Chapter 09 – Entry Strategies and Organizational Structures
Chapter 9: Entry Strategies and Organizational Structures
Learning Objectives and Chapter Summary
1. DESCRIBE how an MNC develops and implements entry strategies and ownership
structures.
MNCs pursue a range of entry strategies in their international operations. These
include wholly owned subsidiaries, mergers and acquisitions, alliances and joint
2. EXAMINE the major types of entry strategies and organizational structures used in
handling international operations.
A number of different organizational structures are used in international operations.
Many MNCs begin by using an export manager or subsidiary to handle overseas
business. As the operation grows or the company expands into more markets, the
3. ANALYZE the advantages and disadvantages of each type of organizational
structure, including the conditions that make one preferable to others.
Although MNC’s still use the various structural designs that can be drawn in a
hierarchial manner, they recently have begun merging or acquiring other firms or
across the world.
4. DESCRIBE the recent, nontraditional organizational arrangements coming out of
mergers, joint ventures, keiretsus, and other new designs including electronic
networks and product development structures.
Some of the more nontraditional changes in organizational structure stem from the
Japanese concept of keiretsu, which involves the vertical integration and
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Chapter 09 – Entry Strategies and Organizational Structures
5. EXPLAIN how organizational characteristics such as formalization, specialization,
and centralization influence how the organization is structured and functions.
A variety of factors help to explain differences in the way that international firms
operate. Three organizational characteristics that are of particular importance are
formalization, specialization, and centralization. These characteristics often vary
The World of International Management: Volkswagen’s Comeback:
Aligning Strategy and Structure
1. Summary:
This vignette explores the efforts of Volkswagen, beginning in 2007, to pursue a
global strategy that emphasizes centralization and regional adaptation while
leveraging the range of capabilities from its brands and their production. The
company made a commitment to global design, production, sales, and marketing
integration. The result has been steady growth.
2. Suggested Class Discussion:
1. What changes did Volkswagen make that account for its comeback?
2. What would you say is Volkswagen’s global strategy?
3. Related Internet Sites:
Volkswagen: {http://www.vw.com/}.
BusinessWeek: {http://businessweek.com}.
Chapter Outline with Lecture Notes and Teaching Tips
Entry Strategies and Ownership Structures
1) International companies use many common entry strategies and ownership structures.
a) Entry approaches include wholly owned subsidiaries, mergers and acquisitions,
alliances and joint ventures, licensing agreements, franchising, and basic export and
import operations.
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Chapter 09 – Entry Strategies and Organizational Structures
Export/Import
1) Exporting and importing often are the only available choices for small firms wanting to go
international.
2) Potential problems facing firms that plan to export, such as the fact that some countries
have rules against dropping an ineffective distributor.
3) Exporting and importing can provide easy access to overseas markets; however, the
strategy usually is transitional in nature. If the firm wishes to continue doing business
internationally, it will need to get more actively involved in terms of investment and take
on new risks.
Wholly Owned Subsidiary
1) A wholly owned subsidiary is an overseas operation that is totally owned and controlled
by an MNC.
2) The primary reason for the use of wholly owned subsidiaries is a desire by the MNC for
total control and the belief that managerial efficiency will be better without outside
partners.
3) Drawbacks:
a) Wholly owned subsidiaries face a high risk with such a large investment in one area
and are not very efficient with entering multiple countries or markets.
b) Host countries often feel that the MNC is trying to gain economic control by setting up
local operations but refusing to include local partners. Some fear the MNC will drive
out local enterprises.
c) Home-country unions may oppose foreign subsidiaries, which they see as an attempt
to “export jobs,” particularly when the MNC exports goods to another country and
then decides to set up manufacturing operations there.
Mergers/Acquisitions
1) The cross-border purchase or exchange of equity involving two or more companies is
achieved through mergers and acquisitions.
2) MNCs may choose this route in order to quickly expand resources or construct high-profit
products in a new market.
3) The record of success for cross-border mergers is mixed:
a) Cultural differences and time constraints
b) Transition costs
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Chapter 09 – Entry Strategies and Organizational Structures
Alliances and Joint Ventures
1) An alliance is any type of cooperative relationship among different firms. Some are
temporary; others are more permanent.
