Going Global_Internationalization Strategies

Going global: Internationalization strategies Robin Teigland Stockholm School of Economics [email_address] www.knowledgenetworking.org www.slideshare.net/eteigland April 2008

What is globalization? A process (or set of processes) which embodies a transformation in the spatial organization of social relations and transactions – assessed in terms of their extensity, intensity, velocity, and impact – generating transcontinental or interregional flows and networks of activity, interaction, and the exercise of power Held et al, 2003

Why globalization? The information age in which we live allows both large and small businesses to thrive on a global scale. Technologies like the internet, mobile phones, etc. have made our shrinking world even smaller. Kingsley 2005

Global supply chains - Dell Susanto Surrounding every Dell factory are supplier logistic centers owned by the different suppliers of Dell parts - Friedman 2005

International production network – Boeing 787 Networked internationalization is at the core of the production process - Castells 2000

Patterns of internationalization Trading Global industries industries --aerospace --automobiles --military hardware --oil --diamond mining --semiconductors --agriculture --consumer electronics Domestic Multidomestic industries industries --railroads --laundries/dry cleaning --retail banking --hairdressing --hotels - - milk --consulting International trade Foreign direct investment LOW LOW HIGH HIGH Grant 2007

You are listening to WWBH , Kiss FM! The Radio Model Adapted from Sölvell

W HY? Ask yourself four basic questions H OW? B RING? W HERE? You are listening to WWBH , Kiss FM! Adapted from Sölvell

Internationalization framework INDUSTRY ENVIRONMENT Rivalry among firms Barriers to entry Bargaining power of suppliers Bargaining power of buyers Substitute products/services FIRM RESOURCES & CAPABILITIES Financial resources Physical resources Technology Reputation Functional capabilities General management capabilities NATIONAL ENVIRONMENT Political environment Economic environment Social environment Technological environment Environmental environment Legal environment National culture Cluster conditions WWBH

Why internationalize? To build global efficiency Benefiting from differences in factor costs – wages, cost of capital Expanding and exploiting potential scale economies - manufacturing, R&D, sales & marketing Sharing of investments and costs across markets and businesses To manage risks through multinational flexibility Different kinds of risks arising from market- or policy-induced changes in comparative advantages of different countries Portfolio diversification of risks and creation of options and side bets To facilitate innovation and learning Tapping into a skill base, eg. technological, organizational, managerial Benefiting from experience – cost reduction and innovation Synergies and shared learning across different products, markets, or businesses Other Following global customers Building reputation, changing identity Adapted from Grant 2007

Forces for worldwide innovation and learning Increasing pace of technology development Shortening product life-cycles Rising R&D costs Increasing number of multinationals with capability to develop and diffuse innovation globally 2-11 Increasing need to develop worldwide organization as a learning system Innovative capability as emerging source of competitive advantage Adapted from Grant 2007

Did You Know: Shift Happens http:// www.youtube.com/watch?v =pMcfrLYDm2U Which globalization forces are presented?

But…. Not every firm is ready to internationalize Prematurely venturing outside borders may harm overall firm performance, especially for smaller firms with small margin for error • Long-term investment • High ambitions - risk • Commitment - exit barriers Adapted from Sölvell

Where? ? ? ? ? ? ? ? ? ? ? ? ? 192 member states in UN !!! ? Wikipedia

PESTEL – What characterizes the national environment? Johnson & Scholes 1997 Political Environmental Technological Legal Social Economic National environment

1. Which of these are the most important at the present time? 2. Which of these will be the most important in the next few years? Political Global, regional, and national political development (administration, political parties) Taxation policy Foreign trade regulations Labour market politics Government stability Terrorism Social Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work and leisure Attitudes to consumerism Levels of education Changes in values/attitudes Education conditions Work environment conditions Health conditions Environmental Ecology Pollution conditions ” Green” energy Energy conservation Waste handling Economic Business cycles GNP trends Interest rates & exchange rates Money supply Inflation Unemployment Wage level Private consumption and disposable income Public finances Energy availability and cost Technological Government spending on research Government and industry focus of technological effort New discoveries/development Speed of technology transfer Rates of obsolescence New patents and products Legal Development in price and competitive legislation Labour market legislation Product safety and approvals

How far is the distance from the home country? Cultural distance Difference between two cultures along some identifiable dimensions, eg such as power distance Institutional distance Extent of similarity or dissimilarity between regulatory, normative, and cognitive institutions of two countries Grant 2007

