MNEsMNEs

A good definition:A good definition:

An enterprise having a substantial An enterprise having a substantial direct investment in foreign countries direct investment in foreign countries engaged in active management of engaged in active management of such offshore assets such offshore assets and and regarding regarding those operations strategically and those operations strategically and organizationally as integral part of it.organizationally as integral part of it.

Motivations for international operations: Motivations for international operations: Capitalize on all potential advantagesCapitalize on all potential advantages

Traditional:Traditional:Secure key supplies. Eg: ONGC in Secure key supplies. Eg: ONGC in

RussiaRussiaSeek markets abroad in pursuit of Seek markets abroad in pursuit of

economies of scale: Mahindra in USeconomies of scale: Mahindra in USSeek access to low cost factors of Seek access to low cost factors of

production. CEAT in Sri Lankaproduction. CEAT in Sri Lanka

These push factors can be related to the These push factors can be related to the product Life Cycle Theoryproduct Life Cycle Theory

Emerging motivations – Beyond overseas Emerging motivations – Beyond overseas sales and production operations:sales and production operations:

Set of forces I Set of forces I Increasing scale economiesIncreasing scale economies expanding R&D investmentsexpanding R&D investments shortening product life cyclesshortening product life cycles

IIII global scanning and learning global scanning and learning

capability (on raw materials, capability (on raw materials, markets, products, technologies)markets, products, technologies)

IIIIII Competitive positioning (eg. Cross-Competitive positioning (eg. Cross-

subsidisation of markets)subsidisation of markets)

Process of Internationalization:Process of Internationalization:

Countervailing strategic advantage of Countervailing strategic advantage of an MNE over a domestic company:an MNE over a domestic company:

Superior knowledge or skills as regards Superior knowledge or skills as regards technology, marketing, R&D, Scale technology, marketing, R&D, Scale economies oreconomies or

some other part of its value chain some other part of its value chain

Options for entry in markets abroadOptions for entry in markets abroadExportsExportsLicensingLicensingFranchisingFranchisingJoint ventureJoint ventureWholly owned subsidiaryWholly owned subsidiary

Uppsala Model of internationalization:Uppsala Model of internationalization:

Go through cycles of investment treating Go through cycles of investment treating market entry as a learning process:market entry as a learning process:

Step I : Step I : Initial commitment of Initial commitment of resources to the foreign resources to the foreign

market to know market to know about about customers, customers, competitors competitors and and regulatory conditions.regulatory conditions.

II : II : On this basis, evaluate On this basis, evaluate

current activities and current activities and opportunities for opportunities for

additional additional investment. investment.

III:III: Make a subsequent Make a subsequent resource resource commitment, eg. buy out local commitment, eg. buy out local

distributor or invest in a distributor or invest in a manufacturing plant.manufacturing plant.

IV: IV: With additional knowledge and With additional knowledge and several cycles of several cycles of

investment, investment, develop capability develop capability and market and market knowledge to knowledge to compete in the compete in the foreign foreign market.market.

STRATEGIC MANAGEMENTSTRATEGIC MANAGEMENT

A critical part: A critical part: Deciding how a company Deciding how a company should should compete abroad.compete abroad.

All companies make money through value All companies make money through value creation.creation.

3 general strategies for value creation:3 general strategies for value creation:• Differentiating products or services from those of Differentiating products or services from those of

competitors (eg. Mercedes Benz.)competitors (eg. Mercedes Benz.)• Cost leadership (eg. ACER of Taiwan)Cost leadership (eg. ACER of Taiwan)• Niche strategy – Focusing a specific line of Niche strategy – Focusing a specific line of

products/services relative to competitors who products/services relative to competitors who operate more broadly (eg. PORSCHE of Germany operate more broadly (eg. PORSCHE of Germany for Upscale sports cars. Slogan “There is no for Upscale sports cars. Slogan “There is no substitute”)substitute”)

Regardless of this basic approach, companies areRegardless of this basic approach, companies are

A LINKED SET OF VALUE CHAINS.A LINKED SET OF VALUE CHAINS.

So, companies can add value bySo, companies can add value by• Changing any of their primary activities Changing any of their primary activities

(manufacturing, marketing)(manufacturing, marketing)• Changing any of their supporting activities (materials Changing any of their supporting activities (materials

procurement, HR)procurement, HR)

either alone or in combinationeither alone or in combination..

So a company’s international strategy is about choices onSo a company’s international strategy is about choices on

- How value chain activities are configured (eg. - How value chain activities are configured (eg.

Where do value chain activities happen? ) andWhere do value chain activities happen? ) and

Coordinated (eg. Are dispersed activities tightly Coordinated (eg. Are dispersed activities tightly

controlled from HQ? orcontrolled from HQ? or

Do they remain under local control?)Do they remain under local control?)

