Globalization of markets & competition Levitt is widely credited with coining the term globalization through an article entitled "Globalization of Markets", which appeared in the May–June 1983 issue of Harvard Business Review. However, as a NYTimes article notes, the term globalization was in use well before (at least as early as 1944) and had been used by economists as early as 1981. However, Levitt popularized the term and brought it into the mainstream business audience.
Globalization is the process of economic integration which includes: Free flow of goods and services Free low of capital Free flow of Technology Free flow of Human Resources
Process of globalization The "Bretton Woods" Agreement which was signed in 1944 considered the creation of three economic institutions: the International Trade Organisation (ITO), the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), also called the World Bank.
The IMF and the IBRD were duly created in 1947. In 1946 and 1947, several meetings took place to negotiate the creation of the ITO. As the drafting of the ITO Charter was not completed at that time, the GATT entered into force on 1 January 1948 on a provisional basis.
Negotiations focused on three main parts: one part dealt with the preparation of a charter for the ITO, the second part focused on negotiating a multilateral agreement to reciprocally reduce tariffs, and the third one on drafting the general principles and obligations relating to tariff reduction. The second and third parts constituted the GATT.
The GATT remained applicable on the basis of the Protocol of Provisional Application for several decades. It was only in 1995 when the WTO came into existence that a real institution was created. Establishment of ITO was never realized as it was not ratified by many members
Meanwhile15 countries had begun talks in December 1945 to reduce and bind customs tariffs. With the Second World War only recently ended, they wanted to give an early boost to trade liberalization, and to begin to correct the legacy of protectionist measures which remained in place from the early 1930s.
First Round Meeting (GenevaRound, 1947), The first round, with 23 countries meeting in Geneva in 1947, led to the establishment of GATT itself. This first round of negotiations resulted in a package of trade rules and 45,000 tariff concessions affecting $10 billion of trade, about one fifth of the world’s total.
Second round of multilateral trade negotiationsAnnecy, France, 1949 In this second round, participants agreed to exchange some 5,000 tariff concessions, 10 more countries signed the General Agreement.
The third round, Torquay, UK, 1950 A year later, the negotiations moved to England. This third round focused again on tariff reductions. The number of participants rose to 38.
The fourth round, Geneva Round(1956) Resulted in further reduction in tariffs The Geneva Round completed in May 1956, resulting in $2.5 billion in tariff reductions
The Dillon Round, Geneva, 1960-61 It continued GATT’s efforts to progressively reduce tariffs U.S. Treasury Secretary and former Under Secretary of State, Douglas Dillon, who first proposed the talks. Twenty-six countries took part in the round. Resulted in reducing over $4.9 billion in tariffs
The Kennedy Round, Geneva,1964-1967 (Sixth Round) GATT trade rounds were getting longer and more complicated. In the sixth, the Kennedy Round, participation surged to 62 countries. The subjects discussed also expanded, from the traditional tariff cuts to new trade rules, such as those on the use of anti-dumping measures. achieves tariff cuts worth $40 billion of world trade
The seventh Round, i.e. the TokyoRound (1973-1979) focused not only on further reducing the tariffs but also addressed various non-tariff barriers to trade. The result was the negotiation of a series of side agreements they were conditional, meaning that they were only binding for those countries which signed the concerned side agreement. Non –tariff ,anti- dumping, import licensing procedures etc..
Participation swelled again to 102 countries. Concessions were made on $190 billion worth. However, the talks failed to come to grips with fundamental reforms in agricultural trade, and stopped short of providing a new agreement on “safeguards”
The Uruguay Round, 1986-94: the lastand the biggest GATT round In 1986, a GATT round was launched in a developing country for the first time. By now developing countries had become the majority in the GATT system, and in this round they were to play an unprecedented active role in the talks, alongside their more powerful fellow-participants.
In September 1986, trade ministers met in the Uruguay resort of Punta del Este. After a week of tough talking, they agreed to launch new negotiations. It took seven and a half years to complete, and it led to the most fundamental reform of world trade rules since GATT itself was created in 1948.
One signature per countrycovering 23,000 pages The delay allowed participants to develop a clearer view of how world trade could be reformed. The final package was 23,000 pages long, the number of participants in the Uruguay Round had reached 123
The most important result was the creation of the World Trade Organization, almost half a century after the failed attempt to create an International Trade Organization. And with the WTOs creation, the multilateral rules were expanded to cover new areas of trade GATT had only dealt with trade in goods. It was to be replaced on 1 January 1995 by the WTO.
New Agreements reached GATT - to be continued as an agreement dealing with trade in goods GATS – deals with trade in service TRIPS – deals with intellectual property TRIMS –deals with investment
Motivations for global expansion Three primary factors motivate companies to expand internationally a) Economies of scale & Scope b) Avoid dependency on one (home) market c) Low cost production process
Economies of Scale & scope -Companies such as Ford, GM need to produce large quantity in order to achieve economies of scale-However, for many companies, domestic markets no longer provide high level of sales needed to maintain enough volume.-Building a global presence expands an organizations scale of operations, enabling to realize economies of scale
For example, if the plant is used to build 6 million cars per year, the highly specialized techniques of the assembly line allow a significant reduction in costs per car.
Avoid dependency on domestic market Having presence in multiple countries provides market power & reduces the dependence on one market Helps reduce the risk by spreading it.
Low cost production process Powerful motivation is to obtain raw materials at the lowest possible cost. Textile manufacturing in the US is now practically non-existent as companies have shifted to Asia, Mexico, Latin America 75% clothing in US produced else where. Companies like GM, Toyota & BMW moved to other countries to make use of cheap resources.
Decision to internationalize Organisational Factors Environmental Factors
Organisational Factorsa) Decision-maker characteristics -Recognition by the top manager of the importance of international activities. -Reid found four characteristics positively influenced the decision- Foreign Travel & Experience abroad- Foreign Langauage proficiency- Decision makers background- Personal Characteristics
Firm Specific Factorsb) Firm Size -Bigger firms tend to internationalize more than smaller firms -Large firms have greater managerial & financial resources -Attain economies of scale
c) International Appeal -International demand for one’s good -Coco Cola,McDonald’s,Pepsi,Nike etc. have international appeal.-Carrefours concept of hypermarket has international appeal
Environmental Factors Unsolicited Proposals - Unsolicited Proposals from govts, distributors or clients are hard to resist. -Volkswagen decided to enter into china after the chinese delegation requested in 1978. -UPs throgh the internet -International contract of Indian Software firm Ekomate came from British firm through its website by accident
b) The ‘bandwagon’ effect -Competitive firms follow each other in an oligopolistic market-If one firm internalizes –create a bandwagon effect
c) Restrictive domestic policy -France introduced the Royer Law, which restricted the introduction of more hypermarkets-Triggered the expansion of Carrefour to European countries.
d) Attractiveness of the Host country-Host country’s market size-Level of PCI –purchasing power-Favorable foreign investment regulation-Low cost of production
The internalization process –Uppsala Model Johanson and Vahlne formulated this approach in 1977, referring to empirical observations on Swedish manufacturing firms from their studies at the international business department of Uppsala University
One of the basic assumptions of the model is that “the lack of knowledge is an important obstacle to the development of international operations. Experiential learning or learning through experience from a firm’s own activities is an important reason why internationalization is often a slow process
According to Johanson and Vahlne (1977: 23) the necessary knowledge can be acquired but, because of its tacit character, the most efficient solution lies on the firm’s own operations.
Objective or general knowledge and experiential or market-specific knowledge. the former can be easily taught, the latter can only be learnt through personal experience and can never be transferred or separated from the primary source (tacit knowledge). International initiatives require both kinds of knowledge.
