JV INTERNATIONAL MANAGEMENT à WHY COMPANIES ENGAGE IN IB - Today’s world: Today’s world: closely intertwined across many markets sector, companies, institutions, and people. Tastes and consumer behaviours converge rapidly, irrespective of geographies and cultures. Companies, to grow and survive, must adapt the constantly changing international environment and embrace the opportunities that a globalizing world is offering. Most businesses today compete against products and services that come from abroad (their competitors do exist beyond the national space). To stay domestic is not an option for a company in today´s world. - International Business VS Domestic Management IB has… Longer distances à + costs; + difficult control Wide diversity of political and legal environments à complexity; transaction costs Wide diversity of social, cultural and economic environments à market heterogeneity; different consumer groups; different languages and currencies; variety of business cycles - The Environment International managers: must be prepared to accept and understand the different environments where a company operates. Blindness to environmental differences in business is a common cause of non-success and failure. à Understanding the environment is key to IM 1 JV - Basic concepts in IB Companies can engage in IB by taking either a controlling or a non-controlling interest in a foreign company. Company takes a controlling interest: investment is known as a foreign direct investment (FDI) If 2 or + companies share ownership of the investment, it is referred to as a joint venture Non-controlling interest: portfolio investment INVESTMENTS: Ø DIRECT INVESTMENT (investor takes a controlling interest in a foreign company – a subsidiary, a joint venture) Inward Investment (FDI) – a country receives a company’s direct investment from abroad Outward investment – a country sends a company’s direct investment abroad Ø PORTFOLIO INVESTMENT (non-controlling financial interest in another entity – investment funds, pension funds, hedge funds). Ownership of a foreign property in exchange for a financial return, such as interest and dividends. Two types: Non-controlling interest of a foreign operation; Extension of loans 2 JV General note: Payments are dividends or interest; Companies make CAPEX when investing EXPORTS & IMPORTS: Companies can also engage in IB by exporting or importing, either goods (merchandise) or services – services is the fastest growth sector in international trade (tourism and transportation, service performance, asset use) Ex:1 Main products exported in 2021 Portugal – machinery, mechanical appliances, vehicles, base meals, plastics, rubbers, agricultural products… Ex2: Industrial companies’ usual mode of operations – import raw materials and export goods Exports and imports are a major source of international revenues and expenditures for most countries. Trade Balance –strength of a country’s economy in relation to other countries Trade Deficit: Imports > Exports (borrowing money to purchase goods and services) Trade Surplus: Exports > Imports (the opposite) Organizations for IB: An International company operates in + than 1 country through different modes of operation: - Export/Import or invest abroad Direct Presence Collaborative Arrangements (joint venture, licensing agreement, management contract, minority ownership, long term contractual arrangement, strategic alliance) A Multinational Enterprise (MNE) has direct investment in some minimum number of countries apart from home country. It takes a global approach to markets and production and has operations in + than 1 country. Companies with FDI may be referred as: MNCs (Multinational corporations); MNEs (multinational enterprises); Transnational companies (TNCs) According to the United Nations (UNCTAD): Transnational corporation (TNC) is generally regarded as an enterprise comprising entities in + than 1 country which operate under one system of decision making that permits coherent policies and a common strategy. The entities (subsidiaries) are so linked (by ownership or otherwise) that one or + of them (generally one – the HQ or parent company) may be able to exercise a significant influence 3 JV over the others and, in particular, to share knowledge, resources and responsibilities with the others. Why companies engage in IB? (IB Operations) à Sales expansion; Resource acquisition; Risk reduction EXTERNAL ENVIRONMENT AFFECTING IB OPERATIONS - Physical factors (geographic, demographic) Institutional factors (political policies, laws & regulations, behavioural factors, economic forces) Competitive factors (company IB/product strategy, company resources, competitors in each market) Ø Physical Factors: Geographics (factors related to geography): location, weather, natural resources, geographic barriers, chance of natural disaster Demographics (factors related to population): population density, education/literacy, age distribution, life expectancy Ø Institutional Factors: Political Policies (rules a how a country is governed): political learning/systems; political/trade disputes Legal policies (laws and regulations): domestic law VS international laws; legal systems; law enforcement vs non-enforcement Behavioural policies (how people think and behave): values, beliefs, attitudes Economic forces (economic differences between countries): salaries, currency Ø Competitive Factors (Competitive Environment): Product Strategy – cost strategy vs differentiation strategy; mass market vs niche market Company resources and experience – size and resources; leadership Competitors faced in each market – type of competition in each market (international or local); Nº and strength of competitors; market share concentration 4 JV à A GLOBALIZING WORLD – How Globalization shapes today’s business strategies - The context of Globalization Deepening relationships and wider interdependence among people from different countries and parts of the world. In all areas of life: Business, Art, Culture, Education, Science, Media, Lifestyles, Diseases, Crime. Uniformization of Tastes and behaviour of consumer – “high touch” products and the role of the media. “Think