MERCOSUR, NAFTA AND THE EU: THREE AGENDAS, THREE STRATEGIES, THREE BUSINESS MANAGEMENT PRACTICES
Steven K. Paulson, University of North Florida
ABSTRACT Three major international trade groups are characterized in terms of their overall strategic objectives using the categories developed by Raymond Miles and Charles Snow. It is hypothesized that the strategic orientation of MERCOSUR is primarily that of analyzer, that the strategic orientation of NAFTA is primarily that of defender and that the strategic orientation of the European Union is primarily that of prospector. The reactor category is seen as a secondary or "back-up" orientation for all of the groups. Implications of these categories for business management practices are discussed within the context of intergroup business transactions. INTRODUCTION The purposes of this paper are to present a comparative overview of three trading groups in terms of (1) their histories, structures and, especially, their strategic objectives ("agendas"), (2) their overall strategic orientations and (3) the implications of this material for business management practices. The three trading groups are MERCOSUR, NAFTA and the European Union (EU). Theoretical material concerning strategic orientation is drawn from the work of Miles and Snow (1994) in which they identify prospector, defender, analyzer and reactor categories. Based upon an assessment of their histories, structures and objectives the trading groups are classified as MERCOSUR-Analyzer, NAFTA-Defender and EU-Prospector. And, based upon these conclusions, management practices in each of the groups are differentiated both descriptively and prescriptively. Implications of these conclusions are drawn in terms of recommendations for intergroup trade at the level of the business firm.
One of the most enduring conceptual frameworks for the classification of the competitive strategy of a business is that developed by Miles and Snow (1994:12-15). The classification system includes three viable categories, which are the defender, the prospector and the analyzer, and a fourth dysfunctional form, the "reactor", which is essentially a "try anything regardless of consequences" approach used when the firm is facing severe challenges to survival. The defender firms move slowly, tend to dominate their markets and work hard to improve quality and efficiency; they strive for economies of scale in areas that are healthy, stable and predictable. Prospecting firms try to achieve success by being "first", by anticipating where the market is headed through their own research efforts; they continually search for new products, services and technologies. Analyst firms are a partial combination of the defender and prospector. They succeed by being careful followers of other firms, learning by others' trials and identifying a niche in an already existing market which can be exploited.
Defenders typically use a functional and centralized organizational structure and their planning process takes the sequential order of plan>act>evaluate. Prospectors usually have a divisional and decentralized organizational structure and their planning process takes the sequential order of act>evaluate>plan. Analyzers are structured as a mixed functional-divisional matrix with some decentralization to operating units and their planning process takes the sequential order of evaluate>act>plan. Innovation for the prospector focuses on new products, services and technology; for the defender, innovation involves developing new ways to produce and deliver existing products and services; the analyst is innovative by adapting to new trends either in their existing business lines or those developed by prospectors.
The application of these frameworks in this paper is to entire groups of nations which have special trade agreements such that there are mutual benefits to trading within the groups. Three trading groups are discussed in this paper (MERCOSUR, NAFTA, The European Union) and the classification of these blocks by Miles and Snow's (1994) scheme is proposed to be as follows: MERCOSUR-Analyzer, NAFTA-Defender and EU-Prospector. These classifications are the subject of the remainder of the paper.
OVERVIEW OF THREE TRADE GROUPS The North American Free Trade Agreement (NAFTA -- implemented in 1994) is an example of a free trade area in which barriers to trade among member countries are eliminated, but allows each country to establish its own external trade barriers. The current members of NAFTA are Canada, the United States of America and Mexico. A problem with free trade areas such as NAFTA is the potential for trade deflection whereby non-member countries try to avoid trade barriers by initially exporting their products to a member country with low trade barriers, then re-exporting the products to a member country with high trade barriers. NAFTA specifies rules of origin, which detail the conditions under which a good is classified as a member or non-member good to try to prevent trade deflection (Griffin and Pustay, 2002). Details from the Agreement itself are provided below.
