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AOF Business in a Global Economy

Lesson 9International Business Strategy

Student Resources

Resource Description

Student Resource 9.1 Reading: Why Companies Globalize

Student Resource 9.2 Defining Format Worksheet: Modes of Entry into Foreign Markets

Student Resource 9.3 Reading: Modes of Entry into Foreign Markets

Student Resource 9.4 Memo: International Expansion Project

Student Resource 9.5 Guide: International Expansion Project Steps

Student Resource 9.6 Worksheet: What is SWOT?

Student Resource 9.7 Guide: SWOT Analysis

Student Resource 9.8 Reading: Choosing a Market Entry Strategy

Copyright © 20092012 National Academy Foundation. All rights reserved.

AOF Business in a Global EconomyLesson 9 International Business Strategy

Student Resource 9.1

Reading: Why Companies Globalize

Globalization is a path of risk and reward for firms. The rewards can be access to a larger customer base, increased profitability, and increased profit growth. The pitfalls include investment losses, failed product launches, and maybe political unpopularity at home; there can also be geo-political issues beyond the control of the company.

This presentation uses MTV’s global expansion as an example of why companies globalize and what they need to do to be successful. While MTV began to expand globally at an early stage of its history, back in 1987, it made a few mistakes along the way. MTV executives have learned about how to market their business to draw a large global audience, and how to do that profitably. Other firms can learn a lot from the difficulties MTV encountered, and how it overcame them to achieve success.



Globalization helps firms save money by:

Sending production activities to the places where they are most efficient, with high productivity and low cost: this is called location economies.

Manufacturing a larger quantity of products, so fixed costs are divided by more units and thus the cost of each unit produced may be lower.

Let’s look at MTV as an example of why a firm decided to globalize. MTV launched in the United States in 1981. The idea was that two of the most popular American art forms, music and film, could be combined in a television station that would appeal to a very attractive market for advertisers, teenagers, and young adults. Executives felt the success of MTV could be transferred to other countries, so in 1987 they launched MTV Europe. Today, after many successes and failures, MTV operates in dozens of countries.



Globalization offers access to more potential customers. The chart to the right illustrates this: MTV’s viewership in the US is 85 million households, which is close to market saturation: there are only about 105 million households of all kinds in the US. However, because MTV expanded to serve a global market, MTV’s various music television channels are now watched in 375 million households in 164 different countries.

However, globalization requires product differentiation, which means tailoring the product to the unique characteristics, needs, and preferences of each market where it is offered. This is something MTV learned the hard way. When MTV began to expand, they used the same videos that were popular in America, and hired VJs who only spoke English no matter where the channel was operating. Ratings were low, so MTV decided on a new approach, customizing MTV for separate markets. This way, the audience in each place could watch original programming about music that was popular where they live, often in their own language. Though differentiation was not cheap, the investment paid off, and MTV now has a loyal following all over the globe.



MTV learned a lot about differentiation when it moved into India. At first, local producers began creating content similar to the US, focusing on international music and movie stars, and using the black and white style that was popular in the US. The initial reception was dismal. MTV reacted, exchanging international content with homegrown Bollywood stars and music, and changing to brightly colored visuals. The audience increased sevenfold.

Likewise, when MTV began broadcasting in Germany, they did it with English-language content that many local viewers could not understand. They also went up against established local competitors that were broadcasting in German. Although MTV recovered somewhat by specializing in German content, they’ve never overtaken their main German competitor, Viva.

Other companies that successfully differentiate, such as Toyota, create products that satisfy the needs of local economies (such as safety standards) and wants (such as power steering) of local customers.



Besides differentiating the product to suit the market where it is being sold, global firms must consider where production of a product will be the most efficient.

Different countries have particular national competitive advantages (or disadvantages) in this regard. For example, China has enormous numbers of people seeking work, good manufacturing and technical skills; very low wages; and lax safety and environmental laws, so manufacturing there is much cheaper than manufacturing in the US.

