This course explores the ways firms overcome challenges when operating globally. The global economy is characterized for its high complexity and uncertainty. Corporations trying to succeed in the global economy need to develop different types of strategies depending on where they are conducting business or what type business they are in. Students taking this course will learn how to determine the best strategy to follow when expanding globally, the advantages and disadvantages of those strategies, and the appropriate responses to external pressures. This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.
Wholly Owned Subsidiaries
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En provenance du cours de University of Illinois at Urbana-Champaign
Global Strategy II: Doing Business in The Global Economy
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University of Illinois at Urbana-Champaign
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Cours 4 sur 7 dans Specialization Global Challenges in Business
À partir de la leçon
Module 3: Entry Strategies of Multinational Corporations
When entering foreign markets, multinational corporations have different options from which to choose. They are determined by the factors studied in the OLI and CAGE frameworks as well as the strategies chosen based on the cost reduction and differentiation pressures. This section studies how to evaluate which way to enter a foreign market, and the associated advantages and disadvantages.
Rencontrer les enseignants
Marcelo BucheliAssociate Professor
Department of Business Administration, College of Business
[MUSIC]
We're going from the least direct entry strategies to the more direct ones.
We started with exports, and now let's go to a more direct one,
which is wholly owned subsidiaries.
A wholly owned subsidiary is the one you have when
a firm completely owns, he's a total owner of the facility, production or
selling facility, in the foreign country.
[MUSIC]
There are many wholly owned subsidiaries in the world.
Let's take just one example.
In 2002, the German in firm falls back in the car manufacturer
acquired Skoda from the Czech Republic.
Skoda remained in the Czech Republic, but Volkswagen owned 100% of this firm.
So this is the type of thing that we're going to talk about here.
As in the other entry strategies we've explored in this module.
Here, let's talk about the advantages and
disadvantages of owning a wholly owned subsidiary.
Among the advantages,
the most clear one is that you don't have to share anything with anybody.
You don't share profits.
You don't share knowledge.
You don't share know-how.
You don't share talents.
Nothing like that.
So in a wholly owned subsidiary, control is absolutely strong and
contrary to some of the other entry strategies that we explored before.
By having a wholly owned subsidiary,
I can also shape the subsidiary in whichever way I want.
In whichever way that is consistent with what the global strategy of the firm is or
consistent with what my competitive advantage is of my firm are.
Like let's say, if my competitive advantages are a particular production
process, a particular human relations way of conducting businesses,
or a particular patent or copyrights, then I just can shape and
not worry too much about anyone else.
Of course there are several disadvantages with wholly owned subsidiaries.
The main one is the one related to costs.
Contrary to the other ones,
the other interest strategies that we have discussed in this module.
With a wholly owned subsidiary, you bear all the costs, and therefore,
yeah, you might bear all the profit, but you will have to deal with
all the bad consequences if the venture does not go well.
Another disadvantage is that it's going to be your own responsibility to
adapt to the local markets.
And this is something that in a wholly owned subsidiary, again,
this basic maneuver might be relatively limited for that.
So wholly owned subsidiaries, again, might give you a lot of control, but
of course, are more risky in the sense that you
bear all the costs of setting the whole thing up.
There are two ways to set up a wholly owned subsidiary.
The first one is what is known as Greenfield Investments.
A Greenfield Investment is when you go abroad and
you start doing everything from scratch.
And you build a building, the production facility,
the retail facility, whatever you are involved in producing.
And this is again something that brings advantages and disadvantages.
I mean a good advantage of a Greenfield Investment is that,
if you start from scratch, certainly this is a situation in which you
can shape the subsidiary in whichever way is more beneficial for
the firm in the long term, or in terms of the global strategy.
You don't need to adapt to anyone.
You adapt to yourself and again, to your larger goals.
And you can shape the subsidiary again based on what the larger picture is.
There are some disadvantages however on Greenfield.
Again it's more costly to start anything from scratch.
Second, what if it doesn't work?
I mean, of course, this happens in any business.
But as we mentioned in the other ones, in the other entry strategies
there are more easy ways to get out of the business if things don't work.
