Market Entry Strategies: Internationalization Theories, Network Concepts and Cases of Asian firms: LG Electronics, Panasonic, Samsung, Sharp, Sony and TCL China 9783486599763

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Market Entry Strategies Internationalization Theories, Network Concepts and Cases of Asian firms: LG Electronics, Panasonic, Samsung, Sharp, Sony and TCL China

by

Mario Glowik

OldenbourgVerlag München

Bibliografische Information der Deutschen Nationalbibliothek Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über abrufbar.

© 2009 Oldenbourg Wissenschaftsverlag GmbH Rosenheimer Straße 145, D-81671 München Telefon: (089) 45051-0 oldenbourg.de Das Werk einschließlich aller Abbildungen ist urheberrechtlich geschützt. Jede Verwertung außerhalb der Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlages unzulässig und strafbar. Das gilt insbesondere für Vervielfältigungen, Übersetzungen, Mikroverfilmungen und die Einspeicherung und Bearbeitung in elektronischen Systemen. Lektorat: Wirtschafts- und Sozialwissenschaften, [email protected] Herstellung: Dr. Rolf Jäger Coverentwurf: Kochan & Partner, München Gedruckt auf säure- und chlorfreiem Papier Gesamtherstellung: Books on Demand GmbH, Norderstedt ISBN 978-3-486-58412-7

Acknowledgements I would like to thank everyone who contributed to and supported the writing of this book. First and foremost, I would like to thank o.Univ. Prof. Mag. Dr. Reinhard Moser and Univ. Prof. Dr. Reiner Springer of the University of Economics in Vienna, Austria, for their support and fundamental advice with respect to the conceptual approach of this publication. Furthermore, I would like to thank Mr. Yun Yang, president of Simon Gisul Co. Ltd., who contributed to the success of the field research by his extraordinary support arranging personal interviews in South Korea. Without his valuable personal network, many conversations would not have taken place with the representatives of the large electronics companies. I thank Mrs. Nana Park from Samsung SDI for her valuable comments from a Korean perspective regarding behavioral aspects of management and their influence on strategic market entry concepts of Asian firms in the consumer electronics industry. I appreciate all the valuable contributions made to this book by the named interviewees and those who preferred to remain anonymous. I sincerely thank Ms. Margie Dyer from the U.S. for proofreading the manuscript.

Mario Glowik

Saarbruecken, Germany October 2008

Table of Contents Acknowledgements

v

List of Figures

xi

1

Introduction

1

2

Methodological Foundations of Research

3

2.1

Qualitative and Quantitative Methods........................................................................3

2.2

A Longitudinal Study for This Publication ................................................................6

2.3

Research Design.........................................................................................................7

2.4 2.4.1 2.4.2

Empirical Research Targets......................................................................................12 Research proposals derived from previous studies...................................................12 Towards a time-based network approach .................................................................13

3

Internationalization Theories

3.1 3.1.1 3.1.2

The International Product Life-Cycle Theory ..........................................................17 Internationalization based on the product life-cycle phase.......................................17 Critical review of Vernon’s theory...........................................................................18

3.2 3.2.1 3.2.2

The Internalization Theory.......................................................................................19 The issue of transaction costs ...................................................................................19 Critical review of the internalization theory.............................................................21

3.3 3.3.1 3.3.2

The Eclectic Paradigm..............................................................................................21 Advantage categories ...............................................................................................21 Critical review of the eclectic paradigm...................................................................25

3.4 3.4.1 3.4.2 3.4.3 3.4.4

Location Theories.....................................................................................................26 Historical foundations ..............................................................................................26 Location factors........................................................................................................27 Questions related to market entry.............................................................................31 Critical review of the location theories.....................................................................32

3.5 3.5.1 3.5.2

The Diamond Model ................................................................................................32 The elements of the diamond ...................................................................................32 Critical review of the diamond model ......................................................................36

17

viii

Table of Contents Introduction

3.6 3.6.1 3.6.2 3.6.3

The Uppsala Model of Internationalization.............................................................. 37 Incremental market entry through accumulated knowledge..................................... 37 State versus change aspects...................................................................................... 38 Critical review of the Uppsala model....................................................................... 39

3.7 3.7.1 3.7.2 3.7.3 3.7.4 3.7.5 3.7.6 3.7.7 3.7.8 3.7.9 3.7.10 3.7.11 3.7.12 3.7.13

Network Theory of Internationalization................................................................... 41 Contents of the systems approach ............................................................................ 41 The impact of the resource-based view.................................................................... 42 Dynamic capabilities................................................................................................ 44 The approach of Johanson and Mattsson ................................................................. 45 The concept of Johanson and Vahlne....................................................................... 47 Resource accumulation through experience and relationship learning .................... 48 Critical review of the network systems positioning approach.................................. 49 Contents of new venture and entrepreneurship concepts ......................................... 50 The dimension of time ............................................................................................. 53 Towards a conceptualized typology of international new ventures.......................... 57 The phenomenon of the ‘born again global’ ............................................................ 60 Individual and corporate entrepreneurship............................................................... 61 Critical review of the new venture and entrepreneurial concepts............................. 62

3.8

Summary .................................................................................................................. 64

4

International Market Entry Strategies

4.1

About Strategy ......................................................................................................... 71

4.2

Motives and the Process of Internationalization ...................................................... 72

4.3 4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 4.3.6 4.3.7 4.3.8 4.3.9 4.3.10

Market Entry Modes ................................................................................................ 74 Indirect and direct export ......................................................................................... 74 Overseas branches.................................................................................................... 75 Contract manufacturing............................................................................................ 76 Licensing.................................................................................................................. 77 Franchising............................................................................................................... 78 Strategic alliances .................................................................................................... 79 International joint ventures ...................................................................................... 80 Turnkey contracts..................................................................................................... 84 Management contracts ............................................................................................. 84 Wholly owned subsidiary......................................................................................... 86

4.4 4.4.1 4.4.2 4.4.3

Strategic Decision Determinants.............................................................................. 88 Entry timing and proximity to the market ................................................................ 88 Degree of hierarchical control and investment risk.................................................. 89 Market entry decision process.................................................................................. 90

4.5

Summary .................................................................................................................. 94

71

Table of Contents

ix

5

Case Studies

103

5.1 5.1.1 5.1.2 5.1.3 5.1.4

The European Television Set Market (1990-2011) ................................................103 Market developments .............................................................................................103 Industry environment .............................................................................................105 European industry cluster.......................................................................................107 Summary ................................................................................................................109

5.2 5.2.1 5.2.2 5.2.3 5.2.4 5.2.5 5.2.6 5.2.7 5.2.8

Samsung .................................................................................................................110 Company background.............................................................................................110 Management Philosophy ........................................................................................112 The network building of Samsung .........................................................................114 Diversified growth strategy ....................................................................................117 The strategy of vertical integration.........................................................................123 International business expansion............................................................................125 Global design and R&D networks..........................................................................129 Summary ................................................................................................................132

5.3 5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 5.3.6

Sony........................................................................................................................133 Company background.............................................................................................133 Conglomerate diversification network ...................................................................134 Loss of core competencies in electronics ...............................................................139 Access to LCD Technology through joint venture networks .................................141 Foreign direct investment in Europe ......................................................................143 Summary ................................................................................................................144

5.4 5.4.1 5.4.2 5.4.3 5.4.4 5.4.5

Sharp ......................................................................................................................146 Company background.............................................................................................146 Technological pioneer in LCD technology ............................................................146 The investment in Loewe AG, Germany................................................................153 FDI in central and eastern Europe (CEE)...............................................................154 Summary ................................................................................................................156

5.5 5.5.1 5.5.2 5.5.3 5.5.4 5.5.5 5.5.6 5.5.7 5.5.8

LG Electronics and Philips International Joint Ventures........................................157 Company background.............................................................................................157 The foundation of LG.Philips LCD........................................................................158 International network .............................................................................................161 Philips reduces its joint venture stake and may disappear? ....................................166 The foundation of LG.Philips Displays..................................................................166 Synergies below expectations.................................................................................167 LG.Philips Displays gets a new name ....................................................................171 Summary ................................................................................................................172

5.6 5.6.1 5.6.2 5.6.3

TCL China..............................................................................................................174 Company background.............................................................................................174 Realization of the Chinese government order ........................................................176 TCL-Thomson Electronics (TTE) international joint venture................................178

x

Table of Contents Introduction

5.6.4 5.6.5

The gradual process towards the liquidation of TTE Europe................................. 182 Summary ................................................................................................................ 185

5.7 5.7.1 5.7.2 5.7.3 5.7.4 5.7.5

Matsushita (Panasonic) .......................................................................................... 186 Company Background............................................................................................ 186 The foundation of IPS Alpha Technology ............................................................. 191 FDI in Europe......................................................................................................... 192 Network structures ................................................................................................. 193 Summary ................................................................................................................ 196

6

Towards a Time-based Network Approach

6.1

General Industry Networking Intensity (Industry Perspective).............................. 197

6.2 6.2.1 6.2.2 6.2.3 6.2.4 6.2.5 6.2.6 6.2.7 6.2.8

Network Systematization ....................................................................................... 199 Strategic resources for future competition ............................................................. 199 Deduction of firms’ networking targets ................................................................. 201 Sharp ...................................................................................................................... 203 Matsushita (Panasonic) .......................................................................................... 205 TCL China ............................................................................................................. 208 LG Electronics and Philips (IJVs).......................................................................... 209 Samsung................................................................................................................. 213 Sony ....................................................................................................................... 214

6.3 6.3.1 6.3.2

Firm’s Bilateral Networking Intensity (Firm Perspective)..................................... 215 A quantification of bilateral networking engagements........................................... 215 A weighted approach for the measurement of networking intensity...................... 217

6.4 6.4.1 6.4.2 6.4.3

A Time-based Network Repositioning Model ....................................................... 222 Intra-Japanese firm networks and partner repositioning over time ........................ 222 Asian-European firm network partner repositioning over time.............................. 226 Networking success factors: A comparative overview .......................................... 229

6.5

Higher Complexity of Market Entry Strategies...................................................... 233

7

Conclusion

197

239

Reference List

243

Index

273

Appendix

277

List of Figures Figure 1.

Qualitative versus quantitative research methods. Source: modified from Bungard et al. (2000), p. 5–6 ........................................5

Figure 2.

Case study research design and method. Source: Adapted from Yin (2003), p. 50............................................................8

Figure 3.

Top five brands in the European market based on unit shipment share (in percentage, status first quarter 2008). Source: DisplaySearch (2008a) ......10

Figure 4.

Interview itinerary of industry experts of leading consumer electronics firms and the market research institute GFK Nuremberg. Source: Author ...............11

Figure 5.

Relationship of the advantage categories and market entry strategies. Source: Dunning (1980), p. 13, Perlitz (2004), p. 110 .....................................23

Figure 6.

A firm’s international market entry modes are deduced depending on these advantage categories (Dunning). Source: Kutschker & Schmid (2006), p. 456 ...................................................24

Figure 7.

Elements of the general external (macro) environment of a firm. Source: Modified from Wheelen and Hunger (2004), p. 53 and Schreyögg (2003), p. 319 .................................................................28

Figure 8.

Industry environment of a television set manufacturer located in the European Union in 2008. Source: Adopted from Porter (1999), p. 34...30

Figure 9.

The fragments of the diamond. Source: Porter (1990), page 127 ....................34

Figure 10.

Firm and market internationalization degree. Source: Johanson & Mattsson (1988: 298) ......................................................45

Figure 11.

Towards an integrative model of small firm internationalization. Source: Bell et al. (2003), p. 351 .....................................................................52

Figure 12.

Internationalization: conceptualization of an entrepreneurial process of behavior in time. Source: Jones and Coviello (2005), p. 297 ..........................54

Figure 13.

Dimension of time in internationalization concepts research. Source: adapted from Hurmerinta-Peltomäki (2003), p. 226...........................56

Figure 14.

Typology of new ventures. Source: Di Gregorio et al. (2008), p. 191.............58

xii

List of Figures Introduction

Figure 15.

A summary of principal contents and major limits of the international product life-cycle and internalization theory. Source: Author................................................................................................. 64

Figure 16.

A summary of principal contents and major limits of the eclectic paradigm by Dunning and location concepts. Source: Author ........................................ 65

Figure 17.

A summary of principal contents and major limits of the diamond model by M.E. Porter and the Uppsala model. Source: Author.................................. 66

Figure 18.

A summary of principal contents and major limits of the network approach. Source: Author................................................................................................. 67

Figure 19.

A summary of principal contents and major limits of the international new venture (born global), entrepreneurial, and time concepts. Source: Author .... 68

Figure 20.

E.P.R.G. scheme and marketing concepts. Source: adapted from Wind et al. (1973) p. 16...................................................................................................... 73

Figure 21.

Mutual obligations of management contracts. Source: modified from Foscht/Podmenik, p. 582 ............................................ 85

Figure 22.

Market entry mode grouping based on four decision determinants. Source: Author................................................................................................. 94

Figure 23.

An overview of strategic decision determinants of the market entry modes: indirect and direct export. Source: Author....................................................... 95

Figure 24.

An overview of strategic decision determinants of the market entry modes: licensing and franchising. Source: Author....................................................... 96

Figure 25.

An overview of strategic decision determinants of the market entry mode: management contracts. Source: Author ........................................................... 97

Figure 26.

An overview of strategic decision determinants of the market entry mode: turnkey contract. Source: Author..................................................................... 98

Figure 27.

An overview of strategic decision determinants of the market entry modes: strategic alliance and international equity joint venture. Source: Author ........ 99

Figure 28.

An overview of strategic decision determinants of the market entry modes: overseas branch network and wholly owned manufacturing plant. Source: Author............................................................................................... 101

Figure 29.

European television set market 1990–2011 without Turkey and Russia (sales in million units – 2009 and 2011 are forecasts). Source: DisplaySearch (2008a) and market research by the author............... 104

Figure 30.

East European television set market volume including the non-Asian part of Turkey and Russia segmented by major technologies in million units (2007 record and 2008–2012 forecast). Source: DisplaySearch, 2008c ........ 105

List of Figures

xiii

Figure 31.

Conglomerate diversification structure of Samsung. Source: Author based on various company documents, verified by Park, N. (status April 2008).....117

Figure 32.

Samsung Group net sales 1999–2007 (2007 forecast). Source: Annual Reports .................................................................................118

Figure 33.

Samsung Group net income 1999–2007 (2007 forecast). Source: Annual Reports .................................................................................119

Figure 34.

Samsung Electronics net sales 1999–2007. Source: Annual Reports ............120

Figure 35.

Samsung Electronics net income 1999–2007. Source: Annual Reports ........121

Figure 36.

Organization of Samsung Electronics. Source: Author based on various company documents, verified by Park, N. (status April 2008) ......................122

Figure 37.

Samsung’s vertical integration of television set assembly. Source: Author, based on company documents .............................................123

Figure 38.

Expansion of Samsung Electronic’s worldwide factory network. Source: collected by the author as exhibited at Samsung Electronics main entrance hall in Seoul, South Korea......................................................128

Figure 39.

Samsung’s worldwide network of product design units. Source: Samsung Electronics Annual Report 2005, p. 52 .............................131

Figure 40.

Net sales of Sony Group 1999–2007 in million dollars. Source: Author based on annual reports ........................................................136

Figure 41.

Net income of Sony Group 1999–2007 in million dollars. Source: Author based on annual reports ........................................................137

Figure 42.

Organization of Sony Group (status January 2008). Source: Sony Corporation (2008d) ................................................................138

Figure 43.

Sony Electronics—net sales 1999–2007 in million dollars. Source: Sony 2006c, 2008c............................................................................140

Figure 44.

Sony Electronics—net income 1999–2007 in million dollars. Source: 2006c, 2008c.....................................................................................140

Figure 45.

Sharp net sales 1999 to 2007. Source: Sharp financial and annual reports 2003–2007.................................147

Figure 46.

Sharp net income 1999 to 2007. Source: Sharp financial and annual reports 2003–2007 .....................................................................................................148

Figure 47.

Sharp Organization (status January 2008). Source: Author based on firm documents......................................................149

Figure 48.

The Kameyama Plant (Japan). Source: Sharp 2008b .....................................150

xiv

List of Figures Introduction

Figure 49.

LCD television set assembly at the Kameyama Plant (Japan). Source: Sharp 2008b...................................................................................... 151

Figure 50.

Sharp’s network relations with Japanese firms in Europe (LCD TV manufacture). Source: Author, design based on various company-related business information sources ......................................................................... 155

Figure 51.

LG Philips LCD production network in 2007. Source: LG.Philips LCD (2007a) .................................................................. 159

Figure 52.

LG.Philips LCD sales network in 2007. Source: LG.Philips LCD (2007b) .................................................................. 160

Figure 53.

LG.Philips LCD vertical integrated value chain activities in Europe (status February 2008). Source: Author, based on various firm-related data ...................................... 162

Figure 54.

Network embedment of LG.Philips LCD (status February 2008). Source: Author, based on various firm-related data ...................................... 164

Figure 55.

LG.Philips LCD net sales 2001–2007 in million dollars. Source: LG.Philips LCD (2003) and LG.Philips LCD (2008b)..................... 165

Figure 56.

LG.Philips LCD net income 2001-2007 in million dollars. Source: LG.Philips LCD (2003) and LG.Philips LCD (2008b)..................... 165

Figure 57.

LG.Philips Displays net sales versus net income for the period 2002 to September 2005. Source: LG.Philips Displays 2005f, 2007a........................ 170

Figure 58.

TCL Corporation organizational chart and executive committee. Source: (TCL, 2008c) .................................................................................... 175

Figure 59.

TCL regional brand strategy. Source: TCL 20087b, TCL 2008a .................. 180

Figure 60.

TCL China Group. Turnover, gross profit and profit (loss) from operating activities for the period 1999–2007 in million dollars. Source: Annual reports 2000–2008 ............................................................... 181

Figure 61.

Television set business related market entry activities by TCL China in Europe for the period 2002–2008. Source: Author, designed based on company information material .............. 185

Figure 62.

Matsushita group net sales 1999–-007 in million dollars. Source: Annual reports 2001–2008 ............................................................... 189

Figure 63.

Matsushita Group net income 1999–2007 in million dollars. Source: Annual reports 2001–2008 ............................................................... 189

Figure 64.

Matsushita organization in 2008. Source: Matsushita (2008e) ...................... 190

List of Figures

xv

Figure 65.

View of IPS Alpha Technology's premises at Mobara, Chiba Prefecture (photograph: SS Tokyo Co., Ltd.). Source: IPS Alpha Technology (Alpha, 2008b).............................................192

Figure 66.

New factory of IPS Alpha Technology Europe, s.r.o. (Czech Republic). Source: IPS Alpha Technology (Alpha, 2008b).............................................193

Figure 67.

IPS Alpha Technology Co., Ltd. interlinked companies and their interlocking financial investment structures (status 05.2008). Source: Designed by the author based on various firm information sources .195

Figure 68.

Sharp’s alliance partner, year of foundation, and alliance mission; television set industry (1995–2008). Source: Author, based on various firm-related information sources..............204

Figure 69.

Matsushita’s alliance partner, year of foundation, and alliance mission; television set industry (2001–2008). Source: Author, based on various firm-related information sources..............207

Figure 70.

Bilateral network agreements of TCL China, the year of foundation and alliance mission during 2002 and 2008 (television set industry). Source: Author, based on various firm-related information sources..............208

Figure 71.

Bilateral network agreements from LG Electronics perspective for the period 1999 and 2008 (television set industry). Source: Author, based on various firm-related information sources..............210

Figure 72.

Bilateral network agreements from Philips’ perspective for the period 1997 and 2008 (television set industry). Source: Author, based on various firm-related information sources..............212

Figure 73.

Bilateral network agreements of Samsung, the year of foundation, and alliance mission (television set industry 2001–2007). Source: Author, based on various firm-related information sources..............213

Figure 74

Bilateral network agreements of Sony, the year of foundation, and alliance mission (television set industry 1996–2008). Source: Author, based on various firm-related information sources..............214

Figure 75.

Network agreements and firm rank (television set industry for the period 1990–2008). Source: Author ...................................................216

Figure 76.

Network engagements of the firms examined in the case studies for the research period 1990–2008. Source: Author ......................................217

Figure 77.

Total network index rates (television set display and set assembly) of the firms examined in the case studies. Source: Author ............................219

Figure 78.

Firm network activity ranking based on the total index rate. Source: Author...............................................................................................219

xvi

List of Figures Introduction

Figure 79.

Network grid of major network players operating in the television set industry (research status October 2008). Source: Author............................................................................................... 220

Figure 80.

A comparative overview of strengths and weaknesses of Asian versus European firms operating in the television set industry. Source: Interview outcomes of Korean respondents in September 2007....... 227

Figure 81.

The joint venture lifetime of TTE Corporation (TCL China and Thomson). Source: Author ................................................. 230

Figure 82.

The joint venture lifetime of LG.Philips LCD (LG Electronics and Philips). Source: Author ............................................... 231

Figure 83.

The joint venture lifetime of LG.Philips Displays (LG Electronics and Philips). Source: Author.......................................................................... 231

Figure 84.

Television set component manufacturing sides of Asian consumer electronics firms in Poland, Hungary, Czech Republic and Slovakia (status October 2008). Source: Author based on firm related information material .......................... 235

Figure 85.

International vertical chain network of Sharp and LG.Philips LCD. Source: Author............................................................................................... 236

1

Introduction

Japanese, Korean, and recently emerging Chinese firms lead the worldwide markets in the technologically driven consumer electronics segments, for instance in the liquid crystal display (LCD) and plasma television industry. Conversely, Western companies, such as the Grundig AG (Germany), had to declare bankruptcy in 2004. Since the 1990s, one of the most famous European brands, Philips (the Netherlands), has continuously lost vertical manufacturing involvement in its television set products. Significant value-added activities contributing to a state-of-the-art television set are increasingly being outsourced as the top management of Philips seeks to procure more and more major components from outside suppliers. The production of television sets at Thomson (France) was transferred to a joint venture with TCL (China) in 2004, and this was followed by a declaration of bankruptcy for the joint venture in its European operations in 2007. Loewe, the traditional German premium price assembler, could only survive because of the financial investment of Sharp (Japan), which holds a capital share of 29 percent at Loewe (Bastian, 2006: 80). Japanese firms started their business expansion in Europe during the 1970s. The successful development of the South Korean electronics industry and its market entry as well as penetration strategies over the last two decades in Europe is even more impressive because it was achieved, relative to Japanese competitors, in a much shorter period of time. All in all, Asian-based TV set manufacturing has significantly increased its market dominance worldwide, and those enterprises have defeated their European competitors accordingly. The market dynamics will increase in the future considerably if Chinese and Taiwanese manufacturers, who are known for their fast learning ability, flexibility, and continuously increasing production capacities, are able to gain further access to Europe. Thus, it is questionable as to what will happen to the remaining European manufacturers in the electronics industry, if Chinese assemblers develop their technological expertise within the same timeframe as the South Koreans have done, but with considerably larger manufacturing capacities. In this publication, the network theory of internationalization will be tested in light of empirical research focused on the business activities of the companies discussed above. Previous criticisms of the international network theory are derived from rather general empirical insights that reflect a momentary spotlight of the industry environment but do not consider appropriately the industry-specific details, such as supplier-customer relations and the factor of time (Gulati et al., 2000: 212–213, Jones and Coviello, 2002: 9, Johanson and Vahlne, 2003: 83, Andersen and Buvik, 2002: 359–360). This publication aims to overcome this conceptual weakness through its longitudinal approach and industry case studies. The research outcomes serve to develop a time-based network concept, which explains the part-

2

1 Introduction

ners’ reposition over a certain time period and takes as examples the cases of cooperation among Japanese firms and Asian-European projects. The research aimed to segment the firms’ relevant networking targets and to measure the networking intensity of the firms. The results allow the derivation of networking success factors that may assist decision makers in management and marketing in international business. The mission of this publication is to evaluate and understand the international networks of Japanese, South Korean, and Chinese firms in comparison to their European competitors in the television manufacturing industry. The question is posed as to how the Asian firms have organized their market entry in Europe via various forms of bilateral networks such as strategic alliances, joint ventures, and regional market entry clusters. The longitudinal study also contains information on the European television set market development for the period 1990–2011 (forecast). The case studies of firms provide insights into the management philosophy, business structure and organization, financial performance, and strategic market entry concepts, and aim to answer the question as to why Japanese, South Korean, and more recently, Chinese firms’ international market entry activities have performed so successfully in Europe. The book is divided into seven chapters. After the acknowledgements, and following this introduction, chapter two describes the multi-case research concept used for this publication, which is based on a comparative overview and provides information about quantitative and qualitative research approaches and their corresponding strengths and weaknesses. Also in chapter two, the research methodology and data exploration methods (i.e., content analysis of relevant corporate data and empirical field research work for the development of the case studies of this publication) are introduced. Chapter three serves as an overview of the main theories related to internationalization of business and international market entry strategies as they are currently found in the relevant literature. In chapter four, relevant market entry modes are reviewed. Chapter five contains the case studies of firms in the television manufacturing industry. The discussion of the results from the case studies is presented in chapter six, where general industry and firms’ bilateral networking structures are evaluated. The major aim of this chapter is the verification and development of a time-based network model of intra-Japanese and Asian-European network relationships. Chapter seven will provide the conclusions of the research. The results invite further discussion concerning other European industries such as automotive, heavy industries, engineering, and others, and their future destinies in light of increasing global competition. Limitations of this publication, which come along with the case study research method, invite continuing research activities aimed at further understanding of the network approach of firms’ internationalization strategies. The results of future research hopefully may verify the outcomes of this book, and thus provide a wider acceptance of its findings.

2

Methodological Foundations of Research

2.1

Qualitative and Quantitative Methods

Qualitative and quantitative research methods differ in many ways, but they complement each other as well. All social researchers systematically collect and analyze empirical data and carefully examine the patterns in it. Quantitative researchers apply ‘reconstruction logic’ and follow a linear research path. ‘Reconstruction logic’ is based on reorganizing, standardizing, and codifying research knowledge and practices into explicit rules, formal procedures, and techniques. Quantitative scientists speak a language of ‘variables and hypotheses’ and emphasize measuring variables precisely and testing hypotheses that are linked to general causal explanations. Researchers who use only one research style do not always communicate well with those using the other, but the orientations of the approaches are mutually intelligible (Neuman, 2006: 151). Qualitative research methods describe and interpret a research object if a reasonable amount of quantifiable data is not available (Bungard et al., 2000: 2). The qualitative researcher views the social phenomena of complex social networks holistically (Orum et al., 1991: 6–7, Creswell, 2003: 182). This explains why qualitative research studies appear as broad, panoramic views of an object rather than as a micro-analysis. The more complex, interactive, and encompassing the narrative, the better the qualitative study (Creswell, 2003: 182). Qualitative researchers often rely on interpretative scientific data and apply ‘logic in practice’ following a nonlinear research path. ‘Logic in practice’ is based on an apprenticeship model and the sharing of implicit knowledge about practical concerns and specific experiences. The researchers speak a language of ‘cases and contexts’ (Neuman, 2006: 151). Qualitative experiments are those predominantly used for the exploration of a topic. In the context of heuristic qualitative research, the data analysis tries to find similarities (Witt, 2001: 4, Kleining and Witt, 2001: 12). In case studies, which are an important qualitative method, the researcher explores a program, an event, an activity, or a process in depth. The cases are limited by time and activity, and researchers collect detailed information using a variety of approaches and techniques (Creswell, 2003: 15). Yin recommends the case study method when ‘how’ research questions are being posed because such questions are more explanatory and can better analyze complex issues that are to be examined over a certain period of time (Yin, 2003: 6). Van de Ven and

4

2 Methodological Foundations of Research

Engleman note that ‘how’ questions help to describe and explain temporal sequences of events that reflect dynamic organizational reality (Van de Ven and Engleman, 2004: 355). In qualitative research through cases studies, the scientist uses complex reasoning that is multifaceted, iterative, and simultaneous. Although the reasoning is largely inductive, both inductive and deductive processes are at work. The thinking process is also iterative, with a cycling back and forth from data collection and analysis to problem reformulation. Added to this are simultaneous activities of collecting, analyzing, and writing up data (Creswell, 2003: 182–183). The analyst emphasizes conducting detailed examinations of cases that arise in the natural flow of social life, trying to present authentic interpretations that are sensitive to specific social-historical contexts (Neuman, 2006: 151). Actual methods of data collection in qualitative research, such as when preparing for a case study, are traditionally based on the available literature and documents (i.e., books, press releases, working papers, minutes of meetings, company balance sheets and pamphlets, etc.) personal interviews, and group discussion, and now also include a vast array of materials, such as electronic databases like the Internet as well as e-mail correspondence (Creswell, 2003: 181, 186–187, Bungard et al., 2000: 5–6). These methods were also used in this publication. The passage of time, which may involve years or decades, is integral to case studies. Analysts look at the sequence of events and pay attention to what happened first, second, third, and so on. Because qualitative researchers examine the same case or set of cases over time, they can see an issue evolve, a conflict emerge, a social relationship or a network develop. The researcher can detect processes and causal relations (Neuman, 2006: 151). A comparative illustration with regard to quantitative and qualitative research methods and their methodological strengths and weaknesses is shown in Figure 1.

2.1 Qualitative and Quantitative Methods

5

Research Method Advantages Quantitative

Qualitative

▪ quantified research results

▪ flexible research methods

▪ data comparability and transferability

▪ open questions approach allows

▪ data objectivity due to quantified methods

background information

▪ statistical and mathematical context

▪ better reflects complex reality

▪ reasonable in cost and time

▪ focus on relevant research issues

▪ more representative due to a larger

▪ contextual validity

sample

▪ exploration of a new topic

Research Method Disadvantages Quantitative ▪ less method flexibility ▪ fixed questions ▪ proposals allow for limited improvements

Qualitative ▪ relatively expensive and time consuming ▪ interviewer’s profound expertise is

▪ lack of individual response

necessary concerning the topic of

▪ limited causation of research results

research

▪ highly quantified data do not reflect specific circumstances in reality

▪ no numerical indications possible ▪ subjective interpretation of results, which depends on interviewer

Figure 1. Qualitative versus quantitative research methods. Source: modified from Bungard et al. (2000), p. 5–6

In the course of qualitative research and the analysis of case studies, hypotheses are not formulated tightly from an existing theory and may rely rather more on research questions. The research process should be flexible and open to new or even unexpected pragmatic information which reflects the observed reality. Due to the complexity of social life, fixed, struc-

6

2 Methodological Foundations of Research

tured, and standardized interview procedures are not recommended for case study research (Yin, 2003–17, Neuman, 2006: 151, Creswell, 2003: 181–187). Behavioral patterns are observed that presume interactive communication between interviewer and interviewee during the study. The individual case study research results can be generalized in the course of the examination, which finally allows for a verification of the theory that was generated during the qualitative research process. The thesis formulation and the choice of the concrete methods as well as the interview subjects are not carried out from each other separately. The methods for analysis rather progress through research phases in analogy in order to allow a profound interpretation of the findings of complex phenomena in the social environment (Atteslander, 2003: 84–85).

2.2

A Longitudinal Study for This Publication

The literature review has revealed that relevant publications concerning market developments in the consumer electronics industries, such as the television manufacturing industry, that examine the firms involved in this research (i.e., case studies of Samsung, Sony, and LG Electronics) are dominated by Asian scholars (compare Chang, 2003, Kim, 1997, Lee and Lee, 2007, Lee, 1995, Lee and Slater, 2007, Chen, 2004, Chen and Li, 2007, Deng, 2006). Cherry (2001) examined the development of the Korean electronics industry and its foreign direct investment activities in Europe after the end of the Korean civil war in 1953 up until 1997. In contrast to the number of publications by Asian scholars, market entry concepts and the strategies of Asian enterprises doing business in the consumer electronics industry have hardly been investigated by European scientists. One of the rare publications was contributed by Fuhl (2006), who recently published his research results regarding the innovation potential of Korean electronic companies using a case study of Samsung Electronics. McIvor et al. (2006) published their results concerning supplier involvement in product development, and Klincewicz (2005) published research on strategic alliances in the electronics industry. It is a matter of fact that the European electronics industry has been affected dramatically since the 1990s by the successful business expansion of Japanese, South Korean, and Chinese firms. While the majority of current studies are focused on the strategic market entry decisions in the Asian markets, i.e., China (Child and Yan, 1999, Cooke, 2006, Li et al., 2000, Yang et al., 2005), less attention is being paid to the successful market entry of Asian firms in Europe in various industries such as textile, toy, automotive, and electronics. This obvious lack of attention strengthened the author’s intentions of looking at the case of the television manufacturing and component business and its European market development since 1990. How has the longitudinal study been prepared? A first step was taken in the year 2004, when preresearch activities were done by the author in order to evaluate whether it would be empirically worthwhile to initiate the project and to conduct a feasibility study. In addition to a

2.3 Research Design

7

content analysis of relevant market and industry data (i.e., annual reports, market surveys, and press releases), five industry-expert interviews using the Delphi method, each interview lasting around one hour, were carried out with former employees of Samsung SDI, Germany. The Delphi technique served as an assessment of the impact of emergent trends on both the European television set product market and the Asian firms involved (Craig and Douglas, 2000: 365, Berekoven et al., 2001: 269). The pre-study results showed an increasing intensity of entry activities by Asian firms, particularly through joint ventures, in order to gain access to the European market. As a result, it becomes questionable as to whether the European-based TV and component manufacturers will be able to continue their competitiveness with their rivals from the Far East in the home market. The author hypothesizes that the success of the Asian firms in the television manufacturing business is fundamentally based on their long-term orientation and narrowly knit network structures, which bring them technological and cost leadership, as is particularly the case with Japanese firms. The weaknesses of the up and coming Chinese firms, such as TCL, regarding their limited access to distribution channels in the European market and rather poor brand recognition comparatively serve as an assumption as to why the Chinese have established bilateral relationships through a joint venture with the traditional French firm Thomson (Windsperger and Cliquet, 2007: 1, TCL, 2004b).

2.3

Research Design

According to the research design instructions recommended by Yin, first of all particular attention should be paid to the theoretical foundation before the empirical part is launched. The theoretical framework then becomes the vehicle for generalizing the results of the empirical cases (Yin, 2003: 28–29, 46, 49–50). For this reason, the first part of this publication is devoted to the relevant theoretical concepts for international market entry, their main contents, and a critical review of each model. After building the research questions and deciding on the theoretical framework, the next step according to Yin entails designing the empirical research framework in which the data collection techniques of pattern-matching provide the basis for logical replication through multiple case study research (Yin, 2003: 14, Coviello and Munro, 1997: 368). This part is reserved for the case study chapter of the publication. The following illustration serves to illustrate the design concept and study approach of the book.

8

2 Methodological Foundations of Research Theory

Longitudinal

Individual Case

Theory

Status

Research

Studies

Development

Network Concepts -

Research design Macro level

Diamond Model

Location Concepts

Uppsala Approach

European TV Market 1990-2011 Micro level Asian consumer electronics firms in the European TV market

European TV market 1990-2011

Cross-case conclusions from empirical reserach

Samsung

Towards a timebased network approach

Sony Sharp LG.Philips LCD

Eclectic Paradigm

Internalization

Research phases Pre-study: 2004 In-depth study: 2005-2008

Product Life-Cycle

Industry network systematization Firm’s networking intensity

LG.Philips Displays

Firms’ repositioning in networks over time

TCL China

Networking success factors

Matsushita [Panasonic]

Higher complexity of market entry strategies

Figure 2. Case study research design and method. Source: Adapted from Yin (2003), p. 50

The qualitative research approach using a multiple case method has been selected for this study because significant variables concerning European market entry patterns and network techniques used by Asian firms are hard to quantify adequately for the present research (Yin 2003: 52). The case studies, through intensive qualitative analysis, are designed to compare and contrast, as well as to describe and understand the industry characteristics within the individual settings of the relevant firms (Van de Ven and Poole, 2005: 1385). As suggested by Eisenhardt, the case sites are used more for theoretical than statistical reasons. In terms of method, the use of case research provides a richness and depth of understanding about the internationalization process that is not possible with survey data (Eisenhardt, 1989: 534, Coviello and Munro, 1997: 368, 383).

2.3 Research Design

9

The fact-finding process used to study the market entry strategies of Asian consumer electronics enterprises in Europe is characterized by relatively high complexity. The television manufacturing and component business belongs to the high technology industries and is characterized by relatively short-lived product life-cycles. Worldwide competition has intensified significantly. Firms that are at the head of the technologically driven market today may not be able to survive in the future because technological trends are misinterpreted by their market research. A country-specific production cluster and the corresponding supply and distribution channels continuously change. Consumer electronic products are usually sold in mass markets that are characterized by extreme price competition. Manufacturing and processing capacities (economies of scale effects) play a significant role in gaining a competitive advantage. Firms that ignore the intense price pressure definitely risk immediately falling from the market. Each individual case study consists of a ‘whole’ study, in which convergent evidence is sought regarding the facts and conclusions. If some of the empirical cases deliver divergent results, this leads to a modification of the existing internationalization network theory and further theory development. Both the individual cases and the multiple case results contribute to a summary report at the end of the empirical research. This report should indicate how and why a particular proposition was demonstrated or not. Furthermore, the statement should indicate the extent of the replication logic and why certain cases were found to have certain results, whereas other cases, if any, showed contrasting results (Yin, 2003: 50). According to Langley (1999: 708), it is of vital importance that the final research step of drawing conclusions from empirical study should involve inspiration (driven by creativity and insight) in order to create new views that are developed through linkages between the collected data and the theory-in-process research. Ideas inspired by the data may be attached to existing theoretical perspectives and further enrich them (Langley, 1999: 708). Within the research framework of this publication, the individual case studies of Samsung (South Korea), Sony (Japan), Sharp (Japan), TCL (China) and its joint venture with the European firm Thomson (France), Matsushita (Panasonic) and its engagement in IPS Alpha Technology (joint venture with Hitachi, and Toshiba from Japan), and two more EuropeanAsian joint venture case studies of LG Electronics (South Korea) with Philips (the Netherlands) provide fundamental insights and updated information about the television set and display component industry and its network structures. Various secondary sources were collected and analyzed, such as companies’ annual reports, press releases, and various kinds of corporate information including enterprise presentation materials and data from market research institutes like ‘DisplaySearch’ or ‘GfK Nuremberg’. The analysis demonstrated that the firms selected for the development of the case studies represent the driving industry forces and the most important brands on the European market. The selection is verified by statistics, such as relevant market shares of the five top brands in Europe that use technologies of liquid crystal display (LCD), plasma display panels (PDP), and the conventional cathode ray tube (CRT), as illustrated below:

10

Rank 1 2 3 4 5

2 Methodological Foundations of Research

TV-Assembler Samsung Philips Sony LG Electronics Matsushita

LCD 30.0 15.7 13.8 12.5 4.4

PDP 27.5 8.1 15.2 39.7

CRT 37.6 1.3 16.2 1.2

Figure 3. Top five brands in the European market based on unit shipment share (in percentage, status first quarter 2008). Source: DisplaySearch (2008a)

Samsung has aggressively developed and become the market leader in Europe over all technologies and has successfully surpassed Philips, which dominated the European market in the 1990s. While Sony focuses on LCD, LG Electronics and Panasonic offer flat (LCD and PDP) and conventional CRT TVs. Based on their market rank and the cases selected, it can be assumed that the research reported in this publication is based on a representative group of firms within the European television manufacturing business. During the second stage of the empirical research phase, field interviews were carried out between July and September 2007. Based on a semi-structured questionnaire, one Internetbased and fifteen face-to-face interviews in Germany and South Korea were completed. The interviews normally lasted one to one and a half hours and were done with current and former executives of Samsung Electronics, Samsung SDI, LG Electronics, LG.Philips Displays, Simon Gisul Co. Ltd., Cheil Industries Inc., Veseg GmbH, and TCL-Thomson Electronics. The interviews provided further in-depth insight into the industry and its networks. There were two criteria for the selection of appropriate interview partners. First, they had to be familiar with the television manufacturing industry environment; and second, they had to be familiar with the corresponding network engagements of the firms selected for this study. The semi-structured interviews were performed based on pre-formulated questions. (The questionnaire used in the interview is in the appendix of this publication.) The sequence of the questions was rather flexible, and the respondents were free to talk and give their opinions (Zou and Ghauri, 2008: 213). This format allowed adaptability in the topics that developed during a conversation and flexibility in pursuing a topic depending on the interviewee’s answers (Atteslander, 2003: 143). The following firms agreed to participate in the project.

2.3 Research Design Firm

11 Interview Location

Interview Date

Interviewee Position

Samsung Electronics

17/09/2007

Director Marketing

Samsung Headquarters Seoul, South Korea

Samsung Electronics

17/09/2007

General Manager Marketing

Samsung Headquarters Seoul, South Korea

Samsung SDI

18/09/2007

Director Sales

Suwon Plant, South Korea

Samsung SDI

18/09/2007

General Manager Sales

Suwon Plant, South Korea

Samsung SDI

18/09/2007

Senior Manager Sales

Suwon Plant, South Korea

Samsung SDI

18/09/2007

Manager Sales

Suwon Plant, South Korea

Samsung SDI

18/09/2007

President

Suwon Plant, South Korea

Samsung SDI

18/09/2007

Market Research Analyst

Suwon Plant, South Korea

LG.Philips Diplays

19/09/2007

Director Sales

LG Twin Towers Bld. (West Building), Yoido, South Korea

LG.Philips Displays

19/09/2007

General Manager Sales

LG Twin Towers Bld. (West Building), Yoido, South Korea

LG.Philips Displays

19/09/2007

Senior Manager Sales

LG Twin Towers Bld. (West Building), Yoido, South Korea

Samsung Che-II Industries

17/09/2007

General Manager

Lobby at Renaissance Hotel Seoul, South Korea

Simon Gisul Co. Ltd

15/09/2007 19/09/2007

President

Seoul, South Korea

GfK Nuremburg

04/07/2007

Director Consumer Electronics

Saarbruecken, Germany

VESEG

22/08/2007

Director Finance and Controlling

Rehlingen, Germany

TCL-Thomson Electronics

27/09/2007

Former Manager European Sales

Internet-based questionnaire response

Figure 4. Interview itinerary of industry experts of leading consumer electronics firms and the market research institute GFK Nuremberg. Source: Author

12

2 Methodological Foundations of Research

While some of the interviewees agreed to publication of their name and title, listed in the reference list of this publication, others insisted on remaining anonymous. Quotations or content contributions from the latter interviews are included in the reference list too but without mentioning the name of the respondent. These responses are reported as ‘Interviewee A [company name] date: year, month, day’. Each interview’s contents were recorded and transcribed. Additionally, the information was analyzed using ‘Nvivo’ computer assisted software for qualitative research, which facilitated theory building from the data and understanding of how these data are interrogated. The combination of classic interview techniques with computer assisted evaluation methods during the qualitative analysis helped to validate or to reject some subjective impressions of information by the interviewer (Welsh, 2002: 6). Overall, this book provides an industry overview that contains firm-specific data of the most important players in the television manufacturing industry and their activities in the European market.

2.4

Empirical Research Targets

2.4.1

Research proposals derived from previous studies

Johanson and Vahlne (2003: 83) claimed that a network-based model for foreign market entry should be strengthened by doing further research that focuses on customer and supplier relationships. Furthermore, the authors concluded that with a network-based model, foreign market entry and expansion activities are no longer abstract issues. How the players are embedded in customer and supplier networks in order to proceed with successful market entry and penetration strategies is the key research question. Johanson and Vahlne assume that personal relationships and enterprise networks are especially important in turbulent, high technology industries. The electronics industry and its television manufacturing segment belong to this kind of industry. Internationalization under turbulent environmental circumstances provides an exploitation of the advantage of these networks (Johanson and Vahlne, 1990: 20, 2003: 83). Similarly, McDougall and Oviatt (2003: 12) ask for further empirical testing of the network theory, which is necessary for the continued development of the model. In order to have a better understanding of the relationship approach and the interrelationships between corresponding market entry modes, Andersen and Buvik (2002: 359–360) proposed longitudinal studies using multiple sources of evidence, i.e., through case studies. A detailed industry-specific knowledge about the potentials of networks in international business indicates a need for further development of the model and empirical testing (McDougall and Oviatt, 2003: 12). The empirical results of this publication concerning networking structures in the television manufacturing industry with a particular focus on a firm’s alliances, joint venture partners, and relationship to its suppliers and customers will contribute to existing theoretical concepts (Hakansson and Johanson, 2001: 2–9, Mathews, 2002: 208, Hohenthal,

2.4 Empirical Research Targets

13

2001: 101–115, Johanson and Vahlne, 2003: 93–94, Coviello and Munro, 1997: 372–375, Sharma and Blomstermo, 2003: 750). Gulati et al. (2000: 212) suggest that the network perspective provides an interesting platform for evaluating the positions of firms in the industry network. Firm attributes, such as scale, scope, and technology, can be considered in constructing strategic groups embedded in the network. The scholars assert that the network perspective provides better insights into dynamics as firms and industries evolve over time and explains why some firms get lockedin and why others get locked-out of the market (Gulati et al., 2000: 212–213). From these assumptions, the main research objectives are derived for the empirical part of this publication. Utilizing a longitudinal in-depth study, the case studies of this book are focused on the television manufacturing industry, investigating the development of Asian television manufacturing enterprises and their European market entry and penetration strategies through various kinds of networks.

2.4.2

Towards a time-based network approach

Research on industry networks tends to be complex and results run the risk of misleading interpretations if the empirical study targets a short period of time. This publication examines bilateral firm networks and the repositioning of the network partners from a process perspective, based on the results of a longitudinal study of the European television manufacturing market environment since the 1990s. Particular attention is paid to the case studies because they provide insights into Asian consumer electronics firms as well as European-Asian joint ventures, their company backgrounds and culturally biased management characteristics, organization structures, major business fields, and financial performance. Research findings at the end of the book, based on the outcomes of the case studies, verify, replicate, and extend the network theory of internationalization, which is the major hypothesis of this work.

Hypothesis: Bilateral firm networks play a significant role for Asian firms in the television manufacturing industry in their market entry strategies in the European market.

The case studies contribute to understanding networking clusters in the electronics industry and how Asian firms make use of them when they follow their market entry and penetration strategies. In order to verify the research hypothesis, major research questions are derived, which will be answered within the chapters of this book.

14

2 Methodological Foundations of Research

General industry networking intensity and influencing factors [industry perspective] q [1]

Did the networking intensity of firms increase for the time period from the 1990s until 2008?

q [2]

Which factors influenced the momentum of industry networking intensity?

Strategic resources for future competition q [3]

What strategic resources should a company in the electronics business develop in order to survive in future competition?

Deduction of firms’ networking targets q [4]

Firms’ networking targets differ, but might they be categorized into segments such as manufacturing cost, research and development, and other potential categories?

Firm specific networking intensity [firm perspective]

q [5]

Firms’ bilateral network intensity differs. Which results deliver a quantification of the networking intensity of the case study firms in relation to each other?

Networking partner repositioning over time q [6]

Is an identification of a network partner repositioning pattern over a period of time possible? •

Intra-Japanese firm networks and partner repositioning over time

•

Asian-European firm network partner repositioning over time

Networking success factors q [7]

Which networking success factors can be deduced from the empirical research outcomes?

2.4 Empirical Research Targets

15

Towards a higher complexity of market entry strategies q [8]

Which factors are responsible for the necessity of a more complex understanding of market entry strategies in light of global world markets?

Yin (2003: 28–29) emphasizes the importance of a rival hypothesis. Rival hypothesis: Bilateral firm networks do not play a significant role for Asian firms in the television manufacturing industry concerning their market entry strategies in the European market.

After looking at the empirical results, it will be determined whether the research results support or deny elementary assumptions of the network concept of internationalization.

3

Internationalization Theories

3.1

The International Product Life-Cycle Theory

3.1.1

Internationalization based on the product life-cycle phase

The international product life-cycle theory developed by Vernon was introduced in 1966 (Vernon, 1966: 190–207). Based on panel research of U.S. enterprises, Vernon’s product life-cycle explanations further developed the existing trade theories introduced by Heckscher-Ohlin and Leontief (Vernon, 1972: 4–6). Vernon assumed that the flow of information across national borders would be restricted and that products undergo predictable changes which have an impact on the firm’s internationalization strategies. The product life-cycle model was developed on the assumptions that the production process is characterized by economies of scale, that the cycle changes over time, and that tastes differ in diverse countries (i.e., each product does not account for a fixed proportion of expenditure for buyers at different income levels). Because information does not flow freely across national boundaries, three important conclusions follow. 1. The innovation of new products and processes is more likely to occur near a market where there is a strong demand for them than in a country with little demand. 2. A businessman is more likely to supply risk capital for the production of a new product if demand is likely to exist in his home market than if he has to turn to a foreign market. 3. A producer located close to a market has lower cost in transferring market knowledge into product design changes than one located far from the market (Vernon, 1972: 6). The international product life-cycle theory claims that the market entry of a product is carried out in a foreign market depending on the position of the product in its country-specific product life-cycle curve. For a certain period, producers based in the U.S are likely to have a virtual monopoly on the manufacturing of new products that are introduced in the U.S. An innovative product at its growth phase is produced inland and sold at relatively high prices. Some foreigners demand the new product and U.S. exports begin (Vernon, 1972: 12).

18

3 Internationalization Theories

This assumes a certain purchasing power and consumption behavior concerning innovative products on the consumer side. The output volume increases in the course of the market penetration inland and experience curve effects appear. Due to the product’s attractive market growth forecasts, the number of enterprises that produce this product increases in the home country (Macharzina, 2003: 841). As a result, standardization and product cost aspects become important in connection with the necessity of mass production outputs. If the growth rates decline during the maturity stage of the product life-cycle in the home market, export activities to other industrially developed countries begin. As foreigners’ incomes grow and lower income consumers abroad begin to buy the older product, prices begin to fall and U.S. exports increase (Vernon, 1972: 13). As the product sales continue and market volumes increase in these foreign markets, it becomes economically desirable to establish foreign production. The time it takes until foreign production begins is dependent on the economies of scale, tariffs, transportation costs, the income elasticity of demand for the product, and the income level and size of the foreign market (Vernon, 1972: 13). The home market becomes more and more unimportant, and local production runs out due to the relatively high production costs in comparison to foreign countries. The remaining market volume during the decline phase of the product life-cycle is supplied completely from abroad (Macharzina, 2003: 841). U.S. exports to non-producing countries begin to be substituted by exports from other nations (Vernon, 1972: 13).

3.1.2

Critical review of Vernon’s theory

Export and foreign direct investment activities depend on the position of the product in its life-cycle. At first, the new innovative product is developed, produced, and sold in the home market. In the second phase, product exports start; and while this product becomes mature, direct investments abroad begin. Finally, import from abroad increases, production is discontinued in the home market, and the demand is completely supplied by foreign countries. At this stage, the product has reached the decline phase of its life-cycle. Vernon’s approach has made an essential contribution to the internationalization concept disciplines. The product life-cycle model provides a useful framework for explaining the post-World War II expansion of U.S. manufacturing and investment activities. However, its explanatory power has waned with changes in the international environment (Robock and Simmonds, 1989: 47). The model can be criticized in general because it assumes an ideal product life-cycle with coherent foreign activities. The theory is limited to a large home market such as the U.S. from whence the firms start their global activities but ignores environmental conditions in small domestic markets (Luostarinen, 1980: 77). Due to its complexity, the general validity of the model is hard to test empirically. Furthermore, factors such as potential trade barriers, different customer behaviors, and protectionism or investment incentives that significantly influence the production costs are not considered (Macharzina, 2003: 842, Perlitz, 2004: 75, Kutschker and Schmid, 2006: 432–433). The case of the television manufacturing industry shows that the model is unable to describe the phenomena of industries located in countries that were ranked among the ‘less developed’ in the past, but could become technological market leaders in the future. The South

3.2 The Internalization Theory

19

Korean television manufacturing industry, which did not exist in the 1950s, started to replace, together with Japanese assemblers, U.S. television manufacturing in the 1980s. Furthermore, the model has limits. First, customers’ expectations concerning the technical performance of the product have become similar worldwide. Second, purchasing power does not differ significantly in the industrially developed countries nowadays. (Vernon correctly assumed a U.S. consumer’s higher purchasing power relative to the rest of the world in the 1950s and 60s.) Third, due to increasing R&D expenses and enormous investment in production capacities, firms are forced to sell their products globally in order to realize early economies of scales. Fourth, product life-cycles, for example in consumer electronics, have become increasingly shorter; thus firms are forced to start the home and global product sales simultaneously. The segmentation of the product life-cycle phases and corresponding conclusions for production locations according to Vernon (i.e., the time when a product declines at home and foreign production starts) is rather arbitrary and depends on many factors. Generalization and verification of the theory is exceptionally difficult (Tesch, 1980: 164–167). In 1979, Vernon retracted his life-cycle model and agreed that there were fewer differences among countries in factor costs and market conditions (Barkema et al., 1996: 152). From today’s view, after passing decades of major economic and political progress in world trade, the international product life-cycle theory has lost much of its validity. Consequently, further internationalization models have been developed, which are described in this chapter.

3.2

The Internalization Theory

3.2.1

The issue of transaction costs

The internalization theory of Buckley and Casson further developed the transaction cost approach of Coase, and the market-hierarchy paradigm of Williamson (Coase, 1937, Williamson, 1975). Buckley and Casson transferred the contents of the transaction cost theory to the idea of multinational enterprise (MNE). The MNE is defined as an enterprise that owns and controls activities in different countries (Buckley and Casson, 1976: 1). According to the internalization theory, firms have two fundamental possibilities when dealing with international transactions: externally through the market (export or license agreements) or in-house through hierarchy (foreign direct investments). The transaction costs in the market need to be compared with the internal coordination costs that arise alternatively when carried out in-house (Perlitz, 2004: 108). Transaction costs always arise due to market imperfections. First, external carrying out over the market is not free of costs for the firm because of a lack of reliable future market forecasts due to significant time lags between initiation and completion of the international busi-

20

3 Internationalization Theories

ness activity. Second, there is a monopoly (or monopsony) incentive in terms of ‘internalization of the market’ (forward or backward integration) in order to implement the desired price. Third, the bilateral concentration of market power (bilateral monopoly) leads to an indeterminate or unstable bargaining situation. Fourth, there are market imperfections caused by an inequality between buyer and seller with respect to knowledge of the nature or value of the product. Finally, market imperfections arise from government interventions in international markets through tariffs or restrictions on capital movements, and from discrepancies between countries in rates of income and profit taxation (Buckley and Casson, 1976: 37–38, Welge and Holtbrügge, 2003: 69, Kutschker and Schmid, 2006: 448). Market imperfections necessarily require the initiation, negotiation, and conclusion of contracts (ex-ante costs) as well as supervision, putting through, and modification of contracts (ex-post costs). According to Williamson the height of transaction costs is determined by the following general factors (Welge and Holtbrügge, 2003: 70, Williamson, 1975). Specificity: Mutual dependence, the danger of opportunistic behavior and declining costs rise with increasing specificity of performance (investment). The difference between the best and second-best use possibility of a performance increases too. The probability of internalization increases with an enhanced specificity of performance (investment). Uncertainty: Contracts are always imperfect and have to be put in concrete terms and adapted in the course of the transaction process. The higher the uncertainty, the more difficult it is to include the complexity of possible future developments in contracts. The danger of opportunistic behavior of the transaction partner rises in accordance with the perceived degree of uncertainty. Frequency: The more frequently equal transactions are carried out, the lower the average costs of a transaction due to learning effects. Mutual trust between the transaction partners rises. Specimen contracts limit the contractual negotiations of the transaction partners to a minimum. With an increasing frequency of transactions, the probability of internalization decreases. The internationalization theory maintains that a firm performs business transactions over the market whenever these costs are lower than the internal organization of these activities. On the other hand, the higher the internal efficiency of in-house procurement, the more desirable is the internalization of market transactions. Besides the existence of economies of scale across activities, the direct coordination of transactions may reduce the costs, associated with information impact, opportunism, and uncertainty (Caves, 1982: 36, Zuchella and Scabini, 2007: 35). Buckley and Casson emphasize the role of MNE as a developer and transferor of various kinds of knowledge and skill. The main rationale for the MNE is the existence of widespread market imperfections which make the production and diffusion of knowledge and production skills difficult. In a world of imperfect markets, foreign investment has allowed MNE to bypass imperfect external markets for knowledge through internalization (Buckley and Casson, 1976: 109–113). Multinational firms appear where it is cheaper to

3.3 The Eclectic Paradigm

21

allocate international resources internally than it is to use the market to do so (Brown, 1976: 39, Welge and Holtbrügge, 2003: 70).

3.2.2

Critical review of the internalization theory

The internalization theory extends the market imperfections approach by focusing on failings in intermediate-product markets rather than on final products (Buckley and Casson, 1976: 33, Robock and Simmonds, 1989: 45). Buckley and Casson identified different factors determining the internationalization decision, which does not depend only on market imperfections but also on the organizational capabilities of the MNE, particularly in terms of internal market organization and coordination. They also considered the role of knowledge in driving foreign investment decisions as opposed to market transactions (Zuchella and Scabini, 2007: 35). MNEs appear where it is cheaper to allocate international resources internally than via the market mechanism (Brown, 1976: 39). The model concentrates on transaction costs as a main impulse for internationalization (Welge and Holtbrügge, 2003: 71). However, there are other motives for enterprises to internationalize, such as the necessity of a supplier ‘to follow the customer’ in foreign markets. Moreover, the actual height of transaction costs can hardly be quantified, and costs usually change in the course of time. The internalization approach pays limited attention to behavioral aspects, such as language and cultural barriers, which are among the major challenges for MNEs in the ‘internalization process’ of foreign operations (McIvor et al., 2006: 392, Welge and Holtbrügge, 2003: 71). The results of business activities in countries that are culturally different or where the protection of the invested private capital is not secured (i.e., Venezuela) may cause that internalization to become rather disadvantageous for the company. The internalization concept of Buckley and Casson (1976) explains the growth of MNEs domestically and internationally. The international expansion of MNEs is a special form of the general theory where the internalization of markets occurs across national boundaries. The approach focuses on the firm’s motives to internationalize but pays only limited attention to the potential of national governments and their political-legal influence. For example, in some countries it is desirable to establish a joint venture with local firms in order to enter the foreign market successfully. The need to found a joint venture with a local partner influences the firm’s decision alternatives and may hinder realizing the concept of a complete internalization (e.g., through foreign direct investment) of foreign country activities into the firm’s hierarchy (Robock and Simmonds, 1989: 47).

3.3

The Eclectic Paradigm

3.3.1

Advantage categories

The ‘eclectic theory of international production’ was developed by Dunning, who claims that the choice of the international market entry strategy depends on enterprise specific advan-

22

3 Internationalization Theories

tages. Dunning distinguishes three types of advantage categories that influence the corresponding market entry strategy (Dunning, 1980: 9–13, Dunning, 1979: 269–272).

1. Ownership-specific advantages The more ownership-specific advantages are possessed by an enterprise, the greater the inducement to internationalize them; and the wider the attractions of a foreign rather than a home country production base, the greater the likelihood that an enterprise will engage in international production. Such ownership-specific advantages may take the form of legally protected rights, patents, brand names, trade marks, or a commercial monopoly. Furthermore, if the access to resources such as particular raw materials becomes essential for the production of a product, exclusive control over particular distribution channels seems desirable. Ownership-specific advantages may arise from the size or technical characteristics of firms, the economies of scale in production, and a surplus of qualified entrepreneurial capacity. The eclectic approach of international production in an enterprise can be described like this: a national firm supplying its own market has various avenues for growth. It can diversify horizontally or laterally into new product lines or vertically into new value chain activities, it can acquire other enterprises, or it can exploit foreign markets. When it makes good economic sense to choose the last route, the firm becomes an international enterprise (defined as a firm which services foreign markets). However, in order to be able to produce alongside indigenous firms domiciled in these markets, it must possess additional ownership advantages sufficient enough to outweigh the costs of servicing an unfamiliar or distant environment. The function of an enterprise is to transform, by the process of production, valuable inputs into more valuable outputs (Dunning, 1980: 9–13). The ownership category is based on ‘why go abroad?’ or ‘how is it possible to go abroad?’ questions. Ownership advantages secure MNEs’ competitive superiority over other firms supplying particular foreign markets (Rasmussen et al., 2008: 71).

2. Internalization advantages In-house value chain activities help the enterprise to reduce the cost of information search in the market, expenses for negotiation and contracting with outside suppliers, and protection of intellectual property rights. Internalization advantages answer the ‘how?’ or ‘by which route?’ question (Rasmussen et al., 2008: 71–72). Internalization advantages develop certain enterprise specific capabilities concerning technology and organizational skills. The basic incentives for a firm to internalize its ownership endowments are to avoid the disadvantage and imperfections of one or the other main external mechanisms or resource allocations: first, the market or price and second, the public authority fiat (Dunning, 1980: 9–13). Market imperfections arise wherever negotiation or transaction costs are high and wherever information about the product or service being marketed is not readily available or is costly to acquire. Public intervention in the allocation of resources may also encourage firms to internalize their activities. This intervention arises particularly with respect to government legislation regarding the production and licensing of technology, including the patent system,

3.3 The Eclectic Paradigm

23

and where there are different tax and exchange rate policies, which multinational enterprises may wish either to avoid or exploit. Under these circumstances, it seems desirable for an enterprise to internalize ownership (Dunning, 1980: 9–13).

