IB Session Module 4 AY20-21 Shared

International Business
Sessions 8-9
Global Business Strategy

Learning Objectives
• Recognize how firms create value by expanding globally
• Understand how strategic choices are shaped by pressures for cost

reduction and pressures for local responsiveness
• Identify and choose strategies for companies to compete globally

Case: IKEA’s Global Expansion
• Established in Sweden as mail order company in 1943
• 2019: Sales 41.3 billion EUR, 433 Stores in more than 50 Countries, 220,000
co-workers, largest furniture retailer in the world
• USP:
• Store layout: the long natural way, enhanced with cafeteria, childcare facilities
• Tasteful, yet inexpensive, easy to assemble, modular, and ready to take away flat-
packed furniture for the young, upwardly mobile family
• IKEA’s own design, working closely with suppliers across countries to lower costs
• International expansion – slow
• Sweden → Scandinavian countries → Developed Countries → Developing Countries
• Learning from initial muted response in the US
• Customer preferences are different
• Now implemented subtle differences in product characteristics and other
offerings to customers
Multinationals are Global Citizens
“The Tommy Hilfiger Corporation [is]
…headquartered in Hong Kong,
…incorporated in the British Virgin Islands,
…listed on the New York Stock Exchange,
…owned primarily by international institutional investors,
…held its annual meeting [of shareholders] in Barbados,
…sourced production to manufacturers in Mexico and Asia,
…licensed its name to producers globally, and
…retailed its ‘classic American clothing’ in Europe and North America.”
- G.F. Davis, Handbook of Economic Sociology, pp. 480-481.

Source: Mauro F. Guillén
Doing Business Globally - Different, if not Difficult!
Factors Domestic Conditions Global Conditions
Culture Homogeneous Heterogeneous
Currency Uniform Different currencies and exchange rates
Economy Stable and uniform May be variable and unpredictable
Government Stable May be unstable

Skilled workers may be hard to find in
Labor Skilled workers available
certain pockets
Language Generally a single language Different languages and dialects
Marketing Many media, few restrictions May be fewer media and more restrictions
Transport &
Several competitive modes May be inadequate
Logistics
Source: World Bank
8.1 Expanding Firm’s Business Beyond
National Borders
How Can Firms Increase Profits Through International
Expansion?
• International firms can
1. Expand their market

• Sell in international markets
2. Realize location economies
• Disperse value creation activities to locations where they can be performed most efficiently
and effectively
How Can Firms Increase Profits Through International
Expansion?
• International firms can…
3. Realize greater cost economies from experience effects

• Serve an expanded global market from a central location
4. Earn a greater overall return

• Leverage skills developed in foreign operations and transfer them elsewhere in the firm
How Can Firms Leverage Their Products and
Competencies?
• Firms can increase growth by selling internationally the goods or
services developed at home market
• The success of firms that expand internationally depends on
• The features and characteristics of the goods or services sold
• The firm’s core competencies

Competencies?
• Core competencies - skills within the firm that competitors cannot

easily match or imitate
• Can exist in any value creation activity
• Core competencies allow firms to reduce the costs of value creation

and/or to create perceived value so that premium pricing is possible
Competencies?
• Location economies refer to the economic advantages that arise from

performing a value creation activity in the optimal location for that
activity, wherever in the world that might be
• By achieving location economies, firms can
• Lower the costs of value creation and achieve a low cost position
• Differentiate their product offering

Why are Location Economies Important?
• Firms that take advantage of location economies in different parts of

the world, create a global web of value creation activities
• Different stages of the value chain are dispersed to locations where perceived
value is maximized or where the costs of value creation are minimized
Why are Experience Effects Important?
• The experience curve refers to the systematic reductions in production

costs that occur over the life of a product
• By moving down the experience curve, firms reduce the cost of creating value
• To get down the experience curve quickly, firms can use a single plant to serve
global markets
• Learning effects are cost savings that come from learning by doing
• When labor productivity increases
• Individuals learn the most efficient ways to perform particular tasks
• Managers learn how to manage the new operation more efficiently

The Experience Curve

• Economies of scale - the reductions in unit cost achieved by producing

a large volume of a product
• Sources of economies of scale include
• Spreading fixed costs over a large volume
• Utilizing production facilities more intensively
• Increasing bargaining power with suppliers

How Can Managers Leverage Subsidiary Skills?
• Managers should
1. Recognize that valuable skills that could be applied elsewhere in the firm can
arise anywhere within the firm’s global network - not just at the corporate
center
2. Establish an incentive system that encourages local employees to acquire new

skills
3. Have a process for identifying when valuable new skills have been created in a
subsidiary
4. Act as facilitators to help transfer skills within the firm

What Types of Competitive Pressures Exist in the Global
Marketplace?
• Firms that compete in the global marketplace face two conflicting

types of competitive pressures
• Reduce cost
• Attend to local needs
• The pressures limit the ability of firms to realize location economies and
experience effects, leverage products, and transfer skills within the firm
• Dealing with both pressures is challenging

Marketplace?
• Two competitive pressures:
1. Pressures for cost reductions

• Force the firm to lower unit costs
2. Pressures to be locally responsive

• Require the firm to adapt its product to meet local demands in each market
• But, this strategy can raise costs
Marketplace?
Pressures for Cost Reductions and Local Responsiveness

When are Pressures for Cost Reductions Greatest?
• Pressures for cost reductions are greatest
1. In industries producing commodity-type products that fill universal needs

(needs that exist when the tastes and preferences of consumers in different
nations are similar if not identical) where price is the main competitive weapon
2. When major competitors are based in low cost locations
3. Where there is persistent excess capacity
4. Where consumers are powerful and face low switching costs

When are Pressures for Local Responsiveness Greatest?
• Pressures for local responsiveness arise from
1. Differences in consumer tastes and preferences
• Strong pressure emerges when consumer tastes and preferences differ significantly between
countries
2. Differences in traditional practices and infrastructure
• Strong pressure emerges when there are significant differences in infrastructure and/or
traditional practices between countries
When are Pressures for Local Responsiveness Greatest?
3. Differences in distribution channels
• Need to be responsive to differences in distribution channels between countries
4. Host government demands

• Economic and political demands imposed by host country governments may require local
responsiveness
So, Why Does a Firm go Global and How?
• Goals
• Pursue efficiency / profit
• Seek new market and resources
• Manage risks
• Innovate, learn and adapt over time
• Tools
• Exploit national differences
• Exploit economies of scale (EOS)
• Exploit economies of scope (EOSc)
• Exploit intangible assets over and above EOS and EOSc
Entry Modes in Foreign Markets
Mode Pros Cons
Exporting • Allows for utilization of capacity • Allows for access to limited
• Focuses the firm on core products markets
• Provides breathing space for • Creates reliance on "distributors"
learning about international • Subject to home market capacity
markets • Subject to currency fluctuation risk
• Relatively low risk • Leads to "distance" from
customers
Licensing • Allows for sharing of key "assets" • Subject to expropriation by
• Allows for rapid increase in licensee
capacity • Subject to legal jurisdiction of
• Gets the product closer to the licensee
market • Generally a limited "lifetime"
• Cheap alternative to going it alone
Entry Modes in Foreign Markets (contd…)
Mode Pros Cons
Joint • Allows for sharing of "assets" • Sharing of profits difficult to assign
Venture • Allows for rapid expansion in • Subject to expropriation by partner
capacity • Difficult to make it work
• Gets the product close to the • Expensive to set up
market • Subject to constant re-negotiation
• Provides access to know-how
otherwise difficult to attain
Direct • Allows complete control • Expensive

Investment • Gets product close to market • Managerial skills needed
• Gives the company 100% • Organizational complexity
protection of its knowledge • Risk borne by company
• Company may not have all the
requisite skills
Time / Speed of Entry
Who are the Largest MNEs Today?
• UNCTAD Transnationality Index

= f (International Revenue, International Assets, International
Employees)
• https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/A
nnex-Tables.aspx
8.2 Choosing a Strategy
Which Strategy Should a Firm Choose?
• There are four basic strategies to compete in international markets
• The appropriateness of each strategy depends on the pressures for

cost reduction and local responsiveness in the industry
Four Basic Strategies

The extent
to which
operations
and Global Integration
of the firm
are
integrated
along a
single
dimension
The extent to which company’s products and

services are responsive to market differences
1. Global standardization - increase profitability and profit growth by

reaping the cost reductions from economies of scale, learning effects,
and location economies
• Goal is to pursue a low-cost strategy on a global scale
• This strategy makes sense when
• There are strong pressures for cost reductions and demands for local
responsiveness are minimal
2. Localization - increase profitability by customizing goods or services

so that they match tastes and preferences in different national
markets
• There are substantial differences across nations with regard to consumer

tastes and preferences and cost pressures are not too intense
3. Transnational - tries to simultaneously achieve low costs through

location economies, economies of scale, and learning effects
• Firms differentiate their product across geographic markets to account for local
differences and foster a multidirectional flow of skills between different
subsidiaries in the firm’s global network of operations
• Both cost pressures and pressures for local responsiveness are intense
4. International – take products first produced for the domestic market

and sell them internationally with only minimal local customization
• There are low cost pressures and low pressures for local responsiveness
Imagine that you are a domestic motorcycle maker with interests in selling
abroad. You have a limited product line, but you are profitable in domestic
market due to low cost of production. You know consumer tastes in various
locations require a high degree of local responsiveness.
Which of the four main strategic postures (global standardization, localization,

transnational, or international) would you adopt to address these pressures?
What advantages or disadvantages would that strategy provide?
How Does Strategy Evolve?
• An international strategy may not be viable in the long term
• To survive, firms may need to shift to a global standardization strategy or a

transnational strategy in advance of competitors
• Localization may give a firm a competitive edge, but if the firm is

simultaneously facing aggressive competitors, the company will also
have to reduce its cost structures
• Would require a shift toward a transnational strategy

