#mbus902

DouglasReid

dreid@business.queensu.ca@douglasreid

Wealth in 2015

Internationalization and Global Strategy

Population in 2015

Source: Worldmapper.org

Administrivia

Breaks at 345, 515 PM (Kingston time)

Slides at slideshare.com (search for MBUS902) and on portal – after class

Twitter hashtag #mbus902

Agenda

Quick recapInternationalization - processRationaleAttractivenessMode

Course stuff

The Value Chain

Customer willingness to pay

Cost of delivering

what the customer buys

Strategy

Four types of distance matter in IB

Cultural distance

Administrative distance

Geographic distance

Economic distance

Different languages

Different ethnicities

Lack of connective social networks

Different religions

Different social norms

Absence of colonial ties

Absence of shared monetary or political association

Political hostility

Government policies

Institutional weakness

Physical remoteness

Lack of common border

Landlocked

Size of country

Weak transport’n or communication links

Climatic differences

Difference in consumer incomes

Differences in costs and quality of resources: Natural Financial Human Infrastructure Intermediate input markets Information or knowledge

Attrib

utes

Cre

ating

Dis

tanc

e

Source: Ghemawat, 2001

Distance Difference Cost Risk

Liability of foreignness

Firm-specific advantage

Internationalization Process

Why

How

WhereWhat Locational attractiveness

Globalization rests on the multinational’s ability to exploit know-how and expertise gained in one market elsewhere at lower cost.

Michael Porter, Competition in Global Industries: A Conceptual Framework

Why go abroad?

ADDING Helps Answer “Why?”

• Adding volume (growth)

• Decreasing costs

• Differentiating (increasing WTP)

• Improving industry attractiveness (bargaining power)

• Normalizing (optimizing) risk

• Generating knowledge (and other resources, capabilities)

Source: Ghemawat

Source: Dunning

Resource seekers

Source: Dunning

Market seekers

Source: DunningEfficiency seekers

Strategic Asset Seekers

Volvo XC90 (Source: www.autospectator.com) Geely FC-1(Source: www.leblogauto.com)

Volvo Geely

Country of Origin Sweden China

Founding Year 1927 1986

No. of Models 10 7

Price Range 25,600-49,000 USD ~8,000-9,500 USD

Company Revenue 2009 12.4 bn USD 2.1 bn USD

Competitive Advantage Safety, Design, Quality Low Cost, ImitationsSource: Dunning

Does the company havethe right attributes and skills?

Available alternatives

Global forest inventory, 2000 worldmapper.org

Deciding to internationalize

Value ADDING possible

Reason / motive / need

Skills available

Lack of better home country alternatives

Increasing attention given to defining

attractiveness

What makes a location attractive?

Relate to the Motivation for Internationalizing

Resources (inputs)

Markets

Efficiency

Strategic assets

Others?

What’s attractive here?

Diamond of National Competitive Advantage

Clusters

The new geography of prosperity

Natural advantages

Government and social advantages

Available alternatives

Entrant characteristics,

preferences and choices

Many patterns of trade are centuries old

Source: New Scientist, 2007

Government,social and economic

advantages

A good place to start a business…

Entrant characteristics, preferences, and adaptations

Characteristics (1)

Characteristics (2)

Preferences

Addressable Market: 510M Subscribers: 93M

Choices: Aggregation (scale)

Choices: Adaptation (go local)

Artist: Liu Bolin

Choices: Arbitrage (exploit difference)

What effect can time…

…exert upon attractiveness?

What?Can VC be fragmented?

Can fragmented VC be controlled?

Cost of re-location?

Competitive risks?

FSA leverage with new location?

Effect on WTP / cost?

What Activities?

Required degreeof local

adaptation

Expected payoff from going international

Moderatelyattractive

Most attractiveModeratelyattractive

High

Low

Low

HighLeast

attractive

Source: Gupta and Govindarajan

The Value Chain Control – mechanism and cost

Capital required

Experience in country, nearby

Assuming compliance with local rules…

…and a cost-benefit calculation…

What are the big drivers of mode choice?

