Sample Chapter - Transnational Management (8th Ed.), Bartlett & Beamish, 2018

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TRANSNATIONAL MANAGEMENT Text and Cases in Cross-Border Management

CHRISTOPHER A. BARTLETT & PAUL W. BEAMISH

BRIEF TABLE OF CONTENTS

Introduction: So What is Transnational Management?

1

Part I The Strategic Imperatives

9

1

Expanding abroad: motivations, means and mentalities

11

2

Understanding the international context: responding to conflicting environmental forces

64

Developing transitional strategies: building layers of competitive advantage

151

3

Part II The Organizational Challenge 4 5 6

213

Developing a transitional organization: managing integration, responsiveness, and flexibility

215

Creating worldwide innovation and learning: exploiting cross-border knowledge management

293

Engaging in cross-border collaboration: managing across corporate boundaries

345

Part III The Managerial Implications

405

7

Building new management capabilities: key to effective implementation

407

8

Shaping the transnational future: defining an evolving global role

476

Index

541

520

Shaping the Transnational’s Future

Legends in their field, both authors hold prestigious fellowships at leading institutions. Their special relationship with Harvard Business Publishing means this book features more HBP case studies than any other publisher.

Christopher A. Bartlett

CASE 8.3 UNILEVER’S NEW GLOBAL STRATEGY: COMPETING THROUGH SUSTAINABILITY

Emeritus Professor Christopher A. Bartlett prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2015, 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

In January 2015, CEO Paul Polman announced Unilever’s financial results for 2014. (See Exhibit 1.) It was hardly a celebration. Despite While retaining classic cases, the company outperforming competitors, company’s 2.9% growthfeatures was its lowest in a decade, and had this newsales edition actually slowed to just 2.1% in the final fi quarter. cutting-edge solutions to The gloomy results were due to depressed growth 21st century issues such asreinforced by shrinking in the developed world sustainability. demand in emerging markets, long the engine of Unilever Unilever’ss growth. But more disturbing than the 2014 results was the news that Polman was not predicting significant improvement in market conditions in 2015.

This already challenging situation was complicated by the fact that the company was in the midst of implementing a transformational strategy driven by the Unilever Sustainable Living Plan (USLP). Despite its impressive results to date, this bold initiative had not been fully embraced by some parts of the organization. One problem was that in order to achieve the expected longterm positive impact, USLP’s shift to a sustainability-focused strategy typically required Unilever’s businesses to make significant upfront investments that could be recouped only in the longer term. In an operating environment that Polman characterized as having “more headwinds than tailwinds,” some wondered how far

he could push this transformational strategic agenda at such a difficult time.

Complicating the issue was the fact that despite making good progress, USLP was well off-target on two key metrics. While reporting a 40% reduction in its own internal greenhouse gases (GHG) emissions and a 31% drop in its water use, Unilever was far short of objectives that encompassed its whole value chain, from sourcing to consumer use and disposal. In fact, against its target to halve the entire environmental footprint of making and using Unilever products by 2020, GHG impact per consumer had actually increased 4% since 2010, and water use per consumer had fallen by only 2%. Even some USLP supporters wondered if it was time to reassess some of its goals and priorities.

It was a complex set of challenges that Polman and his top team faced. Until now, the company had been able to deliver on both its financial expectations and its environmental and social commitments. The question was, could it continue that delicate balancing act into the future.

Behind the Change: Unilever’s Rich History When he became Unilever’s CEO, Polman realized that, as the first outsider ever brought in to lead

A variety of clear tables enable students to make data-driven comparisons with ease.

Case 2.1 Global Wine War 2015: New World Versus Old

87

Exhibit 1a Retail Price Structure of a Typical EU Wine in Select Export Markets (€ per bottle), 2014 China

Grape, winemaking and bottling cost Transportation cost Landed cost (inc. insurance and freight) Add Customs duties Add Excise duties Add VAT Add Importer’s margin Add Retailer’s margin

United Kingdom

%

€/bottle

14% 10% 17% 25% 50%

2.00 1.10 3.10 3.53 3.89 4.55 5.69 8.53

%

0% €2.42a 20% 10% 32%

€/bottle 2.00 0.18 2.18 2.18 4.60 5.52 6.07 8.01

Germany %

€/bottle

0% 0% 19% 10% 32%

2.00 0.20 2.20 2.20 2.20 2.57 3.22 4.83

Source: Adapted from COGEA S.r.l., “Study on the Competitiveness of European Wines,” European Commission, October 2014, p. 94, http://ec.europa.eu/agriculture/external-studies/2014/eu-wines/fulltext_en.pdf, accessed May 2016. a UK excise duty was calculated on volume and alcohol content, not as a percentage.

