Transcript Document

Slide 2.1
Course structure
Classes 1-4
Classes 5-9
International business environment
Regional vs. global
Triad and IB activities
Politics, culture, trade and finance
Firm-specific advantages and firm management
Organization
Production
Marketing
International HRM
Political risk management
International financial management
Class 10
Country-specific advantages
Classes 11-14
Locational choice and regional management
European Union, North America, Japan, and Emerging Markets
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.2
Regional and Global Strategy, the
Triad, Trade and FDI
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.3
Trade and investment
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Trade consists of exports and imports:
• Exports: goods and services produced in one country and then sold to
another country.
• Imports: goods and services produced in one country and bought in
another country.
Foreign Direct Investment: consists of companies investing funds to start
or improve operations in another country (influence, even control.)
• Different from portfolio investment –buying less than 10%
outstanding stocks of a foreign company through stock exchanges,
without pursuing any influence through, for instance, board
membership.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.4
Largest trading and
investing nations
2012
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.5
List of Economies by Exports
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.6
List of Economies by Imports
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.7
List of Economies by FDI abroad
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.8
List of Economies by FDI received
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.9
The triad
• Most global transactions take place within
and between three key regions: the United
States, the European Union and Asia,
notably Japan/China; these are referred to
as: the “triad”.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.10
2012 statistics from WTO - Trade
Region
1,151
3,637
3,012
NAFTA
EU 27
Asia
Outside
1,220
2,166
3,099
100%
1,220
2,166
3,099
1,151
3,637
3,012
50%
0%
NAFTA
EU 27
Region
Asia
Outside
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.11
Triad Regions
(2005 vs. today)
• European Union
• The United States
• Asia, primarily Japan/China
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.12
The Multinational enterprise (MNE)
• A company headquartered in one country but
with operations in one or more other countries.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.13
MNE activity
• Most MNE activity can be classified into two
major categories:
(1) Trade (exports and imports): More than 50% of all
trade is made by the world’s largest 500 MNEs.
(2) Foreign direct investment (FDI): 80% of all FDI is
made by the world’s largest 500 MNEs.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.14
Internationalization Process:
from domestic to multinational enterprises
(MNEs)
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.15
The internationalization process
• Internationalization: The process by which a
company enters a foreign market.
• Not all international business is done by MNEs.
Indeed, setting up a wholly-owned subsidiary is
usually the last stage of doing business abroad.
• Why do businesses wait to set up wholly-owned
subsidiaries?
– Foreign markets are risky.
– Ownership (residual claim) is more risky than, for
instance, franchise (a fixed pay upon contracts).
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.16
Figure 2.2
Entry into foreign markets: the internationalization process
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.17
License
Export
•via Agent / Dealers
•via Own Sales Reps
Local Packaging & Assembly
FDI (different entry modes)
• Mergers & JVs
• Acquisitions
• Greenfield (totally new plant)
Figure 2.2
Entry into foreign markets: the internationalization process
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.18
Level of Risk
Figure 2.2
Entry into foreign markets: the internationalization process
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.19
Why internationalize?
• Profit = (Price per unit –Cost per unit)*(Quantity sold)
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.20
Why FDI?
• Example 1:
• Apple Inc outsourced its assembly and packaging business to a
Taiwanese-owned company Foxconn, whose major manufacturing
operations are based in mainland China.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.21
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.22
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.23
Why FDI?
• Example 2:
• On Jan 23, 2012, Porsche Centre Abu Dhabi opened a US$6 million,
state-of-the-art Porsche Center that features the world’s largest
Porsche service center.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.24
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.25
Why do firms become MNEs?
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to diversify themselves against the risks and uncertainties
of the domestic business cycle;
to tap the growing world market for goods and services;
to reduce costs;
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.26
Why do firms become MNEs?
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to diversify themselves against the risks and uncertainties of the
domestic business cycle;
to tap the growing world market for goods and services;
to reduce costs;
in response to foreign competition;
to overcome barriers to entry into foreign markets;
to take advantage of technological expertise by manufacturing
goods directly.
Any other ideas?
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.27
Frameworks for international strategies:
Two perspectives
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.28
Two
perspectives
• Home country perspective
• Why and how to go out?
• Host country perspective
• Where and how to go in?
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.29
A home-country perspective
CSA/FSA Matrix by Alan Rugman
• Firm-specific advantages (FSAs): a unique
capability proprietary to the organization
• It may be built upon product- or process
technology, marketing- or distributional skills.
