PACE University , Lubin School of business

Global Business Strategy and Operations

Final Exam

Andrey V. Semenov

04.05.2010

Describe several methods of cooperation among Multinational Corporation and explain the

associated potential benefits.

Indicate whether BP used cooperative arrangements for it`s growth and transformation.

Select a company about which we did not have a case study listed on our course outline and

indicate how it used cooperative arrangements in order to grow sales or to retain market

share.

For years the traditional wisdom among multinational corporations was that bigger is better. Large MNCs could lower their production costs by producing massive volumes to serve global markets. By achieving such "economies of scale," they gained a crucial advantage over their competitors. In today's turbulent markets, however, size does not always matter. Big banks have been merging across borders to make them even bigger, but their success rates have been dismal. In the oil and gas industry, traditional leaders such as BP and Shell now face serious challenges from smaller upstarts that have carved out industry niches in exploration or lubricants. The success of Enron in transforming itself from a sleepy, domestic-pipeline operator in Texas to an international force in gas and power generation shows how potent this new challenge can be and it`s collapse give us a example how fast it can be diminished.

New competitors are emphasizing the power of intangible resources such as intellectual property and a flexible organizational structure that allows firms to respond better to their customers' diverse needs. These emerging multinationals are beginning to develop and link together expert teams within the corporation in ways that resemble the activities of the hot-spot clusters that lie outside the corporation. In contrast to traditional economic models of competition, these companies have found that economies of scale can best be achieved at the corporate level rather than the production level.

The message is clear to the major incumbents: transform or die. At a time when size and market shares are growing in importance for some MNCs, for others the value of incumbency has never been less.

MNC`s are the primary players today in the world's most dynamic industries and the driving force behind the global economy. Privatization is reaching deep into the farthest comers of Latin America. Russian firms seek international capital by listing themselves on the New York Stock Exchange. Africa, rich in resources but desperately poor in other respects, sees in foreign investment the only hope for an otherwise dismal future. Indeed, the business of the world today is business.

These are not the times for narrow balance-of-power considerations. As even an unchallenged superpower like the United States has seen, efforts to block the flow of trade and investment to nations such as Iran and Cuba are not just increasingly ineffective but costly. MNC`s - once made vulnerable to the expropriation of property or blockage of funds, and forbidden to trade with hostile countries and to buy and sell freely the latest high technology and scarce commodities - are now more likely to guide foreign policy than follow it. Individual donors such as George Soros and Ted Turner surpass the world's impoverished ministries of foreign affairs with their gifts to countries and world agencies.

The field of international business concerns the study of the international activities of firms, including their interactions with foreign governments, competitors, and employees. It seeks to address not only the question of why firms go overseas but also how they do it. The globalization of markets, and rapid changes in economic and political systems, have forced scholars to rethink the meaning of international business concepts such as location, competitive advantage, and transmission of knowledge among countries. Because multinational corporations dominate trade and world production, international business focuses on the ability of managers to coordinate and organize people - despite large variations in their national origins and culture - within the boundaries of a single firm that spans borders.

The United States has a healthy balance of payments on these transactions and for many years was the principal source of licensing technology in the world economy. Many critics understood these licenses as "giving away" U.S. technology. Japanese industrial policy in the 1950s and 1960s is often the example used as a warning of the consequences of selling technology to firms that later return as formidable competitors. However, a MNC`s will frequently sell licenses to its own subsidiaries abroad or to joint ventures, thereby establishing property rights that can prevent the diffusion of technology to competitors or former partners. Budget deficit that US have now give us good example were it could lead (chart 1):

Historically, IBM has often refused requests by countries to license its technology, out of the belief that certain key technologies should be kept under proprietary control. This policy has generally worked to the company's benefit. If, for example, IBM had licensed its technology to Indian firms during the 1970s, it could conceivably be in a worse position today to establish brand label recognition in India. In contrast, Texas Instruments ultimately came out the loser in tough negotiations in Japan that led it to license its semiconductor-manufacturing technology to Japanese firms that later became dominant competitors. But these examples tend to exaggerate the dangers. It is improbable that IBM's licensing could have created Indian competitors (it could have set a dangerous example for other governments or permitted leakage of computer technology to military programs). Technical change occurs so frequently these days that transferring current technology - without including the capability to improve it - is not a threat in the future. Countries seeking to expand may offer their partners licenses for technology that will become quickly outdated, but only if these partners cannot innovate faster than they can.

