Figure 10 illustrates the bilateral relationships of the consumer electronics firms discussed above and the corresponding country-specific industry clusters for the year 2007.

As illustrated in Figure 10, in 2007, Samsung concentrated on Hungary and Slovakia, where the South Korean Chaebol installed a cross-border, vertically integrated value chain from display to final device assembly (ownership and internalization advantage). LG Electronics and a cluster of Japanese firms, such as Toshiba, Sharp, Tol-and, Sumika, and others, selected Poland. Changhong (China) and the Taiwanese Hon Hai Precision as well as the Japanese firms Sony and Panasonic selected the Czech Republic and Slovakia for their display, electronics component, television set, and audio manufacturing activities.

Since 2007, the electronics industry has experienced changes in firms’ competitive power on a global scale, which also has affected Europe. As a result, Sony significantly reduced its own television set business operations and sold the majority of property to the Taiwanese Hon Hai Precision, which has become significantly stronger not only in the European markets but worldwide. TCL China withdrew its activities in Poland and concentrates on its Chinese home markets. Sharp sold its Polish operations. Panasonic focused on the Czech Republic and Slovakia but due to financial difficulties of the Panasonic Group, had to close its display factory in the Czech Republic in 2012.

The comparison of Figure 11 (status 2014) and Figure 10 (status 2007) illustrates the shift of competitive power from Japanese to South Korean and Taiwanese electronics firms in recent years in Eastern Europe. Poland and Slovakia could further develop their country-specific electronics industry cluster. This is not the case for the Czech Republic and Hungary, where production capacities were shut down (e.g., Philips, Panasonic). Changhong is attempting to remain an independent final assembly location for television sets (displays are procured from Changhong, China).

Overall, Samsung has developed successfully and become the strongest electronics firm, with major production hubs in Poland, Hungary, and Slovakia. As per the end of 2012, the South Korean Chaebol reached around 35 percent market share and was leading in the LCD television set markets in the CEE (ownership advantages through economies of scale effects). In the 3D and large-size television set segment (e.g., 42 inch and more), Samsung even reached more than 40 percent market share in CEE countries such as Poland, Rumania, and Hungary (news1.Korea, 2012). Such market shares provide the best prerequisites for economies of scale (ownership advantages) (Dunning, 1980b: 9) and for realizing Samsung’s cost advantages. The Korean Chaebol successfully established cross-border value chains ranging from display assembly (Slovakia) up to final device assembly (Poland and Hungary). Samsung’s narrowly knit logistics and branches network allows it to reach each European sales destination faster than its competitors, which provides fundamental advantages for its customer response and order handling flexibility (internalization advantages) (Dunning, 2000: 164; Economic_Review, 2013).

Among the new EU member states, Poland has become the major production hub for the consumer electronics components, display, and television set business (e.g., Sharp, LG, Samsung, and TPV) followed by Slovakia (e.g., Samsung, Panasonic, and Hon Hai Precision) and the Czech Republic (e.g., Panasonic, Changhong). Hungary was relatively strong in the 1990s. However, since 2004, Hungary has not kept pace with the other new EU member states. Hungary’s worsening position in the field of electronics production correlates with the development of the country’s macro-economic indicators—for example, its negative GDP development, combined with relatively high inflation rates during recent years when compared with other new EU member states.

Poland, on the other hand, has been able to successfully develop its electronics industry cluster, which goes hand in hand with positive macro-economic indicators, such as a stable GDP growth and relatively low average wages and inflation rates (location-specific advantages) (Dunning, 2000: 164; 2001: 177). Simultaneously, Poland serves as the largest market (market volume) for electronics products among the new EU member countries in the east (location-specific advantage). The first investors, such as LG Electronics (1999) and Sharp (2007), brought further electronics component and service suppliers to Poland.

Taking a more micro perspective, Japanese firms like Sony and Sharp lost their favorable competitive position in recent times, while South Korean companies (above all Samsung) and Taiwanese firms (particularly Hon Hai Precisions) became significantly stronger in Europe. Samsung, through its high degree of vertical manufacturing (internalization advantage) of various products in Poland, Slovakia, and Hungary, has increased its local presence tremendously. Hon Hai Precision, through its acquisitions of some Sony factories in Europe, gained access to Sony’s specific ownership advantages, such as its state-of-the-art research and manufacturing assets and Sony’s well-established distribution channels in Europe. The shift of competitive power from Japanese to South Korean and Taiwanese firms, as witnessed in Europe, follows a global trend. As seen for the last years, increasing investments of South Korean and Taiwanese companies come along with factory shut downs of Japanese firms.

Political decision makers may take into consideration the fact that local electronics industry clusters, especially in Poland and Slovakia, have been successfully established. However, the vast majority of investors located their production facilities in areas where subsidies and tax benefits are granted (compare, for example, the so called ‘customs free zones’ in Poland) (PAIZ, 2009; PolandBusiness, 2007b). The case of Samsung in Slovakia, where the South Korean firm threatened to shut down its Galanta factory if the government did not provide further financial support, illustrates ‘the price’ for attracting investors (Slovak_Investment, 2012). Therefore, politicians, not only in Europe but in general, should always raise a question mark when they consider granting subsidies: Do firms like Samsung really target regional sustainable investment initiatives or rather prefer to create a kind of ‘subsidy competition’ among regions and countries?

Instead of single foreign country markets, the challenge of overcoming entry barriers in worldwide industry networks has moved to the center of consideration. Without access to these organizational grids, a firm is unable to compete and survive in international business. To become an accepted member of an industry is the first issue for a firm that has international business intentions. Therefore, it is of vital importance that a firm proves to be a reliable actor in the areas of quality, service, delivery punctuality, competence, and innovative potential regarding future technologies. A poor performance in one market of the world easily has a negative impact on the firm’s general reputation and on the related global business and corresponding customer relations in other regions.

Chapter review questions

1. Explain the major reasons that Poland has become a leading investment hub for high-technology firms that originated in the Far East.
2. Describe the investment policy of Chinese and Taiwanese electronics firms in Europe.
3. What are the potential advantages and risks for Samsung in terms of its investments (behaviors) in several east European countries?
4. Comparing 2007 and 2014, how did firms’ position in the high-tech industry cluster evolve over time in Eastern Europe? How did Japanese firms develop relative to Chinese, Taiwanese, and South Korean competitors?

2.3The Internalization Theory

2.3.1The issue of transaction costs

The internalization theory of Buckley and Casson (1998) is based on the transaction cost approach of Coase (1937) and the market-hierarchy paradigm of Williamson (1975). Firms have two fundamental possibilities when dealing with transactions: externally in the market (e.g., contracts) or in-house through hierarchy (e.g., production). The transaction costs in the market need to be compared with the internal coordination costs that arise when operations are carried out in-house. Contractual transactions do not perform as expected by the contracting parties or even fail because of the actors’ bounded rationality phenomena (e.g. individual preferences) and the issue of market imperfections (e.g. limited information) (Zhao, Luo, & Suh, 2004: 525).

Market imperfections

The extent and degree of being confronted by market imperfections mainly depends on three transaction dimensions: asset specificity, uncertainty, and frequency. These dimensions are introduced below (compare: Williamson 1975; 1985).

Asset Specificity

Asset specificity refers to the degree to which an asset can be redeployed to alternative uses and by alternative users (Williamson, 1991: 281–282).

There are six types of asset specificity:

Bilateral dependence between market actors (e.g., supplier and customer) rises with increasing asset specificity (as a result of explicit investments causing ‘actor-specific sunk costs’) and, therefore, increases the financial risk. The probability of internalization of value added activities (e.g., vertical forward integration by the supplier or vertical backward integration by the client firm) increases with an enhanced investment specificity (Williamson, 1991: 281–282).

