CrossBorder Alliances and SMEs

Chapter Three
The Context of CrossBorder Alliances and SMEs

(c) 2009 by Nelson Education Ltd. 1
Agenda
Review Discussion Questions Chapter 2 Module Test 1&2 Lecture ~ Chapter 3 Case True & False
(c) 2009 by Nelson Education Ltd.
Chapter 2: Discussion Questions

1. What are the stages a firm typically goes through as it grows internationally and how does each stage affect the HR function? 2. What are the specific HRM challenges in a networked firm? 3. Country of origin influences the firms approach to organization structure. As MNEs from China and India internationalize, to what extent are they likely to differ from that observed for Japanese, European and US MNEs?
(c) 2008 by Nelson, a division of Thomson Canada Limited. 3
Module Test 1&2

Chapters 1&2 Write your student number on the top When completed raise hand and I will collect your paper Remain quiet please
Chapter Focus
Role of HRM and the challenges it faces in international mergers and acquisitions Particular attention to small and medium sized businesses
Chapter Learning Objectives

After reading this chapter, you should be able to: define cross-border mergers and acquisitions (M&As) the different stages of formation, and phase-specific strategic HR requirements describe the formation process of international joint ventures (IJVs) and identify HR measures and roles relevant in the development of such cross-border alliances discuss the internationalization of small and mediumsized enterprises (SMEs) and their approaches to international human resource management
Opening Vignette
Mergers and Acquisitions: The Dynamics of Globalization increased level of internationalization through M & As
M&As
Strong M&A trend in industries such as car manufacturing and natural resources Both sectors in which many Canadian companies have been involved such as the auto industry and mining
Cross-Border Alliances
The Strategic importance of alliances has increased in the course of globalization Cross Boarder Alliances are cooperative agreements between two or more firms from different national backgrounds, which are intended to benefit all partners
Non-Equity Cross-Border Alliance

investment vehicle in which profits and other responsibilities are assigned to each party according to a contract
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Equity Modes
foreign direct investors purchase of shares of an enterprise in a country other than its own
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Equity as well as non-equity cross-border alliances pose specific challenges to international human resource management
The difference in HRM in equity and non-equity is supposed to lie in the differing extent to which specific HR measures are used
Research deficit with respect to non-equity cross border alliances and beyond scope of chatper
Equity and Non-Equity Modes of Foreign Operation (Figure 3.1)
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Cross-Border Mergers and Acquisitions

Merger result of an agreement between two companies to join their operations together
Acquisition one company buys another company intending to control the activities of the combined operations
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M&As
Merger usually results in the formation of a new company, while an acquisition involves the acquiring firm keeping its legal identity and integrating a new company into its own activities (Figure 3.2)
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The Formation Processes of M & As and HR Challenge (Figure 3.2)
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HR Challenges in M&As
creating new HR practices and strategies that meet the requirements of the M & A
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Reason to Engage in M&As
facilitate the rapid entry into new markets
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Facts Firms Take into Consideration When Deciding on a Target Country
the growth aspiration of the acquiring company risk diversification technological advantages a response to government policies in a particular country exchange rate advantages favourable political and economic conditions effort to follow clients
Trends
Cross-border M&As have seen tremendous growth over the last two decades, largely due to globalization Both the value and number of M&As rose in 2005 to $716 billion, an 88% increase Between 1197 & 2002, Canadian firms acquired 447 foreign companies worth 124 billion, while foreign companies acquired 345 Canadian companies worth 144 billion
Mergers and Acquisitions in US Billions (Figure 3.3)
21
M&As
Despite the high yearly growth rates in the area of M&As there seems to be a gap between the expected added value and the benefits realized from an M&A
There is growing appreciation that the way the M&A is managed during the different phases (especially in the post-merger integration phase) has an impact of its performance, and in turn on the added value created.
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IHRM and its Role in Employee Relations (M&A)