Consider McDonald's. When McDonald's set up operations in Russia, it had to train its Russian suppliers to bake the right kind of bread and to deliver it on time, every time. This training was costly and brought the best of Western-quality management to these suppliers. They were then able to use these same techniques to sell bread to Russian customers. Of course, McDonald's chose to own its Russian operations. This choice was based not on the dangers of franchising (i.e., the internalization argument

fashionable in the 1980s) but on the recognition that company knowledge could be more safely, easily, and effectively transferred to Russia through channels managed inside the firm - a crucial consideration if McDonald's has the intention, as it does, to clone this knowledge for use in establishing operations throughout Russia.

For Multinational leaders such as BP and Shell took many years to build their empires, helping create the impression that growth is slow and dependent on physical assets (such as sprawling factories) to erect high barriers to the entry of new competitors. But what about Microsoft (software), Cisco (computers), Fresenius (dialysis treatment), Enron (energy), Ispat Steel, and many other firms that have built billion-dollar international businesses in just a few years? They have relied on human skills to promote growth and remain competitive. These multinationals possess organizational hierarchies that are ideally suited to the creation and deployment of human resources and intangible assets such as patents or brands. By combining these attributes with a reputation for reliability, these new specialists have taken and will take business away from much larger incumbents.

But for now MNCs Are Bigger than Their Assets: The reach and influence of multinationals, large and small, is far greater than the official statistics suggest. Policymakers can, therefore, seriously underestimate the extent to which national economies have become intertwined with others. There are at least two sources for this misconception: the way in which cross-border investments are estimated and the manner in which the "boundary" of a firm is defined.

The official figures for the flow of FDI - the historical cost-accounting basis for the asset base of multinational corporations - show an annual flow of nearly $400 billion. The United Nations, however, has recently begun to question these figures and has estimated that if one includes the capital mobilized by local borrowings and the equity shares of partners, the "real" figure is closer to $1.4 trillion per year. In other words, a corporation's "presence" in a country goes beyond the assets that it chooses to locate there.

And for corporate arrangements, and whey role in firm grows and retaining market share, well lets look at example from footwear industry:

The three leading sportswear companies in the world are Nike, Adidas and Reebok. In August 2005, Nike was the leader in global market share with 32.9% compared to the recently constituted Adidas-Reebok organization that had 26.3% market share. In the largest market in the world, the United States (US), Nike had 36.3% market share in August 2005. Following the acquisition of Reebok in August 2005, the market share of Adidas-Reebok in the US jumped to 21.1% from 8.9%.

We know that athletic shoe segment is highly competitive in nature with the major players such as Nike, Adidas, Reebok and New Balance striving to retain their market share and the smaller players such as Puma trying to gain market share. Important features of this competitive segment are heavy advertising, celebrity endorsements, brand awareness programs etc. Until the 1970s, Adidas, the German sports company, was the market leader in the US due to its product innovation. In the 1970s and 1980s, Nike & Reebok grabbed their share by redefining the product offering and aggressive marketing. Adidas failed to retaliate. Their market was undergoing several crises due to changes in leadership. In the 1990s, though Adidas was revived by a turn-around specialist, it was not a challenge to Nike.

Adidas expected its takeover of Reebok to give increased clout with dealers' leverage of endorsement deals and sponsorships and access to wider consumer base. The Adidas-Reebok merger vaulted the combined entity into the second place in the American athletics shoe market behind Nike. The takeover of Reebok doubled

the German group's North America sales. The Adidas Group's purchase of Reebok North America showed an obvious attitude to ensuring that the Corporation's overall objectives will be achieved. With the acquisition, a focus on increasing the band's apparel offerings and sharpening the brand's image has been set. This allows for an expansion of global position and gaining a broader presence in key markets. To emphasize this fact, Adidas has now replaced Reebok as the official apparel supplier to the American National Basketball Association for the next 10 years. With the two company's combined strengths, an aim to widen the organization’s overall profile and global dominance is now more than ever possible

This is the best example that came to my mind .

Does the “ P&G Japan : The SK-11 Globalization Project “ case provide an example of

mergers and acquisition oriented globalization strategy ? Why and how yes or why and

how not ?

