Introduction to Business Management PDF

Introduction to Business Management Business Basics Prof. Dr. Martin Fleischmann Business and Business Management Business Entity or organization that provides goods and Stakeholders of a Business services to consumers for the purpose of making a profit Revenue = income...

Introduction to Business Management Business Basics Prof. Dr. Martin Fleischmann Business and Business Management Business Entity or organization that provides goods and Stakeholders of a Business services to consumers for the purpose of making a profit Revenue = income Profit = revenue – expenses Entrepreneurs – people who take business risk Profit – the reward for taking risk Business Management Coordination of an organization’s or entity’s business activities Key tasks include planning, organizing, directing and controlling all business processes with the goal to generate and maximize value for all stakeholders Source: Skripak and Poff (2020) Business & Economics Economics: the study of the production, distribution, and consumption of goods and services. Source: Skripak and Poff (2020) External factors influencing a business Macro- and Micro-Environment Macro- Environment Culture Demographics Political/ Social Legal BUSINESS Micro- Trends Env. Economy Technology Functional areas of business A business can be divided into functional areas. Some examples include: Management: planning for, organizing, leading, and controlling a company’s resources so that it can achieve its goals Operations: designs and oversees the transformation of resources into goods or services Marketing: identifies customers’ needs and designs products and services in a customer-centric fashion to meet those needs Accounting: measure, summarize, and communicate financial and managerial information and advise other managers on financial matters Finance: planning for, obtaining, and managing a company’s funds And many more functional areas, such as Human Resources (HR), Legal, etc. Source: Photo by Leon on Unsplash, Skripak and Poff (2020) Production factors in business – pre-digital vs digital era Elementary factors Dispositive factor Operating Materials Work Management resources e.g. raw materials, e.g. machine Planning, e.g. machines, intermediate products, operator organizing, buildings, capital auxiliary materials controlling Operating Materials Work Management resources Transmitter-receiver Problem solver, Data, networking, Technologies & systems (e.g. RFID) human-machine assistance systems, networking interaction decentralization Source: Gutenberg (1966); Gabler Wirtschaftslexikon (2020) Voigt et al. (2019); Obermaier (2019) Introduction to Business Management Business Strategy Prof. Dr. Martin Fleischmann Learning objectives At the end of this lecture, you will be able to: UNDERSTAND the strategic management process DIFFERENTIATE and APPLY different concepts to analyze a businesses’ status in the planning stage DESCRIBE the BCG matrix as a controlling tool in the business management process What does management do? The strategic management process Management: One function within a business What does Management do?  planning for, organizing, leading, and controlling a company’s resources so that it can achieve its goals Source: Skripak and Poff (2020) Planning – What is the business mission? Mission The mission statement is a broad description of a firm’s objectives and the scope of activities it plans to undertake in the future. The mission attempts to answer two main questions: What type of business are we? What do we need to do to accomplish our goals and objectives? Example Tesla’s mission statement To accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible. Source: Photo by Brian McGowan on Unsplash Planning – SWOT analysis Internal Internal Strengths Weaknesses External External Opportunities Threats SWOT analysis – some thoughts on Positive Negative Internal Strengths Weaknesses High market share Low diversification Strong brand Few healthy beverages Strong global presence Excellent customer loyalty Supply chain External Opportunities Threats Emerging countries Water scarcity Diversifying products Potential market saturation Bottled water Changes to labeling regulations Increasing competitors Source: Grewal and Levy (2021) Planning – Competitive forces (Porter model) Socio-cultural Political & legal forces forces New entrants Threat of new Competitors entering market Rivalry among Suppliers