Differences in uncertainty avoidance and power distance Grant 2007

Five dimensions of national culture Differences in national culture found to result in different organizational and administrative practices and employee expectations (Kogut & Singh 1988, Zander 1997, Straub 1994) Power distance Degree that less powerful members of organizations and institutions accept and expect that power is distributed unequally Individualism Degree that individuals are integrated into strong cohesive groups Masculinity Degree that values are characterized by assertiveness and competitiveness vs modesty and caring Uncertainty avoidance D egree that individuals feel comfortable with ambiguity, uncertainty, unstructured situations Long-term orientation Degree that individuals deal with virtue regardless of truth (thrift and perseverance) vs tradition, fulfilling social obligations, and protecting “face” Hofstede 1980, 2003

Three pillars of institutional profile Differences in institutional profile found to result in adoption of different organizational and administrative practices (Kostova & Roth 2002, Busenitz et al. 2000) Regulatory Government policies and legal system Normative Value systems Cognitive Widely shared social knowledge Note: Cross-cultural management researchers are divided as to whether national culture and institutional profile are distinct. Scott 1995

What is the quality of the business environment? Porter’s Diamond Model

Is there a cluster to tap into? Haan

A high-technology cluster in Israel Recognized as excellent source of technology innovation Largest concentration of high-tech companies outside US Created category leaders in various industries Tremendous concentration of global technology leaders Haan

The Boston Life Sciences Cluster – Porter 2005

Nations/regions are trying to attract investment

After this preliminary screening… Which foreign markets warrant further detailed investigation?

Industry definition A group of firms producing products that are close substitutes for each other Porter

How big is the profit and who is after it? vs Profit Profit

Five forces of competition SUPPLIERS POTENTIAL ENTRANTS SUBSTITUTES BUYERS INDUSTRY COMPETITORS Rivalry among existing firms Bargaining power of suppliers Bargaining power of buyers Threat of new entrants Threat of substitutes Porter

Rivalry between established competitors Numerous or equally balanced competitors Slow industry growth High fixed costs Lack of differentiation or switching costs Capacity augmented in large increments High strategic stakes High exit barriers What makes competitors “fight” harder? Porter

Bargaining power of buyers Buyer’s price sensitivity Relative bargaining power What is cost of product as % of buyer’s total costs? How differentiated is the purchased item? How intense is competition between buyers? How important is the item to quality of the buyer’s own output? What are size and concentration of buyers relative to sellers? What are buyer’s switching costs? What is buyer’s information? What is ability to backward integrate? Porter Who decides the price?

Bargaining power of suppliers Supplier’s price sensitivity Relative bargaining power What is cost of supplies as % of total supplier’s sales? How differentiated is the supplied item? How intense is competition between suppliers? What are size and concentration of sellers relative to buyers? What is supplier’s information? What is supplier’s ability to forward integrate? Porter Who decides the price?

Threat of substitutes Existence of substitutes places ceiling on prices that can be charged Same function Train/plane/car/ICT Better price-performance Books/videos Record-players/CD-players Security guards / electronic alarm systems Point A ? Porter How “easy” is it to switch? Point B

Threat of new entrants High capital requirements High economies of scale Strong customer loyalties High switching costs High product differentiation Limited access to distribution channels High legal/regulatory barriers Large cost disadvantages independent of scale Ex. Proprietary technology, raw materials, location, learning curve, government subsidies Strong retaliation by industry participants What keeps new competitors out - barriers to entry? Porter

Can you enter from a vantage point? Adapted from Sölvell

What do you bring? RESOURCES TANGIBLE INTANGIBLE HUMAN Financial Physical Management Systems Organization Structure ORGANIZATIONAL CAPABILITIES Skills/know-how Capacity for communication & collaboration Motivation Technology Reputation Culture Grant 2007

Functional classification of organizational capabilities FUNCTION CAPABILITY EXAMPLES Corporate Financial management ExxonMobil, GE management Strategic control IBM, Samsung Coordinating business units BP, P&G Managing acquisitions Citigroup, Cisco MIS Speed and responsiveness through Wal-Mart, Dell, rapid information transfer Capital One R&D Research capability Merck, IBM Development of innovative new products Apple, 3M Manufacturing Efficient volume manufacturing Briggs & Stratton Continuous Improvement Nucor, Harley-D Flexibility Zara, Four Seasons Design Design capability Apple, Nokia Marketing Brand management P&G, LVMH, Coke Quality reputation Johnson & Johnson Responsiveness to market trends MTV, L’Oreal Sales, distribution Sales responsiveness PepsiCo, Pfizer & service Efficiency and speed of distribution LL Bean, Dell Customer Service Singapore Airlines Caterpillar Grant 2007