The lack of experiential knowledge in a new market forces the firm to pursue a gradual process of internationalization characterized by a sequence of stages presented in what has been called “the establishment chain it has been deemed a clear direct relation between market knowledge and market commitment
To reduce market uncertainty and lower the risks, companies begin their internationalization process in countries that are psychically close before venturing to more distant ones move into those markets they can most easily understand, entering more distant market only at a later stage
-Uppsala Model suggests that a firm’s internationalization is a gradual process.-The firms proceed along the internationalization path in the form of logical steps.-Gather acquisition and use of information determines successive levels of international business activities.
A firm’s international expansion depends on its experiential knowledge of foreign markets. Firms start expanding to neighboring countries or countries with small psychic distance. Firms expand their international operations step by step - small incremental changes
Global Entry Strategies (Uppsala’sLogical Steps) Export Exporting is the first and easier form of market entry Companies have ventured abroad only after establishing themselves at home. Sony, established in 1946, took 11 years to export its first product to the United States,
Export does not need the commitment of large resources & hence less costly Easier for the firm to withdraw its commitments. Inexpensive way to gain experiential knowledge & economies of scale
Due to the physical distance, export strategy does enable the firm to control its operation abroad. Exports could be disrupted due to major political or economic instability Provides very small experiential knowledge
Licensing International licensing is ‘the transfer of patented information and trademarks, information and know-how, including specifi cations, written documents, computer programs, and so forth, as well as information needed to sell a product or service, with respect to a physical territory’
Benefits of licensing include speed to market, especially when a firm lacks sufficient skills, capital, or personnel to enter a foreign market quickly
For instance, German home appliance manufacturers Liebherr and Bosch-Siemens entered several emerging markets such as China and Turkey through licensing agreements for manufacturing refrigerators and other white goods.- 7-Eleven ,US company uses licensing to enter foreign markets
In turn, emerging market firms such as the Haier Group of China (see closing case study) and Arçelik of Turkey used the foreign licensing technology to expand internationally through exporting.
In addition to being used as an entry mode to foreign markets, licensing may also be used as a step towards a more committed mode of entry such as a joint venture or a wholly- owned form.
For example, when in 1997, Phoenix AG, a German manufacturing concern, agreed to license the production of its automotive and railway components in India to Sigma Corp. of Delhi, the license agreement was no more than a step towards establishing a joint venture.
Risks of Licensing Sub-optimal choice. This risk is associated with the possibility of licensing being not the best possible choice and or selecting the wrong partner—hence not realizing the full potential of the partnership
Risk of opportunism. The possibility that the licensee takes the opportunity to appropriate the technology or process that has been licensed to it and internalizes it.
Quality risks. These risks are associated with the possibility that some licensees might not be able or willing to maintain the quality of the product or service and hence compromise the reputation of the licensor.
Production risks. These risks are related to the possibility that licensees will not ‘produce in a timely manner, or will not produce the volume needed, or will overproduce’. Payment risks. There are risks associated with licensees not being able to or decide not to pay for royalties.
Joint Ventures -Popular mode of entry -the most typical joint venture is 50:50-Share the investment & profit-Foreign insurance companies entered into Indian market through this mode-Maruthi Suzuki(54%),Wipro GE etc-TESCO uses this method to enter into new markets
-Tesco’s financial resources and retailing capacities of the local firms with local knowledge.-Local enterprises already have an infrastructure of stores and other-Tesco has a preference for joint venture in which it has majority stake
Strengths -Firm benefits from the local partner’s knowledge of host country’s competitive conditions,culture,langauge & political system -Suitable when the development costs and or risk of opening a market is high – share these with the local partner.-Inevitable entry strategy under govt restriction Honda partnered with Hero when Indian govt was not allowing 100% FDI
Political considerations make joint venture only feasible entry mode -Less likely to attract adverse govt interference due to the local partners.
Weaknesses Firm that enters into a joint venture risks giving control of its technology to its partner. Does not give tight control over the subsidiaries – One of the reason why Honda has broken the joint venture with Hero.
The shared ownership arrangement can lead to conflict and battle. (Maruthi Suzuki) -Conflicts of interest over strategy and goals often arise in joint venture-Such conflicts may result in the break up of joint ventures
Wholly Owned Subsidiaries In a wholly owned subsidiary, the firm owns 100% of the stock. Can be done in two ways -Acquire the existing firms in the foreign country (ING)-Set up a completely new operation in that country (TI) – Greenfield strategy
Strengths-When the firm’s competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode – reduces the risk of loosing control over that advantage
Wholly owned subsidiary gives a firm tight control over operations in different countries – Global strategic coordination Wholly owned subsidiary may be required if a firm is trying to realize location and experience curve economies
Weaknesses Costliest method of serving foreign market from a capital investment standpoint High risk in the foreign market
Greenfield Venture v/s Acquisition Acquisition The volume of cross border acquisition is growing In the last two decades 80% of all FDI inflows have been in the form of acquisitions
For a company to prefer acquisition to greenfield entry, the cost of constructing new facilities must exceed the cost of purchasing the existing properties
Strengths They are quick to execute – firm can rapidly build its presence in the target market. For ex – Daimler Benz needed a big presence in the US, it acquired Chrysler. Telefonica built a service presence In Latin America through a series of acquisition
In many cases firms make acquisitions to preempt their competitors When the economy and cross border FDI is deregulated markets see a waves of acquisitions. Vodafone acquired ATC in the US ($60b), Excel communication in the US by Teleglobe of Canada etc. Daimler Chrysler, Ford Volvo, Renault Nissan
Manager may believe acquisitions to be less risky than greenfield ventures because it buys a set of assets that producing a known revenue and profit stream
Why do acquisition fail? Acquired firms often overpay for the assets of acquired firm Firms are too optimistic about the value that can be created – willing to pay more Hubris hypothesis Ex – Daimler paid $40 b,40% more than the market price.
Paid this much because it thought it could use Chrysler to grow its market in USA. Within a year started loosing money due to weak sales in USA
Many acquisitions fail because there is a clash between the culture. Experience high management turnover In Daimler Chrysler many senior managers of Chrysler left in the first year because they disliked the disliked the dominance of German managers. Local knowledge is lost
Many acquisition fail because integrating the operations of two firms take much longer than forecast Difference management philosophy, culture can slow the process. This occurred a DaimlerChrysler,where grand plans to integrate operations were blocked by endless committee meetings By the type plan was ready,chrysler started loosing money
Greenfield Strategy Entails building an entirely new subsidiary in a foreign country to enable foreign sales & production
Strengths It gives the firm a much greater ability to build the kind of subsidiary company it wants Its much easier to build an organizational culture from scratch than it is to change the culture Helps transfer products, competencies and know how from the established operations of the firm to the new subsidiary
For example – Lincolns competitive advantage in US is strong org,culture. Through its bitter experience it found that its is very difficult to transfer this culture to the acquired firms. As a result the firm switched its entry strategy.
Risks of green filed strategy Risk of not being able to build relationship with customers, suppliers and govt officials in the new country. Possibility of being preempted by more aggressive global competitors via acquisitions strategy
Phases of global strategy Single-Country strategy-Firms that are household names around started as small ventures in a single country -In the past, so long as Internationalization was often considered when the firm’s home market became unprofitable the prospect for growth started to diminish, and attractive opportunities to expand internationally were available
Export strategy Before a firm establishes subsidiaries outside its home market and becomes directly involved in their management, it may start by exporting its products and services outside its home market domestic strategy remains of primary importance considered as a domestic strategy with an export strategy attached to it.
