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AOF Business in a Global Economy

Lesson 9International Business Strategy

Student Resources

Resource Description

Student Resource 9.1 Reading: Why Companies Globalize

Student Resource 9.2 Defining Format Table: Modes of Entry into Foreign Markets

Student Resource 9.3 Reading: Modes of Entry into Foreign Markets

Student Resource 9.4 Memo: International Expansion Project

Student Resource 9.5 Guide: International Expansion Project Steps

Student Resource 9.6 Categorizing: What Is SWOT?

Student Resource 9.7 Guide: SWOT Analysis

Student Resource 9.8 Chart: Choosing a Market-Entry Strategy

Copyright © 20092016 NAF. All rights reserved.

AOF Business in a Global EconomyLesson 9 International Business Strategy

Student Resource 9.1

Reading: Why Companies Globalize

Globalization is a path of risk and reward for businesses. The rewards can include access to a larger customer base, increased profitability, and increased profit growth. The pitfalls include investment losses, failed product launches, and maybe political unpopularity at home. There can also be geopolitical issues beyond the control of the company.

This presentation uses MTV’s global expansion as an example of why companies globalize and what they need to do to be successful. Although MTV began to expand globally at an early stage of its history, back in 1987, it made a few mistakes along the way. MTV executives have learned about how to market their business to draw a large global audience and how to do that profitably. Other firms can learn a lot from the difficulties MTV encountered and how it overcame them to achieve success.



Globalization helps firms save money by:

• Sending production activities to the places where they are most efficient, with high productivity and low cost (These are called location economies.)

• Manufacturing a larger quantity of products so fixed costs are divided by more units, thus lowering the cost of each unit produced

Let’s look at MTV as an example of why a firm decided to globalize. MTV launched in the United States in 1981. The idea was that two of the most popular American art forms, music and film, could be combined in a television station that would appeal to a very attractive market for advertisers: teenagers and young adults. Executives felt the success of MTV could be transferred to other countries, so in 1987 they launched MTV Europe. Today, after many successes and failures, MTV operates in dozens of countries.



Globalization offers access to more potential customers. In 2015, 22.62 million out of 124.6 million households in the United States watched MTV. But because MTV expanded to serve a global market, MTV’s various music television channels are now watched in approximately 387 million households in 164 different countries.

However, globalization requires product differentiation, which means tailoring the product to the unique characteristics, needs, and preferences of each market where it is offered. This is something MTV learned the hard way. When MTV began to expand, they used the same videos that were popular in the United States, and they hired VJs who only spoke English no matter where the channel was operating. Ratings were low, so MTV decided on a new approach, customizing MTV for separate markets. This way, the audience in each country could watch original programming about music that was popular where they live, often in their own language. Though differentiation was not cheap, the investment paid off, and MTV now has a loyal following all over the globe.



MTV learned a lot about differentiation when it moved into India. At first, local producers began creating content similar to that in the United States, focusing on international music and movie stars, and using the black and white style that was popular in the United States. The initial reception was dismal. MTV reacted, exchanging international content with homegrown Bollywood stars and music, and changing to brightly colored visuals. The audience increased sevenfold.

Likewise, when MTV began broadcasting in Germany, they did it with English-language content that many local viewers could not understand. They also went up against established local competitors that were broadcasting in German. Ultimately, MTV proved successful in the German market. A large part of this success was due to MTV’s acquisition of its main German competitor, Viva.

Other companies that successfully differentiate, such as Toyota, create products that satisfy the needs of local economies (such as varying safety standards) and wants (such as power steering) of local customers.



Besides differentiating the product to suit the market where it is being sold, global firms must consider where production of a product will be the most efficient.

Different countries have particular national competitive advantages (or disadvantages) in this regard. For example, China has a large portion of the population seeking work, good manufacturing and technical skills, very low wages, and lax safety and environmental laws. Manufacturing there is much cheaper than manufacturing in the United States.

Our MTV example reflects a globalization strategy based mainly on accessing new markets and differentiating its products for those markets. This strategy is different from seeking out opportunities for low-cost production or other local production advantages. Still, MTV has made use of such opportunities where they arose. MTV Networks recently invested $76 million in a production facility in Argentina. The facility’s main purpose is to translate and dub English-language content into Spanish. It is more efficient to do the translation work in Argentina, a Spanish-speaking country with relatively low wage rates than in the United States. MTV was able to save money by moving translation operations to Argentina.