How well can you sustain your advantage? Scarcity: How scarce are your resources? Imitability: How easy is it to imitate your resources and capabilities? Bundled: How easy is it to identify your resources and capabilities? Adapted from Grant 2007

Leveraging resources and capabilities for success

Modes of entry choice Exporting Direct or indirect sales of services or products in foreign market from home market. Licensing Arrangement where firm (licensor) grants to independent foreign firm (licensee) rights of intangible assets (patents, trade secrets, know-how, trade marks, or company name) to produce firm's product or service in their country for negotiated fee - normally royalty payments on number of units sold. Franchising Specialized form of licensing in which firm (franchisor) licenses business system as well as other property rights to franchisee. Franchisor licenses way of organizing and conducting a business under its trade name and in return, the franchisor receives fees, running royalties, and other compensations from franchisee. Turnkey Firm agrees to handle every detail of project for foreign client, including training of personnel, and at completion “hands over key” to foreign client. Joint venture International firm shares in ownership of an enterprise in target country. Most commonly, international firm agrees to share capital and other resources with another local firm. Wholly owned subsidiary Firm acquires 100 percent of firm or sets up own through greenfield. Hill 2000

A hierarchical model of entry choice modes Adapted from Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538), Journal of International Business Studies , 31: 535–554. Commitment

Criteria for selecting entry mode Trade-off of four critical variables Control - Ability to influence systems, methods, and decisions in operation of target market Transfer risk - Possibility that firm specific advantages in know-how will be expropriated Resource intensity (cost) - Amount of dedicated assets, eg management, marketing, provision of technical support, and human resources Learning - Ability to gain foreign market knowledge, eg customer preferences, techniques of foreign operation, ways of doing business, legal rules, etc. Delfman Delfmann

Assessing trade-offs of entry modes Delfmann

Advantages & disadvantages of entry modes Hill 2000

Entry Modes - Exporting Advantages Avoids the often substantial cost of establishing manufacturing May help firm achieve experience curve & location economies Firm may manufacture in centralized location & export to other national markets to realize scale economies from global sales volume (Sony/TV, Matsushita/VCR, Samsung/Chips) Disadvantages Not appropriate if lower cost manufacturing locations High transport costs can make exporting uneconomical especially bulk products Tariff barriers can make exporting uneconomical If firm delegates marketing, sales & service to another company they may have divided loyalties because they carry competing products or are a large MNE (Diebold) Can set up wholly owned subsidiaries to handle local marketing & sales -> can exercise tight control while reaping cost advantage of manufacturing in a single location Burke

Entry Mode - Licensing Advantages Receive royalties for granting the rights to intangible property to licensee for specified period (patents, inventions, formulas, processes, designs, copyrights, trademarks) Licensee puts up most of the capital to get the operations going – mitigates development cost & risk Allows firm to participate where there are barriers to investment (Fuji-Xerox) Frequently used when firm possesses intangible property but does not want to develop the business application itself (Coco-Cola/clothing) Primarily used by manufacturing firms Disadvantages Does not give firm tight control over manufacturing, marketing & strategy to realize experience curve & location economies Does not allow firm to coordinate strategic moves across countries by using profits earned in one country for competitive attacks in another Firms can lose control over the competitive advantage of their technological know-how. Cross-licensing can mitigate risk by holding each other hostage for misuse Firms can reduce risk by forming a joint venture with each party taking equity stakes Burke

Entry Modes – Turnkey Project Advantages Means of exporting process technology (chemical, pharmaceutical, petroleum, mining) Know-how to assemble & run technologically complex process is valuable asset – earn economic benefit from asset Strategy useful where governments restrict FDI - less risky than conventional FDI Disadvantages Firm has no long term interest in the country – can take minority equity interest in company Firm may inadvertently create a competitor (middle east oil refineries) If firm’s process technology is a source of competitive advantage, then selling technology is also selling competitive advantage to potential competitors Burke

Entry Mode - Franchising Advantages Involves longer term commitment than licensing. Primarily used by service firms (McDonalds) Franchiser sells intangible property (trademark) & insists franchisee agrees to abide by strict business rules (location, methods, design, staffing, supply chain) Royalty payments that are some percentage of franchisee’s revenues Firm relieved of many costs & risks of opening new market. Disadvantages No manufacturing so no location economies & experience curve May inhibit the ability to take profits out of one country to support competitive attacks in another Risk of worldwide reputation if no quality control Firm can set up “master franchise” in each country – subsidiary which is JV (McDonalds & local firm) Burke