International Strategy When firms first establish subsidiaries outside their home market, they move from a domestic strategy phase to an international strategy phase Firms that manufacture and market products or services in several countries are called ‘multinational firms’
each subsidiary is likely to have its own strategy, and will analyze, develop, and implement that strategy by tailoring it to its particular local market. adaptation of products to fit local market peculiarities becomes the main concern for multinational firms
Global Strategy As multinationals mature and move through the first three stages, they become aware of the opportunities to be gained from integrating and creating a single strategy on a global scale. strategy involves a carefully crafted single strategy for the entire network of subsidiaries and partners,
activities of the different subsidiaries are coordinated from headquarters in order to maximize global efficiency Challenge here is balancing global integration and adaptability
Global strategy v/s internationalstrategy The term global strategy has been in use only since the late 1970s and began to assume widespread use in 90s. International strategy was the term used prior 1990s. International and global strategy are sometimes used interchangeably
They are different in three dimensionsb) Degree of involvement and coordination from the centre - Extent to which a firm’s strategic activities in different country locations are planned and & executed interdependently on a global scale-Wal-Mart
Multinational firms must configure their operations to exploit the benefits offered by different country locations, and coordinate their activities across countries to capture synergies derived from economies of scale.
b) Degree of product standardization and responsiveness -Extent to which product or service is standardized across countries.-McDonald’s ,IKEA-absolute standardization across countries is not necessary
c) Integration & competitive move dimension -Extent to which firm’s competitive moves in major markets are interdependent. A firm makes competitive moves not because they are best for the particular country or region involved but because they are best for the firm as a whole a competitive attack in one country is countered in another country’ Profits of one subsidiary is used to upgrade other subsidiaries
Designing global organizations Organisation structure for Global V/s Localization strategy
Managers must decide whether they want each global affiliate to act autonomously or whether activities should be standardized Globalization v/s multidomestic strategy
Globalization strategy Product design, manufacturing and marketing strategy are standardized throughout the world. Japanese took business away from Canadian & American companies by developing similar high quality low cost products for all countries Black & Decker became internationally competitive
Coco Cola supplies similar products globally only marketing strategies are tailored to specific country. IKEA uses this strategy Gillette produces standardized products McDonald’s v/s Jollibee
Multi –Domestic strategy Competition in each country is handled independently. Product design, manufacturing & marketing strategy tailored to the specific needs of the specific countries Wal-Mart has had trouble in transplanting its successful US formula. In Indonesia Wal- Mart closed its store withi year-brightly lit, highly organized stores were not liked by customers
Domino’s offer 100 different Pizza . P & G - cultural factors required adjustment in its product. Jollibee
Export Structure The firm that is selling a large proportion of its output in its domestic market and a small quantity internationally uses export structure Part of the domestic marketing function Structure with which national players experiment with foreign market Internationally experienced personnel handle the dept.
CEO Marketing Operations HR Admn.Domestic Export
International Division Companies typically start with an export department that grows into international division This has the status of other major dept in the organisation Has its own hierarchy to manage international business Acc to Harvard study 60% all firms have initially adopted this structure
CEOMarketing International Operations HR Divisions.
International division allows an MNC to concentrate resources and create specialized programme for international operation. Wal-Mart set up International Division in 90s. This division oversees the operation in various geographical area (Europe, Asia & America) CEO of each region reporting to the head of international division
World wide functional structure Functional dept is responsible for its activities around the world. For example manufacturing dept is responsible for worldwide manufacturing activities The design is used by the MNCs that have similar product lines British Airways uses this structure.
CEO Operation Marketing HR AdmnPlant A Plant BGermany Brazil
McDonald & Coco Cola uses this structure whereby global marketing function controls international marketing activities
Global Product Division structure This is the most common structure followed by the company. Take responsibility for global operations in their specific product area Each division has the functional depts. Suitable for the worldwide standardized & diverse product lines
Divisions operate as a profit centers HUL,Motorola,DaimlerChrysler have product structure
Global Geographic Structure Worldwide activities are organized by dividing globe into different geographic areas The regional Manager responsible for that area reporting to the CEO Each division has its own functional departments suitable to that region Cadbury has five basic divisions- executives in each division handle various functions for that region.
CEOApple America Apple Europe Apple Pacific Canada AsiaLatin America Australia Japan
Well suited to companies that want to emphasize adaptation Environmental factors compelled the companies to shift from product based to geographical structure
Global Matrix Structure -When aerospace industry was fast developing US govt demanded that a single manager be assigned to each of its project.-In response TRW established a project leader –someone who shared authority with the functional heads.
Global Matrix Structure Most complex design Permits a firm to form specific product groups using members from existing functional depts. Combines functional product structure Permanent functional depts supply resources to various product group.
Dow’s organisation structure had three interacting elements- Functions, Businesses and geography. Most managers reported to two bosses. The plastic Managers reported to the head of the worldwide plastic division and head of the Spanish operations. Changed to product structure.
ABB used global matrix structure that worked extremely well coordinate a more than 2lakh employee company in 140 countries Dow chemicals uses matrix structure
Hybrid Structure Most organizations use hybrid structure Helps to achieve economies of scale as well as locally responsive marketing-Hybrid structure combines the characteristics of various approaches tailored to a specific strategic needs.-Popular type – combining characteristics of the functional & divisional structure.
When corporation grows large & has several products – organized into self-contained divisions- functions that are imp to each product are decentralized. Other functions are centralized at headquarters.
Determining Export Potential The most common approach is to examine the success of your products domestically. If company succeeds at selling in the domestic market, there is a good chance that it will also be successful in markets abroad, at least those where similar needs and conditions exist.
Another means to companys potential in exporting is by examining the unique or important features of your product. If those features are hard to duplicate abroad, then it is likely that you will be successful overseas.
Finally, product may have export potential even if there are declining sales in the domestic market. Sizeable export markets may still exist, especially if the product once did well in the United States but is now losing market share to more technically advanced products.
Standardization Versus adaptation After identifying the export potential, this is the first question. A firm has four basic alternatives a) Selling the product as is in the international marketb)Modifying the products for different marketsc)Designing new markets for foreign marketd)Incorporating all differences into one flexible product & introducing a global product.
Studies on product adaptation show that the majority of the products have to be modified for the international market place. All products have to conform to the prevailing environmental condition over which the firm has no control. Adaptation decision are made to enhance the exporter’s competitiveness in the market place.
Govt Regulations -Often present the most stringent requirements.-Sweden was the first country to enact a legislation against most aerosol sprays.- degrade the ozone layer.-Should be monitored by exporters.-Ruling by a European court of justice let stand Danish law that requires returnable containers for all beers and soft drinks
A poll of 4000 European companies found that burdensome regulatory requirements affecting exports made the united kingdom the most difficult market to trade with. Google was forced to establish a new site,Google.cn,contents of which are censored by Google.
Non-Tariff Barriers Include product standards, testing or approval procedures, subsidies for local products and bureaucratic red tape. Normally affects the product adjustments outside the core product. Ex-France requires the use of French language
Getting around them may be the toughest job for the exporter. US dept of commerce dept estimates that typical machine manufacturer can expect to spend between $50000 to &100000 a year. Mack International has to pay $10000 to $25000 for a typical European engine certification. Brake system changes to conform with other countries regulation costs &1500 to $2500 per vehicle
Japan requires the testing of all pharmaceutical products in Japanese laboratories – because Japanese may be physiologically different than other countries US Cookie marketer, for example create separate product batches to meet Japanese requirements.
