International Business Transactions: An Example

1. International Business Transactions: An Example • An entrepreneur, traveling around the world from San Francisco, for pleasure and profit, landed in a less developed country and observed that the capital city in which he was staying lacked an up-to date energy distribution system. He approached country’s government and negotiated a contract with the following major provisions. • The entrepreneur would raise capital on world markets, incorporate off-shore, design, procure and construct a state-of-the-art generation and distribution system and sell energy within the boundaries of the city. • The government would award a franchise to the entrepreneur for a limited period and would commit to purchase a specified volume of energy per year for the first 5 years, subject to: • The entrepreneur spending not less than an agreed sum within 18 months and delivering energy into distribution system within 30 months of the contract date. • The money was raised in London. The primary energy supply, which was coal, was sourced in Australia. Design and procurement were carried out in the UK and the component parts were shipped to site for assembly and final construction. • The owners’ project manger was given substantial stock incentives. • The system started up later than the contract provided for, but the lateness was excused and the new undertaking survived the banking crisis that affected its source of working capital and ultimately went on to prosper.

2. Question: In when was this project conceived and built?

3. Handout: Globalization Example • What company? • The Hong Kong Gas Company • Now merged with China Gas (“Towngas”) • What year? • 1862

4. The Great Globalization Debate

5. Globalization is… • Not so new… • Not well defined… • Imperfect… • Goes beyond the USA…

6. Debate Goals • Introduce contested ideas… • Consider different points of view… • Develop/reinforce your beliefs… • Provide a basis for further discussion… • Have fun…

7. The Great Globalization Debate

8. International Business Wendy Jeffus Harvard Summer School

9. Introduction • Ulrich Suter – “Airline Industry” • Chapter 14: Entry Strategy & Strategic Alliances • Chapter 15: Exporting, Importing, and Countertrade • Case Study: JCB in India • Case Study: Tesco Goes Global • Chapter 18: Global Human Resources Management

10. Session 1: Top Participation Performers 4) Christian Hein 3) Monica Garcia de la Cadena 2) Andre Da Silva 1) Stuart Haigh

11. Session 2: Top Participation Performers 4) Elena Ponomareva, Angela Pernsteiner 3) Ulrich Suter 2) Pablo Cienfuegos 1) Natalia Biteli Santos

12. Wendy Jeffus Harvard Summer School Chapter 14: Entry Strategy and Strategic Alliances

13. Group Projects: Section 1 Green Car (China) Wheel G (Brazil) Spacebox (China) AESNI (U.S.) P-I-M (Switzerland) Shoes (Ethiopia) Food (U.A.E.) Muvbox (Spain) Healthy F (Netherlands) Smart H (Russia)

14. Group Projects: Session 1 Green Car (China) Wheel G (Brazil) Spacebox (China) AESNI (U.S.) P-I-M (Switzerland) Shoes (Ethiopia) Food (U.A.E.) Muvbox (Spain) Healthy F (Netherlands) Smart H (Russia)

15. Group Projects: Section 2 Natura (Russia) Rollasole (Singapore) Shortlister (Singapore) Energy (U.S.) Charge (U.S.) Consult (Japan) Umbrella (England) Natura (Russia) Home E (France) Alt. E (China)

16. Group Projects: Session 2 Natura (Russia) Rollasole (Singapore) Shortlister (Singapore) Energy (U.S.) Charge (U.S.) Consult (Japan) Umbrella (England) Natura (Russia) Home E (France) Alt. E (China)

17. What type of market would you like to enter? • Rich, educated, healthy citizens • Abundant resources • Low political risk • Low economic risk • No exchange rate risk • No competition • Marketing opportunities

18. Which Foreign Markets? • The choice must be based on an assessment of a nation’s long-run profit potential • The attractiveness of a country depends upon balancing the benefits, costs, and risks associated with doing business in that country • Benefits include • Size of market • Present wealth of the consumers in the market • Likely future wealth of consumers • Economic growth rates