Does the “ BRL Hardy : Globalizing an Australian Wine Company “ case provide an

example of mergers and acquisition oriented globalization strategy ? Why and how Yes or

why and how not ?

Select a company about which we did not have case study listed on our course outline and

indicate how it used friendly or unfriendly , hostile mergers and acquisitions , or both , as

parts of it`s globalization strategy .

Lets` start from the end : )

The business press uses the terms ‚mergers‛ and ‚acquisitions‛ interchangeably, they are not the same. Acquisition is the purchase of a firm. The purchase does not have to be 100 percent ownership. It could be a majority ownership (greater than 51 percent of the acquired firm’s stock) or a controlling interest (enough stock ownership to control management and strategic decisions at the acquired firm). Acquisitions can be friendly acquisitions or unfriendly acquisitions. In a friendly acquisition, the management of the acquired firm wants the firm to be acquired. In an unfriendly acquisition (also called hostile takeovers), the management of the target firm does not want the firm to be acquired.

For example :

Warren Buffett, the CEO of Berkshire Hathaway, writes very readable and ‚folksy‛ letters to shareholders in his company’s annual reports. In the company’s annual report for 1995, Buffett recalls how the company acquired Helzberg’s Diamond Shops, a Kansas City, Missouri-based jewelry chain. As Buffett was walking down the street in New York’s Fifth Avenue one day, a woman hailed him by name and proceeded to tell him how she was grateful for having invested her money in Berkshire Hathaway. Upon hearing Warren Buffett’s name, another gentleman who was walking by stopped to ask Buffett if he could have a few words with him. The man was Barnett Helzberg Jr. Helzberg wanted Berkshire Hathaway to buy his family firm as he, Barnett Helzberg Jr., was tired of running it and wanted a different ‚parent‛ for the firm. The details of the deal were ironed out during that serendipitous meeting and shortly thereafter Berkshire Hathaway announced this friendly acquisition.

So, In a friendly takeover of control, the target’s board and management are receptive to the idea and recommend shareholder approval. To gain control, the acquiring company generally must

offer a premium to the current stock price. The excess of the offer price over the target’s pre-merger share price is called a purchase or acquisition premium. U.S. merger premiums have ranged between 38 to 44 percent since 1970. Internationally, acquisition premiums show a wider variance, ranging from 10 percent for Brazil and Switzerland to 120 percent for Israel and Indonesia. The wide range of estimates may reflect the value attached to the special privileges associated with control in various countries. For example, insiders in Russian oil companies have been able to capture a large fraction of profits by selling some of their oil to their own companies at below market prices.

The purchase premium reflects both the perceived value of obtaining a controlling interest (i.e., the ability to direct the activities of the firm) in the target, the value of expected synergies (e.g. cost savings) resulting from combining the two firms, and any overpayment for the target firm. Overpayment is the amount an acquirer pays for a target firm in excess of the present value of future cash flows including synergy. Analysts often attempt to identify the amount of premium paid for a controlling interest (i.e., control premium) and the amount of incremental value created the acquirer is willing to share with the target’s shareholders. An example of a pure control premium is a conglomerate willing to pay a price significantly above the prevailing market price for a target firm to gain a controlling interest even though potential operating synergies are limited. In this instance, the acquirer often believes it will be able to recover the value of the control premium by making better management decisions for the target firm. It is important to emphasize that what often is called a control premium in the popular or trade press is actually a purchase or acquisition premium including both a premium for synergy and a premium for control.

The offer to buy shares in another firm, usually for cash, securities, or both, is called a tender offer. While tender offers are used in a number of circumstances, they most often result from friendly negotiations (i.e., negotiated tender offers) between the acquirer’s and the target firm’s boards. Self-tender offers are used when a firm seeks to repurchase its stock. Finally, those that are unwanted by the target’s board are referred to as hostile tender offers.

An unfriendly or hostile takeover occurs when the initial approach was unsolicited, the target was not seeking a merger at that time, the approach was contested by the target’s management, and control changed hands (i.e., usually requiring the purchase of more than half of the target’s voting common stock). The acquirer may attempt to circumvent management by offering to buy shares directly from the target’s shareholders

(i.e., a hostile tender offer) and by buying shares in a public stock exchange (i.e., an open market purchase).

