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International BusinessTo add
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Explaining Internationalization
• Early contribution of ‘Uppsala model’: Johanson & Wiedersheim-Paul 1975; Johanson & Vahlne 1977
• Key insight: internationalization is an incremental commitment, in terms of (a) geographical sequence and (b) entry mode choice, due to the gradual accumulation of experiential knowledge of foreign markets reducing the uncertainty effect
• interplay between knowledge and commitment the key driver
Distinctiveness of Uppsala model
‘We do not believe that [internationalization] is the result of a strategy for optimum allocation of resources to different countries where alternative ways of exploiting foreign markets are compared and evaluated.
We see it rather as the consequence of a process of incremental adjustments to changing conditions of the firm and its environment.’ (Johanson and Vahlne 1977, p. 35)
Empirical basis for model: e.g.
• PHARMACIA: • 9 overseas affiliates at the time. • In the case of 8, the firm had received orders from foreign
market, then signed an agency/licensing agreement. • After a few years, established sales subsidiary (or made an
acquisition in 1 case).• In two countries began manufacturing, but only less
complicated production at first. • In case 9, started a sales subsidiary almost immediately,
but company decision-maker had prior country experience.
• (Johanson & Vahlne 1977)
Incremental pattern (1): ‘Establishment chain’
No regular export
Direct exporting, via independent agent/distributor
Establishing foreign sales subsidiary
Foreign production/ manufacturing
Johanson & Wiedersheim-Paul 1975; Johanson & Vahlne 1977; cf Bilkey & Tesar 1977, Cavusgil 1980, Czinkota 1982
Psychic distance
Market selection: firms tend to enter psychically close markets firs
Markets in terms of differences in language, culture, political systems, level of education,
levels of industrial development, etc.’
Factors preventing or disturbing the flows of information between firms
Why these patterns? A process explanation
• ‘the firm develops knowledge when it operates in the market,
• this knowledge enables the firm to better see and evaluate business opportunities, consequently, to make new market commitments.
• In their turn, these commitments lead to learning and the ability to identify new market opportunities, and so on.’ (Johanson and Vahlne 2003, p. 9)
Market (Experiential) Knowledge
Market Commitment
Commitment Decisions
Current Activities
STATE ASPECTS CHANGE ASPECTS
Johanson & Vahlne 1977, p. 37
The Uppsala model
Market Commitment
Commitment Decisions
Current Activities
STATE ASPECTS CHANGE ASPECTS
Johanson & Vahlne 1977, p. 37
The Uppsala model
• Lack of market/operations knowledge =main obstacle to internationalization
• Can only be acquired through first-hand experience
• Includes i.e. getting to know customers, suppliers, government agencies
• Includes firm’s internationalization knowledge: firm’s own resources and ability to develop international operations
• Reduces uncertainty associated with foreign market commitment
• Provides framework for perceiving and formulating business opportunities
Johanson & Vahlne 2003, p. 10
Market (Experiential) Knowledge
Market Knowledge
Market Commitment
Commitment Decisions
Current Activities
STATE ASPECTS CHANGE ASPECTS
Johanson & Vahlne 1977, p. 37
The Uppsala model
Result of the conception of business opportunities, which in turn are a result of market (experiential) knowledge.
Johanson and Vahlne 2003, p. 12
Market Knowledge
Market Commitment
Commitment Decisions
Current Activities
STATE ASPECTS CHANGE ASPECTS
Johanson & Vahlne 1977, p. 37
The Uppsala model
• Largely consist of ‘everyday contact with customers, intermediaries, suppliers, authorities and other individuals and organisations important to their firm’
• ‘current activities evidently have a continuous impact on internationalisation, occasionally being interrupted by discontinuities…’
• By interacting with other firms in a market, the firm learns about their needs and situation
• Interaction builds trust, which is an important element in commitment building
(Johanson and Vahlne 2003:11)
Market Commitment
Commitment Decisions
Current Activities
STATE ASPECTS CHANGE ASPECTS
Johanson & Vahlne 1977, p. 37
The Uppsala model
• Market commitment: i.e. not just investment, but also marketing and sales e.g., after-sales service commitments
• Amount of commitment: i.e. level of investment
• Degree of commitment: extent to which commitment cannot easily be withdrawn, and is defended by the firm
• Degree of commitment dependent on firm’s resources and capabilities at home
Johanson and Vahlne 2003, p. 12
Market (Experiential) Knowledge
Hall
High-context and Low-context cultures
Dimensions of time
Relationship of man with nature and space
Dimensions of National Culture
1- Power distance
2- Individualism/collectivism
3- Masculinity/Femininity
4- Uncertainty avoidance
5- Long/Short term orientation
Multiple of Cultureor ‘interfaces’ (Saner)
ProfessionalProfesional
FunctionalFuncional
CompanyCompañía
IndustryIndustria
Regional/ NationalRegional/Nacional
The Contexts ofInternational Negotiations
Influence of Culture on Negotiation: Managerial Perspectives
• Definitions of negotiation• Negotiation opportunity• Selection of negotiators• Protocol• Communication• Time sensitivity• Risk propensity• Groups versus individuals emphasis• Nature of agreements• Emotionalism
Cultural Categories
National Communication Patterns
Finland
USA
Germany
USA Germany
Japanese Arabic
Japanese Business
xxxx xxxx xxx
I. Emperor’s Rule
II. Samurai’s Rule
X
III. Modern-ization
WAR
IV. Postwar
Clan fight
s
× 645
NARA
Centralizatio
n
HEIANNobles,
Decentralizati
on
Internal
wars, dynam
ic & fluid
society
Peace, isolati
on, conservative class
society
EDO
Tokugawa
Shogunate
KAMAKURAMUROMACH
ISENGOKU
1867
MEIJI
Westernization,industrializatio
n,militarilization
Rapid recovery and
growth
Hunting & gathering
Taika Reform
Rice
Chinese culture &political system
Buddhism
WEST: guns &Christianity
WEST!!! US occupation
1945-52
1603
Japan’s Multi-layered Identity
先史時代の日本
Rice cultivation
Heian & Samurai Culture
Western influence
Edo Culture
Guns & Christianity
Pre-historic Japan
Buddhism, China
Note: Colored areas indicate external impacts
1960 ~ 1970 ~ 1980 ~ 1990 ~ 2000 ~1950 ~1940 ~
<Japanese Economy Trends>
<Management Innovation History>
Wartime controlled economy
Postwar recovery period
High-growth period
Energy saving & lean management
Bubble economy
Heisei recession
Recovery period
Process management methodology
American style management method
Productivity improvement
Strategy & marketingMarket-based flexible manufacturing
Japanese style management
American style global management
Japanese Economy and Management Innovation
Japanese keiretsuTypes
- Horizontal keiretsu - Vertical keiretsu
Characteristics- Extensive share cross-holdings- Personnel swaps- Strategic coordination- Commercial transactions
Yataro Iwasaki (1835-85)Mitsubishi Zaibatzu
• Seisho (政商 ) from Tosa, founder of Mitsubishi Zaibatsu
• Shipping company--grew fast with government support (receiving gov’t ships, contract for military transport)
• Established Nippon Yusen (NYK Line), fierce battle with Kyodo Unyu (anti-Mitsubushi company), 1883-85
• Expanded to many areas: trade, banking, shipbuilding, coal, mining (later, more)
Bakufu’s Steel Mill in Nagasaki, transferred to Mitsubishi in 1884
Mechanical factory in Nagasaki, ca 1885
PP.45-46
三菱
Mitsubishi Heavy Industries
Automotive Mitsubishi Fuso Truck Bus Mitsubishi Motors Shin Caterpillar Mitsubishi
Finance & insurance DC Card Diamond Lease Meiji Life Mitsubishi Auto Credit Mitsubishi Securities Mitsubishi Trust & Banking Tokio Marine and Fire
Industrial equipment Mitsubishi Electric Mitsubishi Kakoki Mitsubishi Precision Toyo Engineering Work
Industrial materials Asahi Glass Dai Nippon Toryu Mitsubishi Aluminum Mitsubishi Cable Indus Mitsubishi Materials Mitsubishi Plastics Mitsubishi Rayon Mitsubishi Shindoh Mitsubishi Steel
Electronics & telecom IT Frontier Mitsubishi Research Inst Mitsubishi Space Software Nikon Space Communications
Resources & energyNippon OilMitsubishi LPGMitsubishi Nuclear Fuel Mitsubishi Paper Mills
Transportation & dist Mitsubishi Logistics Mitsubishi One Transport NYK Line
Consumer goods & foods Kirin Beverage Kirin Brewery Ryoshoku
Chemical & pharmaceutical Dai Nippon Toryu Mitsubishi Chemical Mitsubishi Gas Chemical Mitsubishi Petrochemical
Real estate & construction Mitsubishi Estate P.S. Mitsubishi
MitsubishiCorporation
Bank of Tokyo-Mitsubishi
Mitsubishi’s Horizontal Keiretsu
Major FDI Firms in Meiji Period
FDI was relatively small (cf. China, India). However, it played leading roles in tobacco, oil refining, electrical and general machinery, weapons, automobiles, glass, (aluminum). Later, zaibatsu mostly took over FDI technology and production.
Source: S.J.Bytheway (2005), pp.166-167
Year J apanese name Foreign partner Foreignownshp Remark
1 1893 Standard Oil Standard Oil (US) 100% Later sold to Nippon Oil 2 1899 Nippon Electric (NEC) Western Electric (US) 54% Later under Sumitomo3 1900 Murai Brothers American Tobacco (US) 50% State-owned in 19044 1900 Rising Sun S. Samuel & Co. (UK) 100% Oil business5 1901 Singer Mishin Singer Sewing Machine (US) 100%6 1902 Osaka Gas Mr A.N. Brady (US) 50% Brady capital exits 19257 1903 Tokyo Electrical Train Mr Malcolm (UK) - -8 1905 Tokyo Electric General Electric (US) 38% Later Toshiba, 19399 1906 Osaka Glass Manufacturing Private syndicate (UK, Bel, Fr) 56%10 1907 Nippon Steel Armstrong & Vickers (UK) 50% Weapon manufacturing11 1907 Imperial Spinning J &P Coats (UK) 60%12 1909 Dunlop Rubber Far East Dunlop (UK) 100% Later, 100% J apanese13 1910 Shibaura Manufacturing General Electric (US) 24% Later Toshiba, 193914 1910 Nippon Okijenu & Asechiresu L'air Liquide (FR) 100%15 1910 Lever Brothers Amagasaki Lever & Brothers (UK) 100%16 1910 Nippon Chikuonki Trading Mr. F.W. Hohn (US) - - Phonograph
Post War Keiretsu
• Mitsubishi• Bank of Tokyo• Mitsubishi/ Bank of Mits
• Nikon• Kirin
• Sutitomo• Sutitomo Bank• NEC
• Mitsui• Toshiba
• Fuyo• Fuji Bank• Marubeni
• Dai-Ichi• Dai-Ichi Kangyo Bank• Cannon• Nissan (part)
• Sanwa• Sanwa Bank• Kobe Steel
Production Methods & Kaizen
Taiichi Ohno
Production Methods & Kaizen
Production Methods
Efficiency
• Any production method relies on efficiency – this can be viewed in different ways:
• Productivity – a measurement of output per unit of the factor used (labour, capital or land)
Total Output
Productivity = ------------------- Units of Factor
• Technical Efficiency – output produced using the fewest possible inputs
• Productive Efficiency – output produced at the lowest possible cost
Efficiency
• Production decisions involve deciding methods for new production runs and analysis of existing methods.
• Decisions may include:• Substitute machinery for labour? • Use of new technology? • Organisation of the production layout? • Change of production method?
Production Methods
As technology and analysis of production methodology has improved, methods have changed dramatically – what used to be labour intensive production methods are now capital intensive
Production Methods
Textile factoryCopyright: Stock.Xchng
The choice of production method and the factor inputs depends on such things as:
• the nature of the product
• factor costs
• the scale of production
Production Decisions
Which method? Type of Product
One-Off Order?
Mass Market product?
Batch?
Market size and Segment
Factor Costs – Land, Labour and
Capital
Complexity of design
Production Methods
• Job Production – One-off production - each item might have particular specifications
• Flow Production – suitable for mass market products that are identical
• Batch Production – each stage of the production process has an operation completed on it before moving on to the next stage – allows modifications to be made to products that otherwise are the same
Production Methods
Which is more efficient?
Operation 1 2 3 4 5
6
7
891011Finished Product
Production Methods
Operation 1
1a 1b 1c 1d
2a 2b 2c
3a 3b 3c 3d
4 Finished product
Or this?
Production Methods
Or this?
Cell 1 Cell 2 Cell 3
Finished Product Finished ProductFinished Product
Production Methods• Answer
• It could be any of them!• The design of the production space can influence:
• Output levels• Factor use• Efficiency• Cost levels• Quality assurance procedures
Kaizen (Continuous Improvement)
KanbanDo not send defective products to the subsequent process
The subsequent process comes to withdraw only what is needed
Produce only the exact quantity withdrawn by the subsequent process
Equalize production
Kanban is a means to fine tuning
Stabilize and rationalize the process
Kaizen (Continuous Improvement)
• Japanese concept – not made redundant by the decline of the Japanese economy which may be due to other institutional factors!
• Focus on gradual and continuous improvement
• A whole business philosophy• Importance of EVERYONE buying into the
concept and the vision
Kaizen
•Efficient stock control methods help reduce costs and improve cash-flow
•Flexible working practices and empowerment – help increase efficiency, reduce costs and improve motivation
•Leadership seen as vital. Ability to communicate a clear vision, take people along with the vision and to think about where the company needs to be in 5, 10, 15 and 20 years time
Fundamental principles – often characterised as ‘lean production’ – reducing waste, zero defects, high quality control measures at all stages
•Punctuality in all aspects – delivery, supply, manufacture, etc.
Philosophy(Long-term Thinking)
People and Partners(Respect, Challenge and Grow Them)
Process(Eliminate Waste)
ProblemSolving
(Continuous Improvement and Learning)
Base management decisions on a long-term philosophy, even at the expense of short-term financial goals
Grow leaders who live the philosophy Respect, develop and challenge your people
and teams Respect, challenge, and help your suppliers
Create process “flow” to surface problems Level out the workload (Heijunka) Stop when there is a quality problem (Jidoka) Use pull systems to avoid overproduction Standardize tasks for continuous
improvement Use visual control so no problems are hidden Use only reliable, thoroughly tested
technology
Continual organizational learning through Kaizen Go see for yourself to thoroughly understand the situation.
