INTERNATIONAL BUSINESS STRATEGIES Andrey G. Medvedev, Professor September 21, 2009 CEMS MIM Programme

© Andrey Medvedev 6. FOREIGN OPERATIONS METHODS: NON-INVESTMENT MODES 1. FOREIGN ENTRY: A MODEL FOR ANALYSIS 2. COMMERCIAL OPERATIONS (FOREIGN TRADE) 3. EXPORTING SERVICES 4. LICENSING 5. FRANCHISING 6. CONTRACT MANUFACTURING

© Andrey Medvedev FOREIGN OPERATIONS METHODS Responsibilities of International Manager Responsibilities of International Manager: opportunities and risks n Evaluate opportunities and risks of entering foreign economy local responsiveness n Define a degree of local responsiveness foreign operations method n Select a foreign operations method strategic partnerstarget companies n Search for strategic partners and target companies abroad

© Andrey Medvedev FOREIGN ENTRY: A MODEL FOR ANALYSIS Competences, values, overall strategy & OD entry mode; entry-mix; entry stages PEST-factors of opportunities and threats Implementation Goals of internationalisation Development (real option) Industry (SBA) / product nature (multi-domestic vs. global) Current performance Reasons to internationalise

© Andrey Medvedev FOREIGN MARKET AND/OR INDUSTRY ENTRY: BASIC DECISIONS COUNTRY SELECTION n WHICH MARKET / INDUSTRY? COUNTRY SELECTION ENTRY GOALS n WHAT OPPORTUNITIES? ENTRY GOALS TIMING OF ENTRY n WHEN TO ENTER? TIMING OF ENTRY ENTRY MODE n IN WHICH FORM? ENTRY MODE DEGREE OF INTERNATIONALISATION n ON WHAT SCALE? DEGREE OF INTERNATIONALISATION

© Andrey Medvedev FOREIGN OPERATION METHODS (FOM): HOW? n FOREIGN OPERATION METHOD (MODE) = PARTICIPATIVE STRATEGY –ANY TYPE OF BUSINESS ACTIVITY THAT CROSSES NATIONAL BORDERS n INTERNATIONAL COMMERCIAL OPERATIONS n INTERNATIONAL CONTRACTUAL OPERATIONS n FOREIGN DIRECT INVESTMENT MODES

© Andrey Medvedev HOW? NON-INVESTMENT MARKET ENTRY – COMMERCIAL MODES PHYSICAL GOODS n COMMERCIAL OPERATIONS IN PHYSICAL GOODS –INDIRECT AND DIRECT EXPORTING R & D, KNOWLEDGE, KNOW-HOW n EXPORTING R & D, KNOWLEDGE, KNOW-HOW –SELLING R & D PROJECTS, ETC. SERVICES n PROVISION OF SERVICES CONSULTING ENGINEERING –PROVIDING CONSULTING AND ENGINEERING SERVICES

© Andrey Medvedev NON-INVESTMENT MARKET ENTRY – RECENT TRENDS IN RUSSIA n PROMISING OPPORTUNITIES n PROMISING OPPORTUNITIES IN SOME SECTORS: –HIGH DEMAND –GROWING PURCHASING POWER –INDUSTRIAL DEVELOPMENT n CONTROLDIRECT EXPORTATION n CONTROL: MOVING TO DIRECT EXPORTATION EXPANSIONDISTRIBUTION n MARKET EXPANSION: MOVING TO DISTRIBUTION n “A HOME MARKET ABROAD”

© Andrey Medvedev EXPORT OPERATIONS

© Andrey Medvedev EXPORT STRATEGIES n INDIRECT EXPORTING AGENTS DISTRIBUTORS –A FIRM DELEGATES EXPORTING FUNCTIONS TO OUTSIDERS (AGENTS OR DISTRIBUTORS) –THEY USUALLY HAVE A KNOWLEDGE OF LOCAL METHODS OF CONDUCTING BUSINESS AND THE ABILITY TO ACHIEVE A MARKET SHARE MORE RAPIDLY n DIRECT EXPORTING –A COMPANY CARRIES OUT EXPORT TASKS DIRECTLY BY ITSELF (MARKET RESEARCH, INTERNATIONAL INSURANCE, PRICING, FINANCING, ACCOUNTING, SHIPPING AND PREPARING EXPORT DOCUMENTATION)

© Andrey Medvedev FOREIGN TRADE AGENCY EFFICIENCY n TRADING WITHIN A NARROW WELL-EXAMINED SEGMENT OF THE MARKET n REDUCED DISTRIBUTION COST n SHORTER DELIVERY TERMS n PRE-SALES SERVICE AND POST-SALES MAINTENANCE n PROVIDING AN EXPORTER WITH A DATA ON QUALITY LEVELS AND COMPETITIVENESS OF GOODS IN A MARKET SEGMENT