Uncertainty

Actors’ uncertainty related to market transactions is the result of imperfect information (e.g., understanding of performance and quality of the product or service) combined with the bounded rationality phenomena of the actors. Uncertainty as a result of market imperfections necessarily requires market research activities and the initiation, negotiation, and conclusion of contracts (which cause ex-ante costs). Contract supervision and putting through agreed conditions after the contract is signed cause ex-post costs. Because market actors can never rely on perfect and complete information, contracts naturally are imperfect as well because it is impossible to consider all potential eventualities in the course of the market transaction process in concrete contractual terms. The higher the uncertainty, the more difficult it is to include the entire complexity of possible future developments in contracts and, as a consequence, the higher the risk that the market transaction will fail (Williamson, 1975: 9–10; Zajac & Olsen, 1993: 136).

The danger of opportunistic behavior from the transaction partner rises in accordance with the perceived degree of uncertainty. Opportunism refers to the incomplete or distorted disclosure of information, especially calculated efforts to mislead, distort, disguise, obfuscate, or otherwise confuse (Williamson, 1985: 47). The costs of negotiating, monitoring, and enforcing contract conditions in order to ban opportunistic behavior have a tremendous impact on the amount of transaction costs (Hill, 1990: 501). Because contracts can help to mitigate the risk of opportunism in a relationship, they are frequently classified as contractual governance mechanisms (Hoetker & Mellewigt, 2009: 1027–1028).

In addition to (formal visible) contracts, which help to clarify the relationship expectations between the actors, invisible influencing factors such as trust and commitment also have a significant impact on the development of mutually shared expectations related to contractual relationships. The development of trust and commitment can be supported by the contracting actors’ efforts, such as timely communication, smooth exchange of correct information, and coordination of activities (Walter, Müller, Helfert, & Ritter, 2003: 361). However, all these efforts aiming to develop and maintain a trusting contractual relationship cause administrative costs.

Frequency

The more frequently equal transactions are carried out in the market, the lower the average costs of a transaction due to the actors’ learning and experience curve effects. In addition, mutual trust between the transaction partners may rise, which minimizes the contractual negotiation costs of the transaction partners. With an increasing frequency of transactions and mutual trust, the desire to internalize market transactions (hierarchy) decreases (Williamson, 1999: 1089).

Market transactions are recommended as an efficient business form

• –the more standardized the product and service that is the subject of the transaction;
• –the higher the actors’ degree of information, which results in transactional transparency;
• –when product offer and demand are sufficient, such as in polypol market forms; and
• –the more frequently transactions are carried out by the actors.

Backward integration out of manufacturing into the supplier’s value added activities would be implied by hierarchy.

The hybrid mode of business is located between market and hierarchy with respect to control mechanisms, legal responsibility, and costs and corresponding financial risks. An international joint venture and franchising serve as examples of hybrid business modes (Williamson, 1991: 283, 293). Hybrid business models are chosen by actors attempting to balance their market uncertainty risk with the financial risk of internalizing market transactions.

2.3.2Emergence of multinational enterprises

Buckley and Casson transferred the contents of the transaction cost concept to the idea of the multinational enterprise (MNE). Market imperfections (as previously defined in the transaction costs theory) for intermediate products require coordination efforts for global business activities. The desire to increase coordination efficiency has led to the phenomena of emerging MNEs. MNEs internalize the markets across national boundaries whenever the costs of internal organization of market activities are lower than market transactions. Decision determinants for favoring or disfavoring internalization depend on (Buckley & Casson, 1976: 33–34) the following:

(1)industry-specific factors, such as the nature of the product and the structure of the market;

(2)region-specific factors, which relate to the geographical and societal characteristics of the markets;

(3)nation-specific factors, such as political and fiscal relations between the nation concerned; and

(4)firm-specific factors, which reflect the ability of the management to internalize the market.

As illustrated in Figure 12, MNEs appear whenever it is cheaper to allocate international resources and value added activities internally than by making transactions in the markets (Brown, 1976: 39; Buckley & Casson, 1976: 33). Because MNEs own and control resources and activities in different countries, they become able to maximize their profits in a world of imperfect markets. The higher the internal efficiency of in-house procurement and operations, the more desirable is the internalization of international market transactions (Caves, 1982: 36).

Buckley and Casson emphasize the role of an MNE as a cross-boundary developer and transferor of various kinds of knowledge and skills. In an imperfect market system, foreign investment has allowed MNEs to bypass imperfect external conditions through internalization (Buckley & Casson, 1976: 109–110).

2.3.3Review of the internalization theory

The internalization theory extends the market imperfections approach as claimed in the transaction cost theory by focusing on failings in intermediate-product markets rather than on final products. The internalization model identifies transaction costs as a main impulse for internationalization (Buckley & Casson, 1976: 33; Robock & Simmonds, 1989: 45). Buckley and Casson (1976: 33) identified different factors determining the internationalization decision, which does not depend only on market imperfections but also on organizational capabilities, particularly in terms of internal market organization and coordination. As a result of their study, they were the first to describe and explain the emerging MNE phenomena, which has been increasingly seen since the 1970s. They also considered the role of knowledge (disparities) in driving foreign investment decisions as opposed to market transactions (Zuchella & Scabini, 2007: 35). MNEs appear when it is cheaper to allocate international knowledge resources internally than via the market mechanism (Brown, 1976: 39).

Buckley and Casson (1976) focus on industry-specific factors related to internalizing markets for intermediate products in multistage production processes, for example through vertical integration. A vertically integrated firm is determined mainly by the interplay of comparative advantage, tariff and non-tariff trade barriers, and regional incentives to internalize. The firm will become an MNE whenever the combination of these factors makes it optimal to locate different operational stages of value added activities in different countries (Buckley & Casson, 1976: 34–35).

However, there are other motives for enterprises to internationalize, such as for example the necessity of a supplier ‘to follow its customer’ to foreign markets. Moreover, the actual amount of transaction costs can hardly be quantified. Uncertainty is perceived differently by the operating management, and costs usually change in the course of time. Due to the influence of the transaction cost theory (Williamson, 1975; Williamson, 1985) the internalization model is based on ‘rationality’ but pays very limited attention to behavioral-sociological aspects, such as the ethics, culture and norms, or personal preferences of the management (McIvor et al., 2006: 392). Buckley and Casson (2009: 1568) moderate the critics by claiming that rationality does not imply the necessity of complete information. Instead, a rational decision maker collects only enough information to reduce uncertainty.

The latest research considers the behavioral aspects of trust-building and learning as drivers for the success of MNEs in international markets (Vahlne & Ivarsson, 2014: 244). Internalization may be rather disadvantageous in countries where the protection of invested private capital is not secure (consider, for example, the proceeding cases of expropriation of MNEs that originated in the oil industry in Venezuela).

The internalization concept of Buckley and Casson (1976) explains the growth of MNEs domestically and internationally. The approach focuses on a firm’s motives to internationalize but does not consider appropriately the potential of national governments and their political-legal influence on MNE investment decisions. For example, in countries such as China or India, it is advisable to establish a joint venture with local firms in order to enter the foreign market successfully. The need to found a joint venture with a local partner influences the firm’s decision alternatives and may hinder realizing the concept of a complete internalization (e.g., through foreign direct investment) of foreign country activities into the firm’s hierarchy (Robock & Simmonds, 1989: 47).

