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UTA / Business Management / MANA 4321 / uta international business

uta international business

uta international business


INTERNATIONAL MANAGEMENT INTRODUCTION Notes INTERNATIONAL MANAGEMENT  Deepak K. Datta Professor and  Eunice and James West Endowed Chair MANA 4321 2017 Our world is advancing rapidly and inexorably towards a  global marketplace. The most successful firms of the  future will be those that embrace this change and center  their strategies around it. Kenichi Ohmae ③ International competition is inevitable ③ Future managers will be directly involved in or be affected  by international competition ③ Tomorrow’s winners will be firms with managers  comfortable in the international arena ③ Managers need to understand international industries and  be able formulate strategies which achieve competitive  advantage THE WORLD IS FLAT “The cold, hard truth is that management, shareholders, and  investors are largely indifferent to where their profits come  from or even where the employment is created. But they do  want sustainable companies. Politicians, though, are  compelled to stimulate the creation of jobs in a certain  place. And residents-whether they are Americans,  Europeans, or Indians-want to know that the good jobs are  going to stay close to home.” Thomas FriedmanDeepak Datta MANA 4321: 2017 Page 1 INTERNATIONAL MANAGEMENT INTRODUCTION Notes IMPLICATIONS “Flat World” ⑤ “Flattening" is progress and it poses a threat to historical  U.S. and European prosperity and power. The proper  response is not to fight it, but embrace it and adapt, not  only to survive, but thrive in the new environment.  ⑤ New century economies need better education, pervasive  high-speed broadband connections, and more globally  aware government policies.  ⑤ It's a new game out there. Don't complain about it – join it  and enjoy it! If you are not good enough to play in this  different kind of game, you'll simply be sitting on the  sidelines, watching others play. GLOBALIZATION ⑤ The shift towards a more integrated and  interdependent world economy  ⑤ Two components: ???? The globalization of markets ④ The merging of distinct national markets into one  huge global marketplace ???? The globalization of production ④ The sourcing of goods and services from locations  around the globe to take advantage of national  differences in the cost and quality of factors of  production GLOBALIZATION: PROSPERITY OR IMPOVERISHMENT? PROPONENTS CRITICS ③ Free trade results in greater  efficiency/innovaiton - the whole  economy is better off  ③ Reduction of poverty in less  developed economies ③ Lower prices for goods and  services ③ Free trade results in economic  progress and tougher environmental  regulations and stricter labor  standards  ③ Bodies such as United Nations and  the WTO exist to serve the  collective interests of member states  - not subvert them Deepak Datta MANA 4321: 2017 ③ Destroys manufacturing jobs in  wealthy advanced countries ③ Creates income inequality and social  problems③ Wage rates of unskilled workers  in advanced countries declines ③ Manufacturing done in less  developed countries that lack  adequate regulations  to protect labor and environment ③ Unelected bureaucrats impose  policies on nation-states,  undermining sovereignty Page 2 GINI COEFFICIENTS 70 60 50 40 30 20 10 0 USA China India Brazil Sweden 85-86 95-95 06-07 11-14 GINI COEFFICIENT http://en.wikipedia.org/wiki/Gini_coefficient INTERNATIONAL MANAGEMENT INTRODUCTION Notes INCOME INEQUALITY - CAUSES ⑤ Education  ⑤ Skill based technological change ⑤ Globalization - low skilled workers losing ground to  low-wage workers in emerging economies ⑤ Decline of unions ⑤ Taxation – reduction in the effective tax rate for  high earners ⑤ Immigration MEDICAL “TOURISM” ⑤ Bumrungrad boasts U.S. certified  physicians and U.S. accreditation.  However, what are the tradeoffs of  going to a developing country like  Thailand for medical care? ⑤ What makes Bumrungrad/ Apollo  successful? ⑤ Will the Bumrungrad/Apollo models  work in the long term? ⑤ What are the implications for the  hospital industry in countries such as  the U.S.? ⑤ Who are the winners? Losers? http://www.msnbc.msn.com/id/15365149/site/newsweek/Deepak Datta MANA 4321: 2017 Page 3 HEALTH CARE COSTS as % of GDP 18 16 14 12 10 8 6 4 2 0 INTERNATIONAL MANAGEMENT INTRODUCTION Notes 1990 2008 2012 Source: OECD Health Data CHANGING DEMOGRAPHICS OF THE  GLOBAL ECONOMY ⑤ Changing world output and world trade  picture ⑤ Changing FDI picture ⑤ Changing nature of the multinational  enterprise ???? Non-US multinationals ???? Rise of mini-multinationals ⑤ Changing world order CHANGING PATTERN OF WORLD OUTPUT %45 40 35 30 25 20 15 10 5 0 1963 1990 2012 Canada Italy U.K France Germany Japan China United States Source: Hill (2015) Deepak Datta MANA 4321: 2017 Page 4 INTERNATIONAL MANAGEMENT INTRODUCTION Notes INTERNATIONAL DIVERSIFICATION STAGING • When should we go international? How quickly should we expand into international markets? STAGING ECONOMIC LOGIC ARENAS ECONOMIC LOGIC DIFFERENTIATORS ARENAS: • Which geographic areas will we enter? VEHICLES VEHICLES • Which market entry strategies will we use? • How will international diversification create value? DIFFERENTIATORS • How does “being international” make our products more attractive to our customers? INTERNATIONAL DIVERSIFICATION  TRADITIONAL MOTIVATIONS TRADITIONAL ⑤ Use underemployed resources ⑤ Seek new markets ⑤ Secure key supplies ⑤ Exploit firm specific assets  ⑤ Access low cost factors ⑤ Benefit from government investment subsidies ⑤ Lower risks 2015 (in $) HOURLY LABOR COSTS IN  MANUFACTURING (Wages and Benefits) PhilippinesMexico Brazil Taiwan Korea New Zealand Spain Japan Singapore Italy United States France Sweden Germany Norway 0 10 20 30 40 50 60 Source: Conference Board  Deepak Datta MANA 4321: 2017 Page 5 INTERNATIONAL MANAGEMENT INTRODUCTION Notes INTERNATIONAL DIVERSIFICATION:  EMERGING MOTIVATIONS ⑤ Increasing minimum efficient scale and  economies of scale ⑤ Escalating R&D costs and shorter product life  cycles ⑤ Protect domestic markets ⑤ Seek “knowledge”  ⑤ Follow competitors; Competitive positioning ⑤ Tax inversions FACTORS INFLUENCING TYPE OF FDIs RESOURCE SEEKING ③ Availability, price and quality of  natural resources ③ Infrastructure to enable resources  to be exploited ③ Investment incentives (e.g., tax  holidays) MARKET SEEKING ③ Large, growing markets ③ Transportation costs; tariff  barriers ③ Need to be closer to users  ③ Macroeconomic policies pursued  by host governments GOING ABROAD:  EFFICIENCY SEEKING ③ Mainly production cost related  factors ③ Removal of obstacles by  government ③ Availability of specialized clusters  (e.g., science and industrial parks) STRATEGIC ASSET SEEKING ③ Availability of knowledge-related assets  ③ Institutional factors influencing ease or  difficulty by which assets can be  acquired From: Dunning (1998) Deepak Datta PREVENTING FAILURES ⑤ Are there potential benefits for our company? ???? Don’t just mimic your competitors ???? Don’t overestimate the size of the benefits ⑤ Are the necessary management skills present? ???? Theoretical advantages difficult to realize ???? Overstretched management resources ⑤ Are the benefits commensurate with the costs? ???? Increased complexity drives up costs ???? Costs can dwarf the limited benefits Alexander and Korine (2008)Page 6 MANA 4321: 2017 INTERNATIONAL MANAGEMENT INTRODUCTION Notes MANAGING IN THE GLOBAL  MARKETPLACE ⑤ Countries are different – liabilities of “newness”  and “foreignness” ⑤ Range of problems confronted by a manager is  wider ???? Which foreign markets to enter and which to avoid ???? Appropriate mode of entry ???? Where to site production activities etc. ⑤ Governance and coordination ⑤ Work within the limits imposed by government  intervention MANAGERIAL TASKS IN A GLOBAL  ENVIRONMENT ⑤ Ensure that their company leads the industry in  identifying and pursuing market opportunities  worldwide ⑤ Work relentlessly to convert global presence into  global competitive advantage ⑤ Cultivate a global mindset ⑤ Strive to constantly reinvent the rules of the global  game From: Gupta, Govindarajan and Wang’s “The Quest for Global Dominance” (2008) GLOBAL STRATEGY FRAMEWORK KEY CHOICES ENVIRONMENT • Socio-cultural • Political/legal • Economic • Technological •Competition ORGANIZATION • Resources/Compe tencies • Structure/Systems •Leadership •Culture/Values Deepak Datta MANA 4321: 2017 • Entry Modes • Ownership • Control BUILDING A GLOBAL COMPETITIVE  ADVANTAGE GENERIC  STRATEGIES • International • Multinational • Global • Transnational IMPLEMENTATION • Global HRM • Production • Finance • MarketingPage 7 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes ANALYZING THE INTERNATIONAL ENVIRONMENT  Deepak K. Datta MANA 4321: INTERNATIONAL MANAGEMENT 2017 GLOBAL STRATEGY FRAMEWORK KEY CHOICES • Entry Modes •Ownership •Control ENVIRONMENT • Socio-cultural • Political/legal • Economic • Technological • Competitive ORGANIZATION • Resources/Compet encies • Structure/Systems • Leadership • Culture/Values BUILDING A GLOBAL COMPETITIVE  ADVANTAGE GENERIC  STRATEGIES • International • Multinational • Global • Transnational IMPLEMENTATION • Global HRM • Production • Finance • Marketing Deepak Datta ECONOMIC SYSTEMS ③ Market Economy ???? Free interplay of demand and supply ???? No restrictions on supply ???? Vigorous free and fair competition ③ Central Command ???? Government moderates the activities of different  economic systems ③ Mixed ???? Combination of market and command economiesPage 1 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes ECONOMIC ENVIRONMENT  FACTORS ③ Size of the economy ③ Economic growth; stage of economic development ③ Per capita income ③ Fiscal and monetary policies, interest rates, taxation,  inflation ③ Balance of payments; foreign debt ③ “Hard” currency reserves  ③ Exchange rate fluctuations ③ Unemployment levels WORLD’S LARGEST ECONOMIES IN 2015 – NOMINAL  AND PPP ADJUSTED  s noilliB $25000 20000 15000 10000 5000 0 GDP CHANGE  Adjusted for PPP Nominal Source: World Bank and IMF 2016 % change 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 Deepak Datta 2008 2009 2010 2011 2013 2014 Source: World BankPage 2 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes GDP/CAPITA - 2015  (ADJUSTED FOR PPP - $’000) 90 80 70 60 50 40 30 20 10 0 GDP/capita CURRENCY RISKS: YEN VERSUS THE DOLLAR (1975-2014) 2014 2011 2008 2005 2000 1995 1990 1985 1980 1975 Singapore Norway USA Germany Britain Japan South Korea Russia Turkey Mexico Brazil China India Source: The World Bank, 2016 Deepak Datta 0 100 200 300 400 Source: Board of Governors of the Federal Reserve System POLITICAL ENVIRONMENT POLITICAL SYSTEMS ③ Democracy ???? Representative democracy ③ Totalitarianism ???? Communist  ???? Theocratic ???? Tribal ???? Right-wing  ③ Pseudo-DemocraciesPage 3 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes POLITICAL ENVIRONMENT IMPACT OF POLICY CHANGES ③ Creates or diminishes market  opportunities ③ Redefines rules of competition ③ Increases or decreases the risks of  doing business POLITICAL SYSTEM GROUP 2 Power and Ideology Power and Ideology GROUP 1 GOVT POLITICAL DECISIONS Power and Ideology GROUP 3 PROTECTIONISM: FORMS ③ Import tariffs ③ Quotas Source: Phatak, 1997 Deepak Datta ③ Voluntary Export Restraints (VER) ③ Domestic content legislation ③ Monetary barriers ③ Stringent standards ③ Subsidies/ “Buy national” programs ③ Boycott/EmbargoPage 4 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes IMPACT OF GATT ON TARIFF RATES 50 45 40 35 30 25 20 15 10 5 0 1913 1950 1990 2000 France Germany Italy Japan Holland Sweden United States AGRICULTURAL SUBSIDIES (% OF VALUE OF PRODUCTION) 80 70 60 50 40 30 20 10 0 2002 2011 Source: Economist June 21, 2003 Economist September 22, 2012 WHY PROTECTIONISM? In 2013 OECD countries spent $258 billion in subsidies to their farm sector Switzerland Norway Japan United States Turkey Australia New Zealand Deepak Datta ③ Promote domestic production; save  jobs ③ Help “strategic” industries ③ Protect infant industry  ③ Old industry argument ③ Level playing field; combating unfair  competition ③ National security reasons ③ Political reasonsPage 5 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes POLITICAL RISK Any company with exposure to foreign markets  needs early, accurate information on political  developments ???? International markets are more  interconnected ???? The world has become a much more volatile  place and that has changed risk calculations  everywhere ???? Offshoring results in shifting of operations to  countries with potential for unrest ???? Increased dependence for energy on states  troubled by considerable political risk Bremmer, 2005 POLITICAL RISK: TYPES ③ Transfer risk ???? Change in ease of transfer of  capital, goods, technology and  people in and out of the country ③ Operational risk ???? Impact on operations caused by  changes in government’s policies ③ Ownership risk ???? Change in the proportion of equity  owned by a company in a foreign  subsidiary POLITICAL RISKS -- MACRO Causes ④ Competing political  philosophies ④ Civil wars, armed  conflicts  ④ Social unrest and  disorders ④ New international  alliances Deepak Datta Form/Outcomes④ Confiscation,  expropriation or  nationalization ④ Damage to  property, persons ④ Loss of transfer  freedoms Page 6 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes POLITICAL RISKS -- MICRO Causes ③ Changing social  values ③ Unstable economic  conditions ③ Vested interests ③ Quasi-political ③ Local business ③ Latent hostility  towards foreigners POLITICAL RISK JANUARY 2015 Norway Singapore Germany Australia U.S. China Spain India Brazil Greece Russia Turkey Egypt Pakistan Zimbabwe Ukraine Sudan Syria Somalia Form/Outcomes ④ High inflation,  increased taxation,  currency instability ④ Breach/revision of  contracts ④ Discrimination ④ Mandatory labor  benefits, Operating  restrictions 100=Lowest Political Risk 0= Highest Political Risk Deepak Datta 0 20 40 60 80 100 Source: The PRS Group POLITICAL RISK RATING AGENCIES ③ Business Environment Risk Intelligence: BERI Index ③ Business Monitor International ③ Economist Intelligence Unit (EIU): Country Risk  Ratings ③ OECD Country Risk Classification ③ PRS Group LLC ③ Institutional Investor: Country Credit RatingsPage 7 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes POLITICAL RISK -- DEFENSIVE STRATEGIES ③ Stay ahead -- technical and managerial  capabilities ③ Multiple sourcing of products ③ Raise political costs of intervention ③ JVs with politically connected local companies ③ Maximize debt investment from local sources ③ Significant exports ③ “Good citizen” -- public services ③ Hedging via insurance (e.g., OPIC, MIGA) LEVELS OF ECONOMIC INTGEGRATION Free Trade Area (FTA): Member countries eliminate trade barriers on trade among member countries Greater integration FREE TRADE AREA CUSTOMS UNION COMMON MKT ECONOMIC UNION POLITICAL Customs Union: FTA plus a common external trade policy ⌘ MERCUSOR (Argentina, Brazil, Paraguay, Uruguay) ⌘ NAFTA (US, Canada