Global Value Chain Diversity in International Business

1. Chapter 3 Participants in International Business International Business: Strategy, Management, and the New Realities by Cavusgil, Knight and Riesenberger International Business: Strategy, Management, and the New Realities

2. Learning Objectives • Three types of participants in international business • Participants organized by value-chain activity • Focal firms in international business • Foreign market entry strategies of focal firms • Distribution channel intermediaries in international business • Facilitators in international business International Business: Strategy, Management, and the New Realities

3. Three Types of Participants in IB • The focal firm – initiator of IB transaction, including MNEs and SMEs • Distribution channel intermediary – specialist firm providing logistics and marketing services in the international supply chain • Facilitator – a firm providing special expertise in legal advice, banking, customs clearance, market research, and similar areas International Business: Strategy, Management, and the New Realities

4. Participants Organized by the Value Chain Activity • The focal firms, intermediaries, and facilitators all are involved in one or more critical value-adding activities such as procurement, manufacturing, marketing, transportation, distribution, and support -- configured across several countries. • The value chain can be thought of as the complete business system of the focal firm. It comprises all of the activities that the focal firm performs. • The focal firm may retain core activities such as production and marketing, and outsource distribution and customer service responsibilities to foreign-market based distributors, thus the global reconfiguration of the value chain. International Business: Strategy, Management, and the New Realities

6. Global Value Chain in the Automotive Industry • Manufacturing of the Chevrolet Malibu illustrates national and geographic diversity of suppliers that provide content for an automobile, a truly global value chain. • Suppliers are headquartered in Germany, Japan, France, Korea, and United Kingdom, and the U.S., and the components they sell to General Motors are manufactured in typically low-cost countries and then shipped to the General Motors plant in Fairfax, Kansas. International Business: Strategy, Management, and the New Realities

8. Global Value Chain for Dell Computers • Dell makes a variety of products, each with its own value chain. The total supply chain for a notebook computer, including multiple tiers of suppliers, involves about 400 companies, primarily in Asia, but also in Europe and the Americas. • On a typical day, Dell processes orders for 150,000 computers, which are distributed to customers around the world, with non-U.S. sales accounting for 40 percent. • Shipping is handled via air transport, e.g. from the Dell Malaysia factory to the U.S. Dell charters a China Airlines 747 that flies to Nashville, Tennessee six days a week, with each jet carries 25,000 Dell notebooks that weigh a total of 110,000 kilograms, or 242,500 pounds. • One of the hallmarks of Dell’s value chain is collaboration. CEO Michael Dell and his team constantly work with their suppliers to make process improvements in Dell’s value chain. International Business: Strategy, Management, and the New Realities

10. The MNE as a Focal Firm • A Multinational Enterprise (MNE) is a large organization with a network of production plants, regional headquarters, and country subsidiaries in numerous countries. • Examples include: Nestlé, Sony, Unilever, Nokia, Ford, Citibank, ABB, and Shell Oil. • MNEs include those in retailing ( e.g., Carrefour and Gap) and services ( e.g., Citibank, Amazon). • Some MNEs in countries like China and Russia may be state owned. International Business: Strategy, Management, and the New Realities

11. Diversity of Focal Firms • Focal firms in the services sector: Examples- Citibank in banking, CIGNA in insurance, Bouygues in construction, Accor in hospitality, Disney in entertainment, Nextel in telecommunications, and Best Buy in retailing. • Non-traditional Internet-mediated businesses, that deliver knowledge-based offerings like music, movies, and software online e.g. Amazon and Netflix are also considered to be focal firms. • In developing countries and centrally planned economies, some focal firms are partly or wholly owned by the government- China- several examples. • MNEs have shaped the current phase of globalization. Following World War II, most multinationals went abroad in search of raw materials, production efficiencies, and foreign customers. Today these are the firms internationalizing their value chains. International Business: Strategy, Management, and the New Realities

13. The SME as a Focal Firm • A Small and Medium-Sized Enterprise (SME) is a relatively small player in its respective industry (in the U.S., those with less than 500 employees). • SMEs can be more flexible and quicker to respond to international opportunities. • Though their limited resources prevent them from engaging in FDI, SMEs can excel in exporting, licensing, and franchising. International Business: Strategy, Management, and the New Realities

