Chapter 7: Implementing Strategy: Strategic Alliances; Small Businesses; Emerging Economy Firms Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Chapter Learning Goals Realize that much of international business is conducted through strategic alliances. Understand the reasons that firms seek international business allies and the benefits they bring. Become familiar with the ways that SMEs can expand through alliances with MNCs Recognize the changing factors, opportunities, and threats involved in joint ventures in the Russian Federation. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Chapter Learning Goals Focus on how emerging economy firms can implement expansion strategies Understand the complexities involved in managing international joint ventures. Appreciate the governmental and cultural factors that influence strategic implementation; as well as the impact of e-commerce. Copyright ©2014 Pearson Education, Inc.

Chapter Learning Goals Realize that much of international business is conducted through strategic alliances. Copyright ©2014 Pearson Education, Inc.

Opening Profile: From BP and Exxon: Beware the Alliance with the Bear Exxon-Mobil and OAO Rosneft: partnership of $500 billion in investments BP-Rosneft deal: BP’s shareholders blocked the deal; BP’s Moscow offices raided BP’s executive visas revoked; Deutsche Bank’s Moscow office raided  investors are reluctant to invest in Russia The foundation of Haeir’s human resource management strategy is rigorous performance management. As it grew, Haeir acquired 18 companies that it identified as running at a loss. Haeir learned about the U.S. market by supplying small refrigerators to Wal-Mart stores as Haeir built their internationalization competencies. Haeir uses a three-pronged approach to internationalization that includes a localization strategy combining design, production and marketing network as the core of its global branding strategy. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Chapter Learning Goals Understand the reasons that firms seek international business allies and the benefits they bring. Copyright ©2014 Pearson Education, Inc.

Strategic Alliances (Cooperative Strategies) Partnerships between two or more firms that combine financial, managerial, and technological resources and their distinctive competitive advantages to pursue mutual goals Alliances are transition mechanisms that propel the partners’ strategies forward faster than would be possible for each company alone. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Chapter Learning Goals Become familiar with the ways that SMEs can expand through alliances with MNCs. Copyright ©2014 Pearson Education, Inc.

Categories of Strategic Alliances Joint Ventures: Starbucks and Tata Global beverages Equity Strategic Alliances: Daiichi-Sankyo 51% in Ranbaxy Non-Equity Strategic Alliances: UPS and Nike Global Strategic Alliances Joint ventures (JVs) are independent entities jointly created and owned by two or more parent companies. An international joint venture (IJV) is a joint venture among companies in different countries. The JV form for a firm may comprise a majority (more than 50% equity), a minority (less than 50% equity), or may be 50-50 (equal equity). An example of a 50-50 IJV is between France’s PSA Peugeot-Citroen Group and Japan’s Toyota in the Czech Republic. From this IJV Toyota gains knowledge of suppliers and their capabilities from one of Europe’s biggest indigenous car makers. Peugeot-Citroen gains experience from Toyota’s manufacturing system. In equity strategic alliances two or more partners have different relative ownership shares in the new venture. An example is TCL-Thompson Electronics. France’s Thompson owns 33% of the combined company and China’s TCL owns 67%. Most global manufacturers have equity alliances with suppliers, sub assemblers, and distributors. In non-equity strategic alliances, agreements are carried out through contract rather than ownership sharing. Such contracts are often with suppliers, distributors, or manufacturers, but they also may be for the purposes of marketing and information sharing. An example is UPS, which has a non-equity alliance with Nike. Nike contracts with UPS to manage its entire supply chain from factory, to warehouse, to customer, to repair. Global strategic alliances are working partnerships between two or more companies across national boundaries and/or industries. Alliances also can be formed between companies and governments. Alliances may comprise full global partnerships (e.g., joint ventures in which two or more companies retain their national identities but develop a common, long-term strategy), or they may be more narrow and specific (e.g., aimed at production, marketing, or research and development). For example, Covisint has redefined the entire system of car production and distribution through a common electronic marketplace. Covisint is an e-business exchange developed by Daimler-Chrysler AG, Ford, General Motors, Nissan, and Renault. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Global and Cross-Border Alliances: Motivations and Benefits To avoid import barriers, licensing requirements, and protectionist legislation To share the costs of research and development of new products and processes To reduce political risk while making inroads into a new market In the semi-conductor industry each new generation of memory chips is estimated to cost more than $1 billion to develop and technological evolution is rapid. In this and similar industries, such endeavors usually require the resources of more than one firm. For example, Toshiba has more than two dozen major joint ventures and strategic alliances around the world. Alliances can reduce political risks while making inroads into a new market. Hong Kong Disneyland is jointly owned by the Chinese government, which owns a 57% stake. Beijing is interested in promoting tourism through the venture and in the employment of 5,000 Disney workers and 18,000 workers in related services. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Global and Cross-Border Alliances: Motivations and Benefits To gain access to specific markets where regulations favor domestic companies; China, Russia To gain rapid entry into a new or consolidating industry and to take advantage of synergies Firms are forming strategic alliances with European companies to bolster their chances of competing in the European Union and to gain access to markets in Eastern Europe as they open up to world business. Finally, alliances can help gain rapid entry into a new or consolidating industry and to take advantage of synergies. Technology is providing means for the overlapping and merging of traditional industries such as entertainment, computers, and telecommunications in new digital-based systems. In many cases, technological developments are necessitating strategic alliances across industries in order to gain entry into areas in which they have no expertise or manufacturing capabilities. Competition is so strong that they cannot afford to wait to develop those resources alone. For example, an alliance with Japan’s NEC gave AT&T access to new semiconductor and chip making technologies, helping it learn how to better integrate computers with communications. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Challenges in Implementing Global Alliances Alliances: faster and less risky route to globalization Problems with Shared ownership Differences in national cultures Integration of vastly different Conflicts in decision making and control Copyright ©2014 Pearson Education, Inc.

