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Managing Global Expansion

Ajit Prasad, MA, PhD, MSc

EMP, Contact 6.2

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What does globalization entail?

Recognizing CAGE differences in Culture Administration/ Legal framework Geography Economics

Exchange rates PPP (purchasing power parity)

Risks ?

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Components of Global Exp.

Global Exp

Trade

Investment

Merchandise

Services

FDI

Portfolio

Exports

Imports

Re-Exports

Brownfield

Greenfield

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Components of Int. Env. Analysis

Political risk analysis economic risk analysis market risk analysis

industry risk (19%) positioning risk (32%)

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Political Risk Analysis

The difference between Poland and Paraguay Poland might not be able to pay, but

Paraguay might not be willing to pay This is where Political Risk comes

in

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ERA, IMF memo items Measuring the 3 memo items

[a] cad/gdp ratio Should be in similar prices, either constant or

current should be less than 2%

[b] debt service ratio (I +A)/ (Xr + Ir) should be less than 20%

[c] import reserve ratio (Reserves/imports)* 12 should be more than 3 months of imports

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The current account balance

X= Exports Minus, M= Imports = trade balance + invisibles = current

balance

This has to be balanced with the capital account

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The capital account The capital account has following

aggregates Official transactions, IMF, PL480, Aid Portfolio investment Commercial Borrowing Gapfil Borrowing/ exceptional financing

Changes in reserves Negative sign implies accretion to reserves

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Types of convertibility

Convertibility on the trade account Convertibility on the current

account Convertibility on the capital account

What are the preconditions for each ?

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Why do companies venture into global expansion?

The growth imperative Exploit different positions on the PLC

The efficiency imperative Maintaining the ROCE at market levels

The knowledge imperative The dissemination and generation of knowledge

The globalization of customers Preference for consistency Preference for dealing with small number of

suppliers Retention of customer loyalty

Globalization of competitors First mover advantage Multi-markets presence to cross subsidize

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Factors governing the choice of markets

Choice of products Choice of markets Choice of mode of entry Transplanting the corporate DNA Choice of weapons in local battle Rate of expansion

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1. Choice of products Should the firm globalize the entire

portfolio, Or use a subset Global expansion forces companies to

develop three types of capabilities Learning about foreign markets Learning about managing people in foreign

locations Learning how to develop foreign subsidiaries

Choice has to adhere to twin goals of maximizing returns and minimizing risks associated

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2. Choice of markets Not all markets are of equal strategic

importance

Two dimensions Market potential

Strategic importance Ability to exploit

Height of entry barriers, intensity of competition Learning potential

Presence of sophisticated and demanding customers

Pace of evolution of relevant technology

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A framework for the choice of markets

Stra

tegic Im

porta

nce

High Phased-in Entry

[create beachhead]Rapid Entry

Low Ignore for now Opportunistic entry

Low High

Firm’s ability to exploit the market

Beachhead market : one that resembles the targeted market but provides a risk free learning

Austria for Germany, HK for China, B’Desh for India

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3. Choice of mode of entry

Mode of entry rests on two fundamental questions The extent to which the firm will

produce locally The extent of ownership control

Choice of right mode is critical, as it is difficult to alter later on.

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Additional issues on mode of entry

Size of local market is larger than minimum efficient scale production [cars]

Shipping an tariff costs in target market is high [cement]

Need for local customization of product is high [McDonalds]

Local content requirement is cheaper/ high [automobiles]

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Alternate modes of entry

Ow

nersh

ip C

on

trol

10

0%

Maruti’s initial 500 cars

Bata Shoes

0%

Modi BMW KFC Franchisee

100% Exports 100% Local

Exports Vs Local Production

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Advantage of alliance based entry modes

Alliance route is attractive when Cultural, linguistic and physical distances

are high Subsidiary would have low operational

integration with the rest of the MNC The risk of asymmetric learning by the

partners can be kept low The company is short of capital Government regulations require local equity

participation

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Cross border decisions

A company choosing to enter through local production has a secondary question Greenfield Cross border shifting/ acquisition

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Greenfield Vs Cross Border Acq.

Marke

t Gro

wth

rate

Hig

h

EitherGreenfield Operations(MUL/ Suzuki)

Low

Cross Border Acquisitions(Mittals in Steel)

Either

Low High

Uniqueness of Corporate Culture

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Mode of entry & intensity of competition

If local market is high growth Additions to capacity do not intensify

competition, car market in India If local market is in mature phase of PLC

Addition to capacity will intensify competition

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4. Transplanting the corporate DNA

Clarifying and defining Core Beliefs and Practices

Transplanting Core Beliefs.. Embedding the Core Beliefs..

The importance of leadership MUL/ Suzuki example

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5. Winning the local battle Winning Host Country Customers

Deciding who your customers are going to be, FedEx in China

Winning against host Country’s Competitors

Acquire dominant competitor Indian Shaving Products/ Malhotras

Acquire weak competitor and scale up quickly Daewoo with DCM Toyota

Enter a poorly defended niche Toyota Quails

Engage in frontal attack Kellogg's Vs Mohuns

Managing relationships with host country Government

Enron and the BJP/ C(I)

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6. Rate of expansion Should Windows have a world wide launch the

same day, or a phased release?

Accelerated speed is acceptable when It is easy for competitors to replicate your

success Fast Food/ KFC, Starbucks etc

Patent laws are weak Software

Scale economies are important Cars

Capacity to manage is very high ABB

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At the end of the day Strategic choices have to be made about

about a variety of issues [products, markets, modes etc]

Globalization can have dangers Bhagwati’s “Immeserizing Growth” Globalization can be self limiting as the opportunities

for arbitrage reduce

Management cannot and should not ignore the domestic market