Global Enterprise and Competition
66.511.202
Fall 2007
Ashwin Mehta, Visiting Faculty
Session 5
Competitive Strategies:
Modes of Entry and FDI
Session 5
Enron India
What risks did Enron face going
into the Dabhol project?
• Political risk: expropriation of
investment
• Political risk: renegotiation of
contracts after investment
• Contract risk: problems with
local partners
• Currency risk
• Market risk: costs of energy and
demand for electric power
• Recovery of investment costs
(FDI)
Session 5
Enron India
How did Enron prepare for the risks
of the project?
• Long term contracts: purchase
agreement, Maharashtra State
Electrical Board was a credible
buyer
• Political risk: participation of
Overseas Private Investment
Corp, US Export-Import Bank,
International Finance Corp.
• Revenues tied to US dollar
• Partners GE and Bechtel
• Substantial research
Session 5
Enron India
How could Enron have dealt with
risk more effectively?
• Enron could have relied less on
FDI
• Enron could have emphasized
transactions, making
arrangements for construction,
power supply contracts, and
technology transfer
• More reliance on local partners to
construct and operate project
• Greater participation of other
Indian institutions
Session 5
Enron India
Why did Enron choose ownership
(FDI)?
• To exercise control over assets in
investment projects
• To control technology due to
limits on intellectual property
rights
• To improve operational
effectiveness
• To learn about market for future
projects
• To avoid expected contract risk
Session 5
International Strategy
Strategy
Options
Exporting
Licensing
Franchising
Joint Ventures
Acquisitions
Green-Field Development
Production Sharing
Turnkey Operations
BOT Concept
Management Contracts
Session 5
International Markets Entry Mode
Experimental – selected exporting
Comfort levels
Minimal cultural/political differences (little or no psychic distance)
Active Involvement – systematic approach
Identify International markets
Allocate resources
Global involvement – broad business activities
Develop Competitive advantage
Cyclical, causal process:
Market knowledge leads to Commitment decisions
Market commitments Results from Current Activities
Before, an incremental process
Now, Rapid Internationalization a more preferred approach
knowledge, tools, facilitating institutions
Managers are more prepared (outsourcing, technology
transfers)
Partnering/alliances
Session 5
Entry mode is affected by
Product related factors
Product offering range/scope
Product life cycle stage and market strategies
Need for adaptation
Foreign-based partners (advantages?, risks?)
Market based factors
Strategies for target markets
Available distribution channels
Psychic distance
Experience level
Geographical coverage (# of locations/countries)
Relative priority of each market
Organizational Factors
Communication
Control
Amount of assets/resources committed leads to type of Control
e.g. direct selling, manufacturing, R&D require high control
Session 5
Global Market Assessment
Importance of Market research
AT&T’s missed opportunity in China
Many sources, including US and State level departments
Do not rely on a single source
Trade fairs, trade delegations, direct promotion, collaborate
with suppliers and distributors
Some questions to ask:
· Which countries offer the best prospects?
· In which foreign markets can company products be sold profitably?
· Does the foreign market require any modification of the product?
· What distribution channels and arrangements should be employed in
selling to a particular country?
· How sensitive is market demand to product price?
· What should the landed and retail prices be?
· What sales volume and margins can be expected in each market?
· What performance criteria should be used to monitor company
activity in each foreign market?
Session 5
Portfolio Matrix for Plotting Products by Country
Competitive Strengths
High
Low
Invest/Grow
Dominate/Divest
Joint Venture
Selective
Strategies
Harvest/Divest
Combine/License
Session 5
FDI
FDI includes cross-border business investment and M&A.
(not portfolio investment)
World FDI inflows:
$209 billion
(1990) (Cross-border M&A: $151 b.)
$1,492 billion
(2000) (Cross-border M&A: $1,144 b.)
$735 billion
(2001) (Cross-border M&A: $594 b.)
$651 billion
(2002) (Cross-border M&A $ 370 b.)
$560 billion
(2003) (Cross-border M&A $ 297 b.)
Compare with world total gross fixed capital formation: $7,294 b.
(2003)
Session 5
FDI
• World FDI inward stock: $8,245 billion (2003)
• Sales of foreign affiliates: $17,580 billion (2003)
(Compare with international trade of $9,228 billion (2003)
• Gross product of foreign affiliates: $3,706 billion (2003)
(Compare with world GDP of $36 trillion in 2003).
• Total assets of foreign affiliates: $30,362 billion (2003)
• Employment of foreign affiliates: Over 54 million people
(2003 estimated)
Data from United Nations World Investment Report and
UNCTAD website
Session 5
FDI
2003 $
Billions
Developed
countries
FDI inflows
367
FDI outflows
570
Developing
countries
172
36
Central and
Eastern
Europe
21
7
Session 5
International modes of entry and value
at risk
• FDI – whether M&A or company growth – puts full value
at risk.
