International Corporate Strategy
GEST-S-467
Pr Manuel Hensmans
Group presentations
• Present your case
– Imagine I am Chairman of Board of your company
– 12 minutes maximum length
• After 12 minutes I shall stop you regardless of where you are
– Each person +- 3 minutes
– Use visuals to summarize argument!
– Be clear & succinct, to the point!
• Case-study deadline
– for handing in electronic and hard copy of written case is
12/12/2011 5pm Brussels time
• If I’m not in the office (R42.5.207), please leave in my pigeon hole on
the fourth floor (left end of corridor in the CEB lounge)
Plagiarism!
• Plagiarism, or copy-paste of 1 table or 1 paragraph:
0 for the entire group
•
3|
Failure means exam in September
Today: emerging economies
• The problem of institutional voids
– Create compensating location-bound FSAs
• Common assumptions managers
• Analyse 5 components of the institutional context
• Issues to ponder
–
–
–
–
Timing of entry
Market attractiveness
Product policy
Partner policy
• Case
4|
Today: emerging economies
• Entry modes
– Video on
– Joint ventures
• Case
vs
• Global challengers
– Internationalization patterns
– What can Western MNEs do to counteract?
5|
Emerging economies?
• Emerging economies = world’s fastest growing markets
– GDP/capita, GDP growth rate, extent & stability market economy
• Offer cost and innovation advantages
– Western MNEs face difficulties due to?
• unavailability of efficient local intermediary firms
• broader macro-level institutions to facilitate business
– F.i. in absence of efficient, external capital market institutions
» Large firms must establish internal capital markets for resource
allocation
• MNE success depends upon filling institutional voids
6
Emerging economies
• Managerial priorities?
– Almost entirely backwards
• Skewed host country selection criteria
– 61% Western MNEs select host country based on market size
– 16-17% rank political and economic stability highest selection criterion
– Only 12-13% focus on structural conditions (institutional voids)
7
For most internationalizing managers the
world is this…
8|
Yet, the world is also this…
DIFFERENCE = UNRESOLVED INSTITUTIONAL VOIDS
9|
Case
& institutional voids
• Liberal economic policies
– Have allowed for vibrant capital markets
– Yet, political system has constrained trade unions
– Efficient labour markets require minimum strength trade unions
» Wages of unskilled & skilled can be suppressed at will by employers
» No incentive for upgrading labour supply pool!
10 |
Five components of the institutional
context
Beyond GDP/capita, population, ppp, exchange rates,…
1) Macro-level political/social context: a country’s power
centers and presence of checks and balances
•
•
•
•
What form of private property rights protection exists?
How independent are the media?
How accountable are politicians?
Can people be trusted to honour contracts?
e.g.
pro: vibrant electoral democracies + dynamic press
contra: rampant bureaucracy & moderate levels of corruption
11
Five components of the institutional
context
2) Country openness: the extent of it welcoming FDI, but also its
openness to ideas and openness to travel
e.g.
pro: allow greenfield investments & acquisitions
contra: JVs with local partners needed to get access to government & inputs
JVs are only entry mode for MNEs in some sectors
most acquisition targets used to be state-owned (hidden liabilities)
12
Five components of the institutional
context
3) Product markets: respect for intellectual property rights,
brand perceptions and brand management; availability and quality
of intermediaries such as suppliers, logistics providers & retail
chains, consumer advocacy groups, courts…
e.g. IPR problems in order of magnitude (imitation, piracy…):
13
Five components of the institutional
context
4) The labor market: education infrastructure (technical and
management training)
large labour pools, yet lack of managerial & skilled workers
- difficulty to assess quality of talent available…why?
-
1. lack of recruiting agencies to screen potential employees
2. Lack of organizations that rate quality of training provided by educational
institutions
large pool of English-speaking mgt
pools of mgrs with varying degrees of English proficiency
pool of educated mgrs not big enough!
14
Five components of the institutional
context
5) Capital markets:
a country’s debt, equity and venture capital institutions, as well as
the country’s accounting standards and procedures surrounding
financial distress
- inefficient capital markets?
- lack of specialized intermediaries in investment analysis, banking
services, venture capital & auditing?
15
MNEs have three options
Option 1: adapt the strategic capability to the market (LB FSAs)
Option 2: change the emerging economy’s context (only for large MNEs)
Option 3: stay out of emerging economies
16
Implications for …
Timing of entry
• Wait for others to fill institutional voids?
• Or try and gain first mover advantage?
– May be particularly important in emerging economies
• FSAs in government relations
• Chance to enjoy high revenues quickly due to pent-up demand
• Weak prior marketing levels: can have important branding impact
• Pools of experienced managers & innovative distribution processes or
product packaging
17
in China: timing of entry
• China’s car industry started in 1953
– From nation of bikes to cars
• Volkswagen first foreign car investor in China
– First mover advantage
• First office in Beijing 1985
• Strategy
– Target taxi and offical car fleets
• Take first mover advantage
• Create market with state support
– Economies of scale
– Renew fleet park periodically
• 2000: 50% market share
18 |
in China: long-term effects
• Creation premium market
– Market share went down to 15%
• Has gone up again
– New emerging middle classes (emerging economy lifecycle!)
• More price sensitive
• Know Volkswagen brand better via taxi and official fleet presence
