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Aid in the formulation of the internationalisation strategy of a subsidiary company to a hypothetic CEO

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Cisium is looking for to extent its capabilities in R&D by establishing a subsidiary in EU. This report explores 3 EU countries: France, Germany and UK.A systematic analysis is conducted using Porter’s diamonds framework with 5 categories and 15 criterions, the result gives to Germany the highest score. This study stresses the importance of institutional and cultural factors for a successful FDI. It is discussed institutional factors such as political systems, legal systems, property rights, and economical systems. The analysis identifies IP and corruption as critical issues.

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  • Date: 2017-04-17
  • Author: Raúl Bartolomé Castro
  • Program: Distance Learning MBA
  • Module: International Business Strategy
Categories: , , Tags: , ,

Description

Executive Summary

Cisium is looking for to extent its capabilities in R&D by stablishing a subsidiary in EU. This report explores 3 EU countries: France, Germany and UK.

A systematic analysis is conducted using Porter’s diamonds framework with 5 categories and 15 criterions, the result gives to Germany the highest score.

This study stresses the importance of institutional and cultural factors for a successful FDI. It is discussed institutional factors such as political systems, legal systems, property rights, and economical systems. The analysis identifies IP and corruption as critical issues.

Hofstede provides a 6 dimension cultural framework to identify cultural gaps between Philippines and Germany. It is evaluated individualism, masculinity, uncertainty avoidance and indulgence. For biggest cultural gaps, power distance and long term orientation it is provided focused advice to minimize risk.

From the constellation of entry modes for FDIs, it is analysed the most appropriated for the firm: R&D contracts, IJV, green-fields and M&A. After a systematic analysis, it is suggested IJV, however based on company’s strategy might be better green-fields or M&A.

The best organization structure is a matrix organization derived from transnational strategy and the nature of engineering projects operations. This is a challenging organization that brings the maximum flexibility.

Formal control mechanisms are suggested divided in 2 tiers: line organization and project level. These increases the chances of a successful FDI.

Finally, it is provided advice to improve CSR. Especial emphasis is given to code of ethics, training for business ethical, realistic KPIs and monitoring.

Table of Contents

1 Executive Summary 2

2 Introduction 5

3 Internationalisation Strategy 5

3.1 Advice on Selecting an EU Country 5

3.2 Advice on Dealing with Institutional and Cultural Differences 8

3.2.1 Institutional Factors 8

3.2.2 Cultural Factors 10

3.3 Advice on the Entry Mode 13

3.4 Other Advice 14

3.4.1 On the Best Organisational Structures 14

3.4.2 On Control Strategies for the Subsidiary 15

3.4.3 On Managing Key CSR Issues 16

4 Conclusion 16

5 Reflective Account 17

6 References 18

7 Acronyms 20

8 Appendices 21

8.1 Advice on Selecting an EU Country 21

List of Figures

Figure 1 Porter’s diamond of countries competitive advantage 5

Figure 2 Evaluation of Countries 6

Figure 3 Hofstede’s cultural dimension for Philippines and Germany. Source: Hofstede (2017) 10

Figure 4 Cultural gap between Philippines and Germany. Source: derived from Hofstede (2017). 11

Figure 5 Matrix organization of Cisium 14

Figure 6 Integration-responsiveness model 14

Figure 7 Best organization structure after FDI 15

List of Tables

Table 1 Evaluation of countries 6

Table 2 Institutional factors for Philippines and Germany 8

Table 3 Hofstede’s cultural dimensions (Geert Hofstede, 2017). 10

Table 4 Entry mode analysis 13

Table 5 Evaluation of countries in detail 21

Table 6 Evaluation of countries – remarks 22

Introduction

Cisum is a low-cost engineering services provider specialized in fields of electrical / electronic (E/E) and software. The company’s headquarters (HQ) and only location is in Cebu, Philippines. Its primary market is automotive targeting car makers (OEM) and tier-1 suppliers.

The company was born global, since inception the contribution in sales from foreign markets is very high; today presents balanced sales of 20% in USA, 20% in EU and 60% in Philippines.