The Parties to this Agreement, consistent with Article XXIV of the General Agreement on Tariffs and Trade, hereby establish a free trade area. The objectives of this Agreement, as elaborated more specifically through its principles and rules, including national treatment, most-favored-nation treatment and transparency, are to: a) eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties; b) promote conditions of fair competition in the free trade area; c) increase substantially investment opportunities in the territories of the Parties; d) provide adequate and effective protection and enforcement of intellectual property rights in each Party's territory; e) create effective procedures for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and f) establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement. (The North American Free Trade Agreement, Part 1, Chapter 1, Articles 101, 102; see also www.nafta-sec-alena.org/english/index.htm).
The MERCOSUR Accord, formalized in the Treaty of Asuncion in 1991, is an agreement among Argentina, Brazil, Paraguay, and Uruguay, to form a customs union which combines the elimination of barriers to internal trade among member countries with the adoption of common external trade policies toward non-members. Trade deflection is not an issue in a customs union since member countries treat non-members in a uniform manner (Griffin and Pustay, 2002). Details from the Treaty itself are provided below.
The Party States hereby decide to establish a common market, which shall be called the "common market of the southern cone" (MERCOSUR). This common market shall involve: (a) the free movement of goods, services and factors of production between countries through, inter alia, the elimination of customs duties and non-tariff restrictions on the movement of goods, and any other equivalent measures; (b) the establishment of a common external tariff and the adoption of a common trade policy in relation to third States or groups of States, and the co-ordination of positions in regional and international economic and commercial forums; (c) the co-ordination of macroeconomic and sectoral policies between the Party States in the areas of foreign trade, agriculture, industry, fiscal and monetary matters, foreign exchange and capital, services, customs, transport and communications and any other areas that may be agreed upon, in order to ensure proper competition between the Party States; (d) the commitment by Party States to harmonize their legislation in the relevant areas in order to strengthen the integration process. (Treaty of Asuncion, Chapter 1, Article 1; see also www.mercosur.com/in/info/tratadosde_asuncion.jsp -and- www.sice.oas.org/trade/mrcsr/mrcsr1.asp).
The European Union (EU) was created by the Treaty of Maastrich in 1992 and is an example of a common market. Twelve of its members (EURO-12) also present an example of an economic union. The EU combines the elements of a customs union with a policy that allows for the mobility of factors of production. Productivity is expected to rise in a common market because factors of production are free to locate where the returns to them are highest. The EURO currency has been adopted by all but Denmark, Sweden and the United Kingdom, thus forming an economic union which eliminates trade barriers between member countries, establishes a common external trade policy, follows a policy of factor mobility, and coordinates economic policies of member countries (Griffin and Pustay, 2002). The fifteen EU member nations, in order of entry, are Belgium, France, Germany, Italy, Luxembourg, Netherlands, Denmark, Ireland, United Kingdom, Greece, Portugal, Spain, Austria, Finland and Sweden. Details from the Treaty itself are provided below.
By this Treaty, the High Contracting Parties establish among themselves a European Union. This Treaty marks a new stage in the process of creating an ever-closer union among the peoples of Europe, in which decisions are taken as openly as possible and as closely as possible to the citizen. The Union shall be founded on the European Communities, supplemented by the policies and forms of cooperation established by this Treaty. Its task shall be to organize, in a manner demonstrating consistency and solidarity, relations between the Member States and between their peoples. The Union shall set itself the following objectives: (a) to promote economic and social progress and a high level of employment and to achieve balanced and sustainable development, in particular through the creation of an area without internal frontiers, through the strengthening of economic and social cohesion and through the establishment of economic and monetary union, ultimately including a single currency in accordance with the provisions of this Treaty; (b) to assert its identity on the international scene, in particular through the implementation of a common foreign and security policy including the progressive framing of a common defense policy; (c) to strengthen the protection of the rights and interests of the nationals of its Member States through the introduction of a citizenship of the Union; (d) to maintain and develop the Union as an area of freedom, security and justice, in which the free movement of persons is assured in conjunction with appropriate measures with respect to external border controls, asylum, immigration and the prevention and combating of crime; (e) to maintain in full the acquis communautaire and build on it with a view to considering to what extent the policies and forms of cooperation introduced by this Treaty may need to be revised with the aim of ensuring the effectiveness of the mechanisms and the institutions of the Community (Treaty of Maastrich, Title I, Articles 1, 2; see also europa.eu.int/eur-lex/en/treaties/livre102.html).