How Does Strategy Evolve?
Changes in Strategy over Time

Exercise: Strategic Choices of MNEs
• Plot the position of the following firms on the Figure:
• Procter & Gamble, Apple, Coca Cola, Dow Chemical, and McDonald’s
Example of Flexible Integrative Process at a Transnational
• Integration and Differentiation needs at Unilever
Need for global coordination and integration
Businesses Functions Tasks

High High High
Chemicals Research Product Policy
Product
Advertising
Development
Detergents
Manufacturing Pricing
Personal
Products Marketing Distribution
Packaged Sales Promotion

Foods
Low High Low High Low High
Need for national differentiation / responsiveness
Case: Procter and Gamble
• Consumer products company, founded in 1837
• 2019 revenue 68 billion USD, 39 billion USD outside the US
• More than 300 brands, 24 of them billion-dollar brands, sold to consumers in more
than 180 countries
• Initial global expansion strategy
• Develop new products in HQ and rely on semi-autonomous foreign subsidiaries to manufacture,
market and distribute these products in different countries
• Foreign subsidiaries tailored the packaging, brand name, and marketing message to local tastes and
preferences
• Challenge in 1990s
• Diminishing cross-border barriers led to duplication of manufacturing, marketing and admin facilities
• Global retailers demanded deep discounts due to large volume from consolidated markets
• P&G’s response in 2000s
• Reorganization, and rationalization of manufacturing facilities
Case: Procter and Gamble
• Q: What strategy does Procter & Gamble appear to be moving toward?
What are the benefits of this strategy? What are the potential risks
associated with it?
• Trying to take a transnational approach to markets

• Reorganized into business units, each responsible for its own profits
• Each unit to develop global brands where possible, and keep costs low
• New approach introduces new challenge in communication gap between
business units, minimizes the possibility of cross-unit learning and
information sharing
In Summary…
• Strategy ➔ Actions that managers take to attain the goals of the firm
• Publicly traded firms focus on maximizing shareholder value, by increasing profitability and growth
• Through international expansions firms transfer the product offerings derived from its
core competencies to markets where indigenous competitors lack those product
offerings and competencies
• A firm may base each value creation activity at a location where the conditions are the
most conducive to perform that activity
• A firm can rapidly build sales volume of a standardized product, to realize learning
effects and economies of scale
• Valuable skills created within a foreign subsidiary can be transferred across the global
network
• International strategy
• Localization strategy
• Global standardization strategy
• Transnational strategy
Sessions 8-9
Organizational Architecture in Global Business

Learning Objectives
• Describe the different organizational choices that can be made in an

international business
• Explain how organization structure can be matched to strategy to

improve performance of international business
• Discuss what is required for an international business to change its

organization structure so that it better matches the strategy
8.3 Organizational Architecture:
Structure, Processes, Control Systems,
People and Culture
What is Organizational Architecture?
• Organizational architecture is the totality of a firm’s organization,
combining:
• Structure
• Processes
• Control systems
• Culture
• People
1. Organizational structure
• The formal division of the organization into subunits
• The location of decision-making responsibilities within that structure

• Centralized versus decentralized
• The establishment of integrating mechanisms to coordinate the activities of subunits

including cross-functional teams or pan-regional committees
2. Control systems and incentives

• Control systems - the metrics used to measure performance of subunits
• Incentives - the devices used to reward managerial behavior

3. Processes, organizational culture, and people

• Processes - how decisions are made and work is performed within the organization
• Organizational culture - norms and values that are shared among the employees of an
organization
• People - the employees and the strategy used to recruit, compensate, and retain
employees for their skills, values, and orientation
• To create and capture value…
• The elements of the organizational architecture must be internally consistent
• The organizational architecture must fit the strategy
• The strategy and architecture must be consistent with each other, and consistent with
competitive conditions in the industry
What are the Dimensions of Organizational Structure?
• Organizational structure has three dimensions
1. Vertical differentiation - the location of decision-making responsibilities within

a structure
2. Horizontal differentiation - the formal division of the organization into

subunits
3. Integrating mechanisms - the mechanisms for coordinating subunits

Role of Vertical Differentiation
• Vertical differentiation determines where decision-making power is

concentrated
• Centralized decision making
• Facilitates coordination
• Ensures decisions are consistent with the organization’s objectives
• Gives managers the means to bring about organizational change
• Avoids duplication of activities

Role of Vertical Differentiation (contd…)
• Decentralized decision making
• Relieves the burden of centralized decision making
• Has been shown to motivate individuals
• Permits greater flexibility
• Can result in better decisions
• Can increase control

Role of Horizontal Differentiation
• Horizontal differentiation refers to how the firm divides into sub-units
• Usually based on function, type of business, or geographical area
• Most firms begin with no formal structure but later split into functions
reflecting the firm’s value creation activities - functional structure
• Functions are coordinated and controlled by top management
• Decision making is centralized
• Product-line diversification requires further horizontal differentiation

What is a Functional Structure?
A Typical Functional Structure

Does Horizontal Differentiation Change Over Time?
• Firms may switch to a product divisional structure from functional

structure
• Each division is responsible for a distinct product line
• Headquarters retains control for the overall strategic direction of the firm and
for the financial control of each division
What is a Product Divisional Structure?
A Typical Product Divisional Structure

What Happens When Firms Expand Globally?
• When firms expand internationally, they often group all of their

international activities into an international division
• Over time, manufacturing may shift to foreign markets

• Firms with a functional structure at home would replicate the functional
structure in the foreign market
• Firms with a divisional structure would replicate the divisional structure in the
foreign market
• In either case, there is the potential for conflict and coordination

problems between domestic and foreign operations
What is an International Division Structure?
A Company’s International Division Structure
How Does International Structure Change over Time?
International Structural Stages Model (Stopford and Wells)
Geographic
What Happens to International Structure Over Time?
• Firms that continue to expand will move to either a
1. Worldwide product division structure - adopted by firms that are reasonably

diversified
• Allows for worldwide coordination of value creation activities of each product division
• Helps realize location and experience curve economies
• Facilitates the transfer of core competencies
• Does not allow for local responsiveness

What is a Worldwide Product Division Structure?
A Worldwide Product Divisional Structure
(contd…)
2. Worldwide area structure - favored by firms with low degree of

diversification and a domestic structure based on function
• Divides the world into autonomous geographic areas
• Decentralizes operational authority
• Facilitates local responsiveness
• Can result in a fragmentation of the organization
• Is consistent with a localization strategy

What is a Worldwide Area Structure?
A Worldwide Area Structure

(contd…)
• The global matrix structure – tries to minimize the limitations of the

worldwide area structure and the worldwide product divisional
structure
• Allows for differentiation along two dimensions - product division and
geographic area
• Has dual decision making - product division and geographic area have equal
responsibility for operating decisions
• Can be bureaucratic and slow
• Can result in conflict between areas and product divisions
• Can result in finger-pointing between divisions when something goes wrong

What is the Global Matrix Structure?
A Global Matrix Structure
Paradox of Global Matrix Structure
• Balancing of power of the top leadership requires a unique blend of
• Autocratic leadership and
• Participative leadership
• The top role will have to firmly and decisively arbitrate disputes that
cannot be resolved along the dual lines
• At the same time the top role has to promote collaborative decision
making and ensure that both lines have approximately equal influence
in the decision making process
Integration: How Can Subunits be Integrated?
• Regardless of the type of structure, firms need a mechanism to
integrate subunits
• Need for coordination is lowest in firms with a localization strategy and highest
in transnational firms
• Coordination can be complicated by differences in subunit orientation and

goals
• Simplest formal integrating mechanism is direct contact between subunit

managers, followed by liaisons
• Temporary or permanent teams and committees composed of individuals from

each subunit is the next level of formal integration
• The matrix structure allows for all roles to be integrating roles

Integration: How Can Subunits be Integrated? (contd…)
• Many firms use informal integrating mechanisms
• A knowledge network - network for transmitting information within an

organization that is based not on informal contacts between managers
and on distributed information systems
• A non-bureaucratic conduit for knowledge flows
• Must embrace as many managers as possible and managers must adhere to a

common set of norms and values that override differing subunit orientations
What is the Link Between Control, Incentives, and
Strategy?
Interdependence, Performance Ambiguity, and the Costs of Control for the

Four International Business Strategies
What is Organizational Culture?
• Organizational culture - the values and norms that employees are

encouraged to follow
• Evolves from
• Founders and important leaders
• National social culture
• The history of the enterprise
• Decisions in the past that resulted in superior performance

• Organizational culture can be maintained through
• Hiring and promotional practices
• Reward strategies
• Socialization processes
• Communication strategies
• Organizational culture tends to change very slowly