Our MTV example reflects a globalization strategy based mainly on accessing new markets, and differentiating its products for those markets, rather than seeking out opportunities for low-cost production or other local production advantages. Still, MTV has made use of such opportunities where they arose. MTV Networks recently invested $76 million in a production facility in Argentina. The facility’s main purpose is to translate and dub English-language content into Spanish. It is more efficient to do the translation work in Argentina, a Spanish-speaking country with relatively low wage rates, than in the US. MTV was able to save money by moving translation operations to Argentina.



Economies of scale work the same way bulk discounts do in the grocery store: the more you buy, the lower the cost per unit of the product.

This is true of firms, too: the more they manufacture, the less it costs to make the product per unit produced. The product does have to be adapted for local markets: MTV’s cartoons had to be translated into the local language. Still, the cost of translation was only a fraction of the cost of production, so MTV’s international re-broadcasts of ready-made content became very profitable; the addition revenues gained greatly outweighed the additional costs.



Profitability is one of the most important measures of success for investors. If an investment has a high profitability, investors feel well rewarded. One of the most critical goals of globalization is to increase a company’s profitability.

High profits and a profit growth trend generally lead to high stock prices for publicly traded companies, which allows them to invest more, perhaps in global expansion. MTV’s success had contributed to the stock price gains of its parent company Viacom. Additionally, the more successful MTV has been, the more it has been able to expand to new markets.



Avoiding critical backlash at home and abroad is a critical strategic point for many firms. By outsourcing production, firms can save money, but they must maintain close oversight on production. For instance, in 2008, it was discovered that many Mattel toys produced in China were tainted with toxic lead paint; and milk products, pet food, and farm animal feed were contaminated with melamine, a toxic chemical that can damage the kidneys.

Mattel had to recall tens of millions of the tainted toys, and suffered in both profitability and reputation.

Globalization is a game of risk and reward for many firms. To avoid the dangers, companies need long-term strategies for oversight and brand management at home and abroad. The rewards demonstrate exactly why companies globalize: With careful planning, the potential for growth is vast.




Defining Format Worksheet: Modes of Entry into Foreign Markets

Student Names: Date:

A defining format table can help you organize your thoughts about a particular topic’s characteristics. An example is provided below.

Term Category Characteristics

attentiveness is a way of acting that shows customers you are listening

is polite

enhances a customer’s experience

Directions: Now that you see how it works, use the information from the presentation to complete the tables below. List between two or three characteristics in the space provided.


strategic partnership is a mode of entry that is between two firms

helps the firms utilize their individual strengths

management contract

is a mode of entry that involves performing or supervising certain defined functions or activities for a fee

can be a turnkey operation

equity participation is a mode of entry that gives investing firms an ownership stake (often but not always minority ownership)

joint partnership is a mode of entry that allows contributors to share in revenue, expenses, profits, and control of the business




consortium is a mode of entry that is an association of two or more firms

pools resources for a specific purpose only , such as building and operating a particular industrial or infrastructure project




Reading: Modes of Entry into Foreign MarketsStudent Names:_______________________________________________________ Date:___________

Directions: Read about the different modes of entry into foreign markets and then complete the defining format frame.

Consortium: Consortium is a Latin word that means partnership, association, or society. Businesses that form a consortium pool their resources to achieve a common goal. For example, Airbus, one of the world’s two leading civil aircraft manufacturers, is a consortium of European aircraft manufacturers. In the late 1950s, manufacturers realized that they could not compete alone with the huge budgets and production capacity of the American company Boeing; so. In response, companies including British Aerospace; France’s Aerospatiale-Matra, Germany’s DaimlerChrysler Aerospace- and Spain’s Construcciones Aeronauticas S.A. formed Airbus to develop and produce commercial aircraft. Though initially a consortium, Airbus has been a unified corporation since 2001.

Equity participation: Equity participation is a mode of entry in which a multinational corporation invests in a firm in another country. Firms use equity participation to gain an economic share in, and some control over, companies that are strategically important to them. The equity participant provides capital and receives benefits from the investment. For example, Siemens, a European company in electric power, industrial automation, transportation, healthcare, and other technology-based businesses, is managing the building of an airport in Bangalore, India. The government of the State of Karnataka and the firms there will benefit by getting a state-of-the-art airport for a low cost. In exchange, Siemens will own a large stake in a major air travel hub in one of India’s fastest-growing regions, as well as selling airport systems and earning project management fees.

