CMA Executive Program International Business Module

1
CMA Executive Program- International Business
Module

• Dr. Hugh Munro

2
Agenda

• Overview of the Module
• International Business, International Strategy
  Internationalization
• Case Global Company
• International Market Expansion framework
• Case Cameron Auto Parts A B
• Case Global Enterprises

3
International Business Perspectives

• World
• Regions
• Country
• Industry
• Company
• Individual

4
External Drivers of Globalization

• Several forces are driving companies around the
  world to globalize by expanding their
  participation in foreign markets.

5
Scope of International Business

• A. Outward Activities
• Exporting
• Licensing
• Joint Ventures
• Direct Investment
• B. Inward Activities
• Importing/Sourcing
• Licensee
• Domestic JV partner
• Subsidiary of Foreign Parent

6
Global Strategy Levers

• Global Market Participation
• Global Products Services
• Global Location of Activities
• Global Marketing
• Global Competitive Moves

7

• The Value Chain Upstream and Downstream
  Activities

A firm that competes in the international market
must decide how to spread the activities among
countries. Central to this decision is the need
to distinguish upstream from downstream
activities.
Developed by Cool Pictures and MultiMedia
Presentations
8
Is offshoring a good thing or not? For Canada?
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Canadian Industry Punching Out Stronger Dollar
and Low-cost Alternatives are sending Jobs
Offshore GM Jan23, 2004

• Nortel 1500 jobs
• Levis Strauss Company 1200 jobs
• Bauer Nike Hockey 321 jobs
• Camco (refrigerators stoves) 800 jobs
• Roots 200 jobs
• Swift Denim 600 jobs
• International - Multi-foods 135 jobs
• Canam Manac (truck trailers) 245 jobs

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Is Your Job Next?

• By 2015 roughly 3.3 million U.S. business
  processing jobs will have moved offshore
• U.S. service jobs lost to offshoring will
  increase at a rate of 30 to 40 over next five
  years
• Software developers - 60/hr in U.S. vs 6/hr in
  India

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Offshorings Value to India

• Benefit per 1 of U.S. off-shore Spending in 2002
• Offshoring Sector Labour 0.10
• Profits 0.10
• Local Suppliers 0.09
• Government Taxes Central 0.03
• State 0.01
• Net Benefit 0.33

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Global Organization

• Structure
• Management Processes
• People
• Culture

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Internationalization Company Exercise

• Which of the companies is a transnational
  company?
• Why?

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Characteristics of a Global Oriented Company

• Focus/vision - complexity of world differences
  similarities
• Orientation - Geocentric vs Poly or Ethno
• Mktg Strategy - extension,adaptation,creation
• RD Strategy - integrated across regions
• HR Policy - best people
• New Product Developt - global mkt needs
• Manufacturing - lowest cost for global needs
• Financial Policy - global sourcing
• Investment Policy - cross-subsidization
• Operating Style/Communications - integrated,
  interactive across up
• Partnerships - competencies for world leadership
• Score Keeping - share of world mkt
• Attitude/Mindset - Capabilities - Activities -
• Performance

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Stages of International Development
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A Transnational Company

• Links
• the markets of the world
• the resources of the world
• on a profitable basis

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Framework For Global Strategy
Build on the Foundation of a Unique Competitive
Position.
Emphasize a Consistent Positioning Strategy
across International Markets.
Establish a Clear Home Base for Each Distinct
Business.
Global Strategy
Leverage Product-Line Home Bases at Different
Locations.
Disperse Activities to Extend Home Base
Advantages.
Source Adapted from Michael E. Porter,
Competing Across Locations Enhancing
Competitive Advantage through a Global Strategy,
in Michael E. Porter (ed.), On Competition
(Boston Harvard Business School Press, 1998),
pp. 309-350.
Coordinate and Integrate Dispersed Activities.
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A Decision Making Perspective

• Grow domestically or internationally?
• If internationally, which markets?
• Which mode of entry?
• What kind of market entry strategy?
• How to manage international activity for superior
  performance?