The firm wishes to have physical presence in EU to improve its capabilities in research & development (R&D). This is a very natural expansion since the EU is the home of many OEMs and tier-1 suppliers and has highly qualified engineering workforce.

Internationalisation Strategy

Advice on Selecting an EU Country

From the 28 members of the EU, this report evaluates France, Germany and United Kingdom (UK). Porter’s Diamond framework helps to conduct a systematic analysis of the national competitive advantage.

Figure 1 Porter’s diamond of countries competitive advantage

Countries present competitive advantage when the four categories of Figure 1 are favourable. This report focuses in those factors that are more significant to Cisium’s objective.

Table 1 summarizes criterions used for the selection and Figure 2 presents the 5 categories and 15 criterions in a chart style. The results are weighed values where Germany is the best option with a total score of 2,19, second UK with 1,02 and last France with 0,65 (see appendix 8.1 for details).

Table 1 Evaluation of countries

Figure 2 Evaluation of Countries

A short discussion:

Demand conditions cover the influence of home demand, significant are absolute number of passenger cars and number of cars per inhabitant.

Factors endowments are production factors such as labour and infrastructure, considered direct automotive manufacturing employment, internet speed, population, researchers in R&D and employment in technology with tertiary education (level 5-8).

Frim strategy, structure and rivalry are conditions that affect firms, remarkable are country brand index, number of top 100 global OEM suppliers, absolute number of patents and patents per millions of inhabitants.

Related and supporting industries refer to suppliers’ clusters that help the firms, evaluated enterprises in high-tech sectors and number of European software vendors in Truffle 100 ranking.

Finally, Porter believes that luck and government as factors that affects the competitive advantage of the country. Here is considered ease of doing business and R&D expenditure.

Advice on Dealing with Institutional and Cultural Differences

Institutional and cultural factors are key for a successful expansion to new countries, ignoring them brings uncontrolled risk to the foreign direct investment (FDI) (Xu & White, 2010).

Institutional Factors

Formal institutions are the social and economic framework that involves the business activity. Table 2 presents key institutional factors.

Table 2 Institutional factors for Philippines and Germany

Category Germany Philippines
Political systems, government Democratic republic with federal parliament and federal legislative power. Separation of power and multi-party system (Bundespräsidialamt, 2017). Presidential democratic republic with centralist government. Separation of power and multi-party system (Philippine Government, 2017).
Legal systems Civil law with influence of Roman law and German culture (Bundesministerium der Justiz und fur Verbraucherschutz, 2017). Civil law and common law based on Spanish law and influenced by US common law (Chan Robles, 2017).
Property rights, real property Foreign ownerships is fully protected by law (The International Trade Administration, 2017). Property rights is waekly implemented, with redundadnd administration and corruption (The International Trade Administration, 2017).
Property rights, intellectual property (IP) German IP law is strong, availability of copyrights, trademarks and patents (The International Trade Administration, 2017). The country has law for copyrights, trademarks and patents but needs enforcement. IP infraction is a minor fault (The International Trade Administration, 2017).
Corruption Corruption is low, corruption perceptions index (CPI) was 10 in 2016. Corruptions occurs in a small scale in political and business environment (Transparency International, 2017). Corruption is high with CPI = 101 in 2016 but improving (CPI = 129 in 2011).
Corruption is widespread in the society. Present bribery, embezzlement, and political nepotism among other corruption practises (Transparency International, 2017).
Economic systems, GPD $3.5 trillion gross domestic product (GDP) in 2016 (International Monetary Fund , 2017). $0.3 trillion GDP in 2016 (International Monetary Fund , 2017).
Economic systems, ease of doing business rank 17 (Michigan State University, 2017). 99 (Michigan State University., 2017).

Short discussion and advice:

Political systems are similar in Germany and Philippines, both are a democratic republic, however Germany is more federal and Philippines more presidential and centralist. Cisium will not have a significant challenge here.

Legal systems, both countries use civil law as foundation, additionally Philippines is influenced by US common law. The firm will feel familiar with German civil law.

