Presentation on theme: "Doing Business Globally & Internationally"— Presentation transcript:
1Doing Business Globally & Internationally Last year's example guidelines of BP and AAR Company
2Introduction / Background Brief Discussions of CompaniesBackground of companiesMajor Business ActivitiesCore competenceBrief Discussions of IndustryProductsIndustry StructureSuppliersCompetitorsBrief Introduction of Joint VentureTime Frame of Exploration & NegotiationConflicts during the operations(200 words)
3Question 1 (20 marks)With reference to the academic literature and using your analysis of relevant environmental factors, speculate how and why AAR identified BP as a potential ‘partner’.In which areas are the expected benefits and synergies for both companies involved?(600 words)
4Environmental Factors IntroductionLayers of External EnvironmentMacro-EnvironmentIndustryCompetitor and MarketImportance of Identifying the External EventsIdentify the key issues - Threats and OpportunitiesDesign ways of coping with complexity and ChangesIntroduction of FrameworksPESTEL (Political, Economic, Social, Technology, Environmental and Legal ) – Macro-EnvironmentPorter’s Five Forces – IndustryStrategic Groups – Competitor and Market
5Discussion of Porter’s Five Forces Discussion of PESTELPoliticalGovernment’s Attitude, particularly for Russian GovernmentEconomicEconomic EnvironmentAvailability of Oil Reserve in different regionsTechnologyNeed for Extraction TechnologyDiscussion of Porter’s Five ForcesBargaining Power of SuppliersGovernment’s InterventionBargaining Power of CompetitorsLink to the Industry Structure
6Discussion of Porter’s Five Forces Bargaining Power of BuyersThreat of EntryEconomies of Scale / Scope;Access to supply and distribution channels;Threat of SubstituteConclusionImplications on Exploration of the Joint Venture between BP and AAR.
7Identification of Potential Partners IntroductionContractual partnerships can bring a lot of benefits / advantages, butalso brought along increase in complexity and loss of autonomy (flexibility)Important of having carefully manage the partnering process to gain success in partnership4 processes of establishing Contractual PartnershipAssessing strategic logic to establish partnership;Selecting the Right Partner;Negotiating the terms;Implementation and management of the partnership
8Partner Selection Criteria CommunicationHonestyInnovationExperienceInclusiveness / ProactiveFlexibilityCompatibilityUnderstanding (Same / Similar Industry?)
9Partner Selection Criteria CompatibilityGoalsWhat are their goals?Are their goals congruent with ours?What are their motives?Management style & structureComplementary and Synergistic – Core CompetenceDoes the partner have the resources that the other partner needs?Nature of products or servicesNon competitive & complementaryRelative risk of failurePrevious historyDo they have experience in managing JVs?Needs (evaluate from both partners)
10Partner Selection Criteria Learning potentialWhat to learn –Will the partner provide access to the technology that the other partner need?What to protectForm of ownershipOwnership & loyalty to parent firm
11Partner Selection Criteria (conclusion) Compatibility / ComplementaryHave similarity and fit between partners in termsStrategic goalsInternational strategiesSpecific Needs – skills and resourcesHave compatibility or synergy rather than competitiveNeed to prioritize the goals and needs before selecting the partnersTrust (desire to collaborate and loyalty)Good communicationBe true and honest to the partner (do not take advantage)Be flexible
12Overall Conclusion Summary of the discussions Expected synergies and benefits of BP;Expected synergies and benefits of AAR;Suitability of Partnership.
13Question 2 (20 marks) With reference to the academic literature, explain the risks associated with the choice of joint venture as an approach to this particular partnership.Was there any feasible alternative? Justify your view.(600 words)
14International Joint Venture A partnership between two or more firms.Includes equity joint ventures and non-equity, project-based ventures.Sometimes also called partnerships and strategic alliances.Collaboration helps overcome the often substantial risk and high costs of international business. It makes possible the achievement of projects that exceed the capabilities of the individual firm.
15International joint ventures Equity joint venturesTypically one partner contributes capital, technology etc. local partner contributes factory, labour & local knowledgeProject based, Non-equity venturesProject with a narrow scope & defined timetable (no new company formed)Typically co-develop products
16Joint VentureEquity participation: Acquisition of partial ownership in an existing firm.Wholly owned direct investment: A foreign direct investment in which the investor fully owns the foreign assetsEquity joint ventures : A type of partnership in which a separate firm is created through the investment or pooling of assets by two or more parent firms that gain joint ownership of the new legal entity.Joint ventures may be the only way that a company can expand into a country. E.g., until recently, the Chinese government prohibited foreign firms from having more than 49% equity investment in local businesses.
17Success factors in Joint Ventures Half of all global joint ventures failwithin the first 5 years of operations due tounresolved disagreements, confusion, andfrustration. Therefore, partners should:Be aware of cultural differences;Emphasize communications and building trust;Pay attention to planning and management of the venture;Protect core competencies.