OFTEN COMPANIES CHANGE THESE ACTIVITIESOFTEN COMPANIES CHANGE THESE ACTIVITIESTO IMPROVE THEIR CORE COMPETENCIESTO IMPROVE THEIR CORE COMPETENCIES

(i.e: skills that are hard for competitors to imitate) (i.e: skills that are hard for competitors to imitate)

CORE COMPETENCIES CAN BE LOCATED ANYWHERE IN THE CORE COMPETENCIES CAN BE LOCATED ANYWHERE IN THE FIRM’S VALUE CHAIN AND PROVIDE THE BASIS FOR FIRM’S VALUE CHAIN AND PROVIDE THE BASIS FOR INTERNATIONAL COMPETITIVENESS.INTERNATIONAL COMPETITIVENESS.

Examples:Examples: Logistical executionLogistical execution -- Wal-MartWal-Mart Product innovationProduct innovation -- 3M3M Manufacturing QualityManufacturing Quality -- ToyotaToyota

Location Economies: cost effective availability of benefits Location Economies: cost effective availability of benefits exclusive to locations.exclusive to locations.

Scattering certain value chain activities to locations that Scattering certain value chain activities to locations that offer such benefits can provide a source of offer such benefits can provide a source of competitiveness.competitiveness.

But sustainable competitive advantage comes from:But sustainable competitive advantage comes from:ability to constantly change and adapt which allows ability to constantly change and adapt which allows many individual firms to outperform their many individual firms to outperform their

competitors.competitors.

Success factors for cos in specific industries:Success factors for cos in specific industries:Processed FoodsProcessed Foods

• TasteTaste• Sales promotion Sales promotion • PricePrice• Distr. ChannelsDistr. Channels• Brand identificationBrand identification

PharmaceuticalsPharmaceuticals• Product efficiencyProduct efficiency• Product innovationProduct innovation• Patents held / filedPatents held / filed• Co. imageCo. image

AutosAutos• StylingStyling• ServiceService• QualityQuality• PricePrice• Fuel efficiencyFuel efficiency• Distr. systemDistr. system

Strategic Approaches used by MNEs:Strategic Approaches used by MNEs:(International, multidomestic global and (International, multidomestic global and

transactional)transactional)

Diverse MNEs are networks of relationships Diverse MNEs are networks of relationships among many dispersed organizations, each among many dispersed organizations, each with somewhat different goals and with somewhat different goals and perspectives (eg: GE)perspectives (eg: GE)

Understanding strategy in this context Understanding strategy in this context involves figuring outinvolves figuring out

- the internal movements of information, - the internal movements of information,

people, resources and products people, resources and products

through the MNE’s entire web of linkages.through the MNE’s entire web of linkages.

Perspectives on MNE StrategyPerspectives on MNE Strategy

Evolution of strategic role of MNEs’ foreign Evolution of strategic role of MNEs’ foreign operations:operations:

4 stages/ strategic approaches/ mentalities:4 stages/ strategic approaches/ mentalities:

International :Overseas operations International :Overseas operations considered as appendages. considered as appendages.

Technology and other Technology and other knowledge transferred from knowledge transferred from parent company to overseas parent company to overseas operators. operators.

Multidomestic: Multiple, nationally responsiveMultidomestic: Multiple, nationally responsive

strategies by the company’s strategies by the company’s worldwide subsidiariesworldwide subsidiaries

GlobalGlobal : : Treats the world as its unit of Treats the world as its unit of analysis through global analysis through global products and manufacture on products and manufacture on global scale.global scale.

Transnational:Transnational: Combines local responsiveness Combines local responsiveness with global-scale competitive with global-scale competitive efficiency.efficiency.

(Localization Strategy)(Localization Strategy)

Note: An MNE might operate with any Note: An MNE might operate with any one of these strategic approaches, one of these strategic approaches, depending on the industry, the depending on the industry, the company’s strategic position and a company’s strategic position and a variety of other factors.variety of other factors.

More likely, most companies will bear More likely, most companies will bear some characteristics of each of these some characteristics of each of these approaches.approaches.

Exercise:Exercise:

Organisational set-up for the four Organisational set-up for the four strategic approaches.strategic approaches.

Process of developing international Process of developing international strategy – A template:strategy – A template:

Step 1 – The Mission StatementStep 1 – The Mission Statement

Step 2 – Conducting a SWOT (environmental Step 2 – Conducting a SWOT (environmental

scanning)scanning)

Step 3 – Evaluate alternatives, set strategic Step 3 – Evaluate alternatives, set strategic

goalsgoals

Step 4 – Developing implementation Step 4 – Developing implementation

tactics and planstactics and plans

Step 5 – Putting control and Step 5 – Putting control and

evaluation procedures in place.evaluation procedures in place.

