international strategic management module3
TRANSCRIPT
MODULE 3
INTERNATIONAL STRATEGIC MANAGEMENT
3.1 International Strategies
International strategies are comprehensive frameworks for achieving a firm’s fundamental goals.
A firm’s strategic planners must answer the same fundamental questions:
1. What products and/or services does the firm intend to sell?
2. Where and how will it make those products or services?
3. Where and how will it sell them?
4. Where and how will it acquire the necessary resources?
5. How does it expect to outperform its competitors?
3.1.1 International businesses have the ability to exploit three sources of competitive advantage unavailable to domestic firms:
1. Global efficiencies
2. Multinational flexibility
3. Worldwide learning
3.1.2 Strategic Alternatives
Multinational corporations typically adopt one of four strategic alternatives in their attempt to balance the three goals of global efficiencies, multinational flexibility, and worldwide learning:
1. Home replication strategy
2. Multidomestic strategy
3. Global strategy
4. Transnational strategy
Home Replication Strategy
In this approach, a firm utilizes the core competency or firm specific advantage it developed at home as its main competitive weapon in the foreign markets that it enters. That is, it takes what it does exceptionally well in its home market and attempts to duplicate it in foreign markets.
The Multidomestic Strategy
A multidomestic corporation views itself as a collection of relatively independent operating subsidiaries, each of which focuses on a specific domestic market. In addition, each of these subsidiaries is free to customize its products, its marketing campaigns, and its operations techniques to best meet the needs of its local customers.
The Global Strategy
A global corporation views the world as a single marketplace and has as its primary goal the creation of standardized goods and services that will address the needs of customers worldwide. The global strategy is almost the exact opposite of the multidomestic strategy.
The Transnational Strategy
The transnational corporation attempts to combine the benefits of global scale efficiencies, such as those pursued by a global corporation, with the benefits and advantages of local responsiveness, which is the goal of a multidomestic corporation.
3.1.3 Components of an International Strategy
Managers who engage in international strategic planning need to address the four basic components of strategy development:
1. Distinctive competence
2. Scope of operations
3. Resource deployment
4. Synergy
Distinctive Competence
Distinctive competence answers the question “What do we do exceptionally well, especially as compared to our competitors?” A firm’s distinctive competence may be cuttingedge technology, efficient distribution networks, superior organizational practices, or wellrespected brand names.
Scope of Operations
The scope of operations answers the question “Where are we going to conduct business?” Scope may be defined in terms of geographical regions, such as countries, regions within a country, and/or clusters of countries. Or it may focus on market or product niches within one or more regions, such as the premiumquality market niche, the lowcost market niche, or other specialized market niches.
Resource Deployment
Resource deployment answers the question “Given that we are going to compete in these markets, how will we allocate our resources to them?” For example, even though Disney will soon have theme park operations in four countries, the firm does not have an equal resource commitment to each market.
Synergy
Synergy answers the question “How can different elements of our business benefit each other?” The goal of synergy is to create a situation where the whole is greater than the sum of the parts.
3.1.4 Developing International Strategies
Firms generally carry out international strategic management in two broad stages:
1. Strategy formulation
2. Strategy implementation
Strategy Formulation
In strategy formulation , the firm establishes its goals and the strategic plan that will lead to the achievement of those goals. In international strategy formulation, managers develop, refine, and agree on which markets to enter (or exit) and how best to compete in each.
Strategy Implementation
In strategy implementation , the firm develops the tactics for achieving the formulated international strategies. Disney decision to build Disneyland Paris was part of strategy formulation. But deciding which attractions to include, when to open, and what to charge for admission is part of strategy implementation .
3.1.5 SWOT Analysis
A SWOT analysis consists of a firm looking at its strengths, weaknesses, opportunities, and threats.
3.1.6 Strategic Goals
Strategic goals are the major objectives the firm wants to accomplish through pursuing a particular course of action. By definition, they should be measurable, feasible, and timelimited, answering the questions “how much, how, and by when?”
3.1.7 Control Framework
A control framework is the set of managerial and organizational processes that keep the firm moving toward its strategic goals.
3.1.8 Levels of International Strategy
Given the complexities of international strategic management, many international businesses find it useful to develop strategies for three distinct levels within the organization:
1. Corporate
2. Business
3. Functional
Corporate Strategy
Corporate strategy attempts to define the domain of businesses the firm intends to operate. A firm might adopt any of three forms of corporate strategy:
• Single business strategy
• Related diversification strategy
• Unrelated diversification strategy
Business Strategy
Whereas corporate strategy deals with the overall organization, business strategy focuses on specific businesses, subsidiaries, or operating units within the firm. The three basic forms of business strategy are:
• Differentiation
• Overall cost leadership
• Focus
Functional Strategy
Functional strategies attempt to answer the question “How will we manage the functions of finance, marketing, operations, human resources, and research and development in ways consistent with our international corporate strategies?”