• Volkswagen started offering new China VW types
– Not end of international lifecycle mature products (not State cars either)
• 2010?
– VW sells twice as many cars in China than in Germany
• Second home market
• 2011
– VW projected to become biggest carmaker in the world
19 |
Implications for …
Market attractiveness
• Most Western indicators not reliable in emerging economies
• So think in terms of?
– (1) the countries’ long-term market potential
– (2) presence of entry mode business prospects
– (3) potential profits
20
Implications for …
Product policy
• Traditional international product life cycle approach
– Serve emerging economies with mature products
• What MNE types more likely to do this?
– Centralized exporter
– International projector
• Problem?
– Emerging economy customers “want latest products now”
• Adapt products/services!
– Do not just simply reduce prices, by eliminating desirable product
features!
• Low income consumers want to improve their socio-economic status!
• Emerging economy customers view Western MNEs with suspicion!
• Tip: weak technology infrastructure enables technolog. leapfrogging
21
Tata Nano Car
« The people’s car »
2,200$
The average Indian isn’t so keen to
advertise the fact that they can only
afford “the world’s cheapest car”
(2011)
Price close to second-hand branded car!
22
Implications for …
Partner policy
• Government reglation often imposes cooperation with local partners
• Such partners may help MNE overcome
– Bounded rationality problem
• Yet, may worsen
– Bounded reliability problem
“in many cases MNEs plan to switch to direct distribution soon after achieving a
critical mass of sales in order to gain control over their business…”
“…Because distributors follow their own interests”
Vicious cycle of increasing bounded reliability challenges!!
23
Case 14.1 AIG:
Filling the Institutional Voids in China
Background
• US-based
• One of the world’s largest insurance companies
– Founded in 1919 as American Asiatic Underwriters in Shanghai
• Life insurance
– American office set up in 1926
– Shifted focus from China to US in 1950
• Maurice Greenberg becomes president in 1962
– Focus on corporate coverage
– Switch to independent brokers
• Went public in 1969
• Continued expanding in China: Asia’s largest foreign
insurer by 1975
Chinese Insurance Industry
• Government-owned PICC: the only insurance company
operating in China in 1949-1970
– 1959-1979: No domestic general / life insurance business
• Economic reform in 1978
– Economic growth
• Passed threshold of 1,000$ (life insurance becomes viable)
– New laws to govern domestic economic activities
• Insurance market opened up to domestic and foreign companies
• Not an attractive investment market for most foreign
insurers
– Small industry (200 insurers in 1978)
– Patchy enforcement of regulations
• Yet…Market potential
– “…1.3 billion people cannot exist in isolation for long”
Coping with Institutional Voids
• Macro-level political and social context?
– Political power monopoly, little influence of media and NGOs
– Solution: build a strong political network
• Country openness?
– Lack of openness to FDI
– Solution: start with JVs to build relevant FSAs, engage in extensive
relationship building (guan’xi) to gain access to market
• Product markets?
– Weak property right protection, weal legal enforceability
– Lack of established distribution network
– Lack of marketing / research intermediaries
– Solution: create agency system (own distribution network), learn the
market and culture, engage in marketing efforts to tailor products to local
needs
• Labour market?
– Labour force had no expertise in insurance
– Solution: heavy investment in training
AIG Strategies for Emerging Markets
• Timing of entry: first mover advantages
– Develop FSAs in government relations
– Establish presence and brand early and dominate niche
markets before other foreign competitors enter the market
– Achieve efficiencies early / become a low-cost competitor
vis-à-vis latecomers (=> higher profit margins)
• Evaluating market attractiveness
– Non-traditional: evaluated market based on long-term potential
• Partner policy
– Initially relied on government-owned partner to gain entry /
reduce BRat problems
– Switched to direct distribution at the first opportunity
AIG’s FSAs
• LB FSAs developed in China?
– Strong political/government relationship network
– Favourable public image (achieved through public
gestures/investments that signalled long-term commitment)
– Understanding of local market and culture (through history / JV
partnerships)
– Skilled and motivated workforce (achieved through significant
investment in training/commission-based compensation
system)
– Customized products (achieved through understanding of local
culture)
AIG’s FSAs
• NLB FSAs?
– Expertise in insurance business
– Independent broker distribution model
– International experience, particularly in Asia
– Size of operations (largest foreign insurer in Asia)
– Position “at the leading edge of opening markets” (established
model for entering emerging markets)
Problems with LB FSAs early 2000s!
• Modest market share and profits in the early 2000s
• Change of CEO
– Void in AIG’s political network in China (dependent on 1 !)
• Designing the right product
– Balance between finding a sizeable niche market and invading
PICC’s turf
• Small market
– Limited investment opportunities due to government regulations
– BUT! Growth potential: Chinese insurance market predicted
to quadruple between 2001 and 2010
Entry modes: video on China (from 1:41)
Modes of entry
WOFEs
Exporting
32 |
Licensing /
Franchising
Joint
Venture
Acquisition
Greenfield
investment
Risk
Low
Low
Moderate
High
High
Return
Low
Low
Moderate
High
High
Control
Moderate
Low
Moderate
High
High
Integration in
FSAs?
Negligible
Negligible
Low
Moderate
High
Context of JVs
