Doing Business Globally & Internationally

Last year's example guidelines of BP and AAR Company

1

Introduction / BackgroundBrief Discussions of Companies– Background of companies– Major Business Activities– Core competence

Brief Discussions of Industry– Products– Industry Structure• Suppliers• Competitors

Brief Introduction of Joint Venture– Time Frame of Exploration & Negotiation– Conflicts during the operations (200 words)

• With reference to the academic literature and using your analysis of relevant environmental factors, speculate how and why AAR identified BP as a potential ‘partner’.

• In which areas are the expected benefits and synergies for both companies involved?

Question 1 (20 marks)

(600 words)

Environmental Factors• Introduction– Layers of External Environment

• Macro-Environment• Industry• Competitor and Market

– Importance of Identifying the External Events• Identify the key issues - Threats and Opportunities• Design ways of coping with complexity and Changes

• Introduction of Frameworks– PESTEL (Political, Economic, Social, Technology,

Environmental and Legal ) – Macro-Environment– Porter’s Five Forces – Industry– Strategic Groups – Competitor and Market

• Discussion of PESTEL– Political

• Government’s Attitude, particularly for Russian Government

– Economic• Economic Environment• Availability of Oil Reserve in different regions

– Technology• Need for Extraction Technology

• Discussion of Porter’s Five Forces– Bargaining Power of Suppliers

• Government’s Intervention

– Bargaining Power of Competitors• Link to the Industry Structure

• Discussion of Porter’s Five Forces– Bargaining Power of Buyers– Threat of Entry• Economies of Scale / Scope;• Access to supply and distribution channels;

– Threat of Substitute• Conclusion– Implications on Exploration of the Joint Venture

between BP and AAR.

Identification of Potential Partners

• Introduction– Contractual partnerships can bring a lot of benefits / advantages,

but– also brought along increase in complexity and loss of autonomy

(flexibility)– Important of having carefully manage the partnering process to

gain success in partnership• 4 processes of establishing Contractual Partnership

– Assessing strategic logic to establish partnership;– Selecting the Right Partner;– Negotiating the terms;– Implementation and management of the partnership

• Partner Selection Criteria– Communication– Honesty– Innovation– Experience– Inclusiveness / Proactive– Flexibility– Compatibility– Understanding (Same / Similar Industry?)

8

• Partner Selection Criteria– Compatibility

• Goals– What are their goals?– Are their goals congruent with ours?– What are their motives?

• Management style & structure• Complementary and Synergistic – Core Competence

– Does the partner have the resources that the other partner needs?

– Nature of products or services• Non competitive & complementary

– Relative risk of failure• Previous history

– Do they have experience in managing JVs?

• Needs (evaluate from both partners)

9

• Partner Selection Criteria– Learning potential

• What to learn –– Will the partner provide access to the technology that the other

partner need?

• What to protect– Form of ownership

• Ownership & loyalty to parent firm

10

• Partner Selection Criteria (conclusion)– Compatibility / Complementary• Have similarity and fit between partners in terms

– Strategic goals– International strategies– Specific Needs – skills and resources

• Have compatibility or synergy rather than competitive• Need to prioritize the goals and needs before selecting

the partners

– Trust (desire to collaborate and loyalty)• Good communication• Be true and honest to the partner (do not take

advantage)• Be flexible

Overall Conclusion

• Summary of the discussions– Expected synergies and benefits of BP;– Expected synergies and benefits of AAR;– Suitability of Partnership.

With reference to the academic literature,• explain the risks associated with the choice of

joint venture as an approach to this particular partnership.

• Was there any feasible alternative? Justify your view.

Question 2 (20 marks)

(600 words)

International Joint Venture

• A partnership between two or more firms.• Includes equity joint ventures and non-equity,

project-based ventures.• Sometimes also called partnerships and strategic

alliances.• Collaboration helps overcome the often substantial

risk and high costs of international business. It makes possible the achievement of projects that exceed the capabilities of the individual firm.