A Model:A Model: DETERMINATION OF

A FIRM’S COMPETITIVE POSITION IN INTERNATIONAL BUSINESSHANS MUHLBACHER et al

CUSTOMER & MAJOR STAKEHOLDERS

MACRO-ENVIRONMENT

SUCCESS FACTORS

COMPETITOR ANALYSISCOMPETITIVE ENVIRONMENTASSESSMENT OF

• CORPORATE POLICY CORPORATE STRATEGY MANAGEMENT SYSTEMS OPERATIONS

INTERNAL ANALYSIS CORPORATE POLICY CORPORATE STRATEGY MANAGEMENT SYSTEMS OPERAITONS

DISTINCIVE COMPETENCIES• PROFILE OF STRENGTHS & WEAKNESSESS COMPARISON OF PROFILES OF STRENGTHS & WEKNESSES

COMPETITIVE ADVANTAGES

Advantages and disadvantages of different foreign Advantages and disadvantages of different foreign market entry options.market entry options.

Advantages Disadvantages

Exporting ·fairly inexpensive·easy foreign access·no ownership risks

·Missed location economies·logistical difficulties

Licensing ·Fairly inexpensive·Useful where trade barriers/ tariffs hinder exporting·Leverages location economies without ownership concerns

·Risky where IPR protection is weak·Control ceded to licensee may inhibit coordination·May help create new competitors

Franchising ·Low cost, low risk·Offers more control than licensing·Builds presence fast

·Control still an issue·Franchisee may not be motivated to adhere to franchisor’s standards

Management Contracts

·Very inexpensive·Low risk revenue

·No long term presence·May create competitors

Turnkey projects

Greenfield subsidiaries

·An option if direct investment is out·Lowers risk if long term instability exists

·Allows high control·Offers location economies·Can pick own site, workers, technology.

·No long-term presence·May create competitors·Vulnerable to political and legislative changes

·Very expensive to set up ·Time-consuming to set up·Requires considerable international expertise·Risky due to ownership

Acquired subsidiaries ·Allows high control·Rapid market entry·Offers location economies

·Risky due to ownership·Cultural differences may be formidable·May be buying problems

Joint ventures ·Less financial risk than subsidiaries·Leverages partner’s resources, know-how

·Risks giving some control on technology to partner·Still some ownership risk

Other types of International Strategic Other types of International Strategic Alliances than JVs.Alliances than JVs.

Production allianceProduction alliance - Motivation may include - Motivation may include desire to acquire complex manufacturing desire to acquire complex manufacturing expertise from each other or reducing costs of expertise from each other or reducing costs of production.production.

R&D allianceR&D alliance - to develop new products or - to develop new products or technologiestechnologies

Financial allianceFinancial alliance - partners reduce their financial - partners reduce their financial exposure in risky projects by sharing costsexposure in risky projects by sharing costs

Marketing allianceMarketing alliance - partners share services or - partners share services or expertise in marketing related areas in ways that expertise in marketing related areas in ways that generate additional profits for both.generate additional profits for both.

Why SAs?Why SAs?

Local partner’s knowledge of the Local partner’s knowledge of the

marketmarket Government regulationsGovernment regulations Sharing risksSharing risks Sharing technologySharing technology Economies of scaleEconomies of scale Low-cost raw materials or labourLow-cost raw materials or labour

Key considerations in the SA decision:Key considerations in the SA decision:

Could other participation better satisfy Could other participation better satisfy strategic objectives?strategic objectives?

Does the firm have management and Does the firm have management and capital resources to contribute to the SA?capital resources to contribute to the SA?

Can a partner really benefit the Can a partner really benefit the company’s objectives?company’s objectives?

What is the expected payoff of the What is the expected payoff of the venture?venture?

Pre-alliance process: Building an SAPre-alliance process: Building an SA

- Partner selection: Strategic and Partner selection: Strategic and organisational analysis.organisational analysis.

- Avoidance of wrong choices and Avoidance of wrong choices and unrealistic expectations.unrealistic expectations.

- Determination of scope of the Determination of scope of the alliance.alliance.

- Opt for simplicity and flexibility.Opt for simplicity and flexibility.

Managing an SAManaging an SAStructuring the interface.Structuring the interface.Managing knowledge flows.Managing knowledge flows.Adopt appropriate structure for Adopt appropriate structure for

governance.governance.

