1. Global Strategic Management

2. Globalization of markets & competition
 Levitt is widely credited with coining the term
globalization through an article entitled
"Globalization of Markets", which appeared in
the May–June 1983 issue of Harvard
Business Review.
 However, as a NYTimes article notes, the
term 'globalization' was in use well before (at
least as early as 1944) and had been used by
economists as early as 1981.
 However, Levitt popularized the term and
brought it into the mainstream business
audience.

3.  Globalization is the process of economic
integration which includes:
 Free flow of goods and services
 Free low of capital
 Free flow of Technology
 Free flow of Human Resources

4. Process of globalization
 The "Bretton Woods" Agreement which was
signed in 1944 considered the creation of
three economic institutions:
 the International Trade Organisation (ITO),
 the International Monetary Fund (IMF) and
 the International Bank for Reconstruction and
Development (IBRD), also called the World
Bank.

5.  The IMF and the IBRD were duly created in
1947.
 In 1946 and 1947, several meetings took
place to negotiate the creation of the ITO.
 As the drafting of the ITO Charter was not
completed at that time, the GATT entered into
force on 1 January 1948 on a provisional
basis.

6.  Negotiations focused on three main parts:
 one part dealt with the preparation of a
charter for the ITO,
 the second part focused on negotiating a
multilateral agreement to reciprocally reduce
tariffs, and
 the third one on drafting the general
principles and obligations relating to tariff
reduction. The second and third parts
constituted the GATT.

7.  The GATT remained applicable on the basis
of the Protocol of Provisional Application for
several decades. It was only in 1995 when
the WTO came into existence that a real
institution was created.
 Establishment of ITO was never realized as it
was not ratified by many members

8.  Meanwhile15 countries had begun talks in
December 1945 to reduce and bind customs
tariffs. With the Second World War only
recently ended, they wanted to give an early
boost to trade liberalization, and to begin to
correct the legacy of protectionist measures
which remained in place from the early
1930s.

9. First Round Meeting (Geneva
Round, 1947),
 The first round, with 23 countries meeting in
Geneva in 1947, led to the establishment of
GATT itself.
 This first round of negotiations resulted in a
package of trade rules and 45,000 tariff
concessions affecting $10 billion of trade,
about one fifth of the world’s total.

10. Second round of multilateral trade negotiations
Annecy, France, 1949
 In this second round, participants agreed to
exchange some 5,000 tariff concessions,
 10 more countries signed the General
Agreement.

11. The third round, Torquay, UK, 1950
 A year later, the negotiations moved to
England.
 This third round focused again on tariff
reductions.
 The number of participants rose to 38.

12. The fourth round, Geneva Round
(1956)
 Resulted in further reduction in tariffs
 The Geneva Round completed in May 1956,
resulting in $2.5 billion in tariff reductions

13. The Dillon Round, Geneva, 1960-61
 It continued GATT’s efforts to progressively
reduce tariffs
 U.S. Treasury Secretary and former Under
Secretary of State, Douglas Dillon, who first
proposed the talks.
 Twenty-six countries took part in the round.
 Resulted in reducing over $4.9 billion in tariffs

14. The Kennedy Round, Geneva,
1964-1967 (Sixth Round)
 GATT trade rounds were getting longer and
more complicated.
 In the sixth, the Kennedy Round, participation
surged to 62 countries.
 The subjects discussed also expanded, from
the traditional tariff cuts to new trade rules,
such as those on the use of anti-dumping
measures.
 achieves tariff cuts worth $40 billion of world
trade

15. The seventh Round, i.e. the Tokyo
Round (1973-1979)
 focused not only on further reducing the
tariffs but also addressed various non-tariff
barriers to trade.
 The result was the negotiation of a series of
side agreements
 they were conditional, meaning that they were
only binding for those countries which signed
the concerned side agreement.
 Non –tariff ,anti- dumping, import licensing
procedures etc..

16.  Participation swelled again to 102 countries.
 Concessions were made on $190 billion
worth.
 However, the talks failed to come to grips with
fundamental reforms in agricultural trade, and
stopped short of providing a new agreement
on “safeguards”

17. The Uruguay Round, 1986-94: the last
and the biggest GATT round
 In 1986, a GATT round was launched in a
developing country for the first time. By now
developing countries had become the
majority in the GATT system, and in this
round they were to play an unprecedented
active role in the talks, alongside their more
powerful fellow-participants.

18.  In September 1986, trade ministers met in the
Uruguay resort of Punta del Este.
 After a week of tough talking, they agreed to
launch new negotiations.
 It took seven and a half years to complete,
and it led to the most fundamental reform of
world trade rules since GATT itself was
created in 1948.

19. One signature per country
covering 23,000 pages
 The delay allowed participants to develop a
clearer view of how world trade could be
reformed.
 The final package was 23,000 pages long,
 the number of participants in the Uruguay
Round had reached 123

20.  The most important result was the creation of
the World Trade Organization, almost half a
century after the failed attempt to create an
International Trade Organization.
 And with the WTO's creation, the multilateral
rules were expanded to cover new areas of
trade
 GATT had only dealt with trade in goods. It
was to be replaced on 1 January 1995 by the
WTO.

21.  New Agreements reached
 GATT - to be continued as an agreement
dealing with trade in goods
 GATS – deals with trade in service
 TRIPS – deals with intellectual property
 TRIMS –deals with investment

22. Motivations for global expansion
 Three primary factors motivate companies to
expand internationally
 a) Economies of scale & Scope
 b) Avoid dependency on one (home) market
 c) Low cost production process

23. Economies of Scale & scope
-Companies such as Ford, GM need to
produce large quantity in order to achieve
economies of scale
-However, for many companies, domestic
markets no longer provide high level of sales
needed to maintain enough volume.
-Building a global presence expands an
organization's scale of operations, enabling to
realize economies of scale

24.  For example, if the plant is used to build 6
million cars per year, the highly specialized
techniques of the assembly line allow a
significant reduction in costs per car.

25. Avoid dependency on domestic market
 Having presence in multiple countries
provides market power & reduces the
dependence on one market
 Helps reduce the risk by spreading it.

26. Low cost production process
 Powerful motivation is to obtain raw materials
at the lowest possible cost.
 Textile manufacturing in the US is now
practically non-existent as companies have
shifted to Asia, Mexico, Latin America
 75% clothing in US produced else where.
 Companies like GM, Toyota & BMW moved
to other countries to make use of cheap
resources.

27. Decision to internationalize
 Organisational Factors
 Environmental Factors

28. Organisational Factors
a) Decision-maker characteristics
-Recognition by the top manager of the
importance of international activities.
-Reid found four characteristics positively
influenced the decision
- Foreign Travel & Experience abroad
- Foreign Langauage proficiency
- Decision makers background
- Personal Characteristics

29. Firm Specific Factors
b) Firm Size
-Bigger firms tend to internationalize more
than smaller firms
-Large firms have greater managerial &
financial resources
-Attain economies of scale

30. c) International Appeal
-International demand for one’s good
-Coco Cola,McDonald’s,Pepsi,Nike etc. have
international appeal.
-Carrefour's concept of hypermarket has
international appeal

31. Environmental Factors
 Unsolicited Proposals
- Unsolicited Proposals from govts,
distributors or clients are hard to resist.
-Volkswagen decided to enter into china
after the chinese delegation requested in
1978.
-UPs throgh the internet
-International contract of Indian Software
firm Ekomate came from British firm through
its website by accident

32. b) The ‘bandwagon’ effect
-Competitive firms follow each other in an
oligopolistic market
-If one firm internalizes –create a bandwagon
effect

33. c) Restrictive domestic policy
-France introduced the Royer Law, which
restricted the introduction of more
hypermarkets
-Triggered the expansion of Carrefour to
European countries.

34. d) Attractiveness of the Host country
-Host country’s market size
-Level of PCI –purchasing power
-Favorable foreign investment regulation
-Low cost of production

35. The internalization process –
Uppsala Model
 Johanson and Vahlne formulated this
approach in 1977, referring to empirical
observations on Swedish manufacturing firms
from their studies at the international
business department of Uppsala University

36.  One of the basic assumptions of the model is
that “the lack of knowledge is an important
obstacle to the development of international
operations.
 Experiential learning or learning through
experience from a firm’s own activities is an
important reason why internationalization is
often a slow process

37.  According to Johanson and Vahlne (1977:
23) the necessary knowledge can be
acquired but, because of its tacit character,
the most efficient solution lies on the firm’s
own operations.

38.  Objective or general knowledge and
experiential or market-specific knowledge.
the former can be easily taught, the latter can
only be learnt through personal experience
and can never be transferred or separated
from the primary source (tacit knowledge).
International initiatives require both kinds of
knowledge.

