Daniels ib13 ppt_14

Editor's Notes

• #5: Although companies may have products or services that consumers abroad would like to buy, producing them within their home markets may be too expensive, especially if other companies can make reasonably similar substitutes abroad at a lower cost. Transportation raises costs so much that it becomes impractical to export some products. Moreover, the higher the transportation costs relative to production costs, the more difficult for companies to develop viable export markets. For example, the international transportation cost for a soft drink is a high percentage of the manufacturing cost, so a sales price that includes both the manufacturing and transportation costs would be so high by exporting that soft-drink companies would sell little. As long as a company has excess capacity, it may compete effectively in export markets despite high transport costs. Thus Excess capacity: • Usually leads to exporting rather than new direct investment • May lead to competitive exports because of variable cost pricing The more that products must be altered for foreign markets, the more likely that some production will shift to foreign markets. Whirlpool, for example, finds that most U.S. demand is for top-loading washing machines with large capacity using 110 electrical voltage, but most European demand is for front-loading washing machines (more efficient in using energy and water) with smaller capacity using 220 voltage. Given the differences in product preferences, Whirlpool produces in both the United States and Europe. Although governments have been reducing import barriers, they still restrict many imports. Thus companies may find that they must produce in a foreign country if they are to sell there. For example, Volkswagen decided to build its Skoda models in India because of India’s 121 percent duty on the imports. Consumers sometimes prefer domestically produced goods because of: • Nationalism • A belief that these products are better • A fear that foreign-made goods may not be delivered on time
• #8: For direct investment to take place, control must accompany the investment. Otherwise, it is a portfolio investment. If ownership is widely dispersed, then a small percentage of the holdings may be sufficient to establish control of managerial decision making. Generally, the more ownership a company has, the greater is its control over the decisions. However, governments often protect minority owners so that majority owners do not act against their interests. Internalization is control through self-handling of operations. This concept comes from transactions cost theory, which holds that companies should seek the lower cost between handling something internally and contracting another party to handle it for them. Self-handling may reduce costs for the following reasons: 1. Different operating units within the same company are likely to share a common corporate culture, which expedites communications. 2. The company can use its own managers, who understand and are committed to carrying out its objectives. 3. The company can avoid protracted negotiations with another company on such matters as how each will be compensated for contributions. 4. The company can avoid possible problems with enforcing an agreement. The idea of denying rivals access to resources is called the appropriability theory. Companies are reluctant to transfer vital resources—capital, patents, trademarks, and management know-how—to another organization. The organization receiving these resources may be able to use them to undermine the competitive position of the foreign company transferring them. Freedom to pursue global strategy: When a company has a wholly owned foreign operation, it may more easily have that operation participate in a global strategy. For example, if a U.S. company owned 100 percent of its Brazilian operation, it might be able to take actions that, although suboptimizing Brazilian performance, could deal more effectively with actual or potential competitors and customers globally—such as decreasing prices to an industrial customer in Brazil to gain that customer’s business in Germany. Or it might standardize its product to gain global cost savings even though this might result in some lost sales within Brazil. But if the company shared ownership in Brazil, either action might be detrimental to the other owners in Brazil, who would balk at such practices. How to make FDI: Buying: Direct investment by acquisition The advantages of acquiring an existing operation include: • Adding no further capacity to the market • Avoiding start-up problems • Easier financing at times Greenfield Investments: Companies may choose to build if: • No desired company is available for acquisition • Acquisition will lead to carryover problems • Acquisition is harder to finance
• #9: To produce or sell abroad, a company must incur certain fixed costs. At a small volume of business, it may be cheaper for it to contract the work to a specialist rather than handle it internally. A specialist can spread the fixed costs to more than one company. If business increases enough, the contracting company may then be able to handle the business more cheaply itself. The resource-based view of the firm holds that each company has a unique combination of competencies. A company may seek to improve its performance by concentrating on those activities that best fit its competencies, depending on other firms to supply it with products, services, or support activities for which it has lesser competency. This concentration may be considered as horizontal or vertical. Sometimes markets are not large enough to hold many competitors. Companies may then band together so as not to compete. For example, approximately 30 communications carriers, including GTE, MCI, AT&T, and Cable and Wireless, teamed up to form New World, a broadband fiber-optic network connecting the United States with Latin America and the Caribbean. There are potential cost savings and supply assurances from vertical integration. However, both small and large companies may lack the competence or resources necessary to own and manage the full value chain of activities. For example, a study of small and medium-sized Argentine furniture manufacturers showed that they gained manufacturing efficiencies and better access to global markets through vertical alliances. Many companies pursue collaborative arrangements to learn about a partner’s technology, operating methods, or home market so that their own competencies will broaden or deepen, making them more competitive in the future.
