Lesson 4

1. Lesson 4 Global Strategic Management International Investment Management

2. Global Strategic Management Issues: () International Management Strategies () The MNE’s Strategic Orientations () Strategic leadership () Strategic architecture & Strategic flexibility () Industry Competitiveness ()MNEs’ Competitive Advantage () Building Blocks of Competitive Advantage Value Chain & Competitiveness Cases: Larry Bossidy at AlliedSignal Mechanical excavator industry U.S. Semiconductor Industry in Early 1990s Wal-Mart; Intel

3. 4.5 Value Chain & Competitiveness Company Infrastructure Information systems Material management Human resources Value Chain Analysis Support Activities R&D Production Marketing Service Input Output Primary Activities

4. Value Chain & Competitive Advantage Value Chain Analysis Identify Bases for developing Resource Audit Capability Assessment Value Activities Value Drivers Cost Drivers Critical Linkages Competitive Advantage

5. e.g. Intel Why did Intel lose its dominance in DRAMs market in early 1980s? Year Its market share in DRAMs 1974 83% 1984 1% However, later it builds and maintains its competitive advantage in microprocessor market. Why? Main reasons for its failure in DRAMS Externally, Japanese firms developed new products quickly & invested heavily on manufacturing. Their superior production equipment & process technology enabled them to capture large share of the world market for DRAMs.

6. Internally, Intel put too much emphasis on product design by trying to be “first to market.” But it fell behind the foreign competitors in process development & manufacturing scale-up. Q. Is the Icarus (伊卡洛斯) Paradox applicable? The greatest asset can be the cause of demise. It’s very suitable for Digital Equipment Corp.

7. Analysis: Value Chain Linkages In DRAMs, a link broke down R&D production marketing, Input Output * * * * * * * In microprocessors, it has formed successful linkages. R&D production marketing, Input Output

8. Recapitulation  Globalization vs localization is a key strategic issue;  There are four global strategic orientations: ethnocentric, regioncentric, multidomestic, and geocentric; A strategic leader needs: vision & action plans, commitment, emotional intelligence, and astute management skills;Strategy is designed to achieve and enhance competitive advantage; • Building blocks of competitive advantage are superior innovation, efficiency, quality, global leverage, customer responsiveness; Global leverage include cost advantages, global learning, cross-subsidization and risk diversification;  5 forces model is a tool of assessment for industry competitiveness  Value chain analysis is a tool of identifying key variables for developing competitive advantage

9. Lesson 5 Int’l Investment Management Main Issues: International Merger & Acquisition (M & A) International New Start-ups Managing Foreign Exchange Risks Cost of Capital for International Investment Feasibility Analysis for International Projects Cases & Examples: Matsushita in Hollywood IBM PC Goes to Lenovo Buying a Big Mac Jack’s Hedging Strategy Should you invest in MEC?

10. Lesson 5 International Investment Management 5.1 Forms of Foreign Direct Investment 5.1.1 Merger & Acquisition (M & A) Horizontal merger: Combining of firms that sell the same type of goods. e.g. an auto firm + an auto firm Vertical merger: Combining of firms that are linked in production or distribution chain. e.g. an auto firm + a tire Co. Conglomerate merger: Combining of firms in unrelated industries. Concentrated Merger: Combining of firms that have the same market but different production technology, or the same tech but different market

11. Takeover Tactics (1) Direct Takeovers Negotiated acquisition or friendly takeover, Leveraged buyout? Use of a target company’s asset value to finance the debt for acquiring the company. Q. How can a small firm take over a large company? Capital Leverage S Company L Company Stock price: $10 Its cash: Buyout Bid: $20 $100 million Buyout Value: $1 billion borrow $900 million from Bank C by usingL’s assets as guarantee

12. Q. Why is MBO discouraged in China? MBO Management Buyout In China, MBO often takes the form of leveraged buyout. But buyout prices are usually too low for state owned enterprises. Leveraged buyouts tend to enrich management at the expense of public. （2）Indirect Method e.g. hostile takeover Means of Payment Cash, trade bills, stocks

13. Case: Matsushita in Hollywood Questions: A. Why did Matsushita acquire MCA？What type of merger was it？ B. Was Matsushita’s international management strategy effective? C. Disregarding the interest cost of capital, did Matsushita make profit from its investment in MCA in terms of dollar value? What about in terms of Japanese yen? D. Generally speaking, how can the acquirer reform & integrate the acquired firm successfully?

14. A. Why did Matsushita acquire MCA？ （1） Obtain synergies Achieve economies of integration by sharing distribution channels, advertising campaign, etc. （2） Acquire valuable assets Get MCA’s patents, well-known brands, & technological & managerial know-how （3） Build corporate image （4）Expand markets Enter the U.S. market rapidly; Capture international market share through MCA’s influence.

15. What type of merger was it？ This was a hybrid acquisition with cash. It had elements of vertical merger, conglomerate merger & concentrated merger. Reasons: …. B. Was Matsushita’s international management strategy effective? No. It adopted a multidomestic strategy, or localization strategy. But it didn’t work well. There were cultural clash and management upheaval. Several key executives threatened to quit.

16. C. Did Matsushita profit from the investment? In terms of U.S. dollars, in 1990 it paid 6.59 billion, in 1995 it received 5.7 + (1/4) 5.7 = 5.7+1.425 = 7.125 Profit = 7.125 – 6.59 = 0.535 billion=535 million 2. In terms of Japanese yen, in 1990 it paid 6.59 (145) = 955.55 billion yen in 1995 it received 5.7 (97) + (1/4) 5.7 (97) = 691.125 billion yen Loss = 691.125 – 955.55 = 264.425 billion yen The loss would be in fact much larger if opportunity cost is factored in.

17. D. In general, how can the acquirer reform & integrate the acquired firm successfully? There are various integration methods. e.g. CA(Computer Associates): 2nd largest software co. M&As: over 100 CEO: Charles Wang, “Great Master of M&As” Magic formula of CA(Computer Associates): (1) Change the management team of the acquired firm; (2) Inject CA’s culture into the acquired firm through rules change and training e.g. big family feeling (3) Promotion based on performance. e.g. Former managers in the pre-merger firm must prove themselves to be promoted by starting over as ordinary technicians or staff members.

18. In the case of Matsushita & MCA, the following steps may be taken: (1) Set up an integration team, and work out specific plan for integration; (2) Matsushita should hire a management talent in movie industry to be the vice president of MCA; (3) Establish executive exchange programs between the parent and MCA, and break down cultural barriers. e.g. cooking eggs Western and Oriental cooking styles differ.

19. Group Presentation Contest Today (1) Group presentation is a special task, different from the final project. (2) Each group, consisting of 5 to 6 students, will make a presentation in class; (3) The presentation will be focused on a concept, a case, or a model related to our course; (4) Each presentation will last 5 to 6 minutes; (5) The presentation may take any form such as role-play, story-telling or multimedia performance. (6) The presentation will be evaluated based on content, style, team work and originality.   Try to show your creativity & team-work spirit!

20. Next Class Topics: The Rest of Chapter 8, Book 1 Managing Foreign Exchange Risks Cost of Capital for International Investment Feasibility Analysis for International Projects Individual Homework: 7 to 8 students are needed to do the case analysis of Jack’s Hedging Strategy (Available in our class e-mail box) Reminder: For those students choosing it for the case write-up, please submit a hard copy at the beginning of the class. Bonus points will be given if an electronic copy of the case write-up and Powerpoint is sent to the T.A. the day before the class.