Common Functional Strategies
• Some common functional strategies are:
• Financial strategy
• Marketing strategy
• Operations strategy
• Human resource strategy
• Research and development strategy
3. 2 Strategy & the firm
Strategy: actions that managers must take to attain the goals of the firm
• Main goal usually to maximize longterm profit
• Profitability defined by return on sales or return on equity
• Think strategic, not operational this is what makes a great CEO
3.2.1 Value creation
• Profit determined by :
• The amount of value customers place on firm’s goods or services (V)
• Firm’s cost of production (C)
• Consumer surplus occurs when price charged by a firm on a good or service is less than value placed on it by a customer
• Firm creates profit by increasing value or lowering cost
3.2.3 Two basic strategies to create value and attain competitive advantage according to Porter:
• Low cost
• Differentiation strategy
3.2.4 Firm as a value chainVALUE CHAIN
It is also known as value chain analysis. Concept from business management It was popularized by Michael Porter. According to Michael Porter “value chain” is one that sequences the activities related to the creation of value. The ‘value’ is the price paid by the customer willingly for the goods and services of an organization. Value chain is a
chain of activities for a firm operating in a specific industry. Product pass through all activities of the chain in order and at each activity the product gains some value.
The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities.
Example: A diamond cutter can be used as an example of the difference. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond.
3.2.4.1 ACTIVITIES
Primary activities are those which are directly involved in the conversion of raw materials and components into products and services.
Primary activities includes the following:
• inbound logistics• operations management• outbound logistics• marketing and sales• services
Inbound logistics are the activities which are concerned with receiving, storing and distribution of materials, inventory control, warehousing and related activities.
Operations management means production.
Outbound logistics are the activities concerned with collection, storage and physical distribution of finished products t the business and nonbusiness consumers.
Marketing and sales are those activities that are to do with advertising, selling, administrations of sales personnel and sales promotion.
Services are those activities that enhance or maintain the value of a product or service say installation, repairs, training, replacement of parts, meeting the guarantee and warranties as stipulated.
Support activities provides the inputs infrastructure for the primary activities.
It includes:
• Human Resource Management• Information system management• Research and development
3.2.4.2 Value chain analysis
It is a kind of cost benefit analysis. Each and every in an organization is important as it contributes value directly or indirectly. A company in profit wedge means this value exceeds the costs of performing those activities. Reverse implies that company is in loss wedge. It is process for understanding the systematic factors and conditions under which a value chain and its firms can achieve higher levels of performance. The aim of value chain analysis is to understand all the major constraints to improved performance or competitiveness.
Mr. Charles W.L.Hill and Gareth R.Jones said “ to gain a competitive advantage, a company must either perform valuecreation functions at a lower cost than its rivals or perform them in a way that leads to differentiations and a premium price. To do either, it must have a distinctive competences is one or more. More of its value creations function.
3.2.4.3 How to conduct value chain analysis?
It is a process that requires four interconnected steps:
• Data collection and research• Value chain mapping• Analysis of opportunities and constraints• Vetting of findings with stakeholders and • Recommendations for future action
3.2.4.4 Briefly, the steps can be described as follows:
1. The value chain team collects data through primary and secondary sources by way of research and interviews.
2. The team compiles a value chain map, which helps to organize the data.
3. By using the value chain framework, the collected data is further organized and analyzed to reveal opportunities and constraints within the chain.
4. The resulting analysis of opportunities and constraints is vetted with stakeholders
and used to design a strategy for the value chain to improve competitiveness and to agree on upgrading investments
3.2.4.5 Importance of value chain analysis
It helps to assess costs in chain that may be reduced or impacted by a change in one of the chain’s processes. It helps to find the areas or links they may be more efficient than competitors.
3.2.5 RISK ANALYSIS
• Political, legal, and regulatory risks
• Exchange and repatriation risks
• Taxation and double taxation risks
• Market risks – 4/5 P’s
• Product
• Price
• Place
• Promotion
• People
• Distribution and supply chain risks
• Social and cultural risks
• Labor availability and issues
• Potential conflicts and reconciliation with stakeholders:
• Stockholders
• Employees
• Strategic partners
• Government
• Regulators
• NGO’s
Mission statement
What is our business and who are we?
