BBA VIII Semester. Strategic Management. POST RAJ POKHAREL M.Phil. (TU) 01/2010), Ph.D. in Progress

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1 BBA VIII Semester Strategic Management POST RAJ POKHAREL M.Phil. (TU) 01/2010), Ph.D. in Progress 1

2 Global Business Environment Concept, Types and analysis of global business environment, Foreign market analysis and entry strategy, crosscountry differences, strategy options for entering and competing in foreign markets, Strategic alliances and joint ventures, Networking strategies

3 Just Highlight What are involved in International Business? International Trade (export, import, wholesaling, retailing) Foreign manufacturing, assembly of goods abroad. International transportation (airlines, shipping companies) Investment in tourism, banking, insurance) Mass communication (satellite network) Transportations in intellectual property involving copyrights, trademarks,. 3

4 Just Highlight Nature of International Business International Trade Portfolio Investment FDI MNCs Multinational: There are about 70,000 multinational companies. The ownership belongs to one country. Transnational: Ownership is the main considerable factor to differentiate with multinational companies. The shares are distributed and ownership are not controlled over one country. You have one product and your customers are scattered throughout over the world. Sony 4

5 Just Highlight Classification of International Business environment A Turbulent Environment (ups and downs) Rapid changes on a regular basis Innovations Competition Changes in Government regulations A Technically Complex Environment The electric, computer, telecom industries operate in technically complex environment (New development, Short product life, IBM's experience). Hostile Environment: War like environment Pepsi and Coca cola. They are fighting for global market rather than local market. Diverse type of environment: Philip Morris company has 1000 products. Every product has uniqueness in international market. McDoland, having different variety as per the nature of the country. McDonald Singapore, Mcdoland India, etc. 5

6 Global Business Environment International business: the study of transactions taking place across national borders for the purpose of satisfying the needs of individuals and organizations. Multinational enterprises (MNEs): a company headquartered in one country but having operations in other countries. 6

7 Four Stages of Globalization Domestic stage: market potential is limited to the home country production and marketing facilities located at home International stage: exports increase company usually adopts a multi-domestic approach Multinational stage: marketing and production facilities located in many countries more than 1/3 of its sales outside the home country Global (or stateless) stage: making sales and acquiring resources in whatever country offers the best opportunities and lowest cost ownership, control, and top management tend to be dispersed

8 Four Stages of Globalization 1. Domestic 2. International 3. Multinational 4. Global Strategic Orientation Domestically Oriented Export- Oriented multi-domestic Multinational Global Stage of Development Initial foreign involvement Competitive positioning Explosion of international operations Global Cultural Sensitivity Of little importance Very important Somewhat important Critically important Manager Assumptions One best way Many good ways The least-cost way Many good ways

9 Global Environment Factors Economic Economic development Infrastructure Resource and product markets Per capita Income Exchange rates Organizat ion Economic conditions Sociocultural Socio values, beliefs Language Legal-Political Political risk Government takeovers Religion (objects, taboos, holidays) Tariffs, quotas, taxes Terrorism, political instability Laws, regulations Kinship (Affinity, relationship) patterns Formal education, literary Time orientation

10 Economic Environment Factors Economic development Infrastructure Resource and product markets Exchange rates Inflation Interest rates Economic growth 10

11 Economic Development Countries categorized as developing or developed Criterion used to classify is per capita income Developing countries have low per capita incomes LDCs located in Asia, Africa, and South America Developed are North America, Europe, & Japan Driving global growth in Asia, Eastern Europe (Belarus, Bulgaria, Poland, Russia), & Latin America (Brazil, Colombia, Costa Rica) 11

12 Infrastructure A country s physical facilities that support economic activities Airports, highways, and railroads Energy-producing facilities Communication facilities 12

13 Resource and Product Markets When operating in another country... Managers must evaluate market demand To develop plants, resource markets must be available raw materials and labor Corporate Example McDonald 13

14 Exchange Rates Rate at which one country s currency is exchanged for another country s Has become a major concern for companies doing business internationally Changes in the exchange rate can have major implications for profitability of international operations 14

15 The Legal-Political Environment Political Risk due to events or actions by host governments Loss of assets Loss of earning power Loss of managerial control Government takeovers Acts of violence Political Instability Events such as riots (insurgence, rebellion), revolutions, or government upheavals that affect the operations of an international company 15

16 Laws and Regulations Government laws and regulations differ from country to country Make doing business a true challenge for international firms Capital Transfer Act : Congenial or not Taxation on transfer for funds Profit remit permission and taxation on profit limit. Tax to foreign companies, services Access to use foreign technology, plants, software and use of services (service tax provision is present or not) 16

17 Sociocultural Environment Culture shared knowledge, beliefs, values, common modes of behavior, and ways of thinking among members of a society Intangible Difficult for outsider to learn Managers need to understand difference in social values to comprehend local cultures and deal with them effectively 17

18 The triad Most global transactions take place within and between three key regions: the United States, the European Union and Japan; these are referred to as: the triad.

