International Corporate Strategy

GEST-S-467

Pr Manuel Hensmans

Group presentations

• Present your case

– Imagine I am Chairman of Board of your company

– 12 minutes maximum length

• After 12 minutes I shall stop you regardless of where you are

– Each person +- 3 minutes

– Use visuals to summarize argument!

– Be clear & succinct, to the point!

• Case-study deadline

– for handing in electronic and hard copy of written case is

12/12/2011 5pm Brussels time

• If I’m not in the office (R42.5.207), please leave in my pigeon hole on

the fourth floor (left end of corridor in the CEB lounge)

Plagiarism!

• Plagiarism, or copy-paste of 1 table or 1 paragraph:

0 for the entire group

• Failure means exam in September

3 |

Today: emerging economies

• The problem of institutional voids

– Create compensating location-bound FSAs

• Common assumptions managers

• Analyse 5 components of the institutional context

• Issues to ponder

– Timing of entry

– Market attractiveness

– Product policy

– Partner policy

• Case

4 |

Today: emerging economies

• Entry modes

– Video on

– Joint ventures

• Case vs

• Global challengers

– Internationalization patterns

– What can Western MNEs do to counteract?

5 |

Emerging economies?

• Emerging economies = world’s fastest growing markets

– GDP/capita, GDP growth rate, extent & stability market economy

• Offer cost and innovation advantages

– Western MNEs face difficulties due to?

• unavailability of efficient local intermediary firms

• broader macro-level institutions to facilitate business

– F.i. in absence of efficient, external capital market institutions

» Large firms must establish internal capital markets for resource

allocation

• MNE success depends upon filling institutional voids

6

Emerging economies

• Managerial priorities?

– Almost entirely backwards

• Skewed host country selection criteria

– 61% Western MNEs select host country based on market size

– 16-17% rank political and economic stability highest selection criterion

– Only 12-13% focus on structural conditions (institutional voids)

7

For most internationalizing managers the

world is this…

8 |

Yet, the world is also this…

9 |

DIFFERENCE = UNRESOLVED INSTITUTIONAL VOIDS

Case & institutional voids

• Liberal economic policies

– Have allowed for vibrant capital markets

– Yet, political system has constrained trade unions

– Efficient labour markets require minimum strength trade unions

» Wages of unskilled & skilled can be suppressed at will by employers

» No incentive for upgrading labour supply pool!

10 |

Five components of the institutional

context

Beyond GDP/capita, population, ppp, exchange rates,…

1) Macro-level political/social context: a country’s power centers and presence of checks and balances

• What form of private property rights protection exists?

• How independent are the media?

• How accountable are politicians?

• Can people be trusted to honour contracts?

e.g.

pro: vibrant electoral democracies + dynamic press

contra: rampant bureaucracy & moderate levels of corruption

11

2) Country openness: the extent of it welcoming FDI, but also its openness to ideas and openness to travel

e.g.

pro: allow greenfield investments & acquisitions

contra: JVs with local partners needed to get access to government & inputs

JVs are only entry mode for MNEs in some sectors

most acquisition targets used to be state-owned (hidden liabilities)

12

Five components of the institutional

context

3) Product markets: respect for intellectual property rights, brand perceptions and brand management; availability and quality of intermediaries such as suppliers, logistics providers & retail chains, consumer advocacy groups, courts…

e.g. IPR problems in order of magnitude (imitation, piracy…):

13

Five components of the institutional

context

4) The labor market: education infrastructure (technical and management training)

- large labour pools, yet lack of managerial & skilled workers

- difficulty to assess quality of talent available…why? 1. lack of recruiting agencies to screen potential employees

2. Lack of organizations that rate quality of training provided by educational institutions

large pool of English-speaking mgt

pools of mgrs with varying degrees of English proficiency

pool of educated mgrs not big enough!

14

Five components of the institutional

context

5) Capital markets: a country’s debt, equity and venture capital institutions, as well as

the country’s accounting standards and procedures surrounding

financial distress

- inefficient capital markets?

- lack of specialized intermediaries in investment analysis, banking

services, venture capital & auditing?

15

Five components of the institutional

context

MNEs have three options

Option 1: adapt the strategic capability to the market (LB FSAs)

Option 2: change the emerging economy’s context (only for large MNEs)

Option 3: stay out of emerging economies

16

Implications for …

Timing of entry

• Wait for others to fill institutional voids?

• Or try and gain first mover advantage?