• Identification of stakeholders and their claims:
• Labor
• Customers
• Suppliers
• Stockholders
• Management
• Community
Deciding Which Markets to Enter
• Regional free trade zones
• The European Union
• NAFTA
• MERCOSUL
• APEC
Evaluating potential markets
Psychic proximity – difficult to quantify, but very important
Business Risk Analysis
• Country and business risk analysis
• Initial screening
• Basic need potential
• Foreign trade and investment
• Second screening
• Economic forces
• Financial forces
• Third screening
• Political and legal forces
• Fourth screening
• Social forces
• Economic forces
• Fifth screening
• Competitive forces
Country and business risk analysis
• Application of STEEP factors related to country
• Socialdemographic
• Technological
• Economic
• Ecological (environmental)
• Political (legal)
SWOTT analysis
• Strengths
• Weaknesses
• Opportunities
• Threats
• Trends
Initial screening
• Basic need potential
• Foreign trade and investment
2nd Screening: Economic and Financial forces
Economic indicators
Balance of payments
Budget deficits
Degree of inflation
Exchange controls
Currency convertibility
Gross domestic product (GDP) and growth rate of the target country
Third screening Political and legal forces
Entry barriers
Profit remittance barriers
Other possible barriers
Fourth screening – Sociocultural forces
Social forces
Economic forces
Demographics
Cultural
Religious
Educational levels of populace
Health
Labor and unemployment
Fifth screening: competitive forces
Number, size, and financial strength
Market share
Marketing strategies
Distribution and supply chains
3.2.6 COST BENEFIT ANALYSIS
CostBenefit Analysis (CBA) is a term that refers simultaneously to:
A formal method used to estimate or assess the viability of a project or proposal, and An informal approach to making a decision.
Both definitions imply, explicitly, weighing the total expected costs against the total expected benefits of one or more actions to determine which is the best or most profitable.
Benefits and losses are usually expressed in monetary units and are adjusted for inflation, so that the proceeds of the benefits and the losses are expressed in the same present value, despite the length of time involved.
Interrelated, but slightly differing formal techniques include: costeffectiveness analysis and analysis of externalizes in the investment. The second theory is based on costbenefit analysis, but differs in that it sensitizes managers and investors on the social and environmental impacts.
Also close to the CBA, are formal techniques which include analysis and value analysis of measuring the cost of benefits. The process entails the calculation of initial and ongoing costs compared to expected performance.
It is often very difficult to construct plausible measures of costs and benefits of specific actions. In practice, analysts try to estimate the costs and benefits either by studying or tracing interference with market developments.
For example, a product manager may comparatively weigh manufacturing and marketing expenses in projected sales for a particular product. And make the decision only if he hopes to produce a profit that will be enough to ultimately overlap with the costs. In principle, the costbenefit analysis attempts to bring the costs and benefits on the same level.
Costbenefit analysis is employed by governments in the evaluation of the appropriateness of an intervention. It is therefore the costeffectiveness analysis of different alternatives. Analysis allows you to see whether the benefits are greater than the costs. The effect of intervention on the benefits and costs is evaluated in terms of willingness to pay for them (benefits) or willingness to pay to avoid them (costs). Contributions are usually measured as opportunity costs. The main principle in this
analysis is to write all parts that affect the economy after the intervention and location of the relevant item of monetary value.
The calculation of the likely costs and benefits of an activity is usually very difficult. In practice, analysts try to predict the costs and benefits through various research methods or draw conclusions from the behavior of the market. For example, the entrepreneur compares the production costs and promotes a product with projected income from the sale, and then decides to manufacture those goods if the costs are lower than income.
During this analysis, not only is inflation important. It should also pay attention to aspects such as: the risk of the project, market penetration and long term strategies for compensatory business.The costbenefit calculations always involve using the concept of value of money over time. This is often done by converting the future expected costs and benefits in line with the current value.
3.2.7 Strategy in international business
• Strategy is concerned with identifying and taking actions that will lower costs of value creation and/or differentiate the firm’s product offering through superior design, quality service, functionality, etc.
• Meet both of Porters Goals
3.2.7.1 Advantages of global expansion
• Location economies
• Cost economies from experience effects
• Leveraging core competencies
• Leveraging subsidiary skills
BUT
• Profitability is constrained by product customization and the “imperative of localization”.
• Realized by performing a value creation activity in an optimal location anywhere around the globe
• Often arise due to differences in factor costs
• It can lower costs of value to enable low cost strategy and/or
• Help in differentiation of products from competitors
• Global web: different stages of value chain are dispersed to those locations where perceived value is maximized or costs of value creation are minimized
Caveats
• Complications arise due to
• Transportation costs
• Trade barriers
• Political and economic risks
US firms have shifted production from Asia to Mexico due to
• Low labor costs.
