering from Politecnico di Torino, Italy, and an MBA from Harvard Business School, USA.

Preface

We finalized this book from the COVID-19-hit Lombardy region of Italy during the strictest lockdown seen for generations. The globally connected world, with its innovation, new technologies, and exciting opportunities in business, education and travel, worked as a perfectly tuned superconductor allowing the virus to cross borders rapidly and spread panic. Businesses urgently introduced smart working solutions, or temporarily closed or reduced their operations; oil prices and financial markets nosedived like a well-trained Olympic team of synchronized swimmers performing their Ariana figure. The pandemic spread globally, and some responses to it were cross-border, too. China and Russia and other countries sent equipment and doctors to the worst-hit regions of Italy; international teams of researchers worked together to find treatments and vaccines. Technology enabled these responses by making online hospitals globally accessible and allowing scientific research to be shared in international online communities. Geolocation made it possible to track people who had been exposed to others who tested positive for the virus. Our globally connected world will never be the same again. Already, at the peak of the COVID-19 pandemic, questions about its future were being raised. Firms faced the challenges of disrupted international supply chains and lack of components. In lockdown and quarantine areas, demand for the tourism and travel industry was close to zero. Other consumer goods and services were similarly affected, with customers shopping only for food and basic homecare items, delaying other purchases because of the uncertainty. International visitors cancelled or postponed their trips. Some firms urgently converted their production sites to start supplying items necessary to deal with the virus outbreak. Globally, people expressed their solidarity with the ix

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worst-affected areas; we were touched to see the colors of the Italian flag illuminating towers and palaces around the world. As with other global crises, once the emergency is dealt with, memories of the vulnerability of international supply chains and the almost immediate volatility in demand will remain for some time. However, the overwhelmingly global reach of the COVID-19 pandemic makes it different from previous crises. We expect that it will be remembered globally as a reality check, and that the lessons it teaches us about our personal vulnerability will not be easily forgotten. The old tunnel vision that was integral to our goals and ambitions will surrender to a new understanding of our present and of our real values, about what is really important. This book, a decision-making guide organized as a recipe book for key international business decisions, will help you to reshape your firm’s future in this new global order. The seeds of the arguments for deglobalization are not new. We saw them develop long before the COVID-19 pandemic, with waves of nationalism and regionalism, Brexit, reshoring policies and international trade conflicts. The new global order, with its uncertainty, volatility, and unexpected spikes in exogenous factors must now find ways to include the idealism of younger generations, symbolized by the environmental activist, Greta Thunberg. This idealism of the new cohorts, sometimes naïve, but also powerful and able of rapid spreading, is pushing back against the skepticism and indifference of leading elites, who will need to adjust. Progress toward the competitive sustainability of business models will require leaders to incorporate the new ideals, not only in words but also in actions. Our sincere wish is that this book will help you to combine rigorous and analytical decision-making with the ability to include new ways of doing business globally that take into consideration the changed context, the new world order. Chapter 1 of the book deals with internationalization objectives that go beyond economic and competitive reasoning: your managerial and entrepreneurial “dream” and your goals for impacting your industry and society, regardless of the size of your business. All billion-dollar businesses started small—and so we consider the scalability of your business model and how going abroad may enable you to take your business to its full scale. Chapter 2 deals with a topic that is traditionally pushed toward the end of most strategy books—ethics. We discuss the concept of global mindset and how the orientation to long-term sustainability of competitive advantage in global markets relies on three main enablers of a global mindset: individual empathy that spreads throughout an organization, clearly defined universal

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ethical standards, and engaging the resources and people necessary to compete in global markets. Chapter 3 discusses the tricky choice between adapting and standardizing your business model to a new foreign market context, as well as a third alternative, transforming the target market. Research confirms that most firms make the suboptimal choice of under-adaptation. We discuss the cultural, legal, geographical, economic and technological differences among markets and which elements of the business model need adaptation, explaining why this reasoning needs to be carried out at the level of the business unit. We also draw your attention to the internal (regional) diversity that exists within the national boundaries of foreign markets and inside each country. Chapter 4 is about defining your priority foreign markets, one of the central questions of internationalization strategy. We suggest a two-step approach – initial screening of markets, followed by the final decision about which markets to target. We discuss how to deal with a lack of data about foreign markets, how to reason around and compare qualitative data, and how to deal with the large number of factors involved. The last part of the chapter guides you through possible pitfalls in reasoning and the cognitive biases typical of the foreign market selection process. Chapter 5 considers the decision about the mode of entry to a foreign market: how to organize your firm’s legal presence (via contract or as a legal entity) and operations. We start with the challenge of “liability of outsidership” and suggestions for building relevant informal and formal networks in the new market. The decision about the mode of entry is analyzed in terms of a range of factors spanning from the characteristics of the target market to the firm’s strategy and organization and the cognitive models of its top management. Drawing on our consulting and teaching experience, we dedicate part of the chapter to the issue of trust with foreign partners and to the challenges of implementing a cross-border acquisition. Putting into practice your decision about entry mode requires a level of investment that may be quite significant for your firm; at the end of this chapter, we introduce you to the concept of real options to help you evaluate and respond flexibly to the situation. Chapter 6 deals with the issues of delocalization and the locational competitive advantage of an internationalizing firm, and how to configure relationships between subsidiaries and headquarters. We talk about the pros and cons of offshoring and offshore outsourcing. We discuss the different facets of interactions between headquarters and subsidiaries. We share with you what we believe is the future: a new type of multinational that abandons uniform hierarchies and decentralized networks, a heterarchical organization driven by innovative people management policies based on a global mindset and the

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broad involvement of employees, where people are a real core asset (in a way that goes beyond lip service). We conclude the chapter with a topic about which we are strongly convinced: that the innovation potential of subsidiaries is greatly underused, largely because multinational organizations are inefficiently designed. Chapter 7 is dedicated to strategy and is divided in three main parts. First, we discuss the content of strategy: the “classical” internationalization strategy theories and whether internationalization strategy should be decided at the level of the business unit or at corporate level. Second, we analyze the design of internationalization strategy, suggesting solutions for our times of uncertainty and high volatility: real options, effectuation, and some tips from military planning. Third, we suggest some tools for carrying out a check-up of your current approach to the formulation of internationalization strategy: What is the level of “emergentness” or “deliberateness” of your internationalization strategy? Is your internationalization strategy subject to one of the fourteen decision-making biases we discuss? Chapter 8 is devoted to the protagonists of internationalization: people. We discuss the role of expatriate managers and local personnel, both of them crucial, in different ways, for the implementation of your firm’s global strategy. Expatriates are valuable because of the formal and informal networks that they build, linking headquarters and subsidiaries, and we propose a checklist of skills to look for in candidates for expatriate positions. We also discuss the key areas that you need to consider for effective management of the costly decision to use an expatriate, ranging from support for the expatriate’s family to their adjustment and repatriation. We also suggest specific policies for involving and engaging local personnel. We conclude the chapter with an issue that in our experience has caused a number of failures in the implementation of internationalization strategies: the impact of cultural differences on leadership styles. We compare what people around the globe expect from their leaders, and consider why some leaders are successful in one location but not in another. Our book has been designed around your needs and your limited time. It can be read in any direction, one chapter at a time, in any order, according to your priorities. In any situation—crisis or growth—businesses need sound decision makers. Managers and entrepreneurs may not have the immediate impact on people’s lives that surgeons do, but their strategic mistakes may be harmful nevertheless. As a leader, you should not be embarrassed to say, “I don’t know” or “I was wrong”; you should correct a mistaken decision in a timely way, facing the facts rather than trying to brush them under the carpet. Your

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responsibility for your potential impact on people’s lives calls for dedication, rigorous reasoning and knowledge. You are not running a “firm”; you are leading an organization of human beings. Our book will help you to look at a variety of factors in each important internationalization decision, and our hope is that it will help you to make better judgments. Milan, Italy Milan, Italy 

Olga E. Annushkina Alberto Regazzo

Acknowledgements

This book is a result of our interaction with other people. Olga: Participants to executive education workshops are an infinite source of inspiration. Discussions of cases and examples in class brought a lot of insights about how managers and entrepreneurs reason, what are common biases and mistakes, and what we could do to assist them in their immensely difficult task of making decisions about the future of their businesses while basing their reasoning on the facts describing the present or the past. I had many valuable “moments of truth” in class and after classes created and I sincerely thank all my students and participants for being sincere, thoughtful, mindful, challenging, at times teasing and serious. This book also condensates decades of research done by the community of International Business scholars around the world. We aimed to create a working link between academic research and practitioners and I thank in advance my colleagues in not judging too severely this attempt of selection, synthesis and interpretation of concepts and ideas that we thought to be mostly useful in contemporary business practice. I also sincerely thank SDA Bocconi School of Management for encouraging and supporting my work on this book and my colleagues who cheered, inspired, challenged and motivated me during the process. Alberto: Every strategic advisory project, investment thesis - focused due diligence or action plan mobilization and follow on, generates new experience. Suggestions and solutions developed by professional advisors are real-­ life tested and challenged, and curious and caring strategists may get feedbacks to be embedded in the strategy project to come. My challenging clients, partners and colleagues—sharing their experiences with me—represent a daily xv

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workout session always offering me an incredible opportunity to benefit of continuous learning. Olga and Alberto: We’ve met at Bain & co. Italian office right before Olga left her consulting career for academia. For both of us, this book was also a way to celebrate our 20  years of professional collaboration and friendship with an occasion to work on something together once again. For months, we discussed our work on this book with our respective families and friends many times. They listened, motivated, provided ideas and examples. Their encouragement meant everything to allow us complete our work. We would like also to thank Jinny Hayman and Emma Vickers for their patient redrafting, proofreading and redrafting again of our writing. A special thank to Andrea Ansaldo for his case mining and crunching in Alberto’s case shelf. It was an honor to work with Palgrave Macmillan and Liz Barlow and her colleagues. Their support, ideas, suggestions and, most of all, timely responses, allowed us to feel a part of their effectively working virtual team and created a great atmosphere for us in which to complete our work. We are also sincerely grateful to Lucy Kidwell and Sam Stocker for their support and meticulous dedication to the editing process of this book.

Contents

1 Is Your Business Reaching Its Full Scale on Global Markets?  1 2 Global “E–E–E” Mindset: Empathy, Ethics, and Engagement 21 3 The Adaptation Issue 35 4 Foreign Market Selection: Which and How Many? 57 5 Entry Modes: How to Enter a Foreign Market 81 6 Organizing for International Growth109 7 Strategic Decisions in International Business131 8 Implementing Internationalization Strategy: The People Question155 Conclusion181 Index of Companies183 Index of Regions and Countries187 Index of Terms189

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List of Figures

Fig. 1.1 Internationalization motives Fig. 2.1 E–E–E framework: activating a your firm’s global mindset Fig. 3.1 Adaptation needs (or opportunities) for elements of a business model, based on Coda’s Entrepreneurial Formula Fig. 5.1 Factors determining the entry mode choice (Agarwal & Ramaswami, 1992; Andersen, 1997; Howe, 2011) Fig. 6.1 Key factors and decisions in relationships between subsidiaries and headquarters (authors’ elaboration based on the framework of Professors Nitin Nohria and Sumantra Ghoshal) Fig. 7.1 Professor Vittorio Coda’s Entrepreneurial Formula

3 25 44 87 118 133

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List of Tables

Table 1.1 International strategy control panel 10 Table 2.1 Internationalization paths versus international composition of top management teams (example of two Russian telecom operators, MTS and VimpelCom) (Annushkina, 2014) 23 Table 3.1 Cultural dimensions: studies by Hofstede, Trompenaars and the GLOBE project 38 Table 3.2 Evolution of adaptation solutions by AutoLux car manufacturer in India (adapted from Landau, Karna, & Sailer, 2016) 47 Table 4.1 Top 20 recipients of foreign direct investment (FDI), 2018 59 Table 4.2 Top 20 importers, 2018 60 Table 4.3 Top 10 importers of pharmaceutical products and of internal combustion engines versus GDP growth, 2008–2018 62 Table 4.4 Foreign market selection criteria: challenges and solutions 65 Table 4.5 Top 30 economies and their top three export partners, 2018 70 Table 5.1 Entry mode classification (Erramilli & Rao, 1990; Meyer, Wright, & Pruthi, 2009) 85 Table 5.2 Top 10 global retailers (2016) 95 Table 8.1 Four types of global managers (based on “What is a global manager?”, by Bartlett, C.A., Ghoshal, S) 157 Table 8.2 Ethnocentric, polycentric, regiocentric, geocentric (EPRG) approaches by internationalizing firms 162 Table 8.3 Examples of local human resources policies of Italian multinationals operating in Russia (Annushkina & Casalaina, 2010)173 Table 8.4 Local leadership styles according to Globe survey clusters 175

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List of Boxes

Box 1.1 Rosinter Restaurants: Learning (and Earning) from Mistakes (Gryaznova & Annushkina, 2013) 7 Box 1.2 Mahindra & Mahindra in the USA: Learning Applied Back Home (Madhavan, 2017) 7 Box 1.3 Universal Scalability Law (in Computing) 13 Box 1.4 Scalability of Business Models (Zang et al., 2015) 13 Box 1.5 Scalable Business Model Implemented by Jollibee Foods Corporation 14 Box 2.1 Definitions of Global Mindset 24 Box 2.2 Global Managerial Craftsmanship Concept, Inspired by Plato (Klein, 2011) 30 Box 2.3 Possible Strategies for Dealing with an Ethical Conflict Between a Company’s Rules of Conduct and “Local Conditions” (Kohls, J., Buller, P. 1994) 31 Box 3.1 Adaptation in Xiaomi (Based on Zheng, Guo, Burgelman, & Ben El-Baz, 2017) 43 Box 3.2 Green Wise Co., Ltd.: A Journey to Italy 53 Box 4.1 Dealing with Distances in Food Ingredient Industry: Case of IRCA 68 Box 4.2 “Water Strategy” or “Exponential Globalization”: Kaspersky Lab and Netflix 74 Box 5.1 Q-Sense Networking to Access Foreign Markets (Schweizer, 2013) 82 Box 5.2 Two Examples of Entry Modes That Respectively Transfer and Access Resources and Capabilities 88 Box 5.3 Making an International Partnership Work 99 Box 5.4 Making a Complex Cross-Border Acquisition Work (Kullman, 2012) 101 Box 6.1 Locational Decisions and Long-Term Competitiveness (Porter & Porter, 1998) 112

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List of Boxes

Box 6.2 Prysmian’s Organizational Solution After Merger with Draka (Based on Venzin, 2020; Venzin & Amodio, 2014; Venzin et al., 2016; Venzin et al., 2017) Box 6.3 ICM Italy: Moving Away from Top-Down Hierarchy Box 6.4 Alibaba Group. Traits of Heterarchical Organization in Action (Based on Alibaba Group Holding Limited, 2014; Shao, 2020; Wulf, 2010) Box 8.1 Tensions Arising from the Cost of Expatriates: Case of TNK-BP Joint Venture (Vinogradova & Derbilova, 2013) Box 8.2 Balance Between Local and Expatriate Managers (Perlmutter, 1969) Box 8.3 Saipem’s Balance of Local Versus Expatriate Employees Box 8.4 Evolution of Subsidiaries in Ely Lilly and Company and Responsibilities for Local Personnel (based on Malnight, 1995)

120 122 125 160 161 164 171

1 Is Your Business Reaching Its Full Scale on Global Markets?

Strategy is about reaching goals. If you are a business leader considering international expansion, focusing on this seemingly simple statement could save your project. Without clear and measurable objectives, you will find yourself unequipped to confidently dedicate the financial and human resources needed to achieve foreign growth. In this chapter, we discuss how internationalization can affect your firm’s performance (and it is not just about revenue!). Next, we introduce a tool to help you create ambitious and comprehensive internationalization goals. Finally, we discuss how to define the full potential of your business in global markets, by teaching you not ‘how to dream big’, but ‘how big to dream’.

1.1 Going International: the Profitability Issue Businesses love celebrating their global presence. “Our international activities are significant to our revenues and profits, and we plan to further expand internationally,” is fairly typical annual report statement. It is no wonder, considering the extent to which global growth is venerated by shareholders. Yet, in reality, academic research has failed to confirm whether it actually has a positive effect on a firm’s profitability. Over the past three decades, the relationship between internationalization and profitability has received unprecedented attention from international business researchers, yet the studies cannot agree. The impact of internationalization (including all forms, from exporting to joint ventures, acquisitions,

© The Author(s) 2020 O. E. Annushkina, A. Regazzo, The Art of Going Global, https://doi.org/10.1007/978-3-030-21044-1_1

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and greenfield factories) of American, European, and Asian firms’ on performance has been found to concurrently be: 1. positive: an increase in the international presence improved the firms’ performance; 2. negative or insignificant: an increase in the international presence had a negative direct influence on firms’ performance or did not have any significant impact; 3. sigmoid (S-shaped curve): internationalization initially contributed negatively to profitability. During the second stage of international growth the impact was positive, and in the third stage the effect of further international growth was negative or insignificant; 4. U-shaped: international growth initially decreased profitability indices, after which they recovered and the firm’s performance was positive. There have been numerous explanations for such inconclusive results, including measuring imperfections, inconsistent definitions in the “degree of internationalization”, and difficulties in reconciling variations in accounting standards. We point out the above, not to scare you away from international expansion, but to demonstrate that it is a complex process that cannot always be measured in clear cut terms. While this book assumes that internalization has at least the potential to have a positive effect on profitability and competitive advantage, it will also guide you through the associated risks. Unfortunately, there is not a tried and tested “recipe” for how internationalization will grow your business and create value for your shareholders, but you can prepare the starting ingredients: 1. An understanding of the uncertainty of the relationship between internationalization and performance, the factors that will benefit your firm’s international profitability and (more importantly) those that will damage it. 2. A clearly defined set of internationalization goals that include, but are not limited to, financial performance, coupled with a set of metrics with which to evaluate your firm’s advancement on global markets. In the bulk of this book, we seek to shed light on the first topic and on the variety of factors that could influence the profitability of your international operations. We will do this by discussing the key components of internationalization strategy (such as foreign market selection, entry modes, organizational strategies and adaptation-standardization choices) and their potential

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impact on your firm’s success in international markets. Each chapter (except for one dedicated to strategy) contains relevant case studies and examples. The remainder of this chapter explores the second topic: why firms decide to go abroad. We will introduce our International strategy control panel, a tool to help you clarify your international objectives, and we will discuss what defines success in international markets.

1.2 Why Firms Decide to go Abroad Your business is performing well in its home market, and the obvious next step is to launch in other countries. You may be correct, but before booking those plane tickets, take a moment to consider all your implicit motivations for chasing global growth. The result could change your whole approach, or, at least clarify your ideas on how to measure your future progress. The decision to internationalize is made at both corporate and business unit levels (for multi-business firms), and may be driven by a single or a complex variety of motives (Fig. 1.1). Without a deep understanding of why you are taking your business abroad, it is impossible to define meaningful internationalization goals. This is both true for firms that already have an international presence and those branching out for the first time.

• Willingness to: • Improve the firm’s economic and financial performance •

•

Improve the firm’s competitive advantage (by obtaining economies of scale, reducing costs, and accessing new technologies, brands, distribution channels, strategic assets, etc.) Diversify risks (business, currency, macroeconomic cycles, political, etc.)

Proactive (internal) motives for internationalization

Reactive motives for internationalization

• •

External motives for internationalization

Fig. 1.1  Internationalization motives

• •

•

Imitation of competitors and of firms from other industries or geographies Following existing clients “Outside” proposal of partnership, acquisition, etc.

Homeland’s geopolitical influence Evasion of unfavourable business context (fiscal pressure, stringent environmental and labour regulations) Obligations to source locally or to partner with local firms

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The internal motives for your decision to internationalize are likely to fall into four broad and interconnected categories: 1. Financial and economic: to increase revenue (the first line of the profit and loss statement), to optimize cost structure (all other lines of the profit and loss statement), or to do both. 2. Competitive advantage: to obtain access to strategic clients, distribution networks, or specialized know-how and technology. Firms internationalizing for competitive advantage may be unable to predict the immediate or mid-term impact of the internationalization decision on financial performance. 3. Diversification: seeking to manage risk. 4. Reactive motives: reacting to external stimuli that favour an opportunity abroad.

1.2.1 F inancial and Economic Motives of Internationalization Increasing revenue by “market-seeking” is perhaps the most obvious (and commonly cited) reason for internationalization. By going abroad, your business can increase its customer base, approach new types of clients or follow existing clients: take the case of CATL, a Chinese producer of batteries for electric vehicles that decided to open a factory in Germany to better serve its existing client BMW. Internationalization will also enable your firm to learn about customer needs and market segments you may not have even considered. This was the finding of Culinaryon, an international cooking school based in Russia. Its Moscow location thrived on birthday parties, celebrations and corporate events. However, opening in Singapore enabled it to reach a new type of customer, those willing to invest in cooking classes to improve their skills”: a cooking class seen more as an educational experience than entertainment. Let us assume that, to date, your firm has only operated in its domestic market. By default of living in the same country, your customers are subject to the same economic conditions, product availability and cultural influences. It follows that you your product prices are more or less aligned. Now imagine that you operate in several countries. Suddenly it is possible to vary prices depending on local market conditions. You can command more if a particular

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country has a product shortage, or if there are fewer competitors. It could even be the case that the locals perceive imported products to be of higher quality. To see an example of this in action, look no further than Swedish furniture retailer Ikea. Its “Hektar” floor lamp costs 58.00 euros in Sweden, 55.00 euros in Italy, 49.00 euros in Czech Republic, 41.00 euros in Poland, 59.99 euros in Greece and 51.00 euros in Croatia. Internationalization is not just about customer demand. There are potential benefits at every point of the supply chain. You can reduce costs by offshoring some of your business activities to countries where the cost of labour, electric energy and natural resources is lower, or a factory’s productivity-to-­ cost ratio is higher than in your home market. For example, Chinese telecoms and consumer electronics company, Huawei Technologies, opened its first research and development (R&D) centre in Sweden in 2000 to benefit from access to qualified telecoms engineers. The expected output in terms of technology development was attractive enough to outweigh the disadvantage of higher salary levels. In 2018, it announced plans to open R&D centres in Switzerland, citing the presence of the Swiss Federal Institutes of Technology in Zurich and Lausanne as one of the main motives. An international presence will also allow your firm to improve cost structures by spreading fixed costs, such as investments in the R&D of new products and processes over a larger number of markets. All the while, your multinational will be improving its internal processes by cherry picking best practice from each of its foreign subsidiaries and rolling it out business wide. Tax havens represent another driver of cost reduction: firms move their headquarters or production activities, and create subsidiaries to avoid excessive taxation both at home and in international markets. Examples include the headquarters of Inter Ikea Holding B.V. and Fiat Chrysler Automobiles N.V., which both moved to the Netherlands. The “double Irish” strategy implemented by Google exploits the differences in the definitions of corporate residency by Irish and US legislation.

1.2.2 Internationalization for Competitive Advantage Of course, global expansion for competitive advantage has the similar end goal of increasing your firm’s economic performance as the financially driven motives discussed so far, but it is often a more strategic and long term play. Entering new markets can give your firm competitive advantage by giving it

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access to unique resources and specialist skills. You will be able to offer customers a global level of service, and enjoy an enhanced reputation as an international brand. Examples are numerous and span many industries. Belgian advanced materials and specialty chemicals Solvay Group acquired Ausimont (Italy) to enhance capabilities in specialty chemicals in 2002. Italian eyewear firm Luxottica acquired stores to directly approach its retail clients in the USA and South Africa. In 2010, General Motors entered into an alliance with Shanghai based SAIC to access the Chinese automotive market. Likewise, in 2007 Industrial and Commercial Bank of China acquired 20% of South Africa’s Standard Bank to facilitate and finance trade flows between China and Africa. Aerospace company Boeing opened its Research and Technology Center in Madrid (Spain) in 2002 to collaborate with the Polytechnical University of Madrid to access technological competences and talents in Spain and Latin America. A German subsidiary of aerospace group Airbus (headquartered in the Netherlands), began collaborating with engineering and technology conglomerate Siemens Group in 2016, to aid its ambition of converting planes to electric propulsion. One of the less tangible yet important motives for foreign expansion is the resulting boost to your brand’s prestige and reputation. This, in turn, is potentially beneficial to domestic sales. However, this long term strategic—rather than quick win financial—motive can be a tough sell and often goes way beyond the capacity of the typical manager, who presents traditional mid-­ term business plans to justify their decisions.

1.2.3 A Chance to Learn Another intangible and long-term impact of going abroad is learning. Internationalization exposes you to the best ideas and business practices that the globe has to offer. An international presence allows you to collect data about foreign markets, acquire new skills, and enter new business networks. This enables you to make more informed decisions about your next round of foreign market entry strategies. “Learning by experience” is a valuable consequence of internationalization. International firms build their new organizational routines via a trial and error process, which allows them to replicate best practices across a variety of markets, as well as in their domestic base (Boxes 1.1 and 1.2).

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Box 1.1  Rosinter Restaurants: Learning (and Earning) from Mistakes (Gryaznova & Annushkina, 2013) Rosinter Restaurants is a Russian casual dining chain. An 2004 analysis of its restaurants’ performance across borders revealed an interesting learning opportunity. When the company entered Prague in the Czech Republic it struggled with controlling costs. It had to improve and fast! The resulting operational improvements were so effective, that the restaurant began to operate even more efficiently than those in its home market. Indeed, its Prague location managed the same client turnover as one of its Moscow locations, at circa 160,000 visits per month, but it did so with only 45 employees, as opposed to 110. The learnings from the new market were quickly adopted back home.

Box 1.2  Mahindra & Mahindra in the USA: Learning Applied Back Home (Madhavan, 2017) Mahindra & Mahindra, an Indian car and agricultural equipment manufacturer, entered the US market in 1994 with the intention of selling its compact tractors. Mr. Mani Iyer, President & CEO of Mahindra USA, said in one of his interviews: “Being successful in the US is critical to calling ourselves a truly global brand.” Besides gaining prestige and presence in one of the toughest markets for agricultural equipment, the company learned to deal with strict emission controls and demanding customers with high standards in comfort, ergonomics, and design. This knowledge was useful back home in India and in other emerging markets, which were quickly developing in terms of evolving customer requests and gradually tightening environmental regulations.

1.2.4 Diversifying Risk International growth is a good way to help your company protect itself. Risk diversification via internationalization allows you to reduce your firm’s dependence on a single market’s economic cycle, exchange and interest rates, and increases in the price of raw materials and wages. Firms from emerging markets are well practiced in internationalizing their businesses to put their capital into safer political environments, via both equity investments and export activities that leverage low offshore tax rates.

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1.2.5 Reactive Motives for Internationalization The motive for taking your firm abroad may not be entirely in your hands. You may need to move as a reaction to an external stimulus; this is known as the “band-wagon effect”, and particularly applies to foreign market selection, imitating competitors, and following clients. For example, liberalization in emerging markets created “waves” of foreign direct investment to Eastern Europe and the ASEAN region. Internationalization can also be influenced by national political or geopolitical interests: for example, a single firm may be requested to assist its homeland in fulfilling the country’s strategic development goals. China, where economic growth is increasingly dependent on the availability of natural resources, is an example of this. Chinese state-owned or state-related firms demonstrated their interest in shale technology investing to a total of circa 19 bn USD, in deals that were implemented in a relatively short period of time, between 2011 and 2013. In July 2012, CNOOC (China National Offshore Oil Corporation) acquired Nexen, a Canadian firm working with onshore oil, oil sands, and shale oil and gas technologies. The promise of Chinese investors to avoid headcount reduction was not honoured in the subsequent years as the integration of Nexen resulted in a negative impact on CNOOC, as shown in its financial reports. In the same year of the Nexen–CNOOC deal, another Chinese player in oil and gas, Sinopec, founded a joint venture with Talisman Energy, a Canadian global upstream oil and gas company specializing in shale oil and gas technology. In 2011, Sinopec acquired another important Canadian firm in the shale gas industry, Daylight Energy. In 2013, Chinese company Sinochem, oil and chemicals, acquired a 40% stake in Wolfcamp Shale from Pioneer Natural Resources Company, located in West Texas (USA).

1.3 International Strategy Control Panel As we have seen, there is a multitude of reasons as to why a business might want to expand internationally, some more tangible than others. Despite this, internationalization continues to be measured by the narrowly defined financial indicators of success or failure, traditionally using two parameters: profitability and growth rates. This approach leaves other measures of success or failure on global markets to intuitive “off-the-record” or implicit valuations. Limitations in the use of financial indicators are numerous. Differences in accounting standards across countries impede the comparison of financial

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statements among nations. Financial indicators describing past performance are often useless in predicting a firm’s capacity to generate value in the future. The profitability of a firm’s international subsidiaries is hardly comparable due to intra-firm pricing policies. An example from history shows us that financial indicators do not always offer a broader strategic perspective of performance. British Prime Minister Margaret Thatcher wrote, on the composition of her War Cabinet of 1982: “[Harold Macmillan’s] main recommendation was to keep the Treasury—that is, Geoffrey Howe—off the main committee in charge of campaign, the diplomacy and the aftermath. This was a wise course, but understandably Geoffrey was upset. Even so I never regretted following Harold Macmillan’s advice. We were never tempted to compromise the security of our forces for financial reasons. Everything we did was governed by military necessity” (Thatcher, 2011). By excluding a financial perspective from her war cabinet, Mrs. Thatcher ensured that long-term strategic and military thinking was led completely undisturbed by budget or cash-flow concerns. This approach is impossible to replicate for businesses, but may offer a different perspective to managers and entrepreneurs whose attention is entirely absorbed by routine financial and economic indicators. As an alternative to the “tunnel vision” of economic indicators, we have developed an international strategy control panel (Table 1.1) to help you systematically and comprehensively define your motives and create your own measurable goals for internalisation. The upper section of the control panel starts with you, the manager or entrepreneur. Research shows that the experience and motivation of business leaders directly influence the patterns and speed of the firms’ growth in international markets. Your journey starts with a dream statement of your internationalization objectives. This may be stated explicitly, or be implicitly embedded into a statement that describes the desired future state of the business. Your dream statement will be influenced by your personal self-realization objectives— aspirations driving you personally as a business leader, ideas about your personal role in the society. Mr. Brunello Cucinelli, founder of one of the leading luxury apparel “Made in Italy” brands carrying his own name, had the dream statement: “to work for the moral and economic dignity of human beings”. Meanwhile, Mr. Jack Ma, the founder of Alibaba Group, a Chinese conglomerate specializing in online commerce, social media, and cloud computing, had the dream

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Table 1.1  International strategy control panel

Prestige, learning, social, and financial objectives DREAM STATEMENT What makes us different and who would we like to become in global markets?

What is our ambition in global markets?

How can we change industry/society for the better?

Why is our firm a better place to work?

Corporate or business unit level

SELF-REALIZATION OBJECTIVES FOR MANAGERS AND ENTREPRENEURS

Value-creating capacity of the firm VALUE FOR CUSTOMERS How does our presence in international markets serve to improve the way we solve customers’ problems?

EMPLOYEE INVOLVEMENT

MARKET POSITIONING VS. COMPETITORS

How does our presence in international markets serve to improve our employees’ motivation, satisfaction ,and involvement?

What are our growth rates, profitability, market share, and relative market share, and how are our products/services perceived by customers vs. competitors?

SKILLS/ CAPABILITIES

RESOURCES

Which new skills/capabilities (technological and managerial) can our organization acquire from international markets?

Which new resources (financial, tangible, intangible) can we access from our organization’s presence in international markets?

SCALABILITY ACCESS TO DISTRIBUTION

Are we receiving access to a new type of distribution channel?

ACCESS TO PRODUCTION or R&D CAPACITY

ACCESS TO CAPITAL/ INVESTMENTS

Are we solving capacity constraints? Are we accessing necessary skills/ technologies?

Are we solving the financial need issue?

business unit level

How to measure progress

SOURCES OF COMPETITIVE ADVANTAGE

FINANCIAL and ECONOMIC INDICATORS GROWTH

PROFITABILITY

CASH FLOW

EFFICIENCY

SALES BACKLOG

SUSTAINABILITY PERSPECTIVE Legal

Ethical

Environmental

Social

Political

Sustainability of suppliers and related parties

statement of wanting to offer opportunities for small businesses to get in touch with potential customers and to eventually challenge large enterprises. The dream statement is an important message to the people working for your business, your customers, your marketplace, and to the social community to which it is connected. Almost every organization has a mission and a vision, yet few of these speak directly to people’s hearts to instil genuine engagement and a sense of

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belonging, as employees or suppliers or customers. Entrepreneurs’ have dreams “behind the mission”, such as Mr. Jack Ma’s “build a company that could make China and the world proud and one that could cross three centuries to last 102 years”. Your dream statement describes the desired future of the company in global markets, whether that is an ambition to become the next billion dollar global business or to “provide clean water to everyone, everywhere”, as for non-profit organization World Vision. The dream statement and self-realization objectives are defined at the corporate level. The rationale for deploying them (from the third layer onwards of the international strategy control panel) at the business unit level is that performance indicators and ways to achieve the stated corporate goals may vary drastically according to the characteristics of each business unit inside your firm. For example, a company with two business units respectively selling industrial equipment and measurement/analysis services for, say, the pharmaceutical industry, would need at least two completely different sets of business processes for its two business divisions. Sales and pricing tactics, approaches to serving international markets would vary too. The third part of the international strategy control panel focuses on the value creating capacity of your firm (or business unit for multi-business companies): How can internationalization help you to better solve clients’ problems and simplify or enhance their activities? How do international projects make your employees more motivated, happier, and therefore genuinely involved their work? The value creating capacity is benchmarked by competitors and producers of eventual substitute products and solutions: Is the firm’s market share growing? Is internationalization rendering the firm even more indispensable to its customers? The value creating capacity of the firm, with its ultimate goal of increasing the firm’s value for its shareholders, relies on two pillars: sources of competitive advantage, and scalability. Do international projects increase your firm’s technological or industrial know how? Which resources (people, factories, labs, contacts with distributors, cash) will be added and later employed by the internationalization activities? Do international activities create scalability opportunities—i.e., organization of your firm’s activities to accommodate growth and to exponentially increase returns to scale? The central part of the international strategy control panel includes financial indicators, measuring growth, profitability and return on investments, efficiency, cash management, and sales backlog.

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The sustainability of business from a non-competitive point of view is particularly important in unfamiliar social, political, legal, and competitive contexts of new foreign markets. Legal issues, trouble with social acceptance by local stakeholders, and commonly held negative perceptions of multinationals may seriously damage otherwise functioning business models. The international strategy control panel looks complex, but it is in fact easy to use. It would be useless and too costly to deal with all indicators at the same time and with the same frequency. While naturally the attention is constantly driven towards financial performance indicators, you should be aware of the need to monitor the remaining indicators. The trick is to agree upon the right balance between measurement precision, the quality of indicators, and the effort dedicated to obtaining the objectives thereof. Qualitative perceptions of various indicators retrieved via qualitative questionnaires, or even informal conversations with key members of the top management team, may be used to ensure timely feedback. Similar to an aeroplane cockpit, your attention will be directed towards one indicator at the right moment and for the right period of time.

1.4 D  efining the Firm’s Full Scale in Global Markets Definition of the firm’s international growth objectives starts from the dream statement. In our experience, one of core weakness in the internationalization strategy of many firms is rooted exactly in the lack of capacity to “dream big”—or, in the opposite, equally dangerous case, in “dreaming too big”. Many large consultancies propose that they will assess clients’ “full potential” in domestic and international markets. Reaching this “full potential” allows firms to achieve their full capacity utilization for the existing business model. The suggested improvements, which are undoubtedly important, relate to actions aimed at improving both revenues and the cost structure: optimizing distribution channels, marketing investments, pricing, and product strategy; enhancing the sales force’s capabilities and motivation; reducing internal complexity and introducing lean, coordinated, and total quality-­ oriented internal processes; reducing overheads. Conversely, our “full scale” (rather than “full potential”) approach looks broadly at the firm’s capacity to generate economic value. The key question we ask is: What should be done—i.e., which constraints are to be eliminated to create another billion euro business? While it may not be an intention of the

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Box 1.3  Universal Scalability Law (in Computing) Scalability is a function describing the relationship between the input and output of a system. Universal Scalability Law was initially defined for hardware. For example, time of execution of an activity (output) versus number of processors (input), and later for software (gets per second vs. number of active user processes (input)). The output positively depends on the quantity of resources employed and is negatively influenced by certain intrinsic characteristics of the resources used. There are three factors that limit the scalability of computer hardware and software: 1. Need for concurrency: Not all resources can be employed independently and in parallel; the need to use some resources together, concurrently, negatively impacts an otherwise more linear relationship between the amount of resources used and the output; 2. Need for sequential use of resources: The need to employ resources in a certain order limits the output of a system; 3. Lack of coherency: The “coherency delay” (additional overhead due to interprocessor communication)—the employment of a variety of diverse resources may not be immediate, and may require a set up time or investments.

company’s shareholders to build another billion-euro business, the question helps to look at the business model from a different angle: that of its scalability. The term “scalability” probably came to the management field from computer science and technological start-ups that tried to extend scalability logic—in computer science, a focus on productivity and the efficiency of resources employed—to their business models (Box 1.3). Business model scalability is a far more complex phenomenon (Box 1.4)— efficient and productive employment of resources is only one of its ingredients. Business model scalability, contrary to the scalability in computer science, is limited by both sides—supply (resources or capacity constraints) and demand, willingness of “users” (clients) to use the “system” (products or services). Box 1.4  Scalability of Business Models (Zang et al., 2015) “A scalable business model is one in which operational elements have been organized to promote growth, but importantly this is achieved while also preserving, and in some cases increasing, the quality and features of products/ services.” Or, “Business model scalability is the extent to which a business model design may achieve its desired value creation, and capture targets when user/customer numbers increase and their needs change, without adding any proportionate extra resources.”

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Box 1.5  Scalable Business Model Implemented by Jollibee Foods Corporation Jollibee Foods, a fast food chain headquartered in the Philippines, started as an ice cream shop in 1975. In 2017 it had 5 bn USD of capitalization, and declared its goal to become one of the top five fast-food chains globally. Only few years after the foundation, when the chain had only five restaurants, its founder announced to his associates his dream of creating the largest food company in the world. The company, with circa one third of its sales abroad, now targets the Filipino community with its Jollibee-brand restaurants, and manages more than 10 other restaurant chain brands in the Philippines, China, the USA, Saudi Arabia, Qatar, Kuwait, Bahrain, the UAE, Singapore, Vietnam, Brunei, and Italy. Initially Jollibee expanded internationally via franchising agreements, but it soon understood the complexity of adaptation and the need to invest people and capital in learning about local conditions. Success in fast food family restaurant businesses largely depends on local tastes and eating customs. Thus, for Jollibee, learning took time and effort, and investments were difficult to predict. To speed up its international growth, Jollibee opted for acquisitions. This allowed it to focus on what it knew how to do well—co-ordinating affiliated restaurants and running the Jollibee-brand chain. Reinventing menus and business formulas for every new geography would have taken a significant amount of managerial time and required substantial injections of financial and human resources. A combination of working fast food chains acquisitions, master franchising for several global brands, and direct management of expansion of its Jollibee brand allowed the company to speed up its internationalization. It accelerated this further by entering into already working fast food business models in the USA and China, and expanding the Jollibee brand for the Filipino community in a variety of foreign locations.

Successful business model scalability does not mean that a 10% increase in capital, human resources, or managerial time equates to a 10% increase in the business’s sales or profits. The goal is to increase resources employed by 10% and achieve double or triple the sales and profits, by either selling greater volumes or commanding higher prices. A broader look at the business model has allowed many companies to accelerate otherwise difficult growth in international markets. In the case of Jollibee Foods Corporation, the company achieved significant international growth (Box 1.5). It did this by delegating the managerial and human resource investments required for new restaurant openings to franchising partners. It also outsourced local adaptation by acquiring successful incumbent businesses, particularly in such culturally distant markets as the USA and China.

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To understand the economic value embedded within a business model, and how your business can reach the billion euro threshold, we need to unpack how to apply the three “ingredients” of scalability. These are: 1. Uniqueness of the value proposition to customers: Would your customers be able to replace our products or services with alternative solutions relatively seamlessly, in terms of costs and performance? 2. Possibilities to reconfigure your activities: (a) Distribution channels: are your distribution channels adding more than a linear increase in sales, for instance by improving the service to customers via speedier or more frequent delivery? (b) Capacity constraints: are there possibilities to overcome traditional capacity constraints via outsourcing or standardization of activities, or by using different, more efficient technologies? (c) Outsourcing of investments: are there possibilities to outsource the need for further investments (in distribution, production capacities, R&D, logistics, customer services, training of end users, etc.) by “hiring” external investment capacity via contracts or alliances? 3. Adaptation to local markets: Are there possibilities to avoid the need for investment in adaptation by focusing on geographies or markets with similar needs? Is there potential to delegate investment in adaptation to partners or to the producers or services positioned closer to the customer along the industry supply chain? Is it possible to manage investment in adaptation efficiently with shared platform-based product strategies, or by separating activities of adaptation from the core production processes? The full scale approach helps you avoid “trend planning”, by which a future year’s performance is calculated by the current year’s performance plus a percentage (e.g., 2010 = 2019 + 2.3%). The problem with trend planning is that it falls down when unforeseen events occur. Once the full scale is projected and your ideas about your goals are fine-­ tuned with the help of the international strategy control panel, it is time to think about the right approach—your new global mindset—to the internationalization, rather than going directly after the first international opportunity. Or, at least, to question your global mindset contemporarily with your first steps on foreign markets.