Power existing firms Power Customers Intensity of rivalry Threat of substitute products or services Substitution Technological forces Economic forces Source: Porter (1986) Competitive forces (Porter model) – the Coca Cola example Entry barriers are relatively low for the beverage industry: there is no consumer switching cost and zero capital requirement. There is an increasing amount of new brands appearing in the market with similar prices than Coke products Coca-Cola is seen not only as a beverage but also as a brand. It has held a very significant market share for a long time and loyal customers are not very likely to try a new brand. The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener, Medium pressure and caffeine. The suppliers are not New entrants concentrated or differentiated. Coca-Cola is likely a large, or the largest Threat of new customer of any of these suppliers. Competitors entering market Low pressure Rivalry among Suppliers Power existing firms Power Customers High pressure Intensity of rivalry Low pressure Currently, the main competitor is Pepsi which also The individual buyer no pressure on Coca- Threat of substitute has a wide range of beverage products under its products or services Cola brand. Both Coca-Cola and Pepsi are the Large retailers, like Wal-Mart, have predominant carbonated beverages and committed bargaining power because of the large heavily to sponsoring outdoor events and activities. Substitution order quantity, but the bargaining power There are other soda brands in the market that is lessened because of the end consumer Medium/high pressure became popular, like Dr. Pepper, because of their brand loyalty. unique flavors. These other brands have failed to There are many kinds of energy drinks/soda/juice reach the success that Pepsi or Coke have enjoyed. products in the market. Coca Cola doesn’t really have an entirely unique flavor. In a blind taste test, people can’t tell the difference between Coca-Cola and Pepsi. Source: Porter (1986), Valuationacademy.com (2019) Controlling – Evaluating Performance: the Boston Consulting Group Matrix (BCG Matrix) Balanced portfolio needed for sustained market Cash Cows: high market share in low-growth markets Generate cash for the business to stay alive success! Action: „milk for cash“ and maintain market share with as little investment as possible high Cash is used to fund stars and question marks (potential future cash cows) Stars: high market share in high-growth markets Lead a growth-market due to e.g. a dominant unique selling Market Growth proposition (USP) or a monopolistic market position Action: fund to maintain competitive position and growth rate Goal for stars is to become future cash cows Question Marks: low market share in high-growth markets Usually new businesses with potential to gain market share Action: fund to convert into stars and eventually cash cows If a question mark becomes a dog, reduce funding low Dogs: low market share in low-growth markets Barely generate enough money to maintain their business Action: phase out unless they are needed to complement or low Relative Market Share high boost the sales of another product or for competitive purposes Analyze carefully if needed for a business portfolio Boston Consulting Group Matrix (BCG Matrix) The example of Apple high Market Growth low low Relative Market Share high Marketing Prof. Dr. Martin Fleischmann LEARNING OBJECTIVES At the end of this lecture, you will be able to: RECOGNIZE what marketing is and why it is important to a firm UNDERSTAND the marketing process of segmenting, targeting and positioning DESCRIBE the elements of the marketing mix (the 4 P’s) DIFFERENTIATE different pricing strategies that a business can use to capture value in the marketplace 2 WHAT IS MARKETING? An organizational function and a set of processes for creating, capturing, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders. 3 Source: Photo by Merakist on Unsplash CORE ASPECTS OF MARKETING Marketing affects various Marketing is about satisfying stakeholders customer needs and wants Marketing creates value Marketing entails an through product, price, place exchange and promotion decisions Source: Grewal and Levy (2021) WHAT IS A MARKETING STRATEGY? MARKETING STRATEGY A marketing strategy identifies: A firm’s target market. A related marketing mix. The bases on which the firm plans to build a sustainable competitive advantage (something the