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International Strategy and Management

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1 International Strategy and Management

2 Core Topics International growth strategy Entering foreign markets
Global, international, multidomestic Entering foreign markets Market selection, timing, operational decisions Entry modes Exporting, licensing, franchising, joint ventures, strategic alliances, Global marketing strategy Global manufacturing strategy

3 Additional Topics Globalization Global ethics Culture Foreign exchange
Drivers, consequences, success factors Global ethics Impact on business Culture Determinants, impact on business Foreign exchange International human resource management

4 Textbooks Global Business Today Mastering Global Markets
Charles W.L. Hill; Irwin Mastering Global Markets Czinkota, Ronkainen, and Donath; Thompson Total Global Strategy George S. Yip; Prentice Hall

5 Pedagogy Lecture / Discussion Exercises Case studies
Slides on web (before, complete) Exercises Hill – GlobalEDGE Case studies Simulation: Country Manager Interpretive Software

6 Globalization

7 Globalization The way it was…. The way it is…
Self-contained national economies, isolation, differences in govt., culture, and business systems The way it is… Reduced barriers (GATT, tariffs), shrinking distance (technology, transportation, culture), interdependent economies Sample slides

8 Average Tariff Rates (Manufactured Products as % of Value) 1913 1950
1990 2000 France 21 18 5.9 3.9 Germany 20 26 Italy 25 Japan 30 5.3 Holland 5 11 Sweden 9 4.4 Britain 23 U.S. 44 14 4.8

9 Growth – World Trade & Output
500 1000 1500 2000 2500 1950 1960 1970 1980 1990 Trade Output (GDP)

10 National Composition of MNCs
1000 2000 3000 4000 5000 6000 7000 8000 Rest of World Latin America W.Europe Asia Pacific North America 1973 1990 1997 U.S.A. 48.5% 31.5% 32.4% 26% Japan 3.5 12 15.7 17 U.K. 18.8 6.8 6.6 8 France 7.3 10.4 9.8 13 Germany 8.1 .9 12.7

11 The Changing World Order
The fall of Communism in Eastern Europe and the former Soviet Union. Czechoslovakia has divided itself into two states. Yugoslavia has divided into 5 (often warring) successor states. Pro-democracy movement (suppressed) in China. Latin America has seen both democracy and free market reforms.

12 Globalization Driving to work: The typical “American” experience
Your car Your gasoline Your investments Your entertainment Your morning snack Your news Cars: designed in Germany, assembled in Mexico, US/Japanese components, Korean steel, Malaysian rubber Gas: oil well off coast of Africa, French oil company, transported to US on Greek ship, BP gas station Investment: talk to stockbroker on Nokia cell phone (Finland) assembled in Texas using chips from Taiwan, designed in India, working at Qualcomm (San Diego); buy shares in Deutsche Telekom (former German monopoly run by Israeli CEO) Entertainment: car radio made in Malaysia by Japanese firm, hip-hop composed by Swede, sung by Danes, in English, French music company Morning snack: Coffee stall run by Korean immigrant, single-tall-non-fat-latte and chocolate-covered biscotti (coffee from Brazil, chocolate from Peru, Italian recipe) News: Globalization protests in Genoa Italy turns violent, economic slowdown in US sends Japan’s Nikkei stock market index to 16-year low

13 Globalization “Has Globalization Gone Too Far?”
Rodrik - California Management Review, Vol. 39, No. 3, Spring 1997 What are the tensions between social stability and globalization?

14 The Impact of Globalization
Jobs and income Firms move jobs to low cost countries Countries specialize in efficiently produced goods and import those they can not efficiently produce Increases income in less developed countries May lead to income inequality

15 The Impact of Globalization
Labor policies and the environment Firms move to countries with weak laws Economic progress leads to stronger laws By creating wealth and incentives for technology improvements, world will be better Tie strong laws to international agreements

16 What makes a company global?
Kogut - HBR Reprint 99106 Multinational / Multidomestic Products differ greatly among country markets; high transportation costs, no scale economies Global Benefit from worldwide volume; larger production plants (MES), larger production runs, more efficient logistics networks, higher volume distribution networks

17 Global Success Factors
Industry potential Timing Entry barriers First mover advantage Preempting leading positions in NICs Create switching costs Block access to supply chain Arbitrage – exploiting differences Culture, administration, geography, economics “The Forgotten Strategy” Ghemawat - HBR Reprint R0311E