Economies of scale work the same way bulk discounts do in the grocery store: the more you buy, the lower the cost per unit of the product.

This is true of businesses, too: the more they manufacture, the less it costs to make the product per unit produced. The fixed cost of producing something gets spread out across a larger number of units, bringing the price per unit down.

The product does have to be adapted for local markets: MTV’s cartoons had to be translated into the local language. Still, the cost of translation was only a fraction of the cost of production, so MTV’s international rebroadcasts of ready-made content became very profitable; the additional revenues gained greatly outweighed the additional costs.



Profitability is one of the most important measures of success for investors. If an investment has a high profitability, investors feel well rewarded. One of the most critical goals of globalization is to increase a company’s profitability.

ROIC stands for “rate of return on invested capital.” It is one way to measure profitability. It can also be stated as net profits/invested capital.

High profits and a profit growth trend allows companies to invest more, perhaps in global expansion. MTV’s success had contributed to the stock price gains of its parent company Viacom. Additionally, the more successful MTV has been, the more it has been able to expand to new markets.



Avoiding backlash at home and abroad is a critical strategic point for many firms. By outsourcing production, firms can save money, but they must maintain close oversight on production. For instance, in 2008, it was discovered that many Mattel toys produced in China were tainted with toxic lead paint. Mattel had to recall tens of millions of tainted toys, and the company suffered in both profitability and reputation. In addition to Mattel’s products, milk products, pet food, and farm animal feed were contaminated with melamine, a toxic chemical that can damage the kidneys.

Globalization is a game of risk and reward for many firms. To avoid the dangers, companies need long-term strategies for oversight and brand management at home and abroad. The rewards demonstrate exactly why companies globalize: with careful planning, the potential for growth is vast.




Defining Format Table: Modes of Entry into Foreign Markets

Student Names: Date:

A defining format table can help you organize your thoughts about a particular topic’s characteristics. An example is provided below.

Term Category Characteristics

Attentiveness is a way of acting that shows customers you are listening.

is polite.

demonstrates focus.

Directions: Read about the different modes of entry into foreign markets in Student Resource 9.3, Reading: Modes of Entry into Foreign Markets, and then use the information to complete the table below. List between two or three characteristics in the space provided.


Strategic partnership is a mode of entry that is between two firms.

helps the firms utilize their individual strengths.

Management contract

is a mode of entry that involves performing or supervising certain defined functions or activities for a fee.

can be a turnkey operation.

Equity participation is a mode of entry that gives investing firms an ownership stake (often but not always minority ownership).

Joint partnership is a mode of entry that allows contributors to share in revenue, expenses, profits, and control of the business.




Consortium is a mode of entry that is an association of two or more firms.

pools resources for a specific purpose only , such as building and operating a particular industrial or infrastructure project.




Reading: Modes of Entry into Foreign Markets

Consortium: Consortium is a Latin word that means partnership, association, or society. Businesses that form a consortium pool their resources to achieve a common goal. For example, Airbus is one of the world’s two leading civil aircraft manufacturers. It is a consortium of European aircraft manufacturers. In the late 1950s, manufacturers realized that they could not compete alone with the American company Boeing. They didn’t have Boeing’s huge budgets and production capacity. In response, many European companies formed Airbus to develop and produce commercial aircraft. The companies include British Aerospace, France’s Aerospatiale-Matra, Germany’s DaimlerChrysler Aerospace, and Spain’s Construcciones Aeronauticas SA. (Airbus was a consortium until 2001, when it became a unified corporation.)

Equity participation: Equity participation is a mode of entry in which a multinational corporation invests in a firm in another country. Companies that want an economic share of a company that is important to them use this mode of entry. Equity participation also gives them some control over the company. The equity participant provides capital to the foreign company, and the multinational company receives benefits from the investment. For example, Siemens is a European company focused on electric power, industrial automation, and transportation, among other things, It managed the building of an airport in Bangalore, India. The state government where the airport is located benefitted by getting a state-of-the-art airport at low cost. So did local businesses and the people who live there. In exchange, Siemens now owns a large stake in a major air travel hub. The hub is in one of India’s fastest-growing regions.