ISO 9000 standard EU chose ISO as a basis to harmonize varying technical norms for its member states. This determines what may be exported to EU ISO 14000 – basically require that firm has an environmental management system. These serve as non tariff barrier
Customer Characterstics,Expectations & Preferences Product decisions are especially affected by local behaviors,tatses,attitudes and traditions Requires exporter to gain customer approval
Even the benefits sought are similar, physical or intangible characteristics of the customer may dictate product adaptation Quaker Oats’ extension of the soft drink product to Japan to suffered from lack of fit on three dimension;
i) Glass bottles the drinks comes in is almost twice the size that Japanese are used toii) Product itself was too sweet for the palateiii) Japanese did not feel comfortable with the sediment that characteristically collects at the bottom of the bottle
GE medical systems has designed a product specifically for Japan in addition to computerized tomography scanners produced for the US market. The unit is smaller because the Japanese hospitals are smaller than most US hospitals also because of the smaller size of the Japanese patients
The reason most Europeans who wear western boots buy those made in Spain may be that US footwear producers are unaware of style conscious Europeans’ preference for pointed toes and narrow heals. The only way solving this problem is through customer testing and marketing research
Often, no concrete product changes are needed only a change in the product’s positioning. A brand positioning may have to change to reflect the different lifestyles of targeted market. Coco Cola has renamed Diet Coke in many countries Coke light – Shifted the promotional approach from “weight Loss” to “figure maintenance”
In Sweden Helen Curtis changed the name of “Every Night” shampoo to “Every Day” because Swedes wash their hair in the morning.
Economic Development -Level of economic development of the targeted market dictates adaptation-As country’s economy advances, buyers are in a better position to demand more sophisticated goods-Adaptation is required to make the marketers product accessible
The Four –Tiered Structure ofMarkets Global tier – Consumers who want global standard product and willing to pay global price Glocal tier – Consumers who demand customized products of near global standard and are willing to pay slightly less than global consumers do. Local tier – Are happy with the products of local quality and local price
The bottom of the market consists of people who can afford only the least expensive products
Developing markets may require backward innovation-market may require drastically simplified version of the product due to lack of purchasing power or usage conditions. TVS electronics developed a new all in one business machine for small shopkeepers for developing market- It is part cash register, part computer, and able to tolerate heat, dust and power outages
Buying power will affect packaging in terms of size and units sold in the package. In developing markets, products such as cigarettes and razor blades are often sold by the pieces so that limited income consumers can afford it. Soft drink companies have introduced four- can-packs in Europe, where cans are sold singly even in large stores.
Climate & Geography -Climate and geographical distance will have an effect on the total product offering mainly packaging.-Marketing of chocolates in hot climate is challenging.-Nestlés solution was to produce different Kit Kat chocolate for Asia with reduced fat content to raise the candy’s melting point
If the target country is geographically distant product has to be protected against longer transit times. One firm experienced this problem when tried to sell Colombian guava paste in the US. Because the packaging could not withstand the longer distribution channels and the longer time required for distribution, product arrived in stores in poor condition
Export procedures in India Export activities are classified into five stagesii) Preliminariesiii) Offer and receipt of confirmed ordersiv)Production and clearances of products for exportsv) Shipmentvi)Negotiation of documents & realization of export proceedsvii)Obtaining various export incentives
i) Preliminaries-Importer –Exporter Code Number (IEC No) - Should obtain IEC no from the regional licensing authorities. -This no is to be shown in all documents
Membership in Certain Bodies - Exporter may obtain membership in certain bodies like export promotion councils, Trade Promotion Organisation etc. -Help in getting incentives, information & export promotion & contact the prospective importer
ii) Inquiry, Offer and Receipt of Confirmed Order - Inquiry is the request made by a prospective importer regarding his wish to import certain goods. -Offer is a proposal submitted by an exporter expressing his intention to export -usually makes an offer in the form of a “Proforma Invoice”
This includes -Name of the Buyer: The complete name and address of the buyer/importer -Description of the Goods – Technical, physical and chemical features. If necessary detailed description is provided.-Price : Price of the goods in internationally accepted currencies or mutually agreed currencies and discounts
- Conditions of sale - Validity: The period for which the invoice is valid. The importer can accept the invoice anytime before the validity period. -Escalation clause : Price of the good may increase due to increase in the input costs.-Delivery Schedule : Realistic delivery schedule should be indicated.-Based on the pricing mode ( FOB or CIF)
(iv) Inspection – The authority who will conduct the inspection.(V) Force Majeure Clause : Exporter may sometimes fail to deliver due uncontrollable situations. therefore he incorporates this clause
Payment terms : Payment terms like Advance payments, letter of credit etc. should be included Other obligations : -Post sale services to be provided by the exporter -Providing spare parts -Warranty/guarantee for the equipment/technology
- Confirmed Order -The buyer sends the confirmed order to the exporter by signing the copy of the invoice. This becomes the confirmed order
(iii)Production /Procurement of Goods -Should produce the good exactly as specified in the invoice.-If the export house does not have production facility, it has to procure the products from others-Packing & labelling-Quality control and Pre-shipment Inspection
-Excise duty rebates -Govt has exempted the goods meant for export from the imposition of excise duty-Claim for excise rebate-Bond without payment of excise duty
iv) Shipment - Most of the good exported through ship. -The exporter has to contact shipping companies for space after getting the confirmed order.-Through agents as they have information of all shipping companies throughout the world
Custom Clearance - Exporter has to get the custom clearance of the goods before they are loaded.-Custom authorities accord their formal approval after scrutinizing the documents which mainly include:-Proforma Invoice in original & duplicate-Export License (if required)-Letter of credit
Certificate of inspection Shipping bill Quality control inspection certificate (if required)
Crafting order -Once the goods are ready for export and shipping order is available, the exporter has to approach the Superintendent of the concerned Port Trust for the permission to move the goods inside port.-Issues the order for moving the goods into the port area after verifying the shipping bill and shipping order
Custom examination of Cargo at Docks -Custom authorities after checking the documents, check the products to be exported. -After checking the consignment ,will seal the packages and accord formal approval for export.-Exporter can arrange for loading the cargo on a ship
Let Ship Let ship order is the permission of Customs authority issued to the exporter. Authorizes the shipping company to accept the cargo to the vessel
Mate’s Receipt After goods are loaded on the ship, the captain of the ship furnishes the documents to the Port Superintendent which in turn is issued to the exporter. Provides details of products, conditions of the products at the time of loading etc. PS issues this receipt to the exporter
Managing International Licensing International Licensing Risks Seven risk factors have been identified in the literature:(1) suboptimal choice;(2) risk of opportunism;(3) quality risks;(4) production risks;(5) payment risks,(6) marketing control
1) Suboptimal Choice Every firm faces the risk of the opportunity cost of not making the best strategic choice. A firm selects the wrong licensing partner and therefore does not realize the full benefits of the relationship.
DuPont chose to license its Teflon® brand name and technology to six Chinese manufacturers of cookware. However, after six years of investment DuPonts marketing cost in China had outweighed its revenues from product sales.
2.Risk of Opportunism the risk of opportunism is the chance that a licensee will appropriate the technology that has been licensed to it, and internalize it. An opportunistic licensee could be called a "learning licensee” who takes the technology and makes it its own.
In the music industry, the risk of piracy has been a major obstacle to international licensing. In China, for example, western companies have been disinclined to license western pop music to local manufacturers because of the prevalence of pirate CD plants.