39.  The lack of experiential knowledge in a new
market forces the firm to pursue a gradual
process of internationalization characterized
by a sequence of stages presented in what
has been called “the establishment chain
 it has been deemed a clear direct relation
between market knowledge and market
commitment

40. Uppsala Model

41.  To reduce market uncertainty and lower the
risks, companies begin their
internationalization process in countries that
are psychically close before venturing to
more distant ones
 move into those markets they can most easily
understand, entering more distant market
only at a later stage

42. -Uppsala Model suggests that a firm’s
internationalization is a gradual process.
-The firms proceed along the
internationalization path in the form of logical
steps.
-Gather acquisition and use of information
determines successive levels of international
business activities.

43.  A firm’s international expansion depends on
its experiential knowledge of foreign markets.
 Firms start expanding to neighboring
countries or countries with small psychic
distance.
 Firms expand their international operations
step by step - small incremental changes

44. Risk/profit

45. Global Entry Strategies (Uppsala’s
Logical Steps)
 Export
 Exporting is the first and easier form of
market entry
 Companies have ventured abroad only after
establishing themselves at home.
 Sony, established in 1946, took 11 years to
export its first product to the United States,

46.  Export does not need the commitment of
large resources & hence less costly
 Easier for the firm to withdraw its
commitments.
 Inexpensive way to gain experiential
knowledge & economies of scale

47.  Due to the physical distance, export strategy
does enable the firm to control its operation
abroad.
 Exports could be disrupted due to major
political or economic instability
 Provides very small experiential knowledge

48. Contractual Agreement
 Licensing
 Franchising

49. Licensing
 International licensing is ‘the transfer of
patented information and trademarks,
information and know-how, including specifi
cations, written documents, computer
programs, and so forth, as well as information
needed to sell a product or service, with
respect to a physical territory’

50.  Benefits of licensing include speed to market,
especially when a firm lacks sufficient skills,
capital, or personnel to enter a foreign market
quickly

51.  For instance, German home appliance
manufacturers Liebherr and Bosch-Siemens
entered several emerging markets such as
China and Turkey through licensing
agreements for manufacturing refrigerators
and other white goods.
- 7-Eleven ,US company uses licensing to enter
foreign markets

52.  In turn, emerging market firms such as the
Haier Group of China (see closing case
study) and Arçelik of Turkey used the foreign
licensing technology to expand internationally
through exporting.

53.  In addition to being used as an entry mode to
foreign markets, licensing may also be used
as a step towards a more committed mode of
entry such as a joint venture or a wholly-
owned form.

54.  For example, when in 1997, Phoenix AG, a
German manufacturing concern, agreed to
license the production of its automotive and
railway components in India to Sigma Corp.
of Delhi, the license agreement was no more
than a step towards establishing a joint
venture.

55. Risks of Licensing
 Sub-optimal choice. This risk is associated
with the possibility of licensing being not the
best possible choice and or selecting the
wrong partner—hence not realizing the full
potential of the partnership

56.  Risk of opportunism. The possibility that the
licensee takes the opportunity to appropriate
 the technology or process that has been
licensed to it and internalizes it.

57.  Quality risks. These risks are associated
with the possibility that some licensees might
not be able or willing to maintain the quality of
the product or service and hence compromise
the reputation of the licensor.

58.  Production risks. These risks are related to
the possibility that licensees will not ‘produce
in a timely manner, or will not produce the
volume needed, or will overproduce’.
 Payment risks. There are risks associated
with licensees not being able to or decide not
to pay for royalties.

59.  Joint Ventures
-Popular mode of entry
-the most typical joint venture is 50:50
-Share the investment & profit
-Foreign insurance companies entered into
Indian market through this mode
-Maruthi Suzuki(54%),Wipro GE etc
-TESCO uses this method to enter into new
markets

60. -Tesco’s financial resources and retailing
capacities of the local firms with local
knowledge.
-Local enterprises already have an
infrastructure of stores and other
-Tesco has a preference for joint venture in
which it has majority stake

61. JVs in backward integration

62.  Strengths
-Firm benefits from the local partner’s
knowledge of host country’s competitive
conditions,culture,langauge & political system
-Suitable when the development costs and or
risk of opening a market is high – share these
with the local partner.
-Inevitable entry strategy under govt restriction
Honda partnered with Hero when Indian govt
was not allowing 100% FDI

63.  Political considerations make joint venture
only feasible entry mode
-Less likely to attract adverse govt
interference due to the local partners.

64.  Weaknesses
 Firm that enters into a joint venture risks
giving control of its technology to its partner.
 Does not give tight control over the
subsidiaries – One of the reason why Honda
has broken the joint venture with Hero.

65.  The shared ownership arrangement can lead
to conflict and battle. (Maruthi Suzuki)
-Conflicts of interest over strategy and goals
often arise in joint venture
-Such conflicts may result in the break up of
joint ventures

66. Wholly Owned Subsidiaries
 In a wholly owned subsidiary, the firm owns
100% of the stock.
 Can be done in two ways
-Acquire the existing firms in the foreign
country (ING)
-Set up a completely new operation in that
country (TI) – Greenfield strategy

67.  Strengths
-When the firm’s competitive advantage is
based on technological competence, a wholly
owned subsidiary will often be the preferred
entry mode – reduces the risk of loosing
control over that advantage

68.  Wholly owned subsidiary gives a firm tight
control over operations in different countries –
Global strategic coordination
 Wholly owned subsidiary may be required if a
firm is trying to realize location and
experience curve economies

69.  Weaknesses
 Costliest method of serving foreign market
from a capital investment standpoint
 High risk in the foreign market

70. Greenfield Venture v/s Acquisition
 Acquisition
 The volume of cross border acquisition is
growing
 In the last two decades 80% of all FDI
inflows have been in the form of acquisitions

71.  For a company to prefer acquisition to
greenfield entry, the cost of constructing new
facilities must exceed the cost of purchasing
the existing properties

72.  Strengths
 They are quick to execute – firm can rapidly
build its presence in the target market.
 For ex – Daimler Benz needed a big
presence in the US, it acquired Chrysler.
 Telefonica built a service presence In Latin
America through a series of acquisition

73.  In many cases firms make acquisitions to
preempt their competitors
 When the economy and cross border FDI is
deregulated markets see a waves of
acquisitions.
 Vodafone acquired ATC in the US ($60b),
Excel communication in the US by Teleglobe
of Canada etc.
 Daimler Chrysler, Ford Volvo, Renault Nissan

74.  Manager may believe acquisitions to be less
risky than greenfield ventures because it
buys a set of assets that producing a known
revenue and profit stream

75.  Why do acquisition fail?
 Acquired firms often overpay for the assets of
acquired firm
 Firms are too optimistic about the value that
can be created – willing to pay more
 Hubris hypothesis
 Ex – Daimler paid $40 b,40% more than the
market price.

76.  Paid this much because it thought it could
use Chrysler to grow its market in USA.
 Within a year started loosing money due to
weak sales in USA

77.  Many acquisitions fail because there is a
clash between the culture.
 Experience high management turnover
 In Daimler Chrysler many senior managers of
Chrysler left in the first year because they
disliked the disliked the dominance of
German managers.
 Local knowledge is lost

78.  Many acquisition fail because integrating the
operations of two firms take much longer than
forecast
 Difference management philosophy, culture
can slow the process.
 This occurred a DaimlerChrysler,where grand
plans to integrate operations were blocked by
endless committee meetings
 By the type plan was ready,chrysler started
loosing money

79. Greenfield Strategy
 Entails building an entirely new subsidiary in
a foreign country to enable foreign sales &
production

80.  Strengths
 It gives the firm a much greater ability to build
the kind of subsidiary company it wants
 Its much easier to build an organizational
culture from scratch than it is to change the
culture
 Helps transfer products, competencies and
know how from the established operations of
the firm to the new subsidiary

81.  For example – Lincoln's competitive
advantage in US is strong org,culture.
 Through its bitter experience it found that its
is very difficult to transfer this culture to the
acquired firms.
 As a result the firm switched its entry
strategy.

82.  Risks of green filed strategy
 Risk of not being able to build relationship
with customers, suppliers and govt officials in
the new country.
 Possibility of being preempted by more
aggressive global competitors via acquisitions
strategy

83. Phases of global strategy
 Single-Country strategy
-Firms that are household names around
started as small ventures in a single country
 -In the past, so long as Internationalization
was often considered when the firm’s home
market became unprofitable
 the prospect for growth started to diminish,
and attractive opportunities to expand
internationally were available

85.  Export strategy
 Before a firm establishes subsidiaries outside
its home market and becomes directly
involved in their management, it may start by
exporting its products and services outside its
home market
 domestic strategy remains of primary
importance
 considered as a domestic strategy with an
export strategy attached to it.