(Genchi Genbutsu) Make decisions slowly by consensus, thoroughly
considering all options; implement rapidly (Nemawashi)
“4 P” Model of the Toyota Way
Adding Value to Customers &Society
Base management decisions on a long term philosophy, even at the expense of short-term financial goals
Toyota mission:
• Contribute to the economic growth of the country in which it is located (external stakeholders)
• Contribute to the stability and well being of team members and partners (internal stakeholders)
• Contribute to the overall growth of Toyota
Principle One
“The most important factors for success are patience, a focus on long term rather than short-term results, reinvestment in people, product, and plant, and an unforgiving commitment to quality.”
-Robert B. McCurry, former Executive V.P., Toyota Motor Sales
Philosophy(Long-term Thinking)
People and Partners(Respect, Challenge and Grow Them)
Process(Eliminate Waste)
ProblemSolving
(Continuous Improvement and Learning)
Base management decisions on a long-term philosophy, even at the expense of short-term financial goals
Grow leaders who live the philosophy Respect, develop and challenge your people
and teams Respect, challenge, and help your suppliers
Create process “flow” to surface problems Level out the workload (Heijunka) Stop when there is a quality problem (Jidoka) Use pull systems to avoid overproduction Standardize tasks for continuous
improvement Use visual control so no problems are hidden Use only reliable, thoroughly tested
technology
Continual organizational learning through Kaizen Go see for yourself to thoroughly understand the situation.
(Genchi Genbutsu) Make decisions slowly by consensus, thoroughly
considering all options; implement rapidly (Nemawashi)
“4 P” Model of the Toyota Way
Eliminate Waste through Flow& Standardization
is a manufacturing philosophy which shortens the time between the customer order and the product build / shipment by eliminating sources of waste.
Lean Manufacturing
Business as Usual
PRODUCTBUILT & SHIPPED
CUSTOMERORDER
Time
Waste
PRODUCTBUILT & SHIPPED
CUSTOMERORDER
Time (Shorter)
Waste
Lean Manufacturing
Product Lead Time
Value Added Time is only a very small percentage of the Lead time.
Traditional Cost Savings focused on only Value Added Items.
LEAN FOCUSES ON NON-VALUE ADDING ITEMS.
TimeRawMaterial
FinishedParts
WaitingStagingTransportation Inventory Staging
= Value Added Time
= Non-Value Added Time (WASTE)
Machining AssemblyCasting
Before Lean: Organization By Machine Type With Convoluted Flow No Organization and No Control
LATHELATHE
LATHELATHE
MILLMILL
MILLMILL
MILL
GRINDER GRINDERGRINDER
500pcs.
750pcs.
DRILL DRILLDRILL
250pcs.
PART FLOW
Customer Plant
ABCDEFGH
NeededComponents + kanban
Empties + withdrawalkanban
PULLNew product
Empties +production kanban
Supplier Plant
Downstream processes withdraw what they need when they need it.
Preceding processes replenish what is taken away.
Why Focus on Flow?• “If some problem occurs in one-piece-flow
manufacturing then the whole production line stops. In this sense it is a very bad system of manufacturing. But when production stops everyone is forced to solve the problem immediately. So team members have to think, and through thinking team members grow and become better team members and people.”
Teruyuki Minoura, former President, Toyota Motor
Manufacturing, North America
Lean Tools to Support Flow
• 5S-Visual Workplace • Total Productive Maintenance• Quick Changeover• Standardized Work• Quality Methods
Describe this area...
Describe this area...
What is TPM?
Total Productive Maintenance (TPM)
is Productive Maintenance with
EVERYONE’s participation
Maintenance=Teachers, Doctors of Equipment
Operators=Clean, inspect, routine repair
Why Quick Change Over?
Time
Inve
ntor
y le
vel Average inventory levels
Difference in average inventory level with more changeovers
The more quickly we changeover, the more our inventory levels decrease. This helps accomplish our goal of waste elimination.
Change Over
StandardizedWork Chart
Detail of each Process Step
Detail of the Elementsof each Process Step
Work Element Sheet Stack Chart(Yamazumi)
A Visual Tool for Balancing Processes
Takt90s
1 2 3 4 5Assembly Process #
Standard Work Tools
Standardized tasks are the foundation for continuous improvement and employee empowerment
“Today’s standardization…is the necessary foundation on which tomorrow’s improvement will be based. If you think of “standardization” as the best you know today, but which is to be improved tomorrow-you get somewhere. But if you think of standards as confining, then progress stops.”
Henry Ford, Today and Tomorrow, 1926
Philosophy(Long-term Thinking)
People and Partners(Respect, Challenge and Grow Them)
Process(Eliminate Waste)
ProblemSolving
(Continuous Improvement and Learning)
Base management decisions on a long-term philosophy, even at the expense of short-term financial goals
Grow leaders who live the philosophy Respect, develop and challenge your people
and teams Respect, challenge, and help your suppliers
Create process “flow” to surface problems Level out the workload (Heijunka) Stop when there is a quality problem (Jidoka) Use pull systems to avoid overproduction Standardize tasks for continuous
improvement Use visual control so no problems are hidden Use only reliable, thoroughly tested
technology
Continual organizational learning through Kaizen Go see for yourself to thoroughly understand the situation.
(Genchi Genbutsu) Make decisions slowly by consensus, thoroughly
considering all options; implement rapidly (Nemawashi)
“4 P” Model of the Toyota Way
The heart & soul ofThe Toyota Way
People and PartnersRespect, Challenge, and Grow Them:
9. Grow leaders who thoroughly understand the work, live the philosophy, and teach it to others
10. Develop exceptional people and teams who follow your company’s philosophy
11. Respect your extended network of partners and suppliers by challenging them and helping them improve
Station CStation A
Station BTraditional Western Team
One-Piece Flow Demands Team Work!
WorkcellToyota Way Team
Need help?
Need help?
X
xx x
xx
x
x
x
xx
x
xx
x
x
x
x
Principle Five: Stop & Fix Problems Mr. Ohno used to say that no problem discovered
when stopping the line should wait longer than tomorrow morning to be fixed. Because when making a car every minute we know we will have the same problem again tomorrow.”
-Fujio Cho, President, Toyota Motor Corporation
1 2 3
8
4
9
5
10 11
6 7
12 13 14STOP BUTTON(STOP THE L INE AUTHOR ITY)
STOP BUTTON(STOP THE L INE AUTHOR ITY)
AbnormalityStation 5
Team Leader
45
Typical Toyota Organization to support Continuous ImprovementTypical Toyota Organization to support Continuous Improvement
Team Member
Team Leader
Group Leader
Asst. Manager
Manager
{ 5 - 8 }
{ 3 - 4 }
{ 5 - 8 }
{ 4 - 10 }
Source: Bill Costantino, former group leader, Toyota, Georgetown.
Team Size
Kaizen
Step 1: PREPARE WORKER
Step 4: FOLLOW UP
Step 3: TRY OUT PERFORMANCE
Step 2: PRESENTOPERATION
Plan
DoCheck
Action
Major Steps
Key Points
Reasons
The Four Steps of TJI
Bumper Trimming Job Breakdown Sheet
JOB BREAKDOWN SHEET Phil Turek Todd Chambers
DATE: 7/20/2006
AREA: Bumper molding JOB: Rear bumper molding operator - Trimming WRITTEN BY: Phil Turek
SAFETY: Injury avoidance, ergonomics, danger pointsQUALITY: Defect avoidance, check points, standardsTECHNIQUE: Efficient movement, special methodCOST: Proper use of materials
1. Hold flash straight up and tight 1. Makes trimming easier
2. Trim away from body and arm 2. Prevents injury- cuts
Trim flash ball on left side 3. Blade flush with top surface 3. Visible surface, flash line 1mm max.
1. Start on trim line- 1 mm variation 1. Visible surface- quality spec.
2. Blade must be perpindicular 2. Angled cut not acceptable
Trim left side core flash 3. Follow trim line- 1mm variation 3. Visible surface- quality spec.
4. Curving motion while trimming 4. Technique to make trimming easier
1. Hold gate up horizontally 1. Prevents twisting of bumper during cut
2. Rest blade on bumper edge horizontally 2. Helps make cut horizontal and straight
Trim gate flash 3. Angle knife handle back (blade is horizontal) 3. Cut is easier
4. One continuous movement 4. Stopping will cause a jagged cut
1. Hold flash straight up and tight 1. Makes trimming easier
2. Trim away from body and arm 2. Prevents injury- cuts
Trim flash ball on right side 3. Blade flush with top surface 3. Visible surface, flash line 1mm max.
1. Start on trim line- 1 mm variation 1. Visible surface- quality spec.
2. Blade must be perpindicular 2. Angled cut not acceptable
Trim right side core flash 3. Follow trim line- 1mm variation 3. Visible surface- quality spec.
4. Curving motion while trimming 4. Technique to make trimming easier
LEAN ASSOCIATES, INC. www.leanassociates.com
Team Leader Supervisor
MAJORSTEPS
Step # 1
Step # 2
Step # 4
Step # 5
KEYPOINTS
REASONS FOR KEYPOINTS
Step # 3
Auditing Standardized Work
Manager Level Focus on Shop Floor and Systems Improvement. Tools: Visual Factory & TBPT
TBP
Team Leader and Group Leader Manage Standardized Work, Process Improvement and Develop Problem
Solving Skills. Tools: FMDS, TBP & OJD
Team Member Focus on Fundamental Skills & Standardized Work
Tools: Skills Training, Job Instruction, Standardized Work and 5-S
General Manager and VP Level Concentrate on Business Planning and Policy Improvement. Tools: Hoshin Planning & TBP
Roles and Responsibilities
Toyota Way Principles in 4P Model
The dynamic ofThe Toyota Way
Philosophy(Long-term Thinking)
People and Partners(Respect, Challenge and Grow Them)
Process(Eliminate Waste)
ProblemSolving
(Continuous Improvement and Learning)
Base management decisions on a long-term philosophy, even at the expense of short-term financial goals
Grow leaders who live the philosophy Respect, develop and challenge your people
and teams Respect, challenge, and help your suppliers
Create process “flow” to surface problems Level out the workload (Heijunka) Stop when there is a quality problem (Jidoka) Use pull systems to avoid overproduction Standardize tasks for continuous
improvement Use visual control so no problems are hidden Use only reliable, thoroughly tested
technology
Continual organizational learning through Kaizen Go see for yourself to thoroughly understand the situation.
(Genchi Genbutsu) Make decisions slowly by consensus, thoroughly
considering all options; implement rapidly (Nemawashi)
Typical Improvement Opportunities Available
Improvement Approaches of Typical Companies
Toyota Leverages Opportunities at all Levels
Principle TwelveGenchi Genbutsu
“Observe the production floor without preconceptions and with a blank mind. Repeat “why” five times to every matter.”
-Taiichi Ohno
“No Problem” is problem
• Problems are opportunities to learn• Hiding problems undermines the system
Learning from the Toyota Way
Characteristics of Effective Lean Transformation• Top Down Directive that this is the new way.• Bottom-up involvement in concrete projects with
clear results.• Develop internal experts through learning by
doing.• Expert sensei to guide the process and teach.• Learning philosophy: every project, activity, is a
chance to learn.• Start with value stream transformation projects.• Build on successes to transform broader
organization and culture over time---YEARS!
Why is this hard to do?• Traditional organizations in fire fighting mode • No clear vision of the future state• culture change is hard• Organizational change is disruptive
• Management has to change its role from managing from the office to deeply understanding processes!
REVIEW
RtB
Offshoring
The Steroids
Cool Hunter
Next
• Forces• Cluster• Competencies
Forces
• Genzyme • Founded in 1981 • Scientists studying
genetically inherited enzyme diseases
• Global Market• Orphan Drugs
Genzyme’s Focus on “Orphan Drugs”
Unusual strategy
Develop rare drugs diseases not “blockbuster” drugs.
Long development
Blockbuster drugsRevenues of $1 billion and sold to
millions
Genzyme’s Focus on “Orphan Drugs”
Genzyme concentrated on the “orphan drug” market that had a market of only a few thousand
people
Requires smaller clinical trials, less advertising, smaller sales force, less
competitionInsurance companies would be
willing to cover the drugs due to the severity of the diseases and a
limited number of patients for the drug
• In 1983, the FDA established the “Orphan Drug Act,” giving seven years market exclusivity to developers of drugs for rare (<200,000 patients) diseases.
• Also chose unusual strategy of doing its own manufacturing and sales rather than licensing to a large pharmaceutical company.
• Diversified into side businesses to fund its R&D• Chemical supplies• Genetic counseling • Diagnostic testing
Genzyme’s Focus on “Orphan Drugs”
Went public in 1987, raising $27 million
First drug: Cerezyme4,500 patients
Yearly cost of $170,000 (annual revenue of
$800 million). drug is required to be
taken for the lifetime of the patient.
By 2006, Genzyme was the world’s third largest
biotech company proving that a profitable business could be built around small disease
populations
6-103
Strategy for
International
Environment
Foces
Assessing the Firm’s Current Position
• Porter’s Five-Force Model • Whether a particular industry will be profitable • determine if an individual firm’s chances for
success via a vis its competitors
Assessing the Firm’s Current Position
• Degree of existing rivalry. Determined by number of firms, relative size, degree of differentiation between firms, demand conditions, exit barriers (for firm to leave the market)
• Threat of potential entrants. Determined by attractiveness of industry, height of entry barriers (e.g., start-up costs, brand loyalty, regulation, etc.)
• Bargaining power of suppliers. Determined by number of suppliers and their degree of differentiation, the portion of a firm’s inputs obtained from a particular supplier, the portion of a supplier’s sales sold to a particular firm, switching costs, and potential for backward vertical integration - firm produce its own supplies
• Bargaining power of buyers. Determined by number of buyers, the firm’s degree of differentiation, the portion of a firm’s inputs sold to a particular buyer, the portion of a buyer’s purchases bought from a particular firm, switching costs, and potential for forward vertical integration - supplier enters firm’s business
• Threat of substitutes. Determined by number of potential substitutes, their closeness in function and relative price.