firm can persistently do better than its competitors). Source: Photo by Joanna Kosinska on Unsplash HOW CAN A FIRM DEVELOP SUSTAINABLE COMPETITIVE ADVANTAGES? Customer excellence: is achieved when a firm develops value- based strategies for retaining loyal customers and provides outstanding customer service. Operational excellence: involves a firm’s focus on efficient operations, excellent supply chain management, and strong relationships with its suppliers. Product excellence: involves a focus on achieving high-quality products; effective branding and positioning is key. Locational excellence: A method of achieving excellence by having a strong physical location and/or Internet presence.  What is a marketing plan? ROADMAP TO SUCCESS IN MARKETING A written document composed of an analysis of the current marketing situation, opportunities and threats for the firm, marketing objectives and strategy specified in terms of the four Ps, action programs, and projected or pro forma income (and other financial) statements. Source: Photo by Tabea Damm on Unsplash STP: SEGMENTING, TARGETING & POSITIONING Segmenting Divide a marketplace into subgroups or segments Determine which of those segments a business Targeting should pursue to target Decide how to position products and services to best Positioning meet the needs of the chosen target STP AT SEGMENTING Technique used for dividing a population into several homogeneous subsets regarding certain criteria that can explain differences in customer behavior Subset of demand, homogeneous on a certain number Market of criteria and reacting in a specific way to a market segment offer e.g. socio-demographic/ behavioral, lifestyles,.... Marketing segment(s) effectively addressed by the company for the potential(s) that they represent Target(s) A target => a specific mix Targets => differentiated mixes WHY SEGMENTING? Reasons for a company to perform a segmentation: You can’t serve all customers equally well. There are potential customers with zero or little interest in your product. Rare to have one offering that will make everyone happy. You can make more money by serving some segments well, rather than the whole market poorly. Source: Photo by Kelsey Weinkauf on Unsplash TARGETING Targeting is the process of defining those segments of potential customers (prospects) that a company intends to transform into actual customers. It represents a strategic decision which segments to address with offerings and which segments not to address. The decision has long-term implications for all aspects of business (e.g. firm structure, required resources and capabilities, offering, production system, logistics system, pricing concepts etc.) Source: Photo by Ameer Basheer on Unsplash TARGET MARKET & SELECTION CRITERIA Target Market: The set(s) of buyers sharing common needs or characteristics that an organization decides to serve. Criteria for selecting a target market: Size / profit potential Forecasted growth Match with core competencies Ability to reach Competitive intensity Customer satisfaction levels with existing choices Barriers to entry APPROACHES TO TARGETING Three fundamental approaches Undifferentiated approach: Standardized marketing (products, channels, prices and communication) without segment-specific adaptations Differentiated approach: Adaptation of marketing to several segments and its characteristic needs and value perceptions Concentrated approach: Focus on one segment and definition of marketing to satisfy needs of this one segment. POSITIONING & ITS SUCCESS FACTORS The differentiation of an offering and its identity (e.g. a brand or a company) against its relevant competitors  Development of a unique profile in the subjective perception of its relevant public − current customers − potential customers etc. A good positioning must  fit with the company‘s (corporate) overall image  be relevant for the target customers  be perceived (decoded) correctly by the customers  allow competitive differentiation  be maintainable in the long run THE MARKETING MIX – THE 4 P’S Source: Grewal and Levy (2021) THE 4 P’S: PRODUCT A BMW is not just a car… Warranties included Free car washes at some dealers Actual Product: brand name, packaging Free airport parking in some cities quality level, features Free shuttle service to airport Reputation, image Core Financing options Customer Value Services: support, warranty, etc. Source: BMW THE 4 P’S: PRODUCT PRODUCT MIX