global, act local”; uniform tastes and consumer behaviour/global brand positioning with local adaptation The Digital Economy (information technology, multimedia, and world-wide-web): Born-global companies; ability and desire to access global market immediately Decrease of Transportation and Telecom costs – increased business connectivity, advances in transportation and communication Development of Global Financial Markets – access to global network of financing and banking Globalization of Corporate Strategies à Networks of production; World sourcing; Global Marketing; Inter-firm cooperation (to capture scale economies) Work diversity – increasing work teams diversity To capture scale economies: production – manufacturing; marketing – global brand/global advertising; R&D – collaboration; logistics – distribution centres; sourcing – buying worldwide Factors in Increased Globalization: - Technological advances and global value chains Increased competitive pressures Changes in political situations and Government policies Expansion of cross-national cooperation Consumer preferences 5 JV GLOBALIZATION: ADVANTAGES AND CRITICISMS Ø Advantages of Globalization: Foreign Direct Investment (technology transfer, higher productivity, and growth of global companies) Job creation in host countries (countries that receive FDI) Technological innovation (+ info and + tech development) Economies of scale (enables large companies to reduce costs, improve profits and reduce prices) Development of weaker economies (poor countries also sell their goods and services to other richer countries which open them up for development and prosperity) Ø Criticisms of Globalization: Threats to national sovereignty (national interest vs proliferation of international agreements; worker and environmental protection vs competing with countries with less protection; small economies’ overdependence and inadequate capacity to deal with globalization; cultural homogeneity – merchandise, social structures, language, satellite TV, internet) Environmental stress (+ use of natural resources and carbon footprint vs eco-friendly technologies and global cooperation) Growing income inequality and personal stress (+ access to low cost labour in poor countries à - real wage growth of labour in rich countries and job opportunities) FUTURE OF GLOBALIZATION: Further globalization is inevitable (even with the pandemic); IB will grow primarily along regional rather than global lines; forces working against further globalization will slow down the trend. 6 JV FACTORS IMPACTING GLOBALIZATION STRATEGIES: - Behaviour of national governments (Institutional responses and cooperation due to public health concerns, protectionism, tariffs, bailouts, production subsidies) - Attitudes of consumers (living/housing/location preferences, consumption & investment habits, social habits) The trend of Globalization will depend on how each of these mechanisms evolve and respond in the short-term vs. medium/long-term • Mindset of executives and key stakeholders in multinational companies (work location, work life balance/well-being, investment priorities) • Economics of business globalization and supply- chain management (transportation and logistics, adjustments to locations of production, production safeguards, accelerated technology implementation, rise/return of local marketplaces) • Emergence of Political and Trade conflicts (China vs US, Russia vs. Ukraine, China vs. Taiwan, EU vs. Big Tech, Return to subsidy economics – Chip industry) 7 JV à ENVIRONMENTAL DIFFERENCES - Culture Political Risk Government, Legal, Economic Ø CULTURE Cultural factors: Cultural awareness; Identification and dynamics of cultures; Behavioural practices affecting business; Strategies for dealing with cultural differences Culture: Norms based on values, attitudes, and beliefs of a group of people. Culture can be based on nationality, ethnicity, gender, religion… IB activities incorporate people from all different groups and backgrounds, thus, every business function is subject to cultural differences. Culture is an integral part of a nation’s operating environment. Cultural diversity à Nationalities come together with diverse perspectives and experiences, with deeper knowledge of how to create and deliver products and services (different backgrounds and experience), which can be difficult to manage. Fostering cultural diversity can allow a company to gain global competitive advantage. Cultural collision à Contact among divergent cultures creates problems, which may result in companies’ implementation of practices that are less effective and to employees’ distress bc of difficulty in accepting or adjusting to foreign behaviours. Problem areas that can hinder (impeder) managers’ cultural awareness: the assumption that all societal subgroups are similar; difficulty in accepting that one’s culture is not superior to others. Nation à Useful definition of society. Similarity among people is a cause and effect of national boundaries; (Laws apply primarily along national boundaries; language and values are shared within borders; rites and symbols are shared along national boundaries) Language à A shared language between nations facilitates IB Major behavioural practices affecting business: - Issues in social stratification (determined by individuals’ achievements and talents and groups memberships – ethic and racial groups, gender-based groups; ae based groups, family-based groups) - Work motivation (differences in perception of chances of success and reward; live to work vs work to live; reward preferences) 8 JV - Relationship preferences (preferences of interactions between superiors and subordinates – power distance; individualism (ex: USA) vs collectivism (ex: China)…) - Risk taking behaviour (uncertainty avoidance, trust, future orientation, fatalism) - Information and task processing (difference in perception, how to obtain and process info; idealism vs pragmatism…) Rule of Man à Ultimate power in the hands of one person and is the cornerstone of totalitarian governments (ex: China) Rule of Law à Hallmark of democratic governments and holds that authority comes from written and