14. The Born Global as a Focal Firm • A Born Global (BG) firm represents a relatively new breed of the SME that undertakes early and substantial internationalization. • Primarily a niche player, born globals display high degree of entrepreneurial orientation, proactiveness, and customer service. • In the contemporary era, born globals make up the fastest growing segment of exporters in most countries. International Business: Strategy, Management, and the New Realities

15. Examples of Born Global Companies • History and Heraldry, a born global in England that specializes in gifts for history buffs and those with English ancestry- It recently opened a North American subsidiary in Florida. • QualComm, founded in California in 1985, initially developed and launched the e-mail software, Eudora, the firm eventually grew to become a major MNE on the strength of substantial international sales. Technological prowess and managerial vision were strong factors in making the firm an international success. • Born globals are typically avid users of the Internet and modern communications technologies, which further facilitate early and efficient international operations. • The emergence of born globals is associated with international entrepreneurship -- innovative smaller firms increasingly pursue business opportunities everywhere, regardless of national borders. International Business: Strategy, Management, and the New Realities

16. Some will exceed $100 million Manage transition issues early Niche limits Size Small domestic sales only Create international position Product or process development Begin exporting early (2 years) • Credibility • Finance • Export • Innovation… the next product • Finance • Foreign representation • Export know-how & skills • Market information Time Evolution of a Born Global Exporterand Challenges It Overcomes International Business: Strategy, Management, and the New Realities

17. Common Characteristics of Born Global Firms • Experience early, rapid, and substantial internationalization • Fewer financial and other resources than traditional exporters • Formed by technically inclined, market-oriented business people with entrepreneurial drive • Often enjoy internationally recognized technical eminence and universal appeal in given product category International Business: Strategy, Management, and the New Realities

18. Common Characteristics of Born Global Firms (2) • Emergence often associated with significant product/process breakthrough or innovation • Products often involve advanced technology, substantial added value, superior quality, and differentiated design • Internationalization typically via exporting and facilitated through network relationships • Heavy user of advanced IT and communications technologies International Business: Strategy, Management, and the New Realities

19. Distinctive Features of Born Global Marketing Strategy • Typically a specialist, niche player • Distinctive product/offering • High degree of product/service quality • Personal attention to building customer relationships • Constant effort to upgrade foreign distributor effectiveness International Business: Strategy, Management, and the New Realities

20. Foreign Market Entry Strategies of Focal Firms Cross-border business transactions can be grouped into three categories: • Trade: buying and selling of products • Contractual exchange of services or intangibles: buying and selling of services • Equity ownership in foreign operations: establishing foreign presence through direct investment International Business: Strategy, Management, and the New Realities

22. The Nature of Cross-Border Transactions • Trade (export and import) implies a home-based operation where independent partners in the foreign market are engaged to provide local services. • Contractual exchanges include licensing, franchising, service contracting, turnkey operations, and project-based partnerships. • Equity ownership is accomplished through FDI which can be implemented through acquisition or greenfield investment. International Business: Strategy, Management, and the New Realities

23. Examples of Focal Firms that are Involved in Contractual Exchanges Licensor: Focal firm grants the right to the foreign partner to use certain intellectual property in exchange for royalties. • Anheuser-Busch signed a licensing agreement with the Japanese beer brewer Kirin under which Kirin produces and distributes Budweiser beer in Japan. The agreement has substantial potential given Japan's $30 billion-a-year beer market. • Mega Bloks (Canadian toymaker) signed an agreement with Disney that gives the SME the right to produce toys that feature Disney characters such as Winnie the Pooh and Power Rangers. International Business: Strategy, Management, and the New Realities

24. Examples of Focal Firms that are Involved in Contractual Exchanges Franchisor: Focal firm grants the right to the foreign partner to use an entire business system in exchange for fees and royalties. • For many successful service firms such as Subway or KFC, it is a practical way to expand into many foreign markets. • In China, Subway is the third-largest U.S. fast-food chain, where its fish and tuna salad sandwiches are top sellers. • China recently passed its first laws that require franchisees to adhere closely to contractual obligations in the franchisor agreement. International Business: Strategy, Management, and the New Realities

