Entry Strategies and Organizational Structure How an MNC develops and implements entry strategies and ownership structures. The major types of organizational structures used in managing international operations. The advantages and disadvantages of each type of organizational structure, including the conditions that make one preferable to others.

DEVELOPED MARKETS North America Western Europe Japan Australia and New Zealand 0 20 40 60 80 100 % OF RESPONDENTS

EMERGING MARKETS 20 40 60 80 100 % OF RESPONDENTS

Wholly Owned Subsidiary An overseas operation that is totally owned and controlled by an MNC. MNC’s desire for total control and belief that managerial efficiency is better without outside partners. Today many multinationals choose a merger, alliance, or joint venture rather than a fully owned subsidiary. Why?

Mergers and Acquisitions The cross-border purchase or exchange of equity involving two or more companies. The strategic plan of merged companies often calls for each to contribute a series of strengths toward making the firm a highly competitive operation. R/N yes. D/C no. Purchase and pooling of interest accounting

Alliances and Joint ventures Any type of cooperative relationship among different firms. International joint venture (IJV) An agreement under which two or more partners from different countries own or control a business Non equity venture Equity joint venture Advantages Improvement of efficiency Access to knowledge Political factors Collusion or restriction in competition

Licensing An agreement that allows one party to use an industrial property right in exchange for payment to the other party By licensing to a firm already there, the licensee may avoid entry costs Licensor usually may be a small firm that lacks financial and managerial resources Companies that spend a relatively large share of their revenues on research and development (R&D) are likely to be licensors Companies that spend very little on R&D are more likely to be licensees

Franchising Business arrangement under which one party (the franchisor) allows another (the franchisee) to operate an enterprise using its trademark, logo, product line, and methods of operation in return for a fee Widely used in the fast-food and hotel/motel industries With minor adjustments for the local market, it can result in a highly profitable international business

Import and Export Often the only available choices for small and new firms wanting to go international Provide an avenue for larger firms that want to begin their international expansion with a minimum of investment Exporting and importing can provide easy access to overseas markets Strategy usually is transitional in nature

Basic Organizational Structures Initial division structures Subsidiary Common for finance-related businesses or other operations that require an onsite presence from the start Export arrangement Common among manufacturing firms, especially those with technologically advanced products On-site manufacturing operations In response to local governments when sales increase Need to reduce transportation costs

Basic Organizational Structures Chief Executive Office Home-office departments Production Marketing Finance Human Resources V.P. International Operations Overseas subsidiaries China Japan Germany Australia Vietnam Use of Subsidiaries during the Early Stage of Internationalization

Problem 1, Bond Pricing Notes and Bonds payable Notes are at Face value, and may be sold after underwriting. Bonds mature at face value, and are traded and valued inversely with interest rate fluctuations.

Problem 2, Cost of Equity Capital Example: 1. US Beta IBM = 1.0 which is the average B risk level, meaning = to the market. 2. Expected rate of return = 12%. 6% for the risk, then extra volatility (B). 3. U.S. Treasury bill = 6%. CAPM = 6% + (12% - 6%)(1.0) = 12%. Real world = 6% + 6% = 12%.

Problem 3, Weighted Average Cost of Capital after tax borrowing cost and the cost of equity capital.

Problem 4, Mergers and Acquisitions EBITDA X 3 Cash flow from operations X 3 – 5 DCF of future cash flows (NPV) Purchase companies by assets or earnings. Stock buy Publicly traded stock, higher multiples Wall Street Road Shows, White Knight vs. Venture Capital Real world valuations

Problem 5, Goodwill Goodwill = Purchase Price – Fair Market Value of Net Assets

Problem 6, Project Expansion – Capital Budgeting NPV - the PV of future cash flows minus the purchase price IRR - is a rate of return used to measure the profitability of an investment Payback - period of time required for the return on an investment to repay the sum of the original investment.

Problem 7, Entry Strategies Mergers Acquisitions Alliances Joint ventures Licensing Franchising Import Export

M&A and Valuations How to buy…asset or earnings Goodwill NPV, IRR, EVA, Payback

Renault/Nissan I. Introduction: Introduce Renault. Interesting history. 1. History from startup until alliance. 2. Their cars and market. 3. Fundamentals (summary) of their financial condition. Introduce Nissan 1. History from startup until alliance. 2. Their cars and market 3. Summary of their financial condition. Page 1.

Renault/Nissan II. The Alliance: - Page 1, Introduce RNBV - Page 1, Renaults infusion of capital - Page 1,2,3,4 The deal and history of the Alliance - Page 4,17 Synergies, what did each bring to the table? - Page 4,5 CCT’s, summary of these - Page 6, Six major project areas - Page 9 Kaizen - Page 10 Difference in French and Japanese - Page 13,14, a little on the culture, like a marriage

Renault/Nissan III. Financial: - Renault - Key ratios in trends, charts are fine, to include, share price, current ratio, debt to net worth, gross profit %, net profit %, EPS, revenue, and net income. Bring current in Euros. - Nissan - As above, and comparisons. Bring current in Yen.

Renault/Nissan IV. Summary: - Did the Alliance work? Financial support. - Current niche of each manufacture - Where do they combined rank? - Strategy – what is their future?