– May be particularly important in emerging economies

• FSAs in government relations

• Chance to enjoy high revenues quickly due to pent-up demand

• Weak prior marketing levels: can have important branding impact

• Pools of experienced managers & innovative distribution processes or product packaging

17

in China: timing of entry

18 |

• China’s car industry started in 1953

– From nation of bikes to cars

• Volkswagen first foreign car investor in China

– First mover advantage

• First office in Beijing 1985

• Strategy

– Target taxi and offical car fleets

• Take first mover advantage

• Create market with state support

– Economies of scale

– Renew fleet park periodically

• 2000: 50% market share

in China: long-term effects

19 |

• Creation premium market

– Market share went down to 15%

• Has gone up again

– New emerging middle classes (emerging economy lifecycle!)

• More price sensitive

• Know Volkswagen brand better via taxi and official fleet presence

• Volkswagen started offering new China VW types

– Not end of international lifecycle mature products (not State cars either)

• 2010?

– VW sells twice as many cars in China than in Germany

• Second home market

• 2011

– VW projected to become biggest carmaker in the world

Implications for …

Market attractiveness • Most Western indicators not reliable in emerging economies

• So think in terms of? – (1) the countries’ long-term market potential

– (2) presence of entry mode business prospects

– (3) potential profits

20

Implications for …

Product policy • Traditional international product life cycle approach

– Serve emerging economies with mature products

• What MNE types more likely to do this?

– Centralized exporter

– International projector

• Problem?

– Emerging economy customers “want latest products now”

• Adapt products/services!

– Do not just simply reduce prices, by eliminating desirable product features!

• Low income consumers want to improve their socio-economic status!

• Emerging economy customers view Western MNEs with suspicion!

• Tip: weak technology infrastructure enables technolog. leapfrogging

21

22

Tata Nano Car

« The people’s car »

2,200$

The average Indian isn’t so keen to

advertise the fact that they can only

afford “the world’s cheapest car”

(2011)

Price close to second-hand branded car!

Implications for …

Partner policy • Government reglation often imposes cooperation with local partners

• Such partners may help MNE overcome

– Bounded rationality problem

• Yet, may worsen

– Bounded reliability problem

“in many cases MNEs plan to switch to direct distribution soon after achieving a critical mass of sales in order to gain control over their business…”

“…Because distributors follow their own interests”

Vicious cycle of increasing bounded reliability challenges!!

23

Case 14.1 AIG:

Filling the Institutional Voids in China

Background

• US-based

• One of the world’s largest insurance companies

– Founded in 1919 as American Asiatic Underwriters in Shanghai

• Life insurance

– American office set up in 1926

– Shifted focus from China to US in 1950

• Maurice Greenberg becomes president in 1962

– Focus on corporate coverage

– Switch to independent brokers

• Went public in 1969

• Continued expanding in China: Asia’s largest foreign

insurer by 1975

Chinese Insurance Industry

• Government-owned PICC: the only insurance company operating in China in 1949-1970

– 1959-1979: No domestic general / life insurance business

• Economic reform in 1978

– Economic growth

• Passed threshold of 1,000$ (life insurance becomes viable)

– New laws to govern domestic economic activities

• Insurance market opened up to domestic and foreign companies

• Not an attractive investment market for most foreign insurers

– Small industry (200 insurers in 1978)

– Patchy enforcement of regulations

• Yet…Market potential

– “…1.3 billion people cannot exist in isolation for long”

Coping with Institutional Voids

• Macro-level political and social context?

– Political power monopoly, little influence of media and NGOs

– Solution: build a strong political network

• Country openness?

– Lack of openness to FDI

– Solution: start with JVs to build relevant FSAs, engage in extensive relationship building (guan’xi) to gain access to market

• Product markets?

– Weak property right protection, weal legal enforceability

– Lack of established distribution network

– Lack of marketing / research intermediaries

– Solution: create agency system (own distribution network), learn the market and culture, engage in marketing efforts to tailor products to local needs

• Labour market?

– Labour force had no expertise in insurance

– Solution: heavy investment in training

AIG Strategies for Emerging Markets

• Timing of entry: first mover advantages

– Develop FSAs in government relations

– Establish presence and brand early and dominate niche

markets before other foreign competitors enter the market

– Achieve efficiencies early / become a low-cost competitor

vis-à-vis latecomers (=> higher profit margins)

• Evaluating market attractiveness

– Non-traditional: evaluated market based on long-term potential

• Partner policy

– Initially relied on government-owned partner to gain entry /

reduce BRat problems

– Switched to direct distribution at the first opportunity

AIG’s FSAs

• LB FSAs developed in China?

– Strong political/government relationship network

– Favourable public image (achieved through public

gestures/investments that signalled long-term commitment)

– Understanding of local market and culture (through history / JV

partnerships)

– Skilled and motivated workforce (achieved through significant

investment in training/commission-based compensation

system)

– Customized products (achieved through understanding of local

culture)

AIG’s FSAs

• NLB FSAs?