Entry Mode – Joint Ventures Advantages Typically 50/50 with contributed team of managers to share operating control Firm benefits from local partner’s knowledge of competitive conditions, culture, language, political system & business system Sharing market development costs & risks with local partner In some countries, political considerations make JVs the only feasible entry mode Disadvantages Risk of giving away your technology to a partner Hold majority ownership for more control in venture Wall-off technology that is central to your core competency Does not give firm control over subsidiaries that it might need to realize experience curve or location economies Global strategic coordination – firm use JV for checking competitor market share and limiting cash available for invading other markets (TI & Japan) Shared ownership can lead to conflicts & battles for control if goals/objectives change or they take different views on strategy Burke

Entry Mode – Subsidiary Advantages When there is technological competence wholly-owned subsidiary reduces risk over losing control Give firm tight control over operations in country -> engage in strategic coordination with profits Can realize location & experience curve economies – centrally determined decisions Disadvantages Most costly method of market entry Risk associated with learning to do business in a new culture Burke

Greenfield or Acquisition Greenfield better ability to build organization you want Easier to establish own culture & operating routine Do not have revenue & profit history Slower to establish – need to understand how to do business in that country Acquisition 50%-80% of FDI is acquisition Quick to execute – rapidly build presence Acquisitions can preempt competition Buying known revenue & profit stream Need to marry divergent corporate cultures Burke

Scale of entry: Commitment and experience Large-scale entry Benefits Demonstration of strategic commitment to certain markets, which both assures local customers and suppliers and deters potential entrants Drawbacks Large-scale entry limits strategic flexibility elsewhere Entrants must incur sizable losses if the large-scale entry “bet” turns out to be wrong Small-scale entry Benefits Less costly if entry is unsuccessful Organization learns through hands-on experience in host countries Drawbacks Lack of strong strategic commitment, which may lead to difficulties in building market share and capturing first mover advantages Ahlstrom & Cook

Strategic alliances growing in importance Cooperative agreement involving mutual dependence and shared decision making between potential or actual competing organizations Multiple forms including JVs, R&D collaborations, piggy backing, sourcing relationships, etc. Differ from traditional JVs Increasingly between firms in industrialized nations Focus on creation of new products and technologies rather than distribution of existing ones Reasons Rising R&D costs Shortening product life cycles Growing market entry barriers Increasing need for global scale economies Expanding importance of global standards Uncertainty in technological developments GEB 6365

Managing strategic alliances Understanding logic of collaboration Identifying when, where, and why to collaborate Usually one of several options for pursuing a strategic goal (eg product exchange, learning, market positioning) - never an end in itself Alternatives to collaboration: self-sufficiency, buying inputs or skills, full acquisition Selecting partners Knowing how to maximize benefits and minimize risks of partnerships Complementary needs and resources/capabilities Access to market Structuring alliances Choosing organizational forms that provide incentives for success Contracts vs. equity relationships GEB 6365

SUZUKI ISUZU TOYOTA IBC Vehicles Ltd. (U.K.) GM New United Motor Manufacturing Inc. (NUMMI) 10% owned. Co-production 49%owned. Co-production 40% investment 60% owned 50% owned 50% owned (Makes vans in UK) (Makes cars in US) SAAB 50% owned FIAT 20% owned (2000-5). Collaboration on technology and components FUJI 20% owned; joint production DAEWOO 50.9% owned; technical & production collaboration AVTOVAZ Russian JV to produce cars SAIC JV to produce cars in China General Motors ’ alliances with competitors Grant 2007

Timing of entry Early entry Firm enters foreign market before other foreign firms First mover advantage Ability to preempt rivals & capture demand by establishing strong brand name Build sales volume and ride down experience curve with cost advantage Create switching cost that tie customers into products & services First mover disadvantages - Pioneering costs Time & effort in learning rules Mistakes due to ignorance Liability of being foreigner Costs of promoting & establishing product – educating customers (KFC in China -> benefit to McDonald’s) Adapted from Delfmann

Dynamics of internationalization Ongoing assessment of trade-offs and resources and capabilities Ongoing evaluation of national and industry environments Decision to increase internationalization involvement