• Managers in companies with a “strong” culture share a relatively

consistent set of values and norms that have a clear impact on the way
work is performed
• A “strong” culture
• Is not always good
• May not lead to high performance
• Could be beneficial at one point, but not at another
• Companies with adaptive cultures have the highest performance

Hofstede Cultural Dimensions
Source: https://corporatefinanceinstitute.com/
Richard Lewis Culture Types
Source: https://businessinsider.com
8.4 Fit Between Strategy and
Architecture
Localization Strategy
S1 Most key assets and

resources are
decentralized
S5 S2
H
Corporate management
Loose, simple controls, treats subsidiaries as
Financial flows: capital out, independent national
profit back businesses
S4 S3
Source: Bartlett, Ghoshal, Birkinshaw
International Strategy
Most key assets and

resources are
S1 centralized, with local production
facilities in some subsidiaries
S5 S2
H
Moderate strategic and operational Corporate management
controls through centralized treats subsidiaries as
decision making. delivery pipelines to the
Goods flow: from center global market
outwards
S4 S3
Global Standardization Strategy
Many assets and resources
are decentralized but
S1 controlled from center
S5 S2
H
Tight, formal systems based Corporate management
controls (planning, budgeting, treats subsidiaries as
replicating parent’s administrative foreign extension of
systems) domestic operations
Knowledge flows: parent
technology and expertise S4 S3
locally adapted
Comparing the Characteristics
Organization Multi-domestic International Global Standardization
Characteristics (Localization)
Configuration of assets Decentralized and Centralized and Sources of core
and capabilities nationally self- globally scaled competencies
sufficient centralized, others
decentralized
Role of overseas Sensing and exploiting Implementing parent Adapting and

operations local opportunities company strategies leveraging parent
company competencies
Development and Knowledge developed Knowledge developed Knowledge developed

diffusion of knowledge and retained within and primarily retained at the center and
each country unit at the center transferred to overseas
units
Integrated Network (Transnational Architecture)
Distributed, specialized
S1 resources and capabilities
S5 S2
H
Large flow of components, Complex process of
products., resources, coordination and
people and information a cooperation in an
among interdependent environment of shared
units decision making
S4 S3

Comparing the Characteristics
Multi-domestic International Global
Organization (Localization) Standardization
Transnational
Characteristics
Decentralized and Centralized and Sources of core
Configuration of nationally self- globally scaled competencies
Dispersed,
assets and sufficient centralized, interdependent and
others
capabilities decentralized specialized
Sensing and Implementing Adapting and
Role of overseas exploiting local parent company leveraging parent
Differentiated
operations opportunities strategies company contribution by national
competencies
units to integrated
worldwide operations
Knowledge Knowledge Knowledge

Development and developed and developed and developed at the
Knowledge developed
diffusion of retained within primarily retained center and jointly and shared
each country unit at the center transferred to
knowledge overseas units worldwide
What is the Link Between Strategy and Architecture?
A Synthesis of Strategy, Structure, and Control Systems

1. Firms pursuing a localization strategy focus on local responsiveness
• They do not have a high need for integrating mechanisms
• Performance ambiguity and the cost of control tend to be low
• The worldwide area structure is common

2. Firms pursuing an international strategy create value by transferring

core competencies from home to foreign subsidiaries
• The need for control is moderate
• The need for integrating mechanisms is moderate
• Performance ambiguity is relatively low and so is the cost of control
• The worldwide product division structure is common

3. Firms pursuing a global standardization strategy focus on the

realization of location and experience curve economies
• Headquarters maintains control over most decisions
• The need for integrating mechanisms is high
• Strong organizational cultures are encouraged
• The worldwide product division is common

4. Firms pursuing a transnational strategy focus on simultaneously

attaining location and experience curve economies, local
responsiveness, and global learning
• Some decisions are centralized and others are decentralized
• The need for coordination and cost of control is high
• An array of formal and informal integrating mechanism are used
• A strong culture is encouraged
• Matrix structures are common

How are the Environment, Strategy, Architecture, and
Performance Related?
• For a firm to succeed
1. The firm’s strategy must be consistent with the environment in which the firm
operates
2. The firm’s organization architecture must be consistent with its strategy
• Firms need to change their architecture to reflect changes in the environment in which they are
operating and the strategy they are pursuing
8.4 Analyzing P&G’s Reorganization
Challenges of a Matrix Organization in a Global
Environment
Source: Degan
P&G’s Matrix Structure of Early 1990s
• P&G went global in 1948 and its organization structure evolved over time
• The complex matrix structure consisted of 3 dimensions - Geography,

Function and Product Category
Source: Degan
P&G’s Matrix Structure of Early 1990s (contd…)
Source: Degan
Issues with P&G’s Matrix Structure
• Lack of a proper collaborative culture
• Functions and Markets were focusing on individual optimization
• Excessive management levels, and profit centers
• Skewed design of the structure
• Disaggregating effect of its processes and systems

P&G’s 4-Dimensional Matrix Organization as of 2020
• Category-based Global Business Units (GBUs)
• GBUs are responsible for developing overall brand strategy, new product upgrades
and innovations and marketing plans
• Ten categories: Baby Care, Fabric Care, Family Care, Feminine Care, Grooming, Hair
Care, Home Care, Oral Care, Personal Health Care and Skin and Personal Care
Source: Co website
P&G’s Current 4-Dimensional Matrix Organization (contd…)
• Selling and Market Operations (SMOs)
• Responsible for developing and executing go-to-market plans at the local level;
focus is on effective and efficient selling, distribution, shelving, pricing execution
and merchandising for consumers, channels, customers and markets
• Six regions: Asia Pacific, Europe, Greater China, India, the Middle East and Africa
(IMEA), Latin America, and North America
• Global Business Services (GBS)

• Operates and supports the infrastructure, operations, systems, and shared services
that run P&G
• Corporate Functions
• Provide company-level strategy and portfolio analysis, corporate accounting,
treasury, tax, governance, HR, IT, and legal
Source: Co website
In Summary…
• Organization architecture → {formal organization structure, control systems and
incentives, processes, organizational culture, and people}
• Org structure → {formal division of the organization into subunits, location of decision-
making responsibilities, integration mechanisms}
• Control systems → Mechanisms to measure performance of subunits
• Incentives → Devices to reward value creating actions and behavior
• Processes →Manner in which work is carried out and decisions are made
• Culture → System of values and norms, leading to expected behavior patterns
• Three criteria for superior profitability
• Org. architecture must be internally consistent
• Org. architecture must fit the strategy
• Strategy and architecture must be consistent with the industry / competitive environment
• Organizational change may require drastic steps like unfreezing, followed by moving to
the new state and then refreezing
Sessions 8-9
Entry Mode Choices in Global Business

12-Months Sales Data in India for Premium SUV Segment
Source: autoportal.com
Learning Objectives
• Explain the three basic decisions that firms contemplating foreign

expansion must make
• Which markets to enter
• When to enter those markets, and on what scale
• How to enter those markets
• Compare and contrast the different modes that firms use to enter foreign
markets
• Identify the factors that influence a firm’s choice of entry modes
• Recognize the pros and cons of acquisition vs. greenfield ventures as
entry strategy
• Evaluate the pros and cons of entering into strategic alliances
8.5 Basic Entry Decisions
What are the Basic Decisions Firms Make When
Expanding Globally?
1. Which markets to enter
2. When to enter them and on what scale
3. Which entry mode to use

• Exporting
• Licensing or franchising to a company in the host nation
• Establishing a joint venture with a local company
• Establishing a new wholly owned subsidiary
• Acquiring an established enterprise

What Influences the Choice of Entry Mode?
• Several factors affect the choice of entry mode including
• Transport costs
• Trade barriers
• Political risks
• Economic risks
• Costs
• Firm strategy
• The optimal mode varies by situation – what makes sense for one
company might not make sense for another
Tesco’s Global Expansion
• 2019: $82 billion sales, 450000 employees, 6800 stores
• 1993 ➔ France → Own stores under different brands (Exited 2010)

• 1994 ➔ Hungary → Acquisition of stores from Global
• 1995 ➔ Poland → Acquisition of stores from Stavia
• 1996 ➔ Czech Republic and Slovakia → Acquisition of stores from Kmart
• 1997 ➔ Ireland → Acquisition of stores from Power
• 1998 ➔ Thailand → Acquisition of stake in Lotus
• 1999 ➔ South Korea → Joint venture with Samsung (Exited 2015)
• 2000 – 2003 ➔ Taiwan, Malaysia, Japan, Turkey (Exited Japan 2012, Turkey 2016)
• 2004 ➔ USA → Own stores (Exited 2014)
• 2004 ➔ China → Joint venture with multiple players
• 2014 ➔ India → Joint venture with Tata (small scale)
• 2017 ➔ Pakistan → Joint venture
Can Retail Development Index Guide Tesco for the next
move?
• Attractiveness of retail environment in emerging countries
• Any surprises?
MA: Market Attractiveness, CR: Country Risks (lack of), MS: Market Saturation (lack of), TP: Time Pressure to Enter
https://www.atkearney.com/global-retail-development-index/2019
Which Foreign Markets Should a Firm Enter?
• Long-run value creation opportunity and attractiveness are influenced

by
• Macroeconomic and political factors
• Competitive environment in the country for the given sector, including,
• Attractiveness of product / service
• Future potential of the market
Benefits
Costs and
Risks
Which Foreign Markets Should a Firm Enter?
• Favorable markets
• Are politically stable
• Have free market systems
• Have relatively low inflation rates
• Have low private sector debt