Chapter review questions

1. Describe the ‘uncertainty’ phenomenon and propose alternatives for how to handle it in international business.
2. Explain the core message of the internalization theory of Buckley and Casson and deduce conceptual drawbacks.
3. Grounded in the internalization theory, explain why multinational enterprises (MNEs) have developed successfully in recent decades.
4. What do you think about the future of MNEs considering the current political, societal, and international business developments around the globe?

2.4The Eclectic Paradigm

2.4.1Advantage categories

The ‘eclectic theory of international production’ was developed by Dunning, who claims that the choice of the international market entry strategy depends on the availability and combination of so-called advantage categories for a multinational enterprise (MNE). Dunning distinguishes three types of advantage categories: ownership-specific, internalization, and location advantages (Dunning, 1979: 269–272; 1980a: 1980; Dunning, Cantwell, & Corley, 1986: 38).

Ownership-specific advantages

The more ownership-specific advantages are possessed by an enterprise, the greater the inducement to internationalize them; and the wider the attractions of a foreign rather than a home country production base, the greater the likelihood that an enterprise will engage in international production. Such ownership-specific advantages may take the form of legally protected rights, patents, brand names, trademarks, or even a commercial monopoly in the market. Furthermore, if access to resources such as raw materials becomes essential for the production of a product, exclusive control over particular distribution channels seems desirable. Ownership-specific advantages may arise from the size or technical characteristics of firms, the economies of scale in production, and qualified entrepreneurial capacity.

The eclectic approach of international production in an enterprise can be described like this: a national firm supplying its own market has various avenues for growth. It can diversify horizontally or laterally into new product lines or vertically into new value chain activities. Alternatively, the firm can acquire other enterprises; or it can enter and exploit foreign markets. When it makes economic sense to choose the last route, the firm becomes an international enterprise (defined as a firm that services foreign markets). However, in order to be able to produce alongside indigenous firms domiciled in these markets, it must possess additional ownership advantages sufficient enough to outweigh the costs of servicing an unfamiliar or distant environment. The function of an enterprise is to transform, by the process of production, valuable inputs into more valuable outputs (Dunning, 1980a: 9–13). Ownership advantages secure multinational enterprises’ competitive superiority over other firms supplying particular foreign markets (Rasmussen et al., 2008: 71).

Internalization advantages

Market imperfections arise wherever information about the product or service being marketed is not readily available or is costly to acquire and, as a result, wherever transaction costs are high. The risk of market failure causes enterprises to internalize market transactions in intangible assets (e.g., knowledge) or tangible assets (e.g., manufacturing facilities) (Dunning, 1979: 288; 1995a: 476). In-house value chain activities help the enterprise reduce the cost of information search in the market, expenses for negotiation and contracting with outside suppliers, and protection of intellectual property rights. Internalization advantages develop certain enterprise-specific capabilities concerning experience curve, operational scale effects, and organizational skills. The issue of ‘internalization’ deals with the question as to why firms choose to engage in foreign direct investment rather than buy or sell intermediate products, in other words performing market transactions (Dunning, 2000: 179).

Besides the phenomena of market imperfections, local governments’ intervention in the allocation of resources may also encourage firms to internalize their ownership advantages. This arises particularly with respect to government legislation toward the production and, where there are differential tax and exchange rate policies, which multinational enterprises may wish either to avoid or exploit them (Dunning, 1980a: 11).

Location-specific advantages

The ability of an MNE to acquire ownership-specific advantages is clearly related to the endowments that are specific to the countries in which they operate and particularly those endowments that are specific to their country of origin. Location-specific advantages answer the question ‘where?’ firms choose to locate their value adding activities or the question ‘why do firms produce in one country rather than in another?’ (Dunning, 2002: 386). Location advantages evaluate the alternative that it is more profitable for the MNE to use its ownership advantages together with factor inputs outside the home country (Rasmussen et al., 2008: 71). Examples of location-specific advantages are government policy (with respect to tariff and non-tariff import barriers, investment incentives, etc.), access and costs of raw material and labor, market volume and attractiveness, and transportation and communication infrastructure (Dunning, 1980: 9–30).

2.4.2Market entry strategy according to advantage categories

Dunning derives the following recommendations for international business engagements from the ownership-location-internalization (OLI) advantage categories. The OLI-paradigm suggests that MNEs that have merely ownership-specific advantages and neither internalization nor location-specific advantages should deal with their foreign business in the form of international contracts (e.g., licenses). However, the greater the ownership and internalization advantages possessed by firms and the more the location advantages of creating, acquiring (or augmenting), and exploiting these advantages from a location outside its home country, the higher the probability that foreign direct investment activities will be undertaken (Dunning, 1994: 23–25). Where firms possess substantial ownership and internalization advantages but location advantages favor the home country, then domestic investment will be preferred to foreign direct investment; and foreign markets will be supplied by exports (Dunning & Dilyard, 1999: 13). The advantage category connections and corresponding market entry strategies are illustrated in Figure 13.

Initially addressed as a static model, Dunning further developed the eclectic paradigm several times over a period of more than twenty years, paying more attention over time to dynamic competitiveness and the strategic aspects of the firm (compare: Dunning, 1973, 1983, 1993, 2001). Changes in the global markets witnessed since the 1990s, the deepening integration of global capital and logistics, the liberalization of cross-border markets, and the emergence of several new countries as important players in the global economic arena caused Dunning to modify and enlarge each of the OLI categories with dynamic components (Dunning, 2001: 187).

Resources and capabilities, such as the ability to internally produce and organize proprietary assets, that match existing market needs at any given moment of time (static ownership advantages) were enlarged by context-specific issues to increase income generating assets over time (dynamic ownership advantages). Dynamic means, for example, that the trade-off of resources that can be internally developed with those externally acquired (e.g., through bilateral relationships with other market actors) becomes more crucial than the resources themselves (Dunning, 1995b: 198; 2001: 174).

Location-specific advantages have been traditionally expressed by the availability of a country’s unique immobile natural resources, which the MNE may make use of. This category was enlarged by distinctive and non-imitable, location-bound created assets, such as the presence of firms that have specific local market knowledge (e.g., access to local customers because of suitable and efficient marketing communication). MNEs might form relationships to complement their own core competences (e.g., advanced production technology) with the specific knowledge (e.g., marketing) of those local firms (Dunning, 2001: 178). Geographic locations that used to be regarded as targets for the supply of raw materials (e.g., static location advantages) are also becoming recognized as possible sources of learning and innovative capabilities (e.g., dynamic location advantages). The need for the firm’s efficiency improvement through rationalization highlights the importance of management’s strategic capabilities through holding a dynamic perspective (Dunning, Pak, & Beldona, 2007: 534).

2.4.3Review of the Eclectic Paradigm

The achievement of Dunning’s paradigm is that multiple reasons are considered that influence an MNE’s choice of market entry strategy. The appearance and combination of advantage categories serves as the basis for management decision making as to whether to proceed with exports, contractual entry modes such as licensing or franchising, or foreign direct investments.

The creation of the eclectic paradigm is based on different models, such as the internalization theory, the resource-based view, and the location theory. In a parallel manner, criticism of the paradigm is related to its grounding in other theories. Hohenthal (2001: 80) criticizes the paradigm for mixing three different and sometimes overlapping sets of explanations from location concepts (location-specific advantages), resource-based theory (ownership advantages), and transaction cost theory (internalization advantages). This conglomerate of theories makes the eclectic paradigm very complex, limits validity testing of the model, and makes it difficult to use. The three advantage categories are formulated too generally, which makes it impossible to develop a concrete recommendation for an MNE’s internationalization strategy. The eclectic paradigm presupposes that different firms have broadly similar objectives and respond to economic signals both consistently and following the same strategic direction. The model ignores the fact that a firm can also utilize different market entry modes (e.g. export and license) depending on its diversified businesses in the same foreign target country (Robock and Simmonds, 1989: 48).