26. Examples of Focal Firms that are Involved in Contractual Exchanges Turnkey Contractor: Provide engineering, design, and architectural services in the construction of airports, hospitals, oil refineries, and other types of infrastructure. • These projects are typically awarded on the basis of open bidding by the sponsor. • Examples- European Channel Tunnel, the Three Gorges Dam in China, Delhi Metro Rail Ltd. and the Hong Kong Airport. • Build-own-transfer venture- an increasingly popular type of turnkey contract in the developing economies where contractors acquire an ownership in the facility for a period of time until it is turned over to the client. International Business: Strategy, Management, and the New Realities

28. Top International Construction Contractors Based on Contract and Revenue from Projects Outside Home Country (cont)

29. Top International Construction Contractors Based on Contract and Revenue from Projects Outside Home Country (cont.)

30. International Collaborative Venture • In an international collaborative venture (ICV), partners pool their resources and share the cost and risks of the new venture. • Through an ICV, a focal firm can exploit partner’s complementary technologies and expertise, avoid trade barriers, connect with customers abroad, and configure value chains more effectively. • ICV represents the middle ground between FDI and exporting; the firm externalizes value adding activities such as R&D or manufacturing. International Business: Strategy, Management, and the New Realities

31. Two Types of International Collaborative Ventures • Joint Venture: the focal firm creates and jointly owns a new legal entity together with foreign partners • Project-Based Collaborative Venture: Focal firm collaborates with foreign partners on a project with a relatively narrow scope and a well-defined timetable, without creating a new legal entity. • Firms often form project-based ventures to share the cost and risks involved in knowledge-intensive R&D projects. International Business: Strategy, Management, and the New Realities

32. An Example of Joint Venture • Advantages: share costs and risks, gain access to needed resources, gain economies of scale, and pursue long-term strategic goals. • Hitachi formed a joint venture with MasterCard to promote a smart card system (Multos) for banking and other applications. • BP partnered with the state-controlled Hindustan Petroleum Corporation in India. The new venture built a $3 billion refinery in Punjab and established a joint marketing business, including a network of retail service stations around India. International Business: Strategy, Management, and the New Realities

33. An Example of Project-Based Collaboration Cisco Systems has expanded much of its operations through strategic alliances with key foreign players. • With Japan’s Fujitsu to jointly develop routers and switches that enable clients to build Internet protocol networks for advanced telecommunications. • In Italy, Cisco teamed with the telecommunications company Italtel to jointly develop network solutions for the convergence of voice, data, and video to meet growing global demands. • In China, Cisco formed an alliance with telecommunications company ZTE to tap the China and Asian markets. International Business: Strategy, Management, and the New Realities

34. Distribution Channel Intermediary • Specialize in physical distribution and marketing service; connect the focal firm with the end user in the foreign market. • Assist the focal firm by providing logistics services such as warehousing and customer support. • Especially critical to exporters who do not establish foreign presence themselves. • Are based either in the home country or the foreign market. International Business: Strategy, Management, and the New Realities

35. Intermediaries Based in the Foreign Market • Distributor: Takes title to the exporter’s goods and performs marketing functions such as sales, promotion, and after sales service. • Serving as the extension of the firm in the foreign market, a distributor will also arrange for local transportation, clear products through customs, and provide advice to the focal firm regarding product adaptation, promotion, and pricing. International Business: Strategy, Management, and the New Realities

36. Agent and Manufacturer’s Representative • Agent (also known as a broker): Unlike the merchant distributor, an agent does not take title to the goods. Works on a commission basis to bring the buyer and seller together. • An agent operates under contract for a specified period of time and may represent either a buyer or the seller. • Manufacturer’s Representative: Works under contract by the exporter to represent and sell its merchandise in designated territories. It acts as a contracted salesperson in a designated territory. International Business: Strategy, Management, and the New Realities

37. Retailer • Larger focal firms in consumer products may choose to sell directly to retailers, bypassing distributors (wholesalers). • A retailer provides access to end users/customers. • Some focal firms are retailers: Carrefour, IKEA, Royal Ahold, Seibu, Toys “R” Us, Wal-Mart, and Zara. International Business: Strategy, Management, and the New Realities