18 Globalization - Exercise
globalEDGE Exercise globalEDGE Diagnostic Tools GLOBE: Globalization Benchmark

19 Global Ethics

20 Guiding Principles Three Guiding Principles
Respect for core human values, which determine the absolute moral threshold for all business activities. Respect for local traditions. The belief that context matters when deciding what is right and what is wrong. “Values in Tension: Ethics Away From Home” Donaldson – HBR Reprint 96502

21 Global Ethical Perspective
Treat corporate values and formal standards as absolutes. Design and implement conditions of engagement for suppliers and customers. Allow foreign business units to help formulate ethical standards and interpret ethical issues. In host countries, support efforts to decrease institutional corruption. Exercise moral imagination.

22 Global Ethics Incentives to be ethical Ethics and corruption
Avoid legal penalties, bad PR, employee satisfaction Ethics and corruption Foreign Corrupt Practices Act 1977 Example Ethics and human right China & Tibet Alien Tort Statute 1789 – Unocal in Myanmar

23 Ethics and Corruption After graduating, your first assignment lands you in Asia as the local director of a U.S. pharmaceutical firm. It was a small operation, but you have big plans. You hope to segment your customers, empower your workers, implement just-in-time production, and use the balanced scorecard to keep score. You figure to double your business in the first year. But right now, you’re thinking it might have been a better idea to take that consulting offer instead. The first million-dollar shipment of your company’s new HIV-fighting drug has just been removed from the refrigerated C-130 cargo plane. It sits on the steaming tarmac, not 30 feet away, practically melting in the midday heat. Another twenty minutes, and it’s ruined. Unfortunately, you can’t seem to clear it through customs. There is some question as to the approval process that a new product has to go through to enter the country. You’re not sure you can wait. The friendly local customs official cruising around the airport looks from you to the metal container, trying to decide which of you is sweating more profusely. Leaning against the counter, he reviews your bills of lading and other customs documents. “Your papers look to be in order, but I am just not sure about the proper approval process,” he says. You despair. Re-opening the approval process will take time you don’t have. What should you do?!? Fortunately, you remember the $1000 traveler’s check in your back pocket that’s supposed to pay for your apartment deposit. You walk over to the official, grab the manifest, stuff the check into the stack of papers, and hand it back to him. A smile spreads across his face. He decides that his insecurity about the approval process has lessened. “You are so thoughtful to understand. I look forward to conducting further business with you. Your cargo is cleared through customs.”

24 Global Ethics - Case Hitting the Wall: Nike and International Labor Practices – HBS Managing a multinational firm involves managing and exploiting differences among countries. In the case of workplace standards and environmental protection, managers have to understand the underlying tradeoffs and balance exploitation of differences with global ethics.

25 Culture Social insurance: unemployment compensation, trade adjustment assistance, training programs

26 Culture Culture is a system of values and norms shared among a group of people and, when taken together, constitute a design for living. Norms Social rules and guidelines that prescribe appropriate behavior in particular situations Folkways: Routine conventions of everyday life Mores: Central to functioning of society and its social life Values Abstract ideas about what a group believes to be good, right, and desirable The bedrock of culture Have emotional significance. Freedom

27 What are “American Values?”
Achievement and success Individualism Freedom Progress Democracy Equality

28 Views of Another Culture
How the Americans see the French: -arrogant flamboyant hierarchical emotional How the French see the Americans: -naive aggressive unprincipled workaholic French culture American culture Norms and Values

29 Hofstede’s Work-Related Values
Theory and empirical foundation is used in a general way to look at differences between cultures. 5 dimensions Power distance Individualism vs. collectivism Uncertainty avoidance Masculinity vs. femininity ST vs. LT orientation But Don’t assume everyone in a country has the same norms and values U.S. China

30 Determinants of Culture
Religion Language Education Culture: Norms and Value Systems Political Philosophy Economic Philosophy Social Structure

31 Religion Distribution
4% 5% 20% 18% 43% 10% Christian (1.2 Billion) Islam (1 Billion) Hindu (500 Million) Buddhist (250 Million) Confucian (150 Million) Other/ Nonreligious