Typical internationalization process Sporadic exporting in response to unsolicited requests Systematic exporting Licensing to a foreign company Strategic alliances Establishing a wholly owned sales subsidiary Acquiring existing foreign operations Establishing foreign manufacturing and/or R&D Fey 2008

W W B H Often forgotten Implicit Changed logic over time Often overstated Focus often put here Often forced trial-and-error Don´t forget 5 forces analysis! Lessons Adapted from Sölvell

Activio (www.activio.se) Vision To stimulate and improve physical activity and in the long term contribute to an increased wellbeing of today’s society Business Develops, manufactures, and markets heart-rate measurement systems for sports and health industry Systems in fitness centers, schools, professional sports clubs (eg Real Madrid and FC Barcelona) Organization Founded 2004 Competencies Health and fitness, physiology, technology Home country Sweden In use in Sweden, Norway, Denmark, Finland United Kingdom, Netherlands, Spain, Slovenia Turkey, Dubai

Exercise – Help Activio internationalize You are consultants to Activio (www.activio.se) In pairs, develop preliminary recommendations for Activio’s management Should Activio enter India? And if so, how?

What about recent developments in virtual worlds?

The number of virtual worlds is growing Wonderland Teigland 2008

Second Life – one example of a virtual world Film by Duke CE http://www.youtube.com/watch?v=Bi5i3UwVvbg Teigland 2008

Why should we be interested? Second Life as an example (March 2008): ~ 50,000 people online at any one time ~ 1,350,000 people logged on during past 60 days ~ 1,500,000 USD spent every day on virtual goods and services > Numerous multinationals going virtual Teigland 2008

Reaching out to co-create today’s solutions… Philips Design Group Teigland 2008

..and even tomorrow’s solutions Building the house of the future in an HSB competition Teigland 2008

Improving national competitiveness China’s “virtual world where millions will work, communicate, and be in love” 7 mln local + 150 mln overseas Chinese Five virtual banking licenses auctioned for $404,000 May 2007 Financial Times , June 2007 Teigland 2008

Sources Ahlstrom, D. & Cook, C., Global Strategy: Entering Foreign Markets, South-Western, 2005. Burke, Chapter 12: Entering Foreign Markets. Chapter 3: Developing Strategic Capabilities, McGraw-Hill. Delfmann, W. Boundaries of International Business Activities, University of Cologne. Fey, C. International Business, Stockholm School of Economics, 2008. GEB 6365 - INTERNATIONAL BUSINESS, EXECUTIVE MBA, The Internationalization Process & Market Entry Strategies, 2006. Gemcom, Triumphs & Tragedies in International Business, WAGON Conference, Perth April 2008. Grant, R. Contemporary Strategy Analysis, Blackwell, 2007. McGee, J., Thomas, H. & Wilson, D. Strategy: Analysis and Practice, McGraw-Hill, 2005. Porter, ME. Competitive Strategy, Free Press, 1980. Porter, ME. What is Strategy? HBR, Nov-Dec, 1996. Sölvell, Ö. The Radio Model, Stockholm School of Economics, 2007. Teigland, R., Fad or Future: What do virtual worlds have to offer?, www.slideshare.net/eteigland/, 2008.

Thanks and see you in world! Karinda Rhode aka Robin Teigland [email_address] www.knowledgenetworking.org www.slideshare.net/eteigland

Measurement GEB 6365 THE INTERNATIONAL MARKETING RESEARCH PROCESS FIRM OBJECTIVE INFORMATION REQUIREMENT PROBLEM DEFINITION CHOOSE UNIT OF ANALYSIS EXAMINE DATA AVAILABILTY Can Secondary Data be Used? ASSESS VALUE OF RESEARCH RESEARCH DESIGN DATA ANALYSIS INTERPRETATION/ PRESENTATION Firm’s Needs Market Orientation Strategic Orientation Problem Orientation Self Reference Criterion Country Region Global Subgroup/Segments Within Countries Cost/ Benefit Analysis Causal Descriptive Exploratory Data Preparation Data Manipulation T-tests & Cross TAbs Experimental Design & ANOVA Multivariate Techniques Advantages / Disadavantages of Secondary Research Sources of Secondary Data Types of Problems That CAn be Solved Using Secondary Data Frequency & Ease of Use Issues in Primary Data Collection Qualitative Methodsi Surveys Instrument Design Scale Development Sampling Types Sources of Bias Country/ Regional Specific Bias Equivalence Coding Wording Format Construct Sampling Analysis Yes No

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