• Joint ventures are often set up when they are the foreign
MNE’s only penetration option, given a restrictive
regulatory regime
• Local partner substantive contribution results from FSAs in
government relations and other location-bound FSAs
allowing national responsiveness
33
Problems with JVs
• Vicious circle of suspicion (bounded rationality/reliability)
– High distance home country
• HQ: Bounded rationality increases
– Asian partner thinks
• MNE wants to buy me out if I’m successful
– Western partner thinks:
• Asian partner enters markets on its own, outside the alliance
agreement because of what it has learned inside the alliance.
• Weaker firm in JV becomes trapped in a bounded
reliability & dependence spiral
– Especially if one partner engages in continuous alliance-specific
investments, whereas the other does not, the incentive for the latter
to abuse the relationship becomes stronger
34
Problems compounded!
Asian MNE’s & JVs
• Better performance by Asian MNEs:
– Intrinsically more receptive and willing to put effort into
learning from alliance partners
– View alliances as an opportunity to develop new FSAs, not
primarily as a tool to reduce investment costs and risks
– Choose partner on the basis of long-term complementary
capabilities, not established market position
– Own contribution to alliances often involves complex, tacit
process knowledge that is not easily imitated or transferable
35
Case 12.1 Danone
Danone’s Affair in China
The Wahaha Group
• Founded by Quinghou Zong in 1987 as a district
school-run enterprise sales department
• Supported by city government
• Grew through acquisitions (with government’s
support)
• Position in the Chinese market in the mid 1990s
– Strong and profitable
– Faced competition by foreign MNEs
– Lacked financial capital needed to expand scale and
market share in China
Danone and Wahaha
• Cooperation started in 1996
• Waha motivation (institutional voids in China)
– Access to capital to expand product lines and grow market share
– Access to new technology and managerial techniques
•
motivation
– Easy access to fast-growing emerging market
– Access to local knowledge
– Access to managerial resources
• Cooperative arrangement
–
–
–
–
Danone became a majority shareholder in 1998 (51%)
Wahaha took full control of everyday operations
39 JVs by 2007
Excellent financial and market share performance
The Conflict
• Danone accuses non-JVs of illegally using Wahaha brand
• Danone insists on taking over non-JVs
• JV sues three directors appointed by Danone
• Danone files a complaint against 2 companies and 2
individuals (Zong’s family) related to non-JVs
• Danone threatens litigation
• Zong resigns from his position as Chairman of Wahaha
JVs
Wahaha’s Perspective
• Brand transfer (from Wahaha to JV) was hindered by
the government
• Wahaha is the sole owner of the brands according to
revised contract
• Lack of commitment from Danone!
– Danone did not provide access to technological or managerial
expertise
– Danone created barriers to JVs’ business expansion
– Danone had shares in several of Wahaha’s major competitors
• Expanding non-JVs because of Danone’s lack of
commitment to JV expansion (vicious cycle of
bounded reliability)
Danone’s Perspective
• JVs are the sole owners of Wahaha brands (did not realise
IPR institutional void in China)
– Danone had paid usage fees to the Wahaha Group
– Wahaha may not have filed transfer requests
• Competition between non-JVs and JVs
– Non-JVs run as a separate and complete business system
– Illegally manufacture and sell products similar to those of JVs
• Danone chose not to increase investment in JVs
because of discovering the existence of non-JVs
• Danone did not violate agreements by investing in other
companies in China
– Western contractual viewpoint!
What actually happened:
Shift in Bargaining Power
• Danone’s hands-off approach led to its complete
dependence on Wahaha to run local operations
• Embeddedness of Wahaha’s FSAs
– Cannot be easily absorbed by Danone’s culture
– FSAs in running local business cannot be diffused to Danone
without Danone’s involvement in operations
• Vicious cycle of increasing dependency on a partner
for Danone
Lessons for Chinese JVs
• Don’t use technical legal techniques to assert or gain
control in a joint venture
– Do not expect a 51% ownership interest in a joint venture to provide
effective control
• 51/49 joint ventures are generally a mistake in China. The Chinese see
a 51/49 joint venture as fundamentally no different than a 50/50 joint
venture. The absolute legal control afforded by 51% ownership is
viewed as unfair.
• Clear intention of control: 60/40 or a 70/30 ownership structure
• No joint venture formed on a weak or uncertain IPR basis
– Wahaha brand belong to whom? (State-background Wahaha)
– Chinese argue Danone wants to create monopoly
• The foreign party must actively supervise or participate in
the day-today management of the joint venture
43 |
Global challengers are changing the global
business landscape—fast
• Global challengers
– compete with Western multinationals for customers
• but also for key natural resources, capital and talent pools across multiple
geographies
– have a number of strategic advantages
• chief among them: their position in high-growth home markets
• Their ability to learn from markets with big institutional voids
–
& Patrimonio Hoy
– Are attaining leadership positions in their industry segments globally
• often use cross-border M&A as a means to quickly build sizeable global
positions
– are globalizing their management teams
• often achieving a similar level of international board composition to
established incumbents
– their future prospects are bright
Competitive Positioning
Global Competitive Positioning – Major Appliances
Major Appliances – Top 10 Global Companies by
Volume, 2006-2010
Company
5-year
2006 2007 2008 2009 2010
trend
2010
%
share
Whirlpool Corp