Toyota factory, Wal-Mart store
• Managers of an international business choose the mode of
entry based on a trade-off between risk versus control in
the particular supplier or customer country
• Joint ventures, not only share knowledge, but also share
investment costs and value at risk
• Spot or contract sales can substantially reduce value at risk
Session 5
International modes of entry and
value at risk
• Choice of entry mode jointly determines
degree of control and extent of risk
• M&A
• Growth
• Alliances/
Joint
Ventures
• Licenses
• Contract
• Spot
Increase in
control,
• Degree of commitment depends on
contractual duration and vertical integration
Increase in
• With less knowledge of other country’s
market, choose lower degree of commitment
commitment
and risk
• As knowledge increases over time, can
increase degree of commitment to get closer
to desired entry mode.
• Contractual transactions may give optimal
mix of control and commitment
Session 5
Choosing target countries for FDI
• Costs of investment project
• Estimate potential expected returns
• Determine risks associated with revenues and costs in host
country -- Best estimates of expected cash flow
• Apply appropriate risk-adjusted discount rate
• Manager considers trade off between risk and return
Session 5
Why is FDI so common in international
business?
• Production orAdvantages
distribution facilitiesof
in FDI
a country can reduce
costs of trade (transportation, tariff and nontariff barriers,
transaction costs, and time) – Toyota in US
• Production within a country takes advantage of domestic
sourcing of parts, components, services
• Investment and employment in host country gain political
support for the international business:
“quid pro quo investment” – Cemex and Southdown
Session 5
Why is FDI so common in international
business?
Advantages of FDI
• Closer to customers for manufacturers
• Necessary for retail and wholesale companies – Wal Mart,
Carrefour, Ingram Micro
• Take advantage of low-cost labor, highly-skilled labor, and
proximity to resources
• Reduce costs of trade from import/export
Session 5
Advantages of vertical FDI
• Coordination advantages through the value chain
• Access to production facilities, sourcing networks and
distribution networks
• Keeping technology and intellectual property in-house
• Substitution of internal transactions for market transactions
Session 5
Advantages of Horizontal FDI
• M&A acquisition of competitors for market power or cost
savings
• M&A to achieve economies of scale and scope
(Daimler/Chrysler, VW)
• M&A to purchase of technology
• M&A to acquire brand names
• Production avoids costs of trade relative to export
• As hedge against demand and supply fluctuations -Cemex
• Market power in international purchasing (e.g.
Vodaphone/Airtouch purchases wireless equipment for its
many operations)
Session 5
Disadvantages of FDI
• Risk that firm many not recover investment and returns to
investment in supplier country
• FDI increases capital investment, reduces flexibility
• FDI ties business to particular country locations for
production or distribution
• Vertical FDI makes the firm more vertically integrated
Session 5
FDI Trends
• Shift of investment mix toward services
About half in 1990, about two thirds in 2000
• Shift of investment to outsourcing abroad (offshoring +
outsourcing) – reduction in vertical integration
• Globalization (lower costs of trade) leading to reduction
in vertical FDI
• Globalization (market integration) likely to lead to
increases in horizontal FDI
UNCTAD World Investment Report 2004
Session 5
Licensing versus FDI
Why is FDI more prevalent than technology licensing?
• Licensing agreements depend heavily on international
enforcement of intellectual property rights
• International licensing also entails costs of trade
• International licensing is quite common amongst
developed countries, reaching levels up to 1/3 of domestic
R&D expenditures
• International licensing experiencing rapid growth
Session 5
Overview and Take-Away Points
• FDI a major feature of international business – composition
of FDI undergoing transformation – from vertical to
horizontal
• FDI offers advantages in terms of ownership and control and
avoiding trade barriers
• Choose target countries based on expected cash flow and
costs of investment and discount using risk adjusted rate of
return
• Adjust level of investment to reflect expected cash flow and
risk-adjusted rate of return
Session 5
Cooperative Strategies
Cooperative Strategies:
–Collusion
• Active cooperation of firms to reduce
output and raise prices
– Explicit
– Tacit
Session 5
Strategic Alliance:
– Partnership of two or more corporations or
business units to achieve strategically
significant objectives that are mutually
beneficial.
Agreements between firms to do business together in ways that
go beyond normal firm-to-firm dealings but fall short of
merger or full partnership
More effective in combating competitive disadvantage than in
gaining competitive advantage!
Session 5
Continuum of Strategic
Alliances
Mutual Service
Consortia
Weak and Distant
Joint Venture
Licensing Arrangement
Value-Chain
Partnership
Strong and Close
Source: Suggested by R. M. Kanter, “Collaborative Advantage: The Art of Alliances,” Harvard Business Review (July-August
1994), pp. 96–108.