19 The triad: the United States (US) The US has the largest economy in the world with a GDP of over $10 trillion. The US is part of the North American Free Trade Agreement (NAFTA) with Canada and Mexico. The US economy is significantly larger than that of its two trading partners and is therefore a triad member on its own.

20 The triad: the European Union (EU) The EU is composed of the countries in the EU15 (Austria, Belgium, Denmark, Finland, Germany, Greece, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the UK) and twelve new, mainly Central European, countries that joined in 2004 and Now, it is said that the collective GDP of the EU is greater than that of the US and Japan.

21 The triad: Japan Japan is the largest economy in Asia. Japan is the 4th largest importer and 4th largest exporter in the world.

22 Foreign market analysis and entry strategy Market Analysis. 1. Market potential. 2. Economic growth. 3. Availability of natural resources. 4. Availability of labor. 5. Political risk. 6. Market access & trade barrier. 7. Factor costs & conditions. Labor cost. Land material capital cost. 8. Shipping considerations. 9. Country infrastructure. 10. Foreign exchange. 22

23 Foreign market analysis and entry strategy You have no choice but to operate in a world shaped by globalization and the information revolution. There are two options: Adapt or die. Andrew S. Grove Co-founder and Senior Advisor, Intel Corporation 23

24 Foreign market analysis and entry strategy Creating a product market profile 9 W s. 1. Who buys our product? 2. Who does not buy our product? 3. What need or function does our product serve? 4. What problem does our product solve? 5. What are customer s currently buying to satisfy the need or solve the problem for which our product is targeted? 6. What price are they paying for the products they are currently buying? 7. When is our product purchased? 8. Where is our product purchased? 9. Why is our product purchased? 24

25 Foreign market analysis and entry strategy Market selection criteria. 1. Market potential. 2. Market access. 3. Shipping cost & time. 4. Potential competition. 5. Service requirement. 6. Product fit. Visit the potential market.

26 Foreign market analysis and entry strategy Entry & expansion decision model. A. Exporting. Exporting is appropriate strategy when one of more of the following conditions prevail. a. The volume of foreign business is not large enough to justify production in the foreign market. b. Cost of production in the foreign market is high. c. The foreign market is characterized by production bottlenecks like infrastructural problems, material supplies etc. d. There are political or other risks of investment in the foreign country. e. The company has no permanent interest in the foreign market or there is no guarantee of the market available for a long period.

27 Foreign market analysis and entry strategy f. Foreign investment is not favored by the foreign country concerned. g. Licensing or contract manufacturing is not a better alternative. Export marketing requires. a. An understanding of target market environment. b. The use of marketing research & the identification of market potential. c. Decisions concerning product design, pricing, distributions & channels, advertising & communication.

28 Export related problems. a. Logistics. o Arranging transportation. o Transport rate determination. o Handling documents. o o o o Foreign market analysis and entry strategy Obtaining financial information. Distribution co-ordination. Packaging. Obtaining insurance. b. Legal procedure. o Product liability. o Licensing. o Customer / Duty. c. Servicing Export. o Providing parts availability. o Providing repair service. o o Providing technical advice. Providing warehousing. d. Sales Promotion. o Advertising. o Sales effort. o Marketing information. e. Foreign market intelligence o Locating markets. o Trade restrictions. o Competition overseas.

29 Foreign market analysis and entry strategy B. Sourcing. The opposite of exporting is importing. Sourcing decisions factors. a. Factor cost & conditions. b. Logistics. c. Country infrastructure. d. Political risk. e. Market access. f. Exchange rate, availability & convertibility of local money.

30 Foreign market analysis and entry strategy C. Licensing. Licensing is an agreement that permits foreign company to use industrial property (i.e. patents, trademarks & copyrights), technical know-how & skills (i.e. feasibility studies, manuals, technical advice), architectural & engineering design or any combination of these in a foreign market.

31 Cross-country differences Cross-Country Differences in Cultural, Demographic, and Market Conditions Cultures and lifestyles differ among countries Differences in market demographics and income levels Variations in manufacturing and distribution costs Fluctuating exchange rates Differences in host government economic and political demands 31

32 Q. How does cross country difference in cultural, demographic and market condition pose challenge to the international market seeker?7m (PU 2010 Spring, Q2a) 32

33 How Markets Differ from Country to Country Consumer tastes and preferences Consumer buying habits Market size and growth potential Distribution channels Driving forces Competitive pressures One of the biggest concerns of companies competing in foreign markets is whether to customize their product offerings in each different country market to match the tastes and preferences of local buyers or whether to offer a mostly standardized product worldwide.