Joint venture: A joint venture is a relationship between two or more firms to engage in making money together. They do so through a jointly controlled organization set up for a specific purpose. Each party contributes assets and shares in both revenues and expenses. Assets include capital, intangible assets, or production assets (e.g., property, plants, or equipment). For example, Ericsson is a major mobile phone producer. There was a fire in the main factory where they produced cell phone chips, which delayed production. At the same time, Sony was producing cell phones that weren’t selling well. The companies formed a joint venture, Sony Ericsson. Sony designs and produces the phones, and Ericsson markets them through its established distribution channels. These include relationships with operators of wireless networks. Both firms benefited from the joint venture.

Management contract: In a management contract, a firm agrees to manage an aspect of a business in another country for a fee. A company might manage the other country’s marketing or manufacturing, for example. Management contracts can take the form of turnkey operations. These are complete businesses that are maintained and operated by another firm. For example, Venezuela has huge oil reserves but frequently lacks the technical expertise to efficiently extract and sell the oil. In March 2009, the Michael Baker Corporation signed a management contract with Chevron Global Technology Services Company. Chevron provides assistance in hiring technical and organizational support for Venezuelan oil fields.

Strategic partnership: A strategic partnership is a formal alliance between two firms. It allows each to use its strengths to benefit the other. Firms choose this mode of entry when they have one or more assets that will help the other firm but do not want to incur the cost or risk within their own firm. For example, News Corp., owners of Fox News, the Wall Street Journal, and 20th Century Fox, wanted to expand into telecommunications in China. News Corp has a subsidiary called Phoenix Satellite Television Holdings Ltd., which means that News Corp. controls Phoenix Satellite. Phoenix Satellite formed a strategic partnership with a Chinese company called China Mobile Ltd. In this way, News Corp. got access to Chinese consumers through China Mobile’s network. In exchange, China Mobile got access to Phoenix’s content, including Chinese-language movies and news.




Memo: International Expansion ProjectDirections: After you read this memo, work with your strategy team to make a What We Know list based on the information in the memo.

To: Global Business Strategy Teams

From: Annabel Okochi, Vice-President of International Expansion, Smart Car

Re: BRICS Country Expansion

I am happy to let you know that Smart car has secured funding from our parent company, Daimler AG, to begin the market research to enter the market, and/or to refine our market-entry strategies, in the BRICS countries. We have chosen the BRICS countries because they have the fastest growing large economies in the world and are predicted to be among the world’s most dominant economies by 2050. We believe that Smart car’s innovation, functionality, and fun can easily adapt to these markets.

Our focus for expansion is to create value in these countries by showing potential consumers that Smart car can satisfy an unmet need. The Smart car’s core competencies, the skills and qualities we offer that our competitors cannot easily match, are as follows:

Modern technology

High safety

Excellent quality and reliability

Modern design

High fuel efficiency

Low carbon dioxide emissions

Distinctive spatial concept—small on the outside, roomy on the inside

These highly competitive qualities of our product reflect the core competencies of our Smart car business, the skills and capabilities that our competitors cannot easily match.

The outstanding product attributes of Smart car are the key ideas we would like to emphasize in our marketing for the markets in BRICS countries. But first, it is essential that we understand the benefits and risks of entering those markets. This is why your team’s first task is to conduct a SWOT analysis of your market. Look at the strengths and weaknesses of Smart car, and the opportunities and threats in the market. After you have finished your research, work with your team to determine the most appropriate market-entry strategy based on what you discovered. Please create a poster that the Smart car executives and I can use to easily understand how the most important findings from your SWOT analysis led you to your recommendation.

Thank you in advance for your hard work.




Guide: International Expansion Project Steps




Categorizing: What Is SWOT?Student Name:_______________________________________________________ Date:___________

Directions: After you read the description of SWOT, work with your team to place the nine statements in the correct categories by writing the statement number in the appropriate box. Be ready to share your answers.

What is SWOT?SWOT stands for strengths, weaknesses, opportunities, and threats. A SWOT analysis helps decision-makers clarify the strengths and weaknesses of the business and the opportunities and threats of the market. Considered together, this information gives a good overview of the benefits and costs of a business venture.

SWOT analysis of potential expansion of Ruby’s Restaurant to Edison High School

Restaurant STRENGTHS

WEAKNESSES

School OPPORTUNITIES

THREATS

1. 80% of students buy lunch.