The quality of employee relations, ranging from employee support to employee resistance is influenced by variables such as the similarity between management styles of the two organizations type of cross-border combinations combination potential in terms of efficiency gains extent of organizational integration
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Employee Resistance
Evidence that employee resistance endangers M&A performance It is important that all M&As effectively manage issues where employee resistance is encountered HRM can play a major role in this
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Employee Resistance Endangers M&A Performance
HRM role (task and human integration) visibility and continuity of leadership communication processes integrating mechanisms acquired personnel retained voluntary personnel loss
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Human Integration Process
especially difficult to manage and takes time both firms are embedded in their own national, institutional and cultural settings
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Typical Cross-Border M&A Problems

within first year of merger, up to 20% of executives may be lost. Over a longer time frame, this tends to increase even further.
personnel issues are often neglected.
a high number of M & As fail or do not produce the intended results.

Task and Human Integration Process
Low Integration if the M&A is carried out for portfolio reasons both companies remain separate cultures
High Integration crucial for the M&A to meet the HR requirements of the phases
Phases of Cross-Border M & A

Typically mergers and acquisitions are characterized by different phases. 1. 2. 3. 4. Pre M&A Phase Due Diligence Phase Integration Phase Implementation Phase
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pre- M & A phase (a screening of alternative partners based on an analysis of their strengths and weaknesses) due diligence phase (analyzing the potential benefits of the merger, product-market combinations, tax regulations, and compatibility with respect to HR and cultural issues) integration planning phase (planning for the new company) implementation phase (action plan)

Various studies have shown that HR becomes increasingly involved in the phases as the process evolves One study indicated HR issues were only seriously considered once the integration strategy was defined Firms that included HR early in the process were more successful than others with low HR involvement Strongest involvement of the HR Department took place in the last two phases
31
HR Activities in the Phases of a Cross-Border M & A (IHRM Notebook 3.1)
32
Strategic HRM and the Role of the HR Function in M&As

Starting points in HRM practices high HRM involvement early in the M&A process fit between business, M&A and HR strategies decisions about resources involve staffing and retention issues, with termination decisions being particularly important training and development programs appraisal and reward systems

values that shape employees priorities and decision making strategic approach and aligning the HRM activities with the M&A strategy with respect to resources, processes and values
34

create a strong team including a mix of both expatriates and local members of top management language skills and sensitivity toward cultural differences crucial skills for M&A success
35

IHRM roles strategic partner administrative expert employee champion change agent
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A Comparative Approach to HRM in M&A Processes

Post-integration trends in HRM practices The content of HR measures appears to depend much on the nationality and culture of the firms involved Convergence across nationalities in HRM policies (performance-related pay, training and team-based product development) Adjustments to suit the local culture American HRM reflected a short-term individualistic national business culture
IHRM Notebook 3.1 & 3.2

Review IHRM Notebook 3.2 first Then review IHRM Notebook 3.1 to compare the different countries and the factors in the M&A process
38
Different Countries
Performance related pay more popular in US than Japan or Germany Recruitment in US tends to be rather short term as compared to Germany and UK, while Japan the lifetime orientation is less than before but still a long term focus
Training & career planning most extensive in the US
39
A Comparative Approach to HRM in M&A Processes

Japanese HRM reflected long-term, consensual, teambased, collectivist national philosophies French companies displayed an ethnocentric approach
German companies were the most anxious to adopt international practices
Post-Acquisition Trends in HRM Practices (IHRM Notebook 3.3)
41
Cross Border International Equity Joint Ventures
Joint Venture legal entity representing holdings of parent firms located outside the country of operation
Joint ventures can have two or more parent companies however most involve just two
Cross Border International Equity Joint Ventures

The equity division between the parent companies of the join venture may differ In some cases the ration is 50:50, the dominant partner becomes more obvious with a ration of 51:49 In contrast to M&As the parent companies keep their legal identity and an additional new legal identity representing the joint venture is established
Formation of an International Equity Joint Venture (Figure 3.6)
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The Main Reasons for Engaging in an IJV

to gain knowledge and to transfer that knowledge host government insistence increased economies of scale to gain local knowledge to obtain vital raw materials
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The Main Reasons for Engaging in an IJV

to spread the risks (e.g. share financial risks) to improve competitive advantage in the face of increasing global competition provide a cost effective and efficient response forced by the globalization of markets
46
The Main Reasons for IJV Failure

lack of interest in HRM cross cultural management aspects
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IJV Development Stages and HR Implications (IHRM Notebook 3.4)
48 (c) 2009 by Nelson Education Ltd.
Strategic HRM and the Role of the HR Function in JIVs

IJVs are embedded in their own national, institutional, and cultural settings the IHRM challenge is to balance the various interests and manage these cross cultural differences.