Exhibit 7-2 Copyright ©2014 Pearson Education, Inc.

Challenges in Implementing Global Alliances Many alliances fail or end up in takeover Choosing the right form of governance The benefits of cooperation versus the dangers of new competition A recent survey by McKinsey & Company of 150 companies in alliances found that 75% had been taken over by Japanese partners. Many of the issues associated with international activities already discussed also contribute to the difficulty of creating successful alliances. These include problems with shared ownership, differences in national cultures, the integration of different structures and systems, the distribution of power, and conflicts about the locus of decision making and control. Choice of governance—either contractual agreement or joint venture—often depends on the desire to control information about proprietary technology. Joint ventures provide greater control and coordination in high-technology industries. Often cross-border partnerships become a “race to learn,” with the faster learner later dominating the alliance and rewriting its terms. Partners also often have problems with mistrust and secrecy when it comes to competitively sensitive areas. The cumulative learning gained through an alliance can potentially be applied to other products or industries beyond the alliance. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall © 2010 Pearson Prentice Hall

Guidelines for Successful Alliances Choose a partner with compatible strategic goals and objectives. Seek comple-mentary skills, products, and markets Work out how each partner will deal with proprietary knowledge or competitively sensitive information Recognize that most alliances only last a few years Choosing a partner with compatible goals and objectives will result in synergies through combined markets, technologies, and management cadre. Seek alliances where complementary skills, products, and markets will result. If each partner brings distinctive skills and assets to the venture, there will be reduced potential for direct competition. Work out what will be shared, what will not, and how shared technology will be handled. Trust is necessary, but must be backed up with contractual agreements. Most alliances only last a few years and break up once a partner feels it has incorporated the skills and information it needs to go it alone. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Chapter Learning Goals Recognize the changing factors, opportunities, and threats involved in joint ventures in the Russian Federation. Copyright ©2014 Pearson Education, Inc.