32 Impact of Religion on Business
Buddhism Little emphasis on entrepreneurial behavior Christianity “Protestant Work Ethic” and “The Spirit of Capitalism” Confucianism Loyalty, reciprocal obligations, and honesty in dealings Hinduism Asceticism may have an impact (spiritual achievements) Caste system plays a role Islam Favors market-based systems (free enterprise) No payment or receipt of interest

33 Language Allows people to communicate
Structures the way the world is perceived Directs attention to certain features of the world rather than others Helps define culture Creates separatist tendencies? Canada, Belgium, Spain, Cyprus Non-verbal (93% of communication) Eyebrows, fingers/thumbs, hand gestures, feet, personal space, body gestures (ok, thumbs up)

34 Education For int’l business, it is a determinant of national
Formal education supplements family role in teaching values and norms Focus on facts of social and political nature of society Obligations of citizenship For int’l business, it is a determinant of national competitive advantage (post-war Japan) Medium to learn language, conceptual, and math skills Value of personal achievement and competition

35 Political Philosophy (System)
Democracy and Totalitarianism Democracy Government by the people, exercised either directly or through elected representatives. Totalitarianism Government in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited.

36 Economic Philosophy (System)
Market Economy All productive activities are privately owned Command Economy Goods and services produced, their quantity, and prices are determined by the government Mixed Economy Parts of the economy are left to private ownership and free market mechanisms while other sectors are state-owned and have government planning State-Directed Economy The state plays a significant role through its “industrial policy” and setting national goals

37 Social Structure Individuals vs. Groups Social Stratification
Shared sense of identification Degree to which group is viewed as the primary means of social organization Cooperation – MIT Study Social Stratification Social strata Social mobility Class system

38 Cultural Change Americanization/Westernization Global brands
McDonald’s in China Levi’s in India Sony Walkman in South Africa MTV everywhere Countertrends Quebec, Russia, Islamic fundamentalism

39 Culture - Case Euro Disney: The First 100 Days” – HBS 9-693-013
Planning process The role of culture Differences in culture vs. attitude about culture Adapting versus adopting – what is core?

40 Foreign Exchange Social insurance: unemployment compensation, trade adjustment assistance, training programs

41 Foreign Exchange & Strategy
“Note on Operating Exposure to Exchange-Rate Changes” Luehrman – HBS Example: Losses at JAL Airlines (Hill) Case: Japan’s Automakers Face Endaka – HBS Impact on business model - What they sell, how they sell, where they manufacture, manufacturing process Japanese response vs. U.S. response

42 Foreign Exchange Markets

43 Foreign Exchange Markets
The FOREX market provides the physical and institutional structure through which the money of one country is exchanged for that of another country A foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of one currency will be delivered for some other currency at a specified rate

44 Foreign Exchange Markets
There are six main characteristics of the FOREX markets which will be discussed The geographic extent The three main functions The market’s participants Its daily transaction volume Types of transactions including spot, forward and swaps Methods of stating exchange rates, quotations, and changes in exchange rates

45 FOREX Market Geography
Geographically, the FOREX market spans the globe with prices moving and currencies trading on a 24 hour basis Major exchanges are located in Singapore, Hong Kong and Tokyo in the East Then it moves to Bahrain, and London for the European area And on to New York, San Francisco and Sydney

46 FOREX Market Geography
Measuring FOREX Market Activity: Average Electronic Conversations Per Hour Greenwich Mean Time Tokyo opens Asia closing 10 AM In Tokyo Afternoon in America London 6 pm In NY Americas open Europe opening Lunch

47 FOREX Market Functions
The FOREX market is the mechanism by which participants transfer purchasing power between countries, obtains or provides credit for international trade, and minimizes exposure to exchange rate risk Transferring of purchasing power is necessary because international trade and capital transactions normally involve parties in countries with different currencies yet each party wishes to transact in their own currency

48 FOREX Market Functions
Because the movement of goods between countries takes time, inventory in transit must be financed. The FOREX market provides a source of credit via specialized instruments such as letters of credit The FOREX market provides “hedging” facilities for transferring foreign exchange risk to someone else more willing to carry that risk

49 FOREX Market Participants
The FOREX market consists of two tiers, the interbank or wholesale market, and the client or retail market Five broad categories of participants operate within these two tiers Bank and non bank foreign exchange dealers Individuals and firms conducting commercial or investment transactions Speculators and arbitragers Central banks and treasuries Foreign exchange brokers

50 Bank/Non-Bank Dealers
These participants profit from buying currencies at a bid price and then reselling them at an offer or ask price Competition among dealers narrows the spread between the bid and offer rate contributing to the market’s efficiency Dealers on behalf of large international banks often act as market makers, often willing to stand in and buy or sell these currencies without having a counterpart with which to unload the “inventory” Bid price: The price a buyer is willing to pay. Offer (Ask price): the price a seller is willing to receive. Bid-Ask spread: The amount that the ask price exceeds the bid. Market maker: A broker-dealer willing to accept the risk of holding a particular currency in order to facilitate trading in that currency.