• Country-specific advantages (CSAs) – home
countries: country factors
• Natural resource endowments (minerals, energy
and forests), the labor force and associated
cultural factors, etc.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.30
From a home-country perspective: The FSA-CSA matrix
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.31
Cost efficiency
Differentiation
Focus
Restructuring
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.32
A host-country perspective
OLI paradigm by John H. Dunning
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Ownership advantages (O)
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Knowledge advantage
Management, marketing, financial skills
Vertical integration
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Control of resources
Control of markets
Internalization benefits (I)
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To enforce property rights and overcome other transaction costs
To reduce buyer uncertainty
To overcome government regulations
Location factors (L) – Host countries
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National production functions
Government controls and regulations
Political risk; cultural values
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.33
From a host-market perspective
OLI  Entry strategy
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.34
Case study 1:
Wal-Mart
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Founded by Sam Walton in 1962 in
Bentonville, Arkansas, Wal-Mart stores
offered customers a broad range of
goods, including lawn and garden,
jewelry, shoes, electronics, family
apparel, and toys. In the first year, WalMart garnered $700,000 in sales,
which increased to $5.4 million in
1974. In 1980, Wal-Mart became the
youngest U.S. retail company, and the
only regional retailer, to exceed $1
billion in net sales.
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During 1980s, Wal-Mart transformed
itself into a national discount retailer,
saturating regional markets and
forcing the closure of other domestic
retailers.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.35
Wal-Mart in Europe
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Wal-Mart entered the European market in the late 1990s, acquiring
stores in Germany in 1997 and United Kingdom in 1999. While its
U.K stores prospered, the German branch remained unprofitable.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.36
Wal-Mart
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In 1991, with net sales of $43.9 billion,
Wal-Mart became the world’s largest
retailer, and maintained this status since
then.
Between 1977-1992, Wal-Mart Stores
experienced a 35% compound annual
growth of both revenue and net profit.
Between 1992-2003, revenue and net
profit grew at 9% annually.
In 2002, Wal-Mart’s revenue equalled
2.3% of US GDP.
Total Wal-Mart sales on ‘Black Friday’ in
2002 equalled $14.2 billion, larger than
the GDP of 36 countries.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.37
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.38
Wal-Mart
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The largest company in the world
It has more employees in uniform than the U.S. military
It has the world’s largest private database, behind only the Sloan
Digital Sky Survey
If it were a nation, it would be China’s eighth-largest trading partner
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.39
FSAs: a successful business model
Everyday Low Prices (EDLP), through aggressive bargaining with
suppliers (and non-unionized employees)
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Acc. 2002 UBS, 14% lower than its rivals
Zoning: efficient distribution system and inventory control
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3% saving per item in purchasing costs due to logistics
Retail Link satellite/computer system, a $4 billion investment
Each store is within a day’s drive of a distribution center, which supplies 85% of
inventory (compared to 50%-60% for competitors)
Super-large market construction in suburban areas.
Unique culture
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Sam Walton’s three key principles:
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To respect the individual
To provide superior customer service (e.g., 24-hour service; helping bag purchases)
To strive for excellence
Sundown Rule: all concerns be addressed on the day of occurrence
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.40
Some Critics
• Low salaries of its employees: $18,000 per year in 2002
• Highly publicized legal suits concerning its hiring practices
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Charges of failing to pay overtime
Underpaying hourly workers
Sexual discrimination (women make up 70% of store workers but 10% of management)
Non-compliance with the Americans with Disabilities Act.
‘Locking in’ overnight workers
Conspiring with cleaning contractors to underpay immigrant workers
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.41
Retail globalization
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US retail chains had a long history of globalization
• Woolworth in Canada in 1897; in UK in 1909; in Germany in 1926;
• Sears Roebuck & Co in Cuba in 1942; in Mexico in 1947.
European retailers, notably German ones, led a second wave of globalization
• By 2003, Germany’s Metro Group made 47% of sales through it affiliates in
27 foreign countries, inc. China, India, Japan, Morocco, Russia, Turkey,
Ukraine, and Vietnam.
• Dutch food retailer Royal Ahold in US in 1977 (BI-LO, Giant Food Stores,
Finast, Tops, Stops & Stops, Giant Food Inc., and Peapot); in 2003, US
operations accounted for nearly 75%.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.42
Wal-Mart globalization
• A Late-comer, driven by flagging domestic growth.
• Intl division formed in 1993, after two JVs in Mexico in 1991.