– Expertise in insurance business

– Independent broker distribution model

– International experience, particularly in Asia

– Size of operations (largest foreign insurer in Asia)

– Position “at the leading edge of opening markets” (established

model for entering emerging markets)

Problems with LB FSAs early 2000s!

• Modest market share and profits in the early 2000s

• Change of CEO

– Void in AIG’s political network in China (dependent on 1 !)

• Designing the right product

– Balance between finding a sizeable niche market and invading

PICC’s turf

• Small market

– Limited investment opportunities due to government regulations

– BUT! Growth potential: Chinese insurance market predicted

to quadruple between 2001 and 2010

Entry modes: video on China (from 1:41)

32 |

Modes of entry

Exporting Licensing /

Franchising

Joint

Venture

WOFEs

Acquisition Greenfield

investment

Risk Low Low Moderate High High

Return Low Low Moderate High High

Control Moderate Low Moderate High High

Integration in

FSAs? Negligible Negligible Low Moderate High

Context of JVs

• Joint ventures are often set up when they are the foreign MNE’s only penetration option, given a restrictive regulatory regime

• Local partner substantive contribution results from FSAs in government relations and other location-bound FSAs allowing national responsiveness

33

Problems with JVs

• Vicious circle of suspicion (bounded rationality/reliability)

– High distance home country

• HQ: Bounded rationality increases

– Asian partner thinks

• MNE wants to buy me out if I’m successful

– Western partner thinks:

• Asian partner enters markets on its own, outside the alliance

agreement because of what it has learned inside the alliance.

• Weaker firm in JV becomes trapped in a bounded

reliability & dependence spiral

– Especially if one partner engages in continuous alliance-specific

investments, whereas the other does not, the incentive for the latter

to abuse the relationship becomes stronger

34

Problems compounded!

Asian MNE’s & JVs

• Better performance by Asian MNEs: – Intrinsically more receptive and willing to put effort into

learning from alliance partners

– View alliances as an opportunity to develop new FSAs, not primarily as a tool to reduce investment costs and risks

– Choose partner on the basis of long-term complementary capabilities, not established market position

– Own contribution to alliances often involves complex, tacit process knowledge that is not easily imitated or transferable

35

Case 12.1 Danone

Danone’s Affair in China

• Founded by Quinghou Zong in 1987 as a district school-run enterprise sales department

• Supported by city government

• Grew through acquisitions (with government’s support)

• Position in the Chinese market in the mid 1990s

– Strong and profitable

– Faced competition by foreign MNEs

– Lacked financial capital needed to expand scale and market share in China

The Wahaha Group

• Cooperation started in 1996

• Waha motivation (institutional voids in China)

– Access to capital to expand product lines and grow market share

– Access to new technology and managerial techniques

• motivation

– Easy access to fast-growing emerging market

– Access to local knowledge

– Access to managerial resources

• Cooperative arrangement

– Danone became a majority shareholder in 1998 (51%)

– Wahaha took full control of everyday operations

– 39 JVs by 2007

– Excellent financial and market share performance

Danone and Wahaha

• Danone accuses non-JVs of illegally using Wahaha brand

• Danone insists on taking over non-JVs

• JV sues three directors appointed by Danone

• Danone files a complaint against 2 companies and 2 individuals (Zong’s family) related to non-JVs

• Danone threatens litigation

• Zong resigns from his position as Chairman of Wahaha JVs

The Conflict

• Brand transfer (from Wahaha to JV) was hindered by the government

• Wahaha is the sole owner of the brands according to revised contract

• Lack of commitment from Danone!

– Danone did not provide access to technological or managerial expertise

– Danone created barriers to JVs’ business expansion

– Danone had shares in several of Wahaha’s major competitors

• Expanding non-JVs because of Danone’s lack of commitment to JV expansion (vicious cycle of bounded reliability)

Wahaha’s Perspective

• JVs are the sole owners of Wahaha brands (did not realise IPR institutional void in China)

– Danone had paid usage fees to the Wahaha Group

– Wahaha may not have filed transfer requests

• Competition between non-JVs and JVs

– Non-JVs run as a separate and complete business system

– Illegally manufacture and sell products similar to those of JVs

• Danone chose not to increase investment in JVs because of discovering the existence of non-JVs

• Danone did not violate agreements by investing in other companies in China

– Western contractual viewpoint!

Danone’s Perspective

• Danone’s hands-off approach led to its complete dependence on Wahaha to run local operations

• Embeddedness of Wahaha’s FSAs

– Cannot be easily absorbed by Danone’s culture

– FSAs in running local business cannot be diffused to Danone without Danone’s involvement in operations

• Vicious cycle of increasing dependency on a partner for Danone

What actually happened: Shift in Bargaining Power

Lessons for Chinese JVs

• Don’t use technical legal techniques to assert or gain

control in a joint venture

– Do not expect a 51% ownership interest in a joint venture to provide

effective control

• 51/49 joint ventures are generally a mistake in China. The Chinese see

a 51/49 joint venture as fundamentally no different than a 50/50 joint

venture. The absolute legal control afforded by 51% ownership is

viewed as unfair.