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Lall, S., & Siddharthan, N. S. (1982). The Monopolistic advantages of multinationals: lessons from foreign investment in the U.S. The Economic Journal, 92(367), 668–683. Lambert, F. (2017). Airbus partners with Rolls-Royce and Siemens to build an electric airplane. Electrek. Retrieved November 30, 2018, from https://electrek. co/2017/11/28/airbus-partners-rolls-royce-siemens-build-electric-plane/ Levy, O. (2005). The influence of top management team attention patterns on global strategic posture of firms. Journal of Organizational Behavior, 26(7), 797–819. Li, L., & Qian, G. (2005). Dimensions of international diversification: the joint effect on firm performance. Journal of Global Marketing, 18(3/4), 7–35. Licata, P. (2018). Batteria: Catl diventa miliardaria. L’Automobile. Retrieved November 22, 2018, from https://www.lautomobile.aci.it/articoli/2018/06/21/ batterie-catl-diventa-miliardaria.html Lu, J., & Beamish, P. (2004). International diversification and firm performance: the S-curve hypothesis. Academy of Management Journal, 47(4), 598–609. Luong, P. J., & Weinthal, E. (2004). Contra coercion: Russian tax reform, exogenous shocks, and negotiated institutional change. The American Political Science Review, 98(1), 139–152. Luxottica media and investor relations. (2006). Luxottica to make key acquisition of 100 optical stores in the United States. Retrieved November 30, 2018, from http://www. luxottica.com/en/luxottica-make-key-acquisition-100-optical-stores-united-states Luxottica media and investor relations. (2007). Luxottica acquires two prominent sun chains in South Africa. Retrieved November 30, 2018, from http://www. luxottica.com/en/luxottica-acquires-two-prominent-sun-chains-south-africa McKee, A. (2014). Being Happy at Work Matters. Harvard Business Review. Retrieved November 23, 2018, from https://hbr.org/2014/11/being-happy-at-work-matters NDTV. (2018). What Jack Ma, Set To Step Down in 2019, Told Alibaba Employees. Retrieved March 30, 2020, from https://www.ndtv.com/world-news/ alibaba-founder-jack-mas-letter-to-staff-on-his-retirement-full-text-1913961 Nielsen, C., & Lund, M. (2015). The concept of business model scalability. Retrieved March 1, 2019, from https://ssrn.com/abstract=2575962 or https://doi. org/10.2139/ssrn.2575962 Passeri, E. (2018). Brunello Cucinelli celebra il sogno di Solomeo e il capitalismo umanistico. Fashion Network. Retrieved November 23, 2018, from https://it. fashionnetwork.com/news/Brunello-Cucinelli-celebra-il-sogno-di-Solomeo-e-ilcapitalismo-umanistico,1010502.html#.W_e8YOhKg2w Petroff, A. (2016). Fiat’s founders are leaving Italy. CNN Business. Retrieved March 6, 2020, from https://money.cnn.com/2016/09/05/news/companies/agnelliitaly-netherlands-fiat-ferrari/index.html Preisinger, I., & Bryan, V. (2018). China’s CATL to build its first European EV battery factory in Germany. Reuters. Retrieved November 22, 2018, from https:// www.reuters.com/article/us-bmw-catl-batteries/chinas-catl-to-build-its-first-european-ev-battery-factory-in-germany-idUSKBN1JZ11Y

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Qian, G. (2002). Multinationality, product diversification, and profitability of U.S. emerging and medium-sized enterprises. Journal of Business Venturing, 17(6), 611–634. Sayson, I., & Wong, S. (2017). Jollibee Foods eyeing more acquisitions in US and China. Manila Bulletin. Retrieved December 6, 2018, from https://business.mb. com.ph/2017/10/13/jollibee-foods-eyeing-more-acquisitions-in-us-and-china/ Schrader, H. (2018). Huawei to open R&D centres in Switzerland. Switzerland Global Enterprise. Retrieved November 29, 2018, from https://www.s-ge.com/ en/article/news/20183-ict-huawei-switzerland Schwartz, B. (2015). Practical scalability analysis with the universal scalability law. VividCortex. Retrieved December 7, 2018, from https://cdn2.hubspot.net/ hubfs/498921/eBooks/scalability_new.pdf Sethi, D., Guisinger, S., Phelan, S., & Berg, D. M. (2003). Trends in foreign direct investment flows: a theoretical and empirical analysis. Journal of International Business Studies, 34(4), 315–326. Tallman, S., & Li, J. (1996). Effects of international diversity and product diversity on the performance of multinational firms. Academy of Management Journal, 39(1), 179–196. The New York Times. (2007). ICBC to buy $5.6 billion stake in South African bank. Retrieved November 30, 2018, from https://www.nytimes.com/2007/10/26/ business/worldbusiness/26iht-26icbc.8062473.html van Tulder, R. (2015). Getting all motives right: a holistic approach to internationalization motives of companies. Multinational Business Review, 23(1), 36–56. Venzon, C. (2018). How Jollibee's founder is building a fast-food empire. Nikkei Asian Review. Retrieved December 6, 2018, from https://asia.nikkei.com/ Spotlight/Cover-Story/How-Jollibee-s-founder-is-building-a-fast-food-empire Verbeke, A., & Brugman, P. (2009). Triple-testing the quality of multinationalityperformance research: an internalization theory perspective. International Business Review, 18(3), 265–275. World Vision company information. (2018). Retrieved November 23, 2018, from https://www.worldvision.org/our-work/clean-water Yesufu, L. O. (2018). Motives and measures of higher education internationalisation: a case study of a Canadian university. International Journal of Higher Education, 7(2), 155–168. Zanger, D. (2018). Who is Jack Ma? The story of Alibaba’s founder. The Drum. Retrieved November 23, 2018, from https://www.thedrum.com/ news/2018/10/18/who-jack-ma-the-story-alibabas-founder

2 Global “E–E–E” Mindset: Empathy, Ethics, and Engagement

You have perfected a business model that makes you a leader in your domestic market, systems are in place and you know how things work. It is time to roll out your winning formula internationally. Not so fast! Internationalization involves abandoning the “single story” of how your business works within its home market: methods that are tried-and-tested at home will not necessarily translate into a foreign market. Inability to err from the way things have always been done—or “path dependence”—can lead to costly errors and failure. In this chapter, we introduce the E–E–E (Empathy–Ethics–Engagement) framework that sets out the foundations of international expansion. The first part of this chapter discusses organizational empathy—a firm’s ability to listen to local market requirements. The second part deals with the complex issue of a firm’s ethic: how does it change once you start serving foreign clients and hiring foreign employees? are the existing definitions of “good management” and “bad management” still relevant? which guidelines and ethical standards should your employees follow? Finally, we discuss engagement—effort dedicated by top management to international development as acknowledging the need to dedicate time to foreign markets is the first step in successful internationalization.

2.1 A  ctivating a Firm’s Global Mindset: the E–E–E Framework Upper echelons theory says that organizations are reflections of their top management teams. One of the core tasks you have as a business leader is to set a direction for the firm’s development. This involves providing other © The Author(s) 2020 O. E. Annushkina, A. Regazzo, The Art of Going Global, https://doi.org/10.1007/978-3-030-21044-1_2

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managers and employees with implicit or explicit guidelines about their daily decisions and behavior. Establishing your firm’s direction, rules and values is particularly important when expanding into foreign markets. A new territory will involve customers, suppliers, employees and stakeholders, with different needs to those in your home country. New requests, challenges, and opportunities will force you to make unexpected decisions that are unique to foreign markets. In order for you and your team to do this effectively, management must define, communicate and demonstrate (by example) a firm’s and individual “global mindset”. This will simplify the daily routines of the line managers and employees working in unfamiliar markets. A global mindset—of your firm’s employees and of the firm itself—will facilitate international expansion in terms of breadth (entering a larger number of new markets) and depth (gaining expertise and specialization in individual markets). GLOBE (Global Leadership and Organizational Behavior Effectiveness) researchers define the global mindset as: “the set of individual qualities and attributes that help a manager influence individuals, groups and organizations who are from other parts of the world” (Javidan & Bowen, 2013). According to GLOBE, a person’s global mindset can be defined by three competencies: cognitive ability (knowledge about global business and different cultures, coupled with the ability to learn more), affective ability (curiosity, willingness to take risks, energy, and confidence in working with people from other parts of the world), and behavioral ability (skills to build trusting relationships with people from other parts of the world). Research reveals several factors that positively impact the development of a global mindset both at a corporate and personal level: • Industry: high content of technology in the product or service produced by the firm equates to a stronger global mindset. • Functions within the firm: managers and employees in marketing, communication, and finance tend to be more at ease in dealing with different business contexts compared to managers working in administration, IT, and production departments. • Higher hierarchical level within the firm. • Strong proficiency in more than one language. • Number of countries in which the individual has lived (Table 2.1 illustrates the positive impact of the internationality of the top management team on the global expansion of two Russian telecom operators: VimpelCom’s international board of directors seemingly has a positive impact on the breadth and speed of the firm’s internationalization). • Degree in international business, international management, or international affairs.

Non-­ Russian Chairman of the Board

0 0 0 0

1

1

0 1

1 1

0 0

Non-­ Russian Year CEO

0 0 0 0

2002 2003 2004 2005

2006 0

2007 0

2008 0 2009 0

2010 0 2011 1

2012 1 2013 1

33 33

40 44

33 44

29

29

43 43 43 29

Non-­ Russian Board of Directors, % of total

Mobile Telesystems (MTS)

Withdrawal from Uzbekistan

Belarus Ukraine Uzbekistan Turkmenistan;failed attempts to enter Turkey and Kyrgyz Republic Failed attempts to enter Iraq, Egypt, Saudi Arabia, Serbia, Bosnia, Algeria, Italy Armenia, and India (via AFK Sistema); failed attempt to enter Georgia Failed attempt to enter China Announced interest in Kazakhstan and Azerbaijan

2000 (listed on NYSE)

Internationalization pattern (countries of successful and unsuccessful internationalization)

1

0

1 1

0 1

0 0

1 1

0 1

1

0

0 0

1 1 1 1

1 0 0 0

Non-­ Russian CEO

Non-­ Russian Chairman of the Board

VimpelCom

44 45

56 56

56 56

56

56

60 56 56 67

Non-­ Russian Board of Directors, % of total

Kyrgyztan, Laos; Orascom deal: Algeria, Central African Republic, Burundi, Zimbabwe, Bangladesh, Pakistan, Italy, Canada Withdrawal from Vietnam Withdrawal from Cambodia

Vietnam Cambodia

Uzbekistan, Georgia, Armenia

Ukraine, Tajikistan

Kazakhstan

1996 (listed on NYSE); in 1998 acquisition of 31.6% of VimpelCom by Telenor (Norway)

Internationalization pattern (countries of successful and unsuccessful internationalization)

Table 2.1  Internationalization paths versus international composition of top management teams (example of two Russian telecom operators, MTS and VimpelCom) (Annushkina, 2014)

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• Age: younger managers are more interested in working abroad. • Gender: women tend to score higher on the propensity to welcome diversity, as well as on intercultural empathy, energy, and confidence in dealing with uncomfortable situations. Men tend to have more knowledge about the ways business is conducted in different parts of the world. We listed these factors to make you aware about potential strengths or challenges you, your colleagues, your organization may have in developing your firm’s unique global mindset. Interestingly, the same research demonstrated that the size of a firm is not indicative of its managers’ abilities to deal with, and learn, from global markets. While managers working in larger corporations may know more about global business (merely because their companies are offering them more opportunities to work abroad), managers in smaller businesses scored almost equally for their ability to deal with different cultural and business contexts. Other “global mindset” definitions describe a rich variety of intrinsic qualities, including a person’s cognitive ability to deal with different environments, openness and adaptability to new situations (Box 2.1). Box 2.1  Definitions of Global Mindset “Global mindset is an individual’s capability to influence others unlike themselves.” (Javidan & Bowen, 2013). “An ‘international mindset’ can be thought of as a ‘willingness to learn’ and an ‘ability to adapt’… This involves… knowledge about other cultures,… making domestic companies aware of the cultural assumptions underlying their own business practices and behaviors,… the extent to which each individual is sufficiently flexible, adaptable, and open to ‘other ways of doing things’.” (Estienne, 1997). “CGM [corporate global mindset] encompasses the degree to which the company, in an integrated manner and within a global perspective, learns to think, to act, and to operate according to the company’s structure and organization… Global orientation relates to the commitment and effort to understand foreign markets, international networks and the importance of partnerships with other companies.” (Felício, Meidutė, & Kyvik, 2016). Global mindset is “a highly complex cognitive structure characterized by an openness to, and articulation of, multiple cultural and strategic realities on both global and local levels, and the cognitive ability to mediate and integrate across this multiplicity.” (Levy, Beechler, Taylor, & Boyacigiller, 2007) Global mindset is “proactiveness on international markets and the manager’s commitment to internationalization and an international vision.” (Nummela, Saarenketo, & Puumalainen, 2004) “Being world class” means: “driving for a bigger, broader picture; balancing paradoxes [elements that are contradictory,… what we thought of as ‘true’ or ‘obvious’ becoming less so]; trusting process over structure; valuing differences; managing change; seeking lifelong learning.” (Rhinesmith, 1995).

2  Global “E–E–E” Mindset: Empathy, Ethics, and Engagement  EMPATHY

ETHICS

ENGAGEMENT

Ability to acknowledge, to analyze, and to manage the diversity of international business contexts

Rules and values governing a firm’s activities in global markets: what is right and wrong, good and bad, worthy and unworthy

Commitment of time, due attention, and resources to the development of the international market and dealing with new stakeholders

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Activating organizational GLOBAL MINDSET

GOING GLOBAL Fig. 2.1  E–E–E framework: activating a your firm’s global mindset

We can summarize the most frequently mentioned attributes of a global mindset, such as cognitive ability and attitude toward working with different cultures, as “empathy”. The last two definitions shown in Box 2.1. identify two other qualities that are required of people and organizations working in international markets. The first is “engagement”, the commitment, in time and effort, needed from managers, entrepreneurs, and organizations if they are willing to start working in international markets. The other is “ethics”, a set of rules that govern our actions by defining the difference between, right and wrong, good and bad, and worthy and unworthy. An international business context can often throw up situations which question long-held understandings of right and wrong. Ethics provides a solid foundation to resolve such paradoxes. The three “Es” constitute the starting point for the formation of an organizational global mindset that enables will enable your firm to grow in international markets (Fig. 2.1.). In the remainder of the chapter, we discuss the applicability of empathy, ethics, and engagement to the definition of your firm’s global DNA—its global mindset.

2.2 Empathy in Global Markets “…Firms become enabled and constrained by capabilities.” (Arikan & McGahan, 2010) Success in a domestic market generated by a working business model may entrench managers’ and entrepreneurs’ reasoning in a series

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of stereotypes about how things work in their industry, and also in global markets. They become incapable, as former U.S.  President Barack Obama said in his commencement speech at Morehouse College, of “seeing the world through other people’s eyes.” The above quote describes “path dependence”—an inability to stray from “the way we’ve always done business”. It is a typical trait of many successful businesses and is caused (among other reasons) by the fact that most firms develop their business models gradually along a certain trajectory. Path dependence determines a firm’s choice about the key elements of its business model: what kind of value is offered for customers (product and service configuration, pricing, and sales channels), how the value is created (through the firm’s own resources and capabilities, or the firm’s partners network) and how the value is captured (pricing and channel decisions). Positive economic and competitive results achieved by a firm in its domestic market, cause it to stick to the same tried-and-tested business model when embarking on new projects. Managers’ and entrepreneurs’ conviction about how things work may also be reinforced by similar—though not necessarily correct—decisions implemented by peer competitors. Another factor creating path dependence is a tie to certain technologies, channels, and production facilities because of large investments made in the past. If a new strategy risks writing-down past capital investments, it becomes the less favorable choice. Moreover, if previous investments have not been amortized it is difficult to invest in new projects that address the changed external context. Growing firms also tend to cope with the increasing complexity of business processes by establishing procedures, rules, and routines. While these serve a purpose, they also entrench organizations in a set way of doing things, and make deviation from the route difficult. Path dependence is difficult to combat because it brings many apparent and immediate benefits to the firm. 1. Ease of coordination of business activities (all is known, the only thing to be done is to replicate the activity in a new context). 2. Reduced cost of learning—there is nothing to be learned, and no costs to be borne, if the firm decides to replicate the same activity or practice in a new market. 3. No synergies created in the perfectly working business model are interrupted by the newness of a different procedure, or by the introduction of a product modification.

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4. There is no fear of failure felt by employees, as they are basically replicating a process or a routine that works perfectly in the domestic market. If it does not work in the foreign market, their reputation is not threatened as they have a justification for applying a well-known best practice. These arguments are understandable but flawed. This becomes apparent by questioning the applicability of the domestic business model to foreign markets. A way to achieve this is through the development of organizational empathy. Organizational empathy helps top and middle managers and employees working in direct contact with foreign customers to recognize, understand and communicate the unique needs of each new geography—in particular, those that differ from the needs of domestic customers. The company is then well placed to evaluate the costs and benefits of tailoring its products, services and business processes to each new market. Dedicating attention, time and effort to understanding new foreign customers, colleagues, partners and suppliers helps uncover information about a new market that may have been overlooked. The reasons for poor collaboration from local collegues or a poor product uptake, can be viewed from a variety of new angles and different points of view. For example, an North America-based CEO skim-reading a report into the Russian coffee shop market at the turn of the Millennium, would have dismissed the former Soviet Union as a no go area: coffee consumption was very low and not growing. However, they would have missed the “weak signals” that could only be spotted at ground level, namely the instant success of few newly opened coffee shops in Moscow. The problem was not lack of demand, but lack of supply! What we describe here—the ability of a firm to respond to new or changing business contexts—has already been termed “strategic flexibility” or “agility.” This is the ability to recognize new trends in the external environment and implement necessary organizational changes to respond to them. However, when discussing international growth, we prefer to talk about organizational “empathy.” This can be thought of as “strategic flexibility” that starts with capturing and interpreting a new cultural context, where there are differences in culture, legislation, economic cycles, and the level of infrastructure development. “Flexibility” is an action by a firm, whereas “empathy” is the ability to acknowledge the differences in the first place. While we cannot offer a perfect recipe for moving from “path dependence” to “organizational empathy,” a good starting point is simply to be aware of the two phenomena. Secondly, we suggest creating a new organizational routine.

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This is to always include at least one radically different alternative when making a decision about the adaptation or standardization of the core elements of your business model in a new foreign market context. In the chapter of this book dedicated to strategy we further discuss path dependence, cognitive biases in decision-making and how creating strategic real options may enable you to overcome them. At an individual level, professors Mooradian, Davis, and Matzler (2011) define empathy via two facets: emotional (“affective reaction in the observer that results to the exposure to the target”) and cognitive (“intellectual process in which one person attempts to understand the internal states of another person”). For example, if we see a crying child, we start feeling sorry for it (emotional response) and then start searching for ways to alleviate its suffering (cognitive). A firm may train its managers and employees (or assist with organizational routines or procedures) to improve the first, cognitive, aspect of their “empathic abilities” in foreign markets. However, there are few tools—at least to our knowledge—that that positively influence the emotional component of managers and employees empathy. One solution could be to champion the elements of your organizational culture that attract empathic employees, such as openness to new experiences, creativity, warmness towards other humans, and cooperation. We should note, that in the same way as path dependence may cause issues with successful adaptation to foreign markets, an excess of organizational empathy is not beneficial too. Excesses on both sides can lead to the following two costly decision making biases: 1. Path dependence leads to discounting bias—oversimplification of new business contexts, and failure to notice and interpret new, often fragmented and remote environmental information. Discounting bias is one of the key causes of failed adaptation of a firm to differences of foreign markets. 2. Excessive empathic approach causes the opposite problem: illusory perception bias, or noticing distinctions among foreign markets that actually do not exist or are not significant. The result is difficulties with integration and coordination of global activities, and with obtaining efficiencies through standardization of the firm’s products or activities. In the following chapters, we discuss the danger of “under-adaptation” because of the discounting bias, leading to foreign market entry failures caused by managerial mistakes in adapting products, market positioning and even own organizations.

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2.3 Ethics in Global Markets If you are actively engaged in building an international presence, it is not possible to escape the issue of ethical standards. This involves questioning a range of issues, from the fairness and equality of delocalization to the use of social connections to obtain permits. In defining do’s and don’ts for international markets, it is difficult to know which standards should prevail. Should you use exported ethics; relative ethics (standards that vary in different overseas locations); situational ethics—described by Professor McDonald (2010) simply as “if it works, it’s ok”; or universal, cosmopolitan ethics? Alternatively, should decisions about ethical norms vary according to the subject—being universal for topics such as the use of child labor and relative for gift-giving cultures? We suggest that your internationalizing firm should decide in advance on the basic ethical rules for both domestic and international markets. Defined during the first steps abroad, these should be enriched and completed as the firm faces new dilemmas and issues calling for moral guidelines. This set of rules, following the idea of universal moral standards, should be applied regardless of actions and consequences, even if application means losing a cost advantage or an important client. It should also be followed regardless of adherence thereto by other firms—the existence of universal moral rules does not mean that that they are followed and practiced by everyone. Firms’ employees, managers, and owners, by following the predefined set of rules—explicit or implicitly embedded in a firm’s culture—draw mutual encouragement and satisfaction from working towards an engaging common goal. A common counterargument against universal moral codes is that they do not account for cultural differences in the definition of “what is good and what is not.” However, this has been undermined by multiple studies demonstrating that moral standards have insignificant variations from culture to culture. Inspiration for the definition of a firm’s moral standards that will guide its international growth can be found in reflections inspired by Plato on the well-­ being of both state and individuals (Box 2.2). Application of Plato’s reasoning (Box 2.2) to the definition of ethical standards sketches the “ideal state” of the internationalizing firm.

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Box 2.2  Global Managerial Craftsmanship Concept, Inspired by Plato (Klein, 2011) “I tell you that virtue does not come from money, but from virtue comes money and all other good things to man, both to the individual and to the state.” Plato, Apology. The pursuit of excellence, rather than mere economic results, is essential for success. A “bond of shared values”—for instance, wisdom, courage, temperance, and justice—provides employees with greater meaning for their work. Producing quality or excellent goods results in dignity, pride and personal satisfaction. “Managerial craftsmanship” does not permit human manipulation, cynical concepts of consumer dependence, or addiction. Craftsmen are competitive, but without being brutal, inhuman, or driven to win at all costs—their competitiveness is directed towards excellence. A firm with a good purpose embraces only sustainable business practices and encourages the pursuit of excellence. It provides training and education to develop the capacities of its employees and managers—or “constituents.” In turn, these contribute, via their capacities, what is needed for the firm to excel.

Pragmatically, firms also need a set of standards that clearly define “things that are wrong.” This allows staff to discern between “different” and “unacceptable,” for example, between a small souvenir-giving practice, and bribery. Reflections about ethical standards that dictate what is wrong pass through three kinds of reasoning: respect for core human values, human dignity, and good citizenship (determining absolute moral threshold); respect for local traditions; and understanding the role of context in determining right from wrong. Sometimes the “push” to adopt moral standards or sustainability principles comes from the outside. However, if external forces weaken, or are weak to begin with in some locations, the firm’s drive for ethical behavior might weaken too. Another threat is the potential superficiality of corporate social responsibility programs, in which image and bold public statements stand in place of substance. Instead, the ethical set of rules for businesses—a code of conduct— should offer concrete help and guidance, in particular to managers working in new foreign markets, to help them in making decisions regarding new ethical dilemmas. Simple and clear rules of conduct should govern a firm’s direct or indirect dealing, in both domestic and foreign markets, with customers and potential customers, employees, shareholders, suppliers, business partners, competitors, government, authorities and other organizations, partners in consortiums and in alliances, and other stakeholders. They should also influence its interaction with society, especially with regard to the environment, and the economic stability and development of the region. The wider “sphere of influence” of the firm should also include its business partners and supply chain components.

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The code of conduct or ethical rules for internationalizing firms should comprise at least two layers. The first is the definition of the firm’s values, which are absolute and genuine, rather than simply lip service to appealing slogans. The second is the definition of concrete “rules of engagement”, or “rules of conduct”, with each family of stakeholders. For instance, the rule about child labor should include rules about the minimum age of employability; its applicability to the firm’s subsidiaries and suppliers; related legislation and standards; the monitoring firm (itself or a third party); and eventual sanctions. When it comes to global ethics, there is no point “talking the talk” if you do not “walk the walk.” Unfortunately, there is significant evidence about non-adaptation, or superficial adaptation, of an ethical, craftsman’s perspective in globalizing firms. Breaches include the relocation of business activities that are harmful to the environment to regions with less strict regulations, poverty increasing in some areas of the world, protectionism by developed countries, “development” interpreted only from an economic point of view, bribery practices, and so on. The reason for this is that the elimination of illicit behavior, such as corruption, is difficult for firms intending to work in an environment where bribery and rewards for purchase orders are common business practice. “When in Rome, do as the Romans do,” becomes an (unacceptable) excuse for ill business practice. The application of codes of conduct that are counter to local “rules of business” will inevitably lead to conflict: in Box 2.3, we describe alternative methods for dealing with ethical conflicts that arise in international locations. Box 2.3  Possible Strategies for Dealing with an Ethical Conflict Between a Company’s Rules of Conduct and “Local Conditions” (Kohls, J., Buller, P. 1994) Avoiding: Choosing to ignore or not deal with the conflict, so it remains unresolved; an internationalizing firm may avoid doing business with a bribery-­ demanding counterpart. Forcing: Imposing one’s will on another; an internationalizing firm may demand the implementation of certain practices, even if they are not requested or are inconsistent with the local culture. Educating or persuading: A firm may persuade its business partners about the importance of living standards, safety for employees, and protection of the environment. Negotiating: Both parties will give up something in order to reach agreement; for instance, governments, on behalf of firms, may negotiate rules banning unfair trade practices. Accommodation: An internationalizing firm may adopt the culture of lifelong employment, consistent with the host culture, but incoherent with the culture and business practices of the domestic market. Joint problem solving: Parties jointly elaborate the solution by addressing the root of the problem, in an attempt to arrive at a win-win solution for all parties involved.

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Moral guiding principles allow firms not only to avoid the danger of reputation and financial penalties; “ethical capability” activates such areas as: • Firm’s ability to anticipate issues before they arise by acknowledgingits interdependence with stakeholders and by proactive stakeholder management. • Firm’s ability to respond effectively to cross-cultural ethical dilemmas. • Enhanced corporate reputation (positive halo effect on relationships with clients, suppliers, employees). • Fair human resources management system. It is reasonable to conclude that effectively working ethical capability contributes to the sustainability of a firm’s competitive advantage on global markets.

2.4 Engagement: Committing to Global Markets Research has shown that entrepreneurs and managers of firms operating successfully in international markets dedicate a significant portion of their time to travelling to foreign subsidiaries and meeting clients. Managers and entrepreneurs do not only travel extensively to nurture new clients and business relationships, they also gatin first-hand field experience and information that helps them to make reliable and solid decisions. Internationalization will also require time and dedication from the rest of your organization. One study demonstrated the positive impact of short-term international travel on the effectiveness of technology transfer and innovation, finding that technology is best explained via face-to-face communication. Employees from distant (both geographically and in terms of time zones) subsidiaries, who are collaborating via technology, need more time for sharing information, discussion, and decision-making compared to colleagues working in the same building. Global virtual teams may work effectively, but at a different pace. Acknowledgement of the need to dedicate time to foreign markets is the first step in successful internationalization. For example, in his article on global alliances, Ohmae (1989) wrote: “Anticipate that it will take up management time. If you can’t spare time, don’t start it.”

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References Annushkina, O. (2014). The internationalization of Russian mobile telecommunications operators. In C. Pattnaik & V. Kumar (Eds.), Emerging Market Firms in the Global Economy, International Finance Review (Vol. 15, pp.  121–144). Bingley: Emerald Group Publishing Limited. Arikan, A. M., & McGahan, A. M. (2010). The development of capabilities in new firms. Strategic Management Journal, 31(1), 1–18, p. 2. Estienne, M. (1997). The art of cross-cultural management: “an alternative approach to training and development”. Journal of European Industrial Training, 21(1), 14–18. Felício, A. J., Meidutė, I., & Kyvik, O. (2016). Global mindset, cultural context, and the internationalization of SMEs. Journal of Business Research, 69(11), 4924–4932. Javidan, M., & Bowen, D. (2013). The ‘Global Mindset’ of managers: What it is, why it matters, and how to develop it. Organizational Dynamics, 42(2), 145–155. Klein, S. (2011). Platonic reflections on global business ethics. Business & Professional Ethics Journal, 30(1/2), 137–173. Kohls, J., & Buller, P. (1994). Resolving cross-cultural ethical conflict: Exploring alternative strategies. Journal of Business Ethics, 13(1), 31–38. Levy, O., Beechler, S., Taylor, S., & Boyacigiller, N. (2007). What we talk about when we talk about “global mindset”: Managerial cognition in multinational corporations. Journal of International Business Studies, 38(2), 231–258. McDonald, G. (2010). Ethical relativism vs absolutism: Research implications. European Business Review, 22(4), 446–464. Mooradian, T. A., Davis, M., & Matzler, K. (2011). Dispositional empathy and the hierarchical structure of personality. The American Journal of Psychology, 124(1), 99–109. Nummela, N., Saarenketo, S., & Puumalainen, K. (2004). a global mindset—a prerequisite for successful internationalization? Canadian Journal of Administrative Sciences, 21(1), 51–64. Ohmae, K. (1989). The global logic of strategic alliances. In Harvard Business Review (pp. 143–154). Brighton, Massachusetts: Harvard Business Publishing. Rhinesmith, S. H. (1995). Open door to a global mindset. Training and Development, 49(5), 35–43, p. 36, 37,39.

Selected Bibliography Andersson, S. (2000). Internationalization of the firm from an entrepreneurial perspective. International Studies of Management and Organization, 30(1), 63–92. Andersson, S., & Florén, H. (2008). Exploring managerial behavior in small international firms. Journal of Small Business and Enterprise Development, 15(1), 31–50. Andersson, S., & Florén, H. (2011). Differences in managerial behavior between small international and non-international firms. Journal of International Entrepreneurship, 9(3), 233–258.

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Banai, M., & Sama, L. M. (2000). Ethical dilemmas in MNCs’ international staffing policies. A conceptual framework. Journal of Business Ethics, 25, 221–235. Buller, P. F., & McEvoy, G. M. (1999). Creating and sustaining ethical capability in the multinational corporation. Journal of World Business, 34(4), 326–343. Burchielli, R., Delaney, A., Tate, J., & Coventry, K. (2009). The FairWear Campaign: An ethical network in the Australian garment industry. Journal of Business Ethics, 90(4), 575–588. Donaldson, T. (1996). Values in tension: Ethics way from home. In Harvard Business Review (pp. 47–62). Brighton, Massachusetts: Harvard Business Publishing. Gärtner, C., & Schön, O. (2016). Modularizing business models: Between strategic flexibility and path dependence. Journal of Strategy and Management, 9(1), 39–57. Global Leadership and Organizational Behaviour Effectivenes (Globe). (2020). Retrieved March 19, 2019, from https://globeproject.com/ Hambrick, D.  C., & Mason, P.  A. (1984). Upper echelons: the organization as a reflection of its top managers source. The Academy of Management Review, 9(2), 193–206. Hovhannisyan, N., & Keller, W. (2015). International business travel: An engine of innovation? Journal of Economic Growth, 20(1), 75–104. Kolka, A., & Van Tulder, R. (2004). Ethics in international business: Multinational approaches to child labor. Journal of World Business, 39(1), 49–60. Luo, Y. (2006). Political behavior, social responsibility, and perceived corruption: A structuration perspective. Journal of International Business Studies, 37(6), 747–766. Manolova, T.  S., Brush, C.  G., Edelman, L.  F., & Greene, P.  G. (2002). Internationalization of small firms: Personal factors revisited. International Small Business Journal, 20(1), 9–31. Massey, A. P., Montoya-Weiss, M. M., & Hung, Y.-T. (2003). Because time matters: Temporal coordination in global virtual project teams. Journal of Management Information Systems, 19(4), 129–155. Nadkarni, S., Herrmann, P., & Perez, P.  D. (2011). Domestic mindsets and early international performance: The moderating effect of global industry conditions. Strategic Management Journal, 32(5), 510–531, p.510. Obama, B. (2013). Former U.S. President Barack Obama’s commencement speech at Morehouse College. Retrieved March 21, 2019, from https://www.youtube.com/ watch?v=Ft_M5tXRx28 Plato. (n.d.). The Apology of Socrates. H. N. Fowler Translation, Loeb (1913). Retrieved July 13, 2020, from https://sites.ualberta.ca/~egarvin/assets/platoapology.pdf. Sydow, J., Schreyögg, G., & Koch, J. (2009). Organizational path dependence: Opening the black box. The Academy of Management Review, 34(4), 689–709.

3 The Adaptation Issue

The decision to adapt or standardize is one of the central decisions in international business. Some companies still follow Professor Levitt’s more than 30-year-old suggestion of serving global markets by standardizing and reducing breadth of product line. “Ancient differences in national tastes or modes of doing business would disappear,” he wrote in 1983 (Levitt, 1983). Firms offering standardized products globally will benefit from economies of scale, reduce costs, deal better with quality issues because of the learning curve effect, and in general simplify their business processes. Standardization will mean sacrificing some local consumers with persistent local preferences and avoiding markets that require product modifications to comply with local laws on technical standards or safety. Sounds like a solution? Not necessarily. Many businesses move toward global expansion by carefully adapting their business models to almost each different local condition they find. In this chapter we start our discussion of the standardization/adaptation dilemma with an introduction to the concept of distance between markets, an idea that goes beyond issues of culture and physical remoteness. Our next question concerns what to adapt: distances among markets may lead us to modify our entire business model rather than simply making tactical adjustments to pricing or promotion campaigns. The third core argument of this chapter concerns levels of adaptation, alternatives to adaptation and effective methods of implementation.

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3.1 Cultural Differences Why do we need to adapt? Adaptation, as a need—or an opportunity—arises because of objective differences that exist among markets. When we are asked about the need for adaptation to foreign markets, cultural differences are usually among the first factors that come to mind, most likely in the form of language barriers and other communication challenges. Language diversity is an immediate form of cultural distance and relatively easy to deal with. The need for linguistic adaptation is rarely underestimated: the cost of translation of contracts, instruction manuals, product catalogues and media content is probably one of the first investments taken into account and made in global expansion. Language diversity may exist not only among countries but also within a given country, and we may need to consider the cost of translation into local dialects or into more than one official language. In an interview about doing business in India, Professor Asha Bhandarker of IMI New Delhi said, “India is like a continent: it is very complex and diverse. We have 28 states and 7 union territories and 22 official languages, without counting hundreds of minor languages and English. […] Even if the diffusion of English facilitates communication with foreigners, one has to account for difficulties with accents and Indian idioms and terms routinely used in daily conversation. Religions add to the diversity too: for example, India has a larger population of Muslims than Pakistan.” (Annushkina, 2017). Essential knowledge about local norms imposed by local religions and traditions is usually at our fingertips. We avoid planning our business trips during national festivals and holiday periods, we adjust our clothing and eating habits in line with local restrictions, we carefully follow local rituals for business meetings and we avoid full eye contact in countries where it is not appropriate. In initial meetings, symbolic expressions of our cultures—the number of visitors in our delegation, our clothes, our punctuality, the hotels we are staying in, even the stationery we use—may give our foreign counterparts an impression of our firm and our status within it that we did not intend. Experienced export managers and business developers are usually well aware of the importance of first impressions. The biggest difficulty for an outsider is to interpret the differences in cultural values that underlie these external expressions of culture: decisions, behaviors, social rules, local systems of education, even legislation, politics and rules of business. However, existing studies of differences in cultural values are incomplete and focus on a limited number of factors that affect how people from different

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cultures reason and behave. We may refer those of you who are interested in this fascinating and important topic to the work of Professor Geert Hofstede, Dr. Fons Trompenaars and the GLOBE (Global Leadership and Organizational Behavior Effectiveness) project. The dimensions used in these three studies on cultural values are summarized in Table 3.1. The cultural dimensions in Table 3.1 are far from providing a comprehensive description of the “hidden” part—the values—of different cultures. A wide variety of studies in sociology, psychology and anthropology can enrich our interpretation of cultural differences. For example, in his book Culture’s consequences, Professor Hofstede discusses the “silent language” of communication described by Edward Hall: the importance for collectivistic cultures of unwritten and unspoken words relating to time and space and other methods of nonverbal communication. The dichotomy of “neutral” vs. “emotional” cultures proposed by Dr. Trompenaars (Table 3.1) has been further explored in an analysis of differences in how emotions are experienced, in the rules for the display of emotion and in local interpretations of facial expression of emotions. The collectivism–individualism continuum is further clarified by the distinction between “atomistic” perceptions, according to which the default setting of a person in a society is solitude, and “relational” perceptions, which take the default setting of a person in a society to be relational connection. Atomistic vs. relational interpretation of societies allow us to better understand how people in different establish friendships and deal with their enemies, and what kinds of practical and material assistance and trust they expect from friends and acquaintances. As with the need to pay attention to local dialects within one country, we have to be aware of cultural distances that exist within each national market. Cultural diversity within one nation or state is typical for both larger and smaller countries. Professor Goeren Erkan used similarities in languages spoken to calculate an index of internal cultural diversity for each country. His study confirmed high levels of diversity in India and in countries that are smaller in terms of population, such as Canada, Mozambique, Moldova, Qatar, South Africa, the United Arab Emirates and Zambia. Cultural diversity within a nation may emerge not only from regional differences but also from generational differences, as people from different generations have been exposed to varying external conditions in terms of political, economic and technological contexts.

Role of rules in the society

Hierarchies among people

Relation of an individual toward society, family or community

Cultural dimensions Trompenaars

GLOBE project

Individualism vs. collectivism: differences Individualism vs. communitarianism: Institutional collectivism: the degree to which organizational whether people consider in gregariousness, complexity of family and societal institutional practices themselves as individuals or as part units, importance of “personality” as a encourage and reward collective separate entity inside society and culture of a group distribution of resources and Specific relationships, defined by collective action contracts and roles, or diffused In-group collectivism: the degree to relationships, where the whole which individuals express pride, person is involved in the business loyalty, and cohesiveness in their relationship organizations or families Achievement (people are judged by Power distance: the degree to Power distance: the difference in the which members of a collective their achievements) vs. ascription extent to which boss B can determine expect power to be distributed (status is attributed on the grounds the behavior of subordinate S and the equally of birth, kinship, gender, age, extent to which S can determine the Gender egalitarianism: the degree connections etc.) behavior of B to which a collective minimizes gender inequality Uncertainty avoidance: the extent Universalism (decisions and Uncertainty avoidance: the degree of behaviors are guided by predefined to which a society, organization authority of rules in a society and of the or group relies on social norms, rules) vs. particularism (rules may tendency to avoid ambiguous situations rules and procedures to alleviate have exceptions, as greater (for example, by means of rituals, unpredictability of future events attention is given to obligations in decision rules, plans, standardized relationships and to unique procedures) circumstances)

Hofstede

Table 3.1  Cultural dimensions: studies by Hofstede, Trompenaars and the GLOBE project

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Perception of Long-term orientation (persistence, time perseverance, frugality, sense of shame, adaptability of people and of traditions to new circumstances, most important events occur in future) vs. short-term orientation (quick results, most important events occur in past or in present, leisure time is important) Role of emotions

Hierarchies of Femininity (emphasis on social goals, goals including relationships, helping others, the physical environment) vs. masculinity (emphasis on economic and other achievements)

Neutral vs. emotional: acceptability of the expression of emotions; the extent to which emotions are believed to confuse issues

Importance of past, present or future (achievements) Sequential (events are seen as disparate and sequential) vs. synchronic perception of time (events may be happening at the same time)

Assertiveness: the degree to which individuals are assertive, confrontational or aggressive in their relationships with others

Humane orientation: the degree to which a collective encourages and rewards individuals for being fair, altruistic, generous, caring and kind to others Performance orientation: the degree to which a collective encourages and rewards group members for performance improvement and excellence Future orientation: the extent to which individuals engage in future-oriented behaviors such as delaying gratification, planning and investing in the future

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3.2 Distances Between Markets Peter Drucker, it seems, used to say “culture eats strategy for breakfast” (Engel, 2018), and local economic, legal and climatic conditions probably do the same. Let us look at some of these other differences, or “distances,” that exist among markets. In his CAGE framework, Professor Ghemawat identified the distances that require adaptation of business models: cultural, administrative, geographic and economic distances. Cultural distances include diversity in language, religion and norms of behavior imposed by religions and in cultural values. Administrative (or political) distances between countries may have a strong and direct influence on firms’ decisions to internationalize. In different markets, governmental and political institutions vary in their quality, accountability, level of uncertainty, and effectiveness (including control of corruption). A range of industries (including those that are related to infrastructure or are particularly important for national security or the economy, such as the banking, telecommunications, utilities, natural resources or automotive industries) may be affected by direct governmental interventions. To protect national interests, governments may set prices or tariffs, customs duties and non-tariff measures for importers, and rules for conducting business. Internationalizing firms need to take into account differences in civil and penal legislation covering corporate governance, commercial contracts, public institutions, antitrust, private data protection, environmental protection, technological and safety standards, industrial and intellectual property, insolvency, corruption, national and fiscal residency and labor legislation, local rules of business mediation and more—this list is far from being complete. In understanding the requirements of adaptation, firms need to consider regional free trade or preferential trade agreements, local government protectionism toward certain industries or industry players, and similarities in business legislation arising from historical links between countries (such as a colony–colonizer relationship or having previously been parts of a single country). Geographic distances influence logistics costs and directly impact the final price of products or services to the customer. Distances between countries, the presence of natural borders and the size of the target foreign country may imply an increase in transportation costs. The quality of local infrastructure may be an obstacle to accessing a new foreign market. Climatic differences may cause complications in logistics and require modifications to the product. Differences in time zones demand 24-h customer service and good coordination among teams.

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Economic distances include variations in average income levels and in the structures of the domestic and target foreign economies. Analysis of economic structure makes it possible to understand which industries and types of firms—small or large, privately or publicly held, conglomerates or monobusinesses—are predominant in the target economy. These characteristics of target economies are important for decisions about the adaptation of final products and services, as well as for decisions to delocalize business processes to the target market. Economic distance also refers to differences in levels of economic uncertainty and in volatility of markets (and currencies) between the domestic and target economies. For example, firms operating in developed and relatively stable markets may not know how to deal with the hyperinflation, volatility of exchange rates and economic shocks that emerging economies are vulnerable to. This four-distance CAGE framework can be enriched by the addition of a fifth element, technological distance, giving us the acronym CAGE-T. Technological distance is not always directly correlated to levels of economic development. It is true in some cases that clients from developing countries may be prepared to accept reduced performance of products and services, but they may also expect to pay much less for them, creating a situation that requires product adaptation. On the other hand, developing and emerging markets may “technological leapfrog” domestic markets with accelerated evolution in certain industries. For example, we may cite the diffusion of cashless payments in some developing countries in Africa and Asia, access to electricity produced by hydraulic power rather than by coal as the main energy source, and the use of digital technology in primary education. Also, some technological applications do not exist locally, and producers need to add in the costs of educating and training local customers. Distances, or differences, between markets vary in the intensity of their potential impact on businesses. Two factors may moderate the impact of distances: industry/product typology and the firm’s experience in addressing foreign markets. For some industries and products or services the impact of distances may be relatively moderate. For example, research has confirmed that cultural differences have a greater impact on knowledge-intensive industries than on capital-intensive ones. Also, for goods and services aimed at business (rather than retail) clients, distances primarily concern the negotiation process (e.g. cultural, economic and legal differences in procurement processes and in payment systems), product or service modifications (including local technological and environmental standards, measurement systems, climatic conditions and labeling requirements) and pricing strategies. The supposition that industrial products and services require much less adaptation

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is only partly confirmed by research. We need to distinguish industrial products and services with different levels of performance, technology content and customization, adjacent services sold together with products, and products and services tailored to the needs of specific industries. If an internationalizing firm can draw on a “cultural experience reserve,” this may make it simpler to address the challenges of working in a foreign market. Internationalization is a learning process, and firms with previous experience know, at least in broad terms, what kind of challenges to expect. Their adaptation decisions are informed by previous mistakes and subsequent corrective decisions, and by responses they have received in the past from foreign markets.

3.3 What do We Adapt or Standardize? Analysis of the need (or the opportunity) to adapt starts at the level of the business unit. Consider the three major businesses that Danone, a food company, had in 2017: essential dairy and plant-based products, bottled water, and special nutrition products. Differences in product shelf life, transportation costs, research content and potential impact of local food traditions would make it impossible for the company to define one adaptation or standardization approach for all these businesses. In its annual report, Danone stated that it specifically adapts its dairy and plant-based products to local tastes and dietary habits. In contrast, its special nutrition unit develops products according to age and health condition, rather than according to region; for example, it distinguishes the early life nutrition segment from the complementary food segment for age-related and special medical conditions. In its bottled water business unit, Danone is growing globally by combining global and local brands and by developing local water consumption with promotion of hydration. In this example, three different business units take three different approaches to adaptation. The second important factor in defining the need (or the opportunity) for adaptation is focusing attention on the products and services offered (features, pricing, promotion, channel selection), instead of dealing holistically with the competitive business model of each business unit. This approach to adaptation helps a firm to maintain the coherence among the elements of its business model. The type of adaptation demanded by foreign markets can be incompatible with the way a firm is organized or with its position in the industry. This kind of incoherence can be resolved only by adapting all elements of the business model. In fact, it is often impossible to modify products or services for global markets without changing the firm’s organization, as the case of the smartphone producer Xiaomi shows (Box 3.1).