Joint venture: A joint venture is a relationship between two or more firms undertaking an economic activity together through a jointly controlled organization set up solely for this purpose. Each party contributes an equity investment to the activity, and shares in its revenues and expenses. For example, Ericsson, a major mobile phone producer, had a fire in the main factory that produced its cell phone chips, delaying production. At the same time, Sony was producing cell phones that weren’t selling well. The companies formed a joint venture, Sony Ericsson, with Sony designing and producing the phones and Ericsson marketing them through its established distribution channels, including relationships with operators of wireless networks. Both firms benefited from the joint venture.

Management contract: In a management contract, a firm agrees to manage an aspect of a business, such as marketing or manufacturing, in another country for a fee. Management contracts can take the form of “turnkey operations,” complete businesses that are maintained and operated by another firm. For example, Venezuela has huge oil reserves but frequently lacks the technical expertise to efficiently extract and sell them. All of the oil fields in Venezuela are at least partially nationalized, making it very difficult for foreign-owned companies to drill there. In March 2009, the Michael Baker Corporation signed a management contract with Chevron Global Technology Services Company to provide assistance in hiring technical and organizational support for Venezuelan oil fields.

Strategic partnership: A strategic partnership is a formal alliance between two firms that allows each to use its strengths to benefit the other. Firms choose this mode of entry when they have one or more assets that will help the other firm, but do not want to incur the cost or risk within their own firm. For example, when News Corp., owners of Fox News, the Wall Street Journal, and 20th Century Fox, wanted to expand into telecommunications in China, a News Corp. subsidiary called Phoenix Satellite Television Holdings Ltd. formed a strategic partnership with a Chinese company called China Mobile Ltd. News Corp. got access to Chinese consumers through China Mobile’s network, and in exchange China Mobile got preferential access to Phoenix’s content, including Chinese-language movies and news.




Memo: International Expansion ProjectDirections: After reading this memo, work with your strategy team to make a “What we know” list based on what the CEO said.

To: Global Business Strategy Teams

From: Annabel Okochi, Vice President of International Expansion, smart car

Re: BRIC Country Expansion

I am happy to let you know that smart car has secured funding from our parent company, Daimler AG, to begin the market research to enter the market, and/or to refine our market entry strategies, in the BRIC countries. We have chosen the BRIC countries because they have the fastest growing large economies in the world and are predicted to be among the world’s most dominant economies by 2050. We believe that smart car’s innovation, functionality, and fun can easily adapt to these markets.

Our focus for expansion is to create value in these countries by showing potential consumers that smart car can satisfy an unmet need. The smart car’s core competencies, the skills and qualities we offer that our competitors cannot easily match, are:

Modern technology

High safety

Excellent quality and reliability

Modern design

High fuel efficiency

Low carbon dioxide emissions

Distinctive spatial concept—small on the outside, roomy on the inside

These highly competitive qualities of our product reflect the core competencies of our smart car business, the skills and capabilities that our competitors cannot easily match.

The outstanding product attributes of smart car are the key ideas we would like to emphasize in our marketing for the markets in BRIC countries, but first, it is essential that we understand the benefits and risks of entering those markets. This is why your team’s first task is to conduct a SWOT analysis of your market, looking at the strengths and weaknesses of smart car, and the opportunities and threats in the market. After you have finished your research, work with your team to determine the most appropriate market entry strategy based on what you discovered. Please create a poster that the smart car executives and I can use to easily understand how the most important findings from your SWOT analysis led you to your recommendation.

Thank you in advance for your hard work.




Guide: International Expansion Project Steps




Worksheet: What is SWOT?Student Name:_______________________________________________________ Date:___________

Directions: After reading the description of SWOT, work with your team to categorize the statements in the correct categories. Be ready to share your answers.

What is SWOT?SWOT stands for strengths, weaknesses, opportunities, and threats. A SWOT analysis helps decision-makers clarify the strengths and weaknesses of the business and the opportunities and threats of the market. Considered together, this information gives a good overview of the benefits and costs of a business venture.