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Assessing Your Readiness For International Markets

• What do you look for? Why?
• Cameron Case

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Assessing Readiness For International Business

• Management Audit - attitude, commitment,
  adaptiveness, experience
• Product/Service Audit - unique/niche, strong fit
  or potential, quality service
• Financial Audit - cash flow, investment capital,
  vulnerability/capacity
• RD Audit - commitment willingness to adapt to
  market
• Intelligence System Audit - mkt
  opportunities/reqts, partners, competition

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Choosing Markets Entry Modes

• Choosing Markets
• Alternative Modes of Entry
• Case - Cameron Deals

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Screening International Markets

• Macro Level - General Market Potential
• (Political, Economic, Social, Geography)
• General Market Relating to Product/Service
• (Mkt Size, Stage of Mkt Development, Cultural
  acceptance, Grwth Trends of Similar products,
  Taxes duties)
• Micro Level Research
• (Ease of entry, Competition, Cost of entry,
  Product acceptance, Sales Profit Projections,
  Comfort - Feel)
• Corporate Factors Influencing Implementation

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Country Risk Ratings

• GNP Per Capita - ()
• Propensity To Invest - ()
• Reserves to Import Ratio - ()
• Current Account Balance - ()
• Export Growth Rate - ()
• Export Variability - (mixed)
• Net Foreign Debt To Exports - (-)
• Debt Service Difficulty - (-)
• Political Instability - (-)
• Ratings Provided By - Euromoney, Institutional
  investor

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Modes Of Entry

• Indirect Exporting
• Direct Exporting
• Licensing
• Joint Ventures
• Direct Investment
• Amount of commitment, risk, control, profit
  potential increases as you move down the list

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Example Cameron Enters The UK

• Visited customer while on vacation in Scotland
• Customer offers to license the coupling product
  technology with exclusive rights to the UK market
• Terms - 100,000 transfer fee plus 3 on first
  million of sales, 2 thereafter, technology
  flowback clause
• Would you accept the deal? What else would you
  want to know?

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Scottish Company Profile

• Last Yrs Sales - 35 mil (lb), down from 44
• Assets - 11 mil, Equity 6.5 mil
• Net Profit - 1.5 mil
• Control - family
• MKT Coverage - 15 salesmen in UK, 2 -Europe, 1 -
  Australia, 1 - NZ, 1 - India
• Factory - old and larger than necessary, but seem
  to have mfg knowhow
• Reputation - excellent credit record, company 130
  yrs old, good mkt contacts
• Other - one of products recently took a beating
  from competition - sales declined, replaced by
  distributing other companies products - now 50
  business, excess mfg capacity
• Pricing - 100 index (price to dist in Canada)
  15 (Import Duty) 10 (F Ins) 35 (markup)
  160 vs 120 (Cdn Dist Price)

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Licensing Arrangement

• Camerons Return on Assets 42 (5/12)
• Normal Rate of Return (risk free) 12
• Excess Return (Value of Technology) 30
• Licensors Share (negotiable- 40) 12
• Sales to Asset Ratio (30/12) 2.5
• Royalty on sales (12/2.5) 4.8

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Current Relationship Is it working for Cameron?
For McTaggart?

• McTaggart paid Cameron 100,000lbs 3 on first
  100k, 2 on rest Sales 4,950,000lbs _at_ .199
  margin (35/176) 985,000lbs profit
• Cameron 100,000lbs royalty fees upfront money

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Two More Deal Options Would you accept either?

• 1 - French Company - Europe Mkt
• Jt Venture (mfg)- 40 Cameron/60 French
• Cameron - 4mil, 4, supply until French mfg in
  place
• French Company Profile - currently a customer,
  private company, no exp. mfg,high overhead, low
  profits, good coverage in France but poor in
  Germany Holland

• 2 - Scottish Company - Australia
• Jt Venture (finishing assembly)- 40 Cam/60
  Scot
• Cam - 1.6 mil, 2.5 royalty on sales
• Scot - used equipt, mgt, 4 on sales, supply
  components

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Keys To Successful Partnering

• Complementary skills resources
• Mutual need
• Financial capability
• Relative size
• Compatible strategy objectives
• Complementary operating practices
• Compatible management teams
• Trustworthy committed
• Low risk of becoming a competitor

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Adapting Your Marketing Strategy

• Targeting Positioning -
• Product -
• Communications -
• Pricing -
• Distribution -