Friendly takeovers often are consummated at a lower purchase price than hostile transactions. A hostile takeover attempt may attract new bidders, who otherwise may not have been interested in the target. Such an outcome often is referred to as putting the target in play. In the ensuing auction, the final purchase price may be bid up to a point well above the initial offer price. Acquirers also prefer friendly takeovers, because the post-merger integration process usually is accomplished more expeditiously when both parties are cooperating fully. For these reasons, most transactions tend to be friendly.

So that about :‛ P&G Japan : The SK-11 Globalization Project‛

Ten years after entering Japan, P&G had accumulated over $250 million in operating losses on declining annual sales of $120 million by 1983. The decision facing the president of P&G International: exit, retrench or rebuild the operation? Ironically, the initial entry was a success story with P&G Japan achieving an operating breakeven in their fifth year and market leadership in a number of categories. However, in the late 1970's market share and profit in all categories declined disastrously. Management changes failed to reverse the trends until an objective examination of the entry strategy, approach to the Japanese consumer, competition, technology and internal organization were made. By 1983, accelerating losses forced P&G to decide whether to exit or stay.

Traces changes in P&G's international strategy and structure, culminating in Organization 2005, a reorganization that places strategic emphasis on product innovation rather than geographic expansion and shifts power from local subsidiary to global business management. In the context of these changes introduced by Durk Jager, P&G's new CEO Paolo de Cesare who was transferred to Japan, where he took over the mandate of heading up Max Factor Japan. He was particularly encouraged by the growth and expansion of SK-II, a premium, highly profitable skin care product developed in Japan. SK-IIÕs initial success in Taiwan and Hong Kong set him thinking about whether he should propose turning the Japanese brand into a global brand by further expanding it into China and Europe. The fact that P&G was in the midst of a bold reform, shifting decision-making power and profitability responsibility from local subsidiaries to global business management units posed a major constraint to de CesareÕs globalization proposal. De Cesare had to consider whether SK-II had the potential to become a global brand. Also, he had to consider which market to enter and how the brand globalization strategy should be implemented in the newly reorganized P&G global operations. Within the familiar Max Factor portfolio he inherits is SK-II, a fast-growing, highly

profitable skin care product developed in Japan. Priced at over $100 a bottle, this is not a typical P&G product, but its successful introduction in Taiwan and Hong Kong has de Cesare thinking the brand has global potential , will he succeed we’ll see ….

In my mind reason why SK-11 was so successful is quite simple , they introduced something new , something unknown and priced it highly , I’m not sure is it cosmetics SK-II so powerful because of it`s special ingredient , or just people see that they want to see when they pay for the miracle ( I think manage to sell 5 oz bottle for 130$ is miracle by itself ) but they strategy is clear - accelerate, concentrate, adapt, and in the case of international M&As, consider cultural differences. The human and cultural issues that separate the 17% from the 83% are not about some abstract values or the "soft stuff", but the concrete reality of productivity, economic value and sustained growth.

Now let`s look at ‚ BRL Hardy : Globalizing an Australian Wine Company‛ :

The roots of BRL Hardy’s success , in my mind , lay in global expansion. The company’s strategic vision is to become the world’s first truly global wine company. As CEO and managing director of BRL Hardy Europe, Carson’s contribution and achievements had been significant with a 10 fold increase in sales volume, in a tenure spanning just seven years. He successfully turned around Hardy’s U.K. business by implementing cost cutting initiatives and ensuring strong systems, policies, and control. Millar, CEO and managing director at BRL Hardy followed a decentralized approach to management. He believed in delegation and adequately integrated culture and management style into the merged corporation. The U.K. market contributed significantly to BRL Hardy’s revenues and represented 40% of Australian wine exports. In U.K., the fighting brands, namely, Stamps and Nottage Hill, were positioned at price points of $4.5 and $ 6.60 respectively. As low price good quality wines, they accounted for 80% of the value and volume of the Hardy brand sales. As the image of these brands began to erode, Carson decided to relaunch them by relabeling and repositioning the wines. Carson insisted that sales performance in U.K. depended on efficient labeling that should not be completely dictated by the Australian management. Although management was skeptical about local control over branding, labeling, and pricing decisions, the move significantly boosted the fighting brands’ sales. As the fighting brands gradually moved up the price points, there was an opportunity for an entry level wine that could be priced lower than $7 . In line with the company’s vision of becoming an international wine company, Carson decided to tap

non-Australian wine sources and develop a line of branded products that could utilize the company’s strong distribution channels. This strategy would provide vital scale economies, minimize harvest risk, capture rationalizing suppliers, and avoid currency-driven price... and even so the wine industry is a highly competitive industry that has yet to see emerge a true global company with a global brand , BRL Hardy’s position within this industry is presently, similar to many other companies, that of a small global-volume supplier and distributor that has a large footprint within its ‚country-of-origin‛, Australia.