International joint ventures

• Equity joint ventures– Typically one partner contributes capital,

technology etc. local partner contributes factory, labour & local knowledge

• Project based, Non-equity ventures– Project with a narrow scope & defined timetable

(no new company formed)– Typically co-develop products

Joint Venture

• Equity participation: Acquisition of partial ownership in an existing firm.

• Wholly owned direct investment: A foreign direct investment in which the investor fully owns the foreign assets

• Equity joint ventures : A type of partnership in which a separate firm is created through the investment or pooling of assets by two or more parent firms that gain joint ownership of the new legal entity.

• Joint ventures may be the only way that a company can expand into a country. E.g., until recently, the Chinese government prohibited foreign firms from having more than 49% equity investment in local businesses.

Success factors in Joint Ventures

• Half of all global joint ventures failwithin the first 5 years of operations due tounresolved disagreements, confusion, andfrustration. Therefore, partners should:– Be aware of cultural differences;– Emphasize communications and building trust;– Pay attention to planning and management of

the venture;– Protect core competencies.

Degree of Control• Low-control strategies – Export Entry Mode

– exporting, countertrade and global sourcing;– provide the least control over foreign operation;– focal firm delegates considerable responsibility to foreign

distributors. • Moderate-control strategy - Contractual Entry Mode

– Licensing and franchising– Project-based collaborative ventures – Non-equity JV / SA

• High-control strategy - Investment Entry Mode– Equity joint ventures;– Merger and Acquisitions;– Wholly owned subsidiaries;– Focal firm attains maximum control by establishing a physical

presence in the foreign market.

• High-control strategies require substantial resource commitments by the focal firm.

• Because the firm becomes ‘anchored’ or physically tied to the foreign market for the long term, it has less flexibility to reconfigure its operations there, as conditions in the country evolve over time.

• Longer term involvement in the market also implies considerable risk due to uncertainty in the political and customer environments.

Risks of Joint Venture

Issues in Cross Border JV

• Role of Government• Advisors and their cost• National Culture…. Business Ethics• Geography• Strategic Shareholdings• Experience• Global Corporations

Strategic alliances

• Sharing of capabilities between 2 or more firms with the view of enhancing their competitive advantages.

• Strategic because sharing capabilities e.g. R&D, manufacturing or marketing

• Useful for when full control is not feasible for legal or practical reasons.

• A governance structure involving an incomplete contract where each partner has limited control

• May involve equity ownership or not

Types of Strategic Alliance

• Functional alliance– Specific area e.g. production or R&D

• Production alliance– Shared facilities & production resources

• Marketing alliance– Sharing expertise or services, also reciprocal sales in markets

• Financial alliance– Shared costs and risk

• R&D alliance– Joint research or funding of research in return for research findings

• Comprehensive alliance– All of the above, but probably better managed as an JV

By applying appropriate theory, • Compare and contrast the national and

corporate cultures involved. • Critically evaluate the actual and potential

impact of both on this partnership.

Question 3 (20 marks)

(600 words)

(A) Introduction

• The “partnership” has to cooperate / integrate with a partner with a different cultural background;

• Such cultural differences can arise from:-• National culture;• Industry culture; and• Organization / Corporate culture

• Culture difference has implications on “partnership”

• Clash of culture is often quoted as the cause of failure of partnership.

(A1) Definitions of Culture

• National culture– Refers to profound beliefs, values and practices that are

shared by vast majority of people belonging to a nation.• Corporate culture– Refers to values, beliefs and practices shared by most

people within an organization– Corporate culture stems from occupational group

(industry culture) and also reflects, to a certain degree, the national cultures.