19. Timing the Entry • Advantages frequently associated with entering a market early are commonly known as first-mover advantages • The ability to preempt rivals and capture demand by establishing a strong brand name • Ability to build sales volume • Ability of early entrants to create switching costs • Disadvantages associated with entering a foreign market before other international businesses are referred to as first-mover disadvantages • Pioneering costs are costs that an early entrant has to bear • Possibility that regulations may change

20. First Mover Disadvantage • Risk - Without previous experience to draw upon, first movers usually make the worst mistakes in terms of judging whether a product will be suitable for the market. Successive companies can reduce risk by learning from these mistakes. • Example – China’s market over the last decade clearly shows the divide. Some rushed in, others chose to wait, convinced that many of the first-movers would get their fingers burned. • Example - Silicon Valley, is full of companies that had first-mover advantage but still failed; it has been estimated that only about one in a hundred Silicon Valley start-ups survives for more than two years. • The first-mover advantage is no absolute guarantee of success, and often, late-arriving (and occasionally inferior?!) products take over the market from the first-movers. • Example - Sony learned this to its cost, when its Betamax video recorder system was driven out of the market by VHS. Source: FT.com (Financial Time’s Online Management Dictionary) http://content.answers.com/main/content/wp/en/thumb/7/72/180px-Betavhs2.jpg

21. First Mover Disadvantage • Visicalc, the first desktop spreadsheet program, faded away as Lotus took over the field with 1-2-3. In time the Lotus software was itself crushed by Microsoft's Excel. • Prodigy Communications was a first mover in online connections. And it had powerful backers at its launch in 1984. • Dumont led the way in selling TV sets when they were new gadgets, but the company lost out to latecomers like RCA and Motorola. • Chux was the leading disposable diaper yet succumbed to Procter & Gamble. • Ampex had a commanding position in video recorders and tapes for two decades until Sony took over. http://www.forbes.com/forbes/2007/0618/154.html, Image Sources: http://www.earlytelevision.org/images/DuMont-RA-108-hd.jpg http://www.aresluna.org/attached/pics/computerhistory/articles/25latzakratkami/visicalc-reklama.big.jpg

22. More Examples • Hotmail and Yahoo weren’t the first companies to offer free email. "Juno was first and had a $20 million ad budget" • Investors tend to invest in me-too companies because they have a degree of comfort that they're investing in an established market. "We're more impressed to know there are competitors," agrees Neil Weintraut of 21st Century Intenret Venture Partners • The computer industry is littered with companies that were first to market and lost the race big time - remember the Osborne portable computer or the Gavilan notebook? • "History imposes first mover advantage honors," notes Roger McNamee of Integral Capital Partners. "If you asked who was the first computer game software company a lot of people might say Electronic Arts because they're still standing, but EA was about the 41st game software company to get funding." Source: “The Myth of the First Mover Advantage” by David Needle; http://www.roguepc.com/images/juno2.gif http://www.uweb.ucsb.edu/~rverduzco10/images/thunderbird-hotmail.jpg; http://cache.eb.com/eb/image?id=23627&rendTypeId=4 http://oldcomputers.net/pics/gavilan-capsules.jpg

23. Scale of Entry • Large scale entry • Strategic Commitments - a decision that has a long-term impact and is difficult to reverse. • Pros: May cause rivals to rethink market entry, better chance to capture first mover advantages like switching costs, economies of scale & shows potential customers and distributors that you’re committed to the market. • Cons: Fewer resources to pursue other markets (hindering strategic flexibility) • Small scale entry • Pros: Gives the firm time to learn about market & reduces risk • Cons: Lack of commitment may make it harder to capture first mover advantages, etc. P-I-M (Switzerland) Natura (Russia)

24. Wholly Owned Subsidiary Joint Venture Increased Control Franchising Turnkey Projects Licensing Exporting Increased Risk Entry Modes • Firms can use six different methods to enter a market • Exporting • Turnkey Projects • Licensing • Franchising • Joint Ventures • Wholly Owned Subsidiaries