86.  International Strategy
 When firms first establish subsidiaries outside
their home market, they move from a
domestic strategy phase to an international
strategy phase
 Firms that manufacture and market products
or services in several countries are called
‘multinational firms’

88.  each subsidiary is likely to have its own
strategy, and will analyze, develop, and
implement that strategy by tailoring it to its
particular local market.
 adaptation of products to fit local market
peculiarities becomes the main concern for
multinational firms

89.  Global Strategy
 As multinationals mature and move through
the first three stages, they become aware of
the opportunities to be gained from
integrating and creating a single strategy on a
global scale.
 strategy involves a carefully crafted single
strategy for the entire network of subsidiaries
and partners,

91.  activities of the different subsidiaries are
coordinated from headquarters in order to
maximize global efficiency
 Challenge here is balancing global integration
and adaptability

92. Global strategy v/s international
strategy
 The term global strategy has been in use only
since the late 1970s and began to assume
widespread use in 90s.
 International strategy was the term used prior
1990s.
 International and global strategy are
sometimes used interchangeably

94.  They are different in three dimensions
b) Degree of involvement and coordination from
the centre
- Extent to which a firm’s strategic activities in
different country locations are planned and &
executed interdependently on a global scale
-Wal-Mart

95.  Multinational firms must configure their
operations to exploit the benefits offered by
different country locations, and coordinate
their activities across countries to capture
synergies derived from economies of scale.

96. b) Degree of product standardization and
responsiveness
-Extent to which product or service is
standardized across countries.
-McDonald’s ,IKEA
-absolute standardization across countries is
not necessary

97. c) Integration & competitive move dimension
-Extent to which firm’s competitive moves in
major markets are interdependent.
 A firm makes competitive moves not because
they are best for the particular country or
region involved but because they are best for
the firm as a whole
 a competitive attack in one country is
countered in another country’
 Profits of one subsidiary is used to upgrade
other subsidiaries

98. Designing global organizations
 Organisation structure for Global V/s
Localization strategy

99.  Managers must decide whether they want
each global affiliate to act autonomously or
whether activities should be standardized
 Globalization v/s multidomestic strategy

100.  Globalization strategy
 Product design, manufacturing and marketing
strategy are standardized throughout the
world.
 Japanese took business away from Canadian
& American companies by developing similar
high quality low cost products for all countries
 Black & Decker became internationally
competitive

101.  Coco Cola supplies similar products globally
only marketing strategies are tailored to
specific country.
 IKEA uses this strategy
 Gillette produces standardized products
 McDonald’s v/s Jollibee

102.  Multi –Domestic strategy
 Competition in each country is handled
independently.
 Product design, manufacturing & marketing
strategy tailored to the specific needs of the
specific countries
 Wal-Mart has had trouble in transplanting its
successful US formula. In Indonesia Wal-
Mart closed its store withi year-brightly lit,
highly organized stores were not liked by
customers

103.  Domino’s offer 100 different Pizza .
 P & G - cultural factors required adjustment in
its product.
 Jollibee

104. Export Structure
 The firm that is selling a large proportion of its
output in its domestic market and a small
quantity internationally uses export structure
 Part of the domestic marketing function
 Structure with which national players
experiment with foreign market
 Internationally experienced personnel handle
the dept.

105. CEO
Marketing Operations HR Admn.
Domestic Export

106. International Division
 Companies typically start with an export
department that grows into international
division
 This has the status of other major dept in the
organisation
 Has its own hierarchy to manage international
business
 Acc to Harvard study 60% all firms have
initially adopted this structure

107. CEO
Marketing International
Operations HR
Divisions.

108.  International division allows an MNC to
concentrate resources and create specialized
programme for international operation.
 Wal-Mart set up International Division in 90s.
 This division oversees the operation in
various geographical area (Europe, Asia &
America)
 CEO of each region reporting to the head of
international division

109. World wide functional structure
 Functional dept is responsible for its activities
around the world. For example manufacturing
dept is responsible for worldwide
manufacturing activities
 The design is used by the MNCs that have
similar product lines
 British Airways uses this structure.

110. CEO
Operation Marketing HR Admn
Plant A Plant B
Germany Brazil

111.  McDonald & Coco Cola uses this structure
whereby global marketing function controls
international marketing activities

112. Global Product Division structure
 This is the most common structure followed
by the company.
 Take responsibility for global operations in
their specific product area
 Each division has the functional depts.
 Suitable for the worldwide standardized &
diverse product lines

113.  Divisions operate as a profit centers
 HUL,Motorola,DaimlerChrysler have product
structure

115. Global Geographic Structure
 Worldwide activities are organized by dividing
globe into different geographic areas
 The regional Manager responsible for that
area reporting to the CEO
 Each division has its own functional
departments suitable to that region
 Cadbury has five basic divisions- executives
in each division handle various functions for
that region.

116. CEO
Apple America Apple Europe Apple Pacific
Canada Asia
Latin America Australia
Japan

117.  Well suited to companies that want to
emphasize adaptation
 Environmental factors compelled the
companies to shift from product based to
geographical structure

118.  Global Matrix Structure
-When aerospace industry was fast developing
US govt demanded that a single manager be
assigned to each of its project.
-In response TRW established a project leader
–someone who shared authority with the
functional heads.

119. Global Matrix Structure
 Most complex design
 Permits a firm to form specific product groups
using members from existing functional depts.
 Combines functional product structure
 Permanent functional depts supply resources
to various product group.

120.  Dow’s organisation structure had three
interacting elements- Functions, Businesses
and geography.
 Most managers reported to two bosses.
 The plastic Managers reported to the head of
the worldwide plastic division and head of the
Spanish operations.
 Changed to product structure.

122.  ABB used global matrix structure that worked
extremely well coordinate a more than 2lakh
employee company in 140 countries
 Dow chemicals uses matrix structure

125. Hybrid Structure
 Most organizations use hybrid structure
 Helps to achieve economies of scale as well
as locally responsive marketing
-Hybrid structure combines the characteristics
of various approaches tailored to a specific
strategic needs.
-Popular type – combining characteristics of
the functional & divisional structure.

126.  When corporation grows large & has several
products – organized into self-contained
divisions- functions that are imp to each
product are decentralized.
 Other functions are centralized at
headquarters.

128. Managing Internationalization Process
 Export Management

129.  Determining Export Potential
 The most common approach is to examine
the success of your products
domestically.
 If company succeeds at selling in the
domestic market, there is a good chance that
it will also be successful in markets abroad, at
least those where similar needs and
conditions exist.

130.  Another means to company's potential in
exporting is by examining the unique or
important features of your product. If those
features are hard to duplicate abroad, then it
is likely that you will be successful overseas.

131.  Finally, product may have export potential
even if there are declining sales in the
domestic market. Sizeable export markets
may still exist, especially if the product once
did well in the United States but is now losing
market share to more technically advanced
products.

132. Standardization Versus adaptation
 After identifying the export potential, this is
the first question.
 A firm has four basic alternatives
a) Selling the product as is in the international
market
b)Modifying the products for different markets
c)Designing new markets for foreign market
d)Incorporating all differences into one flexible
product & introducing a global product.

133.  Studies on product adaptation show that the
majority of the products have to be modified
for the international market place.
 All products have to conform to the prevailing
environmental condition over which the firm
has no control.
 Adaptation decision are made to enhance the
exporter’s competitiveness in the market
place.

134. Factors affecting adaptation
 The Market Environment
- Govt regulations
- Non –tariff barriers
- Customer Characterstics,Expectations &
preference
- Economic development
- Climate & Geography

135.  Govt Regulations
-Often present the most stringent requirements.
-Sweden was the first country to enact a
legislation against most aerosol sprays.-
degrade the ozone layer.
-Should be monitored by exporters.
-Ruling by a European court of justice let stand
Danish law that requires returnable
containers for all beers and soft drinks

136.  A poll of 4000 European companies found
that burdensome regulatory requirements
affecting exports made the united kingdom
the most difficult market to trade with.
 Google was forced to establish a new
site,Google.cn,contents of which are
censored by Google.

137.  Non-Tariff Barriers
 Include product standards, testing or approval
procedures, subsidies for local products and
bureaucratic red tape.
 Normally affects the product adjustments
outside the core product.
 Ex-France requires the use of French
language

138.  Getting around them may be the toughest job
for the exporter.
 US dept of commerce dept estimates that
typical machine manufacturer can expect to
spend between $50000 to &100000 a year.
 Mack International has to pay $10000 to
$25000 for a typical European engine
certification.
 Brake system changes to conform with other
countries' regulation costs &1500 to $2500
per vehicle

139.  Japan requires the testing of all
pharmaceutical products in Japanese
laboratories – because Japanese may be
physiologically different than other countries
 US Cookie marketer, for example create
separate product batches to meet Japanese
requirements.