and Mexico) UNION Common Market: Customs Union that also allows free movement of factors such as labor and capital ⌘ EU ⌘ ANDEAN PACT (Argentina, Brazil, Paraguay, Uruguay) Economic Union: Common Market wherein national economic policies of member countries are also harmonized CASE FOR INTEGRATION Economic ③ Stimulates economic growth in countries ③ Countries specialize in those goods and services efficiently  produce. ③ Additional gains from free trade beyond the international  agreements such as GATT and WTO Political ③ Economic interdependence creates incentives for political  cooperation  ???? Reduces potential for violent confrontation. ③ Together, the countries have more economic clout to enhance  trade with other countries or trading blocsDeepak Datta Page 8 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes WHAT IS CULTURE? ③ “A system of values  and norms that are  shared among a group  of people and that  when taken together  constitute a design for  living.” o Hofstede,  Namenwirth and  Weber CULTURAL ENVIRONMENT Language Norms and  •Verbal •Non-Verbal value systems Attitudes and  beliefs •Time •Directness and drive •Deadlines Social  structure 1200 CULTURE Religion LANGUAGE •Achievement and work •Wealth, material  possessions Morals and  etiquette 1000 800 600 400 200 0 Deepak Datta Approximately 6000 languages are spoken in the worldSource: Ethnologue (2010) Page 9 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes CULTURAL DIMENSIONS ③ Power distance ③ Uncertainty avoidance ③ Individualism ③ Masculinity Hofstede (1983) HOFSTEDE’S MODEL OF NATIONAL CULTURE POWER DISTANCE ③ Inequality is  fundamentally good ③ Most people should  depend on a leader ③ The powerful are  entitled to privileges ③ Everyone has a place;  some are high UNCERTAINTY AVOIDANCE ④ Conflict should be avoided ④ Laws/rules are very  important and should be  followed ④ Experts and authorities are  usually correct ④ Consensus is important HOFSTEDE’S MODEL OF NATIONAL CULTURE MASCULINITY ③ Gender roles should  be clearly  distinguished ③ People, especially  men should be  decisive  ③ Work take priority over  other duties, including  family ③ Advancement,  success and money  important Deepak Datta INDIVIDUALISM ③ People are responsible  for themselves ③ Individual  achievement is ideal ③ People need not be  emotionally dependent  on organizations or  groupsPage 10 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes POWER DISTANCE INDEX 120 100 80 60 40 20 0 a isyalaMo cixeMa nihCa idnIe cnarFn apaJA SUa ilartsuAy namreGn iatirB. Gk ramneDUNCERTAINTY AVOIDANCE INDEX 100 90 80 70 60 50 40 30 20 10 0 n apaJe cnarFo cixeMy namreGA SUa idnIn iatirB. Ga nihCn edewSk ramneDMASCULINITY INDEX 100 90 80 70 60 50 40 30 20 10 0 k y y e a n o n A niirrccnaeiaSdaaantpdxingUarIaememnrJrnBwuF.MeeSHGDGDeepak Datta Page 11 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes INDIVIDUALISM INDEX 100 90 80 70 60 50 40 30 20 10 0 A SUn iatirB. Gk ramneDe cnarFy namreGa idnIn apaJo cixeMa nihCNATIONAL CULTURE: FIFTH DIMENSION LONG TERM ORIENTATION  (Recently added) ③ Society embraces long-term devotion  to traditional, forward thinking  values ③ Country prescribes to the values of  long-term commitments and respect  for tradition ③ Strong work ethic where long-term  rewards are expected as a result of  today's hard work LONG-TERM ORIENTATION / CONFUCIAN DYNAMISM INDEX 100 90 80 70 60 50 40 30 20 10 0 l k a e a a e n A iaiirrzlcadnSidoaanapmrnrhpUatIannBraCsJaeFguCDniASDeepak Datta Page 12 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes IMPACT OF CULTURAL DIFFERENCES ③ Policies and procedures ???? Formalization and standardization ③ Systems and controls ???? Structure ???? Planning systems ???? Reward systems ③ Information and communication ???? Openness and informality ③ Decision making ???? Who makes decision ???? Level of participation CULTURAL ISSUES ③ CULTURAL BARRIERS  ???? ETHNOCENTRISM: Concluding that new culture  is bad, “stupid” or ineffective simply because it  is different ???? LACK OF CULTURAL EMPATHY: Inability to view  things from the perspective of the host culture ③ CULTURAL CHANGE ???? Culture evolves over time ???? Changes can be painful for society ???? Is not unidirectional DEMOGRAPHIC ENVIRONMENT ③ Population growth ③ Education and literacy ③ Age distribution and  changes ③ Population and  population shiftsDeepak Datta Page 13 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes WORLD POPULATION 10% 15% TOTAL: 7.3 bi. 7% 5% 5% 1% 57% Asia 60 Africa 15.5 Europe 10.4 N. America 7.9 S. America 5.7 N. America 5 Ocenia 1.5 PISA 2015 RESULTS Source: BBC December 6, 2016 44 LEGAL ENVIRONMENT ③ Tariffs, quotas and trade barriers ③ Restrictive trade practices  legislation ③ Taxation ③ Product safety and liability ④ Intellectual property  ⌘ Patent ⌘ Trademark ⌘ Copyright laws ④ Labor laws ④ Laws governing business practicesDeepak Datta Page 14 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes LOSS FROM PIRACY ③ Loss of sales in the copycat country ③ Loss of sales in third countries where  it is forced to compete with pirated  products ③ Reputation as a producer of quality  products and service suffers ③ Dominant share by pirating company  prevents entry PROTECTING PROPERTY RIGHTS ???? Enforcement o Likely to be short-lived if demand is high ???? Education o Educating IPR law enforcement officials o General public on the perils of counterfeits ???? External pressures o Confronting host governments (carefully) o Explaining cost of non-enforcement ???? Economic growth o Growth and home grown brands  DETERMINANTS OF NATIONAL COMPETITIVE  ADVANTAGE Factor Conditions Firm strategy, Structure and Rivalry Deepak Datta Related and Supporting Industries Demand ConditionsPage 15 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes FACTOR ENDOWMENTS ③ Basic factors ???? Natural resources ???? Climate ???? Geographic location ???? Demographics  ③ Advanced factors: Result of investment by  people, companies, government ???? Communications ???? Skilled labor ???? Research/technology ???? Education  DEMAND CONDITIONS ③ Demand: ???? creates capabilities  ???? creates sophisticated and  demanding consumers ③ Demand impacts quality and  innovation RELATED AND SUPPORTING INDUSTRIES ③ Creates clusters of supporting industries that are  internationally competitive ③ Must also meet requirements of other parts of  the DiamondDeepak Datta Page 16 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ANALYZING THE INTERNATIONAL ENVIRONMENT Notes FIRM STRATEGY, STRUCTURE AND RIVALRY ③ Long term corporate vision is a determinant  of success ③ Management ‘ideology’ and structure of the  firm can either help or hurt you ③ Presence of domestic rivalry improves a  company’s competitiveness PORTER’S THEORY - PREDICTIONS ③ Porter’s theory should predict the pattern of  international trade that we observe in the real  world ③ Countries should be exporting products from those  industries where all four components of the  diamond are favorable, while importing in those  areas where the components are not favorableDeepak Datta Page 17 MANA 4321: 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes THE STRATEGY OF INTERNATIONAL  BUSINESS Deepak K. Datta University of Texas at Arlington INTERNATIONAL MANAGEMENT 2017 INTEGRATIVE CONCEPTUAL  FRAMEWORK ENVIRONMENT COMPONENTS • Socio-Cultural • Political • Legal • Economic BUILDING A GLOBAL COMPETITIVE ADVANTAGE ORGANIZATION COMPONENTS • Structures • Leadership • Systems • Values • Technological GENERIC STRATEGIES • International • Multinational • Global • Transnational KEY CHOICES • Entry Modes • Ownership • Control GLOBAL STRATEGY FRAMEWORK KEY  CHOICES ENVIRONMENT • Socio-cultural • Political/legal • Economic • Technological • Competitive ORGANIZATION • Resources/Comp etencies • Structure/Systems • Leadership • Culture/Values MANA 4321 Deepak Datta 2017 • Entry Modes • Ownership • Control BUILDING A GLOBAL COMPETITIVE  ADVANTAGE GENERIC  STRATEGIES • International • Multinational • Global • Transnational IMPLEMENTATION • Global HRM • Production • Finance • MarketingPage 1 THE STRATEGY OF INTERNATIONAL BUSINESS Notes OPPORTUNITIES AND OUTCOMES OF  INTERNATIONAL STRATEGY Identify Int. opportunities • Increased  market size • Return on  investment • Economies  of scale  • Learning • Location  advantage International  Strategies • International  strategy • Multinational  strategy • Global  Standardization  Strategy • Transnational  strategy Entry modes/ strategies • Exporting • Licensing • Strategic  alliances • Acquisitions • Greenfield  investments Competitiveness  outcomes • Superior  economic  performance • Innovation  and learning THE COMPONENTS OF VALUE ADDED The excess of the market  price of a good over the costs  of resources consumed in  B P Consumer surplus Producer’s profit C Cost  producing the good, given the  prevailing market prices for  goods and services the excess of the utility derived  by the buyer from the use of a good over the price paid by  the buyer for the good S U P P O R T MANA 4321 Value created= Consumer surplus+ Producer’s profit VALUE CHAIN  Firm Infrastructure Human Resource Management Technology Development Procurement Inbound  Logistics Operations P R I M A R Y Outbound Logistics Marketing and Sales A C T I V I T I E S

⑤ Who are the winners?

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Service Page 2 Deepak Datta 2017 CORE COMPETENCE Resources Inputs to a firm’s  production  process Capability Integration of a team of resources The source of THE STRATEGY OF INTERNATIONAL BUSINESS Notes Core  Competence A strategic capability If it results in  sustainable  competitive advantage • Provide access to a broad  array of markets • Differentiate core products  and services • Hard to imitate PROFIT GENERATING CAPACITY OF RESOURCES  AND CAPABILITIES APPROPRIABILITY Divisions of rents between the firm and the owners of the resources DURABILITY Life-span and rate of depreciation of resources and capabilities TRANSFERABILITY Ease with which resources can be transferred to rivals Difficulty and time required for REPLICABILITY rivals to replicate the firm’s resources and capabilities FOUR DIMENSIONS OF DISTANCE CULTURAL Different languages, ethnicities,  social networks, religions and  social norms Absence of shared monetary or  ADMINISTRATIVE GEOGRAPHIC ECONOMIC MANA 4321 political association, political  hostility, government policies,  institutional weaknesses Physical remoteness, lack of common  border, size of country, weak  transportation or communication links, differences in climates Differences in consumer incomes,  differences in costs and quality of  natural, financial, human, knowledge  resourcesPage 3 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes INDUSTRIES AFFECTED BY DISTANCE CULTURAL ADMINISTRATIVE GEOGRAPHIC ECONOMIC Products that have high linguistic content (TV), affect cultural or national Identity of consumers (food), product features vary in terms of size, standards and packaging Governmental involvement high in industries that are producers of staple goods (electricity), large employers (farming), national champions (aerospace), vital to national security (telecommunications), exploiters of natural resources (oil, mining), subject to high sunk costs (infrastructure) Products have low value-to-weight or bulk ratio (cement), fragile or perishable (glass, fruit), communication and connectivity are important (financial services), local supervision and operational requirements are high (many services) Demand varies with income level (cars), economies of standardization or scale are important, labor and other factor cost differences are salient (garments), distribution or business systems are different (insurance), companies need to be responsive and agile (home appliances) INTERNATIONAL STRATEGY:  EVOLUTION INTERNATIONAL EXPORT MULTINATIONAL/ LOCALIZATION GLOBAL STANDARDIZATION TRANSNATIONAL INTERNATIONAL DIVISION CEO/ PRESIDENT DOMESTIC DIVISION A DOMESTIC DIVISION B DOMESTIC DIVISION C INTERNATIONAL DIVISION MANA 4321 Deepak Datta 2017 Germany Japan BrazilPage 4 THE STRATEGY OF INTERNATIONAL BUSINESS Notes INTERNATIONAL STRATEGY:  EVOLUTION INTERNATIONAL EXPORT MULTINATIONAL/ LOCALIZATION MULTINATIONAL (LOCALIZATION)  STRATEGY ☉ Customized product  ☉ Countries -- selected on their stand alone potential ☉ Units independent  ☉ Low coordination; high dispersion ☉ Few inter-subsidiary transfers MULTINATIONAL (LOCALIZATION)  STRATEGY Unit 1 HQUnit 2 MANA 4321 Unit 3 Page 5 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes MULTINATIONAL (LOCALIZATION)  STRATEGY Competitive advantage ☉ Local responsiveness ☉ Goodwill -- local government,  customers ☉ Lower costs -- avoiding shipping  costs and tariffs ☉ Lower coordination costs ☉ Quick response to changing local  market situations INTEGRATION-RESPONSIVENESS  FRAMEWORK GLOBAL STRATEGY Consumer  Electronics Pharmaceuticals Telecom, Switching Efficiency benefits from global integration Automobiles Cement Clothing Packaged  foods MULTINATIONAL STRATEGY Benefits from national responsiveness WALMART’S BIDS “AUF WIEDERSEHEN”  TO GERMANY ☉ American approach to business did not quite translate  into German. Attempts to apply the company's proven  US success formula in an unmodified manner to the  German market turned out to be a fiasco  ☉ High labor costs -- workers resisted management's  "If you want to be successful in a foreign demands which they felt were unjust  market, you have to know what your customers want. That's the most important ☉ Buyers were often Americans. Some real goof-ups  lesson. It does no good to force a business occurred – like not knowing that American pillowcases  model on to another country's market just are a different size than German ones  because it works well somewhere else.” David Wild ☉ 85 stores not enough to give the brand a foothold in the  German market Wal-Mart Germany's CEOMANA 4321 In August 2006, eight years after entering the market via acquisitions of Wertkauf and Interspar supermarket chains Wal-mart decided to ☉ Competition (Aldi, Lidl, Metro AG) 'out-Wal-Marted' Wal Mart. exit from Germany, incurring a loss of approx $ 1 bi. What went wrong? Page 6 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes WORLDWIDE AREA  CEO/ PRESIDENT Europe North America South  America Asia Country Manager: U.S. Canada Germany Spain Brazil Argentina China Japan INTERNATIONAL STRATEGY:  EVOLUTION INTERNATIONAL EXPORT MULTINATIONAL/ LOCALIZATION GLOBAL STANDARDIZATION THE GLOBALIZATION TRIANGLE Global Strategy LeversBenefits and Costs of Globalization MANA 4321 Industry Globalization Drivers Global Organization Factors Page 7 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes INDUSTRY GLOBALIZATION POTENTIAL MARKET DRIVERS COST DRIVERS COMPETITIVE DRIVERS Industry Globalization  Potential GOVERNMENT DRIVERS MANA 4321 FACTORS FACILITATING A GLOBAL  STANDARDIZATION STRATEGY ☉ Increased economies of scale/scope ☉ Decreased transportation costs ☉ Lower communication costs ☉ Reduced tariffs, quotas ☉ Reduced non-tariff barriers ☉ Trading blocks/Regional Integration ☉ Compatible technical