3. Location-specific advantages The ability of an enterprise to acquire ownership-specific endowments is clearly related to the endowments that are specific to the countries in which they operate and particularly those endowments that are specific to their country of origin. Location deals with the ‘where?’ or ‘why do firms produce in one country rather than in another?’ question. Location advantages evaluate the alternative that it is more profitable for the MNE to use its ownership advantages together with factor inputs outside the home country (Rasmussen et al., 2008: 71). Examples of location specific advantages are government policy (with respect to import barriers, investment incentives, etc.), access and costs of material and labor, market volume and attractiveness as well as transportation and communication infrastructure (Dunning, 1980: 9–30). Dunning derives the following recommendations for foreign engagement from the ownership-location-internalization (OLI) advantage categories: enterprises that have merely ownership-specific advantages and neither internalization nor location-specific advantages should deal with their foreign business in the form of international contracts (e.g., licenses). Enterprises with ownership and internalization advantages should prefer exports. In case an enterprise has all three advantage categories at its disposal, a foreign direct investment should be considered as a form of a foreign engagement. The category connections are illustrated in the figure below.

Advantage

Ownership specific

Internalization

Location specific

Foreign direct investment

Available

Available

Available

Export

Available

Available

Not available

International contracts

Available

Not available

Not available

Entry strategy

Figure 5. Relationship of the advantage categories and market entry strategies. Source: Dunning (1980), p. 13, Perlitz (2004), p. 110

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3 Internationalization Theories Ownership- specific advantages yes

no

No internationalization

Internalization advantages

no

yes Firm-internal coordination

Resource transfer (international contracts)

Foreign locationspecific advantages yes

Foreign direct investment

no

Export

Figure 6. A firm’s international market entry modes are deduced depending on these advantage categories (Dunning). Source: Kutschker & Schmid (2006), p. 456

Initially addressed as a static model, Dunning further developed the eclectic paradigm several times over a period of more than 20 years paying more attention to dynamic competitiveness and the strategic aspects of the firm (compare: Dunning, 1988, Dunning, 1993, Dunning, 1994, Dunning, 1995, Dunning, 1999, Dunning and Dilyard, 1999, Dunning, 2000, Dunning, 2001). Recent economic changes in the global market, such as the knowledgebased economy; the deepening integration of financial, logistic, and electronic networks; the liberalization of cross-border markets; and the emergence of several new countries as important new players in the global economic arena caused Dunning to modify and enlarge each of

3.3 The Eclectic Paradigm

25

the OLI categories. Resources and capabilities such as the ability to internally produce and organize proprietary assets that match existing market needs at any given moment of time (static ownership advantages) were enlarged by context-specific issues to increase income generating assets over time (dynamic ownership advantages). The need for the firm’s efficiency improvement through rationalization highlights the importance of management’s strategic capabilities. The trade-off of resources that can be internally developed with those externally acquired (i.e., through alliance partners) becomes more crucial than the resources themselves (Dunning, 2001: 174). Location-specific advantages have been traditionally expressed by the availability of a country’s unique immobile natural resources which the MNE may make use of. This category was enlarged by distinctive and non-imitable, locationbound created assets, such as the presence of firms that have specified local knowledge, i.e., better access to local customers because of suitable and efficient marketing communication. MNEs might form alliances to complement their own core competences (e.g., advanced production technology) with the specified knowledge (e.g., marketing) of those local firms (Dunning, 2001: 178).

3.3.2

Critical review of the eclectic paradigm

The achievement of Dunning’s paradigm is that multi-causal reasons are considered that influence an enterprise’s choice of market entry strategy. The creation of the eclectic paradigm is based on different models, such as the theory of the monopolistic advantage, the internationalization theory, and the location theory. However, in a parallel manner the criticism is related to the theory’s grounding in other models. Dunning’s paradigm is rather a conglomeration of variables that are not connected to each other in any way (Perlitz, 2004: 111, Kutschker and Schmid, 2006: 456–457, Macharzina and Engelhard, 1991: 23–43). Hohenthal criticizes the paradigm for mixing three different and sometimes overlapping sets of explanations from international trade theory (location advantages), resource-based theory (ownership advantages), and transaction cost theory (internalization advantages), which makes the model very complex and difficult to use. Thus, the three advantage categories are formulated too generally, which makes it impossible to formulate a concrete recommendation for an enterprise’s internationalization strategy (Hohenthal, 2001: 80). Dunning assumes a rationally acting ‘homo oeconomicus’. This vital assumption in Dunning’s model is hard to agree with when it comes to behavioral aspects, such as preferences or aversions of the management, which influence market entry decisions. The strategic concept concerning foreign market entry is not mandatory based on the rational trade-off of logical circumstances. The model presupposes that different firms have broadly similar objectives and respond to economic signals both consistently and following the same strategic direction. The model ignores the fact that firms utilize different market entry modes in the same country (Robock and Simmonds, 1989: 48). Market entry decisions are also influenced by spontaneously appearing opportunities, such as purchasing the factory of a competitor that recently went bankrupt. In addition, the model has limitations for analyzing public policy issues, such as the influence of tax incentives or subsidies, which influence foreign direct investment decisions (Robock and Simmonds, 1989: 48).

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3.4

Location Theories

3.4.1

Historical foundations

The location concept focuses on the access and optimal allocation of the firm’s input variables needed for manufacturing and service output (Rasmussen et al., 2008: 72). The location discussion in connection with international trade has a long history. The mercantile doctrine, the major economic theory from the 16th to 18th century, claims that the prosperity of a country (accumulated in gold or other precious metals) should be increased by high exports and low imports. The more one country wins from bilateral trade through trade surplus accumulated in the national treasuries, the more the other country loses (Robock and Simmonds, 1989: 140). The mercantile doctrine was replaced by Adam Smith’s ‘theory of absolute advantage’ published in the book The Wealth of Nations in 1776. Smith, who was ahead of his time when he supported the free trade system, argued that countries differ in their manufacturing performance. If one country specializing in a particular product exports the product to a country from which it imports another product the trade partner specializes in, all participating countries will benefit from international trade. Import restrictions lower the gains from specialization and cause a nation to lose wealth (Hill, 2005: 147–151, Parkin et al., 2000: 914). David Ricardo further developed Smith’s idea and introduced ‘the theory of comparative advantage’ at the beginning of the 19th century. He claimed that countries should focus on items that they can manufacture most efficiently in comparison to other countries. Consequently, countries should export those goods where they have a comparative advantage and import other products where the trade partner country has an efficiency advantage. Thus, differences in productivity among countries initiate trade ambitions and result in a higher standard of living for the participating states (Hill, 2005: 150–151, Mankiw, 2007: 223). Heckscher and Ohlin argue that countries differ in their factor endowments, such as ground, labor, and financial capital, and these differences cause divergent competitive advantages. In addition, countries have comparative advantages in those goods for which the necessary factors of manufacture are comparatively abundant locally, which causes the prices of goods to be determined by their corresponding input costs. Thus, a country should manufacture and export those products that use factors that are abundant at home. Nations that have a comparative disadvantage tend to import those goods whose production requires the factors that are relatively scarce in their country (Brakman et al., 2006: 119, Robock and Simmonds, 1989: 36). At the beginning of the 21st century, the external environment of organizations involved in international trade provides many opportunities but simultaneously is becoming increasingly uncertain. The liberalized global trade framework and advanced logistics and communication systems allow a much easier entry of rival firms on the home market or abroad than was true decades ago. Environmental uncertainty reflects the grade of complexity plus the degree of change existing in a firm’s external environment. Before firms decide their market entry strategy, they have to scan the external environment in order to identify possible opportuni-

3.4 Location Theories

27

ties and threats in light of internal resources that reflect the strengths and weaknesses of the company (Wheelen and Hunger, 2004: 52).

3.4.2

Location factors

The location theory of internationalization assumes that the strategic decision for market entry, i.e., foreign direct investment, primarily depends on the location factors of that country (Welge and Holtbrügge, 2003: 66–67, Tesch, 1980: 132–138). The level of risk in the host country affects the strategic entry choice (Pan and Tse, 2000: 540). Two central categories of location factors can be distinguished: the category of the general (macro) environment and of the industry or task (micro) environment (Kutschker and Schmid, 2006: 434, Hitt et al., 2003: 69). Related to these two categories, two kinds of risks can be derived: contextual risk and transactional risk. Contextual risks are those external uncertainties embodied in the market environment. They include the political risk (e.g., instability of the political system), ownership/control risk (e.g., expropriation and intervention), operational risk (e.g., price control and local content requirements), and transfer risk (currency inconvertibility and remittance control). Transactional risks arise as a result of the behavior of competing firms in the industry (e.g., increase of entry barriers through price offensive strategies). Furthermore, transactional risk is, for example, related to opportunistic behavior of joint venture partners (Pan and Tse, 2000: 540) . Aspects of the institutional environment can have a direct effect on a foreign firm’s entry mode strategy. Legal restrictions on foreign ownership of domestic enterprises establish definitive limits on foreign equity holdings. Country uncertainties regarding the protection of intellectual property rights provoke higher environmental risks, which result in a firm’s reduced investment activity (Delios and Beamish, 1999: 917). Demographic dissimilarities can result not only in lower demand for a technology, but also modification and adaptation of the technology may be required (Davidson and McFertidge, 1985: 9). The next figure provides an overview of general external location factors (macro-environment), varying from country to country, which represent opportunities or threats for the international business activity of the firm. An opportunity is a condition in the general environment that if exploited, helps a company to achieve competitive advantage, while a threat may hinder a company’s efforts to attain strategic competitiveness (Hitt et al., 2003: 43).

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3 Internationalization Theories

Economic

Technological

PoliticalLegal

Sociocultural

Ecological

Gross Domestic Product (GDP) trend

Patents outcomes

Market versus central planned economy

Age distribution of population

Environment protection laws

Birth/death and growth rate of population

Nature resources and exploitation

Unemployment rate Wage levels Interest rates State budget volume/surplus /deficit Foreign trade surplus or deficit Inflation rates

Disposable income of consumers Stability of currency Debt-equity ratio

Industry cluster Industry innovation and productivity Telecommunication (Internet-) infrastructure Government spending on R&D Industry expenses for R&D Technology transfer from laboratory to market place

Attitudes toward new technologies, automation, and rationalization Country specific industry focus (i.e., electronics, automotive)

Democracy Stability of government Protection of capital and intellectual property rights

Rate of family formations Regional shifts in population

Corruption level

Life expectancies

Tax laws/ investment incentives

Changes in lifestyle

Antitrust regulations Affiliation to political and economic organizations (WTO)

Attitudes toward minorities Education/ illiteracy Violence potential of the society

Figure 7. Elements of the general external (macro) environment of a firm. Source: Modified from Wheelen and Hunger (2004), p. 53 and Schreyögg (2003), p. 319

Attitudes towards nuclear energy Consumption of bionomical products Market penetration of genetically engineered food Protection of threatened species of animals

3.4 Location Theories

29

An industry is a group of firms producing a similar product or service (Wheelen and Hunger, 2004: 60). The industry or task (micro) environment is a set of industry-specific location factors that directly influence a firm in its competitive position relative to local rivals and, logically speaking, its market entry and penetration strategy abroad. Interaction among these factors, such as the bargaining power of supplier and buyer, the danger of entry of new firms in the market, the threat of product substitutes, the power of other stakeholders (i.e., workers union), and the intensity of rivalry among competitors influences a firm’s profitability in foreign markets (Hitt et al., 2003: 42, Porter, 1999–64, Wheelen and Hunger, 2004: 61, Müller-Stewens and Lechner, 2005: 189). Industry groups consist of firms embedded in their national (macro) environments. These firms, generally assigned to the agricultural, manufacturing, or service industries, decide on their own conditions, i.e., organizational and managerial capabilities, mission, strategy, and policies and procedures (Toyne and Nigh, 1998: 868). The educational system established by the national governments provides for qualified and talented personnel in the firms. At the same time, firms give back to their society through their internal qualification programs and the development of personnel, which necessarily contains behavioral and ethical aspects that reflect the company’s culture (macro-environment). Customers procure products and/or services from the firm, or make use of related services, such as public transportation and shops (Hayter, 1997: 226). Politicians set new legal standards (i.e., product labels that show electricity consumption of the electro-apparatus), which causes a change in customer needs (i.e., product purchase with reduced power utilization). Consequently, they influence the destiny of firm manufacturing and the sales potentials of these products. If the firm has reliable, sophisticated market research and forecasting, it is better able to forecast new technological trends and concentrate the corresponding R&D activities. Suppose an enterprise performs well; its growth strategy will result in a higher number of employees. If not, employees need to be released, and the firm may face bankruptcy, which contributes to an economy’s higher unemployment rate (negative impact on its macro-environment). Finally, there are various linkages between the macro and micro environments. However, the elements of the firm’s environment permanently evolve. Changes lead to modifications in the cost and revenue structure, which may be unfavorable to the firm (Rasmussen et al., 2008: 73). Thus, a consequent and permanent scan of the firm’s macroenvironment, usually maintained by the market research department or outsourced to market research institutes, is of vital importance to the company. The more the firm is involved in global business and the higher the number of potential competitors, the greater the market research complexity. Professional market research requires an organization’s managerial, structural, and strategic flexibility. Jones claims that internationalization in today’s context is less about entering foreign markets than it is about increasing the firm’s exposure and response to international business influences that accommodate not only opportunities but also threats (Jones, 2001: 193). Porter defined five forces that evaluate the firm’s individual task environment (micro-environment), including the bargaining power of suppliers and customers, the threat of product substitution by new technologies or a changed lifestyle, the danger of new market entry activities by other firms, and the intensity of competitive rivalry. The outcomes of the factors mentioned above influence

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the industry attractiveness and corresponding profits of the engaged firms (Porter, 1999: 34). In the case of a television manufacturer, the industry environment in the European Union in the year 2008, according to Porter, is illustrated below: Danger of new market entrants: Firms from China, Taiwan and India

Supplier:

Customer:

Major component supplier in China, Japan, and Korea

High quality consciousness and price sensitiveness

R&D know-how bundled in Asia

Industry Rivalry

Newly upcoming industry cluster in Poland, Slovakia, and Hungary

Market saturation in west Europe Upcoming new markets in central and eastern Europe

Threat of technological substitution: Organic Light Emitting Display (OLED)

Figure 8. Industry environment of a television set manufacturer located in the European Union in 2008. Source: Adopted from Porter (1999), p. 34

3.4 Location Theories

3.4.3

31

Questions related to market entry

The study of market entry abroad necessarily assumes the recognition and understanding of the respective market structures. According to Meyer (2006: 37), a firm that plans direct investment activities in a foreign country should first collect necessary information in order to answer the following questions, which do not claim completeness and serve as an abstract providing selected issues to think about. a. Foreign market potential Which basic trends are visible with respect to the market size and market growth potentials in the country? How will the purchasing power of the potential customers develop in the future? b. Industry cluster Are there any industry clusters of component suppliers available or under development? Is the location attractive for competitors to initiate foreign direct investment activities there? What infrastructure is available? How will the freight rates develop, depending on the number of logistics’ firms that offer services in that region (Meyer, 2006: 37)? According to Rasmussen et al. (2008: 73), the rationale of the ‘incubator’ hypothesis is that a newly established industrialized area (industry cluster) offers firms attractive conditions for investment. Enterprises usually benefit from tax incentives and reasonable prices for real estate. Through concentration in a cluster, firms create economies of scope by sharing storage facilities as well as transportation, which facilitates exports and imports. Especially with regard to technology-oriented complexes, e.g., science parks’ or economic development zones, the ‘incubator hypothesis’ has been useful (Rasmussen et al., 2008: 73). c. Factor costs and productivity How will labor costs develop in the respective regions? Are the factor costs in countries with relatively low wage levels associated with lower educational levels that result in lower productivity and employees that are less conscious of quality? How much training is necessary for the work force? Do the work ethics and the loyalty of the staff differ culturally from the atmosphere at home (Meyer, 2006: 37)? d. Production engineering Which manufacturing methods are used? Does the availability of sufficient qualifications in the population permit running the machines and plants? e. Political-legal factors Is the privately invested capital secured from government access? Is the intellectual property inclusive of patent rights ensured? Does the legal framework change with respect to taxes or granted subsidies? Under which conditions can the firms assert legal claims in the market (Meyer, 2006: 37)?

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Additionally, cultural characteristics can affect local business opportunities because they affect consumer demands and potential behavior patterns and also culturally biased work ethics or quality consciousness (Robock and Simmonds, 1989: 53).

3.4.4

Critical review of the location theories

Location factors, which might include, for example, labor, transportation costs, and demand conditions (i.e., market size), differ among countries, which influences the competitiveness of enterprises. Political-legal, economic, technological, socio-cultural, and ecological framework elements in a country provide opportunities or risks for a firm’s business and influence the mode of market entry. The enterprise has to evaluate external chances and risks in foreign countries against the availability and potentials of the firm’s internal resources. A foreign direct investment (i.e., manufacturing capacities) to a firm abroad, which is riskier than for example export activities, needs to be prepared carefully and should not endanger the existence of the enterprise in case it fails. The location theory assumes that the decision to make a direct investment in a particular country is certainly determined by its location factors (i.e., production costs, investment incentives, and tax burden). However, empirical studies of the relative influence of these individual factors, because of their enormous complexity, are rather difficult. The location factor approach does not supply any contribution regarding the relative meaning of each of the individual factors (Welge and Holtbrügge, 2003: 67). In the public media, labor costs are frequently mentioned as the reason for investment decisions in favor of a particular location relative to others. It is certain that this is a one-sided argument. The development of infrastructure and the availability of educated and motivated employees have additional essential influence on investment decisions. The size of investment benefits is increasingly becoming important, and countries take the risk of competing with each other for potential investors based on the size and length of subsidies granted (i.e., Samsung SDI in Berlin, closed in 2006 after years of massive investment incentives in favor of Samsung SDI in Goed, Hungary).

3.5

The Diamond Model

3.5.1

The elements of the diamond

At the national level, location effects are what Porter describes as the competitive advantage of nations. The drive to be competitive domestically may induce firms to export, hoping to gain competitive advantage in their home market (Rasmussen et al., 2008: 75–76, Porter, 1990: 14). According to Porter, competition in many industries has internationalized, not only in manufacturing, but increasingly in services. Firms compete with truly global strategies involving selling worldwide, sourcing components and materials worldwide, and locating activities in many nations to take advantage of low cost factors. They form alliances with

3.5 The Diamond Model

33

firms from other nations to gain access to their strengths (Porter, 1990: 14). Porter’s diamond approach of internationalization is based on his empirical observation, which concludes that worldwide successful enterprises (global champions) frequently originate in one country. His observation leads to the thesis that those enterprises, due to their industry environment, enjoy particularly favorable conditions in certain native countries, which make it possible for them to become internationally active and to attain competitive advantage in other countries relative to resident enterprises. Porter distinguishes four central factors and two supplementary factors (Porter, 1990: 73–99). 1. Factor conditions Porter defines the availability of a country by their factors of production, which he groups into five categories: Human resources: the quantity, skill, and cost of personnel and management, taking into account standard working hours and work ethic. In connection with this, the so called progressive factors attain special importance. Progressive factors are, for instance, the education and qualifications of the population, the generation of high innovation potentials, their efficient use and combination, as well as their continuous adaptation to the requirements of (foreign) markets. Physical resources: availability and cost of a nation’s land, natural resources, infrastructure, country location, and geographic size. Knowledge resources: the nation’s stock of scientific, technical, and market knowledge concerning goods and services. Knowledge resources reside in universities, government research institutes, private research facilities, government statistical agencies, business and scientific literature, market research and databases, trade associations, and other sources. Capital resources: the amount and cost of capital available to finance industry. Capital is not homogeneous, but comes in various forms, such as secured and unsecured debt. The total stock of capital resources in a country and the forms in which it is deployed are influenced by the national rate of savings and by the structure of national capital markets, both of which vary widely among nations. Infrastructure: the type, quality, and user cost of infrastructure available that affects competition, including road systems, logistics, communications systems, payments, or funds transfer. Infrastructure also includes health care, housing stock, and cultural institutions, which affect the quality of life and the attractiveness of a nation as a place to live and work. The quality of the production factors is more important to Porter than the quantity. Unlike the classical theories of Ricardo or Heckscher-Ohlin, Porter claims that it is advantageous for a country if basic factors are rare, since the waste of resources is avoided through innovation (Kutschker and Schmid, 2006: 441, Porter, 1990: 75–76).

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3 Internationalization Theories

Enterprise Strategy, Change

Structure and Rivalry

Factor

Demand

Conditions

Conditions

Related and Supporting

Government

Industries

Figure 9. The fragments of the diamond. Source: Porter (1990), page 127

Physical resources (i.e., mineral resources and natural raw materials) lose importance or have just temporary meaning and become increasingly substitutable since an artificial way of producing them can be found or innovative production methods can be developed (Welge and Holtbrügge, 2003: 64). On the other hand, advanced factors (i.e., innovation potential and human resources) are now the most significant ones for competitive advantage. They are necessary in order to achieve competitive advantage, such as differentiated products and proprietary production technology. They are scarcer because their development demands large and often sustained investment in both human and physical capital (Porter, 1990: 77).

3.5 The Diamond Model

35

2. Home demand conditions All factors that have an influence on the height of purchase demand are part of the category ‘home demand conditions’. Nations gain competitive advantage in industries where the home demand gives local firms a clearer or earlier picture of buyer needs than foreign competitors can have (Porter, 1990: 86). The size of the home market can represent a criterion for competitive advantage (economies of scale). This efficiency could also lead to a domination of the industry in other countries (Hitt et al., 2003: 248). Quality (i.e., product innovation and service) becomes more important than quantity (i.e., sales volume in units). Particular characteristics of domestic demand, such as design, technology, and product functions attain specific importance for the industry (Welge and Holtbrügge, 2003: 64). Demand at home produces competitive pressure for local manufacturers. Enterprises are forced to be innovative, which positively influences the development of the whole industry. The expectations and wishes of customers at home can often result in innovative technological trends for worldwide sales in the future (Kutschker and Schmid, 2006: 441). The rate of growth of home demand can be as important to competitive advantage as its absolute size. Rapid domestic growth forces a nation’s firm to adopt new technologies faster and, consequently, allows first mover advantages as well as experience curve effects (Porter, 1990: 94). 3. Supporting industries Porter describes the supplying and supporting industries in a country as, for instance, logistics, the educational system, and research and development capacities. Sophisticated, developed supply networks form the basis for stable production of technologically innovative standards with reasonable sourcing prices because supplying enterprises are confronted with high competitive pressure. Qualified suppliers are able to provide considerable input for further technological developments (Welge and Holtbrügge, 2003: 65). Competitive advantage emerges from close working relationships between world-class vendors and the industry. Suppliers help firms perceive new methods and opportunities for applying new technology. Firms gain quick access to information and innovation potentials. The exchange of R&D know-how and the joint problem of solving technical issues lead to faster and more efficient solutions. Through this process, the pace of innovation within the entire national industry is accelerated (Porter, 1990: 103). 4. Firm strategy, structure, and rivalry Porter claims that the goals, strategies, and ways of organizing firms in industries vary among nations (Porter, 1990: 108, Hitt et al., 2003: 250). National advantage results from a good match among these choices. The pattern of rivalry at home also has a profound role to play in the process of innovation and in the ultimate prospects for international business. The higher the competitive pressure at home, the more enterprises are forced to internationalize themselves. Nations will tend to succeed in industries where the management practices and modes of organization favored by the national environment are well suited to the industries’ sources of competitive advantage. Important national differences in management approaches occur in such areas as the way of motivating employees, the hierarchical structures of the enterprise, the strengths of individual initiative, the ability to coordinate across functions, and

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management’s influence on customer relations (Porter, 1990: 108–109, Welge and Holtbrügge, 2003: 66, Hitt et al., 2003: 250–251). 5. Two additional factors: government and the role of chance According to Porter, the government influences positively or negatively the above mentioned four determinants; but it should not be seen as a separate, independent component. Factor conditions are affected by subsidies, policies toward the capital markets, and the educational system. Governmental institutions establish technical standards for products (i.e., specification of safety norms and rules to reduce environmental pollution), which influence the procurement behavior of the customers. Furthermore, the government is often a major buyer of specific goods, among them defense products or aircrafts for the national airline. The way this role as a buyer is played can either support or hurt the nation’s industry (Porter, 1990: 126–128). Chance events are often beyond the influence of firms, i.e., major technological discontinuities, disruption in input costs such as the development of oil prices, or volatile exchange rates (Hitt et al., 2003: 251).

3.5.2

Critical review of the diamond model

Porter claims in his diamond model that the competitiveness of enterprises is influenced by country-specific conditions. Some enterprises, therefore, have better prerequisites for successful international business activities because of favorable home market surroundings than others. Criticism arises because it is empirically hard to measure the meaning of competitive advantage, and some assumptions are rather speculative (Grant, 1991: 542). The theoretical assumptions and the influence of each of the elements as well as their relations are empirically hard to test. The model lacks the ability to provide behavioral patterns or precise recommendations for how to achieve competitive advantage for the firm, which could be of interest to national governments that seek to foster their economies (Grant, 1991: 542). Contrary to Porter, Albach (1994: 45) argues that the size of the home market is most important for innovations. The model does not answer the question that asks under which circumstances it is desirable to enter the market through export or alternatively through foreign direct investment (Kutschker and Schmid, 2006: 445). Furthermore, the approach focuses on the home market conditions, which ignores the fact that multinational enterprises make use of cross-border value-added activities depending on the costs at home and abroad. The model neglects other countries and their impact on the competitiveness of firms in the home country and vice versa. This has led other authors to introduce the ‘double diamond’. While the ‘single diamond’ model by Porter focuses on the ‘home country’ conditions, the ‘double diamond’ simultaneously takes into consideration the elements of the ‘home country’ and the ‘elements of the foreign markets’ with regards to their mutual influence on the performance of the competing firms originating in the home and the foreign markets (Rugman and D'Cruz, 1993: 5–31, Rugman and Verbeke, 1993: 76–77). Esterhuizen stresses the importance of human resources for the firm and, consequently, a nation’s competitiveness. Based on Porter’s five elements, Esterhuizen amplifies the dia-

3.6 The Uppsala Model of Internationalization

37

mond to the ‘nine factor model’ and adds human resources divided into categories, such as ‘workers, politicians and bureaucrats, entrepreneurs, managers, and engineers,’ which are crucial to gaining a nation’s competitive advantage (Esterhuizen, 2006: 73–74). Despite all its weaknesses, the diamond model by Porter has become widely known. Its strength is its simplicity and pragmatic approach. It expands traditional internationalization trade theories, connecting strategic management issues of firms with macro-economic elements of nations and their industries (Grant, 1991: 540–548). The model emphasizes that a firm cannot develop independently from each nation’s environment (i.e., infrastructure, educational system, resource availability, and political-legal system).

3.6

The Uppsala Model of Internationalization

3.6.1

Incremental market entry through accumulated knowledge

Carlson, who is one of the pioneers of internationalization process theories, argues that firms pass cultural barriers when entering foreign markets. With increasing experience in foreign operations, the enterprise is willing to enter one market by another (Carlson, 1966: 15). Firms handle the risk problem through an incremental decision-making process, where information acquired in one phase is used in the next phase to take further steps. Through this incremental behavior, the organization can keep its control over its foreign activities and gradually build up its knowledge of how to conduct business in diversified foreign markets (Forsgren, 2002: 258, Carlson, 1966: 15). Based on the empirical observations of Swedish pharmaceutical, car, steel, pulp, and paper firms, Johanson and Vahlne (1977, 1990) further developed the ideas of Carlson and introduced the gradual internationalization theory. Their research results in connection with articles from other scholars at the University of Uppsala concerning the internationalization processes of firms (Carlson, 1975, Forsgren and Johanson, 1975, Johanson and Wiedersheim, 1975) later became known as the ‘Uppsala internationalization model’ (Björkman and Forsgren, 2000: 11). The Uppsala approach assumes that enterprises, due to a lack of foreign market knowledge which is connected to corresponding market risk, follow an incremental internationalization chain pattern. At the start, there is no regular export. Then export begins via independent representatives (agents), later through sales subsidiary, and eventually foreign manufacturing may follow at the end. Lack of knowledge due to differences between countries with regard to language and culture are important obstacles when making decisions connected with the development of these international operations. As a consequence, another pattern can be derived: firms prefer entering new markets with lower psychic distance. Psychic distance is defined in terms of factors such as differences in language, culture, political systems, etc., which disturb the flow of information between the firm and the market. Thus, firms start internationalization by going to those markets with somewhat lower geographical distance,

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which they can better understand and where the perceived market uncertainty is relatively low (Johanson and Vahlne, 1977: 23–26, Johanson and Vahlne, 1990: 13). The internationalization process of a firm was similarly described by Luostarinen as a stepwise and orderly utilization of outward-going international business operations. The incremental and orderly geographical expansion from countries with close business distance to more distant markets causes an increasing dependence on marketing, purchasing, production, finance, the human resource department, and other functions of the company in international markets. Physical distance represents a restricting force to the flow of information and disfavors countries located further away as a target market (Luostarinen, 1980: 129, 200–201).

3.6.2

State versus change aspects

In their dynamic internationalization model, Johanson and Vahlne distinguish between the state aspects (market commitment and market knowledge and the change aspects (current activities and commitment decisions) (Johanson and Vahlne, 1977: 30). a. State aspect/market commitment: the degree of commitment is higher the more the resources are integrated with other parts of the firm and the more their value is derived from these activities. Vertical integration means a higher degree of commitment than a conglomerate foreign investment. An example of resources that cannot easily be directed to another market is a marketing and sales organization with country-specific product modifications and a related service sector with highly integrated customer relations. The more specialized the resources are to the specific market, the greater is the degree of commitment. b. State aspect/market knowledge: structure of competition, supplier and customer characteristics, and cultural aspects belong to market specific knowledge, which can be gained only through experience during operation in the foreign market. Experiential knowledge, which is associated with particular conditions in the market in question, cannot be transferred to other individuals or markets. It can be considered a unique resource. The more valuable the resource for the firm, the stronger is the commitment to the market. c. Change aspect/current business activities: for instance, marketing and sales activities belong to running firm operations. The higher the investments in advertising in a foreign market, the more technologically sophisticated and differentiated the product, the larger the total commitment as a consequence of current activities. d. Change aspect/commitment decisions: enterprise decisions to commit resources (i.e., financial, human workforce, and advertisement) to foreign markets depend on a firm’s general business experience as well as market specific experience. Additional commitments are made in small steps unless the firms have very large resources and/or market conditions are stable and homogeneous, or the firm has more of its experience from other markets with similar conditions. Further market experience leads to a stepwise increase of the operations and of the integration with the foreign market environment, thus resulting in higher market commitment.

3.6 The Uppsala Model of Internationalization

39

Market uncertainty towards international business depends on knowledge. This learning is a process of accumulating knowledge either through access to information or business experience. The introduction of the concept of organizational learning represents a dynamic process where firms seek experiential knowledge in individual clients and markets, as well as on institutional factors, such as how to deal with local laws, governments, and cultures. Information is collected through activities and presence in foreign markets, which on the other hand increase costs. These costs arise in the process of collecting, encoding, transferring, and decoding knowledge as well as changing the resource structures, processes, and routines in the organization. Thus, knowledge plays the crucial role in strategic international business decision-making (Luostarinen, 1980: 48–49, Eriksson et al., 1997: 352). Internationalization is a process that is difficult to plan well in advance. Organizational structures and routines are built gradually as a consequence of learning: first, a firm’s internal capabilities and competence (i.e., language qualification of employees) and second, foreign market requirements (i.e., process quality consciousness and service expectations). In this process, understanding the history of the firm is important. Sporadic interaction with actors in foreign markets provides little experience. The more the firm pursues durable and repetitive linkage with external participants abroad, the better the basis for the improvement of internal organizational routines and procedures (Eriksson et al., 1997: 354).

3.6.3

Critical review of the Uppsala model

According to the Uppsala approach, firms internationalize incrementally from physically and culturally close foreign business markets to more distant countries. During the internationalization process, the firm gains experience that forms the basis for further foreign activities in countries that are located even further away from the home market. The organizational learning process through accumulated experiential knowledge and through ongoing activities is very important for the firm and its successful international business expansion. How the organizations learn and how their learning affects their organizational behavior are the crucial elements of the Uppsala concept. The more market knowledge the firm acquires through its own experience, the less is the perceived risk and the higher is the propensity for foreign market entry. The model tends to ignore the fact that a firm also faces the risk of not entering a foreign market, i.e., the participation with an up-coming industry cluster of supplier and customer networks where the competitors within one’s own firm are looking for their chance for business (Forsgren, 2002: 258, 260). Hadjikhani listed a considerable number of critical arguments for the Uppsala concept (1997: 47). It is claimed that the model is too deterministic because it considers Swedish firms only and because of its one-sided argument about ‘knowledge’ and ‘learning,’ which influences the market entry activities and performance in foreign business. The model focuses on the process of international market entry (Dunning, 2000: 184). There is a tendency toward shorter product life-cycles and faster knowledge transfer due to improved communication and information technologies. However, the contents and information value of the model are largely restricted to the initial stages of internationalization processes (Perlitz, 2004: 113, Kutschker and Schmid, 2006: 462–264, Welge and Holtbrügge, 2003: 64). The Uppsala

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internationalization model has a rather reactive character leaving little room for entrepreneurial strategic choice (Autio et al., 2000: 909) . Recent research findings concerning the phenomena of new venture firms indicate that firms show a more rapid pace of internationalization; and, contrary to Johanson and Vahlne’s panel of Swedish enterprises, smaller rather than larger firms make large internationalization steps in a shorter period of time (Hashai and Almor, 2004: 479). New venture firms from their inception tend to disregard domestic markets in favor of the international marketplace, which seems to be more attractive (Young et al., 2003: 34). These firms make use of existing business relations in globally knit networks. This strategy allows knowledge about foreign markets to be acquired through interaction with other organizations. The prediction of the Uppsala concepts that internationalization is a slow one-directional process can not be confirmed (Forsgren, 2002: 264). Firms have the opportunity to recall their foreign engagement if the performance in particular markets is below their expectations. Stöttinger and Schlegelmilch comment that psychic distance is perceived differently by operating managers in international business. People develop subjective mental maps of space (i.e., foreign geographical location) and distance (i.e., culture and language) that need not necessarily correspond to reality. The scholars hesitate in assuming that the concept of physical distance naturally correlates with export performance. Thus it has, from their point of view, a limited value as a conceptual approach for firms engaging in international activities (Stöttinger and Schlegelmilch, 2000: 170–172). Accumulated internationalization knowledge that affects both business knowledge and institutional knowledge is not limited to specific country markets. Organization-specific experience in foreign business can be used in all markets (Eriksson et al., 1997: 353). Björkman and Forsgren (2000: 12) argue that the model is less valid for very large multinational enterprises and firms with extensive international experience in high-technology industries. The Uppsala approach focuses on manufacturing products where production takes place in the domestic market, and the goods are sold at arm’s length in overseas markets. Therefore, the business activities of many small firms in the service industry, where manufacture and delivery are inseparable, do not fit into the export-based Uppsala model for the process of internationalization (Jones, 2001: 192). Furthermore, the Uppsala internationalization theory has been criticized for its tendency to ignore or de-emphasize strategy as the evolutionary development of an existing state rather than the result of explicit economic analysis and decisionmaking (Jones and Coviello, 2002: 8). The concept concentrates on experimental learning through commitment decisions and business activities abroad. However, the model is not able to accept the possibility of imitative learning, i.e., monitoring other firms acting in a similar way and assimilating from them. Firms are occasionally forced to follow the client when they enter foreign markets. An organization can also look for radically new alternatives alongside current business modes and decide market entry according to the forecasted market opportunities and not according to its current level of foreign business experience. Thus, the possible internationalization routes are more multifaceted than anticipated in the Uppsala model (Forsgren, 2002: 260, 274).

3.7 Network Theory of Internationalization

3.7

Network Theory of Internationalization

3.7.1

Contents of the systems approach

41

Gulati et al. (2000: 204) describe a social network as a system in which economic actors such as firms are situated. Axelsson and Easton (1992: XIV) say that a network is a model or metaphor that describes a number of entities that are connected. Internationalization is a process of increasing involvement in international operations, which results in an increasing accumulation of knowledge in markets and institutions abroad (Welch and Luostarinen, 1988: 36, Ellis, 2000: 443, Sharma and Blomstermo, 2003: 739–740). In the case of international industrial networks, the entities are actors involved in the economic process that converts resources into finished goods and services. The network model is based on the assumption that a firm’s changing internationalization situation is a result of its positioning in a network of firms and their connections to each other (Zuchella and Scabini, 2007: 48). The market is depicted as systems of social and industrial relationships among various parties. The network concept encompasses a firm’s set of relationships, both horizontal and vertical, with other entities such as system and component suppliers, manufacturers, merchandisers, customers, and competitors, including relationships across industries and countries (Windeler, 2005: 215, Gulati et al., 2000: 203). By entering global networks, firms gain international knowledge through learning, which assumes the establishment, development, and protection of international business relations (Mathews, 2002: 208, Hakansson and Johanson, 2001: 2–9, Hohenthal, 2001: 101–115, Samiee, 2008: 4, Johanson and Vahlne, 2003: 93–94, Coviello and Munro, 1997: 372–375). Modern internationalization processes are particularly characterized as a course in learning through networks (Sharma and Blomstermo, 2003: 750). The network perspective draws attention to long-term business activities that exist among firms in industrial markets. While the traditional Uppsala approach focuses on the circumstances and internationalization process of the individual firm, the network theory pays attention to the firm’s interconnections with local and foreign units (Björkman and Forsgren, 2000: 13, Zuchella and Scabini, 2007: 48). Through its ‘combinative capability,’ a firm exploits knowledge (collected in networks) for expansion into new markets. Thus, the efficient organization of knowledge transfer among the firm units is of vital importance for business performance (Kogut and Zander, 1993: 636, Zuchella and Scabini, 2007: 52). Firms that are able to internationalize rapidly have established early relationships with international firms domestically and/or abroad. They are embedded in business structures and changes that are not limited to inner-firm consequences, but also affect the corresponding international network (Hohenthal, 2001: 25). Thus, members of the network value relationships rather than discrete transactions (Coviello and Munro, 1997: 365). Networks between buyers and sellers, which form the basis of effective communication, have to be established, thus providing firms with the opportunity and motivation to internationalize. Relevant information disseminates via social interaction (Ellis, 2000: 447). The nature of relationships influences the strategic decisions of the participating firms (Coviello and Munro, 1997: 365, Welch and Luostarinen, 1988: 52). Network strategies for market

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entry may range from long-term oriented manufacturing such as R&D, procurement, or sales contracts; various licensing arrangements; and contract manufacturing, strategic alliances, and joint ventures (Müller-Stewens and Lechner, 2005: 34–35, Hitt et al., 2003: 369, Mathews, 2002: 207–208). Due to global competition forces, an increased flow of information and financial capital around the globe, and accelerating technological development, product life-cycles are significantly shortened. For instance, the mass market sales of liquid crystal display (LCD) technology in television sets was launched in 2004 in Europe. In 2006, more LCD sets were sold than conventional devices; thus within only two years, LCD replaced the color ray tube technology, which dominated the industry during the 20th century. Simultaneously, there is a tendency for an increasing number of firms to be rapidly internationalizing (i.e., TCL China).

3.7.2

The impact of the resource-based view

The resource-based view (RBV) holds that a firm acquires competitive characteristics not simply as a function of its industrial location, such as its position in the value chain within a certain industry, but also because of its relationship to rival, supplier, and customer firms, thus industry networks. Competitive advantages are particularly derived from its ‘inner resources’, i.e., financial, managerial, organizational, technological, etc., and the capability to absorb and integrate ‘external resources’ through relationships (Fahy, 2002: 62, Mathews, 2002: 222, Wernerfelt, 1984: 171, Porter, 1999: 70–78, Collis and Montgomery, 1998: 7). As Penrose claimed, ‘A firm is basically a collection of resources.’ Consequently, the assumption that more knowledge would be likely to improve the efficiency and profitability of the firm acts as an incentive to acquire new knowledge and shape the scope and firm’s direction in the search for knowledge inside and outside its own organization (Penrose, 1995: 77). According to Barney (1991: 105–106), a firm’s resources should have the following attributes to gain sustained competitive advantage. The first attribute is resource value. Resources are valuable when they enable a firm to conceive of or implement strategies that improve efficiency and effectiveness. Second, resources need to be rare, which means that current and potential competitors cannot rely simultaneously on them. A firm enjoys a competitive advantage when it is implementing a value-creating strategy that cannot be implemented by a large number of competitors that have limited access to the necessary resources (e.g., patents). Third, sustained competitive advantage can be reached if valuable resources can only be imperfectly imitated by competitors. Finally, rare and valuable resources cannot be substituted by competitors who are able to implement strategically equivalent resources (Barney, 1991: 111). Based on the foundations of the RBV, Grant (2000: 117) argues that the fundamental prerequisite for market power is the presence of market entry barriers based upon a firm’s resources acting in this market, as for example scale economies, patents, experience advantages, and brand reputation. The ability to establish a cost advantage requires possession of scaleefficient plants, superior process technology, ownership of low-cost sources of raw materials, or access to low-wage labor. Differentiation advantage is conferred by superior quality and

3.7 Network Theory of Internationalization

43

innovative products linked with proprietary technology or an extensive sales and service network (Grant, 2000: 117). The RBV perceives the firm as a unique bundle of idiosyncratic resources and capabilities where the primary task of management is to maximize value through the optimal deployment of existing resources and capabilities. In line with RBV, the fostering of the knowledge resource is of vital importance for the firm to gain competitive advantage. Grant (1996: 111) describes ‘knowing how’ as ‘tacit knowledge’ and ‘knowing about facts and theories’ as ‘explicit knowledge’. The critical distinction between the two lies in transferability and the mechanisms for transfer across individuals, space, and time. Explicit knowledge is revealed by its communication and tacit knowledge through application. Communication efficiency is a fundamental resource property, thus an important strength of the firm. At both individual and organizational levels, knowledge absorption depends upon a recipient’s ability to add new knowledge to the existing knowledge (Grant, 1996: 111). Knowledge transferability is important, not only between firms, but even more critically, within the firm. Consequently, the creation of tacit knowledge and the ability to transfer it effectively within the organization, which includes its foreign operations, should move into the focus of management. Transmission capacity is defined as the ability of a firm (or the relevant business unit within it) to articulate uses of its own knowledge, assess the needs and capabilities of the potential recipient thereof, and transmit knowledge in a way that allows it to be used in another location of the firm’s organization at home or abroad (Martin and Salomon, 2003: 363). Thus, knowledge transfer efficiency has a vital impact on the firm’s overall business performance. The firm’s external environment, e.g., competitors, knowledge protection from imitation, including secrecy and intellectual property rights such as patents, copyrights, and trademarks, is of interest. The choice of market entry mode affects the protection of strategic knowledge, e.g., wholly owned subsidiary provides better prerequisites for knowledge safekeeping than the form of a joint venture (Martin and Salomon, 2003: 368). In a joint venture, knowledge is shared with the partner firm, e.g., manufacturing process know-how. As a result, through the process of learning and imitating, the partner firm may become a serious competitor in the future. Since strong protection of intellectual property is rather the exception than the rule, innovators must adopt clever market entry strategies if they want to keep imitators at bay (Teece, 2000: 96). Mathews (2002) analyzed international activities, taking the cases of incumbents (firms established in the worldwide market) and latecomer firms (with delayed global market entry) as exemplary based on the resource-based view (RBV). Internationalization latecomers are firms that initiate their global market entry with a certain time delay relative to the majority of their competitors. They use the benefits of their relationship to an international network and thus overcome conventional market entry barriers and geographic distances, which results in their gaining access to incumbents’ resources, for example their valuable knowledge about technologies, production modes, markets, and customers. Learning from network partners allows a fast substitution of less developed inner resources and experience; thus, they can leverage advantages from the incumbents, for example through the use of strategic alliances and joint ventures and thus accelerate market entry activities launched simultaneously and globally. Latecomers are not tied to past technologies

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or organizational practices; they are able to adopt the most advanced process and production technologies and benefit from experience curve effects of market pioneers through assimilation. In light of an emerging global economy, latecomers can more readily build their global operations by quickly linking up with existing players than was possible in the past (Mathews, 2002: 8, 222).

3.7.3

Dynamic capabilities

Obviously, innovative firms that successfully act in the global arena exhibit ‘dynamic capabilities’ to gain, reconfigure, and integrate external and internal resources in order to match current market expectations and also to create market changes for the future. ‘Dynamic capabilities’ are a set of specific and identifiable processes such as product development, strategic decisions, and alliance building. Imperfectly imitable capabilities (e.g., organizational and quality competence) become more important as a source of competitive advantage (Erramilli et al., 2002: 237). In stable markets where changes are predictable, dynamic capabilities rely on existing knowledge; and the learning process is limited only in organizing and assembling resources as a consequence of market changes. Teece et al. (1997: 515) describe the ability to achieve new forms of a firm’s competitive advantage, necessary in turbulent and uncertain markets, as ‘dynamic capabilities’ and mention two key aspects related to this. • First, the term ‘dynamic’ refers to the capacity to renew competencies so as to achieve congruence with the changing business environment. Certain innovative responses are required when time-to-market decisions are crucial, the rate of technological change is rapid, and the nature of future competition and markets is difficult to determine. All these elements are valid in order to characterize the television manufacturing industry and its competitive market environment. • Second, the term ‘capabilities’ emphasizes the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competencies to match the requirements of a changing environment (Teece et al., 1997: 515). Reputable firms such as Philips tend to follow a resource-based strategy of accumulating valuable technological assets, often guarded by an aggressive intellectual property stance, which has proved not to be enough to gain a significant competitive advantage. Winners in the global marketplace have been firms that can demonstrate timely responsiveness and rapid and flexible product innovation coupled with the management capability to effectively coordinate and redeploy internal and external competencies. Management activity cannot lead to the immediate replication of unique organizational skills through simply entering a market and piecing the parts together overnight. Replication takes time, and the replication of best practices always may be illusive. The potentials for firm capabilities are understood in terms of organization structures and managerial processes that support productive activity (Teece et al., 1997: 515, 517). Dynamic markets force firms to react, within the shortest possible time period, to changing business situations and so to renew competencies in order to respond innovatively in the market (Eisenhardt and Martin, 2000: 1107, Zuchella and Scabini, 2007: 87–88).

3.7 Network Theory of Internationalization

3.7.4

45

The approach of Johanson and Mattsson

Johanson and Mattsson (1988) assume that firms are embedded in industrial networks and linked to each other through long-lasting relationships that develop complex inter-firm information channels. The industrial system is composed of firms engaged in supply, production, distribution, and service. The authors describe this system as a ‘network of relationships between the firms’ (Johanson and Mattsson, 1988: 290–291). The firm’s internationalization development is to an important extent dependent on its position in the network. Thus, the internationalization characteristics of both the firm and the market influence the process. The firm’s market entry resources have different structures if the firm is highly internationalized (e.g., foreign market experience) in relations than if it is less or not experienced. Furthermore, the market assets of other firms in the network have a different structure if the market has a high or low degree of internationalization. From this assumption, Johanson and Mattsson identify four categories that set the degree of market internationalization in relation to the degree of firm internationalization as illustrated below.

Degree of internationalization of the market

Low

High

Degree of

Low

The Early Starter

The Late Starter

High

The Lonely International

The International

internationalization

of the firm

among Others

Figure 10. Firm and market internationalization degree. Source: Johanson & Mattsson (1988: 298)

‘The early starter’ describes firms with few relationships with other enterprises abroad. Competitors, suppliers, and other firms in the domestic as well as in foreign markets have few important international relationships. The initiative to start foreign operations comes from other parties, such as distributors or important customers located abroad. The second

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3 Internationalization Theories

internationalization category according to Johanson and Mattsson is named ‘the lonely international’. A firm that is highly internationalized, while its market environment is not, has unique knowledge of cultures and institutions abroad developed through experience with relationships in foreign markets. The firm’s advanced international expertise compared to other firms gives them a favorable position with easier access to international networks. Initiatives for further internationalization are not developed by other parties in the network since the firm’s suppliers, customers, and competitors are not internationalized. ‘The lonely international’ has the qualifications and resources to promote internationalization for the firms engaged in the network. To exploit the advantages of being a ‘lonely international’, the firm has to coordinate the activities in the different national networks, which necessarily requires international integration know-how (Johanson and Mattsson, 1988: 300–302). Relationships to suppliers, customers, or competitors in the domestic market may be driving forces to enter foreign markets. ‘The late starter’ describes a firm that is focused on the home market and is forced to internationalize by other players, such as customers or suppliers that are actively involved in international business (e.g., the follow the customer phenomenon). Comparative disadvantages for the late starter are derived from less international experience. On the other hand, because it is embedded in the network, the late coming firm is able to gain access to the know-how and experience of other firms (Johanson and Mattsson, 1988: 302–303). These research outcomes are in accordance with Matthew’s international ‘latecomer’ phenomenon and its derived advantages and disadvantages for the firm in the global business arena (Mathews, 2002: 8, 222). The fourth category is reserved for ‘the international among others’. In this case, both the firm and its environment are highly internationalized. Market expansion and penetration of an international firm takes place in a globally independent network. The advantage of the ‘international among others’ is that it is able to coordinate operations in international networks in order to react to changes in the market environments. Disadvantages derive from an increased communication and coordination complexity on a global scale. The ‘international among others’ predominantly faces counterparts and competitors who are themselves internationally active and markets are rather tightly structured. Major position changes in the network will increasingly take place through joint ventures, acquisitions, and mergers in contrast to the situations of the previously introduced categories such as ‘the early starter’, ‘the lonely international’, and ‘the late starter’ (Johanson and Mattsson, 1988: 306). Johanson and Mattsson claim that the network approach can distinguish entry strategies that differ with regard to the characteristics and number of relationships the entry firm seeks to establish with other firms in the network. It can be expected that because of the cumulative nature of network processes, the sequential order of activities in international markets is important and should be given more attention in research. From a strategic point of the most interesting research issue is derived the analysis of how to get prepared for international market entry and penetration when the time is ripe. Following the idea of the network concept, preparedness for and the successful implementation of international market entry strategies is largely a matter of having relationships with other firms and institutions embedded in the network (Johanson and Mattsson, 1988: 311).

3.7 Network Theory of Internationalization

3.7.5

47

The concept of Johanson and Vahlne

An increasing market dynamism linked with a rapid internationalization process of firms, visible since the beginning of the 1990s, has led Johanson and Vahlne to review their own concept of psychic distance and conclude that, ‘we have a situation where old models of internationalization processes are still applied quite fruitfully at the same time as a number of studies have suggested that there is a need for new and network-based models of internationalization. We think it might be worthwhile to reconcile and even integrate the two approaches’ (Johanson and Vahlne, 2003: 84). The scholars have developed the internationalization theory further and have introduced a business network model for the internationalization process. They define business networks as sets of interconnected business relationships in which each exchange relation is between firms and is conceptualized as collective steps. According to this definition, all firms are engaged in a limited set of business relationships with customers, suppliers, and service providing firms (i.e., logistic, consultancy, finance, and insurance) which, in turn, have relationships with other companies (Johanson and Vahlne, 2003: 92). In conformity with Johanson and Vahlne, the basic assumption for international business is that foreign markets are distinct entities in which operations are either performed or not. Lack of knowledge about foreign markets, their operations, and the characteristics of their players are the main obstacles internationalization has to overcome. Knowledge can mainly be developed through experience from operations in those markets. Luo and Peng conclude from their empirical study of firms that engage in market entry actions in transitional economies such as China that experience in foreign markets gained through diverse activities leads to improved business performance (Lou and Peng, 1999: 290). Hohenthal claims that there is always a connection of two separate pools of knowledge when a new relationship is created. Through this connection, the firms gain access to each other’s knowledge systems (and their experience), which can be used in other relationships and in the creation of new international business opportunities with less cost than would be required to generate the knowledge by themselves (Hohenthal, 2001: 54). Experience gives the firm an ability to see and evaluate global business opportunities and thereby to reduce the uncertainty associated with commitments to foreign markets. Johanson and Vahlne (2003: 91) distinguish between market-specific and operation experience. The former concerns conditions in the particular market and cannot, without great difficulty, be transferred to other markets, while the latter refers to ways of organizing and developing international business operations that can more easily be transferred from market to market. Apparently, the internationalization of a firm is associated with commitment decisions such as cooperative agreements with supplier, distributor, or customer; acquisitions of competitors; or direct investment in manufacturing abroad. The more specific and the more integrated those activities abroad, the stronger is the firm’s dependence on them (Johanson and Vahlne, 2003: 91). Within a business network perspective, market entry difficulties are not associated with general country markets but with specific customer or supplier firms due to physical distance, i.e., language and educational levels, and cultural obstacles such as the avoidance of uncer-

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tainty and short versus long term views (Johanson and Vahlne, 2003: 91–92, Hofstede, 2001: 145, 351). Consequently, Johanson and Vahlne combine the process and the network models, assuming that there is one set of business-related managerial issues that is relationship-specific and another set of challenges that is associated with country-specific institutional and cultural barriers (Johanson and Vahlne, 2003: 96). On the way to internationalization, the enterprise has to overcome these obstacles. International expansion is a result of the firm’s establishment of relationships with suppliers and customers. Success in international business significantly depends on the company’s ability to build a network which, for its part, depends on the firm’s learning openness and experience in developing it. Subsequent foreign entries benefit from the learning and experience gained from previous operations. Experienced managers who are familiar with international business help the company overcome difficulties related to entry activities in new markets (Li, 1995: 347). Johanson and Vahlne (2003: 93– 94) distinguish between three types of network learning, which acquire extraordinary importance with regard to prosperous internationalization activities as mentioned below. First, firms do business in customer-supplier relationships. They learn partner-specific behaviors, such as willingness and ability to maintain and develop the relationship (i.e., forecast reliability, flexibility, and keeping promises related to the business). As a result, they learn about each other and how to coordinate their activities so that their joint performance is strengthened. Such connection increases the firm’s commitment in the foreign market. Second, experience in relationship development assumes when interacting in business engagements that the involved partner is learning skills that may be transferred to and used in other business transactions. These skills include how to get in touch with new partners (i.e., customers), and various steps that can be taken in order to develop the relationship with them. Third, coordinating experience concerns several supplier relationships, i.e., just-in-time deliveries. It may also concern coordination between a supplier and a customer in order to speed up the value chain activities. All of these connect the relationships of the business network to each other (Johanson and Vahlne, 2003: 93–94).

3.7.6

Resource accumulation through experience and relationship learning

Hohenthal claims that experience collected from a failure linked with a market entry activity develops the internationalization competence of a firm. Experience thus seems to be important in the triggering, creation, and development of the market entry process (Hohenthal, 2001: 206). As a consequence of the effects of relationship learning, the firm acquires expertise on how to build new business networks and connect them to each other. The relationship development experience is likely to be useful also when the enterprise approaches strategic relationships (Johanson and Vahlne, 2003: 94). For instance, joint ventures may be made in order to secure rare resources or to gain the strategic advantage of the cooperating partners relative to their competitors. Foreign market expansion is a matter first of developing the firm’s rela-

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49

tionships in the specific market, second of establishing and developing supporting relationships, and third of cultivating connections that are similar or connected to the focal one. It may lead to entry into other foreign markets. In order to support a strategic relationship, the firm might be forced to develop a relationship in another country, thereby entering that foreign market (Johanson and Vahlne, 2003: 97). Mathews (2002: 45) similarly argues that firms possess a unique set of links or relations that contribute to their resources and capabilities. The enterprise is able to improve or enhance its capabilities by attracting and sharing resources with other firms with which it shares connections. A network perspective of the economy and its players, which can accommodate the perspectives of firms developing complementary strategies and accessing more mobile resources, needs to be contrasted with the conventional view that sees enterprises as atomistic entities engaged in arm’s length transactions with each other, mediated through the price system. Those firms are viewed only as production entities with transparent technology in the form of a production function that converts input and output (Mathews, 2002: 45). The creation of knowledge through technological learning is crucial to gaining a competitive advantage in international business. Interactions with alliance partners provide important insight into other firms’ research activities and those products being developed. The functions and the design of products and services used to meet local customer expectations can be more easily observed through interlinks with alliance partners. Network relations include information about markets, customers, and stakeholders. The development of future products can be adapted to meet local market conditions. The key characteristic of those interlinked firms is their engagement in a global ‘lattice’ construction, with accelerated global expansion as the key goal. A firm that develops a corporate culture and structures that ensure the effective integration of technological learning from their international interfaces will boost their performance in international business (Zahra et al., 2000: 925, Zahra, 2005: 20–22). From Mathew’s perspective, the resource-based view turns out to be a suitable approach to understanding the dynamics of international competition. Seeing the emerging global economy as networks of interlinked enterprises provides a fresh perspective on the process of internationalization (Mathews, 2002: 46, 217, Sharma and Blomstermo, 2003: 739–740).

3.7.7

Critical review of the network systems positioning approach

The network concept draws particular attention to the social and cognitive ties that are formed between actors (individuals and organizations) engaged in international business. The rapid growth of new entrants in the global arena leads to the conclusion that enterprises do not necessarily internationalize incrementally as claimed in the Uppsala approach (Johanson and Vahlne, 1977: 23–32). Against the background of globalization, international firms make increasing use of their global networks. While traditional foreign-market entry research describes how firms decide on markets and appropriate entry modes, the network approach concentrates on how existing actors influence the entry of new firms into networks that provide the base for business activities abroad (Björkman and Forsgren, 2000: 13).

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The business network model of the internationalization process does not consider the effect of ownership control and does not consider the failure to adequately address concepts such as efficiency and effectiveness (Jones and Coviello, 2002: 9). Network theories tend to theorize about the behavior of oligopolists because ‘a network is simply a web of independent dyadic relationships’ (Dunning, 1995: 473). Network approach researchers tend to include too many variables in their analysis but take the risk of de-emphasizing the opportunistic behavior of the participating players in the network. The resource dependence theory, which is derived from the resource-based view, emphasizes research exchanges (i.e., in joint ventures) as the central feature of these relationships. According to this perspective, groups and organizations gain power over each other by controlling valued resources. However, this causes network instabilities as a considerable number of firms involved in alliance and joint ventures experienced failures, much to their regret (Yan and Zeng, 1999: 397, Das and Teng, 2000: 78, Glaister et al., 2003: 83, Schuler, 2001: 13). While descriptions (i.e., through case studies) of business reality are often satisfactory, the corresponding research results are hard to generalize (e.g., industry structures) and allow predictions that tend to be vague. Consequently, the theoretical potential of drawing conclusions about common patterns of internationalization seems difficult (Björkman and Forsgren, 2000: 14). The network approach of internationalization has been amplified in light of recent developments in global business patterns. Because firms start their foreign trade operations earlier, the usability of traditional step-by-step, stage-by-stage internationalization theories declines (Johanson and Vahlne, 1977: 23). While Johnson and Vahlne claim that because knowledge is developed gradually in networks, international expansion takes place incrementally (Johanson and Vahlne, 2003: 89), there is the up and coming phenomenon of firms that have a rapid and rather non-gradual internationalization process. The appearance of ‘international new venture firms’ and the influence of their ‘entrepreneurs’ have led to a diversified network approach that specifically focuses on behavioral aspects as described in the following section.

3.7.8

Contents of new venture and entrepreneurship concepts

The phenomenon of rapid internationalization of relatively young firms directed the scholars’ research focus to the role and influence of the entrepreneur in the firm’s international activities. Liberalized trade patterns, sophisticated information and communication systems, improved logistics, and up and coming e-commerce provide improved business opportunities for smaller firms with limited resources. Observing this development has led to an increased number of research results found within the framework of entrepreneurial-based internationalization models (compare Young et al., 2003, Oviatt and Mc Dougall, 1994, Zahra, 2005, Jones and Coviello, 2005, Jones, 2001, Jones and Coviello, 2002, Stevenson and Gumbert, 1985, Dimitratos and Jones, 2005, Mathews and Zander, 2007, McDougall, 1989, Zahra and George, 2002). The emergence of knowledge-based industries in particular has further supported the business opportunities of small and medium-sized enterprises to internationalize rapidly after inception. The changing pattern of internationalization, especially among small firms, has

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been increasingly discussed in the literature as the number of ‘international new ventures’ or ‘born globals’ enlarges. These types of firms implement an internationalization strategy from the establishment of their business (Zahra et al., 2000: 925, Oviatt and Mc Dougall, 1994: 45–64, Hurmerinta-Peltomäki, 2003: 217, Sharma and Blomstermo, 2003: 739). International new venture firms develop internationalization knowledge through an ‘absorptive capability’, usually fostered and developed by their entrepreneurs, using their versatile and diversified network ties in foreign markets. These firms are innovative, customer oriented, and flexible so as to adapt their market entry strategy to the needs of the local market circumstances (Sharma and Blomstermo, 2003: 749–750). Firms tend to maintain a range of network relationships including both personal (i.e., individual preference) and market-based relationships (i.e., a supplier’s objective is normally to transact the largest possible volume at the highest price). In a society where personal relationships (i.e., guanxi networks) are of outstanding importance in business, this factor needs to be considered more carefully relative to Western cultures (Samiee, 2006: 592). Thus, the measurement and evaluation of a firm’s business performance within the context of international relationship and its individual impacts are methodologically enormously complex and are, therefore, difficult (Samiee, 2006: 597) . Entrepreneurial capabilities may develop ways to create value beyond their established and presumably resource-rich incumbents. Competitive advantages in the global marketplace are obviously derived from particular intangible assets (i.e., innovation potentials, organizational cultures, and personal relationships). These potentials are fostered by the firm’s entrepreneur, who is often, but not always, the founder and business owner (Zahra, 2005: 21). Consequently, the success of the firm is influenced by the ability of the entrepreneur to mobilize and dynamically combine external and internal resources and adapt them to changes in the environment. Particularly, personal contacts and social interaction play an extraordinary role when it comes to market entry decisions – especially where complex industrial products are concerned. Actors develop and maintain relationships, and industrial activities are related similarly to each other (Axelsson and Easton, 1992: 33, Ellis, 2000: 462). Dynamic capabilities allow a flexible reconfiguration of the firm’s asset structures in term of product portfolio, process efficiency, and personal and organizational experience (Zuchella and Scabini, 2007: 172–173). Grant (1996: 121) emphasizes the role of the individual as the primary actor in knowledge creation and the principal repository of knowledge. International entrepreneurship has been identified as involving firm activity that crosses national borders. Consequently, it is a combination of innovative, proactive, and risk-seeking behavior intended to create value in organizations (McDougall and Oviatt, 2000: 903, Covin and Slevin, 1989: 75–87, Jones and Coviello, 2002: 4, Young et al., 2003: 33). McDougall and Oviatt (2003: 7) enlarged the definition of international entrepreneurship ‘as the discovery, enactment, evaluation, and exploitation of opportunities – across national borders – to create future goods and services.’ An attempt towards an integrative model of small firm internationalization processes was made by Bell at al. (2003: 340–349) as illustrated below.