140.  ISO 9000 standard
 EU chose ISO as a basis to harmonize
varying technical norms for its member
states.
 This determines what may be exported to EU
 ISO 14000 – basically require that firm has an
environmental management system.
 These serve as non tariff barrier

141.  Customer Characterstics,Expectations &
Preferences
 Product decisions are especially affected by
local behaviors,tatses,attitudes and traditions
 Requires exporter to gain customer approval

142.  Even the benefits sought are similar, physical
or intangible characteristics of the customer
may dictate product adaptation
 Quaker Oats’ extension of the soft drink
product to Japan to suffered from lack of fit
on three dimension;

143. i) Glass bottles the drinks comes in is almost
twice the size that Japanese are used to
ii) Product itself was too sweet for the palate
iii) Japanese did not feel comfortable with the
sediment that characteristically collects at
the bottom of the bottle

144.  GE medical systems has designed a product
specifically for Japan in addition to
computerized tomography scanners
produced for the US market.
 The unit is smaller because the Japanese
hospitals are smaller than most US hospitals
also because of the smaller size of the
Japanese patients

145.  The reason most Europeans who wear
western boots buy those made in Spain may
be that US footwear producers are unaware
of style conscious Europeans’ preference for
pointed toes and narrow heals.
 The only way solving this problem is through
customer testing and marketing research

146.  Often, no concrete product changes are
needed only a change in the product’s
positioning.
 A brand positioning may have to change to
reflect the different lifestyles of targeted
market.
 Coco Cola has renamed Diet Coke in many
countries Coke light – Shifted the promotional
approach from “weight Loss” to “figure
maintenance”

147.  In Sweden Helen Curtis changed the name of
“Every Night” shampoo to “Every Day”
because Swedes wash their hair in the
morning.

148.  Economic Development
-Level of economic development of the
targeted market dictates adaptation
-As country’s economy advances, buyers are in
a better position to demand more
sophisticated goods
-Adaptation is required to make the marketers
product accessible

149. Four tiered markets in developing country

150. The Four –Tiered Structure of
Markets
 Global tier – Consumers who want global
standard product and willing to pay global
price
 Glocal tier – Consumers who demand
customized products of near global standard
and are willing to pay slightly less than global
consumers do.
 Local tier – Are happy with the products of
local quality and local price

151.  The bottom of the market consists of people
who can afford only the least expensive
products

152.  Developing markets may require backward
innovation-market may require drastically
simplified version of the product due to lack of
purchasing power or usage conditions.
 TVS electronics developed a new all in one
business machine for small shopkeepers for
developing market- It is part cash register,
part computer, and able to tolerate heat, dust
and power outages

153.  Buying power will affect packaging in terms of
size and units sold in the package.
 In developing markets, products such as
cigarettes and razor blades are often sold by
the pieces so that limited income consumers
can afford it.
 Soft drink companies have introduced four-
can-packs in Europe, where cans are sold
singly even in large stores.

154. Climate & Geography
-Climate and geographical distance will have
an effect on the total product offering mainly
packaging.
-Marketing of chocolates in hot climate is
challenging.
-Nestlé's solution was to produce different Kit
Kat chocolate for Asia with reduced fat
content to raise the candy’s melting point

155.  If the target country is geographically distant
product has to be protected against longer
transit times.
 One firm experienced this problem when tried
to sell Colombian guava paste in the US.
Because the packaging could not withstand
the longer distribution channels and the
longer time required for distribution, product
arrived in stores in poor condition

156. Export procedures in India
 Export activities are classified into five stages
ii) Preliminaries
iii) Offer and receipt of confirmed orders
iv)Production and clearances of products for
exports
v) Shipment
vi)Negotiation of documents & realization of
export proceeds
vii)Obtaining various export incentives

157. i) Preliminaries
-Importer –Exporter Code Number (IEC No)
- Should obtain IEC no from the regional
licensing authorities.
-This no is to be shown in all documents

158.  Membership in Certain Bodies
- Exporter may obtain membership in certain
bodies like export promotion councils, Trade
Promotion Organisation etc.
-Help in getting incentives, information &
export promotion & contact the prospective
importer

159. ii) Inquiry, Offer and Receipt of Confirmed
Order
- Inquiry is the request made by a
prospective importer regarding his wish to
import certain goods.
-Offer is a proposal submitted by an exporter
expressing his intention to export
-usually makes an offer in the form of a
“Proforma Invoice”

160.  This includes
-Name of the Buyer: The complete name and
address of the buyer/importer
-Description of the Goods – Technical,
physical and chemical features. If necessary
detailed description is provided.
-Price : Price of the goods in internationally
accepted currencies or mutually agreed
currencies and discounts

161. - Conditions of sale
- Validity: The period for which the invoice is
valid. The importer can accept the invoice
anytime before the validity period.
-Escalation clause : Price of the good may
increase due to increase in the input costs.
-Delivery Schedule : Realistic delivery
schedule should be indicated.
-Based on the pricing mode ( FOB or CIF)

162. (iv) Inspection – The authority who will conduct
the inspection.
(V) Force Majeure Clause : Exporter may
sometimes fail to deliver due uncontrollable
situations. therefore he incorporates this
clause

163.  Payment terms : Payment terms like
Advance payments, letter of credit etc. should
be included
 Other obligations :
-Post sale services to be provided by the
exporter
-Providing spare parts
-Warranty/guarantee for the
equipment/technology

164. - Confirmed Order
-The buyer sends the confirmed order to the
exporter by signing the copy of the invoice.
This becomes the confirmed order

165. (iii)Production /Procurement of Goods
-Should produce the good exactly as specified
in the invoice.
-If the export house does not have production
facility, it has to procure the products from
others
-Packing & labelling
-Quality control and Pre-shipment
Inspection

166. -Excise duty rebates
-Govt has exempted the goods meant for
export from the imposition of excise duty
-Claim for excise rebate
-Bond without payment of excise duty

167. iv) Shipment
- Most of the good exported through ship.
-The exporter has to contact shipping
companies for space after getting the
confirmed order.
-Through agents as they have information of all
shipping companies throughout the world

168.  Custom Clearance
- Exporter has to get the custom clearance of
the goods before they are loaded.
-Custom authorities accord their formal
approval after scrutinizing the documents
which mainly include:
-Proforma Invoice in original & duplicate
-Export License (if required)
-Letter of credit

169.  Certificate of inspection
 Shipping bill
 Quality control inspection certificate (if
required)

170.  Crafting order
-Once the goods are ready for export and
shipping order is available, the exporter has
to approach the Superintendent of the
concerned Port Trust for the permission to
move the goods inside port.
-Issues the order for moving the goods into the
port area after verifying the shipping bill and
shipping order

171.  Custom examination of Cargo at Docks
-Custom authorities after checking the
documents, check the products to be
exported.
-After checking the consignment ,will seal the
packages and accord formal approval for
export.
-Exporter can arrange for loading the cargo on
a ship

172.  Let Ship
 Let ship order is the permission of Customs
authority issued to the exporter.
 Authorizes the shipping company to accept
the cargo to the vessel

173.  Mate’s Receipt
 After goods are loaded on the ship, the
captain of the ship furnishes the documents
to the Port Superintendent which in turn is
issued to the exporter.
 Provides details of products, conditions of the
products at the time of loading etc.
 PS issues this receipt to the exporter

174. Managing International Licensing
 International Licensing Risks
 Seven risk factors have been identified in the
literature:
(1) suboptimal choice;
(2) risk of opportunism;
(3) quality risks;
(4) production risks;
(5) payment risks,
(6) marketing control

175. 1) Suboptimal Choice
 Every firm faces the risk of the opportunity
cost of not making the best strategic choice.
 A firm selects the wrong licensing partner
and therefore does not realize the full
benefits of the relationship.

176.  DuPont chose to license its Teflon® brand
name and technology to six Chinese
manufacturers of cookware.
 However, after six years of investment
DuPont's marketing cost in China had
outweighed its revenues from product sales.

177. 2.Risk of Opportunism
 the risk of opportunism is the chance that a
licensee will appropriate the technology that
has been licensed to it, and internalize it.
 An opportunistic licensee could be called a
"learning licensee” who takes the technology
and makes it its own.

178.  In the music industry, the risk of piracy has
been a major obstacle to international
licensing.
 In China, for example, western companies
have been disinclined to license western pop
music to local manufacturers because of the
prevalence of pirate CD plants.

179. 3.Quality Risks
 -Quality risk is the concern that the licensee
will not produce or distribute goods in a
manner that meet the licensor's standards

180. 4.Production Risks
 There is a risk that the licensee will not
produce in a timely manner, or will not
produce the volume needed, or will
overproduce.
 the licensee might not produce what is
needed to take advantage of a market
opportunity.

181.  In the case of a trademark, there is also a risk
of producing the design on inappropriate or
poorly assorted products

182. 5.Payment Risks
 What if a licensee does not pay the licensor,
or pays in an untimely fashion, or under-
reports earnings?
 Payment risk is probably greater in a royalty
compensation agreement than in a lump sum
payment arrangement, as the number of
times that a firm is subject to risk increases in
the royalty payment model

183. 6.Marketing Risks
 In an "arm's-length" licensing arrangement,
the licensor loses control of the licensee's
marketing of a product.
 The risk to the licensor is that the product
will be under marketed or otherwise not
marketed optimally.