transparent laws Company and Management Orientations: - Polycentrism (act abroad like local companies do); high response to cultural differences - Ethnocentrism (own practices are superior to those of other countries); low response to cultural differences - Geocentrism (integrates home and host-country practices, introducing new ones); balances response to cultural differences Ex: Context of the Retail Sector Drivers of IB in Modern Retail: Scale (scale is critical – economies of scale and efficiency from source to consumer is critical in modern retail); Online (is becoming critical and is already a relevant source of revenue amongst younger generations) but understanding the local culture is basic (consumer preferences, perceptions of value for money, CSR context, location & licensing) Ex: Jeronimo Martins Ambition: market leadership by country; to be perceived as a local brand à proximity with the customer and the community Ø POLITICAL RISK Political Risk à Risk that political decisions or political/administrative events in a country negatively affect the probability or sustainability of an investment. 9 JV Represents a very real threat for companies, especially in certain emerging markets where weak legal systems, improvised institutions, volatile political systems, and fragile regimes complicate the business environment. Global crisis in 2008 and recent changes in political spectrum in USA and Europe à + political risk (both developed and developing markets) Types of political risk: - Systemic risks (risks that impact all firms that operate in a particular political system) - Procedural risks (risk evolving for the daily movement of people, products, and funds in the global market. Each move à procedural transaction between the units involved. Political actions sometimes create frictions that interfere with these transactions) - Distributive risks (result of the profits generated by foreign companies in the local economy. Fair share of growing profits to host country – distribute justice?) - Catastrophic risks (random political developments that adversely affect the operations of every company in a country. Typically arises from specific dramatic events – ethnic unrest, illegal regime change, civil disorder…Disrupts the business environment in a way that affects every firm in the country) Ex: Portugal à Medium political risk; USA à high political risk; Sweden à very high political risk; Niger à Very low political risk 10 JV Ex: Russia – Ukraine conflict Russia à large state intervention, excessive regulation, weak governance, poor infrastructure, corruption, low levels of voice and accountability à Inequality and Political risk Ø GOVERNMENT & LEGAL à Different legal systems worldwide (Civil Law, Common Law, Muslim Law, Customary Law, Mixed System) à Legal issues: Operational concerns (tax, labor, admin); Strategic concerns (product safety and liability, marketplace behavior, product origin, legal jurisdiction, arbitration); Intellectual property rights à Government Spectrum (from Democracy to Totalitarianism) à Economic elements: type of economic environment, degree of economic freedom, drivers of economic performance, orientation of economic system Economic factors impacting on managerial decisions at international level: Exchange rates; Currencies; Inflation; Public Debt; Purchasing power; Saving rates… Types of Economic systems in the world: Market Economy; Mixed Economy; Command Economy; Traditional systems (families, tribes…) Command System (low economic freedom) à Government owns most or all resources; Centralized, large-scale, capital-intensive production. Communism Market System (high economic freedom) à Mostly private (indiv or business) ownership of resources; Decentralized, entrepreneurial innovation. Capitalism Mixed System (mix) à Government and private ownership of economic resources mixed in varying proportion. Socialism CONCLUSION: Environmental differences impact all functional areas of companies, although with different intensity. Company + involved in international activities à + it has to deal with environmental differences 11 JV à CORPORATE RESPONSIBILITY & ETHICS Business ethics à accepted principles of right or wrong governing the conduct of businesspeople Ethical issues are a function of differences in economic development, politics, legal systems, and culture. Managers working in international companies need to be particularly sensitive to ethical issues, since they are of great concern to the markets and the public opinion where the company operates. Moral issue, values and beliefs of the managers and the company’s stakeholders à good ethical behavior (or lack of it) à Direct impact on company’s reputation Most common ethical issues when managing in a global context: - Employment practices (auditing of foreign subsidiaries and subcontractors) - Environmental pollution (developed vs developing country regulations) - Human Rights (respect the person, freedom of speech, freedom of movement, of political association…) - Corruption (ethical dilemma – speed money and facilitating paymets?) - Moral obligations (large successful businesses need to give something back to societies that made their success possible “noblesse oblige” – Corporate Philanthropy) Corporate Responsibility (CR) à Companies integrate social and environmental concerns in their business operations and in interaction with their stakeholders on a voluntary basis. + Globalization à + aware that CR can be of direct economic value Integrating CR into their core business strategies and operations, companies can contribute to social and environmental objectives Triple Bottom Line (TBL): People (Social); Planet (Environmental); Profit (Economic) Stakeholders: Shareholders, employees, investors, consumers, suppliers, public authorities and regulators, NGOs 12 JV Implications: CR is not philanthropic, since interest underpins its implementation; CR strives to be a winwin solution for companies’ management and their stakeholders. CR objectives are not only boundaries, but also business opportunities. CR targets start where compliance with enforced sustainable practices end. CR = CSR = Sustainability (Corporate Responsibility = Corporate Social Responsibility = Sustainability) BUT: CSR is different from Corporate Philanthropy ESG STANDARDS: E- Environmental S – Social G – Governance ESG standards apply to companies’ strategy and operations. They are used by socially conscious investors in screening their investments and building their investment portfolios. Environmental standards à Assess how companies relate and care for nature and the sustainability of the planet (Ex: Climate change and carbon emission; air and water pollution; biodiversity…) Social standards à Evaluate how the companies engage with their stakeholders, namely communities where they operate, employees, customers, suppliers, NGOs, Governments (customer satisfaction; data protection and privacy; employee engagement…) Governance standards à Deal with shareholder rights, Boards, leadership, executive pay, internal controls, risk assessment and audit. (Board composition; Audit committee structure, Bribery and corruption…) CORPORATE GOVERNANCE of a company à Includes ESG, Corporate Responsibility, Sustainability, Citizenship, Corporate Ethics (imbedded in the Strategy and culture of the company) Socially Responsible Investment Ethical Funds and Sustainability Indices Ethical MNE – adopts right business conduct. Positive impact on reputation Socially Responsible MNE – integrates social and environmental concerns in business operations (voluntary), aims to create win-win solutions between company and stakeholders 13 JV Philanthropical MNE - promotes wellness of others with no direct link with business operations (ex: donation to humanitarian causes) Ethics & Social Responsibility not “straight-forward” because: - Companies must satisfy stakeholders’ interest, but there are trade offs - MNEs are also exposed to tradeoffs in different regions of the world Economic Value of Ethics & Social Responsibility Minimum: Avoid the risk of negative image; Perception of an unethical behavior can “kill” the brand. Optimal: Build a source of competitive advantage (environmentally friendly and socially responsible products can make consumers opt for the brand); Align with global initiates that improve standards and mitigate price impact. Foundations of Ethical Behavior: 1. Organizational (role of conduct) 2. Cultural (Relativism VS Normativism; Framework of standards) 3. Legal Ex: Becoming faster at acting based on ethical standards à Companies announcing their exit from Russian market since the beginning of the war Fraudulent activity à Very serious variant of unethical behavior. MNEs should be prepared to deal with it Corporations must have strong mechanisms of internal regulation and continuous practice (code of conduct, recruitment, corporate certification and reporting…); Example from the Top MNEs are gradually increasing adoption of ESG standards, which ca be associated with certain benefits and externalities Promotion and adoption of ESG à Investors look for growth, opportunities, and reduced risk in ESG investing à Investors invest in companies that adopt ESG/raise capital to grow; MNEs adopt ESG goals and report progress to attract investors 14 JV à STRATEGIES FOR IB – THE FOUNDATIONS - Attitudes towards IB E-P-G model (Howard Perlmutter) à Attitudes of managers inside a corporation related to their company’s international business. The dominant E-P-G attitude in a company defines its management orientation and affects its international strategy E-P-G Model: Ethnocentric (Home-oriented); Polycentric (Host oriented); Geocentric (worldwide) ETHNOCENTRIC à Complex organization structure in the home country and simple in subsidiaries. Authority/Decision making concentrated in HQ. Domestic patters applied across the subsidiaries. Incentive structure is high in HQs and low in subsidiaries. Dense volume of info inflows to the subsidiaries. Identity: nationality of the shareholders or HQ. HR policy: recruitment and development in the home country to key positions abroad. POLYCENTRIC à Complexity of the organization is varied and independent. Decision making is dispersed by subsidiaries. Evaluation and control defined locally. Wide variation in incentive structure. Small volume of info flows to and from the parent corporation. Small volume among subsidiaries. Identity: Nationality of the host country. Recruitment and development in the host countries for key positions in those countries. GEOCENTRIC à Complexity of the organization is increasingly complex and interdependent. Decision making collaborative approach between HQs and subsidiaries. Universal and local standards simultaneously. Managers are compensated for local and global objectives. Info flows in both directions and among subsidiaries. Identity: True international corporation. Recruitment and development of the best irrespective of their origin. Opportunities are independent of nationality. - Typology of International Company Gradual process of international involvement (before being global, a company evolves internationally): Pure domestic à Exporter à 1st FDI à International company à increases international footprint à Multinational company à presence covers a fairly large part of the word, then it is à Global corporation - Impact of Technological Development Evolution of Industry 1.0 to 4.0 à Mechanical Production, Science Mass Production, Energy Electronic Telcos, Digital Transformation Industry 4.0 à Cyber physical systems; Internet of things: On-demand availability of computer system resources; Cognitive computing. Allow for interconnection, technical assistance, decentralized decisions 15 JV Benefits of Industry 4.0 for MNE: + productivity; - costs; + quality control; + fast innovation - Necessary conditions for a company’s successful internationalization Existence of a product/service in whose competitiveness the company believes Willingness and determination of top managers who may lead the company into international expansion leveraging energies within the organization Existence of competitive advantages in relation to competitors, in one or several domains (management know how, tech, R&D, innovation, marketing expertise…) - International Strategies: Model of Strategic