2) A joint venture (JV) is an agreement under which two or more partners own and control a
business. An international joint venture (IJV) is a JV composed of two or more firms from
different countries.
a) A nonequity venture is characterized by one group’s merely providing a service for
another.
b) An equity join venture involves a financial investment by the MNC partners involved.
3) Advantages of alliances and joint ventures:
a) Improvement of efficiency
4) Alliances and JVs are proving to be particularly popular as a means for doing business in
emerging-market countries.
5) Suggestions regarding participation in alliances:
a) First know partners well.
b) Expect differences in objectives.
c) Realize there is no guarantee of complementarity.
d) Be sensitive to partner’s needs.
e) Build a relationship on trust.
Alliances, Joint Ventures and M&A: The Case of the
Automotive Industry
1. Summary: The global automotive industry is a good example of these approaches.
Often alliances and joint ventures are the first step toward a merger or acquisition.
Many U.S. and European auto companies entered China via a joint venture.
Development of hybrid and electric vehicles have often taken the form of joint
ventures. All of these collaborations are fueled by opportunities created by
integrating some combination of market knowledge and access, technological and
managerial capability, scale economies and efficiency, and political and legal
imperatives.
2. Related Internet Sites:
Volkswagen: {http://www.vw.com/}.
General Moters: {http://www.gm.com}.
Ford: {http://www.ford.com}.
Chrysler: {http://www.chrysler.com}.
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Chapter 09 – Entry Strategies and Organizational Structures
GAC Fiat: {http:// www. gacfiat auto.com }.
Licensing
1) A licensing agreement allows one party to use an industrial property right in exchange for
payment to the other party.
2) The party giving the license (the licensor) will allow the other (the licensee) to use a
patent, a trademark, or proprietary information in exchange for a fee. The fee usually is
based on sales.
3) Common conditions:
a) Product in mature stage, competition strong, profit margins declining
4) Some licensors use their industrial property rights to develop and sell goods in certain
areas of the world and license others to handle other geographic locales.
5) Licenses are common among large firms seeking to acquire technology to bolster an
existing product.
Franchising
1) A franchise is a business arrangement under which one party (the franchisor) allows
another party (the franchisee) to operate an enterprise using its trademark, logo, product
line, and methods of operation in return for a fee.
supplies.
The Organizational Challenge
1) An increasing number of MNCs have been rethinking their approach to organizing
international operations. Coca-Cola and Li & Fung, a well-known Hong Kong firm, are
visible examples.
Teaching Tip: Winners of the Baldrige Award often provides excellent case studies of how
to structure an organization for maximum performance. The 2013 award recipient
summaries are available at {http://www.nist.gov/baldrige/baldrige_recipients2013.cfm}.
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Chapter 09 – Entry Strategies and Organizational Structures
Basic Organizational Structures
1) Most MNCs slowly evolve through certain basic structural arrangements. The overall goal
is to meet the needs of both the local market and the home-office strategy of globalization.
Initial Division Structure
1) Many firms make their initial entry into international markets by setting up a subsidiary or
by exporting locally produced goods or services.
a) A subsidiary is a common organizational arrangement for handling finance-related
businesses or other operations that require an onsite presence from the start.
2) If overseas sales continue to increase, local governments often exert pressure in these
growing markets for setting up on-site manufacturing operations.
a) Overseas plants show the government that the firm wants to be a good local citizen.
b) These plants help the MNC greatly reduce transportation costs, thus making the
product more competitive.
International Division Structure
1) An international division structure is a structural arrangement that handles all
international operations out of a division created for this purpose.
a) This structural arrangement takes a great deal of the burden off the CEO for
2) Pros and cons
a) Advantages: The grouping of international activities under one senior executive
ensures that the international focus receives top management’s attention; this allows
the company to develop an overall, unified approach to international operations, as
strategically and to allocate resources on a global basis, thus the international division
may be penalized.
Global Structural Arrangements
1) The global structure arrangement focuses on greater expansion and integration among
international operations.