Perspectives on SAsPerspectives on SAs

- Viewed as second best option.Viewed as second best option.- Alliances need not be permanent.Alliances need not be permanent.- Flexibility is essential.Flexibility is essential.- An internal knowledge network is also a An internal knowledge network is also a

must for organisational learning.must for organisational learning.

Evolution of the strategic role of an MNE in Evolution of the strategic role of an MNE in terms of its overseas operations:terms of its overseas operations:

International (ethnocentric)International (ethnocentric)Multinational (polycentric)Multinational (polycentric)Global (geocentric)Global (geocentric)Transnational (dispersed but Transnational (dispersed but

specialized resources and activities specialized resources and activities integrated into an interdependent integrated into an interdependent worldwide network)worldwide network)

For readings: Characteristics and aspects of For readings: Characteristics and aspects of organizational architecture of organizational architecture of

these strategies.these strategies. Challenges and opportunities Challenges and opportunities

for each of these strategies.for each of these strategies.

Going global: first movers and Going global: first movers and late moverslate movers

Advantages of first movers:Advantages of first movers:Preempt rivals and capture demand by Preempt rivals and capture demand by

establishing a strong brand name.establishing a strong brand name.Capture scale economies ahead of later Capture scale economies ahead of later

entrantsentrantsBenefit from a lower cost structure which Benefit from a lower cost structure which

later entrants find difficult to match.later entrants find difficult to match.Create high switching costs making it Create high switching costs making it

difficult for later entrants to win business.difficult for later entrants to win business.

Disadvantages:Disadvantages: Pioneering costs can be heavy.Pioneering costs can be heavy.

Chances of survival better if a firm enters after Chances of survival better if a firm enters after others have already created potential.others have already created potential.

Regulations can change to the benefit of later Regulations can change to the benefit of later entrants.entrants.

Factors that may prevent companies Factors that may prevent companies from venturing abroad:from venturing abroad:

““Liabilities of Origin” – Christopher Liabilities of Origin” – Christopher Bartlett & Samanthra GhoshalBartlett & Samanthra Ghoshal

Feeling trapped “in prison of local Feeling trapped “in prison of local standards” and of strong domestic standards” and of strong domestic demand for productsdemand for products

Being unaware of the company’s global Being unaware of the company’s global potentialpotential

Limited exposure to global competition, Limited exposure to global competition, leaving companies overconfident or blind leaving companies overconfident or blind to potential dangersto potential dangers

But successful emerging MNEs have But successful emerging MNEs have overcome these constraints through:overcome these constraints through:

—Push from home – eg. SAMSUNG from Push from home – eg. SAMSUNG from South Korea and Thermax from IndiaSouth Korea and Thermax from India

—Pull from abroad – eg. Ranbaxy of IndiaPull from abroad – eg. Ranbaxy of India

Strategies for Late Movers:Strategies for Late Movers:

(Bartlett & Ghoshal)(Bartlett & Ghoshal)

Benchmark and sidestepBenchmark and sidestep

eg. Jollibee of Philippines against McDonaldeg. Jollibee of Philippines against McDonaldConfront and ChallengeConfront and Challenge

eg. BRL Hardy against established wine eg. BRL Hardy against established wine exporters in Europeexporters in Europe

Learning how to learnLearning how to learn• Protect the pastProtect the past• Build the futureBuild the future

Exercise:Exercise:

How MNEs can manage conflicting How MNEs can manage conflicting demands ofdemands of

global integrationglobal integration local responsivenesslocal responsiveness world wide learningworld wide learning

Focus on MNE strategy and Organization

Main preoccupations :

Internal consistency and cohesion of the organizational set-up

Compatibility of organizational features with the strategy of the company or the fit between strategy and organization

Fit between company strategy and organization on the one hand and the competitive conditions in the market

These make demands on;

Structure of the company in its operational aspects :

− Decision-making− Division into subunits− Coordination / integration

Control systems and incentives Processes Organizational culture Capacity to change, innovate and

learn

Structuring International Business Operations

Organizational structure typically changes:

As firms expand their international operations or modify their strategic approach.

A common sequence:An Export Department

International Division Structure with either

Geography or

Product Line as the basis for sub-division

Global Area Structure with countries or regions as basis

Or

Global Product Structure where a company organizes around a diversified set of products or businesses

Global Matrix Structure

Where geographic and product division structures overlap and decision making is shared between product and geographic managers.

Thinking beyond the Matrix structure.

Organizational structure typically Organizational structure typically changes:changes:

When firms expand their international When firms expand their international operations operations oror

They modify their strategic approach.They modify their strategic approach.