• Proximity to U.S.
• NAFTA. transportation costs
Experience effects
• The systematic reduction in production costs that occurs over the life of a product
• First observed in aircraft industry where unit costs reduced by 80% each time output was doubled
3.2.7.2 Caused due to
• Learning effects
• Economies of scale
Learning effects
• Cost savings that come from learning by doing
• Arises due to increased worker productivity and management efficiency
• Significant in cases of technologically complex task as there is a lot to be learned
• Experienced during startup phase, cease after two or three years
• Decline after this point comes from economies of scale.
Economies of scale
• Refers to reduction in unit cost by producing a large volume of a product
3.2.8 Sources:
• Reduces fixed costs by spreading it over a large volume
• Ability of large firms to employ increasingly specialized equipment or personnel
3.2.9 Strategic significance of the experience curve
• The firm that moves down the experience curve most rapidly has a cost advantage over its competitors
• Serving the global market from a single location helps to establish low cost strategy
• Aim to rapidly build up sales aggressive marketing strategies and firstmover advantages
3.2.10 Leveraging core competencies
• Core competence: Skills within the firm that competitors cannot easily match or imitate
• Earn greater returns by transferring these skills and/or unique product offerings to foreign markets who lack them (McDonalds)
Examples:
Consumer marketing skills of U.S. firms allowed them to dominate European consumer product market in 1960s and 70s
3.2.11 Leveraging subsidiary skills
• Value created by identifying them and applying it to a firm’s global network of operations
• Some Challenges:
• Managers must create an environment where incentives are given to take necessary risks and reward them
• Need a process to identify new skill development
• Need to facilitate transfer of new skills within the firm
3.2.12 Pressures for cost reductions
• Intense in industries of standardized, commodity type product that serve universal needs
• Major competitors are based in lowcost locations
• Consumers are powerful and face low switching costs
• Liberalization of world trade and investment environment
Examples
Bulk chemicals, petroleum, steel, personal computers is a pressures for local responsiveness
1. Differences in consumer tastes & preferences
North American families like pickup trucks while in Europe it is viewed as a utility vehicle for firms
2. Differences in infrastructure & traditional practices
Consumer electrical system in North America is based on 110 volts; in Europe on 240 volts
3. Differences in distribution channels
Germany has few retailers dominating the food market, while in Italy it is fragmented
HostGovernment demands
Health care system differences between countries require pharmaceutical firms to change operating procedures
3.2.12 Management focus – tailoring world cars to the U.S. market
• Japanese automobile manufacturers customize car design to tastes of American consumers
• Toyota released the Tundra with V8 engines which looks like a heavyduty pickup truck with a powerful engine
• Nissan let U.S. engineers and planners be completely responsible for development of most vehicles sold in North America
• Honda customizes the Pilot, it’s next generation SUV according to tastes for American families who wanted bigger vehicles with three row seating
3.2.13 Strategic choices
Four basic strategies to enter and compete in the international environment:
• International strategy
• Multi domestic strategy
• Global strategy
• Transnational strategy
International strategy
• Create value by transferring valuable core competencies to foreign markets that indigenous competitors lack
• Centralize product development functions at home
• Establish manufacturing and marketing functions in local country but head office exercises tight control over it
• Limit customization of product offering and market strategy
• Strategy effective if firm faces weak pressures for local responsive and cost reductions
Multidomestic strategy
• Main aim is maximum local responsiveness
• Customize product offering, market strategy including production, and R&D according to national conditions
• Generally unable to realize value from experience curve effects and location economies
• Possess high cost structureGlobal strategy
• Focus is on achieving a low cost strategy by reaping cost reductions that come from experience curve effects and location economies
• Production, marketing, and R&D concentrated in few favorable functions
• Market standardized product to keep cost’s low
• Effective where strong pressures for cost reductions and low demand for local responsiveness
• Semiconductor industryTransnational strategy
To meet competition firms aim to reduce costs, transfer core competencies while paying attention to pressures for local responsiveness
3.2.14 Global learning
• Valuable skills can develop in any of the firm’s world wide operations
• Transfer of knowledge from foreign subsidiary to home country, to other
foreign subsidiaries
• Transnational strategy difficult task due to contradictory demands placed on the organization
Example : CaterpillarCost pressures and pressures for local responsiveness facing Caterpillar
3.2.15 Advantages and disadvantages of the four strategies
3.3 INTERNATIONAL BUSINESS LOCATION
Location decision
Selection of a region
Global firm:
“A firm that operates in more than one country and captures R&D, production, logistical, marketing and financial advantages in its costs and reputation that are not available to purely domestic competitors. Global firms plan, operate and coordinate their activities on a worldwide basis. A company need not be large to sell globally.”