SWOT Analysis of potential expansion of Ruby’s Restaurant to Edison High School

Restaurant STRENGTHS

WEAKNESSES

School OPPORTUNITIES

THREATS

1. 80% of students buy lunch

2. The school district has strict dietary regulations for on-campus food, including no fried food

3. The cafeteria serves breakfast and lunch

4. Ruby’s features American foodburgers, fries, sandwiches

5. Ruby’s has been in the community for over 40 years

6. Three other restaurants are competing for the contract

7. Students spend approximately $3.00 per meal

8. All food preparation must occur on site

9. Ruby’s was voted most popular restaurant in the school newspaper




Guide: SWOT AnalysisStudent Name:_______________________________________________________ Date:___________

Directions: Work with your team to research the SWOTs for smart car’s expansion into your BRIC country using the suggested topics in the chart. As you work, keep in mind that the product’s strengths, weaknesses, opportunities, and threats depend on the country you are considering; for example, smart car’s strengths in one country might be weaknesses in another, so be sure to develop your SWOT with your country in mind. Later you will learn about market entry strategies and recommend one. Then you will fill in the information at the top with the name of the country you researched.

Websites for research: http://www.learnwebskills.com/company/index.html

http://www.smartusa.com/

https://www.cia.gov/library/publications/the-world-factbook/

The Market Entry Strategy Recommendation for _______________________________

is ____________________________________________________________________

STRENGTHS (of smart car) Advantages of firm and car

Unique selling points

Knowledge about product, environment

Price/value/quality of product

Management of smart car company

WEAKNESSES (of smart car) Competition

Market reaction to smart car

Reputation of product

Product offerings

Price

OPPORTUNITIES: Market developments

Industry and lifestyle trends

Size of the market

Present income of consumers (PPP)

Likely future income of consumers (economic growth rate)

Environmental conditions

Economic and political factors, including currency stability and fuel prices

Other influences, including weather

THREATS: Political factors

Environmental conditions

Competition

Market demand

Economic conditions

Infrastructure

Other influences, including weather


https://www.cia.gov/library/publications/the-world-factbook/

http://www.smartusa.com/

http://www.learnwebskills.com/company/index.html



Reading: Choosing a Market Entry StrategyStudent Name:_______________________________________________________ Date:___________

Directions: Read the chart about the four types of market entry strategies and why managers choose them. Think about which products and services could be made more profitable by pursuing each strategy.

In Student Resource 9.3, Reading: Modes of Entry into Foreign Markets, you learned about the ways companies can structure their companies in order to enter a market successfully. In addition to business structure, companies must also think about the ways they will change their products or services (if at all) to compete successfully in a new market. Sometimes the answer is simple, but often it is more complex, with many variables that must be considered.

The chart on the next page is a tool managers can use to analyze how best to enter a market. Each cell represents a different set of variables. In the top-left cell, for example, the Global Standardization Strategy would be appropriate for a product with high pressure for cost reductions, but low pressure for local responsiveness and/or product differentiation. This would be an appropriate market entry strategy for products like microchips or oil.

Think about Solar Dog. Where would it fall? Why? Consider the following products and where they would fall. As you work, keep in mind that there are many ways to think about a product, and there is no absolute right or wrong way to enter a market, so your opinion may be different from the opinions of others. Just make sure you can back up your answer.

Product Strategy Reason

Coca-Cola

Rolex

T-Shirts

Bestselling Novel



Market Entry Strategies for Global Firms

High

PressureFor

CostReductions

Low

Global Standardization Strategy Avoids customizing product offerings

and marketing

Markets standardized product worldwide

Works best for products with universal needs, such as microchips

Transnational Strategy Can be achieved through location

economies (performing value creation activity in place with lowest costs) and/or economies of scale (when a large volume of a product is produced, spreading the fixed costs of production over larger volume)

Differentiates product offerings and marketing strategies

International Strategy Takes products first developed for one

local market, and then sells them internationally

Requires little local customization

Works best when there are few competitors

Localization Strategy Customizes goods and services to local

market

Works best when cost pressures are low and there are substantial differences in national tastes and preferences

Pressure for Local Responsiveness/Differentiation

High Low


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