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2) There are three common global structures.
a) Global Product Division: The global product division is a structural arrangement in
which domestic divisions are given worldwide responsibility for product groups. See
Figure 9–4.
i) Advantages: The most benefits when the need for product specification or
differentiation in different markets is high; preserves product emphasis and
promotes product planning on a global basis; provides a direct line of
communication from customer; helps R&D to work on development of products
b) Global Area Division: The global area division is a structure under which global
operations are organized on a geographic rather than a product basis. See Figure 9–5.
i) Advantages: Global division managers are responsible for all business operations in
their designated geographic area; each division focuses on regional tastes and offers
specialized products for and within that area; by manufacturing in area, the firm can
reduce cost and offer a competitive price.
ii) Disadvantages: Difficulty in reconciling a product emphasis with a geographic
orientation; new R&D efforts often ignored by division groups
c) Global Functional Division: The global functional division is a structure that
organizes worldwide operations primarily based on function and secondarily on
managing multiple product lines can be challenging, only the CEO can be held
accountable for the profits
3) Mixed Organization Structures: A mixed organization structure is a combination of a
global product, area, or functional arrangement.
a) Advantage: Allows design that best meets needs
b) Disadvantages: As the matrix design’s complexity increases, coordinating the
personnel and getting everyone to work toward common goals often become difficult;
too many groups go their own way.
Transnational Network Structures
1) The transnational network structure is a multinational structural arrangement that
combines elements of function, product, and geographic design, while relying on a
network arrangement to link worldwide subsidiaries.
a) They are convoluted integrations of business functions and communications where
decisions are made at the local level, but each grouping informs headquarters and
sometimes each other.
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Chapter 09 – Entry Strategies and Organizational Structures
b) At the center: nodes charged with coordinating product, functional, and geographic
information
2) Basic structural framework consists of three components:
a) Dispersed subunits: subsidiaries anywhere in the world where they can benefit the
dispersed and specialized subunits
Nontraditional Organizational Arrangements
1) In recent years, MNCs have increasingly expanded their operations in ways that differ
from those used in the past. These include acquisitions, joint ventures, keiretsu, and
strategic alliances.
Organizational Arrangements from Mergers, Acquisitions, Joint Ventures, and
Alliances
1) A recent development in the way that MNCs are organized is the increased use of mergers
and acquisitions.
2) Other recent organizational arrangements include joint-venture and strategic alliance
agreements in which each party contributes to the undertaking and coordinates its efforts
for the overall benefit of the venture.
a) Joint ventures require carefully formulated structures that allow each partner to
contribute what it does best and to coordinate their efforts efficiently.
b) Main objective: Help the partners address and effectively meld their different values,
management styles, action orientation, and organization preferences
3) Many companies are finding that M&As do not work out or they involve a considerable
financial risk because of the high sales price. Joint ventures and strategic alliances are a
good alternative. Joint ventures and strategic alliances help promote cooperation between
the participating organizations.
The Emergence of the Electronic Network Organizational Forms
1) Over the last few years there has been a major increase in the number of “electronic
freelancers”―individuals who work on a project for a company, usually via the Internet,
and when the assignment is done they move on to other employment.
a) These individuals represent a new type of electronic network organization
—“temporary companies”—that serve a particular, short-term purpose and then go on
to other assignments.
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Chapter 09 – Entry Strategies and Organizational Structures
are realizing that the outsourcing function can be delivered online.
Organizing for Product Integration
1) Another recent organizing development is the emergences of designs that are tailored
toward helping multinationals integrate product development into their worldwide
operations.
2) In the recent past, cross-functional coordination was used.
a) Resulted in people spending less time within their functions and thus becoming less
Organizational Characteristics of MNCs
1) Even when companies have similar organizational structures, they may not operate in the
same way.
2) Factors include overall strategy, employee attitudes, and local conditions. Of particular
significance to this discussion are the organizational characteristics of formalization,
specialization, and centralization.
Formalization
1) Formalization is the use of defined structures and systems in decision making,
communicating, and controlling. Some countries make greater use of formalization than
others.
2) In recent years, the formal-informal characteristic of organizations has become the focal
point of increased scrutiny. MNCs now realize there are two dimensions of formality-
informality that must be considered: internal and external.
3) Two approaches that firms that must compete globally employ to achieve the layering of
competitive advantages:
a) Development of extensive internal networks of international subsidiaries in major
national or regional markets
b) Forging external networks of strategic alliances with firms around the world
c) Table 9–5 summarizes the characteristics of internal and external networks.
Specialization
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