CHARACTERISTICS OF BUSINESS MANAGEMENT IN THE THREE TRADE GROUPS The European Union (Prospecting) Business Management Model. The following five characteristics represent a summary of the views of directors of major European firms, all members of the European Round Table of Industrialists (ERT), who were asked to describe the "ideal profile of the European manager" (Calori and DeWoot 1994:237): (1) ability to involve people including communication and psychology skills and the capacity to work in teams, to coordinate and to motivate; (2) international skills including international experience, competence in at least three languages, geographical mobility and global thinking; (3) flexibility with aptitudes to manage change and diversity, tolerance to ambiguity and uncertainty and the capacity to learn (self evaluation, openness); (4) intuition including creativity and the ability to innovate; (5) broad vision with an aptitude for interdisciplinary views and deep social, philosophical and ethical understanding. A similar set of characteristics was given by the European Round Table of Industrialists concerning common characteristics of European management (Calori and DeWoot, 1994). These are seen as inclusive of the ideas presented above and are as follows: (1) orientation towards people (ability to involve people); (2) internal negotiation (broad vision, intuition); (3) managing international diversity (international skills); (4) managing between extremes (flexibility). This set of categories is the basis for the EU common management model. The case study research of Paulson, et al. (2002) and Kramer (1996) provide evidence that these elements are, indeed, being practiced. The firms they described are engaged in high-risk entrepreneurial activities which present much ambiguity and uncertainty, requiring tolerance and a reliance on intuition. These firm-level elements are, thus, consistent with the prospecting model which, in turn, is consistent with the general classification of the EU.
The NAFTA (Defending) Business Management Model.
Essentially, the elements of a firm level management model for NAFTA firms are those which are prominent among existing U.S. businesses. The general rationale for this perspective is described by Herman Konrad (1995: 15-35) as a "continentalization process" with antecedents in the late nineteenth century. The process has been one of much variety through time but as Herman Konrad (1995: 15) indicates, one element has not varied and that is the asymmetrical nature of the relationships between Canada and the United States, and between Mexico and the United States as he says: "Fears of dominance and dependence, on the part of Canadians and Mexicans, were and are important issues in the face of disproportionate economic and political influence of a seemingly all-powerful neighbor." Yet as with the Cold War military threat of the past, and Asian and European economic threats of the present, Herman Konrad (1995) concludes that inward-directed nationalist strategies will not be pursued. That is, continentalism will continue to grow and that the United States, at least in the short run, will remain the primary influence. Belous and Lemco (1995), similarly, characterize the United States, and to a lesser extent Canada, as "behemoths." But, of late, these behemoths are opening their doors to Mexico which represents a major shift in continental policy. Policy, that is, which is more consistent with accelerated continentalization. As Blank and Haar (1998: 83) indicate: "There may be a tendency in the United States to take "North America" for granted . . . Many firms no longer view Canada as a "foreign" country [and] . . . Mexico is not very foreign either. . . 'We came to Canada' says the CEO of one of America's largest retail-securities brokerages, 'because we believed the services we offer are universal. They're not American; they're not Canadian.' The notion of 'North America' may have become so commonplace that companies are less conscious of specific arrangements in the region."