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Box 3.1  Adaptation in Xiaomi (Based on Zheng, Guo, Burgelman, & Ben El-Baz, 2017) At the end of 2018, Xiaomi, a Chinese producer of smartphones and smart hardware connected by IoT, celebrated another year of growth. The issue of the almost flat performance of previous years seemed to have been resolved. A number of problems caused Xiaomi’s slowdown in 2015–2016. The company’s reliance on online sales was not suitable for less tech-savvy customers in rural areas or less technologically developed regions. Xiaomi’s CEO also cited supply chain difficulties related to rapid growth in previous years. Moreover, in the attractive and crowded smartphone market, Xiaomi had to find its own way to maintain and develop its base of fans—people passionate about the company’s promise to make their everyday lives better, with, for example, an app to help them find their keys after a night of partying. In 2015–2017 Xiaomi had to change its organization and to invest in resources and capabilities, so that it could bring to market products that were innovative, different from those of their competitors, and capable of boosting sales both at home and abroad. Xiaomi invested in offline retail stores to create a direct relationship with its customers in a place where they can try out new products. In 2016 it acquired patents from Microsoft and Casio for voice communication, multimedia, cloud computing, image capture and image processing technologies. In 2017 it released its own inhouse processor, S1, promising to give “full control of the chipset and integration with the phone” and to “be different” from other smartphone producers. These investments paid off, and in 2017 the media were calling Xiaomi a “Chinese phoenix” for its ability to turn problems into opportunities. However, the company still has to face the challenge of global growth. For example, in Africa it faced strong competition from Transsion, Huawei and Samsung, while the quest for resources and capabilities continued. For instance, Xiaomi needed to be able to compete with Transsion’s Camon 11, with its face unlock feature, AI-enabled front camera, dual rear cameras and dual SIM card, which was sold in Kenya for under 150 euros.

The Entrepreneurial Formula developed by Professor Vittorio Coda allows us to consider in an exhaustive way the key elements of a business unit’s strategy for adapting to the needs of a foreign market (Fig. 3.1). The focus of most firms is the adaptation (as opposed to the standardization) of the highlighted area of the Entrepreneurial Formula: the product or service system. This system consists of the four elements of the marketing mix: price, place (distribution), product or service characteristics and promotion. The most frequently adapted element of the product or service system is price. Even if we do not consider positioning our commercial offer differently in a new foreign market, we need at least to account for tariffs, local taxes and logistics costs. It may seem intuitive to undertake price adaptation for every single market, taking into account local currencies and economies, competitive

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Different system of stakeholders in a foreign market

(local suppliers, employees, authorities, communities, etc.)

Adapted product or service for a foreign market

Adapted organization to suit the needs of a foreign market

(product or service tangible and intangible features, prices and discounts, promotion and sales channels)

(resources and capabilities, processes, structures and culture)

Adapted collaboration opportunities for stakeholders in a foreign market

Fig. 3.1  Adaptation needs (or opportunities) for elements of a business model, based on Coda’s Entrepreneurial Formula

pressures and demand, and legal and governmental restrictions. In fact, the reality is less simple. Internal factors, such as corporate global goals, long-­range commitments to certain markets, and whether headquarters trust local subsidiaries to define prices, may lead to the implementation of a “fixed global price” policy, albeit one that is adjusted for transportation costs and custom duties. The second element is place adaptation. The specific characteristics of local sales channels in each region are a result of local economic, competitive, legal, technological, social and even climatic conditions. Next, firms adapt product characteristics: packaging, names, color schemes and labeling (in many cases, this is necessary to meet local legal requirements). Promotion adaptation is usually the fourth, the last, element of the product or service system to be adapted (Akgün, Keskin, & Ayar, 2014). A meta-analysis of a number of studies on the impact of adaptation on firms’ performance suggests that price is the most important element of the marketing mix to be adapted, to be followed by decisions on adaptation of promotion, product characteristics and then distribution strategy (Brei, D’Avila, Camargo, & Engels, 2011). It is interesting to note that different elements of the same product may have to be adapted for different markets, as in the case of an Italian jewelry producer that adapted its products for Morocco, its pricing for France and its placement (channel selection) for Japan (Matricano & Vitagliano, 2018). If we pay close attention to adaptation strategies that have actually been implemented, we will be tempted to conclude that choices between adaptation and standardization are made also for each distinctive component of each element of the marketing mix. In other words, the decision can be more complex than it first appears. For example, the core (“platform”) part of the product can be standardized to reduce set-up costs and to benefit from the learning

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curve and economies of scale, whereas its peripherals can be adapted for each new foreign market. Will we call such product “adapted” or “standardized”, or both? Also, the content of the promotion can be standardized, but we may decide on different and adapted communication channels and promotional budgets. We should emphasize again that a decision to focus only on adaptation of the commercial offer (price, product, promotion, place) is extremely limiting—for two reasons. First, a firm’s commercial offer of a product or a service is an integral part of its business model, and it is impossible to implement adaptation decisions without impacting, to some extent, all other elements of the business model. Second, even if a firm decides against adapting a product or a service, it may still be necessary to adapt its own internal business processes and relationships with stakeholders. The solution to these difficulties is to take a comprehensive approach to adaptation. We argue that a successful adaptation starts from two insights: (a) an understanding of the characteristics of the foreign market (in ways that go on to inform market positioning decisions); and (b) an understanding of the firm’s existing capabilities and the resources it can employ for adaptation. Peter Drucker said that “the success—indeed, the survival—of every business will depend on the performance of knowledge workers.” We might paraphrase by saying that “the success of every business in a foreign market will depend on the empathy and knowledge of its workers and their ability to choose what, if and how to adapt.” This all-inclusive approach to adaptation poses questions in each of the following five areas: • Positioning—do we maintain the same target markets (price range, types of customers and types of needs served)? • Products and services—do we need to modify our product or service characteristics? our price and payment conditions? our sales channels? the content and channels we use for promotion campaigns? • Organization—which business processes (research and development, procurement, production, logistics, sales, marketing etc.) require adaptation for each new foreign market? wow can we adapt our human resources management practices (see Chap. 10 for extensive discussion of this aspect)? which new skills and capabilities are required in a specific market? • Stakeholder system—which new stakeholders do we need to take into account? what differences in stakeholder needs do we have to consider? • Collaboration with stakeholders—wow do we build trust and align our operations in the new market with the needs of new and existing stakeholders?

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The complexity within a business model of the connections between a firm’s organization, its products and services, its customers and stakeholders does not allow immediate implementation of a working adaptation solution—it is achieved step-by-step. An example of gradual adaptation to the Indian market can be found in the case of AutoLux, a German manufacturer of premium cars (Table 3.2). The case described in Table 3.2 shows the incremental adaptation of a firm’s operations with a gradual development of its product offering, diffusion of its local business processes and increasing involvement of local stakeholders. The firm’s development in India followed transitional changes in the country’s economic context and, as a consequence, in its automotive market. Initially, the firm’s product offer in India was confined to a relatively narrow luxury segment, and was therefore quite different from its positioning in the domestic market. Gradually, the product offer moved closer to the firm’s domestic business model to include a broader range of car models, financial services and a used car business. Adaptation is a step-by-step process. It took Swedish furniture producer IKEA more than 10 years find its way to Chinese customers. It had to invent solutions to start offering lower prices, adapt its furniture and homeware design to local tastes and needs, introduce new services and adjust its business processes to allow the in-store experiences expected by local clients. This example, like the case of AutoLux, shows that finding adaptation solutions takes time and requires headquarters and local subsidiaries to pay constant attention to the foreign market’s special needs. Adaptation of internal organizational practices may create as many challenges as researching the perfect adaptation solution for a product or a service. A Korean organization’s use of the Six Sigma approach, described by Professors Jisun Yu and Srilata Zaheer, demonstrates the relevance of the CAGE-T distances also for the adaptation of internal organizational practices. The adaptation effort started from a redefinition of the Six Sigma concept. In the late 1990s, the most relevant topic was innovation—to sustain global competition—rather than business process improvement. The reason for this was the Asian economic crisis, which led to a nationwide refocus on innovation. However, the all-inclusive approach needed to adopt Six Sigma clashed with the importance of hierarchies and power distances in the local national culture. Managers feared that the adoption of 360° feedback would undermine the order and authority needed for organizations to function. Researchers also reflected on the difficulties of technological and organizational alignment across different markets. Cultural differences may strongly impact the effectiveness of a new technology transfer from headquarters to subsidiary, with new technologies and new business processes altering the organizational status quo of power distribution and hierarchy.

Phase 2 Local operations

Use of local intermediaries to sell Location of production plant in an economically high-performing a select range of top-end area with infrastructure and models qualified labor, creating new workplaces and allowing the firm to be perceived as responsive to local conditions

Collaboration with stakeholders

Local car dealers, local employees

Local intermediaries

Stakeholders

Setting up a local sales company to coordinate dealers and a local assembly factory to address high import duties

Export of cars manufactured in Germany

Organization

Positioning

Addition of corporate fleets to Narrower and more focused target customers (in line with than in European markets: in India the target group included domestic operations) very wealthy individuals for whom an AutoLux car is a luxury item to be driven by a chauffeur Product adjustments for corporate Product/service Positioned as a luxury/status symbol item; higher prices were fleet and private customers, whose cars are driven by charged because of import chauffeurs duties

Business model elements to be adapted Phase 1 Export activities

Addition of locally assembled models for new customer segments and a new sub-brand to distinguish the product offering for the middle-­class customer segment; addition of financial services; addition of roadside assistance; entering the used cars business Expanding local production from two to four models; investing in a new logistics center; investing in a local financial services company to provide retail and commercial financing, leasing and insurance; offering roadside assistance services Local car dealers, employees and suppliers; local insurance partner Local workers employed in local sales, production and logistics activities; collaboration with local dealers and suppliers and with a local insurance partner

Addition of “young and wealthy” customer segment and middle-class customer segment

Phase 3 Local expansion

Table 3.2  Evolution of adaptation solutions by AutoLux car manufacturer in India (adapted from Landau, Karna, & Sailer, 2016)

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The standardization/adaptation decision concerns the whole business model, not only the adaptation of products and services and their positioning (the left-hand section of Fig. 3.1). Studies confirm the importance of social adaptation for foreign markets, and firms need to be proactive in managing local stakeholders’ expectations. In particular, economic success exposes firms to a broader range of clients, suppliers and other stakeholders, and lack of attention to stakeholders’ interests may result in damage to a firm’s reputation. Social adaptation is also important in emerging markets, which are characterized by fast-evolving needs and demands from stakeholders. A way to transform the local business context (rather than adapt to it) is for internationalizing firms to introduce new business practices in environmental protection or social responsibility, perhaps ahead of local legislation. Local stakeholders in emerging markets expect to see foreign firms provide leadership that goes beyond technological and managerial excellence to include social initiatives. There is widespread awareness of the economic opportunities that local markets offer foreign firms. This awareness creates the expectation that foreign firms will contribute voluntarily to the local community, for example with philanthropic donations. However, a firm’s successful adaptation of its organization or its stakeholder management practices is of little value if the initial decision on product or service configuration for the foreign market has gone wrong, an issue that we discuss in the following section.

3.4 P  roduct and Service Configuration for Foreign Markets: Adapt, Transform or Standardize? Let us start by saying that adaptation or standardization of product and services for foreign markets is not a binary decision. In fact, Professor Ghemawat suggests that firms may have the following options: 1. Standardize by choosing to compete with products or resources that do not require adaptation in most markets. Alternatively, in the case of location-­ sensitive products or services, the firm can choose to avoid markets where adaptation would be unavoidable or to focus on upstream products or services that do not require adaptation. 2. Adapt various elements of its commercial offer for the best possible fit with foreign markets. A firm choosing this option should keep an eye on the amount of its investment of financial and human resources dedicated to adaptation.

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3. Transform foreign markets to make them more similar to domestic markets. This would involve seeking the participation of local stakeholders, educating those stakeholders, and introducing new linguistic forms and “boundary objects” to link different social groups. Then, for the target market to start matching practices related to a new service or product, it is essential to deliver that new practice or service in a standardized way. Examples of foreign market transformation (or modification) are many and varied: coffee culture in Japan with Starbucks and its no-smoking coffee shops; IKEA furniture stores in China introducing the idea of gradual home improvements (as opposed to an “all or nothing” approach to interior design); the fast-food culture diffused by McDonald’s in several European countries; and the diffusion of social media and transformation of social communication, fast fashion and low-cost airlines. A firm’s choice among these three options depends on a number of factors: 1. Product or service characteristics. Some products or services are “standard” or “born global” and by their nature do not require important investments in adaptation. 2. The firm’s ability to interpret foreign market needs and characteristics (adaptation investment that goes wrong is twice as costly) and its ability to engage external resources (business partners, external consultants, local employees) to analyze needs and ultimately to implement the adaptation. 3. The demand characteristics of the target market. In our industry, how “distant” are foreign markets? 4. Characteristics of local and international competition on the target market. For example, competitive pressures may require investment in adaptation and significant attention to ensuring the best possible “alignment” with the local market. 5. The possibility of transforming foreign markets instead of adapting to them. For instance, will the strength of our reputation, brand and technology allow us to convince customers to adapt to our firm, instead of our firm adapting to them? It is not possible to say whether standardization or adaptation (or transformation) is the best option. In fact, a meta-analysis of 23 studies on the impact of standardization and/or adaptation revealed that either approach may have a positive influence on a firm’s performance in international markets (Brei et al., 2011). Adaptation versus standardization is therefore not a black or white choice. We need to understand the direction of our preferences. Do we want to maximize adaptation, maximize standardization, or attempt to transform the

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foreign market? Our answer to that question may vary by product line and geography, depending for instance on the product lifecycle. We must then decide on the level of adaptation for each dimension. Will the adaptation allow us to reuse common parts, technologies and processes? Will it be possible, within a general strategy of standardization, to make “last mile” adaptations for a better fit with the local market?

3.5 Adaptation Solutions An extensive study of adaptation practices conducted by Professor Dow revealed that managers responsible for foreign market development often choose to “under-adapt.” In other words, because of firms’ structural inertia, marketing strategies are adapted to a lesser extent than is consistent with the best performance options. The study by Professor Dow explicitly calls for more attention to adaptation. Let us discuss possible adaptation solutions that allow firms to achieve better alignment with local markets while taking into account the cost and the effort of implementation. Professor Ghemawat identified five levers of adaptation: variation, focus, externalization, design of business processes and innovation. Variation implies changes to the commercial offer of the company. As we discussed earlier, we strongly believe that variations in the commercial offer necessarily lead to changes in organization (in business processes, organizational structures, and internal policies and procedures). Firms are aware that adaptation is necessary in some markets and industries (perhaps because of local laws or culture, but also as a way to enter an overcrowded but still-­growing market), and it is inevitable that they will look at ways to reduce its organizational cost. Other ways of approaching adaptation—focus, externalization, design and innovation—enable a firm to act proactively in optimizing the benefit–investment ratio of adaptation, as opposed to footing the bill for customization efforts and hoping to keep costs to a minimum. The focus approach is adopted by firms seeking to minimize the need for adaptation by selecting products or services, customer segments or geographies that share similar needs. The cost of adaptation can be moderated by opting for limited exposure to overseas markets: for example, Dallara Automobile, an Italian producer of racing cars, decided to type-approve its first lightweight roadster (the Dallara Stradale) for the EU, Switzerland and Japan only. Another option is to focus on the upstream parts of the industry value chain, leaving the adaptation decisions and efforts to firms producing final products or services for business or retail customers. The entry of Starbucks to Italy prompted speculation as to how the coffee giant would tackle its adaptation to the unique

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Italian espresso and cappuccino culture. One option for the company would have been to target tourist areas, benefiting from the growing number of international travelers to Italy, rather than attempting to lure sophisticated domestic customers to their coffee shops. Another option would have been to focus on the upstream part of the business. The coffee wholesale market is highly fragmented, and Starbucks could have offered Arabica and Robusta beans (and perhaps their own merchandising) to thousands of local bars. A focus on upstream business activities is similar in logic to the externalization approach to adaptation: rather than going through several rounds of adaptation trial and error and retrial, a firm delegates the adaptation to its customers, suppliers and business partners. This means providing the basic product or service, leaving an external partner to manage the difficult tasks of alignment and finetuning to local market needs. The local franchising partners of international fastfood chains are in a position to know which modifications to the menu are likely to attract local customers. Similarly, a local sales partner is in a position to know how to organize better promotion activities, how to choose the best time for discounts and how to improve product packaging. We may also ask local customers to make suggestions about how to improve products or services. If we decide to implement adaptation of products and services with our own efforts, one approach is to design products, services and business processes accordingly, and to introduce product or service innovation. Business processes designed to reduce the cost of adaptation (a) involve smaller but efficient plants, production lines, warehouses and (b) rely on an external production network. Products and services can be designed to minimize investment in adaptation by using (1) partitioning (clear distinction of products or product parts that vary from country to country), (2) common platforms for production or for products and (3) modularity (“plug and play” compatibility of different components, allowing efficient production of several combinations of the final product or service). Finally, Professor Ghemawat characterizes innovation as a source of ideas to make the most out of adaptation decisions while staying in control of investment and operating costs. Innovative solutions for adaptation include transfer of practices between countries (i.e., applying an adaptation solution invented locally to other markets). This idea underlines the importance of communication between headquarters and subsidiaries, and among subsidiaries. Innovative adaptation can also meld certain elements of the parent business model with local opportunities. Businesses do in fact make “local exceptions.” We have seen that IKEA, to take account of the preferences of its Chinese customers, changed some distinctive elements of its business model. It located stores close to public transportation, offered more in-store assistance, and adapted it fees for delivery and assembly services. It also accepted that some visitors to stores would be “free riders” (for example, using the premises to hold speed-dating events) in the hope that these visitors would eventually become customers.

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Decisions about adaptation, standardization or transformation for each target market and for each business unit (and even product category) can only be taken after the following elements have been analyzed: 1 . CAGE-T distances between our home market and the target market; 2. the characteristics of our product or service; 3. our own resources and capabilities, with a view to the eventual redesign of our business processes or products and services; 4. our ability to involve external parties (including distributors, business partners and clients) in the design of the adaptation solution. “Field” information from the target market—first-hand data and impressions—is essential for sound decisions. Finally, it is important to keep the transformation option in mind. The Green Wise case (Box 3.2) shows how transformation can be a way of introducing different benefits to customers, addressing problems faced by incumbent competitors, and educating customers toward different, better solutions. Green Wise was started in 1915 by Mr. Tamaru, and was the first plant and tree rental business in Tokyo, Japan, to focus on landscape architecture and greenhouse plant cultivation. The business grew, and was incorporated in 1940 as Tokoen Co., Ltd. In 1953, the firm launched one of its landmark projects: the first garden created for the national TV broadcasting company NHK. The firm’s innovations and creative endeavors included developing new materials and technological solutions: for example, in 1962 it created one of the first commercial rooftop gardens in Japan for a prestigious department store by using lightweight artificial soil specifically developed for the project. It also ran several wall-greening projects, started selling the first green interior design projects in Japan, and supervised the launch of Indoor Green Style magazine. A thirdgeneration family member, Mr. Yuichi Tamaru, was nominated to become the company’s representative director in 2002. The firm’s name was changed to Green Wise Co., Ltd., signifying a new phase in its evolution. The new mission was to bring sustainability to floral, landscape and interior design businesses. However, this seemed to entail a paradox: how can landscape and interior green design, which would seem on the surface to be innately good for the environment, also be unsustainable or damaging? Indeed, research confirmed that environmentally sustainable design was becoming a major issue, with several interior designers actually implementing sustainable choices by respecting the natural growth of flowers, evaluating their energy use and water waste, removing volatile chemicals, and paying attention to the origin of all materials used. In 2016, Green Wise announced the introduction of its Slow Green concept. Slow Green’s philosophy honors nature and its original beauty, and respects nature’s

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evolution without human interference. In Green Wise, the explicitly stated concept of Slow Green became a reminder and a guideline for daily business decisions. After careful research, expanding the business abroad appeared a promising way to approach the firm’s evolution (Box 3.2). Box 3.2  Green Wise Co., Ltd.: A Journey to Italy Gardens and flowers are deeply rooted in the Japanese culture and religion. Designed to be enjoyed from a range of viewing positions, Japanese gardens and flower art conceal and then reveal to attentive admirers a variety of subtle meanings that reconnect people to the meaning of life and to their values. The new mission of Green Wise regarding respect towards nature seemed drawn from an innate part of Japanese culture, yet it clashed with contemporary mass industrial production and consumer society, in which the true power that nature can bring to people’s lives remains undervalued. Cultural change was needed, and the firm decided to seek to enact such change abroad. First, attention was placed on SITES® (for landscapes) and LEED (for buildings) certifications developed in the US. Jindaiji Garden in Tokyo underwent an interdisciplinary evaluation in terms of its impact on the environment and society, and in 2018 became the first SITES®-certified project outside of the US. For Green Wise, SITES® and LEED certificates proved that the firm had the knowledge and experience to create sustainable landscapes. Second, in 2017 Green Wise participated, for the first time, in Salone del Mobile, one of the world’s most important interior design trade fairs held each April in Milan, Italy. The attention to sustainability and organic ingredients in Italian society, the concept of Slow Food developed in Italy, and the passion and utmost attention to detail among Italian interior design producers facilitated the diffusion of Green Wise’s business across Italy and Europe and, ultimately, had a positive halo effect on Green Wise’s domestic operations. The success of the exhibition made Mr. Tamaru decide to open a Green Wise showroom in Milan. Milan was also chosen because of the similarities between its natural geographic conditions and those of Japan. Italy, a peninsula, and Japan, an island, have similar shapes and are extended around the same latitudes. Indeed, Rome is very similar to Tokyo in terms of climate. Both countries also have four beautifully expressive seasons. Italy was deemed the ideal place for Green Wise to implement its knowledge and experience. For its Milanese showroom, Green Wise offered a complementary yet different type of service compared to that of its domestic operations; this involved the creation of designs and installations utilizing organic flowers and environmentally sustainable materials. The firm developed the “Stem” concept of floral design specifically for its Italian subsidiary. According to this concept, flowers were exposed using an original “Spiral Up” arrangement aimed at showcasing the magnificence of flower stems, which were usually hidden in vases. Green Wise brought to viewers’ attention the inner beauty of flowers grown with the Slow Green concept by organic flower farms located on the outskirts of Milan. The opening of the showroom in 2019 during Salone del Mobile created a positive buzz, and Green Wise immediately created connections with several well-known fashion brands, an Italian multinational producing organic hair care, and flower installers for large corporate headquarters located in Milan.

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The concept of Slow Green introduced by GreenWise (Box 3.2) was also novel in foreign markets, so the only way to introduce it was to start a transformation among consumers.

References Akgün, A.  E., Keskin, H., & Ayar, H. (2014). Standardization and adaptation of international marketing mix activities: a case study. Procedia, 150, 609–618. Annushkina, O. (2017). Doing business in… India. Ideas of Management, SDA Bocconi School of Management. Retrieved February 20, 2020, from http://ideas. sdabocconi.it/strategy/archives/2366 Brei, V. A., D’Avila, L., Camargo, L. F., & Engels, J. (2011). The influence of adaptation and standardization of the marketing mix on performance: a meta-analysis. Brazilian Administration Review, 8(3), 266–287. Engel, J. M. (2018). Why does culture “eats strategy for breakfast”, Forbes. Retrieved February 20, 2020, from https://www.forbes.com/sites/forbescoachescouncil/2018/11/20/why-does-culture-eat-strategy-for-breakfast/#4b842dba1e09 Landau, C., Karna, A., & Sailer, M. (2016). Business model adaptation for emerging markets: a case study of a German automobile manufacturer in India. R&D Management, 46(3), 480–503. Levitt, T. (1983). The globalization of markets. Harvard Business Review, 61(3), 92–102. Matricano, D., & Vitagliano, G. (2018). International marketing strategies in the jewellery industry: are they standardised, adapted or both? International Journal of Marketing Studies, 10(1), 1–10. Zheng, G., Guo, Y., Burgelman, R.A., & Ben El-Baz, B. (2017). Xiaomi Inc. in 2017. A case study. Stanford Business School. https://www.thecasecentre.org/educators/products/view?id=158842

Selected Bibliography Adams, G. (2005). The cultural grounding of personal relationship: enemyship in North American and West African worlds. Journal of Personality and Social Psychology, 88(6), 948–968. Arnold, R., Feldbaum, E., Kisgen, S., & Faix, W. G. (Eds.). (2015). International business law. Berlin: Steinbeis-Edition, Steinbeis University. Bae, J.-H., & Salomon, R. (2010). Institutional distance in international business research. In T. Devinney, T. Pedersen, & L. Tihanyi (Eds.), The past, present and future of international business and management (Advances in International Management) (Vol. 23, pp. 327–349). Bingley: Emerald.

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Barret, B. 2017. The silicon shift that’s transforming how tech giants make phones. Wired. Retrieved March 10, 2020, from https://www.wired.com/2017/03/ xiaomi-surge-s1-soc/ Cendrowski, S. (2016). Xiaomi revenues were flat in 2015. Fortune. Retrieved March 10, 2020, from https://fortune.com/2016/05/23/xiaomi-revenues-flat-2015/ Ciferri, L. (2017). Racecar specialist Dallara’s Stradale inspired by Lotus. Automotive News Europe. Retrieved March 6, 2020, from https://europe.autonews.com/article/20171116/ANE/171119824/racecar-specialist-dallara-sstradale-inspired-by-lotus Coda, V. (1990). Il problema della valutazione della strategia. Economia & Management, 12(1), 12–25. Danone Group 2017. Registration Document, Annual Financial Report. Dorfman, P., Javidan, M., Hanges, P., Dastmalchian, A., & House, R. (2012). GLOBE: A twenty year journey into the intriguing world of culture and leadership. Journal of World Business, 47(4), 504–518. Dow, D. (2006). Adaptation and performance in foreign markets: evidence of systematic under-adaptation. Journal of International Business Studies, 37(2), 212–226. Drucker, P. (2002). They’re not employees, they’re people. Harvard Business Review, 80(2), 70–77, at 76. Elfenbein, H. A., & Ambady, N. (2003). Universals and cultural differences in recognizing emotions. Current Directions in Psychological Science, 12(5), 159–164. Erkan, G. (2013). Economic effects of domestic and neighbouring countries’ cultural diversity. Oldenburg Discussion Papers in Economics, No. V-352–13. https:// www.econstor.eu/handle/10419/105045 Ghemawat, P. (2007). Redefining global strategy: crossing borders in a world where differences still matter. Boston, MA: Harvard Business School Press. Hall, E. (1959). The silent language. Garden City, NY: Doubleday. Hayles, C. S. (2015). Environmentally sustainable interior design: A snapshot of current supply of and demand for green, sustainable or Fair Trade products for interior design practice. International Journal of Sustainable Built Environment, 4(1), 100–108. Hofstede, G. (1994). The business of international business is culture. International Business Review, 3(1), 1–14. Hofstede, G. (2001). Culture’s consequences. Comparing values, behaviours, institutions and organizations across nations (2nd ed.). Thousand Oaks, CA: Sage. Kedia, B. L., & Bhagat, R. S. (1988). Cultural constraints on transfer of technology across nations: implications for research in international and comparative management. The Academy of Management Review, 13(4), 559–571. Kline, D. 2017. Behind the Fall and Rise of China’s Xiaomi. Wired. Retrieved March 10, 2020, from https://www.wired.com/story/behind-the-fall-and-rise-ofchina-xiaomi/ Lyytinen, T. (2014). Perspectives on the international business strategies of small Finnish technology companies in developing countries. Espoo: VTT Technology. Massi, M., Sullivan, G., & Straus, M. (2019). How Cashless Payments Help Economies Grow. BCG Pubblications. Retrieved March 10, 2020, from https://www.bcg.com/ publications/2019/cashless-payments-help-economies-grow.aspx

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Miller, P.  M. (2004). IKEA with Chinese Characteristics. China Business Review. Retrieved March 6, 2020, from http://www.chinabusinessreview.com/ikea-withchinese-characteristics/ Money, R. B., Gilly, M. C., & Graham, J. L. (1998). Explorations of national culture and word-of-mouth referral behavior in the purchase of industrial services in the United States and Japan. Journal of Marketing, 62(4), 76–87. Popli, M., Akbar, M., Kumar, V., & Gaur, A. (2016). Reconceptualizing cultural distance: the role of cultural experience reserve in cross-border acquisitions. Journal of World Business, 51(3), 404–412. Ramirez, V.B. (2018). Leapfrogging Tech Is Changing Millions of Lives. Here’s How. SingularityHub. Retrieved March 10, 2020, from https://singularityhub. com/2018/05/06/leapfrogging-tech-is-changing-millions-of-lives-heres-how/ Rankin, J. (2014). Ikea sales driven up by growing Chinese middle class. The Guardian. Retrieved March 10, 2020, from https://www.theguardian.com/business/2014/sep/09/ikea-sales-rise-china-middle-class Ringstrom, A. (2013). One size doesn’t fit all: IKEA goes local for India, China. Reuters. Retrieved March 6, 2020, from https://in.reuters.com/article/ikeaexpansion-india-china/one-size-doesnt-fit-all-ikea-goes-localfor-india-china-idINDEE92603L20130307 Samli, A. C., & Jacobs, L. W. (1993-1994). International pricing decisions: a diagnostic approach. Journal of Marketing Theory and Practice, 1(4), 29–41. Shen, X. (2019). Xiaomi is going to expand in Africa. TechinAsia. Retrieved March 10, 2020, from https://www.techinasia.com/xiaomi-expand-africa Theodosiou, M., & Leonidou, L.  C. (2003). Standardization versus adaptation of international marketing strategy: an integrative assessment of the empirical research. International Business Review, 12(2), 141–171. Trompenaars, A., & Hampden-Turner, C. (1998). Riding the waves of culture: understanding cultural diversity in global business. New York: McGraw Hill. Xiaomi Corporation Annual Report. (2018). Retrieved March 10, 2020, from http:// cnbj1.fds.api.xiaomi.com/company/results/en-us/2018%20AR.pdf Yakhlef, A. (2009). The trinity of international strategy: adaptation, standardization and transformation. Asian Business & Management, 9(1), 47–65. Yu, J., & Zaheer, S. (2010). Building a process model of local adaptation of practices: a study of Six Sigma implementation in Korean and US firms. Journal of International Business Studies, 41(3), 475–499. Zhang, J., & Luo, X. R. (2013). Dared to care: organizational vulnerability, institutional logics, and MNCs’ social responsiveness in emerging markets. Organization Science, 24(6), 1742–1764. Zhao, M., Park, S. H., & Zhou, N. (2014). MNC strategy and social adaptation in emerging markets. Journal of International Business Studies, 45(7), 842–861. Zuo, S., Andrus, D. M., & Norvell, D. W. (1997). Standardization of international marketing strategy by firms from a developing country. International Marketing Review, 14(2), 107–123.

4 Foreign Market Selection: Which and How Many?

The question of which foreign markets to focus on is directly linked to other important choices in internationalization: How can we adapt our business model to a chosen foreign market? Which entry mode is the most suitable? What should the speed of our expansion into the chosen market be? Will opportunities in this market allow us to reach our growth goals? What makes this important decision a complex one is its instability over time: our choice of priority markets may change from year to year. A good approach, even for firms with long-term experience of international operation, is to conduct periodical check-ups of their priority foreign markets. The attractiveness of a market evolves—just think about new trade policies, economic growth or crisis, social or political turmoil, natural and environmental events. Resources that we dedicate to developing foreign markets—including people and investment—are limited, but they change over time too, so firms may decide to seize opportunities that had seemed inaccessible before. In this chapter we discuss foreign market selection in terms of two aspects: defining the attractiveness of foreign markets for a specific firm, and defining an “ideal” number of foreign markets to be served. We conclude by identifying biases in the foreign market selection process that we have observed in our teaching and consulting practices.

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4.1 F oreign Market Selection: a Complex, “Personal” and Important Decision As we discussed in other chapters, when managers and entrepreneurs decide on an international growth strategy, they are working in a highly uncertain context. Incomplete, ambiguous and sometimes redundant information needs to be taken into account in each decision. Each newly implemented decision adds another layer of complexity to a firm’s future choices. The choice of priority foreign markets may strongly influence many other decisions, including the mode of entry (risky and capital-intensive vs. gradual), whether and how to adapt products and services (depending on differences between the domestic market and the target market), the level of autonomy of the foreign subsidiary, staffing and reporting. In fact, research by Professor Koch suggests that entry mode and foreign market selection belong to a single complex decision: after the initial screening of markets to create a shortlist, firms need to evaluate the available entry options and then select those with the highest pay-offs. A peculiarity of foreign market selection decision is the significant influence of perception and cognitive models of decision-makers on the final evaluation of an opportunity. In our research and consultancy practice, we often deal with managers and entrepreneurs who simply “like” the idea of expanding to a certain geography. Does this sound familiar? In the following sections of this chapter we suggest how to rationalize and optimize the foreign market selection process, the role of objective data and of full awareness about firm’s priorities. Another important point is that accurate and timely selection of foreign markets makes a firm more competitive. And that’s not all: a combination of foreign markets where a firm conducts commercial, production or research and development activities may create an “isolating mechanism” for its competitive advantage. Competitors would need to invest a lot of time and effort to imitate the unique combination of knowledge, networks and resources created by a firm’s geographic presence.

4.2 Initial Screening of Foreign Market Attractiveness A reasonable starting point for the screening of potential target markets would seem to be assessing macro-factors in a way that goes beyond a simple analysis of concrete business opportunities. This might involve macroeconomic stability and growth, the quality of institutions and infrastructure, demographic

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trends, environmental trends and potentially disruptive natural events, political and social stability, taxation, bureaucracy and general “friendliness” to foreign businesses. In reality, a closer look at the top recipients of foreign direct investment (FDI) in 2018 shows that the situation is less straightforward. Ideally, firms would like to expand their international activities to countries that have a healthy economy, a functioning infrastructure, acceptable fiscal rules and which are generally “easy” to enter from a bureaucratic point of view. Yet it seems that in 2018 investors were more flexible in their decisions: nine countries out of the 20 largest recipients of foreign direct investment had experienced a growth rate of lower than 3% over the previous decade (marked in bold in Table 4.1). Moreover, the majority of these largest recipients were not among the top 20 countries in terms of ease of doing business (as ranked by the World Bank and marked in bold in Table 4.1). For export activities, the top 20 largest importers do not always have the characteristics of an “ideal” target market (see Table 4.2). For example, eight out of the 20 largest markets were neither growing (i.e., their compounded average annual growth rates were below 3%) nor performing well in the “Doing Business” rankings (marked in bold in Table 4.2). Table 4.1  Top 20 recipients of foreign direct investment (FDI), 2018 Year  1 USA  2 China  3 China, Hong Kong SAR  4 Singapore  5 Netherlands  6 United Kingdom  7 Brazil  8 Australia  9 Cayman Islands 10 British Virgin Islands 11 Spain 12 India 13 Canada 14 France 15 Mexico 16 Germany 17 Italy 18 Indonesia 19 Israel 20 Vietnam

FDI inflow, 2018, USD mn

GDP current prices, World Bank Doing CAGR, 2008–2018, % Business ranking, 2018

251,814 139,043 115,662

3 11 5

8 46 4

77,646 69,659 64,487 61,223 60,438 57,384 44,244

7 0 0 1 3 n/a n/a

2 36 9 109 18 n/a n/a

43,591 42,286 39,625 37,294 31,604 25,706 24,276 21,980 21,803 15,500

−1 9 1 0 1 1 −1 7 6 9

30 77 22 32 54 24 51 73 49 69

Sources: UNCTAD, World Bank

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Table 4.2  Top 20 importers, 2018

 1  2  3  4  5  6  7  8  9 10 11 12 13 14 15 16 17 18 19 20

USA China Germany Japan United Kingdom France China, Hong Kong SAR Korea, Republic of Netherlands India Italy Mexico Canada Belgium Spain Singapore Switzerland Poland Thailand United Arab Emirates

Import, 2018a, GDP current prices, USD bn CAGR, 2008–2018, %

World Bank Doing Business ranking, 2018

2611 1844 1293 748 670 659 627

3 11 1 0 0 0 5

8 46 24 39 9 32 4

535

5

5

521 508 499 464 460 450 376 371 279 268 249 245

0 9 −1 1 1 0 −1 7 2 1 6 3

36 77 51 54 22 45 30 2 38 33 27 11

a Data for China: 2017 Sources: UN Comtrade, World Bank

This glance at some basic statistics on foreign direct investment and import– export activities raises a question: how much importance should we attribute to the analysis of “macro”-factors in foreign market screening? In 2018, Heineken was brewing beer in nine developing markets in Latin America, Africa and Asia. All of these markets were ranked lower than 150th position by the World Bank for “ease of doing business” (the lowest ranking was for Democratic Republic of Congo, ranked 184 out of 190). The decision to grow in politically and economically unstable markets, where there is a deficit of working infrastructure and institutions, is problematic. While the disadvantages and risks associated with such a decision are obvious, the underlying reasons usually indicate that a risk-taking investor is following a long-term and holistic view. Firms implementing internationalization strategies in difficult business contexts are aiming to obtain first-mover advantages and hoping that the situation will eventually improve. A further important factor is that difficult business contexts usually create significant barriers to competitors. Once a risk-tolerant investor or exporter has learned how to deal with local inefficiencies, those same inefficiencies shelter its operations from moves by potential, yet more cautious, competitors.

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When it comes to political and social stability and infrastructure factors, we agree that investors should look carefully at both sides of the coin. But what about foreign market screening in terms of key macroeconomic indicators? The size of a country’s GDP certainly represents a valid indicator for an approximate assessment of the potential market. Nevertheless, few firms are able to reach 100% of a country’s population. In 2019 the most eastern trade center of Metro Group, German wholesaler, which has been operating in Russia since 2000, was Irkutsk, which meant that the group’s operations left the whole far east of Russia untouched, except eventual e-commerce sales. The decision to accept this limit is understandable, particularly given the geographic extent of the country. However, it shows that even an approximate initial screening of the attractiveness of a foreign market should consider only those regions where a firm can realistically be present. Another indicator for foreign market pre-screening is GDP growth rate. In Table 4.3, we present evidence that GDP growth rates, often used as a proxy to pre-select “growing markets”, do not always correlate with import growth in specific sectors of economy. Take as an example the import of pharmaceutical products and internal combustion engines. In five of the top 10 importing countries for those two product categories, the difference between import and GDP growth rates exceeded 300 basis points (3%). Managers using GDP growth rates to pre-select or discard potential foreign markets should therefore switch to indicators directly related to their industries. Given these considerations, it seems logical to question whether such genetic macroeconomic indicators are actually useful for assessing foreign markets. We suggest refocusing macro analysis of target markets to two groups of indicators: market accessibility (whether any legislative and political factors seriously prohibit foreign competition, such as state-controlled monopolies or prohibitive tariff systems), and market attractiveness (proxy indicators of eventual business opportunities in the market). Market accessibility and market attractiveness are important antecedents of any in-depth competitive analysis of a target foreign market. As the statistics above illustrate, indicators of market attractiveness are useful only if decision-makers manage to find connections between the macro-­ indicators and the competitive forces shaping the industry their firm is interested in. Information about GDP evolution does not by itself provide any valuable input for a foreign market assessment. It has to be linked to factors that bear directly on business decisions. How will the evolution of a country’s demographic factors impact future demand for our products and services? How volatile is the currency and how will demand react if there is an abrupt change in the exchange rate? Who will decide on new environmental

0 −1

−3 1

 9 Netherlands 16,634 10 Spain 15,703

Sources: UN Comtrade, World Bank

0

1

25,247

 8 France

2 −1 0

6 4 10

29,985 26,682 25,497

3 1 0 0

8 2 0 4

115,635 58,056 40,448 30,257

GDP current prices, growth, 2008–2018, %

USA Germany Belgium United Kingdom  5 Switzerland  6 Italy  7 Japan

 1  2  3  4

Import of pharmaceutical Import of pharmaceutical products, current products, 2018, prices, CAGR 2008–2018, % USD mn USA Canada Germany Mexico

Spain Slovakia Czech Republic 8 Russian Federation 9 Turkey 10 France

5 6 7

1 2 3 4

1162 1088

1329

1859 1378 1365

11,986 4525 4162 3229

Import of internal combustion engines, 2018, USD mn

12 4

1

1 13 5

5 −1 −2 7

Import of internal combustion engines, current prices, CAGR 2008–2018, %

0 0

0

−1 1 0

3 1 1 1

GDP current prices, growth, 2008–2018, %

Table 4.3  Top 10 importers of pharmaceutical products and of internal combustion engines versus GDP growth, 2008–2018

62  O. E. Annushkina and A. Regazzo

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protection laws that may affect demand for our products and services, and when? How might a new tariff system benefit incumbent competitors? Such “macro” questions dig deep into the attractiveness of a potential target market, but it is too costly and time-consuming to conduct a full macro-­ analysis for each of 200 potential foreign markets. The solution is to pre-screen with two or three indicators for all the potential markets, along the lines of the two macro-groups described above. A firm may use one or two indicators for both market accessibility (e.g., presence of prohibitive tariffs and FDI restrictions, or a preferential trade area with reduced tariffs) and market attractiveness (e.g., GDP per capita and population in the top three regions, or import trends for relevant products and services). The data for this kind of pre-screening are usually available publicly or at low cost, and the assessment can be run using a simple Excel spreadsheet or multiple-criteria decision-making software, also widely available. The pre-screening of all possible countries with just two or three indicators ensures that no potentially attractive markets are left out. It also avoids lengthy and costly investigation of countries that turn out to be “second best” when seen from the perspective of the full list of possible markets. Once a number of markets have been pre-selected (usually, but not necessarily, the analysis is done by region rather than globally), a firm looks at the market characteristics directly linked to its internationalization goals and uses macroeconomic indicators to predict the evolution of the main competitive forces at work in the target market. In 2006–2007, the SDA Bocconi School of Management (Milan, Italy) conducted a study of Italy’s attractiveness to foreign firms who had already committed to investing there. The macro-­factors that played an important role in their investment decisions included openness to foreign investment, a strong industrial base (allowing investors to find suppliers and industrial partners), cultural and scientific heritage and a high-quality workforce (innovation potential of factories and subsidiaries in Italy) and geographic location (access to continental Europe and other Mediterranean economies). In this example, we see how macro-factors helped investors to create a broader picture of an investment opportunity in Italy. Without those factors, the assessment would have been limited to a handful of short-term, albeit important, considerations, such as demand, competitors, distribution and fiscal pressure. Macro-factors allow assessment of the overall impact on a firm of investment in a foreign market, and of the level of certainty of predictions about the target market. Macro-factors also allow the target foreign market to be considered from the perspective of the firm’s global competitive advantage. The next step is to narrow down our reflections and link the characteristics of the potential foreign market with the firm’s internationalization goals.