I A common first step:I A common first step:

An export manager with some staffAn export manager with some staff

OrOr

An export departmentAn export department

Functional DivisionsFunctional Divisions

Product Division Product Division GeographicalGeographical

StructureStructure Area StructureArea Structure

Global Product StructuresGlobal Product Structures

OROR

Global Area Global Area Global ProductGlobal Product

StructureStructure Structure Structure

Global Matrix StructureGlobal Matrix Structure

Flexible Matrix StructureFlexible Matrix Structure

OROR

Typical firm Structure:Typical firm Structure:

I . Firm with a narrow product line:I . Firm with a narrow product line:

II. Firm with a wide product line:II. Firm with a wide product line:

Note: Export manager and staff may report directly Note: Export manager and staff may report directly to CEO.to CEO.

CEOCEO

FINANCEFINANCE PRODNPRODN HRHR MARKETINGMARKETING EXPORT DEPTEXPORT DEPT

Small Small AppliancesAppliances

Large Large AppliancesAppliances

Industrial Industrial EquipmentEquipment

Financial Financial ServicesServices

III. International Division on Product III. International Division on Product Structure Basis:Structure Basis:

IV. International Division on Area IV. International Division on Area Structure Basis:Structure Basis:

Example: Harley – Davidson of U.SExample: Harley – Davidson of U.S

V. The Global area structure:V. The Global area structure:

CORP.STAFFCORP.STAFF

Line ManagementLine Management

CEOCEO

FINANCEFINANCEPRODNPRODN R&DR&DMARKETINGMARKETING EXPORT DEPTEXPORT DEPT

N. AMERICAN. AMERICA EUROPEEUROPE L. AMERICAL. AMERICA ASIAASIA

INDIAINDIA

CHINACHINA

INDONESIAINDONESIA

V. The Global Product Structure:V. The Global Product Structure:

CORP.STAFFCORP.STAFF

Line ManagementLine Management

CEOCEO

FINANCEFINANCEPRODNPRODN R&DR&DMARKETINGMARKETING PERSONNELPERSONNEL

Product Product Divn. ADivn. A

Product Product Divn. BDivn. B

Product Product Divn. CDivn. C

Product Product Divn. EDivn. E

INDIAINDIACHINACHINA

INDONESIAINDONESIA

Product Product Divn. CDivn. C

EUROPEEUROPE ASIAASIA MIDEASTMIDEAST AFRICAAFRICA

Marketing Marketing ProductionProduction FinanceFinance

VI. The Global Matrix Structure :VI. The Global Matrix Structure :

CEOCEO

FINANCEFINANCEPRODNPRODN R&DR&DMARKETINGMARKETING PERSONNELPERSONNEL

EuropeEurope TractorsTractors AsiaAsia Other area Other area & Product & Product DivisionsDivisions

GM, GM, Tractors, Tractors,

AsiaAsia

GM, GM, Tractors, Tractors, EuropeEurope

Political Risk Rating Method –Political Risk Rating Method –A Model (IMR)A Model (IMR)

Type of Type of RiskRisk

ExamplesExamples Minimum Minimum ScoreScore

Maximum Maximum ScoreScore

Pol./ Econ. Pol./ Econ. EnvironmentEnvironment

Pol. StabilityPol. Stability 33 1414

Possibility of Internal conflictsPossibility of Internal conflicts 00 1414

External threat to stabilityExternal threat to stability 00 1212

Degree of econ. ControlDegree of econ. Control 55 99

Dependability as trading Dependability as trading partnerpartner

44 1212

Constitutional guaranteesConstitutional guarantees 22 1212

Effectiveness of public Effectiveness of public administrationadministration

22 1212

Quality of labour relations / Quality of labour relations / social peacesocial peace