Session 5
International Markets Entry Issues and Concerns:
R&D
Marketing
Logistics
Sourcing
Session 5
Global R&D Network
Configure for cost and manage for value
Distribution of R&D centers:
Rising costs
Opening of markets (India, China)
Information Technology
Scarcity of scientists and engineers
US/Western Europe/Japan
Proximity to technology/research clusters, markets/customers, qualified
workers
In developing countries (India, Eastern Europe)
Lower cost, access to markets, pool of skilled workers
Session 5
The Internationalization of R&D: The R&D footprint of
most companies is becoming more global, with
China and India seeing significant growth
“Innovation: Is Global the Way Forward?”, Booz, Allen Hamilton & INSEAD, 2005
Session 5
Multinational logistics
Logistics: flow of goods and material
multiple borders crossed (laws/regulations of each country
multiple transportation modes
Complex process and challenging management
Logistics costs – a significant portion of total costs
Multinational transportation
Infrastructure (highways, railroads, air, etc.)
Modes (ocean shipping, air shipping)
Selection (time, predictability, cost, Governmental factors)
Inventory issue (order cycle time, customer service levels, storage)
Logistics Management
Centralized
Decentralized
Outsource
Session 5
Multinational Marketing Issues
· Multinational Marketing Strategies
· Market-Related Factors
· Mix-Related Factors
· Company-Related Factors
4 P’s
Product (positioning, PLM, counterfeit markets, etc.)
Placement (Channels design)
Promotion (advertising, PR, etc.)
Pricing (export pricing, transfer pricing, foreign market pricing, coordination)
Session 5
Multinational Sourcing
Purchasing, Procurement, Acquisition, sourcing/strategic sourcing
Centralized Vs Decentralized function
Worldwide sourcing has increased --- challenges to purchasing managers
culture, language, laws, etc.
Why source Worldwide
cost, access to technology, quality, more options
Barriers to WW sourcing
Paperwork (LOC, Bill of Lading, licenses, etc.)
Inertia
Logistical challenges
Security concerns (causing time delays)
Sourcing process
Establish needs/objectives/strategies
RFP’s
Evaluation and Selections
Countertrades
Session 5
Modes of Entry and FDI
Flextronics in India
© Professor Daniel F. Spulber
Session 5
Flextronics
With fiscal year 2007 revenues of USD$18.9 billion,
Flextronics helps customers design, build, ship,
and service electronics products for OEMs in the
automotive, computing, consumer digital,
industrial, infrastructure, medical, and mobile
market segments.
Flextronics has a network of facilities in over 30
countries on four continents. This global presence
provides design and engineering solutions that are
vertically integrated with manufacturing, logistics,
and component technologies to optimize customer
operations by lowering costs and reducing time to
market.
Session 5
Session 5
“Flextronics Design creates innovative, market-leading products for
our customers. We partner at any phase of the product development
cycle from concept to production launch. Our flexible engagement
models allow customers to utilize Flextronics’ global engineering
team for complete, full turnkey product development or for a specific
contract design service. “
“By balancing stylish product design with the realities of
manufacturing in today's global economy, Flextronics helps
customers rapidly move from concept to production launch while
optimizing resources and reducing costs.”
www.flextronics.com
Flextronics International
Manufacturing operation
Bangalore
Session 5
• June, 2004: Flextronics acquires Hughes Software
Systems.
• August, 2004, Flextronics acquires Chennai-based
Future Software Ltd that provides software solutions to
telecom firms.
• November 2004: Flextronics acquires Emuzed,
multimedia solutions provider with R&D centres in
Bangalore and Chennai.
• December, 2004: Flextronics acquires Deccanet that
provides software and hardware design services.
Session 5
Choice of modes of entry
• Flextronics enters India through M&A by acquiring
four companies – FDI
• Flextronics further expands its design capabilities by
establishing facilities in India – FDI
• Design is vertically integrated with Flextronics
manufacturing – vertical FDI
• Acquiring and protecting intellectual property are the
main strategic motivations
• Management control and hiring skilled labor are also
outcomes of M&A
Session 5
Assignment 3
Due December 13, 2007
GO TO THIS LINK (http://www.strategybusiness.com/press/article/16651?pg=all&tid=230), REVIEW THE ARTICLE, DO
A WEB RESEARCH ON COMPANIES DISCUSSED IN THE ARTICLE, AND
ADDRESS THESE QUESTIONS:
(YOU SHOULD WRITE AN INTRODUCTION/CONTEXT BEFORE
ADDRESSING THESE QUESTIONS)
1. What are key success factors for a Global product Launch? Use Gillette as a
template to discuss your response. Can such a template be applied to other
industries? Give one example to support your response
2. Discuss Gillette’s process for a Global launch of Mach3
3. What are Gillette’s post-launch challenges and how are they managing?
YOUR REPORT MUST BE BETWEEN 1000 AND 1500 WORDS AND MUST
INCLUDE SOURCES REFERENCED.
Session 5