51 Bank/Non-Bank Dealers
They trade amongst other banks and dealers in order to keep their inventory levels at manageable levels Currency trading is profitable and often contributes between 10% - 20% of a banks’ average net income Small- to medium-sized banks rarely act as market makers yet still participate in the interbank market

52 Commercial Investment
Importers, exporters, portfolio investors, MNEs, tourists and others use the FOREX market to facilitate execution of commercial or investment transactions Some of these participants use the market to hedge foreign exchange rate risk

53 Speculators & Arbitragers
Speculators and arbitragers seek to profit from trading in the market itself They operate for their own interest, without need or obligation to serve clients or ensure a continuous market Speculators seek all their profit from exchange rate changes Arbitragers try to profit from simultaneous differences in exchange rates in different markets A large proportion of speculation and arbitrage is conducted on behalf of major banks by traders employed by those banks

54 Central Banks & Treasuries
Central banks and treasuries use the market to acquire or spend their country’s currency reserves as well as to influence the price at which their own currency trades They may act to support the value of their currency because of their government’s policies or obligations or because of commitments entered through joint float agreements such as the European Monetary System (EMS) Consequently their motive is not to profit but rather influence the foreign exchange value of their currency in a manner that will benefit their interests

55 Foreign Exchange Brokers
Foreign exchange brokers are agents who facilitate trading between dealers without themselves becoming principals in the transaction For this service they charge a small commission They maintain instant access to hundreds of dealers worldwide via open lines and at times may maintain such lines with several banks, with separate lines for differing currencies, spot and forward rates

56 Any Questions? Types of transactions

57 Inter-Bank Market Transactions
Transactions within this market can be executed on a spot, forward, or swap basis A spot transaction requires almost immediate delivery of foreign exchange A forward transaction requires delivery of foreign exchange at some future date A swap transaction is the simultaneous exchange of one foreign currency for another

58 Spot Transactions A spot transaction in the interbank market is the purchase of foreign exchange, with delivery and payment between banks to take place, normally, on the second following business day The settlement date is often referred to as the value date This is the date when most dollar transactions are settled through the computerized Clearing House Interbank Payment Systems (CHIPS) in New York

59 Outright Forward Transactions
This transaction requires delivery at a future value date of a specified amount of one currency for another The exchange rate is agreed upon at the time of the transaction, but payment and delivery are delayed Forward rates are contracts quoted for value dates of one, two, three, six, nine and twelve months Terminology typically used is buying or selling forward A contract to deliver dollars for euros in six months is both buying euros forward for dollars and selling dollars forward for euros

60 Swap Transactions A swap transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates Both purchase and sale are conducted with the same counterpart A common type of swap is a spot against forward The dealer buys a currency in the spot market and simultaneously sells the same amount back to the same bank in the forward market Since this transaction occurs at the same time and with the same counterpart, the dealer incurs no exchange rate exposure

61 Swap Transactions Forward-forward swaps – A dealer sells £20,000 forward for dollars for delivery in two months at $1.6870/£ and simultaneously buys £20,000 forward for delivery in three months at $1.6820/£ The difference between the buying and selling price is equivalent to the interest rate differential Thus a swap can be viewed as a technique for borrowing another currency on a fully collateralized basis

62 Swap Transactions Non-deliverable forwards (NDFs) – NDFs possess the same characteristics as traditional forward contracts except that they are settled only in US dollars and the foreign currency being sold or bought forward is not delivered The dollar-settlement feature reflects the fact that NDFs are contracted offshore and are beyond the reach and regulatory frameworks of the home country governments Pricing of NDFs reflects basic interest rate differentials

63 FOREX Market Size The Bank for International Settlements (BIS) estimates that daily global net turnover in traditional FOREX market activity to be US$1,210 billion in April 2001

64 FOREX Market Size Global Foreign Exchange Market Turnover (daily averages in April, billions of US dollars) Source: Bank for International Settlements, “Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2001,” October 2001, Next survey planned for April 2004.