standards/Reduced  adaptation costs ☉ Homogenization of product needs ☉ Adoption of global strategy by competitors PRESSURES: GLOBAL INTEGRATION ☉ COST DRIVERS ❺ Economies of scale ❺ Economies of scope ❺ Decreased transportation costs ❺ Learning and experience ❺ Lower communication costs ☉ GOVERNMENT DRIVERS ❺ Reduced tariffs, quotas ❺ Reduced non-tariff barriers ❺ Trading blocks/Regional Integration ❺ Compatible technical standardsPage 8 Deepak Datta 2017 ECONOMIES OF SCALE $/Unit THE STRATEGY OF INTERNATIONAL BUSINESS Notes AC Q MES ☉ Spreading of fixed costs over increasing output ☉ Lower inventory costs ECONOMIES OF SCOPE TC(QX , Qy ) < TC (QX , 0) + TC (0, Qy )  ☉ Indivisibilities and spreading of fixed costs ☉ Inputs shared over several products ❺ Manufacturing ❺ Marketing ○ Spreading advertising costs ○ Reputation effects ❺ Research and development SHRINKING GLOBE Average speed of horse drawn < 1850 1850 - 1930 1950s 1960s MANA 4321 carriages and sailing ships: 10 mph Steam locomotives average 65 mph Steam ships 35 mph Propeller aircraft: 300-400 mph Jet aircraft: 500-700 mphPage 9 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes IMPACT OF GATT ON TARIFF RATES PRESSURES: GLOBAL INTEGRATION ☉ MARKET DRIVERS ❺ Homogenization of product  needs ❺ Global customers ❺ Improved product quality ❺ Reduced adaptation costs ☉ COMPETITIVE DRIVERS ❺ Global competitors THE COMPONENTS OF VALUE ADDED Consumer B P surplus Producer’s profit C Cost  Value  Created MANA 4321 Value created= Consumer surplus+ Producer’s profitPage 10 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes GLOBAL STANDARDIZATION  STRATEGY ☉ Central control over country  operations ☉ Central surveillance of resource  allocation and performance ☉ Standardized products ☉ Extensive transshipments  ☉ Cross-subsidization  GLOBAL STANDARDIZATION STRATEGY Unit 1 HQ Unit 2 Unit 3 GLOBAL STRATEGY: COMPETITIVE ADVANTAGE MANA 4321 ③ Lower cost structure »Economies of scale »Less duplication of activities »Lower inventories ③ Improved quality ③ Enhanced customer preference ③ Increased competitive leverage ③ Greater bargaining power ③ Quick response -- R&D concentrationPage 11 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes THE BILLION DOLLAR RAZOR!! MULTINATIONAL AND GLOBAL STRATEGIES  Strategic Arena Business Strategy Product-line strategy Production Strategy Sources of supply Marketing Organization MANA 4321 Deepak Datta 2017 MULTINATIONAL ④ Selected Target  Countries  ④ Custom strategies;  little coordination ④ Adapted to local  needs ④ Plants scattered  across many host  countries ④ Suppliers in host  country preferred ④ Adapted to local  practices and culture ④ Autonomy GLOBAL④ Most countries which  constitute critical markets ④ Same basic strategy  worldwide ④ Standardized products ④ Plants located on the basis  of competitive advantage ④ Attractive suppliers from  anywhere ④ Worldwide coordination;  minor adaptation ④ Central control Page 12 THE STRATEGY OF INTERNATIONAL BUSINESS Notes WORLDWIDE PRODUCT DIVISION CEO/ PRESIDENT Product Division A Area Product Manager: U.S. Area Product Manager: Japan Area Product Manager: China Product Division B Area Product Manager: U.S. Area Product Manager: Japan Area Product Manager: China Product Division C Area Product Manager: U.S. Area Product Manager: Japan Area Product Manager: China Product Division D Area Product Manager: U.S. Area Product Manager: Japan Area Product Manager: China FORCES AGAINST GLOBAL STRATEGY ☉ Consumers demanding something  “different”  ☉ Government demands  ☉ Risks (economic, political, resource) ☉ New manufacturing  technology ☉ Organizational limitations ☉ Managerial resistance INTEGRATION-RESPONSIVENESS FRAMEWORK Consumer  Electronics Pharmaceuticals GLOBAL STRATEGY Automobiles Telecom, Switching Efficiency benefits from global integration Cement Clothing MULTINATIONAL STRATEGYPackaged  foods MANA 4321 Deepak Datta 2017 Benefits from national responsiveness Page 13 THE STRATEGY OF INTERNATIONAL BUSINESS Notes “You want to be able to optimize a business  globally -- to specialize in the production of  components, to drive economies of scale as  far as you can ....But you also want to have  deep local roots everywhere you operate ... If  you build such an organization, you create a  business advantage that’s damn difficult to  copy.” Percy Barnevik TRANSNATIONAL STRATEGY Global Efficiency Multinational  Worldwide >> STRATEGY LearningTRANSNATIONAL Flexibility TRANSNATIONAL STRATEGY Global Efficiency Multinational  Flexibility + +TRANSNATIONAL STRATEGY MANA 4321 Worldwide Learning Page 14 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes INTERNATIONAL STRATEGY:  EVOLUTION INTERNATIONAL EXPORT MULTINATIONAL/ LOCALIZATION GLOBAL STANDARDIZATION TRANSNATIONAL MANAGEMENT AND ORGANIZATION FACTORS  Organization Structure Management Processes Ability to develop  and implement  Global Strategy People Culture CONSUMER ELECTRONICS: TRANSITION  TO TRANSNATIONALITY Matsushita Global Integration MANA 4321 Deepak Datta 2017 PhilipsLocal Responsiveness Page 15 Global Integration THE STRATEGY OF INTERNATIONAL BUSINESS Notes AUTO INDUSTRY: TRANSITION TO  TRANSNATIONALITY Toyota Ford GM Local Responsiveness TRANSNATIONAL STRATEGY ☉ Greater emphasis on differentiated products  than in “pure” global industries ☉ Greater demand for global efficiency and lower  costs than in “pure” multinational industries ☉ Greater sensitivity to governmental demands ☉ Units coordinate activities with HQ and with one  another ☉ Units may adapt to special circumstances only  they face TRANSNATIONAL STRATEGY Unit 1 HQUnit 2 MANA 4321 Unit 3 Page 16 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes CONFIGURATION OF ASSETS TECHNOLOGY PROD. DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE LOGITECH • Design • Basic R&D (Ireland) • Manufacturing (Switzerland) • HQ • R&D (Suzhou) • Global Marketing • Finance • Logistics (Fremont) MOUSE: $40 DISTRIBUTORS AND RETAILERS: $15 SUPPLIERS OF PARTS: $14 CHINESE FACTORY: $3 LOGITECH: $8 • Manufacturing (Taiwan) FORD FIESTA PRODUCTION NETWOK IN  EUROPE Belfast Carburetors and distributors Treforest Enfield Instruments and fuel gauges Genk Basildon Radiators, water pump assembly MANA 4321 Spark Plugs Dangenham Final Assembly Bordeaux Transmissions Valencia Final Assembly Body panels and wheels Cologne Transaxle casings, gear and engine components Saarlouis Final AssemblyPage 17 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes PONTIAC LEMANS Assembly Parts Sales Advertising Design Pontiac LeMans Pontiac Le Mans TOYOTA Parts Parts TRANSNATIONAL STRATEGY ISSUES TO CONSIDER Adapting to Local Market Differences ☉ Distinction between attributes where customers truly value  adaptation and where they are neutral or averse. ☉ For attributes where adaptation adds value, how much is  the customer willing to pay? Exploiting Economies of Global Scale ☉ Distinction between activities that are scale sensitive and  those that are not ☉ Benefits from economies of scale vs. increases in costs -- transportation, tariffs etc. ☉ Effective and efficient coordination mechanismsMANA 4321 Deepak Datta 2017 Page 18 THE STRATEGY OF INTERNATIONAL BUSINESS Notes TRANSNATIONAL STRATEGY ISSUES TO CONSIDER Tapping Optimal Locations for Activities ☉ Can it be easily neutralized by competitors? ☉ Organization and resource flexibility to shift  locations over time ☉ How frictionless is the degree of our coordination  across the various locations? Maximizing Knowledge Transfers ☉ Ability to routinely and systematically uncover  opportunities for