But if you go to a place, and build your factory, or
your original facility from scratch, adapt it, and all these kinds of things and
in the end it does not work then the costs are going to be higher.
This is why when it comes to wholly owned subsidiaries there is another
option that we're going to explore here.
Sometimes firms use Greenfield strategies in some places and
other strategies like mergers and acquisitions in others.
Walmart for instance, entered Argentina and
Brazil through a Greenfield Investment.
These, of course, meant a very strong presence in these countries, and
a very rapid presence.
And it was adapting the subsidiaries to the company's needs.
However, it has been said that these left little space for
maneuver for Walmart later on once this was created.
Because then they started discovering certain characteristics of
the local markets that they had not foreseen before and
therefore, the adaptation became more complicated because of the lack of
flexibility of the model they had already set up there.
Another way to establish wholly owned subsidiaries,
that the first from Greenfield, is through mergers and acquisitions.
In fact, mergers and acquisitions in the last couple of decades have become
more popular among investors than Greenfield operations.
So mergers and acquisitions is in it's simplest definition,
the acquisition of another firm that is already operating in that country.
You buy up the firm that is operating in the country in which you want to enter.
Of course the firm should be operating in the same type of industry.
So lets talk about some advantages of mergers and acquisitions.
First, the most obvious one is if the business is already established there and
you buy it,
that business that you bought already knows about the market characteristics.
Again, government regulations, supply chains,
they know who to buy, who to sell to.
All these elements have already been learned by
that domestic actor that you are buying.
Many firms conduct mergers and acquisitions not only to enter markets,
but also to acquire knowledge and know-how.
This is a case of India's Tata Motors
when acquiring Jaguar Land Rover from the United Kingdom.
The point here was, of course not to acquire cheap labor, but to acquire
all the knowledge and the network, that this firm had established in the past.
There are certainly some potential disadvantages in mergers and acquisitions.
Similar to what happens with joint ventures, there might be culture clashes.
Yeah, you might acquire a firm.
You can say now I'm the boss.
But you cannot change a corporate culture just by changing ownership.
And if the corporate culture is very deeply ingrained among the people working
there, this is going to be even harder; if they feel proud, even harder.
So this is what we see, for example in the case of Renault and
Nissan when creating this merger and
the corporate cultures of both firms became very complicated to integrate.
Another element is there needs to be a very big trust about the firm
you're acquiring in terms that the new people that are going to work for
you are not going to start sharing secrets or copyrights or stuff like this.
Even if it's part of the firm,
maybe there are elements that you cannot control that ways people relate,
channels that they have built with other actors outside the firm for a long time.
And if we're talking about a firm located in a country with a different law and
different language and different culture,
well this integration becomes even more complicated.
So let's look at some, both successful and unsuccessful, mergers and acquisitions.
One of the most studied one is the one between the German firm Daimler Benz,
the car manufacturer and Chrysler from the United States.
It was highly celebrated when it was created in the year of 1995,
but it lasted until the year of 2007.
The reasons why this merger and acquisition didn't work,
this integration of these two firms didn't work,
it's has been said, was the clash of cultures.
They really did never integrate the corporate culture of both firms.
Both Germans and
Americans did not really understand very well how the other side worked.
Another problem was that they created this single firm but
they did not create a real global brand.
I mean, throughout these almost a decade, a little bit more than a decade of
creation of this single firm, people around the world still thought about
Mercedes Benz or Chrysler as two separate brands.
I mean the idea of a single product or a single brand related to
a single products really did not permeate people's lives.
And this is something that was a problem of coordination
among those in the two firms.
Both firms believed they were at the top of the world in what they did, and
this is something that, eventually, created clashes and, finally,
the end of these ventures.
Now let's take a look at Walmart, in Canada, Australia,
and Chile, where it expanded through mergers and acquisitions.
In this case, however, Walmart succeeded at
acquiring firms that were involved already in the low cost retail service and
that had created very good supply channels and networks in their countries.
There was not a really big culture clash in between Walmart and
the Target firms, because they all had similar cultures.
And in this way, Walmart could take advantage
of these supply chains that these firms have developed.
And they allowed Walmart to enter in a smooth and
successful way in these countries.
[MUSIC]
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