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Chapter 12: The Strategy of International Business
Chapter 12: The Strategy of International Business

Introduction: •	Companies move into other countries for three reasons: 1) its growth opportunities at home were becoming constrained, 2) it thought it could create value by transferring its business model to foreign markets, 3) it wished to preempt other retailers that were also starting to expand globally •	Transformational corporation: striving to strike the right balance between the global standardization of operating practices and strategy, and local customization of store layout and stocking practices, and by focusing on the transfer of ideas across national borders

Strategy and the Firm: •	A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm •	Preeminent goal is to maximize the value of the firm for its owners, its shareholders •	To maximize the value of a firm, managers must pursue strategies that increase the profitability of the enterprise and its rate of profit growth over time •	Profitability: the rate of return that the firm makes on its invested capital (ROIC), which is calculated by dividing the net profits of the firm by total invested capital •	Profit growth: measured by the percentage increase in net profits over time •	Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firm’s products, which enables the firm to raise prices •	Managers can increase the rate at which the firm’s profits grow over time by pursuing strategies to sell more products in existing markets or by pursuing strategies to enter new markets •	Expanding internationally can help managers boost the firm’s profitability and increase the rate of profit growth over time

Value Creation: •	The amount of value a firm creates is measured by the difference between its costs of production and the value that consumers perceive in its products •	More value the customer places on a firm’s products, the higher the price the firm can charge for those products •	The price a firm charges for a good or service is typically less than the value placed on that good or service by the customer •	Low cost and differentiation are two basic strategies for creating value and attaining a competitive advantage in an industry •	Superior profitability goes to those firms that can create superior value, and the way to create superior value is to drive down the cost structure of the business and/or differentiate the product in some way that consumers value it more and are prepared to pay a premium price •	Superior value creation requires that the gap between value and cost of production be greater than the gap attained by competitors

Strategic Positioning: •	The convex curve is what economists refer to as an efficiency frontier •	Efficiency frontier shows all of the different positions that a firm can adopt with regard to adding value to the product (V) and low cost (C) assuming that its internal operations are configured efficiently to support a particular position •	Diminishing returns imply that when a firm already has significant value built into tits product offering, increasing value by a relatively small amount requires significant additional costs •	Porters says it’s important for management to decide where the company wants to be positioned with regard to value (V) and cost (C)m to configure operations accordingly, and to manage them efficiently to make sure the firm is operating on the efficiency frontier •	To maximize its profitability a firm must do 3 things: 1) pick a position on the efficiency frontier that is viable (enough demand); 2) configure its internal operations, such as manufacturing, marketing, logistics, information systems, human resources; 3) make sure that the firm has the right organization structure in place to execute its strategy •	The strategy, operations, and organization of the firm must all be consistent with each other if it is to attain a competitive advantage and garner superior profitability

Operations: The Firm as a Value Chain: •	The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities including production, marketing and sales, materials management, R&D, human resources, information systems, and the firm infrastructure

Primary Activities: •	Have to do with design, creation, and delivery of the product; its marketing; and its support and after-sale service •	Divided into 4 functions: R&D, production, marketing and sales, and customer service •	R&D: concerned with the design of products and production processes  increase the functionality of products, which makes them more attractive to consumers; result in more efficient production processes, thereby cutting production costs •	Production: concerned with the creation of a good or service •	Marketing and sales: help to create value  brand positioning and advertising, the marketing function can increase the value that consumers perceive to be contained in a firm’s product; favorable impression the firm increases the price that can be charged for its product •	Customer service: provide after-sale service and support  create a perception of superior value in the minds of consumers by solving customer problems and supporting customers after they have purchased the product

Support Activities: •	Provide inputs that allow the primary activities to occur •	In terms of competitive advantage, they are more important than “primary activities” •	The efficiency with which this is carried out can significantly reduce cost, thereby creating more value •	The human resource function can help create more value in a number of ways  1) it ensures that the company has the right mix of skilled people to perform its value creation activities effectively; the thinking behind this is that local nationals will have a better feel for the tastes and preferences of local customers than expatriate managers from U.S; 2) ensures that people are adequately trained, motivated, and compensated to perform their value creation tasks •	Information systems  refer to the electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries  coupled with communications features of the Internet, can alter the efficiency and effectiveness with which a firm manages its other value creation activities •	Company infrastructure  context within which all the other value creation activities occur; includes the organizational structure, control systems, and culture of the firm

Global Expansion, Profitability, and Profit Growth: •	Firms that operate internationally are able to: 1) expand the market for their domestic product offerings by selling those products in international markets; 2) realize location economies by dispersing individual value creation activities to those locations around the globe where they can be performed most efficiently and effectively; 3) realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation; 4) earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm’s global network of operations •	A firm’s ability to increase its profitability and profit growth by pursuing these strategies is constrained by the need to customize its product offering, marketing strategy, and business strategy to differing national conditions

