|
 When
Ivey Professor David Loree worked as an electrical design engineer for
Texas Instruments, he was intrigued by the importance of existing
relationships in selecting suppliers. When he later began his research into factors that
affect the ability of multinationals to survive in turbulent industries,
his experience with Texas Instruments sparked an important question. Do certain structures used by organizations to participate in
global markets facilitate the ability to form relationships, and therefore
affect a firm’s survival chances?
In certain industries,
an important factor in the establishment of relationships between
manufacturing firms and their customers is commitment. In his research
Loree explored how different forms of participation in foreign markets
send signals of commitment, and hence influence a firm’s survival
chances. A mere sales office
trying to drum up business sends a weak signal of commitment, as compared
to the establishment of an R&D facility or a manufacturing plant
within a market. Given the
portfolio of potential markets available in global industries, strategic
decisions about how a firm participates in the markets in which it invests
have become increasingly relevant.
To conduct his
research, Loree studied more than 400 companies in the integrated circuit
manufacturing industry from the early 60s to the mid 90s.
Most researchers and industry analysts view the market as segmented
into three regions: North America, Europe, and Japan (which includes
various other Asian markets). Regarding the consumption of integrated
circuits, the U.S market was by far the largest during the first 20 years
of the industry. But in the 80s increasing Japanese consumption actually
surpassed that of the U.S. before leveling off.
Loree found in his
research that customer organizations view the establishment of an R&D
centre or manufacturing plant in close proximity as a strong signal of
commitment. But he found this
signal of commitment more likely to affect a firm’s survival chances in
the Japanese market than the other markets. This is not surprising, he
says. “There’s a long line of research that has established the
important role that commitment and relationships play in business in
Japan. The customers that comprise this market want to sense commitment
from their suppliers - that whoever they pick is going to be there
tomorrow.”
Because of the size
and segmentation of the integrated circuit manufacturing industry, Loree
says it’s important for a company to use participative structures like
R&D and manufacturing facilities in relevant markets. “Firms are now
looking for ways not only to sell existing products, but to get embedded
into these important international markets,” says Loree, citing Texas
Instruments as a successful example.
Foreign investment
with the appropriate structural configuration also facilitates subsequent
expansion. Although conventional wisdom once held that continued
international expansion was beneficial for a firm, research in the early
90s showed that MNCs reach a point where the costs and bureaucracy of
expansion begin to outweigh the benefits. However, Loree’s research
shows that companies can continue to invest in multiple markets without
reaching a point where costs outweigh benefits as long as their structure
facilitates the absorption of knowledge from the markets in which they
participate.
If companies go abroad
with absorptive structures that allow them to become embedded in the
diverse skills and knowledge of foreign markets, they will create new
knowledge by interacting with other players in the environment, he says.
“What we’re finding is that the more absorptive a firm is, the
more likely it is to survive. More can still be better, as long as you go
abroad in the right way.” For smaller firms, who can’t easily afford
the large expense of opening such large-scale facilities, it means finding
subtler ways to plug into the knowledge base and skill sets of foreign
markets. |
