International Strategy and Management

1. International Strategy and Management

2. Core Topics • International growth strategy • Global, international, multidomestic • Entering foreign markets • Market selection, timing, operational decisions • Entry modes • Exporting, licensing, franchising, joint ventures, strategic alliances, • Global marketing strategy • Global manufacturing strategy

3. Additional Topics • Globalization • Drivers, consequences, success factors • Global ethics • Impact on business • Culture • Determinants, impact on business • Foreign exchange • International human resource management

4. Textbooks • Global Business Today • Charles W.L. Hill; Irwin • Mastering Global Markets • Czinkota, Ronkainen, and Donath; Thompson • Total Global Strategy • George S. Yip; Prentice Hall

5. Pedagogy • Lecture / Discussion • Slides on web (before, complete) • Exercises • Hill – GlobalEDGE • Case studies • Simulation: Country Manager • Interpretive Software

6. Globalization

7. Globalization • The way it was…. • Self-contained national economies, isolation, differences in govt., culture, and business systems • The way it is… • Reduced barriers (GATT, tariffs), shrinking distance (technology, transportation, culture), interdependent economies • Sample slides

8. Average Tariff Rates (Manufactured Products as % of Value)

9. 2500 2000 1500 Trade Output (GDP) 1000 500 0 1950 1960 1970 1980 1990 2000 Growth – World Trade & Output

10. 8000 1973 1990 1997 2000 7000 Rest of World 6000 U.S.A. 48.5% 31.5% 32.4% 26% Latin America 5000 Japan 3.5 12 15.7 17 4000 W.Europe 3000 Asia Pacific U.K. 18.8 6.8 6.6 8 2000 North America 1000 France 7.3 10.4 9.8 13 Germany 8.1 .9 12.7 12 National Composition of MNCs

11. The Changing World Order • The fall of Communism in Eastern Europe and the former Soviet Union. • Czechoslovakia has divided itself into two states. • Yugoslavia has divided into 5 (often warring) successor states. • Pro-democracy movement (suppressed) in China. • Latin America has seen both democracy and free market reforms.

12. Globalization • Driving to work: The typical “American” experience • Your car • Your gasoline • Your investments • Your entertainment • Your morning snack • Your news

13. Globalization • “Has Globalization Gone Too Far?” • Rodrik - California Management Review, Vol. 39, No. 3, Spring 1997 • What are the tensions between social stability and globalization?

14. The Impact of Globalization • Jobs and income • Firms move jobs to low cost countries • Countries specialize in efficiently produced goods and import those they can not efficiently produce • Increases income in less developed countries • May lead to income inequality

15. The Impact of Globalization • Labor policies and the environment • Firms move to countries with weak laws • Economic progress leads to stronger laws • By creating wealth and incentives for technology improvements, world will be better • Tie strong laws to international agreements

16. What makes a company global? • “What Makes a Company Global” • Kogut - HBR Reprint 99106 • Multinational / Multidomestic • Products differ greatly among country markets; high transportation costs, no scale economies • Global • Benefit from worldwide volume; larger production plants (MES), larger production runs, more efficient logistics networks, higher volume distribution networks

17. Global Success Factors • Industry potential • Timing • Entry barriers • First mover advantage • Preempting leading positions in NICs • Create switching costs • Block access to supply chain • Arbitrage – exploiting differences • Culture, administration, geography, economics • “The Forgotten Strategy” • Ghemawat - HBR Reprint R0311E

18. Globalization - Exercise • globalEDGE Exercise • globalEDGE Diagnostic Tools • GLOBE: Globalization Benchmark

19. Global Ethics

20. Guiding Principles Three Guiding Principles • Respect for core human values, which determine the absolute moral threshold for all business activities. • Respect for local traditions. • The belief that context matters when deciding what is right and what is wrong. “Values in Tension: Ethics Away From Home” Donaldson – HBR Reprint 96502

21. Global Ethical Perspective • Treat corporate values and formal standards as absolutes. • Design and implement conditions of engagement for suppliers and customers. • Allow foreign business units to help formulate ethical standards and interpret ethical issues. • In host countries, support efforts to decrease institutional corruption. • Exercise moral imagination.