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Decision to Internationalize

Traditional

Born Again Global

Born Global

Knowledge

Knowledge Based

Intensive

Home

Innovators

Adopters

Export

Lead Market A

Psychically Close

Lead Market B

Lead Market n

Home Market

Export Market n Most Distant

Knowledge as Source of Competitive Advantage

Figure 11. Towards an integrative model of small firm internationalization. Source: Bell et al. (2003), p. 351

Time

State of Internationalization

Export Market B

Home Market

Lead Home Market

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The authors claim that each firm can follow different pathways of internationalization. These modes include the traditional, the ‘born global’ as well as the ‘born again global’ pathways as illustrated below. The model developed by Bell et al. attempts to explore and seeks to explain any variations in the patterns, pace, and process of internationalization. Bell et al. illustrate contrasting internationalization patterns including different motivations, aims, strategies, and methods of market entry (Bell et al., 2003: 349–351). In business reality, internationalization patterns tend to be highly individualistic, situation specific, and unique. These characteristics should reveal rather stereotypical behavior instead of fixed ‘pathways’. Moreover, the knowledge base as a source of competitive advantage affects both the pace and pattern of internationalization, e.g., firms with very advanced knowledge tend to internationalize faster and more efficiently. The concept emphasizes that knowledge is the most important factor allowing firms to gain a competitive advantage in the global marketplace (Bell et al., 2003: 351). The internationalization process is significantly dependent on external environmental conditions as well as on a firm’s internal circumstances including resource availability, behavioral characteristics, and a global vision of the key personnel. Enterprises may pass periods of rapid internationalization and drawbacks in international business. These periods are influenced by political-legal impacts, the firm’s customers, or other network partners (Bell et al., 2003: 351–352). The focus of the model by Bell et al. is on strategic issues with respect to internationalization concepts of small firms, which provide a basis for the evolution of prescriptive models for operational issues. Additionally, the model provides recommendations for strategy formulation and implementation in order to assist the internationalization process as the figure below illustrates.

3.7.9

The dimension of time

Jones and Coviello combine in their model the dimension of time, management’s behavioral aspects, and the influence of the external environment on the firm’s performance. The scholars assume that internationalization is a reflection of time-based behavior, specific to individual entrepreneurs as participants and managers of social systems and networks. Behavioral aspects of the entrepreneur, determined by the decisions and actions that occur at a specific point in time, move to the center of research interest (Jones and Coviello, 2002: 2–3, Jones and Coviello, 2005: 287, 289). The relationship between the entrepreneur, the firm, and the external environment is viewed from a systems perspective and assumes the continued activity of input, process motion, output, and feedback over time, whereby elements of the external environment moderate internationalization behavior. The entrepreneurial influence serves to combine resources and knowledge as part of the strategic and tactical activity of the firm (Jones and Coviello, 2002: 15, Coviello and Jones, 2004: 485). Entrepreneurial activities include specific decisions and actions that result in or contribute to internationalization. External associations, such as international business links with other firms abroad and corresponding modes of market entry, are seen as part of that interaction (as indicated on two dimensions, time and country distance). Cross-border activity may commence or terminate at any time, thus leading to a complex pattern of internationalization decisions, processes, and activities. Enterprises with an open, responsive interactivity with the external foreign

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business community will internationalize more rapidly and successfully than those whose boundaries are relatively impermeable. Consequently, internationalization is a process of behavior that emerges as a firm’s unique response to internal and external influences, which is particularly driven by the entrepreneur (Jones and Coviello, 2002: 16–17). Time is a fundamental component of internationalization in that each firm has a history comprised of significant internationalization events occurring at specific points in time. For example, the establishment of a new type of cross-border link such as the start of an export activity represents a milestone in the firm’s chronology of internationalization (Jones and Coviello, 2002: 18). Jones and Coviello claim (2005, 297) that the internationalization process is understood as ‘value-creating-events’. The entrepreneur’s level of innovativeness, risk tolerance, and managerial competence has a significant impact on the firm and its organizational structure. The new venture’s internationalization behavior is a result of ‘fingerprint pattern’ and profiles over a period of time. The ‘fingerprint’ of internationalization behavior includes the functional diversity (decision of entry mode choice) and country diversity (geographic, economic, and cultural distance) in relation to time. ‘Fingerprint’ patterns give a static impression at a specific point in time, whereas profiles identify changes over a period of time. Thus, the firm’s internationalization process (e.g., market entry organization and innovation) mirrors the entrepreneurial behavior and the firm’s organization (organic vs. mechanistic). Internationalization can be seen as a firm-level entrepreneurial behavior manifested by events and outcomes in relation to time. Internationalization behavior influences the firm’s performance, which can be measured in financial (profit or loss) or non-financial data (organizational learning). Different ‘fingerprint’ patterns of internationalization behavior evolve over time, and firm performance will impact future behavior through an iterative process of organizational learning. The model developed by Jones and Coviello, which contains the entrepreneur, the firm, internationalization behavior, and performance, is illustrated below. The Entrepreneur • Level of innovativeness • Level of risk tolerance • Management competence

The Firm • Organizational structure (organic vs. mechanic)

Internationalization Behavior (as a function of time) • Fingerprint patterns • Profiles

Performance • Financial measures (market success) • Non-financial measures (organizational learning)

Figure 12. Internationalization: conceptualization of an entrepreneurial process of behavior in time. Source: Jones and Coviello (2005), p. 297

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Reuber and Fischer (1999: 31) build on the relationship of time and the ‘stock of experience’, which influence the venture’s performance. Experience includes things that happen or events that occur during a specific time period. A particular event can have both a positive and negative impact on the international business of the firm. For instance, the loss of a key customer might reduce the sales revenue in the short term. This loss may result in better long term performance if the firm is able to learn from its experience, i.e., through improvement of product quality or service. Hurmerinta-Peltomäki claims that traditional internationalization models describe a firm’s export activities as a linear and predictable pattern on a simple, orderly, or progressive path, which is often an unrealistic notion. Consideration should be given to the idea that particular events or experiences in the past may cause a firm’s reorientation, moving the foreign trade activities in a negative direction and causing export involvement to decrease or even to be interrupted. Thus, experience over a period of time may cause strategic reorientation that alters or stops the international activities of the firm (Hurmerinta-Peltomäki, 2003: 219, 224). Time enables us to understand various organizational processes, in particular those of decision-making and learning from positive and negative business episodes. During decision-making, the owner or manager intentionally attempts, in the present, to connect the past to the future by assessing the relevance of his/her experience to the future. Experience is the antecedent of present and future activities, and it is this property that makes it relevant and interesting (Butler, 1995: 925–950, Reuber and Fischer, 1999: 30–45). The past experience dimension, on both the organizational (enterprise) and the individual (entrepreneur) level should be taken into account when describing a firm’s internationalization process. Thus, cyclical, experience-based internationalization on an individual level affects internationalization on an organizational level. Cyclical internationalization may also be perceived on an organizational level in a forward-backward-forward movement. The enterprise is able to utilize its past export experience to continue the internationalization process at present and in the future (Hurmerinta-Peltomäki, 2003: 226–230).

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Current research assumptions on the internationalization process of firms

Events unrepeatable

Linear

Uniqueness

States Subjectivity

Novelty and surprise Positive direction

No fixed direction Rearrangement of given factors

Objectivity

Nonuniqueness

Events

Events repeatable Cyclical

Figure 13. Dimension of time in internationalization concepts research. Source: adapted from Hurmerinta-Peltomäki (2003), p. 226

The figure above describes the dimensions of time that have emerged from time-theory concepts. The direction of development in research on the internationalization process evidently proceeds from the upper left-hand corner (positive direction-linear) towards the lower righthand corner (no fixed direction-cyclical) (Hurmerinta-Peltomäki, 2003: 226). Hurmerinta-Peltomäki (2003: 225) claims that the dimension of time often has not been linked adequately with concepts of internationalization. Current research on internationalization is mostly based on a linear idea of time; that is, the models consist of several identifiable and distinct successive stages. A higher stage of international activities indicates a greater foreign involvement (Leonidou and Katsikeas, 1996: 527). The challenge in this context is to understand internationalization as a process that is highly dynamic and time dependent. However, paradoxically almost all internationalization models are static in nature; for example, models fail to conceive each export stage as a continuum of episodes and micro-steps (Leonidou and Katsikeas 1996: 527). This is one explanation as to why stages models are commonly used because the actual and permanent change between the stages is more difficult to perceive. It could be said that two dimensions of time are relevant to the development of internationalization concepts: linear, which describes the human understanding of time as a forward going line in a positive direction (past-present-future), and cyclical time, which

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reflects the business reality, but where there is no fixed direction or arrow. This allows for the description of a backward direction of internationalization (Hurmerinta-Peltomäki 2003: 226–227).

3.7.10

Towards a conceptualized typology of international new ventures

Due to a lack of previous or fixed routines in entering foreign markets, new ventures or born globals (firms which internationalized early) combine their own resource disadvantages with the potential of other partners through alliances and joint ventures (Sharma and Blomstermo, 2003: 248). Di Gregorio et al. (2008: 190) emphasize the concept of entrepreneurship ‘as the nexus of individuals and opportunities’ applied to international new ventures by distinguishing between opportunities that entail novel resource combinations versus opportunities that entail novel market combinations. The first category of opportunities generally generates potential for creating value by combining internationally dispersed resources. The latter entails leveraging existing resources into new markets. Resource combination chances refer to the potential to create value via innovative arrangements of international strategic factors. Such factors may include assets that are constrained to certain geographic locations such as natural resources, labor force (e.g., qualification and costs), and quality consciousness. Resource combinations may also involve cross-border pooling of entrepreneurial talent (individuals with strong innovative capabilities), valuable knowledge, and/or access to important markets. Market combinations, on the other hand, entail introducing a particular product or service from one country into one or more other countries. Introducing this new perspective enables the delineation of two distinct phenomena: first, the creation of international ventures and second, the process of internationalization of recently established ventures (DiGregorio et al., 2008: 190). DiGregorio et al. (2008, 191–192) divided new venture firms into four typologies as follows. Quadrant I The first quadrant contains new venture firms that have a strictly domestic orientation. That means no international sales or resource combination occurs. Such firms cannot be defined as an international new venture. Quadrant II International new venture firms categorized in this segment begin international sales at an early stage but do not combine resources across borders. These firms concentrate their resources locally and are typically founded in response to local opportunities. They rapidly expand their market scope to include international markets in order to take advantage of their domestically based resources to exploit differences between local and foreign markets in terms of quality or cost.

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3 Internationalization Theories Quadrant III International new venture firms take advantage of geographically dispersed resources and the diverse knowledge embedded within those resources. The combination of resources across national borders is the main basis for gaining competitive advantage. Because they are embedded in international networks, their opportunities to improve the product quality, service, innovation potentials, or cost structures are enhanced. Existing business models in one market are transferred into another. Quadrant IV Venture firms located in this segment depend on cross-border interactions for their tangible and intangible resources in order to realize market opportunities. Competitive advantage is developed by careful management of risks associated with multiple entries into foreign markets. For these firms, internationalization is a means of creating new value via cross-border resource combination and capturing existing value via international sales (DiGregorio et al., 2008: 191–192).

As illustrated in the matrix below, Di Gegorio et al. categorize new venture firms in terms of whether they are domestically focused and whether they are involved in international sales, international resource combination, or both.

Extensive Cross Border Combination of Resources and Individuals

Domestic Combination of Resources and Individuals

III. Cross Border Resource Integration

IV. International Resource and Market Combination

I. Domestic New Venture

II. Accelerated International Sales

Domestic Market Opportunities Pursued

Figure 14. Typology of new ventures. Source: Di Gregorio et al. (2008), p. 191

Extensive Cross Border Market Combination Opportunities Pursued

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The model by Di Gregorio et al. (2008: 191) claims that international new ventures emerge when resources abroad are combined without necessarily coordinating value chain activities internationally. For example, a new venture is created by combining a resource such as technology, an idea, or business model from one country with resources and/or markets in another country. International new ventures arise from leveraging domestic resources into foreign markets or to exploit new foreign resource combinations. While Oviatt and McDougall (1994) focus on internationalization soon after a firm’s inception, the concept of Di Gegorio et al. concentrates on the emergence process of an international new venture. The importance concerning external opportunities of foreign resources (e.g., material procurement, knowhow, and technology transfer), which help to improve the firm’s performance in domestic and foreign markets, has been ignored so far. Di Gregorio et al. recommend that entrepreneurs should intensively and permanently search for foreign resource opportunities (DiGregorio et al., 2008: 192–194). Gabrielsson et al. (2008: 385–388) propose a born global/new venture definition which includes various aspects. A firm should have a global market potential and entrepreneurial competence that enables a rapid internationalization. Furthermore, a firm should have a distinct differentiation strategy and products with either a unique technology, superior design, unique service know how, or other highly specialized competence. Born globals understand foreign markets as a chance to explore and create new knowledge regarding products with global market potentials. The establishment of a successful start-up firm needs a global vision linked with reasonable risk awareness. The time factor should be regarded along with two dimensions: precocity (early internationalization) and speed (effectiveness). Born globals show a broad entrepreneurial scope, high intensity of the business focus, and rapid growth (Gabrielsson et al., 2008: 386–388, Kuemmerle, 2002: 99–122). In order to overcome the conceptualization weakness of the entrepreneurial models, Gabrielsson et al. (2008: 391) attempt to develop a combined approach which includes the born global phenomenon and its behavior over time. They describe the firm’s development in different stages and the reasons why they proceed as they do. Gabrielsson et al. divide the evolution process into three phases: first, introduction and initial launch phase; second, growth and resource accumulation; and third, the break out and desired strategies phase as described below. The first phase, the introduction, describes the period where born globals have limited resources and an undeveloped organizational structure. They rely on unique and mostly tacit knowledge to achieve competitive advantage. The most important resources are the founders and other human resource capabilities and inimitable skills. Combined with entrepreneurship, these abilities may lead to the development of products with global market potential. They attempt to establish channels and networks to bridge the gap between incoming sales revenues and financial needs. Growth mostly depends on the channel strategy and the network approach chosen, for example, a partnership with a multinational enterprise and further networks created through alliances. The channel strategy is chosen according to the characteristics of the firm and its founder and depends on the product and the network environment. Financing is acquired mostly from venture capitalists, domestically and/or abroad. The greater the resources, the faster the internationalization process of the firm proceeds. There is

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also a relationship between early financing, selected operations, and market strategies and fast expansion. Inspirational leadership encompasses all these by motivating the employees. Organizational learning is important for the success of the born global, especially knowledge about foreign markets (Gabrielsson et al., 2008: 391–395). Phase two describes growth and resource accumulation. The time spent during this phase depends on two factors: whether and when the current business field becomes a global industry and the preparedness for globalization. The readiness depends on learning and the firm’s resources. Moreover, business success depends on the product itself and the ability to place it in the market. The pace of growth will be accommodated to and embedded in the main network. Knowledge rests on the ability to learn from partners, suppliers, and customers as well as collected success and failure experiences. Furthermore, accumulation of financial resources, mostly because of product uniqueness and niche markets, allows a firm to gain higher margins; therefore, they do not have to rely anymore on investors or banks that finance the firm’s growth. During this period, born globals accumulate learning and resources through their own growth activities. Additionally, they have to determine how to use resources considering the speed of internationalization, and how long and to what extent the enterprise should be a member of a particular network (Gabrielsson et al., 2008: 396). Phase three, the break out and desired strategies, describes the period where the born global decides on a strategy based on its previous learning and experience in order to arrange its own position in the markets and the network. The strategic reorientation is influenced by the desire for independence from global players and the control of its own actions. A fundamental global vision and devotion are necessary as well as the availability of a client portfolio, which allows the development of international success to continue. At this stage, a born global may develop and continuously grow to become a ‘normal multinational enterprise’ in the future (Gabrielsson et al., 2008: 400).

3.7.11

The phenomenon of the ‘born again global’

The limited focus on the start-up phase of new venture firms led Bell et al. (2003) to expand the discussion towards the ‘born again global’ phenomenon. This term describes firms that have been well established in their domestic market with apparently no great motivation to internationalize, but which have suddenly embraced rapid and dedicated internationalization. This group of firms fail to conform to conventional stage theories of small firms’ internationalization process concepts, which concentrate on the initial phase from the firm’s inception (Bell et al., 2003: 340). This radical change in behavior may be triggered by a critical incident or several events happening at the same time. These incidents may include the change of ownership or management, the decision to follow a main customer to foreign markets, or the introduction of Internet-based distribution channels. Especially the change of ownership or management has significant influence on the internationalization path of born again global firms. Not only top management representatives with an international vision but also other human resources with special international expertise (for example, embedded in the sales or purchasing department) influence the company’s internationalization re-launch. Furthermore, additional finan-

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cial resources and new opportunities may come up due to access to new international networks or wider knowledge. All these factors may stimulate rapid internationalization (Bell et al., 2003: 345–346). The motivation of born again global firms is, in comparison to born globals, rather reactive; they only respond to the critical event. Business goals of born again global firms include the utilization of the new networks and corresponding resources. Concerning entry modes, they usually use existing distribution channels or new upcoming networks of, for example, new or existing partner firms. Bell et al. state that born again global firms show, after the initial reactive event, a more systematic and structured approach to internationalization than new venture firms. They also tend to originate from traditional industries rather than from high technology sectors. It might be assumed that born again global firms have a better position from which to finance rapid internationalization because they have secure revenues from their home market. These firms have a certain stock of human resources, financial resources, and knowledge from the ‘critical incident’ at their disposal. However, international business success will not become reality if the firm faces difficulties in the domestic market (Bell et al., 2003: 347–353). The born again global concept may also apply well to service intensive organizations because these firms will remain in the domestic market until the business idea and the service quality has been verified as successful and able to be culturally adapted abroad, assuming as mentioned before these firms internationalize at a rapid pace. Another explanation of the born again global firm phenomenon is that these firms initially tried to internationalize, but failed. Thus, they decided to build up a supporting domestic infrastructure that allows them to internationalize later quickly and successfully (Bell et al., 2003: 351–353, Gabrielsson et al., 2008: 386). An entrepreneurial person may also be able to bring organizational change and innovation to large and established enterprises. These changes in strategies and knowledge may enable the corporation to form new capabilities and sources of innovation and creativity. Two different approaches derive from this: first, ‘focused corporate entrepreneurship’ and second, ‘dispersed corporate entrepreneurship’, also known as ‘intrapreneurship’ (Zuchella and Scabini, 2007: 69–70, 113).

3.7.12

Individual and corporate entrepreneurship

Focused corporate entrepreneurship is characterized by a new division in an established company that identifies and develops new business opportunities for the firm. The department or division acts autonomously, has a relatively flat hierarchical structure, but has strong internal integrations with high availability of financial resources and permanent support from management. In contrast to this, ‘dispersed corporate entrepreneurship’ (‘intrapreneurship’) assumes that every employee has the potential to behave in an entrepreneurial way. Thus, entrepreneurial groups are formed and deal with normal managerial tasks. This entrepreneurial culture within the company culture serves as a basis for any activity (Zuchella and Scabini, 2007: 113). There are also several ways that entrepreneurial activities can take place either inside or outside of a multinational enterprise. Developing them inside the firm would involve organizational structures and certain capabilities. Outside development would include another

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firm, e.g., through strategic alliances or acquisitions. Entrepreneurial activities increasingly move into the focus of international subsidiaries of multinational enterprises. These subsidiaries are controlled by the multinationals but act proactively and find new resources and opportunities for their patents. They have their own unique capabilities and networks. The local environment makes local managers alert to new opportunities and creates an entrepreneurial orientation within the subsidiary. The local subsidiaries act independently for the most part in pursuing opportunities and develop an organizational culture that sets particular international goals and strategic directions. This development of entrepreneurial subsidiaries can be seen in connection with the need for local market responsiveness. To what extent the subsidiary can determine independent actions, roles, and objectives, or whether these issues have to be strictly in accordance with the parent’s goals seems to be important. The self determined and autonomous approach seems to facilitate entrepreneurship. It ensures exposure to different resources, local knowledge, and close contact with markets and their customers. Entrepreneurial subsidiaries allow further development of adapted solutions and more effective management (Zuchella and Scabini, 2007: 113–117). If the role of the subsidiary is more independent and innovative, it develops and implements better performing strategies because it is closer to the local markets. Moreover, this role supports the employee’s motivation to be innovative and entrepreneurial in the future. It can be assumed that turbulent, complex, and dynamic environments better foster entrepreneurship due to the pressure for the firm to be competitive through permanent innovation and improvement. Nevertheless, there is still a need for coordination and integration of companies in order to avoid duplication of efforts. The multinational firm needs to monitor and evaluate the subsidiary in strategic and financial terms (Zuchella and Scabini, 2007: 118).

3.7.13

Critical review of the new venture and entrepreneurial concepts

Success in international business is dependent upon the embedding of the entrepreneur in cross-border institutional structures comprising national and international networks (Young et al., 2003: 36). Entrepreneurial models try to take into account various influential factors (i.e., the role of the entrepreneur, the factor of time and process, and the internal and external environment). From this criticism arises due to a lacking systematic. The weight of a single businessman or entrepreneur when making internationalization decisions seems significant in small and medium-sized companies. This influence is, however, rather restricted or even legally restrained in larger or multinational companies. On the other hand, the impact of the owner family (e.g., the company chairman of the Lee clan at Samsung) on internationalization decisions is fundamentally stronger in hierarchical cultures with a relatively high degree of top-down decision power, such as South Korea, than in Western cultures. Entrepreneurship and its impact on a firm’s internationalization concepts are recent and upcoming research topics. The different contributions in this field have their roots in many disciplines (i.e., business administration and social sciences like psychology), but generally accepted definitions and theoretical frameworks are still missing (Holmquist, 2003: 74, Zuchella and Scabini, 2007: 57).

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Rialp-Criado et al. critically mention diversified denominations such as international new venture, born global, and instant international, etc., which describe the same phenomenon of internationalization but increase the confusion and complexity of the theoretical concept. Additionally, Rialp-Criado et al. complain that the term ‘global’ is too ‘optimistic’ to be suitable for most firms and their degree of international scope. Therefore, the authors recommend using the term ‘international new venture’ (Rialp-Criado et al., 2002: 10). In the corresponding literature, there are variations of the definitions regarding the time span until an international new venture records the first international sales after its establishment and how much this contributes to the total sales. Knight and Cavusgil (1996: 12) define international new ventures as firms that reach an export sales portion of at least 25 percent within three years after the founding of the firm. Oviatt and McDougall (1997: 86) define a period of six years as a standard time span. Confusion arises because there is not a fixed period of time used as a common basis for empirical research. Entrepreneurs take considerable risks when they pursue opportunities in international markets. Differences in international business performance between firms arise because of the creativity and modes of exploitation the entrepreneurs might use (Zahra et al., 2005: 131). However, entrepreneurs are also embedded in a social context and in institutional external environments. The entrepreneur’s education, functional expertise (i.e., engineer or product manager), and experience with success and failure influence his/her internationalization behavior (Zahra et al., 2005: 136). Loane et al. (2007: 501) argue that entrepreneurship research tends to focus on the owner or key decision maker. In light of project team structures, particularly in knowledge-based industries, this approach needs to be reconsidered. Team members as a collective may have more experience in a greater number of international markets, and their combined networks of contacts are likely to be more extensive than those of a single founder (Loane et al., 2007: 501). Similarly, Zuchella and Scabini (2007: 172) argue that the role of individuals, as well as organizations, have to be analyzed in conjunction with their networks. Sociological and psychological aspects also need to be contemplated, which leads to an enormous complexity. A firm-specific transformational process, sometimes provoked spontaneously due to market competition, causes new organizational structures (Van de Ven and Poole, 1995: 535). The entrepreneur has various links with the environment. Further research is necessary, which may lead to a classification of those environmental conditions that are more supportive in successful international entrepreneurship activities and those of neutral or negative influence (Young et al., 2003: 38). Hypothesis testing of entrepreneurial, new venture, and time-based approaches tends to be difficult. For example, it is hard to verify whether a particular time event (i.e., an increase or reduction of import taxes in the export target country or a meeting with visitors who passed the firm’s booth at the trade fair by chance and later became international customers) causes changes or routes the international business activities of the firm in a particular direction. Thus, empirical methodology and a structured, dominant theoretical framework are missing in the current status of the literature. Future research is necessary in order to evaluate those determinants that attempt to draw behavioral patterns that describe how firms venture into foreign markets right from inception (Schwens and Kabst, 2008: 15).

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3.8

Summary

The internationalization concepts of market entry as previously discussed have been developed in the course of the last decades. The product life-cycle approach by Vernon, valid from the perspective of U.S.-based enterprises and their international business activities for the period after World War II until the 1960s, became obsolete. Nevertheless, Vernon supplied with his model a fundamental contribution that significantly influenced the international management and marketing literature at that time. The internalization concept by Buckley and Casson explains the nature and development of a specific economic institution, the multinational enterprise. However, the model fails to explain internationalization processes (Johanson and Mattsson, 1988: 307). The following summary illustrates the principal contents and major limits of the international product life-cycle theory by Vernon and the internalization concept developed by Buckley and Casson. Model

International Product LifeCycle

Representative Principal contents of the model scholars [Year of Publication] Vernon [1966, • market entry through export and 1972] FDI depends on the product life-cycle position

Internalization Buckley & Theory Casson [1976] based on Coase [1937] and Williamson [1975]

• focus on transaction costs as main impulse for foreign market entry [hierarchy versus market mechanism] • explains MNE appearance because of organizational capabilities and market imperfections • consideration of the ‘knowledge’ and ‘skill’ factors

Major limits of the model

• U.S.-economy perspective after WWII • ignores existence on tariff and non-tariff trade barriers as well as behavioral aspects • verification and generalization difficult • neglects threat of substitution through upcoming nations and their industries • model became almost obsolete • disregard of ‘follow the customer’ phenomenon • transaction costs are hard to quantify • limited attention to behavioral aspects (e.g., customer preferences) • ignores impact of entrepreneur and/or management on firm internationalization • ignores tariff and non-tariff barriers, legal aspects, and tax policy [i.e. subsidies] in the target country

Figure 15. A summary of principal contents and major limits of the international product life-cycle and internalization theory. Source: Author

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65

Location theories of internationalization and the eclectic paradigm by Dunning were developed further during the last decades. These concepts, despite their limits, still have validity. For example, production relocation activities due to regional differences of production factors (e.g., labor costs, investment incentives, infrastructure, regional industry networks, local market size, etc.,) have been intensively discussed in light of the effects of globalization. Thus, the location concept, which is rather an approach than a generally applicable theory, has proved to be important. Principal contents and major limits of the eclectic paradigm by Dunning and location approaches are summarized below. Model

e Representative scholars [Year of Publication]

Eclectic Paradigm

Dunning [1979, 1980, 1983, 1988, 1993, 1994, 1995, 1999, 2000, 2001]

Location Concepts

Tesch [1980] Hill [1998] Porter [1999]

Principal contents of Major limits of the model the model

• consideration of ownership, location, and internalization [OLI] elements • multi-causal reasons influence the market entry strategy of the firm

• location and demand factors differ between countries and influence • in connection the competitiveness of enterprises with traditional • firm’s foreign direct international investment incentive trade theories: Heckscher-Ohlin depends on country specific location [1952] A. Smith [1776] factors

• overlapping ‘conglomeration of variables’ • hard to make concrete recommendations for the firm’s internationalization strategy • assumption of a ‘homo oeconomicus’ • limitations in analyzing the influence of tax incentives or subsidies which influence foreign direct investment decisions • empirical studies about the relative influence of location factors with regards to foreign direct investment decisions are problematic to perform • difficult to consider all relevant factors due to its high complexity • pays less attention to the ‘follow the customer’ phenomenon

Figure 16. A summary of principal contents and major limits of the eclectic paradigm by Dunning and location concepts. Source: Author

The diamond model by M.E. Porter brings traditional location concepts to a national level and is sensitive to issues that are hard to plan by the enterprise (the role of chance). It is true that ‘nations’ compete for investors, taking the examples of economic zones installed by the Polish government with considerable tax incentives for firms that settle there or the case of China and its huge market potential. The Uppsala concept belongs to the most heavily discussed models in the corresponding literature in the last three decades. The model has not

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proved totally obsolete; but a firm’s independent, linear, and forward-directed internationalization approach does not serve as a general theory, particularly against the background of globalized procurement, manufacture, and sales patterns. Model

e Representative Principal contents of scholars the model

Major limits of the model

[Year of Publication] Diamond Model

Porter [1990]

• firm competitiveness influenced by countryspecific conditions • some firms have better prerequisites for successful international business activities than others because of home market surroundings

• the meaning of competitive advantage is empirically hard to quantify • some model assumptions are rather speculative • lacks precise recommendations under which circumstances a firm gains competitive advantage • neglects other countries and their impact on the home country with respect to the firm’s competitiveness and vice versa

Uppsala Model

Carlson [1966] Forsgren & Johanson, Johanson & Wiedersheim [both 1975] Johanson & Vahlne [1977]

• due to a lack of foreign market knowledge firms internationalize incrementally from physically and culturally close foreign business market to more distant countries • stepwise and orderly utilization of outwardgoing international business operations • ‘psychic distance’ is defined in terms of factors such as differences in language, culture, political systesm etc. • focus on experience, knowledge, and learning

• physical distance is perceived differently by operating managers • panel focus on large Swedish firms • restricted to the initial stages of internationalization • reactive character leaving little room for entrepreneurial choice • hard to apply for very small firms or very large MNE • internationalization is not always linear and a continuous process, firms have the opportunity to recall their foreign engagement • the concept concentrates on experimental learning through commitment decisions but ignores imitative learning and the phenomenon of new ventures [born globals]

Figure 17. A summary of principal contents and major limits of the diamond model by M.E. Porter and the Uppsala model. Source: Author

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Findings in empirical research lead to the conclusion that firms tend to be embedded in supplier-customer-competitor networks. Consequently, enterprises do not decide their internationalization activities independently. The systems-network approach views internationalization as the result of the firm’s repositioning in its industry cluster. The concept pays attention, for example, to the fact that firms have to ‘follow the customer’ abroad if they want to remain as a supplier (which is definitely not an independent decision-making process of the firm). Alternatively, a competitor’s movements towards other regions in the world may force a firm to follow and to enter a particular market. Model

e Representative Principal contents of the scholars model [Year of Publication] e Network Johanson & Mattson • assumption that a firm’s Model [1988] changing internationalizaKogut & Zander tion situation (international business success or failure) [1993] is a result of its positioning Hohenthal [2001] in a network of firms or Björkman & institutions and their conForsgren [2000] nections to each other Hakansson & • networks are a set of relaJohanson [2001] tionships between suppliMatthews [2002] Johanson & Vahlne ers, manufacturers, merchandisers and customers [2003] within long-term business relations • knowledge transfer within the networks has particular importance • competitive advantage through dynamic capabilities fostered in networks • emerging global economy as networks of interlinked firms

Major limits of the model

• empirically hard to test due to the complexity of international networks and their influencing variables • need for industryspecific insights which is difficult to realize from an ‘outsiders perspective’ • tends to focus on oligopoly markets and rather larger firms • deemphasizes opportunistic behavior of the network partner • research results (e.g., through case studies) are hard to generalize; predictions tend to be vague • empirical research tends to supply ‘spotlights’ of network structures • longitudinally fact finding research is expensive and time consuming • further research concerning ‘firms repositioning in the network over time’ through longitudinally research necessary

Figure 18. A summary of principal contents and major limits of the network approach. Source: Author

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3 Internationalization Theories

In the recent decades, due to the phenomenon of firms that immediately internationalize following their foundation, there has been an increasing number of articles that deal with the entrepreneurial, new venture (born global, born again global), and time-related internationalization process discussion. All of them disagree with the Uppsala model, which claims an incremental, linear, forward expansion from physically and culturally closed markets to more distant markets through experience and learning. The principal contents as well as major limitations of the concepts are summarized below. Model

Representing scholars

Principal contents of Major limits of the model the model

[Year of Publication] t International New Venture (Born Global), Entrepreneurial and Time Concepts

Oviatt & Mc Dougall [1994, 2000] Jones & Coviello [2002, 2005] Zahra et al. [2000] Sharma & Blomstermo [2003] Bell et al. [2003] Hurmerinta-Peltomäki [2003] DiGregorio et al. [2008] Gabrielsson et al. [2008] Young et al. [2003]

• rapid internationalization after inception fostered by the entrepreneur’s behavior (risk awareness, innovativeness and managerial competence) • internationalization as a systems perspective of the firm, environment and entrepreneur • success in international business is dependent upon the embedding of the entrepreneur in crossborder institutional structures • internationalization is not always a linear and forward going process but rather highly dynamic and cyclical as a reflection of time

• concepts tend to focus on small firms • research tends to focus on the owner or key decision maker • model is influenced by sociological, psychological and business aspects, which leads to an enormous complexity and lacking sytematic • empirical verification is difficult • hard to get a standardized and structured model • length of time horizons is interpreted differently • impact of a particular event of time during internationalization process is difficult to prove • role of individuals have to be analyzed in conjunction with their networks

Figure 19. A summary of principal contents and major limits of the international new venture (born global), entrepreneurial, and time concepts. Source: Author

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‘System network’ and ‘entrepreneurial network’ concepts, which moved into the focus of current literature discussions, show a common denominator: the development and transfer of knowledge through active and/or imitator learning using network interconnections. The system network theory is based on the assumption that a firm’s changing internationalization situation is the result of its institutional positioning in a network (i.e., strategic alliances and joint ventures). The entrepreneurial concept focuses on personal relationships, and the internationalization process is viewed as ‘value-creating-events’ (Jones and Coviello, 2005: 297). Internationalization performance is understood as the result of human behavior (i.e., risk seeking, innovative action) in a context of time (i.e., taking the opportunity at the right time). The ‘systems-network’ concept of internationalization pays particular attention to the firm and its interconnections with other firms such as suppliers and competitors. These network structures change over time which leads to a network reconfiguration of the involved firms (e.g., instabilities lead to the termination of a joint venture and/or strategic reorientation of the firm and/or the establishment of another joint venture with a new partner). ‘Entrepreneurial’ concepts focus on the importance of people and their personal relationships with each other (e.g., the entrepreneur and the firm's management and their relationships and preferences involving suppliers, customers, competitors, etc.), which significantly influence the internationalization activities of the firm. The extent and the quality of personal relationships change over time. Consequently, behavioral characteristics of the people involved in international business have a vital impact on the firms’ internationalization path. Because personal relationships change over time (e.g., the entrepreneur meets another firm's representative at an international trade fair), a network reconfiguration of the involved firms results (e.g., launch of business with a new customer) in the global arena (Hurmerinta-Peltomäki, 2003: 226). In the next chapter, the most relevant modes of market entry are explained and discussed against the background of their individual strengths and weaknesses. This part serves as an introduction to the empirical section of the book, where the case studies that contain the discussion of market entry strategies of Asian electronics giants in Europe are found. The empirical part forms the basis for further theoretical development of the ‘systems network approach’, with particular attention on Japanese, South Korean, and Chinese consumer electronics firms and their network relations. The case studies provide industry and firm specific insights into Asian consumer electronics companies, with a focus on their European market entry strategies, i.e., through various forms of joint ventures.

4

International Market Entry Strategies

4.1

About Strategy

The strategy concept goes back to Chandler, who defined strategy ‘as the determination of basic long term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals’ (Chandler, 1962: 23). According to Wheelen and Hunger, strategic management is a set of managerial decisions and actions that determines the long-run performance of a corporation. The study of strategic management, therefore, emphasizes the monitoring and evaluating of external opportunities and threats in light of a corporation’s strengths and weaknesses. A strategy of a corporation involves a comprehensive master plan stating how the corporation will achieve its mission and objectives. It maximizes competitive advantage and minimizes disadvantage (Wheelen and Hunger, 2004: 3–13). The strategy concept involves obtaining coherence between the strengths and weaknesses of a business and the chances and risks of the environment. Strategic management contains different organizational levels of an enterprise. Top management, strategic business units (SBUs), and functional areas have to be lined up strategically and coordinated with each other (Welge and Al-Laham, 1999: 13–14). A larger firm usually follows three types of strategies, which are hierarchically linked to the firm’s corporate level, SBU, and functional level. Directional strategies on the corporate level of the firm are categorized as growth strategies, stability (e.g., organizational integration of a firm following an acquisition), and retrenchment strategies (e.g., turnaround strategies in order to achieve profits after a time of loss). Growth strategies are realized through expansion of business activities in the current industry, e.g., enlargement of current product portfolio or manufacturing depth (horizontal, vertical backward or forward integration), or in related industries (concentric diversification), or in unrelated industries (conglomerate diversification). A company’s growth strategy can also be implemented through the enlargement of the business by means of geographic expansion into foreign markets. Porter’s concept of competitive strategies such as cost leadership, differentiation, and niche strategies are housed in the firm’s SBUs (Wheelen and Hunger, 2004: 13, Porter, 1999: 32–38). Strategies on the functional level are embedded in the firm’s operating departments such as purchasing (i.e., sole sourcing or multiple sourcing strategies), marketing strategies (i.e., penetration, skimming, push and pull strategies), R&D (technological leadership or followership strategy), and manufacture (e.g., individual or mass production). A functional strategy is the approach used

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in order to realize corporate and business unit strategies by maximizing resource productivity. Functional strategies are concerned with developing a distinctive competence to provide the enterprise and its business units with a competitive advantage. Just as a multidivisional corporation has several business units, each business unit has its own set of departments, each with its own functional strategy (Wheelen and Hunger, 2004: 13–15). An optimal allocation of the firm’s entrepreneurial resources is of vital importance for effectiveness. The concept of the strategic management is focused primarily on the development of long-term corporate success. Mintzberg emphasizes that strategies, due to external or internal circumstances, sometimes cannot be realized as previously planned. In this case, the strategy needs to be modified. Emergent and deliberate strategies create the firm’s realized strategy (Mintzberg, 2003: 5). Kutschker and Schmid (2006: 798) similarly describe strategy as a complex bundle of planned activities for the attainment of long-term business objectives as well as emergent decision and action patterns.

4.2

Motives and the Process of Internationalization

The strategic decision process to procure a growth strategy through entering new foreign markets is very complex and the outcomes normally have a vital impact on the firm’s future destiny. The firm is confronted with various challenges which usually come along with unfamiliar economic, ecological, political-legal, technological, socio-cultural such as language, and cultural issues. Thus, there should be advantages to international business activities that cause firms to consider taking the risk of entering foreign markets. What motives for a firm’s step towards internationalization do exist? Based on Czinkota et al. (2002: 279), Albaum et al. (2001: 56), and Axtel (1991: 26), the following motives for internationalization are listed: •

small and/or mature local markets force the firm to enter markets abroad,

•

foreign market attractiveness (e.g., high purchasing power of local customers),

•

expanded sales volumes provide economies of scale effects,

•

unique technology/product/service with attractive potentials in foreign markets,

•

access to rare or desired resources (e.g., technology, natural resources, labor),

•

seasonable fluctuations of product sales,

•

better customer proximity,

•

risk diversification (increased number of country markets),

•

investment benefits (e.g., subsidies),

•

cognitive preferences towards internationalization of the entrepreneur/management, and

•

necessity to follow a strategically important customer abroad.

4.2 Motives and the Process of Internationalization

73

Berekoven (1978: 8) categorized foreign market entry modes as two dimensional, considering the business risk potentials and cost of activities linked with each mode. Similar to the outcomes of the Uppsala concept, he claimed, that firms tend to expand gradually their foreign operations, starting with foreign trade businesses such as export, and continuing with licensing, franchising, joint venture, and finally ending up with a foreign direct investment (e.g, wholly owned manufacturing facilities). The chances/risks potentials and the costs increase accordingly. However, as discussed as one of the weaknesses of the Uppsala model, in light of current globalized business patterns, new venture firms from their inception tend to internationalize rapidly and disregard domestic markets in favor of foreign markets (Young et al., 2003: 34). Due to firms’ different business concepts, it is hard generalize and to fix a rule, that a firm passes through stages of export, licensing, franchising, joint ventures, and finally, foreign direct investments. Additionally, because of worldwide interlocking valueadded activities and the fact that firms are increasingly embedded in supplier-customer relations and global industry networks, an enterprise is, for example, occasionally forced to invest in a particular location somewhere in the world because this place represents, at the time, the preferred investment location of a strategically important customer. Based on the ethnocentric-polycentric-regiocentric-geocentric scheme (E.P.R.G model) originally founded by Perlmutter (1969), Wind et al. (1973: 16) developed a model that segments four categories of internationalization, reflecting the managers’ attitudes towards internationalization and corresponding marketing policies. Phase

Phase contents

Firm focus

Management policy

Marketing concepts

Phase 1

Ethnocentric

Home market

Ethnocentric strategy

Export marketing

Phase 2

Polycentric

Target country

Polycentric strategy

International marketing

Phase 3

Regiocentric

Regional geographic focus on several target markets

Regiocentric strategy

Multinational marketing

Phase 4

Geocentric

Worldmarket

Geocentric strategy

Transnational marketing

Figure 20. E.P.R.G. scheme and marketing concepts. Source: adapted from Wind et al. (1973) p. 16

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4.3

4 International Market Entry Strategies

Market Entry Modes

Internationalization processes are described when products or services are transferred across national boundaries. The firm has to select the country where or with whom the transaction should be performed and the international exchange transaction modality, for example, the entry strategy (Andersen and Buvik, 2002: 347–348). Foreign market entry mode has been defined as an institutional arrangement for organizing and conducting international business transactions (Andersen, 1997: 29, Brown et al., 2003: 473, Calof, 1993: 97). Market entry determinations are among the most critical decisions made by a firm relative to international markets. The choice of which foreign country to enter commits a firm to operating in a certain terrain and signals its future strategic intention to customer, supplier, competitors, shareholder, and stakeholder (Ellis, 2000: 443, Douglas and Craig, 1992: 302). The most important market entry modes are described in the following sections.

4.3.1

Indirect and direct export

Export means the sale of goods or services outside the country in which they have been produced. The export is a relatively risk free market entry mode for creating business relations with customers in a foreign market (Berndt et al., 1999: 129). By manufacturing the product at home and exporting it abroad, the organization is able to realize substantial scale economies from its expanded sales volumes in the foreign markets (in addition to sales in the local market) (Hill, 2007: 487). Indirect exports describe transactions in which the firm delivers products and/or services to a domestic exporting company or to a domestic branch of a foreign importer. The intermediate (middleman) arranges the transfers of the cargo to the final customer abroad. The homebased firm is not engaged in cross-border activity and, therefore, is not confronted with challenging environmental conditions such as socio-cultural issues, i.e., negotiation styles or language barriers in the target country. Indirect export business is advisable for firms that do not have international trade experience. On the other hand, the enterprise does not have firsthand market access, which is at the same time disadvantageous (Dülfer, 2001: 142). In the case of direct exports, the firm undertakes personal relations with the customer abroad. Direct export binds more resources relative to indirect business because of traveling, negotiating, and contracting as well as actively managing cross-border shipment activities through logistic firms. Advantages from direct market access and the benefits from gaining valuable information may easily equal or even exceed the costs of active export management. The firm’s direct export business can be linked by means of contractual agreements with an agent, who usually works on a commission basis calculated on the products/services sold. However, local agents who run their business based on a commission often carry products of competing firms and, therefore, tend to have divided loyalties (Hill, 2007: 488, GrabnerKräuter, 1992: 435). The major disadvantage to a firm of the export business is the threat of non-tariff (i.e., quota restrictions) and tariff barriers (i.e., taxes). Because of liberalized trade patterns as a result of the ‘General Agreement on Tariffs and Trade’ (GATT), which became effective in 1948 and

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was replaced in 1995 by the World Trade Organization (WTO) contractual system, the average customs tariffs are lower than they were decades ago (Holtfrerich, 1991: 362). However, these days, particularly non-tariff barriers, which are relatively more difficult to provide evidence for (i.e., delay of import customs procedures or bureaucratic documentation), may remain as a threat for the exporting firm, especially in volatile export target markets where the government of the host country tends to make use of it in order to accommodate the domestic industry lobby. On the other hand, export easily becomes uneconomical for bulky products and/or long distance markets, which cause relatively high transportation costs. Furthermore, in light of globalization, firms face the challenge of supply flexibility and an efficient demand change management in order to gain competitive advantage (Vollmann et al., 2005: 588). Exports from geographically distant markets result in a longer transportation lead time, thus reducing the delivery forecast change response time. The management of an after-sales-service becomes more difficult and expensive when the manufacturing place is located far away from the export sales market. Domestic production and export may not be appropriate if lower labor cost locations or highly skilled staff for manufacturing and selling the product or service is available abroad or investments are supported by monetary (i.e., tax incentives of up to 65 percent in the ‘economic zones’ in Poland) or infrastructure incentives granted by the local government (Hill, 2007: 488). ‘Foreign leasing’ is occasionally mentioned in the literature and can be offered by an exporting firm, e.g., of capital intensive products. Instead of purchasing the product, the foreign customer leases the product for a certain time and returns it to the export firm when the agreed upon contract period ends. Foreign leasing does not have significant differences compared to ordinary leasing concepts. The potential challenge of foreign leasing derives from the risk of fluctuating currencies (Kumar, 1989, 923).

4.3.2

Overseas branches

As the export volume increases, the firm may carefully enlarge its engagement to serve the target market abroad. Under this circumstance, the firm may set up its own representative office or sales branch in the foreign target markets (Rugman and Hodgetts, 2003: 41). The establishment of a sales branch represents the lowest form of financial involvement in the category of foreign direct investment. The institutional character of internationalization is mirrored by constant interaction and personal contact with business partners in the host country in the course of day-to-day business activities. Aside from necessary financial transfers, the issue of staff mobility arises in this context. The position of the brand manager is usually filled by a person who has accumulated substantial international business experience. The extent to which additional personnel are employed in the host country depends on the target market business volume, the size of the branch, the degree to which it is embedded in a sales and distribution network, and the environmental conditions prevalent in the host country (Dülfer, 2001: 152–153).

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4.3.3

4 International Market Entry Strategies

Contract manufacturing

In highly competitive and uncertain environments, such as the consumer electronics industry, manufacturers consider, either producing in lower-cost locations (increase of production capacities) or outsourcing components (pre-assembly) and finished products (final-assembly) or even outsourcing the complete manufacturing process (full-assembly) to lower-cost producers, for instance, on a contractual original equipment manufacture (OEM) basis (Walldorf, 1992: 455). In other words, contract manufacturing is linked to the ‘make-or-buy’ question (Morschett, 2005: 599). The OEM strategy allows the brand manufacturer (contractor) a fast market entry abroad via the contract manufacturer (time-to-market response). This is particularly the case in the electronics industry where product technological innovations, simultaneously launched on a global scale, are of vital importance in order to gain competitive advantage. While the contracting firm concentrates on the production, the brand manufacturer can bundle the resources in its core competencies, e.g., research and development or marketing (Morschett, 2005: 610). Assuming the original brand manufacturer contracts with firms that are geographically diversified around the globe, the contractor benefits from cost savings in logistics (market closeness) and an increased flexibility (balanced production capacities). Reasonable transportation costs are crucial particularly for heavy and bulky products with a corresponding delivery lead time (Hollensen, 2004: 310). Contract manufacturing enables the firm to have foreign sourcing without making a final investment commitment. Thus, the original brand manufacturer reduces its investment risk through its contractual commitment (instead of expanding its own production capacities), which can be terminated with the contracting firm if the product sales volume shrinks (Morschett, 2005: 610–611, Cole et al., 2001: 7). Outsourcing through OEM helps to reduce the fixed costs of internal manufacturing facilities and thus to lower the breakeven point, which helps to improve a firm’s return on equity (ROE). Suppose a corporate executive’s performance is evaluated on the basis of the contribution to the firm’s ROE; he/she tends to have a strong incentive to increase outsourcing (Kotabe and Murray, 2003: 7, 10). Further incentives for contract manufacturing are improved sensitivity to local customer needs and avoidance of host country import taxes or quota restrictions (Hollensen, 2004: 310). The ongoing fulfillment of the quality based on a technical specification set by the contractor is of vital importance. OEM disadvantages can derive from the original brand manufacturer’s loss of direct hierarchical control of the manufacturing process. In case the contract manufacturer does not meet quality or working condition standards, this failure may cause serious damage to the original brand manufacturer’s reputation on the market. Thus, partner selection, contract negotiation, and quality control procedures have great importance. Payment by the contractor to the contracted party is generally on a per unit basis (Hollensen, 2004: 310). There is a risk that cost benefits through contract manufacturing will become unbalanced because of transaction costs related to the contract partner’s search and negotiation proce-

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dures (ex-ante costs) and ex-post costs such as the control of manufacturing processes, delivery punctuality, payment procedures, units prices, and quantity and product quality standards (compare Williamson, 1975, Williamson, 1985, Morschett, 2005: 612). The more OEM activities are initiated by the original brand firm, the higher the complexity, which provokes expanded information and communication structures. The original brand manufacturer must decide which value-added activities are outsourced to a contracting firm. There is a risk that the original brand manufacturer will outsource activities that helped the firm differentiate from its competition (Kita, 2001: 1). In the worst case, core competencies of the brand manufacturer are transferred to the contracting firm. As a result, the contracting firm acquires knowledge through its absorptive capability, which helps it to develop and become, with a certain time delay, a serious competitor on the market. The more the original brand manufacturer outsources, the less the firm is involved in production processes, which decreases its engineering and technological expertise. For a brand manufacturer such as Philips, operating in the mass production driven television set industry, it becomes difficult to remain efficient and innovative concerning new product developments without manufacturing involvement (Bengstsson et al., 2002:48). Philips announced that it would outsource more than 70 percent of its television set manufacturing from 2008 onwards to contract manufacturers such as TCL China. Simultaneously, the Chinese electronics giant strengthened its technological expertise and gradually expanded its worldwide business (Digitimes.com, 2008).

4.3.4

Licensing

Licensing is defined as a contractual transaction in which the owner of knowledge assets (intellectual or industrial property) sells to another organization or individual the right to use these assets for a defined purpose. Under the licensing arrangement the licenser transfers, but does not give up, the ownership of the know-how (Luostarinen and Welch, 1997: 31–32, Quack, 1995: 108). The licensee takes the entrepreneurial risks and undertakes financial investments in facilities for material procurement, manufacturing, marketing, sales, and distribution of the goods and services in the foreign target market. The licensee is normally paid a royalty for each unit manufactured and sold (Hitt et al., 2003: 259). Licensing is attractive for firms lacking resources (i.e., financial or organizational) to develop operations overseas. Furthermore, the market entry mode of licensing can be desirable when a firm is unwilling to commit substantial financial resources to a socio-cultural unfamiliar or political-legal volatile foreign market (Hill, 2007: 489). Furthermore, license agreements offer the advantage to the importer of gaining access to foreign technological and intellectual expertise. The exporter can limit the investment risk, which is particularly important in economically and politically rather insecure markets (Meissner, 1995: 52–53). Arora and Fosfuri (2000: 569) concluded from their research that cultural distance is an important limitation to the commitment of resources. Firms prefer to exploit their technological competencies through licensing when the target country is culturally distant from the home country.

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Disadvantages for the licenser include such things as the lack of tight control over manufacturing, marketing, sales, and quality assurance concerning the products and services created by the licensee. Licensing typically involves each licensee setting up its own production operations. This limits the licenser’s ability to realize experience curve and centralized economies of scale effects. When these economies are important, licensing may not be the best way to enter foreign markets (Hill, 2007: 489, Contractor, 1984: 169–171). Many firms have made the mistake of thinking they could maintain control over their know-how within the framework of a licensing agreement. RCA Corporation, for example, once licensed its color television set technology to Japanese firms. The Japanese companies quickly assimilated the technology, improved on it, and used it to enter worldwide markets, taking substantial market share from RCA (Hill, 2007: 490). In a technologically driven industry such as electronics, particularly at the beginning of a newly developed product life-cycle, firms have to decide on common industry standards. At this stage, it is usual for firms to compete against each other for the position of the leading technology standard. Due to enormous R&D efforts and related product features for mass production, enterprises may agree on alliances to support their favored standard for the global market launch. For example, in 2008, Sony succeeded with its patented blu-ray standard against Toshiba’s high definition DVD. Consequently, license fees have to be paid to Sony by other firms that use the leading blu-ray technology in their products. Since Sony previously agreed to a strategic alliance with other electronics giants to support the global mass market penetration with the blu-ray technology, license fees have to be shared with Samsung, Panasonic, and Philips (WeltOnline, 2008).

4.3.5

Franchising

Franchising is a contractual agreement between a franchisor and usually many franchisees that are legally and financially separated (Hendrikse and Jiang, 2007: 13, Zentes et al., 2007: 81). Combs et al. (2004: 907) described the process of franchising when the franchisor sells to the franchisees, which are typically small business owners, the right to commercialize goods or services under its established brand name (market goodwill) and a proven business concept. During the contractual relationship, the franchisor provides ongoing commercial and technical assistance. In return, the franchisee typically pays an initial start-up fee, royalties based on the gross sales, and advertising fees, which depend on the conditions agreed to in the franchising contract (Zentes et al., 2007: 81). The franchise system combines the advantages of ongoing research and development activities and economy of scale potentials offered by the franchisor with the local geographical knowledge, cultural sensitivity, and entrepreneurial talents of the franchisee. The franchisees are most familiar with the local customer preferences. They are able to sense and forecast new trends, and take advantage of the opportunity to introduce new or modified products and services. The motivation of the franchisee to enter a franchise contract is mainly originated by the chance to operate a successful independent business based on a concept provided by the franchisor (Hollensen, 2004: 317). Franchising allows rapid market growth. Especially

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79

when the success of a concept depends on rapid market penetration, franchising allows a business to multiply a concept with fewer financial constraints (Zentes et al., 2007: 83). Disadvantages for a franchisor derive from its limited hierarchical control over the franchisee, which is an independent contractor, not an employee. Franchisees can harm the reputation of the franchisor or its business concept if they do not maintain company standards. Modifications of the business concept may be delayed because substantial alterations are only possible through changes in the franchising agreement. The marketing and management of a franchise system is more complex than for a truly hierarchically organized, companyowned system (Zentes et al., 2007: 84). Conflicts in the franchisor-franchisee relationship mainly arise from disagreements over objectives (i.e., means of achieving profits), which may result from poor communication or failure on the part of the franchisee to understand the franchisor and its concept. The potential for conflicts is reduced if franchisor and franchisee view each other as partners in running a business with common objectives and operating procedures. This approach requires a strong common culture with shared values established by means of intense communication between franchisor and franchisee. Another way of reducing disputes is to establish an efficient and transparent monitoring and reporting system between the franchisor and franchisee, i.e., real-time access to computer-based inventory and accounting systems (Hollensen, 2004: 317).

4.3.6

Strategic alliances

Strategic alliances are agreements between two or more participating organizations to strengthen their mutual competitive position and to fulfill business objectives that are rather long term. The firm members usually have access to some of the strategically relevant resources (e.g., client data and marketing expertise) of their alliance partners. While vertical alliances display cooperation between suppliers and buyers, horizontal alliances are characterized by cooperation on the same stage of manufacture. Lateral alliances entail the firms’ cooperative sharing of products and services originating in different lines of business (Holtbrügge, 2005: 1184, Welge and Holtbrügge, 2003: 108–109). The formal difference compared to a joint venture is that a strategic alliance is typically a non-equity cooperation, meaning that the partners do not commit equity into or invest in the alliance (Hollensen, 2004: 318). Alliances, often called cooperative strategies, are transition mechanisms that are established between the partners to strengthen their competitive positions in the market. Global strategic alliances are working partnerships between firms (two or more) across national boundaries in the same or different industries (Deresky, 2002: 194– 195). Firms ally themselves with actual or potential competitors for various strategic purposes. •

First, strategic alliances may facilitate entry into a foreign market through a partnership with a local firm. The local firm may help secure government and public approval to establish the business. Market entry activities tend to be

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• •

•

more efficient because the foreign alliance firm supports entry with regional marketing expertise and better information access to customer wishes or design tastes. Second, an alliance, supposing it runs well, is a way to bring together complementary skills and assets that neither company could easily develop on its own. Third, an alliance may help to bundle access to similar customer segments (e.g., households with a higher than average monthly income) even if the partner firms operate in diversified businesses (television set sales linked with a pay-TV movie service). Fourth, alliance agreements seem advisable in order to establish a technological industry standard (Hill, 1998: 415–416). For example, Sony agreed to a blu-ray disk technology alliance with Apple, Dell, and Hitachi, which, in 2008, succeeded in competing with the high definition DVD alliance of Toshiba, Microsoft, and Intel (Faigle, 2008)

Potential disadvantages from alliance agreements derive from the risk of resource transfer, such as technological and managerial know-how, to the partner firm, which is often, but not necessarily, a competitor. Therefore, the partner selection process plays a crucial role before the establishment of an alliance is considered. A suitable partner should not exploit the alliance for its own needs. For example, it should not expropriate human resources, such as recruiting highly qualified alliance employees through attractive job offers in order to employ them in its own firm. The process of correct partner selection is of vital importance to the success of the alliance and should include the following: • the collection and analysis of publicly available information regarding potential partners; • an attempt to obtain additional data from third parties (e.g., banks, logistic firms, consultants, customers or suppliers, or even former employees of the targeted partner firm); and • learning as much as possible about the partner: its alliance intentions, company culture, and resource capabilities (Hill, 2007: 501, Hill, 1998: 410). Against the background of liberalized market structures and the strategic importance of product innovation, efficient resource allocation, and product launch speed, firms increasingly tend to agree on alliances (Inkpen and Ramaswamy, 2006: 88–89). Nevertheless, the building of a successful alliance partnership belongs to the most complex of management tasks. Synergy effects of the partner firms often are not performing as expected as many firms involved in international alliances have experienced to their regret.

4.3.7

International joint ventures

A joint venture is formed when two or more legally distinct organizations decide to undertake a common business, e.g., manufacturing and sales of a particular product, and create a new enterprise as a legal entity in order to pursue a set of agreed upon goals. The parties agree to contribute equity and share the revenue and expenses of the joint venture (Zentes et

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al., 2007: 80). An equal joint venture describes the constellation when each party contributes the same amount of financial investment, thus sharing the risk and managerial control (Kutschker and Schmid, 2006: 862). Joint ventures can be established by a firm when it seeks to have a majority share and, thus secures control of strategic decisions (Hill, 1998: 410). A joint venture can be formed between firms that run businesses in the same industry and similar value-added activities (horizontal joint venture). A joint venture can be established between firms that are located at different stages of the industry value-added chain (vertical joint venture), for instance, a joint venture between a supplier and manufacturer. There are concentric joint ventures if the partner’s firm origin is in the same market, or conglomerate joint ventures if the joint venture parents have different lines of businesses (Kutschker and Schmid, 2006: 862). An international joint venture (IJV) is described when at least one parent organization is headquartered outside the venture’s country of operation, or if the venture has a significant level of operations in more than one country (Geringer and Hebert, 1989: 235–237, Frayne and Geringer, 2000: 406). Driven by the fundamental changes that have occurred during recent decades toward internationalization of markets and competition and the increasing costs and complexity of technological developments, IJVs have become an important mode for international market entry (Frayne and Geringer, 2000: 406). The donations of financial and human resources as well as intellectual property rights, manufacture, management expertise, procurement, and distribution networks of the engaged partners create major advantages for IJVs. An IJV can be formed in order to organize R&D and/or manufacturing facilities for the involved partners. This construction belongs to the category of an upstream-based partnership. When companies join their marketing, distribution, sales, and service network, this belongs to downstream-based collaborations. In the case that the joint venture partners have complementary competencies in the value chain (for instance company A, technology, and company B, brand name and/or distribution network), this is an upstream/downstream-based collaboration (Lorange and Roos, 1995: 333). According to Hollensen (2004: 320) there are major incentives for forming a joint venture as mentioned below. 1.