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Culture - learned norms based on attitudes,
values, beliefs

• Approaches - ethnocenric, polycentric, geocentric
• Areas Most Affected
• Business Protocol
• Communications
• Negotiations
• Marketing Mix
• Mgt of JVs Subs

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10 Most Common Mistakes

• No plan or strategy for intl business
• Insufficient Commitment
• Insufficient care in selecting reps, partners
• Opportunistic - chase orders vs systematic
• Neglect foreign market when domestic grows
• Failure to treat foreign distributors like
  domestic reps
• Unwillingness to modify products
• Cultural/language adjustment
• Failure to use outside expertise
• Failure to explore other entry options

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Summary - International Market Expansion

• Domestic - International emphasis?
• Assess your readiness to go international
• Proactive vs reactive approach
• Thorough market selection
• Flexibility wrt entry mode
• Willingness to adapt products practices
• Long term perspective
• Financial resources
• Human capital development
• Commitment
• Confidence - go for it!

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Managing Ongoing International Operations

• Commitment - time, people, investment
• Information - planning control
• Structure - separate, integrated
• Adaptive - mkts, activities
• Learning - ongoing

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Global Organizational Trade-offs

• Local Responsiveness - cultural differences
• Integration - efficiency, learning knowledge
  transfer
• Corporate culture

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Trade-off in Structuring International Activities

• Concentration VS Dispersion
• Efficiency
• Local Responsiveness
• Learning

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Examples

• ICI Paints
• Gillette
• Colgate Palmolive
• Volkswagen
• Best Foods
• Bayer
• Warner Lambert

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Warner Lambert Current Structure

• 3 lines of business Pharmaceutical, OTC,
  Confectionary
• Geographic structure 3 operating groups
  responsible for 45 operating affiliates
• Country managers are king
• Many country managers know only one line of
  business
• HQ staff is too large
• No interaction btwn HO line of business managers
  and their international counterparts
• Affiliate managers focus on their organization
  rather than WL as a whole
• Company is doing ok but missing opportunities
  feel it could be better

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W-L Pharmaceuticals

• Globalization
• Product - chemical compounds
• High RD
• Easy Transport
• Global Diseases
• Knowledge sharing
• Global Competitors
• Regulatory EOS
• Supports OTC

• Localization
• Regulations by country
• Drug preferences
• Marketing practices
• Industry fragmentation
• incidence of diseases

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W-L OTC Business

• Globalization
• similar to pharma
• global consumer needs
• rationalize mfg
• brand-oriented business
• purchasing EOS
• global competitors
• advertising leverage
• global medication

• Localization
• health care a fashion
• local advertising reqt
• purchasing power varies

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W-L Confection Business

• Globalization
• gobal brands
• rationalize mfg
• advertising
• brand-oriented business
• purchasing EOS
• global competitors

• Localization
• food industry - regional
• iocal competitors can imitate
• pricing packaging must be local
• purchasing power differs across countries

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Globalization Issues

• Everything? Where? All businesses same structure?
  What parts? Affiliates?
• What happens to country heads? Buy-in?
• Career paths in company ?
• Support functions? Resource allocation?
• Compensation - business vs affiliate?
• Small countries?
• Decision making? globalization or americanization

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What Happened?

• Quickly moved to line of business model with HQ
  in NJ - 2700 jobs eliminated over 5 years
• Two businesses - Pharma Consumer
• Later split consumer into two - OTC Confection
• Outside triad - new division called Lamea (Latin
  America, ME, Asia)
• Europe - plants closed, new products introduced
  (e.g., Listerine)
• Each affiliate - line of business head, some
  country managers assumed these roles
• Host system or condominium rules for support
  services
• Results from 91 to 95 - Sales -5 B to 7B, NI -
  35m to 740, EPS - .26 to 5.48

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Global Enterprises Case

• Issues Management? Strategy? Structure?
• Different perspectives levels corporate,
  business, geography
• Conflict is not necessarily bad it just needs
  to be regulated channeled
• Short term investment decisions need to consider
  long term strategies
• Management development succession

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Takeaways -

• Why globalization - competitive challenges
  opportunities, goals, CEO
• Evolving process - learning
• Communication - buy-in of key people
• Trade-offs will always exist