AND PRODUCT LINE DECISIONS Product mix breadth (number of product lines) Product line Abbreviated List of BMW Product Mix Product Lines BMW MINI Rolls-Royce Motorrad 2 Series Clubman Ghost C Series 3 Series Convertible Phantom F Series 4 Series Countryman Wraith G Series 5 Series Coupe K Series Product mix depth 6 Series Hardtop R Series (number of 7 Series John Cooper S Series products within a X Series Works product line) Z4 Series Paceman M Series Roadster BMW i Hybrid THE 4 P’S: PRICE “Pricing is the moment of truth – all of marketing comes to focus in the pricing decision.” Raymond Corey, Harvard Business School THE 4 P’S: PRICE – STRATEGIC PRICING CONCEPTS – LUXURY CONCEPT Focus upon: Exclusiveness Characteristics Purism Exceptional quality Prestige High profile brands Exclusiveness / rareness Examples: Outstanding design THE 4 P’S: PRICE – STRATEGIC PRICING CONCEPTS – PREMIUM VALUE CONCEPT Focus upon: Characteristics Solid value High product quality Trustworthy price Latest technology Design Examples: Full service Trustworthy brand THE 4 P’S: PRICE – STRATEGIC PRICING CONCEPTS – FAIRNESS CONCEPT Focus upon: Price security Characteristics Price individualization Price and value Value for money transparency Sincere prices Examples: Price guarantees THE 4 P’S: PRICE – STRATEGIC PRICING CONCEPTS – DEAL-ORIENTED CONCEPT (HIGH/LOW PRICING) Focus upon: Price opportunities Customer “cleverness” Characteristics Price pride / deal Price promotions proneness Active pricing Differential pricing Auctions Examples: THE 4 P’S: PRICE – STRATEGIC PRICING CONCEPTS – DEAL-ORIENTED CONCEPT (HIGH/LOW PRICING) THE 4 P’S: PRICE – STRATEGIC PRICING CONCEPTS – DISCOUNT CONCEPT Focus upon: Simple offering “No frills” Characteristics Lowest prices in category Limited product range Examples: Networking Prof. Dr. Martin Fleischmann LEARNING OBJECTIVES At the end of this session, you will be able to: UNDERSTAND the importance of networking for a successful professional career IDENTIFY your professional network DEVELOP strategies to effectively build and grow your network 2 IS NETWORKING IMPORTANT? 3 Source: Photo by Product School on Unsplash HOW TO BUILD A STRONG PROFESSIONAL NETWORK Build, Build, Build LinkedIn/Collect Cards/ Events Find Connection Points Friends in Common Alma Mater (THRO) Professional Organizations Special Interests/Sports/Food/Travel/Arts 8 Source: Photo by Product School on Unsplash GETTING TO KNOW PEOPLE IS ONLY THE FIRST STEP TOWARDS A STRONG NETWORK Keep in Touch Integrate contacts into your life Update them on new accomplishments Share articles/information based upon shared special interests/affiliations Make sure everyone in your network knows that you are looking for a job 9 Entrepreneurship Prof. Dr. Martin Fleischmann LEARNING OBJECTIVES At the end of this lecture, you will be able to: DIFFERENTIATE and DEFINE the terms entrepreneurship and intrapreneurship UNDERSTAND and APPLY methods to design and implement disruptive digital business models RECOGNIZE patterns that exist within digital business models ENTREPRENEURSHIP VS INTRAPRENEURSHIP Entrepreneurship Intrapreneurship Creating and starting a new Using the methods and mindsets business under conditions of risk from the startup world in established and uncertainty, seizing organizations with the goal to remain opportunities while enjoying most of competitive through innovation and the rewards agility Key characteristics: Key characteristics: Innovation power Innovation power Personal risk Organizational risk Mostly personal rewards Rewards split between organization and intrapreneurs WHAT IS A BUSINESS MODEL? DEFINITION “The magic of a business (…) based on its bits and pieces.” Gassmann et al., 2019 A business model describes how an organization creates, delivers and captures value. Osterwalder & Pigneur, 2010; Demil & Lecocq, 2010 DEVELOPING BUSINESS MODELS IMPLEMENTATION INITIATION INTEGRATION IDEA GENERATION Business Model Navigator, 2019 DEVELOPING BUSINESS MODELS – BUSINESS MODEL CANVAS Key Key Value Customer Customer Partners Activities Propositions Relationships Segments Assumption Product-Market-Fit Assumption Assumption Internal Key Channels Assumption External Perspective Resources Perspective Assumption Assumption Osterwalder & Pigneur, 2010 Cost Structure Revenue Streams Assumption Assumption DEVELOPING BUSINESS MODELS – VALUE PROPOSITION A value proposition creates value for a customer segment through a distinctive