knowledge transfer ☉ Enthusiasm of subsidiaries about knowledge  sharing with peer units ☉ Effective mechanisms for knowledge transfer CHALLENGES ASSOCIATED WITH TRANSITION  TO TRANSNATIONALITY ☉ Independent units feigned compliance while fiercely  protecting their independence  ☉ Dependent units discovered that the new  cooperative spirit bestowed only the right to agree  with those on whom they had depended ③ Develop a configuration that is neither centralized  nor decentralized but is both dispersed and  specialized ③ Build inter-unit integration mechanisms to ensure that  task interdependencies leads to synergy rather than  paralysis of conflict MATRIX CEO/ PRESIDENT Product Division A Product Division B Product Division C Subs. Mgr. Japan Subs. Mgr. Germany y MANA 4321 Manager A Manager B Manager CPage 19 Deepak Datta 2017 NETWORK Business manager Business manager Business manager Corporate Management THE STRATEGY OF INTERNATIONAL BUSINESS Notes Business manager Business manager Business manager NETWORK ORGANIZATION Network Firm s rentraP laitnetoP fo teSNetwork Firm Network Firm Network Firm Network Firm Network Firm Network Firm Network Firm Network Firm Network Firm Network Firm Network Firm MANA 4321 Suppliers Manufacturers Assemblers Distributors INDUSTRY VALUE CHAIN ABB ☉ Percy Barnevik (1993): Flattened the  organization, created small, local operating  companies that reported to both a country  manager and business-area manager ☉ Goran Lindahl (1998): Moved towards a global,  product division structure (tilting the matrix) ☉ Jorgen Centerman (2001): Created four main  customer-centered units defined by industry  rather than countries ☉ Jurgen Dormann (2003): Returned to product  division structurePage 20 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes LOCATION DECISIONS  TRANSNATIONAL STRATEGIES PERFORMANCE ENHANCEMENT ☉ Criticality of customer proximity in the  execution of the activity ☉ Availability of needed talent ☉ Impact on the company’s speed at improving  core competencies ☉ Impact on the quality of internal coordination ☉ Ability to work around the clock LOCATION DECISIONS  TRANSNATIONAL STRATEGIES COST REDUCTION ☉ Impact of location on the cost of activity  execution ☉ Government incentives and tax structure RISK REDUCTION ☉ Currency risks ☉ Political risks POLITICAL ☉ Government demands KEY FACTORS FOR GLOBAL SOURCING VERY IMPORTANT ☉ Better quality ☉ Lower price ☉ Unavailability of items in own country IMPORTANT ☉ More advanced technology abroad ☉ Negotiability ☉ On-time delivery ☉ Willingness to solve problemsMANA 4321 Page 21 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes VALUE CHAIN AND FUNCTIONAL  INTERFACES ☉ Identify the value chain links ☉ Determine the location of the company’s competitive  advantages,considering both economies of scale  and scope ☉ Ascertain the level of transaction costs between  value chain links (both internal and external) and  select the lowest cost mode ☉ Determine comparative advantage of countries  (including the company’s home country) relative to  each link and to relevant transaction costs ☉ Develop adequate flexibility in corporate decision  making and organizational design to respond to  changes in competitive advantage and comparative  advantage of countries TYPES OF SOURCING STRATEGY How to Source Where to Source Type of Sourcing Sourcing Intrafirm Sourcing Outsourcing Domestic Abroad Domestic Abroad Domestic In House sourcing Offshore Subsidiary sourcing Domestic Purchasing Arrangement Offshore Outsourcing ROLE FOR NATIONAL SUBSIDIARIES HighResources and Capabilities of Local  Organization Contributor Leader Low MANA 4321 Implementer Black Hole Low High Strategic Importance of the Local Environment Page 22 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes STRATEGIC ORIENTATION: SUMMARY Global  Multinational Standardization Transnational Building flexibility  to respond to  national  differences through  strong, resourceful,  and  entrepreneurial  national operations Building cost  advantages  through  centralized,  global-scale  operations Developing  global efficiency,  flexibility, and  worldwide  learning  capability  simultaneously STRATEGIES: ADVANTAGES AND DISADVANTAGES ADVANTAGES DISADVANTAGES Multinational Global  Standardization Transnational  • Customize product  offerings and marketing in  accordance with local  responsiveness • Ability to detect potential  opportunities for attractive  niches • Exploit experience curve  effects • Exploit location economies  and economies of scale • Create uniform world  standards • Exploit experience curve  effects • Exploit location economies • Customize product  offerings in accordance  with local responsiveness • Reap benefits of global  learning • Inability to realize location  economies or exploit  experience curve effects • Failure to transfer  competencies to foreign  markets • May lead to overadaptation • Lack of local  responsiveness • Limited global learning • Greater exposure to  political and currency risks  • Difficult to implement due to  organizational problems • Management challenges in  fostering knowledge  transfer SOURCES OF COMPETITIVE ADVANTAGE Strategic Objectives Sources of Competitive Advantage National Differences Scale Economies Scope Economies Achieving efficiency Benefiting from differences in factor costs Exploiting potential scale economies Sharing of investments Managing risks Managing different kinds of risks Balancing scale with flexibility Portfolio diversification of risks Innovation, learning and adaptation Learning from societal differences Benefiting from experience and learning Shared learning across markets and businesses

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MANA 4321 Page 23 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes BUILDING A GLOBAL  KNOWLEDGE MACHINE Market success is only part of  globalization. We must globalize every  activity in the company. We’ve made some  progress in sourcing products and  components so critical to surviving and  winning in a price-competitive world, but  the challenge goes beyond that -- to  capitalize on the vast intellectual capital  available around the globe. Jack Welch Retired CEO, General Electric KNOWLEDGE MANAGEMENT Smith and Conyngham, 1999 Knowledge in Consulting Organizations FutureKnowledge Now Organizational Organizational Knowledge Personal Total knowledge individual can  bring to  customers Personal Knowledge MANA 4321 Knowledge Page 24 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes KNOWLEDGE MANAGEMENT PROCESS IDENTIFYING CONTENT ANDKNOWLEDGE GENERATION ORGANIZING KNOWLEDGE MOBILIZATION KNOWLEDGE ACCUMULATION AND MOBILIZATION ③ Creation ③ Acquisition ③ Retention ③ Identification ③ Willingness to  share and receive  knowledge ③ Transmission KNOWLEDGE ACCUMULATION KNOWLEDGE MOBILIZATION COLLECTIVE ENTERPRISE KNOWLEDGE KNOWLEDGE ACCUMULATION  AND MOBILIZATION ③ Creation MANA 4321 KNOWLEDGE  ACCUMULATION KNOWLEDGE  MOBILIZATION ③ Acquisition ③ Retention ③ Identification ③ Outflow ③ InflowPage 25 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes CHALLENGES IN KNOWLEDGE  ACCUMUALTION ③ Complacence CREATION ACQUISITION ③ Low-decision making discretion ③ Absence of an internal market for ideas ③ Failure to be an early mover in knowledge acquisition ③ Inability to integrate and apply external knowledge RETENTION ③ Employee turnover ③ Bleed-through proprietary knowledge to competitors CHALLENGES IN KNOWLEDGE  MOBILIZATION IDENTIFICA TION OUTFLOW ③ “Halo” effect ③ “How does it help me?” syndrome ③ “Knowledge is