Which Foreign Markets Should Firms Enter?
• Less desirable markets
• Are politically unstable
• Have mixed or command economies
• Have excessive levels of borrowing
• Markets are also more attractive when the product in question is not
widely available and satisfies an unmet need
When Should a Firm Enter a Foreign Market?
• Once attractive markets are identified, the firm must consider the
timing of entry
1. Entry is early when the firm enters a foreign market before other foreign firms
2. Entry is late when the firm enters the market after firms have already
established themselves in the market
Why Enter a Foreign Market Early?
• First-mover advantages:
• The ability to preempt rivals by establishing a strong brand name
• The ability to build up sales volume and ride down the experience curve
ahead of rivals and gain a cost advantage over later entrants
• The ability to create switching costs that tie customers into products or
services making it difficult for later entrants to win business
Why Enter a Foreign Market Late?
• First-mover disadvantages:
• Pioneering costs - arise when the foreign business system is so different from that
in the home market that the firm must devote considerable time, effort, and
expense to learning the rules of the game
• The costs of business failure if the firm, due to its ignorance of the
foreign environment, makes some major mistakes
• The costs of promoting and establishing a product offering,

including the cost of educating customers
On What Scale Should a Firm Enter Foreign Markets?
• After choosing which market to enter and the timing of entry, firms
need to decide on the scale of market entry
• Firms that enter a market on a significant scale make a strategic commitment to

the market
• The decision has a long term impact and is difficult to reverse
• Small-scale entry has the advantage of allowing a firm to learn about a foreign
market while simultaneously limiting the firm’s exposure to that market
Is There a “Right” Way to Enter Foreign Markets?
• There are no “right” decisions when deciding which markets to

enter and the timing and scale of entry
• Managerial / executive decisions associated with levels of costs,

risks and rewards
8.6 Entry Modes
How Can Firms Enter Foreign Markets?
• These are six different ways to enter a foreign market
1. Exporting – a common first step for many manufacturing firms
• Later, firms may switch to another mode
2. Turnkey projects - the contractor handles every detail of the project for a foreign
client, including the training of operating personnel
• At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full
operation
3. Licensing - a licensor grants the rights to intangible property to the licensee for
a specified time period, and in return, receives a royalty fee from the licensee
• Patents, inventions, formulas, processes, designs, copyrights, trademarks
4. Franchising - a specialized form of licensing in which the franchisor not only

sells intangible property to the franchisee but also insists that the franchisee
agree to abide by strict rules as to how it does business
• Used primarily by service firms
5. Joint ventures with a host country firm - a firm that is jointly owned by two
or more otherwise independent firms
• Most joint ventures are 50–50 partnerships
6. Wholly owned subsidiary - the firm owns 100 percent of the stock
• Set up a new operation
• Acquire an established firm

Why Choose Exporting?
• Exporting is attractive because
• Avoids the costs of establishing local manufacturing operations
• Helps the firm achieve experience curve and location economies
• Exporting can be unattractive:
• There may be lower-cost manufacturing locations
• High transport costs and tariffs can make it uneconomical
• Agents in a foreign country may not act in exporter’s best interest

Rajesh Exports – 462nd Position in Fortune 500
• World’s largest gold company and the only end to end provider across
value chain of gold, headquartered in Bangalore, India (1989)
• Extensive global manufacturing and marketing network with
distribution through exports, wholesale and directly to consumers by
own retail brand
• World’s largest refiner of gold, refines over 35% of world’s gold
• World’s lowest cost gold products producer with state-of-art
manufacturing facilities - located at Bangalore, Cochin and Dubai
• Total Refining capacity – 2,400 tons; Manufacturing – 350 tons
• FY20 Revenue: ~ USD 27 Billion, Net Profit: ~ USD 167 Million
Why Choose a Turnkey Arrangement?
• Turnkey projects are attractive because
• They are a way of earning economic returns from the know-how required to
assemble and run a technologically complex process
• They can be less risky than conventional FDI
• Turnkey projects can be unattractive:
• The firm has no long-term interest in the foreign country
• The firm may create a competitor
• If the firm's process technology is a source of competitive advantage, then

selling this technology through a turnkey project is also selling competitive
advantage to potential and/or actual competitors
L&T Power’s Global EPC Contract
• xx
Why Choose Licensing?
• Licensing is attractive because
• The firm avoids development costs and risks associated with opening a foreign market
• The firm avoids barriers to investment
• The firm can capitalize on market opportunities without developing those applications itself
• Licensing can be unattractive:

• The firm doesn’t have the tight control required for realizing experience curve and location
economies
• The firm’s ability to coordinate strategic moves across countries is limited
• Proprietary (or intangible) assets could be lost
• To reduce this risk, use cross-licensing agreements
Aerospatiale (France) licensed Bharat Dynamics to
produce MILAN Anti-Tank Guided Missile
• BDL is a public sector enterprise who produces defense equipment
Why Choose Franchising?
• Franchising is attractive because
• Avoids the costs and risks of opening up a foreign market
• Firms can quickly build a global presence
• Franchising can be unattractive:
• Inhibits the firm's ability to take profits out of one country to support
competitive attacks in another
• The geographic distance of the firm from its franchisees can make it difficult to
detect poor quality
McDonald’s Franchising in India McDonald’s India Pvt.
Ltd.
• Two joint ventures in India in 1995

50:50 JV with 50:50 JV with
• Franchisee agreements with the JVs Connaught Plaza HardCastle
Restaurants Ltd. Restaurants Pvt. Ltd.
• Hybrid approach (Vikram Bakshi) (Amit Jatia)
• Investments, joint partnerships and franchising

Retail outlets in Retail outlets in West
North and East India and South India
• 2010: Exited JV with Jatia and wanted to
buy out JV with Bakshi
• 2013: Dispute with Bakshi escalated to NCLT when McDonald’s
removed Bakshi from MD’s position
• 2019: Out of court settlement with Bakshi selling off his stakes to
McDonald’s India
Why Choose Joint Ventures?
• Joint ventures are attractive because
• Firms benefit from a local partner's knowledge of the local market, culture,
language, political systems, and business systems
• The costs and risks of opening a foreign market are shared
• They satisfy political considerations for market entry

Why Choose Joint Ventures?
• Joint ventures can be unattractive:
• The firm risks giving control of its technology to its partner
• The firm may not have the tight control to realize experience curve or
location economies
• Shared ownership can lead to conflicts and battles for control if goals and
objectives differ or change over time
Hero-Honda JV in 1984 and Split in 2011
• Original motivation
• Subsequent to independence and until the 1980s, foreign companies were not
permitted to enter the Indian market
• Restrictions on foreign companies were relaxed in mid 1980s and they were
allowed to enter the market through minority joint ventures
• Provided HM Japan a means of entry into Indian markets
• Hero Group, with core business in cycle manufacturing was looking to expand
• Their engineering capabilities, experience in handling large volume production, extensive
distribution networks made them a suitable partner for HM Japan
• Structure of JV
• 26% to each partner, 26% sold to public, remaining to financial institutions
• Performance
• Became world’s largest motorcycle manufacturer by volume in 2001
• Reason for success: HM Japan‘s technical expertise in better fuel
efficient motorcycles supported by Hero Group‘s deep distribution
network
Hero-Honda JV in 1984 and Split in 2011 (contd…)
• Reason for split
• Supply of components from Japan

• HM wanted more component and spares sourcing from Japan, as well as higher royalty on spare
sales
• Reluctance to share key technology

• Euro-V compliant emission technology not shared
• Brand confusion because of Honda Motorcycles and Scooters India (1999)

• High-end bikes were being sold by HMSI
• Bar on exports
• Bajaj Auto was exporting 30% of its production in 2000s, but H-H was not allowed to export as per
JV clause
Why Choose a Wholly Owned Subsidiary?
• Wholly owned subsidiaries are attractive because
• They reduce the risk of losing control over core competencies
• They give a firm the tight control in different countries necessary for global
strategic coordination
• They may be required in order to realize location and experience curve

economies
• Wholly owned subsidiaries can be unattractive:
• The firm bears the full cost and risk of setting up overseas operations
8.7 Selecting an Entry Mode
Which Entry Mode is The Most Suitable?
Entry Mode Advantages • Disadvantages
Exporting • Abilities to realize location and • High transportation costs
experience curve economies • Trade barriers
• Increased speed and flexibility of • Problems with local marketing
engaging target markets agents
Turnkey • Ability to earn returns from • Creation of efficient competitors
projects process technology skills, • Lack of long-term market
especially in countries where FDI presence
is restricted
Licensing • Low development costs and risks • Lack of control over technology
• Moderate involvement and • Inability to realize location and
commitment experience curve economies
• Inability to engage in global
strategic coordination
Which Entry Mode is The Most Suitable? (contd…)
Entry Mode Advantages • Disadvantages
Franchising • Low development costs and risks • Lack of control over quality
• Possible circumvention of import • Inability to engage in global
barriers, and strong sales potential strategic coordination
Joint venture • Access to local partner’s knowledge • Lack of control over technology
• Shared development costs and • Inability to engage in global
risks strategic coordination
• Politically acceptable • Inability to realize location and
• Limited ownership restrictions experience economies
Wholly • Protection of intellectual property • High costs and risks
owned • Ability to engage in global strategic • Need for more human and
subsidiaries coordination non-human resources, and
• Ability to realize location and interaction and integration
experience economies with local employees
How Do Core Competencies Influence Entry Mode?
• The optimal entry mode depends on the nature of a firm’s core
competencies
• When competitive advantage is based on proprietary technological know-

how
• Avoid licensing and joint ventures unless the technological advantage is only transitory,
or can be established as the dominant design
• When competitive advantage is based on management know-how / process