The specific rationale for adopting the U.S. business, firm level, management model as the model for NAFTA is in two parts, Canadian and Mexican. In terms of Canada, the U.S. model has been the Canadian model since the 1950s when Peter Drucker, Douglas McGregor and others began to shape management prescriptions for the U.S. and became the basis for ideas taught in business school of the U.S. and Canada. Regional differences within the U.S. and within Canada are greater, for example, than overall differences between the U.S. and Canada. And the expectation is that this will become more the case as NAFTA facilitates international business transactions (cf. Safarian, 1996).
In terms of Mexico, conversely, there are substantial differences in business management yet the trend in the last ten years has been toward emulation of the U.S. approach even in the face of some very rough spots (Baer, 1996). As described by Castillo Vera, 1995:119) "Toward the end of the [1980s] the private sector came to the conclusion that exporting to the United States was the means to survive and . . . that a stronger union with the United States was a wise, if not the only, policy alternative." Also, as with the Canadian case, the dramatically increased, and very influential, presence of U.S. higher educational systems has had a reorienting effect (Victor Konrad, 1995: 353-362). This reorientation has been toward adoption of a U.S. business management perspective with the expectation that with NAFTA-facilitated business transactions it will become even more pronounced.
The expectation is that this orientation to the U.S. model by Canada and Mexico will deepen considerably (Doran, 1996) and that the international mergers and acquisitions, as well as privatization efforts, of the last fifteen years have fostered and will continue to foster this development (Gianaris, 1998: 61-86, 189-206). The result of this trend by the United States, Canada and Mexico has been described by the Conference Board (Taylor, 1991) as a "North American Competitive Space" toward which all three nations are evolving. As evidence for this conclusion, the Conference Board notes the development of "bi-national regions" which include the single markets of Ontario-Michigan and Southern California-Northwestern Mexico. The development of the maquiladora industry, likewise, is an example of such bi-national regionalization (Ganster, 1995).
Thus the specific elements of NAFTA are those associated with U.S. firms and they are delineated in Calori and DeWoot (1994:11-15) as follows: (1) profit orientation which emphasizes shareholders wealth, stock value growth and price levels; (2) competition which focuses on customer satisfaction; (3) individualism, suggesting a strong orientation to self-achievement and mobility with a high turnover of managers; (4) professionalism of managers who learn detailed techniques and apply them through formalized systems. These firm-level elements are evidence of the defending model which is consistent with the general classification of NAFTA.
The MERCOSUR (Analyzing) Business Management Model.
In a report issued in 1998 by Simonsen Associates, a major business consulting firm located in Sao Paulo, Brazil, the critical success factors for the businesses of MERCOSUR are as follows (Simonsen Associados, 1998: 84-89): (1) perseverance in pursuit of a clearly defined goal; (2) formal and well-substantiated knowledge about the market; (3) creativity in utilizing knowledge about the market and adding it to objective knowledge about the company; (4) resources which are available not only at home but also in the other countries; (5) courage; (6) rapid and early decisions. These points, in turn, reflect a set of MERCOSUR market conditions which firms will be facing and they are recommended by Simonsen to be part of a firm's Program of Integration Marketing (PIM) which is an "elaboration of a diagnosis of the company, conducted in accordance with time and resources available and aimed at a systematic approach." This program has the function of "providing executives and shareholders with the necessary elements to be able to define better the positioning and strategic actions of the company in new market realities." The PIM model, and the six success factors listed above, are based upon accumulated experiences with client firms in Argentina, Brazil, Paraguay and Uruguay, market surveys conducted by Simonsen and six case studies which are described in detail as illustrations of these points (Simonsen Associados, 1998: 93-123). The six cases are Groupo Brasil, Arisco, Banco Itau, Brahma, Cotia Trading and LUPATECH S.A.