The eclectic paradigm rather is suitable when considering circumstances in manufacturing industries instead of in internet-based service businesses. Due to the influence of the transaction cost theory, the eclectic paradigm assumes a rationally thinking actor who makes decisions mainly based on cost calculations. On the one hand, transaction costs are difficult to specify and quantify. On the other hand, the assumption of rational thinking is hard to accept fully when it comes to behavioral aspects, such as preferences or aversions of the management, which also influence market entry decisions. The strategic concept concerning foreign market entry is not mandatory based on the pure rational trade-off of logical circumstances but usually influenced by the founding entrepreneur and/or the operating management and their individual experiences in terms of a particular target market.

Chapter review questions

1. Considering the eclectic paradigm, describe when a firm’s management should arrange its foreign market entry through exports.
2. Summarize what kind of ‘market imperfections’ are discussed in the transaction cost theory. Identity linkages between the ‘phenomena of market imperfections’ and the ‘internalization advantage category’ as defined in the eclectic paradigm.
3. Summarize in your own words why foreign direct investments are recommended according to the eclectic paradigm when ownership, location, and internalization advantages are available?

2.5The Uppsala Model of Internationalization

2.5.1Incremental market entry through accumulated knowledge

During the mid-1960s, Carlson, one of the pioneers of internationalization process theories, argued that firms pass cultural barriers when entering foreign markets. With increasing experience in foreign operations, the enterprise is willing to enter one market after another (Carlson, 1966: 15). Firms handle the risk problem through an incremental decision-making process, where information acquired in one phase is used in the next phase to take further steps. Through this incremental behavior, the organization can maintain control over its foreign activities and gradually build up its knowledge of how to conduct business in diversified foreign markets (Carlson, 1966: 15; Forsgren, 2002: 258).

Based on the empirical observations of Swedish pharmaceutical, car, steel, pulp, and paper firms, Johanson and Vahlne (1977, 1990) further developed the ideas of Carlson and introduced the gradual internationalization theory. Their research results, in connection with articles from other scholars at the University of Uppsala concerning the internationalization processes of firms (compare: Carlson, 1975; Forsgren & Johanson, 1975; Johanson & Wiedersheim, 1975), later became known as the ‘Uppsala internationalization model’ (Björkman & Forsgren, 2000: 11). The Uppsala approach assumes that enterprises, due to a lack of foreign market knowledge, which is connected to corresponding market uncertainty, follow an incremental internationalization chain pattern.

Incremental internationalization pattern

At the start, there is no regular export. Business is concentrated in the home market. Then export begins via independent representatives (agents), later through sales subsidiary, and eventually foreign manufacturing may follow at the end (Johanson & Vahlne, 1977: 24)

Lack of knowledge, due to differences between countries with regard to language and culture, is an important obstacle when making decisions connected with the development of international business activities. As a consequence, another pattern can be derived: firms prefer entering new markets with lower psychic distance. Psychic distance is defined in terms of factors such as differences in language, culture, political systems, and others that disturb the flow of information between the firm and the market. Thus, firms start internationalization by going to those markets with somewhat lower geographical distance, which they can better understand and where the perceived market uncertainty is relatively low (Johanson & Vahlne, 1977: 23–26; 1990: 13).

In their incremental internationalization model, Johanson and Vahlne (1977: 30) distinguish between the state aspects (market commitment and market knowledge) and the change aspects (current activities and commitment decisions).

(1)State aspect/market commitment: the degree of commitment is higher the more the resources are integrated and the more their value is derived from these activities. Vertical integration means a higher degree of commitment than a conglomerate foreign investment. An example of resources that cannot easily be directed to another market is a marketing and sales organization with country-specific product modifications and service with highly integrated customer relations. The more specialized the resources are to the specific market, the greater is the degree of commitment.

(2)State aspect/market knowledge: structure of competition, supplier and customer characteristics, and cultural aspects belong to market-specific knowledge, which can be gained only through experience during operation in the foreign market. Experiential knowledge, which is associated with particular conditions in the market in question, cannot be transferred to other individuals or markets. It can be considered a unique resource. The more valuable the resource for the firm, the stronger is the commitment to the market.

(3)Change aspect/current business activities: for instance, marketing and sales activities belong to running firm operations. The higher the investments in advertising in a foreign market, the more technologically sophisticated and differentiated the product, the larger the total commitment as a consequence of current activities.

(4)Change aspect/commitment decisions: enterprise decisions to commit resources (i.e., financial, human workforce, and advertisement) to foreign markets depend on a firm’s general business experience as well as market-specific experience. Additional commitments are made in small steps unless the firms have very large resources and/or market conditions are stable and homogeneous or the firm has more of its experience from other markets with similar conditions. Further market experience leads to a stepwise increase of the operations and of the integration with the foreign market environment, thus resulting in higher market commitment (Johanson & Vahlne, 1977: 29).

The internationalization process of a firm was similarly described by Luostarinen (1980) as a stepwise and orderly utilization of outward-going international business operations (compare Figure 14). The incremental and orderly geographical expansion from countries with close business distance to more distant markets causes an increasing dependence on marketing, purchasing, production, finance, the human resources department, and other functions of the company in international markets. Physical distance represents a restricting force to the flow of information and disfavors countries located farther away as a target market (Luostarinen, 1980: 129, 200–201).

Market uncertainty in international business is related to knowledge. Learning is a process of accumulating knowledge either through access to information or business experience. The introduction of the concept of organizational learning represents a dynamic process where firms seek experiential knowledge about individual clients and markets, as well as about institutional factors, such as how to deal with local laws, governments, and cultures. Information is accumulated through activities and presence in foreign markets, which increases costs. These costs arise in the process of collecting, encoding, transferring, and decoding knowledge, as well as changing the resource structures, processes, and routines in the organization. Thus, knowledge plays a crucial role in strategic international business decision-making (Eriksson, Johanson, Maikgard, & Sharma, 1997: 352; Luostarinen, 1980: 48–49).

Internationalization is a process that is difficult to plan well in advance. Organizational structures and routines are built gradually as a consequence of learning: first, a firm’s internal capabilities and competence (e.g., language qualifications of employees) and second, foreign market requirements (e.g., process quality consciousness and service expectations). In this process, understanding the history of the firm is important. Sporadic interaction with actors in foreign markets provides little experience. The more the firm pursues durable and repetitive linkage with external participants abroad, the better the basis for the improvement of internal organizational routines and procedures (Eriksson et al., 1997: 354).

2.5.2Review of the Uppsala model

According to the Uppsala approach, firms internationalize incrementally from physically and culturally close foreign business markets to more distant countries. During the internationalization process, the firm gains experience that forms the basis for further foreign activities in countries that are located even farther away from the home market. The organizational learning process through accumulated experiential knowledge and through ongoing activities is very important for the firm and its successful international business expansion. How the organizations learn and how their learning affects their organizational behavior are the crucial elements of the Uppsala concept. The more market knowledge the firm acquires through its own experience, the less is the perceived risk and the higher is the propensity for foreign market entry.

During the last decades, the Uppsala model became one of the most cited, discussed, and criticized models in the international business literature (Barkema & Drogendijk, 2007: 1132; Hadjikhani, 1997: 47). It is claimed that the model is too deterministic because it considers Swedish firms only, and research is grounded on a relatively small number of firm cases. In modern international business, firms are less inclined to repeat the value chain in each country, reconfiguring it instead globally in terms of where revenues are high or costs are low. The model tends to ignore the fact that a firm also faces a risk by not entering a foreign market – the risk of not participating in an up-coming industry cluster of supplier and customer networks where the firm’s competitors are looking for their chance for business (Forsgren, 2002: 258, 260).