/ brand
• The risk of losing control over the management skills is not high, and the benefits from
getting greater use of brand names is significant
• Utilize combination of franchising and master subsidiary

• JV is also a politically welcome solution
How Do Pressures for Cost Reductions Influence Entry Mode?
• When pressure for cost reductions is high, firms are more likely to
pursue some combination of exporting and wholly owned
subsidiaries
• Allows the firm to achieve location and scale economies and retain some
control over product manufacturing and distribution
• Firms pursuing global standardization or transnational strategies prefer

wholly owned subsidiaries
8.8 Case: World’s Favorite Indian
“The World’s Favorite Indian: Hamara Bajaj”
• Bajaj Auto’s Export Performance Trend
Source: Company website

• Two million units exported!

• Successful in two-wheelers, reasonable growth in three-wheelers!

• Successful in two-wheelers, reasonable success in three-wheelers!

• Share of Bajaj Auto’s Exports (by numbers) across Geography

• Presence across geography – nearly 70 countries

• Long-term performance trend
Year Total income Total forex Export / Sales (%) PBDITA as % Year Total income Total forex Export / Sales (%) PBDITA as %
(Rs. Mil.) earnings (Rs. of total (Rs. Mil.) earnings (Rs. of total
Mil.) income Mil.) income
31-03-1990 10654.60 262.60 2.50 17.48 31-03-2005 71168.60 7291.40 10.97 18.16
31-03-1991 12212.70 260.20 2.11 15.28 31-03-2006 92261.50 9439.10 10.93 19.97
31-03-1992 12801.20 155.30 1.28 15.74 31-03-2007 113877.30 17184.80 16.05 17.30
31-03-1993 13259.90 388.60 2.92 15.50 31-03-2008 101992.20 20777.70 20.90 12.96
31-03-1994 16843.10 732.60 4.34 20.52 31-03-2009 98256.80 26819.10 27.55 14.50
31-03-1995 22921.00 1382.00 6.04 22.85 31-03-2010 126750.40 32689.50 26.18 20.26
31-03-1996 29330.90 2025.30 6.94 23.21 31-03-2011 187525.90 44634.80 25.68 24.51
31-03-1997 34542.80 1621.10 4.99 23.33 31-03-2012 211213.90 66263.00 31.50 20.76
31-03-1998 35040.50 1444.30 4.43 24.15 31-03-2013 219760.40 67695.90 31.78 20.92
31-03-1999 39216.60 1647.30 4.46 23.54 31-03-2014 219042.50 79638.60 37.47 22.80
31-03-2000 42395.30 1430.70 3.69 23.89 31-03-2015 231074.30 94435.10 41.76 19.11
31-03-2001 39727.60 1390.90 3.73 12.28 31-03-2016 249567.90 94000.30 38.84 23.47
31-03-2002 45749.40 1622.90 3.82 21.33 31-03-2017 243100.00 73364.90 36.90 23.23
31-03-2003 50430.10 3579.80 7.45 19.69 31-03-2018 269105.10 92814.60 39.30 22.67
31-03-2004 59168.50 5644.70 10.25 20.14 31-03-2019 324591.50 114342.30 40.10 21.49
• Long-term performance trend
Long-term Performance Trend
350000.00 45.00
300000.00 40.00
35.00
250000.00
30.00
200000.00 25.00
150000.00 20.00
15.00
100000.00
10.00
50000.00 5.00
0.00 0.00
Total income (Rs. Mil.) Export / Sales (%) PBDITA as % of total income
• Key takeaways
• Till 2000, approach to exports was reactive

• Distributors contacted with proposals and BAL actionized
• With Pulsar, BAL motorcycles became competitive in style, performance and

pricing
• BAL also wanted to move away from the home market comfort zone and compete
against the international brands
• Alliance with KTM, the Dutch high performance motorcycle manufacturer, since
2007 helped in R&D and manufacturing, and going forward collaborative initiative
in electric motorcycles
• Countries grouped in three categories
• < 1 lakh units (Colombia, Philippines etc.)
• Central marketing and strategy team to audit and monitor brand performance in markets
• Understand customer acceptance of product and quality
• Check what competitors are doing
• < 5 lakh units, > 1 lakh units (Mexico, Srilanka etc.)
• Individual teams work closely with each national distributor
• Provide marketing and strategy inputs
• Obtain feedback on sales and services network
• > 5 lakh units (Indonesia, Nigeria etc.)
• Country-specific strategies, with stake in dealerships, range of exclusive showrooms
• 3-wheeler sales in in Indonesia in 1980s helped in brand recall – “reliable”
• Competition in Indonesia from expensive Japanese bikes
• Bikes in Nigeria used extensively as 2-wheeler taxis
• Bikes customized for this purpose
• Also launched 3-wheelers in Nigeria
• Dealt with fakes / copycats – “Gulsar” (Chinese) sold in Srilanka, similar ones in
Iran, South America
• Recent progress
• Very strong growth in Africa, as large economies like
Nigeria and the DRC continued to show buoyant demand • Continued recovery in large,
traditional markets such as
• A strong presence in the ASEAN region, aided by growth Egypt and Nigeria
in the Philippines and in new markets like Malaysia
• Strong growth in new markets
• Capitalized on recovery in Egypt and impressive especially Cambodia, Iraq,
economic growth in Bangladesh Myanmar and Nepal
• Stable volumes in Latin America, despite economic • Markets, where it entered

turmoil in Argentina and some political and trade only in the last few years, grew
uncertainties in Mexico by 73% compared to the overall
growth of three-wheelers and
• New licensing agreement with Triumph, British bike quadricycles exports of 43%
maker, to produce 200-750cc Triumph bikes in India
• Questions
• How did Bajaj choose its export countries?
• How does Bajaj take care of localization requirements in different countries?
• Why is Bajaj’s production still concentrated in India?

• This year Bajaj is again (after 2009, 2013) talking about setting up assembly plant in Brazil
• Why Brazil, a market where Bajaj does not export to directly and is dominated by Honda for
decades?
• How different forms of alliances (equity stake in KTM and licensing agreement with
Triumph) help Bajaj Auto?
8.9 Greenfield Investments vs.
Acquisitions
Which is Better – Greenfield or Acquisition?
• The choice depends on the situation confronting the firm
1. A greenfield strategy - build a subsidiary from the ground up
• A greenfield venture may be better when the firm needs to transfer organizationally
embedded competencies, skills, routines, and culture
Which is Better – Greenfield or Acquisition?
2. An acquisition strategy – acquire an existing company
• Acquisition may be better when there are well-established competitors or global

competitors interested in expanding
• The volume of cross-border acquisitions has been rising for the last
two decades
Why Choose Acquisition?
• Acquisitions are attractive because
• They are quick to execute
• They enable firms to preempt their competitors
• They may be less risky than greenfield ventures
• Acquisitions can fail when

• The acquiring firm overpays for the acquired firm
• The cultures of the acquiring and acquired firm clash
• Anticipated synergies are slow and difficult to achieve
• There is inadequate pre-acquisition screening
• To avoid these problems, firms should

• Carefully screen the firm to be acquired
• Move rapidly to implement an integration plan
Why Choose Greenfield?
• The main advantage of a greenfield venture is that it gives the firm a

greater ability to build the kind of subsidiary company that it wants
• But, greenfield ventures take longer to establish and generate returns
• Greenfield ventures are also risky, especially if the economic and

political system in host country is unstable
How Do Firms Choose Acquisitions Over Greenfield
Investments?
Greenfield Investment Cross-border Acquisition
• Will achieve economies of scale and scope in • Gain access to an established market
production, marketing, finance, R&D, logistics • Have skilled workers at your disposal
and purchasing • Instantly acquire the target company’s
• Greater control of all aspects of the business technology, clients and vendors
• Will be able to implement the best long-term • Get instant branding advantage, if present
strategy with solid commitment to the market • One less competitor to deal with
• Control over the brand • Knowledge pool increases
• Better control over staff
• Likely to cost more and delay in ROI • Hidden surprises? Legal/tax issues?
• Local competition will be difficult to overcome • Target’s technology may well be outmoded
• The entry process may take long • Target’s branding and culture is often not in
• Governmental regulations may put the alignment with acquirer
company at a disadvantage • Valuation is tricky
• Potential integration issues
8.10 Strategic Alliances
What are Strategic Business Alliances?
• Strategic alliances refer to cooperative agreements between potential
or actual competitors
• Range from formal joint ventures to short-term contractual agreements
• Vehicles for implementing business strategies that involve other corporate

entity / entities
• May be informal agreements or highly complex legal structures
• Typically short term / medium term
• The number of strategic alliances has exploded in recent decades