22. Global Ethics • Incentives to be ethical • Avoid legal penalties, bad PR, employee satisfaction • Ethics and corruption • Foreign Corrupt Practices Act 1977 • Example • Ethics and human right • China & Tibet • Alien Tort Statute 1789 – Unocal in Myanmar

23. Ethics and Corruption After graduating, your first assignment lands you in Asia as the local director of a U.S. pharmaceutical firm. It was a small operation, but you have big plans. You hope to segment your customers, empower your workers, implement just-in-time production, and use the balanced scorecard to keep score. You figure to double your business in the first year. But right now, you’re thinking it might have been a better idea to take that consulting offer instead. The first million-dollar shipment of your company’s new HIV-fighting drug has just been removed from the refrigerated C-130 cargo plane. It sits on the steaming tarmac, not 30 feet away, practically melting in the midday heat. Another twenty minutes, and it’s ruined. Unfortunately, you can’t seem to clear it through customs. There is some question as to the approval process that a new product has to go through to enter the country. You’re not sure you can wait. The friendly local customs official cruising around the airport looks from you to the metal container, trying to decide which of you is sweating more profusely. Leaning against the counter, he reviews your bills of lading and other customs documents. “Your papers look to be in order, but I am just not sure about the proper approval process,” he says. You despair. Re-opening the approval process will take time you don’t have. What should you do?!? Fortunately, you remember the $1000 traveler’s check in your back pocket that’s supposed to pay for your apartment deposit. You walk over to the official, grab the manifest, stuff the check into the stack of papers, and hand it back to him. A smile spreads across his face. He decides that his insecurity about the approval process has lessened. “You are so thoughtful to understand. I look forward to conducting further business with you. Your cargo is cleared through customs.”

24. Global Ethics - Case • Hitting the Wall: Nike and International Labor Practices – HBS 9-700-047 • Managing a multinational firm involves managing and exploiting differences among countries. In the case of workplace standards and environmental protection, managers have to understand the underlying tradeoffs and balance exploitation of differences with global ethics.

25. Culture

26. Norms Social rules and guidelines that prescribe appropriate behavior in particular situations Folkways: Routine conventions of everyday life Mores: Central to functioning of society and its social life Culture Culture is a system of values and norms shared among a group of people and, when taken together, constitute a design for living. • Values • Abstract ideas about what a group believes to be good, right, and desirable • The bedrock of culture • Have emotional significance. • Freedom

27. What are “American Values?” • Achievement and success • Individualism • Freedom • Progress • Democracy • Equality

28. Views of Another Culture How the Americans see the French: -arrogant • flamboyant • hierarchical • emotional How the French see the Americans: -naive • aggressive • unprincipled • workaholic French culture American culture Norms and Values

29. Hofstede’s Work-Related Values • Theory and empirical foundation is used in a general way to look at differences between cultures. • 5 dimensions • Power distance • Individualism vs. collectivism • Uncertainty avoidance • Masculinity vs. femininity • ST vs. LT orientation • But • Don’t assume everyone in a country has the same norms and values U.S. China

30. Determinants of Culture Religion Language Education Culture: Norms and Value Systems Political Philosophy Economic Philosophy Social Structure

31. Christian(1.2 Billion) Islam(1 Billion) 20% 43% Hindu(500 Million) 18% Buddhist(250 Million) Confucian(150 Million) 4% 10% 5% Other/Nonreligious Religion Distribution

32. Impact of Religion on Business • Buddhism • Little emphasis on entrepreneurial behavior • Christianity • “Protestant Work Ethic” and “The Spirit of Capitalism” • Confucianism • Loyalty, reciprocal obligations, and honesty in dealings • Hinduism • Asceticism may have an impact (spiritual achievements) • Caste system plays a role • Islam • Favors market-based systems (free enterprise) • No payment or receipt of interest

33. Language • Allows people to communicate • Structures the way the world is perceived • Directs attention to certain features of the world rather than others • Helps define culture • Creates separatist tendencies? • Canada, Belgium, Spain, Cyprus • Non-verbal (93% of communication) • Eyebrows, fingers/thumbs, hand gestures, feet, personal space, body gestures (ok, thumbs up)

34. For int’l business, it is a determinant of national competitive advantage (post-war Japan) Formal education supplements family role in teaching values and norms Medium to learn language, conceptual, and math skills Focus on facts of social and political nature of society Value of personal achievement and competition Obligations of citizenship Education

35. Political Philosophy (System) Democracy and Totalitarianism • Democracy • Government by the people, exercised either directly or through elected representatives. • Totalitarianism • Government in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited.