Forces Resources of firm: Tangible + Intangible Strategic pressures (2 conflicting pressures when developing international strategy): - Global Integration (pressure to standardize and concentrate configuration) - Local Responsiveness (pressure to disperse configuration and adapt coordination) Global Integration à Is driven by globalization (standardize consumer preferences); markets globalizing; technology and mass standardization; economies of scale Local responsiveness à pressures include: consumer divergence; cultural specify and historical legacy; nationalism; host government policies MODEL OF STRATEGIC FORCES 16 JV - Strategies best adapted to the Model of Strategic Forces: International: leverage a company’s core competencies into foreign markets; critical elements of the value chain are centralized at HQ This strategy works well when: the firm has core competencies that foreign rivals lack; there are no significant economic pressures for global integration; local responsiveness is not crucial. [Low for the 2 pressures – low pressure for local responsiveness & low pressure for global integration] Drawbacks: Too much concentration at HQ an little input from foreign subsidiaries – opportunities may be missed. Ex: Apple, P&G, Tesco Multidomestic: Emphasizes responsiveness to the unique circumstances of a country’s market; value added activities are adapted to local markets This strategy works well when: companies are relatively string at subsidiary level; capacity to respond locally is important and there are no significant economic pressures for global integration. [Low pressure for Global Intg, High pressure for local responsiveness] Drawbacks: Costly strategy to implement due to the need of adaptation to local market characteristics. Ex: Nestlé, McDonalds Global: makes standardized products that are marketed with little adaptation to local conditions; Exploits location economies and captures scale economies This strategy works well when: the MNE is a cost leader; worldwide standardization is possible; there are large scale economies available to be captures; local responsiveness is not crucial. [Low Pressure for local responsiveness and high pressure for global integration] Drawbacks: Cost reductions and standardization do not allow for adaptation in local markets. Ex: Walmart, Cisco Transnational: Leverages core competencies worldwide, reduces costs by exploiting location economies and adapts to local conditions. 17 JV This strategy works well when: Global learning is emphasized; knowledge flows within the company; There are sophisticated internal management and control systems; Capacity to respond locally is important; There are large scale economies available to be captured. [High on 2 pressures] Drawbacks: Complicated and difficult to implement. Ex: IBM, GE, Zara MNE OF THE FUTURE: Cybercorp à The connectivity network of the Internet defines its operational boundaries, not national borders. Ex: Farfetch Micro-Multinational à Born-global firms, operate internationally with powerful platforms and less than 250 people. Ex: Uniplaces Glo-Re-Calized MNE à Global vision and local tactics to exploit location economies within a regional network. Ex: Jerónimo Martins (Pingo Doce, Biedronka & Ara) Metanational à Innovate on its existing multinational operation to build competitive advantage. Ex: McDonalds Globally Integrated Enterprise à Companies have no centers, business flows in every direction, internet connects everything, everywhere. Ex: IBM 18 JV EVALUATING COUNTRIES FOR OPERATIONS: Country scanning (look for unacceptable conditions) à Data-driven analysis on the range od countries Detailed country analysis (analyze risk and opportunities – market dimension and sales growth potential & cost of resource acquisition + political, legal and competitive landscape; make a feasibility study with clear-cut decision points before escalation of commitment and investment; Quantitative and qualitative) à EVALUATION OF COUNTRIES FOR INTERNATIONAL OPERATIONS Market Entry – The Modes of Internationalization: - Classic Internationalization process The motivations An exception Ø Classic Internationalization process: From a passive exporter to an active marketeer: Gradual process with a learning and experience curve. Influences on the choice of an export market à Vicinity; Cultural identification; Past Experience; Opportunity; Rational Analysis – market research From a passive exporter to an active marketeer = To export to markets VS To sell in markets (knowing the consumer, the competitors, understanding distribution, anticipating trends… 19 JV Ø The Motivations Traditional motivations à Need to secure key suppliers; Market seeking behavior; Access to low-cost factors Emerging motivations à Scale economies; Increasing R&D investments; shortening product life cycles (global interconnected structures); scanning opp and learning in a global scale; competitive positioning (cross subsidization) Ø An Exception: Some companies are born multinational – the nature of their business (ex: internet distribution) or their ownership, or past legacy makes them international right from the start. Ex: Ebay, Google, Critical Software The Born-Global Phenomenon à Some companies initiate exporting as a born-global (instant international, micronational or international new venture). Evaluation of countries for international operations: - Purpose Modes of Entry Location factors Where to locate Information for decision Ø Purpose: MNEs can enter foreign countries through various modes. Ø Modes of Entry: Greenfield, Acquisition, Licensing, Startup, Joint Venture Ø Where to locate: Normally a result of a spurious factor (knowing a local partner, cultural identification, geographic proximity, past experience). The decision must be taken with some systematization and assessment – most used techniques: scanning, detailed analysis. Scanning à Comparing among several countries through statistics and taking into account business critical variables. Quantitative info. Detailed analysis à Concentrates on the short list of countries and deepens the analysis. Visits to the countries with local distributors, interviews with