18Degree of Control Low-control strategies – Export Entry Mode exporting, countertrade and global sourcing;provide the least control over foreign operation;focal firm delegates considerable responsibility to foreign distributors.Moderate-control strategy - Contractual Entry ModeLicensing and franchisingProject-based collaborative ventures – Non-equity JV / SAHigh-control strategy - Investment Entry ModeEquity joint ventures;Merger and Acquisitions;Wholly owned subsidiaries;Focal firm attains maximum control by establishing a physical presence in the foreign market.
19Risks of Joint VentureHigh-control strategies require substantial resource commitments by the focal firm.Because the firm becomes ‘anchored’ or physically tied to the foreign market for the long term, it has less flexibility to reconfigure its operations there, as conditions in the country evolve over time.Longer term involvement in the market also implies considerable risk due to uncertainty in the political and customer environments.
20Issues in Cross Border JV Role of GovernmentAdvisors and their costNational Culture…. Business EthicsGeographyStrategic ShareholdingsExperienceGlobal Corporations
21Strategic alliancesSharing of capabilities between 2 or more firms with the view of enhancing their competitive advantages.Strategic because sharing capabilities e.g. R&D, manufacturing or marketingUseful for when full control is not feasible for legal or practical reasons.A governance structure involving an incomplete contract where each partner has limited controlMay involve equity ownership or notGlobal strategic management: Lasserre pg
22Types of Strategic Alliance Functional allianceSpecific area e.g. production or R&DProduction allianceShared facilities & production resourcesMarketing allianceSharing expertise or services, also reciprocal sales in marketsFinancial allianceShared costs and riskR&D allianceJoint research or funding of research in return for research findingsComprehensive allianceAll of the above, but probably better managed as an JVGriffin & Pustay pg
23Question 3 (20 marks) By applying appropriate theory, Compare and contrast the national and corporate cultures involved.Critically evaluate the actual and potential impact of both on this partnership.(600 words)
24(A) IntroductionThe “partnership” has to cooperate / integrate with a partner with a different cultural background;Such cultural differences can arise from:-National culture;Industry culture; andOrganization / Corporate cultureCulture difference has implications on “partnership”Clash of culture is often quoted as the cause of failure of partnership.
25(A1) Definitions of Culture National cultureRefers to profound beliefs, values and practices that are shared by vast majority of people belonging to a nation.Corporate cultureRefers to values, beliefs and practices shared by most people within an organizationCorporate culture stems from occupational group (industry culture) and also reflects, to a certain degree, the national cultures.Hofstede’s cultural dimensions are important dimensions to describe organisations
26(A-2) Hofstede’s Dimensions of National Culture Power Distancedegree to which people accept unequal distribution of power;Uncertainty AvoidanceDegree to which people tolerate uncertainty and ambiguity in situations;Individualism vs CollectivismPreference of people belong to a loosely vs tightly knit social network;Masculinity vs FemininityDegree to which people values of success and competition over modesty and concern for othersLong Term OrientationDegree to which people have a future-oriented perspective rather than a focus on the present
27Cultural Distance between Russia and UK Source: geert-hofstede.com
28(B) Implication on National Culture on Corporate Culture National Culture affects 2 critical corporate aspects: -External adaptation – define the strategy and objectives;Internal integration – merging of management structure of the 2 different organizations;Differences in cultural background of partners is considered as a threat to the survival of IJV;Chances of survival of IJV are lower when cultural differences is large
29(B-1) External Adaptation (External Uncertainty) Long Term OrientationLead to differences in objectives and perceived opportunities in the environment;Short term view partner has sense of urgency and favor quick results;Long term view partner orients toward long term investment return and also building up long term relationship with partners
30(B-2) External Adaptation (External Uncertainty) Uncertainty AvoidanceHigh Uncertainty AvoidanceBuild up highly formalized and hierarchical system;Employees feel uncomfortable without such system;Low Uncertainty AvoidanceBuild up more flexible, ad hoc structures that allows more room for improvement and negotiation;Employees feel uncomfortable with rigid rules and hierarchy
31(B-3) Internal Integration (Internal Uncertainty) Power distance and individualism influencerelationship with personnel;organization’s choice of control forms;reward systemsMasculinity vs FemininityAggressive attitude of partners;Relationship orientation of partners
32(C) Definition of Corporate Culture Organization cultureRefers to values, beliefs and practices shared by most people within an organizationOrganization culture stems from occupational group (industry culture) and also reflects, to a certain degree, the national cultures.Hofstede’s cultural dimensions are important dimensions to describe organizations.
33(C) Definition of Corporate Culture Definitions of Corporate Culture:Meschi and Roger (1994) – when an organization develops into a MNC, the corporate culture can have its basis on the “original” organizational culture, or the national culture, or a combination of 2
34(C-1) Corporate Culture Differences Different organizational and administrative practices;Dissimilar leadership, communication and management styles;Interpret and respond to strategic issues differently;Have employees with different preference and expectations
35(C-2) Problems of Integration Misunderstandings and managerial conflicts between partners;Resulting in internal uncertainty;Severely hinders cooperation between partners;Resulting in poor JV performance
36(C-2) Implication of Culture on IJV Performance Cultural Differences and JV LocationImpair information flow and organizational learningLeading to misunderstanding and mistrustLocal JVs shall face lesser cultural differences as compare with JVs locate aboard
37(C-2) Implication of Culture on IJV Performance Cultural Differences and JV PartnerCross national IJVs and Tri-national JVs required Double-layered acculturationAdaptation to both cultures of partners and cultures of nations of JVs operation locationTri-national JVs lead to higher relational hazards and thus lower performance.