–Michael porterInternational LocationMultinationals have located subsidiary businesses in other countries for many years. In recent years, this trend has gathered pace as part of globalisation. There are specific reasons why businesses might want to locate overseas.
1. To avoid import tariffs
Many countries place restrictions of one kind or another on imports, usually to protect their own domestic businesses. One of the main ways is to levy a tariff, or import duty/tax. So, instead of trying to export to that country, and paying the tariff, you can locate a subsidiary based in that country. The work of the WTO since the 1940s has vastly reduced the number and value of tariffs, so this reason is less pressing than it used to be. However, the EU still maintains tariffs on a range of goods, most notably agricultural produce.
2. The Labour Force
Wages vary enormously from country to country, mainly in line with different costs and standards of living. There are costs of employment to go on top of wages as well.
In the UK, for example, employers must pay NI contributions roughly in line with the employees’ wage. In Germany, for example, there are several additional costs due to welfare and pension payments which make the total cost of employment quite high. On top of these again are nonfinancial costs such as the level of worker protection from the law over dismissal, Health & Safety and statutory time off.
Finally, and importantly, productivity varies a great deal. It is no good setting up a business in Turkey, for example, if the wages are half the level of the UK if only to find that productivity is even lower, because the unit wage cost will then be higher in Turkey than in the UK. The combination of wages and productivity gives unit wage costs, and it is this that a business wants to be as low as possible, not wages per se.
3. Legislation & Bureaucracy
Some countries have an awful lot of laws and paper work before a business can get started. Some developing countries are particularly bad in this respect. So, although they look very cheap place to locate, when you take into account the general hassle factor, you may decide not to bother. In India, for example, it is often claimed that the only way to deal with the labyrinth of regulations is to "bribe" officials to clear you through them.
4. Political Stability
This is another factor that goes in favour of apparently "expensive" developed economies. Many cheap developing countries are politically unstable. Your expatriate managers may be kidnapped for ransom; your business may be forced to pay protection money (a big problem in Russia, for example); your premises may be looted or destroyed; and finally a new government could nationalise your assets as happened to all US businesses (mainly oilrelated) in Iran in 1979.
5. Market Opportunities
This is a complex area. Partly it is to do with the level of competition from domestic businesses and other multinationals. Partly it is to do with the tastes and lifestyles of local consumers. For example, the middleclass elites in many developing countries think it fashionable to buy Western products. Rising incomes in fast growing economies mean consumers have more money to spend. Some countries (eg India, China and Indonesia) have temptingly large populations, although many of them cannot afford imported goods (yet). It is also to do with the attitude of the local government and whether it welcomes foreign business investment.
6. Transport Costs
In general these have fallen dramatically in the last 50 years or so and are no longer as significant as they once were. However, they can still be important in some special cases. Some goods, for example polystyrene, occupy a lot of space for little bulk and little value, so it is never transported in its ‘expanded’ form as it is too expensive. Some parts of the world have very poor transport links and so goods only get there by being very expensive. And some parts suffer regular interruptions to transport links due to, for example, natural disaster such as severe weather, or from strikes.
7. Financial Incentives
Attracting big investments from foreign business brings many benefits, not least new jobs. So many governments create financial incentives. The UK, for example, has regional grants available, although these are not specifically targeted at foreign businesses. Ireland has had a lot of success with special low tax arrangements for foreign businesses. A number of countries have created waterside ‘Tax Free Zones’ where import/export businesses can do business without the paper work or expense of customs clearance and duties.
8. Globalisation
Globalisation has accelerated the existing trend toward overseas location. There is a lot of debate over what ‘globalisation’ means exactly, but one way of thinking about it is treating the whole world as your market and not just the country you start off in, or a few neighbouring countries. It follows from this that your Pakistani customers might like to buy from Pakistanis in a Pakistan based office of your business.
9. Corporate Image
Some businesses like to think of themselves as great global adventurers and levellers of barriers, so it suits the fantasies of their managers to open up all over the place. McDonalds has just had to start closing down in a big way because it would appear that they had pushed things too far.
10. The Euro
The single currency makes dealing with money eg accounting simpler, and this may encourage nonEU businesses to set up there.
Inward Investment
This is also called ‘FDI ’. It has grown enormously over the last 20 years or so. The UK has been particularly successful in attracting large amounts of FDI in the last decade, although it appears to be slowing down at present. FDI brings many benefits.