analysts, evaluation of possible partners. Qualitative info. 20 JV Escalation of commitment: the longer and + resources invested in the analysis of a given alternative, the + probable it becomes to choose it, regardless of its merit. (should be avoided) Ø Information for decision: The assessment of alternative countries/markets must contemplate opportunities for sales expansion, needs of allocation of resources, risks, costs Location factors: Where to locate sales, production, logistics, support & admin services? Which Country – Region – City; Sequence of entry in diff countries/regions (resource allocation decision for internationalization); How much effort and what resources to allocate to each country/region Resource allocation decision à Essential to the success of internalization (HR, technical resources, financial resources, company infrastructure) Compare Market Opportunities: Estimated size of market in country A * Estimated market share in country A = Projected revenues in country A THE RISK OF STAYING PURELY DOMESTIC: A purely domestic firm risks of losing competitive advantage to key competitors à Market dimension; Sales growth potential; Cost of resource acquisition Lowe sales, lowed fixed cost dilution, - profitability, + exposure to domestic economic cycles, + cost of resource acquisition (But staying domestic works for some companies) ALTERNATIVES FOR ALLOCATION RESOURCES AMONG LOCATIONS: - Alternative gradual commitments (Intermediates VS M&A; Export VS Local Production; One country VS One region) - Geographical diversification vs concentration (Diversification à rapid movement to several countries and gradual commitment in each. Ex: Revolut, Uber; Concentration à Moving to one and not going elsewhere until it develops a very strong competitive position. Ex: JM, Sumol Compal) - Reinvestment vs Harvesting (Reinvestment à a company may have to make new commitments in a location to maintain competitiveness; Harvesting à Divesting underperforming operations usually take too long with fear of individual consequences and bad publicity) 21 JV EXPORTING & IMPORTING - Operations: Procedures of expedition and freight forwarding Incoterms à intended to establish world standard norms relative to the obligations of sellers and buyers in international transactions Incoterms in Maritime Transportation Incoterms in any means of transportation Countertrade à Classic barter (pagamento em espécie); Counter-purchase (compra recíproca); Compensation Arragements or Buy Back (acordos de compensação); Switch Trade (reversão) Cash Collection and Trade Finance à Cash in advance (pagamento adiantado); Open Account (conta aberta); Consignment (consignação); Letter of credit (carta de crédito) - Collection of Sales In any sales contract there is a collection risk involved. If the transaction is cross-border, this risk is significantly increased. Forms of payment and respective need to hedge the risk of default associated: Cash in advance: no need to hedge (pagamento adiantado) Consignment: moderate need to hedge (consignação) Open Account: only used where there is complete trust among the parties – no need to hedge Sale with deferred payment (30/45 days): Need to hedge depending on the creditor quality and the risk associated to the specific foreign location 22 JV Letter of Credit (Trade Finance): Most used instrument of hedging against the risk of default (lack of payment of an invoice); Also a finance instrument since it has associated to it the capacity to finance the transaction through the involvement of banks in the trade operation. Letter of Credit: “Confirmed” (VS unconfirmed) Letter of Credit: “Irrevocable” (VS not) - Types of Export Documents Bill of Landing (carta de porte); Certificate of Origin; Commercial Invoice; Electronic Export Information (EEI); Export Packing List; Pro Forma Invoice à MARKET ENTRY STRATEGIES Guest Speaker: Fernando Oliveira (President of Sumol Compal Mozambique) + Edfonso Manjate “Conformism doesn´t rhyme with ambition” ALTERNATIVE MODES OF INTERNATIONALIZATION - Internationalization across geographies 23 JV FORMS OF OWNERSHIP OF FOREIGN PRODUCTS - Why Export & Import may not be sufficient When it is cheaper to produce abroad (ZARA – Brazil, Turkey, Asia) When transportation costs are too high (RENOVA – France, Mexico, Canada) When domestic capacity isn’t enough (Volkswagen – Germany, PT, USA) When products and services need altering (Whirlpool – USA, Europe) When trade restrictions hinder imports (SUMOL COMPAL – Angola) When country of origin becomes an issue (FREZITE GROUP – Germany) - Why companies opt for FDI When the business is the “experience” and location is critical (physical retail, hospitality & tourism, physical restaurants…) - Invest in Location à M&A Investment; Leasing; Greenfield Investment - Alternative Modes of Operating à Collaborative arrangements (why companies collaborate? à spread and reduce costs; specialize in competencies; avoid or counter competition; learn from others; gain location specific assets…) FDI FOR HOST COUNTRY GOVERNMENTS - ADVANTAGES Higher level of production, GDP, and fiscal income Sources of new jobs Improves Balance of payments equilibrium Improves local competitiveness, innovation and efficiency Might contribute to increase exports and foreign currency earnings Enables transfer of knowledge and technology, being particularly important for emerging economies 24 JV - POTENTIAL RISKS FDI increases future capital outflows from the host country Foreign ownership of companies in key industries can contribute for lowr comparative advantage of the country ( - R&D and innovation in the country) Non-efficient domestic companies might suffer due to increased local competition Sometimes it is intended for the appropriation of knowledge and technology from the host country Control and decision making moving abroad Foreign Investment Policy and Negotiation à Address challenges of attracting FDI and reducing Capital Account volatility LIMITING FDI IN KEY INDUSTRIES Dependencia theory à Emerging countries have practically no power in their dealings with MNEs Examples: Transportation, Mass Media, Energy Production and Distribution, Defense, Healthcare [Strategic industries vary from country to country] Governments have used powerful foreign companies to influence policies in the countries where they operate Foreign companies have used their home governments as instruments ti improve their interests in a country NOT LIMITING FDI IN KEY INDUSTRIES Bargaining school theory à the terms for a foreign investor’s operations depend on how much the investor and host country need the other’s assets Countries and foreign companies need each other, and both will lose if limitations are placed on foreign control. Local staff and executives have the power of influencing the strategy of the MNE in host country. MNEs need to adhere to local laws and regulations. 