mix of elements catering to that segment‘s needs. Osterwalder & Pigneur, 2010; Demil & Lecocq, 2010 Quantitative/ functional values Qualitative/ emotional values Price Newness Speed of service Design Cost reduction Customer experience Convenience Brand Saving time and effort Status Performance Self-fulfillment Customization DEVELOPING BUSINESS MODELS – CHANNELS OWN PARTNER Sales Team Wholesale E-commerce Third Party Websites Own stores Partner stores DEVELOPING BUSINESS MODELS – CUSTOMER RELATIONSHIPS Example: reusable hangers DEVELOPING BUSINESS MODELS – REVENUE STREAMS & PRICING MECHANISMS DEVELOPING BUSINESS MODELS – BUSINESS MODEL CANVAS Key Key Value Customer Customer Partners Activities Propositions Relationships Segments Assumption Product-Market-Fit Assumption Assumption Internal Key Channels Assumption External Perspective Resources Perspective Assumption Assumption Osterwalder & Pigneur, 2010 Cost Structure Revenue Streams Assumption Assumption DEVELOPING BUSINESS MODELS – BUSINESS MODEL CANVAS Key Key Value Customer Customer Partners Activities Propositions Relationships Segments Fact Product-Market-Fit Fact Fact Internal Key Channels Fact External Perspective Resources Perspective Fact Fact Osterwalder & Pigneur, 2010 Cost Structure Revenue Streams Fact Fact IMPLEMENTATION OF A DIGITAL BUSINESS MODEL THE IMPLEMENTATION IS ALWAYS ITERATIVE Assumption Assumption Test one dimension at a time. Assumption Assumption Assumption Assumption Assumption Assumption Assumption IMPLEMENTATION OF A DIGITAL BUSINESS MODEL THE IMPLEMENTATION IS ALWAYS ITERATIVE Assumption Assumption Test one dimension at a time. Fact Assumption Assumption One after the other, the assumptions of the business Assumption model are replaced by facts , Assumption i.e. verified or falsified. Assumption Assumption IMPLEMENTATION OF A DIGITAL BUSINESS MODEL THE IMPLEMENTATION IS ALWAYS ITERATIVE Assumption Assumption Test one dimension at a time. Fact Assumption Fact One after the other, the assumptions of the business Assumption model are replaced by facts , Assumption i.e. verified or falsified. The business model is constantly adjusted Assumption Fact IMPLEMENTATION OF A DIGITAL BUSINESS MODEL THE IMPLEMENTATION IS ALWAYS ITERATIVE Fact Fact Test one dimension at a time. Fact Fact Fact One after the other, the assumptions of the business model are replaced by facts , Fact Fact i.e. verified or falsified. The business model is constantly adjusted Fact Fact IDEA GENERATION – BRAINSTORMING Groups work together to generate ideas No idea can be immediately dismissed DEVELOPING AND IMPLEMENTING BUSINESS MODELS – KEY TAKEAWAYS IDEA GENERATION INTEGRATION Learn from other industries and their Sync all parts of the business model to business model patterns. allow for rapid scaling. IMPLEMENTATION Experiment, experiment, experiment to adapt the business model to customers’ needs. Digital Business Prof. Dr. Martin Fleischmann 1 BUAD 307 – Marketing Fundamentals – Fall 2020 Prof. Martin Fleischmann LEARNING OBJECTIVES At the end of this session, you will be able to: RECOGNIZE how new digital technologies such as blockchain technology, artificial intelligence or virtual/augmented/mixed reality can impact business processes. UNDERSTAND the concept of Dynamic Pricing and DISTINGUISH the three main types if Dynamic Pricing. DESCRIBE use cases for new digital technologies in business that already reshape the business landscape. 2 AN OVERVIEW OF DIGITAL TECHNOLOGIES TOUTED TO RESHAPE THE FUTURE A report by the World Economic Forum looking at Digital Transformation identified these seven key technologies, to which we could add two more – Blockchain and VR/AR/MR. 3  VR/AR/MR IN BUSINESS (VIRTUAL/AUGMENTED/MIXED REALITY) 4 WHAT IS VIRTUAL REALITY, AUGMENTED REALITY AND MIXED REALITY (VR/AR/MR)? Virtual Reality (VR) Immerses users in a fully artificial digital environment Usually need to be in a VR simulator or wear a VR device (e.g. VR glasses, VR headsets) Example: VR car test drive simulator Augmented Reality (AR) Overlays virtual objects on the real-world environment The real world is enhanced with digital objects Usually enabled via an app on a device (e.g. on a smartphone) Example: Pokemon Go, Snapchat Mixed Reality (MR) Not just overlays but anchors virtual objects to the real world Strong connection between real and virtual world; users can interact with both real and virtual world Headsets needed to create this close