International Strategy International Business Institute May, 2001

Which Group exports more cars?  The 21 foreign auto makers  The “big three” American Auto makers Which Group exports more cars?  The 21 foreign auto makers  The “big three” American Auto makers

Largest U.S. Multinationals: % of Total from Non U. S. Markets Company Revenues Profits Assets Exxon GM Mobil IBM 59.0 D-D 55.1 Ford Motor 30.3 D-P 26.0 Texaco Citicorp du Pont de Neours Chevron Proctor & Gamble

International Strategy  What is a global business?  Will a global business succeed?  How do firms enter global markets?  How does a firm manage a global operation?

What is a Global Business? What are the unique challenges?

Unique Issues  Complex Pricing  exchange rates  Political Risk  threats to ownership, and profit

Political Risk and Economic Forecast Country Transfer Investment Export Inflation Argentina B- B+ C Brazil D+ D+ D India C+ C- C- 8.0 Italy B+ A- B+ 5.0 Japan A A A+ 2.5 Philippines D+ D+ D 12.0 Spain A-(B+) A-(B) A-(B)4.0 Taiwan A A+ A+4.0 U.S. A A A-2.5

Dow Jones Global Stock Indices 1999 % Growth in Market Cap Country%$Local Currency % Chile Brazil Australia Italy Japan Philippines Spain Hong Kong

Unique Issues  Cultural Differences – tastes, values language  Conflicting political demand – government policies and economic systems

Advantages of Globalization  Scale economies  Growth potential  Factor costs  Vertical integration demands  Opportunities  Competitive dynamics – homogenization of global culture

Will a global business succeed? Do competitive advantages transfer?

A competitive advantage based on ______________ is most likely to transfer across national boundaries successfully a.price b.product design c.an ability and willingness to learn d.specific skills Transferring Competitive Advantage

Transferring Competitive Advantages  Advantages vary across value chain  Downstream advantages price, product design,  Midstream advantages assets, skills, relations with other firms  Upstream advantages ability and willingness to learn, adaptability

Transferring Competitive Advantages  Advantages vary across domains  International Contexts public good issues  regulatory climate, economy, trade policy, etc. infrastructure  transportation, education, communication, etc.  Industry Contexts structure  competitive rivalry, entry barriers, etc.

Limitations on Transferability  Geographic advantages – labor, monopoly positions, distribution network, reputation, customer or supplier relations  Tacit knowledge – difficult to enact in different context, unknown interaction with context  Cost of transfer – loss of effectiveness or efficiency  Mode of transfer – joint venture, partnership, direct investment

Transferring Competitive Advantages  Domestic advantages may not transfer across national boundaries he 21 foreign auto makers – The advantage in the home market may not be the most important in foreign markets.  International advantages may not hold in domestic markets – A successful international competitor may not be the strongest firm at home.

A competitive advantage based on ______________ is most likely to transfer across national boundaries successfully a.price b.product design c.an ability and willingness to learn d.specific skills Transferring Competitive Advantage

Walmart Enters Germany Does Small Town America Sell in Europe?

How do firms enter global markets? Balancing opportunity against opportunism

Modes of Entry  Exportation – accessing markets at low risk  Licensing – retaining some rights to product design  Joint Venture – looking for complementary knowledge  Foreign Direct Investment – going it alone

Balancing opportunity with opportunism  Opportunity – the potential returns from taking products into new geographic regions  Opportunism – Contracting and moral hazard – Contracting and learning opportunities. knowledge transfer knowledge development

Matching Advantage to Mode of Entry  Downstream advantages – export or license  Midstream advantages – joint venture or direct investment  Upstream advantages – direct investment

How do firms manage global operations? Balancing Economics and Politics

Economic demands  Remain competitive within one’s industry – Improve efficiency by streamlining operations – Achieve economies of scale – Coordinate R&D efforts  Share assets and knowledge as much as possible – Transfer people and knowledge

Political Demands  Be responsible to local government demands – jobs and taxes  Adjust to different regulatory setting – restrictions on competitive practices  Recognize cultural differences – product design and placement – human resource practices

Strategic Options  Global or Regional Strategy – Cost scale economies, rationalize and integrate activities, allows side-payments (good citizen), simplifies management practices – Lowers expropriation risk – Power larger firms have more influence on environment, deal with integrated rival firms

Strategic Options  Multinational or Nationally Responsive Strategy – Differentiation advantages respond to local tastes and preferences – Image advantages subsidiaries have latitude to respond to local political needs, used where government plays a key role

Strategic Options  Transnational Strategy – Balances cost with differentiation benefits business manager country manager functional manager corporate manager – Balance global efficiency and competitiveness with national-level responsiveness and flexibility – cross market capacity to leverage learning

Think Globally, Act Locally  Shiseido Ltd – regional offices in Americas and Europe regional offices focus on operational efficiency local focus with outlets in emerging markets  Nestle – 500 factories w/ 225,000 people globally decentralized marketing, H/R, local operations centralize strategic decisions, economies

Pedagogy  Involve students with questions – have them discuss and debate before moving on  Include real-life examples – video clips, pictures, data  Organize the material into a story with a logical sequence