The Uppsala model narrowly focuses on ‘knowledge’ and ‘learning’ as major influencing factors for market entry decisions and business performance in the course of the internationalization process (Dunning, 2000: 184). There is a tendency toward shorter product life-cycles and faster knowledge transfer due to improved communication and information technologies. The contents and information value of the model are largely restricted to the initial stages of internationalization processes and have a rather reactive character, leaving little room for entrepreneurial strategic choice (Autio, Sapienza, & Almeida, 2000: 909).

Recent research findings concerning the phenomenon of new venture firms indicate that firms show a more rapid pace of internationalization; and, contrary to Johanson and Vahlne’s panel of Swedish enterprises, smaller rather than larger firms make large internationalization steps in a shorter period of time (Hashai & Almor, 2004: 479). International new venture firms from their firm inception tend to disregard domestic markets in favor of the international marketplace, which seems to be more attractive (Young, Dimitratos, & Dana, 2003: 34). These firms make use of existing business relations in globally knit networks. Instead of focusing on ‘self-learning’, knowledge about foreign markets can be acquired through relationships and interaction with other market actors. The prediction of the Uppsala concepts that internationalization is always a one-directional process cannot be confirmed. Firms have the opportunity to recall their foreign engagement if the performance in particular markets is below their expectations (Forsgren, 2002: 264). Technological and product life-cycles have shortened compared to the past. Thus, an incremental and rather slow international market entry involves the risk that investments are not amortized because technologically advanced products are just around the corner.

Furthermore, psychic distance is perceived differently by operating managers in international business. People develop subjective mental maps of space (e.g., foreign geographical location) and distance (e.g., culture and language) that need not necessarily correspond to reality. Therefore, it is hard to assume that international business performance naturally correlates with the degree (which is difficult to measure) of psychic distance (Stöttinger & Schlegelmilch, 2000: 170 –172).

Accumulated internationalization knowledge that affects both business knowledge and institutional knowledge is not limited to specific country markets. Organization-specific experience in foreign business can be used in all markets (Eriksson et al., 1997: 353). Therefore, Björkman and Forsgren (2000: 12) argue that the model is less valid for very large multinational enterprises and firms with extensive international experience in high-technology industries. The Uppsala approach focuses on manufacturing products where production takes place in the domestic market, and the goods are sold at arm’s length in overseas markets. Therefore, the business activities of many small firms in the service industry, where manufacture and delivery are inseparable, do not fit into the export-based Uppsala model for the process of internationalization (Jones, 2001: 192).

The Uppsala internationalization theory has been further criticized for its tendency to ignore or de-emphasize strategy as the evolutionary development of an existing state rather than the result of explicit economic analysis and decision making (Jones & Coviello, 2002: 8). The concept concentrates on experiential learning through commitment decisions and business activities abroad. However, the model is not able to accept the possibility of imitative learning, i.e., monitoring other firms acting in a similar way and assimilating from them. Firms are occasionally forced to follow the client when they enter foreign markets. An organization can also look for radically new alternatives alongside current business modes and decide market entry according to the forecasted market opportunities and not according to its current level of foreign business experience. Thus, the possible internationalization routes are more multifaceted than anticipated in the Uppsala model (Forsgren, 2002: 260, 274).

Several decades after publishing the Uppsala concept in the academic literature, Johanson and Vahlne concluded that firm behaviors and economic and regulatory environments have changed considerably or did not exist when the Uppsala model was published (Johanson & Vahlne, 2003: 92). Markets and industries have become increasingly integrated worldwide. Internationalization processes are characterized by networks of relationships in which firms are linked to each other in various complex patterns. Instead of focusing on a single firm’s progress in ‘self-learning’ and ‘knowledge accumulation’ as recommended in Uppsala, internationalization processes should be seen from a business network perspective of the environment faced by an internationalizing firm (Johanson & Vahlne, 2009: 1411). The network theory of internationalization is introduced and explained in the next section of this book.

Chapter review questions

2.6Network Theory of Internationalization

2.6.1Inter-organizational relationships

In general, a network is a model or metaphor that describes a number of entities that are connected (Axelsson & Easton, 1992: XIV). In the case of international industrial networks, the entities are actors involved in the economic process that converts resources into finished goods and services. The network model is based on the assumption that a firm’s changing internationalization situation is a result of its positioning in a network of firms and their connections to each other (Zuchella & Scabini, 2007: 48). The market is depicted as systems of social and industrial relationships among various parties. The network concept encompasses a firm’s set of relationships, both horizontal and vertical, with other entities, such as system and component suppliers, manufacturers, merchandisers, customers, and competitors, and includes relationships across industries and countries (Gulati, Nohria, & Zaheer, 2000: 203;Windeler, 2005: 215). By entering global networks, firms gain international knowledge through learning from other network actors, which assumes the establishment, development, and protection of international business relations (Håkansson & Johanson, 2001: 9; Mathews, 2002: 208; Samiee, 2008: 4).

Learning through relationships

Internationalization is a process of increasing involvement in international operations, which results in an accumulation of knowledge about markets and institutions abroad (Ellis, 2000: 443; Welch & Luostarinen, 1988: 36). Modern internationalization processes are particularly characterized as a course of learning through network relationships (Sharma & Blomstermo, 2003: 739–740, 750).

The network perspective draws attention to long-term business activities that exist among firms such as suppliers and customers in industrial markets. While the traditional Uppsala approach focuses on the circumstances and internationalization process of the individual firm, the network theory pays attention to the firm’s interconnections with local and foreign units (Björkman & Forsgren, 2000: 13; Zuchella & Scabini, 2007: 48). Through its ‘combinative capability’, a firm exploits knowledge (collected in industry networks) for expansion into new markets. Thus, the efficient organization of knowledge transfer among the firm units is of vital importance for business performance (Kogut & Zander, 1993: 636; Zuchella & Scabini, 2007: 52).

Networks among buyers and sellers, which form the basis of effective communication, have to be established, thus providing firms with the opportunity and motivation to internationalize. Relevant information disseminates via social interaction (Ellis, 2000: 447). The nature of relationships influences the strategic decisions of the participating firms (Coviello & Munro, 1997: 365). Relationship-based strategies for market entry range from long-term oriented licensing agreements and contract manufacturing to international joint ventures with two or more partners (Mathews, 2002: 207–208).

2.6.1.1The impact of the resource-based view

The resource-based view (RBV) holds that a firm acquires competitive characteristics not simply as a function of its market location, such as its position in the value chain within a certain industry (compare: Penrose, 1959). Competitive advantages are particularly derived from a firm’s ‘inner resources’ (e.g., managerial, organizational, technological resources, etc.) as well as from the firm’s capacity to absorb and integrate ‘external resources’ through relationships (Fahy, 2002: 62; Mathews, 2002: 222; Wernerfelt, 1984: 171).

According to Barney (1991: 105–106), a firm’s resources should have the following attributes to gain sustained competitive advantage.

How to gain competitive advantage according to the resource-based view

Consequently, the assumption that more knowledge would be likely to improve the efficiency and profitability of the firm acts as an incentive to acquire new knowledge and shape the scope and direction in the firm’s search for knowledge inside and outside its own organization (Penrose, 1995: 77). Based on the foundations of the RBV, Grant (2000: 117) argues that the fundamental prerequisite for market power is the presence of market entry barriers based upon a firm’s resources in the market, as for example scale economies, patents, international experience advantages, and brand reputation. The ability to establish a cost advantage requires possession of scale-efficient plants, superior process technology, ownership of low-cost sources of raw materials, or access to low-wage labor. Differentiation advantage is conferred by superior quality and innovative products linked with proprietary technology or an extensive sales and service network.