Exhibit 1b Bottle Wine Segments by Retail Price (European Commission’s Categories), 2014 Medium Range Entry Level

Commercial Premium

Super Premium

Ultra-Premium

Top Range

4.99 €/lt

5.00–9.99 €/lt

10.00–14.99 €/lt

15.00–49.99 €/lt

50.00 €/lt and more

Source: COGEA S.r.l., “Study on the Competitiveness of European Wines,” European Commission, October 2014, p. 66, http://ec.europa.eu/agriculture/external-studies/2014/eu-wines/fulltext_en.pdf, accessed March 2016.

Reinventing the Marketing Model New World producers also innovated in packaging and marketing. While the Europeans targeted the huge entry-level wine segment by selling liter bottles of table wine, in 1965 the Australians developed the innovative “wine-ina-box” package. Employing a collapsible plastic bag in a compact cardboard box with a dispensing spigot, the box’s shape and weight not only saved shipping costs, but also made storage in the consumer’s refrigerator more convenient. Australian producers also began replacing corks with screw caps, even on premium wines. Providing more than cost savings, the screw caps greatly

Complex theory is illustrated by practical examples, such as the struggle for dominance in the Chinese wine market.

reduced spoilage due to deficient corks, particularly in delicate whites.

From their earliest experiences in the marketplace, New World producers learned the value of making wines that appealed to unsophisticated palates. While dismissed by connoisseurs, products like Ripple in the U.S. and Barossa Pearl in Australia were wildly successful. Just as important, they provided valuable lessons in branding and marketing—rare industry skills at the time.

By showing wine’s mass-appeal potential, they enticed Coca-Cola to acquire Taylor California Cellars in 1977, soon followed by other experienced consumer marketers such as Nestlé, Pillsbury, and Seagram. But the challenge of

Chapter 5 Recommended Practitioner Readings

A variety of challenging practitioner readings are recommended, updated with cutting-edge analysis from leading academics for the new edition.

343

Chapter 5 Recommended Practitioner Readings

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• Morten T. Hansen and Nitin Nohria, “How to build collaborative advantage,” MIT Sloan Management Review, 46:1 (2004), 22–30.

In “How to build collaborative advantage,” Hansen and Nohria propose that collaboration can be an MNC’s source of competitive advantage, especially in an environment where new economies of scope are based on the ability of business units, subsidiaries, and functional departments within the company to collaborate by sharing knowledge and jointly developing new products and services.

• Jeffrey R. Immelt, Vijay Govindarajan, and Chris Trimble, “How GE is disrupting itself,” Harvard Business Review, 87:10 (2009), 56–65.

In “How GE is disrupting itself,” General Electric (GE) CEO Jeff Immelt, along with academics Govindarajan and Trimble, describe how GE has learned to master a process of reverse innovation that allows it to bring low-end products created for emerging markets into wealthy markets. It is an innovation process that is increasingly necessary to compete against the emerging giants from developing countries.

• Srivardhini K. Jha, Ishwardutt Parulkar, Rishikesha T. Krishnan, and Charles Dhanaraj, “Developing new products in emerging markets,” MIT Sloan Management Review, 57:3 (2016), 55–62.

In “Developing new products in emerging markets,” Jha, Parulkar, Krishnan, and Dhanaraj note that MNEs from developed countries are now moving a substantial part of their R&D activity to emerging markets such as India and China. The location of R&D in developing countries has been driven largely by the availability of skilled staff at low cost. R&D subsidiaries in emerging markets are uniquely positioned to play an important role in multinational companies’ innovation strategies. A large market opportunity combined with unique customer requirements is a key enabler of innovation for emerging markets. While most emerging markets do present a sizable market opportunity, it is the uniqueness of customer requirements that creates a compelling need to innovate.

• Hae-Jung Hong and Yves Doz, “L’Oréal masters multiculturalism,” Harvard Business Review, 91:6 (2013), 114–18.

In “L’Oréal masters multiculturalism,” Hong and Doz discuss how L’Oréal transformed itself from a very French business into a global leader. It grappled with the global integration versus national responsiveness tension that is at the heart of every global enterprise. L’Oréal dealt with that tension by nurturing a pool of managers with mixed cultural backgrounds, placing them at the center of knowledge-based interactions in the company’s most critical activity: new product development. L’Oréal built product development teams around these managers, who, by virtue of their upbringing and experiences, have gained familiarity with the norms and behaviors of multiple cultures and can switch easily among them. They are uniquely qualified to: spot new product

Engaging examples from emerging markets provide a rich perspective, not limited by cultural or developed economy bias.