65 FOREX Market Size Two of the three categories fell between 1998 and 2001 with spot market daily turnover falling the most, from $568 billion in 1998 to $387 billion in 2001 Forward transactions increased slightly from $128 billion in 1998 to $131 billion in 2001 Swaps fell to $656 billion in 2001 from $734 billion in 1998 BIS attributes the introduction of the Euro, the growing share of electronic broking in the spot market and consolidation in banking as explanations for the reduction

66 FOREX Market Size Geographic Distribution of Foreign Exchange Market Turnover (daily averages in April, billions of US dollars) Source: Bank for International Settlements, “Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2001,” October 2001, Next survey planned for April 2004.

67 FOREX Market Size Currency Distribution of Global Foreign Exchange Market Turnover (percentage shares of average daily turnover in April) Source: Bank for International Settlements, “Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2001,” October 2001, Next survey planned for April 2004.

68 FOREX Rates & Quotes A foreign exchange quote is a statement of willingness to buy or sell at an announced rate In the retail market (newspapers and exchange booths), quotes are often given as the home currency price of the foreign currency Interbank quotes – professionals state forex quotes in one of two ways The foreign currency price of one dollar Sfr1.6000/$, read as Swiss francs per dollar European quote The dollar price of a unit of foreign currency $0.6250/Sfr, read as dollars per Swiss franc American quote

69 FOREX Rates & Quotes The former quote is considered the “European quote” and the latter is the “American quote” Almost all European currencies, except two, are quoted the European way The Pound Sterling and the Euro are the exceptions Additionally, Australian and New Zealand dollars are also quoted in American terms

70 FOREX Rates & Quotes Bid and Ask Quotations
Interbank quotes are given as a bid and ask The bid is the price at which a dealer will buy another currency The ask or offer is the price at which a dealer will sell another currency Example: ¥ ¥118.37/$ is the bid/ask for Japanese yen The bank will buy yen at ¥ per dollar and sell yen at ¥ per dollar making profit on the spread

71 FOREX Rates & Quotes Expressing Forward Quotations on a Points Basis
The previously mentioned rates for yen were considered outright quotes Forward quotes are different and typically quoted in terms of points A point is the last digit of a quotation, with convention dictating the number of digits to the right of the decimal Hence a point is equal to of most currencies

72 FOREX Rates & Quotes Expressing Forward Quotations on a Points Basis
The yen is quoted only to two decimal points A forward quotation is not a foreign exchange rate, rather the difference between the spot and forward rates Example: Bid Ask Outright spot: ¥ ¥118.37 Plus points (3 months) Outright forward: ¥ ¥116.97

73 FOREX Rates & Quotes Forward Quotations in Percentage Terms
Forward quotations may also be expressed as the percent-per-annum deviation from the spot rate This is similar to the forward discount or premium calculated earlier The important thing to remember is which currency is being used as the home or base currency For indirect quotes (i.e. quote expressed in foreign currency terms), the formula is

74 FOREX Rates & Quotes Forward Quotations in Percentage Terms
For direct quotes (i.e. quote expressed in home currency terms), the formula is

75 FOREX Rates & Quotes Forward Quotations in Percentage Terms
Example: Indirect quote Example: Direct quote

76 FOREX Rates & Quotes Direct and Indirect Quotes
A direct quote is a home currency price of a unit of a foreign currency Sfr1.6000/$ is a direct quote in Switzerland $0.625/Sfr is a direct quote in the US An indirect quote is a foreign currency price in a unit of the home currency Sfr1.600/$ is an indirect quote in the US, $0.625/Sfr is a direct quote in the US and an indirect quote in Switzerland

77 FOREX Rates & Quotes Cross Rates
Many currencies pairs are inactively traded, so their exchange rate is determined through their relationship to a widely traded third currency Example: A Mexican importer needs Japanese yen to pay for purchases in Tokyo. Both the Mexican peso (Ps) and Japanese yen (¥) are quoted in US dollars Assume the following quotes: Japanese yen ¥121.13/$ Mexican peso Ps9.190/$