33 1515

Domestic Econ. Domestic Econ. ConditionsConditions

Pop. SizePop. Size 44 88

Per cap. incomePer cap. income 22 1010

Econ. Growth last 5 yearsEcon. Growth last 5 years 22 77

Potential growth last 3 Potential growth last 3 yearsyears

33 1010

Inflation last 2 yearsInflation last 2 years 22 1010

Openness of cap. Mkt for Openness of cap. Mkt for foreignersforeigners

33 77

Availability of high quality Availability of high quality labourlabour

22 88

Ability to hire foreignersAbility to hire foreigners 22 88

Availability of energy Availability of energy resourcesresources

22 1414

Regulations on envrtRegulations on envrt 44 88

Standard of infrast.Standard of infrast. 22 1414

Type of RiskType of Risk ExamplesExamples Minimum Minimum ScoreScore

Maximum Maximum ScoreScore

Type of RiskType of Risk ExamplesExamples Minimum Minimum ScoreScore

Maximum Maximum ScoreScore

External Econ. External Econ. RelationsRelations

Import restrictionsImport restrictions 22 1010

Export restrictionsExport restrictions 22 1010

FDI restrictionsFDI restrictions 33 99

Brand / T. Mark protectionBrand / T. Mark protection 33 99

Rstres on money transfersRstres on money transfers 22 88

Currency revaluation Currency revaluation previous 5 yearsprevious 5 years

22 77

BOP conditionBOP condition 22 99

Amount of oil/energy Amount of oil/energy importsimports

33 1414

Intl financial standingIntl financial standing 33 88

Currency exchange Currency exchange restrictionsrestrictions

22 88

DirectDirect IndirectIndirect

Defensive / Defensive / ReactiveReactive

Legal actionLegal action Risk insuranceRisk insurance

(eg: ECGC of India)(eg: ECGC of India)

Make operations Make operations dependent on parent co.dependent on parent co.

Contingency planning Contingency planning methodsmethods

Control makeup of Control makeup of managementmanagement

Home country Home country government pressuregovernment pressure

Linking / MergingLinking / MergingLong-term agreementsLong-term agreements Lobbying foreign Lobbying foreign

governmentsgovernments

JVsJVs

Promoting host goalsPromoting host goals

Becoming good Becoming good corporate citizen to corporate citizen to host countryhost country

Approaches to managing riskApproaches to managing risk

MODEL FOR ECONOMIC VIABILITY PROFILEMODEL FOR ECONOMIC VIABILITY PROFILEWITH WEIGHTS FOR DIFFERENT SETSWITH WEIGHTS FOR DIFFERENT SETS

CriteriaCriteria IndicatorIndicator WeightWeight

Growth RateGrowth Rate Change of GDPChange of GDP

Level of DevelopmentLevel of Development GDP Per CapitaGDP Per Capita

InflationInflation RateRate 40%40%

InvestmentsInvestments as % of GDPas % of GDP

Fiscal PolicyFiscal Policy Net Budget Deficit as % of GDPNet Budget Deficit as % of GDP

External Debt External Debt as % of Exports as % of Exports 30% 30%

Debt Repayment Debt Repayment as % of Exports as % of Exports

International Trade International Trade Liquidity Liquidity

Balance of Trade in % of GDP Balance of Trade in % of GDP

Foreign Exchange reserves in % of Foreign Exchange reserves in % of Imports Imports

30%30%

EUROMONEYEUROMONEY: : COUNTRY RISK ASSESSMENTCOUNTRY RISK ASSESSMENT Economic Data (25% weight)Economic Data (25% weight) Political Risk (25% weight)Political Risk (25% weight) Debt indicators (10% weight)Debt indicators (10% weight) Debt defaulted/rescheduled (10%)Debt defaulted/rescheduled (10%) Credit ratings (10%)Credit ratings (10%) Access to bank finance (5%)Access to bank finance (5%) Access to short-term finance (5%)Access to short-term finance (5%) Access to international bond/syndicated Access to international bond/syndicated

loan loan markets (5%)markets (5%) Access to forfaiting (5%)Access to forfaiting (5%)

Indian Corporate Acquisitions AbroadIndian Corporate Acquisitions Abroad

2007 – Deals worth $42.6 b. (China 2007 - $13b. Russia - $15 b)2007 – Deals worth $42.6 b. (China 2007 - $13b. Russia - $15 b)

Largest: Tata – Corus; Hindalco – Novelis (Canada)Largest: Tata – Corus; Hindalco – Novelis (Canada)

Between 2003 – 2004: Value of foreign acquisitions more than Between 2003 – 2004: Value of foreign acquisitions more than doubled each year, with a compound annual growth of 108%doubled each year, with a compound annual growth of 108%

SuccessSuccess rate : Between 2003 and 2004 in 42 Indian deals, about rate : Between 2003 and 2004 in 42 Indian deals, about one-third generated 10% above the normal index for foreign one-third generated 10% above the normal index for foreign acquisitions.acquisitions.

Bains’ Study 2005: Only one-third of all foreign deals are Bains’ Study 2005: Only one-third of all foreign deals are successful one year after announcement.successful one year after announcement.

Indian companies, on average are as successful as these US and Indian companies, on average are as successful as these US and European peers.European peers.

Some important ones:Some important ones:

Tata – TetleeTata – Tetlee

Videocon – Thomson (color picture tube plants) 2005Videocon – Thomson (color picture tube plants) 2005

VSNL – Teleglobe (Canada) – 2006VSNL – Teleglobe (Canada) – 2006

Dr. Reddy Labs – Betapharm (Germany) – 2006Dr. Reddy Labs – Betapharm (Germany) – 2006

Apollo – Dunlop South Africa (2006)Apollo – Dunlop South Africa (2006)

Mahindra – Valtra (Finnish truck co.)Mahindra – Valtra (Finnish truck co.)