– Hofstede’s cultural dimensions are important dimensions to describe organisations

(A-2) Hofstede’s Dimensions of National Culture

• Power Distance– degree to which people accept unequal distribution of power;

• Uncertainty Avoidance– Degree to which people tolerate uncertainty and ambiguity in

situations;• Individualism vs Collectivism

– Preference of people belong to a loosely vs tightly knit social network;• Masculinity vs Femininity

– Degree to which people values of success and competition over modesty and concern for others

• Long Term Orientation– Degree to which people have a future-oriented perspective rather

than a focus on the present

Cultural Distance between Russia and UK

Source: geert-hofstede.com

(B) Implication on National Culture on Corporate Culture

• National Culture affects 2 critical corporate aspects: -– External adaptation – define the strategy and

objectives;– Internal integration – merging of management

structure of the 2 different organizations;• Differences in cultural background of partners is

considered as a threat to the survival of IJV;• Chances of survival of IJV are lower when cultural

differences is large

(B-1) External Adaptation (External Uncertainty)

Long Term Orientation• Lead to differences in objectives and

perceived opportunities in the environment;• Short term view partner has sense of urgency

and favor quick results;• Long term view partner orients toward long

term investment return and also building up long term relationship with partners

(B-2) External Adaptation (External Uncertainty)

Uncertainty Avoidance• High Uncertainty Avoidance– Build up highly formalized and hierarchical system;– Employees feel uncomfortable without such system;

• Low Uncertainty Avoidance– Build up more flexible, ad hoc structures that allows

more room for improvement and negotiation;– Employees feel uncomfortable with rigid rules and

hierarchy

(B-3) Internal Integration (Internal Uncertainty)

• Power distance and individualism influence – relationship with personnel;– organization’s choice of control forms;– reward systems

• Masculinity vs Femininity– Aggressive attitude of partners;– Relationship orientation of partners

(C) Definition of Corporate Culture

• Organization culture– Refers to values, beliefs and practices shared by

most people within an organization– Organization culture stems from occupational

group (industry culture) and also reflects, to a certain degree, the national cultures.

– Hofstede’s cultural dimensions are important dimensions to describe organizations.

(C) Definition of Corporate Culture

• Definitions of Corporate Culture:– Meschi and Roger (1994) – when an organization

develops into a MNC, the corporate culture can have its basis on the “original” organizational culture, or the national culture, or a combination of 2

(C-1) Corporate Culture Differences

• Different organizational and administrative practices;

• Dissimilar leadership, communication and management styles;

• Interpret and respond to strategic issues differently;

• Have employees with different preference and expectations

(C-2) Problems of Integration

• Misunderstandings and managerial conflicts between partners;

• Resulting in internal uncertainty;• Severely hinders cooperation between

partners;• Resulting in poor JV performance

(C-2) Implication of Culture on IJV Performance

• Cultural Differences and JV Location– Impair information flow and organizational

learning– Leading to misunderstanding and mistrust

• Local JVs shall face lesser cultural differences as compare with JVs locate aboard

(C-2) Implication of Culture on IJV Performance

• Cultural Differences and JV Partner– Cross national IJVs and Tri-national JVs required

Double-layered acculturation– Adaptation to both cultures of partners and

cultures of nations of JVs operation location• Tri-national JVs lead to higher relational

hazards and thus lower performance.

(C-2) Other Moderating Effects on the Implications

• Post Acquisition Integration depends on– The Objectives of collaboration;– Potential for economies of scale and/or scope;– Relatedness of the industry

• Partners’ level of host-country experience• Partners’ cross-boarder collaboration

experience; and• Relative Size of investment.

• National culture– UK vs Russia

• Industry culture– Oil industry vs Financial industry

• Management style– The background of key personnels – education, up-

bringing or past job– Robert Dudley?

• Size of organization– MNE vs Russian local company

(C-3) Determinants of Corporate culture

(D) Conclusion

• Among the six determinants, which one got the highest influence?

• How do the determinants combine and form a unique corporate / organizational culture?

• Do you think the corporate cultures between AAR, BP and TNK are similar or significantly different? Why?