1. It adds money to the capital account of the balance of payments, thus offsetting any current account deficit.
2. It involves spending a lot of money setting up a new, often large, businesses. This creates spending and demand for local suppliers, especially in construction.
3. The business, once open, will need regular supplies from local suppliers.
4. Jobs are created for local workers.
5. The output may be exported, or replace imports, which improves the current account of the balance of payments.
6. The new business may bring new technology, or management techniques, which the local economy can learn from.
7. Success for some foreign businesses may encourage more to come.
Decisions to be taken while deciding to go global
Decision 1: whether to go abroad ?
global firms producing better products or lower prices can attack the company’s domestic market. The company may want to counter attack these competitors in their home markets foreign markets may provide higher profit opportunities need larger customer
base to achieve economies of sale wants to reduce its dependence on any one market
Decision 2: which market to enter ?
It is sense to operate in fewer countries with a deeper commitment & penetration in each because.....
• market entry and market control costs are high
• product and communication adaptation are high
• population and income size and growth are high in the initial countries chose
Decision 3: How to enter market?
Exports: the company exports from time to time either on its own initiative or in response to unsolicited orders from abroad
...any good, service or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade.
For e.g., It involves....
Direct selling: .....involves sales representatives, distributors, or retailers who are located outside the
exporter's home country.
Indirect exports: .....is simply selling goods to or through an independent domestic intermediary in their
own home county.
Licensing: The licensor licenses a foreign company to use a manufacturing process, trademark, patent, trade secret or either item of value for a fee or royalty.
The licensor licenses a foreign company to use a manufacturing process, trademark, patent, trade secret or either item of value for a fee or royalty
e.g., at the launch of apple iPod, outsiders were licensed to make headphones, charging stations, carrying bags etc.
Joint venture: Foreign investors may join with local investors to create a joint venture in which they share ownership and control
It is an enterprise which is jointly owned and managed by a local entrepreneur and a foreign entrepreneur . In some cases ,there are more than two parties involved .
For e.g., to leap into European market....
For e.g., in India....
Direct investments (FDI)
The shifting of the burden of risk of capital formation from the domestic entrepreneur to foreign investors....
The importance of location decision
• It is a long term decision
• It is a strategic decision i.e., it decides the future of the firm
Foreign Market Entry ModesThe decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms:
• Exporting • Licensing • Joint Venture • Direct Investment
Exporting
Exporting is the marketing and direct sale of domesticallyproduced goods in another country. Exporting is a traditional and wellestablished method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.
Exporting commonly requires coordination among four players:
• Exporter • Importer • Transport provider • Government
Licensing
Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance.
Because little investment on the part of the licensor is required, licensing has the potential toprovide a very large ROI. However, because the licensee produces and markets
the product, potential returns from manufacturing and marketing activities may be lost.
Joint Venture
There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.
Such alliances often are favorable when:
• the partners' strategic goals converge while their competitive goals diverge;
• the partners' size, market power, and resources are small compared to the industry leaders; and
• partners' are able to learn from one another while limiting access to their own proprietary skills.
The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions.
Potential problems include:
• conflict over asymmetric new investments • mistrust over proprietary knowledge • performance ambiguity how to split the pie • lack of parent firm support • cultural clashes • if, how, and when to terminate the relationship
Joint ventures have conflicting pressures to cooperate and compete:
• Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.
• The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.
• The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.
Foreign Direct Investment
Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise.
Direct ownership provides a high degree of control in the operations and the ability to
better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.
The Case of Euro Disney
Different modes of entry may be more appropriate under different circumstances, and the mode of entry is an important factor in the success of the project. Walt Disney Co. faced the challenge of building a theme park in Europe. Disney's mode of entry in Japan had been licensing. However, the firm chose direct investment in its European theme park, owning 49% with the remaining 51% held publicly.
Besides the mode of entry, another important element in Disney's decision was exactly where in Europe to locate. There are many factors in the site selection decision, and a company carefully must define and evaluate the criteria for choosing a location. The problems with the EuroDisney project illustrate that even if a company has been successful in the past, as Disney had been with its California, Florida, and Tokyo theme parks, future success is not guaranteed, especially when moving into a different country and culture. The appropriate adjustments for national differences always should be made.
Comparision of Market Entry Options
The following table provides a summary of the possible modes of foreign market entry:
Comparison of Foreign Market Entry Modes
Mode Conditions Favoring this Mode
Advantages Disadvantages
Exporting
Limited sales potential in target country; little product adaptation required
Distribution channels close to plants
High target country production costs
Liberal import policies
High political risk
Minimizes risk and investment.
Speed of entry
Maximizes scale; uses existing facilities.