Types of Business Alliances
• Forms of business alliances (including legal and informal relationships)
• A - Supplier Contract
• B - Outsourcing
• C - Distribution Agreement
• D - Technology Sharing Degree of Complexity F

/ Integration D
E
• E - Virtual Joint Venture B

C
• F - Equity Joint Ventures

Degree of Commitment
Motivations for Business Alliances
• Risk sharing
• Sharing proprietary knowledge, management skills and resources
• Gaining access to new markets - using other firm’s distribution channel
• Globalization
• Access to foreign markets where laws prohibit 100% foreign ownership or where cultural differences
are substantial
• Cost reduction
• Purchaser / supplier relationships
• Joint Manufacturing
• Prelude to acquisition or exit

Critical Success Factors in Business Alliances
• Clarity of purpose, roles, and responsibilities
• Synergy (e.g., economies of scale/scope; access to new products, distribution channels, and proprietary
know-how)
• Risk reduction
• Cultural alignment
• Win-win situation
• Similar financial expectations
• Support from the top

Typical Issues in Structuring Alliances
• Defining scope (included / excluded products and duration)
• Determining control and management (how are decisions made?)
• How are resources to be contributed (form and value) and how is

ownership determined?
• Tangible contributions (cash or cash commitments and assets required

by the business)
• Intangible contributions (services, patents, brand names, and

technology)
Typical Issues in Managing Alliances
• Governance (protecting stakeholder interests)
• Board or partnership committee?
• Profit/loss and tax benefits allocation and dividend determination
• Dispute resolution and termination

• Who owns assets following dissolution?
• Financing ongoing capital requirements

• What happens if additional capital is needed? Can the alliance borrow? Target
Debt/Equity ratio?
• Performance criteria
• How is performance to plan measured and monitored?
Specific Emerging Market Issues in Alliances
• Political and economic stability
• Country-specific operating conditions
• Staffing and local market resources
• Volatility in local business and legal environment

Equity Joint Venture – Typical Structure
• A corporate structure where tow or more companies form a separate
operating company, jointly funding it, managing it and sharing profits / losses
Company A Company B
Equity Equity
Cash / Assets Cash / Assets
Company C Additional Bank

Funds
• Alternate option is taking equity stakes in each other’s company Source: PWC
Virtual Joint Venture - Structure
• It’s a collaborative arrangement formed through contract
Contract
Company A Company B
Contractual Rights and Contractual Rights and

Economic Returns Economic Returns
Product Launch
Source: PWC
Why Choose Strategic Alliances in International
Expansion?
• Strategic alliances are attractive because they
• Facilitate entry into a foreign market

• Allow firms to share the fixed costs and risks of developing new products or
processes
• Bring together complementary skills and assets that neither partner could
easily develop on its own
• Help a firm establish technological standards for the industry that will benefit
the firm
• But, the firm needs to be careful not to give away more than it
receives
What Makes Strategic Alliances Successful in
International Business?
• The success of an alliance is a function of
1. Partner selection
• A responsible, value-creating partner
• Helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values
• Shares the firm’s vision for the purpose of the alliance
• Will not exploit the alliance for its own ends
• Creates a positive-sum game

2. Alliance structure
• The alliance should
• Make it difficult to transfer technology not meant to be transferred
• Have contractual safeguards to guard against the risk of opportunism by a partner
• Allow for skills and technology swaps with equitable gains
• Minimize the risk of opportunism by an alliance partner

3. The manner in which the alliance is managed
• Requires
• Interpersonal relationships between managers
• Cultural sensitivity is important

• Learning from alliance partners
• Knowledge must then be diffused through the organization

GM, SAIC and MG Motors
• 1995 – GM partnership with Shanghai Automotive Industry Corporation (50:50)
• Mutually beneficial – GM could set up production facility and sell cars in China efficiently
• 2007 – SAIC acquired bankrupt MG Motors of the UK
• 2008 – GM had serious cash-flow issue at its Asian home, South Korea
• 2009 – GM sold additional 1% stake in JV to SAIC to raise funds to save its business in
South Korea
• 2009 – GM USA was bailed out by the government on bankruptcy
• 2010 – GM started unprecedented technology transfer to its Chinese partner
• Over time SAIC absorbed the foreign partner’s technologies related to car design,
engineering, and manufacturing, build cars under its own brand name
• 2017 – GM closed its India operations
• 2017 – Halol plant of GM taken over by SAIC
• 2019 – SAIC starts producing MG Hector from Halol plant – the first “internet” car in
India
A JV partner can weaken a stronger player’s business if there is
imbalance in trust and unfair opportunity seeking attitude https://qz.com/594984/the-secret-history-of-gms-chinese-bailout/
8.11 Strategic Alliance vs. M&A
The Key Differences – Strategic Alliance vs. M&A
Attribute Strategic Alliances / JV M&A
Focus Collaboration and co- Unilateral planning
creation
Agreement negotiation Flexibility Rigidity
Duration Finite Infinite
Benefit and risk allocation Shared Individual
Governance Numerous management One management team
teams
Culture Different for each partner One prevailing culture
Strategic alignment Regular review of alliance Integrate acquisition
Source: PWC
Prescription - When to Ally and When to Acquire
Dimension - Synergy Recommendation

Want sequential synergies – one company Equity JV
completes tasks and passes the results to a partner
to do its part
Want modular synergies – managing resources Non-equity alliance

independently and pooling results for greater
profit
Want reciprocal synergies – both firms execute Acquisition

tasks through close knowledge sharing
Source: Dyer, Kale, Singh

Dimension – Nature of Resources Recommendation

Must combine hard resources (e.g., manufacturing Acquisition
plants) to get the desired synergies
Must combine soft resources (e.g., workforces) to Equity JV

get the desired synergies

Dimension – Redundant Resources Recommendation
Little or no redundant resources Non-equity alliance
Expect some amount of redundancy in resources Equity JV
Expect to be saddled with extensive redundant Acquisition

resources after collaborating with another
organization

Dimension – Market Condition Recommendation

Collaboration's outcome is highly uncertain Equity JV or
Non-equity alliance
Rivals are also potential partners for the target Acquisition

Dimension – Competition Recommendation

Degree of competition for resources is high Acquisition
Medium level of competition Equity JV
Low or no competition for resources Non-equity alliances

M&A vs. Alliance – Another Perspective
Source: Yin and Shangley (2008)

8.12 Case: JCB’s Hopes on Indian
Markets
Context: Entry Strategy of JCB in India
• JCB initially entered India in 1979 when it formed a 40:60 JV with Escorts, an Indian
engineering conglomerate, to manufacture backhoe loaders for sale in India
• JCB had primarily served foreign markets via exports, but high tariffs made direct
exports to India unattractive
• At the same time, government regulations made a wholly owned subsidiary
impossible by requiring foreign investors to create joint ventures with local companies
• By the end of the 1990s, the JV had an 80 percent share of the Indian market
• However, further expansion via the joint venture was difficult, and the company was
concerned about keeping its proprietary technology safe
• Eventually, as government regulations were relaxed, JCB was able to purchase all of
Escorts' equity, transforming the joint venture into a wholly owned subsidiary
• Consequently, JCB increased its investment in India; expanded its dealer network;
and localized production
• The strategy had worked, and the company became the leading manufacturer of
backhoes in the country
Context: Entry Strategy of JCB in India (contd…)
• JCB India revenue
• INR 8100 Cr. In FY18
• Dropped significantly in FY21
• India’s contribution to JCB global sales has shot up…

• From 24 per cent in 2007 to
• A record 39 per cent in 2017
• 3 mfg. facilities in India now (22 total)
• More than 50 products are made in India
• Equipment and components are also exported to over 90 countries

Discussion Questions
• Q1: Why do you think that India was an attractive market for JCB?
• When JCB initially entered the Indian market in 1979, it felt that the market was on
the brink of significant growth
• High tariff barriers prevented JCB from using its usual method of exporting, so it
formed a joint venture with Indian engineering conglomerate, Escorts
• Indian regulations at the time required JCB to partner with local companies
• JCB believed that it was important to gain a strong foothold in the market before other
competitors established a presence
• JCB’s instincts proved to be correct; between 2001 and 2012, JCB’s Indian revenues
increased ten-fold, and the company became the leading manufacturer of backhoes
in the country
• Q2: Historically, JCB entered foreign markets through exports. Why do you think JCB
generally favored exports?
• Until it formed its joint venture with Escorts in 1979, JCB chose exports for its
international expansion
• This strategy allows companies to minimize risk and maintain control
• In JCB’s case, exports offered a level of protection for its proprietary technology and
intellectual property
• Moreover, as it did not involve establishing a physical presence in another market, it

