Learning Unit Five Strategy of International Business

1. Learning Unit FiveStrategy of International Business Business level strategy Corporate level strategy International strategy Case of strategy of international Business

2. Group work!! • Mobile • MBA colleges • Cars • Bikes • Restaurant • Laptop • hotels

3. Strategic choices How to compete in a market? BUSINESS LEVEL STRATEGY Should the organisation be very focused on just a few products and markets? Or should it be much broader in scope, perhaps very diversified in terms of both products (or services) and markets? CORPORATE LEVEL STRATEGY should they be pursued by organic development, acquisitions or through joint ventures with other organisations? INTERNATIONALIZATION STRATEGY

4. How are these choices to be evaluated?

5. 1. BUSINESS LEVEL STRATEGY

6. Chaudhary Group • CG Biotech – Biotech and Ayurveda • CG Cement – Cement • CG Education - Education • CG Electronics – Electronics and White Goods • CG Energy – Energy and Infrastructure • CG Finco– Financial Services • CG Foods- FMCG • CG Hotel and Resorts – Hotel and Resorts • CG Developers – Reality

7. The strategy clock: competitive strategy options

9. CG Instant Noodles • Brown Noodles • Wai Waiis a popular brown noodle (3 Seasonings) available in 2 different flavours - Vegetable and Chicken. It is available in 75 gm packet. • Wai Wai Quick is a brown noodle (Curry Base - 3 Seasonings) available in Vegetable and Chicken flavours. It is available in 75 gm packet. • White Noodles • Wai Wai X Press is a white noodle (2 Seasonings) available in Vegetable and Chicken flavours. It is available in 90 gm packet. • Wai Wai X Press Masala Delight is a white vegetable noodle with 2 seasonings. It is available in 90 gm packet and 50 gm packet. • Soalteeis a white noodle available in Chicken flavour. It is available in 50 gm packet.

10. Himalayan Snax & Noodles Private Limited (HSNPL) (Khetan group) • HSNPL has been manufacturing various brands of instant noodles, i.e., Mayos, MayosShangri-la, ShakaLaka Boom, Ru-Chee, Lekali, J-mee, Hurray, Doharee, Jhilke and Humpty Dumpty. HSNPL understands the need of our valued consumers and converts them into reality

11. Asian Thai food (Sharda Group) • RumPum, 2PM, Phataphat, PikVik, Phuche and Mama Brand Snacks are a few popular brands produced and marketed by the company. ATF has launched the healthy ready to eat noodles made out of whole wheat (Atta)

13. Sustaining competitive advantage

14. A framework for responding to low-cost rivals

15. A prisoner’s dilemma

16. 2. CORPORATE-LEVEL STRATEGY

17. 2.1 Market penetration • The organisation takes increased share of its existing markets with its existing product range. • Organisations seeking greater market penetration may face two constraints • Retaliation from competitors: price war, expensive marketing battles • Legal constraints. Greater market penetration can raise concerns from official competition regulators concerning excessive market power.

18. 2.2 Consolidation • Consolidation is where organisations focus defensively on their current markets with current products. • Consolidationcan take two forms: • Defending market share. When facing aggressive competitors who intend on increasing their market share, organisations have to work hard and often creatively to protect what they already have • Downsizing or divestment. Especially when the size of the market as a whole is declining, reducing the size of the business through closing capacity is often unavoidable. An alternative is divesting (selling) some activities to other businesses

19. 2.3 Product development • Product development is where organisations deliver modified or new products (or services) to existing markets. This is a limited extension of organisationalscope. • For Sony, such product development would include moving the Walkman portable music system from audio tapes, through CDs to MP3-based systems. • Product development can be an expensive and high-risk activity for at least two reasons • New strategic capabilities.* • Project management risk.**

20. 2.4 Market development • If product development is risky and expensive, an alternative strategy is market development. Market development involves offering existing products to new markets. • Market development might take three forms: • New segments.* • New users.** • New geographies***

