UGBA 178FINAL REVIEW

Nelda GabbayErik Kiewiet de Jonge

May 8, 2009

Remember!

One page front/back of notes 3 hour exam Review the articles! They are all fair

game Review Erik’s CSR lecture Review all textbook assigned

chapters/PPT slides on class website…

When and Where

Wednesday, 5/20/2009 from 12:30 pm to 3:30 pm

Bechtel Auditorium (not Haas!)

Today’s Roadmap

Global Strategy and Entry Modes Global Supply Chain Management Global Capital Markets Financial Management in Int’l Business Remember: we’re just covering the most

requested and challenging topics today – review the other material, too!

Global Strategy and Entry Modes

Make sure to review articles: “Big Mac’s Local Flavor” “Philippines Jollibee Goes Abroad” “Material Fitness” “Making It in China”

Strategy, Profitability, Profit Growth

A firm’s strategy refers to the actions that managers take to attain the goals of the firm

Profitability can be defined as the rate of return the firm makes on its invested capital

Profit growth is the percentage increase in net profits over time

Expanding internationally can boost profitability and profit growth

Global Standardization Strategy

The global standardization strategy focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies

The strategic goal is to pursue a low-cost strategy on a global scale

The global standardization strategy makes sense when: there are strong pressures for cost reductions demands for local responsiveness are minimal

Localization Strategy

The localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets

The localization strategy makes sense when: there are substantial differences across nations with

regard to consumer tastes and preferences where cost pressures are not too intense

Transnational Strategy

The transnational strategy tries to simultaneously: achieve low costs through location economies, economies of

scale, and learning effects differentiate the product offering across geographic markets

to account for local differences foster a multidirectional flow of skills between different

subsidiaries in the firm’s global network of operations

The transnational strategy makes sense when: cost pressures are intense pressures for local responsiveness are intense

International Strategy

The international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization

The international strategy makes sense when there are low cost pressures low pressures for local responsiveness

Things to Consider… Entry Modes

Firms expanding internationally must decide: which markets to enter when to enter them and on what scale which entry mode to use

Entry modes include: exporting licensing or franchising to a company in the host nation establishing a joint venture with a local company establishing a new wholly owned subsidiary acquiring an established enterprise

Greenfield Ventures vs. Acquisitions

Firms can establish a wholly owned subsidiary in a country by:

Using a greenfield strategy - building a subsidiary from the ground up

Using an acquisition strategy

Greenfield or Acquisition?

The choice between a greenfield investment and an acquisition depends on the situation confronting the firm

Acquisition may be better when the market already has well-established competitors or when global competitors are interested in building a market presence

A greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture

Strategic Aliances

Strategic alliances refer to cooperative agreements between potential or actual competitors

Strategic alliances range from formal joint ventures to short-term contractual agreements

The number of strategic alliances has exploded in recent decades

Global Production and Supply Chain Management

Make sure to review articles: “A Tale of Two Factories” “Pace-Setting Zara Seeks More Speed To

Fight Its Rising Cheap-Chic Rivals” “Low-skilled Jobs: Do They Have to Leave?”

Things to ask…

International firms must answer five interrelated questions: 1. Where should production activities be located? 2. What should be the long-term strategic role of foreign

production sites? 3. Should the firm own foreign production activities, or is it better to

outsource those activities to independent vendors? 4. How should a globally dispersed supply chain be managed, and

what is the role of Internet-based information technology in the management of global logistics?

5. Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity?

Strategy, Production, And Logistics

Firms need to identify how production and logistics can be conducted internationally to:

lower the costs of value creation add value by better serving customer needs

Production refers to activities involved in creating a product

Logistics refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers

Three factors are important when making location decisions:

country factorsFirms should locate manufacturing activities in those locations where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity

technological factorsThe type of technology a firm uses in its manufacturing can affect location decisions

product factorsthe product's value-to-weight ratiowhether the product serves universal needs

Global Capital Markets

Make sure to review articles and Ch 11: “The Business of Making Money” “Savings and Souls” China Mobile Case Brazil Gol Case Notes from G-20 discussion, particularly

regarding tax havens

Global Capital Markets

In concept, global capital markets are like domestic capital markets – just larger and more diverse

Capital markets unite investors, “market-makers” (banks, etc) and borrowers

The globalization of capital markets has occurred within the last few decades thanks to the liberalization of financial markets

Growth in Global Capital Markets

We can thank: Advances in technology

Capital markets are information intensive – computing power has driven growth and made it a 24 hr business

Deregulation by governmentsElimination/reduction of restrictions on citizens’ cross-

border investing restrictionsGrowth in foreign direct investment and capital flows

between countries

Why Go Global to Raise Capital?