25. Dr. Obioha had started by exporting ethnic hair care products to West Africa. He realized one way he could ensure the top-notch quality, of his merchandise was to manufacture the products himself. He was from Nigeria, so he started in the territory that he knew the best. Then he moved to European countries. After about five years, the entrepreneur recognized the need for his quality skin care throughout the world. The product has been on the market now since 1990. Exporting Advantages: Avoids cost of establishing manufacturing operations May help achieve experience curve and location economies Disadvantages: May be hard to compete with low-cost manufacturers Possible high transportation costs Tariff barriers Possible lack of control over marketing reps Exporting http://www.bluefieldinc.com/BF_Corporate.html http://findarticles.com/p/articles/mi_qa5342/is_200111/ai_n21481091

26. Advantage: Less risky than conventional FDI Disadvantages: May create a competitor Selling process technology may be selling competitive advantage as well Contractor agrees to handle every detail of project for foreign client Turnkey projects After reconstructing and upgrading Lebanon's power grid in 1995, Bouygues Construction handed over the Beirut Seafront redevelopment in May 2000 Forum hotel in Warsaw 1974 - Skanska S.A. 1st turnkey project outside of Sweden http://www.skanska.pl/skanska/templates/page.asp?id=11579 http://www.bouygues.com/us/

27. Licensing • A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee. • Example: Warner licenses images from the Harry Potter books. • Example: Coca Cola (see Next Slide) http://www.sfondideldesktop.com/Images-Movies/Harry-Potter/Harry-Potter-0036/Harry-Potter-0036.jpg; zipcar.com

28. Licensing

29. Licensing • Advantages • Reduces development costs and risks of establishing foreign enterprise • Unfamiliar or politically volatile market • Overcomes restrictive investment barriers • Others can develop new business applications • Disadvantages • Less control over manufacturing, marketing, etc. • Limits the ability to coordinate a strategy across countries. • Risk loosing control of technology Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties.

30. Franchising • Franchising is an advanced form of licensing in which the franchisor, like “McDonalds” allows an entrepreneur (the franchisee) the right to use an entire business system in exchange for compensation.

31. Franchising

32. Franchising a McDonalds • Imagine that you're opening your own McDonald's. • To do this, you have to buy a McDonald's franchise. • In order to qualify for a conventional franchise, you have to have $175,000 (not borrowed). • Your total costs to open the restaurant, will be anywhere from $430,000 to $750,000, which goes to paying for the building, equipment, etc. • Forty percent of this cost has to be from your own (non-borrowed) funds. • You'll pay an initial franchise fee of $45,000 directly to McDonald's. The other costs go to suppliers, so this is the only upfront fee you pay to McDonald's. • Then, you'll go through a rigorous nine-month training period where you'll learn about the McDonald's way of doing things -- things like their standards for quality, service, value, formulas and specifications for menu items, their method of operation, and inventory control techniques. • You'll have to agree to operate the restaurant from a single location, usually for 20 years, following their guidelines for decor, signage, layout and everything else that makes McDonald's McDonald's. Source: http://money.howstuffworks.com/franchising1.htm

33. Franchising a McDonalds • Once you've completed training and are ready to go, • McDonalds will offer you a location they've already developed. • The exterior of the building will be complete, but you will have to take care of interior additions such as kitchen equipment, seating and landscaping. • You'll get constant support from a McDonald's Field Consultant, who can advise you on details and will visit regularly. • You'll pay McDonald's a monthly fee of 4 percent of your sales, and either a flat base rent or a percentage rent of at least 8.5 percent of your sales. How much money you make depends on many things, including the location and its popularity, the efficiency of your operating costs, and your ability to manage and control the business. • Think of franchising as paying someone for their business strategy, marketing strategy, operations strategy, and the use of their name. That's pretty much what franchising is -- you are establishing a relationship with a successful business so you can use its systems and capitalize on its existing brand awareness in order to get a quicker return on your own investment. You are using its proven system and name, and running it by its rules. • Are you still your own boss? In some respects, no. You still have to answer to someone else and follow thier direction. You don't really own the business; you own the assets you've purchased in order to establish the business. Source: http://money.howstuffworks.com/franchising1.htm

34. Franchising • Advantages: • Reduces costs and risk of establishing enterprise • Quality control • Disadvantages: • May prohibit movement of profits from one country to support operations in another country Franchiser sells intangible property and insists on rules for operating business