185.  Planning
 The process of licensing can begin as a well-
developed strategic plan on the part of the
licensor, or as an unexpected encounter
between a potential licensee and licensor.
 However, licensing is best carried out as part
of a strategic plan

186.  A plan provides an overall road map for
getting where the firm wants to go using
licensing.
 The plan guides strategic choices and critical
decisions, and provides criteria for the choice
of licensing versus other forms of market
entry

187.  Licensee Selection
 Selection of a licensee takes on many of the
features of partner selection for an
international joint venture (IJV).
 The choice of partner is highly correlated
with performance.
 Many of the risks may be reduced with the
proper selection of a licensee.

188.  A critical part of the selection process is
determining if there is goal congruence
between the firms.
 one of the issues in partner selection is
finding potential licensees and researching
them
 Careful licensee selection includes a search
for potential licensees with quality assurance
ratings to minimize quality risk.

189.  licensing broker can play a key part in
negotiating contracts, finding suitable
partners, and in some cases, managing the
licensing process entirely for some firms.
 The Licensing Executives Society of Europe
lists links to licensing brokers.

190.  Compensation Choices
 Lump-sum Payments
 Royalties

191.  Aulakh et al.'s (1998) research on licensing
compensation found that "licensor
involvement in a foreign market will be higher
under a royalties-based than under a lump-
sum fee compensation structure"

192.  Aulakh et al. (1998) maintain that it is better
to be paid lump-sum compensation in the
case of a high risk of intellectual property
violation.
 Additionally, the host country's economic
environment is positively related to the use of
a royalties-based compensation structure

193.  On-Going Relationship
 Aulakh et al. (1998) state that an active
interest in licensee performance on the part
of the licensor is highly related to the
compensation choice that is made.

194.  This active interest, or on-going relationship,
is seen as a means of ensuring that;
 opportunistic behavior does not occur (or is
minimized)
 that quality and production expectations are
realized, and
 that appropriate marketing of finished
products takes place

195.  Contract Specification
 Generally, a licensing agreement is
contractual in nature, outlining the transfer of
the technology for remuneration.
 The contract may legalise the agreement
between the parties, defining its terms and
conditions, and serve as a deterrent to
noncontractual behavior

196.  Contract requirements regarding quality,
periodic sampling for quality, or evidence of
quality assurance from the licensee can help
reduce the quality risk issue.
 Contract specification of products and
markets can reduce production and
marketing control risks.
 Specification of the country whose laws are
being used to enforce the contract is
especially important

197.  Organization of the Licensing Function
 Within the firm, licensing is sometimes viewed
as "found money" on the income statement
 Some firms see licensing as an extra profit
builder—others as a core business strategy.

198.  The firm that organizes its licensing as an
integral part of its business structure, and
bases that structure on its strategic planning,
will not only minimize the risks of licensing but
should also maximize firm performance

199. Managing Joint Venture
Source : James Bamford,David Earnst & David
G.Fubini (2004),Launching a World –Class
Joint Vetnture,Harvard Business
Review,February,2004

200.  The success of JVs is so elusive because
many companies overlook the critical piece of
any JV effort –the launch planning and
execution.
 Mistakes made during the launch phase often
erode up to half the potential value creation of
JV.

201.  The launch phase –beginning with the
memorandum of understanding and
continuing through the first 100 days of
operation –is usually not managed closely
enough.
 This lack of attention can result in strategic
conflicts between the companies.

202. JV challenges
 When two companies agree to an alliance,
there are multiple parties – two parent
companies and a new company dealing with
disparate interests
 This creates unique set of challenges

203.  The first challenge is building and
maintaining strategic alignment across the
separate corporate entities
 Each entity has its own goal, market
pressures and shareholders.
 If these interests are not addressed during
the launch phase conflicts will develop in
crucial strategic areas.

204.  JV partners try to anticipate areas of potential
misalignment during the negotiation phase –
but many conflicts of interest surface only
when the partners dig deep into operational
details and start to run the business

205.  The second challenge is to create a
governance system that promotes shared
decision making & oversight between the two
parent companies.
 Governance problems can quickly trigger
termination of deal.
 Weak control can expose them to unexpected
risks & rigid control may kill the
entrepreneurship of the JV

206.  The third challenge that most joint ventures
face is the managing the economic
interdependencies between the corporate
parents and the JVs.
 To avoid duplicating costs, most alliances are
structured so that the parents continually
provide financial capital, human skills,
material resources, and marketing and other
services

207.  The parent companies generally do outline
the broad extent of the economic
interdependencies - but they often don’t
quantify the specific resources & finances
that should be flowing from each partner
phase and the compensating each partner
fairly for its contributions.

208.  The fourth challenge is the building the
organisation – a cohesive high performing
JV.
 Most managers come from, will want to return
to, and may even hold simultaneous positions
in the parent companies.
 Many JV CEOs lament that alliances are
treated as dumping grounds for
underperforming executives rather than
magnets for high –potential managers

209. Managing the challenges
 The parent should appoint a launch leader
and identify deal champions.
 The latter are typically senior executives from
each parent company who are known and
respected across the organization and have a
strong interest in the success of the joint
venture.

210.  The parents should also assemble a
dedicated and experienced transition team
immediately upon signing the memorandum
of understanding.
 This team is responsible for getting the
business up and running. Its tasks include
developing a detailed business plan, creating
the 100-day road map

211. Managing the challenges
 Successful JVs tackle each of the challenges.
 They preempt failures by exposing inherent
tensions early in the process.
 They move quickly from general roadmaps to
detailed practical planning.

212. Resolving Strategic conflicts Upfront
 It is common for companies to assume that
the JV’s strategy has already been defined
during deal making and that the launch
phase, therefore, is simply the time to
implement a shared strategic vision.
 But it is virtually impossible to get into enough
detail during the deal-making phase to
surface and resolve all the strategic
differences between the corporate parents.

213.  examples. Two large pharmaceutical
companies formed a venture to expand the
market for a specific class of drugs. Each
partner contributed complementary patent-
protected medicines and regional marketing
strengths to the JV.
 Yet once the JV was up and running, one
parent wanted to promote its higher-margin,
lower-volume products, while the other parent
wanted to expand its market share for its
products through aggressive pricing.

214.  Develop detailed business plan
-The launch team needs to develop a detailed
business plan.
-To start with, the management team (the
CEO,CFO, and COO) should meet offsite for
two or three days with members of the JV
board and the deal champions from both
parent companies.

215.  The group should define exactly how and
where the JV will compete,project how the JV
might expand beyond its initial scope, set
financial targets, plan capital expenditures,
and create a blueprint for the organization.
 This work is then translated into a detailed
business plan.

216.  The launch team, working with the JV board,
also needs to draw up performance contracts
that make key JV managers accountable for
the success of the venture.
 The partners should clarify the resources,
personnel required for the JV’s success so
confusion about these matters won’t
hamstring the people charged with running
the venture day to day.

217.  Fro instance - Electric power companies
interviewed for a CEO to run their proposed
joint venture. One candidate was offered the
position but took his time in deciding whether
to accept.
 Before committing to the venture, he
interviewed each board member to
understand the parents’ objectives, revised
the JV business plan, and proposed six
specific objectives for the first nine months of
his tenure as CEO.

218.  He then insisted on the collective
endorsement of the JV board as a
precondition to accepting the job, and he
negotiated a compensation agreement that
linked his bonus to these objectives.
 He also negotiated an employment contract
that empowered him to make key operating
decisions and choose executives.

219.  Later he said “In joint ventures, especially
with many partners, there is a tendency for
the partners to each make back-channel
requests of the CEO and to try to influence
the alliance through people they put into the
JV. I was not going to put up with that. I
needed all the partners to agree on the
venture’s overall priorities and hold me
responsible for executing against them.”

220.  Act quickly to manage inevitable setbacks.
A detailed business plan and supporting
performance contracts are important, but they
can’t prevent unpleasant surprises once the
venture is launched.
 For instance, Starbucks and PepsiCo were
forced to rethink the direction of their joint
venture after the first product it introduced, a
carbonated coffee drink, received mixed
results in early tests with customers

221.  The partners ultimately redefined the JV’s
product, drawing on the lessons they learned
from those initial market tests.

222.  Successful alliances pay a lot of attention
to communication – not just during the
launch phase, but throughout the life of the
venture.
 For instance, senior management at TRW
Koyo Steering Systems, a JV manufacturer of
automotive components, followed a policy of
“equal communications” with each of the
parent companies (TRW Automotive and
Koyo Seiko).