78 FOREX Rates & Quotes Cross Rates
The Mexican importer can buy one US dollar for Ps9.190 and with that dollar buy ¥121.13; the cross rate would be

79 FOREX Rates & Quotes Intermarket Arbitrage
Cross rates can be used to check on opportunities for intermarket arbitrage Example: Assume the following exchange rates are quoted Citibank $0.9045/€ Barclays Bank $1.4443/£ Dresdner Bank €1.6200/£

80 FOREX Rates & Quotes Intermarket Arbitrage
The cross rate between Citibank and Barclays is This cross rate is not the same as Dresdner’s rate quote of €1.5800/£, so an opportunity exists for risk-less profit

81 FOREX Rates & Quotes Citibank Dresdner Bank Barclays Bank
End with $1,014,533 Start with $1,000,000 Sell €1,121,651 to Citibank at $0.9045/€ (6) Receive $1,014,533 Sell $1,000,000 to Barclays Bank at $1.4443/£ (2) Receive £692,377 Sell £692,377 to Dresdner Bank at €1.6200/£ (4) Receive €1,121,651

82 Managing Global Expansion
Social insurance: unemployment compensation, trade adjustment assistance, training programs

83 Managing Global Expansion
“Managing Global Expansion: A Conceptual Framework” Gupta & Govindarajan – Business Horizons, March/April 2000, (Reprint BH043) Globalization imperatives Degree of local adaptation Learning potential Entry barriers Competitive intensity

84 Entry Modes Joint Ventures Licensing Wholly Owned Subsidiaries
Franchising Exporting Licensing Joint Ventures Wholly Owned Subsidiaries

85 Exporting Ship to another country for sale or exchange Advantages:
Sony TVs, Matsushita VCRs Exporting Ship to another country for sale or exchange Advantages: Avoid cost of establishing manufacturing operations Help achieve experience curve and location economies Disadvantages: May compete with low-cost location manufacturers Possible high transportation costs Tariff barriers Possible lack of control over marketing reps Example: Heineken Beer (Hill)

86 Improving Export Performance
Information from government sources Export Management Companies Export strategies Export specialists who act as the export management department or international department for client firms Top management commitment Start small Enter to learn, add to grow Build relationships Hire locals

87 An Interesting Fact Although the U.S. is the largest single market, exporting does not seem to come naturally to U.S. companies. In the U.S., exports account for 5.4% of GNP compared to 26% in Germany, 25% in Canada, and 10.5% in Japan (not most recent statistics). 3

88 globalEDGE – Core Exercise
Advanced Biomedical Devices, Inc. Assessment of Readiness to Export Team In-Class Exercise (50 points) Your team has been “hired” to evaluate ABD’s readiness to export. Drawing on information from the case, your knowledge of factors affecting global expansion, and what you learn from the CORE diagnostic tool, prepare a two-page (double-spaced) memo with your team’s assessment and recommendations. You may structure the memo however you see fit. Attach the CORE output as supporting documentation. The memo is due in two hours. The break-out rooms are available.

89 Licensing Euro-Disney Japan Licensor grants rights to intangible property to another entity for a specified period of time in return Advantages: Reduces development costs and risks of establishing foreign enterprise Lack capital for venture; Unfamiliar/volatile market Overcomes restrictive investment barriers Others can develop business applications of intangible property Disadvantages: Lack of control Cross-border licensing may be difficult Creating a competitor

90 Franchising A franchiser sells intangible property and provides guidelines for operating the business. Advantages: Reduces costs and risk of establishing enterprise Disadvantages: May prohibit movement of profits from one country to support operations in another country Quality control

91 Joint Ventures Advantages: Disadvantages:
Benefit from local partner’s knowledge Shared costs/risks with partner Reduced political risk Disadvantages: Risk giving control of technology to partner May not realize experience curve or location economies Shared ownership can lead to conflict

92 Strategic Alliances “Collaborate with your Competitors & Win”
Hamel, Doz & Prahalad – HBR Reprint 89104 Learning

93 Establishing a Wholly Owned Subsidiary
Acquisition Greenfield Pro: Quick to execute Preempt competitors Possibly less risky Con: Often produce disappointing results Overpay for firm Too optimistic about value creation (hubris) Culture clash Problems with proposed synergies Pro: Can build subsidiary it wants Easy to establish operating routines Con: Slow to establish Risky Preemption by aggressive competitors