25 JV Preventing foreign control may lead to the protection of inefficient performance FDI brings important FX liquidity for the company When privatizing companies in strategic sectors, often countries sell stakes in the stock market to spread the shareholder base as much as possible à INTERNATIONAL PRODUCTION & SUPPLY CHAINS | GLOBAL SC MGN - Supply chain and logistics concepts: Supply chain à the network that links together the different aspects of the value chain, coordinating materials, info, and funds from the initial raw material supplier to the ultimate customer Global sourcing à the process of materials management (includes sourcing), inventory management, and transportation between suppliers, manufacturers, and customers Contract manufacturing à when the manufacturing process is being handled by another firm - Manufacturing configurations Offshoring à Manufacturing outside home market anywhere in the world based on cost efficiency. 26 JV Nearshoring à Manufacturing outside home market but regionally close/ + favorable market access Reshoring/onshoring à Manufacturing moving back to home country as a result of improved operational efficiency or legal/regulatory/trade constraints - Factors influencing International Production 1. Compatibility à Degree of consistency between the foreign investment decision and the company’s competitive strategy 2. Manufacturing configuration à requires the company to consider whether to centralize manufacturing in one country, establish regional operations or set up multidomestic production 3. Coordination à involves integrating activities into a unified system 4. Control à involves measuring performances so the company can respond appropriately to changing conditions - Global Sourcing –WHY do companies do it? To reduce costs (cheaper labor, + flexible work rules, lower land and facilities costs) and increase competitiveness To increase exposure to worldwide technology and improve quality To gain access to materials abroad (exclusive raw materials) To improve the delivery of supplies process (and strengthen reliability of supply – supplementing domestic suppliers with foreign suppliers) 27 JV To establish presence in a foreign market and react to competitors’ foreign location strategies - Modes of Global Sourcing (major sourcing configurations): Vertical Integration à Company owns the entire international supply chain or at least a significant part of it Industrial Clusters à Buyers and suppliers locate close to each other somewhere in the world, to facilitate business Keiretsu à Group of independent companies work together to manage the flow of goods (typical Japonese chains) Foreign Ttade Zones (FTZs) à Areas in which domestic and imported merchandise can be stores, inspected, and manufactured free from formal customs procedures until the goods leave the zones (ex: SDM in Madeira) Transportation à A crucial part of logistics; link together suppliers, companies, and customers (sea, air, land) INNOVATION IN ORGANIZATIONS à Strategic Innovation; Operational Innovation Too many companies avoid embracing innovation due to the fear of change. So, Change Management and New Business Development are necessary divers in organizations. Outsource innovation: CONS à Protect what is core intellectual property to avoid/delay becoming a commodity; Competitive advantage often depends on trade secrets that set a firm apart from its rivals; Third party manufacturers can always become competitors themselves; The company loses focus on innovation PROS à Reduce costs and increase R&D productivity (R&D activity is not for all companies – 3rd party developers can dilute costs and leverage R&D expertise); Accelerate innovation with business partners specialized in investing in the early stage of product development (new products and/or upgrade mature products; R&D, design and manufacturing of prototypes, conduct quality tests, put together user manuals and select past vendors) Open Innovation à Can be a unique source of competitive advantage depending on how each company interacts with all its supply chain interfaces. It is state of mind and process. Ex: B2B collaboration, knowledge transfer 28 JV à GLOBAL MARKETING | INTERNATIONAL MKT & GLOBAL BRANDS Environmental differences are key in International Marketing. Differences between the domestic and international environment tend to force managers to apply marketing rules in a different manner. Major problems arise from: Neglecting differences between the different environments; Interpret incorrectly the detected differences - Global Brand VS Global Company Global companies à Normally manage their brands globally. However, they may sustain their business on local brands International companies (not global) may have global brands - Promotion Policy The types of messages, those to whom they are addressed and the way they are presented, can differ significantly according to country, company, and product. Push-Pull Strategy à The mix push-pull is influenced by: the type of distribution system; the cost and availability of media to reach target segments; consumer attitude towards the information source; product prices as a % of income Standardization à cost reduction; prevents international customer of getting confused from exposure to different messages; usually accelerates the product’s penetration rate on target markets Several factors against standardization: Message translation, legal constraints, moral