connection between real and virtual world 5 Source: Photo by Jessica Lewis on Unsplash VR/AR/MR IN BUSINESS: USE CASE 1 – VIRTUAL MIRROR https://youtu.be/Mr71jrkzWq8 6 VR/AR/MR IN BUSINESS: USE CASE 2 – VR TEST DRIVE & AR CAR CONFIGURATOR 7 Source: https://www.motorshowblog.com/en/bmw-personal-copilot-virtual-reality-iaa-2017-personal-experiment/ Source: https://techcrunch.com/2017/09/22/ford-is-now-designing-cars-in-mixed-reality-using-microsoft-hololens/ VR/AR/MR IN BUSINESS: USE CASE 3 – AR IN GROCERY SHOPPING https://youtu.be/UQcJSZPpNhA 8 BLOCKCHAIN IN BUSINESS 10 WHAT IS BLOCKCHAIN? Blockchain describes a digital ledger that cryptographically stores information about transactions of assets. These assets can be money or other types of value or property. The history of transactions forms a chain of information – hence, the name blockchain. A wide variety of participants takes part in the blockchain process. These participants may include e.g. businesses, public institutions and/or private individuals. As opposed to being governed by one central authority, various participating parties manage the blockchain and distribute the ledger among them. This distribution of power and responsibility is supposed to make the blockchain less prone to hacking, fraud and tampering as changes would need to be made with all involved parties, which is almost impossible. Finally, this is touted to result in a highly secure, immutable ledger everybody can trust and rely on. 11 Source: Photo by Hitesh Choudhary on Unsplash WHAT IS BLOCKCHAIN? https://youtu.be/6WG7D47tGb0 12 BITCOIN IN DECEMBER 2024 ≠ BLOCKCHAIN 13 Source: Coinmarketcap.com (2024) KEY BENEFITS OF BLOCKCHAIN TECHNOLOGY IN BUSINESS SETTINGS De-centrality Security Trust Cost savings Efficiency ECONOMIC BENEFITS Speed Anonymity Automation Cryptography FUNCTIONAL BENEFITS Immutability Traceability 14 BLOCKCHAIN IN BUSINESS: USE CASE 1 – CRYPTOCURRENCIES 15 Source: Overstock.com BLOCKCHAIN IN BUSINESS: USE CASE 2 – NON FUNGIBLE TOKENS (NFT) Digital Shoes and Apparel Opportunities Additional sales opportunities for brands, especially cross- selling Digital Trading More intensive consumer Cards engagement Strengthening of customer loyalty (e.g. via exclusive clubs) Risks Price manipulation Legal uncertainty Rejection by customers Digital Art 16 ARTIFICIAL INTELLIGENCE IN BUSINESS 17 WHAT IS ARTIFICIAL INTELLIGENCE (AI)? Artificial intelligence leverages computers and machines to mimic the problem-solving and decision- making capabilities of the human mind. At its simplest form, artificial intelligence is a field, which combines computer science and robust datasets, to enable problem-solving. It also encompasses sub-fields of machine learning and deep learning, which are frequently mentioned in conjunction with artificial intelligence. These disciplines are comprised of AI algorithms which seek to create expert systems which make predictions or classifications based on input data. https://www.ibm.com/cloud/learn/what-is-artificial-intelligence 18 Source: IBM; Photo by Alexander Sinn on Unsplash AI IN BUSINESS: USE CASE 1 – DIGITAL RECOMMENDATION ALGORITHMS https://www.nbcnews.com/mach/video/why-netflix-s- algorithm-is-so-binge-worthy-929058883854 19 AI IN BUSINESS: USE CASE 2 – DYNAMIC PRICING DYNAMIC PRICING... (Diller et al. 2020, Conrady et al. 2019) …describes the approach of companies to dynamically set and adjust prices for products and services based on big data. …is an IT-enabled process that uses digital technologies (such as AI) and complex algorithms. …aims at maximizing sales and revenues. 21 IN WHICH INDUSTRIES IS DYNAMIC PRICING USED? AIRLINES E-COMMERCE RIDE- TRADITIONAL HAILING RETAIL 22 THE CONCEPT OF DYNAMIC PRICING DYNAMIC PRICING (Diller et al. 2020) INFLUENCE OF SITUATIONAL PARAMETERS Automated, real-time 3. 