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4.3 Goal-Driven Assessment of Foreign Markets Internationalization goals are the first determinant of international market selection, once the initial screening described above has been carried out. In Chap. 1, we discussed two broad categories of internationalization goals: improvement of competitive advantage (access to new skills and resources) and scalability of the business (access to new markets, production or research and development capacities, and financial resources). The selection criteria for international markets correspond to a firm’s intentions in those markets: Are we looking for foreign locations with the lowest corporate taxes? Or the largest pool of young talent? Or the largest and fastest-growing demand? Or the fewest competitors, so that we can “plant the flag”? After the pre-screening step, it is crucial to start by reminding ourselves the exact goals of internationalization. Most importantly, internationalization goals may vary among business units of your firm, and priority markets for one type of products or services may not be that attractive for the rest of the firm. If the goal is to “plant the flag” for the sake of the firm’s global reputation or to access a certain technology, then you may decide that the chosen market is an “investment center” rather than a “profit center”. In that case, the indicators to be used for the assessment will be different: for example, you will want to consider the number of annual visits to an eventual flagship store and the cost per visit, rather than the store’s profitability in absolute terms. Once the goals have been clarified and agreed, we need to estimate the firm’s full scale performance against the quantitatively or qualitatively defined goal for each market that we are assessing. The goal of internationalization, defined for each new market, may be “translated” into rather concrete indicators of profitability and growth, but also in terms of service level, cost per unit, possibilities to access to new technologies, reputation and so on. A firm may also have a hierarchy of goals; for instance, the primary aim may be to reduce production costs while maintaining a certain quality and service level, and the secondary aim may be to start selling products or services in the foreign market. A foreign market can also be used as a test for further expansion within a macro-region; so, somewhat counterintuitively, a foreign market may be selected for its small scale, high concentration of potential customers and high level of competition. To reach an accurate estimate of the full scale of performance, we recommend considering the specific part of the country that you intend to address, as discussed above and also in Sect. 4.4 of this chapter. Firms rarely manage to operate over 100% of the national territory of their target markets. Why,

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Table 4.4  Foreign market selection criteria: challenges and solutions Foreign market selection criteria Issue: large number of criteria

Issue: criteria not quantitatively measurable

Issue: sources of data not easily available

Possible solutions: • define weight (importance) of criteria using regression analysis (e.g., if the firm is already operating abroad, by analyzing which factors are most important for driving sales in other markets); •  define weight using pairwise comparisons (e.g., the analytical hierarchy process developed by Professor Saaty); •  simplify by grouping criteria around two major strategic goals to build two indices (e.g., a “market potential” index and a “market accessibility” index), and constructing a matrix with four quadrants illustrating foreign market attractiveness in terms of high/low potential and high/low accessibility

Possible solutions: • use pairwise comparison (e.g., the Analytical Hierarchy Process (AHP) developed by Professor Saaty); •  assign dummy scores (e.g., yes/no, 0 or 1: easily accessible market versus inaccessible); •  assign scores (e.g., Likert scale from 0 to 7 to estimate cultural compatibility of a product to local tastes); •  choose one distinctive feature or qualitative attribute and attribute a value to it (e.g., the “business friendliness or openness” of a foreign location can be measured as “number of procedures required to open a legal entity”); •  assign a ranking (from the best to the worst) subjectively or by using mathematical methods that take into account perceived average variables

Possible solutions: • for data on imports (as a substitute for data on total demand): UN Comtrade database, UNCTAD database; •  for macro-indicators: World Bank Statistics, World Bank “Doing Business” (measures of business regulations), Transparency International Data, CIA World Factbook; • for market accessibility (tariff and trade requirements): International Trade Center Market Access Map, European Commission Market Access Database; •  free industry reports from local chambers of commerce; •  field trips and visits to trade fairs and conferences

then, would we compare 1.39 billion potential customers in China with 1.34 billion potential customers in India? Wouldn’t it be better to compare Guangdong with Maharashtra? Criteria for foreign market selection vary and are specific to each firm, to each business unit inside of a firm and even to each new project. Nevertheless, they have three things in common: usually there are several criteria; some of the criteria are qualitative and may not be quantitatively measureable; and sources of information on foreign markets may not be easily available. Possible (although not exhaustive) solutions to these challenges are suggested in Table 4.4.

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4.4 Which Region, Province, City, Street? The heading of this subchapter is deliberately provocative. Managers traditionally decide on foreign market priorities at a country level, and yet few firms work with 100% of a foreign market’s national territory. The very few exceptions to this rule include certain segments of e-commerce, telecommunications, transportation and logistics. Within a country, foreign investors find dramatic differences between regions from the business, economic and cultural points of view. Not surprisingly, research confirms that regional (and not just national) characteristics play an important role in location selection. A specific region in a country can be more attractive if compared to the rest of the country because of the agglomeration effect: the presence of other foreign and domestic players, of firms from the same industry and of firms from the same country of origin. The presence of other firms means that a new investor may benefit from knowledge that has already been “spilled”. This may have led to improvements in the quality of the local workforce and suppliers, infrastructure may have been built to attract previous investors, and there may already be a good level of local demand for goods and services. The presence of ethnic minorities speaking the language of your country of origin can also be considered as a positive factor: for example, Korean multinationals often locate their subsidiaries in the northeast of China, which is home to many Korean-Chinese who speak Korean. Research on foreign investments in Vietnam conducted by Professor Danchi Tan and Professor Klaus Meyer has also underlined the importance of a local presence on the part of other firms from the country of origin. Their research demonstrated that new investors seek “country-of-origin agglomerations” to help them overcome an initial lack of local knowledge, in particular for dealing with apparently weak local safeguards (protection of market transactions). Regions differ in terms of taxation, local levels of demand, workforce costs and quality, distance from the main infrastructure hubs and the quality of those hubs, and also availability of networks of local partners. Firms should compare market potential at the regional or provincial levels, and in some cases even at the level of a district within a city, rather than at country level. Research confirms that multinationals have a strong propensity to select global cities—global centers of economic coordination with relatively large urban populations—attracted by such “micro-locational”

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indicators as international connectedness, availability of advanced producer services (such as law, accounting, finance, advertising), cosmopolitan environment, in particular if the main motive of internationalization is access to local demand. Locations of production and R&D activities are more likely to be in metropolitan areas surrounding global cities or in the peripheral rural areas. The main difficulty in implementing subnational analysis of location options is the availability of data—qualitative and quantitative data for cross-­ country comparison is usually collected at the national level. One solution is to conduct the preliminary screening of potential markets at a national level by taking into consideration factors that are likely to be homogeneous between regions: demographic trends, country-level tariffs and regulations, macroeconomic stability (including volatility of the national currency), quality of institutions protecting business, and social and political stability. This preliminary screening can then be followed by analysis at the intra-country regional level. For example, in our consulting capacity, we coordinated a project to select a location for a European producer of premium food products. The company was operating near-globally via export contracts and needed to improve its customer service by creating regional hubs with warehouses. Our analysis led us to compare the market potential of the east and west coasts of the USA, of the Tokyo and Osaka areas in Japan, of the Moscow and Saint Petersburg regions in Russia, and of the Guangzhou, Shanghai and Beijing areas in China. The final decision was made, as we expected, at a city level: the firm chose one of the most important agglomerated areas in the USA.

4.5 Distance and Foreign Market Attractiveness Should distances between the home market and potential target markets impact your decision? Geographic distances increase logistics costs. Cultural distances potentially require investment in adaptation. Differences in business legislation require time and money to be dedicated to learning and external consultancy. Some firms, for instance operating in such distance-sensitive industry as food & beverages, chose to deal with distances gradually: in Box 4.1 we describe the experience of IRCA, a leading player in the Italian food ingredient market founded in 1919 by the Nobili family. Distance should have only a minor influence on decision-making about foreign markets’ selection: each firm, as IRCA did (Box 4.1), once an opportunity is identified, should find its own way in dealing with differences among markets. Peter Drucker, one of the most influential thought leaders in

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Box 4.1  Dealing with Distances in Food Ingredient Industry: Case of IRCA In 2017 IRCA, a leading player in the Italian food-ingredient market serving industrial, artisanal and gourmet producers of pastry, ice-cream and bakery, was working at the implementation of its expansion strategy to the gourmet segment of international markets. In that year IRCA that underwent a second change of ownership, transitioning from Ardian (which had acquired control of the firm from the founding family back in 2015) to Carlyle, another international top-tier private equity investor. Due to products’ characteristics (relatively short shelf life and relatively high transportation costs) geographical proximity together with potential market size and expected market growth represented key indicators of a potential market attractiveness. Shareholders’ choice fell on USA, Germany and France. In those markets the only available point of contact with potential customers was represented by national distributors, which would cherry-pick required products from a variety of suppliers, posing limitations to IRCA’s unique capability of efficiently balancing its revenue base by mixing order assortments whenever needed. Variety of ingredients was essential to go-to-market and IRCA decided to accelerate the expansion of its catalogue built upon its most differentiating products—leveraging the Italian “country of origin effect” where possible—like chocolate and pistachio-based ingredients, bakery and ice-cream bases. The firm was able to crack new markets and to attract prospective clients with primary products. In this respect ice-cream ingredients played a key enabling role in IRCA’s gaining market share through sale of non-core products progressively introduced to the distribution network. The variety of ingredients introduced to foreign clients, logistics complexity, and necessity to overcome its “liability of outsidership” led IRCA to use acquisitions as one of core elements of further acceleration of its geographic expansion.

management science, says: “Good executives focus on opportunities rather than problems. Problems have to be taken care of, of course; they must not be swept under the rug. But problem solving, however necessary, does not produce results. It prevents damage. Exploiting opportunities produces results.” The most recent research supports this argument: firms that are able to “recognize, understand, assimilate, adapt and integrate” information about opportunities, even in distant foreign markets, will actually enter those markets. In particular, this absorptive capacity to scan and to capture business opportunities in distant markets works well when managers can rely on a network of relationships in those markets. Rather than distance, it is the assessment of business opportunities in target markets, together with an analysis of firm’s available resources (either directly possessed or potentially accessible), that should guide the selection of foreign markets. The reality check presents a slightly different picture. A closer look at the decisions actually implemented by firms reveals that distance still matters (see

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Table 4.5). For 29 out of the top 30 world economies, at least one of the three top export partners is situated in the same macro-region. For 23 out of the top 30 world economies, at least two of the top three export partners belong to the same macro-region. Business opportunities in the target market play a decisive role, too. In fact, Table 4.5 seems to be a good illustration of Newton’s law of gravitation: the force of “economic attraction” (in our case, export activities) is positively influenced by closer distances (i.e., location in the same macro-region) and by the economic “mass” of a trading partner. No fewer than 55 out of 90 top three export partners are from the top five world economies—the USA, China, Japan, Germany and the UK. Are firms wrong to attribute importance to distance and to prioritize nearby foreign markets? In the 1970s, researchers from the Uppsala school initiated a debate on the importance of distance in foreign market selection. They noted that it is usual for firms to approach foreign markets on a gradual basis, starting with those that are geographically closer. Expanding on the concept of “distance” between domestic and target foreign markets, researchers suggested that important factors influencing the selection of foreign markets should also include differences in levels of economic development, differences in business legislation and the institutional environment, and cultural distances. Risk-­ averse attitude seemed to prevail. Change arrived with “new” multinationals from emerging markets, often situated in regions where neighboring countries offered meager prospects for international growth. Some (but not all) of these new multinationals were willing to implement aggressive international growth strategies, and they looked for opportunities in larger developed economies located in different macro-regions and often quite different in terms of “rules of business”. Take Haier, a Chinese firm and one of the top players in household appliances: their first overseas factory was built in Indonesia in 1996. Fast forward to 1999, when they opened their second overseas production facility in the US—a large step for a predominantly Asian player at that time. New multinationals from emerging markets seemed to learn fast: their approach to foreign market selection, which focused on business opportunities rather than on distances and potential risks, was described as a “springboard” (Luo & Tung, 2007). Peter Drucker would have approved! Recent research has confirmed the subjectivity of distance for each firm: if a firm has “cultural experience reserve” in a certain area, even if that area is relatively “culturally distant”, then the impact of the distance is mitigated by past experience. A firm’s ability to use its own knowledge of the market, to learn from its own experience and to create networks with local

4,970,916

3,996,759 2,825,208 2,777,535 2,726,323

 3 Japan

 4  5  6  7

18 Saudi Arabiab

782,483

38

23 37 17 64

14 15 16 17

1,426,189 1,223,809 1,042,173 912,872

27 37 18

11 Russian Federation 1,657,554 12 Korea, Republic 1,619,424 13 Australia 1,432,195

Spain Mexicob Indonesia Netherlands

26 13 26

39 17 20 12

15

8 17

China

France USA China Germany

China China China

Germany China USA

USA USA Germany USA

China

Canada USA

Total No. 1 exports, % of GDP, export partner 2018

2,073,902 1,868,626 1,709,327

 8 Italy  9 Brazil 10 Canada

Germany United Kingdom France India

20,494,100 13,608,152

Country:

 1 USA  2 Chinaa

GDP (current US$), 2018

3

15 76 15 23

12 27 35

13 27 75

9 13 15 16

20

18 19

Value of exports to no. 1 export partner, % of total exports, 2018

Table 4.5  Top 30 economies and their top three export partners, 2018

United Arab Emirates

Germany Canada Japan Belgium

Netherlands USA Japan

France Germany USA United Arab Emirates France USA China

Mexico China, Hong Kong SAR USA

No. 2 export partner

3

11 3 11 10

10 12 16

10 12 5

8 10 8 9

19

16 12

Value of exports to no. 2 export partner, % of total exports, 2018

USA Argentina United Kingdom Germany Vietnam Korea, Republic Italy China USA United Kingdom Singapore

Korea, Republic China Netherlands Spain China

China Japan

No. 3 export partner

1

8 2 10 8

8 8 7

9 6 3

7 7 8 5

7

7 6

Value of exports to no. 3 export partner, % of total exports, 2018

70  O. E. Annushkina and A. Regazzo

66

16 44

551,032 531,767 518,475 504,993 455,737 434,751

414,179

397,270 375,903

Sweden Belgium Argentina Thailand Austria Norway

22 23 24 25 26 27

28 United Arab Emiratesb 29 Nigeria 30 Ireland

Germany Germany Brazil China Germany United Kingdom Saudi Arabia India USA

Germany Germany

Germany

16 28

9

11 18 18 12 30 22

15 28

10

Netherlands Belgium

India

United Kingdom USA Czech Republic Norway France USA USA USA Germany

11 13

6

10 14 7 11 7 16

13 6

7

Spain United Kingdom

Iraq

China United Kingdom Finland Netherlands China Japan Italy Netherlands

Italy

b

a

Information is not exact, as “areas not otherwise specified” were among the top three target areas for export Export statistics: 2017 data In bold (e.g., USA) we mark the top five world economies among a country’s top three export partners. In italics (e.g., USA) we mark economies located in the same macro-region among a country’s top three export partners. Sources: UN Comtrade, World Bank

30 88 12 50 39 28

44 45

705,501 585,783

20 Switzerland 21 Poland

22

766,509

19 Turkey

10 11

5

7 12 7 10 6 11

10 6

6

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partners—these are factors that can justify attaching less importance to distance as a factor in decisions about priority markets. What about firms with few managerial and financial resources, for instance, SMEs? Adapting to long distances may take significant investment of entrepreneurial time and financial resources. Rather than limiting the distances, however, a winning strategy for internationalizing SMEs with few resources can be to focus on fewer markets. In the next section, we discuss the “ideal” number of markets to serve.

4.6 Number of Markets to Serve Resources, in particular human resources, represent an important limit to a firm’s expansion. Relocating or hiring new managers to work in a foreign market can lead to a (theoretically) temporary reduction in efficiency due to the necessary period of learning and adjustment. Exploring opportunities in new foreign markets requires additional investment, in particular if a firm decides not to rely on a pool of external financial and human resources obtained from partners in a joint venture, franchising or licensing context. The complexity of broadly spread foreign operations demands additional effort in terms of coordination and control, adds new layers to organizational hierarchies, and slows down decision-making processes. Not surprisingly, the question of how many markets are to be served—the so-called “breadth” of foreign operations—has been a focus for scholars studying the impact of international growth on profitability. There is no recipe for an “ideal” spread (or, for that matter, an ideal concentration) of international operations. Even at an industry level, we cannot recommend any “best practice” in terms of number of markets to be served. There are simply too many variables, often pulling in opposite directions, including growth opportunities and the initial investment required. Nor would an analysis of “best practices” implemented by other players make any significant contribution to our decision-making processes; in Chap. 5, we consider the limited geographic scope of the international operations of the top 10 global retailers (see Table 5.2). The decision about how many markets to serve is also relevant for modes of entry where the initial investment is relatively limited, such as export contracts. Exporters may benefit from increasing the number of markets they serve: firms become less sensitive to variations in the competitive or macroeconomic context of any one market, and they acquire more knowledge about doing business abroad. On the other hand, stretching a firm’s resources over

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too many and too distant markets may mean failure to achieve a “critical mass” in any one of those markets. Statistical analysis of export performance does not provide any off-the-shelf solution. Several studies support the choice of a smaller number of foreign markets, in particular for SMEs, while other studies support “market spreading”. Researchers also recommend that firms consider different markets within a single macro-region. This has the effect of defining the level of foreign market spread in two dimensions: the number of markets served and the distance to those markets. While reflecting on the number of countries to be served, we suggest taking the following factors into account: • investment required for foreign market entry and market development (including adaptation of products and services, legal authorization, marketing campaigns and establishing of local operations); this can vary widely from market to market and from product to product; • relative closeness of foreign markets in terms of language, culture, economic and technological development, sophistication, and legal and political contexts; • availability of managerial resources; • availability of financial resources; • need to achieve economies of scale if a firm operates in a niche market segment (i.e., selling products or services to a limited number of customers); • need to achieve economies of scale if a firm sells products or services with a very low frequency of use; • need to achieve synergies among a large number of markets; • need to mitigate the risks of losing customers who “switch” easily; • the firm’s ability to learn fast: its absorptive capacity to scan and to capture business opportunities; • the lifecycle of the product or service and the necessity of being the “first mover” to set technological or customer service standards, and to gain loyalty and reputation ahead of competitors and imitators. Kaspersky Lab, a Russian software producer, and Netflix, a US streaming media and entertainment company, both opted for a large number of foreign markets (see Box 4.2). In each case, fast global expansion was crucial for winning early adopters and first-time customers, as opposed to entering the market later and trying to convince a competitor’s customers to switch. We suggest dealing with uncertainty about the “ideal” number of foreign markets to enter by looking simultaneously at both sides of the matter—business opportunities abroad and the firm’s ability (resources and capabilities) to pursue them—in a growing number of foreign markets.

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Box 4.2  “Water Strategy” or “Exponential Globalization”: Kaspersky Lab and Netflix Kaspersky Lab’s antivirus software is an almost ideal product for a “market spreading” strategy thanks to the relatively low investment required in product adaptation (limited to translation of the product description and user interface into the local language). Co-founder Natalya Kasperskaya referred to the firm’s initial steps in foreign markets as a “water strategy” of entering every possible market at the first opportunity and under almost any economic conditions. For Kaspersky Lab, the first markets were Finland, Germany, Switzerland, Poland, Netherlands and the USA. The “water strategy” generated sales in 20 countries in the first three years after the firm’s foundation. Since then, Kaspersky Lab has rapidly climbed its way into the top four global antivirus vendors (Gryaznova & Annushkina, 2011). Netflix’s rapid and widespread expansion has been called “exponential globalization.” In 2018, 11 years after its foundation, it had 139 million paid memberships in 190 countries for its streaming services and reported its first positive contribution margin for international operations (9%). Unlike Kaspersky Lab, Netflix faced some significant challenges on its way to increasing the number of markets it served: the markets differed dramatically in terms of local competition and substitute services, local TV and media content habits and customs, and licensing of content. Millions of paid members in its domestic US market provided Netflix with a solid foundation in terms of resources for foreign expansion. It started with Canada in 2010, then Latin America and the Caribbean in 2011, followed by the UK, Ireland, Finland, Denmark, Sweden and Norway in 2012, the Netherlands in 2013, and Germany, Austria, Switzerland, France, Belgium and Luxembourg in 2014. Adding original content (in 2018, content was produced in 17 countries) has helped Netflix to meet the requirements of local adaptation and local licensing of content. The firm learned fast from its local partners and from observing which marketing tactics and organizational practices worked and which did not work. As it expanded, it also learned from big data analysis, improving its predictive algorithms for customer usage preferences (Brennan, 2018; Netflix Annual Report, 2018).

4.7 The Truth About Foreign Market Selection In the course of the study of the attractiveness of Italy for foreign direct investment discussed above, top managers were interviewed about the main sources of information they used when deciding to commit to the Italian market. The most important of these were the managers’ own personal knowledge, their personal networks and their previous personal experience of working in Italy. The role of managers and entrepreneurs as protagonists of internationalization comes as no surprise: it is people, not hypothetical “firms”, who enter new markets, commit resources, make errors and learn to correct them. The decision-making process for foreign market selection is far from rational and logical. Much as we would like business leaders to look first at macro-­ factors, to carry out preliminary screening of potential markets, to conduct an

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in-depth investigation of a number pre-selected markets and to decide carefully on a number of foreign markets to focus on, in reality the decision is often influenced externally. An external factor or event may activate a manager’s interest in a foreign market, and a domestic client with operations in a foreign market may represent a good opportunity for a firm to expand internationally through an existing relationship. A decision about the location of a new commercial subsidiary or production unit can be strongly influenced by competitors’ behavior—a phenomenon known in the international business literature as the “bandwagon effect”. In some cases, a firm enters a new market with export sales because of a call from a potential customer, rather than as a result of proactive analysis of opportunities in that market. External stimuli toward entry in a foreign market may come from the business-support activities of a chamber of commerce, from a firm’s bank, consultancy or other service provider, or from any other kind of business or personal network. With approaches like these, the preliminary screening activities are usually skipped. Research conducted by Professor Brewer has shown examples of Australian firms that identified markets reactively in response to external stimuli. His quotes from interviews with managers are revealing: “we want to be opportunistic and we’ll go wherever the projects are”; “generally we do get enquiries for a lot of projects, we’ve been trying to ride the back of these other Australian companies”; new foreign markets exploration started “at the suggestion of the manager of the export division [of another company]” (Brewer, 2001). In Professor Brewer’s research, potential markets were evaluated in terms of two main qualitative considerations: market attractiveness and the prospects of securing a competitive advantage over incumbent players. In some cases, the subsequent allocation of resources was also carried out on a subjective basis. The approach described for Australian firms is far from unique. In our teaching and consulting activities, we observed Russian, European, Asian and American firms adopting similar tactics in foreign market selection. A study by Professors Musso and Francioni showed smaller firms selecting foreign markets without any systemic approach. Interestingly, a firm’s international experience was no guarantee of an analytical decision-making process: many internationally active SMEs continued their global journey by casual browsing of foreign markets. The lack of an analytical approach to foreign market selection leaves the majority of firms pursuing two approaches: the “naïve” approach (for example, justifying a lack of analysis by the fact that their international activities are limited to exporting) or the “pragmatic” approach (not conducting any strategic analysis of target markets, but focusing on limiting risk). In some cases,

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it may even look as if these approaches work. Nevertheless, we have major doubts about these “real-life” approaches to foreign market selection. An absence of preliminary screening activities creates the risk that good business opportunities will be missed. A few years ago, we were approached by a firm operating in the luxury B2B2C segment and willing to expand outside of Asia, with a view to entering the Latin America or Australian markets. Instead, preliminary screening of all the available locations outside of Europe generated a completely different option—the USA. Subsequent qualitative evaluations of potential markets should also involve a quantitative element as an important decision-making tool for resource allocation. Without a clear quantitative understanding of the market perspectives, a firm may adopt a “try it and see” approach, committing resources gradually. Although this gradual approach may be prudent and flexible if a firm objectively lacks the necessary financial and managerial resources, it can also jeopardize the chances of securing first-mover advantage in a highly attractive market. In contrast, coming up with specific numbers on potential sales and demand would push managers to dedicate enough of their time and attention to developing the new market. Defining a firm’s priorities for foreign markets is a key starting point in the formulation of the internationalization strategy. The deliberate rather than casual opportunity-driven choice of foreign markets allows improving the quality of all other subsequent analysis of growth opportunities on global markets. The interconnectedness of the foreign market choice with other internationalization decisions emerge in most of this book chapters as we discuss the characteristics of the foreign markets and their impact on the choice of the entry mode, on adaptation or standardization or transformation decisions, on configuration of new organizational structure, and on most of functional policies: marketing and communication, operations, human resources.

References Brennan, L. (2018). How Netflix expanded to 190 countries in 7 years. Harvard Business Review. https://hbr.org/2018/10/how-netflix-expanded-to190-countries-in-7-years Brewer, P. (2001). International market selection: developing a model from Australian case studies. International Business Review, 10(2), 155–174.

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Gryaznova, A., & Annushkina, O. (2011). Kaspersky Lab is scaling the globe. In M. Peng & K. Meyer (Eds.), International business (pp. 330–331). South-Western: CENGAGE Learning. Luo, Y., & Tung, R. L. (2007). International expansion of emerging market enterprises: a springboard perspective. Journal of International Business Studies, 38(4), 481–498. Netflix Annual Report (Form 10-K). (2018). Retrieved March 10, 2020, from https://www.netflixinvestor.com/financials/annual-reports-and-proxies/ default.aspx

Selected Bibliography Africano, A. P., & Magalhaes, M. (2005). FDI and trade in Portugal: a gravity analysis. In FEP Working Papers, 174, Universidade do Porto, Faculdade de Economia do Porto. Annushkina, O., & Trinca, C. R. (2013). Foreign market selection by Russian MNEs: beyond a binary approach? Critical Perspectives on International Business, 9(1–2), 58–88. Bobonis, G. J., & Shatz, H. J. (2007). Agglomeration, adjustment, and state policies in the location of foreign direct investment in the United States. Review of Economics and Statistics, 89(1), 30–43. Cieslik, J., Kaciak, E., & Thongpapanl, N. (2015). Effect of export experience and market scope strategy on export performance: evidence from Poland. International Business Review, 24(5), 772–780. Cieślik, J., Kaciak, E., & Welsh, D. H. B. (2012). The impact of geographic diversification on export performance of small and medium-sized enterprises (SMEs). Journal of International Entrepreneurship, 10(1), 70–93. Debaere, P., Lee, J., & Paik, M. (2010). Agglomeration, backward and forward linkages: evidence from South Korean investment in China. Canadian Journal of Economics, 43(2), 520–546. Doing Business Rankings. (2019). World Bank. Retrieved March 10, 2020, from https://www.doingbusiness.org/en/rankings Drucker, P. (2004). What makes an effective executive. Harvard Business Review. https://hbr.org/2004/06/what-makes-an-effective-executive Dubini, P., Annushkina, O., & Kumar, V. (2007). Attractiveness of “new” foreign direct investments in Italy: FDI from Far East, in L’attrattività del sistema Paese. In P. Dubini (Ed.), Attrazioni di investimenti e creazione di relazioni. Milano: Il Sole 24 Ore. Ghemawat, P. (2007). Managing differences: the central challenge of global strategy. Harvard Business Review, 85(3), 58–68.

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Goerzen, A., Asmussen, C. G., & Nielsen, B. B. (2013). Global cities and multinational enterprise location strategy. Journal of International Business Studies, 44(5), 427–450. Gomes, R. M., & Carneiro, J. (2017). Branded retailer expansion on a continent-­ sized emerging market. International Journal of Retail & Distribution Management, 46(9), 820–834. Haier company information. (2017). Haier—the world’s No.1 of the five-square meter home appliances’ realm. Retrieved March 10, 2020, from http://mg.haier. com/2016NEWS/2017/newsdetail8.html Hallen, L., & Wiedersheim-Paul, F. (1979). Psychic distance and buyer–seller interaction. Organisasjon, Marked og Samfund, 16(5), 308–324. He, X., & Wei, Y. (2013). Export market location decision and performance: the role of external networks and absorptive capacity. International Marketing Review, 30(6), 559–590. Heineken, N. V. (2018) Annual Report. Retrieved March 10, 2020, from https:// www.theheinekencompany.com/sites/theheinekencompany/files/Investors/financial-information/results-reports-presentations/Heineken-NV-2018-AnnualReport-F.pdf Johanson, J., & Vahlne, J.-E. (1977). The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23–32. Jordaan, J. A. (2012). Agglomeration and the location choice of foreign direct investment: new evidence from manufacturing FDI in Mexico. Estudios Económicos, 27(1), 61–97. Kim, M. (2013). Many roads lead to Rome: implications of geographic scope as a source of isolating mechanisms. Journal of International Business Studies, 44(9), 898–921. Koch, A. J. (2001). Selecting overseas markets and entry modes: two decision processes or one? Marketing Intelligence & Planning, 19(1), 65–75. Lee, T., Chan, K. C., Yeh, J.-H., & Chan, H.-Y. (2010). The impact of internationalization on firm performance: a quantile regression analysis. International Review of Accounting, Banking and Finance, 2(4), 39–59. Mendoza Mayordomo, F., Espinosa, C., & Araya Castillo, L. (2019). When geography matters: international diversification and firm performance of Spanish multinationals. BRQ Business Research Quarterly. https://doi.org/10.1016/j. brq.2018.10.006 Metro company information. (2020). Retrieved March 10, 2020, from https://www. metro-cc.ru/torgovye-centry Musso, F., & Francioni, B. (2012). How do smaller firms select foreign markets? International Journal of Marketing Studies, 4(6), 44–53. Papadopoulos, N., Chen, H., & Thomas, D. R. (2002). Toward a tradeoff model for international market selection. International Business Review, 11(2), 165–192.

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Popli, M., Akbar, M., Kumar, V., & Gaur, A. (2016). Reconceptualizing cultural distance: the role of cultural experience reserve in cross-border acquisitions. Journal of World Business, 51(3), 404–412. Saaty, T. L. (1990). How to make a decision: the analytic hierarchy process. European Journal of Operational Research, 48(1), 9–26. Shenkar, O. (2012). Beyond cultural distance: switching to a friction lens in the study of cultural differences. Journal of International Business Studies, 43(1), 12–17. Smartprofile. (2019). McAfee remains the market leader in business antivirus solutions in Belgium, but is losing market share. Retrieved March 10, 2020, from https://www.smartprofile.io/analytics-papers/mcafee-remains-the-marketleader-in-business-antivirus-solutions-in-belgium-but-is-losing-market-share/ Tan, D., & Meyer, K. (2011). Country-of-origin and industry FDI agglomeration of foreign investors in an emerging economy. Journal of International Business Studies, 42(4), 504–520. UN Comtrade. (n.d.). Retrieved March 10, 2020, from https://comtrade.un.org/data/ UNCTAD data. (n.d.). Retrieved March 10, 2020, from https://unctadstat.unctad. org/wds/TableViewer/tableView.aspx World Bank. (2019). Doing Business Rankings. Retrieved March 10, 2020, from https://www.doingbusiness.org/en/rankings World Bank data. (n.d.). Retrieved March 10, 2020, from https://data.worldbank. org/indicator/NY.GDP.MKTP.CD?most_recent_value_desc=true

5 Entry Modes: How to Enter a Foreign Market

The question of “how” you enter a foreign market is an element of your internationalization strategy that should not be underestimated. There are many different options—acquisition, joint venture, franchising, or the greenfield creation of a full-scale commercial subsidiary—each with its pros and cons. Local business contacts, both formal and informal, may become a key influence on your decision of entry mode. We begin this chapter by discussing how you can forge local relationships and overcome the “liability of outsidership”. Next, we explore what leads a firm to choose one mode of entry over another. Finally, we look at the factors that could facilitate (or threaten) the longevity of your international joint ventures and alliances.

5.1 An Outsider Looking at Unfamiliar Markets The adage, It’s not what you know, it’s who you know, could not be more relevant when devising an international expansion strategy. Every market consists of a network of formal and informal relationships. A typical formal network might include relationships with suppliers, OEMs, distributors, retailers, wholesalers and/or final clients. These may be formed via contracts or, as is often the case, informal agreements about long term collaboration. Being an outsider to a network is one of the major obstacles to growth in an international market. “Knowing people” will strongly influence your decision as to which market to select and how to enter it. It will speed up the implementation of your foreign market entry decision and decrease costs and effort—in particular, those related to research on suitable partners. It also © The Author(s) 2020 O. E. Annushkina, A. Regazzo, The Art of Going Global, https://doi.org/10.1007/978-3-030-21044-1_5

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allows “access knowledge” (about new markets, laws, competitive environment, culture, and business ethics) and reduces the risk related to the liability of foreignness (Box 5.1). Professor Schweizer in his work (2013) dedicated to small and medium firms overcoming the “liability of outsidership” suggested the following pragmatic steps you can take to become part of a relevant business network in a foreign market:

Box 5.1  Q-Sense Networking to Access Foreign Markets (Schweizer, 2013) Q-Sense nanotechnology instruments offer real-time analysis of surface-­molecule interactions. Q-Sense was founded in 1996 by four researchers in the Department of Applied Physics at Chalmers University of Technology in Göteborg, Sweden. By 2007, Q-Sense instruments were being sold in more than 25 countries. Initially, the start-up had to deal with a deficit of financial resources for market development. The founders tried to find applications for Q-Sense instruments in a variety of industries, from pharmaceutics to pulp and paper, but such a broad approach was not bringing the expected results. By 1998 the firm realized that the prototype-like instruments were not matching the needs of industrial customers, so focused its attention on academia. Using Q-Sense instruments, researchers were able to conduct new types of research, publish more, and increase awareness about Q-Sense. The supply-side scalability constraint was solved by outsourcing production to a Swedish manufacturer. At the same time, the firm found a distributor in the UK and Ireland. However, even though Q-Sense invested resources in educating distributors about its instruments, the sales results were unsatisfactory and the distributor soon abandoned the contract. By 2000 only 10 instruments had been sold, mainly thanks to the existing networks of the firm’s founders. These events reinforced the decision to focus sales efforts on academia and opinion makers. The firm decided to create Q-Sense’s Scientific Network to organize international seminars for top researchers to update them about the new technological possibilities of Q-Sense. In return, the firm would receive updates about its use. Not all researchers were eligible to be part of the network or to have access to the seminars and discounts on Q-Sense instruments (the firm selected members following careful analysis of publications by researchers, of PhD candidates’ potential, and of the universities’ reputation). By 2001 the network had 10 members in Europe, North America, and Asia, and was perceived as an exclusive club. Q-Sense could now rely on highly reputable “ambassadors” in the field. The network was later enlarged with “reference centers,” which had a lower level of exclusivity. The networks allowed the firm to gain reputation and legitimacy and to improve its international sales. Q-Sense was later acquired by Biolin Scientific, giving it access to an even larger number of international partners.

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1. Acknowledge the role of informal networks in a your target foreign market and the eventual necessity to dedicate time and resources to building local connections. Informal networks exist in both emerging and developed economies. In the former, they act as a substitute for functioning and efficient institutions and weak legal and law-enforcement structures. An example of an informal network in an emerging economy is guanxi, the Chinese system of social connections built on mutual trust. Elsewhere, research confirms the existence of unique formal and informal networks that “get things done” in Russia, Japan and Italy. Another example of informal networks in a developed economy is the “real” power distribution that sometimes lies behind the superficial organizational charts of large US corporations. 2. Develop a plan as to how to enter relevant networks.

(a) Start by assessing your firm’s existing networking resources, i.e. employees that have primary or indirect connections with the target market. These can be identified through discussion with employees coupled with analysis of employee resumes and their past projects abroad. (b) Set goals to approach networks in your target market that are both directly involved with, and peripheral to, your firm’s industry. (c) Improve your firm’s visibility among relevant formal networks with activities aimed at reinforcing your firm’s image; for instance, by participating in local and international industry events and being present in relevant media. (d) Create a contact generation plan that uses digital and traditional networks, professional associations, conferences, networking events, trade fairs, and alumni associations. Personal contacts should also be leveraged, including local “insiders”, such as personnel, distributors, and clients already in your target market. The contact generation plan can be executed by the networking team of employees established in step a), or by the entire organization. 3. Develop a plan as to how to maintain and nourish relevant networks: (a) Explicitly ask the “networking” team of employees (or all employees) to dedicate time and firm resources to the development of informal business relationships in the target market, via calls, emails, and social events. (b) Think of ways to be useful to the members of your formal or informal network. A network is only viable if all members are reaping the benefits. A co-distribution agreement is an example of how this can be achieved. In this arrangement, a firm willing to enter a new market

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receives access to distribution networks thanks to the connections of its local partners. In exchange, local partners receive access to distribution networks in a firm’s domestic market. However, tread carefully! Research on bribes (Lambert-­Mogiliansky, 2002) has shown the direct impact of business networks on corruption. They can facilitate occasional bribery, particularly in countries with weak, complex, or unstable legislative and law-enforcement institutions. Informal networking should not lead to an increase in reputational risk. To ensure this, the internationalizing firm should define a clear set of rules that govern the mutual benefits of members belonging to any networks of which it is part. 4. Institutionalize the process of your firm’s evolution from an “outsider” to an “insider” in the first foreign market in which you enter by mapping the key steps and analyzing which efforts were particularly efficient. This will allow you to replicate the process when addressing other new foreign markets. The example in Box 5.1 of a start-up called Q-Sense shows how a formal network facilitated the firm’s internationalization and helped it to overcome a lack of awareness about its product in global markets.

5.2 Entry Mode Options The networks that you have established will give you a vital insight into your target market and will form the basis of your entry mode decision. Entry mode options vary in terms of the resources (financial, managerial) required for their implementation, the level of control exercised by the internationalizing firm, and the level of access to local resources (Table 5.1). An important distinction is usually made between equity and non-equity (or contract-based) entry modes, depending on whether the entry mode involves investment. The decision as to whether to implement an entry mode with the involvement of a local partner is another important step: risks and benefits associated with this particular choice are discussed in the remainder of this chapter. Table 5.1 summarizes entry mode classification according to the decreasing levels of resource commitment, possibility to access local resources, and the possibility to exercise control over foreign operations.

Level of control Entry modes with high level of control: • Wholly owned subsidiary • Full acquisition (including brownfield) • Dominant shareholder in partial acquisitions • Dominant shareholder in a joint venture Entry modes with medium level of control: • Equal shareholder in an acquisition or joint venture • Contractual joint venture (partnership) • Contract management • Restrictive exclusive contract (e.g., distribution agreement, licensing contract) • Franchising contract Entry modes with low level of control: • Minority shareholder in an acquisition or joint venture • Other types of nonrestrictive and nonexclusive contracts

Access to local resources High level of access to local resources: • Full acquisition (including brownfield) • Dominant shareholder in partial acquisitions Medium level of access to local resources (entry strategy is partly based on local resources): • Dominant shareholder in a joint venture • Greenfield subsidiary with expatriate and local employees • Equal or minority shareholder in an acquisition or joint venture Low level of access to local resources (entry strategy is based mainly on headquarters’ resources): • Greenfield subsidiary with mainly expatriate employees • Temporary project offices • Export (direct to customer, and indirect via an intermediary) • Licensing contract • Franchising contract • Cross-border provision of goods and services

Resource commitment

High level of resource commitment— equity entry modes: • Full acquisition (including brownfield—an acquisition in which resources transferred by an investor are more important than resources provided by an acquired firm) • Greenfield investment (wholly owned subsidiary started from scratch) Moderate to high level of resource commitment—equity entry modes: • Dominant shareholder in a joint venture • Dominant shareholder in partial acquisitions • Minority shareholder in an acquisition or joint venture Low to moderate level of resources commitment: non-equity entry modes • Representative office • Temporary project offices • Consortium partnership • Export (direct to customer, and indirect via an intermediary) • Licensing contract • Franchising contract • Cross-border provision of goods and services

Table 5.1  Entry mode classification (Erramilli & Rao, 1990; Meyer, Wright, & Pruthi, 2009)

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5.3 H  ow to Approach the Decision Regarding Entry Mode Often, firms start discussions about the entry mode from the end goal: how do we select a company to acquire, or find a joint-venture partner? This approach often skips some important preliminary steps meaning a decision is made without a thorough evaluation of all suitable alternatives. The entry mode choice is one of the core three ingredients of competitive advantage in global markets, together with a firm’s ownership advantage (its superior resources and capabilities) and location decisions (locational advantage). Questions influencing the entry mode decision are numerous. How can a foreign market be entered to seize business opportunities without the related risk? How can the shortage of financial and human resources be dealt with? How can know-how, brands, and client contacts be protected? Which activities should be delegated to a foreign partner? How can a new market be approached and a trustworthy partner be found without any local contacts? The complexity of the entry mode choice is related to the need to take into account multiple, and often interrelated, factors at the same time and at each step as you fine-tune your decision (Fig. 5.1). We suggest that you “observe” by asking at least five sets of questions prior to making your entry mode choice: 1. Resources and capabilities—do we have the financial, human, and other tangible and intangible resources necessary to capture the opportunity in the market? 2. Foreign market characteristics—how strategic, risky, and distant, is the market? 3. Strategy—how might the chosen entry mode reinforce or undermine our competitive advantage? 4. Timing of market entry—do we hope to rely on first-mover advantage or other considerations about the timing and pace [rapid or gradual] of foreign market entry? 5. External influence—are there any external, competitive or noncompetitive, factors that might potentially influence our decision? Let us look at why all five areas are important.

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Questions should be asked…

1…about the compatibility of our resources & capabilities: Which resources are we ready to investin/dedicate to the project (people, financial resources, other tangible and intangible assets)? Do we have previous experience/knowledge of the target foreign market? Do we have previous experience/knowledge of a specific entry mode (e.g., acquisitions, distributors, joint ventures)? 2…about the target foreign market: What is the foreign market potential in the short term and in the long term for our firm? How distant is the market? Is it easily accessible from competitive and normative points of view? Which risks are associated with the market? 3…about strategy: Which business activities should be located abroad (sales? sales and customer services? production? research and development?)? Do we need local partners (to gain local knowledge, to gain access to local business networks, or to comply with the requirements of local laws on foreign direct investments)? Do we need to protect/to assure control over our brands, intellectual property, corporate culture, patents, contacts with clients, etc.? What are our profit expectations? 4.…about timing: How quickly do we need to enter the market? 5…about external influence: Are we being “pushed”into a certain entry mode by “external forces”(local laws, competitors’ moves, existing contacts and opportunities)?

…answers lay in: Firm characteristics: resources and capabilities top management team strategy and organization product/service characteristics

...helping to decide on the entry mode:

Foreign market characteristics: potential level of risk competition intensity competitive and normative barriers to entry distance (cultural, legal, geographic, economic)

1. Equity (investment of capital) or non equity (via contracts)?

2. Need of local partners’ involvement

Selection of an entry mode (joint venture, acquisition, greenfield investment, distribution contract…)

Fig. 5.1  Factors determining the entry mode choice (Agarwal & Ramaswami, 1992; Andersen, 1997; Howe, 2011)

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5.3.1 W  hy Your Firms’ Resources and Capabilities Matter in the Decision on an Entry Mode The entry mode is a way for your firm to transfer its competitive advantage to a foreign market or to access the resources and capabilities necessary to improve its competitive positioning. The availability of resources and capabilities determine whether the firm can successfully implement the selected entry mode. The examples in (Box 5.2) show how the availability of certain resources and capabilities influences the entry mode decision. Resources and capabilities include those specific to a firm’s competitive position within an industry—such as physical assets, factories, proprietary technologies, production processes and brands—and those with broader, cross-industry applications, such as the capability to conduct and implement international acquisitions or to build a sales network in a new market. Capabilities related to the firm’s production process were instrumental in the decision to follow a high-control entry mode in the case of Gromart s.r.l., Box 5.2  Two Examples of Entry Modes That Respectively Transfer and Access Resources and Capabilities At Gromart s.r.l., Italy, the headquarters were determined to directly and meticulously follow and control the process of ice cream making to ensure the quality of the final product. The firm needed to transfer to foreign locations its carefully controlled production process—the firm’s main capability. The firm decided not to use franchising partners and selected the entry mode to foreign markets that offered among the highest levels of control over foreign operations—wholly owned, directly operated shops. It assumed that only directly controlled shops would guarantee that it could recreate exactly the same customer experience and high-quality ice creams as those offered in the country of origin, Italy. The use of foreign franchising partners to expand globally would have meant codifying the art of ice cream making and serving. Only then, could the process be transferred to foreign partners, ensuring that the instructions were carefully followed. Entry modes with lower levels of control, such as joint ventures or franchising agreements, would also have required developing new managerial capabilities: joint venture or franchising partner selection or deal-negotiation skills. The entry mode choice dictated the niche positioning of the firm in international markets. By 2019, 16 years after its foundation in 2003, the firm had 29 shops in 13 cities throughout 8 countries. In 2003, British Petroleum Plc, UK, (BP) decided to form a joint venture, TNK– BP, with a consortium of Russian oligarchs, AAR, to make a long-term commitment to the Russian market and to access Russian oil and gas reserves. The troubled joint venture was bought out by Russian state-owned Rosneft in 2013, and BP received 20% of Rosneft for its shares in the joint venture with AAR.