New market entry: Firms notice that they lack necessary market knowledge, marketing expertise, and brand recognition when they enter new markets. Rather than trying to develop these limited capabilities internally, the firm may identify another organization that possesses those desired marketing skills. Many countries (i.e., China) try to restrict foreign ownership. Governments may create pressure on multinationals to establish international joint ventures with local firms.

2.

Environment: Joint ventures may by helpful when entering a foreign market, particularly where socio-cultural or political-legal differences relative to the home country exist. Cooperation with a firm in the host country can increase the speed of market entry.

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4 International Market Entry Strategies 3.

Reduction of costs: Global operations in R&D and manufacturing are prohibitively expensive but are necessary to achieve competitive advantage. Joint ventures allow participating firms to pool financial capital, human resources, R&D, and production capacities to gain economies of scale or increase the use of facilities, thereby reducing manufacturing costs per output unit. Pooling the procurement increases the bargaining power of the joint venture partners and better provides prerequisites for standardized platform manufacture.

4.

Development and diffusion of technologies: Joint ventures may also be used to build jointly on the technological expertise of two or more firms in developing products that are technologically beyond the capability and resources of the firms acting independently. Complementary technologies provided by the partners can lead to new product or manufacturing process developments. Joint research and development helps to accelerate product innovations. The bundle of distribution channels increases sales capacity and allows access to geographically diversified markets. The costs of after-sales-service might be reduced and the service reaction time could be improved.

Trust is most crucial to the success of an IJV. During the pre-incorporation phase, potential IJV partners have to establish trust so that they will be able to jointly run and control the project. During the post-incorporation phase, constant efforts should be geared towards maintaining the trust relationship generated during the pre-incorporation phase (Newburry and Zeira, 1997: 96). The parent firms of an IJV need to ensure that appropriate values and inter-organization relationships are developed. Considering the complexities associated with operating in an international environment, joint venture parents’ flexibility is required to adapt to changing conditions in the global marketplace (Zeira and Newburry, 1999: 338). The learning success of an IJV participating firm assumes a certain ability to absorb knowledge and expertise from the other IJV partner (Glaister et al., 2003: 103, Meschi, 2005: 692). Learning to manage IJVs is a multifaceted and interrelated course of action that occurs across the areas of formation, partner relationships, and operational management (Glaister et al., 2003: 103). Lane et al. (2001: 1156–1157) emphasize that inter-organizational learning is a process where flexibility and adaptability are consistently important in assimilating the knowledge of the partner firm. Applying the external knowledge from the partner organization involves the ability to diffuse knowledge and to integrate it into the organization and to generate new knowledge from it (Lane et al., 2001: 1157). Unlike, for example, greenfield investments, commitment to the joint venture from a particular parent is dependent upon the position taken by the other parent. Organizational instability is multifaceted and may arise under the following conditions. •

First, one joint venture partner may show opportunistic behavior and attempts to hide proprietary knowledge, such as technological expertise, from the other joint venture participant (Li, 1995: 347).

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•

Second, new contingencies may be created when the IJV management redirects its strategic focus, changes key objectives, attempts to reposition in the markets, or undertakes major growth or downsizing. These changes may be necessitated or prompted by environmental, inter-organizational, as well as intra-organizational factors.

•

Third, instability occurs when the partners renegotiate contracts (e.g., on technology transfer or management licensing).

•

Fourth, the reconfiguration of the venture’s ownership and control structures represents a major source of instability because such amendments cause new bargaining dynamics and/or alter strategic stakes of the partners (Yan and Zeng, 1999: 407). Lack of appropriate organizational structures, uncertain managerial roles, and indefinite decision authority negatively influence IJV performance (Schuler, 2001: 9). Diverse cultural backgrounds of the IJV partners hinder communication and may cause misunderstanding and reduced motivation of the venture management (Frayne and Geringer, 2000: 406–407, Müller and Gelbrich, 2004: 367–381).

•

A fifth facet of instability concerns the IJVs relationship with each parent company. The IJV threatens to become unstable when changes take place that affect the decisional autonomy rendered to the IJV management, such as limitation of their authority (Frayne and Geringer, 2000: 412, Yan and Zeng, 1999: 407).

•

A sixth major category that causes IJV failures is a lack of mutual trust and partners’ learning willingness (Schuler, 2001: 9).

•

Finally, major technological product developments on the market, not noticed by one or the other joint venture partner, may damage the business performance and provoke disputes between the joint venture partners, which can lead to joint venture termination of the project (Contractor and Lorange, 1988: 25).

According to Yan and Gray (2001: 411), IJVs represent ‘mixed-motive games’ in which competitive and cooperative dynamics of the involved partners may occur simultaneously. ‘The significant association of operational control with a partner’s achievement of its strategic objectives confirms inter-partner competition over resource allocation and pursuit of unilateral goals’ (Yan and Gray, 2001: 411). Das and Teng (2000: 94) similarly claim potential diversified motives, such as cooperation versus competition, rigidity versus flexibility, and short-term versus long-term orientation. These fragments create a framework of multiple tensions, which can cause partnership instability (Das and Teng, 2000: 94).

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4.3.8

4 International Market Entry Strategies

Turnkey contracts

In a so-called turnkey operation, a company designs, constructs, and starts-up a project in a foreign country (i.e., building of a power plant), qualifies local personnel, and then ‘turns the key over’ to the local government in return for an agreed payment of use fee (Deresky, 2002: 181). Turnkey operations are attractive for firms that have, for example, specific engineering and/or complex technological process know-how. This market entry mode is attractive to the selling firm because, without them, they would have no way to earn a return on their valuable expertise in the foreign target country. A turnkey strategy can also be less risky than conventional foreign direct investment projects, such as the establishment of a wholly owned factory (Hill, 2007: 488). The BOT (build, operate, transfer) concept is a variation of the turnkey operation. Instead of turning the facility (e.g., power plant or toll road) over to the host country when completed, the firm operates the facility for a fixed period of time. During this operating period, the company earns back the investment, plus a profit. At the end of time period agreed upon with the foreign contract partner, the firm turns the facility over to the government at little or no cost to the host country (Naisbitt, 1996: 143, Wheelen and Hunger, 2004: 146). Critical success factors may derive from the availability of qualified human resources, a developed infrastructure, a local supplier, and logistic firms. There may also be a particular risk exposure if the turnkey contract is with the host government, which is often the case in politically and economically rather fragile countries. Under these circumstances, the firm may face the threat of contract revocation initiated by the government (Deresky, 2002: 181).

4.3.9

Management contracts

Management contracts offer a means through which a firm may use some of its personnel to assist a firm in a host county for a specified fee and period of time. It allows a firm to continue to earn some income from its investment and keep the operations going until local management is trained. Management contracts are common when a host government expropriates part or all of a foreign-owned company’s holdings in its country (Wheelen and Hunger, 2004: 146). The management transfer recipient is interested in finding a cooperation partner that is able to run his enterprise and train his staff by arrangement of the necessary technical and managerial knowledge. The management transferring firm enters new markets, selling its managerial expertise and bringing in resources that help expand sales volume. Moreover, through contractual relations with local governments, the firm is able to enter potential foreign markets where the local authorities behave in an unfriendly way towards foreign investments (Foscht and Podmenik, 2005: 582–583).

4.3 Market Entry Modes

85

Mutual Obligations of Management Contracts

Management contract cooperation Contracting

fees

Managed

firm

firm know-how

Contracting firm functions:

Managed firm functions:

• management responsibility • granting entrepreneurial know-how • granting operational good-will • serving network relations • share of experience

• payment of fees • take over of business risks • input of business objectives: financial, manufacturing, and human resources • learning capabilities

Figure 21. Mutual obligations of management contracts. Source: modified from Foscht/Podmenik, p. 582

An essential part of management contracts includes the qualifications of personnel in the host country. While training the staff, including transfer of managerial and technological knowhow, there is an increasing risk that a potential new competitor is being fostered and developed. The management supplying firm needs to send qualified key personnel, particularly those with cultural sensitivity and language skills. Such a qualified pool of employees is not always readily available. Personal and cultural conflict with locals may arise, depending on the expatriate’s characteristics and qualifications for carrying out the contract tasks. On the other hand, local people may have divergent work ethics or show a less motivated learning behavior. Considerable effort needs to be put into building lines of communication at the local level as well as back to the contracting firm. Opposing expectations concerning the outcomes and realization of the investment project between the contracting firm and the local governments provide the basis for conflicts. Some of the areas of possible disagreements concerning the direction and policies of the contract venture include the extent of use of local suppliers and subcontractors and trade or price policy (Luostarinen and Welch, 1997: 105).

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4.3.10

4 International Market Entry Strategies

Wholly owned subsidiary

A firm investing abroad combines firm-specific advantages developed at home with other assets available in the foreign country (Hennart and Park, 1993: 1055). The term ‘wholly owned subsidiary’ describes an enterprise that owns all of the capital invested abroad such as procurement, R&D, sales, or production facilities. The firm either sets up a new operation (start-up or greenfield) in the foreign target country or it acquires an established firm (Hill, 1998: 412). The level and nature of the firm-specific advantages the investor is exploiting abroad determines whether entry will be through greenfield or acquisition. Firm-specific advantages may consist of superior organizational ability or technical expertise that can be separated from the organization, or they may be deeply embedded into the firm’s labor force. In the first case, an entrant can combine these advantages with those embodied in an acquired foreign firm. In the second case, advantages are tightly bound to the foreign investor’s organization so that it is difficult to combine them with an acquired unit; and, therefore, they have to be developed by internal efforts (Hennart and Park, 1993: 1056, Brouthers et al., 2001: 27). In the case of an international acquisition, which plays an important role in the diversification activities of organizations, the expanding firm buys the equity of an existing firm in a foreign country. There are two different types of acquisitions: •

horizontal acquisition: to realize its growth strategy, a firm acquires another competing firm positioned in the same location of the industry chain. This allows an increase of market share, access to know-how, and usually has potential for cost reduction, and

•

vertical acquisition: a firm acquires the supplier or distributor, and thus becomes vertically integrated (backward/forward integration) in order to realize the firm’s growth strategy (Hitt et al., 2003: 277).

Acquisitions offer the firm the opportunity to develop capabilities and expertise by acquiring new knowledge from the acquisition partner. The firm can ‘acquire an experienced management team’ and skilled technical labor force. A valuable brand reputation can be obtained, which might have taken years to build up; and immediate pressure from competition may be substantially reduced (Penrose, 1995: 127). The new external knowledge from the acquired firm needs to be absorbed and combined with the existing internal knowledge of the acquiring company. By assimilating the acquisition partner’s knowledge and best practices, acquiring firms can enlarge their knowledge base, which helps a firm to adapt itself to the foreign market environment. The absorptive capacity of the acquiring firm influences the performance and effectiveness of its business operations in the foreign market (Zou and Ghauri, 2008: 212). Nevertheless, in spite of all the advantages, an acquisition is by no means a universally available strategy for international market entry nor does it allow a firm automatically to escape

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from limited resources. In consequence, there is a limit to the rate of expansion by acquisitions because consistent general policies have to be worked out and integrated between the acquired firm and its new headquarters. Financial and accounting procedures need to be coordinated and personnel policies and numerous other problems handled by the ‘staff service’ departments harmonized. When the acquisition takes a firm into new and relatively unfamiliar fields (conglomerate or unrelated diversification), the problems related to integration might be fewer in some directions but are greater in others (Penrose, 1995: 129). More autonomy in its own area may provoke the risk of conflicts with the parent company’s policies and activities and result in increased difficulties of working out an appropriate relationship between the firm’s organizational business unit and its headquarters. Financial, managerial, and organizational resource limits on the rate of expansion implies that no company can acquire every likely firm in sight in any given period of time. A firm has to choose carefully; and since mistakes may be costly and not always reparable, those target firms should be selected that seem most likely to complement or supplement existing resources. Acquisition decisions are influenced by the predilections and experience of the management and the expected profitability input of the acquired firm, which depends on the price paid compared with the expected contribution to the earnings of the acquiring firm (Penrose, 1995: 129). In contrast to acquisitions, the establishment of a firm through a greenfield investment (foreign start-up) entails building an entirely new organization. Companies often establish startups by sending expatriates, who select and hire local employees and gradually build up the business. Through its expatriates, the parent firm can train the new labor force, which makes it possible to better incorporate the company culture in comparison to an acquisition, particularly in the case of a hostile takeover (Barkema and Vermeulen, 1998: 9). The main advantage of the market entry mode through the establishment of a wholly owned subsidiary is hierarchical control over decision making, which is important, for example, regarding quality assurance and the protection of intellectual property rights. Further advantages of a wholly owned subsidiary derive from the closeness to the market and its customers, which improves the local product development and serves cultural sensitivity in marketing communication. A wholly owned subsidiary can be integrated (and controlled) in the firm’s overall strategy when the company approaches different markets (Deresky, 2002: 183). Various nations, for example in central and eastern European countries that joined the European Union in 2004, support foreign investments with tax benefits and infrastructure developments in the case of greenfield projects. Assuming the quality and production efficiency is equal relative to the home country, the firm may enjoy additional cost savings due to low labor expenses. Brouthers and Brouthers (2000: 96) claim that firms that have developed strong capabilities, especially in the areas of technology and international operations, tend toward greenfield start-ups. Challenges that come up with the establishment of wholly owned subsidiaries arise from the increased planning and coordination complexity of foreign and local operations. The firm may underestimate culturally biased differences reflected in work ethics, quality conscious-

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ness of the employees, and loyalty toward the enterprise. Various operations have to be prepared to accept centrally determined decisions concerning the production output, product portfolio, service mission, and price policy for the incoming and outgoing units (Hill, 1998: 412). The wholly owned subsidiary in a foreign country is among all market entry concepts the mode with the highest uncertainty and investment risk. Thus, enterprises that have acquired international business experience and the corresponding financial resources may consider a foreign direct investment. The firm may have to acquire the knowledge and expertise of the existing market by hiring either host-country nationals, possibly from competitors, consultants, or suppliers, all of which can be costly (Hitt et al., 2003: 261). The risks associated with learning to do business in a new culture can be reduced if the firm acquires an established host-country organization through a takeover. However, acquisitions raise a whole set of additional problems, including those associated with trying to harmonize divergent corporate cultures. Talented employees may leave the firm. These challenges may offset the benefits derived from acquisition of an established operation (Hill, 1998: 413). Arora and Fosfuri (2000: 569) concluded from their research that learning influences the choice of foreign operation. Prior experience in the host country increases the odds that the project will be carried out through a wholly owned operation rather than licensing. Similarly, Barkema et al. (1996: 164) argued that firms entering foreign markets face cultural adjustment costs in the case of acquisitions, for example. Firms take advantage of the learning curve, especially when they choose their expansion path in such a way that they can exploit previous experience in the same country or other nations with similar cultural characteristics.

4.4

Strategic Decision Determinants

4.4.1

Entry timing and proximity to the market

The strategic concept of international market entry requires the clear formulation of the firm’s objectives in the foreign market. Corporate objectives represent a statement as to what the company will achieve within a certain period of time in terms of market position, return on investment, and the development of key business sectors in the target countries (Hibbert, 1997: 137). An innovator’s (pioneer) strategy linked with skim pricing offers the opportunity to sell the products at a relatively high price level to the innovator’s customers in the foreign market while the product is novel and competitors are few (first mover advantages). Disadvantages derive from delayed market penetration and the risk that competitors will take advantage of higher sales volumes. If fast market penetration is desired, the firm decides on a penetration pricing strategy that attempts to accelerate the market penetration and offers the foreign firm the opportunity to expand the target market share and make use of experience curve effects in order to further lower the price and finally dominate the industry (Wheelen and Hunger, 2004: 169). Potential risks arise from the defense strategies of local firms, which may range from severe price competition to lobbying their regional governments and asking for antidumping actions.

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89

Market entry timing targets significantly influence the selection of the firm’s entry modes. Consequently, the length of time it takes to implement an international market activity represents an important decision-making criterion. On the one hand, a firm may be trying to achieve foreign market entry as rapidly as possible. For example, it might have developed a new product in a market where the technology is changing rapidly, such as in the electronics industry, or where the product development can readily be copied by competitors, so as rapid an exploitation as possible is required. In such cases, export activities are more desirable than for example, greenfield manufacturing investments, which are likely to be inappropriate because of the complexity of the project abroad and the corresponding time delay. On the other hand, if exporting is restricted, contract manufacturing or licensing arrangements may be the fastest means of market entry (Luostarinen and Welch, 1997: 240). Assuming trade activities are restricted because of tariff and/or non-tariff barriers and/or import quotas raised by the target country’s government, indirect/direct export and sales subsidiary operations are not the recommended entry modes. Operations through which the manufacturing function is internationalized and relocated to the foreign market, such as contract manufacturing and wholly owned foreign production, are not affected negatively because the production takes place inside those barriers. The firm secures a closer proximity to the target market abroad (Luostarinen and Welch, 1997: 240). However, these modes of market entry, particularly foreign direct investments, tend to take a much longer time than exports due to their higher complexity. Foreign direct investment (FDI) in the establishment of a sales network and/or manufacturing provide direct access to market information. This serves as the main advantage relative to indirect exports, where, for example, qualified and updated market data depend on the intellectual expertise and efforts of the agent. Due to the fact that the agent usually works on a commission basis, market information and the related data forecasts tend to be biased by the agent, who, moreover, may have contractual relations with other firms (potential competitors).

4.4.2

Degree of hierarchical control and investment risk

Based on the transaction cost concept, the degree of hierarchical control, which differs depending on the entry mode selected, has been widely discussed in the literature (Meffert and Bolz, 1998: 124, Erramilli and Rao, 1993: 33, Hennart and Park, 1993: 1055–1058, Hildebrandt and Weiss, 1997: 3, Wagner, 1993: 456–458, Zhao et al., 2004: 540). Luostarinen and Welch (1997: 241) emphasize the importance of the firm’s control regarding manufacturing, marketing function, and product flow from the production location to the final customer. Possibilities of controlling these functions fundamentally depend on the entry concept. It can be concluded that generally FDI in wholly owned subsidiaries (i.e., greenfield factory) provide better control mechanisms than contractual agreements such as franchising, licensing, or contract manufacturing, where the production function is transferred to the target country but only partially controlled by the original manufacturer. More specifically, with contract manufacturing the degree of control over the local contracting firm is usually higher than in licensing or franchising constructions. In the case of contract manufacturing

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the marketing function (i.e., sales promotion campaigns, price adjustments, and selection of distribution channels) is also under the control of the contractor firm (Luostarinen and Welch, 1997: 242). Indirect exports allow the producer to control only the manufacturing function at home and the product flow from the production facilities to the local purchasing middleman, who takes care of the exported cargo behind the border. If the domestic middleman is an agent who works on a commission contract, then the export techniques also have to be mastered by the manufacturer because it has to be able to control the product flow from the factory to the target customer in the foreign market. Similarly, through direct exports, the manufacturer controls the product flow to the final customer. Thus, the extent of feasible control is greater relative to indirect exports (Luostarinen and Welch, 1997: 241). However, the local government may impose restrictions on imports of certain goods so that their own industries are protected from competition. A government may prohibit competitive entry into designated national industries, such as defense procurement (Hibbert, 1997: 77). Meissner (1995: 51) claims that in the case of exports, the management involvement and the investment risk is concentrated in the manufacturer’s home country. Consequently, financial resources are bound in the native country. Foreign direct investment activities, such as greenfield investment in the foreign target market, route the management efforts and the flow of financial capital abroad. The investment volume is concentrated in the foreign market, and the corresponding risk increases due to environmental circumstances that are naturally unfamiliar compared to the home country. Cooperative modes of market entry, such as IJVs, are rather hybrid forms, where cross-border activities such as management involvement, financial flow, and the corresponding investment risk are balanced between the partners, depending on equity, majority, or minority IJV capital-share structures (Meissner, 1995: 51). The market environment has a direct impact on a firm’s entry mode strategy in the target country. Political uncertainties or legal restrictions on foreign direct investments are not conducive to the establishment of wholly owned subsidiaries. Uncertainties in a country regarding the protection of intellectual property rights reduce the attractiveness of license agreements (Delios and Beamish, 1999: 917).

4.4.3

Market entry decision process

International market entry decisions depend on a firm’s internal resources and external environmental conditions (Anderson and Gatignon, 1986: 2). For example, if an important key customer establishes a factory in a particular country abroad, the supplying firm may have no other choice than ‘following the customer’. Foreign governments may insist for several reasons, such as control or access to modern technologies, on the establishment of an ‘equal joint venture’ with a local firm. In South Korea, Japan, or China, usually due to a lack of personal network relations, it is difficult to initiate local business operations as a foreign firm. Thus, it is advisable to search for a local partner. Once a partner is found and an alliance agreed upon, the firm is confronted with the risk of sharing technological and managerial know-how. As time goes by, through assimilation and learning, the local partner may become a serious competitor, as many multinationals have experienced to their regret.

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91

A firm that seeks international business should evaluate beforehand possible outcomes of their selected market entry mode, which is a very complex management task. In order to facilitate the decision making process, the following steps are introduced.

First step: Setting strategic priorities The management has to take into consideration four basic strategic determinants and needs to answer the questions below which are linked to each of the parameters.

1. Degree of hierarchical control Are tight or loose control mechanisms of foreign operations required? The answer should consider issues such as •

protection of intellectual property rights,

•

strategic market importance,

•

degree of market experience,

•

local government regulation, and

•

the firm’s resources (e.g., human or financial).

2. Market entry rapidity Fast or delayed foreign market entry? The answer should consider issues such as •

the need to follow a key customer,

•

the threat of fast technological product substitution,

•

first mover advantages through a pioneer strategy,

•

latecomer advantages through delayed market entry,

•

intensity of competition,

•

huge investment costs requiring large sales volumes, and

•

the risk of losing control due to hasty entry activity or incorect partner selection.

92

4 International Market Entry Strategies 3. Proximity to the market Is close or distant market proximity necessary? The answer should consider issues such as •

similar or different product design and service expectation of local customers,

•

market volume and growth forecasts,

•

transportation lead time and costs (e.g., bulky products),

•

desired local image building of the firm,

•

socio-cultural issues difficult to evaluate from a distance, and

•

foreign government rules (e.g., import tariffs and, investment incentives).

4. Investment risk Is the firm able to cope with the investment risk? The answer should consider issues such as •

internal and external financial resources,

•

debt to equity ratio,

•

product margin,

•

time horizon of expected return on investment,

•

expected reactions of local competitors, and

•

market forecast (turnover and margins).

Second step: Evaluation of market entry alternatives The firm chooses the suitable market entry mode, which depends on the strategic priorities outlined in phase one (setting strategic priorities) including the following.

1. Contracting (market mechanism) Generally, a market transaction through contracting (for example, indirect exports via a local import agent) allows a fast foreign market entry but does not serve strong hierarchical control. Firms with less experience or limited resources may choose contracting forms because of an investment risk that is relatively low compared to foreign direct investments. In the

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93

group of contracting modes, indirect exports tend to be realized faster than, for example, a management contract because of the necessity of increased local involvement (e.g., search for target firm, quality assurance, and qualifications of local staff), which comes with higher investment risk. Nevertheless, the proximity to the foreign market via exports is lower than in the case of joint ventures with local firms and far less relative to having a sales network in the foreign market. Within the group of ‘contracting forms of market entry’ the firm decides based on their individual resources and priorities between • • • • • • •

indirect export (goods and services), direct export (goods and services), licensing (intellectual know-how and property rights), franchising (business concept), contract manufacturing (goods and services), management contract (intellectual, engineering and management know-how), and turnkey contract (intellectual, engineering and management knowhow).

2. Cooperation (hybrid forms) Cooperation with another partner, realized, for example, in an equity joint venture (with capital investment), shares the investment risk and hierarchical control. Both joint ventures and alliances (without capital investment) with a local organization usually increase the proximity to the market. However, time should be reserved for the right partner selection and organization of the international joint venture. Thus, the realization of market entry tends to be more time consuming than in the case of license agreements, but entry usually is realized faster than in the establishment of a wholly owned subsidiary (e.g., greenfield investment), as in a manufacturing plant. International forms of cooperation for market entry include • •

strategic alliances and international joint ventures.

3. Wholly owned subsidiary (hierarchy) The foundation of a wholly owned manufacturing subsidiary through foreign direct investment represents the financial, managerial, and organizational entry mode that is the most risky. Time is needed for the evaluation and selection of a suitable location (e.g., infrastructure, availability and qualification of staff, manufacturing costs, and investment incentives). However, the proximity to the market provides direct communication channels to the local customers, which is an important advantage. The integration in the firm’s organization provides direct hierarchical control mechanisms and avoids loss of know-how to another firm. Major forms of foreign direct investment are the establishment of an • •

overseas branch network and a wholly owned manufacturing subsidiary.

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The four decision determinants discussed above serve as important parameters for the firm regarding its strategic market entry. They are 1) degree of hierarchical control, 2) proximity to the market, 3) market entry rapidity, and 4) investment risk. These determinants and the correlated positioning of the three main entry mode clusters: contracting, cooperation and foreign direct investment group are visualized in the matrix below. low

high

degree of hierarchical control

low

high

indirect export contracting

direct export

management contracts turnkey contracts strategic alliances

foreign direct investment

IJV

overseas branch network

cooperation

low

manufacturing plant investment risk

low

high

market entry rapidity

contract manufacturing

proximity to the market

licenses/franchising

high

Figure 22. Market entry mode grouping based on four decision determinants. Source: Author

4.5

Summary

Each entry mode has different implications for a firm’s degree of hierarchical control, the resources it must commit, market proximity, and the market entry time framework. It is of vital importance that the firm’s management is aware of potential risks of business expansion into a foreign country (Hill et al., 1990: 117). Competitive advantages result from the right selection of the market entry mode adjusted to the firm’s internal resources and external environmental conditions. The following summary serves as a comparative overview of the strategic advantages and risks of each market entry mode derived from the categories of contracting, cooperation, and foreign direct investment.

4.5 Summary

95

1. Contracting: indirect and direct export Foreign trade activities through exports provide a relatively easy and rapid market entry mode. The main disadvantages derive from the distance to the foreign markets and their customers. Nevertheless, the category of exports belongs to the classic and widely used entry mode practised by firms involved in international business.

Market entry mode

Entry rapidity

Degree of Investhierarchical ment risk control

Proximity Strategy Potential to the recommended strategic risks market for the firm if

Indirect export

high

low

low

low

• no experience in foreign trade • rather simple products with rudimental after sales service • new market potentials abroad • compensation of low seasonal sales in the home markets

• dependency on agent’s expertise • commission costs • divided loyalties of middleman / agent • trade barriers • high transportation costs in case of bulky products

Direct export

high

low

low

low

• less experience in foreign trade • elementary pre- and after sales service • new market potentials abroad • compensation of low seasonal sales in the home markets

• trade barriers • high transportation costs in case of bulky products • language / cultural challenges • unfamiliar market environment

Figure 23. An overview of strategic decision determinants of the market entry modes: indirect and direct export. Source: Author

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4 International Market Entry Strategies

2. Contracting: licensing and franchising Market entry through license and franchising agreements can be realized within a relatively short period of time. Worldwide markets can be penetrated efficiently through the transfer of know-how to local contract firms. Both methods might be suitable for firms with limited resources (e.g., to build up manufacturing or service network facilities) or industry environments with rapidly changing technology. The major disadvantage derives from limited hierarchical control of the contracted firm, which involves the potential risks of harming the business concept or damaging the reputation of the contracting firm. Moreover, the contracted partner may develop its own know-how through learning. Efficient absorptive capabilities may result in the development of a new competitor for the contracting company. Market entry mode Licensing

Entry Degree of Investment Proximity rapidity hierarchical risk to the control market high low low low

Franchis- high ing

low

low

low

Strategy Potential straterecommended gic risks for the firm if • lack of • licensee may financial or damage reputation organizational • risk of technology resources copy by licensee • technological • royalty fees lower fast developing than value of industries technology transfer • fast market • limited entry and experience curve/ penetration economies of scale desired effects of licensor • foreign direct • licensee becomes investment too competitor risky • economies • franchisee may of scale harm reputation realization • partner’s • fast market disagreements over entry and objectives penetration • foreign partner desired selection • sales of a • financial stability business of the partner concept instead of a single product or service

Figure 24. An overview of strategic decision determinants of the market entry modes: licensing and franchising. Source: Author

4.5 Summary

97

3. Contracting: contract manufacturing and management contracts Market entry modes of contract manufacturing or management contracts are realized by rather large firms such as multinationals. These enterprises attempt to increase their manufacturing output on a global scale, which usually comes along with the attempt to reduce production costs (e.g., OEM). Management contracts provide an opportunity to enter rather difficult political-legal markets that simultaneously contain risky momentums. The right business partner selection is of vital importance and requires appropriate time and resources of the firm. Market entry mode

Entry Degree of Investment Proximity Strategy Potential rapidity hierarchical risk to the recommended strategic risks control market for the firm if

medium lowContract manufacturing medium

lowmedium

medium • costcompetitive markets • saving logistics cost • expansion of capacities and product penetration worldwide

• loss of manufacturing involvement and control • reputation damage (i.e., quality, working conditions) • communication complexity • know-how transfer to local firm • foster new competitor

medium medium

medium

medium • specified managerial and/or technological expertise • market entry when local government restrictions expected

• foster potential competitor • countries with uncertain local governments policy and fragile legal environment • lack of educated staff in the target country

Management contracts

Figure 25. An overview of strategic decision determinants of the market entry mode: management contracts. Source: Author

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4 International Market Entry Strategies

4. Contracting: turnkey contract Turnkey contracts tend be a suitable entry mode for firms with specific technology and engineering expertise. They allow market entry in countries with less developed industry, usually through contracts with local governments. Nevertheless, the direct involvement abroad (e.g., construction and start up of a plant) requires considerable firm resources usually over a longer period time.

Market entry mode

Entry rapidity

Degree of Investment hierarchical risk control

Proximity Strategy Potential to the recommended strategic market for the firm if risks

Turnkey contract

medium

medium

medium

medium

• specific engineering and complex technological process knowhow availability (i.e., building of an environment friendly power plant or public water distribution and/or cleaning facilities) • less risky than wholly owned subsidiary • business opportunites with countries which usually hesitate or ristrict direct investments of foreign firms in their local economies

• lack of qualified human resource pool in the target country • relation with host governments which are usually located in politically and economically rather fragile countries

Figure 26. An overview of strategic decision determinants of the market entry mode: turnkey contract. Source: Author

4.5 Summary

99

5. Cooperation: strategic alliance and international equity joint venture Market entry mode

Entry rapidity

Degree of Investhierarchi- ment risk cal control

Proximity Strategy to the recommended market for the firm if

Strategic medium alliance

lowmedium

lowmedium

medium

• bundle of strategic resources • mutual strengthening of competitive position through complementary skills • set of technological industry standards

• partner selection • know-how transfer • opportunistic behavior • reputation damage • synergy effects below expectation

International equity joint venture

medium

medium

medium

• risk sharing • combined market entry • joint activities (e.g. R&D, marketing) • economies of scale • combination of complementary resources and skills

• partner selection • know-how transfer • opportunistic behavior of the partner • unclear ownership structures create confusion • risk of unbalanced efforts of the partner firms • minor synergy effects • partner firm may become competitor

medium

Potential strategic risks

Figure 27. An overview of strategic decision determinants of the market entry modes: strategic alliance and international equity joint venture. Source: Author

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4 International Market Entry Strategies

Alliance and joint venture agreements target the realization of synergy effects among partner firms involved in international business (Meffert and Bolz, 1998: 130). Furthermore, firms sometimes are confronted with foreign government regulations that require the establishment of a joint venture with a national organization. As many firms experienced to their regret, synergy effects tend to be overestimated in the course of joint venture foundations. Thus, the right partner selection is of outstanding importance for business success.

6. Foreign direct investment: overseas branch network and wholly owned manufacturing plant Resource-rich firms may take advantage of market proximity through the establishment of a sales network or production plants (greenfield investment or acquisitions). This form of market entry is recommended for internationally experienced firms. Bulky products, the regional availability of raw-materials, trade barriers, culturally diverse customer behaviors, or long transportation lead times encourage direct investment in a foreign target market instead of other business forms, such as exports. However, in some countries foreign acquisitions are banned in some sectors or are made difficult by legal restrictions on voting rights or a firm’s cross-holdings, as is common in Japan (Hennart and Reddy, 1997: 3). Taylor et al. (2000: 146) have studied market entry strategies of Japanese multinationals. Their findings indicate that Japanese enterprises tend to opt for high-control modes when the risk of doing business in the host country is high. Instead of attempting to reduce the resource commitment by using a low-control mode (e.g., licensing or franchising) like some Western multinationals would do in unfamiliar foreign markets, Japanese firms prefer hierarchical control, for example, through the establishment of a wholly owned subsidiary. Furthermore, the authors found that Japanese firms are very aggressive and long-term oriented when entering foreign markets. They often are able to turn a risky situation to their advantage by using higher bargaining power to gain long-term control of their foreign ventures. On the other hand, Japanese firms are flexible. They are willing to accept a low-control mode of entry if local government restrictions dictate it (Taylor et al., 2000: 158–159).

4.5 Summary

101

Market entry mode

Entry Degree of Investment ProxStrategy rapidity hierarchical risk imity to recommended control for the firm if the market

Overseas branch network

low

high

high

high

• experience in international business • large foreign market • complex products • differentiation strategy by local service/ consulting • advanced after-sales network necessary • proximity to local customers and their design and communication preferences

• unfamiliar environment and marketing policies • increased communication and coordination • investment volume • language and cultural challenges

Whollyowned manufacturing plant

low

high

high

high

• advanced experience in international business • local cost advantage • subsidies or tax incentives • large foreign market potentials • heavy and bulky products

• unfamiliar environment and work ethics • coordination complexity • legal aspects • investment volume • language and cultural challenges • severe response of local firms

Potential strategic risks

Figure 28. An overview of strategic decision determinants of the market entry modes: overseas branch network and wholly owned manufacturing plant. Source: Author

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4 International Market Entry Strategies

In the next chapter, case studies of the driving firms in consumer electronics from Japan, South Korea, and China are introduced. The first case, ‘the European television set market (1990–2011)’, serves as an industry overview. Afterwards, each company case contains a fundamental survey of the firm’s company background and its entry and penetration activities in the European television set market. Various firm and market data with particular attention to alliance, joint venture, or capital investment agreements have been collected during a longitudinal study. Particular attention is paid to a deep evaluation of the Asian firms’ internal and external networks, which they use for their international business. Another research target is to derive strategic groups into which these firms are embedded within the industry. Dynamic capabilities reflect each company’s culture, entrepreneurial strengths, and learning behavior. The focus of research interest is to develop an empirically proven dynamic model that illustrates network repositioning patterns of Asian-European joint ventures.

5

Case Studies

5.1

The European Television Set Market (1990 -2011)

5.1.1

Market developments

In Europe during the 1990s, the cathode ray tube television set market rose from 28 million sets in 1990 up to 38 million units in 1999. European consumer electronics firms such as Philips, Thomson, and Grundig maintained domination of the market, unfortunately based on the mature cathode ray tube technology. In recent years, due to weak R&D competence linked to a poor forecasting performance, and limited networking activities relative to their Asian competitors, European firms significantly lost their market importance against their innovative and cost efficient competitors from the Far East (DisplaySearch, 2008c). Cathode ray tube market volumes continued on a high level until 2003 but then dropped dramatically. Just three years later in 2006, around 18 million LCD television sets were sold in Europe of which 100 percent had a module (synonyms are ‘panel’ or ‘display’) inside that was manufactured in Asia. The LCD module contributes around 70 percent of the total value of a television set. In other words, with the upcoming new flat panel technologies, major value-added contributions to a television set have been finally transferred to Asia. There is a rapid transition to LCD and plasma technologies; and the market has accelerated the adoption of larger sizes, especially 32 inch, as they have reached mass-market price points. Cathode ray tube based television shipments are, consequently, falling fast and are forecast to effectively vanish after 2011 in the European market. By the end of 2007, around 75 percent of the European market has been LCD or plasma based (DisplaySearch, 2008c). The market development from 1990 until 2011 (forecast) divided by the major technologies such as cathode ray tube (CRT), liquid crystal display (LCD), plasma display panel (PDP), projection, and the future organic light emitting diode (OLED) technology is illustrated below.

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5 Case Studies

40 35

M illion T V U n its S h ip m en ts

30 25 20 15 10 5 0

1990

1998

2003

2005

2007

2009

2011

CRT

28

36

37

26

10

3

0,5

PDP

0

0

0,4

2

3

5

6

LCD

0

0

1

9

26

34

38

Projection

0

0,5

0,3

0,3

0,1

0

0

OLED

0

0

0

0

0

0,1

1

Year Figure 29. European television set market 1990–2011 without Turkey and Russia (sales in million units – 2009 and 2011 are forecasts). Source: DisplaySearch (2008a) and market research by the author

The new OLED technology will be launched in mass production by 2010 in Western Europe, which then will start substituting for the LCD technology. Forecasts indicate that the total European TV market will continue to grow. In particular, this increase is driven by markets such as the European parts of Turkey and Russia and other eastern European countries such as Bulgaria, Rumania, etc., which are expected to expand up to 15.4 million in 2012. The market developments segmented by major technologies in these upcoming regions of eastern Europe are illustrated below.

5.1 The European Television Set Market (1990-2011)

105

20 18 16 14 12 10 8 6 4 2 0

PDP TV LCD TV CRT TV

2007

2008

2009

2010

2011

2012

Figure 30. East European television set market volume including the non-Asian part of Turkey and Russia segmented by major technologies in million units (2007 record and 2008–2012 forecast). Source: DisplaySearch, 2008c

‘Eastern Europe, including Russia and Turkey, is the fastest growing television market in the world today,’ said Paul Gray, director of the marketing research institute ‘DisplaySearch’. The research analysis shows that the rate of uptake of flat panel TVs is as fast in these regions as it was in Western Europe and Japan in 2005 and 2006. Average sizes of the television sets in Eastern Europe are expected to be a little smaller, with 42 percent at 32inches in 2010 compared to 35 percent in Western Europe, reflecting an average lower purchasing power of the consumers. Nevertheless, Russia represents a market with enormous potential in the premium price segments for a limited number of wealthy consumers who look for prestigious and branded products. The new OLED technology, due to its relatively high price because of the positioning at the introduction stage of its product life-cycle, will be launched in large numbers in Eastern Europe after 2013.

5.1.2

Industry environment

The television set industry is cost driven, thus economies of scale and scope play a superior role in gaining competitive advantage. Simultaneously, technological changes take place frequently; thus, successful firms need to be innovative. Research and development linked with reliable market forecasting expertise that considers relevant technological changes is of vital importance. Component supplier and television set assembler do business in oligopoly markets. The European market is of particular interest because of the relatively high purchasing power of the local consumers relative to countries such as China or India. Europe belongs to the

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5 Case Studies

leading LCD television set markets, and the volumes are forecasted to grow further by 2012. However, research and development competence is concentrated in South Korea and Japan. These countries currently represent the technologically most advanced markets in the electronics industry worldwide. General R&D and pilot sales tests are conducted in Asia, which in parallel serves as ‘pioneer test markets’. Since a new product development is approved for mass production in Asia, global sales and marketing activities need to start immediately because of the severe global competition. As a senior manager of Samsung SDI explained during an interview with the author, Consumers in South Korea are looking for innovative, state-of-the-art products. The newest is the best and most prestigious. The consumers are ready to try them, even though the product development is at the beginning stage and the performance may not be so reliable. The European customer tends to behave differently and usually hesitates to buy the newest technology. Reliable product performance and expected lifetime have an outstanding importance there, even when the product is a little bit old-fashioned (Glowik, 2007g). In 2008, flat panel television set demand remains strong in global marketplaces, including Europe. Manufacturers are projected to use smaller screen sizes and low-cost models to stimulate demand among price conscious consumers and maintain growth in mature markets (Western Europe), particularly as many consumers look to buy their second technologically improved flat panel TV compared to the first purchase. At the end of the first quarter of 2008, Samsung captured the leading shipment market share across Europe for all television sets with 31.0 percent, followed by LG Electronics (13.4 percent). The former leading European company, Philips, ranked only third at 12.7 percent (DisplaySearch, 2008d). In worldwide LCD TV revenue shares, Samsung gained the top share of 22.1 percent, followed by 18.1 percent for Sony, and 10.1 percent for Sharp in the first quarter of 2008. In worldwide plasma display television set revenue shares, Matsushita (Panasonic) kept the top share of 33.7 percent, followed by 22.7 percent for Samsung, and 16.4 percent for LG Electronics. Plasma TVs also enjoyed market growth but not as strong as LCD, climbing 20 percent (from first quarter 2007 to first quarter 2008) to nearly 2.8 million units worldwide, mostly because of shipments of 32-inch models (DisplaySearch, 2008d). LCD TV continues to post the strongest growth, rising 45 percent within one year (first quarter 2007 to first quarter 2008) to 21.1 million units worldwide (DisplaySearch, 2008d). As a result of the market growth, TFT-LCD panel makers increased their manufacturing capacities by about 25 percent in 2008, while their glass suppliers increased gross substrate capacities by about 32 percent. Corning glass (U.S.A.) and its ‘Samsung Corning Precision Glass’ international joint venture remained the leading TFT-LCD substrate supplier beginning in 2008 with 53.1 percent of market share. The Japan-based ‘Asahi Glass’ and ‘Nippon Electric Glass’ followed with shares of 23.7 percent and 18.4 percent respectively. These suppliers have benefited from the resurgence of TFT-LCD activity in Japan, but forecasts predict that their shares will peak this year and fall slightly in 2009. The one remaining European-based supplier, Schott of Germany, exited the market at the beginning of 2008 (DisplaySearch, 2008a).

5.1 The European Television Set Market (1990-2011)

5.1.3

107

European industry cluster

During the 1990s, European-based enterprises such as Philips, Thomson, and the Grundig AG ranked among the top brands with the largest market shares in the European market. The Grundig AG had television set production facilities in Nuremberg and Vienna. However, in terms of capacities, Grundig was too small to compete in the cost competitive electronics industry against Asian manufacturers, which are embedded in narrowly knit R&D networks as will be introduced and discussed in more detail in the case study section of this book. As a result of its insolvency, in January 2004, the television set business of the Grundig AG was sold at a price of Euro 80 million to the Turkish company ‘Beko Elektronik’ and the British consumer electronics firm ‘Alba’. The syndicate took over the trademark rights and hundreds of patents. The machines from the former Vienna factory were sold to another Turkish firm named Profilo Telra. The majority of work locations were cancelled in Nuremberg, and a factory in Vienna was completely shut down. Since 2004, the television sets have been manufactured at the Turkish Beko Elektronik in Istanbul, labelled with the Grundig brand, and sold in the European markets. Beko Elektronik is the second largest television set manufacturer, ranking behind Vestel in Turkey. However, the vertical range of manufacturing in the Turkish companies is comparatively low. They concentrate on the final assembly of the television set, which is less complex than display manufacturing and, due to local labor costs, attractive in comparison with western European countries. Japanese firms, such as the Victor Company of Japan (JVC), contracted with Vestel as an OEM partner. As a result of the transformation process and the expansion of the European Union (EU) in 2004, which brought several benefits for the new member states, countries such as Poland, the Czech Republic, Slovakia, and Hungary gained significant importance as production places in the European television set industry. Reasons for the investment attractiveness of these countries are • a common EU import tax of 14 percent for television sets and cathode ray tubes; • cessation of customs within the expanded EU territory; • massive financial support by the EU (e.g., improvement of infrastructure); • considerable investment benefits granted by the local governments; • direct market access and proximity to the European customer (e.g., design expectations); • increased market response flexibility; • after-sales-service, which is more efficient and economical than in distant Asian locations; • time and cost savings through local production instead of imports from Asia; • availability of qualified employees; and • lower labor costs relative to western European countries. In the decade of the 1990s, various television set manufacturers relocated their production from western to central and eastern European countries mainly because of lower labor costs

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5 Case Studies

and investment incentives, which were of particular importance in the cost competitive, mature cathode ray tube based television set assembly business. With the newly upcoming flat panel technologies, countries such as Poland, Hungary, the Czech Republic, and Slovakia could develop regional industry clusters with interesting potential for the future. While these countries had rather an image of ‘cheap production locations’ during the 1990s, they changed their reputation towards regional investment clusters bound for new television set technologies as the following cases describing major investment routes within the last 18 years (1990–2008) indicate. Philips concentrated production during the 1990s in western Europe at the following locations: Dreux (France), Brugge (Belgium), and Monza (Italy). The production in Monza was shut down in 1998. A new factory was established in Kwidzyn (Poland) in 1994. However, in December 2004, due to profitability reasons, the plant was sold to ‘Jabil Circuit, Inc.’ at a price of Euro 12 million. It was agreed that the television set production would be continued on an OEM basis in Kwidzyn. In 2002, Philips established a high-end television set assembly factory in Székesféhervár (Hungary). Hungary became the major production site of Philips’ European television set operations. Brugge remained as a research and development center (Zschiedrich and Glowik, 2005). Samsung was one of the first investors following the political transformation process toward market economy in Eastern Europe and established a television set factory in 1989 near Budapest (Hungary). The production capacities, which had yearly increases in Hungary, were deducted from the factory output in Wynyard, Great Britain, which was shut down in 1998. In 2002, Samsung completed the construction of a brand new color picture tube factory in Goed, with an investment volume of around Euro 100 million. The Hungarian government supported this investment with considerable tax incentives and infrastructure support. In addition to Hungary, Samsung SDI ran a color picture tube factory in Berlin, Germany. The factory was bought from the German ‘Treuhandanstalt’ [engl. trust company] in 1993 (Zschiedrich and Glowik, 2005). In 2006, Samsung terminated the production of cathode ray tubes in Berlin. In 2008, Samsung Electronics concentrates its television set operations in Hungary and Slovakia. LG Electronics focused its television set production in Poland. In 1999, a factory was established in Mława. LG will invest Euro 85 million in Mława until 2010 to further expand the production capacities. It is planning to assemble LCD and plasma television sets in Mława. Companies that invest in the ‘Mława economic zone’ will be supported by the local government with considerable tax incentives until the year 2017 (Zschiedrich and Glowik, 2005). Before Thomson (headquarters in Boulogne near Paris) transferred its television set assembly business into a joint venture with TCL China in 2004, the French firm ran factories in Angers (France) and Zyrardow (Poland). The production output in Angers had been gradually reduced from 700,000 units in 2000 to 200,000 units in 2004. During this period, the output at the Polish factory had increased accordingly. In 2005, the factory in Poland produced two million television sets based on cathode ray tube technology and 250,000 LCD television sets (Zschiedrich and Glowik, 2005).

5.1 The European Television Set Market (1990-2011)

109

Japanese firms concentrated their European television set manufacturing during the 1990s in the United Kingdom (UK) and Spain. Meanwhile, Matsushita shifted its production from Cardiff (UK) to Plzen (Czech Republic), where the firm has run production facilities since 1996 (Matsushita, 2008e). Matsushita terminated its cathode ray tube production in Esslingen (Germany) in 2005 (Matsushita, 2005). The Czech Republic was chosen as an investment location for the Japanese joint venture named IPS Alpha Technology and led by Matsushita for the construction of a new LCD module factory that started operation in 2006 (Alpha, 2006b). In addition to their location in Plymouth (UK), Toshiba opened a factory in Poland in 2008, where Sharp also started its LCD panel assembly in 2007. In the same year, the Korean-Dutch joint venture, LG.Philips LCD, initiated their LCD module assembly in Poland. Sharp and Sony continue operations in Spain, but the country is likely to lose importance as a production location in the coming years. Sony has expanded its operations in Slovakia, where the Japanese firm has assembled television sets since 2006 (Sony, 2007).

5.1.4

Summary

The cathode ray tube television set, which represents the leading technology of the 20th century, is being replaced in the global market place by flat panel screen technologies such as LCD and plasma. In the coming years, LCD television sets will keep the largest share in the European market. Plasma sales will continue to grow too but will not be as strong as LCD. However, the next generation television sets based on the OLED technology will be launched in the markets soon. Consumer electronics belongs among the most dynamic, technologically fast changing, and price competitive industries. The majority of recent investments in the European television set industry have been concentrated in Poland (LG.Philips LCD, LG Electronics, Sharp, Toshiba, and Jabil). Further industry clusters are developing in Hungary (Samsung and Philips), the Czech Republic (Matsushita and IPS Alpha Technology), and Slovakia (Samsung and Sony). All of the production sides are located in geographically neighboring countries of the expanded EU (Glowik, 2007a). There are currently more than twenty LCD panel suppliers located in Japan, South Korea, China, and Taiwan. In Europe, LCD panel manufacture started in 2007. Three LCD panel suppliers procure production in Poland and the Czech Republic; all of them are Asian-based firms that made foreign direct investment in Europe. These firms compete with each other on capacity, prices, product development, process technologies, customers, marketing, and capitalization; but they also cooperate in various fields (DisplaySearch, 2008b). The mixture of competition and alliance building creates an enormously complex industry environment. The most important TV-based alliance agreements in recent years were established between (DisplaySearch, 2008b) Sony—Sharp, Sony—Samsung, IPS-Alpha Technology [Canon, Matsushita, Hitachi], Matsushita—Toshiba,

110

5 Case Studies Samsung — LG Display Co. Ltd., Sharp — Pioneer, Sanyo — Sharp, Philips — LG Electronics, and HannStar—LG Display.

In the plasma and cathode ray tube business segments, major alliance agreements have been established since 2001 between Matsushita—Pioneer, Matsushita—Toshiba, Philips—LG Electronics, and TCL China—Thomson. In the following chapters, case studies serve to provide further insights into the different facets of the company backgrounds of the involved firms. Moreover, the cases explain the organizational structures, financial performances, and market entry as well as penetration activities in Europe of current major Asian players in the consumer electronics industry, with a particular focus on the evaluation of their network positioning through various alliance agreements.

5.2

Samsung

5.2.1

Company background

The Korean economy is characterized by local market dominating ‘Chaebols’ with highly centralized decision structures that consist of many affiliated companies. Compared with large Japanese conglomerates (Keiretsu), Chaebols are generally much younger. The oldest, Samsung, was established in Taegu in 1938 (Chen, 2004: 144) by Byung-Chull Lee (Samsung, 2007b). Unlike other Chaebols, for example, LG (former name: Lucky Goldstar), which was founded in 1947, Samsung’s origin goes back to the period of Japanese occupation of Korea. Confucian heritage is still readily visible in Korea; and the influence of Confucian values on the Korean management is significant, which is particularly the case for the most conservative and powerful South Korean conglomerate Samsung. Although Buddhism and Confucianism have generally been accepted as religions in South Korea and have become an integral part of lives of the Koreans, there is a major difference between them: Buddhism is understood and practiced as pure religion; and it recognizes heaven, hell, and transmigration. It teaches that anyone can enjoy the life of heaven if he or she lives a virtuous and honest life in this world. Heaven is the reward for what a person has done on earth. Confucianism, as

5.2 Samsung

111

originally observed in China, is understood more as a philosophy with moral teachings than as a religion. It is involved in the contemporary world, rather than emphasizing the afterlife (Chang and Chang, 1994: 10). The five cardinal values: filial piety and respect, the submission of wife to husband, strict seniority in social order, mutual trust in human relations, and absolute loyalty to the ruler still permeate the Korean society. In 1984, Tu Wei-Ming introduced his thesis of ‘new Confucian ethics’. According to Tu, traditional Confucian ethics, family, or collectively oriented values of the East have mixed with pragmatic, economic goal-oriented values of the West because of the influence of Christianity, which came to Korea in 1884 (Tu, 1984, Kim, 1997: 68). The traditional hierarchical view has significantly altered. Scholars and civil servants are at the top, farmers second, artisans third, and merchants last, which has made it possible for businessmen and engineers to prosper in the new industrial society (Kim, 1997: 68). The ‘new Confucian values’ include five characteristics. First, education is greatly emphasized. For this reason, Korean parents sacrifice their lives for the education of their children. Second, the clan plays an important role in social and economic relations. It is not uncommon for a core of Korean firms to be staffed by family members, distant relatives, people from the hometown, or graduates of the owner’s alma mater, and to be managed like a quasifamily unit (Kim, 1997: 69). Third, harmonious interpersonal consensus-based relations are emphasized. Interpersonal relationships are defined in terms of social status: gender, age, and position in the society. Social etiquette is well defined when it comes to interactions between people. Harmony, which refers to respect for other people and a comfortable atmosphere, plays a very important role in Korea, where people try to avoid or minimize face-to-face conflicts. However, harmonious relationships are built on seniority. The emphasis is on personal loyalty to those of higher rank (Rowley et al., 2002: 72–73). A supervisor can practice massive criticism to a subordinate, while the other way around, unconditional loyalty, obedience, and untiring deployment of labor are expected. In accordance with the fourth characteristic of the ‘new Confucian values’, harmony is reached through cultivation and adaptation of oneself. Fifth, discipline in school and in organizational life is the basic element of social power. As a result, Koreans are action oriented and have a positive attitude towards the future (Kim, 1997: 68–69). The Korean culture is fundamentally influenced to a greater degree by historical and philosophical Chinese thought than, for example, in Japan. Philosophical values of old Chinese military strategists were transferred to the business community. The Chinese expression, ‘Shang Chang Ru Zhan Chang’, is translated to mean ‘the marketplace is a battlefield’ (Chen, 2004: 33). Several Asian business leaders have attached great importance to classical Chinese military strategies. Many of the principles behind these strategies are commonly applied to business activities. Discipline combined with loyalty, moral obligation, severity, and benevolence contribute to business competitiveness (Chen, 2004: 42). It is of vital importance that these attitudes, which reflect the company culture, are respected and shown by each Samsung employee in daily working life. In general, Chaebols are controlled by the founders (paternalistic leadership) or their families, who usually have enormous influence not only on the organizational culture but also on business strategies (Rowley et al., 2002: 75). Samsung is controlled by the Lee family clan

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5 Case Studies

(Chairman Kun-Hee Lee and his sons). The enterprise culture attaches great importance to a ‘friendly relation’ to the environment, which includes people’s goodwill and feelings. When Samsung considers a foreign direct investment abroad, the environment of the company is subject to deep analysis, which is necessarily time consuming, before any market entry activities are taken into consideration (Kono, 1984: 256–258).

5.2.2

Management Philosophy

The Samsung management is target and goal oriented. Consequently, the company pursues a permanent trade-off between the regional advantages and weaknesses of factory locations around the globe. The management of the Samsung headquarters is free to intervene in any subsidiary at any time (Chen, 2004: 191). According to Rowley et al., military structures contribute heavily to ideas on how business organizations should be designed and operated. This orientation influences behavior, predisposing companies to emphasize hierarchical command, a result oriented ‘can-do-spirit’, and competition among the employees (Rowley et al., 2002: 75). The hierarchical working atmosphere at Samsung has been described by one of the interviewees as follows. There are a lot of unscheduled and sudden orders with an urgent due date from the top management and CEO. Even if managers do make a false decision or mistake or give inappropriate orders, employees do not reject or speak out loud to say it is wrong. Koreans are quite used to being told and directed by managers (or teachers) on what they should do since they were teenagers at school and, therefore, have very often a lack of creativity and are afraid of try ing new things and breaking rules (Glowik, 2007c). Koreans rely on personal networks that are embedded in blood relations: the same region of childhood, academic background, or university. According to an empirical study by Chang and Chang, Koreans have most confidence in members of their own family, followed by high school classmates, and people from the same region. In contrast, Koreans do not trust Korean strangers and foreign people (Chang and Chang, 1994: 51, Rowley et al., 2002: 74). Due to its long history as a relatively homogenous ethnic group, Koreans have a high level of communication based on shared contexts (high context society). They like to convey information through nonverbal cues embedded in physical settings or internalized in particular personal relationships (Rowley et al., 2002: 74). The Western scientist Hofstede describes Korea as one of the most collectivist countries in the world (Hofstede, 2001: 215). However, Asian scholars like L. Kim indicate that Koreans are more individualistic than, for example, Japanese (Chang and Chang, 1994: 45, Kim, 1997: 69). Expatriates of multinational companies often presume collective attitudes in Korean managers but recognize individualistic, even egotistical forms of behavior. Koreans have a strong tendency to distinguish themselves from others and show collectivist behavior only to people of the ‘in-group’. Among Koreans, communication is more personalized and smoothly synchronized, which is the opposite in the case of ‘out-group’ members (Rowley et al., 2002: 73). In Korea, the destiny of the enterprise is intertwined with family prosperity (Chang and Chang, 1994: 11). This attitude differs from Western cultures, where the company perform-

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113

ance (expressed rationally in profit or loss figures) and private life are more or less separate matters. Koreans see the company’s prosperity as a private matter and, consequently, more emotionally. In the case of Samsung, this is reflected in the strong motivation of the employees. From a Korean point of view, the success or failure of business reflects one’s ‘own face’ and directly influences the survival of the private family and, consequently, the prosperity of the whole nation (Chen, 2004: 33). Bae notes that, compared with Western enterprises, Korean firms give more weight to human nature, e.g., personality and attitude, than job-related competence, e.g., performance, ability, and knowledge (Kim and Bae, 2004: 139). A task or project is to be done by a due date; all team members are devoted to completing the job as fast as possible by dividing the work. The strengths of Asian-based companies are personal relationships and networks, team work, and self-sacrifice. In Europe, work and personal life are completely separate and isolated. After work, employees do not go together for a further casual discussion. Work time is very rigid and inflexible. At 06:00 p.m. no one is present at work because they have gone home. Europeans have long vacations. ‘The person in charge is on holiday for three weeks; therefore, the job cannot be done at the moment. Please wait’. When a Korean business partner listens to such information on the phone and is confronted with such a situation, he becomes speechless. Speed is the key in the 21st century, especially in the electronics business (Glowik, 2007l). If the profit of a business segment tends to drop, countermeasures follow from the Samsung management. These activities contain restructuring programs, reduction of employees, and shut-down of production lines or even whole factories as was the case in Wynyard, Great Britain, 1998, Berlin, 2006, and Tschernitz, Germany, in 2007 (Zschiedrich and Glowik, 2005: 323, Dassler, 2007). As the company slimmed down during the financial crisis in Asia, around 30 percent of the employees lost their jobs (Genser, 2005: 3). In the spring of 1998, approximately 50 middle-level managers in the manufacturing plant in Busan (Korea) took early retirement, which can be regarded as a de facto layoff program (Kim and Bae, 2004: 185). The financial crisis in Asia caused the number of regular production workers in the Busan plant to be decreased from approximately 7,000 to 5,000. Wages were cut by around 10 percent and benefits like summer vacation allowances were abolished or temporarily restricted (Kim and Bae, 2004: 185). At the end of 2006, several managers at the plasma TV business division in Korea had to leave the company due to a sales performance that was lower than expected by the top management. This represents another example of the targetoriented company culture of the successful Korean Chaebol. These restructuring activities more closely resemble U.S. conditions than traditional Asian management behavior. The influence of the U.S.A. after World War II, e.g., liberalization from Japanese occupation, support of South Korea during the Civil War (1950–1953), and considerable financial aid, have obviously made the country open to Western management styles. According to Kim (1997: 193–198) and Rowley et al. (2002: 75), the economic and technological development policy of South Korea made the country dependent on other industrialized countries or regions (e.g. the U.S.A.). Korea’s business elite has a preference for

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Western ways of thinking, which encouraged learning from industrialized countries along with imitation of advanced technology and management. This is connected to traditional behavioral values like positive attitude towards hard work and lifelong learning, which contribute to the successful performance of Samsung. The Korean employment fluctuation, for example, is comparatively much lower at Samsung than in most U.S.-based enterprises (short-term oriented culture) or in Chinese firms (rapid and partially uncontrolled economic growth). Compared to Japan, the human resource management practice at Samsung could, therefore, be described as a ‘semi-lifelong’ employment policy (compare also Chen, 2004: 193). Unlike its biggest rival, LG Electronics, Samsung is a non-labor union company. The nonunion philosophy was influenced by the founder of Samsung, Lee Byung Chul (Kim and Bae, 2004: 183–184). Representatives of German trade unions even reproach the enterprise for selecting production locations dependent on the volume of subsidies. For instance, in March 2006, the production of cathode ray tubes at Samsung SDI Germany was shut down and 700 employees dismissed (Wohllaib, 2006: 1). Samsung SDI Hungary (Goed), established in 2002, assumed production from Germany. The Hungarian government supported the investment with considerable tax incentives until the end of 2007 (Jacobs, 2006). Nevertheless, this is hard to complain about because in a market economy the firm’s main aim is to make profits, and European enterprises do not differ in that way. For example, the Finnish Nokia in 2008 closed its mobile phone manufacturing in Bochum, Germany, and transferred it to Rumania, where considerable subsidies were paid. And there is another historically biased aspect to be considered. After the civil war, Korean Chaebols such as Samsung, LG, Daewoo, Hyundai, and others had grown successfully, among other reasons, because of the fundamental financial support of the South Korean government. Thus, deciding on investment activities based on the height of tax incentives is neither immoral nor exceptional for Korean managers.