Comparative Management in Focus: JVs in Russian Federation Russia can be an attractive market for foreign companies. The rouble is now convertible and more stable, there is unexploited natural resource potential, and it has a skilled, educated population of 145 million. At the same time, though, Russia poses many risks and, at the very least, confusion for potential investors. For instance, President Putin has sought to take control of key industries (e.g., banks, newspapers, and oil). The state-controlled oil giants, Gazprom and Rosneft can only have foreign investors if those investments are in the minority. A survey of 158 foreign investors found that many think doing business in Russia is more risky and less profitable than doing business in China, India, or Southeast Asia. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Comparative Management in Focus: Guidelines for Establishing JVs in Russian Federation Investigate whether a joint venture is the best strategy—acquiring a Russian business may be better. Set up meeting with appropriate authorities well in advance. Be above board in paying taxes. Set up stricter controls and accountability systems. Managers of foreign companies planning to set up business in Russia should consider these recommendations. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Comparative Management in Focus: Guidelines for Establishing JVs in Russian Federation Make it clear your firm does not pay bribes Assign the firm’s best managers and given them enough authority Take advantage of local knowledge by hiring Russian managers Designate considerable funds for promotion and advertising to establish an image Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Chapter Learning Goals Focus on how emerging economy firms can implement expansion strategies. Copyright ©2014 Pearson Education, Inc.

Strategic Implementation Involves putting decisions about global alliances and entry strategies into action Successful implementation requires creating a “system of fits” Resources must be allocated Leadership is the key Implementation plans are detailed and pervade the entire organization because they entail setting up overall policies, administrative responsibilities, and schedules throughout the organization. Until strategic plans are put into operation, they remain abstract ideas that have no effect on the organization. Successful implementation requires the orchestration of many variables into a cohesive system that complements the desired strategy. This is called creating a system of fits. The structure, systems, and processes of the firm should be coordinated and mutually reinforce one another. Creating such a system may require altering some of its elements to make them work—such as changing the organizational structure. Resources must be allocated to make the strategy work. This entails budgeting money, facilities, equipment, people and other support. People are the ones who make things happen. Leaders must skillfully guide employees and processes in the desired direction. Additionally, in equity-sharing alliances, it is necessary to determine which top managers in each company will be in each position and to determine who will be CEO. Increasingly joint-CEOs are appointed. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Strategic Implementation Implementation McDonald’s Style Form paradigm-busting arrangements with suppliers. Hire locals whenever possible. Know a country’s culture before you hit the beach. Tweak the standard menu only slightly from place to place. Keep pricing low to build market share. Profits will follow when economies of scale kick in. Maximize autonomy. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Breaking Down Barriers for Small Business Exports National Export Initiative – January 2010 created by President Obama The number of American SMEs exporting to China; increased 776% between 1992 and 2009, but still room for growth US Export Assistance Centers Export loans for small businesses Copyright ©2014 Pearson Education, Inc.

Implementing a Global Outsourcing Strategy Examine your reasons for out-sourcing. Evaluate the best outsourcing model. Gain the co-operation of manage-ment and staff. Consult your alliance partners. Invest in the alliance. Outsourcing abroad is often in the news because of concerns about jobs being “lost” to others overseas. However, the strategic view of outsourcing is that it can produce gains in efficiency, productivity, quality, and profitability by fully leveraging talent around the world. For example, Proctor & Gamble (P&G) outsources IT infrastructure and Human resources around the world, and they want 50% of all new products to come from other countries by 2010. This slide and the next present guidelines for successful outsourcing. Make sure the advantages will outweigh the disadvantages from employees, customers, and the community. Opening your own subsidiary in the host country may be better than contracting with an outside firm if you need to keep control of proprietary technology and processes. Open communication and training is essential to get your domestic managers on board. Consult with your partners and teat them with the respect that made you decide to do business with them. Plan to invest time and money in training in the firm’s business practices, particularly in terms of quality control and customer relations. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Global Supply Chain Risks: The Japanese Disaster Supply chains have become larger and far more complex to manage After the March 2011 earthquake and tsunami in Japan  disrupted supply chains Auto industry particularly hard hit Control/risk became issues Copyright ©2014 Pearson Education, Inc.

Exhibit 7-3 Copyright ©2014 Pearson Education, Inc.

Challenges in Implementing Strategies in Emerging Markets “Foreign” firms are often surprised they have trouble competing successfully with local firms Challenges: Poor infrastructure Supply chains/distribution networks Personal challenges Copyright ©2014 Pearson Education, Inc.

Chapter Learning Goals Understand the complexities involved in managing international joint ventures. Copyright ©2014 Pearson Education, Inc.