6-107
GenzymeDegree
of existing rivalry. Threat
of potenti
al entrant
s.Bargaining
power of
suppliers.
Bargaining
power of
buyers.
Threat of
substitutes.
Mitigating Circumstances
Chance Government
Clusters
Salmon
Salmon in Chile
Salmon Cluster
Salmon ClusterFertilization &
incubationFreshwater breeding -
smelt fattening Infrastructure of cagesTanks & recirculation
systemsTransport servicesVaccines, antibiotics
and pharmaceuticalsFeed production
&supply
Salmon Clusters
Fertilization and incubation of ovaFreshwater breeding - smolt fattening Infrastructure of cages and related services
(maintenance of nets)Tanks and recirculation systemsTransport services:Research and production of vaccines, antibiotics
and other pharmaceutical products:Feed production and supply
Theory of Industry Clusters
Alfred Marshall
• Industries tend to cluster in distinct geographic districts, with individual cities specializing in production of narrowly related set of goods
Michae
l Porter
• Clusters, or critical masses of unusual competitive success in particular business areas, are a striking feature of virtually every national, regional, state, and even metropolitan economy, especially in more advanced nations
What are Industry Clusters? (Porter)
• Geographic concentrations of competing, complementary, or interdependent firms
• Common needs for talent, technology, and infrastructure
• Dynamic, changing as the industries themselves or external conditions change
• Centered on firms that sell outside the local, state, national market
• Driving forces in a national, regional, state or metropolitan economy
What are Industry Clusters? (Porter)
Porter Definition1. Geographic concentrations
2. Common needs3. Dynamic,
changing4. Sell outside the
local, state, national market
5. Driving forces economy
Chilean salmon1. .2. .3. .4. .5. .
Competencies
Competency
• “A bundle of skills and technologies (rather than a single discrete skill or technology) that enables a company to provide a particular benefit to customers” - Hamel and Prahalad 1994, p. 199.
• It provides consumer benefits
• It is not easy for competitors to imitate
• It can be leveraged widely to many products and markets.
Dunning–Kruger Effect
• People reach erroneous conclusions and make unfortunate choices but their incompetence robs them of the metacognative ability to realize it
• Illusory Superiority
Core Competencies at FedEx
Bar-codetechnology
Wirelesscommunications
Networkmanagement
Linearprogramming
Logisticsmanagement
Packagetracking
Metacompetency
FedEx
Levels of competition for competence
Develop and acquireconstituent skillsand technologies
Synthesizecore competencies
Maximizecore product share
Maximize end product share (own brand plus OEM)
Develop precision mechanics,fine optics, microelectronics,and electronic imaging
Bring competencies togetherto develop laser printer engines
Core product (engine) sold toHP, Apple, etc.
Canon printers and Canon partson competitors’ printers (own brand plus OEM)
Levels Canon
Swatch
Swatch Activity
1. Summarize2. Look at the three theories3. Brainstorm and try to make connections where
these theories apply and do not apply4. Criticize the choices made, and/or give
suggestions to the country
Theories• CwC• RtB• International Product Life
Cycle Model• 11/9: the fall of the
Berlin Wall opening Windows
• 8/9: Netscape goes public
• Work flow software: • Forces• Cluster• Competencies• Open SOurce
• Dunning Kruger Effect• Uploading• Outsourcing• Offshoring• Supply-chaining• In-sourcing• In-forming• Steroids• Triple Convergence• Personalization• Strategic Alliance• democtatization
Case Study
ONE
• What theory is demonstrated here?
TWO
• How does the theory explain or illustrate what is occurs in the case study?
THREE
• What suggestions would you have for the company/organization going forward?
Psychographic Segmentation
• Divides a population into groups that have similar psychological characteristics, values, and lifestyles
• Lifestyle• people’s decisions about how to live their daily lives,
including family, job, social, and consumer activities• The most common method for developing
psychographic profiles of a population is to conduct a large-scale survey
• AIO statements• VALS and VALS 2
“Values and Lifestyles”
Western Psychographic Segmentation
Swatch: Psychographic Segmentation
• 6-10: Consider it "cool", because big kids have it (42% awareness!)
• 11 –15: ("teeny boppers") provides sense of identity • 11 –15: ("young rockers") high awareness, but represents
t.b. lifestyle • 11-15: ("students") Swatch too wild for them, but they
might buy it to fit in • 16 –22: ("rockers") like the price, but dislike the male model
geeks • 16 –22: ("preppies") prefer a dressier watch • 16- 22: ("trendies") hate it; "fast food of time pieces" (73%
wear no watch) • 22 –32: ("transitionaries") like its durability, disposability,
price • 22 –43: ("older casuals") watches used to tell time (4%
awareness!) • • 33-43: ("weekend hippies") teen image (high awareness,
but 43% have never seen a Swatch in real life
Japan Psychographic Segmentation
• Integrators• Innovators/Adopters
• Display, daring, exciting• Rykoshiki
• Home, career, status• Traditional
• Traditional dress, customs, cooperative
• Pragmatics• Few commitments,
uninformed• Sustainers
• Lack money, education, sustain the past
SwatchPositioning / Repositoning
DiscussionHow do companies we have seen use psychographic segmentation in mix?Think: Swatch, Unilever, NIN
Internationalization
Strategies for Operations Abroad
• International
• Control remains predominately with HQ in home county• Low pressure for local responsiveness-high pressure cost
reductions • Multidomestic
• Customize operations and products to each local market• High local responsiveness-low pressure cost reductions
Strategies for Operations Abroad
• Global
• Tendency to centralize main operational functions• Can mobilize world-wide resources• High cost reductions from economies of scale and
experience curve-low customization to national borders• Transnational
• Looking for ‘global learning’ from HQ to subsidiaries, in reverse and between subsidiaries
• Cost reductions and product differentiation
Advantages and disadvantages of the four strategies
DiscussionHow do Swatch and Unilever employ Global Strategies?
Global Strategy
• To go global or not?• Compelling Reasons
• Diversity of earnings• Exposure to new and emerging markets• Experience curve and access to the most demanding customers
Discussion1. Why do Unilever and Swatch enter
new markets? 2. How do Unilever and Unilever enter
the markets? 3. What is unique is unique or
different about their approach?
Global Company (2SMCG)
• 1. Standard Products and Marketing Mix• Core product and minimum marketing adaptations • Economies of scale benefits• Segmentation cross national borders
Global Company (2SMCG)
• 2. Sourcing all Assets on an Optimal Basis• Ability to source all assets in value chain in terms of availability or
cost-competitiveness• Importance of assets deployment
Global Company (2SMCG)
• 3. Market Access in Line with Break-Even Volume• Size not as important as generation of sales to cover demands of
infrastructure and investment
Global Company (2SMCG)
• 4. Contesting Assets• Ability to neutralize the assets and competencies of competitors
Global Company (2SMCG)
• 5. Global Orientation of Functions• R&D, procurement, production, logistics, marketing, human
resources and finance functions internationalized organizational structure
DiscussionTo what degree are Unilever and Swatch global companies?
Discussion
Entrepreneurship
Entrepreneurs solve big problems
Japan
Craftsmanship
Manufacturing Spirit
Craftsmanship
Most difficult problems do not have obvious solutions
–Vision–Determination–Resourcefulness–Creativity–Willingness to change
direction
EntrepreneursNecessary Traits
Entrepreneurship creates positive change
Entrepreneurial Efforts
Employees Consumers Shareholders
Government
General Economy
• Great opportunities • Greater income
• New products, services
• Increased wealth
• Additional tax revenue• Reduction in social benefit need
• Secondary and tertiary creation of opportunities
Three Forms of Entrepreneurship
Individual Micro & Small Enterprises
Large Markets
Types of Entrepreneurship
Entrepreneurship driven by instincts to survive • Vegetable vendor• Cattle rearing• Tea Stall
• The area of microfinance• Supported by small loans between USD $50 - $200• Debt structure; short payback period• Proven area for finance
Small to medium businesses with scope and employment• 5-100 employees • Relies on internal business sense to succeed
• Currently with limited financial support• Need USD $20K to $250K• Generally rely on personal funds, family, friends, and money lenders
Large businesses with large scope and employment• Typically run by highly educated managers• Exit markets well understood
• Significant conventional venture capital support• Need USD millions in equity•Primarily service export or urban focused• Proven area for finance
Knowledge transfer
Idea incubation
Entrepreneurial India
Institutes of national importance
(IITs, IIMs, NITs, AIIMS, IISc etc.)
Look at Four
CIIE SINE
IIT Chenn
aiSID
Entrepreneurial India- “Top Incubation Center”
1. Centre for Innovation, Incubation& Entrepreneurship (CIIE) - IIM AhmedabadSet up in 2001Since inception CIIE has 15-odd innovations grow out of
the incubation centre in varied technologies
2. Society for Innovation and Entrepreneurship (SINE)- IIT BombaySet up in 2004It currently has 16 companies under its incubation
programme
Entrepreneurial India- “Top Incubation Center”
3. Cell for Tech Innovation, Development & entrepreneurship support- IIT ChennaiSet up in 2000Organises national level competitions, ‘Breakthrough’
(general business plan competition) and ‘Genesis’ (social entrepreneurship plan competition)
4. Society for Innovation and Development (SID) - IISc, BangaloreSet up in 2006The investigator is given a seed capital for Rs 20 lakh a
year for two years as soft loan for the approved plan
Entrepreneurship Type Synergy w/ Rural and Semi Urban India
Individual / Microfinance •Flexible, meets local requirements•Demonstrated ability to scale numbers of individuals•Microfinance an established and growing industry
Micro and small enterprise / informal sources
•Can provide value added employment to multiple people
• Only need one entrepreneur for multiple increases in income
•Flexible – tailored to local market and infrastructure requirements
Large markets / mainstream venture capital
•Can mobilize Fund quickly•Brings most sophisticated business experience•Commercial venture capital entrenched in India
•Limit to impact •Skills of great entrepreneurs not dispersed to others•Diminishing returns with market saturation
•Hamstrung by lack of capital and business building support
•Scale requirements limit flexibility•Limited understanding of rural and semi-urban India•Rural and semi-urban India unlikely to be attractive currently
Dis-synergy w/ Rural and Semi Urban India
Micro and small enterprises are key, receive least support
Entrepreneurial India- “Industry-Academia Interface”
• Cell for innovation management.
Biocon / Indian School of Biz (ISB)
• ‘HP innovate’ - recognise and reward outstanding creative ideas of young engineering graduates
Hewlett-Packard (HP) India
Micro Credit
The Traditional Microfinance Lending Process
Microfinance Institutions
Microfinance Institutions
EntrepreneursEntrepreneurs
Banks and NGOs
Banks and NGOs
• Microfinance institutions typically get the money that they lend, from banks or non-governmental organizations, or both
• This can be expensive, as it is often borrowed with interest
• There may also be difficult application procedures to access debt capital from non-governmental organizations
• Some organizations can even find themselves shut out due to the region they operate in, particularly post-conflict regions
• Restrictions that microfinance institutions face ultimately affect the entrepreneurs, who rely on microfinance institutions to serve them
The Kiva Microfinance Lending Process
Microfinance Institutions
Microfinance Institutions
EntrepreneursEntrepreneurs
You!You!
With Kiva, you can be micro-lender
You can act as a banker and provide the funds to microfinance institutions that they then lend to entrepreneurs
Kiva
• Kiva.org is a website which allows you to lend to an entrepreneur in the developing world who needs a loan
• Through Kiva, you loan as little as $25 to an entreprenuer at 0% interest
• Browse• Loan requests are
funded within minutes
Size of the loan and status
Size of the loan and status
Summary of the business
and loan, including when it is
expected to be paid back
Summary of the business
and loan, including when it is
expected to be paid back
Information on the
microfinance institution which is
managing the loan on the
ground
Information on the
microfinance institution which is
managing the loan on the
ground
Picture of the entrepreneurPicture of the entrepreneur
Description of the business and what the loan will be
used for
Description of the business and what the loan will be
used for
The business page also shows you all of
the other people around the world
who are contributing to this loan
The business page also shows you all of
the other people around the world
who are contributing to this loan
Kiva’s Microfinance Partners
NicaraguaHonduras
Togo
Senegal
Bulgaria
Gaza
Uganda
Kenya
Tanzania
Cambodia
Samoa
Mexico
Ecuador Nigeria
Ghana
Moldova
Mozambique
Ukraine
Afghanistan
Congo
Indonesia
Azerbaijan
Cameroon
Tajikistan
Bolivia
Haiti
Dominican Republic
Vietnam
Iraq
Kiva has 89 Microfinance Partners in 42 countries and is still growing
Paraguay
Pakistan
Peru
Mali
172
Internet Lender Transparent (“I know where my money is going”)
Sustainable (“If repaid, I will re-lend to someone else”)
Affordable (“I only need $25 to change someone’s life”)
Unique (“I love microfinance and I want to participate”)
Microfinance Institution 0% interest USD debt capital
No liability: Client loss borne by Internet Lender
Flexible repayment terms
Exhibit your work to an international audience
Kiva Introduction:
What are Kiva’s benefits?
Chavez and Entrepeneurship
HAARP
How
Silicon Valley
• Silicon Valley is a nickname for the southern part of the San Francisco Bay Area centered roughly on Sunnyvale. • coined by journalist Don C. Hoefler in 1971,
• It was named "Silicon" for the high concentration of semiconductor and computer related industry in the area, and "Valley" for the Santa Clara Valley.