1. high price adjustments Situational- Situational DP Price adjustments are made based on: individualized DP Situational parameters (Time, Day, Weather, Competition, Supply & Demand, etc.) 2. Individual parameters Individualized low Three types of Dynamic Pricing: DP 1. Situational DP 2. Individualized DP 3. Situational-individualized DP low high INDIVIDUAL PARAMETERS 23 DYNAMIC PRICING AT https://www.youtube.com/wat ch?v=VdgzisQ6Scc 24 AI IN BUSINESS: USE CASE 3 – GENERATIVE AI FOR TEXT, PHOTO, AUDIO & VIDEO https://www.youtube.com/wat ch?v=vW9fIro6N6g 25 International Management Prof. Dr. Martin Fleischmann LEARNING OBJECTIVES At the end of this lecture, you will be able to: UNDERSTAND and DESCRIBE the components of a country market assessment DIFFERENTIATE and IDENTIFY market entry possibilities to access foreign, global markets DISTINGUISH different internationalization strategies 2 PLANNING THE FOREIGN ENGAGEMENT Initial situation: Company either not international or barely internationalized Alternative I: Alternative II: Internationalization by coincidence Rational planning of the foreign market engagement PESTLE framework 3 COUNTRY MARKET ASSESSMENT USING THE PESTLE FRAMEWORK Goal: Identification of (company specific) chances and risks in foreign markets as foundation for the formulation of an internationalization strategy Economic Political Socio-cultural COMPANY Environmental Technological Legal 4 PESTLE FRAMEWORK IN DETAIL (1/2) Political factors relate to how the government intervenes in the economy. Specifically, political factors include aspects such as tax policy, trade restrictions or tariffs. Of course, governments also have a high impact on the health system or education system of a country and also determine how well the infrastructure in a particular country is built. Economic factors include elements such as economic growth, gross domestic product (GDP), exchange rates, inflation rate, spending power and many more aspects. We will look at this more in detail in just a second but economic factors have a high impact on how businesses can operate in a specific country market. Socio-cultural factors include cultural aspects particular to a country a company or brand needs to consider when doing business in a specific country. This includes aspects such as uncertainty avoidance or risk taking, masculinity or individualism. We will talk about socio- cultural aspects more in detail in just a little bit, but it is important to note that socio- cultural aspects are sometimes not very easy to measure or determine. That said, many socio-cultural aspects are not visible, unconscious, and widely dispersed within a country, making it hard to assess culture in all its nuances. 5 PESTLE FRAMEWORK IN DETAIL (2/2) Technological factors refer to how technological change and digitalization is embraced by a country. This also includes openness to try out new technologies and products on the consumer side – or if there are any preferred technologies used in a country. Netflix: download function more important in some countries, other countries it may be ore important to offer HD streaming. Legal factors include all legal aspects that refer to areas such as discrimination law, tax law, consumer law or employment law. These factors can affect how a company needs to deliver its products or services and determines whether a company needs to make any adjustments to its product offering. Netflix: how to be taxed in specific countries. Environmental factors include everything that affects the environment and sustainability. Climate change is a big topic here – recycling as well – same with efficient use of energy. Netflix: while it does not seem directly related, streaming causes a lot of energy consumption which is criticized within many countries. Finding ways to alleviate some of the negative environmental effects of streaming may be worthwhile to consider for Netflix in some countries. 6 ASSESSMENT OF THE ECONOMIC ENVIRONMENT 7 GLOBAL MAP: BASED ON COUNTRY/ TERRITORY SIZE Source: Worldmapper.org 8 GLOBAL MAP: BASED ON POPULATION 2018 Source: Worldmapper.org 9 GLOBAL MAP: BASED ON POPULATION INCREASE 2015 - 2050 Source: Worldmapper.org 10 GLOBAL MAP: BASED ON PROPORTION OF THE WORLDWIDE GROSS NATIONAL INCOME (GNI) 2018 Source: Worldmapper.org 11 GLOBAL MAP: BASED ON TRADE DEFICIT WITH THE U.S. (2017) Source: Worldmapper.org 12  CLASSIFICATION: DIFFERENT FORMS OF MARKET ENTRY Host country Direct Investment Joint Venture Investment Strategic Alliance Franchising Home country Direct export Indirect export Home country Management Host country 13 FOREIGN MARKET ENTRY – A FEW DEFINITIONS Export/Import Firm remains domestic but buys products or services from foreign supplier (Import) / sells to foreign buyer (Export) Licensing Firm gives permission to an agent to manufacture/retail abroad on its behalf. Contracts where a licensor grants permission to a licensee to use one of its assets, usually intellectual property (Patents, Utility model, Design) or a trademark, as part of a business process. In return, the licensor will receive royalties. 