• #10: Cultural, political, competitive, and economic differences among countries create barriers for companies abroad. When they feel ill equipped to handle these differences, they may seek collaboration with local companies who will help them. For example, Wal-Mart first tried to enter the Japanese market on its own but gave up after having disappointing sales. It has since returned with a Japanese partner, Seiyu, which is more familiar with Japanese tastes and rules for opening new stores. Virtually all countries limit foreign ownership in some sectors. India and Russia are examples of countries that are particularly restrictive in that they set maximum foreign percentage ownership in an array of industries. In addition, they usually require lengthy negotiations with governmental authorities to determine the terms of operations, and a savvy local partner can help the foreign investor. Thus companies may have to collaborate if they are to serve certain foreign markets. Many countries provide little de facto protection for intellectual property rights such as trademarks, patents, and copyrights unless authorities are prodded consistently. To prevent pirating of these proprietary assets, companies sometimes have made collaborative agreements with local companies, which then monitor so that no one else uses the asset locally. For a company wishing to pursue a geographic diversification strategy, collaborative arrangements offer a faster initial means of entering multiple markets because other companies contribute resources. However, collaborative arrangements will be less appealing for companies whose activities are already widely extended or for those that have ample resources for such extension. The higher managers perceive the risk in a foreign market, the greater their desire to form collaborative arrangements in that market. Companies worry that political or economic changes will affect the safety of assets and their earnings in their foreign operations. One way to minimize loss from foreign political occurrences is to minimize the base of assets located abroad—or share them. A government may be less willing to move against a shared operation for fear of encountering opposition from more than one company.
• #11: The more a company depends on collaboration, the more likely it is to lose decision-making control, such as on quality, new-product directions, and how much to expand. This is because each partner favors its own performance over that of the company network involved, which necessitates compromises. Collaboration also implies sharing revenues and knowledge—an important consideration when profit potentials are high and when information sharing might increase a potential competition. Thus, loss of control over flexibility, revenues, and competition is an important consideration guiding a company’s selection of forms of foreign operation. When a company already has operations (especially wholly owned ones) in place in a foreign country, some of the advantages of collaboration are no longer as important. The company knows how to operate within the foreign country and may have excess plant or human resource capacity it can use for new production or sales.
• #12: Licensing often has an economic motive, such as the desire for faster start-up, lower costs, or access to additional resources. The amount and type of payment for licensing arrangements vary, as each contract is negotiated on its own merits. Companies commonly negotiate a “front-end” payment to cover technology transfer costs. Licensors of technology do this because usually more is involved than simply transferring explicit knowledge, such as through publications and reports. The move requires the transfer of tacit knowledge, such as through engineering, consultation, and adaptation, and these face-to-face interactions incur costs. The licensee usually bears the transfer costs so that the licensor is motivated to ensure a smooth adaptation. Of course, the license of some assets, such as copyrights or brand names, has much lower transfer costs. Technology may be old or new, obsolete, or still in use at home when a company licenses it. Many companies transfer technology at an early or even a developmental stage so products hit different markets simultaneously. This simultaneous market entry is important when selling to the same industrial customers in different countries and when global advertising campaigns can be effective. Although we think of licensing agreements as collaborative arrangements among unassociated companies, licensing is also common between parents and their wholly and partially owned operations abroad. One reason is that operations in a foreign country, even if 100 percent owned by the parent, are usually subsidiaries, which are legally separate companies.