There exists interface and intra-IJV IHRM challenges. Interface IHRM Challenges (initial stages of IJV formation process)
manage the relationships at the interfaces of the parent companies to integrate dualities of rules and practices focuses on the compatibility of the respective partners

Intra-IJV IHRM Challenges (initial stages of IJV formation process) develop IHRM strategies and practices for the new IJV entity.
focus on managing the mutual learning processes between the parent companies and the new joint venture entity.
Strategic HRM and the Roles of the HR Function in IJVs
IHRM roles partnership change facilitator and strategy implementer innovator collaborator
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Partnership Role
HR managers should take all stakeholders needs into account and demonstrate a thorough understanding of the business and market
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Change Facilitator & Strategy Implementer

HR managers should be able to conceptualize and implement new strategies involving trust-based communication and cooperation with relevant partners
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Innovator
HR Manager should be able to identify talent for executing joint venture strategies and adapting to changes through the stages
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Collaborator
The HR Managers strengths should lie in creating winwin situations characterized by sharing rather than competing between the different entities engaged in the joint venture
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The Importance of Cross-Cultural Management ( M&As and IJVs)
different national, institutional, and cultural environments; cultural differences matter in collaboration, decision making and loyalty
top management multicultural team; different cultural expectations, management styles and strategic objectives
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Top Management Team and Role in Joint Ventures Top management has a high impact on the performance of a joint venture Top management is usually composed of individuals from different cultural context due to high competition for these roles
To avoid intercultural conflicts some firms have started to recruit country experts rather than internal staff
SMEs: Strategic Importance and Barriers to Internationalization No standard definition for SMEs, differs per country Some base on headcount, turnover, annual balance or combo In Canada small businesses are defined as companies with up to 49 employees and annual revenue between $30 000 and 5 million Medium companies between 50 500 employees and annual total revenues between 5 million and $50 million
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EU Defining Standards for SMEs

(Table 3.1)
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FACTS: Page 90
2001: 0.2% of Canadian firms had 500 plus employees, 92% fewer than 20 employees Europe: less than 1% of large firms, rest SMEs Most countries 80% SMEs Strong position of SMEs is not reflected to the same extent in the international business environment. Most have less experience and less power to withstand the demand of host governments, financial resources, reputation, etc.
Access Barriers to International Markets by SMEs (IHRM Notebook 3.5)
shortage of working capital to finance exports identifying foreign business opportunities limited information to locate/analyze markets inability to contact potential overseas customers obtaining reliable foreign representation lack of managerial time to deal with internationalization
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Access Barriers to International Markets by SMEs (IHRM Notebook 3.5)
inadequate quantity of and/or untrained personnel for internationalization difficulty in managing competitors prices lack of home government assistance/incentives excessive transportation/insurance costs
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Typical Challenges for IHRM in Internationalized SMEs
importance of the founder/owner recruitment, selection, and retention human resource development; the challenge of learning expatriate management limited resources of the HR department and outsourcing
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Importance of the Founder/Owner
Specific skills of the founder have an impact on the internationalization process of SMEs international work experience or established networks and relationships abroad positive perceptions of the international environment
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Recruitment, Selection and Retention
SMEs more difficulties than large firms in recruiting adequate international managers perceived to lack legitimacy as employers with a strong international orientation perceived as having disadvantages; career/international work opportunities, pay/benefits, progressiveness of company, training
Recruitment, Selection and Retention
IHRM activities for SMEs communicate the company has a strong position in international markets and offers international career opportunities use selection criteria that defines international competencies improve and emphasize benefits; training, career paths, financial
SME Employer Image and Internationalization (Figure 3.8)
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Human Resource Development: The Challenge of Learning
SMEs short term oriented informal learning tacit knowledge
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Human Resource Development: The Challenge of Learning
IHRM activities for SMEs learning processes are critically important improve capacity to perceive relevant environmental developments: strategy and communication training resist the temptation to impose large firm thinking
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Learning in Small Organizations (IHRM Notebook 3.6)
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Expatriate and Limited IHRM Resources
SMEs informal
IHRM activities for SMEs cultural integration outsourcing IHRM
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Case: HR in the Daimler Chrysler Merger