5.2.3

The network building of Samsung

Japanese companies made an essential contribution to the construction and the development of Samsung: in 1969, a joint venture with Sanyo (Japan) was agreed upon, which later led to the foundation of Samsung Electro-Mechanics. Samsung Display Devices is the result of a joint venture with Nippon Electric Company (NEC), Japan, which was established in the same year. The foundation (1969) and development of Samsung Electronics, nowadays one of the most important business divisions of Samsung Group (Samsung, 2007b), was supported by Japanese companies that were involved by contributing essential technology and management know-how transfer. As a result, the first black-and-white television set was produced in 1971. The international joint venture ‘Samsung Corning’, which is a manufacturer of high-quality glass parts (screens and cones) for the production of color picture tubes and TFT-LCD panels, results from an agreement between ‘Corning Inc., U.S.A.’ and Samsung in 1973. Major production capacities for TV glass are located in South Korea, China, and Malaysia (Samsung, 2008a).

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115

Samsung’s technology alliances in the 1990s brought it into collaborative arrangements with the world’s best. For example, in 1994 it was announced that Samsung and the Japanese NEC would share development efforts, at a cost in excess of USD one billion, to bring a 256 M DRAM to market in the late 1990s (Lynskey and Yonekura, 2002: 282). In 2001, Samsung and NEC agreed upon a new joint venture, called Samsung ‘NEC Mobile Display OLED’. The target of the joint venture is to develop the OLED business, which may substitute for plasma and LCD technologies soon. Thus, Samsung and NEC can rely on a joint venture experience that has been developed for decades (long-term orientation). Since the 1980s, the competition between South Korea and Japan in the field of electronics has become intense, which simultaneously caused the number of cooperative arrangements between Japanese and South Korean firms to be reduced. Although South Korea’s electronics industry, which grew by introducing Japanese technologies, is behind that of Japan in the initial phase, South Korean companies, with Samsung as a representative, made innovations on the basis of digestion and assimilation. Thus, Samsung successfully exceeded Japan in the fields of color TV sets and semiconductor chip production (Shigong, 2006: 1, Kim, 1997: 193). In summer of 2004, Samsung and Sony decided to join forces and share the output from the ‘seventh-generation’ LCD factory (Genser, 2005: 3). At this time, Samsung was technologically already ahead of Sony in flat panel production. Samsung’s newly gained position as a serious rival surely was one of the major reasons as to why Sony has not prolonged the joint venture with Samsung and has started to collaborate intensively with Sharp in the LCD panel television set business (compare the Sony case study of this publication) (Otani, 2008a). While the main R&D activities are maintained in South Korea, Samsung increasingly runs production capacities with relatively cheap labor costs in China. In May 2007, Samsung signed another alliance agreement with LG Electronics, its biggest rival and the ‘ever number two’ of the Korean electronics industry and strong competitor in the global display market. Samsung and LG have decided ‘to join forces to challenge the market’ as was stated in the corresponding press release (CDRinf, 2007). The alliance networks of both Korean Chaebols are focused on the LCD business (cooperation of Samsung Electronics and LG Philips LCD) and plasma display panel (PDP) makers (Samsung SDI and LG Electronics), which established the alliance with the relatively neutral name, ‘Korea Display Industry Association’. The firms pledged to cooperate in various fields, ranging from patents and joint research and development to cross-purchasing of panels from each other. The alliance, furthermore, contains a mutual component supply providing selected products, and seeks to standardize panels, equipment, and materials. In addition to this, both panel manufacturing giants have reached an agreement to proceed in the future with a ‘smallto-large’ joint development strategy for the display industry through the project of ‘Eight Win-Win Partnership’, which concentrates on ‘patent cooperation, mutual vertical integration, and joint research and development activities’. Korea’s commerce and industry minister, Kim Young-Ju, said during a meeting of anti-trust regulators, The alliance should not be seen as setting the stage for collusion or price fixing. The companies are not seeking mergers or a cartel to fix prices. South Korea should ease tight antitrust rules to help local firms compete with foreign rivals through strategic tie-ups. Samsung and LG jointly account for some 40 percent

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5 Case Studies of the global market for display panels, about the same as Taiwan, and Japan takes up the remaining 20 percent. The moves are seen as a way to battle aggressive competition by Japanese rivals and alliances among Japanese and Taiwanese companies. Japan’s Sharp Electronics and Taiwan’s Chi Mei Optoelectronics (CMO) and Chunghwa Picture Tubes agreed to share patents last year. But Samsung and LG depend heavily on Japanese parts for their product (CDRinf, 2007).

One of the most recent international joint ventures, but not related to television sets, is with the German ‘Robert Bosch GmbH’ for the development, production, and sales of lithium-ion battery systems. The start of the joint venture with the name ‘SB LiMotive Co. Ltd.’ and headquartered in South Korea is planned for September 2008. The Robert Bosch GmbH and Samsung SDI are invested 50 percent in that ‘equity joint venture’. The management and the supervisory board consist of an equal number of appointed members from both enterprises (Samsung, 2008b). Following the strategy of vertical integration, the batteries manufactured at Samsung SDI will be supplied to Samsung Electronics, which manufactures a wide range of mobile television sets, mobile phones, and other consumer electronics products. The performance and security of the batteries is of vital importance for mobile phones, television sets, and other mobile display equipment. Moreover, energy consumption has become an increasingly crucial issue in consumer electronics. In 2008, for example, the Japanese competitor Sharp introduced an LCD television set linked with an integrated technology based on solar-energy generation in order to run the television apparatus independently from an external electricity supply. The know-how, developed and acquired from the joint venture of Bosch and Samsung, can be used in addition for batteries in similar television sets but also in hybrid cars, which is understood as one of the alternative oil-saving technologies for the near future in the automotive industry. South Korea and Germany heavily depend on natural resources, such as oil and gas, from outside of their home countries.

5.2 Samsung

5.2.4

117

Diversified growth strategy Samsung Group Chairman: Mr. Lee Chairman Office

Machinery & Chemical Industries

Electronics Industries

Trade & Services

Financial Services

Nonprofit Oranizations

Samsung Heavy Industries

Samsung Electronics

Samsung Corporation

Samsung Medical Center

Samsung SDI

Samsung Engineering

Samsung Life Insurance

Samsung Total Petrochemicals

Samsung ElectroMechanics

Cheil Industries

Samsung Fine Chemicals

Samsung Networks

Samsung Techwin

Samsung Petrochemicals Samsung BP Chemicals

Samsung Corning Precision Glass Samsung SDS

Samsung Everland The Shilla Hotel & Resorts Cheil Comunications S1 Corporation

Samsung Fine & Marine Insurance Samsung Securities Samsung Investment Trust

Samsung Economic Research Institute Samsung Advanced Institute of Technology Samsung HR Development Center

Samsung Card

Samsung Foundation of Culture

Samsung Venture Investment

Samsung Welfare and Ho-Am Foundation Samsung Lions Samsung Press

Figure 31. Conglomerate diversification structure of Samsung. Source: Author based on various company documents, verified by Park, N. (status April 2008)

According to Andrews, a corporate strategy is an organizational process in many ways inseparable from the structure, behavior, and culture of the company (Andrews, 2003: 73). Aggressive company growth in unrelated (conglomerate) industries from the current one

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with diversification strategies is a significant characteristic of all Korean Chaebols. In fact, diversification strategies have been widely advocated and heavily supported by the Korean government. Samsung entered into wood textiles and sugar in the fifties; fertilizer and paper production started in the sixties; construction, electronic components, heavy industry, petrochemicals, and shipbuilding were entered in the seventies; and aircrafts, bioengineering and semiconductors were introduced in the eighties (Chen, 2004: 187–188). Samsung seeks advantages accruing from diversified product lines. One obvious benefit is the resulting diversified business risk. Because the company’s products spread out into many fields, it is more effectively able to cope with the ups and downs in certain product markets; and this helps the company to generate steady and stable earnings. Another advantage is the cross-product component sharing, which is important when different products are converging onto the same platforms (Chen and Li, 2007: 77). This facilitates spreading the costs of R&D development, and allows manufacturing capacities and overall economies of scale effects to be realized. Samsung has continuously increased its sales performance, particularly since 2003, which reflects the company’s growth strategy in the global marketsNote:.

Samsung Group - Net sales Billion Dollars

200 150 100 50 0 1999

2000

2001

2002

2003

2004

2005

2006

2007

Year Figure 32. Samsung Group net sales 1999–2007 (2007 forecast). Source: Annual Reports

Note:

As per October 2008, there have been no final sales and income reports of Samsung Group released for the fiscal year 2007; thus, the figure has been estimated by the author. It is assumed that the delay occurred because prosecutors were raiding the Seoul headquarters of Samsung Group in 2008. Investigators were looking into allegations by a former Samsung Group lawyer that the conglomerate had set up a slush fund to bribe prosecutors, government officials, and others. Samsung has denied the allegations (Choe, S.-H., 2008).

5.2 Samsung

119

Samsung Group - Net income Billion Dollars

15

10

5

0 1999

2000

2001

2002

2003

2004

2005

2006

2007

Year Figure 33. Samsung Group net income 1999–2007 (2007 forecast). Source: Annual Reports

Wheelen and Hunger (2004: 138) note that companies that follow a growth strategy expand their business activities. Continuing growth means increasing sales and a chance to take advantage of the experience curve to reduce the per-unit costs of products sold, thereby increasing profits. The sales development of Samsung Group has shown outstanding performance relative to its competitors. However, management was not able to expand net income with the same growth rates. What might be the reason for this shortfall? First, Samsung, because it is embedded in various business fields, runs facilities that have enormous fixed costs. Thus, taking the risk of running overcapacities, the firm becomes vulnerable in the case of economic downturns in the worldwide markets (BFAI, 2007). Second, the electronics industry is highly price competitive. Permanent product innovations are necessary to secure the firm’s business destiny for the future. The corresponding investment volumes in R&D and sophisticated large-scale manufacturing capacities have been sharply increased in recent years, which can explain why the group net income is relatively lower than its sales. In the same time period, the financial situation of Samsung’s competitors has comparatively weakened (e.g., Loewe, Thomson, and TCL-China) or even ended in bankruptcy as in case of Grundig (Zschiedrich and Glowik, 2005: 320–321, TCL, 2006i). Samsung’s strategic advantage lies in its highly diversified activities, which allow aggressive market entry and penetration strategies because temporary losses in foreign markets are compensated by a continued flow of revenues in the native country, where the company has a dominant position. Although the financial, legal, and organizational encouragement by the Korean government to strengthen the Korean Chaebols is nowadays lower than in earlier decades, Chaebols still have several advantages due to their size and importance for the country’s economy. Samsung has a quasi-monopoly position in many areas. For instance, there is the luxury ‘Hotel Shilla’ in the capital of Seoul. ‘Samsung Everland’, a large enter-

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tainment and amusement park, follows the U.S. example of Walt Disney (Samsung, 2004a). Cheil Communications, South Korea’s largest advertising agency, is a member of Samsung Group (Genser, 2005: 3–4). The extremely important meaning of Samsung for the Korean economy permits even influence on political decisions of the Korean government. Samsung Electronics division has helped to make the Samsung business empire the biggest Korean Chaebol with a dominant market position in the electronics industry at home (Genser, 2005: 4). The development of Samsung Electronics’ net sales and net income for the period 1999 to 2007 is illustrated below.

Samsung Electronics - Net sales 150

Billion Dollars

125 100 75 50 25 0

1999

2000

2001

2002

2003

2004

2005

Year Figure 34. Samsung Electronics net sales 1999–2007. Source: Annual Reports

2006

2007

5.2 Samsung

121

Samsung Electronics - Net income Billion Dollars

15

10

5

0 1999

2000

2001

2002

2003

2004

2005

2006

2007

Year Figure 35. Samsung Electronics net income 1999–2007. Source: Annual Reports

Relative to its Japanese rival Sony, Samsung reached a more stable and prospective business performance during 1999–2007 (Annual Reports 2000–2007). One of the reasons is that Samsung concentrated on its core competence, the electronics business. The firm invested early in LCD and plasma module production capacities when the market potentials had been neglected by Sony. Samsung Electronics has been expanded in several related business segments. The complete manufacturing capacities of television sets, semi-conductors, and mobile phones belong to the most important strategic business segments of the group (BBC, 2008, Samsung, 2007a).

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Samsung Electronics Division

Samsung Electro Mechanics

Samsung Corning Precision Glass

Electronic Components

Printed circuit board for TFT-LCD Cathode Ray Glass Tube Bulb and Colored Glass for TFT-LCD

Samsung SDI Cathode Ray Tube PDP Secondary Cell Plasma Displays OLED

Samsung Electronics Device Solution Network (Memory Chips, Semiconductor, TFT-LCD)

Samsung SDS Computer Software Network Support Activity

Samsung Networks Support Activity Telecom. Service

Telecom. Network (Cellular Phones, System Telecom System) Solution Digital Media Network (CTV, Monitor, Computer, Camcorder) Digital Appliance Network (air-conditioner, refrigerator)

Figure 36. Organization of Samsung Electronics. Source: Author based on various company documents, verified by Park, N. (status April 2008)

A firm’s strategic and structural choices always involve two opposing forces: the need for differentiation (focusing on and specializing in specific markets) and the need for integration (coordinating those same markets). The way the firm is organized along a differentiationintegration continuum determines how well strategies along a localization-globalization continuum are implemented. For this reason, the structural imperatives of various strategies such as globalization have to be understood in order to organize appropriate worldwide systems and networks (Deresky, 2002: 225). The fundamental strength of Samsung is the company’s efficient use of its worldwide integrated R&D, purchase, production, and sales network.

5.2 Samsung

5.2.5

123

The strategy of vertical integration

A special form of diversification, which in many cases is of great significance for the growth of a firm, involves an increase in the number of intermediate products that a firm produces for its own use. Vertical integration means an internal transfer of goods and services within a firm. A firm may integrate backward and start producing products or services it previously procured from outside suppliers. Alternatively, a firm may integrate forward and start integrating products and services, such as a distribution or repair service network, that are closer to the final customer. Both of these processes represent methods of a firm’s growth strategy (Penrose, 1995: 145). Differences in Chaebol’s use of vertical integration stem from the distinct characteristics of the industries the conglomerates are involved with (Chang, 2003: 118). The Korean government forced Chaebols into these industries without building the infrastructure of component suppliers or supporting services. Since the Chaebols found it difficult to purchase or otherwise secure necessary parts, and the Korean government pushed domestic firms to industrialize, there were clear and seemingly inevitable reasons to integrate vertically (Chang, 2003: 113–118). In the case of the television set, Samsung Electronics controls all stages from R&D via manufacture up to worldwide distribution and sales. In comparison to European enterprises, such as for example Philips, the Korean firm indicates a much deeper grade of vertical integration. The following illustration displays the case of the television set.

R&D Samsung Research and Development Centers Samsung Design Centers

Primary Components Supply

TV-Display Manufacture

Samsung ElectroMechanics: Electronic Components

Cathode Ray Tube (CRT) Plasma Panel

Samsung Corning: Screen Glass

Backward Integration

Samsung SDI:

OLED

Worldwide Network

TV-Set Fabrication

Trading Company

Samsung Electronics:

Samsung Corporation:

LCD-, Plasma-, Sales CRT-, Projection Intermediates TV Representative LCD-Panel Offices e.g., Production Teheran, Istanbul, Semiconductor Moscow for LCD-TV Forward Integration

Figure 37. Samsung’s vertical integration of television set assembly. Source: Author, based on company documents

Samsung Electronics is closely interlinked with Samsung SDI, a manufacturer and key supplier of cathode ray tubes and plasma displays for television sets. Samsung SDI relies on

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Samsung Corning, which produces glass bulbs for the tubes. Samsung Electro Mechanics delivers components for the display assembly of Samsung SDI. A flat panel display (active matrix) is based on a combination of passive matrix liquid crystal display and semiconductor technology. Thus, R&D and production of active LCD devices mirrors semiconductor technology. Firms like Samsung, with a strong background in passive matrix LCD and semiconductor technologies, are in a good position to build LCD television sets (Kim, 1997: 144). Thus, vertical integration tends to be efficient because it helps Samsung to maintain better quality control and provide better delivery punctuality than the company could achieve through outsourcing. Furthermore, vertical integration means that the fruits of R&D in one stage of production are more likely to be shared with other stages, thereby increasing the overall competitiveness of both upstream and downstream operations (Chang, 2003: 120– 121). In 2006, the LCD television set world market more than doubled to approximately 46 million sets (DisplaySearch, 2007: 1), compared with 20 million units in 2005 (Samsung, 2005a: 61). The market will continue to grow in the future as expected by industry experts (Glowik, 2007j). Samsung benefits from control of the key components such as LCD display, PDP panel, and cathode ray tubes, which provides a significant cost advantage as well as enabling it to enjoy preferential in-house supplies of new technologies. For instance, Panasonic has focused on plasma technology and Sharp specialized in LCD. Yet Samsung is one of the rare manufacturers in the TV equipment industry that assembles the complete range of key components for color picture tubes, LCD, plasma, and projection TVs by themselves and, therefore, can offer a broad product range in the worldwide markets. The distribution of products is supported by Samsung Corporation, which plays the role of business intermediate (forward or downstream integration). Samsung Corporation was established as a result of the oil crisis at the beginning of the 1970s. At this time, the Korean government copied the Japanese system of trading companies. These trading houses have successfully supported the worldwide sales of products as well as the internationalization process of the Chaebols (Kutschker and Schmid, 2006: 770). Samsung Corporation became the first ‘General Trading Company’ in Korea in May 1975 (Samsung, 2007b). Nowadays, the main part of Samsung Electronics industry sales is conducted directly with the customers. The importance of Samsung Corporation has declined due to several reasons including the liberalization of world trade as well as modern information and communication technologies, which create better conditions for direct business activities. However, Samsung Corporation is still important in emerging markets for country research, customer selection, and business transactions support. Samsung Corporation has, for example, offices in Istanbul, Moscow, and Teheran. It sends regular updated macroeconomic as well as industryspecific market data to headquarters, which collects and evaluates the information from around the world. Vertical integration is not always efficient. One of the potential hazards to efficiency comes from vertically integrated suppliers who lack the incentive to be more efficient or innovative because they have captive customers (Mahoney, 1992: 559–584). This lack of incentive can be severe in the case of Chaebol’s affiliates because large portions of their sales are transferred internally (Chang, 2003: 122). For instance, following the HQ’s regulation, Samsung

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125

SDI, Germany, had to purchase large quantities of key electronic components (deflection yokes for color picture tubes) from Samsung Electro-Mechanics, Portugal, in 2002/2003. Samsung SDI Germany, regularly complained about the poor delivery and product quality performance of its supplier. According to S.J. Chang, financially troubled affiliates can survive only with support from their parent company. This is exactly what happened to Chaebols (Chang, 2003: 123). To create a homogeneous group culture and to facilitate the inter-group transfer of personnel, Chaebols used the same level of benefits, which were too generous for poorly performing businesses, and supported unprofitable affiliates via various forms of internal transactions (Chang, 2003: 122–123). The obvious danger for Chaebols like Samsung is favoritism, which leads to buying from within and hinders competition as well as the input of fresh, innovative business ideas from group outsiders. The top management of Samsung obviously recognized this danger and started to run each business unit as a separate profit center, which supports competition with outside suppliers for orders up to a certain budget (Genser, 2005: 5).

5.2.6

International business expansion

As Korean electronics firms gradually strengthened their presence and expanded their market shares overseas, import restrictions regarding goods from Korea increased in key markets such as the United States and the European Union. By the end of the 1980s, there were restrictions in the form of antidumping duties, quota, and quality standard restraints on Korea’s major export producers of color television sets, such as Samsung (Cherry, 2001: 65). This has led to a strategic reorientation of Samsung. In the case of Samsung SDI, the major inhouse supplier of cathode ray tube and plasma displays for Samsung Electronics, the following factories have been established during the 1990s: Germany (1993), Mexico (1995), China (1997), Brazil (1998), and the latest in Hungary (2002) (Samsung, 2004a). Samsung runs three plants in South Korea (Suwon, Pusan, Chunan). Samsung SDI employed approximately 21,000 people in 2006 worldwide. Along with Matsushita and LG Electronics, Samsung SDI is among the top three global plasma TV manufacturers (Shigong, 2006: 1). Overseas expansion through foreign direct investment is even more impressive in the case of Samsung Electronics, headquartered in Seoul, South Korea (Samsung, 2005a). Samsung Electronics was established in 1969. During the 1970s and the 1980s, the firm concentrated its manufacturing capacities in Asia. The first foreign direct investment outside Asia was done in Mexico and Thailand (1988). In Europe, Samsung built its first television set manufacturing plant in Hungary in 1989. Meanwhile, China, as a manufacturing platform, plays an outstanding role for Samsung. Particularly at the beginning of the 1990s, Samsung Electronics established several manufacturing locations for a wide range of products (e.g., television sets, audio, telecommunication, etc.) in China. The manufacturing capacity expansion including foreign direct investment activities of Samsung Electronics, and additional details such as the year of establishment and the manufactured products during the period of 1969 to 2004 (from 2004 to 2008, there has been no new plant building) is illustrated below.

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Region

Country

Plant

Establ.

Products

Asia

Korea

Suwon, Kyonggi-do

1969

CTV, DVDP, video, microwave oven, washing machine, camcorder, MP3, air conditioner

Asia

Korea

Kumi Complex 1, Kyongsangbuk-do

1980

PABX, printer

Asia

Korea

Kiheng Complex (R&D), Yongin-gun, Kyonggi-Do

1980

Semiconductor, TFT-LCD, vending machine,

America

Mexico

Samsung Mexicana S.A. de C.V. (SAMEX), Tijuana

1988

CTV, monitor, HHP

Asia

Thailand

Thai Samsung Electronics Co., Ltd. (TSE), Sriracha

1988

CTV, washing machine, refrigerator, air conditioner, microwave oven

Asia

Korea

Kwangju Complex

1989

refrigerator, vacuum cleaner, vending machine, motor compressor

Asia

Malaysia Samsung Electronics Malaysia Sdn. Bhd (SEMA), Port Klang

1989

Microwave oven

Europe

Hungary

Samsung Electronics Hungarian Co., Ltd. (SEH)

1989

CTV, monitor

Asia

Korea

Onyang Complex, Asan-gun, Chungchongnam-do

1990

Semiconductor

Asia

Indonesia P.T. Samsung Electronics Indonesia (SEIN), CiKarang

1991

VCR, ODD

Asia

China

Hulzhou Samsung Electronics Co., Ltd., Hulzhou (SEHZ)

1992

Audio

Asia

China

Tianjin Samsung Electronics Co., Ltd. (TSEC)

1993

VCR, DVDP

Asia

China

Shandong Samsung Telecommunications Co., Ltd. (SST), Weihai

1993

Fax, printer

5.2 Samsung

127

Asia

China

Samsung Electronics Suzhou Semiconduction (SESS), Suzhou

1994

Semiconductor

Asia

China

Tianjin Tongguang Samsung Electronics Co., Ltd. (TTSEC)

1994

CTV

America

Brazil

Samsung Electronica da Amazona Ltda. (SEDA), Sao Paulo

1995

Monitor, HHP

America

Mexico

Samsung Electronics Mexico S.A. de C.V. (SEM)

1995

W/M, REF, RAC, MWO

Asia

China

Suzhou Samsung Electronics, Suzhou

1995

REF, W/M, RAC, R/Comp, MWO

Asia

India

Samsung India Electronics Ltd. (SIEL), New Delhi

1995

CTV, microwave oven

Asia

Malaysia Samsung Electronics Display (M)SDN, Bhd. (SDMA), Seremban

1995

Monitor, microwave oven

Asia

Vietnam

Samsung Vina Electronics Co., Ltd. (SAVINA), Ho Chi Min

1995

CTV, monitor

America

U.S.A.

Samsung Austin Semiconductor L.L.C. (SAS)

1996

DRAM

Asia

Korea

Kumi Complex 2, Kyongsangbuk-do

1996

Cellular phone, optical cable component

Asia

China

Tianjin Samsung Electronics Display Co., Ltd. (TSED)

1997

Monitor

Asia

Korea

Chonan Complex, Chungchongnam

1997

TFT-LCD

Asia

Korea

Hwasung Complex, Hwasung, Kyonggi-do

2000

Semiconductor

Asia

China

Tianjin Samsung Telecommunications Company (TSTC), Tianjin

2001

HHP

128 Asia

5 Case Studies Philippines Samsung Electronics Manufacturing Corporation (SEPhil), Calamba

2001

ODD

Asia

China

Shanghai Bell, Samsung Mobile Communications Co., Ltd. (SSM), Shanghai

2002

CDMA, BSS, SYS

Asia

China

Samsung Electronics LCD Suzhou Co., Ltd., Suzhou

2002

LCD

Asia

China

Shenzhen Samsung Kejian Mobile Telecommunictions Technology Co., Ltd. (SSKMT)

2002

HHP

Europe

Slovakia

Samsung Electronics Slovakia (SESK), Glanta

2002

CTV C/M

Asia

Korea

Tangjung Complex (Sony) Asan, Chungchongnam-do

2004

TFT-LCD

Figure 38. Expansion of Samsung Electronic’s worldwide factory network. Source: collected by the author as exhibited at Samsung Electronics main entrance hall in Seoul, South Korea

The Uppsala approach assumes that firms follow a linear, incremental internationalization chain pattern (Johanson and Vahlne, 1977: 23–26). The internationalization process of a firm, characterized by orderly expansion from countries with close business distance to more distant markets, was similarly described by Luostarinen as a stepwise and linear utilization of outward-going international business operations (Luostarinen, 1980: 129, 200–201). In contrast to the Uppsala model, as can be seen for the business expansion route of Samsung Electronics, the firm did not follow an incremental, linear investment path from close countries in Asia to overseas. In 1988 and 1995, Samsung Electronics expanded its manufacturing capacities in Latin America, such as in Mexico and Brazil. In 1996, the Korean Chaebol established a semi-conductor plant in the U.S.A. From 1996 onwards, Samsung Electronics again focused its main capacity expansion efforts on Asia, particularly China and its home country, South Korea. In 2002, taking advantage of a favorable investment environment (e.g., relatively low labor costs and tax incentives), Slovakia was selected as a new investment location for building television set manufacturing capacities in Europe. Nevertheless, for research intensive and state-of-the art products, Samsung Electronics always concentrates on its home base. In 2004, Samsung built a new LCD module plant in South Korea, within the framework of the joint venture project with Sony. From the new factory, the worldwide markets are supplied with state-of-the-art LCD modules. Within the portfolio of the factory network, China currently holds the position of a lucrative manufacturing base. Samsung Electronics has plans to open an LCD module factory in the near future in Mexico to target the large regional consumer electronics market in North and South America. If the plan is enacted, the factory in Mexico will become the third largest foreign LCD module

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operation for Samsung Electronics after China and Slovakia. Samsung Electronics is committed to the establishment of foreign operations in each continent to accelerate its access to regional markets. Samsung Electronics targets the building of an LCD module factory in Tijuana, Mexico, with manufacturing facilities for its main suppliers (development of a local network industry cluster). In Tijuana, Samsung Electronics already runs its biggest TV set manufacturing factory in America (Seo and Ahn, 2008). If an LCD module factory is established there too, it may create synergy effects through combined LCD module and TV set assembly in one place. Concentrated local production provides economies of scale effects and increases efficiency in procurement, manufacturing, and distribution, and provides quicker access to local markets and their customers. So far, Samsung Electronics has manufactured LCD modules in South Korea and China, and supplied the assembled modules to the North American market. Particularly, Samsung’s decision to open a module factory in Mexico is derived from its long-term plan to secure a foreign operation in each continent. Therefore, it is likely that Samsung will establish additional factories. It has been said that Samsung is considering the construction of an LCD module factory in Malaysia to cover the Southeast Asian markets. However, the timing for the construction in Mexico and Malaysia is still flexible. Recently, the North American market has been going down due to the subprime mortgage crisis. An official of Samsung Electronics said, Establishing an operation in each continent is a long-term plan that we have pursued for a long time. However, the details of the construction in Mexico we are not yet ready to reveal (Seo and Ahn, 2008).

The European manufacturers in the TV industry prefer to purchase several components and services from outside suppliers, believing this helps cost savings as well as affording them greater flexibility to select from among the world’s best or cheapest suppliers (Genser, 2005: 5). Several of Samsung’s biggest competitors established international joint ventures to bundle their strengths. Philips transferred its display related business activities to a joint venture with LG Electronics (LG.Philips LCD and LG.Philips Display). Thomson integrated its television set business with TCL China (TCL-Thomson Electronics (TTE). In contrast to this, Samsung makes most of its own television set components within the group of affiliated companies using its global manufacturing network (Genser, 2005: 5). With the use of this narrowly knit international network, Samsung can adjust sequentially its global market entry and penetration strategies.

5.2.7

Global design and R&D networks

A decade ago, Samsung was commonly seen as a producer of cheap televisions and microwave ovens (Genser, 2005: 2). However, Samsung has successfully modified its marketing efforts toward a premium brand manufacturer (Rocks, 2004). In this regard, European advertisement campaigns have increased considerably since the year 2000. Samsung’s annual budget for worldwide promotion expenditures amounts to around USD 700 million (Stucky

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and Rüssli, 2005: 17). Such a large advertising budget allows professional and widespread campaigns. Additionally, the company does extensive sports sponsoring (e.g., the Olympic Games). In Europe, the brand awareness has increased accordingly. Another reason for this success is the company’s strategy of single brand marketing, which includes a full product range of television set models. Concerning television sets offered by Samsung in the German market, the firm was exceeded in numbers only by Philips in 2006 (Karmann, 2007: 46). Manufacture, planning, and organization of Samsung are oriented to the lean production model, emphasizing a philosophy of total quality management. The ISO 9000 project and process innovations were introduced in the early 1990s. By the mid-1990s, Six Sigma Management had been adopted in combination with Supply Chain Management (SCM). In the process of implementing Six Sigma, Samsung extensively benchmarked other enterprises such as Motorola, General Electric, Citibank, and Federal Express (Kim and Bae, 2004: 187). Six Sigma management has become the main innovation philosophy of Samsung. It targets improved quality, customer satisfaction, technological innovation speed, and reduction of administration and production costs (George et al., 2005: 1–5, Pande et al., 2000: 379–382). The company established a ‘Six Sigma Academy’ to educate employees and to develop quality specialists with problem solving abilities. The positive outcome of the program is apparent in various performance indicators like, for example, a considerable reduction of product defects (Kim and Bae, 2004: 188). Due to its standardized project structure, ‘Define-Measure-Analyze-Improve-Control’, (George et al., 2005: 1) as well as the use of statistical formulae, measurement methods, and problem solving tools (e.g., process mapping and scatter plot analysis), Six Sigma has helped to improve the internal communication of Samsung headquarters and its overseas facilities. While television set manufacturers such as Sharp and Sony are positioned in LCD niche market segments, Samsung is ready to sell all product technologies, which supports the brand awareness. A company that provides a full product range obtains attention and, consequently, easier access to the end consumer. This is an advantage in mass markets such as consumer electronics with relatively standardized products and intense price competition. A further important success factor is an attractive product design. Since the year 2000, Samsung has increased the number of designers to more than 470 and increased its worldwide network. This allows a much better consideration of local customer tastes. Samsung Design Europe is located in London, UK (Stucky and Rüssli, 2005: 17). With the use of an innovative product design, Samsung seeks to differentiate itself from its competitors.

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Samsung Design Europe (London)

Samsung Design Milan (Milan)

Corporate Design America (San Francisco) Corporate Design Center (Seoul)

Samsung Design China (Shanghai)

L.A. Laboratory (Los Angeles) Samsung Design Japan (Tokyo)

Figure 39. Samsung’s worldwide network of product design units. Source: Samsung Electronics Annual Report 2005, p. 52

Samsung has established a worldwide network of regional product design units. In addition to the Samsung Advanced Institute of Technology (SAIT) located in Korea, the network is completed by local R&D centers in various locations around the world (Lynskey and Yonekura, 2002: 283). The technological results are transferred to HQs in Seoul. It collects data from similar R&D units around the world and prepares mass production scenarios for various Samsung factories, such as in China for example. Recently, Samsung has opened another R&D center in Stuttgart, Germany (Woyzik, 2006). An important activity of the R&D centers is a special product development that considers country-specific customer wishes in Europe. Samsung has made substantial investments in research and development for technologically leading products. The Samsung Group spends approximately 6 percent of the sales turnover for marketing and around 6 percent for R&D. Samsung Electronics and Samsung SDI reinvest up to 9 percent of their turnover for R&D, which results in innovative products (Glowik, 2007g). For example, Samsung SDI exhibited a 31-inch active matrix organic light emitting diode (AMOLED) TV and plans the mass production of 14-inch panels for 2009. The firm targets three million panels at the production starting period. Samsung’s main Japanese competitor, Sony, already launched an 11-inch OLED TV based on mass production in 2007. Samsung SDI vice president, Woo-Jong Lee, assumes that AMOLED displays will soon

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attain market maturity both for monitors and notebook computers as well as for television sets (DisplaySearch, 2008f). Various mobile phone assemblers already are using AMOLED displays made by Samsung SDI, which is the leading firm in the mobile phone display segment. By 2010, Samsung SDI wants to use the technology in other flexible applications too. However, one of the main challenges concerning the production of AMOLEDs is linked to exorbitant costs. Currently, 1.5 million AMOLED panels are manufactured at Samsung SDI per year. By doubling the production capacities, Samsung seeks to gain economies of scale effects (Greif, 2008).

5.2.8

Summary

The consumer electronics business of Samsung has its main roots in network relations with Japanese firms, most of them established at the end of the 1960s. Several joint ventures were agreed upon, such as with Sanyo, which resulted in the foundation of Samsung ElectroMechanics. Currently one of the biggest display manufacturers in the world, Samsung Display Devices has its origin in a joint venture with Nippon Electric Company (NEC) (Samsung, 2007b). Various technological alliances made in the 1980s and 90s helped to develop Samsung to become one of the leading firms in consumer electronics. Samsung’s top management is continuously searching for new market potentials for the future and strengthening its efforts to establish selected alliances, such as the ones recently made with Bosch (2008, lithium-ion batteries), Nokia (2007, mobile phones technologies), Limo (2006, Linux-Platform), IBM (2006, industrial print solution), Sony (2004, LCD panels), and Bang and Olufsen (2004, home cinema systems) (Samsung, 2008c). However, with particular focus on the television set industry, Samsung has not agreed upon network relations such as joint ventures to the same extent as, for example, their Japanese competitors, Sharp or Matsushita. There is no doubt that Samsung has successfully changed its reputation from a cheap OEM producer to a technology and marketing driven company. Nevertheless, price research activities by the author in the German market for the period December 2005 to April 2008 reveal that Samsung’s television set prices were lower than Philips, Loewe, and Panasonic prices, and were similar in price level to LG Electronics. It can be concluded that Samsung pursues an aggressive pricing policy in the mass markets. Market penetration through a push strategy provides the conditions for economies of scale effects (Meffert, 2000: 270, Glowik, 2008: 399–400). A complete product range (cathode ray tube, LCD, plasma, and projection), an aggressive pricing policy, together with intense vertical integration of its value-added chain activities leads to the conclusion that Samsung’s competitive strategy is cost leadership rather than differentiation (Porter, 1999: 71–74). For large-scale modern plants that involve huge financial engagement, high production volumes are essential to recovering the investments (Lippold, 1996: 28). An 8th generation TFT-LCD manufacturing line with a production capacity of 50,000 panels per month necessitates an investment of USD 1.9 billion (Sony, 2006b). While Samsung pursues an aggressive pricing policy in the mass market, activities

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run the risk of getting into price wars with newly competitive Chinese and Taiwanese television set manufacturers (Außenwirtschaft, 2007, DisplaySearch, 2006). Samsung is one of the enterprises most diversified with unrelated products in the world, including a monopoly position in several markets at home, which serves significant business risk portfolio advantages. Samsung’s strength is based on its forecasting expertise of future market potentials, which comes along with its fast market response times. Despite its diversified business portfolio, further strengths of Samsung lay in its vertical manufacturing depth, and in the firm’s fast knowledge absorbing capabilities of strategically valuable information from the market environment and its participants (e.g., customer, supplier, and competitors’ products). This capability is of vital importance in order to continuously improve Samsung’s products, and related activities in the procurement, manufacture, and marketing departments. The acquired knowledge immediately results in newly developed products and the establishment of vertically integrated mass manufacturing techniques, using regional labor cost advantages in its own factories, such as in China. The products then can simultaneously be launched through its global sales network, usually faster than competitors, which allows further economies of scope and scale effects. Additionally, through faster market entry than its competitors, an impression of an innovative technological pioneer firm is developed (e.g., first mover advantage).

5.3

Sony

5.3.1

Company background

In September 1945, a 38-year-old engineer named Masaru Ibuka with about 20 employees and USD 1,600 of his personal savings established a telecommunication engineering firm, Tokyo Tsushin Kogyo K.K. Another engineer named Akio Morita soon joined the team. At the beginning, the company considered producing everything from electric rice steamers to miniature golf equipment. However, the company was never able to make a steamer that worked properly. Ibuka and Morita decided to manufacture sound-recording devices instead (Frisch, 2004: 4–6). Tape recorders had been developed in Germany in the 1930s by Grundig and Telefunken. In the United States after 1945, Ampex had led the market in developing and manufacturing tape recorders. At that time, Matsushita, Hitachi, and Toshiba, the largest Japanese electronic manufacturers, were developing semiconductors under the technical license of Radio Corporation of America (RCA). In 1952, the business focus of Ibuka shifted from magnetic tape recorders to transistors. He learned that Western Electric, the parent company of Bell Laboratories, where semiconductors had been discovered in 1948, was offering a technical license for manufacturing transistors in return for a royalty. The agreement stipulated a USD 25,000 advance payment against royalties (Nathan, 1999: 27–31). The company began using the Sony trademark on its products beginning with the TR-55 transistor radio in 1955. In 1957, the company introduced the world’s smallest transistor

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radio with built-in speakers. In January 1958, the firm had grown to 500 employees and was worth more than USD 100 million, and officially changed its name to Sony Corporation (Frisch, 2004: 10–11, Nathan, 1999: 53). Japanese firms are well known for their complex network of interlinked companies (keiretsu). A classic keiretsu consists of banks, a trading company (sogo shosha), and various manufacturing companies. Besides this horizontal network of associated business groups, there are vertically connected manufacturing firms at the core and suppliers at the periphery. These networks of companies represent a ‘network of knowledge’ (Imai, 1987: 32–35, Chang, 1995: 391). In the late 1950s, Sony diversified its manufacturing to microphones, cassette-tape players, and television apparatuses. In 1960, Sony’s engineering team introduced the world’s first transistor television. Thus, Sony founded Sony Enterprise Co. Ltd. in 1961 to manage the Sony Building in Ginza. Over the next several years, Sony Enterprise added Sony Plaza, a retail chain to market imported goods; French restaurant, ‘Maxim’s de Paris’; Sony Travel Service, an insurance agency; and other services. Building on the theme ‘not hardware, but heartware for everyday life’ to unite a diverse range of businesses, Sony Enterprise continued to move in new directions. It put together a plan to import fine foreign goods and, in the mid-1970s, started to import sports equipment and fashionable luxury items. Sony was at the same time aggressively engaged in exporting products and expanding its overseas operations (Sony, 2008a).

5.3.2

Conglomerate diversification network

Sony opened its first overseas branches in 1958 in Hong Kong, 1959 in the U.S.A., and 1960 in Zurich, Switzerland (Sony, 2008a). Most of Sony’s diversification into new areas of business was through joint ventures with foreign companies. The first operation to be diversified involved products connected to Sony's electronics business. In March 1965, Sony and Tektronix, Inc. of the U.S. formed Sony-Tektronix Corporation in Japan with equal start-up capital from each company. At the time, it was highly unusual for a foreign company to have more than a 49 percent share in a joint venture with a Japanese company. Tektronix was a well known instrumentation and measuring equipment manufacturer commanding over 80 percent of the global market for oscilloscopes. In 1963, Sony and Tektronix agreed that the potential was there for the establishment of a joint venture. The joint venture expanded its operations into new fields, including other electronic measuring instruments, graphic displays, broadcasting equipment, and optical devices. With such a variety of products, SonyTektronix was able to meet the needs of a wide range of customers. In 1966, Sony signed a contract with IBM targeted on cooperation for magnetic computer tapes, which turned out to be rather unsuccessful (Sony, 2008a). Following measuring instruments and magnetic devices, a joint venture was established that involved entering the battery business. In February 1975, Sony and the Union Carbide Corporation (UCC) of the U.S. established a battery manufacturing and marketing joint venture called ‘Sony-Eveready Inc.’ (UCC), which manufactured and marketed batteries under the ‘Eveready’ brand name, was the largest producer of batteries in the world, and wanted to do business in Japan. The initial capital was contributed equally by both parties, and Morita was

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appointed president. The joint venture began importing dry cell batteries from the United States and marketing them under the ‘Sony-Eveready’ name. At the same time, Ibuka and Morita wanted to have their own battery manufacturing facilities. Sony was relying on domestic battery suppliers for their transistor radios, transistor televisions, and tape recorders. But the demand for batteries was growing as Sony focused manufacturing on portable consumer electronics. If Sony had its own battery manufacturing facility, the company could not only meet its own requirements, but also tap into the rapidly growing market for small batteries used in cameras, watches, and calculators. Thus, both companies could benefit from a partnership (Sony, 2008b). In the late 1980s, Sony diversified away from its electronic core business and entered the movie and entertainment industry. In January 1988, it bought CBS Records. In November 1989, Sony purchased Colombia Pictures Entertainment, one of the biggest motion-picture companies in the world, and integrated it into the company in new business units called Sony Music Entertainment and Sony Pictures Entertainment. These two major acquisitions generated mixed media coverage throughout the United States and Japan (Sony, 2008a). In 1995, a new Sony division called Sony Computer Entertainment launched a home video game system and the play station (Frisch, 2004: 19, 25, 31). Entering these fields reflected Morita’s ambitions for the entertainment business and his naturally close relations with the U.S. market, which has been developed over decades. However, resource allocations toward unfamiliar segments caused a weakening position in electronics, the core business of the Japanese firm. As a result, Sony had to transfer its mobile phone business in an international joint venture with the Swedish Ericsson Group in 2001 (Sony, 2008a). The expansion towards the entertainment business rerouted financial, R&D, and human resources away from the firm’s core competencies, such as technological, innovator, and trendsetter in consumer electronics (compare Campell and Sommer-Luchs, 1997). Sony’s turnover has stagnated during recent years as the financial data illustrate.

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Sony Group - Net sales Million Dollars

80.000 70.000 60.000 50.000 40.000 30.000 20.000 10.000 0 1999

2000

2001

2002

2003

2004

2005

2006

2007

Year Figure 40. Net sales of Sony Group 1999–2007 in million dollars. Source: Author based on annual reports

The analysis of net income underlines the firm’s difficult situation in 2001 and 2002, when the group profit dropped dramatically. Sony has not recognized the upcoming television set flat panel technologies such as LCD and plasma, which are major business fields within the firm’s core business of consumer electronics. In parallel, the entertainment business (movies and music) has not developed successfully as planned, which further weakened the firm’s overall business performance.

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Sony Group - Net income Million Dollars

1.800 1.600 1.400 1.200 1.000 800 600 400 200 0 1999

2000

2001

2002

2003

2004

2005

2006

2007

Year Figure 41. Net income of Sony Group 1999–2007 in million dollars. Source: Author based on annual reports

In comparison with other Japanese electronics firms, which usually focus on a particular market segment to gain technological leadership (e.g., Sharp LCD television sets and solar cells), Sony is involved in diversified business fields such as electronics, game pictures, financial service, and ‘others’ (e.g., music entertainment, and communication). On the other hand, Sony represents one of the most internationalized enterprises among the group of Japanese firms in the electronics business. The organizational structure of Sony is illustrated below.

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Sony Group Chairman & CEO Howard Stringer

Electronics Sony Electronics Audio

Game Sony Computer Entertainment

Video

Game Console

Televisions

Software

Information Communication

Pictures

Financial Services

Sony Pictures Entertainment

Sony Life Insurance

Motion Pictures

Sony Assurance

Television Programming

Sony Bank

Other Products

Sony Finance International

Semiconductor Components Other Products

Others Sony Music Entertainment (Japan) Music Content Sony Music Entertainment Music Publishing Sony Communication Network Network Service Animation Products Sony Marketing

Figure 42. Organization of Sony Group (status January 2008). Source: Sony Corporation (2008d)

While in most Japanese enterprises it is rather difficult for non-Japanese employees to get promoted to management positions, Sony has created a global company culture providing chances for all staff (e.g., Howard Stringer as Chairman and CEO). Despite current weaknesses in some business segments, Sony’s group culture serves as a competitive advantage relative to other Asian firms in the worldwide markets of the future.

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5.3.3

139

Loss of core competencies in electronics

The worsening market position of Sony in the mobile phone segment shows similarities with the television set business, which can look back to a long and successful history. In 1968, Sony introduced the Trinitron television technology, at that time with superior color and brightness performance relative to its competitors (Frisch, 2004: 12–13). The transistor radio and the Trinitron television technology supported the successful growth of Sony until the 1970s. Sony has continuously increased its supply network up to about 75 manufacturing plants. The firm’s ‘optimization sharing plan’ enhanced supply chain innovation. This has helped Sony to achieve an efficient supply chain management system within and across its units, which incorporates upstream suppliers and downstream distributors and retailers (Samiee, 2008: 4). Sony kept major know-how expertise with respect to the Trinitron technology inside the company. Sony neither agreed on joint ventures with other firms operating in the television set industry nor purchased major components, such as color picture tubes, from suppliers outside the group. This behavior has provided Sony an invulnerable, independent ‘going alone’ reputation in the television set industry. The introduction of the Walkman in 1979 boosted the reputation of Sony as the driving pioneer in the electronics industry, which represented at the same time the core business and vital strength of the firm. However, a couple of years later, Sony failed to recognize new, upcoming trends in consumer electronics, such as flat panel technologies. This went along with unsuccessful developments in other business operations, when Sony failed against competitors for setting technological industry standards for several electronic systems such as the ‘Betamax-Video,’ the ‘Multimedia-Compact-Disc,’ or the ‘Atrac MP-3’ format (WeltOnline, 2008). The joint research and development activities with Philips started in 1979 (‘world audio disc’) and were renewed in 1992 (joint development of a DVD industry standard). The Sony and Philips partnership failed against the high-definition DVD of the rival alliance of Toshiba, Hitachi, Pioneer, JVC, Thomson, Mitsubishi Electric, and later Matsushita, which supported Sony at the beginning of the technological battle (WeltOnline, 2008, Sony, 2008a). The conglomerate diversification of the business field activities of Sony, e.g., entertainment, was accompanied by a weakening concentration of the core business in electronics, such as the television set business area. Consequently, the turnover related to the electronics business was stagnating during the 1990s (Sony, 2008c, Sony, 2006a). The net income even turned into a loss for the period 2004 to 2006 as illustrated below.

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Sony Electronics - Net sales 70.000 Million Dollars

60.000 50.000 40.000 30.000 20.000 10.000 0 1999

2000

2001

2002

2003

2004

2005

2006

2007

Year Figure 43. Sony Electronics—net sales 1999–2007 in million dollars. Source: Sony 2006c, 2008c

Sony Electronics - Net income 2.500

Million Dollars

2.000 1.500 1.000 500 0 1999

2000

2001

2002

2003

2004

2005

Year

Figure 44. Sony Electronics—net income 1999–2007 in million dollars. Source: 2006c, 2008c

2006

2007

-500

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Sony achieved in the ‘financial service’ business field an operating margin (all data in percents) of 9.9 (2005), 25.3 (2006), and 13.0 (2007), which is comparatively much better performance than the electronics division, which had a loss until 2006 and reached an operating margin of 2.6 in 2007. Sony launched its own life insurance business, which positively contributes to the performance of ‘financial service’ (Sony, 2008c). In 2007, Sony achieved an income record loss of USD 2.2 billion in one of the most promising business segments, ‘game’ (e.g., ‘PlayStation’). The loss is expected to become even more serious for the fiscal year 2008 (Sony, 2008c). According to the annual report of Sony for 2006, the sales of LCD television sets increased worldwide. Simultaneously, the firm record shows a decline in sales of cathode ray tube and plasma televisions (Sony, 2006a). For 2007, according to the turnover and net income data, Sony Electronics division successfully managed a turnaround, among other reasons because of the booming LCD business. The net income sharply increased to USD 1.5 billion, which is the highest since 2002. Sony was much delayed relative to its competitors, such as Sharp and Samsung, in the building of its own LCD module assembly lines, which are of vital importance to guarantee product performance. The LCD module contributes around 70 percent to the television set value-added activities. Thus, naturally, the question arises, how did Sony manage the successful re-launch in the television set (LCD) industry?

5.3.4

Access to LCD Technology through joint venture networks

The lack of technological expertise as well as lacking LCD panel manufacturing capacities forced Sony to establish a joint venture called ‘S-LCD Corporation’ with its Korean rival, Samsung (Sony, 2006b). In 2004, the final contract was signed to establish a 7th generation TFT-LCD panel joint production line at Tangjeong, Chung Cheong Nam-Do, South Korea. Despite compensating for missing LCD technology know-how, Sony tried to accelerate LCD TV product sales in order to make up for lost time. Through the joint venture with the well branded television set manufacturer Sony, Samsung for its part significantly increased its own reputation and balanced the investment risk in LCD module manufacturing. The joint venture formed the common supply basis of LCD modules to Sony Corporation and Samsung Electronics, which are competitors in the final industry stage of LCD television sets. At the beginning of the joint venture operations, Sony had concerns about the quality. The company not only dispatched its own engineers to the joint venture to vet LCD displays, it also insisted that every panel it used be shipped through its LCD-TV factory in Inazawa, near Nagoya, Japan. There the panels went through another rigorous quality check before electronics such as digital tuners, power units, and other components were added. At the end of that quality check procedure, approved displays were assembled into television sets or shipped off as modules to Sony’s assembly plants in Spain and Mexico (Ihlwan, 2006). After a period of joint venture operations, panels were shipped directly from S-LCD to the assembly plants of Sony. Sony confirmed that the venture has been instrumental in the company’s introduction of the successful brand ‘Bravia LCD TV’ lineup. At the same time, Sam-

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sung’s own LCD TV business has made considerable progress. The South Korean giant has emerged as a trend-setter in the LCD panel industry, aided by Sony technology that has helped ensure high-quality picture performance. As a result, Sony and Samsung are competing for leadership in the LCD television set business based on a common supply created through the joint venture. ‘The Sony-Samsung alliance is certainly a win-win’, declared Lee Sang Wan, president of Samsung’s LCD unit. Sony’s executive deputy-president, Katsumi Ihara, who has led Sony’s television set division and was recently appointed to oversee key consumer-electronics product lines, also credits the alliance with helping to revive the company’s LCD television set business fortunes (Ihlwan, 2006). In July 2006, Sony and Samsung announced that they would expand their cooperation towards an 8th generation amorphous TFT-LCD panel production line (Sony, 2006b). However, only two years later, Sony reviewed its ambitious relationship with Samsung and announced Sony’s plans for a new alliance partner. ‘This is a major step in attaining our goal of becoming the top TV manufacturer worldwide’, proclaimed Ryoji Chubachi, president of Sony Corporation of Japan, at the start of the press conference in April 2008, while announcing a new LCD panel joint venture with Sharp Corporation of Japan. The joint venture is not only influencing Samsung’s LCD, Sony’s previous panel investment partner, but also Taiwanese panel makers who also supply large numbers of LCD panels to Sony (DisplaySearch, 2008e). The only way for Sony to capture the throne of the top TV manufacturer in the world is to go face-to-face with Samsung Electronics Co. Ltd. of Korea, its most serious rival (Otani, 2008a). Sony became engaged in severe competition in LCD TVs with Samsung Electronics in the major markets of Europe. Outside the European and North American markets, Samsung Electronics often holds a larger share than Sony, such as in promising markets in the newlyemerging economies of Brazil, Russia, India, and China (the BRIC nations). According to Torii Hisakazu, vice president of ‘Display Search’ market research institute, ‘No matter what market Sony might decide to go after, Samsung Electronics is always its biggest competitor’ (Otani, 2008a). Sony has lacked any real way to differentiate its products from those of Samsung Electronics. The main reason has been the common panel. Sony and Samsung use panels of the same dimension, produced with the same efficiency, and manufactured by the joint venture ‘SLCD Corporation’ in Korea. Thus, both firms use panels with similar cost structures. Naturally, Sony injects its own technology in the form of backlights and other components when it comes to building the panels into modules, creating ‘Sony panels’. Even so, as long as Sony and Samsung Electronics use the same basic panels, it is difficult to end up with any real difference in price. Chubachi explained, ‘We will be procuring panel modules from the joint venture to start; but in the future, we plan to just purchase panels and make our own modules’ (Otani 2008a).

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As was the case with ‘S-LCD Corporation’, he is leaning toward producing Sony panels, complete with Sony's unique backlights. Apparently the firm is determined to keep a tight grip on its panel technology even while cooperating with Sharp in manufacturing (Otani, 2008a). Through the manufacturing facilities at Sharp’s Sakai factory, the first 10th-generation plant in the world, Sony would be able to take advantage of its high assembly efficiency and may achieve price superiority over Samsung Electronics. When Sony first launched the joint venture of S-LCD Corporation with Samsung, it was a state-of-the-art 7th-generation factory and also the largest in the world (Otani, 2008b). The joint venture helped Sony to enter the flat panel LCD television set business at a time when Samsung was already technologically advanced. Sony did not have mature enough LCD TV panel development and production technologies. Therefore, Sony invested 50 percent for the first generation-7 plant with Samsung, forming a joint company named ‘S-LCD’ to reallocate the output and increase purchases from Taiwanese-based ‘AU Optronics’ (DisplaySearch, 2008e). Later, Sony invested another 50 percent in Samsung’s first generation-8 plant. With the new joint venture with Sharp, Sony owns significant stakes in three LCD plant generations: Gen 7, Gen 8, and Gen 10, not to mention Sony’s continuous leveraging of the power of Samsung by buying more panels from ‘AU Optronics’ in Taiwan, which has become its strategic panel supplier for 32inch, 40-inch, and 46-inch panels. Sony has been successfully securing its panel sources, and now the company is aggressively targeting sales of over 18 million units in 2008, representing 90 percent growth from the 9.5 million it shipped in 2007. Sony targets over 30 million for 2009, another growth of more than 60 percent (DisplaySearch, 2008e). In addition to LCD, Sony tries to regain competitive strength as a technological leader in the electronics industry concentrating on the next flat panel generation technology called organic light emitting diode. OLED displays may replace LCD and plasma, and may drive the flatpanel TV business in the future. In 2008, Sony was the first company that launched commercially available OLED TVs (11-inch, 960 x 540-pixel, model ‘XEL-1’), which are selling in limited quantities for the equivalent of USD 1700 in Japan and for USD 2500 in the U.S.A. At trade shows, the XEL-1’s OLED display has dazzled industry professionals due to its superior performance relative to LCD and plasma. Sony developed the OLED technology to become ready for commercial mass production mainly by themselves (DisplaySearch, 2008f). Additionally in 2008, Sony launched the Blu-Ray system as a major industry standard and succeeded against its Japanese rival Toshiba, which was previously the leading firm in developing the high definition (HD) DVD standard (WeltOnline, 2008).

5.3.5

Foreign direct investment in Europe

In Europe, Sony runs two wholly owned production facilities for the manufacture of LCD television sets, which are located in Barcelona, Spain, and in Trnava, Slovakia (Sony, 2006c). In order to meet the rapidly increasing demand for LCD TVs in Europe, Sony decided on the construction of a new factory in Nitra, Slovakia, located 40 kilometers east of Trnava, where Sony has been producing TV sets since February 2006. In August 2007, the Nitra site began producing a limited number of ‘Bravia LCD TVs’ followed by successful

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mass production starting in October 2007. Sony invested EUR 73 million in the brand new factory (greenfield investment). Production lines that currently operate in the Trnava factory are scheduled to be relocated to the Nitra factory in 2008. By the end of 2008, the Nitra plant will have a production capacity of three million LCD TVs per year and around 3,000 employees. Meanwhile, following the transition of the LCD TV production lines to Nitra, the Trnava factory will continue producing tuners for Bravia LCD TVs and providing technical support for ‘playstation’ computer game devices. After the transfer of the LCD TV production lines from Trnava to Nitra, Sony will continue to run its LCD TV assembly in Barcelona, Spain, along with Nitra, Slovakia (Sony, 2007, Sony, 2008d). The Barcelona factory serves as a close manufacturing base for western European markets while Nitra, due to its geographical location, can focus on central and eastern European markets. The Barcelona site will operate as the European technology center for the LCD TV assembly of Sony. The Nitra factory will make use of its state-of-the-art equipment to concentrate mainly on large-size, high-end Bravia LCD sets for the common European market. (Sony, 2006c). As Katsumi Ihara, corporate executive officer of Sony Corporation, commented, Following our 10-year production experience of television sets in Trnava, Slovakia, we are very pleased to officially announce the foundation of a brand new factory in Nitra. This will allow us to expand our European LCD television set business in Europe. We are convinced that the new plant will have an outstanding importance with regards to the market penetration of Sony’s superior technology and design performance. We seek to develop Sony’s Bravia brand to become the leading LCD television set brand in Europe (Sony, 2006c). With regards to procurement flexibility and transportation cost economics concerning component supply in Europe, the newly established joint venture with Sharp makes sense. The LCD module assembly of Sony’s previous partner, Samsung, is located in Asia (Sony, 2006b). Thus, transportation-sensitive electronic modules need to be shipped and imported to Europe, which causes time delay and costs. Sony’s new LCD module manufacturing partner, Sharp, recently opened its manufacturing base in Torun, Poland (Sharp, 2008a). The modules produced at Sharp in Poland can be delivered within less than one day to Nitra, Slovakia. Both Japanese firms make use of the expanded common European market, which profits from the cessation of country border controls.

5.3.6

Summary

Entrepreneurial theories stress the importance of the firm’s founder and his influence on the strategic orientation of the enterprise and its internationalization paths (Zahra, 2005: 21, McDougall and Oviatt, 2000: 903, Jones and Coviello, 2002: 4). Sony’s entry into the entertainment business was to a great extend caused by the ambitions of Akio Morita, one of the firm’s cofounders. Morita’s affinity for the U.S.A. contributed to Sony’s early commitments in the American market and, despite its traditional Japanese roots, the firm’s open mindset towards a multinational management philosophy.

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145

During the 1990s, Sony was ranked as one of the most reputable and best known brands in the European consumer electronics market. Nevertheless, the case study of Sony has shown how fast the firm lost its former core competencies in the television set component industry (e.g., Trinitron TV). Sony was known for its unique ability to develop and manufacture all of the major TV set components, from the cathode ray tube up to the final TV device, by itself. However, during the 1990s, Sony missed the newly upcoming flat technologies, such as LCD, because it routed too much of its resource to the entertainment and game business (ICMR, 2005). A technological and financial return in its television set business was launched through the joint venture with Samsung in 2004. Another joint venture was established with the leading LCD technology pioneer, the Japanese Sharp Corporation, in 2008. Sony successfully managed to catch up in the LCD field through its intensive joint venture networks and strengthened its efforts, recently together with Sharp, to force back the severe competition from South Korea. Despite Sony’s difficulties against the background of increased competition worldwide, Sony has tried for a long time to maintain traditional Japanese firm values, reflected in its employee treatment philosophy, such as long-term employee relationships. In return, the firm expects unconditional loyalty from its company staff (Chen, 2004: 157–163, Frisch, 2004: 23). As a vital part of its company culture, Sony stresses the importance of human capital for the success of the firm. From executives to assembly-line workers, the philosophy of the cofounding entrepreneur, Morita, was designed to make sure that Sony employees were treated well. ‘Sony has a principle of respecting and encouraging one’s ability and always tries to bring out the best in a person,’ Morita once said. ‘This is a vital force of Sony’ (Frisch, 2004: 24). However, at the end of 2008, Sony’s difficulties, particularly in the electronics business, became so severe that the firm had to decide, against the firm’s traditional values, on a drastic lay-off program of employees. Sony announced plans to cut 8,000 jobs in the midst of a financial crisis that has many consumers distancing themselves from the electronics market. In the biggest layoff announced by an Asian firm so far in the current financial crisis, the Japan-based electronics firm said it would cut about 4 percent of its 160,000 employee workforce, scale back investments, and pull out of businesses as it aims to cut USD 1.1 billion in costs from its ailing electronics operations. ‘These initiatives are in response to the sudden and rapid changes in the global economic environment’, Sony said in a statement. About 10 percent of the company’s 57 plants will be shut down, including two overseas sites, and further plans to expand a site in Slovakia, where LCD televisions for the European market are assembled, have been delayed. Sony also intends to reduce its investments in the electronics sector by approximately 30 percent in the fiscal year ending March 2010. The cutbacks will save Sony more than USD 1.1 billion a year (Sony, 2008e). Thus, as a result of the investment cuts, it seems questionable whether Sony may gain back its technological leadership position in consumer electronics. Once the consumer electronics business helped to develop Sony’s valuable reputation worldwide. It can be assumed, that the business success or failure in the consumer electronics segment is of vital importance for the firm’s future destiny.