38(C-2) Other Moderating Effects on the Implications Post Acquisition Integration depends onThe Objectives of collaboration;Potential for economies of scale and/or scope;Relatedness of the industryPartners’ level of host-country experiencePartners’ cross-boarder collaboration experience; andRelative Size of investment.
39(C-3) Determinants of Corporate culture National cultureUK vs RussiaIndustry cultureOil industry vs Financial industryManagement styleThe background of key personnels – education, up-bringing or past jobRobert Dudley?Size of organizationMNE vs Russian local company
40(D) ConclusionAmong the six determinants, which one got the highest influence?How do the determinants combine and form a unique corporate / organizational culture?Do you think the corporate cultures between AAR, BP and TNK are similar or significantly different? Why?
41Question 4 (20 Marks)Drawing upon academic literature and theory, critically discuss the long-term, strategic effects, both positive and negative, of exchange rate movements on the TNK-BP deal duringthe exploration/negotiation period; andafter the deal was agreed.(600 words)
42IntroductionForeign Exchange exposure is a measure of the change of a company’s potential profitability, net cash flow, and market value because of exchange rate movement.Three main types of Foreign Exchange ExposureTransaction ExposureOperating Exposure (Economic Exposure)Translation Exposure
43Application of CaseDetermine the Local Currencies and Foreign CurrenciesIdentify the exchange rate movement trend between Russian Ruble to USD and GBP
44Transaction ExposureTransaction Exposure arises when changes in the value of outstanding financial obligations incurred prior to a change in exchanges rates but not due to be settled after the exchange rate change;A transaction exposure is created when the company has either the commitment or intention of receiving foreign currency (sales) or paying monies (purchase) in a foreign currency.The risk from the exposure is that the cash income in the domestic currency will be lower than expected or the cash payments will be higher.These manifest as losses on adverse exchange rate movements that could have a significant impact on net profits.
45Transaction ExposureTransactional Exposure arises when buy or sell goods and services in foreign currencies on credit;If the company sells the product in foreign currency with payment due 1 month later. However, if the foreign currency unexpectedly depreciate, the total amount received, after exchange into home currency, will be lower than the original expected amount.
46Operating (Economic) Exposure Direct Economic Exposure is where a company’s expected future receipts and payments are in foreign currency and have not yet been made.Change in the present value of the company resulting from any change in expected future operating cash flows of the company caused by unexpected exchange rate movement;Indirect economic exposures are the long term risks to the business from adverse developments in the country it is based, resulting in exchange rate movements that benefit foreign competitors.It helps to assess the impact of exchange rate movement on a company’s operations in the future and its competitive position vis-à-vis other competitors.
47Direct Operation Exposure Operation Exposure arises when investing in assets with payment in foreign currencies;The life span of the transaction exposure of an investment decision composes of quotation exposure (during exploration and negotiation), and the billing exposure (payment of investment amount).
48Direct Operating Exposure If the agreed investment amount is billed at a foreign currency, unexpected appreciation of the foreign currency requires a larger amount of investment in terms of local currency.With higher investment amount, the expected future operating cash flows of the investment project should also be increased in order to achieve the same level of expected rate of return on the investment;However, it may not be easy for the expected future operating cash flows to be increased, the expected rate of return will be lowered. And, in worst situation, it may fall below the Weighted Average Cost of Capital, and lead to an loss-making investment.
49Direct Operation Exposure Other ImplicationsCost of finance: Potential exchange rate movement increases financial risk to investors, and therefore equity investors will expect a higher rate of returns. In other words, cost of finance is increased to attract investors when exchange rate movement is taken into considerationProject viability: Potential dramatic currency fluctuation will create problem of cash flow uncertainty. This has profound effect on the decisions of project viability
50Translation ExposureChanges in the equity value because of the need to “translate” foreign currency financial statement of foreign subsidiaries into a single reporting currency.Any exchange rate movement will cause currency related gains and losses which have destructive impacts on reported earnings.These reported earnings can affect the market’s opinion of that company and finally linked to higher cost of finance.
51Management of Exposures Objective of exposure management is to anticipate and influence the effect of unexpected exchange rate movement on a company’s future cash flows.Transaction and Operating exposures can be partially managed internally by adopting operating or financial hedging policies to offset the anticipated exposures, and externally by contractual hedging.
52Hedging Operating and Financial Hedging: - Contractual Hedging:- Matching Currency Cash Flows;Risk-Sharing agreements;Back-to-back or parallel loans;Currency swaps;Leads and lags;Reinvoicing centers.Contractual Hedging:-Money Market;Forward Market;Options.