38. Top Retailers based on Percent of Sales Outside of Home Country International Business: Strategy, Management, and the New Realities

39. Trading Company • Based in the home country, a trading company is an intermediary that engages in imports and exports of a variety of products. • Large trading companies such as Cargill are high-volume, low-margin resellers. • Many trading companies deal primarily in commodities such as grains, minerals, coal, and metals. International Business: Strategy, Management, and the New Realities

40. The Japanese Sogo Shosha • Large trading companies in Japan are known as the sogo shosha. Each has an extensive network of foreign offices and buyers including governments. • Examples include: Mitsubishi, Mitsui, Marubeni, Sumitomo, and Itochu. • The sogo shosha historically handled about half of Japanese external trade. • Interestingly, the sogo shosha are among the largest exporters of grains from the United States. International Business: Strategy, Management, and the New Realities

42. The Role of Trading Companies in IB • Trading companies work with remarkably low margins; they tend to be high-volume, low-margin resellers. • Five of the 10 largest trading companies are based in Japan. Trading companies have historically played a very important role in Japan’s external trade. • Being an island economy and lacking most raw materials needed for industrialization, Japan had to import them. • Trading companies are also more common in South Korea, India, and Europe. • In Japan, large trading companies are known as sogo shosha, and are usually involved in both exporting and importing, and are specialists in low-margin high-volume trading. • Examples- Mitsui, Mitsubishi, Sumitomo, Itochu, and Marubeni, all firms on the Fortune magazine Global 500. International Business: Strategy, Management, and the New Realities

43. Export Trading Companies in the U.S. • Trading companies in the U.S. have had a relatively negligible impact in in exports. • In 1982, the U.S. Congress passed the Export Trading Company (ETC) Act, giving them immunity from antitrust legislation and allowing banks to invest in trading companies. • These incentives proved to be ineffective. One reason may be a strong preference on the part of U.S. firms to pursue internationalization independently of other firms… International Business: Strategy, Management, and the New Realities

44. Export Management Company (EMC) • A more common intermediary in the U.S. is the Export Management Company which acts as an export agent on behalf of the focal firm. • An EMC finds export customers, negotiates terms of sale, and arranges for international shipping, typically for smaller exporters. • Most EMCs specialize in specific industries and geographic areas. International Business: Strategy, Management, and the New Realities

45. Online Intermediaries • Disintermediation – bypassing traditional intermediaries – is made possible due to widespread use of the Internet to reach customers globally. • Examples include Amazon, Dell, eBay, and Alibaba – English-language portal based in China that specializes in business-to-business exchanges. • Traditional retailers such as Sony and Tesco have also established online presence. • One negative outcome of online retailing has been the ease with which unscrupulous marketers reach on suspecting him customers with fake products (e.g., fake pharmaceuticals). International Business: Strategy, Management, and the New Realities

46. Facilitators in IB • Facilitators assist the focal firm with specialized services required in cross-border transactions. • Facilitators include: Banks, international trade lawyers, freight forwarders, customs brokers, consultants, ad agencies, and market researchers. International Business: Strategy, Management, and the New Realities

47. Examples of Facilitators • Logistics Service Provider is a transportation specialist that arranges for physical distribution and storage for the focal firm. • DHL, FedEx, and UPS are examples of facilitators that can cover virtually the entire planet with their fleet of aircraft and trucks. • Custom Brokers are specialists that arrange for clearance of products through customs on behalf of the focal firm. International Business: Strategy, Management, and the New Realities

48. Other Examples of Facilitators • International tradelawyershelp navigate international legal environments- the best ones are knowledgeable about their client’s industry, the laws and regulations of target nations (import licenses, trade barriers, IP concerns), and the most appropriate means for international activity in the legal/regulatory context. • Lawyers play a critical role when negotiating joint venture, strategic alliance, franchising and licensing agreements. • Insurance companies provide coverage against commercial and political risk. • International business consultantsadvise internationalizing firms on various aspects of doing business abroad and alert them to foreign market opportunities and problems. • Tax accountants can advise companies on minimizing tax obligations resulting from multi-county operations. • Market research firms are a potential key resource for identifying and targeting foreign buyers, by assessing information on markets, competitors, and the methods of international business. International Business: Strategy, Management, and the New Realities