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5.4

Sharp

5.4.1

Company background

Many Japanese firms that began exporting to Western markets in the 1960s and 1970s were faced with powerful Western competitors, who had broader product lines and were solidly established in their home markets. The only feasible alternatives were either to locate market niches for which there were no Western products or to concentrate all their resources on the products that had the greatest market demand and provided the easiest access to customers (Abegglen and Stalk, 1985: 169). By adopting either of these two alternatives, Japanese companies could achieve competitive costs relative to those of their Western competitors, resulting in the ability to undercut the prices of Western firms while maintaining very high quality (Chen, 2004: 169). The Japanese firm Sharp serves as a typical industry case exemplifying the above mentioned strategic concept. In 1912, Sharp's founder Tokuji Hayakawa invented the ‘Tokubijo’ snap buckle and established a metalworking shop in Tokyo to manufacture and market ‘Tokubijo’ snap buckles. In 1951, Sharp succeeded in developing the first television set prototype. One year later, the Japanese firm signed a cooperative license agreement with RCA of the U.S.A., which allowed the firm to use patented technology for television set technology. In 1953, Sharp started the mass production of television sets for the first time in the history of Japan. In 1960, Sharp launched the first color television set on the market. Fifteen years later (1975), Sharp started its foreign direct investment activities and established a television set plant in Australia. Starting with the successful introduction of a calculator with the world’s first practical LCD unit in 1973, Sharp has for more than 30 years pursued LCD development experience, which resulted in numerous pioneering LCD products, such as the ‘AQUOS’ line of LCD televisions (Sharp, 2007b, Fujitsu, 2005).

5.4.2

Technological pioneer in LCD technology

A milestone in the history of Sharp is its ambiguous strategic decision to start developing alternative concepts for television set mass production that might replace the conventional cathode ray tube technology. In 1986, the Japanese firm established liquid crystal display laboratories within the corporate research and development group of the firm. Two years later in 1988, Sharp developed the world’s first 14-inch color TFT LCD. In 1991, Sharp completed its construction of a TFT LCD plant in Tenri, Nara (Japan), and successfully launched the world’s first HDTV LCD projector and the world’s first wall-mounted LCD TV. At that time, the European market reached a sales volume of around 30 million units of cathode ray tube television sets, which was the dominating technology. Despite the mainstream, Sharp concentrated its major financial and R&D resources on LCD technology. At the beginning of the 1990s, it was neither clear when CRT technology might be replaced nor whether the competing flat panel plasma technology might succeed in competing with LCD (Sharp, 2007b).

5.4 Sharp

147

In 1994, Sharp announced the construction of the world’s largest TFT LCD plant in Taki, Mie Prefecture in Japan. In 1995, Sharp established ‘Wuxi Sharp Electronic Components Co., Ltd.’ (WSEC), a joint company in China for the manufacture and sale of LCDs. One year later in 1996, Sharp and Sony agreed on a joint development of large-screen flat display panels. Thus, the joint venture establishment of Sharp and Sony in 2008 (compare the Sony case study chapter) for the development and manufacture of LCD panels can be seen as a continuation of a long-term alliance between both Japanese firms. Why is the consistent and unflustered concentration on LCD technology by the management of Sharp, in fact, impressive? The investment decision was proactive but also very risky due to the nebulous market forecasts for the flat panel market development. For instance in Europe, a mass market for LCD TV still did not exist. Nevertheless, Sharp continued its R&D and manufacturing efforts. In 1999, Sharp launched the world’s first 20-inch LCD TV (Sharp, 2007b). At this time, European manufacturers such as Thomson and Philips, for example, continued to manufacture the obsolete cathode ray tube technology. Thanks to the entrepreneurial capacities of Sharp’s management, tightly linked with excellent R&D resources in LCD technology, which were at that time already much advanced relative to their European competitors, Sharp secured a favorable market position at the beginning of the 21st century. The financial data of Sharp prove that the consequent positioning in the innovative LCD segment was strategically well done. The Japanese firm has calmly maintained its focus strategy on a long-term basis. While the firm’s turnover stagnated between 1999 and 2002, Sharp profited from the upcoming LCD technologies and their mass market penetration in recent years.

Sharp - Net sales

Million USD

30.000

20.000

10.000

0 1999

2000

2001

2002

2003 Year

Figure 45. Sharp net sales 1999 to 2007. Source: Sharp financial and annual reports 2003–2007

2004

2005

2006

2007

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The financial data with regards to the net profits impressively underline Sharp’s business success as a result of the technological focus strategy. The net income of Sharp increased from USD 85.3 million in 2002 to USD 869.4 million in 2007. In other words, the net income of the Japanese firm increased around ten times within five years as the following figures illustrate (Sharp, 2008a).

Sharp - Net income

Million USD

1.000

500

0 1999

2000

2001

2002

2003

2004

2005

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2007

Year Figure 46. Sharp net income 1999 to 2007. Source: Sharp financial and annual reports 2003–2007

Instead of serving consumer electronics mass markets with a conglomerate range of products, Sharp prefers to concentrate on market niches. The Japanese firm carefully divides its business segments in consumer electronics, for example LCD television sets, and electronic components, such as LCD modules and solar cells. Both products have familiar technology platforms. In comparison with its Japanese competitor Sony, Sharp focuses on related business segments instead of pursuing a conglomerate diversification. The strategic concept of Sharp significantly differs from its Korean rivals, such as Samsung or LG Electronics, which aggressively pursue penetration price strategies offering a wide product portfolio and operating in conglomerate business segments. The organization chart below illustrates that Sharp’s main business segments are housed in electronics.

5.4 Sharp

149

Sharp Consumer/ Information Products Audio/Visual and Communication Equipment

Home Appliance

Information Equipment

LCD TVs

Refrigerators

PCs

Color TVs

Steam Ovens

PDAs

TV/VCR Combo

Microwave Ovens

Digital Broadcast Receiver

Air Conditioner

1-Bit Digital Audio Products CD Component Systems

TFT LCD Modules

LSIs for LCDs Microcomputers

POS Systems

Combination Memories

Air Purifiers

Handy Data Terminals

Humidifiers

VCRs

Kerosene Heat-

PHS Phones

CCD/CMOS Imagers

Vacuum Cleaners

DVD Player

Mobile Phones

LCDs

Calculators

Dehumidifiers

Phones

Electronic Dictionaries

LSIs

Flash Memories

Washing Machines

MD Players

Facsimiles

Mobile Communic. Handsets

Electronic Components

ers Electric Heaters Small Cooking Appliances

Electronic Cash Registers LCD Monitors Information Display PC Software FA Equipment Ultrasonic Cleaners

Figure 47. Sharp Organization (status January 2008). Source: Author based on firm documents

Duty LCD Modules System LCD Modules

Other Electronic Compenents

Solar Cells Components for Satellite Broadcasting

Terrestrial Digital Broadcast Tuners RF Modules Network Components Laser Diodes LEDs Optical Pickups Optical Sensors Optical Communication Components

Regulators Switching Power Supplies Analog ICs

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During the last decade, Sharp continued efforts to expand its R&D and manufacturing capacities of technologically advanced displays for future markets. In order to strengthen its competitive position in selected business segments, Sharp has created network relations through alliance agreements with other firms that usually have their origin in Japan. In 2000, Sharp and Pioneer entered into a technological collaboration for next-generation digital products. In 2001, Sharp established ‘ELDis Inc.’, a joint company with ‘Tohoku Pioneer Corporation’ and ‘Semiconductor Energy Laboratory Co., Ltd.’, to manufacture and market TFT substrates for organic displays. In the same year, Sanyo Electric Co., Ltd. and Sharp agreed on a global collaboration for the development of home appliances. In 2002, Sharp started the construction of the ‘Kameyama Plant’ in Japan for the integrated production of LCD TVs, ranging from manufacture of LCD panels to final assembly of finished LCD TV sets. The factory grounds have 776,000 square meters. 100,000 units of 26-inch and larger television sets can be produced per month (Sharp, 2007b, Sharp, 2008b).

Figure 48. The Kameyama Plant (Japan). Source: Sharp 2008b

Sharp’s factory is the world’s first vertically integrated production facility, carrying out the complete range from manufacture of LCD panels to final assembly of television sets. The fusion of liquid crystal technologies and television audio-visual technologies has resulted in high-quality LCD television sets and has accelerated the transition from cathode ray tubes to LCDs. The ‘Kameyama Plant’ is not far from other previously established Sharp LCD plants, such as the ‘Tenri Plant’. Numerous companies in the flat-panel-display industry have moved to the area, enabling Sharp to deepen its networks with related companies, which supports Sharp’s continued component and product developments (Sharp, 2008b).

5.4 Sharp

151

Figure 49. LCD television set assembly at the Kameyama Plant (Japan). Source: Sharp 2008b

In February 2005, Sharp Corporation and Fujitsu Limited announced that they had entered into a basic agreement regarding the transfer of Fujitsu’s liquid crystal display operations to Sharp. The agreement calls for Fujitsu to transfer to Sharp the LCD research and development, manufacturing, and sales operations of its consolidated subsidiary, ‘Fujitsu Display Technologies Corporation’ (FDTC), along with related R&D equipment at ‘Fujitsu Laboratories Ltd.’. As a result of the transfer, Sharp is expected to take on FDTC’s personnel at the Yonago plant, as well as ‘Fujitsu Laboratories’ personnel involved in FDTC-related R&D, and the intellectual property rights held by the Fujitsu Group (Fujitsu, 2005). The planned transfer will further expand Sharp’s development and production capabilities in the small and mid-size LCD segment. In addition, by enhancing its ties with Fujitsu as a key supplier of key components, Sharp will further reinforce its LCD business foundation. Fujitsu, through FDTC, has been producing high-resolution, high-image-quality LCD displays primarily for use in PC monitors. In particular, Fujitsu's original technology for largescreen LCDs requiring superior image quality has become the industry standard, and the company has leveraged that technological leadership in developing its LCD business. However, in light of the situation in the LCD market, Fujitsu has determined that the best way to realize the full potential of this business is by transferring it to the leading company in the LCD business, Sharp. The agreement with Sharp is expected to help enable Fujitsu to further consolidate and effectively allocate its resources in order to strengthen its business (Fujitsu, 2005). In December 2007, Sharp Corporation and Toshiba Corporation announced that the two companies had agreed to collaborate closely in the LCD business, a move that is expected to enhance the companies’ corporate value, profitability, and global competitiveness. The alliance will allow each company to make full and effective use of its respective strengths and resources, particularly Sharp's capabilities in LCDs and Toshiba's expertise in advanced semiconductors. Sharp and Toshiba will initiate the collaborative partnership in fiscal year 2008, starting with an expansion of reciprocal procurement -- Sharp's procurement of system components for LCDs from Toshiba and Toshiba's procurement of Sharp’s LCD modules for

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television sets of 32-inch and larger. Through the alliance agreement, Sharp aims to satisfy about 50 percent of its total demand for LCD system components for its television sets in fiscal year 2010, while Toshiba targets meeting 40 percent of its demand for LCD modules in the same year (Sharp, 2008c). The global market for LCD TVs is growing at a brisk pace, a trend expected to continue in the coming years. While various types of displays are being brought to market, Sharp is channeling its resources into developing LCD TVs characterized by thin lines, light weight, high resolution images, and a long lifetime, and into achieving progressive advances in reducing power consumption. ‘Large-scale integrated circuits’ (LSI) systems for TVs are increasingly required to support advanced functions and higher levels of performance alongside their core role of image processing. As television sets shift to higher levels of resolution, Toshiba’s system LSIs for TVs supply Sharp with advanced expertise and achievements in image processing in products that meet the most exacting requirements of major television set manufacturers. By bringing together such technologies, Sharp and Toshiba will promote business advances through development of differentiated products. Each company aims to secure a leading position in the LCD TV market, and to reinforce its capabilities in LCDs and semiconductors by overcoming increasingly intense global competition (Sharp, 2008c). At the end of February 2008, Sony and Sharp announced that they will form a joint venture to build a generation-10 TFT LCD plant targeting large-size LCD TV panels of 40-inch and larger. Sony and Sharp will invest USD 3.56 billion respectively. Sony will have a 34 percent share of the new company, and Sharp will have 66 percent. It can be assumed that Sony and Sharp will have similar allocations (closer to 50–50) of the stock share when the future output of this generation-10 factory will be launched for production in 2010 (DisplaySearch, 2008e). For Sharp, since the firm cannot rely on its own brand strength to sell its huge panel manufacturing capacities in the markets, the partnership with Sony also serves as a means of risk sharing. In the future, Sharp will be able to sell a part of its panel manufacturing output capacities through Sony TV products and Sony’s worldwide distribution channels. Sharp has been adjusting its policy to retain more then 30 percent of its panel output for its own LCD TV assembly; thus far, the ratio was only 10–15 percent, with other LCD TV makers procuring the rest. Sharp shipped 8 million LCD television sets in 2007, less than Sony’s 9.5 million and Samsung’s 13.4 million units, and the company is also facing competitive pressure from other, smaller brands. With ‘everybody buying panels from everybody’, the Sony and Sharp joint venture seems to be just the latest in a string of recent LCD TV panel industry alliances and mutual procurements happening in Asia (DisplaySearch, 2008e). Sharp seeks to become an innovative pioneer instead of following the mass market trend as the cases of solar cells, used for alternative energy generation, also illustrate. Considering these facts, it is surprising that Sharp faces weaknesses in creating the reputable and powerful image abroad that they have in their home country. Obviously the marketing and communication policy outside Japan needs to be better adjusted according to the behavioral attitudes of the local customers. An investment in the traditional, premium brand company ‘Loewe AG’ was apparently an opportunity for Sharp to gain access to exclusive European distribution channels.

5.4 Sharp

5.4.3

153

The investment in Loewe AG, Germany

While Sharp is well known for innovative and quality products in Japan, the firm has been confronted with rather weak brand recognition in Europe. Therefore, in 2002, Sharp’s management may have decided, in order to overcome the brand weakness within a relatively short time, to invest in the reputable German firm ‘Loewe AG’. Loewe’s television set products are located in the premium price segments and are known for their superior design and quality. The agreement stipulated that Sharp would supply LCD modules to Loewe. The Japanese investor had agreed to subscribe up to 2.3 million shares in 2002. Two years later, Loewe had slipped further into severe financial difficulties due to upcoming flat panel television technologies. The risk had been ignored too long by the German premium assembler, which had positioned its marketing focus on design and an exclusive price policy but kept running its set manufacturing based on bulky cathode ray tube technologies. Finally, in 2004, Sharp had increased its stake in Loewe from the previous 8.9 percent to up to 28.8 percent (Sharp, 2004). Sharp's additional investment equaled EUR 15 million, made the Japanese firm Loewe's most important strategic shareholder, and helped the traditional German manufacturer to survive. In the same year, another German electronics assembler, Grundig, went bankrupt. From January 2005 onwards, Sharp and Loewe launched a ‘Joint European Development Center’ in Kronach (Germany) in order to develop the completely digital electronics platform for LCD TVs and peripheral devices. The R&D focus concentrates on the European broadcasting standard for digital television (DVB). Toshishige Hamano, corporate senior executive director with responsibility for the international business of the Sharp Corporation, commented as follows. As an established manufacturer of high-quality televisions, Loewe is the ideal partner for us in Europe. We are convinced that our strategic cooperation will strengthen both corporations, especially in the rapid development of the dynamically expanding LCD TV market (Sharp, 2004). Nevertheless, major European R&D activities are concentrated at ‘Sharp Laboratories of Europe, Ltd.’ located in Oxford, the United Kingdom. The Japanese firm runs manufacturing capacities for consumer electronics products such as television sets at ‘Sharp Electronica España S.A.’, Barcelona, and ‘Sharp Electronics Ltd.’, Middlesex, the United Kingdom. Further manufacturing locations (status August 2008) outside Europe and Japan are in China, Taiwan, Malaysia, Indonesia, the Philippines, and the U.S.A., where Sharp also runs local R&D activities at ‘Sharp Laboratories of America, Inc.’ in Washington (Sharp, 2008a). In 2007, the London based investment firm ‘EQMC’ acquired 10.13 percent of Loewe shares and became the number second largest investor after Sharp (Tagesspiegel.de, 2007). Obviously, the management of Sharp hesitated to greatly increase its financial engagement at Loewe.

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FDI in central and eastern Europe (CEE)

In January 2007, Sharp started the manufacture of LCD modules in Łysomice, near the city of Torun (Kujawsko-Pomorskie) in Poland. Torun is located in the Pomeranian ‘special economic zone’ (WarsawVoice, 2006: 2). The Polish government has established 14 ‘economic zones’ of which each has various sub-zones. Tax exemptions and other incentives available to investors are among the main advantages of the zone. A multinational firm, such as Sharp, benefits from corporate income tax reductions on income from its activities in the Pomeranian special economic zone, which reach up to between 50 and 65 percent of Sharp’s invested capital there (PolandBusiness, 2007a, PolandBusiness, 2007b). Sharp has invested € 44 million in the new factory in Poland. The plant offers job opportunities for around 800 employees. According to Hans Kleis, CEO of Sharp Electronics Europe, the LCD TV market is growing continuously in Europe. From his perspective, countries such as Poland, the Czech Republic, Hungary, and Slovakia will become increasingly important for LCD TV sales in the near future. Investments in regional manufacturing capacities seem the logical consequence. For Sharp, the location of Torun offers an excellent connection to already booming LCD television markets in western Europe, particularly Germany. Therefore, Sharp plans an expansion of the production capacities in order to be able to manufacture complete LCD TVs in Torun, Poland (Moschek, 2007: 1, BFAI, 2006b). Japanese companies such as Sharp differentiate strategic suppliers (kankei kaisha), which belong to the keiretsu conglomerate, from independent suppliers (dokuritsu kaisha), which do not belong directly to the keiretsu. In utilizing both types of supply sources, Japanese companies are able to achieve economies of scale and gain access to their suppliers’ capabilities for strategic inputs by using strategic partnerships. It is this unique combination of the firms’ and suppliers’ know-how in producing differentiated components for a product that can provide an organization with sustainable competitive advantage (Kotabe and Murray, 2003: 10). As a part of Sharp’s keiretsu network, the Polish factory in Torun holds the position of a European strategic component manufacturer (kankei kaisha) that supplies its modules for the final assembly of television sets at Sharp Electronica Spain S.A. (an example of Sharp’s vertical integration). 100,000 LCD modules per month will be produced for largesize LCD TVs in the initial phase in Poland. Another major part of the LCD flat panel display production is delivered to Loewe Opta GmbH, Kronach, Germany (Moschek, 2007: 1). Sharp has attracted further investors to Poland, such as the Japanese TV set assembler Orion TV, which also chose Łysomice as a future location for their LCD TV assembly. Orion will use Sharp’s display panels in their LCD television sets. Besides Orion TV, several Japanese subcontractors and component suppliers, which do not belong directly to Sharp’s keiretsu network, have decided to establish their plants near the Sharp facilities in Poland. Among them are enterprises such as Tensho, a producer of plastic elements; Nitto Denko Corporation (polarizing films); Sumika Electronic Materials (polarizing films and light diffusion panels); Toland Tokai Okaya Manufacturing (metal frames); and Kimoto Co. Crystal Logistics will invest in warehouse buildings and NYK Logistics will lease magazine surface for Sharp and its subcontractors (Olsson, 2006: 1). The narrowly knit market entry network of

5.4 Sharp

155

Japanese firms in Poland and their positions in the vertical integrated industry chain is illustrated in the figure below.

Japanese LCD-component manufacturer in Poland [supply cluster]

LCD-module [fabrication]

LCD-TV final assembly in Europe [demand cluster]

Toland Tokai Okaya Manufacturing (metal frames)

Tensho (plastic elements)

Sharp Electronica SA, Spain

Sharp Łysomice (Poland)

Nitto Denko Corp., (polarizing films)

Sumika Electronic Materials (polarizing films, light diffusion panels)

Loewe, Germany (Sharp holds 29 % of capital)

Orion, Poland

Supporting industries in Poland, e.g., Kimoto Co. Crystal Logistics and NYK Logistics vertical supply chain

Figure 50. Sharp’s network relations with Japanese firms in Europe (LCD TV manufacture). Source: Author, design based on various company-related business information sources

Sharp’s new partner, the U.S.-based firm Jabil Circuit Inc., will invest € 13 million in a new factory in Kwidzyn, which is located in the economic zone as well. Around 500 employees will assemble LCD TVs for Sharp. In Kwidzyn, Jabil manufactures electronic components, color ray tube (CRT) TVs, and LCD TVs. The factory was established in 1994 by Philips, which sold it to Jabil at a price of € 12 million in December 2004 (Philips, 2004: 28, 107). In 2006, Jabil employed 3,000 people in Kwidzyn; and its customers include Philips, Sharp, and Orion. Jabil benefits from the public assistance offered to businesses within the zone, including tax incentives of the investment (WarsawVoice, 2006: 1).

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5.4.5

5 Case Studies

Summary

According to Chang (1995: 384), Japanese companies make rather frequent small initial investments in their core business and expand their operations if this investment performs well. Later, they diversify into new business areas through foreign market entry. This process takes a comparatively longer period of time than in the case of Western companies, which tend to prefer large investments linked with an expectation of early return on investments. Sharp’s financial engagement at the Loewe AG and its incremental increase of shares from 8.9 to 28.8 percent during the period from 2002 until 2004 underlines Sharp’s careful investment policy. In recent years, Sharp has strengthened its efforts toward other future business opportunities such as the development and manufacture of solar cells for alternative energy generation. Sharp focused much earlier than its competitors on LCD technology. Compared with Sharp’s rival firms from South Korea such as Samsung or LG Electronics, which offer a diversified range of television sets (i.e., CRT, plasma, projection, and LCD TV), the Japanese firm follows a niche strategy and concentrates on selected strategic alliances as, for example, with Fujitsu, Sanyo, and Sony in order to further develop the successful competitive market position of its core LCD business. The recent alliance, agreed upon in 2006 with the Taiwanese ‘Chungwha Picture Tubes Ltd.’, is rather an exceptional candidate in the list of Sharp’s alliance partners, which mainly are Japanese firms. Chunghwa was established in 1971 and produces conventional and LCD television sets (Chungwha, 2008). Sharp provides patents and know-how concerning LCD technology to Chungwha. The Taiwanese firm, which benefits from lower local labor costs in Taiwan relative to Japan, will manufacture LCD television sets for Sharp. While cost incentives are the main reason for the alliance agreement from Sharp’s perspective, Chungwha seeks to gain technological know-how from the Japanese market leader (Otani, 2008a, CDRinf, 2007). In Europe, Sharp has concentrated its LCD manufacturing capacities in Poland since 2007. The investment attracted several Japanese component suppliers and logistic companies to the Polish market. According to the network approach, firms do not decide independently on foreign market entry activities. The case study of Sharp underlines the fact that global business activities are embedded in networks as the Japanese suppliers and logistic firms ‘followed their customer’ to Poland. Sharp vertically integrated its factories within the industry chain of component supply, manufacture, and sales of LCD television sets, combined in a network with external supporting firms. Loewe serves as a premium brand distribution channel for Sharp’s LCD modules. The distribution through the traditional German firm provides access to attractive premium market niches and helps to overcome the relatively weak brand value of Sharp in Europe. Moreover, through the investment at Loewe, Sharp gains knowledge and learns how to build successful marketing strategies. In the European television set industry, Loewe represents a marketing benchmark regarding product design concepts and image building.

5.5 LG Electronics and Philips International Joint Ventures

5.5

LG Electronics and Philips International Joint Ventures

5.5.1

Company background

157

About the joint venture partner Philips The foundations for what was to become one of the world's biggest electronics companies were laid in Eindhoven, the Netherlands, in 1891. Philips began by making carbon-filament lamps and, by the turn of the century, was one of the largest producers in Europe. As developments in new lighting technologies fueled a steady program of expansion, in 1914 it established a research laboratory to study physical and chemical phenomena and stimulate product innovation. In 1918, it introduced a medical X-ray tube. This marked the beginning of the diversification of its product range and the moment when it began to protect its innovations with patents in areas stretching from X-ray radiation to radio reception. In 1925, Philips became involved in the first experiments in television and, in 1927, began producing radios; by 1932, it had sold one million of them. By 1939, when it launched the first Philips electric shaver, the company employed 45,000 people worldwide (Philips, 2008). The company also made major contributions to the development of the recording, transmission, and reproduction of television pictures. In 1963, it introduced the compact audio cassette. In 1965, it produced its first integrated circuits. In 1972, the company established PolyGram, a music recording label. Acquisitions in the 1980s included GTE Sylvania's television company and Westinghouse’s lamp business. In 1983, Philips launched the compact disc. In 1984, Philips celebrated the manufacture of its 100-millionth TV set (Philips, 2008, Philips, 2006). The 1990s was a decade of significant change for Philips. The company carried out a major restructuring program, simplifying its firm organization structure and reducing the number of business areas. In 1997, Philips jointly introduced with Sony its DVD system. By following this up in 2004 with a massive advertising campaign to unveil its new brand promise of ‘sense and simplicity’ the company confirmed its dedication to offering consumers around the world products that are advanced; easy to use; and, above all, designed to meet their needs (Philips, 2008). In September 2006, Philips sold 80.1 percent of its semiconductor business to a consortium of private equity partners. This laid the foundation for an independent new semiconductor company, named NXP. In September 2007, Philips communicated its Vision 2010 strategic plan to further grow the company with increased profitability targets. As part of Vision 2010, the organizational structure was simplified in January 1, 2008, by forming three sectors: Healthcare, Lighting, and Consumer Lifestyle (Philips, 2008).

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About the joint venture partner LG Electronics LG Electronics represents the second biggest Korean Chaebol (LG was originally Lucky Goldstar, established in 1958) in consumer electronics after Samsung. During the 1960s LG produced Korea's first radios, television sets, refrigerators, washing machines, and air conditioners. In 1995, renamed as LG Electronics, the Korean conglomerate acquired the U.S.based enterprise ‘Zenith’. In 1998, LG developed the world’s first 60-inch plasma TV and, in 2004, the first 71-inch plasma TV. In 2006, LG developed the first single-scan 60-inch HD PDP module and 100-inch LCD TV. In 2008, LG has introduced a new global brand identity: ‘stylish design and smart technology in products that fit our consumers’ lives’ (LGElectronics, 2008b, LGElectronics, 2005). Within just a couple of decades after its foundation, the Korean LG group had been developed successfully and expanded worldwide. The firm became a serious competitor in the television set business, particularly for established Japanese firms as well as European-based manufacturers, such as Philips or Thomson. LG established four main business segments including mobile communications, digital appliance, digital display, and digital media. However, the aggressive expansion was financed to a large extent by loans, which resulted in a critical debt-to-equity ratio. As a result of the financial crisis in Asia at the end of the 1990s, LG Electronics faced severe financial difficulties and needed to find external investors (Glowik, 2007k). At that time, the traditional and largest European-based electronics company, the Dutch Royal Philips, was technologically behind its Asian competitors in television flat panel manufacturing. On the other hand, Philips had a reputable image with enormous brand recognition among the European customers and had a large European sales network, which are the firm’s most valuable resources (LGElectronics, 2008a, LGElectronics, 2008b).

5.5.2

The foundation of LG.Philips LCD

In August 1999, the management of Philips took the chance to overcome the technological gap and decided to invest in LG Electronics. Philips paid USD 1.6 billion to LG Electronics and reserved 50 percent of the shares of the newly established joint venture, called ‘LG.Philips LCD’. The alliance aimed for world leadership in the flat display television set industry. The capital investment was carried out so that Phillips purchased new stock (common shares) against payment to LG Electronics, which kept 98.8 percent of its subsidiary ‘LG LCD’ shares from before the transaction was performed (LG.PhilipsLCD, 2005a, LG.PhilipsLCD, 2005c). The joint venture with LG is not the first time Philips has tried to get into the LCD panel business through a partnership with another firm. Several years ago, Philips experimented with developing its own production facilities with limited success. In 1997, Philips attempted to join forces and established a joint venture with ‘Hosiden Co.’, Kobe, Japan, a second-tier Japanese LCD manufacturer (Kovar, 1999). However, the joint venture failed and caused losses that reached more than USD 100 million a year (Bondgenoten, 2001).

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At the beginning, the new venture, LG.Philips LCD had been managed by the Board of Directors, composed of six members, three each from LG and Philips. According to the press release dated May 19th, 1999, The alliance between LG Electronics Inc. and Philips (implemented through selling shares of LG LCD, the global electronic appliances manufacturer) is considered to have an important meaning from the perspective of competition strategy for the highly technical electronics industry including LCDs. The alliance provides an opportunity for Korea to have absolute superiority in the leading-edge LCD industry, because a synergy effect will be generated when the world-class technology of LG’s LCD is combined with the market reputation and distribution network of Philips (LG.PhilipsLCD, 2005a). In other words, besides the financial investment of Philips, which helped LG to survive at the peak of the financial crisis in Asia, the Korean Chaebol could make use of Philips’ exclusive brand and distribution network in Europe and America. Previously, LG’s reputation in Europe was linked with a rather cheap, imitative manufacturer’s image. Moreover, the company name, ‘Lucky Goldstar’ was difficult to promote among European consumers. Headquartered in Seoul, South Korea, the newly established joint venture operated six fabrication facilities in China and South Korea and had approximately 15,000 employees including those in South Korea. A new production site in Poland, responsible for the manufacture of LCD modules, launched production in 2007. The global sales and distribution of the joint venture have been divided among Europe, America (U.S.A.), and Asia (LG.PhilipsLCD, 2005b, LG.PhilipsLCD, 2006d, LG.PhilipsLCD, 2007b, LG.PhilipsLCD, 2007a).

LG.Philips LCD Production Network

Europe Wroclaw, Poland

Asia Nanjing, China Gumi, S. Korea Paju, S. Korea

Figure 51. LG Philips LCD production network in 2007. Source: LG.Philips LCD (2007a)

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LG.Philips LCD Sales Network

Europe

America (U.S.A.)

Asia

Willich, Germany

San Jose

Tokyo, Japan

Istanbul, Turkey

Santa Clara

Osaka, Japan

Westlake Village

Taipei, Taiwan

Austin

Shanghai, China

Houston

Hong Kong, China

Olathe

Shenzhen, China

Gibsonia

Singapore

Plano Glendale Heights Cary Lincolnshire Clearwater Raleigh Bohemia Skaneateles

Figure 52. LG.Philips LCD sales network in 2007. Source: LG.Philips LCD (2007b)

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The joint venture of ‘LG.Philips LCD’ was competing mainly against Samsung and Sharp in the segment that manufactures and supplies thin film transistor liquid crystal display (TFTLCD) panels. The firm concentrated on TFT-LCD panels in a wide range of sizes and specifications for use in notebook computers, desktop monitors, and television sets (LG.PhilipsLCD, 2008a). On September 6th, 2005, LG.Philips LCD announced that it planned to construct the ‘back-end’ module production plant in Wroclaw, becoming the first global LCD industry player to commence such production in Europe. LG.Philips LCD considered building a production plant by 2011 with an annual capacity of 11 million units and with an investment volume total of 429 million Euros. The manufacture of the LCD module began in the middle of 2007, when the construction of the first batch of module lines was completed with an annual capacity of 3 million units (LG.PhilipsLCD, 2006d, LG.PhilipsLCD, 2006e). Vice Chairman and CEO Bon Joon Koo of LG.Philips LCD said, Our planned production facility in Poland is an important step for LG.Philips LCD, as we establish our manufacturing expertise in the geographic center of Europe. With this first major factory outside of Asia, LG.Philips LCD will better serve the rapidly growing European LCD TV market. As we implement our strategic plan for the future, we are proud to broaden the reach of our industry-leading LCD technology and expand our customer intimacy as we bring our products closer to our customers. We are grateful to the Polish government and the city of Wroclaw for their support and cooperation in this great partnership (LG.PhilipsLCD, 2006d).

5.5.3

International network

The investment of LG.Philips LCD in Kobierzyce (a suburb of Wroclaw) generated further market entry through direct foreign investment activities in Poland. The Japanese electronics enterprise Toshiba, for example, decided to set up a Polish subsidiary, assembling LCD TVs in Kobierzyce as well. Toshiba runs an LCD factory in Plymouth, U.K. The new Polish plant was scheduled to start operation by mid 2008. About 1,000 employees would manufacture annually between 1.5 and 2 million 32-inch and larger TVs (Johnston, 2006, LG.PhilipsLCD, 2007c). Toshiba’s annual production capacity of flat panel TVs in Europe, counting both U.K. and Polish output, will reach 3 million units by 2009. Toshiba’s factory will procure most of its LCD panels from the Dutch-Korean joint venture LG.Philips LCD. Toshiba invested 19.9 percent interest in the LG.Philips LCD plant in Poland (Finanznachrichten.de, 2007a). The developing industry cluster initiated the market entry of Korean component suppliers (follow the customer). Various Korean firms decided to enter the Polish market and invested near the LG.Philips plant. The Wroclaw area is becoming an important industry cluster for new television set technologies in Europe. From Poland, the module supply of LG.Philips to other television set assemblers located in Europe is organized as the following figures illustrate (Johnston, 2006).

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Korean LCD-component manufacturer in Poland [supply cluster]

LCD-module [fabrication]

Heesung Electronics Co. Ltd. (back light units)

LG Innotek. Co. Ltd. (electronic components)

D. Yang Electronics (plastic injection)

LCD-TV final assembly in Europe [demand cluster]

LG Electronics Poland

LG.Philips LCD (Kobierzyce, Poland)

Philips Hungary

Toshiba Poland

Oh Sung Display Co. Ltd. (case tops and cover bottoms)

vertical supply chain Figure 53. LG.Philips LCD vertical integrated value chain activities in Europe (status February 2008). Source: Author, based on various firm-related data

In February 2005, LG.Philips LCD announced that it had established another strategic joint venture with Nippon Electric Glass (NEG), a top-tier LCD glass company and supplier for LCD module manufacturer, to build a glass polishing and processing facility in the ‘Paju Display Cluster’ outside of Seoul, South Korea. The new joint venture company is named ‘Paju Electric Glass Co., Ltd’. LG.Philips LCD owns a 40 percent equity position in the new company. According to LG.Philips LCD, the establishment of Paju Electric Glass is a clear demonstration of the company’s commitment to creating a strong, localized supply base (in South Korea) and to increasing production efficiency and competitiveness. With the support of various suppliers and customers, the Paju Display cluster is on track to address the rapidly emerging LCD TV segment as well as the growing large and wide monitor segment (LG.PhilipsLCD, 2006g). In 2006, a further agreement was signed with Kodak concerning joint material components for future display substrates (LG.PhilipsLCD, 2006h).

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In February 2006, LG.Philips LCD and the Chinese electronics giant TCL signed a memorandum of understanding in order to establish a strategic alliance in the growing LCD TV business segment. It was agreed that the Chinese would secure the supply of TFT-LCD panels, while in parallel LG.Philips LCD guaranteed a stable purchase demand in the competitive LCD TV panel market (TCL, 2006h). As Mr. Young Soo Kwon, the LG.Philips venture CEO, announced, As part of our ongoing efforts to enhance our strength and to successfully implement a profitable growth strategy in this dynamic industry, we have been seeking various possibilities for forming strategic alliances, which are gradually bearing fruit. For instance, we have recently signed a cross-license agreement with Kodak for the AMOLED business. Going forward, we remain committed to achieving sustainable growth by emphasizing collaboration with our customers and investing in technology leadership, ultimately generating greater shareholder value (LG.PhilipsLCD 2008a). In 2008, LG.Philips LCD announced that it would form a strategic alliance with ‘Skyworth’, one of the leading television set makers in China. ‘Skyworth’, founded in 1988, also procures business activities in the field of digital set-top boxes. It was the leading Chinese OEM television set exporter beginning in 1995 for eight consecutive years and is among the three largest TV manufacturers in China. The company runs two factories in Shenzhen with an annual production capacity of 3 million color television sets (Skyworth, 2008). The alliance will be focusing on LCD module cooperation since Skyworth will invest in LG.Philips’ LCD module lines in Guangzhou in southern China, where most of Skyworth’s LCD television set assembly lines are located. Both companies will also set up a joint R&D center. The alliance targets coordinated panel supply and share of marketing risk for LCD television set sales (DisplaySearch, 2008e).

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TCL China

19.9 % investment in Poland Kodak U.S.A.

Toshiba Japan LG.Philips LCD [established 1999]

Strategie Alliance Network NEG Japan

Royal Philips The Netherlands LG Electronics South Korea

Skyworth China

HannStar Taiwan

Figure 54. Network embedment of LG.Philips LCD (status February 2008). Source: Author, based on various firmrelated data

In 1999, LG Electronics needed financial help, while Philips was seeking technological know-how. This was the main incentive for the joint venture LG.Philips LCD agreed to. In addition to money, Philips contributed a strong brand, marketing expertise, and European distribution channels to the joint venture (LG.PhilipsLCD, 2007d). In the years following the founding of the venture, stable supplier-customer relationships that secure economies of scale and the access to intellectual property rights were the main incentives for LG.Philips LCD to establish further alliances. The networking activities of LG.Philips LCD caused the introduction of other partner firms with various competencies and technological know-how. The net sales of the joint venture have increased annually and reached more than USD 15 billion in 2007 (LG.PhilipsLCD, 2006f). Despite a loss in 2001, the net income increased in the years following the venture’s founding and reached a peak of around USD 1.5 billion in 2004. Due to intense competition in the LCD business in the worldwide markets, the net income dropped in 2005 but continuously recovered until 2007 (Businessweek.com, 2007).

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The figures below illustrate the financial development of the joint venture (LG.PhilipsLCD, 2008c, LG.PhilipsLCD, 2003, LG.PhilipsLCD, 2006a, LG.PhilipsLCD, 2006b).

LG Philips LCD - Net sales 20.000

Million Dollars

15.000

10.000

5.000

0 2001

2002

2003

2004

2005

2006

2007

Ye a r Figure 55. LG.Philips LCD net sales 2001–2007 in million dollars. Source: LG.Philips LCD (2003) and LG.Philips LCD (2008b)

LG Philips LCD - Net income 2.000 Million Dollars

1.500 1.000 500 0 2001

2002

2003

2004

2005

2006

2007 -500

Ye a r Figure 56. LG.Philips LCD net income 2001–2007 in million dollars. Source: LG.Philips LCD (2003) and LG.Philips LCD (2008b)

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Philips reduces its joint venture stake and may disappear?

On March 3rd, 2008, LG.Philips LCD changed the name of the firm. The world’s secondlargest manufacturer of liquid crystal displays, which began as a joint venture between South Korea’s LG Electronics Inc. and Philips in 1999, was renamed nine years later as ‘LG Display Corporation’. Despite the promising financial development of the joint venture, the European partner firm, ‘Philips’, finally disappeared from the firm name as a result of the stepwise reduction in shares held by Royal Philips Electronics NV of the Netherlands in the joint venture. In October 2007, Philips already reduced its stake from 32.9 to 19.9 percent followed by a further reduction in March 2008 to 13.2 percent. As per December 31st, 2007, LG Electronics, currently LG.Philips’ largest shareholder, holds a 37.9 percent stake. Domestic (Korean) shareholders hold 25.3 percent, and overseas investors and others hold 16.9 percent (LG.PhilipsLCD, 2008d, LG.PhilipsLCD, 2008e, Finanznachrichten.de, 2007b). In April 2008, a Korean top manager, Mr. Young Soo Kwon, CEO of LG Display announced, Last quarter was a notable quarter for us. Our performance was encouraging despite the seasonally slow market condition. In addition, we have changed our corporate name from ‘LG.Philips LCD Co., Ltd.’ to ‘LG Display Co., Ltd.’ and will transition into a single ‘representative director’s’ organization at the annual general meeting according to the change in corporate governance following the reduction of Philips’ equity. The new name reflects our intention to expand our business scope and diversify the business model for sustainable growth in the future. While there were changes in our corporate governance, we remain committed to maintaining our integrity and being transparent and consistent, accompanied by our competent directors on the board (LG.PhilipsLCD, 2008b). LG Display Co., headquartered in Seoul, South Korea, concentrates its R&D in Anyang (South Korea) and runs major module factories in Paju and Gumi (South Korea). In China, the firm established factories in Nanjing and Guangzhou. The one and only European module assembly line remains in Wroclaw, Poland (LG.PhilipsLCD, 2006e).

5.5.5

The foundation of LG.Philips Displays

In Amsterdam, on June 11, 2001, Gerard Kleisterlee, president and chief executive officer of Royal Philips Electronics, and John Koo, vice chairman and CEO of LG Electronics, signed a ‘definitive agreement’ through which the two companies would merge their respective cathode ray tube businesses into a new joint venture company. The official presentation of the new company was held on July 5, 2001, in Hong Kong. The 50-50 joint venture in display technology concerns all CRT activities, including glass and key components. With expected annual sales of nearly USD 6 billion and approximately 36,000 employees, the new company would have a global leadership position in the CRT market (LG.PhilipsDisplays,

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2001a, LG.PhilipsDisplays, 2001c). Philips paid USD 1.1 billion to LG Electronics. At that time, the joint venture held 25 percent of the global market share and ranked ahead of Samsung SDI. The following complementary strengths and synergy potentials of the merged entities were mentioned by both parties’ management (LG.PhilipsDisplays, 2001c, LG.PhilipsDisplays, 2001b): •

Philips’s leadership in television tubes and LG‘s leadership in monitor tubes;

•

LG’s geographical leadership in Asia and Philips’ brand reputation and distribution network in Europe, China, and America; and

•

LG’s industrial and manufacturing expertise and Philips’ global marketing and technological innovation. Further benefits are expected in the areas of purchasing as well as research and development through combining resources and economies of scale effects (LG.PhilipsDisplays, 2005l).

Under the terms of the agreement, LG and Philips have equal control of the joint venture. The new company was legally established in the Netherlands, with operational headquarters in Hong Kong. Philippe Combes, former CEO of Philips Display Components, was appointed to lead the joint venture (LG.PhilipsDisplays, 2001a, LG.PhilipsDisplays, 2001c).

5.5.6

Synergies below expectations

The television set market dramatically changed in 2004. While the demand for conventional cathode ray tubes went down, LCD and plasma sales increased. During the year 2006, LCD replaced conventional television set sales in Europe. Nevertheless, even in 2005, LG.Philips Displays still pronounced in a press release the bright future of conventional television sets and that the cathode ray technology would remain a dominant force in display technology, for example, through the introduction of ‘slim tubes’ (LG.PhilipsDisplays, 2005a, LG.PhilipsDisplays, 2005j, LG.PhilipsDisplays, 2005h, LG.PhilipsDisplays, 2005e). The venture management was totally wrong when it made such a forecast. Just two years later, in 2007, 26 million LCD sets were sold in Europe compared to only 10 million CRT-based units (DisplaySearch, 2008a, GfK, 2007). CRT manufacturers in general, among them LG.Philips Display, faced an enormous price pressure, particularly in highly competitive markets such as Europe. Despite an increasing risk of running overcapacities, the culturally biased management behavior became increasingly obvious in the Korean-Dutch joint venture. Mr. David Kang, a manager of LG Electronics, explained his joint venture work experience, There is a considerably different understanding among Western managers. They insist always on profits, the earlier the better. But our view is different and more longterm oriented. We enter the market with reasonable, well, let’s say with low prices. We may even make a loss. But what is more important? If we become the market leader, one day, our products will set the standards. Then we will drive the market and its prices. From my point of view, these contrasting time horizons are one of the

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main reasons why joint ventures of Western and Korean companies fail (Glowik, 2007f). Concerning different work attitudes and language barriers, Mr. Kang further commented, When we had a problem with the customer, for example, it was sometimes hard to find a Western manager when it happened out of the ordinary daily working time. We Koreans cannot understand such customer treatment. For the Europeans, it seems more important to arrange the time with their private families. We Koreans work hard; we have a lot fewer holidays, but the Philips people had 2.5 times higher salaries than we had. How can a joint venture run like this in the long term? Moreover, I have to say, we had a communication problem. English was selected as the company language, but Koreans have weaknesses communicating in English (Glowik, 2007f). The European view of the joint venture was different. In 2004, an interviewee and former senior manager at LG.Philips Displays, who preferred to remain anonymous, commented to the author during a conversation about the working atmosphere in the joint venture, When we (Philips) had a meeting with LG people, sometimes they kept silent the whole time. Later we recognized the Koreans arranged a separate meeting among themselves, where they discussed and fundamental decisions were made . . . without us. Moreover, I think, the Koreans had very effective conversations among themselves in the ‘smoker’s room’, more than during official meetings with us. It is hard to cooperate and to get access to them. The Korean community is rather a closed shop (Glowik, 2004a). Just two years after the establishment of the joint venture, on May 22nd, 2003, LG.Philips Displays announced the closure of its European production plants in Newport, Wales, and Southport, England, and that the management had started consultations with employees and trade union representatives. The corresponding press release said, The decision is based on business and economic conditions, which are characterized by an increasingly competitive and consolidating industry. The company’s plant at Newport in South Wales produces color display tubes (CDT) for monitors and color picture tubes (CPT) for televisions as well as deflection yokes. A sharp decline in the market for CDTs, due to increasing competition from other display technologies also supplying products for use in computer monitors, and severe downward pressure on prices for CDT and CPT are the primary reasons for the closure (LG.PhilipsDisplays, 2005c). Phil Styles, general manager of manufacturing at Newport, commented, The decision to close was made with great regret and is based solely on the continuing adverse business situation. It in no way reflects on the performance of the employees at the plant, who have worked hard and demonstrated considerable commitment over these past five years (LG.PhilipsDisplays, 2005c).

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Just a couple of months later, on December 2nd, 2003, LG.Philips Displays announced decisions to further restructure its industrial production infrastructure in Europe. ‘The measures, in line with the company’s continuous drive for optimizing business performance, are necessary to remain competitive in a mature and consolidating industry.’ As a consequence, the company’s cathode ray tube plants in Aachen, Germany, and a glass factory in Simonstone, U.K., would be shut down. ‘At all other sites in Europe, cost reduction will be realized by further optimizing the production infrastructure,’ it was announced by the management (LG.PhilipsDisplays, 2005i, LG.PhilipsDisplays, 2005k). However, in the following years, LG.Philips continued the closing process, mainly of its European facilities. On March 2, 2005, LG.Philips Displays published the closure of its plant at Durham in North East England. As was stated in the press release, Crippling price erosion and a shift in demand from Europe to Asia Pacific are the main reasons for the decision, which has been taken with great regret. Consultations with employees and trade union representatives have begun. Production is expected to cease towards the end of July 2005 and will result in the loss of 761 jobs (LG.PhilipsDisplays, 2005b). Finally, in October 2005, LG Electronics announced that it would stop TV manufacturing for the European market, which affected its major supplier LG.Philips Displays and particularly its brand new factory in Hranice, Czech Republic, as well as its R&D and manufacturing facilities in Angers, France (LG.PhilipsDisplays, 2007a, LG.PhilipsDisplays, 2006a). Nevertheless, major production operations in Asia and some in Brazil, representing 85 percent of total manufacturing capacity, as well as minor European component suppliers (Stadskanaal and Sittard, The Netherlands; and Blackburn, United Kingdom) continued activities (LG.PhilipsDisplays, 2005f). Three months later, on January 27, 2006, LG.Philips Displays holding B.V. announced that due to ‘worsening conditions in the cathode ray tube marketplace and unsustainable debt, the holding companies as well as one of its Dutch subsidiaries (LG.Philips Displays Netherlands B.V.) and its remaining legal German subsidiary in Aachen, Germany, have all filed for insolvency protection.’ The holding company in Hong Kong also announced that it would not be able to provide further financial support to certain loss making subsidiaries (in Europe) because it had been unable to obtain sustainable new or additional funding. As a result, approximately 350 employees at the company’s operations in Eindhoven, the Netherlands, and 400 employees in Aachen, Germany, were dismissed (LG.PhilipsDisplays, 2006b, Vereinigte_Wirtschaftsdienste, 2006). As a result of the holding company’s inability to further fund the subsidiaries from its own headquarters, LG.Philips Displays operations in France, the Czech Republic, Slovakia, Mexico, and the U.S. were liquidated. LG.Philips Displays emphasized that its plants in Brazil, China, Indonesia, South Korea, and Poland (component supplier) were, in principle, unaffected. The company’s factories in the United Kingdom (Blackburn) and the Netherlands (Stadskanaal and Sittard, with support from some employees in Eindhoven) are economically viable and are expected to continue production, for which LG.Philips Displays will seek

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support and approval of the Dutch trustee and supervisory judge (LG.PhilipsDisplays, 2006b, LG.PhilipsDisplays, 2005d, LG.PhilipsDisplays, 2006c) . In fact, the LG.Philips Displays joint venture operations resulted in a loss just after the firm’s foundation. The financial situation could not recover in the following years. What are the reasons? The European television set cathode ray tube market went down, and the price competition increased. The remaining tube supplying manufacturers in Europe such as large firms like Samsung, Thomson and Matsushita, but also small competitors, e.g., Ekranas (Lithuania), Tesla (Czech Republic) operating in niche markets, were seriously competing for survival. Additionally, Chinese cathode ray tube manufacturers increased their shipments to Europe and worsened the attractiveness of the market. In parallel, the venture partners from contrasting cultural backgrounds could not solve internal communication problems, which had a negative impact on performance as illustrated below (LG.PhilipsDisplays, 2005g, LG.PhilipsDisplays, 2007b).

LG.Philips Displays - Net sales versus net income 5.000

4.000

Million Dollars

3.000

2.000

1.000

0 2002

2003

2004

2005 Jan-Sep

-1.000

-2.000

Net sales

Net income

Figure 57. LG.Philips Displays net sales versus net income for the period 2002 to September 2005. Source: LG.Philips Displays 2005f, 2007a

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Concerning the insolvency filings, the headquarters in Hong Kong officially declared in a corresponding press release, Over the past year, LG.Philips Displays and other CRT manufacturers have seen an unprecedented decline in the market for CRTs, especially in Europe. The demand for new flat panel televisions, including liquid crystal display (LCD) and plasma televisions, has surged dramatically, as these alternatives have dropped in price and become cost competitive faster than anticipated. Although demand for CRTs has dropped precipitously in mature markets, global demand for CRTs remains strong, especially in emerging markets. LG.Philips Displays has been in extensive discussions with the company’s financiers and parent companies, Philips and LG Electronics, over the past several months to explore financial solutions to the market challenges, especially in Europe (LG.PhilipsDisplays, 2006b). The president and CEO of LG.Philips Displays, J.I. Son, commented, We deeply regret this outcome and the painful impact these filings will have on our valued employees and the communities that have supported us over the years. Unfortunately, market conditions and our financial situation have made this very difficult decision unavoidable. Having explored all possible restructuring options, we really had no choice but to take these actions. We are working to maintain employment for our remaining employees through our ongoing operations (LG.PhilipsDisplays, 2006b). In 2001, when the joint venture with LG Electronics was established, the television set business unit of Philips had a turnover of USD 3 billion, ran twelve cathode ray tube production sites with 24,000 workers worldwide, and reached a profit of USD 157 million (Bondgenoten, 2001). Just a couple of years later, the European market leader of the 1990s disappeared with the joint venture bankruptcy and simultaneously disappeared from the cathode ray tube based television set business (Inquirer, 2006).

5.5.7

LG.Philips Displays gets a new name

Effective on April 1st, 2007, LG.Philips Displays changed its name to ‘LP Displays’. The corresponding press releases by the top management said, The new name and stylized logo are designed to reflect its new corporate status while saluting its roots as a joint venture between LG Electronics and Royal Philips Electronics. At the same time, it reinforces continuity in LP Displays’ position as one of the world’s leading global suppliers of picture tubes used for television sets and computer monitors. The new name and the logo act as an important step forward for LP Displays and reflect the management and financial stakeholders’ confidence in both the future of the company and the CRT business (LG.PhilipsDisplays, 2007c).

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LP Displays continues to focus its business on high performance CRTs and a growing demand for its ‘SuperSlim’ and ‘UltraSlim’ CRTs, particularly in emerging markets. The global demand for CRTs is expected to remain strong. LP Displays president and CEO, Mr. Jeong IL Son, explains, Of the countries with the highest populations, the majority will be CRT customers for the foreseeable future. Markets in Asia and South America offer the company an exciting challenge going forward, and the ‘UltraSlim’ and ‘SuperSlim’ series provide LP Displays the competitive advantage it needs to capture this tremendous opportunity (LG.PhilipsDisplays, 2007c). LP Displays’ management team will remain in Hong Kong under the leadership of Mr. Son; and the company will continue to serve its global markets with its plants in Brazil, China, Indonesia, and South Korea and with its minor component operations in the Netherlands and the United Kingdom. LP Displays employs around 11,000 people worldwide. The company's new name and logo pave the way for the upcoming change in ownership structure (LG.PhilipsDisplays, 2007c). Dutch representatives disappeared completely from the firm, which was originally established in 2001 as a 50/50 joint venture with a payment of USD 1.1 billion by Philips. A couple of years later, the top management consists of Korean managers only; Mr. Jeong IL Son, president and chief executive officer; Mr. Deok Sik Moon, chief financial officer and deputy chief executive officer; Mr. J.M. Park, chief sales officer; and Mr. Soo Dyeog Han, executive vice president, New Business Development (LG.PhilipsDisplays, 2007c).

5.5.8

Summary

Philips paid USD 2.7 billion total to LG Electronics for its joint venture engagements. LG.Philips Displays, established in 2001, went bankrupt in 2005. Due to the shrinking market volume of conventional cathode ray tubes in Europe, Japan, South Korea, and the U.S, replaced by an increasing LCD and plasma demand, the joint venture was established in difficult times. However, the demand in so-called BRIC countries (Brazil, Russia, India, and China) as well as other markets such as Vietnam, Malaysia, Turkey, Eastern Europe, etc. will remain at a significant level in the coming years. Philips finished its joint venture activities in the field of conventional CRT, but LG continued business with conventional tubes. In 2007, the joint venture was renamed ‘LP Displays’. The firm is led by Korean managers only. The picture for the second joint venture, LG.Philips LCD, looks similar. Eight years after establishment, Philips disappeared from the firm name, which was changed to ‘LG Display’ in 2008. The company is controlled by LG managers. The future for LG Display is fundamentally better than LP Displays because the demand for LCD television sets will continue to increase. During the period of ‘partnership’ with Philips, LG gained access to the European distribution channels and learned about proper marketing instruments suitable for the European consumer. For instance, LG has changed the meaning of its initials to ‘LG = Life is Good’, hoping to get closer to its European customers. The true strength of LG is still its LCD production and R&D expertise. Through its newly established LCD module plant in Poland, the firm is able to supply LCD modules to the factory of LG Electronics in Mława,

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Poland, which assembles final television sets and supplies them to the whole European market. Simultaneously, production capacities, particularly in Asia, were expanded during the joint venture period (LG.PhilipsLCD, 2006c). Cost-competitive products, such as cathode ray tubes and related components, are concentrated in China (Changsha, Nanjing, Beijing, and HuaFei). The production locations are desirable because the Chinese market is demanding the lower priced cathode ray tube television sets due to its limited local purchasing power. Technologically advanced LCD modules are manufactured mainly in South Korea (Gumi and Paju) but also in China (Nanjing) and Poland (Wroclaw) (LG.PhilipsLCD, 2006e, LG.PhilipsDisplays, 2007b). Without the financial involvement of Philips, it is questionable whether LG could have recovered and developed successfully after the Asian financial crisis as they have done in recent years. Moreover, LG’s managerial know-how regarding its sales and marketing expertise in Europe is much stronger than before. On the other hand, the European joint venture partner, Philips, lost importance and influence. The management of Philips probably underestimated the sharp decline in conventional CRT TV demand when the company decided to invest in the joint venture in 2001. Moreover, the management of Philips did not pay attention to the ‘absorptive capabilities’ of LG Electronics (during the joint venture period). Royal Philips Electronics, the largest remaining European-based electronics company and one of the former major customers of LG.Philips LCD (new name LG Display), announced in February 2008 that it is looking to outsource manufacturing for 70 percent of its LCD TVs (in 2006 nearly 60 percent). The company expects to ship 14 million LCD TVs in 2008, with about 10 million units outsourced (Digitimes.com, 2008). In other words, Philips will further reduce its technological and manufacturing involvement in the television set business, taking the increased risk of losing know-how. According to the firm’s strategic plan, Philips will strengthen its activities in other business segments, such as lightning and health care, in order to be prepared for prospective future markets (Markets, 2007).

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5.6

TCL China

5.6.1

Company background

Firms in China are generally described by Western managers as having a relatively low level of technology and a comparatively high level of bureaucracy. Since businesses in China rely heavily on personal guanxi relationships, these firms can be quite competitive in the local market due to specific environments, monopolistic sectors, close networks of local partners, and familiarity with local customers (Zou and Ghauri, 2008: 211). Why? When individuals have established guanxi with each other, their relationships have a number of characteristics. First, the relationship is personal and particularistic. Second, it is based on reciprocal obligation. Favors granted by one party must be reciprocated, and favors are given in the expectation that they will be repaid in the future. Thus, guanxi constitutes a form of social capital. If scarce resources are allocated through guanxi, it becomes profitable to cultivate connections. Significant resources are allocated not by the market, but by networks of personal connections. It is, therefore, rational and profitable for businesspeople to cultivate their guanxi in order to secure access to those resources (Davies et al., 2003: 43–49). Over the past two decades, China’s manufacturing industry has experienced a major transition (Chen, 2004: 216). TCL China Multimedia Technology Holdings Limited serves as a representative case of the aggressively upcoming Chinese industry. Established in 1981, headquartered in Huizhou of Guangdong Province, TCL China Multimedia Technology Holdings Limited became the biggest Chinese electronics manufacturer within about 25 years (TCL, 2006f, TCL, 2006e). Today, TCL Group is a highly diversified conglomerate, which operates in electronics and also in the following business fields: real estate, logistics and service, finance, white household application devices including refrigerators, import and export trading, online education technology, batteries, lighting, displays, and others as illustrated in the figure below (TCL, 2008c).

5.6 TCL China

175 Board of Directors Board of Supervisors TCL Corporation

TCL TCL Multimedia Communication

Real Estate & Logistics and Investment Service

Communication Real Estate & Digital Technology Co. Alcatel Unit Global Industry Real Sales & R&D Estate Marketing Home Industry Global Network Holdings Operation Center Strategic Joint Venture Enterprises Purchasing and Supply Global Finance Supporting Departments Corporation Industry Academy Management Co.

TCL Home Appliance

Techne Electronic Group

Information Industry

Air Condition

Flat Panel Project

Online Educational Technology

White Household

Shenghua Industrial

Small Home Appliances Division

High Frequency Electronic

Lighting Division

Display Technology

Nanyang Electrical Equipment Co.

Optical Disk Division

Import & Export Co. Speed Distribution Platform KoYoo Online Co.

Hyper-Power Batteries

Refrigeration LED Division Equipment

Figure 58. TCL Corporation organizational chart and executive committee. Source: (TCL, 2008c)

In 2003, the chairman of TCL, Li Dongsheng, announced his vision for the internationalization strategy of the Chinese firm. In the next three to five years, we want to see TCL’s television and telecom business become one of the top five manufacturers globally. Our main challenge is we must improve our R&D level. Most Chinese firms lack intellectual property rights. We want to focus on business in international markets. We must upgrade our technology and R&D. This is a big challenge for all Chinese companies. I believe

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5 Case Studies our competitive advantage over international companies is in two areas: one is the efficiency of our supply chain; the second is that, in terms of the Chinese market, we are particularly good at knowing what the customer needs (Beijing, 2003).

Regarding TCL’s internationalization strategy and market entry efforts for the future, the firm’s chairman, Li Dongsheng, declared in 2003, We have three strategies overseas. First, we fully use our advantage in manufacturing when working with our partners. Our second strategy we have followed in Southeast Asia, India, Russia, and the Middle East. In these regions, we have sold our branded product (TCL and Rowa). Our third strategy is adapted to the European and U.S markets, the largest overseas markets. These markets are more mature and are already dominated by other brands. To develop our brands (TCL and Rowa) there involves higher investment and more risk. That’s why we have acquired companies. This has lowered our cost, and the risk is lower. Whether the third model will be successful, we do not know yet. But we have seen other companies from Taiwan and South Korea that have not been very successful. Two examples are Acer and LG, both of which lost a lot of money going overseas. There are really successful examples like Samsung, but most companies are not like them. TCL’s strategy is that we want to find strategic partners. We do not want to work alone and have to bear all the risk. That’s because in these mature countries, the growth is relatively stable; and entry barriers are higher. Being the No. 1 player in TVs is very important in reaching our goal of being a global company (Beijing, 2003).