• Fairchild Semiconductor really started and then fuelled it all
WWIIThe First Electronic War
British and American Air War in Europe
• 28,000 Active Combat Planes40,000 planes lost or damaged beyond repair:18,000 American and 22,000 British79,265 Americans and 79,281 British killed
The German Air Defense SystemThe Kammhuber Line
• Integrated Electronic air defense network• Covered France, the
Low Countries, and into northern Germany
• Protection from British/US bomber raids• Warn and Detect• Target and Aim• Destroy
German Air Defense System
Himmelbelt• Local Air Defense• Network• • Box ~30 x 20 miles• • Integrated network• of radars, flak,• fighters,• searchlights
• Radars fed Himmelbett centers
• • Operators worked from rows of
• seats in front of a huge screen
• • Fighters would fly orbits around
• a radio beacon• – fighter controller talked
it to the• vicinity of the target• • Fighters would turn on
its radar,• acquire the target, and
attack
Flak Radar Controlled Anti Aircraft Guns
• 15,000 Flak Guns• 400,000 soldiers in flak batteries
• Radar-directed flak to 30,000’• Fused for time
• Fragmentation rounds• No Proximity Fuses
• 105 mm flak
Two• The Electronic Shield • Electronic Warfare
Harvard Radio Research Lab Signals Intelligence and Electronic Warfare
• Reduce losses to fighters and flak• Find/understand German Air Defense
• Electronic and Signals Intelligence
• Jam/confuse German Air Defense• Radar Order of Battle• Chaff• Jammers
• Top Secret 800 person lab
ELINT Understand German Air Defense
• B-24J flights inside Germany to intercept German radar signals
• Fitted with receivers & displays• Wire and strip recorders
• Frequency, pulse rate, power, etc.• 50 MHz to 3 GHz
Window/ChaffJam Wurzburg
• Strips of aluminum foil• 1/2 Wurzburg frequency
• 46,000 packets tossed out by hand• Each packet contained 2,000 strips• Automatic dispensers came later
• First used July 1943• Raid on Hamburg• Shut down German air defense
• Used 3/4’s of Aluminum Foil in the US
Blind German Early Warning Radar
• Put Jammers on Airplanes• Carpet” AN/APT-2 Jammer
• Confuse Wurzburg radar• Shut down flak• Shut down GCI• 5 Watts
Fred Terman
• Who Ran this Secret Lab and became
• the Father of Electronic Warfare?
• • Harvard Radio Research Lab
• – Separate from MIT's Radiation Laboratory
• – Ran all electronic warfare in WWII
• – 800 people• – 1941-1944• • Director: Fredrick
Terman - Stanford
Fred Terman
• Stanford Professor of engineering 1926• encouraged his
students, William Hewlett and David Packard to start a company
• Dean of Engineering 1946
• Provost 1955
Spook Entrepreneurship
Terman Strategy
• Focus on microwaves and electronics• Not going to be left out of gov’t $’s this time
• Recruits 11 former members of RRL as faculty• Set up the Electronics Research Laboratory
(ERL)• “Basic” and Unclassified Research
• First Office of Naval Research (ONR) contract 1946
• By 1950 Stanford was the MIT of the West
Korean WarSpook Work Comes to Stanford
• • Applied Electronics Laboratory (AEL)• – “Applied” and Classified Military programs• – Doubles the size of the electronics program• – Separate from the unclassified Electronics• Research Laboratory• – Made the university, for the first time, a full• partner in the military-industrial complex
Cold War and Research
• The Cold War battlefield moves 500 miles east• Fear of a “nuclear Pearl Harbor”• Countermeasures, Elint and Sigint, become
critical• Stanford becomes a center of excellence for the
NSA,CIA, Navy, Air Force
The Cold War is an Electronic War
Stanford Helps Understand theElectronic Order of Battle
• Where are the Soviet radars?• Consumers; SAC, CIA.
• Details of the radars• NSA/CIA to contractors
• Periphery of Soviet Union known
U-2 Sigint Platform (1956)Stanford and Silicon Valley
• System IV• 150 - 40,000 MHz• Stanford Electronics Laboratories• Ramo Woolridge
• E/F Band ELINT recorder (1956)• A Band ELINT recorder (1959)• E/F Band Jammer (1959)
• Granger Associates• Watkins Johnson• – QRC -192 Elint receiver• – 50 -14,000 MHz• Communications receiver• – 100-150 MHz/3 channel tape recorder
Stanford Joins the “Black” World
• Electronics Research Laboratory• “Basic” and Unclassified Research
• Applied Electronics Laboratory (AEL)• “Applied” and Classified Military programs
• Merge and become the Systems Engineering• Lab (SEL) in 1955
• Same year Terman becomes Provost
Terman Changes the Startup/University Rules
• Silicon Valley as We Know it Starts Here• Graduate students encouraged to start
companies• Professors encouraged to consult for
companies• Terman and other professors take board seats• Technology transfer/IP licensing easy• Getting out in the real world was good for
your academic career
Stanford’s Role
• Interaction with industry (via legacy just discussed)
• Research funding and creativity
• Silicon Valley as a nearby planting ground for ideas
• Role of students as inventors, as disseminators, and as part of the workforce
• Encouraging entrepreneurship …
Microwave Valley - Components
• Klystrons, Carcinotrons, & Traveling Wave Tubes
• Eitel-McCullough (1934)• Varian Associates (1948)• Litton Industries (1946)• Huggins Laboratories (1948)• Stewart Engineering (1952)• Watkins-Johnson (1957)• Microwave Electronics Co. (1959)
1966
• Hewlett-Packard entered the general purpose computer business with its HP-2115 for computation, offering a computational power formerly found only in much larger computers. It supported a wide variety of languages, among them BASIC, ALGOL, and FORTRAN.
HP-2115
Spook Innovation
Radio Dishes Get Funded
• Attach ELINT receivers to Bell Labs
• 60’ radar antenna in New Jersey• Use “matched filter”
techniques• Developed at Stanford
• • Build steerable antenna at Sugar
• Grove Virginia• • Pay for and build
Stanford “Dish”• Hide relationships via
“cover agencies”
Project Grab 1960-1962
• ELINT in Space• No more overflights• Collect radar emissions from• Soviet air defense radars• Built by the Naval Research Laboratory• Used by SAC for EOB then given to the NRO
Microwave Valley - Systems
• Some Stanford Alum’s• Sylvania Electronics Defense Laboratory
(1953)• Countermeasures, search receivers, converters• Hired faculty as consultants, including Terman
• GE Microwave Laboratory (1956)• Granger Associates (1956)• Electronic Systems Laboratories (ESL) (1964)
• Sylvania EDL director William Perry founder
• Argosystems (1969)
Terman and the Cold WarSilicon Valley’s 1st Engine of Entrepreneurship
Valley Attracts Financial Attention1st West Coast IPO’s
• 1956 Varian• 1957 Hewlett Packard• 1958 Ampex
The Rise of Risk Capital
• “The Group” 1950’s• • First Bay Area “Angels”• – Reid Dennis• – William Bryan• – William Edwards• – William K. Bowes• – Daniel McGanney• ~ 10 deals $75 -$300K
Summary
• • Terman/Stanford/Government responsible for
• entrepreneurial culture of Silicon Valley• • Military primed the pump as a customer for
key• technologies• – Semiconductors, computers, Internet• – But very little technical cross pollination• • Venture Capital turned the valley to volume
corporate• and consumer applications
Hewlett Packard and Wozniack
• Steven Paul Jobs, Stephen Gary Wozniak and Ronald Gerald Wayne founded Apple Computer.
• In 1976, Ronald Wayne resigns from Apple Computer with only a one time payment of $80.
• Hewlett Packard grants Gary Wozniak the permission to create the Apple I.
Japan
Rice Markets And Taxes
• Taxes• Jomen (fixed amount)
system• Stabilization
• Transport• Roads• Trade Routes• Sekisho (passport
Controls)• Trade Cartels• Futures markets
Rich Merchants in Edo Period (Gosho)
Sumitomo
-16c Adopt Western copper refining, copper trade (Kyoto)-17c Move to Osaka-Besshi Copper Mine (under Bakufu’s commission)<Transition to Meiji>
Manager: Saihei Hirose-Avoiding gov’t confiscation-Introducing Western mining technology to renovate Besshi-Business diversification
MITSUI
-17c From Matsuzaka-Kimono trade & money exchange in Edo, Kyoto, Osaka – huge success<Transition to Meiji>
Manager: Rizaemon Minomura-Cope with bakufu policy to protect Mitsui business-Support and work with new government-Internal reform: from gosho to zaibatsu-1876 Establish Mitsui Bank & Mitsui Trading Company
The Black Ships
Negative Consequences
• Comprehensive commercial treaties
• treaties which the bakufu signed with the West were unequal treaties
• Japan had no right to decide tariffs (set at 5%)
• Japanese court could not judge foreign criminals in Japan.
• Japanese Indemnification for Political Problems
• Inflation: Samari Impoverished
• Arms
Positive Consequences
• New ideas, technology, industry and systems
• Silk and tea suddenly found huge overseas markets.
• Western Goods• Yokohama
merchants
Trade 1876-80
0% 20% 40% 60% 80% 100%
Export
Import
Silk Tea
Cottonyarn
Cottonfabrics
Woolengoods
Japanese Respose
• Initially, avoid colonization by the West• Rapid modernization and Westernization• Become “first-class” nation on a par with West• Fukoku Kyohei ( 富国強兵 ) - Rich Country, Strong
MilitaryShokusan Kogyo (殖産興業) - Increase Products, Build Industries
Konosuke Odaka: World of Craftsmen, World of Factories (NTT Publishing, 2000)
• In Japan’s early factories, traditional shokunin (craftsmen) and modern shokko (workers) coexisted.
• Craftsmen were proud, experienced and independent. They were the main force in initial technology absorption.
• Workers received scientific education and functioned within an organization. Their skills and knowledge were open, global and expandable.
• Over time, craftsmen were replaced by workers. Experience was not enough to deepen industrialization.
Monozukuri (Manufacturing) Spirit
• Mono means “thing” and zukuri (tsukuri) means “making” in indigenous Japanese language.
• It describes sincere attitude toward production with pride, skill and dedication. It is a way of pursuing innovation and perfection, disregarding profit or balance sheet.
• Many of Japan’s excellent manufacturing firms were founded by engineers full of monozukuri spirit.
Sakichi Toyota1867-1930
Konosuke Matsushita1894-1989
Soichiro Honda1906-1991
Akio Morita (Sony’s co founder)1921-1999
Four
Steps to Managing Export Operations Step 1 -Segment World markets
Product Quality and Product feature segmentation
Factors influencing segmentation
▪ Purchasing power
▪ Consumer tastes
▪ Weather conditions
▪ Level and dispersion of wages and technical skills
Important factors in analysis
▪ Emerging demand met by innovations in product technology in one country that are mirrored in other countries
▪ Deregulation and restructuring of markets
▪ Government policies and programs
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 4-2INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Steps to Managing Export Operations (contd..)Step 2 - Select an Entry Strategy to Promote
Sustainable Competitive Advantage
Standardized product to all markets
Product- Life cycle strategy
Localized market strategy
A combination of strategies can also be followed
Step 3 - Take a long-run Perspective
Initial costs must be viewed as investments
Returns on investments will not be immediate in export markets
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 4-3INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Pricing in Export Markets Strategy 1 - Requiring prices in export markets that yield
higher returns than are available in domestic markets ▪ Based on the belief that export operations are more risky relative to domestic
sales - can result in uncompetitive prices.
Strategy 2- Pricing to yield similar returns in domestic and export markets
▪ Based on the viewpoint that export markets do not necessarily differ from domestic markets
Strategy 3 - Pricing to yield lower returns, or even losses, in export markets—at least in the short run
▪ Reflects an approach that views export markets as the potential growth markets of the future - firm vulnerable to antidumping action
Strategy 4 - Pricing to sell production in excess of the needs of the domestic market so long as these sales make a contribution to fixed overhead and profit
▪ View of export markets as a dumping ground for production in times of excess capacity - firms very vulnerable to anti-dumping actions
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 4-4INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Stages of Export Market Involvement Stage 1 – Unplanned entry
Unsolicited order from abroad, overproduction, declining domestic sales, pressures, “follow the leader” behavior, government-sponsored trade fairs, and funded export missions
Stage 2 – Systematic evaluation of the impact of exports
Stage 3 - Exports become a major factor in the firm’s strategy and operations.
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 4-5INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Trade Intermediaries Import Traders
For every export, there is an import
Pure importers are market connectors; they create value through linking producers abroad to buyers in the domestic market
Pure importers usually have an advantage such as knowledge of the domestic market and practices
Export Traders They are also market connectors
Their advantages lie in knowledge of markets in particular countries or in knowledge of worldwide markets for particular products.
Trading Houses Pure import operations and pure export operations are joined
together in the trading houses McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 4-6INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Vital Questions to be asked Does our product and firm have a sustainable
competitive advantage in export markets and, if so, why? What are the export markets and the segments of those
markets that will value our product sufficiently (relative to other competing products) to offset our costs of production and distribution?
Should the firm export a standard product with a standard marketing mix worldwide or should it tailor its products and marketing mix to individual export markets?
What natural and government-imposed trade barriers impede linking production in one country to purchase in another, and what factors might facilitate this linkage?
What are the most appropriate channels of distribution for our product to achieve our goals in export markets?
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 4-7INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Present day export trade Tariff and nontariff barriers to trade have fallen
globally and free trade areas have developed.
Firms often now analyze trade opportunities on a regional, and sometimes even broader basis
Products are often not sent directly from one home production site to an export market abroad. Inputs are sourced in a number of countries and assembled in other countries, and the final product is sold in yet other countries
Trade intricately linked with foreign investment, joint ventures, licensing, franchising, contract production, and component sourcing
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 4-8INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Countertrade A special form of exporting is countertrade, the linked
exchange of goods for goods in international trade
Countertrade covers - Barter ,Counterpurchase, Compensation or buyback, Production sharing, Industrial offsets, Switches, Unblocking funds and Debt for equity swaps
Can be complicated and costly to negotiate and execute
Important characteristics of countertrade contracts need to be attended to carefully by an exporter
Generally countertrade is an inefficient form of trade. It creates costs and risks for both importers and exporters
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 4-9INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Major Project Development Importance and investment increased during the 1990s –likely to
continue to increase in the future. Generally for infrastructure development - electricity generation,
telecommunications, water and sewage treatment facilities, and even roads and ports.
Types of Major projects Turnkey projects
▪ Firm undertakes to construct a major project, then turns it over to its owners when it is in full operation
Build, operate, and transfer projects (BOT)
▪ Firms bid for the right to construct the project, the winning firm also operates the facility after it is completed.
▪ Ownership is limited to a certain time period, after which the project is transferred to another organization
Build, operate, and own projects (BOO)
▪ Firms bid for the right to construct the project.
▪ The winning firm also operates the facility after it is completed. .