© Andrey Medvedev FROM INDIRECT TO DIRECT EXPORTATION: VALIO n Valio Group n Valio Group comprises the parent company, Valio Ltd, and its subsidiaries in Finland, Sweden, Belgium, Estonia, Latvia, Lithuania, Russia, and the US. n Production facilities are located in Estonia and Belgium. Valionet turnover was EUR 1.6 billion n In 2005, Valio Group net turnover was EUR 1.6 billion. 10 percent n International operations account for one-third of net turnover. Russia attracts about 10 percent of the Group turnover. subsidiary n ZAO Valio St. Petersburg, Valio Ltd’s subsidiary was founded in 1994 to support exports. only importer n Since 2002, ZAO Valio SPb is the only importer of Valio products in Russia. n Local marketing n Local marketing is designed especially for Russia.

© Andrey Medvedev PURE MARKET ENTRY: HONDA Honda Motor Co wholly owned sales and after-service unit n Japan’s Honda Motor Co. said in April 2004 it had set up a wholly owned sales and after-service unit in Moscow to boost demand for its cars in the Russian market. n The Russian auto market has grown from around 0.9 million units in 2000 to 1.2 million in 2003, and is set to expand even more. from its British and Japanese factories n Honda imports the Civic compact, Accord sedan and CR-V sport utility vehicle, among others, from its British and Japanese factories for the Russian market.

© Andrey Medvedev TRADE IN SERVICES n ENGINEERING n BUSINESS CONSULTING n TRANSPORTATION & COMMUNICATION n CONSTRUCTION n TOURISM

© Andrey Medvedev INTERNATIONAL ENGINEERING n ENGINEERING –PROVIDES A FOREIGN CUSTOMER WITH A PACKAGE OF SERVICES TO SUPPORT AND ENSURE A PRODUCTION PROCESS, MAINTAIN THE CONSTRUCTION AND OPERATION OF INDUSTRIAL PROJECTS n ENGINEERING INCLUDES –PRE-PROJECT SERVICES –PROJECT SERVICES –POST-PROJECT SERVICES –RECOMMENDATIONS AND INSTRUCTIONS

© Andrey Medvedev EXPORTS OF INDUSTRIAL PROJECTS n INDUSTRIAL PROJECT n INDUSTRIAL PROJECT: A CONCEPT –DESIGN –FULL EQUIPMENT –FULL EQUIPMENT (COMPLETE DELIVERIES) –TURNKEY OPERATIONS –TRAINING –POST-PROJECT SERVICES n PROJECT MANAGEMENT n FINANCING INTERNATIONAL PROJECTS JOINT VENTURE –PROJECT IMPLEMENTATION BY A JOINT VENTURE –PROJECT FINANCING –COMPENSATION (BUY-BACK) AGREEMENT TRADE IN EQUIPMENT (A SELLER OF EQUIPMENT RECEIVES PAYMENT AS GOODS PRODUCED AT THIS EQUIPMENT) –PRODUCTION SHARING AGREEMENT

© Andrey Medvedev HOW? NON-FDI MARKET ENTRY – CONTRACTUAL MODES n LICENSING n FRANCHISING n MANAGEMENT CONTRACTS n CONTRACT MANUFACTURING n OEM-AGREEMENT n LOW INVESTMENT RISK n LEARNING n LEARNING LOCAL CONDITIONS MULTI-DOMESTIC SECTORS OPPORTUNITIES ARE LOWRISKS HIGH n SUIT WELL IN MULTI-DOMESTIC SECTORS IF BUSINESS OPPORTUNITIES ARE LOW (OR RISKS HIGH)

© Andrey Medvedev LICENSING: HOLSTEN BRAUEREI Holsten Brauerei AG Kaluga brewery n In 2002, Holsten Brauerei AG has signed a long-term contract with Kaluga brewery in Russia for the latter to produce Holsten Premium and Holsten Festbier under license for 15 years. n The long-term deal caps a pilot partnership that has been running for two years, when Holsten sales in Russia grew by almost 50 percent. Holsten has over 16 percent of the booming licensed beer market in Russia. n All raw materials, from malt to bottles, are supplied by Holsten Brauerei. SAB is responsible for manufacturing, promotion and sales. Producing Holsten in Kaluga is 30 percent cheaper than in Hamburg. n Kaluga Brewing Company was acquired by South African Breweries (SAB) in It produces its own beer brand “Zolotaya Bochka“ and about 16 percent of all licensed beer production in Russia.

