UGBA 178 FINAL REVIEW

1. UGBA 178FINAL REVIEW Nelda Gabbay Erik Kiewiet de Jonge May 8, 2009

2. Remember! • One page front/back of notes • 3 hour exam • Review the articles! They are all fair game • Review Erik’s CSR lecture • Review all textbook assigned chapters/PPT slides on class website…

3. When and Where • Wednesday, 5/20/2009 from 12:30 pm to 3:30 pm • Bechtel Auditorium (not Haas!)

4. Today’s Roadmap • Global Strategy and Entry Modes • Global Supply Chain Management • Global Capital Markets • Financial Management in Int’l Business • Remember: we’re just covering the most requested and challenging topics today – review the other material, too!

5. Global Strategy and Entry Modes • Make sure to review articles: • “Big Mac’s Local Flavor” • “Philippines Jollibee Goes Abroad” • “Material Fitness” • “Making It in China”

6. Strategy, Profitability, Profit Growth • A firm’s strategy refers to the actions that managers take to attain the goals of the firm • Profitabilitycan be defined as the rate of return the firm makes on its invested capital • Profit growth is the percentage increase in net profits over time • Expanding internationally can boost profitability and profit growth

7. Global Standardization Strategy • The global standardization strategyfocuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies • The strategic goal is to pursue a low-cost strategy on a global scale The global standardization strategy makes sense when: • there are strong pressures for cost reductions • demands for local responsiveness are minimal

8. Localization Strategy • The localization strategyfocuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets The localization strategy makes sense when: • there are substantial differences across nations with regard to consumer tastes and preferences • where cost pressures are not too intense

9. Transnational Strategy The transnational strategytries to simultaneously: • achieve low costs through location economies, economies of scale, and learning effects • differentiate the product offering across geographic markets to account for local differences • foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations The transnational strategy makes sense when: • cost pressures are intense • pressures for local responsiveness are intense

10. International Strategy • The international strategyinvolves taking products first produced for the domestic market and then selling them internationally with only minimal local customization The international strategy makes sense when • there are low cost pressures • low pressures for local responsiveness

11. Things to Consider… Entry Modes Firms expanding internationally must decide: • which markets to enter • when to enter them and on what scale • which entry mode to use Entry modes include: • exporting • licensing or franchising to a company in the host nation • establishing a joint venture with a local company • establishing a new wholly owned subsidiary • acquiring an established enterprise

12. Greenfield Ventures vs. Acquisitions Firms can establish a wholly owned subsidiary in a country by: • Using a greenfield strategy - building a subsidiary from the ground up • Using an acquisition strategy

13. Greenfield or Acquisition? • The choice between a greenfield investment and an acquisition depends on the situation confronting the firm • Acquisition may be better when the market already has well-established competitors or when global competitors are interested in building a market presence • A greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture

14. Strategic Aliances • Strategic alliances refer to cooperative agreements between potential or actual competitors • Strategic alliances range from formal joint ventures to short-term contractual agreements • The number of strategic alliances has exploded in recent decades

15. Global Production and Supply Chain Management • Make sure to review articles: • “A Tale of Two Factories” • “Pace-Setting Zara Seeks More Speed To Fight Its Rising Cheap-Chic Rivals” • “Low-skilled Jobs: Do They Have to Leave?”

16. Things to ask… International firms must answer five interrelated questions: 1. Where should production activities be located? 2. What should be the long-term strategic role of foreign production sites? 3. Should the firm own foreign production activities, or is it better to outsource those activities to independent vendors? 4. How should a globally dispersed supply chain be managed, and what is the role of Internet-based information technology in the management of global logistics? 5. Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity?

17. Strategy, Production, And Logistics Firms need to identify how production and logistics can be conducted internationally to: • lower the costs of value creation • add value by better serving customer needs • Production refers to activities involved in creating a product • Logistics refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers

18. Three factors are important when making location decisions: country factors Firms should locate manufacturing activities in those locations where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity technological factors The type of technology a firm uses in its manufacturing can affect location decisions product factors the product's value-to-weight ratio whether the product serves universal needs

19. Global Capital Markets • Make sure to review articles and Ch 11: • “The Business of Making Money” • “Savings and Souls” • China Mobile Case • Brazil Gol Case • Notes from G-20 discussion, particularly regarding tax havens

20. Global Capital Markets • In concept, global capital markets are like domestic capital markets – just larger and more diverse • Capital markets unite investors, “market-makers” (banks, etc) and borrowers • The globalization of capital markets has occurred within the last few decades thanks to the liberalization of financial markets

21. Growth in Global Capital Markets • We can thank: • Advances in technology • Capital markets are information intensive – computing power has driven growth and made it a 24 hr business • Deregulation by governments • Elimination/reduction of restrictions on citizens’ cross-border investing restrictions • Growth in foreign direct investment and capital flows between countries