223.  When Arvind Korde,CEO of the JV, needed to
communicate facts or issues to one parent,
he always copied the other parent, thereby
promoting openness and trust.
 And Korde and his team were quick to react
to problems.
 When it got its first customer, the parent
companies’ difference of opinion around
pricing was exposed.
 TRW, which was focused on profitability more
than growth - argued for higher margins
 Koyo Seiko sought to build market share.

224.  Korde called an off-site meeting of his
management team.
 In that session, the management team crafted
a new vision for the JV and a constructive
approach for resolving the conflict.

225. Achieving Loose-Tight Governance
 Besides managing the parents’ goals and
expectations, the launch team needs to focus
on building an effective governance system
for the JV or alliance.
 An appropriate structure should allow the JV
management team to make timely decisions
while providing the parents with sufficient
oversight to protect their assets.

226.  To find the right balance between giving the
JV enough autonomy and granting the
parents enough control, companies should do
the following:
 Apply rigorous risk management and
performance tracking.
 Some companies grant the venture
management team so much autonomy that it
borders on negligence.

227.  This was the case in a billion-dollar industrial
JV that combined similar business units to
increase scale and reduce operating costs.
During the launch phase, the partners failed
to create adequate oversight mechanisms.
Three years into the alliance, the U.S. partner
was dismayed to discover that the JV had
incurred a $400 million debt

228.  In a second JV at the same company, one
parent found that the venture was delivering
an annual 3% return, a figure well below its
targeted rate of 14%.
 The JV was not part of the standard
corporate-planning and strategy review
forums and was never subject to the same
level of scrutiny as the wholly owned
businesses.

229.  Parents need to treat their ventures and their
wholly owned units similarly. This means, for
large joint ventures, putting in place an audit
process like the ones used at the best public
companies, including an active audit
committee and external auditors focused
solely on the venture’s business.

230.  Streamline decision making
 Some corporate parents go too far and
implement governance systems that stifle
entrepreneurship and create dysfunctional
bureaucracy.
 During the launch of a $4 billion natural
resource JV, the parent companies created a
large board with subcommittees intended to
be heavily involved in –but not accountable
for – the day-to-day operations of the venture.

231.  All major decisions required multiple
subcommittee and board meetings, combined
with additional fact-finding efforts by the JV
management team.
 Since each subcommittee met only four times
per year, the time it took for the JV to make a
decision became a distinct competitive
disadvantage.

232.  Companies can avoid this governance trap by
implementing a loose-tight governance
model.
 In this approach, the partners identify the
venture’s most important governance
processes (for instance, setting strategy,
allocating resources, or determining pricing).
 then designate the appropriate degree of
parental involvement for each.

233.  As a general rule, parent companies
operating through a JV board should play an
active role in the three governance areas
critical to driving financial performance and
protecting shareholder interest: capital
allocation, risk management, and
performance management.

234.  The parents should generally limit their
interventions in more operational processes –
such as staffing, pricing, and product
development–where the JV needs
independence to ensure competitiveness and
market responsiveness.

235. Loose-Tight Governance System

236. Managing the Interdependencies
 For practical reasons, most JVs depend on
their parents to provide ongoing access to
capital, people, intellectual property, raw
materials, and customers.
 But much damage can be done if the details
of those contributions aren’t worked out
during launch.

237.  Specifically, successful ventures do the
following:
 Resolve interdependencies up front.
 According to one JV executive, “Shared
services are often a critical part of
determining total venture economics and how
the value is distributed between the partners.”

238.  In one JV, the partners formed a small
transition services team that identified the
economic interdependencies.
 This group established criteria for determining
which services the JV would purchase from
the parents
 It then documented the shared resources and
services and collaborated with the purchasing
and finance teams to price each shared
service.

239.  Challenge and limit interdependencies
 One of the most valuable tasks of the launch
team is to challenge –and limit wherever
possible – the number of interdependencies
between the parents and the JV.
 Working teams in the high-tech consolidation
JV initially generated a list of more than 1,000
dependencies

240.  Recognizing that a heavy load could create
unmanageable complexity down the road for
the parent company, the launch leaders
challenged virtually every line item on the list.
 Eventually, they whittled it down to just 300
services that the parent would provide the
venture in the first year and less than ten
services in the second year and beyond.

241.  Once a list of shared services is finalized, the
launch team must develop transparent and
honest methodologies for calculating transfer
pricing.

242. Building the Organization
 Choose organizational model carefully.
 There are three basic organizational models
for joint ventures:
 independent, dependent, and interdependent.

243.  The independent model, lets companies
create new and often more entrepreneurial
cultures.
 The independent JV typically has an entirely
separate reporting structure from the parents,
its own HR systems & Policies.
 Allows greater focus & unity of purpose

244.  Some companies go to the opposite extreme
– create dependent JVs.
 This type of JV operates as a business unit of
one parent and uses that parent company’s
incentive systems and HR policies.
 BP & Mobil used this approach –the refining
venture operated as BP business & lubricant
venture operated as Mobil business.

245.  Third model is interdependent JV –most
commonly implemented structure.
 Members of the management teams maintain
links to their original corporate parent.
 They remain on the same compensation
plans & anticipate future career moves back
to the parent.
 Frequent rotation of Executives creates
questionable career path.
 Well performing executives may be poached.

246.  Disadvantages of interdependent model can
be mitigated if the JV CEO is empowered
write performance reviews and make all hiring
and firing decisions;
 If all parties agree on performance criteria;
 A minimum tour of duty established within the
venture; &
 If the parents are not allowed to poach.

247.  Make people want to join the team.
 Regardless of the organizational model, the
launch team must create a compelling value
proposition that makes good people want to
join the team.
 Excitement of building something can attract
motivated executives
 In difficult turnaround situations, the
compensation upside might be essential

248.  selecting a CEO who inspires loyalty is the
best way to build a strong new business.
 Especially important in interdependent JVs.
 It’s equally important to get the staff inside
the parents companies on your side.

249.  Obtain commitments from parent
company staff.
 Top-performing companies recognize that
skills are transferred by people, not by
processes or contracts.
 Getting sufficient time and attention from a
few topflight people is crucial
 JV team Needs identify them and create
mechanism to involve them heavily in the first
6 to 18 months.
 Create formal contracts and incentives

250.  JV will be successful when executives
understand the unique demands of JV &
invest in early planning.
 As one managed summed it up “If you get
launch right, the rest almost takes care of
itself”

252. Managing the strategic alliances
 Jack Welch of GE “ If you think you can go it
alone in today’s global economy you are
mistaken”
 In studying more than 700 alliances it has
been found that the average return on
investment is nearly 17% which is much
higher than the ROI of the same corporation.

253. Managing the strategic alliances
 Strategic alliances are cooperative
agreements between firms.
 Can involve joint research efforts, technology
sharing, joint use of production one another’s
products etc.
 Alliances are an excellent solution to fill the
critical gap where the company lacks
resource/ time to build capabilities.

254.  Strategic Alliances can be grouped into three
broad categories:
 Non-equity alliance
- Cooperating firms agree to work together to
carry out activities but they do not take equity
positions.
Ex-Supply agreements, distribution agreements

255.  Equity alliance
 Cooperating firms supplement contracts with
equity holdings in alliance partners
 GM and Isuzu have Supply contracts.GM also
bought 34.2% of Isuzu’s stock.

256.  Joint venture
 In a joint venture cooperating firms create
legally independent firm in which they invest
and share profit.

257.  All types of alliances have grown substantially
after globalization.
 21 Oil & Gas companies (BP, ENI, Cairn,
Hardy,RIL & ONGC) decided to have a joint
pool of scarce resources –Rig sharing
 Rigs are scarce –cost between $5lakh & 7.5
lac per day

258.  Mahindra partnered with Ford to learn how to
design next generation SUV - resulted in
Scorpio.
 Bajaj Auto partnered with Kawasaki and
Toyota R & D to transform itself from an old
line scooter supplier to new age motor cycle
company.
 Tata Motors partnered with leading global
suppliers like Bosch to develop Nano

259. Scope of Strategic Alliances
 An alliance may be comprehensive that is
one in which the partners participate in all
facets of conducting business. (Joint Venture)
 On the other hand an alliance may have a
more narrowly defined focus concentrating on
any element of the business.

260.  Comprehensive Alliances – Includes
collaborative agreements that covers all
stages of manufacture,such as
R&D,design,production,marketing and
distribution.
 This alliances mainly assume the form of joint
venture

261.  Functional Alliance
 Production Alliance: Two or more firms join
each manufacturing products in a shared or
common facility –Rig sharing by Oil
companies

262.  Marketing Alliance : two or more firms share
marketing services or expertise.
 The established firm helps the newcomer by
promoting,advertsing and/or distributing its
products
 Titan & Timex

263.  R & D Alliance ; Partners agree to undertake
joint research to develop new products or
services

264. Key success factors
 Senior Management Commitment
 Key factor in the alliances’ ultimate success.
 To be strategic they must have significant
impact on the companies overall strategic
plans and must therefore be formulated,
implemented and managed with full
commitment of senior management.
 Without this alliance will not receive the
resources they need.