standards, message content - Branding Policy “Brand” = label used to identify products/services Companies’ typical decisions on branding policy: à To have or not to have a brand à Producer brand or independent brand (ind. brand - + protection for company reputation) à Only one brand or several brands (+ fit to market segments but + investment) à One international brand or several local brands 29 JV Factors against branding policy harmonization: à Linguistic factors (words with diff meanings in diff languages) à Acquired brands à The CoO (Country of origin) effect [MADE IN X] à Generic or almost generic names - International Marketing Strategies | Common Marketing Orientations Production Orientation à Efficiency, Quality, Capacity Product/Customer Orientation à Focus on customer needs in a particular market Sale Orientation à Global customers reasonably similar Strategic Marketing Orientation à Incremental product adaptations to satisfy local consumers Social Marketing Orientation à Preserve and enhance the well-being of all stakeholders - Segmenting Global Markets Geographic approach à Countries; Regions Consumer approach à Global Segment; Mixing the marketing mix (maintain some variables such as promotion, branding, distribution and adapting others); Mass market VS niche market (depending on the size of the market in a specific country compared to other) - Standardize advertising à Some advantages, but also some considerations 30 JV - Potential issues in pricing: Government intervention Market diversity Export price escalation Fluctuations in currency Fixed VS variable pricing - Push and Pull Promotion decisions à definition and factors in these decisions - Working with Product Distribution à Internationalization of distribution?; Factor to determining an internationalization strategy; Distribute partnerships as an option - Decisions on International Marketing Strategy, Branding and Local Marketing Mix cannot be dissociated! International MKT Strategy à The different marketing orientations Branding à Language/Phonetics; Legal considerations; Brands resulting from M&A; Local perception of country of origin; Protected origin; Generic name Local MKT Mix à Product adaptation; Pricing complexities; Promotional approach; Distribution practices and complications; advertising and communication GLOBAL AND LOCAL BRANDING - Reasons for Global Branding: Consistency of brand image Larger customer base Higher international brand notoriety Economies of scale in marketing investment Possible economies of scale in production 31 JV - Reasons for Local Branding: Flexibility to adapt to local needs Home country specific conditions to compete Origin recognition as domestic brand Lack of transferability of comp. advantage Legal constraints to business model Hard to target specific segments abroad Uniqueness to consumers and sense of urgency COUNTRY ADAPTATION VS GLOBAL STANDARDIZATION à Why adapt? Legal considerations; cultural considerations; Economic considerations GLOBAL BRAND STRATEGY à Global Vision; Global notoriety; (some) local responsiveness Ex Global Brands: Apple, Coca Cola, Farfetch, Ronaldo INTERNATIONAL BRAND STRATEGY à Global Vision; Regional Notoriety; Local responsiveness Ex International brand: Delta, Sumol Compal, Pestana Hotels, JM DOMESTIC BRAND STRATEGY à Global Vision; National Notoriety; Local responsiveness Potential to become international/export if they explore digital marketing and online shopping Ex Domestic brand: Cantê, Pasteis de Belém Diversified brand strategy – managing a portfolio of brands (ex: ABInBev – portfolio of global, international and local brands) à INTERNATIONAL HUMAN RESOURCES MANAGEMENT - HR Policy in the E-P-G Model Ethnocentric à Recruitment and development in the home country to key positions abroad Polycentric à Recruitment and development in the host countries for key positions in those countries Geocentric à Recruitment and development of the best irrespective of their origin. Opportunities are independent of nationality. 32 JV - International Careers | Rising to the top Expatriate: executive sent to work temporarily in a country that is not his/her legal residence Skills for expatriate jobs (employees sent to work abroad) à Global mindset; cultural intelligence/sensitivity; Adaptability to change; Emotional intelligence; language skills; prior global experience [all more valued than technical skills] Explaining what are companies looking for in expat positions: Technical competence (skills not available in the country); Self orientation (drive, self-reliance, purpose); Others orientation (understand the culture and connect with others); Resourcefulness (flexibility and adaptation to odd situations); Global Mindset (see opportunity where others see threats and complexity) Successful Expatriate Appointment à Analysis of job requirements; Analysis of country of assignment and evaluation of candidate. Preparation of candidate/family; adequate length of assignment; repatriation preparation à Successful expatriate Good HR management in an MNC à getting the right people in the right jobs, in the right places at the right times and at the right cost Mobility pyramid à Evaluate managers regarding their willingness to move to new location as well as their ability and experience. Should be constantly reassessed. - Practical tips for assessing whether MNCs have a true international HR strategy à Check the organizational chart (should have different nationalities in several hierarchical levels of the organization) à Check the official and unofficial language used in the company (English is the most common language at all levels in a truly global MNC. It is the working language in the company? The language used when people socialize?) - International careers in practice Expatriates are like marathonists à travel a lot; hard work and dedication; involves sacrifices (it is not a job for all). Role and ambition: they should bring people together and develop them. They choose to go further Challenges in becoming an expatriate à Re-establishing a social life abroad; Family and friends; Relocation and visa processes; Tension between locals and expats 33 JV 34 JV 35 JV 36