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 4-10INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Exports, Imports, and International Finance Important aspects for exporters/importers
Effect of the real exchange rate on competitive advantage,
Effect of variations in the nominal exchange rate on export and import profitability
▪ Pricing of the goods in the importers currency
▪ Countered by setting up currency hedge
▪ Use of forward contracts
Effect of trade on financing needs and sources
▪ Irrevocable letter of credit (LoC) used to overcome uncertainty
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 4-11INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Six
Licensing
What is Licensing? Licensing is a contractual arrangement whereby
the licensor (selling firm) allows its technology, patents, trademarks, designs, processes, know-how, intellectual property, or other proprietary advantages to be used for a fee by the licensee (buying firm).
It is a strategy for technology transfer. Franchising is an organizational form where the
franchisor of a service, trademarked product, or brand name allows the franchisee to use the same in return for a lump sum payment and/or royalty, while conforming to required standards of quality, service, and so forth.
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.Beamish, Morrison, Inkpen and Rosenzweig
When is Licensing employed? Used both in technology intensive and non
technology-intensive industries (eg. Computer software, food, sport teams, publishing)
A licensor lacks the capital knowledge of foreign markets required for exporting or FDI, but wants to earn additional profits with minimal commitment.
Host-country governments restrict imports or FDI, or both; or the risk of nationalization or foreign control is too great.
A firm wishes to test the potential for future direct investment.
The technology involved is not central to the licensor’s core business. Generally only peripheral technologies are licensed.
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 6-3INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
When is Licensing employed? (contd..)• High prospects of technology “feedback” or “flowback”
• The licensor wishes to exploit its technology in secondary markets that may be too small to justify larger investments; the required economies of scale may not be attainable.
• The licensee is unlikely to become a future competitor.
• Rapid pace of technological change such that the licensor can remain technologically superior to the licensee. If the technology may become obsolete quickly, there is pressure to exploit it fully while the opportunity exists.
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 6-4INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Licensing Related Issues• Risks
• Dissipation of proprietary advantage• Tarnishing of reputation due to lack of quality• Profits may not be maximized• Difficulty in enforcement of license terms
• Intellectual Property Rights • IP legislations nonexistent or not enforced• “Reluctant Licensing” – attempts to offset piracy
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 6-5INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Licensing Related Issues (contd..)• Costs of Licensing
• Protection costs• License Agreement costs• Agreement Maintenance costs
• Unattractive markets for Licensing• Governmental regulatory schemes• Restrictions imposed on duration and exclusive rights to
territories• Foreign exchange controls and tax on royalty fees
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 6-6INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Elements of License Agreement
• A clear and correct description of the parties to the agreement
• A preamble or recitals describing the parties, their reasons for entering into the arrangement, and their respective roles.
• A list of defined terms for the purposes of the particular contract to simplify this complex document and to eliminate ambiguity.
• A set of schedules, in an exhibit or appendix, where necessary, to segregate lengthy detailed descriptions of any kind.
• Explicit description of the grant that is fundamental to the agreement and the nature of the rights being granted to the licensee.
• Description of any geographical limitations on the licensee’s manufacturing, selling, or sublicensing activities.
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 6-7INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Elements of License Agreement (contd..)• A description of any exclusive rights to manufacture and
sell that may be granted including rights to sublicense.
• The terms relating to the duration of the agreement and its extension or review.
• Provisions for the granting of rights to downstream refinements or improvements made by the licensor in the future.
• Provisions for “technological flowback” agreements.
• Details regarding the royalties or periodic payments based on the use of licensed rights.
• Specification of minimum performance requirements and other protection clauses
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 6-8INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Some Licensing Announcements• Starbucks, the U.S. coffee chain, hopes to have 500
branches in Asia by 2003 through licensing agreements• Licensed properties account for nearly half of the $4
billion in home decorating retail sales sold for the Halloween season.
• Palm makes new licensing deals with Intel, Motorola and Texas Instruments, to expand the Palm operating system into all kinds of mobile devices from handhelds to cell phones and perhaps even wristwatches.
• On June 26, 2001, hundreds of independent record companies in Britain and Europe signed a licensing agreement with Napster to immediately make thousands of tracks available to computer-users worldwide.
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 6-9INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Eight
Strategy
The Changing World• Globalization is the buzzword!
• Change in traditional approaches towards more innovative strategies
• Firms forced to trade off between globalization and localization
• Transformation is slow mainly due to anti-globalization protests and the Internet
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 8-2INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Pressures towards Globalization• Broad factors making global competition possible
• Freer Trade• GATT, WTO agreements• Creation of free trade zones, regional trading blocks like EU,
ASEAN• Global financial services and capital markets
• Growth seen in FDIs• Growth of Overseas venture capitalists and trans-national
banks• Advances in communications technology
• Ease of organizational control• The Internet
• Facilitates ease of communication• CRM, EDI systems are now in place in many companies• Internet exchanges link buyers and sellers worldwide and
have opened up new markets
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 8-3INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Pressures towards Globalization (contd..)
• Industry Specific Factors
• Universal customer needs
• Global customers
• Many MNCs sell to other MNCs and need to keep up with the international expansion of the customers
• Global competitors
• High investment intensity
• High investments required for R&D, advertising due to increased competition
• When investment intensity is high, many companies are eager to amortize expenses by selling products globally
• Pressures for cost reduction
• Economies of scale and learning are important in price-sensitive markets
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 8-4INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Pressures towards Localization
• Country specific Factors
• Trade barriers
• Tariffs, subsidizing domestic production, voluntary export restrictions, competing technical standards
• Cultural differences
• Cultural and religious beliefs, purchasing power, weak enforcement of laws
• Nationalism
• The Internet
• Anti-globalization activism
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 8-5INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Pressures towards Localization (contd..)
• MNC-Specific Pressures
• Organizational resistance to change
• Logistics limitations
• Management skills and competencies
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 8-6INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Business Strategies
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 8-7INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Exhibit 8-1 Mapping Industries
Need for Local ResponsivenessLow High
HighSemiconductors
Watches
Civil Aircraft
Automobiles
Telecommunications
Aerospace
White Goods
Packaged Foods
Funeral HomesCement
Nee
d f
or
Ver
tica
l In
teg
rati
on
Global Industries
Multidomestic Industries
Regional Industries
Key Recommendations for Managing the Formulation Process
• Invest Heavily in Data Collection
• Use multiple data sources, tap external sources and develop internal sources to overcome suspect data
• Determine the Potential for Critical Scale Economies
• Weigh the Value of other Globalization Benefits
• Rotate Country Managers More Frequently to Help Them Develop a Global Vision
• Be Prepared to Reassess your Performance Measurement System and Reward System
• Take a Balanced Approach
McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.
Slide 8-8INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Twelve
Govt Relations
Sources of Trade Regulation• GATT and WTO
• Set up to deal with tariffs and non tariff barriers to trade• Tokyo Round in mid 1970s
• Tariff barriers reduced significantly• Partial success with non-tariff barrier reduction mainly
due to complexity and sensitivity• Uruguay Round – 1986-1993
• Challenging problems addressed – technical barriers, trade in services, intellectual property rights, trade in technology etc.
• More member countries – 117• Problems of developing countries addressed
• WTO formed – meets every 2 years
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Slide 12-2INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Trade Agreements and Associations• U.S. – Canada Free Trade Agreement
• Formed January 1988 – world’s largest free trade area
• Dispute resolution mechanisms established
• NAFTA formed with Mexican representatives
• Association of Southeast Asian Nations
• ASEAN formed August 1967 with 5 member states, presently has 10 members
• Regarded as a loose economic cooperation channel but expected to change, FTA with China expected
• Move towards ASEAN FTA
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Slide 12-3INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Trade Agreements and Associations (contd..)• Asia-Pacific Economic Corporation
• APEC established 1989, presently has 21 members
• Primary vehicle for open trade and economic cooperation
• Agreement to develop free trade yet to be reached
• ANDEAN and MERCOSUR
• Composed of South American nations with an objective of setting a common external tariff
• European Union
• Slow process of European integration
• Founded on the principle of supranationality
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Slide 12-4INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Opportunities and Threats
Threats Government Actions Opportunities
Increase costsReduce ROICompetitive disadvantageIncreased competitionCo-opt
RegulationTaxationExpenditurePrivatizationConsultation
Control competitionCompetitive advantageSubsidies, grants, customerLevel playing fieldInfluence policy
Exhibit 12- 1Opportunities and Threats from Government Actions
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Slide 12-5INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Political Strategy• Essential for a firm to form and implement political
strategy• Formulation
• Objectives• Issues• Stakeholders (allies, opponents, targets)• Position/Case (“public interest”)
• Implementation • Timing• Techniques
• Direct (negotiate, litigate)• Indirect (advocacy advertising, political contributions)
• Vehicles (e.g. coalition, Government Relations department, consultants)
• Style (e.g., confrontation or conciliation)
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Slide 12-6INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Impact of International Business-Government InteractionObjectives and Motivations of MNC-SOE Alliances and Acquisitions
• Objectives of MNCs• Increase profits, reduce potential risks and achieve economies of scale• Control/preempt competition, expand market share, achieve first mover
advantage• Obtain lower-cost production or distribution facilities• Develop or adapt technology jointly, obtain new labor or technology resources• Expand domestic sales through overseas operations• Obtain new labor or technology resources
• Objectives of SOEs or Privatized Enterprises• Ensure survival and financial viability• Gain competitiveness and become profitable• Acquire new technology and improve managerial competence
• Objectives of Governments• Generate public revenues from SOE sales• Reduce subsidies to loss making SOEs, foreign debts and public budget deficits• Strengthen private sector, increase national productivity and stimulate growth• Expand shareholding among citizens and reduce government role in economy
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Slide 12-7INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Proactive Management of Relations
1“Government Policy as lever for global competitiveness” approach
Example: Porter’s home base/cluster concept
3Non-location bound firm specific characteristics in MNE government interactionExample: Use of strategic trade policy arguments to obtain government favors.
2“Good corporate citizen” approachGovernment policy not viewed as a major determinant of international competitiveness
4Location bound firm specific characteristics in MNE government interactionGovernment policy viewed as something which can be influenced through lobbying,i.e., a proactive strategy
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Slide 12-8INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
MNE’s Perception of Government Policy
MN
E’s
ob
ject
ives
in B
usi
nes
s –
Go
vern
men
t In
tera
ctio
ns
To achieve Benefits ofintegration
To achieve Benefits ofNational
Responsiveness
Viewed as outside the InfluenceOf MNE Managers
Viewed as Potentially Influencedby MNE Managers
Exhibit 12-4MNE’s approach to Government Policy
Bargaining Power• Discriminatory enforcement occurs due to
differing characteristics of subsidiaries – Bargaining Power
• Sources of Bargaining power for host country
• Growing capability to replace the MNE’s products
• Control over access to raw materials, labor and capital
• Sources of Bargaining power for MNE
• Vertical integration
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Slide 12-9INTERNATIONAL MANAGEMENT 5/e Beamish, Morrison, Inkpen and Rosenzweig
Lockout
• Acquiring Technology Cheaply.
• Innovating.• Selling Product
Below Cost.• Build market share.
• Adquiriendo Tecnología Barato.
• Innovación. • Venta Del Producto
Debajo Del Coste. • Cuota de mercado
de la estructura.
Lockout Case: VCR• In the 1980s, Japan claimed
the global VCR market for itself by under-pricing potential competitors. They acquired a patent for the VCR process from an American company that couldn’t find a way to make a short-term profit on the VCR.
• Japanese companies then began selling VCRs below cost to build market share & soon were selling at such a high volume that their costs declined to a profitable level.
• Japanese economies of scale were so great that foreign competitors were locked out of the market.
• En los años 80, Japón demandó el mercado global del VCR para sí mismo por los competidores potenciales de debajo-tasacio'n. Adquirieron una patente para el proceso del VCR de una compañía americana que no podría encontrar una manera de hacer un beneficio a corto plazo en el VCR.
• Las compañías japonesas entonces comenzaron a vender VCRs debajo de coste para construir la cuota de mercado y pronto vendían en un tan alto volumen que sus costes declinaron a un nivel provechoso.
• Las economías japonesas de la escala eran tan grandes que los competidores extranjeros eran bloqueados fuera del mercado.
Ch 1
Expanding Abroad: Motivations, means & Mentalities
INB / MGT 352 International Management
Spring 2008
Transnational Management, Text, Cases, and Readings in Cross-Border Management, Christopher Barlett, Sumantra Ghoshal & Palu Beamish, 5th Edition, 2008
Part 1: The Strategic Imperatives
Definition of a Multinational Enterprise (MNE)• MNE have “substantial direct investment” in
foreign countries (1) and “actively” (not passively) manage and coordinate these offshore assets, and their operations as integral parts of the company, both strategically an organizationally.
• MNEs include ExxonMobil, Royal Dutch Shell, BP, Toyota, Ford, DaimlerChrysler, GE, Wal-Mart, GM, ChevronTexaco
• In addition, definition of MNEs includes Intel, Unilever, Samsung, Singapore Airlines, McKinsey & Co., and Starbucks
Note 1: These are not simply trading relationships of an import/export business.
Explosive Growth (MNE)• Number of International Companies
• UNCTAD - United Nations agency in charge of all matters relating to FDI and international corporations.• 1995 – 45,000 parent companies with 280,000 foreign
affiliates ($7 trillion in sales)• 2004 – 70,000 parent companies with 690,000 foreign
affiliates ($19 trillion in sales)
Economic Importance of MNEs• MNEs are equivalent in economic importance to
medium-sized economies of Chile, Hungary, or Pakistan
• MNEs have considerable influence• Employ high percentage of business graduates• Pose the most complex strategic and organizational
challenges for their managers
Top 500 MNEs• 70% of world trade• 85% of world automobiles• 70% of computers • 35% of toothpaste• 65% of soft drinks
Largest 100 MNE• In 2003, excluding banking and finance, the
largest 100 MNEs accounted for over• $ 8 Trillion in worldwide assets, of which • $4.0 trillion was located outside there respective home
countries.