Mode

Occasional export

Licensing

Joint venture

Wholly-ownedsubsidiaryLevel of

Control over

ForeignActivities

Resources Committed to Foreign Market

Franchising

Export through agent

Source: Bartlett and Ghoshal

Escalating c

ommitment

Mode: Closest, First

Cultural distance

Administrative distance

Geographic distance

Economic distance

Different languages

Different ethnicities

Lack of connective social networks

Different religions

Different social norms

Absence of colonial ties

Absence of shared monetary or political association

Political hostility

Government policies

Institutional weakness

Physical remoteness

Lack of common border

Landlocked

Size of country

Weak transport’n or communication links

Climatic differences

Difference in consumer incomes

Differences in costs and quality of resources: Natural Financial Human Infrastructure Intermediate input markets Information or knowledge

Attrib

utes

Cre

ating

Dis

tanc

e

Source: Ghemawat, 2001

Export

Export• Why

– Low cost means of internationalization– Existence of market entry barriers prevents direct investment– Low sales potential in host market– May be high political risk

• How– Usually, first order is unsolicited (“e” raises likelihood)– May be supported by host country sales agent or rep

• Pros– Cost effective, especially for small firms

• Cons– Low returns– Vulnerable to host country domestic competitors– Relatively little useful learning about host market potential

Licensing

Licensing• Why

– Insufficient capital to enter direct– Codifiable IP (a valuable intangible asset)– Great geographical distance to host country market– Some adaptation required for host country consumption

• How– Through partner who has manufacturing / sales capabilities– Royalty and licensing fee negotiated

• Pros– Return on IP (new revenue stream)

• Cons– IP dissipation (create competitor)– Governance and monitoring costs reduce profits– Relatively little useful learning about host market potential

Joint venture

Joint Venture• Why

– May be only way to enter market– Attractive locational advantages -- high sales potential, low political risk,

culturally proximate, partner with valuable IP

• How– “Parents” A and B form “child” C, a host-country incorporated entity with own

assets, management

• Pros– Tremendous opportunity to learn about market potential– Greater returns, usually, than export or licensing

• Cons– Cost of expatriate management ($$$ and career path)– Shared control– IP dissipation, risk of creating powerful competitor– Exit venture may mean exiting market

Wholly-owned subsidiary - Greenfield

WOS – Greenfield• Why

– Unsatisfied demand in host market (growing market)– Sufficient knowledge about host market to enter confidently– Low political risk– Lots of resources– Market leader, or strongly advantaged in some key way– Ability to customize for host market exists (or isn’t needed)

• How– Transfer money, resources, management to new operation– Integrate into global production system

• Pros– Keep all returns– Relatively low IP dissipation– Possibly, lower risk of retaliation by incumbents

• Cons– New facility is “sunk cost” – changes negotiating power with host country

government– Cost of expatriates ($$$ and career path)– Need to hire host country nationals (employment risk) – Need to set up systems to comply with host country laws

Wholly-owned subsidiary – Acquisition

WOS – Acquisition• Why

– Attractive candidate facility, or can be upgraded at reasonable cost– Host country demand slowing or flat– Low investment controls– Low political risk– More favourable cost / benefit than greenfield entry– Window of opportunity

• How– M&A with local advisors (legal, accounting, GR)

• Pros– Acquire going concern (lower set-up risk)– Existing relationships, systems, employees, revenues– Few approvals (usually) beyond acquisition– May block competitor from buying target– Faster time-to-value

• Cons– Administrative heritage is inertial force that may resist change– Cost of expatriates ($$$ and career path)– Loss of key host country staff if career path blocked– Overpayment– “Skeletons in the closet”

Export Licence JV WOS

Control Low Medium Medium-High

High

Capital/ Risk

Low Low Medium-High

High

Prior Experience

Low Low-Medium

Medium High

In full…

Let’s sum up

Assignments 3 and 4

3. 10-15 minute presentation and worked example of decision making tool(class 6)

4: Final version of decision making tool, plus descriptivewrite up, user instructions

What is a decision making tool in our context?

Decision Foci

Whether to internationalize

Part of value chain to internationalize

Where

How

Tool forms

Conceptual model (e.g. 5 forces)

Questionnaire (e.g. Suutari)

Decision tree

Foci * forms = 12 combinations…

Conceptual model Questionnaire Decision tree

Whether to internationalize 1 2 3

Part of value chain to internationalize 4 5 6

Where 7 8 9

How 10 11 12

Key Evaluative Criteria

Reflects underlying ideas and theory correctly

Usefulness to a non-expert

Ability of a non-expert to use it

Breadth (i.e., beyond a single industry setting)

Hooked to other ideas (what precedes/follows you?)

Assignment 5

Reflective memo

What is working well? What can be improved?

Steps:

Discuss in team, pick top 3 for eachEmail me by Friday, July 15I’ll collate / redistribute to class (no edits)Comment and commit

Virtual office hours

http://queensbusiness.adobeconnect.com/douglasreid/

Sunday, July 1012:00 – 2:00 PM

Backup will be Skype: dreid150