These elements are reflected in the work of others. Peter Coffey (1998:7-8) indicates that the two major factors which were indispensable to the creation and subsequent success of MERCOSUR were the return to democracy and accompanying implementation of sober economic and monetary policies by the countries involved, especially Brazil and Argentina. In their review of hemispheric regionalism, Mace and Belanger (1999:2-7) indicate that beginning in the late 1980s, Latin America observed the development of trading groups in North America, Western Europe, Asia and, especially, regional developments in an opened Central and Eastern Europe, and concluded that they must follow suit. And Fischer (1999) describes the integrationist-competitive model as the currently dominant model which has the main purposes of fostering competition within the region and exploiting regional comparative advantages in international markets. This, in turn, requires a careful analysis of other regions and the costs/benefits of developing a market where there is an apparent advantage vis-a-vis other regions. Clearly these firm-level elements are evidence of the analyzing model which is consistent with the general classification of MERCOSUR -- both defending and prospecting elements are found in combination.
CONCLUSION The general conclusion of these assessments is that a structural effect is operating such that the stage of development of the trade group (free trade zone, customs union, common market/economic union) influences the broad strategic orientation of the group which in turn influences the specific orientation of the firm. In the case of NAFTA, as a free trade zone, the trading group is at a very elementary level which encourages a cautious adherence to processes/products/services already mastered and clearly understood -- the effort remains one of looking for ways to fine tune operations for greater efficiency. This is, then, the basis for the defending approach of the trading group and individual firms within member nations. This has been verified, in this paper, by examining independent assessments of management practices at the level of the firm.
In the case of the European Union, the most sophisticated and advanced forms of trading bloc development are found and those are the common market and economic union. At this level it is expected that the most aggressive and proactive strategic orientation would be pursued and this is exactly what has occurred in the form of the prospector orientation. Likewise, this orientation is expected at the level of the individual firm in the form of management practices and this has also been verified, in this paper, by examining independent assessments of management practices at the level of the firm.
Finally, MERCOSUR is in the complicated middle stage of trading bloc development, the customs union, in which there is a combined prospecting and defending orientation. This orientation manifests itself in the common attempt to emulate the success of the EU while recognizing the strength and dominance of NAFTA -- classic characteristics of the analyzing strategic orientation. The manifestation of the analyzing orientation is seen in the practices of managers at the level of the operating business firm which has been documented, in this paper, through examining independent assessments.
The most useful implications of these conclusions are at the level of the individual firm and its managers which desire to establish relationships with firms across trading bloc boundaries. A fictional scenario which applies to these conclusions is as follows. Imagine that a South American pasta maker, with home offices in Montevideo, would like to expand beyond the MERCOSUR market. At the same time, imagine that there is a network of European retail grocery stores with headquarters in Bologna that is interested in supplementing the domestic supply of pasta against possible shortages owing to several years of severe draught in the central regions of Italy -- the source of 80% of the firm's pasta. Both firms independently contact the world's largest volume supplier of pasta which is located in the NAFTA region with centralized management staffs in Minneapolis. The Minneapolis firm studies its long range plan and discovers that there is no provision to become a third party mediator and thus decides to not attempt to buy from Montevideo and resell to Bologna -- this would represent too great a departure from routine company activities and too great a risk for the defender strategy. But, upon hearing that there is a potential supplier in Uruguay, AND realizing the defending tendencies of the U.S., along with the Uruguayan tendency to be cautiously analytical, the Bologna business staff offers to pay a high price for Uruguayan pasta. At the same time, the Italian firm provides consultant expertise which convinces the U.S. firm that third party relationships are an "American Tradition." At that point the Italian firm will have provided key inputs at the very time when the U.S. and Uruguay are on the verge of entering the "act" stage in their respective planning processes (see above discussion concerning the relationships among planning, evaluating and acting). If so, then the MERCOSUR firm can rely on the U.S. firm to buy their product because they have an eager customer in the EU -- all of which was initiated by the Italian firm in true prospecting fashion! This scenario focuses exclusively on strategic activities and, of course, there would be other factors which could play a part in the decision-making of the Italian firm and its desire to secure an additional, very independent supplier, through the risk-taking of the U.S. and Italian firms.
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