Motivations (the ‘Why’) of MNE Int’l Expansion• Traditional Motivations
• Securing key supplies (aluminum, rubber, oil, etc.)• Market-seeking behavior (Nestle, Bayer, Ford)• Access to low-cost factors of production (clothing,
electronics, household appliances, watches, • Emerging Motivations
• Scale economies • Economies of scale and scope• Economies of scope
• Ballooning R&D investments• Shortening product life cycles• Scanning and learning capability• Competitive positioning
Motives to Go International
The Historically Indigenous Firm
Cost-ReductionMotives
StrategicMotives
Market-SeekingMotives
Global Strategy: An Organizing Framework
Strategic Objectives
National Differences
Scale Economies
Scope Economies
Achieving efficiency in current operations
Benefiting from differences in factor costs – wages and cost of capital.
Expanding and exploiting potential scale economies in each activity.
Sharing investments and costs across products, markets, and businesses.
Managing risks Managing different kinds of risks arising from market or policy-induced changes in comparative advantage of different countries.
Balancing scale with strategic and operational flexibility.
Portfolio diversification of risks and creation of options and side-bets.
Innovation, learning, and adapting.
Learning from societal differences in organizational and managerial processes and systems.
Benefiting from experience – cost reduction and innovation.
Sharing learning across organizational components in different products, markets, or businesses.
MNE Advantages Int’l Operations• Ensuring critical supplies• Entering new markets • Tapping low-cost factors of production• Leveraging their global information access• Capitalizing on competitive advantage of multiple
market positions• Use strength to play strategic game of “global
chess”
International Mindsets• Specific pressures will affect competition in
industries and firms that cross national boundaries causing
• a “global orientation” that relies on coordination of worldwide activities to maximize the collective organization, and
• a “multidomestic orientation” that responds to individual country opportunities and constraints.
• Increasingly, there are pressures for international companies to be both globally efficient and locally responsive. These pressures derive from environmental changes such as new technologies, unanticipated competition, and the convergence of industry boundaries. In such situations, firms exhibit a “transnational mindset” to simultaneously gain efficiency and local market benefits.
Assets, responsibilities decentralized
HQ
International mentality
Formal control systems
International Strategy
4-294
International Strategy
4-295
Assets, responsibilities decentralized
International mentality
Formal control systems
HQ
• Main role is to support the domestic parent company in different ways, such as contributing incremental sales to domestic manufacturing operations
• Products developed for domestic market sold abroad
• Technology and other knowledge are transferred from parent company to overseas operators
• Offshore manufacturing represents a means to protect company’s home market
• Companies with this mentality regard themselves fundamentally as domestic with some foreign appendages
• Managers assigned to overseas operations are often domestic misfits who happen to know a foreign language or have previously lived abroad
• Decisions related to foreign operations tend to be made in an opportunistic or ad hoc manner
An “International Business Strategy” Deploying Global Information Systems (GIS)
4-2964-296
International Strategy
International Strategy
International Diagram
GIS Deployment Strategy
Assets, responsibilities decentralized
International mentality
Formal control systems
HQ
Involves transferring knowledge and skills from the central headquarters to the foreign operations.
Businesses that follow an international strategy tend to have distributed GIS in which systems in the central headquarters are connected to those in the foreign operations.
HQ
Financial reporting flows
Multinational Strategy
Loose controls; strategic decisions remote
HQFinancial Reporting flows
Loose controls; strategic decisions remote
• A multinational strategic mentality develops as managers begin to recognize and emphasize the differences among national markets and operating environments
• Companies adopt a more flexible approach to their int’l operations by modifying their products, strategies, and even management practices country by country
• As they develop national companies that are increasingly sensitive and responsive to their local environments, these companies undertake a strategic approach that is literally multinational: Their worldwide strategy is built on a foundation of the multiple, nationally responsive strategies of the company’s worldwide subsidiaries.
Multinational Strategy
• Managers tend to be highly independent entrepreneurs, often nationals of the host country• Using their local market knowledge and the parent company’s willingness to invest in these
growing opportunities, these entrepreneurial country managers often can build significant local growth and considerable independence from headquarters
• Results in a very responsive marketing approaches in the different national markets, it also gives rise to an inefficient manufacturing infrastructure within the company
• Plants are built more to provide local marketing advantages or improve political relations than to maximize production efficiency
• Similarly, the proliferation of products designed to meet local needs contributes to a general loss of efficiency in design, production, logistics, distribution, and other functional tasks
An “Multinational Strategy”Multinational Strategy
Businesses that follow a multinational strategy tend to have decentralized, or independent, information systems for their central headquarters and different
foreign operations.
Multinational Strategy
Multinational Diagram
Central home base; decentralized production, sales, marketing in other countries. The business allows its foreign operations to function largely independently.
GIS Deployment Strategy
HQFinancial Reporting flows
Loose controls; strategic decisions remote
HQ
Tight controls; centrally driven strategy
One-way flows,goods, information,and resources
Global Strategy
4-300
Global Business StrategiesGlobal Strategy
HQTight controls; centrally driven strategy
One-way flows,goods, information,and resources
• In an operating environment of improving transportation and communication facilities and falling trade barriers, some companies adopt a very different strategic approach for their int’l operations
• These companies think in terms of creating products for a world market and manufacturing them on a global scale in a few highly efficient plants, often at the corporate center
• Subscribe to Professor Levitt’s to make and sell “the same thing, the same way, everywhere”
• In an operating environment of improving transportation and communication facilities and falling trade barriers, some companies adopt a very different strategic approach for their int’l operations
• These companies think in terms of creating products for a world market and manufacturing them on a global scale in a few highly efficient plants, often at the corporate center
• The underlying assumption is that national tastes and preferences are more similar than different or that they can be made similar by providing customers with standardized products at adequate cost and with quality advantages over those national varieties they know
• Strategic approach requires considerably more central coordination and control than the others and is typically associated with an organizational structure in which various product or business managers have worldwide responsibility
• R&D and manufacturing activities are typically managed from headquarters, and most strategic decisions also take place at the center
Global Strategy Example
Global Business Strategies
4-303
All use global information systems (GISs) in various ways …
4-303
Multinational Strategy
HQFinancial Reporting flows
Loose controls; strategic decisions remote
Transnational Strategy
International Strategy
Global Strategy
HQTight controls; centrally driven strategy
One-way flows,goods, information,and resources
Assets, responsibilities decentralized
International mentality
Formal control systems
HQ
Complex controls; high coordination skills,
Coordinated strategic decision process
Heavy flows;materials, peopleInformation &technology
Distributedcapabilities,resources &decision making
HQ
A “MNE Business Strategy” Deploying Global Business Systems
The central headquarters coordinates the activities of the foreign operations closely.
4-304
All use global information systems (GISs) in various ways …
4-304
Global Strategy
Transnational StrategyGIS Deployment Strategy Business that follow the transnational strategy require complex, integrated GIS in which the central headquarters and all the foreign operations participate equally
Global Strategy Diagram
HQTight controls; centrally driven strategy
One-way flows,goods, information,and resources
Transnational Strategy
Complex controls; high coordination skills, coordinated strategic decision process
Heavy flows;materials, peopleinformation, technology
Distributedcapabilities,resources &decision making
4-305
HQ
Transnational Strategy
Complex controls; high coordination skills,
Coordinated strategic decision process
Heavy flows;materials, peopleInformation &technology
Distributedcapabilities,resources &decision making
HQ
• The emerging requirement is for companies to become more responsive to local markets and political needs and pressures to develop global-scale competitive efficiency
• Key activities and resources are neither centralized in the parent company nor so decentralized that each subsidiary can carry out its own tasks on a local-for-local basis
• Instead, the resources and activities are dispersed but specialized, to achieve efficiency and flexibility at the same time
• These dispersed resources are integrated into an interdependent network of worldwide operations
• Transnational mentality recognizes the importance of flexible and responsive country-level operations – hence a return of “national” into the terminology
• Compared to multinational approach, it provides for means to link and coordinate those operations to retain competitive efficetiveness and economic efficiency, as is indicated by the prefix “trans”
• The resulting need for intensive, organization-wide coordination and shared decision-making implies that this is a much more sophisticated and subtle approach to MNE management
A “Transnational Business Strategy” Deploying Global Business Systems
Truly global firm; no national headquarters; value-added activities managed from global perspective; optimizes supply & demand, taking advantage of local competitive strengths
4-307
All use global information systems (GISs) in various ways …
4-307
Transnational Strategy
Transnational Strategy
Transnational DiagramComplex controls; high coordination skills,
Coordinated strategic decision process
Heavy flows;materials, peopleInformation &technology
Distributedcapabilities,resources &decision making
HQ
GIS Deployment StrategyBusiness that follow the transnational strategy require complex, integrated GIS in which the central headquarters and all the foreign operations participate equally
Global “Chess” Between Large MNEs• Customers demand differentiation along with the
level of cost & quality typical of global products• Host governments have more aggressive
development & tax agendas• MNEs fight for flexibility to continuously change
product designs, sourcing, and pricing
Multidomestic Strategy Example
Chapter 2: Understanding the International Context
Responding to Conflicting Environmental Forces
2-312
Three Conflicting Setsof External Demands
• Forces for cross-border integration and coordination
• Forces for national differentiation and responsiveness
• Forces for worldwide innovation and learning
2-313
Forces for Global Integrationand Coordination
• Economies of Scale
• Economies of Scope
• Factor Costs
• Increasingly Liberalized Environment for Trade
• Expanding Spiral of Globalization
2-314
Global Competitors as Change Agents
• For industry globalization to take place:• Underlying drivers (economies of scale and scope, etc.)
have to be in place• But always triggered by actions of one of two global
“change agents”
• Examples:• British Airways (airlines)• Starbucks (premium coffee shops)• ISS (cleaning services)
2-315
Global Industries
To borrow from Shakespeare:
• Some industries are born global
• Some are made global
• Others have global-ness thrust upon them
2-316
Forces for Local Responsiveness
• Cultural differences• Consumer tastes and preferences• Ways of doing business
• National infrastructure• Technical standards (e.g., voltage, TV broadcast, etc.)• Distribution channels (e.g., supermarkets vs. bazaars)
• Government demands• National laws and regulations• Host country pressures and demands
• Local competitors• Appeal to nationalism
2-317
MNC-Host Government Relationship: A Study in Love/Hate
MNC
MNCMNC MNC
MNC MNC
Host Country Government
Sought for its capital, technology,
management
Accommodated for its contributions to local social
and economic needs
Courted for its global efficiency and world
market access
Feared for its power and independence
Disliked for its impact on society
Resented for the nation’s dependence on it
2-318
Sources of Conflict
Motivators Strategic viability: global
competitiveness Operational viability: profit
Objectives Freedom to integrate
operations globally Ability to market and ability
to transfer resources freely across borders
Measures (primarily financial)
Profit ROI Market share
Motivators National independence:
social, economic, political International competitiveness
Objectives Protect national sovereignty
from external influence Capture global benefits of
export markets, efficient industrial base, leading edge technology
Measures (social/economic/political) Social cost/benefit Political return Industrial policy “fit”
MNC Host Government
2-319
Sources of Power
No investment or exit option
Access to needed resource (capital, technology, etc…)
Willingness and ability to align with national priorities
Development of local support (shareholders, suppliers)
Position in global economy (market, scale, competitiveness)
Home country support
Legislative power: regulate operating and strategic decisions
Market power-government as a customer
Incentives, supports Attractiveness to
competitors Local operations linkage
to global position (“hostage”)
Shift in power after investment (“obsolescing bargain”)
MNC Host Government
2-320
Recent Backlash against Globalization• Early 1990s: Global integration forces dominated
• Most host governments actively sought investment• Free Trade movement gathered pace
• Late 1990s: Highly visible backlash• Anti-globalization movement (Seattle, Genoa, etc…)• Many developing countries are highly sceptical of benefits
• Many MNEs currently rethinking their approach toward globalization• Need to better articulate benefits they bring
2-321
Forces for Worldwide Innovationand Learning
• Increased need for rapid and coordinated worldwide innovation driven by:
• Shortening product life-cycles
• Increased cost of R&D
• Emergence of global technology standards
• Competitors’ ability to develop and diffuse innovation globally
2-322
Responding to Diverse Forces Simultaneously
• Strength of forces vary by industry; three typical models
• Global industries (consumer electronics)
• Multinational industries (branded packaged goods)
• International industries (telecom)
2-323
Global & National Forces: Industry Effect
Global Integration
National Responsiveness
Consumer Electronics
Telecom Switching
BrandedPackaged ProductsCement
2-324
Transition to Transnationality
• By 1990s environmental forces undergoing change• New bases of competition emerging• New competitors rising on the basis of different competitive
capabilities
• Increasingly industries were becoming transnational• Companies needing to respond to all three diverse and
competing sets of forces: global integration, national responsiveness, and worldwide learning
2-325
A Final Word: Risk of “Globalization Glaucoma”
• Blindness to everything but global forces• Short-sightedness to localizing forces
“As the 1990s were drawing to a close, the world had changed course, and Coca-Cola had not. We were operating as a big, slow, insulated, sometimes even insensitive “global” company; and we were doing it in an era when nimbleness, speed, transparency and local sensitivity had become absolutely essential.”
Douglas Daft, CEO, Coca-Cola, March 2000
International investment agreements:key issues and features
Topics for discussion
1. Definitions and scope2. Admission and establishment3. Four pillars of protection:
− Standards of treatment− Expropriation− Transfers− Settlement of disputes
4. Liberalisation through NT and MFN5. Transparency
Definitions and Scope
•Matter coverage: define those assets to which the treaty applies.
•Subject coverage: define those persons and legal entities to which the treaty applies.
•Geographical coverage: define the territory to which the treaty provisions apply.
•Temporal coverage: determine the date of entry into force of the IIA and its duration.
Scope of an IIA
Definition of “investment”Depending on purpose of treaty, two main approaches:
A. Open-ended asset-based definition : broad protection
Including usually:
Movable and immovable property Various types of interest in companies Claims to money and claims under a contract having
a financial value Intellectual Property Rights Business concessions, including natural resources
concessions
Example of asset-based definition BIT Ethiopia – Sudan 2000 Art. 1 Definitions
For the purpose of this Agreement: a) "Investment" means every kind of asset invested by Investors of one
Contracting Party in the territory of the other Contracting Party, in accordance with the laws and regulations of the latter, and in particular, though not exclusively, includes:
(i) movable and immovable and any other rights such as mortgages, liens or pledges;
(ii) Shares, stocks and debentures of companies or interests in the property of such companies;
(iii) claims to money or to other assets or any performance having an economic value,
(iv) intellectual and industrial property rights, including rights with respect to copy rights, patents, trade marks, trade names, industrial designs, trade secrets, technical processes and know-how and goodwill;
(v) business concessions conferred by Law or under contract, including concessions to search for, cultivate, extract or exploit natural resource;
A change in the form in which assets or capitals have been invested or reinvested shall not affect their designation as "Investments" for the purpose of this Agreement.