United Breweries (Whyte & MackKay – Scotland)United Breweries (Whyte & MackKay – Scotland)

Godrej – Keyline (FMCG firm, UK)Godrej – Keyline (FMCG firm, UK)

Jindal Steel & Power – iron ore mine in Bolivia (2006)Jindal Steel & Power – iron ore mine in Bolivia (2006)

Tata Tea – Energy Brands (US)Tata Tea – Energy Brands (US)

Tata Motors – Jaguar / Land RoverTata Motors – Jaguar / Land Rover

ONGC Videsh – Ominex, ColumbiaONGC Videsh – Ominex, Columbia

Suzlon Energy – Hansen Transmission, BelgiumSuzlon Energy – Hansen Transmission, Belgium

Indian IT could do substantial global acquisitions, Indian IT could do substantial global acquisitions, but the larger acquisitions so far have been in other but the larger acquisitions so far have been in other areas.areas.

Acquisitions give Indian firms:Acquisitions give Indian firms: a global scalea global scale a portfolio of recognized brandsa portfolio of recognized brands access to huge marketsaccess to huge markets

But also involve as key challenges:But also involve as key challenges: difficult integration processes between different difficult integration processes between different

management mindsetsmanagement mindsets Stark cultural differencesStark cultural differences Out-of-sync operational processesOut-of-sync operational processes HRs, deriving value through organizational structuresHRs, deriving value through organizational structures Navigating complex labour laws Navigating complex labour laws

Indian MNCs in Boston Consulting Indian MNCs in Boston Consulting Group’s Challengers 100Group’s Challengers 100

Bajaj AutoBajaj Auto - Automotive Equipment- Automotive EquipmentBharat ForgeBharat ForgeBirla HindalcoBirla Hindalco - Non-ferrous metals- Non-ferrous metalsCipla Cipla - Pharmaceuticals- PharmaceuticalsCromption GravesCromption Graves - Engineered Products- Engineered ProductsDr. Reddy’sDr. Reddy’s - Pharmaceuticals- PharmaceuticalsInfosys Technologies Infosys Technologies - IT Services / BPO- IT Services / BPOLarsen & ToubroLarsen & Toubro - Engineering Services- Engineering ServicesMahindra & MahindraMahindra & Mahindra - Automotive Equipment- Automotive EquipmentSatyam Computer Services – IT Services / BPOSatyam Computer Services – IT Services / BPO

Suzlon EnergySuzlon Energy - Wind energy- Wind energyTata Consultancy ServicesTata Consultancy Services - IT Services / BPO- IT Services / BPOTata MotorsTata Motors - Automotive - Automotive

EquipmentEquipmentTata SteelTata Steel - Steel- SteelTata TeaTata Tea - Food and Beverages- Food and BeveragesVideocon IndustriesVideocon Industries - Consumer Electronics- Consumer ElectronicsVSNLVSNL - Telecom Networks- Telecom NetworksWipro TechnologiesWipro Technologies - IT Services / BPO- IT Services / BPO

China Challengers (41)China Challengers (41)

Bay steelBay steelBYD BYD – Consumer Electronics– Consumer ElectronicsChanghong Changhong – Home Appliances– Home AppliancesCherry AutomobilesCherry AutomobilesChina MobilesChina MobilesCIMC CIMC – Shipping– ShippingCNOOC CNOOC – Oil– OilFAW FAW – Auto equipment– Auto equipmentHaier Haier – Home appliances– Home appliancesHisenseHisense – Consumer Electronics– Consumer ElectronicsHuawei Technologies Huawei Technologies – Telcom Equipment– Telcom EquipmentJohnson Electric Johnson Electric – Engineering products– Engineering productsLenovo Lenovo – Computers– ComputersPetro China Petro China – Oil– OilTCL Corporation TCL Corporation – Consumer Electronics– Consumer ElectronicsZTE ZTE – Telcom Equipment– Telcom Equipment

Off-shoring ServicesOff-shoring ServicesWidely used as a particular subcategory of Widely used as a particular subcategory of

“outsourcing”“outsourcing”So 4 types of ‘outsourcing’ based on location and So 4 types of ‘outsourcing’ based on location and

control / ownership are:control / ownership are:1.1. Captive onshore outsourcing: shift of intra-firm Captive onshore outsourcing: shift of intra-firm

supplies to an affiliated firm in the home countrysupplies to an affiliated firm in the home country2.2. Non-captive: if shift benefits a non-affiliated firm Non-captive: if shift benefits a non-affiliated firm

in the home economyin the home economy3.3. captive offshoring: when supplies sourced from captive offshoring: when supplies sourced from

an affiliated firm abroadan affiliated firm abroad4.4. Non captive offshoring: When supplies are Non captive offshoring: When supplies are

source from a non-affiliated firm abroad.source from a non-affiliated firm abroad.Outsourcing is not a new phenomenon.Outsourcing is not a new phenomenon.