265.  If firms view alliance as the second best
option, the strategic alliance will receive
attention only after one’s wholly owned
business has been dealt with, often through
the assignment of one’s less –than-strongest
executives.
 Thus adequate managerial and other
resources may not be assigned to
accomplish the objectives

266.  Management commitment also helps to
convince throughout the organisation of the
importance of the alliance.
 If alliances are viewed as outside the
organizational mainstream, employee at all
levels may tend to view them not as imp. as
core business.

267.  Xerox has demonstrated high level of senior
management level commitment to strategic
alliances.
 Has executives with titles such as SVP –
Corporate Strategic Alliances and VP -
Worldwide Alliances

268. Preparing a realistic feasibility study
-Survey and interviews with senior executives
of experienced and inexperienced firms
showed that experienced managers
emphasized rigorous alliance business plan
-They often seek the advice of objective
experts outside – particularly when the
alliance brings them to the unfamiliar
markets

269.  They directly translate this assessment into
an explicit operating plan and budget.
 Business may be analytically sound but
success depend on indeterminate factors like
competitive reaction, corporate culture,
organisation structure, overall fit and the
willingness of the firms to dedicate high
caliber people & resources

270.  Good executives not only prepare business
plans but also calculate the probability of
success after examining these factors
 Experienced management concentrates on
understanding the key risks that an alliance
can create and how to deal with them

271.  Similarity of Management Philosophies
 Corning - leader in forming strategic
alliances
 Simple approach – “We go and sniff their
hindquarters and see if they smell like us”
 Prefer to make partnership with those
companies whose management
philosophy,strtaegies are most similar.
 Differences can lead to tragic results

272.  For instances – KLM & Northwest Airlines
 KLM President “Classic clash in culture, a
collision of two diametrically opposed
philosophies”
 KLM – prudent and long-term investment
approach
 Northwest – dealmaking,buyouts,& other
aggressive investments

273.  Companies should either seek partners who
do have similar management philosophies
or draft an alliance agreement that
adequately addresses the differences and
provides for their resolution

274.  Partner selection
 Perhaps the most important step in creating a
successful alliance.
 A successful alliance require the joining of
two competent firms, seeking similar goals
 Lays a solid foundation for strong alliances

275.  Having selected partner, alliance should be
structured so that firm’s risks of too much
away to the partner are reduced to an
acceptable level to avoid opportunism.
 Boeing was strongly criticized for its alliance
with Japan.
 Many feared that Boeing was creating a
competitor in the aerospace industry.

276.  Boeing kept its most valuable techniques
concealed.
 Was done by preventing Japanese engineers
from observing production techniques
firsthand, disallowing them to access to the
Boeing’s state of the art wing design or to the
computer room housing –technology that took
Boeing 20 years to develop.
 Some technology transfer is inevitable.

277.  Effective & strong management team
 McKinsey – 50% alliances are due to poor
management.
 Chuck Knight of Emerson Electric – “I do
not believe that fall in the planning stage.
They fall in implementation.”

278.  Ernst & stern – “Therefore the best strategy
to grow via alliance may be to move slowly
and start with simple alliances and move
towards more complex”
 HP & Lotus have strong alliance management
 HP’s approach is well organised and
structured.
 HP has developed 400 page alliance binder.

279.  Contains policies and procedures to help not
only its alliance managers, but middle
managers as well.
 Developed its own two day strategic alliance
training class, which over 700 alliance
managers attended.
 Lotus likewise has a strong management
team for its alliances
 A 40 person alliance group manages the
companies alliances.

280.  They have designed three dozen alliance
rules to guide their strategic alliance
formation, implementation & Management

281.  Clearly understood roles
 Partnership must have clearly understood
roles.
 Many US companies encountered problems
role of management in marketing and
operations was unclear.
 If the partners in alliance decide upfront
exactly what each partner’s role then there is
no misunderstanding and uncertainly

282.  Frequent Performance Feedback
 To succeed ,their performance must be
continually assessed and evaluated against
short run and long run objectives.
 Bryon Look (HP BDM) – “after each alliance
is formed, we hold a postmortem with all the
involved (HP) parties. We look at the original
objectives, the implementation, what went
right and what went wrong”

283.  The results of the reviews are summarized &
distributed to management & stored in a
strategic alliance tracking database.
 In addition,HP’s business development group
continues to review existing alliances and
evaluate their progress.
 AMI Ltd is a consulting firm which advises its
clients on the formation and management of
strategic alliances.
 Provides its clients an evaluation of their
existing alliances

284.  A typical Performance management process
is required to evaluate.
 Goals of the alliances well defined.
 Measurable – may include market share,
return investment, new product creation, etc.
 Training the alliance managers
 Rewarding individuals based on the
performance measures of alliance.

285.  Communication between partners:
maintaining relationship
 Both partners bring to an alliance a faith that
they would be stronger together.
 There are few rigidly binding provisions
 An essential attribute for the alliances to be
successful is communication
 Without effective communication between
partners, the alliances will inevitably dissolve
as a result of doubt & mistrust

286.  To sum up…
 Strategic alliance strategy has been
prescribed as an important tool for attaining
and maintaining a competitive advantage.
 While such relationship can pay off, no
business should form partnership just
because they are trendy.
 These success factors can be the templates
to ensure lasting relationship.

288. Managing Differences The central
challenge of Global Strategy
 When it comes to the global strategy, most
business leaders and academics make two
assumptions:
 first, that the central challenge is to strike the
right balance between economies of scale
and responsiveness to local conditions,
 and second, that the more emphasis
companies place on scale economies in their
worldwide operations, the more global their
strategies will be

289.  assuming that the principal tension in global
strategy is between scale economies and
local responsiveness encourages companies
to ignore another functional response to the
challenge of cross-border integration:
arbitrage.

290. AAA Triangle
 Stand for the three distinct types of global
strategy
 Adaptation -seeks to boost revenues and
market share by maximizing a firm’s local
relevance. One extreme example is simply
creating local units in each national market
that do a pretty good job of carrying out all
the steps in the supply chain;

291.  Aggregation attempts to deliver economies
of scale by creating regional or sometimes
global operations; it involves standardizing
the product or service offering.

292.  Arbitrage is the exploitation of differences
between national or regional markets, often
by locating separate parts of the supply chain
in different places
 For instance, call centers in India, factories in
China, and retail shops in Western Europe.

293.  The three A’s are associated with different
organizational types.
 If a company is emphasizing adaptation, it
probably has a country-centered
organization.

294.  If aggregation is the primary objective, cross-
border groupings of various sorts – global
business units or product divisions, regional
structures, and so on – make sense
 An emphasis on arbitrage is often best
pursued by a vertical, or functional
organisation

295.  Most companies will emphasize different A’s
at different points in their evolution as global
enterprises, and some will run through all
three.

296.  IBM is a case in point.
 For most of its history, IBM pursued an
adaptation strategy, serving overseas
markets by setting up a mini-IBM in each
target country.
 Every one of these companies performed a
largely complete set of activities and adapted
to local differences as necessary.

297.  In the 1980s and 1990s, dissatisfaction with
the extent to which country-by-country
adaptation curtailed opportunities to gain
international scale economies led to the
overlay of a regional structure on the mini-
IBMs.
 IBM aggregated the countries into regions in
order to improve coordination and thus
generate more scale economies at the
regional and global levels

298.  More recently, however, IBM has also begun
to exploit differences across countries.
 The most visible signs of this new emphasis
on arbitrage are IBM’s efforts to exploit wage
differentials by increasing the number of
employees in India from 9,000 in 2004 to
43,000 by mid-2006 and by planning for
massive additional growth.

299.  Procter & Gamble started out like IBM, with
mini-P&Gs that tried to fit into local markets,
but it has evolved differently
 The company’s global business units now sell
through market development organizations
that are aggregated up to the regional level.

300.  CEO A.G. Lafley explains that while P&G
remains willing to adapt to important markets,
it ultimately aims to beat competitors –
country-centered multinationals as well as
local companies – through aggregation.
 He also makes it clear that arbitrage is
important to P&G (mostly through
outsourcing) but takes a backseat to both
adaptation and aggregation
 “If it touches the customer, we don’t
outsource it.”

301.  The AAA strategy allows managers to see
which of the three strategies – or which
combination – is likely to afford the most
leverage for their companies or in their
industries.
 When managers first hear about the broad
strategies that make up the AAA Triangle
framework for globalization, their most
common response by far is “Let’s do all
three.”

302.  But it’s not that simple. three strategies
reveals the differences – and tensions –
among them.

304.  Expense items from businesses’ income
statements provide rough-and-ready
proxies for the importance of each of the
three A’s.