Definition of “investment”
B. Alternative definitions:
Closed list definition (finite list)
Enterprise–based definition
Focus on the “business enterprise” or the “controlling interests in a business enterprise”. Includes the establishment or acquisition of a business enterprise, as well as a share in a business enterprise, which gives the investor control over the enterprise
Tautological definition
Definition of the term "investment" in economic terms. Covering every asset that an investor owns and controls, directly or indirectly, that has the characteristics of an investment. Approach complemented by explicit exclusion of several kind of assets
Investment - key issues Claims of money: will all claims of money be covered? Even those
claims of money not related to FDI? What about payments derived from commercial transactions or from the sale of goods and services?
Debt instruments: will all debt instruments be covered? What about those debt instruments with short-term maturity? Should there be a minimum maturity term specified?
Intellectual property rights (IPRs): should a reference to a legal framework be included? Would only those IPRs provided in accordance to domestic legislation be considered an investment? Those IPRs existing pursuant international agreements?
State Contracts: need for special treatment in definitions or substantive parts of the agreement.
Exclusions: Public debt? Property acquired not for an economic activity (i.e. leisure houses)? Short term debt instruments?
Definition of “investor”A. Natural persons
Criteria of nationality Criteria of domicile or residence
Natural persons - exampleNationality criterion:
BIT China - Germany, 2003, Art. 1 Definitions 2. the term "investor" means (a) in respect of the Federal Republic of Germany: Germans within the meaning of the
Basic Law for the Federal Republic of Germany, (…) (b) in respect of the People’s Republic of China: natural persons who have the nationality
of the People’s Republic of China in accordance with its laws, (…)
BIT Uganda – Mozambique, Art. 1 Definitions
4. "investor" of a Contracting Party shall mean: a) any natural person who is a national of that Contracting Party in accordance with its
law…
Domicile or residence criterion: BIT Canada -Argentina, 1991, Article 1- Definitions
b) The term "investor" means (i) any natural person possessing the citizenship of or permanently residing in a Contracting Party in accordance with its
laws, (…) who makes the investment; (…).
Definitions - investorB. Legal entities
Criteria to determine the nationality of the legal entity/investor:
Country of organization or incorporationCountry of seatOwnership and controlDenial of benefits clause: (deny treaty protection to
those companies that are controlled by investors of a non-Party (particularly with which the host country does not maintain diplomatic relations) and/or that have no substantial business activities in the territory of the party under whose laws it is constituted)
Legal entities – example 1Criterion of the “seat”:
BIT China - Germany, 2003
Article 1: Definition 2. the term "investor" means (a) in respect of the Federal
Republic of Germany: any juridical person as well as any commercial or other company or association with or without legal personality having its seat in the territory of the Federal Republic of Germany, irrespective of whether or not its activities are directed at profit; (…).
Legal entities – example 2Criterion of ownership or control: Andean Community - Decision 291 Regime for theCommon Treatment of Foreign Capital and Trademarks,Patents, Licensing Agreements and Royalties
Article 1: … Foreign Enterprise:
an enterprise incorporated or established in the recipient country, in which national investors own less than fifty one percent of the equity capital or, if more than that, in the judgment of the competent national agency that percentage is not reflected in the technical, financial, administrative and commercial management of the enterprise.
Legal entities – example 3Example of combined criteria:
BIT China - Germany, 2003
Article 1: Definition 2. the term "investor" means (b) in respect of the People’sRepublic of China:
economic entities, including companies, corporations, associations, partnerships and other organizations,incorporated and constituted under the laws and regulations of and with their seats in the People’s Republic of China, irrespective of whether or not for profit and whether their liabilities are limited or not.
Legal entity – example 4Extent of treaty protection:
US BIT Model, 2004
Article 17: Denial of Benefits 2. A Party may deny the benefits of this Treaty to an investor
of the other Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Party and investors of a non-Party, or of the denying Party, own or control the enterprise.
Admission and Establishment
Admission of foreign investmentTraditionally, right of States to control and limit
addmission. Recent trend towards States deciding to limit this right.
Two approaches in IIAs:
Admission model: entry in accordance with laws and regulations of the host country: NO LIBERALIZATION
Pre-establishment model: right of establishment. National treatment at the pre-establishment stage (approach of western hemisphere, Japan, Korea): LIBERALIZATION : removal of barriers to access
Admission modelHost country discretion: laws and
regulations relating to entry may change
Once admitted, foreign investment is granted NT and MFN
No exceptions in the treaty: no need.
Australia – India BIT
1. Each Contracting Party shall encourage and promote favourable conditions for investors of the other Contracting Party to make investments in its territory. Each Contracting Party shall admit such investments in accordance with its laws and investment policies applicable from time to time.
Tanzania – Netherlands BIT (2001)
Art 2 Promotion and Protection of Investments
“Each Contracting Party shall within the framework of its laws and regulations, promote economic cooperation through the protection in its territory of investments of investors of the other Contracting party. Subject to its right to exercise powers conferred by its laws or regulations, each Contracting Party shall admit such investments.”
Examples of admission model:
Pre-establishment modelNT and MFN at all stages of the investment,
including at the pre-establishment stage: ‘establishment, acquisition and expansion’.
Lists of exceptions: all countries have closed sectors or non conforming measures.
Mostly negative lists. Very few exceptions (TAFTA)
The commitment is made in the Treaty, the national laws must be in conformity with Treaty obligations.
Establishment of investment Each contracting Party shall permit establishment of a new business enterprise or acquisition of an existing business enterprise or a share of such enterprise by investors or prospective investors of the other Contracting Party on a basis no less favorable than that which, in like circumstances, it permits such acquisition or establishment by: (a) investors or prospective investors of any third state; (b) its own investors or prospective investors.
Treatment of Established Investment 1. Each Contracting Party shall grant to investments and to returns of investors of the other Contracting Party treatment no less favourable than that which, in like circumstances, it grants to investments and returns of: (a) investors of any third State; (b) its own investors.
Each Contracting Party shall grant investors of the other Contracting Party, as regards the enjoyment, use, management, conduct, operation, expansion, and sale or other disposition of their investments or returns, treatment no less favourable than that which, in like circumstances, it
grants to: (a) investors of any third State; (b) its own investors.
Pre-establishment NT and MFN model
Canada-Lebanon BIT
Fair and Equitable Treatment
1. Fair and Equitable Treatment
Absolute standard (not relative)
3 approaches:
• Stand alone FET
• FET in accordance with the principles of international law
• FET combined with MFN/NT
Dutch model BIT
“1. Each Contracting Party shall ensure fair and equitable treatment of the investments of nationals of the other Contracting Party and shall not impair, by unreasonable or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those nationals. Each Contracting Party shall accord to such investments full physical security and protection. …”
Kenya – United Kingdom BIT (1999), Art. 2 Promotion and Protection of Investment
“(2) Investments of nationals or companies of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. Neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its territory of nationals or companies of the other Contracting Party”
Fair and Equitable Treatment: examples
Fair and Equitable Treatment: examples
Uganda – Eritrea BIT (2001), Article 3 Treatment of Investment
(1). Each Contracting Party shall in its territory accord to investments made by investors of the other Contracting Party fair and equitable treatment which in no case shall be less favourable than that accorded to its own investors or to investors of any third state, whichever is the more favourable from the point of view of the investors.
(2) Each Contracting Party shall in its territory accord investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investment, fair and equitable treatment which in no case shall be less favourable than that accorded to its own investors or to investors of any third State, whichever of these standards is the more favourable from the point of view of the investor.
2. International Minimum Standard of Treatment
Content of the clause in US and Canadian treaties Clarification of the standard Explicit reference to international customary law (ICL)
Relationship with other standards Explicit clarification that the violation of any other obligation of the
agreement does not entail the violation of the minimum standard of treatment – Same issue for State Contracts.
1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. The obligation in paragraph 1 to provide: (a) “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and (b) “full protection and security” requires each Party to provide the level of police protection required under customary international law.
3. A determination that there has been a breach of another provision of this Treaty, or of a separate international agreement, does not establish that there has been a breach of this Article.
Fair and Equitable Treatment US model BIT(2004)
Expropriation
Expropriation protection
Content of the clause• Several categories of takings:
• expropriations,• nationalizations, • direct or indirect• Regulatory takings: measures tantamount to
expropriation• Creeping expropriations
Conditions for the expropriation to be lawful:Public purposeNon-discriminationDue process of lawCompensations
Expropriation - compensation
Possible standards of compensation:
The Hull formula (prompt, adequate, effective)Appropriate compensationDifferent valuation methods: book-value method,
discounted cash-flow method,..
Expropriation and Regulatory Takings: Necessary clarification of the obligation
General exception: public health and safety.The right to regulate for public purpose.
Expropriation protection: Uganda – Eritrea BIT (2001)
Article 4 Expropriation
(1) Investments of each Contracting Party shall not be nationalised, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as ‘’expropriation’’) in the territory of the other Contracting Party except for expropriations made in the public interest, on a basis of non-discrimination, carried out under due process of law, and against prompt, adequate and effective compensation.
(2) Such compensation shall amount to the fair market value of the investment expropriated immediately before the expropriation or impending expropriation became known in such a way as to affect the value of the investment. The fair market value shall include but not exclusively the net asset value thereof as certified by an independent firm of auditors.
(3) Compensation shall be paid promptly and include interest at a commercial rate established on a market basis from the date of expropriation until the date of payment.
Uganda – Eritrea BIT (2001) cont.
(4) The expropriated investor shall have a right to prompt review under the law of the Contracting Party making the expropriation, by a judicial or other competent and independent authority of the Contracting Party, of its case, of the value of investment, and of the payment of compensation, in accordance with the principles set out in paragraph 1 of this Article.
(5) When a Contracting Party expropriates the assets of a Company or an enterprise in its territory, which is incorporated or constituted under its law, and in which investors of other Contracting Party have an investment , including shareholding, the provisions of this Article shall apply to ensure prompt, adequate and effective compensation for those investors for any impairment or diminishment of the fair market value of such investment resulting from the expropriation.
Transfers
Free Transfer of Funds
Two types of transfers: inward and outward.ExceptionsBOP safeguards: temporary derogationsTransitional provisions: maintaining existing
restrictions.
Free Transfer of Funds
South Africa – Mauritius BIT (1998) 1. Each Contracting Party shall allow investors of the other Contracting Party the free
transfer of payment relating to their investments and returns, which shall include in particular, though not exclusively -
(a) profits, capital gains, dividends, royalties, interest, and other current income accruing from any investment;
(b) the proceeds of the total or partial liquidation of any investment; (c) repayments made pursuant to a loan agreement in connection with investments; (d) licence fees in connection to matters in Article 1(1)(b); (e) payment in respect of technical assistance, technical services and management
fees; (f) payments in connection with contracting projects; (g) earnings of nationals of the other Contracting Party who work in connection with
an investment in the territory of the Contracting Party; (h) compensation paid pursuant to the provisions of Articles 4 and 5. 2. All transfers shall be effected without undue delay in any convertible currency at the
market rate of exchange applicable on the date of transfer. In the absence of a market for foreign exchange, the rate to be used will be the most recent exchange rate applied to inward investments or the most recent exchange rate for conversion of currencies into Special Drawing Rights, whichever is the more favourable to the investor.
Dispute Settlement
Two types of Dispute Settlement mechanisms
• State-to-State: applies only between State parties to the Agreement. (like the DSU in the WTO, the ASEAN DSB)
• Investor-to-State: allows private investors to submit claims against a host State to international arbitration
(eg. NAFTA and BITs)
• Most IIAs contain both types of mechanisms
Investor-to-State mechanism
• Consultations and negotiations (time-period)• Most IIAs do not require exhaustion of local remedies• In some, resort to local courts precludes subsequent submission
to international arbitration: the fork in the road.• Direct resort to international arbitration (institutional or ad hoc): ICSID ConventionAd hoc arbitration following UNCITRAL Arbitration Rules
Investor-to-State mechanism
• Constitution of tribunal (as per arbitral rules)• Applicable law: IIA’s provisions; law of the host-State;
investment contract, rules of international law.ICSID Convention (Article 42): absent agreement between
parties, the tribunal shall apply the law of the host State and the applicable rules of international law.
• Arbitral awards: final and binding, but require exequatur (except in the case of ICSID awards)ICSID Members shall recognize and enforce the awards in
their territory as if they were final judgements of a State court
NT and MFN
Non discrimination: NT and MFNNational treatment: grant foreign investors, in like
circumstances, treatment no less favourable than the treatment of nationals.
Most-favoured-nation treatment: treat all foreign investors alike. No discrimination among foreign investors on the basis of nationality.
National Treatment
1. The application “de jure” and “de facto” of the standard
Most agreements do not specifically limit the scope of the national treatment standard only to a “de jure” test. Thus, jurisprudence has found that the standard applies both to “de jure” and “de facto” discrimination.
Approach may have a positive effect in fostering discipline in the domestic application of legislation
However, it is important to examine administrative practice and existing legislation that may have a “de facto” discriminatory impact on foreign investment.
National Treatment
2. Treatment “in like circumstances”Comparison requires a comparator.
3. Best “in state treatment”
When negotiating with countries having federal systems of government, a situation may arise when one subnational unit discriminates among other subnational units from the same country.
Important to ensure that the National Treatment standard applies with respect to a regional level of government, treatment no less favourable than the most favorable treatment accorded, in like circumstances, by that regional level of government to investments or investors of the Party from which it forms a part.
National Treatment
4. Exceptions and reservations to national treatment
General exceptions based on reasons of public health, order and morals, and national security. Such exceptions are present in most regional and multilateral investment agreements, and also in a number of BITs.
Subject-specific exceptions which exempt specific issues from national treatment, such as intellectual property, taxation provisions in bilateral tax treaties, prudential measures in financial services or temporary macroeconomic safeguards.
Country-specific exceptions whereby a contracting party reserves the right to differentiate between domestic and foreign investors under its laws and regulations – in particular, those related to specific industries or activities – for reasons of national economic and social policy. Country-specific exceptions may overlap with subject-specific exceptions.