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via directly owned points of sale. The need to access natural resources in Russia and increase its stock of resources led BP Plc to create a joint venture with AAR. The capabilities of both firms’ owners and managers to operate a franchising agreement, enter into a joint venture contract, or to integrate an acquired foreign firm, also impacted their respective decisions. In fact, it was not until after its acquisition by Unilever in 2015 that Gromart s.r.l. opened itself to international franchising—or, as the entrepreneurs called them in an interview, “development”—partners. Research shows that the ability of managers and entrepreneurs to facilitate partnerships will impact how they enter a market: internationally inexperienced firms tend to avoid partnerships, slightly more experienced firms are more disposed to choose entry modes involving foreign partners, while firms with extensive international experience revert to using internal capabilities and resources to address foreign markets. Availability or a deficit of resources—financial, human, or other—may strongly impact you choice of entry mode. A lack of financial or human resources (or other “tangible and intangible” resources) can lead to the avoidance of “costly” investments in foreign markets, or, as an alternative solution, the involvement of foreign partners. A shortage of resources can prompt firms to create and manage a network of international intermediaries and partners (distributors, agents, joint venture or franchising partners). The internationalizing firm should carefully evaluate the decision to rely on partnerships and alliances by closely analyzing potential partners and by careful stipulation and implementation of partnership contracts. Instead, it may also decide to follow a more entrepreneurial approach to complensate for the resources shortage, such as bootstrapping, borrowing and sharing resources, to implementing growth. Larger firms may be able to afford multiple and important investments in foreign markets and select entry modes that require injections of capital and human resources. The opportunity to expand abroad via majority-ownership structures may result from a firm’s successful growth in its relatively large domestic market. On the flip side, larger and more established firms may find it a challenge to unlearn old routines, mental models, and technologies in order to embrace the possibilities offered by their new foreign partners or acquisitions. That an entry mode could require the presence of a foreign partner (or foreign employees and managers) may potentially create clashes with established organizational routines. Previous experience of specific entry modes (for example, of finding appropriate distributors or stipulating franchising contracts), and of specific

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markets, strongly impact a firm’s choice of entry mode. Positive experiences with a given entry mode increase the chance that the firm will select it for all other markets. Experience of a firm, or its owners or managers, in a specific market—an important asset—contributes to increasing the levels of commitment in future investment decisions for that market. Research, for example, has highlighted the importance of Chinese diaspora (and their related personal networks) when Chinese firms make decisions about investments abroad. The composition of a firm’s top management team plays a decisive role in the choice of entry mode—we repeat again, all strategic decisions are made by people, entrepreneurs, and managers, rather than by abstract “firms” or “organizations.” The internationally experienced top management teams tend to expand into foreign markets both in breadth and in the level of commitment. Firms with such internationally experienced leadership are disposed to select distant foreign markets, if needed, and to adopt full-control entry modes. Interestingly, international diversity (presence of different nationalities) among top managers often leads to the adoption of shared-control entry modes, such as joint ventures. The past functional experiences of top managers in certain areas (for example, previous positions held in accounting, operations, and process R&D), and long years of tenure in top positions, favor the selection of full-control entry modes. These are decided upon after extensive analysis of their feasibility with the help of information from multiple resources. Full-control entry modes are also preferred in cases where top managers co-own a firm via equity participation, or their pay is linked to the long-term performance of the firm. These facts demonstrate once again how firms’ strategies are strongly impacted by personal characteristics of firms’ leaders. Being aware of the potential impact of cognitive and organizational biases such as the above will help you clarify the reasoning behind your firm’s choice of entry mode. You should ask yourself the following: are we discarding some investment-intensive entry modes because we lack the human or financial resources needed to implement them? Are we adopting less risky entry modes with lower investments because of the background of the top management team? Have we discarded the franchising option because we lack skills in stipulating and running franchising agreements? The main point of this questioning is that a lack of resources and capabilities for implementing a particular entry mode should never be the sole reason for abandoning it. If your firm lacks financial, human, or managerial resources to implement an entry mode that works in terms of strategy and foreign market potential, the missing resources and capabilities should be acquired, or accessed via partnership networks. People can always be hired and financial resources can be

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found at financial markets. Foreign or domestic partners may also compensate for the lack of resources and capabilities. The core reasoning regarding the entry mode decision should, therefore, be concentrated around the three topics discussed next—target market characteristics, firm’s strategy, and time available for the foreign market entry.

5.3.2 W  hy Target Market Characteristics Matter in the Decision on an Entry Mode The interdependence of foreign market selection and entry modes decisions is a perfect example of complex and dynamic strategic decision making. While the academic research has studied the two decisions indepth and separately, in the real world managers and entrepreneurs need to deal with the whole internationalization process in its entirety, and consider contemporarily foreign market characteristics, the number of markets addressed during each period of time, and the available and implementable entry modes. The foreign market’s potential, level of risk, level of competition intensity and accessibility are the four main parameters influencing entry mode. Foreign market potential. Your choice of entry mode will be influenced by the average size of potential partners or targets for acquisitions, or joint venture partners operating in a foreign market (the so-called “digestibility” of the acquisition target), as well as the availability of foreign partners. An early study on entry mode decisions by US advertising agencies revealed that the early steps of internationalization were made via directly founded and owned subsidiaries. Later, when the global advertising industry became more developed, the US firms started acquiring existing local firms, sometimes with minority participation. When considering the potential of a foreign market, you should also question how confident you are that there will be consumer demand in your target market. Research shows that firms with a high certainty of demand in a local market (for instance, firms that internationalize to follow their domestic clients in their respective international ventures) are more disposed to take risks and to implement entry modes that require a high level of resource and commitment. They are also more likely to proceed without the involvement of local partners. Foreign market risk. The level of foreign market risk in your chosen country of entry can influence your entry mode selection. This refers to “noncompetitive” factors such as macroeconomic and political instability, lack of institutions (resulting in a firm’s inability to enforce contracts or to protect intellectual

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property), and cultural and multiethnic tensions that can negatively influence the stability of a business. For example, entry modes with a higher level of control and resource commitment expose investors to major country risks. Firms, unsurprisingly, tend to avoid making equity investments in directly owned subsidiaries in high-risk countries. It only makes sense to enter a highly competitive market if there are other factors that mitigate this. These include market growth potential, possibility to access strategic assets (brands, distribution networks, knowledge, tangible assets or natural resources), and the foreign market’s accessibility in terms of trade barriers or FDI legislation. The first two characteristics call for higher-control entry modes: research has shown that Chinese firms, for example, choose to enter foreign markets with a high level of competition via wholly owned subsidiaries. On the other hand, high competition intensity and volatility may decrease a market’s attractiveness and its potential profitability for your firm. Therefore, some firms decide to opt for non-equity, contract-based entry modes, with a lower commitment of resources and time. With two “forces” working in opposite directions, it is not surprising that some studies have failed to confirm whether a high or low level of competition intensity necessarily calls for a particular entry mode choice. One study (which assumed that the firm entering the market possessed a competitive advantage over local competitors) came to the conclusion that greenfield investment is advisable when the competition intensity is either very high or very low, while entry through acquisition is optimal for a “medium” level of competition intensity. Foreign market accessibility, and the related competitive and noncompetitive barriers, may strongly restrict a variety of available entry mode options for your internationalizing firm. Low trade barriers (tariffs, import quotas, certification, etc.), or free-trade zones, logically lead to the intensification of foreign trade and a multinational firm’s selection of international trade contracts over other entry mode choices. Conversely, high trade barriers make contract-­ based (international trade) entry modes viable only for markets with a relatively high level of demand. An increase in trade barriers will logically leads to the necessity to build local production, if a firm intends to continue working in the market. A foreign market’s distance—in terms of culture, legislative, and political (institutional) environment; the level of economic development; together with the physical distance from your firm’s domestic market—may be another determinant of entry mode choice. The cultural distance from the home market plays an important and complex role in the selection of entry mode. Firms often choose to address

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culturally distant markets with the help of local partners: a local distributor, or franchising or joint venture partner, can provide internationalizing firms with local contacts and insights about the particularities of customers’ and suppliers’ needs and expectations. They can also assist in communication with other local stakeholders. While this solution mitigates “external” issues with cultural differences, there is a threat of cross-cultural conflicts between the partners themselves that must be addressed. Differences in culture between the home and target foreign markets can negatively influence the chances of success. The negative effect of cultural distance is amplified by the presence of local partners—wherein a foreign market entry requires “double-layered acculturation” to both the culture of the other company, as well as the new country itself. The negative impact of cultural barriers of each new foreign market entry is reduced by previous experiences in the same country or, to a lesser extent, in the same “block” of national cultures. Travel time to geographically (physically) distant foreign markets represents a “liability of distance” with associated “spatial transaction costs”. Distant locations consume one of the rarest and most important resources—managerial time. Research has suggested that firms tend to reduce significant monitoring costs (both in financial terms and in travel time) of ensuring their distant subsidiaries meet the strict standards of head office by using entry modes that involve foreign partners. The institutional context of your target market describes factors such as its policy on foreign direct investment (FDI). It also refers to a country’s transaction costs (those related to negotiations with local partners, contract stipulations, and contract enforcement) and will have a bearing on your choice of entry mode. A wholly owned entry mode, for example, tends to be the choice in countries with fewer legal restrictions. This is due to the ease of opening a subsidiary therein. It is also the choice of entry mode for countries with high perceived transaction costs. This is because it allows a firm to internalize as many business processes as possible and reduce the risks and uncertainties related to future transaction costs. On the other hand, joint ventures are the preferred choice for markets with high legal restrictions. As well as looking in isolation at the institutional context of a target market—its barriers or openness to new ventures—you must also evaluate how much it differs from your home market, or the “institutional distance” between the two. In cases where this is low, i.e. for firms entering foreign markets with low levels of regulatory development, companies tend to choose entry modes with a lower level of resource commitment.

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The economic distance between the home and target markets will influence your internationalization strategy in two ways. Firstly, you will need to adapt your products and services to lower or higher levels of economic development in the target market to account for the different purchasing capacity of customers, whether these are businesses or end consumers. The decision as to how you do this could be aided by the input of a local partner, a potential source of knowledge about the local market. Secondly, your competitive advantage, in terms of cost leadership or superior technology, may not be relevant in markets with higher or lower levels of economic development to that of your own. Your choice of entry mode will strongly influence your firm’s ability to either transfer its competitive advantage to a new, economically different market, or to build a competitive advantage based on local resources.

5.3.3 W  hy a Firm’s Strategy Matters When Decision on an Entry Mode The decision about the firm’s strategy in terms of which and how many foreign markes are served, which business units and which business activities are located abroad, about resources dedicated to internationalization, about its organizational structure, along with decisions about the level of adaptation of its products and services will determine the level of commitment needed to each new foreign market. The first necessary step is to distinguish two broad types of foreign market entry decisions: investments into sales and distribution or into production or research and development activities, or both. In this sense, the extent to which your firm’s end product is service based (and the how tangible that service is) will also significantly influence your mode of foreign market entry. For industries that are ostensibly service based, such as telecoms, fast food, or traditional or digital retail chains, a decision to expand abroad means that almost all of the firm’s value chain activities will be transferred to the new market. This is also becoming the case for other industries, where the level of service content is increasing as fewer and fewer firms define themselves as purely “manufacturing”. This is seen as a way for firms to differentiate and to increase customers’ loyalty. Service firms—from fast-food restaurants and engineering consultants to management consultants and education institutions—also vary in the degree of “intangibility” of the output they produce. The decision to follow a

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franchise or license entry requires a service firm to describe in detail (codify) its value chain activities and to transmit its know-how to foreign partners. The definition of your firm’s future international value chain, as we discuss in Chap. 6, will help in quantifying your effort in terms of resources and managerial time dedicated to the new market. It will serve as an important input for financial planning, and will also define eventual risk exposure, to be moderated by the entry mode decision. A firm’s decision, driven by its industry or product or service characteristics, or its strategic positioning choices, to open foreign subsidiaries with a wide range of value chain activities (production, procurement, sales, marketing, etc.) via directly managed investments will lead to quite a slow growth process on global markets. The firm’s global reach will remain limited in this case, as discussed in Box 5.2 in the case of Gromart S.r.l. In line with this, the international exposure of the top 10 global retailers (Table 5.2), even the largest ones, necessarily locating most of their activities, from procurement and logistics to retail stores and customer service, does not exceed 35 countries. The strategic decision regarding the adaptation of products and services to your foreign market may require the involvement of local employees or foreign partners: both decisions have direct implications on your choice of entry mode. For instance, to successfully market product and services in an unknown market, you could choose to enact a joint venture in order to access local market knowledge. Your strategy should also consider the importance of protecting know-how, brand and reputation as it enters the foreign market via a partnership agreement—or managing so-called “dissemination risk”. Firms with highly intangible know-how (or brand/reputational) content of their products and services Table 5.2  Top 10 global retailers (2016)

Rank Company

Number of Country of Retail revenue, countries of origin USD bln, in 2016 operations

1 2 3 4 5 6 7 8 9 10

USA USA USA Germany USA USA USA Germany France USA

Wal-Mart Stores, Inc. Costco Wholesale Corporation The Kroger Co. Schwarz Group Walgreens Boots Alliance, Inc. U Amazon.com, Inc. The Home Depot, Inc. Aldi Group Carrefour S.A. CVS Health Corporation

486 119 115 99 97 95 95 85 84 81

Source: Based on Deloitte Touche Tohmatsu Limited, 2018

29 10 1 27 10 14 4 17 34 3

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(which is difficult both to convey and to protect legally through patents and copyrights) are more inclined to choose equity-based entry modes with higher levels of control. More broadly, the perceived importance of a particular business leads a firm to select an entry mode in which control is not shared with foreign partners. The characteristics of your strategy will determine the desired level of control over foreign operations. It could be the case, for example, that prior to entering a new foreign market you have made significant investment in brand and reputation, patents, industry-specific technology, building your client network, or creating a unique organizational culture or processes. In this scenario you might be strongly motivated to protect these assets, in particular in business contexts with high uncertainty. These investments will influence your decision to opt for entry modes with higher levels of ownership and, therefore, control, and to avoid alliances. The evaluation of entry modes is also linked to your willingness to accept risk. Studies directly relate the average levels of national “anxiety” (as measured, for instance, using Hofstede’s indices of “uncertainty avoidance”) with a firm’s choices regarding the exercise of direct control over foreign subsidiaries via majority ownership. Similarly, a high level of centralized authority and autocratic management in a firm leads to the choice of entry mode with the highest possible level of control.

5.3.4 W  hy the Speed of a Firm’s Internationalization Matters for the Decision on an Entry Mode Internationalizing firms with a strong competitive advantage, achieved via an innovative technology or business model may want to quickly replicate it in other geographies to achieve the so-called first-mover advantage, where competitive performances are likely to be better than those of late-comers. There are several possible reasons for this: 1 . Gaining access to valuable spaces or production facilities before competitors. 2. Achieving economies of scale by starting earlier than others in producing products, building distribution networks, or investing in brand and reputation. 3. Being able to patent innovations. 4. Learning earlier than others about more efficient business processes that are sometimes not immediately obvious.

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5 . Becoming a “habitual” supplier of products and services to loyal customers 6. Buying more time to build a reputation. The time required to implement entry modes to foreign markets may strongly vary: contract-based entry modes usually entail quicker realization compared to equity-based entry modes. Research shows, for example, that the first-mover advantage in the restaurant industry, obtained by franchising, results in a higher market share and profitability.

5.3.5 W  hy External Influence Matters in Decision on an Entry Mode Management fashions—collective beliefs about the best practices leading to success—may play an important role in your entry mode decision making. Management fashions are usually temporary and are characterized by an ascending phase (increasing frequency of use for a certain managerial practice—“bandwagon effect”) and a descending phase—when firms gradually switch to other alternatives. For example, joint ventures were the dominant strategy for multinationals’ entry to China (also encouraged by Chinese government) in the 1990s and early 2000s, gradually giving way to a growing number of mergers and acquisitions. You may choose to imitate the decisions of their competitors in an attempt to manage uncertainty, and increase the predictability of the future. However, in order to imitate a decision, it is important to know whether the results of that decision are good. In a similar vein, firms are also influenced by decisions they have made in the past: for example, one study has shown that the probability of using a wholly owned subsidiary increases with the past experience of the firms in the use of that entry mode. As discussed in Chap. 1, a firm’s internationalization may also arise as a reaction to external—direct or indirect—political influence, leading it to acquire companies, build factories, or create joint ventures. However, external factors can also act as a roadblock: Dow Chemical Company, an American corporation and one of the global leaders in the chemical industry, failed to implement its joint venture deal with Petrochemical Industries Co., owned by the state of Kuwait, because of parliamentary opposition. In 2013, an international arbitration court awarded one of the largest settlements, of USD 2.2 billion, for a failed joint venture.

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5.4 E  ntry Modes with the Participation of Foreign Partners: Building Trust The deficit of trust among foreign partners is a big obstacle for the implementation of joint ventures, partial acquisitions, franchising and licensing, and distribution and co-distribution contracts. You may find yourself forced to quickly create relationships with organizations that differ from yours in many ways—values, languages, communication rules, approaches to decision making and to the management of conflicts, even notions of good manners and hygiene. Lack of knowledge generates uncertainty, and uncertainty generates fear, distrust, and often conflict. Cross-border disputes arising due to miscomprehension and governance issues among international partners are difficult and costly to manage. Legal solutions do not always work. Even countries that have ratified the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards do not always fully apply its rules. In the case of Bhatia International, an Indian mining and trading company, and Swiss Bulk Trading SA, the international arbitral awards were overruled by an Indian court decision, while in a dispute between Chinese Hangzhou Wahaha Group Co., Ltd. (beverages industry) and French food multinational Danone SA the arbitral award decision by Stockholm Chamber of Commerce was not enforced in China. Box 5.3 outlines the key principles for successfully managing an international alliance. As we discuss in Box 5.3, tensions among partners of a joint venture, or indeed any partnership, can arise from both governance issues and different visions of business (goals, strategy, organization, etc.). It is unsurprising, given the complexity of these two aspects (governance and business), that alliances have a median age of seven years and nearly 80% of joint ventures are terminated in sale to one of the partners. It is not correct to say that joint ventures have a 80% failure rate as some of them are created as temporary solutions, but the number of joint venture dissolutions is still high. The joint venture between the Japanese online retailer Rakuten and Indonesian’s Media Nusantara Corp. lasted only two years. Rakuten was interested in growing in the Indonesian market by replicating the core principles of its business model, an online marketplace for merchants, to the joint venture’s website, Rakuten Belanja Online. The company chose Media Nusantara, an Indonesian media company, as a partner, as it was well aware of the importance of media advertising in multiple channels during the launch phase. The reasons for the split have never been made clear by either partner, but their subsequent moves speak for themselves: Rakuten Belanja Online continued in Indonesia with a “business to business to consumer” business

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Box 5.3  Making an International Partnership Work Partners should be aligned along the following five core aspects of an alliance/ partnership: 1. Reasons for the alliance (which may be referred to as the vision, mission, or strategic goals). 2. Strategy (how the goals of the alliance will be achieved). 3. Governance (decision making, strategy execution, control processes and rules). 4. Culture (real values that will drive everyday behaviors). 5. Organization (processes, structures, resources, competencies and skills). Managers from both sides should be aware of the following principles of successful alliance management (Ohmae, 1989): . An alliance is a personal commitment; it is made by people. 1 2. The alliance will require management time: if you don’t have it, do not start it; assure commitment from headquarters. 3. Socialize with your partner: partnerships with friends are more stable. 4. Mutual respect and trust are essential, as is mutual benefit; both partners must get something out of it. 5. Be aware of your partner’s interests, expectations, and time scale; one unhappy partner is a road to failure. 6. A good, legally sound contract is essential. 7. Verify potential involvement, formal or informal, of other stakeholders (state, distributors, etc.). 8. Markets, circumstances, and partners’ priorities are changing: be flexible. 9. Appreciate national cultures.

model, while Media Nusantara entered a joint venture agreement with a South Korean firm to create “Media Nusantara shop,” an online store that has become one of the important TV home shopping businesses in the country by leveraging Media Nusantara’s strength in the media industry. One of the key factors leading to the split of the Russian–British TNK–BP joint venture (also mentioned in Box 5.2) was the inconsistent strategic goals of each partner. BP initially entered the Russian market via the acquisition of a minority stake in Sidanco in 1997. In 2003, BP’s share in Sidanco became one of its contributions to the joint venture with a group of Russian businessmen, Alfa-Access-Renova group (AAR). In 2008, the partners experienced their first serious disagreements. Differing views about the TNK–BP strategy were among several factors cited in the press as reasons for the partners’ conflict. The Russian part of the joint venture wanted to expand its business in international markets, but these attempts were apparently blocked by BP. Conversely, BP was more interested in opportunities in Russia and with Russian partners. In 2011, BP’s intended deal with the state-owned Rosneft to explore the Arctic for oil was blocked by AAR with a court decision. The conflict worsened and in 2013 the state-owned Rosneft completed the acquisition of both parties’ shares via two separate agreements.

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5.5 Cross-Border Acquisitions It is well known that the failure rate of mergers and acquisitions oscillates between 70% and 90% (Christensen et al., 2011). Research shows that more than half of cross-border acquisitions enacted in 1991–2004 by emerging market multinationals actually destroyed the acquirers’ value (Aybar & Ficici, 2009). In particular, firms have found it particularly challenging to acquire companies in industries with a high technological content: some acquired assets have turned out to be incompatible with the acquirers’ businesses (a fact often emerging only after the deal is stipulated and all information about the target is finally disclosed). Another factor is that acquirers usually overestimate the value of a high-tech target for acquisition. International, or cross-border, acquisitions are particularly complex due to differences in cultural, competitive, legal, political, macroeconomic, and social environments. Research has also demonstrated the negative impact of high cultural distances on value creation through cross-border acquisitions: the more culturally distant the target firm, the lower the chance that the acquisition will be successful. You may use cross-border acquisitions for purposes beyond that of conquering clients in new markets and increasing scale. Acquisitions are also used to enhance a firm’s performance by gaining new (or better) technology and skills that help a company maintain a premium position or uniqueness of a product offer. Acquisition of a competitor also allows a business to scale up by reducing the impact of fixed costs (of logistics, R&D, procurement, production, general and administrative expenses, etc.). In the case of acquisitions aimed at performance improvement, you should carefully monitor the following hidden challenges that often emerge during the integration process following the acquisition: • • • •

compatibility, also in terms of quality levels, of products and services; investments in acquired equipment or factory setup and conversion; availability of skills to sell, service, or produce new products and services; overestimation of the impact of synergies in procurement and general and administrative expenses; • overestimation of cross-selling opportunities. Cross-border acquisitions could also be used to reinvent your firms’ business model. Disruptive innovation became one another fashionable buzzword. Disruptive products are usually much simpler and affordable than incumbents, which enables more customers to start using the product. The acquisition of foreign firms offering disruptive products and services can help firms in diversifing their business portfolios and in accelerating their renovation.

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A hidden danger of making a cross-border acquisition to reinvent an existing business model is that of buying a complementary (or competing) “slightly better” product. Acquisition of a “slightly better” product often means that the deal is done in an industry on the verge of sliding into commoditization. Rather than business model innovation, the deal keeps the firm stuck in the same industry, even if with a “slightly better” solution. The problem of disruptive innovation is postponed rather than solved. A much better solution is to search for an acquisition target with the objective of repositioning the firm along the industry value chain: each commoditizing industry’s value chain comprises activities to which the margins are migrating (for example, clinical trials in the pharmaceutical industry). Effective selection of an acquisition target is only a partial prerequisite for success: the evaluation, due diligence, deal stipulation, and subsequent integration of the acquired firm calls for equal attention (Box 5.4.). Box 5.4  Making a Complex Cross-Border Acquisition Work (Kullman, 2012) 1. Appoint a fully dedicated cross-functional team for due diligence and valuation, or more than one team if the acquired target is multi-business. 2. Conduct regular meetings between the due diligence/valuation team and the executive team. 3.  Carefully supervise the legal part of the transaction, foreign regulatory regimes, and governance procedures, and be prepared for eventual delays. 4. During the due diligence, meticulously assess the strategic fit between the two businesses, constantly challenging assumptions and evaluating the potential impact. 5. During the due diligence, do not develop an emotional attachment to the deal; remain vigilant regarding all insights and opinions coming from various functions. 6. Once the evaluation has been done and eventually adjusted based on the emergence of additional facts and analysis, stay with it: even eventually walking away from the deal should still be “Plan A”. 7. Understand the culture you are about to integrate into your company. 8. Identify a list of key people to appoint to new positions before the deal is closed to immediately start appointments, communication, and integration. 9. Immediately discuss with management and employees of the acquired company the ways you intend to blend the two cultures . 10. Immediately organize a “welcome week” for senior executives from both companies to visit key locations affected by the acquisition, and talk to the largest possible amount of employees of the acquired company in person. 11. Immediately communicate redeployment possibilities for redundant personnel. 12. Verbalize (let people know that you are aware) and deal with local concerns as soon as they arise. 13. Regularly and frequently survey people’s concerns and immediately address issues of confusion and miscommunication as transparently as possible. 14. Within two months of the deal’s completion, provide resources and launch integration projects for all business activities, from the frontline and production to support office. 15. Periodically control the key milestones of integration efforts vs. the original plan.

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Regardless of the complexities that arise during the integration of an acquired foreign firm, research has revealed some effective integration techniques. For example, the use of teams and task forces composed of members of both firms (acquirer and acquired), frequent field visits, joint training and development programs, and other social integration activities can reduce the potentially negative effect of cultural distances on the speed and success of integration processes.

5.6 Entry Mode Decision as a Process In this chapter, we have illustrated a wide range of factors that will influence your choice of entry mode. We sum up with two important observations: Firstly, managerial decision making, particularly for such complex decisions as to foreign market and entry mode selection, is a circular process. In Fig.  5.1 we grouped the decision-making steps around Colonel Boyd’s famous observe-orient-decide-act- observe again cycle (Howe, 2011). The aim of the cycle is to fine-tune the decision and to verify the efficacy of the decision and of the implemented action. The ability to analyze past decisions is particularly important for firms that aim to learn how to implement and replicate the experiences they have had with certain entry modes in the past. The “observe” step becomes richer and more elaborate (even if implicitly) for each new internationalization project, and field visits and analysis of potential foreign partners and acquisition targets become more detailed and scrupulous. We remind you about the usefulness of real options tool (discussed in Chap. 3 of this book dedicated to strategic reasoning in international business) for the entry mode choice: the decision is complex, it is dynamic (as through time we may switch from one entry mode option to another) and it is done in volatile external and organizational environments. Secondly, the decision regarding entry mode is far from singular and definite for each foreign location. The internationalization process is often (though not always, particularly for emerging-market firms) characterized by an incremental increase of commitment of resources. As a result, the choice of entry mode may evolve as a series of decisions, starting from export contracts and ending at the stipulation of a joint venture contract, or acquisition.

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Herbert Smith Freehills publications. (2012). Supreme Court of India delivers landmark arbitration decision in Bharat Aluminum, overruling Bhatia International. Arbitrage Notes. Retrieved March 4, 2019, from http://hsfnotes.com/arbitration/2012/09/06/supreme-court-of-india-delivers-landmark-arbitrationdecision-in-bharat-aluminium-overruling-bhatia-trading Hernández, V., & Nieto, M. J. (2015). The effect of the magnitude and direction of institutional distance on the choice of international entry modes. Journal of World Business, 50(1), 122–132. Herrmann, P., Deepak, K., & Datta, D. K. (2002). CEO successor characteristics and the choice of foreign market entry mode: an empirical study. Journal of International Business Studies, 33(3), 551–569. Hill, C. W. L., Hwang, P., & Kim, W. C. (1990). An eclectic theory of the choice of international entry mode. Strategic Management Journal, 11(2), 117–128. Hill, C. W. L., & Kim, W. C. (1988). Searching for a dynamic theory of the multinational enterprise: a transaction cost model. Strategic Management Journal, 9(Special Issue), 93–104. Hofstede, G. (1994). The business of international business is culture. International Business Review, 3(1), 1–14. Retrieved January 25, 2019, from https://www.hofstede-insights.com/product/compare-countries/ Ibata-Arens, K. C. (2004). Alternatives to hierarchy in Japan: business networks as enabling institutions. Asia Business & Management, 3(3), 315–335. Inkpen, A.  C., & Beamish, P.  W. (1997). Knowledge, bargaining power, and the instability of international joint ventures. The Academy of Management Review, 22(1), 177–202. Jakopin, M., & Klein, A. (2012). First-mover and incumbency advantages in mobile telecommunications. Journal of Business Research, 65(3), 362–370. Johanson, J., & Vahlne, J.-E. (1977). The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23–32. Johanson, J., & Vahlne, J.-E. (2009). The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies, 40(9), 1411–1431. Kaynak, E., Demirbag, M., & Tatoglu, E. (2007). Determinants of ownership-based entry mode choice of MNEs: evidence from Mongolia. Management International Review, 47(4), 505–530. Kim, W. C., & Hwang, P. (1992). Global strategy and multinationals' entry mode choice. Journal of International Business Studies, 23(1), 29–53. Knight, G. A., & Cavusgil, S. T. (2004). Innovation, organizational capabilities, and the born-global firm. Journal of International Business Studies, 35(2), 124–141. Krackhardt, D., & Hanson, J. R. (1993). Informal networks: the company behind the chart. Harvard Business Review, 71(4), 104–111.

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Sharma, V.  M., & Erramilli, M.  K. (2004). Resource-based explanation of entry mode choice. Journal of Marketing Theory and Practice, 12(1), 1–18. Soldatkin, V., & Callus, A. (2013). Rosneft pays out in historic TNK-BP deal completion. Reuters. Retrieved January 23, 2019, from https://www.reuters.com/ ar ticle/us-rosneft-tnkbp-deal/rosneft-pays-out-in-historic-tnk-bpdeal-completion-idUSBRE92K0IZ20130321 Suarez, F. F., & Lanzolla, G. (2007). The role of environmental dynamics in building a first mover advantage theory. The Academy of Management Review, 32(2), 377–392. The Economist. 2012. Twilight for BP in Russia? Retrieved March 4, 2019, from http://www.economist.com/node/21556629 The Guardian. (2011). The billionaire oligarchs behind Alfa-Access-Renova (AAR). Retrieved March 4, 2019, from http://www.theguardian.com/business/2011/ may/17/aar-billionaire-oligarchs Tsang, E. W. K., & Yip, P. S. L. (2007). Economic distance and the survival of foreign direct investments. Academy of Management Journal, 50(5), 1156–1168. Webb, T. (2011). BP's Russian deal with Rosneft blocked by court. The Guardian. Retrieved March 4, 2019, from http://www.theguardian.com/business/2011/ mar/24/bp-russian-deal-rosneft-blocked-court Weinstein, A. K. (1974). The international expansion of U.S. multinational advertising agencies. MSU Business Topics, 10(3), 29–35. Xia, J., Justin, T. J., & Tan, D. (2008). Mimetic entry and bandwagon effect: the rise and decline of international equity joint venture in China. Strategic Management Journal, 29(2), 195–217. Zucchella, A., Hagen, B., Denicolai, S., & Masucci, M. (2016). Early and accelerated internationalisation: the role of the niche strategy in a new generation of exporters. International Journal of Export Marketing, 1(1), 27–47.

6 Organizing for International Growth

In this chapter we discuss how multinationals organize their activities to implement their international growth decisions. We distinguish two aspects: location choices for the business activities of an internationalizing firm (i.e., which activities are performed by subsidiaries and which remain at headquarters) and organizational relationships between subsidiaries and headquarters. In our experience, in many multinationals, international organizational structures are “received in heritage.” These structures often emerge spontaneously as a result of implemented strategies for growth (organic or via acquisitions and alliances), which can be a consequence of a firm’s pursuit of concrete business opportunities abroad or the availability of managers capable of launching a new subsidiary or growing local business partners. The trend among multinationals for “deglobalization” and the reshoring of previously offshored activities raises doubts about the quality of their initial locational and organizational decisions. This chapter discusses the key factors influencing locational and organizational choices to ensure that the way you organize your international activities is based on careful and considered decision-making.

6.1 L ocational Decisions as a Source of Competitive Advantage A good decision about the location of business activities is a source of competitive advantage, as emphasized in one of the founding theories of international business, Professor John Dunning’s OLI paradigm.

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Locational decisions depend on two broad ranges of factors: driving and motivational. The first of these, driving characteristics (which might be better described as pushing characteristics) derive mostly from the broadly defined distinctive features of an industry’s products or services. These factors are as follows: • The amount of labor or capital requested per unit of production (if an industry is labor- or capital-intensive). This characteristic makes it necessary to reduce the dominant cost and impacts strongly the importance of scale economies in an industry. • Economies of scale and of scope. This characteristic makes it necessary to build plants and centers for research and development, services, or distribution on a larger scale. • The need to access locally available resources. • The cost and complexity of logistics, for both raw materials and final products. • Perishability of raw materials or final products. • The need to be close to customers to ensure fast reaction to market conditions, to counterattack competitors, and to respond quickly to client requirements, requests for customization, and post-sales service requests. The second range of factors reflects motivations, that is, deliberate choices made by firms about the location of their activities, rather than constraints imposed by product, service, or industry characteristics. These factors are as follows: 1. The possibility of reducing production costs (broadly defined, going beyond the cost of labor to take into consideration both costs and productivity of resources). 2. The potential modularity of the final product, and whether it allows parts of the production process to take place in different locations. 3. The possibility of using unique, locally available resources including technologies, capabilities, know-how, and brands. 4. The intention (rather than the need we considered among the driving factors above) to be close to customers to ensure fast and timely reaction to customer requests and to safeguard and develop a competitive position in a foreign market. 5. The willingness to maintain historically formed organizations of activities in international markets.

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6. The possibility of diversifying to provide protection against currency fluctuations, macroeconomic cycles, and environmental and other business risks. Previously in this book, we have discussed the influence of legislation on the formulation of choices of foreign markets and entry modes. Also locational decisions, through both driving and motivational factors discussed above, can be strongly influenced by legislation of target markets: tariffs and non-tariff barriers, laws on foreign direct investment, fiscal and business licensing legislation and other legal aspects, and the “A” distances of the CAGE-T framework (i.e., administrative or political differences among countries) described in Chap. 3. Locational decisions may help firms to reduce costs significantly, improve productivity, and access unique resources and skills. The differences among markets that arise from cultural, administrative, geographic, economic, and technological differences (the CAGE-T framework discussed in previous chapters) create opportunities to benefit from the absolute economic advantages of delocalization. Professor Ghemawat refers to this exploitation of differences among markets as “arbitrage.” The decision to locate your business activities abroad may therefore give you certain resource-based advantages over your competitors. But will these advantages be counterbalanced by the potential downsides of offshoring? In the short term, the increased complexity of coordination of information and flows of material, the need to manage potential delays, longer production and transportation flows, and logistics risks may be enough to tip the scales against offshoring. Major international exposure of our business activities will also call for more careful monitoring of multiple external risks, including business, macroeconomic, geopolitical, climatic, and environmental risks. The decision to offshore a firm’s activities has a second important aspect. To help explain this aspect, in Box 6.1 we cite part of Professor Michael Porter’s Adam Smith Address, in which he gives an early warning about the short-­ sightedness and short-term orientation of firms that overvalue locational advantages, particularly when their decisions are based on cost reasoning. The decision to offshore production, customer services, or research and development activities with the primary objective of reducing costs is no more than a short-term fix for competitiveness and profitability issues (assuming that it works at all). Offshoring solutions are easily imitated by competitors; across entire industries, business models soon come to resemble one another. Copying each other’s offshoring behavior leads to homogenization of product and service offerings, pushing customers to base their purchase decisions on

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Box 6.1  Locational Decisions and Long-Term Competitiveness (Porter & Porter, 1998) “… It has been widely recognized that changes in technology and competition have diminished many of the traditional roles of location. Resources, capital, and other inputs can be efficiently sourced in global markets. Firms can access immobile inputs via corporate networks. It is no longer necessary to locate near large markets. It is natural, perhaps, that the first response to globalization was to pursue these benefits by shifting activities to low-cost locations. However, anything that can be efficiently sourced from a distance has been essentially nullified as a competitive advantage in advanced economies. Global sourcing mitigates disadvantages but does not create advantages. Moreover, global sourcing is normally a second-best solution compared to a cluster. Paradoxically, then, the enduring competitive advantages in a global economy are often heavily local, arising from concentrations of highly specialized skills and knowledge, institutions, rivals, and sophisticated customers in a particular nation or region. Proximity in geographic, cultural, and institutional terms allows special access, special relationships, better information, powerful incentives, and other opportunities for advantages in productivity and productivity growth that are difficult to tap from a distance. Location matters, then, albeit in different ways at the turn of the twenty-first century than in earlier decades …”

price. In other words, firms risk falling into the dreaded “commoditization trap” and forcing the whole industry into competing on costs rather than on differentiated and unique features of product or service solutions. Spatial transfer of business processes outside a firm’s boundaries may also negatively influence the firm’s competitiveness; the physical closeness of research and development activities to the production floor may be an important factor in the speed of interactive loops of hypothesizing, prototyping, and testing new products and services. What’s more, manufacturing process innovation is an increasingly important component of product innovation. Combined with faster product introduction processes, manufacturing process innovation brings potentially important benefits, including protection against imitation, as proprietary innovative process technology is more difficult to imitate than a product or service technology. Offshoring (delocalization) decisions are implemented in two ways—offshored activities are outsourced to a foreign supplier, or a firm itself creates an offshore subsidiary in a location where these activities are performed more efficiently. The decision to implement the first option, offshore outsourcing, further complicates the evaluation of benefits and potential risks. Even if a firm decides to offshore activities that are not obviously crucial for its

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competitive advantage (for example, the assembly of small domestic appliances), the results of product design activities may become available, legally or otherwise, to third parties. Once offshore outsourcing of assembly activities has begun, other activities, including research and development, graphical design, and prototyping, gradually move outside the firm toward domestic or overseas suppliers. There are two main reasons for this development. First, firms may decide to entrust outsourced activities to third parties that have higher levels of specialization than internal departments. Second, certain activities (such as prototyping) naturally “follow” the assembly activities that firms outsource in the first place. As a result, firms are stripped of their core capabilities, and the whole industry drifts toward commoditization. The four-option decision—whether to offshore (delocalize) but keep activities within an overseas subsidiary, to offshore outsource activities to a third party in a foreign location, to maintain activities integrated at the “home” base, or to outsource activities in the home country—is further complicated by industry evolution. Vertical disintegration of industries and growing specialization are pushing firms to make decisions not only in terms of market positioning (which clients do I serve?). In this way, organizational positioning (which activities do I perform?) may become a distinctive and unique feature of a firm’s strategy on par with positioning in terms of market segments served. Firms that merely follow their competitors and imitate others’ offshoring or offshore outsourcing decisions are ignoring the necessity of honest (and courageous) adherence to a choice about their future place in the industry. The decision to offshore outsource is taken in the context of a specific industry and the arbitrage opportunities offered by international markets. It is therefore valuable to ask the question “Where is our industry going?” and to answer it in terms of spatial allocation of activities, among involved firms and among various geographies. In his 2005 article (published before the 2007/2008 subprime mortgage crisis), Professor Michael Jacobides discussed the factors pushing industries toward specialization and disintegration, which in the context of international business includes also geographic disintegration. We list below the factors that we believe are important for understanding not only the decision to “make or buy” (insourcing vs. outsourcing) but also the decision to locate activities in a different country in order to benefit from arbitrage opportunities (regional differences in cost and productivity of various inputs): 1. The size of the market. Specialization requires a minimum scale of business, so firms operating in larger rather than niche markets will be more likely to consider offshoring and offshore outsourcing.

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2. The size of the firm. Organizational units inside larger firms already operate with a certain degree of autonomy, and processes for coordinating these relatively autonomous organizational units are already in place, creating the conditions for eventual delocalization or outsourcing. 3. The perceived gains from specialization. Different activities in the value chain require different managerial “styles and knowledge” and different incentive structures; organizational specialization is attractive, and one way to implement it is to focus on a single activity while entrusting other activities to external suppliers. 4. The perceived “gains from the trade” (gains from outsourcing). Capabilities vary from firm to firm, some of which are good in upstream activities, others in downstream activities. Firms may decide to outsource activities where they see themselves as relatively weak. 5. The emergence of co-specialization inside the industry. Often, because of recession or intensification of competition, firms become more conscious about their strengths and weaknesses, driving them to focus on their strengths and to search for complementary partners to entrust with other activities. 6. Overcoming non-scalability. If a firm’s growth stalls because it has not managed to scale up part of its value chain, it may turn to an external solution—trade—and entrust non-scalable activities to an external supplier. 7. The necessary conditions for outsourcing and specialization. These are (a) the possibility of managing or reducing interdependencies in the value chain (separating “adjacent” stages in the business processes), and (b) the possibility of standardizing information that allows potential partners to communicate, understand, describe, and monitor activities entrusted to them. These factors explain the evolutionary trend in various industries toward vertical and spatial disintegration. We are aware that the factors we identify in the decision to offshore or offshore outsource are numerous, complex, and interdependent. Here is a way to approach this complex decision. First, consider whether the offshoring or outsource offshoring is “driven” or “pushed” by industry characteristics. Second, if the decision is optional (i.e., if it is a result of the “motivational” factors described above), consider carefully the threat of the commoditization trap and whether your firm or industry, by geographical (and organizational) breakdown of its activities, is destroying spatial links that are sources of competitive advantage.

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Despite the complexities, we have seen that some of the factors driving the decision to offshore are positive: for example, closeness to final customers and access to locally available unique technologies, capabilities, expertise, and brands. Once the decision to enter a market with a range of value chain activities has been taken, it is important to define the role of subsidiaries, which decisions are delegated to them and the appropriate information flow between (and among!) subsidiaries and headquarters. This balance plays an important role in successful expansion to a foreign market. It ensures that foreign expansion not only expands the organizational complexity, but also leads to the creation of competitive advantage for the firm. We devote our next section to the discussion of organizational aspects of the management of subsidiaries.