• By 1997, 41 stores in Mecixo and 89 retail outlets (under various
names) within its control.
• Into Puerto Rico in 1992.
• Into Canada in 1994.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.43
Next stop: Germany
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The largest consumer market in Europe
• 15% of the continent’s $2 trillion annual retail market in 2001
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In 1997, Wal-Mart acquired Wertkauf chain (24 stores) from the Mann Family
and the unprofitable Interspar chain (74 stores) in 1998 for a combined $1.6
billion.
• Both equalled <3% of the market.
• Interspar stores were in poor repair and in poor locations.
• The leading German retailer was Metro Group, followed by Rewe Group.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.44
Immediate actions
• Wal-Mart started by refurbishment of stores to improve their
appearance and the maintenance of price leadership through cost
efficiency.
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Overhaul of the supply chain systems
Implementation of new scanning systems
Centralized distribution
High quality customer service (e.g., helping bag purchases)
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The fiercest price war in Germany’s recent history
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.45
German rules
• Unexpected regulatory obstacles
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Stringent zoning requirements
Price regulations
Limited store hours
More influential unions
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.46
zoning
• In 1997, Germany had app. 2,000 large-surface-area “green field” retail
sites, inc. hypermarkets, furniture stores, and home goods suppliers, all
of which had been built before 1977.
• In 1977, Germany had enacted strict planning and zoning regulations
(“building use plan”) designed to protect traditional retailers.
• The legislation prohibited the construction of stores with more than
800m2 (8,610 ft2) sales area in locations not designated for retailing.
• Indeed, by 2001, Wal-Mart had only managed to open two new stores,
and enlargement of existing stores.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.47
Zoning (cont’d)
• Opening a new large-surface-area store outside of an urban center
was technically possible, it required clearing several difficult hurdles.
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A neighboring city/town was required to create a “building use plan”
Environmental and conservation concerns, & potential private legal conflicts
No potential direct competition with stores in nearby towns
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The reality: almost no new extra-urban hypermarkets were opened in Germany since
1977
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.48
zoning (cont’d)
• “What Germany fears is the experience of cities like
Bordeaux, which had lost retail business to green field sites
outside of town. All that is left is old buildings and
monuments in the city center … We don’t want cities that
look like the United States.” -- Holger Wenzel, Head of
German Retail Federation.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.49
Pricing
• Conflict with Germany’s Federal Cartel Office, e.g., German Rebate
Law
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Wal-Mart’s price guarantee, which offered to refund the price diff between
WM price and any competitor advertising a lower price.
The Law prohibited any retailer from selling a product more than 5%
below its posted price.
1998 amendment: “selling below cost is forbidden except for good
justification” in order to protect existing business.
In June of 2000, the Cartel Office fined Wal-Mart $308,000 for violating
the 1998 amendment.
• Without a sizable scale of customers, Wal-Mart did not enjoy a high
bargaining power with local suppliers and logistics.
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In 2001, WM price were 11-25% higher than its German rivals.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.50
Labor Relations
• In late May 2002, Germany’s service sector union Ver.di, the
largest union in the world, filed a lawsuit against the
company, citing Wal-Mart Germany’s violation of HGB for
not releasing year-end figures for 1999 and 2000.
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Public figures for employees to negotiate wages and ensure job security
• Wal-Mart’s response:Ver.di was not a legitimate plaintiff.
• In April 2003, an appeal by Wal-Mart was dismissed and a
fine of 330,000 euro assessed.
• In July 2002,Ver.di organized 2,000 WM employees for a
two-day strike to get WM into HDE, Germany’s retail
sector employers’ association.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.51
Store hours
• 1956, 6:30pm weeknights; 2pm Saturdays; closed on
Sundays.
• 1989, 8pm on Thursdays (legislation); 6:30pm (labor
union).
• 1996, 8pm for weeknights.
• 2003, 8pm for Saturdays.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.52
Cultural Differences
• Local customer loyalty is high
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Metro, Aldi, and Rewe
• Uncomfortable with the friendly service
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Credit card payment
Free bags
Cashiers helping bagging purchases
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.53
Economic situation
• The proportion of household income that
Germans spend on retail purchases
continues to decline.
• Profit margins in German retailing are the
lowest in Europe.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.54
In 2006, Wal-Mart sold all 85
German stores to The Metro,
incurring a loss of $1 billion.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.55
Case study 2
Analyze the company’s position in the CSA/FSA matrix
Apply OLI to analyze why the company bought Jaguar and Land Rover
in UK
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009