3.Quality Risks -Quality risk is the concern that the licensee will not produce or distribute goods in a manner that meet the licensors standards
4.Production Risks There is a risk that the licensee will not produce in a timely manner, or will not produce the volume needed, or will overproduce. the licensee might not produce what is needed to take advantage of a market opportunity.
In the case of a trademark, there is also a risk of producing the design on inappropriate or poorly assorted products
5.Payment Risks What if a licensee does not pay the licensor, or pays in an untimely fashion, or under- reports earnings? Payment risk is probably greater in a royalty compensation agreement than in a lump sum payment arrangement, as the number of times that a firm is subject to risk increases in the royalty payment model
6.Marketing Risks In an "arms-length" licensing arrangement, the licensor loses control of the licensees marketing of a product. The risk to the licensor is that the product will be under marketed or otherwise not marketed optimally.
Planning The process of licensing can begin as a well- developed strategic plan on the part of the licensor, or as an unexpected encounter between a potential licensee and licensor. However, licensing is best carried out as part of a strategic plan
A plan provides an overall road map for getting where the firm wants to go using licensing. The plan guides strategic choices and critical decisions, and provides criteria for the choice of licensing versus other forms of market entry
Licensee Selection Selection of a licensee takes on many of the features of partner selection for an international joint venture (IJV). The choice of partner is highly correlated with performance. Many of the risks may be reduced with the proper selection of a licensee.
A critical part of the selection process is determining if there is goal congruence between the firms. one of the issues in partner selection is finding potential licensees and researching them Careful licensee selection includes a search for potential licensees with quality assurance ratings to minimize quality risk.
licensing broker can play a key part in negotiating contracts, finding suitable partners, and in some cases, managing the licensing process entirely for some firms. The Licensing Executives Society of Europe lists links to licensing brokers.
Aulakh et al.s (1998) research on licensing compensation found that "licensor involvement in a foreign market will be higher under a royalties-based than under a lump- sum fee compensation structure"
Aulakh et al. (1998) maintain that it is better to be paid lump-sum compensation in the case of a high risk of intellectual property violation. Additionally, the host countrys economic environment is positively related to the use of a royalties-based compensation structure
On-Going Relationship Aulakh et al. (1998) state that an active interest in licensee performance on the part of the licensor is highly related to the compensation choice that is made.
This active interest, or on-going relationship, is seen as a means of ensuring that; opportunistic behavior does not occur (or is minimized) that quality and production expectations are realized, and that appropriate marketing of finished products takes place
Contract Specification Generally, a licensing agreement is contractual in nature, outlining the transfer of the technology for remuneration. The contract may legalise the agreement between the parties, defining its terms and conditions, and serve as a deterrent to noncontractual behavior
Contract requirements regarding quality, periodic sampling for quality, or evidence of quality assurance from the licensee can help reduce the quality risk issue. Contract specification of products and markets can reduce production and marketing control risks. Specification of the country whose laws are being used to enforce the contract is especially important
Organization of the Licensing Function Within the firm, licensing is sometimes viewed as "found money" on the income statement Some firms see licensing as an extra profit builder—others as a core business strategy.
The firm that organizes its licensing as an integral part of its business structure, and bases that structure on its strategic planning, will not only minimize the risks of licensing but should also maximize firm performance
Managing Joint VentureSource : James Bamford,David Earnst & David G.Fubini (2004),Launching a World –Class Joint Vetnture,Harvard Business Review,February,2004
The success of JVs is so elusive because many companies overlook the critical piece of any JV effort –the launch planning and execution. Mistakes made during the launch phase often erode up to half the potential value creation of JV.
The launch phase –beginning with the memorandum of understanding and continuing through the first 100 days of operation –is usually not managed closely enough. This lack of attention can result in strategic conflicts between the companies.
JV challenges When two companies agree to an alliance, there are multiple parties – two parent companies and a new company dealing with disparate interests This creates unique set of challenges
The first challenge is building and maintaining strategic alignment across the separate corporate entities Each entity has its own goal, market pressures and shareholders. If these interests are not addressed during the launch phase conflicts will develop in crucial strategic areas.
JV partners try to anticipate areas of potential misalignment during the negotiation phase – but many conflicts of interest surface only when the partners dig deep into operational details and start to run the business
The second challenge is to create a governance system that promotes shared decision making & oversight between the two parent companies. Governance problems can quickly trigger termination of deal. Weak control can expose them to unexpected risks & rigid control may kill the entrepreneurship of the JV
The third challenge that most joint ventures face is the managing the economic interdependencies between the corporate parents and the JVs. To avoid duplicating costs, most alliances are structured so that the parents continually provide financial capital, human skills, material resources, and marketing and other services
The parent companies generally do outline the broad extent of the economic interdependencies - but they often don’t quantify the specific resources & finances that should be flowing from each partner phase and the compensating each partner fairly for its contributions.
The fourth challenge is the building the organisation – a cohesive high performing JV. Most managers come from, will want to return to, and may even hold simultaneous positions in the parent companies. Many JV CEOs lament that alliances are treated as dumping grounds for underperforming executives rather than magnets for high –potential managers
Managing the challenges The parent should appoint a launch leader and identify deal champions. The latter are typically senior executives from each parent company who are known and respected across the organization and have a strong interest in the success of the joint venture.
The parents should also assemble a dedicated and experienced transition team immediately upon signing the memorandum of understanding. This team is responsible for getting the business up and running. Its tasks include developing a detailed business plan, creating the 100-day road map
Managing the challenges Successful JVs tackle each of the challenges. They preempt failures by exposing inherent tensions early in the process. They move quickly from general roadmaps to detailed practical planning.
Resolving Strategic conflicts Upfront It is common for companies to assume that the JV’s strategy has already been defined during deal making and that the launch phase, therefore, is simply the time to implement a shared strategic vision. But it is virtually impossible to get into enough detail during the deal-making phase to surface and resolve all the strategic differences between the corporate parents.
examples. Two large pharmaceutical companies formed a venture to expand the market for a specific class of drugs. Each partner contributed complementary patent- protected medicines and regional marketing strengths to the JV. Yet once the JV was up and running, one parent wanted to promote its higher-margin, lower-volume products, while the other parent wanted to expand its market share for its products through aggressive pricing.
Develop detailed business plan-The launch team needs to develop a detailed business plan.-To start with, the management team (the CEO,CFO, and COO) should meet offsite for two or three days with members of the JV board and the deal champions from both parent companies.
The group should define exactly how and where the JV will compete,project how the JV might expand beyond its initial scope, set financial targets, plan capital expenditures, and create a blueprint for the organization. This work is then translated into a detailed business plan.
The launch team, working with the JV board, also needs to draw up performance contracts that make key JV managers accountable for the success of the venture. The partners should clarify the resources, personnel required for the JV’s success so confusion about these matters won’t hamstring the people charged with running the venture day to day.
Fro instance - Electric power companies interviewed for a CEO to run their proposed joint venture. One candidate was offered the position but took his time in deciding whether to accept. Before committing to the venture, he interviewed each board member to understand the parents’ objectives, revised the JV business plan, and proposed six specific objectives for the first nine months of his tenure as CEO.
He then insisted on the collective endorsement of the JV board as a precondition to accepting the job, and he negotiated a compensation agreement that linked his bonus to these objectives. He also negotiated an employment contract that empowered him to make key operating decisions and choose executives.
Later he said “In joint ventures, especially with many partners, there is a tendency for the partners to each make back-channel requests of the CEO and to try to influence the alliance through people they put into the JV. I was not going to put up with that. I needed all the partners to agree on the venture’s overall priorities and hold me responsible for executing against them.”