The RBVperceives the firm as a unique bundle of idiosyncratic resources and capabilities where the primary task of management is to maximize value through the optimal deployment of existing resources and capabilities. In line with RBV, particular fostering of the knowledge resource is of vital importance in order for the firm to gain competitive advantage. Grant (1996: 111) describes ‘knowing how’ as ‘tacit knowledge’ and ‘knowing about facts and theories’ as ‘explicit knowledge’. The critical distinction between the two lies in transferability and the mechanisms for transfer across individuals, space, and time. Explicit knowledge is revealed by its communication and tacit knowledge through application. Communication efficiency is a fundamental resource property, thus an important strength of the firm. At both individual and organizational levels, knowledge absorption depends upon a recipient’s ability to add new knowledge to existing knowledge (Grant, 1996: 111).

Knowledge transferability is important, not only between firms such as suppliers and customers, but even more critically, within the firm. Consequently, the creation of tacit knowledge and the ability to transfer it effectively within the organization, which includes its foreign operations, should move into the focus of management. Transmission capacity is defined as the ability of a firm (or the relevant business unit within it) to articulate uses of its own knowledge, assess the needs and capabilities of the potential recipient thereof, and transmit knowledge in a way that allows it to be used in another location of the firm’s organization at home or abroad (Martin & Salomon, 2003: 363). The resource interaction in the coupling and matching of internal and external network processes affects knowledge transfer efficiency and, finally, has a vital impact on the firm’s overall business performance (Gadde, Hjelmgren, & Skarp, 2012: 215).

A firm’s industry network engagements, initiated in order to better manage resource assets, come along with advantages and also with potential risks. Knowledge and experience serve as the most valuable firm resources. Protection of these resources from imitation by securing intellectual property rights (e.g., patents, copyrights, and trademarks) is of interest but, naturally, has limits. The choice of market entry mode affects the protection of strategic knowledge. For example, a wholly owned subsidiary provides better prerequisites for knowledge safekeeping than an international joint venture (Martin & Salomon, 2003: 368). Why? In a joint venture, knowledge is shared with the partner firms (e.g., manufacturing process know-how). Consequently, through the process of learning and imitating, the joint venture partner firm may eventually become a competitor. Protection of intellectual property is always a challenge, and the key is to be faster than the competition if a leading technology firm wants to keep its competitors at bay. Innovators with advanced technological and managerial knowledge resources have to adapt their market entry concepts carefully and intelligently and should think twice when deciding with whom in the market to form a long-term partnership, such as an international joint venture (Teece, 2000: 96).

Mathews (2002: 8) analyzed international activities, examining the cases of incumbents (firms that are already established in the worldwide market) and international latecomers (those with delayed global market entry) as examples based on the RBV. Latecomers are firms that delay their global market entry relative to the majority of their competitors. They use the benefits of their network relationships, which are a valuable resource and help them overcome market entry barriers such as limited knowledge about international markets, suppliers, and customers (Mathews, Hu, & Wu, 2011: 186). Learning from network partners allows a rapid substitution for less developed inner resources and experience; thus, international latecomers or small-and medium-sized firms can leverage advantages from the incumbents, for example through long-term partnerships. Within the global economy, international latecomers can more readily build their global operations by linking up with existing players than was possible in the past (Mathews, 2002: 8, 222).

2.6.1.2Resources and dynamic capabilities

Innovative firms that successfully act in the global arena usually exhibit so-called dynamic capabilities to gain, reconfigure, and integrate external and internal resources in order to match current market expectations and also to create market changes for the future (Liao, Kickul, & Ma, 2009: 264). Dynamic capabilities reflect a firm’s capacity to deploy resources through developing, carrying, and exchanging information, which leads to specific and identifiable processes concerning product development, international market entry, and relationship building (Lin, McDonough III, Lin, & Lin, 2012: 264). Particularly in web-based service industries, imperfectly imitable capabilities (e.g,. innovative ideas) become more important as a source of competitive advantage than conventional asset resources, such as real estate, land, and others (Erramilli, Agarwal, & Dev, 2002: 237). In stable markets where changes are predictable, dynamic capabilities rely on existing knowledge; and the learning process is limited to organizing and assembling resources as a consequence of market changes. However, because of liberalized global trade patterns, international markets have become more complex and, as a consequence, less predictable. Based on the RBV grounding, Teece et al. (1997: 515) highlights a firm’s ability to achieve new forms of competitive advantage, necessary in turbulent and uncertain markets, as dynamic capabilities and mentions two key aspects related to this.

• –First, the term ‘dynamic’ refers to the capacity to renew competencies so as to achieve congruence with the changing business environment. Certain innovative responses are required when time-to-market decisions are crucial, the rate of technological change is rapid, and the nature of future competition and markets is difficult to determine. All these elements are valid in order to characterize the high-technology industries and their competitive market environments.
• –Second, the term ‘capabilities’ emphasizes the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competencies to match the requirements of a changing environment. Capability is a special type of an organizationally embedded nontransferable firm-specific resource, whose purpose is to improve the productivity of the other resources possessed by the firm (Makadok, 2001: 389; Teece et al., 1997: 515).

Successful players in the global marketplace are firms that can demonstrate timely responsiveness and rapid and flexible product innovation coupled with the management capability to effectively coordinate and redeploy internal and external competencies. Management activity cannot lead to the immediate replication of unique organizational skills through simply entering a market and piecing the parts together overnight. Replication takes time, and the replication of best practices always may be illusive. The potentials for firm capabilities are understood in terms of organization structures and managerial processes that support productive activity (Teece et al., 1997: 515, 517). Dynamic markets force firms to react, within the shortest possible time period, to changing business situations and so to renew competencies in order to respond innovatively in the market (Eisenhardt & Martin, 2000: 1107; Zuchella & Scabini, 2007: 87–88).

2.6.1.3The case study of Sony: Resources reshuffled – dynamic capabilities disappeared?

2.6.1.3.1Company origins (the period from 1945 until the 1980s)

In September 1945, a thirty-eight-year-old engineer named Masaru Ibuka, with about twenty employees and USD 1,600 of his personal savings, established a telecommunication engineering firm, Tokyo Tsushin Kogyo K.K. Another engineer by the name of Akio Morita soon joined the team. At the beginning, the company considered producing everything from electric rice steamers to miniature golf equipment. However, the company was never able to make a steamer that worked properly, so Ibuka and Morita decided to manufacture sound-recording devices instead (Frisch, 2004: 4–6).

Tape recorders had been developed in Germany in the 1930s by Grundig and Telefunken. In the United States after 1945, Ampex led the market in developing and manufacturing tape recorders. At that time, Matsushita, Hitachi, and Toshiba, the largest Japanese electronics manufacturers, were developing their first semiconductors under the technical license of Radio Corporation of America (RCA). In 1952, the business focus of Ibuka shifted from magnetic tape recorders to transistors. He learned that Western Electric, the parent company of Bell Laboratories, where semiconductors had been discovered in 1948, was offering a technical license for manufacturing transistors in return for a royalty. The agreement stipulated a USD 25,000 advance payment against royalties (Nathan, 1999: 27–31).