6.2 R  elationships Between Headquarters and Subsidiaries Let us consider the various facets of relationships between headquarters and subsidiaries, starting from the assumption that the subsidiary is subordinate to headquarters (an assumption that will be challenged in Sect. 6.3 below). Professor Birkinshaw described five generic (not sequential) phases of the possible evolution of a role of subsidiary, paying particular attention to building resources and capabilities: 1. Parent-driven investment—a decision by headquarters to invest in a subsidiary’s capabilities to increase the parts of the business model it is responsible for; 2. Subsidiary-driven extension—a subsidiary’s initiative to develop new businesses (pursuit of market opportunities and development of appropriate capabilities); 3. Subsidiary-driven reinforcement—a subsidiary’s operation within its business boundaries to improve its performance and capabilities thanks to internal and external benchmarking, as well as internal reputation, credibility and visibility; 4. Parent-driven divestment—a decision by headquarters to cut costs or focus on certain core activities and, as a consequence, to divest (sell, close, or spin off) from some of its subsidiaries; 5. Atrophy through subsidiary neglect—a lack of attention from headquarters leading to the gradual erosion of a subsidiary’s competitive advantage.

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Professors Nitin Nohria and Sumantra Ghoshal defined the following five aspects of relationships between headquarters and subsidiaries defining the role of subsidiary: 1. The level of resources and capabilities retained by subsidiaries (the availability of advanced physical resources such as technology, capital, or managerial capabilities); 2. The level of centralization (the decisional autonomy of a subsidiary on new product launches, changes in product design, manufacturing processes, and career paths for senior managers); the degree of decisional autonomy can vary from “Headquarters decide” to equal participation in the decision, to total autonomy on the part of the subsidiary with input from headquarters; 3. The level of formalization (availability of well-defined rules and policies for most tasks, manuals defining courses of action in different situations, and continuous monitoring by headquarters that subsidiaries are following the rules); 4. The level of integration (the amount of time spent by people from subsidiaries at headquarters and by people from headquarters at subsidiaries, the number of visits by employees from each, mentorship relationships between employees at subsidiaries and managers at headquarters, and formal training at headquarters for employees of subsidiaries); 5. The level of informal communication with headquarters (daily, weekly, monthly, or yearly). We would like to underline that decisions about the allocation of resources to subsidiaries, suitable levels of decisional autonomy, formal rules and policies, integration, and communication should be made deliberately and periodically reviewed. They should not be “inherited” from the firm’s current characteristics, such as the availability and personal qualities of the people working at headquarters and subsidiaries, acquisitions or greenfield projects, availability of local partners, or macroeconomic and industry cycles. We suggest that the process of configuring the relationship between headquarters and a subsidiary should follow five steps. First, we need to recall the ultimate goal of our decision to internationalize, and in particular the reason why we selected a given market. This involves asking the four questions we used to define our “dream statement” (see Chap. 1): Who would we like to become in global markets? What makes us different? How do we plan to change our industry or society? Why is our firm a good place to work? Our answers—which may range from “we want to triple

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our revenues in a year” to “we want to reduce the global environmental impact of our industry by xx%”—will be one of the four factors influencing the definition of the role of the subsidiary. As a second step, we need to consider the level of strategic importance that the local market has for the implementation of our “dream statement.” A relatively high level of importance will necessarily draw attention, time, and resources from headquarters, often at the expense of the autonomy of a subsidiary. This leads us to consider the strategy execution competences of the subsidiary—if a market has a high level of importance, is the local subsidiary capable of implementing our strategic intent in this market? The third step, which is both difficult and delicate, concerns the ability of headquarters to grasp the CAGE-T diversity and environmental complexity of a local market and to assess objectively any differences between its conditions and those of the home market and other markets where the firm operates. In addition to the CAGE-T distances discussed in Chap. 3, the local competitive environment may operate according to a different logic. Internationalizing firms may find important local differences in terms of intensity of competition, heterogeneity of competitors, diversity of products and services, intricacy of production processes and technologies, levels of specialization of key industry players, the role of human resources (rather than technologies) in achieving competitive advantage, and spatial concentration or dispersion of activities in the local industry (in terms of production, research and development, and sales)—to name only a few of the variables. This kind of self-assessment of differences between home and target markets is not easy and is often a cause of conflict between subsidiaries and headquarters. A lack of understanding of the local environment is also a cause of the decision to “under-adapt,” often imposed by headquarters, that we discuss in Chap. 3. You may argue that all industries and markets are now characterized by high levels of environmental complexity, and so all subsidiaries operate in relatively complex business settings, quite different from the domestic one. And we agree that the “VUCA” context (volatile, uncertain, complex, and ambiguous) is the “new normal” for all industries. Our main point here is not the inherent complexity of local conditions but the ability of headquarters to evaluate and interpret them. By “local conditions” we mean not only external conditions (competitors, suppliers, and customers) but also conditions that are intrinsic to the local subsidiary. The fourth step is evaluation of the resources and capabilities endowment of the subsidiary relative to headquarters and other subsidiaries. We may assume that, if a subsidiary is capable of operating with relative autonomy in a complex and/or strategically important environment, excessive

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centralization of decisions would be counterproductive. An increase in the quality and “quantity” of resources and capabilities retained by a local subsidiary heightens its strategic importance inside a multinational. A strategically important subsidiary may find severe hierarchical controls too restrictive, even if it is willing to accept formal and impersonal methods of integration (such as rules and procedures) employed by headquarters to align goals and strategy. The fifth step is evaluation of the intersection of these factors to ensure that the levels of formalization, centralization, communication, and integration of a subsidiary are proactively defined rather than simply inherited. The intersection of these factors is shown in Fig. 6.1, where we add the transfer and development of resources and capabilities initiated by headquarters. The relationship between headquarters and subsidiaries is only partly captured by the methods of interaction discussed above (decisional autonomy, integration, formalization, and communication). The role of a subsidiary is also defined by the intensity and nature of the tangible and intangible flows that go beyond daily routines and ordinary activities. We talk about transfers of technologies, of organizational practices, and of financial and human resources, as means provided by headquarters to fuel the strategy implementation efforts of subsidiaries.

Internationalization goals

Strategic importance of foreign market

Environmental complexity of foreign market and CAGE-T distances

Resources and capabilities (quality and quantity) retained by subsidiary and headquarters

decision on the level of centralization(decisional autonomy) decision on the level of formalization (rules, procedures) decision on the level of integration decision on the intensity of communication decision on the allocation of resources and capabilities to the subsidiary

Fig. 6.1  Key factors and decisions in relationships between subsidiaries and headquarters (authors’ elaboration based on the framework of Professors Nitin Nohria and Sumantra Ghoshal)

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The decisions shown in Fig. 6.1 need to be taken for each subsidiary, as the availability of resources and capabilities and the peculiarities of local contexts may vary greatly. Researchers describe four broad roles of subsidiary roles present in multinationals: • A “local implementer”—a subsidiary with a limited geography (usually one country) that is focused on limited types of products and services and on performing a limited range of business activities; • A “specialized contributor”—a subsidiary with significant expertise in certain business activities that are closely coordinated with activities of other subsidiaries; a subsidiary’s narrow focus makes it highly interdependent with the rest of the organization; • A “world mandate” subsidiary—a subsidiary with “decentralized centralization” (a regional or worldwide responsibility for a product or service or entire business) that works closely with headquarters on the development and implementation of strategy; • A “black hole”—a subsidiary located in a country with high business potential but incapable of harnessing that potential. Even where local implementers, specialized contributors, and world mandate subsidiaries coexist within an organization, the establishment of common rules and approaches may place some subsidiaries under unnecessary constraints, lead to resources being wasted in others, and create obstacles to growth through deficit of resources. In an entrepreneurial and opportunity-­ driven multinational, it is logical to consider each subsidiary independently, in a much broader variety of roles. In early 2011, Italy’s Prysmian successfully completed the merger with Netherlands’ Draka, creating the world’s largest cable supplier for industries ranging from telecommunications to energy, automotive and elevators. The business combination allowed Prysmian to become the global industry leader by revenues, thanks to a unique geographical and product portfolio fit, and resulted in massive synergies and further strengthening of its technical know-­ how. The easy mistake would have been to adopt the functional and efficient organizational structure, the cornerstone of its “cost leader DNA”, which had strongly contributed to Prysmian’s success. Extending Prysmian’s organizational approach to the new entity would have undermined Draka’s excellence in customer service and its specialty focus. It would have also demotivated Draka’s international managers, able to gain clients’ respect and premium prices (though not followed by superior profitability). The principles used by Prysmian to design its new organization are described in Box 6.2.

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Box 6.2  Prysmian’s Organizational Solution After Merger with Draka (Based on Venzin, 2020; Venzin & Amodio, 2014; Venzin et al., 2016; Venzin et al., 2017) After merger with Draka in 2011, Prysmian became the world’s largest cable supplier. The new organizational structure was quickly designed by taking into consideration the following guiding principles: (i) maintain focus on profitability; (ii) understand thoroughly the key business processes; (iii) understand each business needs in terms of local adaptation; (iv) select and retain talents. The resulting organization was matrix-based: with horizontal axis represent different geographic dimensions (country, region, continent, global) and vertical axis include Prysmian’s lines of business: cables for energy and infrastructure, submarine, specialties, renewables, oil & gas, automotive, elevators, SURF (subsea umbilical, riser and flowline), network components and HV (high voltage). Each business was first analyzed and then assigned a certain degree of centralization: ranging from “country” responsibility for local sales, local manufacturing, local manufacturing and local R&D to “business unit” responsibility for sales, manufacturing, product development and R&D. For example, the energy and infrastructure business unit, for which country-­ specific product specs (as a consequence, for example, of geographic characteristics), legislation and clients’ needs play an important role, would be organized under a country’s responsibility, with local teams made responsible for sales and operations at a country level. On another hand, given the global uniformity of its business dynamics, the elevators would be an example of a centrally managed integrated business unit. Other businesses, like cables for oil & gas, would instead have an intermediate profile, in some cases requiring a regional organizational model, and so on and so forth. The organizational model adopted by Prysmian based on segmentation of business units into “basic” (local), intermediate and integrated allowed the firm to start reasoning on how to strike an optimal balance between adaptation and standardization of its offering while taking into account country and product peculiarities. Such solution eventually adds to the firm’s flexibility making possible eventual introductions of differentiated organizational solutions because of new conditions in the industry or a local market. One of the key enablers of the new organizational model was Prysmian Group’s ability to attract, select and retain talents. Talent selection, together with decisions on “physical” location of managers took into consideration business- and country-level requirements and assured consistency and processes connectedness within the modular matrix.

As we illustrated with example of Prysmian Group (Box 6.2), within a multinational organization, each organizational unit deserves its own unique role. This is often not the case. Several decades ago, Professors Christopher Bartlett and Sumantra Ghoshal spoke about multinationals being guided by oversimplified assumptions in the definition of their organizational structures: uniformity and symmetry of roles, clear and unambiguous patterns of interaction, clearly understood and simple methods of decision-making and control. In our teaching and consulting practices, we often hear about organizational policies, marketing strategies, and even technological solutions that

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have been imposed by headquarters as “standards.” In many cases, this leads to a waste of energy and resources in internal negotiations, led by managers of subsidiaries, to have those standards abolished. In some cases, however, subsidiaries manage to evolve, to create exceptions to the general rule of their strategic subordination to headquarters. They win the right to greater strategic autonomy relative to other subsidiaries. This autonomy facilitates the pursuit of market opportunities and the building of new capabilities; the first positive results create a virtuous cycle, potentially leading to greater autonomy and an increasingly important strategic role for the subsidiary. The traditional organization of a multinational—uniform and symmetric—is no longer viable.

6.3 Heterarchy in a Multinational Organization The functioning of a modern multinational makes it necessary to find new organizational solutions, as hierarchies and networks are no longer capable of dealing with its complexity. Hierarchy, a system of elements arranged in a certain order, with clear departmental boundaries and well-defined control and decision-making, may, with some adjustments, still work in mass production or distribution thanks to its reliability, predictability, and the ease with which it controls the use of resources. An alternative is a network organization, which allows the inclusion of legally external players, and where one organizational element may depend on the resources controlled by another. Networks may be more suitable for fast-­ moving environments where resources are used in volumes and must be pulled together, and where the speed of reaction to market opportunities is a key ingredient in success. Professor Levitt described the ability of “dragon multinationals” (new multinationals arriving from Brazil, India, and China) to gain advantages rapidly in global markets by creating a network of interlinked groups of firms, interacting closely and supporting each other with a “linking–leverage–learning” (L-L-L) approach. Nonetheless, even a network organization has some sort of consistency. In a network, participating units (actors) “pursue repeated, enduring exchange relations with one another and, at the same time, lack a legitimate organizational authority to arbitrate and resolve disputes that may arise during the exchange.” (Podolny & Page, 1998) It is precisely this principle of consistency that ultimately comes into conflict with the fast-developing and highly heterogeneous context of global markets. ICM (former Maltauro—the name of the founding entrepreneur and his inheritors), one of Italy’s leading building and construction groups, operated in its home market with a diversified portfolio ranging from public sector infrastructural projects, commercial buildings, to prefabs, basalts,

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environment protection, and real estate. Slowing domestic market and increasingly complex and burdensome bureaucratic system pushed the company to pursue internationalization as the main growth accelerator. On international markets, ICM explored its renowned expertise and best-in-class technical capabilities, in particular versus local players in developing countries, to work with public infrastructures (airports, hospitals), smart cities and transportation networks, where the firm’s gave it a clear differentiating advantage. The heavily Italy-centric organizational structure needed to be adapted to the new growth opportunities (Box 6.3)

Box 6.3  ICM Italy: Moving Away from Top-Down Hierarchy Originally, ICM’s organizational structure was heavily concentrated: both domestic and international contracts were almost fully managed and accounted for by its Vicenza headquarters. As the non-Italian part of the business started to flourish—thanks to a growing number of contracts in the Middle East, Northern and Eastern Africa, and in Eastern Europe—the inappropriateness of this approach became evident. Geographic distance from project sites and a lack of local knowledge made it extremely complicated and costly for ICM to remotely assess, plan and manage projects. Moreover, addressing constantly arising operative issues meant diverting resources from Italian projects (and vice-versa). Deep transformation of ICM’s organizational structure began by staffing local teams with permanent resources with autonomy to manage projects, employ subcontractors and to develop local business opportunities. High-profile resources were deployed from headquarters to satellite offices, transferring their project management skills to newly-created regional competence centers. Meanwhile, top management retained ownership of overall corporate strategy and systems (including a shared project management framework). It also provided administrative support to local offices, in areas such as finance, legal services, and HR, through central staff. Local teams directly reported to the top management and dealt with central staff resources to get professional support instead of approval to their actions. Strategically important local business decisions were still approved by a central decision committee at headquarters and top management level, allowing ICM to maintain ultimate control of its portfolio strategy, risk management and financial operations. Key operations were also decentralized. For example, logistics used to be controlled by headquarters that even had physical ownership of tools and vehicles. The new structure, however, allowed local offices to hire equipment autonomously. This not only resulted in cost savings, as local teams could bid competitively (also without being limited by own assets’ characteristics), but also removed the operational bottlenecks caused by a limited number of headquarters-based decisionmakers, and reduced the need of investment into fixed assets to sustain growth. Locally driven contract management model resulted in a much greater responsiveness from the firm in terms of bidding and decision making. Organizational change did not just have an impact regionally, but also at a corporate level. The distribution of top management across a number of locations facilitated the dissemination of ICM company culture and improved communication across internal divisions.

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ICM’s ability to move from strictly hierarchical organization (Box 6.3) allowed it to survive tough times in the Italian construction sector, giving the firm an opportunity to position itself as a global force. ICM undergone a transformation from a top-heavy, highly centralized domestic behemoth, to a lean and fast-moving international player while managing to retain its corporate identity and culture and allowing it to remain at the forefront of innovation in the construction sector, both in Italy and internationally. The alternative to hierarchical and network organizations is heterarchy, whose main feature is the availability of alternative evaluating principles and alternative concepts of what is valuable and important. More than three decades ago, Professor Hedlund described what characterizes a modern heterarchical multinational: 1. There are many centers. Competitive advantage resides neither at the periphery nor at headquarters and can be created in any part of an organization, according to unique local factors. 2. There are many kinds of centers. The firm operates according to a mix of organizational principles, none of which predominates—one subsidiary can be responsible for product development, another for the coordination of procurement. 3. Subsidiary managers have a strategic mandate for the whole firm, not only for their “own” subsidiary. The concept of headquarters as the “thinking” brain and subsidiaries as the “acting” body is abandoned—the thinking is done by the whole organization, including its “acting” part. 4. Cooperation (the lateral links usually avoided in hierarchical organizations) and freedom coexist among geographically dispersed organizational units. This freedom may apply to decisions on procurement and sales policies, as well as to the formation external linkages (such as joint ventures) and coalitions with external organizations. 5. Integration is achieved through normative means of control—often without explicit policies or procedures. Bureaucratic solutions are replaced by a corporate culture, management style, management ethos, and cultural control. 6. The hologram principle is in force. Information about the key aspects of a firm’s organization is contained in each part of the firm, and there is a shared awareness of overall goals and strategy. The governance mechanisms of heterarchical organizations are renewed continuously in accordance with evolving conditions. The apparent chaos of a heterarchical multinational is resolved by applying principles of hierarchical

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or market relationships to its different parts, taking into account what will work in each case. In this way, the organizational structure of a heterarchical multinational is a combination of many models used simultaneously and in flexible ways. In a heterarchical multinational, people are no longer “promoted” vertically. Instead, they receive assignments in various parts of the organization according to their skills. People with lengthy work experience across the organization become an important asset, the core of internal communication, and constitute what Professor Hedlund calls the “human system” (Hedlund, 1986). The human system of a heterarchical multinational is fueled by the following approaches to people management: • a global mentality at most of levels of the organization (not only in headquarters); • specifically designed hiring policies (with requirements for new hires including the ability to search out and combine elements in new ways, communication skills, implementation capabilities, language skills, knowledge of several cultures, honesty and personal integrity, willingness to take risks, enthusiasm for and loyalty to the company); • dual careers (lifelong or long-term relationships that include participation in ownership and project-based commitments); • a proactively managed balance between younger and older members in the organization; • rotation of employees among different locations, roles, business units; • broad involvement of employees throughout the organization in developing and implementing strategy (and making information about goals and strategy available throughout the organization). Such people management and organizational systems are not easy to imitate, because each employee is one of many nodes. Compared to the knowledge and experience of senior employees in hierarchical organizations, the knowledge of key employees in a heterarchical organization is much less valuable and replicable outside that organization. We may observe traits of a new heterarchical multinational organization in technology-driven giants such as the Chinese Alibaba Group (see Box 6.4). The Alibaba Group’s organization is a constellation of digital technology-­ driven businesses, and its international revenues are growing, even if they still represent a small proportion of its total business. Organizing a multinational as a heterarchy provides a way to approach the complex task of aligning goals between subsidiaries and headquarters as at a certain point of time each multinational needs to address the following challenges:

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Box 6.4  Alibaba Group. Traits of Heterarchical Organization in Action (Based on Alibaba Group Holding Limited, 2014; Shao, 2020; Wulf, 2010) 1. Since its foundation, the Alibaba Group has operated as a partnership. In 2019, the partnership had 38 members, but this number is not fixed; the Group describes its partners as “peers” and emphasizes that it allows senior managers to collaborate without bureaucracy or hierarchy. 2. The Group offers stock options for employees. 3. The Group’s businesses have a high level of autonomy (they include mobile commerce marketplaces for domestic and global consumers, premium online and mobile commerce, an online wholesale marketplace, a monetization platform, infrastructure as a service (IaaS) and infrastructure utility service provision, a logistic data platform, and an unconsolidated provider of financial services to consumers and retailers). 4. Inspired by General Electric’s Jack Welch, Alibaba Group’s founder Jack Ma allowed each subsidiary to develop its own strategy and to pursue leadership positions in their markets (with competition among them). 5. Delegation is intrinsic to the organization, with heads of subsidiaries free to define strategies and make decisions that they believe are right for their businesses. The Group refrains from imposing synergies and unnecessary organizational links for the sake of growth. 6. Culture is a key to success. The Group’s ability to sustain its culture over the coming years is identified in its annual report as one of the key business risks it faces. 7. People-related policies play a central role. The Group states explicitly the high standards it expects from its people (honesty and integrity, teamwork, a “fire-­ in-­the-belly” approach) and rewards commitment and perseverance. 8. The Group’s flat organization is supported by opportunities for feedback (including negative feedback), employees choosing to be known by their nicknames, and a family-like sense of unity fostered by large-scale corporate events and mass weddings.

1. When defining performance targets, headquarters may not possess all the necessary information about a subsidiary’s resources and business (and, in some cases, a subsidiary may withhold relevant information in order to retain more freedom of action). 2. Subsidiary operations are not totally controlled by headquarters, which leaves room for opportunistic decisions that benefit the subsidiary and its managers at the expense of the whole organization. For example, a subsidiary may be formally compliant with internal rules despite missing clear opportunities for cost reduction or innovation opportunities on the grounds that they were “not asked to do that.” 3. By failing to define performance objectives correctly, headquarters may involuntarily incentivize behavior that is potentially damaging for the firm. For example, a subsidiary measured by its net profitability may, given

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the choice, refuse to buy components internally at a higher price from another subsidiary that desperately needs to fill its production capacity. 4. In complex multinational structures, headquarters may set goals that are damaging for the subsidiary. 5. Non-economic factors such as benevolence, trust, or reciprocity among the managers of a multinational may strongly influence the ways in which a subsidiary’s goals are defined and its performance measured, with the result that the subsidiary’s actions are not always aligned with the firm’s vision. 6. The national cultures in which a subsidiary operates will strongly influence the everyday actions and decisions of its employees. This may alter their understanding and implementation of corporate goals. Heterarchical multinationals can significantly reduce these six challenges by giving their subsidiary managers strategic mandates and responsibilities for the overall organization, using the measures described above (including specific hiring policies and employee rotation). Even more importantly, Professor Hedlund argues that heterarchical multinationals are in a position to deal with today’s global problems by offering radical solutions, rather than formulating gradually evolving goals and strategies based on evaluation of resources and competitive positions. In the final part of this chapter, we discuss how subsidiaries can contribute to the development of a firm’s competitive advantage.

6.4 Subsidiaries as Sources of Innovation More and more, subsidiaries act as sources of innovation. Headquarters of many multinationals are more and more accepting of their new role in receiving and diffusing ideas and technologies from subsidiaries (as opposed to generating and diffusing their own ideas and technologies). We need to pay particular attention to the new phenomenon of reverse innovation, which creates both serious challenges and valuable opportunities for multinationals. Reverse innovation is the path followed by innovative products, services, or processes first adopted in less developed economies when they move to economies with higher levels of development. As an example of reverse innovation flows in a multinational, Professors Immelt, Govindarajan, and Trimble cite the success in the US market of small, low-price electrocardiogram devices and portable ultrasound machines. These two products, which were originally developed for rural areas in emerging markets, are now helping US General

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Electric to protect its operations from potential low-cost competition in developed markets. The benefits of the coexistence of reverse, direct, horizontal, circular—you name it—flows of knowledge and ideas inside a multinational are intuitive. But as Immelt, Govindarajan, and Trimble note, the implementation of reverse knowledge flows is challenging compared to the traditional top-down flow. The main obstacle is the existing organizational structure of the multinationals themselves, as fine-tuned and efficient top-down processes do not allow space, time, or resources for local creativity. Reverse diffusion of managerial practices (as opposed to forward diffusion from headquarters to subsidiaries) is impeded by both centralized and decentralized organization. Multinationals may lack formal channels for the transfer of knowledge and the diffusion of new practices among subsidiaries and from subsidiaries to home or regional headquarters. Top managers may not understand potential sources of knowledge and innovation that are “hidden” in geographically dispersed organizational units. Moreover, research confirms that “older” subsidiaries can be more successful in playing a major role in reverse knowledge transfer; managers at headquarters are more likely to value knowledge received from an older subsidiary than from a newer one. Other organizational practices, such as incentive schemes and performance evaluation principles, are important, too. Managers of subsidiaries, if incentivized to achieve subsidiary-level goals rather than firm-level goals, may not be motivated to share best practices with their internal “rivals.” Managers who are asked to adopt best practices from other subsidiaries may perceive this as a way of attributing higher organizational power and importance to those subsidiaries. For “reversed from subsidiaries” innovation to work, then, subsidiaries must be able to access the necessary resources from other parts of the multinational, be responsible for their own economics, and have the power to make their own decisions. Once a viable product is obtained, a multinational needs to diffuse it globally without fear of cannibalizing its other products. It is better to create market disruption from the inside than to wait for an external competitor to come along. The advantages of reverse innovation in bringing solutions from developing to developed markets are numerous: affordability (instead of targeting not-so-­ price-sensitive early adopters and neglecting price-sensitive later adopters), robustness of solutions for use in harsh environments, ease of operation and maintenance, and new approaches to how products and services are sold, distributed, and financed.

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For anything “reverse”—knowledge, ideas, or innovation—to exist in a multinational and to drive a multinational’s transition to heterarchy, commitment from the CEO is a prerequisite. It is the CEO’s role to enable the “reverse” flow from subsidiaries to headquarters by sensing new growth opportunities and diverting people, organizational power, and resources to local outposts. Field knowledge is crucial in this difficult task—the CEO must talk to teams and meet team members separately during field visits in order to collect information about markets, competitors, trends, products, costs, and execution challenges. As long ago as 1967, Professor Williamson, in his article on control among hierarchical levels of larger organizations, recognized that “the larger and more authoritarian the organization, the better the chance that its top decision-makers will be operating in purely imaginary worlds.” (Williamson, 1967). For a new breed of multinationals, a firm’s uniqueness and cross-border value derives from mixing and melding the dispersed knowledge located in its various parts, not from headquarters or a “center of excellence” subsidiary.

References Hedlund, G. (1986). The hypermodern MNC—a heterarchy? Human Resource Management, 25(1), 9–35. Podolny, J. M., & Page, K. L. (1998). Network forms of organization. Annual Review of Sociology, 24(1), 57–76. Porter, M. E., & Porter, M. P. (1998). Location, clusters, and the ‘new’ microeconomics of competition. Business Economics, 33(1), 7–13. Shao, H. (2020). A peek inside Alibaba’s corporate culture, Forbes. Retrieved March 10, 2020 from https://www.forbes.com/sites/hengshao/2014/05/13/apeek-inside-alibabas-corporate-culture/#58de68364efc Venzin, M. (2020). Integration is only the beginning: the Prysmian Group Academy. SDA Bocconi School of Management Insight, Impact Stories. Retrieved March 9, 2020 from https://www.sdabocconi.it/en/sda-bocconi-insight/integration-isonly-the-beginning-the-prysmian-group-academy Venzin, M., & Amodio, A. (2014). Prysmian Group: leading the way in the global cable industry. SDA Bocconi School of Management case study. Retrieved March 9, 2020 from http://www.thecasecenter.org/ Venzin, M., Bardolet, D., Zerrillo, P. C., & Chan, C.  W. (2016). The Prysmian Group: Strategy in Asia Pacific. Singapore Management University case study. Retrieved March 9, 2020 from http://www.thecasecenter.org/

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Venzin, M., Bardolet, D., Zerrillo, P. C., & Chan, C. W. (2017). Prysmian Group in Asia Pacific: implementing strategy. Singapore Management University case study. Retrieved March 9, 2020 from http://www.thecasecenter.org/ Wulf, J. (2010). Alibaba Group, case study by Harvard Business School, 9-710-436.

Selected Bibliography Alibaba Group Holding Limited, Form 20-F, US SEC, Retrieved March 31, 2019, from https://www.alibabagroup.com/en/ir/pdf/agm190605_ar.pdf. Annushkina, O., & Lojacono, G. (2013). Exploring processes and capabilities in offshoring intermediation. In T.  Pedersen, L.  Bals, & P.  O. Jensen (Eds.), The ­offshoring challenge: strategic design and innovation for tomorrow’s organization (pp. 79–97). New York: Springer. Bartlett, C. A., & Ghoshal, S. (1987). Managing across borders: new organizational responses. MIT Sloan Management Review, 29(1), 43–54. Bennett, N., & Lemoine, J. (2014). What VUCA really means for you. Harvard Business Review, 92(1/2), 27–42. Birkinshaw, J. M. (1998). Multinational subsidiary evolution: capability and charter change in foreign-owned subsidiary companies. The Academy of Management Review, 23(4), 773–795. Birkinshaw, J. M., & Morrison, A. J. (1995). Configurations of strategy and structure in subsidiaries of multinational corporations. Journal of International Business Studies, 26(4), 729–753. Cannon, A. R., & St.John, C. H. (2007). Measuring environmental complexity. A theoretical and empirical assessment. Organizational Research Methods, 10(2), 296–321. Davis, I. (2009). The new normal. McKinsey Quarterly. Retrieved March 10, 2020 from https://www.mckinsey.com/business-functions/strategy-and-corporatefinance/our-insights/the-new-normal Doz, Y., Santos, J., & Williamson, P. (2003). The metanational: the next step in the evolution of the multinational enterprise. In J. Birkinshaw et al. (Eds.), The future of the multinational company (pp. 154–168). Chichester: Wiley. Dunning, J. (2000). The eclectic paradigm as an envelope for economic and business theories of MNE activity. International Business Review, 9(2), 163–190. Edwards, T., & Tempel, A. (2010). Explaining variation in reverse diffusion of HR practices: evidence from the German and British subsidiaries of American multinationals. Journal of World Business, 45, 19–28. Govindarajan, V., & Ramamurti, R. (2011). Reverse innovation, emerging markets, and global strategy. Global Strategy Journal, 1(3–4), 191–205.

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Hoenen, A. K., & Kostova, T. (2014). Utilizing the broader agency perspective for studying headquarters–subsidiary relations in multinational companies. Journal of International Business Studies, 46(1), 104–113. Immelt, J., Govindarajan, V., & Trimble, C. (2010). How GE is disrupting itself. Harvard Business Review, 87(10), 56–65. Jacobides, M. G. (2005). Industry change through vertical disintegration: how and why markets emerged in mortgage banking. The Academy of Management Journal, 48(3), 465–498. Kostova, T., & Zaheer, S. (1999). Organizational legitimacy under conditions of complexity: the case of the multinational enterprise. The Academy of Management Review, 24(1), 64–81. MacCarthy, B., Er, M., & Atthirawong, W. (2003). Border control. Manufacturing Engineer, 82(1), 9–13. Mathews, J.  A. (2017). Dragon multinationals powered by linkage, leverage and learning: a review and development. Asia Pacific Journal of Management, 34(4), 769–775. Nohria, N., & Ghoshal, S. (1994). Differentiated fit and shared values: alternatives for managing headquarters–subsidiary relations. Strategic Management Journal, 15(6), 491–502. Pisano, G. P., & Wheelwright, S. C. (1995). The new logic of high-tech R&D. Harvard Business Review, 73(5), 93–105. Powell, W. W. (1990). Neither market nor hierarchy: network forms of organization. Research in Organizational Behavior, 12, 295–336. Prysmian Group and Draka joint statement. (2010). Creating the World’s Leading Cables & Systems Company. Retrieved March 9, 2020 from https://www.prysmiangroup.com/sites/default/files/20101123DrakaPrysmianJointPresentation.pdf Rabbiosi, L., & Santangelo, G.  D. (2013). Parent company benefits from reverse knowledge transfer: the role of the liability of newness in MNEs. Journal of World Business, 48, 160–170. Taylor, D., King, R., & Smith, D. (2017). Management controls, heterarchy and innovation: a case study of a start-up company. Accounting, Auditing & Accountability Journal, 32(6), 1636–1661. Williamson, O. E. (1967). Hierarchical control and optimum firm size. Journal of Political Economy, 75(2), 123–138.

7 Strategic Decisions in International Business

We have discussed “strategy deficit” issues in other chapters of the book: lack of adaptation, excessively uniform and hierarchical organizational structures, incoherent people management practices, reactive foreign market selection. Culture that “eats strategy for breakfast” remains hungry, as there is nothing left to eat except budgets and high-level statements. Managers and entrepreneurs often avoid strategic decisions, as they involve deliberate choices (as opposed to a “non-decision”), concrete commitment of resources to goals and responsibility for both. The primary objective of this chapter is to make global expansion strategy formulation more approachable. We start by identifying key elements of global strategy. Next, we discuss “classic” theories of strategy for multinational firms. In the third part of the chapter, we discuss difficulties and solutions for better-quality strategic decision making. This chapter is purely conceptual. We provide some examples, but we have deliberately chosen not to include short cases as we have done in other chapters. Strategy of any firm, in terms of process and content, is not something that can be adequately illustrated in a handful of paragraphs.

7.1 What do We Strategize About? In many internationalizing firms, there is a general but unfocused feeling that they could do better in global markets. Similarly, newcomers to global markets may sense potential opportunities abroad, without seeing clearly how to exploit them. The solution is to start from the basics. Businesses that are underperforming in global markets, or that seek to grow in global markets, © The Author(s) 2020 O. E. Annushkina, A. Regazzo, The Art of Going Global, https://doi.org/10.1007/978-3-030-21044-1_7

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should start by asking themselves the following questions: Which businesses do we operate in? What are our core businesses? This is an idea that we have returned to more than once in this book: Internationalization strategy is specific to each business unit. Understanding how many and which businesses we are in is crucial, in particular for managers of small and medium businesses, who tend to think of themselves in oversimplified ways. Clear definition of business units—existing and future—should be the starting point for formulating international strategy. To understand which businesses we are in, to define the business units, we need to interpret the complexity of our firms in three ways: 1 . the types of products and services we offer or the types of needs we satisfy; 2. the types of customers we serve (e.g., industrial or private); 3. the channels we serve our customers in (e.g., B2B or retail, online or offline, direct or via intermediaries). This reasoning applies regardless of size—even small and medium enterprises may have more than one area of business. In our professional and teaching practices, we often meet managers who define their firms’ internationalization strategies simply, holistically and for all the products and services they offer. “We are in the coffee business,” they will say (or “the metal products business” or “the industrial equipment business”). This is understandable, and we all use simplified mental schemes to reduce this world’s complexity. Nonetheless, by moving from “we are in the coffee business” to “we have three business units operating with different logic in global markets”, managers may begin distinguishing the products and services they provide—say, coffee machines, coffee capsules, and maintenance/installation services. Starting from the definition of business units, many doubts about the need for adaptation or about the role of subsidiaries may be quite spontaneously clarified. It is not within the scope of this book to provide readers with a recipe for corporate or competitive strategy in the international context, or with an “ideal” strategic planning process that they can tailor to their own situation. Such generalization would not have any practical meaning. For this reason, we focus on listing the key elements (decisions) in relation to competitive and corporate strategies. Let us look at competitive strategy at the level of the business unit. In the Entrepreneurial Formula developed by Professor Vittorio Coda, competitive strategy is described in terms of a set of elements that includes the firm, its product or service offering, its competitive system and its stakeholders (Fig. 7.1).

7  Strategic Decisions in International Business  Positioning in competitive system

Stakeholders

(suppliers, workforce, trade unions, banks, local authorities, communities, etc.)

(market segments or positioning within a market segment, in terms of clients and competitors)

Product or service

(tangible and intangible features, prices and discounts, promotion and sales channels)

133

Organization

(resources and capabilities, processes, structures and culture)

Employment or collaboration opportunities with stakeholders

Fig. 7.1  Professor Vittorio Coda’s Entrepreneurial Formula

The Entrepreneurial Formula, this simple yet not simplistic scheme, serves as a guideline for defining key decisions regarding internationalization strategy: In which markets do we compete? Do we adapt our products and services and, if so, how? Which resources do we use for international growth? Are our internal competences good enough to implement internationalization? How should our organization change to cater for international expansion? What is the impact of our internationalization on existing and new stakeholders? The answers to these questions will vary among industries, firms and geographic settings—the important point is that the set of questions you ask should be comprehensive. By looking at the elements of the Entrepreneurial Formula, you can start to define intuitively, for each business unit in your firm, the core challenges in defining and implementing internationalization strategy. These may include: • lack of resources (human, financial) and competences (managerial, industry-­specific or about foreign markets) necessary to implement international growth; • lack of commitment by top management to international expansion and consequent overreliance on the domestic market or the domestic macroregion; • lack of adaptation to foreign market needs or its opposite, adaptation that is excessive and costly; • reactive rather than proactive selection of foreign markets; • lack of coherence between decisions regarding foreign market selection, product adaptation and organizational adaptation. After your strategy check-up for each business unit, the second stage is to look at internationalization strategy at the corporate level. Corporate level strategy involves decisions about the following aspects of the business:

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1 . which business units should exist and be developed inside the firm; 2. how resources should be allocated among the business units; 3. how resources are sourced (created inside the firm, acquired, “rented” from various suppliers of financial resources or managerial capabilities, or reallocated from other business units); 4. how relationships among the business units are coordinated. In an internationalizing firm, these questions need to be asked in the context of the opportunities and challenges that each business unit faces in global markets. The interrelationship between corporate strategy and competitive strategies at the level of the business units is complex and “unfolds dynamically across time” (Feldman, 2020). In previous chapters of this book, we have discussed the key decisions at the business-unit level regarding adaptation, foreign market selection, entry mode definition and delocalization of value chain activities abroad. We have also discussed policies that lie within the realm of headquarters—decisions about internationalization goals, culture, common human resources policies, and the underlying logic of the organizational structure of a multinational. In this chapter, we discuss both the content of internationalization strategy—its “classical” archetypes at the business-unit level—and the process by which international strategy decisions “unfold.”

7.2 Classical International Strategy Archetypes One of the fundamental theories of international business is Professor John Dunning’s OLI paradigm. The acronym OLI denotes three sources of competitive advantage for internationalizing businesses: 1. Owned advantages (internal advantages or advantages that derive from ownership). Owned sources of competitive advantage reside within firms. They include (a) possession of unique resources and capabilities that make a firm superior to its competitors, (b) the ability of managers to find, evaluate, start using, and coordinate resources and capabilities around the world, and (c) monopolistic power. 2. Locational advantages. Competitive advantage is achieved through access to natural and created resources (such as skills and capabilities) in foreign markets. On Professor Dunning’s broad definition, created resources also include the presence of local firms with complementary competences that make them potential partners.

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3. Internalization advantages. Internalization advantages can be internal, as when business activities in foreign markets (such as sales, production, research and development, and procurement) are performed inside a firm via a directly controlled subsidiary or an equity joint venture. Internalization advantage can be achieved through an external solution, in which a firm uses a contract with a local supplier or a sales intermediary to benefit from the locational advantages of a foreign market. Internalization advantages concern the ways in which a firm accesses locational advantages: via equity (investment)-based modes or contract-based modes. We discussed factors influencing the decision to internalize or externalize foreign market activities in Chap. 5. You may find that the three potential sources of competitive superiority set out in the OLI paradigm—ownership of superior resources and skills, good choices of foreign markets and of entry modes—are interwoven and that advantages in one or two respects may positively influence other types of competitive advantages. For instance, a good choice of foreign market that can be exploited via a directly managed subsidiary (along with competitively superior organizational choices) may allow you to accumulate the resources and experience you need to go ahead with accessing more foreign markets. If we apply the OLI paradigm to the Entrepreneurial Formula, we are faced with the following decisions: our choice of positioning inside a foreign market (exploring the “L” advantage), our choice of product or service configuration (using the “O” advantage to interpret market need and to create a suitable product or service), our choice of organization in terms of our presence in the foreign market (the “I” advantage) and the resources and skills that we will exploit in a concrete foreign market (sources of further “O” advantages). The next two “classical” international business frameworks we discuss both focus on product/service configuration and the organization of business activities in foreign markets. In the wake of OLI paradigm efforts to conceptualize international strategy elements, it would be easy to take for granted the quality of a business’s foreign market selection or to regard presence in foreign markets almost as a given: By design or by chance, we find ourselves operating in a number of foreign markets, so let’s see how we can be more competitive. In their famous framework, Professors Bartlett and Ghoshal described the two core decisions of internationalizing firms: the level of adaptation (“national differentiation”) and the level of “global coordination.” These two decisional areas allow us to identify four types of international strategy:

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• global (competing internationally through highly centralized structures and exploiting economies of scale, thus with low levels of adaptation); • multinational (combining strong local presence in foreign markets with significant levels of local responsiveness); • international (firms that are present locally exploiting parent company advantages); • transnational (differentiated contributions by local subsidiaries that are often specialized but nevertheless integrated and coordinated at headquarters level). Although empirical tests have confirmed the diffusion of global and multinational strategies among internationalizing firms, international and transnational strategies seem to be used less frequently. Extending the concepts of local responsiveness and locational choices, Professor Ghemawat developed his AAA framework to propose the following three elements of internationalization strategy: adaptation of a firm’s commercial offering, aggregation of a firm’s activities (geographical aggregation of locations to achieve economies of scale, often implemented at regional rather than global level, but also aggregation of managerial approaches), and arbitrage (exploration of advantages of different locations). In all three frameworks, the key elements of internationalization strategies may have higher or lower degrees of generalization, and previous chapters of this book have discussed in detail factors that influence decisions regarding adaptation, location choices, entry modes, and organizational and staffing choices. The key challenges for managers and entrepreneurs are, on the one hand, maintaining coherence between internationalization goals and decisions taken about key elements of the internationalization strategy, and, on the other hand, continuing to have a strong vision of the future. In the remaining part of this chapter we discuss what we believe to be the most important tips and tricks for future-oriented strategic decision making in the context of internationalization.

7.3 S  trategic Decisions in International Business in an Age of Uncertainty: Real Options Internationalization decisions, their timing, the size of the investment and how to implement it, are taken under uncertainty. In the majority of cases, the decision results from the right to act, rather than any obligation to act, and it

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may ultimately be reversed (albeit with a certain, in some cases conspicuous, amount of loss). These two elements—uncertainty and the right, rather than the obligation, to act—bring us to the real-options approach to decision making in internationalization. A real option is defined as an investment in a physical or intangible asset that provides an opportunity to respond to future contingent events. Take as an example the investment in a representative office in a new foreign market; the office is a cost center, but it provides an opportunity to learn and a base for future expansion. For each internationalization decision, the real options theory (which came to management from the theory of financial options, that is, derivative securities) suggests taking the following four factors into consideration. The first factor is the level of uncertainty about the foreign market. To improve the chances of making a good move in a foreign market, we look for more information. What kind of effort do we need to make to acquire the necessary minimum level of data about the market? For example, to make the right decision about entering a new market with a production facility, is it sufficient to run a “field” market analysis, or do we need to start selling trial versions of our product there? The second factor is the irreversibility of an internationalization decision. Imagine applying the same reasoning to entering a joint venture, opening a commercial subsidiary or implementing changes to a domestic production plant in order to deliver adapted products in a new region. The level of irreversibility depends on two aspects: (a) the amount of investment that would be lost if we reversed the decision in the future, and (b) the total amount of the investment and its divisibility—is it possible to start committing resources in a gradual way? The third factor is the risk of “early expiration” of an opportunity. If you decide to “wait and see,” or simply to start committing resources gradually and prudently, you risk losing your first-mover advantage. An opportunity in the foreign market may disappear because of competitors, local or foreign, or because of changing conditions—for example, new regulation. By taking into consideration these first three factors, we end up evaluating three basic options that apply to almost any decision regarding internationalization: grow (invest), defer (delay your decision), exit (disinvest). Suppose, for example, that uncertainty is high and that it is very costly to acquire meaningful information about an entrepreneurial possibility in a new market; if entering this market is only possible with a large and indivisible investment (perhaps because of economies of scale, as in the case of a large industrial plant or a logistics center), the value of the “defer” option increases. In the

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opposite case, however—where uncertainty is relatively low and the investment is divisible—a “growth” decision is called for. Interestingly, research has also confirmed that in times of economic downturn and high levels of macroeconomic uncertainty, multinationals are less likely to “exit,” that is, to disinvest from underperforming subsidiaries. In other words, uncertainty seems to keep growth options alive. The fourth factor is the cost of switching among different market entry options. A firm with subsidiaries in a large number of countries may shift resources and production capacities; a firm may enter a new market by sourcing from a nearby location or by outsourcing some activities on a sufficiently flexible contract. The question is whether your firm can afford the cost of switching among options and can manage its execution. To benefit from switching flexibility, you need to have made at least two parallel commitments to at least two different markets. Another prerequisite is that distances among markets—in terms of legal requirements, physical distances, time zones and other differences—are not so complex that they prevent you taking advantage of switching opportunities. Compared to a domestic firm, a multinational possesses a wider range of real options for growth. In response to changing legal, political, competitive or macroeconomic contexts, it may shift production, research centers or sales subsidiaries from one market to another (even profiting from fluctuations in exchange rates, if it has developed the capacity to manage these). Superior performance of multinationals compared to domestic firms can be achieved by the ability of managers to create conditions to propose more than one real option for each strategic internationalization decision, across international locations and within target markets. Numerous studies have confirmed that multinationals, in particular those present in more markets, tend to exercise their real options, for instance, by creating switching options among markets as a consequence of the fluctuations of exchange rates or changes in the political environment. Multinationals are unique in their ability to coordinate and transfer resources among international subsidiaries. A necessary condition for this is the ability to analyze and implement various real strategic options. Entering numerous joint ventures or subcontracting production in multiple locations will not automatically give you flexibility or protect you against various risks. If not properly managed, the creation of real options (that is, an increase in a firm’s flexibility) may only add to organizational complexity and coordination costs, making decision making more confusing and more drawn-out. If real options are not properly evaluated and implemented by a multinational, they may also bring increased exposure to risk.