Act quickly to manage inevitable setbacks. A detailed business plan and supporting performance contracts are important, but they can’t prevent unpleasant surprises once the venture is launched. For instance, Starbucks and PepsiCo were forced to rethink the direction of their joint venture after the first product it introduced, a carbonated coffee drink, received mixed results in early tests with customers
The partners ultimately redefined the JV’s product, drawing on the lessons they learned from those initial market tests.
Successful alliances pay a lot of attention to communication – not just during the launch phase, but throughout the life of the venture. For instance, senior management at TRW Koyo Steering Systems, a JV manufacturer of automotive components, followed a policy of “equal communications” with each of the parent companies (TRW Automotive and Koyo Seiko).
When Arvind Korde,CEO of the JV, needed to communicate facts or issues to one parent, he always copied the other parent, thereby promoting openness and trust. And Korde and his team were quick to react to problems. When it got its first customer, the parent companies’ difference of opinion around pricing was exposed. TRW, which was focused on profitability more than growth - argued for higher margins Koyo Seiko sought to build market share.
Korde called an off-site meeting of his management team. In that session, the management team crafted a new vision for the JV and a constructive approach for resolving the conflict.
Achieving Loose-Tight Governance Besides managing the parents’ goals and expectations, the launch team needs to focus on building an effective governance system for the JV or alliance. An appropriate structure should allow the JV management team to make timely decisions while providing the parents with sufficient oversight to protect their assets.
To find the right balance between giving the JV enough autonomy and granting the parents enough control, companies should do the following: Apply rigorous risk management and performance tracking. Some companies grant the venture management team so much autonomy that it borders on negligence.
This was the case in a billion-dollar industrial JV that combined similar business units to increase scale and reduce operating costs. During the launch phase, the partners failed to create adequate oversight mechanisms. Three years into the alliance, the U.S. partner was dismayed to discover that the JV had incurred a $400 million debt
In a second JV at the same company, one parent found that the venture was delivering an annual 3% return, a figure well below its targeted rate of 14%. The JV was not part of the standard corporate-planning and strategy review forums and was never subject to the same level of scrutiny as the wholly owned businesses.
Parents need to treat their ventures and their wholly owned units similarly. This means, for large joint ventures, putting in place an audit process like the ones used at the best public companies, including an active audit committee and external auditors focused solely on the venture’s business.
Streamline decision making Some corporate parents go too far and implement governance systems that stifle entrepreneurship and create dysfunctional bureaucracy. During the launch of a $4 billion natural resource JV, the parent companies created a large board with subcommittees intended to be heavily involved in –but not accountable for – the day-to-day operations of the venture.
All major decisions required multiple subcommittee and board meetings, combined with additional fact-finding efforts by the JV management team. Since each subcommittee met only four times per year, the time it took for the JV to make a decision became a distinct competitive disadvantage.
Companies can avoid this governance trap by implementing a loose-tight governance model. In this approach, the partners identify the venture’s most important governance processes (for instance, setting strategy, allocating resources, or determining pricing). then designate the appropriate degree of parental involvement for each.
As a general rule, parent companies operating through a JV board should play an active role in the three governance areas critical to driving financial performance and protecting shareholder interest: capital allocation, risk management, and performance management.
The parents should generally limit their interventions in more operational processes – such as staffing, pricing, and product development–where the JV needs independence to ensure competitiveness and market responsiveness.
Managing the Interdependencies For practical reasons, most JVs depend on their parents to provide ongoing access to capital, people, intellectual property, raw materials, and customers. But much damage can be done if the details of those contributions aren’t worked out during launch.
Specifically, successful ventures do the following: Resolve interdependencies up front. According to one JV executive, “Shared services are often a critical part of determining total venture economics and how the value is distributed between the partners.”
In one JV, the partners formed a small transition services team that identified the economic interdependencies. This group established criteria for determining which services the JV would purchase from the parents It then documented the shared resources and services and collaborated with the purchasing and finance teams to price each shared service.
Challenge and limit interdependencies One of the most valuable tasks of the launch team is to challenge –and limit wherever possible – the number of interdependencies between the parents and the JV. Working teams in the high-tech consolidation JV initially generated a list of more than 1,000 dependencies
Recognizing that a heavy load could create unmanageable complexity down the road for the parent company, the launch leaders challenged virtually every line item on the list. Eventually, they whittled it down to just 300 services that the parent would provide the venture in the first year and less than ten services in the second year and beyond.
Once a list of shared services is finalized, the launch team must develop transparent and honest methodologies for calculating transfer pricing.
Building the Organization Choose organizational model carefully. There are three basic organizational models for joint ventures: independent, dependent, and interdependent.
The independent model, lets companies create new and often more entrepreneurial cultures. The independent JV typically has an entirely separate reporting structure from the parents, its own HR systems & Policies. Allows greater focus & unity of purpose
Some companies go to the opposite extreme – create dependent JVs. This type of JV operates as a business unit of one parent and uses that parent company’s incentive systems and HR policies. BP & Mobil used this approach –the refining venture operated as BP business & lubricant venture operated as Mobil business.
Third model is interdependent JV –most commonly implemented structure. Members of the management teams maintain links to their original corporate parent. They remain on the same compensation plans & anticipate future career moves back to the parent. Frequent rotation of Executives creates questionable career path. Well performing executives may be poached.
Disadvantages of interdependent model can be mitigated if the JV CEO is empowered write performance reviews and make all hiring and firing decisions; If all parties agree on performance criteria; A minimum tour of duty established within the venture; & If the parents are not allowed to poach.
Make people want to join the team. Regardless of the organizational model, the launch team must create a compelling value proposition that makes good people want to join the team. Excitement of building something can attract motivated executives In difficult turnaround situations, the compensation upside might be essential
selecting a CEO who inspires loyalty is the best way to build a strong new business. Especially important in interdependent JVs. It’s equally important to get the staff inside the parents companies on your side.
Obtain commitments from parent company staff. Top-performing companies recognize that skills are transferred by people, not by processes or contracts. Getting sufficient time and attention from a few topflight people is crucial JV team Needs identify them and create mechanism to involve them heavily in the first 6 to 18 months. Create formal contracts and incentives
JV will be successful when executives understand the unique demands of JV & invest in early planning. As one managed summed it up “If you get launch right, the rest almost takes care of itself”
Managing the strategic alliances Jack Welch of GE “ If you think you can go it alone in today’s global economy you are mistaken” In studying more than 700 alliances it has been found that the average return on investment is nearly 17% which is much higher than the ROI of the same corporation.
Managing the strategic alliances Strategic alliances are cooperative agreements between firms. Can involve joint research efforts, technology sharing, joint use of production one another’s products etc. Alliances are an excellent solution to fill the critical gap where the company lacks resource/ time to build capabilities.
Strategic Alliances can be grouped into three broad categories: Non-equity alliance - Cooperating firms agree to work together to carry out activities but they do not take equity positions.Ex-Supply agreements, distribution agreements
Equity alliance Cooperating firms supplement contracts with equity holdings in alliance partners GM and Isuzu have Supply contracts.GM also bought 34.2% of Isuzu’s stock.
Joint venture In a joint venture cooperating firms create legally independent firm in which they invest and share profit.
All types of alliances have grown substantially after globalization. 21 Oil & Gas companies (BP, ENI, Cairn, Hardy,RIL & ONGC) decided to have a joint pool of scarce resources –Rig sharing Rigs are scarce –cost between $5lakh & 7.5 lac per day
Mahindra partnered with Ford to learn how to design next generation SUV - resulted in Scorpio. Bajaj Auto partnered with Kawasaki and Toyota R & D to transform itself from an old line scooter supplier to new age motor cycle company. Tata Motors partnered with leading global suppliers like Bosch to develop Nano
Scope of Strategic Alliances An alliance may be comprehensive that is one in which the partners participate in all facets of conducting business. (Joint Venture) On the other hand an alliance may have a more narrowly defined focus concentrating on any element of the business.