could be very cost effective
• Also, unlike the joint venture with Escorts, JCB earned all of the profits associated
with its exports
• Q3: In India, JCB decided to enter via a joint venture. What was the articulated
rationale for this? In what other ways might the joint venture strategy have benefitted
JCB?
• JCB entered the Indian market in 1979 via a joint venture with Escorts
• The decision to enter via a JV arrangement was prompted by high tariff barriers that
made JCB’s traditional strategy of exporting its products to foreign locations difficult
• In addition, Indian regulations then required foreign investors to form JVs with local
companies ➔ 100% foreign direct investment was initially not an option for JCB
• As JCB had little experience operating in India, the joint venture arrangement offered
the company a means of serving the Indian market without incurring all the risk that
would have been involved in setting up a wholly owned operation
• Another positive aspect of the joint venture was that JCB likely benefitted from its
local partner’s knowledge of India's market, legal system, political system, and
business environment
• Q4: What were the risks associated with the joint venture strategy? How did JCB deal
with these risks?
• While the JV between JCB and Escorts was successful, JCB chose to buy out its partner
• JCB took advantage of changes in government regulations to initially buy a majority
position in the venture in 1999, and later in 2003, buy it outright
• The main benefit of gaining full control of the venture was that JCB could now transfer
its leading edge technologies to the Indian venture without fearing that it could be
creating a future competitor
• Furthermore, since JCB had full control over the venture, it could continue its
expansion in India and benefit from that
• The strategy worked as by 2011, JCB had expanded its dealer network to 400, and had
become the leading manufacturer of backhoes in India
• Q5: What are the benefits to JCB of localizing significant production in India? What are
the disadvantages? Do the benefits outweigh the disadvantages?
• Localizing production in India allowed JCB to be closer to one of its biggest markets
➔ important from a competitive standpoint and from a marketing standpoint
• Being present locally allowed JCB to be more aware of what its competition is doing
and better anticipate the needs of its customers
• Being local – providing jobs and supporting local communities – might give JCB an
edge when it comes to government contracts
• However, the strategy does hold more risk than exporting
• JCB is heavily dependent on growth in India
• If the economy does not prosper, JCB could face significant challenges
• The company is also subject to the whims of the Indian government policies
8.12 Joint Ventures and Partnerships in a
Downturn
JVs in a Downturn
• https://hbr.org/2020/09/joint-ventures-and-partnerships-in-a-downturn
• Analysis of JVs between 2014 and 2017 shows that ROA is significantly
higher than wholly-owned subsidiaries in all sectors, except the utilities
sector
In a economic downturn like Covid-19, how do companies

deal with JVs?
JVs in a Downturn
• Potential actions for existing JVs
• Raise capital in unconventional ways (bring in new PE firms, pension funds)

• These investors may provide in additional managerial and strategic capabilities as well
• Structure creative commercial arrangements with value chain partners
• Reduce cost through unexplored synergies and new business models
• Re-gear financial ratios
• Cooperate in buyout by an owner, if necessary

JVs in a Downturn
• New JVs
• Typically grows in number towards the end of a downturn
• Partial divestment of a struggling business with liquidity issues
• Consolidation of certain business activities with a partner
• Consider capital-light partnership

• With a cash-rich player, looking for some other expertise
• With a cash-strapped player, struggling to run operations
8.13 Cross-Border Acquisitions from
India
Synopsis of Cross-border Acquisitions from India – 2005-
2020
• Largest – Bharti Airtel’s acquisition of Zain’s African telecom business
Drivers for Cross-border Acquisitions
• Search for new markets • Rise of global finance
• Need for new technologies • Attractive assets available for cheap
• Access to resources, including natural • Vertical Integration

resources
• Regulatory evolution
• Product and market diversification
Analysts’ Views on Mahindra-SsangYong in 2010
• M&M would pay $463 million (about ₹ 2,100 crore), split into an equity investment of
$378 million, which would be used to repay the company’s debt, and the balance $85
million would be in the form of corporate bonds
• In return, M&M gets a 70% stake in SsangYong and a global automobile business with
a product portfolio comprising a luxury sedan, four sport utility vehicles and one
multipurpose vehicle
• In FY11 M&M’s shares outperformed the Sensex, and shareholders immediate concern
was whether the acquisition is going to be earnings accretive or a drain on earnings
and weigh down its balance sheet
• Superb performance in FY10-FY11 translated into liquid assets of about ₹ 2,500 crore
• Thus, the firm could fund the acquisition through internal accruals comfortably
• Even if it were to raise debt for the purpose, its low gearing of about 0.4 times in FY10 would
ensure that its balance sheet was not get stretched by the acquisition
Analysts’ Views on Mahindra-Ssangyong in 2010 (contd…)
• After years of loss, SsangYong started making operating profits since the 1Q, CY2010
• Compared with 35,000 vehicles sold in 2008, the firm was selling about 84,000 vehicles in 2010
• Company rationalized costs—the workforce at 4,400 is down to 37% of its original strength
• M&M…
• Would get access to SsangYong’s strong research and development capabilities
• But it would have to invest in developing new models (no new product development since 2003)
• Would harness the 1,300-strong dealer network across 98 countries to market both SsangYong and
M&M brands
• It would look for synergies in manufacturing platforms and processes for both firms
• Would expand product portfolio by leveraging SsangYong’s edge in premium segment utility vehicles
• Shares of M&M closed lower by 0.87% on announcement of the deal
• Opinion: In the longer run, the success of such acquisitions depends on how the two
companies integrate, and feed off each other’s strengths
What Happened Since Then
• M&M infused further capital in SsangYong to raise its stake to more than 74%
• More investments in building R&D capability and production capacity
• Cost structures remained inefficient due to low volume / weak international presence
• It continued to lag Hyundai and Kia in domestic market with shrinking market share (<5% in 2019)
• SsangYong posted profit only in 2016
• Korean market shifted very rapidly from diesel to petrol cars, more rapidly than the
Indian market
• SsangYong’s plants were designed more for output of diesel vehicles
• Its SUVs platforms helped M&M to build own vehicles for the India market
• SsangYong’s Rexton G4 platform is used for Mahindra Alturas G4 and Tivoli platform for its XUV300
variants
What Happened Since Then (contd…)
• M&M engaged with Ford in new joint ventures in FY20, picking up 51% stake in Ford
India
• JV would look at introducing three new utility vehicles under the Ford brand, starting with a new mid-
size sports utility vehicle that will have a common Mahindra product platform and powertrain
• JV will also focus on electric vehicles and both will collaborate to develop vehicles for sustainable
mobility across emerging markets
• JV will use the Ford brand distribution network in emerging markets to extend support for export of
Mahindra products, in addition to Ford-branded vehicles
• M&M took an impairment charges of about ₹600 crores in its own books in FY20 from
SsangYong’s losses
• In FY21, post COVID outbreak M&M rejected SsangYong proposal to invest further in the
company
• SsangYong went into receivership due to non-payment of debt in Dec 2021

What Went Wrong?
• Just an opportunistic attempt at a distress sell?
• Excess cash flow hypothesis!
• Hands-off approach by Mahindra?
• Limited cost synergy?
• Lack of significant global market access (neither Mahindra, nor SsangYong)?
• Lack of R&D and product development leadership?

In Summary…
• Most attractive foreign market tends to be the one that is politically stable, with free
market economy, with no dramatic upsurge in either inflation rate or public sector debt
• The benefits of early entry must be balanced against the pioneering costs, including
greater risk of business failures
• Six modes of entering – exporting, creating turnkey projects, licensing, franchising,

establishing joint ventures, and setting up a wholly owned subsidiary
• The optimal choice depends upon the firm’s strategy
• When establishing WOS, a firm needs to decide whether to do so by greenfield venture

or by acquiring an established player
• Strategic alliances are cooperative agreements between actual / potential competitors,

and it requires trust between parties to mutually benefit from such alliances
Session 10
Global Value Chain

Learning Objectives
• Recognize how firms create value by distributing value addition activities