14 INDIRECT VS DIRECT EXPORT Source: adapted from Jahrmann (2010) 15 DIRECT EXPORT: ADVANTAGES & DISADVANTAGES FROM THE PERSPECTIVE OF THE EXPORTER ADVANTAGES DISADVANTAGES Exporting company builds relationships Currency risk/ foreign exchange risk directly with a foreign market entity Increase in risks as usually all legal risks (buyer or intermediary) are attributed to the exporting company Generation of foreign market know-how Need to establish specific export capabilities within the company, most Control over sales and client likely resulting in costs relationships High returns and profits, especially if sold directly to the end consumer/ buyer 16 WHY DO FIRMS DECIDE TO ENTER GLOBAL MARKETS VIA LICENSING? Bypassing trade barriers Foreign market entry without additional capital expenditures Relatively speedy market entry Use of the licensee‘s knowledge about the foreign market Expansion of the production without increasing fixed costs Faster amortization of the R&D development due to license fees Risk is shared between licensee and licensor Source: Kutschker/Schmid (2011) 17 FRANCHISING – CHARACTERISTICS & FORMATS PRODUCT/ TRADEMARK FRANCHISING FRANCHISE Franchisee acquires the identity of a franchisor by agreeing to sell products MAIN CHARACTERISTICS and/or operate under the franchisor name Contractual agreement between a franchisor and a retail franchisee Franchisee operates autonomously that allows the franchisee to Examples: car dealers, gas stations conduct business under an established name and according to a BUSINESS FRANCHISING given pattern of business Franchisee receives assistance: location, Different models, but generally: quality control, accounting systems, franchisee pays an initial fee and a startup practices, management training monthly percentage of gross sales in Close, interactive relationship between exchange for the exclusive rights to franchisee and franchisor sell goods and services in an area Example: restaurants 18 FRANCHISING – ADVANTAGES & DISADVANTAGES FRANCHISEES FRANCHISORS ADVANTAGES ADVANTAGES Acquisition of well-known names Quick development of a widespread presence with Operating/ management skills taught by franchisor comparably low investment Receipt of exclusive rights (e.g. territories, brands) Qualifications for franchisee/operations are set and enforced Benefit from central marketing activities and bargaining power of franchisors (lower costs) Royalties represent a constant revenue stream Frachisees are owners and have more incentive to work hard than employees DISADVANTAGES DISADVANTAGES Potential to be locked into contracts requiring Potential for harm to reputation by bad franchisee purchases from franchisors or certain vendors Lack of uniformity may affect customer loyalty Oversaturation could occur if too many franchisees (consistency and integration needed) are in one geographic area Franchisees, in greater numbers, may seek to limit Royalties are based on sales, not profits franchisors’ rules and regulations 19 STRATEGIC ALLIANCES – EXAMPLE: AIRLINES Definition – Strategic Alliance: A collaborative relationship between independent firms, though the partnering firms do not create an equity partnership 20 INTERNATIONALIZATION STRATEGIES - OVERVIEW Multinational Global Transnational Configuration of Polycentric structure and Decentralized and Centralized and global- values and integrated network; dispersed independent market-oriented capabilities and interdependent Identification and exploitation Implementation of strategies Differentiated and specialized Role of foreign of local market opportunities defined by the headquarters roles of subsidiaries entities International force of Creation and Acquisition of knowledge Acquisition of knowledge in innovation: worldwide diffusion of within the global each unit acquisition of knowledge in a knowledge headquarters collaborative effort Typical industries Food & Beverage Consumer electronics Pharmaceuticals Dynamism and flexible Industry Market proximity Efficiency innovation tailored to market requirements needs 21 INTERNATIONALIZATION STRATEGIES - EXAMPLES Multinational Global Transnational 22 Source: Photo by Kristine Wook on Unsplash INTERNATIONALIZATION STRATEGIES: GLOBAL INTEGRATION VS NATIONAL DIFFERENTIATION high Global Organization Transnational Forces for Organization Global Integration low Multinational Organization low Forces for national high Differentiation 23