Comprehensive Alliances – Includes collaborative agreements that covers all stages of manufacture,such as R&D,design,production,marketing and distribution. This alliances mainly assume the form of joint venture
Functional Alliance Production Alliance: Two or more firms join each manufacturing products in a shared or common facility –Rig sharing by Oil companies
Marketing Alliance : two or more firms share marketing services or expertise. The established firm helps the newcomer by promoting,advertsing and/or distributing its products Titan & Timex
R & D Alliance ; Partners agree to undertake joint research to develop new products or services
Key success factors Senior Management Commitment Key factor in the alliances’ ultimate success. To be strategic they must have significant impact on the companies overall strategic plans and must therefore be formulated, implemented and managed with full commitment of senior management. Without this alliance will not receive the resources they need.
If firms view alliance as the second best option, the strategic alliance will receive attention only after one’s wholly owned business has been dealt with, often through the assignment of one’s less –than-strongest executives. Thus adequate managerial and other resources may not be assigned to accomplish the objectives
Management commitment also helps to convince throughout the organisation of the importance of the alliance. If alliances are viewed as outside the organizational mainstream, employee at all levels may tend to view them not as imp. as core business.
Xerox has demonstrated high level of senior management level commitment to strategic alliances. Has executives with titles such as SVP – Corporate Strategic Alliances and VP - Worldwide Alliances
Preparing a realistic feasibility study -Survey and interviews with senior executives of experienced and inexperienced firms showed that experienced managers emphasized rigorous alliance business plan-They often seek the advice of objective experts outside – particularly when the alliance brings them to the unfamiliar markets
They directly translate this assessment into an explicit operating plan and budget. Business may be analytically sound but success depend on indeterminate factors like competitive reaction, corporate culture, organisation structure, overall fit and the willingness of the firms to dedicate high caliber people & resources
Good executives not only prepare business plans but also calculate the probability of success after examining these factors Experienced management concentrates on understanding the key risks that an alliance can create and how to deal with them
Similarity of Management Philosophies Corning - leader in forming strategic alliances Simple approach – “We go and sniff their hindquarters and see if they smell like us” Prefer to make partnership with those companies whose management philosophy,strtaegies are most similar. Differences can lead to tragic results
For instances – KLM & Northwest Airlines KLM President “Classic clash in culture, a collision of two diametrically opposed philosophies” KLM – prudent and long-term investment approach Northwest – dealmaking,buyouts,& other aggressive investments
Companies should either seek partners who do have similar management philosophies or draft an alliance agreement that adequately addresses the differences and provides for their resolution
Partner selection Perhaps the most important step in creating a successful alliance. A successful alliance require the joining of two competent firms, seeking similar goals Lays a solid foundation for strong alliances
Having selected partner, alliance should be structured so that firm’s risks of too much away to the partner are reduced to an acceptable level to avoid opportunism. Boeing was strongly criticized for its alliance with Japan. Many feared that Boeing was creating a competitor in the aerospace industry.
Boeing kept its most valuable techniques concealed. Was done by preventing Japanese engineers from observing production techniques firsthand, disallowing them to access to the Boeing’s state of the art wing design or to the computer room housing –technology that took Boeing 20 years to develop. Some technology transfer is inevitable.
Effective & strong management team McKinsey – 50% alliances are due to poor management. Chuck Knight of Emerson Electric – “I do not believe that fall in the planning stage. They fall in implementation.”
Ernst & stern – “Therefore the best strategy to grow via alliance may be to move slowly and start with simple alliances and move towards more complex” HP & Lotus have strong alliance management HP’s approach is well organised and structured. HP has developed 400 page alliance binder.
Contains policies and procedures to help not only its alliance managers, but middle managers as well. Developed its own two day strategic alliance training class, which over 700 alliance managers attended. Lotus likewise has a strong management team for its alliances A 40 person alliance group manages the companies alliances.
They have designed three dozen alliance rules to guide their strategic alliance formation, implementation & Management
Clearly understood roles Partnership must have clearly understood roles. Many US companies encountered problems role of management in marketing and operations was unclear. If the partners in alliance decide upfront exactly what each partner’s role then there is no misunderstanding and uncertainly
Frequent Performance Feedback To succeed ,their performance must be continually assessed and evaluated against short run and long run objectives. Bryon Look (HP BDM) – “after each alliance is formed, we hold a postmortem with all the involved (HP) parties. We look at the original objectives, the implementation, what went right and what went wrong”
The results of the reviews are summarized & distributed to management & stored in a strategic alliance tracking database. In addition,HP’s business development group continues to review existing alliances and evaluate their progress. AMI Ltd is a consulting firm which advises its clients on the formation and management of strategic alliances. Provides its clients an evaluation of their existing alliances
A typical Performance management process is required to evaluate. Goals of the alliances well defined. Measurable – may include market share, return investment, new product creation, etc. Training the alliance managers Rewarding individuals based on the performance measures of alliance.
Communication between partners: maintaining relationship Both partners bring to an alliance a faith that they would be stronger together. There are few rigidly binding provisions An essential attribute for the alliances to be successful is communication Without effective communication between partners, the alliances will inevitably dissolve as a result of doubt & mistrust
To sum up… Strategic alliance strategy has been prescribed as an important tool for attaining and maintaining a competitive advantage. While such relationship can pay off, no business should form partnership just because they are trendy. These success factors can be the templates to ensure lasting relationship.
Managing Differences The centralchallenge of Global Strategy When it comes to the global strategy, most business leaders and academics make two assumptions: first, that the central challenge is to strike the right balance between economies of scale and responsiveness to local conditions, and second, that the more emphasis companies place on scale economies in their worldwide operations, the more global their strategies will be
assuming that the principal tension in global strategy is between scale economies and local responsiveness encourages companies to ignore another functional response to the challenge of cross-border integration: arbitrage.
AAA Triangle Stand for the three distinct types of global strategy Adaptation -seeks to boost revenues and market share by maximizing a firm’s local relevance. One extreme example is simply creating local units in each national market that do a pretty good job of carrying out all the steps in the supply chain;
Aggregation attempts to deliver economies of scale by creating regional or sometimes global operations; it involves standardizing the product or service offering.
Arbitrage is the exploitation of differences between national or regional markets, often by locating separate parts of the supply chain in different places For instance, call centers in India, factories in China, and retail shops in Western Europe.
The three A’s are associated with different organizational types. If a company is emphasizing adaptation, it probably has a country-centered organization.
If aggregation is the primary objective, cross- border groupings of various sorts – global business units or product divisions, regional structures, and so on – make sense An emphasis on arbitrage is often best pursued by a vertical, or functional organisation
Most companies will emphasize different A’s at different points in their evolution as global enterprises, and some will run through all three.
IBM is a case in point. For most of its history, IBM pursued an adaptation strategy, serving overseas markets by setting up a mini-IBM in each target country. Every one of these companies performed a largely complete set of activities and adapted to local differences as necessary.
In the 1980s and 1990s, dissatisfaction with the extent to which country-by-country adaptation curtailed opportunities to gain international scale economies led to the overlay of a regional structure on the mini- IBMs. IBM aggregated the countries into regions in order to improve coordination and thus generate more scale economies at the regional and global levels
More recently, however, IBM has also begun to exploit differences across countries. The most visible signs of this new emphasis on arbitrage are IBM’s efforts to exploit wage differentials by increasing the number of employees in India from 9,000 in 2004 to 43,000 by mid-2006 and by planning for massive additional growth.