Expanding the Market: Leveraging Products and Competencies: •	A company can increase its growth rate by taking goods or services developed at home and selling them internationally •	The returns from such a strategy are likely to be greater if indigenous competitors in the nations a company enters lack comparable products •	The success of many MNC that expand in this manner is based not just upon the goods or services that they sell in foreign markets, but also upon the core competencies that underlie the development, production, and marketing of those goods or services •	Core competencies: skills within the firm that competitors cannot easily match or imitate  exist in any of the firm’s value creation activities – production, marketing, R&D, human resources, logistics, general management  bedrock of firm’s competitive advantage; enable firms to reduce the costs of value creation and/or to create perceived value in such a way that premium pricing is possible •	The success of global expansion is not just based on leveraging products and selling them in foreign markets, but also on the transfer of core competencies to foreign markets where indigenous competitors lacked them

Locational Economies: •	Countries differ along a range of dimensions, including the economic, political, legal, and cultural, and that these differences can either raise or lower the costs of doing business in a country •	The theory of international trade also teaches us that due to differences in factor costs, certain countries have a comparative advantage in the production of certain products •	For a firm that is trying to survive in a competitive global market, this implies that trade barriers and transportation costs permitting, the firm will benefit by basing each value creation activity in performs at the location where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity •	Locational economies: are the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be •	Locating a value creation activity in the optimal location for that activity can have one of two effects  it can lower the costs of value creation and help the firm to achieve a low-cost position, and/or it can enable a firm to differentiate its product offering from those of competitors

Creating a Global Web: •	Creation of a global web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe, where perceived value is maximized of where the costs of value creation are minimized •	A firm that realizes location economies by dispersing each of its value creation activities to its optimal location should have a competitive advantage vis-à-vis a firm that bases all of its value creation activities at a single location  it should be able to better differentiate its product offering (V) and lower its cost structure (C)

Some Caveats: •	Introducing transportation costs and trade barriers complicates this picture •	Another caveat concerns that importance of assessing political and economic risks when making location decisions •	If a government is unstable or totalitarian, the firm might be advised not to base production there  government is pursuing inappropriate economic policies that could lead to foreign exchange risk, that might be another reason for not basing production in that location

Experience Effects: •	The experience curve refers to systematic reductions in production costs that have been observe to occur over the life of a product  a product’s production costs decline by some quantity about each time cumulative output doubles

Learning Effects: •	Learning effects: refer to cost savings that come from learning by doing; labor, learns by repetition how to carry out a task  labor productivity increases over time as individuals learn the most efficient ways to perform particular tasks •	Learning effects disappear after a while  suggested that they are important only during the start-up period of a new process and that they cease after 2 or 3 years  any decline in the experience curve after such a point is due to economies of scale

Economies of Scale: •	Economies of scale: refer to the reductions in unit cost achieved by producing a large volume of a product  attaining economies of scale lowers a firm’s unit costs and increases its profitability •	Number of sources: o	1) ability to spread fixed costs over a large volume  the more rapidly that cumulative sales volume is built up, the more rapidly fixed costs can be amortized over a large production volume, and the more rapidly unit costs will fall o	2) a firm may not be able to attain an efficient scale of production unless it serves global markets  by serving domestic and international markets from its production facilities a firm may be able to utilize those facilities more intensively (translates into higher capital productivity and greater profitability o	3) as global sales increase the size of the enterprise, so its bargaining power with suppliers increases, which may allow it to attain economies of scale in purchasing, bargaining down the cost of key inputs and boosting profitability that way

Strategic Significance: •	Moving down the experience curve allows a firm to reduce its cost of creating value and increase its profitability •	The firm that moves down the experience curve most rapidly will have a cost advantage vis-à-vis its competitors •	One key to progressing downward on the experience curve as rapidly as possible is to increase the volume produced by a single plant as rapidly as possible •	In addition, to get down the experience curve rapidly, a firm may need to price and market aggressively so demand will expand rapidly •	Once a firm has established a low-cost position, it can act as a barrier to new competition

Leveraging Subsidiary Skills: •	The valuable skills are developed first at home and then transferred to foreign operations •	The creation of skills that help to lower the costs of production, or to enhance perceived value and support higher production pricing, is not the monopoly of the corporate center •	Leveraging the skills created within subsidiaries and applying them to other operations within the firm’s global network may create value •	1) managers have the humility to recognize the valuable skills that lead to competencies can arise anywhere within the firm’s global network, not just at the corporate center •	2) managers must establish an incentive system that encourages local employees to acquire new skills  creating new skills involves a degree of risk (not all skills add value) •	3) managers must have a process for identifying when valuable new skill shave been created in s subsidiary •	4) managers need to act as facilitators, helping to transfer valuable skills within the firm

Summary: •	Firms that expand globally can increase their profitability and profit growth by entering new markets where indigenous competitors lack similar competencies, by lowering costs and adding value to their product offering through the attainment of location economies, by exploiting experience curve effects, and by transferring valuable skills between their global network of subsidiaries •	By simultaneously realizing location economies and experience effects a firm may be able to produce a more highly valued product at a lower unit cost, thereby boosting profitability  the increase in the perceived value of the product may also attract more customers, thereby growing revenues and profits •	Firm’s may elect to hold prices low in order to increase global market share and attain greater scale economies  could increase the firm’s rate of profit growth even further, since customers will be attracted by prices that are low relative to value

Cost Pressures and Pressures for Local Responsiveness: •	Firms that compete in the global marketplace typically face two types of competitive pressure that effect their ability to realize location economies and experience effects, to leverage products and transfer competencies and skills within the enterprise  face pressures for cost reductions and pressures to be locally responsive •	Responding to pressures for cost reductions requires that a firm try to minimize its unit costs •	Responding to pressures to be locally responsive requires that a firm differentiate its product offering and marketing strategy from country to country in an effort to accommodate the diverse demands arising from national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions, and government policies