21. 2.5 Diversification • Diversification is strictly a strategy that takes the organisation away from both its existing markets and its existing products. • Potentially value-creating reasons for diversification are as follows. • Efficiency gains • Stretching corporate parenting capabilities • Increasing market power • Responding to market decline • Spreading risk • The expectations of powerful stakeholders,

22. Group Exercises What is the best corporate level strategy for / if .. 1) Chaudhary Group (CG) wants to launch new “WaiWai mutton soup” noodles in Nepali market 2) Chinese mobile company “One plus” enters Nepali market with its existing “one +5t” mobile phone 3) “Shikhar shoes” company wants to decrease price of its product in Biratnagar to compete with shoes imported from India. 4) Nepal Bank limited wants to consolidated its banking activities to the district headquarters because of many other commercial banks entering Nepali market. 5) Raj electronics, an Indian company wants to enter Nepali market for the first time with its new electric induction cooking pad that consume less electricity specially designed for Nepali market. 6) “BajekoSekuwa” introduces new “ostrich momo” to serve its existing client. 7) “Swiffles” newly established start up of company manufacturing chocolates , introduces new range of “home made Nepali dark chocolates” in Kathmandu market. 8) Samsung for the first time lunches its smart home security devices in US market

23. Related diversification options for a manufacturer

24. 3. INTERNATIONAL STRATEGY

25. 3.1 Internationalization drivers • Barriers to international trade, investment and migration are all now much lower than they were a couple of decades ago. • International regulation and governance have improved, so that investing and trading overseas is less risky. • Improvements in communications – from cheaper air travel to the Internet – make movement and the spread of ideas much easier around the world.

26. 3.1. Internationalization drivers

27. 3.2. Porter’s Diamond – the determinants of national advantages

28. International value network • Different locational advantages can be identified: • Cost advantage – US IT based company hiring computer engineers from India at one fourth cost • Unique capabilities – Boeing locating its largest engineering center in Moscow to help in access Russian know-how in areas such as aerodynamics. • National characteristics – Gibson, American guitar-maker complements its products with low-cost alternatives in south Korea under the Epiphone brand.

29. 3.2 International Strategies

30. 3.3 Market Selection • PESTEL Analysis • CAGE Analysis • Political, Economic, Social, Technological, Environmental and Legal • Cultural distance, Administrative and political distance, Geographical distance and Economic.

31. Entry into Foreign Markets Entry Strategies and Modes of International Business • Direct Export • Licensing and Franchising • Greenfield Investment • Merger and Acquisition • Strategic Alliances and Joint Ventures, MBA III Summer Semester 2014 KUSOM

32. Entry Strategies and Modes of International Business Non-equity modes of Entry • Exporting: Selling some of their regular product overseas- little investment and relatively risk-free -- excellent means of getting a feel for international business without committing a great amount of human or financial resources. MBA III Summer Semester 2014 KUSOM

33. Entry Strategies and Modes of International Business Non-equity modes of Entry Indirect Export : uses a) Manufacturers export agent - who sell for the manufactures b) Export commission agents – who buy for their overseas customers c) Export merchants – who purchases and sell for their own accounts d) International firms – uses goods overseas (mining, construction and petroleum companies are example) It has a price to pay: Commission should be paid for the first three type of indirect export; Foreign business can be lost if exporters decides to change their source of supply; and Firm gain littler experience from these transactions. MBA III Summer Semester 2014 KUSOM

34. Non-equity modes of Entry • Direct Export • Someone within the firm handles the export business (often sales manager) • Managed by employee within the firm and later develop a separate export division • Sales have grown up to a point that will support a complete marketing organization • Internet has made direct exporting much easier. MBA III Summer Semester 2014 KUSOM

35. MBA III Summer Semester 2014 KUSOM

36. Non-equity modes of Entry • Licensing and Franchising, • Licensing: By means of licensing agreement, one firm (the licensor) will grant to another firm (the licensee) the right to use any kind of expertise, such as manufacturing processes (patented or unpatented), marketing procedure, and trademarks for one or more of the licensor’s. MBA III Summer Semester 2014 KUSOM