Potential for offshoring depends on:Potential for offshoring depends on:• technical and institutional separabilitytechnical and institutional separability• to what extent the task is standardised to what extent the task is standardised • transaction and managerial costs within the firm relative transaction and managerial costs within the firm relative

to outside suppliersto outside suppliers• production costsproduction costs• size of the marketsize of the market

The location of offshored services depends on:The location of offshored services depends on:• labour costslabour costs• trade coststrade costs• quality of institutions, specially legal frameworkquality of institutions, specially legal framework• tax and investment regimetax and investment regime• quality of infrastructure – esp. telecomsquality of infrastructure – esp. telecoms• skills – esp. language and computer skills.skills – esp. language and computer skills.

Two-thirds of offshoring is estimated to be captive Two-thirds of offshoring is estimated to be captive offshoringoffshoring

Estimates of size of offshoring services Estimates of size of offshoring services in IT and Business Process:in IT and Business Process:

OECD (2005): $32 b. (2001)OECD (2005): $32 b. (2001)McKinsey (2003): $35 b. (2001)McKinsey (2003): $35 b. (2001)

India’s ranking:India’s ranking:In computer & Information In computer & Information

Services: 1(@ $ 31 b.)Services: 1(@ $ 31 b.)In computer Information and In computer Information and

other business services: 8other business services: 8Analyse:Analyse:

India’s strengthsIndia’s strengthsWeaknessesWeaknesses

Data on Indian IT exportsData on Indian IT exports

FY – 07FY – 07 FY (est.) 08FY (est.) 08

IT softwareIT software $22.9 b.$22.9 b. $ 28 – 29 b.$ 28 – 29 b.

ITes – BPOITes – BPO $ 8.4 b.$ 8.4 b. $10.5 – 11 b.$10.5 – 11 b.

TotalTotal $31.4 b.$31.4 b. $ 39 – 40 $ 39 – 40 b.b.

Industry employment in FY 07 - 1.6 millionIndustry employment in FY 07 - 1.6 million

indirect employment due toindirect employment due to

IT – ITesIT – ITes -- nearly 6 millionnearly 6 million

TotalTotal -- 7.5 million7.5 million

Process of International MarketingProcess of International Marketing

Motives for international marketingMotives for international marketing− GrowthGrowth− ProfitabilityProfitability− Risk spreadRisk spread− Access to imported inputsAccess to imported inputs− Uniqueness of product / servicesUniqueness of product / services− Life cycle-oriented marketing Life cycle-oriented marketing

opportunitiesopportunities− Spreading R&D costsSpreading R&D costs

SWOT AnalysisSWOT Analysis

Decision to enter international marketsDecision to enter international markets

International marketing decisionsInternational marketing decisions– Market identification and targeting (Segments)Market identification and targeting (Segments)– Choice of entry modeChoice of entry mode– Product decisionsProduct decisions– Distribution channel decisionsDistribution channel decisions– Market promotion decisionsMarket promotion decisions

Enter international marketsEnter international markets

Review performanceReview performance

Consolidate marketing efforts for global Consolidate marketing efforts for global marketingmarketing

Computation of Market PotentialComputation of Market PotentialIs evaluated, according to one method by 8 Is evaluated, according to one method by 8 dimensions with weights attached to each:dimensions with weights attached to each:

Measures Used

Market Size 10/50 Urban, rural populations – Electricity consumption etc

Market growth rate 6/50 GDP growth rate

Market intensity 7/50 GNI per capita as per PPP – private consumption.

Market consumption capacity

5/50 Percentage of middle class in consumption

Commercial infrastructure 7/50 Telephone and road density, retail outlets etc

Market receptivity 6/50 Trade as percentage of GDP

Country risk 4/50

Analysis of international marketsAnalysis of international markets2 Models :

BCG Matrix:

Classification of markets on the basis of growth rate and market share:

High – growth High – share products (stars) Low – growth High – share products (cash cows) High – growth Low – share products (Question marks) Low – growth Low – share products (Dogs)

Market attractiveness / company strength matrix:Market attractiveness / company strength matrix:

Combining market attractiveness and competitive Combining market attractiveness and competitive strength of a company, both based on various strength of a company, both based on various factors. Firm’s focus is to be at the point where factors. Firm’s focus is to be at the point where the two are very high.the two are very high.