© Andrey Medvedev LICENSING: CHRYSLER n GAZ Chrysler n GAZ, the country’s second-largest automotive firm, invested $150 million in two new cars, based on older-generation Chrysler models. n The company, which is best known for its Volga sedan, will buy licenses and equipment to produce Chrysler Sebring and Dodge Stratus sedans under its own brand in Russia. Chrysler is now working on new versions of both the Sebring and Stratus models. n Under the deal, GAZ transfered older manufacturing equipment from Chrysler’s Sterling Heights, Michigan, plant to Nizhny Novgorod, where the Volga is made. GAZ also plans to buy engines from Chrysler’s engine plant in Saltillo, Mexico. n The models were restyled and adapted to Russian roads. n The first cars based on the Chrysler technology are expected to roll off the production line in GAZ plans to initially produce 65,000 cars per year. Output could be increased if necessary.

© Andrey Medvedev INTERNATIONAL FRANCHISING FRANCHISER FRANCHISEE n AN ACTIVITY WHEN A FRANCHISER FROM ONE COUNTRY TRANSFERS TO A FRANCHISEE IN ANOTHER COUNTRY THE RIGHT TO USE ITS TRADEMARK AND OTHER RIGHTS AS WELL AS THE RESOURCES REQUIRED FOR DOING BUSINESS BUSINESS IDEA n SELLING A BUSINESS IDEA AS THE WHOLE RATHER THAN A PARTICULAR PRODUCTION PROCESS

© Andrey Medvedev FRANCHISING AS A FOREIGN MARKET ENTRY MODE n «TRADE» FRANCHISING n FRANCHISING PLUS A «LICENSE» FOR MANUFACTURING –SOFT-DRINK MANUFACTURING n BUSINESS FRANCHISING –FAST-FOOD RESTAURANTS n SERVICE FRANCHISING –CAR REPARING

© Andrey Medvedev FRANCHISING: KOTIPIZZA Kotipizza Oyj n Finnish home delivery pizza restaurant chain, Kotipizza Oyj, was founded in With €53 million turnover, today it is the second largest in Europe. It has over 220 restaurants in 100 locations all over Finland. franchise n Kotipizza is a 90 percent franchise chain. n Kotipizza Oyj is planning to open about 60 restaurants in St. Petersburg.

© Andrey Medvedev MANAGEMENT CONTRACT: ORIENT-EXPRESS HOTELS Orient-Express Hotels Grand Hotel Europe Kempinsky Hotels & Resorts n In February 2005, British hospitality chain Orient-Express Hotels acquired a 93.5 percent stake in St. Petersburg’s historic Grand Hotel Europe from Germany’s Kempinsky Hotels & Resorts. n Orient-Express owns and manages 48 properties, including hotels, restaurants, tourist trains and river cruises in 28 countries. The company doesn’t usually build its hotels, preferring instead to buy historical or original properties. n The managers plan to bring in an Orient-Express designer to create a more traditionally Russian interior with a local artist.

© Andrey Medvedev MANAGEMENT CONTRACT: TELEFONICA Telefonica management services n An Argentine subsidiary of Telefonica, a Spanish-based telecommunication corporation, has to pay 4.6 percent of its revenue to Telefonica for management services provided by the parent company.

© Andrey Medvedev CONTRACT MANUFACTURING n CONTRACT MANUFACTURING –THE EMPLOYMENT BY ONE FIRM OF AN ESSENTIALLY UNRELATED FIRM TO MANUFACTURE SPECIFIED PRODUCTS FOR DELIVERY BACK TO ITSELF n MAY SERVE AS A FOREIGN ENTRY MODE OR AS FOREIGN SOURCING

© Andrey Medvedev CONTRACT MANUFACTURING AS A FOREIGN MARKET ENTRY MODE n TELECOMMUNICATION EQUIPMENT n COSMETICS n CONFECTIONERY

© Andrey Medvedev CONTRACT MANUFACTURING: ALFRED RITTER GmbH & Co. KG Alfred Ritter GmbH Co. n In 2002, Russia's Odintsovo Confectionery Factory in Moscow region (the A. Korkunov brand) and German chocolate company Alfred Ritter GmbH Co. have signed a $20 million deal on joint production of chocolate. The two companies each invested $10 million in the project. With the new line, the factory increased capacity to produce 25,000 tonnes of confectionery products per year. About a fifth of this was allocated for chocolate under the Ritter Sport brand. The remainder will be produced under the A. Korkunov brand. n During only five years, Ritter Sport occupied 5.3 percent of the Russian market (it is now number 7 chocolate-bar producer in Russia). n In 2007, a new chocolate factory wholly-owned by Alfred Ritter will start its production in Moscow Region.

© Andrey Medvedev CONTRACT MANUFACTURING CONTRACTOR MARKET OFFICE