5.6.2

Realization of the Chinese government order

In the mid-1970s, the Chinese government started to realize that it might be advantageous for the national economy if foreign enterprises were attracted for investment in the domestic markets. As a result of their engagement, these foreign firms would transfer technology and know-how to Chinese enterprises. In December 1978, the Chinese government initiated an opening of the local economy to foreign investors through a so-called ‘open-door policy’. Just half a year later, in July 1979, the enactment of the ‘Law of the People’s Republic of China on Joint Ventures Using Chinese and Foreign Investment’ provided a legal status for foreign direct investments in China (Alon, 2003: 101). Around two decades later, the Chinese government turned over the spear. Instead of attracting foreign investors to China, the political decision makers in Peking started to push local firms to enter foreign markets around the globe. In October 2000, the Chinese government announced its ‘go global’ strategy as a part of its long-term, aggressive business growth efforts, giving encouragement and support for key firms to strengthen their competitive positions outside their home market. As a result of the action of the government, many Chinese companies have increasingly searched for investment opportunities outside their neighbor territories. Recently, they have focused particularly on well developed industrial countries,

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such as Europe or the U.S.A., because of their stable investment environment, high technology, and advanced management methods. According to Deng (2002: 72), such calculated investment behavior is exemplified by TCL of Guangdong Province, China’s largest television set manufacturer. TCL China developed its international market entry strategies primarily by establishing majority-owned joint ventures with incumbent firms mainly located in advanced European countries (Deng, 2006: 76, ChinaBusiness, 2005). It can be stated that the internationalization efforts of Chinese firms at the beginning of the 21st century are based on a politically initiated vision declared by the Chinese government for the coming years. On the one hand, Chinese firms, for example relative to their Japanese competitors, are rather latecomers in the electronics industry (Mathews, 2002: 24, 107, Deng, 2006: 74). On the other hand, through market entries via various forms of alliances and acquisitions with Western firms, they attempt to ‘balance’ their competitive disadvantages with regards to technological, marketing (brand reputation), management, and R&D resources and speed worldwide market penetration. Nowadays, Chinese enterprises are active in establishing extensive networks of distributors, research and development centers as well as product design units in industrial countries. For the strategic purpose of control of the desired recourses, they tend to become either fully owned or the majority shareholder (Deng, 2006: 72, 74). How did TCL China develop the television set business? In 1990, TCL China entered the television set industry through the acquisition of a relatively small Hong Kong-based firm. During the 1990s, television sets became the core product of the group. TCL’s business operations and product model portfolio have been expanded, but sales were geographically focused on China. The international expansion started in September 2002, when TCL China purchased the traditional German firm that went bankrupt, ‘Schneider Electronics GmbH’, at a price of Euro 8.2 million. At the time, besides audio and conventional television set production, Schneider had a particular technological expertise in laser technology used for television sets. Unfortunately, the laser technology standard failed in the markets. Commenting on the acquisition, Mr. Tomson Li, at that time chairman of TCL International said, The acquisition of assets from Schneider marked an important step in TCL International’s overseas expansion. It will accelerate our access to the European market. The Tuerkheim plant will be our first production base in Europe for televisions and other home entertainment products targeting the European market. While various brand names under Schneider are well established, we will initially focus on the SCHNEIDER and DUAL brands, particularly for the high-end market, as we see enormous market potential in the European consumer electronics market. We have full confidence in our overseas business in the years ahead (TCL, 2002b). Through the purchase, in addition to obtaining a well-established European brand such as Schneider and production facilities in Germany (Europe), TCL gained access to management know-how linked with fundamental knowledge resources of the local market and the sales networks in Europe. Mr. Dr. Michael Jaffe, the ‘insolvency administrator’ of Schneider, said,

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5 Case Studies The acquisition marked an important step for both TCL and us. TCL has not only acquired the production facilities, but also the trademarks, distribution network as well as the technical know-how of the former employees of Schneider. This will form a solid base for TCL’s entry to the European market. As for us, in addition to the renewed employment for some former staff of Schneider, new job opportunities will be created along with TCL’s business expansion (TCL, 2002b, Schneider, 2003).

The bright future for Schneider, as forecasted after its acquisition, has not come true. Of course, TCL used the newly acquired trademark rights of Schneider as well as Dual and learned, through the former Schneider management employees, about local market conditions. However, in November 2004, Schneider Electronics announced the shut down of the factory in Tuerkheim, Germany, and further restructuring activities. The firm offices of Schneider moved to Mindelheim, where distribution, marketing, and service activities were continued. Finally, all operations at Mindelheim were stopped; and the location shut down in December 2005, just two years after TCL became the owner. The manufacturing has been continued at TCL’s facilities in Asia and the products sold under the Schneider brand in Europe (Schneider, 2005a, Schneider, 2005b).

5.6.3

TCL-Thomson Electronics (TTE) international joint venture

The acquisition of Schneider in 2002 was not the first and only market entry activity by TCL China in recent times in Europe. The Schneider brand was well known in Germany but comparatively unknown in other European countries. Additionally, Schneider’s manufacturing and R&D capacities were limited relative to the size and the strategic plans of TCL for its European market entry. The traditional French company, Thomson, along with Philips one of the leading European brands in the 1990s and owner of several patents plus exclusive brands, raised the interest of the Chinese. On the one hand, TCL had production cost advantages due to low labor costs and less social security standards in China relative to Western countries. On the other hand, TCL’s weaknesses were its almost unknown brand name outside Asia, limited access to the European market, and the lack of patents and advanced technological know-how. In 2003, Thomson faced increasing difficulties regarding competitive manufacturing of television sets in comparison with firms from Turkey (i.e., Vestel, Beko, and Profilo Telra) and the Far East, which resulted in the television set operations realizing a loss. Moreover, Thomson did not pay enough attention to the development of LCD and plasma technologies, which enjoyed a significant market breakthrough in 2004 and provoked an even higher price competition in Europe in conventional television set sales. Finally, TCL China and Thomson, France, seemed to be ideal joint venture partners with significant mutual synergy potentials (Thomson, 2003, Thomson, 2004).

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In June 2004, TCL and Thomson agreed to combine their activities in order to establish a major player in the television set business with an annual production capacity of approximately 21 million units. The joint venture of TCL-Thomson Electronics (TTE) started its operations in July 2004 (TCL, 2004d). TTE represented the largest agreement ever made until that time in which a Chinese company had taken control of a Western counterpart through direct investment in a joint venture (Deng, 2006: 76). The newly created firm TTE enabled TCL to access Thomson’s distribution channels in the U.S.A. and Europe; R&D laboratories (Singapore, Mexico, Germany, and France); and main manufacturing capacities in France, Poland, Mexico, China, and Thailand. From the Chinese point of view the brands of ‘RCA’ (American market) and ‘Thomson’ (European market) were of particular interest for TCL’s marketing and sales in order to compensate for its own almost unknown brand initials ‘TCL’ in Europe. The development of the Chinese brand ‘TCL’ would have been difficult and time and cost consuming due to its unfamiliar initials in the minds of European and North American customers. As a TCL senior manager described the venture benefit for the Chinese, Leveraging the strengths of Thomson, we have a firm foothold in the R&D of main stream TV products and strong capabilities in high-end digital offerings. We deploy a multi-brand product strategy, spearheaded by established households brands, including TCL, Thomson, and RCA, which are immediately recognizable to consumers worldwide (Deng, 2006: 76). At the beginning of the negotiations in 2003, before the final joint venture contract was signed, it was announced that TCL and Thomson would each invest 33 percent (for a total of 66 percent), and the remaining 34 percent would be launched at the Hong Kong stock exchange market (Glowik, 2004b). This smart approach, initiated by the Chinese, was psychologically, with respect to French public opinion, well conceived. It did not appear to be a ‘takeover’ by the Chinese giant, but rather a partnership. The promotion of a ‘joint venture’ transaction was easier to launch than, for example, an acquisition; and it avoided unfriendly reactions in the French public as well as potential barriers by French politicians, who tend to protect ‘their industry’. If desired, Thomson had the chance to buy shares at the Hong Kong stock exchange market in order to increase its joint venture investment. Theoretically, the company ranked as an equal partner. However, industry insiders were convinced that Thomson might not have the financial resources to buy additional shares. Therefore, even though it was officially called an equal partnership at the beginning, TCL secured the majority control; and it can be assumed that a gradual takeover of the Thomson television set business by TCL may have been planned from the beginning of the joint venture operation. In January 2004, it was discussed that in the initial phase of the venture, TCL would hold 67 percent (and not 1/3 as proposed in 2003) and Thomson only 33 percent of the shares of TCL-Thomson Electronics (TTE). Thomson agreed to the venture because the television set division of Thomson faced financial difficulties before it was transferred to the joint venture, TTE. Finally, the French firm contributed its TV manufacturing units to the venture including the following (TCL, 2004b):

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ƒ ƒ ƒ ƒ

RCA components SA de CV, Manufacturas Avanzadas SA de CV, and Thomson Televisions de Mexico SA de CV [all in Mexico]; Thomson Multimedia Operations Company Limited [Thailand]; Thomson Zhao Wei Multimedia Co. Ltd. [China]; Thomson Multimedia India Private Ltd. [India]; and Thomson Multimedia Polska Zyrardow [Poland].

In addition to the manufacturing capacities mentioned above, three R&D centers located in Villingen (Germany), Indianapolis (U.S.A.), and India were contributed to the TTE joint venture by the French partner Thomson (TCL, 2004b). Thus, through the venture with Thomson, TCL absorbed technological know-how, research and development resources, a wide range of patents, and valuable brands. Since the start of venture operations, the television sets have been sold globally under three key brands: ‘TCL’ (Asia, Australia, Russia and South America), ‘THOMSON’ (Europe, Russia, Ukraine, and Kazakhstan) and ‘RCA’ (North America). The regional brand segmentation is illustrated below (TCL, 2008a, TCL, 2007b). According to the final ‘Shareholders’ Covenants Agreement’ with Thomson, TCL secured the position of the ‘ultimate, controlling shareholding’, with 38.74 percent of TTE’s capital. The remaining share portion of 31.94 percent was placed before the public at the Hong Kong stock exchange market. Thomson was entitled to nominate two out of eleven directors to the Board as long as it held at least a 13.25 percent interest in TTE. Thomson finally decided to invest 29.32 percent of the issued share capital of TCL-Thomson Electronics (TTE). The Chinese venture parent partner, TCL guaranteed its control of the Board (TCL, 2005b).

Figure 59. TCL regional brand strategy. Source: TCL 20087b, TCL 2008a

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The newly formed venture firm helped to further expand the turnover of TCL China group. However, the ‘operating activities’ including TEE resulted in a continuously higher loss in the subsequent years 2005 and 2006 (TCL, 2006g, TCL, 2006c). The meaning of ‘gross profit’, which contains income sources from other businesses of TCL China, such as finance service, result in positive numbers but may include subsidies granted, which is common in a ‘planned economy’ such as China (TCL, 2000, TCL, 2001, TCL, 2002a, TCL, 2003, TCL, 2004a, TCL, 2005a, TCL, 2006b, TCL, 2006c, TCL, 2007d, TCL, 2008e). Therefore, the data ‘profit (loss) from operating activities’ provides a more realistic statement regarding the economic success of the enterprise as illustrated below.

Million USD

5000

4000

Turnover

3000

2000

Gross Profit 1000

Profit/(Loss) from operating activities

0

-1000 1999

2000

2001

2002

2003

2004

2005

2006

2007

Figure 60. TCL China Group. Turnover, gross profit and profit (loss) from operating activities for the period 1999– 2007 in million dollars. Source: Annual reports 2000–2008

In August 2005, Thomson decided to reduce its engagement up to 29.32 percent of the issued share capital of TCL-Thomson Electronics. In parallel, the Chinese venture parent, TCL, the majority shareholder of TTE, strengthened its alliance network. In February 2006, a memorandum of understanding was signed with LG.Philips LCD. Under its framework, it was agreed that LG.Philips LCD would supply LCD-TFT panels to TCL, which guaranteed a stable purchase demand. Mr. Gary Yu, president of TTE Global Operation Center, said,

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5 Case Studies TTE intends to increase the sales of LCD TV globally. As LG.Philips LCD will take into consideration TTE’s product designs in developing high quality TFT-LCD products, this cooperation will enable both companies to boost their presence in the fast growing LCD TV market with fruitful results (TCL, 2006h).

In 2008, after the decision of Philips’ top management to outsource 70 percent of its LCD television set operations, the Dutch company further intensified the business relations with TCL, which have been based on an OEM agreement that was signed for the first time in 2007. TTE became one of the major OEM partners for Philips. The OEM contract with Philips targets making use of lower manufacturing costs relative to Europe. The television sets will be manufactured, with attention to technical specifications and quality standards approved by Philips, at TCL factories in the Far East. These TV sets are globally distributed and labeled with the Philips brand, among others, in the European market (Digitimes.com, 2008). On April 15th, 2008, TCL started construction of its own LCD module plant in China's southern Guangdong province. The commencement of operations will strengthen TCL’s competitiveness in the LCD television set sector. The project was financed by TCL Corporation, with LCD panels and major technological support provided by TCL’s project partner, Samsung (TCL, 2008b). Samsung plans to subcontract parts of its LCD manufacturing to the Chinese television maker after the plant’s opening in 2009 (TCL, 2008d, TCL, 2006j).

5.6.4

The gradual process towards the liquidation of TTE Europe

In Paris on November 3, 2006, the French joint venture partner, Thomson, announced that it would reduce its stake in TCL Multimedia from 29.3 percent to 19.3 percent of its share capital. Thomson’s management said that it intends to continue its business relationship with TCL. However, following the divestment, Thomson’s interest in TTE would not longer have the status of an equity venture partner. The residual stake of Thomson at the TTE joint venture would be a ‘financial participation’ (Thomson, 2006, TCL, 2006d, South_China_Morning_Post, 2006). In Hong Kong on May 24, 2007, approximately a half year later, the chairman of TCL China, Mr. Li Dongsheng, announced on behalf of the board the insolvency of all European operations. At the time of this announcement, who had the decision power? Besides Li Dongsheng, the board was comprised of Lu Zhongli, Wang Kangping, Shi Wanwen, and Yuan Bing as executive directors. Albert Thomas da Rosa, Jr. ranked as non-executive director and Tang Guliang, Wang Bing, and Robert Maarten Westerhof as independent nonexecutive directors of the board (TCL, 2007c). According to the corresponding press release, The company expects that the French court will appoint a judicial liquidator to take control of TTE Europe. TTE Europe still faces a number of outstanding claims that it is unable to settle. As the operations of TTE Europe have caused significant losses ‘of the Group’ in recent years, TTE Europe’s insolvency

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filing will provide closure to the Group’s involvement in TTE Europe, especially with respect to the settlement of claims (TCL, 2007c). To maintain the European business from that time onward, TTE was organized as a platform for all TV related activities and became a wholly owned subsidiary of TCL. It was agreed with Thomson that the OEM business would be expanded (assembly of television sets in China that are sold with the Thomson label around the world). Under the trademark license agreement, Thomson granted a 20-year license to use Thomson’s registered trademarks (RCA, RCA Scenium, and Thomson) for manufacture and sales of television products in certain countries in North America, Europe, and other regions in return for a royalty fee based on net sales. TCL was allowed to use the Thomson trademark in Europe until 2008 without paying a royalty fee. In Russia, Ukraine, and Kazakhstan, TCL’s subsidiary, TTE, can use the Thomson trademark until 2013 with payment of a royalty fee (TCL, 2006a, Thomson, 2007a, Thomson, 2007b). As stated in TCL’s official press release with respect to President Li Dongsheng’s participation at the ‘Caijing Chinese Business Forum on the road to internationalization’ held in June 2008 in London, In January 2004, TCL acquired the color TV business of French company Thomson; three months later, TCL also acquired mobile phone businesses operating under the Alcatel brand, causing unprecedented overseas interest in Chinese firms’ international mergers and acquisitions. However, TCL’s road to internationalization has been far from smooth, as the restructuring of the company’s European business in 2006 led to the company incurring losses (TCL, 2008f). But now, following four years of internationalized development, Li Dongsheng is convinced that pursuing internationalization is a necessary path for the future development of outstanding Chinese businesses. He is also convinced that TCL’s path of internationalization will not end in failure, and that adjusting to environmental conditions, involvement with local regulations, and strengthening business capabilities are crucial points on Chinese businesses’ road to internationalization (TCL, 2008f). The chairman of TCL added, I hope that the international community will maintain an objective and tolerant attitude towards Chinese businesses that ‘step outside China’, viewing them as colleagues in areas such as market access, investment and mergers, and acquisitions, and that it will not overly politicize the economic vitality of Chinese business (TCL, 2008f). Despite temporary losses in recent years, TCL was strengthened by the joint venture. The Chinese firm operates R&D centers and manufacturing plants mainly in Asia (TCL, 2008a). The R&D organization is concentrated in Shenzhen (China), with a satellite office in North

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America (Indianapolis) dedicated to certain core functions (TCL 2007c). The competitive advantage of the group still lies in its Asian low cost manufacturing platform. Consequently, its television manufacturing plants have been expanded in China (Huizhou, Henan, Wuxi), Mongolia, Thailand, and Vietnam, which produce a full range of products covering CRT, LCD, plasma, and projection TVs. Minor manufacturing locations (previously contributed by Thomson) survived in Poland (Zyrardow) and Mexico (Juarez). TCL’s manufacturing activities for audio-visual products are based in China (Shenzhen) and include, for example, DVD player assembly. Meanwhile, TCL China belongs to the world’s largest TV companies, with a relatively broad line of TV products as well as a growing AV (audio-video) line of business. Recently, the firm launched an image campaign to strengthen its Chinese brand: ‘TCL’ -- ‘The Creative Life’ (TCL, 2008a, TCL, 2007a). Some years ago, at the time when the joint venture contract was signed in 2004, Thomson’s cost competitiveness in the television set market was comparatively weak and its firm potential might have been overestimated by TCL’s management. Instead of paying attention to the new flat technologies like LCD and plasma, Thomson concentrated its efforts on TVprojection products, which were in 2004 significantly cheaper to produce and, therefore, price attractive on the markets. However, the picture performance of projection TVs was relatively poor in comparison with the upcoming LCD and plasma television sets. Consequently, the forecast for the European market regarding projection TVs was rather pessimistic. Quality issues and the increasing price competition in the CRT-based segments caused an even more difficult situation for Thomson, particularly in its core market, Europe. The weakness of Thomson was temporarily compensated by TCL’s main and most important strength, its low-cost production facilities of conventional CRT-based television sets in China. However, both TCL and Thomson so far had not gained significant technological expertise in flat panel technology nor did they have LCD or plasma module production capacities built up. Thus, the TTE venture main business segment had to focus on the mature and price competitive CRT-based markets, which were increasingly replaced by LCD and plasma TVs in Europe. Deng claims that Chinese firms, such as TCL, have strong learning and ‘absorptive’ capabilities. Thus, the tendency for them to continue their investment to acquire strategic resources around the globe is very high. The case study of TCL illustrates the firm’s efforts to gain, within the shortest possible time period, resources in areas where the company has current weaknesses (Deng, 2006: 77, Bacani, 2005). Trademarks, used for its European and U.S. market entry, such as Schneider, Thomson, and RCA, as well as intellectual property rights (RCA patents), R&D centers (i.e., Villingen in Germany), and the access to European distribution channels were the most important resources for TCL gained through the joint venture with Thomson. These acquired resources helped to overcome market entry barriers for TCL in Europe. From the beginning of the joint venture, TCL secured the capital majority in order to control its newly acquired assets. Moreover, the management of TCL, until recent times relatively inexperienced in business operations outside China, is gaining stepwise managerial, technological, and cultural experience from its global business networks (TCL, 2004c).

5.6 TCL China

5.6.5

185

Summary

The European market entry strategy of TCL China, as shown for Schneider and TTE, followed a certain pattern: first, in the case Schneider, it was announced at the beginning (when TCL acquired the firm) that the German facilities would continue operations. However, after a relatively short time, Schneider activities were terminated and manufacturing as well as the complete research and development operation, including several patents and the trademark rights, had been transferred to China. Second, in the case of the joint venture with Thomson agreed to as a ‘venture of equals’, TCL secured majority control right after the joint venture was established. While Thomson has gradually decreased its shares since 2004, TCL increased its engagement and, thus, was guaranteed the strategic decision power. In 2007, TCL announced the liquidation of its European operations and once again the desired rare strategic resources in which TCL had fundamental weaknesses (RCA patents, brand rights such as those of Thomson, and technological know-how of the R&D centers) had been transferred to China. The network of alliance building and, simultaneously, the gradual transfer of TTE and Schneider to China are illustrated below. LCD TV OEM Agreement with Philips [signed 2007]

Joint Venture TCLThomson Electronics (TTE) [established 2004]

Liquidation of TTE Europe [2007]

TTE absorbed by TCL China [wholly owned subsidiary, 2008]

TCL China Acquisition of Schneider, Germany, inclusive trademark, R&D and manufacture [2002]

Liquidation of Schneider’s operations and transfer to China [2005]

Strategic Partnership agreement with LG. Philips LCD [signed 2006] Figure 61. Television set business related market entry activities by TCL China in Europe for the period 2002–2008. Source: Author, designed based on company information material

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TCL’s market entry strategy is designed around a combination of its manufacturing cost advantage, for example through cheap labor in China, linked with strategic resources achieved from outside organizations, such as reputable patents and trademarks. Therefore, it can be concluded for the future that TCL China will continuously seek well-branded overseas firms that are open to cooperation. But these ‘partners’ should be aware of the strategic background that may end in a final take over by the Chinese firm. The Chinese labor cost advantage works for highly standardized commodity products of mass production (often positioned in mature markets), such as for example CRT-based television sets. In the case of R&D driven, technologically innovative products located at the beginning stage of their product life-cycles, Chinese firms still have weaknesses. Nevertheless, international upcoming Chinese firms, as the chairman of TCL China, Li Dongsheng, announced in 2003, are aware of their current R&D disadvantages. Therefore, Chinese enterprises such as TCL will speed up their activities to invest overseas to acquire technological and managerial knowledge in order to improve their own resource weaknesses. Because Chinese firms tend to avoid high investment risks, they concentrate on cooperative market entry and penetration strategies, such as through alliance agreements and equity joint ventures, where they will attempt to acquire, sooner or later, the majority of shares in order to secure control or to integrate the operations fully within a certain period of time. The case of TTE Corporation illustrates this tendency, which is similar to the market entry strategy of the South Korean firm LG Electronics, as they founded the joint ventures with Philips, named ‘LG.Philips LCD’ and ‘LG.Philips Displays’, mainly targeting the European market.

5.7

Matsushita (Panasonic)

5.7.1

Company Background

In 1918, Konosuke Matsushita established ‘Matsushita Electric Devices Manufacturing Works’, which began production of an innovative attachment plug and a two-way socket, both of which he designed himself. These new products became very popular, earning the company a reputation for high quality at low prices. Matsushita Electric began printing English instructions for its products in 1931; and in April 1932, Konosuke set up an ‘Export Trading Department’ to carry out research and market development to evaluate the company’s international sales potential. This represented an innovative step in an industry where exports were traditionally left to large trading houses in Japan. With a unified policy for domestic and export markets, the company was able to actively expand its export business. With exports increasing, Konosuke incorporated the Export Trading Department as the ‘Matsushita Electric Trading Company’ in August of 1935. In 1936, the founding owner, Konosuke, sent three people to the U.S.A. and Europe in order to learn about advanced industries there. They visited about twenty local factories including Philips and Siemens (Matsushita, 2008b).

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In 1952, after very intense negotiations, Matsushita Electric made a technical and capital cooperation agreement with Philips of the Netherlands, setting up Matsushita Electronics Corporation as a joint venture. This was the result of Konosuke Matsushita's efforts to find an overseas business partner, convinced that the adoption of advanced Western technology was essential for Japan's postwar reconstruction. In 1954, Matsushita Electric allied with Victor Company of Japan (JVC), a record player producer that was established in 1927 by the Victor Talking Machine Co. of the United States. In 1959, ready to expand business activities abroad, Konosuke founded ‘Matsushita Electric Corporation of America’ in New York as its first overseas sales company. He urged his managers to adapt to their new host nation and to apply themselves to providing products that Americans would appreciate. The formation of an overseas sales network proceeded at a rapid pace. The first European sales company established was National Panasonic GmbH in West Germany in 1962, and was used as a base to enter the European market. Since then, many sales companies have been established throughout the world. On March 22, 1974, Motorola Inc. of the U.S.A. and Matsushita Electric of Japan signed a contract for the purchase of Motorola's TV operations in the U.S.A. and Canada. The purpose of the acquisition was to start a television business in the U.S. market (Matsushita, 2008b). On May 22, 1987, Matsushita Electric and Beijing City in the People's Republic of China signed an agreement to establish a joint venture to produce picture tubes (CRTs) for color TVs. This was Matsushita Electric's first investment in China in the postwar period. The new company, Beijing Matsushita Color CRT Co., Ltd., started production in June 1989 with about 1,400 employees. The company first produced 21" color picture tubes and later added 14-inch and 18-inch tubes. The products were supplied to color television set plants in China (Matsushita, 2008b). MCA Inc. joined the Matsushita Group in November 1990. MCA was a multibillion dollar diversified international entertainment conglomerate engaged in the production and distribution of theatrical, television, and home video products, and the operation of two amusement parks in Hollywood, California, and Orlando, Florida. MCA brought a diversity of new capabilities into the Matsushita Group and also the promise of innovation in the field of electronic entertainment through the integration of hardware and software products. In June 1995, Matsushita Electric transferred an 80 percent share of equity interest in MCA Inc. to the ‘Seagram Company Ltd.’, a Canadian liquor manufacturer (Matsushita, 2008b). In the television set business, Matsushita concentrated its internal R&D resources during the 1990s on the development of the plasma technology. In 1996, Matsushita developed the world’s first 26-inch plasma television set. In June 2001, as the market for plasma television set panels was expected to grow significantly, ‘Matsushita Plasma Display Co., Ltd.’ began full-scale mass production of modules targeting high picture quality at an affordable price. Matsushita aims to be the number one plasma display panel manufacturer in the industry by strengthening its manufacturing structure, including the commencement of production at its plant in China in December 2001 (Matsushita, 2002). In 2001, Matsushita centralized its domestic manufacturing locations, having discontinued color monitor tube production and implemented joint global supply and purchase of color television set picture tubes with Thomson in France. Matsushita decided to mainly focus its

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efforts on increasing competitiveness in large flat-screen cathode ray tubes (Matsushita, 2002). As a pacesetter in the digital television set industry, Matsushita led the market in televisions with digital satellite tuners. In 2002, the company extended its lineup of flatsurface cathode ray tube television sets, and augmented its plasma display panel product portfolio with new 36-inch and 42-inch models, followed by a new 50-inch television set model, all with the industry’s highest levels of brightness and contrast to date, and all equipped with digital satellite tuners. As result of the upcoming flat panel technologies, which resulted in a continued decline of the cathode ray tube television set business, Matsushita decided to reduce production incrementally, which ended in the closure of all remaining cathode ray tube related operations worldwide beginning in 2006 (Matsushita, 2005). In April 2002, Matsushita established ‘eP Corporation’, a common joint venture with Toshiba Corporation and Hitachi Ltd., which launched the world’s first trial service integrating digital broadcasting and high-storage data casting. The introduction of this service enabled users in Japan to access multiple channels with advanced functions on demand, as well as to participate in home-shopping, home-banking, and other interactive services (Matsushita, 2002). However, customers who have an affinity for using interactive services can use their Internet-linked computer and do not necessarily need a television set. Thus, the ambiguous plans ‘to create new markets’ for television sets with compatible terminals could not be realized as expected. The decline of the conventional cathode ray tube business, which came along with an increasing price pressure in flat panel technologies, semiconductors, and other electronic components, caused a severe loss for Matsushita in 2002. Its efforts to reduce fixed costs and rationalize activities in parts and material purchasing were not enough to offset negative factors stemming from the price decline. Furthermore, the company incurred various restructuring charges, which included USD 1.23 billion related to employment reorganization programs, USD 1.35 billion for impairment losses associated with the closure or integration of several manufacturing locations, and a write-down of investment securities, resulting in a net loss of USD 3.24 billion (Matsushita, 2002). In terms of sales and net income, Matsushita recovered stepwise after 2002 and successfully managed a turnaround. The restructuring activities of 2002 resulted in an increasing profit. In 2007, the firm reached a net income of USD 1.9 billion, which represents the highest profit during the period 1999–2007 as the following figures illustrate (Matsushita, 2002, Matsushita, 2007a, Matsushita, 2008f).

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Matsushita Group - Net sales M illio n D o lla r s

90.000 80.000 70.000 60.000 50.000 40.000 30.000 20.000 10.000 0 1999

2000

2001

2002

2003

2004

2005

2006

2007

Year

Figure 62. Matsushita group net sales 1999–2007 in million dollars. Source: Annual reports 2001–2008

Matsushita Group - Net income 3.000 M illio n D o lla r s

2.000 1.000 0 1999

2000

2001

2002

2003

2004

2005

2006

2007

-1.000 -2.000 -3.000 -4.000

Year

Figure 63. Matsushita Group net income 1999–2007 in million dollars. Source: Annual reports 2001–2008

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Matsushita

AVC Networks

AVC: - Panasonic AVC Networks Company Fixed-line Communication: - Panasonic Communications Co., Ltd. Mobile Communications: - Panasonic Mobile Communications Co., Ltd. Automotive Electronics: - Panasonic Automotive Systems Co., Ltd.

Home Appliances

Components and Devices

Home Appliances Household and Equipment: - Home Appliances Group - Matsushita Home Appliances Company

Semiconductors: - Semiconductor Company

Lightning: - Lightning Company Environmental Systems: - Matsushita Ecology Systems Co., Ltd.

Systems Solutions: - Panasonic Systems Solutions Company - Panasonic Shikoku Electro. Co., Ltd. Figure 64. Matsushita organization in 2008. Source: Matsushita (2008e)

Batteries: - Matsushita Battery Industrial Co., Ltd. Electronic Components: - Panasonic Electronic Devices Co., Ltd. Motor Company

Matsushita Electric Works PanaHome

Other Business Domains

- Matsushita Electric Works, Ltd. - PanaHome Corporation

- Panasonic Factory Solutions Co., Ltd. - Matsushita Welding Systems Co., Ltd.

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The new organization that Matsushita launched as a result of its restructuring program in 2002 was slightly modified within the last few years. In 2008, the organization was divided into five major business divisions. The first line of business is named ‘AVC Networks’ and contains the manufacture and sales of plasma and LCD televisions sets, digital cameras, personal and home audio equipment, mobile communication, traffic related systems, and data storage devices. Products such as washing machines, clothes dryers, vacuum cleaners, and kitchen equipment are housed in ‘home appliances’. Industrial robots, electronic measuring instruments, welding equipment, air-conditioning, and medical devices are grouped in the division ‘Matsushita Electric Works’. The semiconductor business and batteries, electronic components, and motors belong to the strategic business unit of Matsushita named ‘Components and Devices’. Factory solutions and welding systems belong to ‘Other Business Domains’.

5.7.2

The foundation of IPS Alpha Technology

The establishment of the international joint venture named IPS Alpha Technology in October 2004 is based on close relations and previous alliances of Matsushita Electric Industrial Co., Ltd. and Toshiba Corporation. On January 29th, 2003, both Japanese electronic companies announced that they had established a joint venture called Matsushita Toshiba Picture Display Co., Ltd. and would start operations on April 1st, 2003. Mr. Minoru Ueda, at that time General Manager of Matsushita's cathode ray tube business integration office, was appointed the president of the joint venture. Based on a September 26th, 2002, basic agreement between Matsushita and Toshiba, the joint venture would integrate both companies' CRT operations from R&D to manufacturing and sales, making it the world's third largest CRT enterprise (after LG.Philips Displays and Samsung). The alliance covered both companies' manufacturing operations worldwide (for example, in Esslingen, Germany) except for those in Japan, where the parent companies continued to run their respective factories (Matsushita, 2003). Two and a half years later, on November 30, 2005, Matsushita Electric Industrial Co., Ltd. announced plans to discontinue operations at Matsushita Toshiba Picture Display Germany GmbH (MTPDG) and Matsushita Toshiba Picture Display Corporation of America in Ohio, U.S.A. (MTPDA) by the end of the fiscal year ending March 31, 2006, and to begin liquidation procedures. MTPDG and MTPDA were both subsidiaries of the Matsushita Toshiba joint venture. MTPDG manufactured CRTs for large screen TVs for the European market, and MTPDA manufactured CRTs for TVs for the North American market. The regional subsidiaries faced declines in demand for CRTs and intensified price competition due to increasing sales of LCD and plasma TVs in their respective markets. The closing of these operations was part of the joint venture restructuring initiatives to shift business to Asian and Chinese markets (Matsushita, 2005). Instead of focusing on CRT, Matsushita and Toshiba within the restructured joint venture, newly named Toshiba Matsushita Display Technology Co., Ltd., focused on the small and medium size LCD and OLED business (ToshibaMatsushitaJV, 2008, Toshiba, 2008).

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In parallel, during October 2004, Toshiba and Matsushita invited another Japanese firm, Hitachi, to start a new cooperation and established an LCD panel manufacturing joint venture. A new more powerful joint venture was created, called IPS Alpha Technology, scheduled to start operation on January 1st, 2005 (Alpha, 2008a). IPS Alpha Technology manufactures LCD panels using Hitachi’s world-leading IPS mode system technology. The panel manufacturing operation was located at Mobara, Chiba Prefecture, Japan (Alpha, 2006a, ElectronicNewsToshiba, 2002, Alpha, 2008c).

Figure 65. View of IPS Alpha Technology's premises at Mobara, Chiba Prefecture (photograph: SS Tokyo Co., Ltd.). Source: IPS Alpha Technology (Alpha, 2008b)

5.7.3

FDI in Europe

Two years later, on September 18th, 2006, IPS Alpha Technology held a roof-raising ceremony following a direct investment of the joint venture near the city of Zatec in the Usti region of the Czech Republic. The new plant, which started operation in July 2007, manufactures LCD modules for the European market (Alpha, 2008a). In Europe, the market has been growing for LCD TVs in the 30-inch range, to fit housing specifications and modern lifestyles. European consumers are increasingly demanding screens featuring higher picture quality and resolution (Alpha, 2006b). Matsushita has been engaged in the Plzen, Czech Republic, since 1996 through its subsidiary Panasonic AVC Networks Czech, which was later integrated in the Matsushita Toshiba Picture Display Co., Ltd. joint venture. The brand new factory in Plzen produced television sets based on the cathode ray tube technology. Production capacities have been shifted from Matsushita’s factory in Cardiff, United Kingdom, where television set production gradually ran out. In 2004, production lines had been modified, and LCD television set manufacturing was launched. Matsushita runs additional factory capacities in Slovakia (i.e., remote control, power supply units, and DVD recorder production) (BFAI, 2006a, Matsushita, 2008e, Panasonic, 2008b).

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Figure 66. New factory of IPS Alpha Technology Europe, s.r.o. (Czech Republic). Source: IPS Alpha Technology (Alpha, 2008b)

IPS Alpha Technology gradually strengthened its technological competencies and manufacturing capacities in Japan. In February 2008, the joint venture announced that it had started preparation of an 8th generation plant in Himeji City, Hyogo Prefecture, expected to commence in January 2010. Full capacity will reach approximately 15 million units per year based on a 32-inch panel. According to the press release of IPS Alpha Technology, the move to digital broadcasting, the launch of blu-ray discs, and other developments have driven the digitization of packaged media and higher picture quality worldwide. In particular, Japan, the U.S., and Europe will soon switch over completely to digital broadcasting; and in these markets, there is growing demand for flat-panel TVs as households replace their main TVs and even their second and third sets. Further expansion in demand is expected also in emerging markets such as BRIC (Brazil, Russia, India, China) and in Vietnam, where digital broadcasting infrastructure is going to be established (Alpha, 2008c).

5.7.4

Network structures

Matsushita made stepwise increases in its influence in the joint venture of IPS Alpha Technology and simultaneously agreed on further alliances. By the year 2000, Matsushita’s flat panel strategy was, among others, based on the following targets (McInerney, 2007: 279– 280): •

specialize in high-quality plasma display panels,

•

rapidly increase capacity so that the company would take 40 percent + of the worldwide market share by 2006,

•

quickly decrease the number of manufacturing steps to less than 50 percent in comparison to the plants’ manufacturing activities during the start-up period of the joint venture operation,

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launch every new product simultaneously worldwide, and

•

build alliances that compensate business areas where Matsushita is weak or where it seems hard to add value.

Matsushita, consequently, pursued the concept of alliance building in order to gain knowhow in business segments where the firm had weaknesses. On January 10th, 2007, Matsushita Electric Industrial Co., Ltd. and the diversified chemical group, Toray Industries, Inc. (Toray), announced plans to build a new plasma display panel manufacturing facility in Japan, the fifth plasma plant of their common joint venture called Matsushita PDP Company, Ltd. (MPDP). This facility enabled Matsushita to further increase its PDP production capacity, making it by far the largest PDP manufacturer in the world (Toray_Industries, 2008, Toray_Industries, 2006). To leverage concentration of manufacturing facilities to its advantage, MPDP decided to build the new plant in Amagasaki, Japan, near the existing fourth plant. The construction was scheduled to start in November 2007 and the first phase of production in May 2009 (Matsushita, 2007b, M2Presswire, 2000). With an investment of approximately 280 billion yen, the fifth plant will have a monthly production capacity of one million units (based on 42-inch panels) and the largest production capacity of plasma in the world (economies of scale). The investment efficiency of the new plant will be five times or greater than that of MPDP's first PDP plant. With its production capacity and cost competitiveness, Matsushita may lead the world market in large-screen, flat-panel plasma displays (Matsushita, 2007b, Matsushita, 2004). In February 2008, Toshiba left IPS Alpha Technology joint venture but still continued its stake (40 percent) in Toshiba Matsushita Display Technology, the second running LCD joint venture with Matsushita (Matsushita, 2008a). Instead of Toshiba, new venture partners were found. In March 2008, IPS Alpha Technology’s joint venture participants were Hitachi Display (50 percent), Matsushita (45 percent), and the Development Bank of Japan (5 percent). The main shareholders of Hitachi Display were its parent company Hitachi (50.2 percent), Canon (24.9 percent), and Matsushita (24.9 percent) (Matsushita, 2008a). Hitachi possessed a range of sophisticated liquid crystal-related technologies that included IPS technology for the joint venture, while Canon contributed its technological expertise in the small LCD (camera) segment (Matsushita, 2008a). Two months later, in April 2008, one of the leading plasma panel assemblers, Pioneer, announced that it would stop production of plasma displays, and instead procure those panels from Matsushita. Pioneer signed an alliance agreement with its former fiercest competitor in the plasma business, Matsushita. In essence, the two companies combined technologies from Pioneer's well-regarded, high-end Kuro line of plasma displays with Matsushita's existing Viera displays and NeoPDP technologies, combining Kuro's high contrast and slim designs with Viera's energy efficiency (Duncan, 2008). Through this cooperation, the development of the next generation PDPs would be further accelerated according to Ken Morita, managing executive officer of Matsushita. For Pioneer, which has fundamental technological know-how but weaknesses in profit performance, the

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alliance with Matsushita allows a considerable reduction of production costs, said Susumu Kotani, senior executive officer of Pioneer. Matsushita gained access to several patents held by Pioneer. In addition, Pioneer will transfer around 200 research and engineering staff as well as laboratory equipment to Matsushita (Digitalfernsehen, 2008). Both firms will continue to offer plasma television sets under their own brands that contain proprietary technologies. It is planned that Kuro will still be offered as a premium brand with high-end features and an associated high-end pricing segment. Matsushita and Pioneer expect that new Pioneer PDP products will begin reaching consumers in autumn of 2009. In the meantime, Pioneer is also cooperating with Sharp on future Kuro LCD displays (Duncan, 2008). As a consequence of shifting Pioneer’s operation to Matsushita, the company further strengthened its market position in the plasma business. Simultaneously, through the joint venture with IPS Alpha Technology, the firm significantly improved its LCD competence. The LCD technology was previously neglected by Matsushita due to its strategic focus on plasma technology. The narrowly knit network where IPS Alpha Technology and its most powerful shareholder, Matsushita, play a significant role is illustrated as below.

IPS Alpha Technology Co., Ltd. LCD Module Joint Venture 5%

45%

50%

Canon [24.9 %]

24.9% Development Bank of Japan 75% Matsushita Plasma Display Panel

Matsushita

Hitachi Display 100%

60% Toshiba Matsushita LCD Display JV

36.8%

Pioneer Plasma

JVC 25% Toray

Kenwood 17%

40% Toshiba

Hitachi [50.2 %]

19.9%

LG.Philips LCD, Poland

Figure 67. IPS Alpha Technology Co., Ltd. interlinked companies and their interlocking financial investment structures (status 05.2008). Source: Designed by the author based on various firm information sources

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5.7.5

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Summary

Although primary learning takes place within associated entities of the firm, it is enhanced by membership in a corporate network of horizontal or vertical business groups. The process of learning from other firms in corporate networks allows building capabilities and competencies regarding foreign market entry. In order to reduce the risk of market entry failure, these firms combine their core businesses in which they have stronger competitive advantages than locals do (Chang, 1995: 402). In this regard, IPS Alpha Technology and Matsushita represent an excellent case. Agreements between Japanese management representatives are built on trustful (aiming a ‘win-win’ partnership), long-term oriented and, therefore, usually very reliable relations. In Asia, one spoken word can sometimes easily have a higher value than several pages of a written contract. Bilateral agreements between Japanese firms allow the involved parties a relatively stable business forecasting, which is of vital importance, especially in technological, extremely short-lived industries like consumer electronics. When Matsushita launches a product market entry in Europe, it takes advantage of powerful Asian network structures, which include R&D and manufacturing expertise from Japanese alliance partners. In order to harmonize its worldwide marketing activities, Matsushita’s management recently decided on a single brand strategy. The brand Matsushita has been better known in Asia, particularly in Japan, because of Konosuke Matsushita, who founded the company in 1918. However, in Europe and America, the name Matsushita sounds rather unfamiliar and is even hard to pronounce for some of the local customers. Therefore, the firm used its brand ‘Panasonic’ in its overseas western markets (Matsushita, 2008c). Matsushita has been operating in Europe under its brand ‘Panasonic’ since 1962, when it established its first sales office in Hamburg, Germany (Matsushita, 2008e). From October 2008 onwards, the company unified its corporate design and changed the firm name from ‘Matsushita Electric’ to ‘Panasonic Corporation’. This emphasizes the firm’s efforts towards a powerful brand building that is necessary for further successful penetration of western markets in the future (Matsushita, 2008d, Panasonic, 2008a).

6

Towards a Time-based Network Approach

6.1

General Industry Networking Intensity (Industry Perspective)

As a result of the longitudinal empirical study of the television set manufacturing industry for the period 1990–2008, thirty-four network engagements such as relations between television set manufacturer and relations between display supplier (e.g., LCD or plasma modules) and television set assembler, have been discovered and evaluated. Networking engagements at earlier manufacturing stages (e.g., glass supplier and LCD module manufacturer) are not counted. Within the project, strategic alliances and joint ventures, established in order to secure a strategically important component supply, or to join research and manufacturing resources with corresponding financial engagement (e.g., establishment of joint manufacturing capacities) have been evaluated. Ordinary contractual relations concerning the mutual supplying of electronic components, which is also intense in the electronics business, were not included, since they can be rapidly agreed upon or terminated. The formulated questions, q [1] and q [2] as listed in chapter 2 (empirical research targets), were the following. q [1]

Did the networking intensity of firms increase for the time period from the 1990s to 2008?

q [2]

Which factors influenced the momentum of networking intensity?

With reference to these questions, the following can be concluded. The first fundamental finding as a result of the study, is that the alliance networking intensity between 2000 and 2008 has significantly increased relative to the 1990s. Out of thirty-four bilateral networking engagements found in the course of the case study research, just four had been agreed to during the 1990s in comparison to thirty during the period from 2000 to 2008. The following factors may serve to explain the phenomenon of increased networking intensity in the television set industry.

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1. Research and development (R&D) The cathode ray tube-based television set manufacturing dominated the industry during the 20th century up to the middle of the 1990s. Newly upcoming flat technologies due to their positioning at the early stage of the product life-cycle had performance weaknesses relative to the mature color picture tube technology. Public viewing channels as, for example, in Germany plan to launch the high definition television (HDTV) standard in 2010. HDTV is important to improving the picture performance of flat panel television sets. Moreover, flat panel LCD and plasma technologies, each of which have technological strengths and weaknesses, compete with each other. It seems that LCD technology may win the technological battle in the long run. Additionally, there is the threat of another technological substitution because it is expected that the new OLED technology will replace LCD and plasma in the future. Thus, market forecasts in the television set industry have been and will remain uncertain, which results in a fundamental incentive for risk sharing between partner firms through alliance agreements. The bundle of R&D resources allows mutual exchange of know-how and helps to increase the speed of product developments. 2. Investment and operation costs The establishment of display module factories involves enormous investment costs. For instance, the new ‘generation-10’ LCD factory of the Sharp and Sony joint venture at Osaka, Japan, will cost USD 3.56 billion of which Sony will contribute USD 926 million. The majority part will be paid by Sharp (HeiseOnline, 2008). The amount is several times higher than building a color picture tube factory and, consequently, confronts the investing firms with a considerable risk, particularly in the high price, competitive electronics markets. Alliance agreements provide an opportunity to share the danger of wrong investments among the partners. 3. Strategic component supply Consumer electronics is a seasonal business. While television set sales in Europe tend to be low between May and August, relatively high sales in winter, particularly from November to February, usually cause material shortages on the television set manufacturers side. Thus, alliance partner firms meet their demand through common component procurement. New products need to be launched globally because competitors may have products at a similar stage of development and also will start marketing and sales activities. Being the first on the markets serves an innovator’s image and provides first-mover advantages. Alliance partners can share their distribution channels, which increases the speed of market launch and volume of sales. Access to the end consumer through the alliance partner network provides direct market information (e.g., design preferences of the local customers). Through joint ventures, the partner firms take advantage of strong regional brands of the participants. For example, TCL China uses the valuable Thomson brand for its television set products in Europe and RCA in the U.S.A. 4. Industry standards The introduction of common industry standards, which is of vital importance in electronics (e.g., HDTV and ‘blu-ray technology’), is easier when partner firms cooperate. Instead of

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199

single firms, ‘groups of allied partner firms’ compete with each other to become the leading industry standard. For example in 1979, Philips started to join its research and development efforts with Sony for the standardized development and introduction of the ‘world audio disc’. The cooperation between Philips and Sony was continued in 1992 (joint development of a DVD industry standard). However, the Sony and Philips partnership finally failed against the high-definition DVD standard of the rival alliance of Toshiba, Hitachi, Pioneer, JVC, Thomson, and Mitsubishi Electric. Matsushita, which supported Sony at the beginning, later joined the rival alliance in the technological battle. In 2008, the alliance group initiator, Sony, with its ‘blu-ray system’ won the competition against its Japanese rival, Toshiba, which was previously the leading firm in developing the high definition DVD standard (WeltOnline 2008; Sony 2008a). The examples above belong to the audio-video segment in the electronics business. However, concerning the setting of new standards in the television set industry, for the research study period 1990–2008, there was no significant firm network coalition found that explicitly attempted to introduce a new rule against another affiliation of enterprises. Cathode ray tube, LCD, and plasma television sets and the corresponding manufacturing firms compete with each other in the fields of picture performance, price, service, product features and design (e.g., Ambilight by Philips).

6.2

Network Systematization

6.2.1

Strategic resources for future competition

Research outcomes from the field interviews of industry experts The research targets of this publication aim to further develop the network concept, which somehow tends be rather general, towards a more systematized and time-based approach. According to the RBV, a firm gains competitive advantage not only due to its position in the value chain within a certain industry but also because of its relationship to competitors, suppliers, and customers, and thus, through being embedded in industry networks. Competitive strengths are particularly derived from the firm’s resources and the ability to absorb and integrate ‘external resources’ through relationships with the market environment (Fahy 2002: 62; Mathews 2002: 222; Wernerfelt 1984: 171; Porter 1999: 70–78; Penrose 1995: 77). Asian consumer electronics enterprises successfully expanded their market positions in Europe, while their local competitors lost importance with regard to their ability to develop innovative products, such as flat display television sets. In order to reflect critically and to verify the results of the case studies, which are mainly based on a longitudinal content analysis of corporate data (e.g., annual reports and official firm press releases), one Internet-based and fifteen face-to-face interviews with industry experts were carried out in addition in Germany and South Korea between July and September 2007. The field interviews supplied further valuable insights concerning the television set

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industry and the relevant networking activities of the involved firms. The interview results also serve as a kind of control variable and, thus, help to interpret correctly the contents of the annual reports and press releases concerning the firms’ joint venture and alliance activities because the corporate data were mainly collected from secondary studies. Among other things, the interview outcomes of industry experts aimed to discover general resource strengths and weaknesses of European and Asian enterprises that influence a firm’s individual networking targets. The semi-structured questionnaire had a total of ten questions. In accordance with the major research questions as formulated in chapter 2 (empirical research targets), the interviewees were asked these questions. q [3]

What strategic resources should a company in the electronics business develop in order to survive in future competition?

The respondents commented as follows. Cost competitiveness is very important. Firms need to differentiate from others through unique innovative products. Thus, a firm has to find the needs of the customer for their product developments. Speed is the key (Glowik, 2007h). A firm should aim to become number 1 in the development of new technologies. Then you can set the industry standards. Production cost and efficiency are very important too. Thus, the combination of technological leadership and cost efficient manufacturing is the best (Glowik, 2007e). The ability to forecast current and future technological trends belongs to the key potentials for a firm. Make quick decisions and actions. Japanese firms intensively cooperate; they share the risk and combine their mutual strengths for future competition (Glowik, 2007j). Key potentials are cost competitiveness, number 1 technology, and the productivity of mass production (Glowik, 2007g). Technology, new ideas, productivity control, cost effectiveness, and innovation knowledge (Glowik, 2007d). Technological leadership and business performance are crucial issues. A joint venture should be agreed upon with the number 1 firm in the industry. Partner weaknesses cannot be compensated through accumulating them in a joint venture (Glowik, 2007b). A former manager of Thomson who temporarily worked in the TCL-Thomson joint venture described strengths and weaknesses of Asian and European firms in the electronics industry. Asian firms have a low cost base for R&D, purchase, and production. Cost control, innovation, and company cultures are important to survive in the future competition. European-based firms have cost disadvantages but strengths through good knowledge and experiences with regard to international business constraints (Glowik, 2007i).

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201

The interviewees repeatedly used expressions such as cost competitiveness, productivity, innovation, and new technologies when they described potentials for a firm’s business success in the electronics industry. Therefore, a proposition has been formulated that the majority of firms because of the superior importance in worldwide competition aim to optimize their manufacturing costs and/or research and development. Supposing that firms cannot generate the proper resources internally, they may search for opportunities to get involved in a bilateral network engagement in order to compensate for manufacturing and/or R&D resource constraints.

6.2.2

Deduction of firms’ networking targets

Research outcomes from the case studies As a result of the content analysis of the firm cases of Samsung, Sony, Sharp, LG Electronics and Philips, TCL China, and Matsushita (Panasonic), the next step is to discover and, if possible, to categorize major networking targets of these firms. Within the study framework, a target, as formulated in chapter 2 (empirical research targets), has been to discover whether the empirical results allow for a systematized strategic grouping. q [4]

Firms’ networking targets differ, but might they be categorized into segments such as manufacturing cost, research and development, and other potential categories?

The empirical data related to the longitudinal case study research involved the analysis of bilateral network agreements in the television set industry in the form of joint ventures or strategic alliances that existed during the period 1990–2008. In the first step, primary bilateral network agreement objectives based on various kinds of information sources such as company balance sheets and appropriate publications (e.g., press releases and annual reports) were collected and filtered. In the second step, building on the first step, firms’ bilateral networking targets were evaluated. It was found that networking incentives naturally differ, but these aims are also not very heterogeneous as indicated by content analysis of the strategic alliance and joint venture agreements. In accordance with the field interview outcomes, firms doing business in the television set industry search for network opportunities for bundling their resources in order to reduce the manufacturing costs and/or to combine their R&D assets. A content analysis of the firm documents concerning joint venture and alliance activities, such as those documents found on the world-wide-web, resulted in these exemplary findings: •

Sharp (2004): Loewe and Sharp agree on the enhancement of LCD TV collaboration and Sharp's additional investment [online]. [cited 13.08.2008]. Source: Available from World Wide Web: http://hiddenwires.co.uk/resourcesnews2004/news20041215-05.html.

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Matsushita (2004): Panasonic and Toray to build world's largest PDP plant in Japan [online]. [cited 15.2.2008]. Source: Available from World Wide Web: http://irsite.panasonic.com/relevant/en040518-3/en040518-3.html.

•

TCL (2004d): Press Release, TCL and Thomson -- Finalization of other definitive agreements and dispatch of shareholders` circular relating to the establishment of TTE Corporation [online]. [cited 15.4.2008]. Source: Available from World Wide Web: http://www.tclhk.com/tclhk/admin/upload/ir/press/ep0462.pdf.

•

Sharp (2008c): Sharp and Toshiba to form alliance in LCD and semiconductor businesses [online]. [cited 09.09.2008]. Source: Available from World Wide Web: http://sharp-world.com/corporate/news/071221.html.

The empirical research project phase contained filtering of key words mentioned in the relevant corporate documents, which described the bilateral networking ambitions. As a result of the content analysis and the corresponding research outcomes, it can be deduced that firms in the television set industry agree on bilateral networking in order to strengthen their competitive position in the market through cooperating in the following target segments: 1. strategic component supply; 2. joint R&D; 3. shared R&D, manufacture, and distribution; and 4. others. The first bilateral network incentive, ‘strategic component supply’, represents a rather loose relation between firms usually without mutual financial engagement. The main aim is to secure a stable supply/sales and, eventually, to reduce costs through technically adjusted and standardized components. The second type, ‘joint R&D’, involves a higher engagement of the cooperating firms in the form of running joint laboratories, exchanging engineers, and common use of intellectual property rights such as patents. The most intensive form of cooperation is the third level, ‘shared R&D, manufacture, and product distribution’, which usually entails fundamental financial, organizational, managerial, and human resource involvement of the participating firms (e.g., establishment of a common manufacturing plant). Opposite to the first type, this form of cooperation should necessarily be long-term oriented. Bilateral network agreements which can not be placed in categories 1–3 are assigned to the fourth category, ‘others’. The following sections serve to provide a quantified firm-specific bilateral network preference view based on the four-segment structure described above. The network intentions of the firms, which have been introduced in the previous case studies, will be evaluated in the following order:

6.2 Network Systematization

6.2.3

203

•

Sharp,

•

Matsushita,

•

TCL China,

•

LG Electronics and Philips (and their cathode ray tube and LCD joint ventures), and

•

Samsung,

•

Sony.

Sharp

The Japanese Sharp cooperation, which represents a pioneer in LCD panel development and manufacture, agreed to twelve networking relations with other enterprises in the form of joint ventures (with mutual capital engagement) and alliances (without mutual financial engagement) as well as one foreign direct investment of capital ownership (Loewe AG in Germany, 2002). These agreements were found for the period between 1990 and 2008 (the first agreement during the 1990s occurring in 1995). One of the most important projects for the joint development and manufacture of LCD modules has recently been established between Sharp and Sony in 2008. In the course of studying the networking activities of Sharp, it was found that in 2005, Fujitsu transferred its complete LCD research and development (including patents and engineers) and manufacture and product know-how to its former competitor, Sharp. This represents a new dimension in the meaning of ‘alliance’. Before a foreign enterprise gets access to the know-how of Japanese firms through acquisition, the firms forge a ‘strategic cooperation’, which is in reality rather a friendly takeover. While the surviving firm (here Sharp) receives technical competence (e.g., in the form of patents, manufacturing capacities, and engineers’ expertise), sensitive knowledge remains at home; and the competitiveness of Japanese enterprises is further strengthened in the world markets. This idea is rather in contrast to Porter, who claims in his ‘diamond model’ that the competitive strengths of an industry in the home market are a result of market forces and intense competition. Enterprises should form alliances with firms from other nations to gain access to their strengths (Porter, 1990: 14). The illustration below summarizes the networking activities of Sharp and the firm’s cooperation targets (alliance mission).

204

Alliance Partner

6 Towards a Time-based Network Approach

Foundation

Alliance Mission

Sharp (Japan) Wuxi (China)

1995

Shared R&D, manufacture, and sales of LCD’s

Sharp (Japan) Sony (Japan)

1996

Joint R&D of large-screen flat panel displays

Sharp (Japan) Pioneer (Japan)

2000

Joint R&D for next generation digital products

Sharp (Japan) Sanyo (Japan)

2001

Joint R&D for consumer home appliance

Sharp (Japan) Tohoku-Pioneer (Japan)

2001

Shared R&D, manufacture, and distribution of TFT substrates for organic displays

Sharp (Japan) Loewe AG (Germany)

2002

Shared R&D, manufacture, and distribution of LCD television sets based on Sharp‘s module supply

Sharp (Japan) Fujitsu (Japan)

2005

Transfer of complete LCD resources to Sharp Shared R&D, manufacture, and distribution

Sharp (Japan) Chungwha (Taiwan)

2006

Strategic component supply to Chungwha, Taiwan

Sharp (Japan) Jabil Circuit Inc. (U.S.A.)

2007

Strategic component supply

Sharp (Japan) Orion (Japan)

2007

Strategic component supply

Sharp (Japan) Toshiba (Japan)

2008

Joint R&D for LCD and semiconductor business

Sharp (Japan) Sony (Japan)

2008

Shared R&D, manufacture, and distribution of LCD modules

Figure 68. Sharp’s alliance partner, year of foundation, and alliance mission; television set industry (1995–2008). Source: Author, based on various firm-related information sources

6.2 Network Systematization

205

As a result, Sharp’s cooperation targets can be specifically segmented and quantified as follows: 1. Strategic component supply

[n=3]

2. Joint R&D

[n=4]

3. Shared R&D, manufacture, and distribution

[n=5]

4. Others

[n=0] Total [n=12]

Sharp has kept a leading position in the LCD flat panel business for years. The firm gave up the manufacture of mature cathode ray tube sets long before its competitors. Sharp never entered the plasma business. The Japanese firm, consequently, follows a niche market strategy in LCD business. Thus, the majority of the firm’s networking activities target intensified research and development in the field of LCD. Obviously, the enterprise is not afraid of any threat of losing technological know-how to one of the cooperating partner firms. It can be assumed that the accumulated experience gained from various previous cooperative agreements enables Sharp not to surrender sensitive and advanced technological knowledge to others. Sharp attaches great importance to close and long-term oriented relations with component supplier and service providing firms (logistics). The case of Poland, where Sharp set up an LCD module factory in 2007, demonstrates that a number of Japanese suppliers and logistics companies accompanied Sharp abroad and have settled in Poland (‘follow the customer’). Sharp does not penetrate the European market alone but in a network with other Japanese enterprises. It can be concluded that Sharp agrees to bilateral networking engagements in order to strengthen its competitive position mainly through intensified R&D activities with partner firms (e.g., Sanyo and Pioneer) and shared research, manufacture, and distribution (e.g., Sony and Fujitsu) in the LCD market segment. Strategic component supply agreements are less represented (e.g., Orion and Chungwha). Sharp’s brand image in Europe is rather weak; thus, the investment at Loewe opened new distribution channels for Sharp’s LCD modules, assembled in Loewe’s television sets and sold at much higher prices than the television set products of Sharp (Karmann, 2007). Moreover, the investment at Loewe gives Sharp the chance to learn from Loewe’s marketing expertise in the European markets.

6.2.4

Matsushita (Panasonic)

The Japanese enterprise, Matsushita, has been concentrating since the 1990s on the plasma technology. However, the market growth of LCD television sets has been significantly higher than plasma TVs in recent years. Thus, Matsushita was behind its competitors, such as Sharp or Toshiba, in research and development as well as in building manufacturing capacities in the LCD business field. The Japanese enterprise overcame this disadvantage through

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6 Towards a Time-based Network Approach

intensive network alliance activities, for example with Toshiba and Hitachi. Toshiba and Matsushita had cooperated previously in the cathode ray tube business. In other words, they can look back on a long networking tradition and accumulated business experience. Based on the case study outcomes, it can be concluded that the alliance agreements between Matsushita and Toshiba rather resemble a ‘project management’. Both firms established a cathode ray tube business joint venture, which ended because the market is no longer there. However, the cooperation was linked to a new and different project in the LCD business, which resulted in the founding of the joint venture, ‘IPS Alpha Technology’. A long-term oriented cooperation provides better knowledge about the partner and develops mutual trust. The case of the LCD module manufacturing joint venture, ‘IPS Alpha Technology’, emphasizes how Matsushita shares the foreign direct investment risk with other Japanese firms. A complex interlocking capital structure of Matsushita, Hitachi, Canon, Toray, Toshiba, JVC, Pioneer, and even the ‘Development Bank of Japan’ provides the capital basis for the LCD module plant, ‘IPS Alpha Technology’, which has been established in the Czech Republic (market entry through foreign direct investment in Europe). As was found for the case study research regarding Sharp and Fujitsu in the LCD business, the former competitor, Pioneer, transferred its complete plasma operations to Matsushita. It can be concluded that Japanese firms do not intensively cooperate only in R&D, strategic component supply, or shared manufactures to increase production efficiency. Japanese firms lift the meaning of ‘alliance’ to another level. When one Japanese firm faces severe business difficulties that may end up in bankruptcy and/or takeover by a foreign enterprise within the framework of an ‘alliance’ agreement, the whole business operation is transferred to another Japanese firm, which represents in the case of Sharp (LCD) and Matsushita (plasma) the corresponding market leaders, and this strengthens the industry competitiveness on a national level. Matsushita’s major networking activities are summarized and illustrated below.