334

Creating Worldwide Innovation and Learning

Dr Ishwardutt Parulkar, principal architect at Cisco Systems, Inc. Cisco’s Indian subsidiary at Bangalore, was on Cisco was founded in 1984 by Stanford Univerhis way to the office one early morning in July sity computer scientists Len Bosack and Sandy 2010. His team had held weeks of detailed disLemer who named it after the city of San Francussions with major Indian telecom operators cisco. Cisco pioneered the development of Intersuch as Airtel, Reliance and Vodafone on businet Protocol (IP)-based networking technologies ness needs and technology requirements for with the invention of the first multi-protocol building their next generation networks. The router. Over the next 25 years, the tradition for broad contour of a product – a router developed innovation continued with the development of in India for India – addressing the specific needs routing, switching and other network-based of telecom in emerging markets was Making networks Local Innovations Efficient 299 sertechnologies such as application networking 1 taking shape in Parulkar’s mind. After working vices, collaboration, home networking, security, for Apple, Sun Microsystems and Cisco for storage area networking, TelePresence systems, 15 years US, he Illinois, had recently moved centerinintheMoline, through thetomany development teams on whichcomputing, they unified communications, unified Indiaworked for suchcollaboratively. an opportunity. video systems and wireless. Cisco’s strategy Given value consciousness of emerging In the many European companies, a cadre of entrepreneurial expatriates has as long centered on leveraging the network a platmarket customers, the lack of significant revenue played a key role in developing and maintaining such linkages to the corporate form, to expand its share of customers’ inforin the short term and little precedence for such center. At Dutch-based Philips, for example,mation many technology of the best managers that year spending. from In fiscal products in emerging markets, the business case ending 31operations, July 2010, Cisco for employed home country spend much of their careers in overseas working three to over for such a router was far from compelling. Par70,000 people in more than 150 countries and four years in a series of national subsidiaries – jobs that are often much larger than ulkar realized that selling the idea internally recorded annual revenues of $40 billion with a those available in the small home-country market of the Netherlands.

Not surpriswould be an uphill task: Despite the ongoing of $7.8 billion.2on ingly, such a career assignment pattern hasnet anincome important influence managerial Basically, we know that our product idea fills a economic downturn, the company achieved attitudes and organizational relationships. The expatriate managers typically tend to gap in our emerging market offering, and the revenue growth from both product and service identify with the perspective of their assigned national organization, and it is this feedback from customers is also encouraging. segments across all geographic regions (refer to shared identity that creates a strongcase bond and distinct subculture among subsidiary But, in the absence of a strong business – Exhibit 1 for a revenue breakdown by product 3 In contrast, Panasonic has been able to generate very withinsense the company. inmanagers the traditional of a high, predictable and geography). little interaction among its expatriate managers, who tend on to its regard themselves capabilas ROI in the short-term – it will be difficult to get Cisco focused core networking parent company executives temporarily on assignment in a foreign company. approval and funding to develop the product ities while continuing to expand and transition through the established processes and criteria into adjacent products and markets. The company in the company. Further, the Indian ecosystem sought to take advantage of virtualization and Integrating Subsidiary Functions is not fully mature in terms of partners and cloud-driven transitions (brought about by the skills required develop such a product, of suchdecentralized convergencefederation of networking, computing, storage Finally, the tolocal innovativeness organizations is asenhanced tier-1 chip vendors, senior engineering and software technologies) the enterprise when there is strong cross-functional integration within ineach national data talent in specific labssubsidiaries that can test use andintegration center market through atitsthree Unified Computing operation.

Mostareas, Philips’ mechanisms organizacertify telecom-grade equipment to global System platform and Nexus product families, tional levels. For each project in a local subsidiary (e.g., to adapt a new foodstandards, manufacturing capability for com- which were designed to integrate the previously processor model for the local market) Philips creates what it calls an “article team.” plex hardware and so on. siloed technologies in the enterprise data center This consists of relatively junior managers from both the commercial and the with a unified architecture.3 In addition, Cisco Parulkar and his team were scheduled to meet technical functions who are given responsibility to apply propose policies and to aimed to thisproduct architectural approach Wimprepare Elfrink, annual chief globalization and Pansales plansofficer, and budgets. market adjacencies such as mobility, the conkaj Patel, senior vice subsidiary president and generallevel man-(e.g., all Brazilian home appliances), crossThen, at the product sumer and electrical services infrastructure. With ager, service provider business unit, to table their functional coordination is accomplished through group team ofoftechnical regard atoproduct mobility, the growth IP traffic on new product development proposal for his and commercial representatives. This team meets to review suggest correcthandheld devices results, was driving the need for more approval. They had to put forward a strong robust architectures, equipment and services in ive actions, and resolve any interfunctional differences.