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Real-options reasoning is quite complex, and its application has remained limited. It was adopted from the field of finance in the 1990s and was briefly popular in strategic decision making (including for international business). Managers and entrepreneurs were often unable to quantify probabilities and future economic outcomes of complex business decisions without making simplifying and overstretched assumptions, including about their competitors’ countermoves. In our view, learning how to create and implement real strategic options in international business decision making is no longer an “option.” More than two decades ago, Professors Buckley and Casson spoke about the end of the “golden age” of Western economic growth and the paramount need for firms to respond to increased external volatility by embracing flexibility, entrepreneurship, cooperation with other firms, and empowerment of subsidiaries and employees. In this light, strategic decision making becomes dynamic; instead of static analysis, it calls for modeling the evolution of the pros and cons of each decision. Research has confirmed the importance of aligning your chosen incremental commitment of resources to a new foreign market with the level of uncertainty of your expectations about it. A gradual entry to a new market or a gradual implementation of an adaptation decision allows you to learn. In turn, learning reduces your uncertainties about the new market. Learning may confirm or question the correctness of your adaptation decision. A gradual (not necessarily very slow!) entry leaves you ready to commit further resources and efforts (or to change your initial intentions). For example, analysis of investments in joint ventures has demonstrated that minority participations “may afford firms more valuable opportunities for future growth” (Tong, Reuer, & Peng, 2008). Each internationalization decision that we have described in this book needs to be considered from these four points of view: the level of uncertainty, the divisibility (and therefore reversibility) of the initial investment, the “expiration date” of the decision and the costs of switching to alternative solutions. Superior performance comes from considering more options for each strategic decision. The “classic” real options decision-making method allows the following strategic alternatives to be evaluated: invest in a certain foreign market, invest in stages, change operating scale, switch from one option to another, exit (disinvest) or downscale operations, wait and see (delay), or a combination of these. The expected performance for each option is assessed according to strategic goals ranging from economic performance to innovation potential (and it is important not to narrow down performance indicators to merely economic values).

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A combination of target market volatility and expected performance evaluation for each option may prompt particular market entry decisions, such as “invest now,” “maybe now,” “probably later,” “maybe later,” “probably never,” and “never invest.” The conclusions are only valid for a certain time, as market conditions will vary, as will the expected outcomes of our decisions. Strategic internationalization decisions are much more sophisticated than this one-dimensional array of “classic” real options might suggest. The really important questions of internationalization, most of them interwoven and mutually influencing, are about “how”—how to adapt our products, how to select people and how to define the governance structure of a new joint venture. According to Professors Kogut and Kulatilaka, firms consist of couplings of people and technologies through organizational design, and the evaluation of strategic real options should necessarily go beyond economic analysis. Research suggests that it is useful to reason in terms of qualitatively described real options (going beyond financial and economic modeling), as this can improve the quality of decision making on such topics as timing and scale of the configuration of a multinational, foreign market entry or exit, entry mode, and control or governance mechanisms inside a multinational. Before taking each strategically important and irreversible decision, you may make a virtue of the real-options approach. You will start by reasoning about the possibilities of scaling the implementation of your decision or about creating options—real options, different courses of action. It will make you ready to respond to environmental contingencies that may arise in the foreign markets you are targeting. In developing strategic real options, you can make use of the rules of military planning, which suggest postponing the development of alternative courses of action until the mission has been analyzed thoroughly. Before developing strategic real options, you will need to clarify the roles of the top management (a restricted team of people who define the strategic alternatives broadly) and the “field teams” (who develop the necessary operational details to ensure that the option is feasible and that resources are available for its execution). Early, and therefore particularly valuable, exposure of the vulnerabilities of the strategic alternatives and of any weakness in their hidden assumptions can be achieved by applying the so-called “crystal ball” technique. The decision-­ makers, after they have developed the strategic options and the implementation stages, look figuratively through a “crystal ball,” working on the assumption that some important elements of their plans will fail. The aim is to find the reasons for those failures. The result is a more complete, realistic and holistic picture of future actions and their implementation.

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The question that inevitably arises is whether the real-options approach to decision making in international business is too sophisticated and time-consuming. One alternative to the effort of predicting the future and describing it in real options is to adopt the logic of effectuation. When we use effectual logic, we base decisions and actions on our firm, who we are and who we know; when it comes to international markets, we make decisions only if we can afford to be wrong, and we commit resources only if we are prepared to lose them. We are committed to growth, we work relentlessly, but we use only resources that we can control or access through our partners. We avoid taking on risk that we aren’t ready for or can’t afford, and so there’s no longer any need for us to predict the future. Research suggests that predictive decision making (when we make decisions based on our best evaluation of future outcomes) is more common for decisions involving relatively large investments. The high quality of predictions—perhaps from using the real-options approach—gives a relatively reliable picture of the future for ourselves and for our competitive environment and allows successful decisions. In other words, it allows us, to some extent, to control the future. Here, too, the decision needs to be about “how”: “The use of predictive approaches to decision making about new venture investments ought to explicitly consider … how each opportunity is pursued, in addition to … which opportunity is pursued.” (Wiltbank, Stuart Read, Dew, & Sarasvathy, 2009). And yet in practice, international strategy decisions are far from being deliberately taken on the basis of rational evaluation of the facts. Strategy formulation gets diverted away from the analysis of strategic options by a number of forces, at the level both of the firm and of individual managers or entrepreneurs. Below, we discuss two broad types of forces that impact the quality of international strategy decisions: the type of strategy formulation process used and the cognitive biases of managers and entrepreneurs. Acknowledging the impact of these forces inside your firm will improve your proactiveness and the quality of your internationalization strategy decisions.

7.4 D  eliberateness of Strategic Decisions in International Business In international business, reversing a decision is costly. Tesco PLC’s (retailer, UK) withdrawal from the US market cost it approximately one billion GBP in after-tax profits. In some cases, internationalization decisions are not only costly but also irreversible, at least in the short term. Managers and

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entrepreneurs may therefore adopt a “wait-and-see” tactic, rather than pursuing growth opportunities in a market that is too uncertain for their maximum tolerable level of risk. What is the maximum tolerable risk in a global market? It seems clear that the answer to this question is subjective, in that it depends on how a particular decision-maker or group of decision-makers perceives the risk involved in a specific growth opportunity. Your propensity to risk will shape your opinions about each internationalization opportunity, its forecastable benefits, potential losses, threats and disadvantages. Rational reasoning and accurate analysis of facts are only part of what will influence your decision, given that certain facts will be unknown, unavailable or impossible to obtain. “Yes,” “no” or “let’s wait-and-see” approaches to important investment decisions in international business are strongly influenced by individual attitudes, which can be amplified and translated to the firm level. As Professors Henry Mintzberg and James Waters have noted, the strategy process inside a firm may fall at any point on the continuum between deliberate and emergent strategies (decided ad hoc for each emerging threat or opportunity). You may position your firm’s strategy among the variety of strategies described below: deliberate, emergent, planned, entrepreneurial, umbrella, process, unconnected, consensus, imposed, ideological strategies. Understanding the type of internationalization strategy your firm is following will help you to understand the pros and cons and may eventually remodel your decision-making process. Deliberate strategies. In deliberate strategies, the implemented strategy is exactly as intended, because (1) the strategic intentions were clearly articulated and sufficiently detailed, (2) they were shared by all members of the organization and (3) they were realized exactly as intended (i.e., the external environment was predictable and no external force interfered). Emergent strategies are the opposite of deliberate strategies, in that they are implemented, without any strategic intention, as a series of responses to the environment in which a firm operates. According to Professors Mintzberg and Waters, the spectrum of strategy typologies varies between deliberate and emergent, and includes the following. Planned strategies are those with clear and articulated intentions, set out in as much detail as possible in the form of budgets, schedules etc. Planned strategies are formulated as a result of analyzing future development trends in the environment. In many cases, planned strategies are not really discussed; instead, they are formulated as an extrapolation of existing visions or copied from an industry’s best practices. Planned strategies are important for organizations that need to dedicate a large and indivisible amount of resources to a certain project, as such decisions require careful analysis.

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In entrepreneurial strategies, the vision of a single leader is implemented without specifying articulated intentions. The alignment of the entire organization’s actions is made possible either by giving direct indications to personnel or because the entire organization is cooperative and willing to follow the leader. The entrepreneurial strategy is mainly deliberate, but it has some traits of emergent strategies. The details of the vision may emerge during its implementation, and the leader may decide to modify the vision as they go. The strategy formulation and implementation are not separated in plans or budgets. Professors Mintzberg and Waters note that many firms operate under a so-­ called “umbrella strategy.” If a leader is able to direct the actions of a firm’s managers and employees, the strategy is planned or entrepreneurial. If a leader has hardly any tools for influencing the execution of the intended strategy, the firm is using an emergent strategy. We find many firms operating somewhere between these two extremes. An umbrella strategy sets general guidelines of behavior—for instance, the type of projects a firm intends to execute or the intended product premium positioning—and the whole firm is allowed to move within those predetermined boundaries. Umbrella strategies are usually designed by leaders with partial control over their organizations, often because of the unpredictability and complexity of the business environment. To be able to function, a firm needs to grant its employees a certain degree of freedom, and the umbrella strategy is deliberately emergent. Intuitively, the main role of leaders is to convince managers and employees to follow the direction set by the umbrella strategy rather than to control its execution. Ideally, the umbrella strategy, together with the patterns within which everyone should operate, will also provide a sense of direction for the firm’s development. Like the umbrella strategy, the process strategy gives a high degree of discretional decision making to the firm’s managers and employees. Leaders define certain core processes, such as staffing principles or the amount of time to be dedicated to the development of new products, but they leave the strategy content to the discretion of managers and employees. Process strategies are typical for larger firms whose headquarters limit their interventions to the selection of business unit leaders and to the definition of key objectives and control procedures. An unconnected strategy is in operation when a business unit, a small part of an organization or even an individual employee—loosely connected to the rest of the organization—implements its own stream of actions in a certain direction. We can imagine an international subsidiary using its freedom by launching a new product or by experimenting with a new type of service. If

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these (possibly clandestine) strategies end up being successful, the whole organization may adopt them as a deliberate strategy. A consensus strategy may emerge from unconnected strategies: a firm is implementing a strategy converged from the mutual adjustment of actors involved. An imposed strategy originates in a firm’s environment: a firm’s behavior is dictated by external conditions; most of strategies are emergent as a response to external factors, even if some firms may manage to implement deliberately taken decisions. In an ideological strategy, all the members of an organization positively embrace and identify with its vision. The collective vision is often rooted in the past and is relatively immutable, in particular when compared to vision in entrepreneurial strategy. The interpretation of the vision might change, but not the wording itself. Changes in the environment are unlikely to prompt change to the strategy, as the purpose of ideological vision is often to shield the organization from the environment. For Professors Mintzberg and Waters, ideological strategies do not seem to be typical in for-profit organizations. The level of “deliberateness” of an internationalization strategy determines the possibilities of formulating and comparing, more or less rationally and analytically, the real strategic options for foreign market entry or foreign market selection. If your firm’s internationalization strategy is more emergent than deliberate, it is important to make sure either that the strategy process is deliberately defined (a process strategy), or that the strategy direction is clear and shared by all members of the organization (an umbrella strategy). You also need to determine whether your firm is capable of identifying opportunities, evaluating and managing threats, absorbing new skills and capabilities from the market and solving any issues that emerge during the execution of the strategy. Beyond the choice of strategy process, there is a further organizational complication at the level of deliberateness of strategic choices and their implementation: organizational inertia. Organizational myopia, the inability or unwillingness to see the necessity of change, may cause reluctance to introduce a deliberate strategy, even when it is necessary and the decision is supported by analysis and evidence. Researchers refer to organizational “hysteresis” (Greek for “delay”), where any input into the firm generates an output with a lag, and the lag depends partly on the input and partly on the firm’s history. In this connection, Professors Kogut and Kulatilaka cite multinationals that continued with their traditional approaches to managerial accounting regardless of drastic changes in the external environment, such as increased volatility in exchange rates. Managers are aware of organizational hysteresis, of the

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disruptiveness of any induced change to existing ways of operating, and of the unpredictability of the lag between the effort and the output. For these reasons, they may choose to postpone radical change.

7.5 C  ognitive Biases in International Strategy Processes Strategic decision making in international business is not immune to cognitive biases. When chances are missed to abandon a failed strategy or to halt a foreign market entry, this is often because of a number of factors in how organizations and humans “think.” These include overconfidence, superficial analysis of the early results of new initiatives in a foreign market (“false positives”), premature decisions to abandon a foreign market based on the first negative results (“false negatives”), inability to acknowledge that resources already invested in the project cannot be recovered and therefore should not influence future decisions (the logic of sunk costs), and fear of admitting failure. Cognitive biases particularly relevant for international businesses, and potentially dangerous in their influence on the reasoning of decision-makers, include availability bias, anchoring bias, representativeness bias, the gambler’s fallacy, focalism, impact bias, the planning fallacy, framing bias, confirmation bias, the endowment effect, overconfidence, and blind-spot bias. Availability bias. We tend to treat the information, data and events that first come to mind as the most significant, frequent or likely to happen. Imagine a decision about the allocation of time and effort among foreign locations by entrepreneurs. For reasons that may be unrelated to the business, one particular foreign market may come to mind first. This may influence decisions about field visits and how much attention to dedicate to exploring other opportunities, regardless of any factual evidence. Anchoring bias. Many decisions are made in an approximate way. We start from an “anchor,” a piece of information that we know for certain, and we use this to make more or less reasonable estimates in other related judgments. Imagine a decision about adapting a communication campaign for a product or a service. You might anchor your decision on what you know about consumer habits in your domestic market and then try to apply your best knowledge about cultural, technological and economic differences between the domestic market and the foreign market. But as we know from the frequency of product adaptation failures, this is unlikely to be sufficient. Take the reasoning that prompted Asian bike-sharing startups to enter the German

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market: Germany is the largest economy in mainland Europe, so there must be consumers there with considerable spending potential. In fact, a large number of households in Germany already own a bike, which significantly reduces their need to rent one. Representativeness bias. The frequency of a phenomenon or the fact that it is described favorably should not be allowed to influence our estimates about the outcome of each concrete case or decision. For example, several consecutive failed attempts to draw up an alliance agreement with potential partners in a foreign market does not increase the probability that the next negotiation will be a failure, too. Each negotiation has its own likelihood of success or failure according to the particular circumstances. The sum of past failures can teach us about the factors that influence the success or failure of alliance negotiations, but they cannot be used to predict the outcome of any particular negotiation. We are influenced and misled by the frequency of past events and their impact on our future actions. Research has confirmed that negative experiences in a foreign market, particularly when recent (the availability bias is also involved here), can lead firms to change entry modes, resulting in a deviated decision. Our judgments depart from rational thinking. Representative bias can also affect the way we describe a strategic option. If we describe a foreign market opportunity as “favorable” without enough evidence, if we are inclined to believe our industry’s current fashion of internationalization of “best practices,” or if we follow our competitors with a herd mentality rather than on the basis of analysis, we will find ourselves being unduly optimistic about our chances of success in a specific foreign market or about its attractiveness for our firm. The gambler’s fallacy involves thinking that the frequency of past events influences the probability of future events. Many gamblers believe in a “law” of tossing a coin: that after a certain number of “heads” a “tail” is inevitable. But this is not a law, as the gambler’s observations relate to only a small part of the coin-flipping sequence. In forecasting the evolution of foreign markets, we need to bear in mind that our observations about the past of those markets may be misleading. Focalism is an illusion about the impact and importance of a single piece of information when making evaluations or predictions. We discussed an example of this bias in our chapter dedicated to foreign market selection. Managers and entrepreneurs are subject to an illusion of focus when they decide, rightly or wrongly, to enter a foreign market on the basis of one event or factor. Examples include the “bandwagon effect” or “herd mentality,” where businesses merely imitate the decisions of their key competitors. Impact bias is probably one of the main reasons behind the fear of “failing fast” when necessary. Under its influence, we may overestimate the duration

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and intensity of future emotions in, for example, a decision to withdraw from a foreign market or to cancel a product line or an internationalization project. We fear that the negative halo effect of past failures will influence our organizational well-being—and it is important for an organization to create a culture (supported by procedures and rules) that includes a “right to fail” and a right to “test and fail,” in particular for decisions regarding complex environments such as foreign markets. The planning fallacy, or our natural tendency to underestimate the resources needed for a task, is one cause of difficulties in joint ventures and failure to integrate an acquired business in a foreign market. In our chapter dedicated to the entry mode decision and its implementation, we emphasized more than once the importance of estimating carefully the correct amount of resources and time commitment that a deal requires. In the second chapter of this book we discuss “engagement” basis of developing a global mindset in your firm— the need to acknowledge that internationalization will necessarily request time and energy from your firm’s management. The framing bias is the impact of wording on decisions (in addition to the effect of “favorable” or “unfavorable” that we discussed in connection with the representativeness bias). If we classify our international projects according to the level of economic and institutional development of each foreign location, we will implicitly attribute higher levels of volatility to projects in emerging markets. This framing bias can lead us to overestimate the growth opportunities in those markets, for instance, or to take too lightly the potential threats of sudden changes in legislation or demand characteristics. The confirmation bias reflects our tendency to search for confirmations of our initial assumptions. Confirmation bias may lead us to neglect or minimize evidence that we don’t like because it contradicts our assumptions. The scarcity of information about foreign markets necessarily leads us to make assumptions—about product choice or adaptation, market entry timing, entry modes, staffing policies. But when we evaluate our strategic options, we should ensure that we overcome the confirmation bias by searching for facts that both confirm and challenge our assumptions. The endowment effect makes us value an object more highly simply because we possess it. To avoid the “loss” of an object, its owners look for a much higher price than the market calls for. Psychologists have studied people’s emotional attachment to objects; we may transpose this idea to the emotional attachment in organizations to “old ways” of doing things, regardless of the outcomes. Together with the loss aversion bias, the endowment effect can keep an organization stuck in one place and lead, for example, to inefficient under-adaptation decisions.

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As Professors Pfeffer and Sutton observed, memory can be a substitute for thinking, even when clear evidence is available. As reasons for this, they cite conventional wisdom, incorrect assumptions about the antecedents needed for the conventional wisdoms to work (i.e. “best practices” that are no longer “best” because the conditions have changed), pressure to be consistent (consistency with the past and persistence being perceived as something positive), a strongly entrenched corporate culture, fear of questioning past decisions, fear of change, and fear of losing the company’s identity. It seems that when faced with ambiguity, we are likely to feel a need for “cognitive closure” and a “freeze on past knowledge.” (Pfeffer & Sutton, 2000) This is often the case when we reason about the future, unknown foreign markets or ambiguous data on new competitors. The need to freeze past solutions can be amplified as a deadline approaches, when we are under pressure, lack the energy to explore new solutions or feel that “cognitive closure” is valued by people we consider significant. For example, research has shown that firms who re-enter foreign markets tend to learn more from their past failures than from their past successes. In cases where the decision to exit was relatively positive (perhaps because of shifts in global priorities or centralized decisions about reallocation of resources), past experiences are less likely to be captured and used by firms in future decision making. Exporters, franchisors and licensors who re-enter tend to address foreign markets with the same level of commitment and with the same entry mode—it seems that the focus is on reducing uncertainty, with firms continuing to implement the entry modes that they “know.” As a result of this narrow reasoning by managers and entrepreneurs, there is only one real entry mode option—the one that didn’t work! The overconfidence bias, as we mentioned above, is a thread that runs through most decision-making biases, as we tend to overrate our abilities to think, evaluate, judge and choose. The overconfidence bias is also linked to the blind-spot bias, whose name comes from an experiment on the visual blind spot. Researchers proved that people were less likely to detect the blind-spot bias in themselves than in other people. We believe that each nation’s folklore contains at least one proverb about our tendency to indulge our own patterns of thinking. Blind-spot bias, which also applies to groups of people, may reduce the ability of headquarters to listen to their international subsidiaries, to delegate decisions, to build trust in international alliances or to make appropriate decisions about international staffing. International strategies may not be fully deliberate, and internationalization decisions may not be fully rational. It is only right to admit that managers and employees will occasionally (or repeatedly) make mistakes.

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Unfortunately, they may also make a series of important decisions that are strategically wrong and, unfortunately, irreversible. For some firms, decisions regarding international markets appear too complex, so they try to simplify them, avoiding different entry options and using only a few criteria for foreign market selection. This brings down the cost and the effort of the decision-­ making process, but it also increases the probability of bad decisions. Therefore, we agree with Professors Buckley and Casson about the centrality for international business theory of learning, and, we would add, practice, rather than flawless analysis of every single strategically important decision. In the remaining part of this chapter, we explore the concept of knowledge acquisition applied to international business.

7.6 Basis for Strategic Decisions: Knowledge Knowledge is at the heart of the competitive advantage of any internationalizing firm, from knowledge about market opportunities and risks related to foreign markets to knowledge that originates at headquarters and is then transformed into products and services that are commercialized in international markets. The effective ability to detect valuable knowledge, assimilate it and use it to a firm’s advantage is called absorptive capacity. Absorptive capacity includes subsidiaries acquiring knowledge from headquarters, headquarters acquiring knowledge from subsidiaries, and the whole firm acquiring external knowledge. A firm’s absorptive capacity depends on the extent and scope of existing layers of relevant knowledge inside the organization. Existing knowledge enables the firm to acquire new knowledge. On the other hand, existing knowledge may inhibit the search for new, innovative solutions. Researchers have observed the “paradox of technological capabilities,” when strong technological capacity constrains a firm’s search for new technologies, particularly in host countries. Absorptive capacity is more than the amount of knowledge in the possession of the firm and its employees, as employees who lack motivation are unlikely either to use existing knowledge fully or to acquire new knowledge. The role of human resources practices in building absorptive capacity, in both “learning” and “teaching” units, is crucial and involves training and competence appraisal, merit-based promotion, performance-based compensation and high-quality internal communication. In Chap. 8 of this book we discuss the importance of internally relocated expatriate managers in two-way knowledge transfer between headquarters and international subsidiaries. Some

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research in this area has gone beyond human resources practices. Professors Verbeke, Bachor and Nguyen found that procedural justice (defined as a decision that is not only subjectively just but also perceived as just by others) was the main determinant motivating managers of subsidiaries to implement new information and communication technologies according to directives from headquarters. Another important element that influences the degree of absorptive capacity of an internationalizing firm is the level of centralization. Centralized control demotivates local subsidiaries, whereas higher levels of autonomy motivate subsidiaries to innovate. We should not attribute lesser importance to the transfer of knowledge and ideas from subsidiaries to headquarters. Nevertheless, research suggests that headquarters tend to “trust” and be more accepting of knowledge generated by older subsidiaries, which further confirms the impact of the cognitive biases discussed above. In the chapters of this book dedicated to adaptation, organizational solutions and international staffing decisions, the topic of knowledge acquisition and learning has arisen more than once. In this chapter, we have examined various aspects of strategic decision making in the international context, finding that the starting point is the facts that we collect about our business and its external environment. If, as we argued earlier, strategic decision making in international business starts with understanding your business units and entrepreneurial formulas, the second important step—before any decision is taken—is to ensure that knowledge continues to flow and be absorbed inside your organization.

References Pfeffer, J., & Sutton, R. I. (2000). The knowing-doing gap: how smart companies turn knowledge into action. Boston, MA: Harvard Business School Publishing. Tong, T. W., Reuer, J. J., & Peng, M. W. (2008). International joint ventures and the value of growth options. The Academy of Management Journal, 51(5), 1014–1029. Wiltbank, R., Stuart Read, S., Dew, N., & Sarasvathy, S. D. (2009). Prediction and control under uncertainty: outcomes in angel investing. Journal of Business Venturing, 24(2), 116–133.

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Selected Bibliography Adner, R., & Levinthal, D. A. (2004). What is not a real option: considering boundaries for the application of real options to business strategy. The Academy of Management Review, 29(1), 74–85. Bartlett, C., & Ghoshal, S. (1990). Matrix management: not a structure, a frame of mind. Harvard Business Review, 68(4), 134–145. Bartlett, C. A., & Ghoshal, S. (1989). Managing across borders: the transnational solution. Boston, MA: Harvard Business School Press. Belderbos, R., Tong, T. W., & Wu, S. (2018). Multinational investment and the value of growth options: alignment of incremental strategy to environmental uncertainty. Strategic Management Journal, 40(1), 127–152. https://doi.org/10.1002/smj.2969 Buckley, P., & Casson, M. (2019). Decision-making in international business. Journal of International Business Studies, 50(8), 1424–1439. Buckley, P.  J., & Casson, M.  C. (1998). Models of the multinational enterprise. Journal of International Business Studies, 29(1), 21–44. Chi, T., Li, J., Trigeorgis, L. G., & Tsekrekos, A. E. (2019). Real options theory in international business. Journal of International Business Studies, 50(4), 525–553. Clarke, J. E., & Liesch, P. W. (2017). Wait-and-see strategy: risk management in the internationalization process model. Journal of International Business Studies, 48(8), 923–940. Coda, V. (1990). Il problema della valutazione della strategia. Economia and Management, 12(1), 12–25. Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: a new perspective on learning and innovation. Administrative Science Quarterly, 35(1), 128–152. Dobush, G. (2018). Shared bikes take over Berlin. Handelsblatt Today. Retrieved February 10, 2020 from https://global.handelsblatt.com/companies/ german-bike-sharing-berlin-ofo-mobike-918266 Driouchi, T., & Bennett, D.  J. (2011). Real options in multinational decision-­ making: managerial awareness and risk implications. Journal of World Business, 46(2), 205–219. Dunning, J. (2000). The eclectic paradigm as an envelope for economic and business theories of MNE activity. International Business Review, 9(2), 163–190. Ehrlinger, J., Readinger, W. O., & Kim, B. (2016). Decision-making and cognitive biases. In H. S. Friedman (Ed.), Encyclopedia of Mental Health (2nd ed., pp. 5–12). Philadelphia, PA: Elsevier. Elia, S., Larsen, M. M., & Piscitello, L. (2019). Entry mode deviation: a behavioral approach to internalization theory. Journal of International Business Studies, 50(8), 1359–1371. Feldman, E. R. (2020). Corporate strategy: past, present, future. Strategic Management Society, 1, 179–206.

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Ghemawat, P. (2007). Redefining global strategy: crossing borders in a world where differences still matter. Boston, MA: Harvard Business School Press. Kogut, B., & Kulatilaka, N. (1994). Operating flexibility, global manufacturing, and the option value of a multinational network. Management Science, 40(1), 123–139. Kogut, B., & Kulatilaka, N. (2001). Capabilities as real options. Organization Science, 12(6), 744–758. Kogut, B., & Kulatilaka, N. (2004). Response. Real options pricing and organizations: the contingent risks of extended theoretical domains. The Academy of Management Review, 29(1), 102–110. Ktena, A., Manasis, C. (2006). Preisach hysteresis modeling and applications. Proceedings of the 2006 IASME/WSEAS International Conference on Energy & Environmental Systems, Chalkida, Greece: 232–236. Leong, S. M., & Tan, C. T. (1989). Managing across borders: an empirical test of the Bartlett and Ghoshal organizational typology. Journal of International Business Studies, 24(3), 449–464. Luehrman, T.  A. (1998). Strategy as a portfolio of real options. Harvard Business Review, 76(5), 89–99. Miller, K.  D., & Reuer, J.  J. (1998). Asymmetric corporate exposures to foreign exchange rate changes. Strategic Management Journal, 19(12), 1183–1191. Minbaeva, D., Pedersen, T., Bjorkman, I., Fey, C. F., & Park, H. J. (2003). MNC knowledge transfer, subsidiary absorptive capacity, and HRM. Journal of International Business Studies, 34(6), 586–599. Mintzberg, H., & Waters, J.  A. (1985). Of strategies, deliberate and emergent. Strategic Management Journal, 6(3), 257–272. Rabbiosi, L., & Santangelo, G.  D. (2013). Parent company benefits from reverse knowledge transfer: the role of the liability of newness in MNEs. Journal of World Business, 48(1), 160–170. Reuer, J. J., & Leiblein, M. J. (2000). Downside risk implications of multinationality and international joint ventures. The Academy of Management Journal, 43(2), 203–214. Sarasvathy, S. D. (2001). Causation and effectuation: toward a theoretical shift from economic inevitability to entrepreneurial contingency. The Academy of Management Review, 26(2), 243–263. Schmitt, J., & Klein, G. (1999). A recognitional planning model. Proceedings of the 1999 Command and Control Research and Technology Symposium, Vol. 1, pp 510–521. Scopelliti, I., Morewedge, C.  K., McCormick, E., Min, H.  L., Lebrecht, S., & Kassam, K. S. (2015). Bias blind spot: structure, measurement, and consequences. Management Science, 61(10), 2468–2486. Song, J. (2014). Subsidiary absorptive capacity and knowledge transfer within multinational corporations. Journal of International Business Studies, 45(1), 73–84.

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Song, J., & Sinn, J. (2008). The paradox of technological capabilities: what determines the knowledge sourcing from overseas R&D operations. Journal of International Business Studies, 39(2), 291–303. Surdu, I., Kamel Mellahi, K., & Glaister, K. W. (2019). Once bitten, not necessarily shy? Determinants of foreign market re-entry commitment strategies. Journal of International Business Studies, 50(3), 393–422. Theodosiou, M., & Leonidou, L.  C. (2003). Standardization versus adaptation of international marketing strategy: an integrative assessment of the empirical research. International Business Review, 12(2), 141–171. Tong, T. W., & Reuer, J. J. (2007a). Real options in strategic management. Advances in Strategic Management, 24(1), 3–28. Tong, T.  W., & Reuer, J.  J. (2007b). Real options in multinational corporations: organizational challenges and risk implications. Journal of International Business Studies, 38(2), 215–230. Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: heuristics and biases. Science, 185(4157), 1124–1131. van Putten, A.  B., & MacMillan, I.  C. (2004). Making real options really work. Harvard Business Review, 82(12), 134–141. Verbeke, A., Bachor, V., & Nguyen, B. (2013). Procedural justice, not absorptive capacity, matters in multinational enterprise ICT transfers. Management International Review, 53(4), 535–554. Whitehurst, S. E. (2002). Reducing the fog of war: linking tactical war gaming to critical thinking. Fort Leavenworth, KS: Army Command and General Staff College.

8 Implementing Internationalization Strategy: The People Question

People, with their energy, enthusiasm, and skills, are the protagonists of your internationalization activity. A solid people management strategy is, therefore, key to success. The initial—and obvious—question you must ask yourself, is how will you staff your new territory. Will you send in managers from your domestic headquarters; use local talent; or bring in someone from an entirely unrelated third country? This final chapter outlines how to achieve balance and integration between these three groups. In particular, we discuss: (a) ethnocentric, polycentric, regiocentric, and geocentric (EPRG) approaches to managing the balance of local and domestic personnel in multinationals; (b) the role and human resources management (HRM) of expatriates; (c) the role and HRM of local personnel; (d) differences regarding people management in various cultures.

8.1 S  taffing Options: Expatriate Versus Local Managers This discussion of human resources management deals with two major factors: people’s skill (“can do”—their potential to perform an activity) and their motivation (“will do”—their willingness). Sometimes one will have a knock-on effect on the other. For example, training on cultural differences (skills) may spark an employee’s willingness to work with different cultures (motivation). Both of these aspects change significantly when an employee is uprooted to a new location to work with foreign clients, suppliers, and stakeholders. Skills required of an expatriate manager go way beyond proficiency in foreign languages. © The Author(s) 2020 O. E. Annushkina, A. Regazzo, The Art of Going Global, https://doi.org/10.1007/978-3-030-21044-1_8

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There are four types of global managerial roles—business manager, country manager, functional manager and corporate manager—each requiring a unique set of skills (Table 8.1). Deciding on the ideal candidate to fill each of these positions can be a question of “where from?” as much as “who?”. You can stick with a local manager, send in an expatriate manager from your domestic headquarters, or employ an expatriate manager from a third country. Let us start with expatriate managers, those that are parachuted in from a company’s domestic headquarters. Firms appoint managers from their country of origin to exercise control over subsidiaries and ensure companywide consistency. An expatriate manager is well placed to ensure the companywide integration of a subsidiary in terms of decisions, processes, resources, and culture. Appointing expatriate managers enables the creation of strong links between headquarters and subsidiaries. The deployment of expatriate managers into key decision making positions tends to occur if: • The internationalizing firm’s national culture is characterized by: –– a strong ‘power distance’, i.e. a culture in which it is universally accepted that high ranking staff members have the decision making authority (“the boss sets the rules”); low power distance societies, in contrast, view workers as equal and encourage collaborative decision making; –– assertiveness, i.e. a culture that values results over relationships, with a tendency to control, act opportunistically, and think of others as opportunists; • there is a need for integration (including cultural integration) and knowledge transfer between local subsidiaries and domestic headquarters; • there is a need for centralized decision making by the headquarters: • the internationalizing firm is taking its first steps in a foreign market, without significant previous experience; • the internationalizing firm is wary that staff in the local subsidiary might act in their own best interests rather than those of the global firm; • the subsidiary is strategically important; • the local subsidiary lacks local managers or employees with necessary skills; • associated costs of expatriates (which are usually higher compared to those of local employees) are lower compared to the expected benefits of expatriate staffing decisions;

Country manager

Objectives: • To ensure the right level of responsiveness of a multinational firm to a local market; • To ensure the local subsidiary’s contribution in terms of economic and competitive results, innovation, and corporate entrepreneurship; • To identify, develop, and leverage local resources (tangible, intangible, human) for the benefit of firms at the corporate level Core abilities: Core abilities: • Recognize opportunities in different • Detect and interpret local opportunities markets from one location; (local customers’ needs); • Recognize risks (business, currency • Detect and interpret local threats (changes fluctuations, political) in a different location; in local customers’ needs, local • Link people and resources within the firm government requirements, dealing with across various locations; counterattacks of local competitors); • Coordinate and synchronize activities across • Scan trends and build scenarios for the borders (including tangible and intangible local market development; flows of goods, components, resources, • Effectively communicate with data, decisions); headquarters and other peer country • Avoid substituting coordination with managers, also by acknowledging and authoritative control. dealing with the distances and • Involve and listen to “local” national ethnocentric attitudes and by instilling the managers and connect them to corporatesense of urgency when needed; level managers; • Contribute and define the firm’s global • Match competences with responsibilities strategy; (assigned to subsidiaries, functions, even • Negotiate; employees); • Lead; • Negotiate; • Select and motivate employees • Lead; • Select and motivate employees across borders

Objectives: • To ensure business-level (or product-level) efficiency across all subsidiaries or markets of a multinational firm

Business manager

(continued)

Core abilities: • Thorough understanding of the business, in both a broad sense (corporate strategy) and at functional, country, and business unit levels (competitive strategy); • Negotiate; • Lead; • Select and motivate high-potential employees across borders; • Handle diversity and “out-of-the box” thinking of high potentials

Core abilities: • Excellent functional skills allowing them to scan for innovation, ideas, talents across subsidiaries; • Transfer, disseminate and store knowledge and best practices; • “Innovation agents” for their functions, with knowledge and expertise facilitating and initiating innovation; • “Strategic intelligence”: scan trends across nations and build scenarios for their functions; • Create formal teams and informal networks; • Negotiate; • Lead; • Select and motivate employees

Corporate manager Objectives: • To lead the multinational firms to reach its strategic goals; • To recruit, train, and develop executives to create a pool of strong business, country, and functional managers

Objectives: • To ensure the contribution of their functions to the firm’s global competitiveness

Functional manager

Table 8.1  Four types of global managers (based on “What is a global manager?”, by Bartlett, C.A., Ghoshal, S)

Country manager

Examples of business decisions: – Which product or service features should be introduced to serve local customers while maintaining profitability? – Who should participate in the development team for the product or service adaptation? – Which functional strategies, at the local level, should be activated implement the firm’s corporate strategy?

Business manager

Examples of business decisions: – Drop or maintain local brands of the same product or service? – Standardize or adapt products or services to each different market? – Which product or service lines should be global, regional, or local? – How to organize a firm’s global industrial footprint (production facilities location and capacity saturation); – How to organize a firm’s global research and development footprint (in which location? Which products and services should be developed?)

Table 8.1  (continued) Examples of business decisions: – Will a certain product or service feature or functionality be appreciated by customers in other markets? Globally? – What should be the role and key responsibilities of the “central” corporate functional unit and of “local” functional units inside subsidiaries? – What should be the key socialization events/ opportunities for a function’s employees to be able to build informal networks and exchange knowledge?

Functional manager

Examples of business decisions: – Most of strategic decisions at corporate and business unit levels; – Hiring and firing of top executives (country, business and functional levels); – How to allocate resources among business units and countries?

Corporate manager

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• there is a need to train and rotate a cohort of international managers in various locations. In this case, the international assignment becomes a source of managerial development for the expatriate in question. For these types of companies, local managers work alongside the expatriate to compensate for the lack of knowledge about local rules, behavioral norms, and legislation. Expatriate managers, as well as local managers who have had the chance to work in the corporate headquarters, will allow you to create information and knowledge flow channels. Arm’s length interaction, such as emails, meetings, visits and telephone conversations, are simply not as effective as the real life social connections that an expatriate can bring. Expatriates create relationships and personal networks inside of a firm that are: 1. Well structured: they know more people, both in a company’s headquarters and its subsidiaries. This interpersonal interaction makes it possible to solve problems and address opportunities using a wide variety of the firm’s resources. 2. High in trust, where trust is defined as an expectation that a partner will not act in their own self-interest. We implicitly trust people more if know we have contacts in common. Staff in a subsidiary will trust their head office colleagues because the expatriate can personally vouch for them (and vice versa). This role of the expatriate as a ‘mutual contact’ facilitates the integration of resources and knowledge. 3. Genuine. One-to-one contact gives the expatriate first-hand experience of their foreign counterpart’s (often tacit) rules of conduct, rituals, linguistic quirks, and so on. Beware! The benefits of expatriate managers come at a price. According to some estimates, an average 3-year assignment costs 1 million USD.  This includes expenses for each stage of the expatriation process. Pre-expatriation expenses include: the selection process, a look-and-see trip for the new location, training and administration, moving costs, and replacing the expatriate’s previous role. Costs for the expatriation phase include: compensation and bonus for an international assignment, housing and other benefits, and training. There is also a cost associated with initial lower productivity while the expatriate adjusts to their new role. Finally, repatriation costs at the end of the contract include moving fees and assistance in finding a new role. There may also be a social cost to employing expatriates, that of internal organizational tension (Box 8.1).

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Box 8.1  Tensions Arising from the Cost of Expatriates: Case of TNK-BP Joint Venture (Vinogradova & Derbilova, 2013) Far from being the key reason for the conflict among TNK–BP joint venture partners, British Petroleum Plc (BP) and AAR (a consortium of Russian oligarchs), the cost of expatriates nevertheless caused significant internal organizational tensions. At one point, 300 Russian top and middle managers left the joint venture, citing difficulties of working with British expatriates under British organizational rules. The estimated cost of each expatriate manager was around 500,000 USD annually, which included salary, bonuses, and a compensation package covering transportation expenses, housing, and education for their children. Mr. Viktor Vekselberg, one of AAR’s partners, commented that “Bonuses and entitlement for expatriates has been one of the most hotly debated issues. Foreigners who come to Russia want to bring a piece of their own life here.” Russian managers complained that despite the generous pay package, expatriates from BP were reluctant to live outside of Moscow—unsurprisingly, the core operations of the Russian oil and gas company are located quite far away from the lavish Tverskaya Street.

Compensation disparity between local and expatriate managers is an issue that must be dealt with delicately. The “relative deprivation” felt by local employees when comparing compensation packages with a newly arrived expatriate may cause ill feelings. This naturally leads to difficulties with the expatriates’ adaptation and integration. There are four steps that you can take to mitigate this: • Local compensation: reward those local employees who work most closely with expatriates a higher remuneration than their peers. This recognizes their superior language and functional skills. • Perception: internally promote the role of expatriates as useful for the development of the firm, or even the country. • Empathy: promote an understanding that expatriates and their families face the challenge of being away from their home country, relatives, and friends. • Cultural training: ensure interpersonal sensitivity of expatriates towards local colleagues during daily interactions. The above should be taken into account when formulating human resources policies, including training and compensation. Striking the right balance between local and home-market managers and employees may have a variety of facets (Box 8.2).

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Box 8.2  Balance Between Local and Expatriate Managers (Perlmutter, 1969) Different approaches to the “balance” between local and expatriate managers are illustrated by the following quotes. Company A. “We are a multinational firm. We distribute our products in more than 100 countries. We manufacture in 17 countries and do research and development in three countries. We look at all new investment projects—both domestic and overseas—using exactly the same criteria.” The executive from Company A tells us that most of the key posts in Company A’s subsidiaries are held by home-country nationals. Company B: “We are a multinational firm. Only 1% of the personnel in our affiliate companies are non-nationals. Most of these are U.S. executives on temporary assignments. In all major markets, the affiliate’s managing director is of local nationality.” Company C. “We are a multinational firm… As our organizational chart shows, the United States is just one region on a par with Europe, Latin America, Africa, etc., in each product division.” Company D (non-American). “We are a multinational firm. We have at least 18 nationalities represented at our headquarters. Most senior executives speak at least two languages. About 30% of our staff at headquarters are foreigners.”