Trade barriers & tariffs add to costs.
Transport costs
Limits access to local information
Company viewed as an outsider
Licensing Import and investment barriers
Legal protection possible in target environment.
Low sales potential in target
Minimizes risk and investment.
Speed of entry
Able to
Lack of control over use of assets.
Licensee may become competitor.
country.
Large cultural distance
Licensee lacks ability to become a competitor.
circumvent trade barriers
High ROI
Knowledge spillovers License period is limited
Joint Ventures
Import barriers
Large cultural distance
Assets cannot be fairly priced
High sales potential
Some political risk
Government restrictions on foreign ownership
Local company can provide skills, resources, distribution network, brand name, etc.
Overcomes ownership restrictions and cultural distance
Combines resources of 2 companies.
Potential for learning
Viewed as insider
Less investment required
Difficult to manage
Dilution of control
Greater risk than exporting a & licensing
Knowledge spillovers
Partner may become a competitor.
Direct Investment
Import barriers
Small cultural distance
Assets cannot be fairly priced
High sales potential
Low political risk
Greater knowledge of local market
Can better apply specialized skills
Minimizes knowledge spillover
Can be viewed as an insider
Higher risk than other modes
Requires more resources and commitment
May be difficult to manage the local resources.
Greenfield Investment
A Greenfield Investment is the investment in a manufacturing, office, or other physical companyrelated structure or group of structures in an area where no previous facilities exist. The name comes from the idea of building a facility literally on a "green" field, such as farmland or a forest. Over time the term has become more metaphoric.Greenfield Investing is usually offered as an alternative to another form of investment,
such as mergers and acquisitions, joint ventures, or licensing agreements. Greenfield Investing is often mentioned in the context of Foreign Direct InvestmentA related term to Greenfield Investment which is becoming popular is Brownfield Investment, where a site previously used for a "dirty" business purpose, such as a steel mill or oil refinery, is cleaned up and used for a less polluting purpose, such as commercial office space or a residential area.
A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new longterm jobs in the foreign country by hiring new employees.
This is opposite to a brown field investment. Green field investments occur when multinational corporations enter into developing countries to build new factories and/or stores. Developing countries often offer prospective companies taxbreaks, subsidies and other types of incentives to set up green field investments. Governments often see that losing corporate tax revenue is a small price to pay if jobs are created and knowledge and technology is gained to boost the country's human capital.
A Strategic Alliance
A Strategic Alliance is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.
Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared riskA typical strategic alliance formation process involves these steps:
• Strategy Development: Strategy development involves studying the alliance’s feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.
• Partner Assessment: Partner assessment involves analyzing a potential partner’s strengths and weaknesses, creating strategies for accommodating all partners’ management styles, preparing appropriate partner selection criteria, understanding a partner’s motives for joining the alliance and addressing resource capability gaps that may exist for a partner.
• Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partner’s contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.
• Alliance Operation: Alliance operations involves addressing senior management’s commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, measuring and rewarding alliance performance, and assessing the performance and results of the alliance.
• Alliance Termination: Alliance termination involves winding down the alliance, for instance when its objectives have been met or cannot be met, or when a partner adjusts priorities or reallocates resources elsewhere.
The advantages of strategic alliance includes:1. Allowing each partner to concentrate on activities that best match their
capabilities. 2. Learning from partners & developing competences that may be more widely
exploited elsewhere 3. Adequacy a suitability of the resources & competencies of an organization for it to
survive. There are four types of strategic alliances: joint venture, equity strategic alliance, nonequity strategic alliance, and global strategic alliances.
• Joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage.
• Equity strategic alliance is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage.
• Non equity strategic alliance is an alliance in which two or more firms develop a contractualrelationship to share some of their unique resources and capabilities to create a competitive advantage.
• Global Strategic Alliances working partnerships between companies (often more than across national boundaries and increasingly across industries. Sometimes formed between company and a foreign government, or among companies and governments
Reasons for international locations
Multinationals have located subsidiary businesses in other countries for many years. In recent years, this trend has gathered pace as part of globalisation. There are specific reasons why businesses might want to locate overseas.
1. To avoid import tariffs
Many countries place restrictions of one kind or another on imports, usually to protect their own domestic businesses. One of the main ways is to levy a tariff, or import duty/tax. So, instead of trying to export to that country, and paying the tariff, you can locate a subsidiary based in that country. The work of the WTO since the 1940s has vastly reduced the number and value of tariffs, so this reason is less pressing than it used to be. However, the EU still maintains tariffs on a range of goods, most notably agricultural produce.