power” syndrome ③ Incentives tied to internal performance MANA 4321 INFLOW ③ “Not invented here” syndrome ③ Reluctance to acknowledge the superiority of peers MAXIMIZING KNOWLEDGE ACCUMULATION  ③ Stretch goals »Develop culture of knowledge creation by  setting targets that cannot be achieved without  some innovation ③ Provide high-powered incentives »Ensure reward matches the higher level of risk  ③ Cultivate empowerment and slack »Supply-side tools that play a critical role in  increasing the creative capacity of subunits ③ Cultivate market for ideas with firm »Screening mechanism to determine which ideas  emerging from various subunits deserve further  supportPage 26 Deepak Datta 2017 THE STRATEGY OF INTERNATIONAL BUSINESS Notes MAXIMIZING KNOWLEDGE MOBILIZATION ③Ban knowledge hoarding  »Knowledge must be treated as a corporate resource that  cannot be hoarded by any particular subsidiary or business  unit ③Rely on group-based incentives »Reinforce knowledge-sharing as a cultural norm ③ Invest in codification of tacit knowledge »Development of standard operating procedures  ③Match transmission mechanisms to knowledge »Exchange of information, conversations and rotating people  by temporary co-location STRATEGIC ORIENTATION: SUMMARY Multinational Global  Standardization Transnational Building flexibility to  respond to national  differences through  strong, resourceful,  and entrepreneurial  national operations Building cost  advantages  through  centralized,  global-scale  operations Developing  global efficiency,  flexibility, and  worldwide  learning  capability  simultaneously OPPORTUNITIES AND OUTCOMES OF  INTERNATIONAL STRATEGY Identify Int. opportunities • Increased  market size • Return on  investment • Economies  of scale  • Learning • Location  advantage MANA 4321 Deepak Datta 2017 International  Strategies • International  strategy • Multinational  strategy • Global  Strategy • Transnational  strategy Entry modes/ strategies • Exporting • Licensing • Strategic  alliances • Acquisitions • Greenfield  investmentsCompetitiveness  outcomes • Superior  economic  performance • Innovation  and learning Page 27 THE STRATEGY OF INTERNATIONAL BUSINESS Notes STRATEGIC ORIENTATION: SUMMARY Multinational ④ Building  flexibility to  respond to  national  differences  through strong,  resourceful,  and  entrepreneurial  national  operations Global ④ Building cost  advantages  through  centralized,  global-scale  operations Transnational ④ Developing  global  efficiency,  flexibility, and  worldwide  learning  capability  simultaneously INTERNATIONAL STRATEGY: EVOLUTION INTERNATIONAL EXPORT MULTINATIONAL GLOBAL TRANSNATIONAL CONSUMER ELECTRONICS: TRANSITION TO  TRANSNATIONALITY Matsushita Global Integration MANA 4321 Deepak Datta 2017 PhilipsLocal Responsiveness Page 28 INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes ENTRY STRATEGIES Deepak K. Datta MANA 4321: International Management 2017 CHOICE OF ENTRY STRATEGIES CHOICE OF ENTRY STRATEGY NON-EQUITY MODES EQUITY (FDI) MODES Exports Contractual Arrangements Joint Ventures/ Strategic Alliances Wholly owned Subsidiaries Direct Exports Indirect Exports Licensing Turnkey Contractual Manufacturing Minority JVs 50-50 JVs Majority JVs Greenfield Investments Acquisitions Deepak Datta EXPORT - APPROACHES DIRECT ③ Firm handles entire export operations  itself INDIRECT ③ Exports using intermediaries ???? CEM (Combination Export Manager) ???? Manufacturers' export agents Phatak, Bhagat and Kashlak (2005)Page 1 MANA 4321: 2017 Deepak Datta INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes EXPORT - ADVANTAGES  ③ Lower per unit cost ???? Economies of scale ???? Better capacity utilization ③ Overcome domestic market size limitations ③ Offset market cyclicality ③ Low asset exposure to political risk ③ Flexibility of switching the geographical  direction of products ③ No need to directly handle export processes  (indirect exports) ③ Concentration of resources on production  (indirect exports) EXPORT -- DISADVANTAGES ③ Costs associated with trade barriers and  protectionism ③ Lower control over market ③ Local government objections ③ High transportation costs for bulky products ③ Costs associated with locating and  maintaining relationships with importer(s)  (indirect exports) ③ Less control over distribution (indirect exports) ③ Conflicts-- exporters’ and importers’ goals  (indirect exports) ③ Inability to learn how to operate overseas  (indirect exports) STEPS IN EXPORTING ③ Segment world markets ???? Characteristics of the product ???? Size of segment; ease of access ???? Presence of domestic producers and other exporters ③ Select Strategy ???? Broad based or niche ???? Distribution, sales, pricing, advertising, service ???? Strategy of other competitors ③ Establish system ???? Direct or indirect Adapted from LeCraw, 1990Page 2 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes CONTRACTURAL ENTRY STRATEGIES ③ CONTRACTUAL ENTRY • Licensing ????Exclusive ????Non-exclusive ????Cross-licensing • Franchising • Contract manufacturing • Turnkey projects Licensing Agreement where licensor grants rights to  intangible property to another  entity for a specified period  of time in return for royalties. Franchising Franchiser sells intangible property and insists on rules  for operating business Deepak Datta LICENSING AGREEMENTS Defined by the nature and content of the  rights granted by the licensor to the licensee ③ A patented product or process ③ A trademark or trade name ③ Manufacturing techniques ③ Technical advice and services of various  sorts ③ Marketing advice ③ Proprietary rights and industry know-how LICENSING: ADVANTAGES ③ Extends product life cycle ③ Allows penetration of small markets,  especially those with high trade barriers ③ Helps build goodwill for MNC’s products ③ Licensee incurs various political and  cultural risks ③ Reduces loss due to “piracy” ③ Requires limited resources ③ Quick entryPage 3 MANA 4321: 2017 Deepak Datta INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes LICENSING: DISADVANTAGES ③ Lost control over technology ③ Difficulty in maintaining quality standards ③ Government restrictions/ high taxes on  royalties ③ Development of potential competitors ③ Opportunity costs ③ Post-agreement costs ???? Protecting industrial property ???? Backup services LICENSING: FACTORS LEADING TO  SUCCESS ③ Choice of reliable and competent partner ③ Goal congruence with partner ③ Close personal contact with licensee ③ Appropriate level of control by licensor ③ Reputation of licensor and licensed “asset” ③ Detailed spelling out of contract obligations and  responsibilities ③ Flexibility of both partners; effective coordination  ③ Thorough research and market knowledge WHEN IS LICENSING EMPLOYED? ③ Firm lacks capital, managerial resources or  knowledge of foreign markets ③ Testing and developing a market that can be  later exploited by direct investment ③ Technology involved is not central to the  licensor’s core business ③ Prospects of “technology feedback” are high ③ Host-country government restricts imports or FDI ③ Licensee unlikely to become a future competitor ③ Pace of technological change is rapid Beamish (1994)Page 4 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes FRANCHISING VS LICENSING ③ Franchising gives a company greater control  over the sale of its product in a target market.  