Managing Performance in International Joint Ventures IJV Control Ensures that the way a joint venture is managed conforms to the parent company’s interests Choice of Partner Suzuki and TVS Motor in India Orgznal. Design The strategic freedom in choosing suppliers, product lines, customers, and so on Ignoring the unique controls required by IJVs can limit the parent company’s ability to efficiently use its resources, coordinate its activities, and implement its strategy. Establishing IJV control entails the choice of partner, the establishment of strategic fit, and the design of the IJV organization. Choice of partner is the most important single factor determining IJV success or failure. Even so, many firms rush the partner selection process because they are anxious to make inroads into an attractive market. IJV performance is a function of the fit between the strategies of the parents, the IJV strategy, and the specific performance goals the parents adopt. Managers must determine the specific task-related skills and resources needed from a partner and, thus, their own firm’s weaknesses in task-related skills and resources that can be overcome with help from an IJV partner. The IJV between Suzuki and TVS Motor, which manufactures motorbikes in India, is an example of one that was unsuccessful. By government regulation, Suzuki’s only avenue for entry into India was through IJV. TVS, however, complained that its was not able to develop its own capabilities because Suzuki wanted to keep all of its technology to itself. Ultimately, TVS bought out Suzuki. Strategic freedom refers to the relative amount of decision-making power that a JV will have, relative to the parents, when choosing suppliers, product lines, customers, etc. An IJV is usually easier to manage when one parent plays a dominant role and has more decision making power than the other in daily operations. It also is easier to manage an IJV if the local manager has considerable management control. When ownership is unequal, partners claim control relative to their ownership share. Where ownership is divided among several partners, daily operations are likely to be delegated to the local IJV management. The increased autonomy of the IJV can resolve many potential disputes and reduce common HR problems—such as staffing friction, blocked communication, and blurred organizational culture. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Three Complementary Dimensions of IJV Control Contractual links with parents IJV General Manager Autonomy of IJV Research suggests parent companies tend to focus their efforts on those activities they consider most important to their strategic goals, rather than monitoring all activities. The extent of control is primarily determined by the decision-making autonomy granted to the IJV management, which is dependent upon how much confidence the partners have in the top IJV managers. Mechanisms for control include the parent organizational and reporting structure, staffing policies, and close coordination with the IJV general manager. Monitoring the general manager includes bonuses and career opportunities and requiring executive committee approval for specific decisions and budgets. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Knowledge Management in IJVs Transfer: managing the flow of existing knowledge between parents and from the parents to the IJV. Transformation: managing the transformation and creation of knowledge within the IJV through its independent activities Harvest: managing the flow of transformed and newly created knowledge from the IJV back to the parents Managing the performance of an IJV for the long term, as well as adding value to the parent companies, necessitates managing the knowledge flows within the IJV network. Thus, managers must recognize that it is critical to overcome cultural and system differences in managing knowledge flows in order to gain advantage for the alliance. Knowledge management is the active management of creating, disseminating, evolving, and applying knowledge to strategic ends. As defined by Berdow and Lane, these processes are: Transfer: managing the flow of existing knowledge between parents and from parents to the IJV. Transformation: managing the transformation and creation of knowledge within the IJV through its dependent activities. Harvest: managing the flow of transformed and newly created knowledge from the IJV back to the parents. Those companies found to be most successful in developing and harvesting information for the benefit of the parents were those that had personal involvement by the principals of the parent company in shared goals, in the activities and decisions being made, and in encouraging joint learning and coaching. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Chapter Learning Goals Appreciate the governmental and cultural factors that influence strategic implementation; as well as the impact of e-commerce. Copyright ©2014 Pearson Education, Inc.