Procter & Gamble started out like IBM, with mini-P&Gs that tried to fit into local markets, but it has evolved differently The company’s global business units now sell through market development organizations that are aggregated up to the regional level.
CEO A.G. Lafley explains that while P&G remains willing to adapt to important markets, it ultimately aims to beat competitors – country-centered multinationals as well as local companies – through aggregation. He also makes it clear that arbitrage is important to P&G (mostly through outsourcing) but takes a backseat to both adaptation and aggregation “If it touches the customer, we don’t outsource it.”
The AAA strategy allows managers to see which of the three strategies – or which combination – is likely to afford the most leverage for their companies or in their industries. When managers first hear about the broad strategies that make up the AAA Triangle framework for globalization, their most common response by far is “Let’s do all three.”
But it’s not that simple. three strategies reveals the differences – and tensions – among them.
Expense items from businesses’ income statements provide rough-and-ready proxies for the importance of each of the three A’s.
The percentage of sales spent on advertisement indicates how important adaptation likely to be. Those that do a lot of R&D may want to aggregate to improve economies of scale. For firms whose operations are labor intensive, arbitrage will be of particular concern because labor costs vary greatly from country to country.
At Procter & Gamble, businesses tend to cluster in the top quartile for advertising intensity, indicating an adaptation strategy. TCS, Cognizant, and IBM Global Services are distinguished by their labor intensity, indicating arbitrage potential
But IBM Systems ranks significantly higher in R&D intensity than in labor intensity and, by implication, has greater potential for aggregation than for arbitrage
From A to AA Although many companies will (and should) follow a strategy that involves the focused pursuit of just one of the three A’s, some leading-edge companies – IBM, P&G, TCS, and Cognizant among them – are attempting to perform two A’s particularly well.
Adaptation and aggregation. Procter & Gamble started out with an adaptation strategy. Halting attempts at aggregation across Europe, in particular, led to a drawn-out, function-by-function installation of a matrix structure throughout the 1980s, but the matrix proved unwieldy
So in 1999, the new CEO, Durk Jager, announced the reorganization whereby global business units (GBUs) retained ultimate profit responsibility but were complemented by geographic market development organizations (MDOs)
All hell broke loose in multiple areas, including at the key GBU/MDO interfaces. Jager departed after less than a year. Under his successor, Lafley, P&G has enjoyed much more success, with an approach that strikes more of a balance between adaptation and aggregation and allows room for differences across general business units and markets.
Thus, its pharmaceuticals division, with distinct distribution channels, has been left out of the MDO structure; in emerging markets, where market development challenges loom large, profit responsibility continues to be vested with country managers
Also important are the company’s decision grids, which are devised after months of negotiation. These define protocols for how different decisions are to be made, and by whom – the general business units or the market development organizations –while still generally reserving responsibility for profits (and the right to make decisions not covered by the grids) for the GBUs.
Such structures and systems are supplemented with other, softer tools, which promote mutual understanding and collaboration. Thus, the GBUs’ regional headquarters are often collocated with the headquarters of regional MDOs. Promotion to the director level or beyond generally requires experience on both the GBU and the MDO sides of the house.
Aggregation and arbitrage In contrast to Procter & Gamble,TCS is targeting a balance between aggregation and arbitrage.
TCS - To obtain the benefits of aggregation without losing its traditional arbitrage-based competitive advantage, it has placed great emphasis on its global network delivery model, which aims to build a coherent delivery structure.
Arbitrage and adaptation. Cognizant has taken another approach and emphasized arbitrage and adaptation by investing heavily in a local presence in its key market, the United States.
AAA Strategy To even contemplate a AAA strategy, a company must be operating in an environment in which the tensions among adaptation, aggregation, and arbitrage are weak or can be overridden by large scale economies or structural advantages.
GE healthcare is successful in adopting AAA strategy. GEH, the largest of the three firms(PMS & SMS), has also consistently been the most profitable.
Economies of scale. GEH has higher total R&D spending than SMS or PMS, greater total sales, and a larger service force (constituting half of GEH’s total employee head count) – but its R&D-to-sales ratio is lower, its other expense ratios are comparable, and it has fewer major production sites.
Economies of scope. The company strives to integrate its biochemistry skills with its traditional base of physics and engineering skills; it finances equipment purchases through GE Capital.
GEH has even more clearly outpaced its competitors through arbitrage. Under Immelt, but especially more recently, it has moved to become a global product company by migrating rapidly to low-cost production bases. By 2005, GEH was reportedly more than halfway to its goals of purchasing 50% of its materials directly from low-cost countries and locating 60% of its manufacturing in such countries
Broader Lessons Focus one or two of the As Companies usually have to focus on one or at most two As in trying competitive advantage. It may have to shift its focus across A’s as the company needs change
Make sure new elements of a strategy are a good fit organizationally Organisation should pay particular attention to how well they work with other things the organisation is doing. IBM has grown its staff in India much faster than other competitors for arbitrage. But quickly molding this workforce into an efficient organisation with high global delivery standards is critical challenge
Strategies That fit Emerging Markets Emerging markets are nations with business activity in the process of rapid growth and industrialization Data from 2010 says there are 40 emerging markets. The economies of China and India are considered to be the largest BRIC, BRICS, BRICET , BRICM , BRICK Next Eleven (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam) CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa)
According to World Bank issued at May 2011, BRIC countries plus South Korea and Indonesia will lead the worlds economy with more than a half of all global growth by 2025. These countries are enjoying an increasing role in the world economy and on political platforms.
Many multinational corporations are struggling to develop successful strategies in emerging markets. Part of the problem is “institutional voids” – absence of specialized intermediaries, regulatory systems, and contract enforcing mechanism. Companies in developed countries usually take for granted the critical role that "soft" infrastructure plays in the execution of their business models in their home markets.
But that infrastructure is often underdeveloped or absent in emerging markets. Companies cant find skilled market research firms to inform them reliably about customer preferences so they can tailor products. Few end-to-end logistics providers, which allow manufacturers to reduce costs, are available to transport raw materials and finished products.
Before recruiting employees, corporations have to screen large numbers of candidates themselves because there arent many search firms that can do the job for them. Because of all those institutional voids, many multinational companies have fared poorly in developing countries.
All the anecdotal evidence gathered suggests that since the 1990s, American corporations have performed better in their home environments than they have in foreign countries, especially in emerging markets. Not surprisingly, many CEOs are wary of emerging markets and prefer to invest in developed nations instead.
By the end of 2002 - according to the Bureau of Economic Analysis, an agency of the U.S. Department of Commerce-American corporations and their affiliate companies had $1.6 trillion worth of assets in the United Kingdom and $514 billion in Canada but only $173 billion in Brazil, Russia, India, and China combined.
Many companies shied away from emerging markets when they should have engaged with them more closely. Since the early 1990s, developing countries have been the fastest-growing market in the world for most products and services.
Companies can lower costs by setting up manufacturing facilities and service centers in those areas, where skilled labor and trained managers are relatively inexpensive. Moreover, several developing-country corporations have entered North America and Europe with low-cost strategies
Western companies that want to develop counter-strategies must push deeper into emerging markets. If Western companies dont develop strategies for engaging developing countries, they are unlikely to remain competitive for long.
However, despite crumbling tariff barriers, the spread of the Internet, and the rapidly improving physical infrastructure in these countries, CEOs cant assume they can do business in emerging markets the same way they do in developed nations