• #13: A franchisor may penetrate a foreign country by dealing directly with individual franchisees or by setting up a master franchise and giving that organization the rights to open outlets on its own or develop subfranchisees in the country or region. In the latter case, subfranchisees pay royalties to the master franchisee, which then remits some predetermined percentage to the franchisor. Finding suppliers can add difficulties and expense for food franchisors. For example, McDonald’s had to build a plant to make hamburger buns in the United Kingdom, and it had to help farmers develop potato production in Thailand. Success generally depends on three factors: product and service standardization, high identification through promotion, and effective cost controls. A dilemma when operating abroad is that the first of these may be difficult to transfer. For example, standardization is important for food franchising so that consumers know what to expect. But when a company enters a foreign country, the taste preferences may be different. In fact, even regionally within large countries, tastes may differ.
• #14: In a foreign management contract, a company transfers management personnel and administrative know-how abroad to assist a company for a fee. Contracts usually cover three to five years, and fixed fees or fees based on volume rather than profits are most common. An organization may pay for managerial assistance when it believes another company can manage its operation more efficiently than it can. The ability to manage more efficiently is most apt to occur because of industry-specific capabilities. With management contracts, the owners and host country get the assistance they want without foreign companies’ control of the operations. In turn, the management company receives income without having to make a capital outlay.
• #16: One characteristic that sets the turnkey business apart from most other international business operations is the size of many of the contracts, frequently for hundreds of millions of dollars and into the billions. This means that a few very large companies—such as Bechtel (U.S.), Fluor (U.S.), Skanska (Sweden), and Hochtief (Germany)—account for a significant share of the international market. The nature of these contracts places importance on hiring executives with top-level contacts abroad, as well as on ceremony and building goodwill, such as opening a facility on a country’s independence day or getting a head of state to inaugurate a facility. Many turnkey contracts are for construction in remote areas, necessitating massive housing construction and importation of personnel. Projects may involve building an entire infrastructure under the most adverse conditions, such as Bechtel’s complex for Minera Escondida, which is high in the Andes. So turnkey operators must have expertise in hiring workers willing to work in remote areas for extended periods and in transporting and using supplies under very adverse conditions. Payment for a turnkey operation usually occurs in stages as a project develops. Commonly, 10 to 25 percent comprises the down payment, with another 50 to 65 percent paid as the contract progresses, and the remainder paid once the facility is operating in accordance with the contract. Because currency fluctuations can occur during the long time frame between conception and completion, contracts commonly include price escalation clauses or cost-plus pricing.
• #17: Possible Combinations: • Two companies from the same country joining together in a foreign market • A foreign company joining with a local company • Companies from two or more countries establishing a joint venture in a third country • A private company and a local government forming a joint venture • A private company joining a government-owned company in a third country
• #18: The purpose of the equity ownership is to solidify a collaborating contract, such as a supplier-buyer contract, so that it is more difficult to break—particularly if the ownership is large enough to secure a board membership for the investing company. The more equity a firm puts into a collaborative arrangement, coupled with the fewer partners it takes on, the more control it will have over the foreign operations conducted under the arrangement. Note that non-equity arrangements typically entail at least one and often several partners.