36. Economic Philosophy (System) • Market Economy • All productive activities are privately owned • Command Economy • Goods and services produced, their quantity, and prices are determined by the government • Mixed Economy • Parts of the economy are left to private ownership and free market mechanisms while other sectors are state-owned and have government planning • State-Directed Economy • The state plays a significant role through its “industrial policy” and setting national goals

37. Social Structure • Individuals vs. Groups • Shared sense of identification • Degree to which group is viewed as the primary means of social organization • Cooperation – MIT Study • Social Stratification • Social strata • Social mobility • Class system

38. Cultural Change • Americanization/Westernization • Global brands • McDonald’s in China • Levi’s in India • Sony Walkman in South Africa • MTV everywhere • Countertrends • Quebec, Russia, Islamic fundamentalism

39. Culture - Case • Euro Disney: The First 100 Days”– HBS 9-693-013 • Planning process • The role of culture • Differences in culture vs. attitude about culture • Adapting versus adopting – what is core?

40. Foreign Exchange

41. Foreign Exchange & Strategy • “Note on Operating Exposure to Exchange-Rate Changes” • Luehrman – HBS 9-288-018 • Example: Losses at JAL Airlines (Hill) • Case: Japan’s Automakers Face Endaka – HBS 9-796-030 • Impact on business model - What they sell, how they sell, where they manufacture, manufacturing process • Japanese response vs. U.S. response

42. Foreign Exchange Markets

43. Foreign Exchange Markets • The FOREX market provides the physical and institutional structure through which the money of one country is exchanged for that of another country • A foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of one currency will be delivered for some other currency at a specified rate

44. Foreign Exchange Markets • There are six main characteristics of the FOREX markets which will be discussed • The geographic extent • The three main functions • The market’s participants • Its daily transaction volume • Types of transactions including spot, forward and swaps • Methods of stating exchange rates, quotations, and changes in exchange rates

45. FOREX Market Geography • Geographically, the FOREX market spans the globe with prices moving and currencies trading on a 24 hour basis • Major exchanges are located in Singapore, Hong Kong and Tokyo in the East • Then it moves to Bahrain, and London for the European area • And on to New York, San Francisco and Sydney

46. Tokyo opens Asia closing 10 AM In Tokyo Lunch In Tokyo Europe opening Americas open London closing Afternoon in America 6 pm In NY FOREX Market Geography Measuring FOREX Market Activity: Average Electronic Conversations Per Hour Greenwich Mean Time

47. FOREX Market Functions • The FOREX market is the mechanism by which participants transfer purchasing power between countries, obtains or provides credit for international trade, and minimizes exposure to exchange rate risk • Transferring of purchasing power is necessary because international trade and capital transactions normally involve parties in countries with different currencies yet each party wishes to transact in their own currency

48. FOREX Market Functions • Because the movement of goods between countries takes time, inventory in transit must be financed. The FOREX market provides a source of credit via specialized instruments such as letters of credit • The FOREX market provides “hedging” facilities for transferring foreign exchange risk to someone else more willing to carry that risk

49. FOREX Market Participants • The FOREX market consists of two tiers, the interbank or wholesale market, and the client or retail market • Five broad categories of participants operate within these two tiers • Bank and non bank foreign exchange dealers • Individuals and firms conducting commercial or investment transactions • Speculators and arbitragers • Central banks and treasuries • Foreign exchange brokers

50. Bank/Non-Bank Dealers • These participants profit from buying currencies at a bid price and then reselling them at an offer or ask price • Competition among dealers narrows the spread between the bid and offer rate contributing to the market’s efficiency • Dealers on behalf of large international banks often act as market makers, often willing to stand in and buy or sell these currencies without having a counterpart with which to unload the “inventory” Bid price: The price a buyer is willing to pay. Offer (Ask price): the price a seller is willing to receive. Bid-Ask spread: The amount that the ask price exceeds the bid. Market maker: A broker-dealer willing to accept the risk of holding a particular currency in order to facilitate trading in that currency.