The company began using the Sony trademark on its products beginning with the TR-55 transistor radio in 1955. In the late 1950s, Sony expanded its consumer use manufacturing portfolio to microphones, cassette-tape players, and television apparatuses. In 1957, the company introduced the world’s smallest transistor radio with built-in speakers. By January 1958, the firm had grown to 500 employees and was worth more than USD 100 million and officially changed its name to Sony Corporation (Frisch, 2004: 10–11; Nathan, 1999: 53). In 1960, Sony’s engineering team introduced the world’s first transistor television.

Japanese firms are well known for their complex network of interlinked companies (keiretsu). A classic keiretsu consists of a bank, a trading company (sogo sho-sha), and various manufacturing companies. Besides this horizontal network of associated business groups, there are vertically connected manufacturing firms at the core and suppliers at the periphery. These networks of companies represent a ‘network of knowledge’, which aims to make the core company independent from outsiders such as banks and invulnerable to competition (Chang, 1995: 391; Imai, 1987: 32–35). Following the philosophy of ‘keiretsu organization’, Sony began to expand its business fields in the 1960s. For example, Sony founded Sony Enterprise Co. Ltd. in 1961 to manage the Sony Building in Ginza. Over the next years, Sony Enterprise added Sony Plaza, a retail chain, to market imported goods; a French restaurant named Maxim’s de Paris; Sony Travel Service, an insurance agency; and other services such as financing. Building on the theme ‘not hardware but heartware for everyday life’ to unite a diverse range of businesses, Sony Enterprise continued to move in new directions. Similar to a trading house, it put together a plan to import fine foreign goods and, in the mid-1970s, started to import sports equipment and fashionable luxury items. Sony was at the same time successfully exporting its consumer electronics products and expanding its overseas operations (Sony, 2008b).

Sony opened its first overseas branches in Hong Kong in 1958, in the US in 1959, and in Zurich, Switzerland, in 1960. Most of Sony’s entrances into new areas of business were through international joint ventures with foreign companies. One of the first international joint venture operations involved products connected to Sony’s core electronics business. In March 1965, Sony and Tektronix, Inc., of the US formed Sony-Tektronix Corporation in Japan with equal start-up capital from each company. At the time, it was highly unusual for a foreign company to have more than a 49 percent share in a joint venture with a Japanese company. Tektronix was a well-known instrumentation and measuring equipment manufacturer, commanding over 80 percent of the global market for oscilloscopes. The international joint venture expanded its operations into new fields, including the further development of electronic measuring instruments, graphic displays, broadcast equipment, and optical devices. With such a variety of products, Sony-Tektronix was able to meet the needs of a wide range of customers. Interestingly, in 1966, Sony signed a contract with IBM aimed at cooperation on production of magnetic computer tapes, which, however, turned out to be rather unsuccessful (Sony, 2008b).

Until the 1970s, Sony mainly relied on domestic battery suppliers for its transistor radios, transistor televisions, and tape recorders. But the demand for batteries was growing as Sony focused manufacturing on portable consumer electronics. If Sony had its own battery manufacturing facility, the company could not only meet its own requirements but also tap into the rapidly growing market for small batteries used in cameras, watches, and calculators. Therefore, Ibuka and Morita wanted to have their own battery manufacturing facilities. In February 1975, Sony and the Union Carbide Corporation (UCC) of the US established a battery manufacturing and marketing joint venture called Sony-Eveready Inc. UCC manufactured and marketed batteries under the Eveready brand name, was the largest producer of batteries in the world, and wanted to do business in Japan. An equal amount of the initial capital was provided by both parties, and Morita was appointed president. The international joint venture began importing dry cell batteries from the United States and marketing them under the Sony-Eveready name in Japan (Sony, 2008c). From today’s perspective, using products such as smart phones and electric cars as examples, Sony was ahead of its time when the company entered the battery manufacturing business within its consumer electronics core business in the 1970s. Unfortunately, Sony did not focus very much on the further development of the battery business and, instead, searched for other businesses in order to achieve additional diversification.

2.6.1.3.2Diversification towards movie and entertainment

In the late 1980s, Sony diversified away from its core competencies in consumer electronics and entered the movie, music, and entertainment industry. In January 1988, it bought CBS Records. In November 1989, Sony purchased Colombia Pictures Entertainment, one of the biggest motion-picture companies in the world, and integrated it into the company in new business units called Sony Music Entertainment and Sony Pictures Entertainment. These two major acquisitions generated mixed media coverage throughout the United States and Japan (Sony, 2008b). In 1995, a new Sony division called Sony Computer Entertainment launched a home video game system and the play station (Frisch, 2004: 19, 25, 31).

Entering these fields reflected Morita’s ambitions for the entertainment business and his naturally close relations with the US market, which had been developed over decades ever since Sony’s foundation. Moreover, Morita intended to serve the entire value chain by combining the making of and watching of movies with Sony’s hardware (e.g., camera, studio equipment, audio, video, and televisions sets). However, resource allocations toward unfamiliar segments such as the movie and music business caused a weakening position in electronics, the core business of the Japanese firm. In order to develop its new diversified business fields, Sony started to reroute its financial, research and development, and human resources away from the firm’s technological and innovative resource competencies in electronics.

Over the years, Sony became involved in diversified business fields such as electronics; game pictures; financial service; music; movies; banking; life insurance; and, recently, medical/healthcare. The current organizational structure reflecting the diversified business of Sony (status 2015) is illustrated in Figure 15 below.

2.6.1.3.3Loss of core competencies in electronics

Recall that in 1968, Sony introduced the Trinitron television technology, with superior color and brightness performance relative to its competitors (Frisch, 2004: 12–13). The transistor radio and the Trinitron television technology were state-of-the-art and led the worldwide markets and, thus, supported the successful growth of Sony until the 1980s. During this time, Sony continuously increased its in-house supply network up to about seventy-five manufacturing plants. The firm’s ‘optimization sharing plan’ enhanced supply chain innovation. This helped Sony achieve an efficient supply chain management system within and across its units, which incorporated upstream suppliers and downstream distributors and retailers within the organization (Samiee, 2008: 4). The introduction of the Walkman in 1979 further boosted the reputation of Sony as the driving pioneer in the consumer electronics industry, which contributed at the same time to the overall vitality and strength of the firm.

Sony kept major know-how and expertise with respect to its electronics technology inside the company. Sony neither agreed to further joint ventures with other firms – for example, those operating in the television set industry – nor purchased major components such as displays from suppliers outside Sony’s group periphery. This firm culture gave Sony an invulnerable, independent, ‘going alone’ reputation in the electronics industry but, simultaneously, created the risk of making the firm blind to emerging technological innovation outside its organization. And soon Sony would need to pay the bill.

In the 1990s, Sony’s management failed to recognize new, upcoming trends in consumer electronics, such as flat panel technologies. This went along with unsuccessful developments in other business operations when, for example, Sony failed against competitors at setting the technological industry standards for several electronic systems, such as the Betamax-Video, the Multimedia-Compact-Disc, and the Atrac MP-3 format. Further joint research and development activities concerning the multimedia disc with Philips started in 1979 and were renewed in 1992 (joint development towards the introduction of a DVD industry standard). Unfortunately, the Sony and Philips partnership failed against the high-definition DVD of the rival alliance of Toshiba; Hitachi; Pioneer; JVC; Thomson; Mitsubishi Electric; and, later, Panasonic, which had supported Sony at the beginning of the technological battle (Sony, 2008b; WeltOnline, 2008).