2. The school district has strict dietary regulations for on-campus food, including no fried food.

3. The cafeteria serves breakfast and lunch.

4. Ruby’s features American foodburgers, fries, sandwiches.

5. Ruby’s has been in the community for over 40 years.

6. Three other restaurants are competing for the contract.

7. Students spend approximately $3.00 per meal.

8. All food preparation must occur on site.

9. Ruby’s was voted most popular restaurant in the school newspaper.




Guide: SWOT AnalysisStudent Name:_______________________________________________________ Date:___________

Directions: Work with your team to research the SWOTs for Smart car’s expansion into your BRICS country using the suggested topics in the chart below. As you work, keep in mind that the product’s strengths, weaknesses, opportunities, and threats depend on the country you are considering. For example, Smart car’s strengths in one country might be weaknesses in another, so be sure to develop your SWOT with your country in mind. Later in the lesson you will learn about market-entry strategies and recommend one. Then you will fill in the information at the top of the chart with the name of the country you researched.

Websites for research: http://www.smartusa.com/

https://www.cia.gov/library/publications/the-world-factbook/

The Market-Entry Strategy Recommendation for _______________________________

is ____________________________________________________________________

STRENGTHS (of Smart car) Advantages of firm and car

Unique selling points

Knowledge about product, environment

Price/value/quality of product

Management of Smart car company

WEAKNESSES (of Smart car) Competition

Market reaction to Smart car

Reputation of product

Product offerings

Price

OPPORTUNITIES: Market developments

Industry and lifestyle trends

Size of the market

Present income of consumers (PPP)

Likely future income of consumers (economic growth rate)

Environmental conditions

Economic and political factors, including currency stability and fuel prices

Other influences, including weather

THREATS: Political factors

Environmental conditions

Competition

Market demand

Economic conditions

Infrastructure

Other influences, including weather


https://www.cia.gov/library/publications/the-world-factbook/

http://www.smartusa.com/



Chart: Choosing a Market-Entry StrategyStudent Name:_______________________________________________________ Date:___________

Directions: Read the chart below on Market-Entry Strategies for Global Firms about the four types of market entry strategies and why managers choose them. Think about which products and services could be made more profitable by pursuing each strategy. Then complete the blank chart by filling in the strategy and reason for each of the four products listed.

In Student Resource 9.3, Reading: Modes of Entry into Foreign Markets, you learned about the ways companies can structure their companies in order to enter a market successfully. In addition to business structure, companies must also think about the ways they will change their products or services (if at all) to compete successfully in a new market. Sometimes the answer is simple, but often it is more complex, with many variables that must be considered.

The chart on the next page is a tool managers can use to analyze how best to enter a market. Each cell represents a different set of variables. In the top-left cell, for example, the Global Standardization Strategy would be appropriate for a product with high pressure for cost reductions but low pressure for local responsiveness and/or product differentiation. This would be an appropriate market-entry strategy for products like microchips or oil.

Think back to Solar Dog Homes from Lesson 4. What market-entry strategy would be appropriate for it? Why? Consider the following products and the appropriate market-entry strategy for each. As you work, keep in mind that there are many ways to think about a product, and there is no absolute right or wrong way to enter a market, so your opinion may be different from the opinions of others. Just make sure you can back up your answer.

Product Strategy Reason

Coca-Cola

Rolex

T-Shirts

Bestselling Novel



Market-Entry Strategies for Global Firms

High

PressureforCostReductions

Low

Global Standardization Strategy Avoids customizing product

offerings and marketing

Markets standardized product worldwide

Works best for products with universal needs, such as microchips

Transnational Strategy Can be achieved through location

economies (performing value creation activity in places with lowest costs) and/or economies of scale (when a large volume of a product is produced, spreading the fixed costs of production over larger volumes)

Differentiates product offerings and marketing strategies

International Strategy Takes products first developed for

one local market and then sells them internationally

Requires little local customization

Works best when there are few competitors

Localization Strategy Customizes goods and services to

local market

Works best when cost pressures are low and there are substantial differences in national tastes and preferences

Pressure for Local Responsiveness/Differentiation

High Low


Documents

curriculum.naf.orgcurriculum.naf.org/packaged/assets/downloads/finance/gl… · Web viewCoca-Cola. Rolex. T-Shirts. Bestselling Novel. Market-Entry Strategies for Global Firms