Franchisees must meet strict guidelines ③ Franchising more common in services;  licensing in manufacturing ③ Licensing typically involves one-time transfer of  property; franchising requires ongoing  assistance from the franchiser ③ Franchisers typically offer start-up capital,  management training, location advice and  advertising assistance to their franchisees CONTRACT MANUFACTURING/  OUTSOURCING ADVANTAGES ③ Limited commitment of  resources ③ Quick entry ③ Avoids ownership  problems ③ Cost reduction ③ Access to technology DISADVANTAGES ③ Time and effort required to  develop manufacturer ③ Adverse sentiment  domestically ③ Potential loss in flexibility  and control ③ Expense -- negotiating,  maintaining and enforcing  contracts ③ Creation of future  competitor Deepak Datta HIDDEN COSTS OF OUTSOURCING ③ Costs associated with identifying and  specifying the functions that ought to be  outsourced (which activities to contract,  where they should be carried out, and by  whom) ③ Costs related to the transfer of knowledge ③ Costs of ongoing management of the  outsourcing relationship ③ Costs of “cultural distance” – from misaligned  cultures and language barriers. ③ Costs related to opportunism from conflict of  interestPage 5 MANA 4321: 2017 TURNKEY PROJECTS (build-operate-transfer) ③ Self-engineered  ???? Exporter undertakes to meet  certain performance requirements  set by the importer but the actual  equipment and plant design is left  up to the exporter ③ Construction to specification ???? Exporter undertakes to construct the  project to the importer’s  specifications INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes Contractor agrees to handle every detail of project for foreign client TURNKEY PROJECTS ③ Advantages ???? Can earn a return on knowledge asset ???? Less risky than conventional FDI ③ Disadvantages ???? Lack of long-term presence in the foreign  country ???? May create a competitor ???? Selling process technology may be selling  competitive advantage as well FULLY-OWNED SUBSIDIARIES:  GREENFIELD INVESTMENTS ADVANTAGES  ③ Total control ③ Lack of partner  commitment not a  concern ③ Greater learning about  foreign markets ③ No loss of technology ③ Better local image of  product Deepak Datta DISADVANTAGES ③ Host government  objections ③ Large investment  required ③ Labor union objections ③ Vulnerability to political  risk ③ Time required to  establish competitive  advantagePage 6 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes FULLY-OWNED SUBSIDIARIES:  ACQUISITIONS ADVANTAGES  ③ Total equity and  operational control ③ Quick entry ③ Does not add further  capacity in the  market DISADVANTAGES ③ Acquisitions difficult to  evaluate ③ Post-acquisition  integration problems ③ Vulnerability to political  risk ③ Can be considered as  “anti-social” M&A: SHAREHOLDER VALUE CAPTURE ⓿ Shifting value from  previous shareholders  and other  stakeholders to the  acquiring firm  shareholders CREATION ⓿ Long term  phenomenon that  results from  managerial actions  and interaction  between firms ACQUISITION PROCESS ACQUISITION OBJECTIVES IDENTIFYING CANDIDATES STRATEGIC EVALUATION DUE DILIGENCE AND VALUATION NEGOTIATION AND FINALIZATION INTEGRATION ⓿ Examine consistency with strategy ⓿ Define acquisition criteria Deepak Datta MANA 4321: 2017 ⓿ Identify target market and companies ⓿ Select potential targets ⓿ Develop M&A plan ⓿ Industry growth and structure ⓿ Strategic fit and potential synergies ⓿ Organization fit ⓿ Integration challenges ⓿Due diligence ⓿Financial ⓿People/ cultural ⓿Legal ⓿Operational ⓿Intellectual capital ⓿Preliminary integration plans ⓿ Set deal terms (legal, structural) ⓿ Financing alternatives ⓿ Secure key talent and integration teams ⓿ Close deal⓿ Strategic interdepen dence ⓿ Level of autonomy ⓿ Integration management ⓿ Integration speed Page 7 RELATED NESS CREATION OF SYNERGY Benefits Resulting from Economies of Scope and Scale and / or Shared Knowledge or Reputation Managerial Actions to to Share INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes Synergy and Improved performance ORGANIZA TIONAL FIT Tangible Resources or Intangible Knowledge and Skills Benefits > Costs ? Costs Associated with Creating Synergy and Administrative Overhead Inefficiency and Lower Performance Deepak Datta CREATION OF MULTI-BUSINESS  OPERATING SYNERGIES  ③ By leveraging capabilities ???? Superior resource allocation ???? Replicating resources/capabilities ③ By improving bargaining position ???? Market power over buyers ???? Market power over suppliers ③ By integrating activities ???? Sharing value-adding activities ???? Linking value-adding activities STRATEGIC ALLIANCES “A collaborative agreement (or agreements)  between two or more firms, which contribute  resources to a common endeavor of  potentially important competitive  consequences, while maintaining their  individuality .”Page 8 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes STRATEGIC ALLIANCES QUESTIONS ③ What types of arrangements are most  appropriate? ③ What can we learn from the experience  of ourselves and others? ③ How do we successfully manage these  alliances? RANGE OF STRATEGIC ALLIANCES n oitcaretnI fo leveLLow High Informal Cooperation Agreements Licensing/franchising Arrangements Cross-licensing Arrangements R&D Consortia Minority One-way Investments Minority Two-way Investments Joint Ventures TYPES OF STRATEGIC ALLIANCES ③ INFORMAL  ????Cooperation without any formal contractual  obligations Barnes & Noble Host Marriott ServicesDeepak Datta Westin Hotels and Resorts United Airlines Page 9 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes TYPES OF STRATEGIC ALLIANCES ③ JOINT VENTURES ????New entity jointly owned by  two or more firms • Shared or 50-50 ventures • Dominant ventures TYPICAL JOINT VENTURE Foreign  partner A B Local  partner Technology  to venture A B Products to the market STRATEGIC ALLIANCES Foreign company offers Local market  knowledge  to venture Local  company  offers Deepak Datta MANA 4321: 2017 Know  how Access to business  system Know -how: Technology; concept Joint development Traditional Joint Venture Access to business system: Customers; distribution; manufacturing Alliances offering access to markets in return for technologyExchange of access Page 10 Deepak Datta INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes TYPES OF STRATEGIC ALLIANCES ③ MINORITY INVESTMENTS  ???? Firm buys stock in another ???? Often access to resources for capital ???? Stronger mutual commitment  ③ TWO-WAY INVESTMENTS ????Reciprocal equity stakes/cross ownership ????Less concern about dominance WHY STRATEGIC ALLIANCES? TRADITIONAL REASONS  ③ Sharing of resources and risks ③ Host government requirements ③ Overcoming strong nationalistic  sentiments ③ Quicker entry ③ Benefit from partner’s local knowledge WHY STRATEGIC ALLIANCES?EMERGING REASONS  ③ Learning from one another ③ Attain global scale economies ???? Raw material/ Component supply ???? Marketing and distribution ③ Rising R&D costs and technological  interdependence ???? Short product life cycles ③ Industry convergence Page 11 MANA 4321: 2017 INTERNATIONAL MANAGEMENT ENTRY STRATEGIESNotes MARKETING STRATEGIC ALLIANCE Products flow A B from partners  to venture A B To the market R&D STRATEGIC ALLIANCE A B Technology to partners R&D R&D Employees to venture AB Employees to venture STRATEGIC ALLIANCES -- POTENTIAL  RISKS  ③ Partner opportunism  and loss of  competitive edge ③ Strategic and  organizational complexity ③ Conflict of interest  problems ③ Decreasing partner  commitmentDeepak Datta PREVENTION • Walling off critical  technology • Establishing  contractual  safeguards • Swapping skills and  technologies • Seeking credible  commitments Page 12 MANA 4321: 2017
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