Drawing upon academic literature and theory, critically discuss the long-term, strategic effects, both positive and negative, of exchange rate movements on the TNK-BP deal during• the exploration/negotiation period; and• after the deal was agreed.

Question 4 (20 Marks)

(600 words)

Introduction• Foreign Exchange exposure is a measure of the

change of a company’s potential profitability, net cash flow, and market value because of exchange rate movement.

• Three main types of Foreign Exchange Exposure– Transaction Exposure– Operating Exposure (Economic Exposure)– Translation Exposure

Application of Case

• Determine the Local Currencies and Foreign Currencies

• Identify the exchange rate movement trend between Russian Ruble to USD and GBP

Transaction Exposure• Transaction Exposure arises when changes in the value of

outstanding financial obligations incurred prior to a change in exchanges rates but not due to be settled after the exchange rate change;

• A transaction exposure is created when the company has either the commitment or intention of receiving foreign currency (sales) or paying monies (purchase) in a foreign currency.

• The risk from the exposure is that the cash income in the domestic currency will be lower than expected or the cash payments will be higher.

• These manifest as losses on adverse exchange rate movements that could have a significant impact on net profits.

Transaction Exposure• Transactional Exposure arises when buy or sell

goods and services in foreign currencies on credit;– If the company sells the product in foreign

currency with payment due 1 month later. However, if the foreign currency unexpectedly depreciate, the total amount received, after exchange into home currency, will be lower than the original expected amount.

Operating (Economic) Exposure• Direct Economic Exposure is where a company’s expected

future receipts and payments are in foreign currency and have not yet been made.

• Change in the present value of the company resulting from any change in expected future operating cash flows of the company caused by unexpected exchange rate movement;

• Indirect economic exposures are the long term risks to the business from adverse developments in the country it is based, resulting in exchange rate movements that benefit foreign competitors.

• It helps to assess the impact of exchange rate movement on a company’s operations in the future and its competitive position vis-à-vis other competitors.

Direct Operation Exposure• Operation Exposure arises when investing in

assets with payment in foreign currencies;• The life span of the transaction exposure of an

investment decision composes of quotation exposure (during exploration and negotiation), and the billing exposure (payment of investment amount).

Direct Operating Exposure– If the agreed investment amount is billed at a foreign

currency, unexpected appreciation of the foreign currency requires a larger amount of investment in terms of local currency.

– With higher investment amount, the expected future operating cash flows of the investment project should also be increased in order to achieve the same level of expected rate of return on the investment;

– However, it may not be easy for the expected future operating cash flows to be increased, the expected rate of return will be lowered. And, in worst situation, it may fall below the Weighted Average Cost of Capital, and lead to an loss-making investment.

Direct Operation Exposure

• Other Implications– Cost of finance: Potential exchange rate

movement increases financial risk to investors, and therefore equity investors will expect a higher rate of returns. In other words, cost of finance is increased to attract investors when exchange rate movement is taken into consideration

– Project viability: Potential dramatic currency fluctuation will create problem of cash flow uncertainty. This has profound effect on the decisions of project viability

Translation Exposure• Changes in the equity value because of the

need to “translate” foreign currency financial statement of foreign subsidiaries into a single reporting currency.

• Any exchange rate movement will cause currency related gains and losses which have destructive impacts on reported earnings.

• These reported earnings can affect the market’s opinion of that company and finally linked to higher cost of finance.

Management of Exposures

• Objective of exposure management is to anticipate and influence the effect of unexpected exchange rate movement on a company’s future cash flows.

• Transaction and Operating exposures can be partially managed internally by adopting operating or financial hedging policies to offset the anticipated exposures, and externally by contractual hedging.

Hedging• Operating and Financial Hedging: -– Matching Currency Cash Flows;– Risk-Sharing agreements;– Back-to-back or parallel loans;– Currency swaps;– Leads and lags;– Reinvoicing centers.

• Contractual Hedging:-– Money Market;– Forward Market;– Options.