1. Why do you think the board member responsible for human resources was not included in the Chairmans Integration Council? Can you think of any consequences for the two companies? 2. How could the HR function of the two merging companies have addressed organizational and national cultural differences before they became problems?
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CrossBorder Alliances and SMEs

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Chapter Three

The Context of CrossBorder Alliances and SMEs

(c) 2009 by Nelson Education Ltd.

Chapter 2: Discussion Questions

Module Test 1&2

(c) 2009 by Nelson Education Ltd.

(c) 2009 by Nelson Education Ltd.

Chapter Learning Objectives

(c) 2009 by Nelson Education Ltd.

(c) 2009 by Nelson Education Ltd.

(c) 2009 by Nelson Education Ltd.

Non-Equity Cross-Border Alliance

(c) 2009 by Nelson Education Ltd.

(c) 2009 by Nelson Education Ltd.

Equity and Non-Equity Modes of Foreign Operation (Figure 3.1)

(c) 2009 by Nelson Education Ltd.

Cross-Border Mergers and Acquisitions

(c) 2009 by Nelson Education Ltd.

(c) 2009 by Nelson Education Ltd.

The Formation Processes of M & As and HR Challenge (Figure 3.2)

(c) 2009 by Nelson Education Ltd.

(c) 2009 by Nelson Education Ltd.

Reason to Engage in M&As

facilitate the rapid entry into new markets

(c) 2009 by Nelson Education Ltd.

Facts Firms Take into Consideration When Deciding on a Target Country

Mergers and Acquisitions in US Billions (Figure 3.3)

(c) 2009 by Nelson Education Ltd.

(c) 2009 by Nelson Education Ltd.

IHRM and its Role in Employee Relations (M&A)

(c) 2009 by Nelson Education Ltd.

(c) 2009 by Nelson Education Ltd.

Employee Resistance Endangers M&A Performance

(c) 2009 by Nelson Education Ltd.

Human Integration Process

(c) 2009 by Nelson Education Ltd.

Typical Cross-Border M&A Problems

a high number of M & As fail or do not produce the intended results.

Task and Human Integration Process

Phases of Cross-Border M & A

(c) 2009 by Nelson Education Ltd.

Phases of Cross-Border M & A

Phases of Cross-Border M & A

(c) 2009 by Nelson Education Ltd.

HR Activities in the Phases of a Cross-Border M & A (IHRM Notebook 3.1)

(c) 2009 by Nelson Education Ltd.

Strategic HRM and the Role of the HR Function in M&As

Strategic HRM and the Role of the HR Function in M&As

(c) 2009 by Nelson Education Ltd.

Strategic HRM and the Role of the HR Function in M&As

(c) 2009 by Nelson Education Ltd.

Strategic HRM and the Role of the HR Function in M&As

(c) 2009 by Nelson Education Ltd.

A Comparative Approach to HRM in M&A Processes

IHRM Notebook 3.1 & 3.2

(c) 2009 by Nelson Education Ltd.

Training & career planning most extensive in the US

(c) 2009 by Nelson Education Ltd.

A Comparative Approach to HRM in M&A Processes

(c) 2009 by Nelson Education Ltd.

Post-Acquisition Trends in HRM Practices (IHRM Notebook 3.3)

(c) 2009 by Nelson Education Ltd.