Chapter 3
International Business:
Strategy, Management, and the New Realities by
Cavusgil, Knight and Riesenberger
International Business: Strategy, Management, and the New Realities
1. Three types of participants in international business
2. Participants organized by value-chain activity
3. Focal firms in international business
4. Foreign market entry strategies of focal firms
5. Distribution channel intermediaries in international business
6. Facilitators in international business
International Business: Strategy, Management, and the New Realities
Three Types of Participants in IB
1. The focal firm – initiator of IB transaction, including MNEs and SMEs
2. Distribution channel intermediary – specialist firm providing logistics and marketing services in the international supply chain
3. 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
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
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
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
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
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
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
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
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
Evolution of a Born Global Exporter and Challenges It Overcomes
Size
Some will exceed
$100 million
Small domestic sales only
Product or process development
Begin exporting early (2 years)
Manage transition issues early
Create international position
Niche limits
Time
Credibility
Finance
Export
Finance
Foreign representation
Export know-how & skills
Market information
Innovation… the next product
International Business: Strategy, Management, and the New Realities
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
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
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
Foreign Market Entry Strategies of Focal Firms
Cross-border business transactions can be grouped into three categories:
1. Trade : buying and selling of products
2. Contractual exchange of services or intangibles : buying and selling of services
3. Equity ownership in foreign operations : establishing foreign presence through direct investment
International Business: Strategy, Management, and the New Realities
The Nature of Cross-Border Transactions
• Trade (export and import) implies a homebased 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
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
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. fastfood 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
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
Top International Construction Contractors Based on Contract and
Revenue from Projects Outside Home Country (cont)
Rank
Based on 2007
Revenu es
11.
Contractor
Royal Bam Group NV, The Netherlands
12.
13.
14.
15.
16.
Bovis Lend Lease, U.K.
Consolidated Contractors Int’l Co., Greece
China Communications Construction
Group, China
JGC Corp., Japan
Chiyoda Corp., Japan
17.
18.
19.
20.
Grupo ACS, Spain
China State Construction Eng’g Corp.,
China
PCL Construction Enterprises, U.S.A.
Baldour Beatty PLC, U.K.
2006 Revenue (U.S.$ millions)
International Total
5,892
5,680
3,941
3,380
3,159
3,053
3,004
2,956
2,527
2,380
10,844
8,353
3,941
14,734
3,804
3,517
18,526
16,146
4,110
9,073
Top International Construction Contractors Based on Contract and
Revenue from Projects Outside Home Country (cont.)
Rank
Based on
2007
Reven ues
Contractor
21.
Construtora Norberto Odebrecht, Brazil
22.
FCC, Fomento de Construc. Y
Contratas, Spain
23.
Kajima Corp., Japan
24.
Taisei Corp., Japan
25.
Ferrovial Agroman SA, Spain
26.
Eiffage, France
27.
Foster Wheeler Ltd., Clinton, N.J., USA
28.
Jacobs, Pasadena, Calif., U.S.A.
29.
Petrofac Ltd., Channel Islands, U.K.
30.
Ohl Sa (Obrascon Huarte Lain Sa),
Spain
2006 Revenue (U.S.$ millions)
International Total
2,267
2,155
2,150
2,069
2,027
2,010
1,920
1,886
1,863
1,801
3,493
11,894
13,981
14,176
6,523
13,970
2,022
3,987
1,863
4,325
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
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
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
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
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
Intermediaries Based in the Foreign Market
•
: 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
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
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
Top Retailers based on Percent of Sales Outside of Home Country
Retailer Base
IKEA
Delhaize "Le Lion"
Royal Ahold
OttoVersand Gmbh & Co
Pinault-Printemps-Red
Tengelmann Warenhande
IGA
Kingfisher plc
MetroAG
Carrefour Group
Sweden
Belgium
Netherlands
Germany
France
Germany
USA
UK
Germany
France
International Business: Strategy, Management, and the New Realities
Percent of Sales in Foreign
Country
99.90
83.00
76.40
52.00
48.10
47.90
44.90
41.00
40.00
37.70
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
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
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
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
Export Management Company (EMC)
• A more common intermediary in the U.S. is the
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
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
Facilitators in IB
International Business: Strategy, Management, and the New Realities
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
Other Examples of Facilitators
• International trade lawyers help navigate international legal environmentsthe 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 consultants advise 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