• Clear intention of control: 60/40 or a 70/30 ownership structure

• No joint venture formed on a weak or uncertain IPR basis

– Wahaha brand belong to whom? (State-background Wahaha)

– Chinese argue Danone wants to create monopoly

• The foreign party must actively supervise or participate in

the day-today management of the joint venture

43 |

Global challengers are changing the global

business landscape—fast

• Global challengers – compete with Western multinationals for customers

• but also for key natural resources, capital and talent pools across multiple

geographies

– have a number of strategic advantages

• chief among them: their position in high-growth home markets

• Their ability to learn from markets with big institutional voids

– & Patrimonio Hoy

– Are attaining leadership positions in their industry segments globally

• often use cross-border M&A as a means to quickly build sizeable global

positions

– are globalizing their management teams

• often achieving a similar level of international board composition to

established incumbents

– their future prospects are bright

Global Competitive Positioning – Major Appliances

Competitive Positioning

Major Appliances – Top 10 Global Companies by

Volume, 2006-2010

Company 5-year

trend 2006 2007 2008 2009 2010

2010

%

share

Whirlpool Corp 1 1 1 1 1 10.5

Electrolux AB 2 2 2 2 2 7.2

Haier Group 4 4 4 3 3 6.9

Bosch &

Siemens

Hausgeräte

GmbH

3 3 3 4 4 5.8

LG Corp 5 5 5 5 5 5.1

GD Midea

Holding Co Ltd 12 11 10 9 6 3.5

Samsung Corp 9 8 8 8 7 3.4

General

Electric Co

(GE)

6 6 6 6 8 3.3

Indesit Co SpA 7 7 7 7 9 3.2

Panasonic

Corp* 8 9 9 10 10 2.9

Note: * Previously Matsushita Electric Industrial Co Ltd

• CEO Zhang Ruimin

– Different internationalization strategy to other Chinese companies

• Others satisfied with exporting low-cost products from China

» as contract manufactureres for foreign firms’ multinational brands

• 1996

– « We need to raise our competitive edge in the West…Otherwise we’ll lose

the Chinese market to foreigners! »

• Haier Group emulated successful Japanese & Korean firms

– Take own brand to foreign markets

– Establish production in foreign markets

– Learn (R&D) in most technologically competitive markets

– Products appeal more to consumers in developed countries if not seen as

Chinese imports by Westerners

» We have to make Americans feel that Haier is a localized US brand

instead of an imported Chinese brand »

Use institutional void experience

& go to developed economies

46 |

© Euromonitor International

47

Consumer Appliances: Haier Group

Downloaded from www.warc.com

Haier Group Global Coverage and Performance

Production and Sales

Very strong growth

Strong growth

Moderate growth

Negative growth

Very negative growth

Not illustrated

7.2%

0.3%

0.4%

0.1%

0.6%

0.4%

0.1%

1.4%

0.2%

0.3%

0.1%

Note: Percentage figures on map show local share of Consumer Appliances market, 2010

Countering the threat of global challengers

48 |

Western companies: strategies?

• Retaliate

– Take advantage of cost structure, natural resources, market size…

• Bottom of pyramid strategies

• Reverse innovation

• Globalizing premium brands

– Focus on consolidating fragmented markets with market potential

49 |

Bottom of the pyramid strategy

50 |

Not destitutes in need of charity!

Can actually be potent

marketing opportunities when

tapped with relevant products

and services

How can Western companies gain from BOP

beyond CSR?

• Reverse innovation home capability

– take ideas developed for developing country markets and bring

them back to wealthier markets.

– For example, GE is bringing cheap medical imaging machines developed

for India back for usage in the United States. Conventional ultrasounds

developed for the West cost $100,000; simple, portable ultrasounds

developed for China cost $15,000; at that price, they could be attractive to

many local clinics in America as well. GE now talks of 50% solutions at

15% prices, relevant in all geographies around the world

– Pre-empt entry of global challengers!

• Condition

– Give subsidiary in emerging market

» Power to take the R&D and marketing lead

» Allow for reverse innovation within your organization

51 |

Dangers of bottom of the pyramid strategies?

• Challenge of maintaining clear market segmentation! – Cheap products designed for the Base of the Pyramid, f.i. in India, could

affect the market for more mainstream products marketed at the

prosperous Indian middle class.

– With huge international travel and internet marketing, such cheap products

could also rebound back to richer geographical markets also – though that

could be an opportunity as well.

52 |

What strategy do most Western companies

actually pursue?

53 |

54

Brand dynamics in Chinese beer

55 |