94 Selecting an Entry Mode
Basis for Competition Entry Mode Technological Know-How Wholly owned subsidiary unless 1. Venture is structured to reduce risk of loss of technology 2. Technology advantage transitory Then licensing or joint venture OK Management Know-How Franchising, subsidiaries (wholly owned or joint venture) Pressure for Cost Reduction Combination of exporting and wholly owned subsidiary

95 Which Foreign Markets? Market potential Learning potential
Market size (e.g., China vs. Taiwan) Demand Costs: Customer acquisition, infrastructure Distance: Cultural, administrative, geographic, economic (Comparisons – Wal-Mart in Mexico) Learning potential Sophisticated/demanding customers? Pace of technology?


97 Wal-Mart de Mexico Sam’s Club, Mexico City, 1991
Per capita income $2,000 Monterrey (Laredo) Distribution problems (no NAFTA yet) Ice skates, riding mowers, leaf blowers, fishing 1994 (post NAFTA) Labels on 80,000 products December: Peso crisis, 40% depreciation By mid-1997, 373 of 1000 non-US stores Distribution center Local sourcing (Sony Wega $1600,$600); scale Joint venture w/ Cifra (WalMex)

98 Timing of Entry First-mover advantage. Disadvantages:
Preempt rivals and capture demand Build sales volume Move down experience curve before rivals and achieve cost advantage Create switching costs Disadvantages: First mover disadvantage - pioneering costs Changes in government policy Costs early entrant bears that later entrant can avoid.

99 Global Expansion - Cases
Citibank: Launching the Credit Card in Asia Pacific (A) - HBS Preempting rivals and capturing demand, Market entry analysis, market evaluation, target market selection, product positioning issues Xerox and Fuji Xerox – HBS Importance of structural flexibility, autonomy/integration tradeoff, drivers of collaboration, multi-market contact

100 International Manufacturing Strategy
Social insurance: unemployment compensation, trade adjustment assistance, training programs

101 Where to manufacture? “How to Integrate Work and Deepen Expertise”
Leonard-Barton, Bowen, Clark, Holloway, & Wheelwright – HBR Reprint 94502 Key factors Country: Factor costs, CAGE, location externalities, infrastructure Technological: Economies of scale, MES, manufacturing flexibility Product: Value to weight ratio, universality of needs

102 Location Strategy Technological Factors
Flexible manufacturing technology Available Not Available Minimum efficient scale High Low Fixed costs High Low Product Factors Serves universal needs Yes No Value-to-weight ratio High Low Country Factors Differences in factor costs Substantial Few Substantial Few Trade barriers Few Many Differences in political economy Differences in culture Substantial Few Concentrated Decentralized Favored Manufactured Strategy

103 Manufacturing Location - Case
The Acer Group’s China Manufacturing Decision – HBS 99M009 Decentralized structure Role of core competencies Key considerations Costs, market presence, infrastructure, materials management, expats (safety, desire), labor laws, time frame, environment PEST framework - environment

104 International Marketing Strategy (Global Branding)
Social insurance: unemployment compensation, trade adjustment assistance, training programs

105 Global Branding “The Lure of Global Branding” Advantages Disadvantages
Aaker and Joachimsthaler – HBR Reprint 99601 Advantages Disadvantages When is it possible? Developing a global brand Managing a global brand

106 Global Branding - Case EMDICO (A) – HBS 9-597-029
Re-launching a global brand in an emerging market Challenges faced by a late entrant Impact of cultural and religious considerations on market demand and marketing strategy Marketing program calculations

107 International Human Resource Management
Social insurance: unemployment compensation, trade adjustment assistance, training programs

108 Developing an Expatriate Policy
“The Right Way to Manage Expats” Black & Gregersen – HBR Reprint 99201 Benefits: Enhance management experience, knowledge transfer, best allocation of people, reducing turnover Constraints: willingness to travel/live abroad, costs, achieving equity (pay, taxes, cost of living), impact on career

109 Expatriate Policy - Case
Colgate-Palmolive: Managing International Careers – HBS Leader in attention and care Pre-departure, moving, financial Needs of expat AND family Compare C-P’s policy to your company’s policy Continuous improvement Pre-departure concerns, spouse assistance Surveys to review and revise Effective but costly Focus on selection

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