6.2 Network Systematization

207

Alliance Partner

Foundation

Alliance Mission

Matsushita (Japan) Thomson (France)

2001

Strategic component supply of cathode ray tubes

Matsushita (Japan) TCL (China)

2002

Strategic component supply of cathode ray tubes

Matsushita (Japan) Toshiba (Japan)

2003

Shared R&D, manufacture, and distribution of cathode ray tubes

Matsushita (Japan) Toshiba (Japan) Hitachi (Japan)

2004

Shared R&D, manufacture, and distribution of LCD modules

Matsushita (Japan) Toshiba (Japan)

2006

Shared R&D and manufacture, and distribution of LCD and OLED’s

Matsushita (Japan) Toray (Japan)

2007

Shared R&D and manufacture, and distribution of Plasma panels

Matsushita (Japan) Pioneer (Japan)

2008

Shared R&D, manufacture, and distribution in Plasma business

Matsushita (Japan) Japan Development Bank Hitachi (Japan)

2008

Shared R&D, manufacture, and distribution in the Czech Republic (LCD module)

Figure 69. Matsushita’s alliance partner, year of foundation, and alliance mission; television set industry (2001– 2008). Source: Author, based on various firm-related information sources

Matsushita has been involved in twelve bilateral cooperation agreements. The main alliance incentives of Matsushita can be quantified as follows. 1. Strategic component supply

[n=2]

2. Joint R&D

[n=0]

3. Shared R&D, manufacture, and distribution

[n=6]

4. Others

[n=0] Total

[n=8]

It can be concluded that Matsushita searched for alliance opportunities in recent years in order to further strengthen its leading competitive position in the plasma markets. The ‘ab-

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6 Towards a Time-based Network Approach

sorption’ of the former strong competitor in plasma technology, Pioneer, significantly changed the competitive environment in the television set industry. The technology transfer helped to ensure that strategic knowledge and important manufacturing resources are bundled and remain in another Japanese firm. Furthermore, networking activities of Matsushita had been procured to speed up the accumulation of technological expertise in the LCD business, where the firm was at a disadvantage relative to its competitors such as Sharp. Concerning Matsushita’s market entry strategy in Europe, another important joint venture has been established in order to share the foreign direct investment risk of the LCD module plant operation of ‘IPS Alpha Technology’ in the Czech Republic.

6.2.5

TCL China

TCL China, relative to Japanese and Korean electronics firms, rather represents an international latecomer in the television set industry. Therefore, the primary strategic objectives of TCL are focused on reducing its technological lag relative to its competitors and to accelerating international market penetration with its products. TCL China did not intensively cooperate with other electronics firms in the 1990s. As a result of the national government order that stressed that Chinese companies should internationalize (‘go global strategy’), TCL China has strengthened fundamentally its networking efforts (Deng, 2006: 72–74). The following figure illustrates the network building activities of TCL China in recent years.

Alliance Partner

Foundation

Alliance Mission

TCL (China) Matsushita (Japan)

2002

Strategic component supply

TCL (China) Thomson (France)

2004

Shared R&D, manufacture and distribution of cathode ray tube television sets

TCL (China) LG.Philips LCD

2006

Strategic component supply

TCL (China) Samsung (South Korea)

2007

Shared R&D, manufacture, and distribution of LCD modules in China

TCL (China) Philips (The Netherlands)

2008

Strategic component supply

Figure 70. Bilateral network agreements of TCL China, the year of foundation and alliance mission during 2002 and 2008 (television set industry). Source: Author, based on various firm-related information sources

6.2 Network Systematization

209

As a result, TCL’s cooperation targets can be specifically quantified in the following way. 1. Strategic component supply

[n=3]

2. Joint R&D

[n=0]

3. Shared R&D, manufacture, and distribution

[n=2]

4. Others

[n=0] Total

[n=5]

Three of five bilateral network relations agreed to in recent years by TCL China focus on strategic component supply. The most important and resource affecting joint venture ever made by TCL China regarding the television set industry was made with the French company Thomson. It contained shared R&D, manufacture, and distribution operations of cathode ray tube television sets and started operations in 2004. However, the joint project was terminated within a relatively short time, just three years later in 2007. Nevertheless, the venture cooperation supplied TCL with a number of valuable patents, access to European and the U.S. markets including established sales networks by Thomson, and the temporary allowance to use valuable trademark rights, such as RCA and Thomson. TCL’s brand portfolio has been further expanded through the acquisition of Schneider. TCL China can accumulate managerial, marketing, and technological know-how through learning from its international operations and may use the time to develop its own brand, ‘TCL’. In comparison with Sharp and Matsushita, TCL shows fewer networking activities that focus to some extent on strategic component supply. The upcoming international business involvement may result in intensified cooperative relations of TCL with other firms in the global markets. The recent joint venture agreement with Samsung, which targets shared R&D, manufacture, and distribution of LCD modules, is one example. The joint venture with Thomson focused on the mature color picture tube technology, where the markets disappeared. The latest joint venture with Samsung concentrates on the LCD module technology, where the markets are expected to continue to grow in the future. This may serve as another example of how fast TCL China is learning.

6.2.6

LG Electronics and Philips (IJVs)

Bilateral network engagements from the perspective of LG Electronics In 1999, the South Korean LG Electronics and the Dutch firm, Philips, established an international joint venture that focused on the LCD business; and in 2001, a second venture was founded, which operated in the cathode ray tube market. For both joint ventures, it was agreed that R&D, manufacture, and distribution of final products would be shared between the partner firms. LG.Philips LCD and LG.Philips Displays and TCL-Thomson Electronics represent the most important European-Asian joint ventures in the television set industry for the research period from 1990 until 2008.

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6 Towards a Time-based Network Approach

In case of LG.Philips LCD and LG.Philips Displays, the venture business operations located at one stage of the industry chain (display module manufacture) had a very influential impact for the parent firms (LG Electronics and Royal Philips), which competed in the next production stage of the vertical industry chain (television set assembly). This constellation (partner firm in one stage and competitor in the next phase) was a novelty in the television set industry until this time. It reflected the increasing network complexity in the industry. LG Electronics incrementally took over the decision power and could renovate its weak capital with the help of the financial investment by Philips. The venture operations for the latter firm turned out to be rather unsuccessful. LG.Philips Displays went bankrupt in 2006, and Philips has reduced its stake from equal capital share ownership to 13.2 percent at LG.Philips LCD per March 2008. LG Electronics has mainly profited from the joint venture by financial support and gaining access to new European distribution channels supplied by Philips. LG Electronics held the joint venture majority of 37.9 percent in October 2007 (LG.PhilipsDisplays, 2006b, LG.PhilipsLCD, 2008e). In 2007, Toshiba invested 19.2 percent in the Polish LCD module plant run by LG.Philips LCD, which helped to stabilize further the financial basis of the Korean firm. The most recent fundamental agreement was signed with Skyworth (China) for joint LCD module research, manufacture, and distribution. The major networking activities of LG Electronics and LG.Philips LCD (renamed LG Display in 2008) for the period 1999–2008 are summarized below. Alliance Partner

Foundation

Alliance Mission

LG Electronics (South Korea) Philips (The Netherlands)

1999

Shared R&D, manufacture, and distribution of LCD panels

LG Electronics (South Korea) Philips (The Netherlands)

2001

Shared R&D, manufacture, and distribution of cathode ray tubes

LG.Philips LCD (South Korea) and TCL (China)

2006

Strategic component supply (LCD modules)

LG.Philips LCD (South Korea) and Toshiba (Japan)

2007

Shared R&D, manufacture, and distribution of LCD modules in Poland

LG.Philips LCD (South Korea) and HannStar (Taiwan)

2007

Strategic component supply (LCD modules)

LG Electronics (South Korea) and Samsung (South Korea)

2007

‘Information exchange’

LG Display (South Korea) and Skyworth (China)

2008

Shared R&D, manufacture, and supply of LCD modules

Figure 71. Bilateral network agreements from LG Electronics perspective for the period 1999 and 2008 (television set industry). Source: Author, based on various firm-related information sources

6.2 Network Systematization

211

Deriving from the scheme above, LG Electronics’ network targets can be segmented and quantified as follows. 1. Strategic component supply

[n=2]

2. Joint R&D

[n=0]

3. Shared R&D, manufacture, and distribution

[n=4]

4. Others

[n=1] Total

[n=7]

The data demonstrate that LG Electronics intends to establish shared R&D, manufacture, and distribution related agreements with other firms. LG Electronics focused on bilateral network relations with Philips, which started in 1999, and simultaneously has intensified its efforts towards Chinese and Taiwanese firms in recent years. The bilateral network relation of LG Electronics with Samsung in 2007 represents an exceptional one. It attempts to ‘exchange market information’ in order to better defend against the Japanese and upcoming Chinese/Taiwanese competition. Because this kind of relationship does not fit category 1, 2, or 3, it was assigned to 4, ‘others’ (CDRinf, 2007). Bilateral network engagements from the perspective of Philips The analysis evaluates and quantifies the network intentions from Philips’ point of view, including the joint ventures with LG Electronics and the expanded networks through LG.Philips LCD. In addition to the network involvement of Philips and LG Electronics, the Dutch firm agreed to an LCD technology related R&D joint venture with the Japanese ‘Hosiden’ in 1997, which failed after a short time. In 2008, Philips agreed to a long-term strategic component supply contract with TCL China regarding television set assembly in Asia (Digitimes.com, 2008).

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6 Towards a Time-based Network Approach

Alliance Partner

Foundation

Alliance Mission

Philips (The Netherlands) and Hosiden (Japan)

1997

Joint R&D concerning LCD technology

Philips (The Netherlands) and LG Electronics (South Korea)

1999

Shared R&D, manufacture, and distribution of LCD panels

Philips (The Netherlands) and LG Electronics (South Korea)

2001

Shared R&D, manufacture, and distribution of cathode ray tubes

LG.Philips LCD (South Korea) and TCL (China)

2006

Strategic component supply

LG.Philips LCD (South Korea) and Toshiba (Japan)

2007

Shared R&D, manufacture, and distribution in Poland

LG.Philips LCD (SouthKorea) and HannStar (Taiwan)

2007

Strategic component supply

Philips (The Netherlands) and TCL (China)

2008

Strategic component supply

LG Display (South Korea) and Skyworth (China)

2008

Shared R&D, manufacture, and distribution of LCD modules

Figure 72. Bilateral network agreements from Philips’ perspective for the period 1997 and 2008 (television set industry). Source: Author, based on various firm-related information sources

The bilateral network engagements of Philips can be segmented and quantified as below: 1. Strategic component supply

[n=3]

2. Joint R&D

[n=1]

3. Shared R&D, manufacture, and distribution

[n=4]

4. Others

[n=0] Total

[n=8]

6.2 Network Systematization

213

The long-term R&D relationship of Philips and Sony is not counted because it concerns the DVD business field and, thus, does not directly refer to television set manufacturing.

6.2.7

Samsung

For the case study research period beginning in 1990, it was found that Samsung agreed to cooperate with the Japanese NEC for joint R&D activities in the field of OLED, and one project each with Sony (Japan) and TCL (China) for the shared R&D, manufacture, and distribution of LCD modules. The agreement between Samsung and LG Electronics as already explained above (‘information exchange’) was placed in the ‘others’ category (CDRinf, 2007). The recent joint venture established in 2008 of Samsung SDI and Bosch has not been counted because it is not directly linked with the television set business (Samsung, 2008b).

Alliance Partner

Foundation

Alliance Mission

Samsung (South Korea) NEC (Japan)

2001

Joint R&D concerning OLED technology

Samsung (South Korea) Sony (Japan)

2004

Shared R&D, manufacture, and distribution of LCD modules

Samsung (South Korea) LG Electronics (South Korea)

2007

‘Information exchange’

Samsung (South Korea) TCL (China)

2007

Shared R&D, manufacture, and distribution of LCD modules

Figure 73. Bilateral network agreements of Samsung, the year of foundation, and alliance mission (television set industry 2001–2007). Source: Author, based on various firm-related information sources

As a result, Samsung’s cooperation targets can be categorized as follows. 1. Strategic component supply

[n=0]

2. Joint R&D

[n=1]

3. Shared R&D, manufacture, and distribution

[n=2]

4. Others

[n=1] Total

[n=4]

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6 Towards a Time-based Network Approach

Because of the relatively low numbers it is difficult to draw a clear trend that describes Samsung’s networking target preferences. Altogether, it can be assumed that Samsung does not extensively search for opportunities to establish partnerships with external firms that operate in the television set and display component industry. Samsung, relative to its main competitors from Japan (Sharp and Matsushita), China (TCL), and its rival firm, LG Electronics from South Korea, shows less networking activities and obviously attempts to compete alone in the television set market.

6.2.8

Sony

In 1996, Sony and Sharp joined their R&D concerning large-screen flat panel displays. Sony established with Samsung (2004) and Sharp (2008) a separate joint venture for shared R&D, manufacture, and distribution of LCD module panels (Samsung, 2008c, Sony, 2006b, DisplaySearch, 2008e). For Sony, the alliances with Sharp and Samsung were of vital importance for the firm’s future in the television set business. The LCD market dynamics had been underestimated by the Japanese enterprise, which faced technological lag and material shortages in 2004, while the LCD market started its boom. Through the common research and production with Samsung and Sharp, Sony acquired access to LCD modules, which were urgently needed for its own television set production.

Alliance Partner

Foundation

Alliance Mission

Sony (Japan) Sharp (Japan)

1996

Joint R&D concerning large-screen flat panel displays

Sony (Japan) Samsung (South Korea)

2004

Shared R&D, manufacture, and distribution of LCD modules

Sony (Japan) AU Optronics (Taiwan)

2007

Strategic component supply (LCD panels)

Sony (Japan) Sharp (Japan)

2008

Shared R&D, manufacture, and distribution of LCD modules

Figure 74 Bilateral network agreements of Sony, the year of foundation, and alliance mission (television set industry 1996–2008). Source: Author, based on various firm-related information sources

6.3 Firm’s Bilateral Networking Intensity (Firm Perspective)

215

Compared to other firms such as Sharp, but similar as Samsung, Sony indicates relatively less networking activities as summarized below.

1. Strategic component supply 2. Joint R&D 3. Shared R&D, manufacture and distribution 4. Others Total

[n=1] [n=1] [n=2] [n=0] [n=4]

Except AU Optronics (Taiwan), Sony has not established any futher bilateral network agreement with either Chinese or another Taiwanese firms.

6.3

Firm’s Bilateral Networking Intensity (Firm Perspective)

6.3.1

A quantification of bilateral networking engagements

The next research aim based on the analysis of the case studies is to evaluate the bilateral networking intensity of the firms, which allows the derivation of general statements to further develop the network concept. In accordance with the research questions formulated in chapter 2 (empirical research targets) in the study framework, the following question should be answered. q [5]

Firms’ bilateral network intensity differs. Which results deliver a quantification of the networking intensity of the case study firms in relation to each other?

First, the total number of network engagements of each firm was investigated. Interestingly it was found that Sharp and Matsushita, each of them the technological market leader in their segments, LCD (Sharp) and plasma (Matsushita), also indicate the highest number of bilateral network relationships with other firms. On the other hand, it seems hard to conclude based on the research outcomes that Japanese firms doing business in the television set industry have generally, or in any particular case, a higher networking behavior than competitors from other nations. The Japanese Sony, for example, represents a case with relatively low networking activities of all tested firms. However, Sony does not hold the position of a technological market leader in the plasma and LCD business. Thus, the empirical research outcomes may allow the conclusion that Sharp and Matsushita, because of their intensive networking activities, and right partner selection, are able to gain a competitive advantage

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6 Towards a Time-based Network Approach

and successfully defend their leading market position in their respective technology. Obviously Sharp and Matsushita have developed managerial and organizational techniques that help to protect firm-specific intellectual know-how; and simultaneously, these firms have an ‘absorptive capability’ to gain missing, but strategically valuable expertise, from their partner firms, which in the end helps to secure their technological leadership in their market segments. The ranking based on the total number of network relationships looks like this.

Firm name Sharp Matsushita Philips LG Electronics TCL China Samsung Sony

Network engagements 12 8 8 7 5 4 4

Rank 1 2 2 3 4 5 5

Figure 75. Network agreements and firm rank (television set industry for the period 1990–2008). Source: Author

It can be concluded that the firms examined in the case study research are embedded to some large extent in networking activities. Of course, the number of activities varies among the firms. As mentioned above, while Sharp and Matsushita are heavily involved in networking, firms such as Sony and Samsung indicate rather less connected positions. At the same time, TCL China has particularly increased its network connection in the last couple of years compared to the 1990s. If the firm continues its network activities in the future, the Chinese will move up in the ranking soon. Second, the next step in the process is to analyze the type of network engagement of each firm. Following the segmentation of network relations into ‘strategic component supply’, joint R&D’, ‘shared R&D, manufacture and distribution’, and ‘others’, the analysis yields the comparison presented below of the enterprises examined in the empirical case studies.

6.3 Firm’s Bilateral Networking Intensity (Firm Perspective) Firm name

Others

Strategic component supply

Joint R&D

217

Shared R&D, Total network manufacture, engagements and distribution

Sharp

0

+

3

+

4

+

5

=

12

Matsushita

0

+

2

+

0

+

6

=

8

TCL China

0

+

3

+

0

+

2

=

5

LG Electronics

1

+

2

+

0

+

4

=

7

Philips

0

+

3

+

1

+

4

=

8

Samsung

1

+

0

+

1

+

2

=

4

Sony

0

+

1

+

1

+

2

=

4

Figure 76. Network engagements of the firms examined in the case studies for the research period 1990–2008. Source: Author

The empirical study delivers additional interesting results. The European-based firm, ‘Philips’, has been involved in eight bilateral networking agreements during the research period 1990–2008, which means that the enterprise is above the industry average. The R&D cooperation in the field of audio/video (DVD) of Philips with Sony is not considered since the empirical study concentrates on the television set industry. However, the Dutch firm has developed far less successfully than Sharp and Matsushita within the last few years. This leads to the conclusion that simply the number of networking activities may not be adequate to properly analyze factors for networking success; instead, a deeper view of the networking characteristics is necessary. In the following section, first, a weighted approach for the measurement of the networking intensity is introduced. Second, a time-based bilateral network model is introduced assuming that partners’ repositioning over time influences the business success or failure of the venture parties.

6.3.2

A weighted approach for the measurement of networking intensity

As a result of the case study research outsomes, instead of rather loose relations, such as in the form of ‘strategic component supply’, firms increasingly seek to establish joint research, manufacture, and distribution projects, which mean close firm connections and corresponding consequences for the network if the project fails. Therefore, it is assumed that the forms

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6 Towards a Time-based Network Approach

of bilateral network relations each have a fundamentally different impact for the firms involved. For example, ‘strategic component supply’ agreements can be initiated and terminated within a relatively short period of time and, thus, represent a rather disengaged form of relationship between firms. In contrast, ‘shared R&D, manufacture, and distribution’ usually has crucial resource consequences for the participating firms, and a project failure has severe effects on the financial performance of the partner firms. Consequently, the right partner selection is of vital importance. Therefore, within the research model, network weighting parameters were included that consider the gravity, which means the positive and negative consequences of the bilateral cooperation, for the firms involved. The bilateral network consequence parameter rankings ranged from rather low [0.2], moderate [0.4], severe [0.7], and very severe [0.9]. Analogous to the segmentation introduced in the previous chapters, the results that follow display the parameter rankings. 1. Others 2. Strategic component supply 3. Joint R&D 3. Shared R&D, manufacture, and distribution

[0.2] [0.4] [0.7] [0.9]

Following the processes of quantifying the network activities of the firms examined in the course of the case studies and the inclusion of the weighting parameters, the next step is to carry out an analysis that yields an index rate. The total index rate takes into account both the frequency of the network activities and the gravity of the selected network mode for each firm. For example, Sharp agreed to 12 bilateral relations divided among the networking categories as follows: ‘others’, 0; ‘strategic component supply’, 3; ‘joint R&D’, 4; and ‘shared R&D, manufacture, and distribution’, 5. The number of each network category is multiplied by the corresponding gravity parameter and the results allow the determination of the total index rate of each firm. The total index rate then allows the firms to be compared and ranked.

6.3 Firm’s Bilateral Networking Intensity (Firm Perspective) Firm name

Total Others network [0,2] quantity

Strategic Joint R&D component [0,7] supply [0,4]

219 Shared R&D, manufacture, distribution [0,9]

Total index rate

Sharp

12

0

+ 3*0.4=1.2 + 4*0.7=2.8 + 5*0.9=4.5

= 8.5

Matsushita

8

0

+ 2*0.4=0.8 +

0

+ 6*0.9=5.4

= 6.2

TCL China

5

0

+ 3*0.4=1.2 +

0

+ 2*0.9=1.8

= 3.0

LG Electronics

7

1*0.2 + 2*0.4=0.8 +

0

+ 4*0.9=3.6

= 4.6

Philips

8

+ 3*0.4=1.2 + 1*0.7=0.7 + 4*0.9=3.6

= 5.5

Samsung

4

Sony

4

0

1*0.2 + 0

+

0

+ 1*0.7=0.7 + 2*0.9=1.8

= 2.7

1*0.4=0.4 + 1*0.7=0.7 + 2*0.9=1.8

= 2.9

Figure 77. Total network index rates (television set display and set assembly) of the firms examined in the case studies. Source: Author

After including the network gravity parameters, the ranking of the firms within the comparative overview does not change fundamentally relative to the ranking based on the calculation of the quantity of network engagements. Sharp (quantity 12 / index rate 8.5) ranks at number one and Matsushita is second (quantity 8 / index rate 6.2). Both Japanese enterprises are primarily involved in ‘shared R&D, manufacture, and distribution networks’. Philips has been engaged in 8 agreements, which is in number equal to Matsushita, but has a lower index of 5.5 due to less ‘shared R&D, manufacture, and distribution’ engagements than Matsushita and, thus, clearly ranks at position 3. Philips is followed by LG Electronics, TCL China, Sony, and Samsung as the figure below illustrates.

Firm name Sharp Matsushita Philips LG Electronics TCL China Sony Samsung

Total Index Rate 8.5 6.2 5.5 4.6 3.0 2.9 2.7

Rank 1 2 3 4 5 6 7

Figure 78. Firm network activity ranking based on the total index rate. Source: Author

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6 Towards a Time-based Network Approach

As a reflection of the research outcomes in the table above, the overview below illustrates the network grid of the firms introduced in the case studies that represent major players in the television set industry worldwide. The illustration also visually describes the superior role in networking of Asian firms, particularly Sharp and Matsushita, in the electronics business. Relative to the market dominance of electronics firms from the Far East, the Europeans are greatly underrepresented and do not cooperate with each other. The thickness and the design of the arrow between the enterprises clarifies the type of network relation, which is segmented into ‘strategic component supply’, ‘joint R&D’, ‘shared R&D, manufacture, and distribution’ and ‘others’, as illustrated below.

Hitachi Thomson Samsung Toray

Matsushita

TohokuPioneer

TCL China

LG Electronics Philips

Pioneer Toshiba

Jabil

Sony

Sharp

Wuxi

Sanyo

Fujitsu

Loewe

Orion

AU Optronics

Skyworth

Chungwha

Bilateral Network Relation Strategic component supply Joint R&D Shared R&D, manufacture and distribution Others (‘exchange of information’)

Figure 79. Network grid of major network players operating in the television set industry (research status October 2008). Source: Author

6.3 Firm’s Bilateral Networking Intensity (Firm Perspective)

221

Based on the total index rate, it can be concluded that the LCD and plasma market leaders, Sharp and Matsushita respectively, are intensively involved in industry networks, while Philips, despite its relatively active networking, has significantly lost importance in the television set industry. Of course, the Dutch firm sells television sets and still belongs among the top brands in the European market. However, Philips’ involvement in R&D as well as in vertical manufacturing stages related to television set assembly has declined in recent times, which also reflects the firm’s strategy for increased outsourcing. The first joint venture of Philips with LG Electronics was established as an equity joint venture in 1999 (LG.Philips LCD). Over the years of the venture operations, Philips has continuously reduced its financial engagement and just held a joint venture stake of 13.2 percent per March 2008 (LG.PhilipsLCD, 2008e). The second joint venture, LG.Philips Displays, established in 2001, went bankrupt in 2006 (LG.PhilipsDisplays, 2006b). On the other hand, LG Electronics, which was in severe financial difficulties before the joint venture partnership with Philips was founded, has continuously strengthened its position during the venture operations. The Korean firm recovered financially and gained access to European marketing expertise as well as distribution channels through its partner firm, Philips. The third major joint venture, established in the television set industry in 2004 (TCL China and Thomson), was terminated in 2007. As a result, Thomson has been absorbed by TCL China, which significantly strengthened TCL China’s market position through additional trademark rights, several R&D centers around the world, and access to several patents. Therefore, it is assumed that network characteristics (e.g., partner firms’ joint venture aims, complementary resources, and cultural origins, etc.) fundamentally influence the network performance and business success. Furthermore, it is assumed that changes in the partner positioning in the bilateral network over time results in diversified business success of the parent firms for the network participants. This leads to the next research task as already introduced in chapter 2 (empirical research targets), which aims to answer the following question. q [6]

Is an identification of a network partner repositioning pattern over a period of time possible?

To pursue this research aim, in the next sections of this publication, a ‘time-based network repositioning model’ for bilateral relationship characteristics of ‘Japanese firms’ and ‘AsianEuropean firms’ is introduced and discussed; and the network success of both constellations is compared.

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6.4

A Time-based Network Repositioning Model

6.4.1

Intra-Japanese firm networks and partner repositioning over time

As found in the course of the case studies, Sharp and Matsushita show intensive network activities. However, it should be emphasized that the Japanese firms prefer network engagements with partners from their home country. In the case of Matsushita, a total of eight network engagements in the form of joint ventures or alliance agreements have been found within the research project. Among them, six agreements were signed with Japanese firms, one with a Chinese firm, and one with a European-based enterprise. Sharp has been involved in a total of twelve partnerships, among them eight commitments with other Japanese firms and one each with a Chinese, Taiwanese, German, and a U.S.-based firm. For Sony, four network relations were found, among them one with a AU Optronics (Taiwan), two with Sharp (Japan) and one with Samsung (South Korea). The network engagements of Japanese firms mainly focus on shared R&D, manufacture, and distribution of the partner firms. Major alliance targets are, for example, bundling technological know-how through joint research and development, and sharing investment risks concerning common manufacturing plants. The cases of Fujitsu, which handed over completely its LCD business to Sharp in 2005, and Pioneer, which transferred its complete plasma operations to Matsushita (Panasonic) in 2008, indicate that Japanese firms cooperate to bundle strategic resources in their home country. Avoiding the risk that technological know-how will be lost to foreign enterprises, the competitively weaker Japanese firms transfer their resources, particularly valuable R&D knowhow, including patents, to another Japanese firm through a ‘cooperative agreement’. ‘Alliances’ between Japanese firms seem to be used on purpose because this avoids the problem of a foreign firm taking advantage of know-how through the acquisition of a Japanese firm. European firms comparatively do not show such cooperative behavior. Similar to Taylor et al. (2000: 159–160), the results of the empirical case studies indicate that Japanese enterprises tend to maintain long-term oriented business relations. A Japanese firm can often cooperate on a number of common joint venture projects with one selected partner firm. If a joint venture is ended, because for example the market for the corresponding products is no longer there, the cooperation is continued in another project. Matsushita, for example, founded a joint venture with Toshiba in the area of color picture tube manufacture in 2003 (Matsushita, 2005, Matsushita, 2003). In 2006, after the previous cooperation was terminated and the production stopped because the color picture tube sales on the worldwide markets went down, a new joint venture was founded between the two Japanese firms for LCD and OLED technology (ToshibaMatsushitaJV, 2008). Matsushita agreed upon a joint venture with Hitachi in 2004 concerning shared R&D, manufacture, and distribution of LCD modules. The cooperation between Matsushita and Hitachi was ‘renewed’ and continued in 2008 (shared R&D, manufacture, and distribution of LCD modules in the Czech Republic). Sharp, for example, made an agreement with Sony in 1996 for the joint development of flat screen panels. In 2008, the joint project was ‘renewed’ when both Japanese firms started

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their common LCD panel manufacturing activities (DisplaySearch, 2008e). In 2000, Sharp agreed to an alliance with Pioneer for the joint development of ‘next generation digital products’. One year later, the cooperation was expanded through the alliance of Sharp and another joint venture with Tohoku-Pioneer targeting R&D, manufacture, and sales of substrates for organic displays (Sharp, 2007a). Joint ventures between Japanese firms follow a certain pattern that is characterized by the mutual wish of contingency over time to create a ‘win-win situation’. The long-term time horizon allows partner firms to build up mutual trust and helps to overcome the short-term venture difficulties that come up during the partnership. Experiences collected in one previous joint venture project improve organizational issues and the corresponding business performance of the next venture operations. Moreover, Japanese firms make sure the joint venture management does not operate separately and too independently. The management is integrated into the parent’s firm structure and long-term strategic plans. The long-term oriented business relations between Japanese firms mean that the partner firm relations are not interrupted when the venture project comes to an end. As found in the case study research outcomes, several Japanese bilateral network activities; in the television set industry, are transferred from one to another alliance project such as the case study outcomes of Sharp and Pioneer, Sharp and Sony, Matsushita and Toshiba, Matsushita and Hitachi illustrate. The joint venture lifetime, divided in process phases, of a cooperation between Japanese firms, can be described in the following way. 1. Main targets and characteristics in the initial phase: •

selection process of a suitable partner (e.g., from previous projects), longterm time horizon of the project;

•

project focus mainly on research and development to develop innovative and efficient technologies (horizontal link of partner firm activities such as their R&D and/or manufacturing departments);

•

exchange of engineers, patents, and licenses;

•

project embedded in the strategic concept and organization structures of the parent firms;

•

the same cultural background creates trust;

•

common understanding of long-term project perspective;

•

philosophy of ‘win-win’ situation; and

•

‘we-sense’ against external competitors (outside Japan) as a vital part of the joint venture culture.

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6 Towards a Time-based Network Approach

2. Main targets and characteristics in the mature phase: •

R&D focus to improve cost competitiveness and manufacturing efficiency (e.g., change of component material and redesign of manufacturing processes);

•

joint forecasting of new market potentials and future technologies;

•

joint activities concentrate on the partner firm’s realization of economies of scale and scope;

•

project run-out if the product life-cycle ends (e.g., color picture tubes);

•

possibly transfer of complete operations of one firm to the partner firm (e.g., Pioneer-Matsushita and Fujitsu-Sharp); and

•

evaluation of opportunities to continue the cooperation in the future based on current market forecasts.

3. Main targets and characteristics in the transformation phase: •

joint resources, particularly R&D know-how and experiences during previous cooperations, are evaluated with regards to new venture potentials;

•

judgment of the partner firm’s ‘strategic fit’ for future projects;

•

conclusion to run-out current project; and

•

possibly continuation of joint activities and shift to a new project.

The long-term approach, similar cultural background and language skills, mutual trust through experience from previous joint projects, and the combining of mutual R&D resources serve as the basis for the competitive advantages in the global market of the Japanese firms in the television set industry. In the course of rapid expansion, Japanese firms had actively sought to promote their manufacturing advantages through ‘just-in-time’ (sequence) systems, total quality management, or ‘kanban’ organization (Chen, 2004: 169–170). It can be concluded that the Japanese firms have established a strong television set industry base with corresponding narrowly knit firm clusters at home. Stable relationships between firms and bundled R&D resources result in innovative, cost-competitive products with superior quality, which provide the basis for successful market entry activities in Europe and other regions around the globe (e.g., Sharp in LCD business and Matsushita in the plasma field). According to Porter’s diamond approach of internationalization, enterprises that are successful worldwide originate in one country. Firms, due to their industry environment, enjoy particularly favorable conditions in certain native countries, which allows them to gain a competitive advantage in other countries relative to resident enterprises (Porter 1990: 73–99). This is true in the case of Japanese firms doing business in the television set industry. Fur-

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225

thermore, Porter claims that the higher the competitive pressure at home, the more enterprises are forced to internationalize (Porter 1990: 108–109). However, as discussed above, Japanese firms tend to join their business operations before a foreign investor can take a competitive advantage through the acquisition of a Japanese firm (e.g., Pioneer-Matsushita and Fujitsu-Sharp). This somehow contradicts the philosophy of Porter because the intensity of competition tends to be reduced if Japanese firms protect their home markets from foreign investors in the manner mentioned above; nevertheless, they are driving the markets in consumer electronics. Larimo claims that international joint ventures between Japanese and Korean firms tend to be more stable than those established with Europeans (Larimo, 2007: 412). The outcomes of this study verify that Japanese joint ventures tend to be very stable. Within the study period 1990–2008, just two bilateral agreements between Korean and Japanese firms in the television set industry have been founded. The cooperation between NEC and Samsung goes back to 1969. At that time, NEC searched for low-cost production locations outside Japan. The wage level in South Korea, relative to Japan, was attractive, which encouraged NEC to set up operations on the Korean peninsula. This later resulted in the establishment of ‘Samsung Display Devices’. NEC delivered fundamental managerial and technological input. In 2001, the bilateral cooperation was renewed when Samsung and NEC agreed upon a new venture for the joint development of the OLED technologies (Samsung, 2007b). Another joint venture between Samsung and Sony, targeting shared R&D, manufacture, and distribution of LCD modules named ‘S-LCD’, was set up in 2004. Just a couple of years later, in 2008, Sony re-oriented its partnership focus to establish joint LCD module manufacturing with Sharp. Sony’s management representatives explained the increasing rivalry with Samsung in worldwide markets as the major reason for their re-orientation. A decade ago, it was hard to imagine that the traditional Japanese Sony with its powerful brand would fear the upcoming competition from the South Korean Samsung in such a way. For the other South Korean enterprise, LG Electronics, there has been no bilateral engagement found with a Japanese firm since 1990. Based on two cases (Samsung-NEC and Samsung-Sony), the case study outcomes of firms operating in the television set industry do not allow generalized comments concerning the stability of Korean-Japanese joint ventures. On the one hand, the Samsung-Sony joint venture was terminated within four years. On the other hand, the mutual engagement of Samsung and NEC has been successfully maintained for years. Nevertheless, the research outcomes can deliver conclusions regarding the stability of Asian-European network engagements in the form of joint ventures or strategic alliances as discussed in the next section of the book.

226

6.4.2

6 Towards a Time-based Network Approach

Asian-European firm network partner repositioning over time

Research outcomes from the field interviews of industry experts Following the idea of the RBV (compare section 3.7.2 of this book), resource differences have a fundamental impact on the competitive position in the worldwide markets of firms originating in Europe and Asia. In order to evaluate this issue more deeply, the interviewees in South Korea were requested to express their opinion on the following issue (compare question 7 of the interview questionaire in the appendix of this publication). Enterprises have strengths and weaknesses. For example: motivation and qualification of employees, labour costs, production capacities, financial power, efficiency, innovation potential, speed of product launch, number of patents and so on. Please mention general strengths and weaknesses of Asian and Europeanbased enterprises in the electronics industry.

These interview responses illustrate the views of industry experts from South Korea. Asian firms have a particular strength in cost competitiveness (e.g., labor and material), which is simultaneously the weakness of the Europeans. Nevertheless, the European market is very attractive due to the high purchasing power of the consumer relative to India or China. The firms acting in the local market can benefit from it. That is why Asian firms target selling their products there. China, Japan, and South Korea are tough competitors with oversupplying capacities, which is at the same time their main weakness (Glowik, 2007g). European people are creative; they keep the regulations, but they are too individualistic and money oriented. The strengths of Asian firms are the vertical and horizontal cooperation and team force, a mixture of competition and mutual support. Benevolence and respect for the higher ranking and older person is very important. It is like in the military service. However, in comparison with a European, the individual staff is not well organized and concentrates on the present activity (Glowik, 2007d). The strengths of Asian firms are flexibility, uniformity of organization, strong eagerness, and loyalty. They have cost advantages in comparison with European firms, which have global management and restructuring experience as well as strong marketing skills. However, the Europeans concentrate on the individual but not on the company and, therefore, have less loyalty than Asian staff (Glowik, 2007e). South Korean and Japanese firms have the product and technological leadership. (Japan is more advanced.) China and Taiwan have strong cost advantages in comparison with Europe and also us (South Korea). On the other

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227

hand, European firms enjoy strong brand awareness (e.g., Philips or Nokia). The European staff has fewer communication problems when talking in English relative to Asians (Glowik, 2007f). The strength of Asian firms is their speed. The weakness is less experience with foreign cultures, which hinders a customer-oriented marketing in foreign markets. European firms have longer marketing experience. However, Europeans are too individual and concentrate on their own interest. ‘This is my right, regardless of what happens with the company’ (Glowik, 2007k).

After evaluation and transcription of all interviews, carried out, the comparative overview summarizes the resource strengths and weaknesses of Asian versus European firms in the consumer electronics industry from the Korean respondents’ perspective.

Resource Strengths

Weaknesses

Asian originated firm in the television set industry •

cost competitiveness

•

technological leadership

•

eagerness, firm loyalty, discipline and mutual team support of the employees

•

speed in product customization

European originated firm in the television set industry •

located in a market with relatively high purchasing power of consumers (access to attractive distribution channels)

•

strong brand awareness and marketing skills

•

creativeness of staff

•

long experience in global business operations

•

oversupply capacities

•

manufacturing costs

•

suitable marketing and access to distribution channels in overseas markets such as Europe

•

focus on individual and personal life instead of firm destiny

•

less firm loyalty

•

English language problems of staff limited experience with other cultures Figure 80. A comparative overview of strengths and weaknesses of Asian versus European firms operating in the television set industry. Source: Interview outcomes of Korean respondents in September 2007

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6 Towards a Time-based Network Approach

According to the interview outcomes of the Korean electronics industry experts, cost competitiveness and technological leadership are the main strengths of the Asian television set manufacturers in relation to European firms. However, Asian firms rather lack European marketing skills and strong local brand awareness. Thus, it is assumed that bilateral network relations between Asian and European firms tend to combine diversified resource strengths and weaknesses, which are to be analyzed in the following section. Research outcomes from the case studies As a part of the empirical multi-case studies, the joint venture developments of the KoreanDutch ‘LG.Philips Displays’ and ‘LG.Philips LCD’ and the Chinese-French ‘TCL-Thomson Electronics’ were examined for the period since their foundations. On the one hand, only three joint ventures have been evaluated, which makes it somehow difficult to define these cases as a representative sample for deducing a general valid pattern for partner repositioning over time. On the other hand, it needs to be emphasized that, except for these three, there were no further important Asian-European international joint ventures in the television set industry established for the research period 1990–2008. Therefore, the complete parent population has been covered. The joint venture cases of LG Electronics and Philips as well as Thomson and TCL China indicate fundamentally different characteristics, particularly the partner firms’ network repositioning within the venture lifetime compared to those established between Japanese firms. In accordance with the segmentation of joint project phases for Japanese firms introduced above and divided into initial, mature, and transformation phases, the joint ventures LG.Philips LCD, LG.Philips Displays, and TCL-Thomson Electronics indicate the following general characteristics based on the case study research outcomes. 1. Main targets and characteristics in the initial phase: •

no or less partner-specific experience from previous projects;

•

European partner agreed to the cooperation usually to target lower production costs through the use of the manufacturing capacities of the Asian partner firm, which from their side seeks to improve marketing expertise and access to European distribution channels (vertical linking of partner firm activities, such as manufacturing on one side and marketing and sales on the other);

•

different language and cultural backgrounds create potential for misunderstanding;

•

European partner tends to be rather short-term oriented (e.g., focus on financial record and early positive results), while the Asian partner tends to have a long-term project perspective; and

•

competing of ‘cultures’ hinders the creation of an atmosphere of ‘win-win’ cooperation.

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229

2. Main targets and characteristics in the mature phase: •

joint venture synergy effects are below expectations;

•

communication problems and culturally biased approaches to solving problems become even more severe when working under pressure;

•

European partner firm gradually decreases its capital shares because shortterm performance records indicate losses or marginal profits;

•

partial closure of European manufacturing locations due to higher costs relative to Asia, where the production quantities have been transferred; and

•

increasing decision power of the Asian joint venture partner.

3. Main targets and characteristics in the transformation phase: •

further divestment activities by the European venture partner;

•

closure of the remaining European-based manufacturing sites;

•

full control of venture operations by the Asian partner, which gains access to desired resources such as patents, trademark rights, European distribution channels, and corresponding marketing expertise; and

•

European partner refocus on new business segments outside of television set industry.

Networking characteristics, particularly with regards to the partner repositioning over time, of intra-Japanese and Asian-European joint ventures differ, which results in contrasting business performances of the joint activities as discussed above. The following section serves to formulate network success factors in international business based on the empirical case study results.

6.4.3

Networking success factors: A comparative overview

The research question raised in chapter 2 (empirical research targets) regarding networking success factors is formulated as follows. q [7]

Which networking success factors can be deduced from the empirical research outcomes?

The research outcomes of the case study analysis deliver the following information about networking success factors within the framework of a comparative overview. Joint ventures and strategic alliances in the television set industry between Japanese firms as evaluated in the case study chapter, such as for example Sharp and Sony, Sharp and Pioneer, Matsushita and Toshiba, and Matsushita and Hitachi record a much better performance than those established between TCL China and Thomson or LG Electronics and Philips. A comparison of

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these bilateral network agreements indicate success factors that are related to the aspects of time, decision power, resource combination, technology, experience, and culture. These network success factors are summarized in a comparative overview as follows. 1. Time TCL-Thomson Electronics and LG.Philips Displays joint ventures both ended within a couple of years. The joint venture LG.Philips LCD, which started as an equal joint venture, has not been terminated yet but due to continuously decreasing shares of Philips to 13.2 percent by March 2008, the firm was renamed ‘LG Display Co.’, which signifies the marginal importance of the Dutch firm (LG.PhilipsLCD, 2008e). Thus, the joint venture lifetimes indicate significantly shorter periods relative to the long-term approach of intra-Japanese ventures. Japanese joint ventures are long-term oriented and may even go back to common previous projects that had their origins years before. The bilateral network relations resemble a circle process, which means a joint project is not definitely terminated but rather modified (e.g., because of upcoming new technologies) and transferred to another common project. 2. Decision power Japanese ventures aim to share equally the management related decision power during the whole time period of the venture. In contrast, the relationship between the Chinese TCL and the French firm Thomson started with the philosophy of a ‘partnership of equals’. However, within a short period of time, the Chinese management incrementally took over the decision power. Instead of English, which was agreed upon as the common venture company language, Chinese letters were widely used, which created further communication difficulties. In 2007, the European operations contributed by Thomson were liquidated. In 2008, all R&D and design laboratories, patents, and several trademark rights became the property of TCL China. Thus, the venture project failed from Thomson’s perspective, while TCL China strengthened its competitive position. The joint venture of TCL-Thomson Electronics has been divided into its relevant venture lifetime phases, which cover a time period of three years. The phases are illustrated below. 1. Initial Phase

Equity joint venture of Thomson and TCL China (‘partnership of equals’)

2. Mature Phase

Incremental increase of strategic decision power by TCL China

3. Transformation Phase

Complete take over of joint venture operations by TCL China [full control]

2004 Figure 81. The joint venture lifetime of TTE Corporation (TCL China and Thomson). Source: Author

2007

6.4 A Time-based Network Repositioning Model

231

The bilateral network repositioning process over time related to the decision power of LG Electronics and Philips shows a pattern similar to the case of Thomson and TCL China. At the beginning, the partnership was established as an equity joint venture. Within a short period of time, the South Korean partner, LG Electronics, increased its influence and decision power regarding the venture operations. From Philips’ perspective, both ventures developed unsuccessfully, while LG Electronics, through absorption of rare resources (e.g., access to European distribution channels and fundamental financial support), improved its competitive position in the television set market. The joint venture phases of LG.Philips LCD are illustrated below. 1. Initial Phase

Equity joint venture of Philips and LG Electronics ‘LG.Philips LCD’

2. Mature Phase

Incremental increase of shares and strategic decision power by LG Electronics

3. Transformation Phase

Majority control by LG Electronics (JV renamed: ‘LG Display Co.’)

1999

2008

Figure 82. The joint venture lifetime of LG.Philips LCD (LG Electronics and Philips). Source: Author

In the case of the cathode ray tube television set business related to the joint venture, ‘LG.Philips Displays’, the partner repositioning process over time indicates the following scheme.

1. Initial Phase

Equity joint venture of Philips an LG Electronics ‘LG.Philips Displays’

2. Mature Phase

3. Transformation Phase

Incremental increase of shares and strategic decision power by LG Electronics

Following joint venture bankruptcy, establishment of an independent Korean firm: ‘LP Displays’

2001 Figure 83. The joint venture lifetime of LG.Philips Displays (LG Electronics and Philips). Source: Author

2007

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‘LG Philips Displays’ venture operations realized a loss in all the years since its foundation in 2001. In 2006, the European manufacturing sides were shut down and the venture operations liquidated. In 2007, the cathode ray tube manufacture was restarted under complete Korean ownership with a new name, ‘LP Displays’. Philips disappeared entirely from the venture business. 3. Resource combination In comparison with the majority of joint venture projects between Japanese firms, which mainly focus on similar value-added activities (horizontal cooperation) particularly in the field of joint R&D as well as common manufacture, the Dutch-Korean and French-Chinese partnerships focused on the resource combination of diverse value-added operations. For example, on the one hand Philips aimed to gain access to the R&D and process know-how concerning flat panel technologies; while on the other hand, LG needed fundamental financial help and desired a more efficient and broader entry base to European markets. Thomson mainly attempted to lower the production costs through its Chinese partner, while TCL aimed at access to trademarks, patents, design centers, and distribution channels in the western markets. Compared to Japanese bilateral horizontal networks, the mutual combination and adjustment of diversified value-added stages of LG and Philips and TCL and Thomson seem more challenging and, therefore, contain higher risk potentials related to venture failures. 4. Technology As described in detail in the corresponding case studies, Japanese network ventures focus their strengths on the joint development of new, innovative technologies. For example, Sharp and Sony bundle their resources on common research and manufacture of LCD modules. Matsushita, Hitachi, and Toshiba share the investment risk and bundle their know-how in the LCD module business and built a state-of-the-art plant (IPS Alpha Technology) in the Czech Republic. In contrast, TCL China and Thomson as well as LG.Philips Displays operated in the cathode ray tube business segment, where the worldwide markets have been shrinking since 2004, which results in severe price competition and correspondingly low margins. Thus, the future business potentials of these European-Asian joint operations were from the beginning pessimistic. Interestingly, European firms, such as Thomson or Philips, have not cooperated with each other in order to defend against the powerful competition from the Far East. 5. Experience Japanese firms, such as Toshiba-Matsushita, Matsushita-Hitachi, Pioneer-Sharp, and SharpSony, can rely on mutual, long-term cooperative experience. Consequently, the partner firms can better evaluate individual strengths and weaknesses, which provides an improved organizational and managerial basis for the new joint projects. European-Asian joint ventures in the television set industry are a rather new phenomenon. The Chinese TCL could not rely on experiences in doing joint business with the French Thomson (joint venture established in 2004). Philips and LG Electronics were pioneers in the field of Dutch-Korean television set

6.5 Higher Complexity of Market Entry Strategies

233

industry joint ventures (joint ventures established in 1999 and 2001). The fundamental lack of experience provoked difficulties during the cooperation. 6. Culture Cooperating Japanese firms have a common cultural background and communicate in the same language. However, in comparison, the language challenges for TCL China and Thomson as well as for LG Electronics and Philips were fundamentally more extensive. Asian and European partner firms have different company cultures, and their employees have diverse national origins with corresponding diverse communication styles. According to the outcomes of the field interviews, the majority of Asian respondents respect the creative skills but simultaneously complain about the individualistic behavior of the Europeans, which is understood as less loyalty towards the firm. Opposite to this, loyalty, eagerness, benevolence, team support, and respect belong to the fundamental values of people from the Far East. These contrasting cultural backgrounds definitely have a negative impact on business performance. Due to the fact that venture operations are usually launched under time and performance pressure, the qualifications of the venture employees concerning cultural issues is not evaluated sufficiently, which later results in misunderstanding, declining motivation of the staff, and finally, the termination of the equal venture partnership.

6.5

Higher Complexity of Market Entry Strategies

The research question raised in chapter 2 (empirical research targets) concerning market entry strategies is formulated as follows. q [8] Which factors are responsible for the necessity of a more complex understanding of market entry strategies in light of global world markets?

According to the research outcomes of the case studies and related strategies of Asian firms in Europe, it can be deduced that those classical market entry modes such as, for example, exports, joint ventures, or foreign direct investments need to be considered against the background of an enormously increased business complexity due to global trade patterns. Consequently, market entry strategies cannot be seen as individual and independent issues related to the firm’s international business. The more complex understanding of market entry decisions comes from an understanding of the factors below. 1. Market versus network entry barriers Instead of single foreign markets, the challenge of overcoming entry barriers in worldwide industry networks moves to the center of consideration. Without access to these organizational grids, a firm is unable to compete and survive in international business. Thus, to become an accepted member of an industry is the first issue for a firm that has international business intentions. Therefore, it is of vital importance that a firm proves to be reliable as a supplier in the areas of quality, service, delivery punctuality, competence, and innovative

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potentials regarding future technologies. A poor performance in one market of the world easily has a bad impact on the firm’s general reputation and on the related global business and corresponding customer relations in another region. 2. Regional network of the television set industry in Europe The major target country for foreign direct investments of Asian consumer electronics firms in Europe during the 1990s was the United Kingdom. In recent years, the foreign direct investment activities of consumer electronics enterprises from the Far East have been focused on Poland, which has become one of the most important manufacturing platforms of the television set industry for the European market. Several important Asian consumer electronics firms such as Toshiba, Sharp, LG Electronics, and others have selected Poland as a production location. JVC decided in 2008 to move their production from Scotland to Poland. The majority of new component factories are established in Poland’s ‘special economic zones’, where the firms benefit from huge tax incentives of up to 65 percent of the investment costs. In addition to the investment incentives, the education and qualification level of the inhabitants is high, and the country has a stable political-legal system. Transportation lead times to various locations in Europe and the corresponding costs are low due to the country’s geographical location (Glowik, 2007a). Despite the relatively low labor costs, in recent years, a huge number of the well educated work force has left the country for destinations such as Ireland and Sweden. Filling the shortage of qualified people has become the major challenge for Poland, as is already visible in various industrial sectors in western Europe (i.e., lack of engineers in Germany) (Glowik, 2007a). Other neighboring states of Poland, such as Hungary, Slovakia, and the Czech Republic, are competing for investors in the television set industry as well. It can be said that these four countries serve as the most advanced regions in Europe concerning state-of-the-art television set manufacture, which requires qualified human resources. Investing outside these regional industry clusters causes a competitive disadvantage for a firm due to a more distant television set component supplier pool. Below figure illustrates the television set component manufacturing sides of Asian consumer electronics firms in Poland, Hungary, Czech Republic and Slovakia (status October 2008).

6.5 Higher Complexity of Market Entry Strategies

235

SHARP

ORION ELECTRIC

LG ELECTRONICS TVP GdaĔsk LG DISPLAY

Kwidzyn Torún

TOSHIBA

Gorzow

POLAND Boleslawiec

Máawa Warszawa

Kobierzyce JVC

PlzĔ CZECH REP. Hranice Nitra

Kraków

SLOVAKIA

SONY

HUNGARY Jászfényszaru Székesfehérvár

IPS Alpha

PHILIPS

SAMSUNG

PANASONIC Figure 84. Television set component manufacturing sides of Asian consumer electronics firms in Poland, Hungary, Czech Republic and Slovakia (status October 2008). Source: Author based on firm related information material

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3. ‘Follow the customer phenomenon’ Sharp and LG.Philips LCD each built an LCD-module factory in Poland, which provoked the main component suppliers and other firms (e.g., logistic) to ‘follow their customer’. In other words, these firms have not decided independently on their foreign market entry route based on their previous international business experience and accumulated knowledge, as the Uppsala concept claims (Johanson and Vahlne, 1977: 23). The LCD modules manufactured in Poland are delivered to related and independent firms of LG.Philips LCD and Sharp located at several places in Europe. LG.Philips LCD relies mainly on Korean suppliers, which established operations in Poland (e.g., LG Innotek, D. Yang, Oh Sung and Heesung); and Sharp brought its own Japanese supplier network (e.g., Toland Tokai, Tensho, Nitto Denko, and Sumika Elect.). The supply and manufacture network are illustrated below. Asian originated supplier in Poland

LCD-module manufacturer in Poland

LG Innotek

D. Yang

TV assembler in Poland LG Electronics, Mława

LG.Philips LCD, Kobierzyce

TVP AOC, Gorzow

TV assembler in Europe Philips, Hungary Toshiba, United Kingdom

Toschiba, Kobierzyce

Heesung

JVC, Bolesławiec Oh Sung

Toland Tokai Loewe AG, Germany Tensho

Nitto Denko Sumika

backward

Sharp, Łysomice

Orion, Łysomice Jabil Circuit Inc., Kwidzyn

International vertical supply chain

Figure 85. International vertical chain network of Sharp and LG.Philips LCD. Source: Author

Sharp Electronica, Spain

forward

6.5 Higher Complexity of Market Entry Strategies

237

The establishment of supply-chain clusters as illustrated above is a result the continuation of partnerships established in their home countries in Asia. 4. Market entry based on R&D leadership The technological market leaders in the television set industry, Matsushita (plasma) and Sharp (LCD), as found in the empirical research study, indicate the highest networking activities. They bundle their R&D know-how through networks, which allows them an innovative leadership. Japanese firms successfully enter the European markets through reliable, state-of-the-art products offered at a reasonable price as a result of their R&D resource allocation strengths in Japan. Members of the same Japanese network group share their R&D outcomes and transfer information about foreign markets among affiliated companies. Such transferred knowledge can help firms to overcome intrinsic disadvantages during the process of entering and penetrating foreign markets (Chang, 1995: 391). A network of coupled strategic alliances and interlocking ownership (e.g., IPS Alpha Technology) allows each member to pursue its particular competence. The basic advantage of such networks is structural flexibility. While maximizing the specialized competence of each participant, the network provides more effective use of resources (i.e., financial, procurement, and distribution) than would accumulation and allocation in single organizations. Having these powerful R&D resources, Japanese firms successfully perform their market entry in Europe. Against the background of liberalized trade patterns between countries, firms participate in a dynamic network of configuration and coordination of product development, procurement, manufacturing, and distribution activities around the world, where the network business performance success of Japanese firms serves as a benchmark (Kotabe and Murray, 2003: 11). 5. Configuration of value-added activities Joint ventures, such as for example TCL-Thomson Electronics, LG.Philips LCD, and LG.Philips Displays, had a short-term life-cycle characterized by relative instability and incremental divestment of the European partner. Among other things, one of the reasons for unsteadiness is the challenge of combining diverse value-added resources, such as marketing strengths in the European part and technological strengths in the Asian part. From this, fundamentally different network targets for the respective partners are derived. Japanese firms usually combine similar value-added activities, such as joint R&D and/or shared manufacturing capacities. 6. Absorptive capabilities European firms probably tend to underestimate the absorptive capabilities of their Asian partners. The case of LG Electronics illustrates how the Korean firm has significantly improved its financial base through the capital injection from Philips and, simultaneously, gained access to the European market. Furthermore, LG Electronics learned through the partnership with Philips about marketing skills in order to efficiently reach the European end consumer. TCL China received several valuable patents and trademark rights from Thomson; Thomson disappeared from the joint venture just three years after foundation.

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7. Preparation of venture staff Joint ventures are usually established under time pressure due to a complex and fast changing market environment. Thus, considering the qualifications of the venture staff is usually done too quickly or does not take place at all. As discussed above, there are culturally biased potentials for misunderstanding, such as the stereotyped assumption by the Asian staff that Europeans are too ‘individual and money oriented’, and, consequently, not loyal to the firm. Europeans, on the other hand, tend to complain that the ‘Asian partners do not want to understand’ because of their indirect, highly complex conversation style or even because of simple communication problems in using (English) language. The proper preparation of the venture staff through adequate training programs is of vital importance for the venture lifetime and business performance. 8. The factor of time Cooperative market entry strategies through joint ventures are not static constructs. These international venture projects proceed in highly complex and permanently changing environments. The factor of time plays an important role for the partner firms, which unavoidably change their bilateral network position as the worldwide market circumstances develop. The networking repositioning process (in a positive or negative direction) often develops unnoticed or underestimated by the firms but in turn has a decisive influence on the international business success of the firm.

7

Conclusion

Gulati et al. (2000: 212) claimed that the network perspective provides better insights into dynamics as firms and industries evolve over time and explains why some firms get lockedin why others get locket-out of the market. According to McDougall and Oviatt (2003: 12) a detailed industry-specific knowledge about potentials of networks in international business indicate a demand for further empirical testing and development of the network theory. In a case study research project it needs to be determined whether the cases selected for the sample reflect the conditions in the parent population; in this context, the television set industry. Within any qualitative research such as a case study project, results should not be grounded in short-time research findings or empirical snapshots, but should focus on a long-term approach to providing industry-specific information. Andersen and Buvik (2002: 359–360) proposed longitudional studies using multiple source of evidence, i.e., through case studies, in order to have a better understanding of the interrelationships between corresponding market entry modes. The research project of this publication aimed to examine these vital research parameters: •

a longitudinal research study concerning the television set industry developments, which covers the period since 1990;

•

the selected cases of Samsung, Sony, Matsushita (Panasonic), LG Electronics and its joint ventures with Philips, which represent the top five brands based on shipment quantities and have an accumulated European market share [status I. Quarter 2008 according to DisplaySearch (2008a)] of 76.4 percent in LCD, 90.5 percent in plasma, and 56.3 percent in the cathode ray tube business. The sample is completed by considering additional firm cases, such as Sharp (and its investment activities in Loewe AG), and TCL China, which strengthens the representativeness of the study outcomes;

•

the cases deliver detailed firm information, which includes the company origins, firm structure, and management; related and unrelated business fields; financial performance; vertically integrated manufacturing stages; and, of course, the internal and external network engagements.

Johanson and Vahlne (2003: 83) assumed that networks are especially important in high technology industries. The research outcomes of this publication concerning consumer electronics/television set industry verify their assumption.

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First, it has been found that the firms’ networking intensity has been sharply increasing in recent years, which underlines the importance of the network approach in international business. The research results allow to deduce reasons of increased networking intensity in the television set industry, such as R&D efforts, higher investment and operation costs, the need for strategic component supply and the introduction of common industry standards. Second, the research delivered further interesting results in this respect: Matsushita (Panasonic) and Sharp, which reached the highest networking scores, simultaneously represent the technological market leaders in the LCD and plasma television set markets respectively. Thus, these firms serve as a benchmark with respect to an ‘absorptive learning capability’ because they benefit from networking advantages with other firms without losing sensitive know-how, which would threaten their technological market leadership. As shown for Matsushita (Panasonic) and its joint venture involvement in IPS Alpha Technology, which established a state-of-the art LCD module plant in the Czech Republic, and Sharp, which attracted several Japanese component suppliers to settle in Poland (follow the customer phenomenon), both firms intensively use networks in order to reduce the risk related to foreign market entries in Europe. TCL China agreed to a joint venture with the traditional French Thomson, which was terminated after a short time. Through the joint venture operations, TCL China gained access to valuable trademark rights, patents, and European distribution channels, which strengthens the competitive position of the Chinese. The joint ventures of LG Electronics with Philips indicate a similar pattern. While the venture projects failed from Philips perspective, LG Electronics has recovered financially because of several capital injections by Philips. The Korean Chaebol also benefited through learning from Philips and its excellent marketing expertise and, thus, efficiently accessed the European market. The leading electronics firm Samsung indicates rather less networking activities in relation to the enterprises mentioned above. The firm’s strength is its highly diversified business network, which goes hand in hand with intensively vertically integrated product manufacturing stages. Samsung benefits from its quasi-monopoly, competitive position in several South Korean industries, which provides huge financial buffer resources for its price-aggressive competitiveness in its overseas markets, such as Europe. Similar as Samsung, Sony records a low networking activity, if counted in numbers. The Japanese electronics giant ignored for too long a time the upcoming flat panel technologies, such as LCD. Thus, Sony aimed to gain back technological competence through its joint venture networking activities with Samsung and recently with Sharp. Japanese firms’ networking targets mainly focus on joint R&D and/or shared manufacturing. Through they technological leadership, which comes along with innovative and superior quality products, Japanese firms are able to successfully realize its market entry and penetration strategies in Europe. On the other hand, the Korean LG Electronics and TCL China focus on price aggressive gaining access to the European distribution channels through networking engagements with the European partner firms. While intra-Japanese bilateral networking relations focus on research and technology driven issues within a long-term horizon, the cases of LG Electronics-Philips and TCL China-Thomson indicate diversified joint venture targets (a combination of European marketing expertise with Asian manufacturing costs) within a short

6.5 Higher Complexity of Market Entry Strategies

241

venture lifetime. Based on the research outcomes, this publication aims to further develop the network concept involving a time-based approach that explains the partner repositioning over time as shown in intra-Japanese networks and European-Asian ventures. As a result of the outcomes of the empirical research on the industry, the hypothesis formulated in chapter 2 is verified.

Hypothesis: Bilateral firm networks play a significant role for Asian firms in the television manufacturing industry in their market entry strategies in the European market.

The successful market entry strategies, based on networks, significantly helped Japanese, South Korean, and the Chinese TCL to successfully defeat the former European market leaders, such as Thomson, Philips, and Grundig. The results may serve as a benchmark for other European industries that compete with Asian firms so that they can avoid the negative outcomes that occurred in the consumer electronics industry. Thus, a vast range of research potential is suggested, including an investigation, similar to this research, of the networks in other industries. The case study research approach has limitations. Based on the individual case considerations, the derivation of general legitimacies tends to be risky. Furthermore, every case study also is influenced by a subjective interpretation of the enterprise because of an outsider’s view of the researcher (Schmid, 2006: 43–44). However, despite its limitations there is, from the author’s perspective, no better empirical research concept than a case study with regards to the research aim of this publication. The research outcomes invite further empirical study regarding Asian firms in the consumer electronics industry and their market entry concepts in Europe. The results hopefully may verify the conclusions discussed above and thus provide a wider acceptance of the findings of this research.

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