22. Why Go Global to Raise Capital? • Supply up, price (cost) down  the cost of borrowing (cost of capital, cost of debt, etc) is driven down by an increased supply of available funds • Remember: bond prices up, yields (cost to firm) down, and vice versa • Establish a presence in a new market – think Brazil Gol and listing on the NYSE

23. Global Capital Markets: Investors’ Perspective • Investors (you, me, Warren Buffet, mutual funds) benefit from global diversification of investments • Diversification works because countries’ returns are not perfectly correlated, meaning losses in one country may be offset by gains in another • Remember the global economy: countries’ economic performances can vary greatly

24. Eurocurrencies • A eurocurrency is any currency banked outside of its country of origin (the USD in the UK, the Euro in Iceland, etc.) • Arose from the Cold War and the USSR’s need to deposit its dollars outside of the US • OPEC countries continue to fuel the eurocurrency market

25. Eurocurrencies: Why the Buzz? • Regulation low, cost of lending/managing low  interest rates for lending low, investing interest rates high • Remember those deposit requirements? Not applicable for eurocurrencies… • With high rewards comes higher risks for investors (depositors)…

26. Bonds with fancy names • Foreign bonds – sold outside the borrower’s country but in local currency (e.g., GE bonds sold in Switzerland in CHF) • Eurobonds – bonds underwritten by and international syndicate of banks and sold in countries other than the one is whose currency the bond is denominated (e.g., P&G selling bonds in USD outside of the US)

27. Global Capital Markets: Too Good to Be True? • Don’t forget currency risks! • These can be offset through: • Currency swaps • Future exchange contracts

28. Things to Consider… • Exchange rate risk • Availability of capital domestically • Effects on cost of capital • (Future) intentions of raising capital in new markets (China Mobile, Brazil Gol) • Direct listing vs ADR • Debt vs Equity • Reporting and tax requirements and implications

29. Financial Management in Int’l Business • Financial managers focus on: • Investment decisions – what to finance? • Financing decisions – how to finance? • Money management decisions – what’s most efficient and will provide the best return? • Tax decisions – what tax regime is most favorable? • Difficult enough domestically – managing internationally adds a whole new layer of complexity

30. Financial Management in Int’l Business • Make sure to review articles and Ch 20: • “The Finance Function in a Global Corporation” • China Mobile Case • Brazil Gol Case

31. Investment Decisions • Decide what projects or investments will provide the highest return, often measured in terms of net present value (NPV) • Show me the money: when assessing projects, NPV isn’t the only concern – remember that cash is (usually) king  consider project cash flows, too • Don’t forget to incorporate all the risks (political, economic, etc.)!

32. Financing Decisions • Raising capital and keeping costs low • Must consider both local, national and global capital market options • Debt versus equity – consider the advantages of both: • Debt usually involves more known costs and may be payable in the instance of bankruptcy • Equity involves selling ownership of the company • Tax benefits often greatest when using debt • Exchange rate movements affect choices

33. Money Management • Bags of cash “under the mattress” are not earning companies money – financial managers must judiciously hold cash • Tradeoff between liquidity and returns • Don’t run cash balances too close to zero – firms need cash for notes payable and unexpected events

34. Certainties in Life: Death and Taxes • Watch out for double taxation, which occurs when host and home countries tax foreign subsidiaries • Tax credits, treaties and deferrals are complicated – hire a good accountant • Tax havens coming under fire from the Obama administration and the G-20

35. Other Financial Issues • Transfer costs – moving money around costs money • Dividends – foreign subsidiaries often remit earnings in the form of dividends • Transfer prices – the prices firms charge internally to transfer goods and services • Bilateral and multilateral netting – reduce transfer payments to settle debts (see pg 690)

36. Bilateral and Multilateral Netting • If a Mexican subsidiary owes a French sub$4M and the French sub owes the Mexican sub $6M, the French sub could pay the Mexican sub $2M and call it even • The same logic applies to multiple foreign subsidiaries to arrive at multilateral netting  check out page 690 for a good diagram

37. Other Topics • You also requested these topics: • Toyota Production System – see the article on the course website and the article in the book • CSR – see Erik’s slides on the website • Marketing – think back to Aldi and review Ch 17 • Human Resource Management – think back to Molex and review Ch 18 • Cumulative concepts – review your midterm and make sure understand the fundamentals

38. Keys to Success • Use your time wisely • On short answer questions: • Completely answer the questions being asked • Write legibly • Organize your thoughts – we must be able to understand your answers • Create answer outlines if you need help organizing (but don’t forget to write out your answer!) • Demonstrate your understanding – go beyond the superficial answer and show depth of knowledge • Bulleted answers usually not sufficient

39. The Five Essential Takeaways from UGBA 178 • Global firms must find an appropriate mix of globalization and localization in their strategy and operations. • Developing countries are increasingly important in international business as markets, production sites, and sources of capital. • Supply chain integration resulting in fast and lean partnerships with suppliers and customers is critical to success of global firms. • High quality and efficient production is possible anywhere in the world by using modern production methods. • Sustainable business practices (environmental and working conditions) have become essential to global success.

40. Questions?