Pressures for Cost Reductions: •	Responding to pressures for cost reduction requires a firm to try to lower the costs of value creation  manufacture might mass-produce a standardized product at the optimal location to realize economies of scale, learning effects, and location economies •	Pressures for cost reduction can be particularly intense in industries producing commodity-type products where meaningful differentiation on non-price factors is difficult and price is the main competitive weapon •	Universal needs: exist when the tastes and preferences of consumers in different nations are similar if not identical  this is the case for conventional commodity products such as bulk chemicals, petroleum, steel, sugar •	Pressures for cost reductions are also intense in industries where major competitors are based in low-cost locations, where there is persistent excess capacity, and where consumers are powerful and face low switching costs

Pressures for Local Responsiveness: •	Pressures for local responsiveness arise from national differences in consumer tastes and preferences, infrastructure, accepted business practices, and distribution channels, and from host-government demands •	Responding to pressures to be locally responsive requires a firm to differentiate its products and marketing strategy from country to country to accommodate these factors, all of which tends to raise the firm’s cost structure

Differences in Customer Tastes and Preferences: •	MNC’s products and marketing message have to be customize to appeal to the tastes and preferences of local customers  creates pressure to delegate production and marketing responsibilities and functions to a firm’s overseas subsidiaries •	Modern communications and transport technologies have created the conditions for a convergence of the tastes and preferences of consumers from different nations  the result is the emergence of enormous global markets for standardized consumer products

Differences in Infrastructure and Traditional Practices: •	Pressures for local responsiveness arise from differences in infrastructure or traditional practices among countries, creating a need to customize products accordingly  will require the delegation of manufacturing and production functions to foreign subsidiaries

Differences in Distribution Channels: •	A firm’s marketing strategies may have to be responsive to differences in distribution channels among countries, which may necessitate the delegation of marketing functions to national subsidiaries

Host Government Demands: •	Economic and political demands imposed by host-country governments may require local responsiveness (registration, price restrictions) •	Threats of protectionism, economic nationalism, and local content rules dictate that international businesses manufacture locally

Choosing a Strategy: •	Pressures for local responsiveness imply that it may not be possible for a firm to realize the full benefits from economies of scale, learning effects, and location economies  it may not be possible to serve the global marketplace from a single low-cost location, producing a globally standardized product, and marketing it worldwide to attain the cost reductions associated with experience effects •	Pressures for local responsiveness imply that it may not be possible to leverage skills and products associated with a firm’s core competencies wholesale from one nation to another •	Firms typically choose among 4 main strategic postures when competing internationally: 1) global standardization strategy; 2) localization strategy; 3) transnational strategy; 4) international strategy

Global Standardization Strategy: •	Global standardization strategy: focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies  their strategic goal is to pursue a low-cost strategy on a global scale •	The production, marketing, and R&D activities of firms pursuing a global standardization strategy are concentrated in a few favorable locations •	Firms pursuing a global standardization strategy try not to customize their product offering and marketing strategy to local conditions because customization involves shorter production runs and the duplication of functions, which tends to raise costs  they prefer to market a standardized product worldwide so that they can reap the maximum benefits from economies of scale and learning effects •	This strategy makes most sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal

Localization Strategy: •	Localization strategy: focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets •	Most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense •	By customizing the product offering to local demands, the firm increases the value of that product in the local market •	On the downside, because it involves some duplication of functions and smaller production runs, customization limits the ability of the firm to capture the cost reductions associated with mass-producing a standardized product for global consumption •	Firms pursuing a localization strategy still need to be efficient and, whenever possible, to capture some scale economies from their global reach

Transnational Strategy: •	In today’s global environment, competitive conditions are so intense that to survive, firms must do all they can to respond to pressures for cost reductions and local responsiveness •	They must try to realize location economies and experience effects, to leverage products internationally, to transfer core competencies and skills within the company, and to simultaneously pay attention to pressures for local responsiveness •	The flow should be from foreign subsidiary to home country and from foreign subsidiary to foreign subsidiary •	Firms that pursue transnational strategy are trying to simultaneously achieve low costs through location economies, economies of scale, and learning effects; differentiate their product offering across geographic markets to account for local differences; and foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations •	Causes problems because differentiating the product to respond to local demands in different geographic markets raises costs, which runs counter to the goal of reducing costs

International Strategy: •	MNC that find themselves in the fortunate position of being confronted with low cost pressures and low pressures for local responsiveness have pursued international strategy, taking products first produced for their domestic market and selling them internationally with only minimal local customization •	The distinguishing feature of many such firms is that they are selling a product that serves universal needs, but they do not face significant competitors, and thus unlike firms pursuing a global standardization strategy, they are not confronted with pressures to reduce their cost structure •	MNC tend to centralize product development functions such as R&D at home  they tend to establish manufacturing and marketing functions in each major country or geographic region in which they do business