2. The Labour Force
Wages vary enormously from country to country, mainly in line with different costs and standards of living. There are costs of employment to go on top of wages as well.
In the UK, for example, employers must pay NI contributions roughly in line with the employees’ wage. In Germany, for example, there are several additional costs due to welfare and pension payments which make the total cost of employment quite high. On top of these again are nonfinancial costs such as the level of worker protection from the law over dismissal, Health & Safety and statutory time off.
Finally, and importantly, productivity varies a great deal. It is no good setting up a business in Turkey, for example, if the wages are half the level of the UK if only to find that productivity is even lower, because the unit wage cost will then be higher in Turkey than in the UK. The combination of wages and productivity gives unit wage costs, and it is this that a business wants to be as low as possible, not wages per se.
3. Legislation & Bureaucracy
Some countries have an awful lot of laws and paper work before a business can get started. Some developing countries are particularly bad in this respect. So, although they look very cheap place to locate, when you take into account the general hassle factor, you may decide not to bother. In India, for example, it is often claimed that the only way to deal with the labyrinth of regulations is to "bribe" officials to clear you through them.
4. Political Stability
This is another factor that goes in favour of apparently "expensive" developed economies. Many cheap developing countries are politically unstable. Your expatriate managers may be kidnapped for ransom; your business may be forced to pay protection money (a big problem in Russia, for example); your premises may be looted or destroyed; and finally a
new government could nationalise your assets as happened to all US businesses (mainly oilrelated) in Iran in 1979.
5. Market Opportunities
This is a complex area. Partly it is to do with the level of competition from domestic businesses and other multinationals. Partly it is to do with the tastes and lifestyles of local consumers. For example, the middleclass elites in many developing countries think it fashionable to buy Western products. Rising incomes in fast growing economies mean consumers have more money to spend. Some countries (eg India, China and Indonesia) have temptingly large populations, although many of them cannot afford imported goods (yet). It is also to do with the attitude of the local government and whether it welcomes foreign business investment.
6. Transport Costs
In general these have fallen dramatically in the last 50 years or so and are no longer as significant as they once were. However, they can still be important in some special cases. Some goods, for example polystyrene, occupy a lot of space for little bulk and little value, so it is never transported in its ‘expanded’ form as it is too expensive. Some parts of the world have very poor transport links and so goods only get there by being very expensive. And some parts suffer regular interruptions to transport links due to, for example, natural disaster such as severe weather, or from strikes.
7. Financial Incentives
Attracting big investments from foreign business brings many benefits, not least new jobs. So many governments create financial incentives. The UK, for example, has regional grants available, although these are not specifically targeted at foreign businesses. Ireland has had a lot of success with special low tax arrangements for foreign businesses. A number of countries have created waterside ‘Tax Free Zones’ where import/export businesses can do business without the paper work or expense of customs clearance and duties.
8. Globalisation
Globalisation has accelerated the existing trend toward overseas location. There is a lot of debate over what ‘globalisation’ means exactly, but one way of thinking about it is treating the whole world as your market and not just the country you start off in, or a few neighbouring countries. It follows from this that your Pakistani customers might like to buy from Pakistanis in a Pakistan based office of your business.
9. Corporate Image
Some businesses like to think of themselves as great global adventurers and levellers of barriers, so it suits the fantasies of their managers to open up all over the place. McDonalds has just had to start closing down in a big way because it would appear that they had pushed things too far.
10. The Euro
The single currency makes dealing with money eg accounting simpler, and this may encourage nonEU businesses to set up there.
Inward Investment
This is also called ‘FDI ’. It has grown enormously over the last 20 years or so. The UK has been particularly successful in attracting large amounts of FDI in the last decade, although it appears to be slowing down at present. FDI brings many benefits.
1. It adds money to the capital account of the balance of payments, thus offsetting any current account deficit.
2. It involves spending a lot of money setting up a new, often large, businesses. This creates spending and demand for local suppliers, especially in construction.
3. The business, once open, will need regular supplies from local suppliers.
4. Jobs are created for local workers.
5. The output may be exported, or replace imports, which improves the current account of the balance of payments.
6. The new business may bring new technology, or management techniques, which the local economy can learn from.
7. Success for some foreign businesses may encourage more to come.
Closing Thoughts
Our two revision notes on business location describe what businesses should do. A survey a few years ago found that most business location decisions in the UK led to a location within 25 miles of the home of the Managing Director. What does that suggest to you? Well, the MD is only one, albeit influential, person. More generally, any location decision is not going to work if employees aren’t happy about it. Employees have all sorts of life goals which aren’t merely to do with money. This, too, has to be taken into account.