MFN Treatment
Additional specific issues:
The Maffezzini jurisprudence and subsequent cases
Free rider issue: is there a free-rider problem in investment policy?
REIO and other exceptions: taxation, other investment agreements.
Other Issues
Transparency
Other issues• Governmental measures: home country measures, host
country operational measures (limitation to operations and performance requirements), incentives
• Entry and sejourn of key foreign personel• Transparency• Environment and labour • Implementation issues: ratification, entry into force,
enactment/implementation of treaty obligations into national legislation, management of investment disputes
Competencies
Competency• “A bundle of skills and technologies (rather than
a single discrete skill or technology) that enables a company to provide a particular benefit to customers” - Hamel and Prahalad 1994, p. 199.
• It provides consumer benefits
• It is not easy for competitors to imitate
• It can be leveraged widely to many products and markets.
Dunning–Kruger Effect• People reach erroneous conclusions and make
unfortunate choices but their incompetence robs them of the metacognative ability to realize it
• Illusory Superiority
Consumers Perceptions
intrinsic value
perceived value
Perceived
value driven
by context
InnovationApp
leSt
yle
Sim
plic
tyFl
ow
Sam
sung
Col
or
Styl
e Fa
shio n
What is Zara?
Largest Pure Play Retailer
Ortega
• Selling• Zara is not a style of
dressing as much as a style of buying, and hence, of selling.
• Producing• Zara-Inditex has
reinvented a form of producing
• Anti-Personalization• No cult of personality
What is the entrepreneur?
Groupwork
• Consider the following:
• “Everybody copies everybody, since the bottom line is that inspiration must come from the same source – society itself . . . Success emerges not so much from the ability to imagine creatively, but rather from managing to interpret trends present or observed in the community, and . . . , the ability to convert this into a physical item in just a few weeks”
• To what extend to you agree and disagree
“To everything there is a season.”• Most firms design a
'collection' for an entire season. • Place a huge order for
stocking at the start of the season.
• What do you suppose are their lead-times from design to manufacture to store: days, weeks, or months? • Months• H&M is #2, it's 3-5
months from creation to delivery.
If you get it wrong, you're hosed
Challenge
Scale• How many new items Gap & H&M produce in a
season?• 2,000-4,000
Testing
LogisticsProduction
Jim Cramer: Fashion• Required Clothing• Reguiired accessory
Culture of Permanent Testing
Logistics
• La Coruna warehouse is 5 million square feet = 90 football fields.
• Nine times the size of Amazon's warehouse
• Move about 2.5 million items a week.
• Connected to 14 Zara factories through tunnels with ceiling-mounted rails.
Self-Start Production
Fast Fashion!Cloth is ironed
Products packed on hangers -- no ironing
Price tags are affixed
Unpack them & they're ready to be sold
Is Galacia Important?
CwF + RtB
Connect with Clients
CwC
• Zara admits and is even proud of the fact that many of their creations are inspired by their own customers.
• Customer trends and preferences, along with their reactions to the products in the stores, are observed and communicated throughout the organization, almost in real time.
Cool Hunter
Intelligence
Mangaers
Staff Designers
Managers• Zara’s store managers.
• Personal digital assistants (PDAs) • Gather customer input.
• Managers: 70 percent of salaries can come from commissions.
The Store Staff
• As soon as the doors close, the staff turns into a sort of investigation unit in the forensics of trend spotting, looking for evidence in the piles of unsold items that customers tried on but didn’t buy. Are there any preferences in cloth, color, or styles offered among the products in stock?
• PDAs are also linked to the store’s point-of-sale (POS) system that captures customer purchase information. • In less than an hour, managers can send updates that
combine the hard data captured at the cash register with insights on what customers would like to see.
• All of this valuable data allows the firm to plan styles and issue rebuy orders based on feedback rather than hunches and guesswork. The goal is to improve the frequency and quality of decisions made by the design and planning teams.
The Designers
• Data on what sells and what customers want to see goes directly to “The Cube” (central command of the Inditex Corporation outside La Coruña0), where teams of some three hundred designers crank out an astonishing thirty thousand items a year versus two to four thousand items offered up at big chains like H&M (the world’s third largest fashion retailer) and Gap• Individual bonuses are tied to the success of the team,
and teams are regularly rotated to cross-pollinate experience and encourage innovation.
12 X Faster
RtB
• Mandatory feature of the Inditex management model: the replacement of stock at least twice a week
• Zara Tuesday• New Cool products
every tuesday
ZARAZARA
CreationZara
AcquisitionStratavatious,
Dutti
Strategic PartnershipProviders
FranchiseZara/ Bershka
Market Entry Decisions
• Foreign Market Selection
• Timing & Order of Entry
• Market Expansion Strategies
• Mode of Entry Decisions
Choice of Entry Modes
• Exporting• Direct vs Indirect
• Contractual Agreements• Licensing, Franchising, etc.
• Equity Based• Joint Ventures• WOS
• Strategic Alliance
• Push• Encourage your position and current national
opportunities
• Pull• Attractive conditions and host mark
Zara Internationalization
• But in general the choice was to move into a country on the basis of the idea that there was a market opportunity, a good location, or sometimes because a foreign party opened the track, sometimes making the offer of investment.
Zara Expansion
• Reluctance and trial (1975 to 1988)• Started opening in Portugal
• Captious Expansion(1989 to 1986)• one or two similar socioeconomic countries per year to
market
• Aggressive expansion (1997 - 2005)
Zara Entry Modes
• Subsidiaries • expensive mode of entry high growth potential business
risk countries IE EU
• Joint venture• large competitive markets
• Franchise• higher risk countries
Strategic partnerships
• Zara is the only member of the group that’s sources all products from company plants
• Other members of the group relying on relationships outsourcing companies or individuals.
• Inditex sells the cloth and recives finished products
Acquisition
• Dutti•Attempt to enter a different segment.
•Different management cultures. •Difficult transition.
Acquisition
• Stradivarius. •Offensive acquisition. •Protect the Bershka. •Similar management cultures. •Easy integration.
Zara International Marketing
• Ethnocentric Strategy• Geocentric Strategy
Franchise
Franchise
• Motivation• Conditions
Internationalization
• But in general the choice was to move into a country on the basis of the idea that there was a market opportunity, a good location, or sometimes because a foreign party opened the track, sometimes making the offer of investment.
HAARP
Silicon Valley
• Silicon Valley is a nickname for the southern part of the San Francisco Bay Area centered roughly on Sunnyvale. • coined by journalist Don C. Hoefler in 1971,
• It was named "Silicon" for the high concentration of semiconductor and computer related industry in the area, and "Valley" for the Santa Clara Valley.
• Fairchild Semiconductor really started and then fuelled it all
OneWWII The First Electronic War
British and American Air War in Europe
• 28,000 Active Combat Planes40,000 planes lost or damaged beyond repair:18,000 American and 22,000 British79,265 Americans and 79,281 British killed
The German Air Defense SystemThe Kammhuber Line
• Integrated Electronic air defense network• Covered France, the
Low Countries, and into northern Germany
• Protection from British/US bomber raids• Warn and Detect• Target and Aim• Destroy
German Air Defense System
Himmelbelt• Local Air Defense• Network• • Box ~30 x 20 miles• • Integrated network• of radars, flak,• fighters,• searchlights
• Radars fed Himmelbett centers
• • Operators worked from rows of
• seats in front of a huge screen
• • Fighters would fly orbits around
• a radio beacon• – fighter controller talked it
to the• vicinity of the target• • Fighters would turn on its
radar,• acquire the target, and
attack
Flak Radar Controlled Anti Aircraft Guns
• 15,000 Flak Guns• 400,000 soldiers in flak batteries
• Radar-directed flak to 30,000’• Fused for time
• Fragmentation rounds• No Proximity Fuses
• 105 mm flak
The Electronic Shield Electronic Warfare
Two
Harvard Radio Research Lab Signals Intelligence and Electronic Warfare
• Reduce losses to fighters and flak• Find/understand German Air Defense
• Electronic and Signals Intelligence
• Jam/confuse German Air Defense• Radar Order of Battle• Chaff• Jammers
• Top Secret 800 person lab
ELINT Understand German Air Defense
• B-24J flights inside Germany to intercept German radar signals
• Fitted with receivers & displays• Wire and strip recorders
• Frequency, pulse rate, power, etc.• 50 MHz to 3 GHz
Window/ChaffJam Wurzburg• Strips of aluminum foil
• 1/2 Wurzburg frequency• 46,000 packets tossed out by hand
• Each packet contained 2,000 strips• Automatic dispensers came later
• First used July 1943• Raid on Hamburg• Shut down German air defense
• Used 3/4’s of Aluminum Foil in the US
Blind German Early Warning Radar• Put Jammers on Airplanes• Carpet” AN/APT-2 Jammer
• Confuse Wurzburg radar• Shut down flak• Shut down GCI• 5 Watts
Fred Terman
• Who Ran this Secret Lab and became
• the Father of Electronic Warfare?
• • Harvard Radio Research Lab
• – Separate from MIT's Radiation Laboratory
• – Ran all electronic warfare in WWII
• – 800 people• – 1941-1944• • Director: Fredrick
Terman - Stanford
Fred Terman
• Stanford Professor of engineering 1926• encouraged his
students, William Hewlett and David Packard to start a company
• Dean of Engineering 1946
• Provost 1955
Spook Entrepreneurship
Terman Strategy
• Focus on microwaves and electronics• Not going to be left out of gov’t $’s this time
• Recruits 11 former members of RRL as faculty• Set up the Electronics Research Laboratory
(ERL)• “Basic” and Unclassified Research
• First Office of Naval Research (ONR) contract 1946
• By 1950 Stanford was the MIT of the West
Korean WarSpook Work Comes to Stanford• • Applied Electronics Laboratory (AEL)• – “Applied” and Classified Military programs• – Doubles the size of the electronics program• – Separate from the unclassified Electronics• Research Laboratory• – Made the university, for the first time, a full• partner in the military-industrial complex
Cold War and Research• The Cold War battlefield moves 500 miles east• Fear of a “nuclear Pearl Harbor”• Countermeasures, Elint and Sigint, become critical• Stanford becomes a center of excellence for the
NSA,CIA, Navy, Air Force
The Cold War is an Electronic War
Stanford Helps Understand theElectronic Order of Battle• Where are the Soviet radars?
• Consumers; SAC, CIA.
• Details of the radars• NSA/CIA to contractors
• Periphery of Soviet Union known
U-2 Sigint Platform (1956)Stanford and Silicon Valley• System IV
• 150 - 40,000 MHz• Stanford Electronics Laboratories• Ramo Woolridge
• E/F Band ELINT recorder (1956)• A Band ELINT recorder (1959)• E/F Band Jammer (1959)
• Granger Associates• Watkins Johnson• – QRC -192 Elint receiver• – 50 -14,000 MHz• Communications receiver• – 100-150 MHz/3 channel tape recorder
Stanford Joins the “Black” World• Electronics Research Laboratory
• “Basic” and Unclassified Research
• Applied Electronics Laboratory (AEL)• “Applied” and Classified Military programs
• Merge and become the Systems Engineering• Lab (SEL) in 1955
• Same year Terman becomes Provost
Terman Changes the Startup/University Rules
• Silicon Valley as We Know it Starts Here• Graduate students encouraged to start
companies• Professors encouraged to consult for
companies• Terman and other professors take board seats• Technology transfer/IP licensing easy• Getting out in the real world was good for your
academic career
Stanford’s Role
• Interaction with industry (via legacy just discussed)
• Research funding and creativity
• Silicon Valley as a nearby planting ground for ideas
• Role of students as inventors, as disseminators, and as part of the workforce
• Encouraging entrepreneurship …
Microwave Valley - Components
• Klystrons, Carcinotrons, & Traveling Wave Tubes
• Eitel-McCullough (1934)• Varian Associates (1948)• Litton Industries (1946)• Huggins Laboratories (1948)• Stewart Engineering (1952)• Watkins-Johnson (1957)• Microwave Electronics Co. (1959)
1966
• Hewlett-Packard entered the general purpose computer business with its HP-2115 for computation, offering a computational power formerly found only in much larger computers. It supported a wide variety of languages, among them BASIC, ALGOL, and FORTRAN.
HP-2115
Spook Innovation
Radio Dishes Get Funded
• Attach ELINT receivers to Bell Labs
• 60’ radar antenna in New Jersey• Use “matched filter”
techniques• Developed at Stanford
• • Build steerable antenna at Sugar
• Grove Virginia• • Pay for and build
Stanford “Dish”• Hide relationships via
“cover agencies”
Project Grab 1960-1962• ELINT in Space• No more overflights• Collect radar emissions from• Soviet air defense radars• Built by the Naval Research Laboratory• Used by SAC for EOB then given to the NRO
Microwave Valley - Systems
• Some Stanford Alum’s• Sylvania Electronics Defense Laboratory
(1953)• Countermeasures, search receivers, converters• Hired faculty as consultants, including Terman
• GE Microwave Laboratory (1956)• Granger Associates (1956)• Electronic Systems Laboratories (ESL) (1964)
• Sylvania EDL director William Perry founder
• Argosystems (1969)
Terman and the Cold WarSilicon Valley’s 1st Engine of Entrepreneurship
Valley Attracts Financial Attention1st West Coast IPO’s
• 1956 Varian• 1957 Hewlett Packard• 1958 Ampex
The Rise of Risk Capital• “The Group” 1950’s• • First Bay Area “Angels”• – Reid Dennis• – William Bryan• – William Edwards• – William K. Bowes• – Daniel McGanney• ~ 10 deals $75 -$300K
Summary
• • Terman/Stanford/Government responsible for
• entrepreneurial culture of Silicon Valley• • Military primed the pump as a customer for
key• technologies• – Semiconductors, computers, Internet• – But very little technical cross pollination• • Venture Capital turned the valley to volume
corporate• and consumer applications
Hewlett Packard and Wozniack
• Steven Paul Jobs, Stephen Gary Wozniak and Ronald Gerald Wayne founded Apple Computer.
• In 1976, Ronald Wayne resigns from Apple Computer with only a one time payment of $80.
• Hewlett Packard grants Gary Wozniak the permission to create the Apple I.