Keeping control and conrationale! order to accommodate not only an increasing flict resolution at this level facilitates sensitive and rapid responses to initiatives and

A focus on integrated methods is maintained throughout the book, practical ideas generated at the local level. examples are 1 These Finally, events havethe been dramatized for the purpose of coordination forum is the senior managehighest subsidiary-level 2 3 provided of how thement Cisco Systems Inc., Annual Report 2010.

Ibid. case. committee (SMC), which consists of the top commercial, technical, and managers can financial managers in the subsidiary. Acting essentially as a local board, the SMC flexibly respond coordinates efforts among the functional groups and ensures that the national operation retains primary responsibility for its own strategies and priorities. Each to cross-cutting issues.

3

See J. B. Hocking, M. Brown, and A. W. Harzing, “Balancing global and local strategic contexts: expatriate knowledge transfer, applications, and learning within a transnational organization,” Human Resource Management, 46:4 (2007), 513–33.

The authors find that expatriate knowledge applications result from frequent knowledge access and communication with the corporate headquarters and other global units of the firm. In contrast,

5

Chapter summaries succinctly ground chapters in the Creating Worldwide Innovation and Learning international context: a Exploiting Cross-Border Knowledge Management comprehensive overview assists student understanding.

In the information-based, knowledge-intensive economy of the twenty-first century, MNEs are not competing only on the basis of their traditional ability to access new markets and arbitrage factor costs. Today the challenge is to build transnational organizations that can sense an emerging consumer trend in one country, link it to a new technology or capability it has in another, develop a creative new product or service in a third, and then diffuse that innovation rapidly around the world.

This transnational innovation process is much more sophisticated than the more traditional “center-for-global” and “local-to-local” approaches that have been the dominant form of cross-border innovation in the past. In this chapter, we describe the traditional and the emerging models of cross-border innovation as well as the nature of the organizational capabilities that must be developed to make them effective. The chapter concludes with a closer examination of the characteristics of the transnational organization that allows the MNE to develop and manage crossborder flows of human and intellectual capital supplement with the same facility it has traditionally managed its international flows of financial capital.

Links to previous chapters create an integrated, accumulative study of methods across different contexts.

In Chapter 3 we described how MNEs competing in today’s global competitive environment are required to build layers of competitive advantage – the ability to capture global-scale efficiencies, local market responsiveness, and worldwide learning capability. As many of these companies found ways to match one another in the more familiar attributes of global-scale efficiency and local responsiveness, they had to find new ways to gain competitive advantage. In this process, competitive battles among leading-edge MNEs (particularly those in knowledge-intensive industries such as telecommunications, biotechnology, pharmaceuticals, etc.) have shifted to their ability to link and leverage their worldwide resources and capabilities to develop and diffuse innovation.1 The trend is reflected in the fact that R&D expenditure globally more than doubled in real terms between 1992 and 2010. Unsurprisingly, worldwide patent applications grew from 922,000 in 1985 to almost 2 million in 2010. In the same period, trademark applications also increased worldwide from about 1 million in 1985 to 3.6 million in 2010.

1

Throughout this chapter, when we talk about innovation we are not only referring to the creation of technology-based new products or services but also to innovations that come from organizational effectiveness breakthroughs, pioneering marketing strategies, state-of-the-art manufacturing processes, or logistical innovations.

“In this eighth edition, the authors have maintained the unique pedagogic philosophy that has been a hallmark of this special book for so long. With a full suite of companion teaching and learning materials, the three parts of the book, strategic imperatives, the organizational challenge and managerial implications have captured the tensions that continue to dominate cross-border management… This remains an outstanding book.”

Peter W. Liesch, Professor of International Business, UQ Business School, The University of Queensland “If I were an MBA student studying anywhere in the world this is the book I would want as the textbook for my global strategy course. As a faculty member, this is the book I would pick for my case-based global strategic management course.”

Lorraine Eden, Professor of Management, Texas A&M University.

President, Academy of International Business “I have been using Transnational Management in my MBA International Competitive Strategy Courses for over 10 years. Since then I have not been able to find another text which compares with the relevance, applicability, and readability of this one.”

P. Roberto Garcia, Ph.D., Young-Jin Kim Distinguished Clinical Professor of International Business. Director, Center for International Business Education & Research Transnational Management offers an integrated framework describing the strategic tasks, organizational capabilities, and management roles and responsibilities of successful and responsible managers of international businesses in today’s global environment.

NEW TO THIS EDITION: • Integrated conceptual framework • Ten brand new cases have been added, and four others have been updated • New academic and practitioner recommended readings have been added to each chapter Suitable for MBA, executive education, and senior undergraduate students studying international management, international business, or global strategy courses, Transnational Management offers a uniquely global perspective on the subject.

Cover images: ‘Silhouettes in a Meeting’, Rawpixel / iStock / Getty Images. ‘World map’, roripond / iStock / Getty Images Cover design by Zoe Naylor

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