The Evolution of Strategy: •	Over time, competitors inevitably emerge, and if managers do not take proactive steps to reduce their firm’s cost structure, it will be rapidly outflanked by efficient global competitors •	An international strategy may not be viable in the long term, and to survive, firms need to shift toward a global standardization strategy or a transnational strategy in advance of competitors •	Localization may give a firm a competitive edge, but if it is simultaneously facing aggressive competitors, the company will also have to reduce its cost structure, and the only way to do that may be to shift toward a transnational strategy  as competition intensifies, international and localization strategies rend to become less viable, and managers need to orientate their companies toward either a global standardization strategy or a transnational strategy

Chapter 14: Entry Strategy and Strategic Alliances
Chapter 14: Entry Strategy and Strategic Alliances

Introduction: •	Concerned with two closely related topics: 1) the decision of which foreign markets to enter, when to enter them, and on what scale; 2) the choice of entry mode •	The various modes for serving foreign markets are exporting, licensing or franchising to host-country firms, establishing in a host country to serve its market, or acquiring an established enterprise in the host nation to serve that market

Basic Entry Decisions:

Which Foreign Markets? •	While some markets are very large when measured by number of consumers, one must also look at living standards and economic growth •	China and India are growing so rapidly that they are attractive targets for inward investment •	Benefit-cost-risk trade-off is likely to be more favorable in politically stable developed and developing nations that have free market systems, and where there is not a dramatic upsurge in either inflation rates or private-sector debt •	Another important factor is the value an international business can create in a foreign market  if the international business can offer a product that has not been widely available in that market and that satisfies an unmet need, the value of that product to consumers is likely to be much greater than if the international business simply offers the same type of product that indigenous competitors and other foreign entrants are already offering •	A firm can rank countries in terms of their attractiveness and long-run profit potential

Timing of Entry: •	Once attractive markets have been identified, it is important to consider the timing of entry  entry is early when an international business enters a foreign market before other foreign firms and late when it enters after other international businesses have already established themselves •	First-mover advantages: advantages frequently associated with entering a market early  1) the ability to preempt rivals and capture demand by establishing a strong brand name; 2) the ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants  cost advantage may enable the early entrant to cut prices below that of later entrants, thereby driving them out of the market; 3) the ability of early entrants to create switching costs that tie customers into their products or services  switching costs make it difficult for later entrants to win business •	First-mover disadvantages: disadvantages associated with entering a foreign market before other international businesses •	These disadvantages may give rise to pioneering costs, costs that an early entrant has to bear that a later entrant can avoid  pioneer costs arise when the business system in a foreign country is so different from that in a firm’s home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game •	Research seems to confirm that the probability of survival increases if an international business enters a national market after several other foreign firms have already done so; the late entrant may benefit by observing and learning from the mistakes made by early entrants •	Pioneering costs also include the costs of promoting and establishing a product offering, including the costs of educating customers

Scale of Entry and Strategic Commitments: •	Entering a market on a large scale involves the commitment of significant resources  implies rapid entry •	The consequence of entering on a significant scale, entering rapidly, are associated with the value of the resulting commitments  a strategic commitment has a long-term impact and is difficult to reverse •	On the positive side, it will make it easier for the company to attract customers and distributors  scale of entry gives both customers and distributors reasons for believe that the company will remain in the market for the long run •	On a negative side, by committing itself heavily to a market, may have fewer resources available to support expansion in other desirable markets •	The value of the commitments that flow from rapid large-scale entry into a foreign market must be balanced against the resulting risks and lack of flexibility associated with significant commitments •	Balanced against the value and risks of the commitments associated with large-scale entry are the benefits of a small-scale entry •	Small-scale entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market •	Small-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to benter •	By giving the firm time to collect information, small-scale entry reduces the risks associated with a subsequent large-scale entry •	But the lack of commitment associated with small0scale entry may make it more difficult for the small-scale entrant to build market share and to capture first-mover or early-mover advantages

Summary: •	Entering a large developing nation before most other international businesses in the firm’s industry, and entering on a large scale, will be associated with high levels or risk •	The potential long-term rewards associated with such a strategy are great  the early large-scale entrant into a major developing nation may be able to capture significant first-mover advantages that will bolster its long-run position in that market •	In contrast, entering developed nations after other international businesses in the firm’s industry, and entering on a small scale to first learn more about those markets, will be associated with much lower levels or risk •	Barlett and Ghoshal argue that such late movers can still succeed against well-established global competitors by pursuing appropriate strategies •	Barlett and Ghoshal argue that companies based in developing nations should use the entry of foreign MNC as an opportunity to learn from these competitors by benchmarking their operations and performance against them

Entry Modes: •	Firms can use 6 different modes to enter foreign markets: exporting, turnkey projects, licensing, franchising, establishing joint ventures with a host-country firm, or setting up a new wholly owned subsidiary in the host country

Exporting: •	Many manufacturing firms begin their global expansion as exporters and only later switch to another mode for serving a foreign market

Advantages: •	1) it avoids the often substantial costs of establishing manufacturing operations in the host country; 2) exporting may help a firm achieve experience curve and location economies  by manufacturing the product in a centralized location and exporting it to other national markets, the firm may realize substantial scale economies from its global sales volume