The EPRG (ethnocentric, polycentric, regiocentric and geocentric) framework provides you with four options as to how to organize your international business (Table 8.2). Many internationalizing firms start with an implicit or explicit ethnocentric approach, in which home-market managers are the center of the company. However, a side effect of this is that any manager or employee outside of this “ethnocentric group” circle risks being ignored, rejected, or perceived as inferior and weak. It is also sidelines valuable local knowledge of the new market. Conversely, some firms gain competitive advantage through an ethnocentric approach, due to a positive country-of-origin effect, for example if a product is “Made in Italy” or “Made in Germany”. External forces may prompt your company to adopt a geocentric or regiocentric approach. For example, if your clients expect customized products at competitive prices, you will need a combination of local adaptation and global efficiency. Another reason to adopt these approaches is to keep up with competitors who are increasingly recruiting the best talent from a global, rather than local, pool. Another approach is geocentrism. Firms might choose this:

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Table 8.2  Ethnocentric, polycentric, regiocentric, geocentric (EPRG) approaches by internationalizing firms Authority location

Ethnocentric

Polycentric

High in headquarters

Relatively low Main decisions are made in in headquarters regional headquarters Evaluation Evaluation standards are standards are determined determined regionally locally

Evaluation and Country-of-­ control origin standards applied for persons and performance Nationality of Identification Nationality of the host the “home” country company Develop Recruitment Key positions: people of and staffing people of the local “home” nationality country Information flow

High volumes towards subsidiaries

Little to and from subsidiaries (and between them)

Regiocentric

Geocentric Aim for collaborative approach Standards are both universal and local

Identification Global with the region identification High positions taken by regional managers Intense inside of a group of subsidiaries located in countries perceived as similar to each other

Develop most suitable people for key positions globally Both ways and between subsidiaries

• To avoid the waste, duplicated functions, and locked-in synergies found in polycentric organizations. • To avoid the low morale in subsidiaries of ethnocentric organizations. • To hire the best talent regardless of nationality. The geocentrist and regiocentrist approaches are not without their challenges. Nationalism, for example, can drive distrust of foreigners by employees of local subsidiaries. Linguistic problems and lack of international experience by local staff can also cause problems. The correct choice of EPRG orientation for your company depends on a variety of objective factors: • Your firm’s size: smaller firms may tend to be more ethnocentric. • Your experience in global markets: for beginners, the ethnocentric approach seems to be the least risky.

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• The product adaptation strategy: Have you chosen to take into account local preferences? • Target market legislation: do you have to adhere to local technical, environmental, and other standards? Is it obligatory to operate via a local partner or local distributor? • The importance of country-of-origin effect on competitive strategy. Is the firm’s product or service recognized as superior because of the firm’s country of origin? The type of approach (with logical consequences for staffing decisions) may vary among different business units, product categories, and functional areas of the same firm. For example, an ethnocentric research and development department may cohabitate with a polycentric sales, and geocentric marketing function within one business unit. We would like to illustrate the evolution of the role of local employees and expatriate with the example of Saipem SpA, an Italian firm specializing in engineering and drilling activities and the development of major construction projects in energy and infrastructure. Initially, Saipem SpA mainly worked as a subcontractor or as a partner in joint ventures with larger international contractors. At the time, Saipem’s organizational structure was highly centralized. Its Milan headquarters was home to the firm’s top and operational management teams and the majority of its overall workforce, including most of the operating personnel. For overseas projects, large teams from headquarters would swarm into these outposts and local yards, returning to Milan when the project was over. SAIPEM would temporarily deploy a massive task force of workers directly to the project location by using a network of international satellite companies that were either lightly staffed or propped up by blue collar workers. Organization was no longer fit to serve SAIPEM’s global ambitions: firm needed to create an organization capable of end-to-end project delivery including design and technical solutions, procurement and construction, all over the world (Box 8.3). SAIPEM’s organizational changes described in Box 8.3. created new horizontal and vertical career development opportunities, for employees that were traditionally based in its Milan headquarters as well as for newcomers. The organizational change build solid ground for the implementation of SAIPEM’s ambitious internationalization strategy and prepared the firm for future growth. A new generation of internationally minded, highly operational managers became key to the firm’s success.

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Box 8.3  Saipem’s Balance of Local Versus Expatriate Employees When management and shareholders decided to turn SAIPEM as global, fully integrated engineering, procurement and construction contractor, their first step was to acquire or develop the full spectrum of knowledge and geographical reach, filling the gaps in its skillset and reinforcing its global reach with own local branches. Then, the group’s satellite companies were transformed into semi-permanent “local competence” outposts, employing a mixture of highly skilled Saipem management specialists, temporary specialist project workers, and a limited number of permanent local resources: 1. it moved its ‘SWAT’ teams of highly specialized full-time employees, e.g. lawyers or cost controllers, are transferred to different project locations, as and when needed. These are also ambassadors of SAIPEM’s culture across its international subsidiaries, sharing companywide best practice and processes; 2. Temporary workers were hired depending on projects’ specificities. For example, highly-skilled “frogmen”, capable of working in harsh environments, could be enlisted for off-shore drilling operations in the Nordics. These are offered significant remuneration, due to their specialist skills. 3. a few permanent local resources allow Saipem, to swiftly and rapidly handle bidding, project setup and management processes at a local level. These three groups replaced the large amount of employees that used to descend from head office, with a lean efficient team tailored to each project. Highly capable, yet lean, management team has then been able to instill Saipem’s business values into every local project, creating a unified global approach, as well as attract international professional and managers.

8.2 Management of Expatriates Whichever of the EPRG approaches you decide on, you will need, at some point, to deploy managers from your domestic headquarters to your new foreign subsidiaries. Expatriate managers will align foreign subsidiaries to your firm’s overall strategy through two major mechanisms: bureaucratic control via formally defined performance goals, and cultural control via shared values and people’s commitment to the organization. The selection and subsequent management of expatriate staff is, therefore, one of the most important things to get right.

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8.2.1 Selection of Expatriates Prior international experience might seem an obvious tick box when selecting an expatriate manager, but things are not that simple. While international experience is important, each expatriate assignment is unique. Whereas, experience in the particular geography for which the candidate is being assessed is relevant to their chances of success, other international assignments serve only as indicators of a person’s experience in relocation. A candidate’s personal character traits are a better indicator of how well they are likely to adjust as an expatriate. High on the list is self-efficacy, a candidate’s belief that they are able to successfully complete a specific task or manage interpersonal relationships. Willingness to communicate, cultural flexibility, and social skills also play a crucial role in adapting to new conditions. Competences of an expatriate that indicate their ability to adjust to a new cross-cultural context fall into three categories: 1. Self-maintenance—their ability to manage stress, deal with obstacles, and remain calm in stressful situations. They must have high self-confidence, a good level of self-efficacy (explained above), and optimism. 2. Relationship building—their willingness and capability to establish and nurture interpersonal relationships (people with good cross-cultural relationship skills are often extraverts). They must be able to deal with different communication styles, social customs, and miscommunication events. They must be empathetic, cooperative, likeable, altruistic, and socially sensitive. 3. Perceptual competency—their capacity to understand why culturally different people behave in a certain way. They must have a willingness to correct any wrong opinions they hold about another person’s behavior once more information becomes available. They must be able to act without dogmatism and ethnocentricity. The assessment criteria for an expatriate candidate should also match the eventual requirements of the future location and business context: an environment requiring a high degree of interpersonal skills may penalize an action-oriented or analytical expatriate manager. A successful manager in one location runs the risk of underperforming if they are transferred to a different location.

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Language skills are also an important criterion; even people with basic skills in the local language may be able to avoid unnecessary conflicts that arise from meanings being “lost in translation”.

8.2.2 Adjustment of Expatriates Expatriate managers have to deal with new business contexts and find a way to adjust their personal lives to adapt to the different cultural standards, climate, level of economic development, legislation, technology, and infrastructure in their host country. Learning to adapt—by observing new attitude systems, practicing them, and analyzing the consequential feedback they receive—brings work satisfaction. Expatriates feel more gratified if they agree with key managerial attitudes expected of them by local colleagues. Adjustment of an expatriate is a two-sided story: they must learn how to perform a new role in their new country, while grappling with the psychological challenges of adjusting to a new culture. The willingness of managers to accept an expatriate assignment is often strongly influenced by the cultural proximity of the reallocation country. Paradoxically, successful adjustment to the local context, or “going native,” produces its own set of problems for an expatriate. They may struggle with: 1. The realization that the cultural stereotypes on which they have been trained do not always apply. For example, they might have been taught that local employees will be “overfriendly”, only to find that in reality they are treated as an outsider. 2. A reluctance to use all the organizational power they have through fear of not fitting in. 3. Identifying with local culture, while maintaining their children’s national identity. 4. Expatriates may find a discrepancy between their firm’s stated global values and those actually practiced in its international locations. For example, the global positioning of a firm might be as a “people-oriented company”, yet this is not the case at a local level. 5. A conflict in loyalties between their host country and the headquarters, where the goals of both differ. 6. Discomfort at the treatment/exploitation of the host country and its employees by the multinational firm.

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The role of the headquarters, in particular of those responsible for expatriate staff, is to deal with the challenge of adjustment by providing: 1. Cross-cultural training for every new assignment, both pre-arrival and post-arrival (the latter may serve also to facilitate the whole transition process). 2. Language training. 3. General assistance for the expatriate and their family in adapting to the local culture. 4. An alignment of the goals and expectations of the headquarters and its subsidiaries. 5. Clarity of the expatriate’s role. 6. Education to headquarters about the needs of local subsidiaries. 7. Consistency, by avoiding assigning expatriates to unfamiliar roles in new locations (the role novelty may generate further complexity and reduce the possibilities of adjustment). 8. Decision autonomy for the expatriate, if it does not conflict with the firm’s goals. 9. Support with logistics for relocation of the expatriate’s family. 10. Social support for the expatriate and their family (helping relationships for the adjustment period) from supervisors and coworkers. 11. Empathy regarding the possible negative influence of an excessive workload, frequent travel, and unfavorable physical environment in which the expatriate has to work. 12. Mentors, in particular managers working in the host country. Experience in similar countries does have a positive effect on expatriates’ adaptation to a new workplace context, whereas their general adjustment to a new location seems to start from scratch every time—each expatriate assignment is unique (for both the firm and the employee).

8.2.3 Family Support to Expatriates Support from the family and the ability of a spouse to adapt to a new environment are crucial for a relocated manager’s emotional wellbeing and success at work. The biggest worries for expatriates fall into three groups: 1. Personal issues (family relationships, work/life balance, impact on real income, and disruption to trailing spouse’s career).

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2. New position issues (position requirements, new organizational culture, performance appraisals, adequacy of training, and competences to fulfill the position). 3. Environmental issues (differences between the home country and new host country environment). Expatriate managers define the support and positive attitude they receive from their spouse as the key factor for their success in an overseas assignment. Family is just one of the three pillars that may ensure an expatriate’s successful adjustment to a new posting. The other two are their own personal skills and the support they receive from the firm. While these three areas can also generate demands, if managed successfully during the transition period, they may have a positive knock-on effect on one another. For example, if an expatriate’s family adjusts well, the expatriate is more likely to perform at work. Though firms may have a clear expatriation strategy for their managers, they often neglect the wellbeing of the expatriate’s family, outside of basic organizational and logistical support for the relocation. By moving to a different country, an expatriate manager and his or her family lose support and social ties with family and friends. Children between three and five years old perceive relocation as punishment, while adolescents between 14 and 16 suffer from the loss of their own circle of friends. Firms with a strategic approach to the administration of expatriate managers adopt a broader perspective. This includes the management of the spouse’s professional career, which is important for their income, identity, and self-esteem. Firms also need to deal with the issue of social isolation of relocating spouses, assisting them with the creation of interpersonal networks, particularly in countries with small and relatively uninfluential expatriate communities that cannot provide a newly arrived spouse with any significant support. Some studies have demonstrated that deficiencies in spouses’ social lives and children’s education are core problems within expatriate families, which can lead to alienation and family breakup. During the relocation and adjustment period, it is good practice for the firm to organize direct contact between the spouse and the relocation support office, to facilitate the adjustment of the entire family.

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8.2.4 Evaluation of Expatriates Performance When considering the organizational and economic cost of expatriates, it is important to periodically evaluate their performance. Evaluating an expatriate’s effectiveness is challenging, as evaluators from headquarters have only limited possibilities to directly observe the expatriate’s behavior. To address this, firms can take into account the opinions of local subordinates, along with self-assessment reports, in which expatriates evaluate themselves and are asked to provide examples of certain behaviors. The performance of an expatriate on an assignment should be measured in line with the assignment’s goals (as discussed above). If a firm expects that the expatriate will help it to exercise a certain level of control over a foreign subsidiary, their success can be measured, in terms of the expatriate’s ability to influence local colleagues, organizations, processes, and organizational culture. If the main reason for the international assignment is the managerial development of the expatriate, the firm can measure their performances in terms of personal changes, while also taking into account the achievement of organizational objectives.

8.2.5 Repatriation of Expatriates Regardless of the attention paid to selecting and preparing expatriate managers, their failure rates remain high: circa one-third of expatriate managers return before the end of their contract. The repatriation of staff requires the management of two processes: their readjustment to headquarters, and the progression of their careers. Managers and employees returning from an overseas assignment must reintegrate themselves into the company headquarters. Adaptation to the culture of their foreign posting means that they are likely to have given up some of their original values and customs. Repatriation creates a situation in which the employee returns to their home country and finds himself or herself detached from its culture, leading to so-called “reverse culture shock”. Managers accept international assignments to accelerate their careers. However, organizations are not always transparent about the impact of the international assignment on the manager’s career. The success of an employee’s career upon repatriation is not automatic, and depends directly on how well they adjust to their return home (and the assistance that they are given). If an expatriate is able to demonstrate high job performance almost immediately after the return to headquarters, the chances of promotion increase.

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Difficulties with repatriation are indicated by the high turnover rate of returned expatriates (circa 20–50% leave within the first two years of their return). To successfully manage the return of expatriates, you may consider: 1. Providing clarity about post-return career development (circa one-third of expatriates lament the lack of clarity about clear repatriation policies and pre-planning of repatriation). 2. Discussing with the expatriate the impact of the international assignment on his or her personal development (on top of career development), e.g. what personal skills and capabilities does the expatriate expect to have developed by the end of the international assignment? 3. Providing tools for expatriates to maintain direct relationships with key decision makers in the headquarters (as eventual restructuring or reorganization may interrupt their links to the organization in the country of origin). 4. Providing repatriation assistance (comprising both practical assistance with logistics, and training programs, before or immediately after return); 5. Providing the expatriate with high role discretion upon return, at least for the adjustment period, allowing them to focus on achieving results rather than focusing on “how and when things are done”—the latter may generate a significant amount of stress as the returnee needs time to relearn the organizational rules back home. Retention of returned expatriates is beneficial for firms wishing to attract other talent willing to relocate and work globally. Expatriates, as discussed above, are an important organizational source of knowledge and social capital, providing formal and informal high-quality social connections with overseas subsidiaries.

8.3 Management of Local Personnel The gradual evolution of the role of local subsidiaries (Box 8.4) will result in the development of, and broader responsibilities for, local personnel. Localization—gradual substitution of expatriate managers with local employees—may pass through intermediate steps such as short term, commuter, or virtual assignments, allowing for the temporary presence of an expatriate manager in a foreign location. Localization occurs for two major reasons:

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Box 8.4  Evolution of Subsidiaries in Ely Lilly and Company and Responsibilities for Local Personnel (based on Malnight, 1995) Ely Lilly and Company operates in discovery, development, manufacturing, and marketing of pharmaceuticals for humans (endocrinology, neuroscience, oncology, immunology, and cardiovascular areas of business) and health products for animals. In 2017, its revenues were 22.9 bn USD. Eli Lilly has manufacturing activities in 16 countries and sales in 125 countries. In the past several decades, its international subsidiaries evolved through four phases, termed appendage, participation, contribution, and integration. Appendage. In early 1980s, Eli Lilly’s subsidiaries outside of the USA limited their activities to support local sales and “formulation, fill and finish” activities for manufacturing. Discovery and research, clinical trials, production of core ingredients, and global marketing strategy were carried out by the headquarters. Participation. In 1983, Eli Lilly established a new organizational unit with the objective of building clinical trial facilities at major subsidiaries to boost international sales. In the late 1980s, it started delegating strategic marketing activities to major subsidiaries. The focus was on local responsiveness and building local experience. Contribution. Subsidiaries started using their expanded resources and knowledge to contribute to global operations. Eli Lilly started using cross-border exchanges as an alternative to duplicating resources for each market. Clinical trial activities started meeting worldwide standards and could be used in an integrated way. Eli Lilly’s marketing organization started its transition towards an integrated matrix. The authority was allocated according to the impact of the decision—local, regional, or global. Meetings, transfer of staff, and global information exchange systems facilitated horizontal linkages among subsidiaries. Integration. Eli Lilly became a single, integrated “geocentric” organization by building links among subsidiaries and headquarters by diffusing common policies and guidelines, and using global coordinating teams and committees. Experience and capabilities of subsidiaries increased and exchanges among them and with headquarters expanded.

1. Local employees have better knowledge of the local market environment (comprising relationships not only with customers but with all major stakeholders, including local employees, business partners, suppliers, trade unions, banks, authorities, and so on). 2. Local employees have better local networking links and are in a better position to build them. Moreover, localization can help your firm to build a positive image with the local community. Successful localization goes hand-in-hand with the increasing autonomy of a foreign subsidiary and changes the role of the local human resources department. The localization process starts with the commitment of a firm’s top management both at headquarter and local subsidiary level. The

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local human resources department, with top management support, starts a series of initiatives aimed at the implementation of localization: 1 . Selecting expatriate managers willing to grow local replacement talent. 2. Developing incentives for localization and implementing appraisal systems and incentives aimed at localization. 3. Selecting, training, and retaining local managers. Local managers may be more loyal to their local subsidiary of origin than to the whole firm. There is a risk that they may pay lip service to the global firm, without going the extra mile. To manage the risk of local managers thinking of themselves as primarily “local,” you may take into consideration the need to: • Show support and appreciation for the manager’s work at both local and headquarter levels. • Provide the manager with global career opportunities. • Assure the manager that there is no nationality barrier to career advancement inside of the organization (geocentric approach). • Contribute to creation of good working relationships among “local” and “global” colleagues. • Link personal success of local managers to the success of the local subsidiary and of the whole firm. The local human resource department of your international firm should take into account local legal systems regarding employee rights, including the role of work councils and trade unions, hiring and compensation, termination of employment contracts, and reductions in workforce. They must also observe immigration and fiscal legislation, protection of privacy, anti-­ discrimination rules, safety standards, non-competition clauses and eventual extensions of home country legislation to foreign subsidiaries. Many firms have developed specific local human resources policies aimed at the empowerment and integration of local managers and employees (Table 8.3). Local managers can bring value to your internationalizing firm by contributing to the adaptation of centrally developed strategy and policy regarding the conditions of a firm’s foreign subsidiaries. Local managers can be hired (temporarily or permanently) by the headquarters—a process called “impatriation.” This is not only motivating for the staff in question, but allows them to contribute a local perspective to a

Role of local ∙ Communication and employees relationships with government and local authorities (therefore, many top managerial positions); ∙  Managerial positions implying interaction with local personnel (for instance, HRM); ∙  “Change agents” for former state-managed assets (for instance, in power generation) – young managers also hired from other sectors Integration ∙ International mobility (temporary assignments at of local headquarters, from 6 months to managers 3 years); ∙  Coaching by expatriate managers; ∙  Dealing with the language barrier, in particular for “technical” employees

ENEL S.p.A.

∙ International mobility (temporary assignments and training at the headquarters); ∙  Coaching by expatriate managers (also expatriate managers on short temporary assignments) working with clear objectives to ensure localization (gradual substitution of expatriate managers with local employees); ∙  Training aimed at localization; ∙  Dealing with language barriers (language skills are among the first selection criteria for local personnel); searching for Italian managers who speak Russian ∙  Successful localization in Russia allowed Indesit to replicate its best practices in other subsidiaries (for example, in Poland)

∙ International mobility (temporary assignments and training at headquarters); ∙  Coaching by expatriate managers (also expatriate managers on short temporary assignments); ∙  Dealing with language barriers (language skills are among the first selection criteria for local personnel); searching for Italian managers who speak Russian

(continued)

∙ Most top-middle managerial positions except for country manager, CFO, COO, and some key positions for the integration with headquarters (e.g., logistics and procurement)

Indesit Company S.p.A. (part of Whirlpool Corporation since 2014)

∙ All key positions (with the exception of roles guaranteeing supervision, control, and integration with the rest of the firm); ∙  Russian CEO worked in strict contact with an expatriate technical director who was chairman of the supervisory board

Freudenberg Politex S.r.l.

Table 8.3  Examples of local human resources policies of Italian multinationals operating in Russia (Annushkina & Casalaina, 2010)

Motivation of local personnel

Freudenberg Politex S.r.l.

∙ Compensation for managers and ∙ Compensation: partly variable, linked to personal objectives (comprising economic employees of support functions: indicators, measures of productivity, partly variable, management by completion of projects, good management personal objectives (MBO); practices); compensation for blue-collar ∙  Training and temporary assignments at workers is fixed and includes headquarters three-month bonuses according to the collective agreements with trade unions; ∙  Training and temporary assignments at headquarters

ENEL S.p.A.

Table 8.3 (continued)

∙ Compensation: partly variable, linked to personal objectives; ∙  Training and temporary assignments at headquarters

Indesit Company S.p.A. (part of Whirlpool Corporation since 2014)

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company’s foreign expansion policy. Most importantly, impatriation creates a valuable and permanent link between the headquarters and subsidiaries, helping the internationalizing firm to become more multicultural.

8.4 People Management in Different Cultures Local cultures, may provide obstacles—or, on the contrary, unexpected help—to the implementation of a globally standardized people management policy, as demonstrated by the results of a Globe survey (Table 8.4). For example, in Russia—a culture with a high power distance—managers (particularly older generations) might find it difficult to delegate authority and take part in participative managerial practices. They may perceive Table 8.4  Local leadership styles according to Globe survey clusters Cluster

Leadership style

“Anglo” Australia, Canada, England, Ireland, New Zealand, South Africa, USA “Latin Europe” France, Israel, Italy, Portugal, Spain, Switzerland “Nordic Europe” Denmark, Finland, Sweden

performance orientation, competitiveness, individualism, assertiveness, future orientation high level of hierarchy, low gender egalitarianism, relatively low level of collectivism rules and procedures to reduce uncertainty, loyalty, egalitarianism, group loyalty, low assertiveness, low level of hierarchy hierarchical, in-group collectivism, loyalty to family and organizations, acceptance of inequality charismatic, participative, and team-oriented visionary and inspirational leaders with integrity, administrative and interpersonal skills, also capable of independent thought and action high level of hierarchy, relatively high level of collectivism, pride and loyalty to organizations and family

“Eastern Europe” Albania, Georgia, Greece, Hungary, Kazakhstan, Poland, Russia, Slovenia “Germanic Europe” Austria, Germany, Netherlands, Switzerland

“Latin America” Argentina, Bolivia, Brazil, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Venezuela “Sub-Saharan Africa” Namibia, Nigeria, South Africa, Zambia, Zimbabwe “Southern Asia” India, Indonesia, Iran, Malaysia, Philippines, Thailand “Confucian Asia” China, Hong Kong, Japan, Singapore, South Korea, Taiwan

authority, power differentials, status privileges, social inequality, low egalitarianism and high collectivism high level of collectivism, human orientation, and hierarchy high level of performance orientation, hierarchy, and collectivism; low scores of gender egalitarianism

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delegation of authority and sharing of information as a loss of control. At the other end of the scale, more lowly employees may not be that eager to have more responsibilities, or even to ask questions to clarify their tasks. Different cultures accept and expect different management styles ranging from a paternalistic dictator to a facilitating and friendly coach. For instance, a leader in the U.S., according to the results of the Globe survey, is expected to be charismatic, team and people oriented, and participative, whereas the primary characteristic for Japanese leaders is self-protection—the ability to ensure safety and security for an individual or a group through status enhancement and face saving. In China, leaders practice in-group collectivism, and while being quite independent and face saving, are also supportive, considerate, compassionate, and generous. While German leaders are characterized as supportive, considerate, compassionate, and generous, both German and French leaders involve others in making decisions.

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Conclusion

This book is for you—managers and entrepreneurs whose life objectives go beyond self-interest and who are aware of their decisive roles in society and in people’s lives. Our aim has been to assist you in your decision-making routines as professionals taking businesses to global markets. We strongly believe that professionalism is a commitment to continuous learning and excellence in the quality of decisions. Throughout this book we have discussed both the content of decisions and the decision-making process. For each pivotal choice in internationalization strategy, we have listed the factors influencing the decision and discussed decision-making criteria. Whenever you need to define the next step in your firm’s internationalization journey, you can use these factors and decision-making criteria as checklists for discussions with your colleagues and partners. Our analysis of the major factors that influence decision making warns about the potential pitfalls in the process, and the cognitive biases and imperfections that may be in play at both the individual and organizational levels. We are aware that improving the decision-­ making processes is a complex matter that goes beyond the fine-tuning of one single decision. This complexity means that you may need to return more than once to the sections of our book dedicated to specific parts of the process. In this book, we have been careful to avoid fashionable managerial buzzwords. We have also avoided generic discussions of “best practices” and “best in industry” cases. You may have noticed that the cases and examples used in this book illustrate one managerial dilemma at a time.

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182 Conclusion

We fully agree with Henry Mintzberg, who described a typical strategy process as an interaction between blind people and an elephant: Each person is touching one small part of this huge animal, but no one has any idea about the rest. This metaphor is the underlying idea of our recipe book on internationalization; we have guided you around key single parts of the elephant, one decision at a time. Now it is your turn, for your firm or start-up project, to put your vision of the elephant parts together, review them and focus on the most important one, while keeping in mind the whole picture. Our first two chapters, which discuss the international strategy control panel and the empathy-ethics-­ engagement approach to building a global mindset, will help you in this complex task. As a final word, we would like to share with you our teaching and consulting priorities for the future. We strongly believe in the potential of real options for internationalization decisions, whether they concern foreign market selection, adaptation, entry mode or organization. Olga has enhanced her internationalization and scenario-planning workshops with a “decision-making workout” dedicated to real options and the “crystal ball technique” we have described in this book. The most difficult point is to decide which businesses you operate in, she says, and the rest of the analysis will follow smoothly. In her research, Olga has also set out to discover more nascent heterarchical multinationals that defy the logic of hierarchies, organizational matrices and formal networks and that bring out the real protagonists of businesses—people. Alberto’s mantra—defining the “investment thesis”—also requires a clear understanding of your business (from its clear definition to the operating model), to allow you to take the appropriate decision of where and when it might be scalable, and at which conditions—model adaptations, financial resources and people. Most importantly, in our professional practices we will continue our relentless commitment to promoting fact- and analysis-based decision making in management, regardless of the unpredictability of the global context.

Index of Companies

A

C

Airbus, 6 aerospace, 6 Alfa-Access-Renova group (AAR), 88, 89, 99, 160 oil and gas, 88 Alibaba Group, 9, 124, 125 cloud computing, 9 conglomerate, 9 digital technology, 124 online commerce, 9 social media, 9 Ausimont, 6 specialty chemicals, 6

Carlyle, 68 private equity, 68 CATL, 4 batteries for electric vehicles, 4 China National Offshore Oil Corporation (CNOOC), 8 oil and gas, 8 Culinaryon, 4 cooking school, 4 D

B

Bhatia International, 98 mining, 98 Boeing, 6 aerospace, 6 British Petroleum, 88, 160 oil and gas, 88 Brunello Cucinelli luxury apparel, 9 Made in Italy, 9 Bulk Trading, 98

Dallara Automobile premium car, 46, 47 racing cars, 50 Danone, 42, 98 food, 42 Daylight Energy, 8 shale gas, 8 Dow Chemical Company, 97 chemicals, 97 Draka, 119, 120 cables, 119, 120

© The Author(s) 2020 O. E. Annushkina, A. Regazzo, The Art of Going Global, https://doi.org/10.1007/978-3-030-21044-1

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184 

Index of Companies

E

Eli Lilly and Company, 171 pharmaceuticals, 171 ENEL S.p.A. oil and gas, 173–174 F

Fiat Chrysler Automobiles N.V., 5 automotive, 5 Freudenberg Politex S.r.l. nonwoven materials, 173–174 G

General Electric, 126–127 conglomerate, 125–128 General Motors, 6 automotive, 6 Google, 5 digital technology, 5 Green Wise, 52, 53 floral, landscape and interior design, 52 Gromart s.r.l., 88, 89, 95 ice cream, 88 H

Haier household appliances, 69 retailer, 69 Heineken, 60 beer, 60 Huawei Technologies consumer electronics, 5 telecommunications, 5

Indesit Company S.p.A. home appliances, 173–174 Industrial and Commercial Bank of China, 6 financial services, 6 IRCA, 67, 68 food ingredient, 67, 68 J

Jollibee Foods Corporation fast food chain, 14 K

Kaspersky Lab, 73, 74 software producer, 73 L

Luxottica, 6 eyewear, 6 M

Mahindra & Mahindra agricultural equipment, 7 car, 7 McDonald’s, 49 fast food chain, 49 Media Nusantara Corp, 98 media, 99 Metro Group food, 61 wholesale trade, 61 N

I

ICM, 121–123 building and construction, 121 Ikea furniture, 5, 46, 49 retailer, 5

Netflix, 73, 74 media and entertainment company, 73 Nexen natural resources, 8 oil and gas, 8 shale oil and gas, 8

  Index of Companies 

Petrochemical Industries Co., 97 chemicals, 97 Pioneer Natural Resources Company, 8 chemicals, 8 Prysmian, 119, 120 cables, 119, 120

Sinopec, 8 oil and gas, 8 Solvay Group, 6 advanced materials, 6 Standard Bank, 6 financial services, 6 Starbucks, 49–51 coffee chain, 49

Q

T

P

Q-Sense, 82, 84 nanotechnology, 82 R

Rakuten Belanja Online, 98 online retailer, 98 Rosinter Restaurants, 7 restaurant chain, 7 Rosneft, 88, 99 oil and gas, 98–99 S

SAIC, 6 automotive, 6 Saipem engineering, drilling, construction projects in energy and infrastructure, 163 Sidanco, 99 oil and gas, 98–99 Siemens Group, 6 electric propulsion planes (aircrafts), 6 Sinochem, 8 oil, 8

Talisman Energy, 8 upstream oil and gas, 8 Tesco PLC bike-sharing, 141–145 retailer, 141 TNK–BP, 88, 99, 160 oil and gas, 88 U

Unilever consumer goods, 89 retailer, 141 W

Wahaha Group Co., 98 beverage, 98 World Vision clean water, 11 non-profit, 11 X

Xiaomi IoT, 43 smart hardware, 43 smartphones, 42, 43

185

Index of Regions and Countries

A

E

Africa, 6, 41, 43, 60 Asia, 41, 60, 76, 82 Austria, 74

EU, 50 Europe, 53, 63, 76, 82, 146 F

B

Bahrain, 14 Belgium, 74 Brunei, 14

Finland, 74 France, 44, 68, 74 G

C

Canada, 37, 74 Caribbean, 74 China, ix, 6, 8, 11, 14, 49, 65–67, 69, 97, 98, 121, 176 Croatia, 5 Czech Republic, 5, 7

Germany, 4, 68, 69, 74, 146 Greece, 5 I

India, 7, 36, 37, 46, 47, 65, 121 Indonesia, 69, 98 Ireland, 74, 82 Italy, viii, ix, 5, 6, 14, 50, 51, 53, 63, 74, 83, 88, 119, 121–123

D

Democratic Republic of Congo, 60 Denmark, 74

J

Japan, 44, 49, 50, 52, 53, 67, 83

© The Author(s) 2020 O. E. Annushkina, A. Regazzo, The Art of Going Global, https://doi.org/10.1007/978-3-030-21044-1

187

188 

Index of Regions and Countries

K

R

Kuwait, 14, 97

Russia, ix, 4, 61, 67, 83, 89, 99, 160, 173–175

L

Latin America, 6, 60, 74, 76 Luxembourg, 74 N

Netherlands, 5, 6, 74, 119 North America, 82 Norway, 74

S

Saudi Arabia, 14 Singapore, 4, 14 South Africa, 6, 37 Soviet Union, 27 Spain, 6 Sweden, 5, 74, 82 Switzerland, 5, 50, 74 U

Poland, 5, 74

UAE, 14 UK, 69, 74, 82, 88, 141 USA, viii, 6–8, 14, 67–69, 74, 76, 171

Q

V

Qatar, 14, 37

Vietnam, 14, 66

P

Index of Terms

A

B

Absorptive capacity human resources practices, 149, 150 level of centralization, 150 paradox of technological capabilities, 149 Adaptation inclusive approach to, 45 place adaptation, 44 price adaptation, 43 product characteristics adaptation, 44 promotion adaptation, 44 social adaptation, 48 solutions of design of business processes, 50 externalization, 50, 51 focus, 50, 51 innovation, 50 variation, 50 standardize-adapt-transform solution, 48–50 vs. standardization, 49 Arbitrage, 111, 113, 136

Best practices from subsidiaries, 127 replicate, 6 roll out, 5 Bribery, 30, 31, 84 Business model, v, x, xi, 12–15, 21, 25–28, 35, 40, 42, 44–46, 48, 51, 57, 96, 98, 100, 101, 111, 115 Business networks, 6, 82, 84 Business sustainability local stakeholders, 12 negative perceptions of multinationals, 12 social acceptance, 12 Business unit business unit level strategy, xii, 11, 132, 134 definition, 132 C

CAGE framework administrative (or political) distances, 40 CAGE-T, 41, 111

© The Author(s) 2020 O. E. Annushkina, A. Regazzo, The Art of Going Global, https://doi.org/10.1007/978-3-030-21044-1

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190 

Index of Terms

CAGE framework (cont.) cultural distances, 40 economic distances, 40, 41 geographic distances, 40 technological distance, 41 technological leapfrog, 52 Cognitive biases (decision-­making biases) anchoring bias, 145 availability bias, 145, 146 bandwagon effect, 75 blind-spot bias, 145, 148 cognitive models, 58 confirmation bias, 145, 147 discounting bias, 28 the endowment effect, 145, 147 false negatives, 145 false positives, 145 focalism, 145, 146 framing bias, 145, 147 the gambler’s fallacy, 145, 146 illusory perception bias, 28 impact bias, 145, 146 overconfidence, 145, 148 the planning fallacy, 145, 147 representativeness bias, 145, 146 sunk costs, 145 Competitive advantage isolating mechanism, 58 sources of, 11, 114, 134 Corporate level strategy, 133 interrelationship between corporate strategy and competitive strategies, 134 Country of origin effect, 68, 161, 163

cultural experience reserve, 42 external expressions, 36 Femininity vs. masculinity, 39 Future orientation, 39 Gender egalitarianism, 38 GLOBE, cultural dimensions by, 38–39 Hofstede, G., cultural dimensions by, 38–39 Humane orientation, 39 Individualism vs. collectivism (communitarianism), 37 In-group collectivism, 38 Institutional collectivism, 38 Internal cultural diversity, 37 local norms, 36 Long-term vs. short-term orientation, 39 Neutral vs. emotional, 37 past, present or future achievements, 39 Power distance, 38 Sequential vs. synchronic, 39 “silent language” of communication by E. Hall, 37 Specific vs. diffused relationships, 38 Trompenaars F., cultural dimensions by, 38–39 Uncertainty avoidance, 38 Universalism vs. particularism, 38 “Doing Business” rankings, 59 Dragon multinationals, 121 linking–leverage–learning, 121 E

D

Deglobalization, x, 109 Distance between markets Achievement vs. ascription, 38 Assertiveness, 39 Atomistic vs. relational, 37 cultural differences, 36–37

Empathy individual empathy, x individual empathy, emotional and cognitive, 28 organizational empathy, 21, 27, 28 organizational empathy vs. strategic flexibility, 27

  Index of Terms 

Empathy–Ethics–Engagement (E-E-E), 21–32, 182 Engagement, 10, 21–32, 147 Entrepreneurial Formula, 43, 44, 132, 133, 135, 150 Entry mode access to local resources, 84 acquisition acquired, 100 in a commoditizing industry, 101 failure rate, 100 hidden challenges, 100 partial, 98 to reinvent business model, 100 contract-based, 84, 92, 97 decision adaptation of products and services, 95 availability of resources and capabilities, 88 dissemination risk, 95 external influence, 86, 97 international value chain, 95 need to access resources and capabilities, 88 previous experience, 89, 93 as a process, 102 real options, 102 single decision, together with foreign markets selection, 76 speed, 96–97 decision, target market characteristics foreign market accessibility, 92 foreign market competition intensity, 91 foreign market potential, 91 foreign market risk, 91 liability of distance, 93 noncompetitive barriers, 92 equity, 84, 90

191

export contracts, 72, 102 franchising, 98 greenfield, 81 joint venture, 72, 81, 88–90, 93, 95, 97–99 failure rate, 98 level of control, 84, 92 licensing, 98 local partner, 84 non-equity, 84, 92 partnerships cross-border disputes, 98 double-layered acculturation, 93 international alliance, 98 internationally inexperienced firms, 89 shortage of resources, 89 trust, 98–99 representative office, 166 resources commitment, 84, 92, 93 top management team, 90 wholly owned subsidiary, 97 Ethic ethical capability, 32 ethical conflict, dealing with, 31 rules of conduct, 30 universal moral standards, 29 Ethnocentric, polycentric, regiocentric and geocentric (EPRG) framework, 155, 161, 162, 164 Expatriate manager adjustment, 166–167 compensation disparity between local and expatriate managers, 160 deployment, 156 evaluation of performance, 169 family support, 168 personal networks, 159 repatriation, 169–170 selection, 165, 169, 172 skills, 155

192 

Index of Terms

Experience, vii, viii, xi, xii, 4, 9, 12, 28, 32, 41, 42, 46, 53, 57, 67, 69, 74, 75, 88–90, 93, 97, 102, 109, 124, 135, 146, 148, 156, 159, 162, 165, 167, 171 F

Financial indicators differences in accounting standards, 8 growth, 8 intra-firm pricing, 9 profitability of subsidiaries, 8, 9 vs. strategic perspective, 9 “tunnel vision,” 9 Foreign direct investment (FDI), 8, 59, 60, 63, 74, 92, 93, 111 Foreign markets selection decision, 72 single decision, together with foreign markets selection, 76 external influence, 75 bandwagon effect, 75 foreign market selection criteria Analytical Hierarchy Process (AHP), 65 large number of criteria, 65 qualitative criteria, 65 sources of data, 65 gradual approach, 76 initial screening, xi, 58–64 macro analysis for foreign markets selection macro-factors, 58, 60, 63, 74 market accessibility, 61 market attractiveness, 61 new multinationals, 69, 121 proactive analysis vs. reactive response, 75 regional characteristics agglomeration effect, 66 “country-of-origin agglomerations,” 66

global cities, 66, 67 subnational analysis, 67 representative office, 85 by SMEs, 72, 73, 75 springboard approach, 69 Uppsala school, 69 Foreign market transformation, 49 Franchising agreements, 14, 88–90 G

Genuine engagement genuinely involved, 11 sense of belonging, 10–11 Geopolitical interests, 8 Global managerial roles business manager, 156 corporate manager, 156 country manager, 156 functional manager, 156 Global mindset affective ability, 22 behavioral ability, 22 cognitive ability, 22, 24, 25 daily routines, 22 gender, 24 Global Leadership and Organizational Behavior Effectiveness (GLOBE) survey, 22, 37, 175, 176 Growth in international markets breadth, 72 depth, 72 speed, 9 H

Heterarchical multinational its characteristics, 122 heterarchy, 121–126 vs. hierarchy, 123 vs. network organization, 121, 123 people management in, 124

  Index of Terms  I

Internationalization and performance, 2 internationalization and profitability, 2 Internationalization motives access to unique resources, 6 competitive advantage, 5–6 diversification, 7 enhanced reputation, 6 financial and economic, 4–5 global level of service, 6 hierarchy of goals, 64 reactive motives, 8 Internationalization strategy content, 163 content, AAA framework adaptation, 136 aggregation, 136 arbitrage, 136 content, Bartlett and Ghoshal’s framework (adaptation/global coordination) global strategy, 136 international strategy, 136 multinational strategy, 136 transnational strategy, 136 effectuation, xii OLI paradigm, 135 organizational “hysteresis,” 144 organizational myopia, 144 process, deliberate and emergent strategies consensus strategy, 142, 144 deliberate strategy, 142–144, 148 emergent strategy, 142–144 entrepreneurial strategy, 142–144 ideological strategy, 142, 144 imposed strategy, 142, 144 planned strategy, 142, 143 process strategy, 143, 144 umbrella strategy, 142–144 unconnected strategy, 142–144

193

process, military planning “crystal ball” technique, 140, 182 alternative courses of action, 140 process, real options cost of switching among options, 138 early expiration of opportunity, 137 invest, invest in stages, switch from one option to another, delay, downscale, disinvest, 139 irreversibility, 137 switching flexibility, 138 uncertainty, 136–141 International strategy control panel aspirations, 9 dream statement, 11 full potential, 12 scalability, 13 self-realization objectives, 11 value creating capacity, 11 L

Learning learning by experience, 6 trial and error, 6 Liability of foreignness, 82 Liability of outsidership, xi overcoming, 68, 81, 82 Local employees localization, 170 loyalty, 175 Local stakeholders, 12, 46, 48, 49, 93 M

Managerial craftsmanship, 30 Marketing mix, 43, 44 Merger, 97, 100, 119, 120 Motivation, 3, 9, 12, 149, 155

194 

Index of Terms

N

New type of customers, 4 Niche positioning, 88 Number of markets to serve concentration, 72 exponential globalization, 74 market spreading, 73, 74 water strategy, 74

People management in different cultures, 155, 175–176 GLOBE survey, 175 Perception of imported goods, 5 Planning for future, 15 trend planning, 17 R

O

Offshoring commoditization trap, 112, 114 delocalization, 112 downsides of, 111 factory’s productivity-to-cost ratio, 5 imitated, 113 industry disintegration, 113 industry specialization, 113 “make or buy” decision, 113 manufacturing process innovation, 112 offshore outsourcing, xi, 112, 113 potential risks, 112 organizational positioning, 113 resource-based advantages, 111 vertical disintegration, 113 OLI paradigm internalization advantages, 135 locational advantages, 134 locational decisions, 110 long-term competitiveness, 112 owned advantages, 134 Organizational routines, 6, 27, 28, 89

Reputation legitimacy, 82 prestige, 6 Research and development (R&D), 5, 15, 45, 58, 64, 67, 90, 94, 100, 110–113, 117, 120, 135, 163 Reshoring, x, 109 Reverse innovation, 126, 127 Role of subsidiaries, 115–121 aligning goals between headquarters and subsidiaries, 121 black hole, 119 evolution, 115 intensity and nature of interaction, 118 local implementer, 119 methods of interaction, 118 process of configuring, 116 relationships between headquarters and subsidiaries, 140–147 reverse diffusion of managerial practices, 127 sources of innovation, 126–128 specialized contributor, 119 world mandate, 119 S

P

Path dependence apparent benefits, 26 entrenching in, 26

Scalability business model scalability, vii, 13, 14 full potential, 12

  Index of Terms 

full scale vs. full potential, 12 ingredients of, 15 Universal Scalability Law, 13 Six Sigma, 46 adaptation of, 46 Standardization, 15, 28, 35, 42–44, 48–50, 52, 76, 120 Stereotypes, 26, 166 Strategic military thinking, 9 military planning, 140 Strategy deficit, 131

T

Tax havens, 5 double Irish, 5 Top management team, 12, 21–23 operating in purely imaginary worlds, 128 U

Under-adaptation, xi, 28, 147 Unfamiliar context, 12 Upper echelons theory, 21

195