37. Licensing • Pays a fixed royalty: It depends on the amount of assistance given and the relative bargaining power of two parties. • Royalty of 2 to 5 percent of sales over the life of contract. • It has become one of the major sources of revenue for international firms because of growing enforcement of patent laws by the international organizations such as WIPO. • In 2005 Royalty & Licensing fee received in US firms was $57 billion vs $24.5 billion paid by US to foreign licensors. • It can be associated with technological product, fashion brand name or even with publication house. MBA III Summer Semester 2014 KUSOM

38. Licensing MBA III Summer Semester 2014 KUSOM

39. Non-equity modes of Entry • Franchising: Its is also a kind of Licensing where franchising permits to sell products or services under a highly publicized brand name and a well proven set of procedures with a carefully developed and controlled market. • McDonald’s, KFC, subway etc are the well known franchising company of US. • McDonald alone has 30’000 restaurants in 120 countries outside the US. • Other example could be, hotel Hilton, UPS store etc. MBA III Summer Semester 2014 KUSOM

40. Franchising MBA III Summer Semester 2014 KUSOM

41. Equity Based Mode Of Entry • Wholly owned subsidiary: • Most preferable mode of entry • Greenfield investment: Start from group up by building a new plant. • In an area where no previous facilities exist • Host countries often offer prospective companies tax-breaks, subsidies and other types of incentives  • Example: Hyundai manufacturing plant in Czech Republic • Acquire a going concern (M&A): Provide direct access to the market and one less competitor after the purchase MBA III Summer Semester 2014 KUSOM

42. Mergers and acquisitions • Types of M&A • Horizontal merge: between two companies in the same business sector • Vertical merge: merger represents the buying of supplier of a business • Conglomerate M&A: merger between two irrelevant companies MBA III Summer Semester 2014 KUSOM

43. Mergers and acquisitions • Motivation • Economy of scale • Economy of scope • Increased revenue or market share  • Cross-selling • Synergy • Taxation • Resource transfer  • Vertical integration • Hiring • Absorption of similar businesses under single management MBA III Summer Semester 2014 KUSOM

44. M&A deals from 2010 to 2014 Source: "The Biggest M&A Deals of 2011 - A running tally - Businessweek". Images.businessweek.com. Retrieved 2013-08-01. MBA III Summer Semester 2014 KUSOM

45. Equity Based Mode Of Entry: Joint Venture • Joint Venture:There are four types • A corporate entity formed by an international company and local owners. E.g.- commercial banks in Nepal. • A corporate entity formed by two international companies for the purpose of doing business in a third market. • A corporate entity formed by a government agency and an international firm. • A cooperative undertaking between two or more firms of limited-duration project. MBA III Summer Semester 2014 KUSOM

46. Equity Based Mode Of Entry: Joint Venture Advantage of joint venture • Forming a joint venture can allow the parents to avoid making expensive and time-consuming investments of their own, while simultaneously helping to avoid dangerous competition with another company. • Need for Joint venture : Government law • When the government of host country requires that companies have some local participation, foreign firms must engage in joint venture with local owners to do business in that country, in some situations, however, a foreign firm will seek local partners even when there is no local requirement to do so. MBA III Summer Semester 2014 KUSOM

47. Equity Based Mode Of Entry: Joint Venture • Strong nationalism: • To overcome it, form a joint venture in which the local parents are highly visible, giving it an indigenous name and then advertise that a foreign firm (actually the partner) is supplying the technology. • Other factors that influences companies to enter joint venture are the ability to acquire expertise that is lacking, the special tax benefits some government extend to companies with local partners and the need for additional capital and experienced personnel. Also to reduce investment risk. MBA III Summer Semester 2014 KUSOM

48. Equity Based Mode Of Entry: Joint Venture • Disadvantage of joint venture • Profit must be shared • No control if law allows only 49% participation for the firm. • Lack of understanding • export to same market by parents and subsidiary company • produce complete product locally vs importing certain products from other subsidiary MBA III Summer Semester 2014 KUSOM

49. Example of JV in Nepal MBA III Summer Semester 2014 KUSOM

50. Example of JV in Nepal MBA III Summer Semester 2014 KUSOM