Supply up, price (cost) down the cost of borrowing (cost of capital, cost of debt, etc) is driven down by an increased supply of available funds

Remember: bond prices up, yields (cost to firm) down, and vice versa

Establish a presence in a new market – think Brazil Gol and listing on the NYSE

Global Capital Markets: Investors’ Perspective

Investors (you, me, Warren Buffet, mutual funds) benefit from global diversification of investments

Diversification works because countries’ returns are not perfectly correlated, meaning losses in one country may be offset by gains in another

Remember the global economy: countries’ economic performances can vary greatly

Eurocurrencies

A eurocurrency is any currency banked outside of its country of origin (the USD in the UK, the Euro in Iceland, etc.)

Arose from the Cold War and the USSR’s need to deposit its dollars outside of the US

OPEC countries continue to fuel the eurocurrency market

Eurocurrencies: Why the Buzz?

Regulation low, cost of lending/managing low interest rates for lending low, investing interest rates high

Remember those deposit requirements? Not applicable for eurocurrencies…

With high rewards comes higher risks for investors (depositors)…

Bonds with fancy names

Foreign bonds – sold outside the borrower’s country but in local currency (e.g., GE bonds sold in Switzerland in CHF)

Eurobonds – bonds underwritten by and international syndicate of banks and sold in countries other than the one is whose currency the bond is denominated (e.g., P&G selling bonds in USD outside of the US)

Global Capital Markets: Too Good to Be True?

Don’t forget currency risks! These can be offset through:

Currency swaps Future exchange contracts

Things to Consider…

Exchange rate risk Availability of capital domestically Effects on cost of capital (Future) intentions of raising capital in new markets

(China Mobile, Brazil Gol) Direct listing vs ADR Debt vs Equity Reporting and tax requirements and implications

Financial Management in Int’l Business

Financial managers focus on: Investment decisions – what to finance? Financing decisions – how to finance? Money management decisions – what’s most efficient

and will provide the best return? Tax decisions – what tax regime is most favorable? Difficult enough domestically – managing

internationally adds a whole new layer of complexity

Financial Management in Int’l Business

Make sure to review articles and Ch 20: “The Finance Function in a Global Corporation” China Mobile Case Brazil Gol Case

Investment Decisions

Decide what projects or investments will provide the highest return, often measured in terms of net present value (NPV)

Show me the money: when assessing projects, NPV isn’t the only concern – remember that cash is (usually) king consider project cash flows, too

Don’t forget to incorporate all the risks (political, economic, etc.)!

Financing Decisions

Raising capital and keeping costs low Must consider both local, national and global capital

market options Debt versus equity – consider the advantages of both:

Debt usually involves more known costs and may be payable in the instance of bankruptcy

Equity involves selling ownership of the companyTax benefits often greatest when using debtExchange rate movements affect choices

Money Management

Bags of cash “under the mattress” are not earning companies money – financial managers must judiciously hold cash

Tradeoff between liquidity and returns Don’t run cash balances too close to zero –

firms need cash for notes payable and unexpected events

Certainties in Life: Death and Taxes

Watch out for double taxation, which occurs when host and home countries tax foreign subsidiaries

Tax credits, treaties and deferrals are complicated – hire a good accountant

Tax havens coming under fire from the Obama administration and the G-20

Other Financial Issues

Transfer costs – moving money around costs money

Dividends – foreign subsidiaries often remit earnings in the form of dividends

Transfer prices – the prices firms charge internally to transfer goods and services

Bilateral and multilateral netting – reduce transfer payments to settle debts (see pg 690)

Bilateral and Multilateral Netting

If a Mexican subsidiary owes a French sub$4M and the French sub owes the Mexican sub $6M, the French sub could pay the Mexican sub $2M and call it even

The same logic applies to multiple foreign subsidiaries to arrive at multilateral netting check out page 690 for a good diagram

Other Topics

You also requested these topics: Toyota Production System – see the article on the course

website and the article in the book CSR – see Erik’s slides on the website Marketing – think back to Aldi and review Ch 17 Human Resource Management – think back to Molex

and review Ch 18 Cumulative concepts – review your midterm and make

sure understand the fundamentals

Keys to Success

Use your time wisely On short answer questions:

Completely answer the questions being asked Write legibly Organize your thoughts – we must be able to understand your answers Create answer outlines if you need help organizing (but don’t forget to

write out your answer!) Demonstrate your understanding – go beyond the superficial answer

and show depth of knowledge Bulleted answers usually not sufficient

The Five Essential Takeaways from UGBA 178

1. Global firms must find an appropriate mix of globalization and localization in their strategy and operations.

2. Developing countries are increasingly important in international business as markets, production sites, and sources of capital.

3. Supply chain integration resulting in fast and lean partnerships with suppliers and customers is critical to success of global firms.

4. High quality and efficient production is possible anywhere in the world by using modern production methods.

5. Sustainable business practices (environmental and working conditions) have become essential to global success.

Questions?