Disadvantages: •	1) exporting from the firm’s home base may not be appropriate if lower-cost locations for manufacturing the product can be found abroad  firms pursuing global or transnational strategies, it may be preferable to manufacture where the mix of factor conditions is most favorable from a value creation perspective and to export to the rest of the world from that location •	2) high transport costs can make exporting uneconomical, particularly for bulk products  get around it by manufacturing bulk products regionally •	3) tariff barriers can make exporting uneconomical •	4) arises when a firm delegates its marketing, sales, and service in each country where it does business to another company •	Get around these drawbacks by setting up wholly owned subsidiaries in foreign nations to handle local marketing, sales, and service  firms can exercise tight control over marketing and sales in the country while reaping the cost advantages of manufacturing the product in a single location, or a few choice locations

Turnkey Projects: •	Firms that specialize in the design, construction, and start-up of turnkey plants are common in some industries •	Turnkey project: the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel  at completion of the contract, the foreign client is handed the “key” to a plant that is ready for full operation •	Most common in the chemical, pharmaceutical, petroleum refining, and metal refining industries, all of which use complex, expensive production technologies

Advantages: •	The know-how required to assemble and run a technologically complex process, such as refining petroleum or steal, is a valuable asset •	The strategy is particularly useful where FDI is limited by host-government regulations •	A turnkey strategy can also be less risky than conventional FDI  in a country with unstable political and economic environments, a longer-term investment might expose the firm to unacceptable political and/pr economic risks

Disadvantages: •	1) the firm that enters into a turnkey deal will have no long-term interest in the foreign country •	2) the firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor •	3) if the firm’s process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantages to potential and/or actual competitors

Licensing: •	Licensing agreement: an agreement whereby a licensor grants the rights to intangible property to another entity for a specified period, and in return, the licensor receives a royalty fee from the licensee  intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks

Advantages: •	The licensee puts up most of the capital necessary to get the overseas operation going  the firm does not have to bear the development costs and risks associated with opening a foreign market •	Very attractive when a firm lacking the capital to develop operations overseas •	Licensing can be attractive when a firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market •	Often used when a firm wishes to participate in a foreign market but it prohibited from doing so by barriers to investment •	Frequently used when a firm possesses some intangible property that might have business applications, but it does not want to develop those applications itself

Disadvantages: •	1) it does not give a firm the tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies •	2) competing in a global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another •	3) the risk associated with licensing technological know-how to foreign companies  many firms wish to maintain control over how their know-how is used, and a firm can quickly lose control over its technology by licensing it •	There are ways of reducing risk  entering into a cross-licensing agreement with a foreign firm; under a cross-licensing agreement, a firm might license some valuable intangible property to a foreign partner, but in addition to a royalty payment, the firm might also request that the foreign partner license some of its valuable know-how to the firm •	Cross-licensing agreements enable firms to hold each other hostage, which reduces the probability that they will behave opportunistically toward each other •	Link an agreement to license know-how with the formation of a joint venture in which the licensor and licensee take important equity stakes

Franchising: •	Similar to licensing, although franchising tends to involve longer-term commitments than licensing •	Franchising: a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business •	Franchiser typically receives a royalty payment which amounts to some percentage of the franchisee’s revenues

Advantages: •	Firm is relieved of many of the costs and risks of opening a foreign market on its own  the franchisee typically assumes those costs and risks •	Using a franchising strategy, a service firm can build a global presence quickly and at a relatively low cost and risk

Disadvantages: •	Quality control  the foundation of franchising arrangements is that the firm’s brand name conveys a message to consumers about the quality of the firm’s product •	This presents a problem in that foreign franchisees may not be as concerned about quality as they are supposed to be, and the result of poor quality can extend beyond lost sales in a particular foreign market to a decline in the firm’s worldwide reputation •	A way around this disadvantage is to set up a subsidiary in each country in which the firm expands  the subsidiary assumes the rights and obligations to establish franchises throughout the particular country or region

Joint ventures: •	Joint venture: entails establishing a firm that is jointly owned by two or more otherwise independent firms •	Establishing a joint venture with a foreign firm has long been a popular mode for entering a new market

Advantages: •	1) a firm benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems  U.S firms; joint ventures have involved the U.S company providing technological know-how and products and the local partner providing the marketing expertise and the local knowledge necessary for competing in that country •	2) when the development costs and/or risks of opening a foreign market are high, a firm might gain by sharing these costs and or risks with a local partner •	3) political considerations make joint ventures the only feasible entry mode •	Joint ventures with local partners face a low risk or being subject to nationalization or other forms of adverse government interference

Disadvantages: •	1) a firm that enters into a joint venture risks giving control of its technology to its partner  agreements can be constructed to minimize this risk. One option is to hold majority ownership in the venture. This allows the dominant partner to exercise greater control over its technology. But it can be difficult to find a foreign partner who is willing to settle for minority ownership •	2) joint venture does not give a firm the right control over subsidiaries that it might need to realize experience curve or location economies  nor does it give a firm the right control over a foreign subsidiary that it might need for engaging in coordinated global attacks against its rivals •	3) the shared ownership arrangement can lead to conflicts and battles for control between the investing firms if their goals and objectives change of it they take different views as to what the strategy should be •	Conflicts arise by shifts in the relative bargaining power of venture partners

Wholly Owned Subsidiaries: •	Firm owns 100% of the stock  establishment can happen in 2 ways: •	1) the firm either can set up a new operation in that country (Greenfield venture); 2) it can acquire an established firm in that host nation and use that firm to promote its products