1
1
1
1
1 10.5
Electrolux AB

2
2
2
2
2
7.2
Haier Group

4
4
4
3
3
6.9
Bosch &
Siemens
Hausgeräte
GmbH

3
3
3
4
4
5.8
LG Corp

5
5
5
5
5
5.1
GD Midea
Holding Co Ltd

12
11
10
9
6
3.5
Samsung Corp

9
8
8
8
7
3.4
General
Electric Co
(GE)

6
6
6
6
8
3.3
Indesit Co SpA

7
7
7
7
9
3.2
Panasonic
Corp*

8
9
9
10
10
2.9
Note: * Previously Matsushita Electric Industrial Co Ltd
Use institutional void experience
& go to developed economies
• CEO Zhang Ruimin
– Different internationalization strategy to other Chinese companies
• Others satisfied with exporting low-cost products from China
» as contract manufactureres for foreign firms’ multinational brands
• 1996
– « We need to raise our competitive edge in the West…Otherwise we’ll lose
the Chinese market to foreigners! »
• Haier Group emulated successful Japanese & Korean firms
–
–
–
–
Take own brand to foreign markets
Establish production in foreign markets
Learn (R&D) in most technologically competitive markets
Products appeal more to consumers in developed countries if not seen as
Chinese imports by Westerners
» We have to make Americans feel that Haier is a localized US brand
instead of an imported Chinese brand »
46 |
Production and Sales
Consumer Appliances: Haier Group
© Euromonitor International
Haier Group Global Coverage and Performance
0.1%
0.2%
0.1%
0.3%
7.2%
0.1%
0.3%
0.4%
0.6%
Very strong growth
Strong growth
1.4%
Moderate growth
Negative growth
0.4%
Very negative growth
Not illustrated
Note: Percentage figures on map show local share of Consumer Appliances market, 2010
Downloaded from www.warc.com
47
Countering the threat of global challengers
48 |
Western companies: strategies?
• Retaliate
– Take advantage of cost structure, natural resources, market size…
• Bottom of pyramid strategies
• Reverse innovation
• Globalizing premium brands
– Focus on consolidating fragmented markets with market potential
49 |
Bottom of the pyramid strategy
Not destitutes in need of charity!
Can actually be potent
marketing opportunities when
tapped with relevant products
and services
50 |
How can Western companies gain from BOP
beyond CSR?
• Reverse innovation home capability
– take ideas developed for developing country markets and bring
them back to wealthier markets.
– For example, GE is bringing cheap medical imaging machines developed
for India back for usage in the United States. Conventional ultrasounds
developed for the West cost $100,000; simple, portable ultrasounds
developed for China cost $15,000; at that price, they could be attractive to
many local clinics in America as well. GE now talks of 50% solutions at
15% prices, relevant in all geographies around the world
– Pre-empt entry of global challengers!
• Condition
– Give subsidiary in emerging market
» Power to take the R&D and marketing lead
» Allow for reverse innovation within your organization
51 |
Dangers of bottom of the pyramid strategies?
• Challenge of maintaining clear market segmentation!
– Cheap products designed for the Base of the Pyramid, f.i. in India, could
affect the market for more mainstream products marketed at the
prosperous Indian middle class.
– With huge international travel and internet marketing, such cheap products
could also rebound back to richer geographical markets also – though that
could be an opportunity as well.
52 |
What strategy do most Western companies
actually pursue?
53 |
54
Brand dynamics in Chinese beer
55 |