globally
The iPhone Supply Chain
• Value addition in stages, across countries
• Link: https://www.cnbc.com/2018/12/13/inside-apple-iphone-where-
parts-and-materials-come-from.html
Global Value Chain – Value Addition in iPhone
Source: https://dfat.gov.au/about-us/publications/Documents/export-council-australia-global-value-chains.pdf
iPhone Component Suppliers
• Accelerometer: Bosch Sensortech, based in Germany with • Compass: AKM Semiconductor, based in Japan with locations
locations in the U.S., China, South Korea, Japan, and Taiwan in the U.S., France, England, China, South Korea, and Taiwan
• Audio chips: Cirrus Logic, based in the U.S. with locations in the • Gyroscope: STMicroelectronics. Based in Switzerland, with
U.K., China, South Korea, Taiwan, Japan, and Singapore locations in 35 countries
• Battery: Samsung, based in South Korea with locations in 80 • Flash memory: Toshiba, based in Japan with locations in over
countries 50 countries
• Battery: Sunwoda Electronic, based in China • Flash memory: Samsung
• Camera: Qualcomm, based in the U.S. with locations in • LCD screen: Sharp, based in Japan with locations in 13
Australia, Brazil, China, India, Indonesia, Japan, South Korea, countries; LG, based in South Korea with locations in Poland
and more than a dozen locations through Europe and Latin and China
America; Sony, based in Japan with locations in dozens of • A-series processor: Samsung, Soth Korea; TSMC, based in
countries Taiwan with locations in China, Singapore, and the U.S.
• Chips for 3G/4G/LTE networking: Qualcomm • Touch ID: TSMC, Xintec. Based in Taiwan.
• Glass screen: Corning, based in the U.S., with locations in • Touch-screen controller: Broadcom, based in the U.S. with
Australia, Belgium, Brazil, China, Denmark, France, Germany, locations in Israel, Greece, the U.K., the Netherlands, Belgium,
Hong Kong, India, Israel, Italy, Japan, South Korea, Malaysia, France, India, China, Taiwan, Singapore, and South Korea
Mexico, Philippines, Poland, Russia, Singapore, South Africa,
Spain, Taiwan, The Netherlands, Turkey, the U.K., and the • Wi-Fi chip: Murata, based in the U.S. with locations in Japan,
United Arab Emirates Mexico, Brazil, Canada, China, Taiwan, South Korea, Thailand,
Malaysia, Philippines, India, Vietnam, The Netherlands, Spain,
the U.K., Germany, Hungary, France, Italy, and Finland
Source: https://www.lifewire.com/where-is-the-iphone-made-1999503
iPhone Assemblers
• Foxconn, Pegatron and Wistron
• Plants in China, Thailand, Malaysia, the Czech Republic, South Korea, Singapore,
Philippines, and India
Source: https://www.lifewire.com/where-is-the-iphone-made-1999503
Global Value Chain – Trade Flows
Source: https://www.wto.org/english/res_e/statis_e/miwi_e/
• Domestic value added sent to consumer economy ➔ Domestic value
added embodied either in final or intermediate goods or services that is
directly consumed by the importing economy
• Domestic value added sent to third economies ➔ Domestic value added
contained in intermediates (goods or services) exported to a partner
economy that re-exports them to a third economy as embodied in other
products
• Domestic value added re-imported in the economy ➔ Domestic value
added of exported intermediates, or inputs, that is sent back to the
economy of origin as embodied in other intermediates and used to
produce exports
• Foreign value-added content of exports ➔ Value added of inputs that
were imported in order to produce intermediate or final goods/services to
be exported Source: https://stats.oecd.org/Index.aspx?DataSetCode=TIVA_2018_C3
Decomposition of Gross Exports into Value-added
Exports
• Backward GVC participation ➔ Ratio of the "Foreign value added content
of exports" to the economy's total gross exports
• This is the "Buyer" perspective or sourcing side in GVCs, where an economy

imports intermediates to produce its exports
• Forward GVC participation ➔ Ratio of the "Domestic value added sent to

third economies" to the economy's total gross exports
• It captures the domestic value added contained in inputs sent to third economies
for further processing and export through value chains
• This is the "Seller" perspective or supply side in GVC participation.
Source: https://stats.oecd.org/Index.aspx?DataSetCode=TIVA_2018_C3
Global Value Chain – TiVA Database
• Backward and Forward GVC participation ➔
2015 Export Data: TiVA Database (US$ Mil.)
Export of
Backward intermediate
Domestic Forward
Total Export Prior Value GVC products with
Value Add GVC
Product / Services Country (EXGR) Add Participati value addition in
(EXGR_DVA) Participation
[A] [C=A-B] on the country
[B] [D/A]
[C/A] (FD_EXGRINT_VA)
[D]
D26: Computer,
electronic and optical China 30.48% 53.54%
493,075.50 342,783.90 150,291.60 264,001.20
equipment
D26: Computer,
electronic and optical India 36.83% 50.66%
3,071.00 1,940.10 1,130.90 1,555.80
equipment
D26: Computer,
electronic and optical Germany 23.60% 53.09%
50,763.70 38,783.90 11,979.80 26,950.00
equipment
Global Value Chain – TiVA Database
• Backward and Forward GVC participation ➔
2015 Export Data: TiVA Database (US$
Mil.)
Export of
Backward intermediate
Total Domestic
Prior Value GVC products with Forward GVC
Export Value Add
Product / Services Country Add Participati value addition in Participation
(EXGR) (EXGR_DVA)
[C=A-B] on the country [D/A]
[A] [B]
[C/A] (FD_EXGRINT_VA)
[D]
D62T63: IT and Other

China 9.71% 799.40 37.90%
Information Services 2,109.50 1,904.60 204.90
India 7.62% 29,605.10 37.72%
Information Services 78,478.00 72,498.70 5,979.30
Germany 10.14% 8,171.60 43.51%
Information Services 18,781.30 16,877.50 1,903.80
• Examples of Forward and Backward GVC participation (2014)
Source: http://www.nber.org/papers/w23222
Source: https://rsa.tandfonline.com/doi/abs/10.1080/23792949.2016.1149434
Global Value Chain – Smile Curve
• Transition in level of value addition in value chain activities
Post 2000’s
Value
Addition Pre 2000’s
Pre-production Production Post-production

Intangible Tangible Intangible
Value Chain Activities →

Source: Mudambi, 2007
Benefits of GVC Participation
• The trade, investment, and knowledge flows that underpin GVCs, provide
mechanisms for rapid learning, innovation, and industrial upgrading
• Complex GVC-related cross-border production-sharing activities are the

most important force driving globalization and the growth of global GDP
• Both upstream suppliers of intermediates and downstream users of

foreign inputs benefit from production networks equally
• Participating in GVCs can stimulate productivity growth through the

potential for firm specialization in core tasks, access to imported inputs,
knowledge spillovers from foreign firms, and pro-competitive effects of
foreign competition Source: https://www.imf.org/~/media/Files/Publications/WP/2019/wp1918.ashx
Question: Not Joining RCEP – Will India Lose Out on GVC
Participation?
• Value addition in most of the industries happens across countries, in stages
• If India does not enjoy free trade with other Asian industrial nations, will
India be part of GVC?
Source: https://www.wto.org/english/res_e/statis_e/miwi_e/
Additional References on GVC
• https://www.wto.org/english/res_e/booksp_e/gvc_dev_report_2019_e.pdf
• https://www.wto.org/english/res_e/statis_e/miwi_e/CN_e.pdf
• https://www.wto.org/english/res_e/statis_e/miwi_e/IN_e.pdf
• https://stats.oecd.org/Index.aspx?DataSetCode=TIVA_2018_C1
• https://gvcc.duke.edu/wp-content/uploads/DigitalEconomyGVCsAsia2018.pdf
In Summary…
• Entering foreign markets through exports, though less capital intensive and fast, do have
challenges
• Limited understanding of opportunities
• Procedural issues, and delays, especially applicable for new exporters
• Uncertainty around tariff and non-tariff barriers imposed by foreign government
• Licensing and franchising, though they address some of these issues, have their limitations too
• FDI (greenfield investment / cross-border acquisition / equity joint venture) are high in complexity
and commitment and may offer long-term value proposition
• However, spreading production activities across global locations offer best utilization of diverse
factor conditions
• Global value chain alters the way value addition happen in products and services before they
reach the final customers
Thank You
arindam@tapmi.edu.in
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International Business

Global Business Strategy

• Recognize how firms create value by expanding globally

• Understand how strategic choices are shaped by pressures for cost

• Identify and choose strategies for companies to compete globally

…headquartered in Hong Kong,

…incorporated in the British Virgin Islands,

…listed on the New York Stock Exchange,

…owned primarily by international institutional investors,

…held its annual meeting [of shareholders] in Barbados,

…sourced production to manufacturers in Mexico and Asia,

…licensed its name to producers globally, and

…retailed its ‘classic American clothing’ in Europe and North America.”

- G.F. Davis, Handbook of Economic Sociology, pp. 480-481.

Currency Uniform Different currencies and exchange rates

Economy Stable and uniform May be variable and unpredictable

Government Stable May be unstable

Language Generally a single language Different languages and dialects

1. Expand their market

2. Realize location economies

3. Realize greater cost economies from experience effects

4. Earn a greater overall return

• The success of firms that expand internationally depends on

• The features and characteristics of the goods or services sold

• The firm’s core competencies

• Core competencies - skills within the firm that competitors cannot

• Can exist in any value creation activity

• Core competencies allow firms to reduce the costs of value creation

• Location economies refer to the economic advantages that arise from

• By achieving location economies, firms can

• Differentiate their product offering

• Firms that take advantage of location economies in different parts of

• The experience curve refers to the systematic reductions in production

• When labor productivity increases

• Individuals learn the most efficient ways to perform particular tasks

• Managers learn how to manage the new operation more efficiently

The Experience Curve

• Economies of scale - the reductions in unit cost achieved by producing

• Sources of economies of scale include

• Spreading fixed costs over a large volume

• Utilizing production facilities more intensively

• Increasing bargaining power with suppliers

2. Establish an incentive system that encourages local employees to acquire new

4. Act as facilitators to help transfer skills within the firm

• Firms that compete in the global marketplace face two conflicting

• Dealing with both pressures is challenging

1. Pressures for cost reductions

2. Pressures to be locally responsive

Pressures for Cost Reductions and Local Responsiveness

• Pressures for cost reductions are greatest

1. In industries producing commodity-type products that fill universal needs

2. When major competitors are based in low cost locations

3. Where there is persistent excess capacity

4. Where consumers are powerful and face low switching costs

• Pressures for local responsiveness arise from

1. Differences in consumer tastes and preferences

2. Differences in traditional practices and infrastructure

4. Host government demands

Direct • Allows complete control • Expensive

• UNCTAD Transnationality Index

• There are four basic strategies to compete in international markets

• The appropriateness of each strategy depends on the pressures for

Four Basic Strategies

The extent to which company’s products and