• #19: Relative Importance: One partner may give more management attention to a collaborative arrangement than the other does. If things go wrong, the active partner blames the less active partner for its lack of attention, and the less active partner blames the more active partner for making poor decisions. The difference in attention may be due to the different sizes of partners. For example, if the joint venture is between a large and a small company, the venture comprises a larger portion of operations for the small company than for the large one, so the small company may take more interest in the venture. Divergent Objectives: Although companies enter into collaborative arrangements because they have complementary capabilities, their objectives may evolve differently over time. For instance, one partner may want to reinvest earnings for growth and the other may want to receive dividends. One partner may want to expand the product line and sales territory, and the other may see this as competition with its wholly owned operations. Questions of Control: Sharing assets with another company may generate confusion over control. When companies license their logos and trademarks for use on products they themselves do not produce, they may lack the ability to discern and control quality. Yet poor quality may affect sales of all products using the brand name and logo. Comparative Contributions and Appropriations Partners’ relative capabilities of contributing technology, capital, or some other asset may change over time. In addition, one partner may suspect that the other is taking more from the operation (particularly knowledge-based assets) than it is, which would enable it to become a competitor. In the face of such suspicions, information may be withheld, which, in time, weakens the operation. Culture Clashes: Managers and the companies for which they work are affected by their national cultures, such as in how they evaluate the success of their operations. For example, U.S. companies tend to evaluate performance on the basis of profit, market share, and specific financial benefits. Japanese companies tend to evaluate primarily on how operations help build their strategic positions, particularly by improving their skills. Differences in Corporate Cultures: Differences in corporate cultures may create problems within joint ventures. For example, one company may be accustomed to promoting managers from within the organization, whereas the other opens its searches to outsiders. One may use a participatory management style and the other an authoritarian style. One may be entrepreneurial and the other risk averse. Thus, many companies develop joint ventures only after they have had long-term positive experiences with the other company, such as through distributorship or licensing arrangements.
• #20: Companies’ capabilities may change over time and influence the form of operations undertaken. For example, collaboration provides a company the opportunity to learn from its partner, enabling it to make a deeper commitment confidently. However, the cost of switching from one form to another—for example, from licensing to wholly owned facilities—may be high because of possibly having to pay contractual termination fees to another company. Tension may develop internally as a company’s form of international operations changes, because individuals may gain or lose responsibilities. The people who then end up with less responsibility may be disadvantaged if bonuses and promotions are based largely on the size of their sales or profits. Given that their lower performance is due to decisions outside their control, companies should evaluate largely on those things that are controllable by personnel in different divisions. Compatible Partners: A company can identify potential partners by monitoring journals, attending technical conferences, and developing links with academic institutions. It can even find partners through social situations as acquaintances offer introductions to managers in other firms. Negotiating the Arrangement: In technology agreements, • A seller does not want to give information without assurance of payment • A buyer does not want to pay without evaluating information Drawing up the contract: Contracts with other companies cause some loss of control over the asset or intangible property that is transferred. A host of potential problems attend this lack of control and should be settled as much as possible in the original agreement. Mutual goals should be set so all parties understand what is expected, and the expectations should be spelled out in the contract. At the same time, not everything can be included in a contract. You need to develop sufficient rapport with partners so that common sense, along with the contract, plays a part in running the collaboration. Improving Performance: When collaborating with another company, managers must • Continue to monitor performance • Assess whether to change the form of operations • Develop competency in managing a portfolio of arrangements Contracting a compatible partner is necessary but insufficient to ensure success of a collaborative arrangement. Once an agreement is operational, it must be managed effectively. Management should estimate potential sales and costs, determine whether the arrangement is meeting quality standards, and assess servicing requirements to check whether the collaborative arrangement is meeting its goals and whether each partner is doing an adequate job.
• #21: Collaborations must overcome differences in a number of areas: • Country cultures that may cause partners to obtain and evaluate information differently • National differences in governmental policies, institutions, and industry structures that constrain companies from operating as they would prefer • Corporate cultures that influence ideologies and values underlying company practices that strain relationships among companies • Different strategic directions resulting from partners’ interests that cause companies to disagree on objectives and contributions • Different management styles and organizational structures that cause partners to interact ineffectively