305.  The percentage of sales spent on
advertisement indicates how important
adaptation likely to be.
 Those that do a lot of R&D may want to
aggregate to improve economies of scale.
 For firms whose operations are labor
intensive, arbitrage will be of particular
concern because labor costs vary greatly
from country to country.

306.  At Procter & Gamble, businesses tend to
cluster in the top quartile for advertising
intensity, indicating an adaptation strategy.
 TCS, Cognizant, and IBM Global Services are
distinguished by their labor intensity,
indicating arbitrage potential

307.  But IBM Systems ranks significantly higher in
R&D intensity than in labor intensity and, by
implication, has greater potential for
aggregation than for arbitrage

308. From A to AA
 Although many companies will (and should)
follow a strategy that involves the focused
pursuit of just one of the three A’s, some
leading-edge companies – IBM, P&G, TCS,
and Cognizant among them – are attempting
to perform two A’s particularly well.

309.  Adaptation and aggregation.
 Procter & Gamble started out with an
adaptation strategy. Halting attempts at
aggregation across Europe, in particular, led
to a drawn-out, function-by-function
installation of a matrix structure throughout
the 1980s, but the matrix proved unwieldy

310.  So in 1999, the new CEO, Durk Jager,
announced the reorganization whereby
global business units (GBUs) retained
ultimate profit responsibility but were
complemented by geographic market
development organizations (MDOs)

311.  All hell broke loose in multiple areas,
including at the key GBU/MDO interfaces.
Jager departed after less than a year.
 Under his successor, Lafley, P&G has
enjoyed much more success, with an
approach that strikes more of a balance
between adaptation and aggregation and
allows room for differences across general
business units and markets.

312.  Thus, its pharmaceuticals division, with
distinct distribution channels, has been left
out of the MDO structure;
 in emerging markets, where market
development challenges loom large, profit
responsibility continues to be vested with
country managers

313.  Also important are the company’s decision
grids, which are devised after months of
negotiation.
 These define protocols for how different
decisions are to be made, and by whom –
the general business units or the market
development organizations –while still
generally reserving responsibility for profits
(and the right to make decisions not covered
by the grids) for the GBUs.

314.  Such structures and systems are
supplemented with other, softer tools, which
promote mutual understanding and
collaboration.
 Thus, the GBUs’ regional headquarters are
often collocated with the headquarters of
regional MDOs.
 Promotion to the director level or beyond
generally requires experience on both the
GBU and the MDO sides of the house.

315.  Aggregation and arbitrage
 In contrast to Procter & Gamble,TCS is
targeting a balance between aggregation and
arbitrage.

316.  TCS - To obtain the benefits of aggregation
without losing its traditional arbitrage-based
competitive advantage, it has placed great
emphasis on its global network delivery
model, which aims to build a coherent
delivery structure.

317.  Arbitrage and adaptation.
 Cognizant has taken another approach and
emphasized arbitrage and adaptation by
investing heavily in a local presence in its
key market, the United States.

318. AAA Strategy
 To even contemplate a AAA strategy, a
company must be operating in an
environment in which the tensions among
adaptation, aggregation, and arbitrage are
weak or can be overridden by large scale
economies or structural advantages.

319.  GE healthcare is successful in adopting AAA
strategy.
 GEH, the largest of the three firms(PMS &
SMS), has also consistently been the most
profitable.

320.  Economies of scale.
 GEH has higher total R&D spending than
SMS or PMS, greater total sales, and a larger
service force (constituting half of GEH’s total
employee head count) – but its R&D-to-sales
ratio is lower, its other expense ratios are
comparable, and it has fewer major
production sites.

321.  Economies of scope. The company strives
to integrate its biochemistry skills with its
traditional base of physics and engineering
skills; it finances equipment purchases
through GE Capital.

322.  GEH has even more clearly outpaced its
competitors through arbitrage. Under
Immelt, but especially more recently, it has
moved to become a global product company
by migrating rapidly to low-cost
production bases.
 By 2005, GEH was reportedly more than
halfway to its goals of purchasing 50% of its
materials directly from low-cost countries and
locating 60% of its manufacturing in such
countries

323. Broader Lessons
 Focus one or two of the As
 Companies usually have to focus on one or at
most two As in trying competitive advantage.
 It may have to shift its focus across A’s as the
company needs change

324.  Make sure new elements of a strategy are
a good fit organizationally
 Organisation should pay particular attention
to how well they work with other things the
organisation is doing.
 IBM has grown its staff in India much faster
than other competitors for arbitrage.
 But quickly molding this workforce into an
efficient organisation with high global delivery
standards is critical challenge

326. Strategies That fit Emerging Markets
 Emerging markets are nations with business activity
in the process of rapid growth and industrialization
 Data from 2010 says there are 40 emerging markets.
 The economies of China and India are considered to
be the largest
 BRIC, BRICS, BRICET , BRICM , BRICK
 Next Eleven (Bangladesh, Egypt, Indonesia, Iran,
Mexico, Nigeria, Pakistan, Philippines, South Korea,
Turkey, and Vietnam)
 CIVETS (Colombia, Indonesia, Vietnam, Egypt,
Turkey and South Africa)

327.  According to World Bank issued at May 2011,
BRIC countries plus South Korea and
Indonesia will lead the world's economy with
more than a half of all global growth by
2025.
 These countries are enjoying an
increasing role in the world economy and
on political platforms.

328.  Many multinational corporations are
struggling to develop successful strategies in
emerging markets.
 Part of the problem is “institutional voids” –
absence of specialized intermediaries,
regulatory systems, and contract enforcing
mechanism.
 Companies in developed countries usually
take for granted the critical role that "soft"
infrastructure plays in the execution of their
business models in their home markets.

329.  But that infrastructure is often underdeveloped
or absent in emerging markets.
 Companies can't find skilled market research
firms to inform them reliably about customer
preferences so they can tailor products.
 Few end-to-end logistics providers, which
allow manufacturers to reduce costs, are
available to transport raw materials and finished
products.

330.  Before recruiting employees, corporations
have to screen large numbers of
candidates themselves because there aren't
many search firms that can do the job for
them.
 Because of all those institutional voids,
many multinational companies have fared
poorly in developing countries.

331.  All the anecdotal evidence gathered suggests
that since the 1990s, American
corporations have performed better in
their home environments than they have in
foreign countries, especially in emerging
markets.
 Not surprisingly, many CEOs are wary of
emerging markets and prefer to invest in
developed nations instead.

332.  By the end of 2002 - according to the Bureau
of Economic Analysis, an agency of the U.S.
Department of Commerce-American
corporations and their affiliate companies had
$1.6 trillion worth of assets in the United
Kingdom and $514 billion in Canada but
only $173 billion in Brazil, Russia, India,
and China combined.

333.  Many companies shied away from emerging
markets when they should have engaged with
them more closely.
 Since the early 1990s, developing countries
have been the fastest-growing market in the
world for most products and services.

334.  Companies can lower costs by setting up
manufacturing facilities and service
centers in those areas, where skilled labor
and trained managers are relatively
inexpensive.
 Moreover, several developing-country
corporations have entered North America and
Europe with low-cost strategies

335.  Western companies that want to develop
counter-strategies must push deeper into
emerging markets.
 If Western companies don't develop
strategies for engaging developing countries,
they are unlikely to remain competitive for
long.

336.  However, despite crumbling tariff barriers, the
spread of the Internet, and the rapidly
improving physical infrastructure in these
countries, CEOs can't assume they can do
business in emerging markets the same
way they do in developed nations

337.  That's because the quality of the market
infrastructure varies widely from country to
country.
 In general, advanced economies have large
pools of seasoned market intermediaries
and effective contract-enforcing
mechanisms, whereas less-developed
economies have unskilled intermediaries
and less-effective legal systems.

338.  Because the services provided by
intermediaries either aren't available in
emerging markets or aren't very
sophisticated, corporations can't smoothly
transfer the strategies they employ in their
home countries to those emerging markets.

339. Why Composite Indices
Are Inadequate
 Companies often target the wrong countries or
deploy inappropriate globalization strategies.
 Many corporations enter new lands because of
senior managers' personal experiences, family ties,
gut feelings, or anecdotal evidence.
 Others follow key rivals into emerging markets; the
herd instinct is strong among multinationals.

340.  Companies that choose new markets
systematically often use tools like country
analysis and political risk assessment,
which chiefly focus on the potential profits
from doing business in developing countries
but leave out essential information about the
soft infrastructures there.

341.  McKinsey Global Survey of Business
Executives polled 9,750 senior managers
on their priorities and concerns,61% said that
market size and growth drove their firms'
decisions to enter new countries.
 While 17% felt that political and economic
stability was the most important factor in
making those decisions.
 Only 13% said that structural conditions (in
other words, institutional contexts) mattered
most

342.  Executives usually analyze its GDP and per
capita income growth rates, its population
composition and growth rates etc.
 To complete the picture, managers consider
composite indices to determine a nation’s
standing.