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
Sources of Competitive Advantage
Benefiting from differences in factor costs
Exploiting potential scale economies
Sharing of investments
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
We also discuss several other topics like jollibee dammam
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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