34 Different Countries Have Different Locational Appeal Manufacturing costs vary from country to country based on Wage rates Worker productivity Inflation rates Energy costs Tax rates Government regulations Quality of business environment varies from country to country Suppliers, trade associations, and makers of complementary products often find it advantageous to cluster their operations in the same general location

35 Fluctuating Exchange Rates Affect a Company s Competitiveness Currency exchange rates are unpredictable Competitiveness of a company s operations partly depends on whether exchange rate changes affect costs favorably or unfavorably Competitive impact of fluctuating exchange rates Exporters always gain in competitiveness when the currency of the country where goods are manufactured grows weaker Exporters are disadvantaged when the currency of the country where goods are manufactured grows stronger

36 Referecne Book Strategic Management Pearce and Robinson 36

37 Strategy options for entering and competing in foreign markets Exporting Licensing Franchising strategy Strategic alliances or joint ventures Multi-country strategy Global strategy 37

38 Export Strategies Involve using domestic plants as a production base for exporting to foreign markets Excellent initial strategy to pursue international sales Advantages Conservative way to test international waters Minimizes both risk and capital requirements Minimizes direct investments in foreign countries An export strategy is vulnerable when Manufacturing costs in home country are higher than in foreign countries where rivals have plants High shipping costs are involved Adverse fluctuations in currency exchange rates occur

Licensing Strategies Licensing makes sense when a firm Has valuable technical know-how or a patented product but does not have international capabilities to enter foreign markets Desires to avoid

39 Licensing Strategies Licensing makes sense when a firm Has valuable technical know-how or a patented product but does not have international capabilities to enter foreign markets Desires to avoid risks of committing resources to markets which are Unfamiliar Politically volatile Economically unstable Disadvantage Risk of providing valuable technical know-how to foreign firms and losing some control over its use

40 Franchising Strategies Often is better suited to global expansion efforts of service and retailing enterprises Advantages Franchisee bears most of costs and risks of establishing foreign locations Franchisor has to expend only the resources to recruit, train, and support franchisees Disadvantage Maintaining cross-country quality control

41 Achieving Global Competitiveness via Cooperative Agreements Cooperative agreements with foreign companies are a means to Enter a foreign market or Strengthen a firm s competitiveness in world markets Purpose of alliances / joint ventures Joint research efforts Technology-sharing Joint use of production or distribution facilities Marketing / promoting one another s products

42 Strategic Alliance and JV Strategic Alliance: A coalition of persons in the same or complimentary business to gain long-term financial, operational, and marketing advantages without jeopardizing competitive independence. Eg: Co-marketing Agreements, Joint Product Development Agreements, Distribution Agreements, Licensing Agreements, Teaming Agreements, e-commerce Agreements Joint Venture: A business undertaking by two or more persons engaged in a singe defined project. The necessary elements are: (1)An express or implied agreement; (2)A common purpose that the group intends to carry out; (3) Shared profits and losses; and, (4)Each member s equal voice in controlling in the project. 42

43 Why Strategic Alliances or Joint Ventures? Opportunity for growth Opportunity to share risk / resources Access to markets not otherwise available Possibility of broader brand recognition Opportunity to expand capabilities Access to technology and business methods

44 Strategic Appeal of Strategic Alliances Gain better access to attractive country markets Capture economies of scale in production and/or marketing Fill gaps in technical expertise or knowledge of local markets Share distribution facilities and dealer networks Direct combined competitive energies toward defeating mutual rivals Take advantage of partner s local market knowledge and working relationships with key government officials in host country Useful way to gain agreement on important technical standards

45 Pitfalls of Strategic Alliances Overcoming language and cultural barriers Dealing with diverse or conflicting operating practices Time consuming for managers in terms of communication, trust-building, and coordination costs Mistrust when collaborating in competitively sensitive areas Clash of egos and company cultures Dealing with conflicting objectives, strategies, corporate values, and ethical standards Becoming too dependent on another firm for essential expertise over the long-term

Localized Multicountry Strategy or a Global

conditions and buyer preferences in each

46 Localized Multicountry Strategy or a Global Strategy? Strategic Issue Whether to vary a company s competitive approach to fit specific market conditions and buyer preferences in each host county Whether to employ essentially the same strategy in all countries or

47 Q. What are entry strategies for entering into foreign market? 8 (PU 2011, fall, 2a) Name and describe the five alternative strategic options for entering into international markets. 7 (2013, Spring, 1b). 47

48 What Is a Think-Global, Act-Global Approach to Strategy Making? A company employs the same basic competitive approach in all countries where it operates.

49 What Is a Think-Global, Act-Global Approach to Strategy Making? A company employs the same basic competitive approach in all countries where it operates.

50 Networking strategies A collaborative (Joint, shared) approach to program delivery based upon: 1) focus on the common vision within the network; 2) confidence that individual organizations can be relied upon to do what they say they ll do and have the networks best interest in Aligning your network towards achieving your goals 50

Lecture 13 International Trade: Economics 181 Foreign Direct Investment (FDI) and Multinational Corporations (MNCs)

Lecture 13 International Trade: Economics 181 Foreign Direct Investment (FDI) and Multinational Corporations (MNCs) REMEMBER: Midterm NEXT TUESDAY. Office hours next week: Monday, 12 to 2 for Ann Harrison