Property systems, the subsidiary will enjoy a stronger property framework than the HQ. Cisium will have to be careful with IP in Germany, since breaching it is severely persecuted, something unusual in Philippines.

Corruption, the gap between Germany and Philippines is big. Philippines presents higher CPI than Germany. The company will have to refrain of any corrupted behaviour in Germany, otherwise it might be persecuted.

Economy systems, both are free open market system and Germany presents very good ranking in ease of doing business. The HQ will find easy to stablish the subsidiary compared with current business in Philippines.

Cultural Factors

Geert Hofstede provides a 6 dimension framework to evaluate the cultural differences between countries. Figure 3 shows the result.

Figure 3 Hofstede’s cultural dimension for Philippines and Germany. Source: Hofstede (2017)

Table 3 summarizes the definition of the dimensions and explains the differences.

Table 3 Hofstede’s cultural dimensions (Geert Hofstede, 2017).

Dimension Definition Comparison
Power distance Represents up to what extend less powerful social members tolerate differences with more powerful members. Philippines scores very high value (94) implies high hierarchical society without justification, however Germany scores low (35) reflecting strong middle class and a participative and communicative society.
Individualism Is the degree of which individuals remain independent with respect the society. Philippines presents low individualism (32) that reflects a collectivist society, consequently contracts and promotions have moral connotation and managers care more about groups than individual members. Germany is an individual society (67), they believe in the individual pursuing the full potential and direct communication between management and employee.
Masculinity Means the society is driven by competition in contraposition with feminine society where values are taking care of others and pursuit of quality of life. Philippines and Germany score high in this feature (64 and 66), both societies consider “live in order to work”, where decisive management focused in competition, performance and direct conflict solving.
Uncertainty avoidance Is the extent to which society feel threaten by uncertainty. Philippines presents certain tolerance to uncertainty (44) therefore more relaxed to norms, schedule and ambiguity, on the other hand, Germany avoid uncertainty (65) consequently interest in planning, details and systematic approaches.
Long term orientation Long term orientation of social goals that reflect pragmatic societies is opposite to short term orientation that resolute in normative societies. Philippines scores very low (27) presenting normative thinking, high respect for traditions and focus in quick results. Germany scores high (83) translated in pragmatism, adaptive culture and perseverance.
Indulgence Is “the extent to which people try to control their desires and impulses”, the opposite concept is restraining. Both countries score a low value (42 and 40) that reflect restrain societies and therefore tendency to cynicism, pessimism, reduced leisure time and control of desire.

Figure 4 presents the cultural gab of both countries.

Figure 4 Cultural gap between Philippines and Germany. Source: derived from Hofstede (2017).

This is the advice:

Power distance is the highest cultural gap (59) and will bring conflict unless it is properly managed. Some advises are: explain management decisions to German employees, make the subsidiary co-participate of the decisions, delegate power to senior engineers and intermediate managers in Germany and perform trainings to increase the awareness of this gap.

Individualism trait presents a significant cultural gap (35) that will produce conflict if it is not well managed; Cisium’s management should tolerate German’s individualism and direct communication and schedule some trainings in both sides to understand each other approach to individualism/collectivism.

Masculinity does not present a significant gab (2). No issue with this dimension.

Uncertainty avoidance trait is not too big (21), so probably the differences are easy to mitigate. Considering the business nature of Cisium, embracing uncertainty avoidance is a good practice; projects will have bigger chance of success with proper planning, requirement management and extensive documentation.

Long term orientation is the second highest cultural gab (56), therefore management attention is necessary. In the subsidiary, the management together with the employee could tailor a career path that engages the long term orientation; Cisium’s top management can get closer to a long term orientation, since it is synonymous of sustainability (Crane & Matten, 2016, p. 431) and perform trainings to understand the cultural gap of each other.

Indulgence is not a significant gab (2), consequently no special measures are necessary, however other sources present Philippines as the most emotional society in the word (Bradberry, 2013)[1], a similar concept to indulgence.

Advice on the Entry Mode

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