In 2008, there were some bright spots when Sony, with its Blu-ray Disc™ technology, succeeded in the competition against its Japanese rival Toshiba, which was the leading firm in developing the high definition DVD standard (Sony, 2008b; WeltOnline, 2008). However, the hardware-based Blu-ray disc business performed below expectations. At the initial stage of its market launch, customers hesitated to switch their movie collection from DVD to Blu-ray. A couple of years later, emerging Internet-based movie streaming technologies invited new players such as Amazon, Netflix, and others and limited the Blu-ray disc sales to a considerable extent. Technology and product life cycles in consumer electronics became significantly shorter compared to the 1970s and 1980s, as Sony’s management realized to their regret.

In recent years, Sony has tried to regain competitive strength as a technological leader in the electronics industry by concentrating on the next flat panel generation technology, called organic light emitting diode (OLED) technology. OLED displays have been supposed to replace LCD/LED soon, thus driving the flat-panel TV business in the future. In 2008, Sony was the first company to launch commercially available OLED TVs (11-inch, 960x540-pixel, model XEL-1), which were selling in limited quantities for about USD 1700 in Japan and USD 2500 in the US. Sony developed the OLED technology mainly by itself (DisplaySearch, 2008b). However, Sony’s main competitors, such as Samsung, LG Electronics, Panasonic, and others, were not sleeping and further improved the LCD/LED technologies utilized in their television sets. As result, the so-called 4 K technology was launched for LCD/LED television sets, which caused Sony to announce in 2015 (seven years after the XEL-1 was introduced) that the company would further delay sales plans for serial production of large quantities of its OLED TVs. Instead, Sony would concentrate as well on the 4 K technology for the time being (Cox, 2015). Another drawback for Sony’s Blu-ray business is the fact that 4 K technology indicates an advanced 4096x2160 pixel display solution, while Blu-ray only reaches 1920 x 1080 pixels.

One of Sony’s biggest mistakes was that it was delayed too much, relative to its competitors such as Sharp and Samsung, in the building of its own LCD module assembly lines. The LCD module contributes around 70 percent to the television set value-added activities. Thus, naturally, the question arises, how will Sony manage to reset in the television set (LCD) industry?

2.6.1.3.4Access to LCD technology through inter-organizational relationships

The lack of LCD manufacturing capacities led Sony to establish a joint venture called S-LCD Corporation with its South Korean rival Samsung (Ihlwan, 2006). In 2004, the final contract was signed to establish a seventh generation LCD panel joint production line at Tangjeong, Chung Cheong Nam-Do, South Korea (Sony, 2006c). Through the international joint venture with the well-branded television set manufacturer Sony, Samsung, for its part, could increase its marketing, sales, and distribution assets and balance the investment risk in LCD module manufacturing. The international joint venture formed the common supply basis to provide LCD modules to Sony Corporation and Samsung Electronics, which, at the same time, are competitors in the final industry stage of LCD television sets. A dilemma?

At the beginning of the joint venture operations with Samsung, Sony had concerns about quality. The company not only dispatched its own engineers to the joint venture to vet LCD displays it also insisted that every panel it used should be shipped through its LCD-TV factory in Inazawa, near Nagoya, Japan. There the panels went through another rigorous quality check before electronics components, such as digital tuners, power units, and other parts, were added. At the end of that quality check procedure, approved displays were assembled into television sets or shipped off as modules to Sony’s assembly plants in Spain and Mexico (Ihlwan, 2006). After the initial period of joint venture operations, manufactured panels were shipped directly from S-LCD to the assembly plants of Sony without a double inspection.

Sony confirmed that the joint venture has been instrumental in the company’s introduction of the successful Bravia LCD TV line up. At the same time, Samsung’s own LCD television set business has made considerable progress. The South Korean Cheabol has emerged as a trend-setter in the LCD panel industry, aided by Sony expertise that has helped ensure high-quality display performance. ‘The Sony-Samsung alliance is certainly a win-win’, declared Lee Sang Wan, president of Samsung’s LCD unit. Sony’s executive deputy-president, Katsumi Ihara, who had led Sony’s television set division and then was appointed to oversee key consumer-electronics product lines, also credited the alliance with helping to revive the company’s LCD television set business fortunes (Ihlwan, 2006). In July 2006, Sony and Samsung announced they would expand their cooperation towards an eighth generation amorphous LCD panel production line (Sony, 2006b, c).

Surprisingly, only two years later, Sony reviewed its ambitious relationship with Samsung and announced plans for a new alliance partner, Sharp Corporation of Japan. ‘This is a major step toward attaining our goal of becoming the top TV manufacturer worldwide’, proclaimed Ryoji Chubachi, president of Sony Corporation of Japan, at the start of the press conference in April 2008. Through the joint manufacturing facilities at Sharp’s Sakai factory, the first tenth-generation plant in the world, Sony thought it would be able to take advantage of higher assembly efficiency and achieve price superiority over its main competitors, such as Samsung Electronics (Otani, 2008). Sony’s new joint venture ambitions with Sharp not only influenced Samsung, Sony’s previous panel investment partner, but also Taiwanese panel makers such as AU Optronics, which also has supplied large numbers of LCD panels to Sony (DisplaySearch, 2008a).

What is the truth behind the sudden joint venture termination with Samsung? Over the years, Sony became engaged in severe competition in LCD TVs with Samsung Electronics in the leading worldwide markets, utilizing their common supply of LCD displays created through the joint venture. Outside the European and North American markets, Samsung Electronics often holds a larger share than Sony, such as in promising markets in the newly emerging economies of Brazil, Russia, India, and China. According to Torii Hisakazu, vice president of Display Search market research institute, ‘No matter what market Sony might decide to go after, Samsung Electronics is always its biggest competitor’ (Otani, 2008).

Additionally, Sony has lacked any real way to differentiate its products from those of Samsung Electronics. One of the main reasons has been the common LCD panel. Sony and Samsung use LCD panels of the same dimension, produced with the same efficiency, and manufactured by the joint venture S- LCD Corporation, located in South Korea. Thus, both firms use panels with similar cost structures. Naturally, Sony injects its own technology in the form of backlights and other components when it comes to building the panels into modules, thus creating Sony panels. Even so, as long as Sony and Samsung Electronics use the same basic panels, it is difficult to end up with any real difference in price, according to Chubachi, Sony Corporation’s president (Otani, 2008).

2.6.1.3.5Market entry strategies for Europe as part of a global value chain

In Europe, Sony operated two wholly owned production facilities for the manufacture of LCD television sets, which were located in Barcelona, Spain, and in Trnava, Slovakia (Sony, 2006c). The Spanish subsidiary was established in 1973 (EU_Japan, 2010). In order to meet the rapidly increasing demand for LCD TVs in Europe since 2005/2006, Sony decided to construct a new factory in Nitra, Slovakia, located 40 kilometers east of Trnava. Sony has been producing TV sets there since February 2006. At that time, Sony developed ambitious plans to regain competitive strengths in the television set business, among other business segments, through expanding their European market presence. Sony opened a new LCD TV manufacturing plant in Nitra (Slovakia) in 2007, one of the largest state-of-the art plants worldwide (Sony, 2007b, 2013a).

In August 2007, the Nitra site began producing a limited number of Bravia LCD TVs, followed by successful serial production starting in October 2007. Sony invested EUR 73 million in the brand new factory, which serves as a typical example of a greenfield investment. Production lines that had operated in the Trnava factory were scheduled to be relocated to the Nitra factory in 2008. By the end of 2008, the Nitra plant had a production capacity of three million LCD TVs per year and around 3,000 employees. Following the relocation of the LCD TV production lines to Nitra, the Trnava factory continued producing tuners for Bravia LCD TVs and providing technical support for Playstation computer game devices. After the transfer from Trnava to Nitra, Sony continued to run its LCD TV assembly in Barcelona, Spain, along with Nitra, Slovakia (Sony, 2007, Sony, 2008d).