Advantages: •	1) when a firm’s competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode because it reduces the risk of losing control over that competence •	2) gives a firm tight control over operations in different countries  necessary for engaging in global strategic coordination •	3) may be required if a firm is trying to realize location and experience curve economies when cost pressures are intense, it may pay a firm to configure its value chain in such a way that the value added at each stage is maximized  establishing such a global production system requires a high degree of control over the operations of each affiliate •	4) the firm receives 100% share in the profits generated in a foreign market

Disadvantages: •	Generally the most costly method of serving a foreign market from a capital investment standpoint  firms doing this must bear the full capital costs and risks of setting up overseas operations

Selecting an Entry Mode: •	Trade-offs are inevitable when selecting an entry mode  when considering entry into an unfamiliar country with a track record for discriminating against foreign-owned enterprises when awarding government contracts, a firm might favor a joint venture with a local enterprise •	If the firm’s core competence is based on proprietary technology, entering a joint venture might risk losing control of that technology to the joint-venture partner, in which case the strategy may seem unattractive

Core Competencies and Entry Mode: •	Firms often expand internationally to earn greater returns from their core competencies, transferring the skills and products derived from their core competencies to foreign markets where indigenous competitors lack those skills

Technological Know-How: •	If a firm’s competitive advantage is based on control over proprietary technological know-how, licensing and joint-venture arrangements should be avoided if possible to minimize the risk of losing control over that technology  if high-tech firm sets up operations in a foreign country to profit from a core competency in technological know-how, it will probably do so through a wholly owned subsidiary •	Licensing or joint-venture arrangement can be structured to reduce the risk of licensees or joint-venture partners expropriating technological know-how •	Another exception exists when a firm perceives its technological advantage to be only transitory, when it expects rapid imitation of its core technology by competitors •	By licensing its technology to competitors, the firm may deter them from developing their own, possibly superior, technology  by licensing its technology, the firm may establish its technology as the dominant design in the industry

Management Know-How: •	The risk of losing control over the management skills to franchisees or joint-venture partners is not that great  these firms value asset is their brand name, and brand names are generally well protected by international laws pertaining to trademarks •	Many service firms favor a combination of franchising and subsidiaries to control the franchises within particular countries or regions •	The subsidiaries may be wholly owned or joint ventures, but most service firms have found that joint ventures with local partners work best for the controlling subsidiaries

Pressures for Cost Reductions and Entry Mode: •	The greater the pressures for cost reductions, the more likely a firm will want to pursue some combination of exporting and wholly owner subsidiaries •	The firm might want to export the finished product to marketing subsidiaries based in various countries  will be wholly owned and have the responsibility for overseeing distribution in their particular countries •	Setting up wholly owned subsidiaries is preferable to joint-venture arrangements and to using foreign marketing agents because it gives the firm tight control that might be required for coordinating a globally dispersed value chain •	It also gives the firm the ability to use the profits generated in one market to improve its competitive position in another market

Greenfield Venture or Acquisition?: •	A firm can establish a wholly owned subsidiary in a country by building a subsidiary from the ground up, Greenfield strategy, or by acquiring an enterprise in the target market

Pros and Cons of Acquisitions: •	1) they are quick to execute  by acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market •	2) in many cases firms make acquisitions to preempt their competitors  great in markets that are rapidly globalizing (telecommunications), where a combination of deregulation within nations and liberalization of regulations governing cross-border foreign direct investment has made it much easier for enterprises to enter foreign markets through acquisitions •	3) managers may believe acquisitions to be less risky than Greenfield ventures  firm buys a set of assets that are producing a known revenue and profit stream

Why Do Acquisitions Fail?: •	1) the acquiring firm overpay for the assets of the acquired firm  the price of the target firm can get bid up if more than one firm is interested in its purchase •	2) there is a clash between the cultures of the acquiring and acquired firm  high management turnover •	3) attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecasted •	4) inadequate preacquisition screening

Reducing the Risks of Failure: •	Screening of the foreign enterprise to be acquired, including a detailed auditing of operations, financial position, and management culture, can help make sure the firm: 1) does not pay too much for the acquired unit; 2) does not uncover any nasty surprises after the acquisition; 3) acquires a firm whose organization culture is not antagonistic to that of the acquiring enterprise

Pros and Cons of Greenfield Ventures: •	Gives the firm a much greater ability to build the kind of subsidiary company that it wants  much easier to build from scratch than it is to change the culture of an acquired unit •	Much easier to establish a set of operating routines in a new subsidiary than it is to convert the operating routines of an acquired unit •	Greenfield ventures are slower to establish •	They are risky  a degree of uncertainty is associated with future revenue and profit prospects •	Greenfield ventures are less risky than acquisitions in the sense that there is less potential for unpleasant surprises •	Being preempted by more aggressive global competitors who enter via acquisitions and build a big market presence that limits the market potential for the Greenfield venture

Greenfield or Acquisition?: •	If the firm is seeking to enter a market where there are already well-established incumbent enterprises, and where global competitors are also interested in establishing a presence, it may pay the firm to enter via an acquisition  Greenfield venture may be too slow to establish a sizeable presence •	If the firm is going to make an acquisition, its management should be cognizant of the risks associated with acquisitions and consider these when determining which firms to purchase  slower route = Greenfield venture •	If the firm is considering entering a country where there are no incumbent competitors to be acquired, then a Greenfield venture may be the only mode  even when incumbent exist, if the competitive advantage of the firm is based on the transfer of organizationally embedded competencies, skills, routines, and culture, it may still be preferable to enter via a Greenfield venture

