Introduction to International Business August 4, 2008 Discussion Section Global Strategy and Entry Modes

Agenda Chapter 7, 9 and 10 in a nutshell Review of Chapter 12 Discussion questions Review of Chapter 14 Case: Tesco goes global

Chapter 7, 9 and 10 in a nutshell Chapter 7: FDI trends, theories, costs & benefits, and strategies Chapter 9: How does the foreign exchange market work? Chapter 10: Currency regimes, the evolution and role of the international monetary regimes

Chapter 12 Learning Goal What is “strategy”? What benefits do firms derive from expanding internationally? How do pressures for cost reductions and pressures for local responsiveness influence strategic choice? What are the different strategies for competing globally and their pros and cons.

Chapter 12: The Strategy of International Business What is strategy? How does it lead to value creation? Benefits of global expansion Expanding the market, location economics, experience effects, leveraging subsidiary skills Cost pressure vs. pressure for local responsiveness Strategy &their evolution Low Pressure for Local Responsiveness High Pressure for Local Responsiveness Low Pressure for Cost Reduction International Strategy Localization Strategy High Pressure for Cost Reduction Global Standardization Strategy Transnational Strategy

Chapter 12: The Strategy of International Business What is strategy? How does it lead to value creation? strategic positioning, operations Benefits of global expansion Expanding the market, location economics, experience effects, leveraging subsidiary skills Cost pressure vs. pressure for local responsiveness Strategy &their evolution Low Pressure for Local Responsiveness High Pressure for Local Responsiveness Low Pressure for Cost Reduction International Strategy Localization Strategy High Pressure for Cost Reduction Global Standardization Strategy Transnational Strategy Strategy – actions that managers take to attain the goals of the firm (maximize profit, which may be different for public and private held firms) Value creation: value vs. cost Primary Activities: R&D, production, marketing and sales, customer service Experience Effect: learning effect, economies of scale Example: McDonald’s, Mittal Steel, Apple Computers, China investment corporation (runs China Sovereign fund) teaming up with JC Flowers, a US private equity fund

Chapter 12 Critical Thinking Question Plot the position of the following firms: Procter & Gamble, Boeing, Coca Cola, Apple Computers, McKinsey Consulting, and McDonald’s. In each case justify your answer. Low Pressure for Local Responsiveness High Pressure for Local Responsiveness Low Pressure for Cost Reduction A B High Pressure for Cost Reduction C D P&G: International Strategy, transitioning into transnational Boeing: Global standardization Coco-cola: International Apple: Global standardization McKinsey Consulting: Localization McDonald’s: Global standardization, in some parts of the world - transnational

Chapter 12 Critical Thinking Question Plot the position of the following firms: Procter & Gamble, Boeing, Coca Cola, Apple Computers, McKinsey & Company, and McDonald’s. In each case justify your answer. Low Pressure for Local Responsiveness High Pressure for Local Responsiveness Low Pressure for Cost Reduction P&G, Coca-Cola, Apple Compuers McKinsey&Company, McD(in some markets) High Pressure for Cost Reduction Boeing, Apple Computers P&G (transitioning into), McD (in some markets)

Chapter 12 Critical Thinking Question Reread the Management Focus, Vodafone in Japan, then answer the following questions: Why do you think that Vodafone was pursuing a global standardization strategy? How did it hope that this strategy would boost profitability and profit growth? Why did the strategy not work in Japan? In retrospect, what should Vodafone have done differently?

Chapter 12 Critical Thinking Question Vodafone’s vision was to build a global brand using a phone that would work anywhere in the world. To achieve that vision, the company offered consumers a standardized product with the same technology regardless of where they were located. In theory, by offering the same basic product everywhere, Vodafone would not only capitalize on a brand name, it would also capitalize on a streamlined production process. However, the company failed to recognize that consumers in different locations values different features. In Japan, the company was selling primarily to younger people who did not travel much, and did not value the global portability of the company’s phones. Instead, Japanese consumers were more interested in other features like games and cameras. In retrospect, Vodafone probably should have paid more attention to local preferences. The company delayed introduction of phones using 3G technology that would allow users to watch video clips and teleconference because it wanted to launch the technology only when it had a phone that would work inside and outside Japan.

Chapter 14 Learning Goals Explain the three basic differences that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale. What are the different entry modes? What are their respective advantages and disadvantages? Evaluate the pros and cons of acquisitions versus greenfield ventures as an entry strategy. Evaluate the pros and cons of using strategic alliances with foreign competitors to achieve a firm’s objectives in a global market place.

Chapter 14: Entry Strategy and Strategic Alliances 3 Basic entry decisions: which market to enter, when to enter, and on what scale to enter? Entry modes: exporting, turnkey project, licensing, franchising, joint venture, wholly owned subsidiary What determines entry modes? Core competencies (technical vs. management) and pressure for cost reduction Greenfield, acquisition or strategic alliances Entry decisions example: iphone Entry mode: see table 14.1 on page 501 for advantages and disadvantages Acquisition: 1) quick, 2) preempt competitors, 3) less risky But also 1) overpay, 2) cultural clash between acquirer and acquiree, 3) fail to realize synergies, 4) inadequate pre-acquisition screening Strategic alliance: firms ally themselves with actual or potential competitors for various strategic purposes

Chapter 14 Critical Thinking Question In recent years, the number of cross-border mergers and acquisitions has ballooned. What are the risks associated with the popularity of this vehicle for entering foreign markets? Can you find an example in recent press reports of such risks? How can these risks be reduced?

Chapter 14 Critical Thinking Question Despite the current popularity of strategic alliances, they should not be taken lightly. In many cases, they give competitors a low-cost route to new technology and markets. It is vital that firms avoid giving away more than it receives. Many alliances run into managerial and financial troubles within a couple of years. To reduce the risks associated with strategic alliances, firms should be careful when selecting their partners, structure the alliance so that the risks of giving too much away are reduced, and build a trusting relationship with partners

Chapter 14 Critical Thinking Question RecallHasbro’s recent law suit against the makers of Scrabulous. You are Mattel, owner of the rights to Scrabble outside U.S. and Canada. Evaluate the pros and cons of various strategies available to you in expanding internationally through the internet and propose a strategy to the board. Team A: launch your own online Scrabble. Team B: Alternative strategy Think outside the box! Review the following articles: “Not Exactly Counterfeit” (july 17) “The Challengers” (july 22) “Chinese Refrigerator Maker Find U.S. Chilly” (july 22) “Big Mac’s Local Flavor” (july 31) “Philippine Jollibee Goes Abroad” (july 31)

Chapter 14 Critical Thinking Question Recall the articles that we have read. For each of the following: Explain why the firm expanded internationally Identify the type of entry mode used Evaluate the optimality of the entry mode Identify the international expansion strategy used (Chapter 12) Evaluate the optimality of these strategies Make a recommendation for future expansions based on your analysis Cases to be examined: Mittal Steel McDonald’s Jollibee The Haier Group New Balance Mittal Steel: acquisition-> wholly owned subsidiary, localization McDonald’s: greenfield -> franchising, global standardization, and transnational in some markets Jollibee: acqusition -> wholly owned subsidiary, transnational Haier Group: greenfield acquisition -> wholly owned subsidiary, localization New Balance: “joint venture” in production, wholly owned subsidiary in sales -> global standardization