Government Influences on Strategic Implementation Profitability impacted by taxation and restrictions on repatriation Unpredictable changes in governmental regulations China’s new restrictions on foreign investors $2.5 billion tax bill for Vodaphone in India Firms are influenced by taxation in the host country, restrictions on profit repatriation, and government policies on foreign ownership, labor union rules, hiring and remuneration practices, and on patent and copyright protection. If the company has done its homework, however, all these factors should be known up front. The problem comes when a firm sets up shop in a host country that then makes major economic or governmental policy changes. For example, China recently added new restrictions on foreign investors, prolonging the time firms must wait to find out if their deals will go through. As another example, when China revoked tax breaks and restricted foreign ownership in 1993, Caterpillar found there was no longer enough domestic demand for their products. As a final example, when Indonesian President Suharto was ousted, the new government reviewed and cancelled business deals linked to the Suharto family. These included two water-supply privatization projects with Britain’s Thames Water PLC and France’s Suez Lyonnaise des Eaux SA. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Cultural Influence on Strategic Implementation: Western ex-pats vs Cultural Influence on Strategic Implementation: Western ex-pats vs. Hungarian managers Western Hungarian Team Orientation Individual Orientation Consensual Management Style Autocratic Style Future planning mentality Survival Mentality When managers are responsible for implementing alliances among partners from diverse institutional environments, such as transition and established market economies, they are faced with the critical challenge of reconciling conflicting values, practices, and systems. In other situations, culture is the issue and the cultural variable has been overlooked when deciding on and implementing alliances. This slide summarizes some of the information in Exhibit 7-3 in the text. It illustrates some of the differences among Hungarian managers and Western expatriates. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Dimensions of National and Corporate Culture Affecting Alliances: U. K Dimensions of National and Corporate Culture Affecting Alliances: U.K. vs. Europe Organizational formality Participation in decision making Attitudes toward risk Systemization of decision making Managerial self- reliance Attitudes toward funding and gearing Research reveals six dimensions of national and corporate cultural differences between the management styles of UK firms and continental European firms. Among these, risk orientation is key because risk-taking propensity impacts managers’ approaches to strategic options. Risk-taking firms are likely to be aggressive and deal well with change. Risk-averse firms tread more carefully and employ incremental strategies. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

French Managers Comment on the U.S. Americans have difficulty accepting foreign managers Americans have difficulty developing a world perspective Americans are very U.S.-oriented; the least international of all people Copyright ©2014 Pearson Education, Inc.

Management in Focus: Mittal’s Marriage to Arcelor Breaks the Marwari Rules In June 2006 Mittal Steel of India merged with Arcelor of Luxembourg to create the world’s largest steel company. Resistance in Europe and by Arcelor: Arcelor had outdated views of Mittal Concerns about losing control of a European multinational Mittal’s initial proposal initially met with overwhelming hostility from Arcelor, and Arcelor initially rejected two bids from Mittal. Mittal realized that Arcelor had outdated views of them. To combat these, they provided a comparison of their deal with that of Russian rival Severstal and a plan for corporate governance rules to promote Arcelor’s business model. Though Severstal also was bidding to takeover Arcelor, France viewed Mittal’s takeover as “a betrayal of old continental European traditions to a new cost-cutting imperative of globalization.” Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

Management in Focus: Mittal’s Marriage to Arcelor Breaks the Marwari Rules Resistance in India: Concerns about breaking Marwari rules Mittal put family interests behind industry and shareholder interests. Lakshmi Mittal gave up half of his 90 percent share in Mittal, will share chairmanship. The deal also met resistance in India. Lakshmi Mittal belongs to the Marwari ethnic group, which believes it is critical for companies to maintain family ownership. Malarwi families have extensive business networks among families and favor doing business with other Malarwis. Lakshmi Mittal was able to shepherd the deal through by managing both the strategic and cultural difficulties. Copyright ©2014 Pearson Education, Inc. © 2010 Pearson Prentice Hall

E-Commerce on Strategy Implementation Outsourcing necessary tasks to e-commerce Help companies sort through the maze of difficult taxes, duties, language translations, etc. Next-Linx: applies technology for strategic implementation Copyright ©2014 Pearson Education, Inc.

Conclusion Cross-border strategic alliances are formed for many reasons: market expansion, cost/technology-sharing, avoiding protectionism, synergies SMEs can leverage network relationships to accelerate the internationalization process Alliances take many forms, but can fail in the strategic implementation phase Emerging economy firms have to move quickly Successful alliances require compatible partners and the creation of a system of fits Differences in national culture and changes in the political arena can affect implementation Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

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