Strategic Alliances: •	Strategic alliances: refer to cooperative agreements between potential or actual competitors •	Run the range from formal joint ventures, in which two or more firms have equity stakes, to short-term contractual agreements, in which two companies agree to cooperate on a particular task

The Advantages of Strategic Alliances •	Firms ally themselves with actual or potential competitors for various strategic reasons •	Allows firms to share the fixed costs (and risks) of developing new products or processes •	Bring together complementary skills and assets that neither company could easily develop on its own •	It can make sense to form an alliance that will help the firm establish technological standards for the industry that will benefit the firm

The Disadvantages of Strategic Alliances: •	Give competitors a low-cost route to new technology and markets •	Many strategic alliances between U.S and Japanese firms were part of an implicit Japanese strategy to keep high-paying, high-value-added jobs in Japan while gaining the project engineering and production process skills that underlie the competitive success of many U.S companies •	Alliances have risks  give away more than it receives

Making Alliances Work: •	The success of an alliance seems to be a function of 3 main factors: 1) partner selection; 2) alliance structure; 3) the manner in which the alliance is managed

Partner Selection: •	1) select the right ally  has 3 characteristics: 1) helps the firm achieve its strategic goals; 2) shares the firm’s vision for the purpose of the alliance; 3) unlikely to try to opportunistically exploit the alliance for its own ends •	To increase the probability of selecting a good partner, the firm should: o	1) collect as much information on potential allies as possible o	2) gather data from informed 3rd parties  firms that have had alliances with the potential partners o	3) get to know the potential partner as well as possible before committing to an alliance

Alliance Structure: •	The alliance should be structured so that the firm’s risks of giving too much away to the partner are reduced to an acceptable level •	1) alliances can be designed to make it difficult to transfer technology not meant to be transferred •	2) contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner •	3) both parties to an alliance can agree in advance to swap skills and technologies that the other covets, thereby ensuring a chance for equitable gain •	4) the risk of opportunism by an alliance partner can be reduced if the firm extracts a significant credible commitment from its partner in advance

Managing the Alliance: •	Once a partner is selected and an appropriate alliance structure has been agreed on, the task facing the firm is to maximize its benefits from the alliance •	Differences in managerial styles  cultural differences •	Managing an alliance requires building interpersonal relationships between the firms’ mangers, or what it sometimes referred to as relational capital •	Resulting friendships help build trust and facilitate harmonious relations between the two firms  personal friendships also foster an informal management network between the firms •	To maximize the learning benefits of an alliance, a firm must try to learn from its partner and then apply the knowledge within its own organization

Chapter 17: Global Marketing and R&D
Chapter 17: Global Marketing and R&D

•	Marketing mix: set of choices the firm offers to its target customers  depends on differences in national culture, economic development, product standards, distribution channels •	Marketing segmentation: refers to identifying distinct groups of consumers whose purchasing behavior differs from others in important ways  markets can be segmented in numerous ways: by geography, demography (sex, age), social-cultural factors (social class, values, religion), psychological factors (personality) •	Product attributes: products sell when their attributes match consumer needs  customer needs vary country to country depending on culture and level of economic development •	Distribution strategy: the means a firm chooses for delivering the product to the consumer •	Channel length: refers to the number of intermediaries between the producer and the consumer •	Communication strategy: a number of communication channels are available to a firm, including direct selling, sales promotion, direct marketing, and advertising •	Push strategy: emphasizes personal selling rather than mass media advertising in the promotional mix •	Pull strategy: depends more on mass media advertising to communicate the marketing message to potential consumers •	Price discrimination: involves charging whatever the market will bear; in competitive market, prices may have to be lower than in a market where the firm has a monopoly  help companies maximize its profits •	Predatory pricing: is the use of price as a competitive weapon to drive weaker competitors out of a national market •	Multipoint pricing: refers to the fact a firm’s pricing strategy in one market may have an impact on its rivals pricing strategy in another market •	Experience curve pricing: strategy on an international scale will price low worldwide in attempting to build global sales volume as rapidly as possible, even if this means taking large losses initially •	Lead market: market where most new products were developed and introduced

Summary:

•	Levitt had argued that due to the advent of modern communications and transport technologies, consumers tastes and preferences are becoming global, which is creating global markets for standardized consumer products  this position is regarded as extreme by many, who argue that substantial differences still exist between countries •	Managers need to be away of 2 main issues relating to segmentation: the extent to which there are differences between countries in the structure of market segments, and the existence of segments that transcend national borders •	A product can be viewed as a bundle of attributes  bed to be varied among country to country •	In some countries, the retail system is concentrated; in others, it is fragmented. In some countries, channel length is short; in others, it is long. Access to distribution channels is difficult to achieve in some countries, and the quality of the channel may be poor •	Barriers to international communication include cultural differences, source effects, and noise levels •	A globally standardized advertising campaign, which uses the same marketing message all over the world, has economic advantages, but it fails to account for differences in culture and advertising regulations •	For price discrimination to be effective, the national markets must be separate and their price elasticities of demand must differ •	New product development is a high-risk, potentially high-return activity. To build a competency in new product development, an international business must do two things: 1) disperse R&D activities to those countries where new products are being pioneered, 2) integrate R&D with marketing and manufacturing •	Achieving tight integration among R&D, marketing, and manufacturing requires the use of cross-functional teams