35. Joint Venture • A form of collaboration between two or more firms to create a jointly owned enterprise.

36. Licensing (& JV) • To enter the Japanese market Xerox (inventor of the photocopier) established a joint venture with Fuji Photo. (25/75) • Xerox licensed its xerographic know-how to Fuji Xerox. • Fuji Xerox paid a royalty fee equal to 5% of the next sales revenue that Fuji Xerox earned from the sales of photocopiers based on Xerox’s patented know-how

37. Joint Ventures • Advantages: • Benefit from local partner’s knowledge • Shared costs/risks with partner • Reduced political risk • Disadvantages: • Risk giving control of technology to partner • May not realize experience curve or location economies • Shared ownership can lead to conflict

38. Wholly Owned Subsidiary • The parent firm owns 100% of the stock. • Subsidiaries could be Greenfield investments or acquisitions • Advantages: • No risk of losing technical competence to a competitor • Tight control of operations • Realize learning curve and location economies • Disadvantage: • Bear full cost and risk

39. Wholly Owned Subsidiaries • 2006 - Swedwood International a wholly-owned subsidiary of IKEA built it’s first U.S. plant in Virginia • IKEA wanted control • Quality • Operations • Company secrets http://www.pittced.com/news/ikea-subsidiary-swedwood-to-build-first-u.s.-manufacturing-facility-in-vir-2.html

40. Core Competencies and Entry Mode • The optimal entry mode for firms depends to some degree on the nature of their core competencies • A distinction can be drawn between firms whose core competency is • Technological know-how (avoid licensing & JVs) • Management know-how (franchisee/JV is okay) • The greater the pressures for cost reductions are, the more likely a firm will want to pursue some combination of exporting and wholly owned subsidiaries

41. Technological Know-How Licensing and joint-venture arrangements should be avoided if possible Should probably use a wholly owned subsidiary Exceptions include An arrangement can be structured to reduce the risk of licensees If the technological advantage is only transitory Management Know-How The firm’s valuable asset is normally a brand name The result is that franchising and subsidiaries are very attractive Often times a joint venture is politically more acceptable Core Competencies and Entry Mode Food (U.A.E.) Home E (France)

42. Pros: Quick to execute Preempt competitors Possibly less risky Cons: Disappointing results Overpay for firm Culture clash Problems with proposed synergies Acquisition or Greenfield Acquisitions Pros and Cons: Greenfield Ventures Pros and Cons: • Pros: • Can build the subsidiary it wants • Easy to establish operating routines • Cons: • Slow to establish • Risky • Preemption by aggressive competitors

43. Acquisitions are attractive if: There are well established firms already in operation Competitors want to enter the region Greenfield ventures are attractive if: There are no competitors Competitors have a competitive advantage that consists of embedded competencies, skills, routines, and culture Acquisition or Greenfield Image Source: http://earthfirst.com/wp-content/uploads/2008/06/trump-hair.jpg

44. Strategic Alliances • Cooperative agreements between potential or actual competitors • Advantages: • Facilitate entry into market • Share fixed costs • Bring together skills and assets that neither company has or can develop • Establish industry technology standards • Disadvantages: • Competitors get low cost route to technology and markets

45. University of Victoria’s Strategic Alliances http://external.uvic.ca/ http://external.uvic.ca/corp-rels/Strategic-Alliance-Logo-Listing.gif

46. ASQ Project Management’s Strategic Alliances http://www.asqprojects.com/images/partners.gif

47. Soaring Word’s Stratgic Allicances http://www.soaringwords.org/content/images/strategic_alliances.gif

48. Phoenix Banking’s Strategic Alliances http://www.vistaatm.com/about/alliances/logos.jpg

49. Alliances are Popular • High cost of technology development • Company may not have skill, money or people to survive alone • Good way to learn • Good way to secure access to foreign markets • Host country may require some local ownership

50. Partner Selection • Get as much information as possible on the potential partner • Collect data from informed third parties • Former partners • Investment bankers • Former employees • Get to know the potential partner before committing