From our examples we can see that Cross border M&A activity is quite common. For example, Unilever (a Dutch company) acquired the U.S.-based Ben & Jerry’s. Ford Motor Company acquired the U.K.-based Jaguar. In general, issues related to domestic M&A activity (both the acquisition process and the implementation process) are relevant in an international context as well. The implications for acquirers and the implications for targets apply in the international context just as they do in the domestic context.

Host governments may present additional challenges and opportunities in the international context. Managers of firms that enter foreign countries through their M&A strategies need to be aware of these issues. Governments tend to protect their national interests when dealing with foreign-owned firms. For example, in the United States an airline cannot have more than 25% foreign ownership. Governments may have currency laws that prevent a foreign-owned firm from taking money out of the country. Labor laws may be different from those in a firm’s domestic market. Such differences may be rooted in culture and tradition that may prove to be difficult to recognize and/or understand. Managers would do well understand what the differences in government involvement are as they enter foreign markets.

The major issue in cross-border M&A activity is that the cultural differences between the firms are likely to be exacerbated by deep-seated country cultural differences. In other words, when firms A and B are in the U.S., they are likely to have some cultural differences, but all the participants share a common culture outside the respective firms. The cultures within the two firms, although different, are based on this common national culture. On the other hand, if a firm acquires another firm in a foreign country, the cultural differences could be even wider because of differences in the underlying national cultures.

Geert Hofstede’s cultural dimensions are likely to be familiar to students who have had a ‚Principles of Management‛ class or an ‚International Management‛ class. Hofstede identified 5 dimensions upon which cultures differ:

� social orientation (individualism vs. collectivism)

� power orientation (power respect vs. power tolerance)

� uncertainty orientation (uncertainty acceptance vs. uncertainty avoidance)

� goal orientation (aggressive goal behavior vs. passive goal behavior)

� time orientation (long-term outlook vs. short-term outlook)

For example, compensation practices are impacted by the country’s social orientation. Titles and organizational chart may mean more in a power respect culture than in a power tolerance culture. Firms engaged in international M&As must recognize that there is an added degree of difficulty involved in such transactions that make the whole process more challenging.

A Chinese shipping company has established an office in the western U.S. This office was initially staffed with Chinese managers and U.S. employees. When the Chinese managers were ready to promote a U.S. employee, they would give the U.S. employee the additional job responsibilities that accompanied the promotion without giving the employee the additional pay that went with the promotion. This was difficult for the U.S. employees to accept because in the U.S. culture the pay for a promotion is usually received at the same time the additional responsibilities are received.

This example highlights a difference in the time orientation between the Chinese and U.S. cultures. The U.S. employees had a short term time orientation compared to the Chinese managers who wanted to see if the U.S. employee could handle the additional responsibilities before bestowing the higher pay on the U.S. employees.

The popularity of M&A activity runs contrary to the research on the value created by these transactions. The essence of the research findings is that stockholders of target firms gain while those of bidding firms do not. However, the popularity of M&A activity is not so perplexing when the long term results of the strategy are considered. Remind students that the outstanding long term results of Wells Fargo were the result of Wells Fargo pursuing an M&A strategy with attention to detail and spreading its core competencies to its targets. another key take away from this chapter should be the importance of post-merger integration. The long-term success of an M&A strategy depends heavily on a firm’s ability to recognize the challenges

of integration and respond with the appropriate structure, controls, and compensation policies.

Although M&A activity is popular, perhaps even glamorous in the business world, at the end of the day the ability of an M&A strategy to generate competitive advantage and above normal returns comes down to the basic logic of the VRIO model. If the economies being exploited are valuable, rare, costly-to-imitate, and the firm is organized to exploit the economies, then competitive advantage is likely. An M&A strategy can create significant long term value for a firm. In fact, some firms with aggressive growth goals must rely on M&A activity to achieve that growth. Such firms cannot afford to fail at M&A activity.

At least I believe it is so .

Referencesmailto:Andrey@SemenovNY.com :

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