Cases, Country/Management Focuses:
Cases, Country/Management Focuses:

Chapter 12:

Opening Case: Wal-Mart’s Expansion Established competitive advantage in the US based on efficient merchandising, buying power, and human relations policies. Efficient High productivity led to low operating costs, lowered prices Decided to expand globally because the US market was drying up 1991 opened first stores in Mexico. Poor infrastructure disrupted their distribution and drove prices up. They also chose the wrong products to sell. Learned from mistakes and partnered with Mexican trucking company and catered product selection to local tastes. They acquired Cifera and became the biggest of its type in Mexico. They moved on to other countries making acquisitions and then using their expertise to make them run smoothly. Global expansion allowed them to demand lower prices from suppliers. They learned things in other countries that they can apply at home: 2 level stores, wine section.

Management Focus: MTV Goes Global, with a Local Accent Opened MTV Europe in 1987, they beamed one station all across Europe with American programming in English, but they did not account for local tastes. Smaller stations pooped up which did satisfy local tastes and stole advertisers away from MTV. MTV then broke down into 8 regional feeds across Eurasia. They still have American programming, but also have local shows that have helped them gain advertisers.

Management Focus: The Changing Strategy of General Motors 1997 invested $2.2 billion in four facilities in Poland, China, Argentina, and Thailand. Traditionally, they just saw these markets as dumping grounds for obsolete products. They were too lax in Europe, allowing them to design their own cars, which led to costly duplication and failed to share valuable technology and skills. All of the new production facilities are exactly the same so changes made in one place can be easily made in another. They follow lean production. They are making vehicles that are the same throughout the world but allow the plants to customize them to local specifications. Making the same car around the world lowers design costs.

Closing Case: The Evolution of Strategy at Proctor & Gamble P&G is one of the biggest international companies. It started in the US but has been going global since 1915. They have done this through acquisitions and Greenfield investments. They would design products in Cincinnati and then have their production facilities in other countries tailor the product to the area. As barriers to global trade diminished, costs rose for P&G because they had production facilities in so many countries when they could have just one in an area. They closed 30 manufacturing plants but it still didn’t really help. They then closed 10 more and tried to establish global brands so they didn’t need to be changed based on different areas.

Chapter 14:

Opening Case: Tesco Goes Global They are a grocery retailer doing very well in the UK. They had a lot of extra cash so they decided to expand overseas, they chose emerging markets in Eastern Europe and Asia. Their first was an acquisition (51%) of Global, a Turkish retailer. They then go 31 in Poland, 13 in Czech Republic, and then Ireland. Asian expansion began in Thailand. They got 75% of Lotus. They then went to South Korea, Taiwan, Malaysia, and China. They went in a 50/50 joint venture in China with Hymall to reduce risks. Success comes from: 1. Retaining core abilities and hire local managers, 2. Partnering with companies to reduce risk, 3. Entering growing markets with weak local indigenous competitors.

Management Focus: International Expansion at ING Group ING started with a merger of the 3rd largest bank in the Netherlands and the biggest insurance company. Their strategy is to expand rapidly over borders through acquisitions. They would get a small portion, make good relationships and then propose a takeover. They flourish due to the removal of barriers between financial services, with combining banking and insurance. They mostly made acquisitions in Europe but have begun to do it in the US. US is the world’s largest financial services market, Americans manage their own retirement (401K), personal investment in the US is booming, selling in the US is a huge market and allows them to make up for poor earnings regions by having big earnings in another. Introduced IGN Direct, online banking, they give higher interest rates due to lower costs.

Management Focus: The Jollibee Phenomenon – A Philippine Multinational Jollier, a Philippine McDonald’s type company. When McDonald’s entered their market they decided to use them as a benchmark to try and make themselves better. It helped improve performance. They then looked for flaws in McDonald’s global strategy. Jollibee decided to take a localization strategy. They expanded around their area and then moved to the US. They’re succeeding with the Pilipino population in California, but other nationalities are going too now.

Management Focus: MG Rover’s Desperate Search for a Partner MG Rover was part of a bigger company but was sold to investors for 10Millions pounds. They’re struggling and losing tons of money. They had a deal with China Brilliance to design and make a new car for China. It was great because it gave them access to China’s emerging car market, but then the chairman of the company in china was accused of fraud and the deal fell apart. They then entered with Shainghai Automotive Industry Corporation. They gained access to China’s market while SAIC gained engineering and access to British and European markets. Time will tell if the partnership works.

Closing Case: Diebold ATM machine makers, they made a distribution agreement with Dutch Philips NV, they’d make the sale then Diebold would ship the ATMs in Europe. They ended the partnership in 1990 and made a joint venture with IBM. After 15 years Diebold dumped IBM and decided to pursue their own global presence. They had to get manufacturers close to the markets because the ATMs around the world serve different functions like paying bills. They then went on an acquisition binge: Brazil, France, and Holland. They then made a joint venture in China. In Brazil they entered the polling machine business. They then acquired an American polling machine company.

May 2008
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